Pipeline Financing Discussion

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N:\Active\W\WY\Wyoming Pipeline Authority\Present.083\P-082503.ppt

Pipeline Financing Discussion

Wyoming Natural Gas Pipeline Authority

August 25, 2003


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Discussion Topics

Economics Drive Project Viability

What Does a Basic Transaction Structure Look Like?

Various Levels of State Involvement – From Facilitator to Capacity Owner

Key Credit Factors, Regardless of Structure

Case Study: Alliance Pipeline


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Project viability will be driven by gas price differentials, capital costs, and interest rates

Treasury Yields(b)

(b) Source: Bloomberg and Goldman Sachs Global Economic Forecast.


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Basic Pipeline Transaction Framework

Shippers Wyoming Natural Gas

Pipeline Company, L.L.C.

ConstructionConsortium

WNGPA(or designee issuer)

Investors

ProducersOthers

Debt Service$

Loan PaymentsLoan Proceeds

Equity Returns~ 30%

$ Equity

Ship-or-Pay Contracts

Transportation Capacity

Project Design &Construction

Progress Payments

Partners


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Transaction Framework

Partners – Most likely Pipeline Companies and Producers in Wyoming fields. The Partners provide initial equity and take risks and benefits of ownership. Not allowed for WNGPA.

Shippers – Any entity that makes a long-term commitment to the Pipeline via Ship-or-Pay contracts. Each Partner will be a primary shipper. Other shippers will include gas companies/marketers who wish to have reserved transportation capacity for gas they may purchase from producers. WNGPA (on behalf of State) could be a shipper.

Ship-or-Pay Contracts – Long-term contract requiring payment regardless of whether gas is shipped. Key underlying security for Pipeline debt.

Wyoming Natural Gas Pipeline Authority – Serves as a passive conduit issuer. Will issue bonds on behalf of the project and lend proceeds to project company in consideration for entering into a loan agreement which obligates project company to make loan payments in amount equal to debt service on the bonds.

Wyoming Natural Gas Pipeline Company LLC – The project company formed by the equity partners. Company would have primary responsibility to develop and operate the project.

Construction Consortium – Group of engineering, design, and construction firms engaged via contract(s) to develop the physical asset.

Investors – Secured by project revenues and/or assets. State can be investor.


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What techniques can Wyoming use to add value to Pipeline development?

Financial involvement and support

Contractual/physical involvement and support


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Conduit

Senior Bond Holder

Junior Bond Holder

Moral Obligation

What financial techniques can Wyoming use to add value to Pipeline development?

Low

High

Technique

Sta

te In

volv

emen

t


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Lending the State’s Conduit Issuance Ability to the Credit

The State, through WNGPA, can act as the nominal issuer of the bonds.

Without other tangible credit support does not change credit.

May open marketing channels to “taxable municipal investors.”


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Conduit Financing: Alaska Pipeline Terminal Revenue Bonds


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Investing in Senior Securities of the Project

Benefit: Core investor, sponsorship

Revenues

O&M

Equity

State asInvestor

Bond MarketInvestors


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Investing in Junior Securities of the Project

Benefit: Enhance position of senior securities – higher rating, higher expected default recovery

Revenues

O&M

Bond MarketSenior Bondholders

State asJunior Bondholder

Equity


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Gaining Authority for Moral Obligation Bonds

Revenues

O&M

Equity

Bondholders Reserve

StateLegislature


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Moral Obligations Are Commonly Used In Resource Development Projects

Moral Obligation of the State

The Act requires that the Chairman of the Authority, at least annually, but not later than January 2 of each year, certify in writing to the Governor and the State Legislature the sum, if any, required to restore the Capital Reserve Fund to the Capital Reserve Requirement. The Bond Resolution requires the Chairman to make such certification whenever the Trustee transfers funds from the Capital Reserve Fund to pay principal of or interest on the Bonds. The State Legislature may, but is not obligated to, appropriate to the Authority the sum certified by the Chairman of the Authority. Under the Alaska Constitution, appropriations passed by the State Legislature are subject to line item veto by the Governor. The Authority required to deposit in the Capital Reserve Fund any amounts so appropriated during the then current Fiscal Year.


