Eletrobras’ consolidated risk profile benefits from an extended debt maturity schedule. Total adjusted debt, excluding the Reserva Global de Reversao (RGR), increased to BRL44.8 billion as of September 2015. The company’s consolidated financial obligations are composed of international bonds (28%), Banco Nacional de Desenvolvimento Economico e Social (BNDES) loans (17%), funds raised from international multilateral agencies (7%) and by Federal Government Banks (BNDES, Banco do Brasil and Caixa Economica Federal; 33%) and others. The federal government has supported the company through guarantees to part of the latter debts, reducing Eletrobras’ cost of funds and benefiting its cash flow. As of September 2015 Eletrobras guaranteed BRL405 million of the debt of its subsidiaries.

Cash Flow Analysis

Eletrobras’ EBITDA generation should achieve an annual average of BRL2.8 billion in the next three years, according to Fitch projections. The company’s operational cash generation should benefit from a tariff increase to incorporate investments that are being made on the renewed concessions, additional compensations for the transmission concessions renewed, efficiency gains and divestment of the distribution business. Eletrobras’ current weak operational cash generation continues to reflect the highly negative impact of its decision to accept the early renewal of all of its generation and transmission power concessions. In the LTM ended Sept. 30, 2015 recurring EBITDA was BRL1.8 billion, which excludes a BRL3.4 billion nonrecurring impairment provision at the Eletrobras Termonuclear S.A. subsidiary.

The company’s consolidated CFFO of BRL4.3 billion during the LTM ended Sept. 30, 2015 was not sufficient to cover capex of BRL8.7 billion and dividends of BRL24 million, leading to negative FCF of BRL4.4 billion. CFFO saw a positive impact in fourth-quarter 2014 from a supplier’s credit of BRL7.2 billion from Amazonas Distribuidora de Energia S.A. with Petroleo Brasileiro S.A. (Petrobras) for fuel supply. Eletrobras’ 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 2016–2019 considers BRL37.1 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 does not expect Eletrobras to pay dividends until 2017.

FX Screener

FX risk screener shows Fitch’s estimates of the foreign currency (FC) and local currency split between Eletrobras’ debt, sales and operating costs. The Fitch FX Screener chart below illustrates the relative proportions rather than specific figures, thereby acknowledging the limitations of calculating the currency splits for a given financial year.

Fitch analysts make estimates, sometimes with information from management, as to the actual FC receipts or FC-linked income relative to costs. Within the graph’s debt columns, the short-term FC (usually U.S. dollar) debt is highlighted since, in a volatile currency market, this debt has to be physically repaid with FC using cash or accommodative refinancing in the bond or bank market.

Fitch believes Eletrobras is materially exposed to exchange rate fluctuations due to its relevant debt portion (BRL17 billion, or 38% of its total debt (ex-RGR) by the end of September 2015) in foreign currency. The company only has revenues in BRL and does not carry any hedging instruments, which could generate negative pressure on the company’s credit metrics and financial covenants given the significant devaluation of the Brazilian real. At Sept. 30, 2015 the company registered BRL2.6 billion of debt maturing until 2016 that is exposed to exchange rate volatility, which poses further risks.

As of September 2015 Eletrobras controlled approximately 32% of Brazil’s total installed generation capacity through its consolidated subsidiaries and its participation in Itaipu. Installed capacity ended 2015 at 44.5 gigawatts (GW), with 0.5 GW of additional capacity added in the year. Eletrobras power plants operate with 91.7% of renewable sources, 85.9% hydro, 4.5% nuclear and 1.3% solar and wind. The balance operates on 8.3% of thermal sources.

The company is also present in the relevant generation projects currently being developed in the country, which will add approximately 15 GW to this capacity by 2016–2018. The company’s investments also include 49.98% participation in the hydroelectric project Belo Monte, which will have a total 11,233 MW installed capacity.

Eletrobras operates as the responsible agent for the commercialization of the electric power generated by Itaipu and through the Programa de Incentivo às Fontes Alternativas de Energia Elétrica (Proinfa). Itaipu is one of the world’s largest hydroelectric plants, with a total installed capacity of 14,000 MW, jointly owned by Eletrobras and Administración Nacional de Electricidad, a Paraguayan governmental entity. Pursuant to a treaty between the two countries, Eletrobras sells approximately 95% of Itaipu’s output, including its 50% share and the part of Paraguay’s share of electricity not used by the country. Proinfa is a federal government program established to foster alternative sources of electric power (wind, biomass and small scale hydro) limited to a total installed capacity of 3,300 MW in stage one of the program.

The output of Itaipu and Proinfa is not subject to the public bidding process for the supply of electricity to the regulated market. Itaipu’s output, net of Paraguayan demand, is directly purchased by the distribution concessionaires in the southern/southeastern interconnected power system, as defined by the Brazilian government through the regulatory agency ANEEL. Proinfa’s output is directly sold to DisCos and free consumers. In both cases, prices are feed-in tariffs defined to cover all Itaipu’s and Proinfa’s costs, annually set by ANEEL and passed on to the energy bills. Itaipu’s feed-in-tariff is denominated in U.S. dollars, and therefore, subject to movements in the exchange rate.

