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
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.
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.
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
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Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Latin America ACR
Ing. Butty 240
Buenos Aires City C1001AFB
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William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's upgrades Edenor ratings to Caa2; outlook positive
Moody's Investors Service, Inc.
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