SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20F
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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OR |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2004 |
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OR |
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¨ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
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Commission file number: 1-15224 |
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COMPANHIA ENERGÉTICA DE MINAS GERAISCEMIG
(Exact Name of Registrant as Specified in Its Charter)
Energy Company of Minas Gerais |
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The Federative Republic of Brazil |
(Translation of Registrants Name into English) |
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(Jurisdiction of Incorporation or Organization) |
Avenida Barbacena, 1200
30190-131 Belo Horizonte, Minas Gerais, Brazil
(Address of Principal Executive Offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class |
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Name of Each Exchange on which Registered |
American Depositary Shares (evidenced by American Depositary Receipts), each representing 1,000 Preferred Shares |
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New York Stock Exchange |
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Preferred Shares, R$0.01 par value* |
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New York Stock Exchange* |
* Not for trading purposes, but only in connection with the registration of American Depositary Shares pursuant to the requirements of the Securities and Exchange Commission.
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report.
70,874,167,923 Common Shares
91,210,522,699 Preferred Shares
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No o
Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 o Item 18 ý
Table of Contents
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Material Modifications to the Rights of Security Holders and Use of Proceeds |
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Purchases of Equity Securities by the Issuer and Affiliated Purchasers. |
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i
PRESENTATION OF FINANCIAL INFORMATION
Companhia Energética de Minas GeraisCEMIG is a sociedade de economia mista (a state-controlled mixed capital company) organized and existing with limited liability under the laws of the Federative Republic of Brazil, or Brazil. References in this annual report to CEMIG, we or the Company are to Companhia Energética de Minas GeraisCEMIG and its consolidated subsidiaries, except when the reference is specifically to Companhia Energética de Minas GeraisCEMIG (parent company only) or the context otherwise requires. References to the real , reais or R$ are to Brazilian reais (plural) and the Brazilian real (singular), the official currency of Brazil, and references to U.S. dollars, dollars or US$ are to United States dollars.
We maintain our books and records in reais . We prepare our financial statements in accordance with accounting practices adopted in Brazil, including the principles that are established primarily through Law No. 6,404 of December 15, 1976, Law No. 9,457 of May 5, 1997 and Law No. 10,303 of October 31, 2001, which we refer to collectively as the Brazilian Corporate Law. For purposes of this annual report, we have presented, and in future reports to be filed with the United States Securities and Exchange Commission, or the Commission, we intend to present, our consolidated financial statements and other financial information in reais in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. For purposes of this annual report we prepared balance sheets as of December 31, 2004 and 2003 and the related statements of operations and comprehensive income, cash flows and changes in shareholders equity for the years ended December 31, 2004, 2003 and 2002, in reais all in accordance with U.S. GAAP. Deloitte Touche Tohmatsu Auditores Independentes has audited our consolidated financial statements at December 31, 2004 and 2003 and for each of the three years ended December 31, 2004, 2003 and 2002.
From and after January 1, 1998, Brazil ceased to be considered a highly inflationary economy under U.S. GAAP and we have not restated financial information to reflect the effects of inflation as from that date. Therefore, for subsequent periods and dates, our financial statements and other financial data are presented in nominal reais and do not reflect effects of inflation. See Note 2(b) to our consolidated financial statements.
This annual report contains translations of certain real amounts into U.S. dollars at specified rates solely for the convenience of the reader. Unless otherwise indicated, such U.S. dollar amounts have been translated from reais at an exchange rate of R$2.6550 to US$1.00, the noon buying rate in New York City for cable transfers in reais as certified for customs purposes by the Federal Reserve Bank of New York, or the noon buying rate, as of December 31, 2004. The real has recently experienced high volatility. See Item 3. Key InformationExchange Rates for additional information regarding exchange rates. We cannot guarantee that U.S. dollars can be converted into reais , or that reais can be converted into U.S. dollars, at the above rate or at any other rate.
1
MARKET POSITION AND OTHER INFORMATION
The information contained in this annual report regarding our market position is, unless otherwise indicated, presented for the twelve-month period ended December 31, 2004 and is based on, or derived from, reports issued by the Agência Nacional de Energia Elétrica (The Brazilian National Electric Energy Agency), or ANEEL.
Certain terms are defined the first time they are used in this annual report. The Index of Defined Terms included in this annual report lists those terms and where they are defined. As used herein, all references to GW and GWh are to gigawatts and gigawatt hours, respectively, references to MW and MWh are to megawatts and megawatt-hours, respectively, and references to kW and kWh are to kilowatts and kilowatt-hours, respectively.
References in this annual report to the common shares and preferred shares are to our common shares and preferred shares, respectively. References to American Depositary Shares or ADSs are to American Depositary Shares, each representing 1,000 preferred shares. The ADSs are evidenced by American Depositary Receipts, or ADRs, issued pursuant to a Second Amended and Restated Deposit Agreement, dated as of August 10, 2001, by and among us, Citibank, N.A., as depositary, and the holders and beneficial owners of ADSs evidenced by ADRs issued thereunder.
FORWARD-LOOKING INFORMATION
This annual report includes forward-looking statements, principally in Item 3. Key Information and Item 11. Quantitative and Qualitative Disclosures about Market Risk. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting our business. These forward-looking statements are subject to risks, uncertainties and assumptions relating to, among other things:
general economic, political and business conditions, principally in Latin America, Brazil and the State of Minas Gerais, Brazil, or Minas Gerais;
inflation and changes in currency exchange rates;
enforcement of legal regulation in Brazils electricity sector;
changes in volumes and patterns of customer electricity usage;
competitive conditions in Brazils electricity generation, transmission and distribution markets;
our expectations and estimates concerning future financial performance, financing plans and the effects of competition;
our level of debt;
the likelihood that we will receive payment in connection with accounts receivable;
trends in the electricity generation, transmission and distribution industry in Brazil and Minas Gerais;
changes in rainfall and the water levels in the reservoirs used to run our hydroelectric power generation facilities;
our capital expenditure plans;
our ability to serve our customers on a satisfactory basis;
2
existing and future governmental regulation as to electricity rates, electricity usage, competition in our concession area and other matters;
existing and future policies of the Federal Government of Brazil, which we refer to as the Federal Government;
existing and future policies of the government of Minas Gerais, which we refer to as the State Government, including policies affecting its investment in us and the plans of the State Government for future expansion of electricity generation, transmission and distribution in Minas Gerais; and
other risk factors as set forth under Item 3. Key InformationRisk Factors.
The forward-looking statements referred to above also include information with respect to our capacity expansion projects that are under way and those that we are currently evaluating. In addition to the above risks and uncertainties, our potential expansion projects involve engineering, construction, regulatory and other significant risks, which may:
delay or prevent successful completion of one or more projects;
increase the costs of projects; and
result in the failure of facilities to operate or generate income in accordance with our expectations.
The words believe, may, will, estimate, continue, anticipate, intend, expect and similar words are intended to identify forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements because of new information, future events or otherwise. In light of these risks and uncertainties, the forward-looking information, events and circumstances discussed in this annual report might not occur. Our actual results and performance could differ substantially from those anticipated in our forward-looking statements.
Neither our independent auditors, nor any other independent accountants, have compiled, examined or performed any procedures with respect to the forward-looking financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and they assume no responsibility for, and disclaim any association with, such forward-looking financial information.
3
Not applicable.
Not applicable.
Selected Consolidated Financial Data
The following tables present our selected consolidated financial and operating information in U.S. GAAP as of the dates and for each of the periods indicated. You should read the following information together with our consolidated financial statements, including the notes thereto, included in this annual report and the information set forth in Item 5. Operating and Financial Review and Prospects.
The selected consolidated financial data as of December 31, 2004 and 2003 and for each of the three years ended December 31, 2004, 2003 and 2002 have been derived from our audited consolidated financial statements and the notes thereto included elsewhere in this annual report. The selected consolidated data as of December 31, 2002, 2001 and 2000 and for the each of the two years ended December 31, 2001 and 2000 has been derived from our audited consolidated financial statements and notes thereto, which are not included in this annual report.
U.S. dollar amounts in the table below are presented for your convenience. Unless otherwise indicated, these U.S. dollar amounts have been translated from reais at R$2.6550 per US$1.00, the noon buying rate as of December 31, 2004. The real has recently experienced high volatility. We cannot guarantee that U.S. dollars can be converted into reais , or that reais can be converted into U.S. dollars, at the above rate or at any other rate. On May 18, 2005, the noon buying rate for reais was R$2.4625 per US$1.00. See Exchange Rates.
4
Selected Consolidated Financial Data
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As of and for the year ended December 31, |
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2004 |
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2004 |
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2003 |
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2002 |
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2001 |
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2000 |
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(in millions
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(In millions of R$ except per share/ADS data or as otherwise indicated) |
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Income Statement Data: |
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Net operating revenues |
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Electricity sales to final customers |
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3,224 |
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8,561 |
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7,179 |
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5,458 |
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4,587 |
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4,478 |
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Regulatory extraordinary rate adjustment(3) |
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34 |
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89 |
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63 |
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281 |
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789 |
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Deferred rate adjustment (3) |
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241 |
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640 |
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199 |
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Electricity sales to the interconnected power system |
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14 |
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36 |
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56 |
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161 |
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517 |
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145 |
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Use of basic transmission network |
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92 |
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245 |
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257 |
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185 |
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154 |
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139 |
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Other operating revenues |
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202 |
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536 |
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468 |
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260 |
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150 |
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124 |
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Tax on revenues |
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(924 |
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(2,453 |
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(2,190 |
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(1,473 |
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(1,191 |
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(1,130 |
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Total net operating revenues |
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2,883 |
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7,654 |
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6,032 |
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4,872 |
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5,006 |
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3,756 |
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Operating costs and expenses |
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Electricity purchased for resale. |
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(556 |
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(1,477 |
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(1,396 |
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(1,333 |
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(1,914 |
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(819 |
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Natural gas purchased for resale |
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(101 |
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(268 |
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(246 |
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(152 |
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(84 |
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(60 |
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Use of basic transmission network |
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(221 |
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(586 |
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(310 |
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(298 |
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(251 |
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(243 |
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Depreciation and amortization |
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(255 |
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(677 |
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(686 |
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(666 |
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(641 |
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(583 |
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Personnel |
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(297 |
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(788 |
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(710 |
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(532 |
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(531 |
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(466 |
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Regulatory charges |
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(324 |
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(861 |
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(585 |
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(548 |
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(420 |
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(433 |
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Third-party services |
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(124 |
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(329 |
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(325 |
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(265 |
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(216 |
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(195 |
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Employee post-retirement benefits |
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(58 |
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(153 |
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(109 |
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(207 |
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(293 |
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(238 |
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Materials and supplies |
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(31 |
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(83 |
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(88 |
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(78 |
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(70 |
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(71 |
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Gain on Gasmig sale |
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38 |
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102 |
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Other |
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(153 |
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(407 |
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(422 |
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(238 |
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(274 |
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(208 |
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Reversal (Provision) for loss on deferred regulatory assets (3) |
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(3 |
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(9 |
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174 |
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(28 |
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(150 |
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Provision for loss on account receivable from State Government |
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(754 |
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Total operating costs and expenses |
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(2,085 |
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(5,536 |
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(4,703 |
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(4,345 |
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(5,598 |
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(3,316 |
) |
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Operating income (loss) |
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798 |
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2,118 |
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1,329 |
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527 |
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(592 |
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440 |
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Financial income (expenses), net |
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132 |
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350 |
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674 |
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(525 |
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(48 |
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(42 |
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Income (loss) before income taxes and minority interests |
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930 |
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2,468 |
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2,003 |
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2 |
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(640 |
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398 |
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Income taxes (expense) benefit |
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(275 |
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(731 |
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(607 |
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(26 |
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(78 |
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(32 |
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Minority interests |
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1 |
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2 |
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12 |
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(1 |
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Net income (loss) |
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656 |
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1,739 |
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1,396 |
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(12 |
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(719 |
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366 |
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Other comprehensive income (loss) |
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(179 |
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(474 |
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(64 |
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242 |
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203 |
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19 |
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Comprehensive income (loss) |
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477 |
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1,265 |
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1,332 |
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230 |
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(516 |
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385 |
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Basic and diluted earnings (loss): |
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Per thousand common shares |
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4.04 |
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10.73 |
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8.61 |
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(0.07 |
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(4.52 |
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2.30 |
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Per thousand preferred shares |
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4.04 |
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10.73 |
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8.61 |
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(0.07 |
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(4.52 |
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2.30 |
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Per ADS |
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4.04 |
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10.73 |
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8.61 |
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(0.07 |
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(4.52 |
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2.30 |
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Balance Sheet Data: |
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Assets |
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Current assets |
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1,268 |
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3,366 |
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2,630 |
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1,845 |
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1,752 |
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1,064 |
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Property, plant and equipment, net (in service) |
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3,498 |
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9,288 |
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9,361 |
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9,322 |
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9,325 |
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9,705 |
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Construction in progress |
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717 |
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1,903 |
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1,556 |
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777 |
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516 |
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592 |
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Deferred regulatory assets long-term |
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1,103 |
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2,929 |
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2,069 |
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1,670 |
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1,245 |
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Account receivable from State Government |
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413 |
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1,097 |
|
891 |
|
755 |
|
451 |
|
953 |
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Other assets |
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252 |
|
669 |
|
612 |
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1,139 |
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773 |
|
484 |
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Total assets |
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7,251 |
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19,252 |
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17,119 |
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15,508 |
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14,062 |
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12,798 |
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Liabilities |
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|
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Current portion of long-term financing |
|
534 |
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1,417 |
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1,660 |
|
946 |
|
451 |
|
502 |
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Other current liabilities |
|
895 |
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2,376 |
|
1,869 |
|
2,097 |
|
1,713 |
|
1,042 |
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Long-term financing |
|
1,036 |
|
2,750 |
|
2,331 |
|
2,593 |
|
2,029 |
|
1,088 |
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Employee post-retirement benefits-long-term |
|
605 |
|
1,606 |
|
1,023 |
|
1,091 |
|
1,475 |
|
1,803 |
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Shareholders equity |
|
3,469 |
|
9,209 |
|
8,524 |
|
7,442 |
|
7,543 |
|
8,162 |
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Capital stock |
|
538 |
|
1,428 |
|
1,428 |
|
1,428 |
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1,396 |
|
1,396 |
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5
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As of and for the year ended December 31, |
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2004 |
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2004 |
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2003 |
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2002 |
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2001 |
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2000 |
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(US$) (1) |
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(In R$ or US$ as indicated, except outstanding shares data) |
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Other Data: |
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Weighted average outstanding shares basic and diluted (thousands) |
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Common |
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70,874,168 |
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70,874,168 |
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70,874,168 |
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69,495,478 |
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69,495,478 |
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Preferred |
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91,210,523 |
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91,210,523 |
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91,210,523 |
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89,436,237 |
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89,436,237 |
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Dividends per thousand shares |
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Common |
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1.35 |
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R$ |
3.58 |
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R$ |
1.54 |
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R$ |
2.04 |
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R$ |
0.65 |
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R$ |
1.18 |
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Preferred |
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1.35 |
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R$ |
3.58 |
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R$ |
1.54 |
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R$ |
2.04 |
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R$ |
0.65 |
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R$ |
1.18 |
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Dividends per ADS |
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Preferred |
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1.35 |
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R$ |
3.58 |
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R$ |
1.54 |
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R$ |
2.04 |
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R$ |
0.65 |
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R$ |
1.18 |
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Dividends per thousand shares(4) |
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Common |
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US$ |
1.35 |
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US$ |
0.53 |
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US$ |
0.58 |
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US$ |
0.28 |
|
US$ |
0.60 |
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Preferred |
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|
|
US$ |
1.35 |
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US$ |
0.53 |
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US$ |
0.58 |
|
US$ |
0.28 |
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US$ |
0.60 |
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Dividends per ADS(4) |
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Preferred |
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|
|
US$ |
1.35 |
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US$ |
0.53 |
|
US$ |
0.58 |
|
US$ |
0.28 |
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US$ |
0.60 |
|
(1) Converted at the exchange rate of US$1.00 to R$2.6550, the noon buying rate as of December 31, 2004. See Exchange Rates.
(2) In millions, except per share/ADS data.
(3) See Note 4 to our consolidated financial statements.
(4) This information is presented in U.S. dollars at the noon buying rate in effect as of the end of each year.
Prior to March 14, 2005 there were two principal foreign exchange markets in Brazil - the commercial rate exchange market and the floating rate exchange market. Most trade and financial foreign-exchange transactions were carried out on the commercial rate exchange market. The floating market rate generally applied to transactions to which the commercial market rate did not apply. Prior to February 1999, the exchange rate in each market was established independently, resulting in different rates during some periods. As of February 1, 1999, the Central Bank of Brazil (Banco Central do Brazil), or the Central Bank, placed the commercial rate exchange market and the floating rate exchange market under identical operational limits, which led to a convergence in the pricing and liquidity of both markets.
On March 6, 2005, the National Monetary Council (Conselho Monétario Nacional) enacted Resolution No. 3,265 that, effective March 14, 2005, consolidated the two foreign exchange markets into one foreign exchange market for the general purpose of making foreign exchange transactions simpler and more efficient. All foreign exchange transactions are now carried out in this single foreign exchange market through financial institutions authorized to operate in the market. Additional regulations governing the new foreign exchange market are pending approval and enactment by the Brazilian government. We cannot predict the actual impact of the enactment of such new regulations on the new foreign exchange market.
Foreign exchange rates continue to be freely negotiated, but may be influenced by Central Bank intervention. From March 1995 through January 1999, the Central Bank allowed the gradual devaluation of the real against the U.S. dollar. In January 1999, the Central Bank allowed the real /U.S. dollar exchange rate to float freely. Since then, the real /U.S. dollar exchange rate has been established mainly by the Brazilian interbank market and has fluctuated considerably.
During 2000, 2001 and 2002 the real declined against the U.S. dollar. Nevertheless, in 2003, the real appreciated significantly against the U.S. dollar due to the adoption of new monetary and fiscal policies by the new Federal Government. In 2004 and the first four months of 2005, the real continued to appreciate against the U.S. dollar, mostly due to the worldwide U.S. dollar depreciation and the tightening of the domestic monetary policy. In the past, the Central Bank has intervened occasionally to control unstable movements in foreign exchange rates. We cannot predict whether the Central Bank or the Brazilian government will continue to let the real float freely or will intervene in the exchange rate market through a currency band system or otherwise, or that the exchange market will not be volatile as a result of political instability or other factors. The real may depreciate or appreciate against the
6
U.S. dollar and other currencies substantially in the future. Any exchange rate fluctuations may also affect our financial condition.
The table below sets forth, for the periods indicated, the low, high, average and period-end noon buying rates for reais , expressed in reais per US$1.00.
|
|
Reais per US$ 1.00 |
|
||||||
Month |
|
Low |
|
High |
|
Average |
|
Period-end |
|
|
|
|
|
|
|
|
|
|
|
November 2004 |
|
2.7277 |
|
2.8630 |
|
2.7877 |
|
2.7310 |
|
December 2004 |
|
2.6510 |
|
2.7800 |
|
2.7150 |
|
2.6550 |
|
January 2005 |
|
2.6115 |
|
2.7227 |
|
2.6895 |
|
2.6115 |
|
February 2005 |
|
2.5640 |
|
2.6310 |
|
2.5971 |
|
2.5846 |
|
March 2005 |
|
2.6103 |
|
2.7755 |
|
2.7061 |
|
2.6660 |
|
April 2005 |
|
2.5135 |
|
2.6572 |
|
2.5760 |
|
2.5330 |
|
May 2005 (through May 18, 2005) |
|
2.4528 |
|
2.5147 |
|
2.4752 |
|
2.4625 |
|
|
|
Reais per US$ 1.00 |
|
||||||
Year Ended December 31, |
|
Low |
|
High |
|
Average |
|
Period-end |
|
|
|
|
|
|
|
|
|
|
|
2000 |
|
1.7230 |
|
1.9840 |
|
1.8301 |
|
1.9510 |
|
2001 |
|
1.9380 |
|
2.7880 |
|
2.3527 |
|
2.3120 |
|
2002 |
|
2.2730 |
|
3.9450 |
|
2.9213 |
|
3.5400 |
|
2003 |
|
2.8230 |
|
3.6640 |
|
3.0757 |
|
2.8950 |
|
2004 |
|
2.6510 |
|
3.2085 |
|
2.9262 |
|
2.6550 |
|
Source: Federal Reserve Bank of New York
Exchange rate fluctuations may affect the U.S. dollar amounts received by the holders of ADSs. We will make any distributions with respect to our preferred shares in reais and the depositary will convert these distributions into U.S. dollars for payment to the holders of ADSs. Exchange rate fluctuations may also affect the U.S. dollar equivalent of the real price of the preferred shares on the Brazilian stock exchange where they are traded. Exchange rate fluctuations may also affect our results of operations. See Risk FactorsRisks Relating to BrazilExchange rate instability may adversely affect our results of operations and financial condition.
As our controlling shareholder, the government of the State of Minas Gerais exercises substantial influence on the management and orientation of the business of CEMIG. Further, the present Governor of the State of Minas Gerais is a member of a party which is in opposition to the present Federal Government. It is not possible to analyze the impact and effects this may have on us or our results of operations.
The government of the State of Minas Gerais currently holds 51% of our common shares and, consequently, has the right to the majority of votes in decisions of the General Meetings of our Shareholders, and can (i) elect the majority of the members of the Board of Directors of CEMIG, and (ii) decide matters requiring approval by a specific majority of our shareholders, including transactions with related parties, shareholding reorganizations and the date and payment of any dividends.
The operations of CEMIG have had and will continue to have an important impact on the commercial and industrial development of the State of Minas Gerais, and on its social conditions. In the past, the State Government
7
has used, and may use in the future, its status as our controlling shareholder to decide that we should engage in certain activities and make certain investments aimed, principally, to promote its political, economic or social objectives and not necessarily to meet the objective of improving our business and/or operational results.
We have a significant receivable from the State Government under the CRC Account Agreement, which totaled R$1,097 million as of December 31, 2004. Historically we have been facing difficulties in collecting such receivable. We are currently offsetting amounts that are due from the State under the CRC Account Agreement against payments of dividends and interest on capital that we are required to pay to the State Government as our shareholder, as allowed under the third amendment to the CRC Account Agreement. On November 19, 2004, our Board of Directors unanimously approved the main terms of a fourth amendment to the CRC Account Agreement, which includes an increase from 25% to 50% to the amount of dividends and interest on capital due to the State that we are entitled to offset against amounts due under the CRC Account Agreement. This amendment is still subject to approval by the State Government, and execution of such amendment depends on the approval of ANEEL, our shareholders and the state congress of the State of Minas Gerais. No assurance can be given that all such approvals will be obtained or, if obtained, that any of the installment payments under this amendment will be paid when due or at all. Furthermore, no assurance can be given that additional loss provisions with respect to receivable will not be recorded in future periods. See Item 10. Additional InformationMaterial ContractsCRC Account Agreement.
The Brazilian Federal Government has been implementing policies that have a far-reaching impact on the Brazilian power industry, in particular, the electricity industry. As part of the restructuring of the industry, Federal Law No. 10,848 of March 15, 2004, (Law No. 10,848/04 or the New Industry Model Law) introduced a new regulatory framework for the Brazilian electricity industry.
Law No. 10,848/04 remains subject to the implementation of resolutions by ANEEL. Moreover, the constitutionality of Law No. 10,848/04 is currently being challenged before the Brazilian Supreme Court. The Brazilian Supreme Court has not yet reached a final decision and, therefore, Law No. 10,848/04 is currently in force. If all or a portion of Law No. 10,848/04 is considered to be unconstitutional by the Brazilian Supreme Court, all or a portion of the regulatory scheme introduced by Law No. 10,848/04 may not come into effect, generating uncertainty as to how and when the Federal Government will be able to introduce changes to the electricity industry. Accordingly, we cannot now evaluate the impact of the new regulation to be issued by ANEEL or the adverse impact of a decision on the constitutionality of Law No. 10,848/04 would have on our future activities, results of operations and financial condition.
Under the New Industry Model Law, an electricity distributor must contract in advance, through public auctions conducted by the Electric Energy Trading Chamber (CCEE Câmara de Comercialização de Energia Elétrica ), in accordance with laws determined by the Ministry of Mines and Energy, or MME, at least 100% of its forecasted electricity needs for the following five years. The New Industry Model Law establishes the conditions for passing through energy purchase volumes and prices. If the energy we purchase in the public auctions is less than 100% of our total captive consumption (which excludes Free Consumers, as defined in this annual report), we may be subject to fines which have not yet been determined by ANEEL and we may not be able to pass on the full costs of our additional energy purchases, which may be at higher prices, to our customers. If the energy we purchase in the public auction is more than 103% of our total captive consumption, we have to assume the price risk of buying in the public auctions and selling in the spot market.
The New Industry Model Law limits our ability to pass through the cost of electricity purchases to our customers if our costs exceed the Annual Reference Value ( Valor Anual de Referência ) established by ANEEL,
8
which is based on the weighted average price paid by all distribution companies in the public auctions for electricity from new generation undertakings to be delivered three and five years from the date of any such auction.
Considering the numerous factors that affect our electricity demand forecasts, including economic and population growth, and our required purchase of energy from Itaipu in an amount determined by the Federal Government, we cannot assure you that our forecasted electricity demand will be accurate and this may have an adverse effect on our business, results of operations and financial condition.
New rules for the sale of electric energy and market conditions may affect our generation sale prices.
The contracts by which we had initially contracted all of our generation capacity with regulated prices (the Initial Contracts) began to phase out at the end of 2002 at the rate of 25% each year and we expect they will be completely phased out in 2005. Even if we are able to contract all generation capacity liberated from such contracts, we are not able to predict the price at which we will be able to contract such energy.
Additionally, we still have capacity from undertakings yet to be operational that we are planning to sell under the auctions for new undertakings to be held under the Regulated Contracting Environment (as defined in this annual report). Legislation allows distributors that contract with our generation company under the Regulated Contracting Environment to reduce the quantity contracted under these contracts until a certain limit, exposing the generation company to the risk of failing to contract this reduced energy with adequate prices.
Contracts with consumers allowed to purchase energy directly from generating companies or energy traders (generally consumers with demand equal to or greater than 3 MW, and referred to as Free Consumers) will also give such consumers the flexibility to purchase less energy from us than was originally contracted for by such consumers, which may adversely impact our business, results of operations and financial condition.
If we are unable to contract our remaining capacity of energy liberated from existing contracts and energy from new undertakings at adequate prices, our revenues and our results of operations may be adversely affected.
ANEEL has substantial discretion to establish the rates we charge. Such rates are determined pursuant to concession contracts entered with ANEEL and in accordance with ANEELs regulatory decision-making authority.
Concession agreements and Brazilian law establish a price cap mechanism that permits three types of rate adjustments: (1) the annual adjustment; (2) the periodic revision; and (3) the extraordinary revision. We are entitled to apply each year for the annual adjustment, which is designed to offset some of the effects of inflation on rates and pass through to customers certain changes in our cost structure that are beyond our control, such as the cost of electricity we purchase from certain sources and certain other regulatory charges, including charges for the use of transmission and distribution facilities. In addition, ANEEL carries out a periodic revision every five years that is aimed at identifying variations in our costs as well as setting a factor based on our operational efficiency that will be applied against the index of our ongoing annual rate adjustments, the intended effect of which is to reward the good management of our costs while sharing any related gains with customers. We are also entitled to request an extraordinary revision of our rates if unpredictable events significantly alter our cost structure. The periodic revision and extraordinary revision are subject to a certain degree of ANEELs discretion.
We cannot assure you that ANEEL will establish rates that will adequately compensate us and that our revenues and results of operations will not be adversely affected. In addition, to the extent any of these adjustments are not granted by ANEEL in a timely manner, our business, results of operations and financial condition may be adversely affected.
Under Brazilian law, we are strictly liable for direct and indirect damages resulting from the inadequate rendering of electricity services. In addition, the damages caused to end consumers as a result of interruptions or
9
disturbances arising from the generation, transmission or distribution systems, whenever these interruptions or disturbances are not attributed to an identifiable member of the Operador Nacional do Sistema (National System Operator, or ONS) or the ONS itself, shall be shared among generation, distribution and transmission companies. Until a final criteria is defined, the liability for such damages shall be shared in the proportion of 60% to distribution agents, 20% to transmission agents and 20% to generation agents.
As a state controlled company, we are subject to rules and limits on the level of credit applicable to the public sector issued by the National Monetary Council and by the Brazilian Central Bank. These rules set certain parameters and conditions for financial institutions to be able to offer credit to public sector entities. Thus, if we do not meet these conditions, we may have difficulty in obtaining financing from Brazilian financial institutions, which could create difficulties in the implementation of our investment plan or in refinancing our financial obligations. Brazilian legislation also establishes that a state-controlled company, in general, may only use proceeds of external or local transactions (debt, including bonds) to refinance financial obligations for which there is no other source of repayment. As a result of these regulations, our capacity to incur debt is again limited, and this could negatively affect the implementation of our investment plan or the refinancing of our obligations.
We are subject to certain restrictions on our ability to incur debt due to covenants set forth in our loan agreements. In the event of our non-compliance with any such covenants in our loan agreements, the total principal, future interest and any penalties due under these agreements may become immediately due and payable. Early maturity of our obligations could adversely affect our financial condition especially in light of cross default provisions in several of our loan and financing contracts. The existence of limitations on our indebtedness could prevent us from borrowing to finance our operations or to refinance our existing obligations which could adversely affect on business, results of operations and financial condition.
We conduct our generation, transmission and distribution activities pursuant to concession agreements entered into with the Brazilian government through ANEEL. ANEEL may impose penalties on us if we fail to comply with any provision of the concession agreements, including compliance with the established quality standards. Depending on the severity of the non-compliance, these penalties could include:
fines per breach of up to 2.0% of the concessionaires revenues in the year ended immediately prior to the date of the relevant breach;
injunctions related to the construction of new facilities and equipment;
restrictions on the operation of existing facilities and equipment;
temporary suspension from participating in bidding processes for new concessions;
intervention by ANEEL in the management of the concessionaire in breach; and
termination of the concession.
In addition, the Brazilian government has the power to terminate any of our concessions prior to the end of the concession term in the case of bankruptcy or dissolution, or by means of expropriation for reasons related to the public interest.
10
We cannot assure you that ANEEL will not impose penalties or terminate our concessions in the event of a breach. Any compensation we may receive upon the termination of the concession contract may not be sufficient to compensate us for the full value of certain investments. If any of our concession agreements are terminated and we are at fault, the effective amount of compensation could be reduced through fines or other penalties. Termination or imposition of penalties could adversely affect our business, results of operations and financial condition.
We carry out our generation, transmission and distribution activities pursuant to concession agreements entered into with the Federal Government. The Brazilian Constitution requires that all concessions relating to public services be awarded through a bidding process. In 1995, in an effort to implement these constitutional provisions, the Federal Government adopted certain laws and regulations, known collectively as the Concessions Law, governing bidding procedures in the electricity industry. In accordance with the Concessions Law, as modified by the New Industry Model Law, upon application by the concessionaire, existing concessions may be renewed by the Federal Government for additional periods of up to 20 years without being subject to the bidding process, provided that the concessionaire has met minimum performance standards and that the proposal is otherwise acceptable to the Federal Government.
In light of the degree of discretion granted to the Federal Government by the Concessions Law and the concession contracts with respect to renewal of existing concessions, and given the lack of long-standing precedents with respect to the Federal Governments exercise of such discretion and interpretation and application of the Concessions Law, we cannot assure you that new concessions will be obtained or that concessions will be renewed on terms as favorable as those currently in effect. See Item 4. Information on the CompanyCompetitionConcessions and The Brazilian Power IndustryConcessions in Annex A. In addition, it is possible that our large industrial clients could be authorized by ANEEL to generate electric energy for self consumption or sale to third parties, in which case they may obtain an authorization or concession for the generation of electric power in a given area, which could adversely affect our results of operations.
Non-renewal of our concessions could adversely affect our business, results operations and financial condition.
The Brazilian electricity industry, highly concentrated in hydroelectric generation, faces a natural limitation to its generation capacity. Hydroelectric power plants cannot generate more electricity than is made possible by the countrys water resources. Natural factors could affect our generating capacity, by increasing or reducing the level of reservoirs. Control of the level of reservoirs by the ONS seeks to optimize the level of water available for hydroelectric generation in each of the power plants associated with the respective reservoirs. In this context, the ONS could, for example, prevent a generating plant located at the beginning of a river from increasing its throughput of water, if this were to negatively affect the other plants further down the same river. In the same way, the ONS may decide to increase thermal generation and reduce hydro generation in order to conserve water in the reservoirs.
Periods of drought could lead to a reduction of the hydro generating capacity, thus obliging us to buy energy in the wholesale market to meet the selling contracts we have made. Shortages and/or rationing due to bad hydrological conditions could result in a reduction of revenue and reduced cash flow. Any limitation on our electricity generation capacity could adversely affect our business, results of operations and financial condition.
We are currently engaged in the construction of additional hydroelectric plants and the evaluation of other potential expansion projects. Our ability to complete an expansion project on time, within a determined budget and without adverse economic effects, is subject to a number of risks. For instance:
11
we may experience problems in the construction phase of an expansion project;
we may face regulatory or legal challenges that delay the initial operation date of an expansion project;
our new or modified facilities may not operate at designated capacity or may cost more to operate than we expect;
we may not be able to obtain adequate working capital to finance our expansion projects; and
we may encounter environmental issues and claims by the local population during power plant construction.
If we experience these or other problems relating to the expansion of our electricity generation, transmission or distribution capacity, our ability to sell electric energy in amounts in line with our projections may be harmed and we may be exposed to increased costs. Consequently, we may fail to produce the revenues we anticipate in connection with such expansion projects.
Our operations related to the generation, transmission and distribution of electricity as well as to the distribution of natural gas, are subject to various federal, state and municipal laws and regulations, and also to numerous requirements relating to the protection of health and the environment.
Non-compliance with environmental laws and regulations could, independently of the obligation to redress any damages that may be caused, result in criminal and administrative sanctions being applied. Based on Brazilian legislation, criminal penalties such as restricting rights, and even imprisonment, may be applied to individuals (including managers of legal entities), and penalties such as fines, restriction of rights or community service may be applied to legal entities. With respect to administrative sanctions, depending on the circumstances, the environmental authorities may impose warnings and fines, require partial or total suspension of activities; suspend or restrict tax benefits or cancel or suspend financing lines from governmental lending establishments as well as prohibit the entity from contracting with governmental agencies, companies and authorities. Any of these events could adversely affect our business, results of operations or financial condition.
As of December 31, 2004, our total past due receivables from final consumers were approximately R$596 million, corresponding to 7.7% of our net revenue for 2004. Approximately 13.4% of the past due receivables were owed by entities in the public sector. We may be unable to recover debts from several municipalities and other defaulting clients which are being renegotiated. If these debts are not totally or partially recovered, we will experience an adverse impact on our business, results of operations and financial condition.
We plan to spend approximately R$6.4 billion during the period from 2005 through 2009 on the construction of new power installations and the refurbishment and maintenance of existing power plants and transmission and distribution systems. Our ability to carry out this capital expenditure program is dependent upon a number of factors, including our ability to charge adequate rates for our services, our access to domestic and international capital markets and a variety of operating and other factors. In addition, our plans to expand our generation and transmission capacity are subject to the competitive bidding process governed by the Concessions Law. We cannot give you any assurance that we will have the financial resources to complete this program.
Our ability to distribute dividends is subject to limitations.
12
Whether or not you receive a dividend depends on the amount of the mandatory distribution required under our bylaws, whether our financial condition permits us to distribute dividends under Brazilian law, and whether our shareholders, on the recommendation of our Board of Directors acting in its discretion, determine that our financial condition warrants a suspension of the distribution of dividends.
Because we are a holding company with no revenue-producing operations other than those of our subsidiaries, we will be able to distribute dividends to shareholders only if we receive dividends or other cash distributions from our subsidiaries.
Empresa de Infovias S.A. , our telecommunications subsidiary, began operations in January 2001 and its subsidiary, WAY TV Belo Horizonte S.A., or WAY TV, began operations in 2002. We consider these businesses to be a strategic use of our existing infrastructure. The telecommunications business will require additional investments to be considered complete and competitive. We perform periodic evaluations of Empresa de Infovias S.A. and WAY TV, in order to determine their ability to run their businesses on a stand-alone and profitable basis, as well as to determine the need for an impairment reserve for this investment. Although currently available projections do not indicate a need for an impairment reserve, we can not assure that such an impairment reserve will not be required or that our investment in the telecommunications sector will not have an adverse impact on our financial condition.
We do not have general third party liability insurance covering accidents and have not asked for bids relating to this type of insurance. However, we may contract for this type of insurance in the future. In addition, we have not asked for bids for, nor do we carry, insurance coverage for major catastrophes affecting our facilities such as earthquakes and floods, for business interruption risk or for operating system failures. Accidents or catastrophic events may adversely affect our business, results of operations or financial condition. See Item 10. Additional InformationInsurance.
On December 31, 2004, our total debt was R$4,167 million, of which R$1,417 million matures in 2005.
We will need funds in the short term to pay and refinance these obligations. For this reason, we intend to refinance our debt profile in 2005 to lengthen maturities. We plan to raise approximately R$1.5 billion in 2005.
We cannot assure you that we will be able to raise these funds prior to the maturities of our current debt obligations, in the amounts necessary or at competitive rates. If the refinancing does not successfully take place, we may not be able to pay our debt. On the other hand, if we simply pay our debt without refinancing, our investment program could suffer significant delays, which could adversely affect our business, results of operations or financial condition.
13
We are exposed to foreign exchange rate risk.
As of December 31, 2004, approximately 26.9% of our total indebtedness was denominated in currencies other than the real (76.6% in U.S. dollars). If the U.S. dollar/ real exchange rate appreciates, our financing expenses will increase and our results of operations and financial condition could be adversely affected. While 37.0% of our debt denominated in foreign currencies is subject to currency swaps that convert our foreign currency obligations into reais in order mitigate this risk, we cannot assure you that these hedging arrangements will be sufficient to avoid an adverse effect on our business, results of operations and financial condition in case of unfavorable exchange rate fluctuations.
We are currently defending several legal proceedings relating to civil, administrative, environmental, tax and other claims. These claims involve a wide range of issues and seek substantial amounts of money. Several individual disputes account for a significant part of the total amount of claims against us. Our consolidated financial statements include reserves relating to litigation and arbitration claims totaling R$303 million as of December 31, 2004 (excluding labor-related matters) for probable and reasonably estimable losses and expenses we may incur in connection with pending litigation. In the event that our reserves for litigation and arbitration claims prove to be insufficient, the payment of litigation claims in an amount in excess of the reserved amounts could have an adverse effect on our business, results of operations or financial condition.
Substantially all of our employees are covered by Brazilian labor legislation applicable to private sector employees. We have entered into a collective bargaining agreement with the labor unions representing most of these employees.
We are currently defending a number of labor-related claims brought by our employees that generally relate to overtime and hazardous occupation compensation. As of December 31, 2004, these employees were seeking, in the aggregate, approximately R$138.5 million in compensation, and at that date we had accrued a liability of approximately R$110.8 million for losses we expect from these claims. For a more detailed discussion of labor-related proceedings, see Item 8. Financial InformationLegal ProceedingsLabor and Pension Fund Obligations.
We have not experienced any material labor unrest during the last four years. Nevertheless, our operations might be interrupted by a labor disturbance in the future. We do not carry insurance for losses incurred as a result of business interruptions caused by labor action. In the event of a strike, we might face an immediate loss of revenue.
Contract disputes, strikes, legal claims or other types of conflicts relating to our employees or the labor unions that represent them may have an adverse effect on our business, results of operations or financial condition and our ability to maintain ordinary service levels or otherwise operate our business in the manner that our customers expect.
All of our directors and officers named in this annual report reside in Brazil. Substantially all of our assets, as well as the assets of these persons, are located in Brazil. As a result, it may not be possible for foreign shareholders to effect service of process within the United States or other jurisdictions outside Brazil upon these persons, attach their assets, or enforce against them or us in United States courts, or the courts of other jurisdictions outside Brazil, judgments predicated upon the civil liability provisions of the securities laws of the United States or the laws of such other jurisdictions. See Item 10. Additional InformationDifficulties of Enforcing Civil Liabilities Against Non-U.S. Persons.
14
In connection with the purchase in 1997 of approximately 33% of our common shares by Southern Electric Brasil Participações Ltda., or Southern, the State Government entered into a shareholders agreement with Southern, granting Southern control over certain significant corporate decisions. In 1999, the State Government filed a lawsuit seeking to nullify the shareholders agreement on constitutional grounds. In August 2001, after several rulings and appeals, the Minas Gerais State Court of Appeals ruled that the shareholders agreement is null and void. In December 2003, this ruling was appealed to the Superior Tribunal de Justiça (Superior Court of Justice), which upheld the Minas Gerais State Court of Appeals ruling. The decision of the Superior Court of Justice is subject to request for amendment and therefore the effective control of CEMIG remains subject to further judicial challenge in the Supreme Court (Supremo Tribunal Federal). As a result, Southern could retroactively challenge the legitimacy of certain decisions taken by our Board of Directors while these legal proceedings are pending. See Item 8. Financial InformationLegal ProceedingsShareholders Agreement and Item 10. Additional InformationMaterial ContractsShareholders Agreement, dated June 18, 1997, between the State Government and Southern.
The Brazilian government intervenes frequently in the countrys economy, in monetary, fiscal and regulatory policy. Our business, results of operations or financial condition may be adversely affected by changes in government policies, and also by:
fluctuations in the exchange rate;
inflation;
instability of prices;
changes in interest rates;
fiscal policy;
other political, diplomatic, social and economic developments which may affect Brazil or the international markets;
control on capital flow; and
limits on foreign trade.
Measures by the Brazilian government to maintain economic stability, and also speculation on any future acts of the government, can generate uncertainties in the Brazilian economy and increased volatility in the domestic capital markets, adversely affecting our business, results of operations or financial condition. If the political and economic situations deteriorate, we may face increased costs.
Inflation and certain governmental measures to curb inflation may contribute significantly to economic uncertainty in Brazil and could harm our business and the market value of the ADSs and our preferred shares.
Brazil has in the past experienced extremely high rates of inflation. Inflation, and some of the Brazilian governments measures taken in an attempt to curb inflation, have had significant negative effects on the Brazilian economy. Since the introduction of the real in 1994, Brazils inflation rate has been substantially lower than in previous periods. However, inflationary pressures persist, and action taken in an effort to curb inflation, coupled with speculation about possible future governmental actions, have contributed to economic uncertainty in Brazil and
15
heightened volatility in the Brazilian securities market. According to the Índice Nacional de Preços ao Consumidor Amplo , or IPCA, a consumer price index, the Brazilian annual inflation rates were 12.5%, 9.3% and 7.6% in 2002, 2003 and 2004, respectively. No assurance can be given that inflation will remain at these levels.
Future measures taken by the Brazilian government, including interest rate increases, intervention in the foreign exchange market and actions to adjust or fix the value of the real may trigger increases in inflation, and consequently, have adverse economic impacts on our business, results of operations and financial condition. If Brazil experiences high inflation in the future, we may not be able to adjust the rates we charge our customers to offset the effects of inflation on our cost structure.
Substantially all of our cash operating expenses are denominated in reais and tend to increase with Brazilian inflation. Inflationary pressures may also hinder our ability to access foreign financial markets or may lead to further government intervention in the economy, including the introduction of government policies that could harm our business, results of operations and financial condition or adversely affect the market value of our preferred shares and as a result, our ADSs.
Exchange rate instability may adversely affect our business, results of operations and financial condition and the market price of the ADSs and our preferred shares.
The Brazilian currency has been devalued periodically during the last four decades. Throughout this period, the Brazilian government has implemented various economic plans and utilized a number of exchange rate policies, including sudden devaluations, periodic mini-devaluations during which the frequency of adjustments has ranged from daily to monthly, floating exchange rate systems, exchange controls and dual exchange rate markets. Although over long periods depreciation of the Brazilian currency generally has correlated with the rate of inflation in Brazil, devaluation over shorter periods has resulted in significant fluctuations in the exchange rate between the Brazilian currency and the U.S. dollar and currencies of other countries.
The real depreciated against the noon buying U.S. dollar by 9.3% in 2000 and by 18.7% in 2001. In 2002, the real depreciated 52.3% against the U.S. dollar, due in part to political uncertainty surrounding the Brazilian presidential elections and the global economic slowdown. Although the real appreciated 18.25% against the U.S. dollar in 2003 and a further 8.1% in 2004, no assurance can be given that the real will not depreciate against the U.S. dollar again. On May 18, 2005, the noon buying U.S. dollar /real exchange rate was R$2.4625 per U.S.$1.00. See Exchange Rates .
There are no guarantees that the exchange rate between the real and the U.S. dollar will stabilize at current levels. Although we have managed our existing U.S. dollar debt obligations in order to protect against fluctuations in the dollar/ real exchange rate, we could in the future experience monetary losses relating to these fluctuations. See Item 11. Quantitative and Qualitative Disclosures about Market RiskExchange Rate Risk for information about our foreign exchange risk hedging policy.
Depreciations of the real relative to the U.S. dollar also create additional inflationary pressures in Brazil that may negatively affect us. Currency depreciations generally curtail access to foreign financial markets and may prompt government intervention, including recessionary governmental policies. Currency depreciations also reduce the U.S. dollar value of distributions and dividends on the ADSs and the U.S. dollar equivalent of the market price of preferred shares and, as a result, the ADSs. On the other hand, appreciation of the real against the U.S. dollar may lead to deterioration of the countrys current account and the balance of payments, as well as to a dampening of export-driven growth.
Changes in economic and market conditions in other countries, especially Latin American and emerging market countries, may adversely affect our business, results of operations and financial condition, as well as the market price of our preferred shares and ADSs.
The market value of securities of Brazilian companies is affected to varying degrees by economic and markets conditions in other countries, including other Latin American and emerging market countries. Although economic conditions in such countries may differ significantly from economic conditions in Brazil, investors
16
reactions to developments in these other countries may have an adverse effect on the market value of securities of Brazilian issuers. Crises in other emerging market countries may diminish investor interest in securities of Brazilian issuers, including us. This could also make it more difficult for us access the capital markets and finance our operations in the future on acceptable terms or at all. Due to the characteristics of the Brazilian electricity industry (which requires significant investments in operating assets) and due to our financing needs, if access to the capital and credit markets is limited, we could face difficulties in completing our investment plan and refinancing our obligations which could adversely affect our business, results of operations and financial condition.
In accordance with the Brazilian Corporate Law and our by-laws, holders of the preferred shares, and, by extension, holders of the ADSs, are not entitled to vote at our shareholders meetings, except in very limited circumstances. Holders of ADSs may also encounter difficulties in the exercise of certain rights, included limited voting rights. Under some circumstances, such as failure to provide the depositary with voting materials on a timely basis, holders of ADSs may not be able to vote by instructing the depositary.
You may be adversely affected by the imposition of restrictions on the remittance to foreign investors of the proceeds of their investments in Brazil and the conversion of reais into foreign currencies. The Federal Government imposed remittance restrictions for approximately three months in late 1989 and early 1990. Restrictions like these would hinder or prevent the conversion of dividends, distributions or the proceeds from any sale of preferred shares, as the case may be, from reais into U.S. dollars and the remittance of U.S. dollars abroad. We cannot assure you that the Federal Government will not take similar measures in the future. See Item 3. Key InformationExchange Rates.
The Brazilian custodian for the preferred shares must obtain an electronic certificate of registration from the Central Bank to remit U.S. dollars abroad for payments of dividends, any other cash distributions, or upon the disposition of the shares and sales proceeds related thereto. If you decide to exchange your ADSs for the underlying preferred shares, you will be entitled to continue to rely, for five business days from the date of the exchange, on the depositary banks electronic certificate of registration. Thereafter, you may not be able to obtain and remit U.S. dollars abroad upon the disposition of the preferred shares, or distributions relating to the preferred shares, unless you obtain your own certificate of registration under Resolution No. 2,689 of January 26, 2000, of the Brazilian Conselho Monetário Nacional , or National Monetary Council, which entitles foreign investors to buy and sell on the Brazilian stock exchanges. If you do not obtain this certificate, you will be subject to less favorable tax treatment on gains with respect to the preferred shares. If you attempt to obtain your own certificate of registration, you may incur expenses or suffer significant delays in the application process. Obtaining a certificate of registration involves generating significant documentation, including completing and filing various electronic forms with the Central Bank and the Comissão de Valores Mobilíarios (the Brazilian securities regulatory body), or the CVM. In order to complete this process, the investor will usually need to have a consultant or attorney who has expertise in Central Bank and CVM regulations. Any delay in obtaining this certificate could adversely impact your ability to receive dividends or distributions relating to the preferred shares abroad or the return of your capital in a timely manner. If you decide to exchange your preferred shares back into ADSs once you have registered your investment in the preferred shares, you may deposit your preferred shares with the custodian and rely on the depositary banks certificate of registration, subject to certain conditions. See Item 10. Additional InformationTaxationBrazilian Tax Considerations.
We cannot assure you that the depositary banks certificate of registration or any certificate of foreign capital registration obtained by you may not be affected by future legislative or other regulatory changes, or that additional Brazilian restrictions applicable to you, the disposition of the underlying preferred shares or the repatriation of the proceeds from disposition could not be imposed in the future.
17
Investing in Latin American securities, such as the preferred shares or the ADSs, involves a higher degree of risk than investing in securities of issuers from countries with more stable political and economic environments and such investments are generally considered speculative in nature. These investments are subject to certain economic and political risks, such as, among others:
changes to the regulatory, tax, economic and political environment that may affect the ability of investors to receive payment, in whole or in part, with respect to their investments; and
restrictions on foreign investment and on repatriation of capital invested.
The Brazilian securities market is substantially smaller, less liquid, more concentrated and more volatile than major securities markets in the United States. This may substantially limit your ability to sell the preferred shares underlying your ADSs at a price and time at which you wish to do so. The Bolsa de Valores de São Paulo BOVESPA , or São Paulo Stock Exchange, the only stock exchange in Brazil upon which shares are traded, had a market capitalization of approximately US$241.8 billion as of December 31, 2004 and an average monthly trading volume of approximately US$9.5 billion for 2004. In comparison, the New York Stock Exchange, Inc., or the NYSE, had a market capitalization of US$19.8 trillion as of December 31, 2004 and an average monthly trading volume of approximately US$968.2 billion for 2004.
There is also significantly greater concentration in the Brazilian securities market than in major securities markets in the United States. The ten largest companies in terms of market capitalization represented approximately 66.9% of the aggregate market capitalization of the São Paulo Stock Exchange as of December 31, 2004. The top ten stocks in terms of trading volume accounted for approximately 49.5% of all shares traded on the São Paulo Stock Exchange in 2004. See Item 9. The Offer and ListingTrading Market.
Under the Brazilian Corporate Law and our by-laws, we must pay our shareholders a mandatory distribution equal to at least 50% of our adjusted net income for the preceding fiscal year, based on our financial statements prepared in accordance with the accounting practices adopted in Brazil, with holders of preferred shares having priority of payment. In addition, our by-laws require us to pay holders of our preferred shares annual dividends equal to the greater of 10% of the par value of our shares or 3% of the book value of our shares. If we do not have net income or our net income is insufficient in a fiscal year, our management may recommend at the annual shareholders meeting in respect of that year that the payment of the mandatory dividend should not be made. However, under the guarantee of the State Government, our controlling shareholder, a minimum annual dividend of 6% of par value would in any event be payable to all holders of common shares and preferred shares issued up to August 5, 2004 (other than public and governmental holders) in the event that mandatory distributions were not made for a fiscal year. See Item 8. Financial InformationDividend Policy and Payments for a more detailed discussion.
Our corporate governance, disclosure requirements and accounting standards applicable to Brazilian companies are governed by our by-laws and by the Brazilian Corporate Law, which may differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States, such as Delaware or New York, or in other jurisdictions outside Brazil. Your rights to protect your interests relative to actions taken by our Board of Directors or by our controlling shareholder may be less well defined and less well supported by established rules and judicial precedents than under the laws of certain jurisdictions outside Brazil.
Although Brazilian law imposes restrictions on insider trading and price manipulation, the Brazilian securities market is not as highly regulated and supervised as the U.S. securities market or markets in certain other
18
jurisdictions. In addition, rules and policies against self-dealing and regarding the preservation of shareholder interests are less developed and enforced in Brazil than in the United States, potentially disadvantaging holders of the preferred shares and ADSs.
Sales of a substantial number of shares or the perception that such sales could take place could adversely affect the prevailing market price of the preferred shares and ADSs. As a consequence of the issuance of new shares or sales by existing shareholders, the market price of the preferred shares and, by extension, the ADSs, may decrease significantly.
You may not be able to exercise the preemptive rights relating to the preferred shares underlying your ADSs unless a registration statement under the United States Securities Act of 1933, as amended, or the Securities Act, is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the shares relating to these preemptive rights, and we cannot assure you that we will file any such registration statement. Unless we file a registration statement or an exemption from registration applies, you may receive only the net proceeds from the sale of your preemptive rights by the depositary or, if the preemptive rights cannot be sold, they will be allowed to lapse.
We were organized in Minas Gerais, Brazil on May 22, 1952 as a sociedade de economia mista (a state-controlled mixed capital company) with limited liability and indefinite duration, pursuant to Minas Gerais State Law No. 828 of December 14, 1951 and its implementing regulation, Minas Gerais State Decree 3,710 of February 20, 1952. Our full legal name is Companhia Energética de Minas GeraisCEMIG, but we are also known as CEMIG. Our headquarters are located at Avenida Barbacena, 1200, Belo Horizonte, Minas Gerais, Brazil. Our main telephone number is (55-31) 32993711.
In order to comply with legal and regulatory provisions pursuant to which we were required to unbundle our vertically integrated businesses, we have incorporated two wholly-owned subsidiaries of CEMIG Cemig Geração e Transmissão S.A., referred to as Cemig Generation and Transmission, and Cemig Distribuição S.A., referred to as Cemig Distribution. Cemig Generation and Transmission and Cemig Distribution were created to carry out the activities of generation and transmission, and distribution, respectively.
On August 4, 2004 the State of Minas Gerais issued Law 15,290 governing the corporate restructuring of CEMIG. Subsequently, ANEEL, by Resolution 407/2004 dated December 23, 2004, approved our proposal for transfer of the concessions, assets and liabilities to the two new companies created, with CEMIG being maintained as a holding company. On December 30, 2004, an extraordinary general shareholders meeting of CEMIG authorized the transfer of assets and liabilities of CEMIG to the two wholly-owned subsidiaries Cemig Generation and Transmission and Cemig Distribution. On the same date, extraordinary general shareholders meetings of Cemig Generation and Transmission and of Cemig Distribution were held and approved capital increases of such subsidiaries. Pursuant to such shareholders meetings, CEMIG subscribed newly issued shares of each such subsidiaries, which shares were paid in with assets of CEMIG. As a consequence of this process, the assets and liabilities of the generation and transmission assets and distribution assets, were transferred to Cemig Generation and Transmission and Cemig Distribution, respectively. Cemig Generation and Transmission and Cemig Distribution began their operations on January 1, 2005.
The following chart shows our corporate structure as of May 18, 2005:
19
Through our subsidiaries, we are the largest integrated concessionaire of electric power generation, transmission and distribution in Brazil. We operate our generation, transmission and distribution businesses pursuant to concession agreements with the Federal Government. Until 1997, we had individual concessions for each of our generation facilities and for various regions within our distribution area. On July 10, 1997, we entered into new concession agreements with ANEEL that consolidated our various generation concessions into one agreement and our several distribution concessions into four distribution concessions covering the northern, southern, eastern and western regions of Minas Gerais. On the same date, we also entered into a new concession agreement with ANEEL with respect to our transmission operations. In connection with the unbundling, our concessions will be transferred to Cemig Generation and Transmission and Cemig Distribution, although we cannot assure you of the timing of that transfer as it will be determined by ANEEL.
At December 31, 2004, we generated electricity at 47 hydroelectric plants, four thermoelectric plants and one wind farm, and had a total installed capacity of 5,949 MW. At the same date, we owned and operated 3,017 miles of transmission lines and 238,309 miles of distribution lines. We hold concessions to distribute electricity in 96.7% of the territory of Minas Gerais.
The Brazilian electricity industry has undergone extensive regulatory restructuring as a result of which our electric generation, transmission and distribution businesses have been and will continue to be subjected to increased competition. For a more detailed description of regulatory changes that affect our business, see The Brazilian Power Industry in Annex A.
Pursuant to Minas Gerais state legislation, our by-laws were amended in 1984 to allow us to participate in an expanded range of activities relating to the energy sector through separate companies. In 1986, we created Companhia de Gás de Minas Gerais GASMIG, or Gasmig, as a subsidiary to undertake the distribution of natural gas through pipelines located in Minas Gerais. I n December 2004 we sold a 40% stake in Gasmig to Petrobras Gás S.A Gaspetro, or Gaspetro, and TSS Participações S.A, or TSS, both of which are wholly-owned subsidiaries of Petrobras S.A, for approximately R$154 million. See Item 10. Additional InformationMaterial ContractsGasmig Shareholders Agreement and Association Agreement.
Additional Minas Gerais state legislative changes enacted in 1997 authorized us to participate in non-energy activities that can be carried out using our operating assets. In January 1999, we incorporated Empresa de Infovias S.A. , a telecommunication service provider, as a joint venture with AES Força Empreendimentos Ltda. , part of the AES Corporation Group. In 2002, we purchased AES Força Empreendimentos Ltda. s interest in Empresa de
20
Infovias S.A. We also provide consulting services and have entered into consulting agreements with electricity companies in several countries.
Traditionally, in the Brazilian electricity sector, generation, transmission and distribution activities are separated, but conducted by a small number of companies that had always been the property of either the Federal Government, or of governments of Brazils individual states. In the last ten years, several companies controlled by the state were privatized, in an effort to increase efficiency and competition. The previous administration stated its objective to privatize the state-controlled part of the electricity sector, but the present administration has stopped this process, and moved in a new direction toward implanting a New Model for the Brazilian electricity sector as set forth in Law No. 10,848, of March 15, 2004.
The main objectives of the new model are to guarantee: (i) security of supply; and (ii) reasonableness of rates. To guarantee supply, the new model creates the requirements (a) that distributors must contract their entire load, and will be responsible for making realistic projections of demand requirements and (b) that building new hydroelectric and thermal plants will be determined in ways that best balance security of supply and reasonableness of rates. The means of achieving reasonableness of rates are to be the following: (a) all purchases of electricity by distributors are to be by auction, on the lowest-rate criterion; (b) contracting is to be through the Pool system, as described below; and (c) contracting of load will be separated into two types of transactions, both of which will always be by auction: (i) contracting of the electricity of the new plants, which will target expansion; and (ii) contracting of the electricity of the existing plants, which will target the existing electricity demand.
The new model also creates two environments for the contracting of electricity supply: (i) the Regulated Contracting Environment (ACR), for contracting of electricity to meet the demands of distributors supplying captive consumers under regulated rates; and (ii) the free contracting environment (ACL), for contracting of energy to supply Free Consumers, through freely negotiated contracts. Distributors will be allowed to operate only in the regulated environment, while generators may operate in both, maintaining their competitive characteristic.
Expansion of the sector will be executed by the concession-granting power. Two new institutional agents have been created: (i) the Energy Research Company (EPE), a state-controlled company responsible for execution of the planning of expansion of generation and transmission; and (ii) the Electricity Trading Chamber (CCEE), a private company, which is the successor of the Wholesale Energy Market, and is responsible for management of the joint contracting of electricity to meet the needs of regulated consumers (the Pool system).
The Brazilian electricity industry is regulated by ANEEL. After the enactment of Law No. 10,848, ANEELs primary responsibility is to regulate and supervise the power industry in line with the policy to be dictated by the MME and to respond to matters which are delegated to it by the Brazilian government and by the MME. ANEELs current responsibilities include, among others, (i) administering concessions for electricity generation, transmission and distribution activities, including the approval of electricity rates, (ii) enacting regulations for the electricity industry, (iii) implementing and regulating the exploitation of hydroelectric resources, (iv) promoting the public bidding process for new concessions, (v) settling administrative disputes among electricity generation entities and electricity purchasers and (vi) defining the criteria and methodology for the determination of transmission rates.
Electric energy rates in Brazil are set by ANEEL, which has the authority to readjust and review rates in accordance with the provisions under the relevant concession contracts. Each distribution companys concession contract provides for an annual rate adjustment ( reajuste anual ). In general, Parcel A costs are fully passed through
21
to consumers. Parcel A costs are the portion of the regular rate calculation formula, which provides for the recovery of certain costs that are not within the control of the distribution company. Parcel B costs, which are costs that are under the control of the distributors, are restated for inflation in accordance with the General Market Price Index (Indice Geral de Preços do Mercado), or IGP-M index.
As part of our annual rate adjustment ANEEL, through Resolution No. 83 dated as of April 7, 2004, provided for an average increase in the rates that we can charge end users from April 2004 until April 2005. In May 2004, ANEEL re-issued Resolution No. 83 and revised the basis for such average increase which resulted in lower rates. On April 6, 2005, through Resolution No. 87 ANEEL established an average rate adjustment of 23.88%. This adjustment includes a component of 1.67% representing an increase to recoup revenue we did not achieve in 2004 due to the lower rates under Resolution No. 83 as re-issued.
Concessionaires of electricity distribution are also entitled to periodic revisions ( revisão periódica ) every few years. These revisions are aimed at (i) assuring necessary revenues to cover efficient Parcel B operational costs and adequate compensation for investments deemed essential for the services within the scope of each such companys concession and (ii) determining the X factor, which is calculated based on expected productivity gains from increases in scale, evaluations by consumers (verified by ANEEL) and labor costs.
On April 8, 2003, we went through our first periodic rate revision and ANEEL established a 31.53% temporary average increase to be applied to our rates. On April 4, 2005, through Resolution No. 71, ANEEL reconsidered such decision and established a 44.41% average increase to be applied to our rates. In order to guarantee low rates to our end consumers, ANEEL only allowed us to reposition our rates up to 31.53% retroactive to April 8, 2003. ANEEL has also indicated that the rate adjustments expected for the years from 2004 to 2007 will be adjusted to recover the difference between the average rate increase of 44.41% we were entitled to and the 31.53% rate adjustment that was authorized. On April 8, 2005 our rate adjustment increase included a portion of the difference related to the difference between the average rate increase we were entitled to in 2004 and the rate adjustment authorized for that year.
In addition, concessionaires of electricity distribution are entitled to extraordinary review of rates ( revisão extraordinária ), on a case by case basis, to ensure their financial equilibrium and compensate them for unpredictable costs, including taxes, that significantly change their cost structure.
ANEEL has also issued regulations that govern the access to the distribution and transmission facilities and establish the rate for use of the local distribution grid, or Distribution Usage Rates (TUSD), and the rate for the use of the interconnected transmission grid, or Transmission Usage Rates (TUST). The rates to be paid by distribution companies, generators and independent customers for use of the interconnected power system are reviewed annually. The review of the TUST takes into account the revenues that are permitted of transmission concessionaires pursuant to their concession contracts. For more detailed information regarding the rate-setting structure in Brazil, see The Brazilian Power IndustryRates for the Use of the Distribution and Transmission Systems in Annex A.
Under the Brazilian Constitution, companies seeking to construct or operate a generation, transmission or distribution facility in Brazil are required to apply for an authorization or a concession from the Federal Government which is generally granted through a public bidding process conducted by ANEEL. Concessions grant exclusive rights to generate electricity in a particular plant, and to transmit or distribute electricity in a particular area for a specified period of time, generally 35 years for new generation concessions, 30 years for new transmission and distribution concessions, and 20 years for the renewal of existing concessions. For more detailed information regarding concessions, see The Brazilian Power IndustryConcessions in Annex A.
The concessions granted to us by the Federal Government do not include a grant of the land upon which the plants are located. Electricity concessionaires in Brazil typically have to negotiate with the individual
22
landowners to obtain needed land. However, in the event that a concessionaire is unable to obtain needed land in this way, such land may be condemned for the concessionaires use through specific legislation. In cases of governmental condemnation, the concessionaires may have to participate in negotiations relating to the amount of compensation with landowners and the resettlement of communities to other locations. Our resettlement policy has generally resulted in the settlement of condemnation disputes.
Unbundling under the New Industry Model
Law No. 10,848/04, which provides for the new industry model, prohibits holders of distribution concessions, permissions or authorizations that operate in the interconnected power system from: (i) performing activities related to generation, transmission and sale of energy to Free Consumers at freely negotiated prices; (ii) holding interest in other companies, directly or indirectly, other than (a) in companies whose corporate purpose is to manage financial resources necessary for rendering of services or (b) as provided in the concession contracts; or (iii) performing activities outside their corporate purpose, except as provided by law and the concession contracts. These restrictions do not apply to distributors: (i) supplying energy to isolated electricity systems; (ii) supplying their own market, provided such market has a demand of less than 500 GWh/year and the totality of energy produced is destined to such market; or (iii) when funding, investing or borrowing funds destined to the distributor itself or a company of the same economic group, subject to prior agreement by ANEEL. Similarly, holders of generation concessions or authorizations that operate in the interconnected system may not be affiliates or controlling shareholders of companies which are responsible for distribution activities.
Holders of concessions, permissions and authorizations for generation and distribution have 18 months in which to adapt to the rules for unbundling referred to above, from the date of publication of Law No. 10,848/04 that is, until September 2005. ANEEL may extend this period once, for 18 months, if the concessionaire is unable to comply with the requirements for reasons beyond its control.
In order to comply with regulatory provisions pursuant to which we were required to unbundle our vertically integrated businesses, we have incorporated two wholly-owned subsidiaries of CEMIG Cemig Generation and Transmission. and Cemig Distribution created to carry out the activities of electricity generation and transmission, and distribution, respectively. For more detailed information regarding these entities and the corporate restructuring of CEMIG, see Organization and Historical Background.
The obligation to implement the unbundling of the generation, transmission and distribution activities in separate operational companies was already provided for in several concession contracts. According to such contracts, the corporate reorganization should have been concluded by December 31, 2000, but we failed to comply with this deadline.
As a result of such non-compliance, ANEEL imposed a fine of R$3.7 million on us at the beginning of 2001, which we contested, achieving not only its cancellation by ANEEL, but also a new deadline for completing the corporate reorganization, namely September 21, 2002. Since we also failed to complete the process by the new deadline, ANEEL imposed another fine on us, of R$5.5 million, on November 11, 2002. On April 3, 2003 we appealed this fine, applying for its suspension. On February 23, 2005, ANEEL issued a ruling reducing the fine to R$2.7 million. We continue to contest this fine. No reserve has been recorded for this potential claim since we believe we have a meritorious defense against this and any other possible penalties that may be imposed regarding this matter. We believe ANEEL is likely to analyze these proceedings taking into consideration the new regulations of the electricity industry, so that in practice, it is unlikely that there is going to be an outcome before September 2005.
Capital expenditures for the years ended December 31, 2004, 2003 and 2002, in millions of reais , are as follows:
23
We currently project total capital expenditures of approximately R$2,068 million in 2005. The principal uses of these expenditures are expected to be for expansion of our distribution infrastructure and increases in our generation capacity.
During 2004, we generated at our own plants approximately 64.5% of the aggregate amount of energy sold by us to end users or lost due to technical and non-technical reasons, and we purchased the balance from third parties. We are required, like other Brazilian electric utilities, to purchase electricity from Itaipu in an amount determined by the Federal Government based on our electricity sales. See Generation and Purchase of Electric PowerPurchase of Electric PowerItaipu. In addition, we purchase energy from other concessionaires and the interconnected power system. See Generation and Purchase of Electric PowerPurchase of Electric PowerInterconnected Power System. We also purchase energy generated by self power producers, or SPPs, and independent power producers, or IPPs, that are located within our concession area.
The following table sets forth certain information, in GWh, pertaining to the electricity that we generated, purchased from other sources and delivered during the periods specified:
24
ELECTRIC ENERGY BALANCE (CEMIG MARKET)
|
|
Year ended December 31, |
|
||||
(GWh) |
|
2004 |
|
2003 |
|
2002 |
|
RESOURCES (1) |
|
45,117 |
|
51,927 |
|
49,372 |
|
Electricity generated by CEMIG (2) |
|
26,922 |
|
27,025 |
|
21,608 |
|
Electricity generated by auto-producers |
|
1,581 |
|
1,650 |
|
1,234 |
|
Electricity generated by Ipatinga |
|
237 |
|
351 |
|
348 |
|
Electricity generated by Barreiro |
|
72 |
|
|
|
|
|
Electricity generated by Sá Carvalho (3) |
|
468 |
|
305 |
|
425 |
|
Electricity generated by Horizontes (3) (4) |
|
105 |
|
59 |
|
|
|
Electricity bought from Itaipu |
|
11,936 |
|
12,220 |
|
12,735 |
|
Electricity bought from the national grid and other companies (5) |
|
|
|
10,317 |
|
13,022 |
|
Electricity bought from CCEE and other companies (6) |
|
3,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
REQUIREMENTS |
|
45,117 |
|
51,927 |
|
49,372 |
|
Electricity delivered to final consumers (7) |
|
36,669 |
|
35,248 |
|
34,862 |
|
Electricity delivered to auto-producers |
|
1,472 |
|
1,323 |
|
1,323 |
|
Electricity delivered by Ipatinga |
|
237 |
|
351 |
|
348 |
|
Electricity delivered by Barreiro |
|
72 |
|
|
|
|
|
Electricity delivered by Sá Carvalho (3) |
|
474 |
|
305 |
|
425 |
|
Electricity delivered by Horizontes (3) |
|
80 |
|
59 |
|
|
|
Electricity delivered to the national grid and other companies (5) |
|
|
|
9,720 |
|
7,863 |
|
Electricity delivered to the CCEE and other companies (6) (8) |
|
1,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses |
|
4,315 |
|
4,921 |
|
4,551 |
|
(1) In 2004 there was a change in the method of calculating and recording transactions in the wholesale market and with other companies, as stated in Notes 5 and 6. This change is responsible for the variation in the figures for sources and demand from 2003 to 2004.
(2) Discounting the losses attributed to generation (637 GWh) and the internal consumption of the generating plants (22GWh).
(3) Up to 2003, these portions referred to the total amounts of energy available and demand. Beginning in 2004, the short-term transactions on the CCEE and with other companies are included in the items Electricity bought from the CCEE and other companies and Electricity delivered to the CCEE and other companies.
(4) Includes the generation by the Pai Joaquim small hydro plant.
(5) In previous years, this portion represented contracts and the physical interchanges between CEMIGs network and the national grid, and also optimization supply.
(6) Beginning in 2004, this amount refers to contracts, purchases and sales of electricity under the CCEE, including the Energy Reallocation Mechanism ( Mecanismo de Realocação de Energia ).
(7) Includes electricity delivered to consumers outside the concession area.
(8) Includes 270 GWh of Initial Contracts and bilateral contracts with other agents of the CCEE.
Generation
According to ANEEL, at December 31, 2004, we were the seventh largest electric power generation concessionaire in Brazil as measured by total installed capacity. At December 31, 2004, we generated electricity at 47 hydroelectric plants, four thermoelectric plants and one wind farm and had a total installed generation capacity of 5,949 MW, of which hydroelectric plants accounted for 5,764 MW, thermoelectric plants accounted for 184 MW and our wind farm accounted for 1 MW. Seven of our hydroelectric plants accounted for approximately 84% of our installed electric generation capacity in 2004. We supplied approximately 93% of the electricity consumed in Minas Gerais during 2004. During the year ended December 31, 2004, we generated approximately 64.5% of the aggregate amount of electricity we delivered to end users or lost due to technical and non-technical reasons. See Energy Losses.
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We are engaged in the electric power transmission business, which consists of transporting electric power from the facilities where it is generated to the distribution networks for delivery to end users. We transport energy produced at our own generation facilities as well as energy that we purchase from Itaipu, the interconnected power system and other concessionaires. Our transmission network is comprised of power transmission lines with a voltage capacity equal to or greater than 230 kV and is part of the national transmission grid regulated by the ONS. See The Brazilian Power Industry in Annex A. As of December 31, 2004, our transmission network in Minas Gerais consisted of 1,344 miles of 500 kV lines, 1,206 miles of 345 kV lines and 467 miles of 230 kV lines, as well as 32 substations with a total of 94 transformers and an aggregate transformation capacity of 15,393 MVA.
We have a distribution concession in Minas Gerais that grants us rights to supply electric energy to consumers within our concession area except for consumers that may be eligible, in accordance with the legislation, to become Free Consumers (currently consumers with demand equal to or greater than 3 MW). Our concession area covers approximately 219,103 square miles, or 96.7% of the territory of the state. As of December 31, 2004, we owned and operated 238,309 miles of distribution lines, through which we supplied electricity to nearly 5.9 million customers. At December 31, 2004, we were the largest electricity distribution concessionaire in Brazil in terms of GWh sold to end users. Of the electricity we supplied to final customers as of December 31, 2004, 61.5% was to industrial customers, 17.4% was to residential customers, 9.4% was to commercial customers and 11.7% was to rural and other customers. These figures include the energy sold by Barreiro and Pai Joaquim of 73 GWh and 29 GWh, respectively, which were not consolidated in our financial statements.
While our main business consists of the generation, transmission and distribution of electric power, we also engage in the business of distributing natural gas in Minas Gerais through our majority-owned subsidiary Gasmig. We also engage in the telecommunications business through our consolidated subsidiary Empresa de Infovias S.A., a company created for the purpose of providing a fiber-optic and coaxial cable network installed along our transmission and distribution lines through which telecommunication services can be provided. We are also engaged in the national and international consulting business through our subsidiary Efficientia S.A.
The following table shows the revenues attributable to each of our principal revenue sources, for the periods indicated:
|
|
Year ended December 31, |
|
||||
|
|
2004 |
|
2003 |
|
2002 |
|
Electricity sales to final customers |
|
8,561 |
|
7,179 |
|
5,458 |
|
Regulatory extraordinary rate adjustment |
|
89 |
|
63 |
|
281 |
|
Deferred rate adjustment |
|
640 |
|
199 |
|
|
|
Electricity sales to the interconnected power system |
|
36 |
|
56 |
|
161 |
|
Use of basic transmission network |
|
245 |
|
257 |
|
185 |
|
Natural gas sales |
|
420 |
|
367 |
|
200 |
|
Services rendered |
|
29 |
|
31 |
|
23 |
|
Telecommunication and other |
|
87 |
|
70 |
|
37 |
|
Total |
|
10,107 |
|
8,222 |
|
6,345 |
|
26
The following table sets forth certain operating information concerning our electric power generation plants as of December 31, 2004:
Facility |
|
Installed
|
|
Assured
|
|
Year
|
|
Installed
|
|
Date Concession
|
|
Major Hydroelectric Plants |
|
|
|
|
|
|
|
|
|
|
|
São Simão |
|
1,710 |
|
1,281.00 |
|
1978 |
|
28.7 |
|
January 2015 |
|
Emborcação |
|
1,192 |
|
497.00 |
|
1982 |
|
20.0 |
|
July 2005 |
(7) |
Nova Ponte |
|
510 |
|
276.00 |
|
1994 |
|
8.6 |
|
July 2005 |
(7) |
Jaguara |
|
424 |
|
336.00 |
|
1971 |
|
7.1 |
|
August 2013 |
|
Miranda |
|
408 |
|
202.00 |
|
1998 |
|
6.9 |
|
December 2016 |
|
Três Marias |
|
396 |
|
239.00 |
|
1962 |
|
6.7 |
|
July 2015 |
|
Volta Grande |
|
380 |
|
229.00 |
|
1974 |
|
6.4 |
|
February 2017 |
|
Salto Grande |
|
102 |
|
75.00 |
|
1956 |
|
1.7 |
|
July 2015 |
|
Sá Carvalho |
|
78 |
|
58.00 |
|
2000 |
(2) |
1.3 |
|
December 2024 |
|
Rosal |
|
55 |
|
30.00 |
|
2004 |
(2) |
0.9 |
|
May 2032 |
|
Itutinga |
|
52 |
|
28.00 |
|
1955 |
|
0.9 |
|
July 2015 |
|
Camargos |
|
46 |
|
21.00 |
|
1960 |
|
0.8 |
|
July 2015 |
|
Porto Estrela |
|
37 |
(3) |
18.60 |
(3) |
2001 |
|
0.6 |
|
July 2032 |
|
Igarapava |
|
30.5 |
(4) |
19.72 |
(4) |
1999 |
|
0.5 |
|
December 2028 |
|
Funil |
|
88 |
(5) |
43.61 |
(5) |
2002 |
|
1.5 |
|
December 2035 |
|
Queimado |
|
86.6 |
(6) |
47.85 |
(6) |
2004 |
|
1.5 |
|
January 2033 |
|
Pai Joaquim |
|
23 |
|
13.91 |
|
2004 |
|
0.4 |
|
April 2032 |
|
Piau |
|
18 |
|
8.00 |
|
1955 |
(2) |
0.3 |
|
July 2015 |
|
Gafanhoto |
|
14 |
|
6.68 |
|
1946 |
|
0.2 |
|
July 2015 |
|
Smaller Hydroelectric Plants |
|
114 |
|
61.88 |
|
|
|
1.9 |
|
|
|
Thermoelectric Plants |
|
|
|
|
|
|
|
|
|
|
|
Igarapé |
|
131 |
|
93.00 |
|
1978 |
|
2.2 |
|
August 2024 |
|
Ipatinga |
|
40 |
|
|
|
2000 |
(2) |
0.7 |
|
December 2014 |
|
Barreiro |
|
12.90 |
|
11.45 |
|
2004 |
|
0.2 |
|
April 2023 |
|
Formoso |
|
0.4 |
|
0.22 |
|
1992 |
|
0.0 |
|
Indefinite |
|
Wind Farm |
|
1 |
|
0.30 |
|
1994 |
|
0.0 |
|
Indefinite |
|
Total |
|
5,949.4 |
|
3,597.22 |
|
|
|
100.0 |
% |
|
|
(1) Assured Energy is the plants long-term average output, as established by ANEEL in accordance with studies conducted by the ONS. Calculation of Assured Energy considers such factors as reservoir capacity and connection to other power plants. Contracts with final customers and other concessionaires do not provide for amounts in excess of a plants Assured Energy.
(2) Indicates our acquisition date.
(3) Represents our interest in the Porto Estrela plant (33.3%).
(4) Represents our interest in the Igarapava plant (14.5%).
(5) Represents our interest in the Funil plant (49.0%).
(6) Represents our interest in the Queimado plant (82.50%).
(7) A renewal request for 20 more years was made to ANEEL in September 2004. See Concessions Competition.
The following tables set forth certain additional operating information pertaining to our electricity generation operations as of the dates indicated:
27
|
|
Circuit Length of Generation
Lines in Miles
|
|
||||
|
|
As of December 31, |
|
||||
Voltage of Connection Lines |
|
2004 |
|
2003 |
|
2002 |
|
500 kV |
|
4 |
|
6 |
|
6 |
|
345 to 230 kV |
|
7 |
|
10 |
|
10 |
|
161 to 138 kV |
|
42 |
|
6 |
|
6 |
|
69 to 13.8 kV |
|
102 |
(1) |
53 |
|
53 |
|
Total |
|
155 |
|
75 |
|
75 |
|
|
|
Step-Down Transformation
Capacity
(2)
|
|
||||
|
|
As of December 31, |
|
||||
|
|
2004 |
|
2003 |
|
2002 |
|
Number of step-down substations |
|
52 |
|
48 |
|
48 |
|
MVA |
|
6,433 |
|
6,240 |
|
6,240 |
|
(1) We increased the circuit length of our 69 kV connection lines in 2004, because we bought the Rosal Facility and the Queimado Facility began operations.
(2) Step-down transformation capacity refers to the ability of a transformer to receive energy at a certain voltage and release it at a reduced voltage for further distribution.
We have formed in Minas Gerais and other states of Brazil, the following wholly-owned subsidiaries to operate certain of our generation facilities and to hold the related concessions:
Usina Térmica Ipatinga S.A. We operate the Ipatinga thermoelectric plant through our subsidiary Usina Térmica Ipatinga S.A. This plant is an SPP installed and operated within the premises of Usinas Siderúrgicas de Minas Gerais S.A.USIMINAS, or Usiminas, a large Brazilian steel manufacturer. The plant supplies power to a large steel mill owned by Usiminas located in eastern Minas Gerais. We acquired the Ipatinga plant in 2000 for R$90 million from Usiminas as payment for outstanding power supply debts. We have signed a power purchase agreement with Usiminas for power produced at Ipatinga. The plant currently has an installed capacity of 40 MW, generated by two units that began operating in 1984 and that use blast furnace gas as fuel.
Sá Carvalho S.A. We operate the Sá Carvalho hydroelectric power plant, located on the Piracicaba River in the municipality of Antônio Dias in the State of Minas Gerais, through our subsidiary Sá Carvalho S.A., which we acquired in 2000 for R$87 million from Acesita S.A., or Acesita, a steel company. This acquisition was funded by an issuance of debentures by a special trust, UHESC S.A., which we are obligated to repay. On June 5, 2003, we renegotiated the interest rate applicable to 46.67% of the aggregate principal amount of these debentures for the following two year period and the remaining 53.33% was redeemed for R$64 million.
Rosal Energia S.A. In November 2004 we bought the Rosal hydroelectric plant, which has installed capacity of 55 MW, from Caiuá Serviços de Eletricidade S.A., or Caiuá, for a payment of R$134 million. The Rosal plant, the sole asset of Rosal Energia S.A . , is located on the Itabapoana River, which runs along the border between the states of Espírito Santo (Municipality of Guaçuí) and Rio de Janeiro (Municipality of Bom Jesus de Itabapoana). It operates in integrated connection with the Alegre and Mimoso do Sul electricity systems, which are owned by the electricity utility of the State of Espírito Santo, Escelsa (Espírito Santo Centrais Elétricas S.A.). The plants first and second rotors started operating in December 1999 and January 2000, respectively. It has a concession contract for 35 years, maturing in 2032. ANEEL approved the transfer of control on December 20, 2004.
