Photo: Mapfre’s office in Barcelona. (Credit: Bengt Nyman)

This beat overall growth in net attributable profit for the Spanish insurer across its operations in the Latin American region, which saw an uptick of 0.7% in the quarter versus the first three months of 2023.

With total premiums of around €2,500 million in Latin America, the region accounts for more than a third of Mapfre’s total premiums.

“The good indicators of the first quarter, with an ROE of more than 10%, reflect the strength of our business model and are the first results of the new strategic plan,” said Antonio Huertas, chairman and CEO of Mapfre, in a statement released with the results. “Our geographic diversification continues to provide solid and profitable growth.”

Mapfre Q1 2024 Performance in Latin America

In addition to the overall results, Mapfre also released the following information about its first quarter performance in Latin America.

• Premiums grew by 8%, while net income stood at €33.5 million, with significant contributions from Mexico and Peru. Issuance in local currency grew with the evolution in Chile (13%), the Dominican Republic (12%), and Peru (12%).
• The combined ratio improved to 99.9% (-0.3 p.p.), with a positive performance in general and motor insurance, offsetting health and accident performance.
• The life business continues to contribute very positively and financial income continues its upward trend.
• In Mexico, premiums amounted to €368 million (+10.5%), also supported by the appreciation of the peso (+8%). Both the Automobile and Life branches have experienced strong business growth. The combined ratio stood at 96.9% and net profit amounted to €12.3 million.
• In Peru, premiums reached €203 million, up 12.1%, while net income stood at €12.3 million.
• Adjustments for hyperinflation, mainly from Argentina, have had a negative impact on the result of €17.9 million (€8.6 million in 2023).

The payment, which was only disclosed last month after a Medellín court issued a judgment demanding it be made public, dates back to losses that began to be incurred in April 2018 when a series of natural and human-made issues led to flooding within the mega-dam, causing a lengthy operational disruption, equipment loss, and a subsequent drop in revenue.

EPM filed a claim under its “all risk construction” policy with Mapfre, which was reportedly designed to cover damages that the project could suffer during the construction, operation and maintenance operations.

 An Extensive Claims Process

During the claims process, each of the incurred damages had to be assessed and validated. While the policy had an upper limit on material damages in construction and loss of profits of more than $3 billion USD, the EPM board of directors at the time set a probable claim amount at 2.8 billion Colombian pesos given that the full value would have only been considered in a total-loss scenario, according to EPM head Jorge Carrillo.

“This is a loss, not a work that has ceased to exist,” said Carrillo in a statement. “The loss of profit is not unlimited.”

Mapfre worked on the known loss assessment with EPM, according to the utility, and between 2019 and 2021 paid out initial sums of $350 million USD.

Carrillo said that the insurer then accelerated the process when the Office of the Comptroller General of Colombia linked the claim to the fiscal responsibility process, as a civilly liable third party, for damages of 4.3 billion Colombian pesos.

This advanced the process and, with the $983 million USD awarded by Mapfre, after the different readjustments that were carried out, for, 90% of the amount assessed by the comptroller’s office was covered, per officials.

The Recent Epilogue to the Hidroituango Settlement

When EPM abided by the court order and revealed the value of its $983 million USD settlement last month on August 30, it included the following statement

“The amount reached with the settlement agreement covers the insured losses, taking into account all the conditions of the policy. In addition to the benefit that represented the early receipt of resources that allowed the progress of the work. Consequently, EPM did not waive to claim values or concepts that would have been covered, since the policy has some conditions that frame the maximum liability of the insurer such as deductibles, exclusions and sub-limits, which applied within a technical adjustment process make that not all the losses derived from the contingency have been indemnifiable by Mapfre. EPM thanks Mapfre.”

Carrillo added that the agreement had not been made public because of a confidentiality clause. “We could not release it because we would be in breach of contract,” he said.

Photo: The Hidroituango hydroelectric dam in Ituango, Antioquia. Hidroituango hydroelectric dam. (Photo credit: EPM)

EPM issued a written statement saying (translated):

That, with the purpose of promoting the plurality of participation in the process and in view of the difficulties identified in the insurance market, the closing date for the reception of offers of the public request CRW 167467, whose purpose is the construction of the final civil works of the Ituango Hydroelectric Project (generation units 5 to 8), which was scheduled for this Friday, November 4, 2022, has been extended.

