EPM Restarts Guatapé, Wins ‘Positive’ Outlook from Wall Street

Medellin-based public utility EPM announced April 23 that it partially restored output from its 560-megawatt (MW) “Guatape” hydroelectric plant in Antioquia – more than a week earlier than planned.

As a result, 140-MW of power supply has now returned to Colombia’s national grid, with the remaining 420-MW from Guatape scheduled to return to service over the next couple of months.

The shut-down of Guatape in February – apparently caused by an operator error resulting in a fire that destroyed power-supply cables at the plant – had threatened to compromise Colombia’s national power supply. Reason: The shut-down came during the height of the El Niño drought, which had sapped hydroelectric capacity nationwide.

Fortunately, rains have returned to Colombia — and EPM simultaneously carried-out a Herculean logistical feat by bringing 800 tons of replacement cables via airlift from Mexico.

“Since February 15, when the incident occurred in the cables that evacuate power from the powerhouse and substation, EPM has concentrated its efforts and expertise to restart the Guatape hydroelectric operations as soon as possible,” said EPM general manager Jorge Londoño de la Cuesta.

The repair-and-replacement project is already at 47% completion, he added.

Moody’s ‘Positive’ on EPM Debt Outlook

Meanwhile, Wall Street bond rater Moody’s announced April 18 that it reaffired a “positive” outlook for EPM’s publicly traded debt.

The “Baa3” ratings were “largely prompted by Moody’s assessment of EPM’s satisfactory liquidity profile,” said Moody’s senior analyst Natividad Martel.

“Moody’s believes that EPM’s US$1.0 billion delayed syndicated term loan facility will allow the company to comfortably cope this year with the increased costs resulting from the combination of the extended outage at its 560-MW Guatape hydroelectric plant and the financial impact of the tail-end of the severe El Niño phenomena currently affecting Colombia,” Martel added.

The debt rating “takes into consideration that both of these events will significantly reduce EPM’s operating cash flows as well as increase its financial leverage as it funds all its capital requirements during 2016,” according to Moody’s.

“Pending a final assessment after Guatape fully resumes operations later this year, EPM estimates the total costs from this incident could hover around US$200 million including physical damages of around US$25 million.

“However, the rating action also factors in EPM’s existing business-interruption insurance coverage as well as Moody’s expectation that key credit metrics will return in 2017 to levels more commensurate with the Baa-rating category, including FFO [funds from operations] to debt of at least 20%, on a standalone and consolidated basis.

“Today’s rating action is predicated on EPM’s expectation that the insurance coverage will allow for the recovery of the majority of the costs caused by the Guatape incident as well as the commitment by EPM’s management to reduce its outstanding financial leverage during 2017 to improve credit metrics.

“This commitment is important because it will allow EPM to comply at year-end 2017 with the financial leverage covenant embedded in three of its loan documentations which caps consolidated debt to EBITDA to 3.5x (as per the documentation definition).

“EPM attained in March the waivers from these financial institutions, mostly multi-laterals, after recording a consolidated debt to EBITDA of 3.76x at year-end 2015,” Moody’s added.

On a related financial front, EPM expects to net about US$440 million this year from the sale of its minority share in Colombian power producer Isagen, recently acquired by Canada-based Brookfield Asset Management (see Medellin Herald on January 13, 2016).

In addition, “Moody’s understands that the Municipality of Medellin (Baa2 stable) has agreed to defer the receipt of its expected portion of the [Isagen] sale proceeds in annual installments between 2017-2019 . . . This is credit positive, as it evidences the Municipality’s support of its wholly-owned subsidiary EPM,” according to Moody’s.

“EPM’s capital requirements during 2016 primarily include the funding of its planned investments (around US$1 billion) largely related to the construction of the 2,400-MW Ituango hydro-electric plant,” now 38% complete, according to Moody’s.

The US$5 billion Ituango project – due for start-up in 2019 – counts about US$2.5 billion remaining to be invested, while planned dividend distributions from EPM to the municipality of Medellin would total about US$200 million.

“EPM anticipates receiving the business interruption insurance proceeds related to the Guatape incident at the latest in 2017 which when combined with the expected improvement in operating cash flows and the anticipated repayment by its subsidiaries of intercompany loans (around US$155 million), will allow EPM’s management to meet its commitment to reduce indebtedness and improve its reported credit metrics,” according to Moody’s.

As for its peso-to-U.S.-dollar exchange risk, “EPM’s management estimates that the combination of natural and financial hedges will allow the issuer to reduce its cash exposure to potential changes in foreign exchange risk to less than 20% in 2016 and 2017, while for 2018 it currently anticipates recording a cash exposure slightly below 30%,” Moody’s added.