Cemig Capim Branco Energia S.A. We incorporated Cemig Capim Branco Energia S.A. to develop the Capim Branco Power Facility in partnership with Companhia Vale do Rio DoceCVRD, or CVRD, a mining company, Comercial e Agrícola Paineiras, an agricultural company, and Companhia Mineira de Metais, a metallurgic company. The project consists of the Capim Branco I and Capim Branco II hydroelectric power plants, with installed capacity of 240 MW and 210 MW, respectively. See Capim Branco Power Facility, under
28
Expansion of Generation Capacity below. As of December 31, 2004, we had invested R$24.2 million in this project. We have entered into a purchase contract with Cemig Capim Branco Energia S.A. under which we will purchase the energy produced by Capim Branco I and Capim Branco II for 20 years from the date of the start of each plants commercial operations. This contract was submitted to ANEEL in 2002 ANEEL and was approved in December 2004. See Item 8. Financial InformationLegal ProceedingsLegal Proceedings Related to Environmental Matters.
Horizontes Energia S.A. We formed Horizontes Energia S.A., or Horizontes Energia, to generate and trade electricity as an IPP through the commercial operation of the following of our smaller hydroelectric plants: the Machado Mineiro Power Plant (located on the Pardo River in the municipality of Ninheira in the State of Minas Gerais with an installed capacity of 1.72 MW); the Salto do Paraopeba Power Plant (located on the Paraopeba River in the town of Jeceaba in the State of Minas Gerais with an installed capacity of 2.37 MW); the Salto Voltão Power Plant (located on the Chapecozinho River in the town of Xanxerê in the State of Santa Catarina with an installed capacity of 6.76 MW); and the Salto do Passo Velho Power Plant (located on the Chapecozinho River in the town of Xanxerê in the State of Santa Catarina with an installed capacity of 1.66 MW), as well as other generating projects to be acquired or built with our participation. The concession relating to the Machado Mineiro Power Plant expires on July 7, 2025 and the concessions relating to the other plants expire on October 4, 2030. Horizontes Energia S.A. currently has an agreement with clients to provide electricity from 2004 to 2005. We entered into an agreement with Horizontes Energia S.A. under which it is obligated to purchase the energy generated by the power plants held by Horizontes Energia S.A. from January 2007 through December 2016, but the approval of this contract is pending. We have requested that MME approve the volume of Assured Energy of Salto Voltão, which we expect to be 7.36 MW on average. This approval is also still pending.
Usina Termelétrica Barreiro S.A. We formed Usina Termelétrica Barreiro S.A. to participate, in partnership with Vallourec & MannesmannV&M do Brasil S.A., or Vallourec & Mannesmann, a metallurgic company, in the construction and operation of the 12.9 MW Barreiro thermoelectric power plant, located on Vallourec & Mannesmanns premises in the Barreiro section of the city of Belo Horizonte in Minas Gerais. See Barreiro Thermoelectric Power Plant, under Expansion of Generation Capacity, below. As of December 31, 2004 we had invested R$24.4 million in this project. ANEEL requested that we transfer our interest in Usina Termelétrica Barreiro S.A. to a company which we do not control. To fulfill this request, a new company called Central Termelétrica de Cogeracão S.A. was formed in 2003 in partnership with Companhia de Saneamento de Minas GeraisCOPASA, or COPASA, the Minas Gerais state-controlled water and sewage company, as described below. ANEEL has authorized Central Termelétrica de Cogeração S.A to trade energy. Usina Termelétrica Barreiro S.A. still holds the assets of Barreiro thermoelectric power plant.
CEMIG PCH S.A. We formed CEMIG PCH S.A. to generate and trade electric energy as an IPP. ANEEL requested that we transfer our interest in CEMIG PCH S.A. to a company which we do not control. To fulfill this request, a new company called Central Hidrelétrica Pai Joaquim S.A. was formed in 2003 in partnership with COPASA, as described below. ANEEL has already authorized Central Hidrelétrica Pai Joaquim S.A to be an IPP. CEMIG PCH S.A. still holds the assets of Pai Joaquim Small Hydroelectric Power Plant which amount to R$49 million as of December 31, 2004.
We also have a minority interest in the following companies:
Central Hidrelétrica Pai Joaquim S.A. We formed Central Hidrelétrica Pai Joaquim S.A. in partnership with COPASA to satisfy ANEELs request to transfer the concession of Pai Joaquim to a company which we do not control. Central Hidrelétrica Pai Joaquim S.A.s main activity is the production and sale of electric energy through a small hydroelectric power plant, as an IPP of 23 MW. These assets are still held by Cemig PCH S.A. We have a 49% interest in Central Hidrelétrica Pai Joaquim S.A. We and COPASA are now negotiating an increase of our interest in this company, which has to be approved by ANEEL. We intend to sell this energy to some Free Consumers which are expected to pay higher prices than distribution companies.
Central Termelétrica de Cogeração S.A. We formed Central Termelétrica de Cogeração S.A. in partnership with COPASA to satisfy ANEELs request to transfer our interest in Usina Termelétrica Barreiro S.A. to a company which we do not control. Central Termelétrica de Cogeração S.A.s main activity is the production and sale of electric energy through a thermoelectric power plant, as an IPP of 12.9 MW. These assets are still held by
29
Usina Termelétrica Barreiro S.A. Commercial generation began in February 2004. We have a 49% interest in Central Termelétrica de Cogeração S.A. We and COPASA are now negotiating an increase of our interest in this company, which has to be approved by ANEEL.
Our capital investment plan submitted to ANEEL currently contemplates increasing the installed generation capacity of our hydroelectric facilities by 617 MW during the next three years through the construction of new power plants and the expansion of existing plants. New generation projects have concession periods of 35 years, beginning on the date of the concession agreement. The construction of the Capim Branco I and Capim Branco II hydroelectric power plants, the Pai Joaquim hydroelectric plant and the Barreiro thermoelectric power plant, discussed under Generation Assets above, constitute a part of our capital investment plan. The following is a brief description of our other projects, the completion of which are subject to various contingencies, certain of which are beyond our control:
Queimado Hydroelectric Power Plant. Our partner in this project is Companhia Energética de Brasília, or CEB, a state-controlled electricity company. CEB has a 17.5% interest and we have the remaining 82.5%. The plant, with an installed capacity of 105 MW, is located on the Preto River, encompassing areas in the states of Minas Gerais and Goiás and in Brazils Federal District. Construction on this project began on August 10, 2000. The power plant began its commercial generation on April 9, 2004 with the operation of its first unit. The commercial operation of the second and third units began on June 16, 2004 and July 8, 2004, respectively. As of December 31, 2004, we had invested R$207.3 million in the project. The concession relating to this plant expires on December 18, 2032.
Funil Hydroelectric Power Plant. The Funil power plant, with an installed capacity of 180 MW, was built in the upper course of Grande River, in southern Minas Gerais. Construction began on September 1, 2000 and commercial generation of the first unit began in January 2003. Commercial generation of the second and third units began in June and July 2003 respectively. We have a 49% interest in this project and our partner, CVRD, has a 51% stake. As of December 31, 2004, we had invested R$155.5 million in this project. The concession relating to this plant expires on December 20, 2035.
Aimorés Hydroelectric Power Plant. The Aimorés power plant, that is under construction on the Doce River, will have an installed capacity of 330 MW. We have a 49% interest in this enterprise and our partner, CVRD, has a 51% interest. Construction began in May 2001 and commercial generation is scheduled to begin in June 2005. As of December 31, 2004, we had invested R$495.8 million in this project. The concession relating to this plant expires on December 20, 2035. We and CVRD are defending a lawsuit related to licensing for this plant. See Item 8. Financial InformationLegal ProceedingsLegal Proceedings Related to Environmental Matters.
Irapé Hydroelectric Power Plant. The Irapé power plant, which will have an installed capacity of 360 MW, is located on the Jequitinhonha River, in northern Minas Gerais. Construction began in April 2002 and commercial generation is expected to begin in August 2005. As of December 31, 2004, we had invested R$802.0 million in this project, including R$67.5 million debentures bought by the State of Minas Gerais, using the dividends that were due to the State Government pursuant to an agreement between us and the State Government. The concession relating to this plant expires on February 28, 2035.
Pai Joaquim Small Hydroelectric Power Plant. This project, with an installed capacity of 23 MW, consists of the construction of a new hydroelectric power plant and the reassembly of the existing Pai Joaquim powerhouse. It is located on the Araguari River in the western part of Minas Gerais. Construction started in April 2002 and the commercial generation began on March 31, 2004. As of December 31, 2004 we had invested R$49.1 million in this project. The concession relating to this plant expires on April 4, 2032.
Capim Branco Power Facility. This project consists of the Capim Branco I and Capim Branco II hydroelectric power plants, with installed capacity of 240 MW and 210 MW, respectively. These power plants will be built on the Araguari River in the western part of Minas Gerais. Construction of Capim Branco I began in September 2003 and Capim Branco II in March 2004. Commercial generation at Capim Branco I is expected to begin in January 2006. Commercial generation at Capim Branco II is expected to begin in December 2006. As of
30
December 31, 2004 we had invested R$24.2 million in this project. The concessions relating to these plants expire on August 29, 2036.
Barreiro Thermoelectric Power Plant. This project consists of the construction and operation of the 12.9 MW Barreiro thermoelectric power plant, which utilizes blast furnace gas and charcoal tar as fuel. The construction of the plant, located on Vallourec & Mannesmanns premises in the Barreiro section of the city of Belo Horizonte in Minas Gerais, began in April 2002. We were the manager of the engineering, procurement and construction contract for this project, and we are also responsible for the operation and maintenance of the plant. Vallourec & Mannesmann provides the facilities, supplies the fuel and signed a power purchase agreement to assure a guaranteed return on investment to us. Commercial generation began on February 21, 2004. As of December 31, 2004 we had invested R$9.3 million in this project.
We intend to enter into joint ventures with industrial customers to develop co-generation facilities. These facilities would be built on customers premises and would generate electricity using fuel supplied by the customers industrial processes. Each co-generation project would be funded in part through an agreement with the particular customer to purchase the electricity generated in that customers facility. We would assume the responsibility for operating and maintaining the co-generation facility.
Morro do Camelinho, our wind farm, began operating in 1994. It is located in Gouveia, a municipality in northern Minas Gerais. This project is the first wind farm in Brazil to be connected to the national electricity transmission grid and it is connected to CEMIGs distribution system. It has a total generation capacity of 1 MW, powered by four turbines with a capacity of 250 kW each. Morro do Camelinho was built through a technical and scientific cooperation arrangement with the government of Germany. The cost of the project was US$1.5 million, with 51% of the cost provided by us and the remaining 49% provided by the government of Germany.
Our transmission business consists of the bulk transfer of electricity from the power plants where it is generated to the distribution system, which carries the electricity to final customers. Our transmission system is comprised of transmission lines and step-down substations with voltages ranging from 230 kV to 500 kV.
In 1998, ANEEL created the ONS, a non-profit private entity comprised of Free Consumers and energy utilities engaged in the generation, transmission and distribution of electricity, in addition to other private participants such as importers and exporters. The ONSs primary role is to coordinate and control the generation and transmission operations in the interconnected power system, subject to ANEELs regulation and supervision. Until the enactment of Law No. 10,848, the ONS was a self-regulated entity and its management was not subject to interference from the Federal Government. Law No. 10,848 granted the Brazilian government the power to nominate the main directors of the ONS. One of the main objectives of the ONS is to guarantee that all parties in the industry have access to the transmission network in a non-discriminatory manner. Under ANEEL regulations, owners of different parts of the basic transmission network, Brazils nationwide electric power transmission network, must transfer operating control of their transmission facilities to the ONS. We complied with this requirement by entering into a transmission service agreement on December 10, 1999. Pursuant to this agreement, the ONS could represent us in contracts with generation companies, distribution companies and Free Consumers for use of the basic transmission network. Pursuant to the contracts between the ONS, acting on our behalf, and users of the basic transmission network, the users pay us a portion of the revenues we are permitted to receive (as determined by ANEEL) pursuant to our concession contract. During the year ended December 31, 2004, we recorded income totaling R$245 million as a result of this arrangement. In turn, because we are also a distribution company and because we purchase electricity from Itaipu and others, our use of the basic transmission network requires us to pay scheduled rates to the ONS and owners of different parts of the basic transmission network. During the year ended
31
December 31, 2004, we recorded expenses totaling R$586 million relating to payments made to the ONS and owners of different portions of the basic transmission network. See Item 5. Operating and Financial Review and Prospects and The Brazilian Power Industry in Annex A.
We transmit both the energy that we generate and the energy that we purchase from Itaipu, the interconnected power system and other sources. At December 31, 2004, we also had 9 industrial customers whom we supplied directly with high voltage (equal to or greater than 230 kV per industrial customer) energy through their connections to our transmission lines. These industrial customers accounted for approximately 11.5% of the total volume of electricity we sold in the year ended December 31, 2004. We also transmit energy to distribution systems through the South/Southeast division of the interconnected power system.
The following tables set forth certain operating information pertaining to our transmission capacity for the dates indicated:
|
|
Circuit Length of Transmission
Lines in Miles
|
|
||||
|
|
As of December 31, |
|
||||
Voltage of Transmission Lines |
|
2004 |
|
2003 |
|
2002 |
|
500 kV |
|
1,344 |
|
1,344 |
|
1,351 |
|
345 kV |
|
1,206 |
|
1,193 |
|
1,195 |
|
230 kV |
|
467 |
|
463 |
|
466 |
(1) |
Total |
|
3,017 |
|
3,000 |
|
3,012 |
|
(1) We reduced the circuit length of our 230 kV transmission lines in 2002 because Escelsa Espírito Santo Centrais Elétricas S.A. connected its own 230 kV transmission line from its Mascarenhas Power Plant to our Valadares distribution substation.
|
|
Step-Down Transformation
Capacity
(1)
|
|
||||
|
|
As of December 31, |
|
||||
|
|
2004 |
|
2003 |
|
2002 |
|
Number of step-down substations |
|
32 |
|
31 |
|
30 |
|
MVA |
|
15,393 |
|
15,169 |
(2) |
14,563 |
|
(1) Step-down transformation capacity refers to the ability of a transformer to receive energy at a certain voltage and release it at a reduced voltage for further distribution.
(2) Increment due to Itajubá 3 and Vespasiano 2.
In accordance with the new regulatory framework in the Brazilian electricity sector, concessions for the expansion of the electricity transmission infrastructure in Brazil are awarded according to a public bidding system or are authorized by ANEEL.
Bom Despacho 3. ANEEL awarded us the concession to build and operate the Bom Despacho 3 Substation in February 2002. This substation, located in the town of Bom Despacho, 93.2 miles from Belo Horizonte, started its operation on May 3, 2004. The goal of this project is to increase the reliability of the basic transmission network in the Southeast Region of Brazil. This substation improves the operation of our system and supplies 100 MVA of reactive energy to the system, which improves the quality of the electricity in our system and in the basic transmission network. As of December 31, 2004, we had invested R$83.4 million in this project.
Montes Claros - Irapé. In September 2003, a consortium formed by us, Companhia Técnica de Engenharia Elétrica ALUSA, or ALUSA, Furnas Centrais Elétricas S.A., or Furnas, and Orteng Equipamentos e Sistemas Ltda., or Orteng, won the concession auctioned by ANEEL to the Montes Claros Irapé transmission line. As required in the bidding process, the partners formed the Companhia Transleste de Transmissão, which will be responsible for building and operating the transmission line. This 345 kV transmission line will connect a substation
32
located in Montes Claros, a city in northern Minas Gerais, and the substation of the Irapé Hydroelectric Power Plant, with a length of approximately 93.2 miles. The project began in May 2004 and construction began in January 2005 and is expected to be completed in October 2005. The concession expires on February 18, 2034. As of December 31, 2004, we had invested R$8.3 million in this project.
Furnas - Pimenta. In September 2004, a consortium formed by us and Furnas, with interests of 49%, and 51%, respectively, won the concession auctioned by ANEEL to the Furnas Pimenta transmission line. As required in the bidding process, the partners formed the Companhia de Transmissão Centroeste de Minas, which will be responsible for building and operating this transmission line. This 345 kV transmission line, with a length of approximately 46.6 miles, will connect the substation of the Furnas Hydroelectric Power Plant and a substation located in Pimenta, a city in the Center West Region of Minas Gerais. We began the project in March 2005 and expect it to be complete in approximately 18 months. As of December 31, 2004, we had invested R$0.3 million in this project.
Itutinga Juiz de Fora. In September 2004, a consortium formed by us, Alusa, Furnas, and Orteng, with interests of 24%, 41%, 25% and 10%, respectively, won the concession auctioned by ANEEL to the Itutinga Juiz de Fora transmission line. As required in the bidding process, the partners formed the Companhia Transudeste de Transmissão, which will be responsible for building and operating this transmission line. This 345 kV transmission line, with a length of approximately 87.0 miles, will connect the substation of the Itutinga Hydroelectric Power Plant and a substation located in Juiz de Fora, a city in the southeastern Minas Gerais. We began the project in March 2005 and expect it to be complete in approximately 20 months. As of December 31, 2004, we had invested R$0.7 million in this project.
Irapé - Araçuaí. In November 2004, a consortium formed by us, Alusa, Furnas, and Orteng, with interests of 24.5%, 41%, 24.5% and 10%, respectively, won the concession auctioned by ANEEL to the Irapé - Araçuaí transmission line. As required in the bidding process, the partners formed the Companhia Transirapé de Transmissão, which will be responsible for building and operating this transmission line. This 230 kV transmission line, with a length of approximately 40.4 miles, will connect the substation of the Irapé Hydroelectric Power Plant and a substation to be built in Araçuaí, a city located in the northeastern Minas Gerais. We began the project in March 2005 and expect it to be complete in approximately 18 months. As of December 31, 2004, we had not started to invest in this project.
We believe that our transmission system will need to be reinforced and expanded through the construction of new substations and transmission lines within the next five years. See Item 5. Operating and Financial Review and ProspectsLiquidity and Capital Resources.
Our distribution operations consist of the transfer of electricity from distribution substations to final customers. Our distribution network is comprised of a widespread network of overhead and underground lines and substations with voltages of less than 230 kV. We supply electricity to smaller industrial customers at the higher end of the voltage range and residential and commercial customers at the lower end of the range.
From January 1, 2000 through December 31, 2004, we invested approximately R$1,755 million in the construction and acquisition of property, plant and equipment used to expand our distribution system.
The following tables provide certain operating information pertaining to our distribution system, as of the dates presented:
33
|
|
Circuit Length of Distribution
Lines in Miles
|
|
||||
|
|
As of December 31, |
|
||||
Voltage of Distribution Lines |
|
2004 |
|
2003 |
|
2002 |
|
161 kV |
|
34.2 |
|
34.2 |
|
34.2 |
|
138 kV |
|
6,526.9 |
|
6,524.4 |
|
6,521.3 |
|
69 kV |
|
2,823.5 |
(1) |
2,887.5 |
|
2,886.3 |
|
34.5 kV + Others |
|
610.8 |
|
610.8 |
|
594.7 |
(2) |
Total |
|
9,995.4 |
(1) |
10,056.9 |
|
10,036.5 |
|
|
|
Circuit Length of Distribution
Lines in Miles
|
|
||||
|
|
As of December 31, |
|
||||
Type of Distribution Lines |
|
2004 |
|
2003 |
|
2002 |
|
Overhead urban distribution lines |
|
51,461.2 |
|
51,051.7 |
|
34,426.3 |
|
Underground urban distribution lines |
|
439.9 |
|
439.3 |
|
195.1 |
|
Overhead rural distribution lines |
|
176,412.8 |
|
171,769.3 |
|
170,777.6 |
|
Total |
|
228,313.9 |
|
223,260.3 |
(3) |
205,399.0 |
|
|
|
Step-Down Transformation
Capacity
(4)
|
|
||||
|
|
As of December 31, |
|
||||
|
|
2004 |
|
2003 |
|
2002 |
|
Number of substations |
|
350 |
|
348 |
|
346 |
|
MVA |
|
8,050 |
|
7,987 |
|
7,953 |
|
(1) The decrease in the circuit length of these lines from 2003 was due to the decommissioning of certain lines.
(2) The decrease in the circuit length of these lines from 2001 was due to the decommissioning of certain lines in eastern Minas Gerais as a result of the conversion of 34.5 kV lines to 69 kV lines.
(3) In April 2003 PROOBRA was replaced by SIGEM in the management of the distribution companys logistics management program.
(4) Step-down transformation capacity refers to the ability of a transformer to receive energy at a certain voltage and release it at a reduced voltage for further distribution.
Physical data for the Control and Management Investment Program, or PROOBRA, were calculated by projection from the existing network. In 2003, we began to calculate this as the sum of the linear extension of the medium-voltage network and the low-voltage network available in the GEMINI system, double counting (in relation to the previous criterion) where joint medium and low voltage networks are in existence.
The GEMINI system is the manager of CEMIGs distribution network. With the inclusion and startup of the Operation, Projects, Client Registry and Planning modules, all the distributors assets are now being managed by the GEMINI system and are now the source of information for ANEEL in assembling the data on assets for the rate reviews.
As a result, the statistics on extent of networks, number of transformers, public illumination and quantity of transmission posts are now supplied by the GEMINI system on a geo-referenced basis. We believe this has resulted in more precise data, reduction of errors in valuing fixed assets, and increased reliability.
Our distribution expansion plan for the next five years is based on projections of market growth. We anticipate that this growth will be fueled by new customer connections, increased electricity usage among our
34
existing customers and additional electricity distribution needs from new IPP projects. According to applicable law, IPPs have the right to use our distribution network upon payment of certain fees. During the next five years, we anticipate connecting approximately 882,000 new urban customers and 182,000 rural customers. In order to accommodate this growth, we expect that we will need to add 885,000 medium-voltage poles, 202.6 miles of transmission lines and 12 step-down substations to our distribution network, increasing the networks installed capacity to 510 MVA. Over the next five years, we expect to invest approximately R$3.45 billion to expand our distribution system. See Item 5. Operating and Financial Review and ProspectsLiquidity and Capital Resources.
We have adopted a rural electricity development program, with the participation of the Federal Government and the State Government, called Luz Para Todos . Our plan is to use the Luz Para Todos program to meet our target for supply of electricity to 100% of rural consumers in Minas Gerais by 2006 this is a total of approximately 176,000 clients. To meet this objective, we will need funding in the amount of approximately R$1,641 million. The Luz Para Todos program includes the Luz Solar sub-program, which uses solar energy to light schools, community centers and rural homes in remote locations not yet reached by the distribution network. We expect that this sub-program will connect 7,000 new consumers by 2006. Additionally, the Luz no Saber sub-program connected 479 state and municipal schools in 2004, and aims to connect 646 state and municipal schools in 2005, thereby completing the connection of electricity services to all the schools in the State of Minas Gerais .
During the year ended December 31, 2004, we purchased 11,936 GWh of electricity from Itaipu, which represented approximately 32.6% of the electricity we sold to end users. In addition, during the same period, we purchased 3,796 GWh of electricity from the interconnected power system and other concessionaires, which represented approximately 10.4% of the electricity we sold to end users.
Itaipu. Itaipu is one of the largest operating hydroelectric plants in the world, with an installed capacity of 12,600 MW. Centrais Elétricas Brasileiras S.A. , or Eletrobrás, a holding company controlled by the Federal Government, owns a 50% interest in Itaipu, while the remaining 50% is owned by the government of Paraguay. Brazil, pursuant to its 1973 treaty with Paraguay, has the option to purchase all of the electricity generated by Itaipu that is not consumed by Paraguay. In practice, Brazil generally purchases more than 95% of the electricity generated by Itaipu.
We are one of the 19 electric power distribution companies operating in the South, Southeast and Center West Regions of Brazil that are jointly required to purchase all of Brazils portion of the electricity generated by Itaipu. The Federal Government allocates Brazils portion of Itaipus power among these electric companies in amounts proportionate to their respective historical market share of total electricity sales. We are currently required to purchase approximately 17% of the total amount of electricity purchased by Brazil from Itaipu at rates fixed to defray Itaipus operating expenses and payments of principal and interest on Itaipus dollar-denominated borrowings and the cost in reais of transmitting such power to the interconnected power system. These rates have been above the national average for bulk supply of power and are calculated in U.S. dollars. Therefore, fluctuations in the U.S. dollar/ real exchange rate affect the cost, in real terms, of electricity we are required to purchase from Itaipu. Historically, we have been able to recover the cost of such electricity by charging supply rates to consumers. According to our concession agreement, increases in the supply rate may be transferred to the final customer upon approval by ANEEL.
Interconnected Power System. We also purchase electricity from the interconnected power system, a national interconnected power grid designed to optimize electricity generation in Brazil. Electric power generation companies in Brazil, including us, are required to transfer excess energy into the interconnected power system, where it then becomes available for purchase by other power companies.
35
Energy Losses
The rules under the New Industry Model for the electricity sector have led to a change in our method of calculating losses resulting from the energy that passes through our system. Under the New Industry Model for the electricity sector, as an incentive for competition, there is now free access to the transmission and distribution networks, enabling certain customers to buy their electricity freely from other suppliers. Customers who opt for this free-negotiation mode of supply now have two contracts: one with the owner of the distribution or transmission network for the use of the networks, and the other with the selling agent or generator for the electricity. Also, under the new regulations, (i) our transmission assets with voltage of greater than or equal to 230 kV became part of the national basic grid which is operated by the ONS, referred to as the Basic Grid; and (ii) energy losses occurring in this Basic Grid are divided equally so that 50% is allocated among generation agents in proportion to each of their levels of energy generation and the other 50% is allocated among consumption agents (distributors and Free Consumers) in proportion to each of their energy loads. As a result, the losses in the Basic Grid attributed to a given agent now have no direct relationship with its Basic Grid assets, nor can the agents have control over them. Therefore, these losses take on the status of an electricity transmission service charge for the agents of the sector, and become part of the cost structure covered by the distributors retail rate, substantially reducing the risk of financial losses.
In 2004, our level of total energy losses was 4,315 GWh. Part of this loss (915 GWh) is related to operations in the Basic Grid, and the remainder (3,400 GWh) reflects losses in our distribution systems and represents 8.6% of the total energy that passed trough our distribution systems (39,375 GWh).
We divide our energy losses into two basic categories: technical losses and non-technical losses. Technical losses account for approximately 92% of our energy losses. These losses are the inevitable result of the step-down transformation process and the transportation of electric energy through the 3,017 miles of transmission lines and 238,309 miles of distribution lines that we operate.
We attempt to minimize technical losses by performing rigorous and regular evaluations of the quality of our electricity supply. We routinely upgrade and expand our transmission and distribution systems in order to maintain quality and reliability standards, and consequently, reduce technical losses. In addition, we operate our transmission and distribution systems at certain specified voltage levels in order to minimize losses.
Non-technical losses account for the remaining 8% of our energy losses and result from fraud, illegal connections (which increased during the Electricity Rationing Plan), metering errors and meter defects. These losses accounted for 0.8% of the electricity that we sold during 2004. In order to minimize non-technical losses, we regularly take preventative actions, including:
inspection of customers meters and connections;
modernization of metering systems;
training of meter-reading personnel;
standardization of meter installation procedures;
installation of meters with quality control warranties;
customer database updating; and
development of a theft-protected distribution network.
Additionally, we have developed an integrated system designed to help detect and measure controllable losses in all parts of our distribution system.
36
Our distribution business customers, all of whom are located within our concession area in Minas Gerais, are divided into five principal categories: industrial (including mining, manufacturing and processing activities); residential; commercial (including service-oriented businesses, universities and hospitals); rural; and other (including governmental and public entities). During the year ended December 31, 2004, we sold 37,533 GWh of energy. This does not include sales to the interconnected power system and other concessionaires, but does include energy sold by Barreiro and Pai Joaquim of 73 GWh and 29 GWh, respectively, which were not consolidated in our financial statements.
For 2004, as compared to 2003, the volume of electric power sold by us to industrial, commercial and rural customers increased by 6.2%, 4.0%, 3.5%, respectively. The other consumer category grew 0.8% (this excludes wholesale supply). The residential consumption remained roughly unchanged from 2003 to 2004. In 2004, Sá Carvalho, Ipatinga, Barreiro, Pai Joaquim and Horizontes Energia S.A. were included considered in the industrial category. The following table provides information regarding the number of our customers as of December 31, 2004 and consumption by customer category for the years ended December 31, 2004, 2003 and 2002:
Customer Category |
|
Number of
|
|
Consumption (GWh) |
|
||||
Years ended
|
|||||||||
|
|
2004 |
|
2004 |
|
2003 |
|
2002 |
|
Industrial |
|
68,265 |
|
23,071 |
(3) |
21,715 |
(2) |
21,906 |
(1) |
Residential |
|
4,830,935 |
|
6,526 |
|
6,529 |
|
6,360 |
|
Commercial |
|
530,158 |
|
3,537 |
|
3,402 |
|
3,283 |
|
Rural |
|
388,445 |
|
1,846 |
|
1,783 |
|
1,705 |
|
Own consumption |
|
1,324 |
(5) |
55 |
|
55 |
|
50 |
|
Other (4) |
|
55,780 |
|
2,498 |
|
2,478 |
|
2,330 |
|
Total |
|
5,874,907 |
|
37,533 |
|
35,962 |
|
35,634 |
|
(1) Includes consumption by Sá Carvalho S.A . and Usina Térmica Ipatinga S.A ., which consume all of the energy that they produce.
(2) ANEEL includes consumption by Sá Carvalho S.A ., Usina Térmica Ipatinga S.A . and Horizontes Energia S.A .
(3) In 2004, in addition to the projects noted in footnote 2, the consumption by Central Hidrelétrica Pai Joaquim and Usina Termelétrica Barreiro S.A. were also included.
(4) Does not include consumption through supply to other concessionaires.
(5) Refers to the number of our plants, facilities and offices that use our energy, each of which is considered a customer pursuant to ANEEL regulations.
In 2004, we added and billed 130,708 new final customers, representing growth of 2.3% compared to 2003, through the expansion of our transmission and distribution systems.
The largest portion of the energy we sell is purchased by large industrial customers. At December 31, 2004, nine of our industrial customers had high voltage electrical energy supplied through direct connections to our transmission lines. These customers constituted 11.5% of our total volume of electrical power sales during 2004, and approximately 6.6% of our revenues. In the same period, our ten largest industrial customers accounted for nearly 17.9% of energy consumed. None of our ten largest customers is owned by the State Government or by the Federal Government.
As of December 31, 2004, we had entered into standard power purchase agreements with 3,840 of our industrial customers, of which 580 customers had demand above 500 kW. Our standard power purchase agreement with industrial customers has a duration of three, five or ten years and contains a minimum demand clause that requires the customer to pay for the contracted demand, which represents the system capacity reserved for that
37
customer, as well as the customers actual consumption. We believe that this billing method provides us with a relatively stable source of revenue.
The following table shows our industrial energy sales volumes by type of industrial customer as of December 31, 2004 :
Industrial Customers |
|
Energy Sales Volume
|
|
Consumption as a
|
|
Steel industry |
|
5,238 |
(1) |
22.70 |
|
Ferroalloy industry |
|
4,575 |
|
19.83 |
|
Non-ferrous metal industry |
|
1,749 |
|
7.58 |
|
Mining industry |
|
2,355 |
|
10.21 |
|
Cement industry |
|
780 |
|
3.38 |
|
Automotive industry |
|
618 |
|
2.68 |
|
Others |
|
7,756 |
(2) |
33.62 |
|
Total |
|
23,071 |
|
100.00 |
|
(1) Includes consumption by Sá Carvalho, Barreiro and Ipatinga.
(2) Includes Pai Joaquim and Horizontes Energia S.A.
The following table sets forth the names and related industries of our ten largest customers in 2004:
Ten Largest Customers
|
|
Industry |
|
Usinas Siderúrgicas de Minas Gerais S.A. USIMINAS |
|
Steel |
|
White Martins Gases Industriais S.A. |
|
Chemical |
|
Rima Eletrometalurgia S.A |
|
Ferroalloys |
|
Companhia Siderúrgica Belgo Mineira |
|
Steel |
|
Companhia Mineira de Metais. |
|
Non-ferrous |
|
Ligas de Alumínio S.A. |
|
Ferroalloys |
|
Companhia Brasileira de Carbureto de Cálcio - CBCC. |
|
Ferroalloys |
|
Companhia Ferro Ligas Minas Gerais |
|
Ferroalloys |
|
Ligas de Alumínio S.A. Italmagnésio Nordeste S.A. |
|
Ferroalloys |
|
Saint Gobain Materiais Cerâmicos Ltda. |
|
Chemical |
|
We have entered into contracts with other large Free Consumers both within and outside of Minas Gerais involving electricity volume of 8,760 GWh as a result of a strategy to capture a larger market share. As a result of the unbundling, these contracts were assigned to Cemig Generation and Transmission in 2005.
Some of our customers may elect to become Free Consumers and purchase electricity directly from other generators or traders of electricity instead of purchasing from us. Most of our large clients have already bought electricity from Cemig Generation and Transmission for the next several years, representing almost 47.3% of our annual sales revenue. Consumers that opt to become Free Consumers are primarily industrial customers whose demand generally exceeds 3 MW. Consumers that consume between 500 kW and 3 MW may opt to purchase energy from other sources, if such source is a renewable energy source, such as small hydroelectric facilities or biomass. A total of 762 of our clients which currently purchase electricity at regulated rates (captive consumers) representing annual sales revenue of R$683 million (or 7.2% of our annual sales revenue), may elect to become Free Consumers or opt to purchase energy from alternative sources.
Our monthly billing and payment procedures for electricity supply vary by customer category. Our large customers with direct connections to our transmission network are billed on the same day their meters are read.
38
Payment is required within five days after delivery of the bill. Other customers receiving high and medium voltage electricity (approximately 8,000 consumers supplied at a voltage level equal to or greater than 2.3 kV or connected by underground distribution lines, with the exception of public sector entities) are billed within one (70%) or two (30%) days of their meter reading and payment is required within five days after delivery of the bill. Our remaining customers are billed within seven days of their meter reading and payment is required within 10 days after delivery of the bill or 15 days after delivery of the bill in the case of public sector entities. Bills are prepared from meter readings or on the basis of estimated consumption.
Our sales are affected by market seasonality. Usually, an increase in consumption by industrial and commercial customers occurs in the third quarter due to increases in industrial and commercial activity. In addition, there is generally an increase in usage across all customer categories during the summer due to the increase in temperatures. Certain figures representing quarterly consumption by final customers from 2002 through 2004, in GWh, are set forth below:
Year |
|
First Quarter |
|
Second Quarter |
|
Third Quarter |
|
Fourth Quarter |
|
|
|
|
|
|
|
|
|
|
|
2002(1) (4) |
|
8,306 |
|
9,087 |
|
9,127 |
|
9,114 |
|
2003(2) (4) |
|
8,831 |
|
8,932 |
|
8,964 |
|
9,235 |
|
2004(3) (4) |
|
9,067 |
|
9,353 |
|
9,496 |
|
9,617 |
|
(1) Includes consumption by Sá Carvalho S.A and Usina Térmica Ipatinga S.A.
(2) Includes consumption by Sá Carvalho S.A., Usina Térmica Ipatinga S.A . and Horizontes Energia S.A .
(3) Includes consumption by Sá Carvalho S.A., Usina Térmica Ipatinga S.A., Usina Térmica Barreiro S.A., Usina Hidrelétrica Pai Joaquim S.A. and Horizontes Energia S.A .
(4) Does not include supply to other concessionaires.
Consumption by residential customers remains sluggish and has not returned to pre-rationing levels. However, the total sales in the fourth quarter of 2003 returned to levels similar to those prerationing. In 2004, consumption by residential customers remained at almost the same level as 2003.
Impacts of the New Model for the Electricity Sector
The implementation of the new model for the electricity sector has allowed consumers with a demand of three MW or more to become Free Consumers. This might adversely affect the results of operations of our distribution company, considering that 48.9% of the volume of its annual sales was to potentially Free Consumers, which were the target of our competitors. Considering the current situation of excess capacity in Brazil and the obligation of distributors to buy through regulated auctions, our generation and transmission subsidiary undertook a strategy of maintaining and even seeking to enlarge its market share, and also of minimizing its need for sales in the regulated auctions for existing capacity.
The management of our portfolio through a major commercial effort in relation to our client base, resulted in our successfully obtaining signatures to 129 contracts with Free Consumers by December 31, 2004. Eleven of these contracts are with companies located outside of our distribution companys concession area. These contracts have an average duration of three to ten years, and represent a volume of 18,000 GWh/year.
Of the previous base of our captive consumers, only four did not sign contracts with us and instead opted to become Free Consumers. These four formerly captive consumers represented an annual volume of 367 GWh. Another seven consumers, representing approximately 963 GWh, elected to opt out of the Regulated Contracting
39
Environment (ACR) and choose their own generation subsidiary as a supplier.
In addition to our sales effort in the Free Contracting Environment (ACL), we were successful in obtaining contracts in the Regulated Contracting Environment (ACR) that represent a volume of 8,120 GWh/year. The term of these contracts begins in 2006 and they have a duration of eight years. In addition, in April 2005 we obtained new contracts in the ACR that represented a volume of 920 GWh/year with terms beginning on January 1, 2008 and which have a duration of eight years. We still have an opportunity to obtain contracts on the remaining 25% of the Initial Contracts, in the approximate amount of 7,600 GWh, which we expect will terminate in 2005.
Through implementation of this strategy, we were successful in selling most of the existing generation capacity, largely through contracts for which renewals will begin only after five years. By that point, a balance is expected between the supply and demand of electricity in Brazil, which should result in better price conditions.
Each concession that we currently hold is subject to a competitive bidding process upon its expiration. However, in accordance with the Concessions Law, existing concessions may be renewed without a bidding process by the Federal Government for additional periods of up to 20 years upon application by the concessionaire, provided the concessionaire has met minimum performance standards and the proposal is otherwise acceptable to the Federal Government. On September 22, 2004, we applied to ANEEL for a 20-year renewal of the concessions of the Emborcação and Nova Ponte Hydroelectric Plants.
In addition, it is possible that a number of our large industrial clients may become SPPs pursuant to the Concessions Law in order to obtain the right to generate electricity for their own use. The granting of certain concessions to our large industrial clients could adversely affect our results of operations.
Our principal raw materials expense is the purchase of fuel oil, which is consumed by our three thermoelectric plants in the electricity generation process. Fuel oil consumption for the year ended December 31, 2004 represented an expense of R$19.1 million of which R$18.3 million was reimbursed to us by the Conta de Consumo de Combustível (Fuel Usage Quota Account), or CCC Account. The CCC Account was created by the Federal Government to offset the higher marginal operating costs of thermoelectric plants, and we and other electricity concessionaires must make contributions to this account. See Item 5. Operating and Financial Review and Prospects and The Brazilian Power IndustryRegulatory Charges in Annex A. We believe that supplies of fuel oil are readily available. Although the price of fuel oil may fluctuate, we have generally been able to offset all or a portion of our increased fuel oil costs through adjustments to our rates.
Our subsidiary Gasmig was established in Minas Gerais, Brazil in 1986 for the purpose of developing and implementing the distribution of natural gas in Minas Gerais. We own approximately 55% of Gasmig. The remaining shares are owned by TSS Participações S.A., Gaspetro Petrobras Gas S.A., Minas Gerais Participações Ltda., or MGI, the investing body of the State Government, and by the city of Belo Horizonte.
In January 1993, the State Government granted to Gasmig an exclusive 30-year distribution concession covering all of Minas Gerais and all types of consumers. Gasmigs marketing efforts focus on its ability to provide a more economically efficient and environmentally friendly alternative to oil, liquefied petroleum gas (LPG) and wood. In 2004, Gasmig supplied approximately 1.1 million cubic meters of gas per day to 140 customers. At December 31, 2004, Gasmig also supplied natural gas to 63 automotive natural gas stations and to two power plants. During 2004, Gasmig distributed approximately 5% of all natural gas distributed in Brazil.
40
Minas Gerais accounts for approximately 17% of the total energy consumption in Brazil. Many energy-intensive industries such as the cement, steel, ferroalloys and metallurgy industries have significant operations in the state. We estimate that total demand for natural gas in Minas Gerais will amount to nearly 13 million cubic meters of gas per day by 2009, which exceeds the projected available supply. In addition, the recent completion of a natural gas pipeline between Brazil and Bolivia provides a significant source of natural gas, enabling Gasmig to better meet demand. Gasmigs key strategy is to expand its distribution network in order to serve the unsatisfied portion of the demand. Gasmig is engaged in the development of new projects to extend its distribution systems to reach customers in other areas of Minas Gerais, principally in heavily industrialized areas.
For 2004, Gasmig had gross revenues of R$435 million and net income after taxes of R$39 million.
In 2004, Gasmig invested approximately R$30 million in the expansion of its gas pipeline network to serve more clients in the State of Minas Gerais. The funds to finance the expansion came primarily from its own cash flow and dividend reinvestment. Currently, the natural gas pipeline which brings natural gas from the Campos oil basin (State of Rio de Janeiro, Brazil) operates at full capacity and further investment by the Federal Government will be necessary to expand the capacity or in the construction of a new pipeline to supply the growing natural gas demand in the State of Minas Gerais.
On August 25, 2004, CEMIG, Gasmig, Gaspetro and Petrobras entered into an Association Agreement, pursuant to which CEMIG agreed to sell a 40% equity interest in Gasmig to Gaspetro, a subsidiary of Petrobras. Under the terms of the Association Agreement, Petrobras agreed to make investments to expand the capacity of the current pipelines connected to the Gasmig distribution network as well in the construction of new pipelines, and CEMIG and Gaspetro agreed to fund Gasmigs capital expenditure plan to expand its distribution network.
The transaction was implemented on December 15, 2004 when Petrobras, through its subsidiaries Gaspetro and TSS, concluded the acquisition of a 40% equity interest in Gasmig. As a condition to such investment, Petrobras and CEMIG entered into a Shareholders Agreement in which CEMIG agreed to with Petrobras and its subsidiaries to share in the management of Gasmig. See Item 10- Additional Information Material Contracts Gasmig Shareholders Agreement and Association Agreement.
We expect that the association with Petrobras will expand Gasmigs distribution capacity, as our ability to offer natural gas to our customers will increase significantly with the implementation of Petrobrass investments in pipelines. We expect that Gasmigs capital expenditure for 2005 will be mostly used for the expansion of our distribution network in highly industrialized areas of Minas Gerais.
Gasmig is not a consolidated subsidiary in our financial statements as of December 31, 2004, in accordance with Emerging Issues Task Force (EITF) Issue No. 96-16, Investors Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights. We consolidated Gasmigs revenues and expenses for the period from January 1, 2004 to December 15, 2004, the date of our sale of a 40.00% equity interest in Gasmig to Petrobras.
On January 13, 1999, we incorporated Empresa de Infovias S.A. in Minas Gerais, Brazil, as a joint venture with AES Força Empreendimentos Ltda., an affiliate of AES Corporation Group. Currently, we own 99.94% of the common shares of Empresa de Infovias S.A. Empresa de Infovias S.A. has an optical fiber-based long-distance communications backbone installed along our power grid using optical ground wire cables. This communications backbone is connected to an access network that is based on hybrid fiber-coaxial cable technology and is deployed along our power grid. We lease our network infrastructure to Empresa de Infovias S.A. pursuant to a 15-year operating lease agreement entered into on March 31, 2000. Pursuant to Brazilian telecommunications law, we also make our network infrastructure available to other telecommunications providers interested in leasing it.
Empresa de Infovias S.A. started its business operations in January 2001. The main telecommunication services provided by Empresa de Infovias S.A. through its network are signal transportation and access, both for point-to-point and point-to-multipoint applications, delivered mainly to telecommunications operators and Internet
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service providers on a clear channel basis. Empresa de Infovias S.A. is also extending its broadband Internet services, currently available in the cities of Belo Horizonte, Poços de Caldas and Barbacena, to other cities in Minas Gerais.
Empresa de Infovias S.A. provides the network for cable television service in 12 cities in Minas Gerais pursuant to a 15-year service agreement with WAY TV Belo Horizonte S.A., or WAY TV, and Brasil Telecomunicações S.A., each a holder of concessions to provide cable television and Internet service in certain cities in Minas Gerais, under which Empresa de Infovias S.A. allows these companies to use its network infrastructure. In return, WAY TV and Brasil Telecomunicações are obligated to deliver to Empresa de Infovias S.A. a percentage of the revenues derived from their cable television and Internet subscribers. At December 31, 2004, these two companies had approximately 43,990 cable television subscribers and 20,333 Internet service subscribers.
Empresa de Infovias S.A. holds a 69.25% equity interest in WAY TV, including 49.9% of its common shares. The control of WAY TV is exercised by Empresa de Infovias S.A. and CLICClube de Investimentos dos Empregados da Cemig, or CLIC, which owns 1.1% of WAY TVs common shares, through a shareholders agreement. Under this agreement, CLIC has agreed to vote in accordance with Empresa de Infovias S.A.s interests at the WAY TV shareholders meetings and board of directors. To date, Empresa de Infovias S.A. has invested approximately R$62.6 million in WAY TV.
Empreasa de Infovias S.A. also provides intracompany data transmission services to us pursuant to a five-year agreement signed in 2001. We use this service for internal communications as well as for certain communications with our customers.
In September 2002, Empresa de Infovias S.A. signed an agreement with us pursuant to which we are to provide geo-referenced information and related services to Empresa de Infovias S.A.
During 2004, Empresa de Infovias S.A. had operating revenues of R$71.0 million, of which R$30.9 million related to the provision of telecommunication services and R$40.1 million related to the provision of cable television and Internet services.
Empresa de Infovias S.A.s capital expenditures for the past four years were R$196.3 million. Empresa de Infovias S.A.s capital expenditures for 2005 will be mostly used for expansion of its telecommunications network.
We provide consulting services to governments and public utility companies in the electricity industry in order to derive additional revenues from the technology and expertise we have developed through our operations. During the past eight years, we have provided such services to government agencies and utilities in ten countries, including Canada, Paraguay, Honduras and El Salvador and to the government of Panama.
On January 9, 2002 we created Efficientia S.A., referred to as Efficientia, in Minas Gerais, to provide project efficiency optimization solutions and operation and management services to energy supply facilities. We have a 100% interest in Efficientia, which began operating in 2003. In 2004, although the Brazilian economic context was favorable to productive activities in general, Efficientia posted a loss of R$1.4 million, largely caused by factors other than its business management, as described below.
In its second year of operations, Efficientia still depended, for a large part of its sales revenue, on CEMIGs Energy Efficiency Program. This program is subject to numerous requirements by ANEEL, including a timetable for approval of the projects presented, with a view to their being executed in the immediately subsequent year. The portfolio of projects presented for approval in November 2003, with a view to implementation and invoicing for sales revenue in 2004, was not converted into revenues in 2004. This was due to the significant delay in the analysis and approval by ANEEL which, instead of complying with its requirement to approve the project within a maximum period of two months, did not approve the program until October 2004.
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Our generation, transmission and distribution activities are subject to comprehensive federal and state legislation relating to the preservation of the environment. See The Brazilian Power IndustryEnvironmental Regulations in Annex A. The primary environmental authorities in the State of Minas Gerais are Fundação Estadual do Meio Ambiente (State of Minas Gerais Environmental Foundation), or FEAM, Instituto Mineiro de Gestão das Águas (State of Minas Gerais Water Management Institute), or IGAM, Secretaria de Meio Ambiente e Desenvolvimento Sustentável (State Secretariat for the Environmental and Sustainable Development), or SEMAD, and Conselho Estadual de Política Ambiental (State of Minas Gerais Environmental Policy Council), or COPAM. At the Federal level, the main authorities are Conselho Nacional de Meio Ambiente (National Environment Council), or CONAMA, Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis (the Brazilian Institute of the Environment and Natural Renewable Resources), or IBAMA, and Agência Nacional de Águas (National Water Agency), or ANA.
We believe that we are in compliance in all material respects with the relevant laws and regulations.
In 2003, we received the ISO 14001:1996 Certification from Det Norske Veritas, or DNV, related to the Environmental Management System of Hydroelectric Facility of Nova Ponte, concerning all activities related to Hydroelectric Energy Generation, Reservoir Operation and Management of a Natural Private Reserve. In addition, DNV also issued certifications for some of our distribution systems, including their respective administrative offices, covering the municipalities of Alfenas, Divinopolis, Varginha, Montes Claros and Pouso Alegre, among others. Such certifications attest to the compliance of such facilities with the Environmental Management System - Level 1, which is CEMIGs internal environmental regulation. In 2004, for the fifth consecutive year CEMIG was selected to be a component of Dow Jones Sustainability Index (DJSI World Index).
In accordance with our environmental policy, we have established various programs for prevention and control of damage aiming at limiting our risks related to environmental issues.
In 2004 we invested approximately R$123 million in environmental compliance projects for plant and equipment and the vehicle fleet, and in the implementation of new projects, and also spent R$19 million on operational and maintenance expenses for our current activities, such as final disposal of waste, putting environmental management systems in place, audits, planting of riverside forests, fish cultivation, putting in place tree pruning and oil policies, environmental education programs, maintenance of conservation units, training and other activities. These amounts also include R$3 million corresponding to environmental research and development projects developed with universities and research institutes.
Applicable law in Brazil requires that licenses be obtained in connection with the construction, installation, expansion and operation of any facility that utilizes environmental resources, causes environmental degradation, pollutes or has the potential to cause environmental degradation or pollution or harm archaeological wealth. Generally, state governments manage the environmental licensing process for facilities that are to be built within their territories. However, the Federal Government manages the environmental licensing process for facilities that are expected to have an environmental impact on more than one state and/or are located between two or more states.
COPAM Regulatory Ordinances No. 17, dated December 17, 1996, and No. 23, dated October 21, 1997, provide that operational licenses shall be renewed from time to time for periods of four to eight years depending on the size and pollution potential of the facility. Aimed at surveying and rescuing archaeological wealth that has not been previously considered, the provisions of Ordinance No. 28, dated January 31, 2003, of Instituto do Patrimônio Histôrico e Art í stico Nacional (National Historical and Artistic Heritage Institute), or IPHAN, set forth that the renewal of operational licenses for hydroelectric power plants shall be conditioned on a favorable opinion of IPHAN concerning archaeological studies on the depletion area of the reservoir. These studies are to be sponsored by the plant operator.
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Gasmigs distribution of natural gas through pipelines in Minas Gerais is also subject to environmental control. We believe that all licenses for the regular operation of Gasmigs activities have been obtained.
Corrective Environmental Operation Licensing
Pursuant to Resolution No. 6, dated September 16, 1987, of the Conselho Nacional de Meio Ambiente (the Brazilian Environmental Council), or CONAMA, environmental impact assessment studies must be undertaken, and a corresponding environmental impact assessment report must be prepared, for all major electric generation facilities built in Brazil after February 1, 1986. While studies are not required for facilities built prior to February 1, 1986, such facilities must obtain corrective environmental operation licenses, which may be acquired by filing a form containing certain information regarding the facility in question.
Federal Law No. 9,605, dated February 12, 1998, sets forth penalties for facilities that operate without environmental licenses. In 1998, the Federal Government issued Provisional Measure No. 1,710 (currently Provisional Measure No. 2,163/41), which establishes the potential for project operators to enter into agreements with relevant environmental regulators for the purpose of coming into compliance with Federal Law No. 9,605/98. Accordingly, we have been negotiating with the Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis (the Brazilian Institute of the Environment and Natural Renewable Resources), or IBAMA, and FEAM to obtain the corrective environmental operation licensing for all our plants that began operating prior to February 1986. Generation facilities located within the State of Minas Gerais fall within the jurisdiction of FEAM for purposes of corrective licensing. We have agreed with FEAM to bring our facilities located in Minas Gerais into compliance on a gradual basis. We do not currently anticipate any costs and commitments in connection with any recommendations that may be made by IBAMA and FEAM. We currently have operating licenses for the following facilities: (i) hydroelectric plants: Miranda, Nova Ponte, Igarapava, Porto Estrela, Sá Carvalho, Funil and Queimado, (ii) small hydroelectric plants: Pai Joaquim, Rio de Pedras, Santa Luzia, Salto dos Moraes, Poquim and Piçarrão, (iii) thermoelectric plants: Barreiro and Formoso, and (iv) the wind farm: Morro do Camelinho.
Our Emborcação, São Simão, Jaguara and Volta Grande hydroelectric power plants need to obtain corrective environmental operation licenses, since they all began operating prior to February 1986. In 2004, after a technical inspection by IBAMA of the facilities and areas of influence of the Jaguara and Volta Grande hydroelectric power plants, a reference report was issued for the preparation of environmental impact studies for the obtaining of corrective environmental licensing for the Emborca ção, Jaguara, São Simão and Volta Grande plants and the transmission systems associated with them. At present we are preparing these studies for submission to IBAMA.
The environmental licenses, either issued by state or federal bodies, are subject to several conditions imposed in light of the foreseen environmental impacts. In extreme circumstances, the failure to comply with such conditions may result in the revocation of the license. We believe we are in compliance with the requirements mentioned in our licenses.
According to Federal Law No. 9,985, dated July 18, 2000, and corresponding Decree No. 4,340, dated August 22, 2002, the companies whose activities are deemed to cause high environmental impacts are required to invest in protected areas in order to offset those impacts. These companies are required to invest at least 0.5% of total amounts invested in implementation of its corresponding project in activities and areas defined by environmental agents.
During the licensing procedure, in light of the environmental impacts identified by the environmental assessment studies presented by the operator, environmental bodies may determine the amount to be invested and which protected areas shall be benefited.
The criteria for environmental and social compensation have not been defined, and there is a possibility that requests from environmental agencies, the Public Attorneys Office, NGOs or affected populations may be added to those traditionally proposed. Due to these uncertainties, licensing (including corrective licensing), timing
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and budgets of new projects, and even their feasibility, may be affected. Discussions are currently in progress with official environmental bodies (at both the federal and state level) for the purpose of establishing criteria to govern environmental compensations.
A work group that has been created in the Brazilian Federal Government is developing a resolution concerning environmental compensation measures which, if implemented, could have an effect on us.
The dams at each of our hydroelectric generation facilities can put fish that inhabit the adjoining reservoirs in danger. In order to reduce the impact of these facilities on nearby fish populations, the State Government enacted State Law No. 12,488, dated April 9, 1997, which imposes measures assuring that migratory fish that pass through dams will be redirected to fishways, through which they can pass safely. As of December 31, 2004, we had fishway projects installed at our Igarapé, Salto de Moraes, Funil and Igarapava facilities. In April 2002 we sent COPAM a study relating to our dams. In July 2002 we received a response from SEMAD that requires us to provide additional studies relating to the feasibility of installing fishways in our dams located in Minas Gerais. We executed an agreement with a non-governmental organization, named SMC ( Sociedade Mineira de Cultura ) and the university PUCMinas (Pontificia Universidade Católica de Minas Gerais) in order to proceed with the studies for SEMAD in connection with the Gafanhoto, Cajuru and Volta Grande hydroelectric facilities. We are also evaluating the options for the construction of fishways at Miranda and Nova Ponte hydroelectric plants. The studies that are in progress are not yet conclusive as to the need for the provision of fishways. In addition, there has been no decision by the environmental authorities regarding the building of fishway projects at CEMIGs hydroelectric generation facilities. However, there is a possibility that future decisions by the environmental authorities, or changes in the environmental legislation, or even new information obtained from the studies which are in progress, may lead to a need for the construction of fishways at our hydroelectric generation facilities.
Our piped natural gas distribution networks are underground, crossing through inhabited areas, and using public rights of way in common with underground piping utilities operated by other public concession holders and public agencies. This increases the potential for risk of undue work without prior communication and consultation of our gas distribution network registers, and there is a possibility of this causing accidents, with potentially significant personal, property and environmental damage. However, all our gas networks are explicitly, and intensively, marked and signaled. Gasmig, through its Dig Safely ( Escave com Segurança ) program, has been building partnerships with the community, mainly with public authorities and holders of concessions, in addition to the companies which carry out digging in public rights of way, to ensure that before digging close to the natural gas network, they telephone Gasmigs 24-hour helpline and request support for safe execution of their work.
Transmission lines : Several of the safety bands under our transmission lines have been occupied by unauthorized facilities (buildings, etc.) and dwellings. These occupations generate risks of electric shock and accidents involving people living at the location, and constitute an obstacle to maintenance of our electricity system. It is thus necessary to solve this situation over the coming years, either removing some of the occupants, or introducing improvements to make it possible to live with these invasions. Faced with the risks associated with this situation, we planned two lines of action for the coming years. The first is preparation of a document entitled Diagnosis of areas invaded and under risk of invasion, for strengthening of inspection activities, including installation of improvements in locations classified as having high invasion risk. In 2004 studies were begun for the contracting of a company specialized in geo-referenced mapping, which will identify the areas with potential for invasion, making possible decisions on measures and procedures in relation to control, monitoring and inspection of the transmission line paths where there is a high risk of invasion. The second line of action involves the evacuation of areas already invaded. The withdrawal of people from these areas involves payment of indemnities, regularization of electricity connections and the opening of bands for the construction of squares and streets. In conformity with CEMIGs risk management, we draw attention to the multi-year planning of allocation of funds to achieve withdrawal of some of the occupants and the execution of local improvements to ensure the safety conditions of these areas.
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Environmental issues can significantly impact the operations of our company. For example, large hydroelectric power plants can require flooding of considerable areas and as a result relocation of a considerable population. The Brazilian Constitution gives the Federal Government, states and municipalities powers to enact laws designed to protect the environment and issue enabling regulations under these laws. While the Federal Government has the power to promulgate general environmental regulation, state governments have the power to enact more stringent environmental regulation.
The Brazilian National Environment System (SISNAMA Sistema Nacional do Meio Ambiente ) was created for the purpose of protecting the Brazilian environment. It consists of: an administrative body, the Governing Council ( Conselho Governamental ); a consultative and decision-making body, the National Environment Council, or CONAMA) ( Conselho Nacional de Meio Ambiente ); a central body, the Environment Ministry, or MMA ( Ministério do Meio Ambiente ); an executive body, the Brazilian Environment and Renewable Natural Resources Institute, or IBAMA ( Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis ); and various local and sectorial bodies. The agencies that merit special attention are CONAMA and IBAMA. CONAMA carries out or approves studies and assists and advises the Government Council on the official orders for government policy on environmental and natural resources, and on decisions, within its attributed scope, on regulations and other legislative rules applicable to the Brazilian environment. IBAMA enforces the national environment policy and inspects, preserves and supports the use of natural resources.
Law No. 6,938/81, of August 31, 1981, is known as the Environmental Policy Law, and regulates civil liability for damage to the environment. In legal terms, this responsibility has an objective nature, and is not only strict but also expands the list of liable parties adopting the principle of joint and several responsibilities. Irrespective of the nature of the offending act, demonstration of a cause-and-effect relationship between the damage caused and an action or omission is enough to create a legal obligation, on the party responsible for the contamination, to redress the environmental damage. Also, compliance with environmental licenses does not eliminate environmental liability.
Activities which cause damage to the environment may also lead to administrative and criminal fines, under Law No. 9,605, of February 12, 1998 (the Environmental Crimes Law). The effects of the aforementioned law apply to any person, individual or legal entity, who by any means contributes to damage caused to the environment to the extent of his/her fault, in the amount of the damage caused. This law provides that a legal entity may be held liable for conduct deemed harmful to the environment, provided that the infraction was committed in its interest or benefit, upon the decision of its legal or contractual representatives or of its plenary board. Management and members of the board who are aware of any criminal conduct of another and are thus able to prevent it but do not do so, are, by their omission, also considered participants in the crime.
The Federal Decree No. 3,179, issued in September 1999, established administrative fines applicable to conduct or activities damaging to the environment and to the regulations governed by the Environmental Crimes Law. This Decree sets forth penalties, such as fines of up to R$50 million, and authorizes facilities to be closed down.
In relation to water resources, Law No. 9,433 of January 8, 1997 created the National Water Resources Policy, which was organized in accordance with the various river basins of Brazil. This policy is implemented by the governmental and non-governmental agencies, and classifies water as a public asset. Thus, no individual or company may appropriate the use of water, and any use of water does not result in absolute exclusion of all potential users.
Also, public authorities must supply a justification for the concession of rights to use water.
The right to use federal water is given by the National Waters Agency, or ANA ( Agência Nacional de Águas ), created by Law No. 9,984 of July 17, 2000, and regulated by Decree No. 3,692 of December 19, 2000, in collaboration with ANEEL. As well as granting these rights, ANA also regulates and supervises the use of federal water resources and implements the collection of charges for the use of water, at a ratio of 0.75% of the value of the energy generated. Permission for use of non-federal water resources must be obtained from the respective state-level environmental/water resource agency.
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The National Water Resources Policy also created the need for the grant of permission for the use of water in the production of electricity. At the phase of planning of the plant, application must be made by ANEEL to the water resources authorities for reservation of water availability, which will be transformed into permission to use water resources and granted together with the grant of concession for commercial operation of hydroelectric energy. The plants which already are in operation, and have the concession grant, automatically also have the grant of the water resources right. However, when application is made for renewal of the concession for commercial use of hydroelectric energy, grant of the right to use the water resources must also be applied for.
For the construction of the hydroelectric power plant, Brazilian electricity companies have to comply with several environmental protection measures. First, an environmental impact study must be prepared by external experts, who should make recommendations on how to minimize the impact of the plant on the environment. The study, in conjunction with a environmental impact assessment report on the project prepared by the company, is then submitted to the state or federal-level governmental authorities for analysis and approval. The project undergoes a process of licensing in three stages, which includes a Prior License which indicates the viability of the project, an Installation License for the beginning of construction, and an Operation License for startup of the plant. Environmental licenses also have to be obtained for expansion of the plant or installation of new equipment. It should be mentioned that on basis of the environmental impact studies conclusions, the issued license is subject to several conditions or requirements that must be observed; otherwise the licenses may be revoked.
Installations that are considered to represent a considerable environmental impact are obliged by law to allocate a minimum of 0.5% of their total investment costs to the creation of environmental preservation areas.
Under the Brazilian Forest Code ( Código Florestal Brasileiro - Law No. 4,771 of September 15, 1965), the land area surrounding water reservoirs, whether it is natural or artificial, is considered to be a permanent preservation area, which represents restriction on use. The amendments to the Brazilian Forest Code introduced by Provisional Measure 2,166-67 of August 24, 2001 provide that the operator of a reservoir is obliged to acquire such surrounding areas. This requirement can impact the economic viability of new hydroelectric undertakings, but has so far not been enforced.
The Forest Policy of the State of Minas Gerais (Law No. 14,309 of June 19, 2002) and Decree No. 43,710 of January 8, 2004 does not oblige the operator to acquire the land area surrounding the reservoir, but it does demand indemnity for the restriction on use, in forms provided for by law.
These rules, when applicable, will result in additional costs in connection with in the installation of new hydroelectric power plants.
Any corporate entity involved in activities which cause pollutant effects, or the potential for pollutant effects, or which involve products which are considered dangerous to the environment, is obliged to register with IBAMA. This registry involves quarterly payments of an environmental control and inspection charge TCFA, which for CEMIGs activities is equal to an amount of approximately R$10 thousand per year.
CEMIGs has implemented a strategy to study CDM project development opportunities in the carbon market. In order to undertake CDM projects, we are training our professionals, including through courses administered by USAID and the World Bank. Last year, CEMIG sponsored a course promoted by USAID and the World Bank at the State of Minas Gerais Industry Federation to discuss CDM projects in the State of Minas Gerais. We intend to create a multidisciplinary task force to mobilize our wholly-owned subsidiaries and affiliated companies to identify projects that would allow us to obtain certificates of reduction of greenhouse gases.
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We continue to invest in automated monitoring and control equipment in connection with our strategy of increasing efficiency and further modernizing and automating our generation, distribution and transmission systems.
The Centro de Operação de Sistema da Cemig (System Operation Center), or COS, located at our headquarters in Belo Horizonte, is the nerve center of our operations. The COS is a data clearing house and control center that uses fiber optic and coaxial cables, microwaves and other communication technologies to monitor and coordinate our generation and transmission systems in real time, helping to guarantee the security, continuity, and quality of our energy supply. With the restructuring of the Brazilian utility sector, the COS has begun operating through the ONS, controlling and supervising 39 substations, 22 large plants and 3,017 miles of transmission lines.
Our distribution network is managed through seven Centros de Operações Regionais de Distribuição (Regional Distribution Operation Centers), or CODs. The CODs monitor and coordinate our distribution network operations in real time. The CODs are responsible for the supervision and control of 350 distribution substations, 228,314 miles of medium voltage distribution lines, 9,995 miles of sub-transmission lines and 5.9 million customers in our concession area.
There are various systems in use to automate and support the CODs processes including trouble call, field crew management, distribution substation supervision and control, restoration of power, emergency switching, network disconnection and inspection. Technologies like geographic information system and radio/satellite data communication help to reduce the customer restoration time and to provide better customer attendance.
We are intensively using the geospatial and technical document management technology to support and improve engineering processes. Geo-referenced information of the electrical network, satellite and aerial photographs of the concession area, diagrams and technical document images are stored in geospatial databases and can be easily retrieved by computers connected to our Corporate Network, helping technicians to plan, design, construct, operate and maintain the generation, transmission and distribution network. We are using mobile technology in service dispatch for distribution network maintenance and medium and high-voltage network data acquisition.
Our private telecommunications network is one of the largest in Brazil. It is comprised of high-performance microwave links with 130 communication stations and total range of 1,380 miles, a telephone system with 188 telephone exchanges and a mobile communication system with 700 trunking radios and 1,105 radio sets. We have also developed several projects in association with Empresa de Infovias S.A. based on fiber-optic networks that uses our distribution infrastructure of poles and transmission towers, aimed at integrating our internal voice, data and image services in order to reduce operational costs and increase the reliability of the electrical system.
Our corporate network integrates enterprise servers (one 350 MIPS Mainframe processing the Billing System and 10 Risc machines for the ERP System), 7,015 Intel microcomputers, 306 servers and 877 units of connectivity equipment, serving 164 sites in 90 cities of Minas Gerais State. The centralized infrastructure uses modern servers and devices with service level agreements for hardware maintenance and software support. The reception of meter reading data, digital calculation of electricity bills, and issuance of electricity bills to consumers in CEMIGs secondary network were recommended for the ISO-9001:2000 certification.
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We have one call center located in Belo Horizonte. Our final customers can use a toll-free number to contact a call center to obtain information about their accounts and to report service problems. Our call center is integrated with the technologies available in the CODs, allowing us to provide up-to-the-minute information to customers about service issues.
We use several maintenance and repair systems to minimize unscheduled interruptions in electrical service to our customers. More than 90% of our service interruptions have resulted from factors such as lightning, fire, vandalism, wind and corrosion on our transmission and distribution networks, which are composed largely of steel towers, although we also have wood and concrete overhead lines.
We inspect our transmission lines on average twice a year. The lines are patrolled by helicopter, car and motorcycle. We also use a Gimbal Camera in the aerial inspections. Our linemen climb most of the towers at least once a year, depending on the age and the importance of each line for the whole system. We have continually introduced new predictive techniques into our maintenance program, as for example corona and infrared inspections.
To support emergencies involving fallen towers, we have used modern modular aluminum structures. Most of our intervention on transmission lines is done using live line methods. Being the first company in Brazil to use bare hand live line techniques in the maintenance of transmission lines, we have accumulated, through the last almost thirty years, significant experience in this area. We have trained our staff in this area and have special vehicles and other necessary tools to support live and dead line maintenance.
We also have crews strategically located throughout the State of Minas Gerais in order to promptly attend to our transmission and distribution system needs.
In August 2004 we put in place the Corporate Information Security Plan. The principal objective of this plan is to prepare an action plan to reduce the risk of loss of information confidentiality, integrity and availability. The project also aims to adapt the company to the new legal and regulatory requirements which call for implementation of various security controls. A specialized consulting company was contracted, for a period of 11 months, and has been assisting the Information Security Management team in developing the actions and projects.
In 2004 we installed software for information security management, completed the Corporate Network security specification, and began the security assessment and implementation for critical information technology assets.
During the end of 2004, we underwent a complex process of improvements on our current Enterprise Resource Planning, or ERP package (SAP R/3). The process involved an upgrade from version 4.0 into the newer version 4.7 with improvements on internal processes and controls and the implementation of new functionalities. The new system has new and revised functionalities covering accounting, cost and funds control, budgeting, investment management, treasury, cash flow management, quality control, project management, inventory management, maintenance, asset control, human resources management (including payroll, time management and personnel development), travel management, sales management and a new workflow functionality covering the finance and supply chains.
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The new solution includes, beyond process review, modernization and legacy systems integration, with new and improved hardware, software and processes on its first phase that went live on January 10, 2005 and supported our unbundling project, approved by ANEEL on December 20, 2004.
The next project phase (expected to be live in July 2005) will pilot improvements on our strategic management functionalities, including balanced scorecard, new data warehouse functionality, long-term cash flow monitoring and financial consolidation.
In 1991, we instituted a company-wide quality control program called Total Quality. As part of the Total Quality Program, we adopted the International Standardization Organization Project in 1999, through which we certify different parts of our operations and management as being of superior quality according to international standards known as ISO 9000 and ISO 14000. We also certify parts of our operations according to internally created criteria.
In addition to the continued expansion in the implementation of the Quality and Environment Management systems in our activities and processes, we also have in progress the implementation of the Health and Safety Management System, providing control in accordance with the standards for this type of system.
Based on experience gained in the last few years, we have prepared the Cemig Management System Manual, which integrates the Quality, Environment and Health and Safety Management Systems. The integration of the management systems, to be carried out in the areas of interest to the Company, will ensure functionality in the activities executed and greater efficiency in the results.
We have received ISO 9001/2000 certification for our business, including certain customer service offices, call centers, laboratories, repair shops, engineering teams and the São Simão hydroelectric power plant, which represented 29% of our installed capacity as of December 31, 2004.
In February 2000, the Nova Ponte hydroelectric power plant, with an installed capacity of 510 MW, received ISO 14001 certification from Det Norske Veritas DNV. The certification includes the 500 square kilometer (193 square mile) reservoir as well as the 2,850 hectare (11 square mile) Galheiro nature reserve. Nova Ponte is the first large power plant in Latin America to receive this certification.
In 2004, one transmission and three distribution units, covering 161 municipalities, 54 substations, more than 93 miles of distribution lines, and more than 5 miles of transmission lines were certified under the internally created criteria that we refer to as the CEMIG EMS (Environmental Management System). A materials storage and logistics warehouse also received this certification. Products and services certified include: new customer connections; billing; collection; product sales and services; network expansion and improvement; network operation; public lighting maintenance and restoration; overhead lines and network maintenance and inspection; electric system planning; and substation and equipment maintenance and inspection.
With the assistance of a leading consulting firm chosen through a formal selection process, we began establishment of a Corporate Risk Management System in 2003, and consolidated it in 2004 in connection with our restructuring. As holder of a concession in the Brazilian electricity sector, we operate in environments where factors such as corporate restructurings, regulations issued by government agencies, technological development, globalizations and changes in the consumer market generate uncertainties and threats.
The implementation of a coherent risk vision and strategy at the corporate level is a new management trend, encouraged not only by the requirements of the Sarbanes-Oxley Act and the methods recommended by the Committee of Sponsoring Organizations (COSO II), but also by the perception that management of risk is an essential part of a sustainable development philosophy which aims to create value for shareholders.
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Our Corporate Risk Management Program aims to achieve the following: operate as an auxiliary in achievement of the objectives set by the strategic plan; create awareness among shareholders of the possible events that could constitute a risk of loss of value; structure the company to be able to take proactive stances in relation to its risk environment; provide the companys executives with a methodology and tools for effective management of risk; and provide other areas of strategic management with input concepts and procedures, and factors that strengthen the companys organizational control infrastructure.
In 2004, the structure of corporate risks that was prepared in 2003 was revised and updated, to adapt it to the profound regulatory changes to which the whole Brazilian electricity sector was subjected most importantly Law 10,848, regulated by Decree 5,163. We also put in place the functional structure of the risk management system, with the creation of CEMIG´s Corporate Risk Management Committee, finalizing an approved version of the Corporate Risks Management Policy, the Corporate Risk Management Procedures Manual, and licensing of the information technology tool which supports this activity.
In 2003, CEMIGs Electricity Risks Management Committee, or CGRE, was created to propose policies and procedures for approval by the executive officers to minimize risks in the contracting (purchase and sale) of energy. The committee has members from numerous areas of the Company, including generation, distribution, sales, legal and financial.
The CGRE was very active in 2004, analyzing the recent changes in the Brazilian electricity sector and their impact on CEMIG. Based on its analyses of market, price, regulatory and legal risks, the committee proposed guidelines for the structure of contracts for the sale of electricity to Free Consumers, through the auction procedures held by the Company. It also gave support to the decisions of the executive officers in relation to the Companys participation in the first Existing Energy Supply Auction, held on December 7, 2004 by the CCEE. Based on risk analyses, it proposed the maximum volumes that could be sold and the amounts purchased by the distributor in that auction.
In 2004, we continued putting in place the Risk Control software for management of financial risks, to monitor the risks associated with the carrying out of transactions in the financial markets. Use of this software, associated with implementation of the risk management methodology, is designed to give our managers capacity to recognize the existing and potential risks and to control them, and to operate proactively in relation to their environment of financial risks when implementing plans of action. The delay in fully implementing the software was due to the mobilization of the task force in the upgrading of SAP R/3.
Our principal properties consist of the power generation plants and transmission and distribution facilities described in this Item 4. Our net book value of total property, plant and equipment, including our investment in certain consortia that operate electricity generation projects, was R$11,191 million at December 31, 2004 (including ongoing construction projects). Generation facilities represented 52.4% of this net book value, transmission and distribution facilities represented 43.8% and other miscellaneous property and equipment, including natural gas and telecommunication facilities, represented 3.8%. The average annual depreciation rate applied to these facilities was 2.5% for hydroelectric generation facilities, 3.4% for transmission facilities, 4.9% for distribution facilities, 7.7% for administration facilities, 6.0% for natural gas facilities and 7.9% for telecommunication facilities. Our facilities are generally adequate for our present needs and suitable for their intended purposes.
You should read the information contained in this section together with our financial statements contained elsewhere in this annual report. The following discussion is based on our financial statements, which have been prepared in accordance with U.S. GAAP and presented in reais.
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We are a state-controlled energy company engaged, through our subsidiaries, primarily in the generation, transmission and distribution of electricity in Minas Gerais. According to ANEEL, at December 31, 2004, we were the seventh largest electric power generation concessionaire in Brazil as measured by total installed capacity, and for the year ended December 31, 2004, we were the largest electric power distribution concessionaire in Brazil, as measured by GWh of energy sold to final customers. We supplied approximately 97% of the electricity consumed in Minas Gerais during the year ended December 31, 2004. See Item 4. Information on the CompanyCustomers and Billing. At December 31, 2004, we generated electricity at 47 hydroelectric plants, four thermoelectric plants and one wind farm and had a total installed generation capacity of 5,949 MW, of which the hydroelectric plants accounted for 5,764 MW. See Item 4. Information on the CompanyGeneration and Purchase of Electric Power. The State Government as our controlling shareholder establishes our operating and long-term strategy.
The following are our subsidiaries as of December 31, 2004:
Cemig Geração e Transmissão S.A. (100% interest). Cemig Generation and Transmission, which as of January 1, 2005 is engaged in the generation and transmission of energy.
Cemig Distribuição S.A. (100% interest): Cemig Distribution, which as of January 1, 2005 is engaged in the distribution of energy.
Sá Carvalho S.A. (100% interest). Sá Carvalho S.A. is engaged in the production and sale of electric energy and holds the concession to operate the Sá Carvalho hydroelectric power plant.
Rosal S.A. (100% interest). Rosal S.A. is engaged in the production and sale of electric energy and holds the concession to operate Rosal hydroelectric power plant. See Note 10 to our consolidated financial statements.
Usina Térmica Ipatinga S.A. (100% interest). Usina Térmica Ipatinga S.A. is an SPP engaged in the production and sale of electric energy at the Ipatinga thermoelectric and steam power plant.
Companhia de Gás de Minas GeraisGASMIG (55% interest). Gasmig is engaged in the acquisition, transportation and distribution of natural gas. In December 2004, CEMIG sold 40% of its interest in Gasmig. See note 10 to our consolidated financial statements.
Empresa de Infovias S.A. (99.94% interest). The principal activities of Empresa de Infovias S.A. are rendering telecommunications services and developing activities related thereto, through multiservice networks using optical fiber cable, coaxial cable and other electronic equipment. Empresa de Infovias S.A. owns 69.25% of the capital stock of Way TV Belo Horizonte S.A., a cable TV and internet services provider in certain cities of the State of Minas Gerais.
Efficientia S.A. (100% interest). Efficientia is engaged in rendering efficiency, optimization and energy solutions services, as well as providing operating and maintenance services, to energy supply facilities. Efficientia initiated operations in the first quarter of 2003.
Horizontes Energia S.A. (100% interest). Horizontes Energia is engaged in the production and sale of electric energy, as an independent power producer, at the Machado Mineiro and Salto do Paraopeba hydroelectric power plants, located in the State of Minas Gerais, and the Salto Voltão and Salto do Passo Velho hydroelectric power plants, located in the State of Santa Catarina. Horizontes Energia initiated operations in the first quarter of 2003.
Companhia de Transmissão Centroeste de Minas (51% interest). Companhia de Transmissão Centroeste de Minas will be responsible for building, implementing, operating and maintaining the 345 kV transmission line from the substation of the Furnas Hydroelectric Power Plant and a substation located in Pimenta.
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We also have a 100% interest in each of the following companies: Usina Termelétrica Barreiro S.A.; CEMIG PCH S.A.; CEMIG Trading S.A.; and Cemig Capim Branco Energia S.A. These companies were organized to conduct specific projects in the electric energy sector and have not yet commenced operations.
Our consolidated financial statements as of and for the years ended December 31, 2004 and 2003 include the financial results of CEMIG and all of our subsidiaries (operational and pre-operational) described above. In 2004, we entered into a Shareholders Agreement with Petrobras and Gaspetro in connection with the sale of 40% of our equity interest in Gasmig. Gasmigs revenues and expenses were included in our consolidated Statement of Income up to December 15, 2004. Gasmigs assets and liabilities are not included in our consolidated financial statements as of December 31, 2004. See Notes 2 and 10 to our consolidated financial statements. Additionally, we have a minority interest in the following companies:
Central Hidrelétrica Pai Joaquim S.A. (48.5% interest). Central Hidrelétrica Pai Joaquim S.A. is engaged in the production and sale of Electric Energy as an independent power producer.
Central Termelétrica de Cogeração S.A. (48.5% interest). Central Termelétrica de Cogeração S.A. is engaged in the production and sale of thermoelectric energy, as an independent power producer, through the Barreiro thermoelectric plant, located on Vallourec & Mannesmanns premises in the State of Minas Gerais.
Companhia Transleste de Transmissão (25.0% interest). Companhia Transleste de Transmissão will be responsible for building and operating the 345 kV transmission line connecting a substation located in Montes Claros and the substation of the Irapé Hydroelectric Power Plant.
Companhia Transudeste de Transmissão (24.0% interest). Companhia Transudeste de Transmissão will be responsible for building, implementing, operating and maintaining the 345 kV transmission line from Itutinga to Juiz de Fora.
Companhia Transirapé de Transmissão (24.4% interest). Companhia Transirapé de Transmissão will be responsible for constructing, implanting, operating and maintaining the 230 kV transmission line LT Irapé Araçuaí.
The preparation of our consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. We evaluate our estimates on an ongoing basis and base them on a combination of historical experiences and various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates. Our critical accounting policies that affect our more significant judgments used in the preparation of our consolidated financial statements are set forth below.
Due to changes in the electric utilities sector in Brazil in 2001 and 2002 and related acts by regulatory bodies of the Federal Government, we have concluded that because the rate-setting structure in Brazil was designed to recover certain allowable costs, we are subject to the provisions of Statement of Financial Accounting Standards No. 71 Accounting for the Effects of Certain Types of Regulation, or SFAS No. 71.
SFAS No. 71 requires rate-regulated public utilities such as CEMIG to record certain costs and credits allowed in the rate-setting process in different periods than for non-regulated entities. These costs and credits are deferred as regulatory assets and are recognized in the consolidated statement of operations at the time they are reflected in rates. Accordingly, we capitalize allowable incurred costs as deferred regulatory assets when there is a probable expectation that future revenue equal to the costs incurred will be billed and collected as a direct result of
53
the inclusion of the costs in an increased rate set by the regulator. The deferred regulatory asset is realized when we collect the related costs through billings to customers. ANEEL performs a rate review on an annual basis. If ANEEL excludes all or part of a cost from recovery, that portion of the deferred regulatory asset is impaired and is accordingly reduced to the extent of the excluded cost. We evaluate and revise the accounting for our regulatory assets on an ongoing basis as new regulatory orders are properly issued and account for our activities under SFAS No. 71. As we recognize regulatory assets in accordance with rulings of the regulatory authorities of the Federal Government, future regulatory rulings may impact the carrying value and accounting treatment of our regulatory assets.
During 2001, the electricity markets in significant portions of Brazil experienced rationing, or reduced availability of electricity to customers, due to low rainfall, reduced reservoir levels and Brazils significant dependence on electricity generated from hydrological resources. These factors resulted in lower sales. In December 2001, electricity concessionaires in Brazil, including us, reached an industry-wide agreement with the Federal Government that provided resolution to rationing related issues as well as certain electricity rate-related issues. This agreement, known as the General Agreement of the Electricity Sector, generally allows for increased rates to be charged to electric power consumers until the amounts lost by the power generation and distribution concessionaires as a result of the rationing are recovered. The rate increases set forth in the General Agreement of the Electricity Sector intended to reimburse rationing-related losses are expected to remain in effect from January 2002 for an average of 72 months. However, no assurance can be given that the full amount of the rationing-related losses we incurred will be recovered over this period.
In addition, we are subject to the provisions of Emerging Issues Task Force Issue No. 92-07 Accounting by Rate-Regulated Utilities for the Effects of Certain Alternative Revenue Programs, or EITF 92-07, which establishes a 24-month limit for collection of regulatory assets related to billing losses. Accordingly, we were required to estimate this asset recovery based on assumptions of future billings.
We perform periodic valuations of the recoverability of our deferred regulatory assets in order to determine whether impairment provisions are necessary based on applicable ANEEL regulations. We recorded a loss provision accordingly. This provision is based on projections prepared by us, which projections may change in response to regulatory changes and other developments. See Notes 2(q) and 4 to our consolidated financial statements. If ANEEL disallows a material amount of capitalized costs to be included in future rates, the write-off of the regulatory assets may have a material adverse impact on our operating results.