The term was extended by thirty-three (33) calendar days and, therefore, the reception of offers will be until December 7, 2022, at 4:00 p.m. Addendum No. 9 containing this modification was sent through EPM’s ARIBA contracting system to potential bidders who are participating in this process and was published on the Te Cuento portal on EPM’s website www.epm.com.co

This indicates two difficulties: The first is that EPM is having difficulty attracting additional bidders to take over an unfinished and highly politicized project. Medellín Mayor Daniel Quintero first demanded renegotiation of the contract that the construction consortium (CCCI) building Hidroituango was working under, and when that failed, litigation ensued.

Now, the Quintero-controlled EPM has put out for bid the construction of the heavy construction associated with installation of the second four turbines, and has, based on its statement above, had difficulty attracting sufficient bidder interest, and for those bidders participating, difficulty in obtaining insurance coverage. Spanish insurer MAPFRE has already paid out $100 million USD in claims on the project, and now with the litigation, changing contractors, and EPM’s potential financial liability should they be fined by Colombia’s Energy & Gas Regulation Commission (CREG), the project is understandably very difficult to insure.

Add to that, the Colombian President Gustavo Petro has said that the turbine testing poses a mortal risk to the citizens living downstream of the dam, and should be evacuated during testing.

All the additional risk means that whatever contractor that wins the bid will likely do so at a price that takes into account the added uncertainty and liability, meaning the project will be vastly more expensive than it would have been otherwise. Should the bids be opened on December 7, the day before a public holiday in Colombia, we will find out; but based on the pattern to date, we should not be surprised by more delays.

This is turning out to be more complicated than the mayor or his political appointees on EPM’s board anticipated.

Above photo: The space where turbines 5-8 will eventually go, once a contractor is selected and insurance is found. (photo: Loren Moss)

Garzón’s own background spans 25 years of experience in forensic engineering, construction vulnerabilities, and pre-loss and post-loss consulting. His experience in the provision of risk and loss adjusting services includes advising on high value disputes within the energy, oil, transportation, commercial and residential property sectors, and advising on high value disputes within the energy, oil, transportation, commercial and residential property sectors.

The two also discuss some innovative things that Garzon’s team is doing with drone technology applied to insurance and risk management applications.

Finance Colombia: Tell me about McLarens’ presence in the region, in Latin America and the Caribbean?

Garzón: In the Caribbean we own operations in Jamaica and Puerto Rico; in Latin America we are in Mexico, Panama, Colombia, Argentina, Chile, and Brazil, and we have some exclusive partners in Peru, Ecuador, and Guatemala, so yes, we have a very good footprint, a, pretty good presence throughout Latam and the Caribbean.

Finance Colombia: So you’re from Colombia, right?

Garzón: Yes, correct. I was born in Colombia, and I moved to New York in 1997, and I’ve been in the US since then actually, but traveling to Latin America very often due to work and family, but yes, I’m originally from Colombia.

Finance Colombia: How did you end up connecting with McLarens?

Garzón: Well, I am a structural engineer by education, a structural civil engineer. So for many years I worked as a structural engineer on the forensic end, doing investigation in collapses and looking at the nature of failures. So, navigating the forensic world, I found McLarens as my client.

I used to work with all the adjusting firms that operate in the US and in the region and McLarens was one of them, and I have to say not because I work for them now, but McLarens gave me a lot of support on some really interesting losses in Chile after the earthquake, in Colombia and in Brazil, so I was always very close to McLarens.  When the opportunity came to replace the previous regional manager, I got a chance and I’m very happy to be connected that way with them.

Finance Colombia: You mentioned working on things like failure analysis and adjusting claims, Colombia is a fascinating country, we’ve seen big projects like there was the bridge collapse between Bogota and Villavicencio, the Chirajara bridge I think. Obviously we have the big Hidroituango situation right now, so I think that there are some unique things…Colombia being in some ways an advanced nation, it is part of OECD now, there are some tremendous projects going on down here like the 4G highway project, some of the tunnels are impressive, the tunnel that goes between the airport and outside of Medellin is a new project that’s open, I think they’re about to open up the second shaft that they built because the traffic is already so big.

What are some of the risk areas where Colombia stands out? It’s especially challenging when it comes to insuring some of these mega projects that we’re seeing down here due to the economic growth, but then the mega project can also create mega risk, right?

Garzón: A very good question; so Colombia is located right in the middle of Latin America. You have towards the left Central America, and you have towards the right and down below, the rest of South America, so in Colombia, you have this formation of the Andes, the Andes that starts down in Argentina, Chile and in Colombia and the three branches of the Andes mountains are pretty significant, pretty high and they actually offer pretty significant challenges to the development of the country.

