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| DCR Assigns Initial 'BBB+' Rating to Merey-Sweeny Phillips/PDVSA Project |
CHICAGO, June 4 /PRNewswire/ -- Duff & Phelps Credit Rating Co. (DCR) has
assigned a preliminary 'BBB+' (Triple-B-Plus) rating to the US$300.0 million
of senior notes due 2019 to be co-issued by Merey Sweeny Limited Partnership
(JV) and Sweeny Funding Corp. (SPV). The JV has the sole responsibility in
financing the construction of a delayed coker, vacuum tower and related
processing facilities at Phillips Petroleum Company's (Phillips) Sweeny
petrochemical complex in Sweeny, Texas. The sponsors are Phillips and
Petroleos de Venezuela, S.A. (PDVSA), each having an indirect 50 percent
ownership interest through their affiliates in the JV. Proceeds of the notes
will be used to finance a portion of the costs in the coker addition and
upgrade improvements to the Sweeny refinery unit and related facilities.
The Merey-Sweeny project is a US$538 million upgrade and improvement
program to the existing refinery and facilities at the existing Sweeny
refinery, which is integrated with Phillips' Sweeny petrochemical complex.
The project is designed to substantially upgrade the current processing
capabilities of the refinery, enabling Phillips to gain a significant cost
advantage from processing lower-cost, heavy sour crude oil. As a result, It
is expected to enable the refinery to achieve top quartile status among the
refineries in the US Gulf Coast region. Phillips' feedstock crude supply will
be provided by PDVSA, through its affiliate, under a long-term crude
supply agreement (CSA).
To finance this project, the JV and SPV will co-issue a total of
US$430 million in senior debt, approximately 80 percent of the total project
costs. Approximately US$130 million will be financed by senior unsecured bank
debt with the remaining US$300 million financed by Rule 144A senior notes due
in 2019. The notes will be unsecured joint and several obligations of the
issuers and will rank pari passu with all other senior unsecured debt of the
project. Typical of most project finance transactions, debtholders will have
limited recourse to the project sponsors.
Total sponsor equity will amount to US$107.5 million, approximately 20
percent of the total project costs. The sponsors will each provide equity
contributions of US$41.3 million with the remaining portion of US$25 million
to be funded by subordinated tax-exempt bonds (guaranteed directly and
indirectly by the sponsors). In addition, prior to completion, the sponsors
will be jointly and severally obligated to make equity contributions to the JV
necessary to cover all project costs, including scheduled senior debt service,
and after certain events of default, accelerated senior debt service.
Post-completion, the sponsors will be severally obligated to make equity
contributions to cover shortfalls in operating expenses, turnaround expenses
and non-debt financed capital expenditures.
The assigned 'BBB+' (Triple-B-Plus) credit rating reflects the following:
** Construction risk is largely mitigated by the construction contracts
budgeted for $449 million with two experienced EPC (engineering,
procurement and construction) contractors, Bechtel and Fluor Daniel,
coupled with the joint and several completion guarantees provided by
the sponsors. Bechtel has been designated the EPC contractor for most
of the units in the inside battery limits (ISBL); while Fluor Daniel
will be the project manager and the EP contractor for the improvements
of the outside battery limits (OSBL).
All necessary construction permits have been obtained. Both contractors
are highly experienced in the design and construction of refining and
petrochemical facilities.
Project construction began January 1999 with expectations of achieving
mechanical completion by August 2000, with scheduled commercial operation by
September 2000. Fluor Daniel, as the project manager, will manage and
supervise the construction of the entire project. Both contractors will be
liable for delay damages if the project does not achieve mechanical completion
by a specified date. Overall liquidated damages are capped at 30 percent of
the total amount of the ISBL construction contracts. As of the end of April
1999, the project was on-schedule at approximately 15 percent complete.
The independent engineer (IE), Turner, Mason & Co., believes that the
project design, schedule and budget are reasonable and achievable, and will
monitor the project throughout the construction process. The IE will also
certify completion and continue to monitor the project throughout the life of
the debt. DCR believes the project's construction risk is well-mitigated by
the expertise of both Bechtel and Fluor Daniel, the sponsor support guarantee,
and the terms and conditions of the construction contracts, which include
adequate provisions for liquidated damages.
