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Lights flicker for Brazil electric sector

By BRADLEY BROOKS, UPI Business Correspondent   |   April 1, 2003 at 3:51 PM   |   Comments

RIO DE JANEIRO, April 1 (UPI) -- Brazil's battered electricity sector -- which lost some $3 billion last year -- is ripe with rumors that a government bailout worth billions might be on the way, though no official confirmation has yet come.

"We're only hearing rumors, it isn't being talked about in the open," said Oswaldo Telles, an analyst at BBV Corretora in Sao Paulo and who covers Brazil's electricity sector, on Tuesday.

"Apparently, it's something being discussed inside of the government that shouldn't have gotten out. Now that it is, the (mines and energy) ministry is criticizing it."

The talk amongst local analysts and within a report in the business newspaper Valor is that an emergency aid package of some $2.5 billion could be in the offing.

Electricity sector executives say they desperately need the aid, after a 2002 that saw the local currency -- the real -- plummet 35 percent in value, and after severe energy rationing Brazil underwent in 2001 when drought slashed hyrdo-electric energy output.

Simply put, Brazil's big electricity generators need cash to meet debt obligations coming due this year.

Foreign credit to Brazil was severely curtailed during last year's tumultuous presidential election. Brazil's electricity companies are further burdened with the stigma of being an extremely turbulent sector within a region perceived as a risky investment.

"Most of the losses are related to the devaluation of the real, because the whole sector has a great deal of dollar denominated debt," Telles said.

"Besides that, the companies have tariff increases only once a year. That has brought many companies into a very delicate situation."

Last Friday, state-owned Cemig, one of Brazil's biggest power companies, reported a $300 million loss for 2002, as opposed to a profit of $137 million in 2001.

Cemig officials blamed the devaluation and lack of energy consumption.

"2002 was a turbulent year, still under the effect of power rationing which started in 2001 and the devaluation of the real, which worsened the situation," said Cemig's investor relations director Luiz Fernando Rolla in a Monday conference call.

A huge hurdle for Cemig is the fact that the state of Minas Gerais, which controls the company, owes it about $570 million, about one-third of which was due last year.

Company officials are working with the state on restructuring that debt, but so far nothing has been hammered out. This is a situation that may prove to be problematic for other electricity companies in other parts of Brazil in the near future.

"We need to stop the bleeding of this wound, and, at the same time, to discuss the future," an electricity sector executive pushing for the rumored government bailout told Valor on condition of anonymity.

In an article in Tuesday editions, the Folha de Sao Paulo newspaper reported that electricity companies lost $3 billion last year, marking the worst year the sector has seen since privatizations took hold in the late 1990s.

The company hit hardest by the real's devaluation and by the lingering effects of energy rationing was Cesp, which the newspaper reported lost nearly $900 million, as compared to a $240 million loss in 2001.

Cesp is particularly hurt by the real's fall, as some 75 percent of debt the company holds is dollar denominated, while the company's revenues are made in reals.

The U.S.-based AES Corp. was included on the list of biggest losers in Brazil's electricity sector for 2002. The AES Sul unit of the company in southern Brazil lost $435 million. In 2001, the company reported a profit of $14 million.

A report last week by Standard & Poor's said that turbulence in Brazil's electricity market was likely to stick, with a lack of "flexible financing" being blamed as cash-strapped companies face looming debt payments.

Telles said that tariff increases of as much as 30 percent -- which will begin taking effect for some companies this month -- should bring an infusion of cash into the sector, enough at least to keep it surviving hand-to-mouth.

"However, we still face, in the general picture, a scenario in which we have high country risk, high (debt) spreads for companies who need to find money abroad," Telles said.

The biggest danger facing the sector in the near-term, according to Telles, is the continuing lack of demand for energy, partly after an intense energy conservation campaign following 2001's rationing.

"I see that some generators will suffer more in the short term, while companies that work with transmission and distribution will suffer less, as they aren't hit by the energy surplus," Telles said.

© 2003 United Press International, Inc. All Rights Reserved. Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI's prior written consent.
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