Credit Opinion: Transportadora de Gas del Peru (TGP)

Transcription

1 Credit Opinion: Transportadora de Gas del Peru (TGP) Global Credit Research - 06 May 2015 Lima, Peru Ratings Category Outlook Senior Unsecured Moody's Rating Stable Baa1 Contacts Analyst Phone Natividad Martel/New York City William L. Hess/New York City Key Indicators [1]TransportadoradeGasdelPeru(TGP) (FFO + Interest) / Interest x 3.8x 3.4x 4.1x FFO / Debt 15.8% 17.4% 19.0% 21.8% FFO - Dividends / Debt 15.8% 17.4% 19.0% 14.8% [1] All ratios calculated in accordance with the Global Natural Gas Pipelines Rating Methodology using Moody's standard adjustments. Note: For definitions of Moody's most common ratio terms please see the accompanying User's Guide. Opinion Rating Drivers - Single asset but key piece of infrastructure for the Peruvian economy amid growing demand - Cash flow visibility enhanced by contracts and terms of the BOOT Agreements - Capex program is being funded without increase in leverage - Credit metrics well positioned within the Baa-rating category and liquidity profile is adequate Corporate Profile Headquartered in Lima, Transportadora de Gas del Peru (TgP, Baa1stable) is the largest natural gas transportation company in Peru (A3 stable) in terms of volume and revenues. Its assets consist of an openaccess 729 kilometer natural gas and a 557 kilometer natural gas liquids (NGL) pipeline stretching from the Peruvian Amazonian jungle to the Pacific coastline. Compañia Operadora de Gas del Amazonas S.A.C. (COGA) is responsible for the operation and maintenance of the pipelines systems. The transportation capacity of TgP's NGL system is 120 thousand barrels/day while the capacity of its NG system

2 is scheduled to increase next year to 920 million cubic feet per day (MMCFD; year-end 2014: 655MMCFD). Its NG system also connects to the pipeline built by Peru LNG S.R.L.(Peru LNG), the operator of the country's only LNG export facility since 2006, at km211. In 2014, NG and NGL transportation services accounted for 66% and 34% of TgP's total revenues. TgP's activities are subject to the regulatory purview of the Ministry of Energy and Mining (MEM) and the Organismo Supervisor de la Inversion en Energia y Mineria (OSINERGMIN). TgP started operating in 2004 under two separate Build Own Operate Transfer (BOOT) Agreements awarded by the Peruvian government in Both BOOT Agreements are currently scheduled to expire in TgP's current shareholders are Carmen Corporation (36.8% and 19% indirect ownership in COGA) controlled by the Canada Pension Plan Investment Board (CPPIB), Sipco Peru Pipelines Corporation (21.2%; wholly-owned by Algerian Sonatrach), Enagas S.A. (Enagas, Baa2, positive)(20%), SK Innovation (11.2%; a wholly owned subsidiary of the South Korean conglomerate SK group), International Power (8.1%), Graña y Montero S.A.A (GyM; 1.6%; a Peruvian construction company) and Corporacion Financiera de Inversiones S.A.A. (CFI; 1. 1%). COGA is owned by GyM (51%), Enagas (30%) and Carmen Corporation (19%). At the end of December 2014, TgP reported total assets of around US$1.8 billion. SUMMARY RATING RATIONALE TgP's Baa1 rating reflects the importance of its NG and NGL infrastructure systems to Peru, and the terms of the BOOT agreements. It further takes into consideration the cash flow visibility resulting from its highly contracted firm capacity and non-volumetric tariffs that are denominated in US dollar (US$), the same currency as the bulk of its costs and debt. These tariffs are annually adjusted to reflect changes in the US$ PPI. The rating is underpinned by the expectation that TgP's credit metrics will remain well positioned within the Baa-rating category going forward and at least US$100 million in cash will be maintained in order to support its liquidity profile. However, these credit-positives are tempered by the single asset nature of its operations and the significant exposure of TgP's revenues to unregulated customers, particularly power generation companies, as well as some exposure to cash flow mismatches resulting from a potential adverse development in the local inflation rate compared to the US$ PPI; and any unfavorable movements in the exchange rate between the Peruvian Nuevos Soles and the US$. DETAILED RATING CONSIDERATIONS SINGLE ASSET BUT KEY PIECE OF INFRASTRUCTURE AMID GROWING DEMAND AND VERY LIMITED COMPETITION TgP is Peru's largest NG transportation company in terms of volume and revenues. The rating largely reflects the importance of its systems to the Peruvian economy in general, and also the territory it serves. TgP's service territory includes Peru's most populated centers (including the capital Lima), which are located along the Pacific coastal area. We consider there to be a low probability that a parallel pipeline to TgP's system will be constructed given the significant capex required. This probability also considers the country's focus on fostering the use of NG and NG liquids in the southern part of Peru. To that end, in July 2014 the government executed a 34-year BOOTagreement with the South Peru Gas Pipeline Consortium in order to construct and operate an over 1,085km long 600MMCFD pipeline, which according to Oderbrecht, the pipelines main shareholder, will cost US$5 billion. This followed the authority's bid in November 2013 to allocate the construction of two power generation projects with total of 1,000MW of installed capacity (scheduled completion in 2016)which will use diesel until the expected completion of the pipeline by The government expects that this energy center will enhance the electricity system reliability with new thermal-fired capacity installed away from the Lima area and help develop a petrochemical hub to diversify the local economy. While the demand of NG in that area is still uncertain, we understand that to supply that region the government has earmarked 1 Tera Cubic feet (Tcf) from the Block 88. In the interim, TgP is still transporting all the NG and associated NG Liquids produced in this Block 88 (currently fully dedicated for the local consumption) as well as from Block 56 (reserves also destined for LNG exports). These along with Block 57 are located in the Camisea basin, and in 2014 accounted for around 49% (Block 88), 42% (Block 56) and 5% (Block 57) of the country's production. According to the authorities' last estimates published at the end of 2013, the proven reserves of these three blocks approximated 2.8 TCf (Block 56), 10.2TCf (Block 88) and 1.0TCF (Block 57). These were estimated to be sufficient for least 30 years considering 2013

