Fitch Upgrades ISA's IDR to 'BBB+'; Outlook Stable

Fitch Ratings has upgraded Interconexion Electrica S.A. E.S.P.'s (ISA) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to 'BBB+' from 'BBB'. The Rating Outlook is Stable. Fitch has also affirmed ISA's senior unsecured local bond and Commercial Paper program at 'AAA(col)' and 'F1+(col)', respectively.

The rating actions consider ISA's track record of strong credit metrics, which positively compares with other companies in the power transmission segment within the region. Fitch expects that the company will maintain moderate leverage levels in the medium term, following the execution of the projects in its business plan.

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.

KEY RATING DRIVERS

Low Business Risk

ISA's low business risk is supported by its regulated revenues and natural monopoly position in the countries in which it has operations. During 2015, around 72% of the company's total revenues and 68% of its EBITDA came from its energy transmission business units in Colombia, Brazil, Peru and Bolivia, which performs as a natural monopoly and it is not exposed to demand risk. The company maintains its lead position in energy transmission in South America, with 41,885 km of circuits in operation. In Colombia, ISA controls 77.2% of the National Transmission System and it is the only operator with national coverage.

Limited Regulatory Risk

The company's ratings consider the reset of the regulatory remuneration applicable to transmission business in Colombia. In February 2016, the Colombian energy regulator (CREG) issued a new regulatory proposal to review the remuneration mechanism of the transmission activity in order to have comments from the market participants. The proposal could imply some pressures in the profitability of the power transmission segment, as well as it would encourage more capex from market participants to maintain the value of the regulatory asset base.

Fitch considers the regulatory risk as low, 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 in an adequate resilience to withstand some adverse scenarios. Fitch will review the potential changes of the tariff mechanism once it is determined, and any implication on ISA's cash generation.

Predictable Cash Flow Generation

ISA's cash flow generation is predictable, supported by the regulated nature of its main sources of revenues. The strong cash flow from operation of the company has been able to finance Capex and dividends, reflecting in a positive free cash flow (FCF) generation in the last years. Fitch expects the company will face pressures in FCF in the next two years, as ISA has estimated capex of COP7.6 trillion between 2016 and 2017, mostly related with power transmission projects in Chile, Colombia and Peru.

Adequate Credit Metrics

ISA has an adequate financial profile, which positively compares with other power transmission companies in the region. ISA's credit metrics reflects its solid cash flow generation, moderate debt levels and adequate liquidity. At end of 2015 on a consolidated basis, ISA's financial debt was COP10.9 trillion, including the obligation of the repurchase of preferred shares in Brazil, which implies a leverage ratio of 3.9x. This ratio is considered adequate for its rating level.

The company's ratings incorporate the expectation that leverage levels on a consolidated basis will be between 4x to 4.5x in the next two years, with a tendency to reduce leverage in the following years, depending on new projects granted to the company going forward. ISA's credit metrics will further benefit when the company start to receive the compensation from the early renewal of its energy transmission concession in Brazil.

Strong Liquidity Position

ISA's liquidity is considered strong and is characterized by healthy cash on hand levels, strong cash from operations, manageable debt amortization and adequate access to local and international capital markets. At the end of 2015, ISA had approximately COP1 trillion of consolidated cash, COP2.8 trillion in cash flow from operations and COP1.5 trillion of consolidated short-term debt. Fitch expects that, given the sizable capex requirements over the next two years, ISA would refinance most of the scheduled amortizations. The company has ample access to financial and credit markets, with available credit lines that reach COP2.3 trillion at ISA's level.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

--Revenues incorporate the development of projects already granted to the company.

--Changes in the regulatory remuneration of power transmission business in Colombia do not have a material impact over ISA's credit metrics.

--Capital expenditures for the next years reflect the construction stage in the new projects awarded by ISA and its subsidiaries.

--Leverage levels between 4x to 4.5x in the next two years.

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 increase debt levels above Fitch's base case scenario;

--Regulatory changes that put significant pressures over 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 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 maturity profile is manageable, as its long-term debt amortization schedule is spread until 2041. ISA's short-term debt represented 14% of total debt at the end of 2015. In the medium term, ISA's liquidity position is expected to remain adequate as a result of the company's stable cash flow generation and its proven access to long-term financing.

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

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004881

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