Fitch Affirms Angamos' IDRs at 'BBB-'; Outlook Stable
The Rating Outlook is Stable.
KEY RATING DRIVERS
Angamos' ratings reflect the sound structure of the company's long-term commercial agreements with strong investment-grade counterparties, which allow the company to generate predictable cash flows. The company's power purchase agreements (PPAs) have an average life of 15 years and provide stable, fixed monthly capacity charge payments. The PPAs also allow for the pass-through of variable costs to the company's counterparties. Furthermore, the ratings are supported by operational and implicit support from the company's owner, AES Gener S.A. (Gener; IDR 'BBB-'/Stable Outlook).
Strong PPAs: The company's ratings are supported by the strength of Angamos' PPAs with investment-grade credit quality counterparties. The company is fully contracted and the PPAs have an average 15-year tenure with a stable, fixed monthly capacity charge structure. The PPAs allow for the full pass-through of variable costs including fuel and non-fuel costs, and certain changes in laws.
Capacity contracted under the PPAs is as follows: Minera Escondida Limitada (MEL) - 340MW with a maturity date of June 2029; Minera Spence S.A. (Spence) - 90MW with a maturity date of October 2026; and 3) Compania Teck Quebrada Blanca S.A. (QB) - 80MW with a maturity date of December 2037. The QB PPA was signed in 2012 with the commercial operation date (COD) expected in 2018, at which time Angamos will begin receiving the fixed monthly charge. At that time, the company's capacity will be approximately 100% contracted. Furthermore, the contracts have comprehensive force majeure terms that add to cash flow predictability.
Further strengthening the company's contractual position is the fact that Angamos' counterparties all possess investment- grade credit quality. Both MEL and Spence are controlled by BHP Billiton Ltd. (IDR 'A+'/Negative Outlook). QB is majority owned by Teck Resources Ltd. (IDR 'BBB-'/Stable Outlook).
Stable Cash Flow Generation: As the company's PPAs have been designed to generate stable payments, Angamos has been generating positive free cash flow (FCF) since its first full year of operations in 2012. During the last three years the company's capex has declined to maintenance levels of USD5 million-USD10 million. During the final construction and commercial launch periods of 2010-2011, the company spent USD510 million in capex. Going forward, Fitch is projecting the company to show average capex of USD9 million per year, with FCF before dividends averaging around USD80 million per year over next five years. Incorporating dividend payments in 2015-2017, FCF after dividends is expected to be negative during this period with a return to positive FCF once the QB PPA begins in 2018.
In the last 12 months (LTM) ended June 2015, Angamos reported consolidated adjusted EBITDA of USD104 million, which was down approximately 11% versus 2013 results. This decrease can be attributed to a decrease in spot market revenues, as in the first half of 2015 (2H15) average spot prices in the Northern Interconnected System (SING) declined by approximately 40% versus the year ago period. Until the company initiates the supply of energy to QB, the company will have approximately 80MW of its installed capacity exposed to the spot market. Overall, the company's EBITDA margins have settled in the 37%-38% range since 2012 as the plant's operations ramped up. Fitch expects the company's margins to remain in the 37%-38% range until the Minera Quebrada Blanca mine's PPA comes into effect in 2018 with EBITDA then settling at around 40% over the long term.
Strong Parent Relationship: The company benefits from the implicit and operational support of its parent company, Gener, which owns 100% of the company's equity. Although Gener does not provide a guarantee for the company's debt, Angamos is one of the parent company's key assets. Overall, Gener has 5,082MW of installed generating capacity, of which its Angamos assets represent roughly 11%. Angamos generated nearly 17% of Gener's consolidated EBITDA in 2014, and dividends from the subsidiary will become an important source of cash flow for Gener as it is engaged in two major generation construction projects (Alto Maipo and Cochrane).
Angamos has secured service agreements with Gener to provide long-term technical, fuel supply and O&M support. Furthermore, Angamos and adjacent sister plant, Cochrane (COD in 2016), have also signed long-term commercial agreements that will eventually yield incremental revenues for Angamos.
