Emerging Markets' Fast Growth Triggers Electric Utility Boom

Indonesia and the Philippines are among the countries struggling to get new investment.

CNNMoney.com

Sep. 13, 2007 (Investor's Business Daily delivered by Newstex) --

Some developing countries are waking up to a big problem: Power shortages could short-circuit their economic growth.

In Latin America and elsewhere, governments have been restructuring utilities to spur private and foreign investment. Heavy-handed regulatory policies are being replaced by market-based systems that give utilities higher returns on investment.

Hiking electricity rates is a tough political step for governments in countries where much of the population still lives in poverty. But, emerging markets need to build more power plants and modernize infrastructure.

"In most developing countries, power demand grows more quickly than the economies," said Jed Bailey, managing director of the Asia and Latin America groups at Cambridge Energy (OOTC:CNGG) Research Associates. "To get investment in place, there's a sense that regulatory structures will evolve and prices on average will go up."

But after running up for much of the year, shares in Latin American utilities traded on the New York Stock Exchange have retreated along with stocks worldwide.

They include Brazil's Companhia Paranaense de Energia ELP, Companhia Energetica CIG and CPFL Energia CPL, as well as Chile's Empresa EOC.

Shares in Argentina's Edenor (NYSE:EDN) EDN have still gained 19% since its initial public offering in April. Other gainers include China's Huaneng Power International (NYSE:HNP) HNP and Russia's Unified Energy System USERY, a state-owned monopoly that the government plans to break up by mid-2008.

Some utilities in emerging markets pay better dividends than those in the U.S., says analyst Rowe Michels of Bear Stearns. (NYSE:BSC)

"Most Latin American utilities provide above 5% dividend yields, some over 10%," Michels said. "That's well above what the average U.S. utility pays.

"U.S. utilities aren't growth stocks," he added. "Demand barely keeps pace with the economy. In Latin America, electricity demand is growing much faster."

Chile, Peru, Colombia and Brazil have "investor-friendly regulatory models," Michels said. Argentina's power shortages have worsened. Its government may have to take unpopular steps, Michels says.

"Some countries are on the verge of blackouts and rationing," said Michels. "A lot of times countries don't give in to business-friendly regulatory models until they have no choice," he said.

With oil-rich Venezuela led by radical socialist President Hugo Chavez and Bolivia renationalizing energy firms, some analysts warn that the region's investment climate may turn for the worse.

U.S. utilities have been exiting Latin America over the past five years, said Philip Adams, analyst at bond rater Gimme Credit.

"It's a higher priority for them to use capital at home," he said.

In March, Allentown, Pa.-based PPL said it would sell interests in utilities in Chile, El Salvador and Bolivia.

Still, Latin America is attracting investors from Europe. Spain's Endesa (NYSE:ELE) , which owns a controlling stake in Chile-based Enersis, plans to invest $3.3 billion in Latin America through 2009. U.K. hedge fund Ashmore Energy International has been acquiring power and natural gas assets in the region, Bailey says.

Latin America gets much of its electricity from hydropower. Sudden droughts have been a problem -- especially given rising demand for electricity. Such demand rose 6% last year, according to BP's (TSX:BP'U) Review of World Energy.

Meanwhile, Asia's demand climbed 8.5%, led by a whopping 14.5% increase in China, BP found.

"Much of Asia needs power plant capacity but they're still struggling with privatization," said Peter Maloney, editor of Platt's Global Power Report.

Indonesia and the Philippines are among the countries struggling to get new investment, says a PricewaterhouseCoopers report.

India still subsidizes the cost of electricity and supplies power to agricultural areas virtually free, Bailey said. He reckons such policies turn off private equity groups and other investors.

India plans to increase generation capacity 60% over the next five years. Power Grid Corp., India's biggest power transmission company, launched a $730 million initial public offering on the Bombay (OTCBB:BBAO) exchange this month.

Some of China's utilities plan to expand into Indonesia, Vietnam and Thailand. Hong Kong and Singapore-based investment groups are eyeing Indonesia and other power-hungry countries.

Globally, electricity demand is expected to double by 2030, with China's growth being a big factor.

China rationed power after blackouts in 2004 and 2005. After that, spending on new power plants surged. The country's utilities now face a short-term glut of capacity, Bailey said, although demand continues to grow in the double digits.

China's industries now gobble up about 75% of electricity. As living standards improve, China's 1.3 billion people should help absorb the power capacity coming online, said Joseph Jacobelli, analyst at Merrill Lynch. (NYSE:MER) (OOTC:MERIZ)

China has big plans to add capacity from nuclear plants, hydropower projects including the Three Gorges Dam, wind farms and solar energy. But, most of its electricity still comes from highly polluting, coal-fired power plants.

Russia's plan to restructure power monopoly UES has drawn plenty of attention.

European utilities, including Italy's Enel and Germany's E.ON, are interested in buying stakes in UES spin-offs.

Michels advises investors to be careful because it's not clear what Russia's regulatory and pricing model will be after the breakup of UES. It also is not clear how UES assets will be carved up, he said.