Following Cheniere Energy’s recent announcement that it is negotiating a deal to outsource the marketing of liquefied natural gas (LNG) at its Sabine Pass terminal, Standard & Poor’s (S&P) Ratings Services said it has placed its ‘B’ corporate credit rating on LNG developer Cheniere Energy and its ‘BB’ senior secured rating on subsidiary Sabine Pass LNG LP on CreditWatch with negative implications.

The CreditWatch warning reflects the potential for the ratings to be lowered if Cheniere Energy’s cash flow projections go down considerably as it shares expected proceeds from the marketing activities with [an outside] gas marketing company,” S&P analyst William Ferara wrote.

Under the outsourcing deal, proceeds from the sale of regasified LNG from the Sabine Pass terminal in Louisiana will be used in part to reimburse Cheniere for certain costs, including the terminal use agreement of in-house marketer (Cheniere Marketing), the tariff of Creole Trail Pipeline and LNG cargo origination efforts, with the remaining proceeds to be shared by both parties, according to Cheniere Energy (see Daily GPI, April 17).

“While the arrangement will reduce Cheniere’s liquidity and working capital requirements, it will also diminish the company’s ability to produce cash flows sufficient to satisfy its debt obligations,” Ferara said. The company had about $2.76 billion of total debt outstanding as of December 2007, S&P said.

Cheniere Energy’s stock price took a substantial hit after it announced the outsourcing arrangement, falling from a close of $16.06 last Monday to $10.88 near the end of trading Friday. Concerns are mounting that the company might not be able to meet its debt obligations in light of the scarcity of LNG supply expected at its terminals.

Cash flows from Cheniere Marketing are necessary for Cheniere Energy to meet its debt obligations because cash flow from the Chevron Corp. and Total SA terminal use agreements are only sufficient to meet Sabine Pass’ debt obligations, according to Ferara.

“A weaker short-term outlook for U.S. LNG imports versus 2007 also needs to improve significantly for Sabine Pass to attract enough LNG cargoes to produce enough cash flow to exceed its 2x fixed-charge covenant, which is necessary to flow monies up to Cheniere Energy Partners LP and ultimately to be distributed to Cheniere.”

S&P said it would review the CreditWatch listing for Cheniere Energy when the gas marketing arrangement is completed and it has reviewed the company’s updated cash flow projections.

Cheniere’s Sabine Pass LNG terminal received its first shipment (145,000 cubic meters from Nigeria) on April 11, which will be used to cool down the facility in Cameron Parish, LA (see Daily GPI, April 15).

Sabine Pass LNG will be the largest LNG receiving terminal in North America by regasification capacity at 4 Bcf/d and will have 16.8 Bcf of LNG storage capacity with two berths capable of handling the largest LNG vessels. It is located about 3.7 miles from the open waters of the Gulf of Mexico.

Sabine Pass is one of three LNG receiving terminals that Cheniere Energy is developing as part of an LNG network in the South. Creole Trail and Corpus Christi are the two other terminals currently under construction.

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