SAO PAULO--(BUSINESS WIRE)--Fitch Ratings has assigned long-term foreign and local currency Issuer Default Ratings (IDRs) of 'BBB' and long-term national rating of 'AAA(bra)' to Itaipu Binacional (Itaipu). The Rating Outlook is Stable.
KEY RATING DRIVERS
Itaipu's ratings reflect its strong credit profile linkage with the Federative Republic of Brazil (long-term IDR 'BBB', Outlook Stable). Brazil has been historically responsible for the acquisition of 90% to 94% of the energy produced by Itaipu and guarantees, through the National Treasury, 99.2% of the company's debt. These characteristics reduce Itaipu's exposure to the weaker sovereign risk of the Federative Republic of Paraguay (long-term IDR 'BB-', Outlook Positive).
The ratings also incorporate Itaipu's adequate liquidity position and cash flow predictability, resulting from the Itaipu Treaty signed between Brazil and Paraguay. This Treaty actually defines the annual tariff as sufficient to cover all operating and maintenance costs, capital expenditures, financial obligations, and has a true-up mechanism to adjust for possible mismatches to be recovered or give backs in the following year; the tariff is in dollars. Itaipu is strategically important for both countries, with the company supplying approximately 17% of the demand for energy in Brazil and 75% of the demand in Paraguay; it has an excellent track record of operating efficiency.
Cash Flow Predictability
Itaipu's credit profile benefits from its known cash flow. The bi-lateral treaty provides the company with the long-term firm commitment of both countries to remunerate the company for 87% of its installed capacity of 14,000 MW and the total energy production of the plant, besides the annual definition of a tariff sufficient to cover all operating costs, shareholder obligations and debt service, which reduces its cash flow generation risk.
Brazil and Paraguay make use of Centrais Eletricas Brasileiras S.A. (Eletrobras) and Administracion Nacional de Eletricidad (Ande), respectively, the two shareholders of Itaipu, for the sale of its energy. In the case of Eletrobras, the Brazilian regulator allocates a proportion of the low cost Itaipu power to approximately 30 Brazilian electric distribution companies, the most representative being Eletropaulo with 15.67%, in 2014. Any mismatch in Itaipu's cash inflows to outflows due to currency fluctuations, payment delays by the Brazilian distribution companies, as well as other budget differences are offset when the tariff for next year is determined.
Itaipu's free cash flow (FCF) continues to be robust and approximates annual debt amortizations. Furthermore, the company's financial profile benefits from adequate liquidity to cover any possible cash flow mismatches. In 2013, the company's cash flow from operations (CFFO) was USD956 million and FCF was USD920 million, against net debt amortization of USD1.1 billion. During that same year, the net revenue of USD3.8 billion was in line with the previous year, while EBITDA increased to USD2 billion versus USD1.6 billion recorded in 2012; EBITDA margins were 52%. At year-end 2013, the company's cash and marketable securities position was USD388 million, while the ratio (cash and marketable securities + CFFO)/short-term debt was 1.1x.
High Leverage Not a Concern
Itaipu's high financial leverage is quite manageable given the tariff setting mechanism embedded in the bi-lateral treaty between Brazil and Paraguay. Further, virtually all of the debt is currently owed either to Brazil's Federal Government or Eletrobras, and guaranteed by Brazil's National Treasury. At year-end 2013, the total debt was USD15.5 billion with USD1.2 billion falling due over the next 12 months; debt has decreased to these levels from USD18 billion at year-end 2010 and carries a 7.5% coupon. The total debt/EBITDA and net debt/EBITDA ratios were 7.8x and 7.6x in 2013.
Fitch expects Itaipu's net debt/EBITDA ratio should remain at around 6.0x to 8.0x until 2017. Itaipu's indebtedness should gradually decline and be fully amortized by 2023. Any unsecured debt issuances that are not directly guaranteed by the Federal Republic of Brazil to refinance existing debt would be rated at the IDR level given the strong ratings linkage between Itaipu and Brazil as well as the financial strength Itaipu receives from the bi-lateral treaty.
Inexistence of Hydrologic and Regulatory Risks
Itaipu does not have hydrologic or regulatory risks associated with the electric sector in Brazil or in Paraguay. The commercial terms of the Itaipu Treaty signed by both countries are based on the plant's installed capacity and not on the energy produced, which results in Itaipu having no obligation to purchase energy from third parties to serve its customers during adverse hydrologic situations.
Future rating actions, either positive or negative, will be highly correlated to the sovereign rating of the Federative Republic of Brazil or negative amendments to the bi-lateral treaty.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology - Including Short-Term Ratings and Linkage Between Holding Companies and Subsidiaries' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage