Executive Summary / Key Takeaways

• Privatization Transformation Complete: After six decades as a state-owned entity burdened with BRL 20+ billion in compulsory debt, Eletrobrás (now AXIA Energia) has emerged from its 2022 privatization with debt halved, costs slashed by 28% quarter-over-quarter, and a clear strategic mandate for efficiency and predictable returns.

• Transmission: The Hyper-Predictable Cash Engine: The company's 73,800 km transmission network (37% of Brazil's grid) generates "mid-teens" returns around 15% with regulated, inflation-linked revenue streams, providing a stable foundation that supports higher leverage and funds aggressive growth in the more volatile generation segment.

• Generation's Cost Leadership in Volatile Markets: With 44.4 GW of installed capacity (17% of Brazil's total) and control of 40% of the nation's hydroelectric assets, AXIA commands unique pricing power in an increasingly volatile energy market, where shrinking reservoirs and intermittent renewables are driving prices toward BRL 240/MWh in 2026.

• Capital Allocation at an Inflection Point: Management projects record BRL 10 billion in 2025 investments, primarily in transmission reinforcements, while simultaneously paying BRL 8.3 billion in dividends for fiscal 2025—a dual commitment possible only because the transmission business's predictability de-risks the generation segment's volatility.

• Critical Variables to Monitor: The investment thesis hinges on whether AXIA can maintain transmission execution while managing hydro volatility, and whether its slower renewables pivot versus peers like Engie (EGIEY) and Neoenergia will erode long-term competitiveness in Brazil's accelerating clean energy transition.

Setting the Scene: Brazil's Energy Backbone Reborn

Centrais Elétricas Brasileiras S.A., incorporated in 1962 in Rio de Janeiro, spent nearly six decades as a government-owned utility accumulating legacy obligations and compulsory debt that peaked at BRL 20-24 billion. During this period, the company was effectively prohibited from participating in growth auctions due to project delivery issues, most notably the decade-long delay of the Transnorte Energia project. This state-controlled era left Eletrobrás with a bloated cost structure, mounting liabilities, and strategic paralysis.

The June 2022 privatization marked a definitive break from this history. New management immediately launched a comprehensive derisking program, simplifying the shareholder structure and implementing aggressive cost reduction measures. By the end of 2024, compulsory loans had been cut by 50% to BRL 13.6 billion, and by Q2 2025 stood below BRL 12 billion. Personnel costs alone dropped BRL 143 million year-over-year as new processes and unified collective bargaining agreements took effect. The transformation's scale becomes clear when considering that operational costs fell 28% quarter-over-quarter in early 2025 while the company simultaneously prepared for record capital deployment.

Today, AXIA Energia operates as Brazil's dominant integrated utility, managing 82 generation plants with 44.4 GW of capacity and 73,800 km of transmission lines. The business model splits into two distinct segments: generation (58% of segment revenue) and transmission (41%), each with fundamentally different risk-return profiles that create a strategic barbell. Generation provides volume and pricing power in a volatile market, while transmission delivers regulated, predictable cash flows that enable the company to sustain higher leverage and fund shareholder returns.

Technology, Products, and Strategic Differentiation

The Hydro Moat and Transmission Network Effects

AXIA's competitive advantage begins with its hydroelectric dominance. Controlling 40% of Brazil's hydro capacity provides a cost structure that competitors cannot replicate. Hydro plants, once amortized, produce electricity at marginal costs near zero, avoiding the purchase costs that wind and solar developers must incur when the sun doesn't shine or wind doesn't blow. This cost leadership translates directly to pricing power in the free market, where management notes they can command premium prices compared to intermittent renewable generators who must hedge their output.

The transmission network amplifies this advantage. At 73,800 km representing 37% of Brazil's National Interconnected System (SIN), AXIA's grid creates powerful network effects. The company can integrate third-party generation while charging wheeling fees, reducing interconnection costs for its own projects and generating stable revenue from competitors who rely on its infrastructure. This moat is further strengthened by regulatory concessions that extend 20-30 years, with recent wins like Transnorte Energia seeing its concession term extended from 17 to 27 years and its Annual Permitted Revenue (RAP) increased from BRL 395 million to BRL 561 million.

