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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 20-F
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/ / REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 1-15224
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COMPANHIA ENERGETICA DE MINAS GERAIS--CEMIG
(Exact Name of Registrant as Specified in Its Charter)
ENERGY COMPANY OF MINAS GERAIS THE FEDERATIVE REPUBLIC OF BRAZIL
(Translation of Registrant's Name into (Jurisdiction of Incorporation or
English) Organization)
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AVENIDA BARBACENA, 1200
30190-131 BELO HORIZONTE, MINAS GERAIS, BRAZIL
(Address of Principal Executive Offices)
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Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on which Registered
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AMERICAN DEPOSITARY SHARES (EVIDENCED BY NEW YORK STOCK EXCHANGE
AMERICAN DEPOSITARY RECEIPTS), EACH
REPRESENTING 1,000 PREFERRED SHARES
PREFERRED SHARES, R$0.01 PAR VALUE* NEW YORK STOCK EXCHANGE*
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* 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 issuer's 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 /X/ No / /
Indicate by check mark which financial statement
item the registrant has elected to follow.
Item 17 / / Item 18 /X/
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TABLE OF CONTENTS
PAGE
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Presentation of Financial Information ..............................................................1
Market Position and Other Information ..............................................................2
Forward-Looking Information ........................................................................2
PART I .............................................................................................4
Item 1. Identity of Directors, Senior Management and Advisers .....................................4
Item 2. Offer Statistics and Expected Timetable ...................................................4
Item 3. Key Information ...........................................................................4
Item 4. Information on the Company ...............................................................24
Item 5. Operating and Financial Review and Prospects .............................................51
Item 6. Directors, Senior Management and Employees ...............................................75
Item 7. Major Shareholders and Related Party Transactions ........................................84
Item 8. Financial Information ....................................................................86
Item 9. The Offer and Listing ....................................................................93
Item 10. Additional Information ...................................................................96
Item 11. Quantitative and Qualitative Disclosures about Market Risk ..............................115
Item 12. Description of Securities Other than Equity Securities ..................................118
PART II ..........................................................................................119
Item 13. Defaults, Dividend Arrearages and Delinquencies .........................................119
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds ............119
Item 15. Controls and Procedures .................................................................119
Item 16. [Reserved] ..............................................................................120
PART III .........................................................................................120
Item 17. Financial Statements ................................................................... 120
Item 18. Financial Statements ................................................................... 120
Item 19. Exhibits ............................................................................... 121
Index Of Defined Terms .......................................................................... 126
Annex A The Brazilian Electricity Sector ....................................................... A-1
i
PRESENTATION OF FINANCIAL INFORMATION
Companhia Energetica de Minas Gerais-CEMIG 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 Energetica de Minas Gerais-CEMIG and its consolidated subsidiaries,
except when the reference is specifically to Companhia Energetica de Minas
Gerais-CEMIG (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, 2002 and 2001 and the related
statements of operations and comprehensive income, cash flows and changes in
shareholders' equity for the years ended December 31, 2002, 2001 and 2000, in
REAIS all in accordance with U.S. GAAP. Deloitte Touche Tohmatsu has audited our
consolidated financial statements at December 31, 2002 and 2001 and for each of
the three years in the period ended December 31, 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$3.5400 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, 2002.
However, the REAL has recently experienced high volatility. See "Item 3. Key
Information--Exchange 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, 2002 and is based on, or derived from, reports issued by the
AGENCIA NACIONAL DE ENERGIA ELETRICA (National Electric Energy Agency of
Brazil), or ANEEL.
Certain terms are defined the first time they are used in this annual
report. The "Index of Defined Terms" that begins on page 126 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," including "Risk Factors," "Item 4. Information on the
Company," "Item 5. Operating and Financial Review and Prospects" 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
including, 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;
- changes in volumes and patterns of customer electricity usage;
- competitive conditions in Brazil's 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;
2
- our capital expenditure plans;
- our ability to serve our customers on a satisfactory basis;
- 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 Information--Risk
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
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
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 balance sheet data as of December 31, 2002 and
2001 and for each of the three years in the period ended December 31, 2002 have
been derived from our audited consolidated financial statements and the notes
thereto included elsewhere in this annual report. The selected income statement
data as of December 31, 2000, 1999 and 1998 and for the years then ended 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$3.5400 per US$1.00, the noon buying rate as of December 31, 2002.
However, the REAL has recently experienced high volatility and has appreciated
against the U.S. dollar. 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 June 18, 2003, the noon buying rate for REAIS was
R$2.9070 per U.S.$1.00. See "--Exchange Rates."
4
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
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2002 2002 2001 2000 1999 1998
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(US$)(1)(2) (In millions of R$ except per share/ADS data or as otherwise indicated)
INCOME STATEMENT DATA:
Net Operating revenues
Electricity sales to final customers .... 1,542 5,458 4,587 4,478 3,678 3,159
Regulatory extraordinary rate
adjustment(3) ......................... 79 281 789 - - -
Electricity sales to the interconnected
power system .......................... 45 161 517 145 63 132
Use of basic transmission network ....... 52 185 154 139 71 2
Other operating revenues ................ 73 260 150 124 93 61
Tax on revenues ......................... (416) (1,473) (1,191) (1,130) (933) (767)
Total net operating revenues ............ 1,376 4,872 5,006 3,756 2,972 2,587
Operating costs and expenses
Electricity purchased for resale ........ (377) (1,333) (1,914) (819) (727) (481)
Natural gas purchased for resale ........ (43) (152) (84) (60) (36) (20)
Use of basic transmission network ....... (84) (298) (251) (243) (151) (71)
Depreciation and amortization ........... (188) (666) (641) (583) (555) (441)
Personnel ............................... (150) (532) (531) (466) (391) (408)
Regulatory charges ...................... (155) (548) (420) (433) (258) (206)
Third-party services .................... (75) (265) (216) (195) (153) (126)
Employee post-retirement benefits ....... (58) (207) (293) (238) (193) (475)
Materials and supplies .................. (22) (78) (70) (71) (59) (45)
Other ................................... (67) (238) (274) (208) (290) (133)
Provision for loss on deferred
regulatory assets ..................... (8) (28) (150) - - -
Provision for loss on account receivable
from State Government ................. - - (754) - - -
Total operating costs and expenses ...... (1,227) (4,345) (5,598) (3,316) (2,813) (2,406)
Operating income (loss) ................... 149 527 (592) 440 159 181
Financial expenses, net ................... (148) (525) (48) (42) (295) (40)
Income (loss) before income taxes
and minority interests ................. 1 2 (640) 398 (136) 141
Income taxes (expense) benefit ............ (7) (26) (78) (32) 114 148
Minority Interests ........................ 3 12 (1) - - -
Net income (loss) ......................... (3) (12) (719) 366 (22) 289
Other comprehensive income (loss) ......... 68 242 203 19 (168) 1
Comprehensive income (loss) ............... 65 230 (516) 385 (190) 290
Basic and diluted earnings (loss):
Per thousand common shares .............. (0.02) (0.07) (4.52) 2.30 (0.14) 1.82
Per thousand preferred shares ........... (0.02) (0.07) (4.52) 2.30 (0.14) 1.82
Per ADS ................................. (0.02) (0.07) (4.52) 2.30 (0.14) 1.82
BALANCE SHEET DATA:
Assets
Current assets .......................... 483 1,711 1,752 1,064 768 593
Property, plant and equipment, net (in
service) .............................. 2,633 9,322 9,325 9,705 9,503 9,822
Construction in progress ................ 219 777 516 592 1,032 904
Deferred regulatory assets - long-term .. 472 1,670 1,245 - - -
Account receivable from State Government 213 755 451 953 809 684
Other assets ............................ 263 931 773 484 1,016 858
Total assets ............................ 4,284 15,166 14,062 12,798 13,128 12,861
Liabilities
Current portion of long-term financing .. 267 946 451 502 337 160
Other current liabilities ............... 541 1,916 1,561 1,042 1,125 781
Long-term financing ..................... 732 2,593 2,029 1,088 1,039 981
Employee post-retirement benefits ...... 359 1,272 1,627 1,803 1,734 1,434
Shareholders' equity ...................... 2,102 7,442 7,543 8,162 7,964 8,509
Capital stock ............................. 403 1,428 1,396 1,396 1,396 1,396
5
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
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2002 2002 2001 2000 1999 1998
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(US$)(1)(2) (In millions of R$ except per share/ADS data or as otherwise indicated)
OTHER DATA:
Outstanding shares (thousands)
Common .................................. - 70,874,168 69,495,478 69,495,478 69,495,478 69,495,478
Preferred ............................... - 91,210,523 89,436,237 89,436,237 89,436,237 89,436,237
Dividends per thousand shares
Common .................................. 0.58 2.04 0.65 1.18 2.23 3.21
Preferred ............................... 0.58 2.04 0.65 1.18 2.23 3.21
Dividends per ADS
Preferred ............................... 0.58 2.04 0.65 1.18 2.23 3.21
Dividends per thousand shares(4)
Common .................................. - 0.58 0.28 0.60 1.23 2.66
Preferred ............................... - 0.58 0.28 0.60 1.23 2.66
Dividends per ADS(4)
Preferred ............................... - 0.58 0.28 0.60 1.23 2.66
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(1) For purposes of this table, US$1.00 is equal to R$3.5400, the noon
buying rate as of December 31, 2002. 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 at the time of the declaration of the dividend.
EXCHANGE RATES
There are two legal exchange markets in Brazil--the commercial rate
exchange market, or commercial market, and the floating rate exchange market, or
floating market. Although the Federal Government has unified the operational
limits applicable to both markets, each market continues to have its own
regulations. The commercial market is reserved primarily for foreign trade
transactions and transactions that generally require prior registration with and
approval from Brazilian monetary authorities, such as the purchase and sale of
registered investments by foreign persons and related remittances of funds
abroad. Purchases and sales of foreign currencies in the commercial market may
be carried out only through a financial institution in Brazil authorized to buy
and sell currency in that market. The floating market rate is the prevailing
selling rate for Brazilian currency into U.S. dollars, as reported by the BANCO
CENTRAL DO BRASIL (the Central Bank of Brazil), or the Central Bank, and applies
to transactions that are not covered by the commercial market. Prior to the
introduction of the real in 1994, the commercial market rate and the floating
market rate differed significantly at times, but the two rates have not differed
significantly since. However, there can be no assurance that there will not be
significant differences between the two rates in the future. Although the
commercial market rate and the floating market rate are freely negotiated, they
may be influenced by an intervention of the Central Bank.
In the past, the Central Bank maintained a band within which the exchange
rate between the REAL and the U.S. dollar fluctuated. Since January 15, 1999,
the REAL has been permitted to float freely. During 1999 the REAL experienced
high volatility and suffered a sharp decline against the U.S. dollar. During
2000 and 2001 the REAL continued to decline against the U.S. dollar. In 2002,
factors including the effect of Argentina's debt default in December 2001 and
concerns regarding the recent presidential elections in Brazil caused the REAL
to lose a significant percentage of its value as measured against the U.S.
dollar. However, the REAL has recently experienced high volatility and has
appreciated against the U.S. dollar. Under the current free-floating
convertibility exchange system, the REAL may undergo devaluation, or it may
appreciate against the U.S. dollar and other currencies.
6
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
U.S.$1.00.
REAIS PER US$1.00
MONTH LOW HIGH AVERAGE PERIOD-END
------------------------------------------------- ------ ------ ------- ----------
December 2002.................................... 3.4390 3.7950 3.6268 3.5400
January 2003..................................... 3.2650 3.6590 3.4375 3.5130
February 2003.................................... 3.5350 3.6640 3.5955 3.5650
March 2003....................................... 3.3320 3.5700 3.4567 3.3320
April 2003....................................... 2.8870 3.3290 3.1090 2.8870
May 2003......................................... 2.8750 3.0340 2.9517 2.9790
June 2003 (through June 18, 2003)................ 2.8550 2.9770 2.8952 2.9070
REAIS PER US$1.00
YEAR ENDED DECEMBER 31, LOW HIGH AVERAGE PERIOD-END
------------------------------------------------- ------ ------ ------- ----------
1998............................................. 1.1160 1.2090 1.1605 1.2085
1999............................................. 1.2074 2.2000 1.8207 1.8090
2000............................................. 1.7230 1.9840 1.8301 1.9510
2001............................................. 1.9380 2.7880 2.3527 2.3120
2002............................................. 2.2730 3.9450 2.9235 3.5400
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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
Factors--Risks Relating to Brazil--Exchange rate instability may adversely
affect our financial condition and results of operations."
RISK FACTORS
RISKS RELATING TO CEMIG
WE ARE CONTROLLED BY THE STATE GOVERNMENT
We are controlled by the State Government, which owns 51% of our
outstanding common shares. Although the State Government controls us, it has not
adopted any laws directly affecting our operations. However, the State
Government has the right to vote the majority of our voting common shares, which
currently includes the power to:
- elect the majority of our directors; and
- determine the outcome of any action requiring shareholder approval,
including transactions with related parties, corporate reorganizations
and the timing and amount of any dividends or interest on capital.
Our operations have had and will continue to have an important impact on
the development of business, industry and social conditions in Minas Gerais. The
State Government has from time to time in the past directed, and may in the
future direct, us to engage in certain activities and make certain expenditures
designated primarily to promote the social, political or economic goals of the
State Government and not necessarily with a view to our profitability. In the
event that the State Government
7
pursues policies, objectives or strategic directions for us with which you
disagree, you and other shareholders will not have the voting power to block
these actions and policies.
In addition, while certain constitutional safeguards exist with respect to
relations between the State Government and the Federal Government, there can be
no assurance that the Federal Government will not take administrative,
legislative or other actions that have an adverse impact on the State
Government, and in turn on our results of operations.
EFFECTIVE CONTROL OF CEMIG IS SUBJECT TO JUDICIAL CHALLENGE
In connection with the purchase in 1997 of approximately 33% of our common
shares by Southern Electric Brasil Participacoes Ltda., or Southern, a joint
venture, 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. However, this ruling has been appealed
to a superior court and therefore, effective control of CEMIG remains subject to
judicial challenge. 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 Information--Legal
Proceedings--Shareholders' Agreement" and "Item 10. Additional
Information--Material Contracts--Shareholders' Agreement, dated June 18, 1997,
between the State Government and Southern."
DIFFICULTIES RELATING TO THE RESTRUCTURING OF OUR OPERATIONS COULD
ADVERSELY AFFECT OUR BUSINESS
Historically, we have been a vertically integrated electric power company,
combining generation, transmission and distribution operations in one operating
entity. However, the concession agreements we signed in 1997 with the Federal
Government's DEPARTAMENTO NACIONAL DE AGUAS E ENERGIA ELETRICA (National
Department of Water and Electrical Energy), or DNAEE, the predecessor to ANEEL,
the agency that regulates the Brazilian energy sector, require us, as well as
other vertically integrated electric power companies in Brazil, to separate our
generation, transmission and distribution operations into distinct operating
units. Pursuant to these concession agreements, we would organize these units
into three separate subsidiaries, each wholly owned by CEMIG, and each of which
would conduct our previously integrated generation, transmission and
distribution operations. See "Item 4. Information on the Company--Organizational
Structure and Unbundling." Under the new structure, each operating subsidiary
would be required to operate independently and in compliance with rate, service,
network and other regulations applicable to its particular business unit.
Because we are a state-controlled company, specific state legislation, in
addition to shareholder approval, is required in order for us to create these
new subsidiaries.
We are unable to predict the effect of this reorganization on our business.
Although we believe that the separation of our electric energy business into
three separate subsidiaries would allow us to enhance operating strategies and
efficiencies, at this time we are not able to estimate the impact of the
restructuring on our financial condition and results of operations. In
particular, compliance by each subsidiary with market-specific rate, tax and
other regulations and the effects of competition in each subsidiary's respective
market segment may adversely impact our results of operations in ways that we
cannot foresee. For example, we believe that revenue taxes payable by generation
and distribution units may, on a consolidated basis, result in higher revenue
taxes than we pay currently as an integrated power company.
In 2001, ANEEL imposed a fine of R$4 million upon us because we did not
comply with the restructuring requirements on a timely basis. However, because
the restructuring requires approval by our shareholders and specific legislation
by the State Government, we believe that we should not be responsible for any
non-compliance with the restructuring requirements and, for this reason, we
formally
8
requested that ANEEL extend for 12 months the unbundling deadline. On September
20, 2001, ANEEL granted us an extension until September 21, 2002 to complete the
unbundling process and on October 31, 2001, ANEEL annulled the previously issued
fine. We did not meet the September 21, 2002 deadline for completion of the
unbundling process and as a result, on November 11, 2002, ANEEL imposed a fine
of R$5.5 million upon us. However, for the reasons set forth above, 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 ANEEL's
fine. For the same reason, we have not recorded any reserve for this fine.
Nevertheless, we may be forced to pay this fine as well as additional fines or
penalties imposed by ANEEL, which may have an adverse effect on our results of
operations.
Notwithstanding the information in the preceding paragraphs, due to public
statements by the Federal Government and reports by the media, we expect that
the Federal Government will modify the regulatory framework of the energy sector
in the near term and, as a result, the restructuring of vertically integrated
electric power companies may no longer be required. If the restructuring
requirements are eliminated, we would request that ANEEL amend our concession
agreements to remove the restructuring clauses and we would terminate our
restructuring plans. However, no assurance can be given that the Federal
Government will so modify the regulatory framework of the energy sector or that
we will no longer be required to restructure our operations.
DELAYS IN THE EXPANSION OF OUR FACILITIES MAY SIGNIFICANTLY INCREASE OUR
COSTS
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:
- 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; and
- we may not be able to obtain adequate working capital to finance our
expansion projects.
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.
WE MAY BE ADVERSELY AFFECTED BY THE IMPOSITION AND ENFORCEMENT OF MORE
STRINGENT ENVIRONMENTAL REGULATIONS THAT WOULD REQUIRE US TO SPEND
ADDITIONAL FUNDS
We are subject to stringent environmental regulations. Changes in
environmental regulations, or changes in the policy of enforcement of existing
environmental regulations, could adversely affect us. See "Item 4. Information
on the Company--Environmental Matters" and "The Brazilian Electricity
Sector--Legal and Regulatory Matters--Environmental Regulations" in Annex A.
Our operations are supervised by governmental agencies that are responsible
for the implementation of environmental laws and policies. These agencies could
take action for our failure to comply with their regulations. These actions
could include the imposition of fines and revocation of licenses and
concessions. Although changes in Brazilian laws and regulations apply only
prospectively
9
under Brazilian law, it is possible that the relevant governmental agencies will
impose additional regulations or will seek a more stringent interpretation of
existing regulations that would require us to spend additional funds on
environmental matters.
BRAZILIAN LAW MIGHT PERMIT CLAIMS AGAINST OUR SHAREHOLDERS FOR DAMAGES WE
CAUSE TO THE ENVIRONMENT
Brazilian Federal Law No. 9,605 of February 12, 1998 provides that the
corporate structure of a company may be disregarded if that structure impedes
recovery of damages for environmental liabilities. Accordingly, we cannot assure
you that, in the case of a claim for environmental damages under this law,
liabilities would not be imposed against our shareholders. Although we are not
aware of any successful assertion of claims against shareholders under this law,
we cannot give assurance that this will not happen.
WE ARE CURRENTLY OPERATING WITHOUT INSURANCE POLICIES
Our insurance policies that covered damages to our power plants caused by
fire and risks such as equipment failures expired on December 31, 2001, and
since that time we have not obtained additional coverage. We are in the process
of soliciting bids from insurance carriers for new insurance policies to cover
these risks. We also 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,
for business interruption risk or for operating system failures.
Although we have not experienced significant losses arising from our lack
of insurance, should losses or other liabilities relating to these risks occur
prior to our entry into relevant insurance policies covering these risks, we may
incur significant costs. In addition, even after we were to obtain insurance
policies for fire and operational risks, we may incur significant unexpected
costs relating to liabilities that are not covered by these policies, including
consequential damages suffered by our customers as a result of interruptions in
power distribution or liabilities that exceed the limits of our insurance
coverage. These events could have a material adverse effect on our financial
condition and results of operations. See "Item 10. Additional
Information--Insurance."
WE MAY NOT BE ABLE TO COLLECT A SIGNIFICANT RECEIVABLE FROM THE STATE
GOVERNMENT
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 company's special account known as the 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 obligation to pay 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. The assignment agreement relating to this transfer, referred to
as the CRC Account Agreement, requires 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 payable under the CRC
Account Agreement accrues at a rate of 6% per year plus inflation adjustments.
Interest commenced accruing on May 2, 1995, and deferred interest during the
initial three-year grace period was capitalized.
10
The State Government did not make any payments to us under the CRC Account
Agreement in 2001 or 2002 and has not made any payments to date in 2003. In
order to address the settlement of these outstanding amounts, we have undertaken
extensive negotiations with the State Government. To date, these negotiations
have resulted in the execution of two amendments to the CRC Account Agreement.
These amendments divided the outstanding amounts due into two parts.
One amendment restructures past due amounts with original due dates from
April 1, 1999 to December 1, 1999 and from March 1, 2000 to December 1, 2002. We
can offset the amounts due under this amendment, which totaled R$755 million as
of December 31, 2002, against payments of dividends and interest on capital that
we are required to make to the State Government as our shareholder. As of
December 31, 2002, the State Government was entitled to receive approximately
R$50 million of dividends. Of this amount, we have allocated R$22.5 million to
the construction of our Irape power project. See "Item 4. Information on the
Company--Generation and Purchase of Electric Power--Expansion of Generation
Capacity." We have allocated the remaining R$27.5 million to offset overdue
amounts under this amendment. Because we have not received payment of the
amounts due under this amendment, we do not intend to pay these dividends to the
State Government.
The other amendment covers installments under the CRC Account Agreement
originally due January 1, 2003 through May 1, 2015, representing approximately
R$989 million, adjusted to present value, as of December 31, 2002. Since this
amendment did not include any guarantees that would assure the realization of
the amounts due thereunder, we recorded a full provision for loss for this asset
as of December 31, 2001. See note 3 to our consolidated financial statements.
Each of the amendments to the CRC Account Agreement is described more fully
under "Item 10. Additional Information--Material Contracts."
We are continuing to negotiate with the State Government and the Federal
Government in respect of the receivables due under the CRC Account Agreement;
however, given the State Government's history of missing payments under this
obligation, no assurance can be given 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 in the respect of this receivable will not
be recorded in future periods.
RELATIVELY FEW CUSTOMERS ACCOUNT FOR A DISPROPORTIONATELY LARGE SHARE OF
OUR REVENUES
The majority of the energy we sell is purchased by large industrial
customers. Our industrial customers are engaged in the steel, non-ferrous metal,
ferroalloy, mining, cement and automotive sectors. For the year ended December
31, 2002, our ten largest industrial customers accounted for approximately 10%
of our revenues and approximately 19.6% of the total quantity of electricity
sold by us. Our industrial customers, in the aggregate, accounted in the year
ended December 31, 2002 for approximately 61.5% of our total volume of
electrical power sales and approximately 40.6% of our revenues. For more
detailed information on our customers, see "Item 4. Information on the
Company--Customers and Billing--Customer Base."
While we have long-term contracts with substantially all of our major
customers, any disruption in existing customer relationships could have a
material adverse effect on our results of operations. For example, it is
possible that a number of our large industrial clients may become self-power
producers, or SPPs, in order to obtain the right to generate electricity for
their own use. In April 2002, our largest industrial client in 2001 became an
SPP and has gradually reduced the amount of energy it purchases from us since
then. See Item 4. "Information on the Company--Customers and Billing." In
addition, when these customers' contracts with us expire, the regulatory system
being implemented in the Brazilian electricity sector will allow these customers
to contract with other electric utilities, traders or directly with generators
provided that such customers can be classified as free customers (those
customers that have a demand of 3 MW or more of electricity at voltage levels of
69 kV or more).
11
The granting of certain concessions to our large industrial clients and the
ability of our large industrial clients to contract with other entities could
adversely affect our results of operations. See "The Brazilian Electricity
Sector--Legal and Regulatory Matters--Competition" in Annex A. In addition, a
slowdown in the manufacturing sector could reduce the energy demands of some of
our major industrial customers, which could have a material adverse effect on
our results of operations.
OUR REVENUE MAY SUFFER AS A RESULT OF THE INTRODUCTION OF REGULATIONS THAT
ENCOURAGE COMPETITION IN THE ENERGY MARKET
In order to permit the gradual introduction of competition into the energy
market and to protect market participants from exposure to volatile wholesale
spot market prices, in 1998 ANEEL implemented a transition period during which
time purchases and sales of energy have been made through regulated contracts,
known as initial contracts, with the prices and volumes of such contracts
approved by ANEEL. This transition period expires in 2005.
From 2003 to 2005, the volume of electricity allowed to be purchased and
sold pursuant to initial contracts will be reduced by 25% per year. The
"deregulated" energy will be bought and sold through contracts with terms of six
months or more awarded through public auctions, through bilateral contracts with
terms of less than six months, and through the MERCADO ATACADISTA DE ENERGIA
ELETRICA (Wholesale Energy Spot Market), or MAE. During this period, the total
amount of energy bought or sold by a concessionaire through such bilateral
contracts and the MAE may not exceed 5% of the electric energy market of such
concessionaire in any given month. Accordingly, 95% of the energy we provide to
final customers must come from our own generation plants or be purchased under
contracts with a term of at least six months that were awarded through public
auction. If we purchase energy in excess of this 5% limit from bilateral
contracts and the MAE, such energy will be priced at a higher statutory rate.
In addition, our current practice includes delivering electricity produced
by our generation plants to our distribution area according to terms equivalent
to those contained in initial contracts. We believe that this practice does not
violate ANEEL restrictions. However, ANEEL has informed us that because we are
considered to be a vertically-integrated utility, we cannot use initial contract
terms to deliver electricity that we produce to our distribution business. We
are in the process of discussing this further with ANEEL and we do not expect to
incur any loss as a result of those discussions. However, ANEEL could force us
to stop delivering electricity from our generation plants to our distribution
areas. See "The Brazilian Electricity Sector--Legal and Regulatory
Matters--Competition" in Annex A.
We cannot assure you that we will be able to produce enough energy and/or
enter into enough electricity purchase agreements awarded by public auction to
satisfy the 95% requirement mentioned above. In addition, we cannot assure you
that the costs associated with any power purchase agreements that we must enter
into will be passed on to our customers. As a result, our revenue, net income,
financial position and results of operations may suffer.
WE ARE UNCERTAIN AS TO THE RENEWAL OF OUR CONCESSIONS
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
must 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 such bidding
procedures in the electricity sector. In accordance with the Concessions 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.
12
In light of the degree of discretion granted to the Federal Government by
the Concessions Law with respect to renewal of existing concessions, and given
the lack of long-standing precedents with respect to the Federal Government's
exercise of such discretion and interpretation and application of the
Concessions Law, we cannot give you any assurance that additional concessions
will not be lost or that concessions will not have to be renewed on terms that
may be less favorable than those currently in effect. See "Item 4. Information
on the Company--Competition--Concessions" and "The Brazilian Electricity
Sector--Legal and Regulatory Matters--Concessions" in Annex A. In addition, it
is possible that our large industrial clients that become SPPs may obtain
certain concessions for the generation of electric power in a given area, which
could adversely affect our results of operations.
OUR CONCESSIONS MAY BE REVOKED, CANCELLED OR EXPROPRIATED
We carry out our generation, transmission and distribution activities
pursuant to concession agreements entered into with the Federal Government.
ANEEL may impose any of the following penalties on us in the event that we fail
to comply with any provision of our concession agreements:
- fines of up to 2% of our annual gross revenues, depending on the
severity of the noncompliance;
- temporary suspension from participating in public bidding processes to
obtain new concessions, permissions or authorizations from ANEEL, as
well as from contracting with governmental agencies;
- administrative intervention; and
- revocation of our existing concessions.
In addition, a concession agreement may be terminated by ENCAMPACAO
(government expropriation) for public interest purposes. In such a case, all
assets, rights and privileges transferred to the concessionaire by the Federal
Government under the terms of the concession agreement would revert to the
Federal Government and the concessionaire would be indemnified to a degree for
its investments in such assets.
The Federal Government revoked one concession we formerly held with respect
to a generation facility because we had not begun construction of the facility
on a timely basis as specified in the concession agreement. In addition, in
February 2002, a concession that we were initially awarded in November 2001 with
respect to the construction and operation of the Traira II hydroelectric power
plant was cancelled by ANEEL because ANEEL claimed that we had not complied with
certain conditions to receive the award.
We cannot give you any assurance that our concessions will not be revoked,
cancelled, or expropriated. The revocation, cancellation or expropriation of any
of our concessions could have an adverse effect on our financial condition,
results of operations and business prospects.
WE ARE UNABLE TO PREDICT THE IMPACT OF A RAPIDLY CHANGING REGULATORY
ENVIRONMENT ON OUR BUSINESS AND RESULTS OF OPERATIONS
In recent years, the Federal Government has undertaken policies that have
had a far-reaching impact on the Brazilian energy sector and, in particular, the
electric power industry and electric power markets. In a sector that was once
dominated by Brazilian federal and state-controlled energy companies that
maintained proprietary pricing power in what were, essentially, closed markets,
ANEEL has adopted policies and regulations designed to encourage privatization
of companies in the sector, open market
13
pricing, separate vertically integrated generation, transmission and
distribution companies, promote competition in the wholesale energy market and
facilitate competition in regional and local distribution markets where
concessionaires previously had operated on an exclusive basis in their
concession markets.
However, we believe that the current Federal Government administration,
which was elected in October 2002, may take actions that alter or reverse the
trend toward privatization in favor of an increased governmental role in the
planning, regulation and operation of the Brazilian electricity sector.
Specifically, the Federal Government indicated that it intends to amend certain
aspects of the regulatory framework of the energy sector to strengthen the
Federal Government's role with respect to implementation of regulatory
initiatives and oversight of the sector. Although no official announcement has
been made, we expect that an announcement regarding these changes may be made in
the second half of 2003. These changes and other regulatory changes might have
an adverse effect on our financial condition, future results of operations, cash
flows and business prospects.
The Federal Government-mandated electricity rationing program in Brazil
from June 1, 2001 to February 28, 2002 resulted in a reduction in our revenues.
In late 2001 we entered into an agreement with the Federal Government whereby a
special rate adjustment was allowed in order to reimburse us for revenue losses,
certain uncontrollable costs referred to as Parcel A costs and the costs of
certain transactions on the MAE incurred as a result of the rationing period. In
2001 and 2002 we recorded deferred regulatory assets expected to be recovered up
to a maximum of 82 months from January 2002 as a result of this rate increase.
This recordation was based on certain assumptions. While we believe these
assumptions are conservative, there can be no assurance that these assumptions
will ultimately prove to be correct or that we will be able to recover the
amount recorded. If we are not able to recover the amount recorded during the 82
month period, we may be required to take an impairment charge in respect of our
deferred regulatory assets, which charge would have an adverse effect on our
results of operations, cash flows and financial position. See note 4 to our
consolidated financial statements.
WE MAY NOT BE ABLE TO COMPLETE OUR PROPOSED CAPITAL EXPENDITURE PROGRAM
We plan to spend approximately R$3.6 billion during the period from 2003
through 2007 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 variety 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 contingencies. 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.
DIFFICULTY IN FINANCING OUR CAPITAL REQUIREMENTS COULD LEAD TO SHAREHOLDING
DILUTION
We fund our liquidity and capital requirements primarily with cash provided
by operations and, to a lesser extent, with proceeds of debt financings. We plan
to continue to finance our liquidity and capital requirements in this way in the
near future. However, should we experience a reduction in cash provided by
operations and/or incur significant additional debt, it may be more difficult to
repay such debt and we may be more likely to raise capital through the issuance
of additional shares. While we have no current intention to issue additional
shares, any future issuance of additional shares could result in dilution to
then-existing shareholders.
WE MAY INCUR LOSSES IN CONNECTION WITH PENDING LITIGATION AND ARBITRATION
We are currently a party to several legal proceedings relating to civil,
administrative, environmental, tax and other claims filed against us. 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
14
amount of claims against us. Our consolidated financial statements include
reserves relating to litigation and arbitration totaling R$245 million as of
December 31, 2002 (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 legal reserves prove to be insufficient, the
payment of litigation claims in an amount in excess of the reserved amounts
could have a material adverse effect on us.
LABOR-RELATED LEGAL CLAIMS, STRIKES AND/OR WORK STOPPAGES COULD HAVE A
NEGATIVE IMPACT ON OUR BUSINESS
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, 2002, these employees were seeking, in the
aggregate, approximately R$87.1 million in compensation, and at that date we had
accrued a liability of approximately R$69.7 million with respect to these
claims. We are also defending, with FUNDACAO FORLUMINAS DE SEGURIDADE
SOCIAL--FORLUZ (the Forluminas Social Security Foundation), or Forluz, the
entity responsible for managing our employee pension fund, a claim brought by
Sindieletro, the organization representing our employees' labor unions.
Sindieletro asserts that we failed to make certain allegedly obligatory
cost-of-living increases in contributions to our employee pension funds. As of
December 31, 2002, the plaintiff in this action was seeking R$593.7 million. We
have not accrued any liability related to this claim because we believe that we
have a meritorious defense. For a more detailed discussion of these and other
labor-related proceedings, see "Item 8. Financial Information--Legal
Proceedings--Labor and Pension Fund Obligations."
We have not experienced any material labor unrest during the last three
years. Nevertheless, our operations might be interrupted by a strike 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 a
material adverse effect on financial results and our ability to maintain
ordinary service levels or otherwise operate our business in the manner that our
customers expect.
YOU MAY NOT BE ABLE TO ENFORCE JUDGMENTS AGAINST OUR DIRECTORS OR OFFICERS
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 you 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 Information--Difficulties of Enforcing Civil Liabilities Against
Non-U.S. Persons."
OUR INVESTMENT IN THE TELECOMMUNICATIONS SECTOR MAY NOT HAVE RETURN WE
EXPECT
Infovias began operations in January 2001 and its subsidiary WAY TV Belo
Horizonte S.A. 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 Infovias 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
15
impairment reserve for this investment. While currently available projections
did not reveal the need for such an impairment reserve, there can be no
assurance that our investment will be profitable or that an impairment reserve
may not be needed in the future.
RISKS RELATING TO BRAZIL
BRAZILIAN POLITICAL AND ECONOMIC CONDITIONS MAY HAVE AN ADVERSE IMPACT ON
OUR BUSINESS AND THE MARKET PRICE OF THE PREFERRED SHARES AND ADSs
The Brazilian economy has been characterized by volatile economic cycles
and by frequent and occasionally drastic intervention by the Federal Government.
The Federal Government has often changed monetary, taxation, credit, rate and
other policies to influence the course of Brazil's economy. For example, the
Federal Government has the authority, when a serious imbalance in Brazil's
balance of payments occurs, to impose restrictions on the remittance to foreign
investors of the proceeds of their investments in Brazil, and on the conversion
of Brazilian currency into foreign currencies.
Rapid changes in Brazilian political and economic conditions have in the
past and may in the future require continued emphasis on assessing the risks
associated with our activities and adjusting our business and operating strategy
accordingly. Future developments in the Brazilian economy, or in the policies of
the Federal Government and the State Government, over which we have no control,
may adversely affect our financial condition or results of operations and impact
the market price of the preferred shares and ADSs.
Brazil's President, Luiz Inacio Lula da Silva, was elected in October 2002
and took office on January 1, 2003. We cannot predict the policies that this new
administration may adopt or the effect that those policies may have on Brazilian
economic conditions, investor confidence in Brazilian companies, our results of
operations and/or the price of the preferred shares and ADSs. The new
administration may adopt policies that contribute to the creation of an
environment that is perceived to be less favorable to Brazilian business and
industrial interests than the environment under former President Fernando
Henrique Cardoso.
State Government elections were also held in October 2002 and a new State
Government administration was elected. The new State Government administration
may also make changes or adopt policies that could undermine investor confidence
and have an adverse effect on our business and/or the price of the preferred
shares and ADSs.
Accordingly, our business, financial condition and results of operations
may be adversely affected by a variety of political and economic factors,
including those relating to:
- electricity rates;
- price controls or rationing of electricity consumption;
- electricity purchase subsidies for final customers;
- the adoption of measures to increase competition in exclusive
concession areas;
- exchange controls;
- currency fluctuations;
16
- inflation;
- price instability;
- interest rates;
- increases in our tax burden pursuant to changes in tax policy;
- policies adopted by the new presidential and state administrations;
and
- other political, diplomatic, social and economic developments in or
affecting Brazil.
INFLATION, AND CERTAIN GOVERNMENTAL MEASURES TO CURB INFLATION, MAY
CONTRIBUTE SIGNIFICANTLY TO ECONOMIC UNCERTAINTY IN BRAZIL AND MAY HEIGHTEN
VOLATILITY IN THE BRAZILIAN SECURITIES MARKET
Historically, Brazil has experienced extremely high rates of inflation.
Inflation itself, as well as certain governmental measures to curb inflation,
have had in the past significant negative effects on the Brazilian economy and
have contributed to heightened volatility in the Brazilian securities market.
Except for energy purchases from Itaipu Binacional, or Itaipu, which are
denominated in U.S. dollars, and financial expenses relating to loans in foreign
currencies, our cash operating expenses are substantially all in REAIS and tend
to increase with Brazilian inflation because the cost of wages and other
operating expenses generally increase according to consumer prices. High
inflation generally leads to higher domestic interest rates, and, as a result,
our costs of REAL-denominated debt are higher during periods of inflation. In
addition, to the extent that the rate of inflation exceeds the increases in
rates that we are allowed to charge our customers, our operating margins will be
adversely affected. On the other hand, if the rate of inflation in Brazil is
lower than the rate of appreciation of the U.S. dollar and other foreign
currencies against the REAL, our cost in real terms of paying interest on our
foreign currency denominated debt will be higher.
Since the introduction of the REAL in July 1994, Brazil's inflation rate
has been substantially lower than in previous periods. Inflation, as measured by
the IGP-DI, was 5.25% for the period from January 1, 2003 to May 31, 2003,
26.41% in 2002, 10.4% in 2001, 9.81% in 2000, 19.98% in 1999 and 1.70% in 1998.
If Brazil experiences substantial inflation, our operating expenses and
borrowing costs may increase, our profit margins may be reduced and, if investor
confidence lags, the price of the preferred shares and ADSs may fall. If
economic difficulties are provoked by or occur at the same time as inflation,
then our revenues may also be negatively affected.
EXCHANGE RATE INSTABILITY MAY ADVERSELY AFFECT OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Because substantially all of our revenues are denominated in REAIS and we
have foreign currency-denominated debt and other liabilities, our results of
operations may be adversely affected by devaluation of the REAL against such
foreign currencies, including the U.S. dollar. Devaluation of the REAL may
produce exchange losses on our debt denominated in foreign currencies. In
addition, devaluation may result in additional expense relating to required U.S.
dollar-denominated purchases of electricity from Itaipu, one of the largest
operating hydroelectric plants in the world jointly developed by the governments
of Brazil and Paraguay. See "Item 11. Quantitative and Qualitative Disclosures
about Market Risk."
In the past, the Central Bank maintained a band within which the exchange
rate between the REAL and the U.S. dollar fluctuated. Since January 15, 1999,
the REAL has been permitted to float freely. It is not possible to predict
whether the Central Bank will continue to let the REAL float freely. Also, it is
not possible to predict what impact the Federal Government's exchange rate
policies may have on us. We
17
cannot assure you that the Federal Government will not impose the band system or
some other exchange rate control system in the future.
The REAL depreciated by approximately 52.27% relative to the U.S. dollar in
2002 due to factors including the effect of Argentina's debt default in December
2001 and concerns regarding the recent presidential elections in Brazil. On
January 2, 2002, the noon buying rate for REAIS was R$2.3100 per U.S.$1.00. On
December 31, 2002, the noon buying rate for REAIS was R$3.5400 per U.S.$1.00.
However, the REAL has recently experienced high volatility and has appreciated
against the U.S. dollar. On June 18, 2003, the noon buying rate for REAIS was
R$2.9070 per U.S.$1.00. Under the current free-floating currency exchange rate
system, there can be no assurance that the REAL will not depreciate or
appreciate against the U.S. dollar and other currencies.
Devaluations of the REAL create additional inflationary pressures in Brazil
that may negatively affect us. These devaluations may curtail our access to
foreign financial markets and may require government intervention, including
recessionary government policies. Certain governmental measures to curb
inflation may contribute significantly to economic uncertainty in Brazil and to
heightened volatility in the Brazilian securities market. Devaluations also
reduce the U.S. dollar value of distributions and dividends on the ADSs and the
market price of the preferred shares and ADSs.
INTEREST RATE INSTABILITY MAY ADVERSELY AFFECT OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
At December 31, 2002, we had approximately R$3,539 million in loans and
financing outstanding, of which approximately R$2,119 million bore interest at
floating rates. See "Item 5. Operating and Financial Review and
Prospects--Liquidity and Capital Resources." Interest rates in Brazil
historically have been higher than in many other countries. In recent years,
interest rates have been used by the Federal Government as a fiscal policy tool
to avoid increased inflation and to control demand for foreign currency. Recent
economic events in Brazil have resulted in additional Federal Government
intervention. Although the Central Bank reduced Brazil's benchmark interest rate
to 18.75% on February 20, 2002, to 18.50% on March 20, 2002 and to 18% on July
17, 2002, the Central Bank raised the interest rate to 21% on October 14, 2002,
to 22% on November 20, 2002, to 25% on December 18, 2002, to 25.5% on January
22, 2003 and to 26.5% on February 19, 2003. On June 19, 2003, the Central Bank
lowered the interest rate to 26.0%.
If interest rates continue to rise significantly, we may be subject to
materially higher interest payments on our outstanding floating-rate
indebtedness, which may have an adverse impact on our results of operations. See
"Item 11. Quantitative and Qualitative Disclosures about Market Risk--Interest
Rate Risk."
DEVELOPMENTS IN OTHER EMERGING MARKETS MAY ADVERSELY AFFECT THE MARKET
PRICE OF THE PREFERRED SHARES AND ADSs
The market price of the preferred shares and ADSs may be adversely affected
by declines in the international financial markets and world economic
conditions. The Brazilian securities market is, to varying degrees, influenced
by economic and market conditions in other emerging market countries, especially
those in Latin America. Although economic conditions may differ from country to
country, investors' reactions to developments in one country can affect the
securities markets and the securities of issuers in other countries, including
Brazil. Since the fourth quarter of 1997, the international financial markets
have experienced significant volatility and a large number of market indices,
including those in Brazil, have declined significantly as a result of the Asian
economic crisis and the 1998 Russian debt moratorium and devaluation of the
Russian currency.
Currently, the poor economic situation in Argentina, Brazil's major trading
partner (which accounted for 4% of Brazil's exports in 2002) represents a
significant external risk to the Brazilian
18
economy. In particular, we are concerned about Argentina's insolvency, the
devaluation of the Argentina peso and its default on its public debt. While we
do not have any direct business relationship with Argentina or Argentine
companies, to the extent that the Argentine government is unsuccessful in
preventing further economic decline, this crisis may produce harmful
consequences in the Brazilian economy, potentially reducing demand for
electrical energy and affecting our results of operations.
Other instances of economic and political instability in Latin America such
as Venezuela's recent political instability and civil unrest, which has had a
material adverse effect on the Venezuelan economy, may have an adverse affect on
the Brazilian economy and on the market price of the preferred shares and the
ADSs.
There is a risk that a continuation or worsening of these conditions in
Argentina, Venezuela or other emerging markets, or similar future developments
in emerging markets, could adversely affect our financial condition and our
ability to raise capital when needed and could also undermine investor
confidence in securities issued by companies in Latin America, such as the
preferred shares and the ADSs, causing their market price to suffer.
CHANGES IN THE RATE-SETTING STRUCTURE APPLICABLE TO BRAZILIAN ELECTRIC
UTILITIES, AS WELL AS OTHER ACTIONS BY THE FEDERAL GOVERNMENT, COULD CAUSE
OUR NET INCOME TO DECREASE
The rate-setting structure applicable to electric utilities in Brazil has
undergone several changes in recent years. Prior to 1993, electric utilities in
Brazil were guaranteed a rate of return on investments in assets used to provide
electric service and the rates charged to customers were uniform throughout the
country. Profits from more profitable utilities were reallocated to less
profitable utilities so that the rate of return for all companies would equal
the national average. This rate-setting structure was modified in 1993 to
require each concessionaire to submit rate proposals to ANEEL covering periods
of three years, taking into account various factors such as operating and other
costs, depreciation and regulatory charges and taxes. In 1994, the Federal
Government, in connection with an economic stabilization plan, made further
changes to the rate-setting process. Since July 1995, rates have been set on an
annual basis by ANEEL, which makes its determinations on the basis of several
factors, including cost of electricity purchased and other charges. Each
distribution company's concession agreement also provides for an annual
readjustment of rates based on certain charges and costs. See "The Brazilian
Electricity Sector--Legal and Regulatory Matters--Rates" in Annex A for a more
detailed description of the rate-setting process in Brazil.
There can be no assurance that we will be able to obtain needed rate
increases in the future, nor that any rate increases that we actually receive
will be sufficient for us to operate at a profit. Furthermore, if the Federal
Government makes further changes to Brazil's rate-setting structure that make it
more difficult for us to obtain needed rate increases, our results of operations
may be adversely affected. In April 2003, the Federal Government, fearing that
rate increases may contribute to overall inflation in Brazil, decided to delay
until 2004 a rate increase to which we were entitled under ANEEL resolutions.
See note 4 to our consolidated financial statements. This rate increase was to
have taken effect in April 2003 and was intended to reimburse us for certain
uncontrollable costs that are referred to as Parcel A costs. In addition, a
portion of the MAE transaction proceeds to which we are entitled under the
ACORDO GERAL DO SETOR ELETRICO, or General Agreement of the Electricity Sector,
have been retained by other utilities pending the outcome of a lawsuit we have
filed against ANEEL and the MAE. See "Item 8. Financial Information---Legal
Proceedings--Rate Increases and Regulatory Matters" and "The Brazilian
Electricity Sector--Brazilian Electricity System Overview--Federal Government
Actions to Reimburse Electric Utilities" in Annex A.
19
WE CURRENTLY FACE LIMITATIONS ON OUR ABILITY TO OBTAIN FINANCING
As a state-controlled company, we are subject to restrictions under current
laws and regulations in Brazil on our ability to enter into certain
international financial transactions. For example, we are required to obtain
approval from the Brazilian Ministry of Finance and the Central Bank prior to
transactions such as bond issuances, loans or export financings when such
transactions involve making payments through the purchase of foreign currency in
Brazil for remittance abroad. We must follow stringent procedures in order to
refinance existing debt obtained from financial institutions. 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 necessary financing although there can be no
assurance that our ability to obtain financing will not be hindered by
restrictions in the future.
If we are unable to raise sufficient capital through domestic markets or if
we fail to obtain the necessary approval to raise sufficient funds
internationally, we may be faced with insufficient cash flows to meet our
budgeted capital expenditures, causing our financial results to suffer.
We are also 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 resource requirements. We are
currently not in compliance with some of these covenants. However, we have
obtained waivers from our creditors which affirm that such creditors will not
exercise their rights to demand either accelerated or immediate payment of the
total amounts due. However, these waivers must be renewed on a quarterly basis
and are conditioned upon our continued compliance with certain requirements. We
cannot assure you that we will be able to renew these waivers and that in such
case the relevant creditors will not accelerate payment. See note 17 to our
consolidated financial statements and "Item 13. Defaults, Dividend Arrearages
and Delinquencies."
THE EFFECTS OF FEDERAL GOVERNMENT MANDATED POWER RATIONING MAY CONTINUE TO
CAUSE OUR NET INCOME TO DECREASE
Low amounts of rainfall in 2000 and early 2001, vigorous growth in demand
for energy and Brazil's significant dependence on electricity generated from
hydrological resources resulted in abnormally low water levels in many
reservoirs that are used to power Brazil's major hydroelectric generation
facilities. These factors led to Federal Government mandated power rationing,
decreases in electric energy consumption, restrictions on our ability to
distribute electricity and, ultimately, a reduction in our revenue and net
income in 2001 and 2002. Future power rationing, resulting from low rainfall
levels or otherwise, could adversely affect our financial performance in future
periods.
The Federal Government mandated rationing was discontinued at the end of
February 2002 due to a recovery in water levels at reservoirs that power
hydroelectric power generation facilities. However, electrical power consumption
following the end of rationing has been sluggish and as a result revenues from
our distribution business have not recovered at the level we had anticipated.
Currently, there is excess electrical capacity in Brazil's interconnected power
system. Such excess capacity may continue to adversely affect our revenues in
the coming years.
GOVERNMENTAL MORATORIUMS OR DEFAULTS MAY ADVERSELY AFFECT OUR FINANCIAL
CONDITION AND THE MARKET PRICE OF THE PREFERRED SHARES AND ADSs
In January 1999, the State Government, our controlling shareholder,
affirmatively suspended its debt repayments to the Federal Government for a
period of 90 days, and the Federal Government blocked payments to the State
Government in response. The State Government has complied with its payment
20
obligations to the Federal Government since that time through contractual
set-off provisions. In 2001, the State Government threatened to declare a
moratorium on its debt payments to the Federal Government but did not act on
this threat. As of December 31, 2002, the State Government owed approximately
R$30.1 billion to the Federal Government.
