UPDATE 1-Eletrobras shares drop 20 pct, biggest decline ever

Wed Nov 21, 2012 4:21pm EST

Related Topics

* Declines on dam renewal, tariff cut plan continue

* Eletrobras stock drops to July 1994 levels

* Preferred-stock premium over common stock shrinks

SAO PAULO, Nov 21 (Reuters) - Shares of Brazil's Eletrobras lost a fifth of their value on Wednesday, their biggest, one-day decline, on expectation that a hydro dam concession renewal plan and related power-rate cuts will slash revenue, profit and investment.

Eletrobras preferred shares, the most traded stock by non-government investors, fell 20 percent in São Paulo on Wednesday to 7.84 reais, th eir lowest close since July 6, 1994 less than a week after Brazil announced its Real anti-inflation plan and created the country's current currency. It's closing price that day was 7.82 reais.

Eletrobras common voting shares, most of which are owned by Brazil's government, fell 16 percent to 6.75 reais. Eletrobras is Latin America's largest utility.

Eletrobras, along with other Brazilian power companies, expects lower revenues as a result of President Dilma Rousseff's plan to slash electric rates by more than 20 percent, an initiative meant to boost economic growth.

Brazilian electricity tariffs are among the world's highest even though about 80 percent of the country's electricity comes from hydro, which is cheaper than oil or natural gas. Taxes and rates set when inflation and borrowing costs were higher helped lead to the current price levels.

As a result of the plan, Eletrobras revenue could fall as much as 30 percent in 2013 compared with 2012, analysts led by Francisco Navarrete at Barclays in Sao Paulo wrote in a report to investors on Monday.

Because of lower revenue, Eletrobras shares could fall another 90 percent to 1 real, the Barclays analysts' price target for the next 12 months. Their previous target was for the stock to rise to 29 reais.

Eletrobras, Latin America's largest utility, has recommended that shareholders agree on Dec. 3 to accept a government offer to immediately renew hydroelectric dam and power transmission concessions expiring between 2015 and 2017 in exchange for lower power rates.

PREFERRED PREMIUM SHRINKS

Eletrobras expects an annual revenue loss of 8.7 billion reais ($4.2 billion) from the cuts. On Monday, it warned of even greater losses from concession renewal.

Shares have fallen nearly 60 percent since Rousseff announced her rate-cutting plan.

Making matters worse, Eletrobras posted a sharp decline in third-quarter profit last week, spurring further concerns over revenue.

The losses could lead the company to cancel dividend payments to preferred shareholders for 2012, he said, and would almost certainly lead to an overhaul of the company.

Because preferred, non-voting shareholders have preference in the distribution of dividends under Brazilian law, premium preferred shares have over Eletrobras common stock could disappear.

With no dividends to pay that preference means nothing.

The premium is now 1.09 reais, or 16 percent more than the common share. At the beginning of the month the premium was 5.22 reais or 45 percent.

On top of that, Eletrobras already has the poorest overall profitability of the Latin American utility sector, and its efforts to control costs are unlikely to be met, Navarrete and the other Barclays analysts wrote.

Other power companies with concessions expiring between 2015 and 2017 have threatened not to accept the government's terms and say they will continue to charge higher prices in the near term, making it harder for the government to fulfill its promise of cheaper electricity starting next year.

Cemig, the utility controlled by the state of Minas Gerais, has refused to submit several dams for renewal citing economic problems with the proposal. Privately-owned Cteep said its board recommended against renewing an expiring concession to transmit power.

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