CELSIA ANALYSIS BANCOLOMBIA: COLOMBIAN EQUITY RESEARCH – Cover Update Utilities I March 24, 2015 Beyond Borders BUY In this report we update our coverage of Celsia based on the latest available financial information and the inclusion of the assets acquired from GDF in Central America. As a result we adjust the target price for 2015 from COP6,860/share to COP6,650/share (-3%), which implies a 30% upside potential from the current market price and leads us to maintain our BUY recommendation. Summary It is important to note that the reduction in the target price is mainly due to changes in the assumptions for some operational variables and has nothing to do with the incorporation of the assets acquired from GDF in Central America, which in addition to providing value strategically contribute to the company’s generation portfolio. The drop in the TP is mainly due to: i) EPSA’s lower projected generation, from an average of 3,989GWh/year to 3,441GWh/year, more in line with the company’s average power generation, ii) lower projected generation for Celsia’s and Zona Franca Celsia’s assets, from an average of 2,534GWh/year to 1,808GWh/year on expectations of lower thermo activity in the energy market due to the increased participation of hydropower in the National Interconnected System (Sistema Interconectado Nacional, SIN) given the start of operation of projects like Sogamoso (820MW), El Quimbo (400MW) and Ituango (2,400MW), and iii) lower operating margins in Celsia and Zona Franca Celsia due to fuel costs, both natural gas and liquid fuel. 52-Week Range (COP) Market Cap. (COPmn) Outstanding Shares (mn) Float (excluding AFPs) (mn) 12-Month Average Daily Volume (COPmn) Expected Return Dividend Return Total Return Bloomberg Free Option: Extra Growth via Porvenir II The valuation does not include the Porvenir II hydroelectric project (352 MW) since the approval of the environmental permit is not ready yet and therefore there’s no green light for the construction or the closing of the transaction to purchase Proesas’ shares, which owns the rights for the project. Thus, it is noted that Celsia has opportunities for organic growth via Porvenir II, while their continued inorganic expansion in either Colombia or region can’t be ruled out. Fundamental Strength We confirm our positive view on Celsia because of: i) the interesting and diversified asset portfolio, which allows them to balance business, generation technology, geography and foreign exchange risks, ii) balance in their generation technologies (48% hydro , 50% thermal and 2% wind) which offers the flexibility needed in case of extreme weather conditions, iii) integrated energy portfolio that offers stability in cash flows generation and greater efficiency, iv) growth potential, and v) attractive upside potential. Multiples (COP mn) Revenues Operating income EBITDA Net Income P/E EV/EBITDA Price/BV Dividend yield 2014 2015E 2016E 2017E 2018E 2,588,781 745,530 894,289 170,528 3,197,293 763,483 950,505 218,745 2,897,016 633,559 834,670 174,044 3,073,794 729,352 934,630 208,343 3,218,618 800,518 1,007,997 269,674 24.8 10.1 1.2 1.9% 16.4 9.3 1.0 2.3% 20.7 10.4 1.0 2.4% 17.3 9.2 1.0 2.5% 13.3 8.4 1.0 2.5% Source: Bancolombia 1 1 Target Price (COP) Previous Price (COP) Closing Price (COP) Mar 20, 2015 Upside Potential 6,650 6,860 5,100 30% 4,585 – 6,620 3,669,881 719.6 322.4 284.5 30.4% 2.2% 32.6% CELSIA CB CELSIA vs. COLCAP (Dec. 2013=base 100) 120 110 100 90 80 70 Dec-13 Mar-14 Jun-14 CELSIA Aug-14 Nov-14 COLCAP Source: Bancolombia, Bloomberg Analysts Name: Phone: E-mail: Juan Camilo Dauder (574) 6049821 [email protected] Name: Phone: E-mail: Diego Alexander Buitrago (571) 7463984 [email protected] Feb-15 CELSIA | Utilities March 24, 2015 Valuation Summary Figure 1 – EPSA’s Power Generation (GWh) Our valuation is based on a Sum-of-the-Parts model in which each of Celsia’s assets (EPSA, ZF CELSIA, Celsia Individual and Central America) was individually assessed through a DCF model. 