October 26, 2016 / 6:57 PM / 2 years ago

Fitch Affirms Promigas S.A. E.S.P.'s IDRs at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, October 26 (Fitch) Fitch Ratings has affirmed Promigas S.A. E.S.P.'s (Promigas) ratings as follows: --Foreign and Local Currency Long-Term Issuer Default Ratings (IDRs) at 'BBB-'; --Long-term national scale rating at 'AAA(Col)'; --Short-term national scale rating at 'F1+(Col)'; --Local bonds issuances at 'AAA(col)'; --Local issuance of Bonds and commercial paper program at 'AAA(col)/F1+(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; Promigas and its subsidiaries operate as natural monopolies. These factors result in stable and predictable cash flows for the company. The company is exposed to regulatory risks, which are deem to be moderate given the constructive regulatory framework and balanced rules found in Colombia. The ratings also incorporate expectations for negative free cash flow generation in the medium term, given the company's high capex program and aggressive dividend policy. Stable Cash Flow Generation Promigas' cash flow predictability is positively factored into the ratings. Promigas' EBITDA generation is mostly explained by its participation in the natural gas transportation and distribution businesses. On the transportation side of the business, the company typically enters into take or pay transportation agreements with off-takers that have contract maturities ranging from one to five years. With the incorporation of a new LNG facility expected in December 2016, the company will extend the length of several of its transportation agreements to 10 years as well as enter into new regasification contracts with the same off-takers, i.e. thermal electric generators. The fixed capacity nature of the contracted payments limits exposure to volumetric risk. In addition, the company's natural gas distribution business has low exposure to economic cycles and its demand is inelastic given the nature of the load. Promigas' cash flow from operation continues to benefit from the current local currency depreciation, given that around 75% of gas transportation tariff is denominated in dollars. The company has a strategy of hedging most of its regulated dollar-denominated revenues for the next year, which adds to cash flow stability. Promigas' EBITDA generation is further supported by a recent regulatory review of its tariff scheme as well as its capacity expansion. During 2014 and 2015, the regulator authorized an increase of Promigas' natural gas transportation tariffs. Further, the company expects an increase in its distribution tariffs over the medium term which should improve its revenue base. Additional revenue growth and profitability is expected from ongoing expansion investments, the 'South Loop', and the liquefied natural gas (LNG) facility that will be fully operational by the end of 2016. High Capital Expenditure Program Promigas' FCF generation has been negative over recent years due to high capital expenditures and high dividend payouts. This trend is expected to continue in the medium term as capex for 2016-2020 is projected to total COP2.2 trillion, with approximately COP878 billion at the holding company level. Capex requirements are mostly concentrated between 2016 and 2017, reaching around 70% of the total capex needs. Promigas' largest projects are 1) the LNG regasification terminal in which the company has a 51% interest, 2) the expansion of the natural gas pipelines in the southern region of Promigas' current system, and 3) the investments in Gases del Pacifico, a new natural gas distributor in the north of Peru that is expected to start commercial operations in 2017. Promigas expects to connect 150,000 customers over the next five years in this company's service area. Leverage Expected to Rise Near-Term Promigas' ratings incorporate the expectation that pressure on FCF generation will lead to an increase in leverage, but still in line with its current ratings. At end of June 2016, financial debt was COP3.4 trillion. This translates to leverage defined as total debt-to-adjusted EBITDA of 3.6x. Fitch anticipates that adjusted leverage will increase to around 4.0x by the end of 2016 and that leverage ratios will be in the 3.5x to 4.0x range in the medium term. Solid Business Position Promigas enjoys a strong market position as one of Colombia's largest natural gas transportation and distribution companies. It distributes approximately 40% of natural gas consumed in the country and serves about 3.1 million users. Promigas and its subsidiaries participate in the natural gas distribution market in Peru. The company's strategy includes continued expansion in the region. Positively, this could reduce its exposure to the inherent risks of 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 in order to foster investment in the sector, and ensure the long-term supply, transportation and distribution of natural gas in the country. 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. Regulators are currently developing a new methodology for regulated tariffs that could lower return on capital in the transportation segment. This negative effect may be offset by expected distribution tariff increases which would benefit Promigas subsidiaries. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Promigas include: --Revenues and EBITDA growth reflect the start of operations of the LNG plant, as well as Gases del Pacifico in Peru; --The company executes around COP 2.2 trillion of capex from 2016 to 2020; --Leverage levels reach around 4.0x by the end of 2016, lowering to a range of 3.5x to 4.0x over the medium term. 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 not 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' liquidity levels are supported by healthy cash balances and predictable cash flow from operations. Nevertheless at end of June 2016, short-term debt temporary increased to 504 billion as the company took on short term debt to finance capex requirements of the LNG plant. Promigas expects to replace these short term loans by the end 2016 with a long term financing. In addition, the company placed COP 500 billion of a local bond program in September 2016 that improved the company's debt maturity profile. Proceeds of the issuance were used to refinance short term debt and fund capex needs. At end of June 2016, Promigas maintained COP 1.3 trillion in available credit lines, which provides additional liquidity support. Contact: Primary Analyst Lucas Aristizabal Senior Director +1-312-368-3260 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Jorge Yanes Director +571-484-6770 Committee Chairperson Daniel R. Kastholm, CFA Managing Director +1-312-326-2070 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. 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