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Global Credit Research - 09 Jul 2010
New York, July 09, 2010 -- Moody's Investors Service affirmed SG Resources Mississippi, L.L.C.'s
(SGRM) B1 Corporate Family Rating and assigned a B1 rating to its $101.5
million senior secured revolving credit facility (Revolver A), $100
million senior secured revolving credit facility (Revolver B) and up to
$163.5 million Term Loan B. The rating outlook is
"The B1 rating reflects management's successful execution thus far
on the first three phases of the project and in maintaining a supportive
contract profile, tempered by high leverage as the project continues
to undertake primarily debt-financed expansions," commented
Gretchen French, Moody's Assistant Vice President.
SGRM is amending its existing credit facilities in order to fund the Phase
IV expansion of the Southern Pines Energy Center natural gas storage development
in Greene County, Mississippi. SGRM is increasing the term
loan by up to $31.2 million and terming out existing Revolver
B drawings of $83.1 million with an $80 million Gulf
Opportunity Zone bond issuance, which will be backed by a letter
of credit under the Revolver B. The maturity of the credit facilities
is also being extended to 2015 and the cash flow sweep will be increased
to 100% for the life of the credit facility.
The Phase IV expansion, which is expected to be completed in the
third quarter of 2012, entails the development of a fourth 10 billion
cubic feet (Bcf) high deliverability, salt dome natural gas storage
cavern. The budgeted cost of the expansion is $49.6
million, which includes a 10% contingency. The Phase
IV expansion will be funded with the proceeds from the increased term
loan and approximately $18 million of projected cash flow.
Phase IV will be undertaken as SGRM continues to complete Phase III of
the project: the expansion of Caverns 1, 2 and 3 by 2 Bcf
each to 10 bcf utilizing the solution mining under gas (SMUG) process.
SGRM has been successful in commissioning and placing into service the
first three caverns on schedule and reasonably close to budget.
Thus far, SGRM has completed all construction activities for Phases
I and II and has spent approximately 64% of the total projects
costs for Phase III. Financial performance, while weaker
than the company's forecast, is within our expectations given its
B1 Corporate Family Rating. Financial results have been impacted,
in part, by limited hub service activities as a result of high gas
storage demand and the utilization of the SMUG process.
Phase IV of the project is being undertaken while SGRM continues to remain
highly leveraged. While the project has been generating cash flow
over the last two years, cash flow levels are expected to remain
modest relative to debt levels through 2012 and the sponsors could proceed
with a fifth cavern development while still substantially leveraged.
However, the increased leverage associated with the funding of Phase
IV is partially mitigated by the contract supporting the expansion and
the 100% cash flow sweep. The Phase IV expansion's
revenues are supported by a 10-year fee-based contract with
a highly rated counterparty for the entire capacity of the cavern.
However, Moody's notes that this agreement has characteristic out
clauses in the event that the project fails to complete within the prescribed
The project remains exposed to inherent delay, completion and cost
overrun risks associated with salt dome storage development. The
project also faces contract renewal risk. While 83% of the
project's capacity is contracted at an average tenor of 6.8
years, as contracts renew they could be exposed to lower rates if
storage market fundamentals were to weaken. In contrast to the
other phases of the project, SGRM has not locked in a portion of
the Phase IV project costs, but we note that market conditions have
since loosened. In addition, while we note that all permits
for Phase IV have been received, the project could face delays stemming
from poor weather conditions or equipment or labor constraints.
Nevertheless, construction risk for Phase IV is considered moderate
relative to earlier phases of the project and is partially mitigated by
the sponsor/management's experience with the previous phases of
the project and considerable experience developing several salt dome facilities
over the past decade; and the nearly identical Phase IV, with
expected expansion economics resulting in a substantially lower cost per
Bcf than the prior phases of the project.
The last rating action on SGRM was on August 12, 2008 when Moody's
affirmed the company's ratings.
The principal rating methodology used in rating SGRM was Moody's
Midstream Energy Companies and Partnerships Industry Rating Methodology,
published in September 2007 and available on www.moodys.com
in the Rating Methodologies sub-directory under the Research and
Ratings tab. Other methodologies and factors that may have been
considered in the process of rating this issuer can also be found in the
Rating Methodologies sub-directory on Moody's website.
SGRM is 60% owned by SGR Holdings, L.L.C.
and 40% ultimately by ArcLight Energy Partners Fund II, L.P.
SGR Holdings and SG Resources Mississippi, L.L.C.
are headquartered in Houston, Texas. ArcLight Energy Partners
is headquartered in Boston, Massachusetts. SGRM is creating
by solution mining the first four of up to five FERC-regulated,
high deliverability, salt dome natural gas storage caverns in the
Byrd Salt Dome.
MD - CCO Structured Finance
Corporate Finance Group
Moody's Investors Service
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service
Moody's affirms SG Resources Mississippi's B1 rating
No Related Data.
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