Fitch Ratings expects to rate FLNG Liquefaction 2, LLC's (FLIQ2) 4(a)
(2) private placement of senior secured notes due 2038 'BBB(EXP)'. Fitch
also affirmed the 'BBB' rating on $1.25 billion outstanding senior
secured notes at 4.125% due 2038. The new issuance will replace some
current bank debt and be pari passu with all existing senior debt. The
rating considers a total debt quantum of about $4.080 billion. The
Outlook is Stable.
The 'BBB' rating reflects a stable revenue profile from a tolling-style
agreement with offtaker BP Energy Company, whose obligations are
guaranteed by its strong parent company, BP Corporation North America
Inc. Completion risk is manageable and adequately mitigated. The
offtaker bears all feedstock supply and cost risks. Proven equipment,
experienced operators, excess capacity and pass-through of nearly all
power expenses help mitigate operating risk, but the project is exposed
to increases in approximately 41% of operating costs. The financial
profile under operational and financial stresses is supportive of the
rating with debt service coverage ratios (DSCR) averaging 1.73x in
Fitch's rating case, potentially falling to approximately1.40x if
permitted additional senior debt is issued. The Stable Outlook reflects
that the project is still on track to be completed by the substantial
completion date of February 2019.
KEY RATING DRIVERS
Manageable Completion Risk [Completion Risk: Midrange]: Development of
the minimum 4.64 million metric tons per annum (mtpa) liquefied natural
gas (LNG) train is supported by a fixed-price, turnkey engineering,
procurement and construction (EPC) agreement with experienced
contractors. Liquidity provided by the EPC contractors' letter of credit
and the owner's contingency is sufficient to absorb substantial cost
overruns and reasonable delay scenarios. The project has been in
construction for nearly 24 months, further mitigating the potential for
delays and cost overruns. Completion of the common facilities is
strengthened by guarantees from Osaka Gas and Chubu Electric and a
letter of credit from FLIQ1 to fund FLIQ1's share of the common
facilities.
Stable, Contracted Revenues [Revenue Risk: Stronger]: The long-term
tolling agreement provides a stable revenue stream, with minimum fixed
capacity payments sufficient to meet fixed operating costs and debt
service. The offtaker's obligations are guaranteed by investment-grade
corporate parent BP Corporation North America Inc. Performance
requirements are not onerous and contract termination risk is low.
Stable Operating Profile [Operation Risk: Midrange]: Operating
performance risk is mitigated by the application of proven technology,
which includes numerous installations worldwide. Excess production
capacity and redundant equipment reduce the impact of potential forced
outages. Output shared among three LNG trains mitigates the single-site
risk of FLIQ2. Fitch expects low margin variability, as more than half
of operating and maintenance (O&M) expenses consist of variable power
costs, which are nearly all absorbed by the offtaker. The project
demonstrates substantial resilience to unexpected cost increases, and
can meet required debt service obligations in a 100% cost increase
stress scenario.
No Supply Risk [Supply Risk: Stronger]: FLIQ2 has no exposure to the
potential variability in feedstock supply or cost, as the offtaker must
procure feed gas for LNG operations.
Manageable Debt Structure [Debt Structure: Midrange]: During
construction an average of 89% of debt is fixed-rate either through the
current bond issuance or interest rate hedging, which minimizes
refinance risk. By project completion, 100% of the debt is expected to
be refinanced at fixed rates. Equity distribution tests and debt service
reserves are consistent with typical investment-grade project finance
features. Fitch assesses a total debt quantum of about $4.080 billion.
The rating considers the potential for additional allowable debt after
project completion.
Investment-Grade Financial Profile: Base case DSCRs average 1.80x with a
minimum of 1.74x . Under a combination of stresses of lower capacity
output and increased cost, rating case DSCRs average 1.73x with a
minimum of 1.68x, which are supportive of the rating.
Peer Comparison: Cameron LNG's rating ('A-'/Stable Outlook) is higher
due to a stronger average rating case DSCR of 1.81x compared to 173x for
FLIQ2. Cameron's completion risk is lower due to sponsor guarantees, and
cost risk is lower as 100% of O&M costs are absorbed by the offtakers.
Dolphin Energy ('A+'/Stable Outlook), which extracts gas from offshore
fields in Qatar was also permitted to issue incremental debt similar to
FLIQ2, which Fitch included in its rating case resulting in an average
DSCR of 2.74x. Ras Gas ('A+'/Stable Outlook), an LNG facility in Qatar
is fully exposed to merchant pricing, but its rating reflects the
project's high financial flexibility to withstand low oil and gas prices
with rating case DSCRs averaging 5.27x.
RATING SENSITIVITIES
Counterparty Risk: Downgrade below 'BBB' of Osaka Gas, Chubu Electric or
BP Corporation North America would result in a downgrade for FLIQ2.
Completion Delay: Construction delay of more than six months past the
guaranteed completion date could result in a downgrade.
Variable Costs and Operating Performance: Unstable plant performance or
materially increasing costs that reduce rating case DSCRs below 1.40x
could result in a downgrade.
Increased Leverage: Issuance of additional debt that results in a rating
case DSCR profile of less than 1.40x could result in a downgrade.
SUMMARY OF CREDIT
FLIQ2 is owned by IFM Global Infrastructure Fund (IFM) and Freeport LNG
Expansion, L.P. (FLEX). FLIQ2 will be a minimum 4.64 mtpa train facility
that will liquefy U.S. natural gas for export. LNG output of 4.40 mtpa
is contracted under a 20-year tolling agreement with BP Energy Company
whose obligations are guaranteed by BP Corporation North America Inc.
