Global Infrastructure Partners (GIP), the $5.64 billion infrastructure fund headed by Adebayo Ogunlesi, has formed a joint venture with natural gas transporter El Paso Corporation to build a 675-mile natural gas pipeline in the Western US.
The $3 billion Ruby Pipeline project, in which GIP will invest up to $700 million in return for a 50 percent equity stake, will mark GIP’s seventh investment and the first in a pipeline asset.
In doing so, it will become at least the third infrastructure-focused private equity firm to dedicate capital to a natural gas pipeline joint venture in the last year, following the footsteps of Alinda Capital's $1.1 billion pipeline deal in Luisiana and Conduit Capital's $1.4 billion pipeline deal in Peru, announced in March 2009 and October 2009, respectively.
The Ruby Pipeline will also mark the firm’s first investment in an as yet non-operational asset, though GIP will avoid having to take on greenfield, or new development risks, such as cost over-runs related to construction.
“We don’t do typical greenfield projects. The [investment] structure was devised to address that issue,” Matt Harris, the lead GIP partner on the transaction, told InfrastructureInvestor.
We don't do typical greenfield projects. The [investment] structure was devised to address that issue
“Once the pipeline is operational, we will own it 50-50. Prior to that time, we invest in a couple of different securities which will have the effect of giving the development and construction risk to El Paso,” Harris added.
Those securities include $145 million of preferred equity interests in El Paso’s Cheyenne Plains Pipeline, a project that is already operational. But the proceeds will be used toward the Ruby Pipeline construction and GIP will have the option to convert its interests in Cheyenne into a similar preferred equity interest in the Ruby Pipeline project. That preferred equity, which will earn a fixed 13 percent return upon project completion, can in turn be converted into common equity at any time, according to a statement issued by El Paso.
GIP will also contribute $405 million toward the project in the form of a senior secured note earning 7 percent interest. Similar to the Cheyenne securities, the senior secured note can convert into 13 percent preferred equity in the Ruby Pipeline project upon completion and can be converted into common equity at any time, El Paso said.
GIP could invest an additional $150 million in preferred equity into the project, bringing its total potential capital commitment to $700 million.
While the El Paso will be able to use those funds to build the pipeline, it will not be able to impose any cost overruns on GIP. If the project is completed by its March 2011 in-service date by less than the budgeted $3 billion, El Paso gets to keep the savings or, conversely, must cover any overrun.
A spokesperson for El Paso said that the firm is matching GIP’s investment amount on similar terms. Together, the two firm’s investments, which are being made at the level of the holding company for the project, will total $1.4 billion. That’s about half the actual $2.8 billion cash cost of the project, the spokesperson said, adding that the remaining financing will be secured at the project level.
Regulatory approval for the pipeline is expected in the first quarter of 2010. Construction will begin in the second quarter and last approximately one year. Once operational, the 42-inch pipeline will ship natural gas from Wyoming to the California-Oregon border.
Pacific Gas & Electric, a natural gas and electric utility in Northern California, signed on as the anchor tenant for the pipeline and will use up 25 percent of its capacity. Additional tenants are currently being sought, the spokesperson said.
For El Paso, already the largest owner of interstate natural gas pipelines in North America, the Ruby Pipeline marks the largest addition to its Western US network of pipelines. It is also the largest development project in its $6 billion project pipeline, the spokesperson said.
For GIP, the investment will mean that its $5.64 billion fund – the largest independent first-time infrastructure fund ever raised – will now be more than 50 percent committed.
In an interview with Infrasturcutre Investor magazine about a month before the El Paso transaction announcement, GIP chairman and managing partner Adebayo Ogunlesi said that $3.7 billion of the fund had yet to be committed to investments.