Fitch Assigns GNL Quintero's Initial IDR of 'BBB+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned foreign and local currency Issuer Default Ratings (IDRs) of 'BBB+' to GNL Quintero S.A. (GNLQ). In addition, Fitch has assigned an expected rating of 'BBB+' to GNLQ's proposed senior unsecured debt issuance, which will total USD1.1 billion. The proceeds will be used for refinancing the company's project finance debt which was used to fund construction of the liquefied natural gas (LNG) regasification terminal.

The Rating Outlook is Stable.

KEY RATING DRIVERS

GNL Quintero S.A.'s ratings reflect the company's role as a key strategic asset for the Republic of Chile and key players in the Chilean energy sector. Furthermore, the ratings reflect the company's very stable and predictable cash flow generation due to long-term use-or-pay terminal agreements with financially strong off-takers who are also GNLQ company shareholders. Finally, the ratings reflect the company's improving credit profile.

STRATEGIC ASSET: GNLQ's regasification terminal is the only LNG terminal located in central Chile, and is a critical asset for the energy sector as the country does not possess substantial hydrocarbon reserves, and no longer has natural gas import options from once energy-rich Argentina following the shut-down of several Argentine gas pipelines in the mid-2000s. The terminal currently provides nearly all of central Chile's natural gas supply, and is indirectly responsible for fueling 19% of the electricity generated in the Chilean central interconnected system (Sistema Interconectado Central or SIC) in 2013, where 92% of the country's population is located. In view of the stressed conditions for hydroelectric power generation, given a four-year drought, thermoelectric generation sourced with LNG is a highly reliable, environmentally clean energy source critical to the SIC.

STABLE AND PREDICTABLE CASH FLOW GENERATION: GNLQ's ratings reflect the company's stable and predictable cash flow generation, derived from its tolling structure business model with long-term contracts covering 100% of the terminal's capacity. GNLQ is not exposed to price or volume risk as the company operates as a tolling terminal unloading, storing and processing LNG on behalf of gas buyers under 20-year initial term use-or-pay contracts (beginning on Jan. 1, 2011) executed with marketing company GNL Chile (GNLC) for exclusive use of the terminal's capacity. GNLC is jointly owned by the terminal's three contracted offtakers: ENAP, Endesa Chile and Metrogas, who are each responsible and gas buyers for one-third of the terminal's capacity under contract.

Payments from the offtakers are based on 100% of the contracted capacity and calculated to give the company a post-tax 10% real rate of return on assets (the payments also take into account capital expansions). The capital cost portion of the tariff is adjusted annually by the U.S. Producer Price Index for Industrial Commodities (PPI) to maintain the approved rate of return. The company is also reimbursed for operational and maintenance expenses, taxes and other variable costs on a pass-through basis. Although the company bills GNLC for its services pursuant to the Terminal Use Agreement (TUA), the invoices are paid directly by the gas buyers, which have also executed conditional (back-up) TUAs with GNLQ in the event of an insolvency of GNLC.

STRONG OFFTAKERS: GNLQ's gas buyers, Endesa, ENAP and Metrogas, have solid investment-grade credit profiles and have signed 20-year agreements with GNLQ. Endesa (Fitch LC/FC IDR: 'BBB+'; Stable Outlook) is the largest electricity generation company in Chile, owning and operating approximately 30% of the country's total generating capacity. ENAP (Fitch LC/FC IDR: A; Stable Outlook) is Chile's leading hydrocarbon company, and its ratings reflect its full ownership by the Chilean government, and potential support given the strong legal, operational and strategic ties with the state.

Metrogas S.A. distributes natural gas in the Santiago Metropolitan Region and also has a commercial presence in the south of Chile. Metrogas is financially strong and has a large market presence, with low financial leverage (2013 total debt-to-EBITDA of 0.9x), and improving financial metrics (EBITDA margins have risen to 42% in 2013 from 22% in 2011 due to increasing availability of natural gas from GNLQ). Metrogas is majority-owned by Chilean holding company Gasco S.A. (52% equity stake), whose Fitch national scale rating is 'AA-(cl)' with a Stable Outlook. Metrogas accounts for approximately 70% of Gasco's consolidated EBITDA. Empresas Copec S.A. (Fitch IDR: 'BBB'; Stable Outlook), owns 40% of Metrogas' equity.

SHAREHOLDER INTERESTS ALIGNED: Sixty percent of GNLQ's equity is owned by the company's gas buyers, with Endesa, ENAP and Metrogas owning 20% each. As all three shareholders are dependent on GNLQ's services to satisfy their critical natural gas needs, the controlling shareholders' interests are aligned with the terminal's operational/financial interests. GNLQ has a policy to pay 100% of its net income in the form of dividends; however, in the past shareholders have temporarily deferred dividend payments when the company embarked on major capital investments. Fitch believes that the company's shareholders would be willing to adjust dividend payments in the future if it benefits GNLQ's financial/operational needs.

