CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) for Emgesa S.A. E.S.P. (Emgesa) at 'BBB'. This rating applies to the company's senior unsecured COP736,760 million notes due 2021. Fitch has also affirmed Emgesa's long-term national scale rating and debt ratings at 'AAA(col)', as well as national short-term rating at 'F1+(col)'. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.
Emgesa's ratings reflect the company's strong business model, supported by asset diversification, solid competitive position and conservative commercial strategy. The company maintains robust cash flow generation, which underpins Fitch's expectations of a moderate financial leverage in the medium term. Also factored into the ratings are the company's adequate liquidity position and Emgesa's strategic importance to Enel Group.
KEY RATING DRIVERS
Solid Business Position
Emgesa's ratings are supported by the company's business position as the second largest generation company in Colombia. At end of 2015, the company had 3,459 MW of installed capacity, after incorporating 400MW of new capacity from the recently completed El Quimbo. The company recorded 13,741 Gwh of electric generation, representing 20.6% of the country.
The combination of Emgesa's low marginal cost hydro-electric generating based, along with its complementary watershed and some thermal generating capacity (87% hydro and 13% thermal), make the company less exposed to severe weather conditions and hydrology risk.
Strong Operational Results
Emgesa's commercial strategy matches its business profile and operating assets, which provides more revenue predictability coupled with stable cash flow generation, although the company operates in the energy generation business, which is competitive and vulnerable to changes in hydrology and in prices of both energy and fuel. The company's commercial strategy has aimed at selling around 70% of its volume at contracted prices for one- to three-year terms.
During 2015, Emgesa's EBITDA margin was pressured by the occurrence of El Nino, which is causing a reduction in rainfall in Colombia, as well as the new wealth tax that the company recorded as an operating expense. The low hydrological condition led the company to increase its thermoelectric generation to historical levels, as well as increase energy purchases in the spot market. Therefore, EBITDA margin decreased to 52.8%, its lowest level in five years. The ratings incorporate an expectation that the company will maintain solid operating cash flows, recovering EBITDA margin to around 60%.
Fitch does not rule out that structural changes in the regulation could take place in the medium term, as the El Nino Phenomenon unveiled some weaknesses in the regulatory framework for electric generation. Fitch will review the potential changes of regulation, and any implication on Emgesa's cash generation.
Leverage is Moderate
Fitch expects Emgesa to maintain its moderate leverage, supported by its strong cash from operation and limited Capex needs, which should translate into a neutral to positive free cash flow generation in the following years. After bringing online the hydroelectric plant El Quimbo in late 2015, the company strengthened its asset base and cash flow from operations prospects. This new asset is expected to contribute with around 2,200 Gwh per year on average from 2016.
At end of 2015, Emgesa's leverage levels closed below Fitch's previous expectations, benefitted from an increase in electric generation and higher spot prices. The company reported COP4.1 trillion in financial debt, including interest payments, with a moderate leverage ratio of 2.4x. Fitch expects a slight increase in leverage during 2016 as the company plans to invest to consolidate the availability of its existing assets during the year. In absence of any sizable project, Emgesa's leverage levels should be trending towards 2x-2.5x in the medium term.
Robust Liquidity Position
Emgesa maintains strong liquidity levels, supported by sound cash flow from operations, moderate leverage and a manageable debt payment schedule. At end of 2015, the company closed with a cash balance of COP299 billion and COP1.1 trillion in cash from operations, while short-term debt stood at COP486 billion. Annual scheduled debt amortization for the next five years is below COP403 billion, which is considered manageable for the company.
Strategic Importance for Shareholders
Emgesa is indirectly controlled by Enel S.p.A.(IDR 'BBB+'/ Outlook Stable), through Enel's subsidiary Enersis Americas (IDR 'BBB'/Outlook Stable) and Endesa Americas, which together control the company and have a 48.5% economic interest in the company and 56.4% of voting rights. Enel's relationship with Emgesa is considered positive because of the transfer of know-how, technology integration and business practices. Emgesa is a sizable asset for Enel and represented 28% of Enel's EBITDA of the electric generation business in Latin America during 2015.
Despite not having the control of Emgesa, Empresa de Energia de Bogota S.A. ESP. (EEB; 'BBB'/Outlook Stable) also participates in the company, with 51.5% of economic rights and 43.6% of voting rights. EEB also owns non-controlling majority participation in the electric distribution company Codensa.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:
--Prices decline in 2016 compared to 2015 given the expected end of low hydrological condition in the second half 2016;
--El Quimbo Hydroelectric plant continues operating without regulatory restrictions on a sustained basis;
--Projected revenues consider that Emgesa maintains its commercial strategy, selling around 70% through contracts;
--Leverage levels in a range of 2x to 3x in the medium term.
RATING SENSITIVITIES
Fitch considers a positive rating action unlikely in the near term. However, a material improvement in credit metrics that could be sustained over time and more conservative dividend policy would be seen as positive to the credit.
On the other hand, the main factors that individually or collectively could lead to a negative rating action are:
--A steep decrease in electricity prices, coupled with low generation and poor electricity demand;
--Changes in regulation that put pressures on Emgesa's cash flow operation capacity;
--A sustained increase in leverage above 3.5x;
--A new suspension of the operations of El Quimbo that put significant pressure on the cash flow generation of the company;
--A change in the company's strategy that results in a more aggressive one in terms of leverage, capital expenditures or acquisitions.
LIQUIDITY
Fitch considers Emgesa's refinancing risk as low, given the moderate leverage levels and the manageable debt profile. In addition, the company has available credit lines of COP5.4 trillion and proven access to local and international capital markets, which reinforce its liquidity position. The company's financial debt is mainly composed of bond issuances denominated in pesos with maturities until 2030. Emgesa's conservative leverage together with solid cash generation has allowed the company to historically present dividend pay-out-ratio of 100%, without affecting its credit profile.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Emgesa S.A. E.S.P.
--Long-Term Foreign Currency IDR at 'BBB';
--Long-Term Local Currency IDR at 'BBB';
--COP736,760 million notes due 2021 at 'BBB';
--National Long-Term Rating at 'AAA(col)';
--National Short-Term Rating at 'F1+(col)';
--Local bond program at 'AAA(col)'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1003995
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003995
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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