Fitch Affirms AES Gener's Ratings at 'BBB-'; Outlook Stable
--Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB-';
--International senior unsecured debt at 'BBB-';
--International junior subordinated debt at 'BB';
--National long-term ratings at 'A+(cl)';
--Domestic senior unsecured debt at 'A+(cl)';
--National equity rating at 'Nivel 2(cl)'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
Gener's ratings reflect the company's balanced contractual position and a diverse portfolio of generation assets. The ratings recognize that the company's major plants operate under constructive regulatory environments in Chile and Colombia. Credit risks include possible environmental and/or political issues, which could result in cost overruns or additional modifications on new and/or existing projects. The credit risks also include the less favorable though slightly improving regulatory environment in Argentina related to Termoandes, though this is mitigated given Argentina represented only 3.4% of consolidated EBITDA the first six months of 2016. In addition, the company could face pressure from AES Corp. ('BB-'/Outlook Stable), its controlling shareholder, to increase dividends above those forecast by Fitch. The company has sufficient liquidity to cushion itself through significant capex needs in the short - to medium-term, though its credit metrics are currently at the upper limit for the rating category.
Gener's equity rating reflects its shares' solid liquidity and 100% availability on the Santiago Stock Exchange during the August 2016 rolling 12-month period. In this period, the company had an average daily trading volume of USD2.204 million. Gener's free float increased to 33.33% from the 29.3% observed last year.
Improved Financial Results: In the first half of 2016 (1H16), AES Gener's EBITDA generation totalled USD345 million, which was 11% higher on a year-over-year (YoY) basis. The company achieved its highest-ever EBITDA generation results over the past five years, supported by higher margins in the Northern Interconnected System (SING) and the Central Interconnected System (SIC) in Chile and to a lesser degree improved results in the Argentine Interconnected System (SADI). Higher margins in the SING were explained as mainly due to new contracts with better terms and exports to Argentina, while improved margins in the SIC relate to higher demand from unregulated customers and increased spot sales. In Chile the company was the market-share leader in terms of generation volumes for 1H16, with a 30% share.
In the last 12 months (LTM) ended June 2016, the company generated EBITDA of USD739.5 million, which is 4.5% higher than in 2015 and 11% higher versus 2014. EBITDA margins have expanded from 28.7% in 2014 to 33.7% in the LTM June 2016. Overall, financial results have come in slightly better than Fitch's forecast.
Robust Expansion Spending: The company continues on an aggressive expansion phase which brings with it execution risk (e. g. construction delays, accidents, cost-overruns). In addition, the expansion plan has resulted in additional pressure on the company's free cash flow generation and credit metrics. Positively, the company has extensive history of finishing major projects on time and on budget. AES Gener's first phase of expansion took place between 2007-2013 during which time the company successfully expanded its generation capacity by 48% to reach 5,082MW of installed capacity at a total investment cost of USD3 billion.
The company is in the midst of what it has termed a second phase of expansion, which involves five major projects under construction that will increase installed capacity by 25%, with the total investment cost for this expansion phase expected to cost USD4 billion. In 2015, Unit 5 of Guacolda (152 MW coal-fired expansion) and the Angamos desalinization plant were completed. Also, during 1H16, Cochrane's Unit 1 (266 MW), the Solar Andes Project (21MW) and Colombian run-of-the-river Tunjita plant (20 MW) began operations.
AES Gener's largest projects under construction are Cochrane (532 MW) and Alto Maipo (531 MW run-of-the-river project) under a 60/40 joint venture with partners Mitsubishi Corporation ('A'/Negative Outlook) and Minera Los Pelambres S. A., respectively. Remaining capex associated with these projects is approximately USD1.1 billion, related mainly to the construction of Alto Maipo. Cochrane Unit 2 remains on schedule to become operational in 2016, while Alto Maipo will begin operations in late 2018 or 1H19. Alto Maipo is currently delayed by six monthsl. Fitch's base case assumptions were revised to reflect this delay and determined cost overruns of USD300 million-USD350 million.
Non-recourse Debt: Capex investment needs for the Cochrane (USD1.35 billion) and Alto Maipo (USD2.053 billion) projects were mainly financed through non-recourse debt of approximately 60% and 70%, respectively. AES Gener financed its equity contribution share with funds from subordinated notes (USD300 million) issued in 2013 and a subsequent USD150 million capital increase. The company's remaining equity contribution for these projects is approximately USD70 million.