Though FLIQ2 is financed as a standalone special purpose vehicle, the
train's operation will be integrated into the total Freeport system,
which includes two other trains each with the same amount of LNG
capacity, FLIQ1 and FLIQ3. All trains will be managed by the same O&M
provider. They will share costs, access to and ownership of various
common facilities, and will jointly bear the risk of operating
performance.
After installing FLIQ1 and FLIQ2, the existing regasification terminal
will have been converted to a bi-directional facility capable of
importing and exporting LNG. Upon completion, the liquefaction project
will consist of three liquefaction trains, three natural gas
pre-treatment facilities, a second marine dock and loading lines, and
related equipment and facilities. Total debt proceeds are to support
project construction, financing fees and hedge breakage costs.
Merlin, the independent engineer, opined that the project is still on
target to achieve substantial completion. Overall engineering,
procurement and construction are slightly ahead of schedule (44%
achieved vs 38% planned), despite delays in some milestones including
construction of the common facilities (41% achieved vs. 48% planned).
While the contractors are revising their milestone schedule to catch up,
the substantial completion date remains unchanged. As such the overall
progress supports maintenance of the Stable Outlook.
Additional information is available on www.fitchratings.com
Applicable Criteria
Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)
https://www.fitchratings.com/site/re/882594
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014481
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014481
Endorsement Policy
https://www.fitchratings.com/regulatory
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM.
PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF
THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
WEBSITE.
Copyright (c) 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its
subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone:
1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or
retransmission in whole or in part is prohibited except by permission.
All rights reserved. In issuing and maintaining its ratings and in
making other reports (including forecast information), Fitch relies on
factual information it receives from issuers and underwriters and from
other sources Fitch believes to be credible. Fitch conducts a reasonable
investigation of the factual information relied upon by it in accordance
with its ratings methodology, and obtains reasonable verification of
that information from independent sources, to the extent such sources
are available for a given security or in a given jurisdiction. The
manner of Fitch's factual investigation and the scope of the third-party
verification it obtains will vary depending on the nature of the rated
security and its issuer, the requirements and practices in the
jurisdiction in which the rated security is offered and sold and/or the
issuer is located, the availability and nature of relevant public
information, access to the management of the issuer and its advisers,
the availability of pre-existing third-party verifications such as audit
reports, agreed-upon procedures letters, appraisals, actuarial reports,
engineering reports, legal opinions and other reports provided by third
parties, the availability of independent and competent third- party
verification sources with respect to the particular security or in the
particular jurisdiction of the issuer, and a variety of other factors.
Users of Fitch's ratings and reports should understand that neither an
enhanced factual investigation nor any third-party verification can
ensure that all of the information Fitch relies on in connection with a
rating or a report will be accurate and complete. Ultimately, the issuer
and its advisers are responsible for the accuracy of the information
they provide to Fitch and to the market in offering documents and other
reports. In issuing its ratings and its reports, Fitch must rely on the
work of experts, including independent auditors with respect to
financial statements and attorneys with respect to legal and tax
matters. Further, ratings and forecasts of financial and other
information are inherently forward-looking and embody assumptions and
predictions about future events that by their nature cannot be verified
as facts. As a result, despite any verification of current facts,
ratings and forecasts can be affected by future events or conditions
that were not anticipated at the time a rating or forecast was issued or
affirmed.
The information in this report is provided "as is" without any
representation or warranty of any kind, and Fitch does not represent or
warrant that the report or any of its contents will meet any of the
requirements of a recipient of the report. A Fitch rating is an opinion
as to the creditworthiness of a security. This opinion and reports made
by Fitch are based on established criteria and methodologies that Fitch
is continuously evaluating and updating. Therefore, ratings and reports
are the collective work product of Fitch and no individual, or group of
individuals, is solely responsible for a rating or a report. The rating
does not address the risk of loss due to risks other than credit risk,
unless such risk is specifically mentioned. Fitch is not engaged in the
offer or sale of any security. All Fitch reports have shared authorship.
Individuals identified in a Fitch report were involved in, but are not
solely responsible for, the opinions stated therein. The individuals are
named for contact purposes only. A report providing a Fitch rating is
neither a prospectus nor a substitute for the information assembled,
verified and presented to investors by the issuer and its agents in
connection with the sale of the securities. Ratings may be changed or
withdrawn at any time for any reason in the sole discretion of Fitch.
Fitch does not provide investment advice of any sort. Ratings are not a
recommendation to buy, sell, or hold any security. Ratings do not
comment on the adequacy of market price, the suitability of any security
for a particular investor, or the tax-exempt nature or taxability of
payments made in respect to any security. Fitch receives fees from
issuers, insurers, guarantors, other obligors, and underwriters for
rating securities. Such fees generally vary from US$1,000 to US$750,000
(or the applicable currency equivalent) per issue. In certain cases,
Fitch will rate all or a number of issues issued by a particular issuer,
or insured or guaranteed by a particular insurer or guarantor, for a
single annual fee. Such fees are expected to vary from US$10,000 to
US$1,500,000 (or the applicable currency equivalent). The assignment,
publication, or dissemination of a rating by Fitch shall not constitute
a consent by Fitch to use its name as an expert in connection with any
registration statement filed under the United States securities laws,
the Financial Services and Markets Act of 2000 of the United Kingdom, or
the securities laws of any particular jurisdiction. Due to the relative
efficiency of electronic publishing and distribution, Fitch research may
be available to electronic subscribers up to three days earlier than to
print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia
Pty Ltd holds an Australian financial services license (AFS license no.
337123) which authorizes it to provide credit ratings to wholesale
clients only. Credit ratings information published by Fitch is not
intended to be used by persons who are retail clients within the meaning
of the Corporations Act 2001
View source version on businesswire.com: http://www.businesswire.com/news/home/20161108005982/en/
Copyright Business Wire 2016
