The Eu1.652 billion ($2.24 billion) Castor underground gas storage project, off the coast of Spain, pulled in a bank oversubscription of over 200% when it went to market. This is a measure not only of the strat­egic importance of the project to Spain’s gas supply but also of the generous regulatory environment for the project.

The storage facility forms a part of Spain’s Basic Gas Infrastructure Network (BGIN), and given current projections, with­out Castor, the overall storage capa­city of the gas system would not be suffi­cient to satisfy the legal requirement of 20 days’ autonomous supply by 2012.

Under the BGIN system 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.

Sponsored by ACS, Eurogas and Enagas (which bought into the project at financial close), 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 10-year debt’s maturity.

The project is located off the coast of Spain and contains an onshore and an offshore element. The onshore element, to be built 15km inland from the coastal town of Vinaroz, 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.

Coordinated by mandated lead arrangers Banesto, Caja Madrid, Credit Agricole, Santander and Societe Generale, the Eu1.318 billion debt for the project comprises a 10-year Eu1.276 billion mini-perm, a four-year Eu32 million letter of credit facility and a four-year Eu9.5 million VAT facility. Equity totals Eu334 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.

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 in 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.

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 began in August 2010. 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. 

Castor UGS
Status: Closed 22 July 2010
Size: Eu1.652 billion
Location: Offshore Spain
Description: Offshore underground gas storage facility
Sponsors: ACS, Eurogas, Enagas
Coordinating MLAs: Banesto (facility agent), Caja Madrid, Credit Agricole, Santander, 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 counsel: Garrigues
Sponsor legal counsel: Cuatrecasas Goncalves Pereira
Lender technical adviser: Gaffney Cline & Associates
Model/audit adviser: PwC
EPC: ACS, Cobra