6-K
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 6-K

 

 

REPORT OF FOREIGN ISSUER

PURSUANT TO RULE 13A-16 OR 15D-16 OF

THE SECURITIES EXCHANGE ACT OF 1934

For the month of January, 2018

Commission File Number: 1-15224

 

 

Energy Company of Minas Gerais

(Translation of Registrant’s Name Into English)

 

 

Avenida Barbacena, 1200

30190-131 Belo Horizonte, Minas Gerais, Brazil

(Address of Principal Executive Offices)

 

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F  ☒                 Form 40-F  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ☐

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes  ☐                No  ☒

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): N/A

 

 

 

 

 

 


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INDEX

 

Item

 

Description of Items

1.  

SUMMARY OF THE MINUTES OF THE 698TH MEETING OF THE BOARD OF DIRECTORS HELD ON JUNE 27, 2017

2.  

MATERIAL ANNOUNCEMENT DATED AS OF DECEMBER  28, 2017: CEMIG COMPLETES R$ 3.4BN DEBT RE-PROFILING

3.  

NOTICE TO STOCKHOLDERS DATED AS OF JANUARY  8, 2018: FINAL FIGURES FOR R$ 1.2BN CAPITAL INCREASE

4.  

MATERIAL ANNOUNCEMENT DATED AS OF JANUARY  12, 2018: BOARD PROPOSES THE MERGER OF CEMIGTELECOM

5.  

SUMMARY OF THE MINUTES OF THE 720TH MEETING OF THE BOARD OF DIRECTORS HELD ON JANUARY 12, 2018

6.  

CONVOCATION OF EXTRAORDINARY GENERAL MEETING OF STOCKHOLDERS DATED AS OF JANUARY 12, 2018 TO BE HELD ON FEBRUARY 28, 2018

7.  

PROPOSAL BY THE BOARD OF DIRECTORS DATED AS OF JANUARY  12, 2018 TO THE EXTRAORDINARY GENERAL MEETING OF STOCKHOLDERS TO BE HELD ON FEBRUARY 28, 2018

8.  

NOTICE TO STOCKHOLDERS DATED AS OF JANUARY  17, 2018: CANCELATION OF THE CONVOCATION TO THE EXTRAORDINARY GENERAL MEETING OF STOCKHOLDERS SCHEDULED FOR JANUARY 24, 2018

9.  

SUMMARY OF THE MINUTES OF THE 721TH MEETING OF THE BOARD OF DIRECTORS HELD ON JANUARY 17, 2018

10.  

MARKET ANNOUNCEMENT DATED AS OF JANUARY  17, 2018: CANCELATION OF THE EXTRAORDINARY GENERAL MEETING OF STOCKHOLDERS SCHEDULED FOR JANUARY 24, 2018

11.  

MARKET ANNOUNCEMENT DATED AS OF JANUARY 24, 2018: BEGIN OF THE 30-DAY EXTENSION TO THE EXCLUSIVITY PERIOD GRANTED TO BROOKFIELD ENERGIA RENOVÁVEL S.A. TO CONTRIBUTE TO THE CAPITAL STOCK OF RENOVA ENERGIA S.A.

12.  

SUMMARY OF THE MINUTES OF THE 722TH MEETING OF THE BOARD OF DIRECTORS HELD ON FEBRUARY 8, 2018

13.  

MARKET ANNOUNCEMENT DATED AS OF FEBRUARY  16, 2018: REPLY TO CVM INQUIRY LETTER 65/2018-CVM/SEP/GEA-1 OF FEBRUARY 15, 2018

14.  

MARKET ANNOUNCEMENT DATED AS OF FEBRUARY  19, 2018: RESIGNATION OF THE CEO OF RENOVA

 

 


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FORWARD-LOOKING STATEMENTS

This report contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. Actual results could differ materially from those predicted in such forward-looking statements. Factors which may cause actual results to differ materially from those discussed herein include those risk factors set forth in our most recent Annual Report on Form 20-F filed with the Securities and Exchange Commission. CEMIG undertakes no obligation to revise these forward-looking statements to reflect events or circumstances after the date hereof, and claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

COMPANHIA ENERGÉTICA DE MINAS

GERAIS – CEMIG

By:   /S/ JOSÉ MARIA RABELO
 

Name: José Maria Rabelo

Title: Acting Chief Finance and Investor Relations Officer

Date: February 23, 2018

 


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SUMMARY OF THE MINUTES OF THE 698TH MEETING OF THE BOARD OF DIRECTORS HELD ON JUNE 27, 2017

 

 

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LOGO

  

 

 

 

COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG

LISTED COMPANY – CNPJ 17.155.730/0001-64 – NIRE 31300040127

BOARD OF DIRECTORS

SUMMARY OF MINUTES

OF THE

698TH MEETING

 

Date, time and place:   June 27, 2017 at 4 p.m. at the head office.

 

Meeting Committee:   Chair:   José Afonso Bicalho Beltrão da Silva;
  Secretary:   Anamaria Pugedo Frade Barros

Summary of proceedings:

 

I Conflict of interest: The board members listed below declared no conflict of interest in relation to the matters on the agenda of this meeting,

 

II The Board approved:

 

a) The following proposal by the Chair:

 

  that as from June 28, 2017, Mr. Luís Fernando Paroli Santos should no longer be Chief Distribution and Sales Officer and interim Chief Institutional Relations and Communication Officer;

 

  Election as Interim Chief Distribution and Sales Officer, from June 28, 2017, to serve the rest of the present period of office, that is to say until the first meeting of the Board of Directors after the Annual General Meeting of 2018, of

 

   

Mr. Ronaldo Gomes de Abreu

   – Brazilian, married, company manager, domiciled in Belo Horizonte, Minas Gerais, at Av. Assis Chateaubriand 46/1301, Floresta, CEP 30150-100, Bearer of Identity Card MG 2868468-PCMG and CPF 563307236-72;

 

  and, as Chief Officer for Institutional Relations and Communication, on an interim basis while also serving as Chief Finance and Investor Relations Officer, of

 

   

Mr. Adézio de Almeida Lima

   – Brazilian, married, economist, domiciled in Belo Horizonte, MG, at Av. Barbacena 1200, 18º andar, Ala B2, Santo Agostinho, CEP 30190-131, bearer of Identity Card 2514340-SSPDF and CPF 342530507-78.

 

b) The minutes of this meeting.

 

III The Board nominated the Chief Officer Luís Fernando Paroli Santos as Chief Executive Officer of Light S.A., and also as Chief Officer for Business Development and Investor Relations Officer of that company, to complete the present period of office or until his duly elected successor is sworn in.

 

  

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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LOGO

  

 

 

 

 

IV The Chair informed the meeting that as from June 28, 2017 the Executive Board comprises:

 

 

Chief Executive Officer:    Bernardo Afonso Salomão de Alvarenga;
Interim Deputy CEO:    Bernardo Afonso Salomão de Alvarenga;
Chief Trading Officer:    Dimas Costa;
Chief Business Development Officer:    César Vaz de Melo Fernandes;
Interim Chief Distribution and Sales Officer:    Ronaldo Gomes de Abreu;
Chief Finance and Investor Relations Officer, and Interim Chief Institutional Relations and Communication Officer:    Adézio de Almeida Lima;
Chief Generation and Transmission Officer:    Franklin Moreira Gonçalves;
Chief Corporate Management Officer:    José de Araújo Lins Neto;
Chief Officer for Human Relations and Resources:    Maura Galuppo Botelho Martins;
Chief Counsel:    Raul Lycurgo Leite,*

 

  * – to be succeeded on July 1, 2017, as per Board decision of June 9, 2017, by:

 

     Mr. Luciano de Araújo Ferraz.

 

V The Chief Officers elected declared – in advance – that they are not subject to any prohibition on exercise of commercial activity, that they do not occupy any position in a company which could be considered a competitor of the Company, and that they do not have, nor represent, any interest conflicting to Cemig’s interest; and made a formal commitment to become aware of, obey and comply with the principles, ethical values and rules established by the Code of Professional Conduct of Cemig and the Code of Ethical Conduct of Government Workers and Senior Administration of the State of Minas Gerais.

The following were present:

 

Board members:  

José Afonso Bicalho Beltrão da Silva,

Bernardo Afonso Salomão de Alvarenga,

Antônio Dirceu Araújo Xavier,

Arcângelo Eustáquio Torres Queiroz,

Bruno Magalhães Menicucci,

Helvécio Miranda Magalhães Junior,

Marco Antônio de Rezende Teixeira,

Marco Antônio Soares da Cunha Castello Branco,

Patrícia Gracindo Marques de Assis Bentes,

Aloísio Macário Ferreira de Souza,

Carolina Alvim Guedes Alcoforado,

 

Nelson José Hubner Moreira,

José Pais Rangel,

Saulo Alves Pereira Junior,

Marina Rosenthal Rocha,

Agostinho Faria Cardoso,

Antônio Carlos de Andrada Tovar,

Geber Soares de Oliveira,

Luiz Guilherme Piva,

Otávio Silva Camargo,

Ricardo Wagner Righi de Toledo,

Tarcísio Augusto Carneiro,

Wieland Silberschneider;

Secretary:   Anamaria Pugedo Frade Barros.    

(Signed by:)    Anamaria Pugedo Frade Barros.

 

 

  

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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MATERIAL ANNOUNCEMENT DATED AS OF DECEMBER 28, 2017: CEMIG COMPLETES R$ 3.4BN DEBT RE-PROFILING

 

 

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LOGO

  

 

 

 

COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG

LISTED COMPANY – CNPJ 17.155.730/0001-64 – NIRE 31300040127

MATERIAL ANNOUNCEMENT

Cemig completes R$ 3.4bn debt re-profiling

Supplementing the Material Announcement published on November 20, 2017, Cemig (Companhia Energética de Minas Gerais – listed and traded, in São Paulo, New York and Madrid), in compliance with CVM Instruction 358 of January 3, 2002 as amended, hereby reports to the Brazilian Securities Commission (CVM), the São Paulo Stock Exchange (B3) and the market as follows:

Cemig’s wholly-owned subsidiaries Cemig D and Cemig GT have completed the re-profiling of their debt, through: (i) a debenture issuance by Cemig D, and (ii) amendments to loan debt transactions of Cemig D and Cemig GT –changing the maturity dates for debt representing a total of approximately R$ 3.4 billion.

Adding these transactions to the total of R$ 3.2 billion raised in the international market through a Eurobond issuance – as reported to the market on December 1 and 5, 2017 – Cemig D and Cemig GT have balanced their cash flows, lengthened the average tenor of their debt, and enhanced their credit quality.

After such re-profiling, the amortization timetable for Cemig’s consolidated debt is the following (the newly contracted components, replacing previous maturities, are shown in yellow):

 

LOGO

Belo Horizonte, December 28, 2017

Adézio de Almeida Lima

Chief Finance and Investor Relations Officer

 

 

  

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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NOTICE TO STOCKHOLDERS DATED AS OF JANUARY 8, 2018: FINAL FIGURES FOR R$ 1.2BN CAPITAL INCREASE

 

 

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LOGO

  

 

 

 

 

COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG

LISTED COMPANY – CNPJ 17.155.730/0001-64

NOTICE TO STOCKHOLDERS

Final figures for R$ 1.2bn capital increase

Further to the Notice to Stockholders published on December 13, 2017, Cemig (Companhia Energética De Minas Gerais) hereby informs its stockholders and the market as follows:

The period for subscription in the second (and last) apportionment of shares not subscribed in the Preemptive Right Exercise Period of the capital increase approved by the Extraordinary General Meeting of October 26, 2017 ended on December 28, 2017.

The total amount of the funds raised by Cemig through such capital increase, now held by the company in cash, is R$ 1.2 billion.

The following numbers of shares were subscribed in the phases of the capital increase:

 

Numbers of shares

     Subscribed in:      Balance of
shares not
subscribed
 
       Preemptive
right
exercise
period
     1st subsequent
apportionment
period
     2nd subsequent
apportionment
period
    

Type

   Proposed                              

ON

     66,849,505        50,106,730        2,954,905        658,191        13,129,679  

PN

     133,061,442        118,949,754        11,004,208        1,291,730        1,815,750  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     199,910,947        169,056,484        13,959,113        1,949,921        14,945,429  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cemig willdisclose, at the appropriate time, the next phase for the completion of this corporate event.

Belo Horizonte, January 8, 2018

Adézio de Almeida Lima

Chief Finance and Investor Relations Officer

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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MATERIAL ANNOUNCEMENT DATED AS OF JANUARY 12, 2018: BOARD PROPOSES THE MERGER OF CEMIGTELECOM

 

 

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LOGO

  

 

 

 

 

COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG

LISTED COMPANY – CNPJ 17.155.730/0001-64 – NIRE 31300040127

MATERIAL ANNOUNCEMENT

Board proposes the merger of CemigTelecom

Cemig (Companhia Energética de Minas Gerais) (listed and traded in São Paulo, New York and Madrid), in compliance with CVM Instruction 358 of January 3, 2002 as amended, hereby reports to the Brazilian Securities Commission (CVM), the São Paulo Stock Exchange (B3) and the market as follows:

In the meeting held on the date hereof, Cemig’s Board of Directors resolved to present to the Extraordinary General Meeting of Stockholders a proposal concerning the merger of Cemig Telecomunicações S.A. (‘CemigTelecom’) into Cemig. Cemig Telecomunicações S.A. is a wholly-owned subsidiary of Cemig.

The merger will have a positive impact on the involved companies resulting from the optimization of assets and synergies, and will reduce financial, operational and administrative costs through concentration of existing administrative structures, while improving options for use of available funds.

The proposal will be submitted to decision by stockholders at an Extraordinary General Meeting to be called on an appropriate date and time (subject to the terms specified by the law and the by-laws).

To take effect, the merger will need also to be submitted, separately, to Cemig’s Audit Committee, pursuant Sub-item III of Article 163 of Law 6404/1976.

Considering that the proposed transaction involves the merger of a wholly-owned subsidiary, there will be no capital increase, nor issuance of new shares. The shares of CemigTelecom will be canceled and the necessary accounting records will be made.

Cemig reiterates its commitment to keep stockholders and the market timely informed in accordance with applicable law and regulations.

Belo Horizonte, January 12, 2018

Adézio de Almeida Lima

Chief Finance and Investor Relations Officer

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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SUMMARY OF THE MINUTES OF THE 720TH MEETING OF THE BOARD OF DIRECTORS HELD ON JANUARY 12, 2018

 

 

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LOGO

  

 

 

 

 

COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG

LISTED COMPANY

CNPJ 17.155.730/0001-64 – NIRE 31300040127

BOARD OF DIRECTORS

Meeting of January 12, 2018

SUMMARY OF MAIN RESOLUTIONS

At its 720th meeting, held on January 12, 2018, the Board of Directors of Cemig (Companhia Energética de Minas Gerais) resolved the following:

 

1. Budget for 2018.

 

2. Instruction to vote in an Extraordinary General Meeting of Lepsa, on: reduction of the corporate capital, amendment of the by-laws, and execution of legal instruments.

 

3. Instruction to vote in an Extraordinary General Meeting of RME, on: reduction of the corporate capital, amendment of the by-laws, and execution of legal instruments.

 

4. Internal Regulations on Competitive Bids and Contracts.

 

5. Execution of a corporate guaranty letter for agreements between Cemig GT and electricity generators or traders, guaranteed by Cemig.

 

6. Appointment of a Manager for MESA.

 

7. Structure of CemigTelecom.

 

8. Convocation of an Extraordinary General Meeting of Stockholders to discuss CemigTelecom.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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CONVOCATION OF EXTRAORDINARY GENERAL MEETING OF STOCKHOLDERS DATED AS OF JANUARY 12, 2018 TO BE HELD ON FEBRUARY 28, 2018

 

 

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LOGO

  

 

 

 

 

COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG

CNPJ 17.155.730/0001-64 – NIRE 31300040127

EXTRAORDINARY GENERAL MEETING OF STOCKHOLDERS

CONVOCATION

Stockholders are hereby called to an Extraordinary General Meeting of Stockholders to be held on February 28, 2018 at 3 p.m., at the company’s head office, Av. Barbacena 1200, 21st floor, Belo Horizonte, Minas Gerais, Brazil, to decide on the following matters:

 

1 Approval and authorization for execution of a Protocol of Merger and Justification, with Cemig Telecomunicações S.A. – CemigTelecom, which will set out the terms and conditions to govern the merger of CemigTelecom into Cemig.

 

2 Ratification of the nomination of the three experts to provide a valuation, for the purposes of Article 8 of Law 6404/1976, of the net equity of CemigTelecom.

 

3 Approval of the Net Equity Valuation Report of CemigTelecom, at book value, as set forth in 2 above.

 

4 Authorization to the merger CemigTelecom into Cemig, and subsequent termination of CemigTelecom.

 

5 Authorization to Cemig to be the successor of CemigTelecom, in all its rights and obligations, for all purposes of law and otherwise.

 

6 Authorization to the transfer to Cemig, by merger, of all the facilities, tangible and intangible assets and goods, inventories, real estate property, credits, assets, rights, employees, stockholdings, contracts, obligations, liabilities, tax books and invoices, controls, records, accounting, documents, systems and information of CemigTelecom, including its shares in Ativas Data Center S.A. (Ativas), which corresponds to 19.6% of the share capital of Ativas, and the contracts related to this stockholding interest.

Proxy votes

Any stockholder who wishes to be represented by proxy at the above General Meeting of Stockholders shall comply with the provisions of Article 126 of Law 6406 of 1976 and with the sole paragraph of Section 9 of the Company’s by-laws, by presenting at the time or providing Cemig, preferably by February 26, 2018, with evidence of ownership of the shares, issued by a depositary financial institution, and a power of attorney with specific powers, at Cemig’s Corporate Executive Office (Superintendência da Secretaria Geral) at Av. Barbacena 1200 – 19th Floor, B1 Wing, Belo Horizonte, Minas Gerais, Brazil.

Belo Horizonte, January 12, 2018

José Afonso Bicalho Beltrão da Silva

Chair of the Board of Directors

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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PROPOSAL BY THE BOARD OF DIRECTORS DATED AS OF JANUARY 12, 2018 TO THE EXTRAORDINARY GENERAL MEETING OF STOCKHOLDERS TO BE HELD ON FEBRUARY 28, 2018

 

 

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LOGO

  

 

 

 

 

PROPOSAL

BY THE BOARD OF DIRECTORS TO THE

EXTRAORDINARY GENERAL MEETING OF STOCKHOLDERS

TO BE HELD ON FEBRUARY 28, 2018

Dear Stockholders:

The Board of Directors of the Company proposes to you the following:

 

1 Approval and authorization for execution of a Protocol of Merger and Justification, with Cemig Telecomunicações S.A. – CemigTelecom, which will set out the terms and conditions to govern the merger of CemigTelecom into Cemig.

 

2 Ratification, because the transaction involves the merger of a wholly-owned subsidiary into its parent company, of the appointment of the three experts,

Mr. Flávio de Almeida Araújo, CRC/MG 86.861,

Mr. Francisco do Couto, CRC/MG 58.343, and

Mr. Leonardo George de Magalhães, CRC/MG 53.140,

to prepare the valuation, under and for the purposes of Article 8 of Law 6404/1976, of the Net Equity Valuation of CemigTelecom.

 

3 Approval of the Net Equity Valuation Report of CemigTelecom, at book value, prepared by three experts, under and for the purposes of Article 8 of Law 6404/1976.

 

4 Authorization to the merger of CemigTelecom into Cemig and subsequent termination of CemigTelecom.

 

5 Authorization for Cemig to be the successor of CemigTelecom, in all its rights and obligations, for all purposes of law and otherwise.

 

6 Authorization to the transfer to Cemig, by merger, of all the facilities, tangible and intangible assets and goods, inventories, real estate property, credits, assets, rights, employees, stockholdings, contracts, obligations, liabilities, tax books and invoices, controls, records, accounting, documents, systems and information of CemigTelecom, including its shares in Ativas Data Center S.A. (Ativas), which corresponds to 19.6% of the share capital of Ativas, and the contracts related to this stockholding interest.

As can be seen, the purpose of this proposal is to meet the genuine interests of the stockholders and of the Company, therefore the Board of Directors expects that it will be approved by the Stockholders.

