SAO PAULO--(BUSINESS WIRE)--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 is Negative. See the complete list of rating actions at the end of this release.
Key Rating Drivers
Eletrobras' IDRs reflect the severe negative impact on its cash generation as a result of the early renewal of its electric concessions which were initially scheduled to expire between 2015 and 2017. The company accepted the Ministerio das Minas e Energia (MME) offering for all those concessions to anticipate the renewal for a 30-year period starting at the beginning of 2013 with a sharp decline in revenues and an initial compensation of BRL14 billion. Credit metrics are high for the rating category due to negative EBITDA, while significant capital expenditures (capex) should continue to pressure free cash flow (FCF) in the next few years. Positively, Eletrobras has 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. Eletrobras is important to the country because of its market share in electricity generation, transmission and distribution, and strong presence in the auctions promoted by the government to reinforce the electric sector in the country. Regulatory risk for the power sector is considered moderate in Brazil.
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.
The Negative Outlook reflects Eletrobras' need to continue reducing costs and add new cash generation, as the group's current capital structure is not sustainable in the long term. The company had already implemented cost reduction measures, mainly linked with personnel expenses, with an estimated impact of BRL1 billion on its EBITDA in 2014.
Operational Cash Generation Still Weak
The anticipated renewal of several concessions highly reduced the group's EBITDA and had a negative impact on its credit profile. Eletrobras was the company most exposed to concession renewal rules established by the Federal Government through the MME, which affected approximately 93% and one-third of its cash flow generated by its transmission and electricity generation businesses, respectively. In the first nine months of 2013, consolidated net revenues of BRL18.5 billion, excluding construction revenues, and negative EBITDA of BRL618 million compared unfavorably with BRL21.9 billion and BRL4.6 billion presented at the same time in 2012. Until September 2013, EBITDA is negatively pressured by non-recurring items in the net amount of BRL652 million. On a recurring basis, EBITDA would be BRL34 million.
Eletrobras has the challenge to reduce costs and eliminate inefficiencies in the coming years. This will be crucial to reinforce its cash flow generation. The group is in the process of reducing its workforce by more than 4,000 employees before year end 2013 and has two other initiatives to identify further potential gains in its operations and to define the best measures to be implemented in the distribution business. Eletrobras' six distribution subsidiaries generated negative EBITDA of BRL221 million in the first nine months of 2013. Elections scheduled for the second half of 2014 can delay the implementation of such measures.
Aggressive Capex Program Should Pressure FCF
The adequate management of Eletrobras' ambitious investment program over the next few years while obtaining further operational efficiency in its existing assets continues to be challenging. 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 energy infrastructure needs. Eletrobras has announced a capex program of BRL53 billion for 2013-2017, which the company expects to finance with 70% project finance debt and 30% equity contribution. Considering that Eletrobras will hold close to 50% of the future projects, additional equity contribution is approximately BRL5 billion.
In the first nine months of 2013, cash flow from operations (CFFO), excluding the non-recurring BRL8.8 billion received as part of the initial compensation for the early concessions renewal, was negative BRL102 million due to lower revenues. Capex and equity contributions of BRL6.7 billion and dividend payout of BRL4.2 billion resulted in a pro forma negative FCF of BRL10.9 billion. Dividends are expected to be low in the next two years.
High Leverage; Debt Guarantees from Government Positive
Fitch expects Eletrobras' leverage to remain high for the rating category in the medium term even if the company successfully reduces its operating costs as planned. As per Fitch criteria, as of Sept. 30, 2013, Eletrobras' consolidated leverage, as measured by total adjusted debt (excluding Reserva Global de Reversao (RGR)) to recurring EBITDA and net adjusted debt to recurring EBITDA, were very high at 615x and 359x, respectively. The recurring EBITDA of BRL45 million used for the credit metrics calculations is based on the annualized recurring EBITDA for the first nine months of the year, as it better reflects the new cash generation capacity after the concession renewals. Considering an EBITDA of BRL2.5 billion in 2014, gross leverage would reduce to around 12x and net leverage to 8x.
Positively, the Federal Government guaranteed BRL2 billion of Eletrobras' debt with Banco Nacional de Desenvolvimento Economico e Social (BNDES) at the end of the third quarter of 2013. This shows the government's willingness to continue providing support to the group. As of Sept. 30, 2013, total adjusted debt excluding RGR amounted to BRL27.7 billion. The debt was mainly composed of loans from BNDES (BRL7.2 billion) and international bonds (BRL7.0 billion). Approximately 39% of Eletrobras' consolidated debt is foreign-currency denominated, with the exchange risk somewhat mitigated by USD-denominated revenues.
Manageable Debt Maturity Profile and Strong Liquidity
Eletrobras' risk profile benefits from a robust liquidity position and extended debt maturity schedule. As of Sept. 30, 2013, the consolidated cash and marketable securities amounted to BRL11.5 billion, which compares favorably to BRL2.1 billion of consolidated short-term debt. Approximately BRL4 billion of its cash position was allocated to the holding company, which was enough to cover its short-term debt of BRL1 billion by 3.9x. Eletrobras' liquidity can be reinforced by an additional BRL12 billion compensation for the early renewal of the transmission concessions to be received over 30 years. 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 52% of transmission lines as of Sept 30, 2013. 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 negative rating action could result from the company's failure to achieve a more solid financial profile, coupled with a weakening in its liquidity position and any evidence of additional financial support from the Federal Government.
The Brazilian government's continuous support to Eletrobras through future debt guarantees or direct capital injections would strengthen the linkage between the group and the Federal Republic of Brazil and lead to a revision of the Outlook to Stable or a potential upgrade of the IDRs. The sustainable recovery of the group's operational cash flow generation and more robust credit metrics could also positively affect the ratings.
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 is Negative.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 5, 2013.
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=810965
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.