Fitch Affirms Instituto Costarricense de Electricidad's Ratings at 'BB+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed Instituto Costarricense de Electricidad y Subsidiarias' (Grupo ICE) foreign and local-currency Issuer Default Ratings (IDRs) at 'BB+' as well as its national scale ratings at 'AAA(cri)' and 'AAA(slv)'. The Rating Outlook is Stable. Concurrently, Fitch affirmed Compania Nacional de Fuerza y Luz's (CNFL) ratings at 'AAA(cri)'. A full list of ratings is provided at the end of this release.

KEY RATING DRIVERS

Grupo ICE's ratings are supported by the company's linkage to the Sovereign rating of Costa Rica (FC and LC IDRs rated 'BB+'/Stable Outlook by Fitch) which stems from government ownership. The link between Grupo ICE and the government also reflects the company's political risk resulting from its tariff approval process and government-mandated strategy to assure the country's electric supply, which temper the ratings to that of the sovereign. The ratings also reflect the government's implicit and explicit support, the company's diversified portfolio of assets, and its adequate financial profile. Also factored into Grupo ICE's ratings is its aggressive capital expenditure program oriented toward increasing renewable generation capacity and maintaining a strong market share position in the telecommunications business.

DIVERSIFIED ASSET PORTFOLIO:

Grupo ICE has a diversified portfolio of assets and a strong business position in electricity and telecommunications markets in Costa Rica. The ratings reflect the company's low business risk resulting from its business diversification and positive characteristics as a utility service provider.

Grupo ICE has a legal monopoly in the electricity sector in Costa Rica. The issuer is the largest power generator and electric distribution company in the country. As of year-end 2013, Grupo ICE had an installed electric generation capacity of 2,067 megawatts (MW) (national capacity of 2,731MW) and was the exclusive owner of the national transmission grid. The national electric industry includes private generation, municipal distribution and electric cooperatives that can generate energy in coordination with Grupo ICE or sell their energy to Grupo ICE. The company is expected to remain a leader in the telecommunications industry in the country, notwithstanding recent changes that opened the industry to competition. Although this has resulted in increased competition, it is also expected to enhance regulatory transparency. ICE's market share in terms of subscribers is approximately 100% in fixed telephony and 70% in mobile.

During the last 12 months (LTM) ended September 2013, the company generated revenues and EBITDA of CRC1,314,436 million and CRC388,299 million, respectively (CRC1,184,950 million and CRC326,506 million in year 2012). The company's electricity segment represented approximately 61% of revenues, with the telecommunications division contributing the rest. Fitch expects ICE's electricity business to increase its contribution given current and future expansion projects, as well as its relatively stable results in the telecommunications segment.

MODERATED LEVERAGE DRIVEN BY CAPEX:

Grupo ICE's ratings reflect the company's moderate leverage and adequate interest coverage, yet with some exposure to foreign exchange risk. In the last few years, the company's leverage weakened as a result of the ongoing large capital expenditures program, which has been financed mainly with debt. Fitch expects the company will be able to reduce leverage as new generation projects, such as PH Reventazon, come online in the next few years, absent significant changes in the tariff scheme.

As of September 2013, Grupo ICE reported consolidated debt of USD3.5 billion, of which USD352 million was short-term and nearly 79% was denominated in USD. The company benefits from a very favorable debt maturity schedule - only 32% of total financial debt matures in the next five years. For the LTM ended September 2013, financial leverage, as measured by total adjusted debt-to-EBITDAR, totaled 5.1x (vs. 5.8x in December 2012).

AGGRESSIVE CAPITAL EXPENDITURE PLAN:

Grupo ICE's capital investment plan is considered aggressive and could weaken the company's financial profile, without increased cash flow generation and adequate tariff adjustments. The company plans to invest approximately USD3.7 billion over the next five years to increase renewable generation capacity and maintain its leadership position in telecommunications in Costa Rica.

Going forward, Grupo ICE's credit metrics could deteriorate significantly. Leverage could increase consistently to over 6.0x if the company finances its capital investment plan heavily with debt and the revenues associated with these investments are delayed beyond the expected ramp-up timeframe or do not receive tariff adjustments. Grupo ICE expects to finance its investments with a combination of internal cash flow, debt, Build Operate and Transfer (BOT) transactions, project finance vehicles and operating leases.

HIGH EXPOSURE TO REGULATORY AND POLITICAL INTERFERENCE:

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

Since 2013, tariffs reflect fossil fuel cost variations on a quarterly basis. This change had a positive impact on Grupo ICE's cash generation and reduced its exposure to hydrology risk. Previously, tariffs did not fully recognize the company's moderate exposure to fuel prices which is borne by its thermoelectric generation business (8%-10% of annual generation on average).

The recent Telecom regulatory framework considers changes in tariffs and competition rules. Fitch expects that new regulations could enhance regulatory transparency. Nevertheless, telecommunications tariffs have been unchanged since 2006.

Despite the regulatory risk, Grupo ICE has managed to maintain 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.

RATINGS SENSITIVITY

--Grupo ICE's ratings could be negatively affected by any combination of the following factors: 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, or if the company is materially isolated from government interference.

Fitch has affirmed the following ratings for Grupo ICE:

--Long-term FC IDR at 'BB+'; Stable Outlook;

--Long-term LC IDR at 'BB+'; Stable Outlook;

--Senior unsecured debt at 'BB+';

--Long-term national scale (Costa Rica) at 'AAA(cri)'; Stable Outlook;

--Senior unsecured domestic long-term debt (Costa Rica) at 'AAA(cri)'; Stable Outlook;

--Short-term debt at 'F1+(cri)';

--Long-term national scale (El Salvador) at 'AAA(slv)'; Stable Outlook

--Senior unsecured domestic long-term debt (El Salvador) at 'AAA(slv)'.

Fitch has also affirmed the following ratings for ICE Subsidiary, Compania Nacional de Fuerza y Luz S.A. (CNFL):

--Long-term national scale (Costa Rica) at 'AAA(cri)'; Stable Outlook;

--Senior unsecured domestic long-term debt (Costa Rica) at 'AAA(cri)'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

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

Applicable Criteria and Related Research:

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

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=824494

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Contacts

Fitch Ratings
Primary Analyst
Giancarlo Rubio (ICE), +1 212-612-7899
Associate Director
Fitch Ratings, Inc.
One State Street Plaza,
New York, NY 10004
or
Secondary Analyst
Allan Lewis (ICE/CNFL), +506-2296-94-54
Associate Director
or
Primary Analyst
Vanessa Villalobos (CNFL), +506-2296-94-54
Associate Director
or
Committee Chairperson
Lucas Aristizabal, +1 312-368-3260
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Giancarlo Rubio (ICE), +1 212-612-7899
Associate Director
Fitch Ratings, Inc.
One State Street Plaza,
New York, NY 10004
or
Secondary Analyst
Allan Lewis (ICE/CNFL), +506-2296-94-54
Associate Director
or
Primary Analyst
Vanessa Villalobos (CNFL), +506-2296-94-54
Associate Director
or
Committee Chairperson
Lucas Aristizabal, +1 312-368-3260
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com