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EFS Special Release - Eletrobras Debentures


Largest power generation and transmission company of the Brazilian electric sector, Eletrobrás is currently facing the dilemma of trying to become the "Petrobras of the electricity sector", in the words of the President of Brazil, Luiz Inácio Lula da Silva, on the other hand the Brazilian government has created difficulties in some cases for the company itself.

The company, from which the Federal Government owns 54% of the voting shares, has problems with its image that leave little room for the company to achieve the desired operational independence. The company is also not immune to political use. Furnas, one of its subsidiaries, is today a stronghold of the Federal Representative Eduardo Cunha (PMDB-RJ), this member of the parliament has appointed the former president of the company who is also the former mayor of Rio de Janeiro, Luiz Paulo Conde. Cunha is also making great pressure to take command of the Foundation Real Grandeza, the pension fund of Furnas’ employees and retirees.

Even so, the Eletrobras’ Strategic Action Program for the period of 2009-2012, which plans for investments of $ 30.2 billion, aims at raising the company’s scores of Corporate Sustainability Index (ISE) of Bovespa for this year until 2012, in order to achieve the level 2 of corporate governance from BMF&Bovespa and to become part of the Dow Jones Sustainability Index.

It is a long way there. It is hard to compare Petrobras and Eletrobrás, the difference begins in the financial statements. Petrobras operates in 19 countries and four continents, has 308 companies, 185 subsidiaries, 39 affiliate subsidiaries, together with 65 companies jointly controlled and 19 companies for specific purpose (SPEs). Despite the complexity, the balance sheet is "clean," unblemished and with no errors indicated by independent auditors. On the contrary the statements of Eletrobrás, with 15 subsidiaries in countries including the distributors that were “federalized”, has emphasized the lack of audit in the related companies, the equivalent to USD 0.72 billion in investments up to the end of 2008.

To convince investors of the change, the company has to start at the balance sheet, but that is not the only change. Eletrobrás has been charged by investors for the payment of dividends withheld in the past 30 years, which now amounts to USD 4.9 billion, while preparing to pay USD 0.82 billion in current dividends in 2009, resulting from the profit of USD 2.95 billion achieved last year.

Criticisms to its governance and transparency are common place. Recent reports given to the Brazilian newspaper “Valor” from two international consultants on matters of governance - RiskMetrics and Glass, Lewis & Co. - showed lack of transparency in the decisions and little independence of its managers as well as of its members of the board, which has representatives from the office of the President of Brazil, the ministries of Mines and Energy, Planning and National Treasury, in addition to the Banco Nacional de Desenvolvimento Econômico e Social (BNDES).

The suggestion was that the foreign minority shareholders voted against or abstained in the Shareholders Assembly held last week. Eletrobrás has ADRs in the U.S. market, which allows the participation of foreigners.

Retention of past dividends, which correspond to the value of the company’s cash flow (not counting the USD 1.7 billion from the subsidiaries), led the U.S. investment fund Brandes in 2008 to file charges against the Brazilian Securities and Exchange Commission name with the acronym CVM, this lawsuit also contains a legal protest.

The regulatory body (CVM) found that the retention of dividends for investments is inconsistent with the Article 198 of the Public Companies Act (the Brazilian legislation for this case), however CVM considered that its out of its “jurisdiction to determine the payment of dividends." Even though the commission began to examine irregularities in the conduct of the matter by Eletrobras’ board of directors.

The current proposal from the state-owned company is to pay such dividends as long as the Federal Government provides immediately the capital for the operation, so the company does not become “decapitalized”. The formula would be having the company to pay R$ 2 billion to the minority holders of common shares, R$ 1.5 billion to the BNDES (Brazilian Government’s national development bank), R$ 1 billion for the National Fund for Privatization (FND) and the Guarantee Fund for Public-Private Partnership (FGP). Other R$ 5.5 billion would under to the National Treasury responsibility.

According to Astrogildo Quental, chief financial officer of Eletrobrás, two simultaneous operations are under analysis, where the payment of dividends would, later on, be returned to the company as capital. This way the Treasury and the funds would receive R$ 6.5 billion and increase the capital in R$ 4.5 billion, resulting in net disbursement of $ 2 billion of Eletrobrás for them. In this case, the state drops the box of $ 10 billion to $ 6 billion, less than its investment program for 2009, when they provided U.S. $ 8.6 billion from own resources and abstraction. So far, only the BNDES agreed to exchange $ 1.5 billion that is to receive dividends.

