Companhia Energética de Minas Gerais

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 3/5

Companhia Energética de Minas Gerais (CIG) is a Brazilian state-controlled mixed-capital company engaged in the generation, transmission, and distribution of electricity, with operations spanning across diverse segments of the energy sector.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Cemig’s business is segmented into four main areas: Generation, Transmission, Distribution, and Gas.

  • Generation: This segment involves the production of electricity from hydroelectric, wind, and solar power plants. It also includes the operation of power plants and related activities.
  • Transmission: This division focuses on construction, operation and maintenance of transmission lines and substations
  • Distribution: The Company engages in electricity distribution to free and captive customers.
  • Gas: The distribution of natural gas to different segments.

Cemig’s revenue is diversified across different customer types:

  • Captive customers: These are customers that are contractually required to receive their energy from Cemig.
  • Free customers: These are customers who can purchase energy from any source
  • Other agents in the energy sector: These include traders, generators, and other independent power producers.

Market Trends

  • The Brazilian energy market is regulated by the National Electric Energy Agency (ANEEL) and the Brazilian Electric Power Trading Chamber (CCEE)
  • Energy prices are often determined by auctions and vary based on factors like seasonality, generation costs, and regulatory changes.
  • The trend is that consumers are increasingly migrating to the free market where the prices are determined by market supply and demand.
  • Brazil is heavily reliant on hydroelectric power, which is very vulnerable to changes in rainfall
  • The increasing need for new infrastructure is becoming a must, due to increases in electricity consumption.
  • Emerging trends include renewable energy sources, and the Brazilian government is trying to transition from thermal to renewable sources for power production.

Competitive Landscape

  • Cemig faces competition from other generators, transmitters, and distributors of energy, but mostly competition is regional due to the concession based structure.
  • In the regulated markets, competition is limited by regulatory barriers and defined concession areas.
  • In the free market, there is more competition due to multiple players. This has been causing increased prices in the free market, with lower risk for utilities.
  • Many competitors have been privatized or have become publicly-traded, and are acting more efficiently.

What Makes the Company Different

  • Cemig is a state-controlled mixed capital company with a historical presence in the Brazilian energy sector.
  • The company is diversified across generation, transmission, and distribution in the Brazilian state of Minas Gerais
  • The Company has significant concession assets that give them a legal right to operate in the areas where they are located.
  • Cemig has been investing substantially in renewable energy projects

Financial Analysis

Let’s break down Cemig’s financial health by examining its key performance indicators.

  • Revenue Growth: For the period 2023 to 2024, Cemig increased revenues significantly from R$5.625 billion to R$ 6.035 billion, indicating a healthy 7.3% increase in sales, especially fueled by trading and distribution activities.
  • Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA): The Consolidated EBITDA improved to 1.6 billion Reais which represented a substantial increase of 24.2% from 2023 to 2024, which shows their increase in operating profitability.
  • Net Profit: Cémig’s net profits have increased from R$1.25 billion to R$1.80 billion, indicating improved performance.
  • Profitability by segment: The best performance is driven by trading activities followed by gas and generation activities. There was a decrease in performance by the distribution unit.
  • Operating Expenses: The operating expenses have seen an increase, however, it is lower than the revenue, and is mainly caused by higher cost of energy purchased for resale and higher expenses on infrastructure and maintenance, and higher personnel costs.
  • Debt: The company continues to take on more debt, increasing their liabilities. The net debt increased from 2.1 billion Reais in 2023 to 3.6 billion in 2024. It also notes that about 86% of their debt has a rating of AA-, or better.
  • Capital Expenditure: The capex plans are ambitious, especially to expand their generation and transmission, with plans to increase investment by about 40% each year until 2029.

Economic Moat Analysis

Cemig has several economic moats in its business that offer some level of long term sustainability.

  1. Regulatory licenses: These act as a barrier to entry, reducing the potential for new competitors to enter the market. The concession based structure enables a quasi-monopoly.
  2. Geographic Location: The areas which are served by Cemig are very difficult for competitors to get into since the company provides the entire electrical service to these regions, creating a mini monopoly.
  3. Switching Costs: Customers will always incur a switching cost when they try to switch to a new utility provider, creating customer stickiness and loyalty to a current provider.
  4. Scale: Cemig is the biggest energy distributor in Minas Gerais, Brazil, which gives them scale advantages like fixed costs and efficiency.

Based on this, I rate Cemig’s moat as a 3 out of 5. While it has some strong moats, they are vulnerable to regulatory or geographical issues. The company’s market share might reduce in the free market, even if the company is strong in the regulated market.

Risks to the Moat and Business Resilience

Several factors could erode Cemig’s moats and impact its resilience:

  1. Regulatory Risks: Changes in Brazilian energy laws and regulations could reduce the company’s profitability or even force them to sell assets. Since Ceming’s concessions are heavily influenced by the Brazil government, any change to the regulations can affect the business gravely.
  2. Macroeconomic Factors: Fluctuations in the Brazilian economy could affect the company’s financial performance. High levels of inflation and increased debt financing are a clear threat.
  3. Competition: The entry of new competitors into the free market could lead to a loss in revenue for Cemig.
  4. Hydro-logical Risks: The company relies on hydro for 60% of its power generation and is therefore very susceptible to hydrological crises and bad droughts which could decrease profits drastically. The company would need to rely more on other energy production, which is more expensive.
  5. Financial distress: The company has taken on a lot of debt and, with its currently low operating margins, if they are unable to increase efficiency or margins, they may end up in trouble. If the Brazilian government starts imposing restrictions on its operations the debt may be unpayable and may lead to a bankruptcy.
  6. Governmental Influence: Since the Brazilian government has a major stake in the company, political intervention can alter or damage the business. This is a large point of concern because it’s not easy for the government and management to take the best strategic decisions for long-term value creation.

Understandability Rating

Cemig is a pretty complicated business because of its high regulation, the many different business segments, and the large exposure to Brazil and its specific conditions, such as the government influence and the economic conditions. But, since they are a utility company, it is somewhat easier to understand what they are doing and why they would make money. Based on this, I would give CIG an understandability rating of 4 out of 5, considering that the typical investor will not have an easy time understanding the Brazilian energy market and its regulations.

Balance Sheet Health Rating

The company’s balance sheet has some red flags, since it has taken on so much debt in the recent years. Despite good intentions from the management, it could end up being unmanageable if the company can’t boost its profitability to make payments, or if revenue falls due to increased competition. Based on this, I would give CIG a balance sheet health of a 3 out of 5. Although it is not in danger at the moment, its huge amounts of debt do pose some significant risks.