Fitch: Brazil Concession Renewal Offer Negative for Eletrobras, Marginal for
RIO DE JANEIRO -- November 07, 2012
The Brazilian Government's offer through its Ministry of Mines and Energy
(MME) for an early renewal of some expiring electricity concessions will have
various impacts for different companies, according to Fitch Ratings. Fitch
considers the offer negative for Centrais Eletricas Brasileiras S.A.
(Eletrobras, IDR 'BBB') and neutral to negative for other affected companies.
The Brazilian government is offering monetary compensation to companies with
concessions expiring between 2015 and 2017 to renew these concessions early in
2013 at tariffs that will generate breakeven EBITDA. The upfront payment might
not be enough for Eletrobras to adjust its capital structure to a level that
will still be in line with the company's credit quality. Other companies could
use the government payment to repay debt and continue to have balanced capital
structures, depending on what they do with cash inflow.
The government's proposal for generation and transmission revenues would
significantly reduce Eletrobras' and Companhia de Transmissao de Energia
Eletrica Paulista S.A.'s (CTEEP; IDR 'AA+(bra)') cash flow generation.
Companhia Paranaense de Energia (COPEL; IDR 'AA+(bra)') could see its EBITDA
decline by 10% to 15% beginning in January 2013, if they accept the
government's offer given these expiring concessions represent only a small
proportion of their total cash generating assets. Companhia Energetica de
Minas Gerais (CEMIG; IDR 'AA(bra)') will also have a EBITDA reduction of 10%
to 15% beginning in January 2013 if they accept the government's offer. This
will increase to around 30% after 2015, as Cemig has three important
hydroelectric plants with concessions expiring during this period and will not
be renewed early under the government's scheme. In general, the government's
proposals will limit available funds to reinvest internal cash flow generation
back into the electricity sector and reduce their ability to access debt
capital markets and bank financing.
Eletrobras Most Exposed
The MME offer for renewing Eletrobras' electric concessions that expire
between 2015 and 2017 holds the potential to negatively impact the company's
credit quality. The MME offered approximately BRL14 billion to Eletrobras to
renew its concessions for a period of 30 years beginning in January 2013. The
new concessions would be at significantly lower revenues, which will result in
zero to negative EBITDA for Eletrobras. The BRL14 billion renewal compensation
compares unfavorably with the company's net adjusted debt of approximately
BRL32.1 billion, particularly considering the ensuing EBITDA would be close to
zero or potentially negative should the company accept the offer.
Although the company is not expected to face immediate liquidity constrains
should it decide to accept the government's offer, its leverage level, as
measured by total debt to EBITDA will significantly increase. The company
would be able to service its debt over the next five years, given its
favorable debt maturity schedule. Nevertheless, Eletrobras' liquidity could be
pressured as the company is significantly involved in the development of the
country's electricity infrastructure expansion efforts. Significant direct
government support in the form of capital contribution and access to financing
from the different government development agencies would play an important
role in mitigating the aforementioned risk and for the company to maintain its
Eletrobras' consolidated EBITDA, as measured by operating income plus
depreciation, for the last 12 months (LTM) ended June 30, 2012 was BRL6.4
billion and would likely decline to a range of zero to negative. The company
would require significant financial support from the Federal Government to
meet its ambitious investment plans and be able to service its debt
obligations. The company's reported and estimated capex for 2011 and 2012 are
BRL10 billion and BRL13 billion, respectively. Fitch expects Eletrobras to
accept the government's proposal given the government's ownership interest,
which will pressure Eletrobras' credit quality given its weak credit metrics
for the assigned rating category on a standalone basis. Under this scenario,
the absence of direct financial support from the Federal Government could
result in a negative rating action.
CTEEP and ISA Capital: Likely Neutral to Credit Quality
MME's offer for renewing electric concessions is neutral to negative for
CTEEP's credit quality, depending on how the company uses the renewal
proceeds. The MME offered CTEEP approximately BRL2.9 billion to renew in 2013
its concession expiring in 2015 and reduce tariffs to a breakeven level for
the next 30 years. The MME's upfront payment is greater than the company's
stand-alone debt of approximately BRL2.1 billion, which should be enough for
CTEEP to repay all its outstanding debt, excluding project finance debt. The
company could also upstream enough dividends to its controlling shareholder,
ISA Capital do Brasil S.A. (ISA Capital), for this entity to repay its
financial debt outstanding, excluding preferred equity, of approximately BRL64
million. Should the company decide to accept the government's offer and use
the proceeds to invest in projects and not repay debt, its credit quality
would deteriorate significantly.
Fitch believes it is unlikely that CTEEP will accept the government's
proposal. Under the government's proposal, CTEEP's pro-forma EBITDA for the
LTM ended June 30, 2012 would be negative and the company will depend on its
current ongoing investments to generate positive cash flow in the future.
MME's proposal will lower the company's revenues by approximately BRL1.6
billion to approximately BRL1.3 billion from BRL2.9 billion, which would wipe
out the company's EBTIDA of BRL1.5 billion as of the LTM ended June 30, 2012.
