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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 Stable.

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 risk.

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.

KEY ASSUMPTIONS
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.

RATING SENSITIVITIES

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.

LIQUIDITY

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 follows:

--Foreign Currency Issuer Default Rating at 'BBB+';
--Local Currency Issuer Default Rating at 'BBB+';
--Senior Unsecure Debt Rating at 'BBB+';
--National Scale Long-term Rating of at 'AAA(col)';
--National Scale Senior Unsecure Debt Rating at 'AAA(col)'.

The Rating Outlook is Stable.

Fitch has affirmed EPM Inversiones S.A.'s ratings as follows:

--National Scale Long-term Rating at 'AAA(col)';
--National Scale 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.

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
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=991016
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991016
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst
Lucas Aristizabal
Senior Director
+1-312-368-3260
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Julio Ugueto
Associate Director
+571-326-9999
or
Committee Chairperson
Joe Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations
Alyssa Castelli, New York, +1 212-908-0540
alyssa.castelli@fitchratings.com


Source: Business Wire (September 18, 2015 - 3:03 PM EDT)

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