Belo Horizonte, January 12, 2018

 

José Afonso Bicalho Beltrão da Silva

   Helvécio Miranda Magalhães Junior

Marco Antônio de Rezende Teixeira

   Hermes Jorge Chipp

Bernardo Afonso Salomão de Alvarenga

   José Pais Rangel

Antônio Dirceu Araújo Xavier

   Marcelo Gasparino da Silva

Arcângelo Eustáquio Torres Queiroz    

   Marco Antônio Soares da Cunha Castello Branco

Arlindo Magno de Oliveira

   Nelson José Hubner Moreira

Carlos Eduardo Lessa Brandão

   Patrícia Gracindo Marques de Assis Bentes

Daniel Alves Ferreira

  

 

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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APPENDICES

APPENDIX I     – Appendix 20A of CVM Instruction 481/2009

APPENDIX II     – Appendix 21 of CVM Instruction 481/2009

APPENDIX III     – Protocol of Merger and Justification

APPENDIX IV     – Opinion of the Auditing Board

APPENDIX V     – Net Equity Valuation Report of CemigTelecom.

APPENDIX VI     – Cemig: Financial Statements for 2016

APPENDIX VII     – Cemig: Quarterly Information (‘ITR’) for 3Q 2017

APPENDIX VIII     – CemigTelecom: Financial Statements for 2016

APPENDIX IX     – CemigTelecom: Quarterly Information (‘ITR’) for 3Q 2017

 

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG

CNPJ 17.155.730/0001-64—NIRE 31300040127

APPENDIX I TO THE PROPOSAL BY MANAGEMENT

INFORMATION ON THE MERGER

(AS PER APPENDIX 20-A OF CVM INSTRUCTION 481)

1. Protocol and justification of the transaction as per Articles 224 and 225 of Law 6404 of 1976.

The protocol and justification of the merger of Cemig Telecomunicações S.A. (‘CemigTelecom’) into Companhia Energética de Minas Gerais – Cemig (‘the Company’ or ‘Cemig’), (‘the Protocol and Justification’) is in Appendix III to the Management Proposal.

2. Any other agreements, contracts or pre-contracts regulating the exercise of the right to vote or transfer of shares in the companies subsisting or resulting from the transaction, filed at the head office of the company or to which the controlling stockholder of the company is a party.

None.

3. Description of the transaction, including:

a. Terms and conditions.

The transaction will consist of the merger of CemigTelecom, a wholly-owned subsidiary, into Cemig, its parent company, at the book value of CemigTelecom, and consequent termination of CemigTelecom; and Cemig will be successor of CemigTelecom in all the goods and assets, rights and obligations of CemigTelecom (‘the Merger’). All of the shares in CemigTelecom are owned by Cemig and will be extinguished, as specified in Article 226, §1, of Law 6404, of December 15, 1976 as amended (‘the Corporate Law’).

The Merger will not result in an increase or reduction of the stockholders’ equity or of the share capital of Cemig, since the stockholders’ equity of CemigTelecom is already reflected in full in the stockholders’ equity of Cemig, as a result of the application of the equity method accounting.

It is intended that the Merger shall not take effect before March 31, 2018, or before completion of the following events:

 

(i) Holding of a General Meeting of Debenture Holders of the 2nd (second) issuance of debentures of CemigTelecom (‘the GMDH’), to be called to take place up to March 16, 2018, including in its agenda the approval of the Merger and of its consequences for the debenture holders.

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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(ii) To be assured, under Article 231, §1 of the Corporate Law, to the debenture holders of CemigTelecom that are dissident or absent to the GMDH, that their debentures will be redeemed within 6 (six) months from the date of publication of the minutes of the General Meeting relating to the Merger.

 

(iii) Approval by a General Meeting of Stockholders of CemigTelecom of:

 

  (a) the execution of the Protocol and Justification; and

 

  (b) the Merger, among other matters.

 

(iv) Holding of a General Meeting of Stockholders of Cemig to:

 

  (a) approve the execution of the Protocol and Justification;

 

  (b) ratify the nomination of the Accounting Experts:

 

  (b.i) Flávio de Almeida Araújo, accountant, registered in the Minas Gerais Regional Accounting Council (‘CRC/MG’) under Nº 86.861;

 

  (b.ii) Francisco do Couto, accountant, registered in the CRC/MG under Nº 58.343; and

 

  (b.iii) Leonardo George de Magalhães, accountant, CRC/MG registration Nº 53.140.

– to be responsible for preparation of the net equity valuation report of CemigTelecom at book value, for the merger of CemigTelecom into the Company (‘the Valuation Report’);

 

  (c) approve the Valuation Report;

 

  (d) approve the Merger and the subsequent termination of CemigTelecom;

 

  (e) authorize Cemig to be the successor of CemigTelecom in all its rights and obligations, howsoever, and for all purposes of law; and

 

  (f) authorize transfer to Cemig, by merger, of all the facilities, tangible and intangible assets and goods, inventories, real estate property, credits, assets, rights, employees, stockholdings, contracts, obligations, liabilities, tax books and tax invoices, controls, records, accounting, documents, systems and information of CemigTelecom, including the shares held by CemigTelecom in Ativas Data Center S.A. (Ativas), which corresponds to 19.6% of the share capital of Ativas, and the contracts related to this stockholding interest.

b. Obligations to indemnify: (i) the managers of any of the companies involved; (ii) in the event that the transaction is not completed.

None.

 

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c. Comparative table of the rights, advantages and restriction applying to shares of the companies involved or the resulting companies, before and after the transaction.

After the Merger, only the common and preferred shares issued by Cemig existing prior to the transaction will remain to exist, which will preserve the same rights and advantages that current are:

 

Common shares in Cemig

Right to dividends:

   The common shares have the same rights as the preferred shares in distribution of bonuses. In fiscal years in which the Company does not generate sufficient profits to pay dividends to its stockholders, the State of Minas Gerais guarantees, for the shares issued by the Company up to August 5, 2004 and held by individual persons, a minimum dividend of 6% (six percent) per year.

Right to vote:

   Full.

Description of any restriction on voting:

   Not applicable.

Convertibility:

   None.

Condition of the convertibility, and effects on the share capital:

   Not applicable.

Right to reimbursement of capital:

   Yes.

Characteristics of the reimbursement of capital:

   The preferred shares have right of preference in the event of reimbursement of shares.

Restrictions on trading:

   None.

Nature of restriction:

   Not applicable.

Redeemable:

   None.

Conditions for alteration of the rights carried by the said securities.

   Under Article 109 of the Corporate Law, neither the by-laws nor the General Meeting of Stockholders may deprive the stockholder of the right to: (i) participate in the profits of the company; (ii) participate in the net equity of the company, in the event of liquidation; (iii) inspect the management of the company’s business, in the manner specified in the Corporate Law; (iv) have first refusal to subscribe shares, founder’s shares convertible into shares, debentures convertible into shares and/or warrants; (v) withdraw from the company in the eventuality specified in the Corporate Law.

Other material characteristics:

   All the information that is relevant and pertinent to this topic has been disclosed in the items above.

 

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Preferred shares in Cemig

Right to dividends:

  

Minimum annual dividend equivalent to the greater of:

(a) 10% (ten per cent) of the nominal value of the shares; or

(b) 3% (three per cent) of the value of the stockholders’ equity corresponding to the shares.

The common shares shall be subject to the same conditions as the preferred shares in distribution of bonuses. In business years in which the Company does not obtain sufficient profit to pay dividends to its stockholders, the State of Minas Gerais guarantees to the shares issued by the Company up to August 5, 2004 and held by individual persons, a minimum dividend of 6% (six per cent) per year.

Right to vote:

   Restricted.

Description of restriction on voting:

   The right to vote is reserved exclusively for the common shares, and each common share has the right to one vote in decisions of the General Meeting of Stockholders.

Convertibility:

   None.

Condition of the convertibility, and effects on the share capital:

   Not applicable.

Right to reimbursement of capital:

   Yes.

Description of the characteristics of the reimbursement of capital:

   The preferred shares will have the right of preference in the event of reimbursement of shares.

Restrictions on trading:

   None.

Nature of restriction:

   Not applicable.

Redeemable:

   None.

Conditions for alteration of the rights carried by the said securities.

   Under Article 109 of the Corporate Law, neither the by-laws nor the General Meeting of Stockholders may deprive the stockholder of the right to: (i) participate in the profits of the company; (ii) participate in the assets and liabilities of the company, in the event of liquidation; (iii) inspect the management of the company’s business, in the manner specified in the Corporate Law; (iv) have first refusal to subscribe shares, founder’s shares convertible into shares, debentures convertible into shares and/or warrants; (v) withdraw from the company in the eventuality specified in the Corporate Law.

Other material characteristics:

   All the information that is relevant and pertinent to this topic has been disclosed in the items above.

 

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As a result of the Merger, all the shares issued by CemigTelecom (100% held by Cemig) will be canceled. Therefore, as there will be no delivery of shares issued by Cemig to stockholders of CemigTelecom, a comparison of the rights and advantages between the shares of the two companies is unnecessary.

d. Is there any need for approval by debenture holders or other creditors?

Not in relation to Cemig.

In relation to CemigTelecom, the Merger will be submitted to the approval of the General Meeting of Debenture Holders, which will state whether or not they are favorable to the Merger. Any of the holders of debentures of CemigTelecom that is dissident or be absent to the General Meeting of Debenture Holders shall have the right to redeem its debentures, under Article 231, §1, of the Corporate Law, for a period of six months from the date of publication of the minutes of the General Meetings relating to the Merger.

e. Any asset or liability elements that will form each portion of the equity, in the event of a split.

Not applicable.

f. Whether the resulting companies have any intention to be listed as issuers of securities.

Not applicable.

4. Plans to conduct of the companies’ businesses, particularly in relation to the specific corporate events that are planned.

After completion of the Merger, Cemig will continue to dedicate itself to the activities covered by its corporate purpose, keeping its registry as a listed company, and to succeeding the rights and obligations of CemigTelecom.

5. Analysis of the following aspects of the transaction:

a. Description of the principal benefits expected, including:

i. Synergies

With the merger, the Company will seek to achieve gains from optimization of assets and synergies, and reduce financial, operational and administrative costs through concentration of existing administrative structures, which will expand the means for Cemig to make use of available resources.

ii. Tax benefits

The Company’s management sees no tax benefits arising from the Merger.

iii. Strategic advantages

One of the important strategic advantages inherent in the Merger is simplification of the current corporate structure and expansion of the means for Cemig to make use of available resources.

b. Costs

The managements of both companies estimate that there will be no additional costs as a result of the Merger. CemigTelecom is today a wholly-owned subsidiary, and all its costs are 100% consolidated by Cemig.

 

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c. Risk factors

One of the goals of the Merger is to integrate the businesses of the companies and improve the use of the synergies obtained from the combination of the businesses of Cemig and CemigTelecom. This process of integration could result in difficulties of operational, regulatory, commercial, financial and contractual nature, which may prevent the expected synergies to be achieved or result in unforeseen losses or expenses.

d. If this is a transaction with a related party, indicate alternatives that could have been used to reach the same objectives, indicating the reasons why those alternatives were discarded.

No alternative structure to the Merger could result in the simplification and integration of the businesses of both companies, with the termination of one of the legal entities and its succession by the remaining company, as it is intended. Additionally, because this case involves the merger of a wholly-owned subsidiary by its parent company, the present question loses its relevance.

e. Exchange ratio

Not applicable, CemigTelecom is a wholly-owned subsidiary of Cemig and thus the Merger will not result in an increase in the net equity of Cemig.

f. For a transaction involving parent companies, subsidiaries or companies under joint control, please provide:

 

(i) The share exchange ratio calculated in accordance with Article 264 of Law 6404 of 1976.

 

(ii) Detailed description of the process of negotiation of the exchange ratio and other terms and conditions of the transaction.

 

(iii) If the transaction was preceded, in the last 12 (twelve) months, by an acquisition of control or acquisition of participation in a controlling stockholding block:

 

  (a) Comparative analysis of the exchange ratio and the price paid in acquisition of control;

 

  (b) Reasons justifying any differences of valuation in the different transactions;

 

(iv) Justification of why the exchange ratio is commutative, with description of the procedures and criteria adopted to guarantee the commutability of the transaction or, if the exchange ratio is not commutative, detailing of the payment or equivalent measures adopted to ensure adequate compensation.

Cemig is the holder of 100% of the share capital of CemigTelecom, so that the transaction does not result in an increase of capital in Cemig, nor any alteration in the participation of its stockholders. Therefore, there is no need to consider any exchange ratio.

6. Copy of the minutes of all the meetings of the Board of Directors, Auditing Board and special committees in which the transaction was discussed, including any dissident votes.

The Opinion of the Auditing Board of Cemig is attached hereto as Appendix IV.

7. Copy of studies, presentations, reports, opinions, professional opinions or valuation reposts of the companies involved in the transaction that have been placed at the disposal of the controlling stockholder at any stage of the transaction.

The Valuation Report is attached hereto as Appendix V.

 

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7.1. Identify any conflicts of interests between the financial institutions, companies and professionals that have prepared the documents referred to in item 7 and the companies involved in the transaction.

None.

8. Plans for by-laws, or changes to by-laws, of the company resulting from the transaction.

No changes to Cemig’s bylaws are being proposed; Cemig will be the successor of CemigTelecom.

9. Financial statements used for the purpose of the transaction, under the applicable rule.

In accordance with Article 6 of CVM Instruction 565 of June 15, 2015, as amended (‘CVM Instruction 565’), the following financial statements have been disclosed:

 

(i) Financial Statements of Cemig of December 31, 2016 (attached hereto as Appendix VI);

 

(ii) Interim Accounting Statements of Cemig of September 30, 2017 (attached hereto as Appendix VII);

 

(iii) Financial Statements of CemigTelecom of December 31, 2016 (attached hereto as Appendix VIII); and

 

(iv) Interim Accounting Statements of CemigTelecom of September 30, 2017 (attached hereto as Appendix IX).

The valuation of the net equity value of CemigTelecom, expressed in the Valuation Report, has been based on CemigTelecom’s balance sheet of November 30, 2017, which comprises the Appendix I to the Valuation Report.

Aiming to ensure the accuracy of the accounting amounts of the assets and liabilities elements comprising the balance sheet of CemigTelecom, on November 30, 2017, the following procedures were adopted in the Valuation Report:

 

  Reading of the Financial Statements of CemigTelecom of December 31, 2016 (attached hereto as Appendix VIII).

 

  Reading of the Independent Auditor’s Report on the Financial Statements issued by Deloitte Touche Tohmatsu Auditores Independentes on April 6, 2017, without qualification in relation to the Balance Sheet of December 31, 2016.

 

  The Interim Accounting Information of CemigTelecom of September 30, 2017 (attached hetero as Appendix IX), combined with the Report of the External Auditors, Ernst & Young Auditores Independentes, on their review of the quarterly information, issued without any qualification on November 10, 2017; and

 

  Analytical review of the movement in the balances of assets and liabilities in the period between September 2017 and November 30, 2017.

10. Pro-forma financial statements prepared for the purposes of the transaction, in the terms of the applicable rule.

Considering that CemigTelecom is a wholly-owned subsidiary of Cemig, and is consolidated in Cemig’s results, we present the Interim Accounting Information of Cemig on September 30, 2017, consolidated and audited (attached hereto as Appendix VII), in compliance with the requirement of Article 7 of CVM Instruction 565 of June 15, 2015 as amended.

11. Document containing information on the non-listed companies directly involved, including:

 

a. Risk factors, in the terms of Items 4.1 and 4.2 of the Reference Form;

 

b. Description of the principal changes in the risk factors that have taken place in the prior business period and expectations in relation to reduction or increase in the exposure to risks as a result of the transaction, in the terms of Item 5.4 of the Reference Form;

 

c. Description of its activities, in the terms of Items 7.1, 7.2, 7.3 and 7.4 of the Reference Form;

 

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d. Description of the economic group, in the terms of Item 15 of the Reference Form;

 

e. Description of the share capital, in the terms of item 17.1 of the Reference Form.

Not applicable.

12. Description of the structure of capital and control after the transaction, in the terms of Item 15 of the Reference Form.

Items 15.1 and 15.2 of the Reference Form of Cemig:

Those items are not subject to any change as a result of the intended transaction.

Item 15.3 of the Reference Form of Cemig:

Those items are not subject to any change as a result of the intended transaction.

Item 15.4 of the Reference Form of Cemig:

 

  Organization diagram before the transaction:

 

LOGO

 

 

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  Organization diagram after the transaction:

 

LOGO

Items 15.5, 15.6, 15.7 and 15.8 of the Reference Form of Cemig:

Those items are not subject to any change as a result of the intended transaction.

13. Number, class, form and type of the securities of each company involved in the transaction held by any other companies involved in the transaction, or by people related to these companies, as defined by the rules that govern public offerings for acquisition of shares

Cemig is, in the present date, holder of 448,340,822 (four hundred forty eight million three hundred and forty thousand eight hundred twenty two) nominal common shares without par value, comprising 100% (one hundred per cent) of the share capital of CemigTelecom.

14. Exposure of the companies involved in the transaction – or any of their related parties, as defined in the rules that govern public offerings for acquisition of shares – to derivatives referenced to securities issued by other companies involved in the transaction.

Not applicable.

15. Report covering all transactions carried out, in the last 6 (six) months, by the following persons with securities issued by the companies involved in the transaction:

a. Companies involved in the transaction:

i. Private purchase transactions

None.

ii. Private sale transactions

None.

 

 

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iii. Purchase transactions in regulated markets

None.

iv. Sale transactions in regulated markets

None.

b. Any persons or entities that are related parties to the companies that are involved in the transaction:

i. Private purchase transactions

None.

ii. Private sale transactions

None.

iii. Purchase transactions in regulated markets

None.

iv. Sale transactions in regulated markets

None.

16. Document by which the Special Independent Committee submitted its recommendations to the Board of Directors, in the event that the transaction has been negotiated in the terms of CVM Orientation Opinion 35 of 2008

Not applicable. Cemig is holder of 100% of the shares corresponding to the share capital of CemigTelecom and, thus, the transaction does not result in an increase of capital of Cemig or in any change to the participation of its stockholders. Therefore, there was no exchange ratio to be negotiated.

*—*—*—*

 

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COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG

CNPJ 17.155.730/0001-64—NIRE 31300040127

APPENDIX II TO THE PROPOSAL OF MANAGEMENT

INFORMATION ON THE VALUER AND PROPOSAL FOR THE VALUATION WORK

(APPENDIX 21 TO CVM INSTRUCTION 481)

 

1. List the valuers recommended by the management.

Expert Accountants:

 

(a) Mr. Flávio de Almeida Araújo, accountant, enrolled with the Minas Gerais State Regional Accounting Council (‘CRC/MG’) under the No. 86,861;

 

(b) Mr. Francisco do Couto, accountant, enrolled with the CRC/MG under the No. 58,343.

 

(c) Mr. Leonardo George de Magalhães, accountant, enrolled with the CRC/MG under the No. 53,140.

 

2. Describe the qualifications of the recommended valuers.

 

  Mr. Flávio de Almeida Araújo has a degree in accountability from Minas Gerais Federal University (UFMG) and a post-graduation MBA with specialization in finance from the Dom Cabral Foundation (FDC). He works at Cemig since 2006, holding, currently, the position ofFinancial Manager for Equity Holdings.

 

  Mr. Francisco do Couto has a degree in accountability from the Newton Paiva University Center, with specialization in external auditing from UFMG, and MBA in Management, Finance, Controllership and Auditing from the Getúlio Vargas Foundation (FGV). His professional life has been almost entirely dedicated to accounting. He has been an independent auditor for 10 years. He has been a professor to undergraduate and extension courses at UFMG. Since February 1999 he has been working as an accountant at Cemig and is currently responsible for the preparation of the Consolidated Financial Statements of the Group. He is also a graduate and undergraduate professor at Centro Universitário UNA, where he has been teaching since 2003.

 

  Mr. Leonardo George de Magalhães has a degree in accountability from UNA Faculdade de Ciências Econômicas, Belo Horizonte, with specialization in accountability from FGV and specialization in business management from UFMG. At Cemig he has been Controller since June 2008. Since September 2017 he has also served as General Manager for Planning and Corporate Control.

 

3. Provide a copy of the proposals for work and remuneration of the recommended valuers.

Appendix I to this document comprises a copy of the work proposal.

 

Scope:    Accounting Net Equity of Cemig Telecomunicações S.A. – CemigTelecom.
Fees:    No remuneration for the valuers further to their normal remuneration as employees of Cemig.

 

 

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4. Describe any material relationship existing in the last three years between the recommended valuers and related parties to the company, as defined in the accounting rules that deal with this subject.

Flávio de Almeida Araújo:

 

  Is currently Cemig’s Financial Manager for Holdings, with the following principal duties:

 

  to promote the financial management of Cemig Group;

 

  to follow the economic and financial results of the companies;

 

  to participate in processes of merger, split, acquisition and disposal of corporate interests.