4.500 4.000 Table 1 – Valuation Summary SOTP (COPmn) Assets EPSA (COP mn) Celsia Individual+ZF Celsia (COP mn) Central America Assets (COP mn) Equity Value (COP mn) Outstanding shares Price per share (COP) Previous Current 2,685,843 2,251,138 4,936,981 2,314,911 1,522,563 948,588 4,786,063 719,584,500 6,860 719,584,500 6,650 WACC 3.500 g% 9.9% 10.0% 8.5% 3.5% 3.5% 3.0% 3.000 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Previous Current Source: Bancolombia Source: Bancolombia. Key Points in the Valuation Figure 2 – Generation Celsia + ZF Celsia (GWh) EPSA: EPSA’s valuation shows a 13.8% decrease compared to the previous model as the generation of the company was adjusted downward 13.7% annual on average, from an average of 3,989GWh/year to 3,441GWh/year. This because the information source (XM MPODE Model) yielded for EPSA a generation that significantly exceeded the expected average generation of 3,450GWh/year including the Cucuana project (55MW). 4.000 3.500 3.000 2.500 2.000 Additionally, an impact on margins is expected due to fuel costs, both gas and liquid fuel. In this regard, it is anticipated that the quantities of gas to be contracted by Celsia may decrease along with the use of their thermal plants, but contracting costs of natural gas may increase given the characteristics of this market. Moreover, the backup using liquid fuel will also increase costs. 2 2 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Previous Current Source: Bancolombia Figure 3 – Projection of Consolidated Revenues (COPmn) 5.000.000 50% 4.000.000 40% 3.000.000 30% 2.000.000 20% 1.000.000 10% Revenues Source: Bancolombia EBITDA Margin 2019E 2018E 2017E 2016E 2015E 2014 0% 2013 - 2012 Consequently, the lower projected generation has a direct implication in the projection of the amount of energy sold, in both contracts and the spot market, and therefore estimated revenues and earnings are affected. In this sense, it is estimated that contract sales of Celsia + ZF Celsia will go up from 1,410GWh in 2014 to 1,500GWh in 2017 and will remain stable in the long term, allowing forecasting a ratio of power sales of 61% contracts and 39% spot market. 1.000 2011 Celsia + ZF Celsia: This block of valuation shows a decrease of 32% vs. the previous model mainly because of declining cash (USD234mn) used to pay part of the USD794mn of the acquisition made in 2014. However, discounting this effect, the value falls only 7.4% because excluding this factor power generation was adjusted downward 19% annual on average, from an average of 2,534GWh/year to 1,808GWh/year. This is explained by the expectation of lower activity of thermal plants in the energy market resulting from the greater share of hydropower in the National Interconnected System (SIN) with projects like Sogamoso (820MW), El Quimbo (400MW) and Ituango (2,400MW). 1.500 2010 Consequently, the lower projected generation has a direct implication in the projection of the amount of energy sold, in both contracts and the spot market, and therefore estimated revenues and earnings are affected. In this sense, stability in contract sales is expected compared to that reported in 2014, and a ratio of power sales of 59% contracts and 41% spot market is estimated. CELSIA | Utilities March 24, 2015 Assets acquired in Central America: The perfecting of the transaction took place on December 1st, 2014, and therefore from that date only the operation of the assets acquired was consolidated. Regarding the amount of the transaction, Celsia transferred USD565mn to GDF Suez and prepaid a loan worth USD229mn, for a total of USD794mn in resources used. This value was funded with own resources for USD234mn and bank loans for USD560mn in very favorable conditions for Celsia in terms of agreed interest rates (Libor 6M + 1.48%), taking the Net Debt/EBITDA indicator from 0.9x to 3.5x. Regarding the business strategy of assets in Panama, we stress that they exhibit a high level of contracting (80%-90%), which favors the predictability of revenues but increases the risk before power shortages under extreme drought events or unavailability of plants, a factor that would eventually force to increase energy purchases. Based on the information released by Celsia, a DCF model was ran from which we highlight an annual compound growth of 2.6% for the projection period, EBITDA margin of 25%, a WACC of 8.5% in COP which is lower than EPSA’s 9.9% and Celsia’s and ZF Celsia’s 10% due to the lower debt cost and the leverage with which the acquisition was structured in Central America. Figure 4 – Installed Capac ity Pre-adquisition Figure 5 – Installed Capac ity Post-adquisition 2% 44% Hydro 48% Thermal 50% 56% Total: 1,777 MW Total: 2,312 MW Source: Bancolombia Tax Reform: Regarding the wealth tax, the impact has been caused every year in the income statement according to what