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Fitch Expects to Rate EPM's Proposed Issuance of up to USD500MM 'BBB' [Health & Beauty Close - Up]
[September 12, 2014]

Fitch Expects to Rate EPM's Proposed Issuance of up to USD500MM 'BBB' [Health & Beauty Close - Up]


(Health & Beauty Close - Up Via Acquire Media NewsEdge) The following is from Fitch Ratings on September 3: Fitch Ratings expects to rate Empresas Publicas de Medellin E.S.P.'s (EPM) proposed senior unsecured Colombian peso denominated debt issuance of up to the equivalent of USD500 million 'BBB'.



The company expects to use the proceeds from the issuance to fund its capital investments, namely the Ituango hydroelectric generation project.

KEY RATING DRIVERS EPM's ratings reflect the company's low business risk resulting from its business diversification and characteristics as a utility service provider. EPM provides electricity distribution and transmission, water and sewage water, garbage collection and disposal, natural gas distribution services and is the largest electric generator in Colombia. The company's ratings also reflect its solid credit protection measures supported by low leverage, healthy interest coverage and strong liquidity position. EPM's ratings also reflect the company's somewhat aggressive growth strategy as well as the company's exposure to regulatory risk, which is considered moderate.


Low Business Risk EPM's low business risk profile stems from its natural monopoly position as the main supplier of electric power, water and natural gas services to Medellin's metropolitan area. The company is one of the largest generators of electricity within Colombia, with nearly 24 percent of the country's installed capacity. EPM's electricity distribution assets reach a network of approximately 5.6 million customers in six states in Colombia and four countries, and the company provides water services to approximately 1 million users. This diversification provides EPM with a stable and predictable cash flow stream, primarily derived from regulated utilities, thereby offsetting some of the company's hydrology risk.

Strong Credit Metrics EPM's financial profile is strong, characterized by healthy cash flow generation, low leverage and healthy interest coverage and liquidity. As of the last 12 months (LTM) ended June 30, EPM reported a consolidated EBITDA of approximately USD2 billion and total consolidated financial debt of approximately USD4.7 billion. This translates into a gross leverage ratio of 2.3 times (x), which is considered solid for the rating category. EPM's pro forma leverage considering the debt issuance and the divestiture of its telecommunication business would be approximately 2.8x, which is considered adequate for the rating category. Interest coverage, as measured by EBITDA-to-interest expense is strong at approximately 6.5x as of the LTM ended June 30, mostly due to the company's low cost of funding.

The company's adequate liquidity position is characterized by a manageable maturity schedule and satisfactory cash on hand of approximately USD507 million as of June 2014. The company dividend policy has been moderate and is currently not considered a credit constraint. EPM has transferred, as dividends, on average, between 45 percent and 55 percent of its net income to the city of Medellin. Although not considered likely in the near term, an increase in the company's dividend distribution policy could pressure its free cash flow generation, which is already expected to continue being negative over the short to medium term due the company's investment plans.

Telecom Unit Divestiture Neutral: EPM's consolidated cash flow generation and capital structure will be marginally affected as a result of the company's divestiture of its telecommunication business, UNE Telecomunicaciones. On a pro forma basis, EPM's consolidated leverage considering UNE's divestiture would not have been materially different than the reported 2.3x given that both companies had somewhat similar capital structures. EPM would maintain a non-controlling participation of approximately 50 percent in the ensuing company following the merger between UNE and Millicom Spain and would benefit from dividend distribution. The company received approximately USD573 million as a result of this transaction; these funds were then transferred to the city of Medellin as an extraordinary dividend.

Aggressive Growth Strategy EPM's growth strategy is considered aggressive and is aimed at increasing consolidated revenues and EBITDA by investing in related businesses both within Colombia and abroad. The company's goals are to reach revenue and EBITDA levels of USD16 billion and USD5.5 billion, respectively, by 2022. This implies doubling the company's size over the next decade. As a result of this, free cash flow is expected to be negative as the company funds its currently ongoing capital investment program of more than USD12 billion. Fitch expects EPM's debt to increase moderately as the company finances a portion of its investments with debt while maintaining consolidated leverage ratios below 3.5x. Over the short term, the company's interest coverage ratios might range between about 5.0x and 8.0x. These credit metrics would still be considered consistent with the company's assigned ratings.

EPM's 10-year capital investment program is largely earmarked towards increasing generation capacity and investments in its water segment. Of the approximately USD12 billion of estimated investment, around 83 percent will go towards generation, distribution, transmission and gas distribution. The balance will go mostly to water segment. Among the largest investment projects is the development of the hydroelectric generation plant 'Ituango', a 2,400 MW of installed capacity project with an estimated cost of USD5 billion. This project will be developed under a 50-year build, operate, own, maintain and transfer (BOOMT) agreement. Construction time is estimated to be between eight to 10 years.

Exposure to Regulatory Risk EPM is exposed to some regulatory risk, but it is considered low. The bulk of EPM's consolidated revenues are generated either by regulated tariffs or medium-term contracts. The latter exposes the company to potentially sustained low electricity prices. Historically, all regulatory entities in Colombia have been independent from central government and have provided a fair and balanced framework for both companies and consumers. Recent regulatory changes have had a neutral to marginally positive impact for the company's financial profile. Going forward, future regulatory changes are expected to be aimed at adding transparency to the market and the regulatory framework overall and to have a neutral impact on EPM's financial profile. EPM's diversified business profile further mitigates the company's regulatory risk as a simultaneous tariff decrease across all businesses is unlikely.

RATING SENSITIVITIES A negative rating action could result for any combination of the following factors; a steep decrease in electricity prices, coupled with low generation and poor electricity demand; increasing leverage on a sustained basis to above 3.5x as a result of overly aggressive investment and/or acquisition strategy; and increasing intervention from the municipality of Medellin, EPM's owner.

A positive rating action could be considered if the sovereign rating is upgraded and the company succeeds in maintaining strong credit metrics despite its aggressive growth strategy.

The complete report is available at 'fitchratings.com'.

More information: fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=720082 fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=749393 fitchratings.com/gws/en/disclosure/solicitation?pr_id=863514 ((Comments on this story may be sent to [email protected])) (c) 2014 ProQuest Information and Learning Company; All Rights Reserved.

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