Light's Out.

A string of bad decisions blows a fuse at Rio's privatized power utility.

WHEN THREE FOREIGN COMPANIES bought the decaying public electric company in Rio, many in this tropical metropolis thought privatization would bring an end to the constant blackouts, burned-out appliances and indifferent service that marked public efforts to supply power. Investors were giddy over the prospect of fat annual dividends. So far, both sides have been disappointed.

Customers are angry over repeated blackouts that force schools to let students out early, movie theaters to dole out rainchecks, motorists to crawl to a halt at non-functioning traffic lights, and thousands to be trapped in elevators and subway cars on a regular basis. "There are more blackouts and power surges since the foreigners took over," says nanny Alzira Rangel. "Almost every day, I reset my clock radio because of voltage highs and lows." Regulators cited Rio power company, Light Servicos de Electricidade, for 32 violations and fined the company US$1.6 million, one of just two fines levied by the agency against Brazil's 74 energy firms during 1998. "Light's treatment of Rio has been less than ideal," chief power regulator Jose Mario Miranda Abdo told reporters at the time. "The company's directors are going to have to sweat through their shirts to get service back to decent levels."

Executives are sweating, and not just over technical glitches. Light's net income sank 40% from $281 million in 1997 to $160 million in 1998. This year promises to be worse as income shrinks further, down to an estimated $70 million in 1999 as devaluation escalates the cost of the company's $2.7 billion debt, most of it short term, that chews through profits. Company officials dump the blame for dismal performance on the worst summer heat wave in 50 years and obsolete equipment that they inherited from the state.

The fact is, the buyers gambled that the Brazilian currency, the real, would remain strong against the dollar. So far, this bet is a loser. Analysts say the company faces grim options--hawking shares on a bearish stock market at bargain-basement prices, if it can be done at all, or pulling off a miraculous refinancing of its mostly dollar-denominated debt.

All bets are off. Customers are not the only ones disillusioned with Light; many investors also have dumped the power company's stock due to poor financial performance. Light's share price plunged 68% last year in dollar terms, the worst performance on the Sao Paulo stock exchange, known as the Bovespa.

In fact, the ordeal's only beneficiary has been the federal government, which unloaded the power company for $2.2 billion to a consortium led by AES Corp. of Arlington, Virginia; Electricite de France (EDF); Companhia Siderugica Nacional, a Brazilian steel company, and Reliant Energy Inc. (formerly called Houston Industries Inc.). At the time, it was the nation's biggest privatization, involving a company with three million customers in an are a covering almost 11,000 square kilometers.

When the real lost as much as 80% of its value against the dollar during January's devaluation, Light was caught long in dollars. Months earlier, Light funded its $1.8 billion purchase of a 74% stake in Eletropaulo Metropolitana, Latin America' s largest electricity distribution utility with 4 million consumers in Sao Paulo city, largely by securing dollar-based bank loans. While the currency eventually stabilized, the company's bold borrowing in dollars quickly tacked more than $365 million to its debt service payments.

Today, three-quarters of Light's total short-term debt is linked to Metropolitana, which lost $390 million last year. A $875 million bridge loan used to pay for the Sao Paulo electric company came due in April, while Light's annual sales continued to sink to around $193 million in vulnerable local currency. "The future doesn't look bright," says Carl Weaver, head of research at the Sao Paulo-based Paribas Bank.

Analysts point to other strategic mistakes as well.

Headbutting management. In an effort to streamline operations immediately after privatization, Light laid off so many employees--over half the 11,170 member workforce--that maintaining service quality became impossible, according to regulators. And when net income nearly doubled from $150 million in 1996 to $282 million in 1997, management was quick to reward shareholders with lucrative dividends rather than increase capacity. "Investors were turned off by stockholders paying themselves generous dividends when investments were needed so urgently," says Weaver.

There is also the perception--whether just or unjust--that Light lacks cohesive management. The utility's partners have struck up a strange strategy that puts each in charge of a different area of the company: AES handles generation; CSN, administration; EDF, distribution; and Reliant, finance. "Some investors believe that may be slowing down the decision making process and is the main reason why business hasn't turned around as fast as people had hoped." says Charles Barnett, an energy analyst with Lehman Brothers in Sao Paulo. Light officials scoff at such charges. "The only problem is learning to speak English and French," says Jose Mario Ribeiro, a member of the Light operations directorate. "They may speak different languages and have different ideas but they have the same objective-improving the company.

Investors are also disappointed that Light has yet to make major inroads into cutting its energy losses from individuals known as gatos who tap illegally into power lines through the age-old Rio tradition of home-made hook-ups. Most are poor people who live in one of the city's 600 favelas, as the slums are popularly known.

