Centrais Eletricas Brasileiras SA (ELET6) slumped to the lowest level in seven years as a worse-than- expected compensation proposal by Brazil’s government triggered a selloff of electricity company shares.
Eletrobras, as South America’s largest generator is known, plunged 8.4 percent to 15.38 reais at 10:44 a.m. in Sao Paulo, the lowest since Aug. 30, 2005. Cia Energetica de Sao Paulo (CESP6), or Cesp, fell 7.9 percent and Cia de Transmissao de Energia Eletrica Paulista, known as Cteep, lost 5 percent.
The government proposed compensating generation and transmission companies about 19 billion reais ($9.4 billion) for the renewal of concessions due to end between 2015 and 2017 as authorities seek lower power prices. Banco Itau SA cut its share-price and earnings estimates for Cteep and Cesp after the Nov. 1 announcement, which UBS AG described in a Nov. 2 note as “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,” Itau analysts Marcos Severine and Mariana Coelho said in a report today, reducing their end-2013 share estimates for Cteep to 30 reais and for Cesp to 18 reais. The proposal trailed expectations of even “the most bearish investor,” they said.
Eletrobras, whose shares have slumped 42 percent this year, will receive 14 billion reais if the company agrees to renew its concession under new rules that lower the revenue of the companies and the power rates charged as part of a package announced by President Dilma Rousseff in September that aims to cut prices by as much as 28 percent.
Jose da Costa Carvalho Neto, president of Eletrobras, said Oct. 31 that he expected to receive “close to” 30 billion reais in compensation. “We hope it will be close to the book value of our assets,” he told reporters in Brasilia. The book value of company assets is 30 billion reais, he said.
The government’s offer of 9.5 reais per megawatt hour to cover for generation operating costs implies a 70 percent revenue cut, UBS analysts Lilyanna Yang and Henrique Peretti said in the report. For transmission companies, the tariffs signify a 67 percent revenue reduction, they said.
Other companies facing concession renewals 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 official gazette. Cemig fell 2.9 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 3.6 percent to 29.41 reais.
“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.
Rousseff unveiled her energy plan in September asking companies to reduce electric rates as of Jan. 1 as a condition to renew concessions set to expire by 2017.
Brazil’s electricity rates for industrial consumers 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.
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