Saturday, 19 January 2019

Alberta PowerLine combines power and P3

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The Alberta PowerLine transaction combined an innovative power financing with a deal structure typically seen in public-private partnerships. The deal represented the largest P3 bond transaction in Canadian history. By Alison Healey.

The 311-mile Fort McMurray West transmission line project was designed to increase transmission capacity within the Alberta region to accommodate current and future electricity load growth associated with the area’s industrial operations. The scheme was tendered in 2013 by the Alberta Electric System Operator (AESO) as a concession and reached financial close this year.

The project was deemed necessary by the AESO based on the increasing population in north-eastern Alberta as well as its role in supporting the oil sands. The AESO made the case for the project in part with the assertion that the extra capacity would be crucial to move power between the south and oil sands cogeneration plants. The AESO estimates that demand for electricity in north-eastern Alberta will almost double in the next 10 years.

The Alberta Electric System Operator is a not-for-profit corporation in charge of the planning and operation of Alberta’s interconnected power system and wholesale electricity market. It is governed by a board that is independent of the electric industry and appointed by the Alberta Minister of Energy.

The AESO owns no transmission facilities but directs the operation of facilities made available by transmission facility owners (TFOs). The AESO is entitled to recover the costs arising from operating the electric transmission system through the AESO tariff payable by the users of the transmission system and then pays the Alberta Utilities Commission (AUC)-approved tariffs to the TFOs.

Under the Electric Utilities Act, the AESO is responsible for the Independent System Operator (ISO) tariff, which includes the rates, terms and conditions that apply to entities connected to the transmission system. It submits an ISO tariff update application to the AUC for approval every year and files a new, comprehensive ISO tariff application every two to three years.

AESO recovers about 18% of its costs from residential consumers, farms pay for about 4% of costs, and the remaining 78% is paid for by industrial and commercial users.

The competitive process was designed to put downward pressure on transmission costs and allow competitively priced power to reach consumers. It was one of six projects approved by the former Progressive Conservative government as critical to address concerns about serious provincial power transmission bottlenecks. The designations as critical transmission infrastructure (CTI) by the Government of Alberta meant the project did not require approval by the AUC.

Fort McMurray West will connect the existing Sunnybrook Substation to an expanded Livock substation, then extend north-east to a planned new Thickwood Hills substation.

The project will comprise a 500 kilovolt (kV) AC single-circuit transmission line, approximately 100km in length, running from a new substation to be established in the Thickwood Hills area approximately 25km west of Fort McMurray, to an expanded Livock substation in the Wabasca area and a 500kV AC single-circuit transmission line, approximately 400km in length, running from the expanded Livock substation to the existing Sunnybrook substation in the Wabamun area.

The AESO was mandated by the Government of Alberta to develop a competitive process to develop the project and have it approved by the AUC. That approval came through on February 14 2013 and the AESO set out to select a winning private team by December 2014. The target in-service date for the project was set for 2019.

The AESO launched the request for expressions of interest (REOI) in the project in May of 2013 and received submissions from companies around the world, including Asia, Europe, South America and North America.

“Alberta is leading the way across North America to inject competitive pressures into the transmission system and to see so many world-class companies from across the globe looking to invest in Alberta is a testament to the success of the competition to-date,” AESO CEO David Erickson said during the process.

The request for qualifications stage was launched in July of 2013 and concluded in December of 2013. The AESO provided draft project agreements at this stage to allow bidders an early look at the AESO’s proposed risk allocation.

In one unique aspect, bidders bid the route path of the transmission line rather than have it dictated. The process resulted in an approximately three-year project development agreement (PDA) period to permit the finalisation of land acquisitions, rights of way and permitting, and licensing prior to execution of the project agreement (PA).

Independent experts were brought in from across North America to evaluate, score and make a final recommendation to the AESO board. After an analysis of technical, financial and route development expertise, the five companies selected to enter the request for proposals (RFP) stage were Alberta PowerLine, owned by Canadian Utilities and Quanta Capital Solutions; Athabasca Transmission, owned by AltaLink and AEP Transmission; NorSpan Partners, owned by Epcor Utilities and LS Power Associates; TAMA Transmission, owned by MidAmerican Energy Holdings and TransAlta; and TransCanada/Elecnor.

