Eletrobras (ELET3;ELET6) could become an energy transition power with greater privatization in 20 years

SAO PAULO (Reuters) – Eletrobras (ELET3;ELET6), Latin America’s largest power generation and transmission company, could become a major player in the energy transition after a billion-dollar share offering scheduled for this week to remove the government from control. of the company, marking the biggest privatization of a company in Brazil in more than 20 years.

Greater financial strength to invest in renewable generation sources and new technologies, cutting costs and expenses and reducing the more than 80 billion reais in contingencies are among the gains from privatization seen by analysts, who consider that the “turn of the key” will not should take place in the short term, but it is part of a process that can take years to complete.

The offer of shares of the Brazilian electric company will be priced this Thursday, and could reach around 35 billion reais and have among its buyers the Canadian pension fund CPPIB and the sovereign fund of Singapore GIC. At first, the State will have its participation diluted from 72% to 45%, a position that should still facilitate the company’s progress in projects with other countries.

One of the most obvious benefits of privatization for Eletrobras is the change of its concession contracts for 22 hydroelectric plants to a new format, outside the quota system, which locks in revenue gains.

With the contractual renewal, the generator will be able to benefit from the price dynamics from the sale of energy in the free market, which promises to expand in the coming years with the opening to new classes of consumers, even residential ones.

But the expectation is that Eletrobras will strengthen its strategic positioning beyond hydroelectric plants, investing in its own wind and solar generation parks – something it has already done in the past but in association with other companies.

Luiz Augusto Barroso, president of the PSR consultancy, notes that the portfolio of hydroelectric plants facilitates the company’s bet on new renewables, as it complements sources that have variable generation, depending on the sun and wind.

“In the future, Eletrobras will certainly be very relevant in the energy transition, due to the characteristics of its assets… .

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For the specialist, Eletrobras can also become a vector of regional energy integration, mainly involving energy transmission projects between countries, taking advantage of the government’s participation that it will still have in its capital.

“These are projects that normally demand more robust partners and that have the participation of governments, because they (governments) end up providing technical, economic and mainly legal solidity”, said Barroso.

A source who follows the capitalization process highlighted that Eletrobras is the largest clean energy platform available for investments in emerging markets.

“The demand is high… It’s a super competitive position to open up green hydrogen,” said the person, who spoke on condition of anonymity, of the demand for the company’s shares.

In the prospectus of its capitalization offer, Eletrobras mentions new fronts that it could invest in, citing, in addition to renewables and transmission, technologies using artificial intelligence and blockchain and energy storage.

REDUCTION OF COSTS AND CONTINGENCIES

Another important aspect for the company’s turnaround will be the reduction of costs and expenses from the creation of a leaner corporate structure and the optimization of processes spread today in six companies (holding Eletrobras, Eletronorte, Chesf, Eletrosul, Furnas and Eletropar) .

According to information from Eletrobras itself, adding up all its units, there are currently 32 directors, 44 members of the board of directors, 6,400 operational employees and 3,750 administrative employees.

Although Eletrobras has been in an effort to improve efficiency since 2016, aiming at privatization and selling loss-making energy distribution units, analysts see room for improvement, without the constraints of a state-owned company.

“We believe that becoming a ‘corporation’ will be very important for the company’s future (cost reduction, balance sheet management and growth). In fact, one of the biggest generators of value for the new company will be the reduction of the cost of capital”, evaluate analysts Giuliano Ajeje and Guilherme Reif, from UBS bank.

Decreasing contingent liabilities is another important value lever. Today, the company has BRL 33.8 billion in provisions on the balance sheet – more than BRL 25 billion relating to the compulsory loan – and another BRL 52.7 billion in off-balance sheet liabilities.

The expectation is that, in a private management, the company can seek more agreements with creditors to close the processes. This type of negotiation becomes more difficult in state-owned companies due to the possibility of holding the public manager accountable, say lawyers Ana Karina Souza and João Reis, partners at Machado Meyer.

“The legislation that governs public companies in a macro way brings a series of responsibilities that often go directly to the manager’s CPF… He is tied up in the management of this judicial liability”, said Reis.

“All acts are subject to the control of the Court of Auditors, which carries out periodic inspections… For better or worse, an additional bond is created”, added Souza.

BIGGEST PRIVATIZATION IN DECADES

If implemented, the privatization of Eletrobras will mean the largest operation of its kind since the sale of Telebras, a telecommunications company, in 1998, according to a survey by Fundação Getulio Vargas (FGV).

“During the Lula-Dilma era, there were many concessions, of highways, railways, airports… But there was no outstanding privatization… on the scale of an Eletrobras”, said Rafael Souza, a researcher at the FGV’s Center for Studies and Regulation in Infrastructure.

According to the survey carried out at the request of Reuters, the Eletrobras operation would be the largest since the sale of 20% of Telebras (TELB4) in 1998, which raised almost 96 billion reais, in real values ​​(adjusted for inflation). The privatization of Vale (VALE3) in 1997, with the sale of 41.7% of the government’s shares, would add up to 15.16 billion reais in reais.

Souza also recalls that, during this privatization “vacuum”, there were important sales of Petrobras assets (PETR3;PETR4), such as the TAG carrier and BR Distribuidora – currently Vibra VBBR3.

Economist and lawyer Elena Landau agrees that the privatization of Eletrobras is symbolically “as important as that of Vale and Telebras”, and could unlock a lot of value, as happened with the mining company, and expand the energy market, as in telecommunications.

However, she believes that the Eletrobras process was poorly conducted, with decisions that were not transparent about the sales model and the inclusion of “tortoises” in the law that should make the tariff more expensive in the coming years. “It remains a process that should not be repeated in the future,” said Landau, who is the former director of privatizations at BNDES.

She recalled that Eletrobras is among the country’s large state-owned companies, which include Petrobras, Banco do Brasil (BBAS3) and Caixa Econômica Federal.

Fábio Coelho, president of the Association of Investors in the Capital Market (Amec), highlights that there was a “learning curve” in relation to the privatizations of the 1990s, when few and large institutional investors, such as pension funds, concentrated their participation in operations. .

Coelho also praises the “more international look”, with rules that provide for the diffuse control of Eletrobras, a model successfully adopted by European electric companies that were privatized, such as EDP (ENBR3) and Enel.

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