But the problems go beyond. So as to capitalize Eletrobrás with USD 2.22 billion it is necessary to forecast the investment in the budget of the Ministry of Finance at the Secretary of the Treasury. "That was the issue last year. To provide this money the Treasury has got to be forecast in the budget that plans for investments. And last year we lost to the areas of health and education. The problem is having budget. Both the collegiate and the board want to pay. Everybody knows that this is damaging the Eletrobrás" he says.

One side effect of the model designed is that the minority shareholders that do not follow the increase in capital will be diluted. "But one cannot make an omelet without breaking the eggs”. The preferred shareholders are those who have mostly complained because they have received no dividends and will have to bring in more money to be part of the capital increase. In any capital increase there is dilution. This is part of the game. It is a market rule” says Quental

Another alternative would be to split the payment of dividends withheld in annual installments, but the director himself admits that Eletrobrás is due to resistance from minority which has little confidence in the company. "Some analysts believe that we will only pay the first installment. Since 2003 I follow this. Technically the split is possible and has a positive point that is paid only as undermining the goal of the surplus," says Quental.

He refers to another aspect of the discussion that involves the company in the government, which is the presence or withdrawal of Eletrobras from the calculation of the Brazilian primary surplus, still within the goal of becoming a "mirror" the richer sibling, Petrobras. In 2008 the target of Eletrobrás was R$ 1.4 billion (with Itaipu), but it achieved R$ 2.5 billion. Over the last year there was a change in the methodology for calculation of the accounts of Itaipu’s target surplus for Eletrobrás. “The accounting methodology changed but our goal was the same. We think we did R$ 2.5 billion, R$ 1.1 billion above the initial target. The debate continues today. The goal [of surplus] this year [2009] is R$ 1.6 billion and to have approximately R$ 1.5 billion from the Itaipu, according to this methodology Eletrobrás the system would have to make only more R$ 100 million. But they say that my goal is $ 1 , 6 billion without Itaipu " he explains.

Another problem is how the funds are administered by the airline industry - including the Energy Development Account (CDE) and the Global Reversion Reserve (RGR) - included in the calculation of the target. "The CDE leaves and RGR is that over U.S. $ 600 million. So I'm increasing RGR every year without being able to spend. This money I apply at the Bank of Brazil. We now have U.S. $ 6 billion that we can not spend because this money is not ours, just run. He is the Treasury, so that does not believe in my box. But he enters the surplus of my goal" he explains.

The issue is not consensual for the ministers Paulo Bernardo (Planning), Dilma Rousseff (Premier) and Edison Lobão (Ministry of Mines and Energy), for all to varying degrees, and the Minister Guido Mantega of Finance. The latter feels that to have the same treatment of Petrobras in the calculation of the surplus, Eletrobrás needs to increase their efficiency, profitability and focus.

The government's contradictory speech on the subject does not improve the perception of the market in relation to Eletrobras. In a report released last month for customers, the analyst's from Ativa brokerage firm considers that the main reason behind this effort of Eletrobrás to come out of the the primary surplus calculation was due to the concentration of auctions of power plants this year. "However, extended investment freedom could mean the participation in projects that are even less profitable than those already observed in recent years," says the report, highlighting that the state's participation in the auction for the construction of hydroelectric plant in Belo Monte with over 9 thousand megawatts (MW) of installed power and starting in the second half of the year, "could result in even greater risk for Eletrobrás which is the most likely candidate to win."

Commenting on the investment plan of the state of R$ 30.2 billion in a report, the investment bank Goldman Sachs says that the need Eletrobrás increase the return of investors to raise the attractiveness of business. Among the items suggested are an increase in return on investment and end the "sweeping" of resources from the distribution system which are controlled by North Eletrobrás (Eletroacre, Ceron, Boavista Energy Energy and Manaus). About these, the director of Eletrobrás says the focus will be negotiating with Aneel "an appropriate regulatory basis, according to the law the power distribution has to be profitable." The problem there, according to Quental is that they do not have a company as reference to calculate the appropriate rate. "The great work of distribution this year will be regulatory. Last year is reversed the result of the distribution system in the very top of the reversal of tax credits and reduced losses. The management should achieve this still year. We need to demonstrate to Aneel (Brazilian regulatory agency for electric power) these concessions need to be balanced."

For Quental to the opposition between the ministries of Mines and Energy, Planning and Finance show that the decision has to be taken on a higher level of government. "It is logical that one of the successes of the Lula government is the fiscal balance. But the company can not be tied at this rules if we want to have a company at the level of Petrobras in the electricity sector."

Source: Valor Economico

Translation: Luciano Medina Martins – journalist (IFJ BR10789)


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