Most of the country, most of the Colombian territory has to cross these three branches of the Andes together here to the Pacific or to the Caribbean coasts, so most of the cities are located on either side of these chains of mountains and the geological challenges and topographical challenges have been for more than 100 years very significant I guess, a roadblock to communicate every area of the country in terms of commerce and transportation and population and all that.

So, building roads between to connect all the major networks of production within Colombia, you have to cross these tremendous mountain chains. For that, there is only one way: You have to build bridges and tunnels and roads. Not only is there the topographic nature of the challenges, but also geological. We have rain, we have earthquakes we have volcanic activity in the region, so if you combine all these challenges…you mentioned a few of the tunnels and bridges that are very challenging to build in the country. I think over the recent years for Colombia, to try to move our country forward we have to move products across the region and you have to build these tremendous projects, and you know, engineering is very advanced in Colombia I would say, but even for international companies coming to Colombia to build this actual work of art, it’s a tremendous challenge that has to be at some point reinsured by reinsurance companies, otherwise it cannot be built.

Finance Colombia: Right, that whole concept of when you have large projects, the idea of being able to spread the risk around I think is fundamental. It’s very common to see insurance syndications. I think with the Hidroituango project we have Mapfre and Sura and other different companies involved. Speaking of that let’s talk about McLarens’ presence, specifically in Colombia and then in the region. I mean Colombia is a fascinating country because you have mountains and then you have two oceans, you have jungle, you have cold areas. What is McLarens’ sweet spot? What kind of risk does McLarens focus on? Different insurance companies often have kind of a sweet spot where some companies focus on maritime risk, other companies look at liability, other companies look at property and casualty. What is, to use an insurance term, the risk appetite of McLarens? I mean when should someone reach out to McLarens, where you might be able to really provide them with what they need?

Garzón: For many years, traditionally we have served the property line of business, which is buildings and any asset that is pretty much operational, you can think of a bridge, of a power plant as something that is built and is up working, running. So, as I said, a lot of these risks, you can think of a factory for instance, they are pretty much prone to having fires or floods due to rains or any other type of losses of that nature, so we have operated in the arena for a long time.

We look at a lot of equipment, if you can think of all the construction happening throughout the country, you have heavy machinery, every time more complex, big pieces of equipment moving around, so from time to time either by operational or you know, man-made errors or natural landslides or things like that, we have losses in that area as well. We have marine and cargo; we have an office in Barranquilla right now on the Caribbean coast of Colombia. You mentioned that we have two oceans, we have two big areas and several ports on the Caribbean side and one big one on the pacific side, so we serve the marine industry and also, we have marine losses due to cargo arriving to the port here that is damaged or these things that are being transported between the port and the interior part of Colombia.

Because of the nature of the work that I’ve been doing for almost 25 years in construction and engineering, I’m pushing the lines of construction and having interesting meetings with some clients in the last couple of months about our expertise in construction. We have worked on construction losses and I’m very interested in growing that line of business as well because we have a tremendous expertise, global expertise, a lot of our insurance clients are located here, and in Madrid, London, in the US, and I see that they’re reinsuring major construction projects so we have the expertise, the technology and they know how to really help our clients: the insurance companies and also the insurers to bring them back to business as soon as possible. But also, we are developing new lines of businesses like for instance cyber. You know, we are penetrating the market on cyber risk, you know, it is today’s new risk. I guess, not only in Latin America but all over the world, we hear about hacking and data breaches and things like that, so we have a wide range of traditional lines of businesses like property and marine, but also we are penetrating some more as I said, construction, financial lines and cyber, and not only the local expertise but also we partner with our international team of adjusters located in the US and in London that help us manage these claims that are more complex and very useful to the local market. So we have a good spread, the type of businesses that we can take care of for our clients.

Finance Colombia: Is there anything that I’ve neglected to ask you, that you wanted to mention, to include?

Garzón: I worked for some of the most sophisticated engineering companies in the past, so something that I’m bringing to McLarens is they use a lot of technology to adjust claims. For instance, we are using a lot of 3D modeling of claims, the claims that we see in the region are very complex, very hard to understand. You have to see that not all the parties that interact during the management of a claim are technical people, so it’s very nice when you have a picture that you can reproduce, you can imagine like a 3D model of a complex bridge, or a complex network of tunnels that you can actually represent that and show that to the clients to help them understand what actually happened during the loss.