The risks of further default by state and municipal governments in Brazil
may undermine investor confidence and have a negative effect on the Brazilian
economy or the economy of the relevant region and may adversely affect our
financial condition. Also, if the Brazilian economy or the economy of Minas
Gerais were to be adversely affected by a default or a protracted dispute
between the Federal Government and the State Government regarding political or
fiscal matters, our operations and the market price of the preferred shares and
ADSs may be adversely affected.
In addition, we have a significant receivable from the State Government,
which is described under "--Risks Relating to CEMIG--We may not be able to
collect a significant receivable from the State Government." If the Federal
Government were to suspend its payments to the State Government, our ability to
collect this receivable would be adversely affected and our financial condition
could suffer.
TERRORIST ATTACKS AND CERTAIN ACTIONS TAKEN BY THE UNITED STATES OR OTHERS
COULD ADVERSELY AFFECT GLOBAL ECONOMIC CONDITIONS AND OUR BUSINESS
The terrorist attacks on September 11, 2001 depressed economic activity in
the United States and globally, including in Brazil. It is not certain how long
these economic conditions will continue. Although the extent of the impact
remains unclear, it has already resulted in:
- increased short-term volatility in the market price of securities;
- a significant decline in corporate earnings estimates;
- substantial losses in important industries, including the air
transport and insurance industries; and
- a significant erosion of consumer confidence.
If additional terrorist attacks occur, the post-war situation in Iraq
worsens or other wars are declared by the United States or others, economic
conditions in the United States and internationally are likely to deteriorate.
Our business, financial condition and results of operations may be materially
and adversely affected as a result of any such actions. These events could also
cause the market price of the preferred shares and the ADSs to suffer.
THE PENDING TAX REFORM IN BRAZIL MAY INCREASE OUR TAX BURDEN
The Federal Government has proposed a broad tax reform in Brazil, mainly
designed to reduce public deficit through an increase in tax collection. It is
expected that the final tax reform bill will be submitted to the Brazilian
Congress for approval during 2003, although we cannot assure you that this will
occur. We may have a higher tax burden if the tax reform bill is approved and
implemented.
RISKS RELATING TO THE PREFERRED SHARES AND ADSs
THE PREFERRED SHARES AND ADSs GENERALLY DO NOT HAVE VOTING RIGHTS
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
21
very limited circumstances. This means, among other things, that you, as a
preferred shareholder, are not entitled to vote on corporate transactions,
including mergers or consolidations of us with other companies.
EXCHANGE CONTROLS AND RESTRICTIONS ON REMITTANCES ABROAD MAY ADVERSELY
AFFECT HOLDERS OF ADSs
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 the U.S.
dollars abroad. We cannot assure you that the Federal Government will not take
similar measures in the future. See "Item 3. Key Information--Exchange Rates."
EXCHANGING ADSs FOR THE UNDERLYING PREFERRED SHARES MAY HAVE UNFAVORABLE
CONSEQUENCES
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
bank's 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 MONETARIO 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
COMISSAO DE VALORES MOBILIARIOS (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 bank's certificate of registration,
subject to certain conditions. See "Item 10. Additional
Information--Taxation--Brazilian Tax Considerations."
We cannot assure you that the depositary bank's 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.
THE RELATIVE VOLATILITY AND ILLIQUIDITY OF THE BRAZILIAN SECURITIES MARKET
MAY ADVERSELY AFFECT YOU
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
22
- 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 SAO PAULO -- BOVESPA, or Sao Paulo Stock Exchange, the only stock
exchange in Brazil upon which shares are traded, had a market capitalization of
approximately US$124.04 billion as of December 31, 2002 and an average monthly
trading volume of approximately US$4.1 billion for 2002. In comparison, the New
York Stock Exchange, Inc., or the NYSE, had a market capitalization of US$9.74
trillion as of December 31, 2002 and an average monthly trading volume of
approximately US$859.26 billion for 2002.
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
48.6% of the aggregate market capitalization of the Sao Paulo Stock Exchange as
of December 31, 2002. The top ten stocks in terms of trading volume accounted
for approximately 56.5% of all shares traded on the Sao Paulo Stock Exchange in
2002. See "Item 9. The Offer and Listing--Trading Market."
YOU MAY RECEIVE REDUCED DIVIDEND PAYMENTS IF OUR NET INCOME DOES NOT REACH
CERTAIN LEVELS
Under the Brazilian Corporate Law and our by-laws, we must pay our
shareholders a mandatory distribution equal to at least 25% of our adjusted net
income for the preceding fiscal year, 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 our net income is
negative or 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 (other than public and governmental holders) in the event that
mandatory distributions were not made for a fiscal year. See "Item 8. Financial
Information--Dividend Policy and Payments" for a more detailed discussion.
HOLDERS OF THE ADSs HAVE LESS WELL-DEFINED SHAREHOLDERS' RIGHTS THAN
HOLDERS OF SHARES IN U.S. COMPANIES
Our corporate affairs 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
jurisdictions. In addition, rules and policies against self-dealing and
regarding the preservation of shareholder interests may be less well-developed
and enforced in Brazil than in the United States, potentially disadvantaging
holders of the preferred shares and ADSs.
23
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET PRICE OF
THE PREFERRED SHARES AND THE 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 PREEMPTIVE RIGHTS WITH RESPECT TO THE
PREFERRED SHARES
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.
AMENDMENTS TO THE BRAZILIAN CORPORATE LAW MAY NEGATE THE STATE GOVERNMENT'S
LIABILITY FOR OUR ADS OBLIGATIONS IN CERTAIN CIRCUMSTANCES
On October 31, 2001, the President of Brazil enacted Law No. 10,303, which
amended certain provisions of the Brazilian Corporate Law, including provisions
applicable to state-controlled companies like us. Law No. 10,303, which became
effective on March 1, 2002, revoked the provision of the Brazilian Corporate Law
that provided for contingent liability of controlling shareholders of
state-controlled companies for debts. Accordingly, the State of Minas Gerais, as
our controlling shareholder, will not be contingently responsible for any of our
debts and obligations created after February 28, 2002. Nevertheless, Law No.
10,303 should not relieve controlling shareholders of any liability for
obligations incurred prior to the effective date of Law No. 10,303. While we do
not believe that Law No. 10,303 will affect the State Government's contingent
liability for our obligations relating to the ADSs, there can be no assurance
that Brazilian courts will reach the same conclusion.
In addition, pursuant to Law No. 10,303, we are no longer immune from
FALENCIA (similar to U.S. bankruptcy proceedings). In fact, if we become
insolvent, we will be subject, as a debtor, to either CONCORDATA (debt
restructuring) or FALENCIA. For more information regarding amendments to the
Brazilian Corporate Law, see "Item 10. Additional Information--Amendments to the
Brazilian Corporate Law."
ITEM 4. INFORMATION ON THE COMPANY
ORGANIZATION AND HISTORICAL BACKGROUND
We were organized in Minas Gerais 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 headquarters are located at Avenida Barbacena, 1200, Belo
Horizonte, Minas Gerais, Brazil. Our main telephone number is (55-31) 3299-3711.
We are the largest concessionaire of electric power generation,
distribution and transmission in Minas Gerais. 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
24
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.
At December 31, 2002, we generated electricity at 44 hydroelectric plants,
three thermoelectric plants and one wind farm and had a total installed capacity
of 5,712 MW. At the same date, we owned and operated 3,019 miles of transmission
lines and 215,435 miles of distribution lines. We hold concessions to distribute
electricity in 96.7% of the territory of Minas Gerais.
The Brazilian electricity sector is undergoing 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 we
expect to affect our business, see "The Brazilian Electricity Sector--Legal and
Regulatory Matters" 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
Gas de Minas Gerais--GASMIG, or Gasmig, as a subsidiary to undertake the
distribution of natural gas through pipelines located in Minas Gerais.
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., or Infovias, a telecommunication service provider, as a joint venture with
AES Forca e Empreendimentos Ltda., part of the AES Corporation group. In 2002,
we purchased AES Forca e Empreendimentos Ltda.'s interest in Infovias. We also
provide consulting services and have entered into consulting agreements with
electricity companies in several countries.
BRAZIL'S ENERGY MARKET
GENERAL
The Brazilian electricity sector consists primarily of separate generation,
transmission, and distribution activities within a few vertically integrated
companies traditionally owned by the federal or state governments. During the
last four years, many of the state-controlled companies have been privatized in
an effort to promote efficiency and competition in the sector. However, we
believe that the current Federal Government administration, which was elected in
2002, does not intend to allow the privatization trend to continue in the power
sector. See "The Brazilian Electricity Sector--Legal and Regulatory
Matters--Privatization" in Annex A.
REGULATION
The Brazilian electricity industry is regulated by ANEEL. ANEEL's
responsibilities include, among others, (i) granting and supervising concessions
for electricity generation, transmission and distribution, (ii) establishing
regulations for the electricity sector, including the approval of electricity
rates, (iii) overseeing and auditing the activities of electric power
concessionaires, and (iv) implementing and regulating the use of electricity, in
the form of both thermal and hydroelectric power. In order to establish
competition and to ensure short-term power supply to the market in Brazil upon
deregulation of the power industry, the Federal Government created the MAE,
which functions as a clearing house for wholesale electric energy trading
transactions.
The electricity industry in Brazil reached a critical point in 2001, as the
result of a series of regulatory, meteorological and market-driven problems. The
combined effects of growth in demand for electricity, decreased rainfall and
Brazil's significant dependence on hydroelectric generating capacity led to
shortages of electricity to meet expected demand in certain regions of Brazil.
In addition, the MAE had
25
a poor performance record due to an inability to resolve commercial disputes. As
a result, the Federal Government, effective as of June 2001, implemented the
Electricity Rationing Plan. The Electricity Rationing Plan placed significant
restrictions on electric power consumption by residential, commercial,
industrial and governmental consumers throughout the industrialized Southeast of
Brazil, resulting in substantially diminished revenues for a number of electric
power concessionaires, including us. The Electricity Rationing Plan was
discontinued at the end of February 2002. See "The Brazilian Electricity
Sector--Legal and Regulatory Matters--Restrictions and Rationing" in Annex A.
In order to address some of the economic losses experienced by electricity
concessionaires in the areas affected by the Electricity Rationing Plan, an
industry-wide agreement was reached with ANEEL. This agreement, known as the
General Agreement of the Electricity Sector, applies to our generation and
distribution businesses. See notes 2(q) and 4 to our consolidated financial
statements. The General Agreement of the Electricity Sector seeks to remedy the
income losses incurred by both generation and distribution businesses in Brazil
as a result of the Electricity Rationing Plan. The General Agreement of the
Electricity Sector provides, among other things, that:
- distribution companies are entitled to recover rationing-related
losses through an extraordinary consumer rate increase beginning in
January 2002 that will be in force for an average period of 72 months;
- thermoelectric power plants dispatched in order to fulfill the
contractual requirements of the hydroelectric power plants are to be
paid at the spot price by the hydroelectric power plant generators (up
to a price cap), with final customers paying the difference between
the spot price and the allowed price cap through rate increases; and
- distribution companies will use proceeds from the extraordinary rate
increase to pay approximately 97% of the amounts originally payable
under the initial contracts in order to provide the generation
companies with recovery of their contractually allowed revenue
amounts.
In addition, the General Agreement of the Electricity Sector provided a
resolution to a long-standing regulatory issue related to a portion of the
distribution rates known as Parcel A costs. 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. Through the
General Agreement of the Electricity Sector, a tracking account was established
in order to compensate distribution companies for losses due to variation in
Parcel A costs that occurred between regular rate adjustment dates. Parcel A
costs include the following: power purchase and transport costs from Itaipu;
fuel usage quota costs; charges for the use of the REDE BASICA, or basic
transmission network; and certain other regulatory charges. See note 4(b) to our
consolidated financial statements. The General Agreement of the Electricity
Sector was set forth in Provisional Measure No. 14, dated December 21, 2001, and
approved through Law No. 10,438 on April 26, 2002.
For a more detailed discussion of the regulatory environment in which we
operate, see "Item 5. Operating and Financial Review and Prospects--Power
Rationing and Government Measures to Compensate Electric Utilities" and "The
Brazilian Electricity Sector" in Annex A.
RATES
Electric rates in Brazil are set by ANEEL, which has the authority to
readjust and review rates in response to changes in operating costs, cost of
capital, market conditions and operating efficiencies realized by distributors
over time. Each distribution company's concession agreement also provides for an
annual readjustment of rates based on increased costs due to inflation and
regulatory charges, the cost of
26
electricity purchased for resale, the cost for use of hydroelectric resources
and transmission cost. The inflation adjusted cost variation is reduced by a
factor called the "X factor." The X factor is the gain obtained by distributors
due to market growth over the five year period in which the rates are valid. In
the first 5 year period in which the X factor was used, the X factor was zero.
In 2003, ANEEL, as part of its rate review, set the new X factor to 1% to be
applied until 2008 with up to an additional 1% to be applied depending on our
relative position in an annual customer satisfaction survey conducted by ANEEL.
In April 2003, ANEEL provided for a 31.53% average increase in the rates that we
can charge to our final customers. As discussed above, ANEEL, through the
General Agreement of the Electricity Sector, has provided for extraordinary rate
increases to compensate distribution companies for losses incurred as a result
of the Electricity Rationing Plan.
ANEEL has also issued regulations that govern access to the transmission
system and establish transmission rates. The rates to be paid by distribution
companies, generators and independent customers for use of the interconnected
power system are reviewed annually. The review takes into account the revenues
that are permitted of transmission concessionaires pursuant to their concession
agreements. For more detailed information regarding the rate-setting structure
in Brazil, see "The Brazilian Electricity Sector--Legal and Regulatory
Matters--Rates" in Annex A.
CONCESSIONS
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 ANEEL, which is generally
granted through a public bidding process. Concessions grant exclusive rights to
generate electricity in a particular plant, and 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
Electricity Sector--Legal and Regulatory Matters--Concessions" in Annex A.
LAND ACQUISITION
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 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 concessionaire's 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.
ORGANIZATIONAL STRUCTURE AND UNBUNDLING
Currently, our electricity generation, transmission and distribution
operations are vertically integrated into and directly operated by CEMIG.
Pursuant to our main concession agreements, however, we are required to
restructure our business (after obtaining the necessary legal authorization),
resulting in the "unbundling" of our generation, transmission and distribution
operations into separate subsidiaries, each wholly owned by CEMIG. Because the
State Government is our majority shareholder, state legislation approving the
restructuring must be adopted (in addition to the shareholder approval that must
be obtained) before the unbundling takes place. On March 2, 2001, a bill was
submitted to the Minas Gerais legislature proposing the restructuring, but this
legislation has not yet been approved.
This unbundling process would result in a new organizational structure in
which each of our generation, transmission and distribution businesses would
conduct its operations as a separate, wholly
27
owned subsidiary of CEMIG. Each of these newly created companies would be
organized under the laws of Brazil. Because each subsidiary would be wholly
owned by us, our shareholders' effective voting power with respect to these new
subsidiaries would remain, in each case, proportional to the voting power held
by such shareholders in CEMIG. In December 2000, ANEEL agreed with the general
terms of our plan to restructure our three major activities into one generation
company, one transmission company and one distribution company.
Because we did not complete the reorganization process prior to the end of
the year 2000 as stipulated in our concession agreement, ANEEL fined us in the
amount of R$4 million. However, we formally requested that ANEEL extend for 12
months the unbundling deadline and, on September 20, 2001, ANEEL granted us an
extension until September 21, 2002 to complete the unbundling process. On
October 31, 2001, ANEEL annulled the previously issued fine. We did not meet the
September 21, 2002 deadline for completion of the unbundling process and as a
result, on November 11, 2002, ANEEL imposed a fine of R$5.5 million upon us.
However, on November 28, 2002, we appealed ANEEL's fine because the
restructuring requires specific legislation by the State Government (in addition
to the shareholder approval that must be obtained) and, as such, we believe we
should not be responsible for any non-compliance with the restructuring
requirements or any fines or penalties associated therewith.
Notwithstanding the information in the preceding paragraphs, due to recent
public statements by the Federal Government that were reported by the news
media, we expect that the Federal Government will modify the regulatory
framework of the energy sector in the near term and that, as a result, the
restructuring of vertically integrated electric power companies may no longer be
required. If the restructuring requirements are eliminated, we would request
that ANEEL amend our concession agreements to remove the restructuring clauses
and we would terminate our restructuring plans. See "Risk Factors--Risks
Relating to CEMIG--Difficulties relating to the restructuring of our operations
could adversely affect our business."
BUSINESS OVERVIEW
GENERAL
During 2002, we generated at our own plants approximately 57% of the
aggregate amount of energy sold by us to final customers and 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
Power--Purchase of Electric Power--Itaipu." In addition, we purchase energy from
other concessionaires and the interconnected power system. See "--Generation and
Purchase of Electric Power--Purchase of Electric Power--Interconnected Power
System." We also purchase energy generated by SPPs and independent power
producers, or IPPs, that are located within our concession area. As part of our
distribution activity, we deliver the energy that we purchase from the
aforementioned sources to our final customers and the interconnected power
system. We also deliver energy generated by the SPPs and IPPs at their own
facilities.
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:
28
YEAR ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
------- -------- --------
Electricity generated by CEMIG................................. 21,608 18,957 30,228
Electricity generated by SPPs.................................. 1,234 1,003 2,005
Electricity generated by Ipatinga(1)........................... 348 344 301
Electricity generated by Sa Carvalho(2)........................ 425 325 27
Electricity purchased from Itaipu.............................. 12,735 11,935 13,967
Electricity purchased from the interconnected
power system and other concessionaires...................... 13,022 14,420 2,851
Electricity delivered to final customers....................... 34,862 34,279 37,542
Electricity delivered to SPPs.................................. 1,323 1,323 1,618
Electricity delivered to Ipatinga(1)........................... 348 344 301
Electricity delivered to Sa Carvalho(2)........................ 425 325 27
Electricity delivered to the interconnected power system and
other concessionaires....................................... 7,863 7,120 5,767
Losses(3)...................................................... 4,551 3,593 4,124
----------
(1) This refers to Usina Termica Ipatinga S.A. See "--Generation and Purchase of
Electric Power--Generation Subsidiaries."
(2) This refers to Sa Carvalho S.A. See "--Generation and Purchase of Electric
Power--Generation Subsidiaries."
(3) Energy losses are cumulative for the periods ending on the dates specified
and occur primarily in the ordinary course of transmission and distribution
of electric energy and, to a lesser extent, as a result of illegal
connections and for other reasons. See "--Energy Losses."
GENERATION
At December 31, 2002, we were the sixth largest electric power generation
concessionaire in Brazil as measured by total installed capacity. At December
31, 2002, we generated electricity at 44 hydroelectric plants, three
thermoelectric plants and one wind farm and had a total installed generation
capacity of 5,712 MW, of which hydroelectric plants accounted for 5,540 MW,
thermoelectric plants accounted for 171 MW and our wind farm accounted for 1 MW.
Seven of our hydroelectric plants accounted for approximately 87% of our
installed electric generation capacity in 2002. We supplied approximately 97% of
the electricity consumed in Minas Gerais during 2002. During the year ended
December 31, 2002, we generated approximately 57% of the aggregate amount of
electricity we delivered to final customers and lost due to technical and
non-technical reasons. See "--Energy Losses."
TRANSMISSION
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 final customers. 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 OPERADOR NACIONAL DO SISTEMA (National System
Operator), or ONS. See "The Brazilian Electricity Sector--Legal and Regulatory
Matters--Regulatory Agencies" in Annex A. As of December 31, 2002, our
transmission network in Minas Gerais consisted of 1,352 miles of 500 kV lines,
1,201 miles of 345 kV lines and 466 miles of 230 kV lines, as well as 30
substations with a total of 89 transformers and an aggregate transformation
capacity of 14,563 MVA.
DISTRIBUTION
We have an exclusive distribution concession in Minas Gerais for customers
that demand less than 3 MW of electricity at voltage levels lower than 69 kV.
Our concession area covers approximately 219,103 square miles, or 96.7% of the
territory of the state. As of December 31, 2002, we owned and operated 215,435
miles of distribution lines, through which we supplied electricity to nearly 5.6
million
29
customers. At December 31, 2002, we were the largest electricity distribution
concessionaire in Brazil in terms of GWh sold to final customers. Of the
electricity we supplied to end users as of December 31, 2002, 61.5% was to
industrial customers, 17.9% was to residential customers, 9.2% was to commercial
customers and 11.4% was to rural and other customers.
OTHER BUSINESSES
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 consolidated, majority-owned subsidiary
Gasmig. We also engage in the telecommunications business through our
consolidated subsidiary Infovias, 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 international consulting business and count several
electric utilities in foreign countries as clients in this area.
REVENUE SOURCES
The following table shows the revenues attributable to each of our
principal revenue sources for the periods indicated:
YEAR ENDED DECEMBER 31,
---------------------------
2002 2001 2000
-------- ------- -------
Electricity sales to final customers ........ 5,458 4,587 4,478
Regulatory extraordinary rate adjustment .... 281 789 --
Electricity sales to the interconnected
power system ............................. 161 517 145
Use of basic transmission network ........... 185 154 139
Natural gas sales ........................... 200 116 80
Services rendered ........................... 23 24 38
Telecommunication and other ................. 37 10 6
----- ----- -----
Total ....................................... 6,345 6,197 4,886
===== ===== =====
GENERATION AND PURCHASE OF ELECTRIC POWER
GENERATION
At December 31, 2002, we owned and operated, with our subsidiaries, 48
power plants, 44 of which were hydroelectric, three of which were thermoelectric
and one of which was a wind farm. At the same date, the installed capacity of
our hydroelectric plants, our thermoelectric plants and our wind farm was 5,540
MW, 171 MW and 1 MW, respectively, comprising an aggregate installed capacity of
5,712 MW.
The following table sets forth certain operating information concerning our
electric power generation plants as of December 31, 2002:
30
INSTALLED ASSURED YEAR INSTALLED
CAPACITY ENERGY(1) COMMENCED CAPACITY DATE CONCESSION
FACILITY (MW) (AVERAGE MW) OPERATIONS % OF TOTAL EXPIRES
----------------------------------- --------- ------------ ---------- ---------- ---------------
Major Hydroelectric Plants
Sao Simao ..................... 1,710 1,207.00 1978 29.6 January 2015
Emborcacao .................... 1,192 559.00 1982 20.7 July 2005
Nova Ponte .................... 510 301.00 1994 8.8 July 2005
Jaguara ....................... 424 329.00 1971 7.4 August 2013
Miranda ....................... 408 180.00 1998 7.1 December 2016
Tres Marias ................... 396 243.00 1962 6.9 July 2015
Volta Grande .................. 380 250.00 1974 6.6 February 2017
Salto Grande .................. 102 71.00 1956 1.7 July 2015
Sa Carvalho ................... 78 58.00 2000(2) 1.4 December 2024
Itutinga ...................... 52 27.00 1955 0.9 July 2015
Camargos ...................... 46 17.00 1960 0.8 July 2015
Porto Estrela ................. 37(3) 18.60(3) 2001 0.7 July 2032
Igarapava ..................... 30(4) 18.31(4) 1999 0.5 May 2025
Funil ......................... 29(5) 15.00(5) 2002 1.5 December 2035
Piau .......................... 18 8.00 1955(2) 0.3 July 2015
Gafanhoto ..................... 14 6.68 1946 0.2 July 2015
Smaller Hydroelectric Plants ...... 114 61.80 - 2.0 -
Thermoelectric Plants
Igarape ....................... 131 93.00 1978 2.3 August 2004
Ipatinga ...................... 40 - 2000 0.7 December 2014
Formoso ....................... 0.4 0.22 1992 0.0 Indefinite
Wind Farm ......................... 1 0.30 1994 0.0 -
---------- -------------- ------------- ----------- ---------------
Total ............................. 5,712 3,463.91 - 100.0% -
========== ============== ===========
----------
(1) Assured Energy is the plant's 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 plant's 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%).
The following tables set forth certain additional operating information
pertaining to our electricity generation operations as of the dates indicated:
CIRCUIT LENGTH OF GENERATION LINES IN MILES
(FROM POWER PLANTS TO GENERATION SUBSTATIONS)
---------------------------------------------
AS OF DECEMBER 31,
---------------------------------------------
VOLTAGE OF CONNECTION LINES 2002 2001 2000
------------------------------------------------- ------ ------ ------
500 kV.......................................... 4.3 4.3 4.3
345 kV.......................................... 0.6 0.6 0.6
138 kV.......................................... 5.5 4.9 4.9
34.5 kV.......................................... 21.7 21.7 21.7
------ ------ ------
Total............................................ 32.1 31.5 31.5
====== ====== ======
STEP-DOWN TRANSFORMATION CAPACITY(1)
OF GENERATION SUBSTATIONS
-------------------------------------
AS OF DECEMBER 31,
-------------------------------------
2002 2001 2000
-------- ------ ------
Number of step-down substations.................. 48 46 40
MVA.............................................. 6,240 6,142 6,080
----------
(1) Step-down transformation capacity refers to the ability of a transformer to
receive energy at a certain voltage and release it at an reduced voltage for
further distribution.
31
GENERATION SUBSIDIARIES
We have formed the following wholly owned subsidiaries to operate certain
of our generation facilities and to hold the related concessions:
USINA TERMICA IPATINGA S.A. We operate the Ipatinga thermoelectric plant
through our subsidiary Usina Termica Ipatinga S.A. This plant is an SPP operated
with Usinas Siderurgicas 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.
SA CARVALHO S.A. We operate the Sa Carvalho hydroelectric power plant,
located on the Piracicaba River in the municipality of Antonio Dias in the State
of Minas Gerais, through our subsidiary Sa 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. Consequently, at the same date we paid R$64 million related to the
redemption of 55.33% of these debentures. See note 32(e) to our consolidated
financial statements.
CEMIG CAPIM BRANCO ENERGIA S.A. We formed Cemig Capim Branco Energia S.A.
to develop the Capim Branco Energy Complex in partnership with Companhia Vale do
Rio Doce--CVRD, or CVRD, a mining company, Comercial e Agricola 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 capacities of 240 MW and 210 MW, respectively.
These power plants will be built on the Araguari River in the western part of
Minas Gerais. As of May 31, 2003, we had invested R$12.5 million in feasibility
studies related to this project and our partners will reimburse us for this
expense. Construction of the Capim Branco Energy Complex is expected to begin in
September 2003. 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. The concessions relating to these plants expire on July 31, 2036.
We have entered into a purchase contract with Cemig Capim Branco Energia S.A.
under which we are obligated to purchase the energy produced by Capim Branco I
and Capim Branco II for 20 years from the date of the start of each plant's
commercial operations. ANEEL has not yet approved this agreement. In addition,
we are a defendant, with CVRD, Comercial e Agricola Paineiras and Companhia
Mineira de Metais, in a class action lawsuit brought by citizens of Minas Gerais
that alleges that proper licensing was not obtained and seeks to nullify the
environmental licenses relating to the Capim Branco I and Capim Branco II
hydroelectric power plants. See "Item 8. Financial Information--Legal
Proceedings--Legal Proceedings Related to Environmental Matters."
USINA TERMELETRICA BARREIRO S.A. We formed Usina Termeletrica Barreiro S.A.
to participate, in partnership with Vallourec & Mannesmann--V&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, utilizing blast
furnace gas and pitch as fuel. The construction of the plant, located on
Vallourec & Mannesmann's property in the Barreiro section of the city of Belo
Horizonte in Minas Gerais, began in April 2002. We are responsible for the
procurement, construction, operation and maintenance of the plant. As of May 31,
2003, we had invested R$4.7 million in this project. Vallourec & Mannesmann will
provide the facilities, supply the fuel and sign a power purchase agreement to
assure a guaranteed return on investment to us. Generation is scheduled to begin
in August 2003. ANEEL has requested that we transfer our interest in Usina
Termeletrica Barreiro S.A. to a company in which we have a minority interest.
ANEEL has authorized the transfer of this interest to Central Termeletrica de
Cogeracao S.A., a
32
company that we formed in 2003 in partnership with Companhia de Saneamento de
Minas Gerais--COPASA, or COPASA, the Minas Gerais state-controlled water and
sewage company. Central Termeletrica de Cogeracao S.A. has not yet commenced
operations.
HORIZONTES ENERGIA S.A. We formed Horizontes Energia S.A. 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 municipalities of Aguas Vermelhas and Sao Joao do Paraiso
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
Voltao Power Plant (located in the Chapecozinho River in the town of Xanxere 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 Xanzere 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. We entered into an agreement with Horizontes Energia S.A.
under which we are obligated to purchase the energy generated by the power
plants held by Horizontes Energia S.A. from March 2003 through December 2017.
This agreement has not yet been approved by ANEEL.
CEMIG PCH S.A. We formed CEMIG PCH S.A. to generate and trade electric
energy as an IPP. CEMIG PCH S.A. has not yet commenced operations. CEMIG PCH
S.A. currently holds the assets relating to the Pai Joaquim powerhouse. As of
May 31, 2003, we had invested R$31.5 million in projects relating to Pai
Joaquim. ANEEL has requested that we transfer the Pai Joaquim assets to Central
Hidreletrica Pai Joaquim S.A., a company in which we own a minority interest,
and we are in the process of transferring these assets.
We also have a minority interest in the following companies:
CENTRAL HIDRELETRICA PAI JOAQUIM S.A. We formed Central Hidreletrica Pai
Joaquim S.A. in partnership with COPASA in connection with the Pequena Central
Hidreletrica Pai Joaquim project, which consists of the construction of a new
hydroelectric power plant and the reassembly of the existing Pai Joaquim
powerhouse. Central Hidreletrica Pai Joaquim S.A.'s principal activities will be
the production and sale of electric energy, as an IPP. Construction began in
April 2002 and we expect that the project will be completed in December 2003.
Central Hidreletrica Pai Joaquim S.A. has not yet commenced operations. We have
a 49% interest in Central Hidreletrica Pai Joaquim S.A.
CENTRAL TERMELETRICA DE COGERACAO S.A. We formed Central Termeletrica de
Cogeracao S.A. in partnership with COPASA. Central Termeletrica de Cogeracao
S.A.'s principal activities will be the production and sale of electric energy,
as an IPP.ANEEL has requested that we transfer our interest in Usina
Termeletrica Barreiro S.A. to Central Termeletrica de Cogeracao S.A.. Central
Termeletrica de Cogeracao S.A. has not yet commenced operations. We have a 49%
interest in Central Termeletrica de Cogeracao S.A.
EXPANSION OF GENERATION CAPACITY
Our capital investment plan submitted to ANEEL currently contemplates
increasing the installed generation capacity of our hydroelectric facilities by
809 MW during the next four 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 Subsidiaries" above, constitute a
part of our capital investment plan. The following is a brief description of the
other planned
33
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 Energetica de Brasilia, or CEB, a state-controlled electricity
company. CEB has a 17.5% interest and we have the remaining 82.5%. Construction
on this project, which will have an installed capacity of 105 MW, began on
August 10, 2000. As of May 31, 2003, we had invested R$112.5 million in this
project. We expect commercial generation to begin in August 2003. The plant is
located on the Preto River, encompassing areas in the states of Minas Gerais and
Goias and in Brazil's Federal District. The concession relating to this plant
expires on December 17, 2032.
FUNIL HYDROELECTRIC POWER PLANT. The Funil power plant, with an installed
capacity of 180 MW, is being 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 December 2002. Commercial generation with
respect to the second and third units is expected to begin in the second half of
2003. We have a 49% interest in this project and our partner, CVRD, has a 51%
stake. As of May 31, 2003, we had invested R$108.3 million in this project.
AIMORES HYDROELECTRIC POWER PLANT. The Aimores power plant, to be
constructed 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 April 2004. As of May 31, 2003, we had invested R$209.5 million in
this project. The concession relating to this plant expires on December 19,
2035. We are a defendant, with CVRD, in a class action lawsuit brought by the
Public Prosecutor of Minas Gerais that alleges that proper licensing was not
obtained and seeks to nullify the environmental licenses relating to this plant
and revoke the related concession. See "Item 8. Financial Information--Legal
Proceedings--Legal Proceedings Related to Environmental Matters."
IRAPE HYDROELECTRIC POWER PLANT. The Irape 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 May 31, 2003, we had invested R$235.6
million in this project, including R$22.5 million in 2002 in dividends that were
due to the State Government pursuant to an agreement between us and the State
Government.
CO-GENERATION JOINT VENTURES WITH CUSTOMERS
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 customer's facility. We would assume the responsibility for operating and
maintaining the co-generation facility.
WIND FARM
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. 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.
34
PURCHASE OF ELECTRIC POWER
During the year ended December 31, 2002, we purchased 12,735 GWh of
electricity from Itaipu, which represented approximately 36% of the electricity
we sold to end users. In addition, during the same period, we purchased 13,022
GWh of electricity from the interconnected power system and other
concessionaires, which represented approximately 37% 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 ELETRICAS BRASILEIRAS
S.A., or Eletrobras, 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 23 electric power distribution companies operating in the
South, Southeast and Center West Regions of Brazil that are jointly required to
purchase all of Brazil's portion of the electricity generated by Itaipu. The
Federal Government allocates Brazil's portion of Itaipu's 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. We are required to purchase Itaipu's energy at rates fixed to defray
Itaipu's operating expenses and payments of principal and interest on Itaipu's
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. This procedure is known as the MECANISMO DE REALOCACAO DE
ENERGIA (Energy Reallocation Mechanism), or MRE. The transferor receives a
payment in REAIS for the energy transferred at a rate which reflects only the
operating cost associated with the energy and does not include profit or return
on investment.
TRANSMISSION
OVERVIEW
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 to oversee the transmission of electricity
in Brazil and to promote a more competitive, less regulated environment. One of
the main goals of the ONS is to guarantee that all participants in the
electricity sector have access to the Brazilian transmission network on a
non-discriminatory basis. Under ANEEL regulations, owners of different parts of
the basic transmission network, Brazil's 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 enters into
contracts with generation companies, distribution companies and free customers
for use of the basic transmission
35
network. Pursuant to the contracts between the ONS 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 transmission
service agreement. During the year ended December 31, 2002, we recorded income
totaling R$185 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 December 31, 2002, we recorded expenses totaling
R$298 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 Electricity Sector--Legal and
Regulatory Matters--Rates" 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, 2002, we also had 11 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 11.9% of the total volume of electricity
we sold in the year ended December 31, 2002. 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
(FROM GENERATION SUBSTATIONS TO DISTRIBUTION SUBSTATIONS)
---------------------------------------------------------
AS OF DECEMBER 31,
---------------------------------------------------------
VOLTAGE OF TRANSMISSION LINES 2002 2001 2000
-------------------------------------------- ----------- ------- -------
500 kV...................................... 1,352 1,352 1,354
345 kV...................................... 1,201 1,196 1,173
230 kV...................................... 466(1) 537 557
----------- ------- -------
Total....................................... 3,019 3,084 3,084
=========== ======= =======
(1) We reduced the circuit length of our 230 kV transmission lines in 2002
because Escelsa Espirito Santo Centrais Eletricas S.A. connected its own 230
kV transmission line from its Mascarenhas Power Plant to our Valadares
distribution substation.
STEP-DOWN TRANSFORMATION CAPACITY(1)
OF TRANSMISSION SUBSTATIONS
-----------------------------------
AS OF DECEMBER 31,
-----------------------------------
2002 2001 2000
-------- --------- -------
Number of step-down substations............. 30 30 29
MVA......................................... 14,563 14,263 13,892
----------
(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.
EXPANSION OF TRANSMISSION CAPACITY
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.
ITAJUBA 3. In June 2000, ANEEL awarded us the concession to build and
operate Itajuba 3, a 600 MVA step-down transmission substation in Minas Gerais
in the first bidding process ever held by ANEEL concerning a transmission
substation. Construction began in October 2000 and was completed in April 2003.
The substation has two transformers, each rated 300 MVA, with step-down capacity
of 500 - 138
36
kV and each is connected to the basic transmission network through two 500 kV
transmission lines. As of May 31, 2003, we had invested R$72.2 million in this
project.
Itajuba 3 is strategically located to relieve the strain on the
transmission system in the southern part of Minas Gerais. It supplies the
regional distribution network, doubling the installed step-down transformation
capacity for that region. Itajuba 3 has increased considerably the efficiency
and reliability of our transmission system and its ability to supply new
customers.
VESPASIANO 2. In October 2001, ANEEL awarded us the concession to build and
operate the Vespasiano 2 Substation near Belo Horizonte. Construction began in
October 2001 and was completed in May 2003. This substation has two transformers
rated 300 MVA, each with a step-down capacity of 500 - 138 kV. This substation
is connected to the basic transmission network through a transmission line and
supplies additional energy to the central region of Minas Gerais. As of May 31,
2003, we had invested R$60 million in this project.
BOM DESPACHO 3. ANEEL awarded us the concession to build and operate the
Bom Despacho 3 Substation in February 2002. This substation will be built in the
town of Bom Despacho, 150 km from Belo Horizonte and is scheduled to be
completed by the second quarter of 2004. The goal of this project is to increase
the reliability of the basic transmission network in the Southeast Region of
Brazil. This substation will improve the operation of our system and supply 100
MVA of reactive energy to the system, which will improve the quality of the
electricity in our system and in the basic transmission network. As of May 31,
2003, we had invested R$1.1 million 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
Prospects--Liquidity and Capital Resources."
DISTRIBUTION
OVERVIEW
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 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, 1998 through December 31, 2002, we invested approximately
R$1,935 million in the construction and acquisition of property, plant and
equipment used to expand our distribution system.
As of December 31, 2002, we provided electricity to a geographic area
encompassing 96.7% of Minas Gerais and served approximately 5.6 million
customers, representing approximately 99.4% and 84.1% of Minas Gerais's urban
and rural populations, respectively. During 2002, we connected and billed
179,418 new customers. These new customers include customers connected through
our rural and urban electrification programs. As of December 31, 2002, our
distribution network consisted of 525,653 distribution transformers and 346
distribution substations, with total distribution lines measuring 215,435 miles,
compared to 210,573 miles at December 31, 2001. At December 31, 2002, we were
the largest electricity distribution concessionaire in Brazil in terms of GWh
sold to final customers.
The following tables provide certain operating information pertaining to
our distribution system, as of the dates presented:
37
CIRCUIT LENGTH OF DISTRIBUTION LINES IN MILES
(FROM DISTRIBUTION SUBSTATIONS TO FINAL CUSTOMERS)
--------------------------------------------------
AS OF DECEMBER 31,
--------------------------------------------------
VOLTAGE OF DISTRIBUTION LINES 2002 2001 2000
-------------------------------------------- -------- -------- --------
161 kV...................................... 34.2 34.2 30.3
138 kV...................................... 6,521.3 6,430.0 6,456.0
69 kV....................................... 2,886.3 2,938.4 2,611.7
34.5 kV + Others............................ 594.6(1) 615.8(1) 866.9
-------- -------- --------
Total ..................................... 10,036.4 10,018.4 9,964.9
======== ======== ========
CIRCUIT LENGTH OF DISTRIBUTION LINES IN MILES
(FROM DISTRIBUTION SUBSTATIONS TO FINAL CUSTOMERS)
--------------------------------------------------
AS OF DECEMBER 31,
--------------------------------------------------
TYPE OF DISTRIBUTION LINES 2002 2001 2000
-------------------------------------------- --------- --------- ---------
Overhead urban distribution lines........... 34,426.2 33,818.4 32,984.9
Underground urban distribution lines........ 194.9 194.1 190.8
Overhead rural distribution lines........... 170,777.5 166,542.2 160,969.5
--------- --------- ---------
Total ..................................... 205,398.6 200,554.7 194,145.2
========= ========= =========
STEP-DOWN TRANSFORMATION CAPACITY(2)
OF DISTRIBUTION SUBSTATIONS
------------------------------------
AS OF DECEMBER 31,
------------------------------------
2002 2001 2000
-------- -------- --------
Number of substations....................... 346 344(3) 293
MVA ....................................... 7,952.2 7,860.3 7,983.0
----------
(1) The decrease in the circuit length of these lines was due to the removal of
certain lines in eastern Minas Gerais as a result of the conversion of 34.5
kV lines to 69 kV lines.
(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.
(3) The significant increase in the number of distribution substations from 2000
to 2001 is a result of the revised definition of distribution substation in
accordance with present Brazilian electricity sector legislation. Step-down
substations with voltages less than 230 kV connected to and registered as
generation assets are now considered to be part of our distribution
business, while the step-up portion of these substations remain classified
as generation substations.
EXPANSION OF DISTRIBUTION CAPACITY
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, increases in electricity usage among our 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 845,000 new urban customers and 145,000 rural
customers. In order to accommodate this growth, we expect that we will need to
add 360,000 medium-voltage poles, 767 miles of transmission lines and 14
step-down substations to our distribution network, increasing the network's
installed capacity to 841.5 MVA. Over the next five years, we expect to invest
approximately R$1.8 billion to expand our distribution system. See "Item 5.
Operating and Financial Review and Prospects--Liquidity and Capital Resources."
We have adopted a rural electricity development program sponsored by the
Federal Government called "Lumiar." Our plan is to use Lumiar to attain our goal
of supplying electricity to 100% of the rural customers in Minas Gerais by 2006.
This will require an investment of approximately R$420 million, which will be
partially funded by the rural municipalities and consumers that will benefit
from the
38
program. We are also involved in the "Luz Solar" project, which uses solar power
to facilitate the lighting of remote schools, community centers and rural
residences where our power lines do not yet reach. Our rural development
programs will be funded partially by credit programs created by the Federal
Government and the State Government.
ENERGY LOSSES
Energy losses affect our financial results because the lost energy would
otherwise have been distributed to final customers or other concessionaires in
return for payment. Energy losses are divided into two basic categories:
technical losses and non-technical losses. In 2002 our level of total energy
losses was 9.2% of the aggregate of the electricity we generated and purchased
during that period.
Technical losses account for approximately 93% of our energy losses. These
losses are the inevitable result of the step-down transformation process and the
transportation of electric energy through the 3,019 miles of transmission lines
and 215,435 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 7% 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
0.5% of the electricity that we sold during 2002. 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.
CUSTOMERS AND BILLING
CUSTOMER BASE
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
39
hospitals); rural; and other (including governmental and public entities).
During the year ended December 31, 2002, we sold 35,584 GWh of energy,
representing R$5,458 million in revenues. These figures do not include sales to
the interconnected power system and other concessionaires.
For the 12 months ended December 31, 2002 as compared to the 12 months
ended December 31, 2001, the volume of electric power sold by us to industrial,
commercial, rural and other customers increased by 2.6%, 0.4%, 8.5% and 4.3%,
respectively, while sales to residential customers decreased by 1.8%.
The following table provides information regarding the number of our
customers as of December 31, 2002 and consumption by customer category for the
years ended December 31, 2002, 2001 and 2000:
CONSUMPTION (GWh)
NUMBER OF --------------------------------------
CUSTOMERS AT YEARS ENDED
CUSTOMER CATEGORY DECEMBER 31, DECEMBER 31,
----------------------------------- ------------ --------------------------------------
2002 2002 2001 2000
------------ -------- -------- ---------
Industrial ........................ 68,211 21,906(1) 21,351(1) 22,247(1)
Residential ....................... 4,615,178 6,360 6,475 7,576
Commercial ........................ 515,771 3,283 3,269 3,584
Rural ............................. 338,396 1,705 1,572 1,676
Own consumption ................... 1,339(2) 50 52 62
Other ............................. 52,593 2,330 2,229 2,425
--------- ------ ------ ------
Total ............................. 5,591,488 35,634 34,948 37,570
========= ====== ====== ======
----------
(1) Includes consumption by Sa Carvalho and Ipatinga, which consume all of the
energy that they produce.
(2) Refers to the number of our facilities that use our energy, each of which is
considered a customer pursuant to ANEEL regulations.
In 2002, we added and billed 179,418 new customers, representing growth of
3.3% compared to 2001, 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, 2002, 11 of our industrial customers had high voltage
electrical energy supplied through direct connections to our transmission lines.
These customers constituted 11.9% of our total volume of electrical power sales
during the twelve-month period ended December 31, 2002, and approximately 6.8%
of our revenues. In the same period, our ten largest industrial customers
accounted for nearly 19.6% of energy consumed. None of our ten largest customers
is owned by the State Government or by the Federal Government.
As of December 31, 2002, we had entered into standard power purchase
agreements with 3,647 of our industrial customers, of which 570 customers had
demand above 500 kW. Our standard power purchase agreement with industrial
customers has a duration of three or five 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 customer, as well as the
customer's 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, 2002:
40
CONSUMPTION AS A
PERCENTAGE OF TOTAL
ENERGY SALES VOLUME INDUSTRIAL ENERGY SALES
INDUSTRIAL CUSTOMERS IN GWh VOLUME
---------------------------------------- ------------------- -----------------------
Steel industry ......................... 4,619 21.09
Ferroalloy industry .................... 3,934 17.96
Non-ferrous metal industry ............. 2,427 11.08
Mining industry ........................ 2,182 9.96
Cement industry ........................ 1,026 4.68
Automotive industry .................... 542 2.47
Others ................................. 7,176 32.76
------------------- -----------------------
Total .................................. 21,906 100.00%
=================== =======================
The following table sets forth the names and related industries of our ten
largest customers in 2002:
TEN LARGEST CUSTOMERS
(LISTED IN ORDER OF TOTAL GWh OF ELECTRICITY PURCHASED FROM US IN 2002) INDUSTRY
------------------------------------------------------------------------ -------------------
Usinas Siderurgicas de Minas Gerais S.A.- USIMINAS .................. Steel
Alcoa Aluminio S.A.- ALCOA........................................... Aluminum
Alcan Aluminio do Brasil S.A.- ALCAN................................. Aluminum
Companhia Brasileira de Carbureto de Calcio - CBCC................... Ferroalloys
White Martins Gases Industriais S.A.................................. Chemical
Belgo Mineira Participacoes Ind. Com. S.A............................ Steel
Rima Eletrometalurgia S.A............................................ Ferroalloys
Companhia Ferro Ligas de Minas Gerais - MINASLIGAS................... Ferroalloys
Ligas de Aluminio S.A.- LIASA........................................ Ferroalloys
Italmagnesio Nordeste S/A............................................ Ferroalloys
Alcoa Aluminio S.A., or ALCOA, our largest customer in 2001 in terms of
total GWh of electricity purchased, became an SPP in April 2002 and now
generates electricity for its own use at a power plant located outside of Minas
Gerais that it constructed for this purpose. Consequently, ALCOA has gradually
reduced the amount of energy it purchases from us and is no longer our largest
industrial customer. A portion of the energy previously sold to ALCOA is now
sold to new customers and the remainder of this energy is sold on the MAE.
BILLING
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. 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 two 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.
At December 31, 2002, we were owed approximately R$414 million in overdue
bills, originating from approximately 1.9 million accounts, representing 7.6% of
our 2002 sales. Of this amount, R$122 million related to bills overdue for less
than or equal to 30 days. As of December 31, 2002, we had accrued R$58 million
as an allowance for doubtful accounts, representing 14% of the overdue amounts.
Based on our past experience, the significant majority of delinquent customers
pay their overdue bill prior to disconnection of their electricity supply. There
are no legal restrictions on our ability to disconnect customers in default.
41
SEASONALITY
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 (not including our own consumption) from 2000
through 2002, in GWh, are set forth below:
YEAR FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
--------------------------------- ------------- -------------- ------------- --------------
2000 ............................ 8,923 9,364 9,572 9,649
2001 ............................ 9,602 9,613 7,800 7,881
2002 ............................ 8,295 9,074 9,114 9,101
Consumption by final customers during the third and fourth quarters of 2001
and the first quarter of 2002, as compared to the same periods in the prior
years, decreased as a result of the Electricity Rationing Plan. Consumption by
residential customers remains sluggish and has not returned to pre-rationing
levels.
COMPETITION
COMPETITION AND LARGE CUSTOMERS AND "FREE CUSTOMERS"
As a result of recent legislation, it may be possible for other
distributors or electricity traders to offer electricity to some of our existing
customers at prices lower than those we are able to charge. Furthermore, the
recently adopted Concessions Law requires distribution and transmission
companies to permit third parties to use their lines and ancillary facilities to
transmit electricity upon payment of a toll and enables certain large
electricity customers, which we refer to as "free customers," to contract with
other suppliers for the supply of electricity. We expect that future regulatory
changes will allow certain smaller customers to be classified as "free
customers" as well, giving them the ability to purchase their electric energy
from any supplier that they wish; however, we do not believe that residential
customers will have this ability in the near future. Currently, free customers
have several distribution alternatives, such as:
- connecting their own direct lines to a generation company;
- paying a toll to a distribution and transmission company while
negotiating a supply contract with a generation company or power
trader;
- negotiating a contract with a distribution company; and
- self-generating.
In addition, the Federal Government proposals with respect to the
revitalization of the electric sector provide that free customers in our
concession area that choose to contract for their energy supply with us will be
entitled to purchase the energy they consume through public auctions to be
conducted by the Federal Government, rather than through initial contracts. For
more information regarding these revitalization measures, see "The Brazilian
Electricity Sector--Legal and Regulatory Matters--Competition" in Annex A.
