2nd UPDATE: Brazil Utility Stocks Plunge on Rate Cuts, Reimbursements

--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 [e-mail]

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