Business Context and Reporting Period
This Form 6-K filing by Energy Company of Minas Gerais (CEMIG) covers the period ending September 19, 2019. The report summarizes Board of Directors meetings held in July and August 2019, market notices regarding operational restructuring and acquisitions, and the company's financial results for the second quarter of 2019 (2Q19).
Key Financial Metrics (2Q19)
| Metric | 2Q19 Value | 2Q18 Value | Change |
|---|---|---|---|
| Net Revenue | R$ 7.02 billion | R$ 5.61 billion | +25.15% |
| EBITDA | R$ 1.81 billion | R$ 0.88 billion | +105.07% |
| Net Profit | R$ 2.11 billion | R$ (0.01) billion (Loss) | Turnaround to Profit |
| EBITDA Margin | 25.82% | 15.75% | +10.07 p.p. |
| Net Debt | R$ 12.45 billion | R$ 13.07 billion | -4.74% |
| Electricity Sold | 13,120 GWh | 14,076 GWh | -6.79% |
Material Changes vs. Prior Period
- Tax Credit Windfall: The primary driver for the surge in profitability was a final court ruling in May 2019 confirming CEMIG's right to exclude ICMS tax from the calculation base for PIS, Pasep, and Cofins taxes. This resulted in R$ 1.44 billion in tax credits recognized in revenue and R$ 1.52 billion in financial income from monetary updating of these credits.
- Renova Provision: Operating provisions increased significantly (548% YoY) due to a R$ 688 million write-down of accounts receivable from the investee Renova following a credit risk assessment.
- Operational Volume: Total electricity sold decreased by 6.79% compared to 2Q18, driven by lower sales in the Free Client segment and the expiration of contracts from the 15th Existing Supply Auction.
- Financial Income: Net financial income turned positive (R$ 1.91 billion) compared to expenses in 2Q18, largely due to the tax credit updating and a R$ 461 million gain on Eurobond hedge transactions.
Guidance, Outlook, and Management Commentary
- Operational Restructuring: In August 2019, CEMIG adopted a new operating structure eliminating hierarchy levels and reducing General Manager posts by 25% to improve efficiency and decision-making.
- Investment Plan Increase: The Board approved an additional R$ 1.2 billion investment in the distribution subsidiary (Cemig D) for the 2020-2022 period to modernize assets and improve quality indicators.
- Debt Management: CEMIG issued R$ 3.66 billion in debentures to refinance more expensive debt, reducing the average cost of debt for Cemig D from 144.13% to 108.61% of the CDI rate and extending the average tenor from 2.9 to 5.1 years.
- Acquisitions and Disinvestments:
- Light S.A.: Sold 33.3 million shares of Light S.A. for R$ 18.75 per share (approx. R$ 625 million).
- Brasnorte: Subsidiary Taesa completed the acquisition of 100% of Brasnorte Transmissora de Energia S.A.
- Rialma I: Taesa signed an agreement to acquire 100% of Rialma Transmissora de Energia 1 S.A. for approximately R$ 56.7 million.
- Renewables: Acquired 196.98 MW of solar and wind supply via auction for delivery starting in 2023.
- Capital Markets: Management stated they are not considering any capitalization via public offering (e.g., follow-on) but are focused on optimizing cash flow and reducing leverage.
Investor Verification Checklist
- Tax Credit Repayment: Verify the mechanism and timeline for repaying a portion of the R$ 1.44 billion tax credit to consumers, as required by management's assessment.
- Renova Exposure: Confirm the current status of the Renova investment and whether the R$ 688 million provision fully captures the credit risk.
- Debt Refinancing Impact: Assess the cash flow impact of the new R$ 3.66 billion debenture issuance and the resulting extension of debt maturities.
- Regulatory Tariff Adjustments: Monitor the implementation of the 8.73% tariff adjustment for Cemig D effective May 2019 and its effect on future revenue stability.
- Shareholder Structure: Note the acquisition of a 5.07% stake in CEMIG common shares by Itaú Unibanco investment funds in September 2019.