3 production levels and transportation capacity. This is longer than the maturity of TgP's international notes, an important credit consideration. Prices for LNG exports are not regulated, but NG to meet local demand is subject to controls such that the well head prices paid by power generators and the other local users are US$1.84/MMBTU and US$3.30/MMBTU, respectively. However, we believe the liquids associated with the Camisean Basin natural gas production have provided some economic incentives for the Upstream consortium to continue the production of NG while the associated royalties paid by the producers are also an important source of income for the government. We also understand that Supreme Decree No established that in times of emergency, all NG from the Camisea basin will be destined exclusively for Peru's local market. That said, we consider the risk that Peru ceases to export NG relatively low because of the uncertainty that such a situation would create given the contracts currently in place, the investments made to develop Peru's LNG facilities and the loss of revenues for the State. Furthermore, the country is not yet able to absorb 100% of the E&P production despite the rapid growth of the Peruvian NG-demand (in 2014 local demand grew by 18% to almost 680MMCFD) amid the government's initiatives to foster greater use. The high involvement of the government in restoring the integrity and preserving the security of the Camisea Basin and TgP's assets (refer to the expansion program section) is evidence of the significance of these assets in meeting the country's growing economy and NG demand, including the significant NG fired power generation fleet. TgP's rating also assumes that its operational data will remain satisfactory despite the challenges posed by the distinct types of topographical terrains its system crosses (compressors etc), including both flat and mountainous (peak at 4,864 meters) as well as earthquake risk. The rating also assumes that TgP's insurance coverage remains appropriate and up to market standards. This includes a reserve of up to 24 months of business interruption losses which is the estimated time required to rebuild some key pieces of infrastructure in the Camisea Basin following a catastrophic failure (including a terrorist attack). CONTRACTED CAPACITY AND BOOT-AGREEMENTS ENHANCE CASH FLOW VISIBILITY BUT EXPOSURE TO POWER GENERATION COMPANIES REMAINS SIGNIFICANT TgP's rating also considers that the terms of its BOOT-concession agreements are credit supportive. Given TgP's operational track-record we assign a low probability to the risk of an early termination of these agreements for poor performance. The BOOT agreements will expire in 2033 but could be extended for ten year periods until a final expiration in TgP's cash flows also benefit from two Tax Stability Fund Agreements which limit TgP's exposure to changes in taxation. Another important rating consideration is that while TgP's NG firm and interruptible transportation service tariffs are subject to maximum regulated rates and supervised by OSINERGMIN, they are not exposed to adjustments based on the issuer's operating costs and/or capital investments. This is credit positive because it reduces the regulatory scrutiny of periodical full-blown tariff reviews assuming no material changes in TgP's cost structure. To offset the risk of the latter we acknowledge that the bulk of TgP's NGL and NG rates are annually adjusted to reflect changes in the US$ PPI. In 2014, TgP's NG base rates were US$1.1/MCF and US$1.24/MCF for firm and interruptible services, respectively, while its NGL transportation services rates were US$4.4/Bbl. This excludes the tariff charged to Peru LNG that is indexed to Henry Hub (HH); however, subject to a floor and cap when HH prices exceed a certain band (range between US$4.0/MMBTU and US$12.25/MMBTU). TgP's NG and NGL system capacities are also highly contracted under long-term agreements which limit its volumetric exposure. TgP also completed an open season end of last year that resulted in TgP contracting 87MMCFD out of the 107 MMCFD additional available capacity.. As a result of this and the renewal of some agreements the weighted average life of its NG firm contracts was lengthened to 18 years from 16 years, another important rating consideration. TgP transports NGL exclusively for the Upstream consortia (Block 88 and Block 56) that are subject to "ship-or-pay" contracts under a 19-year agreement scheduled to expire in TgP also discloses that in 2014, it derived around 96% of its natural gas transportation revenues from firm transportation services (21 contracts) compared to 93.8% in 2013 (22 contracts), while interruptible services approximated 4% (2013: 6.2%). On a less positive note, despite some diversification efforts TgP's top five customers on the NG segment still account for 80% of its total revenues. This includes Peru LNG (over 23% of its revenues; under ship-or-pay arrangements), the NG-distribution company Gas Natural de Lima y Callao (Calidda, Baa3 stable; 17%) and the three largest power generation companies, Kallpa, Edegel and Enersur. The credit concerns associated with this large exposure to the power generation sector is offset by their importance in the Peruvian energy mix (historically at least 30% of the total output regardless of the season). Also this results in the power generator's NG-demand in Peru being less volatile than in other countries in the region where the contribution of hydro-electric plants are

