Traders Bet on $0.42-a-Day Electricity Ending: Argentina Credit

Sebastian Flores likes to keep his one-bedroom rental in Buenos Aires well-lit and cold. The country’s electricity subsidies make it a cheap habit: He pays just $0.42 a day even with his air conditioner running throughout the summer months.

“I don’t have to worry about it,” said Flores, 37.

Creditors of Argentina’s biggest electricity distributor, Empresa Distribuidora & Comercializadora Norte SA, are betting that will change. With the government announcing on March 12 it will cut in half its spending on subsidies such as electricity to rein in the biggest primary deficit in 21 years, speculation has increased that Argentina will also lift distribution rates on electric power that have been frozen since 2008.

The $300 million of debt due 2022 from Edenor, which has posted operating losses for 11 straight quarters, has returned 2.6 percent since newspaper La Nacion reported Feb. 28 that Argentina was preparing a plan to curb energy subsidies. The gain was the biggest among utility bonds in emerging markets.

“The idea is they’re going to remove the imbalances,” Ray Zucaro, who holds Edenor bonds among the $390 million of assets he manages at SW Asset Management LLC, said in a telephone interview from Newport Beach, California. “They’re going to adjust tariffs and move more towards a market system.”

Moody’s Downgrade

Optimism is building off the government’s efforts to rebuild confidence among investors such as acknowledging that prices were rising at double the reported rate and reaching an agreement to compensate Spanish oil producer Repsol SA for the seizure of YPF SA. Still, Moody’s Investors Service cut the government’s credit rating yesterday one step to Caa1.

Edenor’s notes due 2022 yield 18.9 percent after the company’s borrowing costs surged 2.6 percentage points in January following power outages that resulted in fines and the risk of a government takeover. The company has been in distress, with its debt yielding more than 10 percentage points above Treasuries, since October 2011 as annual inflation of more than 20 percent and frozen rates eroded profits.

Edenor buys electricity and passes along the cost to customers. It wouldn’t directly benefit from higher consumer prices unless the rate it’s allowed to charge for distributing energy is also uncapped or increased.

Subsidized residential customers pay an equivalent of 1.5 U.S. cents per kilowatt, less than 20 percent of the unsubsidized price and about 8 percent of what neighboring Brazilians pay, according to Edenor’s 2013 annual report. The average rate the company charges has increased 87 percent over the past decade, while Edenor’s monthly operating costs per customer surged 1000 percent, the report shows.

Electricity Subsidies

Alberto Lippi, a company spokesman, declined to comment on the removal of subsidies or if Edenor expects the government to raise distribution tariffs.

A phone call to the Planning Ministry went unanswered, and Horacio Mizrahi, a spokesman for the ministry, didn’t return an e-mail seeking comment.

Argentina began imposing caps on prices for electricity, natural gas and oil to contain inflation in 2002, when the peso lost more than two-thirds of its value and the economy shrank 11 percent in the wake of the country’s $95 billion default. Edenor has since received two tariff increases that boosted its distribution margins 28 percent in 2007 and 18 percent in 2008.

The peso fell 0.4 percent today to 7.954 per dollar as of 2:18 p.m. in New York.

Higher Rates

Argentina will spend 2 percent to 2.5 percent of gross domestic product on subsidies, Cabinet Chief Jorge Capitanich said March 12. The government now spends about twice that amount, paying almost three times as much to buy natural gas abroad than what it would cost to produce domestically, he said.

“The market is speculating the tariff increases will come because they simply don’t have any option,” Daniel Freifeld, managing director at Callaway Capital Management LLC, which owns shares of Edenor’s parent company Pampa Energia SA, said in a telephone interview from Washington.

Planning Minister Julio de Vido said the government will begin reducing subsidies in the middle of this year, Buenos Aires-based newspaper Clarin reported March 11. President Cristina Fernandez de Kirchner said Feb. 4 that Argentines who are able to pay higher prices for public services should, while the government will maintain subsidies for the poor.

Alejo Costa, head of research at Puente Hnos Sociedad De Bolsa SA, said Argentina probably won’t lift distribution rates anytime soon.

Operating Margins

“The government will very unlikely go that far, as they would rather reduce their part -- the subsidy -- first, and the measure will be highly unpopular,” he said in an e-mailed response to questions from Buenos Aires. “We’re not recommending the credit until we see a clearer path on how operating margins will recover.”

Energy demand may drop as a result of higher prices, providing some relief to Edenor as it struggles to make the investments needed to keep the city’s lights on, according to Andres Chambouleyron, a senior consultant at Chicago-based consultancy Compass Lexecon LLC.

Even after the government reduced subsidies in 2011 and 2012 to some large companies and residents in wealthier neighborhoods, Argentines shattered records for usage in December amid the hottest summer in over a century, spurring weeks of blackouts. Total residential demand for the month soared 22 percent from a year earlier, compared with an average increase of 5 percent, Leandro Montero, Edenor’s chief financial officer, said on a March 12 conference call.

Concession Threat

The government then forced Edenor to pay 78 million pesos ($9.8 million) to consumers to compensate for power outages, Montero said. In December, the government said power distributors risk losing their concessions if they don’t improve services.

Flores, who makes a living renting parking lots in Buenos Aires, said residents may be willing pay more for electricity if it reduces blackouts.

He said his monthly electricity bill is about 100 pesos.

“No one would like to pay more, but if they remove the subsidies it would be understandable,” he said. “Clearly we’re not paying what one of the most essential services really cost. And if that would help eliminate blackouts, I think that’s something most people would understand.”

Edenor’s Lippi said in January the company plans capital expenditures of $300 million in 2014 and $610.2 million over three years.

“There’s a lot of investing to do in too little time and I don’t think the government wants another summer of blackouts,” Chambouleyron said in a telephone interview from Cordoba, Argentina. “They’re reducing demand on the grids, which may mean fewer blackouts despite the lack of investment.”

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