EPM’s ratings reflect strong ownership and control by its owner, the City of Medellin (‘BB+’/Stable), which was downgraded to ‘BB+’/Stable from ‘BBB-‘/Negative. The company’s business risk is low resulting from its diversification and characteristics as a utility service provider. The company’s ratings also reflect its somewhat aggressive growth strategy and solid credit protection measures supported by moderate projected leverage, healthy interest coverage and an adequate liquidity position.

This article is edited from Fitch’s press release regarding its downgrade of EPM

EPM’s Negative Watch reflects continued uncertainty regarding the closure of Ituango’s blocked Auxiliary Diversion System since April 28, 2018, and final cost over-runs of its Ituango project. The possibility of major flooding downstream from the project exists until the diversion tunnel is closed. While the likelihood of this is remote, the environmental, financial and reputational damage to the company could be significant. Fitch’s expectation is that 300MW of the project will be online by mid-2022. The resolution of the Rating Watch may extend longer than six months given these uncertainties.

Key Rating Drivers

Strong Linkage with Parent:

EPM consistently contributes significant cash flows in the form of dividends to its parent, the City of Medellin (BB+/Stable). These distributions comprised over 22% of the city’s total revenues in 2020 and have exceeded government revenues by 20% four out of the last five years. Under Fitch’s criteria, a government-related entity (GRE) that sustainably generates more than 10% of the government’s revenues is considered a strong linkage factor that would lead to an equalization of the ratings.

Ituango Progress:

Fitch continues to maintain the Rating Watch Negative until further confirmation that the diversion and auxiliary tunnels are appropriately plugged. The tunnels are expected to be secured between December 2021 and March 2022, just prior to the entry of the first 300MW unit. As of March 2021, the company reported 92.5% progress on pre-plug 2 of the right deviation tunnel. Despite an additional delay announced in June 2020 due to the coronavirus, Fitch’s base case is that two 300MW units will come online per year between 2022-2025. Fitch expects that once complete, Ituango will add over $800 million USD to the company’s generation revenue and become part of the country’s base load installed capacity.

Insurance Payments Support Capex:

Fitch’s base case assumes that EPM will receive insurance payments of over USD800 million between 2021-2024 for its Ituango project at a rate of roughly USD200 million per year. Insurance payments will be made in instalments as both entities review damages and costs. The payments are a credit positive and relieve pressure of EPM selling assets to offset the estimated incremental project cost of USD1.6 billion. EPM received the first payment of USD150 million from Mapfre Seguros Generales de Colombia S.A. in 2019 and USD200 million in 2020. Payments are contingent on a suspension of the arbitration process against the insurers, which was temporarily suspended in June 2021.

Deleveraging Expected:

Fitch estimates EPM’s consolidated gross leverage, defined as total debt to EBITDA, will average 3.3x between 2021-2024. Leveraged peaked at 4.7x in 2020 as poor demand affected the company’s distribution businesses, low hydrology impacted generation and Ituango incurred additional cost overruns. Fitch expects leverage to fall to 3.8x in 2021 as conditions normalize and to drop to 2.8x by 2024 due to tariff increases at the company’s distribution businesses and a number of Ituango’s generation units coming online, the first of which is expected in mid-2022.

Moderate Regulatory Risk Exposure:

Fitch believes EPM’s exposure to regulatory risk is low. The bulk of EPM’s consolidated revenues is generated by regulated tariffs or medium-term contracts. The latter exposes the company to potentially sustained low electricity prices. Historically, Colombian regulatory entities have ruled independently from the central government and have provided a fair and balanced framework for both companies and consumers. EPM’s diversified business profile further mitigates the company’s regulatory risk, as a simultaneous tariff decrease across all businesses is unlikely.

Assumption of CaribeMar Assets:

Fitch views EPM’s assumption in September 2020 of CaribeMar, a coastal electricity distribution company renamed to Afinia, as positive for the business and credit neutral. Fitch estimates that once the Afinia business is stabilized in 2023, it will add approximately USD1.2 billion in revenue and USD165 million in EBITDA. Fitch estimates capital expenditures of COP4 trillion, or USD1 billion between 2021-2024. This investment will be necessary to lower high energy losses, which stood at an estimated 27.6% in 2020 with the goal to lower this amount to below 22% by 2024.

Stable Cash Flow Profile:

EPM has a stable and predictable cash flow profile supported by regulated businesses in investment grade markets. Fitch estimates 79% of EPM’s 1Q21 EBITDA was derived from its energy business, where its generation segment comprised 34%; 38% was distribution; and the gas and transmission segments combined for 7%. EPM’s distribution business operates in highly regulated markets, mostly concentrated in Colombia, where it is the largest distributor in the country, with a market share of 25%. Fitch estimates that 21% of the company’s EBITDA comes from its water and waste management services.

Interference Weakens Corporate Governance:

Fitch views EPM’s corporate governance as weak due to the strong influence exerted by the company’s owner, the City of Medellin. This follows a lawsuit against the Ituango project insurers and contractors and the contemplated change of the company’s social objective in 2020, which prompted the resignation of all eight independent board members. EPM has an ESG Relevance Score of ‘4’, which reflects the company’s recent instability in board membership and indicates that the score has a negative impact on the company’s credit profile.

Derivation Summary

EPM’s ratings are linked to those of its owner, the Municipality of Medellin (BB+/Stable), due to the latter’s strong ownership and control over the company. The company’s low business-risk profile is commensurate with that of Grupo Energia Bogota S.A. E.S.P.’s (GEB, BBB/Stable), Enel Americas S.A. (A-/Stable), AES Gener (BBB-/Stable) and Promigas (BBB-/Stable).

Fitch projects EPM’s total leverage to average 3.3x over the rating horizon and 3.0x on a net basis. This is slightly above AES Gener’s expected average gross and net leverage of 3.1x and 2.3x and below Promigas’, which is expected to be 3.6x and 3.3x, respectively. In 2024, Fitch expects gross and net leverage to be 2.8x and 2.5x, respectively, reflecting advances in the Ituango project, a recovery in EPM’s electricity distribution businesses and the normalization of operations at newly-acquired Afinia.

Key Assumptions

• Ituango units come online at a rate of two per year from 2022-2025;
• Total Ituango cost of USD3.9 billion, a USD1.8 billion increase from original budget;
• Ituango’s medium-term commercial obligations are covered with electricity purchases, existing hydroelectric asset base and thermal generation;
• No Dividends from UNE expected over the rating horizon;
• Dividend payout of 55% of previous year’s net income;
• No divestments in 2021 or the rating horizon;
• Total Insurance payments in excess of USD800 million from 2021 through 2024;
• Capex for Electricarbe to be financed predominately through debt up to USD800 million;
• Medium-term electricity spot prices of COP155/KWh.

