Future transmission investment will continue to be strong, and investors will continue to support it, according to Josh Batchelder, vice president – Power, Energy & Utilities Division, CoBank, ACB.
“Transmission is robust, scalable and a growing segment of the very well capitalized utility sector,” he said during the panel, “Financing challenges in the transmission space,” as part of TransmissionHub’s TransForum West held in Denver earlier this month.
He noted that there is access to numerous sources of financing due to regulated and predictable cash flows. He also said that the financing structure depends on the type and stages of projects.
The unknowns rest predominantly with disruptive technology and regulation, according to his presentation.
Finance challenges in the transmission space involve external factors, including pressure from other infrastructure investment, smart grid and changes in the financial landscape, he said.
Batchelder also said that transmission investment for reliability, market congestion and enhance grid security support shifts in the nation’s generation portfolio, support flexibility of distributed generation, and meet public policy needs.
He noted that the Edison Electric Institute says that “over 170 projects are highlighted, totaling approximately $48bn of transmission investment through 2025.”
As noted in his presentation, $35bn of forecast capital expenditures through 2020 is concentrated with nine utilities.
Batchelder also discussed the fundamentals of transmission investment from an investor perspective. As noted in his presentation, what makes investment in transmission possible include strong repayment sources in that there are regulated and predictable cash flows; an acceptable regulated debt structure; strong collateral value due to high market valuation multiples; and low construction completion risk.
Also, there are minimal, but recoverable, ongoing maintenance expenses.
There is also, he said, a “supportive regulatory environment during and post construction, particularly from the FERC.”
As noted in his presentation, FERC allows, for instance, a forward test year; theoretical capital structure during construction; construction work in progress (CWIP) revenues – debt service supportable during construction; and return on equity (ROE) calculated on asset base, not volume – revenue/earnings certainty.
He also noted that there are strong sponsors in the transmission space with experience in investing, developing, executing and operating transmission.
Batchelder further discussed the types and stages of transmission investment.
For instance, as noted in his presentation, during the construction stage of a single line – wholly owned or a joint venture (JV) – the financing involves a bank construction revolver, with the terms involving parent/equity support during construction, as well as fairly robust covenants, including leverage ratio. During the completion stage of a single line in service – wholly owned or a JV – the financing involves a bank working capital revolver (smaller size), as well as debt capital markets (once in service), with the terms involving lighter covenants, particularly under indenture.
Bank financing is available at each stage and project type, according to the presentation, which also noted that debt capital markets access becomes easier as the credit profile improves.
Batchelder also discussed the future of transmission financing from a fixed income investor’s perspective.
Opportunities for more investment include migrating demographics, mobile generation – retiring coal plants, as well as new gas and renewables; cyber security; grid complexity driven by distributed generation; and grid reliability, according to his presentation.
He said, “I’m convinced that transmission and reliability [are] becoming more important because of distributed generation, not less.”
In terms of threats to future transmission financing, his presentation noted that those include disruptive technology – centralization to decentralization due to renewables, storage and distributed generation; higher financing cost – financial regulation; as well as interveners impact on ROEs/cap structure.
Another speaker on the panel was Robert Courtney, senior vice president with Luminate LLC, which, according to its website, is a technically based management consultancy providing technical, commercial and environmental advisory services and solutions to the power, energy and renewables markets.
Among the matters that Luminate evaluates for a project, Courtney said, are “who are the players, who’s the sponsor, who’s going to design and build the [project], [and] who’s going to operate and maintain it.”
According to his presentation, the scope of an independent engineering review generally includes an assessment of project participants; project design; the engineering, procurement and construction (EPC) contract; environmental aspects; and projected operating results.
In terms of conceptual design, he said, “[W]e’re going to … make sure that what’s being proposed is commercially proven,” for instance.
Among other things, he said that other factors that are evaluated are the cost structure, including “all the other costs that comprise that project [like] the development cost,” as well as the construction schedule.
Also speaking on the panel was Roman Fontes, senior investment officer – Transmission Infrastructure Program (TIP), Western Area Power Administration (Western).
According to Western’s website, TIP provides project development technical assistance to developers and other interested parties who have a proposal to build new or upgrade existing electric power transmission lines and related facilities. Leveraging Western’s transmission development expertise, TIP works with successful project applicants to qualify projects for financing through the U.S. Department of Energy’s Loan Programs Office. The site also noted that to be eligible, prospective projects must meet, at minimum, such criteria as delivering or facilitating the delivery of renewable energy resources; having at least one terminus – geographical point – in Western’s service territory; and demonstrating a reasonable expectation of repayment.
Most eligible projects will require some project development – for example, for a transmission line, that involves environmental, permitting, establishment of WECC path rating, and technical design work – before a loan can be issued using Western’s borrowing authority. The project development phase, the site continued, consists of the origination and development work for a potential project.
That phase is divided into three parts: project introduction, project initiation and project development. TIP projects that successfully complete the project development phase may advance to the finance phase, the site added, noting that the Loan Programs Office will perform underwriting, loan monitoring and administration functions.
“We also have a mandate as a federal financier … to be complimentary with capital markets,” for instance, Fontes said.
He noted that Western is involved in such projects as the Delaney to Colorado River project.
As TransmissionHub reported, the California ISO in January validated six applications in its competitive solicitation to select a project sponsor to finance, own, build, operate and maintain the 500-kV line.
Among other things, Fontes said that with respect to other projects, “we do have a growing pipeline of energy storage projects. We are helping, at this time, a number of international and U.S-based companies be more competitive in bids in California and Arizona in the energy storage space.”