Monday, December 10, 2007

Fenosa, Iberdrola Fall After Losing CO2 Repayments

Dec. 10 (Bloomberg) -- Union Fenosa SA, Spain's third- largest power company, fell the most in more than five years in Madrid trading after Spain's government reduced rates utilities can charge over carbon-dioxide emissions.

Fenosa dropped as much as 6.3 percent, the biggest decline since October 2002, and traded at 46 euros as of 10:58 a.m. local time. Iberdrola SA, Spain's second-largest power producer, slipped 1.5 percent to 10.83 euros.

Power companies were ordered to stop charging customers for CO2-emissions permits that are freely granted to them by the government. The change, previously established for 2006, was extended to the 2008 to 2012 period by the cabinet on Dec. 7.

``Analysts believed this was a one-off measure just for 2006, so carrying it forward was a surprise,'' Credit Suisse's Raimundo Fernandez-Cuesta said by phone. ``This will have a clear impact on valuations and earnings for the power companies.''

Spanish utilities are paid for wholesale power in the so- called pool market based on their cost structure. Fenosa, Iberdrola and other power companies have been including a value for CO2 permits as a cost in their generation expenses for those allowances that were granted freely by the government.

``This changes our valuations for the power companies,'' said Fernandez-Cuesta, who has a ``neutral'' rating on Fenosa and advised clients today to sell the stock.

Nuclear, Hydro Plants

The change will also affect cost-recovery for nuclear and hydroelectric generators. Although they don't generate emissions, and therefore aren't granted CO2 permits, they have been adding the theoretical cost of permits into their prices. That's because the wholesale price paid for any type of generation is based on the most expensive generator needed to supply demand each day.

``The windfall profits of the sector induced by CO2 will be reduced,'' Enrique Soldevila, an analyst at Banco BPI, said in a note to investors. ``As a consequence, the impact of high pool prices will not be as positive as the market was expecting.''

To contact the reporter on this story: Paul Tobin in Madrid at

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