San Fernando Pipeline
Latin American Oil & Gas Deal of the Year 2002
San Fernando Pipeline
San Fernando probably has the distinction of being one of the easiest and cleanest deals to close in Mexico to date. It is one of the most significant outside investments in the country's gas sector, and the first to take advantage of the improved economic prospects for financing deals there. It also features a strong, clear structure that gained a wide following amongst banks.
San Fernando is a 120km pipeline that runs from the northern border of Mexico towards the centre, and takes in both trunk pipelines and a number of power plants in construction. It will initially use gas sourced from the US, and ultimately from the onshore Burgos Basin gas fields. While there is no LNG feed into the pipeline, LNG could ultimately provide competition for the attentions of the plants further south.
Since the deregulation of the Mexican gas transmission sector, outside firms can compete to provide capacity to Petroleos de Mexico (Pemex). Indeed, Pemex simply went out to negotiate a contract for a fixed level of capacity with El Paso Energy, leaving the fine detail of permitting and construction to the joint venture partner.
El Paso and Pemex Gas y Petrochimica Basica (PGPB) each own 50% of holding company Gasoductos de Chihuahua. This joint venture is the owner of the project company Gasoductos de Tamaulipas, named after the state in which the pipeline ends up. This last takes the form of a voting trust, the means by which project lenders have been able to take security interests in projects after a debtor-friendly tweak to the Mexican law.
El Paso, a sponsor located just the other side of the border with the US, and with a long presence in the country, will be the main developer. As Paula Priestley, project finance director at El Paso emphasises, ?we have a very long history in Mexico, and see San Fernando as a way to expand our business in the country.?
The project was structured to close inside a very tight timetable ? for the simple reason that the pipeline had to be operational in time to start feeding demand at plants set for acceptance. The advantage to this approach is that the plants need this gas, and also are in the process of securing debt from international project finance lenders ? the same group that were asked to look at San Fernando.
Priestley notes that ?the banks were familiar with the deal, and understood the transaction. There was a real congenial atmosphere at the meetings.? The financing took a mere seven months from the start of the application process to export credit agency US Ex-Im, and five from the time when it issued a preliminary approval. Ex-Im lent $68 million to the project directly, inside the level required for Congressional approval.
The Ex-Im portion covers compression equipment supplied to the pipeline by General Electric. GE, however, is not the main engineering, procurement and construction (EPC) contractor. Techint Mexico, subsidiary of the Italian engineering concern. This local aspect, combined with Ex-Im's healthy relationship with El Paso, may explain why SACE's presence was not required here.
Another was the simple fact that Mexican debt is now very attractive. The country is solidly investment grade, at the triple B flat level, although a lingering recession in the US, coupled with difficulties in adjusting the country's tax regime, may undermine this. The sole lead arranger, Citibank, however, offered the lower-margin option of private political risk cover to potential participants, although banks declined to take it up.
The $117 million, 10-year, commercial bank portion, therefore, was the first real use of uncovered debt in the Mexican market. Citibank, together with EDC and BNP Paribas, offered uncovered the debt for the La Rosita project, but this was linked to the offtake credit of Coral Energy. This deal is entirely dependent on the credit of PGPB and, in theory, the United Mexican States.
The contract is structured as a take-or-pay transport deal, with fees based on availability paid in dollars to an offshore account. Given the critical role of the pipeline in reducing bottlenecks in the area most requiring gas, and the fact that San Fernando will increase the available capacity to the Altamira area plants by 1 billion cubic feet per day, rejection is unlikely.
Citigroup brought on board three institutions to look at the credit before financial close ? Bancomext (the government institution, taking a large allocation), BBVA and Nord LB. These three took arranger titles, but did not share top-tier underwriting roles. The debt sold down to a further seven institutions, all of whom saw their allocations cut. Citibank scored a 50% hit rate on the banks that it approached. All this with a deal that is roughly 80% debt.
The only serious obstacle to achieving funding was the process of gaining permitting and negotiating rights of way for the pipeline. This was a relatively lengthy and potentially difficult task, and required the use of a reserve account to deal with any overruns in the costs associated with the process. There was also a mechanism by which El Paso would be able to renegotiate the capacity contract if easements proved impossible to acquire. All the necessary approvals have now been gained, and construction can start on the pipe.
San Fernando is one of the select trouble free deals in a hemisphere dominated either by economic unease (the US), or political unease (much of Latin America). Power deals wait for a formal resolution of supply issues with Pemex, but the experience of dealing with Pemex on such a clean project may give power lenders hope.
Gasoductos de Tamaulipas
Status: closed October 2002
Size: $230 million
Location: Tamaulipas state, Mexico
Description: 120km gas pipeline
Sponsors: El Paso, Pemex
Debt: $185 million
Lead arrangers: Citigroup, US Ex-Im
Arrangers: Bancomext, BBVA and Nord LB
Lawyers to the borrower: Squire Sanders & Dempsey (international), Ritch Heather Muller (local)
Lawyers to the commercial lenders: Shearman & Sterling (international), White & Case (local)
Lawyers to US Ex-Im: Mayer Brown Rowe & Maw
Financial advisor to US Ex-Im: Credit Agricole Indosuez
Engineer: RW Beck
Insurance: AON
Market consultant: Pace Global Energy Services
San Fernando Pipeline
San Fernando probably has the distinction of being one of the easiest and cleanest deals to close in Mexico to date. It is one of the most significant outside investments in the country's gas sector, and the first to take advantage of the improved economic prospects for financing deals there. It also features a strong, clear structure that gained a wide following amongst banks.
