SAO PAULO Shares of Brazil's state-led electricity holding company Eletrobras (ELET6.SA) plunged over 15 percent on Monday after it warned of steeper losses and an end to preferred share dividend payments due to a government plan to cut power rates.
Eletrobras preferred stock, the company's most-traded class of shares, fell 15.4 percent in Sao Paulo, the fourth biggest loss in the company's history and its biggest one-day decline since 1997.
The stock closed at 9.81 reais, its lowest in seven years.
Eletrobras, along with other Brazilian power companies, expects lower revenues as a result of President Dilma Rousseff's plan to slash electricity rates by over 20 percent, an initiative meant to boost economic growth.
Brazilian electricity tariffs are among the highest in the world even though about 80 percent of the country's electricity comes from hydro, which is cheaper than oil or natural gas.
As a result of the plan, utility 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 December 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.
"Although unattractive extension terms imply value destruction, federally controlled utility Eletrobras, unlike other companies exposed, plans to accept," the Barclay's analysts wrote.
The firm 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.
"We could have greater losses than those considered so far," Chief Financial Officer Armando Casado de Araujo said on a conference call.
Shares have fallen nearly 50 percent since Rousseff announced her rate-cutting plan.
Making matters worse, Eletrobras posted a sharp decline in third-quarter profit on Friday, 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, the 1.80 real premium preferred shares have over Eletrobras common stock could disappear.
With no dividends to pay that preference means nothing. 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 Barclays analysts wrote.
"It's a significant restructuring... we want to change management, economies of scale, and make improvements in operation and maintenance," Casado de Araujo said.
Jose Luiz Alqueres, a former Eletrobras CEO and member of the board representing private, minority shareholders, resigned over the plan to renew concessions at lower rates, saying it would be destructive to shareholder value in the company.
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 (CMIG3.SA), 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 (TRPL4.SA) said its board recommended against renewing an expiring concession to transmit power.
(Reporting by Danielle Assalve, Alusio Pereira and Leonardo Goy; Writing by Caroline Stauffer; editing by John Wallace and Andrew Hay)