Fitch Assigns Sabine Pass Liquefaction Issuer Default Rating of ‘BBB-’; Outlook Stable

posted by AJOT | Jul 03 2017 at 11:08 AM | Intermodal

Fitch Ratings has assigned Sabine Pass Liquefaction, LLC (SPL) a Long-Term Issuer Default Rating (IDR) of 'BBB-'. The Rating Outlook is Stable. KEY RATING DRIVERS Summary: SPL's ratings reflect stable cash flows supported by long-term revenue contracts with investment-grade counterparties that effectively pass-through fixed and variable expenses for this liquefaction facility. Three of five trains are completed and operating, with remaining construction completion guaranteed under fixed-price date-certain engineering, procurement and construction (EPC) contracts with an experienced and financially strong contractor. Firm pipeline capacity and a deeply liquid domestic gas market sufficiently mitigate supply risk in full lifting mode. The proven liquefaction technology and well-defined cost profile will help ensure stable, long-term operations. Fitch's rating case, which incorporates operational and financial stresses, yields an average debt service coverage ratio (DSCR) of 1.42x, potentially falling to approximately 1.30x if permitted additional senior debt is issued. Substantial Progress, Contractor Guarantee: While the SPL project is large-scale and complex, contractor Bechtel Oil & Gas, Inc.'s (Bechtel) expertise is a significant completion-risk mitigant, based on prior installations of the ConocoPhilips (COP) Optimized Cascade liquefaction technology and successful construction progress at SPL. The three Bechtel EPC agreements are fixed-price and date-certain with clear risk allocation and performance thresholds. Fixed-price contracts, sufficiently budgeted owner's costs, and adequate contingency protect against cost overruns in remaining construction execution. The exclusive contracting arrangement between COP and Bechtel suggests a higher risk of delay and cost overrun in a contractor replacement scenario. As such, SPL's achievable rating during construction is constrained to no higher than that of Bechtel Global Energy Inc., the guarantor backing Bechtel's obligations under the EPC contracts. Proven Technology, Well-Defined Costs: SPL is effectively self-operating with a management team with extensive experience in liquefaction and a staff that is benefitting from on-site training by Bechtel and other major equipment vendors. Though the project is still under construction, technical risk is mitigated by past installations of this technology and a growing history of actual operating experience of SPL's completed trains. The project design has built-in redundancies for major equipment and is oversized in comparison to contractual performance obligations. The project is further insulated by an 18-month Bechtel warranty and 25-year Contractual Services Agreement (CSA) with GE Oil & Gas, Inc. for all gas turbine maintenance. SPL's cost drivers are well-defined and marginal costs are flexible depending on the operating profile. The CSA with GE and the modularity of the project design allows for maintenance costs to be spread over time. Firm Capacity, Secure Supply: SPL has contracted firm transportation capacity at fixed rates across a diverse set of pipelines, sufficient to meet maximum potential loads. SPL's approach to gas procurement provides sufficient near- to medium-term contracted volumes while maintaining appropriate flexibility for long-term needs. The ability to source gas from all major producing regions in North America sufficiently mitigates the risk associated with the project's sizeable gas needs in full lifting mode. Long-Term Contracted Revenue: SPL has entered into liquefied natural gas (LNG) Sale and Purchase Agreements (SPAs) with six third-party off-takers. Each SPA provides revenue from a capacity payment that is paid regardless of the LNG volumes lifted and a commodity-based payment per unit of LNG lifted. SPL is able to effectively pass along variable fuel costs through the commodity payment (linked to Henry Hub gas prices), while fixed costs are covered by the fixed capacity fees of the SPAs. This structure insulates SPL from broader trends in the demand for LNG. SPL is reliant on the cash flow of all off-takers to meet its debt obligations. As such, the lowest rated off-taker GAIL (India) Limited (rated 'BBB-'/Stable Outlook) constrains the achievable project rating. Significant Refinance Exposure: SPL's senior secured debt ('BBB-'/Stable Outlook) is structured as a series of bullet maturities staggered annually from 2020-2028 and one fully amortizing series due 2037. While no single bullet maturity represents more than 15% of principal outstanding, SPL is nonetheless significantly exposed to the risk of rising interest rates. Upon refinancing, structural covenants force SPL to fully amortize the debt by SPA termination while maintaining coverage consistent with the assigned rating. However, the structure also permits SPL to incur additional debt under certain conditions, which could erode the financial profile if exercised. Investment-Grade Financial Profile: Fitch's financial analysis considers the impact of various lifting scenarios, gas pricing scenarios, higher operating expenses, and high refinance rates while excluding any assumption of merchant LNG sales. The Fitch base case assumes full SPA lifting under Fitch's base gas deck with no increase to operating expenses and an 8% long-term interest rate. The base case DSCR averages 1.53x with debt-to-EBITDA of 7.16x in 2020. The Fitch rating case also assumes full SPA lifting but under Fitch's low gas deck with a 10% increase to operating expenses and an 8% long-term interest rate. The rating case DSCR averages 1.42x with debt-to-EBITDA of 7.34x in 2020. If the project issues additional debt, Fitch estimates that rating case DSCRs could fall to 1.30x. Peer Comparison: FLNG Liquefaction 2, LLC (FLIQ2; 'BBB'/Stable Outlook) is independently financed but part of a multi-train development currently under construction. As with SPL, significant construction progress to date and substantial liquidity suggest a low risk of material cost overruns or delays. Long-term tolling agreements underpin FLIQ2's rating case DSCRs averaging 1.73x, but the financing structure permits additional debt that could reduce projected coverage, similar to SPL's structure. Cameron LNG's ('A-'/Stable Outlook) completion is backed by sponsor guarantees and, once operational, all O&M costs are passed-through to the off-takers, generating a more stable profile than SPL's. The resulting rating case DSCRs average 1.81x, consistent with its rating. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Negative Rating Action:

