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ISAGEN S.A. E.S.P.’s (ISAGEN) ratings reflect the company’s solid Security Current
market share position, its sound commercial strategy and its somewhat diversified portfolio of electricity generation assets located throughout Colombia. ISAGEN’s credit metrics are considered adequate for the FC – Foreign currency. LC – Local currency. IDR – Issuer default rating. NR – Not rated. rating category and supportive of the company’s credit quality. The ratings also reflect the company’s exposure to regulatory risk and the Rating Watch. None
competitiveness of the Colombian electricity industry. Rating Outlook. Stable
Rating Outlook
ISAGEN’s competitive position within the country is bolstered by its significant market share position and its somewhat balanced portfolio of generation assets. ISAGEN ranks third as the largest electricity generation company based on installed capacity with 16% of the +1 312 368-3260 market after Emgesa S.A. E.S.P. (EMGESA) and Empresas Públicas de Medellín E.S.P. (EPM). This solidifies ISAGEN’s prospects for growth both inside Colombia and abroad. Furthermore, ISAGEN’s somewhat balanced installed capacity (86% hydro and 14% thermo) mitigates to some extent the company’s exposure to hydrology risk. The Colombian electricity sector, including ISAGEN, is affected the most by droughts created by the El Niño weather phenomenon, and it may experience profitability margin compression during low ISAGEN is a state-controlled electricity generation company and an energy solution The company’s commercial strategy is solid and supportive of its credit profile. Although, the bulk of the company’s revenue comes installed capacity, the company is the third- from selling electric energy, ISAGEN’s commercial strategy is to largest electricity generator in Colombia and diversify its revenue by selling gas and providing energy solutions to generated, on average, 8,443 GWh during large customers. Additionally, the company’s revenues are considered 2006. ISAGEN has a market share of 16.12% predictable, to some extent, as its strategy is to contract a significant based on electricity generation and 15.8% based on installed capacity. The government portion of its electricity production in the short to medium term. is in the process of selling 19.22% of the Currently, the company has contracted with market participants and company’s total equity. ISAGEN also large customers for approximately 80% of its electricity generation for commercializes gas and provides energy the next three years. solutions to large customers. ISAGEN’s financial profile is considered adequate for the rating category with strong debt-service coverage and moderate leverage. Its recently refinanced debt profile provides the company with a fair debt amortization schedule while minimizing short- to medium-term refinancing risk. ISAGEN’s leverage has declined significantly during the past five years. Going forward, the company is expected to generate sufficient cash flow to cover its capital-expenditure program and service debt. Although the regulatory framework is believed to be supportive of sector participants, recently implemented changes are yet to be proven. Capacity reliability charges replaced capacity payments at the end of 2006. Reliability charges revenue and capacity payments are in Government promotional vehicle for capacity expansion projects. essence similar. They differ in that the former is company’s total equity to the general public as part of driven by the new power plants to be constructed and the government democratization process (Proceso de the latter was based on comparable efficient thermoelectric generation plants outside the country. ISAGEN is schedule to receive US$86 million on reliability charges revenue during 2007. ISAGEN’s business strategy is to sell energy solutions and high value-added products. The company offers a combination of different energy ISAGEN is a public service company that focuses on sources to large customers to diversify its revenue electricity generation and the commercialization of source and decrease its exposure to regulated energy solutions. ISAGEN was spun off from markets. In addition, the company is in the process of Interconexion Electrica S.A. (ISA) in 1995, when the an initial public offering (IPO) that will let ISAGEN Colombian electricity industry was opened to run more independently from the central government. Furthermore, the company has implemented a ISAGEN has 2,132 MW of installed capacity, with commercialization strategy by contracting its 86% coming from hydro- and 14% from thermo electricity production in the midterm in order to have electric generation. In addition, the company has 150- a more stable revenue source. ISAGEN has MW interconnection with Venezuela. The company contracted approximately 80% of expected electricity accounted for approximately 16% of Colombia’s generation during the next three years. Going total installed capacity and generated, on average, forward, the company plans to continue with this strategy for as long as the market allows. In addition to generating electricity, ISAGEN offers ISAGEN has also tried to balance the sales mix comprehensive energy solutions to large customers between regulated and nonregulated business. that demand other sources of energy beyond Contracted sales to nonregulated businesses went electricity. The company commercializes gas from 26% of total sales in 2002 to 35% in 2006, purchased by or left over from its thermo generation illustrating the company’s success in implementing unit, Termocentro, which has a take-or-pay contract with ECOPETROL S.A. for 48,000 million British thermal units per day (MBTUD). Furthermore, the ISAGEN’s growth strategy for the 2006–2010 period company has created a network of businesses that incorporates projects that are mostly aimed at provide all types of services related to the industry. increasing water inflows to existing plants. This Although these businesses provide some amount of would maximize energy generation with minimal revenue diversification, the bulk of its revenue comes cost. The company is projecting to invest from generating and commercializing electricity. approximately US$170 million during this period and expects to increase average energy generation by Currently, the company’s main shareholders are the 1,338 GWh. Among the company’s projects, the Colombian government and other publicly and most significant is a new hydroelectric generation privately owned electricity companies. The facility, located in the Amoyá River that is expected government is in the process of selling 19.22 % of the to have 80 MW of installed capacity and generate Pro Forma Ownership Structure Post IPO
Empresas de
Empresas de
Públicas de
General Public
Nacional S.A.
de Bogotá S.A.
del Pacifico S.A.
