Fitch Affirms Eletropaulo's Ratings at 'BB'; Outlook Stable
KEY RATING DRIVERS
Eletropaulo's ratings reflect its moderate leverage, which is somewhat mitigated by a robust liquidity position and lengthened debt maturity profile. The analysis considered the lower liquidity risks for Brazilian power distribution companies after the introduction of the tariff flag mechanism and the extraordinary tariff revision (RTE) in the first quarter of 2015 to compensate higher costs associated with the power purchase and a sectorial charge (CDE - Conta de Desenvolvimento Energetico).
Fitch expects Eletropaulo's free cash flow (FCF) to be positive only in 2016, as cash flow from operations (CFFO) should continue to be limited in 2015 by the return to its customers of the remaining BRL206 million from the BRL1.1 billion excess funds collected from July 2011 to June 2012. The company's fourth tariff review to be implemented on July 4, 2015, should also slightly pressure its EBITDA as the 1.6% readjustment to be applied to Eletropaulo's manageable costs is below inflation. Current high energy tariffs to customers, along with expected negative GDP growth for Brazil in 2015, may also be negative for Eletropaulo as tends to decrease energy consumption and increase delinquency and energy losses.
The company benefits from its business risk profile, in view of its exclusive rights to distribute electricity within its concession area in the Metropolitan Region of Greater Sao Paulo. The ratings incorporate a moderate regulatory risk for the Brazilian power sector and a hydrological risk currently above average.
Moderate Leverage
Fitch expects Eletropaulo's leverage at moderate levels in the range of 3.0x - 4.0x in the next three years. For the last 12 months (LTM) ended on March 31, 2015, the company reported total debt-to-EBITDA ratio of 5.5x, while the net debt-to-EBITDA ratio was 4.2x in comparison with 9.2x and 7.3x, respectively, in 2014. Fitch's calculations incorporates BRL1.3 billion on the debt related to pension funds obligations, which also take part on the company's financial covenants, excluding pension fund expenses from EBITDA.
Positive FCF in 2016
Eletropaulo's cash flow generation will remain impacted by non-recurring items. The company is expected to return around BRL206 million to its customers in 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 decided that the company should compensate BRL626 million to end users due to a miscalculation of the initial asset remuneration base adjusted in the third tariff review cycle. This amount was expected to be reimbursed in up to four installments beginning on July 2014, but a court decision has upheld the reimbursement. As of March 31, 2015, the balance to be reimbursed was BRL496 million. If the court decides against the company, Fitch believes the company's cash generation will be impacted at BRL170 million-BRL200 million per year until 2018.
FCF should be positive in 2016 based on a more robust CFFO and considering annual capital expenditures around BRL500 million-BRL550 million and limited dividends distribution. In the LTM ended on March 31, 2015, CFFO of BRL478 million was not sufficient to cover capital expenditures of BRL552 million and dividends paid of BRL69 million, leading to a negative FCF of BRL143 million.
CAPEX to be funded by BNDES
Positively, Eletropaulo's capex needs should be partially funded by Banco Nacional de Desenvolvimento Economico e Social (BNDES). Fitch believes this will change the funding sources mix, which has been concentrated on capital markets and bank loans for the last years, and reduce average cost of debt. As of March 31, 2015, a contract of BRL172 million has already been signed with BNDES and a disbursement of BRL140 million is expected for 2015 with the balance of BRL32 million for 2016.
Expected Lower Energy Consumption
Eletropaulo's net revenue and EBITDA are expected to benefit from tariff increases, as the 32% from the RTE on March 2015 and the potential 15%-16% from the tariff review to be applied on July 2015. This should compensate the decline on energy consumption expected for this year, due to high energy costs and challenging macroeconomic scenario. In the first quarter of 2015, energy consumption on Eletropaulo's concession area declined 3.4% compared with the same period of the previous year. In 2014, energy consumption growth was only 0.4%. In the LTM ended March 31, 2015, net revenues were BRL11.5 billion, not considering construction revenues, while EBITDA adjusted for pension funds expenses reached BRL1.1 billion.
RATING SENSITIVITIES
Future developments that may individually or collectively lead to a negative rating action includes:
--Net leverage consistently above 4.0x;
--Cash and equivalents/short-term debt ratio below 1.0x.
Future developments that may individually or collectively lead to a positive rating action includes:
--Net leverage consistently below 2.5x;
--Cash and equivalents/short-term debt ratio above 2.5x.
LIQUIDITY AND DEBT STRUCTURE
Eletropaulo presents a strong liquidity position and a lengthened debt maturity profile, with proven access to capital markets and bank financings. As of March 31, 2015, the company's cash and marketable securities position of BRL1.1 billion covered 1.4x its short-term debt of BRL771 million and 84% of the debt maturing until 2016. Cash plus funds from operations (FFO)-to-short-term debt ratio and cash plus CFFO-to-short-term debt ratio of 3.4x and 2.1x, respectively, are also adequate. Total debt of BRL4.7 billion was mainly comprised of pension fund obligation (BRL1.3 billion) and debentures (BRL2.8 billion).
FULL LIST OF RATING ACTIONS
Fitch has affirmed Eletropaulo's ratings as follows:
--Foreign and local currency IDRs at 'BB';
--Long-term National Scale Rating at 'A+(bra)' ;
--9th debenture issue, in the amount of BRL250 million, due 2018, at 'A+(bra)';
--11th debenture issue, in the amount of BRL200 million, due 2018, at 'A+(bra)' ; and
--15th debenture issue, in the amount of BRL750 million, due 2018, at 'A+(bra)'.
The Rating Outlook for the corporate ratings is Stable.
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