Fitch Affirms TGI'S FC/LC IDR at 'BBB-' Following TGP Acquisition Announcement

Following the announcement that Transportadora de Gas Internacional S.A. ESP (TGI) agreed to purchase a 23.6% stake in Transportadora de Gas del Peru S.A. (TGP), Fitch Ratings has affirmed the foreign and local currency Issuer Default Ratings (FC & LC IDR) of TGI at 'BBB-'. Fitch is also affirming the 'BBB-' rating for TGI's US$750 million notes maturing in 2022. The Rating Outlook remains Stable.

KEY RATING DRIVERS

TGI's ratings reflect the company's stable and predictable cash flow generation as well as its historically moderate leverage position, despite a temporary increase in leverage post-acquisition. TGI has benefited from its linkage to its primary shareholder, Empresa de Energia de Bogota (EEB; LC & FC IDR 'BBB-'), which supports the company through intercompany loans. TGI's exposure to regulatory risk is considered moderate and its liquidity strong, further supporting its ratings. Fitch's ratings of TGP and EEB are unaffected by this transaction.

ACQUISITION DETAILS

TGI agreed to acquire a 23.6% stake in TGP. Fitch's long-term IDR rating for TGP is 'BBB' with a Stable Outlook. TGI has been in private bilateral discussions with the Techint group since May 2013 to possibly purchase their 23.6% controlling stake in TGP and their 100% stake in COGA (the company that operates the TGP gas pipeline system). Both parties officially announced they reached an agreement on the purchase Jan. 16, 2014.

Strategic merits. TGI has been looking for growth opportunities outside Colombia, with Peru being a natural market for its expansion given it currently has a presence in this market. The market has ample proved natural gas/natural gas liquids (NGL) reserves and attractive market dynamics given a stable regulatory environment. TGP is responsible for the transportation of natural gas and NGL from Camisea to the Peruvian coast, and has a strong operational track record.

Deal structure would lead to US$350 million in additional debt. The deal is valued at US$642 million. The company plans to use US$292 million of cash on hand for the purchase, with the remaining US$350 million via syndicated loans. In the 2014-2015 period, the company would look to pay down US$125 million of the debt via TGI's cash generation and dividends from TGP. It should be noted that as of year-end 2013, TGI has US$360 million in cash on hand, leaving it with an adequate level of US$68 million in cash on the books post transaction. The syndicated loan, which will be held at a TGI International Ltd. entity (which currently does not hold any debt), will have a five-year term with a three-year grace period.

Leverage levels expected to rise by 1x in the near term; dividends expected from TGP should help lower leverage ratios in the long term. On a pro forma basis, Fitch estimates that Total debt:EBITDA ratios (using only senior debt for the calculation) would be 3.3x as of YE2013 versus 2.4x in actuality.

Fitch expects minor dividend distributions from TGP given its substantial capex needs during 2014-2015, which will contribute to keeping Total debt:EBITDA in the 3x range during those years. However Fitch expects dividend distributions to rise to the US$70 million/year level starting in 2017, which would lead senior debt leverage levels to come down to the 2x range in the later years. It should be noted that these pro forma conservative calculations include the assumption of US$350 million in debt and add only dividend distributions from TGP to Fitch's adjusted EBITDA calculations.

Deal should close in 1Q'14. The company expects the deal to close by mid-March 2014. It does not expect any regulatory hurdles and will only be facing shareholder approvals (which Fitch believes it should obtain).

RATING SENSITIVITIES

A negative rating action or Outlook would be considered if the rating of EEB or that of the Colombian sovereign deteriorates. It would also be viewed negatively if the company's standalone or underlying operating assets' financial profile deteriorates significantly to a sustained senior debt leverage level above 4x.

A positive rating action or Outlook could be considered if TGI significantly reduces its leverage for a sustained period of time, though given the latest acquisition this is unlikely in the near term.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', dated Aug. 8, 2013;

--'Parent and Subsidiary Rating Linkage', dated Aug., 8, 2013.

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=715139

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=815476

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