Fitch Upgrades Energisa's IDRs to 'BB' and Subsidiaries' IDRs to 'BB+'; Outlook Stable

SAO PAULO--()--Fitch Ratings has upgraded Energisa S.A.'s (Energisa) Long-term foreign and local Currency Issuer Default Ratings (IDRs) to 'BB' from 'BB-' and its Long-term national scale rating to 'A+(bra)' from 'A(bra)'.

At the same time, Fitch has upgraded Energisa's subsidiaries' Long-term foreign and local Currency IDRs to 'BB+' from 'BB' and their Long-term national scale ratings to 'AA-(bra)' from 'A+(bra)'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this press release.

KEY RATING DRIVERS

The upgrade reflects Energisa's ability to revert the negative impact of the acquisition of Grupo Rede on its consolidated credit profile. Fitch considers the sale of its operational and under construction generation assets to Brookfield Renewables for BRL2.8 billion as positive since it reduces pressure on the group's liquidity and leverage ratios on a more restricted credit scenario. The expected capital increase of BRL 500 million to occur in the first half of 2015 also benefits the group credit metrics.

The rating action incorporates Fitch's expectation that Energisa will succeed in continuing improving the still below average operational performance of the subsidiaries acquired from Grupo Rede, located in areas of high energy consumption historical growth. Despite the relatively recent integration, positive results have already been noticed and reflected on the consolidated operational cash generation.

The ratings incorporate a moderate regulatory risk for the 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 that of the operating companies. The holding company debt represented approximately 39% of net consolidated debt as of Dec. 31, 2014.

Stronger than Expected Credit Profile

Fitch expects Energisa's consolidated net leverage to range between 2.5 times (x) and 3.0x in the coming years. In 2014, the consolidated leverage, measured by the Total Adjusted Debt/EBITDA ratio was 4.8x and 3.7x on a net basis. The proceeds from the assets sale (BRL1.4 billion), the debt that went out with the generation assets sold (BRL900 million) and the expected capital increase of BRL500 million are representative when compared to the consolidated total adjusted debt of BRL7.4 billion at the end of 2014. Credit metrics should also benefit from a more robust operational cash generation coming from recent acquired subsidiaries.

Energisa has sold its operational and under construction generation assets to Brookfield Renewables Energy Partners for BRL 2.8 billion. On April 9, 2015, net proceeds of BRL1.4 billion have been used to partially prepay - BRL 886 million - of the holding's 6th Debenture Issuance. Fitch expects the holding company debt of BRL2.7 billion at the end of 2014 to materially reduce to BRL1.3 billion after the mentioned events.

Successful Integration of Grupo Rede Operations

Fitch expects Energisa to benefit from synergy gains among all its distribution companies. The group has been improving the results on the acquired companies, but their performances are still below the levels established by the regulator. Positively, the new subsidiaries are located in areas of high energy consumption historical growth, with a compounded average growth rate of 6.6% p.y in the energy distributed in their concession areas in the last five years (2009-2014), compared with 4.3% p.y. in Brazil in the same period. Improvements on quality and losses indicators were already achieved.

Liquidity to Improve

Energisa's liquidity position should continue to improve on a consolidated basis after the expected capital injection of BRL500 million. In addition a convertible to shares BRL350 million debenture issuance should add to debt maturity profile. The group has been working to lengthen its financial obligations and reduce its cost of funding. At the end of 2014, the short-term debt coverage was moderate, with cash of BRL1.6 billion covering short-term debt of BRL2.1 billion by 0.7x. At the same date, holding company short-term debt was BRL1.1 billion, compared with cash of BRL56 million.

Negative FCF to Remain

The improvement of the operations at the distributors formerly belonging to Grupo Rede, associated to the original subsidiaries' maintenance capex programs, require a significant amount of investments that will keep on pressuring the consolidated free cash flow (FCF). Part of this pressure could be offset by some additional EBITDA coming from the acquired companies. Fitch expects capex requirements of approximately BRL 4.7 billion for the next three years to have adequate sources of funding.

Fitch expects Energisa's consolidated operational cash flow generation to benefit from an above average increase in energy consumption in the concession areas of the acquired distributors, and from the gradual improvement of its operational indicators. The group has consistently reduced its energy losses, both on a consolidated basis and individually. Currently, Energisa's distributors (except some of those acquired from Grupo Rede) report losses below the maximum percentages established by the regulatory agency and contemplated in the energy tariffs, which positively impact its operating cash flow.

In 2014, consolidated net revenues, EBITDA and cash flow from operations (CFFO) reached BRL7.4 billion, BRL1.6 billion and BRL420 million, respectively, compared to BRL2.4 billion, BRL621 million and BRL505 million reported in 2013, with basis on the new International Financial Reporting Standards (IFRS), excluding revenue and infrastructure cost. In 2014, CFFO was not sufficient to cover capex of BRL942 million and dividends of BRL216 million, leading to a negative FCF of BRL739 million.

KEY ASSUMPTIONS

Fitch's main assumptions, in accordance with the base case scenario for this issuer include:

--Average annual market growth rate of 4%;

--EBITDA margin of around 20%;

--Capital increase of BRL 500 million in 2015;

--Capex of BRL4.7 billion from 2015 to 2018.

RATING SENSITIVITIES

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

--Relevant acquisitions and/or additional new investments beyond those envisioned and mostly funded by debt by debt that could increase net leverage to levels consistently above 4.0x;

--Cash-to-short term debt below 0.7x.

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

--More conservative leverage and credit protection measures, with consolidated net leverage levels consistently below 2.5x;

positive FCF;

--Cash-to-short-term debt ratio above 1.2x.

Fitch upgraded the following ratings:

Energisa

--Foreign currency IDR to 'BB' from 'BB-';

--Local Currency IDR to 'BB' from 'BB-;

--Long-term national scale rating to 'A+(bra)' from 'A(bra)'.

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

--Foreign currency IDR to 'BB+' from 'BB';

--Local Currency IDR to 'BB+' from 'BB';

--Long-term national scale rating to 'AA-(bra)' from 'A+(bra)'.

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

--Foreign currency IDR to 'BB+' from 'BB';

--Local currency IDR to 'BB+' from 'BB';

--Long-term national scale rating to 'AA-(bra)' from 'A+(bra)'.

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

--Foreign currency IDR to 'BB+' from 'BB';

--Local currency IDR to 'BB+' from 'BB';

--Long-term national scale rating to 'AA-(bra)' from 'A+(bra)'.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

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=982939

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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
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
elizabeth.fogerty@fitchratings.com