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Rating Action:

Moody's upgrades EPM's rating to Baa2; stable outlook

30 Mar 2017

Approximately USD 1.2 billion rated debt impacted

New York, March 30, 2017 -- Moody's Investors Service (Moody's) upgraded today the Issuer and senior unsecured ratings of Empresas Publicas de Medellin E.S.P. (EPM) to Baa2 from Baa3. The rating outlook is stable.

RATINGS RATIONALE

EPM's Baa2 senior unsecured rating reflects the application of Moody's joint default analysis (JDA) framework for government related issuers (GRI). The Colombian Municipality of Medellin is EPM's majority shareholder. Moody's GRI rating methodology considers the following four input factors (i) a strong-level probability of extraordinary support from the Municipality should EPM face financial distress, (ii) our estimates of a high level of dependence between the company and the Municipality, (iii) Moody´s rating of the City of Medellin (Baa2, stable) as well as (iv) EPM's intrinsic credit profile as captured in Moody´s Baseline Credit Assessment (BCA) of baa3.

The raising of the BCA to baa3 from ba1 reflects management's commitment to maintain a prudent financial policy as evidenced by the group's commitment to maintain the consolidated debt to EBITDA below 3.5x on a sustained basis. This was the case for the last twelve months ending February 2017. Moody´s also notes management´s decision to cease pursuing any significant non-organic growth opportunity until the Ituango hydro-electric plant (2,400MW) starts operations. Moreover, it also reflects our expectation that the company will exhibit this year Funds from Operations (FFO) to debt metric of around 20%.

EPM's financial metrics weakened markedly in 2015 and 2016, due to the severe El Niño phenomena (2015 to mid-2016) along with an incident at EPM´s Guatape plant (560MW). Due to these factors, debt to EBITDA peaked to nearly 4.5x at the end of the 2Q2016 from 3.3x in September 2015. The financial recovery of EPM's generation operations during the second half of 2016, combined with the insurance proceeds and funds from the disposal of EPM's interest stake in ISAGEN (around COP1,480,000 million), contributed to EPM's ability to reduce its outstanding debt at year-end 2016 and improve the company´s financial metrics.

The raising of EPM´s BCA to baa3 captures Moody's expectation of the successful commission of Ituango first phase's four units (1,200MW) starting end of next year. The significant progress in the construction of the Ituango plant (over 65%) and the completion of the more complex milestones underpin this anticipation. The BCA of baa3 already incorporates Moody's expectation that the additional debt to fund the tail-end of the project will cause a temporary deterioration in the metrics. However, the BCA of baa3 also reflects Moody's expectation that the credit metrics will improve rapidly after the four units progressively start operations between December 2018 and mid-2019.

Therefore, the BCA reflects Moody's expectation that the commissioning of Ituango (first phase) will allow EPM to comfortably record key credit metrics that are commensurate with the Baa3-rating category according to the Unregulated Utilities and Unregulated Power methodology; specifically, debt to EBITDA (consolidated and standalone) under 3.5x as well as 3-year average Funds from Operations (FFO) to debt in excess of 20%, respectively, on a sustainable basis. This expectation also considers that EPM is already undertaking material portions of the construction work related to the plant's second phase (+1,200MW). This will reduce EPM's future debt requirements to fund its completion (currently scheduled between 2021 and 2022). The material size of Ituango and EPM's effort to minimize the impact of the plant's operations on the Colombian power market prices largely drive the timing difference in the commissioning of the two phases.

The stable outlook captures mainly Moody's expectation for the successful commissioning of Ituango. It also factors in Moody's understanding that recent changes to EPM's commercial policy related to its power generation operations have reduced the risk that unforeseen events such as a new severe El Niño could jeopardize the company´s ability to record the maximum consolidated debt to EBITDA of 3.5x. Importantly, the stable outlook incorporates a view that the outcome of EPM's pending distribution tariff review (expected in 2018) will be credit neutral because any methodological changes will be implemented in a constructive manner.

What could move the rating up/down

EPM's unsecured debt rating could be upgraded if the rating of the City of Medellin is upgraded. The raising of the BCA could also result if EPM is able to improve its key credit metrics following the completion of the Ituango's phase two, on a standalone and consolidated basis. Specifically if its FFO to debt and Retained Cash flows to debt exceed 30% and 20%, respectively, for an extended period of time.

Negative momentum on EPM's rating and BCA could result from a material delay and/or cost overruns in the completion of Ituango or if EPM's debt to EBITDA exceeds 3.5x and FFO to debt remains below 20%, for an extended period of time, on a standalone and consolidated basis. Additional factors that are likely to cause a downgrade include: a perception that growth initiatives (after Ituango starts operations) are not being prudently managed; a negative change in the commercial policy of the generation business as well as in the group's hedging policy and liquidity profile. Apart from any change in the stand-alone fundamental credit quality of EPM, the unsecured debt rating could be downgraded if the rating of the City of Medellin is downgraded.

The methodologies used in these ratings were Unregulated Utilities and Unregulated Power Companies published in October 2014 and Government-Related Issuers published in October 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Headquartered in Medellin, Colombia (FC long-term government bond rating: Baa2 stable), Empresas Publicas de Medellin, E.S.P. (EPM) is a multi-utility vertically integrated public service group with 3,508MW net installed capacity (hydro: 86.3%). EPM render its own services while it also holds ownership stakes in controlled and non-controlled subsidiaries located in Colombia and abroad (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 stable).

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.

Natividad Martel
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Michael J. Mulvaney
MD - Project Finance
Project Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

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