Fitch Ratings has taken the following rating actions for Capex S.A.
(Capex):
-- Long-Term Foreign Currency (LT FC) Issuer Default Rating (IDR)
affirmed at 'B';
-- Long-Term Local Currency (LT LC) IDR upgraded to 'B+' from 'B'.
The Outlook is Stable.
Fitch has also affirmed the 'B/RR4' long-term rating for Capex's senior
unsecured notes due 2018. The 'RR4' rating for the outstanding notes
reflects an average expected recovery given default and is in line with
the RR soft cap established for Argentina.
The upgrade of the company's LC IDR reflects the recent regulatory
changes resulting in more favorable prices for electricity and natural
gas and the company's deleveraging trajectory, which Fitch expects to
continue. The LC IDR rating action also reflects recent end-users'
tariff increases aimed at reducing the electricity sector financial
deficit.
KEY RATING DRIVERS
Capex's ratings reflect the high regulatory risks associated with
operating in the electricity sector in Argentina, which is improving as
a result of the recent regulatory changes, foreign currency (FX)
exposure (currency mismatch between peso-denominated cash flows and
dollar-denominated debt), and the long-term need to pursue a robust
capital expenditure plan to sustain the company's vertically integrated
business model. Positively, in the last three fiscal years, Capex has
seen slightly constructive regulatory moves by the Argentine government
in the gas and electricity sectors. Such transformative reforms are
needed in the Argentine electricity sector; otherwise the long-term
financial viability of the sector remains uncertain.
Capex's 'B' LT FC IDR is constrained by the 'B' country ceiling of the
Republic of Argentina (Fitch LC and FC IDRs of 'B'). Fitch's country
ceiling of 'B' limits the FC rating of most Argentine corporates.
Country Ceilings are designed to reflect the risks associated with
sovereigns placing restrictions upon private sector corporates, which
may prevent them from converting local currency to any foreign currency
under a stress scenario, and/or may not allow the transfer of FC abroad
to service FC debt obligations. Since taking power in December 2015, the
Mauricio Macri administration removed FX controls introduced in 2011 and
increased the flexibility of the Argentine peso, which should contribute
to improving the capacity of the economy to absorb external shocks and
relieve pressure on international reserves.
HIGH REGULATORY RISK
Capex's ratings reflect high regulatory risk given strong government
influence in both the Electric/Utilities and Energy sectors. Capex
operates in highly strategic sectors where the government both has a
role as the price/tariff regulator and also controls subsidies for
industry players. Electricity and gas prices remain sub-optimal compared
with other countries in the region despite recent marked increases in
tariffs for end-users of between 200% and 300%. The deficit between
electricity tariffs and industry costs is funded through subsidies,
which are dependent on public funding. In the electricity sector, Capex
depends on payments from government agency Compania Administradora del
Mercado Mayorista Electrico S.A. (CAMMESA). Payments from CAMMESA can be
volatile given that this agency depends on the national government for
funds to make these payments. Electricity subsidies and transfers have
increased to approximately ARS140 billion in 2015 from ARS1.18 billion
in 2005. The government has implemented changes in tariffs for the past
few years. With the most recent tariff revision, the government aims to
save USD4 billion per year.
SLIGHTLY POSITIVE REGULATORY CHANGES
Fitch believes the recent resolutions implemented by the new government
reflect a trend of less government interference and discretion in the
power generation sector. Capex has benefited from recent positive
regulatory rulings in both the Oil & Gas and Electricity sectors.
In the Oil & Gas sector, the government stimulus plans to increase
natural gas has resulted in increased tariffs. Currently, two price
schemes for natural gas coexist: Res SEN 24/08 and Res 41/16. Under the
Gas Plus program (Res SEN 24/08), upstream companies receive a base
price for output along a base gas-production curve, and committed gas
production in excess of this is remunerated at
USD4.5/MMBTU-USD7.5/MMBTU. The benefits of the program are already
tangible for Capex. For the fiscal year ended (FYE) April 2016, the
company received approximately ARS257 million (USD23 million) related to
the government stimulus plan resulting in a year-to-year increase of 78%
in USD terms. Under a recently introduced scheme (Res 41/16), the
government increased the prices for natural gas destined for power
generation. For the Neuquen basin where the company operates, the
increase was 106% to USD5.5/mmbtu. Both schemes are in place until the
end of 2017.
