by Staff Writers
Rio De Janeiro (UPI) Nov 30, 2012
Latin America power-generation companies are set for strong growth in the coming years mainly because of an expected surge in demand.
Rising consumer demand has mixed with industrial growth to produce a consistently upward trend in electricity demand in most of Central and South America, even amid recessionary data from countries such as oil-rich Venezuela.
The region's utility industries responded to that demand by continuing to increase power-generation capacity, aided by strong liquidity trends. An overall effect has been to boost gross domestic product in most countries of the region.
Those liquidity gains and positive medium-term electricity demand support a stable rating outlook for Latin American power companies for 2013, Fitch Ratings said in a report.
"Latin American electricity demand is anticipated to be positively correlated to GDP, which is expected to grow by 3.8 percent in 2013, up from 3 percent in 2012," said Fitch Director Lucas Aristizabal.
He cited data to indicate that Latin American power companies' liquidity also continues to be strong.
As of June 2012, the median cash in hand and cash in hand plus last 12 months funds from operations covered short-term debt by approximately 1.1x and 8.7x, respectively.
Despite that strong showing, access to credit continues to be a concern for some companies because of significant capital inputs required over the medium term.
The Fitch report indicates, however, that what is good for the companies isn't necessarily good for the consumer, analysts said.
For example, power companies don't like it when governments try to keep consumer costs low to keep on the right of the voting consumer.
The Brazilian government's attempts to lower end user energy tariffs as much as 20 percent "remain a concern," Fitch says.
Some of these efforts, including a proposal to renew electric concessions early for an upfront payment and lower tariffs and revenues, have the potential to negatively impact credit ratings, the agency warns.
For example, it said, the upfront payment might not be enough for Eletrobras to adjust its capital structure to a level that will still be in line with the company's credit quality.
In general, Fitch says, the Brazilian government's proposals will limit available funds to reinvest internal cash flow generation back into the electricity sector and reduce their ability to access debt capital markets and bank financing.
Analysts say that the companies' profit motives have to be balanced against consumer interests in countries where income disparities remain glaringly obvious. Despite its strong economic performance, Brazil has one of the largest poverty gaps in Latin America, a subject that remains taboo to politicians.
Citizens' access to electricity remains abysmally unequal in other countries, including those cited as strong growth markets in the Fitch report.
Electricity demand is expected to be especially strong in Chile, Peru and Panama and will require capacity additions and associated transmission and distribution investments, Fitch says.
Announced capacity expansions will most likely be insufficient to keep up with energy demand growth in Argentina, Venezuela and some Central American countries.
"This, coupled with already uncomfortably low energy reserve margins in these countries, will have significant short- and long-term consequences," the Fitch report said.
Argentina and Venezuela have frequent power blackouts that tend to affect the governments' popular approval ratings.
Rating actions during 2012 were equally divided between upgrades and downgrades with only 10 rating actions resulting in a rating change. Of the five downgrades during 2012, three were related to Brazilian utility Grupo Rede, which defaulted on its financial obligations during the year.
Eight Grupo Rede Energia power distribution companies were put under government administration in August to avert a rupture in the power supply.
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