Valuation of assets
We have long-lived assets, including power generation plants. Many of these assets are the result of recent capital investments and have not yet reached a mature life cycle in construction. We assess the carrying amount and potential impairment of these long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider in determining whether an impairment review is necessary include a significant underperformance of the assets relative to projected future operating results and significant negative industry or economic trends. We determine when an impairment review is necessary through a comparison between the expected undiscounted future cash flows and the carrying amount of the asset. If the carrying amount of the asset is the larger of the two amounts, an impairment loss is recognized by the amount that the carrying amount of the asset exceeds the fair value of the asset. The fair value is determined by quoted market prices, appraisals or the use of valuation techniques such as expected discounted future cash flows. We must make assumptions regarding these estimated future cash flows and other factors to determine the fair value of the respective assets. In determining estimated future cash flows, we consider historical experience as well as future expectations and estimated future cash flows are based on expected future rates and expected future customer demand. A significant reduction in actual cash flows and estimated cash flows may have a material adverse impact on our operating results and financial condition.
Accrual for contingencies
We are party to certain legal proceedings in Brazil arising in the normal course of business regarding tax, labor, civil and other issues.
54
We account for contingencies in accordance with SFAS No. 5 Accounting for Contingencies. Such accruals are estimated based on historical experience, the nature of the claims, as well as the current status of the claims. Accounting for contingencies requires significant judgment by management concerning the estimated probabilities and ranges of exposure to potential liability. Managements assessment of our exposure to contingencies could change as new developments occur or more information becomes available. The outcome of the contingencies could vary significantly and could materially impact our consolidated results of operations, cash flows and financial position. Management has applied its best judgment in applying SFAS No. 5 to these matters.
Employee post-retirement benefits
We sponsor a defined-benefit pension plan and defined-contribution pension plan covering substantially all of our employees. We have also established post-retirement health care plans and pay life insurance premiums. We account for these benefits in accordance with SFAS No. 87 Employers Accounting for Pensions and SFAS No. 106 Employers Accounting for Post-retirement Benefits other than Pensions. We have applied SFAS 132(R) Employers Disclosures about Pensions and Other Post-retirement Benefits to disclose information about pension plans and other post-retirement benefit plans.
The determination of the amount of our obligations for pension and other post-retirement benefits depends on certain actuarial assumptions. These assumptions are described in note 17 to our consolidated financial statements and include, among others, the expected long-term rate of return on plan assets and increases in salaries and healthcare costs. In accordance with U.S. GAAP, actual results that differ from our assumptions are accumulated and amortized over future periods and generally affect our recognized expenses and recorded obligations in such future periods. While we believe that our assumptions are appropriate, significant differences in actual results or significant changes in our assumptions may materially affect our pension and other post-retirement obligations.
Deferred taxes
We account for income taxes in accordance with SFAS No. 109 Accounting for Income Taxes, which requires an asset and liability approach to recording current and deferred taxes. Accordingly, the effects of differences between the tax basis of assets and liabilities and the amounts recognized in our consolidated financial statements have been treated as temporary differences for the purpose of recording deferred income tax.
We regularly review our deferred tax assets for recoverability and establish a valuation allowance based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. If we are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to establish a valuation allowance against all or a significant portion of our deferred tax assets resulting in a substantial increase in our effective tax rate and a material adverse impact on our operating results.
Depreciation
Depreciation is computed using the straight-line method, at annual rates based on the estimated useful lives of the assets, in accordance with ANEEL regulations and industry practice in Brazil. To the extent that the actual lives differ from these estimates, there would be an impact on the amount of depreciation accrued in our consolidated financial statements. A significant decrease in the estimated useful life of a material amount of property, plant and equipment, or in the assets of the electricity generation project consortium in which we are a partner, could have a material adverse impact on our operating results in the period in which the estimate is revised and in subsequent periods.
Allowance for doubtful accounts
We record an allowance for doubtful accounts in an amount that we estimate to be sufficient to cover presently foreseeable losses.
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We continuously monitor collections and payments from customers and review and refine our estimation process.
In July 2003, the Emerging Issues Task Force stated in EITF Issue No. 03-11, or EITF 03-11, that the determination as to whether realized gains and losses on derivative contracts not held for trading purposes should be reported on a net or gross basis is a matter of judgment that depends on the relevant facts and circumstances and the economic substance of the transaction. In analyzing the facts and circumstances, EITF Issue No. 99-19 and Opinion No. 29, Accounting for Non-monetary Transactions, should be considered. EITF 03-11 is effective for transactions or arrangements entered into after September 30, 2003. The adoption of EITF 03-11 did not have a material effect on the Companys financial statements.
In December 2004, the Financial Accounting Standards Board (the FASB) issued Statement of Financial Accounting Standards No. 153, Exchanges of Non-monetary Assets - an amendment of APB Opinion No. 29 (SFAS 153), which amends Accounting Principles Board Opinion No. 29, Accounting for Non-monetary Transactions to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. SFAS 153 is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company will apply SFAS 153 in the event that exchanges of non-monetary assets occur in fiscal periods beginning after June 15, 2005.
Electricity rates in Brazil are set by ANEEL, which has the authority to readjust and review rates in accordance with the applicable provisions of the concession contracts. See Annex AThe Brazilian Power IndustryRates for the Use of the Distribution and Transmission Systems.
We charge captive customers for their actual electricity consumption during each 30-day billing period at specified rates. Certain large industrial consumers are charged according to the electricity capacity contractually made available to them by us, with adjustments to those rates according to consumption during peak demand time as well as capacity requirements that exceed the contracted amount.
In general, rates on electricity that we purchase are determined by reference to the capacity contracted for as well as the volumes actually used. In the case of Itaipu, we are committed to purchase 17.3% of the amount of its capacity that Brazil is required to purchase at a fixed price denominated in dollars paid three times a month at exchange rates determined at the time of each payment.
The following table sets forth the average rate (in reais per MWh) and volume (by GWh) components of electricity sales and purchases for the periods indicated. The term average rate refers to revenues for the relevant class of customers divided by the MWh used by such class and does not necessarily reflect actual rates and usage by a specific class of end-users during any particular period. The figures included in the table include the energy sold by Barreiro and Pai Joaquim, which were not consolidated in our financial statements.
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|
|
Year ended December 31, |
|
||||
|
|
2004 |
|
2003 |
|
2002 |
|
Electricity Sales: |
|
|
|
|
|
|
|
Average rate to final customers (R$/MWh) |
|
|
|
|
|
|
|
Industrial rate |
|
154.86 |
|
132.35 |
|
100.06 |
|
Residential rate |
|
406.07 |
|
356.87 |
|
281.60 |
|
Commercial rate |
|
355.95 |
|
306.00 |
|
240.94 |
|
Rural rate |
|
214.52 |
|
186.76 |
|
147.80 |
|
Public services rate and others |
|
236.99 |
|
201.78 |
|
158.80 |
|
|
|
|
|
|
|
|
|
Total sales to final customers (GWh) |
|
|
|
|
|
|
|
Industrial customers |
|
22,969 |
|
21,715 |
|
21,906 |
|
Residential customers |
|
6,526 |
|
6,529 |
|
6,360 |
|
Commercial customers |
|
3,537 |
|
3,402 |
|
3,283 |
|
Rural customers |
|
1,846 |
|
1,783 |
|
1,705 |
|
Public services and other customers |
|
2,498 |
|
2,478 |
|
2,330 |
|
|
|
|
|
|
|
|
|
Average rate (R$/MWh) |
|
226.19 |
|
197.12 |
|
151.64 |
|
Total revenues (millions of R$) |
|
8,560 |
|
7,179 |
|
5,458 |
|
Sales to distributors: |
|
|
|
|
|
|
|
Volume (GWh) |
|
364 |
|
621 |
|
313 |
|
Average rate (R$/MWh) |
|
68.68 |
|
51.53 |
|
67.09 |
|
Total revenues (millions of R$)(1) |
|
25 |
|
32 |
|
21 |
|
Electricity Purchases from Itaipu: |
|
|
|
|
|
|
|
Volume (GWh) |
|
11,936 |
|
12,220 |
|
12,735 |
|
Average cost (R$/MWh) |
|
95.93 |
|
96.15 |
|
76.87 |
|
Total cost (millions of R$) |
|
1,145 |
|
1,175 |
|
979 |
|
(1) Does not include R$12 million, R$24 million and R$140 million relating to energy transactions on the CCEE during 2004, 2003 and 2002, respectively.
Rates
Our results of operations in the past have been significantly affected by fluctuations in the levels of rates that we are permitted to charge for the generation and distribution of electricity. The rate-setting process in Brazil has historically been influenced by government attempts to control inflation. With the restructuring of the electric power sector in Brazil that commenced in 1995 and under the terms of the renewal of the concession agreement that we signed with ANEEL in 1997, the process by which rates are set has changed to a significant degree. Electricity that we distribute to captive customers (those customers with no alternative means of energy supply, including residential, commercial and most industrial customers) is provided at rates that are adjusted and revised by ANEEL in accordance with the provisions of our concession contract. We have entered into electricity supply contracts at freely negotiated rates with our Free Consumers (those customers that have a demand of 3 MW or more of electricity at voltage levels of 69 kV or more) that elected not to be subject to ANEELs rate-setting structure. Under Law No. 10,848, distribution companies are no longer allowed to enter in new contracts for sale of electricity to Free Consumers at non-regulated prices. See The Brazilian Power IndustryRates for the Use of the Distribution and Transmission Systems in Annex A.
ANEEL has approved extraordinary rate increases designed to compensate generation and distribution companies for losses incurred as a result of the Electricity Rationing Plan. See Power Rationing and Government Measures to Compensate Electric Utilities.
ANEEL, through Resolution No. 71, dated as of April 4, 2005, established our first periodic rate revision, allowing for recovery of operating costs and an appropriate return on investments.
The average rate adjustment applied to our rates on April 8, 2003 as part of our periodic rate review was 31.53%. However, according to Resolution No. 71, such rate adjustment was entitled to be 44.41%. ANEEL has
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indicated that the rate adjustments expected for the years from 2004 to 2007 will be adjusted in order to recover the differences between the 44.41% rate adjustment we were entitled to and the 31.53% rate adjustment that was authorized. From more information see Item 8. Financial InformationLegal ProceedingsRegulatory Matters.
The difference between the revenue under the 31.53% rate adjustment and the revenue that would have been earned based on the 44.41% rate adjustment was recorded by CEMIG as a deferred regulatory asset of R$1,013 million, including monetary variation and accrued interest at a rate of 11.3%, to be recovered through the annual readjustments until 2007. See Note 4 to our consolidated financial statements.
ANEEL issued Resolution No. 87 on April 6, 2005, which established our average annual rate adjustment of 23.88%. The components of this increase are (i) 6.68% due to the Rate Adjustment Index ( Índice de Reajuste Tarifário ), or IRT; (ii) 5.72% due to deferred regulatory asset; (iii) 7.35% due to intra-annual variation of fixed costs, or CVA; (iv) 2.46% due to increases in the Programa de Formação do Patrimônio do Servidor (a fund for the benefit of public employees), or PASEP, and the Contribuição para Seguridade Social (a federal social security contribution), or COFINS, taxes and (v) 1.67% due to revenue we did not achieve in 2004 as a result of the re-issuing of Resolution No. 83 on May 24, 2004, which reduced our rates.
Power Rationing and Government Measures to Compensate Electric Utilities
Low amounts of rainfall in 2000 and early 2001, vigorous growth in demand for energy and Brazils significant dependence on electricity generated from hydrological resources resulted in abnormally low water levels in many reservoirs that are used to power Brazils major hydroelectric generation facilities. In May 2001, the Federal Government announced several measures in response to these conditions. First, the President of Brazil passed Provisional Measure No. 2,147 on May 15, 2001 (as updated by Provisional Measure No. 2,152-2 on June 1, 2001), creating the Câmara de Gestão da Crise de Energia Elétrica , or Energy Crisis Committee. The Energy Crisis Committee resolved on May 16, 2001 to require certain electricity distributors, including us, to suspend distribution of electricity to new customers (except residential and rural customers) and for certain non-essential purposes such as nighttime sporting events and advertising use, and to reduce distribution for the illumination of public areas by 35%. Second, the President passed Decree No. 3,818, on May 15, 2001, requiring the Federal Government to reduce its electricity consumption by 35% beginning July 1, 2001. Third, on May 18, 2001, the Federal Government announced additional power rationing measures to be imposed on industrial, commercial and residential customers in the most industrialized and heavily populated areas of Brazil beginning on June 1, 2001. These measures required most residential consumers to reduce their electricity consumption by 20% of the average consumption in May, June and July 2000. Industrial and commercial consumers also had to reduce their consumption by 15% to 25% of the average consumption during the same period. Further measures provided that bonuses would be paid to residential consumers whose energy consumption was lower than the requisite target and that power cuts and surcharges would be imposed on consumers whose energy consumption exceeded the requisite target. ANEEL established specific accounts and controls to record the effect of the rationing measures relating to the bonus, surcharge and other related costs. The power rationing measures ultimately ceased on February 28, 2002.
On October 17, 2001, the Federal Government, through Provisional Measure No. 4, approved by Law No. 10,310 of November 22, 2001, stated that electric utilities, including us, would be reimbursed for expenses associated with payment of bonuses to consumers and other related costs that exceeded the aforementioned surcharges. In 2002, we received approximately R$132 million as reimbursement for a portion of the expenses we incurred in connection with payment of bonuses to consumers. In addition, we are currently negotiating with ANEEL our reimbursement of approximately R$23 million relating to surcharges that were not paid by certain customers because their surcharges are under dispute. There is no assurance that ANEEL will reimburse us, and therefore the total estimated exposure to the Company for this matter is fully reserved. In accordance with ANEEL Resolution No. 600, dated October 31, 2002, we have been reimbursed for operating costs of approximately R$28 million that relate to the adoption of the Electricity Rationing Plan and that exceed amounts received from surcharges on consumer rates. Reimbursement of these operating costs was made through rate increases in force since April 8, 2003, April 8, 2004 and April 8, 2005.
On December 12, 2001, through Provisional Measure No. 14, approved on April 26, 2002 by Law No. 10,438, the Federal Government authorized the creation of the General Agreement of the Electricity Sector. The General Agreement of the Electricity Sector provides that electric power distribution and generation companies in
58
Brazil, such as us, will be compensated for revenue losses caused by the reduction in amounts of energy sold and the purchase of energy on the CCEE, as applicable, due to the Federal Government-mandated rationing measures. Compensation is made by means of an extraordinary increase in the energy rate applicable to future power sales and companies are entitled to use this increased rate for an average period of 72 months, beginning January 2002. See Note 4 to our consolidated financial statements.
Impact of Our Account Receivable from the State Government
Our liquidity, as well as net income, is affected by payments made in connection with the CRC Account, the account receivable we have from the State Government. The State Government did not make any payments to us under the CRC Account Agreement in 2001 or 2002. In 2003 and 2004, we offset a portion of these overdue amounts against payments of interest on capital that we are required to make to the State Government as our shareholder. In order to address the settlement of these outstanding amounts, we signed three amendments to the CRC Account Agreement with State Government, each of which is described below.
The First Amendment to the CRC Account Agreement was signed on January 24, 2001 and its purpose was to change the monetary restatement index from UFIR (Tax Reference Unit Index) to IGPD-DI ( Índice Geral de Preços General Market Price Index), since the UFIR was extinguished in October 2000.
The Second Amendment to the CRC Account Agreement, signed on October 14, 2002, refers to 149 monthly installment payments, with maturities from January 1, 2003 through May 1, 2015, representing the total amount of R$1,845 million at December 31, 2004, bearing interest at 6% per year, with restatement based on IGP-DI. We entered into this Second Amendment with the State Government in order to preserve the terms and conditions of the original CRC Account Agreement with respect to the above-referenced installments. We did not receive any scheduled payments from the State Government in respect of this Second Amendment. We recorded a full provision for loss for this asset as of December 31, 2001. See Note 3 to our consolidated financial statements.
The Third Amendment to the CRC Account Agreement, signed on October 24, 2002, refers to outstanding installments originally due under the CRC Account Agreement from April 1, 1999 through December 31, 1999 and from March 1, 2000 through December 1, 2002. These installments, which totaled R$1,097 million as of December 31, 2004, bear interest at an annual rate of 12%, with restatement based on IGP-DI. We did not receive any scheduled payments in respect of this Third Amendment in 2002. In 2003 and 2004, we offset a portion of overdue amounts in the value of R$28 million and R$49 million, respectively, against payments of interest on capital that we are required to make to the State Government as our shareholder. We are permitted to retain payments of dividends and interest on capital due to the State Government as our shareholder as a set-off against amounts that the State Government owes us under this Third Amendment. For this reason, we have not recorded a loss provision in respect of amounts due thereunder. See Note 3 to our consolidated financial statements.
On November 19, 2004 our Board of Directors unanimously approved the main terms of a Fourth Amendment to the CRC Account Agreement. If we execute this amendment with the State Government, we will be entitled to retain 50% of the payments of dividends and interest on capital due to the State Government, as our shareholder, and to set off such amounts against amounts that the State Government owes us under the CRC Account Agreement. Under the terms approved by our Board of Directors, the outstanding amount will bear interest at an annual rate of 10%, with restatement based on the IGP-DI. The execution of the Fourth Amendment depends on the prior approval by our shareholders, ANEEL and the legislative assembly of the State of Minas Gerais. See Item 10. Additional InformationMaterial ContractsCRC Account Agreement.
Exchange Rates
Substantially all of our revenues and operating expenses are denominated in reais . Although our electricity purchases from Itaipu are denominated in U.S. dollars, the related foreign exchange risk is no longer reflected in our operating revenues and operating expenses due to rate legislation changes in 2001 which allow electricity utilities such as us to record exchange rate losses related to Itaipu purchases as deferred regulatory assets. However, we have significant levels of foreign currency-denominated debt and other liabilities. As a result, in reporting periods when the real declines against the dollar or other foreign currencies in which our debt is denominated, our operating
59
results and financial position are adversely affected. Foreign exchange gain or loss and monetary variation gain or loss may significantly impact our results of operations in periods in which there are wide swings in the value of the real relative to the dollar or high inflation. We have a number of financial and other contracts under which we owe, or are entitled to, amounts in respect of monetary variation as measured by an index of price inflation in Brazil. In 2004, we have used financial instruments such as interest rate swaps in order to reduce the risk from exchange rate fluctuations. As of December 31, 2004, we had entered into swap agreements in the notional amount of US$88.2 million and, with respect to the Japanese yen, in the amount of ¥6,937 million (equivalent to US$67.8 million), in order to change the original interest rate of certain financing from an interest rate calculated based on the U.S. dollar and Japanese yen variations to an interest rate calculated based on the Certificado de Depósito Interbancário CDI (Interbank Certificates of Deposit) rate. See Notes 2(d), 14, 21, 23 and 24 to our consolidated financial statements.
Unbundling
We undertook a reorganization of our corporate structure to comply with Law 10,848/04, which establishes that a distribution company may not exercise other activities such as the generation and transmission of electric energy. Two wholly-owned subsidiaries were created, Cemig Generation and Transmisssion and Cemig Distribution, which will carry out the activities of electricity generation and transmission, and distribution respectively. This process will be finalized with the signature of amendments to the existing concession contracts, after convocation by ANEEL.
Financial Reporting and Tax Considerations
We do not believe that the unbundling will result in material differences in the presentation of our reporting for financial purposes in accordance with U.S. GAAP or Brazilian GAAP since the financial results of the new generation, transmission and distribution subsidiaries would be consolidated with ours. We also do not believe that our marginal tax rate, on a consolidated basis, will change as a result of the unbundling. We do, however, anticipate that our operating results will be adversely affected as a consequence of the application of certain Brazilian revenue taxes. The revenue taxes which would cause the adverse effect on operating results comprise the Contribuição para Seguridade Social (a federal social security contribution), or COFINS, and the Programa de Formação do Patrimônio do Servidor (a fund for the benefit of public employees), or PASEP, and were assessed against our consolidated revenues at a combined rate of approximately 4.65% from December 2002 to December 2003 and 3.65% from January through November 2002. Since February 2004, the combined tax rate for these contributions is 9.25% of a tax base equal to the gross revenue less certain deductions. Following the unbundling, we anticipate that the revenue taxes would be assessed at the subsidiary level with respect to revenues of the generation subsidiary and, separately, revenues of the distribution subsidiary.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Net operating revenues
Net operating revenues increased 26.9% to R$7,654 million in 2004 from R$6,032 million in 2003 due primarily to higher electricity sales to final customers.
60
|
|
2004 |
|
% of net operating revenues |
|
2003 |
|
% of net operating revenues |
|
2004 versus
|
|
Electricity sales to final customers |
|
8,561 |
|
111.8 |
|
7,179 |
|
119.0 |
|
19.3 |
|
Regulatory extraordinary rate adjustment |
|
89 |
|
1.2 |
|
63 |
|
1.0 |
|
41.3 |
|
Deferred rate adjustment |
|
640 |
|
8.3 |
|
199 |
|
3.3 |
|
221.6 |
|
Electricity sales to the interconnected power system |
|
36 |
|
0.5 |
|
56 |
|
0.9 |
|
(35.7 |
) |
Use of basic transmission network |
|
245 |
|
3.2 |
|
257 |
|
4.3 |
|
(4.7 |
) |
Other operating revenues |
|
536 |
|
7.0 |
|
468 |
|
7.8 |
|
14.5 |
|
Tax on revenues |
|
(2,453 |
) |
(32.0 |
) |
(2,190 |
) |
(36.3 |
) |
12.0 |
|
Total net operating revenues |
|
7,654 |
|
100.00 |
|
6,032 |
|
100.00 |
|
26.9 |
|
The increase in revenues from electricity sales to final customers is primarily due to increases in the average rate and in the volume of electricity sales to final customers. There was a 14.8% increase in the average energy rate in 2004 to R$226.21 per MWh compared to R$197.12 per MWh in 2003 as a result of rate increases of 31.5% in April 2003 (full effect in 2004) and 14.0% in April 2004. In addition, there was a 4.1% increase in the volume of our electricity sales to final customers. In 2004, we recorded R$89 million in revenue relating to the regulatory extraordinary rate adjustment, a 41.3% increase compared to the R$63 million that we recorded in 2003. We recorded revenue relating to the regulatory extraordinary rate adjustment in accordance with the terms of the General Agreement of the Electricity Sector, which provides for reimbursement of revenue losses incurred during the period of the Electricity Rationing Plan and related spot market transactions through special rate increases to be billed to final customers, and in accordance with consensus described in EITF Issue No. 92-07, Accounting by Rate-Regulated Utilities for the Effects of Certain Alternative Revenue Programs, which establishes a 24-month limit for the recovery of revenue losses incurred during the Energy Rationing Plan. See Note 4 to our consolidated financial statements.
Revenues related to the deferred rate adjustment were R$640 and R$199 million in 2004 and 2003, respectively. The ANEEL Resolution No. 71, dated April 4, 2004, disclosed the results of CEMIGs periodic rate review. According to this resolution, the rate adjustment that would have to be applied on CEMIGs rates starting April 8, 2003 was 44.4%, instead of the 31.5% applied. The difference will be included by ANEEL in future rate adjustments. See Note 4 to our consolidated financial statements.
Electricity sales to the interconnected power system were R$36 million in 2004, a 35.7% decrease compared to R$56 million in 2003. This decrease resulted primarily from lower sales of energy on the spot market in 2004.
Other operating revenues increased 14.5% to R$536 million in 2004 from R$468 million in 2003. The variation in our other operating revenues in 2004 is mainly due to R$53 million increase in revenues from Gasmig, our subsidiary. We consolidated Gasmigs revenues and expenses for the period from January 1, 2004 to December 15, 2004, the date of our sale of a 40.00% equity interest in Gasmig to Petrobras. See Note 10 and 19 to our consolidated financial statements
Taxes on revenues increased 12.0% to R$2,453 million in 2004 from R$2,190 million in 2003 as a result of the increase in our electricity sales to final customers in 2004 as compared to 2003 and as a result of the VAT billed to customers in connection with the extraordinary rate adjustment. Taxes on revenues consist of: (i) VAT, assessed at an average rate of 21% on electricity sales to final customers, and VAT billed to customers related to the deferred regulatory assets; (ii) COFINS, assessed at a rate of 7.6%; (iii) PASEP, assessed at a rate of 1.65%; and (iv) the Encargo de Capacidade Emergencial (Emergency Capacity Charge), a charge established in 2002 that is prorated among final consumers of electric energy and relates to the Comercializadora Brasileira de Energia Elétrica CBEE, or CBEE, a Federal Government agency set up to supply energy to utilities in the event of future shortages. See Notes 4 and 19 to our consolidated financial statements.
61
Operating costs and expenses
Operating costs and expenses increased 17.7% to R$5,536 million in 2004 from R$4,703 million in 2003, principally as a result of an increase in 2004 of regulatory charges, use of basic transmission network, electricity purchased for resale and higher personnel costs.
|
|
2004 |
|
% of net operating revenues |
|
2003 |
|
% of net operating revenues |
|
2004 versus
|
|
Electricity purchased for resale |
|
(1,477 |
) |
(19.3 |
) |
(1,396 |
) |
(23.1 |
) |
5.8 |
|
Natural gas purchased for resale |
|
(268 |
) |
(3.5 |
) |
(246 |
) |
(4.1 |
) |
8.9 |
|
Use of basic transmission network |
|
(586 |
) |
(7.7 |
) |
(310 |
) |
(5.1 |
) |
89.0 |
|
Depreciation and amortization |
|
(677 |
) |
(8.8 |
) |
(686 |
) |
(11.4 |
) |
(1.3 |
) |
Personnel |
|
(788 |
) |
(10.3 |
) |
(710 |
) |
(11.8 |
) |
11.0 |
|
Regulatory charges |
|
(861 |
) |
(11.2 |
) |
(585 |
) |
(9.7 |
) |
47.2 |
|
Third-party services |
|
(329 |
) |
(4.3 |
) |
(325 |
) |
(5.4 |
) |
1.2 |
|
Employee post-retirement benefits |
|
(153 |
) |
(2.0 |
) |
(109 |
) |
(1.8 |
) |
40.4 |
|
Materials and supplies |
|
(83 |
) |
(1.1 |
) |
(88 |
) |
(1.5 |
) |
(5.7 |
) |
Gain on Gasmig Sale |
|
102 |
|
1.3 |
|
|
|
|
|
|
|
Other |
|
(407 |
) |
(5.3 |
) |
(422 |
) |
(7.0 |
) |
(3.6 |
) |
Reversal (Provision) for loss on deferred regulatory assets |
|
(9 |
) |
(0.1 |
) |
174 |
|
2.9 |
|
|
|
Total operating costs and expenses |
|
(5,536 |
) |
(72.3 |
) |
(4,703 |
) |
(78.0 |
) |
17.7 |
|
Electricity purchased for resale consists primarily of purchases from Itaipu through Centrais Elétricas Brasileiras S.A. - Eletrobrás . We are required under applicable regulations to purchase 17.0% of Itaipus capacity at U.S. dollar-denominated prices. We also purchase electricity from the CCEE and Furnas. Electricity purchased for resale increased 5.8% to R$1,477 million in 2004 from R$1,396 million in 2003 due primarily to the system services charges recorded in 2004, in the amount of R$95 million, that are fixed costs which were passed through our rates. See Note 20 to our consolidated financial statements.
Natural gas purchased for resale increased 8.9% to R$268 million in 2004 compared to R$246 million in 2003 and consists of purchases made by our subsidiary, Gasmig.
Charges for use of the basic transmission network mainly correspond to the cost of transporting electricity in the Brazilian basic transmission network that are prorated among the Brazilian distribution companies. Charges for use of the basic transmission network are fixed costs that represented a 89.0% increase to R$586 million in 2004 compared to R$310 million in 2003 primarily due to increases in the operating costs of new transmission lines of the Brazilian electric system.
Depreciation and amortization expense did not vary significantly, decreasing 1.3% to R$677 million in 2004 compared to R$686 million in 2003.
Personnel expense increased to R$788 million in 2004 compared to R$710 million in 2003 primarily as a result of wage increases of 7.0% and 16.2% in November 2004 and 2003, respectively, and the implementation of our Careers and Remuneration Plan in 2004. Additionally, there were provisions related to our Termination Resignation Program in the amount of R$25 and R$78 million in 2004 and 2003, respectively.
Regulatory charges increased 47.2% to R$861 million in 2004 from R$585 million in 2003 due primarily to the increases of R$120 and R$118 million in the Energy Development Account ( Conta de Desenvolvimento Energético ), or CDE, a new charge created to foster energy development in the states and to promote competition regarding energy produced through wind farms, small hydroelectric power plants, biomass, natural gas and coal, and charges for use of water resources, respectively. These expenses are fixed costs. See Note 4 to our consolidated financial statements.
62
Third-party services expense was R$329 million in 2004 compared to R$325 million in 2003. Third-party services expenses consists primarily of contracts related to meter reading, delivery of bills to consumers, collection services and maintenance of distribution and transmission lines.
Employee post-retirement benefits increased 40.4% to R$153 million in 2004 compared to R$109 million in 2003 due to a higher projected net periodic cost for 2004 as a result of a higher expected interest expense compared to the expected return on plan assets. See Note 16 to our consolidated financial statements.
We recorded a provision for losses of R$9 million in 2004 compared to a reversion provision for loss on deferred regulatory assets of R$174 million in 2003 to reflect our estimation of the recoverability of our deferred regulatory assets. The extraordinary rate adjustment regulatory asset had an initial maximum recovery period of 82 months, which was reduced to 74 months, from January 2002 to February 2008, pursuant to ANEELs Resolution No. 1 dated January 12, 2004. We made studies to verify if the 74-month recovery period would be sufficient to recover the amounts approved by ANEEL. Based on those studies, we recorded an allowance for losses in the amount of R$13 million as of December 31, 2004. Therefore, there was an additional allowance, in the amount of R$9 million, since the original amount recorded, as of December 31, 2003, was R$4 million. See Notes 2(q) and 4 to our consolidated financial statements.
Other expenses decreased 3.6% to R$407 million in 2004 from R$422 million in 2003. The main variations in other expenses in 2004 compared to 2003 were a decrease of R$25 million in losses on disposal of fixed assets and a decrease of R$50 million in other provisions for contingencies and doubtful accounts, offset by a provision in 2004 of R$24 million related to bonuses paid during the rationing period which were not reimbursed from the Federal Government, an increase of R$9 million in rental expenses and a increase of R$17 million in employee profit sharing. See Note 20 to our consolidated financial statements.
Operating income
As a result of the foregoing, we had operating income of R$2,118 million in 2004 compared to operating income of R$1,329 million in 2003.
Financial income, net
Financial income, net, includes (i) financial income, which is mainly comprised of interest and monetary restatement of our account receivable from the State Government, investment income earned, late charges on overdue electricity bills, foreign exchange gains, monetary restatement on deferred regulatory assets, and (ii) financial expense, which is mainly comprised of interest expense on loans and financing, the Contribuição Provisória sobre a Movimentação ou Transmissão de Valores e de Créditos e Direitos de Natureza Financeira (a financial transaction tax), or CPMF, foreign exchange losses, monetary restatement losses, monetary restatement of deferred regulatory liabilities and other expenses. We had financial income, net of R$350 million in 2004 compared to financial income, net of R$674 million in 2003, principally due to a R$242 million decrease in foreign exchange revenues resulting from the 8.7% appreciation of the real against the U.S. dollar in 2004 compared to an 18.2% appreciation of the real against the U.S. dollar in 2003. Additionally, there was a R$122 million increase in losses from financial instruments due to the swap operations made in 2004 to reduce our exchange rate risk See Notes 3, 4, 14, 21, 23 and 24 to our consolidated financial statements.
Income taxes
Income taxes were an expense of R$731 million on pre-tax income of R$2,468 million in 2004 compared to expenses of R$607 million on pre-tax income of R$2,003 million in 2003. Deductions of R$173 million and R$85 million in 2004 and 2003, respectively, with respect to interest on capital reduced the amount provisioned for income taxes in 2004 and 2003. See Note 5 to our consolidated financial statements.
Minority interests
We had income from minority interests of R$2 million in 2004, related to our interest in Gasmig.
63
Net income
As a result of the foregoing, we had net income of R$1,739 million in 2004 compared to net income of R$1,396 million in 2003.
Other comprehensive loss
Other comprehensive loss was R$474 million in 2004 compared to other comprehensive loss of R$64 million in 2003 as a result of the higher additional minimum liability recorded in 2004. In 2004, CEMIG made a change in some actuarial assumptions in the annual discount rate and in the mortality rate. The effect of these changes was an increase in our retirement benefit obligation, which was recorded as an other comprehensive loss in 2004.
Comprehensive income
As a result of the factors stated above, comprehensive income was R$1,265 million in 2004 compared to R$1,332 million in 2003.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Net operating revenues
Net operating revenues increased 23.8% to R$6,032 million in 2003 from R$4,872 million in 2002 due primarily to higher electricity sales to final customers, deferred rate adjustment and use of basic transmission network, partially offset by a decrease in regulatory extraordinary rate adjustment intended to reimburse us for revenue losses incurred as a result of the Electricity Rationing Plan and a decrease in electricity sales to the interconnected power system.
|
|
2003 |
|
% of net operating revenues |
|
2002 |
|
% of net operating revenues |
|
2003 versus
|
|
Electricity sales to final customers |
|
7,179 |
|
119.0 |
|
5,458 |
|
112.0 |
|
31.5 |
|
Regulatory extraordinary rate adjustment |
|
63 |
|
1.0 |
|
281 |
|
5.8 |
|
(77.6 |
) |
Deferred rate adjustment |
|
199 |
|
3.3 |
|
|
|
|
|
|
|
Electricity sales to the interconnected power system |
|
56 |
|
0.9 |
|
161 |
|
3.3 |
|
(65.2 |
) |
Use of basic transmission network |
|
257 |
|
4.3 |
|
185 |
|
3.8 |
|
38.9 |
|
Other operating revenues |
|
468 |
|
7.8 |
|
260 |
|
5.3 |
|
80.0 |
|
Tax on revenues |
|
(2,190 |
) |
(36.3 |
) |
(1,473 |
) |
(30.2 |
) |
48.7 |
|
Total net operating revenues |
|
6,032 |
|
100.00 |
|
4,872 |
|
100.00 |
|
23.8 |
|
Electricity sales to final customers were R$7,179 million in 2003, representing a 31.5% increase compared to R$5,458 million in 2002. This resulted primarily from an increase in the average rate and an increase in the volume of electricity sales to final customers. There was a 30.0% increase in the average energy rate in 2003 to R$197.12 per MWh compared to R$151.64 per MWh in 2002 as a result of rate increases of 10.5% in April 2002 (full effect in 2003) and 31.5% in April 2003. In addition, there was a 0.9% increase in the volume of our electricity sales to final customers. For 2003 compared to 2002, the volume of electric power sold by us to residential, commercial, rural and other customers increased by 2.7%, 3.6%, 4.6% and 6.3%, respectively, while sales to industrial customers decreased by 0.9%.
In 2003, we recorded R$63 million in revenue relating to the regulatory extraordinary rate adjustment, a 77.6% decrease compared to the R$281 million that we recorded in 2002. We recorded revenue relating to the regulatory extraordinary rate adjustment in 2003 and 2002 in accordance with the terms of the General Agreement of the Electricity Sector, which provides for reimbursement of revenue losses incurred during the period of the
64
Electricity Rationing Plan and related spot market transactions through special rate increases to be billed to final customers, and in accordance with consensus described in Emerging Issues Task Force Issue No. 92-07, Accounting by Rate-Regulated Utilities for the Effects of Certain Alternative Revenue Programs, which establishes a 24-month limit for the recovery of revenue losses incurred during the Energy Rationing Plan. See Note 4 to our consolidated financial statements.
In 2003, we recorded R$199 million in revenue relating to the deferred rate adjustment. ANEEL Resolution No. 71, dated April 4, 2004, disclosed the results of CEMIGs periodic rate review. According to this resolution, the rate adjustment that would have to be applied on CEMIGs rates starting April 8, 2003 was 37.9%, instead of the 31.5% applied. The difference will be included by ANEEL in future rate adjustments.
Electricity sales to the interconnected power system were R$56 million in 2003, a 65.2% decrease compared to R$161 million in 2002. This decrease resulted primarily from higher spot market rates associated with energy transactions on the CCEE in the prior year.
Revenues from use of the basic transmission network by other concessionaires increased 38.9% to R$257 million in 2003 from R$185 million in 2002 due to rate increases in July 2002 (full effect in 2003) and July 2003.
Other operating revenues increased 80.0% to R$468 million in 2003 from R$260 million in 2002 due primarily to an R$167 million increase in revenues from Gasmig, our subsidiary, reflecting 83.5% period-over-period growth, and an increase of R$28 million in revenue from Empresa de Infovias S.A. as a result of telecommunication services rendered in 2003.
Taxes on revenues increased 48.7% to R$2,190 million in 2003 from R$1,473 million in 2002 as a result of the 31.5% increase in our electricity sales to final customers in 2003 as compared to 2002 and as a result of the VAT billed to customers in connection with the extraordinary rate adjustment. Taxes on revenues consist of: (i) VAT, assessed at an average rate of 21% on electricity sales to final customers, and VAT billed to customers related to the deferred regulatory assets; (ii) COFINS, assessed at a rate of 3%; (iii) PASEP, assessed at a rate of 1.65%; and (iv) the Encargo de Capacidade Emergencial (Emergency Capacity Charge), a charge established in 2002 that is prorated among final consumers of electric energy and relates to the Comercializadora Brasileira de Energia Elétrica CBEE, or CBEE, a Federal Government agency set up to supply energy to utilities in the event of future shortages. See Notes 4 and 19 to our consolidated financial statements.
Operating costs and expenses
Operating costs and expenses increased 8.2% to R$4,703 million in 2003 from R$4,345 million in 2002, principally as a result of an increase in 2003 of electricity purchased for resale and higher personnel costs, partially offset by a reversion provision recognized in 2002 related to loss on deferred regulatory assets.
65
|
|
2003 |
|
% of net operating revenues |
|
2002 |
|
% of net operating revenues |
|
2003 versus
|
|
Electricity purchased for resale |
|
(1,396 |
) |
(23.1 |
) |
(1,333 |
) |
(27.4 |
) |
4.7 |
|
Natural gas purchased for resale |
|
(246 |
) |
(4.1 |
) |
(152 |
) |
(3.1 |
) |
61.8 |
|
Use of basic transmission network |
|
(310 |
) |
(5.1 |
) |
(298 |
) |
(6.1 |
) |
4.0 |
|
Depreciation and amortization |
|
(686 |
) |
(11.4 |
) |
(666 |
) |
(13.7 |
) |
3.0 |
|
Personnel |
|
(710 |
) |
(11.8 |
) |
(532 |
) |
(10.9 |
) |
33.5 |
|
Regulatory charges |
|
(585 |
) |
(9.7 |
) |
(548 |
) |
(11.2 |
) |
6.8 |
|
Third-party services |
|
(325 |
) |
(5.4 |
) |
(265 |
) |
(5.4 |
) |
22.6 |
|
Employee post-retirement benefits |
|
(109 |
) |
(1.8 |
) |
(207 |
) |
(4.3 |
) |
(47.3 |
) |
Materials and supplies |
|
(88 |
) |
(1.5 |
) |
(78 |
) |
(1.6 |
) |
12.8 |
|
Other |
|
(422 |
) |
(7.0 |
) |
(238 |
) |
(4.9 |
) |
77.3 |
|
Reversal (Provision) for loss on deferred regulatory assets |
|
174 |
|
2.9 |
|
(28 |
) |
(0.6 |
) |
|
|
Total operating costs and expenses |
|
(4,703 |
) |
(78.0 |
) |
(4,345 |
) |
(89.2 |
) |
8.2 |
|
Electricity purchased for resale consists primarily of purchases from Itaipu through Centrais Elétricas Brasileiras S.A. - Eletrobrás . We are required under applicable regulations to purchase 17.0% of Itaipus capacity at U.S. dollar-denominated prices. We also purchase electricity from the CCEE and Furnas. Electricity purchased for resale increased 4.7% to R$1,396 million in 2003 from R$1,333 million in 2002 due mainly to a 20.0% increase in purchases from Itaipu to R$1,175 million in 2003 compared to R$979 million in 2002, partially offset by a 73.2% decrease in energy purchased from the CCEE, considering the higher spot market rates associated with energy transactions on the CCEE in the prior year. See Note 20 to our consolidated financial statements.
Natural gas purchased for resale increased 61.8% to R$246 million in 2003 compared to R$152 million in 2002 and consists of purchases made by our subsidiary, Gasmig. The increase in natural gas purchased for resale is the result of increases in the natural gas price, and a 12.2% increase in the volume of gas sold by Gasmig in 2003.
Charges for use of the basic transmission network mainly correspond to the cost of transporting electricity purchased from Itaipu and other concessionaires. Charges for use of the basic transmission network represented a 4.0% increase to R$310 million in 2003 compared to R$298 million in 2002 principally as a result of rate increases in July of 2002 and 2003.
Depreciation and amortization increased 3.0% to R$686 million in 2003 from R$666 million in 2002 as a result primarily of the entry into service of additional distribution and transmission networks and lines.
Personnel expense increased to R$710 million in 2003 compared to R$532 million in 2002 primarily as a result of wage increases of 16.2% and 11.5% in November 2003 and 2002, respectively, and a provision relating to our Termination Resignation Program in the amount of R$78 million.
Regulatory charges increased 6.8% to R$585 million in 2003 from R$548 million in 2002 due primarily to R$118 million related to the CDE, partially offset by a R$63 million decrease in Fuel Usage Quota Account charges in 2003 to R$282 million from R$345 million in 2002 as a result of decreased operations of thermal generation plants in 2003. See Note 20 to our consolidated financial statements.
Third-party services expense increased 22.6% to R$325 million in 2003 compared to R$265 million in 2002. This increase resulted mainly from an increase in the prices for service contracts relating to meter reading, delivery of bills to consumers and collection services.
66
Employee post-retirement benefits decreased 47.3% to R$109 million in 2003 compared to R$207 million in 2002 due to a lower projected net periodic cost for 2003 as a result of a higher expected return on plan assets. See Note 16 to our consolidated financial statements.
We recorded a reversion provision for loss on deferred regulatory assets of R$174 million in 2003 compared to a provision of R$28 million in 2002 to reflect our estimation of the recoverability of our deferred regulatory assets. The extraordinary rate adjustment regulatory asset had an initial maximum recovery period of 82 months, which was reduced to 74 months, from January 2002 to February 2008, pursuant to ANEELs Resolution No. 1 dated January 12, 2004. We made studies to verify if the 74-month recovery period would be sufficient to recover the amounts approved by ANEEL. Based on those studies, we recorded an allowance for losses in the amount for R$4 million as of December 31, 2003. Therefore, there was a reversal of the allowance, in the amount of R$174 million, since the original amount recorded, as of December 31, 2002, was R$178 million. See Notes 2(q) and 4 to our consolidated financial statements.
Other expenses increased 77.3% to R$422 million in 2003 from R$238 million in 2002 due principally to an increase of R$55 million in employees profit sharing, considering our better financial performance in 2003, and an increase of R$44 million in provision for doubtful accounts to R$57 million in 2003 compared to R$13 million in 2002, and, to a lesser extent, to increases in our losses on disposal of fixed assets and expenses related to other taxes and rentals. See Note 20 to our consolidated financial statements.
Operating income
As a result of the foregoing, we had operating income of R$1,329 million in 2003 compared to operating income of R$527 million in 2002.
Financial income (expense), net
Financial income (expense), net, includes (i) financial income, which is mainly comprised of interest and monetary restatement of our account receivable from the State Government, investment income earned, late charges on overdue electricity bills, foreign exchange gains, monetary restatement on deferred regulatory assets, and (ii) financial expense, which is mainly comprised of interest expense on loans and financing, the Contribuição Provisória sobre a Movimentação ou Transmissão de Valores e de Créditos e Direitos de Natureza Financeira (a financial transaction tax), or CPMF, foreign exchange losses, monetary restatement losses, monetary restatement of deferred regulatory liabilities and other expenses. We had financial revenues, net of R$674 million in 2003 compared to financial expenses, net of R$525 million in 2002, principally due to a R$321 million increase in foreign exchange revenues and a decrease of R$800 million in foreign exchange losses, resulting from the 18.2% appreciation of the real against the U.S. dollar in 2003 compared to an 52.3% devaluation of the real against the U.S. dollar in 2002. Additionally, there was a R$330 million increase in monetary restatement on deferred regulatory assets and reclassification adjustment on marketable securities gains of R$76 million from the sale of Notas do Tesouro Nacional (Brazilian National Treasury Notes) offset by a R$158 million decrease in income from temporary cash investments due to lower cash and cash equivalents and restricted investments in 2003 and income from cash investments denominated in U.S. dollars, losses on financial instruments, net of R$44 million and a R$139 million decrease in interest and monetary restatement of an account receivable from the State Government due to lower variation of IGP-DI, index of the contract. See Notes 3, 4, 14, 21, 23 and 24 to our consolidated financial statements.
Income taxes
Income taxes were an expense of R$607 million on pre-tax income of R$2,003 million in 2003 compared to expenses of R$26 million on pre-tax income of R$2 million in 2002. Deductions of R$85 million and R$73 million in 2003 and 2002, respectively, with respect to interest on capital reduced the amount provisioned for income taxes in 2003. See Note 5 to our consolidated financial statements.
67
Minority interests
Minority interests were income of R$12 million in 2002, related to the operation of Empresa de Infovias S.A.
Net income (loss)
As a result of the foregoing, we had net income of R$1,396 million in 2003 compared to net loss of R$12 million in 2002.
Other comprehensive income (loss)
Other comprehensive loss was R$64 million in 2003 compared to other comprehensive income of R$242 million in 2002 as a result of the additional minimum liability recorded and the reclassification adjustment resulting from the sale of the available for sale securities.
Comprehensive income
As a result of the factors stated above, comprehensive income was R$1,332 million in 2003 compared to R$230 million in 2002.
Liquidity and Capital Resources
Our business is capital intensive. Historically, we have required capital to finance the construction of new generation facilities and the expansion and modernization of existing generation, transmission and distribution facilities. Our liquidity requirements are also affected by our dividend policy. See Item 8. Financial InformationDividend Policy and Payments. We have funded our liquidity and capital requirements primarily with cash provided by operations and, to a lesser extent, with proceeds of financings. We believe that our current cash reserves, cash provided by operations and anticipated proceeds from financings will be sufficient during the next 12 months to meet our liquidity requirements.
Cash and cash equivalents
Cash and cash equivalents as of December 31, 2004 were R$874 million compared to R$440 million as of December 31, 2003 and R$123 million as of December 31, 2002. None of our cash or cash equivalents was held in currencies other than reais as of December 31, 2004.
Cash flow from operating activities
Net cash provided by operating activities in 2004, 2003 and 2002 totaled R$1,538 million, R$658 million and R$732 million, respectively. The increase in cash provided by operating activities in 2004 compared to 2003 was due primarily to financial settlement of the CCEE transactions in 2003. The same reason justified the decrease in cash provided by operating activities in 2003 compared to 2002. Significant non-cash items affecting earnings included increased depreciation and amortization expense as a result of our on-going capital improvements projects, recognition of deferred regulatory assets, the effects of monetary variation and exchange rate variations and the provision for loss on the receivable under the CRC Account Agreement.
Cash flow from investing activities
Net cash used in investing activities during 2004, 2003 and 2002 amounted to R$917 million, R$852 million and R$546 million, respectively, principally relating to the acquisition of property, plant and equipment and the modernization of existing generation, transmission and distribution facilities. Capital expenditures from the acquisition of property, plant and equipment amounted to R$1,061 million, R$1,029 million and R$869 million in 2004, 2003 and 2002, respectively. New investments in other affiliates also impacted net cash use in investing activities. Such investments amounted to R$10 million, R$4 million and R$103 million in 2004, 2003 and 2002,
68
respectively. See Item 4. Information on the CompanyCapital Expenditures for more detail regarding how these capital expenditures were applied by us.
Cash flow from financing activities
Net cash used in financing activities during 2004 was R$187 million, comprised of R$1,230 million and R$316 million in proceeds from long-term financing and short-term loans, respectively, offset by the repayment of R$1,424 million of real- and foreign currency-denominated long-term financing and the payment of R$309 million in dividends and interest on capital.
Net cash provided by financing activities during 2003 was R$511 million, comprised of R$717 million and R$820 million in proceeds from long-term financing and short-term loans, respectively, offset by the repayment of R$826 million of real- and foreign currency-denominated long-term financing and the payment of R$200 million in dividends and interest on capital.
Net cash used in financing activities during 2002 was R$281 million, comprised of the repayment of R$597 million of real- and foreign currency-denominated long-term financing and the payment of R$214 million in dividends and interest on capital, offset by R$518 million in proceeds from long-term financing, including U.S. dollar-denominated long-term loans, and an advance for future capital increase made by minority shareholders of R$12 million.
Our indebtedness as of December 31, 2004 was R$4,167 million, composed of R$2,750 million of long-term debt and R$1,417 million of the current portion of long-term debt. This compares with indebtedness as of December 31, 2003 of R$ 3,991 million, composed of R$2,331 million of long-term debt and R$1,660 million current portion of long-term debt. Of our long-term debt (including the current portion) at December 31, 2004, R$1,119 million was denominated in foreign currencies (R$857 million of which was U.S. dollar-denominated) and R$3,048 million was denominated in reais . Of our total indebtedness of R$4,167 million as of December 31, 2004, R$3,369 million is subject to variable interest rates. See Notes 14 and 23 to our consolidated financial statements.
We are subject to financial covenants contained in some of our debt agreements that require us to maintain certain financial ratios. These ratios are computed based on our financial statements prepared in accordance with accounting practices adopted in Brazil. These and other covenants could limit our ability to support our liquidity and capital requirements.
We are currently not in compliance with certain financial covenants of a debt agreement between Empresa de Infovias S.A. and MBK Furukawa Sistemas S.A./Unibanco in the total principal amount of R$58.0 million as of December 31, 2004, of which R$40.8 million is classified as long-term liabilities in our consolidated financial statements. These covenants are based on the financial statements prepared in accordance with the accounting practices adopted in Brazil. However, Empresa de Infovias S.A. has obtained a waiver from the creditors party to the contract for non-compliance with those covenants. The waiver affirms that such creditors will not exercise their rights to demand either accelerated or immediate payment of the total amount due until December 31, 2005. We cannot assure you that we will be able to renew this waiver in which case the relevant creditors would be able to accelerate payment. This would result in the cross-acceleration of other indebtedness of CEMIG due to cross-default provisions in its other debt agreements. See Note 14 to our consolidated financial statements and Item 13. Defaults, Dividend Arrearages and Delinquencies.
On December 31, 2004, our total debt was R$4,167 million, of which R$1,417 million matures in 2005. Of our total debt, R$1,119 million was contracted in foreign currency, of which R$342 million matures in 2005. Due to these maturities in 2005, we need funds in the short term to pay and refinance these obligations. For this reason, we are refinancing our debt in 2005 to lengthen maturities. We plan to raise approximately R$1.5 billion in 2005, which will be used to repay debt. We cannot assure you that we will successfully consummate this refinancing.
In addition to the financings described in our financial statements, we have credit lines with financial institutions as of December 31, 2004 in the amount of R$94 million which we have not yet used.
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On July 19, 2004, we set up a Local Note Program, or the Program, according to Instrução CVM No. 400, dated December 29, 2003 . The Program is expected to last two years from the date of the filing with the Comissão de Valores Mobiliários CVM. Initially, under the Program we were permitted to issue debentures in an amount of up to R$1.5 billion. We currently have R$230.4 million outstanding under the Program. Because of the unbundling, we cannot issue additional debentures under the Program. We may in the future establish other local note programs directly or through our subsidiaries.
As a state-controlled company, we are subject to restrictions under current financing laws and regulations in Brazil on our ability to obtain financing in certain situations. For example, we must obtain approval from the Brazilian Ministry of Finance and the Central Bank prior to certain international financial transactions and such approval is typically granted only if the purpose of the transaction is to finance the import of goods or to roll over our external debt. In addition, financial institutions in Brazil are subject to risk exposure restrictions with regard to state governments, governmental agencies and state-controlled companies such as us. The restrictions mentioned in this paragraph have not prevented us from obtaining financing, although there is no assurance that our ability to obtain financing will not be hindered in the future. See Item 3. Key InformationRisk FactorsRisks Relating to BrazilWe currently face limitations on our ability to obtain financing.
We currently plan to make capital expenditures aggregating approximately R$1,988 million in 2005. The principal uses of these expenditures are expected to be for expansion of our distribution infrastructure and increases in our generation capacity. In 2004, we funded our capital expenditures and met our liquidity requirements through a combination of cash flow from operations and financings. We expect that we will fund our proposed capital expenditures and meet our other liquidity requirements in 2005 through a combination of cash flow from operations and financings. Because we rely primarily on cash generated from operations to fund our liquidity and capital requirements, factors that cause our revenues and net income to increase or decrease could have a corresponding effect on our access to sources of liquidity.
Over the long term, we anticipate that it will be necessary to make significant capital expenditures in connection with the maintenance and upgrading of our generation, transmission and distribution facilities, and we expect to employ a variety of liquidity sources, such as cash flow from operations and financings, in connection with such requirements. See Item 3. Key InformationRisk Factors for a discussion of certain matters that might adversely affect our liquidity position.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Tabular Disclosure of Contractual Obligations
We have outstanding contractual obligations and commitments which include principal debt payment provisions, the obligation to purchase electricity for resale from Itaipu, the obligation to transfer and transport electric power from Itaipu as well as construction commitments. The following table provides information, as of December 31, 2004, about our contractual obligations and commitments in millions of reais .
70
|
|
Total |
|
Less
|
|
1-3
|
|
3-5
|
|
More
|
|
Total debt(1) |
|
4,167 |
|
1,417 |
|
1,322 |
|
873 |
|
555 |
|
Purchase obligations |
|
|
|
|
|
|
|
|
|
|
|
Purchase of electricity from Itaipu for resale(2) |
|
8,619 |
|
1,024 |
|
2,048 |
|
2,048 |
|
3,499 |
|
Energy auction on CCEE |
|
6,478 |
|
267 |
|
1,618 |
|
1,621 |
|
2,972 |
|
Transfer and transport electric power from Itaipu(2) |
|
505 |
|
60 |
|
120 |
|
120 |
|
205 |
|
Investments |
|
|
|
|
|
|
|
|
|
|
|
Aimorés hydroelectric power plant(3) |
|
66 |
|
66 |
|
|
|
|
|
|
|
Irapé hydroelectric power plant(3) |
|
287 |
|
271 |
|
16 |
|
|
|
|
|
Funil hydroelectric power plant(3) |
|
11 |
|
11 |
|
|
|
|
|
|
|
Queimado hydroelectric power plant(3) |
|
20 |
|
20 |
|
|
|
|
|
|
|
Pai Joaquim hydroelectric power plant(3) |
|
10 |
|
10 |
|
|
|
|
|
|
|
Cemig Capim Branco Energia(3) |
|
39 |
|
22 |
|
17 |
|
|
|
|
|
Transmission Lines(3) |
|
46 |
|
35 |
|
11 |
|
|
|
|
|
Gasmig |
|
75 |
|
5 |
|
64 |
|
6 |
|
|
|
Empresa de Infovias S.A. |
|
48 |
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term obligations |
|
|
|
|
|
|
|
|
|
|
|
Pension plan contributions |
|
1,555 |
|
112 |
|
237 |
|
186 |
|
1,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
21,926 |
|
3,368 |
|
5,453 |
|
4,854 |
|
8,251 |
|
(1) In the event of our non-compliance with certain covenants in our loan agreements, the total principal, future interest and any penalties due under these agreements may become immediately due and payable.
(2) Contract with Furnas, denominated in U.S. dollars, to supply electric power purchased from Itaipu until May 2013. Amounts are calculated based on the U.S. dollar exchange rate as of December 31, 2004.
(3) Contractual obligations with contractors.
Research and Development
We are engaged in projects that explore technological advances not only in electric power systems but in all energy-related fields such as the development of the usage of alternative energy sources, environmental control and power system performance and safety optimization. In 2004, we spent approximately R$28 million on research and development, including transfers to Fundo Nacional de Desenvolvimento Cientifico e Tecnológico FNDCT (a federal research and development fund). During the years ended December 31, 2004, 2003 and 2002, we spent an aggregate of approximately R$38 million on research and development, and we transferred the same amount to FNDCT during that time. We expect to spend a total of approximately R$30 million on research and development in 2005. We conduct these efforts in accordance with Federal Law No. 9,991, which requires Brazilian power utilities to spend at least 0.5% of their net income on research and development projects (including transfers to FNDCT), as well as in accordance with our strategic corporate plans.
We have dedicated a substantial portion of our research and development activities to the development of the usage of alternative energy sources, including wind, solar and biomass power generation. For example, our experimental Morro do Camelinho wind farm, with an installed capacity of 1 MW, began operating in 1994. See Item 4. Information on the CompanyGeneration and Purchase of Electric PowerWind Farm. We are currently involved in alternative energy research and development through projects that involve:
the development of the first Latin American 500W and 1,000W prototypes of hydrogen fuel cells (Direct Hydrogen Proton Exchange Membrane Fuel Cells) and research regarding the development of cells fueled directly by ethanol without external reform (Direct Ethanol Proton Exchange Membrane Fuel Cell);
71
the use of low cost technologies for electricity generation such as Elsbeth and Stirling motors, internal combustion engines, photovoltaic panels, micro turbines, high temperature fuel cells, biomass gasification, and bio-gas from animal biomass;
the creation of an experimental laboratory for the production of hydrogen as an energy source;
a joint research program with Universidade Federal de Itajubá relating to small hydroelectric plants, thermal generation and distributed energy resources;
a joint research program with Centro Tecnológico de Minas Gerais focusing on the development of a low-cost photovoltaic cell;
a joint research program with Universidade Federal de Viçosa relating to planted biomass for electricity generation; and
a joint research program with Centro Federal de Educação Tecnológica focusing on the development of small solar thermal power plants using low-cost materials.
Our research and development projects in areas other than alternative energy sources include:
projects regarding the minimization of the environmental impact in areas like fish safety, limnology, aquifers recharge, geology-related researches, riparian vegetation and environmental problems caused by turbines;
projects for monitoring and optimizing of thermal and hydroelectric plants;
meteorology projects, especially related to flood and lightning forecasts, the major causes of power outages;
projects for the optimization and improvement of the performance of transmission and distribution systems, like the development of new computer tools, equipment and materials;
projects for the development of new equipment for energy efficiency; and
projects for the optimization of supervision, control and protection systems of the transmission and distribution control centers.
We have also been instrumental in developing programs relating to the generation of electricity in remote areas and for low-income consumers, such as our Lumiar and Luz Solar programs.
Trends
Including the purchase of energy from the Itaipu power plant, in 2004 our generation resources were sufficient to meet our own load and our sale contracts. Due to the good rainfall, reservoir and river conditions in 2004, the Brazilian water grid as a whole generated 96% of its maximum contracting capacity.
In 2004, since it was still possible to continue Initial Contracts, almost all of our generation was used to supply our own needs. For 2005, only 25% of the Initial Contracts remain and, other than under these contracts, self-supply is no longer permitted. Thus, to complement our needs, we bought energy from several generating companies through the Existing Energy Auction held on December 7, 2004. At that auction we also participated as vendors and sold energy to 35 distribution companies.
As a public service utility, we are subject to regulations issued by the Federal Government as described in Item 4. Information on the CompanyBrazils Energy MarketRegulation. Therefore, any change in the
72
regulatory framework may affect us significantly either with respect to our revenue if the change relates to prices or with respect to our operating expenses if the change relates to costs incurred to provide service to customers.
We do not anticipate any significant change in revenues in respect of the transmission and distribution businesses since the regulation in place meets the plans of the Federal Government administration.
The rate readjustment was applied differently to different client categories with industrial clients having higher readjustments than residential clients. For more information, see Item 4. Information on the CompanyBrazils Energy MarketRates and Annex AThe Brazilian Power IndustryRates for the Use of the Distribution and Transmission Systems. This difference in application may have an impact on sales volume growth in the future since industrial clients will tend to develop power projects to supply energy to themselves at a lower cost. We are taking steps to mitigate this impact through the connection of new clients of different categories as well as clients based in neighboring states. In the coming years, we expect electricity consumption to grow toward the pre-rationing level based on an assumption that economic activity in Brazil will return to the levels it reached prior to the Federal Government-imposed rationing in 2001. However, there can be no assurance that this will occur.
We expect that expenses that we are not able to control will increase at a rate well above inflation, which will require further rate increases. We expect our controllable costs to rise more or less at the rate of inflation since most of these cost items are adjusted for inflation according to contractual terms. We have taken measures to cut operating costs so as to meet benchmarks proposed by ANEEL in the periodic rate review process.
With respect to expansion, the most significant trend relates to universalization of client service. Utilities are currently required to provide service to all clients according to a schedule settled by ANEEL. The legislation provides that financing for universalization of the services will come from the funds of the Energy Development Account (Conta de Desenvolvimento Energético), or CDE, and the Global Reversion Fund (Reserva Global de Reversão), or RGR. According to a program launched by ANEEL for universalization of electric services in rural areas, initially 29.5% of the necessary funds will come from CDE and 25.1% from RGR. With respect to energy supply, we expect the current overcapacity and favorable reservoir levels to prevail in the near term, allowing customers to consume electricity at lower prices and discouraging investment in new power projects. Investment in new generating capacity is one of the major concerns of the Federal Government to be addressed through regulatory framework reform. It is expected that the new regulatory framework will encourage investment in new generation capacity.
Directors and Senior Management
We are managed by our Board of Directors ( Conselho de Administração) , which consists of 14 directors, with each director having a corresponding alternate, and our Board of Executive Officers ( Diretoria) , which consists of seven executive officers. As our majority shareholder, the State Government has the right to elect the majority of our Board of Directors and, therefore, can control the outcome of Board of Director meetings. Each holder of our common shares is entitled to vote to elect members of our Board of Directors. Pursuant to the Brazilian Corporate Law, any shareholder holding at least 10% of our outstanding common shares may request that a cumulative voting procedure be adopted that would entitle each share to a number of votes equal to the current number of members of our Board of Directors and giving each shareholder the right to either vote cumulatively for a candidate or to distribute its votes among several candidates.
Pursuant to the Brazilian Corporate Law, holders of preferred shares representing at least 10% of our share capital or holders of common shares representing at least 15% of our voting capital (other than our controlling shareholder) have the right to appoint one member and an alternate to the Board of Directors. If none of the holders of common shares or preferred shares meets the respective thresholds described above, shareholders representing in the aggregate at least 10% of our share capital will be able to combine their holdings to appoint one member and an alternate to the Board of Directors.
73
CEMIG and its wholly-owned subsidiaries, Cemig Generation and Transmission and Cemig Distribution, all have the same Board of Directors, Board of Executive Officers and Fiscal Council.
Board of Directors
Our Board of Directors ordinarily meets once every two months. Its responsibilities include the establishment of corporate strategy, the general direction of our business and the election, dismissal and supervision of our executive officers.
Each regular member of the Board of Directors has an alternate member, who is elected at general shareholder meetings in the same manner as a regular member. Alternate directors act as substitutes for their respective directors from time to time when the directors are not available to perform normal director functions, or, in the case of a vacancy on the Board of Directors, until a replacement director is appointed to fill such vacancy. No member or alternate member of our Board of Directors has a service contract with us or any subsidiary that provides for benefits upon termination of employment.
The members of our Board of Directors are elected to serve three-year terms and may be reelected. Our full Board of Directors is elected every three years. Of the current 14 members of our Board of Directors, eight were elected by the State Government, five were elected by Southern and one was elected by our preferred shareholders. The terms of the current members of our Board of Directors expire in April 2006.
The names, positions and dates of initial appointment of our directors and their respective alternates are as follows:
Name |
|
Position |
|
Date of Initial
|
|
Wilson Nélio Brumer(1) |
|
Director |
|
February 27, 2003 |
|
Fernando Lage de Melo |
|
Alternate |
|
February 27, 2003 |
|
Djalma Bastos de Morais |
|
Director |
|
January 14, 1999 |
|
Luiz Antônio Athayde Vasconcelos |
|
Alternate |
|
February 27, 2003 |
|
Francelino Pereira dos Santos |
|
Director |
|
February 27, 2003 |
|
Marco Antônio Rodgrigues da Cunha |
|
Alternate |
|
February 27, 2003 |
|
Antônio Adriano Silva |
|
Director |
|
January 14, 1999 |
|
Francisco Sales Dias Horta |
|
Alternate |
|
February 27, 2003 |
|
Nilo Barroso Neto |
|
Director |
|
November 24, 2003 |
|
Guilherme Horta Gonçalves Júnior |
|
Alternate |
|
February 27, 2003 |
|
Haroldo Guimarães Brasil(2) |
|
Director |
|
December 30, 2004 |
|
Antônio Renato do Nascimento (2) |
|
Alternate |
|
December 30, 2004 |
|
Carlos Augusto Leite Brandão(2) |
|
Director |
|
May 07, 2004 |
|
Fernando Teixeira Mendes Filho(2) |
|
Alternate |
|
May 07, 2004 |
|
Andréa Paula Fernandes(2) |
|
Director |
|
May 07, 2004 |
|
Rodrigo Bhering Andrade (2) |
|
Alternate |
|
December 30, 2004 |
|
Antônio Luiz Barros de Salles(2) |
|
Director |
|
May 07, 2004 |
|
Andréa Leandro Silva(2) |
|
Alternate |
|
May 07, 2004 |
|
José Augusto Pimentel Pessoa(2) |
|
Director |
|
May 07, 2004 |
|
Evandro Veiga Negrão de Lima(2) |
|
Alternate |
|
December 30, 2004 |
|
Aécio Ferreira da Cunha |
|
Director |
|
May 28, 2003 |
|
Eduardo Lery Vieira |
|
Alternate |
|
May 28, 2003 |
|
Maria Estela Kubitschek Lopes |
|
Director |
|
February 27, 2003 |
|
Luiz Henrique de Castro Carvalho |
|
Alternate |
|
August 20, 2004 |
|
Alexandre Heringer Lisboa |
|
Director |
|
February 27, 2003 |
|
Franklin Moreira Gonçalves |
|
Alternate |
|
February 27, 2003 |
|
José Luiz Alquéres(3) |
|
Director |
|
December 30, 2004 |
|
Guy Maria Villela Paschoal(3) |
|
Alternate |
|
December 30, 2004 |
|
(1) Chairman of the Board of Directors.
(2) Elected by Southern.
74
(3) Elected by our preferred shareholders.
Set forth below is brief biographical information for each member of our Board of Directors:
Wilson Nélio Brumer Mr. Brumer earned a degree in business administration from the Economics, Administration and Accounting CollegeFUMEC-BH in 1975 and has completed several financial management, planning and managerial development courses in Brazil and abroad. He has been the Minas Gerais State Secretary of Economic Development since January 2003 and a director of Valepar S.A. since January 2001. He is the former chairman of the following companies: BHP Billiton Brasil from November 1998 to December 2002; Grupo Paranapanema from February 1996 to October 1998; Aço Minas Gerais Açominas from May 1995 to June 1997; Eletrometal Metais Especiais S.A. from 1994 to 1996; Brasifco S.A. from 1993 to 1996; Rio Doce Finance Ltd.RDF from 1990 to 1992; Itabira International Company Ltd. ITACO from 1990 to 1992 and Navegação Rio Doce S.A.DOCENAVE from 1990 to 1991. Mr. Brumer is a former vice president of the board of directors of the following companies: Acesita from November 1992 to October 1998; Acesita Energética S.A. from 1992 to 1996; Forjas Acesita S.A. from 1992 to 1996; CVRD from 1990 to 1992 and the Villares Group consisting of Indústrias Villares, Aços Villares S.A. and Elevadores Atlas S.A. from February 1995 to October 1998. He is a former director of: Companhia Siderúrgica de TubarãoCST from July 1996 to April 1999; Varig from November 1994 to February 1996; Usiminas from October 1991 to November 1992; Companhia Siderúrgica Tubarão from August 1992 to November 1992; Rio Doce Geologia e Mineração S.A.DOCEGEO from 1988 to 1990; Florestas Rio Doce S.A. from 1988 to 1990 and Ferritas Magnéticas S.A.FERMAG from 1984 to 1986. Mr. Brumer is also the former chief executive officer of: Acesita from November 1992 to October 1998; Companhia Siderúrgica de Tubarão from July 1996 to April 1999; CVRD from April 1990 to November 1992, Acesita Energética S.A. from 1992 to 1993 and Forjas Acesita S.A. from 1992 to 1993. He served as the chief financial officer of CVRD from February 1988 to April 1990. Mr. Brumer has also served as a member of the fiscal councils of: Navegação Rio Doce S.A. DOCENAVE from 1983 to 1987 (president); Urucum Mineração S.A. from 1983 to 1984 and Fundação Vale do Rio Doce de Seguridade SocialVALIA from 1982 to 1983. Mr. Brumer has also served as the president of the Brazilian Steel Company Institute from August 1997 to May 1999, president of the Industrial Policy Council of the Industry Federation of Minas Gerais from 1994 to 1999, president of the finance committee of Valesul Alumínio S.A. from 1984 to 1988, executive director of the Brazilian Foreign Trade Association AEB from 1994 to 1997, and a member of several councils and committees.
Djalma Bastos de Morais Mr. Morais holds a bachelors degree in engineering from the Military Institute of Engineering and has completed additional post-graduate studies in telephony and computers at the same institute. Since January 1999 he has been our Chief Executive Officer, and since July 2002 he has been the Chief Executive Officer of Empresa de Infovias S.A. From January 1999 to December 2004 he was the Chief Executive Officer of Gasmig. From May 1999 to August 2001 he was the Chief Executive Officer of Empresa de Infovias S.A. From 1995 to 1998, he was Vice-President of Petrobrás Distribuidora S.A., the Brazilian oil company. From 1993 to 1994, Mr. Morais served as Brazilian Minister of Communications. He has also held various other positions, such as chief executive officer of Telecomunicações de Minas Gerais S.A.Telemig; manager of Telecomunicações Brasileiras S.A.Telebrás; chief operating officer of Telecomunicações de Mato GrossoTelemat; chief operating officer of Telecomunicações do AmazonasTelemazon; and manager of Telefônica Municipal S.A.Telemusa.
Francelino Pereira dos Santos Mr. Santos earned a law degree from the Law School of the Federal University of Minas Gerais in 1949. Mr. Santos was a Minas Gerais state senator from 1995 to 2002 and the Governor of Minas Gerais from 1979 to 1983. He also was a congressional representative for four successive terms from 1963 to 1979 and alderman for the city of Belo Horizonte from 1951 to 1954. From 1961 to 1966 he was Chief of Cabinet of the Minas Gerais State Secretary of Internal Affairs and Justice, Chief of the Minas Gerais State General Management Department and Chief Counselor for Municipalities Affairs of the Cabinet of the Governor. From 1985 to 1990, he was vice-president of management of Banco do Brasil S.A. and the chief executive officer of Acesita from October 1983 to August 1984. Mr. Santos was also a professor and director of the Municipal Accounting High School in Belo Horizonte from 1955 to 1959.
Antônio Adriano Silva Mr. Silva holds a business administration degree with a specialization in marketing. He has worked for several private entities, including Mesbla S.A., Empresa Brasileira de Varejo S.A.Embrava, Agência Jornalística Imagem, Associação Comercial de Minas, Asa Criação de Publicidade, and Coteminas.
75
Nilo Barroso Neto Mr. Barroso graduated in economics from the University of Brasília in 1979. He began the training course for a diplomatic career in 1977, completing it in 1982. In 1991 he completed the Masters course in liberal studies at Georgetown University, Washington, specializing in political philosophy. In 1983 and 1984 he was Assistant Head of the Consular Division, and in subsequent years held the posts of Assistant Head of the Division for Market Studies and Research, and Assistant to the Secretary for Relations with Congress. In 1993 he was an official of the General Secretariat of the Presidency of the Republic. From 1991 to 1993 he was Assistant Counsel in Houston, USA. He advised the annual conferences of the Interparliamentary Union in Bangkok (1987) and Mexico (1986), and participated as an Advisor in the meetings with the International Monetary Fund and the World Bank in the period from 1989 through 1991. He was a member of the Brazilian Congressmens Delegation to the Convention of the Republican Party of the United States, in Houston, in 1992. He has been a member of the presidential summit group for the political concentration and consultation mechanisms in Santiago, Chile, since 1993.
Haroldo Guimarães Brasil Mr. Guimarães was born on July 13, 1962. He graduated with a degree in electrical engineering from PUC University of Minas Gerais, and earned a doctorate in economics from Rio de Janeiro Federal University in 1997. He was awarded a Masters Degree in Business Administration by Minas Gerais Federal University in 1991, and completed the Central Bank Technical Graduation Course (Sao Paulo, 1994), as well as post-graduation studies in Public Policies from ENAP of Brasília (1990), and a specialization in economic engineering from the Dom Cabral Foundation in 1986. He is a Director of Strategor Ltda Consultoria e Treinamento, a Consultant of the Management Development Foundation, a Lecturer in the Masters Degree Course in Business Administration of the Pedro Leopoldo Foundation, Lecturer at IBMEC Educacional S.A., and a visiting professor in the Business Administration Masters Degree Program of Minas Gerais Federal University.
Carlos Augusto Leite Brandão Mr. Brandão was born on January 3, 1956. He obtained a degree in electrical engineering from Minas Gerais Federal University in 1978, and subsequently completed post-graduate studies in economic engineering at the Dom Cabral Foundation in 1980. In 2000 he attended the MBA course in finance at IBMEC (the Brazilian Capital Markets Institute). He is currently the Business Coordination Director for AES Eletropaulo, where he is responsible for regulatory and institutional action, and management coordination of the groups companies in Brazil. He is also chairman of the Audit Committee of the CCEE ( Câmara de Comercialização de Energia Elétrica ), was a member of the Market Executive Committee of that organization, and is a member of the Board, and Director, of ASMAE. He has been a member of IEEE The Institute of Electrical Engineers, Inc. since 1980, and a Senior Member since 1990. He was head of the Rio de Janeiro section of the IEEE from 1990 to 1992, and the Minas Gerais section (which he founded) from 1993 to 1996. He was chairman of Conselho Brasil from 1999 to 2001. He is a member of the Editorial Council of the Power Computer Society, has held several posts in the Power Engineering Society, and is the only foreign representative holding a position in the United States Activities Board, headquartered in Washington, D.C. He has been a lecturer in the Computer Science Center of Minas Gerais Federal University, various courses held by Eletrobrás and at the PUC University of Minas Gerais, and the Instituto Brasil-Estados-Unidos. He has more than 50 publications in and outside Brazil, and published a book and CD-ROM jointly with the João Pinheiro Foundation, on Models for the Electricity Sector, in 1995. He coordinated the course in Regulation of the Electricity Sector held by the João Pinheiro Foundation in 1997, the first course of its type in Brazil. He began his career at CEMIG on March 15, 1979, and has held the positions of Engineer, Manager of the Operation and Maintenance Engineering Division, Manager of the Operation and Maintenance Department, Manager of the Planning and Automation Department, Consultant for Sales to Large Clients, and Manager of the Transmission Department. Mr. Brandão currently serves as CEMIGs advisor to the Vice-Presidency and Consultant to the Financial Director.
Andréa Paula Fernandes Ms. Fernandes was born on October 19, 1969. In 1992 she obtained a degree in business administration from FIRP (Faculdades Integradas Rio-Pretense), and completed postgraduate studies at the Getúlio Vargas Foundation (FGV) in 1995. She attended the Extension Business Course of the University of California at Berkeley in 1996, and the Banking Extension Course (GVPEC) of the Getúlio Vargas Foundation in 1998. In 2001 she obtained an MBA in Finance from IBMEC (the Brazilian Capital Markets Institute). She is an advisor to the Business Coordination Directorate of the AES Brasil group companies. Previously she worked at Eletropaulo Metropolitana Eletricidade de São Paulo S.A. as a financial analyst and Investor Relations analyst from 2000 to 2003. She was a portfolio analyst at Banco Santander Brasil S.A. from 1998 to 2000, worked in the marketing department of Tyson Foods in the United States in 1996, and worked at Citibank N.A in 1990 and 1991.
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Antonio Luiz Barros de Salles Mr. Salles was born on February 23, 1946, and obtained a degree in legal and social sciences from São Paulo University (USP) in 1970, with postgraduate course in criminal law, with a specialization in procedural law, from PUC University. He is Legal Business Director for Eletropaulo Metropolitana Eletricidade de São Paulo S.A. He was a career employee of Cesp, which he joined in 1967, and has been a lecturer at the Work Development and Organization Institution (Idort), and at the Management Institute of the economics faculty of São Paulo University (USP). He was Head of the Office of the Presidency in 1987-1991, Vice-President of the Private Pension Funds Association Abrapp (1993-1995) and Superintendent Director of the Cesp Foundation (1993-1995). He was technical advice manager to the government of the State of São Paulo (in 1971-1975), Chief of Staff for the Governor in the same administration, and Highways Secretary for the city of São Paulo (2000).
José Augusto Pimentel Pessôa Mr. Pimentel was born on May 27, 1937, and obtained a degree in Civil Engineering from Minas Gerais Federal University (UFMG) in 1961, with additional specialization in water engineering and services. He worked for Tenenge as chief of the works office at Reduc, as a self-employed engineer (1963-1964), and as an engineer at CEMIG (1974-1974), where he worked in construction of transmission lines and as a field reconnaissance engineer for dam locations. In such capacity he was responsible for the structures sector of the Jaguara power plant. He was head of the Studies and Projects Department of Eletronorte (Centrais Elétricas do Norte do Brasil S.A.) from 1974 to 1978, and a director of Engevix from 1978 to 1994. Since 1994 he has been an independent consultant for Engevix. He was director of the National Union of Architecture and Engineering Companies (in 1994), Administrative Director and Director of the energy area of Amec, the Minas Gerais Association of Consulting and Engineering Companies (in 1992), and currently he is a consulting engineer for Amec. He was a Member and Council Member of the Brazilian Large Dams Committee from 1977 to 1996, and in 1977 was Coordinator of the GTCN the Northern Costs Working Group.
Aécio Ferreira da Cunha Mr. Cunha earned his law degree from the National Law Faculty of the University of Brazil, in Rio de Janeiro, in 1951. He was certified by the Brazilian Superior School of War in 1973. Presently, Mr. Cunha is an agribusiness entrepreneur in northern Minas Gerais. Since 1993, he has been a director of Furnas. In 1993 he was the chairman of BNDES. He was the congressional representative for six terms from 1963 to 1987, and representative of the Minas Gerais House of Representatives for two terms from 1955 to 1962. Prior to that, Mr. Cunha was the Chief of the Cabinet of the Minas Gerais State Secretary of Agriculture, Commerce and Labor. In 1988 Mr. Cunha was nominated Minister of the Brazilian Court of Audit, having his name approved by the Brazilian Congress, but for personal reasons, he declined before taking office.
Maria Estela Kubitschek Lopes Mrs. Lopes holds a degree in architecture and is an interior designer and entrepreneur. She is a managing partner of DF Consultores Ltda. and of Santa Júlia Importação, Exportação e Participações. Mrs. Lopes is also the adviser to the president of the Municipal Theater Foundation of the City of Rio de Janeiro, to the president of the Friends of the State of Rio de JaneiroAME-RIO and to the president of the board of Casa Santa Ignez (a philanthropic association responsible for the nourishment and education of children and aid to low-income families in the Rocinha neighborhood in Rio de Janeiro). She was one of the founders of Memorial JK, an organization founded in the memory of Juscelino Kubitschek de Oliveira (former President of Brazil), and served as its vice-president from September 1981 to May 2000 and as acting president since October 2000. Mrs. Lopes has also served as president of the council of the Cultural Institute Cesgranrio, vice-president of the council of the Womens Bank, president of the Beneficent Institutions of the State of Rio de Janeiro and a member of the council of Casa das Palmeiras, a cultural institution. Mrs. Lopes has received several cultural and social merit awards.
Alexandre Heringer Lisboa Mr. Lisboa holds a degree in electrical engineering from the Polytechnic Institute of the Pontifical Catholic University of Minas Gerais and a masters degree in mechanical engineering with an emphasis in solar energy from the Federal University of Paraíba, in the city of João Pessoa (State of Paraíba). He also has received specialized wind energy training from the Deutsches Windenergie-Institut and from the Summer School on Wind Energy Technology at the University of Oldenburg in Germany. Mr. Lisboa has worked as an engineer for CEMIG since May 1985 and he is a director of SENGE as well as a counselor of the Regional Council of Engineering and Architecture. Mr. Lisboa served as an alternate member of the board of directors of CEMIG from January 1999 to December 2000. He was a researcher for and a consultant to the Technological Foundation Center of Minas GeraisCETEC from November 1983 to April 1985. From January 1977 to May 1979, he was a trainee at Usiminas, Companhia Siderúrgica Belgo-Mineira and Delle-Alstom S.A.DASA.
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José Luiz Alquéres Mr. Alguéres was born on March 31, 1944. He graduated with a degree in civil engineering in 1966, with post-graduation in urban and regional planning in Brazil and electricity planning in the United States and France. He is Honorary Vice-President of the World Energy Council and Vice-President of ABDIB, the Brazilian Infrastructure and Basic Industries Association. He is a Partner-Director of JLA JLAlquéres Engenharia Consultiva Ltda. Through this firm he now exercises non-executive functions providing services at the Consultative Council level, namely as: Country President of ALSTOM do Brasil, a world leader in highway transport and energy infrastructure; Country President of MDU do Brasil, a company which invests in the mining and energy sectors; and is a member of the Strategic Council of ALCOA do Brasil, Banco CALYON and HOLCIM S.A. He was Executive Director of Cia. Bozano-Simonsen (1995-1998), National Energy Secretary (1992), President of Eletrobrás (1993-1994) and President of Cerj, Director of BNDESPar (of the Brazilian Development Bank) and Light; and Board Member of Itaipu Binacional, Furnas, Chesf, CEMIG, Escelsa, CEG, CPFL, Comgás and other companies. In addition to his professional activities, he is active in volunteer work, chairing the French-Brazilian Culture and Cooperation Association, a member of the Council of the National Fine Arts Museum and Vice-President of the Brazilian Oncology Institute.
