Fitch Affirms Guacolda's IDRs at 'BBB-', Outlook Stable
The Rating Outlook is Stable.
KEY RATING DRIVERS
Guacolda's ratings reflect the generation company's (Genco) solid business position, which is supplemented by the efficiency of its operations, competitive generation costs, and the favorable geographic location of its generation units. In addition, the ratings reflect the company's strong operational support of its controlling partner, AES Gener S.A. (Gener, Fitch IDR 'BBB-'; Outlook Stable).
The ratings incorporate Guacolda's adequate financial structure and manageable amortization schedule. The company's debt is comprissa 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 appropriate commercial strategy based on long-term contracts that represent a high percentage of the firm's contracted firm energy capacity. The contracts are well-diversified between regulated (electricity distributors) and non-regulated (high credit quality mining companies) clients, and have an average length of nine-and-a-half years.
Strategic Parent Relationship: Guacolda benefits from the operational support of its co-controlling partner, AES Gener S.A. Gener (Gener) owns a controlling majority stake (50% plus one share) of the company's equity, while Global Infrastructure Partners (GIP) owns the remaining stake. Although it does not guarantee the company's debt, Guacolda is one of AES Gener's key operating assets. Overall, Gener has 5,082MW of installed generating capacity, of which Guacolda represents roughly 12%. Guacolda's efficient generation plants represent a significant economic value for Gener, and Fitch would expect support of this investment from its partners in case of adverse conditions. Gener operates Guacolda within the broader AES platform, guiding the company's commercial strategy, providing Guacolda with increased purchasing power and significant replacement flexibility as an integrated asset within the broader AES structure.
Fitch believes that the March 2014 transaction in which Gener acquired a majority stake in Guacolda has strengthened the operational/strategic ties between Guacolda and Gener. Importantly, via the transaction the company added a committed, strong shareowner in GIP. Although Gener does not consolidate Guacolda into its financial statements, the company does maintain operational control through its shareholder agreement with GIP. Post-transaction, Gener has been able to integrate both companies' administrative personnel, align Guacolda's strategy with its own, and centralize Guacolda's coal procurement process into the parent company's overall coal purchases. The shareholders' agreement with GIP provides the company with a high level of strategic independence, with stated long-term leverage targets of 3x being a key clause of the agreement.
Balanced Contractual Position: Assuming four generation units operating normally, the company's customer contracts are balanced versus Guacolda's efficient generation capacity. In a possible adverse scenario leading to generation shortfalls, these obligations would be covered via purchases in the spot market. Guacolda's sales contracts possess long-term energy price indexation mechanisms, which have reduced Guacolda's exposure to price fluctuations in the Central Interconnection System (SIC). In addition, the company's major clients in the mining and energy distribution sectors maintain investment-grade credit quality. After Unit 5 comes online, most of the capacity will be initially sold in the spot market but the commercial strategy is to participate in upcoming power bids. In 2015, the company will be bidding for 1,200GWh in 20-year contracts with energy supply scheduled to start in 2017. In early 2016, Guacolda will participate in the power bid of up to 13,500GWh for contracts of up to 20 years with regulated clients (supply start is scheduled for 2021). Given the company's efficient generation marginal cost structure, Unit 5 should be well-positioned for the bidding process.
Operating Weakness in 2014: In 2014, the company's financial performance was significantly lower than 2013 results. EBITDA of USD129 million was 22% below 2013 results, as margins contracted by approximately 500 basis points to 25% versus approximately 30% in 2013. This shortfall was mainly due to a price decoupling which occurred in the electrical system during 2014 due to temporary transmission restrictions during a dry hydrology year. In addition, results were negatively impacted by a longer than expected maintenance outage of the plant's Unit 4. These negative impacts took place while the company was investing heavily on the construction of Unit 5, leading to weakened credit metrics for the year. Results have begun to rebound in 2015 as the LTM June 2015 EBITDA of USD132 million is 2% higher than 2014 results, with margins increasing by 90 basis points.