Rating Sensitivities

Factors that could, individually or collectively, lead to positive rating action/upgrade:

• Although unlikely in the near term, Fitch may consider a positive rating action if there is a positive rating action on the company’s owner, the City of Medellin;
• Fitch may consider a resolution of the Rating Watch Negative once the company has secured the second deviation tunnel at its Ituango project, which Fitch expects by early 2022. In such a case, the rating Outlook for the City of Medellin would likely apply.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

• A negative rating action on the City of Medellin’s ratings;
• The materialization of significant cost overruns and contingencies at the Ituango project that weaken the company’s liquidity.

Best & Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity & Debt Structure

Strong Liquidity: Fitch expects the company’s USD750 million 2020 bond issuance to provide the near-term liquidity for general corporate purposes and to fund the company’s capex program in 2021. Approximately 66% of the company’s EBITDA is from regulated businesses with highly stable cash flow generation. EPM held approximately COP5.3 trillion of cash and equivalents as of 1Q 2021. Fitch expects the company will have COP2.3 trillion of cash on hand at the end of 2021 as it continues work on the Ituango project and makes network improvements at its newly-acquired distribution business, Afinia. Fitch estimates the company has in excess of USD500 million in available committed credit lines.

Currently, the company’s dividend policy is expected to remain in place despite the cash flow impact derived from Ituango’s delay. Historically, EPM has transferred on average between 45% and 55% of its net income to the city of Medellin in the form of dividends. EPM’s transfers to Medellin have historically represented approximately 20% to 30% of the city’s investment budget. Although not likely in the near term, an increase in the company’s dividend distribution policy could pressure its FCF generation, which is already expected to continue to be negative in the near term as the company continues to execute its investment plan.

Issuer Profile

EPM is a leading electricity generator in Colombia and exhibits a diversified international portfolio of utility businesses that include electric generation, transmission and distribution, water and sewage services, natural gas distribution, and garbage collection and disposal services.

Here in Colombia, Cartagena has had a notoriously corrupt city administration. Newly elected Mayor William Dau was voted in on an anti-corruption platform and has quickly made some very powerful enemies taking on criminal structures. Bogotá’s political/civic culture can be described as “battle royale” where it is everyone against everyone: Private sector vs. public sector, north side vs. south side; each new administration seems to try to undo and reverse everything that was done before. Many remember former mayor and now Senator Gustavo Petro’s garbage fiasco where trash piled up on the streets of Bogotá in 2012 as Petro unilaterally canceled contracts with sanitation contractors—without a viable plan to replace them. Corrupt contractors are still in jail over the “Carrusel de Contratos” scandal where politicians and corporate thieves conspired to rob millions during the construction of Avenida El Dorado, the main thoroughfare leading to Bogotá’s international airport. Petro kept the fares on Bogotá’s Transmilenio bus system artificially low to buy popularity, creating an operating deficit and financial crisis that the following administration would have to fix, and automatically vilifying whoever would follow and have to make unpopular, drastic corrections.

On multiple occasions, Finance Colombia has reached out to Mayor Daniel Quintero for comment (on various issues), who through his press secretary has refused comment or reply.

On the other hand, Medellín’s professionally managed metro runs on-time, is clean and safe, and used by riders of almost every socioeconomic stratum. Medellín has continued to win international accolades throughout the years, hosting the World Economic Forum’s Latin America event in 2016, several UN events, and many delegations from foreign municipal governments to learn best practices. Many visit the city’s Ruta-N business and entrepreneurship incubator that can be credited, along with ACI (Agencia de Cooperación Internacionál), the city’s investment promotion agency with bringing countless jobs and investment to the Aburrá Valley; home to Medellin and its immediate suburbs like Envigado, Sabaneta, Itaguí, and Bello.

The city is home to several multinationals: Bancolombia, Colombia’s largest Bank; Grupo Sura, an insurance, investment & health care giant; Cementos Argos, which as a cement producer is the 4^th largest in the United States and exports to 27 countries; Nutresa, which is like a Latin American Unilever or Nestle, and newer companies like Viva Air. More precisely in the Medellín Suburb of Rionegro, the low-cost airline operates routes throughout Colombia & Peru, to and from the US, and is currently in expansion mode despite the COVID-19 Pandemic.

EPM Headquarters Building in Medellín’s Plaza Mayor

Another multinational with a very unusual business model is EPM, Empresas Públicas de Medellín. The public utility is responsible for sanitation, sewers, water, electricity, and natural gas in Medellín and much of the surrounding suburbs and rural areas. In a joint venture with global telecommunications provider Millicom called Tigo Une, it provides faster residential internet service than is available in many US cities. Earlier this year, they purchased the formerly insolvent utility networks of much of Colombia’s Caribbean coastal region. EPM already owns utility operations outside of Colombia, with assets of the multibillion-dollar company stretching from Chile to Mexico. EPM, though it does issue debt on international markets is not a publicly traded company. Neither is it a municipal utility. It is a separate company with professional management and (up until now) a board of directors to provide corporate governance, but with the city of Medellín as the sole shareholder. In the form of dividends, EPM provides almost 30% of Medellín’s municipal budget, but the key to this arrangement has been that it operates as a separate entity, expressly not part of the municipal administration, but of course with the city’s input. The mayor by statute is the chairman of EPM’s board of directors and has prerogative to appoint the CEO. As shareholder, the city also appoints board members.

A breath of fresh air?

Many in Medellín were pleased to see Daniel Quintero elected last year as a “breath of fresh air” and change from the traditional power families that have controlled politics, especially as he defeated Alfredo Ramos, son of a former governor and member of Centro Democrático, the party of “Uribistas,” personal acolytes of former President (now under house arrest for witness-tampering charges) Alvaro Uribe. With Medellín & surrounding Antioquia Uribe’s home turf (he was both mayor of Medellín & governor of Antioquia before becoming president of Colombia), it was something of a surprise that this local who was raised by a single mother who died when he was just 14 in a mostly poor neighborhood (Tricentenario) won the election. As a youth, Quintero worked as a street vendor struggling to put himself through college. No one knew quite what to make of him.

Quintero had politicked at different times as a member of Colombia’s Liberal Party, Conservative Party, and Green Party before establishing the “Tomato Party” as a publicity stunt to get himself noticed (see the headline photo). He gained attention by throwing tomatoes at pictures of politicians and people he didn’t like, such as Alvaro Uribe and then President Juan Manuel Santos, though he decided to support Santos’ re-election in 2014. He was then rewarded with the political appointment of running InnPulsa, Colombia’s national entrepreneurship promotion agency, then becoming vice-minister for ICT (Information & Communication Technologies) under Santos. In the last presidential election, Quintero initially supported mainstream liberal candidate & peace negotiator Humberto De La Calle, before switching his support to controversial former mayor of Bogotá Gustavo Petro’s (mentioned above) candidacy.

