OREANDA-NEWS. Fitch Ratings has assigned Empresa Electrica Guacolda S.A. (Guacolda) initial 'BBB-' long-term foreign and local currency Issuer Default Ratings (IDRs).

The Rating Outlook is Stable.

In addition, Fitch assigns a 'BBB-(exp)' long-term rating to the company's proposed senior unsecured debt issuance of up to USD500 million with a 10-year bullet maturity. The proceeds from the issuance will be used to refinance the company's existing indebtedness and related costs.

KEY RATING DRIVERS

Guacolda's ratings reflect the generation company's (Genco) solid business position, which is supplemented by the efficiency of its operations, competitive generation costs, and the favorable geographic location of its generation units. In addition, the ratings reflect the company's strong operational support of its controlling partner, AES Gener S.A. (Gener, Fitch IDR 'BBB-'; Outlook Stable).

The ratings incorporate Guacolda's adequate financial structure and manageable amortization schedule, pro forma for the company's debt refinancing. Post-closing, the company's debt will be comprised of a USD500 million bond issuance and a USD330 million senior unsecured amortizing term loan. This debt is in-line with the company's expected cash flow generation given peak capex spending is complete. Guacolda's investment grade ratings incorporate its appropriate commercial strategy based on long-term contracts that represent a high percentage of the firm's contracted firm energy capacity. The contracts are well-diversified between regulated (electricity distributors) and non-regulated (high credit quality mining companies) clients, and have an average length of nine-and-a-half years.

Strategic Parent Relationship

Guacolda benefits from the operational support of its controlling partner, AES Gener S.A. Gener owns a controlling majority stake (50% plus one share) of the company's equity, and although it is not providing a guarantee for the company's debt issuance, Guacolda is one of AES Gener's key operating assets. Overall, Gener has 5,082 MW of installed generating capacity, of which Guacolda represents roughly 12%. Guacolda's efficient generation plants represent a significant economic value for Gener, and Fitch would expect support to this investment from its partners in case of adverse conditions. Gener operates Guacolda within the broader AES platform, guiding the company's commercial strategy, providing Guacolda with increased purchasing power and significant replacement flexibility as an integrated asset within the broader AES structure.

Fitch believes that the March 2014 transaction in which Gener acquired a controlling stake in Guacolda has strengthened the operational/strategic ties between Guacolda and Gener, and importantly added a committed, strong partner in Global Infrastructure Partners (GIP). Although Gener does not consolidate Guacolda into its financial statements, the company does maintain operational control through its shareholder agreement with GIP. Post-transaction, Gener has been able to integrate both companies' administrative personnel, align Guacolda's strategy with its own, and centralize Guacolda's coal procurement process into the parent company's overall coal purchases. The shareholders' agreement with GIP provides the company with a high level of strategic independence, with stated long-term leverage targets of 3.0x being a key clause of the agreement.

Balanced Contractual Position

Assuming four generation units operating normally, the company's customer contracts are balanced versus Guacolda's efficient generation capacity. In a possible adverse scenario leading to generation shortfalls, these obligations would be covered via purchases in the spot market. Guacolda's sales contracts possess long-term energy price indexation mechanisms, which have reduced Guacolda's exposure to price fluctuations in the SIC. In addition, the company's major clients in the mining and energy distribution sectors maintain investment grade credit quality. After Unit 5 comes online, most of the capacity will be initially sold in the spot market but the commercial strategy is to participate in the upcoming power bid of up to 13,500 GWh in 2015 for contracts of up to 15 years with regulated clients. Given the company's efficient generation marginal cost structure, Unit 5 should be well-positioned for the bidding process.

Operating Weakness in 2014

In 2014, the company's financial performance was significantly lower than 2013 results. EBITDA of USD129 million was 22% below 2013 results, as margins contracted by approximately 500 basis points to 25% versus approximately 30% in 2013. This shortfall was mainly due to a price decoupling which occurred in the electrical system during 2014 due to temporary transmission restrictions during a dry hydrology year. In addition, results were negatively impacted by a longer than expected maintenance outage of the plant's Unit 4. These negative impacts took place while the company was investing heavily on the construction of Unit 5, leading to weakened credit metrics for the year.

Credit Metrics to Improve in 2015

Given the factors which led to operating weakness in 2014, plus a USD117 million increase in financial debt mainly related to the construction of Unit 5, the company's leverage metrics weakened in the year. Leverage defined as Total Debt to EBITDA increased from 3.6x in 2013 to 5.5x in 2014. Positively, coverage metrics remained solid at EBITDA: Gross Interest Expense of 7.3x versus 7.0x in 2013.

