Fitch Affirms Empresas Publicas de Medellin E.S.P.'s IDRs; Outlook Stable

Business Wire, Sept 29, 2008

CHICAGO -- Fitch Ratings has affirmed Empresas Publicas de Medellin E.S.P.'s (EPM) foreign and local currency Issuer Default Ratings (IDRs) at 'BB+' and 'BBB-', respectively. The Rating Outlook is Stable.

EPM's ratings reflect the company's leading and strong market position as Medellin's metropolitan area utility services provider. The ratings also reflect the company's solid financial profile and its aggressive growth strategy, both, inside the country and abroad. EPM's ratings also incorporate the company's exposure to regulatory changes and political interference. EPM is a publicly owned company that has been historically exposed to political interference, however, this risk is somewhat mitigated as the company and the municipality of Medellin, EPM's sole owner, voluntarily signed a public letter of intent where the municipality limits its interference in the company to only its legal channels. (i.e. through the board of directors). Although, municipality intervention is currently limited, the company has historically chosen to charge lowered than allowed tariff for its electricity distribution business. This might not be the case in the future as tariff adjustment are expected to close the gap between the regulatory set tariff and that assumed by the company.

EPM's strong competitive position stems from the company's natural monopoly position as Medellin's power and natural gas service provider. The company's competitive position is also bolstered by its large and diversified electricity generation assets. The company is one of the largest generation company in the country in terms of installed capacity and benefits from both hydro and thermo electric generation capacity. Furthermore, the company presents a strong market position in the water and wastewater sector as well as in the telecom industry in the metropolitan area of Medellin and the country. EPM's assets portfolio provides the company with a stable and predictable cash flow stream that for the most part comes from regulated income. Going forward, the company's strategy aims to increase the company's revenue significantly through 2015, both in and out of Medellin and Colombia.

A large capital expenditure program is expected to be carried on by the company in order to support its aggressive growth strategy. This capital investment program holds the potential to pressure credit quality. However, the company's current credit profile is characterized by low leverage, healthy EBITDA margins and strong liquidity and interest coverage. EPM's EBITDA has been steadily increasing during the past five years to US$661 million as of the end of 2007 from US$428 million as of year-end 2003. Although 90% of EPM's debt is denominated in hard currency, the company has only 38% of debt exposed to foreign exchange risk as the company has hedged most of its debt. Of the US$617 million of debt reported by the company at June 30, 2008, 18% is short-term debt, 67% long-term and the 15% balance is off-balance sheet debt, mostly guarantees of subsidiaries debt.

EPM's ratings are considered strong within the rating category. Going forward, EPM is expected to increase leverage in order to finance its somewhat aggressive expansion strategy, which includes expectation of growth in and out of Colombia. Over the medium term, the company is expected to participate in bidding process for acquisition of power companies in Latin America that fit EPM growth strategy.

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