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We recently upgraded Brazilian electric utility, Companhia Energetica de Minas Gerais (CIG - Analyst Report), also known as CEMIG, from Neutral to an Outperform recommendation. The revision is based on the economic development in Brazil as well as the long-term growth prospects of Cemig.

The company is the fifth largest electricity generator in Brazil and generates approximately 97% of electricity from hydroelectric sources. Apart from its integrated electric business, the company is also engaged in natural gas distribution and telecommunications.

Currently, the company is in a position to derive abundant benefits from the economic recovery of Brazil; the average annual growth of the country’s GDP over the next three years, as estimated by the Brazilian Finance ministry, is about 5.3%.

Also, the Brazilian government brought forth its intention of improvising the electricity industry through its Second Accelerated Growth Program (PAC 2). Approximately R$1.1 trillion has been allocated for the electricity industry under the PAC 2. In CEMIG’s area of operation, according to the national Energy Research Institute, EPE—average consumption growth is expected to be 4.5% from 2011 to 2021.

Moreover, Cemig’s management, over the long term (2011-2015), expects total energy distribution to reach a range of 48.8-53.8 TWh by 2015. Energy generation in 2015 is estimated to be roughly 36.1 TWh while EBITDA for 2015 is expected to be within the R$5.3 - R$6.1 billion range by 2015. 

Cemig reported an increase in net earnings in the fourth quarter and fiscal year 2011. Revenues also increased on the back of rising energy demand. Besides, the company’s efficient operations, strong balance sheet, enviable market share position; all serve to make it an attractive valuation compared with its peers. However, rising operating expenses pose a threat to future growth. Cemig competes with industry players like Companhia Paranaense de Energia (ELP - Analyst Report). 

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