Board of Executive Officers
Our Board of Executive Officers is responsible for the execution of decisions made by our Board of Directors and for our day-to-day management. Our executive officers have individual responsibilities established by our by-laws and serve for three-year terms. The terms of the current executive officers expire in April 2006. They are elected by our Board of Directors. Generally, ordinary meetings are held at least twice monthly and extraordinary meetings are held whenever called by the Chief Executive Officer or by two executive officers other than the Chief Executive Officer.
The names, positions and dates of initial appointment of our executive officers are as follows:
Name |
|
Position |
|
Date of Initial
|
|
Djalma Bastos de Morais |
|
Chief Executive Officer |
|
January 14, 1999 |
|
Francisco Sales Dias Horta |
|
Executive Vice-President |
|
June 2, 2003 |
|
Celso Ferreira |
|
Chief Planning, Projects and Construction Officer |
|
February 11, 2003 |
|
Elmar de Oliveira Santana |
|
Chief Energy Generation and Transmission Officer |
|
February 11, 2003 |
|
José Maria de Macedo |
|
Chief Energy Distribution and Commercialization Officer |
|
February 11, 2003 |
|
Flávio Decat de Moura |
|
Chief Financial and Investor Relations Officer |
|
February 11, 2003 |
|
Heleni de Mello Fonseca |
|
Chief Corporate Management Officer |
|
February 11, 2003 |
|
Set forth below is brief biographical information for each member of the Board of Executive Officers.
Djalma Bastos de Morais For biographical information regarding Mr. Morais, see Board of Directors.
Francisco Sales Dias Horta Mr. Horta holds a degree in business administration from the faculty of UNA. He is a congressional representative and the president of the Minas Gerais Cristian Youth Association, Latin American Confederation of Cristian Youth Associations and of the Benjamin Guimarães Foundation. Mr. Horta was one of the founders of the Shop Owner Club Foundation for assistance of underage teenagers. He is an entrepreneur in the optical sector, owning shops in the cities of Belo Horizonte and Sete Lagoas in Minas Gerais, and in Manaus, State of Amazonas. He is a director and president of the Minas Gerais Trading Association, Minas Gerais Retail Association, Belo Horizonte Shopper Owners Chamber and of the Economic Politics Council of the State of Minas Gerais Industry Federation.
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Celso Ferreira Mr. Ferreira holds a degree in electrical and mechanical engineering from the Federal Engineering School of Itajubá in the State of Minas Gerais and a masters degree in electric system engineering from the Rensselaer Polytechnic Institute and has completed coursework in electrical system operation and energy trading in Brazil and abroad, including courses at the International Agency for Nuclear Energy in Paris and Commonwealth Edison Co. in Chicago. Since March 2003, he has been the Chief Executive Officer of the following companies: Usina Térmica Ipatinga S.A., Cemig Capim Branco S.A., Usina Termelétrica Barreiro S.A. and Central Termelétrica de Cogeração S.A. He is the Chief Technical Officer of Efficientia S.A. Mr. Ferreira was the chief generation and commercialization executive officer of Furnas from 1991 to 2003, chairman of that company for four months in 1999 and a member of the board of directors several times from 1991 to 2003. He also served as a director of the ONS, serving as chairman from its foundation in 1998 to the beginning of 2003. He was a representative of Furnas on the Wholesale Energy Market, participating in discussions regarding certain Wholesale Energy Market rulings and the General Agreement of the Electricity Sector. Mr. Ferreira was a professor of the Engineering School of the University of Rio de Janeiro from 1970 to 1980. From 1966 to 1970, he worked as an engineer for Cia. Auxiliar de Empresas ElétricasCAEEB. He was one of the founders of Associação Brasileira das Empresas Geradoras de Energia ElétricasABRAGE (Brazilian Electricity Generation Company Association) and of Associação Brasileira das Grandes Empresas de Transmissão ABRATE (Brazilian Transmission Company Association). Mr. Ferreira has also served as a member of several associations, including the energy commission of the Commercial Association of Rio de Janeiro from 1999 to 2000 and of the fiscal council of Companhia Paranaense de Energia Copel.
Elmar de Oliveira Santana Mr. Santana holds a degree in electrical engineering from the Pontifical Catholic University of Minas Gerais and a masters degree in business administration from IBMEC (the Brazilian Capital Markets Institute). Since March 2003, he has been the Chief Executive Officer of Efficientia S.A. and Cemig PCH S.A. He is the Executive Officer of Usina Térmica Ipatinga S.A., Sá Carvalho S.A., Horizontes Energia S.A., Cemig Trading S.A. and Central Hidrelétrica Pai Joaquim S.A. He worked from 1977 to 1983 at DAE/MG (a water and electricity utility owned by the State of Minas Gerais) as the rural electrification coordinator and as an operations and distribution superintendent. From 1983 to 2001, he worked at CEMIG as an engineer, as sales and distribution superintendent and as assistant to the head of sales and distribution. From December 2001 to April 2002, he was the Secretary of Mines and Energy for the State of Minas Gerais.
José Maria de Macedo Mr. Macedo earned a degree in electrical engineering from the Federal University of Minas Gerais in 1967 and has completed several specialization courses on electricity and management. He was a trainee at the Bonneville Power Administration in Portland, Texas, at the Tennessee Valley Authority, at the Bureau of Reclamation in Denver, Colorado and Southern California Edison in California. Since March 2003, he has been the Executive Officer of Cemig Trading S.A. Mr. Macedo worked at CEMIG from September 1969 to May 1994, when he retired as superintendent of electricity transmission. After his retirement from CEMIG, Mr. Macedo was an organizer of Cooperativa de Prestação de Serviços de Engenharia Ltda., where he currently serves as president. Prior to joining CEMIG, Mr. Macedo served as an engineer at Sociedade Instalações TécnicasSIT. Mr. Macedo has conducted several studies and seminars on the electricity field in Brazil.
Flávio Decat de Moura Mr. Moura holds a degree in electronic and electrical engineering from the Federal University of Minas Gerais. He has been the Chief Executive Officer of Central Hidrelétrica Pai Joaquim S.A. since January 2005, of Gasmig since December 2004, and of Cemig Trading S.A. since March 2003. He has been the Executive Officer of Cemig PCH S.A., Usina Termelétrica Barreiro S.A, Cemig Capim Branco Energia S.A. and Horizontes Energia S.A since April 2004, of Central Termelétrica de Cogeração S.A., Sá Carvalho S.A. and Usina Térmica Ipatinga S.A. since April 2003, and of Efficientia S.A. since March 2003. He served as a director and chief executive officer of Electronuclear, the Federal Governments nuclear power agency, from May 2001 to January 2003 and as chief development officer of Sithe Energies, Inc. from 1998 to 2000. From 1996 to 1997 he was vice-president and chief electricity distribution officer of Empresa Energética de Mato Grosso do Sul S.A.Enersul. In 1993, Mr. Moura was the chief technical and engineering officer of Itaipu. He served as the chief electricity production officer of Empresa Transmissora de Energia Elétrica do Sul do Brasil S.A.Electrosul from 1992 to 1993 and the superintendent of engineering of Itaipu from 1983 to 1992. Mr. Moura was also the assistant to the chief executive officer of Itaipu and engineer and manager of several divisions of Furnas from 1970 to 1982.
Heleni de Mello Fonseca - Mrs. Fonseca graduated with a degree in electrical engineering with a specialization in electronics and telecommunications from the National Telecommunications Institute INATEL
79
and completed post-graduate studies in marketing and business development at Fundação Getúlio VargasFGV. Since April 2003 she has been the Executive Officer of Central Termelétrica de Cogeração S.A. and since March 2003 she has been the Chief Executive Officer of Sá Carvalho S.A. and Horizontes Energia S.A. and the Executive Officer of Cemig PCH S.A., Cemig Capim Branco Energia S.A. and Usina Termelétrica Barreiro S.A. She was the chief officer of entrepreneurial business of Telemar, the phone company of the State of Bahía, Brazil, from August 2000 to November 2001, the chief officer of corporate and retail business of Telemar from August 1998 to August 2000, the chief of services of Telemig, a phone company in the State of Minas Gerais, from January 1996 to August 1998 and the chief operation officer of Telemig and Telemar from July 1995 to December 1995. Mrs. Fonseca also served as a director of the Telecommunications Department of the State of Minas GeraisDETEL/MG, or DETEL/MG, from June 1991 to July 1995 and the manager of the implementation of data communication services of Empresa Brasileira de TelecomunicaçõesEmbratel in Minas Gerais from 1988 to 1991. From 1976 to 1987, she worked at the Telecommunications Department of DETEL/MG as an engineer, technical officer and engineering superintendent.
Compensation of Directors and Executive Officers
For the year ended December 31, 2004, the aggregate amount of compensation, including pension and other retirement benefits, that we paid to all directors and executive officers was approximately R$3.3 million.
Fiscal Council
Our Fiscal Council, which generally meets once every three months, consists of three to five members and their respective alternates elected by our shareholders at the annual meeting for a one-year term. Holders of the preferred shares as a group are entitled to elect one member of the Fiscal Council and a corresponding alternate. Holders of common shares representing at least 10%, individually or in the aggregate, are entitled to elect one member of the Fiscal Council and a corresponding alternate. The primary responsibility of the Fiscal Council, which is independent from management and from the independent public accountants appointed by the Board of Directors, is to review our financial statements and report on them to our shareholders. The Fiscal Council is also entitled to give opinions on any proposals from our management to be submitted to the shareholders meeting related to (i) changes in our share capital, (ii) issuances of debentures or rights offerings entitling the holder to subscribe for equity (bonus de subscrição), (iii) investment plans and capital expenditures budgets, (iv) distribution of dividends, (v) changes to our corporate form and (vi) corporate restructurings such as mergers, consolidations and spin-offs. The Fiscal Council also examines the activities of management and reports these activities to the shareholders.
The current members of the Fiscal Council and their alternates, all of whose terms expire on April 30, 2006, are as follows:
Name |
|
Position |
|
Date of Initial
|
|
Luiz Guaritá Neto |
|
Member |
|
February 27, 2003 |
|
Aristóteles Luiz Menezes Vasconcellos Drummond |
|
Member |
|
April 27, 1999 |
|
Luiz Otávio Nunes West(1) |
|
Member |
|
April 27, 1999 |
|
Thales de Souza Ramos Filho |
|
Member |
|
February 27, 2003 |
|
Itaumary Teles de Oliveira(2) |
|
Member |
|
April 29, 2005 |
|
Ronald Gastão Andrade Reis |
|
Alternate |
|
April 30, 1998 |
|
Marcus Eolo de Lamounier Bicalho |
|
Alternate |
|
February 27, 2003 |
|
Augusto Cézar Calazans Lopas(1) |
|
Alternate |
|
April 30, 2003 |
|
Ary Barcelos da Silva(2) |
|
Alternate |
|
April 29, 2005 |
|
Aliomar Silva Lima |
|
Alternate |
|
February 27, 2003 |
|
(1) Elected by Southern.
(2) Elected by shareholders holding our preferred shares.
80
Consumer Council
We have established a Consumer Council pursuant to Brazilian law, which is comprised of representatives of consumer groups and advocacy organizations, but not members of our Board of Directors. The Consumer Council advises us as to service and other concerns of our customers.
Audit Committee
CEMIG has not yet established a formal audit committee. Our Board of Directors currently serves as our audit committee for purposes of the Sarbanes-Oxley Act of 2002 and the related regulations.
Employees
As of December 31, 2004, we had 10,668 employees, of which 161 were at the management level. During the year ended on that date we had an average of 327 temporary employees. As of December 31, 2003, we had 11,302 employees, of which 156 were at the management level, with an average of 390 temporary employees during the period then ended. As of December 31, 2002, we had 11,468 employees, of which 147 were at the management level, with an average of 501 temporary employees during the period then ended. This table shows the breakdown of our employees by type on those dates:
|
|
Number of Employees at |
|
||||
|
|
December 31, 2004 |
|
December 31, 2003 |
|
December 31, 2002 |
|
Managers |
|
161 |
|
156 |
|
147 |
|
Professional staff |
|
1,285 |
|
1,409 |
|
1,424 |
|
Operational technical staff |
|
(* |
) |
7,880 |
|
8,112 |
|
Office employees |
|
(* |
) |
1,857 |
|
1,785 |
|
Operational technical staff and Office employees |
|
9,222 |
|
(* |
) |
(* |
) |
|
|
|
|
|
|
|
|
Total |
|
10,668 |
|
11,302 |
|
11,468 |
|
(*) In 2004, we put in place the new Career and Remuneration Plan, bringing together into a single category the previous career plans for operational, technical and administrative staff.
Once a year we hold collective negotiation meetings with the unions that represent our employees. The resulting contract remains in effect for the subsequent 12month period beginning on November 1. About 10 years ago CEMIG ceased to follow the previous market practice in Brazil of automatically adjusting salaries based on inflation.
In November 2004, we completed negotiation of the annual collective agreement for the period from November 1, 2004 to October 31, 2005, after a wide-ranging discussion of all the terms and conditions with the unions that represent our employees. The resulting agreement established salary increases on a sliding scale (shown in the table below) and an extraordinary distribution of amounts under the profit-sharing program in the amount of 121% of the basic remuneration of the employees in November 2004.
Monthly Base salary (R$) |
|
% |
|
|
Up to 2,254 |
|
7.26 |
|
|
From 2,255 |
to 4,770 |
|
7.00 |
|
From 4,771 |
to 7,103 |
|
6.30 |
|
From 7,104 |
to 9,891 |
|
5.60 |
|
Over 9,891 |
|
4.90 |
|
In 1995, we established a profit-sharing program for the employees in conformity with the applicable Brazilian labor legislation. Under this program, we may not contribute an amount to the employee profit sharing plan that is in excess of 25% of the total dividends proposed for that year.
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As of January 1, 2003, we implemented changes to our exiting employee health care plans. The changes are a result of an agreement we reached with our employees labor unions, most of which are represented by Sindieletro. The changes altered the contribution criteria that we, our employees and our retirees are responsible for and the types of benefits covered in each plan.
In the last 4 years there has been no stoppage of work by our employees. We are unable to predict what effect, if any, future labor litigation could or may have on our results of our operations or our financial condition. Similarly, we are unable to predict what effect any changes in the Brazilian labor-law regulations may have on the Company, if any.
In December 2003, in order to effectively manage our employment relations while following our strategic guidelines for growth and the addition of value, we implemented a voluntary employee termination program.
In 2004 a total of 1,101 employees accepted the terms of the companys voluntary employee termination program. Of these, 656 left the company during 2004; a further 311 completed the procedures and left in January 2005. Of the remaining 134 employees, 20 will retire by the end of 2006; and 114 have been withdrawn from the program, in accordance with the terms of the contracts between the company and each employee, because the Government Social Security Organization (INSS) did not accept them for early retirement.
In 2003, the Careers and Remuneration Plan was approved. The goal of this plan is to provide us with the remuneration tools necessary to maintain an equitable and competitive pay structure and establish criteria for promotions. The plan was implemented in January 2004 for professional staff, and in March 2004 for the administrative and operational employees. An internal committee, with representatives of both the company and the labor unions, was created for maintenance of the plan.
The total number of work accidents, for our own employees and those of contracting companies, was lower in 2004 than in 2003, continuing a downtrend over the last four years. In 2004, we again had no fatal accidents among our own employees.
Share Ownership
Each of our directors and executive officers beneficially owns less than 1% of our preferred shares.
Principal Shareholders
As of December 31, 2004, the State Government owned 36,329,063,248 common shares, or 51.26% of our outstanding voting stock, and 2,771,169,109 preferred shares, or approximately 3.04% of those outstanding. As of the same date, Southern, our second largest shareholder, owned 23,362,956,173 common shares, or approximately 32.96% of those outstanding. Southern is a joint venture formed in 1994. We believe that a principal participant in Southern is Cayman Energy Traders, a subsidiary of Mirant Corporation (formerly Southern Energy Inc.), a large United States-based power company. We believe that the other significant member of Southern is, as of December 31, 2004, AES Corporation, a global power company based in Arlington, Virginia that is engaged in the energy generation, distribution and retail supply businesses. We believe that the Opportunity Fund, a Brazilian investment fund, has a minority interest in Southern through 524 Participações S.A. Our principal shareholders do not have different voting rights with respect to those shares they own.
The following table sets forth certain information regarding the ownership of our outstanding common shares and preferred shares at December 31, 2004.
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Shareholder |
|
Common
|
|
%
|
|
Preferred Shares |
|
%
|
|
State Government (1) |
|
36,329,063,248 |
|
51.26 |
|
2,771,169,109 |
|
3.04 |
|
Southern |
|
23,362,956,173 |
|
32.96 |
|
|
|
|
|
All directors and executive officers as a group |
|
2,545,665 |
|
|
|
128,138 |
|
|
|
Other |
|
11,179,602,837 |
|
15.78 |
|
88,439,225,452 |
|
96.88 |
|
Total of outstanding shares |
|
70,874,167,923 |
|
100.00 |
|
91,210,522,699 |
|
99.92 |
|
Treasury shares |
|
|
|
|
|
69,128,403 |
|
0.08 |
|
Total of authorized and issued shares |
|
70,874,167,923 |
|
100.00 |
|
91,279,651,102 |
|
100.00 |
|
(1) The shares in this line item attributed to the State Government include shares held by MGI and other State Government agencies.
Since our incorporation, our operations have been influenced by the fact that the State Government controls us. Our operations have had and will continue to have an important impact on the development of business and industry in Minas Gerais and on social conditions in the state. The State Government has from time to time in the past directed us to engage in certain activities and make certain expenditures designed primarily to promote the social, political or economic goals of the State Government and not necessarily designed with a view to our profitability, and it may direct us to do so in the future. See, Item 3. Key InformationRisk FactorsRisks Relating to CEMIGWe are controlled by the State Government.
As of December 31, 2004, we had 19 common shareholders in the United States, holding a total of 2,159,909,610 common shares. We also had 181 preferred shareholders in the United States, holding a total of 21,140,861,015 preferred shares. These numbers do not include the 14,530,135,788 preferred shares converted into ADRs.
We are not aware of any significant changes in the percentage ownership of any shareholders that held 5% or more of our outstanding voting shares during the past three years. Based on publicly available filings with the SEC, we are aware of the following changes in ownership of our outstanding preferred shares. On March 8, 2005, Capital Group International, Inc., or CGII, a foreign investment management company, acquired, on behalf of its clients, ADRs that increased its holdings of preferred shares of CEMIG to 4,598,610,000, corresponding to 5.03% of CEMIGs preferred shares. In addition, Capital Research and Management Company, also a foreign investment management company and an affiliate of CGII, holds ADRs representing 2,702,900,000 preferred shares in the Company, corresponding to 2.96% of the preferred shares. On April 12, 2005, the aggregate proprietary position of the UBS Group in preferred shares of CEMIG increased to 6,098,366,579 preferred shares, representing 6.68% of the Companys total preferred shares.
Although our by-laws do not provide any restrictions concerning a change in our control, a state law authorizing a change of control would be required for a change of control to take place. Because we are a state-controlled company, the sale of more than 50% of the voting stock of CEMIG by the State Government requires the passage of specific authorizing legislation by the legislature of Minas Gerais.
Related Party Transactions
We are party to the following related-party transactions:
Our agreement with the State Government with respect to the CRC Account and related financial income and provision for loss and VAT advance payments, expenses, assets and liabilities;
Our agreement with FORLUZ, the entity responsible for managing our employee pension fund, pertaining to the fund and related balances; and
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Our agreement with COPASA, a Minas Gerais state-controlled company, related to accounts receivable from energy sales.
For a more detailed discussion of these transactions, see Notes 3, 8, 9, 13, 14, 16, 19 and 21 to our consolidated financial statements.
Consolidated Financial Statements and Other Financial Information
Please refer to our financial statements that appear beginning on page F1 of this document as well as Item 3. Key InformationSelected Consolidated Financial Data.
Legal Proceedings
We are affected by an ongoing dispute between our shareholders. We are also defending several judicial proceedings involving rate increases, taxes and contributions, labor and pension fund obligations and civil liabilities, as well as several administrative proceedings regarding tax obligations, environmental penalties and other charges imposed by governmental agencies, including ANEEL. We recognize contingencies only when a loss is probable and estimable. The most relevant proceedings in which we are involved are summarized below. See also note 18 to our consolidated financial statements.
Shareholders Agreement
In connection with the sale in 1997 of approximately 33% of our shares to Southern as described in Item 7. Major Shareholders and Related Party TransactionsPrincipal Shareholders, Southern and the State Government entered into a shareholders agreement that contained special quorum and veto provisions granting Southern expanded control over certain decisions. In 1999, after a new State Government administration took office, the State Government filed a lawsuit seeking to nullify the shareholders agreement on the grounds that these special provisions constituted an unlawful transfer of control from us to Southern under principles of Brazilian constitutional law, and claiming in particular that the State Government may only cede control of us pursuant to specific state legislation providing for the same.
On March 21, 2000, the First Court of Fazenda Pública e Autarquias in Belo Horizonte rendered a decision declaring the shareholders agreement null and void, and this decision was ratified on August 7, 2001 by the Minas Gerais State Court of Appeals. At present, the State Government has been restored to its position as our sole controlling shareholder and none of the special quorum or veto provisions are in effect. This decision was appealed to the Superior Tribunal de Justiça (Superior Court of Justice), which upheld the decision of the Minas Gerais State Court of Appeals in December 2003. The decision of the Superior Tribunal de Justiça is subject to a request for amendment and therefore the effectiveness of the shareholders agreement and control of CEMIG remain subject to further judicial challenge in the Supreme Court ( Supremo Tribunal Federal ).
Rate Increases
We are the defendant in several lawsuits brought by industrial customers alleging that increases in electricity rates during a price freeze imposed by the Federal Government from March through November 1986, known as the Cruzado Plan, were illegal. The plaintiffs further allege that all our rates after the Cruzado Plan period were illegal in part because they included the Cruzado Plan period increases in the amounts that served as the basis for calculating the further increases. Some of these claims have been decided at the trial court level in our favor, whereas others have been decided in favor of our customers. All of the cases that have been decided at the trial court level have been appealed to the Superior Tribunal de Justiça (Superior Court of Justice), which ruled that the plaintiffs were entitled only to reimbursement for rate increases introduced during the Cruzado Plan. We are actively contesting all of the aforementioned rate increase claims. In the aggregate, these rate increase claims brought against us amounted to R$105.1 million as of December 31, 2004, and at that date we had accrued a liability for the full amount of those claims.
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We are also a defendant in lawsuits and class actions brought by customers, consumer rights groups and the office of the public prosecutor of Minas Gerais contesting the rates we charge our customers, the application of the rate increases determined by ANEEL and the rate subsidies granted to low income customers. These lawsuits involve claims for the suspension of the rate increases and for the reimbursement to our customers of twice the amount of any additional rates we collected. All our rate increases are granted based on ANEELs prior authorization and we believe we have a meritorious defense to each of these lawsuits. It is not possible at the present time to estimate the amounts involved in these claims. We have not accrued any liability related to these claims because we believe that we have a meritorious defense.
The Associação Brasileira de Consumidores ABC (Brazilian Association of Consumers) has filed a class action lawsuit against us, seeking to prevent us from suspending the energy supply in cases of customer default. We received a favorable decision at the trial court level that is subject to appeal. We believe we have a meritorious defense and have not accrued any liability related to this lawsuit.
We are a defendant, together with Comercializadora Brasileira de Energia Elétrica CBEE, in several lawsuits filed between February 2002 and March 2004 contesting the Encargo de Capacidade Emergencial (Emergency Capacity Charge) which we collect from our customers on behalf of the CBEE. It is not possible at the present time to estimate the amounts involved in these claims. However, we have not accrued any liability related to these claims because we believe we have a meritorious defense.
In addition, the Federal Public Auditing Court is challenging the criteria used by ANEEL to calculate the adjustments we applied to our rates in 2003 and in connection with the energy reduction emergency program. See Regulatory Matters.
Taxes and Other Contributions
We are party to a number of proceedings and claims involving the Federal Government as well as other proceedings and claims arising in the ordinary course of business. These proceedings and claims include judicial disputes regarding the payment of taxes and contributions, including two disputes regarding social contribution tax, for which we have accrued a total liability of R$129.2 million as of December 31, 2004. We also are involved in disputes regarding the ISS tax (R$24.9 million), the Imposto de Transmissão Causa Mortis e Doação ITCMD (inheritance and donation tax), three fiscal executions, involving R$112.5 million, R$7.5 million and R$8.0 million), and the COFINS revenue tax (R$230.2 million) for which we have not recorded any reserve, as we believe that we have a meritorious defense.
In addition, we are a party to two Finsocial contribution disputes. In connection with one of these disputes, which was initiated in 1990, we have made a judicial deposit and have recorded a loss provision, each equivalent to the historical litigated amount of R$900 thousand. We have also accrued a reserve of R$20 million for the full amount of the other dispute. We believe our chances of success in these lawsuits are remote.
We have also contested a number of administrative proceedings asserted by federal tax authorities with respect to an income tax set-off resulting from an adjustment made in 2001 to our consolidated financial statements prepared in accordance with accounting practices adopted in Brazil for the years ended December 31, 1997, 1998 and 1999. The adjustment related to new accounting rules for pension fund obligations was established by CVM Instruction No. 371 of December 13, 2000. We received a partially favorable decision relative to the years 1997 and 1998, however an administrative ruling issued by the Office of the Attorney General of the National Treasury in 2004 may allow for additional judicial consideration of these issues. As for the year 1999, for which we received an unfavorable decision, we filed an injunction and believe we have a meritorious defense that supports the procedures adopted. Therefore, no reserve has been recorded for this claim. We estimate the amount involved in these claims to be R$480.7 million as of December 31, 2004.
In 2003, as a consequence of the change in our accounting practice discussed in the above paragraph, the federal tax authorities, after performing an inspection of our tax returns for the years 1997-2001, issued an assessment notice in the amount of R$1,537 million, claiming that we did not pay all our tax liabilities related to those tax years. We submitted an administrative defense requesting that such assessment notice be canceled, since the tax authorities did not consider our amended tax returns which have been filed. We believe such amended tax
85
returns show that we have properly settled the tax liabilities challenged, and therefore no reserve has been recorded for this claim
Lately, some Municipalities of the State of Minas Gerais assessed us for the payment of the tax named Taxa de Ocupação do Solo . There are several administrative proceedings and lawsuits related to this matter, in the total amount of approximately R$10.7 million. We have not accrued any reserves for this amount since we believe we have meritorious defenses in these disputes.
The State of Minas Gerais filed several administrative proceedings against us, alleging that the added-value tax ( Imposto sobre Circulação de Mercadoria ICMS) has not been collected by some sellers of energy distributed through Cemig, and that Cemig would be a co-obligor with respect to the payment of such tax. We have not accrued reserves in connection with these administrative proceedings since we believe we have meritorious defenses in these disputes.
We have also contested three administrative proceedings asserted by federal tax authorities regarding the alleged absence of payment of the rural real estate tax ( Imposto Territorial Rural ITR), related to the power plants Miranda, Emborcação and São Simão, which involve a total amount of approximately R$30.3 million. We have not accrued reserves in connection with these administrative proceedings since we believe we have meritorious defenses in these disputes.
Since 2002, we have been receiving a subsidy from Eletrobrás to reimburse us for losses incurred as a result of the discount we were required to provide to low income consumers under Federal Law No. 10,604/02. Recently, the State of Minas Gerais issued Decree No. 43,999/05 charging the ICMS on this subsidy. We believe the subsidy is not taxable and we are therefore not collecting the ICMS on the subsidy. We may be assessed by the State of Minas Gerais with regard to this matter, but we believe we have a meritorious defense. We estimate the contingency to be approximately R$35 million.
Labor Obligations
We are defending a number of labor-related claims brought by our employees and by third parties, for which we are secondarily liable. These claims generally refer to overtime and hazardous occupation compensation. Employees must file a claim for these payments within two years of the termination of their employment agreement. As of December 31, 2004, these employees were seeking, in the aggregate, approximately R$138.5 million in compensation, and at that date we had accrued a liability of R$110.9 million with respect to these claims.
Claims in the Ordinary Course of Business
We are a party to several civil claims involving small amounts brought by people who have suffered damages arising mainly from accidents that occurred during the ordinary course of our business and damages suffered as a result of the interruption of the supply of energy to them. We are also a party to claims under contractual and other commercial obligations. These claims totaled an estimated R$150.4 million as of December 31, 2004. As of that date, we had accrued a liability of R$25.9 million with respect to these claims. We have not accrued a liability with respect to the full amount of the claims because we believe we have a meritorious defense to certain portions of these claims.
We have contested a lawsuit brought by Sistron Sistemas e Companhia Ltda, referring to alleged damages estimated at R$ 94.7 million arising from a services agreement that was affected by economic distress caused by the real devaluation in 1999. We have not accrued any liability related to this claim, as we believe we have a meritorious defense.
Legal Proceedings Related to Environmental Matters
We are a defendant, along with CVRD, Comercial e Agrícola Paineiras and Companhia Mineira de Metais, in a class action lawsuit brought by the Federal Prosecutor, concerning the environmental licensing of the Capim
86
Branco I and Capim Branco II hydroelectric power plants. This lawsuit alleges that we did not obtain proper licensing for these projects and seeks to nullify the environmental licenses relating to these power plants.
We have not accrued any liability related to this claim as we believe we have a meritorious defense. We are also a defendant, along with CVRD, in a class action lawsuit brought by the Federal Prosecutor, concerning the Aimorés hydroelectric power plant. This lawsuit alleges that we did not obtain proper licensing for this project and seeks to nullify the environmental licenses relating to this plant as well as the related concessions. We have not accrued any liability related to this claim as we believe we have a meritorious defense.
Regulatory Matters
Prior to 1993, electric utilities in Brazil were guaranteed a rate of return on investments in assets used to provide electric service to customers, the rates charged to customers were uniform throughout the country, and profits from more profitable utilities were reallocated to less profitable ones so that the rate of return for all companies would equal the national average. Shortfalls experienced by most electric utilities in Brazil were accounted for in each companys CRC Account. When the CRC Account and the guaranteed return concept were abolished, we used our positive balances to offset our liabilities to the Federal Government.
ANEEL has brought an administrative proceeding against us, contesting a R$610.9 million credit related to such positive balance. On October 31, 2002 ANEEL issued a final administrative decision against us. On January 9, 2004, the Brazilian Treasury Authority (Secretaria do Tesouro Nacional) issued an Official Collection Letter to us in the amount of R$516.2 million to be paid by January 30, 2004. We filed a writ of mandamus to suspend our inclusion in the national non-payers registry (CADIN). Although the relief was denied by the lower court, we appealed to the Federal Court of the First Circuit which granted us a temporary injunction to suspend the inclusion in the CADIN. We have not accrued any liability related to this claim.
We are a defendant in an administrative proceeding brought by ANEEL because we did not meet the September 21, 2002 deadline for completion of the unbundling process. On November 11, 2002, ANEEL imposed a fine of R$5.5 million upon us. However we believe we should not be responsible for any non-compliance with the restructuring requirements and, for this reason, on November 28, 2002, we appealed ANEELs fine. On February 23, 2005 ANEEL issued a ruling reducing the fine to R$2.7 million. We continue to contest this fine. We have not recorded any reserve since we believe we have a meritorious defense.
On June 12, 2003, ANEEL imposed a R$6 million fine on us for our alleged failure to comply with certain electric power supply quality standards with respect to our customers. We have recorded a full provision for this fine.
In December 2002 we filed a writ of mandamus against ANEEL and the CCEE contesting the calculation of the amounts due under the settlement process held by the CCEE between December 2002 and January 2003 in connection with purchases of electricity during the rationing in period of 2001 2002. We believe that, based on the classification of CEMIG under ANEELs Resolution No. 447, the CCEE incorrectly calculated the amount of debt that we had accrued in respect of our CCEE purchases during the rationing period. This debt, which we believe to be in the amount of approximately R$143 million, was due from CEMIG to the other participants of the CCEE. A condition to receipt of the extraordinary rate adjustments ( Recomposição Tarifária Extraordinária ), or RTE, is that the recipient must not to be involved in any lawsuit with ANEEL that questions the RTE or any related regulation. As CEMIG has contested the settlement process conducted by the CCEE, ANEEL issued an order to suspend the payment of the RTE to CEMIG. As a result of this decision, the payment of approximately R$143 million due to CEMIG was also suspended. In January 2003, we filed a lawsuit seeking to reverse ANEELs ruling regarding the suspension of the RTE payments to us. The Federal Court of Appeals of the First Circuit issued a preliminary injunction in our favor and suspended ANEELs ruling. In December 2004, we withdrew our claim against ANEEL and the CCEE and entered into agreement with ANEEL and the other participants in the CCEE. The withdrawal is still subject to the courts approval. We have accrued a liability of R$142.6 million related to this matter. See Item 10. Additional Information Material Contracts Agreement between CEMIG and companies in the New Agreement of the Electric Sector.
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On November 14, 2003, the Federal Public Auditing Court, which has the authority to audit any decision by ANEEL that may impact public finance, initiated an administrative proceeding against ANEEL to evaluate the criterion adopted by ANEEL in the Energy Consumption Reduction Emergency Program ( Programa Emergencial de Redução de Consumo de Energia Elétrica ), or PERCEE. The Federal Public Auditing Court has asked us to provide certain information with respect to our rates, which, according to the Federal Public Auditing Court, were mistakenly approved by ANEEL. If we cannot provide support for these rates and ANEEL fails to confirm the legality of the criterion adopted, we may incur losses in the amount of R$83.2 million. No reserve has been recognized in connection with this proceeding, as we believe we can provide the necessary support and that ANEEL can confirm the legality of the rates.
In addition, the Federal Public Auditing Court contested the index and the X Factor applied by ANEEL in our rate revision of 2003. We have filed an administrative proceeding before the Federal Public Auditing Court to challenge its decision. We have not accrued any liability related to this matter as we believe we have a meritorious defense.
We are also a defendant, together with the city of Belo Horizonte, in a lawsuit brought by a citizen of Belo Horizonte, challenging the number of hours that CEMIG has charged the city of Belo Horizonte for public lighting provided to the city during the past 20 years. We estimate the contingency to be approximately R$62 million. We have not accrued any liability related to this claim because we believe that we have a meritorious defense.
Dividend Policy and Payments
Obligatory dividend; priority and amount of dividends
Under our bylaws, we are required to pay to our shareholders, as obligatory dividends, 50% of the net income of the fiscal year ending December 31. Our preferred shares have priority in the allocation of the obligatory dividend for the period in question. The order of priority of the distribution of dividends is as follows:
The annual minimum dividend for the preferred shares: These have preference in the event of reimbursement of shares, and have an annual minimum dividend equal to the greater of the following:
10% of their par value; or
3% of the shareholders equity associated with it.
The dividends on the common shares , up to the minimum percentage for the preferred shares.
If a portion of the obligatory dividend remains after the payment of the common dividend, the remaining funds are to be distributed on an equal, pro rata basis with respect to all preferred shares and common shares.
Without prejudice to the obligatory dividend, beginning in fiscal year 2005, every two years, or shorter period if the companys cash position permits, we will distribute extraordinary dividends, up to the limit of the cash available, as determined by the Board of Directors, under the Companys Strategic Guidelines Plan and the dividend policy specified in that plan.
The dividends declared, whether obligatory or extraordinary, shall be paid in two equal installments, the first by June 30 and the second by December 30 of each year.
Under the Brazilian Corporate Law, the Board of Directors may declare interim dividends, in the form of interest on capital, to be paid from retained earnings, income reserves or income ascertained in semi-annual or quarterly financial statements. Any interim dividends paid shall be calculated based on the dividend to be paid in the fiscal year in which the interim dividend was declared. Our bylaws authorize our Board of Directors to declare interim dividends. Any interim dividend paid may be set off against the amount of the obligatory dividend payable for the fiscal year in which the interim dividend was paid.
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In the fiscal years in which we do not have sufficient income to pay dividends to our preferred and common shareholders, the State of Minas Gerais guarantees a minimum dividend of 6% of the per value of the preferred or common shares, respectively, per year to all shares in the company issued up to August 5, 2004 and held by individuals.
Amounts available for distribution
The amount available for distribution is calculated on the basis of the financial statements prepared in accordance with accounting practices adopted in Brazil and the procedures described below.
The obligatory dividend is calculated on the basis of adjusted net income , defined as net income after addition or subtraction of: (a) amounts allocated to the legal reserve, (b) amounts destined to the formation of the contingency reserves and reversal of these reserves formed in previous fiscal years, and (c) any unrealized income transferred to the unrealized income reserve account, and any amounts previously posted to this reserve account which have been realized in the fiscal year and used to offset losses.
We are obliged to maintain a legal reserve, to which 5% of the net income of each fiscal year must be allocated until the reserves total value is equal to 20% of the companys total paid-in capital. However, we are not obliged to make any allocation to the legal reserve in relation to any fiscal year in which the sum of the legal reserve and the other established capital reserves exceeds 30% of the companys total paid-in capital. Any net losses may be charged against the legal reserve.
Under the Brazilian Corporate Law, income in subsidiaries or affiliated companies reported by the equity method, and income on term sales, realizable after the end of the next fiscal year, are also considered to be unrealized income.
The total of income reserves (with the exception of the reserve for contingencies relating to expected losses and the unrealized income reserve), the legal reserve, the special reserves, the reserve for investment projects, and retained earnings may not be greater than the companys registered capital. The amount in excess of our registered capital must be used to increase our registered capital or be distributed as cash dividends.
Under the Brazilian Corporate Law and our bylaws, dividends not claimed within three years from the date on which they are distributed revert to us.
Under Brazilian law we may pay interest on capital as an alternative for the distribution of funds to shareholders. Funds distributed as interest on capital qualify within the calculation of minimum dividend established in the bylaws. These amounts may be paid in cash; and the company may treat them as an expense for purposes of the calculation of the income tax and the social contribution tax. The total amount paid in interest on capital is limited to the result of application to the companys shareholders equity of the Long Term Interest Rate (TJLP), published by the Brazilian Development Bank (BNDES) and may not exceed the greater of (i) 50% of the net income(before taxes for social contribution on net profits, income tax, and the deduction of the interest attributable to shareholders equity) for the period in respect to which the payment is made or (ii) 50% of retained earnings as of the date of the beginning of the period in respect of which the payment is made. Shareholders who are not resident in Brazil must register with the Brazilian Central Bank so that the foreign currency proceeds of their dividend payments, or of sale or other amounts relating to their shares, may be remitted to them outside Brazil. The preferred shares underlying the companys ADRs are held in Brazil by the custodian bank, as agent for the depositary bank, which is the registered owner of the shares.
Payments of cash dividends and distributions, if any, will be made in reais to the custodian on behalf of the depositary bank, which will then convert such proceeds into U.S. dollars and will cause such U.S. dollars to be delivered to the depositary bank for distribution to holders of ADRs. In the event that the custodian is unable to
89
immediately convert the reais received as dividends into U.S. dollars, the amount of U.S. dollars payable to holders of ADRs may be adversely affected by devaluations of the real that occur before such dividends are converted and remitted. The real appreciated approximately 7.94% relative to the U.S. dollar in 2004. See Item 3. Key InformationRisk FactorsRisks Relating to Brazil. The Brazilian government exercises a significant influence on the Brazilian economy. Political and economic conditions can have a direct impact on our business.
Dividends in respect of the preferred shares paid to holders who are not Brazilian residents, including holders of ADRs, are generally not subject to Brazilian withholding tax, although in general payments of interest on capital are subject to withholding tax. See Item 10. Additional InformationTaxationBrazilian Tax ConsiderationsTaxation of Dividends and U.S. Tax ConsiderationsTaxation of Distributions. There is no specific record date upon which the depositary bank will determine the exchange rate to be used in connection with converting cash dividends or other cash distributions. Pursuant to the Second Amended and Restated Deposit Agreement, the depositary bank will arrange for the funds to be converted into U.S. dollars upon receipt of notice of cash dividends or other cash distributions.
History of Dividend Payments
The following table sets forth the recent history of declarations of dividends and interest on capital on our common shares and preferred shares. For each year in the table, the payment of the dividends occurred during the year following declaration, except for 1998, when a portion of the total dividend amount for that year was paid during the same year. For the periods indicated, the dividends paid per 1,000 common shares and per 1,000 preferred shares were the same. See Item 3. Key InformationSelected Consolidated Financial Data.
Declaration History of Dividends and Interest on Capital (1)
Dividend Year |
|
Common Shares |
|
Preferred Shares |
|
||||
|
|
(R$)(2) |
|
(US$)(3) |
|
(R$)(2) |
|
(US$)(3) |
|
1998 |
|
243,991,371 |
|
169,459,096 |
|
314,001,295 |
|
218,083,022 |
|
1999 |
|
81,759,386 |
|
41,981,713 |
|
105,219,102 |
|
54,027,780 |
|
2000 |
|
81,768,792 |
|
30,590,644 |
|
105,231,208 |
|
39,368,203 |
|
2001 |
|
93,858,914 |
|
40,099,762 |
|
120,790,421 |
|
51,605,830 |
|
2002 |
|
96,198,579 |
|
33,846,035 |
|
123,801,421 |
|
43,557,683 |
|
2003 |
|
140,081,485 |
|
47,630,144 |
|
180,412,546 |
|
61,343,408 |
|
2004(4) |
|
302,634,209 |
|
119,476,593 |
|
389,766,059 |
|
153,875,270 |
|
(1) In accordance with the accounting practices adopted in Brazil, dividends and interest on capital are accounted for as having been paid in the dividend year in which they are declared, even if such dividends or interest on capital were formally approved by a shareholders meeting in the following year.
(2) Real amounts are expressed in nominal reais .
(3) U.S. dollar amounts are calculated by dividing the amount of dividends paid, expressed in nominal reais , by the noon buying rate on the respective dates when we first paid the indicated dividends.
(4) The 2004 dividends were approved at the annual and extraordinary general shareholders meetings held on April 29, 2005. The 2004 dividends are expected to be paid on June 30, 2005 and December 29, 2005. See note 18 to our consolidated financial statements.
Significant Changes
The most significant change in our financial condition since the date of our financial statements that are included in this annual report on Form 20-F is a 23.88% rate increase implemented in 2005, which has had a positive effect on our electricity sales revenues. In order to comply with regulatory provisions pursuant to which we were required to unbundle our vertically integrated businesses, we have incorporated two wholly-owned subsidiaries of CEMIG Cemig Generation and Transmission and Cemig Distribution.
Item 9. The Offer and Listing
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Trading Market
The principal trading market for our preferred shares is the São Paulo Stock Exchange. Our ADSs, each representing 1,000 preferred shares, have traded on the NYSE under the symbol CIG since September 18, 2001. Prior to that date, our ADSs were traded in the over-the-counter, or OTC, market in the United States. The ADSs are evidenced by ADRs issued by Citibank, N.A., as depositary, pursuant to a Second Amended and Restated Deposit Agreement by and among us, the depositary and the holders and beneficial owners of ADSs evidenced by ADRs issued thereunder. As of December 31, 2004, there were approximately 14,530,135 ADSs outstanding, representing approximately 14,530 billion preferred shares or approximately 16.4% of our 88,439 billion outstanding preferred shares. Such ADSs were held by 10 record holders as of that date. Our common shares are also listed and traded on the São Paulo Stock Exchange.
The following table sets forth the reported high and low closing sale prices for the preferred shares on the São Paulo Stock Exchange (per lot of 1,000 preferred shares) and the ADSs on the NYSE for the periods indicated.
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Preferred Shares(1) |
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ADSs |
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Price in Nominal R$ |
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Price in US$ |
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Period |
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High |
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Low |
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High |
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Low |
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2000 |
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40.50 |
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22.80 |
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|
|
|
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2001(2) |
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36.70 |
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21.00 |
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18.62 |
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8.40 |
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2002 |
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39.70 |
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18.90 |
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16.73 |
|
4.85 |
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2003 |
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52.75 |
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20.74 |
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18.46 |
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6.00 |
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2004 |
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68.00 |
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36.80 |
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25.10 |
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11.42 |
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|
|
|
|
|
|
|
|
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2003 |
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|
|
|
|
|
|
|
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First quarter |
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28.85 |
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21.40 |
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8.75 |
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6.06 |
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Second quarter |
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33.00 |
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25.50 |
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11.28 |
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7.92 |
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Third quarter |
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37.60 |
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24.82 |
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13.41 |
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8.22 |
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Fourth quarter |
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52.75 |
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33.60 |
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18.46 |
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12.05 |
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|
|
|
|
|
|
|
|
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2004 |
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|
|
|
|
|
|
|
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First quarter |
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56.00 |
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46.95 |
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19.99 |
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16.55 |
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Second quarter |
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54.10 |
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36.80 |
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18.72 |
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11.42 |
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Third quarter |
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60.20 |
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46.10 |
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21.25 |
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15.30 |
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Fourth quarter |
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68.00 |
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60.40 |
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25.10 |
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21.07 |
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2005 |
|
|
|
|
|
|
|
|
|
First quarter |
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68.20 |
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53.49 |
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26.10 |
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19.71 |
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|
|
|
|
|
|
|
|
|
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November 2004 |
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65.58 |
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60.99 |
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23.44 |
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21.60 |
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December 2004 |
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64.90 |
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63.60 |
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25.10 |
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22.74 |
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January 2005 |
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68.00 |
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62.55 |
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23.67 |
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19.71 |
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February 2005 |
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68.20 |
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55.55 |
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26.10 |
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21.55 |
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March 2005 |
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66.85 |
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58.10 |
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24.93 |
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21.19 |
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April 2005 |
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74.95 |
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61.71 |
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29.80 |
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23.40 |
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May 2005(3) |
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71.99 |
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65.60 |
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29.11 |
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26.61 |
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(1) Preferred share prices and volumes per 1,000 preferred shares.
(2) From the listing on the NYSE on September 18, 2001 until the end of the period.
(3) Through May 18, 2005.
On May 18, 2005, the closing price per 1,000 of the preferred shares on the São Paulo Stock Exchange was R$70.95 and the closing price per ADS on the NYSE was US$28.55.
Since July 12, 2002, our depositary receipts, each representing 1,000 of our preferred shares, have traded on the LATIBEX, under the ticker symbol XCMIG. The LATIBEX is an electronic trading market created in 1999 by the Madrid Stock Exchange in order to facilitate the trading market of Latin American Securities in Euros.
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Trading on the São Paulo Stock Exchange
The preferred shares are traded on the São Paulo Stock Exchange, the only Brazilian stock exchange that trades shares. Trading on the São Paulo Stock Exchange is limited to member brokerage firms and a limited number of authorized non-members. The CVM and São Paulo Stock Exchange have discretionary authority to suspend trading in shares of a particular issuer under certain circumstances.
If you were to trade in the preferred shares on the São Paulo Stock Exchange, your trade would settle in three business days after the trade date. Delivery of and payment for shares is made through the facilities of separate clearinghouses for each exchange, which maintain accounts for member brokerage firms. The seller is ordinarily required to deliver the shares to the exchange on the second business day following the trade date. The clearinghouse for the São Paulo Stock Exchange is Companhia Brasileira de Liquidação e Custódia.
In order to better control volatility, the São Paulo Stock Exchange has adopted a circuit breaker system pursuant to which trading sessions may be suspended for a period of 30 minutes or one hour whenever the index of this stock exchange falls more than 10% from the index registered for the previous trading session.
The São Paulo Stock Exchange is less liquid than the NYSE and other major exchanges in the world. As of December 31, 2004, the aggregate market capitalization of the 358 companies listed on the São Paulo Stock Exchange was equivalent to approximately US$242 billion and the 10 largest companies listed on the São Paulo Stock Exchange represented approximately 67% of the total market capitalization of all listed companies. Although any of the outstanding shares of a listed company may trade on a Brazilian stock exchange, in most cases fewer than half of the listed shares are actually available for trading by the public. The remainder of these shares is held by small groups of controlling persons, governmental entities or one principal shareholder. As of December 31, 2004, we accounted for approximately 1.55% of the total market capitalization of all listed companies on the São Paulo Stock Exchange.
Our preferred shares and common shares have daily liquidity on the São Paulo Stock Exchange and have had no suspension of trading in the past three years
We have been a member of Special Corporate Governance Level 1 of the São Paulo Stock Exchange since October 2001. As a result, we have agreed to do the following:
maintain a free float of shares representing at least 25% of our capital stock;
provide a minimum notice period of 15 days after calling any general shareholders meeting;
improve the scope of our quarterly financial information, by obligating ourselves to include consolidated financial statements and cash-flow statements with this information;
comply with information disclosure rules for transactions involving securities that we issue on behalf of our controlling shareholder or management;
disclose any shareholder agreements, stock option programs and contracts with related parties;
hold an annual meeting with analysts and any other interested parties;
make available an annual calendar of corporate events; and
adopt mechanisms that favor capital dispersion in public share offerings.
Trading on Brazilian stock exchanges by non-residents of Brazil is subject to limitations under Brazilian foreign investment legislation. See Item 10. Additional InformationExchange Controls.
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Regulation of Brazilian Securities Markets
The Brazilian securities markets are principally governed by Law No. 6,385, dated December 7, 1976, and the Brazilian Corporate Law, each as amended and supplemented, and by regulations issued by the CVM, the National Monetary Council and the Central Bank, which has, among other powers, licensing authority over brokerage firms and which regulates foreign investments and foreign exchange transactions.
Under the Brazilian Corporate Law, a corporation is either publicly owned (companhia aberta), such as we are, or closely held ( companhia fechada ). All publicly owned companies, including us, are registered with the CVM and are subject to reporting requirements. Our shares are traded on the São Paulo Stock Exchange, but may be traded privately subject to certain limitations. The Brazilian OTC market consists of direct trades and trades between individuals in which a financial institution registered with the CVM serves as intermediary.
We have the option to ask that trading in our securities on the São Paulo Stock Exchange be suspended in anticipation of a material announcement. Trading may also be suspended on the initiative of the São Paulo Stock Exchange or the CVM based on or due to, among other reasons, a belief that a company has provided inadequate information regarding a material event or has provided inadequate responses to inquiries by the CVM or the stock exchange.
Brazilian law provides general restrictions on unfair trading practices and market manipulation, although in Brazil there may be fewer instances of enforcement actions and judicial precedent is less well defined than in certain other countries. The Brazilian Corporate Law provides that the controlling shareholders, any shareholder that appoints members to the board of directors and to the fiscal council, members of the board of directors, members of the fiscal council and executive officers will be required to disclose any purchase or sale of shares to the CVM and the São Paulo Stock Exchange.
Trading on the São Paulo Stock Exchange by non-residents of Brazil is subject to limitations under Brazilian foreign investment and tax legislation. The Brazilian custodian for the preferred shares and the depositary bank must obtain a certificate of registration from the Central Bank of Brazil to be eligible to remit U.S. dollars abroad for payments of dividends, any other cash disbursements, or upon the disposition of the shares and sales proceeds thereof. In the event that a holder of ADSs exchanges its ADSs for preferred shares, the holder will be entitled to continue to rely on the depositary banks certificate of registration for five business days after the exchange. Thereafter, the holder may not be able to obtain and remit U.S. dollars abroad upon the disposition of the preferred shares, or distributions relating to the preferred shares, unless the holder qualifies for and obtains a new certificate of registration. See Item 10. Additional InformationExchange Controls.
Corporate Governance Differences from NYSE Practices
On November 4, 2003, the New York Stock Exchange (NYSE) established new corporate governance rules. Under the rules, foreign private issuers are subject to a more limited set of corporate governance requirements than U.S. domestic issuers. Under these rules, we are required to set forth in our annual report to shareholders a description of the significant differences between CEMIGs corporate governance practices and those that would apply to a U.S. domestic issuer under the NYSE corporate governance rules. The following table summarizes these differences.
Section |
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NYSE
Corporate Governance Rule for U.S.
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Our Approach |
303A.01 |
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A listed company must have a majority of independent directors. Controlled companies are not required to comply with this requirement. |
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CEMIG is a controlled company because more than a majority of its voting power is controlled by the government of the State of Minas Gerais. As a controlled company, CEMIG would not be required to comply with the majority of |
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Section |
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NYSE
Corporate Governance Rule for U.S.
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Our Approach |
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independent directors requirements if it were a U.S. domestic issuer. There is no legal provision that requires CEMIG to have independent directors. |
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303A.03 |
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The non-management directors of a listed company must meet at regularly scheduled executive sessions without management. |
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The non-management directors of CEMIG do not meet at regularly scheduled executive sessions without management. |
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303A.04 |
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A listed company must have a nominating/corporate governance committee composed entirely of independent directors, with a written charter that covers certain minimum specified duties. Controlled companies are not required to comply with this requirement. |
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As a controlled company, CEMIG would not be required to comply with the nominating/corporate governance committee requirements if it were a U.S. domestic issuer. CEMIG does not have a nominating/corporate governance committee. |
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303A.05 |
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A listed company must have a compensation committee composed entirely of independent directors, with a written charter that covers certain minimum specified duties. Controlled companies are not required to comply with this requirement. |
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As a controlled company, CEMIG would not be required to comply with the compensation committee requirements if it were a U.S. domestic issuer. CEMIG does not have a compensation committee. |
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303A.06 and 303A.07 |
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A listed company must have an audit committee with a minimum of three independent directors that satisfy the independence requirements of Rule 10A-3 under the Exchange Act, with a written charter that covers certain minimum specified duties. |
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CEMIG has a permanent conselho fiscal, or fiscal council in accordance with the applicable provisions of Brazilian Corporate Law. As required by Brazilian Corporate Law, our fiscal council is independent of our management and external auditors. The primary responsibility of the fiscal council is to review managements activities and the financial statements, and to report its findings to the shareholders. Because CEMIG has no audit committee, the entire Board of Directors serves as CEMIGs audit committee, as defined in the Sarbanes-Oxley Act of 2002. |
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303A.08 |
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Shareholders must be given the opportunity to vote on all equity-compensation plans and material revisions thereto, with limited exemptions set forth in the NYSE rules. |
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Under Brazilian Corporate Law, shareholder preapproval is required for the adoption of equity compensation plans. |
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303A.09 |
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A listed company must adopt and disclose corporate governance guidelines that cover certain minimum specified subjects. |
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CEMIG does not have formal corporate governance guidelines. |
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303A.12 |
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Each listed company Chief Executive Officer must certify to the NYSE each year that he or she is not aware of any violation by the company of NYSE corporate governance listing standards. |
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CEMIGs Chief Executive Officer will promptly notify the NYSE in writing after any executive officer of CEMIG becomes aware of any material non-compliance with any applicable provisions of the NYSE corporate governance rules. |
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By-laws
We are a state-controlled company registered under the laws of Brazil. The registration number given to us by Junta Comercial do Estado de Minas Gerais, or the Board of Trade of Minas Gerais, is 3130004012. Set forth below is a brief summary of certain significant provisions of (i) our by-laws, as amended by our extraordinary shareholders meeting on December 13, 2004, and (ii) Brazilian Corporate Law. The description of our by-laws contained herein does not purport to be complete and is qualified by reference to our by-laws, which have been filed as an exhibit to this annual report.
Object and Purpose
As described in Article 1 of our by-laws, we have four main purposes: (i) to construct and operate electric power generation, transformation, transmission and distribution systems and to trade electric power and related services; (ii) to develop commercial activities in the energy field; (iii) to render consulting services to companies in Brazil and abroad; and (iv) to perform activities directly or indirectly relating to our corporate purposes.
Preferred Shares
Holders of preferred shares have the right to receive annual minimum dividends in an amount equal to the greater of 10% of the par value of each preferred share or 3% of the shareholders equity associated with each preferred share. Holders of our preferred shares also will have priority over any other class of shares if we decide to redeem shares. A preferred share does not entitle its owner to vote at the general shareholders meetings.
Share Subscription
Shares purchased by the State Government, which must constitute at all times the majority of our voting shares, are paid for in accordance with the Brazilian Corporate Law. Shares purchased by other shareholders (whether natural persons or companies) shall be paid for in accordance with the decision resulting from the general meeting of shareholders that addresses the matter.
Article 171 of the Brazilian Corporate Law provides that each shareholder has a general preemptive right to subscribe for new shares or convertible securities issued in any capital increase, in proportion to that shareholders shareholding, except in the event of the exercise of any option to acquire shares of our capital stock. Shareholders must exercise their preemptive rights within 30 days after the publication of the notice of capital increase.
In the event of a capital increase, holders of ADSs, which represent preferred shares, would have preemptive rights to subscribe only to newly issued preferred shares, in proportion to their shareholdings but may not be able to exercise these rights because of U.S. securities law limitations. See Item 3. Risk FactorsRisks Relating to the Preferred Shares and ADSsYou may not be able to exercise preemptive rights with respect to the preferred shares.
Minority Shareholders
Our by-laws provide that the preferred and minority common shareholders are entitled to elect one member and an alternate to the Board of Directors, as more fully described in Rights of ShareholdersRights of Minority Shareholders.
Dividends
For a discussion of our dividend policy, see Item 8. Financial InformationDividend Policy and Payments.
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General Meetings
General meetings of shareholders are held for any legal purpose, as provided by the Brazilian Corporate Law. Ordinary general meetings of shareholders are held within the first four months of the fiscal year and are called upon 15 days prior notice. The Brazilian Corporate Law also provides that the following actions may be taken only at extraordinary general meetings of shareholders held for the following purposes:
to amend our by-laws;
to increase or decrease our issued capital stock or to subscribe new shares;
to elect the members of the Board of Directors and of the Fiscal Council;
to issue debentures or any convertible securities;
to suspend the rights of a shareholder who has violated the Brazilian Corporation Law or our by-laws;
to merge us with another company in a case in which we are not the surviving company ( incorporação and fusão ) or a spin-off ( cisão );
to accept or reject the valuation of in-kind contributions offered by a shareholder in consideration for the issuance of shares of our capital stock;
to transform us into a limited liability company (sociedade por quotas de responsabilidade limitada) or any other corporate form;
to take any action regarding our dissolution or liquidation, and the appointment and dismissal of the respective liquidator and review of the reports prepared by him or her;
to take any action regarding an application for bankruptcy or compulsory rescheduling of our debts; and
to receive annually the financial statements from management and to approve the financial statements.
As a general rule, the affirmative vote of shareholders representing at least the majority of our issued and outstanding common shares present in person or represented by proxy at a shareholders meeting is required to approve or ratify any proposed action, and abstentions are not taken into account. However, the affirmative vote of shareholders representing one half of our issued and outstanding voting capital is required to:
create preferred shares or to increase disproportionately an existing class of preferred shares relative to the other classes of shares, unless such action is provided for or authorized by our by-laws;
modify a preference, privilege or condition of redemption or amortization conferred on one or more classes of preferred shares, or to create a new class with greater privileges than the existing classes of preferred shares;
reduce the percentage of mandatory dividends;
change our corporate purpose;
merge us with another company if we are not the surviving company or consolidate us with another company;
96
spin off a portion of our assets or liabilities;
approve our participation in a group of companies;
apply for cancellation of our voluntary liquidation;
approve our dissolution; and
approve the compulsory transfer of all of our shares to another company in order to make us a wholly-owned subsidiary of that other company ( incorporação de ações ).
Shareholders may be represented at a shareholders meeting by an attorney-in-fact appointed no later than one year prior to the meeting date. To be eligible to represent a shareholder in a shareholders meeting, the attorney-in-fact must be a shareholder, one of our executive officers or directors or an attorney-at-law. In a publicly held corporation, such as ours, the attorney-in-fact may also be a financial institution.
Subject to the provisions of the Brazilian Corporate Law and our by-laws, our Board of Directors may ordinarily call our shareholders meetings. These meetings may also be called by:
the Fiscal Council, if the Board of Directors fails to call a general shareholders meeting within one calendar month after the date it was required to do so under applicable laws or a special shareholders meeting in the case of serious and urgent matters affecting us; any shareholder, whenever the executive officers fail to call the meeting of shareholders within 60 days of being required to do so by the Brazilian Corporate Law or by our by-laws; and
shareholders holding at least five percent of our capital stock, if our Board of Directors fails to call a meeting within eight days after receipt of a request from that shareholder to call the meeting that indicates the issues to be discussed or calls for the creation of the Fiscal Council.
Board of Directors
Our by-laws mandate that our Board of Directors shall be comprised of 14 directors and 14 alternates. One director is designated a chairman and another director is designated the vice-chairman.
Our Board of Directors is responsible for:
establishing the general direction of our business;
electing and dismissing executive officers;
approving the execution contracts between us and our shareholders or any entity that controls, is controlled by or is under joint control with our shareholders;
approving the sale or pledge of our fixed assets, or the granting of guarantees to third parties, with a value of at least R$5 million;
approving, upon proposal by the Board of Executive Officers, the sale or the creation of any in rem guarantees with respect to our permanent assets and the granting by us of any personal guarantee to any third party in an amount exceeding R$5 million;
approving, upon a proposal by the Board of Executive Officers, loans, financings, agreements and any actions which would bind us in an amount exceeding R$5 million;
calling the general meetings of shareholders;
97
supervising the management of the Board of Executive Officers, reviewing our books and documents and requesting information regarding executed and soon-to-be executed contracts, as well as other items of interest;
approving our annual and interim financial statements;
appointing and dismissing independent auditors annually;
approving, upon proposal by the Board of Executive Officers, the commencement or waiver of bidding proceedings for the purchase of goods or services with a value of at least R$5 million;
authorizing, upon proposal by the Board of Executive Officers, legal and administrative action to be taken on our behalf and the settlement of judicial and extra judicial matters in which we are involved with a value of at least R$5 million;
approving the issuance of securities (debentures, commercial papers, notas promissórias , among others) in the local and international capital markets; and
delegating to Board of Executive Officers the power to authorize signature contracts of commercialization of electric energy or rendering distribution and transmission services, in terms of legislation.
Under the Brazilian Corporate Law, directors of a corporation generally have certain duties equivalent to those imposed under the laws of most states of the United States, including a duty of loyalty to the corporation, a duty to refrain from self-dealing and a duty to use reasonable care in the management of the corporations affairs. Our directors and officers may be held liable for breaches of duty to us and our shareholders and may be subject to judicial actions in proceedings brought by government agencies or our shareholders.
There are no provisions in our bylaws with respect to (i) a directors power to vote on proposals or contracts in which such director is materially interested, (ii) borrowing powers exercisable by the directors, (iii) age limits for retirement of board members, and (iv) number of shares required for director qualification.
The chairman and vice-chairman of our Board of Directors are chosen by our Board of Directors at its first meeting following the election of the board members. The vice-chairman of our Board of Directors will act as a temporary replacement for our chairman when the chairman is absent from board meetings.
Our shareholders determine the remuneration of our directors during the general meeting of shareholders at which our directors are elected to office.
Rights of Shareholders
We extend to our shareholders all of the rights that are provided under Brazilian law. Our by-laws are in compliance with the Brazilian Corporate Law.
Essential Rights
Article 109 of the Brazilian Corporate Law provides that a corporation may not deny certain rights to its shareholders under any circumstances. These shareholders rights include:
the right to have a share of the corporations earnings;
the right to have a share of the corporations assets, in the event of liquidation thereof;
the right to supervise our management according to the Brazilian Corporate Law;
98
preemptive rights to subscribe new shares or securities convertible into shares, except for exceptions provided by the Brazilian Corporate Law and our by-laws; and
the right to withdraw from the company under certain circumstances provided in the Brazilian Corporate Law.
Voting Rights
As a general rule, only our common shares are entitled to vote and each common share corresponds to one vote. Holders of preferred shares acquire voting rights if, during three consecutive fiscal years, we fail to pay a fixed or minimum dividend to which the preferred shares are entitled. If a holder of preferred shares acquires voting rights in this manner, such rights will be identical to the voting rights of a holder of common shares and will continue until the dividend is paid. No restrictions exist on the right of a holder of common shares or preferred shares to exercise voting rights with respect to such shares by virtue of such holder being a non-resident of Brazil or a citizen of a country other than Brazil. However, holders of ADSs may only vote the underlying preferred shares through the depositary according to the terms of the Second Amended and Restated Deposit Agreement. In any circumstance in which holders of preferred shares are entitled to vote, each preferred share will entitle its holder to one vote.
Redemption rights
Our common shares and preferred shares are not redeemable, except that a dissenting shareholder is entitled under Brazilian corporate law to obtain redemption upon a decision made at a shareholders meeting by shareholders representing at least 50% of the voting shares:
(1) to create a new class of preferred shares or to disproportionately increase an existing class of preferred shares relative to the other classes of shares (unless such actions are provided for or authorized by the by-laws);
(2) to modify a preference, privilege or condition of redemption or amortization conferred on one or more classes of preferred shares, or to create a new class with greater privileges than the existing classes of preferred shares;
(3) to reduce the mandatory distribution of dividends;
(4) to change our corporate purposes;
(5) to merge us with another company or consolidate us;
(6) to transfer all of our shares to another company in order to make us a wholly-owned subsidiary of such company;
(7) to approve the acquisition of control of another company at a price that exceeds certain limits set forth in Brazilian corporate law;
(8) to approve our participation in a centralized group of companies as defined under Brazilian corporate law; or
(9) in the event that the entity resulting from (a) a merger, (b) a transfer of shares as described in clause (6) above or (c) a spin-off that we conduct fails to become a listed company within 120 days of the general shareholders meeting at which such decision was taken.
Only holders of shares adversely affected by the changes mentioned in items (1) and (2) above may require us to redeem their shares. The right of redemption mentioned in items (5), (6) and (8) above may only be exercised if our shares do not satisfy certain tests of liquidity at the time of the shareholder resolution. The right of redemption
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lapses 30 days after publication of the minutes of the relevant general shareholders meeting, unless, in the case of items (1) and (2) above, the resolution is subject to confirmation by the preferred shareholders (which must be made at a special meeting to be held within one year), in which case the 30-day term is counted from the publication of the minutes of the special meeting.
We would be entitled to reconsider any action giving rise to redemption rights within 10 days following the expiration of such rights if the redemption of shares of dissenting shareholders would jeopardize our financial stability. Law No. 9,457 dated May 5, 1997, which amended Brazilian corporate law, contains provisions which, among other provisions, restrict redemption rights in certain cases and allow companies to redeem their shares at their economic value, subject to certain requirements. Our by-laws currently do not provide that our capital stock will be redeemable at its economic value and, consequently, any redemption pursuant to Brazilian corporate law would be made at no less than the book value per share, determined on the basis of the last balance sheet approved by the shareholders; provided that if the general shareholders meeting giving rise to redemption rights occurred more than 60 days after the date of the last approved balance sheet, a shareholder would be entitled to demand that his or her shares be valued on the basis of a new balance sheet dated within 60 days of such general shareholders meeting.
Rights of Minority Shareholders
The Brazilian Corporate Law provides that shareholders who own at least 5% of the capital stock of a corporation are afforded the following rights, among others:
the right to require that the books of the corporation be made available for review, whenever these shareholders become suspicious that Brazilian law or the corporations by-laws have been violated, or that irregularities have been committed by the management of the corporation;
the right to call a general meeting of shareholders, under certain circumstances, whenever the corporations directors or officers, as the case may be, fail to do so; and
the right to file an action for indemnification by directors or officers, as the case may be, for damages caused to the assets of the corporation, whenever it is determined at the general meeting of shareholders that such a claim shall not be filed.
Whenever the Fiscal Council is not permanently active, it shall be activated at a general meeting of shareholders at the request of shareholders who own at least 10% of the voting shares or 5% of the non-voting shares. Minority shareholders have the right to appoint one member of the Fiscal Council. All shareholders have the right to attend general meetings of shareholders.
The Brazilian Corporate Law also provides that minority shareholders that hold either (i) preferred shares representing at least 10% of the total share capital of a company or (ii) common shares representing at least 15% of the voting capital of a company, have the right to appoint one member and an alternate to the board of directors. If no common or preferred shareholder meets these thresholds, shareholders holding preferred shares or common shares representing at least 10% of the total share capital of the company are entitled to combine their holdings to appoint one member and an alternate to the board of directors. Through 2005, a director appointed by the preferred shareholders as a group, or collectively with the common shareholders, is to be chosen from a list of three names provided by the controlling shareholder. Beginning with the annual general meeting of 2006, this member of the Board of Directors will be elected in accordance with the terms of the law, independently of the period of office of the board member to be substituted.
Changes in Rights of Shareholders
Any change with respect to the rights of holders of our common shares or preferred shares requires a shareholders meeting. Under the Brazilian Corporate Law, the proposed changes must be approved by a majority of the affected class. Certain changes with respect to the rights of non-voting shares, including preferred shares, such
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as a change in payment or voting rights, may give rise to the exercise of redemption rights by the holders of the affected shares.
Going Private Transactions and Delisting from the São Paulo Stock Exchange
Our delisting, as a public company, must be preceded by a tender offer by our controlling shareholders or ourselves for the acquisition of all our then outstanding shares, subject to the conditions below:
the price offered for the shares under the public offering must be the fair value of those shares, as established in Brazilian Corporate Law; and
shareholders holding more than two thirds of our float shares shall have expressly agreed to our decision to become a private company or accepted the offer.
According to Brazilian corporate law, a fair price shall be at least be equal to our valuation, as determined by one or more of the following valuation methods: book value, net book value assessed by market price, discounted cash flow, multiples, price of our shares in the market or any other valuation method accepted by the CVM. This price of the offer may be revised if challenged within 15 days of its publication by holders of at least 10% of our outstanding shares, by means of a request sent to our management that a extraordinary shareholders meeting be called to decide on whether to request a new valuations under the same or different valuation method. Our shareholders that request a new valuation and those who approve such request shall reimburse us for incurred costs if the new valuation is lower than the challenged valuation. However, if the second valuation is higher, the offeror will have the option to continue the offer with the new price or quit the offer.
Arbitration
Pursuant to the Brazilian Corporate Law and related regulations, if provided for in a companys by-laws, disputes among shareholders will be subject to arbitration. Our by-laws currently do not provide for arbitration.
Material Contracts
CRC Account Agreement - Contract for Assignment of Credit of the Remaining Balance of the Revenue Compensating Account, dated May 31, 1995, between the State Government and CEMIG, and Amendments thereto
Prior to 1993, electric utilities in Brazil were guaranteed a rate of return on investments in assets used to provide electric service to customers, the rates charged to customers were uniform throughout the country, and profits from more profitable utilities were reallocated to less profitable ones so that the rate of return for all companies would equal the national average. Shortfalls experienced by most electric utilities in Brazil were accounted for in each companys CRC Account. When the CRC Account and the guaranteed return concept were abolished, concessionaires with positive balances were permitted to offset such balances against their liabilities to the Federal Government.
After all of our eligible payables and debt to the Federal Government had been offset against our CRC Account balance, we entered into an agreement with the State Government in May 1995 to transfer the right to receive the balance of our CRC Account from the Federal Government to the State Government in return for a promissory note from the State Government payable in monthly installments plus interest. This account receivable had a balance of approximately R$2,942 million as of December 31, 2004, which included a significant amount of overdue installments. The agreement relating to this transfer, the CRC Account Agreement, originally required the State Government to make monthly payments to us over twenty years with an initial three-year grace period for interest and principal payments. Interest on the amount receivable under the CRC Account Agreement accrues at a rate of 6% per year plus inflation adjustments. Interest began to accrue on May 2, 1995, and deferred interest during the initial three-year grace period was capitalized.
Since May 1995, the CRC Account Agreement has been amended as follows:
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(a) The CRC Account Agreement was first amended in February 2001 to replace the monetary restatement index originally applicable to the outstanding balance with the IGP-DI.
(b) The CRC Account Agreement was next amended by the Second Amendment to the CRC Account Agreement, signed on October 14, 2002, which refers to 149 monthly installment payments, with maturities from January 1, 2003 through May 1, 2015, representing the total amount of R$1,845 million of December 31, 2004, bearing interest at 6% per year, with restatement based on the IGP-DI. We entered into this Second Amendment with the State Government in order to preserve the terms and conditions of the original CRC Account Agreement with respect to the above-referenced installments. We did not receive any scheduled payments from the State Government with respect to this Second Amendment. In 2001, we recorded a full loss provision with respect to the entire outstanding balance of the Second Amendment. See Note 3 to our consolidated financial statements.
(c) The CRC Account Agreement was next amended by the Third Amendment to the CRC Account Agreement, signed on October 24, 2002, which refers to outstanding installments originally due under the CRC Account Agreement from April 1, 1999 through December 1, 1999 and from March 1, 2000 through December 1, 2002. These installments, which totaled R$1,097 million as of December 31, 2004, bear interest at an annual rate of 12%, with restatement based on the IGP-DI. We are permitted to retain payments of dividends and interest on capital due to the State Government as our shareholder as a set-off against amounts that the State Government owes us under this Third Amendment. For this reason, we have not recorded a loss provision for amounts due thereunder. We paid interest on capital in lieu of dividends in December 2004, of which R$72 million was due to the State Government. Part of this interest on capital, amounting to R$49 million, was used by the State Government to settle part of the CRC overdue credits and the remainder, in the amount of R$23 million, to acquire debentures issued by CEMIG for the Irapé power plant construction. See Note 3 to our consolidated financial statements.
(d) On November 19, 2004 our Board of Directors unanimously approved the main terms of a Fourth Amendment to the CRC Account Agreement, which includes an increase from 25% to 50% to the amount of dividends and interest due to the State that we are entitled to offset against amounts due under the CRC Account Agreement. Under the terms approved by our Board of Directors, the outstanding amount will bear interest at an annual rate of 10%, with restatement based on the IGP-DI. This amendment is still subject to approval by the State Government. In addition to the agreement of the State Government, execution of such amendment depends on the approval of ANEEL, our shareholders and the state congress of the State of Minas Gerais.
Contract on Concessions for Generating Electric Energy, dated July 10, 1997, between the Federal Government and CEMIG
In order to provide electric energy generation services to the public, we entered into a contract with the Federal Government. This concession contract establishes terms of the concessions for each of our generation plants. Although the concessions for different generation plants have different expiration dates, these concessions are extendable by the Federal Government for a period of up to 20 years upon our application. This contract grants us free access to land in the public domain, certain rights of way, and existing transmission and distribution systems so that we may transmit the energy produced in our generating stations. In return, among other things, we must maintain a minimum level of regularity, continuity, efficiency and safety and we must set aside funds to account for fuel consumption, use of water resources and contributions to the RGR. We do not pay the Charge for Use of Public Assets ( Uso do Bem Público) , or UBP, when generating under the public service regime.
This contract also provides that ANEEL (formerly DNAEE) or a substitute agency will supervise us in the provision of our energy generation services and that we will be subject to penalties if we fail to comply with certain contractual provisions. As a party to this contract, we serve a public utility function and we must receive authorization from the Federal Government prior to entering into any other entrepreneurial activities. The Federal Government may intervene in our concession at any time in order to ensure that we are providing our electric energy generation services properly and that we are acting in compliance with this contract.
Contract for Concessions of Electric Energy Transmission Services, dated July 10, 1997, between the Federal Government and CEMIG
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In July 1997, we entered into a contract with the Federal Government authorizing us to provide our electric energy transmission services to the public until July 8, 2015. This contract also provides the rates at which we may charge our customers for our services. Upon our application, this contract may be extended by the Federal Government, at its own discretion, for a 20-year period. Pursuant to the contract, we are given free access to land in the public domain and certain rights of way in order to operate our electric energy transmission service. In return, among other things, we must maintain adequate technology, equipment, facilities and operating methods to ensure optimization of the use of existing and future electric energy resources and we must satisfy the demands of the electric energy market. We are also required to enter into a transmission service agreement with the ONS, pursuant to which we must make the facilities of our transmission service available to the interconnected power system.
These contracts also provide that ANEEL or a substitute agency will supervise us in the provision of our energy transmission services and that we will be subject to penalties if we fail to comply with certain contractual provisions. The Federal Government may intervene in our concession at any time in order to ensure that we are providing our electric energy transmission services properly and that we are complying with this contract.
Contract on Concessions for Distributing Electric Energy, dated July 10, 1997, between the Federal Government and CEMIG
To enable us to provide electricity distribution service to the public, we have a concession contract with the Brazilian Federal Government. This contract also provides for the rates at which we may charge clients for our services.We may apply for a 20-year extension of the period of this contract, and the Federal Government has the discretion to grant or refuse this extension.
The contract gives us free access to land in the public domain, and certain rights of way, in order to operate our electricity distribution service. In return we are required, among other obligations, to maintain certain specified minimum levels of regularity, continuity, efficiency and safety of service; to keep our infrastructure, equipment and services up-to-date; and to maintain availability to the population as a whole, courtesy in provision of services, and moderateness in the rates we charge.
The concession contract covers the state of Minas Gerais, divided into four areas (the North, South, East, and West of the state).
The rates we charge for our services are regulated by the concession-granting power, which grants: (i) an annual adjustment; and (ii) an overall review every five years. The last five-year review took place on April 8, 2003, and the next will be on April 8, 2008.
This contract also provides that ANEEL or a substitute agency will supervise us in the provision of our energy generation services and that we will be subject to penalties if we fail to comply with certain contractual provisions. As a party to this contract, we serve a public utility function and we must receive authorization from the Federal Government prior to entering into any other entrepreneurial activities. The Federal Government may intervene in our concession at any time in order to ensure that we are providing our electric energy generation services properly and that we are acting in compliance with this contract.
Contract for the Supply and Exchange of Electricity, and Passthrough and Transport of Power from Itaipu, dated 31 May 1993, between Furnas and CEMIG
In 1993, we signed a contract with Furnas governing the supply and exchange of energy between Furnas and CEMIG, for a period of 10 years, and also the transfer of power and energy generated by Itaipu, for a period of 20 years.
Since 1999, based on Law 9,648 of May 27, 1998, the portion relating to supply and exchange between Furnas and CEMIG has been regulated by a specific contract, known as an Initial Contract. See Initial Contract for Purchase and Sale of Electricity, dated August 2, 2002, between Furnas and CEMIG.
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Since January 2003, Decree 4,550 of December 27, 2002 has governed the sale of energy generated by Itaipu, appointing Eletrobrás as a trader of Itaipus output. The volumes of energy purchased by CEMIG and the prices of such energy are, since then, established annually by ANEEL. Under decree 4,550, contracts executed with Furnas were required to be assigned to Eletrobrás.
Initial Contract for Purchase and Sale of Electricity, dated August 2, 2002, between Furnas and CEMIG
The Initial Contract signed with Furnas in 2002 governs the purchase by CEMIG of a portion of the electric energy generated by Furnas from the period from 1999 to the end of 2005. The volumes contracted under such contract shall be gradually reduced 25% a year beginning at the end of 2002 in accordance with Law 9,648/98.
Shareholders Agreement, dated June 18, 1997, between the State Government and Southern
In 1999, after a new State Government administration took office, the State Government filed a lawsuit to nullify this shareholders agreement on the grounds that it violated the state and federal constitutions because the Special Quorum Provisions would constitute an unlawful transfer of the control of CEMIG to Southern. According to the lawsuit, state legislation would be required in order for the State Government to relinquish control of CEMIG to Southern.
After some preliminary decisions unfavorable to the State Government by the lower courts, in 1999 the State Government obtained an injunction from the State Court of Appeals, which suspended the effects of the Special Quorum Provisions pending the result of the lawsuit.
In August 2001, the Minas Gerais State Court of Appeals rendered a decision declaring the shareholders agreement null and void. Given this decision, the voting rights as set forth in our by-laws, not those contained in the shareholders agreement, are currently in effect. Our by-laws provide that each common share entitles the holder thereof to one vote at shareholders meetings. The by-laws do not provide Southern with any extraordinary rights or privileges other than the rights it possesses by virtue of its ownership of our common shares. The decision of the State Court of Appeals has been appealed to a superior court, the Superior Tribunal de Justiça, and a final decision, subject only to a request of amendment, was rendered in December 2003. Therefore the effectiveness of the shareholders agreement and control of CEMIG remain subject to judicial challenge in the Supreme Court.
Indenture Covering the First Public Issuance of Debentures, Divided into Two Series of the Same Class, Without Guarantee or Preference, of CEMIG, dated October 4, 2001, between CEMIG and Planner Corretora de Valores S.A.
On November 1, 2001, pursuant to an indenture entered into between us and Planner Corretora de Valores S.A, as fiduciary agent, we publicly issued R$625 million of debentures in two series of R$312.5 million each. The first series of debentures will mature on November 1, 2009 and the second series of debentures will mature on November 1, 2011. The debentures are subject to early redemption at the option of the debenture holders (in 2005 in the case of the first series and in 2006 in the case of the second series). Upon maturity, we are obligated to pay to the debenture holders an amount equal to the indexed par value of any debentures still outstanding plus compensatory interest. These debentures are not convertible and do not have preferences or guarantees.
Should we make a late payment of any amount due to the debenture holders, we will have to pay, in addition to the amount due, a penalty of 10% of the amount due plus interest calculated from the date payment was due to the date of actual payment at the rate of 1% per month on the amount due. In addition, if we do not pay an amount due on a maturity date, the related debentures must be accepted by us as payment by the debenture holders for electricity that we supply to them.
The proceeds from this issuance were used to finance generation, transmission and distribution projects, including projects in partnership with private sector companies in accordance with our capital investment program for 2001 and 2002.
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At the General Meeting of Holders of the Companys First Issue of Non-convertible Debentures held on December 3, 2004, the debenture holders approved an amendment to the indenture providing for the compulsory exchange of the Companys First Issue of Debentures for debentures to be issued by Cemig Generation and Tranmission, in connection with the implementation of the process of unbundling of the Company. In addition, it was provided that the debentures to be issued by Cemig Generation and Transmission will be guaranteed by CEMIG, the holding company.
Financing Agreements by Extension of Credit No. 02.2.962.3.1, dated February 7 and No. 03.2.286.3.1 dated July 1 2003, between BNDES and CEMIG and Intervening Third Parties
On February 7 and on July 1, 2003, we entered into two financing agreements pursuant to which BNDES, upon satisfaction of certain conditions, extended two loans to us in the amounts of approximately R$396.7 million and R$176.5 million, respectively. We borrowed R$335 million pursuant to these agreements and used the proceeds to partially settle our outstanding obligations to the CCEE relating to spot market energy we purchased during the period of the Electricity Rationing Plan. This financing was extended to us pursuant to the terms of the General Agreement of the Electricity Sector. The first loan is repayable to BNDES through 60 monthly installments over five years, beginning March 15, 2003, with the final payment due on February 15, 2008. The second loan is repayable to BNDES through 55 monthly installments over five years, beginning August 15, 2003, with the final payment due on February 15, 2008. Interest on the outstanding balance of both financings accrues at a rate of 1% over the Sistema Especial de Liquidação e Custódia (Special System for Settlement and Custody) overnight rate, or SELIC, the Brazilian benchmark interest rate. We may prepay all or a part of the outstanding balance under these agreements.
