Fitch Revises Georgian Oil and Gas Corporation's Outlook to Stable; Affirms at 'BB-'
The revision of the Outlook follows that on Georgia's Long-term foreign and local currency IDRs (see 'Fitch Revises Georgia's Outlook to Stable; Affirms at 'BB-' at www.fitchratings.com) and on IDRs of GOGC's direct shareholder, the JSC Partnership Fund (BB-/Stable; see 'Fitch Revises Outlook on Georgia's JSC Partnership Fund to Stable; Affirms at 'BB-' at www.fitchratings.com).
The ratings of GOGC are aligned with the sovereign's as the government of Georgia considers the company critical to its national energy policy. Fitch also considers the 100% indirect state ownership and strong management and governance linkages between GOGC and the state.
KEY RATING DRIVERS
Ratings Aligned with Sovereign's
GOGC is one of several corporations in Georgia viewed by the government as critical to the national energy policy. GOGC's rating alignment is supported by 100% indirect state ownership via the JSC Partnership Fund (PF) and by strong management and governance linkages with the sovereign.
GOGC's operations are supervised by the Ministry of Energy and the company has the status of a national oil company operating within the contractual framework of inter-governmental agreements between Georgia and Azerbaijan. GOGC's main investment project, the Gardabani power plant, benefits from a government-guaranteed internal rate of return (IRR) of 12.5% over the asset's life, further underlining the company's strong ties with its ultimate owner. In its discussions with Fitch, the Georgian government has also stressed its commitment to continue supporting the financial health of GOGC.
Power Plant Construction on Track
GOGC and the PF are constructing a USD220m 239Megawatt (MW) capacity gas-fired power plant in Gardabani, with expected completion in 4Q15. GOGC fully finances the project through equity contributions and loans to both the power plant SPV and the PF. GOGC and the PF share ownership of the plant at 51% and 49%, respectively, although GOGC retains managerial control of the SPV.
In our forecasts for GOGC, we incorporate 100% of future cash flows from Gardabani power plant, but exclude interest and principal repayments from the project SPV and the PF. This is due to the related-party character of those loans and also because PF's loan repayments would likely be supported by cash flows from the SPV itself. The power plant has the status of guaranteed capacity provider and will receive a regulated revenue stream with an IRR of 12.5% over asset life guaranteed by the government.
'B+' Standalone Profile
We assess GOGC's standalone profile as commensurate with a 'B+' rating, supported by the contractual nature of GOGC's revenues. GOGC receives fairly stable income from regulated gas supply operations with SOCAR Gas Export and Import, a subsidiary of the State Oil Company of the Azerbaijan Republic (SOCAR, BBB-/Stable). Stable fee income from gas and oil transit operations also provides predictable and high-margin revenues.
Leverage Depends on Investments
GOGC's gross leverage was broadly equal to 4.0x EBITDA in 2012-2014, which is in line with Fitch's guidance for a standalone rating in the upper 'B' category. We currently forecast a gradual decrease in leverage as the new power plant starts to generate revenue in the fall of 2015, but GOGC's credit metrics will depend on the company's investment plans.
GOGC is considering building a gas storage reservoir in a former oil field in Georgia. The final investment decision and financing plan is expected in 2016. As Georgia currently has no gas storage facilities, we assume this project would be strategic for the government, and would further strengthen GOGC's ties with the sovereign. Based on initial information available on the project, we believe that GOGC would be able to maintain debt-to-EBITDA ratios of below 4.0x if the investment goes ahead.
Size and Capex Constrain Ratings
The principal rating constraints are the company's small size, high leverage until at least end-2015 and required funding for the Gardabani power plant resulting in negative free cash flow. We believe the government views GOGC as an investment vehicle for strategically important projects, such as the gas power plant and a potential gas storage facility, which adds to the company's inherent credit risks.
RATING SENSITIVITIES
Positive: Future developments that may result in positive rating action include:
- A positive rating action for Georgia
Negative: Future developments that may result in negative rating action include:
- A negative rating action for Georgia
- Weakening state support and/or an aggressive investment programme resulting in a significant deterioration of standalone credit metrics, eg, EBITDA leverage above 4x on a sustained basis
- Unexpected changes in the contractual frameworks governing GOGC's midstream activities
LIQUIDITY AND DEBT STRUCTURE
At end-2014, GOGC's short-term debt amounted to GEL7m and was fully covered by cash and short-term deposits of GEL176m. The company also held a long-term deposit of GEL38.7m at end-2014. GOGC's other sizable maturities are not until 2017 when a USD250m bond is due. At end-2014, GOGC cash and deposits were held with several local banks, eg, TBC Bank (BB-/Stable) and the Bank of Georgia (BB-/Stable). In addition, GOGC lent USD50m to the PF with repayment in 2015-2019 and GEL47m to the State Service Bureau LLC. The latter loan repayment was extended to 2017 from 2014 and collateralised with State Service Bureau's assets.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Stable revenues and EBITDA from core gas supply, pipeline rental and oil transportation operations
- Gardabani power plant starts operating in 4Q15 and adds around USD40m of EBITDA annually
- Gas supply obligations of GOGC for households and power generation will not exceed the amount of gas available to the company through established contracts by more than 100 million cubic metres per year
- Our base case forecasts do not currently assume the company constructs the gas storage as the final decision for this project has not yet been taken. We therefore currently assume a reduction in capex from 2016 following completion of the power plant in 2015.
FULL LIST OF RATING ACTIONS
JSC Georgian Oil and Gas Corporation
Long-term foreign and local currency IDRs: affirmed at 'BB-'; Outlooks Revised to Stable from Positive.
Short-term foreign and local currency IDRs: affirmed at 'B'
Foreign currency senior unsecured rating: affirmed at 'BB-'.
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