Several of our customers qualify as free customers. Accordingly, we
contract with these customers on a customized basis, allowing us to remain
competitive with other providers of electric energy that such customers have the
right to choose. Through May 31, 2003, we have entered into 12 contracts
42
with free customers representing an aggregate of 349 MW, including two contracts
with free customers outside our concession area. We are currently negotiating an
additional 14 free customer contracts, 10 of which relate to free customers
outside our concession area. So far, all of the free customers located in our
concession area have entered into customized power supply contracts with us.
Other than ALCOA, we are not aware of any free customers in the state of
Minas Gerais that plan to contract directly with generators or traders other
than us or that plan to self-generate. We believe that it is too early to
determine the possible effect of this increased potential for competition on our
results of operations. However, increased competition, including the loss of
several of our large customers, could potentially have a material adverse effect
on our financial condition and results of operations. See "The Brazilian
Electricity Sector--Legal and Regulatory Matters--Competition" in Annex A.
The increasingly competitive environment may be favorable to us because of
our experience with large industrial consumers. For more than 40 years, we have
had a department exclusively dedicated to servicing large customers. Pursuant to
our marketing policy, we assign managers to specific clients, allowing us to
provide tailored customer service. For instance, we have developed an Internet
site that large customers may use for service, information and sales.
We also have fostered important relationships with several large industrial
customers with whom we hope to begin co-generation activities, and we plan to
continue pursuing these relationships in the future. See "--Generation and
Purchase of Electric Power--Co-generation Joint Ventures with Customers."
CONCESSIONS
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.
In addition, it is possible that a number of our large industrial clients,
like ALCOA, 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.
RAW MATERIALS
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, 2002 represented
an expense of R$441 million, which was reimbursed to us from the CONTA DE
CONSUMO DE COMBUSTIVEL (Fuel Usage Quota Account), or CCC Account, which was
created by the Federal Government to offset the higher marginal operating costs
of thermoelectric plants, and to which we and other electricity concessionaires
must make contributions. See "Item 5. Operating and Financial Review and
Prospects" and "The Brazilian Electricity Sector--Legal and Regulatory
Matters--Regulatory 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.
43
OTHER BUSINESSES
NATURAL GAS DISTRIBUTION
Our subsidiary Gasmig was established in 1986 for the purpose of developing
and implementing the distribution of natural gas in Minas Gerais. We own
approximately 95% of Gasmig. The remaining shares are owned by Minas Gerais
Participacoes 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. Gasmig's marketing efforts focus on its ability to provide a more
economically efficient and environmentally friendly alternative to oil, propane,
wood and charcoal. In 2002, Gasmig supplied approximately one million cubic
meters of gas per day to 102 industrial customers. At December 31, 2002, Gasmig
also supplied natural gas to 46 automotive natural gas stations and to two power
plants. During the year ended December 31, 2002, Gasmig distributed
approximately 4% of all natural gas distributed in Brazil.
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. We also expect that the demand outside the state
will grow. 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. Gasmig's 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 the year ended December 31, 2002, Gasmig had total revenues of R$200
million and net income after taxes of R$25 million.
Gasmig's capital expenditures for the past three years were R$35 million.
In 2002, Gasmig invested approximately R$20.8 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 as such will require further investment by the Federal Government
in new capacity or in the construction of a new pipeline to supply the growing
natural gas demand in the State of Minas Gerais.
Gasmig's capital expenditures for 2003 will be mostly used for expansion of
existing pipelines or construction of new pipelines to supply the growing demand
for natural gas in Minas Gerais.
TELECOMMUNICATIONS, INTERNET AND CABLE TELEVISION
On January 13, 1999, we incorporated Infovias as a joint venture with AES
Forca Empreendimentos Ltda., an affiliate of AES Corporation. Currently, we own
99.92% of the common shares of Infovias. Infovias 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 Infovias
pursuant to a 15-year operating lease agreement entered into on March 31, 2000.
This agreement is still subject to approval by ANEEL. Pursuant to Brazilian
telecommunications law, we also make our network infrastructure available to
other telecommunications providers interested in leasing it.
44
Infovias started its business operations in January 2001. The main
telecommunication services provided by Infovias 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
service providers on a clear channel basis. Infovias is also extending its
broadband Internet services, currently available in the cities of Belo Horizonte
and Pocos de Caldas, to other cities in Minas Gerais.
Infovias provides the network for cable television service in 20 cities in
Minas Gerais pursuant to a 15-year service agreement with WAY TV Belo Horizonte
S.A., or WAY TV, and Brasil Telecomunicacoes S.A., each a holder of concessions
to provide cable television and Internet service in certain cities in Minas
Gerais, under which Infovias allows these companies to use its network
infrastructure. In return, WAY TV and Brasil Telecomunicacoes are obligated to
deliver to Infovias a percentage of the revenues derived from their cable
television and Internet subscribers. At December 31, 2002, these two companies
had approximately 28,500 cable television subscribers and 5,000 Internet service
subscribers.
Infovias holds a 66.41% equity interest in WAY TV, including 49% of its
common shares. The control of WAY TV is exercised by Infovias through a
shareholders' agreement with CLIC--Clube de Investimentos dos Empregados da
Cemig, or CLIC, which owns 1.1% of WAY TV's common shares. Per this agreement,
CLIC has agreed to vote in accordance with Infovias' interests at the WAY TV
shareholders' meetings. To date, Infovias has invested approximately R$56
million in WAY TV.
Infovias also provides intra-company data transmission services to us
pursuant to a five-year agreement executed in 2001. We use this service for
internal communications as well as for certain communications with our
customers. In January 2003 we sought authorization from ANEEL in order to enter
into an amendment to this agreement to renegotiate certain terms and conditions.
ANEEL has requested additional information and we are currently in the process
of responding, with Infovias, to this request.
In September 2002, Infovias executed an agreement with us pursuant to which
we are to provide georeferenced information and related services to Infovias. On
January 16, 2003, ANEEL sent a notice to us alleging that we had failed to
obtain necessary ANEEL authorization relating to this agreement.
ANEEL may seek to impose a fine upon us relating to our agreements with
Infovias if it concludes that these agreements are not in agreement with its
regulations. ANEEL may also seek to impose restrictions on the terms and
conditions of these agreements. The maximum penalty is a fine in an amount equal
to 2% of our revenues during the 12-month period immediately prior to the
imposition of such fine.
During 2002, Infovias had operating revenues of R$20 million, of which R$15
million related to the provision of telecommunication services and R$5 million
related to the provision of cable television and Internet services.
Infovias' capital expenditures for the past three years were R$298 million.
Infovias' capital expenditures for 2003 will be mostly used for expansion of its
telecommunications network.
CONSULTING AND OTHER SERVICES
We provide consulting services to governments and public utility companies
in the electricity sector 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.
45
On January 9, 2002, we incorporated Efficientia S.A. to render project
efficiency optimization solutions and operation and management services to
energy supply facilities. We have a 100% interest in Efficientia S.A.
Efficientia S.A. commenced operations in 2003.
On August 12, 2002, we incorporated CEMIG Trading S.A. to conduct
activities relating to the trading of energy. We have a 100% interest in CEMIG
Trading S.A. CEMIG Trading S.A. has not yet commenced operations.
ENVIRONMENTAL MATTERS
OVERVIEW
Our generation, transmission and distribution activities are subject to
comprehensive federal and state legislation relating to the preservation of the
environment. See "The Brazilian Electricity Sector--Legal and Regulatory
Matters--Environmental Regulations" in Annex A. The primary environmental
authorities in the State of Minas Gerais are FUNDACAO ESTADUAL DO MEIO AMBIENTE
(State of Minas Gerais Environmental Foundation), or FEAM, and CONSELHO ESTADUAL
DE POLITICA AMBIENTAL (State of Minas Gerais Environmental Policy Council), or
COPAM.
We believe that we are in material compliance with applicable environmental
legislation and regulations. During 2002, we invested approximately R$11 million
in environmental compliance and we spent R$15 million on expenses relating to
corrective measures.
LICENSING
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.
See "The Brazilian Electricity Sector--Legal and Regulatory
Matters--Environmental Regulations" in Annex A.
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 4 to 8 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 PATRIMONIO HISTORICO E ARTISTICO
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. Costs may be associated with the obligation to
conduct such studies and such costs may have an adverse effect on our results of
operations. We are unable to estimate the amount of future costs related to
these matters as the amount of such costs depends on numerous factors.
Gasmig's distribution of natural gas through pipelines in Minas Gerais is
duly licensed; however, the pipeline installation license for the metropolitan
area of the city of Belo Horizonte is still under review.
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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 INSTITUTO BRASILEIRO DO MEIO AMBIENTE E DOS RECURSOS NATURAIS
RENOVAVEIS (the Brazilian Institute of the Environment and Natural Renewable
Resources), or IBAMA, and FEAM to obtain the corrective environmental operation
licensing of all our plants that began operating prior to February 1986. Our
Emborcacao, Sao Simao, Jaguara and Volta Grande hydroelectric facilities all
fall into this category. IBAMA is currently analyzing the corrective licensing
application we submitted on behalf of Emborcacao. We have also submitted
applications on behalf of our Sao Simao, Jaguara and Volta Grande plants. We are
currently waiting for IBAMA's recommendations concerning the corrective
licensing of these facilities. 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.
FISHWAYS
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, 2002, we had fishway projects
installed at our Igarape, Salto dos Moraes and Igarapava facilities. In April
2002 we sent COPAM a study relating to our dams. In July 2002 we received a
response from the SECRETARIA DE ESTADO DE MEIO AMBIENTE E DESENVOLVIMENTO
SUSTENTAVEL DE MINAS GERAIS, or SEMAD (the Minas Gerais Sustainable Development
and Environment Secretariat) that requires us to provide additional studies
relating to the feasibility of installing fishways in our dams located in Minas
Gerais. We are currently preparing these studies for SEMAD.
OPERATIONAL TECHNOLOGIES
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.
LOAD DISPATCH CENTER
The CENTRO DE OPERACAO 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
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Brazilian utility sector, the COS has begun operating through the ONS,
controlling and supervising 30 substations, 14 large plants and 3,109 miles of
transmission lines.
REGIONAL DISTRIBUTION OPERATION CENTERS
Our distribution network is managed through seven CENTROS DE OPERACOES
REGIONAIS DE DISTRIBUICAO (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 346
distribution substations, 205,398.6 miles of medium voltage distribution lines,
10,036.4 miles of sub-transmission lines and 5.6 million customers in our
concession area.
The CODs use several operational technologies such as:
- CONDIS, a group of computer systems that manage customer needs such as
restoration of power, switching, disconnection and inspection orders;
- GEMINI, a system that provides a geographic overview of our entire
distribution network (including georeferenced information about
customers, poles, transformers, switches and other equipment),
allowing us to ascertain important information about the network such
as which consumers are affected by service interruptions and other
analysis functions that assist us in making decisions about our
operations, including with respect to where and to what extent our
network needs expansion; and
- OMNISAT, a satellite data transmission system that provides fast, safe
communications among the CODs, our client service department and our
service vehicles in the field and allows service orders to be sent
instantly to special monitors in vehicles located near the site where
service is needed, optimizing the efficiency of our service fleet and
personnel.
INTERNAL TELECOMMUNICATIONS NETWORK
Our internal telecommunications network is one of the largest in Brazil and
is comprised of a high-performance microwave system with a range of 1,400 miles,
a telephone system with 188 telephone exchanges and a corporate network that
integrates 6,997 microcomputers and a mobile communication system with 3,000
radio sets. We are also developing several projects in association with Infovias
based on fiber-optic networks that make use of our distribution infrastructure
of poles and transmission towers, aimed at integrating our internal voice, data
and image networks in order to reduce operational costs and increase the
reliability of the electrical system.
CORPORATE DATA NETWORK
Our corporate data network integrates our offices in 85 cities in Minas
Gerais and connects 6,935 work stations running local and corporate
applications. In 2002, we implemented a network management system to provide
faster responses and solutions to contingencies.
NARROWBAND PLC TECHNOLOGY
Narrowband power line communications, or PLC, technology permits the
transmission of data through our electricity distribution lines, allowing us to
collect energy usage information pertaining to individual customers. This
information can be used for a variety of commercial applications, such as:
- creating individually tailored customer services such as pre-payment
schemes and pricing options;
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- automated meter reading and load management;
- account management, including collections, disconnection and
reconnection;
- time of use rate assessment;
- street lighting control and management; and
- energy loss detection.
We currently have 25,000 narrowband PLC points in operation. We expect to
be able to use PLC technology to considerably reduce peak demand in points of
consumption that are connected to this technology.
BROADBAND PLC TECHNOLOGY
Broadband PLC technology permits Internet access through our electricity
distribution lines. In November 2001, we implemented a pilot project to develop
this technology. We are one of the first Brazilian electric utilities to work
with this technology.
The goal of our Broadband PLC pilot project is to test, in the long-term,
the quality of the voice, data and image services provided through our low
voltage distribution network and to establish the economic viability of adding
this technology to the final portion of our distribution network that connects
the end-users. This final portion of our distribution network is called the
"last mile."
CALL CENTERS
We have two call centers, one in Belo Horizonte and one in the city of
Uberlandia. 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 centers are integrated with the technologies available in the
CODs, allowing us to provide up-to-the-minute information to customers about
service issues.
MAINTENANCE AND REPAIR SYSTEMS
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, wind
and corrosion on our transmission and distribution networks, which are composed
largely of non-insulated overhead lines.
INFORMATION SECURITY MANAGEMENT
Our Information Security Management staff is responsible for the security
of our telecommunication and information technology environment. In 2002, this
group began a series of information security awareness seminars that were
presented in our facilities in 11 cities. In addition, we are in the process of
contracting with an information security consulting firm to assist us in
creating a global information security plan. We estimate that it will cost us
approximately R$3.2 million to implement this plan.
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MANAGEMENT TOOLS
MANAGERIAL SOFTWARE
We have implemented eight modules of SAP R/3, a managerial system from SAP,
a German management software company. This system provides support in the areas
of accounting, costs, budgeting, investments, treasury, quality control,
projects, inventory, maintenance, fixed assets, real estate and human resources.
The implementation of this system, together with the installation in April 1999
of a new corporate computer network designed to support this system, has
increased our efficiency by enabling us to redesign, automate or eliminate
preexisting work procedures.
TOTAL QUALITY PROGRAM
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.
We have received ISO 9001/2000 certification for 38 areas of our business,
including certain customer service offices, call centers, laboratories, repair
shops, engineering teams and the Sao Simao hydroelectric power plant, which
represented 30% of our installed capacity as of December 31, 2002.
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.
Three distribution units, which cover almost 70 municipalities, are
certified according to internally created criteria that we refer to as CEMIG's
EMS (Emergency Management System). 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.
As part of the Total Quality program, we have also instituted a program to
focus on employee education. Participation in this program, known as Quality
Control Circles, or QCC, is voluntary and open to all of our employees. As of
December 31, 2002, we had 45 registered QCCs. QCCs hold weekly meetings to
discuss operational and technical problems as well as solutions.
PROPERTY, PLANT AND EQUIPMENT
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 was R$10,099 million at December
31, 2002 (including ongoing construction projects). Generation facilities
represented 44% of this net book value, transmission and distribution facilities
represented 50% and other miscellaneous property and equipment, including
natural gas and telecommunication facilities, represented 6%. The average annual
depreciation rate applied to these facilities was 2.47% for hydroelectric
generation facilities, 3.08% for transmission facilities, 5.21% for distribution
facilities, 9.63% for administration facilities, 5.96% for natural gas
facilities and 7.79% for telecommunication facilities. Our facilities are
generally adequate for our present needs and suitable for their intended
purposes.
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In addition, we are a partner in certain consortia that operate electricity
generation projects. The net book value of our total investment in these
consortia was R$530 million at December 31, 2002 (including ongoing construction
projects).
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
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.
GENERAL
We are a state-controlled, fully integrated energy company engaged
primarily in the generation, transmission and distribution of electricity in
Minas Gerais. At December 31, 2002, we were the sixth largest electric power
generation concessionaire in Brazil as measured by total installed capacity, and
for the year ended December 31, 2002, 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, 2002. See "Item 4. Information
on the Company--Customers and Billing." At December 31, 2002, we generated
electricity at 44 hydroelectric plants, three thermoelectric plants and one wind
farm and had a total installed generation capacity of 5,712 MW, of which the
hydroelectric plants accounted for 5,540 MW. See "Item 4. Information on the
Company--Generation and Purchase of Electric Power." The State Government as our
controlling shareholder establishes our operating and long-term strategy.
The following are our operational subsidiaries as of December 31, 2002:
- Sa Carvalho S.A. (100% interest). Sa Carvalho S.A. is engaged in the
production and sale of electric energy and holds the concession to
operate the Sa Carvalho hydroelectric power plant.
- Usina Termica Ipatinga S.A. (100% interest). Usina Termica Ipatinga
S.A. is an SPP engaged in the production and sale of electric energy
at the Ipatinga thermoelectric and steam power plant.
- Gasmig (95.17% interest). Gasmig is engaged in the acquisition,
transportation and distribution of natural gas and related products.
- Infovias (99.92% interest). Infovias is engaged in the rendering of
telecommunication services and the conducting of related activities
through integrated systems using optical fiber cable, coaxial cable,
electronic equipment and other items.
We also have a 100% interest in each of the following companies: Efficientia
S.A.; Horizontes Energia S.A.; Usina Termeletrica 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 for the year ended December 31, 2002
include the financial results of CEMIG and all of our subsidiaries (operational
and pre-operational) described above. Our consolidated financial statements for
the years ended December 31, 2001 and 2000 include the financial results of
CEMIG and the following subsidiaries: Gasmig, Sa Carvalho S.A. and Usina Termica
Ipatinga S.A. See note 2 to our consolidated financial statements.
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We also have a 49.0% interest in Central Hidreletrica Pai Joaquim S.A., a
company that we formed in 2002 in partnership with COPASA. Central Hidreletrica
Pai Joaquim S.A. has not yet commenced operations.
In addition, we have a 49.0% interest in Central Termeletrica de Cogeracao
S.A., a company that we formed in 2003 in partnership with COPASA. Central
Termeletrica de Cogeracao S.A has not yet commenced operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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 and
estimates used in the preparation of our consolidated financial statements are
set forth below. Please see the notes to our consolidated financial statements
included herein for a more detailed discussion of the application of these and
other accounting policies.
REVENUE RECOGNITION
Revenues 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 price to the buyer has been fixed or is determinable, and
collectibility is reasonably assured), regardless of when the 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 market rates. Electricity distribution sales to final customers are
recognized when power is provided. Billings for these sales are made on a
monthly basis throughout the month. Unbilled revenues from the billing cycle up
to the end of each month are estimated based on the prior month's 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.
Advance billings of electric power represent sales at pre-established
rates, which are indexed contractually by inflation or exchange rate variation,
according to specific criteria set forth in each contract. The revenues are
recognized when electricity is delivered and the advance billings are reduced
accordingly.
Electricity sales to the interconnected power system are recorded when
earned and billed monthly.
Revenues we receive from other concessionaires using the 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
provided by CEMIG and Infovias and the revenues are recognized when the services
are provided. The net effect of deferring the connection fees is not material to
our consolidated financial position and results of operations because the fees
charged approximate the costs of providing the services.
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The IMPOSTO SOBRE AS OPERACOES RELATIVAS A CIRCULACAO DE MERCADORIAS E
SOBRE A PRESTACAO DE SERVICOS DE TRANSPORTE INTERMUNICIPAL E DE
COMUNICACAO--ICMS, a state value-added tax due on sales to final customers, or
VAT, is billed to consumers and recorded as part of gross revenue. The VAT
payable to the state is recorded as a deduction from net operating revenues
under taxes on revenues in the statement of operations.
REGULATORY ASSETS
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 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 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 Brazil's 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
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 in 2003 and 2004. The estimated 24-month period to recover revenue
losses is based on ANEEL Resolution No. 90, dated February 18, 2002, and ANEEL
Resolution No. 36, dated January 29, 2003, which state that billing losses
resulting from the rationing period will be recovered simultaneously with energy
transactions on the MAE and before the recovery of additional Parcel A costs.
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
53
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 and our subsidiaries are party to certain legal proceedings in Brazil
arising in the normal course of business regarding tax, labor, civil and other
issues.
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. The
evaluation of these contingencies is performed by various specialists inside and
outside of CEMIG. Accounting for contingencies requires significant judgment by
management concerning the estimated probabilities and ranges of exposure to
potential liability. Management's 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."
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 19 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. For the period ended December 31, 2002, we
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made some changes to certain actuarial assumptions used to estimate our
post-retirement benefits obligations, such as annual discount rate and annual
expected return on plan assets. These changes were made considering the average
rate of return on our plan assets in the last five years. Additionally, we
changed the mortality table from AT-49 to UB-94. 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.
In the third quarter of 2002, we and our employees' labor unions, most of
which are represented by Sindieletro, agreed upon certain changes to the current
health care plans we offer, which altered (i) the contribution criteria used to
calculate the contributions that we, our employees, and retirees are responsible
for and (ii) the types of costs covered in each plan. These changes were
implemented on January 1, 2003. Effects arising from these changes represented a
gain in the amount of R$48 million, recorded as a component of net period
benefit cost for the year ended December 31, 2002.
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 could have a material adverse impact on our operating results in
the period in which the estimate is revised and 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. The amount of the
allowance for doubtful accounts is estimated considering (i) our policy of
maintaining a 100% reserve with respect to amounts past due over 90 days with
respect to residential customers, 180 days with respect to commercial customers
and 360 days with respect to industrial and governmental entities and (ii) an
analysis of each of our main industrial clients facing financial difficulties.
We continuously monitor collections and payments from customers and review
and refine our estimation process.
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RECENTLY ISSUED U.S. GAAP PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board, or the FASB, issued
SFAS 141, "Business Combinations," or SFAS 141. SFAS 141 addresses financial
accounting and reporting for business combinations. All business combinations in
the scope of SFAS 141 are to be accounted for using one method, the purchase
method. In addition, SFAS 141 requires that intangible assets be recognized as
assets apart from goodwill if they meet two criteria: the contractual-legal
criterion or the separability criterion. To assist in identifying acquired
intangible assets, SFAS 141 also provides a list of intangible assets that meet
either of those criteria. In addition to the disclosure requirements prescribed
in Opinion 16, SFAS 141 requires disclosure of the primary reasons for a
business combination and the allocation of the purchase price paid to the assets
acquired and liabilities assumed by major balance sheet caption. SFAS 141 also
requires that when the amounts of goodwill and intangible assets acquired are
significant to the purchase price paid, disclosure of other information about
those assets is required, such as the amount of goodwill by reportable segments
and the amount of the purchase price assigned to each major intangible asset
class. The provisions of SFAS 141 apply to all business combinations initiated
after June 30, 2001. SFAS 141 also applies to all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001, or later. The adoption of SFAS 141 on January 1, 2002 did not have
any significant impact on our financial statements.
In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible
Assets," or SFAS 142. SFAS 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets. SFAS 142 also amends SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," to exclude from its scope goodwill and intangible assets that
are not amortized. SFAS 142 addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. SFAS 142 also addresses how goodwill and other intangible assets
should be accounted for after they have been initially recognized in the
financial statements. The provisions of SFAS 142 are required to be applied
starting with fiscal years beginning after December 15, 2001. The adoption of
SFAS 142 on January 1, 2002 did not have any significant impact on our
consolidated financial statements.
In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations," or SFAS 143. SFAS 143 requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. Under SFAS 143, the
liability for an asset retirement obligation is discounted and accretion expense
is recognized using the credit-adjusted risk-free interest rate in effect when
the liability was initially recognized. In addition, disclosure requirements
contained in SFAS 143 will provide more information about asset retirement
obligations. SFAS 143 is effective for financial statements issued for fiscal
years beginning after June 15, 2002 with earlier application encouraged. We do
not expect that the adoption of SFAS 143 as of January 1, 2003, will result in a
significant impact on our consolidated financial statements.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections," or
SFAS 145. SFAS 145 rescinds SFAS 4 "Reporting Gains and Losses from
Extinguishment of Debt," which required that all gains and losses from
extinguishment of debt be aggregated and classified as an extraordinary item if
material. SFAS 145 requires that gains and losses from extinguishment of debt be
classified as extraordinary only if they meet criteria in APB 30, thus
distinguishing transactions that are part of recurring operations from those
that are unusual or infrequent, or that meet the criteria for classification as
an extraordinary item. SFAS 145 amends SFAS 13 "Accounting for Leases" to
require that lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. In addition, SFAS 145 rescinds SFAS 44, "Accounting
for Intangible Assets of Motor Carriers" and SFAS 64, "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements," which are not currently applicable
to us. The provisions of SFAS 145 as they relate to the rescission of
56
SFAS 4 shall be applied in fiscal year 2003. Certain provisions related to SFAS
13 are effective for transactions occurring after May 15, 2002. The adoption of
this statement will not have a significant impact on our consolidated financial
statements.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)," or EITF 94-3. The
principal difference between this statement and EITF 94-3 relates to this
statement's requirements for recognition of a liability for a cost associated
with an exit or disposal activity. This statement requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF 94-3, a liability for an exit cost was
recognized at the date of an entity's commitment to an exit plan. A fundamental
conclusion reached by the FASB in this statement is that an entity's commitment
to a plan, by itself, does not create a present obligation to others that meets
the definition of a liability. This statement also establishes that fair value
is the objective for initial measurement of the liability. This statement
improves financial reporting by requiring that a liability for a cost associated
with an exit or disposal activity be recognized and measured initially at fair
value only when the liability is incurred. The accounting for similar events and
circumstances will be the same, thereby improving the comparability and
representational faithfulness of reported financial information. The provisions
of this statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. We do not
expect that the adoption of SFAS 146 will have a significant impact on our
consolidated financial statements.
In November 2002, the FASB issued Interpretation 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," or FIN 45. FIN 45 requires certain
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
FIN 45 also requires a guarantor to recognize, at the inception of a guarantee,
a liability for the fair value of the obligation undertaken in issuing the
guarantee. The disclosure requirements of FIN 45 are effective for interim and
annual periods ending after December 15, 2002. The initial recognition and
initial measurement requirements of FIN 45 are effective prospectively for
guarantees issued or modified after December 31, 2002. Based on an initial
assessment of the provisions and requirements of FIN 45, we do not believe that
the implementation of FIN 45 will have any impact on our consolidated financial
statements.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," or SFAS 148. SFAS 148 amends SFAS 123,
"Accounting for Stock-Based Compensation" and provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. SFAS 148 also amends the disclosure
requirements of SFAS 123 to require more prominent and frequent disclosures in
financial statements about the effects of stock-based compensation. The
transition guidance and annual disclosure provisions of SFAS 148 are effective
for financial statements issued for fiscal years ending after December 15, 2002.
The adoption of SFAS 148 will not have an impact on our consolidated financial
statements.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," or SFAS 149, which amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities under SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," or SFAS 133.
SFAS 149 clarifies the circumstances under which a contract with an initial net
investment meets the characteristic of a derivative as discussed in SFAS 133. In
addition, SFAS 149 clarifies when a derivative contains a financing component
that warrants special reporting in the statement of cash flows. SFAS 149 amends
certain other existing pronouncements, resulting in more consistent reporting of
contracts that are derivatives in their entirety or that contain embedded
derivatives that warrant separate accounting. SFAS 149 is effective for
contracts entered into or modified after June 30, 2003 and for relationships
designated after June 30, 2003 and is to be applied
57
prospectively. We do not believe that the adoption of SFAS 149 will have a
material impact on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity," or
SFAS 150. SFAS 150 modifies the accounting for certain financial instruments
that, under previous guidance, issuers could account for as equity. SFAS 150
requires that those instruments be classified as liabilities in statements of
financial position. SFAS 150 affects an issuer's accounting for three types of
freestanding financial instruments, namely:
- mandatory redeemable shares, which the issuing company is obligated to
buy back in exchange for cash or other assets.
- instruments, other than outstanding shares, that do or may require the
issuer to buy back some of its shares in exchange for cash or other
assets. These instruments include put options and forward purchase
contracts.
- obligations that can be settled with shares, the monetary value of
which is fixed, tied solely or predominantly to a variable such as a
market index, or varies inversely with the value of the issuers'
shares.
SFAS 150 does not apply to features embedded in financial instruments that are
not derivatives in their entirety. In addition to its requirements for the
classification and measurement of financial instruments within its scope, SFAS
150 also requires disclosures about alternative ways of settling those
instruments and the capital structure of entities, all of whose shares are
mandatorily redeemable. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. It is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of SFAS 150
and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. We are currently evaluating the impact of SFAS 150
on our consolidated financial statements.
ANALYSIS OF ELECTRICITY SALES AND COST OF ELECTRICITY PURCHASED
Electricity rates in Brazil are set by ANEEL, which has the authority to
readjust and review rates in response to changes in operating costs, cost of
capital, market conditions and operating efficiencies realized by distributors
over time. Each distribution company's concession agreement also provides for an
annual readjustment of rates based on increased costs due to inflation and
regulatory charges, the cost of electricity purchased for resale, the cost for
use of hydroelectric resources and transmission cost. The inflation adjusted
cost variation is reduced by a factor called the "X factor." The X factor is the
gain obtained by distributors due to market growth over the five year period in
which the rates are valid. In the first 5 year period in which the X factor was
used, the X factor was zero. In 2003, ANEEL, as part of its rate review, set the
new X factor to 1% to be applied until 2008 with up to an additional 1% to be
applied depending on our relative position in an annual customer satisfaction
survey conducted by ANEEL.
In addition, ANEEL, through the General Agreement of the Electricity
Sector, has provided for extraordinary rate increases to compensate distribution
companies for losses incurred as a result of the Electricity Rationing Plan. See
"Item 4. Information on the Company--Brazil's Energy Market--Rates."
ANEEL has also issued rate regulations that govern access to the
transmission system and establish transmission rates. The rates to be paid by
distribution companies, generators and independent customers for use of the
interconnected systems are reviewed annually. The review takes into account the
revenues that are permitted of transmission concessionaires pursuant to their
concession agreements. For
58
more detailed information regarding the rate-setting structure in Brazil, see
"The Brazilian Electricity Sector--Legal and Regulatory Matters--Rates" in Annex
A.
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% 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.
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
------ ------ ------
ELECTRICITY SALES:
Average rate to final customers (R$/MWh)
Industrial rate ..................................... 100.66 86.23 74.84
Residential rate .................................... 281.60 246.18 215.15
Commercial rate ..................................... 240.94 206.18 176.90
Rural rate .......................................... 147.80 131.04 113.96
Public services rate and others ..................... 158.80 137.73 120.00
Total sales to final customers (GWh)
Industrial customers ................................ 21,906 21,351 22,247
Residential customers ............................... 6,360 6,475 7,576
Commercial customers ................................ 3,283 3,269 3,584
Rural customers ..................................... 1,705 1,572 1,676
Public services and other customers ................. 2,330 2,229 2,425
Average rate (R$/MWh) .................................. 151.64 132.45 117.60
Total revenues (millions of R$) ........................ 5,458 4,587 4,478
------ ------ ------
Sales to distributors:
Volume (GWh) ........................................ 313 632 4,937
Average rate (R$/MWh) ............................... 67.09 102.85 23.50
Total revenues (millions of R$)(1) .................. 21 65 116
------ ------ ------
ELECTRICITY PURCHASES FROM ITAIPU:
Volume (GWh) ........................................ 12,735 11,935 13,967
Average cost (R$/MWh) ............................... 76.87 68.96 50.91
Total cost (millions of R$) ......................... 979 823 711
------ ------ ------
----------
(1) Does not include R$140 million, R$452 million and R$29 million relating to
energy transactions on the MAE during 2002, 2001 and 2000, 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
59
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. Under the new regulatory framework, three different rate structures
apply. First, 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
annually with the percentage increase determined by reference to a formula that
takes into account cost increases we incurred during the preceding year. Second,
electricity that we currently buy from and sell to other suppliers is subject to
rates set by ANEEL, however from 2003 to 2006, 25% of electricity bought and
sold in the wholesale market per year through initial contracts will be
deregulated from ANEEL's rate-setting control. We are unable to estimate the
impact of this measure on our operations. Third, we are now able to enter into
electricity supply contracts at freely negotiated rates with our free customers
(those customers that have a demand of 3 MW or more of electricity at voltage
levels of 69 kV or more) that elect not to be subject to ANEEL's rate-setting
structure. See "The Brazilian Electricity Sector--Legal and Regulatory
Matters--Rates" 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."
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 Brazil's significant dependence on electricity generated from
hydrological resources resulted in abnormally low water levels in many
reservoirs that are used to power Brazil's 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. 2152-2
on June 1, 2001), creating the CAMARA DE GESTAO DA CRISE DE ENERGIA ELETRICA, 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$24 million relating to surcharges
that were not paid by certain customers because their surcharges are under
dispute. Although no assurance can be given, we do not expect to incur a loss
with respect to this outstanding amount. In accordance with ANEEL Resolution No.
600, dated October 31, 2002, we have been reimbursed for
60
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 a rate
increase in force since April 8, 2003. See note 5 to our consolidated financial
statements.
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 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
MAE, as applicable, due to the Federal Government-mandated rationing measures.
Compensation will be made by means of an extraordinary increase in the energy
rate applicable to future power sales and companies will be entitled to use this
increased rate for an average period of 72 months, beginning January 2002. The
General Agreement of the Electricity Sector further provides for BANCO NACIONAL
DE DESENVOLVIMENTO ECONOMICO E SOCIAL (National Bank for Economic and Social
Development), or BNDES, to lend the distribution and generation companies an
amount equivalent to 90% of their lost revenues or the energy purchased on the
MAE, as applicable, so that these companies would be able to maintain their
account balances as if no rationing program had taken place. This loan would
then be re-paid to BNDES using revenue obtained from the sale of energy to
consumers at the increased rate. Private distribution concessionaires have
already received this financing. However, because we are a state-controlled
company, we have had to wait for the Federal Government to decide whether the
financing should be provided to us or whether a transaction with equivalent
financial effect should be implemented in which amounts owed to us by the State
Government under the CRC Account Agreement would be transferred to the Federal
Government through BNDES and in return for which we would receive payment from
the Federal Goverment. To date, we have not received this financing. We have
received only R$335 million as a BNDES loan in connection with the settlement of
a portion of our outstanding obligations to the MAE relating to energy we
purchased during the Electricity Rationing Plan. Although we expect to receive
funds as other distribution companies have received and as generation companies
are expected to receive through the financing or a transaction with equivalent
financial effect, we can not assure you that this will happen. 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 and has not made any payments to date in 2003.
In order to address the settlement of these outstanding amounts, we have
undertaken extensive negotiations with the State Government. To date, these
negotiations have resulted in the execution of two amendments to the CRC Account
Agreement, each of which is described below.
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$989 million,
adjusted to present value, at December 31, 2002, 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$755 million as of
December 31, 2002, bear interest at an annual rate of 12%, with restatement
61
based on IGP-DI. We did not receive any scheduled payments in respect of this
third amendment in 2002 or to date in 2003. 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.
EXCHANGE RATES
Substantially all of our revenues and operating expenses are denominated in
REAIS. 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 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 in which we owe, or are entitled to, amounts in
respect of monetary variation as measured by an index of price inflation in
Brazil. In 2003, we have used financial instruments such as interest rate swaps
for purposes of hedging a portion of our foreign-currency denominated
indebtedness in order to reduce the risk from exchange rate fluctuations. As of
May 31, 2003, we had entered into swap agreements in the aggregate amount of
US$52 million in order to change the original interest rate of certain financing
from an interest rate calculated based on the U.S. dollar variation to an
interest rate calculated based on the CERTIFICADO DE DEPOSITO INTERBANCARIO--CDI
(Interbank Deposit Certificate) rate. We did not use any similar financial
instruments in 2002 or 2001. See notes 2(d), 17, 24, 26(d) and 32 to our
consolidated financial statements.
The REAL depreciated by approximately 52.27% relative to the U.S. dollar in
2002 due to factors including the effect of Argentina's debt default in December
2001 and concerns regarding the recent presidential elections in Brazil. More
recently the REAL has experienced high volatility and has appreciated against
the U.S. dollar. On January 2, 2002, the noon buying rate was R$2.3100 per
U.S.$1.00 and on December 31, 2002 the noon buying rate was R$3.5400 per
U.S.$1.00. On June 18, 2003, the noon buying rate for REAIS was R$2.9070 per
U.S.$1.00.
UNBUNDLING
GENERAL
Currently, our electricity generation, transmission and distribution
operations are vertically integrated into and centrally managed by CEMIG.
However, in recent years the Brazilian electricity sector has been undergoing
fundamental change and deregulation. See "The Brazilian Electricity
Sector--Legal and Regulatory Matters--Goals of Reform" in Annex A. As a result,
pursuant to our concessions and contractual undertakings with ANEEL, we are
required to change our business and corporate structure and "unbundle" our
generation, transmission and distribution operations. This unbundling, or
restructuring process would result in a new organizational structure in which
each of our generation, transmission and distribution businesses would conduct
its operations as a separate company for administrative, legal, regulatory and
tax purposes. Each of these separate companies would be a wholly owned
subsidiary of CEMIG and would be consolidated with CEMIG for financial reporting
purposes. We have submitted our restructuring plan to ANEEL. Notwithstanding the
foregoing, due to recent public statements by the Federal Government reported by
the news media, we expect that the Federal Government will modify the regulatory
framework of the energy sector in the near term and that, as a result, the
restructuring of vertically integrated electric power companies may no longer be
required. If the restructuring requirements are eliminated, we would request
that ANEEL amend our concession agreements to remove the restructuring clauses
and we would terminate our restructuring plans. See "Item 3. Key
Information--Risk Factors--Risks Relating to CEMIG--Difficulties relating to the
restructuring of our operations could
62
adversely affect our business" and "Item 4. Information on the
Company--Organizational Structure and Unbundling."
FINANCIAL REPORTING AND TAX CONSIDERATIONS
We do not anticipate that the unbundling would result in material
differences in presentation of our reporting for financial purposes in
accordance with U.S. GAAP or Brazilian GAAP as the results of the new
generation, transmission and distribution subsidiaries would be consolidated
with ours. We also do not anticipate that our marginal tax rate, on a
consolidated basis, would change as a result of the unbundling. We do, however,
anticipate that our operating results would 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 comprises
CONTRIBUICAO PARA SEGURIDADE SOCIAL (a federal social security contribution), or
COFINS, and PROGRAMA DE FORMACAO DO PATRIMONIO DO SERVIDOR (a fund for the
benefit of public employees), or PASEP, and were assessed against our
consolidated revenues at a combined rate of 4.65% in December 2002, 3.65% from
January through November 2002 and 3.65% for 2001 and 2000. 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, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
NET OPERATING REVENUES
Net operating revenues decreased 2.7% to R$4,872 million in 2002 from
R$5,006 million in 2001 due primarily to lower revenues in 2002 from the
regulatory extraordinary rate adjustment that is intended to reimburse revenue
losses incurred as a result of the Electricity Rationing Plan and related spot
market transactions and a decrease in electricity sales to the interconnected
power system, partially offset by a 19.0% increase in electricity sales to final
customers.
In 2002, we recorded R$281 million in revenue relating to the regulatory
extraordinary rate adjustment, a 64.4% decrease compared to the R$789 million
that we recorded in 2001. We recorded revenue relating to the regulatory
extraordinary rate adjustment in 2002 and 2001 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 Emerging Issues Task Force - EITF 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.
Electricity sales to final customers were R$5,458 million in 2002,
representing a 19.0% increase compared to R$4,587 million in 2001. 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 14.5% increase in the average
energy rate in 2002 to R$151.64 per MWh compared to R$132.45 per MWh in 2001 as
a result of rates increases of 16.5% in April 2001 (full effect in 2002) and
10.5% in April 2002. In addition, there was a 2.0% increase in the volume of our
electricity sales to final customers. For the 12 months ended December 31, 2002
as compared to the 12 months ended December 31, 2001, the volume of electric
power sold by us to industrial, commercial, rural and other customers increased
by 2.6%, 0.4%, 8.5% and 4.3%, respectively, while sales to residential customers
decreased by 1.8%. Despite the increase in the volume of electricity sold, new
consumer consumption patterns and Brazil's economic downturn did not permit
energy sales to return to levels realized before the Electricity Rationing Plan.
See note 22 to our consolidated financial statements.
Electricity sales to the interconnected power system were R$161 million in
2002, a 68.9% decrease compared to R$517 million in 2002. This decrease resulted
primarily from the higher spot market rates
63
associated with energy transactions on the MAE while the Electricity Rationing
Plan was in force from June 1, 2001 to February 28, 2002.
Revenues from use of the basic transmission network by other
concessionaires increased 20.1% to R$185 million in 2002 from R$154 million in
2001. This increase was due to 11.6% and 7.15% rate increases in July 2001 and
2002, respectively, as well as an increase in the number of other
concessionaires that used our basic transmission network in 2002.
Other operating revenues increased 73.3% to R$260 million in 2002 from
R$150 million in 2001 due substantially to an R$84 million increase in revenues
from Gasmig, our subsidiary, reflecting 72.4% period-over-period growth, and
R$20 million of revenue from Infovias as a result of telecommunication services
rendered in 2002.
Taxes on revenues increased 23.7% to R$1,473 million in 2002 from R$1,191
million in 2001 as a result of the increase in our electricity sales to final
customers in 2002 as compared to 2001 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 0.65%; and (iv) the ENCARGO DE CAPACIDADE EMERGENCIAL (Emergency
Capacity Charge), a new charge established in 2002 that is prorated among final
consumers of electric energy and relates to the COMERCIALIZADORA BRASILEIRA DE
ENERGIA ELETRICA--CBEE, or CBEE, a Federal Government agency set up to supply
energy to utilities in the event of future shortages. See notes 4 and 22 to our
consolidated financial statements.
OPERATING COSTS AND EXPENSES
Operating costs and expenses decreased 22.4% to R$4,345 million in 2002
from R$5,598 million in 2002, principally as a result of a decrease in 2002 of
electricity purchased for resale and provisions recorded in 2001, for losses
recognized on our receivable from the State Government and for losses on
deferred regulatory assets.
Electricity purchased for resale consists primarily of purchases from
Itaipu through FURNAS CENTRAIS ELETRICAS S.A., or Furnas. We are required under
applicable regulations to purchase 17.0% of Itaipu's capacity at U.S.
dollar-denominated prices. We also purchase electricity from the MAE and Furnas
itself. Electricity purchased for resale decreased 30.4% to R$1,333 million in
2002 from R$1,914 million in 2001 due mainly to the recordation of a R$149
million provision related to energy purchased from the MAE in 2002 while the
Electricity Rationing Plan was in force (compared to the recordation of a R$952
million provision in 2001), partially offset by a 19.0% increase in purchases
from Itaipu to R$979 million in 2002 compared to R$823 million in 2001. See note
23 to our consolidated financial statements.
Natural gas purchased for resale increased 81.0% to R$152 million in 2002
compared to R$84 million in 2001 and consists of purchases made by our
subsidiary, Gasmig. The increase in natural gas purchased for resale is the
result of a 17.1% increase in the volume of gas sold by Gasmig in 2002 and
natural gas price increases of 26% and 50.6% during 2002.
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
an 18.7% increase to R$298 million in 2002 compared to R$251 million in 2001
principally as a result of rate increases in July of 2001 and 2002 and an
increase in the volume of energy transported through the basic transmission
network after the end of the Electricity Rationing Plan.
Depreciation and amortization increased 3.9% to R$666 million in 2002 from
R$641 million in 2001 as a result of the entry into service of additional
distribution and transmission networks and lines.
64
Personnel expense increased to R$532 million in 2002 compared to R$531
million in 2001 primarily as a result of wage increases for employees. Wages
were increased by 11.45% and 8.16% in November 2002 and 2001, respectively.
However, the absence in 2002 of a provision relating to our Voluntary
Resignation Program (R$33 million provision in 2001) contributed to personnel
expenses remaining relatively constant.
Regulatory charges increased 30.5% to R$548 million in 2002 from R$420
million in 2001 due primarily to (i) a R$96 million increase in CCC Account
charges in 2002 to R$345 million from R$249 million in 2001 as a result of
increased operations of thermal generation plants in 2002 and (ii) a R$14
million increase in required contributions to the RGR Fund (a reserve fund
created by the Brazilian Congress that provides compensation to electricity
companies for certain assets used in connection with their concessions if their
concessions are revoked or not renewed) to R$144 million in 2002 from R$130
million in 2001. See note 23 to our consolidated financial statements.
Third-party services expense increased 22.7% to R$265 million in 2002
compared to R$216 million in 2001. 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.
Employee post-retirement benefits decreased 29.4% to R$207 million in 2002
compared to R$293 million in 2001 due to a lower projected net periodic cost for
2002 as a result of a higher expected return on plan assets and a curtailment
gain of R$48 million from changes in our health care plans. See note 19 to our
consolidated financial statements.
We recorded a provision for loss on deferred regulatory assets of R$28
million in 2002 compared to a provision of R$150 million in 2001 to reflect our
estimation of the recoverability of our deferred regulatory assets. See notes
2(q) and 4 to our consolidated financial statements.
Other expenses decreased 13.1% to R$238 million in 2002 from R$274 million
in 2001 due substantially to a decrease in our losses on disposal of fixed
assets, R$42 million in 2002 compared to R$90 million in the prior year. See
note 23 to our consolidated financial statements.
OPERATING (LOSS) INCOME
As a result of the foregoing, we had operating income of R$527 million in
2002 compared to operating loss of R$592 million in 2001.
FINANCIAL EXPENSES, NET
Financial expenses, 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, monetary restatement of recoverable tax, 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 CONTRIBUICAO PROVISORIA SOBRE A MOVIMENTACAO OU TRANSMISSAO DE VALORES E DE
CREDITOS E DIREITOS DE NATUREZA FINANCEIRA (a financial transaction tax), or
CPMF, foreign exchange losses, monetary restatement losses and other expenses.
Financial expenses, net increased 993.8% to R$525 million in 2002 compared to
R$48 million in 2001, principally due to a R$576 million increase in net foreign
exchange losses resulting from the 52.3% devaluation of the REAL against the
U.S. dollar in 2002 (by comparison, there was an 18.7% devaluation of the REAL
against the U.S. dollar in 2001) and a R$204 million increase in interest and
monetary restatement on loans and financing, partially offset by a R$152 million
increase in income from temporary cash investments due to higher cash and cash
equivalents and restricted investments in 2002 and income from cash investments
denominated in U.S. dollars and a 361.5% increase in financial income to R$120
million in 2002 compared to R$26 million in 2001 due to monetary restatement of
the deferred regulatory assets. See notes 3, 4, 17 and 24 to our consolidated
financial statements.
65
INCOME TAXES
Income taxes were an expense of R$26 million on pre-tax income of R$2
million in 2002 compared to expenses of R$78 million on pre-tax loss of R$640
million in 2001. Deductions of R$73 and R$34 million in 2002 and 2001,
respectively, with respect to interest on capital helped reduce the amount
provisioned for income taxes in 2002. See note 6 to our consolidated financial
statements.
MINORITY INTERESTS
Minority interests were income of R$12 million in 2002 compared to expense
of R$1 million in 2001. The increase in minority interests is primarily related
to the operation of Infovias, which was consolidated in the financial statements
in 2002.
NET LOSS
As a result of the foregoing, we had net loss of R$12 million in 2002
compared to net loss of R$719 million in 2001.
OTHER COMPREHENSIVE INCOME
Other comprehensive income was R$242 million in 2002 compared to R$203
million in 2001 as a result of a decrease in our projected benefit obligation as
a result of a higher increase in the fair value of assets contained in plans
administered by Forluz, compared to the increase in Forluz's benefit
obligations. This increase in the fair value of assets was due primarily to
return on plan assets in 2002.
COMPREHENSIVE INCOME (LOSS)
As a result of the factors stated above, comprehensive income was R$230
million in 2002 compared to comprehensive loss of R$516 million in 2001.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
NET OPERATING REVENUES
Net operating revenues increased 33.3% to R$5,006 million in 2001 from
R$3,756 million in 2000 due primarily to the recording of revenue from the
regulatory extraordinary rate adjustment in 2001, which is intended to reimburse
revenue losses incurred as a result of the Electricity Rationing Plan and
related spot market transactions.
In 2001, we recorded revenue relating to the regulatory extraordinary rate
adjustment in the amount of R$789 million, 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. See note 4 to our consolidated financial statements.
Electricity sales to final customers were R$4,587 million in 2001, a 2.4%
increase compared to R$4,478 million in 2000. This increase resulted from the
net effect of the increase in the average rate and a decrease in the volume of
electricity sales to final customers. There was a 12.6% increase in the average
rate in 2001 to R$132.45 per MWh compared to R$117.60 per MWh in 2000. Rates
increased 11.8% in May 2000 (full effect in 2001) and 16.5% in April 2001. The
positive effect of the rate increases was partially offset by a 7.0% decline in
volume of electricity sales to final customers due to the Electricity Rationing
Plan. Our residential, industrial and commercial consumers reduced consumption
in 2001 by 14.5%, 4.0% and 8.8%, respectively, compared to 2000. Despite the
effects of the Electricity Rationing
66
Plan, we added 270,778 new customers to our network in 2001. See notes 4 and 22
to our consolidated financial statements.
