Proceeds from the reopening will be used to convert the TECAN plant to a closed cycle gas turbine plant from an open cycle and any remainder for general corporate purposes. The conversion is expected to increase TECAN’s installed capacity to 566MW from 324MW for approximately $35 million in additional EBITDA beginning in March 2022. Fitch currently rates TermoCandelaria Power Ltd. ‘BB+’/Outlook Stable.

Fitch has assigned a final rating of BB+ for the $200 million for the senior unsecured note reopening due 2029

TermoCandelaria’s ratings reflect the combined operations of TEBSA and TECAN, their relative competitive position in the electricity generation market in Colombia, as well as TermoCandelaria’s limited geographical diversification and asset mix. Also factored into the ratings, are Fitch’s expectations for increased consolidated EBITDA in the short to medium term, driven by the strong load factor in TEBSA, as well as the collection of reliability charges and regulated revenues not exposed to market dynamics.

Key Rating Drivers

Credit Profile Linked to Subsidiaries: TermoCandelaria is a holding company that combines operations of two electricity generation companies (Gencos), TEBSA and TECAN, located on Colombia’s Caribbean coast. TermoCandelaria fully owns and controls TECAN and has a 57.38% stake in TEBSA. TermoCandelaria’s ratings are mostly related to TEBSA’s credit profile since TEBSA accounts for approximately 80% of TermoCandelaria’s consolidated EBITDA.

Moderate Leverage Ahead: TermoCandelaria’s bond reopening is expected to temporarily increase its consolidated total debt/EBITDA leverage ratio to more than 3.5x in 2020 due to the addition of $200 million in debt. Leverage is expected to return to 2.5x in 2021, as the company’s debt begins to amortize, and then fall to around 2.0x in 2022 due to further debt amortization and the closing of TECAN’s cycle. Future leverage will depend on the EBITDA generated by its subsidiaries, as additional debt on a consolidated basis over the rating horizon is not expected.

Limited Operational Diversification: TermoCandelaria’s credit profile is constrained by the limited diversification of its operations. The company is exposed to a higher degree of event risk than local and regional peers from unexpected outages or disaster disruptions. Although out-of-contract sales eliminate exposure to spot market volatility as a buyer, TermoCandelaria’s take-or-pay regasification contracts would put additional pressure on its subsidiaries’ cost structure in the event of an interruption in generation. TermoCandelaria combines the operations of 1,283 MW of thermal electric assets, which represent around 8% of the Colombian electricity generation matrix and around 27% of the thermal electric installed capacity in Colombia.

Positive Near-Term Supply/Demand Dynamics: TermoCandelaria benefits from the country’s transmission bottleneck in the northern coast, which results in persistent dispatch by TEBSA in order to meet demand despite the company’s comparative higher costs relative to non-coastal generation assets. TermoCandelaria’s ratings incorporate Fitch’s expectation that TEBSA will maintain a load factor around 50% in the medium term, which would be in line with its historical levels. Demand characteristics of the Caribbean coast also suggest relatively high growth through the medium term, supporting TEBSA’s continued dispatch as long as present transmission and capacity dynamics continue.

Structure Mitigates Exogenous Market Risks: In the long term, new investments in the transmission network or the development of non-conventional renewable energy projects in Colombia’s coastal region could displace TEBSA within the dispatch curve, resulting in lower EBITDA. The government planning unit is coordinating auction processes to encourage the incorporation of newly installed electric capacity in 2022-2023. In addition, a new transmission line that will permit up to 1,000MW of new projects to be installed in the Guajira region will be available in 2022. These risks are partially mitigated by TermoCandelaria’s amortizing structure and by the cash preservation mechanisms established under the issuance.

Medium-Term EBITDA Upside: TermoCandelaria is expected to maintain stable consolidated EBITDA generation over the rating horizon given the stability of electricity generation, coupled with a regulatory cost pass-through mechanism that applies in the market for out-of-merit generation. When a high hydrology condition prevails in the market, TEBSA has been maintaining its operations through out-of-merit electricity generation. In this situation, the company is remunerated based on its bid price, in which all of its variable costs are passed through the market, capped by its reported referential variable costs.

Inverted Hydrology Risk: TermoCandelaria’s EBITDA generation benefits from low hydrology conditions and hydrology cyclically, which periodically occur in Colombia. TEBSA and TECAN could maintain their operations through in-merit generation since variable costs could be below spot prices, which would translate into more profitable operations. Fitch’s base case contemplates a three-year delay in EPM’s 2,400MW Hidroituango hydroelectric project, which could result in higher spot prices through the medium term. The supply dynamic could cause TEBSA to be dispatched as a baseload generator in addition to its current role as an out-of-merit generator.

