Fitch Affirms Angamos at 'BBB-'; Outlook Stable
The Rating Outlook is Stable.
KEY RATING DRIVERS
Angamos' ratings reflect the sound structure of the company's long-term commercial agreements with counterparties with a weighted average investment-grade rating, which allow the company to generate predictable cash flows. The company's power purchase agreements (PPAs) have an average life of 14 years and provide stable, fixed monthly capacity charge payments. The PPAs also allow for the pass-through of variable costs to the company's counterparties. Furthermore, the ratings are supported by operational and implicit support from the company's owner, AES Gener S. A. (Gener; IDR 'BBB-'/Stable Outlook).
Strong PPAs: The company's ratings are supported by the strength of Angamos' PPA counterparties which have a weighted average investment-grade credit quality. The company is fully contracted and the PPAs have an average 14-year tenure with a stable, fixed monthly capacity charge structure. The PPAs allow for the full pass-through of variable costs including for fuel and non-fuel costs, and certain changes in laws.
The capacity contracted under the PPAs is as follows: 1) Minera Escondida Limitada (MEL) - 340MW with a maturity date of June 2029; 2) Minera Spence S. A. (Spence) - 90MW with a maturity date of October 2026; and 3) Minera Quebrada Blanca (QB) - 80MW with a maturity date of December 2037. The QB PPA was signed in 2012 with the commercial operation date (COD) expected in 2018, at which time Angamos will begin receiving the fixed monthly charge. At that point, the company's capacity will be approximately 100% contracted. Furthermore, the contracts have comprehensive force majeure terms that add to cash flow predictability.
Deteriorating Counterparty Risk: Further strengthening the company's contractual position is the fact that Angamos' counterparties' weighted average credit quality is investment grade. Both MEL and Spence are controlled by BHP Billiton Ltd. (IDR 'A+'/Negative Outlook). QB is majority owned by Teck Resources Ltd. (IDR 'B+'/Negative Outlook). QB is one of Angamos' offtakers; and its offtaker's overall credit quality deterioration may be credit negative for Angamos as counterparty risk increases. Nevertheless, Fitch believes the downgrade of Teck's ratings to 'B+' does not have an immediate impact on Angamos' ratings, as QB represents only 15% of the company's contracted capacity starting in 2018. In addition, Teck's counterparty risk is further mitigated by a letter of credit issued by several strong international banks protecting Angamos from further deterioration of Teck's credit quality. Finally, the overall weighted average credit quality of the offtakers remains investment grade. Further ratings downgrades to BHP or Teck that result in a weighted average rating below 'BBB-' could have a negative impact on Angamos' ratings absent additional protections.
Fitch's multiple-notch downgrades of Teck over the past year reflected the continued decline in metal and coal prices, resulting in weaker results and increased leverage which is not expected to improve until 2018. On the other hand, Fitch revised BHP's Outlook to Negative from Stable in June 2015. The Negative Outlook reflects BHP's elevated financial metrics for the rating given the negative pressure in the industry resulting in declining commodity prices. Fitch expects BHP to implement cash preservation measures including cost and capex cutting, which should improve its metrics by 2018.
Stable Free Cash Flow (FCF): As the company's PPAs have been designed to generate stable payments, Angamos has been generating positive FCF since its first full year of operations in 2012. During the last three years the company's capex has declined to maintenance levels of USD5 million-USD10 million. During the final construction periods and commercial launch in 2010-2011, the company spent USD510 million in capex. Going forward, Fitch projects the company to average capex of USD9 million per year, with FCF averaging approximately USD30 million/year over next five years.
Stable Financial Results: In the first half of 2016 (1H16), Angamos' EBITDA generation totalled USD62.3 million, which was 19% higher on a year-over-year (YoY) basis. Improved results are explained by higher volumes of sales to the spot market at higher average spot prices in the Northern Interconnected System (SING), aided by a reduction in coal prices. Additionally, during 2016 Angamos partially redeemed USD199 million of its outstanding bonds, refinanced with a bank loan at a 37.5-bps lower interest rate. In the last 12 months (LTM) ended June 2016, Angamos reported consolidated adjusted EBITDA of approximately USD120 million, which is 9% higher than 2015 results and 7% higher than 2014. EBITDA margins have remained relatively stable at between 35%-38%. Overall, financial results have come in marginally lower than Fitch's forecast. Until the company initiates the supply of energy to the mine project Quebrada Blanca, the company will have approximately 80MW of its installed capacity exposed to the spot market. Fitch's Base Case forecast for Angamos was pared back to reflect lower spot prices related to the 80 MW in capacity sold on the spot market until the Quebrada Blanca contract comes online in 2018.
