BOGOTA, Colombia--(BUSINESS WIRE)--Fitch Ratings has assigned a foreign and local currency Issuer Default Rating (IDR) of 'BBB-' to Emgesa S.A. E.S.P and a long-term rating of 'BBB-' to its proposed note issuance of approximately USD400 million due 2021. The Rating Outlook is Stable.
Emgesa's ratings reflect the company's strong competitive position, its diversified portfolio of generation assets, and successful business and commercial strategies. The ratings also reflect Emgesa's conservative financial profile as well as the operating support the company receives from its controlling shareholder (Endesa-Chile; 'BBB+' IDR) through the transfer of know-how, experience and best practices. The ratings also consider Emgesa's moderate exposure to hydrology and regulatory risk as well as the potential pressure on credit metrics during the company's construction of El Quimbo project.
Solid Business Position
Emgesa's ratings are supported by the company's business position in Colombia as the largest generation company based on installed capacity and electric generation. As of Sept. 30, 2010, the company had 21.2% of Colombia's total installed generation capacity, and accounted for 20.2% of the country's total generation. The combination of the company's low marginal cost hydro-electric generating base, along with some thermal generating capacity (85% hydro-15% thermal) make the company less exposed to changes in the hydrology system and weather conditions.
Emgesa's commercial strategy also matches its business profile and operating assets that provides more revenue stability, predictability and lowers risk. The company's commercial strategy aims at selling around 70% of its volume at contracted prices for a two- to three-year term. As of Sept. 30, 2010, the company sold 73.3% of its generated electricity under medium-term contracts. Although the energy generation business is more vulnerable to changes in hydrology and in prices of both energy and fuel, Emgesa's administration has demonstrated a strong and conservative management, which has resulted in reasonably stable cash flows over time.
Modest Financial Leverage
Emgesa's credit profile is characterized by moderate leverage and strong interest coverage and is consistent with the assigned rating level. As of the last 12 months (LTM) ended Sept. 30, 2010, the company reported a moderate leverage ratio, as measured by total debt-to-EBITDA of 1.8 times (x). Interest coverage, as measured by EBITDA-to-Interest expense was solid as of the LTM ended Sept. 30, 2010 at 7.9x. Emgesa's liquidity position is considered satisfactory with cash on hand of USD59 million, available credit lines with banks of almost USD500 million and short term debt of USD112 million as of September 2010. The company's long-term debt of USD906 million is composed of several bond issuances due between 2011 and 2024.
Although the company's dividend policy is a minimum of 50%, Emgesa's modest leverage together with a solid cash generation have allowed the company to historically present a dividend pay-out-ratio of 90%, which is considered high, yet manageable.
El Quimbo Project to Increase Leverage Somewhat
Emgesa's expansion plan includes the construction of El Quimbo hydroelectric plant, a 400 MW hydroelectric generation plant with an estimated investment of USD 837 million. El Quimbo is expected to start commercial operations by December 2014. The company plans to finance 80% of the project with on balance sheet debt, which will increase leverage to approximately 2.3x before the project starts commercial operations. This leverage has been incorporated into the assigned ratings.
Emgesa's Strategic Importance for Endesa Group
Emgesa is indirectly controlled by Endesa S.A., through its subsidiary Endesa Latinoamerica and Endesa Chile ('BBB+' IDR), which together control the company and have a 48.48% economic interest in the company. Endesa's relationship with Emgesa is positive due to the transfer of know how, technology integration and business practices. Emgesa is a sizable asset for the Endesa Group and represents 13.2% of Endesa's EBITDA in Latin America; the El Quimbo project should increase the relative size of Emgesa in the group once commercial operation commence.
Despite not having the control of Emgesa, Empresa de Energia de Bogota S.A. ESP. ('BB' IDR) also participates in the company with 51.51% of economic rights. Empresa de Energia de Bogota (EEB) also owns non-controlling majority participations in the electric distribution companies Codensa and Empresa de Energia de Cundinamarca, and in the Colombia's largest natural gas pipeline transportation company, Transportadora de Gas Internacional.
Additional information is available at 'www.fitchratings.com' and 'www.fitchratings.com.co'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' Aug. 16, 2010;
--'Parent and Subsidiary rating Linkage' July 14, 2010;
--'Liquidity Considerations for Corporate Issuers' June 12, 2007.
--'Rating Oil and Gas Exploration and Production Companies' April 6, 2010.
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
Parent and Subsidiary Rating Linkage Criteria Report
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=534826
Liquidity Considerations for Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666
Rating Oil and Gas Exploration and Production Companies: Sector Credit Factors
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=509845
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