 

  to act as a member of the Board of Directors in companies of the Cemig Group; and

 

  to prepare accounting opinions for the purposes of spin-offs, mergers and allocations of capital to companies of the group.

Mr. Francisco do Couto:

 

    Works as an accountant at Cemig.

 

    Is currently responsible for the preparation of the Group’s Consolidated Financial Statements.

Mr. Leonardo George de Magalhães:

 

  Is the executive responsible for accounting, management of costs and tax planning of Cemig and its wholly-owned subsidiaries, and also management of budgeting, economic-financial planning, and analysis and monitoring of projects. He is:

 

  Chairman of the Board of Forluz – the pension fund of the employees of Cemig;

 

  a member of the Rate-regulated Activities Consultative Group of IASB – the International Accounting Standards Board;

 

  a member of the Board of Directors of Aliança Norte – stockholder of the Belo Monte power plant;

 

  Coordinator of the Control and Management Committee of Cemig: this body monitors the budgets and results of the businesses and also advises management in control and management analyzes and initiatives.

 

  Coordinator of the Budget Prioritization Committee: a committee supporting management in decisions and management of investment projects, including analyses and prioritization of use of funds; and

 

  represents Cemig in investor relation events in Brazilian and international financial markets.

 

  He participates, jointly with the CFO and the Investor Relations Director, in the quarterly presentations of the Company’s results to investors.

 

  He has participated in various processes of mergers and acquisitions of Cemig.

*—*—*—*

 

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COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG

CNPJ 17.155.730/0001-64—NIRE 31300040127

APPENDIX I TO APPENDIX II

COPY OF THE WORK PROPOSAL OF THE ACCOUNTING EXPERTS

The accounting examination was carried out in accordance with NBC T 13, and comprised:

 

(a) planning of the work;

 

(b) application of procedures judged to be necessary in the circumstances;

 

(c) issuance of the expert opinion on valuation of the equity to be incorporated.

The scope of the work is specified as: valuation of the equity of CemigTelecom, at book value, for the purpose of absorption. The following procedures were adopted:

 

  Reading of the Financial Statements of December 31, 2016.

 

  Reading of the Report of the External Auditors on the Financial Statements, issued by Deloitte Touche Tohmatsu Auditores Independentes on April 6, 2017, with no qualifications, in relation to the Financial Statements of December 31, 2016.

 

  Reading of the Interim Accounting Information of September 30, 2017, jointly with the Report of the External Auditors, Ernst & Young Auditores Independentes, issued on November 10, 2017 on review of that quarterly information, without qualification.

 

  Analytical review of the movement of balances of assets and liabilities in the period from September 30, 2017 to November 30, 2017.

At September 30, 2017 the books of account of CemigTelecom were compliant with the relevant legal formalities, and were written in accordance with the accounting practices adopted in Brazil.

The Accounting Experts used historic information and data audited by third parties and data provided by the management of CemigTelecom, via email or through its website. This being so, we assume that the data and information obtained for this Opinion is true.

*—*—*—*

 

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LOGO

  

 

 

 

 

Appendix III

PROTOCOL OF MERGER AND JUSTIFICATION

By this private instrument and for all purposes of law,

 

(a) COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG, with head office in Belo Horizonte, Minas Gerais State, at Avenida Barbacena 1200, Santo Agostinho, registered in the CNPJ/MF under Nº 17.155.730/0001-64, herein represented in accordance with its by-laws (‘Cemig’) and

 

(b) CEMIG TELECOMUNICAÇÕES S.A., with head office in Belo Horizonte, Minas Gerais State, at Rua Inconfidentes 1051, registered in the CNPJ under Nº. 02.983.428/0001-27, herein represented in accordance with its Articles of Association (‘CemigTelecom’);

– jointly, ‘the Companies” –

have agreed on the terms and decided to execute the present Protocol of Merger and Justification, in the form set forth by Law 6404 of December 15, 1976 (‘the Corporate Law”), to set out the terms and conditions governing the merger of CemigTelecom into Cemig.

CORPORATE PURPOSE AND SHARE CAPITAL OF THE COMPANIES

 

1. Cemig is a Brazilian publicly held company, its corporate purpose encompasses the following activities:

 

  a) to build, operate and exploit systems of generation, transmission, distribution and sale of electricity and related services;

 

  b) to develop activities in various energy related fields, regardless of the source, focusing on the economic and commercial exploitation;

 

  c) to render consulting services, within its fields of operation, to Brazilian and foreign companies; and

 

  d) to carry out activities direct or indirectly related to its corporate purpose, including the development and commercial operation of telecommunication and information systems.

 

2. CemigTelecom is a Brazilian corporation, its corporate purpose encompasses the following activities:

 

  a) to render and commercially operate limited specialized telecommunication services, through an integrated system of fiber optic cables, coaxial cables, and electronic and related equipment for transmission, emission or reception of symbols, characters, signals, written material, images, sound and information of any type;

 

  b) to render telecommunications services, through various technologies;

 

  c) to render consulting services in telecommunications to Brazilian and foreign companies;

 

  d) to grant use of its telecommunications system upon compensation to:

 

  (i) holders of public electricity services concessions, for their use in the management their generation, transmission and distribution activities; and

 

  (ii) companies aiming to commercially operate the system as alternative provider of carriage of signal to companies holding concession, permission or authorization to provide telecommunications services.

 

 

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LOGO

  

 

 

 

 

  (e) to commercial operate its telecommunications system as an alternative provider of carriage of signal to companies holding concession, permission or authorization to provide telecommunications services.

 

  f) to render multimedia communication services (‘SCM’) in all the Brazilian territory.

 

  g) to hold corporate interests in other companies.

JUSTIFICATION AND BASES FOR THE MERGER

 

3. The transaction that is the subject of this protocol is the merger of CemigTelecom into Cemig, with transfer of the totality of the net assets and liabilities of CemigTelecom to Cemig, which will be the sole successor of CemigTelecom in all its goods and assets, rights and obligations, in the terms of Articles 227 et seq. of the Corporate Law (‘the Merger’).

 

4. After implementation of the Merger the credits and debits of CemigTelecom, which currently constitute its assets and liabilities, will become part of the accounts of Cemig, being transferred to the corresponding lines in Cemig’s accounting books, subject to any necessary adaptations.

 

5. The Merger will provide gains from synergies and reduce financial, operational and administrative costs through concentration of existing administrative structures in Cemig, which will increase the possibilities for Cemig to take advantage of all its available resources.

 

6. The Merger will take effect only as from March 31, 2018 (‘the Effective Date’), regardless of the date on which the required approvals are obtained.

 

7. On the Effective Date, CemigTelecom will cease to exist.

ORGANIZATION AND COMPOSITION OF THE COMPANIES

 

8. Cemig is a Brazilian publicly held company, with corporate capital of R$ 6,294,208,270.00 (six billion two hundred ninety four million two hundred and eight thousand two hundred seventy Reais), divided in

 

  a) 420,764,708 (four hundred twenty million seven hundred sixty four thousand seven hundred and eight) nominal common shares each with nominal value of R$ 5.00 (five Reais); and

 

  b) 838,076,946 (eight hundred thirty eight million seventy six thousand nine hundred forty six) nominal preferred shares each with nominal value of R$ 5.00 (five Reais).

 

9. CemigTelecom is a Brazilian corporation, with corporate capital of R$ 292,399,303.29 (two hundred ninety two million three hundred ninety nine thousand three hundred and three Reais and twenty nine centavos), fully paid up, divided in 448,340,822 (four hundred forty eight million three hundred and forty thousand eight hundred twenty two) nominal common shares without par value, all owned by Cemig:

 

Sole stockholder

   Shares      %  

Companhia Energética de Minas Gerais – CEMIG

     448,340,822        100  

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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LOGO

  

 

 

 

 

VALUATION

 

10. Subject to ratification by the stockholders of the Companies, the managers of the Companies have appointed the following Expert Accountants to prepare the valuation of the net equity of CemigTelecom, as per Article 8 of the Corporate Law:

 

Mr. Flávio de Almeida Araújo

   – Brazilian, married, resident and domiciled in Belo Horizonte, Minas Gerais, at Rua José de Alencar 984, Apt. 401, Nova Suíça, holder of Identity Card MG-7.348.434, CPF 045.915.356-06, and CRC/MG (Minas Gerais Regional Council of Accountants) 86.861/O-7;

Mr. Francisco do Couto

   – Brazilian, single resident and domiciled in Belo Horizonte, MG, at Rua Uberlândia 555, Apt. 902, Carlos Prates, holder of Identity Card MG-3.124.729, CPF 525.441.416-20, and CRC/MG 58.343; and

Mr. Leonardo George de Magalhães

   – Brazilian, married, resident and domiciled in Nova Lima, Minas Gerais, at Rua Vega 55, Quintas do Sol, holder of Identity Card 4.303.799 – SSP/MG, CPF 617.665.426-20, and CRC/MG 53.140/O-4.

 

11. For the purposes of the Merger, the elements of the equity of CemigTelecom to be transferred to Cemig have been valued at book value, based on the financial statements of CemigTelecom on November 30, 2017.

 

12. Having been previously informed of their appointment as valuers subject to ratification by the stockholders of the Companies, the Accounting Experts determined, based on the financial statements on November 30, 2017, that the net value of the total assets and liabilities of CemigTelecom is

 

R$ 245,761,413.36

(two hundred forty five million seven hundred sixty one thousand four hundred thirteen Reais and thirty six centavos),

after the adjustments described in Chapter 4 of the Valuation Report and the cancelation of the investment of Cemig in CemigTelecom.

 

13. Any change in the value of the net equity after the date of those financial statements will be absorbed by Cemig on the Effective Date of the Merger.

CORPORATE INTERESTS IN COMMON AND SUBSTITUTION OF SHARES

 

14. Considering that Cemig is the holder of 100% (one hundred per cent) of the share capital of CemigTelecom, there will be no substitution of shares issued by CemigTelecom by shares issued by Cemig.

With the cancelation of the shares issued by CemigTelecom, the value of the investment recorded in the assets of Cemig will be replaced by the equity value of CemigTelecom, as valued by the experts.

The Merger will not result in a change in the net equity of Cemig since the net equity value of CemigTelecom is already reflected in its entirety in the Stockholders’ equity of Cemig, due to application of the equity method accounting. Consequently there will be no increase in the share capital of Cemig, nor any issue of new shares.

 

15. Since this is a merger of a wholly-owned subsidiary into its parent company, with no other stockholders of CemigTelecom, and since there will be no increase of the corporate capital of the Cemig, there is no need to establish parameters for an exchange ratio, and there is no additional information to be made available to the stockholders of Cemig.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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LOGO

  

 

 

 

 

FINAL PROVISIONS

 

16. Approval of this Protocol by the stockholders of CemigTelecom and by the stockholders of Cemig will result in the termination of CemigTelecom on the Effective Date of the Merger, with the cancellation of all the shares issued by CemigTelecom. The management of Cemig will be responsible for filing all the corporate documents required for the registry of the Merger with the relevant entities.

 

17. With the Merger coming into effect on the Effective Date, all the goods and assets, rights, receivables, obligations and liabilities of CemigTelecom will automatically become part of the assets and liabilities of Cemig, which will succeed CemigTelecom in all its rights and obligation, regardless of any formalities other than those specified by law.

 

18. The provisions relating to the withdraw right and reimbursement of shares are not applicable due to the fact that:

 

  (i) in relation to CemigTelecom: Cemig owns the totality of the shares issued by CemigTelecom and, hence, there is no stockholder dissenting in relation to the Merger; and

 

  (ii) in relation to Cemig: there is no provision of law or in the by-laws of the company that grants a withdraw right to any dissenting stockholder.

 

19. Under Article 231 of the Corporate Law, the Merger will be conditional upon:

 

  (i) the approval by the holders of debentures issued by CemigTelecom, in a General Meeting called specifically to approve the Merger; and

 

  (ii) the granting by CemigTelecom of a minimum period of 6 (six) months, from the date of publication of the minutes of the Meetings relating to the Merger, for redemption of its outstanding debentures.

Having agreed with the terms and conditions set forth above, the parties execute this instrument, in six counterparties of equal form and content, for it to produce its legal and regulatory effects.

 

Belo Horizonte,  

            , 2018

By COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG

 

         

By CEMIG TELECOMUNICAÇÕES S.A.

 

         

Witnesses:

 

1.

       

2.

   
 

Name:

      Name:
 

CPF/MF:

      CPF/MF:
 

ID/Issuer:

      ID/Issuer:

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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LOGO

  

 

 

 

 

Appendix IV

OPINION OF THE AUDITING BOARD

The undersigned members of the Auditing Board of the Companhia Energética de Minas Gerais – Cemig, in performance of their role under the law and under the by-laws of the company, have analyzed the Proposal made by the Board of Directors to the Extraordinary General Meeting of Stockholders to be held on February 28, 2018, which is for the following:

 

  1 Approval and authorization for execution of a Protocol of Merger and Justification, with Cemig Telecomunicações S.A. – CemigTelecom, which will set out the terms and conditions to govern the merger of CemigTelecom into Cemig.

 

  2 Ratification of the nomination of the following 3 (three) experts – Mr. Flávio de Almeida Araújo, CRC/MG 86.861, Mr. Francisco do Couto, CRC/MG 58.343, and Mr. Leonardo George de Magalhães, CRC/MG 53.140, that will provide a valuation, for the purposes of Article 8 of Law 6404/1976, of the net equity of CemigTelecom.

 

  3 Approval of the Net Equity Valuation Report of CemigTelecom, at book value, prepared by the three experts, in accordance with Article 8 of Law 6404/1976.

 

  4 Authorization to the merger of CemigTelecom into Cemig and subsequent termination of CemigTelecom.

 

  5 Authorization to Cemig to be the successor of CemigTelecom, in all its rights and obligations, for all purposes of law and otherwise.

 

  6 Authorization to the transfer to Cemig, by merger, of all the establishments, tangible and intangible assets and goods, inventories, real estate property, credits, assets, rights, employees, stockholdings, contracts, obligations, liabilities, tax books and invoices, controls, records, accounting, documents, systems and information of CemigTelecom, including its shares in Ativas Data Center S.A. (Ativas), which corresponds to 19.6% of the share capital of Ativas, and the contracts related to this stockholding interest.

After carefully analyzing the above proposal and considering that the applicable rules governing the maters under discussion have been complied with, it is the opinion of the members of the Auditing Board that the proposal should be approved by the said General Meeting of Stockholders.

Belo Horizonte, January 25, 2018

Signed:

Edson Moura Soares

Camila Nunes da Cunha Pereira Paulino

Manuel Jeremias Leite Caldas

Rodrigo de Mesquita Pereira

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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Appendix V

 

VALUATION REPORT ON THE EQUITY OF CEMIG TELECOMUNICAÇÕES S.A. FOR THE PURPOSES OF MERGER

 

 

35


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Belo Horizonte, December 22, 2017.

To the Management of

Companhia Energética de Minas Gerais – Cemig

Av. Barbacena, 1.200 – 18º Andar

Belo Horizonte, Minas Gerais

In accordance with the provisions of Paragraphs 1 and 6 of Article 8 of Law 6404/75, the Management of Cemig Companhia Energética de Minas Gerais – CEMIG (‘Cemig’) has appointed three expert accountants to prepare a valuation report, at book value, on the net equity of Cemig Telecomunicações S.A. – CemigTelecom (‘CemigTelecom’ or ‘the Company), details of which are in the appendix to this document. This appointment will be ratified in an Extraordinary General Meeting of Stockholders of Cemig.

1. INFORMATION ABOUT THE EXPERTS

The accountants listed below were appointed as experts to carry out the valuation of the Net Equity of CemigTelecom, and have prepared this Valuation Report in accordance with the accounting practices adopted in Brazil, as defined in Item 7 of Accounting Pronouncement NBC TG 26 – Presentation of Accounting Statements:

 

    Flávio de Almeida Araújo, accountant, enrolled with the Minas Gerais State Regional Accounting Council (CRC/MG) under No. 86.861.

 

    Mr. Francisco do Couto, accountant, enrolled with the CRC/MG under No. 58.343.

 

    Mr. Leonardo George de Magalhães, accountant, enrolled with the CRC/MG under No. 53.140.

In compliance with CVM Instruction 319/99, as amended, the expert accountants represent that:

 

  (a) they have no direct or indirect interest in the Company or in the operations carried out by it.

 

  (b) they found no limitations imposed by the controlling stockholders or managers that might have hindered or jeopardized the access to, use or knowledge of information, goods and assets, documents or work methodologies necessary for construction of their conclusions.

The accounting inspection was carried out in accordance with NBC T 13, and comprised:

 

  (a) Planning of the work;

 

  (b) Application of the necessary procedures due to the circumstances;

 

  (c) Issuance of the expert valuation report on the stockholders’ equity to be transferred to the surviving company.

2. GENERAL INFORMATION ON THE COMPANY BEING VALUED, SUBJECT OF THE MERGER

Cemig Telecomunicações S.A. is a listed corporation and a wholly-owned subsidiary of Companhia Energética de Minas Gerais S.A. – Cemig. It offers optical network for services of carriage of telecommunications in the State of Minas Gerais, using the electricity transmission and distribution infrastructure of Cemig.

 

         

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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CemigTelecom was incorporated on January 13, 1999, with the following purposes: to provide telecommunication services, through an integrated system consisting of fiber optic cables, coaxial cables, and electronic and related equipment for transmission, emission and reception of symbols, characters, signals, written material, images, sound and information of any type, and to operate telecommunications systems as an alternative provider of carriage of signal and other services to companies holding concession, permission or authorization to provide telecommunications services.

3. PURPOSE OF THE VALUATION; BASE DATE

The objective of the valuation of the net equity of CemigTelecom, at book value, on the base date of November 30, 2017, is the merger of its total net assets and liabilities into its parent company Cemig, in accordance with Articles 226 and 227 of Law 6404/76.

4. SCOPE OF THE WORK

To ensure accuracy of the accounting values of the asset and liability elements that comprise the balance sheet of CemigTelecom on November 30, 2017, we adopted the following procedures:    

 

  Ø Reading of the Financial Statements at December 31, 2016.

 

  Ø Reading of the Report by the Independent Auditor, Deloitte Touche Tohmatsu Auditores Independentes, issued on April 6, 2017 on the Financial Statements, without qualification in relation to the Balance Sheet of December 31, 2016.

 

  Ø Interim Accounting Statements of September 30, 2017, accompanied by the Report of the external auditor, Ernst & Young Auditores Independentes, issued on November 10, 2017 on the review of the quarterly information, without qualification.

 

  Ø Analytical review of the movement of balances of assets and liabilities in the period between September 30, 2017 and November 30, 2017.

On September 30, 2017 the accounting records of CemigTelecom were in compliance with the pertinent legal formalities and are written in accordance with accounting practices adopted in Brazil.

The experts used historic information and data audited by third parties and data supplied by the management of CemigTelecom, via email or through its website. We, thus, assume that the data and information obtained for this Opinion is true.

This Report was prepared for use solely and exclusively by Cemig, for the purpose mentioned in Item 3.

5. PRESENTATION OF THE BALANCE SHEET

The Balance Sheet of November 30, 2017 was prepared in accordance with accounting practices adopted in Brazil. The experts verified that the assets and liabilities of CemigTelecom are properly accounted in accordance with the Plan of Accounts of the Telecommunications Sector.

 

         

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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6. COMPOSITION OF NET ASSETS AND LIABILITIES

6.1. Accounting Valuation and base date:

The components of net equity of CemigTelecom on November 30, 2017 are represented, in summary, by the following account lines:

 

ASSETS

   In Reais (R$)  

Current and non-current assets

     363,453,288.20  

LIABILITIES

  

Current and non-current liabilities

     117,691,874.84  

TOTAL OF STOCKHOLDERS’ EQUITY

     245,761,413.36  

6.2. Net equity at market price

Since both the companies involved in the transaction, are listed companies, valuation at market price or any other economic-financial valuation technique is not justified, as specified by Article 264 of Law 6404/76, since this is a case of merger of a wholly-owned subsidiary into its parent company, and there is no determination of an exchange ratio that could be the subject to comparison and/or right to withdraw by dissenting shareholders. In other words, there will be no change in the net equity of Cemig, and consequently, no issuance of new shares, for which reason valuation at market price is not applicable.

