Fitch Affirms Eletrobras and Furnas' IDRs at 'BB'; Outlook Revised to Stable

SAO PAULO--()--Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) of Centrais Eletricas Brasileiras S.A. (Eletrobras) and its wholly owned subsidiary, Furnas Centrais Eletricas S.A. (Furnas) at 'BB'. The Rating Outlook was revised to Stable from Negative. A complete list of the rating actions follows at the end of this release.

KEY RATING DRIVERS

The Outlook revision reflects the increasing support of the Federal Republic of Brazil to Eletrobras, through guarantees to new debt issuances. The sovereign holds 51% of Eletrobras' voting shares and was guaranteeing 16% of its consolidated debt at the end of September 2014, compared with 10% at the end of 2013.

Eletrobras' IDRs continue to reflect some linkage with the Federal Republic of Brazil's sovereign rating ('BBB', Outlook Stable). The company is important to the country due to its relevant market share in electricity generation, transmission and distribution, with strong presence in the auctions promoted by the government to reinforce the electric sector in the country. On a standalone basis, Eletrobras's IDRs would be lower due to its still weak consolidated operational cash generation, high capital expenditures program and deteriorated credit metrics.

The decision to accept the early renewal of all of its generation and transmission power concessions expiring between 2015 and 2017 severely impacted Eletrobras' consolidated credit profile. Positively, the group is being successful in reducing operational costs, while additional compensation for the renewed transmission concessions is expected to add BRL450 - 500 million per year to its cash flow generation. Eletrobras's financial profile benefits from a strong liquidity position and an extended debt maturity profile.

Eletrobras is exposed to political interference risks given its status as an entity controlled by the Brazilian government. The Brazilian government can use the company to help it achieve certain macroeconomic and social objectives through price controls and/or subsidies and as manager of sector funds.

Regulatory risk for the power sector is considered moderate in Brazil, while the hydrological risk is currently above average.

Furnas' ratings are linked with its parent company (Eletrobras). Furnas is one of Eletrobras' largest subsidiaries, representing approximately 24% of the group's installed generation capacity and 32% of its transmission coverage in kilometers. Eletrobras has a centralized cash management policy and is the primary funding provider for Furnas. Furthermore, Eletrobras sets the company's strategic targets, such as corporate governance standards and investment plans.

LOW OPERATIONAL CASH GENERATION

Fitch expects Eletrobras will be able to achieve an annual EBITDA of approximately BRL2 billion in the next three years. The company's operational cash generation should benefit from tariff increase to incorporate the investments that are being made on the renewed concessions and from additional compensations for the transmission concessions renewed.

Eletrobras' current weak operational cash generation continue to reflect the highly negative impact of its decision to accept the early renewal of all of its generation and transmission power concessions expiring between 2015 and 2017. In the last 12 months (LTM) ended on September 2014, EBITDA was BRL3 billion negative, compared with a negative BRL 3.9 billion in 2013.

CAPEX PROGRAM TO PRESSURE FCF

Eletrobras' FCF generation is expected to remain negative, mainly as a result of high capex to support its expansion plans and the country's growing power infrastructure needs. Eletrobras' BRL50 billion capex program for 2015 -- 2018 is expected to be financed with new debt and cash generation. Considering that Eletrobras will hold close to 50% of the future projects, additional equity contributions are estimated at approximately BRL7.5 billion. Fitch does not expect Eletrobras to pay dividends related to 2014 at the same level as the previous years as capital reserves should not be enough to compensate the accumulated loss of the year.

Eletrobras' cash flow from operations (CFFO) of BRL3.5 billion during the LTM ended September 30, 2014 was not sufficient to cover capex of BRL5.4 billion and dividends of BRL852 million, leading to negative FCF of BRL2.8 billion. CFFO was positively impacted by suppliers credit of BRL600 million from CELG Distribuicao S.A.(CELG-D) consolidation and non-recurring BRL1.2 billion from Amazonas Distribuidora de Energia S.A. (Amazonas Energia) that is under negotiation with Petroleo Brasileiro S.A. (Petrobras) for fuel supply.

