OREANDA-NEWS. Fitch Ratings has affirmed Instituto Costarricense de Electricidad y Subsidiarias' (Grupo ICE) foreign- and local-currency Issuer Default Ratings (FC/LC IDRs) at 'BB+' and its National Scale ratings at 'AAA(cri)'. The Rating Outlook remains Negative. A complete list of rating actions follows at the end of this release.

Grupo ICE's ratings are supported by its linkage to the Sovereign rating of Costa Rica (FC and LC IDRs rated 'BB+'/Negative Outlook) which stems from the government ownership and government's implicit and explicit support. ICE's Negative Outlook reflects the Negative Rating Outlook on Costa Rica's Sovereign rating. The company has strategic importance for the government given the growing demand for electricity in the country and the government's plans to increase renewable generation and reduce exposure to fluctuations in fossil fuel prices. The ratings also reflect the company's diversified portfolio of assets, adequate financial profile, aggressive capital expenditure program oriented toward increasing renewable generation capacity and maintaining a strong market share position in the telecommunications business.

KEY RATING DRIVERS

DIVERSIFIED ASSET PORTFOLIO

Grupo ICE is a vertically integrated monopoly in the electricity industry and the incumbent player in the telecommunications industry in Costa Rica. ICE's mobile market share in terms of subscribers was approximately 60% at the end of 2014. The ratings reflect the company's low business risk resulting from its business diversification and positive characteristics as a utility service provider.

The company recorded an installed capacity of 2,338 megawatts (MW) as of August 2015, including plants of its subsidiary, Compania Nacional de Fuerza y Luz (CNFL). ICE is the exclusive owner of the national transmission grid. The National Electric System (SEN) is composed of Grupo ICE, CNFL, two municipal companies, and four rural electrification cooperatives. There are also private generators that sell energy to Grupo ICE. The SEN installed capacity is 3,013MW as of August 2015.

For the LTM ended September 2015 the company generated CRC397,458 million in EBITDA (2014 EBITDA: CRC419.282 million). The company's electricity segment represented approximately 56.7% of total revenues as of September 2015 (2014: 57.7%) and the telecommunications division contributed with 43.1% (2014: 42.1%), supplemental services represented 0.2% (2014: 0.2%). Fitch expects ICE's electricity business to increase its contribution given the current and future expansion projects, as well as relatively stable results in the telecommunications segment.

LEVERAGE DRIVEN BY CAPEX

Grupo ICE's ratings reflect the company's leverage, adequate interest coverage and exposure to foreign exchange risk. In the last few years, the company's leverage has weakened as result of the ongoing large capital expenditure program, which has been financed mainly with debt. Debt related to electricity projects represents approximately 90% of the total debt and the remaining funds are allocated to projects in the telecommunications sector.

The 305MW Reventazon project (currently financed through Reventazon Finance Trust) is expected to begin operations in 2016. Reventazon project will represent close to 10% of Costa Rica's electricity installed capacity matrix. The Reventazon asset and the associated debt will be incorporated in ICE's financial statements when operation begins. Fitch forecasts a peak leverage calculated as adjusted debt / EBITDAR of 5.9x during 2016 due to Reventazon's incorporation to ICE's balance sheet. Fitch expects the company will be able to reduce leverage in 2017 to 5.4x absent of new large generation projects, and tariff recognition of the debt service of the generation plants that will start operations.

Grupo ICE's consolidated debt as of September 2015 was CRC1,947,006 million. The debt adjusted for operating leases was CRC2,515,566 million for the same period. The leverage ratio for the last 12 months, as of September 2015 was 5.4x (2014: 5.2x, 2013: 5.8x). Approximately 85% of total financial debt is denominated in US dollars, which exposes the company to fluctuations in the exchange rate. The company benefits from a very favourable debt schedule, as approximately 48.6% of its balance debt as of September 2015 matures after five years, 40.2% between two and five years, and 11.2% in less than two years. The Costa Rican government guarantees some loans from international development banks, which represent approximately 12% of total indebtedness. The figures consider consolidated debt with the group's subsidiaries.