If Fitch's view of the Bechtel parent guarantee or any of the SPA off-takers falls below the project rating of 'BBB-'.
Actual operating costs that are 30% over budget in a "no lifting" scenario.
An increase in SPL's borrowing costs above the rating case assumption of 8%.
Issuance of additional senior debt that results in a Fitch rating case DSCR profile of less than 1.30x.
For the IDR, issuance of subordinate or unsecured debt at SPL that is rated below the secured debt.

Future Developments That May, Individually or Collectively, Lead to Positive Rating Action:

Actual operating costs persistently under budget.
A significant reduction in leverage.
An improvement in the financial profile following refinancing of SPL's bullets.

TRANSACTION SUMMARY Cheniere Energy Partners, L.P., through its subsidiary SPL, is undertaking the development, construction, and operation of a liquefaction facility located in Cameron Parish, Louisiana on the U.S. Gulf Coast. The SPL facility will include five liquefaction trains capable of converting natural gas (delivered to the facility via several interstate pipelines) into LNG. The project is being developed adjacent to the Sabine Pass LNG Terminal, which is located on a deep-water shipping channel and includes existing infrastructure of LNG storage tanks, two marine berths, and regasification vaporizers. These facilities will be utilized by each of the trains developed by SPL. The SPL facility is being constructed by Bechtel under lump-sum, turnkey EPC contracts covering all five trains. Three of the five trains are now operational with the remaining trains expected to complete in phases between late-2017 and late-2019. SPL has contracted the bulk of the trains' capacity to six third-party off-takers under 20-year SPAs. The SPAs provide off-takers flexibility to lift as much or as little LNG as requested, subject to annual maximum quantities, at prices indexed to Henry Hub. This commodity payment offsets SPL's variable costs for gas procurement, while the fixed capacity payment is due regardless of the volume lifted and covers SPL's fixed operating costs. The excess capacity not sold under the SPAs is available for Cheniere Marketing, LLC to purchase, subject to the terms and limitations of the SPAs. The total project cost, including EPC costs, financing costs, management fees, and interest expense during construction is estimated to be $18.3 billion. These project costs are being funded through a combination of equity (including tax rebates and early operational cash flow) and a total of $13.65 billion of debt currently in the form of staggered bullet maturities each sized between $1 billion to $2 billion and one $800 million fully amortizing series. Provisions within the bond indenture require that SPL fully repay the outstanding debt with reliance only on contracted cash flows within the term of the SPAs.