How Brazil's Power Giant Ended Up Owning a Cinema, Airport and Hospital

(Bloomberg) -- South America’s largest electric utility sprawls across Brazil, its web of wires and hydro dams capable of supplying enough energy for 75 million homes, from the savannah to the teeming coast. Like the country it helped create, Centrais Elétricas Brasileiras SA should be an economic powerhouse.

Instead, it’s a case study in the difficulties of privatization. And it holds lessons across the continent, as a new wave of center-right leaders pushes to sell off state-run businesses.

Since the Brazilian government gave up its majority stake in 2022, the company — better known as Eletrobras — has struggled to find its footing. Its new management, well-regarded veterans of oil and banking, have labored to streamline an organization whose mismatched assets accumulated over time included a hospital, a movie theater, a church and an airport. A Balkanized bureaucracy left over from merging several smaller companies into the modern Eletrobras added to the challenge. Its stock suffered accordingly. 

But there are signs Eletrobras may finally have turned a corner. After the utility reported strong revenue growth on Aug. 6 — and a respectable dividend — investors sent the stock soaring. It now regularly trades above its 2022 offering price of 42 reais ($7.73) after spending most of the last three years below that mark. Analysts say Chief Executive Officer Ivan Monteiro and his team have made progress rationalizing the business and making it more transparent, predictable and bankable. 

“Imagine running a company like this right after privatization, with people demanding ultra-short-term results,” Monteiro said in an interview. “What matters most is where the company is headed. It’s becoming healthier than it was, and our shareholders have a long-term view to support the change.”

Eletrobras’ experience has implications throughout Latin America, which could be on the cusp of a new round of privatization. In Argentina, libertarian Javier Milei has vowed to privatize state-owned enterprises on a sweeping scale. In Brazil, São Paulo Governor Tarcísio de Freitas — a possible 2026 presidential contender — has already taken private a large state water and sewage utility. The process can lead to healthier companies in the end, but success is hardly guaranteed, and shareholders shouldn’t expect a smooth ride.

Alexandre Sant’Anna, an equity researcher at ARX Capital Management, said Eletrobras remains a work in progress, post-privatization. “T

Founded in 1962, Eletrobras was a key player in Brazil’s “economic miracle” of the late 1960s and early ’70s, when the country grew more than 10% per year with massive investments in infrastructure. To build some of its hydroelectric plants on the country’s plentiful rivers, the company had to construct entire towns from scratch — which helps explain its collection of unusual assets.

The Furnas plant on the Grande River, for example, helped build the nearby city of São José da Barra, which now has about 7,800 residents. Although the hydro plant began operations in 1963, Eletrobras still owns the city’s airport, two hotels and a cinema. The airport, intended to give company executives easy access to the site, is now leased by Brazil’s navy, which also uses one of the hotels. Eletrobras is trying to sell the other hotel as well as sell or donate the movie theater.  The hospital, meanwhile, was built during construction of the massive Paulo Afonso Hydroelectric Complex in Bahia state, where work began in 1948. The company last year donated the hospital to a local public university.

The years of growth left Eletrobras with a reputation as one of Brazil’s least efficient state-run companies, weighed down by unnecessary holdings, overlapping systems and high costs. Remnants of the original companies that were welded together to create Eletrobras operated as disconnected bureaucracies, according to company executives. Financial reporting before the 2022 offering took days of manual spreadsheet work to complete. 

Privatization, pushed by former President Jair Bolsonaro, was supposed to change all that. The work has certainly begun. Since taking over as CEO in September 2023, Monteiro has cut operating costs by 18% and reduced headcount by 17%, according to the company’s financial reports. He’s divested non-core assets, such as a fleet of gas-fired power plants sold to Ambar Energia SA. He’s also renegotiated contracts with employees, customers and suppliers and sought to replace a bureaucratic mindset with private-sector discipline. The company in December moved into new headquarters in Rio de Janeiro, with open work spaces rather than big offices for each manager.

“Culture takes time,” Monteiro said. “As we advance, it takes time.”

He and his team have solid reputations within Brazil’s business community. Monteiro is a former CEO of oil giant Petróleo Brasileiro SA and also served as CFO of Banco do Brasil SA. Eletrobras’ CFO, Eduardo Haiama, is a former Banco BTG Pactual SA equity research analyst and was CFO at Eletrobras competitor Equatorial Energia SA for 11 years.

They plan more divestments to come. The company this year reached an agreement with the government to release Eletrobras from funding completion of a long-delayed third reactor at Brazil’s only nuclear power plant — Angra, near Rio de Janeiro. Fitch Ratings, citing government estimates, said completing the project will likely cost 20 billion reais. Eletrobras also is looking to sell minority stakes in assets worth more than 30 billion reais, Haiama said. 

“If it were up to me, I’d sell everything,” Haiama said, in an interview. “But with rates this high, it’s tough to reach a fair valuation.” (Brazil’s benchmark Selic rate is 15%.)

The company reported a profit of 10.4 billion reais for fiscal year 2024, up from 3.6 billion reais in 2022, the year of privatization. But the shift away from state control has not been easy, in part due to the company’s structure.

The government retains 45% ownership through a dual-class share system, and President Luiz Inácio Lula da Silva’s administration successfully pushed to increase its influence on the company’s board. Analysts say the possibility of government interference has weighed on the stock. 

“Eletrobras is not yet priced as a privatized company,” said Vitor Sousa, an equity research analyst at Genial Investimentos. “For that to happen, there may need to be a change in government, interest rates must fall, and the company has to remain committed to its turnaround strategy.”

For many shareholders, Eletrobras isn’t just a speculative investment. The 2022 share sale allowed Brazilian workers to invest into the company 6 billion reais of their savings in a social insurance program known as FGTS. The offering drew 370,000 individual investors. UBS BB Investment Bank, which once targeted a fair value of 70 reais per share, now sees 59 reais as realistic over 12 months. 

Then there’s the matter of the company’s dividends, which have fluctuated as its leadership balances satisfying yield-hungry shareholders with investing in overdue upgrades. Monteiro warned that the most recent 4 billion reais of dividends should not be seen as the new normal, as much as they pleased investors. “You can’t just take an isolated element and say, ‘This is the level of dividends,’” he said.

The company faces a fast-changing market. Solar and wind power — almost nonexistent in Brazil a decade ago — have pushed down wholesale electricity prices. As a result, Eletrobras has held back from locking in long-term contracts with big customers, hoping to capitalize on future price increases. Electricity prices have started to rise again, but the company’s most recent earnings report estimated that 32% to 43% of the company’s available electricity in 2027 remains uncontracted. 

Brazil’s electricity generation is expected to grow a median of 3.3% each year through 2034, according to Brazil's Energy Research Office, a government agency known as EPE. Hydropower is expected decline to 47% of total generation from 56% in 2024, while wind, solar and natural gas expand.  

Eletrobras is trying to modernize its internal operations, as the country it serves evolves into an economic power. It has invested in improving its energy trading models and recently launched an in-house meteorology platform called Atmos to better forecast energy demand and plan maintenance. Such platforms have become increasingly important to electric utilities worldwide, as they adapt to the day-to-day fluctuations of a changing climate.

“My job isn’t just to modernize the company’s infrastructure,” said Executive Vice President Juliano Dantas, who led the Atmos initiative. “It’s to help create future opportunities.” 

Monteiro said the company’s improvements remain on track. “

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