Regional LNG: S&P affirms ?A-? rating to Ras Laffan LNG Co

Rationale
25-Mar-2004 -- Standard & Poor's Ratings Services assigned its final ?A-? rating to Ras Laffan Liquefied Natural Gas Co. Ltd.'s (Ras Laffan) $665 million 3.437% bonds due Sep. 15, 2009. At the time of the announced new bond issue, Standard & Poor's raised its ratings on Ras Laffan's $800 million 8.294% bonds due March 15, 2014, and its $218 million 7.628% bonds due Sept. 15, 2006, to ?A-? from ?BBB+?. The outlook is stable.

Ras Laffan is a two-train liquefied natural gas (LNG) plant in the State of Qatar, with a potential capacity of about 6.6 million metric tons per year (mmtpy). Qatar Petroleum (A+/Stable/--), at 66.5%, and ExxonMobil RasGas Inc., a wholly owned subsidiary of Exxon Mobil Corp. (AAA/Stable/A-1+), at 26.5%, are the primary sponsors.

Ras Laffan used the net proceeds of the bonds to prepay $660 million of existing bank and export credit agency (ECA) project debt that the project borrowed at its inception. As a result, the Ras Laffan project only replaced a more expensive loan with a lower interest rate bearing debt security and did not incur additional debt. Standard & Poor's raised its ratings on the project bonds because the project lowered its interest expense and in recognition of the project's constant performance well beyond its 1996 pro forma projections, which includes a dramatic reduction in operating expenses. Against the pro forma 1996 results, base case minimum debt-service coverage ratios (DSCRs) increase to 2.64x from 2.02x and average DSCRs increase to 3.70x from 2.86x under the project's pro forma cases.

The rating on the bonds incorporates the following risks:
- Long-term market and commodity price uncertainty potentially exposes lenders to reduced credit strength if prices declined for sustained multiyear periods.
- The Republic of Korea's (South Korea; foreign currency rating A-/Stable/A-2) changing energy needs raise the possibility that Korea Gas Corp. (Kogas; foreign currency rating A-/Stable/--), the project's sole contractual long-term LNG offtaker, could legally defer LNG shipments up to 10% of annual contract quantity in aggregate.
- A potential Middle East conflict could temporarily impair LNG production and deliveries beyond six months, the period of debt service, which the debt service reserve fund covers.
- Similarly, ongoing political tensions between South Korea and the Democratic People's Republic of Korea (North Korea), could also result in a temporarily disruption to Kogas' ability to ship and receive LNG.
- Heightened awareness over potential security threats have reduced the amount of insurance coverage that Ras Laffan can purchase to about $300 million for terrorism and sabotage damage to the onshore facilities--the project expects to add another $200 million in coverage within a few months.

However, the following strengths offset the risks at the 'A-' rating level:
- Ras Laffan's position as one of the world's lowest-cost sources of LNG ensures that it can compete economically with the vast majority of new and existing LNG projects. The project can generate a strong economic profit under normalized hydrocarbon pricing or better. ExxonMobil's $200 million contingent price support prevents a debt-service shortfall in a low oil price scenario (break-even Brent crude price is about $7.75 per barrel).
- Qatar's North Field's 900 trillion cubic feet of economically recoverable natural gas reserves ensure that the project will not confront gas reserve depletion risk and provide it with strong growth opportunities. Having become the centerpiece of ExxonMobil Corp.'s LNG strategy, it has earned the company's long-term commitment to Qatar.
- Ras Laffan's excellent financial performance exceeds bond pro forma numbers over the past three years in which DSCRs have been 3.11x in 2002, 3.93x in 2001 and 5.32x in 2000.
- Ras Laffan II's (Ras Laffan's sister company) new 7.5-mmtpy sale and purchase agreement (SPA) with Petronet LNG Ltd. of India and 4.5-mmtpy SPA with Edison Gas SpA of Italy demonstrate further the sponsors' long-term commitment to LNG, as well as an opportunity to reduce Ras Laffan's operating costs through the use of shared facilities and services.
- Korean LNG demand growth continues to grow as gas-fired power generation and residential gas use continues to increase.
- Ten years of production history from Qatar's North Field, the world's largest non-associated gas field, confirm outstanding wellhead deliverability and nearly eliminate the need to drill additional wells for the foreseeable future.
- Commercially proven production technology is used and there have been no significant operating problems since operations began.
- A 25-year take-or-pay sale and purchase agreement with Kogas for 4.8 mmtpy at a price closely tied to the Japanese Customs Cleared price and with limitations in downward volume adjustments provides sale volume assurance.
- An offshore New York State trustee receives all revenues from Kogas and others in U.S. dollars, and pays all expenses, debt service, and equity distributions.

DSCRs for 2002 were 3.11x and will likely be about 3.50x to 4.00x for 2003, based upon nine months' data ending Sept. 30, 2003. Ras Laffan used the proceeds of its first Rule 144A bond offering and bank/ECA loan facilities to build the $3.1 billion two-train LNG plant. Kogas, which is 50.2% owned by South Korea, has entered into a 25-year sale and purchase agreement with Ras Laffan. Under Standard & Poor's latest oil and gas price decks for ratings, Ras Laffan's minimum DSCR is 2.31x, which occurs in 2005 and assumes no sales beyond the Kogas SPA, and its average DSCR is 2.87x through 2015. Under the project's pro forma case, which relies upon Purvin & Gertz's (the project's independent market consultant) price forecast, the minimum DSCR is 2.63x and the average is 3.70x. Practically speaking, because Ras Laffan has consistently sold its entire production capacity beyond the Kogas contracts, Standard & Poor's expects that the project will likely exceed the pro forma and Standard & Poor's base cases by a considerable margin.

Outlook
A highly experienced and committed sponsor in ExxonMobil, a $200 million ExxonMobil contingent price support, exceptional financial performance and a solid, expanding world LNG market will prevent rating deterioration. The rating balances modest structural credit enhancements, including the ExxonMobil price support, and an offshore trust, with regional political and event risks closely intertwined with the Qatar and Kogas counterparty credit risks. Given the uncertainty of oil prices and the nascent spot market, opportunities for a ratings upgrade in the near term are limited.

Ratings List
Ras Laffan Liquefied Natural Gas Co. Ltd.
NEW RATING
$665 million bonds due Sep. 15, 2009 A- (final)

Source: Standard & Poor's