--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 context in second paragraph.)
By Paulo Winterstein
SAO PAULO--Share prices of Brazil's power utilities plunged
Monday after the government released renewal terms for expiring
licenses that will result in lower prices than expected and offer
little chance of improvement.
The change in power industry rules, which is being accompanied
by changes in rail and telecommunications as well, comes as Brazil
tries to reduce costs of production to make its exports more
competitive and reduce pressure on inflation. The government wants
to drive down prices and returns, arguing that Brazil's political
and macroeconomic climate has improved, so margins should shrink to
reflect that.
But power industry executives and analysts warn the license
renewal terms, which are expected to pass with little alteration,
will crimp needed investment in the sector. One utility company has
already said it won't seek renewal of some of its licenses.
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 ahead
of a long, holiday weekend 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. In Monday trading, the first
day following the release of the new terms, Eletrobras plunged 8.2%
to BRL15.42, leading declines on the index. Cia Energetica de Minas
Gerais (CIG, CMIG4.BR) 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 decliner on the broader Ibovespa index of
most-traded stocks. UBS analyst Lilyanna Yang wrote that CESP 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.
"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 reimbursement and power rate 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 Cemig 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," Ms. Yang, of UBS, noted. "We expect most companies
are likely to reject the deal unless terms improve."
Write to Paulo Winterstein at paulo.winterstein@dowjones.com
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