That helped us a lot when making big investments in technology and the 3D modeling technology is something that I’ve been working for maybe the last 15 years in the design world and now we’re using some of that to help our clients make things easier to understand and speed up the resolution of a claim so the clients can be paid sooner rather than later and that everyone is satisfied at the end of the day because they understood what actually happened, so I think we have a big investment on that.

I think during the pandemic also it was very important to be able to perform and conduct remote inspections to have somebody else going to the site without me, from Miami or somebody from the UK, or somebody from Madrid going to the site. We were able to monitor claims remotely, drive through the site and use tools like Matterport, for instance, that we’re using today, Matterport is a tool that pretty much scans your loss and you’re able to send that to the client, so the client can walk through the loss as if you were there, so things like that are able to be more efficient, to navigate through the losses faster, help the clients and, not only the insured clients, but also the insured seeing what actually happened without having to go there. It’s a big step from having to speak these still pictures or drawings, especially with the claims that we see every day that are more complex in nature.

Finance Colombia: How do you spell that tool? so that I make sure that I…

Garzón: So Matterport…and also we use Revit tools. It’s a drafting tool that is used in the design of the most complex jobs throughout the world, we use Revit for claims. And something that is pretty unique to McLarens: I’ve seen all our competitors and I can say that we know how to use it and we are ahead of everybody else on implementing that technology.

“This year in Colombia they have murdered 22 social leaders, there have been 19 massacres. In 2021, within the framework of the protests, the police murdered, disappeared and sexually assaulted hundreds of protesters. The systematic violation of human rights is endless. To complete the shamelessness, Duque is being received with a red carpet in Europe,” said Miguel Urbán Crespo, a radical leftist Member of the European Parliament from Spain.

Indeed during Duque’s tenure, Colombia seems to mirror the popular movie “The Hunger Games” where Bogotá and Medellín, analogous to Districts 1 and 2 from the movie are world class, modern cities complete with luxury housing, advanced health care, and imported delicacies, while much of the country remains without basic services, education, or unlike the Hunger Games, basic security and government protection. The United Nations is very clear that the worsening of conditions is solidly within Duque’s term of responsibility and can’t be blamed on longer term trends. From the UN Global Humanitarian Overview:

In 2021, organized NSAGs [Non-State Armed Groups] have expanded rapidly in peripheral areas of the country, creating an increase in hostilities and violence affecting civilian populations, particularly ethnic minorities. Increased use of explosive ordnance, including improvised landmines, has been reported, particularly in rural areas and regions bordering neighboring countries, where illicit crops and other illegal economies are located. In 2021, indigenous communities have been gravely affected by explosive ordnance, recording a 20 per cent increase in indigenous casualties compared with 2020.¹ The increase in recruitment of minors has also been reported.² 2021 witnessed the highest number of people affected by mass displacements and confinement in the last decade and a continuous trend in confinement affecting more than 113,000 people this year.³

The same report notes that while Colombia is classified as an “Upper Middle Income” country, on the INFORM Severity Index, Colombia ranks as 4.5 / Very High, in other words, a humanitarian disaster. The European Commission’s “INFORM Severity Index is an improved way to objectively measure and compare the severity of humanitarian crises and disasters globally.”

The Duque administration was further embarrassed by the United Nations’ Food and Agriculture Organization that listed Colombia as the only country in South America as “Food Insecure and in need of food assistance in 2022” along with South Sudan, Ethiopia, Somalia, Madagascar and Yemen. Rather than address the crisis, Vice President and acting foreign minister Marta Lucia Ramirez demanded that Colombia be removed from the report.

The administration didn’t dare protest when two years ago, the United States government said the same thing about Colombia: “Food security needs in Colombia remain high due to internal conflict and periodic natural disasters, as well as the influx of vulnerable Venezuelans and Colombian returnees crossing into Colombia as a result of the escalating economic and political crisis in Venezuela.”

During the COVID pandemic lockdowns, for almost a year there was a general curfew throughout the country, giving police more reason and power to stop and question people out on the roads, but during the pandemic, illicit narcotics exports surged. 1,228 metric tons of cocaine were produced in Colombia in 2020, an increase of 8 percent over the previous year.

Photo of Marta Lucia Ramirez by Felipe Castaño, Vicepresidency of The Republic

It has been difficult to take the Duque administration’s antinarcotics efforts seriously when his own Vice President Marta Lucia Ramirez, the same one who made demands against the UN report on Colombia’s precarious humanitarian situation, also tried to press criminal charges against investigative journalists at Insight Crime who revealed and verified her own family’s ties to narcotraffickers. Her husband had business dealings with now convicted paramilitary narcotrafficker “Guillermo León Acevedo Giraldo, AKA “Memo Fantasma,” and it was revealed that the vice president paid $150,000 to bail out her own brother who was caught and convicted for heroin trafficking.

