Fitch Publishes First-Time 'BBB-' Ratings on Kallpa; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has published the 'BBB-' Long-Term Local- and Foreign-Currency Issuer Default Ratings (IDRs) of Kallpa Generacion S.A. (Kallpa). Fitch also expects to rate Kallpa's proposed international bonds due 2026 'BBB-(EXP)'.

The Rating Outlook is Stable.

KEY RATING DRIVERS

Kallpa's ratings reflect its solid operating profile supported by its strong contractual position and competitive cost structure. The company's ratings also reflect its dominant market position as Peru's second largest combined cycle generator in terms of installed capacity. Finally, the company could face pressure from its controlling shareholder, Inkia Energy Ltd. ('BB'/Outlook Negative), to increase dividends above those forecasted by Fitch. The company has sufficient liquidity to cushion itself through significant capex needs in the short- to medium-term.

Predictable Operating Cash Flow:

As of 2015, approximately 98.4% (vs 96.4% in 2014) of energy by volume sales were contracted under U.S. dollar denominated power purchase agreements (PPAs), with an average life of 6.81 years. These PPAs support the company's cash flow stability through fixed payments and pass-through clauses related to potential increases in fuel costs or other costs due to changes in the regulatory framework. The company has secured 100% of its natural gas needs under long term supply contracts with the Camisea Consortium until 2022, further contributing to the predictability of its cash flow generation.

Strong Credit Metrics:

Kallpa maintains a sound credit profile supported by stable EBITDA generation and a moderating leverage level. As of YE2015, EBITDAR was USD157 million with an EBITDAR margin of 35%. The company's EBITDAR margins have been stable and have, on average, exceeded 30% over the last four years. Kallpa's credit metrics are healthy within its rating level, with gross leverage of 2.8x and interest coverage of 5.0x. Fitch expects the company to maintain an average interest coverage of 6.0x and gross leverage ratio of 3.0x or below between 2015-2019. Proceeds from the proposed senior unsecured debt issuance will be used to refinance existing debt improving the liquidity position of the company as the company's maturity profile is extended.

A Market Leader Despite Competitive Environment:

As a low-cost producer, Kallpa is the second largest private power generator in Peru with a 24% share of the thermoelectric generation market and 12% of the country's generation market. Peruvian generating companies (GenCos) compete to supply electricity to distribution companies (DisCos) and large nonregulated clients. The Kallpa and Las Flores terminals have a high priority on the dispatch order in the Sistema Interconectado Nacional (SEIN), reducing its need to access the spot market. The current environment in Peru has increased competition as a result of an overcapacity, resulting in pressured electricity prices. This risk has been mitigated as the company benefits from medium and long term PPAs.

Possible Pressure from Controlling Shareholder:

While the company has consistently generated positive CFFO, Fitch's projections do not contemplate a material reduction in the company's leverage. The company's ratings reflect a moderate to aggressive dividend payment policy, assuming all the cash in excess of $25 million will be upstreamed to its parent company, Inkia Energy Limited (Inkia). Kallpa is a strategic asset for Inkia as it provides constant and stable dividend payments to the company. Inkia's aggressive growth strategy coupled with its policy to pay significant dividends to its parent, Kenon Holdings, add pressure to Kallpa's cash flow generation, if required, to implement a dividend payout ratio above 100% net income.

KEY ASSUMPTIONS

--NG prices will slowly recover in 2017 and 2018;

--Electricity spot prices will remain depressed during 2015-2018 as a result of the market overcapacity;

--Contracted capacity will remain at 96% during the next three years;

--All excess cash will be distributed to the parent with a minimum cash position of $25 million;

--Capex investments will be manageable in line with historical amounts without considering significant expansions or acquisitions;

--The majority of the proceeds of the proposed issuance will be used to repay existing debt.

RATING SENSITIVITIES

Kallpa's ratings could be negatively affected by a combination of the following: a change in the company's commercial policy that results in an imbalanced long-term contractual position; and/or a material and sustained deterioration of the company's credit metrics reflected in a debt-to-EBITDA ratio greater than 3.5x and EBITDA-to-interest coverage below 4x; and/or pressure from shareholders that could result in a significant increase in dividend payments.

A positive rating action would be considered after material improvements in credit metrics that could be sustained over the long term and a substantial reduction in debt levels. Sustained gross debt-to-adjusted EBITDA ratios in the 2.0x - 2.5x level would be viewed positively. While an upgrade is unlikely in the near term, a shift to more predictable and conservative cash management at the parent company would be considered positive.

LIQUIDITY

Kallpa's leverage of 2.8x is comfortably within its rating category. Although leverage may improve from higher expected EBITDAR during 2017 and 2018, Fitch does not expect material reductions in gross debt. Instead, cash will be used for dividend distributions to Inkia to fund the latter's aggressive growth strategy. Negative free cash flow for the purposes of shareholder compensation would be viewed negatively. Short-term debt, which includes annual interest, totalled USD132 million as of YE2015, CFO and Cash/STD was 0.2x, with interest coverage of 5.0x.

As of December 2015, the company's total debt, excluding operating leases, amounted to $416 million, with approximately 70% of the debt related to long term financing for the development of Kallpa II - IV and the acquisition of Las Flores. These financings are project finance type debt supported by all the assets transferred to the Master Trust under the Contrato Marco de Garantias (CMG), under which all the financed assets including the turbines, major and minor spare parts and the land under the central stations secure the debt. The financing related to Kallpa I was repaid in full in March 2016.

The proceeds of the proposed $350 million senior unsecured notes will be used to repay the existing project finance debt, except for the portion issued under Las Flores, which will remain in place. The collateral package under the CMG will be unwrapped, and only the pledge of the assets related to Las Flores will back the lease.

FULL LIST OF RATING ACTIONS

Fitch takes the following rating actions to Kallpa Generacion S.A.:

--Local and Foreign Currency Issuer Default Ratings 'BBB-'

-- Kallpa's proposed notes due 2026 'BBB-(EXP)'.

Date of Relevant Rating Committee: May 6, 2016

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1004344

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004344

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160511006585/en/

Fitch Ratings
Primary Analyst
Cinthya Ortega, +1-312-606-2373
Director
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Josseline Jenssen, +51 1 372 0681
Director
or
Committee Chairperson
Lucas Aristizabal, +1-312-368-3260
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
[email protected]

Source: Fitch Ratings

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