4 significantly higher, causing the dispatch of NG-fired plants to be more seasonal and unpredictable. TgP's rates are also denominated in US$, the same currency as the bulk of its costs and debt. On a negative note, the BOOT concession agreements or contracts lack a mechanism that fully offsets the company's exposure to cash flow mismatches resulting from a potential adverse development in the local inflation rate compared to the US-PPI or unfavorable movements in the exchange rate between Peruvian Nuevos Soles and the US$. This concern considers that around 30% of TgP's operating cost structure, as well as the interest payable under its outstanding local bonds, are denominated in Nuevos Soles and linked to Peruvian inflation rate. RESUMED CAPEX EXPECTED TO BE FUNDED WITH INTERNALLY GENERATED CASH FLOWS AND CASH BALANCE TgP's rating further acknowledges substantial progress in the expansion of TgP's capacity to 920 million cubic feet per day (MMCFD; 2014: 655MMCFD), after the issuer resumed the works end of 2013 that were on hold following terrorist attacks. This followed the execution of a new Addenda by the Peruvian government in September 2013 that reflected certain amendments in the scope of the expansion works that had been initially arranged under two previous Addenda's, Addenda 1 signed in May 2010 and Addenda 2 signed in April Under this new Addenda the parties agreed to increase TgP's transportation capacity to 920MMCFD by no later than the end of June 2016 via the installation of a fourth 18,000HP compressor at the site. This replaced the construction of the 55km pipeline parallel to the existing one (loop) which was more challenging to secure against terrorist attacks by the government. As a result of these changes TgP reported a non-cash write-down of US$102.5 million in 2013 associated to costs already incurred in previous years in connection with the original expansion plans; last year TgP further recorded a non-cash impairment provision for certain supplies for expansion. The parties also agreed to build a 31 km loop between Chilca and the Lurin City Gate, outside of Lima. Furthermore, an agreement to add a branch to TgP's NG transportation system to Ayacucho (estimated capital outlays of US$21.2million), where no security concerns are anticipated, was made. Moody's understands that the total capex earmarked for the amended expansion works under the latest Addenda is lower than that of Addenda 1 and Addenda 2 with a substantial portion being invested this year. This is credit positive as it increases the likelihood that TgP will be able to grow its revenue base while fully funding this expansion with internally generated cash flows and existing cash balances. CREDIT METRICS EXPECTED TO REMAIN STRONG FOR THE Baa-RATING CATEGORY We expect TgP's 3-year average credit metrics to remain strongly positioned in the Baa-rating category according to the financial ratio guidelines outlined in Moody's Natural Gas Pipelines ratings methodology; for example, its three-year average Funds from Operations (FFO) to debt and interest coverage at least in the mid 20% and 5x range, respectively. This expectation is largely based on an increase in EBITDA from its expansion and the funding of its capex program with internally generated cash flows. It further assumes that, after the US$200 million dividend last year, TgP will have a less material payout this year as it funds the tail-end of its expansion. However, once that project is completed we anticipate that the company will adopt a more aggressive dividend policy, as its capital requirements diminish upon the completion of its expansion, such that TgP will record Retained Cash Flows (RCF) to debt that are weak for the Baa-rating category under the methodology mentioned earlier. Liquidity Profile We consider TgP's liquidity profile to be adequate. TgP's management has committed to maintain at least US$100 million in cash balances (year-end around US$329 million) at all times in the absence of committed bank credit facilities. This would allow the company to cover at least four months of operations should the company face an extended outage in its pipeline operation, a credit positive. It also assumes that TgP will fund the tail-end of its capex and its future dividend policy without incurring additional debt. TgP has no debt maturities before 2028 when the 15-year 4.25% US$850 million 144/regS notes will come due after a five-year amortization period. TgP's only other debt consists of two local bond issuances denominated in nuevos soles linked to the Peruvian inflation rate that will mature in August 2029 and May 2030, of which there was about US$118 million outstanding at year end These were the only pieces of its debt that TgP did not solicit last year when it issued the yankee notes. The conditions of their tender did not make it economically feasible. They rank pari passu with the yankee notes after the debt-holders consented to the termination and