BNDES has agreed that as a result of the unbundling process, these contracts were assigned to Cemig Generation and Transmission.
Our obligations under these loans were originally guaranteed by the rate revenue relating to electricity sales to final customers corresponding to 3.27% (as defined in the first loan agreement) and 1.36% (as defined in the second loan agreement) of our monthly sales. As a consequence of the transferring of the debt to Cemig Generation and Transmission, since the revenue of Cemig Generation and Transmission is lower than that of CEMIG entity that guaranteed the debt prior to the unbundling, the guarantee was increased as follows: the loans will be guaranteed by the rate revenue of Cemig Generation and Transmission relating to electricity sales to final customers corresponding to 9% (as defined in the first loan agreement) and 5% (as defined in the second loan agreement) of the monthly sales.
Securities Distribution Program
We set up a Local Note Program, according to Instrução CVM No. 400, dated December 29, 2003. The Program is expected to last two years from the date of the filing with the CVM, which occurred on July 19, 2004. Pursuant to the Program, we may issue debentures of up to R$1.5 billion in a simplified process. The first issuance under the Program is described below. See also Item 5. Operating and Financial Review and ProspectsLiquidity and Capital Resources.
Because of the unbundling, we cannot issue additional debentures under the Program. We may in the future establish other local note programs directly or through our subsidiaries.
Indenture Covering the Third Public Issuance of Common Debentures, Without Guarantee or Preference, of CEMIG, dated June 14, 2004, between CEMIG and Pavarini Distribuidora de Títulos e Valores Mobiliários
On June 14, 2004, we and Pavarini Distribuidora de Títulos e Valores Mobiliários, as fiduciary agent, executed an indenture covering the public issuance of 40,000 debentures, in a total amount of R$400 million. The debentures issued pursuant to this agreement are unsecured, not convertible into shares, with a nominal unit value of R$10,000. On August 2, 2004, a total of 23,042 debentures were subscribed and fully paid up, representing the total amount of R$230.4 million issued on June 1, 2004. The remaining debentures, which were not subscribed, were cancelled. The debentures will mature on the first business day of June 2014. Upon maturity, we are obligated to pay to the debenture holders an amount equal to the indexed outstanding par value of the debentures plus interest.
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In connection with the unbundling process, the indenture provides for the mandatory exchange of the debentures issued by CEMIG for debentures to be issued by Cemig Distribution. In addition, it provides that the debentures to be issued by Cemig Distribution will be guaranteed by CEMIG, as the holding company.
The proceeds from this issuance were used to roll over part of the debt raised to finance investments in the distribution segment.
Initial Contract between Cemig Generation and Transmission and Cemig Distribution
As a result of the process of unbundling, Cemig Generation and Transmission and Cemig Distribution were required to sign a power purchase agreement under the terms of the Law 9,648/98, referred to as the Initial Contract, corresponding to 866 average MW, or 25% of the capacity owned by Cemig Generation and Transmission. The agreement is expected to terminate at the end of 2005 and the energy price was established by ANEEL in compliance with the terms of the above-mentioned Law.
Electricity Sale Contracts in the Regulated Environment (CCEARs)
In 2004, Law 10,848 and Decree 5,163 came into force, altering the structure of the electricity sector, especially the sale of electricity. Under the new regulations, the distributors must buy energy, to serve their markets, through public auctions in the regulated environment, in which the CCEARs are signed. In December 2004, the first electricity auction under the new model for the electricity sector was held. In this auction Cemig Distribution and Cemig Generation and Transmission made electricity purchase and sale contracts.
Cemig Distribution purchased, to serve its market, 530 average MW in contracts with terms of eight years, with the supply starting on January 1, 2005, at an average price of R$57.51/MWh, and 919 average MW in contracts with terms of eight years with the supply starting on January 1, 2006 at an average price of R$67.33 MWh. The contracts were signed with 12 companies holding generation concessions, including Cemig Generation and Transmission.
In the same auction Cemig Generation and Transmission sold 927 average MW in contracts with terms of eight years, with the supply beginning on January 1, 2006. The sale price of the electricity is R$69.58/MWh, referring to January 2005. The contracts were signed with 35 distributors, including Cemig Distribution, which serve consumers in all the regions of the Brazilian national grid system.
In April 2005, the second electricity auction under the new model for the electricity sector was held. In this auction Cemig Distribution and Cemig Generation and Transmission executed CCEARs. Cemig Distribution purchased, to serve its market, 105 average MW in contracts with terms of eight years, with the supply starting on January 1, 2008, at an average price of R$83.13/MWh. The contracts were signed with ten companies holding generation concessions, including Cemig Generation and Transmission. In the same auction Cemig Generation and Transmission sold 105 average MW in contracts with terms of eight years, with the supply beginning on January 1, 2008. The sale price of the electricity is R$83.50/MWh, referring to April 2005. The contracts were signed with 34 distributors, including Cemig Distribution, which serve consumers in all the regions of the Brazilian national grid system
Contracts for Sale of Energy to Free Consumers
Cemig Generation and Transmission sold, through bilateral contracts, power capacity averaging approximately 1,900 MW to a wide range of Free Consumers, the majority of them being in the State of Minas Gerais, under contracts with terms between six and ten years. The average price of these transactions for the year 2005 is around R$70/MWh. In 2010, as some of these contracts expire, there will be a reduction of approximately 600 MW in the amount contracted, especially with large clients such as Usiminas, Cosipa and White Martins. Our expectation is that these contracts will be renewed at better prices in 2010 than the present prices, since we do not expect that there will be the same excess of energy in 2010 that exists today.
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Under these contracts there is flexibility for variations in the clients consumption of energy. There is a possibility that the amount sold may be lower than the amount contracted for due to the take or pay clauses, or that the amount sold may even be larger than the amount contracted for due to the clause covering levels in excess of the amount contracted. The revenue of Cemig Generation and Transmission may vary due to this contractual flexibility.
Gasmig Shareholders Agreement and Association Agreement
As a condition to the investment of Petrobras in Gasmig, we and Petrobras entered into a Shareholders Agreement, pursuant to which the prior approval of Petrobras is required in matters related, among others, to new investments to be conducted by Gasmig, distribution of dividends, nomination of members to the Board of Directors, the issuance of new shares or debentures, annual budget investment plans and any transaction involving more than R$1.5 million. Under the terms of the Gasmig Shareholders Agreement, our ability to transfer our shares in Gasmig is limited, and Petrobras shall have a right of first refusal in any future transfer of shares. As a result of this Shareholders Agreement, our ability to manage Gasmig was considerably reduced.
On December 15, 2004, CEMIG sold part of its shares in Gasmig, corresponding to 40% of the registered capital, 0.5% to Gaspetro and 39.5% to its subsidiary, TSS Participações S.A. The total value of the transaction was R$154 million, providing a gain for CEMIG of R$102 million. This gain was posted in the income statement for 2004 as operational revenue.
Gasmig is not a consolidated subsidiary in our financial statements as of the year ended December 31, 2004, in accordance with the FASBs EITF Issue No. 96-16, Investors Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights. We consolidated Gasmigs revenues and expenses for the period from January 1, 2004 to December 15, 2004.
This sale is the result of the Association Agreement between CEMIG, Gasmig, Gaspetro and Petrobras signed on August 25, 2004, the purpose of which is to develop the market for natural gas throughout the State of Minas Gerais. Under the agreement, a Guidelines Plan specifies the markets to be served, the investment to be made by Petrobras and its subsidiaries in gas pipelines and the investment to be made by Gasmig in expansion of the gas distribution networks.
This capital investment will increase the volume of gas sold from its present level of 3.5 million m³/day to 4.5 million m³/day at the end of 2006, and 11.1 million m³/day in 2023.
Agreement between CEMIG and companies in the New Agreement of the Electric Sector
Resolution No. 91 of the Electricity Crisis Management Chamber (Câmara de Gestão da Crise de Energia Elétrica), or GCE, of December 21, 2001, and Law 10,438 of April 26, 2002, established the procedures for implementing the General Agreement for the Electricity Sector, which came into force on December 27, 2001, and resulted in the repayment by consumers of losses incurred by distributors and generators during the period of rationing of 2001-2002. These repayments are referred to as an extraordinary rate readjustment, or RTE ( Recomposição Tarifária Extraordinária). The RTEs became part of the assets of the companies, and are amortized through extraordinary revenue. See note 4 to our consolidated financial statements.
A condition to receipt of the RTE is that the recipient must not to be involved in any lawsuit with ANEEL that questions the RTE or any related regulation. As CEMIG has contested the clearance process at the CCEE, ANEEL issued an order to suspend the payment of the RTE to CEMIG.
CEMIG executed a settlement agreement with ANEEL, the CCEE and the CCEE participants, to settle the lawsuit CEMIG filed to contest the procedures used by the CCEE during the settlement process. As a condition to the agreement, CEMIG withdrew its lawsuit against ANEEL. As a result of this agreement, ANEEL will revoke the ruling that suspended the payment of the RTE to our distribution subsidiary, which will result in a payment of approximately R$140 million to CEMIG. CEMIG agreed to repay the other CCEE participants the outstanding amounts that ANEEL calculated as being due by CEMIG during the settlement process held by the CCEE between
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September 2002 and January 2003. The calculation of the exact amount due to each of the participants of the CCEE will be made by the CCEE, and such amount will be paid in up to 50 installments, depending on the total amount due to each creditor and will be indexed to the SELIC interest rate plus a spread of 1%. We have accrued a liability of R$142.6 million related to this matter. See Item 8. Financial Information Legal Proceedings Regulatory Matters.
Exchange Controls
There are no restrictions on the ownership of preferred shares by legal entities domiciled outside Brazil. However, your right to convert dividend payments and proceeds from the sale of preferred shares into foreign currency and to remit such amounts outside Brazil is subject to restrictions under foreign investment legislation which generally requires, among other things, that you register the relevant investment with the Central Bank and the CVM.
Investments in the preferred shares through the holding of ADSs must be made pursuant to Annex V to Resolution No. 1,289, as amended, of the National Monetary Council, also known as the Annex V Regulations. Direct investments in the preferred shares upon the cancellation of the ADSs may be held by foreign investors under Law No. 4,131 of September 3, 1962 or Resolution No. 2,689 of the National Monetary Council, both of which effectively allow registered foreign investors to invest substantially in any capital market instrument in Brazil and extend a favorable tax treatment to all foreign investors registered and qualified under Resolution No. 2,689, who are not resident in a tax haven, as defined by Brazilian tax laws.
Under Resolution No. 2,689, foreign investors may invest in almost all financial assets and engage in almost all transactions available in the Brazilian financial and capital markets, provided that certain requirements are fulfilled. In accordance with Resolution No. 2,689, the definition of foreign investor includes individuals, legal entities, mutual funds and other collective investment entities that are domiciled or headquartered abroad.
Securities and other financial assets held by Resolution No. 2,689 investors must be registered or maintained in deposit accounts or in the custody of an entity duly licensed by the Central Bank or the CVM. In addition, any transfer of a security that is held pursuant to Resolution No. 2,689 must be made through the stock exchanges or organized OTC markets licensed by the CVM, except for a transfer resulting from a corporate reorganization outside of Brazil or occurring upon the death of a foreign investor by operation of law or will.
Holders of ADSs who have not registered their investment with the Central Bank could be adversely affected by delays in, or refusals to grant, any required government approval for conversions of payments made in reais and remittances abroad of these converted amounts.
The Annex V Regulations provide for the issuance of depositary receipts in foreign markets in respect of shares of Brazilian issuers. The ADSs have been approved under the Annex V Regulations by the Central Bank and the CVM.
An electronic certificate of registration has been issued in the name of Citibank, N.A., the depositary bank, with respect to the ADSs and is maintained by Citibank Distribuidora de Títulos e Valores Mobiliários S.A., the Brazilian custodian for the preferred shares, on behalf of the depositary bank. This electronic certificate of registration is registered through the Central Bank Information System. Pursuant to the certificate of registration, the custodian and the depositary bank are able to convert dividends and other distributions or sales proceeds with respect to the preferred shares represented by ADSs into foreign currency and remit the proceeds outside Brazil. In the event that a holder of ADSs exchanges such ADSs for preferred shares, the holder will be entitled to continue to rely on the depositary banks certificate of registration for five business days after the exchange. Thereafter, the holder may not be able to convert into foreign currency and remit outside Brazil the proceeds from the disposition of, or distributions with respect to, the preferred shares, unless the holder is a duly qualified investor under Resolution No. 2,689 by registering with the CVM and the Central Bank and appointing a representative in Brazil. If not so registered, the holder will be subject to less favorable Brazilian tax treatment than a holder of ADSs. Regardless of qualification under Resolution No. 2,689, residents in tax havens are subject to less favorable tax treatment than other foreign investors. See TaxationBrazilian Tax Considerations.
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Under current Brazilian legislation, the Federal Government may impose temporary restrictions of foreign capital abroad in the event of a serious imbalance or an anticipated serious imbalance of Brazils balance of payments. For approximately nine months in 1989 and early 1990, the Federal Government froze all dividend and capital repatriations held by the Central Bank that were owed to foreign equity investors, in order to conserve Brazils foreign currency reserves. These amounts were subsequently released in accordance with Federal Government directives. We cannot assure you that the Federal Government will not impose similar restrictions on foreign reparations in the future.
Taxation
The following summary contains a description of the material Brazilian and U.S. federal income tax consequences of the purchase, ownership and disposition of preferred shares or ADSs by a U.S. person, as defined in the Internal Revenue Code of 1986, or the Code, or a holder that otherwise will be subject to U.S. federal income tax on a net income basis in respect of preferred shares or ADSs, which we refer to as a U.S. holder, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to purchase preferred shares or ADSs. In particular this summary deals only with U.S. holders that will hold preferred shares or ADSs as capital assets and does not address the tax treatment of U.S. holders that own or are treated as owning 10% or more of the voting shares of the Company or that may be subject to special tax rules, such as banks, insurance companies, dealers in securities or currencies, persons that will hold preferred shares or ADSs as a position in a straddle or a conversion transaction for tax purposes, and persons that have a functional currency other than the U.S. dollar.
The summary is based upon tax laws of Brazil and the United States as in effect on the date hereof which are subject to change possibly with retroactive effect. Prospective purchasers of ADSs should consult their own tax advisors as to the Brazilian, U.S. or other tax consequences of the purchase, ownership and disposition of preferred shares or ADSs, including, in particular, the effect of any foreign, state or local tax laws.
Although there is at present no income tax treaty between Brazil and the United States, the tax authorities of the two countries have had discussions that may culminate in such a treaty. No assurance can be given, however, as to whether or when a treaty will enter into force or how it will affect the U.S. holders of preferred shares or ADSs.
Brazilian Tax Considerations
General . The following discussion summarizes the principal Brazilian tax consequences of the acquisition, ownership and disposition of preferred shares or ADSs, as the case may be, by a holder that is not domiciled in Brazil, which we refer to as a non-Brazilian holder for purposes of Brazilian taxation. In the case of a holder of preferred shares, we assume the investment is registered with the Central Bank. The following discussion does not address all of the Brazilian tax considerations applicable to any particular non-Brazilian holder. Therefore, each non-Brazilian holder should consult his or her own tax adviser concerning the Brazilian tax consequences of an investment in our preferred shares or ADSs.
Taxation of Dividends . Dividends paid by us, including stock dividends and other dividends paid in property to the depositary in respect of the preferred shares, or to a non-Brazilian holder in respect of the preferred shares, are currently not subject to withholding tax in Brazil to the extent that the dividends relate to profits for periods beginning on or after January 1, 1996. Dividends relating to profits generated prior to January 1, 1996 may be subject to Brazilian withholding tax at varying rates, depending on the year the profits were generated.
Payments of Interest on Capital . Law No. 9,249, dated as of December 26, 1995, as amended, permits Brazilian corporations to make distributions to shareholders of interest on capital, or interest attributed to shareholders equity. These distributions may be paid in cash. A company may treat these payments as an expense for income tax and social contribution purposes. This interest is limited to the daily pro rata variation of the Federal Governments long-term interest rate, as determined by the Central Bank from time to time, and cannot exceed the greater of:
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50% of net income (before taxes for social contribution on net profits, income tax, and the deduction of the interest attributable to shareholders equity) for the period in respect of which the payment is made; or
50% of retained earnings as of the date of the beginning of the period in respect of which the payment is made.
Any payment of interest on capital to shareholders (including holders of ADSs in respect of preferred shares) is subject to a withholding tax at a rate of 15%, or 25% in the case of a shareholder domiciled in a tax haven. These payments may be included, at their net value, as part of any mandatory dividend.
To the extent that payments of interest on capital are included as part of a mandatory dividend, we are required to distribute an additional amount to ensure that the net amount received by shareholders, after payment of the applicable withholding tax is at least equal to the mandatory dividend.
If we distribute interest on capital, distributions to non-Brazilians of interest attributed to shareholders equity in respect of preferred shares, including the preferred shares underlying the ADSs, may be converted into U.S. dollars and remitted outside Brazil, subject to applicable exchange controls.
We cannot assure you that our Board of Directors will not determine that future distributions should be made by means of interest on capital.
Taxation of Gains . Pursuant to Article 26 of Law No. 10,833, published on December 29, 2003, the sale of property located in Brazil involving non-resident investors could be subject to Brazilian income tax as of February 1, 2004. Our understanding is that ADSs do not qualify as property located in Brazil. Insofar as the regulatory norm referred to in Article 26 is recent and generic and has not been tested through the administrative or judicial courts, we are unable to evaluate what the final ruling on the matter will be.
Capital gains earned by residents of low-tax jurisdictions are subject to a 25% withholding tax rate.
For purposes of Brazilian taxation, there are two types of non-Brazilian holders of ADSs or preferred shares:
market investors, which represent those non-Brazilian residents who register with the Central Bank and the CVM to invest in Brazil, in accordance with Resolution No. 2,689 of the National Monetary Council, or those investors holding ADSs; Non-residents domiciled in low-tax jurisdictions are expressly excluded from this mechanism and, therefore, are subject to the same treatment applicable to ordinary non-Brazilian holders; and
ordinary non-Brazilian holders, which include any and all non-residents in Brazil who invest in the country through any other means; and residents of low-tax jurisdictions.
The comments contained below are applicable to all non-Brazilian holders, including non-Brazilian holders investing under Resolution No. 2,689, except where otherwise noted.
Resolution No. 2,689 effectively extends the favorable tax treatment currently afforded to holders of ADSs (except those residing in low-tax jurisdictions, as mentioned above) to all non-Brazilian holders of preferred shares that have:
appointed a representative in Brazil with powers to take action relating to their investment;
appointed an authorized custodian in Brazil for their investments;
registered as a foreign investor with the CVM; and
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registered their investment with the Central Bank.
The deposit of preferred shares in exchange for the ADSs may be subject to Brazilian income tax on capital gains if the amount previously registered with the Central Bank as a foreign investment in preferred shares or, in the case of other market investors under Resolution No. 2,689, the acquisition cost of the preferred shares, as the case may be, is lower than:
the average price per preferred share on the Brazilian stock exchange on which the greatest number of such shares were sold on the day of deposit; or
if no preferred shares were sold on that day, the average price on the Brazilian stock exchange on which the greatest number of preferred shares were sold during the 15 preceding trading sessions.
The difference between the amount previously registered, or the acquisition cost, as the case may be, and the average price of the preferred shares, calculated as set forth above, is considered a capital gain subject to income tax at a rate of 15%.
The withdrawal of preferred shares in exchange for the ADSs is not subject to any Brazilian tax. On receipt of the underlying preferred shares, the non-Brazilian holder will be entitled to register the U.S. dollar value of the shares with the Central Bank.
As mentioned above, as of February 1, 2004, the sale of property located in Brazil involving non-resident investors could be subject to Brazilian income tax. Our understanding is that ADSs do not qualify as property located in Brazil. Insofar as the regulatory norm referred to in Article 26 is recent and generic and has not been tested through the administrative or judicial courts, we are unable to evaluate what the final ruling on the matter will be. Beneficiaries resident of tax havens are subject to the increased 25% withholding tax rate on capital gains.
With reference to proceeds of a redemption of, or a liquidating distribution with respect to, preferred shares, the difference between the amount effectively received by the shareholder and the amount of foreign currency registered with the Central Bank translated into reais at the commercial market rate on the date of the redemption or liquidating distribution, will be treated as a capital gain derived from sale or exchange not carried out on a Brazilian stock exchange and will be subject to income tax at a rate of 15%.
Non-Brazilian holders are subject to a withholding tax rate of 15% on gains realized on:
sales or exchanges of the preferred shares in Brazil; or
sales of the preferred shares to a resident of Brazil outside of a Brazilian stock exchange.
Non-Brazilian holders are currently subject to an income tax at a rate of 15%, as of January 1, 2005, on gains realized on the sale or exchange in Brazil of preferred shares that occur on a Brazilian stock exchange, unless the sale is made by a non-Brazilian holder that is not resident in a tax haven jurisdiction (i) within five business days of the withdrawal of the preferred shares in exchange for ADSs, and the proceeds are remitted abroad within the same five-day period; or (ii) that is an investor under Resolution No. 2,689. In these two cases, the gains realized would be exempt from this income tax.
The gain realized as a result of a transaction on a Brazilian stock exchange is the difference between the amount in reais realized on the sale or exchange and the acquisition cost measured in reais , without any correction for inflation. The acquisition cost of shares registered as an investment with the Central Bank is calculated on the basis of the foreign currency amount registered with the Central Bank translated into reais at the commercial market rate on the date of the sale or exchange. We cannot assure you that the current preferential treatment for holders of the ADSs and non-Brazilian holders of our preferred shares under Resolution No. 2,689 will continue in the future.
As of January 1, 2005 the purchase price of preferred shares sold on the Brazilian stock exchange is subject to a withholding tax rate of 0.005%, except in case of non-Brazilian holders, which invest in Brazil pursuant to
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Resolution No. 2,689. This tax may be offset against the 15% income tax due on the gains realized upon the sale of the shares.
Any exercise of preemptive rights relating to the preferred shares will not be subject to Brazilian taxation. Conversely, any gain on the sale or assignment of preemptive rights relating to the preferred shares by the depositary on behalf of the holders of ADSs or by a non-Brazilian holder of preferred shares will be subject to the same rules of taxation applicable to the sale or assignment of preferred shares. The maximum rate is currently 15%.
Beneficiaries Residing or Domiciled in Tax Havens or Low-Tax Jurisdictions . Law No. 9,779, dated as of January 19, 1999, states that, except under limited circumstances, any income derived from operations by a beneficiary that resides or is domiciled in a country considered to be a tax haven is subject to income tax to be withheld by the source at a rate of 25%.
Accordingly, if the distribution of interest attributed to shareholders equity is made to a beneficiary residing or domiciled in a tax haven, the applicable income tax will be at a rate of 25% instead of 15%. The increased rate also applies for capital gains paid to residents of low-tax jurisdictions as of February 2004.
In accordance with Law No. 9,959, non-Brazilian holders of ADSs or preferred shares which are resident in tax havens are also excluded from the tax incentives granted to holders of ADSs and investors under Resolution No. 2,689 as of January 1, 2000 and will be subject to the same tax treatment applicable to holders that are resident or domiciled in Brazil.
Taxation of Foreign Exchange Transactions . A financial transaction tax is imposed on the conversion of reais into foreign currency and on the conversion of foreign currency into reais . Although the current applicable rate for almost all foreign currency exchange transactions is zero, the Ministry of Finance may increase the rate at any time, up to 25%. However, it may only do so with respect to future transactions.
Taxation of Bonds and Securities Transactions . Law No. 8,894, dated as of June 21, 1994, created the Tax on Financial Transactions, or IOF, which may be imposed on any transaction involving bonds and securities, even if the transaction includes Brazilian stock, futures or commodities exchanges. The rate of IOF/Títulos with respect to transactions of preferred shares and ADSs is currently zero, although the executive branch may increase the rate up to 1.5% per day of the terms of the securities, but only with respect to future preferred shares and ADSs transactions.
Other Brazilian Taxe s. There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of preferred shares or ADSs, except for gift and inheritance taxes imposed by some Brazilian states on gifts or bequests by individuals or entities not domiciled or residing in Brazil to individuals or entities domiciled or residing within such states. There are no Brazilian stamp, issue, registration, or similar taxes or duties payable by holders of preferred shares or ADSs.
CPMF tax has generally been imposed on bank account debits, initially at a rate of 0.38%. Constitutional Amendment No. 42/2003 approved the continued imposition of the CPMF tax until December 31, 2007 at the rate of 0.38%. The responsibility for the collection of the CPMF tax is borne by the financial institution that carries out the relevant financial transaction. Additionally, when the non-Brazilian holder transfers the proceeds from the sale or assignment of preferred shares by a currency exchange transaction, the CPMF tax will be levied on the amount to be remitted abroad in reais . If we perform any exchange transaction in connection with ADSs or preferred shares, we will bear the CPMF tax.
Non-Brazilian holders investing in the Brazilian stock exchange are granted a CPMF exemption upon the entrance of funds into Brazil and the remittance abroad.
U.S. Tax Considerations
In general, for U.S. federal income tax purposes, holders of ADRs evidencing ADSs will be treated as the beneficial owners of the preferred shares represented by those ADSs.
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Taxation of Distributions . Distributions with respect to the preferred shares or the ADSs (other than distributions in redemption of the preferred shares subject to Section 302(b) of the Code or in a liquidation of the Company) will, to the extent made from current or accumulated earnings and profits of the Company as determined under U.S. federal income tax principles, constitute dividends. Whether such current or accumulated earnings and profits will be sufficient for all such distributions on the preferred shares or ADSs to qualify as dividends for U.S. federal income tax purposes depends on the future profitability of the Company and other factors, many of which are beyond the control of the Company. To the extent that such a distribution exceeds the amount of the Companys earnings and profits, it will be treated as a non-taxable return of capital to the extent of the U.S. holders basis in the preferred shares or ADSs, and thereafter as capital gain (provided that the preferred shares or ADSs are held as capital assets). As used below, the term dividend means a distribution that constitutes a dividend for U.S. federal income tax purposes. Cash dividends (including amounts withheld in respect of Brazilian taxes) paid with respect to (i) the preferred shares generally will be includible in the gross income of a U.S. holder as ordinary income on the day on which the dividends are received by the U.S. holder or (ii) the preferred shares represented by ADSs generally will be includible in the gross income of a U.S. holder as ordinary income on the day on which the dividends are received by the depositary bank and, in either case, will not be eligible for the dividends received deduction allowed to corporations. Dividends paid in reais will be includible in the income of a U.S. holder in a U.S. dollar amount calculated by reference to the exchange rate in effect on the day they are received by the U.S. holder, in the case of preferred shares, or the depositary bank, in the case of preferred shares represented by ADSs.
If dividends paid in reais are converted into U.S. dollars on the day they are received by the U.S. holder or the depositary bank, as the case may be, U.S. holders generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. U.S. holders should consult their own tax advisors regarding the treatment of any foreign currency gain or loss if any reais received by the U.S. holder or the depositary bank are not converted into U.S. dollars on the date of receipt, as well as the tax consequences of the receipt of any additional reais from the custodian on account of Brazilian inflation.
Dividends generally will constitute foreign source passive income or financial services income for U.S. foreign tax credit purposes. In the event Brazilian withholding taxes are imposed on such dividends, such taxes may be treated as a foreign income tax eligible, subject to generally applicable limitations and conditions under U.S. federal income tax law, for credit against a U.S. holders U.S. federal income tax liability (or at a U.S. holders election, may be deducted in computing taxable income). The calculation and availability of foreign tax credits and, in the case of a U.S. holder that elects to deduct foreign taxes, the availability of deductions, involves the application of rules that depend on a U.S. holders particular circumstances. In the event Brazilian withholding taxes are imposed, U.S. holders should consult their own tax advisors regarding the availability of foreign tax credits with respect to Brazilian withholding taxes.
It is not entirely clear whether the preferred shares will be treated as preferred stock or common stock within the meaning of section 305 of the Code. If the preferred shares are treated as common stock for purposes of section 305, distributions to U.S. holders of additional shares of such common stock or preemptive rights relating to such common stock with respect to their preferred shares or ADSs that are made as part of a pro rata distribution to all shareholders of the Company generally will not be treated as dividend income for U.S. federal income tax purposes, but could result in additional U.S.-source taxable gain upon the sale of such additional shares or preemptive rights. On the other hand, if the preferred shares are treated as preferred stock within the meaning of section 305, or if the U.S. holder receives a distribution of additional shares or preemptive rights other than as described in the preceding sentence, such distributions (including amounts withheld in respect of any Brazilian taxes) will be treated as dividends that are includible in the U.S. holders gross income to the same extent and in the same manner as distributions payable in cash. In that event, the amount of such distribution (and the basis of the new shares or preemptive rights so received) generally will equal the fair market value of the shares or preemptive rights on the date of distribution.
A holder of preferred shares or ADSs that is not a U.S. holder generally will not be subject to U.S. federal income or withholding tax on dividends received on preferred shares or ADSs, unless such income is effectively connected with the conduct by the holder of a trade or business in the United States.
Qualified Dividend Income . Notwithstanding the foregoing, certain dividends received by individual U.S. holders that constitute qualified dividend income will be subject to a reduced maximum marginal U.S. federal
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income tax rate. Qualified dividend income generally includes, among other dividends, dividends received during the taxable year from qualified foreign corporations. In general, a foreign corporation is treated as a qualified foreign corporation with respect to any dividend paid by the corporation with respect to stock of the corporation that is readily tradable on an established securities market in the United States. For this purpose, a share is treated as readily tradable on an established securities market in the United States if an ADR backed by such share is so traded.
Notwithstanding this previous rule, dividends received from a foreign corporation that is a passive foreign investment company (as defined in section 1297 of the Code), or in either the taxable year of the corporation in which the dividend was paid or the preceding taxable year will not constitute qualified dividend income. In addition, the term qualified dividend income will not include, among other dividends, any (i) dividends on any share of stock or ADS which is held by a taxpayer for 60 days or less during the 120-day period beginning on the date which is 60 days before the date on which such share or the shares backing the ADS become ex-dividend with respect to such dividends (as measured under section 246(c) of the Code) or (ii) dividends to the extent that the taxpayer is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respects to positions in substantially similar or related property. Moreover, special rules apply in determining a taxpayers foreign tax credit limitation under section 904 of the Code in the case of qualified dividend income.
Individual U.S. holders should consult their own tax advisors to determine whether or not amounts received as dividends from us will constitute qualified dividend income subject to a reduced maximum marginal U.S. federal income tax rate and, in such case, the effect, if any, on the individual U.S. holders foreign tax credit.
Taxation of Capital Gains . Deposits and withdrawals of preferred shares by U.S. holders in exchange for ADSs will not result in the realization of gain or loss for U.S. federal income tax purposes.
Gain or loss realized by a U.S. holder on the sale, redemption or other disposition of preferred shares or ADSs will be subject to U.S. federal income taxation as capital gain or loss in an amount equal to the difference between such U.S. holders basis in the preferred shares or the ADSs and the amount realized on the disposition. Gain realized by a U.S. holder on a sale, redemption or other disposition of preferred shares or ADSs, including gain that arises because the U.S. holders basis in the preferred shares or ADSs has been reduced because a distribution is treated as a return of capital rather than as a dividend, generally will be treated as U.S. source income for U.S. foreign tax credit purposes.
If a Brazilian withholding tax or income tax is imposed on the sale or disposition of preferred shares or ADSs as described in TaxationBrazilian Tax Considerations, the amount realized by a U.S. holder will include the gross amount of the proceeds of such sale or disposition before deduction of the Brazilian withholding tax or income tax if applicable. The availability of U.S. foreign tax credits for these Brazilian taxes and any Brazilian taxes imposed on distributions that do not constitute dividends for U.S. tax purposes is subject to certain limitations and involves the application of rules that depend on a U.S. holders particular circumstances. U.S. holders should consult their own tax advisors regarding the application of the foreign tax credit rules to their investment in, and disposition of, preferred shares or ADSs.
A holder of preferred shares or ADSs that is not a U.S. holder will not be subject to U.S. federal income or withholding tax on gain realized on the sale of preferred shares or ADSs, unless (i) such gain is effectively connected with the conduct by the holder of a trade or business in the United States or (ii) in the case of gain realized by an individual holder, the holder is present in the United States for 183 days or more in the taxable year of the sale and certain other conditions are met.
Information Reporting and Backup Withholding . The information reporting requirements will generally apply to U.S. holders of ADSs. A holder of ADSs that is not a U.S. holder may be required to comply with applicable certification procedures to establish that they are not United States persons in order to avoid the application of U.S. information reporting requirements and backup withholding tax.
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Dividends and Paying Agents
We pay dividends on preferred shares in the amounts and in the manner set forth under Item 8. Financial InformationDividend Policy and Payments. We will pay dividends in respect of preferred shares represented by ADSs to the custodian for the depositary bank, as record owner of the preferred shares represented by ADSs. As promptly as practicable after receipt of the dividends we pay through Citibank N.A. to the custodian, it will convert these payments into U.S. dollars and remit such amounts to the depositary bank for payment to the holders of ADSs in proportion to individual ownership.
Documents on Display
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements, we file reports and other information with the Commission. These materials, including this annual report and the accompanying exhibits, may be inspected and copied at the Commissions Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the materials may be obtained from the Commissions Public Reference Room at prescribed rates. The public may obtain information on the operation of the Commissions Public Reference Room by calling the Commission in the United States at 1-800-SEC-0330. In addition, copies of the exhibits that accompany this annual report may be inspected at our principal executive offices located at Avenida Barbacena, 1200, 30190131 Belo Horizonte, Minas Gerais, Brazil.
Insurance
We have obtained, since February 2004, insurance policies to cover damages to the turbines, generators and transformers of our major power plants and substations caused by fire and risks such as equipment failures. We do not have general third party liability insurance covering accidents and have not solicited bids relating to this type of insurance. However, we may contract for this type of insurance in the future. In addition, we have not solicited bids for, nor do we carry, insurance coverage for major catastrophes affecting our facilities such as earthquakes and floods or for operating system failures. We do not have insurance coverage for business interruption risk, which means damages we suffer and consequential damages suffered by our customers resulting from an interruption in power distribution are generally not covered by our insurance and we may be subject to significant related losses. See Item 3. Key InformationRisk FactorsRisks Relating to CEMIGWe operate without general third party liability and catastrophe insurance policies.
We believe that, since we have contracted for fire and operational risk insurance, our insurance coverage will be at a level that is customary in Brazil for the type of businesses in which we are engaged.
Difficulties of Enforcing Civil Liabilities Against Non-U.S. Persons
We are a state-controlled mixed capital company established under the laws of Brazil. All of our executive officers and directors presently reside in Brazil. In addition, substantially all of our assets are located in Brazil. As a result, it will be necessary for holders of ADSs to comply with Brazilian law in order to obtain an enforceable judgment against our executive officers or directors or our assets. It may not be possible for holders of ADSs to effect service of process within the United States upon our executive officers and directors, or to realize in the United States upon judgments against these persons obtained in U.S. courts based upon civil liabilities of these persons, including any judgments based upon U.S. federal securities laws, to the extent these judgments exceed these persons U.S. assets. We have been advised by Brazilian counsel, Machado, Meyer, Sendacz e Opice Advogados, that judgments of U.S. courts for civil liabilities based upon the federal securities laws of the United States may be, subject to the requirements described below, enforced in Brazil. A judgment against us, or the persons described above obtained outside Brazil without reconsideration of the merits, is subject to confirmation by the Brazilian Superior Court of Justice. That confirmation will occur if the foreign judgment:
fulfills all formalities required for its enforceability under the laws of the country where the foreign judgment is granted;
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is issued by a competent court after proper service of process is made in accordance with Brazilian Law;
is not subject to appeal;
is for the payment of a sum certain;
is authenticated by a Brazilian consular officer in the country where the foreign judgment is issued and is accompanied by a sworn translation into Portuguese; and
is not contrary to Brazilian national sovereignty, public policy or public morality.
We cannot assure you the confirmation process described above will be conducted in a timely manner or that Brazilian courts would enforce a monetary judgment for violation of the United States securities laws with respect to the ADSs and the preferred shares represented by the ADSs.
We were further advised by respective Brazilian counsel that:
original actions based on the federal securities laws of the United States may be brought in Brazilian courts and that, subject to Brazilian public policy and national sovereignty, Brazilian courts will enforce liabilities in such actions against us and our officers; and
the ability of a judgment creditor or the other persons named above to satisfy a judgment by attaching our assets or those of the selling shareholders is limited by provisions of Brazilian law.
A plaintiff (whether Brazilian or non-Brazilian) residing outside Brazil during the course of litigation in Brazil must provide a bond to guarantee court costs and legal fees if the plaintiff owns no real property in Brazil that could secure such payment. The bond must have a value sufficient to satisfy the payment of court fees and defendants attorney fees, as determined by a Brazil judge. This requirement does not apply to proceeding to enforce a foreign judgment, which has been confirmed by the Brazilian Superior Court of Justice.
We are exposed to market risk from changes in foreign currency exchange rates and interest rates.
We are exposed to foreign exchange risk because certain of our loans and financings are denominated in currencies (primarily the U.S. dollar) other than the currency in which we earn revenues (the real ). Despite the fact that our electricity purchases from Itaipu, which represented approximately R$1,205 million in 2004, are denominated in U.S. dollars, the related foreign exchange risk is no longer reflected in our operating revenues and operating expenses due to rate legislation changes in 2001 which allow electricity utilities such as us to record exchange rate losses related to Itaipu purchases as deferred regulatory assets. See Item 5. Operating and Financial Review and ProspectsCritical Accounting Estimates.
Exchange Rate Risk
At December 31, 2004, approximately 26.9% of our outstanding indebtedness, or R$1,119 million, was denominated in foreign currencies, of which approximately 76.5%, or R$857 million, was denominated in U.S. dollars. We do not have substantial revenues denominated in any foreign currencies and, due to regulations that require us to keep excess cash on deposit in real -denominated accounts at Brazilian banks, we do not have monetary assets denominated in foreign currencies.
In 2004, we used financial instruments such as interest rate swaps to hedge our foreign exchange rate exposure. The purpose of the swaps was to reduce our exposure on the original interest rate of certain financing from an interest rate calculated based on the U.S. dollar/ real exchange rate to an interest rate calculated based on the
116
Certificado de Depósito InterbancárioCDI (Interbank Deposit Certificate) rate. See Notes 2(d), 14, 21, 23 and 24 to our consolidated financial statements.
In 2005, the potential loss we would experience in the event of a hypothetical 20% depreciation of the real would be approximately R$141 million related principally to loans and financing and primarily due to an increase in our real -denominated interest expense, which would be reflected on our income statement. In 2005, a hypothetical 20% depreciation of the real would result in an additional annual cash outflow of approximately R$305 million, reflecting the increased cost in reais of servicing foreign currency-denominated indebtedness and increased purchasing power relating to Itaipu. This sensitivity analysis assumes a simultaneous unfavorable 20% fluctuation in each of the exchange rates affecting the foreign currencies in which our indebtedness, the related interest expense and the expenses relating to the purchase of energy from Itaipu are denominated. This sensitivity analysis also assumes that the unfavorable fluctuation in the exchange rate affecting the purchase of energy from Itaipu would affect the annual cash payments but would not affect the expense recorded on the statement of operations, since the additional currency exchange expense would be recorded as a deferred regulatory asset.
The tables below provide summary information regarding our exposure to exchange rate risk as of December 31, 2004:
|
|
2004 |
|
U.S. Dollar |
|
|
|
Financing |
|
857 |
|
Less Contracted derivative instruments |
|
(234 |
) |
|
|
623 |
|
Japanese Yen |
|
|
|
Financing |
|
182 |
|
Less Contracted derivative instruments |
|
(180 |
) |
|
|
2 |
|
Other Currencies |
|
|
|
Financing |
|
80 |
|
Net liabilities exposed to exchange rate risk |
|
705 |
|
Interest Rate Risk
At December 31, 2004, we had R$4,167 million in loans and financing outstanding, of which approximately R$3,369 million bore interest at floating rates. Of this R$3,369 million, R$3,047 million is subject to monetary restatement through the application of inflation indices established by the Federal Government, principally the IGP-M, and R$322 million is subject principally to LIBOR. In addition to the floating rate debt described above, we also had assets, net of other liabilities, at December 31, 2004 that bore interest at floating rates in the amount of R$5,708 million. These assets consisted mainly of our account receivable from the State Government and deferred regulatory assets, partially offset by CCEE obligations, bearing interest at rates tied to IGP-DI and SELIC, respectively. As summarized in the tables below, since the assets that bore interest at floating rates were higher than the obligations that bore interest at floating rates, we did not have exposure to interest rate risk as of December 31, 2004.
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|
|
Total Debt Portfolio |
|
|
|
R$ Million |
|
Floating rate debt: |
|
|
|
Real- denominated |
|
3,047 |
|
Foreign currency-denominated |
|
322 |
|
|
|
3,369 |
|
Fixed rate debt: |
|
|
|
Foreign currency-denominated |
|
798 |
|
|
|
|
|
Total |
|
4,167 |
|
|
|
Total Portfolio
|
|
|
|
(R$ million) |
|
Assets: |
|
|
|
Cash and cash equivalents |
|
826 |
|
Restricted investment |
|
20 |
|
Account receivable from State Government |
|
1,097 |
|
Deferred regulatory assets |
|
3,765 |
|
Total |
|
5,708 |
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
Account payable to suppliers-payment to generator for energy purchased on the CCEE |
|
(364 |
) |
Floating rate debt |
|
(3,369 |
) |
Derivative instruments(1) |
|
(414 |
) |
Total liabilities |
|
(4,147 |
) |
|
|
|
|
Total |
|
1,561 |
|
(1) Swaps to reduce our exposure on the original interest rate of certain financing from an interest rate calculated based on the U.S. dollar/ real exchange rate to an interest rate calculated based on the Certificado de Depósito Interbancário-CDI (Interbank Deposit Certificate) rate.
The tables below provide information, as of December 31, 2004, with respect to our debt obligations that are sensitive to changes in interest rates and exchange rates, including the expected maturity dates and annual average interest rates relating thereto. Variable interest rates are based on the applicable reference rate as of December 31, 2004.
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|
|
Expected
Maturity Date
|
|
||||||||||||||
Debt Obligation |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
2012 and
|
|
Total
Long
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency-denominated debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate |
|
51 |
|
222 |
|
42 |
|
176 |
|
8 |
|
8 |
|
73 |
|
580 |
|
Floating rate |
|
74 |
|
37 |
|
14 |
|
12 |
|
11 |
|
11 |
|
38 |
|
197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real- denominated debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate |
|
736 |
|
203 |
|
380 |
|
248 |
|
78 |
|
24 |
|
304 |
|
1,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
861 |
|
462 |
|
436 |
|
436 |
|
97 |
|
43 |
|
415 |
|
2,750 |
|
|
|
Expected Annual Average Interest Rate (%) |
|
||||||||||||
Debt Obligation |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency-denominated debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate |
|
6.19 |
|
6.12 |
|
5.79 |
|
5.63 |
|
7.37 |
|
7.41 |
|
7.50 |
|
Floating rate |
|
3.84 |
|
3.22 |
|
2.87 |
|
2.79 |
|
2.65 |
|
2.41 |
|
2.22 |
|
Floating rate (excluding inflation indices) |
|
13.85 |
|
13.22 |
|
12.98 |
|
12.87 |
|
7.83 |
|
7.83 |
|
6.62 |
|
Floating rate (including expected inflation indices) |
|
18.86 |
|
18.22 |
|
17.98 |
|
17.27 |
|
12.83 |
|
12.83 |
|
11.62 |
|
Not applicable.
119
Empresa de Infovias S.A.s loan from MBK Furukawa Sistemas S.A./Unibanco, in the total principal amount of R$58.0 million as of December 31, 2004, of which R$40.8 million is classified as long-term liabilities in our consolidated financial statements, contains certain financial covenants that, in the event of noncompliance, may cause the amount due under the contract to become immediately due. These covenants are based on the financial statements prepared in accordance with the accounting practices adopted in Brazil. Empresa de Infovias S.A. has obtained a waiver from the creditors that are parties to this contract. The waiver affirms that such creditors will not exercise their rights to demand either accelerated or immediate payment of the total amount due until December 31, 2005. This loan is classified as a current and long-term liability according to the original terms of the respective contract, in compliance with the waiver obtained.
Not applicable.
Evaluation of disclosure controls and procedures
The conclusions of our Chief Executive Officer and Chief Financial and Investor Relations Officer about the effectiveness of our disclosure controls and procedures, based on their evaluation of these controls and procedures as of December 31, 2004, are as follows:
Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us is recorded, processed, summarized and reported within required timeframes. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial and Investor Relations Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on their assessments of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial and Investor Relations Officer have concluded that the disclosure controls and procedures have functioned effectively and that the consolidated financial statements fairly present our consolidated financial position and the results of our operations for the periods presented.
Changes in internal controls
There has been no change in our internal control over financial reporting during the year ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Since we have not yet established an audit committee, our Board of Directors currently performs the functions of an audit committee. Our Board of Directors is in the process of discussing the establishment of an audit committee, which we are required to have in place by July 31, 2005. Our Board of Directors has not yet determined whether any of its members qualify as an audit committee financial expert, but it is currently discussing the selection of an audit committee financial expert.
We have adopted a code of ethics, as defined in Item 16B of Form 20-F under the Securities Exchange Act of 1934, as amended. Our code of ethics applies to our Chief Executive Officer, Chief Financial and Investor Relations Officer and persons performing similar functions as well as to our directors and other officers and
120
employees. Our code of ethics was filed with the SEC as Exhibit 11 to our Annual Report on Form 20-F for the fiscal year ended December 31, 2003, and is also available on our website at www.cemig.com.br. If we amend the provisions of our code of ethics that apply to our Chief Executive Officer, Chief Financial Officer and persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our web site at www.cemig.com.br.
Audit and Non-Audit Fees
The following table summarizes the aggregate fees billed to us by Deloitte Touche Tohmatsu Auditores Independentes during the fiscal years ended December 31, 2003 and 2004:
|
|
Year ended December 31, |
|
||
|
|
2004 |
|
2003 |
|
|
|
(thousands of reais) |
|
||
Audit fees |
|
777 |
|
416 |
|
Tax fees |
|
43 |
|
14 |
|
Audit-related fees |
|
80 |
|
|
|
Total fees |
|
900 |
|
430 |
|
Audit fees . Audit fees in the above table are the aggregate fees billed by Deloitte Touche Tohmatsu Auditores Independentes in connection with the audit of our annual financial statements prepared in accordance with the accounting practices adopted in Brazil and the United States and the review of our quarterly statutory financial statements.
Tax Fees . Tax fees are fees for professional services rendered by Deloitte Touche Tohmatsu Auditores Independentes for tax compliances services.
Audit-related fees . Audit-related fees refers to due diligence related to the acquisition of Rosal Energia S.A., agreed upon procedures related to the application of certain ANEEL rates on energy sales and services in connection with compliance with the Sarbanes-Oxley Act.
We did not incur any fees for non-audit services in 2004 and 2003.
Audit Committee Pre-Approval Policies and Procedures
Our Board of Directors currently serves as our audit committee for purposes of the Sarbanes-Oxley Act of 2002. We have adopted pre-approval policies and procedures under which all audit and non-audit services provided by our external auditors must be pre-approved by the Board of Directors. Any service proposals submitted by external auditors need to be discussed and approved by the Board of Directors during its meetings. Once the proposed service is approved, we formalize the engagement of services. The approval of any audit and non-audit services to be provided by our external auditors is specified in the minutes of our Board of Directors.
None.
121
Not applicable.
Reference is made to pages F-1 through F-57 hereof.
The following financial statements are filed as part of this annual report on Form 20F:
Report of Deloitte Touche Tohmatsu Auditores Independentes
Audited Consolidated Balance Sheets as of December 31, 2004 and 2003
Audited Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2004, 2003 and 2002
Audited Consolidated Statements of Changes in Shareholders Equity for the years ended December 31, 2004 2003 and 2002
Audited Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
Notes to the Consolidated Financial Statements
The following documents are included as exhibits to this annual report:
Exhibit Number |
|
Document |
|
|
|
1 |
|
Corporate by-laws of CEMIG, as amended and in effect since December 13, 2004. |
|
|
|
2.1 |
|
Second Amended and Restated Deposit Agreement, dated as of August 10, 2001, by and among us, Citibank, N.A., as depositary, and the holders and beneficial owners of ADSs evidenced by ADRs issued thereunder (incorporated by reference to the Registration Statement on Form F-6 relating to the ADSs filed on August 20, 2001 (File No. 333-13826)). |
|
|
|
2.2 |
|
Shareholders Agreement, dated June 18, 1997, between the State Government and Southern, relating to the rights and obligations of owners of our shares (incorporated by reference to Exhibit 2.1 to our Registration Statement on Form 20-F filed on August 13, 2001 (File No. 1-15224)). |
|
|
|
3 |
|
Agreement, dated June 17, 2002, between Empresa de Infovias S.A. and CLIC, relating to the shares of WAY TV (incorporated by reference to Exhibit 3 to our Annual Report on Form 20-F filed on March 26, 2003 (File No. 1-15224)). |
|
|
|
4.1 |
|
Contract of Concession for Generating Electric Energy, dated June 10, 1997, between the Federal Government and us, relating to the provision of electric energy generation services to the public (incorporated by reference to Exhibit 4.1 to our Registration Statement on Form 20-F filed on August 13, 2001 (File No. 1-15224)). |
122
Exhibit Number |
|
Document |
4.2 |
|
Contract of Concession of Electric Energy Transmission Services, dated June 10, 1997, between the Federal Government and us, relating to the transmission of electric energy to the public (incorporated by reference to Exhibit 4.2 to our Registration Statement on Form 20-F filed on August 13, 2001 (File No. 1-15224)). |
|
|
|
4.3 |
|
Contracts of Concession of Public Service for Distribution of Electric Energy, dated June 10, 1997, between the Federal Government and us, relating to the provision of electric energy distribution services to the public (incorporated by reference to Exhibit 4.3 to our Registration Statement on Form 20-F filed on August 13, 2001 (File No. 1-15224)). |
|
|
|
4.4 |
|
Contract for the Assignment of CRC Account, dated May 31, 1995, between the State Government and us, relating to amounts due to us from the State Government (incorporated by reference to Exhibit 4.4 to our Registration Statement on Form 20-F filed on August 13, 2001 (File No. 1-15224)). |
|
|
|
4.5 |
|
First Amendment to the Contract for the Assignment of CRC Account, dated February 24, 2001, between the State Government and us, relating to amounts due to us from the State Government (incorporated by reference to Exhibit 4.5 to our Annual Report on Form 20-F filed on March 26, 2003 (File No. 1-15224)). |
|
|
|
4.6 |
|
Second Amendment to the Contract for the Assignment of CRC Account, dated October 14, 2002, between the State Government and us, relating to amounts due to us from the State Government (incorporated by reference to Exhibit 4.6 to our Annual Report on Form 20-F filed on March 26, 2003 (File No. 1-15224)). |
|
|
|
4.7 |
|
Third Amendment to the Contract for the Assignment of CRC Account, dated October 24, 2002, between the State Government and us, relating to amounts due to us from the State Government (incorporated by reference to Exhibit 4.7 to our Annual Report on Form 20-F filed on March 26, 2003 (File No. 1-15224)). |
|
|
|
4.8 |
|
Indenture Covering the First Public Issuance of Common Debentures, dated October 4, 2001, between Planner Corretora de Valores S.A. and us, relating to the first public issuance of R$625 million common debentures, divided into two series of the same class, without guarantee or preference (incorporated by reference to Exhibit 4.8 to our Annual Report on Form 20-F filed on March 26, 2003 (File No. 1-15224)). |
|
|
|
4.9 |
|
Financing Agreement by Extension of Credit No. 02.2.962.3.1, dated February 7, 2003, between BNDES and CEMIG and Intervening Third Parties (incorporated by reference to Exhibit 4.9 to our Annual Report on Form 20-F filed on March 26, 2003 (File No. 1-15224)). |
|
|
|
4.10 |
|
Summary of Indenture Covering the Third Public Issuance of Common Debentures, dated June 14, 2004, between CEMIG and Pavarini Distribuidora de Títulos e Valores Mobiliários. |
|
|
|
8 |
|
List of Subsidiaries |
|
|
|
11 |
|
Code of Ethics (incorporated by reference to Exhibit 11 to our Annual Report on Form 20-F filed on July 1, 2004 (File No. 1-15224)). |
|
|
|
12.1 |
|
Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 25, 2005. |
|
|
|
12.2 |
|
Chief Financial and Investor Relations Officer Certification pursuant to Section 302 of the Sarbanes- |
123
Exhibit Number |
|
Document |
|
|
Oxley Act of 2002, dated May 25, 2005. |
|
|
|
13.1 |
|
Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 25, 2005. |
|
|
|
13.2 |
|
Chief Financial and Investor Relations Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 25, 2005. |
We have omitted from the exhibits filed with or incorporated by reference into this annual report certain instruments and agreements with respect to our long-term debt, none of which authorizes securities in a total amount that exceeds 10% of our total assets. We hereby agree to furnish to the Commission copies of any such omitted instruments or agreements as the Commission requests.
124
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
|
COMPANHIA ENERGÉTICA DE MINAS |
||
|
GERAIS CEMIG |
||
|
|
||
|
By: |
/s/ Djalma Bastos de Morais |
|
|
Name: |
Djalma Bastos de Morais |
|
|
Title: |
Chief Executive Officer |
|
|
|
||
|
|
||
Date: May 25, 2005 |
|
125
Acesita |
28 |
ACL |
21 |
ACR |
21 |
ADRs |
2 |
ADSs |
2 |
American Depositary Receipts |
2 |
American Depositary Shares |
2 |
ANA |
43 |
ANEEL |
2 |
Annex V Regulations |
108 |
ASMAE |
76 |
average rate |
56 |
basic transmission network |
31 |
BNDES |
77 |
Board of Trade of Minas Gerais |
94 |
Brazil |
1 |
Brazilian Corporate Law |
1 |
CBEE |
61, 65 |
CCC Account |
40 |
CCPE |
1 |
CEB |
30 |
CEMIG |
1 |
Central Bank |
6 |
CGSE |
5 |
CHESF |
1 |
CLIC |
42 |
CNPE |
7 |
Code |
109 |
CODs |
48 |
COFINS |
60 |
Commission |
1 |
common shares |
2 |
Company |
1 |
CONAMA |
44 |
Concessions Law |
11 |
COPAM |
43 |
COPASA |
29 |
COS |
48 |
CPMF |
63, 67 |
Cruzado Plan |
84 |
CVM |
17 |
CVRD |
28 |
DETEL/MG |
80 |
dollars |
1 |
EITF 92-07 |
54 |
Eletrobrás |
35 |
Eletronuclear |
2 |
Energy Crisis Committee |
58 |
EPE |
21 |
ERM |
13 |
FASB |
56 |
FEAM |
43 |
Federal Government |
3 |
floating market |
6 |
FNDCT |
71 |
Free Consumers |
8 |
Gasmig |
20 |
GCE |
4 |
GDP |
2 |
General Agreement of the Electricity Sector |
54 |
guaranteed return |
14 |
GW |
2 |
GWh |
2 |
IBAMA |
44 |
IBGE |
2 |
IGP-M index |
22 |
IOF |
112 |
IPHAN |
43 |
IPPs |
24 |
Itaipu |
24 |
kW |
2 |
kWh |
2 |
LATIBEX |
91 |
MGI |
40 |
Minas Gerais |
2 |
MMA |
46 |
MVA |
26 |
MW |
2 |
MWh |
2 |
National Monetary Council |
10 |
non-Brazilian holder |
109 |
noon buying rate |
1 |
NYSE |
18 |
ONS |
10 |
OTC |
90 |
Parcel A costs |
21 |
PASEP |
60 |
preferred shares |
2 |
R$1 |
|
reais |
1 |
real |
1 |
regulatory extraordinary rate adjustment |
64 |
RTE |
4 |
São Paulo Stock Exchange |
18 |
Securities Act |
19 |
SELIC |
105 |
SEMAD |
43 |
SFAS No. 71 |
54 |
SIESE |
2 |
SISNAMA |
46 |
Southern |
15 |
Special Quorum Provisions |
104 |
State Government |
3 |
TUSD |
22 |
TUST |
22 |
U.S. dollars |
1 |
U.S. GAAP |
1 |
U.S. holder |
109 |
126
UBP Fund |
12 |
United States dollars |
1 |
US$ |
1 |
Usiminas |
28 |
Vallourec & Mannesmann |
29 |
VAT |
61, 65 |
WAY TV |
13 |
127
THE BRAZILIAN POWER INDUSTRY
The Brazilian electricity system consists of two large interconnected systemsone for the South, Southeast and Midwest Regions and the other for the North and Northeast Regionsand several small isolated systems in the north and west. The two large systems (which together account for 96.6% of the capacity) are interconnected through a 1,700 MW high-voltage transmission line.
Brazils abundant hydrological resources are managed through storage reservoirs. It is estimated that Brazil has a hydroelectric power generation potential of 260,000 MW, of which only 26% has been developed, according to the Electrical Energy Expansion Committee, or CCPE.
The table below shows the installed capacity of electric power generation in the interconnected power system (excluding non-connected systems and self-production capacities), divided into hydroelectric and thermoelectric generation capacity, from 1991 through 2004 in MW.
Year |
|
Hydroelectric |
|
Thermoelectric |
|
1991 |
|
45,808 |
|
3,789 |
|
1992 |
|
46,995 |
|
3,672 |
|
1993 |
|
47,834 |
|
3,514 |
|
1994 |
|
49,136 |
|
3,490 |
|
1995 |
|
50,582 |
|
3,490 |
|
1996 |
|
52,266 |
|
3,724 |
|
1997 |
|
53,664 |
|
3,730 |
|
1998 |
|
55,519 |
|
3,903 |
|
1999 |
|
57,724 |
|
4,135 |
|
2000 |
|
59,452 |
|
6,217 |
|
2001 |
|
61,044 |
|
7,096 |
|
2002 |
|
65,735 |
|
9,214 |
|
2003 |
|
66,321 |
|
9,226 |
|
2004 |
|
67,503 |
|
10,456 |
|
Sources: National System Operator ONS
Brazil has an installed capacity in the interconnected power system of 78 GW, of which approximately 87% is hydroelectric. The installed capacity includes half of the installed capacity of Itaipu 12,600 MW owned equally between Brazil and Paraguay. According to data from the National System Operator ONS, Brazils installed capacity is projected to increase to approximately 90 GW by 2009, of which 14% is projected to be thermoelectric and 86% is projected to be hydroelectric. There are approximately 45,368 miles of transmission lines with voltages equal to or higher than 230kV in Brazil.
Approximately 35% of Brazils installed generating capacity and 64% of Brazils high voltage transmission lines are operated by Centrais Elétricas Brasileiras S.A., or Eletrobrás, a company owned by the federal government of Brazil, or the Federal Government. Eletrobrás has historically been responsible for implementing electric policy, conservation and environmental management programs. It controls five subsidiaries responsible for the generation, transmission and distribution of electricity in the north, northeast and southeast of Brazil: Centrais Elétricas do Norte do Brasil S.A., or Eletronorte; Companhia Hidroelétrica do São Francisco, or CHESF; Furnas Centrais Elétricas S.A., or Furnas; Companhia de Geração Térmica de Energia Elétrica CGTEE and Empresa Transmissora de Energia Elétrica do Sul do Brasil S.A. Eletrosul; As a result of the restructuring of the Brazilian electric sector, however, these federallyowned companies have been changing their roles from regional development utilities to generation and/or transmission companies acting in a competitive market. Eletrobrás also controls Eletrobrás Termonuclear S.A., or Eletronuclear, a company formed following a partial split-up of Furnas. The remaining high
A-1
voltage transmission lines are owned by state-controlled electric power companies. Distribution is conducted by approximately 60 state or local utilities, a majority of which have been privatized by the Federal Government or state governments.
Between 1986 and 2004, the consumption of electricity in Brazil grew by approximately 3.7% per year (from 166.7 GWh to 320.8 GWh), the number of consumers increased by approximately 4.3% per year (from 25,900 thousand to 54,843 thousand) and the total installed capacity increased by more than 4.1% per year (from 43,264 MW to 88,629 MW). The following table sets forth the growth in Brazils energy consumption, population and growth rate of the gross domestic product, or GDP, from 1986 through December 31, 2004.
Year |
|
Energy
|
|
Energy
|
|
GDP Growth (%) |
|
Population |
|
|
|
(in GWh) |
|
(% Growth) |
|
|
|
(in millions) |
|
1986 |
|
166.7 |
|
10.6 |
|
7.5 |
|
137.7 |
|
1987 |
|
181.3 |
|
7.4 |
|
3.5 |
|
140.3 |
|
1988 |
|
191.8 |
|
5.8 |
|
(0.1 |
) |
142.8 |
|
1989 |
|
200.5 |
|
4.5 |
|
3.2 |
|
145.2 |
|
1990 |
|
204.4 |
|
2.0 |
|
(4.3 |
) |
147.6 |
|
1991 |
|
213.5 |
|
4.4 |
|
1.0 |
|
149.9 |
|
1992 |
|
217.4 |
|
1.8 |
|
(0.5 |
) |
152.2 |
|
1993 |
|
226.2 |
|
4.0 |
|
4.9 |
|
154.5 |
|
1994 |
|
231.6 |
|
2.4 |
|
5.9 |
|
156.8 |
|
1995 |
|
248.7 |
|
7.4 |
|
4.2 |
|
159.0 |
|
1996 |
|
259.3 |
|
4.3 |
|
2.7 |
|
161.2 |
|
1997 |
|
276.8 |
|
6.7 |
|
3.3 |
|
163.4 |
|
1998 |
|
287.5 |
|
3.9 |
|
0.1 |
|
165.7 |
|
1999 |
|
292.7 |
|
1.8 |
|
0.8 |
|
167.9 |
|
2000 |
|
307.5 |
|
5.1 |
|
4.4 |
|
170.1 |
|
2001 |
|
283.3 |
|
(7.9 |
) |
1.3 |
|
172.4 |
|
2002 |
|
290.5 |
|
2.5 |
|
1.9 |
|
174.6 |
|
2003(1) |
|
307.0 |
|
5.7 |
|
0.5 |
|
179 |
|
2004 |
|
320.8 |
|
4.5 |
|
5.2 |
|
183.4 |
(2) |
(1) Updated information
(2) IBGE forecast
Sources: Sistema de Informações Empresariais do Setor de Energia Elétrica (Brazilian Business Information System for the Energy Sector), or SIESE; Instituto Brasileiro de Geografia e Estatística (Brazilian Institute of Geography and Statistics), or IBGE; and the Ministry of Mines and Energy - MME.
Between 1986 and the end of 2004, consumption of electricity in Brazil generally grew at a faster rate than Brazils GDP, with the exception of 1993 and 1994, during which labor intensive industries lowered their output. Even in years in which the GDP had negative growth, electricity consumption increased. Overall electricity consumption growth averaged 5.6% per year from 1970 to 2004. According to 2005 energy operation planning from Eletrobrás - CTEM, the Brazilian consumption growth rate should reach an average of 5.3% per year for the next five-year period. The following table illustrates the forecasted breakdown of the consumption growth rate per region:
A-2
Period |
|
North
|
|
Northeast
|
|
Southeast/
|
|
South
|
|
Brazilian
|
|
2005-2009 |
|
9.4 |
% |
6.7 |
% |
4.3 |
% |
5.8 |
% |
5.3 |
% |
Source: Eletrobrás - CTEM Planning Cycle 2004
The following table provides information relating to the probability of electricity shortfalls in the South, Southeast/Midwest, North and Northeast Regions in the coming years:
|
|
Probability of Electricity Shortfalls (%) |
|
||||||||
Region |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
South |
|
0.1 |
|
0.3 |
|
0.2 |
|
0.8 |
|
0.7 |
|
Southeast/Midwest |
|
0.0 |
|
0.5 |
|
0.5 |
|
0.9 |
|
1.1 |
|
North |
|
1.6 |
|
1.1 |
|
1.0 |
|
1.5 |
|
2.3 |
|
Northeast |
|
0.0 |
|
0.8 |
|
1.4 |
|
3.0 |
|
4.5 |
|
Source: National System Operator ONS, Monthly Operation Planning, January 2005
The Brazilian Constitution provides that the development, use and sale of energy may be undertaken directly by the Federal Government or indirectly through the granting of concessions, permissions or authorizations. Historically, the Brazilian power industry has been dominated by generation, transmission and distribution concessionaires controlled by the Federal and State Governments. In recent years, the Federal Government has taken a number of measures to restructure the power industry. In general, these measures were aimed at increasing the role of private investment and eliminating foreign investment restrictions, thus increasing overall competition in the power industry.
In particular, the Federal Government has taken the following measures:
In 1990, the Federal Government created the National Privatization Program aiming at transferring to the private sector certain companies controlled by it, including those of the power industry.
The Brazilian Constitution was amended in 1995 to authorize foreign investment in power generation. Prior to this amendment, all generation concessions were held either by a Brazilian individual or an entity controlled by Brazilian individuals or by the Federal or State Governments.
The Federal Government enacted Law No. 8,987 on February 13, 1995, or the Concessions Law, and Law No. 9,074 on July 7, 1995, or the Power Concessions Law, that together
required that all concessions for the provision of energy-related services be granted through public bidding processes;
gradually allowed certain electricity consumers with significant demand (generally greater than 3 MW), referred to as Free Consumers, to purchase electricity directly from suppliers holding a concession, permission or authorization;
provided for the creation of generation entities, or Independent Power Producers, which, by means of a concession, permission or authorization, may generate and sell the totality or part of their electricity to Free Consumers, distribution concessionaires and trading agents, among others;
A-3
granted Free Consumers and electricity suppliers open access to all distribution and transmission systems; and
eliminated the need for a concession to construct and operate power projects with capacity from 1 MW to 30 MW, or Small Hydroelectric Power Plants.
Beginning in 1995, a portion of the controlling interests held by Eletrobrás and various states in generation and distribution companies were sold to private investors. At the same time, certain state governments also sold their stakes in major distribution companies. While the majority of the distribution companies have been privatized, most generation capacity is still controlled by Eletrobrás, by means of its subsidiaries Chesf, Eletronorte and Furnas.
In 1998, the Federal Government enacted Law No. 9,648, or the Power Industry Law, to overhaul the basic structure of the electricity industry. The Power Industry Law provided for the following:
the establishment of a self-regulated body responsible for the operation of the short-term electricity market, or the Wholesale Energy Market, which replaced the prior system of regulated generation prices and supply contracts;
a requirement that distribution and generation companies enter into initial energy supply agreements, or the Initial Contracts, generally take or pay commitments, at prices and volumes approved by the Brazilian National Electric Energy Agency ANEEL. The main purpose of the Initial Contracts was to ensure distribution companies have access to a stable electricity supply at prices that guarantee a fixed rate of return for the electricity generation companies during the transition period leading to the establishment of a free and competitive electricity market;
the creation of the National Integrated System Operator ( Operador Nacional do Sistema , or ONS), a non-profit, private entity responsible for the operational management of the generation and transmission activities of the interconnected power system; and
the establishment of public bidding processes for concessions for the construction and operation of power plants and transmission facilities.
In 2001, Brazil faced a serious energy crisis that lasted until the end of the first quarter of 2002. As a result, the Federal Government implemented measures that included:
a program for the rationing of electricity consumption in the most adversely affected regions, namely the southeast, central-west and northeast regions of Brazil; and
the creation of the Electricity Crisis Management Chamber ( Câmara de Gestão da Crise de Energia Elétrica, or GCE), which passed a series of emergency measures that provided for reduced electricity consumption targets for residential, commercial and industrial consumers in the affected regions by introducing special rate regimes that encouraged the reduction of electricity consumption.
In March 2002, the GCE suspended the emergency measures and electricity rationing as a result of large increases in supply (due to a significant rise in reservoir levels) and a moderate reduction in demand, and accordingly, the Federal Government enacted new measures in April 2002 that, among other things, stipulated an extraordinary rate readjustment, or RTE, to compensate financial losses incurred by the electricity suppliers as a result of the mandatory electricity rationing. For additional information regarding the rationing, see Rationing and Extraordinary Rate Increases.
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On December 17, 2002, with the enactment of Law 10,604, the Federal Government granted a subsidy for distribution companies in order to contribute to the moderation of the rates charged to low-income consumers.
On March 15, 2004, the Federal Government enacted Law No. 10,848, or the New Industry Model Law, in an effort to further restructure the power industry with the ultimate goal of providing consumers with secure electricity supplies combined with low rates. On July 30, 2004 the Federal Government published Decree 5,163, governing the purchase and sale of electricity under the New Industry Model Law, as well as the granting of authorizations and concessions for electricity generation projects. These include rules relating to auction procedures, the form of power purchase agreements and the method of passing costs through to final customers.
The New Industry Model Law is still subject to further regulation to be issued by ANEEL and the MME. For additional information regarding the New Industry Model Law, see The New Industry Model Law.
Below average rainfall in the years preceding 2001 resulted in low reservoir levels and low hydroelectric capacity in the southeast, central west and northeast regions. Attempts to offset dependence on hydroelectric plants with gas-fired thermal generation plants delayed due to regulatory and other issues. In response to the energy shortage, on May 15, 2001, the Federal Government created the GCE to regulate and administer the program for reduction of energy consumption to avoid the interruption of electricity supply. This program, known as the Electricity Rationing Program, established limits for energy consumption for industrial, commercial and residential consumers, which ranged from a 15% to a 25% reduction in energy consumption, and lasted from June 2001 until February 2002.
As a result of the end of the rationing measures, the Federal Government, through Decree No. 4,261 of June 6, 2002, extinguished the GCE and created the Câmara de Gestão do Setor Elétrico (the Electricity Sector Management Committee), or CGSE, to replace the GCE as coordinator of the electricity sector revitalization measures, and to give support to the Federal Government with respect to related issues.
Law No. 10,438 of April 26, 2002 authorized the General Agreement of the Electricity Sector, which was designed to resolve issues related to the Electricity Rationing Plan by providing for compensation for rationing-related losses to generation and distribution companies in Brazil and restoring the economic equilibrium of the concession agreements, which was thrown out of balance during the rationing period.
Such Law authorized an extraordinary rate increase, or RTE, applicable to final customers that would compensate both generators and distributors for such rationing-related losses. The increased rates will be in force for an average period of 72 months from January 2002. The RTE also covers financial losses resulting from those costs that are beyond the control of the distributor, referred to as Parcel A costs, from January 2001 to October 2001 as well as losses of generators incurred as a result of payment of free energy costs above the Initial Contract average price. The RTE percentage charged for residential customers (excluding low-income customers), rural customers, public street lighting and high-tension industrial customers whose costs related to electric energy represent at least 18% of average production cost and fulfill certain other criteria was 2.9% and the RTE percentage charged to all other customers was 7.9%, producing a weighted average increase of 5.87%.
Pursuant to Law 10,438, the National Bank for Economic Development ( Banco Nacional de Desenvolvimento Econômico e Social , or BNDES), created a special program to finance 90% of the amounts recoverable by means of the RTE. The loans are repayable over the rate increase collection period.
In April 2003, the Federal Government, fearing that rate increases may contribute to overall inflation in Brazil, decided to delay a rate increase to which distribution companies were entitled under ANEEL resolutions to recover intra-annual variation of Parcel A costs. On November 11, 2003, with the enactment of Law 10,792, the Federal Government implemented an emergency program designed to compensate distribution companies for the losses incurred due to the non-consideration of the intra-annual variation of Parcel A costs on occasion of the annual
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rate readjustments that took place from April 2003 to April 2004. Such program guaranteed to the applicable companies a loan from BNDES under special conditions.
The companies or consortia that wish to build or operate facilities for generation, transmission or distribution of electricity in Brazil must apply to the MME or to ANEEL, by delegation of MME, as granting authority, for a concession, permission or authorization, as the case may be. Concessions grant rights to generate, transmit or distribute electricity in the relevant concession area for a specified period. This period is usually 35 years for new generation concessions, and 30 years for new transmission or distribution concessions. An existing concession may be renewed at the granting authoritys discretion.
The Concession Law establishes, among other things, the conditions that the concessionaire must comply with in rendering electricity services, the consumers rights and the obligations of the concessionaire and the granting authority. Furthermore, the concessionaire must comply with regulations in force governing the electricity sector. The main provisions of the Concession Law are summarized as follows:
Adequate service . The concessionaire must render an adequate service such as to satisfy, among other things, regularity, continuity, efficiency, safety and accessibility of the service.
Use of Land. The concessionaire may use public land or request the granting authority to declare the public interest of private real estate, so as to benefit the concessionaire. In such case the concessionaire shall compensate the affected owners.
Strict liability. The concessionaire is strictly liable for all damages arising from the performance of its services and caused to consumers, to third parties or to the granting authority.
Changes in controlling interest . The granting authority must approve any direct or indirect change in the concessionaires controlling interest.
Intervention by the Granting Authority . The granting authority may intervene in the concession, by means of a presidential decree, to ensure the concessionaires adequate performance of services, as well as the full compliance with applicable contractual, regulatory and legal provisions in case the concessionaire fails to do so. Within 30 days after the decree date, the granting authoritys representative is required to commence an administrative proceeding in which the concessionaire is entitled to due process of law. During the term of the administrative proceeding, a person appointed by the granting authoritys decree becomes responsible for carrying on the concession. If the administrative proceeding is not completed within 180 days after the decree date, the intervention ceases and the concession is returned to the concessionaire. The concession is also returned to the concessionaire if the granting authoritys representative decides not to terminate the concession and the concession term has not yet expired.
Termination of the concession . The concession termination agreement may be terminated through expropriation and/or forfeiture. Expropriation is the early termination of a concession for reasons related to the public interest that must be expressly declared by law and based on public interest grounds. Following the expropriation, the concessionaire is entitled to receive an indemnification, which may or may not adequately compensate investments made by the concessionaire in expropriated assets that have not been fully amortized or depreciated by the time of the expropriation. Forfeiture must be declared by the granting authority after ANEEL, or MME, has made a final administrative ruling that the concessionaire has failed to adequately perform its obligations under the concession agreement. The concessionaire is entitled to due process of law in the administrative proceeding declaring the forfeiture of the concession and can resort to the courts . The concessionaire is entitled to receive an indemnification for the investments made by the concessionaire in expropriated assets that have not been fully amortized or depreciated, after
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deduction of any amounts corresponding to outstanding fines and damages due by the concessionaire .
Expiration. When the concession expires, all assets, rights and privileges that are materially related to the rendering of the electricity services revert to the Brazilian government. Following the expiration, the concessionaire is entitled to receive an indemnification for the investments made by the concessionaire in expropriated assets that have not been fully amortized or depreciated by the time of the expiration.
Penalties
ANEELs Resolution 63, enacted on May 13, 2004 (which revoked Resolution 318), governs the imposition of sanctions against the operators in the electricity sector, defines conduct constituting violations of the law and classifies the appropriate penalties based on the nature and gravity of the violation (including warnings, fines, temporary suspension from the right to participate in bidding procedures for new concessions, licenses or authorizations and forfeiture). For each violation, the fines can be up to two per cent of the amount invoiced by the concessionaires in the 12-month period preceding any assessment notice. Some infractions that may result in fines relate to the failure of the operator to request ANEEL´s approval in case of:
Execution of contracts with related parties in the cases provided by regulation.
Sale or assignment of the assets related to the services rendered as well as the imposition of any encumbrances (including any security, bond, guarantee, pledge and mortgage) on them or any other assets related to the concession or the revenues of the electricity services.
Changes in controlling interest of the holder of the authorization or concession.
Principal Regulatory Authorities
In August 1997, the National Energy Policy Council ( Conselho Nacional de Política Energética , or CNPE) was created to advise the Brazilian president with respect to the development and creation of the national energy policy. The CNPE is presided over by the MME, and the majority of its members are ministers of the Federal Government. The CNPE was created to optimize the use of Brazils energy resources and to assure the supply of electricity to the country.
The MME is the Federal Governments primary regulator of the power industry. Following the adoption of the New Industry Model Law, the Federal Government, acting primarily through the MME, undertook certain duties that were previously under the responsibility of ANEEL, including the drafting of guidelines governing the granting of concessions and the issuance of directives governing the bidding process for concessions relating to public services and public assets.
The Brazilian power industry is regulated by ANEEL, an independent federal regulatory agency. After enactment of the New Industry Model Law, ANEELs primary responsibility is to regulate and supervise the power industry in line with the policy to be dictated by the MME and to respond to matters which are delegated to it by the Federal Government and by the MME. ANEELs current responsibilities include, among others,
administering concessions for electricity generation, transmission and distribution activities, including the approval of electricity rates,
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enacting regulations for the electricity industry,
implementing and regulating the exploitation of energy sources, including the use of hydroelectric energy,
promoting the public bidding process for new concessions,
settling administrative disputes among electricity generation entities and electricity purchasers and
defining the criteria and methodology for the determination of transmission rates.
The ONS was created in 1998 as a non-profit private entity comprised of Free Consumers and energy utilities engaged in the generation, transmission and distribution of electricity, in addition to other private participants such as importers and exporters. The New Industry Model Law, regulated by Decree 5,081 of May 14, 2004, granted the Federal Government the power to appoint three directors of the ONS, including the Director-general. The primary role of the ONS is to coordinate and control the generation and transmission operations in the interconnected power system, subject to ANEELs regulation and supervision. The objectives and principal responsibilities of the ONS include, among others:
operational planning for the generation industry,
organizing the use of the domestic interconnected power system and international interconnections,
guaranteeing that all parties in the industry have access to the transmission network in a non-discriminatory manner,
assisting in the expansion of the energy system,
proposing plans to the MME for extensions of the Basic Grid (which proposal shall be taken into account in planning the expansion of the transmission system) and
submitting rules for the operation of the transmission system for ANEELs approval. Generators must declare their availability to the ONS, which then attempts to establish an optimal electricity dispatch program.
The active participation of the ONS as an instrument to ensure access to transmission grids occurs by means of contractual relationships established between the ONS, the owners of the basic transmission grid and the users of the transmission grid. Such contractual relationships comprise the following:
the C ontrato de Prestação de Serviços de Transmissão (Operating Agreement) , a contract entered into by the ONS with the concessionaires which regulates the technical and financial terms for engaging in transmission activities;
the Contrato de Uso do Sistema de Transmissão (Grid Utilization Contract), a contract entered into by the ONS and the transmission grid users that regulates the use of the Brazilian grid, as well as procedures for invoicing and payment);
the Contrato de Constituição de Garantia (Guarantee Contract, or CCG) , a contract which gives the ONS access to available funds in banks accounts designated by transmission grid users for the purpose of providing funds in case such users fail to make their monthly payments to the concessionaires;
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the Contrato de Conexão à Rede Básica (Connection Contract) , a contract between the concessionaires and the transmission grid users which establishes the technical terms required to connect to the Brazilian grid); and
the Contrato de Compartilhamento de Instalações (Infrastructure Sharing Agreement) , a contract between the concessionaires for the sharing of the Brazilian grid facilities.
Beginning in 2002, the Wholesale Energy Market became subject to the authorization, supervision and regulation of ANEEL. Participants in the Wholesale Energy Market include all of the large energy generating entities, distribution agents, importers and exporters of electricity and other entities authorized by ANEEL to trade electric energy, or Energy Traders. Smaller generation entities are also eligible to participate in the Wholesale Energy Market.
The Wholesale Energy Market computes the spot price for electricity based on a published criteria. The electricity spot price is currently determined taking into account, among other factors, (1) the optimal use of electricity resources, (2) the equilibrium between supply and demand, (3) the load of the agents connected to the Interconnected Power System and (4) projected electricity requirements.
The Wholesale Electricity Market ceased to exist and its assets were absorbed by the new Energy Trading Chamber (CCEE), created by Degree 5,177 of August 12, 2004. The responsibilities of the CCEE include:
(i) to hold electricity purchase and sale auctions, as delegated by ANEEL;
(ii) to keep the register of all Regulated-Environment Electricity Sale Contracts (CCEARs), and contracts resulting from adjustment auctions, and acquisition of electricity from dispersed generation (producers outlying from the grid) and any amendments to these contracts;
(iii) to keep the records of the amounts of load and electricity that are subject of the contracts signed in the Free Contracting Environment (ACL);
(iv) to measure and register the data on purchase and sale transactions and other data inherent to electricity services;
(v) to calculate the Margin Settlement Prices (PLDs) for the short-term market, by sub-market;
(vi) to carry out the accounting of the amounts of electricity sold and the financial settlement of the amounts arising from the electricity purchase and sale transactions in the short-term market;
(vii) to ascertain any non-compliance with the electricity contracting limits, and other infringements and, if applicable, by delegation from ANEEL, under the terms instituted by ANEEL, known as the Sale Convention, which establishes the structure and form of functioning of the Electricity Sale Chamber (CCEE), to apply the respective penalties; and
(viii) to ascertain the amounts and take the necessary action for realization of the deposit, custody and execution of the financial guarantees relating to the financial settlements of the short-term market, in accordance with the Sale Convention.
On August 16, 2004, the Federal Government enacted the decree that created the Electricity Research Company, or EPE, a state-owned company, which is responsible for conducting strategic research on the energy industry, including, among others, electric energy, oil, gas, coal and renewable energy sources. EPE is responsible for (i) studying projections of the Brazilian energy matrix, (ii) preparing and publishing the national energy balance,
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(iii) identifying and quantifying energy resources and (iv) obtaining the required environmental licenses for new generation concessionaires.
The Electricity Sector Monitoring Committee (CMSE)
Decree 5,175 dated August 9, 2004 established the Electricity Sector Monitoring Committee, or CMSE, referred to by Clause 14 of Law 10,848 of March 15, 2004, under the direct coordination of the Ministry of Mines and Energy, with the basic function of monitoring and permanently evaluating the continuity and security of the electricity supply throughout all of Brazil. The CMSE will be chaired by the Minister of Mines and Energy and will have the following composition: (i) four representatives from the Ministry of Mines and Energy; and (ii) the presidents of the following bodies:
a) The National Electricity Agency ANEEL;
b) The National Oil Agency ANP;
c) The Energy Trading Chamber CCEE;
d) The Electricity Research Company EPE; and
e) the National Electricity System Operator ONS.