Electricity sales to the interconnected power system were R$517 million in
2001, a 256% increase compared to R$145 million in 2000. This increase was due
primarily to a significant increase in the average rate in 2001 to R$102.85 per
MWh from R$23.50 per MWh in 2000, partially offset by an 87.2% decrease in the
volume of electric power sold. The increase in the average rate reflects the
higher rates applied during the Electricity Rationing Plan.
Revenues from the use of the basic transmission network by other
concessionaires increased 10.8% to R$154 million in 2001 from R$139 million in
2000. This increase was due primarily to 14.7% and 11.6% rate increases in July
2000 and 2001, respectively.
Other operating revenues increased 21.0% to R$150 million in 2001 from
R$124 million in 2000 due to a R$36 million increase in revenues from Gasmig,
reflecting 45.0% period-over-period growth, partially offset by a R$14 million
decrease in revenue from services rendered with respect to our electricity
distribution business, including inspection, connection, meter reading and
others, primarily due to the mandatory cancellation of certain charges relating
to overdue customer bills.
Taxes on revenues increased 5.4% to R$1,191 million in 2001 from R$1,130
million in 2000 as a result of the increase in our operating revenues in 2001 as
compared to 2000. Taxes on revenues consist of VAT, assessed at an average rate
of 21% on electricity sales to final customers (not including revenue from the
regulatory extraordinary rate adjustment), COFINS, assessed at a rate of 3% and
PASEP, assessed at a rate of 0.65%. The VAT tax in respect of revenue relating
to the regulatory extraordinary rate adjustment amounting to R$301 million, will
only become an obligation to be recorded in the financial statements once
customers are billed. Thus, no provision relating to this amount was recorded in
the financial statements. We do not believe that the recognition of this VAT tax
will impact our net results because we only collect this amount from customers
in order to transfer it to the State Government. See notes 4 and 22 to our
consolidated financial statements.
OPERATING COSTS AND EXPENSES
Operating costs and expenses increased 68.9% to R$5,598 million in 2001
from R$3,316 million in 2000, principally as a result of the recognition of a
R$754 million provision relating to our account receivable from the State
Government as well as increases in electricity purchased for resale,
depreciation and amortization, personnel and employee post-retirement benefits.
We recorded a R$754 million provision relating to our account receivable
from the State Government because of uncertainty with respect to the
recoverability of amounts due under the CRC Account Agreement (as amended by the
Second Amendment) between January 1, 2003 and May 1, 2015. See note 3 to our
consolidated financial statements.
We also recorded a R$150 million provision to reflect our estimation of the
recoverability of our deferred regulatory assets. See notes 2(q) and 4 to our
consolidated financial statements.
Electricity purchased for resale consists primarily of purchases from
Itaipu through Furnas. We are required under applicable regulations to purchase
17.0% of Itaipu's capacity at U.S. dollar-denominated prices. We also purchase
electricity from the MAE and Furnas itself. Electricity purchased for resale
increased 133.7% to R$1,914 million in 2001 from R$819 million in 2000 due
mainly to the recordation of a R$952 million provision related to energy
purchased from the MAE during the Electricity Rationing Plan and, to a lesser
extent, the increase in the REAL/dollar exchange rate applicable to the Itaipu
purchases.
67
Depreciation and amortization increased 10.0% to R$641 million in 2001 from
R$583 million in 2000, mainly as a result of the entry into service of
additional distribution and transmission networks and lines.
Personnel expense increased 14.0% to R$531 million in 2001 compared to
R$466 million in 2000 as a result of wage increases of 5.4%, 6.2% and 8.2%
implemented in July 2000, November 2000 and November 2001, respectively, and
recordation of a R$33 million provision relating to our Voluntary Resignation
Program in March 2001.
Employee post-retirement benefits increased 23.1% to R$293 million in 2001
compared to R$238 million in 2000 as a result of interest cost variation in the
period. See note 19 to our consolidated financial statements.
Regulatory charges decreased 3.0% to R$420 million in 2001 from R$433
million in 2000 due to an 11.7% decrease in CCC Account charges in 2001 to R$249
million compared to R$282 million in 2000 and a R$7 million decrease in
compensation charges for use of water resources, partially offset by an increase
of R$26 million in required contributions to the RGR Fund (a reserve fund
created by the Brazilian Congress that provides compensation to electricity
companies for certain assets used in connection with their concessions if their
concessions are revoked or not renewed) to R$130 million in 2001 from R$104
million in 2000. The CCC Account charges represent contributions made by
electricity concessionaires to subsidize the cost of fuel used in the
thermoelectric energy generating process in the Brazilian energy system. The
decrease in CCC Account charges was due to the fact that R$76 million of these
charges was recorded as a deferred regulatory asset, under non-controllable
Parcel A costs pursuant to the terms of the General Agreement of the Electricity
Sector and rate legislation changes in 2001. See notes 4 and 23 to our
consolidated financial statements.
Third party services expense increased 10.8% to R$216 million in 2001
compared to R$195 million in 2000 primarily due to the increase in expenses
relating to bill collection services, maintenance of our distribution and
transmission lines and operations of our call center.
Charges for use of the basic transmission network mainly correspond to the
cost of transporting electricity purchased from Itaipu and represented a 3.3%
increase to R$251 million in 2001 compared to R$243 million in 2000, principally
as a result of an 11.6% rate increase in July 2001.
Other expenses increased 31.7% to R$274 million in 2001 from R$208 million
in 2000 as a result of a R$20 million increase in employee profit sharing
expense, provisions for contingencies in the amount of R$18 million in 2001
compared to R$9 million in 2000 and R$90 million of net losses relating to
disposal of fixed assets (R$32 million of which related to one of our smaller
hydroelectric plants) compared to R$66 million in 2000. See "Item 8. Financial
Information--Legal Proceedings" and note 23 to our consolidated financial
statements.
OPERATING (LOSS) INCOME
As a result of the foregoing, we had a net operating loss of R$592 million
in 2001 compared to net operating income of R$440 million in 2000.
FINANCIAL EXPENSES, NET
Financial expenses, net includes (i) financial income, which is mainly
comprised of interest on and monetary restatement of our account receivable from
the State Government, investment income earned, late charges on overdue
electricity bills, monetary restatement of recoverable tax, renegotiated account
receivables, foreign exchange gains, monetary restatement of deferred regulatory
assets, and (ii) financial expense, which is mainly comprised of interest
expense on loans and financing, the CPMF (a
68
financial transaction tax), foreign exchange losses, monetary restatement losses
and other expenses. Financial expenses increased to R$48 million in 2001
compared to R$42 million in 2000, principally due to an increase of R$105
million in net foreign exchange losses resulting from the 18.7% devaluation of
the REAL against the U.S. dollar in 2001 (by comparison, there was a 9.3%
devaluation of the REAL against the U.S. dollar in 2000) and a R$46 million
increase in interest on loans and financing resulting from inflation variation
with respect to the indices associated with our debt contracts, partially offset
by a R$93 million increase in amounts due under our account receivable from the
State Government, a R$40 million increase in income from temporary cash
investments due to higher cash surplus in 2001 as compared to 2000 and R$26
million of income from monetary restatement of deferred regulatory assets as a
result of the rate legislation changes in 2001. See notes 3, 4, 17 and 24 to our
consolidated financial statements.
INCOME TAXES
Income taxes were an expense of R$78 million on pre-tax loss of R$640
million in 2001 compared to an expense of R$32 million on pre-tax income of
R$398 million in 2000. Deductions of R$34 million and R$62 million in 2001 and
2000, respectively, with respect to interest on capital helped reduce the amount
provisioned for income taxes in both periods. We have not recorded any income
tax benefits relating to the provision for our account receivable from the State
Government under either Brazilian GAAP or U.S. GAAP due to the treatment of such
provision as a non-deductible expense, since it relates to a loss on a
transaction with a controlling shareholder. See "Item 8. Financial
Information--Dividend Policy and Payments" and note 6 to our consolidated
financial statements.
NET (LOSS) INCOME
As a result of the foregoing, we had a net loss of R$719 million in 2001
compared to net income of R$366 million in 2000.
OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income was R$203 million in 2001 compared to income of
R$19 million in 2000. The increase in other comprehensive income in 2001 was due
principally to a significant decrease in our projected benefit obligations in
2001 as a result of an increase in the fair value of assets contained in plans
administered by Forluz, compared to the increase in Forluz's benefit
obligations. The 2001 increase in value of assets was due to a R$166 million
reversal of the accrued liability for contingencies as a result of the enactment
of new legislation allowing Forluz to deduct penalties and interest from its
payment of income tax in connection with a certain judicial proceeding.
COMPREHENSIVE (LOSS) INCOME
As a result of the factors stated above, comprehensive loss was R$516
million in 2001 compared to comprehensive income of R$385 million in 2000.
OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into material off-balance sheet arrangements as defined
by Commission rules.
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 Information--Dividend Policy and Payments." We have funded our
69
liquidity and capital requirements primarily with cash provided by operations
and, to a lesser extent, with proceeds of financings.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents as of December 31, 2002 were R$123 million
compared to R$218 million as of December 31, 2001 and R$236 million as of
December 31, 2000. None of our cash or cash equivalents was held in currencies
other than REAIS as of December 31, 2002.
CASH FLOW FROM OPERATING ACTIVITIES
Net cash provided by operating activities in 2002, 2001 and 2000 totaled
R$732 million, R$720 million and R$831 million, respectively. The increase in
cash provided by operating activities in 2002 compared to 2001 was due primarily
to higher cash earnings plus changes in working capital. The decrease in cash
provided by operating activities in 2001 compared to 2000 was due primarily to
lower cash earnings plus changes in working capital. 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 in 2002 and 2001, the effects of monetary variation and
exchange rate variations and the provision for loss recognized in 2001 on our
account receivable from the State Government.
CASH FLOW FROM INVESTING ACTIVITIES
Net cash used in investing activities during 2002, 2001 and 2000 amounted
to R$546 million, R$1,099 million and R$523 million, respectively, principally
relating to the acquisition of property, plant and equipment for construction of
new generation facilities by us or our consortia and the expansion and
modernization of existing generation, transmission and distribution facilities.
Capital expenditures amounted to R$636 million, R$323 million and R$406 million
in 2002, 2001 and 2000, respectively. New investments in consortia and other
affiliates also impacted net cash use in investing activities. Such investments
amounted to R$336 million, R$223 million and R$50 million in 2002, 2001 and
2000, respectively. See the table below in "--Cash flow from financing
activities" for more detail regarding how these capital expenditures were
applied by us.
As of December 31, 2001, we had restricted short-term investments in the
amount of R$602 million, of which R$468 million was related to our issuance of
long-term debentures in November 2001 in the amount of R$625 million. See "Item
10. Additional Information--Material Contracts." These resources were used in
connection with our investment plan, executed in 2002, relating to the expansion
of our energy production, transmission and distribution operations.
CASH FLOW FROM FINANCING ACTIVITIES
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.
Net cash provided by financing activities during 2001 was R$361 million,
comprised of R$1,150 million in proceeds from long-term financing, including
U.S. dollar-denominated long-term loans and the November 2001 issuance of R$625
million of long-term debentures, offset by the repayment of R$617 million of
REAL- and foreign currency-denominated long-term financing (including a US$121
million payment made in connection with the partial redemption of our fixed-rate
Eurobonds in November 2001) and the payment of R$172 million in dividends and
interest on capital. A portion of the proceeds from our
70
issuance of long-term debentures, in the amount of R$468 million, was recorded
as restricted short-term investments as of December 31, 2001. See "Item 10.
Additional Information--Material Contracts."
Net cash used in financing activities during 2000 was R$158 million as a
result of repayment of R$282 million of REAL-denominated long term financing and
payment of R$196 million in dividends and interest on capital, partially offset
by R$320 million in proceeds of REAL-denominated long-term loans.
Our indebtedness as of December 31, 2002 was R$3,539 million, composed of
R$2,593 million of long-term debt and R$946 million current portion of long-term
debt. This compares with indebtedness as of December 31, 2001 of R$2,480
million, composed of R$2,029 million of long-term debt and R$451 million current
portion of long-term debt. Of our long-term debt (including the current portion)
at December 31, 2002, R$2,119 million was denominated in foreign currencies
(R$1,995 million of which was U.S. dollar-denominated) and R$1,420 million was
denominated in REAIS. See notes 17 and 26(d) 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 some of these covenants. However, we have obtained
waivers from our creditors which affirm that such creditors will not exercise
their rights to demand either accelerated or immediate payment of the total
amounts due. However, these waivers must be renewed on a quarterly basis and are
conditioned upon our continued compliance with certain requirements. We cannot
assure you that we will be able to renew these waivers and that in such case the
relevant creditors will not accelerate payment. See note 17 to our consolidated
financial statements and "Item 13. Defaults, Dividend Arrearages and
Delinquencies."
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 Information--Risk Factors--Risks Relating to Brazil--We
currently face limitations on our ability to obtain financing."
Capital expenditures for the years ended December 31, 2002, 2001 and 2000,
in millions of REAIS, are as follows:
71
YEAR ENDED DECEMBER 31,
------------------------
2002 2001 2000
------ ------ ------
Generation power projects - under Consortia ........ 233 179 39
Infovias equity acquisition ........................ 87 -- --
Others ............................................. 16 44 11
------ ------ ------
Total capital expenditures under Consortia
and affiliates ................................. 336 223 50
------ ------ ------
Generation power projects - under Property,
plant and equipment .............................. 180 6 107
Transmission network expansion ..................... 59 47 10
Distribution network expansion ..................... 278 206 260
Others ............................................. 119 64 29
------ ------ ------
Total capital expenditures under property,
plant and equipment ............................ 636 323 406
------ ------ ------
We currently plan to make capital expenditures aggregating approximately
R$855 million in 2003. The principal uses of these expenditures are expected to
be for expansion of our distribution infrastructure and increase in our
generation capacity. In 2002, 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 2003 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 Information--Risk Factors" for a discussion of certain matters that might
adversely affect our liquidity position.
COMMITMENTS
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, 2002, about our future commitments in millions
of REAIS.
72
2003 2004 2005 2006 2007
----- ----- ----- ----- -----
Purchase of electricity from Itaipu for resale(1) ..... 1,405 1,405 1,405 1,405 1,405
Transfer and transport electric power from Itaipu(1) .. 43 43 43 43 43
Repayment of long-term financing ...................... 946 818 693 561 108
Pension plan contributions ............................ 179 179 179 179 179
Investment in Infovias ................................ 130 60 - - -
Construction commitments(2)
Aimores hydroelectric power plant ................... 56 15 - - -
Irape hydroelectric power plant ..................... 224 251 160 9 9
Funil hydroelectric power plant ..................... 26 - - - -
Queimado hydroelectric power plant .................. 20 - - - -
Pai Joaquim hydroelectric power plant ............... 28 3 - - -
Bom Despacho 3 transmission substation .............. 60 9 - - -
----- ----- ----- ----- -----
414 278 160 9 9
Total ................................................. 3,117 2,783 2,480 2,197 1,744
===== ===== ===== ===== =====
----------
(1) Contract with Furnas, denominated in U.S. dollars, to supply electric power
purchased from Itaipu
(2) Contractual commitments with contractors
RESEARCH AND DEVELOPMENT
We are engaged in projects that explore technological advances in
energy-related fields such as the development of the usage of alternate energy
sources, environmental control and power system performance and safety
optimization. In 2002, we spent a total of approximately R$21 million on
research and development, including transfers to FUNDO NACIONAL DE
DESENVOLVIMENTO CIENTIFICO E TECNOLOGICO--FNDCT (a federal research and
development fund), or FNDCT. During the years ended December 31, 2002, 2001 and
2000 we spent an aggregate of approximately R$12.3 million on research and
development, and we transferred R$22.3 million to FNDCT during that time. These
figures do not include our purchases of technology such as computer hardware and
software and other technology-related items. We expect to spend a total of
approximately R$25 million on research and development in 2003. 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 Company--Generation
and Purchase of Electric Power--Wind 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);
- 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;
73
- a joint research program with UNIVERSIDADE FEDERAL DE ITAJUBA relating
to small hydroelectric plants, thermal generation and distributed
energy resources;
- a joint research program with CENTRO TECNOLOGICO DE MINAS GERAIS
focusing on the development of a low-cost photovoltaic cell;
- a joint research program with UNIVERSIDADE FEDERAL DE VICOSA relating
to planted biomass for electricity generation; and
- a joint research program with CENTRO FEDERAL DE EDUCACAO TECNOLOGICA
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:
- a research program with respect to lightning, a major cause of power
outages, that uses the first South American lightning research station
and Brazil's first tracking and location system for lightning and a
partnership with Universidade Federal de Minas Gerais that created the
Lightning Research Center;
- a geology-related research program in partnership with the
UNIVERSIDADE FEDERAL DE OURO PRETO;
- a riparian vegetation replanting project in partnership with the
UNIVERSIDADE FEDERAL DE LAVRAS;
- a weather forecasting and meteorology project in partnership with the
PONTIFICIA UNIVERSIDADE CATOLICA DE MINAS GERAIS;
- a fish safety project in partnership with UNIVERSIDADE FEDERAL DE
MINAS GERAIS; and
- a research program that seeks to develop new, better-performing power
line conductors.
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. See "--Distribution--Expansion of
Distribution Capacity."
TRENDS
Under normal weather conditions, we are able to generate approximately 60%
of the electricity sold to final customers. During the last two years, our
ability to do this was deeply affected by insufficient reservoir levels.
Accordingly, part of the electricity supplied to final customers had to be
purchased on the MAE and from IPPs. During the last few fiscal quarters, we have
gradually been able to increase generation to a level similar to that which we
experienced prior to the Electricity Rationing Plan. However, we have not yet
been able to generate 60% of the electricity sold to final customers as we had
previously been able to generate under normal weather conditions.
As a public service utility, we are subject to regulations issued by the
Federal Government as described in "Item 4. Information on the Company--Brazil's
Energy Market--Regulation." Therefore, any change in the 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.
74
We do not anticipate any significant change in revenues in respect of the
transmission and distribution businesses since the regulation in place meets the
announced plans of the new Federal Government administration. Electric energy
retail rates were recently reviewed as provided in our concession agreements and
our rates we charge our captive customers were increased by 31.5%, which is
intended to be sufficient to provide adequate return on the investment made over
the concession term. 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
Company--Brazil's Energy Market--Rates" and "The Brazilian Electricity
Sector--Legal and Regulatory Matters--Rates" in Annex A. 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 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. 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 as
described in "Item 3. Key Information--Risk Factors--Risks Relating to
Brazil--Changes in the rate-setting structure applicable to Brazilian electric
utilities, as well as other actions by the Federal Government, could cause our
net income to decrease" and "The Brazilian Electricity Sector--Legal and
Regulatory Matters--Federal Government Action to Reimburse Electric Utilities"
in Annex A. 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 the ANEEL in the 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 to be set by ANEEL. The funds
needed to expand our distribution system to connect customers that do not
currently have service will come from federal funds derived from regulatory
charges collected from customers. It is unclear how these funds will be
distributed to utilities. ANEEL regulations relating to this matter are expected
to be forthcoming.
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.
According to preliminary versions of the revised regulatory framework,
generators will be encouraged to invest in new capacity through long-term
contracts to be signed with distributors and at prices to be set at public
auctions. Guarantees will be provided in order to reduce the credit risk of
distributors.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS AND SENIOR MANAGEMENT
We are managed by our CONSELHO DE ADMINISTRACAO (Board of Directors), which
consists of 14 directors, with each director having a corresponding alternate,
and our DIRETORIA (Board of Executive Officers), 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 our direction and future operations. Each holder of our common shares is
entitled to vote to elect members of our Board of Directors. Under the
cumulative voting system set forth in the Brazilian Corporate Law and CVM
regulations, any shareholder holding at least 10% of our outstanding common
shares may accumulate votes for one or more designees for a seat on the Board of
Directors.
75
Pursuant to our by-laws, 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.
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. The full complement of directors is elected every three
years. Of the current 14 members of our Board of Directors, 8 were elected by
the State Government, 5 were elected by Southern and one was elected by our
preferred stockholders. The terms of the current members of our Board of
Directors expire in April 2006.
76
The names, positions and dates of initial appointment of our directors and
their respective alternates are as follows:
DATE OF INITIAL
NAME POSITION APPOINTMENT
----------------------------------------------------- ----------------- -----------------
Wilson Nelio Brumer(1)........................... Director February 27, 2003
Fernando Lage de Melo............................ Alternate February 27, 2003
Djalma Bastos de Morais.......................... Director January 14, 1999
Luiz Antonio Athayde Vasconcelos................. Alternate February 27, 2003
Francelino Pereira dos Santos.................... Director February 27, 2003
Marco Antonio Rodgrigues da Cunha................ Alternate February 27, 2003
Antonio Adriano Silva............................ Director January 14, 1999
Francisco Sales Dias Horta....................... Alternate February 27, 2003
Flavio Jose Barbosa de Alencastro................ Director February 27, 2003
Guilherme Horta Goncalves Junior................. Alternate February 27, 2003
Oderval Esteves Duarte Filho(2).................. Director April 14, 2000
Geraldo Dannemann(2)............................. Alternate April 14, 2000
Marcelo Pedreira de Oliveira(2).................. Director April 30, 2002
Luiz Felippe Leal da Fonseca Junior(2)........... Alternate May 28, 2003
Joao Bosco Braga Garcia(2)....................... Director April 14, 2000
Carlos Suplicy de Figueiredo Forbes(2)........... Alternate February 27, 2003
Sergio Lustosa Botelho Martins(2)................ Director April 14, 2000
Marc Leal Claassen(2)............................ Alternate April 14, 2000
Mario Lucio Lobato(2)............................ Director May 28, 2003
Andre Luis Garbuglio(2).......................... Alternate May 28, 2003
Aecio Ferreira da Cunha.......................... Director May 28, 2003
Eduardo Lery Vieira.............................. Alternate May 28, 2003
Maria Estela Kubitschek Lopes.................... Director February 27, 2003
Fernando Henrique Schuffner Neto................. Alternate April 30,2002
Alexandre Heringer Lisboa........................ Director February 27, 2003
Franklin Moreira Goncalves....................... Alternate February 27, 2003
Francisco Roberto Andre Gros(3).................. Director May 28, 2003
Arnaldo Jose Vollet(3)........................... Alternate May 28, 2003
----------
(1) Chairman of the Board of Directors.
(2) Elected by Southern.
(3) Elected by our preferred shareholders.
Set forth below is brief biographical information for each member of our
Board of Directors:
Wilson Nelio Brumer - Mr. Brumer earned a degree in business administration from
the Economics, Administration and Accounting College--FUMEC-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; Aco Minas Gerais - Acominas 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 Navegacao 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 Energetica 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 Industrias
Villares, Acos Villares S.A. and Elevadores Atlas S.A. from February 1995 to
October 1998. He is a former director of: Companhia Siderurgica de Tubarao--CST
from July 1996 to April 1999; Varig from November 1994 to February 1996;
Usiminas from October 1991 to November 1992; Companhia Siderurgica Tubarao from
August 1992 to November 1992; Rio Doce Geologia e Mineracao S.A.--DOCEGEO from
1988 to 1990; Florestas Rio Doce S.A. from 1988 to 1990 and Ferritas Magneticas
S.A.--FERMAG from 1984 to 1986. Mr. Brumer is also the former chief executive
officer of: Acesita
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from November 1992 to October 1998; Companhia Siderurgica de Tubarao from July
1996 to April 1999; CVRD from April 1990 to November 1992, Acesita Energetica
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: Navegacao Rio Doce S.A. -
DOCENAVE from 1983 to 1987 (president); Urucum Mineracao S.A. from 1983 to 1984
and Fundacao Vale do Rio Doce de Seguridade Social--VALIA 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 Aluminio 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 bachelor's 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 the Chief Executive Officer of Gasmig and since July
2002 he has been the Chief Executive Officer of Infovias. From May 1999 to
August 2001 he was the Chief Executive Officer of Infovias. From 1995 to 1998,
he was Vice-President of Petrobras 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 Telecomunicacoes de Minas Gerais S.A.--Telemig; manager of
Telecomunicacoes Brasileiras S.A.--Telebras; chief operating officer of
Telecomunicacoes de Mato Grosso--Telemat; chief operating officer of
Telecomunicacoes do Amazonas--Telemazon; and manager of Telefonica 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.
Antonio 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, Agencia
Jornalistica Imagem, Associacao Comercial de Minas, Asa Criacao de Publicidade,
and Coteminas.
Flavio Jose Barbosa de Alencastro - Mr. Alencastro earned a degree in business
administration in 1988 at the Economic Sciences College of the University of
Brasilia--UniCEUB and completed post-graduate coursework in Managerial
Development at the University of Brasilia. Currently, he attends law school at
the University of Brasilia. Mr. Alencastro is also the private secretary for the
Governor of Minas Gerais. He was Chief of the Cabinet for the President of the
Brazilian House of Representatives from 2001 to 2002, Chief of the Cabinet for
the leaders of the Social-Democratic political party, or PSDB, of the House of
Representatives from 1998 to 2001, Chief of the Counsellorship of the plenary
leaders of the PSDB of the House of Representatives from 1997 to 1998, and
advisor to the Leadership Commissions for the PSDB of the House of
Representatives from 1995 to 1997. Mr. Alencastro also worked at the
Congressional Commission's Department of the Brazilian House of Representatives
from 1993 to 1995. He has also been an employee of Companhia Energetica de
Brasilia--CEB.
Oderval Esteves Duarte Filho - Mr. Duarte earned a degree in economics and
accounting from the Federal University of Minas Gerais in 1991. From 1992 to
1993, he worked as a cost analyst for Usiminas. From
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1993 to 1998, he was a senior auditor at Price Waterhouse. Since 1998, Mr.
Duarte has been the chief financial officer of Southern Energy, Inc. in Brazil.
Marcelo Pedreira de Oliveira - Mr. Oliveira holds a degree in economics and an
MBA from IBMEC (the Brazilian Capital Markets Institute). He was a member of the
board of directors of Infovias and Eletronet S.A. and the former Chief Financial
and Management Officer of Eletronet S.A. He worked as a financial analyst,
managed the accounting department of Light Servicos de Eletricidade S.A. and was
assistant to the Executive Vice-President of CEMIG.
Joao Bosco Braga Garcia - Mr. Garcia earned a degree in accounting and business
administration in 1979 and earned a degree in economics in 1980 from the
Pontifical Catholic University of Minas Gerais. Mr. Garcia is currently the
controlling manager of Southern. He served as consultant to the in-house
auditing department of CEMIG from December 1997 to October 1999. Mr. Garcia has
also served as controlling officer of Itaminas Comercio de Minerios S.A. and
Minas do Itacolomy Ltda. from October 1990 to August 1997, financial analyst for
Constructora Mendes Junior S.A. from August 1984 to September 1990, in-house
audit supervisor of Magnesita S.A. from October 1981 to July 1984 and senior
accountant of Arthur Andersen S/C from July 1977 to July 1981. Mr. Garcia was
responsible for the accounting department of the Pontifical Catholic University
of Minas Gerais.
Sergio Lustosa Botelho Martins - Mr. Martins earned a degree in economics from
the Economic Sciences Faculty of the Federal University of Minas Gerais in 1962.
He has served as the managing partner of Plus Sante Sistemas Assistenciais de
Saude Ltda. since September 1995. Mr. Martins has also served as the Chief
Commercial Officer of Datamec S.A. Sistemas de Processamentos de Dados from
March 1996 to May 1997, managing partner of Mineracao Mira Serra Ltda. from 1989
to 1995, Subsecretary of Industry and Commerce of the State of Rio de Janeiro
from 1988 to 1989, officer of Grupo Tecnicorp from 1979 to 1986, managing
partner of Jequitiba Empreendimentos e Construcoes Ltda. from 1976 to 1988,
officer of Grupo Multiplo from 1971 to 1977 and economist and financial officer
of Magnesita S.A. from 1963 to 1971.
Mario Lucio Lobato - Mr. Lobato earned a degree in mechanical engineering from
the Federal University of Minas Gerais and took post-graduate classes in
economic engineering at Dom Cabral Foundation from September 1980 to April 1981.
He took several refresher courses as AOTS, Tokio-Japan, Import Procurement for
Projects in the electrical sector PRODEC/Helsink School of Economics,
Caracas-Venezuela, Project Management from ProjktStyrning AB, Stockholm-Sweden.
Mr. Lobato has been the procurement manager of Eletronet since 2000. From
January 1999 to February 2000, he was the procurement manager of Infovias. From
April 1984 to January 1999, he worked for CEMIG as the manager of the
procurement area, manager of the special procurement sector and the assistant of
the special procurement sector. From 1977 to 1984, Mr. Lobato was the manager of
the industrial engineering area, supervisor and engineer of methods and
procedures of manufacturing and of General Motors TEREX do Brasil.
Aecio 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 Julia Importacao,
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Exportacao e Participacoes. 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 Janeiro--AME-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 Women's Bank, president of the Beneficent
Institutions of the State of Rio de Janeiro and 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 master's degree in mechanical engineering with an emphasis in solar
energy from the Federal University of Paraiba, in the city of Joao Pessoa (State
of Paraiba). 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 Sindieletro 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 Gerais--CETEC from November 1983 to
April 1985. From January 1977 to May 1979, he was a trainee at Usiminas,
Companhia Siderurgica Belgo-Mineira and Delle-Alstom S.A.--DASA.
Francisco Roberto Andre Gros - Mr. Gros graduated with praise in economics from
Princeton University, EUA, in 1964. He has been a director and the chief
executive officer of Fosfertil-Untrafertil since May 2003. He was appointed in
January 2002 as the chief executive officer of Petrobras and from April 2001 to
December 2001 he was a member of the Energy Crisis Management Chamber of the
Comite de Revitalizacao do Modelo do Setor Eletrico (the Electric Power Sector
Revitalization Committee). In February 2000, Mr. Gros was appointed President of
BNDES while serving as a director of Petrobras. From November 1993 to February
2000 Mr. Gros worked for Morgan Stanley Dean Witter as the executive director
for the bank's transactions in Latin America and the chairman of Morgan Stanley
Dean Witter Latin America. From 1991 to 1992 and in 1981 he was the president of
the Central Bank of Brazil. In his second term as president of the Central Bank
of Brazil he was one of the main members of the economical team responsible for
the elaboration and conduct of the recovering and overture of the Brazilian
economy started in 1991. Also, in his second term he leaded the negotiations
that ended with the Clube de Paris agreement in February 1992, and with the IMF
in June of the same year. From 1987 to 1989 he was the chief executive officer
of Aracruz Celulose, during which time he coordinated a project that doubled the
size of the company, with investments of approximately US$1.2 billion. From July
1985 to February 1987, Mr. Gros was a director of BNDES and vice-president of
BNDESPAR. From 1981 to 1985 he was an executive director of capital markets of
Unibanco. From 1977 to 1981 Mr. Gros was the general superintendent and director
of CVM and from 1975 to 1977 he was an executive director of Multiplica
Corretora. Mr. Gros started his career on Wall Street as a banker. From 1972 to
1975, he worked for Kidder, Peabody and Co., an investment bank.
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. 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.
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The names, positions and dates of initial appointment of our executive
officers are as follows:
DATE OF INITIAL
NAME POSITION APPOINTMENT
----------------------------------------------- -------------------------- -----------------
Djalma Bastos de Morais........................ Chief Executive Officer(1) January 14, 1999
Francisco Sales Dias Horta..................... Executive Vice-President June 2, 2003
Celso Ferreira................................. Chief Planning, Projects and February 11, 2003
Construction Officer
Elmar de Oliveira Santana...................... Chief Energy Generation and February 11, 2003
Transmission Officer
Jose Maria de Macedo........................... Chief Energy Distribution and February 11, 2003
Commercialization Officer
Flavio Decat de Moura.......................... Chief Financial and Investor Relations February 11, 2003
Officer
Heleni de Mello Fonseca........................ Chief Corporate Management Officer February 11, 2003
----------
(1) Mr. Djalma Bastos de Morais has taken a temporary leave of absence from his
duties for personal reasons. In the interim, Francisco Sales Dias Horta, our
Executive Vice-President, is functioning as our Chief Executive Officer.
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 Guimaraes Foundation. Mr. Horta
was one of the founders of the Shop Owner Club Foundation for assistance of
under age 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.
Celso Ferreira - Mr. Ferreira holds a degree in electrical and mechanical
engineering from the Federal Engineering School of Itajuba 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 Termica Ipatinga S.A., Cemig Capim Branco S.A. and
Usina Termeletrica Barreiro S.A. He is the Chief Technical Officer of
Efficientia S.A. and director of Gasmig. 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 MAE, participating in discussions regarding
certain MAE 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 Eletricas--CAEEB. He was one of the founders of Associacao
Brasileira das Empresas Geradoras de Energia Eletricas--ABRAGE (Brazilian
Electricity Generation Company Association) and of Associacao Brasileira das
Grandes Empresas de Transmissao - ABRATE (Brazilian Transmission Company
Association). Mr. Ferreira has also served as a member of several associations,
including the energy
81
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 master's 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 Chief Technical Officer of Gasmig as well as the
Executive Officer of Usina Termica Ipatinga S.A., Sa Carvalho S.A., Horizontes
Energia S.A. and Cemig Trading S.A. He is also the vice-president of the board
of directors of Central Termoeletrica de Cogeracao 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.
Jose 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. 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
Prestacao de Servicos de Engenharia Ltda., where he currently serves as
president. Prior to joining CEMIG, Mr. Macedo served as an engineer at Sociedade
Instalacoes Tecnicas--SIT. Mr. Macedo has conducted several studies and seminars
on the electricity field in Brazil.
Flavio Decat de Moura - Mr. Moura holds a degree in electronic and electrical
engineering from the Federal University of Minas Gerais. He served as a director
and chief executive officer of Electronuclear, the Federal Government's 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 Energetica 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 Eletrica 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 and completed post-graduate
studies in marketing and business development at Fundacao Getulio Vargas--FGV.
Since March 2003, she has been the Chief Executive Officer of Sa 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 Termeletrica Barreiro S.A. She was the chief
officer of entrepreneurial business of Telemar, the phone company of the State
of Bahia, 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 Gerais--DETEL/MG, or
DETEL/MG, from June 1991 to July 1995 and the manager of the implementation of
data communication services of Empresa Brasileira de Telecomunicacoes--Embratel
in Minas Gerais from 1998 to 1991. From 1976 to 1987, she worked at the
Telecommunications Department of DETEL/MG as an engineer, technical officer and
engineering superintendent.
82
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
For the year ended December 31, 2002, the aggregate amount of compensation
that we paid to all directors and executive officers at that time was
approximately R$2.3 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 for a one-year term at the annual meeting. 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
charged with issuing special reports on proposed changes in capitalization,
corporate budgets and proposed dividend distributions and corporate
reorganizations. 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, 2004, are as follows:
DATE OF INITIAL
NAME POSITION APPOINTMENT
--------------------------------------------------------------- --------- ----------------
Luiz Guarita Neto.............................................. Member February 27, 2003
Aristoteles Luiz Menezes Vasconcellos Drummond................. Member April 27, 1999
Luiz Otavio Nunes West(1) ..................................... Member April 27, 1999
Bruno Constantino Alexandre dos Santos(2)...................... Member April 30, 2001
Thales de Souza Ramos Filho.................................... Member February 27, 2003
Ronald Gastao Andrade Reis..................................... Alternate April 30, 1998
Marcus Eolo de Lamounier Bicalho............................... Alternate February 27, 2003
Augusto Cezar Calazans Lopas(1)................................ Alternate April 30, 2003
Beatriz Oliveira Fortunato(2).................................. Alternate April 30, 2003
Aliomar Silva Lima............................................. Alternate February 27, 2003
----------
(1) Elected by Southern.
(2) Elected by shareholders holding our preferred shares.
CONSUMER COUNCIL
We have established a Consumer Council pursuant to Brazilian law, which is
comprised of representatives of consumer groups and advocacy organizations. The
Consumer Council advises us as to service and other concerns of our customers.
EMPLOYEES
At December 31, 2002, we had 11,468 employees, of whom 147 were managers,
and during the year then ended we had an average of 501 temporary employees. At
December 31, 2001, we had 11,288 employees, of whom 148 were managers, and
during the year then ended we had an average of 528 temporary employees. The
following table sets forth the number of our employees by category at the dates
indicated:
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NUMBER OF EMPLOYEES AT
---------------------------------------------------------
DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- ----------------- -----------------
Managers 147 148 390
Professionals 1,424 1,384 1,189
Operational technicians 8,112 7,929 8,020
Clerical workers 1,785 1,827 1,933
----------------- ----------------- -----------------
Total 11,468 11,288 11,532
================= ================= =================
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. Beginning in 1994, we ceased our long-standing practice of
automatically increasing salaries to adjust for the effects of inflation.
Instead, freely negotiated collective bargaining sessions are held on an annual
basis and the resulting agreement is effective during the following 12-month
period beginning November 1. In November 2002, we finalized a collective
bargaining agreement for the one-year period beginning November 1, 2002. This
agreement provides for an 11.43% salary increase compared to the prior year and
for a special profit sharing payment equivalent to 65% of the actual base salary
in force in October 2002, in a minimum amount of R$500.00 per employee.
While we experienced short periods of work stoppages during the past four
years, none of these stoppages was material. We are unable to predict what
effect, if any, future labor disturbances might have upon our results of
operations or financial condition. We are likewise unable to predict what
effect, if any, changes in Brazil's labor regulations may have on us.
In 1995, we established an employee profit sharing program in accordance
with applicable Brazilian labor legislation. Under Brazilian law, we may not
contribute an amount to our profit sharing plan in any single year in excess of
25% of total proposed dividends for that year.
We and our employees' labor unions, most of which are represented by
Sindieletro, agreed on changes to the existing employee health care plans in the
third quarter of 2002. These changes altered the contribution criteria that we,
our employees and our retirees are responsible for and the types of benefits
covered in each plan. The implementation of these changes took place as of
January 1, 2003. See note 19 to our consolidated financial statements.
SHARE OWNERSHIP
Each of our directors and executive officers beneficially owns less than 1%
of our preferred shares.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
PRINCIPAL SHAREHOLDERS
As of December 31, 2002, the State Government owned 36,119,657,399 common
shares, or 50.96% of our outstanding voting stock, and 3,030,572,489 preferred
shares, or approximately 3.31% 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, 2002, AES Corporation, a global power
company based in Arlington, Virginia that is engaged in the energy generation,
distribution
84
and retail supply businesses. We believe that the Opportunity Fund, a Brazilian
investment fund, has a minority interest in Southern through 524 Participacoes
S.A.
The following table sets forth certain information regarding the ownership
of our outstanding common shares and preferred shares at December 31, 2002.
COMMON % PREFERRED %
SHAREHOLDER SHARES OF CLASS SHARES OF CLASS
---------------------------------------- --------------- --------------- --------------- ---------------
State Government (1) 36,119,657,399 50.96 3,030,572,489 3.31
Southern ............................... 23,362,956,173 32.96 - -
All directors and executive officers
as a group ......................... 38,560 - 1,566,338 -
Other .................................. 11,391,515,791 16.08 88,178,383,872 96.61
--------------- --------------- --------------- ---------------
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 attributed in this line item 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
Information--Risk Factors--Risks Relating to CEMIG--We are controlled by the
State Government."
As of December 31, 2002, we had 15 common shareholders in the United
States, holding a total of 229,958,542 common shares. We also had 138 preferred
shareholders in the United States, holding a total of 11,755,157,882 preferred
shares.
We are not aware of any significant changes in the percentage ownership of
any shareholders that held 5% or more of our outstanding shares during the past
three years.
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. See note 31 to our consolidated financial statements.
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; and
- Our agreement with Forluz, the entity responsible for managing our
employee pension fund, pertaining to the fund and related balances.
For a more detailed discussion of these transactions, see note 25 to our
consolidated financial statements.
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ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION
Please refer to our financial statements that appear beginning on page F-1
of this document as well as "Item 3. Key Information--Selected 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.
The most relevant proceedings in which we are involved are summarized below.
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
Transactions--Principal 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 of 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 PUBLICA 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. However, this decision has been appealed to a
superior court and therefore the effectiveness of the shareholders' agreement
and control of CEMIG remain subject to judicial challenge.
RATE INCREASES AND REGULATORY MATTERS
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.
We are actively contesting all of the aforementioned rate increase claims.
Some of these claims have been decided at the trial court level in our favor,
whereas some 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 JUSTICA (Superior Court of Justice), which ruled that the plaintiffs
were entitled only to reimbursement for rate increases introduced during the
Cruzado Plan. In the aggregate, the rate increase claims brought against us
amounted to R$85.7 million as of December 31, 2002, and at that date we had
accrued a liability of that amount.
We are a defendant in a lawsuit contesting rate subsidies granted to
low-income consumers. It is not possible at the present time to estimate the
amounts involved in this claim. We have not accrued any liability related to
this claim because we believe that we have a meritorious defense.
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We are a defendant in five lawsuits contesting the ENCARGO DE CAPACIDADE
EMERGENCIAL (Emergency Capacity Charge), filed between February 2002 and July
2002. Each of these claims has been certified as a class action and involves
alleged damages caused by the Electricity Rationing Plan. 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 we have a
meritorious defense. We merely collect the Emergency Capacity Charge from our
customers on behalf of CBEE.
We are a defendant in a lawsuit related to the RECOMPOSICAO TARIFARIA, or
the regulatory extraordinary rate adjustment, filed in August 2002. It is not
possible at the present time to estimate the amounts involved in this claim. We
have not accrued any liability related to this claim because we believe that we
have a meritorious defense.
In December 2002 we filed a lawsuit against ANEEL and the MAE contesting
the amounts we were charged during a "settlement process" carried out by the MAE
in December 2002 and January 2003. This settlement process was intended to
settle certain outstanding amounts that we and other electric concessionaires
owed to the MAE in connection with spot market energy purchases at high prices
during the Electricity Rationing Plan. In the settlement process, we believe
that the MAE did not calculate correctly the amount of debt that we had accrued
in respect of our MAE purchases. During the pendency of this lawsuit, a portion
of the MAE transaction proceeds to which we are entitled under the General
Agreement of the Electricity Sector have been retained by other utilities. We do
not believe that the retention of these proceeds will have a significant impact
on our results of operations. Furthermore, we expect to be successful in this
lawsuit.
In January 2003 we filed another lawsuit relating to the MAE settlement
process. Due to the circumstances mentioned in the immediately preceding
paragraph, we did not settle our outstanding MAE obligations during the
settlement process. We have filed this additional lawsuit to prevent the
imposition of a fine on us relating to our failure to settle. Such a fine, if
imposed, would amount to R$3.2 million. We expect to be successful in this
lawsuit.
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 payment of taxes and contributions such as a potential tax dispute
including social contribution tax and Finsocial contributions, for which we have
accrued a total liability of R$112.5 million as of December 31, 2002, and a
dispute regarding the COFINS revenue tax for which we have not recorded any
reserve, as we believe that we have a meritorious defense.
We have also contested a number of administrative proceedings asserted by
federal tax authorities in respect of income tax set-off resulting from the
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, 1999 and 2000 relating to new accounting rules for
pension fund obligations established by CVM Instruction No. 371 of December 13,
2000. The amount involved in these claims is estimated to be R$398 million as of
December 31, 2002. In May 2003, we received a final favorable decision with
respect to these claims.
LABOR AND PENSION FUND OBLIGATIONS
We are defending a number of labor-related claims brought by our employees.
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 agreements. As of December 31, 2002, these
employees were seeking, in the aggregate, approximately R$87.1 million in
compensation, and at that date we had accrued a liability of R$69.7 million with
respect to these claims.
87
We are also defending, with Forluz, a claim brought by Sindieletro, our
employees' labor union. Sindieletro asserts that we failed to make certain
allegedly obligatory cost-of-living increases in contributions to our employee
pension funds. As of December 31, 2002, the plaintiff in this action was seeking
R$593.7 million. We have not accrued any liability related to this claim as we
believe we have a meritorious defense.
In addition, Sindieletro has sued Forluz in order to contest the increase
of the value of the contributions to be paid by Forluz to our employees. We
estimate that the amount related to this lawsuit is approximately R$268.2
million as of December 31, 2002. If Sindieletro is successful in this lawsuit,
we expect that Forluz may make a claim against us seeking reimbursement for the
amount payable to employees. We have not accrued any liability relating to this
claim as we believe we have a meritorous defense.
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. These claims totaled an
estimated R$30.1 million as of December 31, 2002. As of that date, we had
accrued a liability of R$18.0 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.
LEGAL PROCEEDINGS RELATED TO ENVIRONMENTAL MATTERS
We are a defendant, with CVRD, Comercial e Agricola Paineiras and Companhia
Mineira de Metais, in a class action lawsuit, brought by citizens of Minas
Gerais, concerning the environmental licensing of the Capim 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 believe we have a
meritorious defense to this lawsuit.
We are also a defendant, with CVRD, in a class action lawsuit, brought by
the Public Prosecutor of Minas Gerais, concerning the Aimores 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 believe we have a meritorious
defense to this lawsuit.
ADMINISTRATIVE PROCEEDINGS
ANEEL has brought an administrative proceeding against us, contesting a
R$187.6 million refund issued to us in 1995 by the Brazilian National Treasury.
ANEEL alleges that this refund originated from a miscalculation of credits in
the amount of a rate shortfall receivable that was applied to reduce amounts
owed to the Federal Government. On October 31, 2002, ANEEL issued a final
administrative decision against us in this matter, but we intend to appeal this
decision in court. We believe that we have a meritorious defense to this claim
and therefore we have not accrued any liability in respect thereof.
On September 18, 2002 four members of our Board of Directors at that time
(Claudio Jose Dias Sales, Oderval Esteves Duarte Filho, Marcelo Pedreira de
Oliveira and David Travesso Neto), all appointed by Southern, filed a complaint
with the CVM regarding the practices of our management and the State Government,
our controlling shareholder, with respect to our ability to collect payments due
to us under the CRC Account Agreement. In October 2002, we responded to the
complaint and indicated that we are negotiating with the State Government
regarding the repayment of these amounts. The CVM currently is investigating
this matter. We do not know whether this complaint will result in further CVM
investigations and/or any administrative proceedings. Further CVM investigations
and/or administrative proceedings may have an adverse effect on our business and
results of operations, including our ability to
88
raise additional capital. On January 29, 2003, our Board of Directors authorized
us to file a lawsuit against the State Government in order to collect the
overdue amounts owed to us under the CRC Account Agreement.
We are also 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 ANEEL's fine. For the same reason, we have not recorded any
provision for this fine.
On January 16, 2003, ANEEL sent us a notice alleging that we had failed to
obtain necessary ANEEL authorization relating to our agreement with Infovias
with respect to the provision of georeferenced information and related services.
ANEEL may seek to impose a fine upon us relating to our contracts with Infovias
if ANEEL concludes that they are not in agreement with its regulations. ANEEL
may also seek to impose restrictions on the terms and conditions of these
contracts. The maximum penalty is a fine in an amount equal to 2% of our
revenues during the 12-month period immediately prior to the imposition of such
fine.
In addition, on June 12, 2003, ANEEL imposed a R$5.2 million fine on us for
our alleged failure to comply with certain electric power supply quality
standards with respect to our customers. We are uncertain as to the potential
outcome of this matter.
DIVIDEND POLICY AND PAYMENTS
PAYMENT OF DIVIDENDS
We are required by the Brazilian Corporate Law to hold an annual
shareholders' meeting by April 30 of each year at which, among other things, an
annual dividend may be declared by decision of the shareholders on the
recommendation of our Board of Executive Officers, as approved by our Board of
Directors. The payment of annual dividends is based on the financial statements
prepared in accordance with accounting practices adopted in Brazil for the
fiscal year ending December 31. Under Brazilian law, dividends are required to
be paid within 60 days following the date the dividend was declared to the
holder of record on such declaration date, unless a shareholders' resolution
sets forth another date of payment, which must occur prior to the end of the
fiscal year in which such dividend was declared.
MANDATORY DISTRIBUTIONS; PRIORITY AND AMOUNT OF DIVIDENDS
Pursuant to our by-laws, we are required to distribute as dividends in
respect of each fiscal year ending on December 31, an aggregate amount equal to
at least 25% of net income for the fiscal year. We refer to this amount as the
mandatory dividend amount.
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. This preferred dividend has priority in the allocation of the
mandatory dividend amount for the relevant period.
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. In addition, if the shareholders approve dividends in
an amount greater than 10% of par value, the amount in excess of 10% must be
distributed equally among all shares.
89
We 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, our Board of Directors is permitted to
recommend 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 our net income is negative with respect to
any fiscal year, some of our shareholders will receive a dividend of 6%. This
state guarantee runs only to private holders of shares and not to public or
governmental holders.
AMOUNTS AVAILABLE FOR DISTRIBUTION
The amount available for distribution is determined on the basis of
financial statements prepared in accordance with accounting practices adopted in
Brazil and the procedures described below.
