Fitch: Brazil's Utility Concession Renewal Proposal Heightens Risk
RIO DE JANEIRO -- September 14, 2012
The measures announced by the Brazilian government for renewing energy
concessions that mature between 2015 and 2017 were unexpected by Fitch Ratings
and substantially heighten risks for companies with concessions expiring
during this period. Previously, Fitch anticipated that concessions would be
renewed at levels that provide for continuity of operations, as well as profit
levels that would provide incentives for management in addition to investments
in these critical assets.
The companies that will be most affected by the government's actions are:
--Centrais Eletricas Brasileiras S.A. (Eletrobras, Issuer Default Rating [IDR]
--Companhia de Transmissao de Energia Eletrica Paulista S.A. (CTEEP, IDR
--ISA Capital do Brasil S.A., CTEEP's controlling company (IDR
--Companhia Energetica de Minas Gerais (CEMIG, IDR 'AA(bra)').
Companhia Paranaense de Energia (COPEL, IDR 'AA+(bra)') will likely be
affected as well but to a much lesser extent. Risks may be somewhat lower for
companies that have concessions expiring beyond 2017, as future governments
may deal with renewals differently.
The main objective of the government's proposal is to lower electricity
tariffs for end users in order to benefit residential consumers and improve
industrial competitiveness. The decline in cash flow for the affected
companies would likely lead to lower investment in the sector in the future,
which would have negative consequences. The companies will have 30 days to
decide whether they accept the government's final proposal, or maintain the
concessions until their final maturities and, thereafter return them to the
government. Fitch sees little room for deviating from the proposal, however,
as the government has already announced its commitment to lower tariff for end
users on a defined percentage.
The Brazilian government's proposal for renewing the concession includes an
upfront payment to the concessionaires in exchange for a significant reduction
in revenues going forward, both of which are to be determined. The upfront
payment is intended to compensate concession holders for their assets net of
depreciation. The value, which would be calculated by the sector's regulator
ANEEL, is uncertain and likely would not fully compensate companies for all of
their investments. The government's proposal also includes a significant
decrease in revenues to levels that would only be intended to cover operating
cost, which prevents them from generating profits and creates disincentives
for future investments. As part of the government's proposal, the concession
renewal date would be moved to 2013 from 2015 to 2017, and companies would
likely have to forego the revenues that were to be generated during this
Fitch believes the government's interference in the concession renewal process
weakens the perception of the country's regulatory framework and increases
regulatory risk. The degree by which the perception of the country's
regulatory strength deteriorates would depend upon how fairly the regulator
values the concession holders' assets. The government's intention to lower
electricity tariffs for end users, which is believed to be the driver of its
actions, would pressure cash flow generation. This would have severe
implications for the investment capacity of sector participants, mainly stated
The government's proposal could also have negative implications for attracting
foreign direct investment into the country, if the market perceives the
government does not compensate existing companies fairly. In addition,
non-power concessions such as toll roads could be impacted, as participants
get a glimpse of what is to come when their own concessions expire. If the
government's actions are very negative, other concession holders could adjust
by lowering maintenance expenditures, for example.
The degree by which the credit quality of companies would be impacted depends
upon the fairness of the upfront payment, the ensuing cash flow generation and
any weakening of the respective capital structures. The credit ratings of
concession holders could be downgraded by several notches should they accept
the government's proposal without using some of the proceeds for the
government's payment to strengthen their capital structures to compensate for
a precipitous decline in their future cash flow generating capacity.
Cemig and Eletrobras are among the companies with relevant generation
concessions maturing between 2015 and 2017. The government's proposed measures
are not expected to have an immediate impact upon generation companies such as
Tractebel and Tiete, which do not have concessions maturing over the next few
years. In the short term, these generators should benefit from the reduction
of transmission costs for the market agents, which include the energy
generators, leading to a slightly positive impact upon their cash flow.
Nevertheless, as the price of energy produced by generators with expiring
concessions diminishes, the energy purchase price mix in the regulated market
would decline and could put downward pressure upon the average amounts to be
practiced in the free market.
The transmission companies with relevant concessions maturing between 2015 and
2017, namely Cemig, CTEEP and Eletrobras, should also face significant
negative impacts. These companies hold older concessions that tend to be more
profitable than new concessions that have been assigned under a more
competitive environment. Transmission companies will also be affected
negatively from a cash flow perspective, as the Brazilian government intends
to pay companies at a level that would only cover their operating and
maintenance costs. For the companies that do not have concessions maturing in
the next years, such as Taesa, Alupar and Abengoa, the immediate impact is
The Brazilian government is still studying the measures to be adopted for
distribution companies with concessions maturing between 2015 to 2017, which
includes Cemig, Copel and Eletrobras. Nevertheless, Fitch considers that the
periodical tariff review processes for this segment leave a limited room for
additional reductions in profitability. The reduction in energy tariffs aims
at stimulating the country's economic growth, which could bolster energy
consumption and increase distribution companies' cash flow generation. Cheaper
tariffs also tend to increase per capita consumption of electricity and reduce
delinquency rates. Under this scenario, distribution companies or groups with
a large participation in the distribution segment, such as Cemar, CPFL Group,
Eletropaulo, Energisa Group, Light Group and Rede Group, tend to capture
higher energy sale volumes with the announced measures.
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Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
Lucas Aristizabal, +1-312-368-3260
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