Cesp Gain Is MPX Loss on Power-Rationing Risk: Corporate Brazil

A dry spell that’s emptying Brazilian hydropower dams is poised to turn Cia. Energetica de Sao Paulo, the second-worst generator stock last year, into one of the industry’s biggest winners.

Cesp, as the utility is known, and other producers that can sell extra electricity in the spot market may be able to profit after prices surged to a record, said JPMorgan Chase & Co. and Banco BTG Pactual SA. Net buyers of energy in the spot market -- from billionaire Eike Batista’s MPX Energia SA to steelmaker Usinas Siderurgicas de Minas Gerais SA -- stand to lose the most, analysts said.

Concern the government will ration electricity to avoid blackouts has wiped out $2.1 billion in the market value of Brazil’s 15 biggest electricity utilities since Jan. 1. Reservoir levels at dams accounting for most of the nation’s generating capacity fell to a 12-year low last month, prompting state-run Centrais Eletricas Brasileiras SA, or Eletrobras, to fire up costly natural-gas plants to meet demand.

“It’s reckless to say that there’ll be rationing, but it’s also reckless to say there won’t be,” Ricardo Correa, a power industry analyst at Ativa Corretora, said by telephone from Rio de Janeiro. “The main victims are Eletrobras and MPX.”

The lack of rain threatening hydro output comes after President Dilma Rousseff triggered an industry-wide selloff last year by requiring companies to cut electricity prices now as a condition of renewing contracts set to expire between 2015 and

2017. While Eletrobras accepted the offer, utilities such as Cesp and Cia. Energetica de Minas Gerais, or Cemig, opted to return some contracts instead.


Cesp jumped as much as 5.2 percent to 19.88 reais in Sao Paulo today, heading for the biggest two-day rise since Nov. 26.

Cesp is “under-contracted,” meaning it produces more than it has pledged to supply, allowing the Sao Paulo-based utility to sell the excess in the spot market, Gabriel Salas, a JPMorgan analyst based in New York, said in a note to clients. The spot price rose to 554.82 reais ($271.86) per megawatt hour from

47.47 reais a year ago. MPX and EDP-Energias do Brasil SA rely on the spot market to secure energy, he said.

“Cesp seems to have the biggest gap of un-contracted energy,” BTG analysts led by Antonio Junqueira said in a Jan. 7 note to clients. While CPFL Energia SA, AES Corp.’s AES Tiete SA unit and GDF Suez’s Tractebel Energia SA may need to buy power in the spot market to offset lower hydro output and meet supply contracts, Cesp may have as much as 21 percent of its electricity available to sell, they estimate.

The BTG analyst based in Rio de Janeiro declined to comment further, while Salas wasn’t available.

Cesp Rebound

Cesp, whose 6.7 percent rally yesterday was the biggest gain on the benchmark Bovespa index, trades at 8.2 times estimated 2013 earnings, less than the average ratio of 12 for Brazil’s 15 biggest electric utilities. Cesp’s 41 percent drop last year made it the worst utility stock after Eletrobras, Eletropaulo Metropolitana SA and Cia. de Transmissao de Energia Eletrica Paulista.

Cesp and Tractebel’s press offices didn’t respond to e-mails and phone calls requesting comment. CPFL’s press office in Sao Paulo declined to comment. Eletrobras is “analyzing any potential impacts of the use of thermal plants on its earnings,” the Rio-based company said in an e-mailed response. MPX’s press office in Rio didn’t immediately respond.

Generators whose hydropower dams are running below capacity are spending 800 million reais a month, or about half their earnings before items, to buy from gas-fired plants to meet supply contracts, said Nelson Leite, president of distributors association Abradee. The government may offer aid in the form of cheap loans from the development bank, he said.

‘Delicate’ Situation

Electricity-intensive industries are also exposed to the surge in spot prices. Usiminas, as Brazil’s third-largest steelmaker is known, is the most exposed because it “only generates 25 percent” of the energy it consumes, according to a Bank of America Corp. note this week. Belo Horizonte-based Usiminas’s press department declined to comment.

Brazil suffered a wave of nationwide blackouts in 2001 after a drought cut output from dams. Thermal capacity has more than doubled since then, according to JPMorgan’s Salas.

“The situation is delicate,” Leite said. “The cash situation is a real problem. Rationing is a future problem.”

Government ‘Tranquility’

Even with record prices, spot market sales may not make much of a difference in Cesp’s operating results, said Felipe Rocha, an analyst at Omar Camargo Investimentos.

“Revenue could increase, yes, because the price is higher,’” he said in a telephone interview from Curitiba, Brazil. Still, “the company might not have as much excess capacity as it had in the past,” as it also deals with falling hydro output, he said.

Rocha estimates the spot market accounted for only about 6 percent of Cesp’s revenue in the third quarter.

The government expects to be able to avoid rationing this year, Mauricio Tolmasquim, head of the state energy planning and research agency, said this week. A meeting of energy officials yesterday confirmed “our tranquility that the country has a firm energy inventory, security and is in conditions to fulfill every need,” Energy Minister Edison Lobao told reporters.

Brazil probably won’t get enough rain to return dam levels to normal by the end of the wet season in March, said Marco Antonio dos Santos, a weather forecaster at Somar Meteorologia.

“We are having a regular summer, but the reservoirs need pouring rains to go back to normal levels,” he said in a telephone interview from Sao Paulo. “The levels are far from comfortable and I fear for the rest of the year.”

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