Prior to each of our annual shareholders' meetings, our Board of Directors
is required to suggest the appropriate allocation of net profit realized during
the preceding fiscal year. For purposes of the Brazilian Corporate Law, net
profit is defined as net income after income and social contribution taxes for
the relevant fiscal year, minus any accumulated losses from prior fiscal years
and any amounts allocated to management's participation in the company's
profits. Under the Brazilian Corporate Law, the amount available for
distribution equals the company's net profit minus any amounts allocated from
such net profit to the following reserves:
- legal reserve;
- contingency reserve for anticipated losses; and
- unrealized income reserve.
We are required to maintain a legal reserve, to which we must allocate 5%
of our net income for each fiscal year until the amount of the reserve equals
20% of our paid-in capital. However, we are not required to make any allocation
to our legal reserve in respect of any fiscal year in which our legal reserve,
when added to our other established capital reserves, exceeds 30% of our paid-in
capital. Net losses, if any, may be charged against the legal reserve. As of
December 31, 2002, we have no legal reserve as our legal reserve was used to
offset net losses in 2002 as set forth in our financial statements prepared in
accordance with accounting practices adopted in Brazil. A percentage of net
profit may also be allocated to a contingency reserve for probable future
losses.
If the amount of unrealized income exceeds the sum of:
- the legal reserve;
- the special reserve, as defined below;
- retained earnings; and
- the contingency reserve for anticipated losses,
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the surplus may be allocated to an unrealized income reserve. Under the
Brazilian Corporate Law, unrealized income results from the recognition of
credits to income, which will be effectively received in succeeding years.
We may also grant a participation in our net profit to our management.
However, the allocation to the special reserve and the participation of our
management cannot reduce the mandatory amount. The balance of the special
reserve plus the balance of other profit reserves (with the exception of the
contingency reserve for anticipated losses and the unrealized income reserve)
may not be higher than our capital. The amount in excess of our capital must be
used to increase our capital or be distributed as a cash dividend.
The amount available for distribution may be further increased by a
reversion of the contingency reserve for anticipated losses constituted in prior
years but not realized, or further increased or reduced as a result of the
allocations of income to or from the unrealized income reserve.
In accordance with the Brazilian Corporate Law and our by-laws, dividends
not claimed within three years of the date they were distributed revert to us.
INTEREST ON CAPITAL
Pursuant to Brazilian law, we may pay interest on capital in lieu of
dividends as an alternative form of making distributions to shareholders.
Distributions made as interest on capital are counted toward the minimum
dividend requirements contained in our by-laws. These distributions may be paid
in cash. We 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 Government's long-term interest rate, as determined by the
Central Bank from time to time, and cannot exceed the greater of:
- 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.
Shareholders who are not residents of Brazil must register with the Central
Bank to be eligible to remit foreign currency outside of Brazil arising from the
payment of dividends, sales proceeds or other amounts with respect to their
shares. The preferred shares underlying the ADSs are held in Brazil by the
custodian, as agent for the depositary bank, which is the registered owner of
our shares.
CURRENCY EXCHANGE
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 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 depreciated by approximately 52.27%
relative to the U.S. dollar in 2002. See "Item 3. Key Information--Risk
Factors--Risks Relating to Brazil--Exchange rate instability may adversely
affect our financial condition and results of operations."
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 payments of
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interest on capital may, in certain circumstances, be subject to withholding
tax. See "Item 10. Additional Information--Taxation--Brazilian Tax
Considerations--Taxation of Dividends" and "--U.S. Tax Considerations--Taxation
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 Information--Selected 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(4)........................ 96,198,579 33,846,035 123,801,421 43,557,683
----------
(1) In accordance with the Brazilian Corporate Law, 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 2002 dividends were approved at the annual and extraordinary general
shareholders' meetings held on April 30, 2003. See note (1). The 2002
dividends are expected to be paid by December 31, 2003.
SIGNIFICANT CHANGES
The most significant changes in our financial condition since the date of
our financial statements that are included in this annual report on Form 20-F
are those related to the appreciation of the REAL against the dollar since
January 1, 2003. This appreciation has had a positive effect on our net earnings
during the first five months of 2003 as it has resulted in an increase in our
financial income. On December 31, 2002, the noon buying rate for REAIS was
R$3.5400 per U.S.$1.00. On June 18, 2003, the noon buying rate for REAIS was
R$2.9070 per U.S.$1.00. See "Item 3. Key Information--Risks Relating to
Brazil--Exchange rate instability may adversely affect our financial condition
and results of operations" and "Item 11. Qualitative and Quantitative
Disclosures about Market Risk--Exchange Rate Risk."
We were also granted a 31.53% rate increase in April 2003, which has had a
positive effect on our electricity sales revenues. In addition, on June 5, 2003,
we renegotiated the interest rate applicable to 46.67% of the aggregate
principal amount of debentures issued by UHESC S.A. for the following two year
period and the remaining 53.33% was redeemed. Consequently, at the same date we
paid R$64 million related to the redemption of 55.33% of these debentures. See
note 32(e) to our consolidated financial statements.
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ITEM 9. THE OFFER AND LISTING
TRADING MARKET
The principal trading market for our preferred shares is the Sao Paulo
Stock Exchange. Our ADSs, each representing 1,000 preferred shares, have traded
on the NYSE, under the symbol "CIG" since September 18, 2001. Prior to that
date, our ADSs were traded in the over-the-counter, or OTC, market in the United
States. The ADSs are evidenced by ADRs issued by Citibank, N.A., as depositary,
pursuant to a Second Amended and Restated Deposit Agreement by and among us, the
depositary and the holders and beneficial owners of ADSs evidenced by ADRs
issued thereunder. As of December 31, 2002, there were approximately 20,458,000
ADSs outstanding, representing approximately 20.548 billion preferred shares or
approximately 23% of our 91.211 billion outstanding preferred shares. Such ADSs
were held by 11 record holders as of that date. Our common shares are also
listed and traded on the Sao Paulo Stock Exchange.
The following table sets forth the reported high and low closing sale
prices for the preferred shares on the Sao Paulo Stock Exchange (per lot of
1,000 preferred shares) and the ADSs on the NYSE for the periods indicated.
PREFERRED SHARES(1) ADSs
-------------------------- -------------------------
PERIOD PRICE IN NOMINAL R$ PRICE IN US$
---------------------------- -------------------------- -------------------------
HIGH LOW HIGH LOW
----- ----- ----- -----
1998.................... 58.99 13.20 - -
1999.................... 44.70 14.50 - -
2000.................... 40.50 22.80 - -
2001(2)................. 36.70 21.00 18.62 8.40
2002.................... 39.70 18.90 16.73 4.85
2001
First quarter........... 36.70 25.90 - -
Second quarter.......... 27.95 21.00 - -
Third quarter........... 29.91 22.90 9.55(2) 8.40(2)
Fourth quarter.......... 35.55 22.51 14.90 8.49
2002
First quarter........... 39.70 29.70 16.73 12.60
Second quarter.......... 38.50 28.10 16.40 9.90
Third quarter........... 31.80 19.93 10.98 5.35
Fourth quarter.......... 27.70 18.90 7.86 4.85
2003
First quarter........... 28.85 21.40 8.75 6.06
Second quarter(3)....... 33.00 25.50 11.28 7.92
December 2002........... 27.70 22.15 7.86 5.84
January 2003............ 28.85 24.04 8.75 6.85
February 2003........... 26.40 21.40 7.15 6.06
March 2003.............. 26.55 22.00 7.75 6.25
April 2003.............. 31.42 25.50 10.60 7.92
May 2003................ 33.00 29.35 11.28 9.89
June 2003(3)............ 31.20 28.50 10.70 9.82
----------
(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 June 18, 2003.
On June 18, 2003, the closing price per 1,000 of the preferred shares on
the Sao Paulo Stock Exchange was R$29.60 and the closing price per ADS on the
NYSE was US$10.20.
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On July 12, 2002, our depositary receipts, each representing 1,000 of our
preferred shares, began trading 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.
TRADING ON THE SAO PAULO STOCK EXCHANGE
The preferred shares are traded on the Sao Paulo Stock Exchange, the only
Brazilian stock exchange that trades shares. Trading on the Sao Paulo Stock
Exchange is limited to member brokerage firms and a limited number of authorized
non-members. The CVM and Sao 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 Sao 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
Sao Paulo Stock Exchange is COMPANHIA BRASILEIRA DE LIQUIDACAO E CUSTODIA.
In order to better control volatility, the Sao 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 Sao Paulo Stock Exchange is less liquid than the NYSE and other major
exchanges in the world. As of December 31, 2002, the aggregate market
capitalization of the 412 companies listed on the Sao Paulo Stock Exchange was
equivalent to approximately US$124 billion and the 10 largest companies listed
on the Sao Paulo Stock Exchange represented approximately 49% 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,
2002, we accounted for approximately 0.93% of the total market capitalization of
all listed companies on the Sao Paulo Stock Exchange.
Our preferred shares and common shares have daily liquidity on the Sao
Paulo Stock Exchange and have had no significant suspension of trading in the
past three years. All interruptions that occurred in the past three years were
caused by the processing of interest on capital rights except for an
interruption on November 17, 2000, which was due to the disclosure of an
announcement of the commencement of studies to evaluate potential sales of our
common shares owned by the State Government. This announcement was applicable
only to shares in the distribution company to be formed in the unbundling
process.
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The following table sets forth, as of December 31, 2002, the trading
interruptions that have occurred in the past three years for our shares traded
on the Sao Paulo Stock Exchange:
SUSPENSION REOPENING REASON
----------------------- ------------------------------ ----------------------------------------------------
April 17, 2000........ April 17, 2000 at 10:15 AM Interest on capital approved at the Board of
Director's meeting on April 14, 2000
June 30, 2000......... June 30, 2000 at 10:15 AM Interest on capital approved at the Board of
Director's meeting on June 29, 2000
November 17, 2000..... November 17, 2000 at 12:00 PM State Government announcement relating to possible
sale of shares relating to post-unbundling
distribution company
We have been a member of Special Corporate Governance Level 1 of the Sao
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 Information--Exchange Controls."
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 Sao 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.
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We have the option to ask that trading in our securities on the Sao Paulo
Stock Exchange be suspended in anticipation of a material announcement. Trading
may also be suspended on the initiative of the Sao 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.
Trading on the Sao 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 bank's 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 Information--Exchange Controls."
ITEM 10. ADDITIONAL INFORMATION
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 May 28, 2003, and (ii) the 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 book value of 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
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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 shareholder's
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. See, however, "Item 3.
Risk Factors--Risks Relating to the Preferred Shares and ADSs--You may not be
able to exercise preemptive rights with respect to the preferred shares."
DIVIDENDS
For a discussion of our dividend policy, see "Item 8. Financial
Information--Dividend Policy and Payments."
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
extraordinary general meetings of shareholders may be held for the following
reasons, among others:
- to amend our by-laws;
- to increase or decrease our issued capital stock or to subscribe new
shares;
- to issue convertible debentures or any other securities;
- to resign the rights of subscription for shares or convertible
debentures issued by any of our subsidiaries or any of our
subsidiaries' controlled or affiliated companies;
- to amalgamate, dissolve, transform, split or merge ourselves;
- to commence an exchange offer for stock or other securities issued by
us;
- to allow for our participation in a group of companies;
- to sell convertible debentures of our subsidiaries that we own;
- upon the sale or loss of control of any of our subsidiaries;
- to elect or to remove from office members of our Board of Directors;
and
- to fix the remuneration of our executive officers.
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A shareholder who has been elected by persons present at the general
meeting of shareholders presides over the meeting and appoints one or more
secretaries of the meeting.
Article 123 of the Brazilian Corporate Law provides that general meetings
of shareholders shall be called, subject to the corporation's by-laws, by the
corporation's board of directors, if there is one, or by the corporation's board
of executive officers. General meetings of shareholders may also be called by:
- the fiscal council, which shall call ordinary meetings of shareholders
if the board of directors and the board of executive officers do not
do so for more than a month and which shall call extraordinary
meetings of shareholders whenever urgent matters occur;
- 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 the corporation's by-laws;
- shareholders representing at least 5% of the corporation's voting
shares, whenever the corporation's officers fail to call a meeting of
shareholders within eight days after these shareholders submit a
reasonable request to hold the meeting and indicate the matters to be
discussed at the meeting; and
- shareholders representing at least 5% of the corporation's shares,
whenever corporate officers fail to instate the fiscal council within
8 days of a general meeting of shareholders.
DIRECTORS
Our by-laws mandate that our Board of Directors shall be comprised of 14
directors and 14 alternate directors. One director is designated a chairman and
another director is designated the vice-chairman. Our directors are elected for
terms of three years and may be reelected or removed from office at a general
meeting of shareholders. Our alternate directors act as temporary replacements
for incumbent directors when certain incumbent directors are absent from board
meetings, and, in cases of a vacancy, until a replacement director is elected to
fill the vacancy at a general meeting of shareholders.
Our Board of Directors is responsible for:
- establishing the general direction of our business;
- electing and dismissing executive officers;
- considering contracts between us and our shareholders or any entity
that controls, is controlled by or is under joint control with our
shareholders;
- considering the sale or pledge of our fixed assets, or the granting of
guarantees to third parties, with a value not less than R$5,000,000;
- considering loans, financings, actions or other legal business in
which we are to become engaged, with a value not less than
R$5,000,000;
- calling the general meetings of shareholders;
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- supervising the management of the Board of Executive Officers,
examining our books and papers and requesting information regarding
executed and soon-to-be executed contracts, as well as other items of
interest;
- the approval of our administration report and the accounting of the
Board of Executive Officers;
- appointing and dismissing independent auditors each year;
- authorizing, 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 not less than R$5,000,000; and
- 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 extrajudicial matters in which we are involved with a
value not less than R$5,000,000.
Ordinary meetings of our Board of Directors are held once every two months.
Extraordinary meetings of our Board of Directors are held upon notice given by
the chairman or vice-chairman of our Board of Directors, one-third of the
members of our Board of Directors or when requested by the Board of Executive
Officers. Notice regarding meetings of our Board of Directors must be in
writing, include the docket of matters to be deliberated at the meeting, and be
forwarded at least five days prior to the meeting. In cases of urgency, our
chairman may provide notice of a meeting to our Board of Directors less than
five days prior to the meeting. Action may be taken by our Board of Directors
only after approval by the majority present at the meeting. In the case of a
tie, the chairman of the Board of Directors will have the tie-breaking vote.
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 corporation's 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.
The chairman and vice-chairman of our Board of Directors are chosen by our
board at the first meeting of our Board of Directors following the election of
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.
Minority shareholders of our common shares and minority shareholders of our
preferred shares each are entitled to elect one member of the Board of
Directors.
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.
For more information regarding these requirements, see "--Amendments to the
Brazilian Corporate Law."
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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 corporation's earnings;
- the right to have a share of the corporation's assets, in the event of
liquidation thereof;
- the right to inspect the management of the corporation's business,
within certain limits provided in the Brazilian Corporate Law;
- preemptive rights to subscribe new shares or securities convertible
into shares; and
- the right to withdraw from the company under certain circumstances
provided in the Brazilian Corporate Law.
A company may also establish that certain disputes between shareholders may
be decided by arbitration, according to terms established in the corporation's
by-laws.
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 must 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.
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 corporation's 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 corporation's 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.
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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.
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 as a change in payment or voting rights, may give rise to
the exercise of appraisal rights by the holders of the affected shares.
Law No. 10,303 amended certain provisions of the Brazilian Corporate Law
that are applicable to mixed capital companies like us. For companies in
existence prior to October 31, 2001, Law No. 10,303 became effective on March 1,
2002. Law No. 10,303 revoked the provision of the Brazilian Corporate Law that
provided for contingent liability of controlling shareholders of mixed capital
companies for the debts and obligations of the mixed capital companies under
their control. Accordingly, the State of Minas Gerais, as our controlling
shareholder, will not be contingently responsible for any of our debts and
obligations created after February 28, 2002. Based on constitutional principle,
according to which a new law cannot be applied retroactively so as to adversely
affect a party's existing contractual rights, Law No. 10,303 should not relieve
controlling shareholders of any liability for obligations incurred prior to the
effective date of Law No. 10,303. While we believe that Law No. 10,303 should
not affect the State Government's contingent liability for our obligations
relating to the ADSs, there can be no assurance that Brazilian courts will reach
the same conclusion. Contingent liability is not a guarantee, however, and the
State Government would only be liable if (i) we were to be declared insolvent or
otherwise involved in receivership or similar proceedings; and (ii) as a result
of these proceedings, we did not have sufficient assets to satisfy our
obligations. In addition, pursuant to Law No. 10,303, we will no longer be
immune from FALENCIA. In fact, if we become insolvent, we will be subject, as a
debtor, to either a CONCORDATA or FALENCIA. For more information regarding
amendments to the Brazilian Corporate Law, see "--Amendments to the Brazilian
Corporate Law."
AMENDMENTS TO THE BRAZILIAN CORPORATE LAW
In addition to the other changes described in this annual report, Law No.
10,303, which amended the Brazilian Corporate Law and related regulations,
provides for the following changes:
- upon a sale of control of a company, the acquiror is required to
launch a tender offer to purchase all minority voting shares at a
price equal to at least 80% of the value paid for shares with voting
rights;
- if provided for in a company's by-laws, disputes among shareholders
will be subject to arbitration (our by-laws currently do not provide
for arbitration);
- upon the launch of a tender offer through which a company is to be
delisted or through which controlling shareholders of a company
acquire more than one-third of the shares outstanding on September 4,
2000, the purchase price shall be equal to the fair value of the
shares considering the total number of the company's shares
outstanding;
- 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
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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. Until 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;
- members of the board of directors elected by the non-controlling
shareholders have the right to veto the choice of independent
accountants of the controlling shareholder;
- controlling shareholders, any shareholders that appoint 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 Sao Paulo Stock Exchange; and
- the chairman of any shareholders' or board of directors' meeting shall
disregard any vote that is rendered against provisions of any
applicable shareholders' agreement.
MATERIAL CONTRACTS
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 contract establishes
terms of the concessions for each of our generation plants and specifies the
rates we may charge customers for our services as well as a formula by which we
may annually adjust these rates. 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 Fund.
This contract also provides that DNAEE (which has since become 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 CONCESSIONS OF ELECTRIC ENERGY TRANSMISSION SERVICES, DATED
JULY 10, 1997, BETWEEN THE FEDERAL GOVERNMENT AND CEMIG.
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 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
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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.
CONTRACTS IN CONCESSION OF PUBLIC SERVICE FOR DISTRIBUTION OF ELECTRIC
ENERGY, DATED JULY 10, 1997, BETWEEN THE FEDERAL GOVERNMENT AND CEMIG.
We have entered into four contracts with the Federal Government to provide
energy distribution services to the public. These contracts cover each of the
four main geographic regions of our concession area. These contracts authorize
us to provide our energy distribution services to the public until February 18,
2016 and specify the rates that we may charge customers for our services as well
as a formula by which we may annually adjust these rates. Upon our application,
these contracts may be extended by the Federal Government for a 20-year period.
Pursuant to these contracts, we are given free access to land in the public
domain and certain rights of way so that we may distribute energy to our
customers. In return, among other things, we must maintain a minimum level of
regularity, continuity, efficiency, safety and courtesy in the provision of our
services and we must satisfy the demands of the electric energy market.
These contracts also provide that ANEEL or a substitute agency will
supervise us in the provision of our energy distribution services and that we
will be subject to penalties if we fail to comply with certain provisions of
these contracts. As a party to these contracts, 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 distribution services properly and that we are acting in
compliance with these contracts.
CONTRACT FOR THE SUPPLY AND EXCHANGE OF ELECTRIC POWER AND TRANSFER AND
TRANSPORTATION OF LOAD FROM ITAIPU, DATED MAY 31, 1993, BETWEEN FURNAS AND
CEMIG.
In 1993, we entered into a contract pursuant to which Furnas supplies us
with electric power for a 10-year term and transfers and transports electric
power loads from Itaipu for a 20-year term. The contract is amended annually,
subject to certain conditions, in order to update the amount of electric power
to be supplied, the length of the supply term and the transfer and
transportation loads. We will be subject to penalties if our payments under the
contract are delayed.
During the year ended December 31, 2002, we paid approximately R$1,019
million to Furnas for the supply of electric power and the transfer and
transportation of electric power loads from Itaipu.
We have begun negotiations with Furnas to enter into a new electric power
supply and exchange agreement that takes into account changes in the regulatory
framework of the Brazilian electricity sector. The provisions of the General
Agreement of the Electricity Sector are expected to facilitate these
negotiations.
SHAREHOLDERS' AGREEMENT, DATED JUNE 18, 1997, BETWEEN THE STATE GOVERNMENT
AND SOUTHERN.
In 1997, the State Government, our controlling shareholder, sold
approximately 33% of our common shares to a group of strategic investors led by
Southern. As part of this sale, conducted through a public bidding process, the
State Government and Southern also entered into a shareholders' agreement
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which created special quorum requirements to approve certain matters, referred
to as Special Quorum Provisions.
In accordance with this shareholders' agreement, the parties to the
agreement vote as a block regarding, among other things, certain amendments to
our by-laws, the issuance of convertible debentures and warrants, the creation
of founders' shares, the redemption of shares, changes to our corporate
structure, and any distribution of dividends other than that required by our
by-laws. The State Government and Southern appoint seven and four members,
respectively, to our Board of Directors as well as these board members'
respective alternates. The State Government and Southern also appoint three and
two members, respectively, to our Fiscal Council. Under this agreement, Southern
also has the right to nominate three of the eight members of the Board of
Executive Officers and to appoint two members of the Fiscal Council.
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. However, the decision of the State Court of Appeals has been appealed to
a superior court and therefore the effectiveness of the shareholders' agreement
and control of CEMIG remain subject to judicial challenge.
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 company's 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 obligation to pay 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, recorded at present value,
of approximately R$1,744 million as of December 31, 2002, which included a
significant amount of overdue installments. The agreement relating to this
transfer, the CRC Account Agreement, requires 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 payable under the
CRC Account Agreement accrues at a rate
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of 6% per year plus inflation adjustments. Interest commenced accruing 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:
(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$989 million, adjusted to
present value, as of December 31, 2002, 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 in respect of this
second amendment. In 2001, we recorded a full loss provision in respect of 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$755 million as of December 31,
2002, bear interest at an annual rate of 12%, with restatement based on IGP-DI.
We have not received any scheduled payments in respect of this third amendment.
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. See note 3 to our
consolidated financial statements.
PRIVATE INSTRUMENT COVERING THE FIRST PUBLIC ISSUANCE OF COMMON 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 our contract with 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
debentureholders 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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FINANCING AGREEMENT BY EXTENSION OF CREDIT NO. 02.2.962.3.1, DATED FEBRUARY
7, 2003, BETWEEN BNDES AND CEMIG AND INTERVENING THIRD PARTIES.
On February 7, 2003, we entered into a financing agreement pursuant to
which BNDES, upon satisfaction of certain conditions, extended a loan to us in
the amount of approximately R$396.7 million. We borrowed R$335 million pursuant
to this agreement and used the proceeds to partially settle our outstanding
obligations to the MAE 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
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.
Interest on the outstanding balance accrues at a rate of 1% over the SISTEMA
ESPECIAL DE LIQUIDACAO E CUSTODIA (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 this agreement with amounts
received pursuant to the CRC Account Agreement.
Our obligations under this loan are guaranteed by the proceeds of our
collection of rates relating to our electricity sales to final customers
corresponding to 3.27% of our monthly sales, as defined in the loan agreement.
We have applied the proceeds of this loan to settle in part our outstanding
obligations related to energy transactions on the MAE effected during the period
of the Electricity Rationing Plan.
EXCHANGE CONTROLS
There are no restrictions on your ownership of preferred shares or
ownership 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.
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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 Titulos e Valores Mobiliarios 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 bank's 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
"--Taxation--Brazilian Tax Considerations."
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 Brazil's 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 Brazil's 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
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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 and, in
the case of a holder of preferred shares, which has registered its investment in
preferred shares with the Central Bank as a U.S. dollar investment. The
following discussion does not specifically address all of the Brazilian tax
considerations applicable to any particular non-Brazilian holder, and 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 are subject to
Brazilian withholding tax at varying rates, depending on the year the profits
were generated. Notwithstanding the previous sentence, stock dividends are not
subject to withholding tax, unless the stock is redeemed by us or sold by a
non-Brazilian holder within five years after distribution. A tax treaty may
reduce the rate of withholding tax. Brazil has entered into tax treaties with
several countries, however, there is currently no tax treaty between the United
States and Brazil. The only Brazilian tax treaty now in effect that reduces the
current rate of withholding tax on interest is the treaty with Japan, which, if
certain conditions are met, reduces such rate to 12.5%.
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 Government's
long-term interest rate, as determined by the Central Bank from time to time,
and cannot exceed the greater of:
- 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.
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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. Gains realized outside Brazil by a non-Brazilian holder
on the disposition of ADSs to another non-Brazilian holder are not subject to
Brazilian tax.
For purposes of Brazilian taxation, there are three 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;
- ordinary non-Brazilian holders, which include any and all
non-residents in Brazil who invest in the country through any other
means; and
- investors that reside in a tax haven (i.e., a country that does not
impose income tax, or where the income tax rate is lower than 20%),
regardless of registration under Resolution No. 2,689.
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 that are not resident in tax havens 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
- 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%, except in the case of Resolution No. 2,689 investors who
are not resident in a tax haven jurisdiction.
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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.
Non-Brazilian holders are not subject to tax in Brazil on gains realized on
sales of preferred shares and ADSs that occur outside of Brazil to persons who
are not resident in Brazil. The proceeds of a redemption of, or a liquidating
distribution with respect to, the ADSs, under the same conditions, are exempt
from Brazilian taxes. 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 subject to income tax at a
rate of 15%.
Non-Brazilian holders are subject to a withholding tax at a 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
20% 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 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.
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, with the exception of
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%. Currently, capital gains are not subject to
the 25% tax rate, even if the beneficiary resides in a tax haven.
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.
110
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/Titulos 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 TAXES. 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.
Transactions by the depositary or by holders of preferred shares, which
involve the removal of Brazilian currency from an account maintained with any
Brazilian financial institution, will be subject to the CPMF tax. CPMF tax has
generally been imposed on bank account debits, initially at a rate of 0.38%. On
June 12, 2002, Constitutional Amendment No. 37/02 approved the continued
imposition of the CPMF tax until December 31, 2004. For the fiscal years ended
December 31, 2002 and 2003, the rate for the CPMF tax will be 0.38%. The CPMF
tax rate should be decreased to 0.08% for the fiscal year 2004.
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.
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.
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 Company's earnings and profits, it will be treated as a
non-taxable return of capital to the extent of the U.S. holder's 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
111
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. Subject to
generally applicable limitations under U.S. federal income tax law, the
Brazilian withholding tax will be treated as a foreign income tax eligible for
credit against a U.S. holder's U.S. federal income tax liability (or at a U.S.
holder's election, may be deducted in computing taxable income). 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. holder's 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, pursuant to
recently enacted legislation, certain dividends received by individual U.S.
holders that constitute "qualified dividend income" will be subject to a reduced
maximum marginal U.S. federal 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 foreign investment company (as defined in section 1246(b)
of the Code), a passive foreign investment company (as defined in section 1297
of the Code), or a foreign personal holding company (as defined in section 552
of the Code) in either the taxable year of the corporation in which the dividend
was paid or the preceding
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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 taxpayer's 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. holder's
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. holder's 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. holder's 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 is imposed on the sale or disposition of
preferred shares as described in "--Taxation--Brazilian 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.
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. holder's 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.
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.
DIVIDENDS AND PAYING AGENTS
We pay dividends on preferred shares in the amounts and in the manner set
forth under "--Dividend Payment and Policy." 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
113
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
Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. Copies of the materials may be obtained from the Commission's Public
Reference Room at prescribed rates. The public may obtain information on the
operation of the Commission's 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, 30190-131 Belo Horizonte, Minas Gerais,
Brazil.
INSURANCE
Our insurance policies that covered damages to our power plants caused by
fire and risks such as equipment failures expired on December 31, 2001, and
since that time we have not obtained additional coverage. We are in the process
of soliciting bids from insurance carriers for new insurance policies to cover
these risks. We also 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 Information--Risk Factors--Risks Relating to
the Company--Our insurance coverage may be insufficient to cover our losses."
We believe that, once 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. Pursuant to our concession
agreements, ANEEL may fine us if they believe that we have not adequately
insured the assets that are essential to our generation, transmission and
distribution operations. Although we believe that certain operating procedures
that we have implemented constitute adequate insurance, we cannot assure you
that ANEEL will agree.
DIFFICULTIES OF ENFORCING CIVIL LIABILITIES AGAINST NON-U.S. PERSONS
We are a state-controlled company (a public sector company with some
private sector ownership) 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 these foreign resident persons 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.
Specifically, our Brazilian legal counsel, Machado, Meyer, Sendacz e Opice
Advogados, has advised us that Brazilian courts will enforce judgments of U.S.
courts for civil liabilities predicated on the U.S. securities laws, without
reconsideration of the merits, only if the judgment satisfies certain
114
requirements and receives confirmation from the Federal Supreme Court of Brazil.
The foreign judgment will be confirmed if:
- it satisfies all formalities required for its enforceability under the
laws of the country that granted the foreign judgment;
- it is for the payment of a sum certain of money;
- it was issued by a competent court in the jurisdiction where the
judgment was awarded after service of process was properly made in
accordance with Brazilian law;
- it is not subject to appeal;
- it is authenticated by a Brazilian consular office in the country
where it was issued, and is accompanied by a sworn translation into
Portuguese; and
- it is not contrary to Brazilian national sovereignty, public policy or
good morals, and does not contain any provision which for any reason
would not be upheld by the courts of Brazil.
Notwithstanding the foregoing, no assurance can be given that such
confirmation will be obtained, that the process described above will be
conducted in a timely manner or that a Brazilian court will enforce a monetary
judgement for violation of the U.S. securities laws with respect to any
securities issued by us.
Machado, Meyer, Sendacz e Opice Advogados has advised us that (i) the
confirmation process described above may not be conducted in a timely manner and
(ii) Brazilian courts may not enforce awards for all of the damages prescribed
in the decision of a U.S. court because certain concepts such as punitive and
consequential damages do not exist under Brazilian law.
Machado, Meyer, Sendacz e Opice Advogados has also advised us that:
- as a plaintiff, you may bring an original action predicated on the
U.S. securities laws in Brazilian courts and that, subject to
applicable laws, Brazilian courts may enforce liabilities in these
types of actions against us, our directors, and certain of our
officers and advisors and the State Government;
- if you reside outside Brazil and own no real property in Brazil, you
must indicate a legal representative in Brazil and provide a bond
sufficient to guarantee court costs and legal fees, including the
defendant's attorney's fees, as determined by the Brazilian court in
connection with litigation in Brazil, except in the case of the
enforcement of a foreign judgment which has been confirmed by the
Brazilian Federal Supreme Court; and
- according to judicial precedent in Brazil, you may be precluded from
satisfying a judgment against us by attaching assets used in the
rendering of our generation, transmission and distribution services,
although there is no law specifically prohibiting such attachment.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in both foreign currency
exchange rates and interest rates.
115
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 accounted for approximately 22% of our
operating costs and expenses in 2002, are denominated in U.S. dollars, we are no
longer exposed to related foreign exchange risk 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 Financial Review and Prospects--Critical Accounting Policies." In
2003, we have used financial instruments such as interest rate swaps for
purposes of hedging a portion of our foreign-currency denominated indebtedness
in order to reduce the risk from exchange rate fluctuations. As of May 31, 2003,
we had entered into swap agreements in the aggregate amount of US$52 million in
order to change 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 DEPOSITO INTERBANCARIO--CDI (Interbank
Deposit Certificate) rate. We did not use any similar financial instruments in
2002 or 2001. See notes 2(d), 17, 24, 26(d) and 32 to our consolidated financial
statements.
We are also subject to market risk resulting from changes in interest rates
that may affect the cost of financing.
EXCHANGE RATE RISK
At December 31, 2002, approximately 63% of our outstanding indebtedness, or
R$2,119 million, was denominated in foreign currencies. As of December 31, 2002,
approximately 94% of our foreign currency indebtedness, or R$1,995 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. As of December 31, 2002, we
had restricted investments, to be used for repayment of long-term financing, in
the amount of R$194 million, which comprises (i) investments in the amount of
R$137 million, which have interest rates calculated based on the U.S.
dollar/REAL exchange rate and (ii) R$57 million, which have interest rates
calculated based on the CERTIFICADO DE DEPOSITO INTERBANCARIO--CDI (Interbank
Deposit Certificate) rate.
In 2003, the potential loss we would experience in the event of a
hypothetical 20% change in foreign currency exchange rates would be
approximately R$396 million related principally to loans and financing and
primarily due to increase in our REAL-denominated expense, which would be
reflected on our income statement. In 2003, a hypothetical and instantaneous
change of 20% in foreign currency exchange rates would result in an additional
annual cash outflow of approximately R$472 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.
INTEREST RATE RISK
At December 31, 2002, we had approximately R$3,539 million in loans and
financing outstanding, of which approximately R$2,709 million bore interest at
floating rates. Of this R$2,709 million, R$1,260 million is subject to monetary
restatement through the application of inflation indices established by the
Federal Government, principally the IGP-M, and R$1,449 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, 2002 that bore
interest at floating rates in the amount of R$2,080 million. These assets
116
consisted mainly of our account receivable from the State Government and
deferred regulatory assets, partially offset by MAE obligations, bearing
interest at rates tied to IGP-DI and SELIC, respectively. See notes 3, 4 and 8
to our consolidated financial statements.
We estimate that the potential loss we would experience in the event of a
hypothetical, instantaneous and unfavorable change of 100 basis points
(equivalent to 1%) in interest rates applicable to our floating rate financial
assets and liabilities held at December 31, 2002 would be approximately R$6
million and would result in an additional annual cash outflow of approximately
R$8 million.
The tables below provide summary information regarding our exposure to
interest rate and exchange rate risk as of December 31, 2002:
TOTAL DEBT PORTFOLIO
---------------------------
R$ MILLION %
-------------- ------
Floating rate debt:
REAL-denominated......................... 1,260 36
Foreign currency-denominated............. 1,449 41
-------------- ------
2,709 77
Fixed rate debt:
REAL-denominated......................... 160 4
Foreign currency-denominated............. 670 19
-------------- ------
830 23
-------------- ------
Total....................................... 3,539 100
============== ======
FLOATING RATE
(R$ MILLION)
-----------------
Assets:
Cash and cash equivalents................... 103
Restricted investment....................... 57
Account receivable from State Government.... 755
Deferred regulatory assets....................... 1,709
-----------------
Total............................................ 2,464
Liabilities......................................
Account payable to suppliers-spot
market-MAE.................................. (335)
Account payable to suppliers-payment to
generator for energy purchased on the
MAE......................................... (209)
Total liabilities........................... (544)
Total............................................ 2080
=================
The tables below provide information, as of December 31, 2002, 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, 2002.
117
EXPECTED MATURITY DATE
(AMOUNTS EXPRESSED IN R$ MILLION)
---------------------------------------------------------------------
2010 AND TOTAL LONG
DEBT OBLIGATION 2004 2005 2006 2007 2008 2009 AFTER TERM
---------------------------- ----- ----- ----- ----- ----- ----- -------- ----------
Foreign currency-denominated
debt:
Fixed rate ............... 334 55 19 11 10 10 120 559
Floating rate ............ 390 147 104 65 35 25 78 844
REAL-denominated debt:
Fixed rate ............... 30 30 20 14 6 6 24 130
Floating rate ............ 64 461 418 18 18 11 70 1,060
----- ----- ----- ----- ----- ----- -------- ----------
Total ...................... 818 693 561 108 69 52 292 2,593
===== ===== ===== ===== ===== ===== ======== ==========
EXPECTED ANNUAL AVERAGE INTEREST RATE (%)
--------------------------------------------------------
2010 AND
DEBT OBLIGATION 2004 2005 2006 2007 2008 2009 AFTER
---------------------------- ----- ----- ----- ----- ----- ----- --------
Foreign currency-denominated
debt:
Fixed rate ............... 8.97 8.00 7.86 7.92 7.94 7.96 7.99
Floating rate ............ 4.70 4.32 4.26 4.05 3.89 3.80 3.88
REAL-denominated debt:
Fixed rate ............... 4.67 4.60 4.46 4.30 4.27 4.23 4.18
Floating rate (excluding
inflation indices) ....... 11.24 11.40 10.76 5.00 4.78 4.56 4.27
Floating rate (including
expected inflation
indices) ................. 14.51 13.87 12.94 8.36 8.54 8.66 8.82
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
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PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Certain of our loan, financing and debenture contracts, in the total
principal amount of R$553 million as of December 31, 2002, of which R$388
million are classified as long-term liabilities, contain certain financial
covenants that, in the event of noncompliance, may cause the amounts due under
the contracts to become immediately due. In addition, we also have financing
contracts that contain cross-default clauses. These covenants are based on the
financial statements prepared in accordance with the accounting practices
adopted in Brazil. We have obtained waivers from the creditors that are parties
to contracts that contain covenants with respect to which we are not in
compliance. These waivers affirm that such creditors will not exercise their
rights to demand either accelerated or immediate payment of the total amounts
due if we meet certain financial conditions. Such conditions refer to revised
contractual clauses relating to our total debt divided by EBITDA (earnings
before interest, taxes, depreciation and amortization) and capital expenditures
divided by EBITDA. We are in compliance with the revised conditions as of May
31, 2003 and our expectation is that we will continue to be in compliance
through June 2003. The waivers are in force as of June 30, 2003 but must be
renewed every quarter. Loans, financings and debentures are classified as
current and long-term liabilities according to the original contract terms, in
compliance with the waivers obtained.
Infovias' loan from MBK Furukawa Sistemas S.A./Unibanco, in the total
principal amount of R$123 million as of December 31, 2002, of which R$100
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. Infovias 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. The waiver
obtained has to be renewed every quarter. This loan is classified as current and
long-term liability according to the original terms of the respective contract,
in compliance with the waiver obtained.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
These conclusions of our Executive Vice-President 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
a date within 90 days of the filing of this annual report on Form 20-F 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 time frames. Our disclosure controls and procedures
include controls and procedures designed to ensure that information required to
be disclosed is accumulated and communicated as appropriate to allow timely
decisions regarding required disclosure. Based on their assessments of our
disclosure controls and procedures, our Executive Vice-President 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.
119
CHANGES IN INTERNAL CONTROLS
There have not been any significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to their
last evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
ITEM 16. [RESERVED]
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
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 20-F:
- Report of Deloitte Touche Tohmatsu
- Audited Consolidated Balance Sheets as of December 31, 2002 and 2001
- Audited Consolidated Statements of Operations and Comprehensive Income
(Loss) for the years ended December 31, 2002, 2001 and 2000
- Audited Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 2002, 2001 and 2000
- Audited Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000
- Notes to the Consolidated Financial Statements
120
ITEM 19. EXHIBITS
The following documents are included as exhibits to this annual report:
EXHIBIT
NUMBER DOCUMENT
-------- -------------------------------------------------------------------
1 Corporate by-laws, as amended and in effect since May 28, 2003.
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)).
2.3 Fiscal Agency Agreement, dated November 18, 1996, among us, The
Chase Manhattan Bank, Chase Trust Bank and Chase Manhattan Bank
Luxembourg S.A., relating to US$150,000,000 of our 9.125% Notes due
2004 (incorporated by reference to Exhibit 2.2 to our Registration
Statement on Form 20-F filed on August 13, 2001 (File No.
1-15224)).
2.4 First Supplemental Fiscal Agency Agreement, dated as of October 11,
2001, among us, The Chase Manhattan Bank, as fiscal agent,
registrar, paying agent and transfer agent, Chase Trust Bank, as
principal paying agent and transfer agent, and Chase Manhattan Bank
Luxembourg S.A., as paying agent and transfer agent relating to
US$150,000,000 of our 9.125% Notes due 2004 (incorporated by
reference to Exhibit 2.4 to our Annual Report on Form 20-F filed on
March 26, 2003 (File No. 1-15224)).
3 Agreement, dated June 17, 2002, between Infovias and CLIC, relating
to the shares of WAY TV.
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)).
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)).
121
EXHIBIT
NUMBER DOCUMENT
-------- -------------------------------------------------------------------
4.8 Private Instrument 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)).
12.1 Certification of Executive Vice-President Pursuant to 18 U.S.C.
Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act
of 2002, dated June 30, 2003.
12.2 Certification of Chief Financial and Investor Relations Officer
Pursuant to 18 U.S.C. Section 1350, as enacted by Section 906 of
the Sarbanes-Oxley Act of 2002, dated June 30, 2003.
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.
122
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
COMPANHIA ENERGETICA DE MINAS
GERAIS - CEMIG
By: /s/ Francisco Sales Dias Horta
-------------------------------
Name: Francisco Sales Dias Horta
Title: Executive Vice-President
Date: June 30, 2003
123
CERTIFICATIONS
I, Francisco Sales Dias Horta, certify that:
1. I have reviewed this annual report on Form 20-F of CEMIG;
2. Based on my knowledge, this annual 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
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Francisco Sales Dias Horta
------------------------------
Name: Francisco Sales Dias Horta
Title: Executive Vice-President
Date: June 30, 2003
124
I, Flavio Decat de Moura, certify that:
1. I have reviewed this annual report on Form 20-F of CEMIG;
2. Based on my knowledge, this annual 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
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Flavio Decat de Moura
-------------------------
Name: Flavio Decat de Moura
Title: Chief Financial and
Investor Relations Officer
Date: June 30, 2003
125
INDEX OF DEFINED TERMS
Acesita............................................32
ADRs................................................2
ADSs................................................2
ALCOA..............................................41
American Depositary Receipts........................2
American Depositary Shares..........................2
ANA..............................................A-16
ANEEL...............................................2
Annex V Regulations...............................106
ASMAE.............................................A-7
average rate.......................................59
basic transmission network.........................26
BNDES.........................................61, A-5
Board of Trade of Minas Gerais.....................96
Brazil..............................................1
Brazilian Corporate Law.............................1
CBEE...............................................64
CCC Account..................................43, A-14
CCPE..............................................A-1
CDE Account......................................A-14
CEB................................................34
CEMIG...............................................1
Central Bank........................................6
CGSE..............................................A-4
CHESF.............................................A-1
CLIC...............................................45
CNPE..............................................A-6
Code..............................................107
CODs...............................................48
COFINS.............................................63
commercial market...................................6
Commission..........................................1
common shares.......................................2
Company.............................................1
CONAMA.......................................47, A-15
Concessions Law....................................12
COPAM..............................................46
COPASA.............................................33
COS................................................47
CPMF...............................................65
CRC Account........................................10
CRC Account Agreement..............................10
Cruzado Plan.......................................86
CVM................................................22
CVRD...............................................32
DETEL/MG...........................................82
DNAEE..........................................8, A-6
dollars.............................................1
EITF 92-07.........................................53
Eletrobras....................................35, A-1
Eletronorte.......................................A-1
Eletronuclear.....................................A-2
Eletrosul.........................................A-1
Energy Crisis Committee............................60
ERM..............................................A-14
falencia...........................................24
FASB...............................................56
FEAM...............................................46
Federal Government.............................3, A-1
floating market.....................................6
FNDCT..............................................73
Forluz.............................................15
free customers.....................................42
Furnas........................................64, A-1
Gasmig.............................................25
GCE...............................................A-3
GDP...............................................A-2
General Agreement of the Electricity Sector........19
guaranteed return.................................A-7
GW..................................................2
GWh.................................................2
IBAMA........................................47, A-15
IBGE..............................................A-2
IGP-M.............................................A-8
Infovias...........................................25
initial contracts..................................12
IOF...............................................111
IPHAN..............................................46
IPPs...............................................28
Itaipu.............................................17
kW..................................................2
kWh.................................................2
LATIBEX............................................94
MAE...........................................12, A-3
mandatory dividend amount..........................89
Market Agreement..................................A-6
MGI................................................44
Minas Gerais........................................2
MMA..............................................A-15
MME...............................................A-1
MRE................................................35
MVA................................................29
MW..................................................2
MWh.................................................2
National Monetary Council..........................22
non-Brazilian holder..............................108
noon buying rate....................................1
NYSE...............................................23
ONS...........................................29, A-7
OTC................................................93
Parcel A costs.....................................26
PASEP..............................................63
126
PLC................................................48
preferred shares....................................2
PSDB...............................................78
QCC................................................50
R$..................................................1
REAIS...............................................1
real................................................1
regulatory extraordinary rate adjustment...........87
RFB..............................................A-12
RGR Fund...........................................68
RTE...............................................A-4
Sao Paulo Stock Exchange...........................23
Securities Act.....................................24
SELIC.............................................106
SEMAD..............................................47
SFAS No. 71........................................53
SIESE.............................................A-2
SISNAMA..........................................A-15
Southern............................................8
Special Quorum Provisions.........................104
SPPs.........................................11, A-12
State Government....................................3
TFSEE............................................A-15
Tractebel.........................................A-1
U.S. dollars........................................1
U.S. GAAP...........................................1
U.S. holder.......................................107
UBP Fund.........................................A-14
United States dollars...............................1
US$.................................................1
Usiminas...........................................32
Vallourec & Mannesmann.............................32
VAT................................................53
WAY TV.............................................45
127
ANNEX A
THE BRAZILIAN ELECTRICITY SECTOR
THE BRAZILIAN ELECTRICITY SYSTEM OVERVIEW
The Brazilian electricity system consists of two large interconnected
systems--one for the South, Southeast and Midwest Regions of Brazil and the
other for the North and Northeast Regions--and several small isolated systems in
the north and west. The two large systems (which together account for 97% of the
capacity in Brazil) are interconnected through a 1,200 MW high-voltage
transmission line.
Brazil's abundant hydrological resources are managed through storage
reservoirs. It is estimated that Brazil has a hydroelectric power generation
potential of 258,420 MW, of which only 28% has been developed, according to the
Electrical Energy Expansion Committee, or CCPE.
The table below shows the installed capacity of electric power generation
in Brazil's interconnected power system (excluding non-connected systems and
self-production capacities), divided into hydroelectric and thermoelectric
generation capacity, from 1991 through March 31, 2003 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 (through March 31, 2003)........... 66,147 10,119
----------
Sources: National System Operator - ONS
Brazil has an installed capacity in the interconnected power system of 76.3
GW, of which approximately 87% is hydroelectric. The installed capacity includes
half the installed capacity of Itaipu with 12,600 MW of capacity owned equally
between Brazil and Paraguay. The Ministry of Mines and Energy, or MME, has
produced a ten-year expansion plan (2003-2012) under which Brazil's installed
capacity is projected to increase to approximately 120 GW by 2012, of which 17%
is projected to be thermoelectric and 83% is projected to be hydroelectric.
There are approximately 190,000 kilometers of transmission lines in Brazil.
Approximately 32% of Brazil's installed generating capacity and 50% of
Brazil's high voltage transmission lines are operated by Centrais Eletricas
Brasileiras S.A., or Eletrobras, a company owned by the federal government of
Brazil, or the Federal Government. Eletrobras has historically been responsible
for implementing electric policy, conservation and environmental management
programs. It controls four subsidiaries responsible for the generation,
transmission and distribution of electricity in the north, northeast and
southeast of Brazil: Centrais Eletricas do Norte do Brasil S.A., or Eletronorte;
Companhia Hidroeletrica do Sao Francisco, or CHESF; Furnas Centrais Eletricas
S.A., or Furnas; and Centrais Eletricas do Sul do Brasil S.A., or Eletrosul
(excluding Eletrosul's generation assets that formed Tractebel Energia S.A., or
Tractebel, which was privatized in 1998). As a result of the restructuring of
the Brazilian electric sector, however, these federally-owned companies have
been changing their roles from regional development utilities to generation
A-1
and/or transmission companies acting in a competitive market. Eletrobras also
controls Eletrobras Termonuclear S.A., or Eletronuclear, a company formed
following a partial split-up of Furnas. The remaining high 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.
ELECTRICITY SUPPLY AND DEMAND
Between 1986 and 2002, the consumption of electricity in Brazil grew by
approximately 3.5% per year (from 166,734 GWh to 290,530 GWh), the number of
consumers increased by approximately 4.5% per year (from 25.6 million to 51.5
million) and the total installed capacity increased by more than 3.7% per year
(from 42,619 MW to 75,830 MW). The following table sets forth the growth in
Brazil's energy consumption, population and growth rate of the gross domestic
product, or GDP, from 1986 through December 31, 2002.
ENERGY ENERGY
CONSUMPTION CONSUMPTION POPULATION
YEAR (IN GWH) (% GROWTH) GDP GROWTH (%) (IN MILLIONS)
--------------------------------------- ----------- ----------- -------------- -------------
1986................................... 166,734 10.60 7.5 134.7
1987................................... 179,067 7.40 3.5 137.3
1988................................... 187,373 4.64 (0.1) 139.8
1989................................... 196,069 4.64 3.2 142.3
1990................................... 204,440 4.27 (4.3) 147.6
1991................................... 213,483 4.42 0.3 149.9
1992................................... 217,408 1.84 (0.8) 152.2
1993................................... 226,179 4.03 4.2 154.5
1994................................... 231,641 2.41 6.0 156.8
1995................................... 248,680 7.36 4.3 159.0
1996................................... 259,322 4.27 3.6 161.2
1997................................... 276,798 6.74 3.0 163.5
1998................................... 287,515 3.87 0.1 165.7
1999................................... 292,677 1.80 0.8 167.9
2000................................... 307,529 5.07 4.4 170.1
2001................................... 283,257 (7.90) 1.5 172.4
2002................................... 290,530 2.57 1.5 174.6
----------
Sources: SISTEMA DE INFORMACOES EMPRESARIAIS DO SETOR DE ENERGIA ELETRICA
(Brazilian Business Information System for the Energy Sector), or SIESE;
INSTITUTO BRASILEIRO DE GEOGRAFIA E ESTATISTICA (Brazilian Institute of
Geography and Statistics), or IBGE; and the MME.
