Third Party Financing of Pulp and Paper Mill Steam, Power, and Utility Assets, 1996 Engineering Conference Proceedings

John W. Rohrer - Zurn/lndustrial Energy Partners

Joseph J. Fiato - Cogentrix/Industrial Energy Partners

Historically, pulp and paper steam, power, and other utility assets have been owned and operated by mill owners. During the last decade approximately 50% of all U.S. power plant capacity additions have been developed by non-utility independent power producers who have established the acceptability of power plant third party non-recourse project financing with major lenders (typically $3 billion to $6 billion per year). During the last several years major forest products companies have utilized third party financing for powerhouse replacements, upgrades, and/or asset sales. Several financing methods can be used including highly leveraged credit leases or pure non-recourse project financings (which involve no balance sheet liabilities or notations). Under some financing structures the host mill can continue to fuel and operate third party owned powerhouse or utility assets. It is generally unrecognized that the ownership cost of third party financed assets is often substantially less expensive than on-balance sheet self financed assets. This is due to the fact that the third party financier is often willing to take a lower return on equity than that acceptable to the forest products company and/or is willing to utilize a higher debt to equity ratio than the forest products company existing capital structures. often mills have limited cash resources and wish to utilize them on vital core business capacity expansions, quality upgrades, or mandated pollution controls rather than steam, power, and utility assets. In some cases existing powerhouse assets have significant value and sale to a third party owner can generate cash for core business investments (monetizing assets). Financing structures can be customized to the host mills needs. Structures include a buy-back option and/or sale to the host at the end of the initial debt term (typically 10 to 20 years) for a stipulated value. The third party owner arranges for the sale of any excess power and the purchase of back-up power during maintenance outages. Uninterrupted steam supply is assured by redundant boiler units, back-up packaged boilers, and/or maintaining older existing boilers for back-up steam supply. Third party owners have more experience with new generation...