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Rating Action:

Moody's downgrades EPM, ratings placed under review for downgrade

24 May 2018

New York, May 24, 2018 -- Moody's Investors Service ("Moody's") downgraded today the issuer and senior unsecured debt ratings of Empresas Publicas de Medellin E.S.P. (EPM) to Baa3 from Baa2 and the baseline credit assessment (bca) to 'ba1' from 'baa3'. The ratings have been placed under review for downgrade.

Downgrades:

..Issuer: Empresas Publicas de Medellin E.S.P

.... Issuer Rating, Downgraded to Baa3 from Baa2; Placed Under Review for further Possible Downgrade

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa3 from Baa2; Placed Under Review for further Possible Downgrade

Outlook Actions:

..Issuer: Empresas Publicas de Medellin E.S.P

....Outlook, Changed To Rating Under Review From Negative

As a government related issuer, EPM's ratings reflect its ownership structure and linkages to the City of Medellin (Baa2 negative), on top of its intrinsic credit quality, measured by the bca. While we have downgraded EPM's bca, to 'ba1' from 'baa3', our views concerning the Municipality of Medellin's support and dependence are unchanged at 'Strong' and 'Very High', respectively. As such, EPM's rating downgrade to Baa3 from Baa2, reflects the downgrade of EPM's bca, driven by Ituango related events, rather than a change in our views concerning support or dependence from the municipality.

The rating action reflects our expectation that EPM's credit metrics will remain pressured in the medium term as a result of the material recent incidents on EPM's landmark hydro project Ituango (2,400 MW in installed capacity).

RATINGS RATIONALE

The downgrade follows the recent force majeure events at Ituango and our initial understanding of the negative financial implications that such events will have on EPM's credit profile. On May 21, 2018, EPM announced that Ituango's initial commercial operations date (COD), originally targeted for November 2018, would likely be delayed for at least one year.

EPM is still conducting emergency actions to control the flow of water through various means, including raising the height of the dam to the 410 meter mark, which has been achieved, to allow water to flow through the spillway if needed, reducing the risks of water topping over the dam.

These events have several financial implications. The most immediate relates to the costs of relocating and supporting the evacuated population downstream from the project; conducting fast-track work on the dam; as well as assessing damage to project equipment and the surrounding infrastructure. While EPM has third-party responsibility insurance as well as insurance coverage for project equipment and infrastructure damage, the extent to which such insurance protection will mitigate EPM's incurred expenses is unclear at this stage.

Medium term implications relate to the assessment of cost overruns to complete the project, lost revenues in 2018 and 2019 related to the inability of Ituango to generate energy in those years, costs to honor firm power purchase agreements from 2020 onwards, and capacity revenue charges that EPM has with Colombia's electricity regulator. Our estimates indicate that Ituango would contribute around $325 -- $375 million to EPM's revenues in 2019, and signed firm energy commitments add between $425 -- $475 million in 2020, first full year of operations with 1,200 MW of installed capacity.

Moody's preliminary sensitivity analysis suggests an 18-month delay in commercial operations would cause Debt to EBITDA to peak above 4.5x, and lengthen the period to achieve Debt to EBITDA below 3.5x beyond 2021.

The ratings have been placed under review for downgrade, reflecting the downside risks that persist in this still evolving emergency situation. Timing for completion of the project, the amount of additional environmental and social expenses, the degree of construction cost overruns, the potential damage to infrastructure, the timing and amounts of insurance reimbursements, and the effect on revenues and expenses in light of the company's energy commitments, all remain uncertain. A sensitivity analysis considering operating expense increases (+10%), cost overruns (+15%), and spot energy prices (COP150/KWh) indicates that EPM's leverage can potentially peak above 5.0x.

As of March 2018, the company reported total consolidated short term maturities of around $1.6 billion, 73% of which are with banks and multilateral institutions. Approximately 25% is related to debt at Chilean-water project Aguas de Antofagasta.

At the operating holding company level, short term maturities amount to approximately $900 million, mostly due between November 2018 and January 2019. With cash balances of approximately $370 million on a consolidated basis and $120 million at the holding company, rising liquidity risks are mitigated by a substantial concentration of short term maturities with banks, multilaterals, and development banks (76% and 56%, consolidated and holding company basis, respectively) where longstanding relationships may assist. In addition, we understand that there is $1.2 billion available to be drawn upon in contracted credit lines which in majority have been sized to supplement capital needs related to the Ituango project. According to the company, these lines can be used for general purposes and are not specifically earmarked for the project.

WHAT COULD CHANGE THE RATINGS UP/DOWN

We see very limited space for upward rating pressure in the medium term. The ratings can be stabilized once the water flow problems are addressed and greater transparency concerning the overall project execution is known, with the resulting project economics leading to an expectation that Debt to EBITDA will reach below 3.5x by 2021 and the company being able to present a clear and reliable liability management plan to meet its short term debt maturities.

The rating could be downgraded if further incidents at Ituango cause significant environmental damage, third-party liability expense, or permanent/irreversible damage to the project's infrastructure. Negative rating pressure will arise should Moody's believe that further project delays that cause deeper declines in revenue, expense increases, or capex overruns will lead to Debt to EBITDA remaining above 3.5x beyond 2021. Slow progress in refinancing short term debt maturities could result in downgrades. A perception of lower support from the Municipality of Medellin would also exert negative rating pressure.

The methodologies used in these ratings were Unregulated Utilities and Unregulated Power Companies published in May 2017, and Government-Related Issuers published in August 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Located in the department of Antioquia, Colombia, and benefiting from the water flow of the Cauca River, the Ituango hydro project is designed to have a total installed capacity of 2,400 MW, with first phase COD initially expected to be reached in November 2018, with 300 MW. Full 1,200 MW of Phase 1 capacity was expected by August 2019. Phase 2 was initially programed to reach COD in 2021.

Construction on the project began in 2011, and equipment is procured with Alstom (Baa2 stable) turbines and generators, Siemens Aktiengesellschaft (A1 Stable) transformers, and electrical systems from a consortium which includes the two latter companies. Civil works are being performed by Camargo Correa S.A. , and Colombian firms Conconcreto S.A. and Coninsa Ramon H S.A. The project was conceived under a company named Hidroelectrica Ituango S.A. E.S.P., which is owned in majority by the Department of Antioquia through the Instituto para el Desarrollo de Antioquia (IDEA, 50.74%), with EPM (46.33%), and minority shareholders (2.93%) holding the remaining shares. Shareholders are responsible for the pro-rata share of necessary equity contributions. Concomitantly, EPM signed a Build, Own, Operate, Maintain, and Transfer (BOOMT) agreement with Hidroelectrica Ituango S.A. E.S.P. for a period of 50 years. Under the agreement, EPM is responsible for the project completion (hence all the debt) and will benefit from the rights of all revenues for the 50-year period, upon when the rights are transferred back the Hidroelectrica Ituango S.A. E.S.P.

Headquartered in Medellin, Colombia (Baa2 negative), EPM is a multi-utility vertically integrated public service group with 3,680 MW net installed capacity (hydro: 83%). EPM renders its own services while it also holds ownership stakes in controlled and non-controlled subsidiaries located in Colombia and in Latin America (mainly Chile, Panama, El Salvador, Guatemala and Mexico). The 2007 Governance Framework Agreement outlines EPM's relationship with its single owner, the City of Medellin (Baa2 negative).

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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.

Bernardo Costa
Vice President - Senior Analyst
Corporate Finance Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800 891 2518
Client Service: 1 212 553 1653

Michael J. Mulvaney
MD - Project Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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