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Rating Action:

Moody's assigns B3 rating to Pampa's proposed peso global notes

22 Jun 2017

New York, June 22, 2017 -- Moody's Investors Service ("Moody's") has assigned a B3 global scale rating to Pampa Energia S.A. ("Pampa")'s proposed up to USD500 million Argentine-peso equivalent in global notes due 2022. The notes will be denominated in Argentine pesos but payable in US dollars in New York, at a specified foreign exchange rate. The notes will be registered under rule 144A/Reg. S and governed by New York law. The outlook on the ratings is stable.

RATINGS RATIONALE

Pampa's B3 ratings consider the company's low to negative free cash flow, although fueled by expansionary capital investments in natural gas and power projects, which have favorable prospects; low interest coverage and low retained cash flow compared to total debt, pro forma for the proposed notes; as well as exposure to volatile, highly-regulated power and oil and gas industries in Argentina. On the other hand, these factors are mitigated by the company's strategy to focus on businesses with positive pricing outlooks, namely natural gas production and power generation; the expected stable demand for electricity and strong demand for natural gas in Argentina; as well as low foreign exchange risk.

About half of the company's costs, mainly in the oil and gas business, is linked to the US dollar and, pro forma for the proposed notes, close to 75% of the company's debt will be in US dollars. However, close to 80% of Pampa's EBITDA is generated in the gas and power generation businesses, whose sales are US dollar-linked, although dependent on prevailing exchange rate. While the peso/dollar exchange rate had been controlled and kept low by the Argentine government in the past, since the new government took place, in early 2016, the exchange rate has been set by the market, with limited government intervention. The risks of convertibility of local currency into US dollars and transferability of foreign currency abroad are high and considered in Pampa's ratings.

Pampa's free cash flow will be low to negative in the next two years given high expansionary capital expenditures compared to operating cash generation. However, the company's debt burden will not be materially high compared to retained cash flow in the medium term: retained cash flow/total debt ratio will hover around 30% in the next two years (Moody's considers the USD170 million owed to Cammesa, Argentina's wholesale power market administrator, as short-term payable, not financial debt). Likewise, Moody's forecasts that the company's Moody's-adjusted EBITDA/interest expenses will be above 4 times in 2017 and 2018, which is low for a volatile business profile.

Pampa operates in the power as well as the oil and gas industries in Argentina, which are highly-regulated and pose high operating risk. But the industry fundamentals in Argentina for the gas industry in particular are favorable since local natural gas production supplies only 75% of the country's needs, while the 25% difference is imported from Bolivia and Chile, among others, a situation which should prevail for the next 6 to 7 years, at current local natural gas production growth rate. This dependence on imports of gas, which is paid in kind and with US dollars, a scarce currency in the past for the country, sustains solid prospects for the gas industry in the country in the medium to long term. For instance, tight and shale gas prices were fixed for 2018-21 at favorable levels, starting at USD7.5/MMBTU in 2018 and declining to USD6/MMBTU in 2021. In turn, while margins in the refining business have been under pressure given low economic growth and demand for oil products, as well as labor pressure for high wages and benefits, this line of business is small on a consolidated basis.

In the electricity segment, it is positive that, during the first quarter 2017, the government approved a new pricing scheme for power generators, pegging prices to the US dollar; in addition, generators will now collect full amounts from Cammesa, with practically no payment delays. In turn, in March 2016, the Secretariat of Energy of Argentina announced adjustments in electricity prices as part of an effort to normalize tariffs ("the RTI process") and to allow participants in the electricity sector to cover costs resulting from inflation and currency devaluation. The Ente Nacional Regulador de la Electricidad (the Argentine National Electricity Regulator, or the "ENRE") issued the new 5-year tariff schedule for Edenor, Transener and TGS with granted tariff review increases of 98%, 215% and 1.100%, respectively.

As of March 2017, Pampa's liquidity profile was good: its USD753 million in cash & equivalents plus USD900 million in EBITDA compared to close to USD750 million in capital expenditures and USD300 million in taxes and interest expenses for the following 12 months. Similarly, Pampa's refinancing risk is low since in the reminder of 2017 debt maturities amount to only USD112 million and the next major debt payment, of USD500 million, is not due before 2023. However, as per the company's financial policies, it would always maintain a minimum of up to USD100 million in cash at all times, which would not be available to repay debt. In addition, the company does not count with revolving credit facilities.

The stable outlook on Pampa's ratings reflects Moody's expectation that the company will be able to steadily, though slowly, improve cash generation based on adequate electricity tariffs and natural gas prices, fueled by lower local supply vis-a-vis demand. Moody's believes that Pampa's credit metrics related to debt burden and interest coverage will remain in line with its B3 rating in the next 24 months or more.

Pampa's B3 ratings could be downgraded if the company materially increases its leverage, measured as retained cash flow (funds from operations less dividends) to total debt lower than 10%, or if its interest coverage, as per EBITDA to interest expense, declined to below 2 times with limited prospects of a quick turnaround. Also, a deterioration of the company's liquidity profile could lead to a rating downgrade.

In turn, a rating upgrade could occur is Pampa's retained cash flow to total debt ratio is higher than 35% and its EBITDA to interest expense rate is above 6 times on a sustainable basis. An upgrade on the ratings of the Government of Argentina would not necessarily translate into an immediate upgrade of Pampa's ratings.

The principal methodology used in this ratings was Independent Exploration and Production Industry published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Pampa is engaged in generation, distribution and transmission of electric power in Argentina as well as on oil and gas production, refining, petrochemicals and hydrocarbon commercialization and transportation in Argentina and, to a lesser extent, in Venezuela. As of March 31, 2017, Pampa was the third largest power generator in Argentina, with approximately 10.6% market share. In addition, it was the fourth oil and gas producer in the country, with an equity oil and gas production of over 70 thousands of barrels of oil equivalent per day.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Nymia C. Almeida
VP - Senior Credit Officer
Corporate Finance Group
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Mexico
JOURNALISTS: 1 888 779 5833
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Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 800 891 2518
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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