SAO PAULO--(BUSINESS WIRE)--Fitch Ratings has maintained Energisa S.A.'s (Energisa) and its subsidiaries' Issuer Default Ratings (IDRs) on Watch Negative. A full list of the rating actions follows at the end of this press release.
KEY RATING DRIVERS
Energisa one step closer to complete the
acquisition of Grupo Rede.
On January 28th, 2014 Energisa received the regulatory approval from Brazilian Regulatory Agency (ANEEL) for its acquisition and investment plan of Grupo Rede. Energisa has 75 days to fulfill other precedent conditions of the bankruptcy protection plan, after which the target companies shares will be released for negotiation by the local court and the acquisition can be completed.
On December 10, 2013 Fitch has placed Energisa's and Subsidiaries' IDRs on Negative Watch reflecting the expected pressure of the potential acquisition of Grupo Rede on Energisa's consolidated credit metrics. The reorganization and investment plan of Grupo Rede comprises the incorporation of BRL4.8 billion of Grupo Rede's net debt, after the write-off of part of debt at Grupo Rede's holdings level, and operating integration with its eight distribution companies. This integration poses a significant credit and operational challenge to Energisa since Grupo Rede's subsidiaries operate in an extensive area with an operational performance below average. The conclusion of the acquisition could result in a one-notch downgrade of all ratings, if a firm proposal of capital increase of Energisa is not carried out in the near term or is insufficient to make credit metrics compatible with current ratings.
The ratings reflect Energisa's ability to keep its consolidated leverage ratios at levels consistent with the assigned rating category, even during a time of higher capital expenditures. The group currently presents a solid financial profile, underpinned by a robust liquidity position, and a lengthened debt maturity profile. The analysis also incorporates Energisa's robust operational cash flow generation, with the negative impact of the third tariff review cycle in its distribution companies to be partially offset by potential new efficiency gains and increase in the generation business.
The group's credit profile is also bolstered by its diversified power distribution concessions, which dilutes business risk, and the benefits of a growing client base. Fitch considers the investments in the generation segment as positive, based on asset diversification and more predictable cash flow generation. The generation segment has improved the group's business profile and should represent 20% - 25% of its consolidated EBITDA in 2015, considering the current asset base. Energy generation activities benefit from long-term energy sales contracts with fixed prices adjusted for inflation, which mitigate the cash flow volatility related to periodical tariff reviews of Energisa's energy distribution subsidiaries.
The one-notch difference between Energisa's ratings and those of its subsidiaries is based on the relevance and structural subordination of the holding company's debt compared to that of the operating companies. The holding company debt represented approximately 22% of net consolidated debt as of Sept. 30, 2013.
Leverage to Increase After Grupo Rede Acquisition
Fitch expects the acquisition of Grupo Rede will have a material impact on Energisa's leverage ratios. On a pro forma basis, Fitch expects a consolidated net leverage between 4.0 times (x) and 4.5x, considering a recurring EBITDA for Grupo Rede of BRL1.0 billion, the incorporation of BRL4.8 billion in net debt of the acquired group including the upfront payment of BRL500 million for Grupo Rede's creditors, and potential new debt issuance to finance immediate capital expenditures at the acquired distribution companies. In the last twelve months (LTM) ended Sept. 30, 2013, Energisa presented a total debt-to-EBITDA ratio of 4.1x and a net debt-to-EBITDA ratio of 3.0x. Fitch expects Energisa to fund the acquisition and new capex requirements with appropriate funding and potential equity contribution from shareholders, as well as refinance the existing debt at Grupo Rede's subsidiaries at lower interest rate and lengthened maturity profile.
Sound Operational Profile
Energisa's consolidated cash flow has benefited from a higher than expected increase in energy consumption in the group's concession areas, and, to a lesser extent, from the gradual improvement of its operational indicators. Energy distributed in its concession areas increased 4.7% in 2012 and 11.9% in the first nine months of 2013 compared with the same period of the previous year. The group has consistently reduced its energy losses, both on a consolidated basis and individually. Currently, all of Energisa's distribution companies report losses below the maximum percentages established by the Aneel, which is an important factor regarding their operating cash flow.
