Fitch Affirms Empresas Publicas de Medellin E.S.P. at 'BBB+' and 'AAA(col)'; Outlook Stable
Fitch Ratings has affirmed Empresas Publicas de Medellin E.S.P.'s (EPM)
foreign and local currency Issuer Default Ratings (IDRs) at 'BBB+' and
the 'BBB+' long-term rating assigned to the company's approximately
USD1.7 billion of outstanding debt. Fitch has also affirmed EPM's
national scale rating at 'AAA(col)' and its senior unsecured COP4.500
billion debt issuance program at 'AAA(col)'. The Rating Outlook is
Concurrently, Fitch has affirmed EPM Inversiones S.A.'s long- and
short-term national scale ratings at 'AAA(col)' and 'F1+(col)'. The
Rating Outlook is Stable. EPM Inversiones is a wholly owned subsidiary
of EPM that consolidates most of the company's investments.
KEY RATING DRIVERS
EPM's ratings reflect the company's low business
risk resulting from its business diversification and characteristics as
a utility service provider. EPM provides electricity distribution and
transmission, water and sewage water, garbage collection and disposal,
natural gas distribution services and is the largest electric generator
in Colombia. The company's ratings also reflect its solid credit
protection measures supported by moderate leverage, healthy interest
coverage and an adequate liquidity position. EPM's ratings also reflect
the company's somewhat aggressive growth strategy as well as the
company's exposure to regulatory risk, which is considered moderate.
Low Business Risk:
EPM's low business risk profile stems from its natural monopoly position
as the main supplier of electric power, water and natural gas services
to Medellin's metropolitan area. The company is one of the largest
generators of electricity within Colombia, with nearly 23% of the
country's installed capacity. EPM's electricity distribution assets
reach a network of approximately 5.9 million customers in six states in
Colombia and four countries, and the company provides water services to
approximately 1 million users. This diversification provides EPM with a
stable and predictable cash flow stream, primarily derived from
regulated utilities, thereby offsetting some of the company's hydrology
Strong Credit Metrics:
EPM's financial profile is strong, characterized by healthy cash flow
generation, moderate leverage and healthy interest coverage and
liquidity. As of the last 12 months (LTM) ended June 30, 2015, EPM
reported a consolidated EBITDA of USD1.5 billion and total consolidated
financial debt of approximately USD4.8 billion. This translates into a
gross leverage ratio of 3.1 times (x), which is considered adequate for
the rating category. Interest coverage, as measured by
EBITDA-to-interest expense is strong at approximately 6.5x as of the LTM
ended June 30, 2015, mostly due to the company's low cost of funding.
The company's adequate liquidity position is characterized by a
manageable maturity schedule and satisfactory cash on hand of
approximately USD451 million as of June 2015. The company's dividend
policy has been moderate and is currently not considered a credit
constraint. EPM has transferred, as dividends, on average, between 45%
and 55% of its net income to the city of Medellin. Although not
considered likely in the near term, an increase in the company's
dividend distribution policy could pressure its free cash flow
generation, which is already expected to continue being negative over
the short to medium term due the company's investment plans.
Aggressive Growth Strategy:
EPM's growth strategy is considered aggressive and is aimed at
increasing consolidated revenues and EBITDA by investing in related
businesses both within Colombia and abroad. The company's goals are to
reach revenue and EBITDA levels of USD14 billion and USD5 billion,
respectively, by 2022. This implies doubling the company's size over the
next decade. As a result of this, free cash flow is expected to be
negative as the company funds its currently ongoing capital investment
program of more than USD7 billion. Fitch expects EPM's debt to increase
moderately as the company finances a portion of its investments with
debt while maintaining consolidated leverage ratios below 3.5x. Over the
short term, the company's interest coverage ratios might range between
about 5.0x and 8.0x. These credit metrics would still be considered
consistent with the company's assigned ratings.
