Fitch Affirms Transportadora de Gas Internacional SA ESP's IDRs at 'BBB'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Transportadora de Gas Internacional S.A. E.S.P.'s (TGI) Foreign and Local Currency Issuer Default Ratings (IDRs), as well as international bond issuance at 'BBB'. The Rating Outlook for TGI is Stable.

A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

TGI's ratings reflect the company's stable and predictable cash flow generation, business strength, expectations of moderate leverage over the medium term, 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 from Operations:

TGI's ratings reflect the company's low business risk profile, which stems from its stable and predictable cash flow generation, characteristic of gas transportation companies. TGI benefits from contracts with an average remaining life of around 10 years and with 90% of revenues coming from regulated fixed tariffs, which limit its exposure to volumetric risk. During the first half of 2016, fixed payments which are independent from variable transportation charges volume decreased to 83% of the revenues stream as variable charges soared due to large increase demand from the thermal electric sector. The portfolio of off-takers of these contracts has solid credit profile, which adds to cash flow stability.

Strong Competitive Position

TGI's benefits from a strong competitive position, derived from the pipeline location and the importance of its service area. TGI serves areas where most of the major Colombian cities and demand centers are located, which help support the company's credit profile and credit rating. During 2016, more than 60% of the revenues come from sales to gas distributors, which include residential demand; TGI transports more than 50% of the total gas volumes in Colombia.

High Capex Ahead:

TGI's capital expenditures in the medium term are expected to be at high levels as the company executes an investment plan to expand and replace some of its infrastructure. The company is executing projects that total USD 385 million until 2020 which will pressure the free cash flow generation over the next few years. Positively, the company's strategy is to have contracts in place with its off takers before beginning the construction stage of its projects in order to assure an adequate investments return on its new assets. Fitch expects TGI to pursue additional investments as the Government Planning Unit has identified sizable projects to be executed in the medium term in order to increase the reliability and supply of natural gas.

Constructive Regulatory Environment:

TGI's ratings also incorporate its exposure to regulatory risk, as the bulk of its revenue comes from regulated contract tariffs. 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, as well as return on invested capital.

Regulators are currently developing a new methodology for regulated tariffs that could lower return on capital. Historically, the Colombian utilities' regulatory framework has been balanced and fair to market participants and independent from the central government and associated politics. In addition, although the new tariff could imply a reduction in the profitability of the business over the medium term, Fitch considers that TGI's credit profile is adequate and could withstand some adverse regulatory scenarios and still maintain its investment grade rating.

Leverage in Line with Expectations:

TGI's increase in leverage is in line with Fitch expectations and adequate for the rating category. At the end of 2015, TGI's financial debt closed at USD873 million. TGI's debt comprised USD750 million of senior unsecured notes due 2022 and the balance composed by currency swap losses due in 2017 and financial leases in local currency. In addition, TGI records USD 370 million deeply subordinated intercompany loan from EEB (which receives 100% equity credit when Fitch calculates the company's leverage metrics), TGI's financial debt increased by USD219 million in the second quarter 2016 when it absorbed a syndicated loan EEB used to finance its acquisition of TGI's equity stake in 2015.

Fitch expects TGI's leverage level to be close to around 3x in 2016 and to remain below that level in the medium term. This includes the execution of around USD 385 million in capex until 2020 due to the company's ongoing projects as well as some demanding dividend policy. If the USD 370 million of the intercompany loan is included, leverage levels will increase to a range of 3.5x to 4.0x over the medium term.

Parent-Subsidiary Linkage:

TGI's ratings are related to its parent company, and both entities are considered to have similar credit profiles on a stand-alone basis. Empresa de Energia de Bogota S.A. E.S.P. (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. Recent announcement of the Bogota district to sell a 20% stake in EEB is neutral to the credit profile of EEB and TGI. Both companies reallocate its funds depending on cash financing needs. TGI maintains an intercompany loan from EEB of USD 370 million from 2007, while TGI provided loans to EEB between 2015 and 2016 of COP 430 billion, of which COP 230 billion remained outstanding at end of June 2016.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for EEB include:

--Revenues and EBITDA growth reflects expected remuneration of the ongoing projects in which the company are currently working on;

--The company executes Capex of around USD 385 million between 2016 and 2020;

--Leverage levels, excluding intercompany loan with EEB reach around 3.0x in 2016 and lower to 2.5x to 3.0x thereafter.

RATING SENSITIVITIES

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

--The 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 result in a sub-optimal financial/operational strategy that could hurt the company's credit quality;

--The company's ambitious capex program becomes largely funded with financial debt.

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

Fitch considers the company's liquidity is strong, supported by its cash on hand, strong internal cash flow generation and manageable amortization schedule. At end of June 2016, TGI reported cash and equivalents of USD 145 million with no debt amortizations in the short term. No material debt maturities are scheduled until 2022, when its USD 750 million of the international issuance is due. Given the company's strong cash flow generation, Fitch expects TGI to maintain comfortable liquidity despite high capex and dividends over the next few years.

TGI's regulated revenues are partially indexed to the U.S. dollar (approximately 68% of 1H16 revenues are indexed to USD), which mitigates the risk from currency fluctuations as financial debt is almost entirely denominated in dollars.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Transportadora de Gas Internacional S.A. E.S.P

--Foreign and local currency Long-Term IDRs at 'BBB'; Outlook Stable;

--International senior unsecured debt at 'BBB'.

Date of Relevant Rating Committee: Oct. 18, 2016

Additional information is available on www.fitchratings.com.

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013388

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013388

Endorsement Policy

https://www.fitchratings.com/regulatory

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+1-312-368-3260
Fitch Ratings, Inc.
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or
Secondary Analyst
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Director
+571-484-6770
or
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or
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elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Lucas Aristizabal
Senior Director
+1-312-368-3260
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Jorge Yanes
Director
+571-484-6770
or
Committee Chairperson
Daniel R. Kastholm, CFA
Managing Director
+1-312-368-2070
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com