Peso Depreciation Against U.S. Dollar Causes EPM to Post 1Q 2020 Net Loss

Medellin-based multinational utilities giant EPM on May 22 posted a COP$276 billion (US$73 million) net loss for first quarter (1Q) 2020 –solely because its debt accounting is in U.S. dollars, rather than in sharply-depreciating Colombian pesos.

“Due to accounting standards and due to the depreciation of the Colombian peso, understanding the debt that the company has in dollars, this accounting loss is generated by re-expressing it to pesos in accounting in Colombia,” according to EPM, 100% owned by the city of Medellin.

“This accounting loss is the result of the historical depreciation of the Colombian peso, which reached 24.03% in March as a consequence of the unusual behavior of world oil prices.

“In this sense, EPM must comply with accounting standards that imply that the depreciation of the Colombian peso leads to an increase in the debt balance in pesos due to the restatement of debt balances in dollars, even when the value owed in dollars does not change. The restatement negatively affects profits and generates high volatility,” the company added.

While depreciation hurts its accounting balance, “borrowing in dollars allows the business group to access the necessary funds to enable investments in infrastructure and growth, which are essential in generating employment,” the company explained.

Despite the accounting loss, EPM nevertheless maintained an investment-grade rating, actually “the highest credit rating among Colombian companies,” it noted.

During 1Q 2020, revenues rose 11% year-on-year, to COP$4.7 trillion (US$1.2 billion), while operating earnings rose 1%, to COP$1.2 trillion (US$318 million).

Earnings before interest, taxes, depreciation and amortization (EBITDA) rose 5% year-on-year, to COP$1.5 trillion (US$397 million), with an EBITDA margin of 32%.

“The pandemic caused by the Coronavirus did not impact these figures, since its appearance in the country occurred at the end of the quarter,” according to EPM.

Despite the accounting loss, “these results reflect the health and financial strength of the organization” thanks in part to portfolio diversification, added EPM General Manager Álvaro Guillermo Rendón López.

“Of the COP$4.7 trillion [US$1.2 billion] in revenue as of March 31, 2020, EPM parent company contributed 49%, foreign subsidiaries 34% and national energy and water subsidiaries 17%,” he added.

Meanwhile, profit transfers to the municipality of Medellín in 2020 — which will reach COP$1.5 trillion (US$397 million) or about COP$29 billion (US$7.7 million) weekly – “generate a decrease in equity as of March. The resources for transfers, which allow for greater social investment in the Antioquia capital, are guaranteed given EPM’s liquidity situation,” the company added.

At the end of 1Q 2020, EPM Group’s assets totaled COP$57.2 trillion (US$15 billion), up 4%, while liabilities totaled COP$34.5 trillion (US$9 billion), up of 12%. Equity now stands at COP$22.7 trillion (US$6 billion), down 6%, according to the company.