October 16, 2012 / 5:00 PM / in 5 years

TEXT-S&P revises Sweetwater Investors LLC outlook to positive

Overview
     -- We have revised the outlook on Houston-based special-purpose entity 
Sweetwater Investors' parent Anadarko Petroleum to positive from stable.
     -- We are revising our outlook on Sweetwater Investors to positive from 
stable to reflect the parent's outlook revision. For more details, see the 
research update on Anadarko published May 24, 2012.

Rating Action
On Oct. 16, 2012, Standard & Poor's Ratings Services revised its outlook on 
Sweetwater Investors LLC to positive from stable. At the same time, we 
affirmed our 'BBB-' senior secured debt ratings on the company. Sweetwater had 
about $168.3 million of senior secured notes ($45 million outstanding as of 
June 30, 2012) due in 2014.

Rationale
The rating and outlook reflect Sweetwater's stand-alone credit quality and the 
Anadarko Petroleum Corp. (BBB-/Positive/--) rating that caps the project 
rating. The project relies on royalty payments that have outperformed the 
original 2004 projections by 22%, resulting in an average debt service 
coverage level of about 2.2x through 2011. Although the project's royalty 
revenue is subject to price and volume risk, it can survive a downturn 
significantly below 10-year historical lows. It is also insulated from 
short-term volatility by advance royalty payments based on the previous year's 
production volumes. We expect royalty payments to continue to drive strong 
coverage levels due to higher trona pricing and higher average production 
volumes for trona and coal. 

The following strengths support the rating:
     -- The sponsor projects a 2.05x minimum debt service coverage ratio over 
the remainder of the transaction. In a stress case assuming 10-year historic 
low prices and a 20% volume reduction, the minimum debt service coverage ratio 
was still 1.3x.
     -- Trona is used in making soda ash, a global commodity used in producing 
glass, chemicals, soap, and detergents. Prices for pure soda ash have exceeded 
the project forecast, providing excess royalty coverage. At this time, we do 
not expect competitive substitutes for soda ash in Sweetwater's end markets, 
resulting in stable prices and volumes.
     -- Trona reserves, located in Sweetwater County, Wyo., represent about 
90% to 95% of the world's known natural sources and are the lowest-cost source 
in the world. Demand for trona is growing modestly as the economy slowly 
recovers.
     -- The two key trona mines on Anadarko's acreage have an estimated 
reserve life through at least 2050, which should be ample to service this 
transaction and provide substantial excess capacity to compensate for any 
production incidents.
     -- Sweetwater is not an operator in any of the mining interests and does 
not have any direct operating or capital expense risk.
     -- Quarterly royalty prepayments insulate revenues from year-on-year 
volume decreases. Volume decreases reduce revenue only in the following year, 
when they are reflected in advance royalties.
     -- The mines are highly capitalized and established operations with 
stable records. Operations are diversified across six mines (four soda ash and 
two coal) with no individual operation contributing more than 27% of cash flow.
     -- The coal mines enjoy a logistics advantage from being adjacent to the 
Bridger Station power plant, which is one of the largest and lowest-cost power 
facilities in the western U.S. The coal contracts run through 2014, and 
average royalties have increased since the financing.

The following factors offset the strengths:
     -- The project is not structurally ring-fenced from Anadarko, so our 
rating on Anadarko caps our rating on Sweetwater.
     -- Prices for soda ash, which support about 75% of royalties, are neither 
hedged nor fixed. Trona prices have increased sharply since 2004, but risks 
remain that recent price increases are not sustainable.
     -- Coal royalties have customer concentration and operational risks, 
because they lack the size, scale, and cost attributes of larger mines in 
Wyoming's Powder River Basin.
     -- Operating and economic risks could arise if the Black Butte mine 
production shifts to underground operations.
     -- The $6.5 million debt service reserve only covers about three months, 
which could prove inadequate in an extended period of depressed pricing.
     -- Cash trap provisions are weak if coverage is lower than expected, and 
there are no significant liquidity enhancements if coverage levels exceed 
projections.
     -- Reserve estimates could be wrong, but they are unlikely to fall short 
during the debt's tenor.
     -- This transaction is non-recourse to Anadarko, and Sweetwater's rating 
could fall below Anadarko's if its stand-alone credit profile deteriorates.

Liquidity
Sweetwater does not operate any of the mining interests and therefore has no 
capital spending requirements. Operating expenses are also minimal. 
Amortization is through a mortgage-style repayment of about $22.5 million per 
year. Sources include cash flows from royalty payments that average about $47 
million under the sponsor's base case, most of which is prepaid quarterly. The 
project benefits from a $6.5 million debt service reserve fund that was funded 
at the transaction's close and is equivalent to about three months' debt 
service obligations. Almost no additional cash is held at the project level 
because Headwater LLC, an indirect, wholly owned subsidiary of Anadarko 
Petroleum Corp.,  distributes excess cash after making its minimum production 
payment to Sweetwater, and Sweetwater distributes almost all excess cash to 
equity after paying debt service and operating expenses. Sweetwater's equity 
distribution is usually about $1 million per year and could decrease further 
if there is a cash shortfall.

In addition, at the Headwater level, there is a royalty-retention account that 
funds up to a balance of $25 million from the aggregate royalty account when 
its first nonparticipating royalty falls below $14 million. This is 
essentially a distribution lock-up if coverage levels fall below 1.25x, but it 
is not forward- or backward-looking and it releases as soon as coverage rises 
above the threshold. These features weaken the cash trap. This reserve account 
is currently unfunded. There is also an upside account at Headwater, which 
will begin to fund with 5% of aggregate cumulative royalties of more than $400 
million and will be paid out to Sweetwater on May 15, 2014. The account has 
begun to fund and contained about $1.1 million as of June 30, 2012, enhancing 
liquidity.
Outlook
The outlook on our rating for Sweetwater is positive and in line with our 
outlook on Anadarko because Anadarko's rating caps Sweetwater's. In our 
opinion, if Anadarko's rating did not act as a cap, Sweetwater's rating could 
rise to 'BBB' or 'BBB+' based on the project's stand-alone credit quality. 
However, a sustained fall in trona and coal prices below 10-year historical 
lows, or a sustained decrease in production volumes of at least 30%, could 
trigger a downgrade independent of Anadarko's rating.

Related Criteria And Research
"Updated Project Finance Summary Debt Rating Criteria," published Sept. 18, 
2007.

Ratings List
Ratings Affirmed; Outlook Action
                                        To                 From

Sweetwater Investors LLC
 Senior secured                         BBB-/Positive      BBB-/Stable

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