Centrais Eletricas Brasileiras SAEletrobras

Transcription

1 CREDIT OPINION Centrais Eletricas Brasileiras SA-Eletrobras Update Following Outlook Change to Negative Update Summary Rating Rationale The Ba3 corporate family rating considers Eletrobras' dominant position as Brazil's largest electricity utility, accounting for 31% of the generation capacity and 47% of installed transmission lines in the country. The rating also incorporates a track record of financial support from the government of Brazil (Ba2 negative), Eletrobras' largest shareholder holding 51% of its voting shares and 41% of total share capital. RATINGS Centrais Eletricas Brasileiras SAEletrobras Domicile Rio de Janeiro, Brazil Long Term Rating Ba3 Type LT Corporate Family Ratings Outlook Negative Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. On a stand-alone basis, Eletrobras baseline credit assessment (BCA) of b2 reflects the company's relatively weak credit metrics and tight liquidity in face of large upcoming debt maturities. In addition, the company faces large contingent liabilities and remains exposed to ongoing corruption investigations. Eletrobras' revised business strategy through 2021 will partially address a number of its credit risks by improving the company's corporate governance and operating efficiency and, ultimately, reduce leverage. Exhibit 1 Credit Metrics to Remain Weak in 2017 (CFO Pre-W/C) / Debt (left axis) (CFO Pre-W/C + Interest) / Interest Expense (right axis) 35% 5.5x 30% Contacts 25% 4.5x 20% 3.5x 15% 2.5x Cristiane Spercel VP-Senior Analyst cristiane.spercel@moodys.com Cintia Nazima Associate Analyst cintia.nazima@moodys.com Alejandro Olivo Associate Managing Director alejandro.olivo@moodys.com 10% 1.5x 5% 0.5x 0% -0.5x -5% -1.5x -10% -2.5x -15% E Source: Moody's Investors Service Credit Strengths Dominant position in the Brazilian electricity industry Evolving business turnaround Improving corporate governance Strong level of support from the Government of Brazil (Ba2 negative) 2018E

2 Credit Challenges Execution risks on capital expenditures and business divestures Large contingent liabilities and high debt burden Regulatory uncertainties, despite some recent positive decisions Tight liquidity profile in face of large upcoming debt maturities Rating Outlook The negative outlook for Eletrobras' rating follows the negative ratings outlook for Brazil, given strong links to sovereign credit quality, as their revenues are derived from economic activity within Brazil and subject to government policies. Factors that Could Lead to an Upgrade Upward ratings pressure could result from a sustained trend of stronger internal cash generation and the extension of the company s debt maturity profile that reduces refinancing pressure over the next months. Quantitatively, the ratings could be upgraded if we see an upturn in the company s overall metrics so that the cash from operations before changes in working capital (CFO pre-wc) to total debt ratio increases above 5% and the interest coverage remains above 1.0x on a sustainable basis. Moody s may also consider an upgrade of Eletrobras ratings following a material reduction of the uncertainties around the company's contingent liabilities. An upgrade of Brazil s sovereign rating could exert upward pressure on the company's ratings. Factors that Could Lead to a Downgrade Downward rating pressure could come with a deterioration in the company's liquidity profile resulting from challenges in refinancing its short term debt obligations and/or an unexpected large cash outlays related to the company's contingent liabilities. Moody's would consider a downgrade if such pressures were not mitigated by an extraordinary financial support from its shareholders or upcoming asset sales. A weakened support of the regulatory framework could also prompt a downward action, as well as further deterioration in the sovereign s credit quality. Key Indicators Exhibit 2 Key Indicators [1] entrais Eletricas Brasileiras SA-Eletrobras [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. Source: Moody's Financial Metrics This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2

