Approximately BRL170 million of Senior Unsecured Debentures Rated
Sao Paulo, April 04, 2011 -- Moody's America Latina (Moody's) affirmed Light 's corporate
family rating of Ba1 on the local currency on the global scale and Aa2.br
rating on the Brazilian national scale. At the same time,
Moody's assigned issuer ratings of Ba1 on the global scale and Aa2.br
on the Brazilian national scale to Light Energia S.A. (Light
Energia). Moody's has also assigned a Ba1 local currency
rating on the global scale and Aa2.br rating on the Brazilian national
scale to Light Energia's proposed up to BRL170 million senior unsecured
debentures due in five years. These debentures will be supported
by a corporate guaranteed of Light. The outlook is stable for all
the ratings. This was the first time Moody's had rated Light
Energia.
The 5-year issue is being offered under CVM's Regulation 476 with
a firm underwriting commitment for up to BRL100 million from the arranging
banks Bradesco BBI, Citibank and Itau BBA. The proceeds will
be used to support investments and working capital needs of Light Energia.
Ratings Affirmed:
Issuer: Light S.A. (Light)
Corporate Family Ratings: Ba1/Aa2.br
Ratings Assigned:
Issuer: Light Energia S.A. (Light Energia)
Issuer Ratings: Ba1/Aa2.br
up to BRL170 million senior unsecured debentures guaranteed by
Light S.A.(Light): Ba1/Aa2.br
RATINGS RATIONALE
The Ba1/Aa2.br issuer ratings reflect the Light Energia's
solid capital structure, characterized by its low level of indebtedness,
healthy debt maturity profile, steady cash generation and profitability.
This largely stems from long-term concession contracts, which
allows the company to operate its generation portfolio in a relatively
secure regulated market until 2026. The uncertainties related to
its capital expenditures program and potential for high dividend distributions
in the future constrain the ratings. Moody's rates the proposed
debentures of Light Energia at the same level as the corporate family
rating of its parent company, Light, which is the guarantor
of this debt. As a result, our assessment of Light Energia's
ultimate financial strength largely reflects the rating assessment of
Light based on its consolidated financial statements.
The Ba1/Aa2.br corporate family ratings reflect Light's strong
consolidated credit metrics for the rating category. The group's
relatively stable cash flow is largely derived from the regulated distribution
business represented by Light Serviços de Eletricidade S.A.
(Light SESA), which is Light's main subsidiary responsible
for around 93% of consolidated Net Sales and 85% of consolidated
EBITDA. Light's adequate governance practices and liquidity
position also support the ratings. Constraining the ratings are
a sizeable consolidated capital expenditure program, relatively
high dividend distributions, potential cash flow drains related
to existing contingent liabilities and the challenges from high levels
of energy losses and delinquency rates at the distribution subsidiary.
The credit profile of the generation company, Light Energia,
reflects adequate projected credit metrics for the rating category supported
by stable operating margins and cash flows over the next two years.
Light Energia's electricity supply contracts, which are mostly to
the regulated market, lead to this stability. Nevertheless,
these contracts will begin to expire in 2012. Accumulated expiring
contracts represent approximately 27% of total assured energy by
year-end 2012 and 51% by year-end 2013. Starting
in 2013, Light Energia is expected to benefit from higher energy
prices and enhanced operating cash flows. Light Energia's average
energy prices are currently around BRL70 per MWh and preliminary estimates
for new contracts indicate that energy prices could reach as much as BRL130
per MWh in 2013.
Light and its subsidiaries have significantly enhanced their capital structures
since 2005 when EDF (Electricite de France), the sole shareholder
at that time, converted around BRL940 million of inter-company
loans into equity. Another BRL800 million conversion of debt into
equity followed in 2007, this time by BNDES Participacoes S.A.
(BNDESPar, the investment arm of the Brazilian Development Bank
- BNDES). As a result, Light has a solid consolidated
capital structure. Its leverage ratios are currently strong for
the rating category. Using Moody's standard adjustments,
Cash Flow From Operations before working capital needs (CFO pre --WC)
to Debt is 41% and Debt over total capitalization is 50.6%
as of December 31, 2010. These indicators are expected to
deteriorate over the next three years as a result of Light's capital
expenditures program and high dividend distributions to shareholders.
Nevertheless, additional leverage is limited on a consolidated basis
by the financial covenants embedded in the proposed debentures,
which require Light's consolidated net debt to EBITDA to be lower
than 3.0 times while EBITDA coverage of interest expense needs
to be higher than 2.5 times.
