Fitch Assigns 'BBB' IDR to Itaipu; Outlook Stable
SAO PAULO -- August 14, 2014
Fitch Ratings has assigned long-term foreign and local currency Issuer Default
Ratings (IDRs) of 'BBB' and long-term national rating of 'AAA(bra)' to Itaipu
Binacional (Itaipu). The Rating Outlook is Stable.
KEY RATING DRIVERS
Itaipu's ratings reflect its strong credit profile linkage with the Federative
Republic of Brazil (long-term IDR 'BBB', Outlook Stable). Brazil has been
historically responsible for the acquisition of 90% to 94% of the energy
produced by Itaipu and guarantees, through the National Treasury, 99.2% of the
company's debt. These characteristics reduce Itaipu's exposure to the weaker
sovereign risk of the Federative Republic of Paraguay (long-term IDR 'BB-',
The ratings also incorporate Itaipu's adequate liquidity position and cash
flow predictability, resulting from the Itaipu Treaty signed between Brazil
and Paraguay. This Treaty actually defines the annual tariff as sufficient to
cover all operating and maintenance costs, capital expenditures, financial
obligations, and has a true-up mechanism to adjust for possible mismatches to
be recovered or give backs in the following year; the tariff is in dollars.
Itaipu is strategically important for both countries, with the company
supplying approximately 17% of the demand for energy in Brazil and 75% of the
demand in Paraguay; it has an excellent track record of operating efficiency.
Cash Flow Predictability
Itaipu's credit profile benefits from its known cash flow. The bi-lateral
treaty provides the company with the long-term firm commitment of both
countries to remunerate the company for 87% of its installed capacity of
14,000 MW and the total energy production of the plant, besides the annual
definition of a tariff sufficient to cover all operating costs, shareholder
obligations and debt service, which reduces its cash flow generation risk.
Brazil and Paraguay make use of Centrais Eletricas Brasileiras S.A.
(Eletrobras) and Administracion Nacional de Eletricidad (Ande), respectively,
the two shareholders of Itaipu, for the sale of its energy. In the case of
Eletrobras, the Brazilian regulator allocates a proportion of the low cost
Itaipu power to approximately 30 Brazilian electric distribution companies,
the most representative being Eletropaulo with 15.67%, in 2014. Any mismatch
in Itaipu's cash inflows to outflows due to currency fluctuations, payment
delays by the Brazilian distribution companies, as well as other budget
differences are offset when the tariff for next year is determined.
Itaipu's free cash flow (FCF) continues to be robust and approximates annual
debt amortizations. Furthermore, the company's financial profile benefits from
adequate liquidity to cover any possible cash flow mismatches. In 2013, the
company's cash flow from operations (CFFO) was USD956 million and FCF was
USD920 million, against net debt amortization of USD1.1 billion. During that
same year, the net revenue of USD3.8 billion was in line with the previous
year, while EBITDA increased to USD2 billion versus USD1.6 billion recorded in
2012; EBITDA margins were 52%. At year-end 2013, the company's cash and
marketable securities position was USD388 million, while the ratio (cash and
marketable securities + CFFO)/short-term debt was 1.1x.
High Leverage Not a Concern
Itaipu's high financial leverage is quite manageable given the tariff setting
mechanism embedded in the bi-lateral treaty between Brazil and Paraguay.
Further, virtually all of the debt is currently owed either to Brazil's
Federal Government or Eletrobras, and guaranteed by Brazil's National
Treasury. At year-end 2013, the total debt was USD15.5 billion with USD1.2
billion falling due over the next 12 months; debt has decreased to these
levels from USD18 billion at year-end 2010 and carries a 7.5% coupon. The
total debt/EBITDA and net debt/EBITDA ratios were 7.8x and 7.6x in 2013.
Fitch expects Itaipu's net debt/EBITDA ratio should remain at around 6.0x to
8.0x until 2017. Itaipu's indebtedness should gradually decline and be fully
amortized by 2023. Any unsecured debt issuances that are not directly
guaranteed by the Federal Republic of Brazil to refinance existing debt would
be rated at the IDR level given the strong ratings linkage between Itaipu and
Brazil as well as the financial strength Itaipu receives from the bi-lateral
Inexistence of Hydrologic and Regulatory Risks
Itaipu does not have hydrologic or regulatory risks associated with the
electric sector in Brazil or in Paraguay. The commercial terms of the Itaipu
Treaty signed by both countries are based on the plant's installed capacity
and not on the energy produced, which results in Itaipu having no obligation
to purchase energy from third parties to serve its customers during adverse
Future rating actions, either positive or negative, will be highly correlated
to the sovereign rating of the Federative Republic of Brazil or negative
amendments to the bi-lateral treaty.
Additional information available at 'www.fitchratings.com' or
Applicable Criteria and Related Research:
--'Corporate Rating Methodology - Including Short-Term Ratings and Linkage
Between Holding Companies and Subsidiaries' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and
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Adriane Silva, +55-11-4504-2205
Fitch Ratings Brasil Ltda.
Alameda Santos, 700 - 7th floor - Cerqueira Cesar
Sao Paulo - SP - CEP: 01418-100
Mauro Storino, +55-21-4503-2625
Ricardo Carvalho, +55-21-4503-2627
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