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

The outlook revision considers Fitch’s expectation of further strengthening of Isagen’s credit 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.

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, an 820 MW 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 for the pressures experienced by its other plants. Hydroelectric generation growth has been limited since 2015 due to low hydrological conditions caused by El Niño 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’s expectations, Isagen reported an important increase in EBITDA and margins during 2015. The company recorded $1.2 trillion COP 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 Termocentro thermoelectric plant. The company has been operating this asset close to full capacity since 2013, as hydroelectric assets face less than ideal conditions. 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 a cash balance of $365 billion and $311 billion COP 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 300 billion COP in 2017 and 2018.

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.

Brookfield Renewable Energy Partners L.P. CEO Sachin Shah

Isagen owns and operates a renewable energy portfolio consisting of 3,032 MW of principally hydroelectric generating capacity and a 3,800 MW development portfolio in Colombia. During the meeting, BRE Colombia Investments LP informed the minority shareholders, including several Colombian municipal-owned entities and pension funds that all shareholder questions and inquiries would be answered and a written tender would be offered for outstanding shares in the following days, and published on Isagen’s website. The price offered for the remaining shares will be equal to the auction purchase price of $4,130 COP per share.

BRE Colombia Investments indicated its intent to maintain existing strategic initiatives and projects that Isagen has planned and undertaken. “Our objective is to remain here, to continue contracting with people from here, and to continue fomenting the company’s growth from here, over the next 30 or 40 years, as Isagen is one of the most important energy generators of the country, for that our objective is to protect its market strength,” said Sachin Shah, the head of Brookfield Renewable Energy.

The new board of directors seated consists of the following individuals:

* Denotes An Independent Board Member

During the special shareholder’s meeting, new bylaws were also approved, adjusting for the changing of majority ownership from Colombia’s government to private-sector shareholders.

Colombia’s national government sold its shares in Isagen, worth slightly more than $2 billion USD, in order to fund the country’s major highway modernization initiative, called “4G.”

Above photo: Inside Isagen’s Sogamoso Hydroelectric Facility -(courtesy Isagen)

Brookfield Renewable is the flagship listed renewable energy company of Brookfield Asset Management, a global alternative asset manager based in Toronto, Canada with roughly $225 billion USD of assets under management.

President Juan Manuel Santos

The Colombian government sold its stake in Isagen to fund its ambitious 4G highway modernization project. “Isagen is a great business for the Colombian community, for the wellbeing of the community and the Colombian economy. Its sale is the most reasonable and logical,” said Colombia’s President Juan Manuel Santos in a statement.

According to Santos, usually the private sector is more efficient in asset management. The President reiterated that the proceeds from the sale will augment the government’s capacity to make more profitable investments in Colombia’s transportation infrastructure, especially highways, bridges, and tunnels. The sale was vigorously opposed by labor unions, some political parties, and Colombia’s Prosecutor General, Alejandro Ordoñez, who works independently of the President. The sale was blocked once, in May of 2015, by legal challenges issued by opponents of the sale. The Santos Administration was able to eventually defeat the initiatives and move forward with the sale.

Brookfield Renewable Energy Partners L.P. CEO Sachin Shah

A Brookfield-led consortium will acquire 1,570,490,767 common shares of Isagen for aggregate consideration of COP $6.486 trillion pesos (approximately $2 billion dollars), payable in cash in US dollars on the expected closing date of January 26, 2016. This reflects a purchase price of COP $4,130 per share (approximately $1.38 USD). Brookfield Renewable’s equity commitment will be approximately $243 million USD giving it an approximate 9% interest in Isagen. Brookfield Renewable currently has $1.2 billion of available liquidity and will fund its commitment with available resources.

Sachin Shah, Chief Executive Officer of Brookfield Renewable, said: “We are extremely pleased to grow our business in Colombia, an attractive market with strong long-term growth fundamentals, a highly skilled labor force and continued need for new investment. This transaction aligns with our objective of building our global renewable energy business with high quality, predominantly hydro assets.”

