NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Transelec S.A.'s (Transelec) foreign and local currency Issuer Default Ratings (IDRs) at 'BBB', and long-term national scale at 'AA-(cl)'. These ratings actions cover the company's international and domestic bonds outstanding, which total approximately USD675 million and the equivalent of USD1.2 billion, respectively. The Rating Outlook is Stable.
A complete list of ratings follows at the end of this press release.
KEY RATING DRIVERS
Transelec's ratings are largely driven by the company's low business risk profile reflected in highly predictable and stable cash flow generation, combined with a solid balance sheet and a broad financial flexibility. The company's financial results as of September 2015 have come slightly above Fitch's expectations, especially measured in USD due to the effect of the Chilean Peso (CLP) devaluation versus the USD. As of 3Q15, Transelec shows an overall sound financial and business risk profile. The ratings also reflect the company's relatively lower sector risk, versus other regional transmission companies, as Transelec owns its transmission assets versus operating under concession agreements typically seen in the region.
Furthermore, though privately owned, the company's ratings also incorporate the strategic importance of Transelec to the Republic of Chile (IDR 'A+'). Transelec is the owner of over 80% of the country's main energy transmission system, and its operational and financial strength reflect the country's robust regulatory framework, which has remained stable over time. Although Chile's congress is currently discussing a new energy Transmission Law, Fitch does not expect this new regulation to materially harm the businesses strengths, stability and/or profitability. Unexpected changes in local regulation should be analyzed once details are available.
Transelec's ratings also reflect the implicit shareholder support from the company's shareowners (Brookfield Asset Management Inc. (IDR 'BBB-'/Outlook Stable), CPP Investment Board, British Columbia Investment Management Corporation, and PSP Investment. However, it is worth mentioning that Transelec's shareholders are no longer funding the six-month debt service reserve account (DSRA) for the the company's public debt, which had been in place since 2006 and has been replaced by a stand by LC issued by Transelec. The company's liquidity profile remains solid, with no significant debt maturities until 2023, with the exception of a CLP152 billion (USD210 million approx.) local bond series due in September 2016, which Fitch expects will be refinanced.
The main ratings constraints are related to the company's relatively high leverage level as compared to peers in the rating category. Transelec has limited headroom for any meaningful increase in debt, as the company is targeting maintaining long-term maximum debt to EBITDA ratios in the 6.0x - 6.5x range. Offsetting this factor, the company possesses highly stable cash flow generation, a comfortable maturity schedule, and implicit shareholder support from strong credit profile shareowners.
Low Business Risk Profile: Transelec's ratings reflect its low business risk profile stemming from its exceptionally stable and predictable cash flow generation, characteristic of electric transmission utility companies and its natural monopoly condition. The regulatory environment in Chile is considered solid and stable, and provides for certainty in the determination of regulated transmission revenues and returns on future investments. Tariff resets for 2015 were rescheduled to 2016 due to large delays in the studies. Going forward and based on the historic results of last tariff setting processes, Fitch does not expect the tariff resets to have a material impact on the company's revenues.
New Transmission Law in Congress: The stable business risk profile of the energy transmission business in Chile is largely driven by its sound regulatory framework, which has allowed the operation and extensive expansion on the country's grid over the past decade. Although there is room for improvements, and even when profitability for the sector could be slightly reduced, Fitch does not expect a substantial deterioration in the country's energy transmission business risk profile resulting from this new regulation. In the event of unexpected changes in the regulation with material impact on the company's cash flow stability, overall profitability, tariff setting process and adjustment, among others, Fitch could revise its opinion in the light of the new regulation's details.
August 2015, the Chilean government sent to congress a new transmission law that seeks to achieve a more robust and flexible system through a more active state and a central role in both long-term planning and in the definition of paths and location the new transmission systems, especially those that are considered of public interest. A new independent body as coordinator system would also be created, and energy storage as part of the subject to independent electrical system coordination be recognized. The remuneration associated with the new law is not yet known, and will be a determining factor in judging the attractiveness of the industry for new investments in the sector.
Stable Operating Performance Strengthens Credit Metrics: Transelec's financial results for 2015 have come slightly above Fitch's expectations, especially measured in USD due to the effect of the Chilean Peso (CLP) depreciation versus the USD, as Transelec's tariffs are partially indexed to the USD while most of its costs are CLP linked. Mainly as a result of this, as of the 12 month period (LTM) ended Sept. 30, 2015, Transelec recorded EBITDA generation of CLP229 billion (USD364 million), showing an 8.6% increase versus year-end 2014 and a historically high margin of 84.6%. Fiscal year 2015 is expected to close in line with this level of EBITDA generation, although going forward Fitch expects EBITDA margins closer to 80%, as tariff resets are usually pressured downwards and such decreases are compensated with new assets entering operations.
