This is a classic example of how the over-leveraged utility and energy companies partly owned by the Brazilian government can get squeezed, considering that the State “freezes” the prices they charge (in order to control inflation) in an environment of increasing operation costs … Petrobras anyone???

Anyway… bonds issued by Rede Energia SA (REDE4) and unit Centrais Eletricas do Para SA plummeted after the Brazilian utility known as Celpa filed for bankruptcy protection amid increasing debt and more than four years of frozen tariffs.

State-controlled Centrais Eletricas Brasileiras SA (ELET6), or Eletrobras, may bail out Rede Energia if requested by the government, Reuters reported yesterday. Eletrobras owns about a one-third stake in Celpa.

“These companies have cash flow problems, but they also have links with the federal government,” Marco Aurelio de Sa, a director at Credit Agricole Securities, said yesterday to Bloomberg. “Eventually some sort of arrangement will be made, especially when you consider the Brazilian government has a strategic interest in the electricity sector.”

Owned by the taxpayer…

In addition to Chairman Jorge Queiroz de Moraes Jr, an investment fund of FGTS, Brazil’s workers’ compensation fund, and BNDES Participacoes SA, the investment arm of the state development bank, are also Rede shareholders.

The debt…

Celpa’s debt increased to 1.96 billion reais ($1.14 billion) in the third quarter of 2011 from 1.57 billion a year earlier, while cash and equivalents tumbled to 259.1 million reais from 680.4 million in the same period.

Celpa said it distributes electricity to 7.4 million people in 143 municipalities in Brazil’s northern Para state. Celpa is the biggest power distributor in Brazil’s remote Amazon region by the number of consumers.

Source: Bloomberg, Reuters, BofA

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