Brazil power sector sends new distress call

reuters.com Fri February 21, 2003 02:40 PM ET By Andrei Khalip

RIO DE JANEIRO, Brazil, Feb 21 (Reuters) - Brazil's electricity sector, in trouble since power rationing in 2001, is sending new distress signals as utilities are running out of cash while the government does little to inspire investor confidence, analysts say.

This week, the head of federal utility Eletrobras ELET6.SA said he could not rule out the nationalization of some assets of cash-strapped U.S.-based power company AES Corp. AES.N which had defaulted on a debt payment in Brazil.

On Wednesday, investors were scared when left-leaning President Luiz Inacio Lula da Silva slammed the failure of regulatory agencies to control utility prices while the country is fighting a surge in inflation.

"This is a very scary change in attitude," said an energy analyst with a big foreign bank who did not want to be named. "The power sector crisis is deepening as many firms have run out of capital flow, unable to pay their bills and creditors."

Before Lula's comments, the energy ministry had agreed in principle to raise power rates by about 30 percent to adjust prices for inflation and foreign exchange rate swings. Up to 40 percent of Brazil's energy comes from the Itaipu dam on the Paraguay border and is priced in dollars.

"We get contradictory signals from different places, and, joined with a total lack of regulation, that aggravates the sector's crisis," said Aline Cardoso of Banco Brascan.

Analysts agreed that many companies would simply go bankrupt if not allowed to readjust their rates soon, while many also needed urgent debt restructuring.

"If the government doesn't intervene, utilities will go bust," said Adriano Pires, director of Brazilian Center for Infrastructure consultancy, adding that the next step after bankruptcy would be nationalization of power utilities.

"Maybe it's part of the government's plan, but they should know that nationalization is the worst thing that could happen. The power sector needs private investment," he added, reminding that in 1993 Brazil had to inject $28 billion into the then state sector to save it from collapse.

In the case of AES, which in January did not pay an $85 million installment on its $1.2 billion debt with state-run BNDES National Development Bank for the purchase of Eletropaulo ELPL4.SA distributor, nationalization is already an option.

A source close to AES-BNDES talks said the U.S. firm was ready to give up 50 percent in Eletropaulo and other assets to settle the debt, but the bank wanted all of Eletropaulo as well as AES Tiete generator, which AES has said it wants to keep.

Even if AES had its way, it would settle only about half of its debt and will have to refinance the other half.

LOW DEMAND FOR POWER, BIG DEBTS

The problem is typical for the sector. Many foreign firms bought Brazilian utilities during privatization in the 1990's, paying in local currency but taking credits in dollars.

The 1999 devaluation of Brazil's currency, the real, inflated their debts, while rates remained under government control. Power rationing that started in 2001 due to Brazil's dependence on often-scarce water resources and lasted for nine months slashed demand and undermined utilities' revenues.

As Brazilians stuck to conservation habits after the end of rationing, demand for power in 2002 slumped to 1999 levels and the price of a megawatt crashed to 4 reais ($1.1) from over 600 reais during rationing.

So far this year, stocks of power utilities have fallen about 18 percent, twice as much as the broader market's fall. Eletropaulo alone slumped 35 percent in the past four weeks.

The most unexpected recent shock came from a relatively well-off company, public utility Copel CPLE6.SA in southern Brazil, after Parana state Gov. Roberto Requiao threatened to tear up contracts under which Copel buys energy because they were too expensive and risked bankrupting the Brazilian firm.

Analysts said the threat was particularly alarming as last week Requiao decreed the state was taking back management control of a local waterworks utility. "This means political risks on the rise for Copel ... which is among the few strong companies," Brascan's Cardoso said.

Analysts agreed the government had to come up with a new model soon for the sector, now fragmented into federal and state generators and mostly private distributors, to prevent collapse and lure back private investors. Lula's administration has promised to come up with a rescue plan by July.