Fitch expects a moderate negative impact on Energisa's consolidated operational cash generation in the next years as a consequence of the third tariff review in all its five distribution companies in 2012 - 2013. This effect can be partially offset by the start-up of some generation projects, which should increase the group's energy generation installed capacity from current 253 MW to 363 MW by 2017. On Sept. 2013, 150MW of new generation installed capacity were available to operate and are expected to add BRL80-90 million to the group's consolidated net revenues in a yearly basis. In the LTM ended Sept. 30, 2013, consolidated net revenues and EBITDA reached BRL3 billion and BRL688 million, respectively, excluding construction revenues, which favorably compares with BRL2.9 billion and BRL640 million reported in 2012.
High Capex Needs to pressure FCF
Energisa's free cash flow (FCF) is expected to stay negative in the following years as a result of high capital expenditures and dividend distribution. Fitch considers the investments in the generation segment as positive, based on more predictable cash flow generation. Cash flow from operations (CFFO) was BRL828 million for the LTM ended Sept. 30, 2013. Cash generation was used to fund capital expenditures of BRL648 million and the dividend distribution of BRL181 million, resulting in a slightly negative FCF of BRL1 million. The acquisition of Grupo Rede can put more pressure on Energisa's cash flow in the first years as a result of additional capex requirements. Operational improvements and synergies should be obtained gradually.
Robust Liquidity and Adequate Debt Profile
Energisa presents comfortable liquidity levels on a consolidated basis. As of Sept. 30, 2013, the group reported BRL767 million of cash and marketable securities, which covered its short-term debt by 2.3x. For the same period, the cash + CFFO-to-short-term debt ratio was 3.7x, evidencing the company's adequate debt repayment schedule. Debt is concentrated in the long term, with maturities well-distributed over time.
RATING SENSITIVITIES
The ratings could be downgraded by one-notch after the conclusion of Grupo Rede's acquisition. After this event, Fitch will monitor Energisa's operational performance in the new distributors, with potential improvements in cash flow generation and credit metrics to benefit the overall credit profile of the group. An upgrade in the ratings is not likely in the short-term.
Fitch has maintained the following ratings on Negative Watch:
Energisa
--Foreign currency IDR 'BB';
--Local currency IDR
'BB';
--Long-term national scale rating 'A+(bra)'; and
--Long-term
national rating of the third debentures issuance, in the amount of
BRL150 million, due in 2014, 'A+(bra)'.
Energisa Paraiba - Distribuidora de Energia S/A (Energisa Paraiba)
--Foreign
currency IDR 'BB+';
--Local currency IDR 'BB+';
--Long-term
national scale rating 'AA-(bra)'; and
--Long-term national rating
of the first debentures issuance, in the amount of BRL80 million, due in
2014, 'AA-(bra)'.
Energisa Sergipe- Distribuidora de Energia S/A (Energisa Sergipe)
--Foreign
currency IDR 'BB+';
--Local currency IDR 'BB+';
--Long-term
national scale rating 'AA-(bra)'; and
--Long-term national rating
of the second debentures issuance, in the amount of BRL60 million, due
in 2014, 'AA-(bra)'.
Energisa Minas Gerais - Distribuidora de Energia S/A (Energisa Minas
Gerais)
--Foreign currency IDR 'BB+';
--Local currency IDR
'BB+';
--Long-term national scale rating 'AA-(bra)'; and
--Long-term
national rating of the seventh debentures issuance, in the amount of
BRL60 million, due in 2014, 'AA-(bra)'.
In accordance with Fitch's policies the issuer appealed and provided additional information to Fitch that resulted in a rating action that is different than the original rating committee outcome."
Additional information is available at 'www.fitchratings.com`.
In accordance with Fitch's policies the issuer appealed and provided additional information to Fitch that resulted in a rating action that is different than the original rating committee outcome.
Applicable Criteria and Related Research:
--'Corporate Rating
Methodology' (Aug. 5, 2013);
--'National Scale Ratings Criteria'
(Oct. 30, 2013).
Applicable Criteria and Related Research:
Corporate Rating
Methodology - Effective from 8 August 2012 - 5 August 2013
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
National
Scale Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=819876
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