AI-Driven Operational Excellence

AXIA's partnership with Google Cloud to develop AI-based weather forecasting represents more than a technology upgrade—it addresses the core risk of its hydro portfolio. By predicting extreme weather events and hydrological patterns with greater accuracy, the company can optimize reservoir management, reduce spillage, and better position its energy sales in the volatile spot market. This capability directly mitigates the "shrinking reservoirs" risk that management identifies as a primary driver of future market volatility.

The clean energy transition strategy reinforces the technology moat. By divesting its last thermal power plant in October 2025 and targeting 100% renewable generation, AXIA aligns with Brazil's 89% renewable energy matrix while focusing capital on its lowest-cost assets. The acquisition of a 50.1% stake in Tijoa Energia for BRL 247 million—a debt-free, quota-based plant with expansion potential—demonstrates disciplined capital allocation toward scalable, low-risk renewable assets.

Financial Performance & Segment Dynamics

The Barbell Strategy in Action

For the twelve months ending September 2025, generation contributed approximately BRL 25.72 billion (58.1% of segment revenue) while transmission added BRL 18.19 billion (41.1%). This mix reveals the strategic barbell: generation provides growth and pricing power, transmission provides stability.

The generation segment's contribution to margins increased 21% from Q1 to Q2 2025 and 16% year-over-year, helping offset transmission revenue fluctuations. This performance occurred despite the energy market's increasing volatility, which management attributes to shrinking reservoirs and the steady growth of intermittent renewable sources. The company's response has been to adopt more conservative pricing assumptions for unsigned contracts, using BRL 240/MWh as a baseline for 2026 planning while allowing some energy to remain uncontracted to capture potential price spikes.

Transmission's "hyper predictable" nature enables a fundamentally different capital structure. Management targets leverage of 3.75-4.25x for transmission versus 3-3.5x for generation, reflecting the segment's regulated, inflation-linked revenue streams. The BRL 2.4 billion increase in transmission revenue since privatization demonstrates this predictability in practice. In Q3 2025 alone, AXIA won BRL 1.6 billion in new transmission investments generating BRL 140 million in additional RAP, with 249 large-scale projects in execution adding BRL 1.8 billion in RAP between 2025 and 2030.

Cost Discipline and Balance Sheet Repair

The privatization transformation shows most clearly in the cost structure. Operational costs fell 28% quarter-over-quarter in Q1 2025 and 8% year-over-year, with personnel savings of BRL 143 million. The recurring PMSO (Personnel, Material, Services, and Other) figure is targeted below BRL 6 million for 2025, a dramatic reduction from state-owned levels.

Balance sheet repair has been equally aggressive. Compulsory loans dropped from BRL 26 billion at privatization to below BRL 12 billion by Q2 2025, a 54% reduction that directly improves financial flexibility. Net debt reduction has been so substantial that management maintains a minimum cash position of BRL 10 billion (with BRL 20-30 billion considered necessary given the company's size) while simultaneously funding record dividends and capex.

Cash generation supports this strategy. Annual operating cash flow reached BRL 2.29 billion with free cash flow of BRL 1.71 billion, providing the liquidity to fund BRL 10 billion in 2025 investments while paying BRL 8.3 billion in dividends. The company's liquidity needs have decreased due to risk reduction, though management maintains higher cash balances to manage generation segment volatility.

Outlook, Management Guidance, and Execution Risk

The BRL 10 Billion Investment Wave

Management's guidance for 2025 centers on record BRL 10 billion in investments, focused primarily on transmission reinforcements and improvements. This represents a strategic inflection point: the company is shifting from derisking and cost-cutting to growth deployment. The transmission focus is deliberate—reinforcements and improvements are projected to exceed BRL 4 billion in 2025, targeting the 30+ year-old assets that require modernization and offer "mid-teens" returns.

The auction strategy demonstrates newfound competitiveness. After being "forbidden from participating" pre-privatization due to project delivery issues, AXIA emerged as a "great winner" in 2024 auctions, securing BRL 5.6 billion in CapEx. For 2026, management expects capacity auctions in March where the company's nearly 6 GW of implementable capacity will be deployed, with battery auctions anticipated in the second half of 2026.

