Eletropaulo Dividends Imperiled in Brazilian Rate Review

Eletropaulo Metropolitana Eletricidade de Sao Paulo SA’s tariff talks with the government this month will show whether Brazil will sacrifice the country’s highest dividend payouts to help contain inflation.

Eletropaulo, as the AES Corp. unit is known, is locked in negotiations with regulator Aneel over prices Brazil’s biggest distributor can bill in the next four years. Authorities proposed an 8.8 percent reduction to benefit customers.

President Dilma Rousseff is pushing utilities from Eletropaulo to Cia. Energetica de Minas Gerais, the nation’s most profitable non-financial industry, to cut tariffs after inflation exceeded the central bank’s 4.5 percent target every month since August 2010. Too big a price cut would erode investor returns and push up funding costs, said Eletropaulo Chief Executive Officer Britaldo Soares.

“The importance of the process is to maintain the balance of companies’ investment capacity, vis-a-vis Brazil’s modernization challenges, better tariffs for customers and appropriate returns for investors to keep the sector bankable,” Soares said in a May 22 interview in Rio de Janeiro.

Eletropaulo, based in Sao Paulo, has a dividend yield of

28.5 percent, the highest among Brazilian companies with a market value of at least $500 million, according to data compiled by Bloomberg. Electricity companies account for eight of the 20 highest dividend yields.

‘Balanced’ to Clients

Brazilian utilities have an average operating profit margin of 15.4 percent, the highest among nine non-financial industries tracked by Bloomberg. The second highest is consumer goods at 15 percent.

Eletropaulo’s share price has slumped 34 percent so far this year compared with a 5.9 percent slide by Brazil’s benchmark index and a 2.1 percent decline by Santiago-based Enersis SA, the Latin American unit of Spain’s Endesa SA.

Over the past five years Eletropaulo’s share price slid 24 percent, while its total return jumped 83 percent.

The industry’s profitability and dividend levels signal prices need to be “balanced” more toward customers, said Nelson Hubner, general director of Aneel.

“If companies turned a profit in one tariff cycle, it’s a sign that I can capture a lot of that in the next cycle,” Hubner said in a May 29 interview in Brasilia. “We are going to start to do that. The consumer will profit with that.”

Strict Rules

Eletropaulo’s communications department didn’t respond to telephone and e-mailed requests for comment on whether Aneel’s proposed tariff changes would prompt a reduction in dividends.

Cia. Paranaense de Energia, the largest distributor in Brazil’s southern region, is also in talks with Aneel over tariffs to be put in place June 24. The regulator proposed a

0.85 percent reduction for the Curitiba-based company known as Copel.

The larger cut proposed for Eletropaulo is related to company investments that the regulator decided to exclude from the tariff framework, according to Antonio Junqueira, an analyst at Banco BTG Pactual SA.

“The government is being strict within the rules, which is their job,” Junqueira said by telephone from Rio de Janeiro. “The process took place in the right manner.”

While Eletropaulo’s last tariff cycle, in 2007, led to a bigger cut than the 8.8 percent proposed in this month’s review, other terms in the previous package, such as prices paid to generators, offset the earnings impact, Junqueira said.

Inflation Link

Aneel, which delayed this month’s Eletropaulo revision from July last year, is also considering scrapping a mechanism that links rate adjustments with inflation. That could hurt distributors more than generators and transmission companies whose operating margins are wider, according to BTG’s Junqueira.

Lower tariffs would help contain inflation, giving Rousseff more scope to stimulate the economy. Brazil’s central bank cut its benchmark interest rate to a record 8.5 percent last month, taking total reductions since August to four percentage points. The economy expanded a lower-than-forecast 0.2 percent in the first quarter from the three previous months.

Authorities must understand that high dividends and quality service aren’t “incompatible,” said Luiz Fernando Rolla, chief financial officer of Cemig, Brazil’s largest power company by market value.

“Distribution is an investment business,” Rolla said in a May 22 interview in Rio de Janeiro. “In order to invest you need to attract investors and the only way to do that is to have a very clear, solid and transparent dividend policy.”

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