Approximately BRL190 million of debt instruments affected
Sao Paulo, February 23, 2011 -- Moody's America Latina (Moody's) assigned issuer ratings of Ba1
on the global scale and Aa2.br on the Brazilian National Scale
to Empresa Norte de Transmissão de Energia S.A. (ENTE).
At the same time, Moody's assigned a Ba1 global scale rating and
Aa2.br rating on the Brazilian National Scale to the 5-year
BRL190 million senior unsecured debentures to be issued by ENTE in the
local market. The outlook for all ratings is stable. This
is the first time Moody's has rated ENTE.
The proceeds of the proposed BRL190 million debentures will be used to
replace around BRL140 million of existing long-term debt with the
BNDES and to support dividend distributions to the shareholders in the
....Issuer: Empresa Norte de Transmissão
de Energia S.A. (ENTE)
....Issuer Rating: Ba1 (global scale)
/ Aa2.br (Brazilian national scale)
....BRL190 million senior unsecured debentures:
Ba1 / Aa2.br
The Ba1 and Aa2.br issuer ratings reflect ENTE's predictable and
stable cash flows provided by its long-term regulated concession
agreement to operate an electricity network in the north of Brazil.
The relatively long track record of operations, management's
expertise in the transmission business and the company's strong credit
metrics further support the ratings.
The high level of investment activity of its controlling shareholders:
Alupar (Ba1/Aa2.br Corporate Family Ratings, Outlook stable)
and Cemig (Ba1/Aa2.br Issuer Ratings, Outlook stable) constrains
the ratings, as does the limited structural provisions embedded
in the proposed debentures and ENTE's evolving corporate governance
practices. ENTE's relatively small scale and limited portfolio
diversification further constrain the ratings.
Moody's views the regulatory framework for transmission companies in Brazil
as well developed and highly predictable in terms of cost recovery and
return on invested capital. The secure and stable nature of the
transmission segment stems from the Permitted Annual Revenues (RAP),
which are based on fixed capacity payments throughout the concession period
that have provisions for automatic annual adjustments for inflation.
Nevertheless, the track record of the current framework is rather
limited and some procedures are still untested, such as the indemnification
of non-depreciated assets upon the non-renewal or termination
of an existing concession.
ENTE operates two transmission lines under a 30-year concession
that was signed in December 2002; the lines started operations in
February 2005. The company largely benefits from a concession granted
prior to 2006 wherein the tariffs are not subject to periodic reviews.
On the other hand, the Permitted Annual Revenue (RAP) for this concession
is scheduled to step down 50% starting in February 2021.
The current RAP authorized by the regulator is BRL142 million, which
is valid from July 2010 through June 2011.
The inherently stable nature of its transmission services provides ENTE
predictable cash flows, while the high internal rate of return and
low investment requirements support its strong credit metrics for the
rating category. The network availability has been around 99.9%
over the last three years and maintenance capital expenditures represent
less than 1% of its regulated asset base. ENTE's cash
generation has been further boosted by fiscal incentives that have lowered
its income tax rate. Moody's estimates the effective tax
rate to be around 15% over the next five years, after which
it would return to the regular 34% rate.
As a result of its ongoing insignificant capital requirements, ENTE's
leverage is low, which is evidenced by a Net Debt to EBITDA ratio
of just 1.4x in 2009. This level is well below the limitation
included in the proposed debentures of a maximum Net debt of BRL354.1
million representing approximately 3 times ENTE's current EBITDA.
This maximum amount of net debt as defined in the indenture will be adjusted
annually by the general price index (IGP-M).
Leverage as measured by the Funds From Operations (FFO) to Net averaged
27% from 2007 through 2009, while the FFO interest coverage
ratio was 3.2x in the same period. Under normal circumstances,
Moody's would expect a gradual and consistent improvement in ENTE's
capital structure given its very stable and predictable cash flow under
the assumption that capital expenditures are restricted to maintenance
expenditures only. Moody's believes that the lack of clarity
with regard to possible expansion capital expenditures, new concessions
or acquisitions represents potential changes to the above-outlined
scenario. A dividend payout ratio estimated at 95% also
tempers the view of an improving capital structure.
ENTE has corporate governance standards that are below the average of
its peer group of electric utilities with investment grade ratings.
Moody's view is that the entrance of CEMIG into the capital structure
of ENTE in August 2006 helped to enhance its corporate governance practices
and assures higher transparency, given that CEMIG is a company with
corporate governance standards above the average; however,
we believe there is still room for further improvement by the publication
of audited and consolidated cash flows on a quarterly basis.
The stable outlook reflects Moody's expectation that ENTE will continue
to prudently manage capital expenditures and the distribution of dividends
in tandem with its cash flow capacity while maintaining an adequate liquidity
The ratings could be upgraded if ENTE's corporate governance practices
improve along with a track record of continued strong financial performance,
such that FFO interest coverage is greater than 4.5x along with
FFO to Net debt above 45% on a sustainable basis.
The ratings or outlook could be downgraded if there is significant increase
in leverage and deterioration of the liquidity profile driven, for
example, by an unexpected sizeable investment program or dividend
distribution. Quantitatively, the ratings or outlook could
come under downward pressure if the FFO interest coverage ratio falls
below 3.0x and the FFO to Net debt stays below 30% for an
extended period. A material change in the regulatory framework
in Brazil could also cause a downgrade in the ratings or outlook.
The principal methodology used in this rating was Regulated Electric and
Gas Networks published in August 2009.
Moody's National Scale Ratings (NSRs) are intended as relative measures
of creditworthiness among debt issues and issuers within a country,
enabling market participants to better differentiate relative risks.
NSRs differ from Moody's global scale ratings in that they are not globally
comparable with the full universe of Moody's rated entities, but
only with NSRs for other rated debt issues and issuers within the same
country. NSRs are designated by a ".nn" country modifier
signifying the relevant country, as in ".br" for Brazil.
For further information on Moody's approach to national scale ratings,
please refer to Moody's Rating Implementation Guidance published in August
2010 entitled "Mapping Moody's National Scale Ratings to Global Scale
Empresa Norte de Transmissão de Energia S.A. (ENTE),
owns a 30-year concession contract that expires in December 2032
to operate a 464 kilometer high-voltage transmission network in
the states of Maranhão and Pará. ENTE is controlled
by Alupar Investimentos S.A. (Alupar), which has 50.01%
of ENTE's voting and total capital. The other major shareholder
is Companhia Energetica de Minas Gerais (CEMIG) with 49.99%
of ENTE's voting and total capital. In 2009, ENTE posted
consolidated net sales of BRL 124 million (USD62million) and EBITDA of
BRL115 million (USD57 million).
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service's information, and confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Infrastructure Finance Group
Moody's America Latina Ltda.
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
Moody's America Latina Ltda.
Moody's assigns Aa2.br rating to ENTE's debentures, outlook stable
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