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The previous article addressed the question: Should You Buy Brazil's Electric Utilities for Their High Yield? The short answer is a "maybe, but not yet." One needs to defer the purchase, recognize the risks, limit exposure and determine the actual yield. It also identified a universe of potential investment candidates and their respective dividend yields. This article will continue with the assessment, by describing and contrasting investment candidates.

Although I am focused on building a high-yield portfolio, some of these high-yield investment candidates are struggling - both from an EBITA and share-price perspective. The dividend yields, alone, should not drive your investment decision, although my thesis is that this is a major decision-driver. The objective is to narrow the range of potential investments and provide a starting point for research (in order to satisfy your own investment goals and strategy).

Brazilian Electric Utilities

In order to provide an overview, the following table briefly describes the operations of each company and provides one important investment consideration. One should assess many factors to qualify an investment decision, however, I have attempted to identify a compelling qualitative factor or trend.

#

ABBREVIATION - NAME - TICKER

BRIEF DESCRIPTION

INVESTMENT COMMENT

1

AES Tiete S.A. (OTCPK:AESAY)

Operates 18 hydroelectric plants, which have 2,659 mega watts of installed capacity, located in the central and northeastern regions of the Brazilian state of Sao Paulo.

Growing revenue, but declining income

2

CELESC - Centrais Eletricas Santa Catarina (OTCPK:CEDWY)

Operates of 12 small hydroelectric power plants, with a total installed capacity of 81.9 megawatts. SCGAS is active in the distribution of natural gas in the Brazilian state of Santa Catarina. ECTE holds a concession contract for electric power transmission.

Declining margins, shrinking dividend, and under-performing the Bovespa (Brazil's stock exchange)

3

CESP - Companhia Energetica de Sao Paulo (OTCPK:CESDY)

Engaged in the planning, construction and operation of electrical energy generation and distribution infrastructure. Installed generating capacity of 7,456 megawatts , composed of 6 hydroelectric plants.

Costs are increasing, revenues declining, and is Brazil's most shorted stock. Large pension fund and electricity purchase in Q4 2012 drastically reduced income.

4

CEMIG - Companhia Energetica Minas Gerais (CIG)

CEMIG was Brazil´s largest distributor by number of consumers and kilometers of lines, the country´s 3rd largest transmission company and its 3rd largest generator.

One-year return -22% per Bloomberg. Concern earnings will suffer as hydro plant contracts expire and regulators deny rate requests.

5

CPFL Energia S.A. (CPL)

Generation of electric energy through hydroelectric plants, small hydro power plants and thermoelectric power stations. Through 8 distribution subsidiaries, as of December 31, 2011, it served 559 municipalities and distributed electrical energy to approximately 6.9 million clients in Brazilian states of Sao Paulo, Rio Grande do Sul, Parana and Minas Gerais.

Increasing revenues and income - details here. Focus on renewable energy.

6

CTEEP - Companhia De Transmissao De Energia Eletricas (OTCPK:CTPZY)

Operates in 14 states. Electrical system network comprised 12,993 kilometers of transmission lines, 18,782 kilometers of circuits, 2,488 kilometers of fiber optic cables and 106 substations, with a total installed capacity of 45,131 mega volt amperes.

Transmission of 30% of all electricity produced in Brazil. Growing through acquisition - bought Evrecy in 2012. Ongoing loan dispute with EBR. Parent (ISA) rating just raised to BBB.

7

Eletrobrás - Centrais Eletricas Brasileiras SA (EBR)

Operated 36 hydroelectric plants, 120 thermal power plants, two nuclear power plants and 4 wind and solar farms, which totaled 41,621 megawatts of installed capacity as of December 31, 2011. Additionally, the Company is responsible for approximately 56,179 kilometers of transmission lines, 187,256 kilometers of distribution lines and 229 substations.

Movement of assets between the government and EBR is creating issues. Losing money: EPS down 1,900%. -61% 1-year return per Bloomberg. Beginning to restructure.

