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Fitch Affirms Inkia's IDRs at 'BB'; Outlook Revised to Negative

July 3, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed Inkia Energy's Ltd (Inkia) foreign and local currency Issuer Default Ratings (IDRs) at 'BB'. Fitch has also affirmed its long-term rating for the company's USD450 million senior unsecured notes due in 2021 at 'BB'. The Rating Outlook was revised to Negative from Stable.

The Outlook revision to Negative reflects Inkia's decision to repay USD 167 million intercompany loans to its parent Israel Corporation (IC). These loans were subordinated to outstanding notes. Fitch grants an equity credit for these loans and considers that a repayment and/or other transfers to the shareholders have the same effect of a dividend payment. Additionally, consolidated leverage continued increasing as the result of the acquisition of AEI Nicaragua. These transactions generated a credit position weaker than previously anticipated.

Inkia' ratings are supported by the solid credit profile of its most important subsidiary, Kallpa, a 1063 MW (megawatt) Peruvian thermoelectric generation company. Kallpa's credit quality is supported by its contractual position and competitive cost structure; Inkia has a 75% participation in Kallpa. Inkia's ratings also incorporate the geographic diversification of its assets, large expansion projects, and expected improvements in its financial profile following the completion of these projects.

Credit Profile Linked to Kallpa: Kallpa Generacion S.A.'s (Kallpa) credit quality is supported by its competitive cost structure and contracted position. Kallpa's power purchase agreements (PPAs) represent approximately 87% of its firm energy for the period 2014-2021 (excluding Las Flores plant) and support cash flow stability through fixed payments and fuel cost pass-through clauses. The company has secured 100% of its natural gas needs under long-term gas supply contracts through 2022. In 2013, Kallpa's EBITDA represented 60% of Inkia's consolidated EBITDA.

In August 2012, Kallpa completed its expansion project, which increased the plant's installed capacity to 870 MW from 581 MW and improved its efficiency through the installation of a 289 MW combined-cycle unit. The company has recently acquired Las Flores, a 193MW simple-cycle gas power plant located 3Km from Kallpa's plant. The transaction closed in April 2014 and will add USD108M of new debt. By 2015 and after the acquisition is completed, leverage at this subsidiary level should range between 2.5 times (x) and 3.0x.

High Leverage driven by growth strategy: Inkia's stand-alone financial profile has historically been weak for the rating category and leverage is expected to remain high for the foreseeable future. Between September 2013 and March 2014, consolidated leverage increased from 4.2x to 6.3x as result of i) debt related to CdA, ii) the acquisition and debt consolidation of AEI Nicaragua Holdings and iii) a short-term credit facility provided secured with the shares of Southern Cone Power Ltd and Latin America Holding. Net leverage, measure as total net debt with equity credit / EBITDA, was 4.2x at the end of the first quarter of 2014.

In the short to medium term, leverage is expected to weaken as the company issues between USD750 million and USD800 million of new debt, mostly to finance its projects Cerro del Aguila (CdA) and Samay I and the acquisition of Las Flores. Consolidated leverage metrics could then return to approximately 3.5x to 4.0x, absent additional investments that can perpetuate the company's high consolidated leverage.

Adequate Liquidity Position: Inkia's ratings reflect the strong liquidity profile it maintained during its expansion process. Liquidity was supported on cash on hands, readily monetizable assets and steady dividends from EDEGEL. As of March 2014, its consolidated cash position amounted to USD494 million. This compares with short-term debt of USD 411 million, including a USD 168 million intercompany loan. In the short to medium term, Inkia's liquidity position may change as result of its divestiture in EDEGEL, investments in projects with credit profiles different from that of EDEGEL and changes in the dividend policy.

The company benefits from access to local and international capital markets to finance investment projects at the subsidiary level. Currently, the company has a syndicated bank facility for USD591 million to finance the construction of the CdA hydroelectric generation plant (project finance debt) and is negotiating a facility for up to USD 304 million to finance Samay I. Additionally, Kallpa has incurred in additional debt up to USD 108 million to finance the acquisition of Las Flores.

Debt Structurally Subordinated: Inkia's debt is structurally subordinated to debt at the operating companies. Total debt at the subsidiary level amounted to approximately USD1.041 billion, or 70% of total consolidated adjusted debt at 1Q2014. The bulk of this debt is represented by notes issued by Kallpa to fund its capacity expansion. This project finance-like debt has a standard covenants package including dividend restrictions and limitations on additional indebtedness.

On unconsolidated basis, Inkia's cash flow depends on dividends received from subsidiaries and associated companies. In YE 2013, the company received distributions for USD 109 million vs. USD 22 million in 2012. This significant increase is mainly explained as Kallpa started paying dividends after completing its expansion project (USD 67 million in 2013). Kallpa's project finance-like debt has a standard covenant package including dividend restrictions and limitations on additional indebtedness. Kallpa is restricted from paying dividends if its debt service coverage ratio (DSCR) falls below 1.2x. Fitch expects Kallpa's DSCR will be approximately 1.6x in 2014.

In 2013, Inkia received dividends from Southern Cone Power (EDEGEL) for USD 29 million vs. USD 9 million in 2012. Inkia is entitled to receive dividends from EDEGEL until the divestiture is completed. Going forward, the company expects to receive dividends for more than USD 25 million yearly from its investments in Central America (Nicaragua and El Salvador subsidiaries would contribute USD 14 million). Fitch considers that the quality of these proceeds is weaker than that of EDEGEL.

Portfolio of projects with stable cash generation profile: Cerro del Aguila is a 510MW hydro plant with long-term PPAs for approximately 402 MW starting in 2018. The project is estimated to cost USD910 million and Inkia expects to fund this project with approximately 65% debt and the balance with equity. The plant would likely benefit from an existing reservoirs in the Mantaro river basin; Inkia estimates a capacity factor over 70% for this plant. Samay I is a 600MW dual-fuel power plant, which will operate initially as a cold reserve plant. It will receive fixed capacity payments for 20 years. The plant has the potential to increase its cash generation when a gas pipeline recently awarded by the Peruvian government is built. Inkia has approximately a 75% participation in both projects. Fitch expects a significant improvement in the financial profile of the issuer after these projects start generating cash flows in 2016.

Asset Diversification: The ratings also take into consideration the company's geographic diversification. Excluding its Peruvian operations, Inkia generated approx. 28% of its consolidated EBITDA (plus dividends) in 2013 from assets located in Bolivia (rated 'BB-' by Fitch), Chile ('A+'), the Dominican Republic ('B'), El Salvador ('BB-') and Panama ('BBB'). Over the past few years, cash flow from these assets was of strategic importance for Inkia. After the completion of Kallpa's expansion, these assets represent smaller portion of cash distributions to the holding company.

RATING SENSITIVITIES

A negative rating action could be triggered by a combination of: investments in projects with risk profiles different from that of EDEGEL; deterioration of credit metrics as result of new investments, dividend payments while leverage is high; failure to decrease consolidated leverage below 4.0x after Cerro del Aguila and Samay I commence operations; concentration of assets in countries with high political and economic risk.

Although a positive rating action is not expected in the near future, any combination of the following factors could be considered: the Peruvian operation's cash flow contribution increasing beyond current expectations and/or leverage declines materially.

Additional information available at 'www.fitchratings.com.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis' (Dec. 23, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726863

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=837898

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Giancarlo Rubio, +1 212-612-7899

Associate Director

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Lucas Aristizabal, +1 312-368-3260

Senior Director

or

Committee Chairperson

Joe Bormann, CFA, +1 312-368-3349

Managing Director

or

Media Relations:

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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