Between 1986 and the end of 2002, consumption of electricity in Brazil
generally grew at a faster rate than Brazil's GDP, with the exception of 1993
and 1994, during which time labor intensive industries lowered their output.
Even in years in which the GDP had negative growth, electricity consumption
increased. Overall electricity consumption growth averaged 6.5% per year from
1970 to 2002. According to the 2003 - 2012 Indicated Planning Report from MME,
the Brazilian consumption growth rate should reach 5.8% per year for the
respective 10-year period. The following table illustrates the forecasted
breakdown of the consumption growth rate per region:
A-2
CONSUMPTION GROWTH RATE (PER YEAR)
--------------------------------------------------------------------------------------
SOUTHEAST/
NORTH NORTH NORTHEAST MIDWEST SOUTH BRAZILIAN
PERIOD ISOLATED(1) INTEGRATED INTEGRATED INTEGRATED INTEGRATED AVERAGE
------------------ ----------- ---------- ---------- ---------- ---------- ---------
2001 - 2007....... 6.9% 7.9% 6.1% 5.0% 5.5% 6.4%
2001 - 2012....... 6.6% 7.1% 4.9% 4.8% 4.9% 5.8%
----------
Source: Electrical Energy Expansion Committee; CCPE-Expansion Planning
2003/2012.
(1) The "isolated" portion of the North Region refers to the portion of the
North Region that is not connected to the basic transmission network.
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 2003 2004 2005 2006 2007
------------------------ ---- ---- ---- ---- ----
South................... 0.1 1.1 1.1 1.3 1.0
Southeast/Midwest....... 0.1 1.0 0.7 1.0 1.2
North................... 8.5 1.3 1.5 2.5 8.5
Northeast............... 9.7 2.5 2.4 2.8 4.1
----------
Source: National System Operator - ONS, Planning of Operation for the year 2003
The electricity shortfall figures assume the occurrence of substantial
capacity additions forecasted in Eletrobras' most recent 10-year plan.
RESTRICTIONS AND RATIONING
In connection with the termination of the Electricity Rationing Plan on
February 28, 2002 and the execution of the General Agreement of the Electricity
Sector, new rules were issued to encompass the terms of the agreement and to
allow the MERCADO ATACADISTA DE ENERGIA ELETRICA (Wholesale Energy Spot Market),
or the MAE to account for electricity transactions resulting therefrom. A brief
historical description of events and related impacts in us are described below.
Low amounts of rainfall in 2000 and early 2001, as well as vigorous growth
in demand for energy, resulted in abnormally low water levels in many reservoirs
that are used to power Brazil's major hydroelectric generation facilities. As a
response to these conditions, the President of Brazil passed a provisional
measure and a decree on May 15, 2001. Provisional Measure No. 2,147 (as updated
by Provisional Measure No. 2,152-2 on June 1, 2001) created the CAMARA DE GESTAO
DA CRISE DE ENERGIA ELETRICA (Energy Crisis Committee), or GCE. The GCE enacted
its first resolution on May 16, 2001, which provided that electricity
distribution concessionaires in the Southeast of Brazil suspend the provision of
(i) electricity distribution to new customers (except residential and rural
customers); (ii) increased electricity to existing customers; (iii) electric
service for events such as festivals, circuses and nighttime sporting events;
and (iv) electric service for ornamental or advertising uses. The resolution
also called for a 35% minimum reduction in the provision of illumination in
public spaces. Presidential Decree No. 3,818 required the Federal Government to
reduce its electric power consumption by 15% in May 2001, 25% in June 2001 and
35% by July 1, 2001.
In addition, on May 18, 2001, the Federal Government announced several
measures aimed at consumers of electric energy. Power rationing measures were
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 one-fifth of the average residential consumption during May, June
and July 2000. Industrial and commercial
A-3
consumers were required to reduce their consumption by 15% and 25% of the
average consumption for the above mentioned period. The Federal Government also
established that residential consumers who failed to reduce their consumption
and consumed over 200 kWh per month would be subject to a 50% surcharge
applicable to the portion of their consumption between 201 kWh and 500 kWh, and
a 200% surcharge applicable to the portion of their consumption that exceeded
500 kWh per month, while residential customers that reduced consumption in
excess with the mandated reductions would receive bonuses based on the extent of
their reduction in consumption. These payments would be made from funds
collected as a result of the surcharges described above. Consumers of all
classes that failed to reduce consumption by the specified amounts would also be
subject to power cuts. The power rationing measures ultimately ceased on
February 28, 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
CAMARA DE GESTAO DO SETOR ELETRICO (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.
FEDERAL GOVERNMENT ACTIONS TO REIMBURSE ELECTRIC UTILITIES
On October 17, 2001, the Federal Government, through Executive Act No. 4,
approved by Law No. 10,310 of November 22, 2001, stated that electric utilities
will be reimbursed for expenses associated with payment of bonuses to consumers
and other related costs that exceeded the surcharges. ANEEL established the
procedures and deadlines relating to such reimbursement. After approval by
ANEEL, we received approximately R$132 million in reimbursements for consumer
bonuses paid. Additionally, as of December 31, 2002, we have recorded R$20
million as current assets and R$32 million as other assets related to additional
reimbursable bonuses and costs related to the Electricity Rationing Plan.
Due to the rationing measures, power generation and distribution companies
sought guidance regarding the applicability of Annex V to their initial
contracts. Annex V to the initial contracts was designed to protect distribution
companies from reduced sales volumes and limit the financial burden of
generation companies during periods of rationing and provides for a reduction of
the amount of energy contracted between distribution companies during rationing
periods and upon the occurrence of certain other events. Because of the rainfall
shortage, some generation companies could not produce energy at normal rates. As
a consequence, they could not deliver the contracted energy, and were obligated
to purchase it in the MAE, at prices significantly higher than the contracted
prices.
On December 12, 2001, through Provisional Measure No. 14, approved by Law
No. 10,438 on April 26, 2002, the Federal Government authorized the creation of
the General Agreement of the Electricity Sector, which is 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.
Under the General Agreement of the Electricity Sector, Annex V to the
initial contracts was replaced with an extraordinary rate increase applicable to
final customers that would compensate both generators and distributors for
rationing-related losses. The increased rates will be in force for an average
period of 72 months from January 2002 (82 month period for CEMIG). An
extraordinary rate increase, or RTE, established by Federal Law 10,438 of May
26, 2002, is aimed at recovering the economic and financial balance of the
electricity utilities impaired by losses of revenue resulting from the
rationing. The RTE also covers financial losses resulting from 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 rate.
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
A-4
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%.
In April 2003, the Federal Government, fearing that rate increases may
contribute to overall inflation in Brazil, decided to delay until 2004 a rate
increase to which we were entitled under ANEEL resolutions. This rate increase
was to have taken effect in April 2003 and was intended to reimburse certain
uncontrollable costs that are referred to as Parcel A costs.
In addition, a portion of the MAE transaction proceeds to which we are
entitled under the General Agreement of the Electricity Sector have been
retained by other utilities pending the outcome of a lawsuit we have filed
against ANEEL and the MAE. See "Item 8. Financial Information--Legal
Proceedings--Rate Increases and Regulatory Matters."
The General Agreement of the Electricity Sector has also established that
BANCO NACIONAL DE DESENVOLVIMENTO ECONOMICO E SOCIAL, (the National Bank for
Economic Development), or BNDES, will make loans available with respect to 90%
of the amounts recoverable under the rate increase already given. The loans are
repayable over the rate increase collection period. On February 3, 2003, we
entered into a loan agreement with BNDES in the principal amount of R$396.7
million under which we borrowed R$335 million. See "Item 10. Additional
Information--Material Contracts."
LEGAL AND REGULATORY MATTERS
The Federal Government, in recent years, has undertaken extensive reforms
in the Brazilian electricity sector. In general terms, these measures have been
aimed at placing regulatory authority in the hands of independent agencies, in
addition to increasing the role of private enterprise (including foreign
investors) in electricity generation and distribution and promoting competition
in the sector. These developments have resulted in profound changes to the
competitive and regulatory environment in which we operate. It is not possible
to predict the over-all impact that these changes will have on us and our
results of operations as certain changes have not yet been announced by the
Federal Government regarding the electric sector policy.
GOALS OF REFORM
The Brazilian electricity sector consists primarily of separate generation,
transmission, and distribution activities within a few vertically integrated
companies traditionally owned by the federal or state governments. During the
last four years, many of the state-controlled companies have been privatized in
an effort to promote efficiency and competition in the sector.
As part of the Federal Government's attempt to foster private investments,
encourage efficiency, reduce its role in the Brazilian energy sector and
increase the level of industry competition, a new regulatory system has been
developed. The goals of such regulatory system include:
(i) the separation of generation, transmission, distribution and
commercialization activities;
(ii) the creation of the MAE;
(iii) the institution of the ONS (as defined below) to ensure
optimized dispatch and access to transmission grids;
(iv) the establishment of certain concentration restrictions on
ownership within the generation and distribution areas; and
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(v) the appointment of BNDES as the sector's "financial agent,"
particularly to support new generation projects.
The new Federal Government administration has stated to the media that it
plans to stop the privatization process by using the generators under its
control to promote the electric sector expansion together with the private
sector. In addition, according to preliminary versions of the revised regulatory
framework, generators will be encouraged to invest in new capacity through
long-term contracts to be signed with distributors and at prices to be set at
public auctions. Guarantees will be provided in order to reduce the credit risk
of distributors.
REGULATORY AGENCIES
Prior to 1997, the electricity industry in Brazil was comprehensively
regulated by the MME, acting through the National Department of Water and
Electrical Energy, or DNAEE. The DNAEE had the power to grant concessions for
the generation, transmission and distribution of electricity and played an
important role in the rate-setting process. The principal regulatory authority
for the sector has now passed to an independent agency, ANEEL, which was created
on December 26, 1996 and established in October 1997. ANEEL is responsible for
(i) acting on bids and contracts for concessions for electricity generation,
transmission and distribution, (ii) determining rate revision methods and for
setting rates, (iii) supervising and auditing the activities of electricity
concessionaires, (iv) issuing regulations for the electricity sector in
accordance with policies and guidelines established by the Federal Government,
(v) planning, coordinating and executing water resource studies, (vi) solving
administrative disputes among agents for the electric sector, (vii) issuing
antitrust regulations and monitoring compliance with antitrust laws and (viii)
determining penalties for violations of law and breach of contract. However, the
new Federal Government administration has stated to the media that ANEEL's role
will be reduced to one of supervision and regulation of the electric sector
whereas the executive branch, through the MME, will be responsible for
establishing policies for the electric sector and granting concessions.
In the past, the construction of new generation facilities and the level of
production permitted to existing facilities were subject to regulation by two
committees coordinated by Eletrobras, which included representatives of each of
the major concessionary companies, including us. These committees were
responsible for preparing and periodically revising plans establishing the
number, location, generating capacity and construction schedules of power plants
to be built in each region. Supply contracts among the electricity companies
within a region were based on an allocation scheme established by the
committees.
In 1996, a consortium was selected by the MME and Eletrobras to conduct a
study regarding the reform of the electricity sector in Brazil. The objective of
such reform was to focus the Federal Government's activities on regulatory
matters while transferring operation and investment responsibilities to the
private sector, permitting the introduction of competition into the sector.
In August 1997, the CONSELHO NACIONAL DE POLITICA ENERGETICA (National
Energy Policy Council), or CNPE, was created. The CNPE advises the President of
Brazil on the formation of energy policy in order to: (i) promote the rational
use of Brazilian energy resources; (ii) assure the supply of energy to remote
areas of the country; and (iii) establish rules regulating the use of natural
gas, alcohol, coal and thermonuclear energy.
Between 1998 and 1999, three new institutions were created:
(i) the MAE, established by the Federal Government in May 1998 and
instituted by the Market Agreement (a standard form agreement that was
approved in January 1999 by ANEEL and implemented in August 2000 by
Resolution No. 290, that establishes trade rules, allocates costs and
provides for dispute resolution mechanisms for market participants);
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(ii) the OPERADOR NACIONAL DO SISTEMA (National System Operator), or
ONS, a not-for-profit entity created to coordinate and control
generation and transmission operations in the connected system. The
objectives and principal responsibilities of the ONS include: planning
generation operations; organizing the use of a national interconnected
electricity system and international interconnections; guaranteeing
access of all agents in the sector to the transmission network in a
non-discriminatory manner; and contributing to the expansion of the
electricity systems at lower costs with a view toward improved
operational conditions in the future; and
(iii) the ADMINISTRADORA DE SERVICOS DO MERCADO ATACADISTA DE ENERGIA
ELETRICA (Administrator of Services for the Wholesale Energy Market),
or ASMAE, an entity that manages the MAE and that has been, since
September 2000, responsible for an Internet-based system that receives
energy bids, contracts and meter readings from participating
organizations and settles the market. ASMAE also provides the
following functions: maintenance of participant information;
governance; penalty calculations; pre-billing; and publishing of
pricing and trading information through a web portal.
In addition, the management and supervision of the application of the rules
of the Market Agreement was carried out by the Executive Committee of the Market
Agreement, which is composed of representatives elected by the signatories of
the Market Agreement.
Due to problems in ASMAE's administration in connection with disputes
regarding the establishment of procedures for accountability and liquidation of
transactions conducted in the market, ANEEL, through Resolution No. 162 of April
20, 2001, established that ASMAE functions require authorization and supervision
by ANEEL. In addition, ANEEL changed the structure of the ASMAE in relation to
its Executive Committee. This was the first intervention of ANEEL in the market.
The measures undertaken by the GCE before it was extinguished and replaced
by the CGSE included commencement of a revitalization process for the power
sector. Following the commencement of this process, the Federal Government
issued Provisional Measure No. 29 of February 2002, authorizing the creation of
a new MAE to replace the ASMAE as administrator of the market. This new MAE was
created as a private corporate body to act under the authorization and
supervision of ANEEL. This new market, contrary to the previous one, will no
longer be self-regulated, as its convention, rules and proceedings will be
regulated by ANEEL.
The implementation of the new MAE began on March 1, 2002, through
Resolution No. 103 of ANEEL, which authorized the establishment of the new MAE,
and Resolution No. 102, which approved the convention of the new MAE but
maintained the rights and obligations accrued by the transactions performed
under the rules of the previous market (Market Agreement and ANEEL Resolution
290 of August 2000).
RATES
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
company's 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
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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 concessionaire's 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.
In July 1997, we signed, with the Federal Government, our concession
agreements for generation, transmission and distribution of electric power.
These contracts give us the right to use the concessions for twenty years and
contain a rate increase clause, based on a price cap formula (FORMULA
PARAMETRICA).
The price cap formula increases rates for captive customers and is as
follows:
VPA + VPB (IVI +- X)
IRT = --------------------
RA
Where:
- IRT is the index of adjustment rate;
- VPA represents the Parcel A costs, which are the uncontrolled costs of
the company, such as the cost of electricity purchased for resale,
costs associated with the use of hydroelectric resources, fuel,
contributions to the RGR Fund (a reserve fund created by the Brazilian
Congress that provides compensation to electricity companies for
certain assets used in connection with their concessions if their
concessions are revoked), etc.;
- VPB represents the controlled costs of the company, such as the cost
of employees, material, services, and others;
- IVI adjusts the controlled costs of the company according to the rate
of inflation and is based on the INDICE GERAL DE PRECOS-MERCADO (the
Brazilian General Market Price Index), or IGP-M, an index similar to
the retail price index;
- X is a factor used to measure the productivity of the utility.
Depending upon the performance of the utility, this factor may
increase or decrease the IVI. The first calculation of this factor
occurred in April 2003, and is calculated every five years; and
- RA is the company's annual revenue.
Beginning in December 1993, the Federal Government introduced the Real
Plan, which suspended the automatic adjustment process. Instead, rates were
frozen and any increases required the approval of Brazil's Ministry of Finance.
Rate-setting authority has now passed to ANEEL. In April 1997, we were granted
an average rate increase of 9.75% for sales to distributors and final customers.
During
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1998, 1999, 2000, 2001, 2002 and to date in 2003 we were granted average
increases of 4.54%, 20.73%, 11.83%, 16.49%, 10.51% and 31.53%, respectively. In
December 2001, we had an average rate increase of 5.87%, which will last until
October 2008, to reimburse us for losses relating to rationing.
In August 1998, ANEEL issued new regulations governing distribution rates.
ANEEL has the authority to readjust and review rates in response to changes in
energy purchase costs and market conditions. In readjusting distribution rates,
ANEEL considers the following: (i) costs of electricity purchased for resale
under initial contracts (See "--Competition") and from Itaipu; (ii) costs of
electricity purchased under freely negotiated contracts; (iii) costs of
electricity purchased in the spot market; and (iv) other transmission and
distribution system charges.
Each distribution company's concession agreement also provides for an
annual readjustment of rates based on certain regulatory charges, and other
costs such as those related to electricity purchased for resale, use of
hydroelectric resources and transmission. In addition to ordinary adjustments,
the concession agreements provide that extraordinary adjustments may be made if
concessionaires experience material costs not contemplated by the time of
execution of the agreement.
ANEEL has also issued rate regulations that govern access to the
transmission system and establish transmission rates. The rates to be paid by
distribution companies, generators and independent customers for the use of the
interconnected systems are established by ANEEL and reviewed annually, taking
into account the revenues that are permitted of transmission concessionaires
pursuant to their concession agreements. Owners of the different parts of the
basic transmission network have to transfer operating control of their
facilities to the ONS in return for the receipt of regulated payments linked to
availability. Network users, including generation companies, distribution
companies and large customers, have signed contracts with the ONS entitling them
to use the basic transmission network in return for payment of published rates.
The other parts of the transmission network, which are not part of the basic
transmission network, will be made available directly to the interested users by
paying specified fees. Transmission charges will be based on the nodal costs
calculated according to the long-range incremental costs methodology. Generation
companies will pay 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.
Open access to the basic national grid is integral to the ongoing
comprehensive reform of the electricity sector. ANEEL considers strict price
regulation of transmission services and non-discriminatory pricing to be
necessary to ensure that open access to the basic national grid is maintained.
To this end, ANEEL issued Resolution No. 167, on May 31, 2000, establishing (i)
the annual levels of revenue allowed for each transmission facility integrating
the basic grid, (ii) the fee for the use of the basic grid, and (iii) the value
of the connection changes. The basic transmission grid includes all transmission
lines with voltage equal to or higher than 230 kV. In addition, certain other
unbundled facilities related to transmission must be available to interested
parties at regulated rates as part of open access to the transmission grid.
In June 2000, ANEEL set the monthly amount of R$3,235.49/MW as the rate for
use of the basic transmission network to be applied to initial contracts between
the ONS and the distribution companies. ANEEL increased this rate to
R$3,612.19/MW and R$4,774.74/MW in June 2001 and 2002, respectively. In June
2000, ANEEL also set the amount of R$1,755.49/MW as the rate for the
transportation of energy from Itaipu to be paid to Furnas by distribution
companies that utilize this energy. ANEEL increased this rate to R$1,955.38/MW
and R$2,110.81/MW in June 2001 and 2002, respectively.
The rates that energy utility companies pay for the purchase of electricity
generated by Itaipu were established pursuant to a treaty between Brazil and
Paraguay and are denominated in U.S. dollars. As a consequence, Itaipu's rates
rise or fall independently of the rates established by federal regulatory
authorities for sales by electric utilities. The sale of Itaipu-generated energy
does not generate any margin
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to the distribution companies because the rate for such sales is equal to the
rate paid by the utility plus sales taxes.
COMPETITION
In an effort to promote increased competition, ANEEL in March 1998
announced limits on the concentration of certain services and activities within
the electric power sector. ANEEL updated these limits in July 2000. Under these
limits (i) no generation company may own more than 20% of Brazil's 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, (ii) no
distribution company may account for more than 20% of Brazil's distribution
market, 25% of the south/southeast/central-west market or 35% of the
north/northeast market, (iii) no trade company may deal more than 20% of
Brazil's final trade energy (consumers), 20% of Brazil's intermediate trade
energy (between companies), and 25% of Brazil's total trade market (consumers
and companies), and (iv) no distributor may purchase from an affiliated
generation company, or itself generate, more than 30% of its captive consumers'
total energy requirements (known as the self-dealing limit).
The generation and distribution companies subject to the above limits are
companies or consortia that are holders of concessions, permissions or
authorizations, as the case may be, to generate or distribute energy, or agents
that hold shares in the controlling group of the generation or distribution
company. In the case of an agent, the calculation of such limits is based on the
number of common shares of the company owned by the agent. In the case of a
limited liability company, the calculation is based on the participation of the
agent in the capital of the company.
The self dealing limit does not apply (i) to energy contracted under the
initial contracts, (ii) to energy produced by small hydroelectric plants,
alternative sources and co-generation facilities and (iii) distribution
concessionaires with a market that does not exceed 300 GWh/year. Furthermore,
with respect to computation of energy amounts for purposes of the self dealing
limit, energy produced by the following entities shall not be considered until
2012: (i) thermoelectric plants that began operating in 2001 or 2002; and (ii)
hydroelectric plants which have been authorized by ANEEL to begin production
after December 31, 2002, but that actually began operating in 2001 or 2002. In
addition, with respect to computation of energy amounts for purposes of the self
dealing limit, energy produced by thermoelectric plants that are included in the
PROGRAMA PRIORITARIO DE ENERGIA (Thermoelectric Priority Program) that begin
operating prior to December 31, 2004 shall not be considered until 2014.
In May 1998, the MAE was created as the only energy market in accordance
with the Market Agreement and subsequently became the market administrator. The
terms of this agreement were approved by ANEEL in January 1999. The following
entities are required to participate in the MAE: (i) generation companies with
installed capacity of 50 MW or more; (ii) distribution and retail companies with
annual sales of 300 GWh/year or more; and (iii) companies that import or export
50 MW or more of electricity. Other generation, distribution and import/export
companies are permitted to participate in the market on a voluntary basis.
During a transition period (1998 - 2005), purchases and sales of energy in
the MAE will occur pursuant to bilateral contracts and initial contracts that
specify contract prices and volumes approved by ANEEL for their entire duration
and replace the former system of supply contracts. The purpose of the transition
period is to permit the gradual introduction of competition into the sector and
to protect market participants against exposure to potentially volatile spot
prices.
From 2003 to 2005, the volume of electricity allowed to be purchased and
sold pursuant to the initial contracts will be reduced by 25% per year. The
deregulated energy will be bought and sold by distribution concessionaires
through public auctions in accordance with Federal Law No. 10,438, dated April
26, 2002, Federal Law No. 10,604, dated December 17, 2002, and Decree No. 4,562,
dated
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December 31, 2002. Deregulated energy that is not bought or sold through public
auction may be bought or sold through power purchase agreements with terms of
less than 6 months. Deregulated energy that is not bought or sold through public
auction or limited term power purchase agreements with limited terms may be
purchased on the MAE. During this period, the total amount of energy bought or
sold pursuant to public auction or limited term power purchase agreements may
not exceed 5% of the electric energy market of public service concessionaires in
any given month.
In order to avoid exposing final customers to the volatility of market
prices, ANEEL's legislation provides that distributors must have 95% of the
energy they contract to final customers guaranteed by energy from their own
plants or power purchase agreements. Furthermore, 85% of the energy guaranteed
by power purchase agreements must be guaranteed by power purchase agreements
with terms not less than two years.
The MAE is responsible for registering any power purchase agreements
entered into among agents that participate in the MAE. Any difference between
the volume of contracted energy registered with the MAE and the energy actually
purchased or sold will be accounted for using the MAE spot price. The MAE spot
price is defined, in accordance with MAE rules that are approved by ANEEL, by a
pricing methodology that considers various factors including transmission
restrictions and loss factors. By having its long-term power purchase agreements
registered at the MAE, each distributor assures that purchases of electric
energy necessary to fulfill its obligations will be made at a fixed price, thus
avoiding market volatility (except with respect to any differences between the
volume of energy registered and energy actually purchased or sold).
Until December 2002, rules of the MAE did not apply to electricity
generated by Itaipu. Electricity generated by Itaipu was purchased through
specific contracts between concessionaires operating in the South, Southeast and
Center West Regions of Brazil and Furnas or Eletrosul. Since January 2003,
pursuant to Decree No. 4,500 of December 27, 2002, Eletrobras became the AGENTE
COMERCIALIZADOR DE ITAIPU (Trading agent of Itaipu). The commitment to buy and
resell the electricity from Itaipu to distribution utilities previously held by
Furnas and Eletrosul was transferred to Eletrobras. In order to accommodate
rules of the MAE, Itaipu will be considered a participant of the MRE and
Eletrobras, as the trading agent of Itaipu, will be the entity responsible for
the accounting of MAE transactions that result from the MRE.
The implementation of the model created by the former Federal Government
required changes in the Brazilian legal system then in force. New rules were
then issued and a new player in the Brazilian power sector, the Independent
Power Producer, or IPP, was introduced and a transition period prior to the
total deregulation of the Brazilian electric energy market was initiated.
During the above-mentioned period, the market was progressively deregulated
and the concept of "free consumers" (the equivalent of CEMIG's "free customers")
was introduced which currently consists of those consumers that: (i) have a
minimum load of 3 MW, supplied at a voltage of 69 kV or above; (ii) were
connected after July 8, 1995 and have a minimum load of 3 MW, regardless of the
voltage; or (iii) have a minimum load of 0.5 MW regardless of the voltage,
provided that they acquire energy of the so-called "PCH" (a small hydroelectric
power generator). Free consumers bear such a designation because they are not
restricted to only acquiring energy from public services concessionaires, but
may also opt to acquire energy from an IPP or any other source.
Currently, it is possible to have direct sales of electricity between IPPs
and free consumers through the interconnected power system, regardless of their
location.
To encourage the participation of private companies in the electricity
sector, generation and distribution companies, acting as brokers and traders,
may sell energy directly to final customers.
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CONCESSIONS
The Brazilian Constitution provides that the development, use and sale of
electricity may be undertaken directly by the Federal Government or indirectly
through the granting of concessions and authorizations. Companies or consortia
seeking to construct or operate a generation, transmission or distribution
facility in Brazil are required to apply for a concession from ANEEL.
Concessions grant exclusive rights to generate, transmit or distribute
electricity in a particular area for a specified period of time, generally 35
years for new generation concessions and 30 years for new transmission and
distribution concessions.
The Power Sector Law addressed the question of renewal of existing
concessions by providing that existing concessions could be extended for the
following periods: (i) for generation concessionaires, 20 years beginning from
the end of the present concession or 35 years for generation plants that had not
yet been completed; (ii) for distribution concessions, (a) up to 20 years
(beginning July 8, 1995) or (b) for a period equal to the longest remaining
period in respect of the concessions to be regrouped (whichever is the longest);
and (iii) for transmission concessions, the same period as the generation or
distribution concessions relating thereto. Existing concessions may be extended
provided that applications for extension were (i) made within specified time
periods from the enactment of the Power Sector Law, (ii) accepted by the Federal
Government, and (iii) formalized by a new concession agreement. Concessions for
projects which are delayed may be extended for the period necessary for the
amortization of the investment (but in no event more than 35 years) as long as a
completion plan is provided and an undertaking given that at least one-third of
the funding will be provided by the private sector.
Pursuant to Decree No. 1717/95, in order to renew a concession, a request
for the renewal of a concession must be submitted to ANEEL and must be
accompanied by a statement of costs for exploiting the concession and documents
which evidence the legal, technical, financial and administrative qualifications
of the concessionaire. In addition, the concessionaire must show full compliance
with its obligations to public entities, fiscal obligations, social security
obligations and obligations arising from other agreements made with entities of
the Federal Public Administration and/or from the rendering of electric energy
services. The concessionaire is also required to pay compensation for the
exploitation of hydroelectric resources.
Brazil's legislation requires that the granting of any public utility
concession be preceded by a public bidding process. Whenever a concession is up
for bid, ANEEL will publish an edital (request for bid), or RFB. The RFB must
contain certain information, including: (i) the purpose of the concession, its
duration and goals; (ii) a description of the qualifications required for the
adequate performance of the services covered by the concession; (iii) the
deadlines for submission of bids; (iv) the criteria used for selection of the
winning bidder; and (v) a list of the documents required to establish the
bidder's technical, financial and legal capacities. Companies interested in
bidding for the concession must submit their proposals in accordance with the
RFB, including a detailed description of the company's commercial plan.
Companies may submit proposals either individually or in consortia. ANEEL
determines a winning bid based on, generally, the largest payment to the Federal
Government in consideration for receipt of the concession, and, in the case of
bids for distribution or transmission projects, ANEEL's determination is
generally based on the lowest transmission or distribution rates.
Concessionaires may not transfer, sell or assign certain assets without the
prior written consent of ANEEL. The purchase and sale of energy by the
"authorized free market retailers," the import and export of energy and the
trade of exceeding energy by the self power producers, or SPPs are subject to
prior approval by ANEEL. Spin-offs, consolidations, mergers and reorganizations
of concessionaires require prior approval from ANEEL. Concessionary companies
may use public land or subject private property necessary for the development of
a project to condemnation proceedings.
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The development of hydroelectric plants by an IPP or an SPP requires a
concession only if the project will have installed capacity in excess of 1 MW in
the case of an IPP or 10 MW in the case of an SPP. Simplified procedures apply
to all other cases, including thermoelectric plants.
Since 1995, controlling interests in distribution and generation companies
previously owned by the Federal Government through Eletrobras, and in
state-controlled distribution companies, have been sold to private investors.
Certain state governments have also sold minority interests in major
distribution companies in the same period. See "--Privatization."
ROLE OF THE PRIVATE SECTOR
Various legislative and constitutional initiatives in 1995 gave rise to
substantial changes in the regulatory framework governing the Brazilian
electricity sector. The Brazilian Federal Constitution was amended to permit any
Brazilian company to become a concessionaire in the electricity sector
(regardless of the nationality of the company's shareholders). A federal law on
public concessions (in the electricity and other sectors) required the renewal
of most existing concessions and required that the granting of new concessions
for public utility services be preceded by a public bidding process. New federal
legislation relating specifically to the electricity sector opened the sector
permitting IPPs to generate and sell electricity for their own account to
certain categories of customers, permitting certain customers to purchase
electricity from any power supplier and requiring that suppliers and large
consumers be given open access (for a fee) to the distribution and transmission
systems of concessionaires that are included in the basic transmission network.
The Power Sector Law introduced the concept of the IPP. An IPP is a legal
entity or consortium of legal entities holding a concession or authorization to
generate and sell power to: (i) concessionaires; (ii) an existing customer with
a demand of at least 3 MW supplied at a voltage level equal to or greater than
69 kV; (iii) a new consumer with a demand of at least 3 MW supplied at any
voltage; (iv) groups of consumers subject to agreement with the local
distribution concessionaire; (v) consumers who do not receive supply within a
certain period from a local distribution concessionaire; and (vi) industrial or
commercial consumers to which the IPP also provides the steam that results from
the co-generation process.
Pursuant to the Power Sector Law, IPPs are subject to specific operating
and commercial rules and, in many cases, to pricing established pursuant to the
rules issued by relevant government authorities. The Power Sector Law also
provides for the formation of consortia with a view to generating power for
public utilities, for the exclusive use of consortium members, for independent
power production or for any one or more of these, in each case governed by
applicable rules.
The Power Sector Law also mandates that, in order to receive extensions for
distribution concessions, companies must "regroup" their facilities according to
certain technical and economic principles and obtain consolidated concessions in
accordance with those principles. The Federal Government published regulations
clarifying the concept of "regrouping" in Decree No. 1717/95 on November 24,
1995. Pursuant to Decree No. 1717/95, each distribution concessionaire was
required to submit its "regrouped" distribution concession to ANEEL by July 8,
1996. We submitted our "regrouped" distribution concession to ANEEL on a timely
basis and were informed that they agreed with our plan. In our proposal, we
regrouped our existing distribution concessions into four large groups, each
designed to be independently economically feasible and all expected to have
similar profitability.
PRIVATIZATION
Since 1995, a number of federal and state electric utilities have been
privatized. However, we believe that the current Federal Government
administration, which was elected in October 2002, may take actions that alter
or reverse the trend toward privatization in favor of an increased governmental
role in the
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planning, regulation and operation of the Brazilian electricity sector.
Specifically, the Federal Government indicated that it intends to amend certain
aspects of the regulatory framework of the energy sector to strengthen the
Federal Government's role with respect to implementation of regulatory
initiatives and oversight of the sector. Although no official announcement has
been made, we expect that an announcement regarding these changes may be made in
the second half of 2003. These changes and other regulatory changes might have
an adverse effect on our financial condition, future results of operations, cash
flows and business prospects.
REGULATORY CHARGES
Electricity companies are compensated for certain assets used in connection
with a concession if the concession is revoked or is not renewed. In 1971, the
Brazilian Congress created the RGR Fund, a reserve fund designed to provide
funds for such compensation. In February 1999, ANEEL revised the assessment of
the RGR fee requiring public-sector electricity companies to make monthly
contributions to the RGR Fund at an annual rate equal to 2.5% of assets in
service, not to exceed 3% of total operating revenues in any year. See note
17(a) to our consolidated financial statements. In recent years, virtually no
concession, once the related concession agreement has been entered into, has
been revoked or failed to be renewed, and the RGR Fund has been used principally
to finance generation and distribution projects. The RGR Fund is scheduled to be
terminated in 2010, which should result in rate reductions for customers.
The Federal Government has imposed a fee on IPPs similar to the fee levied
on public-sector generation companies in connection with the RGR Fund. IPPs are
required to make contributions to the FUNDO DE USO DE BEM PUBLICO (Public Use
Fund), or UBP Fund, for five years from the date that they receive their
concessions. Eletrobras received UBP Fund payments until December 31, 2002. All
subsequent payments to the UBP Fund are now paid directly to the Federal
Government.
Distribution companies are required to contribute to the CONTA DE CONSUMO
DE COMBUSTIVEL (Fuel Usage Quota Account), or CCC Account. The CCC Account was
created in 1973 to generate financial reserves to cover fossil fuel costs in
thermal power plants in the event of a rainfall shortage, which would require
increased use of thermal plants. Thermal power plants have higher marginal
operating costs than hydroelectric plants. Each electricity 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 thermal
power plants in the succeeding year. Eletrobras administers the CCC Account. The
CCC Account, in turn, reimburses electricity companies for a substantial portion
of the fuel costs of their thermal power plants.
In February 1998, the Federal Government provided for the gradual
elimination of the CCC Account. Subsidies from the CCC Account will be phased
out over a three-year period beginning in 2003 for thermal power plants
constructed prior to February 1998. Thermal power plants constructed after that
date will not be entitled to subsidies from the CCC Account. Protection from
hydrological risk for centrally dispatched hydrogenerators is now provided
through an Energy Reallocation Mechanism, or ERM. The ERM will ensure that,
under normal operating conditions, hydrogenerators will receive the income
associated with their assured energy entitlement by allocating generation from
those in surplus to those in deficit.
In April 2002, the Federal Government created the CONTA DE DESENVOLVIMENTO
ENERGETICO (Energy Development Account), or CDE Account. The CDE Account was
created to improve the development of energy utilities in the states and to
promote alternative sources of energy. CDE Account resources are derived from
(i) Uso de Bem Publico--UBP (Public Asset Use Fund), (ii) penalties imposed by
ANEEL and (iii) a percentage of the annual payment due by agents that transact
with final consumers. Among other things, CDE Account resources are used to
cover the fuel usage quota in certain thermoelectric plants. Eletrobras
administers the CDE Account, which shall last for 25 years.
A-14
All hydroelectric utilities in Brazil are required to pay fees to Brazilian
states and municipalities for the use of hydrological resources. Such amounts
are based on the amount of energy generated by each utility and are paid to the
states and municipalities where the plant or the plant's reservoir is located.
ANEEL also charges a fee to agents and concessionaires that render electric
energy services. This fee is known as TFSEE--TAXA DE FISCALIZACAO DE SERVICOS DE
ENERGIA ELETRICA (Fee for the Supervision of Electric Energy Services), or
TFSEE. The TFSEE was created pursuant to Federal Law No. 9,427, dated December
26, 1996, and is equivalent to 0.5% of the annual economic benefit realized by
the agent or concessionaire. Determination of "economic benefit" is based on the
installed capacity of authorized generation and transmission concessionaires or
the annual billings of distribution concessionaires.
ENVIRONMENTAL REGULATIONS
Environmental issues can significantly impact our operations. For example,
large hydroelectric power plants can cause the flooding of considerable areas of
land and relocation of large populations. The Brazilian Constitution gives
federal, state and municipal governments power to enact laws designed to protect
the environment and to issue regulations under such laws. While the Federal
Government has the power to promulgate general environmental regulations, state
governments have the power to enact more stringent environmental regulations.
The SISTEMA NACIONAL DO MEIO AMBIENTE (the National Environmental System),
or SISNAMA, was created to protect the Brazilian environment. SISNAMA is
comprised of: a governing body (Government Board); a consulting and
decision-making body, CONSELHO NACIONAL DE MEIO AMBIENTE (the Brazilian National
Environmental Council), or CONAMA; a central body, MINISTERIO DO MEIO AMBIENTE
(the Ministry of the Environment), or MMA; an executive body, INSTITUTO
BRASILEIRO DO MEIO AMBIENTE E DOS RECURSOS NATURAIS RENOVAVEIS (the Brazilian
Institute for Environment and Renewable Natural Resources), or IBAMA; and a
number of sectoral and local bodies. The bodies deserving special attention are
CONAMA and IBAMA. CONAMA conducts studies and assists and advises the Government
Board on government policy directives for environment and natural resources, and
the resolution, within the scope of its duties, of rules and regulations
applicable to the Brazilian environment. IBAMA enforces the National
Environmental Policy and inspects, controls and supports the use of natural
resources.
Law No. 6,938, dated August 31, 1981, is known as the National
Environmental Policy Act and regulates civil liability for damages caused to the
environment. This liability has an objective nature and, besides being strict,
it has also expanded the list of liable parties, adopting the principle of joint
and several liability. Irrespective of fault, the demonstration of the
cause-effect relationship between damage caused and action or inaction is
sufficient to create an obligation by the contaminating party to redress
environmental damage. Moreover, compliance with environmental licenses does not
rule out civil liability.
Activities that damage the environment may also lead to criminal and
administrative penalties, provided for in Law No. 9,605, dated February 12, 1998
(Environmental Crimes Act). The effects of the Environmental Crimes Act apply to
any person, whether an individual or legal entity, who, by any means,
contributes to environmental damage, to the extent of his/her fault. In 1999,
Decree No. 3,179 was enacted, establishing the applicable administrative
penalties for conduct and activities damaging the environment and the
regulations under the Environmental Crimes Act. The Decree establishes fines of
up to R$50 million and allows for the shutdown of operations.
Law No. 9,433 of January 8, 1997 created the POLITICA NACIONAL DE RECURSOS
HIDRICOS (National Water Resources Policy), which is organized considering
Brazil's hydrographic basins. The National Water Resources Policy is implemented
by governmental and non-governmental agencies and classifies water as an asset
of public domain. As a result, water usage may not be appropriated by one
person,
A-15
whether an individual or legal entity, nor shall it entail absolute exclusion of
all other potential users. Moreover, public authorities must provide
justification for the granting of water usage rights.
The right to use federal water is granted by the AGENCIA NACIONAL DE AGUAS
(National Water Agency), or ANA, created by Law No. 9,984, dated July 17, 2000,
and regulated by Decree No. 3,692, dated December 19, 2000, in collaboration
with ANEEL. Besides granting these rights, ANA also regulates and supervises the
use of federal water resources and implements the collection of the fees for
water usage, under a 0.75% rate upon the value of the generated energy.
Permission for use of non-federal water resources must be obtained from relevant
state water/environmental agencies.
In order to build a hydroelectric power plant, Brazilian electricity
companies must comply with a number of environmental safeguards. First, an
environmental impact assessment study must be prepared by outside experts who
make recommendations as to how to minimize the impact of the plant on the
environment. The study, together with a special environmental impact assessment
report on the project prepared by the company, is then submitted to federal or
state governmental authorities for analysis and approval. The project undergoes
a three-stage licensing process, which includes a provisional license indicating
the environmental feasibility of the project, an installation license to begin
construction and an operation license to operate the facility. Environmental
licenses must also be obtained in order to enlarge a facility or install new
equipment in a facility. Pursuant to CONAMA Resolution No. 279, dated June 27,
2001, a simplified licensing process may be used for undertakings that are not
deemed to have a large environmental impact. In addition to hydroelectric
plants, this simplified procedure is also applicable to thermoelectric plants,
transmission lines and similar facilities as well as alternative energy
undertakings.
Facilities considered to have a significant impact on the environment are
required by law to allocate a minimum of 0.5% of their total investment costs to
the creation of environmental preservation areas.
As per the Brazilian Forestry Code, the land surrounding water reservoirs,
whether natural or man-made, is considered a permanent preservation area, which
represents restrictions for land use.
The amendments to the Brazilian Forestry Code (Law No. 4, 771, dated
September 15, 1965), introduced by Provisional Measure No. 2,166-67, dated
August 24, 2001, established that the operator of the reservoir is required to
acquire such surrounding areas. Said requirement may impact the economic
viability of new hydroelectric undertakings, but is yet to be regulated.
The State of Minas Gerais Forestry Policy (Law No. 14309, dated June 19,
2002) does not oblige the operator to acquire the reservoir surrounding areas,
but instead requires indemnification of the landowners for the restriction to
land use caused by the reservoir. At the present time, neither said law is being
applied due to the fact its regulation is pending.
These rules, when applicable, will impose additional costs upon the
installation of new hydroelectric facilities.
Every legal entity that is involved in activities that have polluting
effects, or the potential for polluting effects, or that involve products that
are considered hazardous to the environment, must register with IBAMA.
Registration with the IBAMA involves quarterly payment of the TAXA DE CONTROLE E
FISCALIZACAO AMBIENTAL - TCFA (Environmental Inspection and Control Fee), which
amounts to approximately R$10,000 per year.
A-16
COMPANHIA ENERGETICA
DE MINAS GERAIS -
CEMIG
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2002, 2001 AND 2000 AND
INDEPENDENT AUDITORS' REPORT
Deloitte Touche Tohmatsu Auditores Independentes
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Companhia Energetica de Minas Gerais - CEMIG
Belo Horizonte - MG, Brazil
We have audited the accompanying consolidated balance sheets of COMPANHIA
ENERGETICA DE MINAS GERAIS - CEMIG (a Brazilian corporation) and its
subsidiaries (the "Company") as of December 31, 2002 and 2001, 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, 2002, all expressed in Brazilian REAIS. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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 Energetica
de Minas Gerais - CEMIG and its subsidiaries as of December 31, 2002 and 2001,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
June 26, 2003
/S/ Deloitte Touche Tohmatsu
COMPANHIA ENERGETICA DE MINAS GERAIS - CEMIG
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(EXPRESSED IN MILLIONS OF BRAZILIAN REAIS)
A S S E T S
DECEMBER 31,
-------------------
2002 2001
-------- --------
CURRENT ASSETS:
Cash and cash equivalents (note 7) 123 218
Restricted investments (note 8) 145 602
Accounts receivable, net (note 9) 882 485
Accounts receivable - use of basic transmission network 18 18
Deferred regulatory assets (note 4) 361 259
Recoverable taxes (note 10) 21 86
Materials and supplies 21 12
Receivable from Federal Government in respect of bonus paid and rationing
adoption costs incurred (note 5) 20 -
Receivable from Federal Government related to low-income consumers
(note 11) 42 -
Other 78 72
------ ------
1,711 1,752
------ ------
INVESTMENTS (note 12) 543 437
------ ------
PROPERTY, PLANT AND EQUIPMENT, NET (note 13) 10,099 9,841
------ ------
OTHER ASSETS:
Marketable securities - available for sale (note 14) 53 70
Deferred regulatory assets (note 4) 1,670 1,245
Receivable from Federal Government in respect of bonus paid and rationing
adoption costs incurred (note 5) 32 123
Restricted investments (note 8) 49 18
Recoverable taxes (note 10) 82 48
Account receivable from State Government (note 3) 755 451
Other 172 77
------ ------
2,813 2,032
------ ------
Total assets 15,166 14,062
====== ======
The accompanying notes are an integral part of the consolidated
financial statements.
F - 3
COMPANHIA ENERGETICA DE MINAS GERAIS - CEMIG
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(EXPRESSED IN MILLIONS OF BRAZILIAN REAIS, EXCEPT SHARE AMOUNTS)
LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31,
-------------------
2002 2001
-------- --------
CURRENT LIABILITIES:
Accounts payable to suppliers (note 15) 1,275 945
Payroll and related charges 108 97
Taxes payable (note 16) 151 219
Dividends and interest on capital 211 105
Current portion of long-term financing (note 17) 946 451
Regulatory charges payable (note 18) 94 52
Advance billings of electric power - 42
Employee profit sharing 26 35
Other 51 66
------ ------
2,862 2,012
------ ------
LONG-TERM LIABILITIES:
Long-term financing (note 17) 2,593 2,029
Employee post-retirement benefits (note 19) 1,272 1,627
Deferred income taxes, net (note 6) 4 46
Accrued liability for contingencies (note 20) 315 319
Accounts payable to suppliers (note 15) 334 364
Taxes payable (note 16) 204 -
Surcharge applied to consumers (note 5) - 26
Other 113 93
------ ------
4,835 4,504
------ ------
MINORITY INTEREST 27 3
------ ------
SHAREHOLDERS' EQUITY: (note 21)
Capital stock -
Preferred - 91,210,523 thousand shares authorized, issued and
outstanding as of December 31, 2002 (89,436,237 thousand shares as of
December 31, 2001) 804 786
Common - 70,874,168 thousand shares authorized, issued and
outstanding as of December 31, 2002 (69,495,478 thousand shares as of
December 31, 2001) 624 610
------ ------
1,428 1,396
Additional paid-in capital 3,170 3,170
Appropriated retained earnings 2,693 3,133
Unappropriated retained earnings 144 79
Accumulated other comprehensive income (loss) 7 (235)
------ ------
7,442 7,543
------ ------
Total liabilities and shareholders' equity 15,166 14,062
====== ======
The accompanying notes are an integral part of the consolidated
financial statements.