8

COPEL - Companhia Paranaense de Energia (OTCQB:ELPVY)

Operates 17 hydroelectric plants, 1 thermoelectric power plant, 31 substations and 2,028 kilometers of transmission lines; distribution and commercialization of electricity in 396 municipalities.

One-year return -29% per Bloomberg

9

Eletropaulo Metropolitana Electricidade de Sao Paulo S.A. (OTC:EPUMY) aka AES Eletropaulo

Supply of electric power to 24 municipalities in the metropolitan region of São Paulo

Investing in smart-grid project to help curb electricity theft.

10

Equatorial Energia (OTCPK:EQUEY)

Distribution of electric energy in the Brazilian state of Maranhao. Operation of 2 thermoelectric plants. Provides services related to electrical energy, and telecommunications.

Revenue trend substantially increasing; profit trend substantially decreasing.

11

Light S.A. (OTCPK:LGSXY)

Operates 5 hydroelectric plants, which total 855 megawatts of capacity, 2 pumping stations, 2 main reservoirs and 6 small reservoirs. The Company distributes energy to 31 municipalities in the state of Rio de Janeiro and provides services to approximately 4.1 million customers. Additionally, the Company is engaged in the manufacture of two-wheeled electric vehicles.

One-year return -26% per Bloomberg. Spinning-off operations of Light Energia SA.

12

MPX Energia S.A. (MPXEY.PK)

Portfolio includes thermoelectric plants in Brazil and Chile, as well as projects related to renewable resources, such as solar energy. In addition, it is involved in the mining of coal in Colombia and extraction of natural gas in Brazil.

Raising capital (@ 10 BRL/share) after a bad year, and for additional investments

13

Tractebel Energia (OTCPK:TBLEY)

The Company generates energy through 9 hydroelectric power plants, 6 thermoelectric plants, 3 small hydroelectric power plants, 2 wind farms and 2 biomass fired power plants.

One-year return +8% per Bloomberg

This table (source: barchart.com, as at May 31, 2013) provides comparative statistics on opinions, price-performance and volumes. As you can see, the overall opinions are to "sell" the Brazilian electric companies, and the low Average Daily Volumes of some of these shares (typically, those traded Over The Counter) can exaggerate price volatility (Note: all values are U.S. Dollars = USD, unless Brazilian Reals = BRL is indicated):

#

ABBREVIATION - NAME

May 31 OPINION

May 31 PRICE

52-WK LOW

52-WK HIGH

12-MONTH %

12-MONTH CHANGE

12-MONTH AVG VOL

1

AES Tiete S.A.

Hold

9.73

8.47

12.59

-0.1803

-2.14

9454

2

CELESC - Centrais Eletricas Santa Catarina

N/A

10.01

10.01

12.09

N/A

N/A

N/A

3

CESP - Comp. Energetica de Sao Paulo

N/A

11.7

8.04

19.25

-0.381

-7.2

2067

4

CEMIG - Companhia Energetica Minas Gerais

96% Sell

10.42

10.07

19.97

-0.3867

-6.57

3440792

5

CPFL Energia S.A.

16% Sell

21.29

19.3

25.81

-0.0979

-2.31

471036

6

CTEEP - Companhia De Transmissao De Energia Eletricas

48% Buy

18.64

12

32

-0.3905

-11.94

14953

7

Eletrobrás - Centrais Eletricas Brasileiras SA

64% Sell

2.58

2.28

7.96

-0.5911

-3.73

1248088

8

COPEL - Companhia Paranaense de Energia

16% Sell

13.15

10.49

19.7458

-0.2617

-4.66

572

9

Eletropaulo Metropolitana Electricidade de Sao Paulo S.A.

N/A

N/A

N/A

N/A

N/A

N/A

N/A

10

Equatorial Energia

N/A

9.95

6.95

10.44

0.3668

2.67

1082

11

Light S.A.

