The upgrade on Genneia's NSR has been prompted by Genneia's successful completion and startup of its 80 MW wind farm project in Rawson. Capacity factors and generation levels after the start-up in line with our previous expectations reinforce this positive rating action. In addition, Genneia's revenues arising from its other main business line, Energía Distribuida (ED) have gained greater predictability due to the extension of the term of the contracts under the framework agreement reached on April by the company and the Energy Secretariat. In spite of reduced prices under the renewed ED contracts, the company has extended its contractual horizon to 7 years from the original 3 year contract. This agreement going forward should generate stable revenues under the ED contracts of approximately USD 120 million per year .
The ratings are also supported by the various payment mechanisms available for debt repayment. Most of Genneia's outstanding debt is payable from direct transfers to a trustee arising from collections under the Res. 220 ED contracts and by payments under the off-take contract with Cammesa for the wind farm production, which has a fixed price per MWh for a 15-year period. Consequently, Genneia's improved operating performance after the initial delays in the implementation of its ED project should result in significant debt reduction over coming years.
Nevertheless, the ratings remained mainly constrained by the concentration of its operations in only the Argentinean market, which has been highly unpredictable in recent years. Furthermore, most of Genneia's cash flows arise from contracts where the off-taker is Cammesa, an federal government agency that administers the wholesale electricity market in Argentina. Cammesa administers not only the operation of the system but also manages its collections and payments. Since the price paid for electricity by most consumers is not enough to cover electricity production costs, Cammesa faces an ongoing operating deficit that is currently financed with federal government resources to facilitate payments to the producers. This represents a high degree of exposure to the Argentine government credit risk (B3, Negative), which adds a constraint to the ratings.
Additional constraining factors are Genneia's relatively tight liquidity and limited financial flexibility. In particular we see Genneia's limited flexibility under its current bank loan covenants as challenging over the short term. Longer term, we expect Genneia's operations to stabilize leverage to decline and financial flexibility to improve.
The stable outlook reflects our expectation that Genneia will stabilize its cash flows and operations as it approaches the end of the current fiscal year while reducing leverage over time.
Negative pressure on the ratings or outlook could occur if Genneia's financial policy becomes more aggressive than expected. Specifically, we would become concerned should debt to EBITDA exceed 4.0x times; interest coverage (CFO pre WC + Interest/Interest) falls below 1.5x or RCF /Debt becomes lower than 15%.
The ratings could also come under downward pressure if payments from Cammesa begin to experience significant delays. In additional, a negative rating action at the sovereign level could also add further downwards rating pressure.
Given the recent up-grade and the current constraining factors, limited prospects exist for a further upgrade over the near term.
Longer term a rating up-grade would require Genneia to continue to generate stable cash flows from its ED business and from its wind generation plan for which we would expect capacity realizations of around 40%. Quantitatively, a rating upgrade would require Genneia to generate CFO (pre WC) to debt of above 20%, and positive levels of FCF on a sustainable basis.
Genneia S.A., headquartered in the province of Buenos Aires, Argentina, initiated operations in 1991 in the gas distribution and transportation business under its previous denomination "Emgasud". However, since 2008 power generation has been its main business, contributing more than 80% of its total revenues. For the last 12 months ending June 2012, Genneia reported revenues of approximately USD 150 million.
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Daniela Cuan Senior Analyst Infrastructure Finance Group Ing. Butty 240 16th Floor Buenos Aires City C1001AFB Argentina 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 StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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