Gas storage facilities, once a promising niche of the US infrastructure finance market, are now edging towards centre stage. High gas prices, constricted US gas distribution networks, and high levels of private equity liquidity have contributed to this trend. The Pine Prairie financing demonstrates the attractive terms available to borrowers because of this confluence.

SunTrust Robinson Humphrey, a subsidiary of SunTrust, is leading a $320 million financing for the Pine Prairie Energy Center (PPEC). Commitments came in on 13 April and the deal closed on 10 May. PPEC will be the largest natural gas salt cavern storage facility in North America. PPEC is a joint venture between Plains All-American Pipeline and Vulcan Capital – the investment arm of Microsoft co-founder Paul Allen.

The partnership formed in 2005 and is now developing the 24 billion cubic feet (bcf) PPEC facility in Evangeline Parish, Louisiana. It will comprise three 8 bcf underground storage caverns, a gas handling facility and also interconnecting pipelines, which extend into Rapides and Acadia Parishes and will serve consumers in the Southeastern US.

Sempra Energy was the original developer of the project, and in 2004 petitioned for Federal Energy Regulatory Commission (FERC) authorisation to build the facility. In 2005, Plains All-American Pipeline and Vulcan Capital acquired all of the equity in Energy Center Investments Corporation (a subsidiary of Sempra Energy), which held stakes in the BlueWater gas storage facility in Michigan and PPEC.

PPEC will be constructed in three phases. Construction began in summer 2005, and is expected to be complete by the end of 2009. In addition, the facility can accommodate a fourth cavern, which will be built later, depending on market conditions. The project will deliver up to 2.4 bcf of gas per day, and receive and inject up to 1.2 bcf of gas per day. Operation with a 4.5 bcf capacity is expected by the second quarter of 2007, and full capacity operation by the end of 2009.

The $320 million financing takes the form of a $220 million seven-year term loan B, due 2013 and priced at 250bp over Libor drawn and 125bp over Libor undrawn, and a $100 million five-year revolver priced at 250bp over Libor drawn and 50bp over Libor undrawn. ING acted as syndication agent, and the syndication brought in roughly 30 funds for the term loan B, and a handful of banks in the revolver. SunTrust considered several alternatives in terms of financing; however structurally this was the best option, as it gives the sponsors some flexibility.

The drawn-down funds are staggered; half is drawn at the beginning following financial close, and the remainder over the next year. The revolver will be used afterwards to fund excess capacity and construction. The facility also has a $12 million debt-service reserve account as well as a $20 million contingency reserve which may be used for construction or delays, and a $32 million equity contingent equity call from the sponsors. There is also a cash sweep facility in the deal for 50%, 75% or 100%, dependent on debt to Ebitda ratio.

Pace Global acted as market consultant for SunTrust in the deal, as it did with the earlier Southern Pines financing. It had been retained by ABN Amro, which was financial adviser when the project was proposed by Sempra. From Pace's perspective, PPEC has a competitive edge in the gas storage market, largely due to its location. This is seemingly ideal – downstream of a number of Gulf constraint points, with protection from hurricanes and access to most of the interstate pipelines, with which it will interconnect. Some of these pipelines' access points cross within a few miles of the project and serve the Midwest, north east and south east.

Moody's rated the deal B1/B+, which noted the deal's sound credit facility structure, substantial sponsor equity, reasonable back-up liquidity for project delays and cost overruns, proven technology for completing the facility, the good location of PPEC and the strategic value to the sponsor as it progresses into the natural gas storage business. But sponsor recourse is limited to a $30 million contingent equity call, the project does not have a turnkey engineering and construction contract (the contractor role being assumed by PPEC, which is a new developer is considered a risk) and also the lack of firm storage contracts for the project's capacity.

So far, only 9.2 bcf has been contracted out of the 24 bcf capacity. A source at Plains All-American does not consider this to be urgent, as the capacity will only be available sequentially as the project advances, and the entirety of the capacity unavailable until 2009. The LNG business is competitive, with importers and developers anxious for storage capacity. Securing contracts should therefore not be difficult when the space becomes available. Gas storage facilities benefit from the current volatility in gas prices – there are fears surrounding supply in winter and at this time storage should fetch a high premium. Storage facilities therefore offer a large seasonal price bridge.

The project also benefits from 15-year tax abatement from Louisiana State to encouraging development. Through this benefit, the project will save over $3 million per year in taxes. The context is encouraging for developers – two thirds of Gulf Coast gas production was impaired in the aftermath of Hurricanes Katrina and Rita. These disasters highlighted the need for new storage facilities.

SGR Holdings' Southern Pines gas storage project was the first ever B loan financing for a gas storage facility in the US. And Carlyle/Riverstone Global Energy and Power Fund recently agreed to acquire EnCana's natural gas storage business for $1.5 billion. The 174 billion cubic feet (bcf) business is located in key regions in terms of production and consumption and linked to major North American pipelines.

Pine Prairie Energy Center
Status: Closed 10 May
Size: $467 million
Location: Evangeline Parish, Louisiana
Description: 24 billion cubic feet gas storage facility
Sponsors: Plains All-American Pipeline and Vulcan Capital
Debt: $320 million
Lead arranger: SunTrust Robinson Humphrey
Syndication Agent: ING
Co-agents: CoBank, Bank of America
Market Consultant for lenders: PACE Global Energy
Engineering Consultant: E3 Engineering
Legal counsel to lenders: King and Spalding
Legal counsel to borrowers: Vinson & Elkins
Insurance: Moore-McNeil