100% Sell

8.53

8.53

13.02

-0.2921

-3.52

1897

12

MPX Energia S.A.

72% Sell

4.5

4.19

25.66

-0.7578

-14.08

4466

13

Tractebel Energia

40% Sell

17.34

14.6

19.03

0.007

0.12

17238

To simplify our technical analysis, I grouped the companies based on market capitalization and control, I allocated each of the Brazilian electric utilities to 1 of 3 categories: 1. Government Controlled; 2. Large Private Sector; and 3. Small Private Sector. I have also identified their respective websites for your own researching convenience (many have English translations).

#

ABBREVIATION - NAME

CONTROL

COMPANY WEBSITE

MARKET CAP (,000 USD)

CATEGORY

1

AES Tiete S.A.

AES Corp (AES)

http://www.aestiete.com.br/Paginas/default.aspx

$1,974,610

Small Private Sector

2

CELESC - Centrais Eletricas Santa Catarina

State Controlled

http://novoportal.celesc.com.br/portal/

$230,200

Government controlled

3

CESP - Comp. Energetica de Sao Paulo

State controlled

http://www.cesp.com.br/

$97,370

Government controlled

4

CEMIG - Companhia Energetica Minas Gerais

State Controlled

http://www.cemig.com.br

$10,323,970

Government controlled

5

CPFL Energia S.A.

None

http://www.cpfl.com.br/

$10,508,030

Large Private Sector

6

CTEEP - Companhia De Transmissao De Energia Eletricas

ISA Capital Do Brasil SA

http://www.cteep.com.br

$1,600,000

Small Private Sector

7

Eletrobrás - Centrais Eletricas Brasileiras SA

Federally controlled

http://www.eletrobras.com/

$3,800,900

Government controlled

8

COPEL - Companhia Paranaense de Energia

State Controlled

http://www.copel.com/

$1,800,000

Government controlled

9

Eletropaulo Metropolitana Electricidade de Sao Paulo S.A.

AES Corp

http://www.eletropaulo.com.br/ri

$669,116

Small Private Sector

10

Equatorial Energia

FUNDO DE INVESTIMENTO EM PARTICIPACOES PCP

http://www.equatorialenergia.com.br

$2,000,000

Small Private Sector

11

Light S.A.

CEMIG

http://www.light.com.br

$1,700,000

Government controlled

12

MPX Energia S.A.

Main Shareholder: Eike Fuhrken Batista + EON (OTCQX:EONGY)

http://www.mpx.com.br

$2,568,170

Small Private Sector

13

Tractebel Energia

GDF Suez (OTCPK:GDFZY)

http://www.tractebelenergia.com.br/

$11,400,000

Large Private Sector

The following table summarizes the cash distribution yield (excludes stock dividends) and growth. The approximate yields were validated with the respective websites, and 5 Year Dividend Growth rates are from Bloomberg:

#

ABBREVIATION - NAME

APPROX YIELD

5 YEAR DIV GROWTH

DIVIDEND COMMENT

1

AES Tiete S.A.

10.00%

8.13%

Consistently a little over 100% pay-out

2

CELESC - Centrais Eletricas Santa Catarina

7.00%

-35.64%

2012 Investor Presentation showed consistent 30% pay-out, with 7.3% yield for 2011, But Bloomberg shows a near-zero yield

3

CESP - Comp. Energetica de Sao Paulo

7.00%

0.00%

Their website reports constant BRL 1.82/share distribution since 2008

4

CEMIG - Companhia Energetica Minas Gerais

6.00%

36.79%

Policy to distribute 50% of income as dividends, annually.

5

CPFL Energia S.A.

7.00%

-6.88%

Since 2010, annual dividend generally in the $1.55 USD range

6

CTEEP - Companhia De Transmissao De Energia Eletricas

9.00%

-30.36%

33% Dividend Payout Ratio

7

Eletrobrás - Centrais Eletricas Brasileiras SA

6.00%

-10.03%

March 2013 EBR announced it would pay dividends, even having recorded the largest quarterly loss in a listed company in Brazil.

