Fitch Affirms IEnova at 'BBB+'; Outlook Stable.
IEnova's ratings reflect the company's strong competitive position in the highly regulated energy environment in Mexico, its adequate capital structure and stable and predictable cash flow generation supported by long-term agreements with no material commodity exposure signed with investment grade off-takers. IEnova's ratings also reflect the company's strong liquidity position and the support of its primary shareholder, Sempra Energy (BBB+/Stable). Sempra's rating reflects its well-diversified investment portfolio, the financial strength of its U.S. regulated utilities, and long-term contracted infrastructure investments, while offset by a relatively high level of parent debt.
KEY RATING DRIVERS
Predictable and Stable Cash Flow: IEnova's ratings reflect its stable and predictable cash flow generation supported by long-term, take-or-pay dollar-denominated contracts. The group's strategy is to engage in long-term firm capacity contracts with strong credit-quality counter parties limiting exposure to volume risk. Fitch expects IEnova's EBITDA margins to stabilize in the range of 55%-60%, or USD760 million-820 million during the next four years as the company benefits from asset diversification and its large business scale.
Strong Competitive Position: IEnova's ratings benefit from its strong market position as one of the largest private utility companies in Mexico. It currently ranks first in terms of presence in the natural gas transportation, with 36% of the market. IEnova is strategically positioned to increase participation in the highly prospective Mexican energy environment as demonstrated by the addition of five new projects during 2018 (one solar plant, three storage terminals and the potential conversion of the LNG regasification plant). Fitch expects private investment activities will remain high in the medium term as demand for infrastructure projects continues to increase. Going forward, the company could gain future biddings on energy projects throughout the country. During 2018, approximately 85% of the company's EBITDA will be related to the gas segment (transportation, regasification and distribution) while the remaining correspond to the power generation sector.
Strong Off-takers: IEnova's ratings are supported by the company's strong client mix and firm, long-term contracts with investment-grade credit quality government-related entities and private companies. Around 60% of IEnova revenues come directly or indirectly from state owned companies Petroleos Mexicanos S.A. (PEMEX, BBB+/Negative), Comision Federal de Electricidad (CFE, BBB+/Negative) and Centro Nacional de Control del Gas Natural (CENAGAS, not rated) and around 10% come from subsidiaries of its parent company, Sempra Energy S.A. (Sempra Energy, BBB+/Stable). The long-term agreements bind the off-taker to pay the agreed price for the contracted capacity despite the portion used, mitigating volume and commodity risk.
Adequate Capital Structure: IEnova's capital structure is supportive of the rating category and is characterized by moderate leverage, strong cash flow generation and solid contractual structure. Fitch expects the company's leverage to remain below 3.5x, as new projects comes online and start contributing to cash flow generation despite intensive capital expansion plan and its acquisitive profile. As of the LTM ended Sept. 30, 2018 the company had a total financial debt of approximately USD2.5 billion (not including intercompany loans) and EBITDA of USD729 million, resulting in a gross leverage of 3.4x.
Aggressive Expansion Phase: IEnova should continue benefiting from its strong market position in Mexico and aggressively pursue large projects during the medium term to capture investment opportunities in the country. These investments may carry some execution risk related to construction delays, accidents and cost-overruns. Fitch forecasts capex totalling around USD2.9 billion (including investments in joint ventures) between 2018 and 2021 as opportunities for capital intensive projects remain attractive in the country. Fitch expects IEnova to continue pursuing partnerships to develop and fund new projects, limiting capital structure pressures absent any guarantee exposure. IEnova's wholly owned construction portfolio includes five storage facilities, one wind farm and three solar farms with estimated capex of USD1.04 billion, of which USD900 million is yet to be funded.
