Companhia Energetica de Minas Gerais (CIG), known as CEMIG, is one of the largest integrated electric utilities in Brazil with more than 6,000 megawatts of installed generation capacity. Currently, the company is the fifth largest electricity generator in Brazil. Approximately 87% of the company's installed generation capacity is hydroelectric power. The company currently meets approximately two-thirds of its power needs from internal generation assets, and purchases the rest from third parties. CEMIG's customer base of more than 10 million residential, industrial, commercial, and rural customers is located primarily in the southeastern Brazilian state of Minas Gerais. In addition to its integrated electricity business, CEMIG is also engaged in natural gas distribution and telecommunications. The state government of Minas Gerais is the company's largest shareholder with a 51% stake of the voting shares. Currently CEMIG has over 10 million consumers (82% residential, 1% industries, 9% commercial units, 6.6% rural properties and 1.4% others).
Demand for electricity in Brazil has been growing rapidly, due to the local economic recovery. Economic figures in 2005 were disappointing, with Brazilian gross domestic product (GDP) growth around 2.5%. Even so, CEMIG's electric power sales increased 4.5% totaling 39,614 GWh. In 2006, Brazilian economic figures were not that encouraging either, with a GDP growth of just 2.9%. However, total energy sold increased by 31.9% year-over-year thanks to the incorporation of Light into CEMIG's network. For 2007 Brazilian economic growth is expected to reach 5% and for 2008, at least 4.5%. During the first nine months of 2007, CEMIG's electricity sales increased by 12.1%. We expect the strong growth for electricity demand to continue.
The current economic growth in Brazil has been fueled by a more benign domestic monetary policy. The Brazilian Central Bank started to cut local interest rates in September 2005. Interest rates came from more than 19% to 11.25% now, and they are still very high if compared to other emerging markets.
Nevertheless, Brazilian Central Bank decided to stop to cut basic interest rates in the short term. After the August Bank meeting, an official report was released with strong comments on domestic inflation pressures. In October, it was decided to leave rates unchanged for the first time in two years. Even though the news was not encouraging, the outlook for Brazil for the medium-term remains promising. We believe that the continued improvement in the Brazilian economic environment will make Brazil reach investment grade within the next twelve months, thus leading to a multiple expansion for Brazilian stocks. We expect CIG to benefit from this development in the short term. In the following years, we expect Brazilian domestic rates to converge to international standards, providing a lasting effect of local demand for electricity.
According to ANEEL (the Brazilian National Agency for Electric Utilities), the demand for electricity in Brazil is expected to increase by 4.5% in average in the upcoming years. In its guidance for 2007-2012, CEMIG expects energy demand to increase 3.8% on average if Brazilian GDP growth reaches 3.5% per year during this period. We understand this is a very conservative assumption as we expect Brazilian economic growth to be within the 4% to 5% range for the next few years. Additionally, CEMIG expects the average generation price to increase 3.5%. Even considering those conservative estimates, the outlook for CEMIG and the Brazilian electric utility industry seems quite promising in the short-to-medium term.
There is room for continued growth in energy consumption in Latin America in the medium-to-long term. Per head consumption is around 1.600 KWH (Kilowatt per hour) in countries like Peru and Colombia, while countries like Brazil, Chile, and Argentina have a per head consumption rate of 2000 to 2,500 KWH. These totals lag behind European per head consumption of 5,000 KWH to 8,000 KWH and the U.S., which is above 13,000 KWH, as we can see in the graph below:
Due to CEMIG's geographical position in the important state of Minas Gerais, Southeast Brazil, its aggressive expansion plan, increasing its presence among industrial customers all over the Southeast and South of Brazil, and its integrated nature (generating and distributing energy), CEMIG is one of the best-positioned companies in the Brazilian electric utility sector. Additionally, CEMIG is already expanding and preparing itself for the consolidation process that will take place in the Brazilian electricity business in the following years.
During the first quarter 2006, a consortium headed by CEMIG acquired almost 80% of Light (electricity distribution company in the State of Rio de Janeiro) paying US$320 million. Also during 2006 another consortium also headed by CEMIG acquired 5 transmission lines in Brazil owned by Schain Group in the amount of US$300 million. CEMIG has been doing many other investments to meet the continued increase in electricity demand in Brazil. During the first quarter 2007 CEMIG started the operation of the Capim Branco II plant, which added 44 MW of installed capacity into the company's network. Additionally, during the second quarter 2007 CEMIG started the operation of two new transmission lines in the State of Minas Gerais. Finally, CEMIG is still investing in its small hydro plant program (Minas PCH), particularly interesting is the Baguari project, a joint venture between CEMIG, Furnas and Neoenergia, with 140 MW of capacity. In March 2007 it was initiated the construction of Cachoeirao small hydro plant with a capacity of 27 MW which is expected to begin operating during the second quarter 2008. We are convinced that CIG needs to increase its generation capacity in order to reduce the purchase of energy from external sources, which are much more expensive than the company's own energy. Moreover, also during the first quarter 2007, the company energized two new transmission lines: Itutinga-Juiz de Fora and Irape-Aracuai, which will operate 345kV and 230 kV, respectively.
The Brazilian electric utility industry is still dominated by old fashioned state-owned companies. In such an environment, CEMIG was able to position itself as a leader in the consolidation process of the electricity industry in Brazil. However, this process is in the very beginning and it will take many years until the effects of this consolidation become apparent. Additionally, CEMIG has been expanding beyond Brazil. CEMIG is investing in Chile, with a local company (ALUSA), it formed a joint venture to explore a 20 years concession of Nueva Temuco, a total investment of US$ 60 million. According to management's long-term plan, generation is expected to increase from 30.4 TeraWatt-hours (TWh) in 2005 to 239.7 TWh in 2035, giving the company market share of roughly 19%. Finally, it is important to mention that during the second quarter 2007, CEMIG obtained the confirmation of renewal for 20 more years of the concessions for 9 hydroelectric plants with a total capacity of 1,735 MW.
The company posted very good numbers for the third quarter of 2007. The acquisition of Light is already adding significant value and the improvement in the Brazilian economic/business environment continues to benefit the electric utility industry. During the third quarter 2007, CEMIG posted higher revenues if compared to the same period 2006, thanks to increasing energy sales by volume coupled with a tariff adjustment of 7.05% in average from April 2007, and better-than-expected EBITDA and net income. As a result of those good numbers, we are increasing our 2007 and 2008 earnings estimates. For the following quarters we continue to expect good numbers due to the benign business environment in Brazil coupled with the April tariff adjustment and the growing electricity demand.
We believe that the continued increase in demand in Brazil, coupled with all the new investments will fuel earnings in the short-to-medium term. Moreover, during the first quarter of 2007, the Brazilian government announced an ambitious four-year US$235 billion infrastructure investment plan called PAC. A huge part of the investments will be directed to energy generation and energy distribution. The Brazilian domestic electric companies will receive some tax benefits to encourage new investments. We believe CIG will benefit from this plan in the following years.
Finally, we think that CEMIG still has an attractive valuation compared to other international electric utilities. We remain confident that demand for electricity will continue to increase in Brazil both in the short-term and in future years. Moreover, we are positive on the company's dividend policy, which includes half-year payments and a payout of 50% of the net income and the new economic plan should help continued generation and distribution investments in the following years. All considered, we are keeping our Buy recommendation on CEMIG.