EPM Begins Multimillion Dollar Emergency Repairs on Guatapé Hydroelectric Dam After Parts Arrive From Mexico; EBITDA Hit Estimated At $35 Million USD
The third shipment of electrical cables has arrived from Mexico aboard a Ukraine-flagged, Russian-built specialized transport aircraft to make emergency repairs to EPM’s Guatapé hydroelectric generation facility after an accidental fire on February 15 in an access tunnel took the power generation facility, located 2 hours to the northeast of Medellin, out of commission. The high capacity cables carry the up to 560 megawatts of power from Guatapé’s eight Pelton turbines (pictured, left) out to connect with the electrical grid.
Fitch places EPM’s decrease in earnings due to the Guatapé fire at $35 million USD
EPM (Empresas Publicas de Medellín) projects that the first two generator turbines can return to service in May of 2016, bringing 140 megawatts back on line, two more in June, two more in august, and the final two in September. Guatapé generates 4% of Colombia’s electrical capacity, thus the outage is a serious blow to the country’s electrical grid, in a time when the hydroelectric-dependent country is experiencing reduced rainfall due to the El Niño weather pattern.
On March 20, the third of five Antonov 124-100 cargo plane shipments (pictured above) arrived in Rionegro, outside of Medellín, from Mexico with the special high-capacity cables aboard; too large and heavy for regular cargo aircraft. The repairs are too urgent to await the cables via less-costly ocean shipments. On the plane were seven spools, weighing 12 tons each, and roughly 12 feet across. From there they made the 40 kilometer trek to Guatapé over a period of three hours aboard heavy cargo trucks. The trucks left the Rionegro airport at 6:25 am, arriving at Guatapé 9:18 am, that same morning.
Significant financial ramifications
According to Fitch Ratings, unplanned outages such as the one at Guatapé have impacted 10% of Colombia’s electrical generations supply in March. Combined with cyclical water scarcity due to El Niño, this has increased the risk of electrical rationing amidst growing residential demand. Fitch says that electrical generators such as EPM (BBB+), Isagen (BBB-), and Emgesa (BBB) have the capacity to absorb this stress without permanently deteriorating credit quality. All companies, says Fitch, maintain adequate capital structures and liquidity sources to deal with these temporary pressures.
Still, The El Nino phenomenon, along with operating failures, reduced any leeway for Colombia’s electrical system to meet electric demand during the following two months. The market manager XM adjusted the water reservoirs resource planning to account for the forced outage in Guatape, so the reserves as of February 29 closed at 5,185 Gwh, 30% of the total capacity, down from 9,041 Gwh at end of January 2016. The system’s response to try to rebalance the energy supply includes increasing the load factor of hydroelectric plants, the total utilization of the thermoelectric matrix, the purchase of up to 7Gwh of energy from Ecuador, and incentive plans to reduce energy demand.
Fitch: At the time of the accident, EPM had Firm Energy Obligations of 38 GWh per day. The outage impacted 10 GWh per day and therefore left the company with available capacity to meet only 28 GWh of firm energy obligations. EPM will have to meet its 10GWh firm obligations’ deficit with purchases in the spot market at the spot price. Simultaneously, EPM has un-winded its contract position from 38 GWh per day to 33 GWh per day, in order to diminish its contract exposure to 5 GWh per day to contain potential losses derived from its lower available generation.
According to Fitch, EPM’s leverage, as measured by total debt to EBITDA, may increase to 4.5x to 5.0x in 2016 after rising to 4.0x during 2015 from 2.9x as of 2014. Fitch expects the company’s leverage to return to below 3.5x by next year. The expected continuation of El Nino at least until the month of May and the forced outage of Guatape are bound to further impact the company’s EBITDA generation in 2016. EBITDA is likely to contract by 6% in 2016 given EPM’s EBITDA expectation of approximately $3,407 billion COP for the year, compared to an EBITDA of $3,609 billion COP in 2015. This contraction, combined with an increase in total debt of COP2.8 billion will pressure EPM’s leverage metric to the neighborhood of 5.0x by the end of December 2016. The bulk of this debt increment is earmarked to finance the progress of the company’s capex, mainly its 2,400 MW Ituango project, for which there is little flexibility in terms of execution.
EPM’s liquidity position is considered adequate and not impacted by the expected temporary fall in EBITDA, supported by strong and stable cash flow generation derived from the provision of regulated utility services, available cash and marketable securities and available funding vehicles.
Cash and cash equivalents stood at $446 million USD, representing 0.5x its short term debt of
$824 million COP as of December 2015, a ratio that is expected to decrease to approximately 0.45x in 2016. Although the company’s flexibility to issue debt is somewhat restricted by approval requirements from the Ministry of Finance, the company has been successful at accessing both the local and international debt capital markets to finance its capex and meet working capital needs, a condition expected to be maintained going forward.
Photos courtesy of EPM