rio parana energia s.a.€¦ · sources: ctg brasil, moody's investors service detailed credit...

INFRASTRUCTURE AND PROJECT FINANCE

CREDIT OPINION8 May 2019

Update

RATINGS

Rio Parana Energia S.A.Domicile Brazil

Long Term Rating Ba1

Type LT Corporate FamilyRatings

Outlook Stable

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Cristiane Spercel +55.11.3043.7333VP-Senior [email protected]

Igor Kfouri +55.11.3043.6091Associate [email protected]

Alejandro Olivo +1.212.553.3837Associate Managing [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

Rio Parana Energia S.A.Update to credit analysis

SummaryRio Parana Energia S.A.'s (Rio Parana, Ba1/Aaa.br stable) credit profile reflects its stable andpredictable cash flow derived from a long-term concession to operate the Jupia and IlhaSolteira hydropower plants. The compensation for the assets' operating and maintenanceservices is primarily provided by fixed-capacity payments, adjusted annually for inflation andinsulated from hydrologic risks. The ratings also incorporate our assessment of the likelihoodof continued support from China Three Gorges Corporation (CTG Corp, A1 stable), theultimate controlling shareholder and guarantor of a substantial part of Rio Parana's currentdebt arrangements.

Rio Parana’s standalone credit profile is constrained by the company's (1) limited assetdiversification, along with an expected accelerated investment program to recover andupgrade its existing 34 generation units in the first years of the concession; (2) exposure toforeign-currency volatility because 53% of its financial liabilities, related to an intercompanyloan, are denominated in US dollars without hedging; and (3) aggressive dividend distributionstrategy.

Exhibit 1

Rio Parana's cash flow-based metrics are expected to remain well positioned for the ratingcategory through 2020 [1]

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

5.0x

0%

5%

10%

15%

20%

25%

2016 2017 2018 2019E 2020E

(CFO Pre-W/C) / Debt (left axis) (CFO Pre-W/C + Interest) / Interest Expense (right axis)

[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-FinancialCorporations. Financials are sourced from the company's audited reports prepared according to the IFRS standards.Sources: Moody's Financial Metrics™, Moody's Investors Service projections

Credit strengths

» Stable and predictable cash flow derived from the regulated market, based on fixedrevenue, with no exposure to volume risk

» Support from the ultimate parent, CTG Corp

» Strong credit metrics

MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE

» Long operating track record

Credit challenges

» Limited asset diversification

» Unhedged exposure to foreign-currency volatility

» Accelerated investment program in the first years of the concession

» Large dividend distributions

Rating outlookThe outlook on Rio Parana's ratings is stable, in line with the outlook on the Government of Brazil's (Ba2 stable) rating. Given the highlyregulated nature of the energy sector and the operating environment in Brazil, we expect the company to be rated no more than onenotch above the sovereign bond rating.

Factors that could lead to an upgradeGiven the intrinsic link between Rio Parana's standalone credit quality and that of the Brazilian government, a positive rating action onthe government's rating could result in upward pressure on the company's global scale ratings. A rating upgrade would also take intoaccount the company's liquidity position and business profile, and the regulatory environment in which it operates. Quantitatively, anupgrade would also require a sustainable improvement in the company's credit metrics, such as:

» cash flow from operations before working capital changes (CFO pre-WC)/net debt remaining consistently above 35%

» cash interest coverage ratio remaining above 4.5x

Factors that could lead to a downgradeRio Parana's ratings will face downward pressure if the stability and transparency of the regulatory regime for the generation segmentweaken, ultimately resulting in higher volatility of or lower visibility into Rio Parana's cash flow base, leading to a sustainable decline inthe company's credit metrics. The global scale ratings can also be downgraded if there is a similar action on the Brazilian government'srating or CTG Corp’s credit profile. Our assumption of a decline in the shareholders' willingness to provide support could also lead toa downgrade of the company’s ratings. Quantitatively, a downgrade would be considered if the company's credit metrics consistentlydeteriorate, such as:

