Following GOGCs 1H13 results, we revise our revenue and margin forecasts on the back of reduced gas sales tariffs but higher revenues. According to our estimates, the 9% cut in retail gas prices in effect from March 2013 will undercut profitability until 2015. However, on the debt servicing side, neither liquidity nor leverage covenants should be a concern for Eurobond holders. GOGC’s capex plans have shifted to a thermal power plant, Gardabani, from the Namakhvani hydropower plant. Operations at Gardabani, of which the Partnership Fund will own 49%, will contribute an estimated US$ 50mn in EBITDA from 2016 onwards on a fully-consolidated basis.
Higher 1H13 revenues and costs, but still ample profitability remains
Revenues from gas supplies (75% of sales) grew by a respectable 14% y/y in 1H13 on higher volumes. Higher transportation fee income and gas volumes on the Main Gas Pipeline System (MGPS) increased revenues from pipeline rentals by 5% in 1H13 (accounting for 11.6% of total revenues). Upstream activities posted 6x higher revenue in 1H13 y/y as oil reserves from 2012 were sold and recognized as income per production sharing agreements, now representing 10% of total revenues. The oil transportation segment remained largely flat, as expected. The rising cost of gas purchases – the main cost component for GOGC – narrowed the EBITDA margin by 290bps to 39.8%. Eurobond financing costs also cut into the bottom line. According to GOGC’s FY13 guidance, gas prices are likely to decline while volumes should increase slightly. We expect revenues to grow by a modest 4.5% in FY13 and 1.8% and 1.5% in FY14 and FY15, respectively.
Capex remains priority, but redirected to Gardabani
In 2012, GOGC ended its involvement in the Namakhvani Hydro Plant due to potential environmental issues that required further revision. Instead, GOGC will invest in the Gardabani Combined Cycle Power Plant (CCPP) which should be fully operational in 2016. Project construction costs were re-evaluated to US$ 220mn from US$ 200mn. The plant will be run by the Gardabani TPP LLC with funding from both GOGC and PF, where each invests US$ 50mn of equity and GOGC provides an additional US$ 120mn in debt financing to the Gardabani SPV. Upon completion, GOGC will own a 51% equity stake in Gardabani, while the PF will retain the remaining 49%. PF’s US$ 50mn equity investment will be financed from a loan of the same amount that GOGC made to PF for the plant’s construction in 2012. It will be repaid by the PF over 2015-2019.
Eurobond covenants in-check, liquidity still strong
GOGC’s 2.7x FY12 and projected 3.1x FY13 net debt-to-EBITDA ratios leave the company in compliance with the 3.5x Eurobond covenant. The expected rise in the ratio in 2013 will be driven by US$ 120mn in outflows related to Gardabani’s construction. Term deposits (US$ 41mn in 1H13) are included as cash equivalents in adjusted net debt calculations, which lowers the ratio to 2.1x in FY13. We do not include an un-tapped overdraft facility of US$ 53mn in net debt calculations, but note that it does provide an additional liquidity buffer.