Under the state, Light looked the other way as the poor siphoned off enough juice to cause a loss of $250 million a year. Since privatization, stolen energy has dropped modestly from 16.7% of the electricity Light distributes to 14.5%, according to regulators. "Most privatized companies are able to cut illegals by at least 4% in the first two years," says Lehman Brother's Barnett.

Payback time. In recent weeks, the real has made a dramatic comeback against the dollar, centering at around R$l.70 to the dollar. That lowers Light's debt bill. "The world looked bleak for Light when the dollar reached R$2.20," says Banco Paribas's Weaver. "Those losses are now being reversed." The company's share price has rebounded accordingly, though it still lags behind the main index.

Service is on the upswing. too, as measured by interruption rates. "Since the fine, Light has learned a lot," says a regulatory spokesman. Light's Ribeiro credits the improvement on the company's $580 million infrastructure investment since privatization. Just last year. Light replaced 170 kilometers of underground cable and 400 transformers and this year plans to spend $200 million more.

But the shadow of debt looms large over Light's shareholders. Analysts have written off a repeat of the fat profits of the past. In fact, the four partners are faced with the prospect of pumping capital back in to pay down obligations, say analysts. Such is the return on forecasts that bet on a stable currency. Says Warburg, Dillon & Read analyst Samantha Sparks of the Light investment: "It was a good idea if the real hadn't gone into a crisis."

Currency Flows = Current Woes

BRAZIL'S SUB-PAR POWER GRID showed its vulnerability after a lightning boll hit a power substation in Sao Paulo state in March. Residents of Sao Paulo, Rio de Janeiro and other parts of the country--97 million Brazilians in 11 states, all told- suffered without electricity for four hours.

Electric companies across the nation are under pressure to improve service as energy consumption rises much faster than the ability to generate it. By 2010, total comsumption will be double 1997 levels, according to the Brazilian Association of Nuclear Energy trade group.

The situation got worse because the economy got better. The disappearance of chronic inflation-from 929% in 1994 to under 3% last year coupled with economic growth sparked sales of appliances in a big way. Over the last few years, consumers have pushed local utility companies to the brink by plugging in millions of new televisions, stereo systems, refrigerators, microwave ovens and freezers.

Critics say Eletrobras, the state utilities holding company, has failed to invest in new generators and distribution lines to keep pace. To meet the rising energy demand, the government will import energy from Argentina and Venezuela.

Also, Brazil is finally turning to natural gas, which: today generates less than 2% of the nation's power. In March, a US$2.5 billion, 3,150-kilometer pipe line was inaugurated, bringing natural gas from Bolivia to the state of Sao Paulo. The line is expected to extend to Porto Alegre by the end of the year. Within a decade, up to 15% of Brazil's energy needs will be met by natural gas.

Privatization, however, remains the federal government's ace in the hole. Officials insist that private investment will eventually improve the nation's electricity service. Since 1995, Brasilia has sold off 17 utility companies for over $17 billion and plans to privatize another 18 firms by the year 2000 to earn another $40 billion. President Fernando Henrique Cardoso says privatization will ensure the $4 billion a year in infrastructure investments needed to keep pace with demand straight through drastic government budget cuts in the wake of the economic crisis.

Moreover, Brazil has promised the International Monetary Fund that it will speed up the sale of its remaning companies, starting this year with the generating utility Companhia Energetica de Sao Paulo (CESP), along with Eletrobras' remaining shares in Light and other privatized power companies.

Blinded by Light

BRAZIL'S SUMMER HEAT HAS subsided, but Rio residents are increasingly steamed by the poor service of local power company Light Servicos de Electricidade.

Disgruntled customers are doing more than badmouthing the company. Some 1,250 customers have filed complaints so far this year, demanding renumeration for appliances burned out by blackouts and power surges. Computer programmer Celso Clapp wants $3,800 to compensate the loss of two computers; two printers, a monitor and scanner. "My entire investment went up in smoke," he says.

Another 2,000 customers have approached a state legislative consumer commission, which employs some 20 attorneys. Overwhelmed by telephone complaints, the commission has dispatched its members to meet with irate consumers in public plazas, shopping centers and train stations, according to O Globo newspaper.

Judging by past levels of complaints, the ranks of angry residents is swelling. Rio consumers filed 1,086 complaints against Light with the state consumer affairs office last year, up from 105 in 1995 when the company still belonged to the state.

Businessman Raul Stehlin took Light to court after losing his farmhouse, a century-old family art collection and 800 rare books. All were destroyed in a 1997 fire caused by a defective Light transformer in the municipality of Comendador Levy Gasparian. The case is still in the courts.