Fitch Ratings has assigned a 'BBB' rating to FLNG Liquefaction 2, LLC's (FLIQ2) US$1.25 billion senior secured notes at 4.125% due 2038. The rating outlook is stable. The rating considers a total senior debt quantum of US$4.080 billion in bonds and bank loans. The transaction closed on 20 July 2016. Fitch will soon publish a new issue report.
The 'BBB' rating reflects a stable revenue profile from a tolling-style agreement with 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, an experienced operator, excess capacity and pass-through of nearly all power expenses mitigate operating risks, but the project is exposed to increases in approximately 41% of operating costs. Under operational and financial stresses in the Fitch rating case, debt service coverage ratios (DSCR) average 1.68x, 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 tpy 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 minimises 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 US$4.080 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 1.76x with a minimum of 1.74x. Under a combination of stresses of lower capacity output and increased cost, rating case DSCRs average 1.68x with a minimum of 1.65x 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.
FLIQ2 is owned by IFM Global Infrastructure Fund (IFM) and Freeport LNG Expansion, L.P. (FLEX). FLIQ2 will be a minimum 4.64 million tpy train facility that will liquefy US natural gas for export. LNG output of 4.40 million tpy 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.
Adapted from press release by Francesca Brindle
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