Centrais Eletricas Brasileiras S A : Fitch Affirms Eletrobras' Ratings at 'BB-'; Revises Outlook to Stable

15 JUN 2022

Fitch Affirms Eletrobras' Ratings at 'BB-'; Revises Outlook to Stable

Fitch Ratings - New York - 15 Jun 2022: Fitch Ratings has affirmed Centrais Eletricas Brasileiras S.A.'s (Eletrobras) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) and outstanding senior unsecured bond ratings at 'BB-'. Eletrobras' National Scale ratings, as well as its rated subsidiaries and their outstanding local debentures ratings were also affirmed at 'AA(bra)'. The Rating Outlook on the IDRs has been revised to Stable from Negative. The Outlook for the National Scale ratings remains Stable.

The Outlook revision to Stable for the IDRs reflects the weakened linkage between the company and the Brazilian sovereign rating (BB-/Negative) following the privatization of the company's shares. Fitch rates Eletrobras on a standalone basis since the government now owns less than 50% of the shares and will likely only control one or two of 11 board seats after the board election. The government retains the right to veto changes to the company's bylaws.

Fitch has withdrawn the company's standalone credit profile (SCP) assessment of 'bb-' since the company is now rated on a standalone basis and not equalized with the sovereign. The rating also reflects the consolidation of the 3,568MW hydro plant Santo Antonio, the deconsolidation of Eletronuclear and anticipated increases in the tariffs of the capacity currently sold under the Quota regime.

Key Rating Drivers

Standalone Approach Following Privatization: The Brazilian government and state-run development bank BNDES completed the sale of 697 million shares at BRL42 per share, or USD8.56, reducing its ownership to less than 50% from a combined 72.8%. The government's board representation has also been reduced from eight of 11 seats to likely one or two of 11 depending on the results of the board election; however, the government does retain a golden share allowing it to veto bylaw changes. Following the privatization, Fitch no longer rates Eletrobras according to its Government-related Entity (GRE) criteria and assesses the company's credit quality of 'BB-'.

Moderately Elevated Leverage: Fitch expects Eletrobras' total adjusted leverage, including off balance sheet guarantees, to be 5.3x and rise to 6.4x in 2023 due to BRL2.1 billion in annual privatization- related contractual obligations and capital injections. Leverage will return to the 5.5x-5.7x level in 2024 and 2025 due to scheduled debt amortizations, Quota regime tariff increases and moderate privatization synergies. Fitch assumes 20% of the company's quota capacity will be repriced per year beginning in 2023 to reflect free market conditions. A one-time BRL5 billion capital injection outflow is assumed in 2022 related to the privatization.

Changes to Consolidation: An BRL11.3 net increase in total adjusted debt is expected in 2022 due to Eletrobras' decision to inject capital in and subsequently consolidate the 3.568GW hydro plant Santo Antonio. Prior to the capital increase, controlled entity Furnas had owned a minority stake of 43.06% of Madeira Energia S.A. (MESA), the entity that wholly owns Santo Antonio Energia (SAESA). Santo Antonio's recurring EBITDA is approximately BRL1.3 billion. Eletrobras has also deconsolidated Eletronuclear whose EBITDA is roughly BRL900 million and whose deconsolidation reduces total adjusted debt by around BRL1 billion.

Privatization Increases Hydrology Risk: Fitch estimates that Eletrobras' uncontracted energy volumes of 25% in 2022 and 31% in 2023, will be sufficient to support the expected generating scaling factor (GSF) of 0.80 in 2022 and 0.85 in 2023. This scenario mitigates the company's exposure to the energy price in the spot market (PLD), whose ceiling defined by the regulator for 2022 is BRL640/MWh. The company exposure to the hydrological risk will increase after the privatization, as the sales contracts in the quota regimes, which represents around 50% of the total energy sold, currently are not affected by GSF.

If needed, Eletrobras has to obtain energy purchase contracts at prices compatible with those established in the sales contracts or maintain uncontracted energy to cover the reduction in its own generation to avoid higher negative impacts on cash generation.

Manageable Negative FCF: Eletrobras' Strategic Plan for 2022-2025 incorporates an aggressive investment plan of BRL33.5 billion in capex, which should pressure FCF over the next few years. Despite of strong expected cash flow from operations (CFFO) of around BRL8.2-8.9 billion over the next four years, the capex program should leave Eletrobras with negative FCF of around BRL2.3 billion on average between 2023 and 2025. Fitch forecasts dividend payout of 25% over the rating horizon.

Subsidiaries Ratings Equalized: Fitch equalizes National Scale ratings of Companhia Hidro Eletrica do São Francisco (Chesf) and Companhia de Geracao e Transmissao de Energia Eletrica do Sul do Brasil - Eletrobras CGT Eletrosul (CGT Eletrosul) with Eletrobras' rating due to the high legal, operational and strategic incentives between them and the controlling shareholder. Eletrobras held 99.58% of Chesf and 99.89% of CGT Eletrosul. The high incentives are mainly based on the importance of Chesf and Eletrosul assets for the Eletrobras group and on Eletrobras' position as guarantor and creditor of 55% of Chesf's debt and 81% of CGT Eletrosul's debt.

