Fitch: EPM's Leverage Pressured by Low Hydrology, Currency Depreciation and Guatape Outage
Empresas Publicas de Medellin E.S.P.'s (EPM) leverage is expected to recover to levels commensurate with its 'BBB+' Foreign currency Issuer Default Rating (IDR) in the short to medium term, according to Fitch Ratings.
EPM's leverage metrics have weakened in recent months following: the intense drought caused by the El Nino phenomenon since September 2015; the peso depreciation; and more recently, the Feb. 15, 2016 unplanned outage of its Guatape generation asset. EPM's leverage, as measured by total debt to EBITDA, may increase to 4.5x to 5.0x in 2016 after rising to 4.0x during 2015 from 2.9x as of 2014. Fitch expects the company's leverage to return to below 3.5x by next year.
Fitch believes EPM has strong credit quality which allows the company to withstand stress periods of low hydrology. EPM's ratings could see negative actions should its gross leverage stay above 3.5x for a sustained period. This could be caused by recurring poor hydrologic conditions, aggressive investment strategy, or adverse regulatory actions to cope with current low electricity supply conditions. Fitch currently rates EPM's Foreign and Local Currency IDRs 'BBB+'. A negative action on the company's national scale rating of 'AAA(col)' may not be expected in the medium term, even if the international ratings see a one-notch downgrade.
The increase in leverage in 2015 is explained by the 34% yoy depreciation of the peso, which impacted approximately 33% of the company's consolidated debt which is denominated in USD, and by the impact of El Nino, which led to an increase in its more expensive thermoelectric generation to 9% of total generation in 2015 from the historic level of 4% registered in 2013 - 2014. This substitution of cheaper hydroelectric generation for thermoelectric generation resulted in actual EBITDA underperforming budgeted EBITDA for 2015 by approximately COP421.000 million, and partially explains the increase in leverage.
The expected continuation of El Nino at least until the month of May and the forced outage of Guatape are bound to further impact the company's EBITDA generation in 2016. EBITDA is likely to contract by 6% in 2016 given EPM's EBITDA expectation of approximately COP 3,407 billion for the year, compared to an EBITDA of COP3,609 billion in 2015. This contraction, combined with an increase in total debt of COP2.8 billion will pressure EPM's leverage metric to the neighborhood of 5.0x by the end of December 2016. The bulk of this debt increment is earmarked to finance the progress of the company's capex, mainly its 2,400 MW Ituango project, for which there is little flexibility in terms of execution.
EPM's liquidity position is considered adequate and not impacted by the expected temporary fall in EBITDA, supported by strong and stable cash flow generation derived from the provision of regulated utility services, available cash and marketable securities and available funding vehicles. Cash and cash equivalents stood at USD446 million, representing 0.5x its short term debt of USD824 million as of December 2015, a ratio that is expected to decrease to approximately 0.45x in 2016. Although the company's flexibility to issue debt is somewhat restricted by approval requirements from the Ministry of Finance, the company has been successful at accessing both the local and international debt capital markets to finance its capex and meet working capital needs, a condition expected to be maintained going forward.
The company's amortization schedule is manageable with approximately 10% of total debt coming due over the next twelve months, providing enough financial flexibility to absorb the expected incremental operational cost while its capital structure is considered adequate although with limited room to absorb the expected additional debt during 2016 which is bound to lead to a substantial deviation from Fitch's Leverage expectation.
EPM has a combined insurance coverage of up to USD700 million that encompasses both asset damage and business interruption. The company's policy requires EPM to pay a USD200 thousand deductible and absorb 45 equivalent days of business interruption associated with the total casualty cost days. EPM estimates that the total business interruption cost associated with Guatape outage may range between USD200 million to USD300 million depending on how long it takes for EPM to re-stablish the 560 MW installed capacity generation plant. Depending on the total cost scenario EPM will have to absorb between USD35 million to USD75 million of business interruption for the 45 days deductible. The final impact on EBITDA generation will ultimately depend on the timely incorporation of Guatape's eight generation units as any deviation from the initial timeframe of seven months would increase the number of interrupted days and the energy bill for total purchases in the spot market.
Guatape, a hydroelectric plant with 560 MW of installed capacity that represents approximately 17% of EPM's total installed capacity and electricity generation during 2015, went off line on February 15, 2016 after a group of cables that connect its generation units exploded. This caused an immediate fall of 10 GWh/day of its own electricity generation, which the company expects to recover partially starting in May 2016. EPM has stated that if the installation and replacement of the cables goes as planned, Guatape's capacity will be fully reestablish by September 2016. In this scenario, the decrease in the company's EBITDA due to the outage would be close to USD35 million.
At the time of the accident, EPM had Firm Energy Obligations of 38 GWh/day. The outage impacted 10 GWh/ day and therefore left the company with available capacity to meet only 28 GWh of firm energy obligations. EPM will have to meet its 10GWh firm obligations' deficit with purchases in the spot market at the spot price. Simultaneously, EPM has un-winded its contract position from 38 GWh/day to 33 GWh/day, in order to diminish its contract exposure to 5 GWh/day to contain potential losses derived from its lower available generation.
Additional information is available at www.fitchratings.com.
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