Update CPFL Energia

09/12/2012 4:15 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

Brazilian utility stocks are taking a pounding on new government policies that will end the practice of automatic extensions of 20-year, no-cost concessions to provide electric power, that will increase the price of concessions to the point where inefficient utilities might not be able to make money, and that will pay very low prices for the replacement value of assets to utilities that lose their concessions.

The goal of the new policies are to cut some of the world’s highest electricity rates in an effort to reduce inflation. The new rules are projected by the government to reduce electricity rates by as much as 28%

The changes, announced yesterday September 11, whacked 5.3% today off the share price of a utility such as CPFL Energia (CPL). CPFL is a member of my dividend income portfolio http://jubakpicks.com/ )

And that’s the good news in the sector. Shares of Cia. Energetica de Minas Gerais (CIG in New York), Brazil’s largest utility by market value, are down 20.8% today. Shares of Cia. de Transmissao de Energia Electrica Paulista (TRPL3.BZ in Sao Paulo or CTPZY in New York) are down 37.1% in Sao Paulo.

What accounts for the big differences in the impact of these changes to companies in the sector?

A utility’s mix of assets—in general the younger the assets, the more exposure the company has to renewable energy sources (a sector favored by government policy) and the les ownership of transmission lines, the less damage the new rules impose on a utility. CPFL scores well on these parameters.

Estimates of the dimension of the write-downs in asset values for individual utilities as a result of the government’s very low estimates of residual values (after depreciation) at expiring concessions. Credit Suisse estimates that the government’s formula will result in a 10.3% reduction in fair value at CPFL. That’s in comparison to a 43.3% reduction at Transmissao de Energia Electrica Paulista. The write down in values for transmission lines is especially brutal.

If, as this new policy seems to indicate, the Brazilian government is trying to prod the country’s utility sector toward greater efficiency and less reliance on profits guaranteed by the government, CPFL has more experience than most of its competitors in competing for customers. Even before the rule changes, about 25% of all regulated utility customers could move to competing suppliers when their contracts expired. CPFL’s commercialization unit has been focused on recapturing any of its customers who have left the world of regulated utility contracts and to compete for customers from other firms who have opted out of the decision.

In short, I think CPFL is decently placed to compete in the emerging more competitive world of Brazil’s utilities. The company hasn't yet talked about the impact, if any, on the company’s dividend. So far, I don’t have any reason to think that the dividend is in danger.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of CPFL as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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