NEW YORK, Dec. 19, 2000 (PRNewswire) Standard & Poor’s today assigned its ‘brA’ national scale issuer credit rating to AES Sul Distribuidora Gaucha de Energia S.A. The outlook is stable.
AES Sul is an electric distribution company serving 3.3 million customers in the state of Rio Grande do Sul, which is one of the most prosperous and fastest growing regions in Brazil. AES Sul’s rating reflects the challenges of operating in Brazil, including an evolving regulatory scheme and the potential for economic and financial volatility.
These risks are offset by a 30-year monopoly to distribute electricity within its concession area, a robust and diversified industrial base, and strong operating performance. In addition, AES Sul is (ultimately) 96.7% owned by AES Corp. (double-‘B’, CreditWatch Pos), which demonstrated support during the financial crisis in Brazil in 1999 by injecting about U.S.$320 million of equity.
Brazil’s regulatory system is unique in the global privatization arena because several Brazilian utilities have been privatized prior to final definition of the overarching industry structure and regulatory rules under which they operate. Rate increases and the pass through of purchased power have approximated the tenets of the concession contracts. Two developments, however, pose a generic risk for distributors in Brazil.
One is the development of a transparent and systematic approach to the reset of distribution tariffs, which will be addressed for AES Sul in 2003. The second is the ability to pass on purchased power costs after “initial contracts” are ramped down (by 25% per year) during 2003-2006. Newly signed contracts must approximate an established reference price (VN) to be passed through to customers. Since incremental power will be gas fired, however, in contrast to the current predominate hydro system, it is unclear if changes in commodity price and currency price would be passed on to the customers in their entirety.
An additional issue is the accurate calculation for a wheeling fee for free customers; as of July 2000, all customers greater than 3 MW and 69 kilovolts can choose their own supplier. This is not an imminent concern since Brazil is suffering from a shortage in capacity, and customer defection throughout Brazil has been negligible. Another issue specific to AES Sul is the mismatch of cost increases by its primary supplier (Gerasul; 49% of contracted supply) in October, and AES Sul’s own annual tariff adjustment in April.
AES Sul is working with the regulator to address this lag, which cost AES Sul about BrR8.2 million over the past cycle.
AES Sul’s electricity demand grew 8.6% for the 12 months ended Sept. 30, 2000, compared to national growth of 4%. The service territory contains the industrial areas and related service businesses in the industrial belt of Porto Alegre. While the industrial segment is large, representing 49% of energy sales and 37% of revenues, there is no particular industry concentration.
Additionally, this sector benefited significantly from the devaluation of the real in 1999, which created a boon for exports. Contractual agreements entered into by these large customers, largely for goods for export, should ensure that electricity demand for this segment remains strong for the next several years. The industrial boom activity has spurred growth in the commercial segment as well.
Financial results (on a consolidated basis with interim holding company AES Guaiba II/Empreendimentos Ltd.) are expected to improve over 1999, a year in which the lag of Gerasul’s cost recovery and unexpected and expensive purchases on the spot market due to strong demand, impaired earnings.
Still, cost management and power procurement strategy will be key for AES Sul to meet covenants in financial loan agreements at Guaiba. AES Sul will be power long over the next several years due to its contractual commitments with the recently completed Uruguaiana plant. Cash flow interest coverage (net) and cash flow to net debt are expected to exceed 3.5 times and 30%, respectively, by 2003, Standard & Poor’s said. SOURCE: Standard & Poor’s