With a US$3bn price tag, the Ruby Pipeline was considered an ambitious project and not a sure thing in terms of obtaining financing under difficult market conditions. But the deal enjoyed tremendous success, with an oversubscription and terms more favourable than El Paso had predicted. By Alison Healey.
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The Ruby pipeline is a project designed to transport natural gas from an existing supply hub at Opal, Wyoming, to interconnections near Malin, Oregon. It will have an initial design capacity of up to 1.5bn ft3 per day. The start of construction is now imminent and the project is scheduled to be in service by March 31 2011.
The project is expected to include approximately 675 miles of 42-inch natural gas transmission pipeline. Contracts for the pipe have been signed and pipeline construction companies have been selected. The project will cross portions of four states: Wyoming, Utah, Nevada and Oregon.
Four compressor stations are proposed for the project: one near the Opal Hub in southwestern Wyoming; one south of Curlew Junction, Utah; one at the mid-point of the project, north of Elko, Nevada; and one in northwestern Nevada. The final sustainable summer-day capacity is expected to be between 1,300,000 Dth/day and 1,500,000 Dth/day. El Paso selected US Pipeline Inc of Houston, Rockford Corp of Hillsboro, Oregon and Precision Pipeline of Eau Claire, Wisconsin.
El Paso set out to finance Ruby on a non-recourse basis such that the capital structure of the project would reflect a 60:40 debt-to-equity ratio. The goal was to put in place a debt financing as soon as reasonably possible that would allow El Paso to borrow over time to pay for construction costs as they were incurred, and which will be fully drawn at or near the estimated completion date.
At the time of El Paso’s presentation of a preliminary financing plan to the Federal Energy Regulatory Commission (FERC) the company estimated that the construction debt would bear a 9% interest coupon during the construction period along with upfront financing fees and closing costs representing approximately 3% of the total debt commitments, with Ruby’s all-in cost of debt projected at 9.3%.
El Paso reported that it expected that after Ruby was placed into service, the construction period debt could be converted into term loan or possibly bond commitments bearing an interest rate of approximately 8%, reflecting the credit quality of the assets, the BBB– weighted average credit rating of the shippers, and the steady cashflow generating nature of the project.
It was expected that term financing would mature over varying periods up to 10 years following the in-service date, supported by revenues from Ruby’s firm transportation agreements, the bulk of which have coterminous 10-year initial terms. The goal was to have the term financing with some amortisation over its life, and the amortisation would start following the debt instrument’s execution. Terms, however, ended up better than initially proposed.
Contracts, partnership key
In June 2009, El Paso announced that it had entered into binding agreements in the form of 10 to 15-year contracts for a total of 1.1bn cubic feet per day of capacity. PG&E is the anchor shipper of the project. The recourse monthly reservation rate for capacity on the Ruby Pipeline will vary depending upon the final pipeline design, the final costs of construction and components and the final in-service date.
Assuming an in-service date of March 31 2011 and based on a 42” pipeline design with a capacity of 1,300 MDth/day, the recourse reservation rate is expected to be approximately US$33.3884 (equivalent to US$1.0977/Dth on a 100% load factor basis), and the recourse reservation rate for a 42” pipeline design with a capacity of 1,500 MDth/day is expected to be approximately US$29.0114/Dth (equivalent to US$0.9538/Dth on a 100% load factor basis).
The commodity rate on the Ruby Pipeline will be established as the facility design is finalised, but is expected to be negligible. Shippers should assume a commodity rate of approximately US$0.005/Dth.
In July 2009 El Paso executed a binding agreement with Global Infrastructure Partners (GIP) through which GIP will acquire a 50% interest in the Ruby Pipeline project.
Under the terms of the agreement, GIP would invest up to US$700m in the project in the following three major tranches: US$405m in the form of a 7% secured note that was drawn upon to reimburse one half of El Paso’s costs to date, as well as to fund one half of the future costs of developing the project.
