Fitch Ratings has affirmed the 'B-' Long-Term Issuer Default Ratings (IDRs) of
Fitch has also affirmed RGSCAN's 2023 senior secured notes at 'B'/'RR3'. The Rating Outlook is Stable for both entities.
The ratings reflect ROCGAS's smaller relative size, with typical EBITDA of less than
The Stable Outlook is based on solid performance versus Fitch targets and expectations for a continued improvement in market fundamentals leading to more consistent and higher values ascribed to natural gas storage.
Key Rating Drivers
Reverberations from Winter Storm Uri: ROCGAS realized increased EBITDA from delivering natural gas in during
Winter vs Summer Prices: Time-spreads, the difference between natural gas prices in summer versus winter months, are one of the main drivers of the fees ROCGAS can charge for its storage services. These spreads are driven by regional market and nonmarket factors. ROCGAS operates in distinctly different regions of
Spreads compressed at AECO for much of the first nine months of 2021, relative to recent years, due to strong demand for post-winter storage fill and an extreme heat event that gripped the province in June and
Contracting Targets: ROCGAS has set targets for the allocation of capacity to longer-term firm storage service (FSS) contracts, short-term storage service (STS) contracts and matched-booked proprietary storage positions (Optimization). The targeted allocation includes a higher percentage of FSS and STS contracts than currently exists. The trend of lower natural gas storage values across
Fitch views management's ability to both successfully re-contract where appropriate and replace lost contracted dollars with optimization revenue as central to the internally-driven aspect of the ROCGAS story. Fitch would view contract lengths at or beyond three years in
Credit Metrics: Fitch expects leverage, as measured by total debt with equity credit to operating EBITDA, to be around 5.0x for the fiscal year ending
LNG Read-Throughs: The expansion of LNG facilities in
Rating Linkages A parent-subsidiary relationship exists between ROCGAS (parent) and RGSCAN (subsidiary). Fitch determines ROCGAS' standalone credit profile (SCP) based upon consolidated credit metrics. Fitch considers RGSCAN to have a stronger SCP than ROCGAS. As such, Fitch has followed the stronger subsidiary path. Fitch views legal ringfencing as open as there are guarantees that flow between the parent and the subsidiary.
Fitch evaluates Access & Control as open as well given ROCGAS' 100% ownership and control of RGSCAN, as evidenced by the subsidiary's financial statements being consolidated in the parent's group financial statements. This more than offsets the mix of external and internal funding sources at RGSCAN. Due to the aforementioned linkage considerations, Fitch will rate both entities based on the consolidated credit profile and assign the same IDRs.
Derivation Summary
ROCGAS is somewhat unique in Fitch's rated midstream universe in that it is the only pure play natural gas storage business. The most direct peer comparison available is
Fitch views the business risk as lower at TransMontaigne, compared to ROCGAS, due to a combination of longer relative contract duration and TransMontaigne's essentially 100% fixed-fee business mix, both of which provide better relative revenue assurance. ROCGAS utilizes matched-booked proprietary storage positions to increase returns/utilize unused storage capacity. TransMontaigne also benefits from greater geographic diversification and larger scale. ROCGAS generates roughly half the annual EBITDA compared to TransMontaigne, in most years.
Somewhat offsetting the perceived higher relative business risk, Fitch has forecasted leverage at ROCGAS to be 1.0x-1.5x lower than TransMontaigne. Fitch expects ROCGAS' FY23 total debt with equity credit to operating EBITDA to be roughly 5.0x, with leverage moving below 5.0x over the forecast period. Following a leveraging transaction completed in 4Q21, TransMontaigne has leverage that is projected to move from around 6.5x at YE2022 to closer to 6.2x over the forecast period. Fitch views the higher business risk, lower revenue assurance and smaller relative size (as measured by annual EBITDA), partially offset by lower leverage, as the main factors driving the two-notch difference between the IDRs of TransMontaigne and ROCGAS.
Key Assumptions
A historically typical summer injection season along with more normalized time-spreads, allowing natural gas storage levels at the AECO HUB to enter winter 2022/2023 at sufficient levels;
New contract and Optimization revenue both reflect on a near-term basis time-spreads near current levels, supported by natural gas storage inventories in
The absolute level of
Performance under existing contracts with third-parties produces the cash flows management forecasts;
Capex of approximately
The senior secured notes due in
All BAM-held (or BAM-affiliate-held) debt at ROCGAS or RGSCAN remains subordinated;
Return of capital to sponsor, including repayment of sponsor-provided subordinated debt, consistent with excess cash flow assumptions;
For the Recovery Rating, Fitch utilized a going-concern (GC) approach with a 6x EBITDA multiple, which is an approximation of the multiple seen in recent reorganizations in the energy sector. There have been a limited number of bankruptcies and reorganizations within the midstream space, but bankruptcies at Azure Midstream and Southcross Holdco had multiples between 5x and 7x by Fitch's estimate. In its recent Bankruptcy Case Study Report, 'Energy, Power and Commodities Bankruptcies Enterprise Value and Creditor Recoveries,' published in
Fitch's corporate recovery analysis uses
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An increase in the percentage of working gas capacity tied to contracts with three years or more left and total debt with equity credit to operating EBITDA is expected to be 5.5x or less on a sustained basis;
Total debt with equity credit to operating EBITDA sustained below 4.0x without an increase in the percentage of working gas capacity tied to contracts with three years or more left.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Leverage, defined previously, sustained above 7.5x and/or adjusted EBITDA interest coverage below 1.5x;
A future decrease in the percentage of working gas capacity tied to multi-year contracts;
The existence of liquidity pressures including, but not limited to, debt maturities;
Change in the way the company structures new debt issuances (such as without full guarantees, or debt at affiliates);
Change in terms regarding Brookfield debt instruments that are adverse to third-party senior creditors.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Adequate Liquidity: ROCGAS has adequate liquidity stemming from a
ROCGAS' secured asset-based revolving credit facilities mature in
The company has the option to defer or pay interest in kind on its
The company utilizes its credit facilities largely to purchase natural gas inventory in the summer months to be sold at higher prices in the winter months. Given that ROCGAS hedges those open positions immediately with future/forward contracts this strategy of using short-term debt instruments appears appropriate.
Issuer Profile
ROCGAS is the largest independent (i.e., not affiliated with a natural gas pipeline) owner of natural gas storage facilities in
Summary of Financial Adjustments
Fitch's leverage metrics are based on financial data contained in
Fitch has applied 100% equity credit to subordinated indebtedness provided by ROCGAS's sponsor, BAM.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
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