The attorney general’s office has now revealed that criminal mafias such as the notorious Clan del Golfo have likely infiltrated the Colombian military and law enforcement at the highest levels, including army generals. Had this been revealed at the beginning of Duque’s term, he could claim to be the guy to clean things up, but he is in the final months of his presidency. Even the Catholic church has spoken out against what it sees as actual collaboration between the military and mafias.

“We found in various municipalities that in many places where there is a strong presence of the Army and the public force there is a concomitant presence of the Clan del Golfo,” said Monsignor Juan Carlos Barreto, Archbishop of Quibdó, Chocó “We confirm the seriousness of the humanitarian crisis due to the armed conflict and the abandonment of the state.”

It’s not hard to argue that Duque has been no friend of the campesinos. Criminal displacements—being run off your land or home by armed gangs—has more than doubled in the past year alone. From the UN Office for the Coordination of Humanitarian Affairs report (translated):

“The number of victims due to mass displacement has increased by 101% between January and May 2021 compared to the same period in 2020. Likewise, the number of displacement events has increased by 31%, that is, they have been registered 15 more events in relation to the same period in 2020. So far, only 19% of the victims of displacement in 2021 have returned to their homes, while 81% or 23,837 people remain displaced, due to the impossibility of having a safe return due to the inadequate security conditions that remain in the territory, and in the midst of intersectoral needs that require attention.”

The report goes on to say:

It is worrying that the attacks against the civilian population and that trigger mass displacements are expanding and increasing by 54% to other departments such as La Guajira, Cesar, Arauca, Meta, Guaviare and Caquetá, among others. The increase in homicides and intentional injuries in civilians stands out by 161% and 70% respectively, showing an increase in attacks against civilians in a large part of the national territory.

The security situation under Duque is deteriorating such that criminals are emboldened enough to even attack the Presidential helicopter, as happened last year when the president was arriving in Cúcuta, a city on Colombia’s border with Venezuela. The presidential Sikorsky Black Hawk took six hits from small arms fire.

Colombians at home are unhappy with Duque

Colombia’s ESMAD riot police have indiscriminately attacked journalists, bystanders, and unlucky passers-by caught in the area.

Last year, Colombians took to the streets after Duque’s finance minister, Alberto Carrasquilla sought to raise taxes by expanding Colombia’s income tax obligation to lower income Colombians and taxing basic staples, but in an interview demonstrated he had no idea how much a dozen eggs cost. The abusive response by Colombia’s ESMAD riot police further inflamed the situation.

Yesterday, Colombian polling firm Invamer released results of a poll taken the first two weeks of February that shows only 20% of Colombians approve of his governance, while 73% disapprove. Many Colombians and investors abroad fear a left-wing presidency by former guerilla militant Gustavo Petro, but Duque with his dismal ratings may inadvertently be Petro’s best ally. The same Invamer poll showed that for the first time since 2018, Petro’s favorable ratings at 42 points have exceeded his unfavorable opinion ratings, which are at 40 points. Other presidential candidates’ ratings:

• • Juan Manuel Galán (centrist): 29% favorable, 22% unfavorable
  • Sergio Fajardo (centrist): 25% favorable, 33% unfavorable
  • Ingrid Betancourt (left): 23% favorable, 43% unfavorable
  • Alejandro Gaviria (centrist) 17% favorable, 23% unfavorable
  • Francia Márquez (left) 16% favorable, 8% unfavorable
  • Rodolfo Hernández (right) 16% favorable, 16% unfavorable
  • Federico Gutierrez (centrist) 15% favorable, 22% unfavorable
  • Alejandro Char (centrist) 12% favorable, 32% unfavorable

The Centro Democrático political party controlled by former President and current Senator Álvaro Uribe’s candidate Óscar Iván Zuluaga has a favorable rating of 15% and unfavorable rating of 45%, a higher unfavorable rating than anyone except Ivan Duque himself, who cannot run due to Colombia’s single presidential term limit, and former president Álvaro Uribe Vélez, who has an approval rating of 21% and unfavorable image of 67%. Uribe was once widely seen as a hero, but his popularity has plummeted as allegations surface of human rights abuses during his administration, and more recent witness tampering and charges of attempting to frame opposition politicians. Uribe spent some time under house arrest due to the charges.

