Why two Brazil power distributors are suffering serious financial difficulties

Two Brazilian power utilities are suffering serious financial difficulties, mainly due to non-technical losses (mainly energy theft), commonly known as gatos in Portuguese. 

Local analysts and a lawyer told BNamericas that the recovery of both companies will be challenging.  

The most notorious case is that of Light, which serves the metropolitan region of Rio de Janeiro, where several areas are dominated by criminal organizations.  

With gross debt of 11.5bn reais (US$2.05bn), the company's judicial reorganization plan – similar to Chapter 11 bankruptcy protection in the US – was approved by Rio courts in June. 

An important factor for Light’s recovery is the renewal of its concession contract, which is scheduled to end in 2026. 

More recently, another case has emerged, that of Amazonas Energia, which is responsible for distributing electricity to more than 1mn consumer units in Amazonas state. 

Also heavily affected by gatos, the company has a debt estimated to be more than 11bn reais. 

On Tuesday, electric power watchdog Aneel decided to open a public consultation on the analysis of the transfer of corporate control of Amazonas Energia due to the loss of the distributor's economic and financial sustainability. 

The decision was taken after the end of the temporary lenience it was granted regarding its efficiency and financial obligations, addressed in provisional measure (MP) No. 1,232/2024.

The MP allowed Aneel to approve a plan to transfer control as an alternative to terminating the concession, transferring the Oliveira Energia concession to Futura Venture Capital Participações and Fundo de Investimento em Participações Infraestrutura Milão de Responsabilidade Ilimitada (FIP Milão), both controlled by the J&F group. 

The plan filed with the regulatory agency calls for the transitional easing, for up to three regulatory cycles – the equivalent of 15 years – of parameters assessed by Aneel such as operating costs, the trajectory of non-technical losses and unrecoverable revenues. 

However, Aneel’s technical areas claim there is no significant improvement in the operational efficiency projected by the would-be controllers. The watchdog calculates that, if the future concessionaire is not required to perform in a similar way to other distributors, the cost to be shared by Brazilian consumers over 15 years in the fuel consumption account (CCC) will be 15.8bn reais.

The CCC is responsible for the administration of a charge paid by all electricity distributors and transmitters in Brazil to subsidize the annual generation costs of isolated systems, that is, areas not integrated into the national grid, which is the case of various locations in the north of the country. 

Arlindo Souza, of investment analysis firm Levante Inside Corp, underscored that the main challenges for the recovery of Light and Amazonas Energia are to curb energy theft and resolve their poor financial conditions, which have produced a sort of snowball effect.  

“As a result, they're unable to invest and their distribution grids are deteriorating, resulting in technical losses and poorer service quality, which is reflected in their power rate review by Aneel. With a lower rate and energy theft, the hole is getting bigger,” Souza told BNamericas. 

Ângelo Belitardo, of asset manager Hike Capital, highlighted that Amazonas Energia is also facing difficulties such as high operating costs due to the complex logistics in the Amazon. 

“The end of the financial lenience [granted under MP 1,232], which relieved cash flow, would worsen the deficits,” he told BNamericas. 

“The new controller will have to demonstrate technical and economic capacity to improve services, benefit consumers and reduce structural costs, especially those covered by the CCC.”

Pedro Vasconcellos, from law firm Marcelo Tostes Advogados, said the transfer of control of Amazonas Energia presents significant challenges. 

“This company's concession was poorly structured, as it covers an area with high losses and it operates with several isolated systems, which increases costs,” he told BNamericas. 

Another point of concern is that the J&F group does not have a track record that can ensure its technical capability to meet the requirements established by the provisional measure. 

“Without a solid plan that meets these requirements, there is an opportunity for it being questioned, especially since we're dealing with a public concession,” Vasconcellos said. 

Through its energy company Âmbar, J&F bought 12 gas-fired plants in Amazonas state in June. 

Vasconcellos said the acquisition of the assets would bring economic viability to the operation, allowing the conversion of infrastructure expenses into reserve energy contracts. 

“But does this really bring benefits to consumers? The answer is not necessarily positive,” he said. 

OTHER CASES 

Other power distribution concessionaires in Brazil are also financially distressed. 

They include Companhia de Eletricidade do Amapá (CEA), which is facing challenges such as energy losses and defaults, along with 1.5bn reais in debt. 

Equatorial Alagoas is also struggling, with its debts currently at 288mn reais, “despite belonging to the Equatorial Group, which generally performs well,” Belitardo said.  

“These companies are under pressure due to defaults and operational challenges in economically vulnerable regions,” he added.