Business Context and Reporting Period
This Form 6-K filing by Companhia Energética de Minas Gerais (Cemig) covers the month of December 2008 and includes the Quarterly Financial Information (ITR) for the period ended September 30, 2008. Cemig is a Brazilian holding company operating in electricity generation, transmission, and distribution, as well as natural gas distribution. The filing also contains summaries of Board of Directors meetings held between August and December 2008 and various market announcements.
Key Financial Metrics (Consolidated)
Values in Brazilian Reais (R$) thousands, unless otherwise noted.
| Metric | 9 Months Ended Sept 30, 2008 | 9 Months Ended Sept 30, 2007 | Change |
|---|---|---|---|
| Net Operational Revenue | 8,135,437 | 7,512,622 | +8.29% |
| Net Profit | 1,605,794 | 1,468,758 | +9.33% |
| EBITDA | 3,170,416 | 3,067,430 | +3.36% |
| Net Financial Result | (17,784) Expense | (161,488) Expense | Improvement of R$ 143.7M |
| Cash and Cash Equivalents | 3,012,006 | 2,002,199 (June 2008) | +50.4% (QoQ) |
| Total Debt (Loans, Financings, Debentures) | 7,371,097 | 7,076,933 (June 2008) | +4.2% (QoQ) |
| Stockholders' Equity | 10,031,566 | 9,515,329 (June 2008) | +5.4% (QoQ) |
Material Changes vs. Prior Period
- Revenue Growth: Net operational revenue increased 8.29% year-over-year, driven by a 5.43% increase in gross retail electricity sales and a 9.13% increase in revenue from the use of the network (TUSD).
- Tariff Reduction Impact: A tariff review for Cemig Distribuição effective April 8, 2008, resulted in an average tariff reduction of 12.24% for consumers. Despite this, volume growth (6.45% increase in MWh sold to final consumers) offset the price reduction.
- Financial Performance: Net financial expenses improved significantly (from R$ 161.5M to R$ 17.8M) due to higher revenue from cash investments, a favorable court decision regarding PIS/Cofins taxes on financial revenue (R$ 108.1M gain), and the abolition of the CPMF tax.
- Operational Costs: Operational costs increased 9.48%, primarily due to higher personnel expenses (12.34% increase) driven by a 5% wage adjustment and a Voluntary Dismissal Program (PPD), and higher gas purchase costs (65.93% increase) due to increased thermal plant usage.
- Post-Employment Obligations: Expenses related to post-employment obligations doubled (100.79% increase) due to actuarial adjustments in December 2007 that reduced assumed interest rates, increasing the value of obligations.
Guidance, Outlook, and Management Commentary
- Strategic Plan: Management reaffirmed its Long-Term Strategic Plan, maintaining investment, amortization, and dividend policies despite macroeconomic changes. The company aims to grow in generation, distribution, transmission, and natural gas.
- Dividend Policy: The company adheres to bylaws requiring a consolidated debt-to-EBITDA ratio of less than 2.0x and a net debt-to-(net debt + equity) ratio of less than 40%. A second installment of 2007 stockholder remuneration (R$ 433.9M) was paid in December 2008.
- Acquisitions: In October 2008, Cemig (via subsidiary EATE) acquired 80% of Lumitrans and STC transmission companies for approximately R$ 89.2M combined.
- Rating Upgrade: On December 10, 2008, Moody's upgraded Cemig's Corporate Family Global Local Currency Issuer Rating from Ba2 to Baa3 (Investment Grade), citing healthy profitability and strong cash flows.
- Index Inclusion: Cemig was selected for inclusion in The Global Dow index (only Latin American electricity company) and the Brazil Corporate Sustainability Index (ISE) for the fourth consecutive year.
- Risks: Key risks include exchange rate exposure (USD appreciation against the Real), regulatory changes by ANEEL, and legal contingencies regarding tax disputes and tariff increases. The company maintains hedging strategies to mitigate FX risk.
Important Facts for Investor Verification
- Debt Structure: Verify the composition of the R$ 7.37B total debt, noting significant exposure to foreign currency (USD, Euro, Yen) and the effectiveness of swap transactions used to hedge this exposure.
- Tariff Review Finality: Confirm the finalization of the second periodic tariff review for Cemig Distribuição, as the current financials reflect provisional adjustments that could be modified.
- Legal Contingencies: Review the status of significant legal proceedings, particularly the R$ 113.4M provision for tariff increase disputes and the R$ 74.3M provision for suspended tax demandabilities.
- Post-Employment Liabilities: Monitor the actuarial assumptions for the Forluz and Braslight pension plans, as changes in interest rates significantly impact the R$ 1.5B in post-employment obligations.
- State Government Receivables: Verify the collection status of the R$ 1.76B receivable from the State of Minas Gerais (CRC contract), which is amortized via dividend retention.