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Fitch Affirms Dolphin Energy's Bonds at 'A+'.

$1,250 million 5.888 per cent secured bonds due 15 June 2019: affirmed at 'A+'; outlook stable. $1,300 million 5.5 per cent secured bonds due 15 December 2021: affirmed at 'A+'; outlook stable.

The affirmation reflects the strong results achieved by DEL in 2013 and Fitch's expectation of the company continuing its stable operating and revenue performance. Robust operational performance, high commodity prices and strong gas demand in the UAE and Oman during 2013 resulted in an annual debt service coverage ratio (DSCR) of 4.42x, well in excess of the Fitch base case of 3.27x. Fitch's base case projects average and minimum DSCRs at 4.38x and 2.75x respectively over the life of the debt. The ratings are constrained to the 'A' category, notably by counterparty risk and the project's single-facility nature.

DEL is assessed as Stronger in respect of revenue risk. The project's long-term fixed-price gas supply contracts (now also including the former capacity payment payable by ADWEC for the Taweelah Fujairah pipeline) account for around 40 per cent of DEL's gross margin. Such solid revenue base is a material stabilising factor that mitigates DEL's exposure to commodity prices in respect of upstream revenues and interruptible gas sales.

Fitch's base case uses moderate price assumptions for liquids (long-term Brent price of $80/bbl) and does not take into account in its analysis the EBITDA contribution from the sale of third-party gas bought by DEL from Qatar Petroleum (QP). These sales are viewed as an addition to DEL's business and in Fitch's opinion do not worsen the project's risk profile, as DEL essentially acts as an intermediary between QP and the offtakers of third-party gas and the additional volumes do not weigh on the project's technical risk profile.

The third-party gas business increases DEL's exposure to counterparty risk, which Fitch assesses as Midrange. The relative weakness of some DEL's natural gas offtakers is mitigated by DEL's competitive gas price, which provides the offtaker with a strong incentive to perform. More generally, the growing natural gas deficit in the markets served by DEL makes the project's reliable gas supply critical to the local economies and supports Fitch's view that DEL would be able to find alternative customers if required. Furthermore, the company reports that customers are paying regularly. In Fitch's view, stress resulting from a payment default, if any, is adequately mitigated by the project's strong liquidity position.

Fitch assesses DEL's operational risk as Midrange, as the project's facilities are fairly complex but have been performing strongly, as evidenced by DEL's ability to consistently meet the maximum production targets under a development and production sharing agreement. DEL's operating costs have been either in line or below expectations, and the company currently does not expect extraordinary maintenance works.

DEL has commenced work for the addition of three additional compressors at its Ras Laffan plant (six are already in operation) to increase the export pipeline's capacity to its 3.2bcfd maximum. In connection with this, the capacity of the pipeline delivering QP's gas to DEL's plant will also be enhanced. Investment cost is budgeted at around $400 million and will be funded by sponsors directly (no additional debt or use of internally generated cash). The EPC contract for the addition of the compressors was awarded to Larsen & Toubro Limited, a large Indian construction company. The project is reported to be progressing in line with plan and commissioning is now expected for 1H15.

The project's exposure to supply risk is assessed as Stronger. Reserve consultants Netherland, Sewell & Associates Inc. estimated that 1P developed reserves (the level of production likely to be reached or exceeded with a 90 per cent probability using existing infrastructure) are sufficient to cover the base case requirements until 2027. DEL will commence in 2014 a closer monitoring of reservoir performance so as to be able to plan corrective action (such as drilling further wells or introducing compression) if required.

Fitch assesses DEL's debt structure as Midrange, reflecting the complexity of the project's structure (upstream-midstream split, dual waterfall etc.) together with fairly strong structural features. Refinancing risk related to the 2021 bullet bond and associated shareholder debt is largely addressed by a sinking fund which traps 100 per cent of the refinancing requirement in Fitch's base case. In Fitch's stress case, the mechanism traps more than 80 per cent of the bullet.

Fitch is unlikely to upgrade DEL's ratings given the single-site nature of the project's processing facilities in Ras Laffan and the single subsea export pipeline. On the other hand, DEL's ratings would come under downward pressure should the project experience major operating problems, if there is a severe reduction in the length of the production plateau or a material deterioration in the credit quality of Abu Dhabi, the main market for DEL's natural gas, and Qatar.

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Publication:CPI Financial
Date:Jan 22, 2014
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