the company said in the 4Q14 conference call. Tariff revision: The valuation model does not consider any impact of the tariff revision for the transmission and distribution activities proposed by the CREG since the proposed comprehensive resolution isn’t out yet. However, we reiterate not to be expecting a significant negative impact as revenues subject to be affected represent about 10% of total. Expectations 2015: Celsia’s performance this year will depend largely on exogenous factors such as: i) the occurrence of El Niño, due to the relevance of their thermal assets in the Colombian electricity market, and the effect this phenomenon may have on the price of energy (to date, the outlook is uncertain given the changing weather conditions, although we highlight the decrease in the probability of occurrence of El Niño, from 80% by mid-2014 to 55% in February 2015, according to the IRI model), and ii) the behavior of oil prices which has implications in the way the benchmark spot market price of energy is defined in Panama. 3 Hydro Thermal Wind 3 CELSIA | Utilities March 24, 2015 As for the company’s business strategy, the same levels of contracts seen in 2014 are expected, both in Celsia and EPSA, while the activity in the spot market will depend on the opportunities that emerge. At this point, it must be noted that the entry into operation of the Sogamoso hydroelectric project (820MW) will be crucial to moderate the behavior of the spot market price. Regarding the estimated 2015 capex, the company said investments will depend on the decision made regarding the projects of the expansion plan such as Porvenir II and interventions to assets in Central America. However, consolidated investments are expected to reach COP230,000mn linked to replacement, operation and maintenance in the normal course of business. 4 4 CELSIA | Utilities March 24, 2015 Multiples Before analyzing the multiples is important to note there’s a distortion because the EV considers the totality of assets acquired in Central America but earnings and EBITDA only consolidate a month of operations so the EV/EBITDA and RPG multiples look enriched vs. their peers. Importantly, the increase in net debt/EBITDA indicator should be noted which went from 0.9x in 3Q14 to 3.5x at the end of 2014 due to the debt contracted to fund the acquisition of assets in Central America. Table 2 – Comparable Multiples Company EV / EBITDA LIGHT CPFL ENERGÍA CEMIG ELETROBRAS COPEL TRANSM ALIAN ENERSIS EEB AVERAGE CELSIA 5.4 10.8 5.1 N/A 6.0 9.0 6.2 10.5 8.0 9.2 P/E P / BV 4.5 25.6 5.5 N/A 7.9 8.2 16.3 14.0 12.8 21.5 0.8 2.9 1.3 0.2 0.7 1.8 1.6 1.5 1.4 1.1 EBITDA Margin 18.1% 20.2% 29.2% -8.7% 15.7% 83.8% 31.7% 60.8% 33.3% 34.3% ROE 18.7% 11.2% 21.9% -11.9% 9.3% 21.2% 9.9% 10.9% 11.3% 4.9% Net Debt to EBITDA 3.6 4.3 1.9 N/A 2.1 3.0 0.8 2.3 2.4 3.5 Yield 12.3% 5.2% 25.4% 21.5% 6.8% 13.5% 3.0% 3.9% 10.7% 2.2% Source: Bloomberg, Bancolombia Figure 6 – EV /EBITDA Fw d 12M Figure 7 – P/E Fw d 12M 13 50 40 11 30 9 20 7 10 5 Mar-11 Mar-12 EV/EBITDA Fwd Mar-13 -1SD Mar-14 Average Mar-15 0 Mar-11 +1SD Mar-12 RPG fwd Source: Bancolombia 5 5 Mar-13 -1SD Mar-14 Average Mar-15 +1SD CELSIA | Utilities March 24, 2015 Equity Sales Equity Research Rupert Stebbings Jairo Agudelo Equity Markets Vice President Head of equity research [email protected] [email protected] +574 6045138 +574 6047048 Natalia Agudelo Parra Juan Camilo Dauder Sánchez Equity Sales Head Energy Analyst [email protected] [email protected] +574 6045144 +574 6049821 Maria Paula Cortés Durán Fixed Income Head Financial & Small Cap [email protected] Pablo Caicedo +571 353 6600 ext. 37387 VP International Business [email protected] Diego Buitrago Aguilar +571 488 6000 Energy Analyst [email protected] Economic Research +571 7463984 ext. 37307 Juan Pablo Espinosa German Zúñiga Saavedra Head of Economic Research Infrastructure and Industry Analyst [email protected] [email protected] +571 7463991 ext. 37313 +574 6047045 Alexander Riveros Federico Perez Garcia Senior Economist Oil & Gas Junior Analyst [email protected] [email protected] +571 7463980 ext. 37303 +574 6048172 Research Assistant Claudia Restrepo Research Editor [email protected] +574 404 3809 6 6 CELSIA | Utilities March 24, 2015 TERMS OF USE This report has been prepared by Analysis Bancolombia a research and analysis department at Grupo Bancolombia. 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