By Gordon Feller, Eurasia Correspondent
Despite climate change, and uncertain futures for both demand and supply, some financial investors have become enthusiastic about gas pipelines.
The main entrance of the ADNOC offices in Abu Dhabi.
One of the most recent major financings followed on the heels of a successful debut debt issuance in November 2020 by Galaxy Pipeline Assets Bidco Ltd. (GalaxyCo).
Early in 2021, GalaxyCo announced a new issuance by way of Series D and E notes, to refinance in part or whole the Initial Bank Facility outstanding in the amount of about $4 billion. Since the July 2020 acquisition of 47.7% in AssetCo from ADNOC, their joint venture (JV) partner, GalaxyCo’s operations have performed well through 2020.
GalaxyCo’s network encompasses 38 pipelines. These form the backbone of Abu Dhabi’s national gas infrastructure. AssetCo has lease rights on a network of gas and natural gas liquids (NGL) pipelines, spanning 610 miles (982 km).
The pipelines supply a large part of the United Arab Emirates’ (UAE’s) estimated annual gas demand of 7.7 Bcf/d (218 MMcm/d). The GalaxyCo pipeline network is a critical asset and provides an essential service to the Emirate’s economy and gas industry plan, playing a key role in delivering ADNOC’s “Economic Vision 2030.”
ADNOC holds the use and operation rights of the pipelines. All of ADNOC’s current gas production serving the local market is connected to the pipeline network. The gas transported by GalaxyCo’s pipeline network serves the following end-users:
- Power and utilities sector
- Industrial sectors (aluminum, cement, steel)
- ADNOC downstream ventures
- Refining, petrochemicals, and export (NGL products)
- Injection gas
Gas volumes transported are above the baseline supply forecast (BSF). Health, safety and environment (HSE) performance has been deemed by analysts to be “excellent” with very robust financial out-turn – despite COVID-19.
AssetCo holds the lease to GalaxyCo’s gas pipeline network, a critical infrastructure network for the Emirate of Abu Dhabi and the UAE. It transports all of Abu Dhabi’s current sales gas production and directly supplies Abu Dhabi’s significant gas demand, including local industry, LNG export flows, utilities and injection.
The acquisition valued AssetCo at $20.7 billion. GalaxyCo funded its share with a $1.98 billion equity investment by the six Consortium shareholders and the US$7.96 billion Initial Bank Facility. The debut November 2020 bond issuance (of the Series A, B and C) leaves $4 billion of acquisition bank debt remaining.
The GalaxyCo Consortium comprises six of the largest infrastructure investors and gas network owners globally: GIP, Brookfield, GIC, OTPP, NH Investments and SNAM, one of Europe’s leading gas infrastructure network owners.
In forming this strategic long-term JV partnership with the Consortium, ADNOC continues to execute its 2030 strategy by opening up to new partnerships and foreign investments. Operations are structured to minimize operational risk to debt holders. ADNOC has entered into a fixed 20-year user and operator (U&O) agreement and is contracted to:
- Pay a fixed tariff on all volumes passed through the pipelines
- Provide a cashflow floor through a contracted minimum volume commitment (MVC), ensuring debt service is paid with no exposure to price or volume risk
- Take responsibility for all operational, maintenance and capital costs in relation to the GalaxyCo pipelines, de-risking creditors’ exposure to pipeline operations
Proceeds from the new bond issuance will refinance acquisition bank debt, in whole or in part, with the corresponding amount of interest rate swap associated with the Initial Bank Facility being canceled.
BSF is expected to generate throughput and cashflows in excess of the MVC. The expected minimum and average debt service coverage ratio (DSCR), against the MVC-only, are c. 1.07x.
If total possible cashflows under the U&O agreement are considered (meaning both MVC and non-MVC cashflows), the expected DSCRs are c. 1.43x. Under the bond terms, the minimum total DSCR commitment is 1.02x (backward-looking for permitted distributions, and forward-looking for additional indebtedness).
AssetCo is owned by a strong shareholder group. It is backed by a robust U&O agreement with ADNOC.
The AssetCo’s consortium, together with ADNOC, constitute what GalaxyCo considers to be a “best-in-class partnership. It includes industry-leading infrastructure investors and ADNOC, an operator and JV partner.
BidCo owns a 47.7% interest in AssetCo. Bidco is a newly formed SPV that is 100% owned by funds managed by Brookfield Asset Management, the Government of Singapore Investment Corporation, Global Infrastructure Partners, NH Investment & Securities, Ontario Teachers’ Pension Plan and Snam S.p.A.
ADNOC retains an indirect 51% ownership interest in AssetCo. The remaining 1.3% is owned directly by NHI&S’s subsidiary NH Galaxy Pipeline HoldCo Limited. BidCo raised US$7.96 billion bank debt to purchase the 47.7% stake in AssetCo.
On Nov. 3, 2020, BidCo refinanced a portion of the bank facility by issuing the US$4 billion series A, B and C senior-secured bonds to repay principal amounting to US$3.954 billion on the bank facility.
The issuance of the series D and E notes, together with positive cash flow from the termination of the interest rate hedge related to the bank facility, fully refinanced the remaining bank facility.
The analysts that have assessed BIDCO have assumed that transportation volumes in line with the baseline production volumes set out in the U&O agreement. The contractually guaranteed minimum transportation volumes will apply no cost stresses to operating and administrative costs at AssetCo, given the high cash-flow visibility under the contractual structure.