6.3. Treatment of subsequent variations in the value of equity

Under Article 224, Sub-item III of Law 6404/76, the variations in equity that take place between the base date of this Opinion and the date of the merger of CemigTelecom into Cemig will be appropriated directly by Cemig, and at the time of the actual merger, the balances of existing account lines in the analytical interim balance sheet of CemigTelecom will be reflected, line by line, into Cemig’s balance sheet.

7. CONCLUSION

As a result of the procedures and analyses effected, we conclude that the value of the stockholders’ equity of CemigTelecom, on November 30, 2017 is R$ 245,761,413.36 (two hundred forty five million seven hundred sixty one thousand four hundred thirteen Reais and thirty six centavos).

Expert accountant:              Flávio de Almeida Araújo

Expert accountant:              Francisco do Couto

Expert accountant:              Leonardo George de Magalhães

 

         

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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APPENDIX I – BALANCE SHEET AT NOVEMBER 30, 2017

 

LOGO

 

 

    

LOGO

 

 

CEMIG TELECOMUNICAÇÕES S.A. - CEMIGTELECOM

BALANCE SHEET ON NOVEMBER 30, 2017 AND DECEMBER 31, 2016

(In reais)

          

CEMIG TELECOMUNICAÇÕES S.A. - CEMIGTELEC

BALANCE SHEET ON NOVEMBER 30, 2017 AND DECEMBER 31, 2016

(In reais)

 
                
    Nov. 30, 2017     Dec. 31, 2016     % change                Nov. 30, 2017     Dec. 31, 2016     % change  
    30/11/2017     31/12/2016     AH%                30/11/2017     31/12/2016     AH%  

ASSETS

          

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

CURRENT

           CURRENT:      

Cash and cash equivalents

    12.806.068       1.033.959       1138,5%       

Loans and debentures

    13.132.426       63.751.660       -79,4%  

Securities

    524.834       1.855.029       -71,7%       

Suppliers

    18.778.123       21.750.011       -13,7%  

Accounts receivable from clients

    20.832.186       19.552.443       6,5%       

Tax obligations

    10.597.094       9.572.512       10,7%  

Taxes recoverable

    4.148.829       3.683.818       12,6%       

Salary-related charges

    3.199.241       4.862.624       -34,2%  

Advances

    1.677.037       898.825       86,6%       

Advances from clients

    459.764       459.764       0,0%  

Prepaid expenses

    37.559       33.931       10,7%       

Other

    571.122       973.002       -41,3%  
 

 

 

   

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

Total, current

    40.026.512       27.058.004       47,9%        Total, current     46.737.770       101.369.573       -53,9%  
 

 

 

   

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

NON-CURRENT:

           NON-CURRENT:      

Long term assets

          

Loans and debentures

    55.109.273       37.620.519       46,5%  

Securities held to maturity

    203.143       83.248       144,0%       

Provisions for contingencies

    56.714       82.858       -31,6%  

Accounts receivable from clients

    11.602.136       11.875.973       -2,3%       

Advances from clients

    4.227.688       4.663.107       -9,3%  

Taxes recoverable

    3.184.911       2.997.422       6,3%       

Tax obligations

    1.907.021       2.465.572       -22,7%  

Deferred income tax and Social Contribution

    6.345.656       8.037.818       -21,1%       

Salary-related charges

    3.279.115       2.800.761       17,1%  

Other

    239.113       906.930       -73,6%       

Ativas

    6.374.295       3.409.654       86,9%  
            

 

 

   

 

 

   

 

 

 

Financial assets

    4.483.565       4.586.470       -2,2%        Total, Non-current     70.954.105       51.042.472       39,0%  
            

 

 

   

 

 

   

 

 

 

Investments

    17.598.105       19.744.312       -10,9%             

Net PP&E

    270.145.535       261.612.715       3,3%        STOCKHOLDERS’ EQUITY:      

Intangible

    9.624.612       9.489.877       1,4%       

Share capital

    292.399.303       241.741.866       21,0%  
          

Equity valuation adjustments

    (755.826     (755.826     0,0%  
          

Retained losses

    (45.882.064     (47.005.316     -2,4%  
            

 

 

   

 

 

   

 

 

 
           Total stockholders’ equity     245.761.413       193.980.724       26,7%  
 

 

 

   

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

TOTAL ASSETS

    363.453.288       346.392.769       4,9%        TOTAL LIABILITIES     363.453.288       346.392.769       4,9%  
 

 

 

   

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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Nov. 30, 2017    Dec. 31, 2016 % change

 

Cemig Telecomunicações S.A. – CemigTelecom

 

  

Cemig Telecomunicações S.A. – CemigTelecom

 

BALANCE SHEETS ON NOVEMBER 30, 2017 AND DECEMBER 31, 2016

 

(In Reais—R$)

 

  

BALANCE SHEETS ON NOVEMBER 30, 2017 AND DECEMBER 31, 2016

 

(In Reais—R$)

 

ASSETS   

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

CURRENT    CURRENT:

Cash and cash equivalents

  

Loans and debentures

Securities

  

Suppliers

Accounts receivable from clients

  

Tax obligations

Taxes recoverable

  

Salary-related charges

Advances

  

Advances from clients

Prepaid expenses

  

Other

Total, current   

Total, current

 

NON-CURRENT:   

NON-CURRENT:

 

Long term assets   

Loans and debentures

Securities held to maturity

  

Provisions for contingencies

Accounts receivable from clients

  

Advances from clients

Taxes recoverable

  

Tax obligations

Deferred income tax and Social Contribution

  

Salary-related charges

Other

  

Ativas

Financial assets    Total, Non-current
Investments   
Net PP&E    STOCKHOLDERS’ EQUITY:
Intangible   

Share capital

  

Equity valuation adjustments

TOTAL ASSETS

  

Retained losses

  

Total stockholders’ equity

 

   TOTAL LIABILITIES

 

 

         

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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Appendix VI

 

 

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LOGO

 

Companhia Energética de

Minas Gerais –

CEMIG

Financial Statements as of December 31, 2016 and December

31,2015 and for the Years Ended December 31, 2016, 2015 and

2014 and Report of Independent Registered Public Accounting

Firm

 

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LOGO

 

CONTENTS

 

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

     44  

CONSOLIDATED STATEMENTS OF INCOME

     46  

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

     47  

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

     48  

CONSOLIDATED STATEMENTS OF CASH FLOW

     50  

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

     52  
1.  

OPERATING CONTEXT

     52  
2.  

BASIS OF PREPARATION

     61  
3.  

PRINCIPLES OF CONSOLIDATION

     72  
4.  

CONCESSIONS AND AUTHORIZATIONS

     74  
5.  

OPERATING SEGMENTS

     85  
6.  

CASH AND CASH EQUIVALENTS

     89  
7.  

SECURITIES

     89  
8.  

CONSUMERS, TRADERS AND POWER TRANSPORT CONCESSION HOLDERS

     90  
9.  

RECOVERABLE TAXES

     91  
10.  

INCOME AND SOCIAL CONTRIBUTION TAXES

     91  
11.  

RESTRICTED CASH

     94  
12.  

ESCROW DEPOSITS

     94  
13.  

ENERGY DEVELOPMENT ACCOUNT (CDE)

     95  
14.  

FINANCIAL ASSETS AND LIABILITIES OF THE CONCESSION

     96  
15.  

INVESTMENTS

     103  
16.  

PROPERTY, PLANT AND EQUIPMENT

     125  
17.  

INTANGIBLE ASSETS

     127  
18.  

SUPPLIERS

     129  
19.  

TAXES, INCOME TAX AND SOCIAL CONTRIBUTION TAX

     130  
20.  

LOANS, FINANCINGS AND DEBENTURES

     131  
21.  

REGULATORY CHARGES

     136  
22.  

POST-RETIREMENT LIABILITIES

     137  
23.  

PROVISIONS

     142  
24.  

EQUITY AND REMUNERATION TO SHAREHOLDERS

     150  
25.  

REVENUE

     155  
26.  

OPERATING COSTS AND EXPENSES

     159  
27.  

FINANCIAL REVENUES AND EXPENSES

     162  
28.  

RELATED PARTY TRANSACTIONS

     163  
29.  

FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

     166  
30.  

MEASUREMENT AT FAIR VALUE

     173  
31.  

INSURANCE

     175  
32.  

COMMITMENTS

     176  
33.  

NON-CASH TRANSACTIONS

     176  
34.  

SUBSEQUENT EVENTS

     176  

 

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LOGO

 

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

AS OF DECEMBER 31, 2016 AND 2015

ASSETS

(MILLIONS OF BRAZILIAN REAIS—R$ mn)

 

     Note      2016      2015  

Current

        

Cash and cash equivalents

     6        995        925  

Securities

     7        1,014        2,427  

Consumers and traders and

Concession holders – Transport of electricity

     8        3,425        3,765  

Financial assets of the concession

     14        730        874  

Recoverable taxes

     9        236        175  

Income and social contribution tax credits

     10a        590        306  

Dividends receivable

        11        62  

Restricted cash

     11        367        —    

Inventories

        49        37  

Advance to suppliers

     28        1        87  

Energy Development Account (CDE)

     13        64        72  

Low-income subscriber subsidy

        36        31  

Receivable from Eletrobras – RGR

     21        48        —    

Receivable from Eletrobras – CDE

        90        —    

Other

        630        616  
     

 

 

    

 

 

 

TOTAL, CURRENT

        8,286        9,377  
        

NON-CURRENT

        

Securities

     7        31        84  

Advance to suppliers

     28        229        60  

Consumers and traders and Concession holders – Transport of electricity

     8        146        133  

Recoverable taxes

     9        178        258  

Income and social contribution taxes recoverable

     10a        112        206  

Deferred income and social contribution taxes

     10b        1,797        1,498  

Escrow deposits

     12        1,887        1,813  

Other credits

        1,051        808  

Financial assets of the concession

     14        4,971        2,660  

Investments – Equity method

     15        8,753        9,745  

Property, plant and equipment

     16        3,775        3,940  

Intangible assets

     17        10,820        10,275  
     

 

 

    

 

 

 

TOTAL, NON-CURRENT

        33,750        31,480  
     

 

 

    

 

 

 

TOTAL ASSETS

        42,036        40,857  
     

 

 

    

 

 

 

The Notes are an integral part of these Consolidated Financial Statements.

 

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LOGO

 

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

AS OF DECEMBER 31, 2016 AND 2015

LIABILITIES

(MILLIONS OF BRAZILIAN REAIS—R$ mn)

 

     Note      2016     2015  

CURRENT

       

Suppliers

     18        1,940       1,901  

Regulatory charges

     21        381       517  

Profit sharing

        18       114  

Taxes payable

     19a        794       740  

Income and Social Contribution tax

     19b        27       11  

Interest on equity and dividends payable

     24        467       1,307  

Loans, financings and debentures

     20        4,837       6,300  

Payroll and related charges

        225       221  

Post-retirement liabilities

     22        199       167  

Concessions payable

        3       3  

Financial liabilities of the concession

     14        482       —    

Financial Instruments—put options

     15        1,150       1,245  

Advance sales of power supply

     8        181       —    

Other obligations

        743       548  
     

 

 

   

 

 

 

TOTAL, CURRENT

        11,447       13,074  
       

NON-CURRENT

       

Regulatory charges

     21        455       226  

Loans, financings and debentures

     20        10,342       8,867  

Taxes payable

     19a        724       740  

Deferred income and social contribution tax

     10b        582       689  

Provisions

     23        815       755  

Post-retirement liabilities

     22        4,043       3,086  

Concessions payable

        19       19  

Financial liabilities of the concession

     14        323       —    

Financial Instruments—put options

     15        192       148  

Other obligations

        160       265  
     

 

 

   

 

 

 

TOTAL, NON-CURRENT

        17,655       14,795  
     

 

 

   

 

 

 

TOTAL LIABILITIES

        29,102       27,869  
     

 

 

   

 

 

 
       

EQUITY

     24       

Share capital

        6,294       6,294  

Capital reserves

        1,925       1,925  

Profit reserves

        5,200       4,663  

Accumulated Other Comprehensive Income

        (489     102
     

 

 

   

 

 

 

EQUITY ATTRIBUTABLE TO THE CONTROLLING SHAREHOLDERS

        12,930       12,984  
     

 

 

   

 

 

 

EQUITY ATTRIBUTABLE TO NON-CONTROLLING SHAREHOLDER

        4       4  
     

 

 

   

 

 

 

TOTAL EQUITY

        12,934       12,988  
     

 

 

   

 

 

 

TOTAL LIABILITIES AND EQUITY

        42,036       40,857  
     

 

 

   

 

 

 

The Notes are an integral part of these Consolidated Financial Statements.

 

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LOGO

 

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(MILLIONS OF BRAZILIAN REAIS—R$ mn)

(except Net income per share)

 

     Note      2016     2015
Restated
    2014
Restated
 

NET REVENUE

     25        18,773       21,868       19,595  
         

OPERATING COSTS

         

COST OF ELECTRICITY AND GAS

     26         

Electricity purchased for resale

        (8,273     (9,542     (7,428

Charges for the use of the national grid

        (947     (999     (744

Gas purchased for resale

        (878     (1,051     (254
     

 

 

   

 

 

   

 

 

 
        (10,098     (11,592     (8,426

OTHER COSTS

     26         

Personnel and managers

        (1,348     (1,143     (999

Materials

        (41     (126     (340

Outsourced services

        (720     (740     (736

Depreciation and amortization

        (802     (811     (779

Operating provisions

        (171     (23     (262

Infrastructure construction cost

        (1,193     (1,252     (942

Other

        (57     (96     (318
     

 

 

   

 

 

   

 

 

 
        (4,332     (4,191     (4,376
         

TOTAL COST

        (14,430     (15,783     (12,802
         

GROSS PROFIT

        4,343       6,085       6,793  
         

OPERATING EXPENSES

     26         

Selling expenses

        (382     (175     (128

General and administrative expenses

        (667     (674     (654

Operating provisions

        (5     (1,203     (190

Other operating expenses

        (420     (452     (674
     

 

 

   

 

 

   

 

 

 
        (1,474     (2,504     (1,646
         

Equity in earnings of unconsolidated investees, net

     15        (302     393       210  

Impairment of Investments

     15        (763     —         —    

Fair value gain (loss) on stockholding transaction

     15        —         729       —    

Gain on acquisition of control of investee

     15        —         —         281  
         

Income before Financial income (expenses) and taxes

        1,804       4,703       5,638  
         

Financial revenues

     27        1,041       863       535  

Financial expenses

     27        (2,478     (2,204     (1,694
     

 

 

   

 

 

   

 

 

 

Income before income tax and social contribution tax

        367       3,362       4,479  
         

Current income and social contribution taxes

     10c        (174     (881     (1,259

Deferred income and social contribution taxes

     10c        141       (12     (83
     

 

 

   

 

 

   

 

 

 

NET INCOME FOR THE YEAR

        334       2,469       3,137  
     

 

 

   

 

 

   

 

 

 
         

Total of net income for the year attributed to:

         

Controlling shareholders

        334       2,469       3,137  

Non-controlling shareholder

        —         —         —    
     

 

 

   

 

 

   

 

 

 
        334       2,469       3,137  
         

Basic income per preferred share – R$

     24        0.35       1.96       2.49  

Basic income per common share – R$

     24        0.10       1.96       2.49  

Diluted income per preferred share – R$

     24        0.32       1.96       2.49  

Diluted income per common share – R$

     24        0.07       1.96       2.49  

The Notes are an integral part of these Consolidated Financial Statements.

 

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LOGO

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(MILLIONS OF BRAZILIAN REAIS—R$ mn)

 

     2016     2015     2014  

NET INCOME FOR THE YEAR

     334       2,469       3,137  

OTHER COMPREHENSIVE INCOME

      

Items that will not be reclassified to profit or loss

      

Post retirement liabilities – remesurement of obligations of the defined benefit plans, net of taxes

     (515     (360     (44

Equity gain (loss) on Other comprehensive income in jointly-controlled entities

     4       (1     (7
  

 

 

   

 

 

   

 

 

 
     (511     (361     (51
      

Items that may be reclassified to profit or loss

      

Conversion adjustment of equity gain (loss) in other comprehensive income in subsidiary and jointly-controlled entity

     (3     54       10  

Recycling of conversion adjustments to the Income statement arising from sale of Transchile

     (39     —         —    
  

 

 

   

 

 

   

 

 

 
     (42     54       10  
      
  

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME FOR THE YEAR

     (219     2,162       3,096  
  

 

 

   

 

 

   

 

 

 
      

Total of comprehensive income for the year attributed to:

      

Controlling shareholders

     (219     2,162       3,096  

Non-controlling shareholder

     —         —         —    
  

 

 

   

 

 

   

 

 

 
     (219     2,162       3,096  
  

 

 

   

 

 

   

 

 

 

The Notes are an integral part of these Consolidated Financial Statements.

 

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LOGO

 

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(MILLIONS OF BRAZILIAN REAIS—R$ mn, except where otherwise indicated)

 

     Share
capital
     Capital
reserves
     Profit
reserves
    Accumulated
Other
Comprehensive
Income
    Retained
earnings
    Total
interest of
the
controlling
shareholders
    Total interest
of the
non-controlling
shareholder
     Total
equity
 

AS OF DECEMBER 31, 2013

     6,294        1,925        3,840       579       —         12,638       —          12,638  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net income for the year

     —          —          —         —         3,137       3,137       —          3,137  

Other comprehensive income

                   

Post retirement liabilities, net of taxes

     —          —          —         (44     —         (44     —          (44

Equity gain on Other comprehensive income in jointly-controlled entity

     —          —          —         3       —         3       —          3  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total Comprehensive income for the year

     —          —          —         (41     3,137       3,096       —          3,096  

Other changes in equity:

                   

Additional dividends proposed in 2013 (R$ 0.04 per share)

     —          —          (55     —         —         (55     —          (55

Extraordinary dividends (R$ 2.23 per share)

     —          —          (2,804     —         —         (2,804     —          (2,804

Statutory dividends (R$ 1.04 per share)

     —          —          —         —         (1,364     (1,364     —          (1,364

Interest on Equity (R$ 0.18 per share)

     —          —          —         —         (230     (230     —          (230

Constitution of reserves

               —           

Tax incentives reserve

     —          —          29       —         (29     —         —          —    

Profit reserve

     —          —          1,584       —         (1,584     —         —          —    

Realization of reserves

                   

Equity valuation adjustments – deemed cost of PP&E

     —          —          —         (70     70       —         —          —    

ATTRIBUTED TO INTEREST OF THE CONTROLLING SHAREHOLDERS

     6,294        1,925        2,594       468       —         11,281       —          11,281  

Non controlling shareholder

     —          —          —         —         —         —         4        4  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

AS OF DECEMBER 31, 2014

     6,294        1,925        2,594       468       —         11,281       4        11,285  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net income for the year

     —          —          —         —         2,469       2,469       —          2,469  

Other comprehensive income

                   

Post retirement liabilities, net of taxes

     —          —          —         (361     —         (361     —          (361

Equity gain on Other comprehensive income in jointly-controlled entity

     —          —          —         54       —         54       —          54  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total Comprehensive income for the year

     —          —          —         (307     2,469       2,162       —          2,162  

Other changes in equity:

                   

Reserve for obligatory dividends not distributed

     —          —          797       —         —         797       —          797  

Statutory dividends (R$ 0.84 per share)

     —          —          —         —         (1,056     (1,056     —          (1,056

Interest on Equity (R$ 0.16 per share)

     —          —          —         —         (200     (200     —          (200

Constitution of reserves

                   

Tax incentives reserve

     —          —          21       —         (21     —         —          —    

Profit reserve

     —          —          1,251       —         (1,251     —         —          —    

Realization of reserves

                   

Equity valuation adjustments – deemed cost of PP&E

     —          —          —         (59     59       —         —          —    
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

ATTRIBUTED TO INTEREST OF THE CONTROLLING SHAREHOLDERS

     6,294        1,925        4,663       102       —         12,984       —          12,984  

Non-controlling shareholder

     —          —          —         —         —         —         4        4  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

AS OF DECEMBER 31, 2015

     6,294        1,925        4,663       102       —         12,984       4        12,988  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

48


Table of Contents

LOGO

 

 

     Share
capital
     Capital
reserves
     Profit
reserves
    Equity
Valuation
adjustments
    Retained
earnings
    Total
interest of
the
controlling
shareholders
    Total
interest of
Non-
controlling
shareholder
     Total
equity
 

AS OF DECEMBER 31, 2015

     6,294        1,925        4,663       102       —         12,984       4        12,988  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net income for the year

     —          —          —         —         334       334       —          334  

Other comprehensive income

                   

Post retirement liabilities – remesurement of obligations of the defined benefit plans, net of taxes

     —          —          —         (515     —         (515     —          (515

Equity gain on Other comprehensive income in subsidiary and jointly-controlled entity

     —          —          —         (39     —         (39     —          (39

Total comprehensive income for the year

     —          —          —         (554     334       (220     —          (220
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Other changes in equity:

                   

Reserve for mandatory dividends not distributed

     —          —          623       —         —         623       —          623  

Dividends under by-laws (R$ 0.16 per share )

     —          —          127       —         (204     (77     —          (77

Interest on equity (R$ 0.30 per share )

     —          —          (380     —         —         (380     —          (380

Constitution of reserves

                   

Tax incentive reserves

     —          —          7       —         (7     —         —          —    

Retained earnings reserve

     —          —          160       —         (160     —         —          —    

Equity valuation adjustments – deemed cost of PP&E

     —          —          —         (37     37       —         —          —    
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

ATTRIBUTED TO INTEREST OF THE CONTROLLING SHAREHOLDERS

     6,294        1,925        5,200       (489     —         12,930       —          12,930  

Non-controlling shareholder

     —          —          —         —         —         —         4        4  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

AS OF DECEMBER 31, 2016

     6,294        1,925        5,200       (489     —         12,930       4        12,934  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

The Notes are an integral part of these Consolidated Financial Statements.

