SG has closed a $550 million private placement backing the construction of the Neptune subsea transmission cable project. The financing is the first for a transmission, or wires, asset, since the Path 15 financing in 2003. The deal, which features solid offtake and construction packages, sold down strongly, although monolines and banks did offer competing structures.

Neptune is a 65-mile underwater transmission cable that connects Sayreville, New Jersey and Levittown, in Nassau County, Long Island. The developer is Atlantic Energy Partners, a consortium of Cianbro Corporation, ESAI Power, Standard Energy Development, CTSBM Investments and Boundless Energy. The equity in the deal, however, ultimately came from EIF Group and Starwood Capital.

Neptune started life in 2001 as a massive $4 billion subsea cable system running along much of the coast of the northeastern US. Its rationale, at the time, was to take advantage of disparities in prices between the NEPOOL, New York and PJM power markets. It was envisaged as a merchant project, or at least one that would be of use to players in the merchant energy market.

And so, in August 2001, Neptune began an open season on the cable, attempting to interest utilities, generators and power traders in booking capacity on the system. The process resulted in one expression of interest from an energy trader, but the trader suffered from a series of ratings downgrades as the merchant power sector's credit quality deteriorated in 2002. By 2003, the developers were looking for a new business model and a new client.

The sponsors' saviour was the transmission congestion around New York City, as exemplified by the blackout that hit the northeastern US in August 2003. The eastern part of New York City, as well as Long Island, has long suffered from congestion and strained capacity. At peak hours the Long Island Power Authority (LIPA) is forced to rely on elderly and inefficient oil-fired capacity.

LIPA issued a request for proposals for baseload capacity in May 2003, before the blackout, and selected Neptune, from a field of 14, in June 2004. It signed a 22-year contract for 660MW of capacity on 29 September 2004. The Federal Electricity Regulatory Commission (FERC) had approved a cable in June 2001, providing that the agreement was subject to an open season, although the collapse of the merchant market, and LIPA's municipal status, meant that alternative candidates would have been scarce.

The original order stood, and the open access provision was upheld, although according to Ed Stern, CEO of Neptune RTS, the project did have to contend with interconnection issues. But for LIPA, the cable presented a useful and flexible means of diversifying away from independent power producers on Long Island. It also provided an alternative to the Cross-Sound cable from Connecticut, which was at the centre of a dispute between Long Island and Connecticut until its settlement in June 2004.

For the developer, the 22-year contract was the key to making the project financeable. LIPA has a rating of A3/A- (S&P/ Moody's), and as the main counterparty, and by far the most substantial credit risk, made the project a candidate for an investment grade rating. The contract, which specifies payments based largely on the availability of the project, does not expose the cable's owners either to volume or price risk.

The project also benefits from the use of Siemens and Pirelli as the contractors for the project. Both are providing substantial and tight guarantees for their share of work on the project. The project also benefits from a $150 million letter of credit from DZ Bank and AIB, which is priced at 150bp and largely supports the obligations of the project to LIPA.

The project will, if it is commissioned as planned, produce very stable revenue streams, with limited excess returns available if the project consistently reaches high availability levels. As such, the project is of interest to equity interests looking at stable contracted returns, similar to those of a contracted power plant.

EIF Group had been discussing the project with the developers since early on in the cable's development, according to Andrew Schroeder, a partner at EIF. "the project receives capacity payments, and can be financed as a standard project finance." EIF provided 75% of the $73 million in equity through its United States Power fund, with Starwood Capital Group Global, a real estate investment specialist, providing the remainder. EIF group's investment initially took the form of a convertible loan, which allowed the developers to access early stage capital, and EIF to manage its exposure to the project.

SG, as advisor, began putting together a financing package that leaned heavily towards the use of a private placement. The nature of the assets meant that the route was a sensible one, and also spoke to SG's strengths in the area. Nevertheless, an alternative proposal, understood to come from WestLB and Ambac, featured a monoline-wrapped issue. Ultimately, according to several participants, the sponsors opted for the flexibility and independence of an uncovered deal.

The $550 million in 22-year bonds came in priced at a rumoured 175bp over the equivalent Treasury, for an all in cost of less than 6%. Several sources at the team putting forward the wrap say that the project could have come in with an all in cost (coupon plus premium) much lower than this, given the widening of spreads that the lower end of the investment grade spectrum experienced in July.

It has become common to hail transmission assets as the next big set of opportunities for project bankers, alongside coal plants and private toll roads. The permitting issues that dog such projects have, over time, tempered such enthusiasm. But it is clear that, following the rate-based Path 15 financing, and the recent leveraged buy-outs of rate-based transmission assets, bilateral deals such as Neptune will also be attractive assets. While Atlantic Energy Partners has not announced any further projects (although several members have other deals in the works), there remains a template for extending the project along the eastern seaboard.

Neptune Regional Transmission System
Status: Closed July 2005
Location: Long Island to New Jersey, USA
Description: 65-mile subsea transmission cable
Sponsor: Atlantic Energy Partners
Equity providers: EIF Group, Starwood Capital Group
Lead manager and financial advisor: SG
Debt: $550 million
Equity provider legal: Chadbourne & Parke
Developer legal: Skadden Arps
Underwriter legal: Milbank Tweed
Independent engineer: Stone & Webster
Environmental: Tetra Tech