Bloomberg News

Eletrobras Slumps to Seven-Year Low in Electricity Rout

November 05, 2012

Centrais Eletricas Brasileiras SA (ELET6) slumped to the lowest price in seven years as a worse-than- expected compensation proposal by Brazil’s government triggered a selloff.

Eletrobras, as South America’s largest generator is known, plunged 8.2 percent to 15.42 reais in Sao Paulo, the lowest since August 2005, in the first day of trading since the government released its proposal. Cia Energetica de Sao Paulo (CESP6), or Cesp, fell 5.8 percent and Cia de Transmissao de Energia Eletrica Paulista, known as Cteep, dropped 4.2 percent.

The government on Nov. 1 proposed paying generation and transmission companies about 19 billion reais ($9.3 billion) to cover the costs of their prior investments, in an effort to reduce future power prices. In exchange, the companies would be able to operate in the country for 30 years.

Banco Itau SA cut its estimates for share price and earnings for Cteep and Cesp after the announcement. UBS AG said in a Nov. 2 note the proposal was “worse than expected and more so for Cesp and Eletrobras.”

“Despite the sector’s poor performance since September we do not believe that it is time to go shopping for these stocks yet, given the unpredictable risk and the lack of marginal buyers,” Marcos Severine and Mariana Coelho, analysts for Itau, said in a report today. The proposal trailed expectations of even “the most bearish investor,” they wrote.

Eletrobras, whose shares have slumped 43 percent this year, would receive 14 billion reais if the company agrees to renew its concession. The government’s proposal is part of a package announced by President Dilma Rousseff in September to cut power prices by as much as 28 percent.

Revenue Reduction

Jose da Costa Carvalho Neto, president of Eletrobras, told reporters on Oct. 31 that he expected to receive “close to” the book value of the company’s assets, an estimated 30 billion reais.

Brazil’s electricity rates for industrial customers are among the highest in the world, averaging more than double those of China and the U.S., according to a report published by the Rio de Janeiro State Industry Federation in July.

The government’s offer of 9.5 reais per megawatt-hour for generation operating costs implies a 70 percent revenue cut, Lilyanna Yang and Henrique Peretti said in the UBS report. For transmission companies, the tariffs are a 67 percent cut, they said.

Other companies facing renewals in Brazil are Cia Energetica de Minas Gerais, or Cemig. Cemig and Cesp may receive 285.4 million reais and 1 billion reais, respectively, according to the Nov. 1 notice in the nation’s official gazette. Cemig fell 2.8 percent to 24.21 reais.

Under terms of the proposal, Cteep and Cia Paranaense de Energia, known as Copel, would receive 2.9 billion reais and 893.9 million reais, respectively. Copel shares declined 0.5 percent to 30.34 reais.

No Assurances

“In our opinion, Eletrobras, ISA Cteep, Cesp, Cemig and Copel continue to be names to be avoided in the short term, simply because no one can assure that we have reached the bottom,” Itau’s Severine and Coelho said in their report.

The companies have until Dec. 4 to respond to the government’s proposal. If they don’t take the offer, they may have to bid to supply power to customers when contracts start to expire in 2015.

To contact the reporters on this story: Mario Sergio Lima in Brasilia Newsroom at mlima11@bloomberg.net; Rodrigo Orihuela in Rio de Janeiro at rorihuela@bloomberg.net

To contact the editor responsible for this story: James Attwood at jattwood3@bloomberg.net


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