SAO PAULO--(BUSINESS WIRE)--Fitch Ratings has downgraded Eletropaulo Metropolitana de Eletricidade de Sao Paulo S.A.'s (Eletropaulo) foreign and local currency Issuer Default Ratings (IDRs) to 'BB' from 'BB+' and long-term National Scale Rating to 'A+(bra)' from 'AA(bra)'. The Rating Outlook for the corporate ratings was revised to Stable from Negative. A complete list of rating actions is included at the end of this press release.
KEY RATING DRIVERS
The rating downgrade reflects Eletropaulo's weaker credit profile since the third tariff review cycle implementation in July 2012, with significant reduction in its operating cash generation and worse credit metrics. Fitch had already downgraded Eletropaulo's IDRs and assigned the corporate ratings a Negative Outlook on June 2013 based on the opinion that the company's potential achievements in terms of cost reductions most likely would not be sufficient to sustain the ratings at those levels. Eletropaulo is expected to return to its customers from July 2014 to June 2015 the remaining portion of one third of the BRL1.1 billion of excess funds collected from July 2011 to June 2012 and will face the fourth tariff review, scheduled for July 2015, which should continue to pressure the company's cash flow generation in the coming years.
Eletropaulo's ratings incorporate Fitch's expectation that the company's adjusted net leverage should remain moderate to high in the next few years, based on the agency's criteria, which is somewhat mitigated by its robust liquidity position and by a lengthened debt maturity profile. The company benefits from its business profile, in view of its exclusivity rights to distribute electricity within its favorable concession area in the Metropolitan Region of Greater Sao Paulo. Fitch considers the Brazilian electricity sector regulatory risk as moderate.
The hydrological risk is, currently, above average and has been putting additional pressure on Eletropaulo's cash flow due to increased costs related to high energy prices in the spot market and heavy dispatches of thermal plants. Despite the fact that those non-manageable costs are being partially compensated by a sectorial fund and the remaining portion should be recovered later through tariff increase, they pressure EBITDA and liquidity on the short-term.
Higher Leverage to Remain
Fitch expects Eletropaulo's financial leverage to be significantly higher than the conservative levels it reported prior to the 2012 tariff review. During the last 12 months (LTM) ended March 31, 2014, the company reported weak credit measures for its current ratings, with a leverage ratio, as measured by total debt-to-EBITDAP of 7.1x, and 6.3x in a net debt basis. This net leverage metric is significantly above the 4.1x recorded in 2013. Total debt of BRL5.4 billion includes additional BRL1.3 billion of pension fund liabilities due to the regulation coming from Comissao de Valores Mobiliarios (CVM) applied since the first quarter of 2013, which may not materialize in cash disbursement by the company in the future. If excluded this amount, the ratio net debt/EBITDAP would be 4.5x at the end of March 2014. Eletropaulo's financial covenants are calculated on a different basis and as of March 2014 were in compliance.
Cash Flow Under Pressure
Fitch believes Eletropaulo's cash flow generation will remain under pressure in the coming years. Eletropaulo is expected to return around BRL370 million to its customers from July 2014 to June 2015 as the remaining portion of the BRL1.1 billion of excess funds collected from July 2011 to June 2012 due to one year delay of the negative third tariff review cycle implementation. In addition, the regulatory agency (Aneel) may impose the company to compensate BRL626 million to end users due to a miscalculation of the asset remuneration base adopted during the second tariff review cycle, which will be partially offset by an increase (BRL390 million)in the asset remuneration base used on the third tariff review cycle and other regulatory items. Eletropaulo's annual regulatory EBITDA, estimated at around BRL1 billion in 2011 after the third tariff review, could be again under pressure in 2015 due to the effect of the fourth tariff review cycle.
The rules for the third tariff review cycle of Brazilian distribution companies have pressured Eletropaulo's EBITDA. The company's results have been also negatively impacted by the increased costs due to higher dispatch from thermal plants and higher electricity spot market prices, mainly in 2014, in view of unfavorable hydrological conditions. As such increased costs are not manageable, they are later on recovered via tariff, except for those already recovered through sectorial fund. Eletropaulo has used its best efforts to reduce annual expenses in order to face the more challenging environment of lower operating cash generation, with positive achievements in 2013 and in the first quarter of 2014. Its EBITDA of BRL435 million during the 12-month period ended as of March 31, 2014 was lower than the BRL575 million recorded in 2012. If not considered pension fund expenses, EBITDAP was BRL756 million in the LTM ended on the first quarter of 2014, compared to BRL1.1 billion in 2013 and BRL822 million in 2012.
The reduction of CFFO to BRL585 million as compared to BRL693 million in 2012 follows the same rationale as for the EBITDA and was not sufficient to cover BRL776 million of investments and BRL48 million of dividend payment. The company reported a negative free cash flow (FCF) of BRL239 million during the LTM ended March 2014. FCF will likely stay negative over the next few years despite lower dividend payments.
Lengthened Debt Maturity
Eletropaulo's robust liquidity position and lengthened debt maturity profile partially mitigate the company's increased leverage. Cash and marketable securities have remained above 1.5x its short-term debt throughout the last few years. As of March 31, 2014, the company's cash and marketable securities position of BRL669 million covered 3.3x its short-term debt of BRL200 million. During this period, cash plus funds from operations (FFO)-to-short-term debt ratio and cash plus cash flow from operations (CFFO)-to-short-term debt ratio of 4.9x and 6.3x, respectively, have remained comfortable despite of the sharp drop in relation to the previous years. The agreement with the pension fund during the second quarter of 2014 also benefits Eletropaulo's liquidity, as the postponement of 24 monthly payments of the principal amount due to this entity, starting on April 1st, 2014, should improve cash position by around BRL300 million.
Increasing Demand
Eletropaulo's ratings incorporate the company's low business risk profile, with an exclusive right to distribute electricity within its favorable concession area in the Metropolitan Region of Greater Sao Paulo. The company should benefit its future cash flow from electricity demand growth in its service area, as a result of the country's expected economic growth. During the first quarter of 2014, electricity demand in Eletropaulo's concession area grew by 3.5%, as compared to the same period in the previous year and above the 1.4% recorded in 2013. The average annual demand growth was 2.9% for the period 2009 to 2013, mainly due to the residential segment performance, driven by lower unemployment rates and income expansion. These two factors have also contributed for the favorable performance of the commercial segment.
Rating Sensitivities
Eletropaulo's ratings would be negatively affected in case the company's net leverage remains above 4.0x on a sustainable basis or if its cash plus marketable securities-to-short-term debt ratio goes below 1.5x. A positive rating action will depend on the company's ability to sustain a net leverage lower than 3.0x and it is not likely before the definition of the forth tariff review. Fitch will also continue to monitor the developments of the legal dispute involving Eletropaulo and Centrais Eletricas Brasileiras S.A. (Eletrobras), which could lead to increased indebtedness.
Fitch has downgraded Eletropaulo's ratings as follows:
--Foreign and Local Currency IDRs to 'BB' from 'BB+';
--Long-Term National Scale Rating to 'A+(bra)' from 'AA(bra)';
--9th debenture issue, in the amount of BRL250 million, due 2018, downgraded to 'A+(bra)' from 'AA(bra)';
--11th debenture issue, in the amount of BRL200 million, due 2018, downgraded to 'A+(bra)' from 'AA(bra)'; and
--15th debenture issue, in the amount of BRL750 million, due 2018, downgraded to 'A+(bra)' from 'AA(bra)'.
The Outlook for the corporate ratings was revised to Stable from Negative.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
--'National Ratings Criteria' (Oct. 30, 2013);
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
National Scale Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=836988
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