Tractebel Leads Utilities by Avoiding Rousseff Rate Cuts

Tractebel Energia SA (TBLE3), Brazil’s biggest power utility, is becoming the favorite among investors after it avoided rate cuts that wiped out $3.9 billion in the market value of rivals.

The generator -- whose $11 billion market value surpassed Cia. Energetica de Minas Gerais, or Cemig; CPFL Energia SA (CPFE3) and Centrais Eletricas Brasileiras SA (ELET6), or Eletrobras, last quarter after ranking fourth since 2004 -- gained 8.7 percent in the past year. Shares of Cemig, CPFL and Eletrobras each fell at least 27 percent in the period.

While Brazilian President Dilma Rousseff’s plan to force utilities to cut power prices in exchange for early renewal of concessions triggered a selloff among electricity stocks, Tractebel sidestepped the pressure because its contracts don’t expire for at least 14 years. The unit of France’s GDF Suez (GSZ) is also taking advantage of record prices by selling more of its power in the spot market than rivals amid a shortage of hydro- power.

“What makes this an attractive company is low risk and very good management,” Oswaldo Telles, an equity analyst at Banco Espirito Santo SA (BES) who rates Tractebel a buy, said by telephone from Sao Paulo. “The low risk comes from being a non- state-owned company, with good management and concessions that aren’t expiring.”

Florianopolis, Brazil-based Tractebel trades at 13 times estimated 2013 earnings, compared with a 6.6 ratio for Cemig and 14 for CPFL, according to data compiled by Bloomberg. Tractebel rose 0.3 percent to 33.51 reais at 2:14 p.m. in Sao Paulo.

Best Returns

Tractebel’s 27 percent return on equity in the fourth quarter was the highest among power utilities worldwide worth at least $5 billion after Chile’s Empresa Electrica Pehuenche SA (PEHUEN) and the Philippines’s Aboitiz Power Corp. (AP), according to data compiled by Bloomberg. Eletrobras ranked 51st with a return of 5.3 percent.

Rousseff said in September she aimed to cut power costs for companies and consumers by as much as 28 percent and in January extended the goal to as much as 32 percent. Under the plan, generation and transmission utilities were asked to lower rates now in exchange for the renewal of concessions set to expire in 2015 and 2017.

Eletrobras, Cemig

State-controlled Eletrobras, based in Rio de Janeiro, was the hardest hit by the measures because it was the only major generator that accepted the proposal and holds most of the concessions affected. Cemig has dropped after it rejected the offer and instead agreed to give up concessions. CPFL’s distribution business has been hurt by rising costs after a dry spell drained hydroelectric dam reservoirs, forcing Brazil to fire up more-expensive thermal plants.

Thermal generation represents about 17 percent of Tractebel’s output capacity, most of which isn’t contracted to clients. That means the company can sell the energy in the spot market for prices near a five-year high.

GDF’s plan to transfer its 60 percent stake in the Jirau dam project in the Amazon to Tractabel once it’s completed threatens to derail the stock’s rally because the handover includes debt, Geracao Corretora de Valores’s Cristiane Fensterseifer said.

Risk to Rally

“There’s still the risk that it could be transfered this year,” said Fensterseifer, an equity analyst at the brokerage that manages 6 billion reais ($3.03 billion) of stocks. While the company is attractive, its strengths have already been “priced in,” she said.

Tractebel’s press office declined to comment in an e-mailed response to questions.

While South American operations represented about 5 percent of 2012 sales at GDF, Europe’s biggest utility by market value, it’s focusing on “fast-growing markets” such as Brazil, Chief Executive Officer Gerard Mestrallet said Feb. 28 on a call with investors.

Faith in management is a key driver for investors’ interest in Tractebel, said Sergio Tamashiro, a utilities analyst at Banco Safra SA, who rates the stock the equivalent of a buy.

“Many companies lost money rather than win with the high spot prices,” Tamashiro said in a telephone interview from Sao Paulo. “Tractebel has a good portfolio, so they manage at least not to lose money in this crisis.”

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: Jessica Brice at jbrice1@bloomberg.net; James Attwood at jattwood3@bloomberg.net

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