Fitch Affirms Energisa's IDRs at 'BB'; Outlook Remains Stable

SAO PAULO, Brazil--()--Fitch Ratings has affirmed Energisa S.A.'s (Energisa) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB' and upgraded its Long-term National Scale Rating to 'AA-(bra)' from 'A+(bra)'. The Rating Outlook remains Stable.

Fitch has also affirmed Energisa's subsidiaries' Long-Term Foreign and Local Currency IDRs at 'BB+' and upgraded its Long-Term National Scale Rating to 'AA(bra)' from 'AA-(bra)'. The Rating Outlook remains Stable. A full list of rating actions follows at the end of this press release.

KEY RATING DRIVERS

The rating actions reflect Fitch's expectation that Energisa will succeed in continuously improving its consolidated credit profile after the initial impact of the acquisition of the Grupo Rede distribution companies (DisCos). The sale of its operational and under construction generation assets to Brookfield Renewables for BRL2.7 billion combined with a capital increase of BRL 250 million, the issuance of BRL1 billion debentures and BRL 661 million of Banco Nacional de Desenvolvimento Economico Social (BNDES) loans in 2015 benefited the group credit metrics since it reduced pressure on the group's liquidity and leverage ratios on a more restricted credit scenario. The upgrade of the National Scale ratings incorporates Fitch's view that the group is stronger in its IDR levels.

Energisa should continue to achieve efficiency gains in the still below average operational performance of the subsidiaries acquired from Grupo Rede and benefit from the next tariff review cycle. Despite the relatively recent integration, positive results have already been noticed and reflected on the consolidated operational cash generation. Fitch also considered that the group is well positioned to compensate for potential negative pressures on energy consumption, delinquency and energy losses due to the challenging Brazilian macroeconomic environment.

The ratings incorporate a moderate regulatory risk for the Brazilian power sector and a hydrological risk currently above average. The asset diversification of Energisa through 13 power distribution companies is positive as dilutes operational risks.

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 the operating companies. The holding company debt represented approximately 24% of consolidated debt as of Dec. 31, 2015 and the ratio total debt/dividends received at 14.3x was high.

Leverage to Reduce

Fitch expects Energisa group to manage its consolidated net leverage below 3.5x in the medium term, absence new acquisitions or relevant capex program to resume the activity on the generation segment. The cash inflows of BRL1.7 billion of assets sale and BRL250 million of capital increase during 2015 contributed to keep leverage at moderate levels. In 2015, the consolidated leverage, according to Fitch methodology, measured by the total adjusted debt/EBITDA ratio was 5.2x and 4.0x on a net basis.

Future Efficiency Gains to Improve EBITDA

Fitch expects Energisa's consolidated EBITDA to benefit from continuing operational improvements on the distribution companies acquired from Grupo Rede. The fourth tariff review cycle, scheduled to occur on its main subsidiaries in 2016 to 2018, should also add to cash flow generation. The achievement of these positive aspects is crucial to offset the likely decrease on energy consumption in the group's concession areas, as well as higher delinquency and energy losses, driven by the expected economic downturn. In 2015, country energy consumption decreased by 2.1% leading Energisa consolidated market to marginally increase by 0.1% compared to 2014.

FCF Under Pressure

According to Fitch's base case projections, the group's free cash flow (FCF) should be negative until 2018. The improvement of the operations of the DisCo's formerly belonging to Grupo Rede's associated with the original DisCo's maintenance capex programs require a significant amount of investments that will keep on pressuring the consolidated FCF. In 2015, cash flow from operations (CFFO) of BRL549 million was not enough to cover capex of BRL1.3 billion and BRL272 million of dividends paid, leading to a negative FCF of BRL979 million. As CFFO increases with the tariff review cycle and energy consumption resumes growth, the group will be able to keep high capex and deliver a positive FCF.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case include:

--Energy consumption decrease of 3.5% in 2016, and growth of 0.7% in 2017 and average of 2.75% after 2018;

--Annual average CAPEX of BRL1.3 billion from 2016 to 2019;

Payout dividend ratio of around 40% in 2016 and 75% from 2017;

--No mergers or acquisitions.

RATING SENSITIVITIES

Future developments that may individually or collectively lead to a negative rating action includes:

--New mergers or acquisitions involving relevant amounts and predominantly financed by debt;

--Consolidated net leverage consistently above 4.0x;

--Cash and equivalents + CFFO/short-term debt ratio below 1.3x.

Future developments that may individually or collectively lead to a positive rating action includes:

--Consolidated net leverage continuously below 2.5x;

--Cash and equivalents + CFFO/short-term debt ratio above 1.7x.

LIQUIDITY

Energisa group presents a strong liquidity position and is expected to continue accessing different sources of funds for capex and short-term debt refinancing. At the end of 2015, cash and equivalents of BRL1.9 billion represented 1.2x its short-term debt of BRL1.6 billion. The cash and equivalents + CFFO-to-short-term debt ratio has improved to 1.5x in 2015 from 1.0x in the previous year, evidencing the company's better debt repayment schedule. On a standalone basis, the holding company was carrying a more tight liquidity position of BRL274 million compared with short-term debt of BRL500 million.

Fitch has taken the following rating actions:

Energisa

--Foreign Currency Long-Term IDR affirmed at 'BB';

--Local Currency Long-Term IDR affirmed at 'BB';

--Long-Term National Scale Rating upgraded to 'AA-(bra)' from 'A+(bra)'.

Energisa Paraiba - Distribuidora de Energia S/A (Energisa Paraiba)

--Foreign Currency Long-Term IDR affirmed at 'BB+';

--Local Currency Long-Term IDR affirmed at 'BB+';

--Long-Term National Scale Rating upgraded to 'AA(bra)' from 'AA-(bra)'.

Energisa Sergipe - Distribuidora de Energia S/A (Energisa Sergipe)

--Foreign Currency Long-Term IDR affirmed at 'BB+';

--Local Currency Long-Term IDR affirmed at 'BB+';

--Long-Term National Scale Rating upgraded to 'AA(bra)' from 'AA-(bra)'.

Energisa Minas Gerais - Distribuidora de Energia S/A (Energisa Minas Gerais)

--Foreign Currency Long-Term IDR affirmed at 'BB+';

--Local Currency Long-Term IDR affirmed at 'BB+';

--Long-Term National Scale Rating upgraded to 'AA(bra)' from 'AA-(bra)'.

Date of Relevant Rating Committee: [31, December, 2015.]

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Metodologia de Ratings Corporativos - Incluindo Ratings de Curto Prazo e Vinculo Entre Matrizes e Subsidiarias (pub. 06 Nov 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873441

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1002253

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002253

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Adriane Silva
Associate Director
+55-11-4504-2205
Fitch Brazil
Alameda Santos, 700
Sao Paulo, Brazil
or
Secondary Analyst
Wellington Senter
+55-21-4503-2606
or
Committee Chairperson
Ricardo Carvalho
Senior Director
+55-21-4503-2627
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Adriane Silva
Associate Director
+55-11-4504-2205
Fitch Brazil
Alameda Santos, 700
Sao Paulo, Brazil
or
Secondary Analyst
Wellington Senter
+55-21-4503-2606
or
Committee Chairperson
Ricardo Carvalho
Senior Director
+55-21-4503-2627
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com