OREANDA-NEWS. Fitch Ratings has affirmed the foreign and local currency Issuer Default Ratings (IDRs) of Colbun S.A. (Colbun) at 'BBB', its long-term national scale rating at 'A+(cl)', and the national equity rating at 'Primera Clase Nivel 2(cl)'. Furthermore, Fitch affirms the company's national scale short-term and long-term commercial paper ratings at 'N1+(cl)' and 'A+(cl)' respectively. These rating actions affect, as of March 2015, approximately USD1 billion of outstanding international bonds and USD473.45 million of domestic bonds.

The Rating Outlook is Stable.

KEY RATING DRIVERS
Colbun's ratings reflect its diverse and improving portfolio of generation assets by energy source, its balanced long-term contracted position and a constructive regulatory environment. Credit risks associated with the company include exposure to hydrological risk, which represents 48% of its installed capacity, potential for large acquisitions and/or to increase capex, and possible environmental and/or political issues. The latter could result in cost overruns or modifications of projects under construction.

Balanced Contractual Position: Colbun benefits from long-term contracts with financially strong counterparties (power distribution companies and industrials). These contracts have adequate indexation mechanisms that closely match the company's generation mix and somewhat mitigates Colbun's exposure to fuel price volatility.

Based on a normal hydrology, Colbun's contract requirements are balanced and its contracted volume is expected to be in the 12,000 Gigawatt hours (GWh) per annum level and increasing as new projects come on-line. Under a scenario of dry hydrology, the contracted volume could be met with the company's natural gas back-up units or by purchases in the spot market, although with a negative impact on margins.

Favorable Temporary Gas Contracts: Positively, the company has extended its temporary natural gas contracts for its thermal units with Metrogas and Enap Refinerias S.A. (Fitch IDR: A/ROS). The company estimates this secures the company's needs for gas production of 2,300 GWh in 2015.

The contract with Metrogas had ensured the provision of natural gas during January to April of 2013, 2014 and 2015, and included the option of additional purchases outside such periods. In September 2014, the company signed an extension of this contract through 2019 with improved contractual conditions. The second supply contract is a short-term contract originally signed with Enap Refinerias S.A. in third quarter 2013 (3Q13) that provided natural gas supply for the other combined cycle unit of the Nehuenco Complex, from October 2013 to March 2014. The company negotiated to extend this supply contract with ENAP until September 2014, and then signed a further extension for the January to mid-April 2015 period.

Angostura Significantly Helps in 2014: The Angostura hydroelectric project was officially commissioned in April 2014, and became a significant contributing factor for Colbun. The plant generated incremental year-over-year sales totaling 1,301 GWh in 2014. The plant's launch increased the mix of cost-efficient energy sources for the company at the expense of more expensive fuel sources such as diesel. The plant, which cost USD760 million to build, is the largest hydroelectric plant built in Chile over the last decade and added 316 MW of generation capacity to Colbun. The plant is expected to generate 1,500 GWh of power production per year.

Generating Positive FCF: On a reported basis, in 2014 the company's free cash flow (FCF) was negative USD193 million as cash flow from operations was reported at negative USD59 million. This was the result of auditors classifying the company's short-term investments totalling USD579 million as a negative entry to operating cash flow (payments from contracts maintained for negotiations). Normalizing for this entry, operating cash flow would have been USD519 million and FCF would have been USD386 million, which is a large increase versus FCF of USD5 million in 2013. The company's short-term investments should be fully reclassified in its 2Q15 financial statements, which will eliminate this negative effect on the company's reported operating cash flow.

Isagen Sale Postponed: In April 2015, Colbun prequalified for the public auction of the Colombian government's equity stake of Isagen S.A. ESP (IDR: 'BBB-'/Stable Outlook). The government had scheduled the auction to sell its 57.66% stake in Isagen with the three final bidders (Colbun, GDF Suez, Brookfield Asset Management) for May 19. However, the sales process was suspended on May 14 by a Colombian court. The court has noted it may take two to three months for it to make a definitive ruling.

The company will remain in the bidding process, but it is uncertain if the equity sale will go forward. The equity stake was expected to be valued at a minimum of USD2 billion, which would make this a transformative acquisition for Colbun. If the deal does go through and Colbun wins the bid, depending on how the transaction was structured, it could pressure the company's credit metrics.

Manageable Growth Agenda: Colbun has an ambitious medium- to long-term expansion agenda. As the company returned to positive FCF generation and, given the company's strong cash position, Fitch is incorporating a significant expansion program during the next five years. In Fitch's view, the project build-out seems financially manageable without need for additional indebtedness. However, consistent with major engineering works, the projects do add to Colbun's execution and construction risk.

Fitch's forecast assumes that the company will execute on the following projects: San Pedro Hydroelectric Project (170 MW), La Mina Hydroelectric Project (34 MW), and the coal-fired Santa Maria II thermoelectric project (350 MW). The La Mina project is currently under construction, while the Santa Maria II and San Pedro projects are in the most advanced stages of development, but have yet to be approved by Colbun's Board of Directors. The San Pedro project also still awaits environmental approvals. Given the company's large cash holdings, Fitch believes these three projects can be paid with the company's own cash flow generation. Any additional projects or significant cash outflows could pressure the company's credit profile.

RATING SENSITIVITIES
After an extended period where Colbun's leverage and financial profile were relatively weak for the rating category, Colbun's leverage and coverage metrics have significantly improved and are now in-line with the rating category. Fitch expects that the company's leverage defined as Total Debt:EBITDA remains at 3.5x or below on a sustained basis. If the company's does not maintain the aforementioned leverage levels, this could result in a one-notch downgrade. In addition, if there is an imbalance in Colbun's long-term contracted position and/or if the performance of its larger, more efficient thermal plants is consistently below expectations, these factors could pressure the company's credit profile.

Due to a return to elevated capex expectations over the next four years due to upcoming plant construction projects, a positive rating action is not likely in the near future.

LIQUIDITY AND DEBT STRUCTURE
Large Cash Holdings: As of March 2015, Colbun's total debt was USD1.9 billion and its cash position was a robust USD817 million, resulting in net debt of USD1.1 billion. The company's liquidity is enhanced by its access to committed credit lines of approximately USD170 million. Fitch expects the company to use this cash to fund its expansion program, with expected minimum cash of approximately USD150 million during the next five years. The company should end the year at leverage levels (Gross Debt:EBITDA) of approximately 3x, with debt ratios remaining in the 3x-3.5x range during the next five years (under Fitch's base case investment scenario).

KEY ASSUMPTIONS
--Contracted energy sales of approximately 12,000 GW in the short- to medium-term rising as new capacity comes on-line;
--Company executes on La Mina, San Pedro and Santa Maria II projects;
--Peak capex in 2017;
--EBITDA generation rises to USD650 million-USD700 million/year by 2019;
--Dividend payout rate of 30%.

Fitch affirms the following:

Colbun S.A.
--Foreign and local currency Issuer Default Ratings (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.