Fitch Ratings Ratifies Colombian Power Generator Isagen At AAA and F1+ & BBB International Rating

Fitch Ratings ratified the BBB international rating and the AAA and F1 + national long and short-term ratings, respectively, of ISAGEN S.A. E.S.P., all with stable perspective. Likewise, it affirmed the AAA rating of local bond issuances of ISAGEN, and the AAA and F1 + the long and short-term issuances, respectively, of the shelf registration program of ordinary bonds and commercial paper of the company.

The ratings assigned are based on the company’s solid position in the energy market, its strong and diversified portfolio of generation assets, the predictability of its EBITDA generation and its credit metrics.

The report highlights that Isagen is well positioned in respect to other electric generation companies that Fitch rates at a national scale: “Its conservative business strategy mitigates its exposure to the volatility stemming from the structural characteristics of the electricity generation market in Colombia.”

Isagen is controlled by Toronto based Brookfield Asset Management

Fitch ratified the BBB international rating and maintained the maximum national long and short-term ratings of ISAGEN.

Key Ratings Drivers

Solid Business Position:  Isagen’s ratings reflect its solid competitive position in the Colombian electricity generation sector, reinforced by its scale and the low marginal costs of its portfolio of generation assets. These factors effectively offset risk posed by a highly competitive market historically exposed to energy and fuel price volatility, as well as some structural risks that emphasize contractual portfolios with relatively short tenors compared to other gencos outside Colombia. The company has been able to extend contract tenors with customers in the non-regulated market as a way to mitigate these risks. Isagen is the third largest electricity generation company in Colombia with 3,032MW of installed capacity. During 2018, the company generated 13,987Gwh, the third largest generation in the country.

Adequate Leverage Metrics: Isagen’s ratings factor the expectations that the company’s leverage metrics would be in the 3x range over the medium term. At end of 2018, Isagen’s leverage was 3x, in line with Fitch expectations, and fostered by strengthening EBITDA for the year. Fitch does not consider Isagen’s shareholder loan (SHL) as financial debt for its leverage calculation, as the SHL is a subordinated obligation, with interest payment optionally paid in kind (PIK), subject only to Isagen’s request. Moreover, the lender cannot take any action to accelerate or enforce any of its rights or exercise any of its remedies to collect this loan.
Low Business Risk Profile: Isagen continues to deploy a conservative commercial strategy that links its contract sales with its firm energy of hydroelectric assets. This strategy allows the company to limit its exposure to the spot market as a buyer since hydroelectric generation should be able to cover contract sales amid hydrological stressed conditions. In 2018, the company recorded an increase in electricity purchases in the spot market, but this was related to Isagen’s water reservoir management in which it seized the low spot prices during the first quarters of the year and displaced its hydroelectric generation to capture higher spot prices recorded in late 2018 and the beginning of 2019.

Positive EBITDA Performance: Fitch expects Isagen to continue reporting moderate growth in EBITDA over the rating horizon, driven by its proven commercial policy and its recent cost efficiency initiatives. Moreover, limited capex requirement should positively contribute to FCF generation. The company has a portfolio of 497MW of expansion plants, of which only 24MW already have all the environmental licenses granted. Isagen has not disclosed when they plan to execute these projects, but internal cash flow generation should allow Isagen to easily meet these Capex.

Cash Generation Depends on SHL Payments:  Isagen’s future cash generation performance would mostly be dependent on the company’s distributions to its shareholder, Brookfield, which could take place as interest payments and prepayments on the shareholder loan or as dividends. During 2018, Isagen prepaid COP 1.36 trillion of the subordinated SHL; this obligation closed at COP 4.88 billion at the end of 2018. Ratings factor in the expectations that, in absence of sizable capex, Isagen’s positive FCF will be distributed to shareholder. Nevertheless, it is expected that leverage ratios continues around 3x, the target established by the company.