The Minister of Mines and Energy may invite to meetings of the CMSE, among others, representatives of federal, state and municipal government bodies, and public and private entities, and also technical experts from the electricity sector.
The responsibilities of the CMSE are: (i) to monitor the development of the activities of generation, transmission, distribution, sale, import and export of electricity, natural gas and oil; (ii) to evaluate the conditions of supply and meeting of demand in relation to the activities referred to in item (i) over pre-determined time horizons; (iii) to periodically carry out integrated analysis of the security of supply and meeting of market demand for electricity, natural gas and oil; (iv) to identify difficulties and obstacles which affect or could affect the regularity and security of supply and meeting of demand in relation to expansion of the electricity, natural gas and oil sectors; and (v) to prepare proposals for adjustments, solutions and recommendations for preventive actions or actions to maintain or restore security in the supply and meeting of demands for electrical energy, and to submit them, when appropriate, to the National Energy Policy Council CNPE.
An Independent Power Producer, or IPP, is a legal entity or a consortium which is granted an authorization or concession to generate electric energy at its own account and risk.
An IPP may sell energy to (i) distribution companies by means of public auctions held by ANEEL or CCEE upon termination of the existing contracts, (ii) consumers with a demand of at least 3MW supplied at a voltage level equal to or greater than 69 kV, (iii) new consumers with a demand of at least 3MW supplied at any voltage, (iv) consumers who are part of an industrial or commercial complex to which the IPP also supplies steam or some other by-product resulting from the co-generation process, (v) any group of consumers subject to agreement with the local distribution concessionaire, and (vi) any consumer to which the local distribution concessionaire is unable to supply energy prior to 180 days after an initial request.
Law No. 9,074 of July 7, 1995, as amended by Law Nos. 9,648/98 and 10,848/04, partially abolished the exclusivity of supply of electricity that distribution concession holders had previously enjoyed within their concession areas. Consumers that qualify as Free Consumers may choose their energy supply between generators and traders of electricity. Currently, such consumers are the ones (i) connected prior to July 1995 with a demand
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equal to or greater than 3 MW, supplied at a voltage level equal to or greater than 69 kV or (ii) connected after July 1995 with a demand equal to or greater than 3 MW, supplied at any voltage level or (iii) that consume between 500kW and 3MW if they choose to purchas e their energy from renewable energy sources, such as small hydroelectric facilities or biomass.
Law No. 10,848 prevents distribution companies from selling power to Free Consumers at freely negotiated prices. Supply to captive consumers must be made only at regulated rates. In order to exercise the option to be a Free Consumer, a consumer that complies with the legal requirements and does not have a previously agreed term in the contract with the local distributor must deliver a prior notice to such concessionaire, not exceeding 36 months, unless the distribution concessionaire, at its discretion, agrees to a shorter term. Law No. 10,848 exceptionally allows that, until December 31, 2009, those consumers that intend to become self-producers of power or even IPPs may do so upon delivery of a written notice to the supplier, at least 180 days in advance.
Additionally, those who choose to be Free Consumers may only return to the status of captive consumers, i.e., to be once again subject to regulated rates, upon a five-year prior communication to the local distribution company, unless such company, at its discretion, agrees to a shorter term. With the publication of Decree 5,163, of July 30, 2004, Free Consumers became subject to penalties if they do not contract all of their demand under the so-called bilateral contracts. Also, under the new market rules, Free Consumers are obliged to join and subscribe to the CCEE. Presidential Decree 4,413 and ANEELs Resolution 665, of October and November of 2002, set directives for the separation of the wholesale supply contracts of large electricity consumers whose supply voltage is 2.3 kV or higher. Such legislation determined that these large electricity consumers split their current supply contracts into three types: (i) a supply agreement, (ii) a main transmission grid connection and use agreement and (iii) a distribution grid connection and use agreement. The deadlines established for compliance with this resolution are (i) July 1, 2003, for those consumers whose purchased demand is higher than 3 MW, (ii) July 1, 2004, for those consumers whose purchased demand is higher than 1 MW and (iii) July 1, 2005, for all other consumers.
In 2000, ANEEL established new limits on the concentration of certain services and activities within the power industry. Under these limits, with the exception of companies participating in the National Privatization Program (which need only comply with such limits once their final corporate restructuring is accomplished) no power company (including both its controlling and controlled companies) may (1) own more than 20% of Brazils installed capacity, 25% of the installed capacity of the South/Southeast/Central-West region or 35% of the installed capacity of the North/Northeast region, except if such percentage corresponds to the installed capacity of a single generation plant, (2) own more than 20% of Brazils distribution market, 25% of the South/Southeast/Central-West distribution market or 35% of the North/Northeast distribution market, except in the event of an increase in the distribution of electricity exceeding the national or regional growth rates or (3) own more than 20% of Brazils trading market with final consumers, 20% of Brazils trading market with non-final consumers or 25% of the sum of the above percentages.
In 2000, a federal decree created the Thermoelectric Priority Program ( Programa Prioritário de Termeletricidade , or PPT), for purposes of diversifying the Brazilian energy matrix and decreasing its strong dependency on hydroelectric plants. The benefits granted to thermoelectric plants under the PPT include (1) guaranteed gas supply for 20 years, (2) assurance of the application of the normative value by distribution companies who purchase their electricity for 20 years, according to regulation from ANEEL, thereby assuring that costs related to the acquisition of the electricity produced by thermoelectric plants will be transferred to rates and (3) guaranteed access to a BNDES special financing program for the power industry.
In 2002, the Proinfa Program was established by the Federal Government to create certain incentives for the development of alternative sources of energy, such as wind energy projects, Small Hydroelectric Power Plants and biomass projects. Under the Proinfa Program, Eletrobrás will purchase the electricity generated by these alternative sources for a period of 20 years. In its initial phase, the Proinfa Program is limited to a total contracted capacity of 3,300 MW. Projects seeking to qualify for the benefits offered by the Proinfa Program must be fully operational by December 31, 2006.
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Law 9,427/96, as amended by Law 10,762/03, further established that hydroelectric plants with installed capacity of 1,000 kW or less, generation plants classified as small hydroelectric plants, and those with qualifying solar, wind, biomass or cogeneration sources with installed capacity of 30,000 kW or less, used for independent production or self-production, will have the right to a discount of 50% on the rates for use of the transmission and distribution systems, charged on production and consumption of the energy sold. This article of the law was regulated by ANEEL through its Resolution 077/2004.
In certain circumstances, power companies are compensated for assets used in connection with a concession if the concession is eventually revoked or is not renewed. In 1971, the Brazilian Congress created a Global Reversion Fund ( Reserva Global de Reversão , or RGR Fund) designed to provide funds for such compensation. In February 1999, ANEEL revised the assessment of a fee requiring all distributors and certain generators operating under public service regimes to make monthly contributions to the RGR Fund at an annual rate equal to 2.5% of the companys fixed assets in service, but not to exceed 3.0% of total operating revenues in any year. In recent years, the RGR Fund has been used principally to finance generation and distribution projects. The RGR Fund is scheduled to be phased out by 2010, and ANEEL is required to revise the rate so that the consumer will receive some benefit from the termination of the RGR Fund.
The Federal Government has imposed a fee on IPPs reliant on hydrological resources, except for small Hydroelectric Power Plants and generators under the public services regime, similar to the fee levied on public-industry companies in connection with the RGR Fund. IPPs are required to make contributions to the Public Use Fund ( Fundo de Uso de Bem Público , or UBP Fund) according to the rules of the corresponding public bidding process for the granting of concessions. Eletrobrás received the UBP Fund payments until December 31, 2002. All payments to the UBP Fund since December 31, 2002 are paid directly to the Federal Government.
Distribution companies must contribute to the Fuel Consumption Account ( Conta de Consumo de Combustível , or CCC Account). The CCC Account was created in 1973 to generate financial reserves to cover elevated costs associated with the increased use of thermoelectric energy plants, in the event of a rainfall shortage, given the higher marginal operating costs of thermoelectric energy plants compared to hydroelectric energy plants. Each energy company is required to contribute annually to the CCC Account. The annual contributions are calculated on the basis of estimates of the cost of fuel needed by the thermoelectric energy plants in the following year. The CCC Account, in turn, reimburses energy companies for a substantial portion of the fuel costs of their thermoelectric energy plants. The CCC Account is administered by Eletrobrás.
In February 1998, the Federal Government provided for the phasing out of the CCC Account. Subsidies from the CCC Account will be phased out over a three-year period beginning in 2003 for thermoelectric energy plants constructed prior to February 1998 and currently belonging to the Interconnected Power System. Thermoelectric energy plants constructed after that date will not be entitled to subsidies from the CCC Account. In April 2002, the Federal Government established that subsidies from the CCC Account would continue to be paid to those thermoelectric plants located in isolated systems for a period of 20 years in order to promote generation of electricity in these regions.
With the exception of Small Hydroelectric Power Plants, all hydroelectric utilities in Brazil must pay fees to Brazilian states and municipalities for the use of hydrological resources. Such amounts are based on the amount of electricity generated by each utility and are paid to the states and municipalities where the plant or the plants reservoir is located.
In 2002, the Federal Government instituted the Energy Development Account ( Conta de Desenvolvimento Energético , or CDE), which is funded through annual payments made by concessionaires for the use of public assets, penalties and fines imposed by ANEEL and, since 2003, the annual fees to be paid by agents offering electricity to final consumers, by means of a charge to be added to the rates for the use of the transmission and distribution systems. These fees are adjusted annually. The CDE was created to support the (1) development of electricity production throughout the country, (2) production of electricity by alternative energy sources and (3) universalization of energy services throughout Brazil. The CDE shall be in effect for 25 years and shall be managed by Eletrobrás.
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The New Industry Model Law establishes that the failure to pay the contribution to RGR, Proinfa Program, the CDE, the CCC Account, or payments due by virtue of purchase of electricity in the regulated market or from Itaipu will prevent the non-paying party from receiving a rate readjustment (except for an extraordinary review) or receiving resources arising from the RGR, CDE or CCC Accounts.
Under the Wholesale Energy Market, protection from hydrological risks for centrally dispatched hydrogenerators is provided through an Energy Reallocation Mechanism, or ERM, which attempts to mitigate the risks involved in the generation of hydrological electricity by mandating that hydrogenerators share the hydrological risks of the Interconnected Power System. According to Brazilian Law, the revenue arising from the sale of energy by generators does not depend on the energy effectively generated by them, but rather on the Assured Energy (a reference amount of electricity established by the MME in accordance with studies conducted by the ONS) of each new plant, which is determined by the government in each relevant concession agreement. Any imbalances between the energy actually generated and the Assured Energy is covered by the ERM. The purpose of the ERM is to mitigate hydrological risks, guaranteeing that all participant plants in the ERM receive revenue related to their Assured Energy, irrespectively of the volume of energy generated by them. In other words, the ERM reallocated the energy, transferring surplus energy from those who generated in excess their Assured Energy to those who generated less than their Assured Energy. However, it is possible that this reallocation may correspond to an amount less than 100% of the Assured Energy of the participant plant and, if all the Assured Energy has been sold through long-term contracts, the participant plants would be exposed to the short-term market, paying for the balance at the PLD Price (the Differences Settlement Price).
ANEEL oversees rate regulations that govern access to the distribution and transmission systems and establish rates (i) for the use of the local distribution grid, or Distribution Usage Rates (TUSD), and (ii) for the use of the interconnected transmission grid, or Transmission Usage Rates (TUST). Additionally, distribution companies of the South/South-East interconnected system pay specific charges for the transmission of electricity generated at Itaipu. In recent years, the Federal Government has had a goal of improving the national transmission system, and as a result, certain transmission companies have engaged in significant expansion programs, which have been paid for by increases in transmission rates and charges. The increase in transmission rates and charges paid by distribution concessionaires are passed on to their respective customers through Annual Rate Adjustments. The following is a summary of each rate or charge:
The TUSD is paid by generation companies and Free Consumers for the use of the distribution system of the distribution concessionaire to which the relevant generator or Free Consumer is connected and are revised annually according to an inflation index and investments made by the distributors in the preceding year for the maintenance and expansion of the grid. The amount to be paid by the user connected to the distribution system is calculated by multiplying the amount of electricity contracted with the distribution concessionaire for each connection point, in kW, by the rate in R$/kW which is set by ANEEL.
The TUST is paid by generation companies and Free Consumers for the use of the basic transmission grid to which they are connected and are revised annually according to an inflation index and the annual revenue of the transmission companies. According to criteria established by ANEEL, owners of the different parts of the transmission grid have transferred the coordination of their facilities to the ONS in return for receiving regulated payments from the transmission system users. Network users, including generation companies, distribution companies and Free Consumers, have signed contracts with the ONS entitling them to use the transmission grid in return for the payment of published rates. Other parts of the grid that are owned by transmission companies but which are not considered part of the transmission grid are made available directly to the interested users who pay a specified fee.
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The TUST is currently based on the nodal costs calculated according to the long-range incremental costs methodology. Regulation by ANEEL changed the current criteria for determination of the TUST so that the physical location of the users of the transmission grid (near or far from the center of load) was taken into consideration. This change did not affect CEMIG Generation and Transmission.
In accordance with Law 9,648/98 power purchase contracts, known as Initial Contracts, have being reduced 25% since 2002. With this reduction the responsibility for payment of the TUST, which was previously paid by the distribution companies, has been transferred to generation companies. Generation companies are paying transmission charges on the basis of the amount of power demand sold to customers. Charges for load will be determined on the basis of maximum use of the transmission system during periods of peak usage.
ANEEL Inspection Charge
Energy Services Inspection Charge (TFSEE) was instituted by Law No. 9,427/96 and is regulated by Decree No. 2,410/97. TFSEE is an annual tax calculated based on the type of service (including independent production), and is proportional to the size of the concession, permission or authorization. The TFSEE is limited to 0.5% of the annual economic benefit earned by the concessionaire, permit holder or authorized party and must be paid directly to ANEEL in twelve monthly installments.
Until early 1993, two important principles dominated the rate-setting process in Brazil: (i) that electric utilities should be guaranteed an annual real rate of return of between 10% and 12%, known as the guaranteed return, on service-related assets included in the rate base and (ii) that the rates charged to each class of customer for electricity should be uniform throughout Brazil, notwithstanding the high costs of distribution to remote areas of the country. In cases where the rates set by the Federal Government resulted in returns below 10% or above 12%, shortfalls or excesses were credited or debited to each companys CRC Account. In general, until 1975, rates were set at levels that afforded the guaranteed return to companies in the sector. From 1975 through early 1993, however, rates were fixed at levels that in nearly all cases did not permit electric utilities to achieve the guaranteed return because the Federal Government sought to use lower rates to combat inflation. The practical effects of this rate-setting and compensation system were significant fluctuations in real terms in the level of rates during the period and a substantial increase in the CRC Account balances of most utilities.
Legislative changes in 1993 abolished the guaranteed return concept and the requirement that electricity rates be uniform throughout Brazil. Instead, each utility was to propose a rate structure based on its particular circumstances for approval by federal regulatory authorities. The proposed rate was to be calculated taking into account the concessionaires desired level of remuneration as well as, among other things, operating expenditures, including personnel costs, the costs of electricity purchased from other concession companies, certain construction costs, depreciation and amortization charges, taxes other than income taxes and other charges. This legislation abolished the CRC Accounts and permitted concessionaires with positive CRC Account balances to offset such balances against obligations of such concessionaires to the Federal Government, to federal financial institutions and to other concessionaires in the electricity sector. In connection with these regulatory reforms, the authorities granted electric utilities significant real rate increases and established a mechanism for automatic adjustments in rates to take account of inflation.
The concession agreements for distribution services executed with the Federal Government establish the maximum rates distribution concessionaires are allowed to charge their consumers.
Distribution rates are subject to review by ANEEL, which has the authority to adjust and review rates in response to changes in electricity purchase costs and market conditions. When adjusting distribution rates, ANEEL divides the costs of distribution companies between (1) costs that are beyond the control of the distributor, or Parcel A costs, and (2) costs that are under the control of the distributor, or Parcel B costs. The rate adjustment is based on a formula that takes into account the division of costs between the two categories.
Parcel A costs include, among others, the following:
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costs of electricity purchased for resale pursuant to Initial Contracts;
costs of electricity purchased from Itaipu;
costs of electricity purchased pursuant to bilateral agreements that are freely negotiated between parties; and
certain other charges for the transmission and distribution systems.
Parcel B costs are determined by subtracting all the Parcel A costs from the distribution companys revenues.
Each distribution companys concession agreement provides for an annual rate adjustment ( reajuste anual ). In general, Parcel A costs are fully passed through to consumers. Parcel B costs, however, are restated for inflation in accordance with General Market Price Index (Indice Geral de Preços do Mercado), or IGP-M index.
Concessionaires of electricity distribution are also entitled to periodic revisions ( revisão periódica ) every few years. These revisions are aimed at (1) assuring necessary revenues to cover efficient Parcel B operational costs and adequate compensation for investments deemed essential for the services within the scope of each such companys concession and (2) determining the X factor, which is based on three components: (a) expected gains of productivity from increase in scale, (b) evaluations by consumers (verified by ANEEL) and (c) labor costs.
The X factor is used to adjust the proportion of the change in the IGP-M index that is used in the annual adjustments. Accordingly, upon the completion of each periodic revision, application of the X factor requires distribution companies to share their productivity gains with final consumers.
In addition, concessionaires of electricity distribution are entitled to extraordinary review of rates ( revisão extraordinária ), on a case by case basis, to ensure their financial equilibrium and compensate them for unpredictable costs, including taxes, that significantly change their cost structure.
The New Industry Model Law introduced material changes to the regulation of the power industry with a view to providing incentives to private and public entities to build and maintain generation capacity that will assure the supply of electricity within Brazil at low rates through competitive electricity public bidding processes. The key features of the New Industry Model Law include:
Creation of two environments for the sale of energy with (i) a more stable market in terms of supply of energy, so as to provide an additional guarantee of supply to captive consumers, referred to as the Regulated Contracting Environment (ACR) or regulated market; and (ii) a market especially destined for certain participants (that is to say, Free Consumers and selling companies) which will permit a certain degree of competition in the context of the regulated market, known as the Free Contracting Environment (ACL), or free market.
Restrictions on certain activities of distributors, so as to permit them to focus on their core business to promote more efficient and reliable services to captive consumers.
Elimination of self-dealing, in order to provide an incentive to distributors to purchase electricity at the lowest available prices rather then buying electricity from related parties.
Respect for contracts executed prior to the New Industry Model Law, in order to provide regulatory stability to transactions carried out before its enactment.
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The New Industry Model Law also excluded Eletrobrás and its subsidiaries from the National Privatization Program, which is a program originally created by the Federal Government in 1990 with a view to promote the privatization process of state-owned companies.
Challenges to the Constitutionality of the New Industry Model Law
The New Industry Model Law is currently being challenged on constitutional grounds before the Brazilian Supreme Court. The Federal Government moved to dismiss the actions arguing that the constitutional challenges were moot because they related to a provisional measure that had already been converted into law. However, on August 4, 2004, the Brazilian Supreme Court denied the governments motion and decided to hear the actions and rule on their merits. A final decision on this matter is subject to majority vote of the 11 Justices, provided that a quorum of at least eight Justices must be present. To date, the Brazilian Supreme Court has not reached a final decision and we do not know when such a decision may be reached. Therefore, the New Industry Model Law is currently in force. Regardless of the Supreme Courts final decision, certain portions of the New Industry Model Law relating to restrictions on distributors performing activities unrelated to the distribution of electricity, including sales of energy by distributors to Free Consumers and the elimination of contracts between related parties are expected to remain in full force and effect.
If all or a portion of the New Industry Model Law is determined unconstitutional by the Brazilian Supreme Court, the regulatory scheme introduced by the New Industry Model Law may not come into effect, generating uncertainty as to how and when the Federal Government will be able to introduce changes to the electric energy sector. We have already contracted a significant portion of our electricity capacity and needs until 2013, and the pass-through to rates of such electricity is expected to continue to be governed by the regulation in effect on the date of the contract. As such, irrespective of the outcome of the Supreme Courts decision, we believe that in the short term, the effects of any such decision on our activities will be limited. Nevertheless, the exact effect of an unfavorable outcome of the legal proceedings on us is difficult to predict and it could have an adverse impact on our business and results of operations.
Coexistence of Two Electricity Trading Environments. Under the New Industry Model Law, electricity purchase and sale transactions will be carried out in two different market segments: (1) the regulated market, or the Pool, which contemplates the purchase by distribution companies through public bids of all electricity necessary to supply their customers and (2) the free market, which encompasses purchase of electricity by non-regulated entities (such as the Free Consumers and energy traders).
The electricity arising from (1) low capacity generation projects located near the consumption points (such as certain co-generation plants and the Small Hydroelectric Power Plants), (2) plants qualified under the Proinfa program, as defined below, and (3) Itaipu, will not be subject to the public bidding process for the supply of electricity to the Pool. The electricity generated by Itaipu, located on the border of Brazil and Paraguay, is traded by Eletrobrás and the Federal Government, by means of ANEEL, and determines the volumes that shall be mandatorily purchased by each distribution concessionaire. The rates at which the Itaipu-generated electricity is traded are denominated in U.S. dollars and established by ANEEL pursuant to a treaty between Brazil and Paraguay. As a consequence, Itaipu rates rise or fall in accordance with the variation of the U.S. Dollar/real exchange rate. Changes in the price of Itaipu-generated electricity are, however, subject to the Parcel A cost recovery mechanism.
In the regulated market, distribution companies will buy their forecast requirements for electricity for their captive consumers from the ACR through tender bids. The distribution companies will be obliged to acquire electricity from generators through a process administered by ANEEL, whether directly or through the CCEE. Any generator selling in the tender proceedings must sign sale contracts with all the companies of the interlinked grid system.
Energy purchases, sold by the ACR in tender proceedings, will take place through two types of bilateral contract: (i) Energy Quantity Contracts and (ii) Energy Availability Contracts. Under an Energy Quantity Contract, a generator commits to supply a certain amount of electricity and assumes the risk that electricity supply could be adversely affected by hydrological conditions and low reservoir levels, among other conditions, that could interrupt
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the supply of electricity, in which case the generator will be required to purchase the electricity elsewhere in order to comply with its supply commitments. Under an Energy Availability Contract, a generator commits to make a certain amount of capacity available to the ACR. In this case, the revenue of the generator is guaranteed and the distributors face the risk of a supply shortage. Together, these agreements comprise the energy purchase agreements in the ACR ( Contratos de Comercialização de Energia no Ambiente Regulado , or CCEAR).
The CCEARs will allow reductions in the amounts contracted as a function of: (i) up to 4% of the amounts contracted, each year, due to a reduction in the market projected for the following years; (ii) clients leaving to migrate to the free environment; and (iii) purchases of electricity contracted up to March 15, 2004 (the date of Law 10,848/04).
Under the New Industry Model Law, the estimate of demand from distributors is the principal factor in determining how much electricity the system as a whole will contract. Under the new system, distributors are obligated to contract 100% of their projected electricity needs, as opposed to 95% under the previous regime. A deviation in actual demand from projected demand could result in penalties to distributors, but this remains subject to implementation.
Under the New Industry Model Law and Decree 5,163 of June 30, 2004, electricity distribution companies, provided they accurately forecast their demand, will be allowed to pass through to the rates charged to their consumers, all the costs related to electricity which they have purchased in tender bids, and also any sector charges and taxes related to the tender bids.
According to the New Industry Model Law, although subject to further regulation, electricity distribution entities will be entitled to pass through to their respective customers, in the form of higher rates, all costs related to electricity they purchased through public bids as well as any taxes and industry charges related to the public bids.
The free market will cover freely negotiated electricity sales between generation concessionaires, IPPs, self-generators, energy traders, importers of energy and Free Consumers. The free market will also include existing bilateral contracts between generators and distributors until they expire. Upon expiration, such contracts must be executed under the New Industry Model Law guidelines.
A consumer that is eligible to choose its supplier may only be able to rescind its contract with the local distributor by notifying such distributor up to three years in advance.
Once a consumer has opted for the free market, it may only return to the regulated system once it has given the distributor of its region five years notice, provided that the distributor may reduce such term at its discretion. Such an extended period of notice seeks to assure that, if necessary, the construction of cost efficient new generation could be finalized in order to supply the re-entry of Free Consumers into the regulated market. State-owned generators may sell electricity to Free Consumers, but as opposed to private generators, they are obliged to do so through an auction process.
Industrial customers who purchase their electricity from distributors in the regulated market do so at a subsidized price. This subsidy, known as the cross-subsidy, is being gradually eliminated by ANEEL, and its full termination is scheduled for 2007. Those consumers purchasing at the regulated market whose demand exceeds 3MW connected at a voltage equal to or higher than 69 kV if supply began before July 7, 1995 or at any voltage if supply began later, or Potentially Free Consumers, are required to enter into separate contracts for the connection and use of the transmission or distribution lines and for the purchase of power. We believe that Potentially Free Consumers will migrate to the free market once the subsidy has been phased out and that the purchase price of electricity in the free market will continue to be relatively low due to excess electricity generation in Brazil. Potentially Free Consumers may elect to opt out of our regulated distribution system upon the expiration of their contracts.
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Distributors in the interconnected Brazilian grid are not permitted to (1) develop activities related to the generation or transmission of electricity, (2) sell electricity to Free Consumers, except for those in their concession area and under the same conditions and rates maintained with respect to captive customers in the ACR, (3) hold, directly or indirectly, any interest in any other company, corporation or partnership or (4) develop activities that are unrelated to their respective concessions, except for those permitted by law or in the relevant concession agreement. Generators will not be allowed to hold equity interests in excess of 10% in distributors. The New Industry Model Law has granted a transition period of 18 months for companies to adjust to these rules, and ANEEL can extend such term for another 18 months in the event that companies are unable to comply with such requirements within the prescribed timeframe.
Since the purchase of electricity for captive customers will be performed through the ACR, so-called self-dealing, when distributors were permitted to meet up to 30% of their electricity needs through electricity that was acquired from affiliated companies, is no longer permitted, except in the context of agreements that were duly approved by ANEEL before the enactment of the New Industry Model Law. Distributors may, however, make purchases from affiliated companies if the distributor participates in the public bidding process through the ACR, and the generator that bids the lowest price is an affiliated party.
The New Industry Model Law provides that the contracts executed by electricity distribution companies and approved by ANEEL before the enactment of the New Industry Model Law will not be amended to reflect any extension in their terms or modification in prices or volumes of electricity already contracted, with the exception of Initial Contracts, as described below.
During the transition period to a free and competitive energy market (1998-2006) that was established by the Power Industry Law, purchases and sales of electricity between generation and distribution concessionaires must occur pursuant to Initial Contracts. The purpose of the transition period was to permit the gradual introduction of competition in the industry and to protect market participants against exposure to potentially volatile spot market prices.
Under the Power Industry Law, electricity committed to Initial Contracts is reduced by 25% each year from 2002 to 2005. Generation companies will be allowed to trade their excess, non-contracted electricity in the ACR or in the free electricity market and may conduct public auctions to trade any non-contracted volumes with Free Consumers or energy traders. When the Initial Contracts expire, which is expected to be in 2005, all electricity will be negotiated in the ACR or in the free market.
Electricity Purchases under the New Industry Model Law
Decree 5,163/04 provides that all electricity-purchasing agents (agentes compradores) must contract all of their electricity demand necessary to serve 100% of their markets under the guidelines of the New Industry Model Law. Electricity-selling agents (agentes vendedores) must provide evidentiary support linking the allotted energy to be sold to existing or planned power generation facilities. Agents that do not comply with such requirements are subject to penalties imposed by ANEEL.
Beginning in 2005, all electricity distribution companies are required to notify MME, by August 1 of each year, of their estimated electricity demand for each of the subsequent five years. In addition, distribution companies will be required to specify the portion of the amount they intend to contract to supply its Potentially Free Consumers.
The MME will establish the total amount of energy to be traded in the regulated market and the list of generation facilities that will be allowed to participate in the auctions in each year.
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The new regulations provide for electricity distribution companies
to fulfill their electricity supply obligations primarily through public
auctions, in accordance with the procedures described in
The 2004 Auction and Subsequent Auctions below.
In addition to these auctions, a distribution company may purchase electricity: (1) from generation companies that are connected directly to the distribution company, (2) from electricity generation projects participating in the Proinfa Program, and (3) from Itaipu.
The 2004 Existing Energy Auction
On December 7, 2004, ANEEL coordinated the conduction by CCEE of the first auction under the procedures and conditions established by the New Industry Model Law.
Distributors delivered by December 2, 2004 their declaration of estimated contracting demand for the next five years (including a portion related to the Potentially Free Consumers). Based on these declarations, the MME established the total amount of energy to be traded in the 2004 auction. The auction was held in two phases, through an electronic system.
In the first phase, negotiations took place in multiple rounds, in each of which energy sellers offered blocks of energy ( blocos de energia ) at a specific price (the current price) to be delivered within a proposed time. The sizes of the blocks of energy and their respective delivery times were set in advance by the MME. The first phase ceased when no offers to sell were made in a round and the current prices were equal to or lower than the reserve prices.
The second phase had a single round, in which sellers that made valid offers in the first phase could make new offers for each block of energy.
Following the conclusion of the 2004 auction, the distribution companies and sellers executed CCEARs setting forth the terms, conditions, prices and contracted amounts of electricity. The distributor was also required to provide security interests in connection with the CCEARs. Generally, the seller will be granted an interest in receivables in an amount equal to 110.0% of the average amount of the last three invoices under the CCEAR.
During the auction, a total of 17,008 MW were sold, corresponding to 96.0% of the distribution companies total demand, of which 9,054 MW were sold at an average price of R$57.51/MWh for eight-year contracts beginning in 2005; 6,782 MW were sold at an average price of R$67.33/MWh for eight-year contracts beginning in 2006; and 1,172 MW were sold at an average price of R$75.46/MWh for eight-year contracts beginning in 2007.
We sold 65,008,656 MWh through our generation company at an average price of R$69.58/MWh for eight-year contracts beginning in 2006 and acquired 37,180,042 MWh at an average price of R$57.51/MWh for eight-year contract beginning in 2005; and 64,457,335 MWh at an average price of R$67.33/MWh for eight-year contracts beginning in 2006.
The security interests offered by the distributors to the generators in connection with the CCEARs are usually in the form of receivables or bank certificates of deposit. In a few cases, bank guarantees have been used.
In April 2005, the second electricity auction under the New Industry Model Law for the electricity sector was held. In this auction, Cemig Distribution and Cemig Generation and Transmission made electricity purchase and sale contracts.
During the auction, a total of 1,325 MW were sold, corresponding to only 42% of the energy initially foreseen by the MME for 2008, at an average price of R$83.13/MWh for eight-year contracts beginning in 2008. The energy to be sold with delivery initiating in 2009 was automatically excluded from the auction in accordance with the rules determined by MME, as the price for this product during the auction reached a value that was below
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the market expectations. By the end of 2005, the MME is expected to present a solution under which the distributors can achieve the contracting of 100% of their energy demand from 2008 to 2010.
Cemig Distribution purchased, to serve its market, 105 average MW in contracts with eight-year terms, with the supply starting on January 1, 2008, at an average price of R$83.13/MWh. The contracts were signed with 10 companies holding generation concessions, including Cemig Generation and Transmission.
In the same auction, Cemig Generation and Transmission sold 105 average MW in contracts with eight-year terms, with the supply beginning on January 1, 2008. The sale price of the electricity is R$83.50/MWh. The contracts were signed with 34 distributors, including Cemig Distribution, which serve consumers in all the regions of the Brazilian national grid system
Subsequent Auctions
Electricity auctions for new generation projects will be held (1) five years before the initial delivery date (referred to as A-5 auctions), and (2) three years before the initial delivery date (referred to as A-3 auctions). There will also be electricity auctions from existing power generation facilities (1) held one year before the initial delivery date (referred to as A-1 auctions) and (2) held no longer than four months before the delivery date (referred to as market adjustments). The invitations to bid in the auctions will be prepared by ANEEL, in compliance with guidelines established by the MME.
Each generation company that succeeds in the auctions will execute a power purchase agreement with each distribution company, in proportion to the distribution companies respective estimated demand for electricity. The only exception to these rules relate to the market adjustment auction, where the contracts will be between specific selling and distribution companies. The CCEAR of both A-5 and A-3 auctions will have a term of between 15 and 30 years, and the CCEAR of A-1 auctions will have a term between five and 15 years. Contracts arising from market adjustment auctions will be limited to a two-year term.
Reduction of the Level of Contracted Electricity
Decree No. 5,163/04, which regulates the trade of electricity under the New Industry Model Law, allows distribution companies to reduce their CCEARs: (1) to compensate for the exit of Potentially Free Consumers from the regulated market, pursuant to a specific declaration delivered to MME, (2) by up to 4.0% per year of the initial contracted amount due to market deviations from the estimated market projections, at the distribution companies discretion, beginning two years after the initial electricity demand was declared and (3) in the event of increases in the amounts of electricity acquired pursuant to contracts entered into before March 17, 2004.
The circumstances in which the reduction of the level of contracted electricity will occur will be duly set forth in the CCEARs, and may be exercised at the sole discretion of the distribution company and in compliance with the provisions described above and ANEEL regulations.
Limitation on Pass-Through
The rules also limit the pass-through of costs of electricity to final customers. The Annual Reference Value corresponds to the weighted average of the electricity prices in the A-5 and A-3 auctions, calculated for all distribution companies, and creates an incentive for distribution companies to contract for their expected electricity demands in the A-5 auctions, where the prices are expected to be lower than in A-3 auctions. The Annual Reference Value will be applied in the first three years of the power purchase agreements from new power generation projects. After the fourth year, the electricity acquisition costs from these projects will be allowed to be fully passed-through. The decree establishes the following limitations on the ability of distribution companies to pass through costs to customers:
no pass-through of costs for electricity purchases that exceed 103% of actual demand;
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limited pass-through of costs for electricity purchases made in an A-3 auction, if the volume of the acquired electricity exceeds 2.0% of the demand verified in A-5 auctions;
limited pass-through of electricity acquisition costs from new electricity generation projects if the volume re-contracted through CCEARs of existing generation facilities is below a Contracting Limit defined by Decree No. 5,163;
from 2006 to 2009, electricity purchases from existing facilities in the A-1 auction is limited to 1.0% of distribution companies demand. If the acquired electricity in the A-1 auction exceeds 1.0%, pass-through of costs of the exceeding portion to final customers is limited to 70.0% of the average value of such acquisition costs of electricity generated by existing generation facilities. The MME will establish the maximum acquisition price for electricity generated by existing projects; and
if distributors do not comply with the obligation to fully contract their demand, the pass-through of the costs from energy acquired in the short-term market will be the equivalent to the lower of the PLD or the Annual Reference Value.
The New Industry Model Law establishes that, in a situation where the Federal Government decrees a compulsory reduction in the consumption of electricity in a certain region, all energy amount agreements in the regulated market, registered within the CCEE in which the buyer is located, shall have their volumes adjusted in the same proportion to the consumption reduction.
Brazilian environmental legislation requires that environmental licenses must be obtained wherever there is construction, installation, expansion or operation of any undertaking that uses natural resources, causes environment degradation, pollutes or has the potential to cause degradation or pollution to the environment.
New generation, transmission or distribution projects or activities that expand the electricity sector require a series of environmental procedures to be complied with. Environmental impact studies are prepared by multi-disciplinary teams, which analyze the environmental impact and propose solutions to minimize the effects of these projects on the environment.
The environmental impact studies are then submitted to the federal or state authorities for examination, and also, in public hearings, to the population of the communities affected by the project.
The process of licensing of undertakings with significant environmental impact follows a three-phase procedure, in which the following licenses have to be acquired:
prior license , attesting that the project is environmentally viable;
installation license , enabling the work to be built; and
operation license , for actual startup of the project.
For the following undertakings, the application must be made to the federal environmental body:
those located on international borders or developed in conjunction with an adjoining country, or in territorial waters, on the continental shelf, in an exclusive economic zone, on indigenous lands or in federal protected areas;
locations or developments in more than one Brazilian state;
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where the direct environmental impacts surpass the countrys territorial limits or the limit of one or more Brazilian state; or
where radioactive material is involved, or nuclear energy used.
Applications for the following types of project have to be made to the environmental bodies of the relevant Brazilian state:
those located or developed in more than one municipality, or in state or Federal District conservation areas;
those located or developed in forests or other forms of natural vegetation subject to permanent preservation;
those whose direct environmental impacts exceed the territorial limits of one or more municipalities; or
when delegated, by legal instrument or agreement, by the union to the states or to the Federal District.
The municipal environmental body, after acquiring a position statement from the competent bodies of the federal government, and the states or Federal District, as applicable, gives the environmental license for projects and activities with local environmental impact, and for any which are delegated by the state, by legal instrument or agreement.
Finally, projects with significant environmental impact are obliged by law to allocate a minimum of 0.5% of their total investment costs to environmental compensation.
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Companhia Energética de Minas Gerais CEMIG |
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Financial Statements as of December 31, 2004 and 2003 and for the Years Ended December 31, 2004, 2003 and 2002 and Report of Independent Registered Public Accounting Firm |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Companhia Energética de Minas Gerais CEMIG
Belo Horizonte MG, Brazil
We have audited the accompanying consolidated balance sheets of COMPANHIA ENERGÉTICA DE MINAS GERAIS - CEMIG (a Brazilian corporation) and its subsidiaries (the Company) as of December 31, 2004 and 2003, and the related consolidated statements of operations and comprehensive income (loss), changes in shareholders equity and cash flows for each of the three years in the period ended December 31, 2004, all expressed in Brazilian reais . These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of Companhia Energética de Minas Gerais CEMIG and its subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.
May 17, 2005 |
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/s/ Deloitte Touche Tohmatsu |
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F-2
COMPANHIA ENERGÉTICA DE MINAS GERAIS - CEMIG
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(Expressed in millions of Brazilian reais )
ASSETS
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December 31, |
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2004 |
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2003 |
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CURRENT ASSETS: |
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Cash and cash equivalents (note 6) |
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874 |
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440 |
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Restricted investments (note 7) |
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|
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72 |
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Accounts receivable, net (note 8) |
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1,183 |
|
1,050 |
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Accounts receivable - use of basic transmission network |
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28 |
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29 |
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Deferred regulatory assets (note 4) |
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836 |
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633 |
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Deferred income taxes benefits (note 5) |
|
149 |
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114 |
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Recoverable taxes (note 9) |
|
108 |
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108 |
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Materials and supplies |
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19 |
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22 |
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Receivable from Federal Government in respect of bonus paid and rationing adoption costs incurred |
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9 |
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Receivable from Federal Government related to low-income consumers |
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9 |
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40 |
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Other |
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160 |
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113 |
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3,366 |
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2,630 |
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INVESTMENTS (note 10) |
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128 |
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12 |
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|
|
|
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PROPERTY, PLANT AND EQUIPMENT, NET (note 11) |
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11,191 |
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10,917 |
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OTHER ASSETS: |
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Deferred regulatory assets (note 4) |
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2,929 |
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2,069 |
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Account receivable from Minas Gerais State Government (note 3) |
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1,097 |
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891 |
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Recoverable taxes (note 9) |
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141 |
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116 |
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Accounts receivable, net (note 8) |
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78 |
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91 |
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Deferred income taxes benefits (note 5) |
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165 |
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175 |
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Restricted investments (note 7) |
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20 |
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60 |
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Receivable from Federal Government in respect of bonus paid and rationing adoption costs incurred |
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23 |
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Other |
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137 |
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135 |
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4,567 |
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3,560 |
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Total assets |
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19,252 |
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17,119 |
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The accompanying notes are an integral part of the consolidated financial statements.
F-3
COMPANHIA ENERGÉTICA DE MINAS GERAIS - CEMIG
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(Expressed in millions of Brazilian reais , except share amounts)
LIABILITIES AND SHAREHOLDERS EQUITY
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December 31, |
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2004 |
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2003 |
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CURRENT LIABILITIES: |
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Accounts payable to suppliers (note 12) |
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648 |
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618 |
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Payroll and related charges |
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189 |
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199 |
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Taxes payable (note 13) |
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480 |
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321 |
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Dividends and interest on capital |
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470 |
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241 |
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Current portion of long-term financing (note 14) |
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1,417 |
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1,660 |
|
Regulatory charges payable (note 15) |
|
155 |
|
134 |
|
Employee post-retirement benefits (note 16) |
|
200 |
|
185 |
|
Employee profit sharing |
|
63 |
|
51 |
|
Other |
|
171 |
|
120 |
|
|
|
3,793 |
|
3,529 |
|
LONG-TERM LIABILITIES: |
|
|
|
|
|
Long-term financing (note 14) |
|
2,750 |
|
2,331 |
|
Employee post-retirement benefits (note 16) |
|
1,606 |
|
1,023 |
|
Deferred income taxes (note 5) |
|
874 |
|
798 |
|
Accrued liability for contingencies (note 17) |
|
414 |
|
354 |
|
Accounts payable to suppliers (note 12) |
|
246 |
|
325 |
|
Taxes payable (note 13) |
|
166 |
|
100 |
|
Other |
|
173 |
|
108 |
|
|
|
6,229 |
|
5,039 |
|
|
|
|
|
|
|
MINORITY INTEREST |
|
21 |
|
27 |
|
SHAREHOLDERS EQUITY: (note 18) |
|
|
|
|
|
Capital stock - |
|
|
|
|
|
Preferred 91,210,523 thousand shares authorized, issued and outstanding as of December 31, 2004 and 2003 |
|
804 |
|
804 |
|
Common 70,874,168 thousand shares authorized, issued and outstanding as of December 31, 2004 and 2003 |
|
624 |
|
624 |
|
|
|
1,428 |
|
1,428 |
|
Additional paid-in capital |
|
3,170 |
|
3,170 |
|
Appropriated retained earnings |
|
2,693 |
|
2,693 |
|
Unappropriated retained earnings |
|
2,449 |
|
1,290 |
|
Accumulated other comprehensive loss |
|
(531 |
) |
(57 |
) |
|
|
9,209 |
|
8,524 |
|
Total liabilities and shareholders equity |
|
19,252 |
|
17,119 |
|
The accompanying notes are an integral part of the consolidated financial statements.
F-4
COMPANHIA ENERGÉTICA DE MINAS GERAIS CEMIG
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in millions of Brazilian reais , except share and per share amounts)
|
|
Years ended December 31, |
|
||||
|
|
2004 |
|
2003 |
|
2002 |
|
NET OPERATING REVENUES: |
|
|
|
|
|
|
|
Electricity sales to final customers (note 19) |
|
8,561 |
|
7,179 |
|
5,458 |
|
Regulatory extraordinary rate adjustment (note 4) |
|
89 |
|
63 |
|
281 |
|
Deferred rate adjustment (note 4) |
|
640 |
|
199 |
|
|
|
Electricity sales to the interconnected power system (note 19) |
|
36 |
|
56 |
|
161 |
|
Use of basic transmission network |
|
245 |
|
257 |
|
185 |
|
Other operating revenues (note 19) |
|
536 |
|
468 |
|
260 |
|
Taxes on revenues (note 19) |
|
(2,453 |
) |
(2,190 |
) |
(1,473 |
) |
Total net operating revenues |
|
7,654 |
|
6,032 |
|
4,872 |
|
OPERATING COSTS AND EXPENSES: |
|
|
|
|
|
|
|
Electricity purchased for resale (note 20) |
|
(1,477 |
) |
(1,396 |
) |
(1,333 |
) |
Natural gas purchased for resale |
|
(268 |
) |
(246 |
) |
(152 |
) |
Use of basic transmission network |
|
(586 |
) |
(310 |
) |
(298 |
) |
Depreciation and amortization |
|
(677 |
) |
(686 |
) |
(666 |
) |
Personnel (note 20) |
|
(788 |
) |
(710 |
) |
(532 |
) |
Regulatory charges (note 20) |
|
(861 |
) |
(585 |
) |
(548 |
) |
Third-party services |
|
(329 |
) |
(325 |
) |
(265 |
) |
Employee post-retirement benefits (note 16) |
|
(153 |
) |
(109 |
) |
(207 |
) |
Materials and supplies |
|
(83 |
) |
(88 |
) |
(78 |
) |
Gain on Gasmig Sale |
|
102 |
|
|
|
|
|
Other (note 20) |
|
(407 |
) |
(422 |
) |
(238 |
) |
Reversion (provision) for loss on deferred regulatory assets (note 4) |
|
(9 |
) |
174 |
|
(28 |
) |
Total operating costs and expenses |
|
(5,536 |
) |
(4,703 |
) |
(4,345 |
) |
Operating income |
|
2,118 |
|
1,329 |
|
527 |
|
|
|
|
|
|
|
|
|
FINANCIAL INCOME (EXPENSES), NET (note 21) |
|
350 |
|
674 |
|
(525 |
) |
Income before income taxes and minority interests |
|
2,468 |
|
2,003 |
|
2 |
|
INCOME TAXES - (EXPENSE) BENEFIT: (note 5) |
|
|
|
|
|
|
|
Current |
|
(543 |
) |
(224 |
) |
(187 |
) |
Deferred |
|
(188 |
) |
(383 |
) |
161 |
|
|
|
(731 |
) |
(607 |
) |
(26 |
) |
MINORITY INTERESTS |
|
2 |
|
|
|
12 |
|
NET INCOME (LOSS) |
|
1,739 |
|
1,396 |
|
(12 |
) |
OTHER COMPREHENSIVE INCOME (LOSS): |
|
|
|
|
|
|
|
Unrealized holding gains (losses) on available-for-sale securities |
|
|
|
|
|
|
|
Unrealized holding gains arising during period |
|
66 |
|
(17 |
) |
|
|
Less: reclassification adjustment for gains included in net income |
|
|
|
(76 |
) |
|
|
Minimum pension liability adjustment (note 16) |
|
(717 |
) |
(87 |
) |
378 |
|
Deferred income taxes (expense) benefits |
|
243 |
|
33 |
|
(119 |
) |
|
|
(474 |
) |
(64 |
) |
242 |
|
COMPREHENSIVE INCOME |
|
1,265 |
|
1,332 |
|
230 |
|
Weighted average number of common and preferred shares outstanding during the year (thousand) for purposes of calculating basic and diluted earnings (loss) per thousand shares |
|
162,084,691 |
|
162,084,691 |
|
161,033,699 |
|
Basic and diluted earnings (loss) per thousand common and preferred shares - In Brazilian reais |
|
10.73 |
|
8.61 |
|
(0.07 |
) |
The accompanying notes are an integral part of the consolidated financial statements.
F-5
COMPANHIA ENERGÉTICA DE MINAS GERAIS - CEMIG
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in millions of Brazilian reais )
|
|
Years ended December 31, |
|
||||
|
|
2004 |
|
2003 |
|
2002 |
|
CAPITAL STOCK: |
|
|
|
|
|
|
|
Preferred - |
|
|
|
|
|
|
|
Balance, beginning of year |
|
804 |
|
804 |
|
786 |
|
Transfer from appropriated retained earnings |
|
|
|
|
|
18 |
|
Balance, end of year |
|
804 |
|
804 |
|
804 |
|
|
|
|
|
|
|
|
|
Common - |
|
|
|
|
|
|
|
Balance, beginning of year |
|
624 |
|
624 |
|
610 |
|
Transfer from appropriated retained earnings |
|
|
|
|
|
14 |
|
Balance, end of year |
|
624 |
|
624 |
|
624 |
|
|
|
1,428 |
|
1,428 |
|
1,428 |
|
ADDITIONAL PAID-IN CAPITAL |
|
3,170 |
|
3,170 |
|
3,170 |
|
APPROPRIATED RETAINED EARNINGS: |
|
|
|
|
|
|
|
Fiscal incentive investment reserve- |
|
|
|
|
|
|
|
Balance, beginning of year |
|
45 |
|
45 |
|
45 |
|
Transfer from unappropriated retained earnings |
|
|
|
|
|
|
|
Balance, end of year |
|
45 |
|
45 |
|
45 |
|
Rate shortfall reserve- |
|
|
|
|
|
|
|
Balance, beginning of year |
|
2,648 |
|
2,648 |
|
2,680 |
|
Transfer to capital stock |
|
|
|
|
|
(32 |
) |
Balance, end of year |
|
2,648 |
|
2,648 |
|
2,648 |
|
Unrealized income reserve- |
|
|
|
|
|
|
|
Balance, beginning of year |
|
|
|
|
|
314 |
|
Transfer to unappropriated retained earnings |
|
|
|
|
|
(314 |
) |
Balance, end of year |
|
|
|
|
|
|
|
Legal reserve- |
|
|
|
|
|
|
|
Balance, beginning of year |
|
|
|
|
|
94 |
|
Transfer to unappropriated retained earnings |
|
|
|
|
|
(94 |
) |
Balance, end of year |
|
|
|
|
|
|
|
|
|
2,693 |
|
2,693 |
|
2,693 |
|
UNAPPROPRIATED RETAINED EARNINGS: |
|
|
|
|
|
|
|
Balance, beginning of year |
|
1,290 |
|
144 |
|
79 |
|
Net income (loss) |
|
1,739 |
|
1,396 |
|
(12 |
) |
Transfer from appropriated retaining earnings |
|
|
|
|
|
408 |
|
Dividends and interest on capital |
|
(580 |
) |
(250 |
) |
(331 |
) |
Balance, end of year |
|
2,449 |
|
1,290 |
|
144 |
|
|
|
|
|
|
|
|
|
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS): |
|
|
|
|
|
|
|
Balance, beginning of year |
|
(57 |
) |
7 |
|
(235 |
) |
Unrealized holding gains arising during period |
|
|
|
44 |
|
|
|
Less: reclassification adjustment for gains included in net income |
|
|
|
(51 |
) |
|
|
Other comprehensive income (loss) |
|
(474 |
) |
(57 |
) |
242 |
|
Balance, end of year |
|
(531 |
) |
(57 |
) |
7 |
|
Shareholders equity at end of year |
|
9,209 |
|
8,524 |
|
7,442 |
|
The accompanying notes are an integral part of the consolidated financial statements.
F-6
COMPANHIA ENERGÉTICA DE MINAS GERAIS - CEMIG
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in millions of Brazilian reais )
|
|
Years ended December 31, |
|
||||
|
|
2004 |
|
2003 |
|
2002 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
Net income (loss) |
|
1,739 |
|
1,396 |
|
(12 |
) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities |
|
|
|
|
|
|
|
Depreciation and amortization |
|
677 |
|
686 |
|
666 |
|
Deferred regulatory assets and liabilities |
|
(598 |
) |
(67 |
) |
(432 |
) |
Monetary variation and exchange rate variation loss (gain) |
|
(627 |
) |
(766 |
) |
342 |
|
Loss on disposal of property, plant and equipment |
|
29 |
|
61 |
|
42 |
|
Employee post-retirement benefits |
|
(118 |
) |
(152 |
) |
24 |
|
Provision for contingencies and doubtful accounts receivable |
|
146 |
|
117 |
|
45 |
|
Provision (reversal) for loss on deferred regulatory assets |
|
9 |
|
(174 |
) |
28 |
|
Deferred income taxes |
|
188 |
|
383 |
|
(161 |
) |
Gain on sale of Gasmig |
|
(102 |
) |
|
|
|
|
Other |
|
(31 |
) |
15 |
|
(38 |
) |
|
|
|
|
|
|
|
|
Decrease (increase) in operating assets- |
|
|
|
|
|
|
|
Accounts receivable |
|
(196 |
) |
(316 |
) |
(410 |
) |
Recoverable taxes |
|
(25 |
) |
(121 |
) |
38 |
|
Account receivable from State Government |
|
49 |
|
28 |
|
|
|
Receivable from Federal Government in respect of bonus paid and rationing adoption costs incurred, net of surcharge applied to consumers |
|
|
|
20 |
|
45 |
|
Other |
|
117 |
|
(40 |
) |
(129 |
) |
|
|
|
|
|
|
|
|
Increase (decrease) in operating liabilities- |
|
|
|
|
|
|
|
Accounts payable to suppliers |
|
(101 |
) |
(723 |
) |
289 |
|
Payroll and related charges |
|
(25 |
) |
91 |
|
11 |
|
Taxes payable |
|
240 |
|
198 |
|
125 |
|
Regulatory charges payable |
|
21 |
|
40 |
|
42 |
|
Advance billings of electric power |
|
|
|
|
|
(42 |
) |
Accrued interest on long-term financing and short-term loans |
|
3 |
|
(111 |
) |
253 |
|
Other |
|
143 |
|
93 |
|
6 |
|
Net cash provided by operating activities |
|
1,538 |
|
658 |
|
732 |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
Restricted investments |
|
|
|
62 |
|
426 |
|
Proceeds from sale of Gasmig |
|
154 |
|
|
|
|
|
Sale of marketable securities |
|
|
|
119 |
|
|
|
Acquisition of new investments |
|
(10 |
) |
(4 |
) |
(103 |
) |
Acquisition of property, plant and equipment |
|
(1,061 |
) |
(1,029 |
) |
(869 |
) |
Net cash used in investing activities |
|
(917 |
) |
(852 |
) |
(546 |
) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
Proceeds from issuance of long-term financing |
|
1,230 |
|
717 |
|
518 |
|
Repayment of long-term financing and short-term loans |
|
(1,424 |
) |
(826 |
) |
(597 |
) |
Advance from minority shareholder for future capital increase in subsidiary |
|
|
|
|
|
12 |
|
Proceeds from short-term loans |
|
316 |
|
820 |
|
|
|
Dividends and interest on capital paid |
|
(309 |
) |
(200 |
) |
(214 |
) |
Net cash provided by (used in) financing activities |
|
(187 |
) |
511 |
|
(281 |
) |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
434 |
|
317 |
|
(95 |
) |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS: |
|
|
|
|
|
|
|
Beginning of the year |
|
440 |
|
123 |
|
218 |
|
End of the year |
|
874 |
|
440 |
|
123 |
|
|
|
434 |
|
317 |
|
(95 |
) |
|
|
|
|
|
|
|
|
SUPPLEMENTARY CASH FLOWS DISCLOSURE: |
|
|
|
|
|
|
|
Taxes paid - income taxes |
|
225 |
|
169 |
|
42 |
|
Interest paid, net of interest capitalized |
|
383 |
|
405 |
|
285 |
|
The accompanying notes are an integral part of the consolidated financial statements.
F-7
COMPANHIA ENERGÉTICA DE MINAS GERAIS - CEMIG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
(Amounts expressed in millions of Brazilian reais , unless otherwise indicated)
1. THE COMPANY AND ITS OPERATIONS
(a) The Company:
Companhia Energética de Minas Gerais CEMIG (CEMIG or the Company), a partly state-owned company, organized under the laws of the Federative Republic of Brazil (Brazil) and publicly traded, is an electric power public utility concessionaire controlled by the Government of the State of Minas Gerais, Brazil (the State Government). Its principal activities are the construction and operation of systems used in the production, transformation, transmission, distribution and sale of electric energy, as well as in certain related business activities.
As a concessionaire of electric utility services, the Company is subject to regulations set by the Agência Nacional de Energia Elétrica (the Brazilian National Electric Energy Agency or ANEEL), an agency of the Brazilian Federal Government (the Federal Government).
The Company has equity interests in the following operating companies as of December 31, 2004:
Sá Carvalho S.A. (Sá Carvalho) (100.00% interest) - Its principal activities are the generation and sale of electric energy from the Sá Carvalho hydroelectric power plant, as an electric energy public service concessionaire.
Usina Térmica Ipatinga S.A. (Ipatinga) (100.00% interest) - Its principal activities are the generation and sale of electric energy, as an independent power producer, at the Ipatinga thermoelectric power plant located at the facilities of Usinas Siderúrgicas de Minas Gerais S.A. USIMINAS.
Companhia de Gás de Minas Gerais - GASMIG (GASMIG) (55.19% interest) - Its principal activities are the acquisition, transportation and distribution of natural gas and related products. GASMIG was granted a concession by the State Government to distribute gas in the State of Minas Gerais. GASMIGs bylaws also permit the performance of activities related to the exploration, production and storage of natural gas; these activities, however, are not currently being performed. CEMIG sold 40.00% of its interest in GASMIG in December 2004, as mentioned in Note 10.
Empresa de Infovias S.A. (99.93% interest) - Its principal activities are rendering telecommunications services and developing activities related thereto, through multiservice networks using optical fiber cable, coaxial cable and other electronic equipment. Empresa de Infovias S.A. owns 69.25% of the capital stock of Way TV Belo Horizonte S.A., a cable TV and internet services provider in certain cities of the State of Minas Gerais. Empresa de Infovias S.A. began operations in January 2001 and its subsidiary WAY TV Belo Horizonte S.A. began operations in 2002. These businesses are considered strategic for CEMIGs existing infrastructure. The telecommunications business will require additional investments to be considered complete and competitive. Periodic evaluations of Empresa de Infovias S.A. and WAY TV are performed in order to determine their ability to run their businesses on a stand-alone and profitable basis, as well as to determine the need for an impairment reserve for the assets of this subsidiary. Currently available projections did not reveal the need for such an impairment reserve.
F-8
Efficientia S.A. (Efficientia) (100.00% interest) - Its principal activities are rendering efficiency, optimization and energy solutions services through studies and carrying out of projects, as well as providing operating and maintenance services, to energy supply facilities.
Horizontes Energia S.A. (Horizontes) (100.00% interest) - Its principal activities are the generation and sale of electric energy, as an independent power producer, at the Machado Mineiro and Salto do Paraopeba hydroelectric power plants, located in the State of Minas Gerais, and the Salto Voltão and Salto do Passo Velho hydroelectric power plants, located in the State of Santa Catarina.
Central Termelétrica de Cogeração S.A. (Cogeração) (48.50% interest) Its principal activities are the generation and sale of electric energy, as an independent power producer, through the construction and operation of the Barreiro thermoelectric power plant, located on Vallourec & Mannesmann Tubess facilities, in the Minas Gerais State.
Rosal Energia S.A. (Rosal) (100.00% interest) Its principal activities are the generation and sale of electric energy as an electric energy public service concessionaire through Rosal hydroelectric plant, located on the border between Rio de Janeiro and Espírito Santo States. The plant was acquired in 2004, as mentioned in note 10.
CEMIG also has an interest in the following development-stage companies as of December 31, 2004:
Cemig Geração e Transmissão S.A. (Cemig Generation and Transmission) (100.00% interest) - Its principal activities are the generation and transmition of electric energy as an electric energy public service concessionaire.
Cemig Distribuição S.A. (Cemig Distribution) (100.00% interest) - Its principal activities are the distribution of electric energy as an electric energy public service concessionaire.
Cemig PCH S.A., Cemig Capim Branco Energia S.A. and UTE Barreiro S.A. (100.00% interest) Their principal activities will be the generation and sale of electric energy, as independent power producers.
Cemig Trading S.A. (100.00% interest) Its principal activities will be related to the purchase and sale of energy.
Companhia de Transmissão Centroeste de Minas (51.00% interest) This company will be responsible for constructing and operating the 345 Kv transmission line LT Furnas Pimenta.
Central Hidrelétrica Pai Joaquim S.A. (48.50% interest) Its principal activities will be the generation and sale of electric energy, as an independent power producer.
Companhia Transleste de Transmissão (25.00% interest) This company will be responsible for constructing and operating the 345 Kv transmission line connecting the substation located in Montes Claros and the substation of the Irapé Hydroelectric Power Plant.
Companhia Transudeste de Transmissão (24.00% interest) This company will be responsible for constructing and operating the 345 Kv transmission line LT Itutinga Juiz de Fora.
Companhia Transirapé de Transmissão (24.40% interest) This company will be responsible for constructing and operating the 230 Kv transmission line LT Irapé Araçuaí 230 Kv.
(b) The electricity sector in Brazil:
The electricity sector in Brazil is regulated by the Federal Government, acting through its Ministry of Mines and Energy, which has exclusive authority over the electricity sector. Regulatory policy for the sector is implemented by ANEEL.
F-9
Retail electricity sales by the Company are made pursuant to provisions of its long-term electricity sales concession agreements. Under the terms of the concession agreements, the Company is authorized to charge its customers a rate for electricity supply that consists of two components: (1) a non-controllable energy generation, transmission and distribution cost pass-through component (Parcel A costs); and (2) an operating cost component (Parcel B costs). Both components are established as part of the original concession for certain initial periods. Subsequent to the initial periods, and at regular intervals thereafter, ANEEL has the authority to review the costs of the Company to determine the inflation adjustment (or other similar adjustment factor), if any, to the Parcel B costs (the Adjustment Escalator) for the subsequent period. This review can result in an Adjustment Escalator that has a positive, zero or negative value.
In addition to the adjustments of Parcel A costs and Parcel B costs mentioned above, the electricity sales concessions provide for an annual rate adjustment based on several factors, including inflation. In addition, as a result of regulatory changes in December 2001, the Company may now request rate adjustments arising from significant events which disrupt the economic and financial equilibrium of its business. Other normal or recurring factors (such as increases in purchased power costs, taxes on revenue generated or local inflation) are also allowed to be offset through specific rate increases. When making a request for such a rate increase, the Company is required to prove the financial impact of the cited events, and there can be no assurance that the requested adjustments will be granted.
See further references to regulatory changes in notes 2 and 4.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In preparing financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), management is required to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could vary from these estimates. The Companys financial statements therefore include various estimates concerning (i) the recoverability of deferred regulatory assets, (ii) valuation allowances for accounts receivable, deferred tax assets and the account receivable from the State Government, (iii) the useful lives of property, plant and equipment and consortia, (iv) provisions necessary for contingent losses, and (v) estimates of employee post-retirement benefit obligations and other similar estimates.
(a) Basis of presentation The financial statements have been prepared in accordance with U.S. GAAP, which differ in certain respects from the Companys statutory financial statements prepared in accordance with the accounting practices adopted in Brazil, which are prepared and filed in accordance with the specific rules from the Comissão de Valores Mobiliários (the Brazilian Securities Commission, or CVM) and ANEEL.
(b) Constant currency remeasurement Up to December 31, 1997, Brazil was considered a highly inflationary economy (cumulative inflation exceeding a total of 100% over a consecutive three-year period) and, for U.S. GAAP purposes, the Company prepared its financial statements under the constant currency method up to that date. CEMIG adopted the IGP-DI (General Price Index - Internal Availability) to restate its financial statements for inflation.
Under the constant currency method, all relevant non-monetary assets and liabilities, shareholders equity accounts and components of the statements of operations, cash flows and changes in shareholders equity were expressed in the constant purchasing power of the currency as of the most recent balance sheet date.
Beginning on January 1, 1998, Brazil ceased to be considered a highly inflationary economy under U.S. GAAP and, accordingly, the Company ceased to restate its financial statements in constant reais for the effects of inflation as from that date. The restated balances of non-monetary assets and liabilities as of December 31, 1997 thus constitute the historical amounts of such assets and liabilities as from that date.
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Shareholders equity presented in these financial statements differs from that included in the statutory accounting records filed pursuant to the accounting practices adopted in Brazil as a result of the following: (i) as of January 1, 1996, indexation of Brazilian financial statements prepared for Brazilian Corporate Law purposes was abolished, whereas for U.S. GAAP purposes such indexation was applied up to December 31, 1997; (ii) differences between the IGP-DI and the official indices mandated for indexation of the financial statements prepared in accordance with the accounting practices adopted in Brazil; and (iii) adjustments made to reflect the requirements of U.S. GAAP. Current income taxes and dividend distribution capacity are determined based on the financial statements prepared in accordance with accounting practices adopted in Brazil.
(c) Principles of consolidation The consolidated financial statements include the accounts of all majority-owned subsidiaries as of December 31, 2004, and GASMIGs revenues and expenses for the period from January 1, 2004 to December 15, 2004, the date of acquisition of a 40% equity interest in GASMIG by Petrobras. As discussed in note 10, in December 2004, the Company entered into a shareholders agreement giving the minority shareholder in GASMIG substantive participating rights. These rights preclude the Company from consolidating GASMIG. Consequently, the Companys investment in GASMIG is accounted for using the equity method of accounting as of the date of the shareholders agreement.
In consolidation, all significant intercompany balances and transactions were eliminated. The minority interest in the positive equity in subsidiaries is shown separately as a liability.
(d) Foreign currencies Assets and liabilities denominated in foreign currencies are related principally to financing and are translated into reais at the official exchange rates reported by the Brazilian Central Bank at each balance sheet date. The resulting gains and losses are recognized currently and included in the statements of operations for the appropriate period.
(e) Cash and cash equivalents The Company considers unrestricted cash on hand, deposits in banks and short-term investments with original maturities of three months or less, when purchased, and readily convertible to cash to be cash and cash equivalents.
(f) Restricted investments Restricted investments consist of investments with original maturities of three months or less, which are legally restricted for capital expenditures and repayment of foreign currency debt based on the related debt agreements and the requirements of the Brazilian Central Bank.
(g) Accounts receivable Includes both amounts billed to customers and accrued revenues relating to unbilled energy supplied to customers as of the balance sheet date. Late fees arising from overdue electricity bills are accounted for on a cash basis. The allowance for doubtful accounts is recorded at an amount estimated by management as sufficient to cover probable losses.
(h) Investments The Companys investments in affiliated companies in which the company has the ability to exercise significant influence, but not control, are accounted for using the equity method of accounting.
(i) Property, plant and equipment Are recorded at acquisition or construction cost, restated to reflect price-level changes through December 31, 1997. Interest and other financing charges, excluding foreign exchange losses, incurred during the construction period on third-party financing are capitalized, in accordance with SFAS 34. Depreciation is computed on the straight-line method, at annual rates determined by ANEEL, which represent the estimated useful lives of the assets. Expenditures for maintenance and repairs are charged to operating costs as incurred. Materials to be used in construction are included in electric generation, distribution and transmission assets. The net results of disposals of fixed assets are recorded as part of operating income.
The Companys investments in consortia (groups of organizations participating in joint ventures formed to promote common objectives or engage in projects to benefit all the members without the creation of a legal entity), are recorded at acquisition or construction cost less allowance for loss, when applicable. Interest and other financing charges, excluding foreign exchange losses, incurred during the construction period on third-party financing are capitalized, in accordance with Statement of Financial Accounting Standards (SFAS) 34 Capitalization of Interest Cost. The consortium
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depreciation is computed on the straight-line method, at annual rates determined by ANEEL, which represent the estimated useful lives of the consortias underlying assets. The consortium expenditures for maintenance and repairs are charged proportionally to operating costs by the Company as incurred.
(j) Impairment of long-lived assets CEMIG follows SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Whenever events or changes in circumstances indicate that the carrying value of long-lived assets may not be recoverable, CEMIG performs calculations of undiscounted cash flows expected to be derived from assets in service to determine whether impairment has occurred. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, such assets are written down to their estimated fair values based on discounted cash flow analyses. The Company has not recognized any impairment as a result of the application of this accounting policy for all periods presented.
(k) Revenues, costs and expenses Revenues, costs and expenses are recognized on an accrual basis, i.e., when persuasive evidence of an arrangement exists, delivery of goods has occurred or services have been rendered, our rates have been fixed or are determinable, and collectibility is reasonably assured regardless of when cash is received.
Revenues from the sale of electricity generation are recorded based upon the output delivered provided at rates as specified under contract terms or prevailing regulatory rates. Electricity distribution sales to final customers are recognized when power is provided. Billings for these sales are made on a monthly basis. Unbilled revenues from the billing cycle up to the end of each month are estimated based on the prior months billing and are accrued at the end of the month. Differences between estimated and actual unbilled revenues, which have not been significant, are recognized in the following month.
Electricity sales to the interconnected power system are recorded when earned and billed monthly.
Revenues received by the Company from other concessionaires using its basic transmission network are recognized in the month that the network services are provided to the other concessionaires.
Revenues from natural gas sales by GASMIG are recognized when the natural gas is supplied.
Services rendered include connection fees and other related services and the revenues are recognized when the services are provided.
Taxes on revenue consist of: (i) value-added tax (VAT), which is a state tax due on the sales to final customers, is billed to the consumers and recorded as part of gross revenue; (ii) COFINS revenue tax; (iii) PIS-PASEP social contribution tax on revenues; and (iv) Emergency capacity charge. It is the Companys policy to deduct these taxes from gross revenues.
(l) Income taxes CEMIG accounts for income taxes in accordance with SFAS 109 Accounting for Income Taxes, which requires an asset and liability approach to recording deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases.
CEMIG records the tax benefit of all net operating losses as a deferred tax asset and records a valuation allowance, when necessary, to reflect the benefit that management believes will more likely than not be recovered through future taxable income.
(m) Contingencies The Company records provisions for contingencies when the loss is considered to be probable based on the opinion of internal and external legal counsel and is reasonably estimable, in accordance with SFAS 5 Accounting for Contingencies.
(n) Employees benefit plans The Company sponsors a defined-benefit pension plan and a defined-contribution plan covering substantially all of its employees. The Company has also established post-retirement health care plans and pays life insurance premiums for its retirees. The Company applies SFAS No. 87, Employers Accounting for Pensions and SFAS No. 106, Employers Accounting for Post-retirement Benefits Other Than Pensions which require recognition of the costs on a
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comprehensive accrual basis. The Company has disclosed information about pension plans and other postretirement benefit plans as required by SFAS 132(R) Employers Disclosures about Pensions and Other Postretirement Benefits.
Under Brazilian law, employees are entitled to a minimum of one-month vacation upon completion of each year of service. CEMIG fully accrues this liability based on the vested entitlement of the employees at each period end, plus related social security costs.
(o) Environmental and remediation costs CEMIG, in accordance with its environmental policy, has established various damage control and prevention programs in order to help limit its risks with respect to major environmental-related liabilities. The cost of these programs is expensed as incurred. CEMIGs policy is to provide for remediation costs when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. No provision in respect of these matters has been required to date.
(p) Comprehensive income (loss) CEMIG reports comprehensive income (loss) in accordance with SFAS 130 Reporting Comprehensive Income and has elected to present this in the statement of operations. Comprehensive income (loss) comprises the results of unrealized holding gains or losses on securities classified as available-for-sale under SFAS 115 Accounting for Certain Investments in Debt and Equity Securities and minimum pension liability adjustments made pursuant to SFAS 87. All investments in securities classified as available-for-sale were sold in 2003.
(q) Regulation and deferred regulatory assets As a result of various actions taken by the Federal Government and ANEEL in 2001, the Company is subject to the provisions of SFAS 71 Accounting for the Effects of Certain Types of Regulation. The rate-setting structure in Brazil is now designed to provide for recovery of the Companys allowable costs, including those incurred as a result of Federal Government-mandated power rationing measures imposed in 2001, as described further below. Accordingly, the Company capitalizes incurred allowable costs as deferred regulatory assets when instructed by ANEEL and there is a probable expectation that future revenue equal to the costs incurred will be billed and collected as a direct result of the inclusion of the costs in an increased rate set by the regulator. The deferred regulatory asset is eliminated when the Company collects the related costs through billings to customers at the increased rate. ANEEL performs a rate review on an annual basis. If ANEEL excludes all or part of a cost from recovery, that portion of the deferred regulatory asset is impaired and is accordingly reduced to the extent of the excluded cost. The Company has recorded net deferred regulatory assets that it expects to pass through to its customers in accordance with and subject to regulatory provisions.
During 2001, the Federal Government instituted an electricity rationing plan in response to an energy shortage caused by low rainfall, reduced reservoir levels and Brazils significant dependence on electricity generated from hydrological resources. The rationing resulted in losses for the Company and other electricity distribution companies in Brazil. In December 2001, electricity concessionaires including the Company reached an industry-wide agreement (the General Agreement of the Electricity Sector or the General Agreement) with the Federal Government that provided resolution to rationing-related issues as well as to certain other electricity rate-related issues. The General Agreement provided for a rate increase intended to reimburse revenues lost as a result of the rationing program in 2001 and 2002. The increased rates will be in force in the electricity industry for an average period of 72 months as from January 2002. The asset of R$404 (note 4) recognized by the Company represents the amount expected to be recovered over the next 24 months, in accordance with Emerging Issues Task Force (EITF) No. 92-7 Accounting by Rate Regulated Utilities for the Effects of Certain Alternative Revenue Programs. The balances of the deferred regulatory assets are periodically compared with the Companys recoverability projections, which are reviewed by Management depending on market events, changes in regulation and related circumstances. The respective provision for losses is adjusted accordingly.
The General Agreement also addressed Parcel A costs, which are certain costs that each distribution company is permitted to defer and pass through to its customers via a future rate adjustment. Parcel A costs are limited by the concession contracts to the cost of purchased power and certain other costs and taxes not controlled by the Company. ANEEL had granted rate increases to recover a portion of previously deferred Parcel A costs. The General Agreement provided a tracking account mechanism, created in October 2001 through Executive Order No. 296, to record
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the variation in the Parcel A costs for rate adjustment calculation purposes. Parcel A costs incurred previous to January 1, 2001 are not recoverable though the tracking account. As a result, the Company has not recognized any regulatory asset for Parcel A costs incurred prior to 2001, except for the system services charges from September 2000 (as allowed by ANEEL). See note 4.
(r) Earnings per share Since each class of shares participates equally in earnings in the years presented, earnings per share was computed by dividing net income by the weighted average number of common and preferred shares outstanding during the year. Consistent with many other Brazilian corporations, CEMIG discloses earnings per one thousand shares, as this is the minimum number that can be traded on the Bolsa de Valores de São Paulo (the São Paulo Stock Exchange, or BOVESPA). As mentioned in note 3, the Company has a contingent obligation to issue shares of capital stock in connection with payments received on the account receivable from the State Government. This accounts receivable is currently being paid down with dividends due to the State Government. Any shares to be issued in connection with this obligation are considered for purposes of calculating dilutive earnings only when all necessary conditions for their issuance have been satisfied. As such, these shares are considered dilutive as defined in SFAS 128 Earnings per Share. However, the potentially dilutive shares in 2002, consisting solely of the estimate of shares issuable mentioned above, have been excluded from the computation for 2002 as their effect would have been anti-dilutive, as a result of the net loss incurred in that year. In 2004 and 2003, the Company has no obligation to issue shares in connection with dividends used to offset the receivable, as the corresponding shares (129,145 shares) were already issued in 2002. As a result of this, basic and diluted earnings per share are the same for all periods presented.
(s) Segment information The Company operates in the electric energy, gas distribution and telecommunication segments. The respective breakdown of information is included in note 29. The Companys electric energy business is managed centrally on the basis of the consolidated results of the generation, transmission and distribution operations until December 31, 2004. Accordingly, the electric energy business represents a single segment per the criteria described in SFAS 131- Disclosures about Segments of an Enterprise and Related Information. As described in note 29, the Company restructured its operations on January 1, 2005 to separate its generation and transmission and distribution activities.
(t) Derivatives and hedging activities As required by SFAS 133 - Accounting for Derivative Instruments and Hedging Activities derivative financial instruments are being recorded based on their fair values as assets or liabilities in the accompanying balance sheet, and corresponding changes in fair value are being recognized in earnings. Hedge accounting has not been applied to any of the Companys derivative financial instruments. The Company calculates the fair value of financial instruments using quoted market prices whenever available. When quoted market prices are not available, the Company uses standard pricing models with market-based inputs, which take into account the present value of estimated future cash flows.
3. ACCOUNT RECEIVABLE FROM MINAS GERAIS STATE GOVERNMENT
Prior to March 1993, the following two principles guided the rate setting process in Brazil: (i) that electric utilities should be guaranteed an annual real rate of return on service-related assets included in the rate basis; and (ii) that the rates charged to each class of customer for electric power should be uniform throughout Brazil, notwithstanding the high cost of distributing electricity to remote areas of the country.
Under this rate structure, the guaranteed return was set by the Brazilian Federal Government through its regulatory agency at a level between 10% and 12%, depending on the particular circumstances of each concessionaire. In order to compensate concessionaire companies experiencing a rate of return below the national average of the sector, the Federal Government created the National Reserve for Compensation of Remuneration - RENCOR, through which profits from more profitable companies were to be reallocated to less profitable companies, so that the rate of return realized by all companies would be equal to the national average of the sector.
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The shortfall experienced by most concessionaire companies between the guaranteed return and the actual realized rate of return was accounted for by an increase in each companys Recoverable Rate Deficit Account (the CRC Account), in an amount equal to such shortfall. This account was recorded, until 1992, in a memorandum account, not as an asset on the balance sheet.
With the enactment of Law No. 8,631 on March 4, 1993, the Company recorded a receivable, crediting the statement of operations, from the Federal Government for the balance of the rate shortfall compensation as approved by the regulatory agency. During 1993 and 1994, the Company recovered part of the rate shortfall through an offset against amounts due to Federal Government-owned entities arising from purchased power and financing.
On May 2, 1995, the obligation to pay the remaining balance of this receivable, then R$602, was transferred from the Federal Government to the State Government through a credit assignment contract. In connection with this assignment, the State Government agreed to pay the amount due to the Company over 20 years, with an initial three-year grace period, as restated based on the UFIR (Tax Reference Unit Index) and accruing interest at 6% per year.
In the event that the Company receives any payments or retains declared dividends to offset amounts not paid by the State Government, the Company is obligated to issue shares to all shareholders in proportion to their shareholdings, transferring the principal amount of the related paid installments from Appropriated retained earnings - Rate shortfall reserve to Capital Stock.
Since the original contract, there have been the following amendments:
(a) First Amendment to the CRC Credit Assignment Contract, signed on January 24, 2001
The purpose of this amendment was to change the monetary restatement index from UFIR to IGP-DI (Índice Geral de Preços General Market Price Index), since the UFIR was extinguished in October 2000.
(b) Second Amendment to the CRC Credit Assignment Contract, signed on October 14, 2002
This Amendment refers to 149 installments from the original contract, maturing from January 1, 2003 to May 1, 2015, in the total amount of R$1,844, as of December 31, 2004. These installments are subject to annual interest of 6% and are restated based on the IGP-DI.
Due to the non-inclusion in the Second Amendment of effective guarantees that would assure the realization of the aforementioned credit, CEMIG recorded an allowance for losses equal to the total amount referred to in the Second Amendment.
Due to the full allowance recorded on April 1, 2002, the financial income related to monetary restatement and interest on the Second Amendment, from April 2002 to December 2004 in the amount of R$800, did not impact results, considering that provisions for loss were recorded in the same amounts. However, in compliance with Brazilian tax legislation, CEMIG recorded the federal taxes payable on the financial income, since the recorded allowances are considered permanently non-deductible for tax purposes in accordance with Brazilian tax legislation.
Installments under this Amendment, due from January 1, 2003 to May 1, 2005, totaling R$552, including monetary restatement, interest and fines were not collected by the Company. Company management is negotiating the collection of the aforementioned past due amount with the State Government, under the conditions established by the contract.
(c) Third Amendment to the CRC Credit Assignment Contract, signed on October 24, 2002
CEMIG and the State Government signed the Third Amendment in order to reschedule the payment of the original contract installments due from April 1, 1999 to December 1, 1999 and from March 1, 2000 to December 1, 2002. These installments were renegotiated with an annual interest rate of 12.00% per year and monetary restatement based on the IGP-DI. The installments are due in 149 monthly payments from January 2003 to May 2015. This amendment amounts to R$1,097 as of December 31, 2004, including interest and fines on overdue installments.
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The Third Amendment also established a guarantee which permits the Company to retain dividends (including interest on capital in lieu of dividends) to be paid to the State Government, as a Company shareholder, net of amounts intended to acquire Company debentures related to the Irapé power plant construction. This guarantee will continue in force even after the Third Amendment termination date, scheduled for May 2015.
Part of the Third Amendment installment due from June 1, 2003 to May 1, 2005, totaling R$348, including monetary restatement, interest and fines, were not collected by the Company. The Companys management is negotiating the collection of the aforementioned past due amount with the State Government, under the conditions established by the contract.
CEMIG paid interest on capital in lieu of dividends in December 2004, of which R$72 was due to the State Government. Part of this interest on capital, amounting to R$49, was used by the State Government to settle part of the CRC overdue credits and the remainder, in the amount of R$23, to acquire debentures issued by CEMIG for the Irapé power plant construction.
The projection of the Companys future operations indicates that the dividends attributable to the State Government will be sufficient, in the long-term, to assure the full realization of the credit related to the Third Amendment, in the event of nonpayment by the debtor.
Management monitors future events which may impact the Companys dividend payment projections, in order to conclude whether the above-mentioned guarantee is still effective or an additional allowance under this amendment is necessary.
(d) The composition of the CRC balance as of December 31, 2004 and 2003 is follows:
|
|
December 31, |
|
||
|
|
2004 |
|
2003 |
|
Second amendment: |
|
|
|
|
|
Current - |
|
1,409 |
|
1,293 |
|
Past due amounts as of December 31 |
|
435 |
|
226 |
|
(-) Allowance for losses |
|
(1,844 |
) |
(1,519 |
) |
Net amount recorded |
|
|
|
|
|
|
|
|
|
|
|
Third amendment: |
|
|
|
|
|
Current |
|
836 |
|
744 |
|
Past due amounts as of December 31 |
|
261 |
|
147 |
|
Net amount recorded |
|
1,097 |
|
891 |
|
The Company has recorded, under current liabilities, dividends and interest on capital, proposed by management and the Board of Directors, to be paid to shareholders related to 2004 net income after the approval by the Shareholders Meeting, of which R$147 is due to the State Government. Part of such dividends, in the amount of R$23, are destined to the acquisition of Irapé Plant debentures, by the State of Minas Gerais and R$124 may be used to settle part of the CRC overdue credits.
e) Negotiations with the State Government
The State Government is preparing a new proposal to settle the payments of the CRC contract. This new proposal includes a new amendment to the contract, with a rescheduling of the contract payment and a new dividend policy for the Company, which will allow the settlement of the contract through the retention of dividends due to the State Government.
