NEW YORK, Feb. 7 /PRNewswire/ -- Standard & Poor's today affirmed its
triple-'B' rating on Husky Terra Nova Finance Ltd.'s $178.7 million senior
secured bonds due 2012. The outlook is stable.
This affirmation follows indications that the project has reached the
milestone of first oil. The project came in behind the original schedule by
about one year and over original budget by about 45%. The project sponsors
have funded all cost overruns associated with the delay. Delays at Daewoo
Corp., the constructor of the floating production storage and offloading
vessel, as well as re-engineering of the turret and problems with the
connectors on the sub-sea equipment caused schedule delay and budget overrun.
Interest and principal on the bonds is currently being funded by a
combination of capitalized interest (adequate funds for the first five
interest payments through February 2002 were funded at financial closing) and
equity contributions from Husky Energy. Given that the project will reach
full production within the next month and that the lenders have a gross
revenue pledge, Standard & Poor's is comfortable affirming the rating at
triple-'B' and maintaining the stable outlook. Production will likely suffer
due to normal start-up problems during the first six months, after which full
production should be achievable. Ramp up of production was always expected in
the original financing base case. At the time of the original financing, a
sensitivity case was performed that analyzed the effect of lower production on
the project lenders. At 60% production, the debt service coverage ratio is a
minimum of 1.45 times (x) and an average of 1.90x, adequate for the rating
level.
Husky Terra Nova Finance Ltd. is the funding vehicle and a direct wholly
owned subsidiary of Husky Terra Nova Partnership. The partnership is owned by
Canadian-based Husky Oil Operations Ltd., a wholly owned subsidiary of Husky
Energy Inc. (triple-'B'/Stable/--) and 579518 Alberta, a wholly owned
subsidiary of Husky Oil Operations Ltd. The partnership owns a 12.51%
undivided interest in the Terra Nova Project.
The Terra Nova project developed, constructed, and will operate a
production facility to exploit the crude oil reserves of the Terra Nova Oil
Field, located in the Jeanne d'Arc Basin, off the east coast of Newfoundland.
The triple-'B' rating reflects the following risks:
* Revenues are subject to price risk from the sale of crude oil;
* The owners are providing a several, but not joint and several
commitment to fund construction of the project;
* Construction is behind original schedule and over budget; however,
this delay has not affected debt service payments on the bonds and the
project is very near completion;
* There is no fixed-price construction contract;
* There is the possibility oil production from the field will not be
enough to repay the debt;
* An owner default may cause the project to be abandoned if the other
owners do not vote to fund the defaulting owners proportionate share,
thereby creating a scenario where Husky Terra Nova Finance Ltd. may
receive no revenues; and
* The Terra Nova field is located in a harsh offshore environment, where
operations may be physically challenging, especially because of
icebergs, sea ice, and severe weather.
Nonetheless, the following strengths support the project's triple-'B'
rating:
* The strategic importance of the project to develop Canada's offshore
oil and gas industry to Newfoundland, Canada and the sponsors;
* Construction and development of the project is well conceived and
contracted for with world class engineering and construction firms to
the oil and gas industry and is very near completion;
* The project owners represent creditworthy, well-experienced companies
in the oil industry;
* The technology that will be used in the project, while technically
complex and sophisticated, is currently in use in other harsh offshore
applications;
* Extensive geologic and geophysical analysis and a meaningful five-well,
delineation-drilling program indicate a high probability that reserves
will be more than enough to cover debt service;
* Husky Terra Nova Finance Ltd., the issuer of the bonds has a first
claim on all revenues the partnership receives from the sale of its
share of Terra Nova's crude oil, thereby making payment of debt service
a priority payment;
* The project owners have a voting procedure under the development and
operating agreement to fund cost overruns up to 70% of total project
hard cost; and
* Debt service coverage ratios are adequate for the rating level at a
minimum of 1.93 times (x) and average of 2.55x under base case
assumptions.
Husky Terra Nova Ltd. used the proceeds of the issue to fund costs of its
12.51% share of the Terra Nova Oil Field Development Project. The Terra Nova
field is located approximately 350 kilometers southeast of St. John's,
Newfoundland, in water that is 90 to 100 meters deep. The total amount of
recoverable oil reserves from two of the three blocks at Terra Nova is
estimated to be between 300 million to 400 million barrels. The owners expect
an initial oil production rate of 127,500 barrels of oil per day based on
capacity of 150,000 barrels of oil per day and an 85% onstream factor. The
owners have chosen to develop the field using a new-build, steel mono-hull,
floating production storage and offloading vessel, moored by a disconnecting
turret that connects to subsea wellheads.
OUTLOOK: STABLE
The project's highly experienced, creditworthy sponsors, and bondholder's
first claim on all revenues received by the partnership allow Standard &
Poor's to conclude that the outlook is stable. In addition, the Terra Nova
project's strategic importance to Newfoundland and the sponsors' ability to
develop an offshore oil industry off Canada's Atlantic coast supports the
stable outlook. If production revenues are less than expected because of
persistent technical problems, a downgrade on the bonds could occur. The
project's reliance upon Husky Energy to make royalty and operating and
maintenance payments will tie the project's ratings to Husky Energy's rating.
SOURCE Standard & Poor's
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CONTACT:
Arleen Spangler, +1-212-438-2098, Peter
Rigby, +1-212-438-2085, or Michelle Dathorne, +1-416-507-2563,
all of Standard & Poor's
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