October 12, 2017 / 8:44 PM / in 2 months

Fitch Affirms TGI's IDRs at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, October 12 (Fitch) Fitch Ratings has affirmed Transportadora de Gas Internacional S.A. E.S.P.'s (TGI) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs), as well as international senior unsecured bond issuance, at 'BBB'. The Rating Outlook for TGI is Stable. TGI's ratings reflect the company's business strength, stable cash flow generation, and expectations of moderate leverage increase over the medium term. TGI's exposure to regulatory risk is considered moderate, further supporting its ratings. Also factored into the ratings are the strong linkage with its parent company, Empresa de Energia de Bogota S.A. (EEB: BBB/Stable), which almost fully controls TGI. KEY RATING DRIVERS Strong Business Position: TGI benefits from a strong competitive position, derived from its pipeline location and the importance of its service area. The company is the market leader in gas transportation in Colombia, both in terms of infrastructure length and natural gas transported. It owns and operates approximately 3,957km of natural gas transportation pipelines in Colombia's Andean region that cover the three most important cities in Colombia: Bogota, Medellin and Cali. Stable EBITDA Generation: TGI's ratings reflect the company's low business risk profile, which stems from its stable and predictable cash flow generation. TGI benefits from contracts with an average remaining life of around 8.4 years and with 90% of revenues coming from regulated fixed tariffs, which limit its exposure to volumetric risk. TGI's off-takers concentration, which is a characteristic of the natural gas transportation business, is offset by the high credit quality of its clients and the lack of complementary infrastructure to transport natural gas in its relevant area, which in turn contributes to the company cash flow from operational stability. In addition, around 68% of revenues are denominated in USDs, which mitigates the effect of currency depreciation on financial metrics, since almost 100% of the financial debt is dollar denominated. Moderate Leverage: Medium-term FCF and leverage performance will depend on the capex intensity to be executed in the following years. Ratings incorporate the expectations that leverage levels will remain around 2.5x-3x in the medium term, including the projects in execution. Debt balance excludes USD370 million of a deeply subordinated intercompany loan from EEB (which is not considered debt when Fitch calculates the company's leverage metrics). If this intercompany loan is included, leverage levels will increase to 3.5x-4.0x over the medium term. Moderate Exposure to Regulatory Risk: TGI's ratings also incorporate its exposure to regulatory risk, as the bulk of its revenue comes from regulated contract tariffs. Regulators are currently developing a new methodology for regulated tariffs that would lower return on capital and in turn would generate some pressures on TGI's EBITDA. Historically, Fitch considers the Colombian utilities' regulatory framework has been balanced and fair to market participants. In addition, although the new tariff could imply a reduction in company profits over the medium term, Fitch considers TGI's credit profile to be adequate and could withstand some adverse regulatory scenarios and still maintain its investment-grade rating. Expectations for Elevated Capex: TGI's capital expenditures in the medium term are expected to be high as the company executes an investment plan to expand and replace some of its infrastructure. Projects that total more than USD300 million until 2022 will pressure FCF generation over the next few years. In addition, Fitch expects TGI to pursue additional potential investments, as the government adopted a long-term natural gas supply plan in which it identified key projects to strengthen the natural gas infrastructure, most of them complementary or close to the TGI's current system. If these projects are executed and TGI are granted the permission to bring them online, they could triple its capex execution in the next five years. Additional credit risks are associated with potential cost overruns or completion delays during the execution of these projects that could reflect in further pressures on FCF generation and leverage. Strong Parent-Subsidiary Linkage: TGI's ratings are strongly linked to its parent company, and both entities are considered to have similar credit profiles on a stand-alone basis. Empresa de Energia de Bogota S.A. E.S.P. (BBB IDR) owns 99.97% of TGI and, in turn, Bogota, Capital District of Colombia (Foreign Currency IDR BBB) owns 76.3% of EEB. Both companies reallocate their funds depending on cash financing needs. TGI maintains an intercompany loan from EEB of USD370 million from 2007, while TGI has provided loans to EEB in 2015 and 2016 that were fully repaid during 2016 and 2017. DERIVATION SUMMARY TGI maintains an investment-grade credit profile, with strong and predictable EBITDA generation, characteristic of pure natural gas transportation companies such as Transportadora de Gas del Peru S.A. (TGP) (BBB+/Stable). TGI is also well positioned related to regional peers that operate in the Natural Gas Distribution segment or Liquefied Natural Gas, such as Gas Natural de Lima y Callao (Calidda: BBB/Stable), Promigas S.A. E.S.P. (Promigas: BBB-/Stable ) and Gas Natural Quintero (GNLQ: BBB+/Stable). TGI is less exposed to volumetric risks and maintains lower leverage expectation than Promigas, but it also has expectations for elevated capex in the medium term, given the current projects in execution, as well as new projects to potentially be tendered for the natural gas transportation network in Colombia, all of which could keep leverage levels above Fitch estimates for TGP.TGI also has stronger credit metrics than GNLQ, but this is mitigated by its lack of exposure to price or volumetric risk and the longer term of its concession agreement. TGI's ratings also reflect its strong legal, strategic and operation linkage with EEB, which is also rated 'BBB'/Stable. Therefore, Fitch considers it unlikely to see both companies with differing credit profiles, as the companies maintain intercompany loans to allocate cash depending on each company's needs. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenues and EBITDA growth reflects expected remuneration for the currently ongoing project; - Expected changes in the regulatory tariff will have a neutral effect on TGI's credit profile; - Leverage, excluding the USD370 million of the intercompany loan with EEB, will be 2.5x-3x in the medium term. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -A positive rating action or Outlook is unlikely in the near- to medium-term given the company's expectations of elevated capex in the medium term. It would be viewed positively if the company significantly reduces its leverage to below 2.5x on a sustained basis after the company's latest investment program is finalized. An upgrade to EEB's credit rating could also be positive for TGI's credit rating. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -Negative regulatory developments and/or tariff reviews that could lead to a deteriorating credit profile. -Influence from the company's shareowner that results in a sub-optimal financial/operational strategy that could hurt the company's credit quality; -EEB credit quality deterioration that leads to having to extract material cash flow from TGI; -TGI's executes higher-than-expected investments, resulting in gross leverage levels of 4.0x or above on a sustained basis. LIQUIDITY Strong Liquidity: The company's liquidity position is supported by its cash on hand, strong internal cash flow generation and favorable amortization schedule. At end of June 2017, debt maturities for 2017 were mostly defined by the USD110 million in FX losses due in October 2017 that the company paid-off using its cash balances. The next sizable debt maturities are due in 2019 when USD84 million of the syndicated loans is due; Fitch notes that the company recently prepaid USD100 million of this loan. After that, the next sizable payment is in 2022 when USD750 million of the international issuance comes due. At end of June 2017, TGI's debt reached around USD1.05 billion, consisting of USD750 million in 2022 international bond issuance, USD184 million of a credit loan, with the balance in FX losses and financial leases in local currency. In addition, TGI records a USD370 million deeply subordinated intercompany loan from EEB due in 2022, which is not considered debt when Fitch calculates the company's leverage metrics. Fitch expects TGI's financing needs would increase in the medium term if the company is granted the projects identified as strategic by the regulator. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings: Transportadora de Gas Internacional S.A. E.S.P. -- Long-Term Foreign and Local Currency IDRs at 'BBB'; Outlook Stable; --International senior unsecured debt at 'BBB'. 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 +1-312-368-2070 Summary of Financial Statement Adjustments: FX losses of around USD110 million due October 2017 are included as part of TGI's financial debt. Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: benjamin.rippey@fitchratings.com. 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