Centrais Eletricas de Santa Catarina S.A.

Transcription

1 CREDIT OPINION Centrais Eletricas de Santa Catarina S.A. Update following affirmation to 3/A1.br, positive outlook Update Summary RATINGS Centrais Eletricas de Santa Catarina S.A. Domicile Brazil Long Term Rating 3 Type LT Corporate Family Ratings Outlook Positive Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. The credit profile of Centrais Elétricas de Santa Catarina S.A ( Celesc or the company, 3/A1.br positive) reflects (i) a lower business risk profile following settlement of dispute on sector fees and extension of power generation concession, (ii) a moderate leverage relative to peers, even considering the additional debt resulting from arrears in sector fee payments (iii) relatively strong credit metrics for the rating category as shown by a Cash from operations before working capital change (CFO pre WC) to debt ratio of 16.2% and CFO pre WC interest coverage of 2.0x in the last twelve months ended 30 September 2017, and (iv) a supportive regulatory framework mitigating higher energy costs due to poor hydrology conditions. Celesc s credit profile is constrained by (i) stricter quality of service requirements which we expect will drive higher capex in coming years (ii) record low level of hydropower reservoirs in Brazil that will continue to pressure energy costs and working capital needs (iii) foreign exchange exposure rising from the additional USD denominated debt with multilateral banks. Exhibit 1 Credit metrics to improve in 2018 Contacts (CFO Pre-W/C + Interest) / Interest - left axis (CFO Pre-W/C) / Debt - right axis 6.0x Paco Debonnaire Analyst paco.debonnaire@moodys.com Cristiane Spercel VP-Senior Analyst cristiane.spercel@moodys.com 40% 35% 5.0x 30% 4.0x 25% 3.0x 20% 15% 2.0x 10% 1.0x 5% 0% 0.0x Alejandro Olivo Associate Managing Director alejandro.olivo@moodys.com CLIENT SERVICES Americas Asia Pacific Japan EMEA e 2018e Source: Moody's Financial Metrics, Mooody's estimates Credit Strengths» Gradual recovery in consumption supports improvement in operating performance and credit metrics» Moderate leverage despite scheduled payment of arrears in sector fees and additional multilateral debt This report was republished on to correct national scale rating displayed on first page

2 » Relatively supporting regulatory environment Credit Challenges» Higher working capital needs due to rise in energy costs» Higher capex requirements to meet quality indicators and repayment of sector fees arrears will negatively weight on cash flows during 2018 and 2019» Foreign exchange exposure rising from US denominated loans with multilateral banks, although mitigated by long tenor and contractual hedging options available Rating Outlook The positive outlook reflects our expectations that Celesc will strengthen its cash flow from operations (before capex) going forward driven by higher consumption on the back of Brazil s economic recovery, and improvements in regulatory loss rates and quality of service indicators. Factors that Could Lead to an Upgrade An upgrade of Celesc's ratings could be considered upon sustainable growth in consumption trends, compliance with regulatory targets and improvements in operating performance leading to CFO pre WC to debt remains above 20% and CFO pre WC interest coverage ratio exceeding 3.5x. Factors that Could Lead to a Downgrade Conversely a weakening in consumption trends and/or continued failure to meet regulatory targets leading to a deterioration in the company's credit metrics such that CFO pre WC to debt falls below 15% and CFO pre WC interest coverage remains sustainably below 2.0x could prompt a rating downgrade. Key Indicators Exhibit 2 Centrais Eletricas de Santa Catarina S.A. CFO pre-wc + Interest / Interest CFO pre-wc / Debt CFO pre/ Debt Debt / Capitalization Column x 17.5% 11.9% 43.2% Column x 36.9% 36.9% 37.8% Column x 22.7% 19.3% 40.2% Column x 20.2% 12.7% 46.9% Column x 12.9% 11.1% 44.2% Column5 LTM Sept x 16.2% 15.6% 69.1% [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. Source: Moody's Financial Metrics Profile Headquartered in Florianopolis, in the state of Santa Catarina, Brazil, Celesc is an electricity utility company specialized in the generation and distribution of electricity. Through its wholly owned subsidiary Celesc Distribuiçao (responsible for 82% of consolidated EBITDA) the company serves a population of approximately 6 million including 2.8 million consumer units across 264 municipalities in the state of Santa Catarina and one municipality in the state of Parana. Celesc also owns a hydropower generation unit through small hydropower plants with a total of around 107MW in installed capacity. Celesc also holds a 51% equity interests in Companhia de Gas de Santa Catarina, a gas distribution company, and minority interests in small hydropower projects, transmission and water sewage assets. Celesc is controlled by the state government of Santa Catarina, which holds 50.2% of the company s voting capital and 20.2% of its total capital. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2 Centrais Eletricas de Santa Catarina S.A.: Update following affirmation to 3/A1.br, positive outlook

