Eletrobras in Record Slump as Rate Cuts Imperil Earnings

Centrais Eletricas Brasileiras SA (ELET6), South America’s largest power generator, headed for its biggest decline on record on concerns rate cuts ordered by the government will erode earnings.

Eletrobras, as the Rio de Janeiro-based utility is also known, slumped 18 percent to 8.01 reais at 4:15 p.m. in Sao Paulo and slid as much as 20 percent, the biggest drop on a closing basis since at least 1994 when Bloomberg records begin. The preferred shares are down 41 percent in the past four trading days. Brazilian markets were closed Nov. 15 and yesterday for holidays.

“Under the worst-case scenario Eletrobras will start losing book value,” Dany Rappaport, who helps manage about 250 million reais at Investport in Sao Paulo, said by phone from Sao Paulo. “Politics has always been a problem for Eletrobras, and this has been magnified” by pressure to lower rates.

The government’s plan to reduce electricity costs by as much as 28 percent will almost erase earnings before interest, taxes, depreciation and amortization next year, Chief Financial Officer Armando Casado de Araujo said Nov. 19. The government is offering Eletrobras 14 billion reais ($6.7 billion) in cash as compensation, less than half the 30 billion reais the company had said it expected to receive.

Brazil is ordering power rate cuts to help companies become more competitive. Manufacturers pay more for electricity than their peers in the U.S., most of the European Union and the largest emerging markets -- China, Russia and India -- according to a report published in July by the industrial federation of Rio de Janeiro, known as Firjan.

To contact the reporter on this story: Peter Millard in Rio de Janeiro at pmillard1@bloomberg.net

To contact the editor responsible for this story: James Attwood at jattwood3@bloomberg.net