Fitch Affirms GNL Quintero S.A.'s IDRs at 'BBB '; Outlook Stable
KEY RATING DRIVERS
GNL Quintero S.A.'s (GNLQ) 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 with strong credit profile offtakers who also hold majority ownership of GNLQ. Finally, the ratings reflect the company's stable and improving financial/credit profile.
Strategic Asset for Chile: GNLQ's regasification terminal is the only LNG terminal located in central Chile, and is a critical asset for the energy sector as the country does not possess substantial hydrocarbon reserves, and no longer has natural gas import options from once energy-rich Argentina following the shut-down of several Argentine gas pipelines in the mid-2000s. The terminal currently provides nearly all of central Chile's natural gas supply, and is indirectly responsible for fueling 15% of the electricity generated in the Chilean central interconnected system (Sistema Interconectado Central or SIC) in 2014, where 92% of the country's population is located. 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 (beginning on Jan. 1, 2011) executed with marketing company GNL Chile (GNLC) for exclusive use of the terminal's capacity. GNLC is jointly owned by the terminal's three contracted offtakers: Empresa Nacional del Petroleo (ENAP, IDR rated 'A'/Stable Outlook by Fitch), Empresa Nacional de Electricidad S.A. (Endesa-Chile, IDR rated 'BBB+'/Stable Outlook) and Metrogas S.A. (Metrogas), who are each gas buyers for approximately one-third of the terminal's capacity under contract.
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 Gas Buyers: GNLQ's gas buyers, Endesa, ENAP and Metrogas, have solid investment-grade credit profiles and have signed 20-year agreements with GNLQ. Endesa-Chile is the largest electricity generation company in Chile, owning and operating approximately 32.8% of the SIC'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 (2014 total debt-to-EBITDA of 1.1x), and improving financial metrics (EBITDA margins have risen to 36% in 2014 from 22% in 2011 due to increasing availability of natural gas from GNLQ. Metrogas is majority-owned (52% equity stake) by Chilean energy holding company Compania General de Electricidad S.A. (CGE), whose Fitch national scale rating is 'AA-(cl)' with a Stable Outlook. Metrogas accounts for approximately 37% of CGE's consolidated EBITDA. For its part, CGE is owned by Spanish-based natural gas utilities company Gas Natural SDG, S.A. (IDR: BBB+/Stable Outlook), which has other significant holdings in Latin America.
Shareholder Interests Aligned: Sixty percent of GNLQ's equity is owned by the company's gas buyers, with Endesa, ENAP and Metrogas owning 20% each. As all three shareholders are dependent on GNLQ's services to satisfy their critical natural gas needs, the controlling shareholders' interests are aligned with the terminal's operational/financial interests. GNLQ has a policy to pay 100% of its net income in the form of dividends; however, in the past shareholders have temporarily deferred dividend payments when the company embarked on major capital investments. Fitch believes that the company's shareholders would be willing to adjust dividend payments in the future depending on GNLQ's financial/operational needs.
Phase I Expansion Over: The company recently completed Phase I of its terminal regasification capacity expansion plans (USD30 million investment). The terminal's regasification capacity was increased by 50% to 15 million standard m3 (Sm3) per day. GNLQ has plans to expand capacity further by an additional 5 million Sm3/day (Phase II), which would entail a more significant investment of upwards of USD300 million. Conservatively, Fitch's financial projections for the next five years assume the terminal expansion to 20 million m3, although the company has made it clear it will not proceed with this expansion unless the added capacity is first contracted via long-term take-or-pay terminal agreements with strong credit-profile offtakers. Fitch's base case model assumes the company will be able to fund the expansion via internally generated cash flows.
Financial/Credit Metrics Improving: GNLQ's operations were launched under a fast track model in 2009, and financial revenue/EBITDA growth has ramped up since that point reaching a point of stability starting in 2012. As the terminal has achieved an operational steady state, EBITDA margins have grown from 63% in 2010 to 80% in 2013 - 2014. Fitch expects margins to remain in the upper 70% to 80% level going forward. Even with 100% dividend payouts, the company has been free cash flow positive since operations ramped up following the 2009-2010 start-up phase. In 2014, the company reported Cash Flow from Operations of USD126 million, and after capex and dividends, generated FCF of USD37 million. Fitch is projecting that the company will return to negative FCF during 2016-2019, assuming a maximum buildout of the terminal. However, starting in 2020, with the fully expanded and operational terminal starting in the second half of the year, GNLQ should return to positive free cash flow generation.
As of December 2014, GNLQ's leverage as measured by debt to EBITDA was 6.8x, down from the 7.7x level in 2012 and significantly below the 17.6x level seen in December 2010 when the company was in its initial stages of operations. Fitch expects GNLQ to slowly lower its leverage levels going forward despite the maximum facility expansion assumption (peak capex in 2015 - 2019). Leverage levels should fall below 6x starting in 2020, and long-term the company should achieve its target of sub-3x leverage levels given bond amortization payments starting in 2021. As of December 2014, interest coverage improved to nearly 3.2x when compared to 2.5x in December 2012. Post-expansion, interest coverage should ascend above 4x starting in 2021.
RATING SENSITIVITIES
GNL Quintero's ratings could be negatively impacted by a change in the company's strategy with respect to leverage, 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 AND DEBT STRUCTURE
Solid Liquidity and Debt Maturity Mirrors Revenue Profile: Proceeds from 2015's USD1.1 billion bond issuance (due 2029) were used to repay the company's project finance debt that was used to fund construction of the terminal. 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 March 2015, the company had USD143 million in cash and equivalents versus USD8.5 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 Sm3 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.
KEY ASSUMPTIONS
--EBITDA margins in the upper 70% - 80% range;
--100% of net income dividend payments;
--Expansion to 20 million Sm3 of regasification capacity starting in 2020;
--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 2020, with bond amortization payments leading to long-term leverage below 3x.
Fitch has affirmed the following ratings:
GNL Quintero S.A.
--Foreign and local currency IDRs at 'BBB+';
--International senior unsecured bond ratings at 'BBB+'.
The Rating Outlook is Stable.
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