Medellin E.S.P.
E.S.P 2.52%
E.S.P. 5.04%
IPO – Initial public offering. Source: ISAGEN S.A. E.S.P.
Sales Proceeds
Installed Capacity
approximately 510 GWh, on average. Construction is The San Carlos plant’s first phase entered expected to begin in July 2007, and the plant should commercial operation in 1984, and the second phase reach commercial operations during 2010. began in 1987. It is composed of eight 155-MW units. The plant’s historical availability has been in excess of 90%, with the exception of 2001 and 2006, Although operating in a competitive market, when the plant had a major unscheduled outage due ISAGEN benefits from low-cost and somewhat to a short circuit in one of the units. All corrective balance electricity generation assets located actions have been taken, and the plant was fully throughout Colombia. ISAGEN’s installed capacity, functional once again on March 17, 2007. plus the capacity provided from the interconnection Notwithstanding the 2006 unscheduled outage, the with Venezuela, positions the company as the third- San Carlos plant’s average generation during 2006 largest generation company in the country after did not decrease significantly, declining by only 135 Emgesa and Empresas Públicas de Medellín E.S.P. GWh year over year to 5,930 GWh from 6,065 GWh ISAGEN has five generation plants, of which four are Miel I is ISAGEN’s second-largest generation unit, hydro and one is thermoelectric. Three of its with 396 MW of installed hydroelectric generation hydroelectric generation plants are located in the state capacity. This plant is located in a different of Antioquia’s hydrology system, which is the largest hydrology system than the San Carlos plant, which hydrology system in the country and where two other provides the company some diversification to hydrology risk. Miel I reached commercial operation in December 2002, and it generated 1,492 GWh, on ISAGEN’s main unit is La Central Hidroelectrica de San Carlos (San Carlos), a 1,240-MW installed capacity hydroelectric generation plant. The San The other two hydroelectric generation plants owned Carlos plant is the largest of its kind in the country. It by ISAGEN are Jaguas and Calderas, with an is located at the end of the previously mentioned Antioquia hydrology system, providing the company respectively. Jaguas reached commercial operation in with a stable water inflow from other generation units 1998 and Calderas was brought back to operations in in addition to the water intake for the San Carlos 2006 after being decommissioned in 1998. Jaguas and Calderas generated, on average, 716 GWh and 49G GWh, respectively, during 2006. Gas (CREG) mandates international interconnection to pay transmission charges as any generation plant Installed
within the country. This elevates the electricity price Generator
Capacity (MW)
under this contract, placing this energy source out of Colombian per-capita electricity consumption levels are below those of other Latin American countries. This creates a positive expectation in demand growth, which is characterized by being closely linked to the country’s gross domestic product (GDP). Colombian per-capita electricity consumption is approximately 1 MW per year, while the per-capita consumption of Termocentro, ISAGEN’s sole thermoelectric countries such as Chile and Argentina is close to generation plant, is a gas-fueled, combined-cycle plant with an installed capacity of 300 MW. The plant started commercial operations in 2000 and Colombia has approximately 13,500 MW of installed generated 229 GWh during 2006. The company capacity, of which 67% comes from hydroelectric benefits from Termocentro as it helps to mitigate the plants and 33% from thermoelectric plants. The business exposure to hydrology risk. Furthermore, Colombian generation capacity mix has significantly this plant is of extreme importance for the company, improved since the country’s suffered a major as it is expected to generate approximately electricity crisis during 1992 and 1993. This crisis US$27 million out of the US$86 million in capacity stemmed from the system’s high dependency on reliability charges revenue expected to be paid to hydroelectric generation capacity. At the time of the crisis, approximately 80% of installed capacity was hydroelctric, significantly exposing the country to In addition to its own plants, ISAGEN has the droughts. Market participants project that current exclusive right to use an interconnection line of 150 capacity is enough to meet future demand until 2012. MW with Venezuela. Electricity under this contract is seldom dispatched into the Colombian spot market, given that the Comisión de Regulación de Energía y Colombian Demenad Versus Supply
M W – M egawatt. So urce: ISA GEN S.A . E.S.P .
Amortization Schedule
EB ITDA – Operating inco me plus depreciatio n and amo rtizatio n. COP - Co lo mbian peso . So urce: ISA GEN S.A . E.S.P .
