NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed local and foreign currency Issuer Default Rating (IDR) of Gas Natural de Lima y Callao S.A's (Calidda) at 'BBB-' along with Calidda's USD320 million senior unsecured bond. The Rating Outlook is Stable.
KEY RATING DRIVERS
Calidda's investment grade ratings reflect the company's strong market position due to its exclusive right to distribute natural gas in Lima and Callao, the largest markets in Peru, which have high growth potential. The ratings also factor in the issuer's diversified client base and predictable and stable cash flow, which is supported by a regulated tariff structure that aims at assuring an adequate return on investment. Calidda's cash flow generation also benefits from expected demand growth.
The ratings incorporate the company's increase in leverage resulting from the bond issuance to fund ongoing capital expenditures. Nonetheless, Fitch expects the company will be able to reduce leverage to a level more in line with the assigned rating in the short to medium term. Calidda's gross leverage is expected to stand at around 4.4x at 2013-end and to reduce to a range between 3.5x and 3.0x thereafter.
Strong Market Position
Calidda is the largest natural gas (NG) distribution company in Peru. It has exclusive rights to distribute natural gas in Lima and Callao, an area that has approximately one third of country's population and represents 44% of its GPD. 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.
Highly Strategic Industry for Peru
NG is the second most demanded power source in Peru after hydroelectric energy. Calidda distributed the NG used to generate approximately 41% of the electricity produced in the country in 2013. The government of Peru, through Law 1999, declared the development of NG infrastructure of national interest and has been promoting the use of gas on large scale by establishing a goal of connecting 500 thousand residential customers in the medium term. As of December 2013, there were a few more than 163 thousand residential customers.
Regulated Tariff Scheme Ensures Return on Investments
The tariff structure recognizes efficient investments and operating costs and applys an annual discount rate of 12% to helps ensure sufficient payments to cover the cost of Calidda's main grid and secondary network expansions, as well as provide an adequate rate of return. Tariffs are fixed in US dollars by regulator entity OSINERGMIN every four years. Tariffs are also periodically adjusted considering variations in exchange rate, USPPI, Steel Price Index, Polyethylene Price Index and Peruvian Wholesale. The next four-year tariff will take place in 2014 and an increase is expected given the CAPEX program.
Predicable and Stable Cash Flow
Calidda's regulated clients, including natural gas stations for natural gas vehicles(NGV), commercial and residential, provide the company with stable and predictable cash flow generation. The company's regulated tariff scheme, which assures cost recovery and adequate return over total capital investments, further supports cash flow predictability. Additionally, 42% of distribution revenues come from firm take-or-pay contracts with an average life of 17 years with top tier power generators and large industries companies.
Increased Leverage Due to Large CAPEX
As of result of the bond issuance to fund capex, total debt/EBITDA ratio grew from 3.0x in December 2012 to 4.4x in December 2013. Fitch expects leverage to decrease to a level more in line with the assigned rating in the short to medium term. For 2014, Calidda's leverage is expected to decrease to approximately 3.8x and to range between 3.5x and 3.0x thereafter. The speed of deleverage depends on Calidda's ability to promote and capture potential demand.
Concentration on Natural Gas Supply
In order to serve the regulated demand, Calidda needs to negotiate its gas supply contract. In 2004, Calidda entered into a master supply contract with the Camisea Consortium (mostly interruptible capacity since 2015 from block 88) with an expiration date in December 2016. This 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 expects to renew the agreement in the short term. Calidda has reached out other producers to diversify NG supply and improve commercial agreement terms, including lengthening the contract term and additional firm capacity.
Shareholders with Proven Track Record
Fitch positively considers that the company is part of Empresa de Energia de Bogota-EEB (60% ownership). The remaining 40% is owned by Promigas. Both companies' IDR are 'BBB-'/Stable Outlook rated by Fitch. 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 natural gas transportation and distribution companies in Colombia with international presence in Panama, Peru and Costa Rica.
A positive rating action could be triggered by a significant and sustained deleveraging to the low 2.0x range along with the growth and consolidation of the regulated supply and demand (NGV and residential and commercial segments) including a major penetration.
A negative rating action could be taken if leverage, as measured by total debt/EBITDA, increased and remained at a level of more than 3.5x for a prolonged period of time either due to operational deterioration or unexpectedly large dividend distributions.
Material changes in BOOT's agreement and accomplishment, tariff scheme and applicable regulations would also be considered in future rating actions. The inability to secure gas supply for non-regulated clients, may also impact the rating.
Additional information available at 'www.fitchratings.com.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage