Fitch Ratings has upgraded Tractebel Energia S.A.'s (Tractebel) Local and Foreign Currency Issuer Default Ratings (IDRs) to 'BBB' from 'BBB-'. At the same time, the agency has also upgraded Tractebel's National Scale rating and the rating of its second debenture issuance due 2014 to 'AAA(bra)' from 'AA+(bra)'. The Outlook remains Stable.
The rating action reflects Tractebel's solid consolidated financial profile, strong and predictable cash flow generation from operations and its low financial leverage. Fitch's view is that the company has implemented the actions needed to prepare its balance sheet for the very likely transfer of the hydroelectric plant of Jirau (UHE Jirau) from its parent company GDF-Suez (Suez) to Tractebel. Tractebel's consolidated financial profile is expected to deteriorate only moderately as a result of this transaction given the expected favorable terms of the transfer. Fitch estimates that Tractebel's consolidated leverage, measured by total debt-to-EBITDA, should reach approximately 3.0 times (x), which is still consistent with the company's ratings.
The ratings also incorporate Fitch's expectations that Tractebel will be cautious regarding the price it will pay for the asset, in accordance with the strength of UHE Jirau. The project has approximately 73% of its assured energy already commercialized and it should not be difficult to negotiate the remaining portion with adequate terms. It also counts on a project finance line already approved by Banco Nacional de Desenvolvimento Economico e Social (BNDES) with a 25-year tenor, which will not have corporate guarantee from Tractebel.
Tractebel's ratings are further supported by the company's prominent market position as the largest private electric energy generation company in Brazil; its operational efficiency; the existence of long-term power purchase agreements and, to a lesser extent, the credit strength and sector expertise of its parent company, GDF-Suez, as a relevant global power company. The ratings also factor in the company's ambitious expansion plans and the risks associated with the execution phase of the projects being developed by the company, although the latter is reduced by the controlling shareholder's strategy of only transferring the assets under development to Tractebel after the main risks are mitigated. Hydrological risk is inherent to the company's activities but it does not represent a concern at this moment.
High and Predictable Operational Cash Generation:
Tractebel's credit profile benefits from its strong and predictable cash flow generation. In 2011 the company posted record results with net revenues of BRL4.3 billion and EBITDA of BRL2.9 billion on a consolidated basis, which compare favorably to BRL4.1 billion and BRL2.6 billion, respectively, in 2010. The main factors that contributed for this growth were higher average prices, as a result of the company's adequate contracts portfolio management; the start-up of UHE Estreito, in which Tractebel holds a 40.07% participation; and the higher dispatch of its generating assets, due to favorable hydrological conditions throughout the year. This scenario also benefited EBITDA margin, which reached 67.2% in 2011 compared to 63.7% in the previous year.
Sound Free Cash Flow, Despite High Dividends Payout:
Fitch considers as positive the flexibility that Tractebel demonstrated in reducing its dividends distribution as a way to preserve cash and provide debt reduction. In 2011, the robust cash flow from operations (CFFO) grew 22%, to BRL2.1 billion and was sufficient to cover BRL347 million of capital expenditures and BRL1 billion of dividends, resulting in a positive free cash flow (FCF) of BRL704 million for the period. The company has historically presented a high dividends payout, around 95% of net profit; however, it reduced the distributions for 2009 and 2010, to 58% and 55%, respectively, aiming at strengthening its financial statements and preparing for the acquisition of the UHE Jirau project from its parent company. In 2011, the dividends payout of 95% was resumed after the postponement of this movement.
Maintenance of Solid Credit Metrics:
Fitch believes that Tractebel will be able to maintain credit indicators consistent with its ratings even after the acquisition of UHE Jirau. This acquisition should occur in the beginning of 2013, after main project risks are mitigated. It is a large hydroelectric plant, with expected installed capacity of 3,750 megawatts (MW) and investments estimated at BRL15,1 billion, which up to now has been on GDF Suez's balance sheet.
According to Fitch estimates, Tractebel's consolidated total debt-to-EBITDA may not exceed 3.0 times (x), and is expected to de-lever from 2014 onwards. Fitch believes that the parent company would provide some flexibility in transferring these assets in order to avoid liquidity pressure and to respect existing financial covenants for Tractebel's debt.
As of year-end 2011, Tractebel's consolidated leverage declined to 1.4x from 1.9x in 2010, while its net debt-to-EBITDA ratio decreased to 1.1x from 1.5x during the same period. As of December 2011, the company's interest coverage, as measured by EBITDA to interest expenses was strong, at 11.3x. From 2007 to 2011 the company reported, on average, a net leverage of 1.2x and an interest coverage ratio of 9.7x.
Credit Profile Benefits from Long-Term Energy Sale Contracts:
Tractebel is the largest private energy generation company in Brazil, with a total installed capacity of 6,907.6 MW, to be further increased to 8,931.8 MW after the acquisition of 50.1% of the 3,750 MW of UHE Jirau and the conclusion of investments of 145 MW in wind farms. Its low cost structure guarantees the company's competitiveness within the segment and stable operational margins. Tractebel further 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 recent operation of UHE Estreito, the potential acquisition of UHE Jirau, and the ongoing investments in wind farms reinforce this diversification.
Tractebel's energy balance going forward shows a secure contracted volume. Its contracted energy position is strong, above 87% of assured energy until 2015, being 98% in 2012, with adequate tariffs. Tractebel is also in a position to capture probable energy prices 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:
Tractebel's consolidated figures present a robust liquidity position. As of Dec. 31, 2011, cash and marketable securities amounted to BRL782 million, covering by 1.7x its short-term debt of BRL453 million. The cash and equivalents + CFFO/short-term debt ratio of 6.3x was also strong. There was a significant reduction in Tractebel's consolidated debt to BRL4 billion at the end of 2011, from BRL4.9 billion the previous year. The company's debt maturity schedule is adequately distributed along the years and it is consistent with Tractebel's strong cash generating capacity.
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.
Ambitious Investment Plan; Project Risks Partially Mitigated:
Tractebel has made sizeable investments in the energy sector, representing 86% 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 add debt and require resources, while operational cash generation occurs only after the operation starts up. Despite the inherent risk of the construction of generation plants, Fitch sees as positive Suez's strategy of first developing projects and transferring them to Tractebel only after mitigation of the main risks. The consequences of the incorporation and/or development of other projects by Tractebel for the company's ratings will depend on the time to realization and the financial conditions of these transactions.
Key rating drivers:
The ratings could be negatively affected if Tractebel expands its activities more rapidly than expected, incorporating projects that are not under its current business plan and financing them mainly with debt, to the extent that would lead to a material deterioration in its credit protection measures. Another upgrade of Tractebel's ratings is unlikely until the Jirau acquisition is concluded. Going forward, the ratings could benefit from operational cash flows more robust than expected, supported by adequate management of its energy and cost discipline. These factors could contribute to a further strengthening of its capital structure and the maintenance of its financial leverage at conservative levels.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'National Ratings Criteria' (Jan. 19.2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
National Ratings Criteria
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