Fitch Affirms Inkia's IDRs at 'BB'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed Inkia Energy's Ltd (Inkia) foreign and local currency Issuer Default Ratings (IDRs) at 'BB'. Fitch has also affirmed its rating for the company's USD450 million of senior unsecured notes due in 2021 at 'BB'. The Rating Outlook is Stable.

Inkia' ratings are supported by the solid credit profile of its most important subsidiary, Kallpa, which is an 870 MW (megawatt) Peruvian thermoelectric generation company. Kallpa's credit quality is supported by its contractual position and competitive cost structure; Inkia has a 75% participation in Kallpa. Inkia's ratings also incorporate the geographic diversification of its assets, large expansion projects, and expected improvements in its financial profile following the completion of these projects.

KEY RATING DRIVERS

Credit Profile Linked to Kallpa:

Kallpa Generacion S.A.'s (Kallpa) credit quality is supported by its competitive cost structure and contracted position. Kallpa has several power purchase agreements (PPAs) with regulated and unregulated users. These PPAs represent approximately 87% of its firm energy for the period 2014-2021 and add to cash flow stability and predictability given the fixed payments and fuel cost pass-through clauses. The company has secured 100% of its natural gas needs under long-term gas supply contracts through 2022. Kallpa's PPAs have fuel cost pass-through clauses and are linked to the U.S. dollar, reducing exposure to foreign exchange risk and supporting cash flow stability and predictability.

In August 2012, Kallpa completed its expansion project, which increased the plant's installed capacity to 870 MW from 581 MW and improved its efficiency through the installation of a 289 MW combined-cycle unit. Kallpa's financial profile improved as a result of this expansion. The company has recently acquired Las Flores, a 193 MW simple-cycle gas power plant located 3Km from Kallpa's plant. The transaction is expected to close in April 2014, after approval of the Peruvian antitrust authority, and will add USD114 million of new debt. By 2015 and after the acquisition is completed, leverage at this subsidiary level should range between 2.5x and 3.0x. This subsidiary is estimated to have accounted for more than 60% of Inkia's consolidated EBITDA in 2013.

High Leverage driven by growth strategy:

Inkia's stand-alone financial profile has historically been weak for the rating category and leverage is expected to remain high for the foreseeable future. Following the completion of Kallpa's expansion project, Inkia's consolidated financial profile started improving to a level consistent with the assigned rating. As of Sept. 30, 2013, Inkia's consolidated leverage, as measured by total senior debt to EBITDA, decreased to 4.2x from 4.8x at the end of 2012. During the next two to three years, leverage is expected to weaken as the company issues between USD750 million and USD800 million of new debt, mostly to finance its projects Cerro del Aguila (CdA) and Samay I. Consolidated leverage metrics could then return to approximately 3.5x to 4.0x, absent additional investment programs that can perpetuate the company's high consolidated leverage.

Adequate Liquidity Position:

Inkia's ratings reflect the strong liquidity profile it maintained during its expansion process. The company's consolidated cash position amounted to USD312 million as of Sept. 30, 2013. Liquidity is supported by its cash on hand, readily monetizable assets, as well as dividends and disbursements, which range between USD20 million and USD30 million, from its different subsidiaries. Inkia owns 21% of Edegel, which is the largest generation company in Peru, with a current market capitalization of approximately USD2.2 billion.

The company also benefits from favorable access to the local capital markets to finance investment projects at the subsidiary level. Currently, the company has a syndicated bank facility for USD591 million to finance the construction of the Cerro del Aguila hydroelectric generation plant (project finance debt). Inkia also benefits from the financial flexibility provided by intercompany debt with its ultimate shareholder as this subordinated debt does not carry a fixed amortization schedule and does not share collateral (shares on assets) with Inkia's bonds.

Debt Structurally Subordinated:

Inkia's debt is structurally subordinated to debt at the operating companies. Total debt at the subsidiary level amounted to approximately USD529 million, or 54% of total consolidated adjusted debt, as of Sept. 30, 2013. The bulk of this debt is represented by notes issued by Kallpa to fund the capacity expansion. This project finance-like debt has a standard covenants package including dividend restrictions and limitations on additional indebtedness. Specifically, Kallpa is restricted from paying dividends if its debt service coverage ratio (DSCR) falls below 1.2x. Fitch expects Kallpa's DSCR will be approximately 1.6x in 2014.

Portfolio of projects with stable cash generation profile:

Cerro del Aguila is a 510MW hydro plant with long-term PPAs for approximately 402 MW starting in 2018. The project is estimated to cost USD910 and Inkia expects to fund this project, in which it has a 74.9% participation, with approximately 65% debt and the balance with equity. The plant would likely benefit from an existing reservoirs in the Mantaro river basin; Inkia estimates a capacity factor close to 80% for this plant. Samay I is a 600MW dual-fuel power plant, which will operate initially as a cold reserve plant. It will receive fixed capacity payments for 20 years. The plant has the potential to increase its cash generation if a gas pipeline that is currently being promoted by the Peruvian government is built. Existing PPAs will provide both projects with solid and stable cash flows. Inkia participation in Samay I is also 74.9%. Fitch expects a significant improvement in the financial profile of the issuer after these projects start generating cash flows in 2016.

Asset Diversification:

The ratings also take into consideration the company's geographic diversification. Excluding its Peruvian operations, Inkia generated approximately 25% of its consolidated EBITDA (plus dividends) as of the last 12 months (LTM) ended Sept. 30, 2013 from assets located in Bolivia (rated 'BB-' by Fitch), Chile ('A+'), the Dominican Republic ('B'), and El Salvador ('BB-'). Over the past few years, cash flow from these assets was of strategic importance for Inkia. After the completion of Kallpa's expansion, these assets will represent smaller portion of cash distributions to the holding company.

RATING SENSITIVITIES

Negative Drivers: A negative rating action could be triggered by a combination of: Inkia pursuing additional opportunities in generation without an adequate amount of additional equity; if consolidated leverage does not decrease to below 4.0x after Cerro del Aguila and Samay I commence operations; the company implements a dividend policy while leverage is high; or the company's asset portfolio becomes more concentrated in countries with high political and economic risk.

Positive Drivers: Although a positive rating action is not expected in the near future, any combination of the following could be considered: the Peruvian operation's cash flow contribution increasing beyond current expectations and/or leverage declines materially.

Additional information available at 'www.fitchratings.com.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013);

--'Parent and Subsidiary Rating Linkage Criteria Report' (Aug. 5, 2013);

--'Rating Hybrid Securities' (Dec. 29, 2009).

Applicable Criteria and Related Research:

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Rating Hybrid Securities -- Effective 28 July 2011 to 13 December 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647091

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=822107

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Giancarlo Rubio, +1-212-612-7899
Associate Director
Fitch Ratings, Inc.
One State Street Plaza,
New York, NY 10004
or
Secondary Analyst
Lucas Aristizabal, +1-312-368-3260
Director
or
Committee Chairperson
Joe Bormann, CFA, +1-312-368-3349
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Giancarlo Rubio, +1-212-612-7899
Associate Director
Fitch Ratings, Inc.
One State Street Plaza,
New York, NY 10004
or
Secondary Analyst
Lucas Aristizabal, +1-312-368-3260
Director
or
Committee Chairperson
Joe Bormann, CFA, +1-312-368-3349
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com