Fitch Ratings has affirmed Instituto Costarricense de Electricidad y
Subsidiarias' (Grupo ICE) foreign- and local-currency Issuer Default
Ratings (IDRs) at 'BB+' as well as its national scale ratings at
'AAA(cri)' and 'AAA(slv)'. The Rating Outlook is Stable.
KEY RATING DRIVERS
Grupo ICE's ratings are supported by the company's linkage to the
Sovereign rating of Costa Rica (FC and LC IDRs rated 'BB+'/Stable
Outlook by Fitch) which stems from the government ownership and
government's implicit and explicit support. The company holds strategic
importance for the government given the growing demand of electricity in
the country and government's plans to increase renewable generation and
to reduce exposure to fluctuations in fossil fuel prices. The ratings
also reflect company's diversified portfolio of assets, adequate
financial profile, aggressive capital expenditure program oriented to
increase renewable generation capacity and maintaining a strong market
share position in the telecommunications business.
DIVERSIFIED ASSET PORTFOLIO
Grupo ICE is a vertically integrated monopoly in the electricity
industry and the incumbent player in the Telecom industry in Costa Rica.
The ratings reflect the company's low business risk resulting from its
business diversification and positive characteristics as a utility
As of year-end 2013, Grupo ICE had an installed electric generation
capacity of 2,067 megawatts (MW) (national capacity of 2,731MW) and is
the exclusive owner of the national transmission grid. The national
electric industry includes private generation, municipal distribution
and electric cooperatives that can generate energy in coordination with
Grupo ICE or sell their energy to Grupo ICE. The company is expected to
remain a leader in the telecommunications industry in the country,
notwithstanding recent changes that opened the industry to competition.
Although this will increase competition, it is also expected to enhance
regulatory transparency. ICE's market share in terms of subscribers was
near to 100% in fixed telephony and 70% in mobile at 2013-end.
In YE 2013, the company generated revenues and EBITDAR of USD 2,647
million and 936 million, respectively (USD 2,375 million and USD844
million in 2012). The company's electricity segment represented
approximately 59% of revenues, with the telecommunications division
contributing the rest. Fitch expects ICE's electricity business to
increase its contribution given the current and future expansion
projects, as well as relatively stable results in the telecommunications
LEVERAGE DRIVEN BY CAPEX
Grupo ICE's ratings reflect the company's leverage, satisfactory
interest coverage and exposure to foreign exchange risk. In the last few
years, company leverage weakened as result of the ongoing large capital
expenditure program, which is mainly financed with debt. Fitch expects
the company will be able to reduce leverage as new generation projects,
such as PH Reventazon, become online in the next few years, absent of
significant changes in tariffs.
As December 2013, Grupo ICE reported consolidated debt of USD3.7
billion, of which USD423 million was short-term and near 85% was
denominated in USD, which exposes the company to fluctuations in the
exchange rate. The company benefit from a very favorable debt schedule,
approximately 25% of its debt matures in the next five years. Financial
leverage ratio, as measured by total adjusted debt-to-EBITDAR, totaled
In the short-term, credit metrics could deteriorate s result of adverse
weather conditions and a lag in regulated tariffs to incorporate the
costs of thermal generation and net electricity imports. A further
devaluation of the local currency may also impact leverage ratios. These
factors could reduce company's ability to meet some financial covenants
and financial flexibility. A breach of covenants could limit temporarily
issuer's ability to take new debt.
AGGRESSIVE CAPITAL EXPENDITURE PLAN
Grupo ICE's capital investment plan is considered aggressive and could
weaken the company's financial profile, absent increased cash flow
generation and adequate tariff adjustments. The company plans to invest
approximately USD3.7 billion over the next five years in order to supply
electricity to meet demand and maintain its leadership position in
telecommunications in Costa Rica.
Going forward, leverage could increase consistently to over 6.0x if the
company finances its capital investment plan heavily with debt and the
revenues associated with these investments are delayed beyond the
expected ramp-up timeframe or don't received opportunely the tariff
adjustments. Grupo ICE expects to finance its investments with a
combination of internal cash flow, debt, Build Operate and Transfer
(BOT) transactions, project finance vehicles and operating leases.
HIGH EXPOSURE TO REGULATORY AND POLITICAL INTERFERENCE
Grupo ICE is highly exposed to regulatory interference risk given the
lack of clear and transparent electricity tariff schedules. The company
annually proposes to the regulator electricity tariffs for end-users; in
previous years, the regulatory and political interference affected the
tariff adjustment process.
Positive for the company's business and financial profile is the
approved mechanism to adjust tariffs to reflect fuel cost variations on
a quarterly basis, starting in 2013. This change has a positive effect
on Grupo ICE's working capital and reduces its exposure to hydrology
risk. Before 2012, the regulator approved tariffs that do not fully
recognized the company's moderate exposure to fuel prices borne by its
thermoelectric generation business (8% - 10% of annual generation on
average). Currently the issuer is proposing to modify the existing
tariff scheme to incorporate the costs of net electricity imports given
ongoing adverse weather conditions.
The recent Telecom regulatory framework considers changes in tariffs and
competition rules. Fitch expects that new regulations could enhance
regulatory transparency. Nevertheless, telecommunications tariffs have
been unchanged since 2006.
Despite the regulatory risk, Grupo ICE has managed to maintain a
relative stable cash flow generation. Also, the company is exposed to
political interference given that the government appoints and removes
ICE's directors and executives, sets and approves the company's tariffs,
and regulates its budget.
--Grupo ICE's ratings could be negatively affected by any combination of
the following factors: sovereign downgrades; weakening of legal,
operational and/or strategic ties with the government; or regulatory
intervention that negatively affects the company's financial performance.
--Grupo ICE's ratings could be positively affected by an upgrade of
Costa Rica's sovereign rating, or if the company is materially isolated
from government interference.
Fitch has affirmed the following ratings for Grupo ICE:
--Long-term FC IDR at 'BB+'; Stable Outlook;
--Long-term LC IDR at 'BB+'; Stable Outlook;
--Senior unsecured debt at 'BB+';
--Long-term national scale (Costa Rica) at 'AAA(cri)'; Stable Outlook;
--Senior unsecured domestic long-term debt (Costa Rica) at 'AAA(cri)';
--Short-term debt at 'F1+(cri)';
--Long-term national scale (El Salvador) at 'AAA(slv)'; Stable Outlook
--Senior unsecured domestic long-term debt (El Salvador) at 'AAA(slv)'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May. 28, 2014).
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage
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