F - 4
COMPANHIA ENERGETICA DE MINAS GERAIS - CEMIG
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(EXPRESSED IN MILLIONS OF BRAZILIAN REAIS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
NET OPERATING REVENUES:
Electricity sales to final customers (note 22) 5,458 4,587 4,478
Regulatory extraordinary rate adjustment (note 4) 281 789 -
Electricity sales to the interconnected power system (note 22) 161 517 145
Use of basic transmission network 185 154 139
Other operating revenues 260 150 124
Taxes on revenues (note 22) (1,473) (1,191) (1,130)
------------ ------------ ------------
Total net operating revenues 4,872 5,006 3,756
------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Electricity purchased for resale (note 23) (1,333) (1,914) (819)
Natural gas purchased for resale (152) (84) (60)
Use of basic transmission network (298) (251) (243)
Depreciation and amortization (666) (641) (583)
Personnel (532) (531) (466)
Regulatory charges (note 23) (548) (420) (433)
Third-party services (265) (216) (195)
Employee post-retirement benefits (note 19) (207) (293) (238)
Materials and supplies (78) (70) (71)
Other (note 23) (238) (274) (208)
Provision for loss on deferred regulatory assets (note 4) (28) (150) -
Provision for loss on account receivable from State Government (note 3) - (754) -
------------ ------------ ------------
Total operating costs and expenses (4,345) (5,598) (3,316)
------------ ------------ ------------
Operating income (loss) 527 (592) 440
FINANCIAL EXPENSES, NET (note 24) (525) (48) (42)
------------ ------------ ------------
Income (loss) before income taxes and minority interests 2 (640) 398
------------ ------------ ------------
INCOME TAXES - (EXPENSE) BENEFIT: (note 6)
Current (187) (166) (62)
Deferred 161 88 30
------------ ------------ ------------
(26) (78) (32)
------------ ------------ ------------
MINORITY INTERESTS 12 (1) -
------------ ------------ ------------
NET INCOME (LOSS) (12) (719) 366
------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gains (losses) on available-for-sale securities (note 14) (17) 9 20
Minimum pension liability adjustment (note 19) 378 293 8
Deferred income taxes (119) (99) (9)
------------ ------------ ------------
242 203 19
------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) 230 (516) 385
============ ============ ============
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 161,033,699 158,931,715 158,931,715
============ ============ ============
Basic and diluted earnings (loss) per thousand common and preferred shares -
In Brazilian REAIS (0.07) (4.52) 2.30
============ ============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
F - 5
COMPANHIA ENERGETICA DE MINAS GERAIS - CEMIG
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(EXPRESSED IN MILLIONS OF BRAZILIAN REAIS)
YEARS ENDED DECEMBER 31,
2002 2001 2000
-------- -------- --------
CAPITAL STOCK:
Preferred -
Balance, beginning of year 786 786 786
Transfer from appropriated retained earnings 18 - -
-------- -------- --------
Balance, end of year 804 786 786
Common -
Balance, beginning of year 610 610 610
Transfer from appropriated retained earnings 14 - -
-------- -------- --------
Balance, end of year 624 610 610
-------- -------- --------
1,428 1,396 1,396
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL 3,170 3,170 3,170
-------- -------- --------
APPROPRIATED RETAINED EARNINGS:
Fiscal incentive investment reserve-
Balance, beginning of year 45 41 41
Transfer from unappropriated retained earnings - 4 -
-------- -------- --------
Balance, end of year 45 45 41
-------- -------- --------
Rate shortfall reserve-
Balance, beginning of year 2,680 2,680 2,680
Transfer to capital stock (32) - -
-------- -------- --------
Balance, end of year 2,648 2,680 2,680
-------- -------- --------
Unrealized income reserve-
Balance, beginning of year 314 484 538
Transfer to unappropriated retained earnings (314) (170) (54)
-------- -------- --------
Balance, end of year - 314 484
-------- -------- --------
Legal reserve-
Balance, beginning of year 94 94 94
Transfer to unappropriated retained earnings (94) - -
-------- -------- --------
Balance, end of year - 94 94
-------- -------- --------
2,693 3,133 3,299
-------- -------- --------
UNAPPROPRIATED RETAINED EARNINGS:
Balance, beginning of year 79 735 502
Net income (loss) (12) (719) 366
Transfer from appropriated retaining earnings 408 166 54
Dividends (331) (103) (187)
-------- -------- --------
Balance, end of year 144 79 735
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance, beginning of year (235) (438) (457)
Other comprehensive income 242 203 19
-------- -------- --------
Balance, end of year 7 (235) (438)
-------- -------- --------
Shareholders' equity at end of year 7,442 7,543 8,162
======== ======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
F - 6
Page 1 of 2
COMPANHIA ENERGETICA DE MINAS GERAIS - CEMIG
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(EXPRESSED IN MILLIONS OF BRAZILIAN REAIS)
YEARS ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) (12) (719) 366
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Depreciation and amortization 666 641 583
Deferred regulatory assets and liabilities (320) (290) -
Monetary variation and exchange rate variation loss (gain) 342 (145) (82)
Loss on disposal of property, plant and equipment 42 103 79
Employee post-retirement benefits 24 116 77
Provisions for contingencies and doubtful accounts receivable 45 32 (8)
Provision for loss on deferred regulatory assets 28 150 -
Provision for loss on account receivable from State Government - 754 -
Deferred income taxes (161) (88) (30)
Provision for global reserve for reversion quota long-term - 34 -
Other (38) 6 11
Decrease (increase) in operating assets-
Accounts receivable (410) 170 (214)
Recoverable taxes 38 100 87
Account receivable from State Government - - 17
Deferred regulatory assets (112) (328) -
Receivable from Federal Government in respect of bonus
paid and rationing adoption costs incurred, net of
surcharge applied to consumers 45 (97) -
Other (129) (48) (21)
Increase (decrease) in operating liabilities-
Accounts payable to suppliers 289 36 15
Payroll and related charges 11 17 (4)
Taxes payable 125 190 4
Regulatory charges payable 42 (38) 21
Advance billings of electric power (42) (62) (76)
Accrued interest on long-term financing and short-term loans 253 147 39
Other, including initial Infovias consolidation 6 39 (33)
-------- -------- --------
Net cash provided by operating activities 732 720 831
-------- -------- --------
F - 7
Page 2 of 2
YEARS ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted investments 426 (553) (67)
Acquisition of new investments, including Infovias (336) (223) (50)
Acquisition of property, plant and equipment (636) (323) (406)
-------- -------- --------
Net cash used in investing activities (546) (1,099) (523)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term financing 518 1,150 320
Repayment of long-term financing (597) (617) (282)
Advance from minority shareholder for future capital
increase in subsidiary 12 - -
Dividends and interest on capital paid on shareholders' equity (214) (172) (196)
-------- -------- --------
Net cash provided by (used in) financing activities (281) 361 (158)
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (95) (18) 150
======== ======== ========
CASH AND CASH EQUIVALENTS:
Beginning of the year 218 236 86
End of the year 123 218 236
-------- -------- --------
(95) (18) 150
======== ======== ========
SUPPLEMENTARY CASH FLOWS DISCLOSURE:
Taxes paid - income taxes 42 38 53
Interest paid, net of interest capitalized 285 202 122
The accompanying notes are an integral part of the consolidated
financial statements.
F - 8
COMPANHIA ENERGETICA DE MINAS GERAIS - CEMIG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
(AMOUNTS EXPRESSED IN MILLIONS OF BRAZILIAN REAIS, UNLESS OTHERWISE INDICATED)
1. THE COMPANY AND ITS OPERATIONS
(a) The Company:
Companhia Energetica de Minas Gerais - CEMIG ("CEMIG" or the "Company") is a
partly state-owned company (SOCIEDADE DE ECONOMIA MISTA), organized under the
laws of the Federative Republic of Brazil ("Brazil") and controlled by the
government of the State of Minas Gerais (the "State Government"). The Company's
principal business activities are the construction and operation of systems used
in the generation, transmission, distribution and sale of electric energy. The
Company also conducts business in certain related activities.
As a concessionaire of electric utility services, the Company is subject to
regulations set by the AGENCIA NACIONAL DE ENERGIA ELETRICA (the Brazilian
National Electric Energy Agency or "ANEEL"), an agency of the Brazilian Federal
Government (the "Federal Government").
The Company holds a concession to distribute electric power over an area of
562,762 square km (approximately 97% of the State of Minas Gerais), to
approximately 5,591,000 consumers at December 31, 2002 (5,412,000 at December
31, 2001). The Company has 46 power plants, consisting of 42 hydroelectric
plants, three thermoelectric plants and one wind farm, with an aggregate
installed generating capacity of approximately 5,704MW at year-end 2002 (5,675MW
at year-end 2001). The Company's various power generation, transmission and
distribution concessions expire during the years 2004 through 2035, subject to
renewal under certain circumstances.
The following are the Company's operational subsidiaries as of December 31,
2002:
- Sa Carvalho S.A. ("Sa Carvalho") (100.00% interest) - Its principal
activities are the production and sale of electric energy from the Sa
Carvalho hydroelectric power plant, as an electric energy public service
concessionaire;
- Usina Termica Ipatinga S.A. ("Ipatinga") (100.00% interest) - Its principal
activities are the production and sale of electric energy, as an
independent power producer, at the Ipatinga thermoelectric power plant
located on the premises of Usinas Siderurgicas de Minas Gerais - USIMINAS,
a large steel manufacturer;
- Companhia de Gas de Minas Gerais - GASMIG ("GASMIG") (95.17% interest) -
Its principal activities are the acquisition, transportation and
distribution of natural gas and related products. In 1993, GASMIG was
granted a 30-year concession by the State Government to perform these
activities. Its bylaws also permit the performance of activities related to
the production and storage of natural gas. These activities, however, are
not currently being performed; and
- Empresa de Infovias S.A. ("Infovias") (99.92% interest) - Its principal
activities are rendering telecommunications services and developing related
activities through integrated systems using optical fiber cable, coaxial
cable, electronic equipment and other items. Infovias began commercial
operations in 2001. CEMIG increased its interest in Infovias from 49.44% to
99.92% in 2002 (see note 12). Additionally, Infovias has 66.41% of the
capital stock of Way TV Belo Horizonte, a cable TV and Internet services
provider in certain cities in the State of Minas Gerais, including 49% of
its common shares. The control of Way TV Belo Horizonte is exercised by
Infovias through a shareholders' agreement with CLIC - Clube de
Investimentos dos Empregados da Cemig, that owns 1.1% of Way TV Belo
Horizonte common shares. As per this agreement, CLIC agreed to vote in the
Way TV shareholders' meeting in accordance Infovias interests.
F - 9
Additionally, the Company has a 100% interest in each of the following
pre-operational companies as of December 31, 2002:
- Horizontes Energia S.A. - Its principal activities will be the production
and sale of electric energy, as an independent power producer, at the
Machado Mineiro and Salto do Paraopeba hydroelectric power plants, both
located in the State of Minas Gerais, and Salto Voltao and Salto do Passo
Velho hydroelectric power plants, both located in the State of Santa
Catarina. These plants were transferred to, and recorded as paid in capital
of, Horizontes Energia S.A. during the third quarter of 2002.
- Cemig PCH S.A., Cemig Capim Branco Energia S.A. and Usina Termeletrica
Barreiro S.A.- Their principal activities will be the production and sale
of electric energy, as independent power producers.
- Efficientia S.A. - Its principal activities will be rendering efficiency,
optimization and energy solutions services, and rendering operation and
management services in energy supply facilities. Efficientia S.A. started
its operations in the first quarter of 2003.
- Cemig Trading S.A. - Its principal activities will be developing activities
to trade electricity.
Additionally, the Company has a minority interest in the following companies:
- Central Termeletrica de Cogeracao S.A. and Central Hidreletrica Pai Joaquim
S.A. - 49% interest in each company. These companies are in the
pre-operational phase. Their principal activities will be the production
and sale of electric energy, as independent power producers.
(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.
ANEEL is responsible for: (1) granting and supervising concessions and setting
electricity rates; (2) supervising and performing financial examinations of the
concessionaire companies; (3) issuing regulations applicable to the electricity
sector; and (4) planning, coordinating and executing water resource studies and
granting and supervising concessions for the use of water resources. The
Company's electricity business is subject to regulations set by ANEEL.
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 electric services 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.
F - 10
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 Company's 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, (iv) provisions necessary for contingent losses,
and (v) estimates of employee post-retirement benefit obligations and other
similar evaluations.
(a) Basis of presentation -- The financial statements have been prepared in
accordance with U.S. GAAP, which differ in certain respects from the
Company's 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 COMISSAO DE VALORES MOBILIARIOS
(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 for all years ended 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 are expressed
in the constant purchasing power of the currency as of the most recent
balance sheet date.
As from 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 values of such
assets and liabilities as from that date.
The general price-level adjusted amounts included in the financial
statements do not purport to represent appraised value, replacement cost or
any other measure of the current value of assets or the price at which
transactions would take place currently.
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 method as a result of the following:
(i) as from 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.
F - 11
(c) Principles of consolidation -- The consolidated financial statements for
the year ended December 31, 2001 included the accounts of CEMIG and its
subsidiaries Sa Carvalho S.A., Usina Termica Ipatinga S.A. and Companhia de
Gas de Minas Gerais - GASMIG. The consolidated financial statements for the
year ended December 31, 2002 include the accounts of CEMIG and its
subsidiaries Sa Carvalho S.A., Usina Termica de Ipatinga S.A., Companhia de
Gas de Minas Gerais - GASMIG, Empresa de Infovias S.A., Cemig PCH S.A.,
Cemig Capim Branco S.A., Usina Termeletrica Barreiro S.A., Efficientia
S.A., Horizontes Energia S.A. and Cemig Trading S.A.. Infovias, the entity
that was jointly controlled with other shareholders until May 2002, was
consolidated as of December 31, 2002. In consolidation, the Company's
investment in the shareholders' equity of the subsidiaries and 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 -- CEMIG conducts no foreign operations. 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, to be cash and cash equivalents.
(f) Restricted investments -- Restricted investments consist of investments
with original maturities of three months or less, which are restricted for
use in the Company's investment plan and repayment of outstanding
financing.
(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. Charges 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 Company's investments in affiliated companies are
accounted for based on the equity method. Other investments, including the
consortia, are recorded at acquisition or construction cost. 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 consortia depreciation is computed
on the straight-line method, at annual rates based on the estimated useful
lives of its assets. The consortia expenditures for maintenance and repairs
are charged to operating costs as incurred.
(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 based on 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.
(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.
(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 is determinable, and collectibility is reasonably
assured regardless of when cash is received.
F - 12
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 month's 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.
Advance billings of electric power represent sales at pre-established
contractual rates. The revenues are recognized when electricity is
delivered and the advance billings are reduced accordingly.
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 Company's 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 accounts for contingencies 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. With respect to such plans, SFAS 87 "Employers' Accounting for
Pensions" has been applied as from January 1, 1995. CEMIG has also
established post-retirement health care plans and pays life insurance
premiums for its retirees. The accounting for these benefits is in
accordance with SFAS 106 "Employers' Accounting for Post-retirement
Benefits other than Pensions". 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.
In addition, CEMIG contributes to the Federal Government-sponsored social
security plan at rates based on payroll and such contributions are expensed
as incurred. Also, severance payments may be payable upon involuntary
severance of employees.
F - 13
(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. CEMIG's 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 and minimum pension
liability adjustments made pursuant to SFAS 87. There were no adjustments
for realization of gains (losses) of available-for-sale securities in the
presented years.
(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 Company's 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 Brazil's 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. 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$461 (note 4) recognized by the Company represents the amount expected
to be recovered over 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 Company's
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 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 to December 2002 (as allowed by ANEEL). See
note 4.
F - 14
(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 SAO PAULO
(the Sao 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 its account receivable from 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.
(s) Segment information -- The Company operates in the electric energy, gas
distribution and telecommunication segments. The respective breakdown of
information is included in note 34. The Company's electric energy business
is managed centrally on the basis of the consolidated results of the
generation, transmission and distribution operations. Accordingly, the
electric energy business represents a single segment per the criteria
described in SFAS 131.
(t) Derivatives and hedging activities -- Effective January 2001, the Company
adopted SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended. The impact of adopting SFAS 133 was immaterial to
the Company's consolidated financial position and results of operations.
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 base; 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 ANEEL 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.
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 company's 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 ANEEL. 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$867, 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
F - 15
shareholdings, transferring the principal amount of the related paid
installments from Appropriated retained earnings - Rate shortfall reserve to
Capital Stock.
Since May 1995, the credit assignment contract has been amended as follows:
a) First Amendment, signed on February 24, 2001:
In October 2000, the UFIR index was eliminated by the Federal Government. As a
result, CEMIG negotiated and signed an amendment to the contract with the State
Government to change the index used from the UFIR index to INDICE GERAL DE
PRECOS - DISPONIBILIDADE INTERNA - IGP-DI (General market price index - internal
availability), as from November 1, 2000.
b) Second Amendment, signed on October 14, 2002 (the "Second Amendment"):
The Second Amendment refers to 149 monthly installment payments, with maturities
from January 1, 2003 through May 1, 2015, in the total amount of R$989, adjusted
to present value, as of December 31, 2002. These installments continued with an
annual interest rate of 6%, as restated based on IGP-DI variation.
b.1) No payments made to date in 2003:
The State Government did not pay the first six installments due under the Second
Amendment, due from January 1 to June 1, 2003, totaling R$82 in the aggregate.
Management is currently negotiating the collection of the aforementioned past
due amounts with the State Government.
b.2) Provision for loss:
Since the Second Amendment did not include any guarantees that would assure the
realization of the CRC receivable, CEMIG recorded a full provision for loss for
this asset as of December 31, 2001. On January 21, 2003 the Company's Board of
Directors ratified such provision.
This provision for loss was recorded separately in the statement of operations,
due to its significance and specific nature. For income tax purposes, such
provision is considered a permanent difference, since it involves a related
party non-deductible loss and, therefore, did not impact the deferred income and
social contribution taxes.
CEMIG continues to negotiate the payment of the balance due to it under the
Second Amendment, including the possibility of transfer of this obligation back
to the Federal Government.
c) Third Amendment, signed on October 24, 2002 (the "Third Amendment"):
The Third Amendment covers installments originally due but unpaid under the
credit assignment contract from April 1, 1999 through December 1, 1999 and from
March 1, 2000 through December 1, 2002. Under the Third Amendment, these unpaid
installments, which totaled R$755 as of December 31, 2002 (R$451 as of December
31, 2001), are subject to annual interest of 12.00% and are monetarily restated
based on the IGP-DI variation. The Third Amendment requires repayment of these
amounts over 149 monthly installments from January 2003 to May 2015. The Third
Amendment allows CEMIG to retain annual dividends and interest on capital due to
the State Government as a Company shareholder as an offset against any amounts
not paid by the State Government.
c.1) No payments made to date in 2003:
The State Government did not pay the first six installments under the Third
Amendment, due from January 1 to June 1, 2003, totaling R$63 in the aggregate.
Management is negotiating the collection of the aforementioned past due amounts
with the State Government.
F - 16
The projection of the Company's future operations indicates that the offsetting
of the dividends and interest on capital corresponding to the State Government's
share equity in the Company will be sufficient in the long term to assure the
realization of the entire outstanding receivable covered by the Third Amendment,
should the State Government continue in default. Management will monitor future
events, which could impact the Company's dividend payment projections, in order
to conclude whether an allowance relating to the Third Amendment is necessary.
4. DEFERRED REGULATORY ASSETS
An emergency energy-rationing program (the "Energy Rationing Plan") was created
by the Federal Government's 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 Brazil's 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 2 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, additional Parcel "A" costs for the period from
January 1, 2001 to October 25, 2001 and costs of energy purchased in the spot
market through the MERCADO ATACADISTA DE ENERGIA (the Wholesale Energy Market or
"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
ANEEL's Resolution No. 130, dated April 30, 2002.
II. an increase of 7.90% for all other consumers.
According to ANEEL's Resolution No. 484, of August 29, 2002, the extraordinary
rate adjustment for CEMIG is to be in force for a maximum period of 82 months,
as from January 2002 and bearing interest equivalent to the SELIC interest rate
(Brazilian benchmark interest rate). The Company recorded a provision for loss
on the deferred regulatory assets referred to above, considering its
recoverability projections for the 82-month recovery period allowed to the
Company by ANEEL. The deferred regulatory assets are periodically compared with
the Company's recoverability projections, which are constantly reviewed by
Management, accordingly to market conditions, changes in regulation and other
similar events. The balance of the provision is adjusted accordingly.
F - 17
The components of the deferred regulatory assets are as follows:
DECEMBER 31,
-------------------------------
2002 2001
------------ ------------
Revenue losses (expected to be recovered within 24 months) incurred
during the rationing period 461 398
Additional Parcel A costs:
- Period from January 1, 2001 to October 25, 2001 326 273
- Period from October 26, 2001 and thereafter 421 139
Recording of energy transactions on the MAE 1,001 844
-------- --------
2,209 1,654
( - ) Provision for loss on deferred regulatory assets (computed
based on an 82-month period) (178) (150)
======== ========
2,031 1,504
Current assets 361 259
Other assets 1,670 1,245
During the year ended December 31, 2002, the Company collected R$218 as a result
of application of the extraordinary rate adjustment.
The VAT related to the rationing program revenue, amounting to R$416 as of
December 31, 2002 (R$301 as of December 31, 2001), only becomes an obligation to
be recorded in the financial statements once the customers are billed;
therefore, no provision related to this tax was recorded. The Company passes all
VAT amounts received from customers on to the State Government. In 2002, as a
result of the application and billing of the extraordinary rate adjustment, the
Company collected VAT of approximately R$55, which it passed on to the State
Government.
(a) Recovery of revenue losses incurred during the period of the Energy
Rationing Plan:
Although CEMIG's total revenue losses were R$1,023 as of December 31, 2002
(R$724 as of December 31, 2001), CEMIG recorded a regulatory asset on a U.S.
GAAP basis in the amount of R$679 as of December 31, 2002 (R$398 as of December
31, 2001), in accordance with consensus reached by the FASB's - 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.
(b) Recovery of additional Parcel A costs:
ANEEL Resolution No. 90, dated February 18, 2002, established procedures for the
compensation of some Parcel A costs for 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 most recent annual rate adjustment prior to
the Energy Rationing Plan. This amount will bear interest at the SELIC rate from
the day that the actual cost was paid until the date of compensation.
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.
F - 18
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:
VALUES TO BE VALUES TO BE
COMPENSATED COMPENSATED TOTAL TOTAL
UNTIL APRIL AFTER APRIL, DECEMBER 31, DECEMBER 31,
PARCEL A ITEMS 2003 2004 2002 2001
-------------------------------------------- ------------ ------------ ------------ ------------
System service charges - 120 120 84
Itaipu Binacional electricity purchase rate 13 311 324 35
Itaipu Binacional electricity transport rate 1 2 3 1
Fuel usage quota - CCC 4 (82) (78) 11
Rate for use of basic transmission network 3 48 51 8
Charges for use of water resources - 1 1 -
------------ ------------ ------------ ------------
21 400 421 139
============ ============ ============ ============
The Company recorded System service charges related to the period from September
2000 to December 2002, which are expected to be paid in 2003, in accordance with
information provided by the MAE.
The Federal Government, through Executive Act No. 116, issued on April 4, 2003,
deferred for 12 months the compensation of the Parcel "A" costs from April 8,
2002 to April 7, 2003. Such Parcel A costs will be included in the electric
energy tariff for 24 months, effective April 8, 2004. Therefore, the Parcel "A"
costs balances, recorded as Deferred regulatory assets as of December 31, 2002,
were classified as current and other assets considering the respective expected
realization period.
(c) Energy transactions on the MAE and other:
(c.1) Recording of energy transactions on the 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 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 MAE are being prorated among consumers
supplied by the Brazilian interconnected power system through an extraordinary
rate adjustment, as from 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 MAE during the period from June 1, 2001 until February
28, 2002, and equals the difference between the energy purchase price on the MAE
and R$49.26/MWh (which is the initial contract average cost for the period).
Generators will not be reimbursed with respect to MAE energy purchases at a
price less than or equal to R$49.26/MWh.
F - 19
(c.2) Financial settlement of the MAE transactions:
On February 18, 2003, CEMIG settled 50% of its outstanding obligations relating
to MAE transactions. In connection with this settlement, CEMIG disbursed R$335
to the MAE agents.
The funds required for this settlement were obtained through a financing
agreement dated February 7, 2003 between the Company and BANCO NACIONAL DE
DESENVOLVIMENTO ECONOMICO E SOCIAL (Social and Economic National Development
Bank or "BNDES"). See note 32(a).
CEMIG is required to settle the remaining 50% of its outstanding MAE amounts
after the completion of an audit performed during 2003 by independent auditors
of data provided by MAE to the concessionaires. Under the General Agreement,
BNDES must provide additional financing in connection with such additional
settlement.
(c.3) Judicial claims
In December 2002, CEMIG filed a lawsuit against ANEEL and the MAE contesting the
amounts charged during the settlement process carried out by the MAE in December
2002 and January 2003. This process was intended to settle the outstanding
amounts that the Company and other electric concessionaires owed to the MAE in
connection with spot market energy purchases during the Electricity Rationing
Plan.
As a result of the lawsuit filed, CEMIG did not settle its outstanding MAE
obligations at the date determined by MAE. The Company has filed an additional
lawsuit to prevent the imposition of a fine relating to the non-compliance with
the MAE determination. Such fine, if imposed, would amount to approximately R$3.
Management expects to be successful in this lawsuit and, accordingly, no
provision was recorded for this contingency.
The outcome of the judicial claims brought by market participants (including
CEMIG) concerning the interpretation of the market rules in force, may result in
the recalculation of the transaction data figures previously provided by MAE.
Such a recalculation may impact the Company's future results of operations and
cash flows. Also, as from March 2003, the collection of the asset to which the
Company is entitled related to MAE transactions under the General Agreement of
the Electricity Sector has been partly retained by other utilities that are in
charge of collecting such amounts from their consumers. The resolution of this
matter is dependent on the outcome of a lawsuit we have filed against ANEEL and
MAE.
5. BONUS PAID, SURCHARGES AND RATIONING ADOPTION COSTS INCURRED
Through Federal Government Executive Act No. 2,152-2, dated June 1, 2001, the
Federal Government determined that residential consumers whose electric energy
consumption was lower than the target consumption levels during the period of
the Energy Rationing Plan would be entitled to receive a bonus, limited to their
electric energy invoice amount, and that all consumers whose consumption
exceeded the target would be subject to surcharges, calculated based on the
effective consumption in excess of such target, as established by the Energy
Crisis Committee.
F - 20
ANEEL established specific accounts and controls to record the effects of the
Rationing Program involving the bonus, surcharge and related costs. The related
balances as of December 31, 2002 and 2001 are as follows:
DECEMBER 31,
-------------------
2002 2001
-------- --------
Receivable from Federal Government in respect of bonus paid to
consumers that consumed less than the target consumption 24 108
Receivable from Federal Government in respect of costs related to
the adoption of the Energy Rationing Plan in excess of the
2.00% surcharge on consumer rates 28 15
-------- --------
52 123
Surcharge applied to consumers that consumed more than the target
consumption - (26)
-------- --------
Net receivable from Federal Government in respect of
bonus paid to consumers and related costs in excess of
the surcharge applied to consumers 52 97
======== ========
Current assets 20 -
Other assets 32 123
Long-term liabilities - (26)
In 2002, the Company recorded additional reimbursable bonuses and costs related
to the Energy Rationing Plan of R$74 and R$13, respectively.
In 2002, upon ANEEL approval, CEMIG received approximately R$132 in
reimbursement for consumer bonuses paid.
According to ANEEL Resolution No. 600, dated October 31, 2002, operational costs
of approximately R$28 related to the adoption of the Energy Rationing Plan in
excess of the 2.00% surcharge on consumer tariffs will be reimbursed through the
rate increase in force as from April 8, 2003.
The remaining net amount to be received by CEMIG, of approximately R$24, is
under negotiation with ANEEL. The surcharges represented by this amount were not
billed or collected from the consumers as they are currently subject to a
judicial dispute. Management does not expect losses relating to the realization
of this outstanding amount.
F - 21
6. 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 8% for
social contribution tax at December 31, 2002, 2001 and 2000. On December 30,
2002, the Federal Government issued Law No. 10,637 that increases the social
contribution tax rate from 8% to 9%, beginning on January 1, 2003.
(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,
--------------------------------
2002 2001 2000
-------- -------- --------
Income (loss) before income taxes and minority interests 2 (640) 398
======== ======== ========
Income taxes - 33% rate (1) 211 (131)
Effects of:
Tax benefit (expense)-
Interest on capital deductibility 73 34 62
Provision for loss on account receivable from
State Government - non deductible - (343) -
Interest and monetary variation on account
receivable from State Government that was subject
to a loss provision (91) - -
Special liabilities amortization 32 29 40
Rate difference - (2) (2)
Others (39) (7) (1)
-------- -------- --------
Tax expense in the statement of operations (26) (78) (32)
======== ======== ========
As from January 1, 1996, Brazilian companies are permitted to pay interest on
capital. The calculation is based on the shareholders' equity amounts as stated
in the financial statements prepared in accordance with the 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 revenue 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%.
F - 22
(b) Analysis of deferred tax balances:
Tax rate changes are enacted in the year prior to the year in which they become
effective. As of December 31, 2002 and 2001, 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:
DECEMBER 31,
--------------------
2002 2001
-------- --------
Other assets-
Employee post-retirement benefits - 74
Tax loss carryforwards 234 192
Temporary difference on regulatory assets 176 151
Other temporary differences 138 105
-------- --------
548 522
-------- --------
Long-term liabilities-
Employee post-retirement benefits (79) -
Effects of differences between tax basis of non-monetary
assets relating to property, plant and equipment and
amounts reported for U.S. GAAP (473) (568)
-------- --------
(552) (568)
-------- --------
Net (4) (46)
======== ========
The change in the deferred taxes related to employee post-retirement benefits
from December 31, 2001 to December 31, 2002 results mainly from the decrease in
accrued pension liability (See note 19).
In 2002 and 2001, deferred tax expenses of R$119 and R$99, respectively, related
to minimum pension liability adjustment (note 19) and unrealized gains (losses)
on available-for-sale securities (note 14) were recorded directly to
shareholders' equity as other comprehensive income (loss).
7. CASH AND CASH EQUIVALENTS
The following table sets forth amounts of cash and cash equivalents for the
dates indicated:
DECEMBER 31,
-------------------
2002 2001
-------- --------
Cash on hand and in banks 20 66
Short-term investments, with original maturity of three months or
less, mainly bank certificates of deposit and investment funds at
fair value 103 152
-------- --------
123 218
======== ========
CEMIG has short-term investments with interest income primarily calculated based
on the Brazilian Interbank Certificates of Deposit - CDI rate ("CDI").
F - 23
8. RESTRICTED INVESTMENTS
The following table sets forth amounts of restricted investments for the dates
indicated:
DECEMBER 31,
-------------------
2002 2001
-------- --------
Investments to be used in investment plan - 468
Investments to be used to repay outstanding financing 194 152
-------- --------
194 620
======== ========
Current assets 145 602
Other assets 49 18
On December 31, 2001, the balance of R$468 refers to short-term investments,
acquired with resources obtained from the issuance of debentures (note 17), with
interest income calculated based on the variation of Brazilian Interbank
Certificates of Deposit - CDI and maturity dates that do not exceed 30 days.
These resources were used for the portion of the investment plan related to the
expansion of the Company's energy generation, transmission and distribution
operations, executed in 2002.
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 Brazilian Interbank
Certificates of Deposit - CDI and the U.S. dollar/REAL exchange rate and
maturity dates that do not exceed 30 days. The restricted investments to be used
in the investment plan are classified as current and other according to the
maturity date of the respective financing.
9. ACCOUNTS RECEIVABLE, NET
The following table sets forth information concerning accounts receivable by
type of consumers for the dates indicated:
TOTAL
PAST-DUE DECEMBER 31,
------------------- --------------------
UP TO 90 OVER 90
CURRENT DAYS DAYS 2002 2001
-------- -------- -------- -------- --------
Residential 198 103 13 314 176
Industrial 178 104 20 302 181
Commercial 77 41 11 129 77
Rural 22 12 4 38 24
Governmental entities 26 32 26 84 37
Public services 19 42 6 67 38
-------- -------- -------- -------- --------
Subtotal 520 334 80 934 533
Distributors 6 - - 6 6
-------- -------- -------- -------- --------
526 334 80 940 539
Allowance for doubtful accounts - - (58) (58) (54)
-------- -------- -------- -------- --------
526 334 22 882 485
======== ======== ======== ======== ========
F - 24
No single customer represented more than 10% of total receivables as of December
31, 2002 and 2001 and electricity sales to final customers for the years ended
December 31, 2002, 2001 and 2000.
The changes in allowance for doubtful accounts were as follows:
YEAR ENDED DECEMBER 31
--------------------------------
2002 2001 2000
-------- -------- --------
Balance at beginning of the year 54 51 63
Accounts written off (9) (10) (18)
Provision for the year 13 13 6
-------- -------- --------
Balance at end of the year 58 54 51
======== ======== ========
10. RECOVERABLE TAXES
The following table sets forth amounts of taxes recoverable for the dates
indicated:
DECEMBER 31,
-------------------
2002 2001
-------- --------
Current assets -
Income tax 3 66
Social contribution tax - 4
VAT 18 16
-------- --------
21 86
======== ========
Other assets -
VAT 82 48
-------- --------
82 48
======== ========
The recoverable VAT credits are being offset by the Company with VAT to be paid,
in accordance with Brazilian tax legislation.
11. RECEIVABLE FROM FEDERAL GOVERNMENT RELATED TO LOW-INCOME CONSUMERS
In 2002, the Federal Government established a new classification criteria
regarding the low income consumers. The application of this new criteria by
CEMIG in 2002 resulted in a decrease in its revenues from electricity sales to
final customers in the amount of R$42, as of December 31, 2002. The Federal
Government will reimburse CEMIG, according to a criteria not yet defined. In the
meantime, ANEEL has requested that CEMIG record this asset crediting its
revenues from electricity sales to final customers.
F - 25
12. INVESTMENTS
The following table describes the consolidated investments:
DECEMBER 31,
----------------
2002 2001
------ ------
Consortia 530 297
Empresa de Infovias S.A. - 65
Hydroelectric plants to be transferred to a subsidiary - 62
Other investments 13 13
------ ------
543 437
====== ======
(a) Consortia:
CEMIG is a partner in certain consortia for electricity generation projects.
Each partner of each consortium has the right to take energy generated by the
power plant in an amount proportionate to the partner's investment.
CEMIG's participation in consortia, represented by amounts already invested in
the projects, is as follows:
ANNUAL AVERAGE DECEMBER 31,
CEMIG'S RATE OF -------------
PARTICIPATION DEPRECIATION 2002 2001
------------- -------------- ---- ----
In service-
Porto Estrela Hydroelectric Power Plant 33.33% 2.47% 53 72
Igarapava Hydroelectric Power Plant 14.50% 2.47% 50 52
Funil Hydroelectric Power Plant 49.00% 2.47% 111 52
Construction in progress-
Queimado Hydroelectric Power Plant 82.50% 121 74
Aimores Hydroelectric Power Plant 49.00% 183 47
Cemig Capim Branco Hydroelectric Power Plant 21.05% 12 -
--- ---
530 297
=== ===
Interest cost capitalized in consortia was R$47 during the year ended December
31, 2002.
F - 26
(b) Empresa de Infovias S.A.:
In June 2002, the Company acquired 90,695,543 common shares of Infovias, for
R$87, from AES Forca Empreendimentos Ltda. ("AES"), corresponding to 50.48% of
Infovias' capital. This transaction increased CEMIG's interest in Infovias'
capital from 49.44% to 99.92%. CEMIG has recorded such acquisition by assessing
the fair value of Infovias' 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 is substantially complete and, up to the closing
of the December 31, 2002 financial statements, did not result in the
identification of goodwill. As from June 2002, Infovias is consolidated in the
Company's financial statements.
The net consolidated assets acquired of Infovias is as follows:
Current assets 18
Property, plant and equipment 278
Other assets 38
-----
Total assets acquired 334
=====
Current liabilities (38)
Long-term financing (87)
Other long-term liabilities (12)
Minority interest (25)
-----
Total liabilities (162)
=====
Net consolidated assets 172
Interest acquired 50.48%
-----
Net consolidated assets acquired 87
Price paid 87
=====
The Company's Board of Directors authorized CEMIG to provide a guarantee
relating to a financing obtained by Infovias in the amount of US$40 million,
which began amortizing in May 2002. Any installment paid by CEMIG in case of
non-payment by Infovias will be repaid to CEMIG in the form of preferred shares
issued in connection with a capital increase of Infovias.
Infovias started operations in January 2001 and its subsidiary WAY TV Belo
Horizonte S.A. in 2002. These businesses are considered strategic for CEMIG's
existing infrastructure. The telecommunications business will require additional
investments to be considered complete and competitive. Periodic evaluations of
Infovias 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 for
determining the need for an impairment reserve for this investment. Currently
available projections did not reveal the need for such an impairment reserve.
F - 27
CEMIG has signed the following agreements with Infovias:
- Lease of CEMIG's network infrastructure to Infovias pursuant to a 15-year
operating lease agreement entered into on March 31, 2000. This agreement
is still subject to approval by ANEEL. Pursuant to Brazilian
telecommunications law, CEMIG may also lease its network infrastructure to
other telecommunications providers.
- Intra-company data transmission services provided by Infovias to CEMIG
pursuant to a five-year agreement executed in 2001. CEMIG uses this
service for internal communication as well as for certain communications
with customers. In January 2003 CEMIG requested authorization from ANEEL
to enter into an amendment to this agreement regarding certain terms and
conditions. ANEEL has requested additional information regarding this
amendment, which is being provided by CEMIG.
- Geo-referenced information and related services provided by CEMIG to
Infovias, executed in September 2002. On January 16, 2003, ANEEL sent a
notice to the Company alleging that it had failed to obtain the necessary
ANEEL authorization relating to this agreement.
ANEEL may seek to impose a fine relating to the above agreements if it concludes
that they are not in agreement with its regulations. ANEEL may also impose
restrictions on the agreements' terms and conditions. The maximum penalty is a
fine in an amount equal to 2% of the Company's revenues during the 12-month
period immediately prior to the imposition of such fine. Management believes to
have meritorious arguments to present to ANEEL in relation to this subject.
(c) Hydroelectric power plants to be transferred to a subsidiary:
In 2001, the Company transferred R$62 to Investments from Property, plant and
equipment, after recognizing an impairment charge of R$33, of the Machado
Mineiro and Salto do Paraopeba hydroelectric plants, both located in the State
of Minas Gerais, and the Salto Voltao and Salto do Passo Velho hydroelectric
plants, both located in the State of Santa Catarina. In 2002, these power plants
were transferred to, and recorded as paid in capital of a subsidiary named
Horizontes Energia S.A..
F - 28
13. PROPERTY, PLANT AND EQUIPMENT, NET
The following table describes the consolidated property, plant and equipment:
ANNUAL DECEMBER 31,
AVERAGE RATE OF ------------------
DEPRECIATION 2002 2001
-------------- ------- -------
In service
Generation-
Hydroelectric 2.47% 7,773 7,629
Thermoelectric 1.83% 261 261
Transmission 3.08% 1,418 1,403
Distribution 5.21% 7,189 7,075
Administration 9.63% 457 447
Gas 5.96% 68 48
Telecom 7.79% 304 -
------- -------
17,470 16,863
------- -------
Accumulated depreciation and amortization-
Generation (3,794) (3,595)
Transmission (756) (714)
Distribution (3,270) (2,966)
Administration (293) (252)
Gas (16) (11)
Telecom (19) -
------- -------
(8,148) (7,538)
------- -------
Total in service 9,322 9,325
------- -------
Construction in progress-
Generation 207 82
Transmission 95 58
Distribution 420 346
Administration 31 20
Gas 14 10
Telecom 10 -
------- -------
Total in construction in progress 777 516
------- -------
Total 10,099 9,841
======= =======
Interest cost capitalized during the years ended December 31, 2002, 2001 and
2000 was R$74, R$57 and R$31, respectively.
Under Brazilian law, CEMIG's 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$10. Such
contingencies are included in accrued liabilities for contingencies (see note
20).
F - 29
14. MARKETABLE SECURITIES - AVAILABLE FOR SALE
As of December 31, 2002 and 2001 the Company has NOTAS DO TESOURO NACIONAL - NTN
A3 (Brazilian National Treasury Notes, Series NTN-A3) in the amount of R$53 and
R$70, respectively. These notes were acquired from the State Government on
September 1998. These notes have final maturity on April 15, 2024. They are
subject to restatement according to the REAL / U.S. dollar exchange rate
variation and interest over the restated face value of 6.00% per year. The fair
value of these notes is readily determinable and available through the
ASSOCIAcao Nacional de INSTITUIcoes do Mercado Aberto (National Association of
Open Market Institutions, or "ANDIMA") and therefore the asset recorded as of
December 31, 2002 and 2001 was determined based on the ANDIMA quotation at those
dates.
Unrealized gross loss during the year ended December 31, 2002 and unrealized
gross gains during the year ended December 31, 2001 and 2000 was R$17, R$9 and
R$20, respectively, and was presented in Other comprehensive income (loss).
The Company did not sell any of these notes in 2002, 2001 and 2000, and
therefore there were no related realized gains (losses) in such periods.
15. ACCOUNTS PAYABLE TO SUPPLIERS
DECEMBER 31,
--------------
2002 2001
----- -----
Electricity suppliers-
Furnas Centrais Eletricas S.A. (indexed to U.S. dollar) 259 213
Spot market - MAE 771 644
Payments to generators for energy purchased on MAE 418 364
Others 31 22
----- -----
1,479 1,243
Supplies and services 130 66
----- -----
1,609 1,309
===== =====
Current liabilities 1,275 945
Long-term liabilities 334 364
The Spot market - MAE liability includes the energy purchased on the wholesale
spot market during the period from September 2000 to December 2002, based on
information provided by MAE, the spot market administrator. The definitive
amounts and effective payment of this liability depends on the judicial claims
currently in progress, brought by market agents, including the Company, related
to the interpretation of the market rules in force, as well as in obtaining the
necessary financing, as more fully set forth in note 4.
F - 30
16. TAXES PAYABLE
The following table describes accrued taxes payable:
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
Short-term -
Income tax 21 72
Social contribution tax 29 36
VAT 45 30
Tax on billing - COFINS 30 52
Others 26 29
--- ---
151 219
Long-term - --- ---
Income tax 112 -
Social contribution tax 40 -
Tax on billing - COFINS 36 -
Tax on billing - PASEP 16 -
--- ---
204 -
--- ---
355 219
=== ===
CEMIG transferred to long-term liabilities, the income tax, social contribution
tax, COFINS and PASEP on extraordinary rate adjustment revenue, recorded in 2001
and 2002. This proceeding was adopted according the Resolution of the Brazilian
Federal Tax Authority (Secretaria da Receita Federal), issued in the third
quarter of 2002, which allowed the payment of the mentioned obligations
proportionally to the consumers' billing.
As of December 31, 2002 the Company had VAT obligations in amount of R$121 (R$87
in December 31, 2001). On December 30, 2002 the Company negotiated with certain
financial institutions to partially prepay the VAT in the amount of R$76 (R$57
in 2001), with a discount.
17. FINANCING
(a) The following tables describe financings:
F - 31
ANNUAL INTEREST RATES
LENDERS PAYMENTS OF PRINCIPAL (%) CURRENCY
----------------------------------------------- ---------------------------- --------------------- ----------
IN FOREIGN CURRENCY
ABN AMRO Bank - Banco Real S.A. Annually through 2005 6.20 US$
Banco BNL do Brasil S.A. Annually through 2005 Libor + 0.50 US$
Banco do Brasil S.A. - Various Bonds (1) Semi-annually through 2024 Various US$
Banco do Brasil S.A. Semi-annually through 2004 Libor + 3.13 US$
Banco do Brasil S.A. Single payment in 2004 10.38 US$
Banco do Brasil S.A. Single payment in 2003 16.00 US$
Banco Interamericano Desenvolvimento - BID Basket of
Semi-annually through 2006 4.00 to 9.25 currencies
Banco Itau S.A. Annually through 2007 Libor + 3.25 US$
Banco Itau S.A. Annually through 2004 4.46 US$
Citibank N.A. Semi-annually through 2004 8.40 US$
Citibank N.A. Semi-annually through 2003 Libor + 2.84 US$
Citibank N.A. Annually through 2005 6.20 US$
Citibank N.A. Single Payment in 2004 10.00 US$
Fixed Rate Notes (2) Payable in 2004 9.13 US$
Impsa - Ind. Metal. Pescarmona S.A. Semi-annually through 2003 9.80 US$
Kreditanstalt fur Wiederaufbau - KFW Semi-annually through 2016 4.50 US$
Lloyds Tsb Bank Plc Semi-annually through 2004 8.00 US$
MBK Furukawa Sistemas S.A. / Unibanco Annually through 2008 Libor + 5.45 US$
Siemens S.A. Semi-annually through 2005 9.97 US$
Siemens S.A. Semi-annually through 2004 Libor + 4.25 US$
Other Various Various Various
TOTAL FOREIGN CURRENCY FINANCING
IN LOCAL CURRENCY
Centrais Eletricas Brasileiras S.A.- ELETROBRAS Monthly through 2013 FINEL (7 +6.50) R$
Centrais Eletricas Brasileiras S.A.- ELETROBRAS UFIR (8 + 3.00 to
Monthly through 2023 5.00) R$
Centrais Eletricas Brasileiras S.A.- ELETROBRAS Monthly through 2005 IGP-M (6 + 10.00) R$
Consumers -TELEMIG / C.V.R.D. Semi-annually through 2009 Various R$
Debentures (3) Payable in 2009/2011 with an
early redemption option in
2005/2006 IGP-M (6 + 12.70) R$
Debentures (5) Single payment in 2027 IGP-M (6) R$
UHESC S.A. (4) Single payment in 2003 IGP-M (6) + 14.87 R$
Others Various Various R$
TOTAL LOCAL CURRENCY FINANCING
Total
[Additional columns below]
[continued from above table, first column repeated]
2002
----------------------------------------
CURRENT PORTION LONG-TERM
-------------------- ---------
LENDERS PRINCIPAL INTEREST PRINCIPAL TOTAL
----------------------------------------------- --------- -------- --------- -----
IN FOREIGN CURRENCY
ABN AMRO Bank - Banco Real S.A. 24 - 35 59
Banco BNL do Brasil S.A. - - 20 20
Banco do Brasil S.A. - Various Bonds (1) 9 5 317 331
Banco do Brasil S.A. 97 3 48 148
Banco do Brasil S.A. - 2 141 143
Banco do Brasil S.A. 125 1 - 126
Banco Interamericano Desenvolvimento - BID
16 1 34 51
Banco Itau S.A. - 4 177 181
Banco Itau S.A. 23 1 59 83
Citibank N.A. 82 4 40 126
Citibank N.A. 54 1 - 55
Citibank N.A. 18 - 28 46
Citibank N.A. - - 38 38
Fixed Rate Notes (2) - 1 96 97
Impsa - Ind. Metal. Pescarmona S.A. 42 - - 42
Kreditanstalt fur Wiederaufbau - KFW 2 3 32 37
Lloyds Tsb Bank Plc 18 - 9 27
MBK Furukawa Sistemas S.A. / Unibanco 22 1 100 123
Siemens S.A. 110 1 111 222
Siemens S.A. 28 2 56 86
Other 14 1 63 78
------- ----- --------- -----
684 31 1,404 2,119
TOTAL FOREIGN CURRENCY FINANCING
IN LOCAL CURRENCY
Centrais Eletricas Brasileiras S.A.- ELETROBRAS 17 - 137 154
Centrais Eletricas Brasileiras S.A.- ELETROBRAS
22 1 129 152
Centrais Eletricas Brasileiras S.A.- ELETROBRAS 35 - 81 116
Consumers -TELEMIG / C.V.R.D. 5 1 4 10
Debentures (3)
- 16 793 809
Debentures (5) - - 26 26
UHESC S.A. (4) 100 15 - 115
Others 17 2 19 38
------- ----- --------- -----
TOTAL LOCAL CURRENCY FINANCING 196 35 1,189 1,420
------- ----- --------- -----
Total 880 66 2,593 3,539
======= ===== ========= =====
F - 32
ANNUAL INTEREST RATES
LENDERS PAYMENTS OF PRINCIPAL (%) CURRENCY
----------------------------------------------- ---------------------------- --------------------- ----------
IN FOREIGN CURRENCY
ABN AMRO Bank - Banco Real S.A. Single payment in 2002 Libor + 4.00 US$
Banco do Brasil S.A. - Various Bonds (1) Semi-annually through 2024 Various US$
Banco do Brasil S.A. Semi-annually through 2004 Libor + 3.13 US$
Banco do Brasil S.A. Single payment in 2004 10.38 US$
Banco do Brasil S.A. Single payment in 2002 Libor + 2.70 US$
Banco Interamericano de Desenvolvimento - BID Basket of
Semi-annually through 2006 4.00 to 9.25 currencies
Banco Itau S.A. Annually through 2004 4.46 US$
Citibank N.A. Semi-annually through 2004 Libor + 5.5 US$
Citibank N.A. Semi-annually through 2003 Libor + 2.84 US$
Citibank N.A. Single Payment in 2004 10.00 US$
Fixed Rate Notes (2) Payable in 2004 9.13 US$
Impsa - Industria Metalurgica Pescarmona S.A. Semi-annually through 2003 9.80 US$
International Bank for Reconstruction and
Development - IBRD Semi-annually through 2002 7.25 US$
Kreditanstalt furWiederaufbau - KFW Semi-annually through 2016 4.50 US$
Lloyds Tsb Bank Plc Semi-annually through 2004 8.00 US$
Siemens S.A. Semi-annually through 2004,
beginning in 2003 Libor + 4.25 US$
Siemens S.A. Semi-annually through 2005,
beginning in 2003 9.97 US$
Other Various Various Various
TOTAL FOREIGN CURRENCY FINANCING
IN LOCAL CURRENCY
Centrais Eletricas Brasileiras S.A.- ELETROBRAS Monthly through 2005 FINEL (7) + 6.50 R$
Centrais Eletricas Brasileiras S.A.- ELETROBRAS Monthly through 2013 IGP-M (6) +10.00 R$
Centrais Eletricas Brasileiras S.A.- ELETROBRAS UFIR (8) + 3.00 to
Monthly through 2023 5.00 R$
Consumers -TELEMIG / C.V.R.D. Semi-annually through 2009 Various R$
Debentures (3) Payable in 2009/2011 with an
early redemption option in
2005/2006 IGP-M (6) + 12.70 R$
UHESC S.A. (4) Single payment in 2003 IGP-M (6) + 14.87 R$
Others Various Various R$
TOTAL LOCAL CURRENCY FINANCING
Total
[Additional columns below]
[continued from above table, first column repeated]
2001
----------------------------------------
CURRENT PORTION LONG-TERM
-------------------- ---------
LENDERS PRINCIPAL INTEREST PRINCIPAL TOTAL
----------------------------------------------- --------- -------- --------- -----
IN FOREIGN CURRENCY
ABN AMRO Bank - Banco Real S.A. 42 2 - 44
Banco do Brasil S.A. - Various Bonds (1) 6 3 216 225
Banco do Brasil S.A. - 2 96 98
Banco do Brasil S.A. - 1 93 94
Banco do Brasil S.A. 82 1 - 83
Banco Interamericano de Desenvolvimento - BID
9 1 31 41
Banco Itau S.A. 15 1 54 70
Citibank N.A. 54 3 81 138
Citibank N.A. 35 2 35 72
Citibank N.A. - - 26 26
Fixed Rate Notes (2) - 1 63 64
Impsa - Industria Metalurgica Pescarmona S.A. 55 1 28 84
International Bank for Reconstruction and
Development - IBRD 7 - - 7
Kreditanstalt furWiederaufbau - KFW 1 - 19 20
Lloyds Tsb Bank Plc 15 - 17 32
Siemens S.A.
