Isagen S A ESP : Fitch ratifies ISAGEN issuer ratings in 'AAA (col)'.

ISAGEN ratings reflect Fitch's expectation of strengthened credit metrics, given its sound operational cash flow and the reduced need for future investment. Similarly, the ratings reflect its sound business position, its outlook for moderate financial leverage and adequate liquidity. The ratings also incorporate its manageable exposure to regulatory risks.

ISAGEN ratings are supported by its sound competitive position in the electric energy generation market in Colombia, its low marginal costs and its adequate generation assets portfolio. ISAGEN upholds its position as the third electric power generator, with 3,032MW installed capacity, 90% of which correspond to hydroelectric assets. In 2016, ISAGEN contributed 17.3% to meet the domestic electric energy demand.

ISAGEN experienced operational pressures in early 2016. This was derived from the lower hydrology and the negative impact on some of the main electric energy assets of ISAGEN caused by the accident at the power plant of Empresas Públicas de Medellín (EPM). At the time, ISAGEN's electric energy generation reduced by nearly 11% to 11,392Gwh. Thus, to fulfill its electric energy sale obligations in contracts, the Company increased by approximately 48% its spot energy purchases, at high prices due to lower hydrology (El Niño).

ISAGEN ratings incorporate Fitch's expectations that 2016 operational pressures were caused by temporary situations and that the Company will recover its electric energy generation capacity as of 2017. ISAGEN's commercial strategy that has included a high proportion of contract sales in its sales mix has contributed a favorable predictability on the flow of revenues. Nonetheless, it also required a high plant factor in its power generation matrix, both hydroelectrical and thermal, to meet contract obligations with its own generation to thus limit spot market exposure. In 2014-2016, contract sales were attributed 88% of total electric energy sales of ISAGEN.

In line with Fitch expectations, the FCF was positive in 2016 in spite of Operating Cash Flow pressures, driven by lower investment needs, as the Company already executed its largest projects, and by the decision of not paying dividends in 2016. After the local regulator denied the environmental license for ISAGEN's largest project, Fitch does not foresee the development of any large project to increase its installed capacity in the short to medium term. The FCF performance will depend, to a large extent, on the strategy of dividend and other payments to the shareholders in coming years.

Fitch expects ISAGEN to reduce its leverage levels in 2017, driven by recovery of the EBITDA. The leveraging was affected in a temporary manner in 2016 due to operational pressures over the year. In a positive manner for its credit profile, the Company registered positive FCF, refinanced its 2016 debt maturities, and maintained a stable financial debt balance. ISAGEN's capital structure has limited exposure of exchange variations, given that only 7.5% of its financial debt is expressed in US dollars.

ISAGEN's ratings incorporate the expectation that the EBITDA will be close to COP1,200 m in the medium term, which tend to a leverage level 2.5 times (x) from 2017 to 2019.

© 2017 Fitch Ratingswww.fitchratings.com

ISAGEN ratings do not consider the potential absorption of its shareholder in Colombia, BRE Colombia Holdings S.A.S., the vehicle used by Brookfield to acquirs its holding in ISAGEN. Last April 28th, ISAGEN announced the call for an extraordinary shareholders meeting that will be held in June 2017, which will consider and potentially approve the merger of ISAGEN and its shareholder. Fitch considers that at this time there is limited information available to assess the impact of this transaction on ISAGEN's credit profile. The agency will follow up this transaction and its impact on the business equity structure.

Fitch key assumptions for issuer rating purposes include:

- energy prices reflect standardization of hydrology conditions in the medium term; - the distribution among shareholders does not impair the performance of the FCF;

-leverage levels tending to be lower than 3x for 2017 and to stabilize close to 2.5x in the medium term.

Some of the future developments that could, either individually or collectively, lead to a negative rating action include:

• Significant reduction of electric energy prices, together with the drop in electricity demand;

• Sustained leverage increased above 4x;

-change in corporate strategy weakening the performance of the CFO or implying material increase of capital investment and leverage.

ISAGEN maintain an adequate liquidity position supported by healthy cash balances, the expectation for a growing operational generation and a manageable debt maturity profile. At the close of 2016, the Company's cash balance was close to COP396,000 m, while the short-term debt was close to COP230,000 m.

ISAGEN reduces its potential refinancing risk in 2016, as it renegotiated the conditions of the Power Finance Trust Limited loan that expires in 2025. Thus, the Company and the creditor withdrew the loan prepayment clause in the event of a change in the Company's holding. The debt maturity profile is manageable for the company with annual amortization below COP300,000 m in 2017 and 2018, which is lower than the CFO generation expectations for those years.

The financial debt of the company is made up of financial obligations in local currency (65.9%), bank loans in US dollars (7.8%), and domestic market bonds (26.3%). In 2016, ISAGEN issued COP300,000 m in local bonds with maturities until 2028. Resources from the emission refinanced the short-term debt and some bank loans, which benefited the company's debt maturity profile.

Lucas Aristizábal (Lead Analyst) Senior Director

+1 312 368 3260

Fitch Ratings, Inc. 70 West Madison St. Chicago, IL 60602

Jorge Yanes (Secondary Analyst) Director Director

+571 484 6770. Ext.1170