CIG

Business Context and Reporting Period

Company: Energy Company of Minas Gerais (CEMIG)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Consolidated results for the nine months ended September 30, 2004, compared to the same period in 2003.
Business Overview: CEMIG is the leading electric energy concessionaire in Brazil, operating in generation, transmission, and distribution. The company is partially owned by the State of Minas Gerais (24.1% total ownership).

Key Financial Metrics (Jan–Sep 2004 vs. 2003)

Debt Profile: Approximately 59% of debt matures within the next two years. The company aims to maintain indebtedness at roughly 40% of capitalization.

Material Changes and Drivers

• Revenue Growth: Gross electricity supply revenues increased 20.5% to R$ 6,348 million, driven by a 4.8% increase in sales volume and tariff adjustments (average 14.00% effective May 2004, following an initial 19.13% adjustment).
• Industrial Demand: Industrial consumption grew over 8% year-over-year, contributing significantly to the 5%+ sales growth in Q3.
• Expense Increases: Operating expenses rose 18.2%. Key drivers included:
  • Personnel expenses up 27.9% (salary adjustments, profit-sharing, and voluntary retirement provisions).
  • Transmission network use charges up 60.9% due to regulatory tariff adjustments.
  • Gas purchased for resale up 71.4% due to an 88.5% volume increase.
  • Retirement benefits expense up 122.2%.
• Financial Performance: Net financial expenses improved significantly (from R$ 501 million to R$ 149 million) due to higher income from financial applications, monetary restatement on state receivables, and a reduction in exchange rate losses compared to 2003.
• Tax Rate: Effective tax rate increased to 42.8% in 2004 from 37.1% in 2003, partly due to non-deductible provisions for CRC losses.

Guidance, Outlook, and Strategic Initiatives

• Management Outlook: Management expects a "very good result" for the full year 2004 based on strong Q3 performance and revenue growth.
• Debt Management Strategy: The company is actively rolling over short-term debt to lengthen the maturity profile and reduce foreign currency exposure.
  • R$ 1.331 billion targeted for debt rollover in 2004; over R$ 800 million raised through September.
  • Secured a R$ 1.5 billion loan package from five institutions with an average 4-year maturity.
  • Plans to issue R$ 1.5 billion in debentures and establish a US$ 500 million Medium-Term Notes program.
• Corporate Unbundling: CEMIG is restructuring into a holding company with two subsidiaries: Cemig Geração e Transmissão S/A (Generation/Transmission) and Cemig Distribuição S/A (Distribution). ANEEL approval is pending formalization.
• Investment Program: Installed capacity increased to 5,894 MW with new plants (Pai Joaquim, Barreiro, Queimado). Total investment for 2004 is projected at R$ 1,081 million (constant currency).
• Sustainability: Selected for the Dow Jones Sustainability Index for the fifth consecutive year.

Investor Verification Checklist

• Regulatory Risks: Verify the status of the administrative suit against ANEEL regarding the 19.13% vs. 14.00% tariff adjustment and the final approval of the corporate unbundling structure.
• Debt Maturity: Confirm the execution of the R$ 1.5 billion loan package and the success of the 2004 debt rollover to mitigate the concentration of debt maturing in the next two years.
• Cost Pressures: Monitor the trajectory of personnel costs and transmission charges, which are rising faster than revenue in certain categories.
• State Receivables: Assess the collectability of the R$ 1,087 million receivable from the State of Minas Gerais Government, which represents a significant portion of long-term assets.
• Gas Business: Review the progress of the Gasmig association agreement and the legislative vote on the sale of 40% of Gasmig shares.