DCR Press Releases - Hidroelectrica Piedra del Aguila S.A.

Duff & Phelps Credit Ratings Co.

DCR Rates Hidroelectrica Piedra del Aguila S.A.’s US$100 Million Euro Medium-Term Note Offering ‘BB’

Chicago (September 24, 1996) -- Duff & Phelps Credit Rating Co. (DCR) has assigned a rating of ‘BB’ (Double-B) to Hidroelectrica Piedra del Aguila S.A.’s (PDA) offering of five-year, single-maturity US$100 million Euro medium-term notes to be issued under its US$300 million Euro medium-term note program.

PDA is an Argentine hydroelectric generating company located approximately 1,200 km southwest of Buenos Aires. The company supplies electricity primarily to the spot market in Argentina’s National Interconnected System. PDA is a low marginal cost producer of electricity, which affords it high dispatch priority. The company’s assets consist of a single four-unit, dam-based generation facility with a total capacity of 1,400 mw. PDA began operations approximately two years ago and is the largest private hydroelectric generator in Argentina. Operating risks and ongoing capital needs for this type of facility are low. Proceeds from the debt issuance will be used to refinance short-term debt.

PDA operates in a competitive generation market and sells most of its electricity in the spot market at market prices. In 1995, PDA sold 89 percent of its energy into the spot market and 11 percent under short-term contract; exposure to market price fluctuations adds to business risk. In 1996, PDA has increased its term contracts to 30 percent and will continue to pursue a strategy to increase the level of sales covered by such contracts. PDA’s 1996 financial results have been negatively impacted by weather-induced lower volume output of electric energy; lower interest expense and higher spot market prices have partially offset the impact of the reduced output. Interest expense should continue to moderate going forward as debt levels are reduced.

Over the next several years, market prices for electricity in Argentina are expected to soften as a result of excess generating capacity in the system, the addition of several low marginal cost natural gas-fired units and low natural gas (fuel) prices. Projected prices incorporate all known electric generating projects scheduled to come on-line over the next several years, as well as modest growth in electricity demand. Despite expected weakening in electricity prices, PDA’s cash flow should be sufficient to satisfactorily meet its debt service obligations.

PDA is currently constrained by transmission capacity, which negatively affects its prices. Some increased transmission capacity has come on-line this year, providing some relief; by 1999, construction of a fourth transmission line to Buenos Aires from southwest Argentina should alleviate transmission capacity constraints and help support PDA’s prices. The transmission line will be constructed, owned and operated by a third party; construction will be funded by a market funding mechanism external to PDA and by a toll to be paid by the beneficiaries of the project.

PDA’s debt structure is short in duration and exposes the company to refinancing risks. Debt owed to Banco de la Nacion is rapidly amortizing over four years. As a result, projected debt service coverage (EBITDA/interest plus principal) is tight and may require the use of balance sheet cash and/or small amounts of incremental debt to service a portion of the Banco de la Nacion principal payment over the next couple of years. Projected debt service coverage assuming a more normal 25-year amortization schedule would provide PDA with a comfortable cushion throughout the projection period, which is consistent with the ‘BB’ (Double-B) rating category.

Balance sheet cash of approximately US$15 million and a three-year, unconditional shareholder liquidity facility of US$30 million somewhat buffer the refinancing risks. Ownership by financially strong shareholders with substantial equity positions is a positive. In 1995, Hidroneuquen, which is a 59 percent owner, provided PDA with a US$115 million shareholder loan during the Argentine liquidity crisis. Implicit shareholder support also helps to mitigate refinancing concerns. Hidroneuquen is a consortium including Chilgener S.A. (27 percent ownership, U.S.-dollar obligations rated ‘A-’), Transalta Energy Corporation (27 percent, unrated) and Duke Energy Corporation (17 percent owner, rated ‘AA’).

PDA’s foreign currency-denominated debt ratings incorporate the economic, political and sovereign risk factors associated with an investment in Argentina. DCR’s foreign currency sovereign rating for the Republic of Argentina is ‘BB’ (Double-B). PDA’s rating is not constrained by the sovereign foreign currency rating of Argentina and would not necessarily be upgraded if the sovereign rating were upgraded.

DCR is the leading credit rating agency in Latin America with joint venture affiliates in Argentina, Brazil, Chile, Colombia, Peru, Mexico and Venezuela.

Contact:	Daniel R. Kastholm, CFA		Miguel Arndt
		kasthom@dcrco.com		DCR Argentina
                (312)  368-2070			(011-541) 311-7414

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