Members of Duque’s own Centro Democrático don’t seem to have much respect for him. “Uribista” senator María Fernanda Cabál was caught in a recorded phone call with a retired military officer sharing her true sentiment toward President Duque:

Uribista senator Maria Fernanda Cabal says Ivan Duque is a “Mamerto.”

“Duque is a leftist liberal, Duque is a mamerto,” says Cabal. Mamerto is a very strong insult in Colombian slang that can translate as idiot, but in Colombia is especially used as a pejorative for leftists, such as historically, sympathizers with the FARC or ELN rebel groups.

The soldier then asks how he could have infiltrated the party. “He didn’t infiltrate us, he was installed by Fabio Echeverri Correa, because Duque was intelligent and applied, and was sent to accompany [chaperone] his lazy son, who isn’t worth a butthole, Luigi Echeverri,” Cabal goes on to say. Fabio Echeverri Correa was a powerful businessman and president of ANDI, Colombia’s largest business trade association. His son, Luigi Echeverri is a friend of President Duque and a member of several corporate bords in Colombia, such as Telefónica Colombia (operating as Movistar), Ecopetrol, and the Bogotá Chamber of Commerce. He was President Duque’s campaign manager, and based on his LinkedIn profile, he presides over an “entity supporting the ideas of f. President Dr. Alvaro Uribe Vélez.”

Needless to say, Maria Fernanda Cabal is not impressed.

“It is that if you have a lazy son and you have money and you want him to graduate, then you invite the most intelligent girl in the class to blow him off. Like when your daughter is ugly, you have to take her with the pretty one to see if she picks someone up,” she continued.

“This guevón worked in Washington all his life and he carried Uribe’s suitcase when he went on a trip, but that’s only when we see the guy.” Guevón literally translates to “big eggs” but is also an insult in Colombian slang, like mamerto: strong words that would tend to start a bar fight if used with a stranger

“He is poison, so [President] Uribe always ends up falling, and we end up fucked because he [Duque] has the flavor of shit…There is nothing to do until he is gone, so I tell you, we win or we are all going to shit,” said Cabal. When the recording was leaked, she doubled down and stood by her words. Duque and Luigi Echeverry refused to respond, with Echeverry saying to simply consider the source, and Duque responding in Latin: “De minimis non curat praetor:” The magistrate does not consider trifles.

Let them eat eggs…and potatoes

Nos llevó el putas! Huevos a más de mil pesos cada uno pic.twitter.com/mNxjmKGsEq

— JUAN CARLOS VILLANI (@JUANVILLANI) February 15, 2022

Last year, the finance minister was lost when it came to the price of eggs. But Monday, a journalist with one of Colombia’s largest media networks was moved to profanity when he encountered eggs in a Bogotá supermarket selling for over $1,030 Colombian pesos per egg, or 26 US cents.

“On the issue of eggs, it depends on its quality. Let’s say $1,800 COP (48 cents, US) a dozen or something like that.”

For the record, Duque’s former Finance Minister Alberto Carrasquilla guessed that a dozen eggs cost $1,800 pesos, or 48 cents. Carrasquilla proposed adding Colombia’s 19% VAT tax to basic foodstuffs like eggs and rice, also to gasoline and funerals, while exempting firearms and sugary soft drinks. Carrasquilla’s answer? “On the issue of eggs, it depends on its quality. Let’s say $1,800 COP (48 cents, US) a dozen or something like that.”

Even though Colombia is a petroleum exporting country and petroleum prices have jumped, the Colombian peso is at a near record low, worsening inflation. Potatoes, another Colombian staple, have jumped 140% in prices compared to a year ago. Per capital potato consumption in Colombia exceeds a whopping 79 pounds, or 36 kilos.

The government has announced it is removing import duties on agricultural supplies such as pesticides in an attempt to reduce prices, but any effect will be delayed until future harvests.

Colombian food price increases between December 2021 & January 2022

The Ivan Duque Legacy

While it is far too early for historians to assess Duque’s presidency, it is hard to find economic or social indicators that can justify a positive assessment of Duque’s term.  Duque has promoted relatively investor-friendly policies, but his neglect of everyone outside of Colombia’s investor class has created a possible opening for the first-ever left-wing populist to enter the presidential palace.

Political risk expert Sergio Guzmán is co-founder of Colombia Risk Analysis

“There is a generalized negativity in the country and that favors candidates who show a platform of opposition to the status quo,” said Colombia Risk Analysis co-founder Sergio Guzman. “This drastically improves Gustavo Petro’s chances of not only making it to the second round, but potentially winning.”

