Higher-than-expected clearing prices in the
latest PJM Interconnection capacity
auction mean that several gas-fired projects that have been in
the works for months will almost certainly be able to circle
financing, deal watchers tell PFR.
Capacity cleared in much of the regional transmission
operator's territory at $140/MW-day, versus $76.53/MW-day in
most of the same zones last year.
"The results were above expectations but not outside of our
range of projections,"
says Sherman Knight,
president and chief commercial officer
at Competitive Power Ventures in
Silver Spring, Md., which is developing the 725 MW Woodbridge
project (also known as CPV Shore) in Middlesex County, N.J.,
and the 1,250 MW Three Rivers project in Grundy County,
"We as an industry tend to focus too intently on one annual
data point," says Knight, adding, however, that it
was "nice to see something higher than the last couple
years, which were lower than usual and not sustainable."
An additional gigawatt of gas-fired generation cleared the
auction compared with last year, including at least one new
Ares-EIF’s 664.7 MW Hill Top
Energy Center in Greene County, Pa., is among the projects that
cleared the auction, PFR understands.
Officials at the private equity sponsor in New York declined to
TIME TO HIT THE GAS
Bankers expect the recent lull in quasi-merchant
financing—which has become something of an annual
ritual in the run up to the capacity auctions—to end
as developers push to round up their final equity checks.
"This is not just a green light," says Ralph
Cho, co-head of North American power
at Investec in New York. "This is a
neon green light to all developers, saying, 'come and get
"I’m getting emails from Japan already, saying,
'we are very pleased to hear the results from the auction,"
adds an investment banker.
Other observers are slightly more cautious, saying that
banks and investors need time to assess whether the higher
capacity prices are here to stay. "One good auction jump
doesn’t make a trend," says another senior project
The location of a project and the nature of the sponsor
behind it will be determining factors in how quickly it is able
to come to the debt market.
"Many projects in the pipeline will move from amber to green
light, depending on where they’re located,
especially if they they are backed by a private equity
says Louise Pesce,
an m.d. in the project finance division
at MUFG, in Los Angeles.
"If there is one large P.E. sponsor who can hold 50% to 70%
of the project, it’s much easier to circle
equity," she adds. "If they're relying on a group of three or
four investors, one could hold the whole project up."
Several sponsors that were close to rounding up all of the
equity they needed for specific projects had already approached
banks last year to discuss debt sizing, but deals had stalled
as the last equity checks had remained elusive.
The better-than-expected auction result is likely to put
those financing processes back on track, in what one project
finance banker describes as "a resurrection from the dead."
Among the projects that are back in play
is Panda Power Funds’ 990
MW Mattawoman project in Maryland,
deal watchers tell PFR.
"Wednesday's RTO print was 40% higher than what many
had believed were optimistic estimates, providing a shot in the
arm for equity and mezzanine investors in recent PJM new
builds," says Kevin Phillips, New
York-based global co-head of the power, energy and
infrastructure group that recently moved en masse
from Jefferies to Cantor
"In the 24 hours following the auction result we are hearing
a palpable reaction of relief," he adds, "especially from Asian
equity and mezzanine investors, many of whom had begun to
question their PJM thesis after the abysmal RTO print last
SIZING THE DEBT
While higher capacity prices might be expected to result in
higher leverage ratios in project finance deals, this may not
be the case across the board.
"A project's leverage ratios may not necessarily shift
because of higher capacity prices," says MUFG's Pesce. "Prices
for hedging tools like heat-rate call options and revenue puts
have not moved upward as energy prices are still
depressed—which is why capacity prices were bid up in
the first place!"
What is more likely is a wave of refinancings in the term
loan B market, along the lines of the deal BNP
Paribas arranged for Ares-EIF’s 700
MW St. Joseph CCGT in Indiana earlier this year (
"We are skeptical that commercial bank term loan A lenders
will substantially revise their downside cases so as to
materially improve debt capacity," says Cantor's Phillips.
"However, we do expect institutional debt from the term loan B
market and gray market private placements to be more
constructive on debt capacity as a consequence of the auction
Senior project finance bankers had mostly expected the
outcome of the auction to be flat to last year or lower,
according to a survey conducted by PFR last
"Everybody is surprised," says an executive at a strategic
investor. "Almost everybody thought it would be a lot lower.
Maybe a little bit of an increase from last year but not
Several reasons were given for the higher print, including
bidders seeking to offset low power prices with higher capacity
revenues; an increase in the net cost of entry for new
generation resources because energy revenues have decreased,
resulting in upward shift of the capacity demand curve; and a
decrease in the total capacity that cleared—which was
not unexpected given a fairly high reserve margin and low
These were all somewhat offset by a forecast decrease in
future electricity demand.
"Separations in ATSI, Comed and PSEG were generally driven
by the changes in transmission limits and
generators’ decisions to opt out from the
auction," says Adil Sener, director in
the power, energy and infrastructure group
at Cantor in New
York. "However, the RTO result indicates a major upward
shift in bidding behavior and is more interesting."
Additional reporting by Richard Metcalf.