New York, May 24, 2016 -- Moody's Investors Service assigned a B3 rating to Empresa Distribuidora
de Electricidad de Salta S.A. (EDESA)'s USD 65 million
senior unsecured notes. Moody's also assigned to Edesa a
B3 corporate family rating and affirmed its B3 ratings on Edesa's
outstanding notes. The outlook for all ratings is stable.
Proceeds from the USD 65 million notes will be used by the company to
prepay the outstandings on Edesa's 2017 notes, currently amounting
to USD 48 million. Through the issuance of the USD 65 million Edesa
will anticipate all of its financing needs for this year and for 2017
while extending debt maturities to 2021. The new notes will have
an amortizing profile, including a 2 year grace period for principal,
growing semi-annual payments from May 2018 to November 2020 and
a final balloon payment in 2021 equal to 40% of total.
The B3 rating for Edesa take into consideration the historically reasonable
tariff track record from the province's regulator as compared to
federally regulated utilities operating in Argentina, in spite of
the transitory disruption introduced by the Electricity Federal Convergence
Plan in 2014 by the previous federal government.
The ratings are also supported by Edesa's reasonable credit metrics
for the rating category, including a three year average interest
coverage ratio (CFO pre working capital plus interest to interest) of
3.17 times and a ratio of CFO (pre-working capital) to debt
of 28.4%, both stronger than EDESA's currently
assigned rating. Somehow counterbalancing those relative strong
metrics, Edesa's debt to capitalization ratio is weak,
negatively impacted by the double effect of the peso devaluation in both
EDESA's retained earnings and with the amount of its outstanding
The ratings also acknowledge the recent positive developments in favor
of most of the infrastructure companies in Argentina such as the reduction
in electric energy subsidies, the increases in the electricity distribution
tariffs for both the federal and provincial distribution companies and
the improved operating environment for regulated companies overall.
Recent measures will not only improve the infrastructure companies' financial
strength in 2016 but also will bring credit-positive structural
changes to Argentina's regulatory frameworks in particular for the regulated
distribution and generation companies.
In particular, the Provincial regulator in Salta (Enresp) has adopted
a proactive attitude towards the company, as evidenced by its quick
reaction to changes in economic policy. Salta's regulator
has not only authorized recurrent tariffs increases tied to cost recovery
in the past but also finished --in 2012- the RTI (integral
tariff review) as originally established by the Concession Agreement.
The only adverse event in terms of the tariff mechanism occurred in 2014
(repeated in 2015) due to the Province's adherence to the "Convergence
Plan" promoted by federal authorities of the previous administration.
Nevertheless, to offset the lack of cost recovery during those years,
Edesa received additional funds from the Province that allowed the funding
of the company's investment program. Moreover, as soon
as the "Convergence Plan" was approaching its expiration date
in December 2015, the Provincial regulator allowed Edesa to implement
the tariff increase already approved in 2014 (19.38%).
Furthermore, on January 14, 2016, and on March 17,
2016, Enresp also allowed the increase previously authorized in
2015 (16,70%), which in our view materially differentiates
Enresp from the federal regulatory authorities' track-record
in recent years.
The ratings are constrained by an overall uncertain and unpredictable
regulatory track record for regulated utilities in Argentina in recent
years. Although Salta's Provincial regulator has been more
proactive and supportive of utilities when compared to federal regulators
in recent years, the overall regulatory framework in Argentina remains
uncertain. We recognize some recent positive developments in favor
of regulated utilities nation-wide that will likely bring credit-positive
structural changes to Argentina's regulatory frameworks. The opening
of a one-year period for the regulatory authorities and the companies
mandated by the Energy Ministry to put forward a more transparent and
predictable framework for tariff reviews (RTI) is in our opinion a clear
indication of a positive structural change. The Energy Ministry
mandated that regulatory authorities undertake --within
a year- an integral review of the current framework, which
we expect will increase transparency and predictability. Once in
place, we expect the revised framework to set a clear path for the
regulated utilities' future tariff revisions and for the timely recovery
of their increased costs while providing sufficient returns to facilitate
the required investments in network maintenance, increased efficiency
and necessary expansions. We also note that, once in place,
future tariffs or further changes to the regulatory framework will require
consistent application and some passage of time before the structural
changes and new regulatory regime will be considered effective and predictable.
The ratings also factor-in the small size of the company in terms
of revenues, number of clients and service area. From a comparison
stand point Edesa's market position is considered weaker than that
of other regulated utilities with operations in the greater Buenos Aires
Edesa's notes are dollar denominated and will not be hedged;
therefore, they will be fully exposed to further devaluation risk.
Counterbalancing the company's exposure to potential FX risks,
we believe that the amortizing profile of the notes gives the company
some flexibility to cope with any unexpected or sudden devaluation.
In addition, the company's internal cash generation is robust,
with average historical and projected cash flow from operations to debt
(CFO -pre working capital- to debt) of around 25-30%.
The stable outlook reflects Moody's expectation that Edesa will continue
to maintain a proactive relationship with the Provincial regulator and
that provincial regulations will continue to be supportive in relation
to cost recoveries and authorized returns. The stable outlook is
also in line with Moody's stable outlook for Argentina's government bond
rating and Moody's view that the creditworthiness of the company continues
to be highly dependent on the credit quality of the Argentine government
given the domestic nature of its operations.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Given the inter-dependence of the company on the government rating,
an upgrade of the sovereign rating could result in positive rating actions
for Edesa. The timely finalization of the RTI (expected to be completed
in 2017) would be also an important consideration for an upgrade.
In light of the latest positive developments for regulated utilities and
the stable outlook, Moody's does not anticipate a rating downgrade
in the near term. Yet, the assigned ratings would face downward
pressure if the government of Argentina's rating or outlook were to be
downgraded or changed to negative. Or if the approved tariff increases
for Edesa and the expected timely recovery of increased costs does not
materialize leading to a weakened credit profile. Quantitatively,
if Edesa reports Interest coverage (FFO + interest to interest) below
2.5 times, CFO (pre working capital) to debt below 20%
and RCF to debt below 15%, there could be negative pressure
on Edesa's ratings.
The principal methodology used in these ratings was Regulated Electric
and Gas Utilities published in December 2013. Please see the Ratings
Methodologies page on www.moodys.com for a copy of this
Empresa Distribuidora de Electricidad de Salta S.A. (Edesa)
is the sole electricity distribution company operating in the Province
of Salta in northern Argentina. On August 12, 1996,
Edesa was granted a 50-year concession by the Salta Provincial
government to distribute electricity on an exclusive basis within the
Province's territory. Edesa's current indirect controlling shareholder
is SIESA (not rated), an Argentinean investment group, through
the holding of 78.44% of Edesa Holding SA (Edesa's direct
holding company parent).
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
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
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Latin America ACR
Ing. Butty 240
Buenos Aires City C1001AFB
JOURNALISTS: (800) 666 -3506
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William L. Hess
MD - Utilities
Corporate Finance Group
Moody's assigns a B3 to EDESA up to USD 65 million senior unsecured notes; stable outlook
Moody's Investors Service, Inc.
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New York, NY 10007