8

COPEL - Companhia Paranaense de Energia

3.00%

-3.88%

Dividend equal to at least 25% of Adjusted Net Profit. For 2012, was 0.93 BRL

9

Eletropaulo Metropolitana Electricidade de Sao Paulo S.A.

4.00%

-38.83%

Minimum dividend of 25% of net income; preferred shares are entitled to dividends 10% higher than attributed to common shares. Dividends have fallen from BRL 8.69 in 2010; BRL 5.14 in 2011; to BRL 0.31 in 2012.

10

Equatorial Energia

1.00%

-35.01%

Substantially cut dividend in 2012. Shareholders are entitled to at least 25% of the net profit of each fiscal year, after the deduction of 5% of net profits to a legal reserve.

11

Light S.A.

7.00%

-14.25%

Dividends are at least 50% of the adjusted net income. Yield is down from 8.1% to 5.4% since 2010, and destined to be lower this year.

12

MPX Energia S.A.

0.00%

N/A

Zero dividend

13

Tractebel Energia

5.00%

19.92%

Dividend $0.83 USD/share for 2011 and 2012

From a dividend yield perspective, there is definitely a pattern. Government Controlled generally yields in the 7% range - large private sector is around 6%, and small private Sector is at the two extremes - either little or no dividend, or +7%.

This is not to propose that this is all that you need to make your investment decisions - additional research should include Income Statement (e.g., earnings growth and profitability) and Balance Sheet (e.g., debt levels - and all of these electric utilities have substantial debt levels) assessments. As a subsequent step, let's examine the share-price performance for each of the 3 categories. Note: All graphs courtesy of CIBC Investors Edge.

Government Controlled

Whether state or federally controlled, this 5-year chart shows that the two government-controlled large-caps' share prices peaked in 2011 and 2012, and subsequently, are not faring well. Eletrobrás (the lower, dark-green line) is on a "slippery slope" down, and CEMIG (the heavy-gold line) is trading near its 2009 price.

(click to enlarge)

As we can see from the one-year chart, below, the electric utility share prices fell sharply after the government-instituted electricity price cuts in the autumn of 2012. COPEL (the purple line) is the only one of the utilities which has seen a partial share-price recovery. Light (the thin gold line) was declining more slowly than the others, but has fallen precipitously in the past few weeks.

(click to enlarge)

From a personal investment perspective, I would like to co-own a utility with the government of Brazil. The benefits include guaranteed solvency, dividends and often generous rate increases. The problem is that the negative growth, reduced dividends, increased payroll and retirement costs, other taxation and government pricing impacts are probably not yet fully reflected in their share prices. From a macroeconomic perspective, the impending currency, GDP, inflation, regulatory and other problems, are probably not yet fully reflected in the Brazilian stock market.

Large Private Sector

As can be seen from the 5-year chart, the 2 large-caps which are not controlled by the federal or state governments are doing relatively well. Tractebel seems to have been trading with an upward trajectory and attained a plateau price since the end of 2010. CPFL peaked in early 2012 and seems to have found support in the $20 zone.

(click to enlarge)

The 1-year charts show a trading range for both of these large-capitalization, private-sector, electric utilities. Tractebel is out-performing CPFL, but is has a 5% yield compared to 7% from CPFL, so the overall return is probably similar.

(click to enlarge)

Small Private Sector

I was able to provide 3 examples for the 5-year chart for the Small Private Sector category (EQUEY.PK had outlier data which flat-lined the graphs for other securities, and EPUMY.OB was not eligible for graphing). MPX outperformed AES Tiete and CTEEP, while the latter two were "Steady Eddies" over the period.

