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Announcement:

Moody's affirms ratings of EPM and EEGSA following acquisition announcement of DECA II

22 Oct 2010

New York, October 22, 2010 -- Moody's Investors Service affirmed the Baa3 local currency issuer rating of Colombia's Empresas Publicas de Medellin, E.S.P. (EPM) as well as the Baa3 foreign currency rating of its outstanding US$500 million senior unsecured notes. The outlook remains stable. Moody's also affirmed the Ba3 Corporate Family Rating (CFR) and senior unsecured rating of Empresa Electrica de Guatemala, S.A. (EEGSA). The outlook remains negative.

The rating affirmations follows yesterday's announcement that EPM acquired 100% of Distribucion Electrica Centro Americana II S.A. (DECA II) and GESA for a total consideration of around US$620 million to be funded with cash and up to a maximum of US$300 million of debt. DECA II holds an 80.9% ownership interest in Empresas Electricas de Guatemala (EEGSA; Ba3, negative outlook) and other affiliated companies, including Comercializadora Electrica de Guatemala (COMEGSA).

"The affirmation of EPM's ratings and maintenance of a stable outlook reflects Moody's view that its stand-alone credit risk profile or the Baseline Credit Assessment (BCA) of 11 or Ba1 had already factored in its aggressive Mega 2015 expansion strategy", said Moody's analyst Natividad Martel. This program will increase the size of the group and its revenue base substantially over the next several years, both in Colombia and abroad. While we acknowledge the benefits of geographically diversifying its sources of cash flow, Moody's believes that this expansion is not without risks, particularly as EPM moves outside of its traditional regulatory environment to jurisdictions, such as Guatemala, where the regulatory framework is less developed and transparent compared to Colombia.

Moreover, such expansion is likely to be accompanied by an increase in leverage and an associated deterioration in its strong historical credit metrics. EPM's 2007-2009 Retained Cash Flow (RCF) to debt and CFO pre-W/C interest coverage ratio averaged around 40% and 8x, respectively, both of which strongly positioned the issuer at the current BCA, but are expected to decline following this acquisition.

In this regard, we note that this acquisition has been funded in a relatively prudent fashion in terms of debt incurrence, but has also weakened EPM's liquidity profile, another factor constraining EPM's BCA. Moody's gains further comfort from the fact that the group's ability to incur additional debt is limited by the covenants embedded in EPM's financial documentation, and that the acquisition of DECA II accounts for a significant portion of EPM's expansion plans abroad in the context of its Mega 2015 program. As a result, Moody's expects EPM's credit metrics to remain well-positioned within its rating category and does not expect its RCF to debt and CFO pre-W/C interest coverage ratio to fall below the mid-teens or below 3.5x, respectively, on a sustained basis.

For more information about EPM's rating considerations, refer to the presale report and Credit Opinion published in July 2010 and September 2010 available in our website www.moodys.com

Moody's also affirmed EEGSA's Ba3 rating and maintained its negative outlook reflecting uncertainties associated with the change in ownership, including any changes that may be triggered to the capital structure and to dividend policy. Today's rating action factors in the challenging regulatory environment that exists in Guatemala which has resulted in a substantial deterioration in EEGSA's credit metrics from historical levels. While the credit deterioration at EEGSA appears to be abating, we also believe that the change in ownership may produce a better regulatory relationship for EEGSA, particularly given the litigious relationship that had developed between the previous owners and the regulator. Greater clarity on this relationship as well as the company's prospective financial performance, including dividend policy, could stabilize the rating outlook.

Moody's observes that EEGSA's current outstanding US$70 million 8.5% senior unsecured 144-A notes due in December 2014 have change of control language in their indenture which we believe can be triggered by this acquisition. Moody's understands that EEGSA has a bank commitment to fund any mandatory prepayment that may be required. Failure to formalize that commitment will trigger a negative rating action.

The last rating action on EPM was the assignment of a Baa3 local currency issuer rating and a Baa3 foreign currency rating to its outstanding US$500 million senior unsecured notes on July 16, 2009.

The last rating action on EEGSA was a downgrade of its CFR and its senior unsecured rating to Ba3 from Ba2 on December 11, 2008.

The principal methodology used in rating EPM and EEGSA was the Regulated Electric and Gas Utilities rating methodology published in August 2009. In addition, given EPM's 100% ownership by the City of Medellin (Baa3 Global Scale, local currency and foreign currency rating) it falls under the scope of Moody's rating methodology entitled "The Application of Joint Default Analysis to Government-Related Issuers (GRIs)". As such its Baa3 local and foreign currency results from applying a medium-level probability of extraordinary support from the municipality and a high level of dependence with the Municipality under that methodology on EPM's BCA of 11. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

Headquartered in Medellin, Empresas Publicas de Medellin, S.A. E.S.P. (EPM), is a vertically integrated multi-utility company controlled by the City of Medellin which provides generation, transmission, distribution and commercialization of electricity and natural gas as well as water and sewage services. EPM also offers telecommunications service through its 99.99% subsidiary EPM Telecomunicaciones S.A. E.S.P (trade mark: UNE). As of June 30, 2010, EPM reported assets of approximately US$12 billion (about 90% of the group's consolidated assets).

Headquartered in Guatemala City, EEGSA is the largest distribution company in the country in terms of GWh distributed. EEGSA owns 100% of the distribution assets within its service area and operates under an Authorization Agreement expiring in 2048, to provide electric distribution services to the Departments of Guatemala, Escuintla and Sacatepequez. As of June 30, 2010, EEGSA reported assets of approximately US$545million.

New York
Natividad Martel
Associate Analyst
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
A.J. Sabatelle
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.

Moody's affirms ratings of EPM and EEGSA following acquisition announcement of DECA II
No Related Data.
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