Fitch Affirms Eletrobras and Furnas' IDRs at 'BBB'; Outlook Stable

  Fitch Affirms Eletrobras and Furnas' IDRs at 'BBB'; Outlook Stable

Business Wire

SAO PAULO -- September 06, 2012

Fitch Ratings has affirmed the ratings of Centrais Eletricas Brasileiras S.A.
(Eletrobras) and its wholly owned subsidiary, Furnas Centrais Eletricas S.A.
(Furnas), including their Issuer Default Ratings (IDRs) at 'BBB', with a
Stable Outlook. See the full list of ratings at the end of this release.

Eletrobras' ratings reflect its strong linkage with the Federal Republic of
Brazil (rated 'BBB', Outlook Stable by Fitch). Eletrobras is exposed to
political interference risks given its status as an entity controlled by the
Brazilian government. At times, the Brazilian government utilizes Eletrobras
to help it achieve certain macroeconomic and social objectives through price
controls and/or subsidies and as manager of sector funds, which underscores
its linkage to the sovereign.

Eletrobras' importance to the country given its market share in electricity
generation, distribution and transmission further strengthens the linkage
between the company's credit quality and that of the government. The company
has a strong position as the largest electricity generation and transmission
company in Brazil, representing approximately 35.3% of installed generation
capacity and around 53% of transmission lines as of June 30, 2012. 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.

Furnas' ratings are linked with its parent company (Eletrobras). Furnas is one
of the largest companies within the Eletrobras System, representing
approximately 23% of the group's installed generation capacity and 33% 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.

Uncertainties Regarding the Impact on Concession Renewal

Eletrobras is the company most exposed to concession renewal risk in 2015.
Approximately 93% and one-third of its cash flow generated by its transmission
and electricity generation businesses, respectively, is exposed to the Federal
Government's decision about renewing electricity concessions. Brazil is
expected to define the concession renewal rules for the entire sector within
the next few weeks. Fitch believes that the concessions will be renewed, yet
cash flow generation will likely be affected negatively; the main uncertainty
is the extent of this impact. For Eletrobras, if severe reductions are imposed
on energy prices and the permitted annual revenues (PAR) of transmission
lines, without any mitigating action from its controlling shareholder, the
company's credit quality could be pressured and it could also affect its
capacity to invest in current projects and to participate actively in new
auctions.

Increasing Leverage; Adequate Debt Profile

Eletrobras' leverage is considered high for the rating category. As per Fitch
criteria, as of June 30, 2012, Eletrobras' consolidated leverage, as measured
by total adjusted debt excluding Reserva Global de Reversao (RGR) to EBITDA
and net adjusted debt excluding RGR to EBITDA, were 6.8x and 5.0x,
respectively. These ratios compare unfavorably with 5.8x and 2.8x,
respectively, in 2010, and mostly reflect the high capital expenditures and
dividends payout in this period.

Fitch excluded the withdrawals from the government fund (RGR) from total debt
for the leverage calculations. Eletrobras is the manager of the RGR fund and
the company does not face credit risk on these resources that are lent to
market participants with a positive spread, and are registered also as an
asset on the company's financial statements.

As of June 30, 2012, total adjusted debt excluding RGR amounted to BRL43.8
billion. Approximately 22% of the company's debt relates to the Itaipu project
and it carries a low risk profile, since it is paid out by feed-in tariffs.
The remaining debt was composed of loans from BNDES (24%), international bonds
(14%), funds raised from international multilateral entities and guaranteed by
the federal government (6%), pension fund obligations (6%), rescheduled taxes
(2%), and other obligations (26%), with lengthened maturity profiles.
Approximately 37% of Eletrobras' consolidated debt is foreign-currency
denominated; however, exchange risk is considered low, since it holds a
natural hedge through USD-denominated revenues.

FCF Pressured By High Capital Expenditures and Dividends Payout

In Fitch's view, the adequate management of Eletrobras' ambitious capital
expenditures program over the next years, while obtaining further operational
efficiency in its existing assets continues to be challenging. Another
priority is to promote the turnaround of the weak performance of the energy
distribution subsidiaries.

Going forward, Eletrobras' free cash flow (FCF) generation is expected to
continue to be negative, mainly as a result of dividend payments and high
capital expenditures to support the country's growing energy infrastructure
needs. This situation could be further intensified depending on the magnitude
of the expected reduction in the energy tariffs and in the PAR, within the
renewal of its generation and transmission concessions due in 2015.

For the last 12 months (LTM) ended June 30, 2012, on a consolidated basis, net
revenues and EBITDA reached BRL27.6 billion and BRL6.4 billion, respectively,
which compares positively with the BRL23.9 billion and BRL5.3 billion reported
in 2010. These amounts exclude construction revenues and related costs. As per
Fitch criteria, EBITDA calculation does not consider earnings from
subsidiaries.

Cash flow from operations (CFFO) of BRL7.5 billion was not sufficient to cover
either capital expenditures of BRL11.8 billion, which were higher than
previous years, or the high dividend payout (BRL4.8 billion). This resulted in
a negative FCF of BRL9.1 billion for the LTM ended June 2012. Dividends were
affected by the partial payment of retained dividends from previous years. The
dividend balance should be repaid in a final annual installment scheduled for
June 2013. EBITDA margin of 20% (or 23% excluding construction revenues) for
the LTM ended June 2012, continues to be pressured by negative results coming
from the distribution segment and lower average prices in the sale of energy
from the generation segment compared with other players.

Strong Liquidity

The company's liquidity, although it has reduced in recent years, continues to
be robust, both on a consolidated and holding company levels. As of June 30,
2012, Eletrobras' cash and marketable securities amounted to BRL11.7 billion,
which compares favorably to BRL7 billion of consolidated short-term debt.
Approximately BRL6.1 billion of its cash position was allocated to the holding
company, which was enough to cover its short-term debt by 7.9x.

Although Fitch believes Eletrobras' liquidity could be compromised, the
holding company is not expected to face refinancing challenges. As mentioned,
Eletrobras' liquidity could be reduced in the coming years due to large
capital expenditures, high dividends, and potential pressure on its cash flow
generation. The company's liquidity will continue to be supported by its
implicit support from the government, proven access to capital markets and
expected reduction in dividend payout after 2013.

Key Rating Drivers

Eletrobras' and Furnas' ratings are linked to those of the Federal Republic of
Brazil. Therefore, any rating action related to Brazil would impact these
ratings. Moreover, given Eletrobras' weak credit metrics for the assigned
rating category on a standalone basis, any evidence of lack of financial
support from the Federal Government could result in a negative rating action.
Fitch will follow closely the impact of the concession renewals on Eletrobras,
and the support from the controlling shareholder in case of a stress scenario.

Fitch has affirmed the following ratings, with a Stable Outlook:

Eletrobras

- Foreign Currency IDR at 'BBB';

- Local Currency IDR at 'BBB';

- National Scale rating at 'AAA(bra)';

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

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

Furnas

- Foreign Currency IDR at 'BBB';

- Local Currency IDR at 'BBB';

- National Scale rating at 'AAA(bra)'.

Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 08, 2012);

--'National Ratings - Methodology Update' (Jan. 19, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

National Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885

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Contact:

Fitch Ratings
Primary Analyst
Renata Pinho, +55-11-4504-2207
Director
Fitch Ratings Brasil Ltda.
Alameda Santos, 700 - 7o. andar - Sao Paulo - SP - CEP: 01418-100
or
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Mauro Storino, +55-21-4503-2625
Senior Director
or
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Ricardo Carvalho, +55-21-4503-2627
Senior Director
or
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elizabeth.fogerty@fitchratings.com
 
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