GROWING DEBT GUARANTEES FROM GOVERNMENT

Since the end of 2013, Eletrobras and some of its subsidiaries contracted BRL12.8 billion bank loans guaranteed by the federal government. Guaranteed debt will increase to 27% of total debt until 1Q'15 from 10% at year-end 2013 once the last tranche of BRL2 billion of a BRL6.5 billion loan be disbursed and a new BNDES loan under negotiation is concluded. Fitch believes this reinforces the government intention to support the company recovery after the concessions renewal strong negative impact on Eletrobras' cash flow generation, although it is not considered enough to equalize Eletrobras and the sovereign's ratings. Federal government's guarantee to Eletrobras' debt also benefits the company through lower cost of funds.

MANAGEABLE DEBT MATURITY PROFILE AND STRONG LIQUIDITY

Eletrobras' risk profile benefits from a robust liquidity position and extended debt maturity schedule. Eletrobras' total adjusted debt, excluding the Reserva Global de Reversao (RGR), increased to BRL33.9 billion as of September 2014, mostly reflecting the maintenance of the same debt level as of year-end 2013 with the increase of the first tranche of the new debt with Banco do Brasil S.A. (BB) and Caixa Economica Federal S.A. (Caixa) at the amount of BRL6.5 billion to support working capital needs. The company' financial obligations on a consolidated basis are composed of Banco Nacional de Desenvolvimento Economico Social (BNDES) loans (19%), international bonds (18%), funds raised from international multilateral entities (7%) and guaranteed by the Federal Government (BNDES, BB and Caixa) (14%) and others.

As of Sept. 30, 2014, the company's consolidated liquidity ratios, as measured by cash/short-term debt and cash plus CFFO/short-term debt, were robust, at 1.8x and 2.6x, respectively, while net leverage cannot be calculated due to a negative EBITDA. Eletrobras' liquidity may be reinforced by an additional complimentary compensation for the concessions renewal for the existing transmission assets, estimated at BRL15 billion. The exact amount will be determined after technical studies are concluded and the regulator defines the asset's valuation. Eletrobras has the possibility of anticipating this receivable through a future flow securitization transaction.

HIGH IMPORTANCE TO BRAZIL

Eletrobras has a strong position as the largest electricity generation and transmission company in Brazil, representing approximately 34% of installed generation capacity and around 49% of transmission lines as of Sept 30, 2014. Its size and active presence in the most relevant energy projects under construction in Brazil makes it strategically important to the country's economy and development.

RATING SENSITIVITIES

A downgrade of the sovereign, the weakening of the Brazilian government support and/or the deterioration on the company's liquidity position would negatively pressure Eletrobras' IDRs.

The company's IDRs may benefit from a sustained recovery of the group's operational cash flow generation and more robust credit metrics. The Brazilian government's continuous support could also strengthen the linkage between the group and the Federal Republic of Brazil and lead to a positive rating action.

Fitch has affirmed the following ratings:

Eletrobras

--Foreign Currency IDR at 'BB';

--Local Currency IDR at 'BB';

--National Scale rating at 'AA-(bra)';

--USD1 billion senior unsecured notes due 2019 at 'BB';

--USD1.75 billion senior unsecured notes due 2021 at 'BB'.

Furnas

--Foreign Currency IDR at 'BB';

--Local Currency IDR at 'BB';

--National Scale rating at 'AA-(bra)'.

The Rating Outlook was revised to Stable from Negative.

Additional information is available at 'www.fitchratings.com'.

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=944015

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Contacts

Fitch Ratings
Primary Analyst
Adriane Silva, +55-11-4504-2205
Fitch Ratings Brasil Ltda., Alameda Santos, 700 - 7 andar - Cerqueira Cesar - Sao Paulo - SP - CEP: 01418-100
or
Secondary Analyst
Mauro Storino, +55 21 4503-2205
Senior Director
or
Committee Chairperson
Lucas Aristizabal, +1-312-368-3260
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Adriane Silva, +55-11-4504-2205
Fitch Ratings Brasil Ltda., Alameda Santos, 700 - 7 andar - Cerqueira Cesar - Sao Paulo - SP - CEP: 01418-100
or
Secondary Analyst
Mauro Storino, +55 21 4503-2205
Senior Director
or
Committee Chairperson
Lucas Aristizabal, +1-312-368-3260
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com