Fitch Affirms Isagen's IDRs at 'BBB-'; Outlook Revised to Positive

CHICAGO--()--Fitch Ratings has affirmed Isagen S.A. ESP's (Isagen) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB-'. The Rating Outlook has been revised to Positive from Stable.

Fitch has also affirmed Isagen's long-term National Scale rating as well as its local bond issue program at 'AAA(col)'; Outlook Stable. In addition, Fitch has affirmed the company's 'F1+(col)' short-term National Scale rating.

The Outlook revision considers Fitch's expectation of further strengthening of Isagen's credits metrics, given the robust cash from operation and the reduction of Capex needs for the next few years. Isagen's ratings reflect its solid business position, moderate financial leverage and adequate liquidity. Also factored into the ratings are the moderate exposure to regulatory risk and the change of control of the company. The rating action also reflects the renegotiation of the conditions of a loan that had a prepayment clause, which reduced Isagen's debt amortization for 2016.

KEY RATING DRIVERS

Solid Competitive Position

Isagen's ratings reflect the company's solid competitive position, its low marginal costs and robust portfolio of generation assets. With the incorporation of Sogamoso, a 820MW of installed capacity hydroelectric plant, in December 2014, Isagen consolidated its business position as the third largest generation company in Colombia, with 3,032 MW of installed capacity. This new asset generated 24.8% of the company's total electricity generated in 2015.

The location of Sogamoso has also allowed Isagen to compensate the pressures experienced by its other plants. Hydroelectric generation growth has been limited since 2015 due to low hydrological condition as well as the negative externality of the accident of an Empresas Publicas de Medellin's hydroelectric plant over some Isagen's key hydroelectric assets.

Increase in EBITDA

In line with Fitch expectations, Isagen reported an important increase in EBITDA and margins during 2015. The company recorded COP1.2 trillion in EBITDA, which represented a margin of 41.5%. The results benefited from the startup of the company's Sogamoso hydroelectric plant, which increased the hydroelectric generation in the company energy mix. In addition, the significant increase in spot prices by the end of 2015 boosted Isagen's revenues and EBITDA.

Fitch expects ISAGEN to record stable EBITDA during 2016, although it is expected some pressures during the first months of 2016, given the pressures in Isagen's hydroelectric generation. Isagen's commercial strategy concentrates the majority of its sales through long-term contracts with distribution companies and major industries, which supports its cash from operations stability.

Fitch does not rule out that structural changes in the regulation could take place in the medium term, as El Nino Phenomenon unveiled some weaknesses in the regulatory framework for electric generation. Fitch will review the potential changes of regulation, and any implication on Isagen's cash flow generation.

Free Cash Flow With Less Pressure

Free cash flow (FCF) has been consistently negative during the past five years due to expenses related to the construction of Sogamoso and an aggressive dividend policy. Fitch expects FCF generation to turn to positive, as capital expenditures will be reduced during the year, along with the Isagen's decision of not paying dividends in 2016. Capex for 2016 includes a major maintenance of its thermoelectric plant. The company has been operating this asset closed to full capacity since 2013. In the medium term, the FCF generation performance will depend on the execution of new sizable projects and the new dividend policy of the company to be defined by the new shareholders.

Moderate Leverage

Fitch expects Isagen's leverage levels to remain around 3x during 2016. In line with Fitch expectations, the increase in EBITDA and the reduction of Capex led to an important reduction of leverage in 2015. At end of December 2015, the company closed with a debt to EBITDA ratio of 3.2x, which positively compared with the 4.5x leverage reached in 2014. Isagen's capital structure has a limited exposure to FX risk, as only 9% of its financial debt is dollar-denominated.

Adequate Liquidity Position

Isagen maintains adequate liquidity levels, supported by healthy cash balance, stable cash from operations and a manageable debt structure profile. At end of 2015, the company closed with cash balance of COP365 billion and COP311 billion in short-term debt. The reduction of Capex in the next years along with the decision of not paying dividends during 2016 should strengthen liquidity position.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

--Prices decline in 2016 compared to 2015 given the expected end of low hydrological condition in the second half 2016;

--EBITDA levels to stabilize during 2016;

--Capex for 2016 incorporates major maintenance in Termocentro plant.

--Leverage levels trending towards 3x in 2016 onwards.

RATING SENSITIVITIES

A positive rating action could be considered in case the company consolidates the strengthening of its credit metrics from 2016 onwards, following a conservative growth and dividend strategy. An upgrade for Isagen's ratings could be supported if leverage trend towards 2.5x or below on a sustainable basis.

The main factors that individually or collectively could lead to a negative rating action are:

--A steep decrease in electricity prices, coupled with low generation and poor electricity demand;

--Changes in regulation that put pressures on Isagen's cash flow operation capacity;

--A sustained leverage levels over 4x;

--A change in the company's strategy that results in a more aggressive one in terms of leverage and capital expenditures.

LIQUIDITY

Isagen reduced its potential refinancing risk for 2016 as it renegotiated the conditions of the loan from Power Finance Trust Limited due in 2025 on April 2016. Hence, the company and the creditor removed the mandatory pre-payment clause as an event of change of control took place. Debt maturity profile is manageable for the company, with annual debt amortizations below COP300 billion in 2017 and 2018.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Isaqen S.A. E.S.P.

--Long-Term Foreign Currency IDR at 'BBB-';

--Long-Term Local Currency IDR at 'BBB-';

--National Long-Term Rating at 'AAA(col)';

--National Short-Term Rating at 'F1+(col)';

--Local bond program at 'AAA(col)'.

The Rating Outlook is revised to Positive from Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1004108

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004108

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Lucas Aristizabal
Senior Director
+1-312-368-3260
Fitch Ratings, Inc.
70 West Madison St.
Chicago, IL 60602
or
Secondary Analyst
Jorge Yanes
Director
+571-326-9999 Ext. 1170
or
Committee Chairperson
Joseph Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Lucas Aristizabal
Senior Director
+1-312-368-3260
Fitch Ratings, Inc.
70 West Madison St.
Chicago, IL 60602
or
Secondary Analyst
Jorge Yanes
Director
+571-326-9999 Ext. 1170
or
Committee Chairperson
Joseph Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com