» CFO pre-WC/net debt remaining below 20%

» interest coverage ratio staying below 2.8x

Key indicators

Exhibit 2Rio Parana Energia S.A. [1]

12/31/2016 12/31/2017 12/31/2018 12/31/2019 (E) 12/31/2020 (E)

(CFO Pre-W/C + Interest) / Interest 3.2x 3.7x 3.6x 4.2x 4.4x

(CFO Pre-W/C) / Debt 22.7% 23.1% 20.8% 20.3% 20.6%

(CFO Pre-W/C) / Net Debt 27.4% 25.9% 25.0% 22.1% 21.9%

RCF / Debt 18.3% 3.2% 19.2% 9.6% 9.0%

[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. Financials are sourced from the company'saudited reports prepared according to the IFRS standards.Sources: Moody's Financial Metrics™, Moody's Investors Service projections

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 8 May 2019 Rio Parana Energia S.A.: Update to credit analysis


ProfileBased in Sao Paulo, Rio Parana is an operating power company controlled by CTG Brasil S.A. (CTG Brasil), which holds 67% of thecompany's voting capital. The other 33% is held by Huikai Clean Energy S.A.R.L, a Chinese fund that invests in Latin America. InNovember 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 comprise5.0 gigawatts (GW) of installed capacity, with 2.6 GW of average physical guarantee (certified energy output or assured energy). As ofDecember 31, 2018, Rio Parana reported regulated annual net sales of BRL2.9 billion and regulated EBITDA of BRL2.0 billion.

Exhibit 3

Simplified ownership structure

Sources: CTG Brasil, Moody's Investors Service

Detailed credit considerationsStability and predictability of long-term energy supply contractsRio Parana's superior credit quality reflects its stable and predictable cash flow profile, supported by a 30-year concession to operatethe Jupia and Ilha Solteira hydropower plants granted in January 2016.

The concession agreement establishes a combined regime of mandatory quotas to the regulated market on 70% of the physicalguarantee, in accordance with Law 12,783/2013, and the remaining 30% can be traded in the free market under an independentproduction regime. As a result, the compensation for the services is primarily provided by fixed-capacity payments, based on theavailability of the company's generation assets.

The physical guarantee under the quota regime is contracted to a pool of distribution companies in the regulated market asdetermined by Agência Nacional de Energia Elétrica (ANEEL). The regulated payments are adjusted annually for inflation and insulatedfrom hydrologic risks. The high diversification of the off-take base mitigates the average-to-weak off-taker credit quality in thissegment.

Regulated revenue is subject to certain discounts when availability rates are lower than 100%, but the impact is rather limited through2020. In 2018, the average availability rate of the Jupia power plant was 92.84% and that of Ilha Solteira was 92.57%, above theregulatory limit of 89.58% and higher than the previous year's average indexes of 91.88% and 91.98%, respectively. These levels wouldimply an around 7% discount on the component of the regulated revenue formulaic approach that refers to the cost of managingthe generation assets (Gestão dos Ativos de Geração or GAG), which would translate into a 1%-2% reduction in the overall regulatedannual revenue. However, according to a determination from ANEEL, the company will not be subject to the availability adjustmentuntil the third year of the concession (July 2019) and there is a cap of 10% on discounts for the fourth and fifth years.



Hydrologic risk exposure in the short termIn the free market, which accounts for the remaining 30% of Rio Parana's revenue, the company is exposed to hydrologic risks andenergy purchase requirements in the spot market. Unlike its sister company, Rio Paranapanema Energia S.A. (Ba1 stable), the companydoes not rely on legal injunctions or hedging mechanisms to avoid additional costs when the hydrologic conditions are unfavorable.

