RIO DE JANEIRO--()--Fitch Ratings expects the temporary increase in electricity prices in the spot market and larger dispatches of thermal plants to negatively impact Brazilian electricity distribution companies' (DisCos) financial profile. Electricity prices in Brazil have spiked during recent months as a result of lower rain levels affecting the country's hydroelectric generation. The DisCos' credit metrics are under pressure due to: lower EBITDA generation resulting from the substantial cost increases and/or higher net debt to finance increasing working capital needs. Fitch is currently assessing the credit implications for the different distribution companies, and negative credit actions might follow for some DisCos.
The DisCos' exposure to higher spot market price has also significantly intensified in recent months as the companies are buying energy in the spot market to meet consumption demand. The current scenario is leading distribution companies to have cash disbursements with the Power System Service Charges (ESS) and with the purchase of energy at levels significantly higher than those currently passed through to end users.
Fitch understands that such higher costs are beyond the control of DisCos, which are part of the so-called 'Portion A' of the costs, and should be ultimately passed-through to end users and gradually compensated in 12 months after each company's annual tariff readjustments. As it stands, the company's ability to service short-term financial obligations will remain under pressure while they wait for tariffs to catch up with their costs. DisCos with upcoming tariff readjustment, as well as those with a lower level of under contracted energy, are less exposed to the current unfavorable scenario. These DisCos would be less affected and recover faster, provided that the currently high prices are reflected in the new tariffs.
Fitch will continue to closely monitor DisCos' financials, and some rating downgrades may occur over the short term if measures to effectively alleviate the current situation are not promptly implemented. In Fitch's opinion, it is important to have a decision from the Federal Government of Brazil in order to preserve the DisCos' liquidity during the current stress period, as well as to lower the negative impacts on their debt financial covenants and reduce the reliance on third party sources to finance their working capital needs. A bridge financing from BNDES or a cash contribution from the government could be two possibilities. It is unlikely an immediate extraordinary industry-wide tariff adjustment, as it would come just after the government implemented a 20% reduction on average on electricity prices for end users. Instead, Fitch expects that cost pass-through will be implemented during each individual DisCo's appointed tariff adjustment.
The spot market price volatility has increased during recent months, adding to DisCos' risks. During the fourth quarter of 2012, the average spot market price in the Southeastern Region submarket, for example, was BRL305.17/MWh, up from BRL42.39/MWh in the same period the year before. During January 2013, electricity prices in the same region increased to BRL413.95/MWh from an average of BRL 259.57/MWh during December 2012 and up from BRL23.14/MWh in January 2012. The average energy spot price in February 2013 was lower in the first three weeks, close to BRL183.40/MWh, in average, yet again exceeded BRL300/MWh during the week of Feb. 23.
Fitch currently analyzes several distribution companies in order to assign individual ratings or to rate a holding company. The complete list of distribution companies with the scheduled next tariff adjustment/review is bellow:
Cemig Distribuicao S.A. - April 2013
Centrais Eletricas Matogrossenses S.A. - April 2013
Companhia Paulista de Forca e Luz -April 2013
Empresa Energetica de Mato Grosso do Sul - April 2013
Energisa Sergipe - Distribuidora de Energia S.A. - April 2013
Caiua Distribuicao de Energia S.A. - May 2013
Cia Nacional de Energia Eletrica - May 2013
Empresa de Distribuicao de Energia Vale Paranapanema S.A. - May 2013
Empresa Eletrica Bragantina S.A. - May 2013
Cia Forca e Luz do Oeste - June 2013
Copel Distribuicao S.A. - June 2013
Energisa Minas Gerais - Distribuidora de Energia S.A. - June 2013
Energisa Nova Friburgo - Distribuidora de Energia S.A. - June 2013
Rio Grande Energia S.A. - June 2013
Cia de Energia Eletrica do Estado de Tocantins - July 2013
Eletropaulo Metropolitana Eletricidade de Sao Paulo S.A. - July 2013
Centrais Eletricas do Para - August 2013
Companhia Energetica do Maranhao - August 2013
Energisa Paraiba - Distribuidora de Energia S.A. - August 2013
Companhia Piratininga de Forca e Luz - October 2013
Light Servicos de Eletricidade S.A. - November 2013
Companhia Jaguari de Forca e Luz - February 2014
Companhia Leste Paulista de Forca e Luz - February 2014
Companhia Mococa de Forca e Luz - February 2014
Companhia Santa Cruz de Forca e Luz - February 2014
Companhia Sul Paulista de Forca e Luz - February 2014
Energisa Borborema - Distribuidora de Energia S.A. - February 2014
Additional information is available at 'www.fitchratings.com'.