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Global Credit Research - 09 Mar 2011
Buenos Aires, March 09, 2011 -- Moody's Latin America has assigned provisional ratings of (P)B3 on the
global scale and (P)A3.ar on the Argentine national scale to Empresa
Provincial de Energia de Cordoba's (EPEC) USD 565 million proposed
notes, with a stable outlook.
Proceeds from the notes will be used to repay an existing loan from the
Fondo de Garantía de Sustentabilidad (FGS) de la Administración
Nacional de Seguridad Social (ANSES) and to complete the financing for
the construction of a new combined cycle thermal plant at Pilar,
in the Province of Cordoba. The (P) provisional ratings will remain
in place until the full disbursement of the proposed note offering.
In case EPEC fails in obtaining the full amount as described above,
Moody's will review all ratings accordingly. Given the sizable
capital expenditures remaining to complete the plant, issuance of
these notes is crucial for the successful implementation of this investment
Moody's has reviewed preliminary draft legal documentation related to
the debt issuance and the assigned ratings assume that there will be no
material variation from the drafts reviewed and that all agreements will
be legally valid, binding and enforceable. In particular,
Moody's ratings of EPEC's notes assume the due execution of the
transfer of rights to the trustee under the Coparticipación Federal
de Impuestos and from the Resolution 220 contracts.
EPEC, wholly owned by the Province of Cordoba, is the province's
vertically-integrated utility and the fourth-largest electricity
company in the country. Because EPEC is an autarchic agency of
the provincial government, it is considered a government related
The (P)B3 and A3.ar ratings reflect the application of Moody's
joint default analysis (JDA) framework for GRIs, which takes into
account the following four input factors: i) a baseline credit assessment
(BCA) of 17 as a measure for the rated entity's standalone creditworthiness,
which is consistent with a Caa1 rating; ii) the B3 rating of the
Province of Cordoba as the support provider, as well as iii) our
estimates of a high degree of implied government support in the case of
financial distress and iv) a high default dependence between EPEC and
the province. Moody's assigns BCAs on a scale from 1 to 21 with
1 reflecting the lowest credit risk.
EPEC's BCA of 17 reflects a Caa credit profile and it captures the
company's material increase in leverage to fund the current expansion
program which has resulted in a deterioration in EPEC's historical
credit metrics. The BCA also takes into account EPEC's historically
poor operating margins and weak cash generation. Offsetting those
credit negatives, EPEC's ratings are supported by the importance
of the company for the continuity of the service provided within the Province
of Cordoba, its position as the fourth largest electricity company
in the country behind three federal regulated companies with operations
in Buenos Aires, and the province's 100% ownership.
Although sponsored by both the province and the national government,
EPEC's current expansion program principally consisting of the construction
of a new combined cycle at Pilar, is significantly above EPEC's
historical capital expenditures. At EPEC's current cash generation
levels, the project magnitude and its related financing are extremely
aggressive. However, to finance the construction and to repay
the required financing, EPEC has entered into an agreement with
Cammesa (Argentina's wholesale electricity market administrator),
to sell the energy from the new combined cycle under a "Resolution
220" contract. In addition to establishing capacity and energy
charges, this contract specifies a specific remuneration charge
related to the financing of the combined cycle plant. In addition
to the contract, the repayment of the notes will be supplemented
from the province's contributions through the Argentine co-participated
tax regime (Coparticipación Federal de Impuestos).
Even though the Province of Cordoba is the support provider and it is
rated B3/A2.ar, EPEC's A3.ar national scale
rating takes into consideration both EPEC's position within the
industry and its financial position relative to other domestic peers.
In our view, EPEC's operating performance and recent results
are weaker than those of the other rated utilities in Argentina.
EPEC's ratings also take into consideration the repayment mechanism
for the notes from the Resolution 220 contracts. While the contracts
and the expansion at Pilar are supported by the increasing demand for
electricity in the country, cash flows from Resolution 220 are dependent
on Cammesa's continuing to make payments for the duration of the
notes. Cammesa, the wholesale electricity market administrator
in Argentina, continues to face ongoing deficits and to make payments
it depends on periodic transfers from the national government.
Repayment of the notes is therefore exposed to Argentine government (B3/Stable)
credit risk. Which is also the case with respect to the other repayment
mechanism via the utilization of the co-participated tax regime
which is funded by the federal government.
Moody's National Scale Ratings (NSRs) are intended as relative measures
of creditworthiness among debt issues and issuers within a country,
enabling market participants to better differentiate relative risks.
NSRs differ from Moody's global scale ratings in that they are not globally
comparable with the full universe of Moody's rated entities, but
only with NSRs for other rated debt issues and issuers within the same
country. NSRs are designated by a ".nn" country
modifier signifying the relevant country, as in ".ar"
for Argentina. For further information on Moody's approach to national
scale ratings, please refer to Moody's Rating Implementation Guidance
published in August 2010 entitled "Mapping Moody's National Scale
Ratings to Global Scale Ratings."
EPEC's free cash flow generation has been negative in recent years
given its modest results at the operating level coupled with strong capex
needs arising from the construction of Pilar II combined cycle plant which
is not expected to go into commercial operation until the beginning of
2012. Consequently, we also expect negative free cash flow
EPEC's primary source of liquidity has been capital contributions
from the province, the province's own bank, and from
the federal government. In 2008, the company received funds
from the federal government of about ARS 140 million, which were
applied to initially finance the project. During 2009/10,
a USD 300 million loan from Anses plus additional loans from Banco de
Cordoba and the province were used to finance this investment.
EPEC's current liquidity profile is challenging and is considered
inadequate in Moody's opinion, as evidenced by a cash position
of about ARS 76 million as of September 30, 2010 vis-à-vis
short term debt of ARS 1.6 billion (including the ANSES loan due
in March and refinanced through October 2010). Consequently,
the proposed 8 year note offering is crucially important to not only facilitate
the refinancing of the existing short-term debt but also to provide
sufficient funds to finish the plant.
EPEC's stable outlook reflects the stable outlook of Cordoba's
ratings and Moody's expectation that implied support and dependence
levels will not change. It also assumes that EPEC will successfully
implement its expansion at Pilar and will begin receiving payments from
Cammesa on a timely basis.
The ratings could be downgraded if the Province of Cordoba's ratings
are downgraded or if the start-up of commercial operations at Pilar
suffer a material delay or collections under the Res. 220 contracts
or receipts under the co-participated tax regime are not available
to be transferred to the trustee.
Given EPEC's aggressive leverage position, weak liquidity
and weak operating results, a rating upgrade is unlikely in the
near term. However, EPEC's ratings or outlook could
be revised upward if there were an upgrade of the province's ratings
or if there is a material improvement in the operating results such that
Funds from Operations pre-Working Capital (FFO/Debt -- W/C)
+ Interest to Interest and Debt exceeds 2.0x and 10%
on a sustainable basis.
Empresa Provincial de Energia de Córdoba (EPEC) is the province's
vertically integrated electric utility and the fourth largest electricity
company in Argentina. As of September 30, 2010 EPEC reported
revenues of ARS 1.5 billion.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Infrastructure Finance Group
Moody's Latin America, Calificadora de Riesgo
JOURNALISTS: (800) 666 -3506
SUBSCRIBERS: (5411) 4816-2332
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
Moody's Latin America, Calificadora de Riesgo
Moody's assigns (p) B3/A3.ar ratings to EPEC's USD 565 m proposed notes; outlook stable
Cerrito 1186, 11th fl
Buenos Aires C1010AAX
JOURNALISTS: (800) 666 -3506
SUBSCRIBERS: (5411) 4816-2332
No Related Data.
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