Jan 21 -
-- On Jan. 15, 2013, the Norwegian Ministry of Petroleum & Energy (MPE)
issued a proposal to substantially reduce transport tariffs on the majority of
future capacity bookings for the Gassled network.
-- The proposal is subject to consultation and therefore not final but,
if approved, the tariff reductions would lead to a substantial fall in
revenues for Norway-based asset company Njord Gas Infrastructure AS (NGI) for
the period beyond 2022.
-- We are therefore placing on CreditWatch negative the 'A-' long-term
issue ratings on the bonds issued by NGI. If enacted as proposed, the tariff
reductions could lead to downgrades of more than one notch.
-- We aim to resolve the CreditWatch placement following finalization of
the tariff structure by the MPE.
On Jan. 21, 2013, Standard & Poor's Ratings Services placed on CreditWatch
with negative implications its long-term issue ratings on the Norwegian krone
(NOK)-equivalent 3.798 billion senior secured index-linked bonds due September
2027, issued by Norway-based asset company Njord Gas Infrastructure AS (NGI).
The CreditWatch placement follows the announcement by the Norwegian Ministry
of Petroleum & Energy (MPE) that it aims to establish new tariffs on the
majority of future capacity bookings for the Gassled network. The announcement
on Jan. 15, 2013, marked the start of a two-month consultation period, after
which the MPE plans to finalize its position. If implemented, the revised
tariffs would take effect for bookings from May 1, 2013.
The proposal from the MPE is to reduce the current 'K' element of the tariff
by 90% for all new bookings. Although varying over time as a result of
changing operating expenses and maintenance capital expenditure requirements,
the 'K' element currently constitutes the greatest share of forecast revenues,
averaging about 55% of total annual revenues over the remaining life of the
licenses. Approximately 75% of forecast total bookings for the same period
have already been made. The revenues to be generated from these bookings will
therefore be unaffected. For the period to 2021, the proportion is higher.
However, from 2021 and beyond, this proportion falls significantly. Over the
same period, due to increasing maintenance needs, the 'K' element of the
tariff represents about 50% of current total forecast annual revenues. We
believe that a reduction in the tariffs as proposed would result in a material
fall in revenues for the period beginning in 2022, and a greater fall in cash
flows. That said, we understand that NGI believes that debt service payments
would be unaffected.
NGI used the proceeds of the bonds to acquire from ExxonMobil Corp.
(AAA/Stable/A-1+) its approximate 8% interest in the Gassled partnership.
Gassled comprises the bulk of the natural gas pipeline infrastructure on the
Norwegian Continental Shelf, which enables 96% of the gas extracted on the
shelf to be processed, transported, and exported to mainland Europe and the
U.K. Gassled provides about 20% of the EU's gas consumption, and accounted for
about 18% of its imports in 2010.
The ratings are supported by the following credit strengths:
-- The network's strategic importance and financial significance to the
Kingdom of Norway.
-- Transparent tariffs for gas transport prices set by an agreed formula,
which passes through all operational and maintenance costs and is not directly
exposed to gas prices.
-- Highly profitable and cash-generative operations, although this is in
part offset by a high (but in our view stable,) tax rate, at 78%.
-- Stable and predictable bookings for pipeline capacity in the medium
term because of "take-or-pay" arrangements that mean bookings are typically
confirmed 18 months ahead of time.
-- Low operational risk. Operational performance since the formal
aggregation of the network assets into Gassled has been good. Operating risk
is further limited by the reliance of the operator, Gassco, on the shippers'
technical ability as subcontractors.
However, the ratings also reflect the following credit weaknesses:
-- A highly leveraged financial profile, reflected by a capital structure
that increases to about 80% debt to equity and subordinated debt in 2013. This
results in relatively low debt service coverage ratios (DSCRs) for the rating,
which NGI projects at 1.16x (minimum) and 1.66x (average) using our definition
and NGI's current base-case assumptions.
-- The potential volatility in, and uncertainty of, future capital
expenditure (capex) amounts. In our opinion, this exacerbates NGI's highly
leveraged financial profile to the extent that the majority of future capex is
remunerated over the remaining life of the licenses. NGI's position is
partially mitigated, and its financial flexibility improved, however, by: the
inclusion in the terms of the bonds of a dividend lock-up in the event that
the contractually defined DSCR is less than 1.20x; NGI's ability to delay bond
principal repayments in certain circumstances; and the lack of an event of
default tied to the DSCR.
-- The project's exposure to refinancing risk should the terms of the
license be renegotiated. This refinancing risk is mitigated by our expectation
that NGI and the regulatory authorities will reach a fair settlement, which
should allow for adequate access to refinancing alternatives at that time.
-- The transaction's relatively weak liquidity support given the
comparatively short (five-year) maturity of NGI's revolving credit facility
and the potential drawing constraints. That said, the maturity of the facility
has been extended from the previous three years, and must still be refinanced
at least one year ahead of maturity or a dividend lock-up will be triggered.
-- Volume risk associated with some of the revenues linked to the return
on assets, since they are not fully pass-through. This risk is mitigated by
Norway's low exposure to political risk, as well as by the long-term nature of
contracts in the European gas market, which makes shipments more stable.
The CreditWatch negative placement reflects our view of the potential impact
on the project's financial profile of the proposed reduction in tariffs by
We aim to resolve the CreditWatch placement following finalization of the
tariff structure by the MPE.
We could remove from CreditWatch and affirm the ratings if the MPE does not
proceed with its current proposal, or if the final tariff reduction is
substantially less than currently proposed, resulting in a financial profile
that is in line with our previous projections.
We would lower the ratings, likely by more than one notch, if the MPE proceeds
with its current proposed reduction in tariffs. We could also lower the
ratings by one or more notches if the MPE introduces lower tariff reductions,
significant enough to result in a weaker financial profile than we previously
Ratings Affirmed; CreditWatch/Outlook Action
Njord Gas Infrastructure AS
Senior Secured A-/Watch Neg A-/Negative