Grupo ICE recorded charges for currency exchange losses of CRC3,411 million during the nine months period as of 2015, which is well below the annual figure of CRC151,577 million during fiscal year 2014. A devaluation of the local currency would generate an increase in debt service payments and the debt service coverage ratios could deteriorate. The debt service coverage ratio measured as EBITDA/debt service was 1.6x for the LTM ended as of September 2015 (2014: 1.8x).

AGGRESSIVE CAPITAL EXPENDITURE PLAN

Grupo ICE's capex investment plan is considered aggressive and could weaken the company's financial profile, absent increased cash flow generation and adequate tariff adjustments. The company's capex plan considers investments by approximately USD3.2 billion during 2016-2020 in order to increase renewable generation capacity and maintain its leadership position in telecommunications in Costa Rica, if all the planned projects are executed. Grupo ICE expects to finance its investments with a combination of internal cash flow, debt, Build Operate and Transfer (BOT) transactions, and special purpose vehicles.

Fitch expects the company will be able to reduce leverage as capex requirements decrease in the medium term (2016-2018), absent large new generation projects, and tariff recognition of the debt service of the generation plants that will start operations in the next few years.

During the nine months period as of September 2015, capital expenditures of CRC208.930 million represented 21% of revenues. During the years 2010 through 2013, this ratio was 44.2% per year on average, which indicates that the largest investment phase of the projects has been completed. Fitch forecasts that capex investment for the years 2016 - 2018 could average 21% of total revenues.

Going forward, leverage could increase consistently to over 6x if the company finances its capex investment plan heavily with debt and the revenues associated with these investments are delayed beyond the expected ramp-up timeframe or do not received the tariff adjustments opportunely.

HIGH EXPOSURE TO REGULATORY AND POLITICAL INTERFERENCE

Grupo ICE is exposed to regulatory interference risk given the lack of clear and transparent electricity tariff schedules. The company annually proposes to the regulator electricity tariffs for end-users; in previous years, the regulatory and political interference affected the tariff adjustment process.

Electricity tariffs are set using two mechanisms: through the quarterly adjustment of variable costs of fuel (CVC) in place since 2013, and the ordinary tariff review that considers the operating costs. ICE cash flow benefits from the tariffs adjustments to recognized expenses from previous years related to fuel expenses, exchange rate difference for fuel oil purchases, and energy import expenses, through deferred quarterly adjustments.

The funding requirement of working capital by ICE Group depends on the lag in cost recognition that may arise in both tariff reviews. The telecom regulatory framework considers the price ceiling methodology in tariffs, and grants operators authority to review and adjust rates for some services in order to promote competition.

Despite the regulatory risk, Grupo ICE has managed to maintain a relative stable cash flow generation. Also, the company is exposed to political interference given that the government appoints and removes ICE's directors and executives, sets and approves the company's tariffs, and regulates its budget.

KEY ASSUMPTIONS

--The strong linkage between the Sovereign of Costa Rica and ICE continues;
--Grupo ICE remains important to the government as a strategic asset for the country;
--Fuel variable-cost tariff revision and ordinary tariff adjustments are in place;
--The Reventazon project begins operations by the end of 2016.
--The 2016 tariff review considers the debt service and revenue from Reventazon hydroelectric project;
--Grupo ICE will continue to support its subsidiaries in terms of its financial obligations, and as advisor on operational or technical issues, when is needed or required.

RATING SENSITIVITIES

--Grupo ICE's ratings could be negatively affected by any combination of the following: sovereign downgrades; weakening of legal, operational and/or strategic ties with the government; or regulatory intervention that negatively affects the company's financial performance;
--Grupo ICE's ratings could be positively affected by an upgrade of Costa Rica's sovereign rating.

Fitch has affirmed the following ratings:

Instituto Costarricense de Electricidad y Subsidiarias' (Grupo ICE)
--Long-term FC IDR at 'BB+'; Negative Outlook;
--Long-term LC IDR at 'BB+'; Negative Outlook;
--Senior unsecured debt at 'BB+';
--Long-term national scale (Costa Rica) at 'AAA(cri)'; Stable Outlook;
--Short-term debt at 'F1+(cri)';
--Senior unsecured domestic long-term debt (Costa Rica) at 'AAA(cri)'.