RBS has closed a $383 million private placement to fund completion of the Freeport LNG regasification terminal. This financing completes the fundraising for the first phase of the project, and supplements a financing from the terminal's main customer. The blend of financing sources is a unique one, but given how critical oil majors have become to the LNG business, is likely to become more common.

Freeport is a receiving terminal with a nameplate capacity of 1.5 billion cubic feet per day (cfpd), topping out at 1.7 billion cfpd at peak operation. It is located on Quintana Island, near Freeport, Texas. The project's original developer was Cheniere Energy, which subsequently went on to develop the Sabine Pass receiving terminal nearby.

But in 2002 neither Cheniere nor LNG ventures had the potential they have today. In August that year, Cheniere sold a 60% interest in the project to Michael Smith for $5 million, as well as the contribution of $9 million in development costs. Smith, who founded Basin Exploration, and sold it to Stone Energy for $400 million in 2001, was looking for a new business opportunity.

By March 2003, Contango Petroleum had bought a 10% stake, so that the limited partners in the project were now Smith with 60%, Cheniere with 30%, and Contango with 10%. Later that month, Freeport filed with the Federal Energy Regulatory Commission (FERC) for permission to build the facility, which FERC granted in June 2004.

In the interim, the sponsors lined up contracts for the facility's output. In June 2003, it signed an agreement covering 500 million cfpd with Dow Chemical, which runs petrochemical facilities nearby. Dow also bought 25% of Smith's stake in the project, leaving it with 15% of the project's equity.

More significantly, however, was the terminal use agreement (TUA) that it signed with ConocoPhillips late in December 2003. Under this agreement, Conoco would buy 1 billion cfpd of capacity, acquire 50% of the project's general partner (Smith has the remainder), and provide construction financing for the terminal, which at the time had a price tag of over $400 million.

Conoco's commitment was for $460 million, as well as 50% of the costs of the facility above this point. It also provided for a second subordinated tranche of $160 million, to be replaced by third party debt as soon as possible. At around this time, CSFB, the project's initial financial adviser, was replaced by RBS on the grounds that such a supplementary financing would likely come from the bank market.

Indeed, in November 2004, RBS tested sentiment in the bank market for a $140 million deal to take out the second Conoco tranche. This deal, according to sources at the arranger, did not close because the size and scope of the project changed, and the sponsor wanted to lock in more attractive fixed-rate funding.

The resulting package provided a host of complications several of which the sponsor and adviser had not encountered before. There have been such mixtures of financing from a corporate and bank before. There have even been mixtures of financing from banks, bonds and corporates before. But in the first instance, say on the Atlas Methanol deal in Trinidad, the lender, BP, was able to negotiate terms that were similar to the institutions supporting the deal. In the latter instances, common terms for the banks and bondholders have been hashed out in advance.

In this instance, the parameters of the Conoco financing were set in stone – its length, amortization profile, and security package, in particular. Any supplemental financing would either work from a different term sheet and be pari passu, or would be subordinated. Meanwhile, the total cost of the project had increased to $600 million at the time of the abortive bank deal, and then to $780 million.

Some of the increase has been down to raw materials prices, In addition, though, the sponsors have come to realise that the facility might have some success in bringing in additional customers. Indeed, in January 2005, Mitsubishi agreed to take 150 million cfpd of capacity, as well as an option for 100 million cfpd more, under a 17-year TUA. Mitsubishi will be bringing into the US LNG that it is purchasing from the Omani Qalhat LNG facility.

The private placement, which closed on 19 December, takes care of refinancing the original subordinated tranche, accounts for Conoco's partners' share of the cost increases, and even provides for some cash to be reinvested in the likely expansion project. Since the project has a total cost of $780 million, Conoco is providing $460 million, and the private placement raised $383 million, the project is over 100% leveraged. And in any case, as one source close to the financing put it, "the sponsors have not put a great deal of equity into the deal."

The private placement is without recourse to any of the shippers or sponsors, although its credit rests on the TUA with Dow Chemical. As such the Dow contract, but not its partnership interest in Freeport, are pledged to the lenders. Moreover, the private placement lenders a group of 11 led by Prudential Capital, relied on a separate security package. The TUA operates much as a tolling agreement for a power plant would, with an availability fee providing for both debt repayments and most of the project's equity return. The per unit fees paid to the operator according to the terminal's throughput do little more than cover costs.

The note issue, with a maturity of 20 years, extends beyond the Conoco tranche, and while pari passu, does not benefit from any Conoco guarantees.

The project gained a solid investment grade rating from Fitch and pricing that has been described as attractive. The financing also includes provisions for the eventual expansion financing, although the scope of the work, and thus the size of a second round of fundraising, has yet to be determined. However, given the number of expansion deals, and multiple offtaker projects, in the works in the US, this deal may serve as a template, albeit a complex one.

Freeport LNG
Status: Closed 19 December
Size: $780 million
Description: 1.5 billion cubic feet per day LNG receiving terminal
Location: Quintana Island, Texas
Sponsors: Michael Smith (45%), Cheniere Energy (30%), Dow Chemical (15%), Contango (10%)
Debt: $460 million from offtaker ConocoPhillips, $383 million private placement
Financial adviser: RBS
Placement agent: RBS Greenwich Capital
Independent engineer: Merlin
Legal adviser to the institutional lenders: Bingham McCutchen
Legal adviser to the developer: Chadbourne & Parke (financial aspects), King & Spalding (TUA aspects), Brownstein Hyatt & Farber
Legal adviser to the purchaser: Mayer Brown Rowe & Maw