Brazil Sticks to Renewal Terms That Sank Utility Stocks
Brazil’s government will enforce a Dec. 4 deadline it gave power companies to decide whether to renew concessions and won’t change any terms of its offer, Deputy Energy Minister Marcio Zimmermann said.
In an interview yesterday, he said state-controlled Centrais Eletricas Brasileiras SA (ELET6), the worst performer in the MSCI Emerging Market Index (EEM) in the past month, has more to gain by accepting new conditions and keeping its licenses than by returning assets in 2015. All companies probably will reach the same conclusion before the deadline, he said.
President Dilma Rousseff is forcing utilities including Eletrobras, as the Rio de Janeiro-based company is known, and Cia. Energetica de Sao Paulo to reduce rates in exchange for the renewal of licenses for an additional 30 years. Rousseff wants energy rates to fall 20 percent next year as part of a plan to reduce production costs and slow inflation.
“I saw with such clarity during an Eletrobras board meeting the advantages of renewing licenses that I find it very difficult that other companies will opt to lose their license,” Zimmermann said from his office in Brasilia. “If they want to renew, they will need to accept the rules.”
Utilities with contracts expiring between 2015 and 2017 have plunged in share trading since Rousseff announced the concessions plan on Sept. 11. Eletrobras has lost 62 percent in that period, including a 6.9 percent drop yesterday to a decade- low 7.30 reais.
“There were frustrated expectations, funds that thought Eletrobras was sitting in an infinite oil well and probably never read Brazilian concession law,” said Zimmermann.
Cia. Energetica de Minas Gerais is another company facing renewals. Cemig, as the Belo Horizonte-based utility is known, hasn’t looked to negotiate the renewal of three of its dams that have concessions expiring, Zimmermann said
“I’ve signaled interest for a deal but they never looked us up,” he said.
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