Brazil Utility Stocks Plunge on Worse-Than-Expected Rate Cuts, Reimbursements

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 then. 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, was expecting 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 70% in transmission and generation prices.

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."

Eletrobras plunged 8.4% to BRL15.39, while Cemig dropped 2.8% to BRL24.22.

Cia Energetica de Sao Paulo (CESDY, CESP6.BR) plunged 9.2% to BRL16.56, leading declines 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 3% each, rounding out the top five declines on the Ibovespa.

Write to Paulo Winterstein at [e-mail]

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