 

49


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LOGO

 

CONSOLIDATED STATEMENTS OF CASH FLOW

FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(MILLIONS OF BRAZILIAN REAIS—R$ mn)

 

     2016     2015     2014  

CASH FLOW FROM OPERATIONS

      

Net income for the year

     334       2,469       3,137  

Expenses (revenues) not affecting cash and cash equivalents

      

Income and social contribution taxes

     33       893       1,342  

Depreciation and amortization

     834       835       801  

Write-offs of PP&E, Intangible assets and Investments

     109       124       105  

Gain on disposal of investments

     (315     —         —    

Impairment of Investments

     763       —         —    

Equity in earnings (losses) of unconsolidated investees, net

     302       (393     (210

Interest and monetary variation

     808       818       1,384  

Fair value gain (loss) on stockholding transaction

     —         (729     —    

Provisions for operating losses

     704       1,401       581  

Net gain on indemnity of assets

     —         —         (420

Financial assets —CVA

     1,455       (1,704     (1,107

Gain on acquisition of subsidiary

     —         —         (281

Post-retirement liabilities

     447       285       311  
  

 

 

   

 

 

   

 

 

 
     5,475       3,999       5,643  

(Increase) / decrease in assets

      

Consumers and traders

     (64     (1,470     (285

Financial assets —CVA

     341       1,529       —    

Energy Development Account (CDE)

     8       273       (170

Recoverable Taxes

     19       167       320  

Income and social contribution tax credit

     (62     (77     (37

Transport of electricity

     8       (5     (5

Escrow deposits

     (28     (67     (305

Dividends received from investments

     683       487       683  

Financial assets

     (1,941     10       6  

Advance to suppliers

     (120     (131     —    

Gas

     (193     (141     (265

Other

     105       (248     74  
  

 

 

   

 

 

   

 

 

 
     (1,244     327       16  

Increase (decrease) in liabilities

      

Suppliers

     38       297       472  

Taxes payable

     38       202       54  

Income and social contribution taxes payable

     24       (105     (22

Payroll and related charges

     4       26       4  

Regulatory charges

     92       386       11  

Post-retirement liabilities

     (239     (208     (195

Financial instruments – Put options

     (150     —         —    

Other

     (167     156       (160
  

 

 

   

 

 

   

 

 

 
     (360     754       164  
  

 

 

   

 

 

   

 

 

 
      

Cash generated by operating activities

     3,871       5,080       5,823  

Interest paid on loans and financings

     (2,369     (1,331     (781

Income and Social Contribution taxes paid

     (289     (741     (1,308
  

 

 

   

 

 

   

 

 

 

NET CASH GENERATED BY OPERATING ACTIVITIES

     1,213       3,008       3,734  
  

 

 

   

 

 

   

 

 

 

 

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     2016     2015     2014  

CASH FLOWS FROM INVESTMENT ACTIVITIES

      

Marketable securities

     1,400       (1,499     116  

Financial assets

     —         (145     (80

Restricted cash

     (367     1       1  
      

Investments

      

Acquisition of equity investees

     —         (310     (2,405

Disposal of Investments

     949       —         —    

Acquisition of subsidiary – Gasmig

     —         —         (465

Capital increase in investees

     (1,455     (181     (546

PP&E

     (120     (126     (122

Intangible assets

     (1,021     (957     (798
  

 

 

   

 

 

   

 

 

 

NET CASH USED IN INVESTMENT ACTIVITIES

     (614     (3,217     (4,299
  

 

 

   

 

 

   

 

 

 
      

CASH FLOW IN FINANCING ACTIVITIES

      

Loans, financings and debentures

     5,737       5,739       4,562  

Payment of loans financings and debentures

     (5,591     (4,696     (1,394

Interest on equity and dividends

     (675     (796     (3,918
  

 

 

   

 

 

   

 

 

 

NET CASH FROM (USED IN) FINANCIAL ACTIVITIES

     (529     247       (750
  

 

 

   

 

 

   

 

 

 
      

NET CHANGE IN CASH AND CASH EQUIVALENTS

     70       38       (1,315
  

 

 

   

 

 

   

 

 

 
      

STATEMENT OF CHANGES IN CASH AND CASH EQUIVALENTS

      

Beginning of the year

     925       887       2,202  

End of the year

     995       925       887  
  

 

 

   

 

 

   

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

     70       38       (1,315
  

 

 

   

 

 

   

 

 

 

The Notes are an integral part of these Consolidated Financial Statements.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2016 AND 2015 AND FOR THE YEARS ENDED ON DECEMBER 31, 2016, 2015 AND 2014

(In Millions of Brazilian Reais—R$ mn—except where otherwise indicated)

 

1. OPERATING CONTEXT

Companhia Energética de Minas Gerais (‘Cemig’, also herein ‘the Company’, ‘Parent company’ or ‘Holding company’) is a listed corporation registered in the Brazilian Registry of Corporate Taxpayers (CNPJ) under number 17.155.730/0001-64, with shares traded on the BM&F Bovespa (‘Bovespa’) at Corporate Governance Level 1; on the New York Stock Exchange (‘NYSE’); and on the stock exchange of Madrid (‘Latibex’). It is domiciled in Brazil, with head office at Avenida Barbacena 1200, Belo Horizonte, capital of the state of Minas Gerais. It operates exclusively as a holding company, with interests in subsidiaries or jointly controlled entities, which are engaged in the activities of the construction and operation of systems for generation, transformation, transmission, distribution and sale of electricity, and also activities in the various fields of energy, for the purpose of commercial operation.

In order to finance the capital expenditures needed to meet long-term growth objectives, CEMIG have incurred a substantial amount of debt. As of December 31, 2016, the CEMIG’s Current Liabilities exceeded Current Assets by R$3,162. As of December 31, 2016, the CEMIG total short-term and long-term loans, financing and debentures are R$4,837 and R$10,342, maturing in the first, second, third and fourth quarters of 2017, in the amounts of R$783, R$1,017, R$579 and R$2,458, respectively. Those CEMIG had positive operating cash flows in the amounts of R$1,213, R$3,007 and R$3,733 in 2016, 2015 and 2014, respectively.

CEMIG H’s substantial debt could adversely affect the business, financial condition, and results of operations. Specifically, CEMIG is subject to certain restrictions on its ability to raise funds from third parties, which might prevent it from entering into new contracts for financing of its operations, or for the re-financing of its existing obligations, including the following:

 

  The by-laws of CEMIG express the obligation for the consolidated figures of the group to maintain certain financial indicators, related to factors including debt and Capital Expenditures, within certain limits, and this could affect its operational flexibility. In the years 2015 and 2016, certain limits and financial ratios specified in the bylaws of CEMIG were exceeded, under approval by the General Meeting of Stockholders. CEMIG has obtained its stockholders to exceed these limits and financial ratios applicable for 2017.

 

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  In relation to loans from outside parties: (i) as a state-controlled company, CEMIG is subject to rules and limits relating to the level of credit applicable to the public sector, including rules established by the National Monetary Council (Conselho Monetário Nacional, or CMN), and by the Brazilian Central Bank; (ii) CEMIG operates in the electricity sector, it is subject to the rules and limits established by Aneel which deal with indebtedness for companies of the electricity sector and (iii) state-controlled companies may use funds arising from transactions with commercial banks only for refinancing of financial obligations, or in transactions guaranteed by duplicate trade bills.

 

  The National Treasury Department (part of the Finance Ministry) and by the Central Bank would need to approve certain international financial transactions; this approval is usually given only if the purpose of the transaction is to finance importation of goods or to roll over external debt. These rules have the effect of placing limits on the CEMIG H’s capacity for indebtedness.

 

  CEMIG is subject to certain contractual conditions under existing debt instruments. In the event of non-compliance with an obligation under that financing contract, the CEMIG will be required to strengthen the guarantees for the financing, on penalty of early maturity of the contract. Any default event in our financial instruments might lead creditors to cause all the amounts relating to that debt to become payable immediately. Acceleration of debts might cause significant negative effects on the CEMIG H’s financial situation, and might also cause activation of cross-default clauses in other financial instruments. In the event of a default, CEMIG H’s cash flow might be insufficient to completely settle the debts, or to comply with the servicing of such debts.

 

  The credit risk rating agencies attribute a rating to Brazil, the Company and its debt securities on a Brazilian basis, and also a rating for the Company on the global basis. If ratings are downgraded due to any external factor, operational performance or high levels of debt, it may increase the cost of capital.

In order to amortize scheduled debt maturities, CEMIG will need to raise significant amounts of debt capital from a broad range of funding sources. To service CEMIG debt after meeting our capital expenditure targets, CEMIG have relied upon, and may continue to rely upon, a combination of cash flows provided by our operations, drawdowns under our available credit facilities, our cash and short-term financial investments balance and the incurrence of additional indebtedness.

CEMIG has several initiatives designed to increase liquidity through entering into new contracts for financing or for the re-financing of its existing obligations and potential divestitures of non-core assets. In 2016, CEMIG introduced a divestment program that contemplates the sale of assets for the period of 2017–2018, with the goal of improving our short-term liquidity position by increasing our cash balance and reducing indebtedness.

 

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Although the CEMIG is significantly leveraged, it expects that the current cash balances, liquidity from its revolving credit facility, cash generated from the initiatives described above, and from operations should be sufficient to meet working capital, capital expenditure, debt service, and other cash needs for the next year. Management believes that they will be successful in their plans.

If, for any reason, CEMIG are faced with continued difficulties in accessing debt financing, this could hamper our ability to make capital expenditures in the amounts needed to maintain our current level of investments or our long-term targets and could impair our ability to timely meet our principal and interest payment obligations with our creditors, as our cash flow from operations is currently insufficient to fund such both planned capital expenditures and all of our debt service obligations. A reduction in our capital expenditure program or the sale of assets could significantly affect our results of operations.

Cemig has interests in the following subsidiaries, jointly-controlled entities and affiliated company (information in MW has not been audited by the external auditors):

Cemig Geração e Transmissão S.A. (‘Cemig GT’) is Cemig’s wholly-owned subsidiary operating in generation and transmission. It is listed, in Brazil, but not traded. Cemig GT has interests in 60 power plants, of which 56 are hydroelectric, 3 are wind power plants and one is a thermal plant, and associated transmission lines, most of which are part of the Brazilian national generation and transmission grid system. Cemig GT has interests in the following jointly-controlled entities and affiliated company:

Jointly-controlled entities and affiliated company:

 

  - Hidrelétrica Cachoeirão S.A. (‘Cachoeirão’) (Jointly controlled): Production and sale of electricity as an independent power producer, through the Cachoeirão hydroelectric power plant, located at Pocrane, in the State of Minas Gerais.

 

  - Baguari Energia S.A. (‘Baguari Energia’) (Jointly controlled): Construction, operation, maintenance and commercial operation of the Baguari Hydroelectric Plant, through participation in the UHE Baguari Consortium (Baguari Energia 49.00%, Neoenergia 51.00%), located on the Doce River in Governador Valadares, Minas Gerais State.

 

  - Central Eólica Praias de Parajuru S.A. (‘Parajuru’) (Jointly controlled): Production and sale of electricity from the Parajuru wind farm at Beberibe, in the State of Ceará, Northern Brazil.

 

  - Central Eólica Praias do Morgado S.A. (‘Morgado’) (Jointly controlled): Production and sale of electricity from the Morgado wind farm at Acaraú in Ceará, Northern Brazil.

 

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  - Central Eólica Volta do Rio S.A. (‘Volta do Rio’) (Jointly controlled): Production and sale of electricity from at the Volta do Rio wind farm also at Acaraú, in the State of Ceará, Northern Brazil.

 

  - Hidroelétrica Pipoca S.A. (‘Pipoca’) (Jointly controlled): Independent production of electricity, through construction and commercial operation of the Pipoca Small Hydro Plant (Pequena Central Hidrelétrica, or PCH), on the Manhuaçu River, in the counties of Caratinga and Ipanema, in the State of Minas Gerais.

 

  - Madeira Energia S.A. (‘Madeira’) (Affiliated): Construction and commercial operation, through its subsidiary Santo Antônio Energia S.A., of the Santo Antônio hydroelectric plant, in the basin of the Madeira River, in the State of Rondônia.

 

  - Lightger S.A. (Jointly controlled): Independent power production through building and commercial operation of the Paracambi Small Hydro Plant (or PCH), on the Ribeirão das Lages river in the county of Paracambi, in the State of Rio de Janeiro.

 

  - Renova Energia S.A. (‘Renova’) (Jointly controlled): Listed company operating in development, construction and operation of plants generating power from renewable sources – wind power, small hydro plants (SHPs), and solar energy; sales and trading of electricity, and related activities.

 

  - Retiro Baixo Energética S.A. (‘RBE’) (Jointly controlled): RBE holds the concession to operate the Retiro Baixo hydroelectric plant, on the Paraopeba River, in the São Francisco river basin, in the municipalities of Curvelo and Pompeu, in Minas Gerais State. The plant has installed capacity of 83.7 MW and assured energy offtake level of 38.5MW average.

 

  - Aliança Norte Energia Participações S.A. (‘Aliança Norte’) (Jointly controlled): A special-purpose company (SPC) created by Cemig GT (49.9% ownership) and Vale S.A. (50.1% ownership), for acquisition of an interest of 9% in Norte Energia S.A. (‘Nesa’), the company holding the concession for the Belo Monte Hydroelectric Plant, on the Xingu River, in the State of Pará. The first turbine of Belo Monte Plant started operating on April 20, 2016 and the second turbine began operating on July 16, 2016. There are more details on this in Note 15.

 

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  - Aliança Geração de Energia S.A. (‘Aliança’) (Jointly controlled): Unlisted corporation created by Cemig GT and Vale S.A. to become a platform for consolidation of generation assets held by the two parties in generation consortia, and investments in future generation projects. The two parties subscribed their shares in the company by transfer of their interests in the following generation assets: Porto Estrela, Igarapava, Funil, Capim Branco I and II, Aimorés and Candonga. With these assets the company has installed hydroelectric generation capacity in operation of 1,158 MW (physical offtake guarantee 652 MW average), and other generation projects. Vale and Cemig GT respectively hold 55% and 45% of the total capital.

 

  - Cemig Geração Três Marias S.A.: A corporation wholly owned by Cemig GT. Its objects are production and sale of electricity as public service concession holder, by commercial operation of the Três Marias Hydroelectric Plant, and sale and trading of electricity in the Free Market. It has installed capacity of 396 MW, and guaranteed offtake level (‘Assured energy’) of 239 MW average.

 

  - Cemig Geração Salto Grande S.A.: A corporation wholly owned by Cemig GT. Its objects are production and sale of electricity as public concession holder, by commercial operation of the Salto Grande Hydroelectric Plant, and trading in electricity in the Free Market. This company has installed generation capacity of 102 MW, and average offtake guarantee of 75 MW.

 

  - Cemig Geração Camargos S.A.: Corporation wholly owned by Cemig GT. Its objects are production and sale of electricity as public concession holder, by commercial operation of the Camargos Hydroelectric Plant, and trading in electricity in the Free Market. Has installed generation capacity of 46 MW, and average offtake guarantee of 21 MW.

 

  - Cemig Geração Itutinga S.A.: Corporation wholly owned by Cemig GT. Its objects are production and sale of electricity as public concession holder, by commercial operation of the Itutinga Hydroelectric Plant, and trading in electricity in the Free Market. Has installed generation capacity of 52 MW, and average offtake guarantee of 28 MW.

 

  - Cemig Geração Leste S.A.: Corporation wholly owned by Cemig GT. Its objects are production and sale of electricity as public concession holder, by operation of the Dona Rita, Sinceridade, Neblina, Ervália, Tronqueiras and Peti Small Hydroelectric Plants (PCHs), and trading in electricity in the Free Market. Installed generation capacity is 35.16 MW; average offtake guarantee is 18.64 MW.

 

  - Cemig Geração Oeste S.A.: Corporation wholly owned by Cemig GT. Its objects are production and sale of electricity as public concession holder, by commercial operation of the Gafanhoto, Cajuru and Martins Small Hydroelectric Plants, and trading in electricity in the Free Market. Installed generation capacity is 28.90 MW, and average offtake guarantee 11.21 MW.

 

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  - Cemig Geração Sul S.A.: Corporation wholly owned by Cemig GT. Its objects are production and sale of electricity as public concession holder, by commercial operation of the Coronel Domiciano, Marmelos, Joasal, Paciência and Piau Small Hydroelectric Plants and trading in electricity in the Free Market. Installed generation capacity is 39.53 MW; average offtake guarantee is 27.42 MW.

Subsidiaries and jointly-controlled entities at development stage:

 

  - Guanhães Energia S.A. (‘Guanhães Energia’) (Jointly controlled): Production and sale of electricity through building and commercial operation of the following Small Hydro Plants (PCHs): Dores de Guanhães, Senhora do Porto and Jacaré, in the county of Dores de Guanhães; and Fortuna II, in the county of Virginópolis, in Minas Gerais. Construction works are 97% completed, and start of commercial generation is scheduled for April 2017.

 

  - Cemig Baguari Energia S.A. (‘Cemig Baguari’) (Subsidiary) – Production and sale of electricity as an independent power producer in future projects.

 

  - Amazônia Energia Participações S.A. (‘Amazônia Energia’) (Jointly controlled) – Unlisted company whose object is to hold and manage equity interest in Norte Energia S.A. (Nesa), which holds the concession to operate the Belo Monte Hydroelectric Plant, on the Xingu River, in the State of Pará. It is jointly controlled by Light S.A. (25.5%) and Cemig (74.5%). Amazônia Energia owns 9.77% of the share capital of Nesa. The first turbine of the Belo Monte Plant started operating on April 20, 2016 and the second turbine began operating on July 16, 2016. There are more details in Note 15.

Cemig Distribuição S.A. (‘Cemig D’ or ‘Cemig Distribution’) (Subsidiary): Wholly-owned subsidiary, listed but not traded; distributes electricity through networks and distribution lines to practically the whole of the Brazilian State of Minas Gerais.

Transmissora Aliança de Energia Elétrica S.A. (‘Taesa’) (Jointly controlled): Construction, operation and maintenance of electricity transmission facilities in 17 states of Brazil through direct and indirect equity interests in investees.

Light S.A. (‘Light’) (Jointly controlled): Holds direct or indirect interests in other companies and directly or indirectly operates electricity services, including generation, transmission, trading or distribution, and other related services. Light S.A. has the following subsidiaries and jointly-controlled entities:

 

  - Light Serviços de Eletricidade S.A. (‘Light Sesa’) (Subsidiary) – A listed company operating primarily in electricity distribution, in various municipalities of Rio de Janeiro State.

 

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  - Light Energia S.A. (Subsidiary) – Plans, builds and operate electricity generation, transmission and sales/trading systems and related services. Owns equity interests in two wind power companies – Central Eólica São Judas Tadeu Ltda. and Central Eólica Fontainha Ltda – and in Guanhães Energia S.A. and Renova Energia S.A.

 

  - Light Esco Prestação de Serviços Ltda. (‘Light Esco’) (Subsidiary) – Purchase, sale, importation and exportation of electricity and consultancy services in the electricity sector. Light Esco has an interest in EBL Companhia de Eficiência Energética S.A.

