November 14, 2016 - 5:53 PM EST
Print Email Article Font Down Font Up
Fitch Affirms Colbun S.A.'s IDR at 'BBB'; Outlook Stable

Fitch Ratings has affirmed the Foreign and Local Currency Issuer Default Ratings (IDRs) of Colbun S.A. (Colbun) at 'BBB', and long-term National scale rating at 'A+(cl)'. The Rating Outlook is Stable. A complete list of rating actions follows at the end of this press release.

KEY RATING DRIVERS

Colbun's ratings reflect the company's improved financial profile supported by a balanced contract position with favorable natural gas contracts and a diverse portfolio of generation assets operating in Peru and Chile where Fitch believes they benefit from favorable regulatory environments. Credit risks associated with the company include exposure to hydrological risk, which represents 41% of its total installed capacity, potential large acquisitions and/or significant capex investments, and possible environmental and/or political issues that could result in cost overruns or delays.

Colbun's equity rating reflects its shares' solid liquidity and 100% availability on the Santiago Stock Exchange during the October 2016 rolling 12-month period. In this period, the company had an average daily trading volume of USD1.9 million. Colbun's free float decreased to 40.5% from the 41.3% observed last year.

SLIGHTLY IMPROVED FINANCIAL PROFILE

Colbun improved its contracted position and operational performance with the start of operations of its efficient generation units. For the last 12 months (LTM) ended September 2016, the company reported total debt/EBITDA of 2.8x, decreasing from the average 4.0x observed during 2013-2015, more in line with the company's target leverage of 3.5x or below and its rating level. As of Sept. 30, 2016, Colbun's total debt was USD1.7 billion and its cash position was robust at nearly USD620 million.

BALANCED CONTRACTUAL POSITION

Colbun's ratings incorporate its relevant commercial strategy based on contracts that represent 94% of the firm's energy capacity. The contracts are balanced between regulated and non-regulated clients and carry a weighted average life of approximately 9.8 years. These contracts have adequate indexation mechanisms that closely match the company's generation mix and somewhat mitigate Colbun's exposure to fuel price volatility. Based on normal to dry hydrology conditions, Colbun's contract requirements are balanced with approximately 12,000 gigawatt hours (GWh) contracted per year.

RECONTRACTING RISK

Fitch believes Colbun will maintain an adequate contractual position in the long term; a change in Colbun's commercial policy that results in an imbalanced long-term contract position would be viewed negatively by Fitch. During 2020, the company's purchase power agreements (PPAs) start expiring, with approximately 37% of its current contracted capacity (12,000 GWh) exposed to recontracting risk by 2022.

Chile expects to have additional regulated auctions for approximately 24,000 Gigawatt hours (GWh) within the next four years; this may alleviate the pressure if the company is not able to re-contract the approximately 4,000 GWh expiring by 2022. Fitch believes the Chilean government will award the contracts for the next auctions based on the stability of the country generation matrix for the future. Chile has historically benefited from one of the most balanced regulatory frameworks in Latin America. Fitch believes the government will likely preserve a balanced generation matrix despite an increased participation of non-conventional renewable energy (NCRE) players. Additionally, Fitch expects Colbun and the other dominant players to continue to have a key role in the country's power generation.

FAVORABLE NATURAL GAS CONTRACTS

Under a scenario of dry hydrology, Colbun's contracted volume could be met with the company's natural gas units or by purchases on the spot market, although with a negative impact on margins. Positively, the company has extended its temporary natural gas contracts for its thermal units with Metrogas and Enap Refinerias S.A. (IDR: 'A'/Stable) until 2019. Fitch views the 20-year contract with GNL Chile positively as it secures regasification capacity at the Quintero terminal Open Season starting in 2021.

CREDIT-NEUTRAL ACQUISITIONS

Fitch considers the company's recent acquisitions to be in line with its growth and geographical diversification strategy. In December 2015, Colbun acquired 51% of the 570MW Peruvian thermoelectric power plant Fenix Power. The power plant has a favorable contracted situation, as 60% of its total generation is currently contracted with a weighted life of 7.5 years. EBITDA related to this terminal represents less than 10% of Colbun's consolidated EBITDA. Additionally, in April 2016, the company bought SunEdison's 202MW solar projects under development in Chile. Both transactions were partially financed with cash flow generation and cash on hand, thus having a neutral impact on Colbun's debt profile.

