OREANDA-NEWS. August 10, 2015. Fitch Ratings has affirmed Turkey-based Turcas Petrol A.S.'s (Turcas) Long-term foreign and local currency Issuer Default Ratings (IDR) at 'B' and its National Long-Term Rating at 'BBB-(tur)'. The Outlooks are Stable.

Turcas is an investment holding company with minority stakes in JVs in energy-related sectors in Turkey (BBB-/Stable). Its main investments are a 30% stake in the leading Turkish fuel distributor Shell & Turcas Petrol (STAS) and a 30% stake in the 775 gas-fired power plant, commissioned in 2013 in Denizli, Turkey, a JV with RWE AG (BBB+/Negative). Turcas's credit profile is subordinate to the weighted average credit profile of these companies as it does not have direct access to their operating cash flows and assets.

Supporting factors include Turcas's positive free cash flow after dividends, its long-term debt maturity profile and the increased financial metrics' headroom following its exit from the STAR refinery project. Constraints on the ratings include Turcas's small size and the limited diversification of its dividend income stream.

KEY RATING DRIVERS
Limited Income Stream Diversification
We expect STAS to remain Turcas's primary source of revenue as weak gas and power prices will constrain the power plant's capacity to fully cover its shareholder loan repayments or contribute dividends. STAS, Turcas's JV with Royal Dutch Shell plc (AA/RWN), is Turkey's leading fuel distributor with 1,072 Shell-branded gas stations and reported EBITDA of TRY0.4bn in 2014. Fitch does not rate STAS but based on a comparison with other rated fuel retailers believes that its profile would warrant a standalone rating in the 'BB' category. This captures its relatively sound financial metrics and leading market position in the growing domestic market. These positives are overlaid by STAS's limited geographical diversification and full exposure to Turkey's regulatory and macro-economic environment.

Reliable Dividend Flows from STAS
Turcas's lack of control over STAS's dividend distributions is strongly mitigated by the track record of recurring payments received over the past eight years. Income from STAS also includes management fees based on a pre-approved formula. In aggregate, cash inflows from STAS over 2007-2014 were TRY401m, compared with TRY140m paid by Turcas to its shareholders over the same period.

STAS's leverage is projected to increase in 2015 due to higher spending for dealer contract renewal and worse financial performance due to pressure on margins. We continue to view STAS's headroom for dividend distribution as adequate. At the same time, we view its weaker financial profile as a risk as the company is the main contributor to Turcas's cash inflows. Our forecasts set 2015 dividends from STAS at a conservative level and assume growing distributions over the next three years due to the end of its peak investment period in 2016.

Pressure on Power Plant's Cash Flows
Although Turcas's 775 megawatt gas-fired power plant is one of the most efficient in Turkey, the economics of the project are now unlikely to meet pre-investment assumptions due to challenging conditions in the gas and power market. Combined with the power plant's asset concentration and limited operational track record, in our view this would constrain the standalone rating to the 'B' category. Turcas's debt consists of project loans raised to finance its 30% share in the construction of the plant. We previously assumed that from 2015, the debt service of these facilities would be fully covered by payments from Denizli under a shareholder loan structured to mirror their terms. Our forecasts now project that Turcas will have to fund a shortfall in repayments in the medium term.

New Investments
In May 2014, Turcas sold its 18.5% stake in the STAR refinery project to State Oil Company of the Azerbaijan Republic (BBB-/Stable) for USD59.4m. The most advanced new investment project being considered by the company is the geothermal power plant with 16MW capacity in western Turkey. If the company decides to realise the investment, we view the additional capex for this project of around USD2.5m as manageable for Turcas. This assumes that the project is also financed with non-recourse debt.

Weaker Credit Metrics in 2015
Turcas's credit metrics improved at end-2014 following disposal of its stake in STAR refinery and lower capex. Our base rating case forecasts an increase in net funds from operations (FFO) leverage to 4.4x in 2015 from 2 in 2014. We project dividend/gross interest cover to decline to 3.7x from 4.8x over the same period. This reflects a reduction in expected cash flows received by Turcas from STAS and the power plant and lira depreciation assumed by Fitch. We forecast that higher dividends from STAS from 2016, after the dealer contract renewal period is over, coupled with low capex will lead to an improvement in credit metrics post-2015.

FX Risks Weigh on Profile
Turcas's cash inflows, except for management fee from STAS, are linked to the lira, while Turcas's debt is euro and US dollar denominated. Foreign exchange risk is a credit constraint.

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- FFO adjusted net leverage consistently below 2x.
- Greater diversification of dividend income.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- FFO adjusted net leverage exceeding 5x on a sustained basis.
- Deterioration in financial performance of key investments.

KEY ASSUMPTIONS
- USD/TRY of 2.5 in 2015, 2.6 in 2016, 2.68 in 2017, and 2.84 thereafter in line with average exchange rate as per Fitch's sovereign team.
- Relatively stable management fee and dividend from STAS in 2015-2019.
- Shareholder loan repayments from RWE Turcas JV lower than Turcas's obligations under the back-to-back bank loans.
- Capital expenditures mainly for geothermal power plant investment project.
- Dividend payments in line with management assumptions.

LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity, Comfortable Maturities
At end-1Q15, Turcas's liquidity was adequate with TRY210m of cash and TRY58m of short-term debt. Total debt consisted of TRY441m of mainly project-related ECA long-term loans denominated in euros and US dollars. Turcas's cash balance surged in May 2014 due to the USD59m proceeds from the sale of the stake in STAR. According to Turcas, it had around TRY92m of undrawn non-committed credit lines at end-April 2015.