 

  - Itaocara Energia Ltda. (Subsidiary) – Company and pre-operational phase: principal activity will be construction and operation of generation plants. It is a member of the Itaocara Hydro Plant Consortium for commercial operation of the Itaocara Hydroelectric Plant (51%). Cemig GT owns 49%. There are more details in Note 14.

 

  - Lightger S.A. (Jointly controlled) – Described in the list of jointly controlled entities of Cemig GT, above.

 

  - Light Soluções em Eletricidade Ltda. (Subsidiary): Its main objects are provision of service to low-voltage clients including assembly, overhaul and maintenance of installations in general.

 

  - Instituto Light para o Desenvolvimento Urbano e Social (Light Institute) (Subsidiary): Participation in social and cultural projects, and interest in economic and social development of cities.

 

  - Lightcom Comercializadora de Energia S.A. (Subsidiary): Purchase, sale, importation and exportation of electricity, and general consultancy, in the free and regulated electricity markets.

 

  - Axxiom Soluções Tecnológicas S.A. (Jointly controlled): Unlisted company, providing technology and systems solutions for operational management of public service concession holders, including companies in electricity, gas, water, sewerage, and other utilities. Jointly owned by Light (51%) and Cemig (49%).

 

  - Amazônia Energia Participações S.A. (Jointly controlled) – Described in the list of equity interests of Cemig GT above.

 

  - Renova Energia S.A. (Jointly controlled) – Described in the list of equity interests of Cemig GT above.

 

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Sá Carvalho S.A. (Subsidiary): Production and sale of electricity, as a public electricity service concession holder, through the Sá Carvalho hydroelectric power plant.

Usina Térmica Ipatinga S.A. (‘Ipatinga’) (Subsidiary) – Currently without operational activity.

Companhia de Gás de Minas Gerais (‘Gasmig’) (Subsidiary): Acquisition, transport and distribution of combustible gas or sub-products and derivatives, through a concession for distribution of gas in the State of Minas Gerais.

Cemig Telecomunicações S.A. (‘CemigTelecom’ – previously named Empresa de Infovias S.A.)(Subsidiary): Provision and commercial operation of a specialized telecommunications service through an integrated multi-service network of fiber optic cables, coaxial cables, and electronic and associated equipment. CemigTelecom owns 19.6% of Ativas Data Center (‘Ativas’) (a jointly controlled entity), which operates primarily in supply of IT and communications infrastructure services, including physical hosting and related services for medium-sized and large corporations.

Efficientia S.A. (Subsidiary): Provides electricity efficiency and optimization services and energy solutions through studies and execution of projects; and services of operation and maintenance in energy supply facilities.

Horizontes Energia S.A. (Subsidiary): Production and sale of electricity, as an independent power producer, through the Machado Mineiro and Salto do Paraopeba hydroelectric power plants in the State of Minas Gerais, and the Salto do Voltão and Salto do Passo Velho hydro power plants in the State of Santa Catarina.

Cemig Comercializadora de Energia Incentivada S.A. (‘CCEI’ – previously named Central Termelétrica de Cogeração S.A.) (Subsidiary) – Production and sale of electricity as an independent power producer, in future projects.

Rosal Energia S.A. (Subsidiary): Production and sale of electricity, as a public electricity service concession holder, through the Rosal hydroelectric power plant located on the border between the States of Rio de Janeiro and Espírito Santo.

Empresa de Serviços e Comercialização de Energia Elétrica S.A. (‘ESCE’ – previously named Central Hidrelétrica Pai Joaquim S.A.) (Subsidiary): Production and sale of electricity as an independent power producer, in future projects.

Cemig PCH S.A. (Subsidiary): Production and sale of electricity as an independent power producer, through the Pai Joaquim hydroelectric power plant.

Cemig Capim Branco Energia S.A. (Capim Branco) (Subsidiary): Production and sale of electricity as an independent producer, through the Amador Aguiar I and Amador Aguiar II hydroelectric power plants, built through a consortium with private-sector partners. This company was merged with and into Cemig GT in 2015.

 

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UTE Barreiro S.A. (Subsidiary): Production and sale of thermally generated electricity, as an independent producer, through construction and operation of the UTE Barreiro thermal generation plant, located on the premises of V&M do Brasil S.A., in the State of Minas Gerais.

Cemig Trading S.A. (Subsidiary): Sale and intermediation of business transactions related to energy.

Companhia Transleste de Transmissão (Jointly controlled): Operation of the transmission line connecting the substation located in Montes Claros to the substation of the Irapé hydroelectric power plant.

Companhia Transudeste de Transmissão (Jointly controlled): Construction, operation and maintenance of national grid transmission facilities of the Itutinga–Juiz de Fora transmission line.

Companhia Transirapé de Transmissão (Jointly controlled): Construction, operation and maintenance of the Irapé–Araçuaí transmission line.

Axxiom Soluções Tecnológicas S.A. (Jointly controlled): Described in the investees of Light, above.

Transchile Charrúa Transmisión S.A. (Jointly controlled): Construction, operation and maintenance of the Charrúa-Nueva Temuco transmission line, and two sections of transmission line at the Charrúa and Nueva Temuco substations, in the central region of Chile. The head office of Transchile is in Santiago, Chile. In 2016 Cemig sold the whole of its interest in Transchile to Ferrovial Transco Chile SpA., a company controlled by Ferrovial S.A.

Companhia de Transmissão Centroeste de Minas (Jointly controlled): Construction, operation and maintenance of the Furnas-Pimenta transmission line – part of the national grid.

Participações em Ativos de Energia Elétrica (‘Parati’) (Jointly controlled): Holding company owning interests, through shares or share units, in other companies, Brazilian or foreign, in any business activity. Parati holds an equity interest of 26.03% in Light. Parati was closed down in 2016, following its reverse absorption by RME and Lepsa, with 50% Cemig ownership in each of these two companies.

Where Cemig exercises joint control it does so through shareholders’ agreements with the other shareholders of the investee company.

 

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2. BASIS OF PREPARATION

 

2.1 Statement of compliance

The Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) as issued by the International Accounting Standards Board (IASB).

Management certifies that all the material information in the financial statements, and only that information, is being presented, and that it corresponds to the information used by Management in its administration of the company.

On May 16, 2017, the Company’s Audit Board authorized filing of the Financial Statements for the year ended December 31, 2016.

 

2.2 Bases of measurement

The consolidated financial statements have been prepared based on historical cost, with the exception of the following material items recorded in the Statement of financial position:

 

  Non-derivative financial assets measured at fair value through profit or loss.

 

  Financial assets held for trading measured at fair value.

 

  Financial assets of the Concession measured by the New Replacement Value (VNR), equivalent to fair value.

 

2.3 Functional currency and currency of presentation

These consolidated financial statements are presented in Reais, which is the Company’s presentation and functional currency. All the financial information is presented in millions of Reais, except where otherwise indicated.

 

2.4 Use of estimates and judgments

The preparation of the consolidated financial statements, under IFRS, requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the amounts reported in assets, liabilities, revenues and expenses. Future reported results may differ from these estimates.

Estimates and assumptions are revised continually, using as a reference both historical experience and also any significant changes of scenario that could affect the equity situation of the company or its results in the applicable items. Revisions in relation to accounting estimates are recognized in the period in which the estimates are reviewed, and in any future periods affected.

 

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The principal estimates related to the financial statements refer to recording of effects arising from:

 

  Allowance for doubtful accounts – see Note 8;

 

  Deferred income and social contribution taxes – see Note 10;

 

  Financial assets of the concession – see Note 14;

 

  Investments – See Note 15.

 

  Property, plant and equipment – Note 16.

 

  Intangible assets – see Note 17;

 

  Depreciation – see Note 16;

 

  Amortization – see Note 17;

 

  Employee post-retirement liabilities – see Note 22;

 

  Provisions – see Note 23;

 

  Unbilled electricity supplied – see Note 25; and

 

  Fair value measurement and Derivatives instruments – see Note 30.

 

2.5 Rules, interpretations and changes that came into force on January 1, 2016

The following rules and changes of rules came into effect during 2016

The Changes to IFRS 7 provide additional orientations to clarify whether a service contract constitutes continuous involvement in an asset transferred, for the purposes of the necessary disclosures in relation to the transferred assets.

The changes to IAS 19 clarify that the rate used to discount obligations for post-retirement benefit should be determined based on AA corporate bond yields at the end of the reporting period.

The changes to IFRS 5 introduce specific orientations in relation to when an entity reclassifies an asset (or group of assets held for sale) from ‘held for sale’ to ‘held for distribution to holders’ (or vice-versa).

Changes to IAS 16 and IAS 38 – Clarification of the acceptable methods for depreciation and amortization.

Changes to IAS 1 – Disclosure Initiative – These offer orientations on application of the concept of materiality in practice.

Changes to IFRS 10, IFRS 12 and IAS 28 – Investment entities: Applying exception from consolidation – These clarify that exemption from preparing consolidated financial statements is applicable to a controlling entity that is the subsidiary of an investment entity, even if the investment entity values all its subsidiaries at fair value under IFRS 10.

 

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Changes to IFRS 11 – Joint Arrangements – provides instructions on accounting for the acquisition of a ‘business combination’ as defined by IFRS 3 – Business Combinations.

The application of these changes had no significant impact on the disclosures or the amounts recognized in the financial statements of Cemig.

 

2.6 New and revised rules and interpretations already issued and not yet adopted, with possible impacts for the Company

In effect for annual periods starting on or after January 1, 2017:

 

  Changes to IAS 12 – Recognition of deferred tax assets for non-realized losses.

 

  Disclosure Initiative (Changes to IAS 7) – Alters IAS 7 – Statement of Cash Flows, to clarify that entities should supply disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities. Applicable to annual periods starting on or after January 1, 2017

In effect for annual periods starting on or after January 1, 2018:

 

  Changes to IFRS 10 and IAS 28 – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture – Deals with situations that involve sale or contribution of assets between an investor and its associate or joint venture.

 

  IFRS 9 – Financial instruments – Establishes that all the financial assets recognized that are within the scope of IAS 39 must be subsequently measured at amortized cost or fair value. In relation to the impairment of financial assets, IFRS 9 requires use of a forward-looking ‘expected loss’ impairment model, in contrast to the model of actual impairment stated in IAS 39.

 

  IFRS 15 – Revenue from Contracts with Customers: Issued in May 2014, IFRS 15 established a simple and clear model for companies to use in accounting for revenue arising from contracts with clients. When it comes into effect, it will replace the present orientations on recognition of revenue contained in IAS 18 – Revenues, IAS 11 – Construction Contracts and the related interpretations.

In effect for annual periods starting on or after January 1, 2019:

 

  IFRS 16 – Leases – With this new rule, lessors will have to recognize the liability for future payments and the right to use of the leased asset for practically all leasing contracts, including those currently classified as operational leasing contracts.

 

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The Company is still evaluating the effects of application of these new rules, and changes to existing rules, on the amounts and disclosures presented in the financial statements.

 

2.7 Principal accounting policies

The accounting policies described in detail below have been applied consistently to all the periods presented in these consolidated financial statements, in accordance with the rules and regulations described in item 2.1 – Statement of compliance.

The accounting policies relating to the Company’s present operations that require judgment and the use of specific valuation criteria are the following:

 

  a) Financial instruments

Financial liabilities relating to put options – The options to sell units in FIP Melbourne and FIP Malbec (‘the SAAG Put’) and the options to sell shares in RME and Lepsa (‘the Parati PUT’) were valued at fair value using the Black-Scholes-Merton (BSM) method. Both the options were calculated using the discounted cash flow method: for the SAAG Put option, up to the third quarter of 2016; and for the Parati Put option, up to the first quarter of 2016. The method used was changed, in the fourth and second quarters, respectively, to the BSM model. The Company calculated the fair value of these options having as a reference their respective prices obtained by the BSM model, valued on the closing date of the financial statements for the 2016 business year.

Share capital: The rights to minimum dividends as established for the preferred shares are described in Note 24 to the financial statements.

Financial instruments available for sale: As from December 31, 2012, assets in this category include the financial assets of the transmission and distribution concession that were covered by Law 12783 (of January 11, 2013). They are measured at New Replacement Value (Valor Novo de Reposição, or VNR), equivalent to fair value on the date of these financial statements. The Company recognizes a financial asset resulting from a concession contract when it has an unconditional contractual right to receive cash or another financial asset from, or under the direction of, the Concession-granting power for the services of construction or improvement provided.

Loans and receivables – The category includes: Cash equivalents; Consumers and traders; Power transport concession holders; Financial assets of the concession not covered by Law 12783; the CVA Account (for compensation of changes in Portion A costs) and Other financial components of tariff adjustments; Escrow deposits; and Traders – ‘Free Energy’ transactions.

 

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Cash and cash equivalents includes: Balances of cash; Bank deposits; and cash investments with original maturity of three months or less from the date of contracting, which are subject to an insignificant risk of change in value. Cash and cash equivalents are maintained for the purpose of meeting cash commitments in the short term and not for investment or other purposes.

 

  b) Consumers and traders; Power transport concession holders; and Traders – transactions in ‘Free Energy’

Accounts receivable from Consumers and traders, and from power transport concession holders, are initially recorded at value, whether already invoiced or not, and measured by amortized cost. They include any direct taxes for which the company has the tax responsibility, less taxes withheld at source, which are considered to be tax credits.

The provision for doubtful receivables, for low and medium voltage consumers, is recorded based on estimates by Management, in an amount sufficient to cover probable losses. The principal criteria set by the company are: (i) For consumers with significant balances, the balance receivable is analyzed in the light of the history of the debt, negotiations in progress, and real guarantees. (ii) For other consumers, the following are provisioned: Debts from residential consumers more than 90 days past due; debts from commercial consumers more than 180 days past due; and debts more than 360 days past due from other consumers. These criteria are the same as those established by Aneel.

For large consumers an individual analysis is made of the debtors and of the actions in progress for receipt of the credits.

 

  c) Investments

The Company’s investments include the intangible concession assets identified on acquisitions, net of any accumulated losses by impairment.

 

  d) Assets linked to the concessions

Electricity distribution activity: The portion of the assets of the concession that will be totally amortized during the concession period is recorded as intangible and is completely amortized during the concession agreement period.

The amortization reflects the pattern of consumption of the rights acquired. It is calculated on the balance of the assets linked to the concession, by the straight-line method, based on the application of the rates set by Aneel for the electricity distribution activity.

The Company calculates the value of the assets which will not be fully amortized by the end of the concession agreement period, and reports this amount as a financial asset because it is an unconditional right to receive cash or other financial asset directly from the grantor.

Company has measured the parcel of the assets that will be completely amortized by the end of the concession, assuming extension of its concession agreement for a further 30 years, as described in more detail in Note 4.

New assets are recorded initially in Intangible assets, valued at acquisition cost, including capitalized borrowing costs. When the assets start operation they are split into financial assets and intangible assets, according to the criterion mentioned in the previous paragraphs: The portion of the assets that is recorded in financial assets is valued based on the new replacement cost, having as a reference the amounts homologated by Aneel for the Asset Base for Remuneration in the processes of tariff review.

When an asset is replaced, the net book value of the asset is written down as an expense in the Statement of income.

Transmission activity: For the new transmission concessions, granted after the year 2000, the costs related to construction of the infrastructure are recorded in the Statement of income as and when they are calculated, and a Construction Revenue is recorded based on the stage of conclusion of the assets, including the taxes applicable to the revenue and any profit margin.

 

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Since the transmission contracts determine that the concession holders have an unconditional right to receive cash or another financial asset directly from, or in the name of, the Concession-granting power, for the new transmission concessions the Company records a financial asset, during the period of construction of lines, the transmission revenue to be received during the whole period of the concession, at fair value.

Of the invoiced amounts of Permitted Annual Revenue (RAP), the portion relating to the fair value of the operation and maintenance of the assets is recorded as revenue in the Statement of income, and the portion relating to the construction revenue, originally recorded at the time of the formation of the assets, is used to recover the financial assets.

Additional expenditures incurred for purposes of capital expansion and improvements to the transmission assets generate additional cash flow, and hence this new cash flow is capitalized into the financial asset balance.

In counterpart to acceptance of the terms of renewal of the old transmission concessions, as described in more detail in Note 4, the greater part of the transmission assets of the old concessions will be the subject of indemnity by the Concession-granting power, having already been written off on December 31, 2012, and an item in Accounts receivable having been posted corresponding to the estimated indemnity to be received.

Gas distribution activity: The portion of the assets of the concession that will be amortized in full during the concession is recorded as an Intangible asset and fully amortized over the period of the concession contract.

The amortization is calculated on the balance of the assets linked to the concession by the straight line method, applying amortization rates that reflect the estimated useful life of the assets.

The Company calculates the value of the assets which will not be fully amortized by the end of the concession agreement period, and reports this amount as a financial asset, because it is an unconditional right to receive cash or other financial asset directly from the grantor.

New assets are recorded initially in Intangible assets, valued at acquisition cost, including capitalized borrowing costs. When they start operation they are divided into a financial asset and an intangible asset, in accordance with a criterion mentioned in the previous paragraphs. When an asset is replaced, the net book value of the asset is written down as an expense in the Statement of income.

 

  e) Intangible assets

Intangible assets comprise assets relating to: service concession contracts, and software. These are measured at total acquisition cost, less expenses of amortization.

Interest and other financing charges incurred on financings linked to works in progress are appropriated to Intangible assets in progress, and Consortia, during the period of construction.

For borrowings raised for the construction of a specific PP&E asset, the Company allocates all of the financial costs related to the borrowings directly to the respective assets being financed. For other borrowings raised that are not linked directly to a specific PP&E asset, a weighted average rate is established for the capitalization of the costs of those loans.

For intangible assets linked to the concession, the accounting practices described in the item ‘Assets linked to the concession’ above are applied.

 

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  f) Property, plant and equipment

Depreciation and amortization: These are calculated on the balance of property, plant and equipment in service and investments in consortia, on a straight-line basis, using the rates determined by Aneel for the assets related to electricity activities, which reflect the estimated useful life of the assets.

The depreciation rates applied to the Company’s property, plant and equipment assets are shown in Note 16 to the financial statements.

Assets not fully depreciated by the end of the concession will be reverted to the Concession-granting power and this non-depreciated portion will be indemnified.

Interest and other financing charges incurred on financings linked to works in progress are appropriated to PP&E assets in progress, and Consortia, during the period of construction.

For borrowings raised for the construction of a specific PP&E asset, the Company capitalizes all of the financial costs related to the borrowings directly to the respective assets being financed. For other borrowings raised that are not linked directly to a specific PP&E asset, a weighted average rate is established for the capitalization of the costs of those loans.

The residual value is the balance remaining of the asset at the end of the concession, thus, as established in a contract signed between the Company and the federal government, at the end of the concession the assets will be reverted to the federal government which, in turn, will indemnify the Company for those assets that have not yet been totally depreciated. In cases where there is no indemnity at the end of the concession, no residual value is recognized, and the depreciation rates are adjusted so that all the assets are depreciated within the concession period. See more details in Note 14.

 

  g) Impairment

In assessing impairment, the Company uses historic trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgment as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends.

 

  h) Benefits to employees

For the Company’s retirement benefit pension plan obligations, the liability recorded in the statement of financial position is the greater of: (a) the debt agreed upon with the foundation for amortization of the actuarial obligations, and (b) the present value of the actuarial obligation, as calculated by a qualified actuary, less the fair value of the plan’s assets, and adjusted for unrecognized actuarial gains and losses. In the business years presented, the expenses related to the debt agreed upon with the pension fund were registered in Financial revenue (expenses), because they represent interest and monetary updating. The other expenses on the pension fund were recorded as operational expenses.

Short-term benefits to employees: Employees’ profit shares specified in the Company’s by-laws are accrued for in accordance with the collective agreement established with the employee unions and recorded in Employees’ and managers’ profit shares in the Statement of income.

 

  i) Income and Social Contribution taxes

Deferred income tax and Social Contribution tax assets are reviewed at each financial position date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

 

  j) Operational revenue

In general, for the Company’s business in the electricity, gas, telecommunications and other sectors, revenues are recognized when there is persuasive evidence of agreements, when delivery of merchandise takes place or when the services are provided, the prices are fixed or determinable, and receipt is reasonably assured, independently of whether the money has actually been received.

 

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Revenues from sale of electricity are recorded based on the electricity delivered and the tariffs specified in the terms of the contract or in effect in the market. Revenues from retail supply of electricity to final consumers are recorded when the delivery has taken place. The billing is carried out monthly. Unbilled retail supply of electricity, from the period between the last billing and the end of each month, is estimated based on the billing from the previous month and is accrued for at the end of the month. The differences between the estimated amounts accrued and the actual revenues realized are recorded in the following month.

