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From negative to stable
Standard & Poor’s (S&P) Ratings Services says its decision to raise its rating outlook on Phoenix Park Gas Processors Ltd (PPGPL) to stable from negative on Wednesday was based on the financial strength of the company and its low cost of production. In a report first published in the Guardian on Thursday, S&P said the outlook on PPGPL had been negative due to significant natural gas supply interruptions in 2013, which S&P expected would lead to diminished debt service coverage ratios (DSCR) through the rest of the year.
“Despite the disruptions, the company has outperformed operational expectations, resulting in a DSCR of more than 6x (multiple of 6) in 2013, and we anticipate that this will continue through the rest of 2014 and 2015 at current commodity prices. As a result, we are revising our outlook to stable from negative and affirming our “A-” rating,” S&P said. S&P said the “A-” rating with stable outlook reflected the following strengths:
• The company’s financial and operational performance remains strong, with highly competitive break-even prices for propane, butane, and natural gasoline;
• Processed volumes should remain robust over the next three years, with feedstock contracts with NGC NGL Company Ltd through 2029, supported by growth in export-oriented downstream natural gas consumption. Flexible contract pricing also helps preserve margin percentage as NGL pricing fluctuates, partially mitigating commodity risk;
• Fixed-capacity payments from Atlantic LNG and Petrotrin substantially help reduce commodity and volume risk;
• The company benefits from experienced sponsors and a supportive host country;
• All sales are paid in US dollars directly into US-based trustee accounts, alleviating the risk of currency mismatch in debt repayment;
• Relatively modest debt levels and high cash balances.
In S&P’s view, the following weaknesses partly offset the strengths:
• Significant exposure to volatile market NGL prices, which have dropped somewhat in recent years, and could be subject to further decreases;
• Exposure to a decline in demand for natural gas from T&T’s export-oriented petrochemical industry;
• Natural gas supply risk due to upstream maintenance activities, which came to fruition in 2013;
• Potential for increased competition from planned projects in Latin America and the Middle East, but this 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.
S&P said: “We anticipate that the company could issue further debt (more bonds) if management decides to undertake significant capital spending projects.”
On PPGPL’s cash position, S&P said: “Phoenix Park continues to maintain liquidity that is sufficient to meet its anticipated needs in the short term. Combined with a cash balance of about US$118 million as of December 31, 2013, and a US$26 million six-month debt-service reserve, the company’s cash flow from operations will likely provide at least 2x (two times the) coverage for anticipated cash needs during the next 12 months, including scheduled debt service, capital spending and dividends.”
S&P said the “stable” outlook it gave PPGPL reflects S&P’s “expectation of DSCRs of about 6x through the end of 2015, evidencing its strong competitive and financial position after a period of interruption. We could lower the rating if we expect that debt service coverage levels fall below 4x for a sustained period due to lower NGL prices and lower sustained domestic demand for natural gas, or if management pursues major capital projects.”
In addition, “an erosion of Phoenix Park’s Caribbean market share from regional competitors could result in a downgrade,” S&P said, adding though that “this would more likely unfold over a longer period of time due to the infrastructure required.” S&P said an upgrade is unlikely during the next two years, given the single-asset nature of the project, inherent volatility in NGL prices and the creditworthiness of key counterparties.
The rating agency said that it expects 2014 product pricing and increased throughput volumes will produce a DSCR in excess of 6x through 2015, a modest drop from 7.3x during 2011, but still likely sufficient to maintain the rating level during the next few years.
“We believe this will largely result from the continuation of normal upstream natural gas production after interruptions caused by maintenance activities at offshore production facilities. In our forecast, we assume somewhat lower natural gas liquids (NGL) prices relative to recent years, which are more than offset by lower projected debt levels and good operational performance. Financial performance highly depends on commodity prices. For example, the DSCR fell to about 3.5x in 2009 when market conditions were at trough levels,” S&P said.
Phoenix Park processes and sells the NGLs (propane, butane, and natural gasoline) from native natural gas and other streams at its plant in the Point Lisas Industrial Estate. The facility receives its feedstocks from several sources: natural gas comes from National Gas Company of T&T Ltd (NGC), associated gas is supplied by the Petroleum Company of T&T Ltd (Petrotrin), and direct NGLs come from Atlantic LNG.
The company combines NGLs processed from these gas streams with the NGLs acquired from Atlantic LNG and then fractionates them into propane, mixed butane, and natural gasoline, all of which it exports to regional markets. Ninety per cent of the company is owned by NGC and with the balance being held by Pan West Engineers and Constructors Inc.
NGC acquired an additional 39 per cent of Phoenix Park from ConocoPhillips for US$600 million last year. Government has signalled that it wants to sell some shares in Phoenix Park to the investing public of T&T through an Initial Public Offering.