Duque has publicly dragged his feet when it comes to implementing the peace accords negotiated under the previous administration, but bitterly opposed by Duque’s political godfather, Alvaro Uribe.

Overall, the Duque administration has seemed to do a competent job managing the COVID pandemic, with some notable fiascos such as his infamous “COVID Friday.” Duque also intervened to assure an insurance settlement between Spanish insurer MAPFRE and public utility conglomerate Empresas Públicas de Medellín, controlled by Medellín’s populist mayor Daniel Quintero.

Ivan Duque is seen buddy-buddy with then-head of the US International Development Finance Corporation Adam Boehler

Duque, who speaks fluent English having spent much of his professional career in Washington, has generally maintained friendly, even fawning relations with Colombia’s traditional allies such as the United States. His administration has been relatively scandal free, defined by the lack of criminal charges filed against his appointees; still, it is early. After Uribe was out of office, some of his political appointees were jailed for corruption, such as Uribe’s deputy transportation minister Gabriel Garcia Morales, and his agriculture minister Andrés Felipe Árias.

On the other hand, Duque’s attorney general and personal friend Francisco Barbosa has been seen by many to do his best making the charges that got Alvaro Uribe arrested “go away.”

Colombian President Ivan Duque does not seem like an evil person or a mean man. He may be a fairly competent administrator in the bureaucratic sense. On the other hand, he has had almost four years to demonstrate leadership and statesmanship in a country with bitter divisions, and promising economic prospects clouded by vast inequality and social stratification where it seems like the rich and poor are living in two completely different countries.

Duque has been impacted by factors out of his control such as the COVID pandemic and the Venezuelan refugee crisis. In both cases, his response deserves some praise. It must also be said that crime and insecurity seem to be on the rise, especially in rural areas beyond the cosmopolitan neighborhoods of Bogotá and Medellín. The extreme poor don’t seem to be any less poor. Colombia lost its investment grade rating under Duque’s administration. The president is left with few friends and many detractors, even within his own party.

On May 29, Colombians will go to the polls to vote for president. If no candidate wins a majority of votes, the top two candidates will go to a runoff on June 19. According to law, the new president will be inaugurated August 7. Things can get worse, much worse. But as Duque’s four year term comes towards a close, there is a practical consensus in Colombia that things could have been much better.

Those individuals and companies held responsible have five business days to appeal, and certainly will do so. One of the primary contractors, Colombian construction firm Conconcreto already stated that it does not agree with the ruling and has instructed its legal team to take necessary steps.

Colombian presidential hopeful Sergio Fajardo is one of the defendants the comptroller held responsible in today’s ruling, along with former Medellín Mayor Federico Restrepo, former candidate Alonso Salazar, and former CEO of EPM / current CEO of Cementos Argos, Juan Esteban Calle. Former mayor of Medellín and suspended governor of Antioquia, Anibal Gaviria was cleared of responsibility, as was former EPM director Jorge Mario Pérez Gallón.

Fajardo issued a brief statement on Twitter saying “I have the certainty and peace of mind that we did well, my team did well, with absolute transparency. We will work on the appeal for reconsideration to show my innocence before the Comptroller’s Office. A lot of calm and a lot of concentration.”

To download the entire ruling document (in Spanish) click here

With last week’s payment of $100 million USD to EPM by Mapfre, the utility has collected a total of $350 million destined to the recovery of the hydroelectric project. EPM states that it expects Hidroituango to begin electrical production by the end of 2022 with two generation units coming online, and the six remaining units between 2023 and 2025.

“The 350 million dollars received to date for the compensation of the contingency in the Ituango Hydroelectric Project, through the ‘all-risk construction and assembly’ policy, are the product of this new payment of $100 million dollars, added to the $150 million dollars delivered by Mapfre in December 2019 and the $100 million dollars reimbursed in September 2020,” said EPM General Manager Jorge Andrés Carrillo Cardoso.

EPM also indicated that it is insured with Mapfre against delays in the project coming online and generating revenues for up to $628 million dollars.