So no one knew what to expect, though it is clear they wanted more of the vice-minister of technology or InnPulsa director than the tomato throwing stunt man who once handed former EPM general manager Jorge Londoño a chunk of cheese (nonverbally calling him a rat).

A whiff of Limburger—stinky cheese.

Finance Colombia being primarily a business and finance publication rather than a political journal, heard some low intensity criticism of appointments that Quintero had been making in the city administration and the way he was making them, but did not actively pursue the stories at the time. Quintero made some other moves that seemed politically silly, such as writing the Cuban government to ask for doctors to help with the COVID-19 pandemic. Regardless of the merits of Cuban medical missions (which are very dubious), it is inconceivable that the current national government would permit such activity, and the action could only embarrass the mayor, which it did. Finance Colombia chalked it up to benign political inexperience.

The mayor also fought back a scandal where he was accused on social media of inappropriate sexual conduct before he was mayor, but even more ominous was his reaction to the press, which brought condemnation from Colombia’s Foundation for Press Liberty, FLIP:

“FLIP was able to document that Quintero personally pressured media executives and pointed out journalists as being opponents of his administration as a way to avoid questions about matters on which he must be held accountable…In events related to this situation, administration officials tried to force national and local media to improve the image of the mayor in exchange for advertising. Telemedellín (City government’s official TV channel) officials asked W Radio to rectify a truthful publication and also that the media agree to subscribe and publish a joint statement with Telemedellín to disseminate as true a situation that did not correspond to reality,” said the journalism rights defense group.

In other words, “I will buy advertising with your paper if you help me bury this scandal.” FLIP also denounced the mayor for pressuring newspaper El Espectador to block coverage of the scandal. According to FLIP, and El Espectador’s own account of the misdeeds, the publisher, Fidel Cano, responded by sending the questions to the mayor that his reporters had been trying to ask. “The mayor of Medellín assured the director of the newspaper that he would take legal action if the publication affected his reputation” (he never did).

All this so far and the mayor has served only his first 8 months of a 4-year term.

The mayor’s official press conference, canceled at the last minute, crowing “Why Medellin is the world’s standard in the assertive management of Covid-19” as cases in the city began to skyrocket

On June 27, the Quintero administration scheduled a press conference titled “Why Medellín has one of the lowest contagion and mortality rates in Latin America?” scheduled for July 2^nd, and led by Daniel Quintero himself, backed by Andree Uribe, Medellin’s Secretary of Health, Alejandro Arias, Medellín’s Secretary of Economic Development, and Eleonora Betancur, the director of ACI Medellin. The day before the press conference, it was abruptly canceled. It seemed the mayor wanted to take credit for good news but avoid bad news. The headlines that day in El Colombiano, Medellín’s largest daily? “100,000 cases of Coronavirus in Colombia, Where are we going?” and with 40% of ICU units full, “Doctors of Antioqua appeal for total & obligatory quarantine.”  The last weekend of August the ICUs are now 70.79% full. The day the press conference was to be held, a headline in El Colombiano announced a coronavirus outbreak with 36 infected in the La Paz prison in Medellín’s southern suburb of Itaguí.

The cases—and deaths were just beginning to skyrocket and two months later Colombia has one of the world’s worst mortality rates on a trailing 7 day average. According to the Colombian government, Antioquia department (Medellín is the only large city in Antioquia) alone has had 77,709 cases so far. Colombia now has over 18,000 deaths from COVID-19, most within the past two months. 1,603 in Medellín & surrounding Antioquia.

Last month, EPM general manager Álvaro Guillermo Rendón announced a memorandum of understanding with InnPulsa, the same national government agency formerly run by Quintero himself, that would, if more than just talk, “convert EPM into a laboratory of smart cities, the 4^th industrial revolution, and the orange economy.” All well and good (maybe, but that doesn’t sound like the function of a utility), but what the public did not know was that this fundamental change in corporate strategy and negotiations with the national government were worked out without the knowledge, discussion or approval of the company’s board of directors. EPM was being treated not as a separate entity but part of the municipal administration.

OFFICIAL STATISTICS: As of August 28th, Antioquia had 77,709 total COVID-19 cases, 1.603 deaths and hospital intensive care wards were over 70% of capacity over 80% of Antioquia’s cases are from metro Medellín.

The $2.7 billion dollar WTF

On August 10, EPM sent out a press release (and the mayor tweeted) that EPM would be initiating legal proceedings in the amount of  approximately $2,7 billion US dollars against the consortiums responsible for construction of EPM’s troubled Hidroituango dam that suffered catastrophic setbacks due to unexpected flooding in 2018 and design flaws that were thus revealed. Whether such legal action is a good idea is debatable: On one hand there certainly were defects that have cost the company millions and delayed the project by over a year. On the other hand, litigation could potentially bring the project to a halt, as EPM is still depending upon the parties it is suing to complete the project before certain deadlines, or it faces economic penalties in power generation commitments of over $150 million USD. It is also far from certain that EPM would prevail in its legal crusade against all the parties named, some of which have nothing to do with the construction defects that led to a tunnel blockage during construction.

The shocking thing is that Mayor Quintero along with Rendon and Alexander Sánchez Pérez, EPM’s vice president for legal affairs, declared this multibillion dollar action without discussion, input or even knowledge of the company’s board of directors!

The next day, the entire board of directors, except for Quintero himself, resigned.

Soon Quintero tried to justify his actions saying “there was no time” and he had to act, but he had already been mayor for 8 months and ran on a campaign of rectifying the Hidroituango situation (remember his cheese stunt with the former general manager?) and so was aware of the situation. If not, he had 8 months to be brought up to speed. At any rate, without board ratification, such actions have dubious legal force, and as bad or worse, prove a lack of corporate governance at EPM and direct political control. CEO Rendón clearly answers not to the board of directors but to a politician.

One day after the board of directors of EPM resigned, the entire board of directors of Medellín’s storied Ruta-N also resigned, along with its executive director, Juan Andrés Vásquez. Ruta N was already under its third executive director in Quintero’s 8 month old administration. Vásquez learned that Quintero was replacing him after Quintero announced Trump-style, in the media, saying he “had drifted away from the administration.” Like EPM, Ruta-N is not a city agency directly under the administration, but a public-private partnership with professionalized management and governance, and internal merit-based personnel policies.  Sources inside Ruta-N say that Quintero had been trying to circumvent the qualifications-based hiring of the business incubator to install friends and supporters into sinecures. People inside both organizations indicate that morale is at bottom.