TERMINAL EXPANSION: The company is in the midst of expanding the terminal's regasification capacity by 50% to 15 million m3/day (Phase I) and has tentative plans to expand capacity further by an additional 5 million m3/day (Phase II). Conservatively, Fitch's financial projections for the next five years assume the terminal expansion to 20 million m3, although the company has made it clear it will not proceed with this expansion until approved internally and the added capacity is first contracted via long-term take-or-pay terminal agreements with financially strong offtakers. Total investment in Phase I, which should be completed in early 2015, is expected to total USD30 million. Phase II investment would total USD300 million and would take four years to complete and would be funded via internal cash flow generation. Phase II's investment incorporates the purchase and installation of an additional storage tank and two new vaporizers, and jetty adjustments.

BOND IMPROVES MATURITY PROFILE: Proceeds from the bond issuance will be used to repay current project finance debt, due in 2023, that was used to fund construction of the terminal. Post-issuance, the company's debt maturity profile will be consistent with its long-term revenue profile as the 15-year bond will eliminate refinancing risk over the life of the contracts given the amortizing nature of the bond. Furthermore, the company would not begin to make amortization payments until 2021, which would be the second year of operations of the fully expanded terminal facility. Once the company begins to make amortization payments in 2021, Fitch expects leverage (total debt-to-EBITDA) to reach below 4x and then fall by 0.5x per year until reaching zero when the bond is fully amortized in 2029. Furthermore, Fitch expects debt service coverage to remain in the 1.5x-2.5x range after 2021.

IMPROVING FINANCIAL/CREDIT METRICS: GNLQ's operations were launched under a fast-track model in 2009 (i.e. began operating before full storage capacity was completed), and financial revenue/EBITDA growth has ramped up since then, reaching a point of stability during the 2012-2013. As the company's capacity has come fully on-line, EBITDA margins have grown to 80% in 2013 from 63% in 2010. Fitch expects margins to remain in the upper 70% to 80% range going forward. Even with 100% dividend payouts, the company has been free cash flow (FCF) positive since operations ramped up following the 2009-2010 start-up phase. In 2013, the company reported cash flow from operations of USD105 million, and after capex and dividends, generated FCF of USD55 million (27% of revenues). Fitch is projecting that the company will continue to maintain minimum liquidity and return to negative FCF during 2015-2018, assuming maximum buildout of the terminal. However, starting in 2019, Quintero should return to positive FCF generation.

As of December 2013, GNLQ's leverage as measured by debt-to-EBITDA was 6.9x, down from the 7.7x level in 2012 and significantly below the 17.6x seen in December 2010 when the company was in its initial stages of operations. Fitch expects Quintero to slowly lower its leverage going forward, with leverage levels falling below 6x in 2018. Over the long term, the company should achieve its target of below-3x leverage given debt amortization payments from the new issuance starting in 2021. As of December 2013, interest coverage improved to nearly 2.8x compared to 2.5x in December 2012.

RATING SENSITIVITIES

GNLQ's ratings could be negatively impacted by a change in the company's strategy with respect to leverage, dividends and capital expenditures. In addition, ratings could be affected if there is a change in commercial strategy that would further expand the terminal without TUAs or if the company signs new TUAs that are dissimilar in nature to the current terminal user agreements (e.g. a move away from use-or-pay agreements, shorter TUA tenors than the tenor of the debt, etc.), or adds new off-takers that would weaken the overall credit quality of GNLC. A general deterioration in the credit quality of the current offtakers could also impact the ratings of GNLQ.

A positive rating action is unlikely in the medium term due to the company's expansion plans and because the debt amortization payments, which will lead to lower leverage levels, will not begin until 2021. Long term, a positive rating action could occur if the company lowers its leverage level below 2.0x on a sustained basis.

GNL Quintero S.A. owns and operates the largest LNG regasification terminal in Chile, the only one located in central Chile where 92% of the country's population is located and approximately 85% of the country's GDP is generated. The terminal has a processing capacity of 2.5 million metric tons per year of LNG (approximately 10 million standard cubic meters per day), and storage capacity of 334,000 m3 of LNG, which is the equivalent of approximately 17 days' worth of delivery at full capacity. Additionally, it operates a truck loading facility with the capacity to load 2,500 m3 of LNG, equivalent to approximately 50 trucks per day, serving customers that are not connected by pipeline. Incorporated in 2007, GNLQ's shareholders are ENAP (Fitch IDR 'A'; Stable Outlook), Endesa Chile (Fitch IDR 'BBB+'; Stable Outlook), and Metrogas, each with 20% ownership participation. In addition, Terminal de Valparaiso S.A. owns a 40% equity stake. Terminal Valparaiso is 51%:49% owned by Enagas (Fitch IDR 'A-'; Positive Outlook) and Oman Oil Company, which is a commercial company with major investments in the Oil & Gas sector owned by the Sultanate of Oman.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=839896

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Contacts

Fitch Ratings
Primary Analyst
Xavier Olave, +1-212-612-7895
Associate Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Paula Garcia, +562-2-4993316
Director
or
Committee Chairperson
Daniel Kastholm, +1-312-368-2070
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Xavier Olave, +1-212-612-7895
Associate Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Paula Garcia, +562-2-4993316
Director
or
Committee Chairperson
Daniel Kastholm, +1-312-368-2070
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com