The RFP stage was launched in 2014. In addition to a number of technical submissions that bidders were required to provide for assessment, the AESO conducted multiple rounds of confidential collaborative meetings with both a technical and commercial focus with each bidder.

At the conclusion of the meetings, the AESO issued final versions of the project agreements upon which all bidders based their technical and pricing submissions. Only bidders whose technical submissions received a passing grade were able to continue in the process. Bidders were evaluated in terms of their ability to provide the lowest life-cycle cost estimate for the transmission line and the competition cost savings for Alberta ratepayers was estimated to be more tha C$400m.

On December 18 2014, the AESO awarded Alberta PowerLine the contract to design, build, own and operate the Fort McMurray West 500kV Transmission Project. The project was awarded under the AESO’s newly-instituted competitive process, which was recommended in 2011.

Alberta PowerLine submitted a bid of C$1.43bn. The team will build, finance and own and operate the transmission line under the newly-created competitive process and will earn fixed monthly payments for 35 years. On February 10 2017, the AUC approved the proposed route of the project based on landholders’ feedback, land use, social factors, cost, and environmental considerations. The public engagement process for the project was extensive. In total, 27 Indigenous communities were engaged and more than 3,000 face-to-face meetings were conducted.

The ultimate debt/equity financing structure was priced and put into place at financial close of the project agreement after completion of a comprehensive funding competition process undertaken in the last few months of the PDA period involving the AESO, the project company and their financial advisor RBC, and resulting in a fully underwritten financing with an extended commitment period.

Development phase expenses were funded by the project’s equity sponsors and repaid at financial close except for approximately C$15m. The funds were re-injected towards the end of the construction period. The two equity sponsors supported their equity commitment by way of letters of credit.

Alberta Powerline Partnership prepared a C$1.38bn four-tranche bond deal to finance Fort McMurray. RBC acted as financial adviser and was engaged on the mandate for four years. RBC and CIBC were lead underwriters. The underwriters held investor meetings in September 2017 and a roadshow was launched in Montreal on September 12 and Toronto on September 13 and 14.

The offering included a Series A tranche sized at C$534.4m and due in 2053, a Series B tranche sized at C$534.4m and due in 2054, and Series C and D tranches sized at C$146.5m and due in September and June 2032. The Series A, B, C, and D bonds were priced at 155bp, 155bp, 123bp, and 123bp over the Canadian benchmark, respectively. Financing fees amounted to C$8.1m, underwriting fees and expenses were C$23.9m, and interest during construction is C$70.8m. Moody’s rated the deal A2.

The use of two medium-term bond issues of reasonable size was determined to create greater pricing tension and overall reduce the cost of financing. The semi-annual pay bonds provide a quarterly structure for debt payment and equity distributions.

The bonds were well received by the broad bond market. Series A and B were more than three times oversubscribed and Series B and C were able to be placed early. Pricing was on the tight end of the guidance range.

The structure of the deal as unique and represented many “firsts”. Once the project is in service, Alberta PowerLine will receive availability payments from AESO covering operating, maintenance and rehabilitation costs, debt service and equity returns, with the payments only subject to deductions for unavailability or non-performance. Moody’s said it deems the likelihood of material deduction and termination for poor performance to be “very low”.

The deal had to overcome some unique risks, as Moody’s pointed out. There is a risk that the initial tariff, which covers everything including all monthly payments, and termination payments, may not be approved. If this were to happen, energisation of the line cannot be declared and revenues cannot be paid to the project company.

Alberta PowerLine was set to start the tariff application process only after financial close, but there are protections built into the deal stipulating that if the tariff has not been approved by the AUC within 16 months of filing, the project company may declare a termination for extended delays.

A 21-month construction period started in summer 2017. The project will predominantly cross Crown land, with about 30% covering private land. During the operations phase, Alberta PowerLine will receive availability payments on a monthly basis from AESO. The total availability payments will be made up of non-indexed capital payments, O&M payments that cover indexed life-cycle costs, and insurance payments.

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