Colbun has an ambitious medium- to long-term regional expansion agenda. Fitch believes the company has sufficient liquidity coupled with strong cash flow generation to resume moderate M&A activities in the short- to medium-term as indicated by the company. Fitch expects Colbun will continue to be disciplined in its M&A activities and will remain committed to maintaining a capital structure that is commensurate with an investment-grade rating.

POSITIVE FREE CASH FLOW (FCF)

Colbun generated USD242 million of FCF as of LTM ended September 2016, mainly as a result of lower fuel costs. This compares with USD443 million of FCF during 2015 and negative USD193 million during 2014. During 3Q16, Colbun bought approximately 430GWh on the spot market to meet its contractual position, because of the dry season experienced during that period. Fitch expects dry conditions to remain until 2Q17, which will affect the company's FCF, since contractual positions should be met with fossil fuels or buying energy at spot market prices.

ROBUST EXPANSION SPENDING

Colbun is in the middle of a potential significant expansion with La Mina (34MW) currently under construction, and San Pedro (170MW) and Santa Maria (350MW) under development. Fitch believes the company will be able to finance the completion of these projects without a significant increase in debt, although we note that these major engineering developments increase execution and construction risk.

Fitch assumes the company will complete La Mina by 1Q17, and although construction of the San Pedro and Santa Maria II terminals remains at the early stage, we do not include these projects as part of our projections as they have not yet been approved by the company's board of directors. Fitch believes these projects can be financed with the company's own cash flow generation and its strong cash on hand. Any additional significant projects or cash outflows could pressure the company's credit profile.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Colbun include:

--EBITDA generation rises to between USD600 million-USD650 million/year by 2019;

--Contracted energy sales in Chile of approximately 12,000GW;

--Installed capacity increasing to 3,886MW in 2017 once La Mina is completed. As part of the expansion plan in Peru, contracted energy sales in this country reach nearly 3,000GW;

--Average annual capex investments of USD60 million during the next four years related to maintenance capex;

--Dividend payments of 30% of net income.

RATING SENSITIVITIES

A change in Colbun's commercial policy that results in an imbalanced long-term contracted position would be viewed negatively by Fitch. In addition, the company's inability to re-contract a significant portion of its expiring contracts could affect the company's credit profile. Finally, a material and sustained deterioration of credit metrics reflected in total consolidated debt-to-EBITDA ratios above 3.5x could result in a negative rating action.

Fitch believes that a positive rating action is limited at this time because of the expected capacity expansion over the next few years.

LIQUIDITY

Colbun has maintained a solid liquidity position with approximately USD620 million of cash and cash equivalents as of September 2016, compared with USD42 million of short-term debt. Colbun enjoys an extended maturity profile; during 2016, the company repaid two long-term loans and a local bond, improving the company's maturity profile. Additionally, Colbun refinanced approximately USD366 million of Fenix's outstanding debt after its acquisition. The company's liquidity is further buoyed by uncommitted credit lines of approximately 150USD million and other lines related to commercial paper totalling USD100 million.

FULL LIST OF RATING ACTIONS

Fitch affirms the following ratings for Colbun S.A.:

--Long-Term Foreign and Local currency IDRs at 'BBB';

--International senior unsecured bond ratings at 'BBB';

--Long-term national scale rating at 'A+(cl)';

--National senior unsecured bond ratings at 'A+(cl)';

--National commercial paper long- and short-term ratings of 'A+(cl)' and 'N1+(cl)';

--National Equity Rating at 'Primera Clase Nivel 2 (cl)'.

The Rating Outlook is Stable.

Date of Relevant Rating Committee: Nov. 11, 2016

Additional information is available on www.fitchratings.com.

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014757

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014757

Endorsement Policy

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

Fitch Ratings
Primary Analyst
Cinthya Ortega
Director
+1-312-606-2373
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Alejandra Fernandez
Director
+56-2-2499-3323
or
Committee Chairperson
Lucas Aristizabal
Senior Director
+1-312-368-3260
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
[email protected]


Source: Business Wire (November 14, 2016 - 5:53 PM EST)

News by QuoteMedia
www.quotemedia.com

Legal Notice