Fitch Ratings has affirmed the local and foreign currency long-term
Issuer Default Rating (IDR) of Gas Natural de Lima y Callao S.A.
(Calidda) at 'BBB-', and revised the Rating Outlook to Positive from
Stable. Additionally, Fitch has affirmed the 'BBB-' rating assigned to
the USD320 million senior unsecured notes.
KEY RATING DRIVERS
The Positive Outlook reflects the company's improving credit metrics
which are due to an increase in number of customers, higher volumes,
additional revenues from relocation services, and a favorable natural
gas distribution tariff revision. The company was able to decrease its
leverage to levels below Fitch's expectations. We project gross leverage
could further decline within the next two years and stabilize in the
3.0x - 3.5x range. The company's ability to maintain gross leverage
below 3.5x on a sustained basis could result in a positive rating action.
Calidda's investment-grade ratings reflect the company's strong market
position due to its exclusive right to distribute natural gas (NG) in
Lima and Callao, the largest market in Peru with a high potential for
growth. The ratings also factor in the issuer's diversified client base
and predictable and stable cash flow generation. The company's stable
cash flow is supported by a regulated tariff scheme that aims at
ensuring an adequate return on investment; the NG distribution tariffs
were increased during 2014 by Peru's energy & mining regulator,
OSINERGMIN, improving the company's financial results. Calidda's cash
flow generation also benefits from expected demand growth and
installation service revenues from residential client additions of
approximately 100,000 per year.
--Strong Market Position
Calidda is the largest NG distribution company in Peru. It has exclusive
rights to distribute NG in Lima and Callao, an area that contains more
than 35% of the country's population and over 50% of its GDP. The
concession may be renewed upon request from Calidda after 2033 in
10-year increments, up to 2060. As of today, Calidda has complied with
all the commitments established in the concession. The company's
penetration rate has grown consistently, increasing to 57% in 2015 from
42% observed in 2012 and it is expected to further increase within the
next two to three years.
--Predictable and Stable Cash Flow
The vast majority of Calidda's revenues are derived from its regulated
NG distribution clients, such as natural gas for vehicles (NGV),
commercial and residential, providing the company with stable and
predictable cash flow. Its regulated tariff scheme, which assures cost
recovery and an adequate return on total capital investments, further
supports cash flow predictability. Additionally, 78% of the invoiced
distribution volumes are through firm take-or-pay contracts with an
average life of 15 years with top-tier power generators and large
industrial companies, adding to the visibility of the cash flows.
As of year-end 2015, the company generated USD104 million of EBITDA, up
from USD92 million recorded in 2014, mainly due to an increase in the
distribution tariff, coupled with slightly higher volumes and additional
revenues from relocation services. EBITDA margins also improved to 19%
from 18% observed in 2014. Over 65% of the company's revenues are from
pass-through services that carry no profit margin. The remaining
revenues (adjusted revenues) are divided primarily between gas
distribution and connection fees, with 52% of the distribution revenues
associated with power generators.
--Improving Credit Metrics
Calidda's credit metrics have improved significantly since 2013.
Leverage, measured as total debt/EBITDA, decreased to 3.3x from 4.4x in
2013, in line with Fitch's expectations. Our forecast incorporates
expectations for a substantial capex program in the near- to
medium-term. Additionally, the company started paying dividends to
shareholders during 2015. Fitch expects that the company will finance
its capex needs with its internal cash flow generation and that dividend
payments will continue to be moderate, allowing the company to maintain
leverage below 3.5x.
--Concentration of Natural Gas Supply
In order to serve the regulated demand, Calidda needs to negotiate its
NG supply contract. Over the course of 2017 and 2018, Calidda will
gradually increase its contracted volume from the Camisea consortium by
almost 40%. Moreover, it will rebalance its interruptible capacity to
20% of the total (versus 78%, currently). Single-source exposure is
mitigated by the fact that Pluspetrol, the consortium operator, is
obliged to prioritize NG supply to cover local demand, according to its
concession agreement. The company recently renewed the agreement until
2021. Calidda has reached out to other producers to diversify NG supply
and improved its commercial agreement terms, including lengthening the
contract term and taking additional firm capacity.
--Shareholders with Proven Track Record in the Sector
Fitch considers positively that the company is part of Empresa de
Energia de Bogota (EEB; 'BBB'/Stable Outlook), which maintains a 60%
ownership. The remaining 40% is owned by Promigas ('BBB-'/Stable
Outlook). EEB is a leading energy holding company with interests across
the electricity and natural gas sectors in Colombia, Peru and Guatemala
while Promigas is one of the largest NG transportation and distribution
companies in Colombia, with international presence in Brazil, Panama,
Peru and Costa Rica.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for Calidda include:
-- An average of 100,000 additional clients per year
-- Average annual volume per client per month in line with historical
volumes
-- Lower power generators volumes starting by the end of 2017 as a
result of an increase in hydro projects.
-- Tariffs per customer segment according to 2014-2018 review, then
reset in 2019 by 4% for residential clients and an average of 8% for the
industrial customers
-- Pass-through of costs and inflation in the tariffs
-- Manageable annual capex of approximately $80 million on average for
the next five years
-- Dividend distribution of 100% of net income
RATING SENSITIVITIES
A negative rating action could be taken if leverage, as measured by
total debt/EBITDA, increased and remained at more than 4.0x for a
prolonged period of time due either to operational deterioration or
unexpectedly large dividend distributions.
Material changes in the BOOT agreement, tariff scheme and applicable
regulations would also be considered in future rating actions.
For a positive rating action, Fitch has revised its leverage trigger to
3.5x due to Calidda's stable and predictable cash flow generation and
balanced regulatory framework. A positive rating action could be
triggered if the company maintains leverage measured as total
debt/EBITDA below 3.5x on a sustained basis and net leverage below 3.0x,
along with the growth and consolidation of the regulated supply and
demand (NGV and residential and commercial segments) including a higher
penetration rate and a favorable balanced regulatory framework.
LIQUIDITY
Fitch considers Calidda's liquidity position as sufficient with
manageable debt amortizations over the next 24 months. As of year-end
2015, Calidda had cash and short-term investments of USD69.5 million.
These liquidity sources compare with debt amortizations of USD9 million
in 2016 and no significant maturities until 2023.
Fitch expects the company to remain free cash flow negative during the
next two years as a result of significant capex investments and dividend
payments. We consider the dividend payment policy and capex investment
plan to be flexible and commensurate with the company's ratings.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Gas Natural de Lima y Callao S.A (Calidda)
--Foreign currency long-term Issuer Default Rating (IDR) at 'BBB-'
--Local currency long-term IDR at 'BBB-';
--USD320 million due 2023 senior unsecured notes at 'BBB-'.
The Rating Outlook is Positive.
Date of Relevant Rating Committee: March 11, 2016.
Additional information is available at 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
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Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000911
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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