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Rating Action:

Moody´s upgrades the ratings of Brennand Energia to Ba2/Aa3.br from Ba3/A2.br, stable outlook

 The document has been translated in other languages

26 Oct 2018

Sao Paulo, October 26, 2018 -- Moody´s América Latina Ltda., ("Moody´s") today upgraded the Corporate Family Rating (CFR) of Brennand Energia S.A ("BESA" or "the company") to Ba2 from Ba3 on the global scale, and to Aa3.br from A2.br on the national scale. The outlook is stable for all ratings.

RATINGS RATIONALE

The upgrade of the ratings reflects the positive track record that the company has built over the last three years through consistent improvements in operating performance, despite the negative impact stemming from poor hydrology conditions affecting hydropower water reservoirs in Brazil. Since 2015 BESA's cash flow from operations before working capital change (CFO pre WC) grew consistently to reach BRL 153 million in the last twelve months ended June 2018, from BRL 143 million and BRL 133 million in 2016 and 2015 respectively.

To mitigate the costs related to shortfalls of energy generation in Brazil reflected by a Generating Scale Factor (GSF) below 1.0, BESA uses a mixed strategy of contracting an insurance coverage for the portion of energy in the regulated market, and leave a portion of energy in the free market uncontracted, to compensate for those costs. The strategy has been relatively successful in recent years, despite a slower recovery than anticipated in the GSF indicator since 2017.

Supported by moderate capital expenditures and a relatively conservative dividend payout, BESA managed over the last two years to generate positive free cash flow generation and progressively reduce its debt. This resulted in the strengthening of the company's credit metrics as shown by CFO pre WC to debt exceeding 34% and CFO pre WC interest coverage reaching 4.7x in the last twelve period ended 30 June 2018.

At an auction held by Centrais Eletricas Brasileiras SA-Eletrobras (Ba3 stable) in October 2018 BESA acquired the remaining equity stake it did not already own in eight wind power projects. The company was the main operator of those projects but not consolidating them in its financial statements. The consolidation of those wind power companies expected in 2018 will result in a higher leverage for BESA compared to previous years. Moody's estimates that CFO pre WC to debt on a pro forma basis including the full consolidation of the wind power assets will fall to around 20% in 2018, from 34% reported in 2017. However the agency expects that the additional cash flow contribution and good operating performance of those assets will contribute to progressive improvements in BESA's credit metrics going forward.

BESA's ratings continue to be constrained by (i) a small scale relative to peers as shown by only 453 Megawatts (MW) of installed capacity to date and (ii) relatively weak corporate governance and financial policy reflected in lack of publicly disclosed leverage target and financial reporting on a semi-annual basis.

The stable outlook reflects expectations that BESA will grow cash flow generation and progressively reduce its leverage such that CFO pre WC to Debt and CFO pre WC interest coverage ratios remain above 25% and 3.5x over the next 12 to 18 months.

Moody's views BESA's liquidity profile as adequate. As of 30 June 2018 the company had BRL 40 million in available cash compared to around BRL 102 million of debt maturing in the twelve months to June 2019. The agency understands that the company is currently in discussion with domestic banks to extend a portion of short term maturities and fund the acquisition of equity stakes from the Eletrobras auction. Going forward Moody's expects BESA will continue to generate positive free cash flow and maintain good access to bank debt funding at favorable conditions.

WHAT COULD CHANGE THE RATING UP/DOWN

A rating upgrade could be considered upon material improvements in BESA's operating performance such that CFO pre WC-to-debt exceeds 35% and CFO pre WC interest coverage remains above 5.0x on a sustainable basis. Given its close linkages to the local economic/regulatory environment BESA's credit quality is somewhat constrained by Brazil's sovereign rating. As such a rating upgrade could occur upon an upgrade of Brazil's sovereign rating.

A rating downgrade could result from a significant deterioration in operating performance and credit metrics, such that CFO pre WC to Debt falls below 15% and CFO pre WC interest coverage remains sustainably below 3.0x. Perception of a weakening liquidity profile could also exert negative pressures on the ratings.

Headquartered in Recife, Brazil, BESA is a family-owned holding company founded in 2006 controlling ten small hydro-power plants with an installed capacity of 205 Megawatts (MW) and eight wind power plants totaling 248MW of installed capacity, all in their operational phase. BESA is controlled by members of the Ricardo Brennand family, some of which holds minority equity interests in Brennand Investimentos S.A (BISA), a power generation holding company controlled by another arm of the Ricardo Brennand family. In the last twelve months ended 30 June 2018, BESA reported BRL322 million in revenues, BRL106 million in net income.

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_1113601.

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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, operating data, historical performance data, public information, and Moody's information.

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.

Please see the ratings disclosure page on www.moodys.com.br for general disclosure on potential conflicts of interests.

Moody's America Latina Ltda. may have provided Other Permissible Service(s) to the rated entity or its related third parties within the 12 months preceding the credit rating action. Please go to the report "Ancillary or Other Permissible Services Provided to Entities Rated by Moody's America Latina Ltda." in the link http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1143294 for detailed information.

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The date of the last Credit Rating Action was 17/3/2017.

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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.

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Paco Debonnaire
AVP - 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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