BOGOTA, Colombia--(BUSINESS WIRE)--Fitch Ratings has affirmed Interconexion Electrica (ISA)'s foreign and local currency Issuer Default Rating (IDR) at 'BBB-' and revised its Rating Outlook to Positive from Stable. Fitch has also affirmed Interconexion Electrica's local bonds listed at the end of this release at 'AAA(col)'.
ISA's Positive Outlook reflects the company's strong financial profile, characterized by stable and predictable cash flows, and Fitch's expectation that credit metrics will remain at current levels for the medium term. Fitch may consider an upgrade once the company's participation in the Autopistas de la Montana Project is clearer and its impact is not considered detrimental to the company's credit quality. This project has the potential to weaken the company's credit profile given its large magnitude when compared to the company's existing cash flows.
ISA's ratings reflect the company's low business risk profile, which is characteristic of the power transmission business, and the company's natural monopoly position and geographic diversification. The ratings are also underpinned by ISA's comfortable liquidity levels and adequate credit metrics.
TRANSMISSION BUSINESS' STABLE CASH FLOW
ISA's ratings reflect the company's low business risk level supported by its regulated income and natural monopoly position in the countries in which it has operations. During the last 12 months (LTM) ended March 31, 2012, electric transmission accounted for 80.4% of ISA's consolidated revenues and nearly 85% of ISA's consolidated EBITDA. ISA on a standalone basis accounted for 20.4% of its consolidated EBITDA for the same LTM period. Most of the revenues from electric transmission operations in Colombia (70%) are regulated and its tariffs are reset every five years. Previous tariff resets have not resulted in significant changes, due to the balanced regulatory environment in Colombia, which aims at providing adequate returns on investment.
ISA operates in Brazil through a 37.8% indirect controlling stake in Companhia de Transmissao de Energia Eletrica Paulista S.A. (CTEEP, rated 'AA+(bra)' by Fitch). Although ISA's financial results consolidate CTEEP, the company does not fully benefit from this subsidiary's cash flow generation given its ownership position. CTEEP accounts for around 54% of ISA's consolidated EBITDA. ISA also generates cash flow from its investments in Peruvian transmission companies (7% of consolidated EBITDA). Both the Brazilian and Peruvian operations have most of their revenues guaranteed by regulated tariffs adjusted annually by inflation during their concession periods.
STRONG BALANCE SHEET SUPPORTS LEVERAGE INCREASE
ISA has a strong financial profile, which is characterized by strong cash generation, moderately low debt levels and healthy interest coverage. Despite this, ISA's consolidated credit metrics are somewhat affected by the increase in debt following the company's acquisition of Intervial in Chile. ISA's stand-alone financial profile is strong and consistent with an investment grade rating. During the LTM ended March 31, 2012, the company reported an EBITDA plus dividends of approximately USD366 million and total debt of USD862 million. This translates into a leverage ratio of 2.6x, while the company's interest coverage was 4.8x.
For the LTM ended March 31, 2012, ISA reported a consolidated EBITDA of USD1.7 billion and total consolidated adjusted debt of USD5.9 billion (including USD659 million of ISA Capital preferred shares). This translates into a leverage ratio, as measured by total debt-to-adjusted EBITDA of 3.6x. Interest coverage, as measured by EBITDA-to-interest expense is 3.4x, considered acceptable for ISA's rating category.
AGGRESSIVE EXPANSION PLAN
Fitch considers ISA's expansion plan to be somewhat aggressive as the company expects to have revenues of USD3.5 billion (up from the current USD2.5 billion) over the next five years by investing, for the most part, in electric transmission businesses inside and outside Colombia. In 2016, the company expects to generate approximately 20% of its revenue from businesses other than transmission, such as toll roads and engineering, procurement and construction services. In line with its strategy, ISA acquired 100% of Intervial Chile, the major concession road operator in Chile. During the LTM ended March 31, 2012, Intervial accounted for 16% and 14% of ISA's consolidated revenues and EBITDA, respectively. In Fitch's opinion, the company's incursion into the toll roads infrastructure business does not materially alter ISA's business risk profile as electric transmission is expected to continue generating the majority (80%) of its cash flow.
The company's aggressive growth strategy could, however, weaken ISA's consolidated credit metrics. ISA's individual figures would not be affected significantly given that the company expects to execute most of the investment plan at a subsidiary level. Total capital investment over the next four years is expected to amount to approximately USD2.5 billion to be financed 30% with debt and 70% with internal cash flow generation. The company's capital investments and associated financing strategy will marginally increase the company's consolidated leverage, yet is expected to remain within the assigned rating category. This capital expenditure does not include a possible position in a sizable toll road project in Colombia called Autopistas de la Montana, which total capital expenditures could amount to USD9 billion. Thus far, ISA has performed studies and designs for this project, which will likely be a public-private partnership for which the government would provide a significant portion of the construction costs.
ROBUST LIQUIDITY
ISA's liquidity is considered robust and is characterized by healthy cash on hand levels, manageable debt amortization and adequate access to local and international capital markets. As of March 31, 2012, ISA had approximately USD825 million of consolidated cash on hand (USD95 milion at the parent company) and USD922 million of consolidated short-term debt. ISA's maturity profile is manageable, as its long-term debt amortization schedule is spread between 2012 and 2041.
ISA's short-term debt has been around 18% of total debt over the years. In the medium term, ISA's liquidity position is expected to remain healthy as a result of the company's stable cash flow generation. As of March 31, 2012, ISA standalone had USD95 million of cash and marketable securities, which will allow the company to meet its USD82 million of current maturities.
A combination of conservative credit metrics and sustained growth in cash flows might result in a positive rating action. Conversely, higher than expected debt levels, deteriorating cash generation or regulatory changes that negatively affect the company's financial performance could lead to a negative rating action.
Fitch affirms the following issues at 'AAA(col)':
-- ISA's COP$1.7 billion bond program.
Additional information is available at 'www.fitchratings.com' and 'www.fitchratings.com.co'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' Aug. 12, 2011;
--'Parent and Subsidiary Rating Linkage' Aug. 12, 2011;
--'Liquidity Considerations for Corporate Issuers' June 12, 2007.
Applicable Criteria and Related Research:
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210
Liquidity Considerations for Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666
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