Fitch Ratings expects to rate FLNG Liquefaction 2, LLC's (FLIQ2) senior
secured notes due 2038 'BBB'. The Outlook is Stable. The rating
considers a total debt quantum of $3.955 billion.
The 'BBB' expected 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 1.60x in Fitch's rating case, potentially falling to
approximately 1.40x if permitted additional senior debt is issued.
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 approximately 18 months and is approximately 30%
complete, 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 $3.955 billion. The
rating considers the potential for additional allowable debt after
project completion.
Investment Grade Financial Profile: Base case debt service coverage
ratios (DSCR) average 1.68x with a minimum of 1.66x. Under a combination
of stresses of lower capacity output and increased cost, rating case
DSCRs average 1.60x with a minimum of 1.59x DSCR, which are supportive
of the rating. DSCRs during the operating period may fall to 1.40x if
the project issues the maximum allowable debt.
Peer Comparison: Cameron LNG's rating ('A-'/Stable Outlook) is higher
due to a stronger average rating case DSCR of 1.81x compared to 1.61x
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) a 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 US 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.
Date of Relevant Rating Committee: June 14, 2016.
Additional information is available on www.fitchratings.com
Applicable Criteria
Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870967
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1007764
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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