Wind Energy Transmission Texas closed on a $584.5 million debt financing for its competitive renewable energy zones transmission project in Texas on 28 July 2011. The financing is split between loans at the operating company and holding company, which allowed the sponsors – Brookfield Power and Isolux Corsan – to optimise their financing while staying within the debt-to-capital ratio requirements of the project’s grantor, the Public Utilities Commission of Texas (PUCT).

The concession includes 603.5km of 345kV transmissions lines connecting west Texas to load centres in eastern Texas. It is split into seven segments and includes five new substations in Borden, Dickens, Glasscock, Martin and Sterling counties. It is also Isolux Corsan’s first transmission investment in the US – the sponsors won the concession in the first quarter of 2009. Isolux Corsan Ingenieria holds the cost-plus engineering, procurement and construction contract. Construction began in October 2011 and is scheduled to be completed in phases from the end of this year through the second quarter of 2013.

Bank of Tokyo-Mitsubishi UFJ, Deutsche Bank, Scotia Capital and Societe Generale were lead arrangers of the debt, split between a $506.8 million opco loan and expansion contingency facility, and a $77.7 million holdco loan. Both have limited amortisation and balloon payments at the end of their construction plus three-year tenor. Pricing was inside 300bp over Libor, in line with that of other CREZ transmission concession financings during the period, which closed at between 200bp and 250bp over Libor. CIBC, DnB Nor, MetLife, Siemens Financial Services participated in the deal.

The holdco is the vehicle for the sponsors’ equity investment in the regulated opco. The sponsors’ $325 million equity contribution, which is split equally between Brookfield and Isolux, complements the loan at the holdco level. The structure allows the project to meet the debt-to-capital ratio required by the grantor.

Wayne Morton, general manager of WETT, said that the sponsors had to work closely with the club of relationship lenders to bring them up to speed on the rate recovery process for the concession. PUCT awarded the consortium the right to build, finance, operate and maintain the transmission lines in 2009 but has yet to hold the rate case proceeding where it will establish the tariff payments. The tariff will include cost recovery plus a fixed return for operating and maintaining the assets.

A bond refinancing is likely, though Morton would not comment on the possibility of this happening. But a long-term fully amortising bond issue that closes after construction is complete, but before the balloon payment comes due, would allow the sponsors to establish a fixed debt payment regime for the term of the concession. Morton does note that the sponsors have the opportunity for further incremental financings at the regulated opco.

WETT was one of four CREZ transmission lines that reached financial close in 2011. LS Power and John Hancock’s 378km Cross Texas Transmission was the only other one to use an opco and holdco structure for its $433.2 million, construction plus 5.5-year debt package, which closed in August. The loans were split between an opco $264 million term loan and a $10 million revolver, and a holdco $140.2 million term loan and $19 million letter of credit facility. NextEra Energy closed a $386.6 million five- year mini-perm for its 526.4km Lone Star Transmission in December and Sharyland Utilities closed a $650 million, construction plus five-year loan for its 450km line in June.

Given the sensitivities attached to rate-setting in Texas, not to mention PUCT’s scrutiny of projects’ debt levels, sponsors will need to tread carefully when closing deals and work with trusted banks to bring financings to completion. But the CREZ concept, and with it the state’s plans to connect its abundant wind resources to its growing population centres, received a powerful validation in debt markets in 2011.

Wind Energy Transmission Texas
STATUS: Closed 28 July 2011
SIZE: $910 million
LOCATION: Texas
DESCRIPTION: 603.5km of 345kV CREZ transmission lines and five substations between west Texas and major metropolitan areas in the state
GRANTOR: Public Utilities Commission of Texas
SPONSORS: Brookfield Power (50%) and Isolux Corsan (50%)
EQUITY: $325 million
DEBT: $506.8 million opco loan and expansion contingency facility and $77.7 million holdco loan
LEAD ARRANGERS: Bank of Tokyo Mitsubishi UFJ, Deutsche Bank, Scotia Capital, Societe Generale
PARTICIPANTS: CIBC, DnB Nor, MetLife, Siemens Financial Services
SPONSOR LEGAL COUNSEL: Latham & Watkins
LENDER LEGAL COUNSEL: Milbank
EPC CONTRACTOR: Isolux Corsan Ingenieria
USA INDEPENDENT ENGINEER: Black & Veatch
INSURANCE ADVISER: Moore-McNeil