The $145 million financing for the $270 million Ryckman Creek gas storage project involves a new venture from the management of a former award-winner – Falcon Gas Storage – that will connect to another recent award winner – the Ruby natural gas pipeline. The project is a rare example of a gas storage located in the US Rockies, since most recent construction financings have been for projects located closer to the Gulf Coast.

The project will be located at the Ryckman Creek field, a partially depleted oil and gas reservoir that has the good fortune to be located close to Opal Hub, a major junction for US gas pipelines. The storage project is able to serve five different pipelines, including Ruby, and be part of the means by which Marcellus shale gas producers access markets in the western United States and elsewhere.

Chief executive officer John Hopper and chief operating officer Jeff Foutch founded Peregrine in January 2009, shortly after leaving Falcon, which they also founded. By early 2010, after being joined in June 2009 by chief financial office Luke Saban, they had started an open season for the pipeline, seeking customers for a proposed 35 billion cubic feet facility, of which a first phase would be 18 billion cubic feet.

The project has some similarities to Falcon’s NorTex, not the least of which is a small component of oil and gas production, which is not central to the financing’s economics but a useful bonus to sponsors. The remaining oil will be extracted using enhanced oil recovery techniques. The project also incorporates nitrogen rejection processes to separate out the nitrogen previously used in oil recovery, but which threaten to be present in quantities that exceed those permitted in regulated gas pipelines.

The field is a former Amoco property, and the developer bought an existing 22,000-horsepower compressor that Kinder Morgan was about to dismantle 5km away from Ryckman. Acquiring this unit may have saved the developer about $50 million in construction costs.

Finding equity investors for Ryckman Creek involved finding novel ways to deal with gas storage’s typical construction risk profile. As Saban notes “risk capital providers do not always have very high risk appetites.” Infrastructure funds, while hungry for assets, and envious of the returns available to first movers, do not have a high tolerance for construction and merchant risk. Arcapita, which jumped into Falcon’s NorTex and MoBay enthusiastically, struggled to cope with the development challenges of these assets.

EQT Infrastructure, which had hired a number of personnel familiar with gas storage, was more aware of the typical issues with the sector. Peregrine was able to lock down several important construction components, equivalent to $87 million in costs, under either fixed-price or target price contracts to assuage some of its concerns. It met EQT’s other major concerns with the project by contracting 18 billion cubic feet, or the project’s first year of capacity, under agreements running to nearly six years, and eventually received its FERC approvals.

Following the open season that Peregrine launched in early 2010, it lined up a group of shippers that included both regulated distribution company Questar and producer Anadarko, both previous clients of Falcon. This group of shippers reassures lenders, as does the comparative lack of competition near Opal Hub. There is maybe 500 billion cubic feet of storage capacity within 50 miles of Henry hub, compared to 120 billion cubic feet of storage near Opal, and all of the existing storage at Opal is regulated. Peregrine will allow its clients to exploit price anomalies in an evolving and growing gas market.

The deal, despite the work that the developer did to reduce Ryckman’s risk profile, launched to market just as European banks turned decisively against riskier energy credits. Several European lenders dropped out of the deal, leaving Peregrine/Falcon relationship lender ING (administrative agent) and EQT relationship bank RBC (syndication agent) as joint lead arrangers, bookrunners and swap banks. SEB, which took a participation in Falcon’s NorTex deal and has a relationship with EQT’s anchor investor, joined as documentation agent, and SMBC, another Falcon relationship, joined as agent.

The debt consists of a $105 million construction-plus-five-year term loan, and a $40 million revolving credit. EQT is providing a backstop to $15 million of the term debt in the event that the lead banks cannot syndicate it, on top of $75 million in equity. The debt and equity complements $8 million in equity that Peregrine raised from friends and family and $30 million in cashflow during construction from oil and gas sales. Pricing on the debt begins at 250bp over Libor with step-ups to 400bp by maturity.

Protecting lender interests are a perfected security interest in and lien on the property, including its $30 million in pad and flex gas, as well as pledges of project assets, equity, contracts and permits. Lenders can take comfort from cash sweeps whose level is tied to a leverage grid.

They did, however, have to accept the complications arising from the status of the US Bureau of Land Management as owner, which receives fees based on production and injection at the site, has to approve the renewal of Peregrine’s agreement to run the project, and has a lien over the land on which the project operates. But the fees are linked to CPI, and the rights can only be terminated if Peregrine does not fulfill its obligations under the agreement.

The Gulf Coast and wider Texas gas storage markets are now extremely competitive, and sponsors will be forced to find rock- solid capacity and construction contracts if they wish to find debt and equity capital in these markets. In the Rockies the opportunities are much more plentiful, but developers may find some elements of cost and market risk mitigation to be worthwhile ways of attracting equity capital.

Ryckman Creek Resources LLC
STATUS: Closed 2 November 2011
SIZE: $260 million
DESCRIPTION: 35 billion cubic feet gas storage project located close to Opal Hub, Wyoming
SPONSOR: Peregrine Midstream Partners, majority owned by EQT Infrastructure Fund
DEBT: $145 million
LEAD ARRANGERS: ING, RBC, SEB, SMBC
SPONSOR LEGAL COUNSEL: Vinson & Elkins
LENDER LEGAL COUNSEL: Porter & Hedges
INDEPENDENT ENGINEER: AF Energy
MARKET CONSULTANT: Pace Global
INSURANCE ADVISER: Moore-McNeil