Fitch Rates Grupo Energia Bogota 's Senior Unsecured Notes 'BBB'

Fitch Ratings has assigned a 'BBB' rating to Grupo Energia Bogota S.A. E.S.P.'s (GEB) proposed new issue of up to USD400 million senior unsecured notes due 2033.

The proposed notes are rated at the same level as GEB's Issuer Default Rating (IDR), as they constitute its direct, unsubordinated and unsecured obligations. GEB will use the net proceeds from the proposed notes to refinance outstanding debt and to partially fund capital investment plan for 2023-2027.

GEB's ratings reflect the company's stable cash flow, strong business position and adequate liquidity, as well as expectations for credit metrics in line with the rating over the medium term. The ratings also reflect GEB's reliance on dividends from its financially solid subsidiaries to service its debt and the company's ongoing growth strategy and aggressive dividend policy, which will keep GEB's leverage averaging 3.5x over the medium to long term.

Fitch's base case incorporates Transportadora de Gas Internacional S.A. ESP's (TGI; BBB/Stable) EBITDA growth from the new useful asset life tariff recognition and catch-up dividends of COP437 billion (approximately USD107 million) from Enel Colombia S.A. E.S.P. (BBB/Stable) paid in 2022. Fitch expects GEB's gross leverage to be 4.0x in 2024 and 3.3x in 2025, which is commensurate with the 'BBB' category.

Key Rating Drivers

Credit Metrics Stabilizing: Following the acquisitions of Elecnorte S.A.S. E.S.P. and five transmission concessions in Brazil in 2022, Fitch expects GEB's gross leverage to stabilize at 4.1xin 2023 before falling to 4.0x in 2024 and 3.3x in 2025. The gradual deleveraging is due to revenue increases at TGI and in the transmission business, as well as significant dividend payments from retained earnings at the company's subsidiary Argo Energia Empreendimentos e Participacoes S.A. in Brazil in 2025 and 2026. No major acquisitions or capex are assumed in the near term, apart from the transmission line Colectora, which is expected to begin operations in 2025.

Solid Business Position: GEB's ratings reflect its diversified portfolio of regulated businesses, mostly comprising companies with solid market positions and credit profiles. The company operates in the electricity transmission business in Colombia and has controlling stakes in energy assets, which operate as regulated natural monopolies within their served areas. GEB fully owns TGI, Colombia's largest natural gas transportation company, and has a 60% stake in Gas Natural de Lima y Callao S.A. (Calidda; BBB/Stable), the largest natural gas distribution company in Peru. GEB has supported its subsidiaries through equity injections and guarantees, including expected guarantees for USD253 million to be extended to subsidiaries in Guatemala.

Stable Cash Flow Generation: GEB's operations benefit from its business diversification, given its participation in companies that maintain low business-risk profiles, and from stable and predictable cash flow. GEB subsidiaries are, for the most part, regulated monopolies within their relevant business segments with limited volume risk. TGI is the most important asset for GEB and is expected to make up 45% of its EBITDA from controlled companies in 2023.

GEB fully controls TGI and has no limitation to its cash generation. GEB's electricity transmission business is expected to gain higher participation in the EBITDA mix in the medium term, as the company will be executing around USD518 million in capex in 2023-2026 through its recently created subsidiary Enlaza S.A. in order to complete projects granted by the government's planning unit.

Portfolio of High Credit Quality: GEB is an operating holding company that derives most of its cash from operations from its subsidiaries and noncontrolling stakes. GEB's cash flow from operations benefits from dividends received from its portfolio of noncontrolling stakes, mostly made up of investment-grade companies or companies with the highest national scale rating. This has resulted in a predictable source of dividends for GEB and mitigates the structural subordination of the dividends stream to the debt service at GEB's level.

Enel Colombia, created from the merger of Emgesa S.A. E.S.P., the largest electricity generation company in Colombia, and Codensa S.A. E.S.P., the second-largest electricity distribution company, will make up 72% of GEB's dividends received from noncontrolling interests in 2023.

