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Rating Action:

Moody's assigns Ba1/Aaa.br First-time ratings to Rio Parana Energia S.A.; Outlook negative

 The document has been translated in other languages

16 Jan 2018

Sao Paulo, January 16, 2018 -- Moody's America Latina (Moody's), has assigned a Ba1 global scale and Aaa.br national scale Corporate Family ratings to Rio Parana Energia S.A. (Rio Parana). The outlook on the ratings is negative. This is the first time Moody's assigns ratings to Rio Parana.

Based in Sao Paulo, Rio Parana is an operating power company controlled by CTG Brasil (unrated), which holds 67% of the company's voting capital. The other 33% is held by Huikai Clean Energy S.A.R.L (CLAI Fund), a Chinese fund that invests in Latin America. In December 2015, the company won the bid for a 30-year concession to operate the Jupia and Ilha Solteira hydropower stations. Located along the Parana river, between the states of Sao Paulo and Mato Grosso do Sul, the two power stations combined comprise 5.0 GW of installed capacity and 2.6 GW average of physical guarantees. The company's generation represents about 6% of Brazil's electricity output. In the last twelve months ended 30 June 2017, Rio Parana reported net sales of BRL2.8 billion and net profit of BRL630 million.

RATINGS RATIONALE

Rio Parana's strong credit quality derives from its stable and predictable cash flows, supported by a long-term concession to operate the Jupia and Ilha Solteira hydro power plants. The concession agreement establishes a combined regime of mandatory quotas to the regulated market on 70% of the physical guarantee, in accordance with Law 12,783/2013, and the remaining 30% can be traded in the free market under an independent production regime. As a result, the compensation for the services is primarily provided by fixed-capacity payments, based on the availability of the company's generation assets. The regulated payments are adjusted annually to inflation and are insulated from hydrologic risks. In the free market, the company is exposed to hydrologic risks.

Rio Parana's physical guarantee is mostly contracted through 2019, which exacerbates the hydrologic risk in the short term. But, for the medium term, the company's management has indicated their intention to maintain about 15% of physical energy under the independent production regime un-contracted to protect against unfavorable hydrology conditions and a potential spike in spot prices.

As of the 12 months ended June 30, 2017, Rio Parana reported cash flow-based metrics that bode well for the rating category, including cash flow from operations before working capital changes (CFO pre-WC) to net debt and interest coverage ratio of 30% and 4.2x, respectively.

The corporate family rating of Ba1 on the global scale also incorporates Moody's assessment of the likelihood of continued support from China Three Gorges Corporation (CTG Corp, A1 stable), the ultimate controlling shareholder and debt guarantor. Rio Parana's current debt structure comprises a BRL2.7 billion bank loan guaranteed by CTG Corp and a USD1.0 billion intercompany loan provided by China Three Gorges (Luxembourg) S.A.R.L. Over the last few years, CTG Corp has invested over USD5 billion to become the second largest private power company operating in Brazil. As of the most recent reporting period in 2017, Rio Parana represented approximately 7% of the group's installed capacity and 8.5% of consolidated revenues of CTG Corp.

Rio Parana's credit profile is balanced by the company's (i) limited asset diversification, along with the expectation of an accelerated investment program to recover and upgrade the existing 34 generation units in the first years of the concessions, (ii) exposure to foreign currency volatility because 55% of its financial liabilities are denominated in US dollars without hedging, (iii) large refinancing needs, given BRL2.7 billion of its in debt is due in 2019, and (iv) an aggressive dividend distribution strategy, all of which currently constrain its standalone financial risk profile.

The outlook on the ratings is negative, reflecting the outlook on the Goverment of Brazil (Ba2 negative). Given the highly regulated nature of the energy sector and the operating environment in Brazil, we expect the company to be rated no more than one notch above the sovereign bond rating.

WHAT COULD CHANGE THE RATING UP/DOWN

Given the intrinsic linkages of Rio Parana's standalone credit quality to that of the Brazilian government, a positive rating action on the government's rating could result in upward pressure on the company's global scale ratings. A rating upgrade or outlook stabilization would also take into account the company's liquidity position and business profile, and the regulatory environment in which Rio Parana operates. Quantitatively, an upgrade would also require improvement in the company's credit metrics, as reflected in a CFO pre-WC to net debt ratio consistently above 35% and interest coverage ratio above 4.5x.

On the other hand, the ratings will face downward pressure if the stability and transparency of the regulatory regime for the generation segment is weakened, ultimately resulting in more volatility or decreased of the cash flow base, causing sustainable declines in CFO pre-WC to net debt and/or interest coverage ratio to levels below 20% and 2.8x, respectively. The global scale ratings can also be downgraded upon a similar rating action on the Brazilian goverment's rating or on CTG Corp's credit profile. Moody's perception of shareholder's weaker willingness to support, could also lead to a downgrade of Rio Parana's rating.

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in May 2017. Please see the Rating Methodologies page on www.moodys.com.br for a copy of this methodology.

Moody's National Scale Credit 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 credit 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 ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1060333.

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Information sources used to prepare the rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's information.

Information types used to prepare the rating are the following: financial data, economic and demographic data, legislation, by-laws and legal documents, operating data, historical performance data, public information, Moody's information, and regulatory filings.

Sources of Public Information: Moody's considers public information from many third party sources as part of the rating process. These sources may include, but are not limited to, the list available in the link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_193459.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

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Moody's ratings are constantly monitored, unless designated as point-in-time ratings in the initial press release. All Moody's ratings are reviewed at least once during every 12-month period.

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.br.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see ratings tab on the issuer/entity page on www.moodys.com.br for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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.br for further information.

Please see Moody's Rating Symbols and Definitions on the Ratings Definitions page on www.moodys.com.br for further information on the meaning of each rating category and the definition of default and recovery.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com.br for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com.br for additional regulatory disclosures for each credit rating.

Cristiane Spercel
Vice President - Senior Analyst
Project Finance Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800 891 2518
Client Service: 1 212 553 1653

Michael J. Mulvaney
MD - Project Finance
Project Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800 891 2518
Client Service: 1 212 553 1653

No Related Data.
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