June 5 (Bloomberg) -- Cia. Energetica de Minas Gerais, Brazil’s second-biggest power utility, fell after Itau BBA cut its recommendation on concern earnings will suffer as hydroplant contracts expire and regulators deny rate requests.
Shares of Cemig, as the Belo Horizonte, Brazil-based company is also known, declined 1.9 percent to 21.51 reais at the close of trading in Sao Paulo, the lowest level since May 15. The Ibovespa stock benchmark slumped 2.3 percent.
Itau BBA cut Cemig to hold from buy while reducing its year-end price target to 24 reais a share from 25.7 reais, according to a report today. The company probably will have to reduce its dividend payout to keep debt at a comfortable level, analysts Marcos Severine, Mariana Coelho and Gabriel Lara wrote in the report.
Last month’s inclusion of three Cemig-operated hydropower plants in a list of expiring concessions was “unexpected and devastating,” the analysts wrote. In addition, the final numbers from a rate review came back “harsh” and were below Itau BBA’s estimate, according to the report.
The rate review conducted by Brazil’s energy regulator, known as Aneel, demanded that the rates the utility charges businesses were cut by 4.83 percent starting on April 8, according to an e-mailed statement from Cemig.
The utility’s earnings before interest, taxes, depreciation and amortization will decline by 16 percent this year to 4.03 billion reais ($1.89 billion), the analysts estimated.
President Dilma Rousseff in September unveiled a plan to reduce electricity costs for consumers and businesses by demanding that utilities agree to reduce rates as a condition of renewing hydroplant concessions expiring from 2015 to 2017.
The country’s Ministry of Mines and Energy on May 3 rejected Cemig’s request to renew the licenses of the hydropower dams of Sao Simao, Jaguara and Miranda.
Cemig has gained 7.4 percent this year while the Ibovespa declined 13 percent.
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