NEW YORK (
--Brazil's economy has grown at an annualized rate of 8.9% for the first six months of 2010, but the growth hasn't come without pain.
The Brazilian government realizes it's behind the curve on building out its infrastructure and has accelerated efforts to remedy the problem, including a program with $250 billion set aside for infrastructure spending. Roads and power plants are the main focus of the upgrades. Last November, the country experienced a blackout with 60 million people losing electricity for 4 hours. The country is gearing up for the 2014 World Cup and wants to be prepared.
Investors not wanting to miss out on the coming spending spree have pushed the
Brazil Infrastructure Index
( INDXX) up 19% year-to-date vs. an increase of 7% for the S&P 500.
One area where billions will be spent is hydroelectric power. The program was begun by President Luiz Inacio Lula da Silva whose presidential term is ending. His personal pick for successor is Dilma Roussef, whose is currently expected to win a runoff election between her and Jose Serra set for Oct. 31. The country's utility companies have rallied ahead of the election with the hope that a win by Rousseff will keep the momentum alive for the infrastructure spending.
recently spoke to Luiz Rolla, Chief Financial Officer of
Companhia Energetica Minas Gerais
or Cemig, Brazil's second largest utility company, and asked him about the elections.
TheStreet: Brazil has a runoff coming up on the presidential election, do you think that the outcome is going to affect the power companies?
No, in general there will be very little chance to have some impact, because both candidates, regardless who is going to win, they have to support infrastructure projects. In Brazil, the power industry is one of the areas where we need more investments. So they have to support any investor who of course has plans to invest in the power industry.
The economy in Brazil has been very good, very strong, so clearly that should bode well for your company, right?
It's fantastic. The Brazil economic growth projected for the next five years implies 5,000 megawatts of new capacity every year and that represents a lot of additional investment. Not only for the power capacity but also for transmission lines, for distribution network.
All of this represents good opportunities for companies like ours.
Cemig has made some acquisitions, do you have more expansion plans?
The Brazilian industry will be undergoing a consolidation process. We have too many small companies there. The scale in this industry is a key process. So, we foresee a lot of acquisitions coming in the near future for sure.
With that comes taking on debt. How are you planning to pay for these acquisitions and reduce debt?
The structure we have used so far is a mix of debt and equity. Debt, mostly in the local market. The local market has been strong enough to finance our expansion and we rely on this market in the coming years as well. But of course as soon as you grow, the need for more funds grows a lot. So it's very likely in the near future we have to go to the international market to raise funds as well to finance a large acquisition.
What has been your response to the currency? The real's been very strong.
That is our issue. The appreciation of the real results in very high forex risk that has prevented us from raising funds abroad. Despite that, the international bonds have a longer term than the local bonds, but the costs for hedging is pretty high as well. So that's why we have focused on the local market.
Locally, there has been a lot of talk about installing smart meters. Where is Cemig on that regard?
This is the technology we have to implement over the next five years. It's a very big investment we have to do. It's necessary, but also it's going to open a lot of opportunities for utilities. We have a lot of negotiations to do for the clients, provide new services that technology will allow us to do. So we see these as great opportunities, in spite of the investment we have to do.
Cemig is in various power sources. Which is the one that the company is putting most of its investments behind?
For our company, for Brazil, mostly we have to invest in hydro power plants, because we have untapped hydro potential in Brazil. So, it makes sense for us. That is the lowest cost of producing electricity in Brazil. But there are some other alternatives like wind farms that has grown significantly over the last 3 years and the costs have come down significantly.
Today I say wind farm costs are very competitive to the small hydro power plants and that is amazing. A few years ago the cost was too high and that is result of the equipment and development by the manufacturer's especially the European ones and they are selling equipment at pretty low cost in Brazil. In that turn, wind farms are very competitive.
What's the one thing you're most excited about in the company?
We have the results we got from the last acquisitions. We are digesting those acquisitions. For sure the next quarter you are going to see good results.
--Written by Debra Borchardt in New York.
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