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

SAO PAULO--()--Fitch Ratings has affirmed the Foreign and Local Currency Long-Term 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 for both IDRs has been revised to Stable from Negative. Fitch has also affirmed the companies' Long-Term National Scale Ratings at 'AA-(bra)' with a Stable Outlook. A complete list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The Outlook revision for the IDRs reflects the Federal Republic of Brazil's ('BB', Outlook Negative) increasing support to the Eletrobras group through capital injections of approximately BRL3 billion during 2016 and guarantees for loans reaching 30% of the debt. Fitch also expects the group's new management to implement measures to gradually improve its consolidated cash flow from operations.

Eletrobras' IDRs consider its strategic importance to the country because of its prominent position within the Brazilian power sector due to its significant market share in generation and transmission. The sovereign holds 51% of company voting shares.

On a standalone basis, Eletrobras' IDRs would be lower, due to its still weak consolidated operational cash generation, high capital expenditures program, and deteriorated credit metrics for the current rating category. The decision to accept the early renewal of all of its generation and transmission power concessions expiring between 2015 and 2017 severely affected Eletrobras' consolidated credit profile. Positively, the group has been successful in reducing operational costs, while additional compensation for the renewed transmission concessions at BRL28 billion will be added to its cash flow generation after July 2017. Eletrobras' 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, despite of the positive initiatives from the new management. Current and future governments can use the company to help it achieve certain macroeconomic and social objectives through price controls and/or subsidies. Regulatory risk for the power sector is considered moderate in Brazil, while the hydrological risk is inherent to the sector.

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 31% of its transmission coverage in kilometers. Eletrobras has a centralized cash management policy and is the primary funding provider for Furnas. Eletrobras sets the company's strategic targets, such as corporate governance standards and investment plans.

INCREASING FEDERAL GOVERNMENT SUPPORT

Fitch believes Brazilian government's increasing support to Eletrobras is positive and should help the company to achieve the operational turn around needed to bring the group's credit metrics to more adequate levels in the medium term. Government has appointed market professionals and sector experts to Eletrobras' Board and Management teams followed by the development of a new Strategic Plan for 2017-2021. National Treasury has increased its participation as guarantor in loans (30% of total debt) and injected around BRL 3 billion of cash at Eletrobras' holding company to be converted into capital in the near future.

CASH GENERATION TO IMPROVE

Eletrobras' consolidated EBITDA generation should achieve an annual average of BRL2.7 billion in the period of 2017-2019, according to Fitch projections. Eletrobras' weak operational cash generation reflects the highly negative impact of its decision to accept the early renewal of all of its generation and transmission power concessions in 2013. As Fitch expected, in the LTM ended on Sept. 30, 2016 EBITDA was positively impacted by the booking of additional revenues referring to the compensation values for the transmission assets existing before 2000 for the concessions that were early renewed in 2013. EBITDA for the period reached BRL17.6 billion in comparison with a negative BRL6 billion in 2015. If the impact of compensation revenues was not factored in, the EBITDA would be negative.

LOWER CAPEX NEEDED

Eletrobras' consolidated free cash flow (FCF) generation is expected to remain negative, even though capex and investment have been revised and reduced as part of a new business strategy. Fitch views as positive that the company's subsidiaries did not participate in the recent transmission and generation bids promoted by the government. Eletrobras' Strategic Plan for 2017-2021 considers BRL35.8 billion of capex and capital injection in subsidiaries. Expansion plans pose a challenge and will need to be funded through new debt and cash generation. Fitch expects Eletrobras to resume paying dividends in 2017. The company's consolidated cash flow from operations (CFFO) of BRL5.3 billion during the LTM ended on Sept. 30, 2016 was sufficient to cover capex of BRL1.9 billion and dividends of BRL5 million, leading to a FCF of BRL3.5 billion.

MANAGEABLE DEBT MATURITY PROFILE

Eletrobras' consolidated risk profile benefits from an extended debt maturity schedule. Total adjusted debt, excluding the Reserva Global de Reversao (RGR), was BRL40 billion in September 2016 and includes 38% of loans coming from federal banks, which may give some financial flexibility. The federal government has supported the company through guarantees to part of the debts, reducing Eletrobras' cost of funds and benefitting its cash flow. Around 27% of the debt (excluding the RGR) was in foreign currency which brings some currency risk to the group.

