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In Search of... Transmission Capitalists

Facing a cash crunch, transmission owners look for new funding sources.
Fortnightly Magazine - April 1 2003

a mix of private and public finance to fund retrofits on their systems, likely taking the form of corporate rather than project investment.

New transmission upgrade and expansion projects are currently seeking capital from private equity and debt financing sources. Electricity infrastructure projects involving transmission hold the potential to attract investors seeking investments with a long economic life and relatively stable and regulated returns. According to private sources, there are several billion dollars available for new transmission investments for the right opportunities.

We believe that some of these sources of capital will be quite new to the utility industry and to transmission in particular. Some will be passive investors, while others will seek an active management role. For example:

  • Transmission-only companies (e.g., Trans-Elect, TransLink) will serve as project developers, managers, and investors;
  • Engineering, construction, and O&M firms (e.g., Bechtel, Black & Veatch) will be seeking project-related contracts in exchange for their capital commitments;
  • Equity investors (e.g., investment firms such as KKR and Berkshire Hathaway, and asset managers such as Trimaran) will seek management fees and capital appreciation;
  • Pension and university endowment funds (e.g., Canadian Teachers Fund, CALPERS) will primarily seek stable returns, long-term capital preservation, and growth; and
  • Sources of structured finance (e.g., AIG, GECC) and other partners will seek stable cash flows and attractive returns.

This unprecedented expansion of the pool of capital available for transmission will require entirely new transactions and project structures, as transmission owners try to blend traditional corporate and public finance with project-oriented, private sources. This expansion is the best near-term hope for filling the capex gap. Partnering with utilities makes sense, for the regulatory and rights of way reasons cited above, but new sources will provide the engine for transmission system upgrades, expansions, and acquisitions.

These investments can take many of the same forms applied to independent power plants and gas pipeline projects over the past 20 years. The basic vehicles are: a) private equity investment though partnerships or corporate structures involving preferred and/or common stock; b) project or corporate debt financing on a non-recourse or asset-backed basis; and c) leases involving the project/corporate transmission assets. There are many permutations to the applications in structured finance today that may be applied to new transmission investment.

The application of these financing techniques depends on the alignment of capital needs, investors' interests and objectives, and the transmission owners' and developers' business priorities. However, based on commentary by the financial community in FERC's recent conference on capital availability, it appears that those projects or acquisitions that have long-term stable revenue opportunities through regulated rates or contractual arrangements with load-serving entities, IPPs, and other market participants are more likely to obtain funding. The sidebar, "Transmission & Private Equity: Doing the Deal" (p. 24), describes the structure of several such recent deals. Merchant-type projects face more challenges for funding in today's financial environment. In this sense, the situation with transmission is no different than the situation facing domestic power plant development.

Regulatory Change: Helping or Hurting?

Will regulatory developments improve the transmission picture, and if so, will it be soon enough?