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PPL may report a $300 million loss
Problems in Brazil could cost it half of its profit for last year.

By Christian Berg
Of The Morning Call

January 23, 2002
PPL Corp. of Allentown warned Tuesday it could lose more than $300 million because of severe electricity shortages and other problems that have crippled its Brazilian power distribution company.

In a document filed Tuesday with the U.S. Securities and Exchange Commission, PPL said its Companhia Energetica do Maranhao (CEMAR) power distribution unit is struggling to meet its financial obligations and secure credit.

PPL said the problems at CEMAR could result in “substantial charges” against the company's 2001 and 2002 earnings. In a worst-case scenario, PPL said it could lose its entire $314 million investment in the Brazilian operation.

Writing off the entire amount would be the equivalent of losing $2.14 a share, based on the 146.5 million shares of PPL stock outstanding as of Oct. 31.

That's about half as much as PPL made during the 12 months ended Sept. 30, when the company reported a profit of $619 million, or $4.25 a share.

“We knew that there was trouble down there, but this is surprising,” said ABN Amro analyst Paul Patterson, who covers PPL stock. “A sizable investment they've made isn't working out the way it should have.”

PPL stock closed down 3.7 percent Tuesday at $33.06 in trading on the New York Stock Exchange.

Patterson said the CEMAR situation might push PPL shares down further over the next several days.

Despite that, he said the situation is not devastating for PPL, which has annual revenue of almost $6 billion.

“I think it's manageable for the company,” said Patterson, who has a “hold” rating on PPL stock. “It shouldn't impact its long-term prospects. Wall Street often doesn't pay all that much attention to one-time write-offs or gains, because they're not seen as having an ongoing economic impact.”

PPL spokesman Dan McCarthy said the company decided to make its SEC filing after the Brazilian government denied CEMAR's request for an emergency rate hike.

More information about the CEMAR situation could be released when PPL announces its fourth-quarter financial results Jan. 30, McCarthy said.

CEMAR distributes electricity to about 1 million customers in northeastern Brazil. It does not generate power. PPL Global, a PPL subsidiary that manages the company's international operations, bought CEMAR in June 2000.

There are several reasons for CEMAR's woes, according to PPL's filing. One of the biggest is a yearlong drought that has reduced power-generation capacity. Hydroelectric plants account for about 90 percent of the country's electricity.

PPL said the drought, combined with increasing electric demand, resulted in a power crunch and high electricity prices. The Brazilian government responded with mandatory power rationing in June.

In its filing, PPL also blamed regulators' failure to encourage non-hydroelectric power generation.

CEMAR has asked Brazilian regulatory authorities for rate relief. It also is seeking financial assistance from the Brazilian development bank. But according to PPL's filing, there isn't much chance for a quick solution to CEMAR's problems.

PPL said that in December and January, Brazilian regulators approved power rates too low for CEMAR to recoup its losses and meet future obligations.

Patterson compared CEMAR's situation to what happened last year in California, when a power shortage forced electric utilities to buy wholesale power at high prices and resell it to retail customers at lower, state-imposed prices.

“It really isn't PPL's fault operationally,” Patterson said. “Power prices are very high. There is a lot of risk when regulators don't allow you to flow through legitimate costs.

“In these situations, what you hope for is that the regulators come to their senses.”

In the California situation, PPL profited from high wholesale prices because it is a major electricity generator in the West.

In Brazil, where PPL must buy the electricity it needs, it is being hurt by the same market dynamics.

In its filing, PPL said it “is currently evaluating the business and regulatory situation in Brazil to determine what actions should be taken with respect to the CEMAR investment.”

McCarthy said that while CEMAR's future is uncertain, “We're still delivering electricity and we will continue to do so.”

PPL Global also operates electric distribution companies that do not produce power in Great Britain, Chile, Bolivia and El Salvador. It has power plants in Bolivia, Peru, Spain and Portugal.

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