Under a 20-year U&O agreement, AssetCo receives its entire revenue from ADNOC – by granting ADNOC the right to transport gas and the obligation to operate the gas pipeline network. The use and occupancy (U&O) agreement is coterminous with the agreement to lease ADNOC’s gas pipeline network in Abu Dhabi.
ADNOC contracts with AssetCo, whereby it is obligated to pay a throughput tariff of US$0.57 per million British thermal units (fixed in nominal terms with no inflation risk) on the total sales and injection gas, natural gas liquids and liquified natural gas transported through the pipeline network with a guaranteed minimum volume commitment (MVC), providing a stable and predictable revenue stream.
Operating and maintenance costs are entirely borne by ADNOC and it carries full responsibility for performing the operating services in line with good industry practice, laws and regulations. We view the underlying technology risk as low as the pipelines use proven technology and are in operation.
ADNOC also provides management services to AssetCo under a general services agreement (GSA). The costs under the GSA are capped at US$150,000 per year and indexed at a fixed 2% per year. This relieves AssetCo of all major cost overrun risks.
Under the U&O agreement, ADNOC is also responsible for any capex required during the term of the lease. Any reduction in pipeline capacity will not reduce the MVC, so AssetCo is insulated from the risk of reduced pipeline capacity as the assets age.
The closest peer is the Abu Dhabi Crude Oil Pipeline (ADCOP) transaction, which has a similar contractual structure, albeit with some key structural differences. ADCOP also receives revenue based upon an MVC, regardless of the actual throughput or availability of the pipeline and all opex and capex is passed to a third party via a U&O agreement.
Text BoxThe major structural difference between the AssetCo transaction and ADCOP is the shareholding structure. Ultimately, both projects relate to assets that are integral to the ability of Abu Dhabi to commercialize its oil and gas production. The contractual structure is reflective of this and supports a rating in line with the ratings of Abu Dhabi and ADNOC.
The Consortium Players
Each of the Consortium members are major companies that bring to the partnership both their substantial assets and their long track records:
41% is owned by Global Infrastructure Partners.
GIP is a leading global infrastructure asset manager. Their targets are core infrastructure assets in the energy, transportation, water and waste sectors. They have more than US$74 billion of assets under management (AuM).
12.3% is owned by Brookfield.
Brookfield has a 120-year heritage as an owner and operator of long-life assets across real estate, infrastructure, renewable power, private equity and credit They have more than US$540 billion in AuM.
12.3% is owned by GIC (formerly known as Government of Singapore Investment Corporation).
GIC is Singapore’s sovereign wealth fund, one of the largest investment management organizations in the world – more than $100 billion invested in multiple asset classes.
12.3% is owned by Ontario Teachers’ Pension Plan, based Toronto, Canada.
OTPP invests and administers the pensions of more than 329,000 active and retired teachers in Ontario. They have net assets of more than US$160 billion.
12.3% is owned by SNAM.
SNAM is a European leader in the development, operation and management of natural gas infrastructures. The company owns a transmission network that stretches over 25,000 miles (41,000 km). It owns a total of 706 Bcf (20 Bcm) storage capacity. It has 300 Bcf (8.5 Bcm) annual pro-rata regasification capacity.
Among ADNOC’s key characteristics are the following:
100%-owned by Emirate of Abu Dhabi (Rated as Aa2 / AA / AA)
Manages c. 260-Tcf (7.4 Tcm) proven natural gas reserves
Manages 94% of UAE’s oil reserves and 6% globally (according to “OPEC Annual Statistical 9 Bulletin” 2020; UAE Government Website; Supreme Petroleum Council, UAE Ministry of Energy and Industry’s “State of Energy Report 2019.” Numbers include additional gas reserve discovered in Abu Dhabi in Nove mber 2019)
Integrated across the value chain
Represents 90% of Abu Dhabi Government Revenues (according to S&P, “Emirate of Abu Dhabi Full Rating Analysis – May 2020”)
Owns 7th largest gas reserves, globally (according to “OPEC Annual Statistical 9 Bulletin” 2020; UAE Government Website; Supreme Petroleum Council, UAE Ministry of Energy and Industry’s “State of Energy Report 2019.” Numbers include additional gas reserve discovered in Abu Dhabi in November 2019)
Highest rated oil and gas company, globally
Manages 95% of UAE’s gas reserves and 4% globally (according to “OPEC Annual Statistical 9 Bulletin” 2020; UAE Government Website; Supreme Petroleum Council, UAE Ministry of Energy and Industry’s “State of Energy Report 2019.” Numbers include additional gas reserve discovered in Abu Dhabi in November 2019)
Top 7 lowest greenhouse gas emitters in oil and gas, globally (according to International Association of Oil & Gas Producers “Environmental Performance Report for 2018”)
Represents 50% of Abu Dhabi GDP (according “S&P, Emirate of Abu Dhabi Full Rating Analysis – May 2020”)
Some other interesting highlights about AssetCo should be noted:
Critical sovereign infrastructure assets
AssetCo owns the essential midstream assets that transport all of Abu Dhabi’s and all of ADNOC’s current sales gas, and all of ADNOC’s NGL production. AssetCo satisfies a large part of the UAE’s demand.
ADNOC is AssetCo JV partner and 100% off-taker.
ADNOC is AA-rated. It is the sole and direct off-taker, pursuant to the U&O Agreement. It is entirely responsible for operations, maintenance and capex.
Predictable and high-quality cashflows
The certainty of AssetCo’s cashflows are underpinned by strong demand fundamentals, and by the long-term ship-or-pay contract with ADNOC, based on a minimum volume commitment contract (MVC). The debt service is covered entirely by MVC cashflows, with no exposure to volume or to price risk.