Beverage giant Postobón rescinded its financial support of a health initiative spearheaded by Ruta-N saying it no longer had confidence in the entity’s governance. Postobón had already spent $4 billion pesos on the initiative to build respirators for coronavirus patients but said it would continue to donate, just elsewhere after the board resignation.

That same week, in reaction to what it called “a deterioration of corporate governance controls at the company,” global ratings firm Fitch downgraded EPM’s credit as a bond issuer to one notch above junk bond status. In a statement, the foreign, independent agency stated:

“Fitch believes recent actions taken by the company are contrary to the Governability Agreement, signed on April 23, 2007, between the City of Medellin and EPM’s management, in which the municipality agreed to respect the autonomy of EPM as an industrial and commercial enterprise of the state and to act exclusively through the board of directors.”

Flailing about

The mayor scrambled to assemble a new board of directors for EPM, which as an issuer of debt in the international capital markets, must answer to institutional bondholders. Over the ensuing days, Quintero variously announced that Claro Colombia CEO Juan Carlos Archila would join EPM’s board (creating a conflict since Claro competes with Tigo Une), Grupo Santo Domingo’s Alberto Preciado,  Luis Fernando Rico, formerly of Isagen, another Colombian utility, and Sandra Suarez, the former general manager of newsweekly Semana all rejected Quintero’s oddly public nominations. Did he not confirm with them beforehand if they would accept the appointments, or did they publicly reject the nominations as a rebuke to the mayor?

Meanwhile, EPM’s board representative to Tigo Une, Federico Arango Toro also resigned in a public letter saying he wanted no part of Quintero’s administration.

Banks and insurers are already turning their back on EPM, citing a lack of control at the organization. EPM had to admit that certain loans and lines of credit had been shut off after the board resignations. An internal document seen by Finance Colombia stated that the firm may have difficulty finding or renewing certain insurance coverages.

In the midst of all this, Colombia’s human rights tribunal set up as part of the 2016 Peace Accords, the JEP (Special Jurisdiction for Peace) has subpoenaed general manager Rendón under threat of arrest for ignoring during his 8 months as the utility’s legal representative, a year old subpoena for documents regarding possible obstruction of the search for the remains of victims of violence during the construction of Hidroituango, before Rendón’s appointment.

Medellín’s city council is on scheduled recess, but they have publicly asked the mayor to reconvene a session to discuss the governance crisis. Under law, (article 23, law 136 of 1994), they can only formally convene during a recess at the mayor’s request.

Labor unions & business community united

EPM’s largest labor union, SINPRO has called for a protest on Wednesday, September 2nd, for everyone in the city to turn out their lights for 30 minutes at 8pm, and for workers and the public to gather outside of the company’s headquarters in Plaza Mayor at that time for a rally in defense of EPM.

“When Medellín turns off, we hope that our leaders will understand that this is everyone’s problem, and that a city shut down doesn’t serve anyone. If EPM is in crisis, it doesn’t just shut down the city, it shuts down the country,” said union President Olga Lucia Arango.

The union is also demanding explanation of EPM general manager Rendon’s alleged private gym and luxury remodel during a time the company is under self-imposed austerity orders.

Civic leaders, executives, and nonprofits from across the region have begun to organize in reaction to the mayor, forming on August 25, a veeduría, or citizen’s oversight group ”made up of people with no particular economic interests in either EPM or the mayoralty that will work to take care of the heritage of the city and the interests of all Medellinenses.”

The initiative, called “Todos por Medellín” (Everyone for Medellín) is backed by over 40 groups, including the Chamber of Commerce of Medellin (in Colombia, chambers of commerce perform a quasigovernmental function, for example, as the registry of corporate and nonprofit organizations, and their articles of incorporation), the Intergremial committee (a grémio is a trade group or business association), and Proantioquia, the region’s primary civic benevolent foundation.

The mayor gets combative

Last Thursday, Mayor Quintero showed no contrition, but tried to dismiss the concerns as political machinations. “The oversight is fine, but we need oversight agencies to see everything. They didn’t see a lot of things, for example, $17 trillion of debt in the last 15 years. How come they didn’t see Orbitel, UNE, Antofagasta, Porce III and Hidroituango? A mayor appears to them who responds, has character, then a lot of politicians come out to do oversight. The veeduría is welcome but we are going to review everything. That the mayor is the one who manages the networks and they govern? No!” he said in a press conference.

Taking a page from the playbook of his preferred presidential candidate and apparent ally Gustavo Petro, who had a disastrous term as mayor of Bogotá and was temporarily removed from office by the national government, Quintero frames it all as a nefarious plot against him (does he think international ratings firm Fitch is in on the plot?)

“There are some groups full of politicians who want to carry out processes to revoke the mayor, that have been moving for a long time, we are ready, we have no problems in showing results and what we have done. They are worried because a long time ago they did not meet an independent mayor, a mayor who is not beholden to politicians or businessmen, but to the people,” said Quintero.

Navegamos entre fuerzas oscuras que se resisten al cambio. Con fe y sin miedo seguiremos adelante con transparencia, honestidad y contra la corrupción y la politiquería.

— Daniel Quintero Calle (@QuinteroCalle) August 26, 2020

CAPED CRUSADER? Quintero seems to fancy himself a hero navigating “between dark forces that resist change. With faith and without fear we will continue forward with transparency, honesty, and against the corruption and politicking” he tweeted last week after learning of the group Todos por Medellín.

Analysis

Quintero’s plan seems to be to blame his woes not on his own actions, but on former President Alvaro Uribe. Uribe’s reputation has steadily declined since his presidency, and where he was once seen as the man who rescued Colombia from communist rebels and drug cartels, his legacy has steadily soured as an avalanche of allegations and evidence piles up that tie him directly to paramilitary death squads during his time as governor, and indirectly to narcotraffickers and civilian massacres committed during his presidency. As if that were not enough, he is currently under arrest and confined to his northern Colombia ranch on charges of witness tampering, attempting to frame leftist senator Ivan Cépeda, a nemesis of Uribe in the Colombian senate.

Quintero wants to blame Uribe & his Centro Democrático for his woes, but since Uribe founded the party in 2013 it has never won a mayoral election in Medellín. The last Uribe supporter to hold the office was Luis Pérez from 2001-2004. Perez later abandoned Uribe for President Santos, working in 2015 as his regional campaign coordinator to defeat Uribe’s chosen presidential candidate Ivan Zuluaga.

