TEXT-S&P cuts Empresa Distribuidora y Comercializadora Norte to 'CCC'
June 8 - Overview -- We expect Argentina-based electricity distributor EDENOR's very poor financial performance to continue in the second half of 2012, which could hinder its ability to continue complying with its financial obligations. -- The currently high political and regulatory risks and lack of tariff adjustments would provide relatively low incentives for its ultimately parent, Pampa Energia to provide financial support. -- We are lowering our global scale ratings on EDENOR to 'CCC' from 'CCC+'. -- The negative outlook reflects our expectations that amid further deterioration of its cash flow generation and absent any rebalancing of the concession, we could continue lowering the ratings. Rating Action On June 8, 2012, Standard & Poor's Ratings Services lowered the global scale ratings on Empresa Distribuidora Y Comercializadora Norte S.A. (EDENOR) to 'CCC' from 'CCC+', including the corporate credit rating. The outlook is negative. Rationale The rating action follows EDENOR's weaker-than-expected financial performance in the first quarter of 2012 and our expectation that its credit metrics will continue to worsen during the rest of the year. In addition, if delays in obtaining tariff increases persist, while operating costs increase, we believe that EDENOR would struggle to meet its financial obligations during that period. Given these financial difficulties, EDENOR has decided to sell some of its subsidiaries, including its 77.2% stake in Empresa Distribuidora Electrica Regional (EMDERSA) and 99.9% in AESEBA-both of which received several tariff increases and were, in our opinion, much healthier from an operational and financial perspective. EDENOR recently sold its controlling stake in Empresa Distribuidora San Luis S.A. for $27 million and in Empresa Distribuidora de Energia de Salta S.A. for ARP99 million. Additionally, it has announced its agreement to sell EMDERSA Generacion Salta and an option to sell its stake in Empresa Distribuidora de Electricidad La Rioja (EDELAR) for about $31 million. The transactions are subject to the successful spin-off of several assets, the creation of new holding companies, and the exercise of the option to sell EDELAR. Although we believe these transactions will provide some additional cash to EDENOR, the proceeds won't be sufficient to cover capital expenditures and interest payments in the second half of 2012. Our ratings on EDENOR reflect Argentina's high political and regulatory risk as evidenced by the sector's difficulties in adjusting tariffs while operating cost increase due to high inflation, the company's exposure to foreign-exchange risk (its cash generation in Argentine pesos while its debt is dollar-denominated), high capital expenditure, and weak liquidity position. The ratings also incorporate EDENOR's solid competitive position, stemming from both its exclusive concession to distribute electricity in northern and northwestern greater Buenos Aires and its favorable debt maturity profile. In 2012, following the deconsolidation of EMDERSA and assuming no tariff increases, we expect negative consolidated EBITDA generation and FFO. Given the measures to reverse the negative trend are beyond the company's control, we are concerned about EDENOR's ability to comply with its financial obligations during the second half of 2012. Additionally, we believe that current political and regulatory risks and EDENOR's increasing cash shortfalls would discourage its ultimate parent, Pampa Energia, to provide financial support. EDENOR is Argentina's largest electricity distribution company by customers, with about 3 million customers and annual power sales of about 25,000 gigawatt-hours (both figures include AESEBA S.A.). Since 1992, EDENOR has held a 95-year contract to distribute electricity in the densely populated northwest sector of the greater Buenos Aires province and the northern sections of the city of Buenos Aires. Electricidad Argentina S.A. (EASA; CCC/Stable/--) owns 51% of EDENOR (excluding share repurchases). Pampa owns EASA. Liquidity We assess EDENOR's liquidity position as "weak" (as defined by our criteria), based mainly on its limited cash flow generation. As of March 2012, the company's cash holdings and short-term liquid investments totaled $48 million, compared with short-term debt of about $15 million. If the current conditions remain unchanged, we believe that the company's financial situation will continue to deteriorate, resulting in negative free operating cash flow of $100 million - $150 million between April 2012 and March 2013. As of March 31, 2012 EDENOR and its subsidiaries were in compliance with all their debt covenants. Outlook The negative outlook reflects our expectations that amid further deterioration of its cash flow generation and absent any rebalancing of the economics of the concession, we could lower the ratings. We might consider revising the outlook to stable if the company's cash generation strengthens as a result, for example, of tariff increases or other mechanisms. Related Criteria And Research -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- Key Credit Factors: Business And Financial Risks In The Investor-Owned Utilities Industry, Nov. 26, 2008 -- 2008 Corporate Ratings Criteria, April 15, 2008 Ratings List Downgraded To From Empresa Distribuidora Y Comercializadora Norte S.A. Corporate Credit Rating CCC/Negative/-- CCC+/Negative/-- Senior Unsecured CCC CCC+ Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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