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Rating Action:

Moody's downgrades Peru LNG's notes to Ba3; outlook stable

06 Dec 2019

New York, December 06, 2019 -- Moody's Investors Service (Moody's) downgraded PERU LNG S.R.L.'s (PLNG) senior unsecured ratings on the company's existing notes to Ba3 from Baa3. Simultaneously, Moody's withdrew PLNG's Baa3 issuer rating and assigned a Ba3 corporate family rating to the company. The rating actions were driven by weak cash flows and Moody's expectation that PLNG's credit metrics will remain weak in the foreseeable future. The rating outlook is stable. This concludes the rating review for downgrade initiated on 3 September 2019.

Downgrades:

..Issuer: PERU LNG S.R.L.

....Senior Unsecured Regular Bond/Debenture, Downgraded to Ba3 from Baa3

Withdrawals:

..Issuer: PERU LNG S.R.L.

.... Issuer Rating, Withdrawn , previously rated Baa3

Assignments:

..Issuer: PERU LNG S.R.L.

.... Corporate Family Rating, Assigned Ba3

Outlook Actions:

..Issuer: PERU LNG S.R.L.

....Outlook, Changed To Stable From Rating Under Review

RATINGS RATIONALE

PLNG's cash flow is vulnerable to volatile natural gas prices and to production disruptions caused by adverse weather conditions or unplanned plant maintenance, among others. The company will take measures to reduce its exposure to i) adverse weather conditions that affect loading vessels mainly in winter months (May through July) and ii) price volatility. However, Moody's expects that major improvements in cash flow are unlikely in 2020-21 given the rating agency's negative view on natural gas prices and the company's plans to invest in 2020-21 higher amounts of capital than originally anticipated.

PLNG's cash generation so far in 2019 has been weak mainly due to lower liquefied natural gas (LNG) prices than Moody's had expected for the year but also due to lower production. In the first nine months of 2019, although the company had sold close to 100% of its cargos to non-Henry Hub markets, which have recently had better commercial conditions, its average LNG price fell to $4.21 per million British thermal units (MMBtu) from $6.83/MMBtu in the same period in 2018. In addition, volumes were affected by an unplanned plant shutdown of 16 days, related to works in the Main Cryogenic Heat Exchanger and Dry Gas Flare, as well as adverse weather conditions that caused a 30-day closure of the port where Peru LNG delivers LNG cargoes; as a result, the company's plant was closed for 46 days in the second quarter 2019.

For the full-year 2019, Moody's expects PLNG's production in the range of 208-212 trillion British thermal units (TBtus) and EBITDA to reach $100 million, which is well below management's original expectations for the year, of about $200 million. As a consequence, Moody's estimated that PLNG's reported debt/EBITDA will be over 9 times in 2019, with a low likelihood of a sharp decline in 2020 due to weak LNG prices given limited prospects for robust global economic growth.

PLNG's Ba3 ratings are based on its high leverage, small and single operational asset base, as well as its exposure to natural gas and LNG prices and adverse weather conditions, which brings in operating and financial risk. These factors are counterbalanced by PLNG's low supply risk, high capacity utilization rate, limited competition risk, minimum foreign-exchange risk, adequate financial policies, strong shareholder support and the high relevance of the company to Peru's trade balance and energy industry.

PLNG has adequate liquidity. The company's cash on hand amounted to $70 million in September 2019 and we estimate that it will generate about $75 million in cash from operations from October 2019 through December 2020. Interest expenses and capital spending in the period will be about $51 million and $21 million, respectively, and Moody's understands that the company will not pay dividends related to 2019. Most of PLNG's accounts payable are related to the $110 million in credit received from off-taker SITME, which has no specific maturity date. PLNG's debt maturity is comfortable because the amortization of the existing notes begins in September 2024. The company has a $75 million committed revolving credit facility that matures in 2021.

The stable rating outlook reflects Moody's expectation that PLNG's credit profile will remain for the most part unchanged in 2020 but will start an improving trend in late 2021.

PLNG's Ba3 ratings could be upgraded if it manages to decrease leverage efficiently, as per EBITDA to gross debt below 6 times on a sustainable basis, as well as if maintains an interest coverage above 3.5 times, as per EBITDA to interest expense.

In turn, PLNG's Ba3 ratings could be downgraded if its interest coverage falls to below 2 times with limited prospects of a quick turnaround. In addition, a deterioration of the company's liquidity profile and an increase in leverage above to 10 times could lead to a rating downgrade.

The principal methodology used in these ratings was Midstream Energy published in December 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

PLNG, based in Lima, has a 4.45 million tons per annum (mmtpa) natural gas liquefaction plant located in Pampa Melchorita (Cañete), a marine terminal, and a 408-kilometer pipeline that transports natural gas from the Camisea fields (Cusco, Peru). The company is committed to selling 218 TBtus of LNG per year to a subsidiary of Shell (SITME), which has committed to take-or-pay this annual volume (95% of PLNG's total capacity) until 2028. In the last twelve months ended in September 2019 it posted revenues of $674 million and EBITDA of $140 million.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Nymia C. Almeida
Senior Vice President
Corporate Finance Group
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