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Eletropaulo Profit Outlook Exceeds Analysts: Corporate Brazil

Eletropaulo Metropolitana Eletricidade de Sao Paulo, Brazil’s largest power distributor, is expecting profit to drop less than some analysts estimate after rates were cut to make manufacturers more competitive.

Earnings before interest, taxes, depreciation and amortization, known as Ebitda, will fall 30 percent to 35 percent on an annual basis after regulators cut Eletropaulo rates by 9.3 percent in July, Chief Executive Officer Britaldo Soares said in an interview. Analysts expect Ebitda to drop 62 percent in 2012 and a 15 percent decline in 2013, according to data compiled by Bloomberg.

The Eletropaulo rate cut, which was bigger than analysts anticipated, was the first step in a broader drive by President Dilma Rousseff to force utilities to reduce power bills. Her plan, which was unveiled in September, wiped out more than $10 billion in the market value of power companies. The stocks pared losses last week after Brazil boosted compensation for companies that cut prices now in exchange for renewing contracts set to expire through 2017.

“I don’t think anybody disagrees with the fact that something had to be done with regards to the costs of energy,” Soares said in a Nov. 30 interview at the company’s headquarters in Barueri, Brazil. “Because of the way it was announced, the markets were surprised and reacted very badly to the uncertainties that were put on the table.”

Eletrobras Gains

State-run Centrais Eletricas Brasileiras SA, or Eletrobras, as Brazil’s largest generator is known, led the gains by power companies last week after the government raised compensation by 9.87 billion reais ($4.7 billion) to 29.87 billion reais.

“The government is seeking a negotiating angle,” Gabriel Salas, an analyst at JPMorgan Chase & Co., said in a telephone interview from New York. “It’s making the transition to the new rules more benign.”

Eletrobras, based on Rio de Janeiro, has dropped 64 percent this year, Sao Paulo-based Cesp fell 43 percent and Eletropaulo is down 62 percent. Brazil’s benchmark stock index has gained 2.6 percent in the same period.

Eletropaulo was ordered by the electricity regulator to cut rates as part of a regular review taken every four years. Eletropaulo and generator AES Tiete SA, both of which are controlled by Arlington, Virginia-based AES Corp., won’t be immediately affected by the renegotiation of contract terms and prices because they don’t have any concessions expiring before 2017, Soares said. Eletropaulo shares rose 1 percent to 13.84 reais at 10:50 a.m. in Sao Paulo.

Unhappy Shareholders

Eletrobras, which had the biggest weekly gain since September 1998 last week, voted in a shareholder meeting yesterday to accept the government renewal terms. Companies have until today to say whether they will agree to cut rates or return contracts.

Not all shareholders are happy with the sweetened compensation offer.

“The country is being very harmed by interference in the markets,” Joao Antonio Lian, the representative of Eletrobras minority shareholder Fundo Nueva Sumatra, which voted against the government’s terms, said in an interview after the investor meeting yesterday in Brasilia. “You already have people abroad saying that Brazil is on its way to become a Venezuela or an Argentina. Never in history has the value of public companies been so damaged.”


Shareholders of Cia. Energetica de Sao Paulo voted not to renew three concessions worth 1.76 billion reais in a meeting yesterday, according to a regulatory filing. Cia. de Transmissao de Energia Eletrica Paulista shareholders, which also met yesterday, agreed to the terms.

Concern that government intervention will reduce earnings probably will prompt shareholders to demand higher returns for new investments and projects, Eletropaulo’s Soares said.

“Certainly with all these uncertainties, with all this noise, the cost of financing has increased somewhat,” he said. “It’s reasonable to say that we may see an increase in the cost of equity and the cost of debt.”

The move by the government to make the renewal terms more favorable may help utility shares regain some more of their losses, said Rafael Dias, an analyst at Banco do Brasil SA.

“It’s still early to price this in,” he said. “But it’s a first step in the sense that the government also realizes that it can’t harm companies that much.”

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