3 Detailed Rating Considerations WEAK CREDIT METRICS TO GRADUALLY IMPROVE ONLY AFTER 2017 Eletrobras' credit profile faced significant deterioration since 2012, mainly as a result of political interference in the company's business and its aggressive capital expenditures program, but also due to the losses imposed by severe drought conditions and the national hydrological crisis in As a result, the company s credit quality deteriorated rapidly, as indicated by a (CFO pre-wc) to total debt ratio of 0.3% and an interest coverage ratio of 1.0x in 2016; down from 31.8% and 5.1x, respectively, in December 31, In late 2016, the management underpinned a revised multi-year business strategy that, if fully executed, will render a more efficient and focused utility company and a gradual and sustainable improvement in credit metrics. Under the plan, Eletrobras expects to shift to a more conservative investment strategy facilitated by the company's efforts to improve governance standards. In addition, the company is considering divesting some of its non-core assets, including all of its unprofitable distribution companies. We anticipate potential cash savings of up to BRL23 billion in cash savings with the plan over a five-year period through 2021, However, tangible results will materialize later in this decade, as the initiatives will be gradually implemented in 2017 through mid The plan is evolving at a fast pace. In November 2016, Eletrobras announced the successful privatization of Celg D, a distribution company that was acquired by a subsidiary of Enel Americas (Baa3 stable). With this transaction, Eletrobras cashed in approximately BRL1.1 billion (after taxes) equivalent to its 51% stake in Celg D. The successful auction of Celg D sets a positive precedent for Eletrobras to dispose six additional distribution companies. Moody s, however, expects that the privatization of the additional six distribution companies in the North and Northeast to be relatively more difficult due to their weaker financial profile and operating inefficiencies. More recently, in May 2017, the company launched a voluntary retirement plan to 4,607 eligible employees that are expected to reduce the workforce by about 20%. For this year, the company will remain subject to relatively lower operating margins than its peers due to the early renewal of concessions in 2013 at much lower tariffs for both the generation and transmission segments as well as by the low efficiency level of distribution segments. Large capital expenditure commitments and potential outlays with contingency liabilities will also prevent a significant leverage reduction in the near term. HYDROLOGICAL RISK ISSUE MITIGATED BUT LEGAL AND REGULATORY UNCERTAINTIES REMAIN After experiencing severe losses with the drought season in , Eletrobras exposure to hydrological risk has receded. The company adhered to ANEEL's, Brazil's electricity regulator, revision of the hydrological risk burden for most of hydro power generation plants operating in the regulated market. Similar to other generators, Eletrobras adhered to the new law on the regulated market, which allows the company to transfer part of the hydrological risk to final consumers in exchange for a premium payment that varies according to the level of protection chosen. Among those different levels, Eletrobras opted for the SP92 product for Eletrosul, limiting its exposure up to 8% of its physical energy on the regulated market. Eletrobras opted for the SP100 product for Furnas, Eletronorte and Amazonas GT, which is intended to effectively protect the companies hydrological risk in the future in cases where the system Generating Scaling Factor (GSF) falls. Brazil's regulatory framework has a record of inconsistent or politically charged decisions that have caused financial stress to the company. Some recent decisions have been more supportive even if that support was not without financial stress. For example, in 2016, Eletrobras also received a favorable determination from ANEEL to recognize about BRL17.7 billion of extraordinary gains as compensation for a portion of concession-related assets that the transmission companies agreed to renew ahead of their expiration date in December The final amount approved was 13% lower than Eletrobras requested and those regulatory assets will be collected through an increase in transmission tariffs starting in July 2017 that will last for eight years. Now ANEEL is looking at ways to improve the cost-sharing mechanisms among utilities and the most efficient dispatch of costlier thermal power versus hydropower. Eletrobras also has a number of other claims with the regulator regarding its transmission, generation and distribution assets that could eventually contribute to increase the size of its regulatory asset base and further boost future cash generation. We estimate that Eletrobras could eventually benefit from up to BRL20 billion in incremental cash flows over the next five years under a relatively stable and more supportive regulatory framework than in the past. Conversely, Eletrobras currently carries an onerous liability of BRL2.45 billion, because certain costs to provide services exceed the economic benefit of the concessions. The company also depends on regulatory approvals to access cash funds of the Fuel Consumption 3

4 Account (CCC) and the Energy Development Account (CDE) to honor fuel obligations of its distribution companies, for which there is a track record of delays and less supportive decisions CONTINGENT LIABILITIES PUT FURTHER PRESSURE ON HIGH DEBT BURDEN Eletrobras is exposed to several risks that could further pressure the company's already high debt burden or require additional provisions. These include off-balance-sheet liabilities, multiple litigations, unfavorable regulatory decisions and ongoing corruption investigations. As of March 2017, the company reported BRL47.0 billion in consolidated debt maturities and BRL21.2 billion in provisions to address probable losses regarding lawsuits, of which the most significant relate to certain compulsory loans (BRL14.1 billion 1Q17). Additionally, Eletrobras is part of regulatory investigations and shareholder litigations and at this point, it is unclear how much the Brazilian and US regulators might demand in total fines and penalties if they determine Eletrobras has violated any corruption or bribery laws. Eletrobras has about BRL6 billion of financial resources in judicial deposits and escrow accounts available to settle potential litigation. However, these may not be enough if there are settlements or unfavorable decisions against the company. HIGH LEVEL OF SUPPORT FROM THE GOVERNMENT OF BRAZIL In accordance with Moody's methodology for government related issuers, or GRIs, the Ba3 corporate family rating of Eletrobras reflects the combination of the following inputs: Baseline credit assessment (BCA) of b2 High-level of dependence (70%) Strong level of government support (51%-70%) The Ba2 rating of the Government of Brazil, with a negative outlook While Eletrobras' baseline credit assessment (BCA) is b2 three notches below Brazil s sovereign rating the company's credit profile benefits from the implicit support from the federal government and its superior credit quality. The government of Brazil (Ba2 negative) is Eletrobras' largest shareholder, holding 51% of its voting shares and 41% of total share capital. Recently the federal government of Brazil has provided strong evidence of continued financial support in case of need. For example, in 2016, the federal government provided for approximately BRL2.9 billion in advances for equity increases to cover for losses of previous years and anticipated cash requirements in the first half of We also note as a clear example of support the recent interaction between Eletrobras and the Federal Government to succeed in the privatization of the distribution companies by setting it as a priority for both entities, with well-defined guidance on this process set in Law # Due to the relevance of Eletrobras as the main electric utility in Brazil, we expect that the support of the federal government should be forthcoming in case of unexpected needs, despite Brazil s fiscal consolidation and potential budget restrictions. Nevertheless, legal barriers could impose a challenge for a timely financial support. EVOLVING CORPORATE GOVERNANCE During the year of 2016, Eletrobras faced some challenges to complete the filing of its 20-F forms filing for the years of 2014 and 2015 with the U.S. Securities and Exchange Commission. The filing in October 2016, following the outcome of an independent investigation on potential corruption practices in the company allowed Eletrobras to resume trading its ADS (American Depositary Shares) in the N.Y. Stock Exchange Eletrobras failed to deliver its 20F 2014 form in April 2015 after auditors expressed a qualified opinion stating that the impact, if any, from bribery allegations on Eletrobras finances due to alleged involvement in potential illegal activities related to its subsidiary, Eletrobras Termonuclear S.A. Angra 3 nuclear power plant. The company s Board of Directors, hired the law firm Hogan Lovells US LLP to undertake an independent internal investigation for the purpose of assessing the eventual existence of irregularities. The findings of the independent investigation identified an overpricing scheme of BRL302 million since 2008, BRL158 million net of impairments. Although not material to Eletrobras on a consolidated basis, it negatively affected its credit profile and created uncertainties regarding further investigations. 4

