Moody’s Investors Service upgraded both the issuer rating and senior unsecured rating of Empresas Publicas de Medellín E.S.P. (EPM) from Baa3 to Baa2 this month. About $1.2 billion USD in rated debt is impacted by the move, and the ratings outlook is now stable for the city-controlled Medellín-based utility, which provides services including electricity, gas, water, and sanitation in Antioquia.
In its analysis, Moody’s listed four factors as its key rationale to upgrade EPM’s ratings:
- Moody’s Baa2 rating for the city of Medellín (with a stable outlook)
- the “high level of dependence” between the company and Medellín
- the strong probability of “extraordinary support” from Medellín if EPM faces financial distress
- “EPM’s intrinsic credit profile,” which is based upon Moody’s baseline credit assessment (BCA) of baa3
Moody’s also noted the significance of EPM’s ability to reduce its debt last year after dealing with both a “severe El Niño phenomena” (that caused drought and lowered hydropower production) and a major disruption to its energy plant in Guatape. The company improved financial metrics in the second half of the year were also aided by Colombia’s $2 billion USD sale of Isagen, which EPM had a stake in and benefitted from, as well as a recovery in generation operations.
Between the debt reduction and a belief that EPM is now better prepared to withstand risks posed by the extreme weather cycles, Moody’s felt comfortable upgrading the rating.
“The raising of the baseline credit assessment 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,” stated Moody’s. “This was the case for the last 12 months ending February 2017.”
The upgrade also reflects optimism surrounding EPM’s Ituango hydroelectric plant, which is reportedly about two-thirds complete and is expected to provide some 2,400 megawatts of capacity after it begins operating (with a projected online date sometime in 2018). Moody’s was encouraged by the utility’s announcement that it plans to remain patient in terms of pursuing growth until after the Ituango plant comes online.
“The raising of EPM’s BCA to baa3 captures Moody’s expectation of the successful commission of Ituango first phase’s four units — of 1,200 megawatts — starting end of next year,” stated the rating agency. “The significant progress in the construction of the Ituango plant (over 65%) and the completion of the more complex milestones underpin this anticipation … The stable outlook captures mainly Moody’s expectation for the successful commissioning of Ituango”
Photo credit: Empresas Publicas de Medellín (EPM)