Research Update: Empresas Copec S.A. 'BBB' Credit Rating Affirmed, Outlook Remains Stable Primary Credit Analyst: Cecilia L Fullone, Buenos Aires (54) 114-891-2170; cecilia.fullone@standardandpoors.com Secondary Contact: Francisco Gutierrez, Mexico City (52) 55-5081-4407; francisco.gutierrez@standardandpoors.com Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria & Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 23, 2014 1
Research Update: Empresas Copec S.A. 'BBB' Credit Rating Affirmed, Outlook Remains Stable Overview We expect Chile-based conglomerate, E-Copec, to maintain its good market position in its main operating lines and its stable operating performance. We are affirming our 'BBB' corporate credit rating on the company. The stable outlook reflects our expectation that the company will keep a financial performance in line with its "intermediate" financial risk profile. Rating Action On July 23, 2014, Standard & Poor's Ratings Services affirmed its 'BBB' corporate credit rating on Empresas Copec S.A. (E-Copec). The outlook remains stable. The rating action follows our ordinary annual review. Rationale Our 'BBB' rating on E-Copec comprises the following: Our "satisfactory" business risk and "intermediate" financial risk profile assessments for the company, which determine our anchor of 'bbb-'; and We assess the diversification/portfolio effect for E-Copec as moderate, which leads to a one-notch uplift from the anchor score. E-Copec has four main business lines (fuel, midstream energy, pulp, and wood and panels). Although many of these divisions operate within the same industry, the conglomerate conducts business in multiple regions, resulting in a medium degree of correlation among them. In our view, E-Copec maintains its "satisfactory" business risk profile thanks to the good market position in its main business lines. We expect the company to maintain a significant market share in the wood panel sector in the Americas and in the global pulp market. Also, its well-known brand, good operating and logistical practices, nationwide coverage, and ability to successfully transfer price risk to customers support the company's market position in the Chilean and Colombian fuel distribution sectors. In addition, the company's operating efficiency is above average in its pulp and forest products production, thanks to its productive plantations that shorten its trees' life cycle to half of that of similar species in the WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 23, 2014 2
northern hemisphere, adequate technology, efficient asset configuration, and energy self-sufficiency. The inherent price volatility of forest products, which is highly dependent of consumer spending cycles (especially pulp, because it is subject to fluctuating demand patterns from Asian markets), represents the main risk, in our view. We continue to assess E-Copec's financial risk profile as "intermediate." Although credit metrics at Celulosa Arauco y Constitucion S.A. (Arauco; BBB-/Stable/--), its operating subsidiary, were weaker in 2012 and 2013 due to high debt and aggressive investments amid softer-than-expected results, we believe E-Copec's cash flow diversification and strong liquidity shield the conglomerate from the inherent volatility of the pulp and wood-related products business. Our base-case scenario incorporates the following expectations for 2014 and 2015: Operating assumptions match those of its rated subsidiaries, Arauco and Compania de Petroleos de Chile COPEC S.A. (Copec; BBB/Stable/--). See our full analysis on Arauco published on Feb. 24, 2014, and our research update on Copec published on June 24, 2014. Consolidated annual capital expenditures (capex) approaching $1 billion in 2014, which is in line with management's plans. Annual dividends from subsidiaries registered under the equity method at about $120 million. Cash proceeds ($364 million) from the divestment of E-Copec's 25% stake in Empresa Electrica Guacolda S.A. (not rated). Dividend payout ratio at 40% of net income. Under these assumptions, we expect the company's consolidated annual EBITDA to be $2.0 billion - $2.3 billion in 2014 and 2015. At the same time, in our view, debt levels will drop to about $5 billion from $6 billion in 2013, as we expect Arauco to consolidate its new panel operations in the U.S. and Canada, and to continue to prioritize debt reductions over investments until its Montes del Plata operations reach full capacity by mid-2015. Therefore, we expect debt to EBITDA to be about 2.5x and FFO to debt in a range of 30%-35%, compared with 3.3x and 22%, respectively, in the 12 months ended March 2014. E-Copec's total cover ratio (dividends-to-operating costs plus net interest and dividends-paid ratio) of 1.6x indicates robust operating cash flows. Also, in December 2009 and September 2011, the company issued bonds for $300 million and $70 million, respectively, and lent those amounts to its subsidiaries, Abastible S.A. and Copec, via intercompany loans with the same maturity and interest rate. Due to its relatively low debt and the issuance of the bonds for $370 million, we expect E-Copec's net interest payments to remain minimal. E-Copec has stakes in the following companies: Arauco (99.98%); Copec (100%); Chilean liquefied gas importer and distributor, Abastible (not rated; 99.05%) WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 23, 2014 3