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Conduit

Aggregator

Owner

Operating Support Techniques

Low

High

Technique

Sta

te In

volv

emen

t


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Acting as Aggregator for Smaller Producers

MajorProducers

BBB

ChicagoLDCs

A

WNGPA

X

Y

Z

Pipeline Co.15 Years300 mcfd

15 Years300 mcfd

15 Years300 mcfd

10 Years100 mcfd

5 Years50 mcfd

8 Years75 mcfd


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Acting as Capacity Owner for RIK Gas

RIKGas

State ofWyoming WNGPA

Constructorsor

PipelinesPipeline

750 mcfdContract

$

$ D/S

Bondholders


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Construction Risk Mitigation

Usual Standard forProject Finance

100% turnkey construct, fixed price

Performance and delay liquidated damages

Alliance Pipeline

Stone & Webster opined that a full fixed price EPC contract not feasible due to size and complexity

87% of expenses were fixed or capped

If remaining 13% costs rose, sponsor equity returns dropped; some pass through to users, some contractor absorption

Stone & Webster said 5% contingency fund enough; 6.2% used

100% turnkey should be achievable

If not, need to maximize fixed price procurement and minimize construction risks

Bond holders will demand that other parties (producers, shippers or State) bear bulk of construction risk

Wyoming Gas Pipeline


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Operating Risk Mitigation

Investors looking for high degree of certainty that the following will be covered – Debt Service, O&M, allowances for future capital and maintenance, and equity returns

65% of capacity constructed for investment grade parties

1-year LOCs for lower rated shippers

Transportation rates step down sharply at 15 years so that pipeline looks very economic once 15-year contracts are over

In Alliance, which was privately owned, sponsor group contributed cash equity on which it earned an 11% return

Alliance Example

Firm transportation ship-or-pay contracts from investment grade parties (approximately sufficient to service debt)

Credit support for non-investment grade parties. WNGPA could provide.

Sufficient debt amortized during term of ship-or-pay contracts

Adequate quasi-equity contribution – combination of shipper prepayments and State investment

Wyoming Pipeline


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Alliance Pipeline—Example of Project Financed Pipeline


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Alliance Pipeline Structure

ConstructionConsortium

Sponsors/Equity Owners Fort Chicago Energy

Partners West Coast Energy Inc. Enbridge Inc. Williams Companies El Paso Corp.

Shippers(a)

35 Companies including producers, pipeline companies, aggregations, end users

(a) Includes Sponsors.

Investors

Trustee

ProgressPayments

ProceedsDebt

Service

Equity Returns

Pipeline Capacity

Physical Completion

Alliance Pipeline Companies

(US and Canada)

Revenue

Ship or Pay $

Construction Contract


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Ship-or-Pay Contracts from Variety of Shipper Credits

Example from Alliance Pipeline:

“All of the 1.325 b.c.f.d. of firm transportation capacity of the System has been contracted by the shippers. . . .”

Contracts require payment regardless of pipeline use

72.5% of shippers have investment grade rating

14.9% were not investment grade, but accepted by lenders

12.6% were required to post letters of credit

Contracts were 15 years in length


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Flexibility in Evolving Group of Shippers

1998(Initial Rating)

1999(First $300 MnBond Issue)

2001(Second CapitalMarkets Issue

EquitySponsors

Shippers

18 equity sponsors, almost all upstream

Canadian oil and gas companies.

Six equity sponsors. Five are investment grade companies that are themselves, or are

associated with large energy companies. One

(Fort Chicago Energy Partners) is not, but

provided LOCs.

Five Sponsors. Williams bought PanEnergy share. El Paso was successor to Coastal, after a merger.

60% of ship-or-pay contracts were with the 18 companies who were

also equity sponsors.

By time of first financing only 39% was contracted to parties who are equity

sponsors or their affiliates.

By second financing down to 36% contracted

to equity sponsors or their affiliates.

Documents

Pipeline Financing Discussion