The note was to be exchanged for a convertible preferred equity interest in Ruby at the close of construction financing; US$145m contributed as a preferred equity interest in the Cheyenne Plains Pipeline that will be exchanged for a convertible preferred equity interest in Ruby at final project completion; depending on the amount of external financing that is raised, GIP could invest up to an additional US$150m as a convertible preferred equity interest in Ruby. GIP’s convertible preferred equity interest in Ruby will earn a fixed 13% return beginning at final project completion.
Cheyenne Plains is a gas pipeline project financed by El Paso in 2005 and put into service the same year. GIP will have the option to convert its preferred equity to common equity at any time. However, GIP’s preferred equity is subject to a mandatory conversion to common equity upon the satisfaction of certain conditions, including additional shipper commitments on the Ruby Pipeline.
El Paso provided security for GIP’s investment until the completion of the project in the form of a portion of its 55m El Paso Pipeline Partners common units and a portion of its equity in the Cheyenne Plains Pipeline.
If all conditions to closing are satisfied or waived, GIP would own a 50% equity interest in Ruby and all ownership in Cheyenne Plains would be transferred back to El Paso. However, if conditions are not satisfied, including placing the Ruby pipeline project in service by August 2011, GIP has the option to convert its Cheyenne Plains preferred interest to a common interest and/or be repaid in cash for its remaining investment.
El Paso will be responsible for the construction of the Ruby Pipeline project and its operations. If construction costs come in under budget, El Paso will retain all benefits but if there are any cost overruns El Paso will absorb those as well.
In June 2009, El Paso retained Credit Suisse as financial adviser. By March of this year, details of a project financing began to emerge, with reports that the loan had already received commitments in excess of the US$1.5bn it was seeking.
In April 2010 El Paso won final approval for the Ruby Pipeline project from the Federal Energy Regulatory Commission, concluding a review process that began in January 2009. The project got approval as several other projects were cancelled. In 2009, Williams and TransCanada quietly called off plans for a similarly-sized project called Sunstone. The project was also proposed for service in 2011 and would have would involved constructing a new pipeline substantially parallel to the existing Williams Northwest Pipeline system between the Opal Hub in Wyoming and Stanfield, Oregon. Williams’ Northwest system interconnects at Stanfield with TransCanada’s Gas Transmission Northwest pipeline system.
FERC approval cleared the way to close the deal, and a few weeks later, in early May 2010, joint bookrunners and joint lead arrangers Bank of Montreal, Credit Agricole, RBS, Santander, Scotia, SG and UniCredit closed the US$1.5bn project loan for the Ruby Pipeline for El Paso and Global Infrastructure Partners.
The seven-year deal was priced at 300bp over Libor for years one and two, 325bp for years three and four, and 375bp for years five, six and seven, with the stipulation that US$700m of debt must be refinanced by the end of year four. If El Paso does not refinance US$700m by the end of year four, the rate will be 425bp over Libor for years five through seven.
El Paso has entered into hedges that hedge at least 75% of the floating Libor interest rate exposure on this facility beginning in June 2011 and extending through the maturity of the facility. The project sponsor also provided a contingent completion and cost-overrun guarantee to Ruby lenders; however, upon the Ruby pipeline project becoming operational and making certain permitting representations, the project financing will become non-recourse to El Paso.
Using the current six-month Libor rate, the expected weighted average rate for the financing is expected to be less than 7%, excluding debt issuance costs.
Ruby will not draw under the new facility until it has received final regulatory approvals and other conditions precedent under the financing agreements. The debt will be supported by the equity of Ruby and an El Paso Corporation construction completion guarantee.
The Ruby Pipeline project benefited from a combination of favourable trends, including high gas prices and problems with LNG projects as well as the momentum the sponsor was able to build in financing markets throughout the past few years. In February 2009, for example, El Paso was able to pull off a US$500m, seven-year bond deal at a yield of 9-1/8%, about 650bp over Treasuries, impressing investors that remarked that the pricing was almost as tight as an investment grade bond. This deal followed a 15% offering in December 2008 that generated a tremendous amount of investor interest.