Stabilizing Cost Structure: TermoCandelaria’s consolidated CFO is relatively predictable due to recent changes to capacity remuneration in Colombia. Both TEBSA and TECAN will receive reliability payments until 2025 amounting to annual revenues of around USD 160 million in order to be able to dispatch its firm energy obligations when spot prices surpass the scarcity price as defined by the regulator. Both companies chose to elect the new scarcity price defined under CREG Resolution 140 2017 as the reported variable costs of the thermal electric matrix. This limits the possibility of being required to dispatch with a negative gross margin, a situation experienced by TECAN during the last El Niño phenomenon in 2015-2016.

Secure Fuel Supply: TermoCandelaria has reduced its exposure to liquid fuel price volatility by entering into long-term gas supply contracts that extend to 2026 with the right to extend until 2031. TEBSA and TECAN will receive around $30 million in annual dollar denominated regulated revenues for securing this LNG access, which represents 50% of the of the fixed payments TermoCandelaria has to make to the LNG operator for granting access to this natural gas source. Fitch expects that TermoCandelaria’s regulated revenues along with reliability charges payments will continue to be enough to cover the company’s fixed costs, absent any interruption in the company’s generation capacity.

Derivation Summary

TermoCandelaria’s ratings are one notch above Nautilus Inkia Holding LLC’s (Inkia; BB/Negative), its closest peer. Although lacking Inkia’s geographical diversification and asset base mix provided by its key subsidiary Kallpa Generacion S.A. (BBB-/Negative), TermoCandelaria’s capital structure is more conservative, with leverage levels reaching 2.5x in 2020, while Fitch expects Inkia’s leverage to decrease to below 5x in 2019 and to around 4.5x in the medium term. In addition, Inkia’s debt is structurally subordinated to debt at the operating companies, while TermoCandelaria’s is not. TermoCandelaria’s capital structure also compares positively with Orazul Energy Egenor S. en C. por A (BB/Stable). Orazul’s high medium-term leverage of above 5.0x under Fitch’s forecast places it at the high end of its rating level.

Fitch considers TermoCandelaria’s business risk is higher than multi-asset energy regional investment grade peers such as AES Panama S.R.L. (BBB-/Stable), Kallpa and AES Gener (BBB-/Stable). All of these companies benefit from a strong contractual position in their respective markets. These companies’ PPAs support their cash flow stability through USD-linked payments and, in Kallpa’s case, pass-through clauses related to potential increases in fuel costs. This contributes to a higher EBITDA visibility in the long term, compared to TermoCandelaria, which remains exposed and exogenous supply/demand dynamics. Although TermoCandelaria’s key subsidiary TEBSA maintains relative cost efficiency that currently places it within the coastal base load, future additions to the local renewable energy matrix or expansion of the national transmission network could potentially displace the company from its strong competitive position in the coastal region in the long term.

TermoCandelaria ratings are one notch below those of Fenix Power Peru S.A. (BBB-/Stable). As a single-asset generator with a high proportion of take-or-pay costs and a deleverage trajectory that will reach 5x by 2021, Fitch views Fenix’s standalone credit quality as consistent with a ‘BB’ rating. However, Fenix’s ratings are buoyed by strong support from its parent Colbun S.A. (BBB/Positive).

Key Assumptions

Fitch’s Key Assumptions Within Its Rating Case for the Issuer
–TermoCandelaria places $200 million notes in a reopening of its 2029 international notes.
–No additional debt is contemplated at the TermoCandelaria’s holding level or subsidiaries over the rating horizon.
–TermoCandelaria’s combined annual generation over the medium term reaches at least 3,800 Gwh per year, similar to the level reported in 2017.
–TEBSA’s and TECAN’s strong availability factors at above 90%.

Rating Sensitivities

Developments That May, Individually or Collectively, Lead to Positive Rating Action
–A positive rating action is unlikely in the medium term, given TermoCandelaria’s limited asset diversification and long-term threats to its competitive position.

Developments That May, Individually or Collectively, Lead to Negative Rating Action
–Additional material debt at TEBSA’s or TECAN’s level that structurally subordinates debt repayments at TermoCandelaria’s holding level.
–A material deterioration of TEBSA’s or TECAN’s EBITDA’s generation capacity, declining to below $150 million on a sustained basis.
–Consolidated leverage levels above 3.5x on a sustained basis.

