Financing for a new 500kV transmission line to run through Virginia, Pennsylvania and West Virginia reached its US$1.1 billion close last month.

Trans-Allegheny Interstate Line - or TrAIL - stands out not only for its size both in terms of physical length and consequent cost, but also for the strong appetite demonstrated by the banks to underwrite the loan.

IJ reporter Verity Ratcliffe takes a look at the first of a kind transaction that offers a firm path for upcoming transmissions projects across the American east coast to follow. 

The project

The regional transmission operator (PJM) recognized the need for TrAIL through its 2006 planning review. Development was seen as necessary to resolve potential overloads/brownouts.

This 'violation' in the grid attracted the attention of Allegheny which used the report as the basis for its proposal to the FERC. FERC then approved a PJM recommendation on the cost allocation of the project.

Plans for the 500kV TrAIL project - spanning 215 miles and transporting power from areas of peak supply to areas of high demand - consequently progressed beyond the drawing board.

TrAIL will be connected at a substation named 502 Junction. From there the power will flow in two directions east and north.  The northern segment is called Prexy and the eastern section terminates at a point of interconnection with Dominion close to Loudon, Virginia.

Completion of the project is expected by 1 June 2011.

The financing

The project itself is expected to cost in the region of US$880 million. US$1.1 billion will finance the project in addition to other PJM projects (such as the installation at the Black Oak substation).

The US$1.1 billion total is to be covered equally through equity from sole-sponsor Allegheny Energy and debt from 17 banks.

The debt has two tranches:

• US$530 million credit facility with a 7-year tenor and pricing at Libor + 187.5bps for the first five years
• US$20 million revolver with a 7-year tenor and pricing at Libor + 187.5 bps for the first five years

MLAs Citi and BNP Paribas covered the revolver and US$27.5 million each of the term loan while the remainder of the term loan was put forward by the following underwriters:

• CoBank - US$87.5 million
• DZ Bank - US$45 million
• Bank of America - US$35 million
• Commerzbank - US$35 million
• JPMorgan - US$35 million
• Scotia - US$35 million
• UBOC - US$35 million
• Natixis - US$30 million
• Barclays - US$27.5 million
• Huntington National Bank - US$20 million
• US Bank - US$20 million
• Credit Suisse - US$17.5 million
• Morgan Stanley - US$17.5 million
• National City - US$17.5 million
• PNC - US$17.5 million

During construction, there will be a 66.7:33.3 debt-equity ratio which will then be equalised once construction has ended.

The eventual 50:50 debt-equity ratio is a requirement laid out by FERC. While the project is allowed to use a hypothetical capital structure during the construction period, by end of construction the 50:50 ratio must apply.

Vinson & Elkins advised the sponsors while Latham & Watkins provided legal advisory services to the lenders.

Risk Profile

While there is no real risk present on the demand side, some state regulatory approvals necessary for the project are still pending.

Approval has been granted for the project to run through West Virginia while Pennsylvania's consent is still pending and approval from Virginia is expected shortly.

However, the above risk is mitigated by the presence of FERC and the strength of the sponsor's balance sheet.

The FERC formula guarantees a specific rate of return on investment which commences at the start of construction of the project.

Allegheny, like many utilities, has a strong balance sheet backing up its investments. This provides the banks with a certain degree of assurance that the sponsor will be able to make its equity payment.

Should the sponsor not manage this, the project will be providing a return on the investment from the outset (as guaranteed by FERC) which could be used.

Further, should approval not be granted in Pennsylvania and Virginia, the project may well be financially viable regardless (just running through West Virginia), and there are caveats in the financing structure to allow for this eventuality.

However, with approvals from PJM for the project, a refusal from the states for the physical presence of the line is unlikely.

Conclusion

The financing for TrAIL demonstrates the strength of appetite from the banking community in the tricky post-credit crunch period with the US$550 million debt requirement around US$200 million oversubscribed.

Similarly impressive was the speed with which the MLAs managed to draw in banks at syndication. Negotiations opened on 17 July and reached financial close in just under a month (15 August) with a total of 17 banks in on the financing.

The stage is now set for the financing of the three other major transmission lines to serve the country's east coast.

The future

The successful financing of the TrAIL project bodes well for similar projects currently in PJM's pipeline - including Potomac-Appalachian-Transmission Highline (PATH), Susquehanna - Roseland Line and Mid-Atlantic Power Pathway (MAPP).

The Amos - Kemptown Line (also known as PATH) will run about 300 miles from the Amos substation in West Virginia to the Kemptown substation in Maryland. A certificate of public convenience and necessity (CPCN) will be filed in the fourth quarter to West Virginia, Maryland and possibly Virginia. Its estimated cost is US$1.8 billion.

The Susquehanna - Roseland Line will run about 130 miles from the Susquehanna substation in Pennsylvania to the Roseland substation in New Jersey. A CPCN filing in Pennsylvania and local proceedings in New Jersey are planned in the fourth quarter. Its estimated cost is US$930 million.

The Possum Point - Calvert Cliffs - Indian River - Salem Line (also known as MAPP) will run about 230 miles from the Possum Point station in Virginia through the Delmarva Peninsula to Salem station in New Jersey. CPCN filings in Maryland and Virginia and local proceedings in Delaware and New Jersey are planned for the fourth quarter.

The project at a glance