Fitch: Cameron Highway Remains on Rating Watch Negative
The 'BBB-' rating assigned to Cameron Highway Oil Pipeline Co.'s (CHOPS) privately placed $415 million of senior secured notes remains on Rating Watch Negative. The rating was placed on Rating Watch on March 14, 2006 due to the adverse near-term financial impact of lower than anticipated volumes on the system.
As a result of lingering issues highlighted in the March rating action, throughput on the CHOPS system continues to significantly underperform the projections originally provided to Fitch in November 2005. In response to the very weak credit protection metrics, the project owners are currently providing equity contributions to make up for the debt service shortfalls. Fitch expects the contributions to continue as long as CHOPS is unable to support its obligations. While Fitch also continues to believe that the current shortfalls are temporary, particularly with completion of the Atlantis development expected in the first quarter of 2007, if transportation volumes remain impaired over the next several months Fitch will likely lower the rating.
CHOPS remains the primary link between deepwater developments in the Gulf of Mexico and refiners along the Texas Gulf Coast. CHOPS is supported by life-of-lease dedications of the production from the respective interests of BP plc, BHP Billiton Ltd., and Chevron Corp. in the Holstein, Mad Dog, and Atlantis fields as well as with Anadarko Petroleum Corp.'s (formerly Kerr McGee Corp.) production from the Constitution and Ticonderoga fields.
Early in 2006, CHOPS received an amendment to the senior secured notes to address the lower production volumes whereby the debt service coverage ratio (DSCR) test has been waived through the second quarter of 2007. The DSCR will increase to 1.0 times (x) in the third and fourth quarters of 2007 and be reinstated at the 1.25x test level in the first quarter of 2008 and beyond. With the amendment, the sponsors have also foregone their right to distributions through the term of the amendment (the end of 2007) and increased the debt service reserve account (DSRA) to one year's maximum debt service (approximately $73.5 million) through 2007 as well. After 2007, the DSRA will return to six-months' coverage. Should operations improve significantly the sponsors also have the right to terminate the amendment early.
CHOPS is a 50/50 joint venture between Enterprise Products Partners, L.P. (EPD; Fitch Issuer Default Rating (IDR) of 'BBB-') and Valero Energy Corp (VLO; Fitch IDR of 'BBB') which owns and operates an offshore crude oil pipeline system capable of delivering up to 500,000 barrels per day from the deepwater Green Canyon area of the Gulf of Mexico to refineries and terminals located along the Texas Gulf Coast.