Fitch: Eletrobras' Qualified Financial Statements Will Not Impact Ratings

SAO PAULO--()--Centrais Eletricas Brasileiras S.A.'s (Eletrobras; 'BB'/ Outlook Stable) first quarter qualified financial statements release will not result in downgrade, according to Fitch Ratings. KPMG's decision to qualify the statements reflects the uncertainty regarding the results from an investigation on alleged bribes involving the former CEO of Eletronuclear - an Eletrobras' subsidiary.

Fitch believes the potential magnitude of the results, if any, from the corruption investigation will not impact the company's cash or cash flow generation in the short term. Eletrobras is currently in the process of engaging a specialized independent firm to conduct an external investigation into the bribes allegations.

Eletrobras has also failed to file its Form 20-F as required by United States Securities and Exchange Commission (SEC). The prescribed filing date was April 30, 2015, as well as the extended date of May 15, 2015. The delay was not only due to the investigation of alleged bribes, but also due to the fact that the statutory auditor of its SPC Energia Sustentavel do Brasil Participacoes S.A. (Jirau) did not find itself independent as determined by the SEC. Another audit firm to audit the financial statements of Jirau for purposes of applying equity method accounting to Eletrobras' consolidated financial statements had to be appointed.

The delay in filling the 2014 20-F does not impact Eletrobras covenants. The company took the necessary measures to release quarter audited financial statements in BRGAAP, and complied with SEC's policy by publicly and temporarily disclosing the filling delinquency and its cause.

Two years ago Fitch downgraded Eletrobras' IDRs to high yield levels ('BB'). Fitch's decision has reflected the highly negative impact on Eletrobras' credit quality due to its decision to accept the early renewal of all of its generation and transmission electric concessions scheduled to expire between 2015 and 2017. Eletrobras continues to face a lot of challenge in achieving a sustainable capital structure absent government support, and also to significantly downsize its balance sheet through debt repayment, improvements on operational cash flow generation, and divestments on its distribution segment.

Eletrobras' ratings continue to reflect some linkage with the Federal Republic of Brazil's sovereign rating ('BBB', Outlook Negative). 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.

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Contacts

Fitch Ratings
Adriane Silva
Associate Director
+55 11 4504-2205
Fitch Ratings Brasil Ltda.
Alameda Santos, 700 - 4 andar
Sao Paulo, SP
or
Mauro Storino
Senior Director
+5 21 4503-2625
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Adriane Silva
Associate Director
+55 11 4504-2205
Fitch Ratings Brasil Ltda.
Alameda Santos, 700 - 4 andar
Sao Paulo, SP
or
Mauro Storino
Senior Director
+5 21 4503-2625
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com