Conservative Assumptions in an Uncertain Market

Management's outlook embeds conservative assumptions about market volatility. Eduardo Haiama explicitly states that the period from January 2022 to July 2024, characterized by lower energy prices, was "atypical." Going forward, the company expects an "ever more volatile" environment due to shrinking reservoirs and increased intermittent sources. This conservatism manifests in several ways:

• Price assumptions for unsigned contracts use BRL 240/MWh for 2026, below spot market expectations
• Leverage targets remain at the low end of the optimal range (3-3.5x generation, 3.75-4.25x transmission)
• The company maintains excess cash (BRL 10+ billion) despite having reduced risk
• Dividend payouts follow a disciplined methodology based on five-year capital structure projections

The guidance for 2026 average prices around BRL 240/MWh reflects this caution. While the company notes that submarket mismatches between Southeast and North/Northeast reached BRL 300 in March 2025, its strategy has evolved to hold some energy uncontracted, anticipating better price reflection in volatile conditions.

Risks and Asymmetries

Hydro Volatility: The Core Risk

AXIA's 90% hydro-heavy portfolio exposes it to Brazil's changing hydrology. Reservoir levels have declined from 5.2 in 2010 to 3.7 in 2024, with management expecting this trend to continue. In a severe drought scenario, the company must purchase energy at spot market prices that can spike dramatically, compressing generation margins and potentially requiring additional debt. This risk is not theoretical—Q1 2025's hedging strategy was impacted by a submarket mismatch that led to "less satisfactory" results in March, prompting a strategic shift to hold more uncontracted energy.

The mitigation strategy relies on the transmission segment's stability and conservative leverage. However, the risk remains material: if drought conditions persist for multiple years, the generation segment's volatility could overwhelm the transmission foundation, forcing dividend cuts or asset sales.

Competitive Disadvantage in Renewables

While AXIA dominates in hydro and transmission, it lags peers in wind and solar scale. Engie Brasil and Neoenergia have built diversified renewable portfolios that are "notably lower" cost and more resilient to drought. This creates a structural disadvantage in the free market, where corporate customers increasingly demand clean energy PPAs. If AXIA cannot accelerate its renewables pivot, it risks losing market share in the high-growth commercialization segment, where it serves 781 power trading customers (+24% year-over-year) but faces competition from more diversified suppliers.

The Tijoa Energia acquisition (BRL 247 million for 50.1% of a debt-free plant) shows the company is addressing this, but the pace remains slower than peers who are building greenfield wind and solar at scale.

Execution Risk on Record Capex

The BRL 10 billion investment target for 2025 represents a dramatic scaling of execution capability. While the Transnorte Energia project concluded on time and within its BRL 3.3 billion budget, providing proof of concept, the company must now deliver 249 large-scale transmission projects simultaneously. Any cost overruns or delays could strain the balance sheet, particularly given the 5.7x gross leverage ratio reported by Fitch.

Management's confidence stems from the "hyper predictable" nature of transmission projects, but the sheer volume creates operational risk. The company's historical project delivery issues, which previously barred it from auctions, could resurface if execution falters.

Competitive Context and Positioning

Scale Dominance Versus Nimble Rivals

AXIA's competitive position reflects a classic scale-versus-agility tradeoff. With 46 GW of installed capacity, it dwarfs Neoenergia (4-5 GW), Engie Brasil (10 GW), CPFL (3 GW), and Cemig (CIG) (7 GW). This scale creates cost leadership in hydro generation and network effects in transmission that smaller rivals cannot replicate. The company's 73,800 km transmission network is materially larger than any competitor's, enabling it to charge wheeling fees and integrate third-party generation at scale.

However, this scale advantage comes with baggage. AXIA's negative operating margin (-34.96%) and return on equity (-5.21%) trail all major peers, reflecting the legacy cost structure and higher debt burden (Debt/Equity 0.69 versus Cemig's 0.55 and Engie's superior net margins). While the privatization transformation is repairing these metrics, the company remains in transition while peers like Neoenergia (36% profit growth in H1 2025) and Engie (9.8% net income growth in Q3 2025) are already delivering strong profitability.

