Alliance Pipeline: on the shelf?
The Alliance Pipeline has a filed a shelf registration for C$1.2
billion in senior notes to refinance bank facilities taken out at
the end of 1997. The initial bank deal, signed with Bank of
Montreal, Bank of Nova Scotia, Chase Manhattan and Greenwich
NatWest, consisted of C$1.931 billion and $1.222 billion in 10-year
money. This represented a major step in the convergence of project
and corporate finance structures and featured a variable security
package. Since then the sponsors have been attempting to replace
this short-term, variable rate and project finance premium money
with long-dated bonds.
Alliance carries gas from the vast Western Canadian fields to the energy hub of Chicago and is a 1,875 miles in length. The $3.5 billion pipeline was financed with a 70/30 debt/equity split. The sponsors of the pipeline are El Paso Corporation, Westcoast Energy, Fort Chicago Energy Partners, Enbridge and Williams, who have provided no support to the project beyond their equity interest (now spent on construction) and contracts for around a third of the pipeline's capacity.
The 1.325 billion cubic feet per day capacity of the pipeline, therefore, has been tied down in long-term, 15-year, contracts, with around 35 shippers. 69% of these are with companies rated BBB- or higher, with Coastal Corporation (now in the clutches of El Paso) the largest single shipper at 11%. Given the length of time and complexity of the permitting, easement acquisition and construction of the pipeline, this was the best way to ensure bank comfort and keep the pricing down to a very reasonable 125bp over libor. Moreover, many of he firms sponsoring the deal have built up very sizeable trading operations in the intervening period ? with Alliance performing the function of a useful physical hedge.
The aim for Alliance, however, is to move more towards a corporate debt underpinning, and the original package had several unusual security features. Since the pipeline comes within the remit of two sets of regulators Alliance is actually two companies, each responsible for respective American and Canadian sections of pipeline, and separately financed. The two companies are formally partnerships and lenders received a pledge of the sponsors' ownership stakes pre-completion ? a pledge that has now been removed.
The units of share in the pipeline were also pledged, although since the cash has already been injected and spent this ceases to have any real use. A pledge on the transportation contracts, which are ship or pay, continues. The most interesting feature is that the operators of the pipeline would be able to release itself from most of its security pledges three years after operation (i.e after 2003) providing it stays at a BBB+ (Standard & Poor's) and Baa1 (Moody's Investors Service) investment grade rating.
This is an important provision, since whilst the company stresses that given the solidity of the transportation contracts three years is long enough, the removal of the security package changes the character of the debt. As Standard & Poor's notes ?In addition to risk that the project would begin to take on the characteristics of a highly leveraged corporate pipeline, lenders would not be able to claw-back their security if the project's credit quality deteriorates over time?.
Of more immediate concern to Alliance, however, was how to increase the tenor and stabilise the interest rates that it paid on its debt. Alliance has been working solidly since 1999 to start retiring as much of the bank facility as possible. In July 1999 it issued C$300 million and $300 million in a private placement led by Goldman Sachs in the US and its group of Canadian bankers north of the border, which includes all of the top five institutions there. According to Rick Masters, assistant treasurer at Alliance, the private placement was designed for speed and to cut down on documentation, trusting in the managers' skills and client books.
Goldman and JP Morgan Chase led a further issue in 2000 that netted $550 million, meaning that the total bank debt is down to $622 million and C$1.61 billion. The shelf registration, which is valid for two years, enables Alliance to borrow up to the C$1.2 billion at a time of its choosing without filing a new prospectus. It will potentially reduce the Canadian bank debt to $410 million.
The first issue under this announced medium term note programme went out in March 2000. According to Masters the issue was oversubscribed, although despite indications from the bookrunners that the issue could have been increased it was confined to C$450 million. The notes have a maturity of June 2023 and a weighted average life of 14.7 years and are priced at 170bp over the March 15 2014 Canadian government issue. The bonds are fully amortizing and hence carry no refinancing risk
Potential bookrunners were included in the documentation for the shelf registration, and Scotia Capital, Bank of Montreal-Nesbitt Burns, RBC-Dominion securities, CIBC World Markets, TD Securities and National Bank Finance were selected. All six were included in the first issue, although this does not mean that all issues will use all of the brokerge houses. The next issue from Alliance will be of an opportunistic nature, to take advantage of the best window in the bond markets.
Alliance will benefit from fairly rude fundamentals, as one of the principal transporters, along with the Maritimes Northeast pipeline, of gas from Canada to the US. Capacity is already constraining movement and bottlenecks could occur more frequently. Indeed, several of the smaller shippers on the pipeline are already assigning their capacity on Alliance to the larger energy companies and earning themselves a tidy profit in the process. Most new power capacity uses gas, and Cambridge Energy Research Associates, engaged by the operator to reassure lenders, estimates demand growth at roughly 3% per year.
