Brazil’s Minas Gerais is the country’s main coffee producing state, but the state-controlled electric utility Companhia Energetica Minas Gerais (CIG), is making investors perk up. That’s because the company, known as Cemig, has embarked on a recent shopping spree, including transmission and renewable energy assets which should allow it to capture a greater share of Brazil’s growing power demand.
In June, Cemig reached a $700 million agreement with Spanish firm Abengoa (ABGOF) to take a 50 percent stake in four Brazilian transmission concessions and to buy 100 percent of a fifth. It also recently acquired an additional 13 percent interest in the Rio de Janeiro power distributor Light, thereby bringing its stake to 52 percent.
Through Light, Cemig is making moves in the renewable energy sector. In July, Light agreed to pay $230 million for a 26 percent stake in the Brazilian renewable energy firm Renova Energia. The deal is subject to approval by the Brazilian electricity authority, ANEEL. “The acquisition will give Light a better profile for cash generation with more predictability,” CFO Luiz Fernando Rolla said in a conference call to discuss second quarter results.
The upside for Renova is Light’s large consumer market, which will absorb all the company’s growth in generation capacity, said Rolla.
In 2009 and 2010 Renova was awarded contracts for 20 wind farms in government-organized auctions totaling 423 megawatts. It also operates small hydro projects.
Despite Renova’s potential, Light’s shares were cut to neutral from buy by Banco BTG Pactual and Goldman Sachs after the deal was announced. “From current levels we see less scope for the stock to outperform,” Goldman Sachs’s analysts Francisco Navarrette and Andre Gaeta wrote in a note to clients.
Cemig’s expansion is founded on strong revenue growth. The firm’s second quarter profit rose 29 percent from a year earlier to $325 million, due primarily to higher prices and demand.
Revenues surged 11 percent to $2.39 billion, led by an increase in commercial and industrial sales. “This shows that our efforts to capture efficiency gains and enhance customer loyalty have resulted in benefits to shareholders,” said Rolla.
Physical sales improved modestly year-on-year, but around 97 percent of Cemig’s generation is hydroelectric which means that, like other Brazilian utilities, it is exposed to drought risk.
It also faces stiff competition from rivals Companhia Paranaense de Energia (ELP), EDP-Energias de Portugal (ELCPF) and privately-held Eletropaulo Metropolitana Eletricidade de São Paulo (EPUMI).
Demand for electricity in Brazil is rising and is expected to get a boost from the FIFA World Cup in 2014 and the Olympic Games in Rio de Janeiro in 2016. Investments in 2011 and 2012 are expected to be approximately $1.44 billion and $689 million, respectively.
In July, Fitch reaffirmed its AA rating of Cemig and its subsidiaries with a stable outlook. Cemig is one of the largest integrated electric utilities in Brazil. It also owns the natural gas distributor Companhia de Gas de Minas Gerais (Gasmig) and Cemig Telecomunicacoes (Cemig Telecom). It next reports on or about Nov. 11.
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