Renewables: The Achilles Heel

The competitive gap is most pronounced in renewables. Engie Brasil generates over 50% of its capacity from clean sources and maintains 40%+ operating margins. Neoenergia's diversified portfolio delivered 13% EBITDA growth in Q3 2025. Both companies benefit from wind and solar's "notably lower" levelized costs and drought resilience.

AXIA's slower pivot exposes it to two threats. First, corporate customers increasingly prefer PPAs from diversified renewable portfolios, potentially limiting growth in the commercialization segment where AXIA has been adding customers at 24-35% annually. Second, regulatory shifts favoring distributed generation (40 GW solar by mid-2025) could erode the centralized generation model that AXIA dominates.

The company's response—divesting thermal assets, acquiring Tijoa, and targeting 100% renewables—addresses this but at a measured pace that may not match market transition speed.

Valuation Context

At $11.68 per share, AXIA Energia trades at a market capitalization of $24.82 billion and an enterprise value of $34.17 billion, reflecting net debt of approximately $9.35 billion.

Key valuation metrics reveal a company in transition:

• EV/Revenue: 4.34x, roughly in line with utility peers but above distressed players like Cemig (1.19x)
• Price/Operating Cash Flow: 8.02x, suggesting the market is pricing in significant operational improvement
• Price/Free Cash Flow: 9.78x, indicating reasonable valuation relative to cash generation
• Gross Margin: 52.30%, healthy for a capital-intensive utility and comparable to Engie's 48.47%
• Operating Margin: -34.96%, reflecting the ongoing cost transformation and legacy burden
• Dividend Yield: 0.06% nominal, but this masks the BRL 8.3 billion (approximately $1.53 billion) total payout for fiscal 2025, representing a 6.2% yield on current market cap

The balance sheet shows improvement but remains leveraged:

• Debt/Equity: 0.69x, higher than Cemig (0.55x) but lower than Engie (2.24x)
• Current Ratio: 1.92x, indicating adequate liquidity
• Return on Equity: -5.21%, trailing all major peers but improving from state-owned era losses

Comparative positioning shows AXIA trades at a discount to its growth potential but a premium to its current profitability. Neoenergia trades at a P/E of 7.85 with 12.86% ROE, while Engie commands a P/E of 11.58 with 25.5% ROE. AXIA's negative earnings reflect transformation costs that should normalize as the BRL 10 billion capex program yields returns and cost cuts fully flow through.

The valuation hinges on whether the transmission segment's predictable 15% returns and the generation segment's cost leadership can combine to produce peer-level profitability within 2-3 years. Management's guidance suggests this is achievable, with deleveraging projected from 2027 as capital allocation moderates.

Conclusion

AXIA Energia represents a unique post-privatization transformation story where the market has yet to fully price the combination of a repaired balance sheet, derisked cost structure, and dominant market position. The company's strategic barbell—hyper-predictable transmission providing stable cash flows and massive hydro generation offering cost leadership—creates a durable competitive moat in Brazil's increasingly volatile energy market.

The investment thesis rests on three pillars: first, that the transmission business's regulated returns and network effects will continue funding aggressive growth and shareholder returns; second, that the generation segment's hydro cost advantage will prove resilient as market volatility drives prices toward BRL 240/MWh; and third, that management's conservative capital allocation and cost discipline will deliver peer-level profitability within two years.

Critical variables to monitor include hydrological conditions affecting generation margins, execution of the BRL 10 billion capex program, and the pace of renewables adoption relative to nimbler competitors. The company's slower pivot to wind and solar remains the primary strategic vulnerability, potentially ceding market share in the fastest-growing customer segments.

Trading at $11.68 with improving fundamentals and a dominant market position, AXIA offers a compelling risk/reward profile for investors willing to underwrite the execution of Brazil's largest utility privatization. The transmission moat provides downside protection, while the generation segment's pricing power offers upside optionality in an increasingly volatile energy market. The key question is whether this transformed state-owned giant can move with the speed required to maintain its leadership in Brazil's clean energy transition.