After a lengthy wait for fulfilment of its conditions precedent, a club of 19 banks have closed debt financing the Eu1.5 billion Castor underground gas storage project in Spain. The complex financing features geological risks more associated with oil and gas financings than a PPP-style concession structure.

Coordinated by Banesto, Caja Madrid, Credit Agricole, Santander and Societe Generale, the Eu1.318 billion debt consists of a 10-year Eu1.276 billion mini-perm, a four-year Eu32 million letter of credit facility and a Eu9.5 million VAT facility. Equity totals Eu398 million and the debt-equity ratio is 85:15.

Margins on the senior debt are 300bp over Euribor during the two-year construction period, 350bp in the first two years of operation, 400bp in the two years after that, and 450bp from then on until the term expires. There is a 50% cash sweep in the second year of operation, which rises to 75% in year four of operations and 100% the year after that. The average debt service coverage ratio is 1.3x.

The sponsors are ACS, Eurogas and Enagas, under a 30-year concession granted by the Ministry of Industry, Commerce and Tourism. The concession can be extended by 10 years, and then a further 10 years after that, giving the project a long potential tail after the debt’s maturity.

Getting a bank group together was challenging given the size and complexity of the deal, but this was achieved in late 2009, when an additional 14 banks joined the coordinating mandated lead arrangers. Each of the coordinating MLAs holds Eu150 million, while participations from the remainder range between Eu30-50 million. The due diligence process lasted longer than expected, as the concession terms were still being finalised and regulations had to be drafted specially for the project.

The debt replaces a Eu250 million bridge facility that first closed July 2009, when the five-bank coordinating MLA group was appointed. The banks extended the bridge at the end of 2009, simultaneously increasing it from its original Eu200 million. The initial MLA group had been working together before they were formally appointed, and had been chosen on the basis of offers received in early 2009, though Credit Agricole did not participate in the bridge.

The project is located near the east coast of Spain and contains an onshore and an offshore element. The onshore element, to be built 15km inland from the coastal town of Vinaros, is where gas is to be compressed for injection into the gas reservoir, and where impurities will be removed after extraction, ready to be pumped back into the Enagas-operated pipeline network. The offshore element involves wells 21km off the coast over the depleted Amposta reservoir, which is 5km long, 2.5km wide and up to 250m thick. This will provide an estimated 1.9 billion cubic metres (67 billion cubic feet) of storage capacity.

The project company is ESCAL, of which ACS owns 66.7% and Castor Limited Partnership (CLP), which is 73.7% owned by Eurogas, the project’s original developer, owns the remaining 33.3%. ACS is responsible for building the project and raising the finance, but once it is completed management of the facility will pass to Enagas, which will buy 50% of ACS’s equity stake. CLP has the option of selling its stake in the project on the same terms that ACS gets from Enagas, meaning that the project would be owned 50% each by ACS and Enagas.

Construction is already underway, with some long lead items ordered in 2008. Delivery has taken place for the first of two permanent offshore platforms, and drilling for 12 wellheads will begin in August. Unlike facilities such as those in Germany’s salt caverns, the injection and extraction process for Castor is time-consuming, so gas will mostly be injected into the reservoir in summer, and then withdrawn in winter when Spain’s demand for gas is higher.

The storage facility forms a part of Spain’s Basic Gas Infrastructure Network, whereby owners get paid a fixed remuneration based on the recovery of invested capital and a variable remuneration based on the facility’s variable costs. Users of Spain’s gas infrastructure pay a tariff to the operators of the facilities, but the revenues count as income to the system as a whole. The gas regulator calculates how much each operator of the facility is owed, and then orders payments to be redistributed accordingly. Unlike Spain’s electricity grid, where tariffs are fixed, gas tariffs in Spain are continually adjusted to ensure that revenues and costs match up.

User contracts follow a regulatory template, with short-term contracts of up to two years available and long-term contracts for periods longer than that. At least 20% of the storage facility’s capacity has to be reserved for short-term contracts.

The revenue model is based on recovering 10% of the fixed capital cost of the facility each year over a 10-year period, except for the cushion gas element, which will be recovered over 20 years. However, after this period ends, the sponsor will continue to receive fixed annual revenues equalling 5% of the capital cost for “extending the life” of the project.
Though the formula is known, the actual amounts to be paid will be determined once construction is complete and the project’s costs are audited. The regulatory structure nevertheless looks generous, provided it is not changed retroactively. This fear is not far-fetched, given that there has been discussion in Spain about reneging on the high tariffs agreed with renewable energy suppliers.

There is no market of volume risk on the project, but the construction and geological risk, particularly in the latter part when the cushion gas is being inserted, is difficult to quantify. Moreover, the project does not benefit the high returns from oil exploration that compensate for these. To counter this, there is a five-year window in which the sponsor can step away from the project and receive compensation, provided there are reasonable grounds for doing so.

Castor UGS
Status: Closed 22 July 2010
Size: Eu1.5 billion
Location: Off Vinaros, eastern Spanish coast
Description: Underground gas storage facility
Sponsors: ACS, Eurogas and Enagas
Debt: Eu1.318 billion
Tenor: 10-year mini-perm
Margins: 300-450bp
Coordinating MLAs: Banesto (facility agent), Caja Madrid, Credit Agricole, Santander and Societe Generale
Lead managers: BNP Paribas, Banca IMI, Mediobanca, BES, Natixis, La Caixa, Banco Popular, Banco de Sabadell, ICO, BTMU, BayernLB, Dexia, WestLB and ING
Lender legal adviser: Garrigues
Lender technical adviser: Gaffney Cline & Associates
Model/audit adviser: PwC