Executive Summary / Key Takeaways

• Massive Regulated Investment Cycle: Cemig is executing the largest investment program in its 73-year history, with BRL 59.1 billion allocated through 2028, overwhelmingly focused on regulated network infrastructure that guarantees returns through future tariff reviews, creating a rare combination of predictable cash flows and visible growth acceleration.

• Regional Moat Under Pressure: The company's strategic focus on Minas Gerais provides regulatory protections and operational synergies, but this concentration is now being tested by accelerating client migration to free markets, volatile submarket pricing that destroyed BRL 136 million in trading value in Q3 2025, and the looming possibility of privatization through the Propag program.

• Financial Resilience vs. Earnings Volatility: While Cemig maintains investment-grade metrics (net debt/EBITDA of 1.76x, 100% Real-denominated debt, 5.7-year average tenure) and pays a 10.97% dividend yield, Q3 2025 results showed a 16.3% EBITDA decline and 30.2% drop in recurring net profit, demonstrating that even regulated utilities are not immune to market dislocations.

• Valuation Disconnect: Trading at 4.91x earnings and 7.06x EV/EBITDA with a 14.16% ROE, Cemig trades at a significant discount to Brazilian peers, reflecting investor concerns about trading losses, concession renewals for 31% of generation capacity expiring in 2027, and the binary outcome of the Propag privatization process.

• Critical Variables to Monitor: The investment thesis hinges on three factors: whether management can execute the BRL 6.3 billion 2025 capex plan while maintaining covenant compliance, how quickly submarket price differences normalize (management expects this to approach zero by H2 2025), and the ultimate resolution of Minas Gerais' attempt to include Cemig in its federal debt amortization program, which requires constitutional amendment or plebiscite.

Setting the Scene: From State Utility to Regulated Infrastructure Platform

Companhia Energética de Minas Gerais, incorporated in 1952 and headquartered in Belo Horizonte, Brazil, spent its first six decades as a traditional state-owned electric utility. The company operated the standard model: generate power, transmit it across Minas Gerais, distribute to captive customers, and collect regulated returns. This model produced stable but uninspiring results, with investment levels so low in 2018 that the company deployed only BRL 954 million—far below regulatory depreciation—and consistently missed efficiency benchmarks.

The transformation began in 2019 with the launch of a BRL 59.1 billion investment program through 2028, representing a sixfold increase from 2018 levels. This wasn't merely a spending spree; it represented a strategic pivot toward regulated network infrastructure where returns are contractually guaranteed through future tariff reviews. Over 75% of investments target distribution, transmission, and gas networks—assets that generate predictable cash flows for decades. By 2024, this strategy delivered record results: BRL 11.3 billion in EBITDA, the highest net profit in company history, and BRL 5.7 billion in annual CapEx, all while achieving a AAA rating from Fitch.

Cemig's competitive positioning rests on two pillars: its regional monopoly in Minas Gerais and its integrated value chain. The company controls the entire electricity value chain within Brazil's second-largest state, serving industrial, commercial, and residential customers across a territory larger than France. This integration creates operational synergies that pure-play generators or distributors cannot replicate. When agribusiness expands in Minas Gerais—the company's "Minas three phase" program target—Cemig can simultaneously build distribution networks, offer gas connections, and deploy smart meters, capturing multiple revenue streams from the same customer growth.

The Brazilian energy sector provides a supportive backdrop. Distribution utilities plan to invest BRL 235.7 billion between 2025-2029, with 60% allocated to expansion projects supporting load growth from electrification and reshoring. Cemig's BRL 39.2 billion plan for 2025-2029 aligns perfectly with this trend, positioning it to capture disproportionate value as Minas Gerais' economy grows. However, this regional focus also concentrates risk: 70% of revenue depends on Minas Gerais' economic health, and any regulatory or political changes at the state level directly impact the entire business.

Technology and Strategic Differentiation: Modernizing the Regulated Moat

Cemig's technology investments aim to transform its regulated monopoly from a cost center into a competitive advantage. The company is deploying Advanced Distribution Management Systems (ADMS) and migrating to SAP S4/HANA, creating a digital backbone that reduces operational costs while improving service quality. This matters because regulated utilities live and die by their ability to operate within approved expense limits. In 2024, Cemig's operating expenses were BRL 156 million below regulatory OpEx, directly boosting allowed returns.