As a result of the 1992 and 1993 electricity crisis, the revenue. This new reliability charges scheme mainly Colombian government implemented the domestic seeks to promote investment in new generation. public service law (Ley 142) and the electricity law (Ley 143) of 1994. These laws gave CREG Reliability charges are defined, under Resolution 071 regulatory power over the industry. Furthermore, the of 2006, as payments made to a generation company government incentivized private investment in for making its firm capacity available to the system. thermoelectric generation projects to reduce the After a five-year transitioning period, new generation country’s high exposure to hydrology risks. companies will offer to the system their firm capacity under an anonymous biding process, thus setting the price per KWh (in $/KWh) for existing generation The recently revised Colombian regulatory companies for the subsequent year. New generation framework seems supportive of sector participants companies will receive reliability charges revenue for and financial stability; however, it is yet to be proven. the period determined under the bidding process. During the past year, the Colombian regulatory (i.e., the new plans will set their long-term reliability framework underwent additional fundamental revenue for up to 20 years). The first bidding process changes. The most significant change in the sector of this kind is scheduled to take place during May regarding electricity generation companies was the 2008 for the period of Dec. 1, 2012, through Nov. 30, redefinition of capacity payments as reliability 2013. During the transitioning period, CREG has set charges revenue or cargos por confiabilidad. reliability charges at approximately US$13/MWh and linked them to U.S. inflation. ISAGEN will generate, In 1996, CREG implemented capacity payments to as previously mentioned, US$86 million of reliability generators. These payments seek to guarantee efficient availability of electricity supply by paying generation companies for their installed capacity. Firm capacity (energía firme para el cargo por This scheme was designed to be in place for 10 years, confiabilidad [ENFICC]), is defined under expiring on Nov. 30, 2006. During 2006, CREG Resolution CREG-071 of 2006 as the maximum published a new methodology to compensate electricity a certain plant is able to generate generators for their installed capacity under continuously, under low hydrology conditions, during Resolution CREG-071 of 2006, which was later one year. Generation companies have the option, and modified by Resolution CREG 079 of 2006. These not the obligation, to make their plants available to resolutions establish the new reliability charges receive payments for reliability charges. Generation plants receiving revenue for reliability company should be able to comfortably cover 2007 charges will deliver the energy related to their debt service with internally generated cash flows. capacity when the country faces supply shortages. ISAGEN’s free cash flow generation has averaged Supply shortages occur when the spot price surpasses approximately US$70 million during the past five years. a cap called the shortage price or precio de escasez. This cap price is set by CREG monthly and is the ISAGEN’s capital-expenditure program for the next price at which energy related to capacity receiving three years is considered moderate compared with its reliability charges will be paid. Furthermore, cash flow generation ability. ISAGEN’s cash flow thermoelectric generation plants that receive revenue from operations (CFO) and funds from operations for reliability charges must have fuel supply contracts (FFO) of US$136 million and US$130 million, in order to guarantee their availability. respectively, generated during 2006 create a positive precedent for the company’s ability to meet its capital The company’s financial profile is considered to be adequate for the rating category and has significantly ISAGEN’s debt is mainly composed of two tranches. improved during the past four years. ISAGEN has Tranche A is for US$212 million, with a five-year, significantly deleveraged its balance sheet during the interest-only grace period and a 15-year semiannual past five years by collecting and refinancing debt. In amortization thereafter. This tranche has a sovereign addition, ISAGEN benefited from the peso guarantee and is insured by OPIC. Tranche B is a appreciation. Cash flow generation also improved simple bank facility for US$38 million with a five- considerably during the past five years. year amortization schedule. These two tranches make up 95% of the company’s total debt. Short- to medium-term liquidity is not a major concern for the company. During 2007, ISAGEN faces debt amortizations of approximately US$31 million. The Financial Summary — ISAGEN S.A. E.S.P. (US$ Mil., Years End Dec. 31) Operating EBITDAR/(Interest Expense + Rental Expenses) (FCF + Cash and Marketable Securities)/Debt-Service Coverage Cash Flow from Operations/Capital Expenditures Total Debt with Equity Credit/Operating EBITDA Total Net Debt with Equity Credit/Operating EBITDA Total Adjusted Net Debt/Operating EBITDAR Total Nonoperating/Nonrecurring Cash Flow EBITDA –Operating income plus depreciation and amortization. EBITDAR – Operating income plus depreciation, amortization and rents. FFO – Funds from operations. FCF – Free cash flow. EBIT – Operating income. Note: Numbers may not add due to rounding. Copyright 2007 by Fitch, Inc., Fitch Ratings Ltd. and its subsidiaries. One State Street Plaza, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. All of the information contained herein is based on information obtained from issuers, other obligors, underwriters, and other sources which Fitch believes to be reliable. Fitch does not audit or verify the truth or accuracy of any such information. As a result, the information in this report is provided “as is” without any representation or warranty of any kind. A Fitch rating is an opinion as to the creditworthiness of a security. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed, suspended, or withdrawn at anytime for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from USD1,000 to USD750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from USD10,000 to USD1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of Great Britain, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.


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