Light currently has a number of judicial disputes at the level of the
distribution company arising from a variety of sources, of which
BRL552 million are considered a probable loss and accounted for as contingent
liabilities. Although these liabilities are recorded as long-term
items on the balance sheet, some of them could eventually be paid
off in the short-term as a result of judicial settlements.
Like most other Brazilian companies, Light does not maintain committed
credit facilities to face unexpected large cash disbursements.
Nonetheless, Moody's deems Light's liquidity as adequate.
Stable and predictable operating cash flows from the regulated business
support liquidity as does a consolidated cash position outstanding in
the balance sheet of BRL525 million as of December 31, 2010.
Light has short-term debt maturities of BRL664 million in 2011,
calculated using Moody's standard adjustments for pension obligations
and refinanced tax liabilities. These maturities will be largely
addressed by a proposed issuance of BRL650 million debentures by Light
SESA.
Moody's expects Light to make up to BRL3.4 billion of consolidated
capital expenditures in the period 2011 through 2014. These are
largely to develop the distribution network, improve system reliability,
reduce energy losses and fund additional investments in the generation
business. Management announced the construction of two small hydroelectric
power generation units and one hydroelectric power plant with a combined
installed capacity of 238MW, which are scheduled to come on stream
from 2011 through 2013. Total investment in generation could reach
BRL700 million over the next four years, with 60-70%
of the long-term funding coming from the BNDES. Light is
developing these generation projects in partnership with Companhia Energética
de Minas Gerais (CEMIG; Ba1/Aa2.br Issuer Ratings; Outlook
Stable). In the partnership, Light will own 51% and
CEMIG 49% of the projects.
Going forward, Light is likely to continue this expansion strategy,
particularly given the stated willingness of Light's major individual
shareholder, CEMIG, to pursue strategic investments in the
electricity sector. CEMIG has also recently been increasing its
equity participation in the company. Moody's incorporates into
its long-term rating assessment the potential risk that CEMIG will
use Light as a vehicle to further expand its activities in distribution
and generation businesses. Additional acquisitions and investments
would not necessarily cause a rating downgrade, but the impact of
future deals on consolidated leverage and liquidity will be particularly
important in our analysis.
Light has evolving corporate governance practices that Moody's views
as above the average for Latin American issuers. In March 2010,
Light announced a significant change in the composition of its Board of
Executive Officers, including the appointment of Mr. Jerson
Kelman, former General Director of ANEEL, as the CEO as well
as the appointment of four other senior executives. Moody's expects
Light's new executives to face stepped-up pressure to enhance processes
and strengthen the quality of service provided. They will look
to balance the needs of shareholders and bondholders against the necessity
of addressing the company's current challenging operational issues.
The stable outlook captures Moody's view that despite some expected reduction
in operating margins, internal cash generation should be the primary
funding source for the group's cash needs. Long-term funding
on a timely basis will complement internal cash generation over the medium
term. The overall level of debt should moderately increase along
with the planned investments, remaining compatible with the current
rating category.
The ratings or outlook could be upgraded as a result of greater visibility
regarding the potential impact of both contingent liabilities and acquisitions
on the group's consolidated cash flow and leverage. Pressure
for an upgrade could increase if Light's consolidated Retained Cash
Flow (RCF) over Total Debt remained higher than 20% and interest
coverage (CFO pre-WC over cash interest) became higher than 5.0x,
both on a sustainable basis.
The ratings or outlook could be downgraded if Light's consolidated
RCF over Total Debt ratio fell below 10% and interest coverage
decreased to below 3.0x for an extended period. A change
in the supportiveness of the Brazilian regulatory environment could also
trigger a rating action
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 (GSR) 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
Ratings"
The principal methodology used in rating Light Energia was the Global
Unregulated Utilities and Power Companies published in August 2009.
Headquartered in Rio de Janeiro - Brazil, Light S.A.
(Light) is an integrated utility company with activities in generation,
distribution and commercialization of electricity. Light Energia
S.A. (Light Energia), the generation subsidiary,
has 855MW of total installed capacity representing approximately 0.8%
of the country's electricity generation capacity. Light reported
consolidated net revenues of BRL6,509 million (USD3,951 million)
and Net Profit of BRL575 million (USD346 million) in 2010. Light
Energia accounted for 5% of the revenues and 14% of the
consolidated EBITDA.
REGULATORY DISCLOSURES
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 information, and confidential and proprietary Moody's Analytics
information.
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.
Sao Paulo
Cristiane Spercel
Analyst
Infrastructure Finance Group
Moody's America Latina Ltda.
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300
New York
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
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Moody's assigns Ba1 and Aa2.br ratings to Light Energia's debentures; outlook stable.