Rio Parana's physical energy traded under the independent production regime is 90% contracted in 2019 and 87% contracted in 2020,which exacerbates the company's exposure to hydrological risk in the short term. For the medium term, the company's managementhas indicated its intention to maintain about 15% of physical energy uncontracted for protection against unfavorable hydrologyconditions and a potential spike in spot prices. As a result, the company is relatively well insulated in scenarios where the generatingscaling factor is at or above 85%.

The severe drought in Brazil over the past years resulted in higher costs for hydro generators related to energy purchase on thespot market. As such, the company experienced around BRL325 million in incremental costs in 2018. We expect the hydrologic riskto recede, leading to a generating scaling factor of 86% in 2019 and 91% in 2020, up from 84% in 2018. The improvement is acombination of the more favorable rainy season, additional installed power capacity coming on stream and an only gradual recovery inelectricity consumption.

Continued shareholder supportRio Parana's Ba1 Corporate Family Ratings (CFR) also incorporates our assessment of the likelihood of receiving continued support fromCTG Corp, the ultimate controlling shareholder and debt guarantor. The company's current debt structure comprises a BRL2.7 billionbank loan guaranteed by CTG Corp and a $925 million intercompany loan provided by China Three Gorges (Luxembourg) S.A.R.L.

Over the last few years, CTG Corp has invested over $5 billion to become the second-largest private power company operating inBrazil. In addition to controlling two hydroelectric power plants on the Parana river with an installed capacity of 5.0 GW, the CTGGroup controls 10 hydroelectric power plants on the Paranapanema river with 2.3 GW installed capacity, and has full or partialownership of 14 other hydropower plants and wind farms in the region through a partnership with EDP - Energias de Portugal, S.A.(EDP, Baa3 stable).

The investments in Brazil facilitate the implementation of CTG Corp’s global strategy by expanding its full range of services intooverseas markets while representing the Chinese engagement in the investment, construction, operation and management of overseasclean energy plants. As of the end of June 2018, Rio Parana represented around 7% of the group’s installed capacity and 7.9% of theLTM consolidated revenue of CTG Corp - assuming an average foreign-exchange rate of BRL0.55 per Chinese Yuan.

Strong credit metricsIn 2018, Rio Parana's Moody's-calculated CFO (pre-WC)/debt was 21% and cash interest coverage ratio was 3.6x, which is somewhatabove our expectation and already considered a nonrecurring judicial deposit of BRL420 million related to a tax dispute in 2016.

Until December 2016, the entirety of the company's electricity output was traded in the regulated market, at relatively higher energyprices. The changes in the revenue mix to 30% of the power purchase agreements in the free market were recognized by the regulatoronly by mid-2017, with a 10% discount on the permitted annual revenue (Receita Anual de Geração or RAB) for the review cyclespanning from July 1, 2017 to June 30, 2018. For the 2018/2019 review cycle, the company's regulated revenue was adjusted by 4.4%,in accordance with the provisions of the contractual agreement.

We expect the company to facilitate regular pass-through of inflation without significant discounts on the revenue base, with its CFO(pre-WC)/debt remaining above 20% and cash interest coverage within 3.5x-4.0x, which bode well for its rating category.

A risk to Rio Parana's credit metrics stems from its high exposure to foreign-currency volatility because 53% of the company's financialliabilities related to an intercompany loan are denominated in US dollars without hedging. Our base case scenario for the companyassumes an average foreign-exchange rate of BRL3.8 per US dollar in 2019. In the scenario of an additional 20% devaluation of thelocal currency against the US dollar, the company's CFO (pre-WC)/debt will likely fall to 18% and cash interest coverage ratio to 3.3x.



Liquidity analysisRio Parana's liquidity profile is mostly adequate for 2019, but its accelerated investment program and aggressive dividend distributionpolicy could exert some pressure over the next years.

Rio Parana plans an accelerated investment schedule in the first half of the concession to recover and upgrade the existing 34generation units. We expect capital investments for maintenance, environmental measures and upgrade of the asset base to be aroundBRL2.4 billion through 2023. Additionally, the company has a track record of high dividend distributions, which will likely translate intonegative free cash flow for the next few years.

