Paul Corcoran: We've spent €4.8 billion so far

Nord Stream has agreed to finance the second phase of the project

Today Nord Stream AG will sign letters of commitment with a syndicate of banks to provide financing for the second phase of the Nord Stream project. Almost three dozen commercial banks will provide funds to the company, the founders of which are Gazprom (51%), German E.ON Ruhrgas and Wintershall (15.5%), Dutch Gasunie (9%) and French GDF Suez (9%), 2. $5 billion. This amount is needed to complete the construction of a two-line gas pipeline from Russia to Germany along the bottom of the Baltic Sea. Nord Stream AG CFO Paul CORCORAN told Vremya Novostey columnist Alexey GRIVACHA that the deal is planned to be completed in the first quarter of 2011 and how the company was supported by shareholders during the delay in raising financing.

-- How do you assess the financing market now that you are completing negotiations with lenders on the second phase?

-- When we raised funding for the first phase of the project, the market was at its worst. Nevertheless, we managed to raise 3.9 billion euros on favorable terms. It was an achievement. The market is much better now - more stable and liquid. Rates have dropped significantly. We are counting on more favorable lending conditions. In terms of the financing structure and the profile of creditors, the second phase is similar to the first. The volume will be about 2.5 billion euros, of which banks will issue 1.7 billion euros under the cover of export support agencies (Italian SACE and German Hermes, as well as under the German untied loan guarantee program) for 16 years and 800 million euros (bank loans without coverage) for 10 years.

-- The signing of agreements with creditors in the first stage was delayed, and you had to fulfill obligations to suppliers and contractors. How did you solve the problem of the cash gap then?

-- We signed letters of commitment with banks for the first tranche of financing in November 2009 (by the way, the volume of supply exceeded our needs by 60%) and actually planned to complete the financing last year. But we were talking about a very large sum, and even in simple market conditions such work takes several years. The contract itself is more than 1,500 pages, each of which must be legally verified and agreed upon by a large number of participants in the transaction. At the same time, it was important for us to conclude a competent contract on acceptable terms, and rushing in the name of the initial deadline could cause harm. We signed contracts with banks in March 2010. The shareholders helped us fulfill our financial obligations to our partners during those three to four months by providing short-term loans (bridge financing). Nord Stream repaid these loans immediately after receiving money from banks as part of the first phase of project financing. I would like to emphasize that the original structure of Nord Stream financing has remained unchanged: 30% is invested by shareholders, 70% by external loans. We plan to raise a total of 6.4 billion euros from banks, and 2.4 billion euros from shareholders.

— On what terms did the shareholders give you money and how much did you need to cover the cash gap?

-- Shareholders issued loans in proportion to their shares in the project on market conditions as loans to third parties. It took approximately 200-300 million euros.

-- How much of your 7.4 billion euro budget have you already spent?

-- At the moment, we have paid 4.8 billion euros under contracts. In 2011, 2 billion will be invested, in 2012 - 0.6 billion euros.

-- When you signed an agreement with banks on the first stage in the spring, you announced that the financial costs of attracting and servicing loans for three years before the start of operation of the gas pipeline, i.e. before Nord Stream AG has transit revenues, it will amount to 1.4 billion euros. Can we expect these costs to go down as the market improves?

- We assessed these costs, expecting an improvement in the market. Therefore, there will be no significant savings.

--Have you managed to reduce capital investments due to the decline in prices for pipes and contract work after the crisis?

-- We will definitely meet the approved capital expenditure budget (7.4 billion euros). Almost all contracts for gas pipeline construction and logistics have been signed. Everything that can be saved goes into a reserve fund for unexpected expenses. Now 65% of the first line has been built, that is, only a third of the construction work has been completed within the entire project, so some kind of buffer will not hurt us.

-- What will happen to Nord Stream AG after the pipeline is built?

-- There will remain a small company headquartered in Zug, which will perform dispatch functions and maintain the gas pipeline, as well as cover financial obligations to creditors and shareholders. Operating costs will be small, several tens of millions of euros per year plus taxes in Germany, Russia and Denmark, since the pipeline passes through the territorial waters of these countries.

-- Gazprom is the guarantor of Nord Stream loading; how does this mechanism work?

-- Gazprom has contracted 100% of Nord Stream’s capacity on a “pump or pay” basis. From the moment the pipeline is ready, this guarantees us a stable income from full capacity, regardless of the physical volume of pumping (the gas pipeline should reach its design capacity of 55 billion cubic meters per year in 2013. - Ed. ).

-- The first line is planned to be launched in October 2011. Its capacity is 27.5 billion cubic meters per year. That is, next year its pipe capacity will be about 7 billion cubic meters (for the fourth quarter). Should Gazprom pay for this entire volume or is there some kind of schedule for the growth of the Russian concern’s obligations to your company?

- This is not really my topic. Nord Stream and Gazprom Export specialists, as far as I know, are discussing the schedule for commissioning the pipe and filling it with gas. We still have time until October next year.

—You do not disclose the rate for transit through the Baltic pipeline. But if the internal rate of return of the project is 10%, then, according to experts, taking into account your capital costs and the capacity of the gas pipeline, to achieve this indicator, a tariff of $ 2.7 per thousand cubic meters per 100 kilometers is required.

- This is an overestimate. But I cannot comment on tariffs, this is a commercial aspect, and it falls within the competence of shareholders.

-- What is the payback period of the project included in your calculations?

-- We have never disclosed this data. But if you take the period of repayment of loans, you can estimate the period of return of investments by shareholders.

-- How do you plan to repay the loans: evenly throughout the entire term or will there be some peaks in repayments.

-- We will repay the loans evenly over 10 (for unsecured loans) and 16 years, respectively.