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Standard & Poor’s Ratings Services (S&P) has affirmed its A- rating on T&T-based Phoenix Park Gas Processors Ltd and Phoenix Park Funding Ltd’s senior secured project debt. “The rating outlook is negative,” S&P said. “We expect 2013 and 2014 product pricing and reduced throughput volumes will produce a debt service coverage ratio (DSCR) in excess of five times, a substantial drop from 7.3 times in 2011, but still likely sufficient to maintain the rating level during the next few years.
“We believe this will largely result from upstream natural gas production interruptions caused by significant maintenance activities at offshore production facilities, which have also led to leaner gas and lower product yields—these are not likely to affect 2014 operational performance, however.
“We also believe the weaker financial performance resulted from lower product pricing, driven by increased US production that has caused natural gas liquid (NGL) prices to fall; we believe that this climate of low NGL prices will persist during the forecast period. We believe these developments are likely to result in similar coverage levels for the full year 2013 as well, and perhaps through 2014.”
However, S&P said its “forecast remains modestly above the project’s financial results during the recession, when the DSCR fell to about 3.5 times in 2009 as a result of lower product prices and throughput volumes”. S&P said its ratings reflect the company’s strengths which it listed as:
• Strong financial and operational performance with low break-even prices for propane, butane, and natural gas.
• Processed volumes should remain strong over the next three years, with feedstock contracts with NGC NGL Co. Ltd. through 2029, supported by growth in export-oriented downstream natural gas consumption, despite cyclical volatility. Flexible contract pricing also helps preserve margin percentage as NGL pricing fluctuates, partially mitigating commodity risk.
• Fixed-capacity payments from Atlantic LNG and Petrotrin meaningfully help reduce commodity and volume risk, though some still exists.
• The company benefits from experienced sponsors and a supportive host country, with significant deterrents to sovereign interference in the flow of export proceeds.
• All sales are paid in US dollars directly into US-based trustee accounts, alleviating concerns about currency mismatch in debt repayment.
S&P said the following weaknesses partly offset the transaction’s strengths:
• Significant exposure to volatile market NGL prices, which have dropped somewhat in recent years;
• Exposure to a decline in demand for natural gas from Trinidad and Tobago’s export-oriented petrochemical industry;
• Natural gas supply risk due to upstream maintenance activities, which came to fruition in 2013;
• Significant reliance on key counterparties for critical supply inputs and capacity-based payments;
• Potential for increased competition from planned projects in Latin America and the Middle East, though is partially offset by the facility’s ability to host smaller ships; and
• Clauses in the lending documents that allow the company to incur modest additional debt, which could lower its pro forma DSCRs in the short term.”
Phoenix Park continues to maintain liquidity that is sufficient to meet its anticipated needs in the short term, S&P said. Combined with a cash balance of about US$175 million as of September 30, 2013, and a US$26 million six-month debt-service reserve, the company’s cash flow from operations will likely provide at least 2 times coverage for anticipated cash needs during the next 12 months, including debt service, capital spending, and dividends,
The negative outlook reflects S&P’s expectation of DSCRs of about 5 times through the end of 2013 despite weaker-than-normal throughput, yields, and pricing, a reflection of its strong competitive and financial position.
“We could lower the rating if we expect debt service coverage levels will fall significantly below 4 times for a sustained period due to lower NGL prices and lower sustained domestic demand for natural gas, perhaps the result of another recession. In addition, an erosion of Phoenix Park’s Caribbean market share from regional competitors could result in a downgrade, though this would more likely unfold over a longer period of time due to the infrastructure required,” the ratings agency said.
“An upgrade is unlikely during the next two years, given the single-asset nature of the project, the volatility in NGL prices, and the creditworthiness of its key counter parties.”