The financing for El Paso Corporation and Global Infrastructure Partners’ Ruby natural gas pipeline was the largest bank project financing to close in North American in 2010. It has, like most pipeline deals put before project lenders, impeccable fundamentals, and a solid set of underlying contracts. What distinguishes the Ruby deal is the presence of an infrastructure fund in the financing at a comparatively early stage.

Midstream US gas assets are very popular with infrastructure funds, particularly those staffed by former energy project finance bankers. Most funds have been more inter­ested in operational than development-stage assets, though they struggle to compete with strategic pipeline operators and their associated master limited partnerships.

The $2.922 billion pipeline financing in­clud­ed $1.51 billion in bank debt, which came from a 19-strong group of banks. The seven-year miniperm debt has a scheduled amortisation of 30%, with another 20% to come under the base case using cash sweeps in years five to seven. The debt is priced at 300bp over six-month Libor for the first two years, 325bp in years three and four, and 375bp thereafter, as long as the project has refinanced $700 million of the outstanding balance. According to El Paso, it is likely to swap the rate on debt to roughly 7% all-in in June 2011.

The bank debt was structured around the pipeline’s then-existing contracts, accounting for the low level of leverage, and was 1.7x oversubscribed. Joining initial mandated lead arrangers Credit Agricole, SG, Santander, BMO, Scotia, RBS, UniCredit, which had committed to underwrite half the debt, were Credit Suisse (also El Paso’s financial adviser and a founder of GIP), Barclays, BayernLB, BBVA, BNP Paribas, DnB NOR, ING, Lloyds, Natixis, Mizuho, RBC, Bank of Tokyo-Mitsubishi UFJ.

More unusual than the project debt, however, is the financial engineering that preceded financial close on 5 May 2010. In July 2007, El Paso received commitments for $700 million in interim financing for the pipeline from GIP. The deal was carefully structured to minimise its exposure to development and con­struction risk. But it provided cash for early-stage development costs at a time when bank underwriting and hold position capacities were weak.

The GIP commitment consisted of a $405 million secured note, which would become convertible preferred equity, when the pipeline’s construction financing closed, a $145 million preferred equity interest in El Paso’s Cheyenne Plains pipeline, which would become Ruby convertible preferred equity when the pipeline was complete, and a $150 million commitment that was contingent on El Paso closing a construction financing. The secured note had a 7% interest rate, while the preferred equity would be priced at 13%.

El Paso, which lacked the capacity to finance the pipeline itself, was prepared to offer up some of its other assets to access low-cost development capital. The arrangement is not unusual in power, where power funds frequently offer developers convertible loans in the months and years leading to their equity contributions at financial close. But few pipeline operators have El Paso’s need for external financing capacity.

Ruby is a 1,086km natural gas pipeline that runs from Opal Hub in Wyoming through Utah and Nevada to Pacific Gas & Electric’s delivery point near Oregon’s border with California. In addition to the main 42-inch pipeline, the project includes a short 4.3km lateral running from the PG&E point to the Gas Transmission Northwest delivery point in Malin. The pipeline has an initial capacity of 1.2 billion cubic feet per day (cfpd), but could be expanded to 1.5 billion.

The rationale for the Federal Energy Regulatory Commission-regulated pipeline is to carry gas from the Rockies, where pro­duc­tion has increased sharply in recent years, to California, which still suffers from con­strained trans­portation capa­city, a reli­ance on gas for its generation needs and represents an attractive market for traders. Roughly 87% of Ruby’s capacity is now under ship-or-pay contracts, usually for ten-year terms.

El Paso started developing the project in December 2007, with PG&E as an anchor customer. PG&E was originally set to be a 25.2% owner of the project, but by May 2008 had withdrawn from an equity participation, though it kept a roughly 350 million cubic feet per day capacity commitment.

El Paso filed its application with FERC in January 2009, and the sponsor and its adviser held its first meeting with potential lead banks in December 2009, giving them a month to submit take-and-hold commitments of $175 million each. In early February, the leads did the same with potential participants, with a 19 March deadline. Docu­mentation signed on 5 May, with financial close taking place in August after the project received the necessary permits.

The pipeline entered construction shortly after funding, with Rockford Corporation, US Pipeline, Precision Pipeline, and Associated Pipe Line as the main contractors, and CIG Pipeline Services as construction manager. El Paso is providing lenders with a completion guarantee.

Ruby is a quickly and smartly executed project financing for a large and complex undertaking. It closed at a time when the ability of banks to write big tickets for even the best-structured projects was in question. The deal may also herald the wider involvement of infrastructure funds in pipeline development, as the US reorients its gas infrastructure towards newer domestic sources of gas.

Ruby Pipeline LLC
Status: Closed 5 May 2010
Size: $2.922 billion
Location: Western US
Description: 1,086km, 1.5 billion cubic feet per day gas pipeline
Sponsors: El Paso Corporation (50%), Global Infrastructure Partners (50%)
Debt: $1.51 billion
Initial mandated lead arrangers: Credit Agricole, SG, Santander, BMO, Scotia, RBS, UniCredit
Participants: Credit Suisse, Barclays, BayernLB, BBVA, BNP Paribas, DnB NOR, ING, Lloyds, Natixis, Mizuho, RBC, Bank of Tokyo-Mitsubishi UFJ
Financial adviser: Credit Suisse
Sponsor legal advisers: Bracewell & Giuliani (El Paso and project), Vinson & Elkins (GIP)
Lender legal adviser: Chadbourne & Parke
Independent engineer: RW Beck
Market consultant: ICF
Construction management: CIG Pipeline Services
Pipeline construction: Rockford Corporation, US Pipeline, Precision Pipeline, Associated Pipe Line
Pipeline supply: Berg, Welspun