Dividend Payments Begin: In 2015, Fitch expects the company to begin making substantial dividend payments to its parent. The company will not begin making amortization payments on its corporate bond until 2018 (3 1/2-year grace period), so for 2015-2018 Fitch expects Angamos to be making maximum dividend payments. Once amortization payments begin in 2018, dividends should be substantially pared back.
Solid Debt Service Coverage: The company's high leverage is mitigated by solid debt service coverage provided by strong contracts generating a highly stable source of cash flow. Fitch's base case assumes the company will average a debt service coverage ratio (DSCR) of approximately 2x for the life of the bond. The average is skewed by the 3.5-year grace period when the DSCR would average around 3x. Fitch's base case expectations for a median DSCR of 1.5x, with a minimum of 1.3x, are consistent with the rating category.
Fitch expects leverage metrics to remain high for the rating category in the short- to medium-term, declining when the company begins making principal amortization payments starting in 2018. Despite the expected elevated leverage metrics over the medium term, the combination of the fixed payment structure of the company's PPAs and the amortizing nature of the bond should lead to fairly stable DSCR for the life of the bond.
Fitch's forecast assumes the company's peak leverage levels are in the 2014-2015 period, with overall leverage defined as adjusted debt/EBITDA declining to under 5x starting in 2019 and under 4x by 2021. In terms of interest coverage, EBITDA/gross interest expense should slowly improve from 3x currently to 6x within six years, with a median interest coverage level of approximately 4.5x for the life of the bond.
RATING SENSITIVITIES
Angamos' ratings could be negatively impacted by a change in the company's strategy with respect to leverage, dividends and capital expenditures. Additional substantial indebtedness before the bond matures would be viewed negatively. The ratings could be affected if there is a change in commercial strategy that would lead to an over-contracted position for the plant. In addition, the company signing new PPAs that are dissimilar in nature to the current PPAs would be negative (e.g. a move away from fixed payments, shorter PPA tenors than the tenor of the debt, etc.). A general deterioration in the credit quality of the plant's counterparties could also impact the ratings of Angamos.
A positive rating action is unlikely in the medium term as the Angamos bond's annual debt service requirements are appropriately sized with the company's predictable cash flow generation, and coverage is in line with the rating category. The company's credit quality would improve if cash flow generation increases as a result of significant gains in operating efficiency, such as reducing the company's heat rate.
LIQUIDITY AND DEBT STRUCTURE
Sufficient Liquidity: Fitch believes Angamos has adequate liquidity to support its financial needs despite the heavy dividend payments the company will be engaging in during the bond's amortization payment grace period. Once the QB contract becomes effective in 2018, Fitch is projecting that the company will average FCF before dividends of USD100 million.
The company maintains a modest cash balance, reporting USD30 million of cash and marketable securities as of 2Q15, compared to USD70 million at year-end 2013. Long-term, the company is targeting to maintain a cash balance of approximately USD30 million, which should be attainable despite robust dividend payments. Total debt after the recent issuance is approximately USD800 million, for leverage of approximately 7.5x in the LTM June 2015 period, which is high for the rating category. Average leverage through the final repayment date is projected to be around 3.5x.
KEY ASSUMPTIONS
--Energy sales of approximately 3,600GWh/year until Quebrada Blanca comes on-line in 2018 and energy sales rise to 3,800GWh/year;
--Fitch's base case assumes Quebrada Blanca mine project cash-flow streams begin as planned in 2018;
--In the short- to medium-term, EBITDA generation to average approximately USD120 million/year with a step-up to the USD140 million/year level starting in 2018;
--Capex of USD9 million per year;
--Leverage declining to below the 5x level in 2019 as debt amortization payments begin.
Fitch is affirming the following ratings for Empresa Electrica Angamos S.A.:
--Foreign and local currency IDRs at 'BBB-';
--International senior secured bond ratings at 'BBB-'.
The Rating Outlook is Stable.
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