Fitch Affirms Guacolda's IDRs at 'BBB-'; Outlook Stable
The Rating Outlook is Stable.
KEY RATING DRIVERS
Guacolda's ratings reflect the strong operational support of its controlling partner, AES Gener S. A. (Gener; IDR 'BBB-'/Outlook Stable), its solid business position supplemented by the efficiency of its operations, competitive generation costs, and the favorable geographic location of its generation units.
The ratings incorporate Guacolda's adequate financial structure and manageable amortization schedule. Company debt consists of a USD500 million senior unsecured bond and a USD330 million senior unsecured amortizing term loan. This debt is in-line with the company's expected cash flow generation given that peak capex spending is complete. Guacolda's investment-grade ratings incorporate its relevant commercial strategy based on contracts that represent 87% of the firm's contracted energy capacity. The contracts are mainly with non-regulated clients and carry a weighted average life of approximately five years.
Strategic Parent Relationship: Guacolda benefits from the relationship with its shareowners, Gener and Global Infrastructure Partners (GIP). Gener, which owns a co-controlling majority stake (50% plus one share), operates the company within its broader platform, providing Guacolda with increased purchasing power and significant replacement flexibility as an integrated Gener asset. The shareholders' agreement with Gener provides Guacolda with a high level of strategic independence. Long-term leverage targets of 3x are a key clause of Guacolda's agreements with Gener and GIP.
Although Gener does not consolidate Guacolda into its financial statements, the company does maintain operational control through its shareholder agreement with GIP. Additionally, Gener integrates both companies' administrative personnel, aligns Guacolda's strategy with its own, and has centralized Guacolda's coal procurement process into the parent company's overall coal purchases, thus strengthening the strategic ties between Guacolda and Gener.
Postponed Dividend Payments: Fitch forecasts Guacolda will halt dividend payments over the next two years. Guacolda does not have a stated dividend policy and indicated that shareholders have agreed to support the company during this period strengthening the linkage between Guacolda and Gener. The shareholder agreement between Gener and GIP maintains that Gener will target a long-term leverage ratio of 3x, and management believes it can be flexible with its dividend policy in order to reach this long-term goal. Fitch projects no dividends will be paid during 2016-2017 and a 100% net income dividend payout ratio starting in 2018, which is in line with historical payout rates for Gener subsidiaries.
Regulated Bids in 2016: Guacolda Energia S. A. (Guacolda) is an efficient coal-fired generation company that has customer contracts with investment-grade credit counterparties in the mining and energy distribution sectors. The contracts are balanced with its efficient generation capacity and possess long-term energy price indexation mechanisms to reduce exposure to price fluctuations. Given the company's efficient generation marginal cost structure, Guacolda has been well positioned to participate in bids for long-term regulated contracts since the fifth generation unit (Unit 5) came online in fourth-quarter 2015 (4Q15).
Manageable Capex: Now that Unit 5, which began construction in 2012, is operational, the company's peak capex is behind it. Capex from 2013 to 2015 totalled USD582 million, including USD220 million to add filters to Units 1, 2 and 4 to reduce environmental emissions. Fitch expects capex will be approximately USD70 million in 2016 - mainly associated with investments to comply with the emissions regulation - and will drop to about USD20 million per year on average in the future.
Slower Financial Results Improvement: Fitch expects Guacolda's leverage to remain stressed during 2016, and that EBITDA will improve and remain stable at approximately USD150 million-USD170 million per year for the next four years despite weak results reported in 2015. In 1H16, Guacolda's EBITDA totalled USD71million, which was 7% higher on a year-over-year (YoY) basis. Financial results in 2015 were hurt by lower spot prices and lower sales to both unregulated and regulated customers, in some part due to flooding in the region where Guacolda is located and early termination of the contract with the mining company Pascua Lama, temporarily exposing the company's revenue generation to sales in the spot market. During 1H16, the company was able to sign additional contracts with unregulated clients, mitigating its exposure to spot prices.
In the last 12 months (LTM) ended June 2016, the company generated EBITDA of USD127 million, 4% higher than in 2015 but approximately 12% lower than Fitch's initial expectations upon commencement of operations of Unit 5. This will result in a slightly slower deleveraging profile. Fitch expects that under stabilized EBITDA of USD150 million-USD170 million, Guacolda's net debt/EBITDA will be below 3.5x by 2018, which is consistent with an investment-grade rating.
Fitch's key assumptions within the rating case for Guacolda include:
--Annual net generation on average of 5,000GWh/year during the next five years;
--No dividend payments during 2016-2017 until the contracted capacity improves. Starting in 2017, dividend payout ratio of 100% net income;
--A full year of operations of Unit 5 in 2016, with total installed capacity of 760MW;
--Decoupling disappears in 2018 when the the Northern Interconnected System (SING) and the Central Interconnected System (SIC) are connected;
--Capex of USD72 million in 2016 decreasing to approximately USD20 million-USD25 million per year for 2017-2019;
--Variable costs on average of USD35-USD40 MW/h.
Failure to delever to under the 4x Total Debt/EBITDA level during the next three years would pressure credit quality. Financial deterioration in the company's controlling shareholders' financial profile could also trigger negative rating actions if this results in increased cash flow demands from Guacolda to the parent company.
Guacolda's ratings could be negatively impacted by a change in the company's strategy with respect to leverage, dividends and capital expenditures. In addition, a general deterioration in the credit quality of the current counterparties could also have a negative impact on Guacolda's ratings.
A positive rating action is unlikely in the short - to medium-term, as the company's leverage is expected to remain on the higher end for the rating category during the next two years. Long-term, a positive rating action could occur if the company executes on its delevering plan while retaining a strong contractual position with a diversified portfolio of high-credit-quality customers. Stable cash flow generation and sustained leverage levels below 3.0x could be a positive rating triggers as well.
Improving Liquidity Position: As of June 30, 2016, Guacolda had USD60 million in cash and equivalents and approximately USD43 million in undrawn and committed lines of credit with a local bank. This liquidity position of USD103 million covered 1.7x its short-term debt. The company's liquidity position is further supported by uncommitted and unused credit lines of approximately USD157 million.
Post-refinancing, the company pushed out its debt obligations with only USD28 million and USD57 million in debt amortization payments coming due in 2016 and 2017, respectively. The company is targeting a minimum USD25 million cash balance going forward, which it should be able to achieve due to reduced capital requirements.
FULL LIST OF RATING ACTIONS
Fitch is affirming the following ratings for Empresa Electrica Guacolda S. A.:
--Long-Term Foreign and Local currency IDRs at 'BBB-';
--International senior unsecured bond ratings at 'BBB-'.
The Rating Outlook is Stable.