The Brookfield-led consortium is also required to conduct two tender offers with respect to the remaining outstanding shares of Isagen. Assuming all remaining Isagen shares are sold to the Brookfield-led consortium pursuant to these tender offers, Brookfield Renewable’s additional equity commitment would approximate COP 1.552 trillion (approximately $517 million USD), which it would fund with a committed $500 million acquisition facility and existing liquidity, giving it an approximate 25% interest in Isagen.

Brookfield’s perspective on Isagen (from a statement):

• Isagen is the third-largest power generation company in Colombia with an installed capacity of 3,032 MW. The portfolio is comprised of six hydroelectric plants, and includes the country’s largest operating hydro power generating facility (San Carlos) and largest hydro-based reservoir by volume (Sogamoso). Average annual generation approximates 15,000 GWh and accounts, on average, for approximately 20% of Colombia’s annual production.
  

  Sogamoso Is Isasgen’s Most Recent Hydroelectric Project (Photo courtesy Isagen)

• Isagen has delivered consistent operating results over the last 20 years and is well positioned to participate in the country’s growth. Approximately 80% of Isagen’s energy sales are derived from contracts with a broad base of large commercial and industrial customers and distribution companies. In addition, Isagen benefits from a fixed stream of reliability and capacity payments.
• Isagen has high-quality and modern generating facilities with an average facility age of 18 years. The company’s management team and employees possess extensive experience in operating electricity businesses and a comprehensive knowledge of the Colombian energy market.
• The company has approximately 3,800 MW of potential expansion projects in the early stages of development providing a long-term growth opportunity.
• Colombia is one of the strongest and most stable economies in South America with a population of approximately 48 million, nominal GDP of US$380 billion and projected GDP growth of approximately 4% annually. Hydroelectricity is integral to the country’s supply mix, accounting for 70% of installed capacity, with higher-priced natural gas and coal accounting for most of the remainder. Despite uninterrupted power demand growth since 2000, the country’s per capita electricity consumption is still below the South American average, representing attractive growth potential.

Brookfield Renewable Energy Partners operates one of the world’s largest publicly traded, pure-play renewable power platforms. Their portfolio consists of hydroelectric and wind facilities in North America, South America and Europe and totals more than 7,000 megawatts of installed capacity, generating enough renewable energy to power more than four million homes. Brookfield Renewable is listed on the New York and Toronto stock exchanges as (TSX:BEP.UN) and (NYSE:BEP).

In the case of Isagen, this declaration by EEB is consistent with Fitch’s belief that regulatory impediments would continue to hamper any possible major bid by EEB. Fitch viewed the possible acquisition of Isagen, if financed mostly by incremental debt, as a potential credit risk which is now behind it.

EEB has decided not to participate in the sales process of Isagen’s shares held by the Republic of Colombia (57.66% stake), despite the fact the government is attempting to reactivate the sales process. Under the current regulatory framework of the Colombian energy industry and restrictions of the local antitrust agency, the company would be forced to divest strategic assets if it participated in the sale. EEB will continue to pursue other expansion opportunities, both in Colombia and abroad in such countries as Peru, Brazil, Mexico, Canada, and others.

Fitch’s base case assumes the company will ramp-up capex spending in 2014-2017 to USD2.3 billion as it searches for growth opportunities both in Colombia and the rest of Latin America. The company spent USD1.8 billion in capex (excluding acquisitions) during 2010-2013. Fitch’s incremental capex expectations assume primarily green-field investments in the transmission and natural gas segments. Significantly large acquisitions hold the potential to result in negative rating actions if financed mostly with incremental debt.

Going forward, EEB expects to use debt at its subsidiaries’ level, cash on hand and a portion of its internal cash flow generation to finance its expansion projects. Given the aggressive capex forecast, Fitch expects leverage, defined as gross debt-to-adjusted EBITDA, to settle in the 3x level in the near- to medium-term. In the long term, Fitch expects the company’s consolidated leverage level to decline to approximately 2.0x-2.5x as its expansion projects start operations.

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