Fitch Ratings has assigned foreign and local currency Issuer Default Ratings (IDRs) of 'B-' to Empresa Distribuidora de Electricidad de San Luis (EDESAL). In addition, Fitch has assigned EDESAL's up to USD 15 million proposed debt issuance a 'B-' international scale rating and a Recovery Rating of 'RR4'. The new notes have also been assigned a long-term national scale rating of 'BBB+(arg)'. The purpose of the transaction is to refinance the outstanding amount for USD 45.3 million of the existing notes due in December 2010. The Rating Outlook is Stable. The proposed issuance will be guaranteed by EDESA's parent company Empresa Distribuidora Regional S.A. (EMDERSA).
EMDERSA is a holding company that owns three provincial distribution companies: Empresa Distribuidora de Electricidad de San Luis (EDESAL), Empresa Distribuidora de Electricidad de Salta (EDESA), Empresa Distribuidora de Electricidad de la Rioja (EDELAR), and a power generation company EMDERSA Generation Salta (EGSSA). The group's financial strategy is to place debt at the subsidiary level, while EMDERSA's consolidated cash flow guarantees each of the subsidiaries debt. As part of EMDERSA's strategy to extend its consolidated debt profile, EDESA and EDESAL are expected to issue a total of USD 45.3 million which would be used to refinance 2010 debt maturities. Fitch rates EDESA's up to USD 33 million proposed debt issuance 'B-/RR4 on the international scale and 'BBB+(arg)' on the national scale.
EDESAL's ratings reflect the expected stability of EMDERSA's consolidated revenues, the maintenance of a conservative leverage, and solid credit metrics. The ratings are tempered by exchange rate volatility and the inherent regulatory risk as there is uncertainty about the timing and amount of future tariff adjustments for the operating companies. Following the proposed debt issuances of EDESAL and EDESA, EMDERSA's consolidated leverage as measured by Debt to EBITDA is expected to remain below 1.5 times (x) and interest coverage above 6x. EMDERSA has committed credit lines that are expected to be used to redeem USD 40 million of notes on June 9, 2010. Additional credit facilities are available for the company to cancel the remaining portion of outstanding notes for USD 5.3 million. Despite difficult credit markets, the company has adequately managed refinancing risk and extended its financial commitments until 2012.
The company benefits from a stable and predictable flow of income stemming from the diversification of its assets due to the monopoly position its subsidiaries have within their respective concession contracts in each of the provinces where they operate. Also, from an operational standpoint, EMDERSA and its subsidiaries have demonstrated solid and consistent operational efficiency as it is demonstrated by its low level of energy losses. Over the last couple of years, EMDERSA showed a negative trend in its free cash flow as a result of its high levels of capital investment program and moderate tariff adjustments. As of March 2010 (LTM) EMDERSA's free cash flow (after capital expenditures and dividend payments) was negative USD 13 million. Free cash flow is not expected to increase significantly going forward on a consolidated basis.
Tariff adjustments are a critical factor in EMDERSA's group profitability and margins, particularly within the context of rising inflation and cost increases. EDESA and EDELAR's tariff structure and adjustment mechanism have already been reviewed, while EDESAL is still under a transitory regime where periodic tariff adjustments are set forth by regulator and is awaiting for a full tariff review. Positively, the company now has the option to request tariff adjustments related to cost increases, but those adjustments remain subject to the discretion of the provincial regulatory entity.
EDESAL is a subsidiary of EMDERSA. Ashmore Energy International (AEI) owns 77% of EMDERSA while the remaining 23% is owned by private investors and the Administracion Nacional de la Seguridad Social (Argentina's government-owned pension fund). EDESA has a 50-year concession to distribute energy in the province of Salta since 1996.
Applicable criteria available on Fitch's web site at 'www.fitchratings.com':
--'Fitch Corporate Rating Methodology', Nov. 24 2009;
--'Parent and Subsidiary Rating Linkage', June 19, 2007.
Additional information is available at 'www.fitchratings.com'.
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