OREANDA-NEWS. June 15, 2015. The presidential decree authorizing the Ministry of Mines and Energy to renew the power distribution concessions is positive for the Brazilian power sector, but will pose some challenges for certain Distribution Companies (DisCos), according to Fitch Ratings. The agency had already incorporated the concessions' renewal into its base case scenario for the industry.

Fitch considers the non-existence of concession fees or the tariff reduction associated with the renewals as positive, since they do not affect the DisCos? cash flow. Also, maintenance of the tariff review date provides stability to the sector.

Compliance with strict quality and financial health indicators to be determined on a case-by-case basis by the regulator, Agencia Nacional de Energia Eletrica (ANEEL) in the next 30 days may pose some challenges to those DisCos that have historically performed poorly. As indicated in the decree, target indicators will be determined for a five-year period with annual milestones to be achieved. Non-compliance with the annual target indicators for two consecutive years may automatically terminate the concession. On that basis, according to Fitch, the most threatened are those Discos belonging to Centrais Eletricas Brasileiras (Eletrobras/'BB'/Stable Outlook).

From July 2015 to 2016, 44 DisCos concessions will expire, among which are seven owned by Eletrobras, seven by Energisa S.A. (Energisa/'BB'/Stable Outlook), five belong to CPFL Energia S.A. (CPFL/'AA(bra)'/Stable Outlook) and four belong to Companhia Energetica de Minas Gerais (Cemig/'AA(bra)'/Stable Outlook). These concessions represent approximately 30% of power distribution market share in Brazil.