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