Derivation Summary

Isagen’s credit profile is commensurate with the investment-grade electric generation companies in the region, such as Emgesa S.A. E.S.P. (BBB/Stable), Enel Generacion Chile S.A. (BBB+/Positive), Enel Americas S.A. (BBB+/Stable), Engie Energia Chile S.A. (BBB/Stable), Colbun S.A. (BBB/Stable), and AES Gener S.A. (BBB-/Stable). All of these companies benefit from predictable cash flow from operations, stemming from robust business profiles and conservative capital structures. Differences in specific rating levels are largely a function of revenue mix, both geographically and by business, along with asset base diversification and the presence of long-term contract sales. Enel Generacion Chile has the largest installed capacity within this peer, with more than 6,000MW distributed among hydroelectric, thermal electric and wind plants. In addition, leverage levels have been consistently at or below 1.5x. Enel Americas’ ratings reflect strong and sustained credit metrics coupled with a solid business platform, as well as a strong degree of business and geographic diversification across Latin America.

Fitch expects Isagen to maintain leverage levels between 2.5x and 3x, in line with projections for Colbun and above the estimations from Engie (below 2x). The Chilean companies benefit from a longer-term contractual position, which mitigates re-contracting risk. Colombian generation companies are structurally more exposed to this risk, as around two thirds of Colombian electricity demand comes from electricity distribution companies, whose typical contract terms are less than three years.

In addition, Isagen is well positioned in regards to peers with national ratings in the electricity generation market, namely Emgesa, Empresas Publicas de Medellin E.S.P (EPM) and Empresa de Energia del Pacifico S.A. (EPSA), all rated ‘AAA(col)’. Isagen is the third largest electricity generation company in Colombia, behind Emgesa and EPM. Its conservative commercial exposure mitigates its exposure to results volatility stemming from the structural characteristic of the Colombian market, which is heavily concentrated in hydroelectric assets.

Key Assumptions

Fitch’s Key Assumptions Within Its Rating Case for the Issuer
– Isagen’s electricity generation reaches around 14,000 Gwh per year;
– Isagen mantains a contracting policy of around 70% of total electricity sales on average;
– The company’s shareholder distribution policy does not deteriorate Isagen’s credit performance in the medium term, which results in a gross leverage level in the 2.5x to 3x range.

Rating Sensitivities

Developments That May, Individually or Collectively, Lead to Positive Rating Action
– Fitch considers a positive rating action unlikely in the near term, given business and geographic concentration in electricity generation in Colombia, as well as leverage expectations;
Developments That May, Individually or Collectively, Lead to Negative Rating Action
– A steep decrease in electricity prices, coupled with low generation and poor electricity demand;
– Sustained leverage of more than 3.5x;
– A change in company strategy that weakens cash flow from operations (CFFO) performance or results in a more aggressive plan in terms of leverage and capex.

Liquidity

Adequate Liquidity Position: Isagen maintains adequate liquidity levels, supported by prospects for strong and predictable EBITDA generation. The company has the flexibility to capitalize interest payments on its SHL, which reached COP 737 billion during 2018, and can retain CFO generation if necessary. Fitch anticipates that Isagen will maintain relatively low cash balance levels and refinance most of debt obligation, since the company plans to maintain leverage levels around 3x, and any cash excess will be distributed to shareholders in the form of dividends or serving its SHL loan.

At the end of 2018, the company reported COP4.4 trillion of financial debt. Isagen’s financial debt is comprised of 45% local bond issuances (about COP 2 trillion), 53% for credit loans (about COP2.35 trillion) and the balance in financial leases. Financial debt is 94% concentrated in local currency, which matches cash flow generation and limits volatility of results stemming from FX volatility. Isagen has scheduled debt amortization of around COP632 billion in 2019, which is expected to be refinanced. Fitch consider Isagen refinancing risk as manageable, given its moderate leverage levels and ample access to local capital markets and bank loans, both locally and abroad. During 2018, Isagen refinanced around COP 2 trillion in bank loans, extending maturities up to 2030 and reducing financial costs.

Full List of Ratings Actions

Isagen S.A. E.S.P.
– Long-term Foreign-Currency IDR at ‘BBB’; Outlook Stable;
– Long-term Local-Currency IDR at ‘BBB’; Outlook Stable;
– National Long-term rating at ‘AAA(col)’; Outlook Stable;
– National Short-term rating at ‘F1+(col)’;
– Local bond issuances at ‘AAA(col)’;
– Local bond and commercial paper program at ‘AAA(col)’ and ‘F1+(col)’.