Negative Free Cash Flow (FCF): Primarily due to cash outflows to fund the Cochrane and Alto Maipo projects, Fitch forecasts the company to be FCF negative in 2016-2018, becoming positive once Alto Maipo records a full year of operations. Fitch expects Cochrane and Alto Maipo to be significant positive cash flow contributors in 2017 and 2019, respectively. The company's financial strategy revolves around maintaining a balance between continuity of funding and financial flexibility through internally generated cash flows, bank loans, bonds, short-term investments, committed credit lines and uncommitted credit lines.
Pressured Credit Metrics: Given AES Gener is in the midst of an aggressive expansion plan, Fitch expects the company's credit metrics to remain pressured in the short - to medium-term. For the LTM ended June 2016, the company's consolidated debt-to-EBITDA and EBITDA coverage metrics were 4.8x and 4.5x, respectively. These ratios are weaker versus leverage levels of 4.1x and 4.3x in 2014 and 2013, though coverage ratios positively improved versus 4.1x in 2014.
Excluding the non-recourse debt and EBITDA of the Alto Maipo and Cochrane power plants, AES Gener's debt-to-EBITDA for the LTM June 2016 was 3.18x. Fitch expects the company's consolidated leverage levels to remain slightly above 5.0x in 2016 as the company receives further project finance disbursements - mainly for Alto Maipo, which is on the weak side for the rating category. Leverage levels should slowly decline to the 4x level starting in 2H17 as Cochrane comes on-line and begins generating meaningful cash flow. Fitch has revised its assumptions for Alto Maipo, and we expect this project to become a meaningful cash flow generator in 2019, contributing to consolidated leverage's decline to below 3.5x.
High Dividend Payment: AES Gener has a track record of high dividend payments, and Fitch expects the company to continue to pay out 100% of net income going forward. Cash flow could be further pressured during this expansion phase should this dividend policy be increased to a payout rate above 100% of net income.
Fitch's key assumptions within our rating case for AES Gener include:
--Cochrane begins positive contributions in 2016;
--Alto Maipo begins contributing in 2019, additional cost overruns of USD300 million incurred in 2019;
--Angamos Base Case forecast pared back to reflect lower spot prices as 80MW in capacity is sold in spot market until Quebrada Blanca contract comes online in 2018;
--Lower expected generation in Colombia in 2016 due to weaker hydrology and higher FX rate, partially mitigated by startup of Tunjita;
--Benefit of the resolution 482 in Argentina starting in 2016;
--SING/SADI transmission revenues lead to $10 million in incremental EBITDA starting in 2016;
--Guacolda dividends suspended during 2016-2017
A change in AES Gener's commercial policy that results in an imbalanced long-term contractual position would be viewed negatively by Fitch. In addition, a material and sustained deterioration of credit metrics reflected in total consolidated debt-to-EBITDA ratios above 4.5x-5x and total non-recourse debt-to-EBITDA ratios above 3.0x-3.5x on a sustained basis could result in a negative rating action. If the company develops additional significant projects previous to the start of Alto Maipo, it will be viewed negatively by Fitch. Additional delays on Alto Maipo beyond Fitch's expectations and/or additional significant cost overruns may also be viewed negatively.
Fitch believes that a positive rating action is limited at this time because of the expected capacity expansion over the next few years.
The company's liquidity is supported by USD468 million of cash on hand against USD128 million of short-term debt. Gener enjoys an extended maturity profile, with over 80% of debt coming due after 2020. The company's liquidity is further buoyed by committed and uncommitted credit lines of approximately USD236 million and undrawn credit lines totalling USD176 million.
FULL LIST OF RATING ACTIONS
Fitch is affirming the following ratings for AES Gener S. A.:
--Long-Term Foreign and Local Currency IDRs at 'BBB-';
--International senior unsecured bond ratings at 'BBB-';
--International junior subordinated bond ratings at 'BB';
--Long-term national scale rating at 'A+(cl)' ;
--National senior unsecured bond ratings at 'A+(cl)';
--National equity rating at 'Primera Clase Nivel 2(cl)'.
The Rating Outlook is Stable.