As of December 2018, the company had large refinancing needs, given that BRL4.1 billion of its debt due in 2020; however, the largestportion (BRL3.6 billion, as of December 31, 2018) related to the intercompany loan with China Three Gorges (Luxembourg) EnergyS.A.R.L. was refinanced at the same cost and conditions over the next years leading to a more manageable debt maturity schedule.

Exhibit 4

Rio Parana's pro-forma debt amortization schedule

1,124

3

675 675 675 675

119 361

451

451 451 451

1,804

-

500

1,000

1,500

2,000

2,500

3,000

Cash & CashEquivalents

2019 2020 2021 2022 2023+

in B

RL

mill

ion

Bank loan Debentures Refinanced Intercompany loan

Debt amortization schedule based on company's cash and debt position as of December 31, 2018 adjusted by its refinanced intercompany loan made in 2019 and assuming a foreign-exchange rate of BRL 3.90/USD.Source: Rio Parana 2018 financials and information provided by the company



Rating methodology and scorecard factors

According to our Unregulated Utilities and Unregulated Power Companies rating methodology, our 12-18-month forward view for RioParana maps to a Ba1 outcome, which is at the same level as the Corporate Family Rating (CFR) assigned to the company on the globalscale.

Exhibit 5

Rating factorsRio Parana Energia S.A.

Unregulated Utilities and Unregulated Power Companies Industry Grid [1][2]

Factor 1 : Scale (10%) Measure Score Measure Score

a) Scale (USD Billion) Baa Baa Baa Baa

Factor 2 : Business Profile (40%)

a) Market Diversification Ba Ba Ba Ba

b) Hedging and Integration Impact on Cash Flow Predictability Baa Baa Baa Baa

c) Market Framework & Positioning Ba Ba Ba Ba

d) Capital Requirements and Operational Performance Baa Baa Baa Baa

e) Business Mix Impact on Cash Flow Predictability NA NA NA NA

Factor 3 : Financial Policy (10%)

a) Financial Policy B B B B

Factor 4 : Leverage and Coverage (40%)

a) (CFO Pre-W/C + Interest) / Interest (3 Year Avg) 3.5x Ba 3.5x - 4.0x Ba

b) (CFO Pre-W/C) / Debt (3 Year Avg) 22.2% Baa 20% - 22% Baa

c) RCF / Debt (3 Year Avg) 13.8% Ba 9% - 10% Ba

Rating:

a) Indicated Outcome from Grid Ba1 Ba1

b) Actual Rating Assigned Ba1

Current

FY 12/31/2018

Moody's 12-18 Month Forward

View

As of 4/22/2019 [3]

[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations.[2] As of 12/31/2018 (L).[3] This represents Moody's forward view, not the view of the issuer, and unless noted in the text, does not incorporate significant acquisitions and divestures.Source: Moody's Financial Metrics™

Ratings

Exhibit 6

Category

Outstanding Amount– BRL million –

as of 31 Dec 2018 Maturity Moody’s RatingRIO PARANA ENERGIA S.A Outlook Stable Corporate Family Rating Ba1 Senior Unsecured -Dom Curr Ba1 1st Debenture Issuance – 1st series 239 12-Jul-23 Ba1 1st Debenture Issuance – 2nd series 238 16-Jun-25 Ba1 NSR Corporate Family Rating Aaa.br NSR Senior Unsecured Aaa.br 1st Debenture Issuance – 1st series 239 12-Jul-23 Aaa.br 1st Debenture Issuance – 2nd series 238 16-Jun-25 Aaa.brPARENT: CHINA THREE GORGES CORPORATION Outlook Stable Issuer Rating A1Source: Moody's Investors Service



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REPORT NUMBER 1168248



CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454


rio parana energia s.a.€¦ · sources: ctg brasil, moody's investors service detailed credit...

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