BOGOTA, Colombia--(BUSINESS WIRE)--Fitch Ratings has upgraded Isagen S.A. ESP's (Isagen) Foreign and Local Currency Issuer Default Ratings (IDRs) to 'BBB-' from 'BB+'. The Rating Outlook has been revised to stable from positive.
KEY RATING DRIVERS
The rating action reflects the improvement of the company's financial results and leverage metrics during 2012 and the expectation of a lower financial leverage for 2013 and beyond than previously anticipated by Fitch. The Rating action incorporates the significant progress in the construction of the Sogamoso project and the positive expected cash flows that will result from its completion in 2014.
Solid Results Improve Credit Profile Expectations
Isagen is currently in the midst of a large capital expenditure program that is mainly comprised of the Sogamoso hydroelectric project (820 megawatt) at an estimated cost of USD2.4 billion. The construction of the project is currently on time and is on budget with approximately 72% of the project completed as of Dec. 31, 2012. The company has shown proficiency in the project construction, and it is expected that the remaining construction will be completed without major delays.
Capital expenditures of the project have been financed with a combination of internally generated cash flows and debt. As of Dec. 31, 2012, Isagen's financial debt was USD1.2 billion and the company's debt/EBITDA ratio was 3.4x. Fitch expects Isagen's leverage ratio to increase to around 3.7x during the final phases of Sogamoso's construction in 2013 and then recover to levels of 2.5x once Sogamoso starts operations by 2014; peak leverage during the construction cycle is below Fitch's initial expectations and underpins the ratings upgrade.
Project Completion to Increase Cash Flow
Isagen's cash flow generation is expected to benefit from a larger installed capacity. Following the completion of the Sogamoso, Amoya and Manso projects, Isagen's installed capacity will increase to nearly 3,000 MW and the company's total energy generation would be around 14,500 GWh per year (currently, average energy generation is 9,500 GWh per year). This should result in an EBITDA of around US$400 million and EBITDA margins of around 40%. During 2012, the company's EBTIDA was USD353 million with a margin of 36%. These figures are considered adequate despite adverse weather conditions in 2012, which somewhat pressured results.
Committed Funding Supports Strong Liquidity Position
Isagen has strong liquidity with committed credit lines of USD472 million to fund the remaining part of the capital expenditure program. Isagen's liquidity is further supported by a strong cash flow from operations and manageable amortization schedule. As of Dec. 31, 2012, Isagen reported USD99 million of cash and marketable securities, which together with committed credit lines will allow the company to meet the USD28 million of short-term debt and the approximately USD498 million of 2013 capex program.
Solid Competitive Positions and State Ownership Support Credit Quality
Isagen's ratings reflect the company's solid competitive position, its low marginal cost and robust portfolio of generation assets located throughout Colombia. The ratings also consider the company's moderate exposure to hydrology and regulatory risk. In addition, Isagen is a state-controlled entity and the third largest electricity generation company in Colombia based on installed capacity and energy generation. During 2012, the company had 15% of Colombia's total installed generation capacity, and accounted for 17% of the country's total generation. Its strong business position is supported by low marginal costs and a diversified portfolio of assets (86% hydro and 14% thermo). Although the company's generation is mainly hydrologic, its assets are somewhat geographically diverse and help to mitigate hydrology risks to some extent.
RATING SENSITIVITIES
A negative rating action could result from a combination of the following factors; a steep decrease in electricity prices, coupled with low generation and poor electricity demand; a sustained increase in leverage above 4.0x as a result of investments in the Sogamoso project and/or a change in the company's strategy that results in a more aggressive one in terms of leverage and capital expenditures. A further positive rating action could be considered if the sovereign rating is upgraded and the company succeeds in maintaining strong credit metrics after the incorporation of the Sogamoso Project.
Additional information is available at 'www.fitchratings.com'. 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. 8, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
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