Fitch Affirms Promigas S.A.'s Ratings at 'BBB-'

Fitch Ratings has assigned a 'BBB-' senior unsecured debt rating to Promigas S.A. (Promigas). In addition, Fitch has affirmed Promigas' existing ratings as follows:

-- Foreign Issuer Default Ratings (IDRs) at 'BBB-'.

-- Local currency IDRs at 'BBB-'.

-- Long-term national rating at 'AAA(Col)'.

-- Short-term national scale rating at 'F1+(Col)'.

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

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

The Rating Outlook is stable.

KEY RATING DRIVERS

Promigas expects to issue, at the parent level, senior unsecured bonds of up to COP1.2 trillion with tenures up to 20 years. Approximately, COP800 billion (USD400 million) will be used to fund the company's capital expenditure program for 2014 to 2017 of approximately COP1.80 trillion. The remaining COP400 billion (USD200 million) will be used to refinance debt and extend the company's debt maturity profile at subsidiary level. Fitch also believes the company will require additional debt issuances totaling COP350 billion for the next four years, in order to cover its cash deficits given its projected capital investments and aggressive dividend policy.

Fitch expects that during the next two years, incorporating the new debt issuance, consolidated financial leverage should exceed 4x total debt / adjusted EBITDA (including dividends), which is above previous guided range of 3.5x to 4.0x. Fitch does expect Promigas' Net Debt leverage to be lower than 4.0x during the peak capex period. The leverage ratio should start improving to below 4x beginning in 2016 as the company starts to receive returns from its investments. Promigas' rating stability depends on the accuracy of its expected return on investments and the funding of its free cash flow deficit with a balanced mix of debt and equity that could result in improved leverage metrics.

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.

KEY RATING DRIVERS

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 COP1.80 trillion, a little higher than last guidance of COP1.65 billion. The company plans to accelerate its capital expenditures during the next two years, thus capex will reach a maximum of 35% of revenues in 2015. As Fitch stated in its last rating revision, the capital expenditure program is more than double previous years' projections for long-term capex, though still considers it manageable given the company's solid liquidity position and stable operational cash flows. The higher investment program 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

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. With the current debt issuance the company expects to fund about 40% of its capex needs for 2014-2017 and anticipates the required additional debt issuances totaling COP1.100 billion. Thus the resulting gross leverage will be higher than 4x, which breaches the previous guided 3.5x-4.0x Total Debt to Adjusted EBITDA level. Fitch takes into account the company?s expected cash position for the end of 2014 and 2015 and believes Total Net Debt to Adjusted EBITDA will range between 3.5x to 4.0x, which is adequate for the company's rating. Furthermore, Fitch's adjusted debt levels conservatively consider the capitalization of operating leases with which Promigas will account for the LNG facility. Fitch expects gross leverage to return to a level below 4x starting in 2016.

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.

RATING SENSITIVITIES

The ratings incorporate the expectation that Promigas' consolidated leverage will range between 3.5x and 4.0x on a sustained basis. For the next two years, Fitch expects the company's credit metrics to be above the upper-end of this guidance, which is weak for the rating category. The company's combination of aggressive capex with historically low retention of net income reduces the company's headroom to absorb negative credit shocks, which could lead to a rating downgrade.

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. Funding capex programs via internally generated cash flow/higher earnings retention would be viewed positively.

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=913655

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