Fitch expects for the company's credit metrics to improve in 2015 as the plant's Unit 5 begins operations in the fourth quarter of 2015. Also, the company's transmission bottleneck has been mostly solved after installing EDAG systems in January 2015 that helped to increase transmission capacity between Maitencillo and Quillota from 220MW to 350MW.
Fitch expects the company's EBITDA to improve to the USD160 million level for 2015, implying a slight deleveraging to the 5.1x level. Long-term, with Unit 5 in operation for a full year in 2016 and amortization payments for its amortizing bank term loans beginning in that same year, Fitch expects for the company to steadily delever and achieve long-term leverage of Total Debt/EBITDA of 3.5x by 2018, which is consistent with an investment credit rating given the company's contracted position.

Capex Has Peaked

In the last quarter of 2012, Guacolda commenced construction on the plant's fifth unit (Unit 5), which will have an expected total cost of USD455 million and adds 152 MW of installed capacity. As of February 2015, the total investment had reached USD404 million reaching a 93% completion rate and the unit is on schedule to be operational in the fourth quarter of 2015. Capex during 2013-2014 totaled nearly USD467 million, mainly due to the construction of Unit 5- and the USD220 million investment to add filters to Units 1, 2 and 4 to reduce environmental emissions. Fitch expects for capex to be USD150 million in 2015 as both projects come to conclusion, with average capex of USD20 million/year going forward.

Dividends Set to Begin in 2015

Post-refinancing, Fitch expects for the company to begin making dividend payments as soon as 2015. The company does not have a stated dividend policy, citing many factors to be considered including Net Income obtained during the year, year-end projections, financing needs for projects and compliance with credit agreement restrictions. The shareholder agreement between AES Gener and GIP maintains that the company will target a long-term leverage ratio of 3x and management believes it can be flexible with its dividend policy in order to reach this long-term goal. Fitch is projecting a 100% of Net Income dividend payout ratio starting with 2015, which is in line with historical payout rates for AES Gener subsidiaries.

Liquidity Position Getting Stronger

As of year-end 2014, Guacolda had USD62 million in cash and equivalents and USD45 million in undrawn and committed lines of credit with a local bank. This liquidity position of USD107 matches the company's short-term debt obligations of USD107 million. Post-refinancing, the company will be able to push out its debt obligations with only USD55 million in debt amortization payments coming due in 2016 (after a one-year grace period on the new bank loans). The company is targeting a minimum USD25 million cash balance going forward, which it should be able to achieve due to reduced capital requirements despite a 100% dividend payout rate.

RATING SENSITIVITIES

Failure to delever to under the 4x Total Debt/EBITDA level during the next three years would pressure credit quality. A financial deterioration in the company's controlling shareholders' financial profile could also trigger negative ratings actions if this condition results in increased cash flow demands from Guacolda to the parent company.

Guacolda's ratings could be negatively impacted by a change in the company's strategy with respect to leverage, dividends and capital expenditures. In addition, a general deterioration in the credit quality of the current counterparties could also negatively impact Guacolda's ratings.

A positive rating action is unlikely in the short to medium term as the company's debt to be used for refinancing does not begin amortization payments until after a 1 year grace period, and leverage is expected to remain on the higher end for the rating category during the next two years years. Long-term, a positive rating action could occur if the company executes on its delevering plan while retaining a strong contractual position with a diversified portfolio of high credit quality customers. Stable cash flow generation and sustained leverage levels below 3.0x could be a positive rating trigger.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

--Power generation sales averaging 5,000 GWh/year during next five years;
--EBITDA generation converging to the USD200 million/year level in the near/medium term;
--Capex of USD150 million in 2015, with average capex of USD20 million per year going forward;
--Dividend payout ratio of 100% of Net Income starting with 2015;
--Leverage slowly declining to a long-term target level of 3.0x.

COMPANY OVERVIEW

Empresa Electrica Guacolda S.A. is engaged in the generation, transmission and supply of electricity in Chile's Central Interconnected System (SIC). The company owns four coal-fired power units, Guacolda I/II/III/IV, with an aggregate gross capacity of 608 MW. Guacolda is completing construction on a fifth generation unit, which will add 152 MW of installed capacity in the fourth quarter of 2015. With the addition of this unit, the company's total installed capacity will be 760 MW. As of December 2014, the company had a generation and installed capacity market share in the SIC of 9% and 4%, respectively. Guacolda is owned by AES Gener S.A. (50% plus 1 share), which is the second largest generation company in Chile, and Global Infrastructure Partners (50% minus 1 share). AES Gener operates nearly 20% of the Chile's total generation capacity, and also has ownership interests in electric generation in Colombia and Argentina. Overall Gener has 5,082 MW of installed generation capacity.