May 11, 2017 / 7:59 PM / a year ago

Fitch Affirms ISA's IDR at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, May 11 (Fitch) Fitch Ratings has affirmed Interconexion Electrica S.A. E.S.P.'s (ISA) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB+'. The Rating Outlook is Stable. Fitch has also affirmed ISA's senior unsecured local bond and commercial paper program rating at 'AAA(col)' and 'F1+(col)', respectively. KEY RATING DRIVERS ISA's ratings reflect the low business risk profile of the company, which is a characteristic of the power transmission business. The ratings incorporate the geographic diversification of its revenues source, which along with the high predictability of cash flows from operations translate into a strong financial profile. Also factored in ISA's ratings are its adequate liquidity position and its aggressive growth strategy. Low Business Risk: ISA's low business risk is supported by regulated revenue and as a natural monopoly in the countries where it operates. During 2016, around 74% of total adjusted revenue, excluding revenue recognition of COP5.5 trillion at its subsidiary CTEEP's level in Brazil, was from energy transmission business units in Colombia, Brazil, Peru and Bolivia. This business line acts as a natural monopoly with no exposure to demand risk. ISA's ratings consider the reset of regulatory remuneration applicable to the transmission business in Colombia. In November 2016, the Colombian Energy and Gas Regulatory Commission issued a new regulatory proposal to review the remuneration mechanism of transmission activity. The new proposal still puts some pressure on the profitability of the power transmission segment and would encourage more capex from market participants in order to maintain the value of the regulatory asset base. Fitch considers the regulatory risk as low, however, given that regulatory entities in Colombia have provided a fair and balanced framework for both companies and consumers. In addition, ISA's diversified sources of revenues reflect an adequate resilience to withstand some adverse scenarios. Fitch will review the potential changes of the tariff mechanism once it is determined, along with any implications for ISA's cash generation. Predictable Cash Flow Generation: ISA's cash flow generation is predictable, supported by the regulated nature of the company's main sources of revenue, coupled with its no exposure to volumetric risk. ISA's business diversification both geographically and by business contributes to operational stability as the company mitigates its exposure to regulatory risk. ISA's consolidated cash flow from operations will further benefit from the collection from 2017 until 2025 of around COP5.5 trillion, at 2012 value, at ISA's subsidiary CTEEP, related to the compensation from the early renewal of its concession in 2012. These resources are expected to finance ISA's growth strategy in Brazil. Aggressive Growth Strategy: Fitch considers ISA's ambitious growth strategy; the company targets to triple net income in 2020, compared to that recorded in 2012. Incorporated into the ratings is ISA's growth strategy based on its active participation in bidding for electric transmission and other infrastructure projects, as well as inorganic growth through the acquisition of stakes in companies that operate in ISA's core businesses. Fitch expects the company will face pressure on FCF in the next two years, as ISA has estimated capex of around COP7 trillion between 2017-2018, mostly related to power transmission projects. Adequate Credit Metrics: ISA has an adequate financial profile, and compares positively with other power transmission companies in the region. ISA's credit metrics reflect solid cash flow generation, moderate debt levels and adequate liquidity. Fitch expects leverage will rise between 4x-4.5x in 2017, trending towards 3.5x in the medium term, as the company will execute significant capex in the next few years, along with more than COP1 trillion in acquisition of companies' stakes in Brazil and Peru that should be completed in 2017. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for ISA include: --Revenue incorporates the development of projects already granted to the company. --Changes in the regulatory remuneration of the power transmission business in Colombia do not have a material effect on credit metrics. --ISA's subsidiary CTEEP receives around COP5.5 trillion, at 2012 value, in cash compensation in annual installments from 2017. --Capex for the next several years reflect the construction stage in new projects awarded to the company and subsidiaries. --Leverage levels around 4x-4.5x in 2017, trending at 3.5x afterward. RATING SENSITIVITIES The main factors that individually or collectively could lead to a negative rating action are: --A sustained increase in leverage above 4.5x on a consolidated or non-consolidated basis, as a result of a progressive deterioration in its cash generation, or increased debt levels above Fitch's base case scenario; --Regulatory changes that put significant pressures on ISA's cash flow generation; --A change in the company's strategy that results in a more aggressive one in terms of leverage, capital expenditures or acquisitions. -- A downgrade in Colombia's sovereign rating and country ceiling could stress ISA's foreign currency ratings. A positive rating action is not likely in the short- to medium-term given the company's current credit metrics and its growth strategy. LIQUIDITY ISA's liquidity is considered adequate and is characterized by healthy cash on hand, strong and predictable cash from operations, manageable debt amortization and adequate access to local and international capital markets. At the end of 2016, ISA had approximately COP1.1 trillion of consolidated cash on hand, of which COP260 billion was recorded at the holding level. This compares with COP1.7 trillion in consolidated short-term debt, of which around COP147 billion was recorded at the holding level. For 2017, Fitch expects an increase in ISA's financing needs, given the pressures projected in FCF because of capex requirements and acquisitions during the year. In the absence of additional sizable capex, FCF should turn neutral or positive in the medium term. ISA's maturity profile is manageable, as its long-term debt amortization schedule is spread until 2042. ISA's short-term debt represented around 13% of total debt at the end of 2016. On April 2017, the company placed COP700 billion in local bonds with maturities up to 2042. The proceeds from the issuance will be used in financing its consolidated investment program. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings: Interconexion Electrica S.A. E.S.P. --Long-Term Foreign Currency IDR at 'BBB+'; --Long-Term Local Currency IDR at 'BBB+' --Local bond and commercial paper program at 'AAA(col)'/'F1+(col)'. Contact: Primary Analyst Lucas Aristizabal Senior Director +1-312-368 3260 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Jorge Yanes Director +571-484-6770 Ext. 1170 Committee Chairperson Alberto Moreno Senior Director +52 81 8399 9100 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: Date of Relevant Rating Committee: May, 10, 2017 Summary of Financial Statement Adjustments Fitch excluded from the 2016 consolidated revenues and EBITDA analysis around COP 5.5 billion from CTEEP's compensation in order to increase comparability with historical and projected financial metrics. 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