Liquidity

Adequate Liquidity: TermoCandelaria’s liquidity levels are explained by stable cash inflows from its subsidiaries and moderate financial debt at the holding level. As a holding company without operations, TermoCandelaria does not maintain a material cash balance on a non-consolidated basis. In the absence of execution of sizable projects (as is currently the case) any excess funds are paid in dividends. TermoCandelaria’s pro forma capital structure includes $410 million in an international bond issuance and an additional $200 million from the bond reopening. The bond amortizes gradually beginning in 2021 that will ease leverage pressure in 2023 when it is likely that TermoCandelaria’s EBITDA capacity will be pressured because of the expected increased installed capacity. Although the transaction implies a leverage increase, the debt maturity profile is manageable, and it also removed structural subordination.

All dollar amounts in this article are US Dollars, unless otherwise indicated.

Images courtesy of Termocandelaria

As of press-time the day before, Colombia’s President Juan Manuel Santos remains defiant against his critics in Congress and certain voices in the public, stating via Twitter that there is no legal impediment and that the legality of the process has been ratified by the Council of State.”

A statement posted on Colbún’s website signed by General Manager Thomas Keller Lipportd read, in part: “Soon after evaluating the situation in corporate meetings, and with attention to the recent media reports that assure the participation of Colbún in the final stage of the public auction process if Isagen, implicating the presentation of an offer next January 13, Colbun informs that, due to the new terms established by the authority for the presentation of the Offer, and also in part, because of the raising of the price some 21.5%, we will not be in conditions to present an offer on the defined date.”

The sale of Isagen is slated to take place tomorrow, Wednesday January 13 at 8am. If the sale does indeed go ahead, Canadian investment manager Brookfield Asset Management is expected to purchase Isagen at the auction’s minimum price of $4130 COP per share. This reflects a 21% increase over the price set for the auction slated for May of 2015 that ended up being delayed by legal maneuvering by opponents to the sale. At that time there were seven interested bidders.

“This won’t be an auction. Who will bid up the price? Or is it that Brookfield, in an act of generosity towards Colombia, will pay more than the base price?” asks rhetorically Mario Alejandro Valencia, a member of “Red de Justicia Tributaria” (Fiscal Justice Network).

“We don’t consider this an auction,” Elber Castaño, a member of Isagen’s Union told Colombian daily El Tiempo. Members of Congress, currently not in session, from various political parties are also calling for a halt to the sale. “

Why is it the Council of State (Cabinet) prohibits assigning a TV channel with only one bidder, but the government threatens to sell Isagén with only one bidder?” asked ex-President and current Senator Alvaro Uribe.

Finance Colombia will continue to monitor the situation. Follow us on Twitter for real time updates.

Photos courtesy of Isagen

After a series of debates in Congress and conflicting positions between Colombian political parties, the Colombian government has announced the official auction date for companies interested in buying the majority percentage of Isagen shares (BVC:ISAGEN) held by the national government. The companies that are participating in the negotiation must make an offer on January 13 of 2016.

Above photo: Isagen’s Sogamoso Hydroelectric Dam (Photo courtesy Isagen)

Isagen is a power generation and distribution company headquartered in Medellin, with regional offices in Bogota, Cali and Barranquilla. The Colombian government controls Isagen, owning 57.61% of the shares. The City of Medellin, through Empresas Públicas de Medellin (EPM) owns 13.14%, Grupo Energia de Bogotá (EEB), 76.52% owned by the city of Bogotá owns 2.52%, and the rest of the shares are owned by institutional and retail investors.

Isagen ownership (click graph to enlarge)

Isagen ownership at the beginning of Q4, 2015  (Details in appendix below). Graphic by Finance Colombia of data provided by Isagen

Isagen is the third largest generator of energy in Colombia with 16% of the country’s grid (National Interconnected System (SIN) capacity. In addition, It has an installed capacity of 3,032 megawatts (MW) from five hydroelectric plants, and one thermoelectric plant. Isagen has a market capitalization of $9.32 trillion pesos ($2.85 billion USD). There are 2.73 billion shares outstanding, and 728.53 million are issued publicly. Friday, the shares closed at $3,420 COP ($1.05 USD per share).

In 2014 the Santos administration announced its intention to sell the national government’s stake in Isagen in order to fund the country’s ambitious multibillion-(US) dollar highway modernization and upgrade project, known as 4G.   The government announced the auction date for May 15, 2015, but opposition parties with diverse motives in Colombia’s congress and a group of activists filed legal actions attempting to block the sale, resulting in delays and court battles that the executive branch has apparently won.