According to Colombia’s Comptroller General, those financially responsible for the Hidroituango loss are:

1. 1. 1. 1. Federico José Restrepo Posada
         2. Juan Esteban Calle Restrepo
         3. Alejandro Antonio Granda Zapata
         4. Fabio Alonso Salazar Jaramillo
         5. Alvaro Julian Villegas Moreno
         6. Sergio Betancur Palacio
         7. Alvaro de Jesús Vásquez Osorio
         8. Ana Cristina Moreno Palacios
         9. Iván Mauricio Pérez Salazar
         10. Jesús Arturo Aristizabal Guevara
         11. Luis Guillermo Gómez Atehortúa
         12. John Alberto Maya Salazar
         13. Luis Javier Vélez Duque
         14. Maria Eugenia Ramos Villa
         15. Rafael Andrés Nanclares Ospina
         16. Sergio Fajardo Valderrama
         17. Luis Alfredo Ramos
         18. Integral S.A.
         19. Integral Ingeniería de Supervisión S.A.S., sucesor de Solingral S.A.
         20. Construcoes E Comercio Camargo Correa S.A.
         21. Constructora Conconcreto
         22. Coninsa Ramón H S.A.
         23. Ferrovial Agroman Chile S.A.
         24. SAINC Ingenieros Constructores S.A.
         25. Ingenieros Consultores Civiles Y Eléctricos S.A. Ingetec
         26. Sedic S.A

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.

While EPM seeks a litigation jurisdiction of Antioquia Administrative court, the consortium is countersuing in an international court, away from potential political influence in Antioquia’s capital of Medellín.

Medellín Mayor Daniel Quintero (Photo courtesy Alcaldia de Medellín)

Quintero ran on a populist platform alleging corruption in the management of public bond issuer EPM, and soon after taking office as Medellín’s mayor, moved to take direct control of the utility, replacing its board of directors with personal allies after the old board resigned in protest of his tactics.

Eight months into his administration, Quintero directed EPM to file for mandatory mediation with Colombia’s attorney general against the consortium building the troubled hydroelectric dam. The project suffered near catastrophic setbacks after a bypass tunnel collapsed required EPM to flood the unfinished generation facility in the dam to prevent a catastrophic dam failure that could have killed tens of thousands of residents downstream in April 2018.

The previous administration and management team preferred a less confrontational approach, working with the contractors and insurers to mitigate the damage, but now the conflict may cause a delay in the completion of the project, which in addition to not providing Colombia with the electrical supply the country was counting on, can subject EPM to multimillion-dollar penalties for failing to comply with contractual obligations.

“There has always been a suspicion of a possible hiring of a Chinese company for the completion of the work,” said Olga Lucía Arango, president of Sinpro.

The consortium CCC Ituango, comprising Coninsa-Ramón H, Conconcreto, and Brazilian firm Camargo Correa, is taking the conflict to international court, counter to the desire of the Quintero administration’s strategy of keeping the litigation in a local jurisdiction.

“The Consortium reiterates its interest in demonstrating that, in the execution of the civil works under its responsibility, it has not only acted in good faith, but diligently and in accordance with good engineering practices, complying with the designs and instructions provided by Empresas Públicas de Medellín (EPM),” said the consortium in a statement. “At the same time, we are forced to seek to compensate for the reputational and economic impact that this unique claim has been causing to the Consortium.”

SINPRO President Olga Lucia Arango

The lawsuit for $9.9 billion pesos (roughly $2.8 billion USD, as the Spanish billion equals the US trillion) is between EPM and the designer Generación Ituango (Solingral SA and Integral), the CCC Ituango construction consortium, the construction management consortium Ingetec–Sedic, and reinsurers Chubb & Sura. Another lawsuit for $5.5 billion pesos  ($1.6 billion USD) is between EPM and Spanish insurer Mapfre. Mapfre had already acknowledged that the flooding was an insurable los and was in the process of adjusting the claim when it was sued by EPM at Quintero’s direction.

Meanwhile, EPM’s largest union SINPRO has expressed its dissatisfaction with EPM’s management and Quintero’s direction of the litigation, citing “the possible decisions made by risk rating agencies, EPM bondholders and multilateral banks, which could imply prepayment of debts.” Endangering EPM’s finances and employment.

“We do not know what the ‘plan b’ is because we do not know it and there has always been a suspicion of a possible hiring of a Chinese company for the completion of the work,” said Olga Lucía Arango, president of Sinpro.

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’).

The deal contemplates future addition of group life, home, business, auto and basic driver liability insurance (SOAT). MAPFRE has a 33 year operating history in Colombia with 965 direct employees, 6,000 affiliates (brokers, agents, etc.), and 105 offices.

Banco Pichincha has 50+ years in Colombia with 1,500 employees. The bank counts 218,059 customers and has 46 bank branches and 27 additional payment centers throughout the country.

With this new agreement, we reinforce the commitment of both entities, and bet on developing joint strategies that boost our growth and development in the country, says José Carpio Castaño, the CEO of MAPFRE Colombia.