OREANDA-NEWS. Emgesa's halt of operations of Hidroelectrica El Quimbo, following the decision of Colombia's Constitutional Court, could limit the company's expected EBITDA strengthening in 2016, says Fitch Ratings. The magnitude of the negative impact depends on how long Emgesa takes to overcome the legal issues and resume operation of this new hydroelectric asset, the timing of which still is uncertain. Fitch does not expect to take negative rating actions on Emgesa's ratings in the near term, as it is the agency's view that the company has enough operational and financial strength to cope with this situation.

Emgesa announced that it suspended the operations of El Quimbo on December 16 after it was notified that the Constitutional Court declared as invalid the Presidential Decree 1979 (Sept. 17, 2015) which authorized the beginning of operations at its hydroelectric plant. The Court's decision left in place the Regional Court of Neiva decision of July 2015 that prohibited the start of operations of El Quimbo until some environmental issues are met.

The El Quimbo project, with an installed capacity of 400 MW and an expected average electric generation of 2,216 Gwh, represents 13.1% of Emgesa's total installed capacity. The company brought this asset online in November 2015, after five years of construction and USD 1.2 billion in capex. With the El Quimbo operations, Fitch expects Emgesa's leverage to fall to 2x during 2016, from 2.4x at end of September 2015. The current leverage level is below previous projections, benefitting from an increase in electric generation and higher spot prices.

The suspension of Emgesa's El Quimbo operation could hurt the company's EBITDA generation, but given its robust cash flow from operations, ample liquidity levels, and no sizable capex projected in the medium term, Fitch believes Emgesa will be able to weather the situation with no immediate impact on its credit profile. EBITDA impact could come two ways: First, the company will not benefit from the electricity generated by this asset and the reliability charge as long as the suspension is in place. Also, since El Quimbo has Firm Energy Obligations (OEF) of 1,650 Gwh per year that are activated when the spot energy prices surpasses scarcity price (which is the current situation expected to continue in the following months amid the El Nino Phenomenon), the company could have to back up this OEF with energy provided by its other plants and third party plants with a resultant reduction of its profitability.