President Santos discusses Isagen from Santa Marta, where he attended the presentation of new municipal water resources. (Photo courtesy of the Presidencia de Colombia)

“Hopefully the opponents will not resort to dishonest arguments that these resources are sold to cover fiscal ‘holes.’ It has been said in every possible way that the resources are going to Financiera de Desarrollo Nacional (FDN-Colombia’s capital projects treasury), and will leverage the great infrastructure investments that we need, and that the country is modernizing like never before, and these resources are very important at this moment,” said President Juan Manuel Santos.

Colombia’s highway network has been a weak link in the country’s transportation infrastructure, and has held back economic development, especially compared to the countries Colombia competes with economically, like México and Brasíl. For example, Medellín and Bogotá are only 260 miles apart (419km), but road travel can easily take over 10 hours, much of the trip over two-lane, low-speed roads. None of Colombia’s major cities have internal or outerbelt freeways. Bogotá and Cartagena have infamous traffic problems. Away from the major cities, connectivity can be even more challenging, making freight transport notoriously expensive. Colombia’s very limited heavy rail network is mostly dedicated to coal and bulk transport.

“Isagen is an asset that produces a dividend, a profit, but that profit is very low compared with what that same money, belonging to Colombians, can render, for example, leveraging the financing of large highways, large projects that the country needs,” said Santos while attending an event opening new municipal water wells in the Atlantic coastal city of Santa Marta. “Nobody has any conspiracy regarding Isagen. The energy can be provided by the public sector or the private sector without affecting a single electricity user, because energy is a very highly regulated industry. What affects Colombians is the regulation, and not who supplies the energy.”

Isagen produces 16.4% of Colombia’s electrical consumption.

According to President Santos, the 4G highways modernization project is the most ambitious construction and modernization project in the history of the country, and will generate dozens of thousands of jobs in rural areas of the country, and will feed economic growth during construction, operation, and maintenance phases.

Minister of Transport Natalia Abello says the sale of Isagen is key to the success of the 4G highway modernization project. (Photo courtesy Mintransporte)

“To invest the resources from the sale of Isagen in infrastructure will have more economic and social benefits because they will contribute to the financing of the highways by private enterprise, where they will not require public backing to operate, but require capital investment by consessionaries in the construction phase. In 2016, for what we expect from private initiatives, these resources will be very important,” said Minister of Transport Natalia Abello in a statement.

For the auction that was to be held in May of 2015, the minimum bid was set at $3,399 Colombian pesos (COP). At that price, the minimum value of Isagen would have been $6.48 billion COP. At the time, there were seven potential bidders that had indicated interest. In December, President Santos’ cabinet, the Consejo de Ministros revised the valuation to $4,130 pesos per share; an increase of 21.5%

On Monday, December 28, Minhacienda, the Ministry of Public Finance and Credit said that two companies have submitted monetary guarantees required to participate in Wednesday’s auction: BRE Colombia Investments LP, an investment fund of Canada’s Brookfield Asset Management, and Consorcio del Pacifico (Pacific Consortium), an entity owned by Chile based electrical generator Colbún.

Brookfield Asset Management is a Canadian company that focuses on property, renewable energy, infrastructure and private equity in North and South America, Australia, Asia, and Europe. Brookfield Asset Management currently has over $225 billion USD in assets under management.

Colbún SA is a Chilean electrical producer with an installed generation capacity of 3,278 megawatts. Colbun has no activities in the Colombian electricity sector, but in Chile it operates 15 hydroelectric plants, 7 thermal plants and 17 substations. According to Colbún General Manager Thomas Keller Lippold, “Colbún S.A. has analyzed and studied Isagen´s history, (¨due diligence¨) and it is prequalified to make an offer.”

Another company that considered making an offer for Isagen but apparently has dropped out, was Engie, a French energy company active in electrical generation and distribution, natural gas and renewable energy, across 15 countries, including Canada, Portugal, Italy, Belgium, the Netherlands, Chile and the USA. As of publication, the company has not formalized its intention to make an offer to the government of Colombia.

Isagen-owned power generation facilities in Colombia

Chart data courtesy Wikipedia

Construction during 2014 on Rotor 1 of Isagen’s Sogamoso Hydroelectric Facility (Photo courtesy Isagen).

Current significant shareholders in Isagen: