Fitch: Energy Dispatch Policy Pressures Brazilian Hydroelectric

NEW YORK & SAO PAULO--(BUSINESS WIRE)-- Brazil's severe two-year drought will continue to pressure hydroelectric generation companies' operating cash flows through the end of 2015, Fitch Ratings says. Despite adequate rainfall in March, hydroelectric companies are generating below their contracted levels, requiring them to close the gap by purchasing energy on the spot market.

We believe the Operador Nacional do Sistema Eletrico (ONS) will continue to prioritize the use of higher cost thermal plants over the near term to preserve reservoir levels. The Southeastern/Midwest subsystem, the largest in Brazil, rose to 33.2% of total capacity in April 2015. It was at 19.4% in December 2014.

The duration of the drought has had a more negative impact on issuers than Fitch anticipated. Costs related to spot market purchases reached approximately BRL26 billion in 2014 for the sector. For 2015, the decline in the spot price cap (BRL388.48/MWh compared to BRL822.23/MWh previously) will be offset by a decline in the Generating Scaling Factor (GSF). The GSF is the ratio of the deficit of hydroelectric companies' actual generation volumes to their assured energy delivery. It fell from 80.6% to 78.6%, and 78.0% in January, February, and March of 2015, respectively, compared to 90.7% in 2014. For 2015, Fitch estimates GSF levels of 80%-90% and sector losses between BRL20 billion to BRL30 billion.

The impact on the credit of any specific corporate entity depends on its financial strength and asset profile diversification. Asset-specific project finance structures usually benefit from liquidity mechanisms and/or guarantees that alleviate temporary shocks.

The application of mechanisms to preserve the issuers' liquidities would be positive for their credit profile. Some hydroelectric generation companies are arguing that the GSF is inappropriate because ONS controls the dispatch order. Further, loans to cover the short-term burden of spot market purchases are currently being discussed with Agencia Nacional de Energia Eletrica, the sector regulator. The cost of the loans would eventually be recouped by additional tariffs or fees added to consumer energy bills probably in the medium term.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Fitch Ratings
Bruno Pahl
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Alameda Santos 700
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or
Adriane Silva
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or
Rob Rowan
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Source: Fitch Ratings

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