Alliance's wish to eventually throw of most of its project finance shackles is a sign that few of the oil and gas producers are happy any longer with the non-recourse model. Indeed, buoyed by high oil prices ? few are experimenting even with the hybrid structures popular in the power industry.
Alliance carries gas from the vast Western Canadian fields to the energy hub of Chicago and is a 1,875 miles in length. The $3.5 billion pipeline was financed with a 70/30 debt/equity split. The sponsors of the pipeline are El Paso Corporation, Westcoast Energy, Fort Chicago Energy Partners, Enbridge and Williams, who have provided no support to the project beyond their equity interest (now spent on construction) and contracts for around a third of the pipeline's capacity.
The 1.325 billion cubic feet per day capacity of the pipeline, therefore, has been tied down in long-term, 15-year, contracts, with around 35 shippers. 69% of these are with companies rated BBB- or higher, with Coastal Corporation (now in the clutches of El Paso) the largest single shipper at 11%. Given the length of time and complexity of the permitting, easement acquisition and construction of the pipeline, this was the best way to ensure bank comfort and keep the pricing down to a very reasonable 125bp over libor. Moreover, many of he firms sponsoring the deal have built up very sizeable trading operations in the intervening period ? with Alliance performing the function of a useful physical hedge.
The aim for Alliance, however, is to move more towards a corporate debt underpinning, and the original package had several unusual security features. Since the pipeline comes within the remit of two sets of regulators Alliance is actually two companies, each responsible for respective American and Canadian sections of pipeline, and separately financed. The two companies are formally partnerships and lenders received a pledge of the sponsors' ownership stakes pre-completion ? a pledge that has now been removed.
The units of share in the pipeline were also pledged, although since the cash has already been injected and spent this ceases to have any real use. A pledge on the transportation contracts, which are ship or pay, continues. The most interesting feature is that the operators of the pipeline would be able to release itself from most of its security pledges three years after operation (i.e after 2003) providing it stays at a BBB+ (Standard & Poor's) and Baa1 (Moody's Investors Service) investment grade rating.
This is an important provision, since whilst the company stresses that given the solidity of the transportation contracts three years is long enough, the removal of the security package changes the character of the debt. As Standard & Poor's notes ?In addition to risk that the project would begin to take on the characteristics of a highly leveraged corporate pipeline, lenders would not be able to claw-back their security if the project's credit quality deteriorates over time?.
Of more immediate concern to Alliance, however, was how to increase the tenor and stabilise the interest rates that it paid on its debt. Alliance has been working solidly since 1999 to start retiring as much of the bank facility as possible. In July 1999 it issued C$300 million and $300 million in a private placement led by Goldman Sachs in the US and its group of Canadian bankers north of the border, which includes all of the top five institutions there. According to Rick Masters, assistant treasurer at Alliance, the private placement was designed for speed and to cut down on documentation, trusting in the managers' skills and client books.
Goldman and JP Morgan Chase led a further issue in 2000 that netted $550 million, meaning that the total bank debt is down to $622 million and C$1.61 billion. The shelf registration, which is valid for two years, enables Alliance to borrow up to the C$1.2 billion at a time of its choosing without filing a new prospectus. It will potentially reduce the Canadian bank debt to $410 million.
The first issue under this announced medium term note programme went out in March 2000. According to Masters the issue was oversubscribed, although despite indications from the bookrunners that the issue could have been increased it was confined to C$450 million. The notes have a maturity of June 2023 and a weighted average life of 14.7 years and are priced at 170bp over the March 15 2014 Canadian government issue. The bonds are fully amortizing and hence carry no refinancing risk
Potential bookrunners were included in the documentation for the shelf registration, and Scotia Capital, Bank of Montreal-Nesbitt Burns, RBC-Dominion securities, CIBC World Markets, TD Securities and National Bank Finance were selected. All six were included in the first issue, although this does not mean that all issues will use all of the brokerge houses. The next issue from Alliance will be of an opportunistic nature, to take advantage of the best window in the bond markets.
Alliance will benefit from fairly rude fundamentals, as one of the principal transporters, along with the Maritimes Northeast pipeline, of gas from Canada to the US. Capacity is already constraining movement and bottlenecks could occur more frequently. Indeed, several of the smaller shippers on the pipeline are already assigning their capacity on Alliance to the larger energy companies and earning themselves a tidy profit in the process. Most new power capacity uses gas, and Cambridge Energy Research Associates, engaged by the operator to reassure lenders, estimates demand growth at roughly 3% per year.
Alliance's wish to eventually throw of most of its project finance shackles is a sign that few of the oil and gas producers are happy any longer with the non-recourse model. Indeed, buoyed by high oil prices ? few are experimenting even with the hybrid structures popular in the power industry.
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