3 In the twelve months ended 30 September 2017 the company reported BRL6.4 billion in net revenues (excluding construction revenues) and BRL42 million in net income respectively. Detailed Rating Considerations Lower risk profile following settlement of dispute on sector fees and extension of power generation concession In July of this year two events have helped to materially reduce some contingency risks that have weighted on Celesc's credit profile. Brazil s electric sector regulator Aneel renewed for a period of 30 years the concession of Celesc s main power plant Pery (30MW of installed capacity) responsible for 28% of Celesc s generation installed capacity. Aneel also approved a compensation in favor of Celesc from unamortized assets for a value of BRL 107 million that will be paid through the new concession period. Operating under the regime of quotas, the plant's revenues are set by the regulator to cover operating and capital expenditures, and immune to the additional thermal power costs triggered by poor hydrology conditions. Celesc also settled a long standing dispute with Brazil s power commercialization chamber (CCEE) to repay suspended sector fees that had been accumulated at energy development account fund (CDE) since April The settlement of this contingency supports a more predictable cash flow stream for the company, although it will represent large outflows in 2018 and As per the agreement Celesc will repay the past-due amounts of BRL 1.2 billion over 30 months from July 2017 causing extra costs of around BRL 500 million in 2018 and 2019 respectively. These recent developments support the gradual strengthening of Celesc s credit profile. Moderate leverage despite scheduled payment of arrears in sector fees and additional multilateral debt Celesc s leverage has historically been low relative to peers, with a ratio of Debt to Capitalization of around 42% on average in the five years to 2016, compared to around 50-70% on average for other rated electricity distribution companies. As of 30 September 2017 that ratio rose to 69%, reflecting the increase in debt due to the inclusion of the accumulated CDE sector payment arrears amounting to BRL 1.05 billion at the end of September. Celesc is well advanced in securing long-term financing that will enable the company to cover its capex requirements for the period 2018 to The company expects to close a loan of around USD 345 million (BRL 1.1 billion equivalent) from the Inter-American Development nk (IDB) and from the Agence Française de Developpement (AFD). While significant, the IDB/AFD loans will be disbursed progressively throughout the next 5 years as the company deploys its capital investment program and therefore will not result in a significant increase in leverage. In addition, we expect the company will releverage relatively quickly in the next two years given the short payment schedule on the sector fee arrears, and we anticipate the ratio of Debt to Capitalization will fall back to around 50-60% in 2018 and The additional debt with IDB/AFD is denominated in foreign currency, exposing Celesc to a risk of currency devaluation given that the company's revenues is exclusively denominated in domestic currency. This risk will be mitigated by the long tenor (25 years including a 5 year grace period) and relatively low interest rates on the loans. In addition we understand that Celesc could mitigate that risk through the use of derivatives under a clause of the loan contract. Due to its state-owned status, Celesc features a higher pension burden related to privately owned peers, reflected by underfunded pension obligations which represent 32% of its debt (as adjusted by Moody s) as of 30 September Credit metrics expected to improve gradually, supported by pick up in consumption Since 2014 Celesc's credit metrics progressively deteriorated, impacted by the decline in energy consumption on the back of Brazil's economic recession, and in 2016 by a BRL 256 million provision following the settlement of a dispute with the regulator ANEEL related to energy costs incurred during This led Moody s adjusted cash flow from operations before working capital (CFO pre WC) to Debt to fall to 12.9% in 2016 from 22.7% in 2014, and CFO pre WC interest coverage to move to 1.8x in 2016 from 3.4x in Since 2017 however, in the absence of such provisions cash flow from operations started to recover driven by a gradual recovery in consumption which grew by 3% year on year during the first nine month of Going forward we expect operating cash flows will continue to grow driven by a gradual recovery in consumption levels in line with Brazil's GDP expected to grow between 2% to 3% in We expect improvements in credit metrics will be gradual however, held 3 Centrais Eletricas de Santa Catarina S.A.: Update following affirmation to 3/A1.br, positive outlook

