-- Brazilian electric utility Eletropaulo reported
weaker-than-expected credit metrics and incurred additional debt to fund
implementing the third tariff review cycle.
-- However, service quality indicators improved and now are in line with
-- We revised the outlook to stable from positive and affirmed the 'BB+'
rating on the company.
On Nov. 13, 2012, Standard & Poor's Ratings Services revised its outlook on
Eletropaulo Metropolitana Eletricidade de Sao Paulo S.A. (Eletropaulo) to
stable from positive. At the same time, we affirmed our 'BB+' credit rating on
The outlook revision reflects the company's weaker-than-expected credit
metrics. Although Eletropaulo's lower cash-flow generation, due to the
third-cycle tariff reset in July 2012, was in line with our expectations,
higher debt pressured its credit metrics. Despite the active liability
management and improving debt maturity profile, the company funded the higher
capital expenditures with debt. The ratings reflect our view of the company's
"satisfactory" business risk profile and "significant" financial risk profile.
The company's "satisfactory" business risk profile (as defined by our
criteria) reflects the benefits from an exclusive concession to distribute
electricity in the Sao Paulo metropolitan area. It also reflects its large
customer base, with residential and commercial segments representing about 65%
of the company's revenues. These segments tend to be more resilient during an
economic slowdown, and we expect electricity demand to be greater than
national GDP growth. Eletropaulo's total electricity losses gradually
decreased to 10.4% as of Sept. 30, 2012, from 13% in 2007. In addition, the
company's quality service ratios improved, particularly its outage duration,
which is now in line with the regulatory standards. The impact of the third
tariff review cycle is in line with our previous expectations, which reduced
the company's EBITDA by more than 35%; however, the restructuring cost put
further pressure on the company's operating results.
In our view, Eletropaulo's cash-flow metrics will be more pressured in the
next few years than we have previously expected amid lower operating margins
from 2012 on. We revised our base-case scenario, which now incorporates
Brazil's slower economic growth for the next 12 months and funds from
operations (FFO) would be somewhat around R$900 million. We believe that the
company's credit metrics will remain in line with the rating, with total
adjusted debt to EBITDA of around 4.0x and FFO to total adjusted debt of less
than 30%, compared with our previous expectations of 3.0x and more than 35%,
As of September 2012, Eletropaulo's adjusted total debt totaled R$4.2 billion,
including adjustments for R$1.2 billion in pension fund obligations, which
require Eletropaulo to pay about R$160 million annually. We consider the
company's foreign currency debt exposure as low.
We view Eletropaulo's liquidity as "strong," reflecting the company's high
level of cash holdings, which it will use for its modest amortization
requirements. We expect Eletropaulo to report cash sources (cash reserves and
FFO) to exceed cash uses (debt amortization, capital expenditures, and
dividend payment) by almost 2.0x in 2012 and 2013. As of Sept. 30, 2012, the
company had R$930 million of cash reserves, which was sufficient to cover its
short-term maturities of R$386 million.
The stable outlook reflects our expectation that Eletropaulo will take longer
than we expected to improve its credit metrics. We could lower the ratings if
the company aggressively upstreams dividends or its cash flows deteriorate
further, leading to permanently weaker credit metrics and liquidity.
Conversely, an upgrade is possible if better-than-expected results leading to
EBITDA of less than 3.0x and FFO to total debt of more than 40%.
Related Criteria And Research
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
Sept. 18, 2012
-- Methodology and Assumptions: Standard and Poor's Liquidity Descriptors
for Global Corporate Issues, Sept. 28, 2011
-- Corporate Criteria: Ratios and Adjustments, April 15, 2008
Ratings Affirmed; CreditWatch/Outlook Action
Eletropaulo Metropolitana Eletricidade de Sao Paulo S.A.
Corporate Credit Rating BB+/Stable/-- BB+/Positive/--
Brazilian Rating Scale brAA+/Stable/-- brAA+/Positive/--
Senior Unsecured brAA+