Increased EBITDA generation linked to a stronger USD, combined with a mostly local currency denominated debt resulted in stronger credit metrics for the LTM as of September 2015. Leverage measured as financial debt to EBITDA reached 5.8x, measured in CLP, and stands in the strong end of the company's target. However, Fitch does not expect a significant deleveraging going forward as the company's financial strategy is aimed at maintaining a leverage level measured as debt to EBITDA in-between 6.0x and 6.5x in the long term. Net leverage was 5.7x, while interest coverage ratio remains stable at 3.9x. Overall, Transelec continues to show a stable financial position based on its strong operating cash flow generation.
High Capex and Dividend Payouts Favor High Leverage to Continue: Transelec's leverage is considered high for its rating category. Leverage is largely driven by the company's capex program of close to USD200 million per year, and a dividend policy of distributing 100% of net profits; which has resulted in a negative free cash flow on a sustained basis. Additionally, in 2015 the company paid out extra funds to shareholders in the form of a 10-year term inter-company loan for some USD 70 million. Fitch incorporates Transelec's base case forecast expectations of extraordinary dividend payments, assuming that, based on the company's solid cash generation capacity, it should be able to maintain adequate levels of indebtedness, profitability and liquidity.
Transelec's capex level remains at USD200 million per year, and is mostly focused in reinforcing its leading position in Chile through the development of new transmission projects. However, in 2015 the company started exploring investment opportunities in Peru, which could include the acquisition of existing assets and/or the development of new ones. The company has stated that these possibilities are to be analyzed under the same criteria of risks and returns that it applies in its operations in Chile.
KEY ASSUMPTIONS
--Tariff reset in line with expectations (-1% to -3% on average);
--New transmission law does not have a material impact in the industries' fundamentals;
--EBITDA generation of CLP270 billion for 2015, and in the range of CLP255 billion to CLP275 billion for the 2016 - 2018 period;
--Dividend pay-out rate of 100% of net income;
--Annual Capex in the range of CLP100 billion to CLP150 billion;
--FCF remains mostly negative.
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a negative rating action include: a negative, meaningful change to Chile's regulatory framework; a change in the company's strategy that becomes more aggressive in terms of leverage, dividends, and capital expenditures; sustained leverage ratios above 6.5x total debt to EBITDA levels; or movements beyond the expected debt levels, liquidity, and operational earnings.
Although unlikely in the near term given the company's capital structure profile, a positive rating action could be considered if the company decreases its financial leverage strategy. In particular, leverage levels of 4.5x or below would be seen positively.
LIQUIDITY
Liquidity supported by access to Refinancing and a Comfortable Debt Maturity Schedule: As of September 2015, the company had cash on hand in the amount of CLP32 billion (USD46 million) and short-term debt maturities of CLP182 billion (USD260 million). Eighty-four percent of this short-term debt corresponds to local bonds (Series C) maturing in 2016 that will probably be refinanced. Thereafter, the company faces no debt maturities until 2023.
Transelec's liquidity is additionally supported by its proven access to both domestic and international capital and financial markets, as it is the largest individual local bond issuer in Chile. Finally, the company's liquidity is complemented by a USD250 million committed revolver credit line maturing in September 2017.
Fitch has affirmed the following ratings:
Transelec S.A.
--Foreign currency long-term IDR at 'BBB';
--Local currency long-term IDR at 'BBB';
--Senior unsecured international bonds at 'BBB';
--National scale rating at 'AA-(cl);
--Local bond program No.480 and Series C at 'AA-(cl)';
--Local bond program No.481 and Series D at 'AA-(cl)';
--Local bond program No.598, at 'AA-(cl)';
--Local bond program No.599 and Series H, K, M and N at 'AA-(cl)';
--Local bond program No.743 and Series R and U at 'AA-(cl)';
--Local bond program No.744 and Series Q, S and T at 'AA-(cl)'.
Additional information is available on www.fitchratings.com
Applicable Criteria
Metodologia de Ratings Corporativos - Incluindo Ratings de Curto Prazo e Vnculo Entre Matrizes e Subsidirias (pub. 06 Nov 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873441
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