Allegheny Energy's subsidiary Trans-Allegheny Interstate Line (TrAILCo) closed a $350 million three-year unsecured revolving loan and a $450 million bond issue on 25 January 2010. The $800 million proceeds will finance a power transmission line along the eastern seaboard, with part of the proceeds used to refinance a $550 million credit facility from September 2008.

The deal took the project's increased regulatory certainty and used it to raise cheap bond debt, though its bank debt attracted a slightly higher margin. The five-year bonds had the lowest coupon of any non-recourse energy or infrastructure financing since the crunch. They also lowered Allegheny's required commitments to the project's financial structure.

TrAILCo is a interstate transmission company owned by Allegheny through holding company Allegheny Energy Tramsission (AET). It was created to construct, own, and operate Allegheny's share of a 500kV 386km transmission line, extending from south-western Pennsylvania to West Virginia and Northern Virginia at a cost of $1.2 billion. The Federal Energy Regulatory Commission (FERC) regulates the line's operations.

In February, Allegheny and First Energy announced a $8.5 billion stock for stock merger, which will result in a consolidated company with $16 billion in annual revenues and will retain the name of First Energy.

Regional grid manager PJM Interconnection found the project necessary in June 2006, saying it would prevent blackouts in the region, expected as early as 2011, as growing demand for electricity in the Mid-Atlantic region was overloading the existing transmission system. The project has a targeted completion date of June 2011. Included in the development are 138kV lines in Pennsylvania for local reliability, while Dominion Energy is developing another 96km of the project separately.

The lead arrangers for the $350 million non-recourse revolving credit with a bullet maturity, which was priced at 300bp over Libor, are BNP Paribas, administrative agent, Bank of Nova Scotia, co-syndication agent, and Bank of America, also co-syndication agent.

The loan was sold down to a syndicate of 17 banks, including JPMorgan Chase, Barclays, Credit Suisse, Cobank, Wells Fargo, Sovereign Bank, Toronto-Dominion Bank, Commerzbank, Union Bank, US Bank, PNC Bank, Huntington Bank, Morgan Stanley and Deutsche Bank.

The $450 in senior notes, sold in the 144A market with a 4% coupon, were issued at a slight discount of 99.626 to yield 4.084%, or a spread of 162.5bp over the comparable five-year US Treasury. Underwriters for this deal were Barclays, Credit Suisse and JP Morgan The non-callable bonds mature on 15 January 2015, with first pay in July 2010. The loan and the notes were rated BBB- by Standard & Poor's, Baa2 by Moody's and BBB by Fitch.

Lenders responded well to both offerings. Although the bonds were initially expected to be sold in two separate tranches of two-year and five-year bonds, due to increased demand they were eventually sold as one five-year issue. TrAILCo's FERC-authorised rate structure appealed most to investors, and helped ease concerns over construction risks.

The FERC structure includes 100% of revenues derived through formula-based recovery throughout the life of the project, return on construction work in progress, recovery for costs prudently incurred, a 12.7% return on equity for the TrAIL transmission line and the Black Oak static reactive power compensator, and an 11.7% return on equity for additional PJM Interconnection projects. The transmission line is seen to have relatively low-risk operations, which are expected to generate stable and robust cash flows once construction is completed.

The company chose to refinance now rather than wait for construction to end in 2011 largely because of the new ratings, which came in as investment grade in early winter, according to Allegheny's treasurer, Barry Pakenham. Allegheny also reached an attractive rate formula with FERC, which allowed for returns during construction, made progress on regulatory hurdles that had blocked the project for the last few years in Pennsylvania, West Virginia and Virginia, as well as receiving the Certificate of Public Convenience and Necessity (CPCN) for right of way. The sponsor felt it was in a strong position to negotiate, and approached several banks with various proposals to raise extra cash and refinance the existing credit facility.

The previous Citibank- and BNP Paribas-led $550 million seven-year bullet loan, priced at 187.5bp over Libor, required a contingent equity commitment from the parent and had restrictions on additional indebtedness and distributions. Although the new loan is priced higher, at 300bp, it does not require this equity commitment from Allegheny, which was important to the sponsor.

Adding to the appeal of the project for investors was the strength of Allegheny Energy, which has a strong credit quality and liquidity, and enjoys revenues from the stable regulated utility operations of West Penn Power (Pennsylvania), Monongahela Power (West Virginia), Potomac Edison (Maryland, Virginia, and West Virginia), as well as robust cashflow from its unregulated operations.

Issues of some concern, according to rating agency Fitch, are a leveraged balance sheet during construction, the absence of some easements needed for the project in West Virginia and Virginia, and the potential for cost overruns or delays due to rough terrain and weather. Emission prices, volatile power prices and a generation portfolio that is overwhelmingly dependent on coal also mitigate a little the strengths of the sponsor. Allegheny Energy Tranmissions's other subsidiary is PATH, LLC, which is engaged in the development of the PJM transmission line project PATH.

Trans-Allegheny Interstate Line
Status: Signed January 25, 2010
Size: $1.2 billion
Location: Pennslyvania, West Virgina, Virginia
Description: A 500kV 386km power transmission line
Sponsor: Allegheny Energy
Debt: $350 million, three-year revolver priced at 300bp over Libor, $450 million five-year bond issue with 4% coupon, priced at 162.5 basis points over Libor
Bank lead arrangers: BNP Paribas (administrative agent), Bank of America and Bank of Nova Scotia
Bond underwriters: Barclays, Credit Suisse and JP Morgan
Sponsor legal counsel: Vinson & Elkins, K & L Gates, Hunton & Williams, DLA Piper
Legal counsel to lenders and underwriters: Latham & Watkins
Independent engineer: RW Beck