KEY RATING DRIVERS
Colbun's ratings reflect its diverse and improving portfolio of generation assets by energy source, its balanced long-term contracted position and a constructive regulatory environment. Credit risks associated with the company include exposure to hydrological risk, which represents 48% of its installed capacity, potential to increase capex and possible environmental and/or political issues. The latter could result in cost overruns or modifications of projects under construction.
Balanced Contractual Position
Colbun benefits from long-term contracts with financially strong counterparties (power distribution companies and industrials). These contracts have adequate indexation mechanisms that closely match the company's generation mix and somewhat mitigates Colbun's exposure to fuel price volatility.
Based on a normal hydrology, Colbun's contract requirements are balanced and its contracted volume is expected to reach about 12.000 GWh per annum in 2015 and to remain at that level. Under a scenario of dry hydrology, the contracted volume could be met with the company's natural gas back-up units or by purchases in the spot market, although with a negative impact on margins.
Temporary Natural Gas Provision Helps
Positively, the company has secured the temporary provision of natural gas for its thermal units through contracts with Metrogas and
Nehuenco II Back in Service
Angostura Power Plant In Operation
The Angostura hydroelectric project was officially commissioned in
Ambitious Growth Agenda
In the medium- to long-term time horizon, the company has an ambitious expansion agenda. As the company returned to positive free cash flow generation and given the bond issuance, the project build-out seems financially manageable especially if the projects are spread apart from each other. However, consistent with major engineering works, the projects do add to Colbun's execution and construction risk.
The company's multiple projects under development are: 1)
Return to Positive Free Cash Flow
For the 12 months ended
Fitch expects Colbun to reduce its free cash flow deficit, under the assumption it maintains a 30% dividend payout ratio. Should dividend payments or investments materially increase, free cash flow deficits could potentially persist. Net debt should remain at or below current levels, and short-term debt maturities should remain manageable following the bond issuance. Assuming the company uses proceeds from the new bond to pre-fund its
Credit Metrics Recovering
Colbun's credit metrics have been gradually improving since the third quarter of 2012 (3Q12), as Colbun rebalanced its contracted position with its efficient generation capacity following the start-up of its coal-fired Santa Maria plant. 2013 was the first full-year of operations for the Santa Maria plant. The newly commissioned Angostura hydro plant has also had a positive effect so far in 2014, and Fitch expects consolidated EBITDA to total approximately
Failure to continue to improve leverage and coverage ratios could pressure Colbun's credit quality and result in a negative rating action. The ratings could be negatively pressured if the company's credit metric recovery ceases, if there is an imbalance in its long-term contracted position and/or if the performance of its thermal plants is consistently below expectations. In 2011 and 2012, the company's metrics significantly deteriorated as a result of an over contracted position and due to the delay in the construction of Santa Maria plant in combination with dry hydrology.
A positive rating action is not likely in the near future.
Colbun is the second largest electricity generator in
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology' (
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Source: Fitch Ratings
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