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
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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.
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Roxana Munoz
Asst Vice President - Analyst
Infra Finance
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