Neutral Parent Support: Fitch views the parent support of IEnova as credit neutral. Historically, Sempra
has financially and operationally supported the company through intercompany loans, equity injections and commercial agreements ensuring steady cash inflows. As of Sept. 30, 2018, IEnova reported USD486 million of intercompany loans with Sempra. Future pressures on Sempra's capital requirements that lead to pressure on IEnova's capital structure would be viewed as negative. Sempra Energy is one of the largest natural gas utility in the U.S. in terms of coverage area and population service.
Sempra is facing several challenges and its credit profile is expected to evolve in the next two years in light of the portfolio optimization and activist involvement. Sempra's rating stability depends upon successfully completion of Cameron liquefied natural gas (Cameron LNG) project, which is experiencing cost overrun and delays. Other challenges include effectively managing the political and judicial lands cape in California, especially associated with wildfire risks. Activist investors' involvement is generally negative from a credit perspective and will likely increase, in Fitch's view, although the recent cooperation agreement and the appointment of two new board members provide some clarity.
IEnova's investment grade rating is comparable to that of other utility peers in Latin America such as Transportadora de Gas del Peru S.A. (TGP, BBB+/Stable) and Gas Natural Quintero (GNLQ, BBB+/Stable). The 'BBB+' ratings are supported by long-term agreements with no material volume exposure signed with investment grade off-takers. GNL Quintero's higher leverage at 7.0x is compensated by the amortizing structure of its notes and strong debt service coverage ratios (DSCR) while TGP capital structure is more conservative with leverage at 2.3x and strong DSCR once the notes start amortizing and higher diversification of client base. IEnova is rated above other utility companies with less predictable cash flow generation and higher exposure to volumetric risks such as Transportadora de Gas Internacional S.A. E.S.P.'s (TGI, BBB/Stable), Gas Natural de Lima y Callao (Calidda, BBB/Stable) and Promigas S.A. E.S.P. (Promigas, BBB-/Stable) partially mitigated by the companies' more conservative capital structure.
Fitch's key assumptions within our rating case for the issuer include:
- Mexico GDP growth of 2.0% in 2018, 2.3% in 2019 and 2.5% in 2020;
- Mexico Inflation of 4.6% in 2018, 3.9% in 2019 and 3.5% in 2020;
- Annual average capex of USD725 million during four-year period 2018 and 2021;
- Dividends payment at 60% of previous year net income.
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action
Although a positive rating action or Outlook is not expected in the short or medium term, it could be considered if leverage were to fall below 2.0x on a sustained basis, or if the credit quality of IEnova's off takers improves.
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action
--Leverage increases above 3.5x on a sustained basis. This could happen if the company adopts an aggressive dividend policy, or implement aggressive expansion plans financed by debt.
--Adverse changes to the regulatory and operating environment or failure to diversify its client base.
--More than a one-notch downgrade on Pemex or CFE's ratings.
--A downgrade on the parent's IDR may add additional pressure on the credit quality of IEnova.
Adequate Liquidity: The company's liquidity position is adequate as a result of cash on hands, adequate cash flow generation, comfortable amortization debt profile and unused committed credit lines of USD555 million as of Sept. 30, 2018. On the same date, IEnova's readily available cash was USD45.9 million compared with short-term debt of USD680 million and total debt of USD2.5 billion. Around 30% of the debt was secured at the subsidiary level mainly related to the Ventika wind plant and IEnova Pipelines acquisition in 2016.
Fitch expects IEnova to fund upcoming projects with internal cash flow generation, the use of the revolving credit facility of USD1.17 billion and expanding financing from nonconsolidated projects.
The company's liquidity is also supported by its strong access to the equity capital markets. During 2016, the company successfully issued equity shares in the total amount of USD1.6 billion. The funds were mainly used to acquire the remaining 50% of Gasoductos de Chihuahua for USD1.1 billion and for Ventika acquisition of USD435 million.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Infraestructura Energetica Nova, S. A. B. de C. V. y Subsidiarias (IEnova)
--Foreign and Local Currency IDR at 'BBB+'/Outlook Stable;
--Senior unsecured notes at 'BBB+'.