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 the MPE.
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 forecast.
Ratings Affirmed; CreditWatch/Outlook Action
Njord Gas Infrastructure AS
Senior Secured A-/Watch Neg A-/Negative