For Sale: The Rio Utility That Loses a Fourth of Its Electricity

  • Light lost 24% of its power in past year, mostly to thieves
  • Utility ‘can’t do much in areas where there’s no rule of law’

People look out from a window in Rio's Rocinha favela. Rocinha, home to more than 69,000 residents, is one of Latin America's largest favelas or shantytowns.

Photographer: Nadia Sussman/Bloomberg

Anyone thinking about buying Rio de Janeiro’s biggest electric utility should pay attention to one critical number: 24 percent.

That’s the amount of electricity Light SA lost in the past year, almost twice the national average. Most of that is due to power thieves in the favelas where gang members brazenly tap into power lines, and it’s too risky for the company to send workers to disconnect them.

Theft is one of the reason Light’s revenue has slumped, and there’s little reason to expect any improvement. The company was officially put up for sale last week by the state-owned Cia. Energetica Minas Gerais, and power losses are expected to hold down bids.

“Power losses have a direct effect on Light’s revenue,” Wilson Couto, the company’s commercial director, said in a telephone interview from Rio de Janeiro. “Light’s losses are among the largest in the country. We want to take the company out of that ranking and improve its results.”

While all utilities lose a small amount electricity as it’s generated and transported across their networks, more than 90 percent of Light’s losses come from theft and fraud. And 45 percent of that came from the worst neighborhoods in Rio de Janeiro, the metropolitan area where Light serves 10 million people. More than 20 percent of all electricity pilfered in Brazil is lost in Rio de Janeiro, according to Couto.

On average, electric power distribution losses in Brazil were 13.5 percent last year, according to Brazil’s association of electric energy distributors, known as Abradee.

“Light can’t do much in areas where there’s no rule of law, where losses, informality and crime are common,” Henrique Peretti, Latin America utilities analyst at JPMorgan Chase & Co. in Brazil, said in a telephone interview on Wednesday. “Fighting energy losses is Light’s worst problem and the key valuation driver for the company,” he said in a report from July 21.

Any potential acquirer will have to price in theft, and the most problematic areas “can jeopardize a possible deal as the buyer will have to take a big risk,” Peretti said.

Cemig, as the Minas Gerais-based company is known, controls Light with a 32.5 percent stake. It’s seeking to sell assets to pay down debt, including 9 billion reais ($2.9 billion) coming due in the next three years. Sales efforts are expected to be concluded in 2017, according to a statement Tuesday.

Revenue Slipping

Light’s revenue slumped 10 percent in the second quarter, and losses increased 2 percent to 58.4 million reais.

Power theft may increase and is expected to hinder Light’s cash flow in the next 12 to 18 months, and “challenges Light’s ability to obtain future tariff reviews from the regulator,” according to a July 21 report from Moody’s Investors Service.

The Brazil power regulator’s tariff reviews are directly related to distributors’ performance and efficiency. Light has told the regulator, known as Aneel, that its service area has unique security issues and the company should be evaluated differently.

“We cannot be active in some areas in Rio de Janeiro, and that’s a fact,” Ana Marta Horta Veloso, Light’s chief executive officer, said in an Aug. 9 conference call. “Rio’s state authorities themselves cannot enter in some areas.”

Security Issues

Since security is a state’s responsibility, there are few expectations it will improve as Brazilian states have been struggling to service debt due to prolonged recession that saps tax revenue.

Rio de Janeiro declared a state of financial emergency, preventing it from honoring commitments to the Olympic games that began on Aug. 5. The federal government provided financial assistance on the eve of the event.

Light uses so-called smart meters that use wireless technology to remotely monitor customers’ power consumption. It has 800 people on the street in Rio and another 120 working on an intelligence center to fight theft.

The company is focusing on Rio de Janeiro’s safer areas for now and invested 131.8 million reais in the first half of the year developing a new plan to fight losses, according to Couto.

“Given Light’s weak operational situation, selling it now would mean getting rid of a strategic asset, without pocketing its potential value,” said Peretti. “It could be hard to find a buyer able to face all the company’s challenges.”

Before it's here, it's on the Bloomberg Terminal.