Eletrobras Is Worst Power Bet as Rates Decline: Corporate Brazil

Brazil’s push to reduce electricity rates is making Centrais Eletricas Brasileiras SA (ELET6) the world’s worst-performing major power utility.

Eletrobras, as the state-run company is known, has lost investors 24 percent this quarter as the government orders distribution rate cuts of as much as 28 percent. The company is also being used as a policy tool to bail out a debt-laden distributor for at least a third time.

The stock’s return since Sept. 30, the worst among power companies with a market value of at least $5 billion, shows minority holders are paying the price of President Dilma Rousseff’s efforts to contain inflation and improve service in remote areas. By comparison Spain’s Iberdrola SA and Italy’s Enel SpA returned 9.6 percent and 0.2 percent, respectively, according to data compiled by Bloomberg.

“Eletrobras faces a fork in the road, where it has to decide if it’ll be a profit-maximizing company or if it’ll be a ministry with shares,” Gabriel Salas, an analyst at JPMorgan Chase & Co., said in a telephone interview from New York yesterday. “It’s very difficult to have a combination of both interests.”

A 51 percent slump this year makes Eletrobras the 9th worst performer in the 818-member MSCI Emerging Markets Index, which has gained 7 percent in 2012.

Eletrobras dropped 5.1 percent to 13.11 reais at close in Sao Paulo, the lowest since May 24, 2004.

Takeover Plan

The stock, heading toward the worst annual performance since 1998, fell as much as 6.1 percent yesterday when the company announced plans to take over Cia. de Eletricidade do Amapa, or CEA, as part of an attempt by the federal government to salvage the financially embattled power distributor controlled by the Amazonian state of Amapa.

CEA’s debt is about 1.6 billion reais, according to the state government website. CEA owed Eletrobras 900 million reais by 2010, according to the Amapa government website.

Eletrobras didn’t disclose the price of the acquisition, which is pending a financial restructuring by CEA, in which it held a 0.3 percent stake on Dec. 31, 2011, according to information published by CEA.

Eletrobras’s press office referred all questions regarding the takeover of CEA, which has 165,349 clients, to the regulatory statement announcing the takeover agreement. The filing said additional details may be disclosed in the future.

Electricity companies in Brazil are holding negotiations with authorities over renewal of concessions set to expire in 2015 and 2017. Rousseff announced Sept. 11 a plan to cut prices as she seeks to make Brazilian industries more competitive. Terms of the government’s proposal were announced Nov. 1.

Compensation Package

Companies that accept the cheaper prices as of next year will be paid compensation as the new prices cover operating and maintenance costs. The compensations announced Nov. 1 total 19 billion reais, with the amount for each company varying according to their assets. Eletrobras is entitled to about 14 billion reais while Chief Executive Officer Jose da Costa Carvalho said before the announcement that he expected 30 billion reais.

Cia. Energetica de Minas Gerais, or Cemig, announced Oct. 16 that it won’t request renewal for three dams under the new rules and Cia de Transmissao de Energia Eletrica Paulista, known as Cteep, said Nov. 12 that it will recommend shareholders reject the proposal. Eletrobras doesn’t have the same option, according to Pedro Galdi, head of equity research at Sao Paulo- based SLW Corretora.

“Eletrobras belongs to the government so it can’t say it won’t renew concessions,” Galdi said in a telephone interview.

Credit Quality

The tussle over concession renewals could reduce Eletrobras’s credit quality, Fitch Ratings said in a Nov. 7 report. Accepting the government terms will “significantly increase” the company’s leverage levels, Fitch said.

The government has used Eletrobras as a policy tool by saving distributors at least twice before. In 2003, the company rescued Cia. Energetica do Maranhao and is in talks to take over Cia Celg de Participacoes SA, a distributor in Goias state.

Government intervention makes Eletrobras a less attractive prospect, said Felipe Rocha, an analyst at brokerage Omar Camargo.

“While it has potential to be a good company, there’s that question of always having to rescue distributors,” Rocha said in a telephone interview from Curitiba, Brazil.

To contact the reporter on this story: Rodrigo Orihuela in Rio de Janeiro at rorihuela@bloomberg.net

To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net; Adriana Arai at aarai1@bloomberg.net

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