Blaming the Uribe bogeyman may be a good tactic after the damage that has been done, but those aghast at recent developments extend far outside Uribe’s sphere of influence. Uribe did tweet support for the citizens movement, and Petro in support of Quintero, but opponents of Uribismo are also speaking out against Quintero. Former mayor of Medellín (2004-2008) and governor of Antioquia Sergio Fajardo immediately wrote a letter of concern, on August 12, admonishing Quintero’s actions.

Medellín’s previous mayor, Federico Gutierrez, nicknamed Fico, surprisingly upset Uribe’s candidate Juan Carlos Vélez to win the mayoralty in 2016. His letter, also dated August 12 is even more blunt. “EPM & Medellin are in danger.”

Letter from former Medellín Mayor Federico Gutierrez: “EPM & Medellín Are In Danger”

“The discourse of Quintero is based on lies. He talks of social struggle, of a class struggle, the same ideas of Gustavo Petro, who furthermore was the first to celebrate and support the mayor’s decision to deinstitutionalize EPM, which obliged the board’s renunciation. But look at the contradictions: What kind of social struggle destroys the motors of progress? EPM is that very thing, an incalculable help for the most vulnerable communities, a tool to breach social divides.” – excerpt from Federico Gutierrez’s letter.

Paisas, as people from Medellín & Antioquia call themselves tend center to right on the political spectrum and have less appetite for the far-left adventurism much more popular in Bogotá. Marxist talk like “class struggle” doesn’t go over so well here. Before this editor started Finance Colombia or even moved to Colombia, representatives from the city (going back to before 2013) would call and extend invitations: “Come to Medellín, let us show you what we are doing” with genuine pride. At the time, this editor was an analyst covering the Latin American services sector for a Connecticut-based research firm. “Look, we want to show you the good things we are doing!” Apparently with no other motivation beyond civic pride and attracting investment and positive attention. “We are building the Metrocable system” a network of cable cars extending far up into low income hillside neighborhoods on the valley walls. “We are building it so everyone can participate in our economic growth,” they said, beaming with pride. Not politicians or political appointees, but entry-to mid-level civil servants.

After moving to Colombia, first to Bogotá and launching Finance Colombia, the outreach didn’t stop. Medellín kept calling. “Come see what we are doing!” In 2015, Finance Colombia published “Social Inclusion: The Secret Sauce To Medellín’s Incredible Renaissance.”

They were going about it pragmatically, person to person, neighborhood to neighborhood, but without any ideological polemics or Marxist-Leninist babbling. There was no talk of class struggle, no attack on the city’s beloved institutions, whether well-established like EPM or new innovations like Ruta-N. Generally, each succeeding administration handed the keys over to the next politely, and with decorum.

One thing that unites Paisas, especially those in Medellín is the progress the city has made, going in less than 3 decades from one of the most dangerous on earth to an international showcase. Startups and international businesses have entered Colombia by first setting up operations in Ruta-N then moving out into larger spaces as they gain a foothold in the country. Get in a taxi and instead of trying to rip you off like in some parts of the country, if the driver realizes you are a foreigner, they will inevitably ask “What do you think of Medellín?” and beam with pride like you just presented them their firstborn child if you have something nice to say.

When protesters rioted in Bogotá last November, partially destroying their own transportation infrastructure and battling with police, Paisas marched peacefully. A few vandals were quickly confronted by peaceful protesters, and students came to undo the defacing they caused.

Medellín has built a strong credit rating in international markets for municipal debt, and EPM has enjoyed an investment grade credit and risk profile. There has been a level of peace between labor and employer, business and government rarely seen elsewhere in Latin America. Is it run by saints? Of course not. But that is precisely why the checks and balances of good governance are important, and Quintero seems to either not understand this, or have other priorities. EPM provides the city with more than electricity, water, and natural gas services. The international corporation provides almost 30% of the city’s revenue by way of operating profits. The fortunes of every residence and business in the Aburrá Valley (where Medellín is the largest city) are tied to EPM. The vitality of the city’s foreign investment attraction is tied to Ruta-N. Investors, both institutional and global-minded individuals are attracted by collaboration and progress, and repelled by scandal, conflict and controversy.

Being a crusader is easy. Throwing tomatoes at pictures is easy. A child can do it. Governing is complex and requires accountability. Medellín Mayor Daniel Quintero is sawing at the very foundations of Medellín’s success, by attacking its governance and institutionalism. It may very well be a good idea to take legal action against the consortiums that are (still) building the Hidroituango dam. But to launch a multibillion-dollar lawsuit behind the back of your own board of directors? No deliberation by the body designed to deliberate such fundamental issues? Are we seeing dictatorial tendencies, the likes of which one would expect from a Banana-Republic Caudillo?

When criticized, the new mayor goes into attack mode. Seeing everyone from the labor unions to civic leaders as a cabal “out to get him.” This editor remembers seeing such behavior at the beginnings of Chavismo in Venezuela. It is also Donald Trump’s style. Attack someone who is offering constructive criticism and they often will instinctively get sidetracked trying to defend the legitimacy of their criticism, allowing attention to be shifted from the original critique, no matter how legitimate.

“Ah, he’s going after the elites,” one more populist journalist friend said to this editor, when the conflict between former directors and the mayor became public. “Who the hell do you want running a multibillion-dollar international energy company?” this editor replied. “They had damn sure better be elite and know what they are doing!”

The former EPM board had directors like Javier Gutiérrez, who was former president of oil giant Ecopetrol, and general manager of energy company ISA; Manuel Mejia, former general manager of Colombiana de Comercio (distributor or manufacturer of brands in Colombia such as AKT motorcycles, Foton trucks, Castrol lubricants, Royal Enfield motorcycles, and Kalley appliances); Andrés Correa, formerly part of the insurance multinational SURA; and one of EPM’s own retired executives: Jesús Aristizábal Guevara, a civil engineer.

The new EPM board of directors is notable for having a preschool teacher, community activists, former politicians, lawyers, but no large company leadership experience. The mayor did nominate a few, but they all refused. Now, the mayor’s new board will have to navigate the $2 billion USD litigation that he unilaterally launched, and the war he has started with what seems the entire political, business, civic, and even labor community of Medellín. What do they know about international capital markets and the mechanics of bond pricing and currency risk? This editor wishes them luck. We want to see EPM succeed and Medellín do well. The only way this will happen is if they make drastic course corrections. It is not too late for the mayor.

On the other hand, we are only 8 months into a four-year mayoral term. This editor has never seen so many disparate people and institutions unite since the 9/11 attacks in the US. There, the population at least temporarily united behind then President Bush. In August, 2020, sectors from labor to enterprise are all uniting against Quintero. He is at a juncture in his mayoralty. He can attempt to reconcile, or he can take Gustavo Petro’s style book and fancy himself the martyr and class-struggler that everyone is out to get.

