SAO PAULO--(BUSINESS WIRE)--Fitch Ratings has affirmed Tractebel Energia S.A.'s (Tractebel) ratings as follows:
--Local and Foreign Currency Issuer Default Ratings (IDRs) at 'BBB';
--Long-term National Scale Rating at 'AAA(bra)'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
Tractebel's ratings reflect that the company will be able to sustain its solid consolidated credit profile even in a challenging operational scenario of low hydrology levels pressuring its cost in 2015. The company should resume a more strong and predictable operational cash flow generation during regular hydrology conditions. Tractebel also benefits from its financial profile with low leverage, robust liquidity position and manageable debt maturity schedule.
The ratings already incorporate that credit metrics should moderately deteriorate after the very likely transfer of the hydroelectric plant of Jirau (UHE Jirau) from its parent company GDF-Suez (Suez). The new percentage of this project to be acquired by Tractebel has been reduced to 40% from 60% as previously expected, as Suez has sold part of its stake to Mitsui Corp. The company's consolidated leverage, measured by net adjusted debt-to-EBITDA, should not exceed 2.5x, which is still consistent with its ratings. Fitch considers as positive that the acquisition may occur only in its operational phase in 2016 - 2017, eliminating execution and cost overruns risks.
The ratings are further supported by the company's prominent market position as the largest private electric energy generation company in Brazil. Tractebel benefits from its positive asset diversification, operational efficiency, and the existence of long-term power purchase agreements with its clients. To a lesser extent, the Fitch's analysis considered the credit strength and sector expertise of its parent company, Suez, as a relevant global power company. The analysis also factored in Tractebel's ambitious expansion plans and the risks associated with the construction phase of the greenfield projects, which is somewhat mitigated by its proven experience in developing similar projects. The ratings incorporate a moderate regulatory risk.
Robust Operational Cash Generation
Tractebel has maintained sound financial performance even a challenging operational scenario due to low hydrology levels. In 2014, net revenues and EBITDA amounted to BRL6.5 billion and BRL2.9 billion, respectively. In comparison to 2013, net revenues have grown approximately 16% from BRL5.6 billion. Main factors that contributed for the evolution in revenues were higher average energy prices, as a result of tariff readjustments and the company's contracts portfolio management, and to a lesser extent, higher energy sales volume.
EBITDA margin continued to drop, achieving 44.7% in comparison with 53.3% recorded in 2013, 63.3% in 2012 and 67.2% in 2011, reflecting the scenario of higher thermoelectric dispatch and the reduction of the assured energy of its hydroelectric plants.
This reduction corresponded to 9.3% of its assured energy of 3,869.9 average megawatt (aMW) in 2014, with the company being obligated to acquire this percentage in the spot market, where the average price was BRL690/MWh last year. In comparison to 2013, EBITDA has dropped approximately 2.5% from BRL2.9 billion reported at that year. Fitch expects EBITDA margin will remain at the range of 35% - 40% due to a continuous scenario of hydrology crisis in 2015.
Free Cash Flow to Turn Negative
Fitch considers as positive the flexibility Tractebel has demonstrated in reducing its dividends distribution as a way to preserve cash and provide net debt reduction when necessary. cash flow from operations (CFFO) remained adequate at BRL1.7 billion, despite lower than the BRL- 2.3 billion recorded in 2012 and 2013. This reduction was compensated by reduced dividends payment (BRL1.1 billion) and capital expenditures (BRL353 million) in comparison to 2013, resulting in a free cash flow (FCF) of BRL243 million, higher than the BRL182 million recorded in 2013. The company has historically registered a payout of 95% to 100%, with a temporary reduction in 2009 and 2010 in order to be prepared for the migration of UHE Jirau project to its balance sheet. Due to the UHE Jirau acquisition postponed to 2016 - 2017 and a strong cash flow generation, dividends payout returned to 100% in 2011. In 2014, forecasting a more restricted credit scenario and to compensate the impact of low hydrology levels, dividends payout has been reduced to 55%. Fitch expects FCF to turn negative by the next years as a result of higher impact of power purchase in the spot market in 2015 and the increase on capex after 2016.