5 release of all security interests. Rating Outlook The stable outlook assumes that TgP will successfully complete its expansion according to budget and schedule, and that it will contract the remaining 20 MMCFD of unsecured capacity in another open season before year-end. The stable outlook also assumes that TgP's overall credit metrics will remain strongly positioned for the Baa-rating category. It further assumes that TgP's liquidity profile will remain adequate given management's commitment to maintain at least US$100 million in cash balances at all times even after implementing a more aggressive dividend policy. It also considers our expectation that the capacity of TgP's systems will remain highly contracted over the next fifteen years and that the country's security concerns will not materially impair TgP's operations and financial performance. What Could Change the Rating - Up The rating could experience additional positive momentum if, upon successful completion of the systems' expansion program, risk management initiatives are implemented to completely offset the issuer's exposure to cash flow mismatches and currency risks mentioned earlier. Upward rating pressure could materialize if TgP is also able to record more robust credit metrics that offset the business risks associated with its customer base, for example, if TgP records FFO to debt, interest coverage and RCF to debt above 35%, 6x, and 18%, respectively, on a sustainable basis. What Could Change the Rating - Down The rating or outlook would come under pressure if TgP fails to complete its expansion program on schedule and/or faces cost overruns that impact its financial performance. The rating could be downgraded if its system's capacity does not remain highly contracted over the next fifteen years; cash mismatches affect the predictability of its cash flows; TgP fails the minimum target cash balance; and/or if its capital structure is re-leveraged such that TgP reports 3-year average FFO to debt, interest coverage, and RCF to debt below 15%, 4x, and 12%, on a sustainable basis. Other Considerations As mentioned earlier TgP's functional currency is US$, the same currency in which its denominated, which offsets concerns about TgP's exposure to foreign exchange risk to a large extent. However, it remains exposed to some cash flow mismatches resulting from a potential adverse development in the local inflation rate compared to the US-PPI or unfavorable movements in the exchange rate between Peruvian Nuevos Soles and US$. This is because around 30% of TgP's operating costs, as well as the interest payable under its two outstanding local bonds are denominated in Nuevos Soles and linked to the local inflation rate while its revenues are 100% denominated in US$ and largely adjusted to reflect changes in the US PPI. We evaluate TgP's financial performance relative to the Natural Gas Pipelines methodology, published in November As depicted in the methodology grid below the company's indicated rating based on historical and projected credit metrics is Baa1, the same as its assigned Baa1 senior unsecured rating. Rating Factors TransportadoradeGasdelPeru(TGP) Natural Gas Pipelines [1] 12/31/2014 Moody's month Forward View* As of April 2015 Factor 1: Market Position (15%) Measure Score Measure Score a) Demand Growth (5%) Baa Baa b) Competition (5%) Aa Aa c) Volume Risk & Throughput Trend (5%) Baa Baa

6 Factor 2: Quality of Supply Sources (10%) Baa Baa Factor 3: Contract Quality (30%) a) Firm Revenues (10%) Aa Aa b) Contract Life (10%) Aa Aa c) Shipper Quality / Re-contracting Risk (10%) Ba Ba Factor 4: Financial Strength (45%) a) (FFO + Interest) / Interest (15%) 3.9x Ba x Baa b) FFO / Debt (15%) 21.2% Baa 15-25% Baa c) FFO - Dividends / Debt (15%) 12.1% Baa 12-18% Baa Rating: a) Indicated Rating from Grid Baa1 Baa1 b) Actual Rating Assigned Baa1 Baa1 * THIS REPRESENTS MOODY'S FORWARD VIEW; NOT THE VIEW OF THE ISSUER; AND UNLESS NOTED IN THE TEXT DOES NOT INCORPORATE SIGNIFICANT ACQUISITIONS OR DIVESTITURES [1] All ratios are calculated using Moody's Standard Adjustments; 3 year averages This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history Moody s Corporation, Moody s Investors Service, Inc., Moody s Analytics, Inc. and/or their licensors and affiliates (collectively, MOODY S ). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES ( MIS ) ARE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY S ( MOODY S PUBLICATIONS ) MAY INCLUDE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY S OPINIONS INCLUDED IN MOODY S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY S ANALYTICS, INC. CREDIT RATINGS AND MOODY S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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