This offer would also significantly hindered CTEEP's investment ability going
forward as it would limit the company's ability to raise debt at the holding
company level and it would affect its cash flow generation to support
If CTEEP declines the government's offer and waits until 2015 when its main
concession expires, the company will benefit from the permitted annual revenue
(PAR) generated by this concession between 2013 and 2015. The company will
also likely receive compensation for the remaining value of this asset, net of
depreciation, when the concession expires in 2015, which will likely be
disputed. Under this scenario, the company would also have the possibility of
participating on a bidding process to retain the asset or returning this asset
to the government if it deems its ensuing PAR is unattractive. Of CTEEP's
BRL2.9 billion of consolidated revenues reported for the LTM ended June 30,
2012, BRL2.0 billion came from its concession expiring in 2015. The government
offered CTEEP BRL2.9 billion of an upfront payment to lower this revenue to
approximately BRL500 million.
The current government's proposal could also have other negatives implications
for CTEEP as significant capital investment requirements as well as asset
impairments that could hurt net income and the company's ability to distribute
dividends. If the government payment for CTEEP's concession expiring 2015 is
lower than the book value of this asset, it will immediately result in an
impairment of the asset that will lower net income and impact the company's
ability to pay dividends to its shareholders. Also, the current government
proposal for extending the concession has some mandatory capital investments
that will be difficult for CTEEP to accomplish given its resulting limitation
to its capital structure and cash flow generation ability.
Copel: Impact Marginal
The concession renew process is not expected to materially pressure Copel's
credit profile. Under the government's offer for Copel, the company would
receive approximately BRL894 million to renew its concessions expiring between
2015 and 2017 and accept the lower generation and transmission revenues. As a
result, EBITDA would decline by approximately 10% to 15%. As of the LTM ended
June 30, 2012, Copel reported an EBITDA of approximately BRL1.8 billion. Fitch
expects Copel's credit metrics to continue to be in line with its assigned
ratings even if it accepts the government offer. As of June 2012, the
company's consolidated net leverage of approximately 0.8 times was considered
strong for the rating category. The company can use this proceeds to pay a
portion of its BRL2.7 billion of debt outstanding, pay dividends or reinvest
in new projects without significantly impacting its ratings.
Cemig: Negative Impact Partially Offset by New Investment
A majority of Cemig's concessions expire between 2013 and 2017. Cemig has
informed the government it was not interested in an offer to renew three of
its largest concessions early at significantly lower tariffs for an upfront
government payment. The company was interested in receiving an offer for other
The government offered BRL285 million and lower revenues to the company to
renew the other eligible concessions, which compares unfavorable with the
company's total net debt of approximately BRL15.2 billion. If Cemig accepts
MME's proposal, the company's cash flow generation and credit quality would be
marginally affected as its EBITDA could decline by approximately 10% to 15%
beginning in 2013.
After 2015, Cemig is exposed to losing another 15% of its EBITDA due to the
expiration of three concessions. The company has already indicated to the
government that it would not participate in any early renewal offer of
approximately 2,542 MW of installed capacity coming from three hydroelectric
plants. Cemig will let these concessions expire and is likely going to
litigate the renewal of these concessions at similar terms with the government
Cemig's credit quality will be subject to the company's ability to quickly
increase revenues and EBITDA from new projects and maintain adequate liquidity
from the potential sale of assets. The company is currently in the processes
of selling some assets to Transmissora Alianca de Energia Eletrica S.A.
(Taesa) for approximately BRL1.8 billion and the company could receive
approximately BRL2.0 billion from the Minas Gerais Government in relation to
Fitch rates the various companies as follows:
--Foreign Currency IDR 'BBB';
--Local Currency IDR 'BBB';
--National Scale rating 'AAA(bra)';
--USD1 billion senior unsecured notes due 2019 'BBB';
--USD1.75 billion senior unsecured notes due 2021 'BBB'.
Furnas Centrais Eletricas S.A.
--Foreign Currency IDR 'BBB';
--Local Currency IDR 'BBB';
--National Scale rating 'AAA(bra)'.
--National Scale rating 'AA(bra)'.
Cemig Distribuicao S.A.
--National Scale rating 'AA(bra)';
--BRL250.5 million 1st debenture issuance due 2014 'AA(bra)';
--BRL400 million 2nd debenture issuance due 2017 'AA(bra)'.
Cemig Geracao e Transmissao S.A.
--National Scale rating 'AA(bra)';
--BRL1.35 billion 3rd debenture issuance due 2022 'AA(bra)'.
--National Scale rating 'AA+(bra)'.
--National Scale rating 'AA+(bra)' ;
--BRL548 million 1st debenture issuance due 2017 'AA+(bra)'.
--Foreign Currency IDR 'BB+';
--Local Currency IDR 'BB+';
--National Scale rating 'AA-(bra)';
--USD31.6 million outstanding senior secured notes due 2017 'BBB-'.
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