Approximately BRL650 million of Senior Unsecured Debentures Rated
Sao Paulo, April 04, 2011 -- Moody's América Latina (Moody's) affirmed Light S.A.'s
(Light) corporate family ratings of Ba1 on the global scale and Aa2.br
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 Serviços de Eletricidade
S.A. (Light SESA). 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 SESA's proposed up to BRL650
million senior unsecured debentures due in five and seven years.
These debentures will be supported by a corporate guarantee of Light.
The outlook is stable for all the ratings.
The issue is being offered under CVM's Regulation 476 with a firm underwriting
commitment for the whole amount from the arranging banks Itau BBA,
Bradesco BBI e Citibank. The proceeds will be used to repay Light
SESA's short-term debt maturities and to support its corporate
investments.
Ratings Affirmed:
Issuer: Light S.A. (Light)
Corporate Family Ratings: Ba1/Aa2.br
Ratings Assigned:
Issuer: Light Serviços de Eletricidade S.A.
(Light SESA)
Issuer Ratings: Ba1/Aa2.br
up to BRL650 million senior unsecured debentures guaranteed by
Light S.A.(Light): Ba1/Aa2.br
RATINGS RATIONALE
The Ba1/Aa2.br issuer ratings reflect Light SESA's stable and predictable
cash flows derived from its regulated distribution business but are constrained
by the potential cash flow drains related to existing contingent liabilities
and the challenges from high levels of energy losses and delinquency rates.
Moody's rates the proposed debentures of Light SESA at the same
level as the corporate family rating of its parent company, Light,
which is the guarantor of this debt. Considering that Light SESA
is the principal subsidiary of Light, our assessment of Light SESA's
financial strength largely reflects the rating assessment of Light based
on its consolidated financial statements.
Light's Ba1/Aa2.br corporate family ratings reflect its strong
consolidated credit metrics for the rating category. The relatively
stable cash flow derived from the regulated distribution business of Light
SESA, which is the primary support for this stability along with
the medium-term supply contracts of the generation segment represented
by Light Energia S.A. (Light Energia). 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 and
the potential impact of acquisitions on cash flow and leverage.
Light SESA's annual Cash Flow From Operations (CFO) has been in
the range of BRL1.0 billion to BRL1.3 billion since 2007.
These cash flows derive from the company's monopoly rights to provide
the essential service of electricity distribution in a relatively wealthy
service area in the state of Rio de Janeiro. Nevertheless,
Light SESA's operating margins have been below their potential because
of low rates of growth for electricity consumption in its concession area
over the last five years, continued high levels of electricity losses
and high delinquency rates.
Another important factor constraining the ratings has been the evolving
Brazilian regulatory framework, which is well developed but has
a limited track record of support to entail timely recovery of costs and
investments. In 2010, Light SESA's operating margins remained
low while the company contended with higher administrative expenses (controllable
costs) in face of a modest tariff adjustment of 0.88% that
the regulator ANEEL granted in November 2009. Despite the positive
tariff adjustment of 8.31% granted in November 2010 to compensate
for higher controllable costs, Moody's expects operating margins
to remain low in 2011 pressured by higher electricity purchase costs (non-controllable
costs). Going forward, Moody's expects higher volatility
in operating margins and cash flow parameters as measured by funds from
operations (FFO) given that the IFRS does not provide for the accountability
of regulatory assets and liabilities and all the changes in non-controllable
costs needs to be expensed in the income statement rather than deferred
for later recovery.
The expiration of approximately 42% of Light SESA's existing
power purchase agreements from 2013 through 2015, which are currently
priced at approximately BRL80 per megawatt-hour, will also
cause increased volatility in operating margins of the distribution business.
Moody's expects an increase of approximately 30% in the re-pricing
of those contracts, with a 12-month lag for the effective
pass-through of those costs to higher tariffs. Moody's
expects an effective reduction of operating margins in 2014 as a result
of the third cycle of periodic tariff review scheduled to occur by the
end of 2013. The periodic tariff review aims at adjusting the company's
tariffs to reflect the typical more efficient operational parameters as
determined by the regulator and to transfer to consumers the productivity
gains attained since the last tariff periodic review in 2008. Moody's
expects a tariff reduction to stay within the 4-6% range,
which translates to an EBITDA reduction of approximately 20% in
2014.
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 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 the 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, but it should remain compatible
with the current rating category.
The ratings or outlook could be upgraded as a result of progress in reducing
the company's high levels of bad debt provisions (currently at 3.2%
of gross revenues) and total energy losses (currently at 21.3%).
Also important to an upgrade would be 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 and Light SESA was Regulated
Electric and Gas Utilities 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. The distribution
company, Light Servicos de Eletricidade S.A. (Light
SESA), is Light's main subsidiary responsible for around 93%
of consolidated Net Sales and 85% of consolidated EBITDA.
In 2010, Light SESA distributed 22,384 GWh of electricity
(approximately 5.3% of the electricity consumed in the Brazilian
Integrated National System). Light reported consolidated net revenues
of BRL6,509 million (USD3,951 million) and Net Profit of BRL575
million (USD346 million) in 2010.
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
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SUBSCRIBERS: 212-553-1653
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Moody's assigns Ba1 and Aa2.br ratings to Light SESA's debentures; outlook stable.
