NEW YORK–(BUSINESS WIRE)–Fitch Ratings has affirmed Transportadora de Gas del Peru S.A.’s (TGP) Issuer Default Ratings (IDRs) and senior unsecured notes at ‘BBB+’. The Rating Outlook is Stable. A full list of rating actions follows at the end of this press release.
KEY RATING DRIVERS
Higher Cash Flow Generation Expected
TGP is expanding its pipeline capacity to 920 MMCF/d from 655 MMCF/d to attend the increasing demand for natural gas in Lima, the largest market in Peru with potential to continue growing. The extra capacity is already allocated and is expected to come on line during 2Q-2016. Higher volumes along with fixed tariffs linked to U.S. currency off take agreements, will allow TGP to improve its EBITDA generation to USD413 million in 2016 from USD360 million in 2015.
Predictable and Stable Revenue
TGP’s cash flow generation is considered stable and predictable, characteristic of gas transportation companies. The company’s revenues are derived from long-term ship or pay contracts with an average remaining life of around 17 years. The counterparties of these contracts have an adequate credit quality. The stability of cash flows is also supported by the company’s stable operating costs and its ability to pass through these costs to end users. The BOOT agreement defined the initial maximum tariff TGP is allowed to charge users for their natural gas (NG) transportation contracts. The BOOT also allows TGP to freely negotiate tariffs for access to its natural gas liquids (NGL) pipeline. All NG and NGL transportation tariffs are fixed in U.S. dollars and adjusted by U.S. inflation.
Strong Competitive Position
The company’s competitive position is supported by TGP’s natural monopoly position given the high barriers to entry created by high capital requirements, economies of scale and geographic location of gas production and consumption centers. TGP has a 33-year non-exclusive Build, Own, Operate and Transfer (BOOT) contract to transport NG and NGL from the country’s main gas production formation, Camisea, to the main consumption area and export terminal. The solid position of the company is reflected in the fact that 100% of its existing and under development transport capacity is committed through long-term firm ship-or-pay contracts. Going forward, the company could benefit from its competitive position to gain future additional gas transportation contracts.
Solid Financial Profile
TGP’s financial profile is considered strong supported by its moderate leverage and strong cash flow generation due to its contractual structure. As of year-end 2015, the company had a total financial debt of approximately USD1.1 billion and a gross leverage of 3.0x. Fitch projects the company will deleverage following the completion of the expansion as extra capacity comes on line. Gross Leverage is expected to be around 2.5x by YE2016. In 2015, TGP’s free cash flow was negative and is expected to remain negative in 2016 due to expansion capex and dividend payments. Capex for 2016 would be USD140 million and is expected to be reduced to maintenance levels (around USD50 million) for the next years. TGP’s free cash flow may face pressure from changes to the company’s dividend policy in the absence of future investments.
Moderate Regulatory Risk and Strategic Importance
The company’s exposure to regulatory and political risk is considered low given the strength of the BOOT contract and the Peruvian government’s initiative to promote NG consumption in the country. TGP’s assets are also considered of strategic importance for the country as they connect the country’s main gas production center, Camisea, to the main demand and export centers. In 2015, TGP transported 100% of the NG used in Lima and Ica explaining approximately 43% of country’s electricity generation (up to 50% in dry season). Additionally, 100% of NG exported by Peru and 83% of the NGL used for LPG (liquid petroleum gas) production in Peru is transported by TGP.
Adequate Gas Supply
TGP’s gas supplier, Camisea (Blocks 56, 57 & 88), has proven reserves for more than 20 years. As of December 2014, according to Peruvian Ministry of Energy and Mines, Camisea’s proven reserves amounted to 13.4 trillion cubic feet (TCF) of NG and 698 million barrels (MMbbl) of NGL. This accounts for 92% and 96% of total proved reserves of NG and NGL, respectively. During 2015, 95% of NG in Peru came from Camisea fields. This bodes well for the company’s strategic importance for the country of Peru and matches the life of outstanding issuances.
RATING SENSITIVITIES
Although a negative rating action or Outlook is not expected in the short term, it could be considered if TGP’s leverage increases above 3.5x on a sustained basis. This could happen if the company adopts an aggressive dividend policy, or if there are adverse changes to the regulatory and operating environment.
A positive rating action is unlikely in the short to medium term due to the company’s business concentration risk.
KEY ASSUMPTIONS
–265MMCFD of additional capacity coming online in the 2Q-2016, for total natural gas transportation capacity of 920MMCFD;
–EBITDA margin around 68%;
–Capex of USD140 million for 2016 and around USD50 million thereafter;
–Approximately 100% of net income paid out in dividends as the expansion project is completed.
–Minimum cash at USD100 million.
LIQUIDITY
Fitch considers TGP’s liquidity position as strong supported by its solid and stable cash flow generation and flexible debt amortization schedule. As of December 2015, TGP had cash and short-term investments of USD149 million positively compared to USD8.6 million as short-term debt. No significant maturities are due until April 2024 when its USD850 million senior unsecured notes amortize in equal payments for the next five years.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Transportadora de Gas del Peru S.A.
–Foreign currency long-term IDR at ‘BBB+’;
–Local currency long-term IDR at ‘BBB+’;
–Senior unsecured notes at ‘BBB+’.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1002258
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002258
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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