MOODY'S ASSIGNS B3 RATING TO CHENIERE ENERGY'S SENIOR UNSECURED NOTES; STABLE OUTLOOK
Approximately $500 Million of Debt Securities Affected
New York, April 15, 2005 -- Moody's assigned a B3 rating to Cheniere Energy, Inc.'s
pending $500 million of ten year senior unsecured notes,
a B1 senior implied rating, and an SGL-2 liquidity rating.
The rating outlook is stable.
STRUCTURAL AND FUNDAMENTAL OVERVIEW
Note proceeds will increase parent company cash. Pro-forma
year-end 2004 cash would then approximate $800 million,
though substantial first quarter 2005 project outlays and overhead have
significantly reduced cash balances by mid-April 2005.
The first six coupon payments will be escrowed. Remaining cash
will principally fund Cheniere's substantial project development
costs and front-end owner equity for up to three wholly-owned
leveraged liquefied natural gas (LNG) import and regasification projects.
For example, front-end equity for Cheniere's Sabine
Pass LNG L.P. project is approximately $216 million.
Moody's expects Cheniere's first material operating cash flow
to begin in second half 2008. Relying on cash flow from tolling
contracts alone, Moody's expects first free cash flow after
capital spending to occur no earlier than 2009, assuming timely
successful completion of at least one LNG project. Any subsidiary
project financing debt would have first claim on that cash flow for debt
The note indenture provides minimal restrictions on the use of note proceeds
or other protections for note holders. No subsidiaries, including
the LNG project subsidiaries, are required to, or are likely
to, guarantee the notes. It is likely that virtually all
operating assets and cash flow will be at the subsidiary level.
Any project financing is likely to restrict each project's ability
to upstream cash to the parent due to project debt covenants.
Partly supported by $286 million of net proceeds from a December
2004 common equity offering, Cheniere is creating a capital intensive,
largely project financed, downstream LNG regasification business
to participate in rapid world and U.S. LNG market growth.
It seeks to build 10 bcf/day to 12 bcf/day of LNG regasification capacity
by 2009 to 2010 at a cost to Cheniere of $2.3 billion to
$2.6 billion excluding interest expense. Moody's
believes that interest expense could push that to $2.5 billion
to $2.7 billion though this figure would be lower to the
degree Cheniere issues common equity or does not pursue three projects.
To put Cheniere's undertaking into perspective, its capacity
goal equates to roughly two-thirds of 2003 world LNG consumption
and LNG liquefaction capacity and roughly one third to one-fourth
of expected world capacity by 2008 to 2010. Notably, the
offsetting world natural gas production, LNG liquefaction,
and LNG tanker investments necessary to deliver a sufficient volume of
LNG to a new regasification plant is at least 11 times the unit capital
cost of a regasification plant's capacity. The evolution
of the LNG market may not proceed in a balanced linear path.
However, while considerable market and market structure risk lies
ahead, Cheniere has successfully developed two world-scale
regasification projects that have attracted major participants,
full project funding, and investment grade offtake counterparties
for the majority of capacity. It just received FERC approval for
a third project and is well into developing a fourth project.
In spite of high consolidated leverage and no cash flow until late 2008,
the B1 senior implied rating reflects the sensitized potential long-term
earnings power of Cheniere's well-sited and reasonably structured
LNG projects. The projects are supported by long-term tolling
agreements, assuming stipulated construction and operating performance
by Cheniere. The projects will be built under major engineering,
construction, and procurement (EPC) contracts with major general
contractors (Bechtel and Technip, so far). The lump sum turnkey
contracts cover the majority of project costs (a $647 million Sabine
contract with Bechtel). Regasification technology is generally
well established and eventual cash flow is substantially supported by
attractive tolling agreements with investment grade counterparties.
However, the B1 consolidated rating is restrained by Cheniere's
very high consolidated and project leverage, its early stage of
formation relative to the management and operating challenges ahead;
no free cash flow for at least 3 and one-half years; and potential
project construction delay, cost overrun, and performance
risk. Furthermore, leveraged Cheniere has notably wide indenture
latitude to invest in a very wide array of capital intensive business,
directly or indirectly through affiliates, within a very broadly
defined energy sector.
Importantly too, Moody's observes significant risks and uncertainties
associated with the pace, scale, and upstream versus downstream
balance by which the world and U.S. LNG market expands over
the next five to ten years. Rising regasification competition may
hamper Cheniere's ability to win attractive tolling contracts for
Corpus Christi and Creole Trail at the same blended $0.32/mcf
capacity and operating fees built into the Sabine Pass contracts.
We also note that a degree of cost overrun risk is borne by Cheniere.
A partial mitigation may be recent trends that suggest inflationary pressures
in certain materials markets are abating. Moody's also notes
a potential imbalance in Cheniere's bargaining leverage over very
large Bechtel as Cheniere's front-end equity funding is down-streamed
into Sabine Pass LNG.