San Fernando is a 120km pipeline that runs from the northern border of Mexico towards the centre, and takes in both trunk pipelines and a number of power plants in construction. It will initially use gas sourced from the US, and ultimately from the onshore Burgos Basin gas fields. While there is no LNG feed into the pipeline, LNG could ultimately provide competition for the attentions of the plants further south.
Since the deregulation of the Mexican gas transmission sector, outside firms can compete to provide capacity to Petroleos de Mexico (Pemex). Indeed, Pemex simply went out to negotiate a contract for a fixed level of capacity with El Paso Energy, leaving the fine detail of permitting and construction to the joint venture partner.
El Paso and Pemex Gas y Petrochimica Basica (PGPB) each own 50% of holding company Gasoductos de Chihuahua. This joint venture is the owner of the project company Gasoductos de Tamaulipas, named after the state in which the pipeline ends up. This last takes the form of a voting trust, the means by which project lenders have been able to take security interests in projects after a debtor-friendly tweak to the Mexican law.
El Paso, a sponsor located just the other side of the border with the US, and with a long presence in the country, will be the main developer. As Paula Priestley, project finance director at El Paso emphasises, ?we have a very long history in Mexico, and see San Fernando as a way to expand our business in the country.?
The project was structured to close inside a very tight timetable ? for the simple reason that the pipeline had to be operational in time to start feeding demand at plants set for acceptance. The advantage to this approach is that the plants need this gas, and also are in the process of securing debt from international project finance lenders ? the same group that were asked to look at San Fernando.
Priestley notes that ?the banks were familiar with the deal, and understood the transaction. There was a real congenial atmosphere at the meetings.? The financing took a mere seven months from the start of the application process to export credit agency US Ex-Im, and five from the time when it issued a preliminary approval. Ex-Im lent $68 million to the project directly, inside the level required for Congressional approval.
The Ex-Im portion covers compression equipment supplied to the pipeline by General Electric. GE, however, is not the main engineering, procurement and construction (EPC) contractor. Techint Mexico, subsidiary of the Italian engineering concern. This local aspect, combined with Ex-Im's healthy relationship with El Paso, may explain why SACE's presence was not required here.
Another was the simple fact that Mexican debt is now very attractive. The country is solidly investment grade, at the triple B flat level, although a lingering recession in the US, coupled with difficulties in adjusting the country's tax regime, may undermine this. The sole lead arranger, Citibank, however, offered the lower-margin option of private political risk cover to potential participants, although banks declined to take it up.
The $117 million, 10-year, commercial bank portion, therefore, was the first real use of uncovered debt in the Mexican market. Citibank, together with EDC and BNP Paribas, offered uncovered the debt for the La Rosita project, but this was linked to the offtake credit of Coral Energy. This deal is entirely dependent on the credit of PGPB and, in theory, the United Mexican States.
The contract is structured as a take-or-pay transport deal, with fees based on availability paid in dollars to an offshore account. Given the critical role of the pipeline in reducing bottlenecks in the area most requiring gas, and the fact that San Fernando will increase the available capacity to the Altamira area plants by 1 billion cubic feet per day, rejection is unlikely.
Citigroup brought on board three institutions to look at the credit before financial close ? Bancomext (the government institution, taking a large allocation), BBVA and Nord LB. These three took arranger titles, but did not share top-tier underwriting roles. The debt sold down to a further seven institutions, all of whom saw their allocations cut. Citibank scored a 50% hit rate on the banks that it approached. All this with a deal that is roughly 80% debt.
The only serious obstacle to achieving funding was the process of gaining permitting and negotiating rights of way for the pipeline. This was a relatively lengthy and potentially difficult task, and required the use of a reserve account to deal with any overruns in the costs associated with the process. There was also a mechanism by which El Paso would be able to renegotiate the capacity contract if easements proved impossible to acquire. All the necessary approvals have now been gained, and construction can start on the pipe.
San Fernando is one of the select trouble free deals in a hemisphere dominated either by economic unease (the US), or political unease (much of Latin America). Power deals wait for a formal resolution of supply issues with Pemex, but the experience of dealing with Pemex on such a clean project may give power lenders hope.
Gasoductos de Tamaulipas
Status: closed October 2002
Size: $230 million
Location: Tamaulipas state, Mexico
Description: 120km gas pipeline
Sponsors: El Paso, Pemex
Debt: $185 million
Lead arrangers: Citigroup, US Ex-Im
Arrangers: Bancomext, BBVA and Nord LB
Lawyers to the borrower: Squire Sanders & Dempsey (international), Ritch Heather Muller (local)
Lawyers to the commercial lenders: Shearman & Sterling (international), White & Case (local)
Lawyers to US Ex-Im: Mayer Brown Rowe & Maw
Financial advisor to US Ex-Im: Credit Agricole Indosuez
Engineer: RW Beck
Insurance: AON
Market consultant: Pace Global Energy Services
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