(click to enlarge)

The 1-year chart includes Equatorial, which substantially out-performed the others over this period. AES Tiete is the middle-of-the road, and CTEEP is the under-performer. AES Tiete and CTEEP "fell off a cliff" in September 2012 (at the time of the government intervention in electricity pricing), and both have found a new, lower, trading range.

(click to enlarge)

Relative results

Finally, let's compare representative securities from each of the 3 groupings. This 5-year graph shows CPFL (the thin-orange line) - the Private Large Cap - as the best performer (for most of the timeframe). Government-controlled CEMIG (the thick-gold line) is the next-best performer, with CTEEP (the thin-blue line) as the generally worst performer - except for when the securities were recovering from the 2009 financial crisis.

(click to enlarge)

The 1-year chart follows the same trend as the long-term one, with lower trading ranges for all securities - least so for CPFL - since the September 2012 state intervention on electricity prices.

(click to enlarge)

Of course, none of these graphs include the impact of dividends upon investor returns. Despite this, the graphs do demonstrate that investors require an excellent yield to compensate for the price-performance of the securities, and the economic risks of the Brazilian economy.

Conclusion

Depending upon your investment time-horizon and yield requirements, you may find certain Brazilian electric utility investment opportunities attractive, given a low-growth developed world. That said, as was previously discussed, the macroeconomic situation in Brazil is deteriorating, with increased inflation and declining GDP. There are conflicting government policies and taxation which should impact investors' decisions. External factors are also exacerbating Brazil's stagflation. A recent example of an external factor is an appreciating U.S. dollar has caused Brazil to remove a tax on foreign investment inflows, which they hope will moderate the plunge in their currency: "The currency has depreciated from a March 8 high of 1.94 Brazilian Reals to the USD to its current price of around 2.13BRL, or an 8.9% drop." Recently increased electric utility industry and other regulation and taxation will dampen investor returns. From this perspective, investments in Brazil generally, and electric utilities specifically, should be deferred. Based on the general direction of the graphs and the Brazilian economy, it appears that one should wait for an additional 10% - 50% decline in share prices before purchasing positions.

Dividend yield is a critical component of my personal investment decision. As Brazil has high inflation, and the electric utilities generally have had falling share prices this past year, I suggest that one needs to recover over 6.5% from dividend yields to consider these investments.

From both a dividend yield and technical perspective, my 3 (future) stock picks are all in the private sector - AESAY.PK, CPL and CTPZY.PK:

#

ABBREVIATION - NAME

APPROX YIELD

REASONING

5 YEAR DIV GROWTH

CATEGORY

1

AES Tiete S.A.

10.00%

Consistently high yield; growing revenue; strong foreign parent company; other than legislation-caused decrease in 2012, relatively steady long-term share price. Negatives: declining income and share price this year.

8.13%

Small Private Sector

5

CPFL Energia S.A.

7.00%

Steady dividend; growing revenue and income; making acquisitions; renewable energy; relatively strong 1 and 5 year performance (good charts). Negatives: dividends have declined.

-6.88%

Large Private Sector

6

CTEEP - Companhia De Transmissao De Energia Eletricas

9.00%

High dividend yield with low (33%) pay-out ratio; growing revenue; growing through acquisitions; strong foreign parent company; other than legislation-caused decrease in 2012, relatively steady long-term share price; the only "Buy" rated Opinion. Negatives: Substantially reduced income and dividend; poor share-price performer (may provide a good entry point).

-30.36%

Small Private Sector

Of course, this list could change, and 2 Government Controlled companies could qualify for my short list. If CEMIG or Light would plunge in price (and spike in yield) relative to their private-sector counterparts, their comparative attractiveness could make them more opportunistic investments.

These electric utilities may become excellent long-term positions, but Brazil is not a developed country, so one should limit exposure. Experience dictates caution - anecdotally, my single Brazilian investment - AES Tiete - in under water subsequent to 2012 government electricity pricing intervention.

Source: Which Of Brazil's Electric Utilities Should You Buy?