4 back by higher operating costs during 2018 reflecting the impact of a voluntary personnel dismissal plan announced in September 2017, and by the additional debt formed from the arrears in sector fee payments that the company will have to repay up until March Relatively supporting regulatory environment ANEEL has over the last several years consistently applied tariff decisions in what we consider an open and transparent manner, taking into consideration comments from market participants through public hearings and providing the methodological background supporting each tariff increase. We expect the regulatory framework will continue to be supportive of distribution companies in Brazil, including Celesc. The National Electric Energy Agency (ANEEL), the industry' regulator has for example allowed distributors to reduce the amount of energy they commit to buying when contracts are renewed (today, this amount is set at 96% of expiring contracted energy), or enabled direct negotiations between distributors that are over-contracted and generators whose power projects are delayed. This has led Celesc to expect oversupply below the 105% threshold which allows a full pass through the oversupply costs to consumers in ANEEL has also used concession contractual agreements to provide support to distribution companies. In March 2015, it approved an exceptional tariff increase of around 23% on average for all operators to account for the impact of a severe drought in Brazil s southern region. More recently, the regulator has revised its criteria related to the tariff flag mechanism, allowing for additional energy costs to pass through sooner to the end consumer, and allowed a portion of the August 2017 annual tariff adjustment to cover the increase in projected energy costs due to the drought. Higher capital expenditures to meet stricter quality of service requirements Following completion of its fourth tariff review on Celesc Distribuiçao in August 2016 the regulator imposed more challenging qualityof-service requirements to the company relating to the frequency and duration of service interruptions within its concession area. Meeting efficiency levels for operating costs and energy losses is important for Celesc because it determines its ability to satisfy the regulatory EBITDA targets on which ANEEL has based its tariffs. Also, failure to comply with any of these indicators for two consecutive years, for three out of five years within the cycle, or at the last annual testing date, could lead to cancellation of its concession contract. Exhibit 3 Target for duration of service interruptions will be challenging to meet FEC - Actuals DEC - Actuals FEC Regulatory Target DEC Regulatory Target FEC ( Frequencia Equivalente de Interrupção por Unidade Consumidora ) measures the average annual number of interruptions per consumer of the public energy distribution; DEC ( Duração Equivalente de Interrupção por Unidade Consumidora ) measures the average duration (in number of hours) per consumer of service interruptions Source: ANEEL, Celesc 4 Centrais Eletricas de Santa Catarina S.A.: Update following affirmation to 3/A1.br, positive outlook

5 Exhibit 4 Despite recent improvements loss rates remain above regulatory targets Technical Non-technical Regulatory target 10% 9% 8% 7% 1.6% 6% 3.0% 2.6% 3.0% 2.5% 2.4% 2.3% 0.9% 5% 4% 3% 6.1% 6.1% 6.1% Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Q3 17 2% 1% 0% Source: ANEEL, Celesc The regulator requires the DEC (indicator measuring the annual duration of electricity interruptions within the network) to continuously drop from 12.1 hours in 2017 to around 11 hours by 2020, and the FEC (measuring the frequency of interruption) to fall from 10x to 8.6x. This compares with a reported DEC and FEC of 12.8x hours and 8.7x in 2016 respectively, and points to challenges in Celesc D s meeting the requirements in particular for duration of service interruptions (see exhibit 3). Similarly Celesc's loss rates remain above regulatory targets which continues to be a drag on the company's operating performance. To improve the quality service indicators (DEC and FEC) and reduce loss rates, Celesc D will need to continue to invest in the stability of its distribution network throughout the review cycle and we expect the company's capex will reach BRL million per annum throughout 2021, compared to BRL350 million incurred on average over the last three years, which will weigh negatively on free cash flow generation. Diversification expected to grow through the greenfield generation assets The hydropower generation assets provide Celesc with some cash flow diversification away from the dominant distribution business. The generation business is relatively protected from adverse hydrology conditions as 66% of its hydropower generation is contracted under the quota regime and therefore not exposed to variation in the sector s Generating Scaling Factor (GSF) - an index measuring the industry exposure to the spot market. The generation business is still relatively small representing around 18% of the company s consolidated EBITDA. However it is bound to increase as the company is involved in greenfield projects and plans to increase installed capacity to 300 MW by Celesc also reinforced its position in the transmission business through a bid the company won in conjunction with EDP-Energias do Brasil at the April auction for a lot comprising for three transmission lines cumulating 484 kms in the state of Santa Catarina. While Celesc's participation in the bid was limited to 10% (90% with EDP-Energias do Brasil) we understand that the company could reap some synergies with its distribution segment in its concession area when the lines become operational in August Liquidity Analysis We regard Celesc s liquidity profile as adequate. As of 30 September 2017 the company had BRL 965 million in available cash (including marketable securities) and less than BRL 400 million in debt maturing in the next 12 months. Celesc has kept sufficient cash in hand to cover upcoming debt maturities. While we expect significant cash outflows coming from higher capex, working capital needs and repayment of the sector fee arrears in the coming quarters, we anticipate that the growing operating cash flows and the successful closing of the loan with the IDB/AFD loan will provide sufficient funding to cover the company s needs over the foreseeable future. Celesc s debentures are subject to financial covenant restrictions that includes the maintenance of a Net Debt/EBITDA above 2.0x. As of 30 September 2017 Celesc D reported a Net Debt / adjusted EBITDA (as reported by the company) of -0.3x and we expect the company will keep remain in compliance with its covenants in the foreseeable future. 5 Centrais Eletricas de Santa Catarina S.A.: Update following affirmation to 3/A1.br, positive outlook

