U.S. Markets closed

Petrobras to make $2 bln capital injection into fuel distribution arm

(Adds detail from filing, context)

SAO PAULO, Aug 25 (Reuters) - Brazil's state-run oil company Petroleo Brasileiro SA will inject 6.3 billion reais ($2 billion) of fresh capital into its fuel distribution arm, cleaning up its balance sheet in an effort to attract investors to an initial public offering.

The money from the capital injection, approved by the board of the company and announced in a securities filing on Friday, will solve a long-standing problem with state-controlled power utility Centrais Eletricas Brasileiras SA.

The capital injection solves the main hurdle to the initial public offering of the unit, Petrobras Distribuidora SA, according to a person with direct knowledge of the matter.

After years of supplying fuel for thermal power plants held by the electricity holding, commonly called Eletrobras, the oil giant known as Petrobras has amassed overdue bills worth around 10.4 billion reais in different subsidiaries.

Part of that debt will now be transferred to another Petrobras unit, Downstream Participações Ltda, which will later be consolidated by the parent company.

Petrobras and Eletrobras can now sort out their obligations without involving BR Distribuidora, the source said, asking for anonymity due to a lack of authorization to discuss the matter publicly. Current fuel supply at Eletrobras power plants is being paid normally, the source added.

The move comes after Brazil's cash-strapped government floated a proposal on Monday to cede control of Eletrobras, the country's biggest power utility, in its boldest privatization yet.

The capital injection at Petrobras may finally free up its distribution unit for a planned IPO that has been stymied time and again since it was first proposed in 2015.

Petrobras revived the BR Distribuidora IPO in June to cut debt and capital spending in low-return activities. The company is increasingly relying on asset sales and spinoffs to trim its $95 billion debt burden, the largest of any major oil company.

Reuters reported earlier this month that Citigroup Inc and seven other banks would underwrite the IPO, which will likely occur in November.

Petrobras said some of the operations announced on Friday are still subject to approval by shareholders and other stakeholders.

($1 = 3.14 reais) (Reporting by Luciano Costa, Tatiana Bautzer and Ana Mano in Sao Paulo; Writing and additional reporting by Alexandra Alper in Rio de Janeiro; Editing by Chizu Nomiyama and Alistair Bell)