Solid Credit Metrics to Remain
Fitch believes that Tractebel will be able to keep credit metrics consistent with its ratings even with the challenging operational scenario and after the acquisition of UHE Jirau, with net adjusted debt-to-EBITDA ratio below 2.5x. Positively, this acquisition may occur in 2016 - 2017, after main project risks are mitigated and corporate guarantee to the project debt is no longer required. Fitch believes that the parent company may also provide some flexibility in transferring this asset in order to avoid liquidity pressure and to respect existing financial covenants for Tractebel's debt. UHE Jirau is a large hydroelectric plant, with expected installed capacity of 3,750 megawatts (MW) and estimated investments that exceed BRL18.0 billion, mainly financed by Banco Nacional de Desenvolvimento Economico e Social (BNDES), which up to now has been on Suez's balance sheet.
As of year-end 2014, Tractebel's consolidated gross leverage slightly increased to 1.4x from 1.2x in 2013, while its net debt-to-EBITDA ratio has been stable in 0.8x since 2012. The company's interest coverage, as measured by EBITDA to interest expenses, was strong at 13.8x.
Credit Profile Benefits from Long-Term PPA's
Tractebel is the largest private energy generation company in Brazil, with a total installed capacity of 7,027 MW, to be further increased to 9,305 MW after the acquisition of 40% of the 3,750 MW of UHE Jirau and the conclusion of its new projects already under construction phase. The company benefits from a successful energy commercialization strategy, the efficient monthly allocation of firm capacity and, to a lesser degree, the dilution of operational risks obtained through its diversified asset base. The potential acquisition of UHE Jirau and the ongoing investments in wind farms and the thermal plant reinforce this diversification.
Tractebel's contracted energy position is high, above 84% of assured energy until 2017, being 98% in 2015 and 91% in 2016, with adequate tariffs. Particularly, the percentage contracted in 2015 should bring estimated losses of around BRL1.7 billion to the company, as the assured energy should be reduced by 15% -20% and Tractebel will have to acquire the correspondent energy volume to meet its sales contacts in the spot market.
Positively, the cap for the spot market price reduced to BRL388.28/MWh in 2015 from BRL822.23 in 2014. In the future, the company is in a position to capture probable energy prices increases based on a tighter supply and demand balance. Its sales are diversified among distribution companies with long-term contracts and unregulated customers and commercialization companies with shorter-term contracts and flexible conditions.
Strong Liquidity Position and Financial Flexibility
Tratebel's consolidated figures present a robust liquidity position. As of December 31, 2014, cash and marketable securities amounted to BRL1.6 billion and were sufficient to fully cover its short-term maturities of BRL455 million by 3.5x despite the significant dividends payments during 2014 (BRL1.1 billion). The cash and equivalents + CFFO/short-term debt ratio was also strong at 7.2x. The company's debt maturity schedule is manageable despite some concentration in 2016 (BRL1.2 billion).
Fitch notes that Tractebel has financial flexibility and broad access to bank debt and the capital markets, as one of the main companies engaged in the power sector in Brazil. It is important that the company finances its projects with adequate credit lines in terms of payment conditions and financial costs. Given the financial strength of its parent company, greater flexibility is also expected in the payment of dividends or for the acquisition of assets, if necessary.
Manageable Investment Plan
Tractebel has made sizeable investments in the energy sector, with 89% growth in its generation installed capacity since 1998. In general, investments in new projects have a negative impact on the company's consolidated credit ratios and pressure its cash flow, since they may add debt and require resources, while operational cash generation occurs only after the operation starts up. Fitch sees as positive Suez's strategy of first developing sizeable projects and transferring them to Tractebel only after mitigation of the main risks. The change on this strategy may add additional risk to Tractebel.
Fitch's main assumptions, in accordance with the base case scenario for this issuer include:
--Assured energy reduction for the hydroelectric plant of 20% in 2015 and 10% in 2016;
--Average spot price of BRL388.28/MWh in 2015 and 2016;
--Capital expenditures of BRL5.4 billion from 2015 to 2018;
--Payout of 55% in 2015 and 100% in the following years.
Future developments that may individually or collectively lead to a negative rating action include:
The ratings could be negatively pressured by sizeable investments or acquisitions currently out of the company's business plan, that could lead to a leverage consistently above 3.0x.
Cash and equivalents/short-term debt ratio below 1.0x.
A potential rationing scenario and/or high assured energy reductions depending on their extension.
An upgrade of Tractebel's ratings is unlikely until after the UHE Jirau acquisition concludes or while the conditions for this transference are unknown. After that, a positive rating action will require a net adjusted leverage consistently below 2.0x.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research
--'Corporate Rating Methodology - Including Short-Term Ratings and Link Between Holding Parents and Subsidiaries' (May 28, 2014);
--'National Scale Rating Methodology' (Oct. 30, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
National Scale Ratings Criteria