5 Since the beginning of the internal investigations on corruption allegations, the company has replaced its entire board of directors, hired a new CEO and a compliance officer, and has created an independent compliance department to help coordinate compliance across subsidiaries. The company is working to improve its corporate governance and decision making processes to restore investor confidence and mitigate refinancing risk. The plan to improve compliance includes initiatives for the elimination of material weaknesses in audited financials related to deficiencies in internal controls and alignment of the status approval levels in compliance with international standards, such as the U.S. Sarbannes-Oxley Act, the U.S. FCPA, the Brazilian Anti-Corruption Law (12.846/2013), among others. In 2016, the company already reviewed the by-laws of all Eletrobras' companies, implemented a qualification of the governance of the Board Members and completed the filing of the Forms 20F for 2014 and 2015 that were delinquent, but the complete elimination of material weakness from its audited financials is yet to be resolved. Liquidity Analysis Eletrobras liquidity position is tight in face of large upcoming debt maturities and capital expenditure requirements. As of March 2017, consolidated cash and cash equivalents amounted to BRL7.5 billion vis-a-vis BRL5.9 billion consolidated short-term debt maturities through March 2018, the company also faces large upcoming debt maturities in 2018 and 2019, respectively of BRL4.5 billion and BRL8.0 billion. Like other Brazilian companies, Eletrobras does not have committed banking facilities to face any unexpected cash disbursements. The company s debt service is further increased by large financial expenses, which have been hovering around BRL7.8 billion per year. Despite the revised capital expenditure program, which decreased 29% from the previous plan, we expect disbursements in the range of BRL7 billion to 9 billion from , of which 66% would be directed to complete power generation projects and 25% to expanding transmission business. We expect the company to finance those investments with a combination of internal cash generation and external financing sources. Profile Eletrobras is a holding company controlled by Brazil s federal government. Brazil s government holds 51% of Eletrobras' voting capital and 41% of its total capital. Eletrobras is the largest Brazilian generation and transmission company. Eletrobras transmission lines comprise 70,148 kilometers, or 47% of the country s total high-voltage transmission lines. Eletrobras electricity generation has installed capacity of 47 gigawatts, which accounts for 31% of Brazil s total generation installed capacity, besides, the company also has 22.4 GW in projects under construction to be completed by The distribution business, largely composed of small distribution companies in the north and center west portions of Brazil, represents around 5% of the total energy distributed in the country. Rating Methodology and Scorecard Factors Moody's evaluates Eletrobras' BCA mainly relative to Moody's Regulated Electric and Gas Utilities methodology published in December as depicted in the Exhibit below, the implied rating from Moody's month forward view of the industry methodology grid is Ba3. Eletrobras BCA-rating is b2, two notches below the forward looking grid, which reflects the uncertainties on contingent liabilities and tight liquidity in face of large upcoming debt maturities. 5

6 Exhibit 3 Rating Factors Centrais Eletricas Brasileiras SA-Eletrobras [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. [2] As of 12/31/2016; Source: Moody s Financial Metrics [3] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures. Source: Moody's Investors Service Ratings Exhibit 4 Category CENTRAIS ELETRICAS BRASILEIRAS SA-ELETROBRAS Outlook Corporate Family Rating Senior Unsecured Moody's Rating Negative Ba3 Ba3 Source: Moody's Investors Service Recent developments On May 31, 2017 Moody s changed the outlook of Eletrobras to negative from stable. Eletrobras's outlook follows the negative outlook of Brazil s Ba2 rating, given the company's strong links to sovereign credit quality as their revenues are derived from economic activity within Brazil and subject to government policies. 6

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8 Contacts Cristiane Spercel VP-Senior Analyst 8 CLIENT SERVICES Cintia Nazima Associate Analyst Americas Asia Pacific Japan EMEA