Cameron Highway: good to go
The $500 million Cameron Highway pipeline financing has closed - the result of an unusual hybrid of project and reserve-based finance. The deal shows that participant bank diversification from power credits has encouraged creative thinking in oil and gas transactions. Nevertheless, by exposing lenders to volume risk, the debt is dependent on the prospects for Gulf of Mexico field development.
Cameron Highway is a 380-mile oil pipeline that will deliver up to 500,000 barrels of oil per day from the southern Green Canyon and western Gulf of Mexico areas to Port Arthur and Texas City, Texas. The pipeline is expected to be in service by the third quarter of 2004. El Paso Energy Partners (EPN), the master limited partnership (MLP) controlled by El Paso Corporation, announced the pipeline on 13 February 2002.The pipeline will serve the Atlantis, Mad Dog and Holstein fields, where BP, Unocal and BHP Billiton have substantial drilling interests. The three shippers will construct gathering lines to the new pipe, and are all solid credits. Additional discoveries in the Green canyon region could also use the pipeline. Nevertheless, the producers examined a number of competing options, including shuttle tanking, and pipeline from Shell in the same region, as well as a land-based pipeline, before accepting the sponsor's offerEPN has since been renamed GulfTerra Energy Partners, to reflect the increased separation of the MLP operationally from El Paso. The MLP had also found it increasingly difficult to separate investor perceptions of GulfTerra from El Paso's corporate difficulties. It bought a number of properties from El Paso as part of the process of shoring up the parental balance sheet. Most MPL debt is usually raised on a corporate basis, and project debt is rarely used, except where joint ventures are concerned.And GulfTerra had always intended to bring in a partner to take a 50% equity interest, and one of the shippers would have been the most likely candidate. The developer ran an auction to select the partner with the best offer, a process that it has followed for divestitures, but not for joint ventures. Ultimately, Valero Energy Corporation made the best of seven offers for the project, and injected its equity at financial close.Valero has paid GulfTerra roughly $51 million, or half the money spent so far on construction. Valero will also pay a total of $35 million in participation fees to GulfTerra for developing the project, $19 million of which was paid at closing, $5 million to be paid once the system is completed and the remaining $11 million by the end of 2006.The project's credit is based upon the reserves held by the three shippers, and their willingness to use the pipeline and build the necessary infrastructure to feed into Cameron Highway. The pipe, however, is a cheap and compelling option for the shippers, and its cost is a fraction of what they have spent developing the three fields.The other main rationale behind the pipeline is the current bottlenecking and oversupply at the Louisiana onshore facilities that handle eastern gulf crude. Moreover the market for Texas sour oil is improving as West Texas sour production declines. Sources close to the transaction note that the number of delivery points has increased from four to seven during the development of the pipeline.The project buys the crude production from the three suppliers, and then resells it, remitting the money raised to the producers after adding a shipping fee that is calculated according to the costs of alternatives and capital. The operation also requires a quality bank, which compensates higher quality producers for the fact that their crude may be diluted in shipping by payments from those who have benefited from an increase in quality. GulfTerra is rare among limited partnerships in that it has the size and stature to accommodate a project financing, which usually involves a drag on the balance sheet during construction. In fact, as EPN, it has completed project financings for the Prince and Marco Polo properties, largely because there was a joint venture in place. Valero is sponsoring the deal as a corporation, rather than through its own partnership, but will probably transfer it to the partnership as soon as it becomes cash generative. The financing, therefore, has been designed with this change of ownership in mind, to the extent that there is a window within which Valero should transfer its stake. Otherwise, lenders were largely at the mercy of the shipping agreement signed between BP, BHP and Unocal. But BP is the dominant credit, to the extent that the deal could almost be pitched as a BP financing with a premium.The debt has been split into two tranches: a $100 million private placement and a $225 million bank facility. The private placement, underwritten by JP Morgan and WestLB, was sold down to John Hancock and ING, and was priced at 325bp over the ten-year Treasury. The other 70% of the debt was a five-year loan priced at 300bp over libor. This brought in Royal Bank of Scotland, Fortis and BNP Paribas as arrangers, alongside the two placement agents. It also attracted Bank of Scotland, Scotia Capital, Bayerische Landesbank, GE Capital, Erste Bank, Southwest Bank of Texas, Natexis and RZB Finance as participants, and intriguing mix of regional, project, and yield players. This was a reserve-based credit that was not immediately familiar to banks. Most, however, were familiar with GulfTerra, and the arrangers did their work through Houston or Dallas offices, with the exception of WestLB. The lenders worked using analysis of available reserves from Netherland & Sewell (NSAI), commissioned by the producers, as well as additional research commissioned by Valero.While the deal bears some similarities to GulfTerra's earlier Poseidon financing, it takes on a higher degree of volume and market risk. Nevertheless it builds on features of the first financing, in which EPN had a 36% stake (alongside Marathon and Shell), with respect to the quality bank. And, like Poseidon, Cameron highway is a proprietary pipeline that, since it is not under Ferc regulation, can offer choice producers increased flexibility.
