Trans Bay Cable: It's a wrap

Babcock & Brown's Trans Bay Cable financing marries smart structuring to a project with marked real-world benefits. At a project level, the transmission cable has the capacity to deliver around 40% of San Francisco's electricity requirement and will play a pivotal role in ensuring the City's security of supply in the medium term. On a financing level, the transaction involved arranging wrapped and unwrapped debt facilities totaling $515 million on a limited recourse basis. With a nominal senior debt tenor of 33 years, it is the longest dated bank loan ever in the US power sector.

The project involves the construction of an 85km, 400MW high voltage direct current (HVDC) underwater electricity transmission cable from a substation near the East Bay city of Pittsburg to San Francisco. The cable is scheduled to come online in 2010.

The construction contractors are Siemens and Prysmian, which are building the cable under an engineering, procurement and construction (EPC) contract. In conjunction with another project being developed by the City of San Francisco, TBC will allow for the shutdown of a final, ageing power plant in the city.

Babcock & Brown opted to install the cable on the bottom of San Francisco Bay, avoiding unsightly and intrusive above-ground transmission infrastructure and related land acquisition and permitting issues, and providing a relatively benign and safe environment to site the cable.

Babcock & Brown is the sole developer of the project, and worked alongside the City of Pittsburg and the Pittsburg Power Company (PPC), with Pittsburg acting as lead agency in the procurement of the environmental permits for construction and operation of a cable located in a sensitive ecosystem.

Under the novel ownership structure, once operational, PPC will become the owner of the physical plant and equipment, with Babcock & Brown retaining ownership of the right to transmit electricity, or Transmission System Rights (TSRs), within the California electricity grid. PPC will assume responsibility for the ongoing operations and maintenance of the cable, with daily dispatch controlled by the California Independent System Operator.

Babcock & Brown has agreed to transfer the TSRs to Pittsburg after 99 years. The Federal Energy Regulatory Commission (FERC) provided for the project's revenue to be calculated under a cost recovery model that allows for a return of and on capital for 30 years, and a recovery of taxation and what it defines as prudently incurred operating costs. This provides the project with a steady underlying revenue basis.

Babcock & Brown's principal objectives in financing the transaction were to ensure that all financing costs be competitively incurred to produce a lowest cost outcome, and that the financing reflected the FERC pre-approved capital structure and be consistent with the overall FERC revenue principles.

To finance the project, Babcock & Brown used a mixture of senior and subordinated non-recourse bank loan facilities. The sponsor chose a monoline-wrapped bank loan, which represented the lowest total cost financing outcome. The main challenge for the sponsor, as with most deals after the summer, was getting the best terms in a choppy financing market.

The financing breaks down into three elements. The first is a $267 million in senior loans to operating company Trans Bay Cable LLC, arranged by BayernLB and wrapped to AAA/Aaa (S&P/Moody's) by Ambac, which will be used to finance 50% of the project's capital costs and provide for working capital needs. The second consists of subordinated facilities of $198 million representing around 40% of the capital costs, also from BayernLB. The third is around $50 million in equity from Babcock & Brown, representing the residual capital commitment The subordinated loan will be taken out by equity upon the commencement of operations. The debt facilities are supported by standard cost overrun and debt service reserves.

Although sponsors of transmission projects can usually command favorable financing terms, given the stable, regulated long-term revenue streams and the assets' minimal operations and maintenance requirements through their lifetimes, the deal also stands out for the terms Babcock & Brown was able to extract during the credit crunch. The lead arranger is believed to be pitching the senior debt to potential participants on the basis of pricing of roughly 50bp over Libor, and the junior debt at 150bp.

The sponsor also benefited from closing the financing early into the subprime fallout, when the implications for monolines of defaults in subprime securities were not fully apparent. As it has come to light that many monolines are nursing billions of dollars of mark-to-market losses, a wave of recapitalizations has ensued among the insurers, which have struggled to maintain their triple-A ratings.

Syndication for Trans Bay Cable started in mid-January 2008 and the covered portion may be a challenging sell. Ambac has had a difficult time in light of a probable writeoff of $3.5 billion subprime securities, and Fitch has cut its rating in to AA.

Although, following commercial operations, TBC's sole asset will be the TSRs, the lenders will have mortgage security over all tangible project assets, including the physical plant and equipment and land rights owned by PPC. A sizeable challenge for Babcock & Brown was obtaining access to or title over land parcels in both Pittsburg and San Francisco and over 85km of waterway floor in four different counties with three different public authority landowners – this included negotiating packages for the relocation of multiple established business operations – and then facilitating mortgage security over such parcels.

Despite any difficulties Trans Bay Cable may have in syndication due to the monoline malaise, the deal breaks new ground in being the first transmission project independently developed with private equity that will be rate based under a FERC tariff regime.

According to a spokesman for Babcock & Brown: "The financing package accommodated the financing requirements of the FERC approvals, contemplates and facilitates the transfer of physical asset ownership to PPC, and understands the nature of the technological solution."

The transmission sector, after several years of inaction, may finally be coming back to life, since several utilities are planning new transmission development entities. If future private transmission projects wish to benefit from the federal tariff regime they would be wise to replicate the Trans Bay model.

Trans Bay Cable LLC
Status: Closed 31 August, in syndication
Size: $515 million
Location: San Francisco, California
Description: 85km high voltage direct current electricity cable
Sponsor: Babcock & Brown
Construction Equity: $50 million
Senior debt: $267 million, wrapped to AAA/Aaa
Junior debt: $198 million
Monoline: Ambac Assurance Corporation
Lead arranger: Bayerische Landesbank
Sponsor legal: Skadden Arps (financing); Reed Smith (land security); Nixon Peabody (FERC)
Lender legal: Milbank Tweed
Monoline legal: Latham & Watkins
Independent engineer: E3
Insurance adviser (Sponsor): Marsh
Insurance adviser (Lenders): Moore-McNeil