CIG

Business Context and Reporting Period

This Form 6-K filing by Energy Company of Minas Gerais (CEMIG) covers material announcements and financial results for the fourth quarter and full year ended December 31, 2019. The report was filed on May 14, 2020. CEMIG operates in the Brazilian energy sector through its distribution subsidiary (Cemig D), generation and transmission subsidiary (Cemig GT), and various affiliates including Taesa (transmission) and Renova (wind energy).

Key Financial Metrics

Segment Performance (4Q 2019):

• Cemig D (Distribution): Net profit of R$ 393 million (up from R$ 189 million in 4Q18).
• Cemig GT (Generation/Transmission): Net profit of R$ 43 million (down from R$ 586 million in 4Q18).

Material Changes vs. Prior Period

• Net Profit Decline in 4Q19: Consolidated net profit dropped 50.4% year-over-year to R$ 498 million. This was primarily driven by Cemig GT, which saw a significant reduction in profit due to non-recurring items.
• Non-Recurring Expenses (Cemig GT): Three specific items impacted 4Q19 results:
  • R$ 71.8 million write-off for the deactivation of the Igarapé thermal plant.
  • R$ 32.1 million obligation under an investment contract with Aliança.
  • R$ 21.7 million impairment at the Volta do Rio wind farm.
• Financial Results: Net financial expenses were R$ 213 million in 4Q19, compared to net financial revenue of R$ 669 million in 4Q18. The prior year included a R$ 570 million gain on hedge transactions related to Eurobonds, which did not recur in 4Q19.
• Revenue Growth: Despite the profit decline, net revenue increased 16.8% in 4Q19, driven by tariff adjustments and higher sales to commercial users.
• Debt Levels: Total consolidated debt remained stable at approximately R$ 14.8 billion, with net debt increasing slightly by 3.2% to R$ 13.5 billion.

Guidance, Outlook, and Material Announcements

Renova Wind Complex Transaction:

• On March 16, 2020, Renova Energia S.A. (in judicial recovery) received a binding offer from Castlelake L.P. and partners for the acquisition of Phase A of the Alto Sertão III Wind Complex.
• On March 20, 2020, Renova accepted a binding offer from ARC Capital, G5, and XP Vista for financing to complete Phase A works and fund operational expenses. Renova granted a 30-day exclusivity period for document negotiation.

Taesa Capex Revision:

• Taesa (CEMIG affiliate) revised its 2019 nominal Capex downward to R$ 314 million (23.4% below the minimum projection) due to project delays (Janaúba, Mariana, Sant'Ana) and savings (Miracema).
• 2020 Capex projections were increased to R$ 1.04 billion - R$ 1.13 billion to account for investments deferred from 2019.

Operational Outlook:

• Default Rates: The default rate at the end of 2019 was 5.10%, a 10% improvement over 2018, attributed to robust collection efforts and disconnection plans.
• Consumer Base: The number of billed clients grew 1.5% to 8.54 million in December 2019.

Risks and Contingencies:

• Forward-looking statements are subject to risks including hydrological conditions, Brazilian economic scenarios, and regulatory changes.
• Renova remains in judicial recovery, creating uncertainty regarding its capital structure resolution.

Investor Verification Checklist

• Renova Transaction Status: Verify the finalization of the binding offer for the Alto Sertão III Wind Complex and the impact on CEMIG's equity method accounting for Renova.
• Non-Recurring Items: Confirm the classification and tax implications of the R$ 125.6 million in non-recurring expenses (Igarapé write-off, Aliança obligation, Volta do Rio impairment) in Cemig GT.
• Financial Hedging: Review the exposure to foreign exchange fluctuations given the significant swing in financial results from hedge gains in 2018 to losses in 2019.
• Capex Execution: Monitor Taesa's ability to execute the revised 2020 Capex plan following the 2019 delays.
• Debt Covenants: Verify compliance with Eurobond covenants, specifically the Net Debt to Covenant EBITDA ratio (reported at 2.98x vs. 3.50x limit).