GOGC released 1H16 unaudited results. Revenue increased 30.6% y/y, boosted by electricity sales, which commenced in 3Q15. Operating expenses, dominated by cost of gas, increased 15.0% y/y. As a result, adjusted EBITDA almost doubled, compared to the same period last year, reaching US$ 47.0mn. Strengthening of GEL against US$ between end-15 and 1H16 led to a US$ 3.8mn non-cash FX gain, which boosted net income to US$ 40.4mn. Construction of Gardabani CCPP II is expected to start in 2017. The gas storage reservoir project has entered the second phase of the feasibility study, with construction expected to commence in early 2018.
The addition of electricity sales (US$ 37.0mn) from Gardabani CCPP drove 30.6% y/y growth in revenue to US$ 140.6mn in 1H16. Sale of electricity seized a sizable 26.3% share in revenue, diversifying the top line. Sale of gas declined 4.8% y/y in US$ terms, as volume decreased 5.9% y/y to 686 mmcm in 1H16. Rent of pipelines and oil transportation revenues shrank 13.1% y/y to US$ 13.4mn and 5.7% y/y to US$ 3.9mn, respectively.
1H16 operating expenses increased 15.0% y/y to US$ 100.9mn, on the back of a 9.2% y/y increase in cost of gas. The latter includes cost of gas used in electricity generation, in addition to cost of gas sold. Cost of gas sold decreased 10.7% y/y to US$ 69.2mn, driven by the drop in average purchase price of gas, per the amendment (effective Mar-16) to the SOCAR Sales and Purchase Agreement (for additional gas volumes up to 350 mmcm). The amendment changed the pre-existing fixed purchase price to a price determined by calculating the weighted average price of oil and certain oil products.
Sale of electricity, coupled with savings in cost of gas, pushed up 1H16 adjusted EBITDA to US$ 47.0mn, up 92.5% y/y. The adjusted EBITDA margin improved from 22.7% in 1H15 to 33.4% in 1H16. All other profitability margins also improved in 1H16, compared to the same period last year.
In 1H16, operating cash flows were at US$ 45.6mn, compared to a negative figure (US$ -13.4mn) in 1H15. In addition to the boost from electricity sales, savings in cost of gas had a positive impact on the increase in operating cash flows.
In Apr-16, GOGC refinanced its outstanding GEOROG 05/17 US$ 250.0mn Eurobond with a new US$ 250.0mn Eurobond maturing in 5 years. Approximately 80% of the outstanding bonds have been purchased by GOGC, while the rest remain to be redeemed in May 2017. In 1H16, GOGC paid its 2015 dividend in the amount of US$ 5.5mn.
We expect end-2016 net debt-to-adjusted EBITDA to come in at 1.5x, well below the Eurobond covenant of 3.5x, on the back of significant expected growth in adjusted EBITDA and lower capital spending in FY16.
