Tran-Elect and its partners have closed financing on the Path 15 transmission project, capping what looks like a good month for independent wires operators. The blackout in the northeastern US has concentrated attention on the state of the country's transmission grid - and Trans-Elect and its peers say that they are the solution. The deal also builds upon the close of the SR-125 toll road in adding to the list of US public private partnership projects that have raised financing.

Path 15 is one of the most notoriously congested parts of the Californian electricity grid, a power thoroughfare that links the northern and southern parts of the state. One of the more often overlooked aspects of the Californian power crisis was that the state of the grid, as much as market structure or generation capacity, shared a large part of the blame for the blackouts. More often recognised is the fact that many of the sham electricity trades that enriched the less scrupulous traders relied upon grid congestion to be effective.

The need for additional capacity over the 3,900MW line has been clear since the early 1980s, and the local utility, Pacific Gas & Electric, the Western Area Power Administration and what was then known as the Transmission Agency of Northern California prepared an environmental impact assessment as far back as 1988. The plan, however, got snarled up in the ongoing Californian deregulation experiment.

The crisis spurred Energy Secretary Spencer Abraham to authorise the resurrection of the project in 2001 - compared to the costly and fraught process of building new plants the line was relatively palatable. Nevertheless, the bankruptcy in April 2001 of Pacific Gas & Electric, the owner of the line and chief financial victim of the power crisis, complicated matters still further. Upgrading the line was one issue, inserting it into a broken and uncertain market was another.

The entry of Trans-Elect, with its selection by the department of Energy in October 2001, was therefore good timing. Trans-Elect, formed in 1999, had already agreed to buy TransAlta's transmission assets in Alberta, and was in negotiations with Consumers Energy over its wires business. The DoE's approval was a sign that the independent operator had arrived, but the fact that Abraham decided to label it a public-private partnership was an indication that structural complexity was to be a fixture of the financing.

Indeed, Trans-Elect, which has built its name on being an independent, expert operator of transmission assets, has largely been retained as a financing partner. This is a measure of the attractions that its business model has for lenders, and even if Path 15 is not the paradigm for how it hopes to grow its business, it is a solid marquee project.

The named owner, developer and operator is the Western Area Power Administration (WAPA), a publicly-owned body, while PG&E Corp also has a stake in the project, and will have to undertake upgrade work at either end of the line. The fact that the WAPA retains ownership, and that the California Independent System Operator (CalISO) will control the line's operation deterred a number of further bidders, which included Mirant, Williams, Kinder Morgan and PG&E NEG. Turning the solution to the country's largest transmission bottleneck over to firms among whose number were those that exploited constraints would not have been good politics.

Nevertheless, working within government rules on contracting and financing has been difficult, as those working on the handful of other US PPP projects can attest. While siting was not an issue - the expansion will follow the route of existing lines through largely barren scrubland - having FERC oversight of the ratemaking process was useful.

Trans-Elect's stake in the project, and the key for lenders providing financing to a project that they could not take over, comes in the form of Transmission Scheduling Rights (TSRs). These are similar in concept to the transmission capacity entitlements used by the CalISO, and are the chief means by which independent operators make back their investment. Once construction is complete, the line will be handed over to the ISO in exchange for a portion of the TSRs.

So, the credit behind the project will chiefly be the CalISO, and behind it the bag of investor-owned utilities and municipals that make up the California retail market. In practice, the two largest customers will be PG&E and San Diego Gas & Electric, part of Sempra Energy. SDG&E is currently rated A2 by Moody's, while PG&E, still under bankruptcy protection, is at Caa2. However, since the TSRs are a regulated revenue stream, there is little chance that the project would be affected by further turbulence in the retail market.

The deal is financed by means of two vehicles - a holding company (holdco) and an operating company (opco). The holdco, Trans-Elect NTD Holdings Path 15, is the subject of $56 million in debt, rated Ba3, and features $38 million in equity from EIF, ArcLight Capital and a third, unnamed, investor. It is structured as a partnership, in which Trans-Elect is the general partner, and controls the vehicle, but does not receive the bulk of the revenues.

Holdco in turn owns all of Trans-Elect NTD Path 15, the opco. Debt at this level is $95 million in senior notes, rated Ba1, as well as a $9.5 million letter of credit from Citigroup, DZ Bank and SG. Citigroup and Macquarie Securities led a note issue of both the holdco and opco debt.

While the deal was a long-dated high-yield financing, inevitable given the rating of the two entities, it was not pitched to hedge funds. This sold down to traditional buy and hold investors, although it benefited from the current low interest environment. Had it managed to sell down a little earlier it might have gained even sweeter pricing. The opco bonds are due 2028, while the holdco bonds are due 2023.

Trans-Elect's next financing should be for the Illinois Power transmission assets, for which it has mandated WestLB and SG. Illinois Power, now owned by Dynegy, faces an uncertain regulatory and ownership situation, and the putative sponsor will have to stand by and see how the struggle plays out. In the mean time it is looking to apply the Path 15 lessons to a partnership with the Bonneville Power Administration, a large state-mandated agency looking to do some upgrade work.

Status: Closed 16 September 2003

Location: California

Description: upgrade of 83-mile transmission bottleneck by 1500MW

Sponsors: PG&E, Western Area Power Administration, Trans-Elect

Equity: $38.5 million

Debt: $160.5 million

Bookrunners: Macquarie, Citigroup

Equity providers: EIF, ArcLight, unnamed third

Market consultant: E3

Lawyers to the sponsors: Pillsbury Winthrop

Lawyers to the lenders: Latham & Watkins