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4. DEFERRED REGULATORY ASSETS
The components of the deferred regulatory assets are as follows:
|
|
December 31, |
|
||
|
|
2004 |
|
2003 |
|
Energy Rationing Plan: |
|
|
|
|
|
Revenue losses (expected to be recovered within the next 24 months) incurred during the rationing period |
|
404 |
|
446 |
|
Recording of energy transactions on the CCEE/MAE |
|
1,002 |
|
1,030 |
|
(-) Provision for loss on deferred regulatory assets |
|
(13 |
) |
(4 |
) |
|
|
1,393 |
|
1,472 |
|
Additional Parcel A costs: |
|
|
|
|
|
- Period from January 1, 2001 to October 25, 2001 |
|
462 |
|
398 |
|
- Period from October 26, 2001 and thereafter |
|
549 |
|
621 |
|
|
|
|
|
|
|
Deferred rate adjustment |
|
1,013 |
|
211 |
|
PIS/PASEP/COFINS |
|
348 |
|
|
|
|
|
3,765 |
|
2,702 |
|
|
|
|
|
|
|
Current assets |
|
836 |
|
633 |
|
Other assets |
|
2,929 |
|
2,069 |
|
During the years ended December 31, 2004, 2003, and 2002, t he Company collected R$310, R$271, and R$218, respectively, as a result of application of the extraordinary rate adjustment.
The VAT related to the rationing program revenue, deferred rate adjustment and regulatory assets PIS/COFINS, amounting to R$537 as of December 31, 2004 (R$370 as of December 31, 2003), only becomes an obligation to be recorded in the financial statements once the customers are billed. However, because the Companys only responsibility is to transfer this tax from its consumers to the State tax authorities, the Company did not record this obligation in advance. The Company passes all VAT amounts received from customers on to the State Government. In 2004, as a result of the application and billing of the extraordinary rate adjustment, the Company collected VAT of approximately R$65, which it passed on to the State Government. Such amount is recorded as gross operating revenues and sales deduction not affecting net operating revenues.
a) Energy Rationing Plan
An emergency energy-rationing program (the Energy Rationing Plan) was created by the Federal Governments Executive Order No. 2148, of May 22, 2001, to reduce energy consumption and avoid unplanned interruption in power supply. Average reduction in monthly consumption of electricity during the rationing period was estimated at 20% of the actual consumption for the months of May, June and July 2000. The energy rationing became effective on June 1, 2001 and ended February 28, 2002, when the Federal Government determined that the water levels in the reservoirs serving Brazils hydroelectric facilities had returned to normal.
As a result of the Energy Rationing Plan, many electric generation and distribution companies in Brazil, including CEMIG, experienced a reduction in their profit margins, as their physical and personnel structures could not be reduced in line with the consumption reduction quotas imposed. Thus, they continued incurring fixed costs without earning corresponding revenue.
In December 2001, the Federal Government and the electric utilities in Brazil affected by the Energy Rationing Plan signed the General Agreement referred in note 29 to regain the financial-economic equilibrium of the existing concession contracts and recover revenues relating to the period during which the Energy Rationing Plan was in effect.
The General Agreement addressed margin losses incurred by the electric distribution and generation companies during the period that the Energy Rationing Plan was effective and costs of energy purchased in the spot market through the Mercado Atacadista de Energia (the Wholesale Energy Market or MAE),
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succeeded by the Câmara de Comercialização de Energia Elétrica CCEE (CCEE/MAE), up to December 2002. These items will be recovered by an extraordinary rate adjustment as follows:
I. an increase of 2.90% for rural and residential consumers (excluding low-income consumers), lighting streets and high-tension industrial consumers whose costs related to electric energy represent at least 18.00% of average production cost and fulfill certain criteria, related to charge and demand energy factors which were determined by ANEELs Resolution No. 130, dated April 30, 2002 ; and
II. an increase of 7.90% for all other consumers.
The extraordinary rate adjustment regulatory asset had its maximum recovery period, initially established as being 82 months, reduced to 74 months, from January 2002 to February 2008, pursuant to ANEELs Resolution No. 1 dated January 12, 2004. The Company has made studies to verify if the 74-month recovery period would be sufficient to recover the amounts approved by ANEEL. Based on those studies, the Company recorded an allowance for losses in the amount for R$13 and R$4 as of December 31, 2004 and 2003, respectively.
Considering that the assumptions used in managements studies may change throughout the recovery period, management periodically reviews these projections, and consequently, the recorded allowance.
(a.1) Recovery of revenue losses incurred during the period of the Energy Rationing Plan:
Although CEMIGs total revenue losses were R$692 as of December 31, 2004 (R$781 as of December 31, 2003), CEMIG recorded a regulatory asset on a U.S. GAAP basis in the amount of R$404 as of December 31, 2004 (R$446 as of December 31, 2003), in accordance with consensus reached by the FASBs EITF Issue No. 92-07, Accounting by Rate-Regulated Utilities for the Effects of Certain Alternative Revenue Programs, which establishes a 24-month period limit for collection of the asset.
The accrued amount related to this asset, which will be reimbursed through the special rate adjustment is monetarily restated based on SELIC from January 1, 2002 until collection.
(a.2) Energy transactions on the CCEE/MAE and other:
During the period of the Energy Rationing Plan in Brazil, electricity utilities, including CEMIG, made a substantial number of energy purchases on the spot market through the CCEE/MAE in order to supply their customers. During this period, the prices for spot market energy were often significantly higher than the prices set forth in initial energy purchase contracts.
Costs related to energy sold on the CCEE/MAE are being prorated among consumers supplied by the Brazilian interconnected power system through an extraordinary rate adjustment, beginning in January 2002. The amount to be passed along to consumers through the rate adjustment is calculated based on the amount of energy purchased on the CCEE/MAE during the period from June 1, 2001 until February 28, 2002, and equals the difference between the energy purchase price on the CCEE/MAE and R$49.26/MWh (which is the initial contract average cost for the period). Generators will not be reimbursed with respect to CCEE/MAE energy purchases at a price less than or equal to R$49.26/MWh.
Under ANEEL Resolution No. 36, dated January 29, 2003, beginning in March 2003, the Company is required to collect from its customers and transfer to generators, on a monthly basis, the special rate adjustment amounts. Pursuant to this resolution, the Company is also entitled to receive R$200 from other distributors relating to its generation activities by December 2004. As of December 31, 2004, only R$52 of this amount was received by the Company, since certain distribution concessionaires believe that the Company is challenging the General Agreement of the Electricity Sector since it has filed a claim against CCEE/MAE relating to the methodology used to calculate CEMIGs obligations resulting from the CCEE/MAE transactions.
A portion equaling 82% of CEMIGs receivables relating to CCEE/MAE transactions is being monetarily restated based on the SELIC. The remaining 18% has not been monetarily restated and corresponds, according to CEMIG estimates, to the amounts that were not settled on the CCEE/MAE due to judicial claims currently in progress, filed by generators and distributors. According to ANEEL Resolution No. 36,
F-18
these amounts can only be monetarily restated after the definitive CCEE/MAE settlement, which will only take place after the resolution of the judicial claims.
In December 2002, the Company filed a claim against ANEEL and CCEE/MAE contesting the amounts that were charged to the Company during the settlement process carried out by CCEE/MAE. The Company believes that the recorded payable to CCEE/MAE of R$143 was not correctly calculated. ANEEL contested this claim and issued a ruling suspending the payment of the remaining RTE credits of R$148 to CEMIG. In January 2003, the Company filed a lawsuit to cancel the ANEELs ruling regarding the suspension of the RTE payments and the Federal Court ruled in the Companys favor and suspended the effects of ANEELs ruling. On December 2004, the Company withdrew the above claim and entered into an agreement with ANEEL and the other market participants; the withdrawal of the lawsuit is still subject to the courts approval. The Company had previously recorded a provision of R$143 related to this matter and consequently the withdrawal of this claim had no impact on the Companys financial statements for the year ended December 31, 2004.
The major terms of the above agreement, which is still subject to approval by the CCEE agents and ANEEL, are as follows:
CCEE/MAE will recalculate CEMIGs liability;
The calculated amounts will be updated by IGP-M from July 2003 until the beginning of the settlement, on a date to be determined by CCEE/MAE;
CEMIG will settle the liability over a maximum term of 50 months; the liability will be subject to monetary restatement based on the SELIC variation, beginning on the official settlement date, plus 1.00% interest per year.
ANEEL will eliminate the ruling suspending the payment of the remaining RTE credits; these amounts will be paid to CEMIG over a period of two months.
(a.3) Recovery of additional Parcel A costs:
(a.3.1) Additional Parcel A Costs from January 1, 2001 to October 25, 2001
ANEEL Resolution No. 90, dated February 18, 2002, established procedures for the recovery of certain Parcel A costs incurred during the period from January 1, 2001 to October 25, 2001. The base amount to be reimbursed is equal to the difference between the Parcel A costs actually incurred and the estimated Parcel A costs used for purposes of computing the last annual rate adjustment prior to the Energy Rationing Plan. This amount bears interest at the SELIC rate from the day that the actual cost was paid until the date of recovery. ANEEL, through Normative Resolution No.1 dated January 12, 2004, declared that the variations in Parcel A costs are not subject to a maximum recovery period. Recovery of Parcel A costs will start immediately after the end of special rate adjustment recovery period, using the same recovery criteria. Thus, the extraordinary rate adjustment applied to recover billing losses and free energy will also be used to recover the Parcel A costs.
(a.3.2) Additional Parcel A Costs from October 26, 2001 and thereafter
On October 25, 2001, the Federal Government, through Executive Act No. 296, created a tracking account mechanism to control the variation of Parcel A costs for rate adjustment calculation purposes. This account is comprised of the amounts resulting from the difference between the Parcel A costs actually incurred, from October 26, 2001 and thereafter, and the estimated Parcel A costs used for purposes of computing the annual rate adjustment as from April 8, 2001.
The Federal Government, through Executive Act No. 116, issued on April 4, 2003, deferred for 12 months the recovery of Parcel A costs incurred from March 10, 2002 to March 9, 2003. Such Parcel A costs were included in the electric energy rate for 24 months, effective April 8, 2004. Therefore, the Parcel A costs balances, recorded as Deferred regulatory assets as of December 31, 2004, were classified as current and other assets considering the respective expected realization period.
F-19
The amounts determined for the Parcel A costs for the period from October 26, 2001 and thereafter are recorded as deferred regulatory assets, as follows:
Parcel A Items |
|
Total
|
|
Total
|
|
|
|
|
|
|
|
System service charges |
|
143 |
|
206 |
|
Itaipu Binacional electricity purchase rate |
|
178 |
|
257 |
|
Itaipu Binacional electricity transport rate |
|
12 |
|
11 |
|
Fuel usage quota CCC |
|
(31 |
) |
(132 |
) |
Rate for use of basic transmission network |
|
170 |
|
170 |
|
Energy development account quota CDE |
|
33 |
|
48 |
|
Charges for use of water resources |
|
44 |
|
61 |
|
|
|
549 |
|
621 |
|
The above-mentioned amounts are restated based on the SELIC from the expense payment date to effective recovery through annual rate adjustments.
The recoverable amounts recorded in current assets refer to variations of uncontrollable costs that are being offset based on the annual rate adjustment on April 8, 2005, according to managements estimates.
b) Deferred rate adjustment
The ANEEL Resolution No. 71, dated April 4, 2005, disclosed the definitive results of CEMIGs periodic rate review. According to this resolution, the rate adjustment that should have been applied to CEMIGs rates on April 8, 2003 was 44.41%, instead of the rate of 31.53% that was originally applied. The difference will be included by ANEEL in the future rate adjustments. Consequently, CEMIG recorded a deferred regulatory asset for the difference between 44.41% and 31.53% rate increase on the volume of electricity sold to customers from April 8, 2003 to December 31, 2004, in the amount of R$1,013, including monetary restatement. This amount will be collected through annual rate increases from April 8, 2004 to April 8, 2007.
In 2003, the Company recorded a deferred regulatory asset in the amount of R$211, which corresponds to the difference between 37.86% (the rate adjustment provisionally disclosed by ANEEL in the prior period) and the 31.53% rate increase on the volume of electricity sold to customers from April 8, 2003 to December 31, 2003.
c) PIS-PASEP/COFINS
The Federal Laws No. 10,637 and 10,833 increased the rates and changed the basis of calculation of PIS/PASEP and COFINS taxes on revenues. As a result of those changes, there was an increase in expense relating to PIS/PASEP and COFINS, from December 2002 to December 2004 and from February of 2004 to December of 2004, respectively. ANEEL, through correspondence sent to CEMIG, recognized the Companys right to record an asset related to the additional costs relating to PIS/PASEP and COFINS. These amounts are recorded as a noncurrent asset in the Companys financial statements.
The recorded amounts shall be recovered in future rate adjustments, beginning in April 2005, and the monetary restatement criteria and the recovery term are still pending definition by ANEEL. However, CEMIG recorded the amounts updated by the IGP-M variation.
F-20
|
|
December, 31
|
|
|
|
|
|
PIS/PASEP expenses increase from December 2002 to December 2004 |
|
101 |
|
COFINS expenses increase from February 2004 to December 2004 |
|
228 |
|
Monetary restatement IGP-M |
|
19 |
|
|
|
348 |
|
5. DEFERRED INCOME TAXES
Income taxes in Brazil include federal income tax and social contribution on income (which is an additional federal income tax). For U.S. GAAP purposes, the statutory annual rates applicable are 25% for federal income tax and 9% for social contribution tax.
(a) Income tax reconciliation:
The amounts reported as income tax expense in the financial statements are reconciled to the statutory rates as follows:
|
|
Year ended December 31, |
|
||||
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interests |
|
2,468 |
|
2,003 |
|
2 |
|
Income taxes 34% rate |
|
(839 |
) |
(681 |
) |
(1 |
) |
Effects of: |
|
|
|
|
|
|
|
Tax benefit (expense)- |
|
|
|
|
|
|
|
Interest on capital |
|
173 |
|
85 |
|
73 |
|
Interest and monetary variation on provision for loss on account receivable from State Government |
|
(111 |
) |
(67 |
) |
(91 |
) |
Amortization of special liabilities |
|
35 |
|
31 |
|
32 |
|
Others |
|
11 |
|
25 |
|
(39 |
) |
Tax expense in the statement of operations |
|
(731 |
) |
(607 |
) |
(26 |
) |
As from January 1, 1996, Brazilian companies are permitted to pay interest on capital. The calculation is based on the shareholders equity amounts prepared in accordance with accounting principles adopted in Brazil. The interest rate applied may not exceed the long-term interest rate determined by the Brazilian Central Bank and interest paid may not exceed the greater of 50% of net income for the year or 50% of retained earnings plus income reserves.
The amount of interest on capital is deductible for income tax purposes. Accordingly, as opposed to a payment of dividends, the benefit to CEMIG is a reduction in its income taxes payable equivalent to the statutory tax rate applied to such amount. Income tax is withheld from the payment of such amount to shareholders at the rate of 15%.
(b) Analysis of deferred tax balances:
As of December 31, 2004 and 2003, the deferred tax balances have been computed using a 34% rate, which is the rate expected to be in force upon realization. The major components of the deferred income taxes account in the balance sheet are as follows:
F-21
|
|
December 31, |
|
||
|
|
2004 |
|
2003 |
|
Current and other assets- |
|
|
|
|
|
Tax loss carryforwards |
|
16 |
|
133 |
|
Employee post-retirement benefits |
|
90 |
|
|
|
Provision for contingencies |
|
100 |
|
77 |
|
Other temporary differences |
|
108 |
|
79 |
|
|
|
314 |
|
289 |
|
Current assets |
|
149 |
|
114 |
|
Other assets |
|
165 |
|
175 |
|
|
|
|
|
|
|
Long-term liabilities- |
|
|
|
|
|
Employee post-retirement benefits |
|
|
|
(116 |
) |
Temporary difference on regulatory assets |
|
(461 |
) |
(245 |
) |
Effects of differences between book and tax basis of property, plant and equipment. |
|
(413 |
) |
(437 |
) |
|
|
(874 |
) |
(798 |
) |
For the years ended December 31, 2004 and 2003, deferred tax benefits of R$243 and R$33 respectively, and for the year ended December 31, 2002, deferred tax expenses of R$119, related to the minimum pension liability adjustment and unrealized gains and losses on available-for-sale securities were recorded directly to shareholders equity as other comprehensive income (loss).
6. CASH AND CASH EQUIVALENTS
The following table sets forth amounts of cash and cash equivalents for the dates indicated:
|
|
December 31, |
|
||
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Cash on hand and in banks |
|
48 |
|
128 |
|
Short-term investments, mainly bank certificates of deposit and money market funds at fair value |
|
826 |
|
312 |
|
|
|
874 |
|
440 |
|
CEMIG and its subsidiaries have investments in public and private securities issued by third parties. These investments accrue interest rates based on the Brazilian Interbank Certificates of Deposit, or CDI, and can be redeemed at any time without penalty or loss of income.
7. RESTRICTED INVESTMENTS
In compliance with Resolution No. 2,515 dated June 29, 1998 issued by the Brazilian Central Bank, when CEMIG extends the maturity of any foreign currency-denominated financing, it must make deposits in respect of the principal amount of such extended financing into a short-term investment escrow account so that at the final maturity date of the financing, such escrow account contains an amount equal to the entire principal amount due under the financing. The interest income is calculated based on the variation of CDI and the U.S. dollar/ real exchange rate and maturity dates that do not exceed 30 days. The restricted investments are classified as current and other assets according to the maturity date of the respective financing.
F-22
The following table sets forth amounts of restricted investments for the dates indicated:
|
|
December 31, |
|
||
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Interest based on variation of CDI |
|
20 |
|
91 |
|
Interest based on U.S. dollar/ real |
|
|
|
41 |
|
|
|
20 |
|
132 |
|
Current assets |
|
|
|
72 |
|
Other assets |
|
20 |
|
60 |
|
8. ACCOUNTS RECEIVABLE, NET
The following table sets forth information concerning accounts receivable by type of consumers for the dates indicated:
|
|
|
|
Past-due |
|
Total |
|
||||
|
|
Current |
|
Up to 90
|
|
Over 90
|
|
December 31, |
|
||
2004 |
|
2003 |
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
284 |
|
157 |
|
43 |
|
484 |
|
409 |
|
Industrial |
|
218 |
|
44 |
|
141 |
|
403 |
|
351 |
|
Commercial |
|
120 |
|
66 |
|
36 |
|
222 |
|
202 |
|
Rural |
|
35 |
|
20 |
|
9 |
|
64 |
|
56 |
|
Governmental entities |
|
45 |
|
23 |
|
23 |
|
91 |
|
121 |
|
Public services |
|
123 |
|
26 |
|
8 |
|
157 |
|
103 |
|
Subtotal |
|
825 |
|
336 |
|
260 |
|
1,421 |
|
1,242 |
|
Distributors |
|
5 |
|
|
|
|
|
5 |
|
5 |
|
|
|
830 |
|
336 |
|
260 |
|
1,426 |
|
1,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
|
|
|
|
(165 |
) |
(165 |
) |
(106 |
) |
|
|
830 |
|
336 |
|
95 |
|
1,261 |
|
1,141 |
|
Current assets |
|
752 |
|
336 |
|
95 |
|
1,183 |
|
1,050 |
|
Other non-current assets |
|
78 |
|
|
|
|
|
78 |
|
91 |
|
No single customer represented more than 10% of total receivables as of December 31, 2004 and 2003 and electricity sales to final customers for the years ended December 31, 2004, 2003 and 2002.
As December 31, 2004, other non-current assets include accounts receivable from consumers, in the amount of R$78, composed as follows:
R$52 from Companhia de Saneamento de Minas Gerais - COPASA, a company controlled by the Minas Gerais State Government. CEMIG renegotiated the payment of this receivable into 96 monthly consecutive installments, from October 2004 to September 2012. This receivable is subject to IGP-M index variation and interest of 0.5% per month.
R$26 from the Municipality of Belo Horizonte, due substantially to public lighting. The debt was renegotiated to be paid in 80 monthly installments, until March 2010. This debt is restated based on the Companys rate adjustments.
F-23
The changes in allowance for doubtful accounts were as follows:
|
|
Year ended December 31 |
|
||||
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
Balance at beginning of the year |
|
106 |
|
58 |
|
54 |
|
Accounts written off |
|
(3 |
) |
(9 |
) |
(9 |
) |
Provision for the year |
|
62 |
|
57 |
|
13 |
|
Balance at end of the year |
|
165 |
|
106 |
|
58 |
|
9. RECOVERABLE TAXES
The following table sets forth amounts of taxes recoverable for the dates indicated:
|
|
December 31, |
|
||
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Current assets - |
|
|
|
|
|
Income tax |
|
75 |
|
64 |
|
Social contribution tax |
|
3 |
|
9 |
|
VAT |
|
27 |
|
26 |
|
Other |
|
3 |
|
9 |
|
|
|
108 |
|
108 |
|
Other non-current assets - |
|
|
|
|
|
VAT |
|
141 |
|
116 |
|
|
|
141 |
|
116 |
|
The recoverable VAT credits are being offset by the Company with VAT to be paid over a period of 48 months, in accordance with Brazilian tax legislation. The Company is in a legal dispute with the State Government in order to offset the VAT credits arising from acquired equipment to be used in the Companys operation, in the amount of R$20.
10. INVESTMENTS
The following table describes the consolidated investments:
|
|
December 31, |
|
||
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Goodwill recorded on Rosal Energia acquisition |
|
33 |
|
|
|
Equity investments in Gasmig |
|
80 |
|
|
|
Other investments |
|
15 |
|
12 |
|
|
|
128 |
|
12 |
|
a) GASMIG - Sale of 40% of CEMIGs interest in GASMIG to PETROBRAS
On December 15, 2004, CEMIG sold 40% of the capital stock of GASMIG to Petrobras for R$154, resulting in a gain of R$102. The price of the sale was determined based on GASMIGs discounted cash flows.
The sale is part of the Association Agreement signed on August 25, 2004 among CEMIG, GASMIG, and PETROBRAS to develop the natural gas market. The Agreement includes an investment plan to expand the gas distribution networks serviced by GASMIG. According to the plan, these capital investments will increase GASMIGs daily natural gas volume production from 3.5 million m3/day to 4.5 million m3/day at the end of 2006, ultimately reaching 11.1 million m3/day in 2023.
F-24
GASMIG Shareholder agreement
In 2004, the Company signed a shareholders agreement with Petrobras relating to GASMIG which gave Petrobras substantive participating rights including, among others, (i) the approval of operating budgets and (ii) approval of transactions not provided for in the operating budget that exceed low threshold amounts. As a result of these rights, the Company is precluded from consolidating GASMIG and consequently, GASMIG is accounted for using the equity method of accounting beginning on the date of the shareholders agreement.
b) Investments in Rosal Energia S.A.
On December 23, 2004, CEMIG acquired 100.00% of the capital stock of Rosal Energia S.A. (Rosal) for R$134. Rosal holds a concession to operate the Rosal hydroelectric plant, as well as the associated transmission system of the plant with installed capacity of 55MW. The price of the acquisition was determined using the projected cash flow of Rosal until 2032, the date that the concession expires.
CEMIG has recorded such acquisition by assessing the fair value of Rosal Energia S.A. assets and liabilities and determining goodwill in accordance with the purchase method prescribed by SFAS 141 Business Combinations and SFAS 142 Goodwill and Other Intangible Assets. The application of SFAS 141 and 142 resulted in the recognition of goodwill in the amount of R$33.
The net consolidated assets of Rosal that were acquired are as follows:
|
|
December, 31
|
|
Current assets |
|
|
|
Property, plant and equipment |
|
107 |
|
Other assets |
|
5 |
|
Total assets acquired |
|
112 |
|
Current liabilities |
|
(1 |
) |
Other long-term liabilities |
|
(10 |
) |
Net consolidated assets |
|
101 |
|
Interest acquired |
|
100.00 |
% |
Net consolidated assets acquired |
|
101 |
|
Price paid |
|
134 |
|
Goodwill on purchase |
|
33 |
|
11. PROPERTY, PLANT AND EQUIPMENT, NET
The following table describes the consolidated property, plant and equipment:
|
|
Annual
|
|
December 31, |
|
||
|
|
depreciation |
|
2004 |
|
2003 |
|
|
|
% |
|
|
|
|
|
In service |
|
|
|
|
|
|
|
Generation- |
|
|
|
|
|
|
|
Hydroelectric |
|
2.48 |
|
7,922 |
|
7,787 |
|
Hydroelectric Consortia |
|
2.51 |
|
470 |
|
263 |
|
Thermoelectric |
|
2.29 |
|
260 |
|
261 |
|
Transmission |
|
3.38 |
|
1,622 |
|
1,512 |
|
Distribution |
|
4.92 |
|
7,571 |
|
7,421 |
|
Administration |
|
7.71 |
|
441 |
|
458 |
|
Gas |
|
5.96 |
|
|
|
82 |
|
Telecom |
|
7.94 |
|
347 |
|
334 |
|
|
|
|
|
18,633 |
|
18,118 |
|
F-25
|
|
Annual
|
|
December 31, |
|
||
|
|
depreciation |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
Accumulated depreciation and amortization- |
|
|
|
|
|
|
|
Generation |
|
|
|
(4,202 |
) |
(3,993 |
) |
Generation - Consortia |
|
|
|
(21 |
) |
(11 |
) |
Transmission |
|
|
|
(848 |
) |
(800 |
) |
Distribution |
|
|
|
(3,848 |
) |
(3,553 |
) |
Administration |
|
|
|
(345 |
) |
(330 |
) |
Gas |
|
|
|
|
|
(18 |
) |
Telecom |
|
|
|
(81 |
) |
(52 |
) |
|
|
|
|
(9,345 |
) |
(8,757 |
) |
Total in service |
|
|
|
9,288 |
|
9,361 |
|
Construction in progress- |
|
|
|
|
|
|
|
Generation |
|
|
|
946 |
|
549 |
|
Generation - Consortia |
|
|
|
493 |
|
524 |
|
Transmission |
|
|
|
35 |
|
90 |
|
Distribution |
|
|
|
366 |
|
336 |
|
Administration |
|
|
|
53 |
|
34 |
|
Gas |
|
|
|
|
|
18 |
|
Telecom |
|
|
|
10 |
|
5 |
|
Total in construction in progress |
|
|
|
1,903 |
|
1,556 |
|
Total |
|
|
|
11,191 |
|
10,917 |
|
Interest cost capitalized during the years ended December 31, 2004, 2003 and 2002 was R$194, R$131, and R$74, respectively.
Under Brazilian law, CEMIGs power generation, transmission and distribution assets may not be retired, disposed of, transferred, sold or mortgaged without the prior authorization of ANEEL. The proceeds received from the disposal of assets must be deposited in an earmarked bank account and used in the purchase of other concession assets. In accordance with normal practice in Brazil for electric utilities, from time to time, CEMIG constructs distribution systems for the benefit of consumers for which the consumer reimburses the cost. These reimbursements are accounted for as a reduction to the cost basis of the related assets as they are received.
CEMIG has lands and buildings recorded under Property, plant and equipment Administration, which have been pledged in connection with legal proceedings related to tax, labor, civil and other contingencies in the amount of R$11. Such contingencies are included in accrued liabilities for contingencies (see note 17).
Construction in Progress Generation includes the costs incurred related to the Irapé power plant in the amount of R$ 802 (R$355 in 2003).
Consortia
CEMIG is a partner in certain consortia for electricity generation projects. Each partner has the right to take energy generated by the power plant in an amount proportionate to the partners investment. These projects are governed by executory contracts which establish the rights and obligations of each party.
F-26
CEMIGs participation in consortia, represented by amounts already invested in the projects, is as follows:
|
|
CEMIGs
|
|
December 31, |
|
||
|
2004 |
|
2003 |
|
|||
|
|
% |
|
|
|
|
|
In service- |
|
|
|
|
|
|
|
Queimado Hydroelectric Power Plant |
|
82.50 |
|
207 |
|
|
|
Funil Hydroelectric Power Plant |
|
49.00 |
|
153 |
|
153 |
|
Igarapava Hydroelectric Power Plant |
|
14.50 |
|
56 |
|
56 |
|
Porto Estrela Hydroelectric Power Plant |
|
33.33 |
|
54 |
|
54 |
|
(-) Accumulated depreciation |
|
|
|
(21 |
) |
(11 |
) |
|
|
|
|
449 |
|
252 |
|
Construction in progress- |
|
|
|
|
|
|
|
Aimorés Hydroelectric Power Plant |
|
49.00 |
|
467 |
|
305 |
|
Cemig Capim Branco Hydroelectric Power Plant |
|
21.05 |
|
24 |
|
17 |
|
Funil Hydroelectric Power Plant |
|
49.00 |
|
2 |
|
|
|
Queimado Hydroelectric Power Plant |
|
82.50 |
|
|
|
202 |
|
|
|
|
|
493 |
|
524 |
|
|
|
|
|
942 |
|
776 |
|
The participation of the other partners in energy generation from consortia is as follows:
Consortium |
|
Shareholders |
|
Interest (%) |
|
|
|
|
|
|
|
Porto Estrela |
|
Companhia de Tecidos Nortes de Minas Gerais COTEMINAS |
|
33.34 |
|
|
|
Companhia Vale do Rio Doce CVRD |
|
33.33 |
|
|
|
|
|
|
|
Igarapava |
|
Companhia Vale do Rio Doce CVRD |
|
38.15 |
|
|
|
Companhia Mineira de Metais CMN |
|
23.93 |
|
|
|
Companhia Siderúrgica Nacional - CSN |
|
17.92 |
|
|
|
Mineração Morro Velho - MMV |
|
5.50 |
|
|
|
|
|
|
|
Funil |
|
Companhia Vale do Rio Doce - CVRD |
|
51.00 |
|
|
|
|
|
|
|
Queimado |
|
Companhia Energética de Brasília |
|
17.50 |
|
|
|
|
|
|
|
Aimorés |
|
Companhia Vale do Rio Doce - CVRD |
|
51.00 |
|
|
|
|
|
|
|
Capim Branco Energia S.A. |
|
Companhia Vale do Rio Doce - CVRD |
|
48.42 |
|
|
|
Comercial e Agrícola Paineiras Ltda. |
|
17.89 |
|
|
|
Companhia Mineira de Metais - CMN |
|
12.63 |
|
F-27
12. ACCOUNTS PAYABLE TO SUPPLIERS
|
|
December 31, |
|
||
|
|
2004 |
|
2003 |
|
Electricity suppliers- |
|
|
|
|
|
Eletrobrás Energy from Itaipu |
|
166 |
|
178 |
|
Furnas Centrais Elétricas S.A. (indexed to U.S. dollar) |
|
31 |
|
52 |
|
Spot market CCEE/MAE |
|
149 |
|
146 |
|
Payments to generators for energy purchased on CCEE/MAE during the rationing period |
|
364 |
|
412 |
|
Others |
|
47 |
|
41 |
|
|
|
757 |
|
829 |
|
|
|
|
|
|
|
Supplies and services |
|
137 |
|
114 |
|
|
|
894 |
|
943 |
|
|
|
|
|
|
|
Current liabilities |
|
648 |
|
618 |
|
Long-term liabilities |
|
246 |
|
325 |
|
CCEE/MAE obligations in the amount of R$143, which are fully reserved, were not paid due to an injunction granted to CEMIG in December 2002 that changed the criteria to calculate its obligation, as mentioned in Note 4. The eventual payment of this additional obligation depends on the conclusion of CCEE/MAEE calculations, considering the negotiations between CEMIG and CCEE/MAEE agents described on Note 4.
13. TAXES PAYABLE
The following table describes accrued taxes payable:
|
|
December 31, |
|
||
|
|
2004 |
|
2003 |
|
Short-term - |
|
|
|
|
|
Income tax |
|
159 |
|
80 |
|
Social contribution tax |
|
60 |
|
31 |
|
VAT |
|
169 |
|
142 |
|
Tax on billing COFINS |
|
56 |
|
33 |
|
Others |
|
36 |
|
35 |
|
|
|
480 |
|
321 |
|
Long-term - |
|
|
|
|
|
Tax on billing COFINS |
|
139 |
|
84 |
|
Tax on billing PASEP |
|
27 |
|
16 |
|
|
|
166 |
|
100 |
|
|
|
646 |
|
421 |
|
The federal taxes classified in long-term liabilities refer to part of the net deferred obligations and rights on assets and liabilities arising from the General Agreement of the Electricity Sector and the deferred rate adjustment, which are due based on the realization of these assets and liabilities. These taxes are recorded based on the rates expected to be in force upon realization. The income tax and the social contribution tax arising from these events are recorded as Deferred income taxes (see Note 5).
F-28
14. FINANCING
(a) The following tables describe financings:
LENDERS |
|
Payments of Principal |
|
Annual
|
|
2004 |
|
2003 |
|
||||||
Currency |
|
Short term |
|
Long
|
|
Total |
|
||||||||
Total |
|||||||||||||||
IN FOREIGN CURRENCY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABN AMRO Bank N.V. |
|
Semi-annually through 2005 |
|
Libor + 4.25 |
|
US$ |
|
9 |
|
|
|
9 |
|
29 |
|
ABN AMRO Real S.A. I, II e III |
|
Semi-annually through 2009 |
|
6.35 |
|
US$ |
|
1 |
|
77 |
|
78 |
|
|
|
Banco BNL do Brasil S.A. |
|
Semi-annually through 2005 |
|
Libor + 0.50 |
|
US$ |
|
13 |
|
|
|
13 |
|
16 |
|
Banco do Brasil S.A. Various bonus (1) |
|
Semi-annually through 2024 |
|
Various |
|
US$ |
|
24 |
|
187 |
|
211 |
|
250 |
|
Banco do Brasil S.A. I |
|
Single payment in 2004 |
|
1.40 |
|
JPY |
|
|
|
|
|
|
|
99 |
|
Banco do Brasil S.A. II |
|
Semi-annually through 2004 |
|
Libor + 3.13 |
|
US$ |
|
|
|
|
|
|
|
41 |
|
Banco do Brasil S.A. III |
|
Single payment in 2004 |
|
10.38 |
|
US$ |
|
|
|
|
|
|
|
119 |
|
Banco do Brasil S.A. V |
|
Single payment in 2005 |
|
1.30 |
|
JPY |
|
81 |
|
|
|
81 |
|
83 |
|
Banco do Brasil S.A. VI |
|
Single payment in 2009 |
|
3.90 |
|
JPY |
|
|
|
101 |
|
101 |
|
|
|
Banco Interamericano de Desenvolvimento -BID |
|
Semi-annually through 2006 |
|
4.00 a 7.67 |
|
US$ |
|
13 |
|
6 |
|
19 |
|
35 |
|
Banco Itaú BBA I |
|
Semi-annually through 2004 |
|
3.70 |
|
US$ |
|
|
|
|
|
|
|
120 |
|
Banco Itaú BBA II (2) |
|
Single payment in 2005 |
|
Various |
|
US$ |
|
83 |
|
|
|
83 |
|
90 |
|
Banco Itaú BBA III |
|
Semi-annually through 2004 |
|
3.69 |
|
US$ |
|
|
|
|
|
|
|
111 |
|
Banco Itaú S.A. I |
|
Semi-annually through 2007 |
|
Libor + 3.25 |
|
US$ |
|
47 |
|
66 |
|
113 |
|
148 |
|
Banco Itaú S.A. II |
|
Annually through 2004 |
|
Libor + 2.45 |
|
US$ |
|
|
|
|
|
|
|
49 |
|
Citibank N.A II |
|
Annually through 2004 |
|
Libor + 5.50 |
|
US$ |
|
|
|
|
|
|
|
34 |
|
Citibank N.A III |
|
Single payment in 2004 |
|
10.00 |
|
US$ |
|
|
|
|
|
|
|
33 |
|
Citibank N.A IV |
|
Semi-annually through 2005 |
|
Libor + 4.25 |
|
US$ |
|
7 |
|
|
|
7 |
|
23 |
|
ING Bank Eurobônus |
|
Single payment in 2004 |
|
9.13 |
|
US$ |
|
|
|
|
|
|
|
79 |
|
KFW |
|
Semi-annually through 2016 |
|
4.50 |
|
EURO |
|
2 |
|
26 |
|
28 |
|
31 |
|
LLoyds Tsb Bank Plc |
|
Semi-annually through 2004 |
|
Libor + 6.00 |
|
US$ |
|
|
|
|
|
|
|
7 |
|
Siemens LTDA, I |
|
Semi-annually through 2004 |
|
Libor + 4.25 |
|
US$ |
|
|
|
|
|
|
|
91 |
|
Siemens LTDA, II |
|
Semi-annually through 2005 |
|
9.97 |
|
US$ |
|
22 |
|
|
|
22 |
|
47 |
|
UNIBANCO I, II e III |
|
Single payment in 2009 |
|
6.50 |
|
US$ |
|
|
|
190 |
|
190 |
|
|
|
UNIBANCO IV |
|
Single payment in 2009 |
|
5.50 |
|
US$ |
|
|
|
5 |
|
5 |
|
|
|
UNIBANCO V |
|
Single payment in 2009 |
|
5.00 |
|
US$ |
|
|
|
23 |
|
23 |
|
|
|
MBK Furukawa Sistemas S.A. / Unibanco |
|
Semi-annually through 2008 |
|
Libor + 5.45 |
|
US$ |
|
17 |
|
41 |
|
58 |
|
81 |
|
Toshiba do Brasil S.A. |
|
Quarterly through 2009 |
|
Libor 6.00 |
|
US$ |
|
4 |
|
12 |
|
16 |
|
18 |
|
Other |
|
Various |
|
Various |
|
Various |
|
19 |
|
43 |
|
62 |
|
78 |
|
Total foreign currency financing |
|
|
|
|
|
|
|
342 |
|
777 |
|
1,119 |
|
1,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IN LOCAL CURRENCY - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banco Credit Suisse First Boston S.A. |
|
Various |
|
100.00 do CDI |
|
R$ |
|
|
|
66 |
|
66 |
|
|
|
Banco do Brasil |
|
Single payment in 2009 |
|
111.00 do CDI |
|
R$ |
|
3 |
|
119 |
|
122 |
|
|
|
Banco Itaú BBA IV |
|
Single payment in 2004 |
|
CDI + 3.90 |
|
R$ |
|
|
|
|
|
|
|
302 |
|
Banco Itaú BBA V |
|
Single payment in 2008 |
|
IGP-M (5) + 10.48 |
|
R$ |
|
12 |
|
213 |
|
225 |
|
|
|
Banco Itaú BBA VI |
|
Annually through 2008 |
|
CDI + 2.00 |
|
R$ |
|
3 |
|
100 |
|
103 |
|
|
|
Banco Votorantim S.A. |
|
Single payment in 2010 |
|
113.00 do CDI |
|
R$ |
|
|
|
54 |
|
54 |
|
|
|
BNDES |
|
Monthly through 2008 |
|
SELIC + 1.00 |
|
R$ |
|
102 |
|
288 |
|
390 |
|
475 |
|
Bradesco I, II, III, IV, V, VI, VII e VIII |
|
Single Payment in 2005 |
|
107.50 do CDI |
|
R$ |
|
218 |
|
|
|
218 |
|
|
|
Debêntures I (3) |
|
Annually through 2006 |
|
IGP-M + 12.70 |
|
R$ |
|
504 |
|
485 |
|
989 |
|
879 |
|
Debêntures II - Governo do Estado de M.G. (4) |
|
Annually from 2027 to 2028 |
|
IGP-M |
|
R$ |
|
|
|
8 |
|
8 |
|
50 |
|
Debêntures III (3) |
|
Single payment in 2014 |
|
IGP-M + 10.50 |
|
R$ |
|
15 |
|
246 |
|
261 |
|
|
|
ELETROBRÁS I |
|
Monthly through 2013 |
|
FINEL (6) + 6.50 |
|
R$ |
|
17 |
|
109 |
|
126 |
|
139 |
|
ELETROBRÁS II |
|
Monthly through 2005 |
|
IGP-M + 10.00 |
|
R$ |
|
52 |
|
|
|
52 |
|
88 |
|
ELETROBRÁS III |
|
Various |
|
UFIR (7), RGR + 5.00 a 8.00 |
|
R$ |
|
28 |
|
133 |
|
161 |
|
110 |
|
Large Consumers - TELEMIG/ C.V.R.D. |
|
Various |
|
Various |
|
R$ |
|
3 |
|
6 |
|
9 |
|
8 |
|
HSBC I e II |
|
Single Payment in 2005 |
|
104.00 do CDI |
|
R$ |
|
33 |
|
|
|
33 |
|
|
|
UHESC S.A. |
|
Annually through 2005 |
|
IGP-M + 14.66 |
|
R$ |
|
63 |
|
|
|
63 |
|
56 |
|
UNIBANCO |
|
Single payment in 2009 |
|
CDI + 2.98 |
|
R$ |
|
4 |
|
104 |
|
108 |
|
103 |
|
Other |
|
Various |
|
Various |
|
R$ |
|
18 |
|
42 |
|
60 |
|
69 |
|
Total local currency financing |
|
|
|
|
|
|
|
1,075 |
|
1,973 |
|
3,048 |
|
2,279 |
|
TOTAL |
|
|
|
|
|
|
|
1,417 |
|
2,750 |
|
4,167 |
|
3,991 |
|
(1) These interest rates vary from 2.00 to 8.00 % per year;
F-29
(2) Semiannual Libor plus a spread from 0.81 to 0.88% per year for floating-rate obligations. These interest rates vary from 3.90 to 5.00 % per year for fixed-rate obligations.
(3) Simple Debentures, not convertible into shares and without any preferences or guarantees or issuance of certificates. The debentures accrue annual interest as defined in the bookbuilding process.
(4) The annual shareholders meeting on April 30, 2002 approved the issuance of debentures in the total amount of R$90 to be acquired by the State Government. These debentures are issuable in series, are not convertible into shares of CEMIG, do not have any preference or guarantee, mature within 25 years from the date of issuance and will be restated based on the IGP-M index, without interest. The funds to be obtained from these issuances will be used for the construction of the Irapé Power Plant. The Company issued the first three series in the amount of R$23 from 2002 to 2004. The State Government is settling these debentures with the funds from its share of CEMIGs dividends.
(5) IGP-M - Índice Geral de Preços de Mercado (General Market Price Index)
(6) FINEL - Índice Interno da Eletrobrás (Eletrobrás Internal Index)
(7) UFIR - Unidade Fiscal de Referência (Tax Reference Unit)
The escrow deposits made in compliance with Resolution No. 2,515 of June 29, 1998 of the Brazilian Central Bank are classified as Restricted investments Current and Other assets (note 7).
In addition to the financings described above, the Company has unused credit lines with financial institutions as of December 31, 2004 in the amount of R$94.
Most of the Companys financing are guaranteed by the Federal and State governments and the proceeds of the financings have generally been used by the Company for working capital and to finance the expansion of its electric power generation, transmission and distribution systems.
CEMIG has pledged its rights to future revenues related to electricity sales in the amount of R$1,075. These rights serve as collateral for certain financing.
(b) Composition of foreign financings by currency and domestic currency indices:
|
|
December 31, |
|
||
|
|
2004 |
|
2003 |
|
Currency - |
|
|
|
|
|
United States Dollars |
|
857 |
|
1,424 |
|
Japanese yen |
|
182 |
|
182 |
|
Euro |
|
61 |
|
69 |
|
Currency baskets |
|
18 |
|
33 |
|
Others |
|
1 |
|
4 |
|
|
|
1,119 |
|
1,712 |
|
Index - |
|
|
|
|
|
Índice
Geral de Preços de Mercado
IGP-M
|
|
1,606 |
|
1,085 |
|
Certificado de
Depósito Interbancário CDI
|
|
704 |
|
405 |
|
Sistema
Especial de Liquidação e Custódia
|
|
390 |
|
475 |
|
Unidade
Fiscal de Referência
|
|
161 |
|
110 |
|
Índice Interno da Eletrobrás
|
|
126 |
|
139 |
|
Others |
|
61 |
|
65 |
|
|
|
3,048 |
|
2,279 |
|
|
|
4,167 |
|
3,991 |
|
F-30
(c) The following table sets forth the variations for the periods indicated in the foreign currency / Brazilian real exchange rates for the principal foreign currencies used to restate financing, expressed as a percentage:
|
|
Year ended December 31, |
|
||||
|
|
2004 |
|
2003 |
|
2002 |
|
Currency- |
|
|
|
|
|
|
|
Currency baskets |
|
2.81 |
|
3.63 |
|
60.32 |
|
Euro |
|
(0.85 |
) |
(7.78 |
) |
79.35 |
|
Japanese Yen |
|
(7.02 |
) |
(9.30 |
) |
68.18 |
|
United States Dollars |
|
(8.74 |
) |
(18.23 |
) |
52.27 |
|
(d) The following table sets forth the variations for the periods indicated of the principal indices applied to domestic currency financing, in percentages:
|
|
Year ended December 31, |
|
||||
|
|
2004 |
|
2003 |
|
2002 |
|
Index- |
|
|
|
|
|
|
|
SELIC |
|
16.24 |
|
23.41 |
|
19.37 |
|
CDI |
|
16.16 |
|
23.33 |
|
19.09 |
|
IGP-M |
|
12.41 |
|
8.71 |
|
25.31 |
|
FINEL |
|
2.38 |
|
1.70 |
|
4.67 |
|
(e) Maturities of the long-term financing:
|
|
As of December 31,
|
|
|
|
|
|
2006 |
|
861 |
|
2007 |
|
462 |
|
2008 |
|
437 |
|
2009 |
|
436 |
|
2010 |
|
97 |
|
2011 and thereafter |
|
457 |
|
|
|
2,750 |
|
(f) Restrictive Covenants
Certain of CEMIGs loans, financing agreements and debentures contain certain covenants, calculated according to Brazilian Corporate Law, which the Company has complied with as of December 31, 2004 as described below:
Description of the Restrictive Clause |
|
Required Rate |
|
Position on
|
|
EBITDA/Debts |
|
Greater than or equal to 3.0 |
|
6.50 |
|
Debts/EBITDA |
|
Less than or equal to 2.5 |
|
1.56 |
|
Net fixed asset/Assets |
|
Greater than or equal to 30% |
|
49 |
% |
Shareholders equity/Assets |
|
Greater than or equal to 30% |
|
43 |
% |
EBITDA/Financial Income |
|
Greater than or equal to 2.0 |
|
8.06 |
|
Net debts/EBITDA (*) |
|
Less than or equal to 3.25 |
|
1.47 |
|
EBITDA/Debts |
|
Greater than or equal to 2.8 |
|
5.63 |
|
Debts/EBITDA |
|
Less than or equal to 3.36 |
|
1.80 |
|
Debts/Shareholders equity + debts |
|
Less than or equal to 53% |
|
37 |
% |
Current debts/EBITDA |
|
Less than or equal to 90% |
|
60 |
% |
Investiment/EBITDA |
|
Less than or equal to 60% |
|
43 |
% |
(*)
Net debt = Total debt less cash balance and
negotiable values
EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization
Some contracts established specific criteria to define EBITDA to be used
in the covenants calculations.
F-31
Empresa de Infovias S.A. financing contract with MBK Furukawa Sistemas S.A. / Unibanco, in the amount of R$58 as of December 31, 2004, of which R$41 is classified under long-term liabilities, contains certain covenants with which Empresa de Infovias S.A. has not complied. These covenants are based on the financial statements prepared in accordance with the accounting practices adopted in Brazil. Empresa de Infovias S.A. has obtained a waiver from the creditors that are parties to this contract. The waiver affirms that such creditors will not exercise their rights to demand accelerated or immediate payment of the total amount due until December 31, 2005. This financing is classified in current and long-term liabilities according to the original terms of the respective contract, in light of the waiver obtained. CEMIG guarantees this contract and any payments made by CEMIG will be converted into preferred shares of Empresa de Infovias S.A..
15. REGULATORY CHARGES PAYABLE
The following table describes the Companys accrued regulatory charges payable:
|
|
December, 31 |
|
||
|
|
2004 |
|
2003 |
|
Global reserve for reversion quota |
|
42 |
|
60 |
|
Fuel usage quota |
|
36 |
|
7 |
|
Emergency capacity charge |
|
56 |
|
51 |
|
Energy development account |
|
18 |
|
13 |
|
Other |
|
3 |
|
3 |
|
|
|
155 |
|
134 |
|
(a) Global reserve for reversion quota:
The global reserve for reversion quota was established as a fund managed by ELETROBRÁS ( Centrais Elétricas Brasileiras S.A ., the Federal Government-owned holding company for investments in the Brazilian power sector) for the purpose of reimbursement of electricity companies investments when their concessions expire and assets subject to the concession revert to the Federal Government. It is funded through assessments on power companies and is based on 2.5% of assets in service, limited to 3% of total annual operating revenues, net of value-added tax on sales to final customers.
(b) Fuel usage quota:
The fuel usage quota represents contributions made by the electricity company concessionaires to subsidize the cost of fuel used in the thermoelectric energy generating process in the Brazilian energy system.
(c) Emergency capacity charge:
The emergency capacity charge represents a charge established in 2002, which is prorated among final consumers of electric energy, and relates to the acquisition of energy and contracted generation capacity by the Comercializadora Brasileira de Energia Elétrica (The Brazilian Emergency Energy Trader or CBEE).
(d) Energy development account:
The energy development account was created by Law No. 10,438/02 to foster energy development in the states and to promote competition regarding energy produced through wind farms, small hydroelectric power plants, biomass, natural gas and coal. The amounts to be paid by CEMIG were defined by ANEEL Resolution No. 42 dated January 31, 2003.
F-32
16. EMPLOYEE POST-RETIREMENT BENEFITS
The Company sponsors a pension plan, administered by Fundação Forluminas de Seguridade Social - FORLUZ (Forluminas Social Security Foundation, or FORLUZ) covering substantially all of its employees. With respect to such plan, SFAS 87 Employers Accounting for Pensions has been applied from and after January 1,1995. However, amortization of the net transition obligation existing at January 1, 1995 has been computed retroactively as if it had been established on January 1, 1989, which is the date that SFAS 87 first became applicable for non-U.S. pension funds.
Until October 1997, the Company sponsored only a defined benefit pension plan. From September 29, 1997 to May 1, 1998, participants were permitted to elect to migrate to a new defined contribution plan. Those participants who elected to join the new plan had two options. The first was to maintain the benefit earned up to the date of migration in the defined benefit plan, with no further increases for salary increases or future services, and future contributions would be made to the new plan to the individual account. The second option for those participants who migrated to the defined contribution plan was to transfer the accumulated benefit as of that date to their individual account in the defined contribution plan. In both alternatives, the participants became fully vested in the benefits accumulated as of the migration date.
Under the defined contribution plan the Company will match the employees contributions from 3% to 12% of each employees salary, depending on certain factors. The total assets in the defined contribution plan (which is also administered by FORLUZ) as of December 31, 2004 and 2003 was R$1,109 and R$865, respectively, and the contribution expense for the years ended December 31, 2004, 2003 and 2002 was R$37, R$31 and R$22, respectively.
CEMIG has also established post-retirement health care plans and pays life insurance premiums for retirees. The accounting for these benefits is in accordance with SFAS 106 Employers Accounting for Post-retirement Benefits other than Pensions.
CEMIG has offered to its employees an incentive for early retirement, which consists of an additional amount, paid when the employee retires, of 10% of the employees salary for each year worked for the Company. To obtain this benefit the employee must opt in writing indicating his intention to retire early. Accordingly, the costs of this incentive are recognized on accrual basis. CEMIG may withdraw this additional benefit at anytime.
CEMIG uses a December 31 measurement date for its employee post-retirement benefits.
Amortization of deficit in actuarial reserves
Part of the post-retirement benefit liabilities, in the amount of R$1,555, as of December 31, 2004 (R$1,539 as of December 31, 2003), was recognized as obligations payable by the Company. These obligations are being amortized through monthly installments, through June 2024, calculated under the fixed-installment system (Price Table). Part of these amounts is restated annually according to the salary adjustment index for the Companys employees (not including productivity) included in the defined benefit plan, and part is adjusted according to the IPCA IPEAD (consumer price index calculated by the Minas Gerais Accounting Management and Economic Research Institute of Minas Gerais Federal University), plus 6% per year.
In case FORLUZ reports a surplus for three consecutive years, such surplus may be used to reduce CEMIGs obligations mentioned in the previous paragraph, as contractually agreed.
F-33
The change in benefit obligations for the years ended December 31, 2004 and 2003 is as follows:
|
|
Defined benefit pension plan |
|
Post-retirement health care
|
|
||||
|
|
Year ended December 31, |
|
Year ended December 31, |
|
||||
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
Benefit obligation beginning of year |
|
3,485 |
|
2,752 |
|
512 |
|
438 |
|
Service cost |
|
6 |
|
6 |
|
25 |
|
14 |
|
Interest cost |
|
449 |
|
353 |
|
66 |
|
57 |
|
Actuarial loss |
|
897 |
|
579 |
|
144 |
|
4 |
|
Plan amendment |
|
|
|
46 |
|
|
|
35 |
|
Benefits paid to participants |
|
(339 |
) |
(251 |
) |
(41 |
) |
(36 |
) |
Benefit obligation - end of year |
|
4,498 |
|
3,485 |
|
706 |
|
512 |
|
The change in plan assets for the years ended December 31, 2004 and 2003 is as follows:
|
|
Defined benefit pension plan |
|
Post-retirement health care
|
|
||||
|
|
Year ended December 31, |
|
Year ended December 31, |
|
||||
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
Fair value of plan assets beginning of year |
|
2,584 |
|
2,112 |
|
16 |
|
9 |
|
Employer contributions |
|
210 |
|
207 |
|
25 |
|
23 |
|
Employee contributions |
|
|
|
|
|
21 |
|
18 |
|
Actual return on plan assets |
|
610 |
|
516 |
|
11 |
|
2 |
|
Benefits paid to participants |
|
(339 |
) |
(251 |
) |
(41 |
) |
(36 |
) |
Fair value of plan assets end of year |
|
3,065 |
|
2,584 |
|
32 |
|
16 |
|
The funded status of the defined benefit pension plan and post-retirement health care and insurance is as follows:
|
|
Defined benefit pension plan |
|
Post-retirement health care
|
|
||||
|
|
December 31, |
|
December 31, |
|
||||
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
Projected benefit obligation in excess of plan assets |
|
1,433 |
|
901 |
|
674 |
|
496 |
|
Unrecognized net transition obligation, being recognized from January 1, 1995 |
|
|
|
|
|
(27 |
) |
(33 |
) |
Unrecognized prior service cost |
|
(43 |
) |
(46 |
) |
(33 |
) |
(35 |
) |
Unrecognized net actuarial gain (loss) |
|
(826 |
) |
(116 |
) |
(176 |
) |
(46 |
) |
|
|
|
|
|
|
|
|
|
|
Accrued pension liability |
|
564 |
|
739 |
|
438 |
|
382 |
|
Additional minimum liability Other comprehensive income |
|
804 |
|
87 |
|
|
|
|
|
Total accrued pension liability |
|
1,368 |
|
826 |
|
438 |
|
382 |
|
F-34
The components of net periodic benefit costs for the years ended December 31, 2004, 2003 and 2002 are as follows:
|
|
Defined benefit pension plan |
|
Post-retirement health care and
|
|
||||||||
|
|
Year ended December 31, |
|
Year ended December 31, |
|
||||||||
|
|
2004 |
|
2003 |
|
2002 |
|
2004 |
|
2003 |
|
2002 |
|
Service cost |
|
6 |
|
6 |
|
6 |
|
25 |
|
14 |
|
25 |
|
Interest cost |
|
449 |
|
353 |
|
340 |
|
66 |
|
57 |
|
56 |
|
Expected return on plan assets |
|
(422 |
) |
(346 |
) |
(197 |
) |
(7 |
) |
(2 |
) |
(1 |
) |
Amortization of transition obligation |
|
|
|
|
|
|
|
6 |
|
5 |
|
6 |
|
Amortization of loss (gain) |
|
|
|
(1 |
) |
6 |
|
3 |
|
2 |
|
3 |
|
Expected Employee contribution |
|
|
|
|
|
|
|
(18 |
) |
(10 |
) |
(11 |
) |
Curtailment gain |
|
|
|
|
|
|
|
|
|
|
|
(48 |
) |
Net periodic benefit cost |
|
33 |
|
12 |
|
155 |
|
75 |
|
66 |
|
30 |
|
The components of the projected net periodic post-retirement benefit costs for 2005 are as follows:
|
|
Defined benefit
|
|
Post-retirement
|
|
Service cost |
|
7 |
|
9 |
|
Interest cost |
|
491 |
|
77 |
|
Expected return on plan assets |
|
(437 |
) |
(5 |
) |
Amortization of prior service cost |
|
3 |
|
2 |
|
Amortization of transition obligation |
|
|
|
5 |
|
Amortization of loss (gain) |
|
27 |
|
10 |
|
|
|
91 |
|
98 |
|
The weighted-average asset allocations by asset category is as follows:
|
|
Defined benefit pension plan and Post-retirement health care |
|
||||
|
|
Asset allocation
|
|
Target asset allocation
|
|
||
Type of investment |
|
2004 |
|
2003 |
|
Percentages |
|
|
|
|
|
|
|
|
|
Debt Securities |
|
83.52 |
% |
85.07 |
% |
From 70% to 100% |
|
Equity Securities |
|
10.48 |
% |
8.67 |
% |
Up to 15% |
|
Real Estate |
|
3.33 |
% |
4.02 |
% |
Up to 8% |
|
Participant loans |
|
2.67 |
% |
2.24 |
% |
Up to 10% |
|
Total |
|
100.00 |
% |
100.00 |
% |
|
|
Investment strategies:
FORLUZ Investment Committee determines investment guidelines;
Investment objectives: achieve the minimum actuarial yield (IPCA/IPEAD plus 6% per year), in both long and short terms;
Types of allowed investments: Fixed income low credit risk, stocks, real estate and loans to participants;
Types of investments not allowed: medium and high credit risk assets, foreign currencies and others according to the Brazilian legislation;
Use of derivatives: with the purpose of hedging exposures.
F-35
Benchmarks for investing plan assets:
Debt securities: CDI, IGP-M, INPC (1), IPCA/IBGE (2);
Equity securities: Average IBOVESPA (3);
Real Estate: IPCA/IPEAD + 6% per year;
Participant loans: IPCA/IPEAD + 10.03% per year.
(1) Indice Nacional de Preços ao Consumidor INPC (Consumer Price National Index)
(2) Indice de Preços ao consumidor amplo - IPCA (Consumer price index calculated by the Brazilian Institute of Geography and Statistics IBGE)
(3) Indice da Bolsa de Valores de São Paulo IBOVESPA (Index which represents the variation of the main shares negotiated on Sâo Paulo Stock exchange)
As of December 31, 2004 and 2003, the pension plan assets includes securities issued by CEMIG as follows:
|
|
Defined benefit pension plan |
|
||
|
|
December 31, 2004 |
|
December 31, 2003 |
|
|
|
|
|
|
|
Debentures |
|
212 |
|
202 |
|
Shares |
|
|
|
40 |
|
|
|
212 |
|
242 |
|
Assumptions used by the Company were as follows (percentage including projected inflation of 5% per annum):
|
|
Defined benefit pension plan |
|
||
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
Actuarial method |
|
Projected Unit Credit |
|
Projected Unit Credit |
|
Annual discount rate |
|
11.30 |
|
13.40 |
|
Annual expected return on plan assets |
|
14.45 |
|
16.55 |
|
Annual salary increase |
|
7.10 |
|
9.20 |
|
Annual increase in benefits |
|
5.00 |
|
5.00 |
|
Mortality rate |
|
AT - 83 |
|
UP-94 |
|
Disability rate |
|
Light Medium |
|
Light Medium |
|
Disable mortality rate |
|
IAPB-57 |
|
IAPB-57 |
|
Expected annual turnover rate |
|
2.00% |
|
2.00% |
|
The Company changed its mortality table in 2004 from UP-94 to AT-83 based on studies performed by FORLUZ which concluded that AT-83 better represents the demographic profile of the FORLUZ participants. The mentioned tables do not have material differences between each other and, therefore, this change did not have a material impact in CEMIGs statement of operations in 2004.
The Company expects a reduction in the Brazilian interest rate in the long-term. Therefore, the Company reduced the annual discount rate on post-retirement benefits from 13.40% to 11.30% (assuming an annual inflation rate of 5.00%).
The rationale used in determination of long-term return on assets rate described above is based in the asset managers mid to long-term expectations and the Brazilian government bonds rates. Additionally, the Company consider as reasonable an expected return on assets which would be equal to discount rate plus 2% or 3%.
CEMIGs obligation related to its post-retirement health care plan is calculated using a defined annual contribution per employee during the rest of their lives. The contribution amount is not based on the increase or decrease in medical care cost. If the predetermined contributions do not cover future benefit expenses, CEMIGs employees will be required to make additional contributions or the related medical
F-36
benefits will be reduced, in accordance with an agreement between CEMIG and the labor union relating to the health care plan.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
|
|
Pension benefits |
|
Other benefits |
|
2005 |
|
323 |
|
29 |
|
2006 |
|
326 |
|
29 |
|
2007 |
|
329 |
|
30 |
|
2008 |
|
331 |
|
30 |
|
2009 |
|
332 |
|
30 |
|
2010-2014 |
|
1,652 |
|
155 |
|
|
|
3,293 |
|
303 |
|
17. CONTINGENCIES
CEMIG and its subsidiaries are party to certain legal proceedings in Brazil arising in the normal course of business, regarding tax, labor, civil and other issues.
The Company believes that any loss in excess of the amounts provided for in respect of such contingencies will not have a material adverse effect on the Companys results of operations or financial position.
For those contingencies for which an adverse outcome has been deemed probable, the Company has made provisions for losses as follows:
|
|
December 31 |
|
||
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Labor claims |
|
111 |
|
91 |
|
Civil lawsuits - Consumers |
|
105 |
|
97 |
|
Social contribution tax |
|
69 |
|
52 |
|
Finsocial |
|
20 |
|
20 |
|
ANEEL administrative proceedings |
|
5 |
|
15 |
|
Tax and contributions |
|
60 |
|
30 |
|
Civil lawsuits - Others |
|
28 |
|
44 |
|
Others |
|
16 |
|
5 |
|
|
|
414 |
|
354 |
|
CEMIG believes that short-term losses were not probable with respect to pending litigation in 2003. Accordingly, the accrual for contingencies has been fully classified as long term.
Certain details relating to such provisions are as follows:
(a) Labor claims:
The labor claims relate principally to overtime and hazardous occupation compensation. The total exposure for those matters is estimated to be R$139 as of December 31, 2004 (R$113 as of December 31, 2003). CEMIG determines the amounts to be reserved based on the nature of groups of claims and the most recent court decisions.
F-37
(b) Civil lawsuits Consumers:
A number of industrial consumers have brought legal action against the Company seeking refunds of amounts paid to CEMIG as a result of a rate increase that became effective during the Brazilian governments economic stabilization Cruzado Plan in 1986, alleging that such increases violated the price controls instituted as part of that plan. CEMIG determines the amounts to be reserved based on the amount billed subject to consumers claims and recent court decisions. The total estimated exposure to the Company for those claims is fully reserved.
(c) Social contribution tax:
On June 28, 1991, the Federal Government enacted Law No. 8,200, regulating the monetary restatement for purposes of the financial statements prepared in accordance with the accounting practices adopted in Brazil. Under this law, the Company was required to record complementary monetary restatement, increasing its fixed assets, that was considered, through depreciation, amortization and write-offs of fixed assets, a deductible expense for income tax calculation. Such law did not clarify the proceedings regarding the deductibility of the complementary monetary restatement charged to income for social contribution tax purposes.
The Company is deducting the amounts of depreciation, amortization and write-off of the supplementary monetary restatement of property, plant and equipment, for purposes of computation of social contribution tax. However, the Company has recorded a full provision for this tax contingency.
(d) Finsocial:
In 1994, CEMIG was fined by the Secretaria da Receita Federal (the Brazilian federal tax authorities) due to the exclusion of State VAT from the Finsocial calculation, a tax on revenue extinguished in 1992. The total estimated exposure to the Company for this claim is fully reserved.
CEMIG has a Finsocial contribution dispute involving an amount of R$115 for which CEMIG has recorded a judicial deposit and a loss provision, both equivalent to the historic litigated amount. In case CEMIG does not succeed in this lawsuit, it will have a loss equivalent to the difference between the loss provision recorded and the actual loss incurred. At the same time, CEMIG will have a financial revenue equal to the difference between the restated balance in the judicial deposit account and the amount originally deposited, substantially off-setting the increase in the loss provision.
(e) ANEEL administrative proceedings
CEMIG was fined by ANEEL in some administrative proceedings due to alleged failure to comply with certain quality standards with respect to consumers and other matters. The Company is defending itself against such fines. The provision as of December 31, 2004 represents the potential loss in those matters.
(f) Taxes payable Suspended liability
The recorded provision of R$60 is related to the deduction of the social contribution tax paid in the calculation of income tax. CEMIG has a preliminary court order granted by the Eighth Civil Court of the Federal Justice, on April 17,1998, for the exemption of payment.
(g) Civil lawsuits and others:
Other reserves are related to a number of lawsuits involving the Federal Government, in which the Company is disputing the constitutionality of certain federal taxes that have been assessed against it and other general claims arising from the ordinary course of business.
(h) Contingencies for which an adverse outcome has been deemed remote or possible:
CEMIG has other relevant legal proceedings against it for which the Company considers an unfavorable outcome to be remote or possible. The Company does not expect to incur any losses with respect to these contingencies and therefore the Company has not recorded any accruals for such claims. Certain details relating to such matters are as follows:
F-38
(i) Income and social contribution taxes on post retirement benefits:
On October 11, 2001, the Brazilian Federal Tax Authorities (Secretaria da Receita Federal) issued an assessment notice, in the updated amount of R$264, arising from the utilization of tax credits that resulted from the amendment of the Companys 1997, 1998, 1999 and 2000 tax returns. The tax returns were amended as a result of a change in the accounting method for recording post-retirement benefit liabilities. The additional liabilities that resulted from the accounting change were recognized in the revised tax returns, resulting in tax loss carryforwards. No reserve has been recorded as a result of this assessment notice, since the Company believes that the procedures which generated the tax credits are legally sound. An adverse outcome in this mater has been deemed remote.
The tax credits mentioned in the preceding paragraph were offset against federal taxes paid in 2001 and 2002. Due to this offset, CEMIG is exposed to additional penalties in the amount of R$217. No reserve for contingencies has been made to cover any liabilities that may result from the tax assessment, since CEMIG believes that it has solid legal grounds that support the procedures adopted. An adverse outcome in this mater has been deemed remote.
In 2003, the Federal Tax Authorities, after performing an inspection of the Companys tax returns for 1997-2001, issued an assessment notice, in the amount of R$1,537, claiming that the Company did not pay all its tax liabilities related to those tax years. CEMIG submitted an administrative defense requesting that such assessment notice be canceled, since the Tax Authorities did not consider the Companys amended tax returns which have been filed. Such amended tax returns show that the Company has properly settled the tax liabilities challenged. No reserve has been recognized for this claim, since the Company believes that it has a meritorious defense to such claim, either at the administrative level or in the courts. An adverse outcome in this mater has been deemed remote.
(ii) COFINS:
The Company began contesting the payment of COFINS (tax on revenue) in 1992. As a result of an unfavorable court ruling, the Company paid R$239 of COFINS tax on July 30, 1999. The Federal Government is claiming that the Company owes approximately R$230 in additional fines and interest relating to the non-payment of COFINS. The Company is contesting such claim. No reserve has been recorded for this claim, since the Company believes that it has a meritorious defense against such claim and, consequently, does not expect to incur losses related thereto. An adverse outcome in this mater has been deemed remote.
(iii) Taxa de ocupação do Solo:
Some Municipalities of the State of Minas Gerais assessed the Company for the payment of the tax named Taxa de Ocupação do Solo (tax charged by municipalities due to the use of the land to construct energy distribution network). There are several administrative proceedings related to this matter, with the total amount of approximately R$11. No reserve has been recorded for these claims, since the Company believes that it has a meritorious defense against such claims. An adverse outcome in this mater has been deemed remote.
(iv) ITCMD Imposto de Transmissão Causa Mortis e Doação:
The State of Minas Gerais assessed the Company for the non-payment of the tax named ITCMD Imposto de Transmissão Causa Mortis e Doação ((inheritance and donation tax), through three fiscal executions, in the amount of R$128. No reserve has been recorded for these claims, since the Company believes that it has a meritorious defense against such claims. An adverse outcome in this mater has been deemed possible.
(v) VAT:
In 2004, the State Government filed three administrative proceedings against the Company, in the amount of R$47. CEMIG filed its defenses in May 2004. No reserve has been recorded for these claims, since the Company believes that it has a meritorious defense against such claims. A adverse outcome in this mater has been deemed remote.
F-39
(vi) VAT on low income customer subsidy:
Since 2002, CEMIG has been receiving a subsidy from ELETROBRÁS to reimburse the Company for losses incurred as a result of the discount CEMIG was required to provide low income consumers under Federal Law No.10,604/02. Recently, the State of Minas Gerais issued the Decree No. 43,999/05 charging ICMS on this subsidy. The Company believes the subsidy is not taxable and it is therefore not collecting the ICMS on the subsidy. The Company may be assessed by the State of Minas Gerais with regard to this matter. CEMIG estimates this possible contingency to be approximately R$35. A adverse outcome in this mater has been deemed possible.
(vii) Regulatory agency acts:
ANEEL has a regulatory proceeding pending against CEMIG claiming that CEMIG owes the Federal Government R$509 due to a miscalculation of credits in the amount of the cumulative rate deficit (CRC) applied to reduce amounts owed to the Federal Government. On October 31, 2002, ANEEL issued a final administrative decision against the Company. On January 9, 2004, the Brazilian Treasury Authority (Secretaria do Tesouro Nacional) issued an Official Collection Letter, in the amount of R$611, to be paid by January 30, 2004. The Company did not make such payment since it believes that it has a meritorious defense against such claim and has therefore recorded no reserve in respect thereto. An adverse outcome in this matter has been deemed possible.
The Federal Public Auditing Court (Tribunal de Contas da União) which is in charge of the verification the legality of acts performed by the Federal Government and other federal entities of including ANEEL, has recently decided that the methodology adopted by ANEEL for the periodic revision did not consider certain tax benefits obtained by distribution companies, including CEMIG, thus, causing a higher rate adjustment applied to rates and harming end consumers. The outcome of such decision may be a reconsideration by ANEEL of the rate adjustment determined to be applied to CEMIGs rates in the periodic rate revision occurred in April 8, 2003. No reserve has been recorded for this claim, since the Company believes that it has a meritorious defense against such claim and, consequently, does not expect to incur losses related thereto. An adverse outcome in this matter has been deemed possible.
On November 14, 2003, the Federal Public Auditing Court, which has the authority to audit any decision by ANEEL that may impact public finance, initiated an administrative proceeding against ANEEL to evaluate the criterion adopted by ANEEL in the Energy Consumption Reduction Emergency Program (Programa Emergencial de Redução de Consumo de Energia Elétrica), or PERCEE. The Federal Public Auditing Court has asked us to provide certain information with respect to our rates, which, according to the Federal Public Auditing Court, were mistakenly approved by ANEEL. If we cannot provide support for these rates and ANEEL fails to confirm the legality of the criterion adopted, CEMIG may incur losses in the amount of R$83.2 million. No reserve has been recognized in connection with this proceeding, as we believe we can provide the necessary support and that ANEEL can confirm the legality of the rates.
(viii) Civil lawsuits:
Various consumers and the Public Prosecutor of Minas Gerais have brought civil claims against CEMIG contesting rate adjustments applied in prior years, including rate subsidies granted to low-income consumers, the special rate adjustment, the inflationary index used to increase the electric rates in April 2003 and double reimbursement for any amounts that the Company found to have wrongfully collected and substitution of current adjustment index contained in the concession agreement as well as a revision of the methodology for calculation of the X Factor. It is not possible at the present time to estimate the amounts involved in these claims. The Company believes that it has a meritorious defense and, therefore, no reserve has been recorded for such claims. An adverse outcome in this matter has been deemed remote.
The Company is a defendant in some lawsuits contesting the Emergency Capacity Charge. The Company collects the Emergency Capacity Charge from its customers on behalf of Comercializadora Brasileira de Energia Elétrica CBEE, a federal government agency set up to supply energy to utilities in the event of future shortages. It is not possible at the present time to estimate the amounts involved in these claims. No accrual has been recorded for these claims since the Company believes that it has a meritorious defense. An adverse outcome in this matter has been deemed remote.
F-40
CEMIG is a defendant, together with the city of Belo Horizonte in a lawsuit brought by a citizen of Belo Horizonte, challenging the number of hours that CEMIG has charged the city of Belo Horizonte for public lighting provided to the city during the past 20 years. CEMIG estimates the contingency to be approximately R$62. An adverse outcome in this matter has been deemed possible.
The Company is a defendant, with CVRD, Comercial e Agrícola Paineiras and Companhia Mineira de Metais, in a class action lawsuit, brought by the citizens of the State of Minas Gerais. This lawsuit seeks to nullify the environmental licenses relating to the Capim Branco I and Capim Branco II hydroelectric power plants. The Company believes that it has a meritorious defense to this lawsuit. An adverse outcome in this matter has been deemed possible.
The Company is also a defendant, together with CVRD, in another class action lawsuit, brought by the citizens of the State of Minas Gerais. This lawsuit seeks to nullify the environmental license relating to the Aimorés hydroelectric power plant as well as the related concession. Management believes that it has a meritorious defense to this lawsuit. An adverse outcome in this matter has been deemed remote.
We have contested a lawsuit brought by Sistron Sistemas e Companhia Ltda, referring to alleged damages estimated at R$94.7 million arising from a services agreement that was affected by economic distress caused by the real devaluation in 1999. We have not accrued any liability related to this claim, as we believe we have a meritorious defense.
In addition to the matters described above, CEMIG and its subsidiaries are involved in other litigation arising from the normal course of business. Management believes that any losses would not have a material adverse effect on the consolidated financial position and results of operations of the Company.
18. SHAREHOLDERS EQUITY
(a) Capital stock:
|
|
Year ended December 31,
|
|
||||
|
|
2004 |
|
2003 |
|
2002 |
|
PREFERRED SHARES: |
|
|
|
|
|
|
|
Balance, at beginning of the year |
|
91,279,651 |
|
91,279,651 |
|
89,504,020 |
|
Issuance of new shares |
|
|
|
|
|
1,775,631 |
|
Balance, at the end of the year |
|
91,279,651 |
|
91,279,651 |
|
91,279,651 |
|
|
|
|
|
|
|
|
|
COMMON SHARES: |
|
|
|
|
|
|
|
Balance, at beginning of the year |
|
70,874,168 |
|
70,874,168 |
|
69,495,478 |
|
Issuance of new shares |
|
|
|
|
|
1,378,690 |
|
Balance, at the end of the year |
|
70,874,168 |
|
70,874,168 |
|
70,874,168 |
|
|
|
|
|
|
|
|
|
TREASURY STOCK (Preferred shares): |
|
|
|
|
|
|
|
Balance, at beginning of the year |
|
(69,128 |
) |
(69,128 |
) |
(67,783 |
) |
Issuance of new shares |
|
|
|
|
|
(1,345 |
) |
Balance, at the end of the year |
|
(69,128 |
) |
(69,128 |
) |
(69,128 |
) |
Total |
|
162,084,691 |
|
162,084,691 |
|
162,084,691 |
|
At December 31, 2004, the State Government owned 51% of the Companys common shares and 3% of its preferred shares, equal to 24% of total capital. The holders of the preferred shares are not entitled to vote at shareholders meetings, but the shares have priority in the repayment of capital upon liquidation and are entitled to a minimum annual dividend as described in note 18 (d.1).
The common and preferred shares have a par value amount of R$0.01.
(b) Additional paid-in capital:
The balance refers to premium received by the Company when shares were issued.
F-41
(c) Appropriated retained earnings:
The following describes certain reserves that are included in shareholders equity:
Fiscal incentive investment reserve this reserve results from an option to designate a portion of income tax otherwise payable for investment in government-approved projects and is recorded in the year following that in which the taxable income is earned. Under the financial statements prepared in accordance with the accounting practices adopted in Brazil, the amount designated for investments is recorded as an asset and credited directly to this reserve. This balance is restricted for capital increase. Under U.S. GAAP, this investment tax credit was originally credited to income and then transferred from unappropriated retained earnings to this reserve.
Rate shortfall reserve this represents the accumulated rate shortfall reimbursement recorded under the rate-setting system in force up to March 1993. Under the financial statements prepared in accordance with the accounting practices adopted in Brazil, the amount of rate shortfall, net of taxes, was credited directly to this reserve, which can be used only for capital increases. Under U.S. GAAP, this amount was originally credited to income, at its net present value, and then the corresponding amount was transferred from unappropriated retained earnings to this reserve.
Unrealized income reserve this represents inflationary profits arising from the system of indexation of the financial statements prepared in accordance with the accounting practices adopted in Brazil in force up to December 31, 1995. Brazilian companies are allowed to record this reserve in order to restrict the amount of net income available for compulsory dividends.
Legal reserve this reserve is a requirement for all Brazilian corporations and represents the appropriation of 5% of annual net income up to a limit of 20% of share capital. This appropriation is not required in the fiscal year in which this legal reserve balance, added to the other established capital reserves, exceeds 30% of the paid-in capital, which has been the case with respect to 2004 and 2003.
In its 2002 financial statements prepared in accordance with accounting practices adopted in Brazil, the Company transferred its total legal reserve and unrealized income reserve to accumulated retained earnings in order to offset the net loss for the year, which resulted primarily from the recording of the provision for loss on the account receivable from the State Government and the exchange loss caused by the devaluation of the real compared to the U.S. dollar. Therefore, in its U.S. GAAP financial statements, CEMIG recorded the transfer from its legal reserve and unrealized income reserve to the unappropriated retained earnings.
(d) Unappropriated retained earnings:
This balance represents retained earnings determined in accordance with U.S. GAAP after (i) the allocation of the amount for legal reserve (when required) as described in note 18 (c); (ii) allocation or transfer to or from other reserves as described in note 18 (c); and (iii) dividends and interest on capital in lieu of dividends as described in note 18 (d.1).
(d.1) Dividends and interest on capital in lieu of dividends:
The extraordinary shareholders meeting held on December 13, 2004 changed the mandatory dividend rate from 25% to 50% of adjusted net income under Brazilian Corporate Law. Additionally, the Company may distribute extraordinary dividends, to the extent that cash is available, as determined by the Board of Directors, subject to the guidelines of the Company Directive Plan. Declared dividends are paid in two equal installments, the first on June 30 and the second on December 30 of each year.
Each preferred share is entitled to an annual dividend equal to the greater of 10% of par value per preferred share or 3% of the book value of such preferred share, also based on the financial statements prepared in accordance with accounting practices adopted in Brazil. This preferred dividend has priority over the allocation of the mandatory dividend amount for the relevant period.
F-42
After payment of the preferred dividend, the remainder of the mandatory dividend amount, if any, is allocated first to the payment of an annual dividend to the holders of common shares in an amount up to the annual cash dividend guaranteed to the preferred shares. If a portion of the mandatory dividend amount remains after the payment of the common dividend, the remaining funds are to be distributed on an equal, pro rata basis with respect to all preferred shares and common shares.
The Company may also pay interim dividends to holders of preferred shares and common shares. Any interim dividends paid will count toward the calculation of the dividend payable for the fiscal year in which the interim dividend was declared. Under the Brazilian Corporate Law, the Companys Board of Directors is permitted to recommend, under certain conditions, the non-payment of the mandatory dividend for any year.
The State Government guarantees that the amount of dividends received by certain holders of preferred shares and common shares with respect to any fiscal year will equal at least 6% of the par value of the preferred shares and the common shares. Accordingly, even if net income, based on the Companys financial statements prepared in accordance with accounting practices adopted in Brazil, is none with respect to any fiscal year, some of CEMIGs shareholders will receive a dividend of 6%. This guarantee applies only to private holders of shares and not to public or governmental holders.
Under the Brazilian Corporate Law, if the Company does not distribute the minimum preferred dividends for three consecutive years, the preferred shares become entitled to vote.
Effective December 26, 1995, Brazilian law allows the deductibility of interest on capital paid to shareholders for income tax purposes, provided such interest is computed based on the Brazilian Long-term Interest Rate (TJLP), effective in the year the interest on capital is computed.
In 2004, 2003 and 2002, the minimum dividend requirements have been met and dividend distributions have been made on an equal, pro rata basis with respect to all preferred shares and common shares.
The Company declared dividends and interest on capital in lieu of dividends as follows:
|
|
Year ended December 31, |
|
||||
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
Dividends |
|
70 |
|
|
|
111 |
|
Interest on capital |
|
510 |
|
250 |
|
220 |
|
Total |
|
580 |
|
250 |
|
331 |
|
Interest on capital related to 2004, in the amount of R$510, will be paid during 2005.
The annual shareholders meeting held on April 29, 2005 approved dividends to be paid in the amount of R$182.
The Company reverts the dividends not claimed by the shareholders within three years of the date they were distributed in accordance with the Brazilian Corporate Law and its by-laws. The amounts of the dividends not claimed is de minimis.
F-43
19. NET OPERATING REVENUES
(a) The composition of electric energy supplied by consumer class is as follows:
|
|
Year ended December 31, |
|
||||||||||
|
|
GWh (unaudited) |
|
R$ |
|
||||||||
|
|
2004 |
|
2003 |
|
2002 |
|
2004 |
|
2003 |
|
2002 |
|
Residential |
|
6,526 |
|
6,529 |
|
6,360 |
|
2,650 |
|
2,330 |
|
1,791 |
|
Industrial |
|
22,969 |
|
21,715 |
|
21,906 |
|
3,557 |
|
2,874 |
|
2,192 |
|
Commercial |
|
3,537 |
|
3,402 |
|
3,283 |
|
1,259 |
|
1,041 |
|
791 |
|
Rural |
|
1,846 |
|
1,783 |
|
1,705 |
|
396 |
|
333 |
|
252 |
|
Governmental entities |
|
1,532 |
|
1,506 |
|
1,373 |
|
393 |
|
329 |
|
240 |
|
Public services |
|
966 |
|
972 |
|
957 |
|
200 |
|
171 |
|
130 |
|
Own consumption |
|
55 |
|
55 |
|
50 |
|
|
|
|
|
|
|
Unbilled, net |
|
|
|
|
|
|
|
106 |
|
101 |
|
62 |
|
|
|
37,431 |
|
35,962 |
|
35,634 |
|
8,561 |
|
7,179 |
|
5,458 |
|
Supply |
|
364 |
|
621 |
|
313 |
|
24 |
|
32 |
|
21 |
|
Energy transactions on CCEE/MAE |
|
|
|
|
|
|
|
12 |
|
24 |
|
140 |
|
Total |
|
37,795 |
|
36,583 |
|
35,947 |
|
8,597 |
|
7,235 |
|
5,619 |
|
Low-income consumers
The Federal Government, through Centrais Elétricas Brasileiras ELETROBRAS is reimbursing distributors for billing losses incurred from 2002 resulting from the new classification criteria established for low income consumers due to the lower rate applied to them.
|
|
Number of consumers (unaudited) |
|
||||
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
Residential |
|
4,830,935 |
|
4,729,674 |
|
4,615,178 |
|
Industrial |
|
68,263 |
|
68,159 |
|
68,211 |
|
Commercial |
|
530,158 |
|
523,055 |
|
515,771 |
|
Rural |
|
388,445 |
|
368,057 |
|
338,396 |
|
Governmental entities |
|
48,475 |
|
46,877 |
|
45,785 |
|
Public services |
|
7,305 |
|
7,069 |
|
6,808 |
|
Other |
|
1,324 |
|
1,308 |
|
1,339 |
|
|
|
5,874,905 |
|
5,744,199 |
|
5,591,488 |
|
Supply |
|
5 |
|
7 |
|
4 |
|
Total |
|
5,874,910 |
|
5,744,206 |
|
5,591,492 |
|
(b) The composition of other operating revenues is as follows:
|
|
Year ended December 31, |
|
||||
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
Gas sales |
|
420 |
|
367 |
|
200 |
|
Telecom and cable TV services |
|
62 |
|
44 |
|
16 |
|
Services rendered |
|
21 |
|
23 |
|
15 |
|
Rental and leasing |
|
23 |
|
22 |
|
20 |
|
Others |
|
10 |
|
12 |
|
9 |
|
|
|
536 |
|
468 |
|
260 |
|
The results of GASMIG were consolidated up to December 15, 2004. For more information, see note 10.
