Approximately BRL350 million of debt instruments affected
Sao Paulo, April 18, 2011 -- Moody's Investors Service (Moody's) assigned a Baa2 rating
to up to BRL350 million unsecured bonds due in 5 years to be issued by
Companhia de Eletricidade do Estado da Bahia S.A (Coelba) in the
international markets. The outlook is stable. This is the
first time Moody's has assigned a rating to Coelba.
RATINGS RATIONALE
The proceeds of the issuance will be used to pay-off short-term
debt and strengthen the company's liquidity profile.
The Baa2 rating reflects Coelba's inherently stable and predictable
cash flow supported by a long-term concession to distribute electricity
in the state of Bahia and its relatively adequate credit metrics for the
rating category. The Baa2 rating is one notch higher than the rating
indicated by Moody's methodology grid to reflect the financial strength
of Neoenergia (not rated) on a consolidated basis and the implicit support
of its ultimate shareholders, which include the Spanish company
Iberdrola S.A (A3; negative), Banco do Brasil (Baa2
(pos), Senior Unsecured Debt Rating) and PREVI (not rated).
The rather aggressive distribution of dividends and relatively high capital
expenditures constrain the rating as does the Brazilian evolving regulatory
framework.
The change of the accounting principles from the Brazilian GAAP to the
IFRS (International Financial Reporting Standards) for Coelba's
2009 and 2010 financial statements does not interfere with Moody's
comparative analysis of the utilities' cash flow statements for
these years against the previous years.
This stems from the fact that the main cash flow parameter used in Moody's
methodologies for electric utilities cash from operations before changes
in working capital needs (CFO Pre-WC), already captured the
variations in the regulatory assets and liabilities.
Unlike the Brazilian GAAP accounting method the IFRS does not recognize
the concept of regulatory assets and liabilities. As a result,
going forward Moody's expects higher volatility in cash flow parameters
as measured by funds from operations (FFO). Any change in the so-called
regulatory assets and liabilities will be recognized either as expense
or revenue in the profit and loss statement.
Coelba has posted outstanding operating performances over the past three
years with both profitability and cash flow remaining relatively stable.
In 2010, largely as a result of a 7.5% expansion in
volume sales FFO expanded to BRL1,150 million from BRL1,010
million in 2009.
Despite the improvement in FFO, Coelba's cash flow metrics
showed some deterioration in 2010, because of a higher level of
indebtedness while CFO Pre WC remained virtually flat. The higher
level of debt mainly derived from the sizeable distribution of dividends
of BRL1 billion in 2010 up from BRL334 million in 2009 and BRL873 million
in 2008. As a result, the CFO pre-WC - Dividends
over total debt ratio fell to just 2.2% in 2010 from 45.4%
in 2009 and 13.2% in 2008.
Going forward, Moody's projects that CFO will increase until
April 2013, when lower tariffs from the application of the third
tariff review will go into effect resulting in a lower level of CFO.
The higher CFO over the next two years will derive mainly from expected
growth in annual sales volume of around 4%, in line with
the forecasted increase in the Brazilian GDP, but impaired somewhat
by projected higher interest expenses. The projected higher level
of debt along with the recent spike in the local interest rates explains
the expected higher level of interest expenses.
In April 2013, the regulator ANEEL will apply the third tariff review
to Coelba, which will transfer productivity gains to consumers.
The application will also apply a lower WACC in the face of lower capital
costs (equity and borrowings) among the Brazilian electricity distribution
companies. At the end of last year, ANEEL signaled a significant
reduction of tariffs for all Brazilian electricity distribution companies
when it placed for public hearing the new procedures for the third electricity
tariff review, to be implemented from 2011 through 2013.
According to the Brazilian electricity regulatory model all Brazilian
electricity distribution companies are subject to periodic tariff reviews
every four to five years in order to transfer any productivity gains to
consumers.
Based on public information available at ANEEL's website, a very
preliminary estimate indicates that the average reduction in EBITDA for
the Brazilian electricity distribution companies could reach as much as
30% if the tariff review parameters the regulator has suggested
are strictly followed. Moody's expects that electricity tariffs
will eventually be reduced but by a lower percentage amount than the regulator
initially suggested. Moody's expects the reduction in EBITDA
to stay within the 20-25% range, which translates
into a tariff reduction of 5% to 7%.
Moody's projects that debt will increase in 2011 and remain relatively
stable over the following two years. The projected higher level
of debt in 2011 mainly results from planned capital expenditures of over
BRL900 million and from maintaining the high dividend pay-out ratio
of close to 100%.
The stable outlook reflects Moody's expectations that, despite
some forecasted deterioration in credit metrics in comparison with the
historical three- year average, Coelba will post credit metrics
in line with the Baa3 rating category. It also reflects that Moody's
feels the company will be able to continue to count on the support of
its immediate and ultimate shareholders.
Given the recent rating action and the fact some deterioration in credit
metrics is expected, an upgrade rating action over the medium term
is very unlikely. A pronounced improvement in the level of the
support of the Brazilian electricity regulatory framework could prompt
upward rating pressure.
Moody's would consider a downgrade rating action if CFO Pre WC --
dividends over debt falls below 13% and interest coverage stays
below 3.5x for a prolonged period. Deterioration of the
financial condition of Neoenergia and the perception of lower support
from its immediate and ultimate shareholders could also prompt a downgrade
rating action.
Coelba distributes electricity to 415 municipalities out of 417 in the
state of Bahia through a 30-year concession agreement granted by
ANEEL which expires in 2027. In 2010, Coelba distributed
15,329 GWh to the regulated and free consumers, which is equivalent
to around 3.5% of all the electricity consumed in the Brazilian
integrated system. In 2010, Coelba posted net revenues of
BRL3.7 billion (USD 2.1 billion), which does not include
construction revenues of BRL693 million (USD394 million) and net profit
of BRL946 million (USD 538 million).
Coelba is controlled by Neoenergia, which has 89.8%
of its voting capital and 87.8% of its total capital.
Neoenergia is a holding company with interests in three electricity distribution
companies with also a relevant participation in the generation business.
Neonergia is controlled through a shareholding agreement by the Spanish
group Iberdrola (39% of the voting capital), Previ (49%
of the voting capital), which is the pension fund of Banco do Brasil's
employees and the federal owned bank Banco do Brasil (12% of the
voting capital).
The principal methodology used in this rating was Regulated Electric and
Gas Utilities published in August 2009.
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
Jose Soares
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's America Latina Ltda.
JOURNALISTS: 800-891-2518
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New York
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
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Moody's assigns a Baa2 rating to COELBA up to BRL350 million bonds; Outlook stable