Mayor Quintero talks about making Medellín what he calls “software valley,” but foreign investors will not locate to a destination mired in conflict that can’t keep its lights on. He was elected without a power base, to some degree a rejection of the Uribista alternative. He clearly views the civic dissatisfactions with his moves as an Uribista plot. Surely they are included in his menagerie of new opponents, but they weren’t the ones who led to a loss of $30 million USD in EPM’s outstanding bond value in the space of 3 days. There were no Uribistas behind Wall Street firm Fitch deciding to lower the utility’s credit ratings. The only “forces of darkness” Fitch cited was Quintero’s “deterioration of corporate governance controls at the company.”

In this editorial, Finance Colombia calls on the mayor to rectify his course and work in a more collaborative, professional and transparent spirit with all the city’s stakeholders, or alternatively on Paisas to democratically and civilly protect the trajectory of amazing progress the city has made in the last two decades. Choose quiet progress over loud and bombastic stagnation. Cooperation over tomato-throwing confrontation.

Medellín Mayor Daniel Quintero (Photo courtesy Alcaldia de Medellín)

At closing the issuance amount of the 8.375% senior notes payable in Colombian pesos will be converted into an initial equivalent Colombian peso amount based on the then current exchange rate. The Colombian peso amounts payable in respect of principal and interest will be converted to U.S. dollars based on the Colombian peso exchange rate prevailing at that moment. Payment of the notes is therefore exposed to exchange rate fluctuations, and payment of principal and interest can decrease in USD terms if the Colombian peso depreciates.

EPM’s ratings reflect the company’s low business risk resulting from its diversification and characteristics as a utility service provider. EPM is a leading electricity generator in Colombia and exhibits a diversified portfolio of utility businesses that include electric generation, transmission and distribution, water and sewage services, natural gas distribution, and garbage collection and disposal services. The company’s ratings also reflect its solid credit protection measures supported by moderate historical and projected leverage, healthy interest coverage and an adequate liquidity position. EPM’s ratings also reflect the company’s somewhat aggressive growth strategy as well as its exposure to regulatory risk, which is low.

EPM’s Negative Watch reflects continued uncertainty regarding the closure of Ituango’s blocked Auxiliary Diversion System since April 28, 2018, and final cost over-runs of its Ituango project. In June 2020, the company announced an additional delay due to the coronavirus pandemic. Fitch’s expectation is that 300MW of the project will be online by early 2022. Additional technical and infrastructure complications are possible and could further delay the project’s Commercial Operation Date (COD). Additional unforeseen contingencies have been partially mitigated after the insurers announced the damages qualified under the insurance policy, but there is no clarity as to when and what damages will be covered. The resolution of the Rating Watch may extend longer than six months given these uncertainties.

KEY RATING DRIVERS

Minor Delay at Ituango: Fitch continues to maintain the Rating Watch Negative until further confirmation that the diversion and auxiliary tunnels are appropriately plugged. In June 2020, the company announced an additional delay because of the coronavirus pandemic. Fitch believes that the financial impact of the Ituango project is mitigated after the announcement that its insurer, Mapfre, determined that the causes of damage at the Ituango project is covered by the insurance policy. EPM received $150 million USD in insurance proceeds in 2019 and expects to receive between $100 and $200 million USD in 2020.

Fitch believes the company remains exposed to execution risk even though the company has made progress to remediate the collapse of the project’s tunnels. Fitch expects EPM will plug the diversion tunnels and auxiliary diversion tunnels (ADT) within the next six to 12 months. Fitch’s base case assumes that 300MW will be in operation in 2022, in line with the company’s guidance.

Stable Credit Metrics: Fitch estimates EPM’s consolidated gross leverage, defined as total debt to EBITDA, will average 4.1x between 2020-2023. The elevated leverage is mostly explained by the company’s Ituango project, which Fitch estimates will cost a total of USD3.4 billion by the final completion, an incremental cost of $1.5 billion USD as well as the additional debt incurred from the offering. Net leverage is expected to average 3.5x over the same horizon as the company is expected to increase its cash on hand to combat economic uncertainty.

Fitch’s base case assumes a modest increase in cash flows in 2022 when 300MW of the project comes online, followed by two additional launches of 300MW thereafter. Fitch believes that despite higher leverage in the medium term, EPM has a solid credit profile with FFO interest coverage averaging 3.7x times between 2020-2023 and average net debt to EBITDA of 3.5x over the same time period. Lastly, Fitch believes EPM has strong access to international and local financial markets, and over the rated horizon, will refinance upcoming maturities to preserve liquidity.

Assumption of CaribeMar Assets: EPM’s assumed ownership of CaribeMar is positive for the business and credit neutral. Fitch’s base case for EPM assumes the company will take over CaribeMar’s operations and assets in September 2020, which are just north of its existing concession areas and will commit up to $1.0 billion USD of investment capex by 2024 to reduce energy losses, quality improvements and general collections. CaribeMar’s capex is expected to be 3.3x greater than its projected EBITDA between 2020 through 2024. Fitch expects material increases of EBITDA by 2025, when losses are expected to decrease and tariffs adjustments. Fitch understands that CaribeMar has no financial debt and the government will assume the pension obligations of the company.

Insurance Payments Support Capex: Fitch’s base case assumes that EPM will receive payments up to USD1.1 billion from its insurance policy between 2019 through 2022. The company received the first payment of USD150 million from Mapfre Seguros Generales de Colombia S.A. in Dec. 2019. Fitch believes the insurance payments will be made in instalments as both entities review damages and costs. The payments are a credit positive and relieve pressure of selling EPM assets to further offset the estimated incremental cost of $1.5 billion USD of the project.

Stable Cash Flow Profile: EPM has a stable and predictable cash flow profile supported by regulated businesses in investment grade markets. Fitch estimates 80% of EPM’s 1Q20 EBITDA was derived from its energy business, where its generation segment comprised 32%; 43% was distribution; and the gas and transmission segments combined for 5%. EPM’s distribution business operates in highly regulated markets, mostly concentrated in Colombia, where it is the largest distributor in the country, with a market share of 25%. Further, EPM is a majority shareholder in the second largest distribution company in Panama, Elektra Noreste (BBB/Stable). EPM also has a presence in water and waste management services in Chile, Colombia and Mexico. Fitch estimates that 20% of the company’s EBITDA comes from its water and waste management services.