Cheniere is exposed to follow-on financing risk, future contract
risk, commodity risk somewhat mitigated by long-term tolling
agreements, the risk of an uneven pace of growth and upstream versus
downstream balance within the world LNG market, and competition
from expected rapid U.S. regasification growth. It
is exposed to major competitors and general contractors far larger and
more experienced than Cheniere.
We favorably note that the $822 million Sabine Pass LNG project
financing package appears to have been satisfactorily structured and reviewed
by a seasoned third party engineer. Overall, the Sabine financing
is led by experienced project lenders, it is tightly documented,
change orders exceeding $5 million, or $15 million
in aggregate require bank approval, a third party project documentation
and engineering review was conducted at the behest of the banks by experienced
Stone and Webster, and it was syndicated to 47 banks.
The B3 senior unsecured note rating reflects the note's weak position
within the corporate and financial structure. Indenture protections
are weak and, with no upstream guarantees, the notes are structurally
and effectively subordinated to high levels of structured project finance
debt per project and would be effectively subordinated to up to $350
million of parent senior secured debt should that eventually be arranged.
It is likely that virtually all operating assets and cash flow are likely
to be at the subsidiary level and project debt would also restrict the
upstreaming of cash once operations commence. Furthermore,
relative to its leverage and cash flow timing, the note indenture
carveouts permits significant restricted payments latitude.
The SGL-2 rating reflects good liquidity cover of visible obligations
over the next 4 quarters. Cheniere has very high initial balance
sheet liquidity, tempered by outlays over the next four quarters
for project and overhead costs, a highly opportunistic business
investment posture, and note indenture language permitting cash
to be used for virtually any investment purpose within a notably broadly
defined energy sector. Still, while there are negligible
indenture restraints on the use of liquidity, Cheniere's initial
pro-forma liquidity appears to reside in sound territory over the
next four quarters, amply covering parent company overhead and Cheniere's
owner's share of project costs.
OVERVIEW OF CHENIERE
Lacking a specific operating track record to date, Cheniere is building
an able management team, will now begin building a track record
in project construction management, in running a rapidly growing
highly leveraged business of considerable scale, and running a world
scale LNG business. Cheniere is a small leveraged business in a
sector dominated by major deeply capitalized international operators.
It faces inherent construction and completion risk and uncertainty over
whether world LNG liquefaction capacity will grow sufficiently fast to
keep pace with LNG regasification capacity and provide a highly liquid
spot market by the time Cheniere's projects come on line.
Overall, Cheniere is well into its project development phase,
very early in the project construction phase, and is staffing up
for its project construction management and eventual operating needs.
It has been developing four potentially very attractive LNG import and
regasification terminals along the U.S. Gulf Coast.
It intends to operate the three currently wholly-owned projects.
Sabine Pass LNG (100%), Freeport LNG (30%),
Corpus Christy LNG (100%), and Creole Trail LNG (100%),
are well situated along the U.S. Gulf Coast.
Sabine Pass has arranged its non-recourse secured project financings
and construction of both Freeport and Sabine Pass has already commenced.
Corpus Christy received its pivotal FERC (Federal Energy Regulatory Commission)
approval this week to proceed and may commence construction in second
half 2005. Cheniere hopes for Creole Trail's FERC approval
next year and may commence construction in first half 2006.
Cheniere is making an important contribution to the major expansion of
U.S. LNG import capacity, hoping to capitalize on
rising U.S. natural gas import requirements and rapid growth
in the world LNG market. There is no assurance that the rapid expansion
of U.S. LNG import facilities will be matched by expansion
of foreign LNG liquefaction capacity and LNG tanker tonnage sufficient
to feed both the rapid U.S. and world expansions in LNG
demand. While the secular demand trends for the highly competitive
world LNG market are strong, LNG supply and the competition for
that supply will be intense on a world scale.
Uncertainties and risks remain along the way to the LNG's market's
full regional and world development that will affect LNG shippers'
willingness to commit to term tolling contracts; the pricing of such
commitments; the eventual scale of the world spot LNG market;
the ability of regasification terminals to consistently compete for spot
cargoes in that market, given the intense price shopping on a world
scale by holders of spot cargoes; the uncertain risks and inexperienced
Cheniere's eventual skill at profiting from a merchant energy role
in the spot market; and the rapid U.S. expansion of
competing regasification terminals.
A key concern is whether the pace of U.S. and international
growth in regasification capacity outpaces the growth of extremely capital
intensive LNG liquefaction and LNG tanker capacity needed to supply LNG
to regasification terminals.
Moody's also sees a risk to natural gas economics in the event that
oil prices moderate to levels that, through fuels cross-competition,
reduces natural gas sufficiently to slow the pace of growth in regasification
To the degree that LNG market growth and liquefaction capacity is being
driven by major producers that have also sponsored or are minority investors
in downstream regasification capacity, Moody's believes that
Cheniere's ability to compete for those LNG producers committed
and spot volumes would be reduced.
Cheniere Energy, Inc. is headquartered in Houston,
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service