Revenue from the supply of electricity to the Brazilian grid system is recorded when the delivery has taken place and is invoiced to consumers on a monthly basis, in accordance with the payment schedules specified in the concession agreement.

For the older transmission concessions, granted before 2000, the fair value of the operation and maintenance of the transmission lines and the remuneration of the financial asset are recorded as revenue in the Statement of income for each period.

The services provided include charges for connection and other related services; the revenues are accounted when the services are provided.

The ‘Portion A’ revenue and the Other financial items related to tariff adjustments are recognized in the statement of income when the costs effectively incurred are different from those incorporated into the electricity distribution tariff. For more details, see Note 14.

The gain on adjustment of expectation of cash flow from the indemnifiable financial asset of the distribution concession arising from the variation in the fair value of the Remuneration Asset Base is presented as operational revenue, together with the other revenues related to the Company’s end-activity.

 

  k) Financial revenue and expenses

Financial revenue includes interest income on funds invested, fee income for consumer payments made late, interest income on financial assets of the concession, and interest income on other financial assets. Interest income is recognized in the Statement of income using the effective interest method.

Financial expenses include: interest expense on borrowings; and foreign exchange and monetary variation on borrowing cost of debt, financings and debentures. Interest expense on the Company’s borrowings that is not capitalized is recognized in the Statement of income using the effective interest method.

 

  l) Segment reporting

The operating results of all operating segments for which discrete financial information is available are reviewed regularly by the Company’s CEO, to make decisions about resources to be allocated to the segment, and to assess its performance.

Segment results that are reported to the CEO include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets (primarily the Company’s headquarters) and head office expenses.

Segment capital expenditure is the total cost incurred during the year to acquire: the Financial assets of the concession; Property, plant and equipment; and Intangible assets other than Goodwill.

 

  m) Determination of the adjustment to present value

The Company has applied adjustment to present value to certain concession contracts held for consideration, and also to the balance of debentures issued by the Company. Discount rates were used that are compatible with the cost of funding in transactions with the same maturity on the date of the transactions. These rates are: 12.50% for the small hydro plants and 5.10% for the conventional hydroelectric plants.

 

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2.8 Restatement of the Income Statement for the years ended December 31, 2015 and 2014

The Company, in order to more adequately present its financial and operational performance, concluded that the adjustment related to the expectation of cash flow from the indemnifiable financial asset of the distribution concession should be presented as an operating revenue, instead of financial revenue, under net financial revenue (expenses), as originally presented, in order to be presented together with the other revenues related to its core business. This classification results in a more adequate presentation of the energy distribution business performance and provides a better presentation of the company’s performance.

This conclusion is based in the following facts:

 

i. Investing in infrastructure is an inherent activity of the energy distribution business, which business model is supported by the construction, maintenance and operation of this infrastructure;

 

ii. Part of the energy distribution industry, as well as the energy transmission industry, already adopts this classification, hence the Company will be increasing the comparability of its financial statements with others;

 

iii. As a result of the inflation increase in the past years faced by the country, which directly impacted the increase in the financial asset of the concession, impacted the importance of this revenue in the income statement.

In accordance with the requirements of IAS 8—Accounting Policies, Changes in Accounting Estimates and Errors, the Company changed the accounting policy previously adopted to an accounting policy that better presents its business performance (as described in the above mentioned topics). Therefore, the corresponding figures in the financial statements relating to the consolidated income statement for the year ended December 31, 2015 and 2014, presented for purposes of comparison, were retrospectively reclassified and are being restated for purposes of comparison. The reclassification does not change the total consolidated assets, consolidated equity, net income, statements of comprehensive income and cash flow.

 

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The consolidated income statement for the year ended December 31, 2015, presented for purposes of comparison, is as follows:

 

     2015     Ajustment     2015
Restated
 

NET REVENUE

     21,292       576       21,868  

OPERATING COSTS

      

COST OF ELECTRICITY AND GAS

      

Electricity purchased for resale

     (9,542     —         (9,542

Charges for use of the national grid

     (999     —         (999

Gas bought for resale

     (1,051     —         (1,051
  

 

 

   

 

 

   

 

 

 
     (11,592     —         (11,592

OTHER COSTS

      

Personnel and managers

     (1,143     —         (1,143

Materials

     (126     —         (126

Outsourced services

     (740     —         (740

Depreciation and amortization

     (811     —         (811

Operating provisions

     (23     —         (23

Infrastructure construction cost

     (1,252     —         (1,252

Other

     (96     —         (96
  

 

 

   

 

 

   

 

 

 
     (4,191     —         (4,191

TOTAL COST

     (15,783     —         (15,783

GROSS PROFIT

     5,509       576       6,085  

OPERATING EXPENSES

      

Selling expenses

     (175     —         (175

General and administrative expenses

     (674     —         (674

Operating provisions

     (1,203     —         (1,203

Other operating expenses

     (482     30       (452
  

 

 

   

 

 

   

 

 

 
     (2,534     30       (2,504

Equity method gains in non-consolidated investees

     393       —         393  

Fair value results in Corporate Operation

     729       —         729  

Income before Financial income (expenses) and taxes

     4,097       606       4,703  

Financial revenues

     1,469       (606     863  

Financial expenses

     (2,204     —         (2,204
  

 

 

   

 

 

   

 

 

 

Income before income tax and social contribution tax

     3,362       —         3,362  

Current income tax and Social Contribution tax

     (881     —         (881

Deferred income tax and Social Contribution tax

     (12     —         (12
  

 

 

   

 

 

   

 

 

 

NET INCOME FOR THE YEAR

     2,469       —         2,469  
  

 

 

   

 

 

   

 

 

 

Total of net income for the year attributed to:

      

Interest of the controlling shareholders

     2,469       —         2,469  

Interest of non-controlling shareholder

     —         —         —    
  

 

 

   

 

 

   

 

 

 
     2,469                2,469  
  

 

 

   

 

 

   

 

 

 

Basic and diluted income per preferred share

     1.96       —         1.96  

Basic and diluted income per common share

     1.96       —         1.96  

 

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The consolidated income statement for the year ended December 31, 2014, presented for purposes of comparison, is as follows:

 

     2014     Ajustment     2014
Restated
 

NET REVENUE

     19,540       55       19,595  

OPERATING COSTS

      

COST OF ELECTRICITY AND GAS

      

Electricity purchased for resale

     (7,428     —         (7,428

Charges for the use of the national grid

     (744     —         (744

Gas purchased for resale

     (254     —         (254
  

 

 

   

 

 

   

 

 

 
     (8,426     —         (8,426

OTHER COSTS

      

Personnel and managers

     (999     —         (999

Materials

     (340     —         (340

Outsourced services

     (736     —         (736

Depreciation and amortization

     (779     —         (779

Operating provisions

     (262     —         (262

Infrastructure construction cost

     (942     —         (942

Other

     (318     —         (318
  

 

 

   

 

 

   

 

 

 
     (4,376     —         (4,376

TOTAL COST

     (12,802     —         (12,802

GROSS PROFIT

     6,738       55       6,793  

OPERATING EXPENSES

      

Selling expenses

     (128     —         (128

General and administrative expenses

     (654     —         (654

Operating provisions

     (190     —         (190

Other operating expenses

     (677     3       (674
     (1,649     3       (1,646

Equity in earnings of unconsolidated investees, net

     210       —         210  

Gain on acquisition of control of investee

     281       —         281  

Income before Financial income (expenses) and taxes

     5,580       58       5,638  

Financial revenues

     593       (58     535  

Financial expenses

     (1,694     —         (1,694
  

 

 

   

 

 

   

 

 

 

Income before income tax and social contribution tax

     4,479       —         4,479  

Current income and social contribution taxes

     (1,259     —         (1,259

Deferred income and social contribution taxes

     (83     —         (83
  

 

 

   

 

 

   

 

 

 

NET INCOME FOR THE YEAR

     3,137       —         3,137  
  

 

 

   

 

 

   

 

 

 

 

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3. PRINCIPLES OF CONSOLIDATION

The financial statements date of the subsidiaries and jointly-controlled entities, used for the purposes of calculation of consolidation and equity in earnings of unconsolidated investees coincide with those of the Company.

The Company uses the criteria of full consolidation for the following companies which are direct equity investments of Cemig:

 

     Dec. 31, 2016      Dec. 31, 2015      Dec. 31, 2014  
   Direct interest %      Direct interest %      Direct interest %  

Cemig Geração e Transmissão

     100.00        100.00        100.00  

Cemig Distribuição

     100.00        100.00        100.00  

Gasmig

     99.57        99.57        99.57  

CemigTelecom

     100.00        100.00        100.00  

Rosal Energia

     100.00        100.00        100.00  

Sá Carvalho

     100.00        100.00        100.00  

Horizontes Energia

     100.00        100.00        100.00  

Usina Térmica Ipatinga

     100.00        100.00        100.00  

Cemig PCH

     100.00        100.00        100.00  

Cemig Capim Branco Energia

     —          —          100.00  

Cemig Trading

     100.00        100.00        100.00  

Efficientia

     100.00        100.00        100.00  

Cemig Comercializadora de Energia Incentivada

     100.00        100.00        100.00  

UTE Barreiro (Barreiro Thermal Plant)

     100.00        100.00        100.00  

Empresa de Serviços e Comercialização de Energia Elétrica

     100.00        100.00        100.00  

 

a) Subsidiaries and jointly-controlled entities

The financial statements of subsidiaries are included in the consolidated financial statements as from the date on which the control starts until the date on which the control ceases to exist. The assets, liabilities and profit (loss) of the subsidiaries were consolidated using full consolidation. The accounting policies of the subsidiaries and jointly-controlled entities are aligned with the policies adopted by the Company. The financial information of the jointly-controlled entities is recognized by the equity method of accounting.

 

b) Consortia

The assets, liabilities, and profits (losses) of a consortium are recorded in accordance with the percentage interest held in the consortium, since these investments are considered to be ‘joint operations’ in accordance with the requirements of IFRS11.

 

 

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c) Transactions eliminated in consolidation

Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealized gains arising from transactions with investee companies recorded by the equity method are eliminated against the investment in proportion to the Company’s equity interests in the investee. Unrealized losses are eliminated in the same way as unrealized gains are eliminated, but only up to the point at which there is no evidence of impairment.

The financial statements of Transchile, for the purposes of calculations by the equity method, are converted from US dollars (the functional currency of Transchile) to Reais based on the exchange rate at last quoted day of the year, since Cemig’s functional currency is the Real. Foreign currency differences are recognized in Other comprehensive income and presented in equity up to the date of the sale of the interest in Transchile. After conclusion of the sale, the amount recognized in Other comprehensive income, in Equity, was transferred in full to the Income statement. In 2016, the whole of Cemig’s interest in Transchile was sold to Ferrovial Transco Chile SpA., a company controlled by Ferrovial S.A. For fuller details please see Note 15.

The consolidated financial statements include the balances and transactions of the investment funds in which the Company and its subsidiaries and jointly-held subsidies are the sole unit holders. These funds comprise public securities, private securities and debentures of companies which have low risk classification, ensuring high liquidity.

These investment funds, the financial statements of which are regularly reviewed/audited, are subject to limited obligations, namely payment for services provided by the administrators of the assets, attributed to the operation of the investments, such as charges for custody, auditing and other expenses, and there are no significant financial obligations, nor are there assets of the unit holders to guarantee those obligations.

 

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4. CONCESSIONS AND AUTHORIZATIONS

Cemig and its subsidiaries hold the following concessions and authorizations, from the National Electricity Agency, Aneel:

 

    

Location

   Date of
concession or
authorization
     Expiration
date
 

GENERATION

        

Hydroelectric plants

        

São Simão (1)

   Rio Paranaíba      01/1965        01/2015  

Emborcação

   Rio Paranaíba      07/1975        07/2025  

Nova Ponte

   Rio Araguari      07/1975        07/2025  

Jaguara (1)

   Rio Grande      08/1963        08/2013  

Miranda (1)

   Rio Araguari      12/1986        12/2016  

Três Marias

   Rio São Francisco      01/2015        01/2045  

Volta Grande

   Rio Grande      02/1967        02/2017  

Irapé

   Rio Jequitinhonha      01/1999        02/2035  

Salto Grande

   Rio Santo Antônio      01/2015        01/2045  

Queimado

   Rio Preto      11/1997        01/2033  

Itutinga

   Rio Grande      01/2015        01/2045  

Camargos

   Rio Grande      01/2015        01/2045  

Piau

   Rio Piau / Pinho      01/2015        01/2045  

Gafanhoto

   Rio Pará      01/2015        01/2045  

Cachoeirão SHP

   Rio Manhuaçu      07/2000        07/2030  

Santo Antônio

   Madeira      06/2008        06/2043  

Baguari

   Rio Doce      08/2006        08/2041  

Pipoca SHP

   Rio Manhuaçu      09/2001        09/2031  

Other

   Various      Various        Various  
        

Wind farms (2)

        

Morro do Camelinho

   Gouveia – Minas Gerais      03/2000        01/2017  

Praias do Parajuru

   Beberibe – Ceará      09/2002        08/2029  

Volta do Rio

   Acaraú – Ceará      12/2001        08/2034  

Praia de Morgado

   Acaraú – Ceará      12/2001        08/2034  
        

Thermal plants

        

Igarapé

   Juatuba – Minas Gerais      01/2001        08/2024  

Barreiro

   Belo Horizonte, Minas Gerais      02/2002        04/2023  
        

TRANSMISSION

        

National grid

   Minas Gerais      07/1997        07/2015  

Itajubá Substation

   Minas Gerais      10/2000        10/2030  
        

DISTRIBUTION

   Minas Gerais      01/2016        12/2045  

 

(1) The extension of the concession specified in the concession contract is not included in these figures. See details in this Note.
(2) Permission to operate the activity of wind power generation is given by means of authorizations.

Generation concessions

In the generation business, the Company sells electricity: (1) through auctions to distributors to meet the demands of their captive markets; and (2) to Free Consumers in the Free Market (Ambiente de Contratação Livre, or ACL). In the Free Market, electricity is traded by generation concession holders, Small Hydro Plants (SHPs), self-producers, traders, and importers of electricity.

Free Consumers are those that have demand of more than 3MW at a voltage of 69kV or higher, or at any voltage if their supply began after July 1995.

 

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A consumer that has opted for the Free Market may return to the regulated system only if it gives its distributor five years’ prior notice. The purpose of this period of notice is to ensure that if necessary the distributor will be able to buy additional electricity to supply the re-entry of Free Consumers into the Regulated Market. The state-controlled generators can sell electricity to Free Consumers but, unlike the private generators they are obligated to do so through an auction process.

Auctions of electricity generation concessions

In November 2015, Cemig GT took part in Auction 12/2015 and won the concessions for Lot D. This was for 18 plants – shown below – for five of which the concession had been previously held by Furnas S.A.:

 

Generating plant

   Concession
expiry
date
     Installed
capacity
(MW)
     Average physical
offtake guarantee level

(‘Assured Energy’) –
MW
 

Três Marias Hydroelectric Plant

     Jan. 2045        396.00        239.00  

Salto Grande Hydroelectric Plant

     Jan. 2045        102.00        75.00  

Itutinga Hydroelectric Plant

     Jan. 2045        52.00        28.00  

Camargos Hydroelectric Plant

     Jan. 2045        46.00        21.00  

Piau Small Hydroelectric Plant

     Jan. 2045        18.01        13.53  

Gafanhoto Small Hydroelectric Plant

     Jan. 2045        14.00        6.68  

Peti Small Hydroelectric Plant

     Jan. 2045        9.40        6.18  

Tronqueiras Small Hydroelectric Plant

     Jan. 2045        8.50        3.39  

Joasal Small Hydroelectric Plant

     Jan. 2045        8.40        5.20  

Martins Small Hydroelectric Plant

     Jan. 2045        7.70        1.84  

Cajuru Small Hydroelectric Plant

     Jan. 2045        7.20        2.69  

Paciência Small Hydroelectric Plant

     Jan. 2045        4.08        2.36  

Marmelos Small Hydroelectric Plant

     Jan. 2045        4.00        2.74  

Coronel Domiciano Small Hydroelectric Plant (1)

     Jan. 2045        5.04        3.59  

Dona Rita Small Hydroelectric Plant (1)

     Jan. 2045        2.41        1.03  

Ervália Small Hydroelectric Plant (1)

     Jan. 2045        6.97        3.03  

Neblina Small Hydroelectric Plant (1)

     Jan. 2045        6.47        4.66  

Sinceridade Small Hydroelectric Plant (1)

     Jan. 2045        1.42        0.35  
     

 

 

    

 

 

 
        699.60        420.27  
     

 

 

    

 

 

 

 

(1) Plants for which the concession was previously held by Furnas.

Please note that the information presented in this table on installed capacity, guaranteed average offtake, and other operational information is not part of the scope of an audit of financial statements, and has thus not been examined by the external auditors.

For more information please see Note 14.

 

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Renewal of the concessions of the Jaguara, São Simão and Miranda Hydroelectric Plants

The company believes that it has the right to completion of periods of these concessions, based on the original terms of the Concession Contracts, and is currently arguing this in the courts.

The Jaguara hydroelectric plant

As specified in the Concession Contract for the Jaguara Plant, the Company applied for the extension of the concession. The Mining and Energy Ministry (‘MME’) refused the Company’s application, on the grounds that the application was made outside the time limits set by Law 12783/13.

On June 20, 2013, Cemig GT obtained an interim injunction in its application to the Higher Appeal Court (Superior Tribunal de Justiça, or STJ) for order of mandamus No. 20.432/2013, against the decision of the MME not to entertain the application for extension of the period of concession of the Jaguara plant (424MW capacity, with average 336 MW assured offtake), which had an expiration date on August 28, 2013. The interim remedy, given by Reporting Justice Sérgio Kukina, ensured that Cemig GT would continue to operate the concession for the Jaguara plant until final judgment in the action. On August 23, 2013, Reporting Justice Sérgio Kukina ruled that the application for mandamus had failed.

On August 30, 2013 the STJ granted an interim order, published on September 3, 2013, in a new application for mandamus in the STJ, against the decision by the Mining and Energy Ministry which, in a dispatch published on August 23, 2013, refused, on its merits, the application by Cemig GT for extension of the concession of the Jaguara Plant under its Concession Agreement. This interim order gave Cemig GT the right to remain in control of the Jaguara Plant, commercially operating the public service concession granted to it, until final judgment of the case.

On June 24, 2015 the judgment on the application for mandamus brought by Cemig GT was completed. With all the votes given by the Justices of the first Section of the STJ, the applications made by Cemig GT were defeated by six judgment votes to 2.

On September 22, 2015, Cemig GT filed a further action, for Provisional Remedy, with the Federal Supreme Court (Supremo Tribunal Federal, or STF), to maintain ownership of the concession for the Jaguara plant, on the initial bases of the concession agreement.

On November 3, 2015, the Reporting Justice of the Federal Supreme Court published a Dispatch requesting a position from the parties on their interest in holding a reconciliation hearing, due to the complexity and importance of the debate on the subject in the action for Provisional Remedy. On November 4, 2015, Cemig filed a statement with the Court stating its interest in such a hearing.

On December 21, 2015, Supreme Court Justice Dias Toffoli, rapporteur of the case, granted the application for interim injunction made by the Company, to suspend the effects of the judgment of the First Section of the STJ, and keep Cemig GT in possession of the concession to operate the Jaguara plant, on the initial bases of the concession agreement, until such time as the Supreme Court might make a decision to the contrary. On February 1, 2016, the decision granting the application for interim injunction applied for was published.

 

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On February 15, 2016 the Panel Judgment of the STJ was published, containing the decision of the First Section of that Court, which refused to grant mandamus and refused the Special Appeal.

On February 22, 2016, in the STF, the Reporting Justice issued a Dispatch extending continuity of the Reconciliation Hearing between Cemig GT and the federal government; the parties are currently awaiting a further dispatch to set a new date for continuation of that hearing, begun on December 15, 2015.

On March 1, 2016 the Company filed an Ordinary Appeal with the STJ against the panel judgment of February 15, 2016, and on April 11, 2016 the Justice Deputy Chair of the STJ issued a decision accepting that this Ordinary Appeal should be heard, and ordered it to be submitted to the STF.

On March 21, 2017 the Federal Supreme Court revoked the interim order given in the case in which Cemig GT is requesting suspension, until final judgment on the Ordinary Appeal by the Supreme Court, of the effects of the judgment of the First Section of the Supreme Court which refused to grant an order to maintain Cemig GT’s ownership of the concession for the Jaguara Plant on the initial bases of Concession Contract 007/97. The judgment remitted the case records to the office of the Procurator-General of the Republic (PGR), for that body to state its opinion.

