Eletrobrás: The New Petrobras?

Centrais Eletricas Brasileiras SA, or Eletrobrás (EBR.B - Analyst Report) is the biggest electric utility in Brazil, with operations in the generation and transmission of electricity. The company is 54% controlled by the Brazilian government, and that's where the problems begin.

Eletrobras has a long tradition of political influence in its internal management and investment decisions -- a fact that makes investors skeptical on the company's outlook. Additionally there are some old unsolved problems, like the payment of a 10-years-retained dividend equivalent of R$9.4 billion(US$4.5 billion) that should be paid to investors, and the expiration of some important generation facilities concessions.

According to the privatization program legislation dated 1995, the distribution and generation privatized facilities were granted to the private sector for 30 years, with the possibility of renovation. The companies that were not privatized, which is the case of Eletrobrás, got a renovation of the concession for 20 years, maturing in 2015, without possibility of renovation.

According to the law, some of Eletrobrás' facilities would return to the government in 2015. As we are approaching the due date, there are some talks that the government plans to change the legislation to allow some kind of renovation; nevertheless it is not clear how it will be and how much it will cost for Eletrobrás. In fact, around 30% of the company's installed capacity will expire in 2015.

Despite all the problems, the Brazilian government has plans to transform the problematic Eletrobrás in a model company, in the words of President Luis Ignacio Lula da Silva, "A Petrobras (PBR - Analyst Report) of the electric sector." In order to reach this goal, Eletrobrás plans to invest US$14.5 billion in the 2009-2012 period, reach the level 2 of corporate governance in the Bovespa and be listed in the Dow Jones Sustainability Index by 2012. Additionally, the company must clean up its balance sheet -- there are currently plenty of remarks from auditors due to lack of adequate transparency.

It is too early to be sure that the plans to transform Eletrobrás in something comparable to Petrobras, a model of efficiency in Brazil, will be successful. However, if we could suggest a first step, it would be for the reduction of political influence in the company's matters.

Eletrobras has a long tradition of low investment return, as some of its investment decisions are not guided by technical standards. If the political influence could be reduced in the near future, the retained dividends paid or negotiated in a reasonable way and the concessions renewed, Eletrobrás would be closer to its goal. For the time being, we continue to have a neutral view on the company.