Moderate Regulatory Risk Exposure: Fitch believes EPM’s exposure to regulatory risk is low. The bulk of EPM’s consolidated revenues is generated by regulated tariffs or medium-term contracts. The latter exposes the company to potentially sustained low electricity prices. Historically, Colombian regulatory entities have ruled independently from the central government and have provided a fair and balanced framework for both companies and consumers. Fitch expects future regulatory changes will have a neutral impact on the company’s cash flow generation and financial profile. Future regulatory changes are expected to be aimed at adding transparency to the market and the regulatory framework overall. EPM’s diversified business profile further mitigates the company’s regulatory risk, as a simultaneous tariff decrease across all businesses is unlikely.

Strong Linkage with Parent: EPM consistently contributes significant cash flows in the form of dividends to its parent, the City of Medellin (BBB-/Negative). These distributions comprised 20% of the city’s total revenues in 2019, and have exceeded government revenues by 20% four out of the last five years. Under Fitch’s criteria, a government-related entity (GRE) that sustainably generates more than 10% of the government’s revenues is considered a strong linkage factor that would lead to an equalization of the ratings. Fitch may nevertheless choose to apply notching down from the government if there are concerns regarding the company’s financial structure. Considering EPM’s capital structure is not as strong as its parent’s and uncertainty surrounding the financial impacts of the Ituango project, Fitch maintains a Negative Watch on EPM’s ratings until the company can regain control of the project.

DERIVATION SUMMARY

EPM’s low business-risk profile is commensurate with its investment-grade rating and is comparable with that of Grupo Energia Bogota S.A. E.S.P.’s (GEB, BBB/Stable), Enel Americas S.A. (A-/Stable), AES Gener (BBB-/Stable) and Promigas (BBB-/Stable). EPM’s ratings are two notches below Enel Americas, as the latter has a strong diversified and geographic footprint in South America and a more conservative capital structure. Fitch estimates Enel Americas gross leverage will be 1.6x in 2020 and will remain below that level thereafter, not considering any acquisitions. Fitch projects EPM’s leverage to average 4.1x over the rating horizon, falling to 3.7x in 2024.

EPM and GEB are rated one notch above AES Gener and Promigas. GEB’s operating environment and exposure to regulated business bodes well for its credit quality compared with AES Gener, which operates in a more competitive environment. Also, Fitch projected leverage for GEB is in the range of 3.5x to 4.0x, slightly lower than AES Gener, for which Fitch expects leverage metrics to average 4.0x. Promigas is also rated one notch below GEB in the international scale, given its lower level of business and geographic diversification and its higher leverage levels over the medium term compared to GEB.

KEY ASSUMPTIONS

Fitch’s Key Assumptions Within Its Rating Case for the Issuer:

• EPM issues a senior unsecured USD bond due 2031 and reopens its 2027 peso-denominated bond;
• Ituango project gradually launched into operations with 300MW by early 2022, 600MW later in 2022 and 1,200MW in 2026;
• Total Ituango cost of USD3.4 billion, a USD1.5 billion increase from original budget;
• Ituango’s medium-term commercial obligations are covered with electricity purchases, existing hydroelectric asset base and thermal generation;
• No Dividends from UNE expected over the rated horizon;
• Dividend pay-out of 50% of previous year’s net income;
• Divestment in 2019 of Los Cururos for USD 138 million, 1% overall stake in ISA for USD69 million and 10% stake in GasOriente for USD10 million;
• No Divestment in 2020 or the rating horizon;
• Total Insurance payments of USD1.1 billion from 2019 through 2022;
• Refinancing of all Local & International bonds maturing over the rated horizon;
• Capex for CaribeMar to be financed predominately through debt up to USD800 million.

 RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

• An upgrade is not likely in the short to medium term given the expected delay in Ituango’s operation, the company’s current credit metrics, large capex program and the potential materialization of project relation contingencies.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

• The materialization of significant cost overruns and contingencies that weaken the company’s liquidity;
• Additional delays in Ituango’s COD;
• Sustained leverage above 4.0x;
• An overly aggressive investment and/or acquisition strategy that drives leverage metrics consistently above 4x;
• Increased intervention from the company’s owner, the municipality of Medellin, which negatively affects cash flows.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE

Fitch expects the company’s July 2020 issuance to bolster liquidity and does not anticipate a material near-term effect on EPM’s liquidity and operating cash flow resulting from the Ituango 2018 landslide. Approximately 66% of the company’s EBITDA is from regulated businesses with highly stable cash flow generation. EPM held approximately COP 2.4 trillion of cash on hand as of March 2020. Fitch expects the company will have 3.1 trillion cash on hand at the end of 2020 following the issuance and cash flow from operations of approximately COP 2.4 trillion for the year. These amounts provide sufficient liquidity to cover short-term financial obligations of COP 1.5 trillion for 2020 and its capex program.

Currently, the company’s dividend policy is expected to remain in place despite the cash flow impact derived from Ituango’s delay. Historically, EPM has transferred on average between 45% and 55% of its net income to the city of Medellin in the form of dividends. EPM’s transfers to Medellin have historically represented approximately 20% to 30% of the city’s investment budget. Although not likely in the near term, an increase in the company’s dividend distribution policy could pressure its FCF generation, which is already expected to continue to be negative in the medium term as the company continues to execute its investment plan.

Empresas Publicas de Medellin E.S.P.’s (EPM) ratings are linked to the country ceiling of Colombia (‘BBB’).

As of press-time the day before, Colombia’s President Juan Manuel Santos remains defiant against his critics in Congress and certain voices in the public, stating via Twitter that there is no legal impediment and that the legality of the process has been ratified by the Council of State.”

A statement posted on Colbún’s website signed by General Manager Thomas Keller Lipportd read, in part: “Soon after evaluating the situation in corporate meetings, and with attention to the recent media reports that assure the participation of Colbún in the final stage of the public auction process if Isagen, implicating the presentation of an offer next January 13, Colbun informs that, due to the new terms established by the authority for the presentation of the Offer, and also in part, because of the raising of the price some 21.5%, we will not be in conditions to present an offer on the defined date.”

The sale of Isagen is slated to take place tomorrow, Wednesday January 13 at 8am. If the sale does indeed go ahead, Canadian investment manager Brookfield Asset Management is expected to purchase Isagen at the auction’s minimum price of $4130 COP per share. This reflects a 21% increase over the price set for the auction slated for May of 2015 that ended up being delayed by legal maneuvering by opponents to the sale. At that time there were seven interested bidders.

“This won’t be an auction. Who will bid up the price? Or is it that Brookfield, in an act of generosity towards Colombia, will pay more than the base price?” asks rhetorically Mario Alejandro Valencia, a member of “Red de Justicia Tributaria” (Fiscal Justice Network).

