El Paso corporate has closed a $278 million long-dated financing for its Cheyenne Plains natural gas pipeline. The financing is the first for an onshore pipeline in the US since the Kern River expansion deal in June 2002. It also shows the advantages – in terms of pricing, tenor and covenants – of using the bank market.

The ten-year deal, led by WestLB, is a product of the recent upheavals at El Paso (for more details search 'El Paso' on www.projectfinancemagazine.com). Its terms have, paradoxically, benefited from the fall-out at the company. But El Paso is still one of the strongest and most able pipeline operators in the business, particularly in Mexico, and also, through its former master limited partnership GulfTerra, offshore.

Cheyenne Plains is a 380-mile pipeline that has been operational since 31 January 2005. It takes natural gas from collection points in Cheyenne, Wyoming to distribution networks in Greenburg, Kansas. The 36-inch pipeline will connect with Colorado Interstate Gas and Wyoming Interstate, both El Paso subsidiaries.

It will bring gas from deposits in the Rockies to markets in the Midwest, although it connects with hubs in Kansas that will send gas in several directions. The pipeline is regulated, and falls under the jurisdiction of the Federal Energy Regulatory Commission (FERC).

El Paso first announced plans for a pipeline in May 2003, when it submitted an application to FERC for a 30-inch pipeline with a 560,000 Dekatherm per day (Dthpd) capacity. The pipeline was set to be in service in the middle of 2005, and shortly after submitting the application, El Paso commenced an open season for prospective shippers on the pipeline.

This process proved to be successful enough for El Paso to announce later in the year that it would be making the project bigger. On 22 September, it said that it would increase the diameter of the pipe to 36 inches, and thus the capacity of the pipeline to 730,000 Dthpd.

The original financing featured firm contracts with lengths of 10 years or longer from 14 shippers and has additional 10-year commitments in support of the expansion. Among the shippers listed in the pipeline company's informational filings are Anadarko, Atmos, BP, Bill Barrett, ConocoPhillips, Kennedy Oil, Kerr-McGee, Noble Energy and ONEOK.

The increase in capacity required a modified FERC submission, and increased the cost of the pipeline from $336 million to $435 million. The sponsor made this decision just as it received a preliminary approval for the pipeline, but had to go back and modify the submission, a time-consuming process.

The background to the initial pipeline planning, and the decision in late 2003 to go for a project financing, was the restructuring that El Paso launched in the wake of Enron's bankruptcy. This involved the sale of merchant assets, the restructuring of structured finance vehicles and a return to El Paso's core pipeline capacities. As such, the Cheyenne plains financing was unlikely to be a casualty.

And so, in February, El Paso mandated WestLB to provide a min-perm debt facility to finance construction of the project, and the arranger launched a limited syndication. The deal, with a five-year maturity and $278 million in size, received commitments from a small number of banks.

But, according to Sanjay Nayyar, the head of project finance at El Paso, "before we went out seeking secondary commitments, the restatement of reserves issue hit El Paso, and we elected to put it on hold." El Paso worked throughout the middle of 2004 on restating its financials, as, says Nayyar, it would then be able to resurrect the financing.

In the interim, according to Nayyar, El Paso had begun work on the project using equity, and was managing the construction process through Colorado Interstate. Ultimately, says Nayyar, "We worked with the banks throughout the restatement process, which we completed in September 2004. Once these issues were resolved, it made sense to go back to the banks with a new package."

Work on the pipeline had proceeded very quickly, and the sponsor managed to get the project in service in December 2004, when it started free flowing gas. At this time, and with construction on phase I out of the way, El Paso was in a position to get much better terms on the financing. It closed a new financing, still with WestLB, in May 2005.

This financing has a ten-year tenor, but a 15-year amortization profile – a structure that syndications personnel are now calling a maxi-perm. It is an indication of the strength of demand in the New York bank market that such a loan package, with a sizeable balloon payment at maturity, is acceptable.

Moreover, sources close to the arranger have said that the contracts that underpin the deal's credit do not always benefit from parent-level guarantees, which are usually demanded by project lenders. The project's financing consists of 70% debt and 30% equity, while the debt breaks down into a $266 million senior secured term loan and $12 million senior secured letter of credit.

It is tempting to ascribe the improved terms to the delay in financing, although Nayyar thinks that the fact that the second deal excluded construction risk is more significant. Asked whether El Paso would have been better off with a bond financing, either public or private, Nayyar says simply "we considered all options for the asset." Nevertheless, a bond refinancing in the future cannot be ruled out.

WestLB approached 21 banks on the deal, of which it persuaded 15 to commit, including several supporters of the first deal. These were: ABN Amro, Scotia, Nord/LB, RBS, HVB, Fortis, Allied Irish, UBoC, Met Life, RZB, DZ Bank, CoBank, Natexis, CIT and Amarillo National Bank.
$22 million of the financing has been earmarked for work on the phase 2 expansion, including the addition of additional compression equipment. This work will be complete later on in the year. n

Cheyenne Plains Gas Pipeline Company
Status: Closed May 2005
Size: $435 million
Location: Wyoming and Colorado, US
Description: 380-mile, 36-inch gas pipeline
Sponsor: El Paso Corporation
Debt: $278 million
Arranger: WestLB
Tenor: 10 years
Sponsor legal counsel: Chadbourne & Parke
Lender legal counsel: Milbank Tweed