NEW YORK--(BUSINESS WIRE)--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)' and 'AAA(slv)'. 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 'BB+'/Outlook Negative), which stems from the company's government ownership and the implicit and explicit expectation of government support. ICE's Negative Rating Outlook reflects the sovereign's Negative Outlook. The company has a strong linkage to the government given its strategic importance due to the growing demand for electricity 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 telecommunications 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 had an installed capacity of 2,336 megawatts (MW) as of December 2015, including the generation 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, two municipal companies, and four rural electrification cooperatives. There are also private generators that sell energy to Grupo ICE. The SEN installed capacity is 3,068MW as of December 2015.
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. The electricity segment represented approximately 56.3% of total revenues as of 2015 (2014: 57.5%) and the telecommunications division contributed with 43.6% (2014: 42.3%), supplemental services represented 0.1% (2014: 0.2%). During 2015, EBITDA amounted to CRC329,866 million.
WEAKER STANDALONE CREDIT QUALITY
ICE's standalone credit quality is in line with a 'BB-' Long-Term Rating, should the company not be owned by the state. This standalone rating assumes that ICE's current favorable funding conditions will not remain the same absent from ownership support from the government. Additionally, local funding for its subsidiary, Compania Nacional de Fuerza de Luz (CNFL), could be limited absent from government support or Grupo ICE support. CNFL relies on funds from state-owned banks due to its weak financial profile.
LEVERAGE DRIVEN BY CAPEX AND TARRIF ADJUSTMENTS
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 lesser tariff adjustments during 2015 coupled with extraordinary expenses have impacted EBITDA by year-end 2015. Adjusted leverage (total adjusted debt /EBITDAR) for the last 12 months, ending March 31, 2016 was 6.3 times (x) (2015: 6.5x, 2014: 5.5x).
Consolidated gross debt as of March 2016 was CRC2,063,728 million (2014: CRC1,987,070 million)and total debt adjusted for operating leases was CRC2,560,816 million for the same period. As of March 2016, the company benefits from a manageable debt schedule, as approximately 46.2% of it matures after five years, 39.1% between two and five years, and 14.7% in less than two years. Approximately 85% of total debt is denominated in U.S. dollars, which exposes the company to fluctuations in the exchange rate. The Costa Rican government guarantees some loans from international development banks, which represent approximately 12% of total indebtedness.
Fitch expects the company will be able to gradually reduce its leverage as new generation projects come online, absent of any new large generation projects and through tariff recognition of the debt service of the generation plants that will start operations in the next few years. One example is PH Reventazon, which began operations in March 2016 and is under testing proofs before the asset will be transferred to ICE.
The 305 MW Reventazon asset (USD1.4 billion cost) and the associated debt (USD904 million) is expected to be incorporated in ICE's financial statement between end of this year and the first quarter of 2017. Fitch's forecast considers the effect in the end of 2016.
AGGRESSIVE CAPITAL EXPENDITURE PLAN
Grupo ICE's capex investment plan is considered aggressive and could weaken the company's financial profile without lacking of increased cash flow generation and adequate tariff adjustments. Nevertheless, annual capex requirements are expected to decrease in relation to the past years as Reventazon, the largest hydroelectric project, was already completed.
The company's capex plan considers investments by approximately USD2.3 billion during 2016-2020 over the next five years to increase renewable electricity generation capacity and maintain its leadership position in telecommunications, 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 forecasts that capex investment for the years 2017-2019 could average 25% of total revenues. In 2015, capital expenditures of CRC228,351 million represented 17.9% of revenues for the year (2014: 15.9%). During the years 2010 through 2013, this ratio was 44.2% per year on average.
Fitch expects the company to 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. Currently, there are two geothermal generation projects by 55MW each, under developments. These projects are: Pailas 2 (with an approximately cost of USD335 million project) and Borinquen (at design and planning stage).
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 receive the tariff adjustments expediently.
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.
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.
--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 asset and the associated debt will be incorporated in ICE's 2016 financial statements.
--The 2017 tariff review considers the debt service for 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.
--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+'; Outlook Negative;
--Long-term LC IDR at 'BB+'; Outlook Negative;
--Senior unsecured debt at 'BB+';
--Long-term national scale (Costa Rica) at 'AAA(cri)'; Outlook Stable;
--Short-term debt at 'F1+(cri)';
--Senior unsecured domestic long-term debt (Costa Rica) at 'AAA(cri)'.
--Long-term national scale (El Salvador) at 'AAA(slv)'; Outlook Stable;
--Senior unsecured domestic long-term debt (El Salvador) at 'AAA(slv)'.
Additional information is available on www.fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Dodd-Frank Rating Information Disclosure Form