Strong Parent Relationship: The company benefits from the implicit and operational support of its parent company, Gener, which owns 100% of the company's equity. Although Gener does not provide a guarantee for the company's debt, Angamos is one of the parent company's key assets. Overall, considering the entrance of new capacity already completed, Gener has 5,298 MW of installed generating capacity, of which its Angamos assets represent roughly 11%. Angamos generated nearly 15% of Gener's consolidated EBITDA in 2015, and dividends from the subsidiary will become an important source of cash flow for Gener, as it is engaged in two major generation construction projects (Alto Maipo and Cochrane). Angamos has secured service agreements with Gener to provide long-term technical, fuel supply and O&M support. Furthermore, Angamos and adjacent sister plant, Cochrane, have also signed long-term commercial agreements that will eventually yield incremental revenues for Angamos.
Dividend Payments Begin: In 2016, Fitch expects the company to begin making substantial dividend payments to its parent. Angamos will not begin making amortization payments on its corporate bond until 2018, so for the 2016-2018 period Fitch expects the company to be making maximum dividend payments. Once amortization payments begin in 2018, dividends should be substantially pared back.
Solid Debt Service Coverage: The company's high leverage is mitigated by solid debt service coverage provided by strong contracts generating an highly stable source of cash flow. Fitch's base case assumes the company will average a debt service coverage ratio (DSCR) of approximately 2.0x for the life of the bond. The average is skewed by the 3.5-year grace period when the DSCR would average around 3.0x. Fitch's base case expectations for a median DSCR of 1.5x, is consistent with the rating category.
Fitch expects leverage metrics to remain high for the rating category in the short - to medium-term, declining when the company begins making principal amortization payments starting in 2018. Despite the expected elevated leverage metrics over the medium term, the combination of the fixed payment structure of the company's PPAs and the amortizing nature of the bond should lead to fairly stable DSCRs for the life of the bond.
Fitch's forecast assumes the company's leverage levels will remained pressured during 2016 at approximately 7.0x, with overall leverage defined as adjusted debt/EBITDA declining to under 5x starting in 2019. On a sustained basis, Fitch expects leverage to decline to under 4x by 2021. In terms of interest coverage, EBITDA/gross interest expense should slowly improve from 3x currently to 6x within five years, with a median interest coverage level of approximately 4.5x for the life of the bond.
Fitch's key assumptions within the rating case for Angamos include:
--Energy sales of approximately 3,600 GWh/year until Quebrada Blanca comes on-line in 2018 and energy sales rise to 3,800 GWh/year;
--Fitch's base case assumes Quebrada Blanca mine project cash flow streams begin as planned in 2018;
--EBITDA generation to average approximately USD120 million/year in the short - to medium-term, with a step-up to the USD140 million/year level starting in 2018;
--Capex of USD9 million per year;
--Leverage declining to below 5.0x level in 2019 as debt amortization payments begin.
Angamos' ratings could be negatively impacted by a change in the company's strategy with respect to leverage, dividends and capital expenditures. Additional substantial indebtedness before the bond matures would be viewed negatively. The ratings could be affected if there is a change in commercial strategy that would lead to an over-contracted position for the Angamos plant. In addition, the company signing new PPAs that are dissimilar in nature to the current PPAs would be a negative factor (e. g. a move away from fixed payments, shorter PPA tenors than the tenor of the debt, etc.). A general deterioration in the credit quality of the offtakers could also impact the ratings of Angamos.
A positive rating action is unlikely in the medium term as the Angamos bond's annual debt service requirements are appropriately sized with the company's predictable cash flow generation, and coverage is in line with the rating category. The company's credit quality could also improve if cash flow generation increases as a result of significant gains in operating efficiency, such as reducing the company's heat rate.
Sufficient Liquidity: Fitch believes Angamos has adequate liquidity to support its financial needs despite the heavy dividend payments the company will be engaging in during the bond's amortization payment grace period. Once the QB contract becomes effective in 2018, Fitch is projecting that the company will average FCF before dividends of USD70 million-USD80 million. The company is targeting a cash cushion of USD30 million, for working capital purposes, which should be attainable despite the high dividend payouts forecast.
FULL LIST OF RATING ACTIONS
Fitch is affirming the following ratings for Empresa Electrica Angamos S. A.:
--Long-Term Foreign and Local Currency IDRs at 'BBB-';
--International senior secured bond ratings at 'BBB-'.
The Rating Outlook is Stable.