OREANDA-NEWS. Fitch Ratings has upgraded the foreign and local currency Issuer Default Ratings (IDRs) of Transportadora de Gas del Peru S.A. (TGP) to 'BBB+' from 'BBB'. The rating action affects USD850 million of outstanding senior unsecured debt. The Rating Outlook is Stable.

KEY RATING DRIVERS

The upgrade reflects Fitch's expectation of significant and sustained improvement in TGP's operational cash flow as a 265 MMCFPD expansion comes online in the first half of 2016. Additionally, the company continues to benefit from take-or-pay contracts and the predictability of a tariff scheme that ensures margin stability.

Predictable and Stable Revenue

TGP's cash flow generation is considered stable and predictable, characteristic of gas transportation companies. The company's revenues are derived from long-term ship or pay contracts with an average remaining life of around 18 years. The counterparties of these contracts have an adequate credit quality. The stability of cash flows is also supported by the company's stable operating costs and its ability to pass through these costs to end users. The BOOT agreement defined the initial maximum tariff TGP is allowed to charge users for their natural gas (NG) transportation contracts. The BOOT also allows TGP to freely negotiate tariffs for access to its natural gas liquids (NGL) pipeline. All tariffs are calculated in U.S. dollars and adjusted by U.S. inflation.

Strong Competitive Position

The company's competitive position is supported by TGP's natural monopoly position given the high barriers to entry created by high capital requirements, economies of scale and geographic location of gas production and consumption centers. TGP has a 33 year non-exclusive Build, Own, Operate and Transfer (BOOT) contract to transport NG and NGL from the country's main gas production formation, Camisea, to the main consumption area and export terminal. Given the strong demand of natural gas in Lima, TGP is expanding its pipeline capacity to 920 MMCF/d from 655 MMCF/d currently. The solid position of the company is reflected in the fact that 100% of its existing transport capacity and 98% of the capacity under development is committed through long-term firm or ship-or-pay contracts. Going forward, the company could benefit from its competitive position to gain future additional gas transportation contracts.

Solid Financial Profile

TGP's financial profile is considered strong for the rating category and is supported by its moderate leverage and strong cash generation supported by its contractual structure. As of year-end 2014, the company had a total financial debt of approximately USD1.1 billion and generated an adjusted EBITDA of approximately USD370 million, for a gross leverage of 2.9x. 2014 results were affected by a non-recurrent pre-tax write-off of USD78 million derived from changes in the design of the expansion project given security issues. Nevertheless, according to Fitch's projections, the new capex plan will represent significant savings versus the original plan. Going forward, Fitch expects the company's leverage to decrease by at least half a turn over the next 3 years, as its extra capacity comes online. TGP free cash flow may face pressure from changes to the company's dividend policy.

Moderate Regulatory Risk

The company's exposure to regulatory and political risk is considered low given the strength of the BOOT contract and the Peruvian government's initiative to promote NG consumption in the country. TGP's assets are also considered of strategic importance for the country as they connect the country's main gas production center, Camisea, to the main demand and export centers. In 2014, TGP transported NG used to produce approximately 45% of country's electricity generation.

Adequate Gas Supply

As of December 2013, according to Peruvian Ministry of Energy and Mines, Camisea (Lots 56 & 88) had approximately 12.9 trillion cubic feet (TCF) of NG proved reserves. This bodes well for the company's strategic importance for the country of Peru and matches the life of outstanding issuances.

RATING SENSITIVITIES

Although a negative rating action or outlook is not expected in the short term, it could be considered if TGP's leverage increases above 3.5x on a sustained basis. This could happen if TGP fails to execute the expansion project, if the company adopts an aggressive dividend policy, or if there are adverse changes to the regulatory and operating environment.

Although unlikely, a positive rating action could be considered if leverage ratios were to fall consistently below 1.5x and/or new reserves are discovered in the Camisea region.

KEY ASSUMPTIONS

--265MMCFD of additional capacity coming online over the next two years, for total natural gas transportation capacity of 920MMCFD;
--Approximately 100% of net income paid out in dividends after completion of expansion project.