Fitch Ratings has affirmed the Long-Term Foreign Currency and Local Currency Issuer Default Ratings (IDRs) of Fenix Power Peru S.A. (Fenix) at 'BBB-'.

The Rating Outlook is Stable.

Fenix's ratings and Outlook reflect its strong EBITDA margins and stable leverage underpinned by long-term contracts, manageable costs and an amortizing debt burden. The cash support agreement (CSA) extended by parent Colbun S.A. (BBB+/Stable) since 2019 will expire in April 2024 without renewal.

Key Rating Drivers

Strong Leverage: Fenix ended fiscal 2023 with Fitch-calculated leverage (total debt/EBITDA) at 2.8x, in line with fiscal 2022. EBITDA, which includes certain lease adjustments, exceeded USD90 million in fiscals 2022 and 2023. These levels were strong by historical standards due to greater dispatch amid drier weather conditions each year. Fitch's base case predicts that EBITDA should reduce in 2024 and beyond to an average USD52 million, assuming a return to a more balanced national electricity generation mix that includes greater hydroelectricity output.

EBITDA assumptions for Fenix include a mix of 80% contracted and 20% spot sales, negotiated average purchase agreement (PPA) prices of USD67/MWh for regulated customers and USD38/MWh for unregulated customers, a flexible gas supply contract, and a steadily amortizing debt profile, with 40% of remaining bonds amortizing by 2026 and 100% by 2027. Fitch assumes no new debt and that the 2027 bonds will be refinanced. These assumptions drive average leverage of 3.5x and EBITDA interest coverage of 5.8x over the rating horizon.

Solid Contractual Position: Fenix benefits from stable and predictable cash flows driven by generation capacity contracted under U.S. dollar-denominated long-term PPAs with high credit quality off-takers and full cost pass-through provisions. Contracted PPAs have historically accounted for around 70% of full generation capacity and as of 2024 have an average remaining contract life of six years. Regulated off-takers account for an average 60% year-end generation revenues, and include credit worthy distribution company off-takers Enel Distribucion S.A.A., Luz Del Sur, and Distriluz. Large nonregulated customers comprise an average 12% of revenues and include around 40 distinct businesses. Spot market revenue accounts for around 27% historical of annual energy sales.

Solid Market Position, Expansion Planned: Fenix operates an efficient single-asset 573MW gas-fired combined cycle plant and accounts for an average 7% of Peru's total electricity generation. The company, in conjunction with parent Colbun, plans to diversify its Peruvian generation capacity by constructing up to 900MW in renewable solar and wind projects through 2030, depending on feasibility and profitability. Base case capital spending is otherwise predictable and manageable. In fiscal 2023 Fenix underwent a routine major maintenance program totaling USD20 million, but annual capex through 2026 will average USD11 million per year for renewal and replacement. The next major maintenance is scheduled for 2027 for USD30 million.

Parent-Subsidiary Assessment: Fitch views Colbun's strategic incentive to support Fenix as low, given the subsidiary's minimal contribution to its parent's financial position of around 10% of average annual EBITDA. The operational incentive is medium due to managerial and brand overlap, as well as a reasonable degree of operational cost avoidance. Additionally, Fitch expects the company's cash support agreement with parent Colbun to expire in April 2024, which results in a low level of legal support incentive by the parent company. Combined, this incentive structure results in a 'bottom up plus one (BU+1)' approach from Fenix's 'BB+' Standalone Credit Profile to the 'BBB-' IDR.

Derivation Summary

Fenix's business profile compares favorably with other generation companies in the region, namely Kallpa Generacion S.A. (BBB-/Stable), Orazul Energy Peru S.A. (BB/Stable) and AES Andes S.A. (BBB-/Stable). The peers' ratings reflect stable, diversified asset bases and predictable cash flows, supported by solid contractual positions, embodied in medium- to long-term agreements with financially strong counterparties and limited volume exposure.

Kallpa benefits from a stronger capital structure, asset diversification across thermal and hydroelectric facilities, a stronger contractual structure and a leading market position with nearly three times the installed capacity of its Fitch-rated Peruvian peers. Kallpa's leverage is trending toward 3.5x and below within the rating horizon. Orazul operates two hydroelectric generation facilities and has medium-term leverage approximating 5.0x.

AES Andes' credit profile benefits from a diverse generation portfolio, which features long-term contracted assets with investment-grade counterparties and supports these companies' ratings. AES Andes' PPAs have a comparatively longer average life of nine years.

Additionally, Fenix compares well to German utility RWE. Though RWE operates a diversified generation mix with a materially higher 34GW of installed capacity (nearly 60x that of Fenix), its output comes primarily from its gas-fired thermal capacity. Similar to Fenix, this proves strategic for RWE during high price environments as the company can hedge its contracted position through increased spot market sales. Fenix's leverage is comparatively higher than RWE's; however the latter expects a near-term leverage uptick with new debt.

Key Assumptions

Energy production of approximately 4,000 gigawatt hours (GWh) on average per year during 2024-2027

Electricity spot price of USD72/MWh in 2023, declining to an average USD35/MWh thereafter;

Monomic regulated PPA prices averaging USD66/MWh and unregulated prices averaging USD40/MWh in 2024-2027, and capacity prices averaging USD5/kWh per month;

Cost of goods sold assumed at 65% of revenue each forecast year;

Average demand growth of 1% yoy;

Heat rate at 6.75Btu/kWh;

Capex averaging USD11 million in 2024-2026 for renewal and replacement work, until 2027 when a planned USD29.5 million will fund periodic major maintenance;

Neither dividend payments to shareholders nor financial support from shareholders is assumed.

RATING SENSITIVITIES

Developments That May, Individually or Collectively, Lead to Positive Rating Action

Gross leverage, measured by total debt/EBITDA, falling to below 3.5x on a sustained basis;

An increased weighted average contract life while maintaining similar contractual positions;

Maintaining robust liquidity indicators such as a one-year liquidity ratio above 1.25x.

Developments That May, Individually or Collectively, Lead to Negative Rating Action

A multiple-notch downgrade of Colbun's ratings or the perception of a weaker linkage between parent and subsidiary;

Increase of Fitch-adjusted total debt/EBITDA to 4.0x on a sustained basis;

A change in Fenix's commercial policy that results in an imbalanced long-term contracted position;

Material disruptions to operations that weaken cash flows.

Liquidity and Debt Structure

Strong Liquidity: Fenix ended fiscal 2023 with an estimated USD50 million in cash and cash equivalents, and an average USD29 million the two years prior. Strong cash generation is supported by stable and predictable cash flows, manageable capex levels and no dividend payments. Liquidity has been further underpinned by a drawn committed credit line of USD25 million. Fitch assumes year-end cash balances to average USD50 million going forward.

The 10-year term notes due in 2027 started a step-up amortization of principal in September 2018, after a one-year grace period. Continued amortization will retire 40% of remaining debt by 2026, with the balance of roughly USD168 million to be paid down and refinanced in 2027.

Issuer Profile

Fenix owns and operates one combined cycle gas plant with a total installed capacity of 573 MW located in Salinas, Peru. The plant is strategically located near the Camisea natural gas pipeline terminal and Chilca's electric substation.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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