** PDVSA Petroleos y Gas (PDVSA P&G), a wholly owned subsidiary of PDVSA,
has entered into a 20-year crude supply agreement (CSA) with Phillips
to begin delivery of Venezuelan Merey or its equivalent crude supply
upon start up of the project. PDVSA P&G has agreed to deliver the
required feedstock crude volumes of Venezuelan Merey or its comparable
substitute to Phillips` sour crude distillation unit. In turn,
Phillips will refine the heavy sour crude into long residue to be
further processed by the JV.
As long as Phillips delivers the required volumes of long residue for
processing at the JV, Phillips will be obligated to pay a processing tariff to
the JV. If PDVSA P&G is unable to fulfill its crude supply deliveries of the
specified feedstock crude under the CSA, it will be obligated to provide other
alternative substitute crudes, except under certain circumstances, including
force majeure. A supplemental CSA (SCSA) has also been executed to protect
against discriminatory acts against Phillips by the Republic of Venezuela (or
any subdivision thereof), if an event of force majeure has been invoked. DCR
views the CSA and SCSA as key strengths in the project, since they provide
long-term strategic and economic value to both Phillips and PDVSA.
Furthermore, as another alternative, the refinery is also able to process
other heavy sour crudes (i.e., Mexican Maya) in the event that Merey is
unavailable.
** Offtake risk is mitigated by 20-year processing agreement (PA) entered
into between Phillips and the JV. Under the PA, Phillips has agreed
to pay the JV a processing tariff for each barrel of long residue
Phillips delivers for processing, subject to an event of force majeure
and processing limitations. DCR views that Phillips demonstrates
credit protection measures that are indicative of a 'A' (Single-A)
rated entity.
The bondholders' primary revenue source will be the processing tariff,
which is expected to be collected from Phillips during the 20-year term of the
JV. Since Phillips will own title to the delivered long residue and processed
end-product, there is limited product ownership risk to bondholders. This
processing tariff will be derived from the light/heavy differential between
West Texas Intermediate (WTI) and Mexican Maya (Maya), and has a floor
mechanism that is set annually to cover the project's projected debt service
and budgeted operating expenses.
Since the processing tariff was designed to capture the incremental
improvement in the refinery's margins as a result of the project, bondholders
are insulated from the volatility in the light/heavy differential through the
margin stabilization mechanism to the extent actual operating expenses for a
given year approximate levels projected for that year and utilization rates
achieve the expected levels. This commodity price risk to bondholders is
further reduced by the fact that operating expenses are structurally
subordinate to senior debt service and there will be cash calls on the
sponsors if the project does not have the resources to cover operating
expenses and capital expenditures.
** The monthly historical WTI-Maya spread (measured on a six-month
rolling average) has averaged approximately $5.93 per barrel since
January 1988, with a high of $8.90 per barrel and a low of $3.74 per
barrel. The project's average breakeven WTI-Maya price differential
requires at least $3.19 and $4.52 to cover debt service and debt
service plus operating expenses, respectively. In other words, an
average WTI-Maya differential of at least $3.19 will be sufficient to
cover only debt service (no operating expenses since they are
subordinated to debt service). In order to cover both debt service
and operating expenses, the WTI-Maya differential must average at
least $4.52.
** Phillips will be the project operator under a long-term operating
agreement between the JV and Phillips. Although Turner Mason has
concluded that the facilities can reasonably expect to achieve an
average utilization rate of 95 percent of nameplate capacity as
assumed in the base case projections, the design of the facilities is
capable of operating rates of 10-12 percent higher than the nameplate
capacity. Since Phillips has been operating the Sweeny refining
facilities since 1947 and the project will be an integral part of the
refinery, DCR views operating risk to be minimal.
** Both Phillips and PDVSA are reputable, key players in the
international oil and gas market with significant experience in the
refining industry. The proposed upgrade and improvements to the
project facilities will be a technical and economic integration to
Phillips' existing Sweeny refining complex. Furthermore, the project
will ensure a long-term crude offtaker for PDVSA's Merey crude
supply, which will be an optimal crude slate for Phillips' sour crude
distillation unit. DCR is comfortable with the financial commitment
of both sponsors and the expertise they have contributed to the
project.
