Business Context and Reporting Period
Company: Energy Company of Minas Gerais (CEMIG)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Nine months ended September 30, 2003 (Interim)
Submission Date: November 17, 2003
Business Overview: CEMIG is a Brazilian electric power concessionaire controlled by the Government of the State of Minas Gerais. Its principal activities include the generation, transmission, distribution, and sale of electric energy. The company also holds significant interests in natural gas distribution (GASMIG) and telecommunications (Infovias).
Key Financial Metrics
All figures in thousands of Brazilian Reais (R$) unless otherwise noted.
| Metric | Nine Months Ended Sept 30, 2003 | Nine Months Ended Sept 30, 2002 |
|---|---|---|
| Net Operating Revenues | 4,056,162 | 3,820,671 |
| Net Income (Loss) | 813,163 | (1,150,905) |
| Operating Cash Flow | 586,746 | 642,376 |
| Total Assets | 14,690,854 | 14,489,861 (June 30, 2003) |
| Total Liabilities | 8,168,429 | 8,245,101 (June 30, 2003) |
| Shareholders' Equity | 6,494,159 | 6,216,459 (June 30, 2003) |
| Current Ratio | 0.73 | 0.62 (Sept 30, 2002) |
| Debt to Equity | 125.78% | 150.82% (Sept 30, 2002) |
Material Changes vs. Prior Period
- Profitability Turnaround: The company reported a net income of R$813.2 million in 2003, a significant reversal from a net loss of R$1.15 billion in the same period of 2002. The 2002 loss was heavily impacted by a R$1.05 billion provision for losses on receivables from the State Government and foreign exchange losses.
- Revenue Growth: Electricity sales increased 18.85% to R$5.27 billion, driven by rate increases (10.51% in April 2002 and 31.53% in April 2003) and a 0.61% volume increase.
- Financial Income: Net financial income improved dramatically due to the appreciation of the Brazilian Real against the U.S. Dollar (17.26% appreciation in 2003 vs. 67.85% devaluation in 2002), resulting in net exchange gains of R$315.7 million.
- Expense Reduction: Electricity purchased for resale decreased 28.75% to R$1.04 billion, primarily due to lower spot market (MAE) transaction costs compared to the rationing period in 2002. Employee post-retirement benefit expenses dropped 78.11%.
- Provisions: Operating provisions increased 377.71% to R$133.9 million, largely due to a new provision for losses on the realization of the special rate adjustment (R$32.2 million) and increased allowances for doubtful accounts (R$66.2 million).
Guidance, Outlook, Risks, and Contingencies
- Corporate Reorganization: CEMIG is required to unbundle its generation, transmission, and distribution operations into separate subsidiaries. The deadline was extended to September 2002, but the process remains incomplete pending State Legislature approval. ANEEL fined the company R$6.0 million in November 2002 for non-compliance; management believes it has a meritorious defense.
- Wholesale Energy Market (MAE) Litigation: Significant assets and liabilities related to MAE transactions are subject to change based on ongoing litigation regarding market rule interpretations. An injunction granted to CEMIG in December 2002 altered the calculation of rights and obligations, but the final methodology is still under legal discussion.
- State Government Receivables: The company holds significant receivables from the Minas Gerais State Government (R$874.1 million noncurrent). While a portion is fully provisioned, management is negotiating collection of overdue amounts and believes the guarantee of retaining dividends to the State Government secures the remaining credit.
- Debt Covenants: CEMIG has not complied with certain financial covenants in two financing contracts totaling R$340 million. However, the company has obtained waivers from creditors preventing immediate acceleration of debt.
- Legal Contingencies: The company maintains a reserve for contingencies of R$371.9 million for labor claims, civil lawsuits, and tax disputes. Management believes losses in excess of these provisions will not be material.
Investor Verification Checklist
- MAE Settlement Outcome: Verify the final resolution of the litigation regarding Wholesale Energy Market (MAE) transaction calculations, as this could materially alter recorded assets and liabilities.
- State Government Receivables: Monitor the collection status of overdue receivables from the Minas Gerais State Government and the effectiveness of the dividend retention guarantee.
- Unbundling Progress: Track the legislative approval status for the corporate reorganization (unbundling) to assess potential regulatory penalties or operational restructuring costs.
- Debt Covenant Compliance: Confirm that the waivers obtained for debt covenant non-compliance remain in effect and that the company returns to full compliance in upcoming quarters.
- Special Rate Adjustment Recovery: Review the realization of the special rate adjustment assets, as management has recorded provisions for potential losses on these recoveries.