EPM Wins Hidroituango Insurance Claim Worth Trillions; Finance Outlook Dramatically Improves

EPM general manager Jorge Londoño de la Cuesta revealed in a September 17 press conference here in Medellin that insurer Mapfre just issued a letter of coverage worth trillions of Colombian pesos for damages at the under-construction, US$5 billion Hidroituango hydroelectric plant in Antioquia.

The exact amount of payment won’t be known for months, as a technical panel must now prepare a detailed, itemized report on the exact value of each area of the dam works and machinery damaged by a diversion tunnel collapse last year, Londoño explained.

While EPM has insurance coverages totaling about COP$8 trillion (about US$2.5 billion) for physical damages as well as US$628 million for lost power sales, EPM likely won’t be getting the maximum amount, as the damages (as roughly estimated to-date) probably will come-in at below that total, he estimated.

EPM expects that the first sales of power from Hidroituango will be in December 2021, rather than the initially planned start-up in December 2018 — a date that was forcibly postponed by the April 2018 tunnel collapse.

So, until the company has an exact startup date — and an exact market quote for Colombian power prices matching that start-up date — it can’t yet quantify the value of the insurance coverages for lost and delayed Hidroituango power sales. But the payment likely will be less than the US$628 million policy-coverage maximum for lost power sales, he estimated.

“The positive response of the insurer to the efforts made by EPM to obtain the coverage for the incident was based on the investigations and findings advanced by the insurer autonomously, which concluded that the cause of the contingency is framed in the terms and conditions of the policy and therefore we will have coverage,” Londoño said.

“In this sense, once the value of the incident has been quantified, and taking into account the conditions and limits established in the insurance policy, the [insurance payment] resources will be reimbursed to EPM and will enter into the financial statements of the project.

“It is important to highlight that the insurer appointed a series of national and international experts including engineers, geologists and geo-technicians specialized in dams and underground works, as well as lawyers, among others, to review the technical information of the main fronts of project work including tunnels, caverns, dam and landfill. Likewise, they reviewed the designs, plans, technical specifications, construction processes, work logbooks, risk matrix and pre- and post-contingency studies.

“The work of this group of experts also included 12 visits to the project, multiple meetings and in-depth interviews with the EPM technical team, the main contractors and the board of experts,” he added.

The letter from Mapfre confirming insurance coverage for Hidroituango is a huge step forward, because “if we’d done something wrong, then they wouldn’t agree to pay us” for damages, he explained.

“The causes of the [tunnel collapse] are covered by this policy. This was an unpredictable accident, not negligence,” Londoño added.

“Now we’re entering the second phase, where the experts will adjust the amount of payment and determine when they pay. This involves a detailed inventory of all the damages and the value of each,” up to a maximum US$2.5 billion in insurance coverage for physical damages.

Medellin Mayor Federico Gutierrez added at the press conference that the insurance coverage announcement not only is good news for EPM but also for the city of Medellin, which gets about 25% of its annual revenue from the city-owned utility.

Chile Asset Sales

On a related financial front, EPM announced September 17 that it inked a US$138 million sale of its Chile wind-power unit to AES Gener SA and its Norgener Renovables SpA subsidiary, following a plan announced last year to sell “non-strategic” assets — aiming to boost liquidity as a result of the Hidroituango project delay.

Combined with EPM’s continuing sale of its 10% stake in shares of Colombian power transmission giant ISA, its sale of Chile assets, its successful US$1.3 billion bond sale this year, and now the upcoming multi-trillion-peso Hidroituango insurance payment, EPM’s financial outlook has improved dramatically when compared to market worries in the aftermath of the Hidroituango tunnel collapse last year, Londoño added.