--Brazil stocks plunge after rate cuts and smaller-than-expected
reimbursements
--Analysts see little chance of increase in rates or
reimbursement
--Low rates and reimbursement could discourage future
investment, industry group says
(Adds Abrage president's comments beginning in sixth paragraph,
and closing share prices.)
By Paulo Winterstein
SAO PAULO--Brazil's electric utilities plunged Monday as
investors saw that the government's renewal of expiring licenses
resulted in lower prices than expected and offered little chance of
improvement.
The government has agreed to renew licenses that start expiring
in 2015, but only in exchange for lower power prices. By writing
down the value of past investments, the government expects to lower
electric prices paid by final consumers by 20% starting next
year.
To that end, the Mines and Energy Ministry said late Thursday
that it would pay about 20 billion Brazilian reais ($9.8 billion)
to utilities, part of its reimbursement for investments that won't
be fully amortized by the end of the current license. It also set
the new prices that generators and transmission companies can
charge for their services.
The value of reimbursements was lower than expected by investors
and companies. Centrais Eletricas Brasileiras, the mammoth
government-owned utility known as Eletrobras (EBR, ELET6.BR), for
example, expected to receive BRL30 billion for unamortized
generation and transmission investments, but will receive less than
half of that, according to the Ministry.
The reduction in prices was also more than expected, with an
average reduction of about 70% in transmission and generation
prices.
"The new prices aren't enough for companies to carry out all the
services that they realize today" and can put at risk future
investments needed to ensure smooth operation of the electrical
grid, said Flavio Neiva, president of Abrage, or the Brazilian
association of electricity generating companies.
According to Mr. Neiva, allowing companies to only pass on to
customers the cost of operation and management for the existing
power plants won't cover other costs that companies incur.
"New plants are like new cars, with few problems. That's not the
case with these old plants," Mr. Neiva said.
The values are still subject to congressional approval, but "we
are convinced that President Dilma [Rousseff] is strongly committed
to the measures proposed," Banco Itau analyst Marcos Severine
wrote. With the instrument of a presidential veto in Ms. Rousseff's
hand to head off moderation by the congress, however, "this means
that there is very little room for changes in the
concession-renewal package."
One possibility for companies is to "fight" the license-renewal
plan like Cia Energetica de Minas Gerais (CIG, CMIG4.BR) did, Mr.
Severine wrote. Cemig said it wasn't renewing some licenses because
it wasn't economically advantageous to keep them.
While investors were hoping for a softening of the originally
announced price reductions, Thursday's announcement damped
expectations of an improvement.
"There is room for improvements over the next 10 days, but
limited and with uncertainty," UBS analyst Lilyanna Yang wrote. "We
expect most companies are likely to reject the deal unless terms
improve."
In Monday trading, Eletrobras plunged 8.2% to BRL15.42, leading
declines on the index. Cemig dropped 2.9% to BRL24.21, while the
Ibovespa closed 0.3% lower.
Cia Energetica de Sao Paulo (CESDY, CESP6.BR) plunged 5.8% to
BRL17.19, following Eletrobras as the second-biggest decline on the
broader Ibovespa index of most-traded stocks. Ms. Yang noted that
the company saw one of the lowest generation rates, and was
compensated for BRL1 billion of investments, or one-fifth of what
it had asked.
Cia. De Transmissao de Energia Eletrica Paulista, or CTEEP
(TRPL4.BR), and Aes Corp. unit Eletropaulo (EPUMY, ELPL4.BR) fell
more than 2% each, among the biggest drops on the Ibovespa.
Write to Paulo Winterstein at paulo.winterstein@dowjones.com
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