Largest supplier of natural gas for industrial clients in Chile, Metrogas S.A. (not rated; 39.83%); Fishing company, Pesquera Iquique- Guanaye S.A. (not rated; 81.9%); and Some mining investments--specifically its 50% ownership in the coal mine project, Sociedad Mina Invierno S.A. (not rated). We based our ratings on E-Copec on our stand-alone credit profile (SACP) for the company and our view that it's a core subsidiary to its parent, AntarChile S.A. (not rated), because: E-Copec's sale is highly unlikely; Its operations are integral to the overall group strategy; The group has incentives to support E-Copec as it contributes a meaningful stream of cash. In 2013, E-Copec's EBITDA represented 97% of AntarChile's EBITDA and it's the sole dividend contributor to its parent's asset portfolio; It's closely linked to the group's reputation as it has been the flagship company of the Angelini group since its inception; It has a long track record as a profitable business; and Its capitalization is commensurate with that of the group. Liquidity We assess E- Copec's liquidity as "strong." We incorporate the following aspects in our assessment of the company's liquidity profile: Sources of liquidity will exceed uses by at least 1.5x in the next 12 months; Sources should continue to exceed uses even if EBITDA declines by 30%; E-Copec should absorb high-impact, low probability events with limited need for refinancing, as it has some flexibility in both its capex and dividend payments; Solid relationship with banks and good access to debt markets; and As of March 31, 2014, E-Copec and its subsidiaries were in compliance, and have sufficient room, under their covenants. Principal Liquidity Sources: Cash balances of $1.4 billion as of March 31, 2014; Committed credit bank lines of $320 million for Arauco; Funds from operations (FFO) of $1.6 billion - $1.8 billion; and Proceeds from the recent sale of Guacolda for $364 million. Principal Liquidity Uses: Short-term debt of $1.2 billion as of March 31, 2014 (part of it was refinanced with the proceeds from Arauco's recent $500 million issuance bullet due 2024); Capex and working capital needs of about $1 billion in 2014; and Dividend payments at a 40% payout ratio, which the company can lower to the 30% legal minimum, if necessary. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 23, 2014 4
Outlook The stable outlook on E-Copec reflects our expectation that the company will maintain its credit metrics commensurate with its "intermediate" financial risk profile in the next two to three years. Downside scenario We could lower the ratings if the company's core credit metrics weaken, which could mean, for instance, a debt to EBITDA of more than 3.0x and FFO to debt of less than 30%. This could be in line with scenarios of consolidated EBITDA margins below 7%. Upside scenario An upgrade is unlikely in the intermediate term, but it's possible if the company significantly improves its financial risk profile, with debt to EBITDA consistently below 2x or FFO to debt higher than 45%. Ratings Score Snapshot Corporate Credit Rating: BBB/Stable/-- Business risk: Satisfactory Country risk: Intermediate Industry risk: Intermediate Competitive position: Satisfactory Financial risk: Intermediate Cash flow/leverage: Intermediate Anchor: bbb- Modifiers Diversification/Portfolio effect: Moderate (+1 notch) Capital structure: Neutral (no impact) Liquidity: Strong (no impact) Financial policy: Neutral (no impact) Management and governance: Satisfactory (no impact) Comparable rating analysis: Neutral (no impact) Entity status within group: Core (no impact) Related Criteria & Research Related criteria Methodology And Assumptions: Liquidity Descriptors for Global Corporate Issuers, Jan. 2, 2014 Corporate Methodology, Nov. 19, 2013 Corporate Methodology: Ratios and Adjustments, Nov. 19, 2013 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 23, 2014 5
Group Rating Methodology, Nov. 19, 2013 Related research Celulosa Arauco y Constitución S.A., Feb. 24, 2014 Compania de Petroleos de Chile Copec S.A. 'BBB' Credit Rating Affirmed, Outlook Remains Stable, June 24, 2014 Ratings List Ratings Affirmed Empresas Copec S.A. Corporate Credit Rating BBB/Stable/-- Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 23, 2014 6
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