Termocandelaria’s Proposed Bond Reopening Rated BB+ By Fitch

Fitch Ratings has assigned a ‘BB+’ rating to TermoCandelaria Power Ltd.’s proposed notes reopening of up to $200 million USD under its 7.875% senior unsecured notes due 2029. TermoCandelaria initially issued $410 million in senior unsecured notes in January 2019 to refinance its outstanding debt. The reopening will follow the same principal repayment schedule as the initial issuance, which amortizes at 7.5% annually between 2021 and 2028 and 40% in 2029.

Proceeds from the reopening will be used to convert the TECAN plant to a closed cycle gas turbine plant from an open cycle and any remainder for general corporate purposes. The conversion is expected to increase TECAN’s installed capacity to 566MW from 324MW for approximately $35 million in additional EBITDA beginning in March 2022. Fitch currently rates TermoCandelaria Power Ltd. ‘BB+’/Outlook Stable.

Fitch has assigned a final rating of BB+ for the $200 million for the senior unsecured note reopening due 2029

TermoCandelaria’s ratings reflect the combined operations of TEBSA and TECAN, their relative competitive position in the electricity generation market in Colombia, as well as TermoCandelaria’s limited geographical diversification and asset mix. Also factored into the ratings, are Fitch’s expectations for increased consolidated EBITDA in the short to medium term, driven by the strong load factor in TEBSA, as well as the collection of reliability charges and regulated revenues not exposed to market dynamics.

Key Rating Drivers

Credit Profile Linked to Subsidiaries: TermoCandelaria is a holding company that combines operations of two electricity generation companies (Gencos), TEBSA and TECAN, located on Colombia’s Caribbean coast. TermoCandelaria fully owns and controls TECAN and has a 57.38% stake in TEBSA. TermoCandelaria’s ratings are mostly related to TEBSA’s credit profile since TEBSA accounts for approximately 80% of TermoCandelaria’s consolidated EBITDA.

Moderate Leverage Ahead: TermoCandelaria’s bond reopening is expected to temporarily increase its consolidated total debt/EBITDA leverage ratio to more than 3.5x in 2020 due to the addition of $200 million in debt. Leverage is expected to return to 2.5x in 2021, as the company’s debt begins to amortize, and then fall to around 2.0x in 2022 due to further debt amortization and the closing of TECAN’s cycle. Future leverage will depend on the EBITDA generated by its subsidiaries, as additional debt on a consolidated basis over the rating horizon is not expected.

Limited Operational Diversification: TermoCandelaria’s credit profile is constrained by the limited diversification of its operations. The company is exposed to a higher degree of event risk than local and regional peers from unexpected outages or disaster disruptions. Although out-of-contract sales eliminate exposure to spot market volatility as a buyer, TermoCandelaria’s take-or-pay regasification contracts would put additional pressure on its subsidiaries’ cost structure in the event of an interruption in generation. TermoCandelaria combines the operations of 1,283 MW of thermal electric assets, which represent around 8% of the Colombian electricity generation matrix and around 27% of the thermal electric installed capacity in Colombia.

Positive Near-Term Supply/Demand Dynamics: TermoCandelaria benefits from the country’s transmission bottleneck in the northern coast, which results in persistent dispatch by TEBSA in order to meet demand despite the company’s comparative higher costs relative to non-coastal generation assets. TermoCandelaria’s ratings incorporate Fitch’s expectation that TEBSA will maintain a load factor around 50% in the medium term, which would be in line with its historical levels. Demand characteristics of the Caribbean coast also suggest relatively high growth through the medium term, supporting TEBSA’s continued dispatch as long as present transmission and capacity dynamics continue.

Structure Mitigates Exogenous Market Risks: In the long term, new investments in the transmission network or the development of non-conventional renewable energy projects in Colombia’s coastal region could displace TEBSA within the dispatch curve, resulting in lower EBITDA. The government planning unit is coordinating auction processes to encourage the incorporation of newly installed electric capacity in 2022-2023. In addition, a new transmission line that will permit up to 1,000MW of new projects to be installed in the Guajira region will be available in 2022. These risks are partially mitigated by TermoCandelaria’s amortizing structure and by the cash preservation mechanisms established under the issuance.

Medium-Term EBITDA Upside: TermoCandelaria is expected to maintain stable consolidated EBITDA generation over the rating horizon given the stability of electricity generation, coupled with a regulatory cost pass-through mechanism that applies in the market for out-of-merit generation. When a high hydrology condition prevails in the market, TEBSA has been maintaining its operations through out-of-merit electricity generation. In this situation, the company is remunerated based on its bid price, in which all of its variable costs are passed through the market, capped by its reported referential variable costs.

Inverted Hydrology Risk: TermoCandelaria’s EBITDA generation benefits from low hydrology conditions and hydrology cyclically, which periodically occur in Colombia. TEBSA and TECAN could maintain their operations through in-merit generation since variable costs could be below spot prices, which would translate into more profitable operations. Fitch’s base case contemplates a three-year delay in EPM’s 2,400MW Hidroituango hydroelectric project, which could result in higher spot prices through the medium term. The supply dynamic could cause TEBSA to be dispatched as a baseload generator in addition to its current role as an out-of-merit generator.