Smart meter installations exemplify this strategy. By expanding smart meter coverage, Cemig achieves two objectives simultaneously: it reduces non-technical losses (which remain within regulatory limits partly due to improved measurement methodology) and creates a data platform for value-added services. The company now collects 67.5% of payments through digital channels, including Pix, which cut collection costs by 50% while achieving a 99% receivables collection index. This operational excellence translates into higher effective returns on the same regulated asset base.

The "Minas three phase" program targets agribusiness, one of Minas Gerais' fastest-growing sectors. By offering integrated energy solutions—electricity, gas, and distributed generation—Cemig becomes a strategic partner rather than a commodity supplier. This approach locks in customers and creates switching costs that pure commodity providers cannot match. When a dairy farm installs Cemig's three-phase system, it becomes economically prohibitive to switch to alternative suppliers, even in the free market.

Organizational restructuring supports this technological foundation. Creating six regional distribution areas and 17 high-voltage management units brings decision-making closer to customers, improving response times and enabling local optimization. Hiring 228 new electricians isn't merely workforce expansion; it's a strategic investment in customer proximity that reduces outage duration and improves satisfaction metrics. In 2024, Cemig reduced its DEC outage indicator by 2.5 hours—a tangible improvement that supports future tariff negotiations.

Financial Performance: Record Investment Meets Market Headwinds

Cemig's financial trajectory tells a story of deliberate acceleration into a market downdraft. The company invested BRL 4.7 billion in the first nine months of 2025, on track to deliver the full-year BRL 6.3 billion target—a 10.5% increase from 2024's record level. This spending is "all contracted" in regulated sectors, meaning the cash outflows are matched by future revenue recognition in tariff reviews, particularly the 2028 review that management views as a major catalyst.

The Q3 2025 results, however, reveal the friction of this transition. Recurring EBITDA fell 16.3% year-over-year to BRL 1.5 billion, while recurring net profit dropped 30.2%. These declines are not indicative of structural deterioration but rather reflect three temporary factors: BRL 136 million in trading losses from submarket price differences, a BRL 54 million generation impact from lower GSF requiring spot market purchases, and the absence of 2024's non-recurring gains (BRL 1.6 billion from Aliança disposal and BRL 1.5 billion transmission tariff review). The underlying regulated business remains solid, with distribution EBITDA declining a modest 4.7% despite client migration and mild weather.

Segment performance illustrates the portfolio's resilience and vulnerabilities. Distribution (Cemig D) generated BRL 1.21 billion in adjusted EBITDA in Q2 2025, up 39% year-over-year, driven by tariff subsidy reimbursements. However, the energy market contracted 3.3% in Q2 and 4.4% in Q3 as industrial clients migrated to the free market and transmission network. This migration is the single biggest threat to the distribution moat, as each large customer lost reduces the regulated revenue base that supports infrastructure investments.

The generation segment faces hydrological volatility. A lower Generation Scaling Factor (GSF) in Q3 forced BRL 54 million in spot market purchases to cover hydrological risk. While Cemig secured 7-year extensions for Queimado and Pai Joaquim hydro plants (and 3 years for Irapé) through a BRL 200 million GSF credit auction, 31% of generation capacity still faces concession expiration in 2027. Management prefers quota-based renewals that require no disbursement and shift plants to the regulated market, but this depends on state government decisions, not company control.

Transmission provides stable growth, adding BRL 32 million in allowed annual revenue during 2025. The segment's BRL 173 million investment in H1 2025 focuses on the Verona project and network reinforcements. While Q2 2025 EBITDA was impacted by a BRL 199 million non-cash RBSE remeasurement, the underlying business shows 1.48% revenue growth and benefits from the 2024 tariff review's BRL 1.5 billion impact.

Trading has become a significant drag, with submarket price differences creating a BRL 136 million negative impact in Q3 and BRL 76 million in Q2. Management is actively closing positions and not opening new ones, expecting normalization to zero once ONS criteria are revised and interchange increases. This represents a temporary but material earnings headwind that masks the regulated business's strength.

Gas (Gasmig) offers steady growth, with EBITDA up 2.85% in Q2 2025 despite a 6% market drop in Q3. The BRL 180 million Centralized pipeline project, expected to complete by end-2025, will expand the customer base and lock in long-term industrial contracts.

Balance Sheet Strength: Funding the Transformation

Cemig's financial health provides the foundation for its aggressive investment program. Net debt to recurring EBITDA stood at 1.76x in Q3 2025, which management considers a safe level, particularly for a capital-intensive utility. The debt structure is entirely Real-denominated with an average tenure of 5.7 years, eliminating currency mismatch risk—a critical advantage in Brazil's volatile macro environment.