Derivation Summary

Eletrobras' 'BB-' rating is three notches below the Local Currency IDR of the Brazilian generation company Engie Brasil Energia S.A. ('BB'/Negative, LC: 'BBB-'/Negative) and the Brazilian transmission groups Alupar Investmento S.A. ('BB'/Negative, LC: 'BBB-'/Negative) and Transmissora Alianca de Energia Eletrica S.A. ('BB'/Negative, LC: 'BBB-'/Negative; TAESA) due to its lower operating performance and weaker financial profile, despite its larger size and asset diversification.

Eletrobras will have higher gross and net leverage than its higher rated peers, particularly after the consolidation of Santo Antonio Energia S.A. and incurring privatization-related costs. Eletrobras' 2021 gross and net leverage were 4.7x and 3.7x, respectively, which includes off balance sheet guarantees as

debt. Engie Brasil's gross and net leverage were 3.7x and 2.7x, Alupar's were 2.6x and 2.1x and TAESA's were 3.0x and 2.9x.

Eletrobras' leverage is expected to remain above of its peers over the next two years, with 2022 net leverage of 4.6x and 5.8x in 2023, while Engie Brasil's will be 3.0x and 2.5x. Alupar's leverage will be 3.3x and 2.7x, and TAESA's will be 3.0x and 2.5x. Additionally, Alupar and TAESA have a lower business risk profile due to their concentration in electricity transmission, which has less variability than generation.

Key Assumptions

--Generation prices of BRL196/MWh in 2022, BRL178/MWh in 2023, BRL184/MWh in 2024 and 2025;

--Hydro plant Santo Antonio's revenue, EBITDA, debt and capex are fully consolidated and Eletronuclear is de-consolidated;

--20% per year of capacity under the quota regime is repriced to reflect market prices;

--Financial obligations from the privatization of BRL5 billion in 2022 and BRL2.068 billion annually thereafter;

--Inflation of 9.2% in 2022 and 5% thereafter;

--GDP growth of 0.5% in 2022 and 1.8% thereafter;

--Average annual capex (not including equity contributions) of BRL7.9 billion from 2022 to 2025; --Dividends of 25% of net income;

--No distributions associated with the outstanding guarantees to non-consolidated subsidiaries.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

--Sustained total adjusted leverage below 5.0x and sustained net adjusted leverage below 4.0x, coupled with FFO interest coverage of 3.5x or greater.

Factors that could, individually or collectively, lead to negative rating action/downgrade: --Total adjusted leverage above 6.0x or net adjusted leverage above 5.0x; --Structurally materially negative free cash flow (FCF) across the investment cycle.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three

notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Sound Liquidity Profile: Eletrobras has a strong liquidity position. The company's robust consolidated cash and marketable securities of BRL15.4 billion were above its short-term debt of BRL9.4 billion at the end of the first quarter of 2022. Eletrobras' total adjusted debt of BRL72.6 billion at YE 2021 was mainly concentrated in Brazilian state-owned entities. Brazilian owned Federal banks hold 29% of the consolidated on-balance-sheet debt, with Petrobras responsible for 12%. Foreign currency debt representing around 17% of the group's debt. The Brazilian government provides guarantees in the amount of BRL5.9 billion, approximately 14% of total consolidated debt.

Issuer Profile

Eletrobras is the largest electric energy group in Brazil. It operates in the energy generation and energy transmission segments. The group is responsible for 28% of the installed generation capacity and 40% of the transmission lines in the country.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

Fitch Ratings Analysts

Lincoln Webber, CFA, CAIA

Director

Primary Rating Analyst [phone]

Fitch Ratings, Inc. Hearst Tower 300 W. 57th Street New York, NY 10019

Wellington Senter

Director

Secondary Rating Analyst [phone]

Saverio Minervini Senior Director Committee Chairperson [phone]

Media Contacts

Elizabeth Fogerty

New York

[phone] [e-mail]

Rating Actions

ENTITY/DEBT	RATING				RECOVERY	PRIOR
Companhia
de Geracao e
Transmissao
de Energia	Natl LT	AA(bra)		Affirmed		AA(bra)
Eletrica do
Sul do Brasil

• Eletrobras CGT Eletrosul

•	senior	Natl LT	AA(bra)		Affirmed	AA(bra)
	unsecured
•	senior	Natl LT	AA(bra)		Affirmed	AA(bra)
	secured
Centrais
Eletricas
Brasileiras	LT IDR	BB-				Affirmed	BB-
S.A.
(Eletrobras)
		Natl LT	AA(bra)		Affirmed	AA(bra)