6 Structural consideration Celesc s corporate family rating (CFR) reflect its consolidated debt structure, which is essentially made of senior unsecured obligations either debentures or loans with domestic banks. The senior unsecured issuer ratings of Celesc Distribuiçao are the same level as the CFR of its parent company Celesc. This reflects the dominance of Celesc Distribuiçao within the group as the distribution subsidiary accounts for over 80% of consolidated EBITDA, as well as the high degree of financial linkages between Celesc Distribuiçao and other subsidiaries within the Celesc group, due to cross default provisions embedded in its debt documents. Rating Methodology and Scorecard Factors Over 80% of Celesc's EBITDA derives from the distribution segment and so the principal methodology used in this rating is Regulated Electric and Gas Utilities methodology, published in June On a month forward Celesc s rating grid model indicates an outcome of 1, two notches above the assigned ratings of 3. Exhibit 5 Centrais Eletricas de Santa Catarina S.A. Regulated Electric and Gas Utilities Industry Grid [1][2] Current LTM 9/ 30/ 2017 Fact or 1 : Regulat ory Framework (25%) a) Legislative and Judicial Underpinnings of the Regulatory Framework b) Consistency and Predictability of Regulation Fact or 2 : Abilit y t o Recover Cost s and Earn Ret urns (25%) a) Timeliness of Recovery of Operating and Capital Costs b) Sufficiency of Rates and Returns Fact or 3 : Diversificat ion (10%) a) Market Position b) Generation and Fuel Diversity Fact or 4 : Financial St rengt h (40%) a) CFO pre-wc + Interest / Interest (3 Year Avg) b) CFO pre-wc / Debt (3 Year Avg) c) CFO pre/ Debt (3 Year Avg) d) Debt / Capitalization (3 Year Avg) Rat ing: Grid-Indicated Rating Before Notching Adjustment HoldCo Structural Subordination Notching a) Indicated Rating from Grid b) Actual Rating Assigned Moody's Mont h Forward View As of 12/ 1/ 2017 [3] Measure Score Measure Score 2.1x 15.2% 12.2% 51.5% a a a 2x-3x 15%-20% 13%-18% 55%-60% a a [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. [2] As of 9/30/2017(L); Source: Moody s Financial Metrics [3] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures Source: Ratings Exhibit 6 Category CENTRAIS ELETRICAS DE SANTA CATARINA S.A. Outlook Corporate Family Rating 6 Moody's Rating Positive 3 Centrais Eletricas de Santa Catarina S.A.: Update following affirmation to 3/A1.br, positive outlook

7 NSR Corporate Family Rating A1.br CELESC DISTRIBUICAO S.A Outlook Issuer Rating -Dom Curr NSR Issuer Rating Bkd Senior Unsecured -Dom Curr NSR Bkd Senior Unsecured Positive 3 A1.br 3 A1.br Source: Moody's Investors Service 7 Centrais Eletricas de Santa Catarina S.A.: Update following affirmation to 3/A1.br, positive outlook

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9 CLIENT SERVICES 9 Americas Asia Pacific Japan EMEA Centrais Eletricas de Santa Catarina S.A.: Update following affirmation to 3/A1.br, positive outlook