DIVESTMENT OF DISTRIBUTION COMPANIES POSITIVE

Fitch believes the planned divestment of the power distribution companies contributes to the group's ability to improve cash generation. CELG's privatization auction is scheduled to occur on Nov. 30, 2016 and the remaining six companies should be privatized or returned to the Federal Government by December 2017. Fitch expects Eletrobras to sell its stake/control at CELG D for a minimum BRL900 million, which enhances the liquidity. In addition, even if the privatization of the other six other distribution companies should not bring any cash to Eletrobras, it will avoid approximately BRL 2 billion per year of losses.

HIGH IMPORTANCE TO BRAZIL

Eletrobras has a strong position as the largest electricity generation and transmission company in Brazil, with 32% of installed generation capacity and 53% of transmission lines as of September 2016. Its size and active presence in the most relevant energy projects under construction in Brazil make it strategically important to the country's economy and development.

KEY ASSUMPTIONS

--Receipt of BRL27.8 bi from compensation value for the transmission concession renewal over eight years, starting in July 2017 (inflation adjusted);

--Receipt of BRL900 million from the divestment of CELG D in 2017;

--Average annual capex (including capital injection in subsidiaries) of BRL7.4 billion from 2017 to 2019;

--Dividends: no payment in 2016; 25% of net profit in 2017 and 50% from 2018.

RATING SENSITIVITIES

Factors that could potentially lead to a negative rating action are:

--A downgrade of the sovereign;

--The perception of a weakening linkage of Brazilian government support;

--Deterioration on the company's liquidity position.

Factors that could potentially lead to a positive rating action are:

--Sustained recovery of the group's operational cash flow generation;

--The Brazilian government's continuous support in order to strengthen the linkage between the group and the Federal Republic of Brazil.

LIQUIDITY

Eletrobras has historically maintained a strong liquidity position. As of Sept. 30, 2016, the company's consolidated liquidity ratios, as measured by cash and equivalents/short-term debt and cash and equivalents plus CFFO/short-term debt, were adequate at 1.1x and 2.1x, respectively. Eletrobras' liquidity of BRL6.5 billion at the end of 3Q16, compared with BRL5.8 billion of short-term debt, should be reinforced the receipt of the compensation revenues for the renewal of the transmission concessions after July 2017 and the sale of CELG D. The negative EBITDA, when excluded the non-recurring compensation revenues, does not allow calculation of leverage ratios.

FULL LIST OF RATINGS ACTIONS

Fitch has affirmed the following ratings:

Eletrobras

--Foreign Currency LT IDR at 'BB-'; Outlook revised to Stable from Negative

--Local Currency LT IDR at 'BB-'; Outlook revised to Stable from Negative

--National Scale LT rating at 'AA-(bra)'; Outlook Stable

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

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

Furnas

--Foreign Currency LT IDR at 'BB-'; Outlook revised to Stable from Negative

--Local Currency LT IDR at 'BB-'; Outlook revised to Stable from Negative

--National Scale LT rating at 'AA-(bra)'; Outlook Stable

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

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016)

https://www.fitchratings.com/site/re/886557

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1015489

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015489

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https://www.fitchratings.com/regulatory

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Fitch Ratings Brasil Ltda. Alameda Santos, 700 - 7 andar - Cerqueira Cesar - Sao Paulo - SP - CEP: 01418-100
or
Secondary Analyst
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or
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or
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Contacts

Fitch Ratings
Primary Analyst
Adriane Silva, +55 11 4504-2205
Associate Director
Fitch Ratings Brasil Ltda. Alameda Santos, 700 - 7 andar - Cerqueira Cesar - Sao Paulo - SP - CEP: 01418-100
or
Secondary Analyst
Mauro Storino, +55 21 4503-2625
Senior Director
or
Committee Chairperson
Lucas Aristizabal, +1-312-368-3260
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com