Stabilizing Cost Structure: TermoCandelaria’s consolidated CFO is relatively predictable due to recent changes to capacity remuneration in Colombia. Both TEBSA and TECAN will receive reliability payments until 2025 amounting to annual revenues of around USD 160 million in order to be able to dispatch its firm energy obligations when spot prices surpass the scarcity price as defined by the regulator. Both companies chose to elect the new scarcity price defined under CREG Resolution 140 2017 as the reported variable costs of the thermal electric matrix. This limits the possibility of being required to dispatch with a negative gross margin, a situation experienced by TECAN during the last El Niño phenomenon in 2015-2016.

Secure Fuel Supply: TermoCandelaria has reduced its exposure to liquid fuel price volatility by entering into long-term gas supply contracts that extend to 2026 with the right to extend until 2031. TEBSA and TECAN will receive around $30 million in annual dollar denominated regulated revenues for securing this LNG access, which represents 50% of the of the fixed payments TermoCandelaria has to make to the LNG operator for granting access to this natural gas source. Fitch expects that TermoCandelaria’s regulated revenues along with reliability charges payments will continue to be enough to cover the company’s fixed costs, absent any interruption in the company’s generation capacity.

Derivation Summary

TermoCandelaria’s ratings are one notch above Nautilus Inkia Holding LLC’s (Inkia; BB/Negative), its closest peer. Although lacking Inkia’s geographical diversification and asset base mix provided by its key subsidiary Kallpa Generacion S.A. (BBB-/Negative), TermoCandelaria’s capital structure is more conservative, with leverage levels reaching 2.5x in 2020, while Fitch expects Inkia’s leverage to decrease to below 5x in 2019 and to around 4.5x in the medium term. In addition, Inkia’s debt is structurally subordinated to debt at the operating companies, while TermoCandelaria’s is not. TermoCandelaria’s capital structure also compares positively with Orazul Energy Egenor S. en C. por A (BB/Stable). Orazul’s high medium-term leverage of above 5.0x under Fitch’s forecast places it at the high end of its rating level.

Fitch considers TermoCandelaria’s business risk is higher than multi-asset energy regional investment grade peers such as AES Panama S.R.L. (BBB-/Stable), Kallpa and AES Gener (BBB-/Stable). All of these companies benefit from a strong contractual position in their respective markets. These companies’ PPAs support their cash flow stability through USD-linked payments and, in Kallpa’s case, pass-through clauses related to potential increases in fuel costs. This contributes to a higher EBITDA visibility in the long term, compared to TermoCandelaria, which remains exposed and exogenous supply/demand dynamics. Although TermoCandelaria’s key subsidiary TEBSA maintains relative cost efficiency that currently places it within the coastal base load, future additions to the local renewable energy matrix or expansion of the national transmission network could potentially displace the company from its strong competitive position in the coastal region in the long term.

TermoCandelaria ratings are one notch below those of Fenix Power Peru S.A. (BBB-/Stable). As a single-asset generator with a high proportion of take-or-pay costs and a deleverage trajectory that will reach 5x by 2021, Fitch views Fenix’s standalone credit quality as consistent with a ‘BB’ rating. However, Fenix’s ratings are buoyed by strong support from its parent Colbun S.A. (BBB/Positive).

Key Assumptions

Fitch’s Key Assumptions Within Its Rating Case for the Issuer
–TermoCandelaria places $200 million notes in a reopening of its 2029 international notes.
–No additional debt is contemplated at the TermoCandelaria’s holding level or subsidiaries over the rating horizon.
–TermoCandelaria’s combined annual generation over the medium term reaches at least 3,800 Gwh per year, similar to the level reported in 2017.
–TEBSA’s and TECAN’s strong availability factors at above 90%.

Rating Sensitivities

Developments That May, Individually or Collectively, Lead to Positive Rating Action
–A positive rating action is unlikely in the medium term, given TermoCandelaria’s limited asset diversification and long-term threats to its competitive position.

Developments That May, Individually or Collectively, Lead to Negative Rating Action
–Additional material debt at TEBSA’s or TECAN’s level that structurally subordinates debt repayments at TermoCandelaria’s holding level.
–A material deterioration of TEBSA’s or TECAN’s EBITDA’s generation capacity, declining to below $150 million on a sustained basis.
–Consolidated leverage levels above 3.5x on a sustained basis.

Liquidity

Adequate Liquidity: TermoCandelaria’s liquidity levels are explained by stable cash inflows from its subsidiaries and moderate financial debt at the holding level. As a holding company without operations, TermoCandelaria does not maintain a material cash balance on a non-consolidated basis. In the absence of execution of sizable projects (as is currently the case) any excess funds are paid in dividends. TermoCandelaria’s pro forma capital structure includes $410 million in an international bond issuance and an additional $200 million from the bond reopening. The bond amortizes gradually beginning in 2021 that will ease leverage pressure in 2023 when it is likely that TermoCandelaria’s EBITDA capacity will be pressured because of the expected increased installed capacity. Although the transaction implies a leverage increase, the debt maturity profile is manageable, and it also removed structural subordination.

All dollar amounts in this article are US Dollars, unless otherwise indicated.

Images courtesy of Termocandelaria