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Cesp Aging-Asset Costs Rise on Brazilian Government Rule
Cia. Energetica de Sao Paulo, the state electricity utility, is letting its assets age faster than any other company in Brazil as it awaits a government decision on whether power-generation contracts will be renewed.
Depreciation costs at Cesp, as the Sao Paulo-based utility is known, topped capital expenditures by 635 million reais ($313 million) last year, signaling the utility isn’t investing to maintain and expand its hydroelectric plants and distribution networks, data compiled by Bloomberg show. Cesp and airline Gol Linhas Aereas Inteligentes SA are the only two companies listed on the Bovespa index whose investments have trailed depreciation in each of the past three years.
Sao Paulo state, which controls Cesp with 94 percent of ordinary shares, has postponed plans to sell a stake in the utility at least three times as the federal government decides whether to renew operating concessions or hold new auctions to drive down electricity prices in Brazil. Two-thirds of Cesp’s operating licenses are set to expire in 2015, accounting for 90 percent of its revenue.
“They don’t know what’s going to happen after 2015,” Eduardo Gomide, an analyst at HSBC Holdings Plc, which rates the stock neutral, said in a July 27 telephone interview from Sao Paulo. “For Cesp it makes sense. It’s a cautious move. There’s a reason behind this conservative management.”
Cesp rose 1.1 percent to 36.64 reais on Aug. 3 in Sao Paulo trading, bringing its gain in the past year to 22 percent. Cesp’s 28 percent total return in the past year is the highest among its peers in Brazil after Duke Energy International Geracao Paranapanema SA’s 79 percent and AES Tiete SA’s 29 percent, according to data compiled by Bloomberg.
Cesp shares are outperforming peers on speculation that the renewal will be announced soon, Ricardo Correa, an analyst at Ativa SA, said in a telephone interview from Rio de Janeiro. Correa rates the stock hold.
“The extension is very likely to occur and the market is taking that view,” Correa said. Capital expenditures may be low at Cesp because the company already has “mature” assets and doesn’t need to invest heavily, he said.
Brazil’s government, which missed a deadline to rule on the concessions in June, probably will extend the licenses for 20 years in exchange for lower electricity rates, Energy Minister Edison Lobao told reporters on July 26. The government will present the proposal, which may include a plan to eliminate some fees and lower taxes, to industry executives in a meeting tomorrow, he said at the time.
Cesp’s press office didn’t respond to e-mailed requests for comment. The Energy Ministry declined to comment and wouldn’t confirm if the meeting will still take place.
The renewals are more important for Cesp because the concessions represent more of the utility’s installed generating capacity, Gomide said. Expiring licenses account for 67 percent of Cesp’s capacity, compared with 46 percent for Eletrobras, 15 percent for Cemig and 6 percent for Copel.
Eletrobras has declined 9.6 percent in the past year, while Cemig is up 72 percent and Copel has risen 15 percent.
Cesp is probably also holding back on investments as it seeks to sell a stake, said Marcos Severine, head of utilities research at Banco Itau BBA SA in Sao Paulo.
The Sao Paulo government “doesn’t seem to see the sense in investing in assets that will be privatized,” Severine said in a telephone interview.
Sao Paulo’s state government unsuccessfully tried to sell its stake in Cesp three times since 2000. The last attempt was in 2008, when it canceled an auction after failing to attract bidders because the federal government hadn’t said if it would renew licenses. Chief Executive Officer Mauro Arce said in January that Cesp was awaiting the renewals before deciding on whether to sell its stake.
Brazilian President Dilma Rousseff has said she wants to lower electricity rates as part of efforts to spur the economy. Her government has enacted a series of measures in recent months, including lowering borrowing costs, cutting taxes and auctioning concessions for public infrastructure such as airports.
Brazil’s electricity is among the world’s most expensive, the Rio de Janeiro Industrial Federation, known as Firjan, said in a report last week. Prices for industrial users average 329 reais per megawatt hour, compared with 142.40 reais in China and 124.70 reais in the U.S., the report said.
Delays in renewing concessions make it more difficult to tap funding for investments, said Elena Landau, an attorney who specializes in energy and participated in Brazil’s privatization process in the 1990s as director for asset sales at the BNDES state development bank.
“The government’s delay in deciding on concession renewals is inexcusable,” Landau said in a telephone interview from Rio. “I don’t know if it makes investments impossible, but it makes it more difficult, because there isn’t a clear outlook for contracts that companies could use as collateral for financing.”