CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the Foreign and Local Currency Issuer Default Ratings (IDRs) of Colbun S.A. (Colbun) at 'BBB', and long-term National scale rating at 'A+(cl)'. The Rating Outlook is Stable. A complete list of rating actions follows at the end of this press release.
KEY RATING DRIVERS
Colbun's ratings reflect the company's improved financial profile supported by a balanced contract position with favorable natural gas contracts and a diverse portfolio of generation assets operating in Peru and Chile where Fitch believes they benefit from favorable regulatory environments. Credit risks associated with the company include exposure to hydrological risk, which represents 41% of its total installed capacity, potential large acquisitions and/or significant capex investments, and possible environmental and/or political issues that could result in cost overruns or delays.
Colbun's equity rating reflects its shares' solid liquidity and 100% availability on the Santiago Stock Exchange during the October 2016 rolling 12-month period. In this period, the company had an average daily trading volume of USD1.9 million. Colbun's free float decreased to 40.5% from the 41.3% observed last year.
SLIGHTLY IMPROVED FINANCIAL PROFILE
Colbun improved its contracted position and operational performance with the start of operations of its efficient generation units. For the last 12 months (LTM) ended September 2016, the company reported total debt/EBITDA of 2.8x, decreasing from the average 4.0x observed during 2013-2015, more in line with the company's target leverage of 3.5x or below and its rating level. As of Sept. 30, 2016, Colbun's total debt was USD1.7 billion and its cash position was robust at nearly USD620 million.
BALANCED CONTRACTUAL POSITION
Colbun's ratings incorporate its relevant commercial strategy based on contracts that represent 94% of the firm's energy capacity. The contracts are balanced between regulated and non-regulated clients and carry a weighted average life of approximately 9.8 years. These contracts have adequate indexation mechanisms that closely match the company's generation mix and somewhat mitigate Colbun's exposure to fuel price volatility. Based on normal to dry hydrology conditions, Colbun's contract requirements are balanced with approximately 12,000 gigawatt hours (GWh) contracted per year.
Fitch believes Colbun will maintain an adequate contractual position in the long term; a change in Colbun's commercial policy that results in an imbalanced long-term contract position would be viewed negatively by Fitch. During 2020, the company's purchase power agreements (PPAs) start expiring, with approximately 37% of its current contracted capacity (12,000 GWh) exposed to recontracting risk by 2022.
Chile expects to have additional regulated auctions for approximately 24,000 Gigawatt hours (GWh) within the next four years; this may alleviate the pressure if the company is not able to re-contract the approximately 4,000 GWh expiring by 2022. Fitch believes the Chilean government will award the contracts for the next auctions based on the stability of the country generation matrix for the future. Chile has historically benefited from one of the most balanced regulatory frameworks in Latin America. Fitch believes the government will likely preserve a balanced generation matrix despite an increased participation of non-conventional renewable energy (NCRE) players. Additionally, Fitch expects Colbun and the other dominant players to continue to have a key role in the country's power generation.
FAVORABLE NATURAL GAS CONTRACTS
Under a scenario of dry hydrology, Colbun's contracted volume could be met with the company's natural gas units or by purchases on the spot market, although with a negative impact on margins. Positively, the company has extended its temporary natural gas contracts for its thermal units with Metrogas and Enap Refinerias S.A. (IDR: 'A'/Stable) until 2019. Fitch views the 20-year contract with GNL Chile positively as it secures regasification capacity at the Quintero terminal Open Season starting in 2021.
Fitch considers the company's recent acquisitions to be in line with its growth and geographical diversification strategy. In December 2015, Colbun acquired 51% of the 570MW Peruvian thermoelectric power plant Fenix Power. The power plant has a favorable contracted situation, as 60% of its total generation is currently contracted with a weighted life of 7.5 years. EBITDA related to this terminal represents less than 10% of Colbun's consolidated EBITDA. Additionally, in April 2016, the company bought SunEdison's 202MW solar projects under development in Chile. Both transactions were partially financed with cash flow generation and cash on hand, thus having a neutral impact on Colbun's debt profile.
Colbun has an ambitious medium- to long-term regional expansion agenda. Fitch believes the company has sufficient liquidity coupled with strong cash flow generation to resume moderate M&A activities in the short- to medium-term as indicated by the company. Fitch expects Colbun will continue to be disciplined in its M&A activities and will remain committed to maintaining a capital structure that is commensurate with an investment-grade rating.
POSITIVE FREE CASH FLOW (FCF)
Colbun generated USD242 million of FCF as of LTM ended September 2016, mainly as a result of lower fuel costs. This compares with USD443 million of FCF during 2015 and negative USD193 million during 2014. During 3Q16, Colbun bought approximately 430GWh on the spot market to meet its contractual position, because of the dry season experienced during that period. Fitch expects dry conditions to remain until 2Q17, which will affect the company's FCF, since contractual positions should be met with fossil fuels or buying energy at spot market prices.
ROBUST EXPANSION SPENDING
Colbun is in the middle of a potential significant expansion with La Mina (34MW) currently under construction, and San Pedro (170MW) and Santa Maria (350MW) under development. Fitch believes the company will be able to finance the completion of these projects without a significant increase in debt, although we note that these major engineering developments increase execution and construction risk.
Fitch assumes the company will complete La Mina by 1Q17, and although construction of the San Pedro and Santa Maria II terminals remains at the early stage, we do not include these projects as part of our projections as they have not yet been approved by the company's board of directors. Fitch believes these projects can be financed with the company's own cash flow generation and its strong cash on hand. Any additional significant projects or cash outflows could pressure the company's credit profile.
Fitch's key assumptions within the rating case for Colbun include:
--EBITDA generation rises to between USD600 million-USD650 million/year by 2019;
--Contracted energy sales in Chile of approximately 12,000GW;
--Installed capacity increasing to 3,886MW in 2017 once La Mina is completed. As part of the expansion plan in Peru, contracted energy sales in this country reach nearly 3,000GW;
--Average annual capex investments of USD60 million during the next four years related to maintenance capex;
--Dividend payments of 30% of net income.
A change in Colbun's commercial policy that results in an imbalanced long-term contracted position would be viewed negatively by Fitch. In addition, the company's inability to re-contract a significant portion of its expiring contracts could affect the company's credit profile. Finally, a material and sustained deterioration of credit metrics reflected in total consolidated debt-to-EBITDA ratios above 3.5x could result in a negative rating action.
Fitch believes that a positive rating action is limited at this time because of the expected capacity expansion over the next few years.
Colbun has maintained a solid liquidity position with approximately USD620 million of cash and cash equivalents as of September 2016, compared with USD42 million of short-term debt. Colbun enjoys an extended maturity profile; during 2016, the company repaid two long-term loans and a local bond, improving the company's maturity profile. Additionally, Colbun refinanced approximately USD366 million of Fenix's outstanding debt after its acquisition. The company's liquidity is further buoyed by uncommitted credit lines of approximately 150USD million and other lines related to commercial paper totalling USD100 million.
FULL LIST OF RATING ACTIONS
Fitch affirms the following ratings for Colbun S.A.:
--Long-Term Foreign and Local currency IDRs at 'BBB';
--International senior unsecured bond ratings at 'BBB';
--Long-term national scale rating at 'A+(cl)';
--National senior unsecured bond ratings at 'A+(cl)';
--National commercial paper long- and short-term ratings of 'A+(cl)' and 'N1+(cl)';
--National Equity Rating at 'Primera Clase Nivel 2 (cl)'.
The Rating Outlook is Stable.
Date of Relevant Rating Committee: Nov. 11, 2016
Additional information is available on www.fitchratings.com.
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
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