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Rating Action:

Moody's changes EPM's outlook to stable, affirms Baa3 ratings

07 Mar 2022

New York, March 07, 2022 -- Moody's Investors Service ("Moody's") has today changed the outlook on Empresas Públicas de Medellín E.S.P (EPM) to stable from negative and has affirmed the Baa3 global scale issuer and senior unsecured ratings. The baseline credit assessment (BCA) of 'ba1' has also been affirmed.

Issuer: Empresas Publicas de Medellin E.S.P

..Affirmations:

....LT Issuer Rating: Baa3

.Baseline Credit Assessment:ba1

.Senior Unsecured (Foreign): Baa3

.Senior Unsecured (Domestic): Baa3

Outlook Actions:

.Outlook: Changed to Stable from Negative

RATINGS RATIONALE

The rating action reflects Moody's view of stability on EPM's credit quality following the Ituango hydro plant's construction progress, which achieved an 87% completion progress as of January 2022. The construction advancements reduced uncertainties on the degree of damage to existing infrastructure and total costs required for project completion. Moody's recognizes that Ituango's development still faces some construction challenges, as related to the spillway and water deviation tunnels. Nonetheless, Moody's considers there are enough incentives in place to mitigate the remaining execution risks, so that at least one of the eight engines will start operations during 2022.

Moody's reviewed the opinions from ANLA, the national authority that grants environmental licenses in Colombia, and a third-party engineering report provided by the Poyry's consulting firm. Both entities are aligned that advancing with the project works is the best way to mitigate risks to the project's physical structure and to the communities downstream. The ratings' affirmation also considers that EPM received insurance indemnifications for damage and fiscal responsibilities coverages during 2021 and 2022 amounting roughly $1.1 billion, strengthening the company's liquidity position. Additionally, following the lift of Colombia's Controller-General precautionary measures that weighed on the construction companies after the accident, EPM was able to sign a contract extension with the current construction consortium for eight additional months in December 2021, which mitigates the risk of additional delays and cost overrun for project completion.

EPM reported strong liquidity position as of September 2021 that allows for the debt repayment over the next 12 months. Nonetheless, EPM's capital investments will remain high during 2022-2024, leading to negative free cash flows that will prevent a more significant leverage reduction. According to the company, funding for the remaining capital expenditures will be provided by a combination of available liquidity, asset sales and new debt issuances. As such, the rating's base case considers EPM's leverage, measured by the Debt/EBITDA ratio, will remain around 3.5x range until 2024.

The ratings affirmation with stable outlook also incorporates EPM's large scale and diversified revenue profile on a consolidated base including predictable cash flows derived from its regulated electricity distribution business (43% of the consolidated EBITDA up until September 2021). Moody's projections consider that the EBITDA in 2021 increased at a higher pace than expected, as a reflection of higher revenues from its Colombian distribution, generation and gas companies, along with the ramping up of certain water assets and the incorporation of Afinia since October 2020. Moody's now expects the (CFO pre-WC) / Net Debt ratio and interest coverage, measured by (CFO pre-WC + Interest Expense)/ Interest Expense, to remain at or above 20% and 4.0x, respectively, during 2022 and 2023.

EPM's issuer rating and senior unsecured rating of Baa3, considers Moody's assumption of a 'Strong' potential for extraordinary support in case of need and 'Very High' dependence to the City of Medellin (Baa2 negative), as the company's majority shareholder and support provider, which results in a one-notch uplift on top of the company's standalone credit profile.

Moody's considers ESG attributes as having a discernible negative impact on EPM's current rating. It's Credit Impact Score CIS-4 (highly negative) incorporates Moody's assessment of highly negative environmental and social risks deriving from concerns raised after the emergency event on the Ituango hydropower plant development in April 2018. Those risks are partially mitigated by moderate governance risks, which incorporates Moody's expectation of strong financial support from its shareholder if necessary. While ESG risks remain a constraint to the rating, Moody's views that further continuance with the project's construction schedule mitigates some environmental and social risks EPM could face.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Upward pressure on EPM's ratings can occur upon clear indications that Debt to EBITDA will be below 3.5x, with the (CFO pre WC) / Net Debt and (CFO pre WC + Interest Expense) / Interest Expense ratios staying above 20% and 4.2x, respectively, on a sustainable basis.

The ratings could face downward pressure if further incidents at Ituango cause additional environmental damage, third-party liability expense, or permanent/irreversible damage to the project's infrastructure. Negative rating pressure will arise should the company be unsuccessful in raising the expected amounts under its asset divestment program, or if significant cost overruns, substantial delays, or potentially project cancellation lead to a perception of Debt to EBITDA remaining above 4.0x beyond 2022, with (CFO pre WC) / Net Debt and (CFO pre WC + Interest Expense ) / Interest Expense kept below 17% or 3.5x, respectively. A perception of lower support from the Municipality of Medellin would also exert negative rating pressure.

PROFILE

Headquartered in Medellin, Colombia (Baa2 stable), EPM is a multi-utility vertically integrated public service group. EPM is the parent company of a group made up of 44 companies and four structured entities. EPM has presence in the provision of public services in Colombia, Chile (A1 negative), El Salvador (Caa1 negative), Guatemala (Ba1 negative), Mexico (Baa1 negative) and Panama (Baa2 stable), and offers its services through the following segments: power generation, distribution and transmission; natural gas distribution; water provision; wastewater treatment; and solid waste management. As of September 2021, 81% of EPM's EBITDA came from Colombia, while the most important business segment, power, accounted for 80% in the same period.

The methodologies used in these ratings were Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207, and Unregulated Utilities and Unregulated Power Companies published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1066389. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Roxana Munoz
Asst Vice President - Analyst
Infra Finance
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Mexico
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Cristiane Spercel
Senior Vice President/Manager
Infra Finance
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653

Releasing Office:
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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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