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CESP | New Kid on the Block?

CESP

A tip from the always interesting, if habitually noncommittal, Relatório Reservado:

The [São Paulo] state government is working to consummate the merger of CESP and EMAE. The next step would be to resume the process of privatizing CESP, but there are at least 500 other steps to be taken [before that can happen]..

The Folha de S.Paulo pursues the hint. My translation.

São Paulo electrical generator Cesp may soon merge with EMAE — the Metropolitan Water and Power Company — in order to improve its muscle tone in the area of energy generation, according to state secretary of energy José Aníbal.

“A merger between the two is a possibility. EMEA has its own specific characteristics and has renewed its concessions properly. This shows that we are not engaged in a political dispute, but rather a technical discussion,” said Anibal. “With the merger complete, we can begin to study the future of the two companies.”

Cesp rejected a federal government proposal in which concessions expiring in 2017 would be renegotiated in the present for another 30 years, in return for which concessaires would move to reduce the price to the consumer of electricity.

With that refusal, CESP will shortly lose three principal generating plants, representing 70% of its total generation capacity, which will decline from 7,400 MW to 1,600 MW.  EMAE, which chose to renew its generating capacity, will continue to supply 940 MW per year.

Cesp has already lost half of its market value and is studying its employee pension plan, ahead of having to lay off 45% of its 1,200 employees given the current situation.

“Of these employees, we calculate that 60% are qualified to participate in the pension scheme until 2015,” said Cesp CEO Mauro Arce last week.

Even as Cesp reins in its production, however, Aníbal noted that Emae is building a brand new PCH (Small Hydroelectric Company) in Pirapora and could serve as a partner in the generation of electricity using solar, wind and biofuel made from sugarcane bagasse.

Aníbal attended another meeting today in which he sign a joint venture with the state secretary of the enviroment that will improve the usage of the state’s mineral resources.

After the event, Aníbal said that neither the federal government nor the bill’s sponsors in congres had replied to his group’s suggested amendments to MP 579, the provisional measures that set new rules for the awarding of concession contracts.

“This is an example of politics without dialogue.  The proposed MP 579 creates costs that could have been shared but were not,” he said, recalling the demand for restitution of non-amortized assets.

According to Aníbal, Cesp is owed R$ 7.2 billion in indemnity for non-amortized assets, while the government calculates the amount as  R$ 1.8 billion.

“Our book are open and our data is real, whereas the feds will not disclose their accounting methds. This is the wrong way to get started.” According to Anibal, the government proposal has chosen a political path that has led [state-owned] Cesp, Cemig, Copel, and the like to refuse to renegotiate concessions. These refusals may have caused some surprise, but we do not want to bear the brunt. We want energy prices to come down, but we lack the profit margins needed to bankroll this policy.”

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CESP saw its Moody’s ratings adjusted upward from stable to positive in mid-December, and treated by the agency as a GRI — Government Related Insitution, to which special rules apply.

CESP is the fourth largest electricity generator in Brazil. Its generation park comprises six hydro plants with a combined capacity of 7,456 MW  and a physical guarantee of 3,916 MW. The controlling shareholder of CESP is the state government of São Paulo, with  94.1% of the voting shares and 36% of all shares outstanding.

The business section of the Estado de S. Paulo reported back in September that whether or not it adopts the new rules, it will likely fair worse than its colleagues and competitors due to the current financial configuration of its holdings.

Cesp (CESP6) has been singled out by analysts as one of the electricity companies that will suffer most under the new rules for concession renewal scheduled for 2015, recently finalized by the federal government.

Ágora Corretora analysis Filipi Acioli says the company will be sharply impacted by the new regime given that the largest hydro generation plants in its portfolio are governed by a 30 year contract. This means that these assets are almost completed depreciated, based on the formula stipulated for the calculation of indemnification.

In August of that year, Eduardo Tavares of Arena do Pavini had run the numbers and favored the prospects of a viable merger.

By December, however, news agencies were reporting that shareholders had balked at the privatization plan over the issue of compensation. Shares were up 8.88% on the Bovespa that day.

However, the possibility of the current concessionaire participating in the auction of these concessions could position CESP, along with other electricity companies that opted out of the federal renewal plan, as  strong candidates for new 30 year concessions. That is the opinion of Souza Barros chief economist Clodoir Vieira, who says he has talked with an industry source who is confident that the assets will eventually be restored to their market value. The analyst, who does not work with  Cesp or Eletrobras, preferred not to be identified.

The other state-owned São Paulo energy company with concessions expiring in the next three years, EMAE — the Metropolitan Water and Power Company — took the opposite tack and agreed to early expiration and renewal of its concessions, which amount to 1 GW.  Like Eletrobras, it accepted the federal plan for early renegotiation. Electricity companies who agreed to the plan will sign their 30-year extensions today — 12 December 2012.