GOGC released audited FY18 results. Reduced demand on natural gas due to mild winter decreased both, the revenue and expenses of the company. Revenue was down 5.3% y/y to US$ 253.6mn and operating expenses decreased 3.4% y/y to US$ 182.5mn. Notably, less favorable contractual terms for pipeline rentals and one-off costs related to legal fees weighed on profitability in 2018. Therefore, adjusted EBITDA decreased 7.4% y/y to US$ 86.8mn. Importantly, expected growth in gas consumption and related increase in gas purchase costs will temporarily deteriorate profitability metrics in 2019. Significant cash outflows related to the Gardabani 2 construction is another channel effecting negatively the net-debt-to-adjusted EBITDA ratio, which expected to reach 3.1x in 2019, still below Eurobond covenant of 3.75x. From 2020, Gardabani 2 commissioning and availability of increased cheap gas volumes from SCP are seen as major channels supporting significant improvement in GOGC’s profitability. Notably, Fitch upgraded company’s credit rating to BB in March 2019 matching that of Sovereign, backed by GOGC’s solid financial position, diversified cash flow streams and strong monopoly in Georgia’s energy sector.
Mild winter reduced revenue. FY18 revenue was down 5.3% y/y to US$ 253.6mn as gas sales volume reduced due to favorable weather conditions. Gas sales decreased 5.7% y/y in 2018, still remaining largest revenue item (56.3% of the total). Electricity sales made up 32.5% of total revenue and increased 3.6% y/y to US$ 82.5mn. Revenue from rent of pipelines dropped 30.4% y/y to US$ 16.6mn due to revised contractual terms, which are less favorable.
Lower gas purchases reduced operating expenses. Cost of gas, the largest operating expense category (79.4% of the total) was down 7.4% y/y to US$ 145.0mn in 2018. Operating expenses were down 3.4% y/y to US$ 182.5mn, driven by lower gas purchase costs, while one-off costs related to legal fees increased. Low demand limited gas purchase costs, with average prices remaining flat y/y at US$ 95.4/mcm in 2018. These flows resulted in 6.4% y/y reduction in adjusted EBITDA, which came in at US$ 86.8mn in 2018.
Expected gas demand growth to deteriorate profitability in 2019 before significant improvement from 2020. We expect the average gas purchase price to increase 13.0% y/y to US$ 107.9 in 2019 as enhanced SCP’s throughput will be still insufficient to satisfy the growing gas consumption. As a result, 2019 adjusted EBITDA expected to slide to US$ 54.9mn compared to US$ 86.8mn in 2018. The trend is set to reverse from 2020, helped by increased share of cheap gas from SCP and launch of Gardabani 2.
Electricity will make up c. 45% of revenue from 2020. Commissioning of Gardabani 2 from 2020 expected to generate c. US$ 66.0mn in revenue from electricity sales and add c. US$ 26.0mn to 2020 EBITDA. This revenue stream and decreased cost of gas expected to significantly strengthen GOGC’s financial position from 2020. We forecast adjusted EBITDA to rise to US$ 90.1mn and US$ 96.9mn in 2020-21, respectively.
KfW approved US$ 150mn loan for gas storage construction, which is expected to be finalized by 2022-23.
Temporary deterioration of the company’s profitability and credit metrics will push net-debt-to adjusted EBITDA from 1.4x in 2018 to 3.1x in 2019. However, improved financial position from 2020 expected to bring the ratio back to around 1.5x over 2020-21.
