News Column

Fitch Affirms Promigas S.A.'s IDR at 'BBB-'; Outlook Stable

June 12, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed Promigas S.A.'s (Promigas) foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-' and the long- and short-term national scale ratings at 'AAA(col)' and 'F1+(col)', respectively. The Rating Outlook is Stable.

Fitch has also affirmed Promigas' outstanding debt ratings as follows:

--COP400 billion local unsecured bonds due 2014, 2016 and 2019 at 'AAA(Col)';

--COP580 billion local unsecured bonds due 2020, 2023 and 2033 at 'AAA(Col)'.

Promigas' ratings are underpinned by the company's strong competitive position in the natural gas transportation, distribution and trading sector and by the regulated nature of its businesses. These factors result in stable and predictable cash flows for the company. Promigas and its subsidiaries operate in regulated businesses characterized by moderate exposure to legal and regulatory risks. The rating considers the company's adequate liquidity position and manageable debt maturity profile, and the structural subordination of Promigas' debt to its subsidiaries.

The ratings also incorporate the increase in financial leverage both at the parent and subsidiary level in recent years, and the expectation that Promigas' consolidated leverage, both at the parent and subsidiary level, will be sustained at the 3.5x to 4.0x total debt / adjusted EBITDA (including dividends) level on recurring basis. Fitch's forecast incorporates expectations for a robust capital expenditure program during the next four years, leading to leverage possibly remaining at the high-end of the guided range during this period with eventual leverage declining afterwards. Promigas' rating stability depends on funding free cash flow deficit with a balanced mix of debt and equity that could result in improved leverage metrics.

KEY RATING DRIVERS

Strong Competitive Position

Promigas enjoys a strong market position as it is one of Colombia's largest natural gas transportation and distribution companies. It distributes approximately 50% of natural gas consumed in the country and serves about 2.8 million users. The company's strategy aims to geographically diversify its presence in the Latin American region. Promigas and its subsidiaries participate in the natural distribution market in Peru and expect to continue expanding operations in other countries in the region. Positively, this could reduce the company's exposure to the risks inherent to the Colombian market, such as long-term gas supply constraints.

Stable Operational Cash Flows

Promigas operates in a regulated business thereby benefiting from stable and predictable profitability and cash flow generation. In addition, the company possesses a diversified revenue base. In 2013, approximately 80% of revenues and 55% of EBITDA was derived from its gas and energy distribution companies, which operate in mature markets with regulated tariffs and low exposure to economic cycles and elastic demand. The remaining 20% of total revenues and 45% of EBITDA originated from transportation services, which also benefit from regulated tariffs. Contracts in this segment typically have maturities between one to five years, with a fixed/variable ratio of 75/25, which limits exposure to volumetric risks.

Adequate Liquidity Maintained

Promigas has maintained an adequate liquidity position supported by its favorable amortization schedule. As of year-end 2013, the company held a cash balance of COP260 billion, which should fully cover its short-term debt obligations of COP128 billion. The company also has COP2.1 trillion of uncommitted credit facilities and proven access to the local capital markets. Given its ambitious capex program and dividend policy, the company should need additional debt disbursements in the next four years.

Fitch expects Promigas and its subsidiaries to continue with a demanding dividend policy. In 2013, dividends distributed by Promigas were COP293 billion, compared to a similar amount of dividend receipts from subsidiaries. In the coming years, the ratings consider the dividend policy to and from Promigas to remain at these payout ratios.

Moderate Regulatory and Market Exposure

The regulatory framework in Colombia is balanced and provides support to industry participants. Promigas and its subsidiaries are exposed to regulatory and gas supply risks to the extent that most revenues come from regulated contracts. Fitch believes these risks are moderate given the independence and balance of the regulatory framework in Colombia.

Promigas could have some exposition to supply risk as production of its main natural gas source has begun to decline. With the construction of the LNG plant the company will have an additional option to inject imported gas to the transportation system. The current reserves of natural gas are sufficient to meet demand in Colombia for the next five years (assuming normal thermal demand of power plants). During the last year, the government has issued important regulations that are expected to contribute to increased exploration activity. This should result in the incorporation of new gas reserves and strengthen the reliability and security of gas supply to meet the country's growing demand.

Elevated Capital Spending Program

Promigas plans to significantly increase its capital investment program during the next four years. Capital expenditures for 2014 to 2017 are estimated to total approximately COP1.65 trillion, which is equivalent to approximately 20% of revenues. This is more than double previous Fitch projections for long-term capex, though it is manageable given the company's solid liquidity position and stable operational cash flows. The higher investment program now includes a 50% participation in a project to build and operate a Liquefied Natural Gas (LNG) facility and expansion plans for the gas distribution business in Colombia and Peru.

Fitch considers the construction of the LNG facility as strategically important for Promigas, as it will provide an additional gas supply source for the thermal generators in the north region of Colombia, that represent approximately 25% of national gas demand. Although Promigas' cash flow from operations (CFO) is sufficient to cover about 80% of its capital expenditures, Fitch is projecting a continued aggressive dividend policy that should contribute to negative free cash flow during the next four years with cash deficits expected to be funded via debt offerings.

Leverage Expected to Rise Near-Term

Positively, total debt to EBITDA levels has recently improved, with leverage of 3.7x registered in 2013 versus 4.1x at the end of 2012. For 2013, consolidated debt was COP2.2 trillion of which COP938 billion was at the parent level. Debt at the parent level is comprised of COP400 billion unsecured bonds issued in 2009 and COP500 billion unsecured bonds issued in 2013.

The ratings consider a rise in Promigas' individual and consolidated debt attributed to increased projected capital investments and a continuation of an aggressive dividend policy. Given cash deficits over the next four years, Fitch believes the company will require additional debt issuances totaling COP800 billion. Furthermore, it should be noted that Fitch's adjusted debt levels considers the capitalization of operating leases with which Promigas will account for the LNG facility. Despite these increases in debt, Fitch expects leverage to remain near the top of the guided 3.5x-4.0x Total Debt to Adjusted EBITDA level.

RATING SENSITIVITIES

The ratings incorporate the expectation that Promigas' consolidated leverage will remain in the range of near 3.5x to 4.0x total debt/EBITDA on a recurring basis. Additional significant investments that do not involve financing via an equity component and/or are followed by significant reductions in dividend outflows could trigger a downgrade to the current rating. In addition, investments with lower than expected returns could be viewed negatively.

Given elevated capex expectations over the next four years, a positive rating action is not envisioned.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=834353

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Fitch Ratings

Primary Analyst

Xavier Olave, +1 212-612-7895

Associate Director

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Natalia O'Byrne, +57 1 326 9999 Ext. 1100

Director

or

Committee Chairperson

Glaucia Calp, +57 1 326 9999 Ext. 1110

Senior Director

or

Media Relations:

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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