In the electricity sector, during the last three years the government
has adjusted the remuneration scheme for GenCos operating under Res SEN
95/13, which has assisted the company in improving its financial
performance. Furthermore, the remuneration scheme was revised in
February 2016 (Res 22/16) to improve the remuneration conditions of the
GenCos selling at spot. This new revision adjusts upwards the
remuneration of fixed expenses, nonrecurring O&M expenses, and variable
costs (other than gas). Net-net, this new remuneration scheme would
result in a close to 50% increase in tariffs for Capex compared with the
previous year.
ADVANTAGEOUS VERTICAL INTEGRATION:
Capex is an integrated thermoelectric generation company whose
vertically integrated business model gives it an advantage over other
Argentine generation companies. Capex benefits from operating
efficiencies as an integrated thermoelectric generating company and from
the flexibility of having its own natural gas reserves to supply the
plant. This gives the company an advantage against other players in the
industry, especially given existing gas restrictions in the country.
Capex's generating units are efficient, and the proximity to its natural
gas reserves in the Agua del Cajon field coupled with gas transportation
restrictions from the Neuquen basin to the main consumption area in
Buenos Aires reduces the gas supply risk.
CAPITAL INVESTMENT NEEDS:
Fitch expects the company to invest approximately USD65 million in
capital expenditures during the next 12 months, with the vast majority
related to E&P in order to maintain reserves. The company reported
proved reserves of 32 million barrels of oil equivalent (mmboe) at
year-end 2015 (approximately 92% natural gas and 80% proved and
developed), relatively flat compared with the previous year. Natural gas
production remained relatively flat at 1.5 million cubic meters per day,
with oil production increasing approximately 17% year over year, but
still remaining negligible. Based on daily production of 9,560 BOE, the
company's overall reserve life is nine years. The company's capex
investment plan remains crucial as part of the vertical integration
strategy of the company.
FINANCIAL IMPROVEMENT
In large part, due to the government's slightly improved regulations,
the company has recorded improving financial metrics. On a dollar basis,
for the FYE April 2016, Capex registered EBITDA of USD92.8 million,
which is 40% higher than the previous year (USD66 million), mainly
attributable to a higher volume of hydrocarbon sales that resulted in
higher revenues associated to the natural gas stimulus plan, and higher
natural gas prices. EBITDA margins reached a historical high of 56%.
Fitch expects the company's EBITDA generation to range between
USD85-USD90 million with EBITDA margins similar to those observed during
the FYE April 2016.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Capex include:
-- Consistent double-digit currency depreciation per year; inflation in
ARS of 30% in 2016 decreasing to 17% by 2019
-- Energy production to range between 3,800GWh/year and 4,000GWh/year;
-- Natural gas sales prices stabilizing at USD5.5 per million BTU;
-- Overall, EBITDA to average approximately USD100 million/year;
-- Leverage in the 2.0x-3.0x level during next three years.
RATING SENSITIVITIES
Capex's ratings could be negatively affected by a combination of the
following:
-- Argentina's credit quality deterioration;
-- Given high dependence on the subsidies by CAMMESA from the Treasury,
any further weakening of Argentina's fiscal accounts could have a
negative impact on the company's collections/cash flow;
-- A significant deterioration of credit metrics; and/or
-- Sustained declines in gas reserves/production or failure to further
develop new fields, which could threaten the integrated business model
in the long-term.
An upgrade of Argentina's ratings and country ceilings may result in a
positive rating action.
LIQUIDITY
Solid Liquidity and Improved Leverage: As of April 2016, the company's
total debt was USD237 million, slightly lower than the USD250 million
reported in the FYE April 2015. Capex's long-term debt is primarily
composed of a USD200 million long-term bond with a March 2018 maturity
date. As of April 2016, the company reported cash and equivalents
totalling USD57 million versus short-term debt of USD21 million, giving
the company one of the strongest liquidity profiles for Argentine
corporates rated by Fitch. The company's leverage levels have steadily
improved due to the company's improved financial performance, as
leverage defined as Total Debt/EBITDA was 2.6x in 2016 vs. 3.8x in 2015
and 4.2x in 2013. Fitch expects for leverage to remain in the 3.0x-3.5x
range for the next three years.
FULL LIST OF RATING ACTIONS
Fitch has taken the following rating actions:
Capex S.A.
-- Foreign currency IDR affirmed at 'B';
-- Local currency IDR upgraded to 'B+' from 'B';
-- International senior unsecured bond ratings affirmed at 'B/RR4';
The Rating Outlook for the IDRs is Stable.
Date of Relevant Rating Committee: July 27, 2016
Additional information is available on www.fitchratings.com.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009672
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009672
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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