Standalone Credit Profile: GEB's credit profile is commensurate with its 'BBB' rating and is not capped by the credit profile of its controlling owner, the Capital District of Bogota (BB+/Stable). Fitch believes the presence of regulatory ring-fencing mechanisms, material minority shareholders and a track record of strong governance practices diminish the parent's capacity to extract value from its stronger subsidiary. GEB continues to be managed with independence and autonomy, which is positively incorporated in the ratings. Under Fitch's Parent and Subsidiary Linkage Rating Criteria, the assessment of these factors allows Fitch to rate GEB two notches above Bogota's consolidated profile.

Derivation Summary

GEB's low business-risk profile is commensurate with its investment-grade rating and is comparable to Enel Americas S.A. (BBB+/Stable), AES Andes S.A. (BBB-/Stable) and Promigas S.A. E.S.P. (BBB-/Stable). GEB's ratings are one notch below Enel Americas, as the latter has a strong diversified and geographic footprint in South America and has a more conservative capital structure. Fitch estimates Enel Americas' gross leverage will remain below 2.0x over the rating horizon, while Fitch projects GEB's leverage to average 3.5x over the rating horizon as increased cash flow from its underlying businesses is paid out in dividends.

GEB's ratings are two notches above those of Empresas Publicas de Medellin E.S.P. (EPM; BB+/Rating Watch Negative), as GEB compensates its higher dependence on dividends received from noncontrolling stakes with core businesses with high cash flow predictability, such as electricity transmission and natural gas transportation. EPM's EBITDA has higher participation in the competitive electricity generation business, and its rating are linked to that of its owner, the City of Medellin (BB+/Stable). EPM's ratings are on Negative Watch, reflecting ongoing uncertainty surrounding the Ituango hydroelectric project.

GEB is rated one notch above AES Andes and Promigas. GEB's operating environment and exposure to regulated business bode well for its credit quality in comparison with AES Andes, which operates in a more competitive environment. Promigas is also rated one notch below GEB on the international scale, given its lower business and geographic diversification and higher leverage.

Key Assumptions

GEB's revenues and EBITDA projected performance reflect expansion in the operations at GEB holding company level, along with TGI and Calidda, following the projects executed by the companies and the implementation of new tariff frameworks;

GEB's capex execution in the medium term incorporates projects already granted to the company, coupled with the ones with higher probability of being executed, averaging roughly USD300 million per year between 2023-2026;

No sizable acquisition is assumed over the rating horizon;

Argo pays dividends from retained earnings of COP900 billion between 2025-2026;

Dividends equal to approximately 70% of the previous year's net income.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

A positive rating action or Outlook revision is unlikely in the near to medium term given the company's expectations of EBITDA pressures and potential elevated capex in the medium term;

The company reduces its leverage below 2.5x on a sustained basis after the regulatory tariff reset and the company's investment program is completed.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A negative rating action on the company's majority owner, the City of Bogota;

Gross leverage levels sustainably above 4.0x;

Influence from the company's shareowners results in a sub-optimal financial or operational strategy that could weaken the group's credit quality;

Significantly large acquisitions mostly financed with incremental debt;

Material cost overruns or delays in the start of operations of sizable projects that pressure GEB's credit metrics.

Liquidity and Debt Structure

Manageable Liquidity: GEB's liquidity remains adequate, supported by high cash on hand, predictable cash flow from operations, and proven access to bank and capital markets, through the holding company and its subsidiaries. As of June 30, 2023, the company held approximately USD354 million in cash and equivalents. Roughly USD178 million of the total was held at the holding company level.

GEB faces near-term debt maturities of USD244 million in the remainder of 2023 and USD798 million in 2024. Fitch expects the company will be able to refinance upcoming maturities with a mix of bank and capital market resources. The proposed senior unsecured notes issuance of up to USD400 million will allow the company to refinance a USD320 million Syndicated Loan due 2024 and to partially fund capital investment plan for 2023-2027.

Issuer Profile

GEB is an energy operating holding company with direct operations and stakes in electricity generation, distribution and transmission, as well as natural gas transportation and distribution.

Date of Relevant Committee

31 August 2023

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

GEB is rated two notches above the City of Bogota's consolidated profile (BB+/Stable). A change in the City of Bogota's credit profile has the potential to affect GEB's rating.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.