Canadian developer Tonbridge Power is rushing to close a senior debt financing for the construction of the Montana Alberta Tie (MATL) project before its construction permit expires.

According to a filing with the Federal Energy Regulatory Commission, Tonbridge wants to close a $161 million 30-year senior debt financing with the Western Area Power Administration (WAPA), one that would be priced at Western's cost of funds: Western recently received authority to borrow $3.25 billion from the US treasury to finance transmission infrastructure under Section 402 of the American Recovery and Reinvestment Act of 2009. A term sheet for the MATL deal was announced on 10 August.

The Montana Alberta Tie is a proposed 240kV transmission line that would run 345km from Lethbridge, Alberta to Great Falls, Montana. It has a rated capacity of 300MW and Tonbridge says it has commitments for all of this capacity, but could be expanded to move more power. The plant has received all of its regulatory approvals and has settled all legal challenges. The tie is designed to sell power from coal and renewable power generators in the Western US into Alberta's deregulated, and gas-dominated, power market.

Tonbridge wants the FERC to grant expedited approval for the financing by 31 August, because its permit to build the project from the Canadian national energy board, which has already been extended, expires at the end of the year. It has blamed the delays on credit market conditions, and has indicated in disclosures to investors that its engineering, procurement and construction contracts did not contain enough control over costs to be financeable by banks. It has said in its FERC filings that it is paying a 14% interest rate on a 2007 loan from the Anchorage Capital Master Offshore fund.

Tonbridge has previously mandated HSH as lead arranger of the senior debt financing for the tie, although HSH has recently pulled back from North American energy financing, retaining only a focus on key corporate clients. HSH has suffered from substantial losses in structured products, and as part of a February bail-out has promised to concentrate on shipping, private banking and corporate clients, spinning its remaining activities, and toxic assets, into a separate vehicle.

In December 2006, Tonbridge closed a C$13 million development loan with HSH's Cayman Islands branch and named HSH as project finance bank, a deal that also provided HSH with equity warrants, and in late 2008 mandated it for a $99 million project finance loan. That loan would split into $90 million for the tie and $9 million for substation upgrades.

The developer has indicated in presentations with investors that it still has access to $90 million in HSH debt should the WAPA loan not close. It said that it would supplement this with the proceeds of a $25 million preferred equity issue and a $35 million prepayment for capacity, both from wind generator Naturener. However, one analyst familiar with MATL described the HSH financing as "dead, though it might be possible to resurrect it."

NaturEner is developing the Glacier wind project, and closed $160 million in financing in September 2008 for a first phase, and $120 million in July to finance a second phase. NaturEner is currently using Morgan Stanley to sell its output indirectly into the California market, but wants to use the tie to sell power in Alberta. It did, however, on 13 August, request to intervene in the FERC financing approval process.

A source close to NaturEner says that the motion to intervene was not designed to be adversarial. Recent filings from NaturEner in connection with the FERC approval asked for better information on the financing model and Western's ownership interest. In 2008 NaturEner filed a motion with FERC to reject changes to the creditworthiness provisions of the tariff agreement between the two, though this dispute has since been settled. After an exchange of arguments in late August between the developer and customer, NaturEner withdrew most of its protests.

The Western financing guidelines, which were proposed in March 2009, commented on in April, and adopted in May, are vague on the exact terms on which it will offer debt. Several lawyers and sponsors contacted by Project Finance were unaware that Western was able to provide such financing, and Western has never offered loans before. The US Department of Energy, of which Western is an agency, has spent several years building up a loan guarantee capability and has yet to close a transaction.

Tonbridge's filing with FERC says that WAPA, which transmits and markets hydroelectric power to utility customers in the western US, would be granted a priority right to 50MW of capacity northbound, and a conditional right to 50MW of southbound capacity. It would also have an 8.3% ownership stake in the project, to comply with justice department rules. The unrated debt would consist of a construction loan that would convert on completion of the line into a 30-year loan. The FERC approval, which rejected NaturEner's protests, was forthcoming on 1 September. FERC noted that the financing did not meet its normal standard of a 2x coverage ratio, though Tonbridge argued convincingly that this standard should not apply.

The developer has said it will provide capacity on the line at market rates directly to wind producers, including Invenergy and Wind Hunter, a GreenHunter subsidiary, although neither has signed a binding contract with MATL. It has hired MDU to be the EPC contractor on the project, using a restructured contract that provides it with greater cost control. Tonbridge says it hopes that the line can be in service by the end of 2010.

Tonbridge is not alone in looking for debt from Western. The authority received 200 responses to its request for expressions of interest in the transmission infrastructure programme. Among them is LS Power, which recently signed a letter of intent with Western for an unspecified partnership covering its 805km Great Basin Transmission project. Western senators, including majority leader Harry Reid, and influential figures such as Max Baucus and John Tester, have all put their weight behind the transmission financing programme.

Tonbridge's chances of success in closing the financing are difficult to gauge, though two firms that cover its stock, Clarus and Macquarie, have treated the news of the term sheet as positive. Tonbridge did not answer questions about the financing, while Dan Svejnar, a banker at HSH familiar with the financing, declined to comment on whether the bank's financing was still available.

Whatever the outcome, the Montana Alberta Tie is set to disprove the industry truism that financing transmission projects is much easier than permitting them.