Liquidity remains robust, with BRL 2.3 billion in cash at Q3 2025 and operating cash flow of BRL 3.4 billion.

The company successfully issued BRL 2.5 billion in debentures in Q1 2025, with demand exceeding 2.5x the offering and rates below peer benchmarks, extending average maturity from 4.8 to 5.5 years. An additional BRL 1.9 billion issuance in April further strengthened the liquidity position.

This financial flexibility enables Cemig to invest BRL 4.96 billion in distribution, BRL 425 million in transmission, BRL 284 million in gas, and BRL 280 million in generation during 2025 while maintaining its 50% dividend payout policy. Management explicitly states they do not expect changes to this policy, having historically paid dividends even during periods with non-recurring effects that didn't generate cash. The 10.97% dividend yield provides tangible evidence of shareholder commitment.

The investment program's scale is unprecedented: BRL 39.2 billion between 2025-2029, following BRL 23.5 billion already executed from 2019-2024. This represents 4x regulatory depreciation (QRR ), a dramatic reversal from the pre-2018 period when investment fell below depreciation. The strategy is clear: front-load regulated investments to capture guaranteed returns in future tariff reviews while financing costs remain manageable.

Outlook and Execution: Navigating Multiple Transitions

Management's guidance reflects confidence tempered by realism. The BRL 6.3 billion 2025 CapEx target is "all contracted" in regulated sectors, providing revenue visibility. The 2028 tariff review represents a major inflection point where these investments will translate into allowed returns. As management states, "These are very cautious investments in regulated areas that when they get mature and the agency recognizes that we are going to have very positive results for the company."

However, execution risks are multiplying. The trading segment's BRL 600 million EBITDA drop in 2024 and continued losses in 2025 demonstrate that even conservative hedging strategies can fail when submarket price differences spike to BRL 272/MWh in March 2025 due to dry hydrological conditions. While management expects normalization, the company's short exposure in 2026-2027 from undelivered contracts creates ongoing risk.

Client migration presents a structural challenge. Large industrial customers are leaving the regulated distribution network for the free market or basic network, reducing Cemig D's market by 4.4% in Q3 2025. This trend accelerates as distributed generation grows 20% year-over-year, enabling customers to bypass traditional utility services. While Cemig is expanding its own distributed generation offerings, the net effect is erosion of the regulated customer base that underpins the investment thesis.

Concession renewals represent a binary outcome. For Sá Carvalho, ANEEL has recommended quota-based renewal requiring no disbursement and moving the plant to the regulated market—a positive outcome. However, decisions for other plants and the 31% of capacity expiring in 2027 depend on "the executive power and the statehouse, Minas Gerais in terms of changes in the capital structure," not management. This creates uncertainty that the market is pricing aggressively.

The Propag program adds political risk. Minas Gerais included its Cemig stake in assets for federal debt amortization, requiring either constitutional amendment or plebiscite to remove the current privatization barrier. Management is cooperating with the Economic Development Secretariat, providing information for a possible control transfer. While not imminent, this overhang constrains valuation multiples.

Competitive Context: Regional Depth vs. National Scale

Cemig's competitive positioning reflects a deliberate choice: regional dominance over national scale. With approximately 7% of Brazil's generation capacity, Cemig is a mid-tier player compared to Eletrobras (EBR)' 40% share. However, its integrated presence in Minas Gerais creates local economies of scale that national competitors cannot replicate.

Eletrobras operates at a scale that provides lower generation costs through mega-hydro projects, but its bureaucratic legacy and federal political exposure create inefficiencies. Cemig's regional focus yields faster decision-making and stronger customer relationships, evidenced by its 99% collection efficiency and 67.5% digital payment adoption—metrics that national players struggle to match across diverse territories.

CPFL Energia (CPFE3), the second-largest private utility, serves over 10 million customers with superior distribution efficiency due to its urban São Paulo focus. However, Cemig's integrated gas and electricity offerings provide a stickier customer proposition. While CPFL leads in renewables deployment speed, Cemig's hydro assets provide baseload reliability that wind and solar cannot match, creating a complementary rather than directly competitive position.

Engie Brasil (EGIE3)'s pure renewables strategy positions it better for the energy transition, with 48.5% gross margins and 40.3% operating margins that exceed Cemig's 13.6% and 10.2% respectively. However, Engie lacks distribution and gas assets, making it a generation play rather than an integrated utility. Cemig's diversification provides more stable cash flows across market cycles.