Cameron Highway is a 380-mile oil pipeline that will deliver up to 500,000 barrels of oil per day from the southern Green Canyon and western Gulf of Mexico areas to Port Arthur and Texas City, Texas. The pipeline is expected to be in service by the third quarter of 2004. El Paso Energy Partners (EPN), the master limited partnership (MLP) controlled by El Paso Corporation, announced the pipeline on 13 February 2002.The pipeline will serve the Atlantis, Mad Dog and Holstein fields, where BP, Unocal and BHP Billiton have substantial drilling interests. The three shippers will construct gathering lines to the new pipe, and are all solid credits. Additional discoveries in the Green canyon region could also use the pipeline. Nevertheless, the producers examined a number of competing options, including shuttle tanking, and pipeline from Shell in the same region, as well as a land-based pipeline, before accepting the sponsor's offerEPN has since been renamed GulfTerra Energy Partners, to reflect the increased separation of the MLP operationally from El Paso. The MLP had also found it increasingly difficult to separate investor perceptions of GulfTerra from El Paso's corporate difficulties. It bought a number of properties from El Paso as part of the process of shoring up the parental balance sheet. Most MPL debt is usually raised on a corporate basis, and project debt is rarely used, except where joint ventures are concerned.And GulfTerra had always intended to bring in a partner to take a 50% equity interest, and one of the shippers would have been the most likely candidate. The developer ran an auction to select the partner with the best offer, a process that it has followed for divestitures, but not for joint ventures. Ultimately, Valero Energy Corporation made the best of seven offers for the project, and injected its equity at financial close.Valero has paid GulfTerra roughly $51 million, or half the money spent so far on construction. Valero will also pay a total of $35 million in participation fees to GulfTerra for developing the project, $19 million of which was paid at closing, $5 million to be paid once the system is completed and the remaining $11 million by the end of 2006.The project's credit is based upon the reserves held by the three shippers, and their willingness to use the pipeline and build the necessary infrastructure to feed into Cameron Highway. The pipe, however, is a cheap and compelling option for the shippers, and its cost is a fraction of what they have spent developing the three fields.The other main rationale behind the pipeline is the current bottlenecking and oversupply at the Louisiana onshore facilities that handle eastern gulf crude. Moreover the market for Texas sour oil is improving as West Texas sour production declines. Sources close to the transaction note that the number of delivery points has increased from four to seven during the development of the pipeline.The project buys the crude production from the three suppliers, and then resells it, remitting the money raised to the producers after adding a shipping fee that is calculated according to the costs of alternatives and capital. The operation also requires a quality bank, which compensates higher quality producers for the fact that their crude may be diluted in shipping by payments from those who have benefited from an increase in quality. GulfTerra is rare among limited partnerships in that it has the size and stature to accommodate a project financing, which usually involves a drag on the balance sheet during construction. In fact, as EPN, it has completed project financings for the Prince and Marco Polo properties, largely because there was a joint venture in place. Valero is sponsoring the deal as a corporation, rather than through its own partnership, but will probably transfer it to the partnership as soon as it becomes cash generative. The financing, therefore, has been designed with this change of ownership in mind, to the extent that there is a window within which Valero should transfer its stake. Otherwise, lenders were largely at the mercy of the shipping agreement signed between BP, BHP and Unocal. But BP is the dominant credit, to the extent that the deal could almost be pitched as a BP financing with a premium.The debt has been split into two tranches: a $100 million private placement and a $225 million bank facility. The private placement, underwritten by JP Morgan and WestLB, was sold down to John Hancock and ING, and was priced at 325bp over the ten-year Treasury. The other 70% of the debt was a five-year loan priced at 300bp over libor. This brought in Royal Bank of Scotland, Fortis and BNP Paribas as arrangers, alongside the two placement agents. It also attracted Bank of Scotland, Scotia Capital, Bayerische Landesbank, GE Capital, Erste Bank, Southwest Bank of Texas, Natexis and RZB Finance as participants, and intriguing mix of regional, project, and yield players. This was a reserve-based credit that was not immediately familiar to banks. Most, however, were familiar with GulfTerra, and the arrangers did their work through Houston or Dallas offices, with the exception of WestLB. The lenders worked using analysis of available reserves from Netherland & Sewell (NSAI), commissioned by the producers, as well as additional research commissioned by Valero.While the deal bears some similarities to GulfTerra's earlier Poseidon financing, it takes on a higher degree of volume and market risk. Nevertheless it builds on features of the first financing, in which EPN had a 36% stake (alongside Marathon and Shell), with respect to the quality bank. And, like Poseidon, Cameron highway is a proprietary pipeline that, since it is not under Ferc regulation, can offer choice producers increased flexibility.
Cameron Highway
Status: closed July 14 2003
Size: $500 million
Location: Gulf of Mexico
Description: 390 mile pipeline running from Holstein, Mad Dog and
Atlantis fields to Texas coast
Sponsors: GulfTerra, Valero Energy
Debt: $225 million, five-year bank piece, $100 million, ten-year private placement
Bank arrangers: WestLB, JP Morgan, Royal Bank of Scotland, Fortis and BNP Paribas
Placement agents: WestLB, JP Morgan
Lawyers to the arrangers:
Vinson & Elkins
Lawyers to the institutions: Freshfields
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