Fitch Affirms ENAP's FC IDR at 'A' & National Scale Rating at 'AAA(cl)'
KEY RATING DRIVERS
ENAP's ratings reflects its 100% ownership by the Chilean government, the sound credit profile of its parent, the strong legal, operational and strategic ties with the state, and strategic importance to Chile given it assures a significant portion of the country's energy supply. ENAP owns 100% of the refining capacity of the country, meeting approximately 61% of the internal demand, and representing around 40% of the country's energy matrix. As a state-owned company, ENAP's FC IDR is strongly linked with the credit profile of the Chilean sovereign (FC IDR 'A+'; Outlook Stable by Fitch), although direct financial support provided by the government has been limited.
Strong Government Support
ENAP's ratings reflect the historical support showed by the Chilean State in different ways, and Fitch's analysis includes the assumption that the State of Chile will continue to provide timely and sufficient support to the company in the event of financial distress. The Chilean government is strongly involved in ENAP's business; the Ministry of Finance approves ENAP's budget and any new debt assumed by the company. In 2014, government support materialized with the payment of USD65 million as compensation for subsidies granted by ENAP for natural gas consumption in the Magallanes region. Positively, this compensation payment, included in the Ministry of Energy's budget, is already approved for USD100 million for year 2015. Additionally, the government's energy agenda announced in May 2014 considered a USD400 million capital increase for ENAP, which will be made in conjunction with a Corporate Governance law for the company that should be in Congress by 1Q 2016.
In the past, government support has been reflected in a temporary capitalization of retained earnings at ENAP's subsidiaries since 2009 and approved until 2016, suspension of dividend payments over the past six years, and a USD250 million equity injection in 2008. Although the Republic of Chile does not explicitly guarantee any of ENAP's indebtedness, the all of the financial debt has a Change of Control Clause.
Financial Metrics to Deteriorate
Although ENAP's financial performance has improved since 2013, its leverage level continues to be high for the rating category and Fitch does not foresee room for deleverage in next two years given the current market conditions and the company's investment plan. For 2015, Fitch estimates that ENAP's leverage measured as debt to EBITDA will stand close to 8x, up from 6.3x as of YE14, while interest coverage ratio should be in the range of 2.5x to 3.0x. In spite of the company's weak credit metrics for the ratings category, Fitch anticipates continued strong parent support, which includes the assumption of the USD400 million capital injection announced in the energy agenda in 2016 - 2017. Metrics are expected to improve over the mid-term.
Based on Fitch's price deck for 2015, Fitch expects ENAP's EBITDA for the next 12 months to be approximately USD500 million. Meanwhile the company's financial debt is projected to grow mainly due to the E&P investments that ENAP is committed to carry on in the Magallanes Region to ensure gas supply in the area. Total Capex estimated in USD500 million includes USD200 million in maintenance capex and USD250 million in E&P investments. Financing of these investments should imply additional debt for USD100 million to USD200 million. ENAP's total debt as of December 2014 amounted for USD3.8 billion.
As of year-end 2014, ENAP's credit metrics have remained quite in line with 2013. The company's leverage ratio (Debt to EBITDA) stood at 6.3x, down from over 100x in 2012. Main driver for this improvement was the recovery of the EBITDA generation, while financial debt showed moderate reductions in the last two years.
EBITDA Generation Expected to Decrease; Negative Free Cash Flow
For 2015, and assuming an international oil price around USD50/bbl, Fitch expects ENAP's EBITDA to stand at approximately USD500 million, although more downward pressure on international prices could further stress the scenario. Additionally, we expect the company's free cash flow to remain negative for at least the next 12 to 24 months, as the company will pursue an investment plan aligned with the government's energy agenda, which targets ENAP with the key role as a coordinator / facilitator of certain investments for the development of the country's energetic strategy.
In 2013 and 2014, ENAP's EBITDA generation showed a consistent increase as a result of lower Liquefied Natural Gas (LNG) import costs resulting from the new contract with British Gas and a more efficient hedging strategy, which allowed ENAP to ensure fuel supply for its refining assets at a lower cost and also to provide natural gas to electric generation companies and industrial clients at higher margins. EBITDA for 2014 was USD604 million, down from 2013's USD634 million mainly due to the decline in the international oil prices in 2014 last quarter, but maintained a good margin on 6.1%.
