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Fitch Affirms Instituto Costarricense de Electricidad's Ratings at 'BB+'; Outlook Stable

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 service provider.

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 segment.

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 5.6x.

In the short-term, credit metrics could deteriorate as 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.

RATINGS SENSITIVITY

--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).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=835249

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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