Operator series: What to expect from Eletrobras post-privatization

Fabio Di Lallo
BNamericas
26/08/2019

The Brazilian government confirmed preparations for the privatization of state power giant Eletrobras.

The process began in 2017 under the administration of Michel Temer but stalled due to political and technical reasons. Now, under Jair Bolsonaro, there is an expectation of a better environment for the sell-off as he has been implementing a pro-market agenda.

“The political environment is favorable. This government’s agenda includes privatizations. However, since this a polemical theme, some setbacks might still occur,” Thaís Pradini, a director at consultancy firm Thymos Energia, told BNamericas.

The main expectation is that after the privatization the company will be in a better position to increase investment. During the first half of 2019, Eletrobras invested 1.09bn reais (US$264mn), around 19% of the
5.7bn reais expected for the entire year.

“Eletrobras needs to be capitalized to acquire the ability to invest and participate in the new phase of the country’s economic growth,” energy minister Bento Albuquerque said recently in a statement.

The company has been keeping investment levels down since 2012 when then president Dilma Rousseff approved provisional measure 579, which offered electric utilities with concessions due to between 2015 and 2017 the option of an early renewal for up to 30 years in exchange for a significant reduction in prices and rates. The measure affected Eletrobras’ cash generation and damaged its credit metrics.

“The recommendation is that there’s a bill for Eletrobras’ capitalization. The company has been repeatedly losing space in the market and that justifies this process,” CEO Wilson Ferreira Júnior said during a conference call earlier this month.

Specialists believe that if the privatization succeeds the company will focus on improving the quality of services for final consumers and eventually it could go back to participating in concession auctions. “The Eletrobras sale is the natural path for it to be able to provide more adequate service,” Fábio Di Lallo, an attorney specialized in the electric power market at Brazilian law firm Souto Correa Advogados, told BNamericas.

Despite the difficulties in investing in recent years, the company continues to be Brazil’s largest power generation firm and, with 49.9GW, is responsible for 30.2% of the country’s installed capacity. Most of Eletrobras’ capacity comes from renewables, mainly hydro, wind and solar, and its goal is to be among the world’s three largest clean energy companies and the top 10 biggest electricity firms, with profitability comparable to the best in the industry, according to its 2019-23 business plan. Eletrobras also remains Latin America’s largest power transmission firm, with 71,042km of lines, or 46.5% of Brazil’s total.

“There will be greater demand for investments if Brazil goes back to its [former] pace of economic growth in the coming years. There will be a need for power supply expansion and we’ll need a consistent transmission network to support it,” said Francelli Jodas, a partner at KPMG.

Eletrobras has been restructured over the last three years to help it reduce debt and focus on power generation and transmission, selling non-core assets. The goal is to help it become more attractive for private investors.

In 2018 the firm sold six distribution subsidiaries in Amazonas, Acre, Piauí, Alagoas, Roraima and Rondônia states. It also raised US$320mn in an auction held last September of 71 specific purpose companies. Next steps include selling the remaining 39 specific purpose companies focused on wind generation and power transmission, and launching another voluntary redundancy plan for the rest of the year.

“There is a work in progress to reduce costs and raise revenues, but this is limited since Eletrobras remains a state-run firm,” Pradini said.

PRIVATIZATION PROCESS

The government plans to privatize Eletrobras through a share offering and converting it into a traded corporation. The final terms of the sale have not been disclosed and will be studied by national development bank BNDES.

In the past, there have been discussions on whether the federal government would maintain a golden share which would allow it to veto strategic decisions. That option, however, is unlikely to be pursued as it would make the sale harder.

Discussions also continue as to whether the government will use the same bill in congress that was presented under Temer or if a new one will be drafted. In either case, the idea would be to avoid major changes since legislators are more likely to approve a bill they have already studied.

CHALLENGES AHEAD

The privatization of state-run companies in Brazil must be approved by congress with the support of a majority of legislators, so the supreme court ruled in June. The process is expected to face opposition in both houses, and the support of lower house president Rodrigo Maia is considered critical. According to political observers, Maia played a decisive role in securing enough support for approval of the unpopular pension reform in the lower chamber.

However, this is not the only challenge ahead for the Eletrobras process. According to Di Lallo, the process could suffer a series of setbacks such as the ones seen during the privatization of the distribution subsidiaries last year, when unions filed a string of injunctions that delayed the sales.

“Those are labor issues. Big firms such as Eletrobras have many employees throughout the country and during a privatization process there’s greater uncertainty regarding the legal security of employment contracts,” the lawyer said.

Another challenge is the need to separate core assets that cannot be privatized and are currently under Eletrobras’ administration, such as Eletronuclear, which operates Brazil’s two nuclear power units Angra 1 and 2 and is responsible for construction of Angra 3. The Itaipu hydroelectric dam, which is shared with Paraguay, will also need to remain under state control, according to the federal constitution.

Legislators also need to approve the company’s migration to the independent power generation market. Warding off threats of legal action, such as injunctions over hydrological risk, is also considered fundamental for the success of the sell-off.

With such difficulties ahead, the industry remains skeptical about the chances of finishing the process this year and most specialists point to 2020 as a more realistic date.