NEW YORK–(BUSINESS WIRE)–Fitch Ratings has affirmed Promigas S.A. E.S.P.’s (Promigas) ratings as follows:
–Foreign and Local Currency Issuer Default Ratings (IDRs) at ‘BBB-‘;
–Long-term national scale rating at ‘AAA(col)’;
–Short-term national scale rating at ‘F1+(col);
–Local senior unsecured debt ratings at ‘AAA(col)’.
The Rating Outlook is stable.
KEY RATING DRIVERS
Promigas’ ratings are underpinned by the company’s strong competitive position in the natural gas transportation and distribution sectors, and by the regulated nature of its businesses. These factors result in stable and predictable cash flows for the company. Promigas and its subsidiaries operate in regulated businesses characterized by moderate exposure to legal and regulatory risks. The ratings also incorporate expectations for negative free cash flow generation through 2017, given the company’s high capex needs and aggressive dividend policy.
Promigas’ ratings take into consideration the company’s adequate liquidity, and factor in Fitch’s expectations for the strengthening of cash flow from operations. This strengthening is driven by the positive effect of local currency depreciation on its revenue base, and the upward revision of its transportation tariffs between 2014 and 2015. Fitch expects Promigas’ medium-term leverage will be lower than previously projected given the expectation of more robust cash from operations.
Strengthening Cash Flow Generation
Promigas’ cash flow predictability is factored into the ratings positively. Promigas’ EBITDA generation is mostly explained by its participation in the regulated business of natural gas transportation and distribution. In transportation, the company typically enters into contracts with a maturity from one to five years, with a fixed/variable ratio of 75/25, which limits exposure to volumetric risks. The company operates in the distribution business (53% of the company’s EBITDA), which is characterized by market maturity regulated tariffs, low exposure to economic cycles, and elastic demand.
During 2015 and 2016, Fitch expects the company will benefit from the current local currency depreciation, given that around 75% of transportation revenues are denominated in dollars, while the company’s debt is local-currency denominated. The company already hedged most of its regulated dollar-denominated revenues for 2016 at an exchange rate 40% higher than the hedge contracted for 2015, thus securing sound cash flow generation.
Promigas’ EBITDA generation is further supported by the regulatory review of its regulated tariff scheme as well as its capacity expansion. Effective the second half of 2014 and through 2015, the regulator authorized a tariff increase for the fixed charge component of Promigas’ transportation tariffs of around 22%. Distribution tariff increases should also improve the revenue base of the company’s subsidiaries. Higher revenue growth will also result from increased installed capacity as the ‘South Loop” begins operations in 2016 and the liquefied natural gas (LNG) plant currently under construction should also begin contributing in December of that year.
Ambitious Capital Expenditures Program
Promigas’ FCF generation has been consistently negative in recent years due to high capital expenditures and robust dividend payments. This trend is expected to continue during the next two years, as capex will remain high at the COP750 billion level through 2016. Promigas continues to execute a significant capital expenditure program that will total COP 2.1 trillion between 2015 and 2019, in line with the last company guidance. The majority of investments will take place in 2015-2016, when capex could reach approximately 28% of revenues.
The bulk of the investment program, or approximately COP343 billion will be focused on the 50% equity contribution to a joint venture that will build and operate a LNG regasification terminal. Another important investment is expansion of the transportation facilities in the southern region of Promigas’ current system. Fitch considers the construction of the LNG facility as strategically important to Promigas as it will provide an additional, critical gas supply source for thermal generators in the north region of Colombia that represent approximately 25% of national gas demand.
Leverage Expected to Rise Near-Term
Promigas’ ratings incorporate the expectation that pressure on FCF generation will lead to an increase in leverage ratios, but to a lower degree than previous projections. At end of 2014, financial debt was COP2,443 billion, while the company generated EBITDA of COP650 billion for the year. This translates to leverage defined as total debt-to-adjusted EBITDA of 3.8x.
Fitch anticipates that adjusted leverage will increase to around 4x by the end of 2015, which is still in-line with the rating. The agency believes leverage ratios should start improving in 2016 reaching the 3.5x level by year-end. This level compares favorably with projections from the last annual review, as strengthened internal cash flow generation should reduce the necessity to raise incremental financial debt.
Solid Business Position
Promigas enjoys a strong market position as it is one of Colombia’s largest natural gas transportation and distribution companies. It distributes approximately 50% of natural gas consumed in the country and serves about 2.8 million users. The company’s strategy aims to geographically diversify its presence in the Latin American region. Promigas and its subsidiaries participate in the natural gas distribution market in Peru, and expect to continue expanding operations in other countries in the region. Positively, this could reduce the company’s exposure to the risks inherent to the Colombian market, such as long-term gas-supply constraints.
Moderate Regulatory and Market Exposure
The regulatory framework in Colombia is balanced and provides support to industry participants. Promigas and its subsidiaries are exposed to regulatory and gas supply risks to the extent that most revenues come from regulated contracts. Fitch believes these risks are moderate given the independence and balanced nature of the regulatory framework in Colombia.
KEY ASSUMPTIONS
–Promigas records local currency revenues growth in the range of 15%-20% per year until 2017, driven by exchange rate depreciation, review of regulated tariffs, and increased contracted capacity;
–EBITDA margins improve to around 35%;
–Leverage defined as total debt to adjusted EBITDA increases to 4x in 2015, and then declines to the 3.5x level starting in 2016
RATING SENSITIVITIES
Fitch considers a positive rating action unlikely in the near term given elevated capex expectations over the next four years. A material improvement in credit metrics that could be sustained over time and/or a more conservative dividend policy would be seen as positive to the company’s credit profile.
The main factors that individually or collectively could lead to a negative rating action are:
–A lower than expected return on investment that puts pressures on cash flow generation;
–Additional significant investments that do not involve financing via an equity component and/or are followed by significant reductions in dividend outflows;
–Exchange rate volatility that pressures EBITDA generation;
–Gross leverage levels over 4.5x on a sustained basis.
LIQUIDITY
Promigas maintains adequate liquidity levels, supported by a healthy cash balance, strong cash from operations, and a manageable debt profile. At end of December 2014, on a consolidated basis, Promigas maintained COP120 billion in cash, while cash flow from operations in 2014 was COP382 billion. This compares favorably with COP64 billion in short-term debt. Excluding 2016 debt amortizations of COP323 billion, the next sizable debt repayment is in 2019 in the amount of COP500 billion.
Given its ambitious capex program and dividend policy, the company should require additional debt disbursements in the next four years. Refinancing risk is considered low, due to the COP1.5 trillion of uncommitted credit facilities and proven access to the local capital markets.
FULL LIST OF RATING ACTIONS
Fitch ratings has affirmed Promigas’ ratings as follows:
–Foreign currency Issuer Default Ratings (IDRs) at ‘BBB-‘;
–Local currency IDRs at ‘BBB-‘;
–Long-term national scale rating at ‘AAA(Col)’;
–Short-term national scale rating at ‘F1+(Col)’;
–COP400 billion local unsecured bonds;
–COP580 billion local unsecured bonds;
–COP 500 billion local unsecured bonds;
In addition, Fitch has withdrawn the ‘BBB-‘ rating previously assigned to a possible international bond issuance that did not take place.
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
Metodología de Calificación de Empresas no Financieras (pub. 19 Dec 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=844890
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=993022
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993022
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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