“We don’t consider this an auction,” Elber Castaño, a member of Isagen’s Union told Colombian daily El Tiempo. Members of Congress, currently not in session, from various political parties are also calling for a halt to the sale. “

Why is it the Council of State (Cabinet) prohibits assigning a TV channel with only one bidder, but the government threatens to sell Isagén with only one bidder?” asked ex-President and current Senator Alvaro Uribe.

Finance Colombia will continue to monitor the situation. Follow us on Twitter for real time updates.

Photos courtesy of Isagen

After a series of debates in Congress and conflicting positions between Colombian political parties, the Colombian government has announced the official auction date for companies interested in buying the majority percentage of Isagen shares (BVC:ISAGEN) held by the national government. The companies that are participating in the negotiation must make an offer on January 13 of 2016.

Above photo: Isagen’s Sogamoso Hydroelectric Dam (Photo courtesy Isagen)

Isagen is a power generation and distribution company headquartered in Medellin, with regional offices in Bogota, Cali and Barranquilla. The Colombian government controls Isagen, owning 57.61% of the shares. The City of Medellin, through Empresas Públicas de Medellin (EPM) owns 13.14%, Grupo Energia de Bogotá (EEB), 76.52% owned by the city of Bogotá owns 2.52%, and the rest of the shares are owned by institutional and retail investors.

Isagen ownership (click graph to enlarge)

Isagen ownership at the beginning of Q4, 2015  (Details in appendix below). Graphic by Finance Colombia of data provided by Isagen

Isagen is the third largest generator of energy in Colombia with 16% of the country’s grid (National Interconnected System (SIN) capacity. In addition, It has an installed capacity of 3,032 megawatts (MW) from five hydroelectric plants, and one thermoelectric plant. Isagen has a market capitalization of $9.32 trillion pesos ($2.85 billion USD). There are 2.73 billion shares outstanding, and 728.53 million are issued publicly. Friday, the shares closed at $3,420 COP ($1.05 USD per share).

In 2014 the Santos administration announced its intention to sell the national government’s stake in Isagen in order to fund the country’s ambitious multibillion-(US) dollar highway modernization and upgrade project, known as 4G.   The government announced the auction date for May 15, 2015, but opposition parties with diverse motives in Colombia’s congress and a group of activists filed legal actions attempting to block the sale, resulting in delays and court battles that the executive branch has apparently won.

President Santos discusses Isagen from Santa Marta, where he attended the presentation of new municipal water resources. (Photo courtesy of the Presidencia de Colombia)

“Hopefully the opponents will not resort to dishonest arguments that these resources are sold to cover fiscal ‘holes.’ It has been said in every possible way that the resources are going to Financiera de Desarrollo Nacional (FDN-Colombia’s capital projects treasury), and will leverage the great infrastructure investments that we need, and that the country is modernizing like never before, and these resources are very important at this moment,” said President Juan Manuel Santos.

Colombia’s highway network has been a weak link in the country’s transportation infrastructure, and has held back economic development, especially compared to the countries Colombia competes with economically, like México and Brasíl. For example, Medellín and Bogotá are only 260 miles apart (419km), but road travel can easily take over 10 hours, much of the trip over two-lane, low-speed roads. None of Colombia’s major cities have internal or outerbelt freeways. Bogotá and Cartagena have infamous traffic problems. Away from the major cities, connectivity can be even more challenging, making freight transport notoriously expensive. Colombia’s very limited heavy rail network is mostly dedicated to coal and bulk transport.

“Isagen is an asset that produces a dividend, a profit, but that profit is very low compared with what that same money, belonging to Colombians, can render, for example, leveraging the financing of large highways, large projects that the country needs,” said Santos while attending an event opening new municipal water wells in the Atlantic coastal city of Santa Marta. “Nobody has any conspiracy regarding Isagen. The energy can be provided by the public sector or the private sector without affecting a single electricity user, because energy is a very highly regulated industry. What affects Colombians is the regulation, and not who supplies the energy.”

Isagen produces 16.4% of Colombia’s electrical consumption.

According to President Santos, the 4G highways modernization project is the most ambitious construction and modernization project in the history of the country, and will generate dozens of thousands of jobs in rural areas of the country, and will feed economic growth during construction, operation, and maintenance phases.

Minister of Transport Natalia Abello says the sale of Isagen is key to the success of the 4G highway modernization project. (Photo courtesy Mintransporte)

“To invest the resources from the sale of Isagen in infrastructure will have more economic and social benefits because they will contribute to the financing of the highways by private enterprise, where they will not require public backing to operate, but require capital investment by consessionaries in the construction phase. In 2016, for what we expect from private initiatives, these resources will be very important,” said Minister of Transport Natalia Abello in a statement.

For the auction that was to be held in May of 2015, the minimum bid was set at $3,399 Colombian pesos (COP). At that price, the minimum value of Isagen would have been $6.48 billion COP. At the time, there were seven potential bidders that had indicated interest. In December, President Santos’ cabinet, the Consejo de Ministros revised the valuation to $4,130 pesos per share; an increase of 21.5%

On Monday, December 28, Minhacienda, the Ministry of Public Finance and Credit said that two companies have submitted monetary guarantees required to participate in Wednesday’s auction: BRE Colombia Investments LP, an investment fund of Canada’s Brookfield Asset Management, and Consorcio del Pacifico (Pacific Consortium), an entity owned by Chile based electrical generator Colbún.

Brookfield Asset Management is a Canadian company that focuses on property, renewable energy, infrastructure and private equity in North and South America, Australia, Asia, and Europe. Brookfield Asset Management currently has over $225 billion USD in assets under management.

Colbún SA is a Chilean electrical producer with an installed generation capacity of 3,278 megawatts. Colbun has no activities in the Colombian electricity sector, but in Chile it operates 15 hydroelectric plants, 7 thermal plants and 17 substations. According to Colbún General Manager Thomas Keller Lippold, “Colbún S.A. has analyzed and studied Isagen´s history, (¨due diligence¨) and it is prequalified to make an offer.”

Another company that considered making an offer for Isagen but apparently has dropped out, was Engie, a French energy company active in electrical generation and distribution, natural gas and renewable energy, across 15 countries, including Canada, Portugal, Italy, Belgium, the Netherlands, Chile and the USA. As of publication, the company has not formalized its intention to make an offer to the government of Colombia.

Isagen-owned power generation facilities in Colombia

Chart data courtesy Wikipedia

Construction during 2014 on Rotor 1 of Isagen’s Sogamoso Hydroelectric Facility (Photo courtesy Isagen).

Current significant shareholders in Isagen: