NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-(EXP)' rating to Trinidad Generation Unlimited's (TGU) proposed notes due 2027.
KEY RATING DRIVERS
TGU's rating primarily reflects its stateownership as well as its strategic importance to the country's energy matrix. Additionally, the rating is supported by highly stable cashflows generated under a long-term PPA with a tolling structure that eliminates commodity risk exposure.
Government Ownership & Operational Linkage
Trinidad Generation Unlimited (TGU) is indirectly controlled by the Government of the Republic of Trinidad & Tobago through Union Estate Electricity Generation Company Limited, an entity formed expressly to hold the government's shares in TGU. Additionally, TGU's sole offtaker and fuel supplier, Trinidad and Tobago Electricity Commission (TTEC), is owned by the government. The company's water supply is also guaranteed by another government controlled entity, the Water and Sewage Authority of Trinidad and Tobago.
The presence of government authorities as both offtaker, subsidized supply of gas and water, as well as sponsor to the project is evidence of the strategic importance of the asset and alignment to the sovereign's overall objective to maintain low energy prices as a competitive edge for private investment.
Long-term PPA Provides Cashflow Predictability
TGU's PPA with TTEC established a 30-year energy supply agreement, of which approximately 25 years still remain, beyond the life of the proposed issuance. The bulk of the company's revenues are generated from the capacity payments (~99% of revenues) with energy sales making up the balance. Its capacity payments assume plant availability of 93%, allowing the company a cushion of approximately 5% planned maintenance and 2% unplanned shutdowns. For availability below 93%, the company still receives a prorated capacity payment. In four of the last five years, TGU has achieved availability factors above 93%.
Tolling Structure Eliminates Commodity and Volumetric Risks
Under the terms of the PPA, fuel and water supply are guaranteed by the government, and supply interruption of either one has no effect on TGU's receipt of capacity revenues. Moreover, as fuel is supplied and guaranteed by TGU's offtaker, TTEC, payment and delivery of that fuel is entirely TTEC's obligation. Fuel purchases do not flow through TGU's financial statements. This ensures predictable cashflows even during periods of high commodity volatility.
Adequate Credit Metrics for its Operating Profile
The company's leverage is consistent with investment grade peers that operate under toll-based revenue schemes and that have little or no market based risks, such as electric transmission companies, pipelines and LNG terminals. As of FY2015, the company had gross leverage of approximately 6.5x. Under Fitch's forecast assumptions, this ratio should rise to around 7.0x through the medium term. The proposed $600 million bond issuance will extend TGU's maturity profile to an average life of 10 years. The company's cash flow predictability will provide more than adequate debt service coverage of around 2.5x until the bond begins amortizing in 2025.
--Annual CPI growth of 1.5%
--Energy demand in line with GDP forecast
--Average billable availability of around 91%
--Major maintenance in 2017
--100% of previous year's net income paid as dividends
Factors that could lead to a downgrade include: weaker sovereign indicators; material de-linkage from the government; substantially lower availability factors in conjunction with major unplanned maintenance expense resulting in a debt service coverage ratio below 1.50x on a sustained basis; dividend distributions that significantly weaken overall liquidity.
A positive rating action would be possible if there is material improvement in the country's overall economic condition and debt relative debt levels.
As of year-end 2015, the company held USD95 million in cash and equivalents. At these levels, pro forma interest coverage would be in excess of 2.6x. Barring major unexpected maintenance expense, Fitch generally expects cash to remain at these levels through the medium term, supported by the high margins and cashflow predictability afforded under TGU's PPA.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following rating:
Trinidad Generation Unlimited
--Proposed senior unsecured notes due 2027 'BBB-(EXP)'.
Date of Relevant Rating Committee: Oct. 14, 2016
Additional information is available on www.fitchratings.com.
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
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