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Brazil's Eletrobras Emerges as Main Loser in Power Price Scrap

Date : 11/20/2012 @ 3:19AM
Source : Dow Jones News
Stock : Cemig (CIG)
Quote : 5.36  0.37 (7.41%) @ 2:58AM
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Brazil's Eletrobras Emerges as Main Loser in Power Price Scrap

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--Eletrobras could lose BRL10 billion in annual revenue as it renews licenses

--Utilities, government engaged in apparent stand-off regarding renewal

--Analysts expect government to use Eletrobras to operate licenses rivals don't renew

By Paulo Winterstein

SAO PAULO--Shares in Brazil's state-controlled utility Centrais Eletricas Brasileiras (ELET6.BR) slumped again on Monday, as the firm is emerging as one of the clearest losers in the government's drive to bring down electric power prices.

President Dilma Rousseff promised to cut electricity bills 20% next year as part of a broader effort to lift economic growth without boosting inflation. The administration will renew power utility licenses that start expiring in 2015 but only if the concessionaires agree to major revenue cuts.

Eletrobras, as Brazil's biggest electric company is known, won't have a choice, as the government is its major shareholder and the board of directors has recommended renewing concessions. The firm estimates it will lose close to 10 billion Brazilian reais ($4.8 billion) in annual revenues as a result.

On Monday, the firm said it needs to cut costs and improve operating efficiency to cope. Chief Financial Officer Armando Casado de Araujo said "there needs to be a restructuring at all subsidiaries. We need to improve scale, improve maintenance, computerize our operations."

The problems could be compounded if a number of utilities don't renew their contracts, as they've indicated. Analysts believe the government will force Eletrobras to buy and run those assets at lower prices, further eroding its profitability.

Eletrobras' shares have lost almost half their value since September, when the government first announced the new rules. The shares plunged once again on Monday, dropping 15% to BRL9.81, as analysts slashed their rating on the company's stock after last week's announcement. Barclays Capital analyst Francisco Navarrete on Monday note said he sees the shares falling to BRL1, as the company will have to slash dividends and issue new shares.

"What the government is doing is draconian," said Alexandre Furtado, an electric analyst at Lopes Filho brokerage in Sao Paulo. "Everyone in the market is saying that it's more rational not to renew."

The board of transmission company CTEEP (TRPL3.BR) has recommended that shareholders vote against renewal. Cemig (CMIG4.BR), a power company controlled by the state government of Minas Gerais, has also said it won't renew some concessions, while Jose Anibal, the energy secretary for the state of Sao Paulo, which controls Cesp (CESP6.BR), said his state likely won't seek renewal of some licenses.

Deputy Mines and Energy Minister Marcio Zimmermann brushed off those statements in a report in Valor Economico published on Monday.

"Probably, on Dec. 4 you'll see a lot of surprises," Mr. Zimmermann said, referring to the deadline for signing up to new contracts. CTEEP and Cesp are "almost certain" to sign the contracts, he said.

The ministry's press department wasn't available for comment on Monday.

Some saw Mr. Zimmermann's statement as a bluff by the government, which has said it won't budge on the prices it set on the expiring contracts. Some of the power companies may also be bluffing, but in cases such as CTEEP, were the board has made a formal recommendation, it seems serious enough.

"What CTEEP is doing is much more serious and says that that company really won't renew." said Mr. Furtado.

For Eletrobras, the only way to improve the dismal outlook is to cut costs and emphasize profitable investments, said the analysts. It has often become involved in costly projects such as taking over struggling power distributors, or helping build power plants such as the controversial Belo Monte, which has seen its price tag increase in the face of protests and delays.

But analysts said it would be difficult to turn around the company in a few years, especially because of its status as a state-controlled company.

"Either you'll have a very strong structural adjustment," Mr. Furtado said, "or the company will go bankrupt. But state companies don't go bankrupt, they get more money from the government."

Write to Paulo Winterstein at paulo.winterstein@dowjones.com

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