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 October 27, 2015 - 3:18 PM EDT
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Fitch Affirms TGI's IDRs at 'BBB'; Outlook Stable

Fitch Ratings has affirmed Transportadora de Gas Internacional S.A. E.S.P.'s (TGI) ratings as follows:

--Foreign and local currency Issuer Default Ratings (IDRs) at 'BBB';

--International senior unsecured debt at 'BBB'.

The Rating Outlook is Stable.

KEY RATING DRIVERS

TGI's ratings reflect the company's stable and predictable cash flow generation, business strength, as well as its solid liquidity position. Historically, TGI has benefited from its linkage to its primary shareholder, Empresa de Energia de Bogota S.A. E.S.P. (EEB), which supports the company through an intercompany loan. TGI's exposure to regulatory risk is considered moderate, further supporting its ratings.

Stable Cash Flow: TGI's ratings reflect the company's low business risk profile, which stems from its stable and predictable cash flow generation, as well as its strong competitive position. TGI has favorable long-term take-or-pay contracts with approximately 90% of revenues coming from regulated fixed tariffs. These fixed payments from a diversified portfolio of off-takers add to cash flow stability. The company has low exposure to volume risk as only 9% of revenues are linked to volume throughput. TGI's pipeline location and the importance of its service area, where 70% of the Colombian population resides, represent substantial growth potential and help support the company's credit profile and credit rating.

Capex Step-up: Per Fitch's base case, capital expenditures for 2015 to 2019 are expected to ramp-up versus the 2011-2014 period as the company executes an investment plan in pursuit of growth opportunities. As a reminder, during 2011-2014 the company spent USD1.2 billion in capex. Fitch believes this ambitious capital investment program will be funded via the company's strong internal cash flow generation and the addition of an equity partner in 2016.

Constructive Regulatory Risk: TGI's ratings also incorporate its exposure to regulatory risk, as the bulk of its revenue comes from contract tariffs, which are set by the regulator. The tariff structure for natural gas transportation companies is based on each company's asset value, expected capital expenditures for expansion, and remuneration for costs and operating expenses. Fitch considers the Colombian utilities' regulatory framework to be balanced and fair to market participants and independent from the central government.

Parent Support: TGI benefits from its parent company's explicit and implicit support. EEB (Fitch IDR: 'BBB') owns 99.97% of TGI, and, in turn, the District Capital of Bogota (Bogota DC; foreign currency IDR 'BBB') owns 76.3% of EEB.

Company Transitioning to IFRS: The company is transitioning to international financial reporting standards (IFRS), so latest 12 months (LTM) calculations are inaccurate in measuring the company's financial performance. Comparable 2015 and 2014 results will not be available until the company publishes full-year 2015 results in early 2016. As the company has disclosed first-half 2015 (1H15) and 1H14 financial results in IFRS format, these are the most relevant year-over-year comparisons that can be analyzed for income statement and cash flow performance.

Increasing Leverage: TGI's leverage level is moderate with debt-to-EBITDA of approximately 2.5x in dollar terms as of June 30, 2015. Including a USD370 million deeply subordinated intercompany loan from EEB (which receives 100% equity credit when Fitch calculates the company's leverage metrics), leverage would be approximately 3.5x in dollar terms. Going forward, TGI's leverage will increase given EEB's transaction to buy the 31.92% stake of TGI it did not previously own.

The USD645 million syndicated loan used to fund the purchase of the TGI equity stake is held in an offshore SPV, with the debt expected to be absorbed by TGI in 1H16. Following debt prepayments, Fitch expects the total incremental debt at the TGI level from this transaction will total approximately USD219 million. Fitch expects leverage to rise to 3.2x when the debt is absorbed by TGI. Long-term, given the company's strong cash flow generation, leverage is expected to decline to the 2.5x-3.0x range on a sustained basis. In 2014, the company reported EBITDA of approximately USD357 million. Total debt (including an equity credit for the subordinated intercompany loan) was approximately USD880 million.

Dividend Payments to Continue: In March 2014, TGI's shareholders approved the first dividend distribution in the history of the company. The approved dividends amounted to 100% of 2013 net income, an advance of the 2014 net income, and payouts from the company's reserves. Total dividend payouts were USD319 million for the 2014 fiscal year. Fitch is projecting that the company will be paying on average USD125 million in annual dividends going forward, a figure that is above company guidance. Given the company's strong cash flow generation, Fitch expects the company to maintain comfortable liquidity despite the payment of substantial dividends and ramped up capex going forward.

RATING SENSITIVITIES

Negative: Future developments that could, individually or collectively, lead to negative rating actions include:

--Company's financial profile deteriorates resulting in sustained gross leverage levels of 4.0x or above on a sustained basis;

--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 suboptimal financial/operational strategy that could hurt the company's credit quality;

--Company's ambitious capex program is not partially funded by substantial capital injections.

Positive: A positive rating action or Outlook is unlikely in the near- to medium-term given the company's ambitious capital investment program. It would be viewed positively if the company significantly reduces its leverage after the company's latest investment program is finalized.

LIQUIDITY AND DEBT STRUCTURE

Strong Liquidity: The company's liquidity position is supported by its cash on hand, strong internal cash flow generation and favorable amortization schedule. TGI does not have significant amounts of debt coming due before 2022. On June 30, 2015, TGI's cash and marketable securities totaled USD328 versus no short-term debt.

TGI's regulated revenues are partially indexed to the U.S. dollar (approximately 66% of 1H15 revenues are indexed to USD), which mitigates the risk from currency fluctuations as USD denominated revenues satisfactorily cover interest expenses. Going forward, the company's liquidity position will be supported by its internal cash flow generation, despite expectations for a ramp-up in capex during the next five years.

KEY ASSUMPTIONS

--Average EBITDA of USD350 million per year, ramping up starting with 2019 as projects come on-line;

--Company prepays syndicated loan by around USD219 million by the time the debt is absorbed by TGI;

--Capital expenditures to ramp up in 2015-2019 versus 2011-2014 spending;

--Company gains an equity partner to help fund the ramp in capex;

--Leverage rises to 3.0x-3.5x range in 2016, declining long-term to 2.0x-2.5x.

Fitch has affirmed the following ratings:

--Foreign and local currency IDRs at 'BBB';

--International senior unsecured debt 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=992952

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=992952

Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst:
Xavier Olave, +1-212-612-7895
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Jorge Yanes, +571-326-9999
Director
or
Committee Chairperson:
Lucas Aristizabal, +1-312-368-3260
Senior Director
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
New York
alyssa.castelli@fitchratings.com


Source: Business Wire (October 27, 2015 - 3:18 PM EDT)

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