Minas Gerais Almost In Line – Analyst Blog

Companhia Energetica de Minas Gerais (CIG) posted better-than-expected results for the first quarter of 2010 with an EPS of R$0.68 or 38 cents compared to an EPS of R$93 or 40 cents in the first quarter of 2009. Reported EPADR was a penny above the Zacks Consensus Estimate of 37 cents.

Net income for the quarter was R$419.2 million (US$234.8 million), up from R$336.2 million (US$144.6 million) in the same quarter of 2009 based on higher revenues and lower net financial expense.

Net revenues grew to R$2,910.4 million (US$1,629.8 million) from R$2,361.5 million (US$1,015.4 million) in the first quarter of 2009, an increase of 23.24% from the year-ago quarter. The growth was attributable to an increase in the average price per MWh.

Sales volume to final consumers dipped 2% year over year with residential volume decreasing 4.0%, industrial 0.1% and commercial 6%.  However, rural volume bloated 10.47% year over year. The main reason for the decrease was lower consumption, reflecting a fall in economic activity in CEMIG’s concession area.

Operating expenses as a percentage of revenue dropped by 30 basis points mainly due to higher cost of electricity. EBITDA reached R$949.5 million (US$531.7 million) from R$780.7 million (US$335.7 million) in the year-ago quarter. EBITDA margin bloated by 50 basis points, reaching 32.6% from 33.1% in the first quarter of 2009.

Net financial expense was R$90 million (US$50.4 million) compared to an expense of R$38 million in the first quarter of 2009.

The favorable outlook of CEMIG reflects the positive potential for electricity demand in Brazil. Despite the continued global economic downturn, we have a reasonably positive view of the Brazilian economy. However,  state government’s intervention appears to be problematic. Moreover, the company faces competitive pressures in the Brazilian market and its revenue is highly dependent on natural water resources, which is risky. Thus, we reiterate the ADR as Neutral.