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Rating Action:

Moody's upgrades Edenor ratings to Caa2; outlook positive

01 Feb 2016

New York, February 01, 2016 -- Moody's Investors Service has upgraded Empresa Distribuidora Norte S.A (Edenor) Corporate Family Rating and debt ratings to Caa2 from Caa3. The rating outlook is positive.

This rating action concludes the review initiated on this issuer on November 4th, 2015.

RATINGS RATIONALE

The upgrade takes into consideration the the ratification of a number of supportive measures announced by the new government in addition to some positive measures taken by the former administration towards the federally regulated electric utilities. Those measures included Resolution 32/2015 wherein the former Energy Secretariat in March last year took steps that produced significantly better margins for the company during 2015, through the transfer of cash funds by the government instead of an increase in tariffs paid by consumers. For the nine months ended September 30, 2015, Edenor received funds from the government for an amount of ARS 3.8 billion . Those funds allowed Edenor not only to cover its increased operating costs but also to make regular payments to Cammesa for the energy it acquired to distribute to its customers. Before Resolution 32, Edenor was not able to cover its operating costs or pay the monthly bill from Commesa for the electricity delivered.

On January 28, 2016, the newly created Ministry of Energy and Mining (ME&M) that replaced the former Energy Secretariat, enacted Resolution 7/2016 which basically incorporates the funds previously provided by Resolution 32 into higher tariffs to be paid by consumers, therefore eliminating the transfer of funds from the government to all federally regulated distribution companies and establishing a more reasonable tariff regime where consumers (instead of the government) pay for their electricity consumption. Resolution 7 also eliminates many of the other intricate mechanisms that were put in place by the former administration to provide distribution companies with some financial relief given their unwillingness to make any tariff adjustment despite the steady erosion of cash flows and operating margins that were exacerbated by high rates of inflation. The last tariff increase for distribution companies goes back as far as 2006. Resolution 7 also revokes the PUREE (program for the rational use of energy that penalized higher levels of electricity consumption), and the FOCEDE trust (fixed amount charged to consumers allotted to investments in the electricity network) and others. All of these charges presumably will be included into the new tariff design.

In spite of this clearly positive industry development, a considerable amount of uncertainty remains in place, which constrains the ratings. However, Resolution 7 states that distribution companies and the regulator (Ente Narional Regulador de la Electricidad or ENRE) should agree on a mechanism for the companies to repay the amounts owed to Cammesa. Edenor's debt with Cammesa as of September amounted to approximately ARS 3.0 billion and depending upon the terms and tenor of the repayment schedule of that debt, cash flows could be substantially impacted. Also, Resolution 7 along with the Energy Emergency decree from December 1015, require the distribution companies to improve efficiency and service quality, which will require investments significantly above recent capital expenditure levels, which will create additional pressure on Edenor's future cash flow generation. ME&M not only increased the tariff for distribution companies but also significantly increased electricity prices through Resolution 6/2016 as of January 27th which will likely result in higher provisions for bad accounts, and amplify the pressure on cash flows from increased energy losses which will be now accounted for at much higher prices. The combination of higher energy prices and a higher distribution margin will undoubtedly result in a substantially higher electricity bill for most consumers which will likely result in a decrease electticity consumption, with an overall uncertain impact on Edenor's future profitability.

Nevertheless, the positive outlook acknowledges that the recent measures taken by the regulatory authorities are directed towards returning the industry eventually to a state of normalization: more realistic prices for the energy produced and the cost of distributing that electricity which will be reflected in the monthly energy bills that consumers will pay coupled with the progressive cut to distorting subsidies of the past administration. The positive outlook also considers that Resolution 7 sets a date certain -end of the year- to complete the long waited integral tariff review (RTI) that will set the basis for the regulatory regime and tariff reviews going forward.

Liquidity Profile

Considering Edenor's improved cash generation from the increased tariffs and a comfortable debt maturity profile which primarily corresponds to the USD 180 million notes, due 2022, excluding the indebtedness payable to Cammesa, we see the company's current liquidity as adequate. We note however that Edenor's debt outstanding is denominated in USD dollars and the company does not generate any foreign currency. We do not expect that a new tariff regime will include any coverage of foreign exchange exposure and, therefore. it will remain a significant credit risk. On the other hand, we also note that Edenor had historically good access to the capital markets, both locally and internationally. Fortunately, this USD debt does not need to be refinanced until 2022 which provides sufficient time for the current administration to establish an appropriate regulatory framework and tariff review track record that enables to company to readily access the capital markets once again.

RATING OUTLOOK

The positive rating outlook incorporates our view that recent developments will positively impact on Edenor's cash flows and credit metrics and that the expected year-end review of the industry regulations and tariff schedules will be supportive for the company.

WHAT COULD CHANGE THE RATING - UP

A rating upgrade will require that the recent resolutions and the resulting tariff scheme translates into enhanced margins and operating profits on a consistent basis and cash generation that is sufficient to fund all of the company's cash needs, including the Cammesa repayments and the higher capital investment that will be required to provide adequate service to customers in line with regulatory requirements. Quantitatively, an upgrade would require Edenor to post positive operating income and positive free cash flow along with indications of future regular adjustments of tariffs to incorporate increased costs would also be important consideration for an upgrade of the ratings.

WHAT COULD CHANGE THE RATING -- DOWN

In light of the positive rating outlook and recent positive announcements for the electricity industry, near-term prospects for the rating to be downgraded are limited. However, if the recent announcements prove to be insufficient for the company to reverse its past operating losses or to improve its cash generation capability, the rating outlook could be stabilized.

Empresa Distribuidora Norte S.A (Edenor), headquartered in Buenos Aires, Argentina, is the country's largest electricity distribution company in terms of number of clients and revenues. Edenor is indirectly controlled by Pampa Energía S.A. (not rated), the largest fully integrated electricity company in Argentina. Edenor's direct controlling shareholder, Electricidad Argentina S.A. (EASA), is a wholly indirectly owned subsidiary of Pampa Energía.

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 these methodologies.

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.

Daniela Cuan
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Latin America ACR
Ing. Butty 240
16th Floor
Buenos Aires City C1001AFB
Argentina
JOURNALISTS: (800) 666 -3506
SUBSCRIBERS: (5411) 5129 2600

William L. Hess
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's upgrades Edenor ratings to Caa2; outlook positive
No Related Data.
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