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Brazil spares Eletrobras from taking on failed utilities
SAO PAULO/BRASILIA (Reuters) - Brazilian President Dilma Rousseff's decision to step up government intervention in some sections of the nation's electricity industry has already produced one clear winner: state-run power holding company Eletrobras (ELET6.SA).
After years of being used as a "hospital" for failed power transmission and distribution companies, Eletrobras is finally being spared from taking on troubled utilities. Such policy still costs the Brasilia-based company billions of reais a year in restructuring and debt reduction charges.
Rousseff, aware that such policy hampered Eletrobras' investment plans for years, last week allowed industry regulator Aneel to speed up the seizure of operating licenses from power utilities that fail to meet contract terms. The new rule eased terms for a change in control at distressed utilities without forcing Eletrobras to pour money into them.
The decree, which on Friday helped accelerate the seizure of eight units belonging to debt-laden Grupo Rede Energia (REDE3.SA), "means that Eletrobras won't be always required to bail out utilities in distress," a senior executive at the company told Reuters on condition of anonymity due to the sensitivity of the issue.
"The agency in charge of any intervention will be Aneel," the executive added.
The mechanism is completely new for a country in which state intervention in most strategic industries is mounting. Rousseff is pressing private sector utilities to slash rates and increase investments ahead of her decision to either extend or revoke dozens of licenses that are due to expire through 2015.
Aneel's decision to seize Rede's eight units and separately agree to a restructuring plan for Celpa, the most indebted of Rede Energia's units, seeks to ensure the continuity of service and prevent Celpa's problems from spreading to the other units.
"Aneel got ahead of a potential bankruptcy event of Grupo Rede," said Erik Rego, managing director of Excelência Energética, a consulting firm on the sector.
Eletrobras' shares tumbled 13 percent over the past three weeks on concern the aggravation of Rede Energia's woes would lead to an Eletrobras-funded bailout. Apart from keeping a number of utilities that were left unsold during a privatization round in the 1990s, it has taken over half a dozen companies with financial problems over the past decade.
That group of companies posted combined losses of 507 million reais ($252 million) in the first half of the year, while posting a shortfall of 109 million reais in earnings before interest, tax, depreciation and amortization. The indicator, known as EBITDA, is a gauge of operational earnings.
Rede Energia's assets have been considered a takeover target as the government and private companies boost their market share in power distribution, a segment in which bigger scale offsets the risk of lower power rates in coming years. Consolidation is key for the companies, known as DisCos, to gain financial and operating muscle.
According to Nivalde de Castro, who heads the center for electricity industry research at the Universidade Federal do Rio de Janeiro, the Aneel intervention "is a measure that helps consolidation in the sector."
De Castro said Rede Energia had no spare ability to improve efficiency and sort out its debt problems. Excelência's Rego believes that some assets of a revamped Rede Energia could well fit into the expansion strategy of CPFL Energia (CPFE3.SA) and Cemig (CMIG3.SA).
CPFL may express interest in Rede Energia's assets in the state of São Paulo, Brazil's richest and most populous, Rego added.
Aneel gave the eight Rede Energia units it seized as many as 60 days to present a plan to revamp operations, which, if successful, could lead to management of the units being handed over to Rede Energia shareholders.
Adriano Pires, who heads the Brazilian Center for Infrastructure think tank known as CBIE, said intervention could be helpful for the industry, but state intervention needs to remain balanced.
"The sector generates low margins so scale gains relevance to keep activity profitable," Pires said.
Rede Energia's liabilities almost tripled to 6 billion reais over the past five years. Celpa faces geographic and demographic challenges that drive up costs while reducing potential revenue. It serves an area with 7.6 million people spread out over 1.3 million square kilometers, an area bigger than Germany, France and Britain combined.
(Reporting by Anna Flávia Rochas and Leonardo Goy; Writing and additional reporting by Guillermo Parra-Bernal in Buenos Aires; Editing by Maureen Bavdek)
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