OREANDA-NEWS. The Brazilian electricity sector's renegotiation of the hydrology risk-sharing scheme is positive for the sector, says Fitch Ratings. The agreement will reduce the pressure on most thermoelectric generating companies' working capital. It will also reduce future cash flow volatility for the companies that accepted the proposal as it limits their exposures to hydrological risk.

When hydroelectric production declines, as it did during last year's severe drought, hydro-generating companies are obliged to buy higher priced energy on the spot market, mainly from thermoelectric generators, to cover their contracted volume commitments. The government proposal allows contracts in the regulated market (ACR) to shift this risk (partially or fully) to consumers, retroactive to early 2015, and upon the monthly payment of a risk premium. The government's proposal, which closed on Jan. 15, was widely accepted by generating companies for contracts that have distribution companies as counterparties and operate in the ACR. In contrast, generating companies rejected the offering for contracts signed on the free market (ACL), which are mainly sold to large electricity consumers and energy traders.

By accepting the government's proposal, even for just part of their energy sales contracts, the companies agree to remove all the preliminary injunctions that they had used to avoid paying for the energy they had to acquire in the spot market. Without those injunctions, the hydro-generating companies are expected to pay a large part of the approximately BRL4.2 billion outstanding balance owed to the Electric Energy Commercialization Chamber (CCEE) at the end of September 2015. Uncertainties around the injunctions for the companies that have not accepted the renegotiation proposal remain.

Fitch-rated companies that have accepted the renegotiation and are obliged to pay CCEE will not be affected. The amounts to be disbursed by Alupar, Cemig, Copel, CPFL, Eletrobras, Renova and Tractebel are manageable and should be paid in first-quarter 2016 (unless payments are scheduled in installments). Light Energia, of Group Light, is among the companies that have not accepted such renegotiation and, for this reason, should maintain their injunctions.