- 1 145 146
Siemens S.A.
- - 51 51
Other 9 3 28 40
------- ----- --------- -----
330 22 983 1,335
TOTAL FOREIGN CURRENCY FINANCING
IN LOCAL CURRENCY
Centrais Eletricas Brasileiras S.A.- ELETROBRAS 27 1 146 174
Centrais Eletricas Brasileiras S.A.- ELETROBRAS 27 1 92 120
Centrais Eletricas Brasileiras S.A.- ELETROBRAS
8 1 80 89
Consumers -TELEMIG / C.V.R.D. 6 1 8 15
Debentures (3)
- 13 633 646
UHESC S.A. (4) - 12 80 92
Others 2 - 7 9
------- ----- --------- -----
TOTAL LOCAL CURRENCY FINANCING 70 29 1,046 1,145
------- ----- --------- -----
Total 400 51 2,029 2,480
======= ===== ========= =====
F - 33
(1) The interest rates applicable to the Company's outstanding financing
vary:
- from 4 to 8% per annum for fixed-rate obligations; and
- semiannual LIBOR plus spread of 0.81 to 0.88% per annum for
floating-rate obligations.
(2) In 1996, CEMIG issued Fixed Rate Notes in the amount of US$150 million
originally due on November 18, 2004. These bonds were subject to early
redemption, at the option of CEMIG or the holders, on November 18,
2001, at a redemption price equal to 98.704% of the aggregate principal
amount of the notes. On November 18, 2001 holders representing
approximately 81% of the principal amount of the notes exercised their
option and, as a result, the Company paid an aggregate amount of US$121
million to such noteholders.
(3) In November 2001, CEMIG issued R$625 of debentures, in two series of
R$312.5 each. The debentures are not convertible into shares of CEMIG
and do not have preferences or guarantees, and bear interest at 12.70%
per annum, defined through book building process, and monetary
variation based on the IGP-M. Interest on both series is paid to
investors annually beginning in 2002. Principal will be paid on the
maturity date of each series respectively: November 1, 2009 and
November 1, 2011. Debenture holders have put options (early redemption)
at 4 and 5 years, from the issuance date, for the first and second
series, respectively. The funds obtained from the issuance of
debentures have been designated to finance projects in the generation,
transmission and distribution of energy in conformity with CEMIG's
capital investment program for the years 2001 and 2002. The two series
of Debentures are recorded as payable in November 1, 2005 and November
1, 2006, respectively.
(4) In December 2000, CEMIG acquired control of Sa Carvalho S.A. in return
for the assumption by CEMIG of the obligations of debentures issued by
UHESC S.A.. In order to guarantee such obligations, CEMIG has agreed to
pledge its rights to accounts receivable relating to its subsidiary, Sa
Carvalho S.A., under the electricity supply contract between Sa
Carvalho S.A. and ACESITA S.A..
(5) 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 and do not have any preference or
guarantee, will 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 Irape Power Plant. On September 30, 2002, the Company issued the
first series in the amount of R$23.
(6) INDICE GERAL DE PRECOS DE MERCADO (General Market Price Index)
(7) INDICE INTERNO DA ELETROBRAS (Eletrobras Internal Index)
(8) UNIDADE FISCAL DE REFERencia - UFIR (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 8).
In addition to the financing described above, the Company has credit lines to be
used with financial institutions as of December 31, 2002, in the amount of
R$167.
Most of the Company's 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 assigned its rights to accounts to be billed and collected from its
consumers related to electricity sales in the amount of R$1,218. These rights
serve as collateral for certain financing.
F - 34
(b) Composition of foreign financing by currency and domestic currency indices:
DECEMBER 31,
--------- ---------
2002 2001
--------- ---------
Currency -
United States Dollars 1,995 1,255
Euro 73 15
Currency baskets 51 42
German Deutsche Marks - 20
Others - 3
--------- ---------
2,119 1,335
Indices - --------- ---------
INDICE GERAL DE PRECOS DE MERCADO - "IGP-M"
(General Market Price Index) 1,076 866
INDICE INTERNO DA ELETROBRAS - "FINEL"
(Eletrobras Internal Index) 154 174
UNIDADE FISCAL DE REFERencia - "UFIR"
(Tax Reference Unit) 152 89
Others 38 16
--------- ---------
1,420 1,145
--------- ---------
3,539 2,480
========= =========
(c) The following table sets forth the increases 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,
-----------------------
2002 2001 2000
----- ---- ------
Currency-
United States Dollars 52.27 18.67 9.30
Euro 79.35 12.05 -
Currency baskets 60.32 14.39 4.88
(d) The following table sets forth the increases for the periods indicated of
the principal indices applied to domestic currency financing, in
percentages:
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
------- ---- ------
Index-
IGP-M 25.31 10.39 9.95
FINEL 4.67 2.00 1.80
UFIR - - -
(e) Maturities of the long-term financing:
AS OF DECEMBER 31,
2002
------------------
2004 818
2005 693
2006 561
2007 108
2008 and thereafter 413
-----
2,593
=====
F - 35
(f) Certain of the Company's financing and debenture contracts, in the total
principal amount of R$553 as of December 31, 2002, of which R$388 are
classified as long-term liabilities, contain certain financial covenants
that, in the event of noncompliance, may cause the amounts due under the
contracts to become immediately due. In addition, the Company has financing
contracts that contain cross-default clauses. These covenants are based on
the financial statements prepared in accordance with the accounting
practices adopted in Brazil. The Company has obtained waivers from the
creditors that are parties to contracts that contain covenants with respect
to which it is not in compliance. These waivers affirm that such creditors
will not exercise their rights to demand either accelerated or immediate
payment of the total amounts due if the Company meets certain financial
conditions. Such conditions refer to revised contractual clauses relating to
total debt divided by EBITDA (earnings before interest, taxes, depreciation
and amortization) and capital expenditures divided by EBITDA. CEMIG is in
compliance with the revised conditions as of May 31, 2003 and management
expectation is that it will continue to be in compliance through June, 2003.
The waivers are in force as of June 30, 2003 but must be renewed every
quarter and are conditioned upon the Company continued compliance with
certain requirements, until the original terms of the restricted clauses are
met. Financings and debentures are classified as current and long-term
liabilities according to the original contract terms, in compliance with the
waivers obtained.
(g) Infovias' financing from MBK Furukawa Sistemas S.A. / Unibanco, in the total
amount of R$123 as of December 31, 2002, of which R$100 is classified as
long-term liabilities, contains certain 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.
Infovias 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. The waiver obtained has to be renewed every quarter until the original
terms of the restricted clauses are met. This financing is classified as
current and long-term liability according to the original terms of the
respective contract, in compliance with the waiver obtained.
18. REGULATORY CHARGES PAYABLE
The following table describes the Company's accrued regulatory charges payable:
DECEMBER, 31
---------------
2002 2001
---- ----
Global reserve for reversion quota 52 25
Fuel usage quota 26 24
Emergency capacity charge 14 -
Other 2 3
---- ----
94 52
==== ====
(a) Global reserve for reversion quota:
The global reserve for reversion quota was established as a fund managed by
ELETROBRAS (CENTRAIS ELETRICAS 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.
F - 36
(c) Emergency capacity charge:
The emergency capacity charge represents a new 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 ELETRICA (The Brazilian Emergency Energy Trader or
"CBEE").
19. EMPLOYEE POST-RETIREMENT BENEFITS
The Company sponsors a pension plan, administered by FUNDAcao 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 19% of each employee's salary, depending on certain
factors. The total assets in the defined contribution plan (which is also
administered by FORLUZ) as of December 31, 2002 and 2001 was R$679 and R$443,
respectively, and the contribution expense for the years ended December 31,
2002, 2001 and 2000 was R$22, R$22 and R$28, 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 as individual employees
opt for this benefit. CEMIG may withdraw this additional benefit at anytime.
The change in benefit obligations for the years ended December 31, 2002 and 2001
is as follows:
POST-RETIREMENT HEALTH CARE
DEFINED BENEFIT PENSION PLAN AND INSURANCE
---------------------------- ---------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
---------------------------- ---------------------------
2002 2001 2002 2001
-------- --------- -------- --------
Benefit obligation - beginning of year 3,109 2,970 502 424
Service cost 6 7 14 12
Interest cost 340 325 56 47
Actuarial loss (gain) (481) 29 (110) 39
Benefits paid to participants (222) (222) (24) (20)
----- ----- ---- ----
Benefit obligation - end of year 2,752 3,109 438 502
===== ===== ==== ====
F - 37
The change in plan assets for the years ended December 31, 2002 and 2001 is as
follows:
POST-RETIREMENT HEALTH CARE
DEFINED BENEFIT PENSION PLAN AND INSURANCE
---------------------------- ---------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
---------------------------- ---------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Fair value of plan assets - beginning of
year 1,768 1,390 13 13
Employer contributions 151 146 11 8
Employee contributions - 1 7 10
Actual return on plan assets 415 453 2 2
Benefits paid to participants (222) (222) (24) (20)
----- ----- --- ---
Fair value of plan assets - end of year 2,112 1,768 9 13
===== ===== === ===
The funded status of the defined benefit pension plan and post-retirement health
care and insurance is as follows:
POST-RETIREMENT HEALTH CARE AND
DEFINED BENEFIT PENSION PLAN INSURANCE
---------------------------- -------------------------------
DECEMBER 31, DECEMBER 31,
---------------------------- -------------------------------
2002 2001 2002 2001
---------- -------- --------- -------
Projected benefit obligation in excess of
plan assets 640 1,341 429 489
Unrecognized net transition obligation,
being recognized from January 1, 1995 - - (38) (47)
Unrecognized net actuarial gain (loss) 293 (412) (52) (122)
--- ----- --- ----
Accrued pension liability 933 929 339 320
Additional minimum liability - Other
comprehensive income - 378 - -
--- ----- --- ----
Total accrued pension liability 933 1,307 339 320
=== ===== === ====
The components of net periodic benefit costs for the years ended December 31,
2002, 2001 and 2000 are as follows:
POST-RETIREMENT HEALTH CARE AND
DEFINED BENEFIT PENSION PLAN INSURANCE
---------------------------- -------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
---------------------------- -------------------------------
2002 2001 2000 2002 2001 2000
------ ------ ------ ------ ------ ------
Service cost 6 7 9 14 12 11
Interest cost 340 325 219 56 47 33
Expected return on plan assets (197) (155) (100) (1) (1) (1)
Amortization of transition obligation - - - 6 6 6
Amortization of loss 6 26 29 3 4 5
Curtailment gain - - - (48) - -
Employee contributions - - (1) - - -
---- ---- ---- --- --- ---
Net periodic benefit cost 155 203 156 30 68 54
==== ==== ==== === === ===
CEMIG and its employees' labor unions, most of which are represented by
SINDIELETRO agreed on changes to the existing employee health care plans in the
third quarter of 2002. These changes altered the contribution criteria that
CEMIG, its employees and its retirees are responsible for and the types of
benefits covered in each plan. The implementation of these changes took place as
of January 1, 2003. The effects arising from these changes represented a
curtailment gain in the amount of R$48, recorded as a component of net period
benefit cost for the year ended December 31, 2002.
F - 38
The components of the projected net periodic post-retirement benefit costs for
2003 are as follows:
POST-RETIREMENT
DEFINED BENEFIT HEALTH CARE AND
PENSION PLAN INSURANCE
--------------- ---------------
Service cost 6 4
Interest cost 353 57
Expected return on plan assets (346) (2)
Amortization of transition obligation - 5
Amortization of loss (1) 2
---- ---
12 66
==== ===
Assumptions used by the Company were as follows (percentage including projected
inflation of 5% per annum):
DEFINED BENEFIT PENSION PLAN
----------------------------------------------
2002 2001
% %
--------------------- ---------------------
Actuarial method Projected Unit Credit Projected Unit Credit
Annual discount rate 13.40 11.30
Annual expected return on plan assets 16.55 11.30
Annual salary increase 9.20 8.15
Annual increase in benefits 5.00 5.00
POST-RETIREMENT HEALTH CARE AND INSURANCE
-----------------------------------------
2002 2001
% %
------------------ --------------------
Annual discount rate 13.40 11.30
Annual expected return on plan assets 16.55 11.30
In 2001, the Company used an additional assumption to measure the accumulated
post-retirement benefit obligation, a weighted average medical care cost trend
rate of 5.54% for 2001, decreasing gradually to approximately 2.70% through the
year 2046, and remaining at that level thereafter. This assumption was not used
in 2002 because of changes to CEMIG's health care plan, as CEMIG's obligation is
no longer indexed to the variation of the medical care cost.
An annual increase or decrease in the assumed medical care cost trend rate of 1%
would affect the accumulated benefit obligation and the service and interest
cost components at December 31, 2002, as follows:
ONE-PERCENTAGE POINT
--------------------
INCREASE DECREASE
-------- --------
Effect on total of service and interest cost components 3 2
Effect on the post-retirement benefit obligation 33 27
F - 39
20. ACCRUED LIABILITY FOR 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
Company's 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
-----------------
2002 2001
------ -------
Labor claims 70 54
Civil lawsuits - Consumers 86 74
Social contribution tax 93 125
Finsocial 19 19
Civil lawsuits - Others 26 22
Others 21 25
-------- -------
315 319
======== =======
CEMIG believed that short-term losses were not probable with respect to pending
litigation in 2002. Accordingly, the accrual for contingencies has been fully
classified as long term.
Certain details relating to such provision 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$87 as of
December 31, 2002 (R$68 as of December 31, 2001). CEMIG determined the amounts
to be accrued based on the nature of the group of claims and the most recent
court decisions.
(b) Civil lawsuits - Consumers:
A number of industrial consumers have brought suits against the Company seeking
refunds of amounts paid to CEMIG as a result of a rate increase that became
effective during the Brazilian government's "Cruzado Plan" in 1986, alleging
that such increases violated the price controls instituted as part of that
economic stabilization plan. CEMIG determined the amounts to be accrued based on
recent court decisions.
The total anticipated exposure to the Company for those suits, fully provided
for, is R$86 as of December 31, 2002 (R$74 as of December 31, 2001).
(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 and tax liability.
Under this law, the Company was required to record complementary monetary
restatement 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.
F - 40
The Company is deducting the amounts of depreciation, amortization and write-off
relating to the complementary monetary restatement of Property, plant and
equipment, for purposes of computation of social contribution tax on income. The
Company believes that such deduction is in accordance with the provisions of Law
No. 8,200. The Company estimates that its potential exposure in this matter is
approximately R$93 as of December 31, 2002 (R$125 as of December 31, 2001), for
which a provision has been recorded.
(d) Finsocial:
In 1994, CEMIG was fined by the SECRETARIA DA RECEITA FEDERAL (the tax authority
of the Federal Government) due to the Company's exclusion of State VAT in the
Finsocial calculation, a social contribution tax on billing extinguished in
1992. The Company estimates that its potential exposure in this matter is
approximately R$19 as of December 31, 2002 and 2001. This amount is fully
provisioned.
(e) Others:
Other accrued liabilities are related to a number of lawsuits involving the
Federal Government, pursuant to which the Company is disputing the
constitutionality of certain federal taxes that have been assessed against it
and other general claims arising in the ordinary course of business.
(f) Contingencies for which a favorable outcome has been deemed probable:
CEMIG has other relevant legal proceedings with respect to which the Company
believes that a favorable outcome is probable, and therefore the Company has not
recorded any accruals for such claims. Certain details relating to these matters
are as follows:
(i) Litigation involving FORLUZ with possible financial effect upon CEMIG:
The Company is defending, with FORLUZ, a claim brought by SINDIELETRO that
asserts that CEMIG failed to make certain allegedly obligatory
cost-of-living increases in contributions to employee pension funds. The
total amount sought in this claim is R$594. No accrual has been recorded
for this claim because the Company believes that it has a meritorious
defense to such claim and, consequently, does not expect to incur losses
related to such claim.
In addition, SINDILETRO has sued FORLUZ for R$268 relating to changes made
to the pension fund's contribution adjustment index. If SINDILETRO is
successful in this lawsuit FORLUZ may claim the reimbursement from CEMIG.
No accrual has been recorded for this potential claim because the Company
believes that it has a meritorious defense to such claim and, consequently,
does not expect to incur losses related to such claim.
(ii) Income and social contribution taxes on post retirement benefits:
On October 11, 2001, the Federal Government's tax authority issued a
deficiency notice in the amount of R$227 arising from the utilization of
tax credits that resulted from the amendment of the Company's 1997, 1998,
1999 and 2000 tax returns, to reduce taxable income. The tax returns were
amended as a result of a change in accounting method for recording
post-retirement benefit liabilities, as required by the accounting
practices adopted in Brazil. The additional liability that resulted from
the accounting change was attributed to the tax year that was amended,
resulting in net operating tax loss and social contribution negative basis
carryforwards.
The credits mentioned in the prior paragraph were offset by CEMIG from its
federal tax obligations in 2001 and 2002. Due to this offset, CEMIG was
exposed to additional penalties in amount of R$171. The Company obtained a
final favorable decision on this claim in May 2003.
F - 41
(iii) COFINS:
The Company began contesting the payment of COFINS contributions beginning
in 1992. As a result of a judicial ruling, the Company paid R$248 of
accrued COFINS contribution on July 30, 1999. The Federal Government is
claiming that the Company owes approximately R$127 in fines and interest
relating to its non-payment of COFINS contributions. The Company is
contesting such claims. No accrual has been recorded for this claim, as the
Company believes that it has a meritorious defense to such claim and,
consequently, does not expect to incur losses related to such claim.
(iv) Regulatory agency acts:
ANEEL has brought an administrative proceeding against the Company,
contesting a R$188 refund issued in 1995 by the Brazilian National
Treasury. ANEEL alleges that this refund originated from a miscalculation
of credits in the amount of rate shortfall receivable that was applied to
reduce amounts owed to the Federal Government. On October 31, 2002, ANEEL
issued a final administrative decision against the Company. The Company
intends to appeal this decision in court. The Company believes that it has
a meritorious defense to such claim and has therefore recorded no accrual
in respect of such claim.
(v) Civil lawsuits:
Some consumers have brought civil claims against CEMIG contesting rate
readjustments applied in prior years, including rate subsidies granted to
low-income consumers, the special rate adjustment and the emergency
capacity charge applied since 2002. 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 we have a meritorious
defense.
The Company is a defendant in five lawsuits contesting the ENCARGO DE
CAPACIDADE EMERGENCIAL (Emergency Capacity Charge), filed between February
2002 and July 2002. Each of these claims has been certified as a class
action and involves alleged damages caused by the Electricity Rationing
Plan. It is not possible at present to estimate the amounts involved in
these claims. No accrual was recorded for these claims since management
believe to have a meritorious defense. The Company merely collects the
Emergency Capacity Charge from its customers on behalf of COMERCIALIZADORA
BRASILEIRA DE ENERGIA ELETRICA--CBEE, or CBEE, a Federal Government agency
set up to supply energy to utilities in the event of future shortages.
The Company is a defendant, with CVRD, Comercial e Agricola Paineiras and
Companhia Mineira de Metais, in a class action lawsuit, brought by citizens
of Minas Gerais, concerning the environmental licensing of the Capim Branco
I and Capim Branco II hydroelectric power plants. This lawsuit alleges that
the Company did not obtain proper licensing for these projects and seeks to
nullify the environmental licenses relating to these power plants.
Management believes to have a meritorious defense to this lawsuit.
The Company is also a defendant, with CVRD, in a class action lawsuit,
brought by the Public Prosecutor of Minas Gerais, concerning the Aimores
hydroelectric power plant. This lawsuit alleges that the Company 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. Management believes to have a meritorious defense to this
lawsuit.
In addition to the matters described above, CEMIG and its subsidiaries are
involved as a plaintiff or defendant in a variety of routine litigation
incidental to the normal course of business. Management believes that it has an
adequate defense in respect of such litigation and that any losses therefrom
would not have a material adverse effect on the consolidated financial position
or results of operation of the Company.
F - 42
21. SHAREHOLDERS' EQUITY
(a) Capital stock:
YEAR ENDED DECEMBER 31,
(THOUSANDS OF SHARES)
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
PREFERRED SHARES:
Balance, at beginning of the year 89,504,020 89,504,020 89,504,020
Issuance of new shares 1,775,631 - -
------------ ------------ ------------
Balance, at the end of the year 91,279,651 89,504,020 89,504,020
COMMON SHARES:
Balance, at beginning of the year 69,495,478 69,495,478 69,495,478
Issuance of new shares 1,378,690 - -
------------ ------------ ------------
Balance, at the end of the year 70,874,168 69,495,478 69,495,478
TREASURY STOCK (Preferred shares):
Balance, at beginning of the year (67,783) (67,783) (67,783)
Issuance of new shares (1,345) - -
------------ ------------ ------------
Balance, at the end of the year (69,128) (67,783) (67,783)
------------ ------------ ------------
Total 162,084,691 158,931,715 158,931,715
============ ============ ============
The shareholders' meeting, approved, as of April 30, 2002, a capital increase in
the amount of R$32, through the issuance of 3,154,321 new shares, as a result of
the capitalization of the rate shortfall reserve. The new shares were
distributed among the shareholders in proportion to their participation in the
capital prior to the issuance. As a result, the interest of the shareholders and
the par value per share did not change.
Additionally, the Company has a contingent obligation to issue 159,225 thousand
shares in 2002 related to the account receivable from the State Government, as a
result of the estimated amount of R$27 to be retained from the dividends due to
the State Government to offset overdue receivables. These shares are expected to
be issued during 2003, in connection with such dividend retention. See notes 3
and 2 (r).
At December 31, 2002, the State Government owned 51% of the Company's common
shares and 3% of its preferred shares, equal to 23% 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
21 (d.1).
The common and preferred shares have a par value amount of R$0.01 according to
the financial statements prepared in accordance with the accounting practices
adopted in Brazil.
(b) Additional paid-in capital:
The balance refers to premium received by the Company when shares were issued.
(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.
F - 43
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 2001
and 2000.
In its 2002 financial statements prepared according to 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);
(ii) allocation or transfer to or from other reserves as described in note 21
(c); and (iii) dividends and interest on capital.
(d.1) Dividends and interest on capital:
Pursuant to its by-laws, CEMIG is required to distribute as dividends in respect
of each fiscal year ending on December 31, an aggregate amount equal to at least
25% of net income for the fiscal year, based on its financial statements
prepared in accordance with accounting practices adopted in Brazil. The Company
refers to this amount as the mandatory dividend amount.
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.
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 Company's Board of Directors is
permitted to recommend 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 Company's financial
statements prepared in accordance with accounting practices adopted in Brazil,
is negative with respect to any fiscal year, some of CEMIG's shareholders will
receive a dividend of
F - 44
6%. This state guarantee runs 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 2002, 2001 and 2000, 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,
--------------------------
2002 2001 2000
------- ------- -------
Dividends 111 - -
Interest on capital 220 103 187
----- ----- -----
Total 331 103 187
===== ===== =====
Interest on capital related to 2002, in the amount of R$220, will be paid during
2003.
Brazilian law permits payment of dividends and interest on capital only in REAIS
from unappropriated retained earnings based on financial statements prepared in
accordance with accounting practices adopted in Brazil. At December 31, 2002,
2001 and 2000, unappropriated retained earnings in the statutory financial
statements amounted to R$0, R$601 and R$1,379, respectively.
The Company reverts the dividends not claimed by the shareholders within three
years of the date they were distributed in accordance with the Brazilian
Corporate Law and its by-laws.
22. NET OPERATING REVENUES
(a) The composition of electric energy supplied by consumer class is as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
GWh (UNAUDITED) R$
------------------------ ------------------------
2002 2001 2000 2002 2001 2000
------ ------ ------ ------ ------ ------
Residential 6,360 6,475 7,576 1,791 1,594 1,630
Industrial 21,906 21,351 22,247 2,192 1,841 1,665
Commercial 3,283 3,269 3,584 791 674 634
Rural 1,705 1,572 1,676 252 206 191
Governmental entities 1,373 1,290 1,491 240 196 196
Public services 957 939 934 130 111 95
Own consumption 50 52 62 - - -
Unbilled, net - - - 62 (35) 67
------ ------ ------ ------ ------ ------
35,634 34,948 37,570 5,458 4,587 4,478
Supply 313 632 4,937 21 65 116
Energy transactions on MAE - - - 140 452 29
------ ------ ------ ------ ------ ------
Total 35,947 35,580 42,507 5,619 5,104 4,623
====== ====== ====== ====== ====== ======
F - 45
NUMBER OF CONSUMERS (UNAUDITED)
---------------------------------
2002 2001 2000
--------- --------- ---------
Residential 4,615,178 4,429,005 4,248,144
Industrial 68,211 68,105 64,315
Commercial 515,771 540,442 476,500
Rural 338,396 322,493 300,329
Governmental entities 45,785 44,126 44,414
Public services 6,808 6,508 6,128
Other 1,339 1,391 1,456
--------- --------- ---------
5,591,488 5,412,070 5,141,286
Supply 4 5 11
--------- --------- ---------
Total 5,591,492 5,412,075 5,141,297
========= ========= =========
(b) The composition of taxes on revenues is as follows:
YEAR ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
VAT 1,151 964 956
COFINS 186 187 143
Emergency capacity charge 80 - -
PIS-PASEP social contribution 56 40 31
----- ----- -----
1,473 1,191 1,130
===== ===== =====
23. OPERATING COSTS AND EXPENSES
Some of the operating costs and expenses consist of the following:
(a) Electricity purchased for resale:
YEAR ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
Itaipu Binacional (through FURNAS) 979 823 711
From suppliers though MAE 149 952 -
FURNAS - 12 -
Initial contracts 148 126 84
From other 57 1 24
----- ----- ----
1,333 1,914 819
===== ===== ====
The electricity acquired from Itaipu Binacional is denominated in U.S. dollars
and the prices are defined by ANEEL, that reduced by 13.18% the price of energy
acquired from Itaipu, from US$ 20.1988 to US$ 17.5374 per kW, since October 23,
2002.
F - 46
(b) Regulatory charges:
YEAR ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
Global reserve for reversion quota 144 130 104
Fuel usage quota 345 249 282
Charges for use of water resources 47 29 36
ANEEL inspection fee 12 12 11
--- --- ---
548 420 433
=== === ===
(c) Other:
YEAR ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
Insurance 1 2 13
Consumption - electric energy 12 9 9
Labor indemnity 4 6 10
Disposal of fixed assets, net 42 90 66
Grants and donations 14 12 13
Provisions for contingencies-
Labor claims 16 - 1
Civil lawsuits - Consumers 12 6 4
Civil lawsuits - Other 4 12 4
Provision for doubtful accounts 13 13 6
Rentals 15 12 11
Advertising 19 23 21
Employees profit sharing 38 47 27
MAE contribution 6 11 7
Technological and scientific national fund 12 10 -
General expenses 30 21 16
--- --- ---
238 274 208
=== === ===
F - 47
24. FINANCIAL EXPENSES, NET
Financial income (expense) consists of the following:
YEAR ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
Financial income-
Interest and monetary restatement of account
receivable from State Government 303 253 160
Investment income earned 236 84 44
Late charges on overdue electricity bills,
recorded on the cash basis 43 42 31
Monetary restatement on recoverable taxes - 17 -
Renegotiated accounts receivable - 12 7
Foreign exchange gains 31 58 8
Monetary restatement on deferred regulatory assets 120 26 -
Other 6 18 19
------- ----- -----
739 510 269
======= ===== =====
Financial expense-
Interest on loans and financing (300) (164) (118)
Financial transaction tax (CPMF) (28) (27) (9)
Foreign exchange losses (816) (267) (112)
Monetary restatement losses (101) (33) (22)
Other expenses (19) (67) (50)
------- ----- -----
(1,264) (558) (311)
======= ===== =====
Financial expenses, net (525) (48) (42)
======= ===== =====
The foreign exchange losses are related to the devaluation of the REAL in
relation to the U.S. dollar. See notes 17 and 26 (d) for the composition of
foreign currency debt, variation of exchange rates of each foreign currency for
each year presented and exposure to foreign exchange variation.
25. 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 24
VAT - Assets Note 10
VAT - Liabilities Note 16
VAT - Expense Note 22
(b) FORLUZ -
Employee post-retirement benefits related balances Note 19
Other related party transactions are not material.
F - 48
26. 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, restricted investments, accounts
receivable and escrow accounts. CEMIG limits its credit risk associated with
cash and cash equivalents, restricted investments by placing its investments
with highly rated financial institutions generally in short-term securities. The
credit risk associated with accounts receivable from residential consumers is
limited by CEMIG's policy of interrupting the supply of electricity if payment
becomes in arrears. With respect to larger industrial and commercial consumers
CEMIG limits its credit risk by performing ongoing credit evaluations and, in
certain cases, obtaining guarantees or collateral for impaired receivables. The
Company's customers are primarily located in the State of Minas Gerais, although
distributed among a wide variety of economic sectors.
(a) Cash and cash equivalents and restricted investments:
As of December 31, 2002 and 2001, 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, 2002 and 2001, the Company has investments in debentures in
the amounts of R$32 and R$132, respectively. These securities were issued by
third parties, all Brazilian financial institutions, and have immediate
repurchase clauses exercisable by the Company. These securities have interest
rates based on the Interbank Deposit Certificate - CDI rate.
As of December 31, 2002 and 2001, the Company has short-term investments
contracted with financial institutions, through the transfer of public or
private securities issued by third parties, in the amounts of R$7 and 70,
respectively. The interest rate is based on the CDI rate. These securities have
repurchase clauses. CEMIG has the right to call for early redemption of these
securities without any penalty or loss.
As of December 31, 2001, the Company has restricted investments, in the amount
of R$468, in connection with the issuance of the Company's own debentures (note
17). In 2002, these funds were used in the Company's capital expenditure
program, exclusively related to the expansion of its energy generation,
transmission and distribution operations.
As of December 31, 2002 and 2001, the Company has restricted investments in the
amount of R$194 and R$152, respectively, and include short term investments in
the amount of R$137 and R$133, respectively, which have interest calculated
based on the U.S. dollar variation.
(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, 2002 and 2001 is R$2,527 and R$2,102, respectively.
(c) Other financial instruments:
The carrying value of CEMIG's other financial instruments, in REAIS,
approximates fair values at such dates reflecting the short-term maturity or
frequent repricing at December 31, 2002 and 2001 of these instruments.
F - 49
(d) Exposure to foreign currency exchange losses:
The Company's exposure to foreign currency exchange rate risks is as follows:
DECEMBER 31,
----------------
2002 2001
------ ------
U.S. DOLLAR
Financing 1,995 1,255
Advanced billing of electric power - 42
(-) Restricted investments (137) (133)
------ ------
1,858 1,164
OTHER CURRENCIES
Financing 124 80
------ ------
Net liabilities exposed to exchange rate risk 1,982 1,244
====== ======
After 2001, the effects of the exchange rate variation on the liabilities
related to the energy purchase from Itaipu Binacional are included in the Parcel
A costs and will be considered in the subsequent rate adjustments as described
in note 4.
27. CORPORATE REORGANIZATION
Currently, CEMIG's electricity generation, transmission and distribution
operations are vertically integrated into and directly operated by CEMIG.
However, pursuant to CEMIG's main concession agreements and in accordance with
certain changes in the regulatory framework of the Brazilian electricity sector,
CEMIG has to restructure its business, resulting in the "unbundling" of its
generation, transmission and distribution operations into separate subsidiaries,
each wholly owned by CEMIG. According with the concession agreements, CEMIG had
to complete the reorganization process until December 31, 2000.
ANEEL granted the Company an extension until September 21, 2002 to complete the
unbundling process.
The State Government, the controlling shareholder, assuming that the
"unbundling" must be previously approved by Minas Gerais State Legislature,
submitted to the Legislature, on March 2, 2001, a bill proposing the
restructuring of the Company into three companies. This legislation has not yet
been approved and the reorganization process has not yet been completed.
Additionally, the Company has submitted an extension date request to ANEEL,
which has not yet been answered.
On November 11, 2002, ANEEL fined the Company in the amount of R$6, because
CEMIG had not concluded the "unbundling". No accrual has been recorded for this
claim, as the Company believes it has a meritorious defense against the fine and
any other possible penalties that may be imposed regarding this matter.
28. SHAREHOLDERS' AGREEMENT
In 1997, the State of Minas Gerais sold approximately 33% of the Company's
common shares to a group of investors led by SOUTHERN ELECTRIC BRASIL
PARTICIPACOES 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 CEMIG's by-laws, the issuance of
convertible debentures and warrants, changes to the Company's 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.
F - 50
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 a legal
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.
Southern has appealed the Court's decision and their appeal is still pending.
29. CONCENTRATIONS
(a) Labor:
The majority of CEMIG's 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 2002 collective bargaining agreement included an 11.4% average
salary increase.
(b) Hydroelectric power plants:
Seven of our hydroelectric plants accounted for approximately 88% of our
installed electric generation capacity as of December 31, 2002, as follows:
INSTALLED DATE
CAPACITY CONCESSION
HYDROELECTRIC POWER PLANT (MW) EXPIRES
------------------------------ --------- --------------
Sao Simao 1,710 January 2015
Emborcacao 1,192 July 2005
Nova Ponte 510 July 2005
Jaguara 424 August 2013
Miranda 408 December 2016
Tres Marias 396 July 2015
Volta Grande 380 February 2017
Others 692 August 2004 to
December 2035
-----
TOTAL INSTALLED CAPACITY 5,712
=====
F - 51
30. INSURANCE
The Company's insurance policies covering damages to its power plants caused by
fire and operational risks such as equipment failures expired on December 31,
2001 and since that date the Company has not obtained coverage. The Company is
soliciting bids from insurance carriers for new insurance policies to cover
these risks.
CEMIG does not have general third party liability insurance covering accidents
or damages suffered by our customers as a result of interruptions in power
distribution and has not solicited bids relating to this type of insurance. In
addition, the Company has not solicited bids for, nor does it carry, insurance
coverage for major catastrophes affecting its facilities such as earthquakes and
floods, for business interruption risk or systemic failures.
The Company does not carry insurance for losses incurred as a result of business
interruptions caused by labor actions.
The Company has not experienced significant losses arising from the
aforementioned risks.
31. OTHER SIGNIFICANT INFORMATION
(i) Amendment to Constitution of the State of Minas Gerais:
On October 29, 2001, the Minas Gerais State Legislature, through state
constitutional amendment No. 50, amended Article 14 of the Constitution of the
State of Minas Gerais, inserting paragraphs 15, 16 and 17, as follows:
Paragraph 15 - "Three-fifths of the Minas Gerais State Legislature shall
constitute a quorum for the purpose of approving any law authorizing the
split-up of partly state-owned companies and public utilities, the selling
of shares that guarantee the State the direct or indirect control of these
entities, or the alteration of the shareholding structure of these
entities."
Paragraph 16 - "The law which authorizes the selling of shares of
utilities or companies in the public service will obligate the buyer of
such shares to adhere to service quality goals and the purpose of the
entity as set forth in its constitutive documents."
Paragraph 17 - "The privatization of electric energy generation,
transmission and distribution companies or of water and sewage companies
owned by the State, authorized by the terms of this article, shall be
submitted to public referendum."
(ii) Procedure for transferring electricity from generation to distribution:
The Company's current practice includes delivering electricity produced by its
generation plants to its distribution area according to terms equivalent to
those contained in its initial contracts. The Company believes that this
practice does not violate ANEEL restrictions. However, ANEEL has informed the
Company that because it is considered to be a vertically-integrated utility,
CEMIG cannot use initial contract terms to deliver electricity that it produces
to its distribution area. CEMIG is in the process of discussing this further
with ANEEL and does not expect to incur any loss as a result of those
discussions. However, ANEEL could force the Company to stop delivering
electricity from its generation plants to its distribution area.
32. SUBSEQUENT EVENTS
(a) Financing obtained from BNDES for settlement of MAE transactions:
On February 7, 2003, CEMIG obtained a financing from BNDES, in the amount of
R$335. The financing bears interest of 1% per year and monetary variation based
on SELIC. It will be paid through 60 monthly installments from March 15, 2003 to
February 15, 2008 and is guaranteed by 3.27% of the Company's monthly
electricity sales to final customers.
F - 52
(b) Periodic Rate Review:
The Periodic Rate Review represents the revision of the rates granted to the
distribution electricity concessionaires to assure the financial-economic
equilibrium of the existing concession contracts. The Period Rate Review occurs
every 4 or 5 years, depending on each concession contract (5 years for CEMIG).
In the rate definition, ANEEL considers the Company's structural changes
occurred in its costs and its market and the desirable return on its
investments.
CEMIG's energy rates increased by an average of 31.5% on April 8, 2003, as a
result of the Company's Periodic Rate Review.
(c) Significant exchange variation after December 31, 2002:
After December 31, 2002, the REAL appreciated significantly against the U.S.
dollar, which has had a positive effect on the Company's net earnings in 2003.
The Company recorded exchange gains of approximately R$304 (unaudited) in the
five-month period ended May 31, 2003. From December 31, 2002 to May 31, 2003,
the REAL appreciated 16.1% as compared to the U.S. dollar.
(d) Financial instruments contracted in 2003:
As of May 31, 2003, the Company has swap financial instruments, in the amount of
US$52 million, contracted in order to change the original interest rate of some
financing from U.S. dollar to CDI rate variation. The Company did not have any
similar financial instrument as of December 31, 2002 and 2001.
(e) Repayment of Debentures:
As of June 5, 2003 the Company paid R$64 related to the early redemption of
4.000 debentures of UHESC S.A., which were assumed as a result of the
acquisition of Sa Carvalho S.A., representing 53.33% of the debt outstanding as
of December 31, 2002. See note 17 item (4). The remaining balance of this debt
was renegotiated and it is subject to the variation of the IGP-M index plus
interest of 12.8% per year, for the period from June 5, 2003 to June 5, 2005.
33. RECENTLY ISSUED U.S. GAAP PRONOUNCEMENTS
During June 2001, FASB issued SFAS 141, "Business Combinations". SFAS 141
addresses financial accounting and reporting for business combinations. All
business combinations in the scope of SFAS 141 are to be accounted for using one
method, the purchase method. In addition, SFAS 141 requires that intangible
assets be recognized as assets apart from goodwill if they meet two criteria:
the contractual-legal criterion or the separability criterion. To assist in
identifying acquired intangible assets, SFAS 141 also provides a list of
intangible assets that meet either of those criteria. In addition to the
disclosure requirements prescribed in Opinion 16, SFAS 141 requires disclosure
of the primary reasons for a business combination and the allocation of the
purchase price paid to the assets acquired and liabilities assumed by major
balance sheet caption. SFAS 141 also requires that when the amounts of goodwill
and intangible assets acquired are significant to the purchase price paid,
disclosure of other information about those assets is required, such as the
amount of goodwill by reportable segment and the amount of the purchase price
assigned to each major intangible asset class. The provisions of SFAS 141 apply
to all business combinations initiated after June 30, 2001. SFAS 141 also
applies to all business combinations accounted for using the purchase method for
which the date of acquisition is July 1, 2001, or later. The adoption of SFAS
141 on January 1, 2002 did not have any significant impact on the Company's
financial statements.
F - 53
During June 2001, FASB issue SFAS 142, "Goodwill and Other Intangible Assets".
SFAS 142 addresses financial accounting and reporting for acquired goodwill and
other intangible assets. SFAS 142 amends SFAS 121, "Accounting for the
Impairment of Long Lived Assets and for long-lived Assets to Be Disposed Of", to
exclude from its scope goodwill and intangible assets that are not amortized.
SFAS 142 addresses how intangible assets that are acquired individually or with
a group of other assets (but not those acquired in a business combination)
should be accounted for in financial statements upon their acquisition. This
Statement also addresses how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the financial
statements. The provision of SFAS 142 is required to be applied starting with
fiscal years beginning after December 15, 2001. The adoption of SFAS 142 on
January 1, 2002 did not have any significant impact on the Company's
consolidated financial statements.
In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations". SFAS 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. Under SFAS 143, the liability for
an asset retirement obligation is discounted and accretion expense is recognized
using the credit-adjusted risk-free interest rate in effect when the liability
was initially recognized. In addition, disclosure requirements contained in SFAS
143 will provide more information about asset retirement obligations. SFAS 143
is effective for financial statements issued for fiscal years beginning after
June 15, 2002 with earlier application encouraged. The Company does not expect
that the adoption of this standard as of January 1, 2003 will result in a
significant impact on the Company's consolidated financial statements.
In April 2002, the FASB issued SFAS 145 "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections." SFAS
145 rescinds SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt,"
which required that all gains and losses from extinguishment of debt to be
aggregated and classified as an extraordinary item if material. SFAS 145
requires that gains and losses from extinguishment of debt be classified as
extraordinary only if they meet criteria in APB 30, thus distinguishing
transactions that are part of recurring operations from those that are unusual
or infrequent, or that meet the criteria for classification as an extraordinary
item. SFAS 145 amends SFAS 13, "Accounting for Leases", to require that lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. In addition,
SFAS 145 rescinds SFAS 44, "Accounting for Intangible Assets of Motor Carriers,"
and SFAS 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements," which are not currently applicable to the Company. The provisions
of SFAS 145 as they relate to the rescission of SFAS 4 shall be applied in
fiscal year 2003. Certain provisions related to SFAS 13 are effective for
transactions occurring after May 15, 2002. Adoption of this statement will not
result in a significant impact on the Company's consolidated financial
statements.
In June 2002, FASB issued SFAS 146 "Accounting for costs associated with Exit or
Disposal Activities". This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." The principal difference between
this Statement and EITF 94-3 relates to its requirements for recognition of a
liability for a cost associated with an exit or disposal activity. This
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Under EITF 94-3,
a liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. A fundamental conclusion reached by the Board in
this Statement is that an entity's commitment to a plan, by itself, does not
create a present obligation to others that meets the definition of a liability.
This Statement also establishes that fair value is the objective for initial
measurement of the liability. This Statement improves financial reporting by
requiring that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value only when the
liability is incurred. The accounting for similar events and circumstances will
be the same, thereby improving the comparability and representational
faithfulness of reported financial information. The provisions of this Statement
are effective for exit or disposal activities that are initiated after December
31, 2002, with early application encouraged. The Company does not expect that
the adoption of SFAS 146 will have a significant impact on the Company's
consolidated financial statements.
F - 54
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure". SFAS 148 amends SFAS 123, "Accounting
for Stock-Based Compensation", and provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. SFAS 148 also amends the disclosure
requirements of SFAS 123 to require more prominent and frequent disclosures in
financial statements about the effects of stock-based compensation. The
transition guidance and annual disclosure provisions of SFAS 148 are effective
for financial statements issued for fiscal years ending after December 15, 2002.
The adoption of SFAS 148 will not have an impact to the Company's consolidated
financial statements.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", which amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and hedging activities under SFAS 133, "Accounting
for Derivative Instruments and Hedging Activities". SFAS 149 clarifies the
circumstances under which a contract with an initial net investment meets the
characteristic of a derivative as discussed in SFAS 133. In addition, SFAS 149
clarifies when a derivative contains a financing component that warrants special
reporting in the statement of cash flows. SFAS 149 amends certain other existing
pronouncements, resulting in more consistent reporting of contracts that are
derivatives in their entirety or that contain embedded derivatives that warrant
separate accounting. SFAS 149 is effective for contracts entered into or
modified after June 30, 2003 and for relationships designated after June 30,
2003 and is to be applied prospectively. The Company does not believe that the
adoption of SFAS 149 will have a material impact on the Company's consolidated
financial statements.
In May 2003 the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
modifies the accounting for certain financial instruments that, under previous
guidance, issuers could account for as equity. The Statement requires that those
instruments be classified as liabilities in statements of financial position.
SFAS No. 150 affects an issuer's accounting for three types of freestanding
financial instruments, namely:
- mandatory redeemable shares, which the issuing company is obligated to
buy back in exchange for cash or other assets.
- instruments, other than outstanding shares, that do or may require the
issuer to buy back some of its shares in exchange for cash or other
assets. These instruments include put options and forward purchase
contracts.
- obligations that can be settled with shares, the monetary value of
which is fixed, tied solely or predominantly to a variable such as a
market index, or varies inversely with the value of the issuers'
shares.
SFAS 150 does not apply to features embedded in financial instruments that are
not derivatives in their entirety. In addition to its requirements for the
classification and measurement of financial instruments within its scope, SFAS
150 also requires disclosures about alternative ways of settling those
instruments and the capital structure of entities, all of whose shares are
mandatorily redeemable. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. It is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of the
Statement and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. The Company is currently evaluating the impact of
SFAS 150 on the Company's consolidated financial statements.
F - 55
In November 2002, the FASB issued Interpretation 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 requires certain disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also requires a
guarantor to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The disclosure
requirements of FIN 45 are effective for interim and annual periods ending after
December 15, 2002. The initial recognition and initial measurement requirements
of FIN 45 are effective prospectively for guarantees issued or modified after
December 31, 2002. Based on an initial assessment of the provisions and
requirements of FIN 45, the Company believes that the implementation of this
statement will not result in any impact to the Company's consolidated financial
statements.
34. 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.
The operations of all reportable segments of the Company are conducted 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 about each of
the Company's reportable segments based on records in accordance is as follows:
2002 2001
-------- --------
Identifiable assets
Electricity 14,697 13,924
Gas 130 85
Telecommunications 367 65
Eliminations (28) (12)
-------- --------
Total consolidated assets 15,166 14,062
======== ========
Investments in equity investees
Telecommunications - 65
-------- --------
Total consolidated - 65
======== ========
F - 56
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 profit (loss) before
financial income (expense) 536 31 (40) - 527
----------- ------ ------------------ ------------ ------------
Financial revenues (expenses), 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 615 19 89 - 723
2001
---------------------------------------------------------------------------
Electricity Gas Telecommunications Eliminations Consolidated
----------- ------ ------------------ ------------ ------------
Net revenues from external customers 4,894 112 - - 5,006
Intersegment sales - - - - -
----------- ------ ------------------ ------------ ------------
Net revenues 4,894 112 - - 5,006
=========== ====== ================== ============ ============
Operating profit (loss) before
financial income (expense) (610) 18 - - (592)
=========== ====== ================== ============ ============
Financial revenues (expenses), net (52) 4 - - (48)
Income tax benefit (expense) (72) (6) - - (78)
Net income (loss) (734) 15 - - (719)
=========== ====== ================== ============ ============
Depreciation and amortization
charges 638 3 - - 641
Additions to property, plant and
equipment 313 10 - - 323
2000
---------------------------------------------------------------------------
Electricity Gas Telecommunications Eliminations Consolidated
----------- ------ ------------------ ------------ ------------
Net revenues from external customers 3,680 76 - - 3,756
Intersegment sales - - - - -
----------- ------ ------------------ ------------ ------------
Net revenues 3,680 76 - - 3,756
=========== ====== ================== ============ ============
Operating profit before financial
income (expense) 431 9 - - 440
=========== ====== ================== ============ ============
Financial revenues (expenses), net (44) 2 - - (42)
Income tax benefit (expense) (30) (2) - - (32)
Net income (loss) 358 8 - - 366
=========== ====== ================== ============ ============
Depreciation and amortization
charges 581 2 - - 583
Additions to property, plant and
equipment 401 5 - - 406
**********************
F - 57
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT
--------- --------------------------------------------------------------------
1 Corporate by-laws, as amended and in effect since May 28, 2003.
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)).
2.3 Fiscal Agency Agreement, dated November 18, 1996, among us, The
Chase Manhattan Bank, Chase Trust Bank and Chase Manhattan Bank
Luxembourg S.A., relating to US$150,000,000 of our 9.125% Notes due
2004 (incorporated by reference to Exhibit 2.2 to our Registration
Statement on Form 20-F filed on August 13, 2001 (File No. 1-15224)).
2.4 First Supplemental Fiscal Agency Agreement, dated as of October 11,
2001, among us, The Chase Manhattan Bank, as fiscal agent,
registrar, paying agent and transfer agent, Chase Trust Bank, as
principal paying agent and transfer agent, and Chase Manhattan Bank
Luxembourg S.A., as paying agent and transfer agent relating to
US$150,000,000 of our 9.125% Notes due 2004 (incorporated by
reference to Exhibit 2.4 to our Annual Report on Form 20-F filed on
March 26, 2003 (File No. 1-15224)).
3 Agreement, dated June 17, 2002, between Infovias and CLIC, relating
to the shares of WAY TV.
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)).
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 Private Instrument 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)).
12.1 Certification of Executive Vice-President Pursuant to 18 U.S.C.
Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of
2002, dated June 30, 2003.
12.2 Certification of Chief Financial and Investor Relations Officer
Pursuant to 18 U.S.C. Section 1350, as enacted by Section 906 of the
Sarbanes-Oxley Act of 2002, dated June 30, 2003.
2