Equatorial Energia (EQTL3)'s acquisition-driven growth in northern Brazil creates a parallel regional monopoly strategy, but in less developed markets with higher operational risk. Cemig's mature Minas Gerais market offers lower growth but higher profitability and predictability.

Cemig's primary moats are threefold: regulatory licenses granting exclusive distribution rights, hydroelectric assets providing low-cost baseload power, and proprietary IT systems enabling operational efficiency below regulatory limits. These advantages translate into 14.16% ROE and 5.61% ROA that, while modest compared to Engie Brasil's 25.5% ROE, are achieved with significantly lower risk.

Valuation Context: Discounted for Uncertainty

At $2.11 per share, Cemig trades at 4.91x trailing earnings and 7.06x EV/EBITDA, a substantial discount to Brazilian utility peers. CPFL trades at 10.5x earnings, Engie at 11.6x, and Equatorial at 15.5x. This discount reflects specific risks rather than fundamental weakness.

The 10.97% dividend yield is among the highest in the sector, supported by a 63.3% payout ratio and management's commitment to maintaining the 50% of net profit distribution policy. This yield provides downside protection while investors wait for the investment program to mature.

Balance sheet metrics support the valuation. Net debt to EBITDA of 1.76x is conservative for a utility, particularly with 5.7-year average debt tenure and 100% Real-denominated debt eliminating FX risk. The BRL 2.3 billion cash position provides 1.5 years of investment funding at current rates.

Enterprise value of $9.46 billion represents 1.21x revenue, below CPFL's 7.5x and Engie's 17.7x, reflecting Cemig's lower-margin trading and generation exposure versus pure regulated peers. However, as trading losses normalize and transmission investments receive tariff recognition, multiple expansion is plausible.

The key valuation driver is the 2028 tariff review, where BRL 39.2 billion in contracted investments will generate allowed returns. Management estimates over BRL 500 million in additional revenue from nine months of 2025 investments alone. If execution continues and regulatory treatment remains favorable, current multiples appear conservative.

Risks and Asymmetries: What Could Break the Thesis

The investment thesis faces three material risks. First, client migration could accelerate beyond management's 4-5% annual expectations, eroding the regulated revenue base that supports infrastructure returns. If industrial customers leave faster than Cemig can add new connections, the 2028 tariff review could disappoint.

Second, trading losses may not normalize as quickly as hoped. While management expects submarket differences to approach zero, the BRL 133 million Q1 impact, BRL 76 million Q2 impact, and BRL 136 million Q3 impact demonstrate persistent volatility. If the ONS criteria revision is delayed or interchange capacity proves insufficient, trading could remain a BRL 100+ million quarterly drag.

Third, the Propag privatization process creates a binary outcome. If Minas Gerais successfully amends its constitution to allow privatization without plebiscite, control could transfer to the federal government, fundamentally altering Cemig's strategic focus and potentially disrupting the Minas Gerais-centric investment program.

Upside asymmetries exist. Faster-than-expected normalization of trading conditions could release BRL 400-600 million in annual EBITDA. Quota-based renewal of the 2027 concession expirations would preserve cash and increase regulated earnings. Successful Propag negotiation could reduce state political interference while maintaining operational focus.

Conclusion: A Regulated Utility at an Inflection Point

Cemig represents a regulated infrastructure story disguised as a troubled utility. The BRL 59.1 billion investment program, concentrated in guaranteed-return network assets, creates a visible path to earnings growth through the 2028 tariff review. The company's financial health—low leverage, long-duration Real debt, and strong liquidity—provides the foundation for this transformation.

Current valuation reflects legitimate concerns about trading volatility, client migration, and political risk from Propag. However, these headwinds mask the underlying strength of the regulated business, which continues to generate stable cash flows supporting a 10.97% dividend yield.

The thesis will be decided by execution velocity and external variables. If management delivers the BRL 6.3 billion 2025 investment target while maintaining covenant compliance, and if submarket trading conditions normalize as expected, the market will be forced to re-rate the stock toward peer multiples. Conversely, accelerated client migration or adverse Propag outcomes could compress valuations further.

For investors, Cemig offers a unique proposition: a utility transitioning from stagnant state-owned enterprise to efficient regulated platform, with the investment phase coinciding with temporary market dislocations that obscure progress. The low valuation provides margin of safety, while the dividend yield pays investors to wait for the 2028 tariff review catalyst. The key is distinguishing between cyclical trading losses and the structural improvement in regulated returns—a distinction the market has not yet made.