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We recently maintained our Neutral recommendation on Brazilian electric utility, Companhia Energetica de Minas Gerais (CIG - Analyst Report), also known as CEMIG.

Why Neutral?

CEMIG is the fifth largest electric utility in Brazil and sources approximately 97% of electricity from hydroelectric sources. The Brazilian electricity industry is on the rise with the ever increasing demand for electricity in the country.

According to the Ministry of Mines and Energy's (MME) ten-year plan till 2019, energy consumption in Brazil is expected to rise by 5.9% annually. Also, the demand is likely to get a boost from the two major sporting events that the country will be hosting in the coming years. To meet the demand, the government has decided to enhance Brazil’s total installed capacity for electricity generation from 112 megawatts to 167 megawatts by 2019.

Talking of CEMIG, we believe the company is in a constant pursuit to attain the position to benefit from the expected growth in electricity demand in Brazil. The company’s management anticipates energy generation in 2015 to reach 36.1 TWh while EBITDA to range within R$5.3-6.1 billion.  

Despite these positives, it’s the near-term concerns that restrict our view on CEMIG and keep us on the sidelines. Rising operating expenses, governmental interference and dependence on hydro sources for electricity pose a serious threat to growth. In the fourth quarter 2012, the company reported a 49% year-over-year increase in operational costs and expenses primarily due to rises in personnel costs, electricity bought for resale, infrastructure construction costs and gas bought for resale, among others.

Others Stocks to Consider

CEMIG currently has a market capitalization of $10 billion. Other stocks to watch out for in the industry are Brookfield Infrastructure Partners L.P. (BIP - Snapshot Report), Pike Electric Corporation (PIKE - Snapshot Report) and Empresa Nacional de Electricidad S.A. (EOC - Snapshot Report), each holding a Zacks Rank #1 (Strong Buy).
 

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