Business Context and Reporting Period
Company: Energy Company of Minas Gerais (CEMIG)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Second Quarter 2012 (Ended June 30, 2012)
Filing Date: October 10, 2012
Business Overview: CEMIG is a Brazilian holding company operating in the generation, transmission, and distribution of electric power, as well as gas and telecommunications. The company operates primarily in the state of Minas Gerais and holds interests in various subsidiaries and jointly-controlled entities.
Key Financial Metrics (Consolidated)
| Metric (R$ Thousands) | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 | Change (%) |
|---|---|---|---|
| Net Operating Revenue | 8,562,335 | 7,394,322 | 15.80% |
| Operating Profit | 2,391,289 | 2,052,872 | 16.48% |
| Net Profit for the Period | 1,235,620 | 1,049,208 | 17.77% |
| Earnings Per Share (Basic/Diluted) | R$ 1.67 | R$ 1.54 | 8.44% |
| EBITDA | 2,874,004 | 2,529,002 | 13.64% |
| EBITDA Margin | 33.57% | 34.20% | -0.63 pp |
| Net Cash from Operating Activities | 1,745,889 | 1,771,361 | -1.44% |
| Total Assets | 37,556,923 | 37,357,746 | 0.53% |
| Total Liabilities | 24,659,039 | 25,612,798 | -3.72% |
| Shareholders' Equity | 12,897,884 | 11,744,948 | 9.82% |
| Net Debt / Adjusted Capital Ratio | 1.65 | 1.91 | -13.61% |
Material Changes vs. Prior Period
- Revenue Growth: Net operating revenue increased 15.80% year-over-year, driven by a 13.74% increase in revenue from final consumers and a 16.18% increase in transmission revenue. The latter was largely due to the acquisition of assets by the subsidiary Taesa (formerly Abengoa).
- Cost Increases: Operating costs rose 15.53%. Notable increases included electricity purchased for resale (up 21.01% due to higher spot market prices and dollar appreciation) and employee profit sharing (up 391.30% due to the timing of provisions for the 2011 collective agreement).
- Profitability: Net profit increased 17.77% to R$1.24 billion. The effective tax rate was 32.30% compared to 32.69% in the prior year.
- Capital Structure: Shareholders' equity increased by R$1.15 billion, primarily due to a capital increase approved in April 2012 involving the issuance of new shares (25% stock bonus) and the capitalization of profit reserves.
- Cash Flow: Net cash from operating activities decreased slightly by 1.44%, while cash used in investing activities increased to R$1.72 billion, reflecting continued infrastructure investments.
Guidance, Outlook, Risks, and Unusual Items
- Concession Renewals: The company is evaluating the impact of new federal government measures regarding the renewal of electricity concessions. Management expects a definition of renewal criteria in 2012, which could affect future profitability if conditions impose additional costs ("onerous concessions").
- Covenant Compliance: As of June 30, 2012, the subsidiary Cemig Geração e Transmissão (Cemig GT) was non-compliant with a debt-to-equity covenant (62.20% vs. 61% limit). However, the company obtained formal waivers from creditors in August 2012, preventing early debt maturity. Consequently, R$2.88 billion of debt was reclassified from non-current to current liabilities.
- Subsidiary Financial Health: The auditor highlighted that the indirect jointly-controlled subsidiary Madeira Energia S.A. (MESA) is incurring recurring losses and has current liabilities exceeding current assets by R$1.5 billion. MESA depends on shareholder support to continue operations.
- Acquisition Interest: In response to media reports, CEMIG confirmed it is evaluating investment alternatives, including potential assets from the Grupo Rede Energia, which is under government intervention, though no specific transaction was confirmed.
- Subsequent Events:
- Taesa acquired the remaining 50% of Unisa for R$876.9 million.
- Taesa completed a public offering of 27 million units at R$65.00 each.
- Cemig GT signed a long-term electricity supply contract with Samarco Mineração valued at approximately R$2.1 billion.
Key Facts for Investor Verification
- Covenant Waivers: Verify the status of the debt covenants for Cemig GT and ensure no further waivers are required to maintain current debt classification.
- Concession Renewal Criteria: Monitor the finalization of federal government rules for concession renewals, as this poses a significant regulatory risk to future cash flows and asset valuation.
- Madeira Energia (MESA) Liquidity: Assess the ongoing financial support required by MESA and the potential impact of its recurring losses on CEMIG's consolidated results.
- Spot Market Exposure: Review the company's hedging strategies and exposure to the spot market price (PLD) for electricity, which significantly impacted costs in 2012.
- Capital Increase Impact: Confirm the dilution effects of the April 2012 capital increase on future earnings per share calculations.