Business Context and Reporting Period
This Form 6-K filing by Energy Company of Minas Gerais (CEMIG) covers material events and financial results for the period ending November 21, 2017. The filing includes summaries of Board of Directors meetings held between September and November 2017, market announcements regarding debt restructuring and disinvestment, and the publication of consolidated financial results for the third quarter of 2017 (3Q17).
Key Financial Metrics (3Q17)
| Metric | 3Q17 Value | 3Q16 Value | Change |
|---|---|---|---|
| Net Revenue | R$ 5.14 billion | R$ 4.90 billion | +4.9% |
| EBITDA | R$ 101 million | R$ 1.19 billion | -91.6% |
| Net Profit | (R$ 84 million) | R$ 434 million | Loss vs. Profit |
| Net Debt | R$ 12.77 billion | R$ 13.14 billion | -2.8% |
| EBITDA Margin | 1.97% | 24.39% | -22.42 p.p. |
Cash Flow (9M2017): Cash generated from operations was R$ 2.14 billion. Financing activities resulted in a net outflow of R$ 1.72 billion, primarily due to loan repayments. Investment activities resulted in a net outflow of R$ 841 million.
Material Changes and Unusual Items
- Tax Regularization Plan (ICMS): CEMIG joined the Minas Gerais State Tax Credits Regularization Plan (PRCT) for R$ 588 million in ICMS tax. This resulted in a one-time expense reducing 3Q17 EBITDA by approximately R$ 588 million and Net Profit by R$ 388 million. The plan reduced interest and penalties by 90-95%.
- Debt Refinancing: On November 20, 2017, CEMIG subsidiaries (Cemig GT and Cemig D) signed an agreement to refinance R$ 4 billion of short and medium-term debt. The new debt will be amortized in 36 monthly installments starting in 2019, extending the maturity profile.
- Disinvestment Progress:
- Renova: Received a binding proposal from Brookfield for a primary capitalization of R$ 1.4 billion (R$ 6 per unit) plus an earn-out.
- Light: Received non-binding offers for the sale of CEMIG's stake in Light S.A.
- AGC Energia: Reduced its holding in CEMIG common shares from 16.29% to 12.79%.
- Regulatory Penalties: Affiliated company Renova was fined R$ 3.8 million and suspended from contracting with ANEEL for one year regarding the transfer of control of the Umburanas wind farm complex, though the transfer to Engie was approved.
Guidance, Outlook, and Risks
Management Commentary: Management highlighted that the reduction in the Selic interest rate has substantially lowered financial expenses. The company is executing a plan to improve capital structure through debt reprofiling, international debt issuance (approx. US$ 1 billion), and a capital increase of R$ 1.3 billion. Operational efficiency measures, including voluntary retirement programs, are expected to reduce costs by approximately R$ 450 million annually.
Outlook: The Periodic Tariff Review scheduled for May 2018 is expected to contribute to increased cash flow generation. The company aims to complete the sale of shares in Taesa and Light to resolve put option obligations and reduce leverage.
Risks and Contingencies:
- Put Option Exercise: CEMIG is seeking shareholder approval to postpone the exercise date of put options granted to banks (Santander, BV Financeira, BB-BI) to avoid Light becoming state-controlled and triggering cross-defaults.
- Hydrological Conditions: Unfavorable hydrological conditions have increased the cost of electricity purchased for resale and spot market prices.
- Default Rates: While collection efforts have stabilized default rates, the macroeconomic context remains a risk factor for receivables.
Key Facts for Investor Verification
- Verify the final approval and terms of the R$ 4 billion debt refinancing agreement signed in November 2017.
- Monitor the status of the binding proposal from Brookfield for Renova Energia (R$ 1.4 billion) and the non-binding offers for Light S.A.
- Confirm the outcome of the Extraordinary General Meeting regarding the postponement of the put option exercise date for Parati/Light assets.
- Assess the impact of the R$ 588 million ICMS tax regularization on future liquidity and the schedule of the six monthly installments.
- Review the progress of the capital increase (R$ 1.3 billion) and the international debt issuance (US$ 1 billion) to validate the leverage reduction strategy.