Credit Metrics to Improve: Given the factors which led to operating weakness in 2014, plus a USD117 million increase in financial debt mainly related to the construction of Unit 5, the company's leverage metrics weakened in 2014. Leverage defined as total debt-to-EBITDA increased from 3.6x in 2013 to 5.5x in 2014. Positively, coverage metrics remained solid at EBITDA-to-gross interest expense of 7.3x versus 7x in 2013.
Fitch expects the company's credit metrics to remain relatively stressed in 2015, rebounding as the plant's Unit 5 begins operations in the fourth quarter of 2015 (4Q15). Also, the company's transmission bottleneck has been partly solved after installing EDAG systems in January 2015 that helped to increase transmission capacity between Maitencillo and Quillota from 220MW to 350MW.
Fitch expects the company's EBITDA to improve to the USD150-USD160 million level for 2015, implying a slight deleveraging to 5-5.5x. Long-term, with Unit 5 in operation for a full year in 2016 and amortization payments for its amortizing bank term loans beginning in that same year, Fitch expects the company to steadily delever and achieve long-term leverage of total debt/EBITDA of 3.5x by 2018, which is consistent with an investment-grade credit rating given the company's contracted position.
Peak Capex Behind: In the last quarter of 2012, Guacolda commenced construction on the plant's fifth unit (Unit 5), which will have an expected total cost of USD455 million and adds 152MW of installed capacity. As of August 2015, the project is 99% complete and the unit is on schedule to be operational in 4Q15. Capex during 2013-2014 totaled nearly USD467 million, mainly due to the construction of Unit 5, and the USD220 million investment to add filters to Units 1, 2 and 4 to reduce environmental emissions. Fitch expects capex to be USD150 million in 2015 as both projects are completed, with average capex of USD20 million/year going forward.
Dividends to Begin: Fitch expects the company to begin paying dividend payments in 2015. The company does not have a stated dividend policy, citing many factors to be considered including net income obtained during the year, year-end projections, financing needs for projects, and compliance with credit agreement restrictions. The shareholder agreement between AES Gener and GIP maintains that the company 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 is projecting a 100% of net income dividend payout ratio starting with 2015, which is in line with historical payout rates for AES Gener subsidiaries.
RATING SENSITIVITIES
Failure to delever to under the 4x total debt/EBITDA level during the next three years would pressure credit quality. A financial deterioration in the company's controlling shareholders' financial profile could also trigger negative ratings actions if this condition 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 negatively impact Guacolda's ratings.
A positive rating action is unlikely in the short- to medium-term as the company's debt to be used for refinancing does not begin amortization payments until after a one-year grace period, and 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 3x could be a positive rating trigger.
LIQUIDITY AND DEBT STRUCTURE
Liquidity Position Improving: As of year-end 2014, Guacolda had USD62 million in cash and equivalents and USD45 million in undrawn and committed lines of credit with a local bank. This liquidity position of USD107 matched the company's short-term debt obligations of USD107 million. Post-refinancing, the company pushed out its debt obligations with only USD55 million in debt amortization payments coming due in 2016 (after a one-year grace period on the new bank loans). As of June 2015, the company had USD91 million in cash and equivalents versus $8.5 million in short-term debt. The company is targeting a minimum USD25 million cash balance going forward, which it should be able to achieve due to reduced capital requirements despite a 100% dividend payout rate.
KEY ASSUMPTIONS
--Power generation sales averaging 5,000 GWh/year during next five years;
--EBITDA generation reaching the USD200 million/year level in the near/medium term;
--Capex of USD150 million in 2015, with average capex of USD20 million per year going forward;
--Dividend payout ratio of 100% of net income starting with 2015;
--Leverage slowly declining to a long-term target level of 3x.
Fitch is affirming the following ratings for Empresa Electrica Guacolda S.A.:
--Foreign and local currency IDRs at 'BBB-';
--International senior unsecured bond ratings at 'BBB-'.
The Rating Outlook is Stable.
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