EPM's 10-year capital investment program is largely earmarked towards
electricity business while the balance will be directed towards the
water segment. Of the approximately USD7 billion of estimated
investment, around 84% will go towards generation, distribution,
transmission and gas distribution. Among the largest investment projects
is the development of the hydroelectric generation plant 'Ituango', a
2,400 MW of installed capacity project with an estimated cost of USD5
billion, of which approximately 65% of funds remain to be invested. This
project will be developed under a 50-year build, operate, own, maintain
and transfer (BOOMT) agreement. Construction time is estimated to be
between eight to 10 years and the first phase to come on line towards
the end of 2018.
Exposure to Regulatory Risk:
EPM is exposed to some regulatory risk, but it is considered low. The
bulk of EPM's consolidated revenues are generated either by regulated
tariffs or medium-term contracts. The latter exposes the company to
potentially sustained low electricity prices. Historically, all
regulatory entities in Colombia have been independent from central
government and have provided a fair and balanced framework for both
companies and consumers. Expected regulatory changes over the coming
months are assumed to have a neutral impact for the company's cash flow
generation and financial profile. Future regulatory changes are expected
to be aimed at adding transparency to the market and the regulatory
framework overall. EPM's diversified business profile further mitigates
the company's regulatory risk as a simultaneous tariff decrease across
all businesses is unlikely.
Neutral Regulatory Changes: EPM's ratings assume
that the currently proposed regulatory changes do not materially impact
the company's cash flow generation goring forward, nor it significantly
increase capital investment requirements on its regulated businesses.
Stable Dividends to Medellin: Dividends to the City of Medellin continue
to range between 45% and 55%.
Ituango's First Phase Online in 2018: Ituango's first phase come on line
at the end of 2018 with half of its capacity that is 1,200 MW, which
lowers electricity prices in the country by at least 10%.
No Major Acquisition in the Short-term: EPM's ratings don't assume
additional major acquisitions in the short term. The company's credit
metrics could deteriorate beyond its rating triggers depending on how
additional acquisitions are financed.
A negative rating action could result for any combination of the
following factors; a steep decrease in electricity prices, coupled with
low generation and poor electricity demand; increasing leverage on a
sustained basis to above 3.5x as a result of overly aggressive
investment and/or acquisition strategy; and increasing intervention from
the municipality of Medellin, EPM's owner. Fitch expects EPM's capital
structure to gravitate towards 3.0x total debt to EBITDA.
An upgrade is not likely in the short to medium term given the company's
current credit metrics and aggressive growth strategy. Considerations
for an upgrade include improvements in the macroeconomic environment in
the countries where EPM operates, namely Colombia; couple with a
sustained leverage level below 2.5x.
EPM's liquidity position is considered adequate, which is supported by
healthy cash flow generation and cash and marketable securities. The
company's amortization schedule is manageable with less than 10% of
total debt coming due over the next twelve months. Cash and cash
equivalents as of June 2015 was USD451 million compared with short term
debt of USD525 million. Although the company's flexibility to issue debt
is somewhat restricted by approval requirements from the Ministry of
Finance ("Ministerio de Hacienda"), the company has been successful at
accessing both the local and international debt capital markets to
financing its capex.
FULL LIST OF RATING ACTIONS
Fitch has affirmed Empresas Publicas de Medellin E.S.P.'s ratings as
--Foreign Currency Issuer Default Rating at 'BBB+';
Currency Issuer Default Rating at 'BBB+';
--Senior Unsecure Debt
Rating at 'BBB+';
--National Scale Long-term Rating of at
--National Scale Senior Unsecure Debt Rating at
The Rating Outlook is Stable.
Fitch has affirmed EPM Inversiones S.A.'s ratings as follows:
--National Scale Long-term Rating at 'AAA(col)';
Short-term Rating at 'F1+(col)'.
The Rating Outlook is Stable.
Date of Relevant Rating Committee: Sept. 17, 2015
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including
Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
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