Effects of Declining Oil Prices on ENAP
Although Chile should be the biggest beneficiary from the decline in oil prices in the region, this scenario does not benefit ENAP and Fitch projects that its profitability will suffer. For the company's E&P business, which represents 51% of its consolidated EBITDA as of 2014, Fitch estimates that its break-even point stands at a crude oil price between USD45 and USD50/barrel. This business segment will suffer from low oil prices mainly in Chile and Egypt, which represent close to 60% of the ENAP's total oil production. Higher pressure on international prices will probably stress the scenario. In the refining and marketing business, which represents 49% of ENAP's EBITDA as of 2014, the effect of the decline in the oil prices is reflected in the refining margins, as there is a correlation between the price of refined products in the Gulf of Mexico, to which ENAP's prices are linked, and the price of oil. In the last 12 months, overall margins showed a declining trend, compensated by the reduction in operational costs of the oil-fuelled refineries.
Positively, the company has hedged most of its exposure to crude oil price volatility between the moment the crude oil is bought and the time it is sold through time spread swaps and other hedging instruments, protecting the business' margins. As from 2013, and after the losses suffered in 2012 as a result of the sharp decline in international oil process over high stocks and with an insufficient hedging policy, ENAP introduced relevant changes in its overall policies, which included new inventory management procedures, a more efficient and flexible commodity price hedging policy, the re-negotiation of sales contracts and the sale of non-core assets among others. These modifications had positive effects in different areas, and are allowing the company to show more stability, have a better control over its costs, respond more quickly to changes in market conditions and cover its exposure to crude oil price volatility, besides shortening the inventory cycle.
Liquidity Remains Weak; Access to Refinancing is expected to Remain Strong
ENAP's liquidity remains relatively weak, although it has showed an important improvement over the past two years, as the company refinanced a large portion of its short term debt and improved its debt maturity profile. Fitch expects access to local and international markets to remain strong and based on a strong government support. Cash and equivalents as of December 31, 2014, amounted to USD153 million, while current maturities for 2015 were USD403 million (including revolving short-term debt for USD300.) Additionally, some 20% of such cash is located in Argentina, reducing its availability.
During 2014, ENAP carried out refinancing activities for a USD600 million through an international bond issuance (10-year bullet maturity) entirely used for refinancing purposes, reflecting good access to both local and international financial markets. Financial maturities for the next four years (2015 -2018) are manageable and range between USD110 and USD365 million per year, which are likely to be refinanced. Fitch does not see this as a major risk due to the company's proven access to the financial markets.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:
--Fitch price deck (WTI) of USD50/bbl in 2015, USD60/bbl in 2016, and USD75/bbl long term
--2015 consolidated capex of USD500 million
--USD400 million capital injection for 2016-2017
--Subsidy for gas consumption in the Magallanes Region in place
--Continuous State support
RATING SENSITIVITIES
ENAP's ratings could be negatively affected by a downgrade of the Chilean Sovereign rating. In addition, any weakening of legal, operational and/or strategic ties with the government could put downward pressure on ENAP's ratings.
A positive rating action is not envisioned due to the company's weak capital structure and financial profile for its rating category.
Fitch affirms ENAP's debt instruments as follows:
--Senior unsecured notes USD 300 million due 2019 at 'A';
--Senior unsecured notes USD 500 million due 2020 at 'A';
--Senior unsecured notes USD 500 million due 2021 at 'A';
--Senior unsecured notes USD 600 million due 2024 at 'A';
--Senior unsecured notes CHF 215 million due 2018 at 'A';
--Senior unsecured notes CLF 9.75 million due 2019 at 'AAA(cl)';
--Senior unsecured notes CLF 2 million due 2017 at AAA(cl)';
--Senior unsecured notes CLF 4 million due 2033 at AAA(cl)
-- Bond Program 303 at AAA(cl)
-- Bond Program 585 at AAA(cl)
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