On December 31, 2016 the asset, at book value of R$ 41, is posted in PP&E, and in 2016 the Company recognized the plant’s revenues from sales of power supply, and operational costs, since it remained in control of the asset during this period.

On March 29, 2017 Cemig GT filed an Internal Appeal against the decision that repealed the remedy, requesting a revision of judgment, to allow cognizance to be taken of a Special Appeal.

The São Simão hydroelectric plant

On June 3, 2014, the Company filed a request for extension of the concession of the São Simão Hydroelectric Plant, since it believes that the concession contract for this plant is not subject to the new rules created by Provisional Measure 579 (which became Law 12783/2013).

On August 5, 2014, the Council of Aneel decided to recommend to the Mining and Energy Ministry (MME) that renewal of the concession for the São Simão plant should be refused.

On August 29, 2014, the Mining and Energy Minister decided to refuse the request for extension of the period of concession of the São Simão plant, based on Opinion 559/2014/CONJURMME/CGU/AGU.

 

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On September 10, 2014, Cemig GT filed a Hierarchy Appeal with the MME, with request for reconsideration, for the Mining and Energy Minister to reconsider his decision and to grant the Company’s request based only on the Concession Contract; and, successively, that the appeal should be sent to the President of the Republic, so that the President should issue a decision in favor of the Company’s request in the same terms. This appeal is still pending, awaiting consideration by the MME.

Notwithstanding this, on December 15, 2014 Cemig GT filed an application for mandamus (No. 21465/DF), with the Higher Appeal Court (STJ), requesting interim relief, against an illegal act by the Mining and Energy Minister, violating net and certain right of the plaintiff, for the purpose of obtaining extension of the period of concession of the São Simão plant, based on the Concession Contract.

On December 17, 2014, Justice Mauro Campbell granted an interim order (published on December 19, 2014) that Cemig GT should remain in control of the plant, commercially operating the public service concession conceded to it, until the final judgment on application for mandamus governing the Jaguara plant, or until a re-examination of the remedy just refused.

When the judgment in the application for mandamus governing the Jaguara plant was concluded, with rejection of the application, the Reporting Justice revoked the interim remedy given in the Application for mandamus relating to the São Simão plant, the decision on which was published on June 30, 2015.

On July 3, 2015, Cemig GT filed a Special Appeal for retraction of the decision by the Reporting Justice, or, if the court should not be of that opinion, that the appeal referred to should be submitted to consideration by the First Section of the STJ, for an interim remedy ordering that the Company should continue to hold the concession for the São Simão Plant, on the initial bases of the Concession Contract.

On July 10, 2015, the Energy Planning and Development Department (Secretaria de Planejamento e Desenvolvimento Energético) sent an official letter to Cemig GT requiring it to state whether the Company would be interested in remaining in possession of the São Simão Plant, on the new bases of Law 12783/13, until its assumption by the winner of a new tender to be held, in view of the repeal of the interim remedy.

In response to this new event, on July 22, 2015 Cemig GT filed a petition with the Chair of the STJ requesting the application for retraction made within the Special Appeal, in such a way that, through reconsideration of the decision appealed against, an interim remedy should be granted, to keep the Company as holder of the concession of the São Simão Plant, on the initial basis of the Concession Agreement, until final judgment be given on this application for mandamus, or, subsidiarily, that, at least, suspension effect should be attributed to the Special Appeal.

 

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On August 20, 2015 it was stated that the MME would take the necessary measures to designate Cemig GT as provider of electricity generation service through the São Simão plant, under the quota regime, on the basis that the revocation of the interim order given in the application for mandamus had immediate enforceability.

In response, Cemig GT stated interest in remaining responsible for the provision of the electricity generation service of the São Simão plant, but pointed out that there are doubts as to the type, and legal security, of this provision of services, since the matter was still pending court and administrative decisions.

The MME, by Ministerial Order 432/2015, published on September 15, 2015, designated Cemig GT as the party responsible for provision of electricity generation service through the São Simão plant, under the quota regime (being responsible for the operation and maintenance of the plant without, however, having the right to its output of electricity, which will be allocated to the Guaranteed Power Offtake Auctions) until the taking over of the concession by the winner of the auction.

Further, in the judiciary, Cemig GT filed a further application for mandamus, to Justice Mauro Campbell Marques, requesting an annulment of the act of coercion, and assertion of the interim remedy that authorized the applicant to remain in possession and operation of the concession of the São Simão plant, on the initial bases of the contract, until final judgment was given on the application for mandamus governing the São Simão plant or, subsidiarily, until the merit of the Special Appeal would be considered.

On September 8, 2015, the decision of the Reporting Justice (Justice Herman Benjamin) was published, refusing the application for interim remedy applied for by the Company.

Also on September 8, 2015, a Special Appeal was filed against the decision of Justice Herman Benjamin that refused the application for interim remedy that had been made. During the Session of the Special Court of the STJ, on November 4, 2015, the Special Appeal was unanimously refused, in the terms of the judgment of the Reporting Justice.

On November 25, 2015, the Special Appeal filed by Cemig GT against the decision that overturned the interim remedy, in application for mandamus N° 21.465/DF, was, unanimously, refused by the first Section of the STJ, the said Appeal Court Judgment being published on December 1, 2015, the judgment on the merits of this application for mandamus remaining to be heard.

On March 6, 2017 the STJ granted an interim remedy maintaining Cemig GT in possession of the concession to operate the São Simão plant on the initial terms of its Concession Contract 007/1997, until conclusion of the judgment of the Company’s application for mandamus.

 

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On March 28, 2017 the interim remedy was revoked in the case in which Cemig GT seeks, in the STJ, annulment of the decision of the Mining and Energy Ministry (MME) which refused, on its merits, the application by Cemig GT for extension of the period of concession of the São Simão hydro Plant, in the terms of its Concession Contract.

Considering the present status of the legal dispute, the Company:

 

  recognized, up to the date of September 15, 2015, the operational revenues from sales of power supply and costs of this plant, in accordance with current accounting practices, in view of the fact that it remained in control of the asset up to that date;

 

  considering the requirements of Ministerial Order 432/2015, as from September 16, 2015, ceased to recognize the expenses of depreciation on the São Simão plant, and began to recognize revenues relating to the provision of services of operation and maintenance of the plant, in accordance with the regime of quotas;

 

  transferred, on September 16, 2015, the amount of R$ 220 from its PP&E to the account line ‘Other long term assets’, considering that it is still under decision in the Courts. Based on the terms of the concession agreement, this asset is considered as having a recovery value higher than the value at which it is recorded.

Concession of the Miranda Hydroelectric Plant

On June 10, 2016, Cemig Geração e Transmissão filed application to the regulator, Aneel, to extend the period of the concession for the Miranda Hydroelectric Plant for 20 years. On July 12, 2016, Aneel, complying with the judgment vote of the Reporting Council Member in the case, José Jurhosa Junior, decided to submit the case “to the Mining and Energy Ministry with the recommendation not to give cognizance to the request by Cemig Geração e Transmissão S.A. – Cemig GT for extension of the period of concession of the Miranda Hydroelectric Plant, since that request was made outside the period stipulated by Law 12783/2013”.

Cemig GT filed a request with the Concession-granting power requesting extension of the concession for the Miranda Hydroelectric Plant under Concession Contract 007/1997 – this plant had a period of the concession expiring on December 23, 2016.

Considering that this request was not accepted by the Mining and Energy Ministry, Cemig GT applied to the Higher Appeal Court (STJ) for an interim remedy. This was granted on December 22, 2016, ordering that control of the Miranda hydroelectric plant should remain with the Company, on the initial bases of Concession Contract 007/1997, until completion of the judgment in the application for Mandamus made by the Company.

On December 31, 2016 the asset, with book value of R$ 756, is posted in PP&E, and in 2016 the Company recognized the revenue from sales of power supply, and operational costs, of this plant, since it remained in control of the asset during that period.

 

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On March 29, 2017, the interim remedy (injunction) given in application for mandamus number 23.042/DF, before the Higher Appeal Court (STJ), brought by the Company to annul the decision by the Mining and Energy Ministry (MME) which refused, on merits Cemig GT’s request for ratification of the extension of its concession for the Miranda Hydroelectric Plant, under its Concession Contract, number 007/97, was revoked.

Administrative proceedings – Material Announcement of February 21, 2017

Subsidiarily to its request for extension for 20 years of the concessions of the Jaguara, São Simão and Miranda Hydroelectric Plants, the Company requested opening of an Administrative Proceeding under Paragraph 1-C of Article 8 of Law 12783/2013, in benefit of Cemig GT.

Paragraph 1-C was added to Article 8 of Law 12783, of 2013, by Law 13360, of November 17, 2016, and enables the federal government to grant a concession contract for electricity generation for a period of 30 (thirty) years when there is transfer of control of a legal entity that is already providing this service (in this case, one of the subsidiaries of Cemig GT), and is under direct or indirect control of an individual State, or the Federal District, or the municipality, provided that:

I – the tender, which may be by auction or by competitive bidding, is held by the controlling shareholder on or before February 28, 2018; and

II – the transfer of control takes place by June 30, 2018.

The subsidiary request was made on the grounds of the spirit of conciliation and cooperation that should govern the relationship between a concession holder and the concession-granting power, and the constant quest, at all times, for alternatives that present the best solution for consumers, for the country and for the shareholders of the Company – who in this case include the people of the state of Minas Gerais.

Thus, in the event that the Ministry decides to maintain its position, and if all the court judgments that have determined that Law 12783/2013 should prevail to the detriment of the provisions of the Second Subclause of Clause 4 of Contract CEMIG 007 of 1997 are maintained, Cemig GT has requested, for the benefit of one of its subsidiaries, application of the rule that is now contained in §1-C of Article 8 of Law 12783 of 2013.

We would point out that the presentation of the Subsidiary Request does not result in any waiver by Cemig GT of its right – which is the subject of the legal actions that it currently has in progress against the federal government – that is to say its right to guaranteed extension of the concessions as specified in Clause 4 of Concession Contract 007/1997.

 

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On the same date the Company filed with the MME a response to the formal question as to its interest in remaining as provider of electricity generation service after the ending of the concession period of the Volta Grande Hydroelectric Plant, which took place on February 23, 2017. In this response, and adding a request of its own, the Company stated its interest in remaining responsible for the provision of electricity generation service by this hydroelectric plant, and also requested opening of an administrative proceeding for the purposes of §1-C of Article 8 of Law 12783/2013, also to the benefit of one of the service providing subsidiaries of Cemig GT.

Management continues to be confident of its right in relation to the Jaguara, São Simão and Miranda plants, supported by a contractual clause, by the legislation in force, and by opinions issued by renowned jurists. The Company’s internal and external legal advisers have categorized the chance of success in the court dispute as ‘possible’.

Transmission concessions

Under its transmission concession contracts, the Company is authorized to charge the Tariff for Use of the Transmission System (Tarifa de Uso do Sistema de Transmissão, or TUST). Tariffs are adjusted annually on the same date as the adjustments of the Permitted Annual Revenue (Receitas Anuais Permitidas, or RAP) of the holders of transmission concessions. This tariff period starts on July 1 of the year of publication of the tariffs and runs until June 30 of the subsequent year.

The service of transport of large quantities of electricity for long distances, in Brazil, is provided by a network of transmission lines and substations operating at a voltage of 230kV or higher, referred to technically as the Basic Grid (Rede Básica), or National Grid.

Any agent of the electricity sector that produces or consumes electricity has the right to use the National Grid, as does the consumer, provided certain technical and legal requirements are met. This is referred to as Open Access, and in Brazil is guaranteed by law and by the regulator, Aneel.

The payment for use of transmission service also applies to generation provided by Itaipu Binacional. However, due to the legal characteristics of that plant, the corresponding charges are assumed by a number of holders of distribution concessions that hold quotas of its output.

For the newer transmission concessions – granted after the year 2000 – the portion of the assets that will not be used up during the concession is recorded as a financial asset, because there is an unconditional right to receive cash or other financial assets directly from the grantor at the end of the concession agreement period.

 

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For the older transmission concessions, granted before the year 2000, renewals have been applied for as from January 1, 2013 in accordance with Law 12783, under which the assets are the property of the Concession-granting Power, and the Company is remunerated, as from 2013, for the operation and maintenance of these assets.

Distribution of electricity concessions

Cemig D has the concession from Aneel for commercial exploration of the activity of distribution of electricity in the greater part of the State of Minas Gerais, expiring in December 2045.

As determined by the concession contract, all assets and facilities that are linked to the provision of the distribution service and which have been created by the concession holder are considered reversible and part of the assets of the related concession. These assets are automatically reverted to the Grantor at the end of the contract, and are then valued to determine the amount of the indemnity payable to the concession holder, subject to the amounts and the dates on which they were incorporated into the electricity system.

The Company does not have obligations to make payment in compensation for commercial operation of the distribution concessions, but is required to comply with requirements related to quality, and investments made, in accordance with the concession contract.

The concession contracts, and the Brazilian legislation, establish a mechanism of maximum prices that allows for three types of adjustment to tariffs: (i) an annual tariff adjustment; (ii) periodic review of tariffs; and (iii) extraordinary reviews.

Each year the Company has the right to request the annual adjustment, the purpose of which is to compensate for the effects of inflation on the tariffs, and to allow for certain changes in costs that are outside the Company’s control to be passed through to clients – for example the cost of electricity purchased for resale, and sector charges, including charges for the use of the transmission and distribution facilities.

Also, Aneel makes a Periodic Review of tariffs every five years, which aims to identify changes in the Company’s costs, and to establish a factor based on scale gains, which will be applied in the annual tariff adjustments, for the purpose of sharing such gains with the Company’s consumers.

The Company also has the right to request an extraordinary review of tariffs, in the event that any unforeseen development significantly alters the economic-financial equilibrium of the concession. The Periodic Review and the Extraordinary Review are subject, to a certain degree, to the discretion of Aneel, although there are pre-established rules for each cycle of revision. When the Company requests an annual tariff adjustment, it becomes necessary to prove the resulting financial impact of these events on operations.

 

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Under the distribution concession contracts, the Company is authorized to charge consumers a tariff consisting of two components: (i) One part relating to electricity purchased for resale, charges for use of the transmission grid and charges for use of the distribution system that are not under its control (‘Portion A costs’); and (ii) a portion relating to operating costs (‘Portion B costs’).

Renewal of concessions

On December 21, 2015 the Company signed, with the Mining and Energy Ministry, the Fifth Amendment to its concession contracts, extending its electricity distribution concessions for a further 30 years, as from January 1, 2016.    

The principal characteristics and terms of the Amendment are as follows:

 

  The annual tariff adjustment will take place on May 28 of each year, the first to be in 2016. For this first adjustment the rules specified in the previous concession contract will be applied. For the subsequent tariff adjustments the rules in Clause 6 of the Amendment will be applied.

 

  Limitation of distribution of dividends and/or payment of Interest on Equity to the minimum established by law, if there is non-compliance with the annual indicators for outages for two consecutive years, or for three in any five years, until the regulatory parameters are restored.

 

  Requirement for injections of capital from the controlling shareholder in an amount sufficient to meet the minimum conditions for economic and financial sustainability.

 

  Subject to the right to full defense and right of reply, for the concession to be maintained, compliance is required with efficiency criteria for continuity of supply and for economic and financial management, as follows: (i) for five years from January 1, 2016, any non-compliance for two consecutive years, or non-compliance with any of the conditions at the end of five years, will result in extinction of the concession; (ii) as from January 1, 2021, any non-compliance for three consecutive years with the criteria of efficiency in continuity of supply, or for two consecutive years with the criteria of efficiency in economic and financial management, will result in proceedings to establish expiration of the concession.

Distribution of gas concessions

The concessions for distribution of natural gas are given by Brazilian states, and in the state of Minas Gerais the tariffs for natural gas are set by the regulatory body, the State’s Economic Development Secretariat, by market segment. The tariffs comprise a portion for the cost of gas and a portion for the distribution of gas. Every quarter the tariffs are adjusted to pass through the cost of gas, and once a year they are adjusted to update the portion allocated to cover the costs relating to the provision of the distribution service – remuneration of invested capital and to cover all the operating, commercial and administrative expenses of the concession holder.

In addition to these adjustments, in April 2015 the Economic Development Secretariat sent Gasmig Official Letter SEDE/GAB/Nº303/2014 stating the timetable set for the first Tariff Review cycle. The decision process is still in progress; the latest estimated date for its completion is the beginning of the second half of 2017. These reviews occur every five years, to evaluate the changes in the costs of the Company, and to adapt the tariffs. The Concession Contract also specifies the possibility of an extraordinary review of tariffs if any event occurs that puts the economic-financial balance of the Concession at risk.

On December 26, 2014 the Second Amendment to the Concession Contract was signed by Gasmig and the Minas Gerais State Government, extending by 30 years the period of concession in which Gasmig may commercially operate the services of industrial, commercial, institutional and residential piped gas in the state of Minas Gerais. The expiration date of the contract is thus now extended from January 10, 2023 to January 10, 2053.

 

 

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Concessions payable

In obtaining the concessions for construction of certain generation projects, the Company undertook to make payments to Aneel, over the period of the contract, as compensation for the commercial operation. The information on the concessions and the amounts to be paid is as follows:

 

Enterprise

   Percentage
interest
     Nominal
value in
2016
     Present
value
in 2016
     Amortization period      Updating
indexor
 

Irapé

     100.00        35        14        03/2006 to 02/2035        IGP-M  

Queimado (Consortium)

     82.50        9        4        01/2004 to 12/2032        IGP-M  

Salto Morais Small Hydro Plant

     100.00        —          —          06/2013 – 07/2020        IPCA  

Rio de Pedras Small Hydro Plant

     100.00        1        1        06/2013 – 09/2024        IPCA  

Various Small Hydro Plants (*)

     100.00        4        3        06/2013 – 08/2025        IPCA  

 

(*) Luiz Dias, Poço Fundo, São Bernardo and Xicão.

The concessions to be paid to the concession-granting power provide for monthly portions with different values over time. For the purposes of accounting and recognition of costs, due to the understanding that they represent an Intangible Asset related to the right of commercial operation, they are recorded as from the date of signature of the contracts at the present value of the payment obligation.

The portions paid to the Concession-granting power in 2016, the present value and the nominal value of the portions to be paid in the forthcoming period of 12 months, are as follows:

 

Enterprise

   Percentage
interest
     Amounts
paid in
2016
     Present
value of
amounts
to be
paid in
12
months
     Nominal
value of
amounts
to be
paid in
12
months
 

Irapé

     100.00        2        2        2  

Queimado (Consortium)

     82.50        1        —          1  

 

(*) Luiz Dias, Poço Fundo, São Bernardo and Xicão.

The rates used for discounting of liabilities to present value, of 12.50% for the small hydro plants and 5.10% for the conventional hydroelectric plants, are the average rates for raising of funds in normal conditions on the date of registration of each concession.

 

5. OPERATING SEGMENTS

The operating segments of Cemig reflect the structure of the regulatory framework for the Brazilian electricity sector, with different legislation for the sectors of generation, transmission and distribution of electricity. The Company also operates in gas, telecommunications, and other businesses, which have a smaller impact on the results from its operations.

These segments are reflected in the Company’s management, organizational structure, and monitoring of results. In accordance with the regulatory framework of the Brazilian electricity sector, there is no segmentation by geographical area.

 

 

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These tables show the operating revenues, costs and expenses for 2016, 2015 and 2014 in consolidated form:

 

OPERATING SEGMENTS, 2016

 
     ELECTRICITY     TELECOMS     GAS     OTHER (*)     ELIMINATIONS     TOTAL  
   GENERATION     TRANSMISSION     DISTRIBUTION            

ASSETS OF THE SEGMENT

     14.414       4.267       18.166       338       2.737       2.389       (276     42.035  

ADDITIONS TO THE SEGMENT

     916       —         1.602       163       56       —         —         2.737  

ADDITIONS TO FINANCIAL ASSETS

     2.217       54       —         —         —         —         —         2.271  

INVESTMENTS IN SUBSIDIARIES AND JOINTLY-CONTROLLED ENTITIES

     5.292       1.670       1.754       18       —         19       —         8.753  

NET REVENUE

     5.875       1.113       10.597       125       1.181       116       (234     18.773  

COST OF ELECTRICITY AND GAS

     —         —         —         —         —         —         —         —    

Electricity bought for resale

     (3.071     —         (5.260     —         —         —         59       (8.272

Charges for use of the national grid

     (321     —         (760