Standard & Poor’s Ratings Services (S&P) said it assigned a “B+” rating to the proposed $500 million senior unsecured notes and corporate credit of liquefied natural gas (LNG) import terminal developer Cheniere Energy Inc. with a stable outlook. S&P analysts said the junk bond rating primarily reflects the risk and uncertainties of the company rather than the operations of its four proposed LNG projects.

The notes will be used to fund construction of proposed LNG terminals along the Gulf Coast, including one in Freeport, TX (1.5 Bcf/d), another in Sabine Pass, LA (2.6 Bcf/d), one in Corpus Christi, TX (2.6 Bcf/d) and the last near Lake Charles, LA (3.3 Bcf/d). Only two of the projects, Freeport and Sabine Pass, have final regulatory approvals in place and are fully contracted and financed. The total expected investment in the projects is more than $3 billion.

“The projects are expected to have strong economics and stable cash flows, especially at Sabine Pass, where long-term contracts have been executed and the terms are known,” said S&P analyst Swami Venkataraman. “The primary credit risk for the noteholders comes from the fact that except for an interest escrow account, there are minimal restrictions on the use of the funds should future terminals not be built.”

He said permitted business investments under the terms of the notes include both downstream and upstream ventures, such as oil and gas exploration and production, and the acquisition of other assets or operations across the LNG value chain, including shipping and gas marketing. “The wide latitude available to the management creates the possibility that Cheniere will have a business profile that is completely different than that of a developer of LNG terminals in a few years’ time,” Venkataraman said. “Cheniere could also decide to retain more capacity on a merchant basis in forthcoming terminals, and it is S&P’s assessment that Cheniere’s management seeks to opportunistically maximize shareholder returns as a start-up venture.”

He said the factors supporting the company’s credit quality include its “strong economic incentives to execute its LNG strategy without any changes” and its “competitive advantage in the LNG business because of the ownership of attractive sites on the Gulf Coast.

“Should Corpus and Creole not be built, the proceeds of the notes could also be used to repay a portion of the project finance debt at Sabine Pass,” Venkataraman noted.

The stable outlook assumes that note proceeds will be invested in future LNG terminal projects. S&P said “considerable rating upside exists” for the company over the medium term if it successfully executes on its LNG strategy. However, ratings could be lowered if funds are invested in other riskier businesses that fail to provide returns.

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