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TEXT-S&P cuts Empresa Distribuidora y Comercializadora Norte to 'CCC'
June 8, 2012 / 5:51 PM / 5 years ago

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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