The independent transmission space is rife with investment opportunities.
That is the position Powerlink Transmission has taken. The Washington-based company, led by CEO Frederick Buckman, the founder of Trans-Elect Development Co., and backed by private equity shop Lindsay Goldberg, is looking to take advantage of changes in the transmission industry.
“There are two things that have opened the door wider for people who are independent owners of transmission,” Buckman said. “One is that FERC has made it clear through their policy views and Order 1000 that the [right of first refusal (ROFR)] that has been part of vertically integrated utility ownership forever is kind of going away. And secondly, there is a lot of new generation that needs to get to market and the amount of capital that’s available to build the transmission necessary for that is being constrained somewhat.”
The traditional builders of transmission, investor-owned utilities (IOUs), are seeing a lot of demands on their capital, from the need to meet renewable portfolio standards (RPS) and comply with EPA mandates to investing in their own infrastructure to address reliability issues, the CEO said. “Some have underfunded pension plans, and continued low interest rates are exacerbating that problem,” Buckman said.
That is where Powerlink Transmission steps in. Launched on May 1, the company has been in talks with cooperatives and a number of utilities, both investor-owned and municipal, about investing in and partnering with them on transmission projects.
“We’ve been pleasantly surprised by the willingness of people who currently own transmission to talk to us about alternative structures of ownership – ones where we might own a piece of an entire transmission system, where we might own the whole transmission system, where we might own a line or part of a line or help an existing owner of a transmission system build a new line,” Buckman said.
Through that investment, Powerlink Transmission would create either a line or a system that has the “mantle of independence” that helps it receive favorable regulatory treatment, he said. Compared to vertically integrated utilities that may have concerns about their generation being utilized, independent transmission players are solely focused on transmission, Buckman said.
“We bring an ability to identify projects which are in the best interest in the marketplace and the end-use customers, and to pursue those projects in a way where we are not conflicted by any other issue,” Buckman said. “We’ve done a lot of work on what kind of capital structures make the most sense, not for utility assets in generation but for transmission assets specifically. When you start to separate out transmission assets and capitalize them just by themselves, there are some things you can do to take advantage of the relatively low interest rate environment we have today, to take advantage of provisions in tax codes that work to the benefit of transmission owners – we try to bring those benefits not just for us but for whoever our partner is.”
No project too big, CEO says
Though Buckman wouldn’t disclose the amount of Lindsay Goldberg’s investment in Powerlink Transmission, he said the company has no qualms about taking on projects that are several billions of dollars.
Powerlink Transmission is currently looking at two $1bn projects “and there hasn’t been any conversation about ‘Is this project too big?’ for either one of those,” he said. “I would say operating systems even much bigger than that, several billions of dollars, would be no problem for us.”
Powerlink Transmission could be a 100% owner of a system that big “and that would not be a strain on what we can do,” he said.
The CEO said Powerlink Transmission intends always to have private equity backing. Bringing in another financial partner would be something the company and Lindsay Goldberg would discuss if an investment or purchase of new assets was “big enough,” he said.
“Between what Lindsay Goldberg has offered to put up and what I know is available from other partners that Lindsay Goldberg and I could recruit to help us, there isn’t any project that I would be unwilling to look at because of its size,” Buckman said. “We are very well capitalized.”
Lindsay Goldberg on its website indicates an investment horizon of 20 years.
Powerlink Transmission currently has a preliminary term sheet with a company Buckman would not disclose. “It would be great if we could have a couple of agreed-to final term sheets by the end of the year,” he said, adding, “I don’t know whether that would happen or not. I would say that’s in the realm of the possible, and not necessarily in the realm of the likely.”
By May 1, 2014, the CEO said he hopes to have at least one deal on an operating asset, one deal on a new project with an existing transmission owner and one or two deals on new projects in late-stage development that need someone “to bring forward the capital and closing expertise that we have.”
Because of the range in the types of projects the company would consider investing in, there are not necessarily geographic restrictions. However, there are more opportunities to build new assets in the West, while there are many opportunities with existing projects both in the West and East.
“Candidly, one of the big building projects we’re looking at is more of an eastern project than a western project,” he said. “While there is probably more activity in the West, it’s not exclusively West.”
In addition to its partnership with Lindsay Goldberg, Powerlink Transmission has a quasi-partnership with Quanta, which is helping the company to analyze some existing transmission systems and opportunities. “The conversations we have are in the several-times-a-week variety,” Buckman said. “And I see that continuing.”