** DCR views the structural aspects of the transaction to be strong,
despite the high degree of leverage (80 percent debt to
capitalization) and the debt being unsecured. Aside from the
structural aspects common in most project financing, a standard
six-month debt service reserve account, specified additional debt
tests, and restricted payment tests of at least 1.35 times, there are
additional credit enhancements that will be beneficial to the
bondholders. These additional structural enhancements include: 1)
the structural subordination of operating expenses to the senior debt
service; 2) the several cash calls on the sponsors for shortfalls in
operating expenses, turnaround expenses and capital expenditures; 3)
a Phillips' fronting obligation to initially cover shortfalls in the
project's expenses; and 4) a JV ownership call/put option that is
priced to incentivize a transfer to Phillips of PDVSA's ownership
interest in the event of a Material Breach by either party. While
the debt will initially be unsecured, if the ownership call/put option
is exercised, a springing lien on Phillips` partnership interest will
be effective immediately for the benefit of the bondholders.
** Since the project's debt service obligations are senior to all of its
other fixed operating expenses and mandatory capital expenditures
combined with the annually adjusted floor price in the processing
tariff, there is very little variability in the debt service coverage
ratios (DSCR). Overall, the project has strong and stable annual base
case DSCR of an average of 3.8 times with a minimum of 3.0 times on a
constant dollar, zero inflation basis with non-fuel costs escalated 3
percent annually. For comparison purposes, using the same base case
as above produces annual debt service and operating expense coverage
ratios (DSOCR) averaging 2.8 times with a minimum of 2.0 times. Under
certain stress scenarios, sponsor cash calls are anticipated in
certain years to meet operating expenses (including turnaround
expenses and capital expenditures). However, in all the stress cases
DCR analyzed, projected annual DSCRs did not fall below 1.5 times.
In summary, DCR believes the Merey-Sweeny project is a strong project with
experienced sponsors, sufficient protection measures to ensure construction
completion and stable economics. Prior to completion, construction risk is
mitigated by fixed-priced and cost-plus construction contracts with two
reputable contractors combined with a joint and several completion guarantee
provided by the sponsors. After completion, the project's key strengths are
the long-term contractual agreements between the project participants under
the CSA, the SCSA and the PA. These contracts minimize the crude supply
and offtake risks of the project throughout its expected 20-year term
to commence upon completion.
Since the processing tariff will be primarily derived from a pricing
formula that incorporates the price differential between two appropriate
benchmark crudes with a built-in floor protection, DCR believes that the
tariff would adequately lessen bondholders' exposure to the volatility of the
international petroleum market. In the event that Merey is unavailable, the
refinery is also able to process other heavy sour crude alternatives such as
Maya. For further credit protection, the transaction has additional
structural enhancements (aside from the standard structural aspects) that give
bondholders more comfort in their likelihood of timely payment of debt service
throughout the relatively long-term duration of the project.
Information was obtained from sources believed to be accurate and
reliable. However, DCR does not guarantee the accuracy, adequacy or
completeness of any information and are not responsible for any errors or
omissions or for the results obtained from the use of such information.
Issuers of securities rated by DCR have paid a credit rating fee based on the
amount and type of securities issued. DCR does not perform an audit in
connection with any information received and may rely on unaudited
information. DCR's ratings are opinions on credit quality only and are not
recommendations to buy, sell or hold any financial obligation and may be
subject to revision, suspension or withdrawal at any time as necessary due to
changes in or unavailability of information or other circumstances.
SOURCE Duff & Phelps Credit Rating Co.
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CONTACT:
John W. Kunkle, 312-606-2329, or
kunkle@dcrco.com, Caren Y. Chang, 312-368-3151, or
chang@dcrco.com, Stephen J. Flaherty, 312-368-3141, or
flaherty@dcrco.com, Alejandro Bertuol, 212-908-0393, or
bertuol@dcrco.com
