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 'www.fitchratings.com'.

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Contact:

Fitch Ratings
Wellington Senter, +55 21 4503 2606
Analyst
Fitch Ratings Brasil Ltda.
Praca XV de Novembro, 20 - Room 401 B - Downtown
Rio de Janeiro - RJ
CEP: 20010-010
or
Adriane Silva, +55 11 4504 2205
Senior Analyst
or
Mauro Storino, +55 21 4503 2625
Senior Director
or
Ricardo Carvalho, +55 21 4503 2627
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com
 
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