Transmission

Eletrobras benefits from the transmission segment’s stable cash flow generation. The subsidiaries operate as natural monopolies and revenues are exempt from volumetric risk. Rather than relating to the transmitted electricity volume, the permitted annual revenues (PARs) for a given tariff period are based on available transmission assets. PARs relating to the basic network (transmission lines with voltages equal or higher than 230 kV) are adjusted on an annual basis to take into account inflation, as measured by the general price index market, without the need of prior approval by ANEEL. Gross revenues from energy transmission represented about 12% of Eletrobras’ total revenues at LTM Sept. 30, 2015.

As of Sept. 30, 2015 Eletrobras owned approximately 49% of all transmission lines in Brazil above 230 kV, totaling 67,494km of transmission lines. Transmission projects under construction should add 10,239km of transmission lines, representing an increase of BRL1.3 billion of PAR in the next three to four years. These projects should demand total capex of around BRL12.9 billion, including BRL2.2 billion from Eletrobras’ equity contributions.

Eletrobras, as well as other companies that accepted the early renewal of the concessions, were waiting until the government approved the compensation for the investments made in the transmission assets before May 2000. As of December 2015 two of its subsidiaries, Furnas and Eletrosul, have received the regulatory approval for the claimed value amounting to BRL10 billion (originally booked as BRL5 billion). After approving the compensation values,

government still needs to determine the terms and conditions for the payment of these amounts.

Distribution

Eletrobras holds interest in the distribution segment through six federal utilities in the north/northeast regions and a 51% stake in CELG D added to this portfolio in 2014. This segment accounts for 36% of total gross revenues at LTM Sept. 30, 2015 with a negative contribution to EBITDA.

Eletrobras’ DisCos have been presenting a weak operational performance, with low service quality and energy losses above the maximum parameters established by ANEEL, thus negatively affecting their operational cash flow and financial metrics. In July 2015 these seven concessions, along with 41 other DisCos (representing 65% of Brazilian DisCos), expired. Most of the 41 concessions were renewed up to December 2015, including CELG D. The remaining six concessions from Eletrobras should be renewed until July 2016.

Fitch considers Eletrobras’ strategy to sell all of its DisCos concessions as positive. CELG D should be the first DisCo to be privatized. The privatization was approved by Eletrobras’ board at the end of 2015 and the bidding auction and sale conclusion should occur in first-half 2016. Minimum price for Eletrobras’ total shares, representing 50.93% of the CELG D’s total capital, was set to approximately BRL1.4 billion. Eletrobras expects to privatize the remaining six DisCos in the short term.

The Brazilian power sector presents a lower rationing risk at the beginning of 2016 compared with the same period in 2015. The recovery of the hydropower plant’s reservoirs levels located in the southeastern/midwestern subsystem, the country’s major and most important subsystem, is essential to surpass this issue. The storage capacity of these plants was at 29.82% in December 2015, compared with 19.36% in December 2014. Along with this recovery, a lower energy consumption scenario for 2016, due to weak macroeconomic conditions supports the lower risk of a power rationing.

At the same time, the introduction of the tariff flag mechanism at the beginning of 2015 was positive for the segment as substantially reduced the operational cash flow volatility. The Tariff Flag System comprises three flags: green, yellow and red, in reference to the colors of traffic lights, so that consumers can more easily understand them. The tariff flags signal to consumers the actual energy price in the country and the conditions of system supply. Fitch’s concern is the behavior of losses and delinquency for 2016. As the unemployment rate increases, industrial and commercial sectors’ performance deteriorates and public entities’ cash squeezes.

Other Activities

Eletrobras acts as the sector-financing agent, managing a portfolio of sector funds that are sector charges. RGR, Conta de Desenvolvimento Energético, Uso do Bem Público and Conta de Consumo de Combustíveis Fósseis dos Sistemas Isolados collected from all market participants and are used to fund sector investments. Particularly, RGR and CDE funds finance three federal government programs: Luz para Todos, which aims at universalization of electricity access; the National Program of Efficient Public Lighting; and the National Program for Electric Power Conservation. The CDE fund acts as a government subsidy, whereas RGR borrowings bear a low, subsidized interest rate. Eletrobras incurs interest at 5% when borrowing from the RGR fund and charges an extra average administrative fee of 1%–2%

Organizational Structure

Organizational Structure— Centrais Elétricas Brasileiras S.A. (Eletrobras)
(BRL Mil., Eletrobras as of Sept. 30, 2015 and Itaipu as of June 30, 2015)

Debt and Covenant Synopsis — Centrais Eletricas Brasileiras S.A. (Eletrobras)

The ratings above were unsolicited and have been provided by Fitch as a service to investors.

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