F-44
(c) The composition of taxes on revenues is as follows:
|
|
Year ended December 31, |
|
||||
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
VAT |
|
1,784 |
|
1,523 |
|
1,151 |
|
Emergency capacity charge |
|
292 |
|
265 |
|
80 |
|
COFINS |
|
347 |
|
272 |
|
186 |
|
PIS-PASEP social contribution |
|
27 |
|
127 |
|
56 |
|
Others |
|
3 |
|
3 |
|
|
|
|
|
2,453 |
|
2,190 |
|
1,473 |
|
20. OPERATING COSTS AND EXPENSES
Some of the operating costs and expenses consist of the following:
(a) Electricity purchased for resale:
|
|
Year ended December 31, |
|
||||
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
Itaipu Binacional |
|
1,204 |
|
1,175 |
|
979 |
|
Initial contracts |
|
116 |
|
151 |
|
148 |
|
From suppliers though CCEE/MAE |
|
41 |
|
40 |
|
149 |
|
System services charge |
|
92 |
|
|
|
|
|
From other |
|
24 |
|
30 |
|
57 |
|
|
|
1,477 |
|
1,396 |
|
1,333 |
|
The rate for electricity purchased from Itaipu is denominated in US dollars, as defined by ANEEL. ANEEL increased the rate of the electricity purchased from Itaipu by 7.62% from US$17.8474 to US$19.2071 per kW, effective January 1, 2005.
(b) Personnel:
|
|
Year ended December 31, |
|
||||
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
Salary and payroll charges |
|
802 |
|
657 |
|
572 |
|
Benefits |
|
80 |
|
71 |
|
59 |
|
|
|
882 |
|
728 |
|
631 |
|
Personnel costs transferred to construction in progress |
|
(121 |
) |
(96 |
) |
(101 |
) |
|
|
761 |
|
632 |
|
530 |
|
Voluntary termination program |
|
27 |
|
78 |
|
2 |
|
|
|
788 |
|
710 |
|
532 |
|
Voluntary termination program - PDI
The Companys Voluntary termination program implemented by CEMIG in December 2003 and May 2004 was accepted by 987 employees.
F-45
The financial incentive to accept the program was a lump sum payment from 0 to 17 times the employees monthly salaries, according to specific established criteria, mainly the contribution time for the federal social security program (INSS). According to the defined criteria, the highest incentive, equal to 17 monthly salaries, was granted to male and female employees who contributed to the INSS during 30 and 25 years, respectively, gradually decreasing for employees whose contribution time is higher or lower.
Additionally, CEMIG guarantees a full 6-month payment of the employee life insurance and health plan costs, starting on the termination date.
The PDI costs of R$105 were recorded in the Statement of Income in 2004 and 2003 in the amounts of R$27 and R$78, respectively.
The employees terminations started on January 15, 2004 and were concluded on January 4, 2005
Employee Profit Sharing
The Company used as general criteria for the payment of the employees participation in the results of the fiscal years 2004, 2003 and 2002 a percentage of 3% of the service income. Additionally, in the collective labor agreement reached with the unions in November 2004 and 2003, the Company agreed to pay an additional installments of R$48 and R$41, respectively.
(c) Regulatory charges:
|
|
Year ended December 31, |
|
||||
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
Fuel usage quota |
|
292 |
|
282 |
|
345 |
|
Global reserve for reversion quota |
|
204 |
|
156 |
|
144 |
|
Energy development account |
|
238 |
|
118 |
|
|
|
ANEEL inspection fee |
|
19 |
|
15 |
|
12 |
|
Charges for use of water resources |
|
108 |
|
14 |
|
47 |
|
|
|
861 |
|
585 |
|
548 |
|
(d) Other:
|
|
Year ended December 31, |
|
||||
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
Employees profit sharing |
|
110 |
|
93 |
|
38 |
|
Provision for doubtful accounts |
|
62 |
|
57 |
|
13 |
|
Disposal of fixed assets, net |
|
28 |
|
53 |
|
42 |
|
Provisions for contingencies- |
|
|
|
|
|
|
|
Labor claims |
|
20 |
|
21 |
|
16 |
|
Civil lawsuits Consumers |
|
8 |
|
11 |
|
12 |
|
ANEEL administrative proceedings |
|
(10 |
) |
15 |
|
|
|
Civil lawsuits Other |
|
(8 |
) |
18 |
|
4 |
|
Bonus paid during the rationing period |
|
24 |
|
|
|
|
|
Rentals |
|
34 |
|
25 |
|
15 |
|
Grants and donations |
|
19 |
|
17 |
|
14 |
|
Consumption electric energy |
|
20 |
|
17 |
|
12 |
|
Technological and scientific national fund |
|
20 |
|
16 |
|
12 |
|
Advertising |
|
20 |
|
11 |
|
19 |
|
CCEE/MAE contribution |
|
2 |
|
3 |
|
6 |
|
Labor indemnity |
|
2 |
|
|
|
4 |
|
General expenses |
|
50 |
|
47 |
|
27 |
|
Other taxes (real estate, vehicle, etc) |
|
6 |
|
18 |
|
4 |
|
|
|
407 |
|
422 |
|
238 |
|
F-46
As a result of a judicial dispute during the Electricity Rationing Plan, CEMIG was not able to charge part of the surcharges due by some consumers, in the amount of R$24. As a result, ANEEL has not reimbursed the Company for the bonuses equivalent to the unbilled surcharge. This issue is under negotiation with the Ministry of Mines and Energy, since the Company was only an agent for the policy determined by the Energy Crisis Committee regarding the bonus and surcharge polices. The Company recorded a full reserve for this issue due to the uncertainty regarding its collection.
21. FINANCIAL INCOME (EXPENSES), NET
Financial income (expense) consists of the following:
|
|
Year ended December 31, |
|
||||
|
|
2004 |
|
2003 |
|
2002 |
|
Financial income- |
|
|
|
|
|
|
|
Interest and monetary restatement of account receivable from State Government |
|
255 |
|
164 |
|
303 |
|
Investment income earned |
|
137 |
|
78 |
|
236 |
|
Late charges on overdue electricity bills, recorded on the cash basis |
|
63 |
|
56 |
|
43 |
|
Foreign exchange gains |
|
110 |
|
352 |
|
31 |
|
Reclassification adjustment on marketable securities gains |
|
|
|
76 |
|
|
|
Monetary restatement on deferred regulatory assets |
|
573 |
|
450 |
|
120 |
|
Gains on financial instruments |
|
2 |
|
10 |
|
|
|
Taxes on financial revenues |
|
(57 |
) |
(78 |
) |
(45 |
) |
Other |
|
32 |
|
49 |
|
51 |
|
|
|
1,115 |
|
1,157 |
|
739 |
|
Financial expense- |
|
|
|
|
|
|
|
Interest on loans and financing |
|
(255 |
) |
(221 |
) |
(300 |
) |
Monetary restatement on deferred regulatory liabilities |
|
(80 |
) |
(77 |
) |
|
|
Financial transaction tax (CPMF) |
|
(49 |
) |
(39 |
) |
(28 |
) |
Foreign exchange losses |
|
(25 |
) |
(16 |
) |
(816 |
) |
Monetary restatement losses |
|
(124 |
) |
(53 |
) |
(101 |
) |
Losses on financial instruments |
|
(176 |
) |
(54 |
) |
|
|
Other expenses |
|
(56 |
) |
(23 |
) |
(19 |
) |
|
|
(765 |
) |
(483 |
) |
(1,264 |
) |
Financial income (expenses), net |
|
350 |
|
674 |
|
(525 |
) |
The foreign exchange gains and losses are substantially related to the variation of the real in relation to the U.S. dollar.
22. RELATED PARTY TRANSACTIONS
The Company enters into a variety of related party transactions, the main transactions are as follows:
(a) State Government -
|
Account receivable and related financial income |
Note 3 and 21 |
|
Accounts receivable, net |
Note 8 |
|
VAT - Assets |
Note 9 |
|
VAT - Liabilities |
Note 13 |
|
VAT - Expense |
Note 19 |
|
Debentures Liabilities |
Note 14 |
(b) FORLUZ -
|
Employee post-retirement benefits related balances |
Note 16 |
Other related party transactions are not material.
F-47
23. FINANCIAL INSTRUMENTS
The Company manages its financial instruments through periodic monitoring of positions, diversification of counterparties and establishment of credit limits by counterparty.
Financial instruments, which potentially subject CEMIG to concentrations of credit risk are cash and cash equivalents and restricted investments. CEMIG limits its credit risk associated with cash and cash equivalents and restricted investments by placing its investments with highly rated financial institutions generally in short-term securities.
(a) Cash and cash equivalents and restricted investments:
As of December 31, 2004 and 2003, cash and cash equivalents and restricted investments are stated at cost plus accrued interest and approximate fair value, given the short term maturities of these items.
As of December 31, 2004 and 2003, the Company has restricted investments in the amount of R$20 and R$132, respectively, which have interest calculated based on the CDI variation for 2004 and CDI variation and U.S. dollar variation for 2003.
(b) Financing:
Based on interest rates currently available to CEMIG for bank financings with similar terms and average maturities, the fair value of long-term financing at December 31, 2004 and 2003 is R$1,786 and R$2,281, respectively.
(c) Derivative financial instruments:
The Company utilizes derivative financial instruments to protect its operations from exchange rate risk. The derivative financial instruments are not used for speculative purposes. CEMIGs subsidiaries have no derivative financial instruments.
As of December 31, 2004, the Company has derivative financial instruments (swaps) with financial institutions, in connection with potential exchange losses resulting from the devaluation of the Brazilian real compared to the U.S. dollar in the notional amount of US$88 million and the Japanese yen in the notional amount of ¥6,937 million.
As of December 31, 2003, the Company has swaps with financial institutions, in connection with potential exchange losses resulting from the devaluation of the Brazilian real compared to the U.S. dollar in the notional amount of US$139 million and the Japanese yen in the notional amount of ¥6,739 million.
The net realized and unrealized losses from these operations for 2004, in the amounts of R$105 and R$69, respectively, were recorded in financial expenses.
The net realized and unrealized losses from these operations for 2003, in the amounts of R$30 and R$14, respectively, were recorded in financial expenses.
F-48
The table below summarizes the Companys derivative financial instruments and the unrealized losses recorded on these instruments as of December 31, 2004:
|
|
|
|
|
|
|
|
As of December
|
|
|
|
|
|
|
|
|
Notional
|
|
Unrealized
|
|
|
CEMIGs
|
|
CEMIGs
|
|
Maturity |
|
|
Fair
|
|
||
|
|
|
|
|
|
|
|
|
|
|
YEN - Japanese Plus interest rate ranging from 1.31% to 3.90% per annum |
|
R$
|
|
Ranging
from
|
|
¥ |
6,937 |
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
U.S. dollar Plus interest rate ranging from 5.58% to 7.48% per annum |
|
R$
|
|
Ranging
from
|
|
US$ |
111 |
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
R$
|
|
R$ or
US$
|
|
Ranging
from
|
|
US$ |
23 |
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
U.S. dollar Plus interest rate ranging from 3.30% to 4.10% per annum |
|
R$ or
US$
|
|
Ranging
from
|
|
US$ |
31 |
|
(20 |
) |
|
|
|
|
|
|
|
|
(69 |
) |
At December 31, 2004, the Company had recorded the amount of R$69 as other current liabilities, representing the fair value of these financial instruments at the respective balance sheet date.
(d) Other financial instruments:
The carrying value of CEMIGs other financial instruments, in reais , approximates fair values at such dates reflecting the short-term maturity or frequent repricing at December 31, 2004 and 2003 of these instruments.
24. EXPOSURE AND RISK MANAGEMENT
As a Brazilian energy concessionaire, the Company operates in an environment in which factors such as corporate reorganization, new regulations issued by governmental bodies and consumer market changes are considered risk factors.
The Company established of a Corporate Risk Management Program in January 2003, and implemented this program in 2004 in connection with its restructuring. This Corporate Risk Management Program aims to achieve the following: operate as an auxiliary in achievement of the objectives set by the strategic plan; create awareness among shareholders of the possible events that could constitute a risk of loss of value; structure the company to be able to take proactive stances in relation to its risk environment; provide the companys executives with a methodology and tools for effective management of risk; and provide other areas of strategic management with input concepts and procedures, and factors that strengthen the companys organizational control infrastructure.
F-49
The main market risks which affect CEMIGs operations are described as follows:
(a) Exchange rate risk
CEMIG and its subsidiaries are exposed to the risk of increases in exchange rates, mainly U.S. dollar against the real, significantly impacting its financial position, results of operations, and cash flows. In order to protect against increases in exchange rates, the Company has derivative financial instruments (swaps) with financial institutions in the amount of R$234, equivalent to the notional amount of US$88 million and R$180, equivalent to the notional amount of ¥6,937 million. These financial instruments offset the exchange variation of the Brazilian real compared to the U.S. dollar and yen for interest based on the CDI (See Note 23 c). The exchange rate net exposure is as follows:
|
|
December 31, |
|
||
|
|
2004 |
|
2003 |
|
U.S. Dollar |
|
|
|
|
|
Financing |
|
857 |
|
1,424 |
|
(-) Contracted derivative instruments |
|
(234 |
) |
(401 |
) |
(-) Restricted investments |
|
|
|
(41 |
) |
|
|
623 |
|
982 |
|
Japanese Yen |
|
|
|
|
|
Financing |
|
182 |
|
182 |
|
(-) Contracted derivative instruments |
|
(180 |
) |
(182 |
) |
|
|
2 |
|
|
|
Other Currencies |
|
|
|
|
|
Financing |
|
80 |
|
106 |
|
Net liabilities exposed to exchange rate risk |
|
705 |
|
1,088 |
|
Starting in 2001, the exchange rate variation related to energy acquisition from Itaipu Binacional is being offset in subsequent rate adjustments, considering the implementation the Parcel A tracking mechanism. Due to that, these purchases no longer represent an exchange rate risk.
(b) International interest rate risk
CEMIG and certain subsidiaries are exposed to the risk of increases in international interest rates, impacting their loans and financing denominated in foreign currencies with floating rates, mainly LIBOR, in the amount of R$322 (R$702 as of December 31, 2003).
(c) Credit risk
The risk resulting from losses on doubtful receivables for CEMIG is considered low. A significant part of electricity sales is dispersed among a large number of customers. The Companys procedures to reduce overdue bills comprise the issuance of notices that bills are overdue, phone calls and negotiations to permit the collectibility of bills that are in arrears. After these efforts are exhausted, CEMIG interrupts the energy supply.
(d) Energy rationing risk
A substantial portion of the energy sold by CEMIG is generated by its own power plants. The remaining portion is acquired from Itaipu through initial contracts signed with ELETROBRAS, and a smaller part from other generators and through the MAE/CCEE. A long period without rainfall that would reduce the reservoir levels used to feed hydroelectric generation facilities would create losses for CEMIG, due to an eventual increase in the purchased energy rate and the adoption of a new Electricity Rationing Plan. Considering the current hydroelectric reservoir levels of the Brazilian electric system, the Federal Government does not expect a new Electricity Rationing Plan in the foreseeable future.
F-50
(e) Debt acceleration risk
The Company and certain of its subsidiaries have contracts for loans, financing and debentures with certain restrictive clauses (covenants), usually applicable to such operations, related to compliance with economic-financial indices, cash flow generation and other indicators. The creditors have the right to declare the early termination of CEMIGs obligations and require the immediate payment of all outstanding debts in the case of a violation of such restrictive clauses. Such clauses were complied with, except for the MBK Furukawa Sistemas S.A. / UNIBANCO loan to Empresa de Infovias S.A., for which a waiver has been granted by the creditors up to December 31, 2005. (See Note 14)
25. SHAREHOLDERS AGREEMENT
In 1997, the State of Minas Gerais sold approximately 33% of the Companys common shares to a group of investors led by Southern Electric Brasil Participações Ltda. (Southern). As part of this sale, the State of Minas Gerais and Southern entered into a shareholders agreement that provided for, among other matters, special quorum requirements to approve significant corporate actions, certain amendments to CEMIGs by-laws, the issuance of convertible debentures and warrants, changes to the Companys corporate structure and any distribution of dividends other than that required by the by-laws. This agreement granted Southern a veto right over certain important corporate decisions.
On September 13, 1999, the State of Minas Gerais filed a lawsuit to nullify this shareholders agreement on the grounds that it violated the state and federal constitutions because the special quorum provisions would constitute an unlawful transfer of the control of CEMIG to Southern.
On September 27, 1999, the Minas Gerais State Court of Appeals granted an injunction suspending the effects of the special quorum provisions, pending the outcome of the lawsuit.
In March 2000, the lower court rendered a decision declaring the shareholders agreement null and void.
On August 7, 2001, the Minas Gerais State Court of Appeals upheld the March 2000 lower court ruling declaring the shareholders agreement null and void.
This decision was appealed to the Superior Tribunal de Justiça (Superior Court of Justice). A final decision confirming the Minas Gerais State Court of Appeals was ruled on in December 2003. The decision of the Superior Tribunal de Justiça is subject to a request for amendment and therefore the effectiveness of the shareholders agreement and control of CEMIG remain subject to further judicial challenge.
26. CONCENTRATIONS
(a) Labor:
The majority of CEMIGs work force belongs to SINDIELETRO (employee labor union). CEMIG and SINDIELETRO negotiate a collective bargaining agreement on an annual basis, which includes wage increases and profit sharing, along with other matters. The collective bargaining agreement becomes effective in November of each year. The 2004 collective bargaining agreement included an 7.0% average salary increase.
(b) Renewal of concession agreements:
In accordance with the Concessions Law, as modified by the New Industry Model Law, upon application by the concessionaire, existing concessions may be renewed by the Federal Government for additional periods of up to 20 years without being subject to the bidding process, provided that the concessionaire has met minimum performance standards and that the proposal is otherwise acceptable to the Federal Government. Although the Company believes that its concessions will be renewed on consistent terms with those in effect at December 31, 2004, the renewal process is subject to the Federal Governments discretion and there is a lack of precedent with respect to the Federal Governments exercise of such discretion and interpretation and application of the Concessions Law.
F-51
In September 2004, CEMIG requested a 20-year extension of the concessions of the following plants: UHE Emborcação, UHE Nova Ponte, PCH São Bernardo, PCH Poço Fundo, PCH Santa Luzia, PCH Luiz Dias and PCH Xicão. ANEEL and the Ministry of Mines and Energy have not responded to CEMIGs request.
Seven of the Companys hydroelectric plants accounted for approximately 87% of its installed electric generation capacity as of December 31, 2004.
GENERATION CONCESSIONS- |
|
Installed
|
|
Date concession
|
|
|
|
(unaudited) |
|
|
|
São Simão |
|
1,710 |
|
January 2015 |
|
Emborcação |
|
1,192 |
|
July 2005 |
|
Nova Ponte |
|
510 |
|
July 2005 |
|
Jaguara |
|
424 |
|
August 2013 |
|
Miranda |
|
408 |
|
December 2016 |
|
Três Marias |
|
396 |
|
July 2015 |
|
Volta Grande |
|
380 |
|
February 2017 |
|
Others |
|
929 |
|
August 2004 to August 2036 |
|
Total installed capacity |
|
5,949 |
|
|
|
DISTRIBUTION CONCESSIONS- |
|
Date concession
|
|
Northern Region |
|
02/2016 |
|
Southern Regional |
|
02/2016 |
|
Eastern Region |
|
02/2016 |
|
Western Region |
|
02/2016 |
|
The Company expects its concessions will be renewed, and thus losses are not expected due to the non-renewal of the current concessions.
27. INSURANCE
The Company has insurance policies for part of its property, plant and equipment, as follows:
Risk |
|
Coverage |
|
Effective
|
|
Insured
|
|
Aircraft |
|
Total |
|
02/28/05 to 02/28/06 |
|
18 |
|
Warehouses and buildings |
|
Fire |
|
07/10/04 to 07/10/05 |
|
418 |
|
Generators, turbines and equipment |
|
Total |
|
02/04/2005 to 02/04/2006 |
|
1,333 |
|
CEMIG does not have general third-party liability insurance covering accidents and has not requested bids relating to this type of insurance. The Company has not requested bids for, nor does it carry, insurance coverage for major catastrophes affecting its facilities such as earthquakes and floods, for business interruption risk or system failures. In addition, the Company does not have insurance for losses incurred as a result of business interruption caused by a strike or other type of labor action.
The Company has not experienced significant losses arising from the aforementioned risks.
F-52
28. COMMITMENTS
Cemig has outstanding contractual obligations and commitments which include principal debt payment provisions, the obligation to purchase electricity for resale from Itaipu, the obligation to transfer and transport electric power from Itaipu as well as construction commitments. The following table provides information, as of December 31, 2004, about our contractual obligations and commitments.
|
|
Total |
|
Less
|
|
1-3 years |
|
3-5 years |
|
More
|
|
Long-term debt |
|
4,238 |
|
1,417 |
|
1,322 |
|
873 |
|
626 |
|
Purchase obligations |
|
|
|
|
|
|
|
|
|
|
|
Purchase of electricity from Itaipu for resale (1) |
|
8,619 |
|
1,024 |
|
2,048 |
|
2,048 |
|
3,499 |
|
Energy auction on CCEE |
|
6,478 |
|
267 |
|
1,618 |
|
1,621 |
|
2,972 |
|
Transfer and transport electric power from Itaipu (1) |
|
505 |
|
60 |
|
120 |
|
120 |
|
205 |
|
Investments |
|
|
|
|
|
|
|
|
|
|
|
Aimorés hydroelectric power plant (2) |
|
66 |
|
66 |
|
|
|
|
|
|
|
Irapé hydroelectric power plant (2) |
|
287 |
|
271 |
|
16 |
|
|
|
|
|
Funil hydroelectric power plant (2) |
|
11 |
|
11 |
|
|
|
|
|
|
|
Queimado hydroelectric power plant (2) |
|
20 |
|
20 |
|
|
|
|
|
|
|
Pai Joaquim hydroelectric power plant (2) |
|
10 |
|
10 |
|
|
|
|
|
|
|
Cemig Capim Branco Energia(2) |
|
39 |
|
22 |
|
17 |
|
|
|
|
|
Transmission lines |
|
46 |
|
35 |
|
11 |
|
|
|
|
|
GASMIG |
|
75 |
|
5 |
|
64 |
|
6 |
|
|
|
Empresa de Infovias S.A. |
|
48 |
|
48 |
|
|
|
|
|
|
|
Other long-term obligations |
|
|
|
|
|
|
|
|
|
|
|
Pension plan contributions |
|
1,555 |
|
112 |
|
237 |
|
186 |
|
1,020 |
|
Total |
|
21,997 |
|
3,368 |
|
5,453 |
|
4,854 |
|
8,322 |
|
(1) Contract with Furnas, denominated in U.S. dollars, to supply electric power purchased from Itaipu until May 2013.
(2) Contractual obligations with contractors.
29. SEGMENT INFORMATION
CEMIG has three reportable segments: the electric energy segment, the gas segment and the telecommunications segment.
The electric energy segment engages primarily in the generation, transmission, distribution and sale of electric energy.
The gas segment principal activities are the acquisition, transportation and distribution of natural gas.
The telecommunications segment principal activities are rendering telecommunications services and developing related activities through integrated systems using optical fiber cable, coaxial cable, electronic equipment and other, as well as providing cable TV and internet access services.
F-53
The operations of all reportable segments of the Company are conducted substantially in the State of Minas Gerais, Brazil. Reportable segments are strategic business units that offer different products and services. Each of the reportable segments has a responsible senior officer. All inter-segment activity has been eliminated with respect to revenue and gross margin. Financial information for each of the Companys reportable segments is as follows:
|
|
2004 |
|
2003 |
|
Identifiable assets |
|
|
|
|
|
Electricity |
|
18,919 |
|
16,652 |
|
Gas |
|
|
|
145 |
|
Telecommunications |
|
346 |
|
355 |
|
Eliminations |
|
(13 |
) |
(33 |
) |
Total consolidated assets |
|
19,252 |
|
17,119 |
|
|
|
2004 |
|
||||||||
|
|
Electricity |
|
Gas |
|
Telecommunications |
|
Eliminations |
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers |
|
7,267 |
|
335 |
|
52 |
|
|
|
7,654 |
|
Intersegment sales |
|
|
|
|
|
9 |
|
(9 |
) |
|
|
Net revenues |
|
7,267 |
|
335 |
|
61 |
|
(9 |
) |
7,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) before financial income (expense) |
|
2,085 |
|
46 |
|
(13 |
) |
|
|
2,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial income, net |
|
348 |
|
7 |
|
(5 |
) |
|
|
350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
(712 |
) |
(18 |
) |
(1 |
) |
|
|
(731 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Minoritary interests |
|
|
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
1,721 |
|
35 |
|
(17 |
) |
|
|
1,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization charges |
|
644 |
|
4 |
|
29 |
|
|
|
677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
1,045 |
|
|
|
16 |
|
|
|
1,061 |
|
F-54
|
|
2003 |
|
||||||||
|
|
Electricity |
|
Gas |
|
Telecommunications |
|
Eliminations |
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers |
|
5,621 |
|
367 |
|
44 |
|
|
|
6,032 |
|
Intersegment sales |
|
|
|
|
|
8 |
|
(8 |
) |
|
|
Net revenues |
|
5,621 |
|
367 |
|
52 |
|
(8 |
) |
6,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) before financial income (expense) |
|
1,318 |
|
45 |
|
(34 |
) |
|
|
1,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial income, net |
|
657 |
|
9 |
|
8 |
|
|
|
674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
(589 |
) |
(14 |
) |
(4 |
) |
|
|
(607 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
1,386 |
|
37 |
|
(27 |
) |
|
|
1,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization charges |
|
652 |
|
4 |
|
30 |
|
|
|
686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
987 |
|
20 |
|
22 |
|
|
|
1,029 |
|
|
|
2002 |
|
||||||||
|
|
Electricity |
|
Gas |
|
Telecommunications |
|
Eliminations |
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers |
|
4,665 |
|
194 |
|
13 |
|
|
|
4,872 |
|
Intersegment sales |
|
|
|
|
|
4 |
|
(4 |
) |
|
|
Net revenues |
|
4,665 |
|
194 |
|
17 |
|
(4 |
) |
4,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) before financial income (expense) |
|
536 |
|
31 |
|
(40 |
) |
|
|
527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial income (expense), net |
|
(480 |
) |
5 |
|
(50 |
) |
|
|
(525 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense) |
|
(32 |
) |
(10 |
) |
16 |
|
|
|
(26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
37 |
|
25 |
|
(74 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization charges |
|
646 |
|
3 |
|
17 |
|
|
|
666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
761 |
|
19 |
|
89 |
|
|
|
869 |
|
Under CEMIGs distribution concession agreements, signed in 1997, CEMIG was required to restructure its operations in order to place its generation, transmission and distribution operations into separate subsidiaries, wholly owned by CEMIG. To comply with this requirement, in 2004, CEMIG incorporated two new wholly-owned subsidiaries: CEMIG Geração e Transmissão S.A. and CEMIG Distribuição S.A.. The Companys Extraordinary Stockholders General Meeting on December 30, 2004 authorized the transfer, as of January 1, 2005, of the Companys investments and separate assets and liabilities to these subsidiaries to separate its generation, transmission and distribution activities. CEMIG Geração e Transmissão S.A. and CEMIG Distribuição S.A. began to operate as from January 1, 2005. The effective transfer of concessions of electricity transmission, generation and distribution to the new subsidiaries was
F-55
subject to ANEELs approval, in accordance with Resolution N.o 407, of December 20, 2004. This restructuring had no effect on the consolidated financial statements of the Company. As a result of this restructing the Companys Electricity reportable segment will be divided into Generation/Transmission and Distribution for 2005.
30. SUBSEQUENT EVENTS
ANEEL issued Resolution No. 87 on April 6, 2005, which established our average annual rate adjustment of 23.88% to be effective beginning on April 8, 2005. The components of this increase are (i) 6.68% due to the Rate Adjustment Index; (ii) 5.72% due to deferred regulatory asset; (iii) 7.35% due to intra-annual variation of fixed costs, or CVA; (iv) 2.46% due to increases in the PASEP and COFINS taxes and (v) 1.67% due to revenue the Company did not achieve in 2004 as a result of the re-issuing of Resolution No. 83 on May 24, 2004, which reduced the Companys rates.
31 - RECENTLY ISSUED U.S. GAAP PRONOUNCEMENTS
In July 2003, the Emerging Issues Task Force stated in EITF Issue No. 03-11, or EITF 03-11, that the determination as to whether realized gains and losses on derivative contracts not held for trading purposes should be reported on a net or gross basis is a matter of judgment that depends on the relevant facts and circumstances and the economic substance of the transaction. In analyzing the facts and circumstances, EITF Issue No. 99-19 and Opinion No. 29, Accounting for Non-monetary Transactions, should be considered. EITF 03-11 is effective for transactions or arrangements entered into after September 30, 2003. The adoption of EITF 03-11 did not have a material effect on the Companys financial statements.
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, Exchanges of Non-monetary Assets - an amendment of APB Opinion No. 29 (SFAS 153), which amends Accounting Principles Board Opinion No. 29, Accounting for Non-monetary Transactions to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. SFAS 153 is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company will apply SFAS 153 in the event that exchanges of non-monetary assets occur in fiscal periods beginning after June 15, 2005.
**********************
F- 56
Exhibit Index
Exhibit
|
|
Document |
|
|
|
1 |
|
Corporate by-laws of CEMIG, as amended and in effect since December 13, 2004. |
|
|
|
2.1 |
|
Second Amended and Restated Deposit Agreement, dated as of August 10, 2001, by and among us, Citibank, N.A., as depositary, and the holders and beneficial owners of ADSs evidenced by ADRs issued thereunder (incorporated by reference to the Registration Statement on Form F-6 relating to the ADSs filed on August 20, 2001 (File No. 333-13826)). |
|
|
|
2.2 |
|
Shareholders Agreement, dated June 18, 1997, between the State Government and Southern, relating to the rights and obligations of owners of our shares (incorporated by reference to Exhibit 2.1 to our Registration Statement on Form 20-F filed on August 13, 2001 (File No. 1-15224)). |
|
|
|
3 |
|
Agreement, dated June 17, 2002, between Empresa de Infovias S.A. and CLIC, relating to the shares of WAY TV (incorporated by reference to Exhibit 3 to our Annual Report on Form 20-F filed on March 26, 2003 (File No. 1-15224)). |
|
|
|
4.1 |
|
Contract of Concession for Generating Electric Energy, dated June 10, 1997, between the Federal Government and us, relating to the provision of electric energy generation services to the public (incorporated by reference to Exhibit 4.1 to our Registration Statement on Form 20-F filed on August 13, 2001 (File No. 1-15224)). |
|
|
|
4.2 |
|
Contract of Concession of Electric Energy Transmission Services, dated June 10, 1997, between the Federal Government and us, relating to the transmission of electric energy to the public (incorporated by reference to Exhibit 4.2 to our Registration Statement on Form 20-F filed on August 13, 2001 (File No. 1-15224)). |
|
|
|
4.3 |
|
Contracts of Concession of Public Service for Distribution of Electric Energy, dated June 10, 1997, between the Federal Government and us, relating to the provision of electric energy distribution services to the public (incorporated by reference to Exhibit 4.3 to our Registration Statement on Form 20-F filed on August 13, 2001 (File No. 1-15224)). |
|
|
|
4.4 |
|
Contract for the Assignment of CRC Account, dated May 31, 1995, between the State Government and us, relating to amounts due to us from the State Government (incorporated by reference to Exhibit 4.4 to our Registration Statement on Form 20-F filed on August 13, 2001 (File No. 1-15224)). |
|
|
|
4.5 |
|
First Amendment to the Contract for the Assignment of CRC Account, dated February 24, 2001, between the State Government and us, relating to amounts due to us from the State Government (incorporated by reference to Exhibit 4.5 to our Annual Report on Form 20-F filed on March 26, 2003 (File No. 1-15224)). |
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4.6 |
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Second Amendment to the Contract for the Assignment of CRC Account, dated October 14, 2002, between the State Government and us, relating to amounts due to us from the State Government (incorporated by reference to Exhibit 4.6 to our Annual Report on Form 20-F filed on March 26, 2003 (File No. 1-15224)). |
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4.7 |
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Third Amendment to the Contract for the Assignment of CRC Account, dated October 24, 2002, between the State Government and us, relating to amounts due to us from the State Government (incorporated by reference to Exhibit 4.7 to our Annual Report on Form 20-F filed on March 26, 2003 (File No. 1-15224)). |
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4.8 |
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Indenture Covering the First Public Issuance of Common Debentures, dated October 4, 2001, between Planner Corretora de Valores S.A. and us, relating to the first public issuance of R$625 million common |
Exhibit
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Document |
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debentures, divided into two series of the same class, without guarantee or preference (incorporated by reference to Exhibit 4.8 to our Annual Report on Form 20-F filed on March 26, 2003 (File No. 1-15224)). |
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4.9 |
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Financing Agreement by Extension of Credit No. 02.2.962.3.1, dated February 7, 2003, between BNDES and CEMIG and Intervening Third Parties (incorporated by reference to Exhibit 4.9 to our Annual Report on Form 20-F filed on March 26, 2003 (File No. 1-15224)). |
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4.10 |
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Summary of Indenture Covering the Third Public Issuance of Common Debentures, dated June 14, 2004, between CEMIG and Pavarini Distribuidora de Títulos e Valores Mobilários. |
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8 |
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List of Subsidiaries |
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11 |
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Code of Ethics (incorporated by reference to Exhibit 11 to our Annual Report on Form 20-F filed on July 1, 2004 (File No. 1-15224)). |
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12.1 |
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Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 25, 2005. |
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12.2 |
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Chief Financial and Investor Relations Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 25, 2005. |
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13.1 |
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Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 25, 2005. |
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13.2 |
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Chief Financial and Investor Relations Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 25, 2005. |
Exhibit 1
CEMIG
COMPANHIA
ENERGÉTICA DE
MINAS GERAIS -
CEMIG
BYLAWS
CHAPTER I
Name, constitution, objects, head office and duration
Article 1: Companhia Energética de Minas Gerais Cemig, constituted on 22 May 1952 as a corporation with mixed private and public sector stockholdings, is governed by these bylaws and by the applicable legislation, and its objects are: to build, operate and carry out commercial transactions with systems of generation, transmission, distribution and sale of electricity, and related services; to operate in the various fields of energy, from whatever source, with a view to economic and commercial operation; to provide consultancy services within its field of operation to companies in and outside Brazil; and to carry out activities directly or indirectly related to its objects.
§ 1 The activities referred to in this article may be carried out directly by Cemig or, upon decision by the Board of Directors, in accordance with State Laws 828 of 14 December, 1951, 8655 of 18 September, 1984 and 15290 of 4 August, 2004 and with prior authorization by ANEEL, the Brazilian National Electricity Agency, through companies constituted by Cemig or companies in which it comes to have majority or minority stockholdings.
Article 2: The company shall have its head office and management in Belo Horizonte, capital city of the state of Minas Gerais, Brazil, and may open offices, representations and any other establishments in or outside Brazil on authorization by the Executive Board.
Article 3: The company shall have indeterminate duration.
CHAPTER II
Capital and shares
Article 4: The companys capital is R$1,621,538,190.25 (one billion, six hundred and twenty one million, five hundred and thirty eight thousand, one hundred and ninety Reais and twenty five centavos), represented by:
a) 70,874,167,923 (seventy billion, eight hundred and seventy four million, one hundred and sixty seven thousand, nine hundred and twenty three) nominal common shares, each with par value of R$0.01; and
b) 91,279,651,102 (ninety one billion, two hundred and seventy nine million, six hundred and fifty one thousand, one hundred and two) nominal preferred shares, each with par value of R$0.01.
§ 1 The right to vote shall be reserved exclusively for the common shares, and each common share shall have the right to one vote in decisions of the General Meeting of Stockholders.
Article 5: The preferred shares shall have right of preference in the event of reimbursement of shares and shall have the right to a minimum annual dividend of the greater of the following amounts:
a) 10% (ten percent) of their par value; or
b) 3% (three percent) of the value of stockholders equity corresponding to the shares.
Article 6: The common shares and the preferred shares shall have equal rights to distribution of bonuses.
§ 1 Capitalization of monetary adjustment to the value of the registered capital shall require a decision by the General Meeting of Stockholders, but shall be obligatory when the limit specified in Section 297 of Law 6404 of 15 December 1976 has been reached.
Article 7: In the business years in which the company does not obtain sufficient profit to pay dividends to its stockholders, the State of Minas Gerais shall guarantee to the shares issued by the company up to 5 August 2004 and held by individual persons a minimum dividend of 6% (six percent) per year, in accordance with Article 9 of State Law 828 of 14 December 1951, and State Law 15290 of 4 August 2004.
Article 8: The State of Minas Gerais shall at all times obligatorily be the owner of the majority of the shares carrying the right to vote, and the capital subscribed by it shall be paid in accordance with the legislation from time to time in force. The capital subscribed by other individuals or legal entities shall be paid as specified by the General Meeting of Stockholders which decides on the subject.
§ 1 The Executive Board may, in order to obey a decision by a General Meeting of Stockholders, suspend the services of transfer and registry of shares, subject to the legislation from time to time in force.
§ 2 The stockholders shall have the right of preference in subscription of increases of capital and in the issue of the companys securities, in accordance with the applicable legislation. There shall, however, be no right of preference when the increase in the registered capital is paid with funds arising from tax incentive systems, subject to the terms of the sole paragraph of Section 172 of Law 6404 of 15 December 1976.
CHAPTER III
The General Meeting of Stockholders
Article 9: The General Meeting of Stockholders shall be held, ordinarily, within the first 4 (four) months of the year, for the purposes specified by law, and extraordinarily whenever necessary, and shall be called with minimum advance notice of 15 (fifteen) days, and the terms of these bylaws and the relevant legislation shall be obeyed in its convocation, opening and decisions.
§ 1 The stockholder may be represented in General Meetings of Stockholders in the manner specified in Section 126 of Law 6404, as amended, by showing at the time of the meeting, or by previously depositing at the companys head office, proof of ownership of the shares, issued by the depositary financial institution, accompanied by the proxys identity document and a power of attorney with special powers.
Article 10: The ordinary or extraordinary General Meeting of Stockholders shall be chaired by a stockholder elected by the General Meeting from among those present, who shall choose one or more secretaries.
CHAPTER IV
Management of the company
Article 11: Management of the company shall be exercised by a Board of Directors and an Executive Board.
§ 1 The structure and composition of the Board of Directors and the Executive Board of the company shall be identical in the subsidiaries Cemig Distribuição S.A and Cemig Geração e Transmissão S.A., with the following exceptions: only the subsidiary Cemig Distribuição S.A shall have a Chief Energy Distribution and Sales Officer and the respective Department, and only the subsidiary Cemig Geração e Transmissão S.A. shall have a Chief Energy Generation and Transmission Officer and the respective Department.
Section I
The Board of Directors
Article 12: The companys Board of Directors shall be made up of 14 (fourteen) members and an equal number of substitute members. One of the members shall be its Chairman and another its Vice-Chairman, all being subject to election and dismissal at any time by the General Meeting of Stockholders, for a period of office of 3 (three) years, and able to be reelected.
§ 1 The substitute members shall substitute the respective members of the Board if the latter are absent or impeded from exercising their functions and, in the event of a vacancy, shall do so until a new member is elected.
§ 2 The global or individual amount of the remuneration of the Board of Directors shall be fixed by the General Meeting of Stockholders which elects that Board, in accordance with the legislation from time to time in force.
§ 3 The minority holders of common shares, and the holders of preferred shares, each have the right to elect 1 (one) member of the Board of Directors, in a separate vote, according to law.
§ 4 The Boards of Directors of the subsidiaries Cemig Distribuição S.A. and Cemig Geração e Transmissão S.A. shall, obligatorily, be composed of the members or substitute members elected to the Board of Directors of the company.
Article 13: In the event of a vacancy on the Board of Directors, the first General Meeting of Stockholders shall elect a new member, for the period of office which was remaining to the previous member.
§ 1 In this event, if the previous Board member was elected by a minority, the new member shall be elected by the same minority.
Article 14: The Board of Directors shall meet, ordinarily, every 2 (two) months and, extraordinarily, on convocation by its Chairman, or its Vice-Chairman, or one-third of its members, or when requested by the Executive Board, and decisions taken shall be valid when the majority of its members are present.
§ 1 The meetings of the Board of Directors shall be called by its Chairman or its Vice-Chairman, by written advice sent with 5 (five) days notice, containing the agenda to be discussed. Meetings of the Board of Directors called on the basis of urgency may be called by its Chairman without being subject to the above-mentioned period provided the other members of the Board are unequivocally aware of the convocation.
§ 2 Decisions of the Board of Directors shall be taken by the majority of the votes of the board members present, and in the event of equality of votes the Chairman shall have the casting vote.
Articl 15: The Chairman of the Board of Directors has the competency to grant leave to the Boards members, and the other members of the Board have the competency to grant leave to the Chairman.
Article 16: The Chairman and Vice-Chairman of the Board of Directors shall be chosen by their peers, at the first meeting of the Board of Directors that takes place after the election of its members, and the Vice-Chairman shall take the place of the Chairman when the Chairman is absent or impeded from exercising his functions.
Article 17: The Board of Directors shall have the following attributions:
a) to fix the general orientation of the companys business;
b) to elect or dismiss the Executive Officers of the company, subject to these bylaws;
c) to decide, prior to the company entering into them, on contracts between the company and any of its stockholders, or companies which are sole or joint controlling stockholders of any of its stockholders;
d) to decide, upon proposal by the Executive Board, on disposal or placement of a charge on any of the companys property, plant or equipment, and on the giving by the company of any guarantee to any third parties of which the individual value is greater than or equal to R$5,000,000.00 (five million Reais);
e) to decide, upon proposal put forward by the Executive Board, on loans, financings, acts or other legal transactions to be entered into by the company the amount of which is equal to or more than R$5,000,000.00 (five million Reais), subject to subclause g of § 4 of Article 21 below;
f) to call the General Meeting of Stockholders;
g) to monitor and inspect the management by the Executive Board: the Board of Directors may, at any time, examine the books and papers of the company, and request information on contracts agreed or in the process of being agreed, and on any other administrative facts or actions which it deems to be of interest;
h) to give a prior opinion on the report of management and the accounts of the Executive Board of the company;
i) to choose, annually, and to dismiss, the companys auditors, from among companies with international reputation authorized by the Securities Commission (CVM) to audit listed companies;
j) to authorize, upon a proposal by the Executive Board, the start of administrative proceedings for competitive bids, and proceedings for dispensation from and non-requirement of bids, and the corresponding contracts, in amounts more than or equal to R$5,000,000.00 (five million Reais);
k) to authorize, upon a proposal by the Executive Officers, the initiation of legal actions and administrative proceedings, and making of Court and extrajudicial settlements, when the amount is greater than or equal to R$5,000,000.00 (five million Reais);
l) to authorize the issue of securities, in the domestic or external markets, for the raising of funds, in the form of debentures, promissory notes, medium-term notes and other instruments.
§ 1 The Board of Directors, through specific resolutions, may delegate the power to authorize agreement of contracts for sales of electricity or for provision of distribution or transmission services to the Executive Officers, in accordance with the legislation.
Section II
The Executive Board
Article 18: The Executive Board shall be made up of 7 (seven) Executive Officers, who may be stockholders, elected by the Board of Directors, namely: the Chief Executive Officer, the Executive Vice-Chairman, the Chief Energy Distribution and Sales Officer, the Chief Financial and Investor Relations Officer, the Chief Energy Generation and Transmission Officer, the Chief Corporate Management Officer, and the Chief Planning, Projects and Construction Officer.
§ 1 The period of office of the Executive Officers shall be 3 (three) years, and re-election is permitted. The Executive Officers shall remain in their posts until their duly elected successors take office.
§ 2 The global or individual amount of the remuneration of the Executive Board, including benefits of any type, shall be fixed by the General Meeting of Stockholders, in accordance with the legislation currently in effect.
§ 3 The Executive Officers shall exercise their positions as full-time occupations in the regime of exclusive dedication to the service of the company. They may at the same time hold and exercise non-remunerated positions in the management of the companys wholly-owned subsidiaries, other subsidiaries or affiliated companies, at the option of the Board of Directors. They shall, however, obligatorily exercise the corresponding positions in the subsidiaries Cemig Distribuição S.A. and Cemig Geração e Transmissão S.A.
§ 4 Those Executive Officers who are not employees shall have the right to an annual period of not more than 30 (thirty) days remunerated leave, which shall be granted by the Board of Directors. This leave may not be accumulated into the subsequent year, and its remuneration shall be augmented by one-third of the monthly remuneration currently in effect. Payment in cash in compensation for a period of leave not taken is not permitted.
Article 19: In the event of absence, leave, impediment, resignation or vacancy of the post of the Chief Executive Officer, this post shall be exercised by the Executive Vice-Chairman, for whatever period the absence, leave or impediment may last, and, in the event of vacancy or resignation, until the post is filled by the Board of Directors.
§ 1 If there is vacancy, resignation, leave or temporary impediment of any of the other members of the Executive Board, a meeting of the Executive Board may by a majority vote attribute the exercise of the respective functions to another Executive Officer, until the post is filled by the Board of Directors, or for as long as the period of leave or impediment, as the case may be, continues.
§ 2 A Chief Executive Officer or a member of the Executive Board elected in the way described in this article shall hold the position for the time which remains of the period of office of the Executive Officer who is substituted.
Article 20: The Executive Board shall meet, ordinarily, at least 2 (two) times per month and, extraordinarily, whenever called by the Chief Executive Officer or by 2 (two) Executive Officers with prior notice of at least 2 (two) days, but this notice shall not be necessary if all the Executive Officers are present. Unless stated to the contrary in the Bylaws, the decisions of the Executive Board shall be taken by a vote of the majority of its members, and in the event of a tie the Chief Executive Officer
shall have a casting vote and the Board of Directors must be advised that the casting vote has been used.
Article 21: The Executive Board is responsible for the current management of the companys business, subject to the companys Multi-year Strategic Plan and its Annual Budget, prepared and approved in accordance with these Bylaws.
§ 1 The companys Multi-year and Strategic Plan shall contain the plans and projections for a period of 5 (five) financial years, and must be updated at least once a year, and shall deal with the following subjects, among others:
a) the companys activities and strategies, including any project for construction or expansion of generation, transmission or distribution;
b) the new investments and business opportunities, including the companys subsidiaries and affiliated companies;
c) the amounts to be invested or in any other way contributed from the companys own funds or funds of third parties;
d) the rates of return and profits to be obtained or generated by the company.
§ 2 The companys Annual Budget shall reflect the companys Multi-year Strategic Plan and must give details of operational revenue and expenses, costs and investments, cash flow, the amount to be allocated to the payment of dividends, investments of cash from the companys own funds or funds of third parties, and other data which the Executive Board considers to be necessary.
§ 3 The companys Multi-year Strategic Plan and the Annual Budget shall be prepared and updated annually, by the end of each business year, to be in effect in the following business year. Both shall be prepared in coordination with the Chief Finance and Investor Relations Officer and submitted to examination by the Executive Board.
§ 4 The following decisions shall require a vote by the Executive Board:
a) approval of the plan of organization of the company and issuance of the corresponding rules and any changes to them;
b) approval of the companys Multi-year Strategic Plan, and updated and revised versions of it, including the timetables, amount and allocation of the investments that it specifies;
c) approval of both the companys Annual Budget, which must reflect the companys Multi-Year Strategic Plan in force at that time, and also any investment or expense not provided for in the Annual Budget as approved, in amounts lower than R$5,000,000.00 (five million Reais);
d) approval of disposal of, or placement of a charge on, any of the companys property, plant or equipment, or of provision by the company of guarantees to third parties, in amounts lower than R$5,000,000.00 (five million Reais);
e) approval of contracts, loans, financings and other legal transactions to be entered into by the company the amounts of which individually or jointly are lower than R$5,000,000.00 (five million Reais);
f) exercise of the vote in the General Meetings of affiliated companies and subsidiaries, when they deal with matters included in the companys Multi-year Strategic Plan;
g) approval of wholesale energy purchase and sale contracts of which the Board of Directors must be informed at its first subsequent meeting;
h) authorization to initiate administrative tender proceedings and proceedings for exemption and non-requirement for tenders, and the corresponding contracts, in amounts greater than or equal to R$1,000,000.00 (one million Reais) and less than R$5,000,000.00 (five million Reais);
i) authorization to file legal actions and administrative proceedings, and to enter into Court and extra-judicial settlements, for amounts less than R$5,000,000.00 (five million Reais);
j) authorization of provisions in the companys accounts, of any value, on proposal from the Chief Finance and Investor Relations Officer.
§ 5 Actions necessary for the regular functioning of the company, agreement of contracts and other legal transactions shall be taken by the Chief Executive Officer, jointly with one Executive Officer, or with a person holding a valid power of attorney.
§ 6 Powers of attorney must be granted by the Chief Executive Officer, jointly with an Executive Officer, except for the power described in sub-clause c of Sub-item I of Article 22, for which only the signature of the Chief Executive Officer is required.
§ 7 The Executive Board may, annually, delegate to one or more Executive Officers the competency to carry out the actions described in § 4 of this article, by resolution unanimously approved by its members.
Article 22: Subject to the provisions of the previous articles, the following are the functions and powers attributed to the Executive Board:
I To the Chief Executive Officer:
a) to oversee and direct the work of the company;
b) to execute the strategic actions of the company defined in the companys Multi-Year Strategic Plan;
c) to represent the company in the Courts, actively and passively;
d) to sign, jointly with one of the Executive Officers, documents which bind the company;
e) to present the annual report of the companys business to the Executive Board and to the Ordinary General Meeting of Stockholders;
f) to hire and dismiss the companys personnel;
g) to conduct the activities of Internal Audits and Institutional Relationships, and legal, communication and representation activities, and the function of the companys Ombudsman.
II To the Executive Vice-Chairman:
a) to substitute the Chief Executive Officer if he is absent, on leave, impeded from exercising his functions, or has resigned or his post is vacant;
b) to set the policies and guidelines for the environment, technological development, alternative energy sources, technical norms and improvement of product service and quality;
c) to co-ordinate the companys strategy for operations in relation to the environment, technology and strategic technology management;
d) to co-ordinate corporate programs for promotion and improvement of quality;
e) to promote the implementation of programs for the companys technological development;
f) to monitor performance of plans for compliance with the guidelines for the environment, technology and the improvement of quality.
III To the Chief Distribution and Sales Officer:
a) to make continuous efforts for the quality of supply of energy to consumers that are directly linked to the companys sub-transmission and distribution systems;
b) to prepare the planning of the companys high- and medium-voltage distribution system;
c) to plan and build distribution lines and networks;
d) to operate and maintain the companys electricity sub-transmission and distribution systems, and the associated systems of supervision and long-distance control;
e) to formulate and implement the marketing plan related to the activities of distribution and sales;
f) to carry out actions and programs with consumers for improved use of electricity;
g) to prepare the projections for the market in which this Department operates;
h) to maintain commercial relationships with, and make sales of electricity and services to, captive consumers;
i) to carry out environmental programs and actions within the scope of this Chief Officers Department.
IV To the Chief Finance and Investor Relations Officer:
a) to make available the financial resources necessary for the operation and expansion of the company, in accordance with the Annual Budget, conducting the processes of contracting of loans and financings, and related services;
b) to co-ordinate the preparation and consolidation of the companys Multi-year Strategic Plan and Annual Budget;
c) to carry out the accounting of, and to control, the companys economic-financial transactions;
d) to determine the cost of the service and to establish an insurance policy, as laid out in the companys Multi-year Strategic Plan;
e) to prepare short-, medium- and long-term financial programming in detail, as specified in the companys Multi-year Strategic Plan and Annual Budget;
f) to control the companys registered capital, decide policy for its shares and suggest dividend policy;
g) to carry out research, studies and analysis of the Brazilian energy market for the purposes of taking action in the Electricity Sale Chamber (CCEE);
h) to plan and carry out electricity purchase and sale transactions in the wholesale market and with free consumers, and the operations of management of the associated risks;
i) to carry out activities of purchase, sale and accounting of electricity in the Electricity Sale Chamber (CCEE);
j) to represent the company in relations with the Electricity Sale Chamber (CCEE);
l) to establish prices for purchase and sale of electricity;
m) to co-ordinate the preparation and negotiation of the companys electricity tariffs;
n) to analyze proposals and co-ordinate the development of the companys new business outside the spheres of generation, transmission, distribution and sale, jointly with other areas involved;
o) to support the Departments of the other Executive Officers in the development of the companys new business in generation, transmission, sub-transmission and distribution;
p) to evaluate and monitor the companys holdings in other companies;
q) to be responsible for the provision of information to the investing public, to the Securities Commission (CVM) and to the Brazilian and international stock exchanges or over-the-counter markets, and the corresponding regulation and inspection entities, and to keep the companys registrations with these institutions updated.
V To the Chief Energy Generation and Transmission Officer:
a) to make continuous efforts on behalf of the quality of supply of electricity to consumers that are directly linked to the transmission system;
b) to prepare the planning of the operation and maintenance of generation and transmission;
c) to operate and maintain the systems of generation and transmission and the associated systems of supervision and long-distance control;
d) to carry out environmental programs and actions within the scope of this Chief Officers Department;
e) to develop and conduct hydro-meteorological activities of interest to the company;
f) to manage the transactions arising from the inter-linking of the companys electricity system with those of other companies;
g) to represent the company in relations with the National Electricity System Operator;
h) to manage the companys central laboratories and workshops;
i) to ensure the availability of the generation and transmission facilities and equipment.
VI To the Chief Corporate Management Officer:
a) to ensure the provision of appropriate personnel to the company;
b) to decide the companys human resources policy and to orient and promote its application;
c) to orient and conduct activities related to organizational studies and their documentation;
d) to decide, conduct and supervise the companys telecommunications and information technology policy;
e) to project, put in place and maintain the companys telecommunications and information technology systems;
f) to decide policies and rules on support services such as transport, administrative communication, security guards, and provision of adequate quality in the workplace for the companys personnel;
g) to provide the company with infrastructure and administrative support resources and services;
h) to manage the process of contracting of works and services for acquisition and disposal of materials and real estate property;
i) to effect quality control of the material acquired and of the qualification of contracted service providers;
j) to administer and control the stock of material, the separation and recovery of used material, and to carry out sales of excess and unusable material, and scrap;
l) to carry out environmental programs and actions within the scope of this Chief Officers Department;
m) to authorize initiation of administrative tender proceedings and proceedings for exemption and non-requirement for tenders, and the corresponding contracts, in amounts up to R$1,000,000.00 (one million Reais).
VII To the Chief Planning, Projects and Construction Officer:
a) to prepare the planning of expansion of the generation, transmission and sub-transmission systems;
b) to consolidate the planning of the companys electricity system;
c) to consolidate the companys program of investments in generation, transmission, sub-transmission and distribution;
d) to represent the company in relations with the Electricity System Expansion Planning Co-ordination Committee;
e) to conduct negotiations for the development of generation and transmission undertakings;
f) to promote the planning, construction and assembly of generation, transmission, sub-transmission and co-generation facilities;
g) to promote the planning and construction of buildings;
h) to conduct evaluation studies and actions for obtaining of environmental licensing;
i) to conduct environmental programs and plans within the scope of this Chief Officers Department.
CHAPTER V
The Audit Board
Article 23: The companys Audit Board shall function permanently and shall be made up of between 3 (three) and 5 (five) members and their respective substitute members, who shall be elected annually, on the occasion of the Annual General Meeting, and may be re-elected.
§ 1 The Audit Board shall elect its Chairman from among its members, and the Chairman shall call and chair the meetings.
Article 24: In the event of resignation of position, death or impediment, a member of the Audit Board shall be replaced by his respective substitute, until the new member is elected, and such member shall be chosen by the same party that appointed the substitute.
Article 25: The responsibilities and powers of the Audit Board are fixed by the Corporate Law.
Article 26: The remuneration of the members of the Audit Board shall be fixed by the General Meeting of Stockholders which elects it, in accordance with the legislation from time to time in force.
CHAPTER VI
The business year
Article 27: The business year shall coincide with the calendar year, closing on 31 December of each year, when the financial statements shall be prepared, in accordance with the relevant legislation. Financial statements may be prepared for periods of six months or shorter periods.
Article 28 : Before any profit share, the accumulated losses and the provision for income tax shall be deducted from the result for the business year.
§ 1 Allocation of the net profit ascertained in each business year shall be as follows:
a) 5% (five percent) for the legal reserve, up to the limit specified by law;
b) 50% (fifty percent) distributed as obligatory dividends to the stockholders of the company, subject to the other terms of these bylaws and the applicable legislation; and
c) The balance, after the retention specified in a capital expenditure and/or investment budget prepared by the management of the company, in obedience to the companys Strategic Guidelines Plan and the dividend policy contained therein and duly approved, shall be applied in the constitution of a profit reserve for the purpose of distribution of extraordinary dividends, in accordance with Article 30 of these bylaws, up to the maximum limit specified by Article 199 of the Corporate Law.
Article 29: The dividends shall be distributed in the following order:
a) The annual minimum dividend guaranteed to the preferred shares;
b) The dividend for the common shares, up to a percentage equal to that guaranteed to the preferred shares.
§ 1 Once the dividends specified in lines a and b of the head paragraph of this article have been distributed, the preferred shares shall have equality of rights with the common shares in any distribution of additional dividends.
§ 2 The Board of Directors may declare interim dividends, in the form of interest on equity, to be paid from retained earnings, profit reserves or profits ascertained in six-monthly or interim financial statements.
§ 3 The amounts paid or credited as interest on equity, in accordance with the relevant legislation, will be imputed to the amounts of the obligatory dividend or of the dividend payable under the bylaws to the preferred shares, being for all purposes of law a part of the amount of the dividends distributed by the company.
Article 30: Without prejudice to the obligatory dividend, every two years, starting from the business year of 2005, or with a shorter periodicity if the companys availability of cash so permits, the company shall use the profit reserve provided for by line c of Article 28 of these bylaws for the distribution of extraordinary dividends, up to the limit of cash available, as determined by the Board of Directors, in obedience to the companys Strategic Guidelines Plan and the Dividend Policy contained therein.
§ 1 It shall be the function of the Board of Directors of the company to approve the Strategic Guidelines Plan, and any revisions thereof.
§ 2 The companys Strategic Guidelines Plan shall contain the long-term strategic planning, and the fundamental factors, targets, objectives and results, to be pursued and achieved by the company, and its dividend policy, and on these shall be based the plans, projections, activities, strategies, investments and expenses to be incorporated in the companys Multi-year Strategic Plan, and in its Annual Budget.
Article 31: The dividends declared, whether obligatory or extraordinary, shall be paid in 2 (two) equal installments, the first by 30 June and the second by 30 December of each year, and the Executive Board shall decide the location and processes of payment, subject to these periods.
§ 1 Dividends not claimed within a period of 3 (three) years from the date on which they are placed at the disposal of the stockholder shall revert to the benefit of the company.
CHAPTER VII
Responsibilities of the management officers
Article 32: The management officers are responsible to the company and third parties for the actions which they take in the exercise of their functions, as specified by the law and by these bylaws.
Article 33: The company guarantees defense, when legally possible, of members of the Board of Directors, the Audit Board and the Executive Board in Court and administrative proceedings brought against them as individuals by third parties, during or after their periods of office, for actions related to the exercise of their specific functions and which do not violate legal provisions or the provisions of these bylaws.
§ 1 The guarantee given in the head paragraph of this Article extends to employees who legally carry out actions by delegation from the companys management officers.
§ 2 Any member of the Board of Directors or the Audit Board, or any Executive Officer or employee against whom a Court judgment subject to no further appeal is given must reimburse the company all the costs, expenses and losses caused to it.
Exhibit 4.10
English Summary of Indenture Covering the Third Public Issuance of Common Debentures, dated June 14, 2004, beteween CEMIG and Pavarini Distribuidora de Títulos e Valores Mobilários, which also includes certain covenants on supplying financial information, corporate purpose, maintenance of books and records, maintenance of insurance and compliance with laws.
PUBLIC DISTRIBUTION OF NON-CONVERTIBLE DEBENTURES:
NOTICE OF START OF SUBSCRIPTION PERIOD
hereby announces the distribution for public subscription, on 2 August 2004, of the Third Issue, made up of 40,000 (forty thousand) nominal, unsecured, non-preferred book-entry Debentures, not convertible into shares, in a single Series, with unit value R$10,000.00 (ten thousand Reais) on 1 June 2004 (the Issue Date), issued by Companhia Energética de Minas Gerais CEMIG (the Debentures), with total value:
ISIN: BRCMIGDBS032
RISK RATING
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1. The Issuer: name and head office
Companhia Energética de Minas Gerais CEMIG (the Issuer), a listed corporation with head office at Avenida Barbacena, 1200, in the city of Belo Horizonte, State of Minas Gerais, Brazil, registered in the Brazilian Register of Corporate Taxpayers (CNPJ) under number 17.155.730/0001-64, with its Articles of Association filed with the Commercial Board of the State of Minas Gerais, under NIRE number 06.2.002160005/7.
2. Decision
The decision to make this Third Issue of debentures for public distribution (the Issue) was taken in meetings held by the Issuers Board of Directors on 27 May and 23 June 2004 (the Board Meetings). The minutes of the Board Meetings were filed at the Commercial Board of the State of Minas Gerais under numbers 3188769 and 3188778 respectively, and published in the newspapers Gazeta Mercantil, National Edition, Minas Gerais and O Tempo , on 30 June 2004.
3. Securities Distribution Program
This issue is part of the Issuers Public Debenture Issue Program, with maximum value of R$ 1,500,000,000.00 (one billion and five hundred million Reais) (the Program), approved by the board meeting of 27 May 2004. The Program was filed at the CVM (the Brazilian Securities Commission) on 19 July 2004.
4. Characteristics of the Debentures
4.1. Amount of the Issue : R$ 400,000,000.00 (four hundred million Reais) on the Issue Date.
4.2. Number of Debentures : 40,000 (forty thousand) Debentures.
4.3. Form : Nominal, book-entry Debentures, without issue of deposits or certificates.
4.4. Convertibility : The Debentures are not convertible into shares.
4.5. Type : The Debentures are unsecured, and without preference rights.
4.6. Nominal Unit Value : R$ 10,000.00 (ten thousand Reais), on the Issue Date.
4.7. Series Number : The Issue is made in a single series.
4.8. Maturity : The debentures will have tenor of 120 (one hundred and twenty) calendar months from the Issue Date, with final maturity on the first business day of June 2014 (the Maturity Date), on which date the Issuer undertakes to pay the debentures which are still in the market, for their Nominal Unit Value, augmented by the due Remuneration.
5. Remuneration
The Debentures of this Issue shall have the right to the following remuneration (the Remuneration):
5.1. Updating adjustment of the Debentures
The nominal value of the Debentures shall undergo updating adjustment as from the Issue Date by application of the variation in the IGP-M Inflation Index (the Index), calculated and published by the Getúlio Vargas Foundation. This adjustment will be calculated pro rata temporis , per business day, according to the following formula (the Updating Adjustment):
Where:
VNa |
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is the updated nominal value calculated to 6 (six) decimal places, without rounding; |
VNe |
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is the nominal value or balance of nominal value, calculated to 6 (six) decimal places, without rounding; |
C |
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is the accumulated result of the monthly variations of the indices used, to 8 decimal places, without rounding; |
NI 0 |
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is the numerical value of the Index for the month prior to the first month of the period for which the adjustment is made; |
NI 1 |
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is the numerical value of the Index for the first month of the period for which the adjustment is made; |
NI 2 |
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is the numerical value of the Index for the second month of the period for which the adjustment is made; |
NI n |
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is the numerical value of the Index for the month prior to the month of updating, up to the monthly-anniversary date. After the monthly-anniversary date, it is the numerical value of the Index for the month of updating; |
NI n-1 |
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is the numerical value of the Index for the month prior to month n; |
dup |
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is the whole number of business days from the last base-date to the date of the updating adjustment; |
2
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and |
dut |
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is the whole number of business days between the last and the next base-date. |
The month of the updating adjustment is the month between the two consecutive monthly-anniversary dates of the debentures in question.
The monthly-anniversary date is the first business day of each month.
The base-date is the same day as the date of anniversary in each month.
The numerical (index-number) value of the IGP-M index will be used employing an identical number of decimal points to that published by the body which calculates it.
The IGP-M will be applied annually, or in the shortest period permitted by the legislation currently in force, in this case without the need for adjustment to the respective Issue Deed or any other formality.
5.1.1. If on the date of maturity of any of the pecuniary obligations of the Issuer, the IGP-M is not disclosed, the last prior index number of the IGP-M that was published shall be applied, calculated pro rata temporis , and no financial compensation whatsoever shall be due between the Issuer and the holders of the Debentures on the occasion of any subsequent disclosure of the IGP-M which would have been applicable.
5.1.2. In the event that the IGP-M is abolished, or not calculated and/or not disclosed for more than 10 (ten) consecutive days after the date expected for its calculation and/or disclosure, or if any legal impossibility arises preventing the application of the IGP-M to the Debentures, the Fiduciary Agent shall, within 30 (thirty) calendar days from the event, carry out a meeting of debenture holders, for decision, in agreement with the Issuer, subject to the applicable regulations, of a new parameter for remuneration of the Debentures to be proposed by the Issuer. Until the decision on this parameter, the last prior IGP-M officially published shall be used for the calculation of the amount of updating adjustment of the Debentures, augmented by the Remuneration Interest (as defined below), up to the date of the decision of the meeting of debenture holders.
5.1.3. If there is no agreement about the new remuneration between the Issuer and debenture holders representing at least 2/3 (two thirds) of the total of the Debentures in circulation (or if there is a lack of quorum to decide on the question), the Issuer shall redeem the totality of the Debentures in circulation, within 30 (thirty) calendar days from the date of the meeting of debenture holders, for the balance of their Nominal Unit Value plus the remuneration due up to the date of the redemption, calculated pro rata temporis , starting from the Issue Date or the date of the last payment of remuneration interest, as the case may be, using the last IGP-M index officially published. The redemption to which this item refers shall not be increased by any premium of any nature.
5.1.4. On the maturity date the updating of value of the Debentures shall be paid by the Issuer together with the nominal unit value of the Debentures.
5.1.5. On the day on which subscription of the Debentures takes place, and for the purposes only of ascertaining the subscription price, if there is no publication of the IGP-M index relating to the month in which the subscription of the Debentures is taking place, the last previous projection of the IGP-M index made by Andima (Brazilian Financial Market Institutions Association), based on the forecast published by the Getúlio Vargas Foundation (FGV), available on the Internet at www.andima.com.br, shall be used to calculate the updated nominal value of the Debentures, or in its absence the last IGP-M index officially published, and no financial compensation shall be due for payment between the Issuer and the Debenture Holders at the time of the subsequent publication of the IGP-M which would be applicable.
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5.2. Remuneration Interest of the Debentures
Interest at 10.5% (ten point five percent) per year, decided on the basis of a bookbuilding procedure, shall be payable on the Nominal Unit Value, of the Debentures augmented by updating adjustment, and shall be calculated by business days, based on a year of 252 (two hundred and fifty two) days, from the Issue Date (the Remuneration Interest). The Remuneration Interest shall obey the following formula:
where :
J |
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is the amount of interest due at the end of each Capitalization Period (as defined below), calculated to 6 (six) decimal places, without rounding; |
VNa |
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is the Nominal Unit Value, or balance of Updated Nominal Value, as previously established; |
taxa |
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is 10.5; |
N |
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is 252; |
n |
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is the whole number of business days between the next and the prior event; |
DT |
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is the whole number of business days between the date of the next event and the date of the previous event; and |
DP |
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is the whole number of business days between the date of the previous event and the present date. |
5.2.1. The Remuneration Interest was approved by the Issuers Board of Directors in a meeting held on 23 June 2004, the minutes of which were published on 30 June 2004, in the newspapers Gazeta Mercantil , National Edition, Minas Gerais and O Tempo .
5.2.2. The Remuneration Interest shall be paid by the Issuer annually, the first payment to be made 12 (twelve) months after the Issue Date, that is to say on the first business day of June 2005, and the other payments on the first business days of June of the subsequent years, on the compound capitalization basis, pro rata temporis per business day.
5.2.3. No discounts of any nature shall be granted to investors in relation to acquisition of the Debentures.
6. Right of preference
There shall be no right of preference for the Issuers present stockholders in subscription of the Debentures.
7. Conditions of subscription and payment
7.1. Price of subscription and form of payment : The price of subscription of the Debentures shall be their Nominal Unit Value, augmented by the Remuneration, calculated pro rata temporis from the Issue Date up to the date of payment, according to item 5 above. The Debentures shall be paid at sight, simultaneously with subscription, in Brazilian currency.
7.2. Place of payment : The payments to which the Debenture Holders are entitled shall be made using, as the case may be: (i) the procedures adopted by the CBLC (Brazilian Settlement and Custody Chamber) for Debentures registered in the BOVESPA FIX trading system; or (ii) the procedures adopted by CETIP (the Custody and Settlement Chamber) for Debentures registered in the National Debentures System ( SND ); or (iii) for Debenture Holders not linked to either of these systems, through the respective Mandated Recording Bank for this Issue.
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7.3. Programmed amortization: The Debentures shall not be the subject of programmed amortization before their respective Maturity Date.
7.4. Extension of payment periods : In the event that the due date of any payment of any obligation of either of the parties, including the Debenture Holders, coincides with a day which is not a working or banking business day in the cities of São Paulo (São Paulo State) and/or Belo Horizonte (Minas Gerais State), the period for payment shall be deemed extended until the next subsequent business day, without any increase in the amounts to be paid, other than for payments to be made by CETIP or CBLC, for which there shall be extension only when the payment date coincides with a Brazilian nationwide holiday.
8. Distribution placement and procedure
8.1. The Debentures shall be the subject of public distribution, under the best efforts distribution regime, with intermediation by financial institutions which are part of the Securities Distribution System, through the SDT, administered by Andima (the Brazilian Association of Financial Market Institutions) and operated by Cetip and/or through the BOVESPA FIX system of the São Paulo stock exchange with custody provided by CBLC.
8.2. Subject to the applicable regulatory provisions, the intermediary institutions shall carry out the public distribution of the Debentures according to a distribution plan adopted in accordance with §3º of Section 33 of CVM Instruction 400/03, so as to ensure: (i) that investors are treated fairly and equitably; (ii) that the investment is appropriate to the risk profile of the respective clients of the Intermediary Institutions, and (iii) that the sales representatives of the Intermediary Institutions previously receive a copy of the Prospectus and the Supplement for obligatory reading and that their doubts can be resolved by a person designated by the Lead Manager of the Issue. The distribution plan was decided as follows:
(i) Prior to the registry of the distribution of the Debentures a roadshow was carried out as decided by the intermediary institutions in agreement with the Issuer, during which versions of the preliminary prospectus and the preliminary supplement were distributed;
(ii) after the roadshow, and as decided by the intermediary institutions in agreement with the Issuer, the intermediary institutions began a process of bookbuilding, subject to the procedures relating to this Issue;
(iii) after the process of bookbuilding, the intermediary institutions consolidated the proposals of the investors for subscription of the Debentures;
(iv) after the final remuneration of the Debentures had been decided, the documents relating to the Offering of the Debentures were presented to the CVM;
(v) this present announcement of start of distribution is being published subsequent to registry of the Public Offering of Debentures having been obtained from the CVM,;
(vi) there shall be no minimum or maximum lots for subscription of the Debentures; and
(vii) demand of clients of the intermediary institutions who wish to invest in the Debentures shall be met preferentially, having in mind the relationship of the intermediary institutions with these clients and other considerations of a commercial or strategic nature.
8.2.1. In the terms of the Board Meetings and pursuant to Section 30 of CVM Instruction 400/03, partial distribution of the debentures shall be allowed and this Issue shall in no way be affected if the Debentures are not subscribed and paid up in their totality. The Debentures which are not subscribed and paid up shall be cancelled by the Issuer. Maintenance of this Issue is not conditional on a minimum quantity of Debentures subscribed or paid up nor on a minimum amount of funds raised by the Issuer by means of the Issue.
8.2.2. If the Offering is not finalized, for any reason, the funds deposited by investors in relation to the Debentures shall be returned to the respective depositors, in a way and on the conditions established in the
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Supplement, and these funds shall be returned to the investors without the addition of interest or monetary adjustment, and with the deduction of the amount relating to the CPMF tax on bank debits. This shall also apply, as the case may be, to investors who make their subscription to the issue conditional at the time of signing the respective subscription bulletins in the event that their condition is not met on closing of the Debenture offer.
8.2.3. A. The Issuer has authorized the leading intermediary institution, at its option, to distribute a supplementary lot of debentures if the demand for the debentures justifies this. In this event, the quantity of Debentures to be distributed under this public offering may be increased by up to 15% (fifteen percent) from the quantity initially offered, subject to the same conditions and price as the debentures initially offered.
8.2.4. The maximum period for public placement of the Debentures shall be 5 (five) business days, from the date of publication of this announcement of start of public distribution of the Debentures.
8.2.5. No fund for maintenance of liquidity of the debentures has been constituted, and no such fund shall be constituted, and no contract for stabilization of price in relation to the Debentures shall be signed.
8.3. Any Debentures which are the subject of this public distribution and are not subscribed and paid up shall be cancelled.
9. Renegotiation
The Debentures of this Issue shall not be subject to programmed renegotiation.
10. Optional early redemption
The Debentures of this Issue shall not be subject to optional early redemption by the Issuer.
11. Early Acquisition
11.1. Optional Early Acquisition : The Issuer may, at any time, acquire the Debentures that are in circulation in the market, for a price not superior to their nominal value plus the remuneration, subject to the terms of Section 55 of Law 6404/76. The Debentures which are the subject of such acquisition may be cancelled, remain in the Issuers treasury, or be placed in the market again.
11.2. Obligatory Early Acquisition: If there is a change in the direct or indirect stockholding control of the Issuer, the Issuer shall be obliged to acquire the Debentures of this issue which are in circulation, at the option of the respective Debenture Holders who do not accept to remain as holders of Debentures of the Issuer after the change in its stockholding control. The offer to purchase shall be notified to these Debenture Holders by means of a specific advice published within 15 (fifteen) calendar days from the date of effective change of stockholding control, with a period of not less than 60 (sixty) calendar days from the publication of the notice and in accordance with the procedures described in this notice. The acquisition of the Debentures by the Issuer shall take place on the 30th (thirtieth) calendar day after the last day of the period for Debenture holders to express an opinion, for their Nominal Value, augmented by the Remuneration, as specified in item 5 above. For the purposes of this item, there shall occur a change in stockholding control if the present controlling stockholder of the Issuer, the Government of the State of Minas Gerais, directly or indirectly, ceases to hold the equivalent of at least 50% (fifty percent) plus one of the total of shares representing the voting capital of the Issuer.
12. Trading
The Debentures shall be registered for trading on the secondary market, on the (i) SND (National Debentures System), administered by Andima and operated by Cetip and/or (ii) on the BOVESPA FIX, of the São Paulo stock exchange, with custody by CBLC.
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13. Target Investing Public
The target public of this offering consists of all investors, in general.
14. Inappropriateness of Investment in the Debentures
The present issue is not appropriate for investors who (i) need considerable liquidity in relation to the securities acquired, since trading in Debentures in the Brazilian secondary market is restricted, and (ii) are not willing to run the credit risk of the companies of the Brazilian electricity sector.
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II INTERMEDIARY INSTITUTIONS
Lead Manager:
UNIBANCO - União de Bancos Brasileiros S.A.
Av. Eusébio Matoso, 891
CEP 05423-901, São Paulo, SP
Tel: (11) 3097-1213
Fax: (11) 3813-2675
Internet: www.unibanco.com.br
Co-Lead Managers:
Banco Itaú BBA S.A.
Avenida Brigadeiro Faria Lima, 3400, 5th floor
CEP 04538-132, São Paulo, SP
Tel: (11) 3708-8717
Fax: (11) 3708-8107
Internet: www.itaubba.com.br
BB-Banco de Investimento S.A.
Rua Lélio Gama, 105, 28th floor
CEP 20301-080, Rio de Janeiro, RJ
Tel: (21) 3808-3773
Fax: (21) 3808-3239
Internet: www.bb.com.br
III MANDATED RECORDING BANK
Banco Itaú S.A.
Avenida Engº. Armando de Arruda Pereira, 707 9th floor
CEP 01014-919, São Paulo, SP
IV FIDUCIARY AGENT
Pavarini Distribuidora de Títulos e Valores Mobiliários Ltda.
Rua Sete de Setembro, 99 16th floor
CEP 20050-005, Rio de Janeiro, RJ
V REGISTRATION OF THE ISSUE WITH THE CVM
THE PRESENT ISSUE WAS REGISTERED WITH THE CVM (BRAZILIAN SECURITIES COMMISSION) UNDER NUMBER CVM/SRE/DEB/2004/015, ON 19 JULY 2004.
VI DATE OF START OF PUBLIC DISTRIBUTION
The date of start of the public distribution is 2 August 2004.
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VII THE PROSPECTUS, THE SUPPLEMENT, ADDITIONAL INFORMATION AND SERVICE TO DEBENTURE HOLDERS
The Prospectus and the Supplement of the present offering are available at the head offices and on the web pages of the intermediary institutions of the present Issuer, and of the CVM, Cetip and CBLC.
Further information can be obtained from the intermediary institutions of the present issue or the CVM.
In addition to the addresses of the intermediary institutions, the Mandated Recording Bank and the Issuer, we present below other important addresses:
CVM (Comissão de Valores Mobiliários) |
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Cetip Settlement and Custody Chambe |
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1) Rua Sete de Setembro, 111 5th floor, Centro |
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Rua Líbero Badaró, 425, 24th floor |
CEP 20159-900, Rio de Janeiro RJ |
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CEP 01009-000 São Paulo, SP |
2) Rua Formosa, 367 20th floor, Centro |
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www.cetip.com.br |
CEP 01049-000, São Paulo SP |
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www.cvm.gov.br |
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CBLC Brazilian Settlement and Custody Company |
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Rua XV de Novembro, 275. |
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CEP 01013-001São Paulo, SP |
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www.cblc.com.br |
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THE REGISTRATION OF THIS DISTRIBUTION DOES NOT IMPLY ANY GUARANTEE BY THE CVM OF THE TRUTHFULNESS OF THE INFORMATION PROVIDED OR ANY JUDGMENT ON THE QUALITY OF THE ISSUER, NOR ON THE DEBENTURES TO BE DISTRIBUTED.
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This public offering was prepared in accordance with the provisions of the Auto-Regulation Code of Anbid for public offerings of securities, registered in the Fifth Public Registry Office of documents of Rio de Janeiro, under number 497585, meeting the minimum standards of information therein contained, and Anbid has no responsibility for the said information, for the quality of the Issuer/Offering Party or of the participating institutions or for the securities which are the subject of this offer. |
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Exhibit 12.1
CERTIFICATION
I, Djalma Bastos de Morais, certify that:
1. I have reviewed this annual report on Form 20-F of CEMIG;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The companys other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. evaluated the effectiveness of the companys disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. disclosed in this report any change in the companys internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the companys internal control over financial reporting; and
5. The companys other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the companys auditors and the audit committee of companys board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the companys ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the companys internal control over financial reporting.
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/s/ Djalma Bastos de Morais |
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Name: |
Djalma Bastos de Morais |
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Title: |
Chief Executive Officer |
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Date: |
May 25, 2005 |
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A signed original of this written statement required by Section 302 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 12.2
CERTIFICATION
I, Flávio Decat de Moura, certify that:
1. I have reviewed this annual report on Form 20-F of CEMIG;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The companys other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. evaluated the effectiveness of the companys disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. disclosed in this report any change in the companys internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the companys internal control over financial reporting; and
5. The companys other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the companys auditors and the audit committee of companys board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the companys ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the companys internal control over financial reporting.
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/s/ Flávio Decat de Moura |
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Name: |
Flávio Decat de Moura |
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Title: |
Chief Financial and Investor Relations
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Date: |
May 25, 2005 |
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A signed original of this written statement required by Section 302 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 13.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ENACTED BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 20-F of Companhia Energética de Minas GeraisCEMIG (the Company) for the period ended December 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Djalma Bastos de Morais, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ |
Djalma Bastos de Morais |
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Name: |
Djalma Bastos de Morais |
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Title: |
Chief Executive Officer |
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Date: May 25, 2005
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 13.2
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ENACTED BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 20-F of Companhia Energética de Minas GeraisCEMIG (the Company) for the period ended December 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Flávio Decat de Moura, Chief Financial and Investor Relations Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ |
Flávio Decat de Moura |
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Name: |
Flávio Decat de Moura |
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Title: |
Chief Financial and Investor |
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Relations Officer |
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Date: May 25, 2005
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.