Brazilian Power Distribution Companies Again Under Pressure

  Brazilian Power Distribution Companies Again Under Pressure  Business Wire  RIO DE JANEIRO -- February 6, 2014  Fitch Ratings believes that the currently weak hydrology scenario, combined with the high power consumption, leads to unbalanced power supply, significantly higher short-term power prices (PLD), and cash-burn by the power distribution companies (Power DisCos) in order to support the unexpected spot market prices.  On a probability scale of low, medium, reasonable, or likely, Fitch considers the risk of a rationing event to be reasonable. If a rationing scenario develops without any substantial measures by the regulator to avoid deterioration in the sector's financial profile, negative rating actions could be taken on Brazilian power. Fitch believes it is highly likely that government support will be on par with the 2013 disbursement of interest-free financing to Power DisCos, but persistent drought would require additional support in order to avoid sector downgrades.  The current hydrology scenario has caused dispatches of almost the entire capacity of thermal power plants, boosting the price of energy on the spot market (PLD). Short-term energy prices should remain under pressure, at least during the next few weeks, as initial forecasts for February indicate a low rainfall. In January, power prices at the spot market increased to BRL484.43/MWh, from BRL249.22/MWh. The regulatory PLD cap of BRL822.83/MWh was reached in the first week of February. These prices compare to BRL413.95/MWh and BRL214.54/MWh, recorded in January and February 2013, and to an annual average of BRL262.53/MWh in 2013.  The next couple of months will be crucial in defining the hydrology scenario for the entire year of 2014, and consequently for crystalizing rationing risks. A continued drought until the beginning of April, when the dryer season starts, would impact the recovery of Brazil's most important reservoirs, such as those in the Southern and Southeastern regions, and would likely result more restrictive consumption measures. In January 2014, the level of these reservoirs were 58.6% and 40.6%, respectively, which compares to 43.8% and 37.5% during the same period in 2013 and to 63.3% and 76.2% in 2012.  The government has a few options to manage the current scenario. Among the already known forms of compensation are the Annual Tariff Readjustments, Extraordinary Readjustments and Government contributions to companies through specific funds (via Energy Development Account - CDE). The Government budget for 2014, provides for BRL 9 billion (USD4.1 billion) to be passed on from the National Treasury to CDE, and it is most likely that the Government will, once more, make use of these funds to support the Power DisCos. In 2013, the funds used to support the power distribution companies were approximately BRL 9.5 billion (USD4.4 billion).  The Annual Tariff Readjustment allows the higher power purchase costs to be fully passed on to the tariff on the tariff readjustments scheduled dates. Within this scenario, companies with their annual readjustments scheduled until April/May would be able to recover their capacity to generate operating cash flow. However, Power DisCos with readjustments scheduled for the following months would continue with their liquidity strongly pressured for longer periods, thus increasing the systemic risk of default. Among those companies with readjustments scheduled for the second semester, which should be mostly affected in case the Government decides not to support DisCos with CDE funds are: Eletropaulo, Celpa, Cemar, CPFL - Piratininga and Light.  Authorization for an extraordinary tariff readjustment for all Power DisCos would be viewed as positive, although unlikely. Both readjustment options imply increased inflation pressures. The Government has given clear signs that inflation control is a priority, even if this result in fiscal pressure on public accounts, reduced operating cash flow generation and investing capacity, and a weakened regulatory environment.  Fitch currently assigns the following ratings to companies operating with power distribution:  Eletropaulo  --Long-Term Foreign Currency IDR (Issuer Default Rating) 'BB+' (BB plus); Outlook Negative  --Long-Term Local Currency IDR 'BB+' (BB plus); Outlook Negative  --Long-Term National Rating 'AA(bra)'; Outlook Negative  Cemig  --Long-Term National Rating 'AA(bra)'; Outlook Negative  Cemig D  --Long-Term National Rating 'AA(bra)'; Outlook Negative  CPFL Energia:  --Long-Term National Rating 'AA+(bra)'; Outlook Stable  CPFL Paulista:  --Long-Term National Rating 'AA+(bra)'; Outlook Stable  CPFL Piratininga:  --Long-Term National Rating 'AA+(bra)'; Outlook Stable  RGE:  --Long-Term National Rating 'AA+(bra)'; Outlook Stable  Copel  --Long-Term National Rating 'AA+(bra)'; Outlook Stable  Light  --Long-Term National Rating 'AA-(bra)'; Outlook Negative  Light Sesa:  --Long-Term National Rating 'AA-(bra)'; Outlook Negative  Energisa  --Long-Term Foreign Currency IDR 'BB' (BB); Outlook Negative  --Long-Term Local Currency IDR 'BB' (BB); Outlook Negative  --Long-Term National Rating 'A+(bra)'; Outlook Negative  Energisa Paraiba - Distribuidora de Energia S/A (Energisa Paraiba):  --Long-Term Foreign Currency IDR 'BB+'; Outlook Negative  --Long-Term Local Currency IDR 'BB+'; Outlook Negative  --Long-Term National Rating 'AA-(bra)', Outlook Negative;  Energisa Sergipe - Distribuidora de Energia S/A (Energisa Sergipe):  --Long-Term Foreign Currency IDR 'BB+'; Outlook Negative  --Long-Term Local Currency IDR 'BB+'; Outlook Negative  --Long-Term National Rating 'AA-(bra)'; Outlook Negative;  Energisa Minas Gerais - Distribuidora de Energia S/A (Energisa Minas Gerais):  --Long-Term Foreign Currency IDR 'BB+'; Outlook Negative  --Long-Term Local Currency IDR 'BB+'; Outlook Negative  --Long-Term National Rating 'AA-(bra)'; Outlook Negative;  Cemar  --Long-Term National Rating 'AA-(bra)'; Outlook Stable  Celpa  --Long-Term Foreign Currency IDR 'B-' (B minus); Outlook Stable  --Long-Term Local Currency IDR 'B-' (B minus); Outlook Stable  --Long-Term National Rating 'BB+(bra)'; Outlook Stable  Additional information is available at ''.  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