Fitch Affirms GNL Quintero's IDRs at 'BBB+'; Outlook Stable
GNLQ'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 stable and predictable cash flow generation due to long-term terminal user agreements (TUA) with strong credit profile offtakers. Finally, the ratings reflect the company's stable financial/credit profile.
KEY RATING DRIVERS
STRATEGIC ASSET FOR CHILE
GNLQ's regasification terminal is the only liquefied natural gas (LNG) terminal located in central Chile and is a critical asset for the energy sector. The country does not possess substantial hydrocarbon reserves, and has not had natural gas import options from Argentina for more than a decade. GNLQ's terminal provides nearly all of central Chile's natural gas supply. During the first half of 2016, 19.7% of the electricity generated in the Chilean central interconnected system (Sistema Interconectado Central or SIC) -- where 92% of the country's population is located -- was generated with regasified GNL. In view of the stressed conditions for hydroelectric power generation, given a five-year drought, thermoelectric generation sourced with LNG is a highly reliable, environmentally clean energy source critical to the SIC.
STABLE CASH FLOWS
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. These contracts are executed with marketing company GNL Chile (GNLC) for exclusive use of the terminal's capacity.
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
The company's ratings are supported by the strength of GNLQ's gas buyers: Endesa-Chile ('BBB+'/Stable Outlook), ENAP ('A'/ Stable Outlook) and Metrogas, which have solid investment-grade credit profiles and have signed 20-year agreements with GNLQ.
Endesa-Chile is the largest electricity generation company in Chile, and owns and operates approximately 32% of the country's total generating capacity. ENAP 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 (2015 total debt-to-EBITDA of 1.4x), and improving EBITDA margins (increased to 31% in 2015 from 22% in 2011 due to increasing availability of natural gas from GNLQ). Metrogas is 52% owned by Gas Natural Chile S. A. and 40% owned by Empresas Copec S. A.('BBB'/ Stable Outlook).
SHAREHOLDERS CHANGES
Until June 2016, 60% of GNLQ's equity was owned by the company's gas buyers, with Endesa, ENAP and Metrogas owning 20% each. As all three shareholders were dependent on GNLQ's services to satisfy their critical natural gas needs, the controlling shareholders' interests were aligned with the terminal's operational/financial interests. Although GNLQ has a policy to pay 100% of its net income in the form of dividends, in the past, shareholders have temporarily deferred dividend payments when the company embarked on major capital investments.
During June and July 2016, Endesa Chile and Metrogas announced that they had entered into an agreement to sell their participation in GNLQ to Enagas Chile. If ENAP does not exercise its refusal rights related to the sale of Metrogas's share, Enagas' participation in GNL Quintero would increase to 40%, and indirectly through Terminal del Valparaiso, would increase to 80%, while ENAP would remain at 20%. After the closing of the transactions, Endesa-Chile and Metrogas will not have a participation in GNLQ, but will retain a 33.3% participation in GNLC, GNLQ's sole customer.
PHASE I EXPANSION OVER
The company recently completed Phase I of its terminal regasification capacity expansion plans. This USD30 million investment increased the terminal's regasification capacity by 50% to 15 million m3 per day. GNLQ has plans to expand processing capacity further by an additional five million m3/day, and its truck loading facility by 50% through a USD300 million investment. In March 2016, AES Gener ('BBB-'/Stable Outlook) and Colbun ('BBB'/ Stable Outlook) signed commitment agreements to contract a portion of the expanded gas supply and regasification capacity through an open season process. This process is expected to conclude after the execution of long-term gas supply agreements and the corresponding TUAs.
Fitch's financial projection for the next five years conservatively assumes the terminal will expand to 20 million m3, even though the company has announced it will not proceed with the Phase II expansion unless the added capacity is fully contracted. Fitch's base case model assumes the company will be able to fund the expansion via internally generated cash flows.
MATURITIES MIRROR REVENUE PROFILE
The company's debt maturity profile is consistent with its long-term revenue profile as the only outstanding debt relates to an international bond due 2029, mitigating refinancing risk in the short-to-medium term. The company will not begin to make amortization payments until 2021, which would be the second year of operations of the fully expanded terminal facility.
FINANCIAL/CREDIT METRICS IMPROVING
Fitch expects EBITDA margins to remain in the upper 70% to 80% level for the next five years. EBITDA margins have grown from 63% in 2010 to 78% - 80% in 2013 - 2016. Even with 100% dividend payouts, the company has been positive FCF since operations started. Fitch is projecting that the company will be negative FCF during 2016 - 2019, assuming a maximum build out of the terminal and significant capex needs to finance the phase II expansion. Starting in 2021, Fitch expects GNLQ to be positive FCF after a full year of operations with the expanded terminal.
GNLQ's leverage as measured by debt to EBITDA was 7.0x as of June 30, 2016, down from the 7.7x level in 2012. Fitch expects GNLQ to slowly lower its leverage levels going forward despite its maximum facility expansion assumption that will lead to a spike in capex through 2019. Beginning in 2021, Fitch expects leverage levels to fall below 6x starting. Post-expansion, interest coverage is expected to increase above 4x starting in 2021. This compares with 1.9x as of June 30, 2016.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for GNL Quintero include:
--EBITDA margins in the upper 70% - 80% range;
--100% of net income dividend payments;
--Expansion to 20 million m3 of regasification capacity
--Peak capex in the 2016 - 2019 period, with the fully expanded terminal operational in second half of 2020;
--Gross adjusted leverage decreases to below 6x level starting in 2021.
RATING SENSITIVITIES
GNL Quintero's ratings could be negatively impacted by a change in the company's strategy with respect to dividends and capital expenditures. In addition, ratings could be impacted by a weakening of the credit profiles of GNLQ's counterparties. A change in commercial strategy that would result in signing new offtaker agreements that are dissimilar in nature to current terminal user agreements (e. g., a move away from take-or-pay agreements, lower tenure, etc.) would be seen negatively.
A positive rating action is unlikely in the medium term due to the company's expansion plans and the fact debt amortization payments, which will lead to lower leverage levels, will not begin until 2021. A strengthening of the credit profiles of the company's offtakers/shareowners and/or the further diversification of the company's counterparties that would increase the strength of the company's combined offtaker credit profile would be seen positively.
LIQUIDITY
Solid Liquidity and Debt Maturity Mirrors Revenue Profile: The company's debt maturity profile is consistent with its long-term revenue profile as the fifteen year bond eliminates refinancing risk in the short-to-medium term. The company will not begin to make amortization payments until 2021, which would be the second year of operations of the fully expanded terminal facility (post-peak capex).
As of June 2016, the company had USD230 million in cash and equivalents versus USD21 million in short-term debt. The company has a conservative cash management policy, seeking to maintain sufficient cash on hand for monthly payment requirements plus reasonable reserve for potential contingencies. Even conservatively forecasting that the company fully builds out the terminal to a maximum capacity of 20 million m3 while maintaining a dividend payout rate of 100%, Fitch is projecting the company will be able to maintain a robust average cash cushion of USD200 million over the next five years.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
GNL Quintero S. A.
--Long-Term Foreign and Local Currency IDRs at 'BBB+';
--International senior unsecured bond ratings at 'BBB+'.
The Rating Outlook is Stable.
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