Cemig captivates investors with aggressive behavior in a defensive industry
Whenever a crisis comes around, investors scramble for defensive assets. It’s a recurring story, and it helps to explain Cemig’s success on the Brazilian exchange. The electricity generator, transmitter and distributor, based in the Brazilian state of Minas Gerais, saw a share price climb of 78% during the six months ended on April 30. The rise is not entirely due to the alluring dividends habitually paid by power companies. Cemig, which is controlled by the Minas Gerais state government, has a light of its own. Even bad news for an industry peer can reflect positively on the price of its shares, as was recently seen.
In April, the São Paulo–based power distributor Eletropaulo was notified that the rate revision calculations by Aneel (the Brazilian electricity regulator) had established a 8.8% decrease in final rates. Every four years on average, the regulating agency adjusts electricity rates based on inflation and, after an analysis of investments made and improvements in quality of service, may even decide to shrink the amount charged from consumers — which is exactly what happened to the São Paulo company. In press releases, the agency named insufficient investment as a fundamental factor in its decision and suggested that the problem had been caused by high dividend payouts to investors. Eletropaulo had been giving shareholders almost 100% of its net earnings in recent years.
Cemig has been distributing about 50% of its net profits as dividends — the minimum level established in the company’s bylaws. "The federal government wants to lower the price of electricity and will bear down on companies that invest too little", believes Artur Nehmi, an analyst with the Sparta asset management office, a Cemig investor between October 2011 and January this year. The signals put out by the government also feed the prospects for new consolidations in the segment, which would benefit Cemig. "With the rate cuts, some concessionaires would lose value and revenues, an interesting combination for buyers", says Thomas Chang, an electrical industry analyst for the UM Investimentos brokerage. Perceived as an aggressive consolidator, Cemig has expanded its operations into other Brazilian states — such as Rio de Janeiro, where Light is one of its subsidiaries — and even other countries (Uruguay and Chile, for example) in recent years.
There’s another reason behind the consolidation rumor: Cemig’s already robust cash stores will soon gain even greater proportions. At least two extraordinary inflows of revenue are expected to expand the current R$ 2.2 billion (roughly US$ 1.06 billion). On May 17, the company disclosed a proposal from the Minas Gerais state government — its controller — regarding the early settlement of a nine–figure debt. The debt is a longstanding one. Up until 1993, the rate of return on investments of power utility concessionaires was guaranteed by the government. It didn’t matter if the company earned high or low profits. Everyone got the same rate of return based on a national average. It was a rule that diminished the returns of very lucrative companies, such as Cemig. An account was created to compensate the top performers: the Outstanding Income Account (CRC), which has been adjusted regularly ever since.
The compensation had already been reported in the company’s balance sheets since the 1990s, but will soon be transformed into actual cash, should Cemig accept the government’s proposed discount of 35%. The operation would earn the company R$ 4 billion (about US$ 1.95 billion). "The funds can be used for acquisitions. Consolidating is in line with Cemig’s objective of becoming the second largest energy company in Brazil, second only to Petrobrás", Mr. Nehmi assesses.
There’s another event that could fatten Cemig’s coffers: a possible stock issue by Taesa, one of its subsidiaries. Despite its 108% appreciation during the six months ended in April, Taesa has a free float of only 2%. Listed on the BM&FBovespa’s Nível 2 segment, it will have to adapt to the exchange’s regulations, which require a minimum free float of 25%. Cemig preferred not to contribute to this story, so it remains unclear whether the initial public offering will truly take place. What we do know, according to a public announcement released on May 17, is that Taesa has transferred R$ 1.7 billion (about US$ 825 million) to Cemig in exchange for 3,127 kilometers of power transmission lines. The initiative increases Taesa’s value and is an indication that an IPO may be nigh.
The Plural Capital asset manager, another new investor in Cemig, projects this succession of good news in numbers. "I calculate that Cemig’s profits will be 80% higher in 2012", says Pedro Menezes, an electrical industry analyst at Plural. In 2011, the company’s net earnings added up to R$ 2.4 billion (roughly US$ 1.2 billion). Aside from revenues, the expert highlights the cost–cutting plans revealed by Cemig’s managers. The cuts will amount to R$ 600 million (about US$ 290 million) over the next three years. Profit sharing for employees was limited to R$ 220 million, R$ 150 million less than the amount paid in 2010 (respectively about US$ 105 million and US$ 73 million). "The market trusts in Cemig’s management. It proves that a state–controlled company can be well managed", Menezes affirms.