Business context and reporting period
Companhia Energética de Minas Gerais (CEMIG) is a state-controlled Brazilian utility engaged in electricity generation, transmission and distribution, as well as natural-gas distribution and related services. This Form 20-F reports the fiscal year ended December 31, 2019, with comparisons to 2018 and 2017. Financial statements are audited and prepared under IFRS as issued by the IASB, in Brazilian reais (R$). Amounts below are in R$ millions unless noted. The filing was signed May 22, 2020; CEMIG said it relied on SEC COVID-19 relief to delay filing because pandemic-related disruptions hindered its annual review and preparation.
Financial and operating highlights
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net operating revenue | 25,390 | 22,266 | +14.0% |
| Income before finance income (expenses) and taxes | 3,109 | 2,496 | +24.6% |
| Income before income taxes | 4,469 | 1,978 | +126.9% |
| Net income from continuing operations | 2,904 | 1,379 | +110.6% |
| Net income, including discontinued operations | 3,128 | 1,742 | +79.6% |
| Net cash from operating activities | 2,036 | 1,008 | +102.0% |
| Cash and cash equivalents at year-end | 536 | 891 | −39.8% |
| Loans, financing and debentures | 14,777 | 14,772 | +0.03% |
Gross profit was R$5,792 million, or approximately 22.8% of net revenue; income before finance and taxes was approximately 12.2% of revenue. Net income including discontinued operations was approximately 12.3% of revenue. These ratios are calculated from reported figures; the filing does not present them as reported margins.
Operating costs and expenses rose 15.8% to R$22,479 million. Energy purchased for resale cost R$11,286 million; operating provisions and adjustments for operating losses were R$2,401 million, versus R$466 million in 2018. Net finance income was R$1,360 million, compared with net finance expense of R$518 million in 2018. The filing attributes the improvement principally to recognition of PIS/Pasep and Cofins tax credits related to ICMS and gains on hedging transactions, partly offset by other financing costs.
Cash flow used in investing activities was R$1,188 million, including Gasmig’s R$891 million concession grant-fee payment. Cash flow used in financing activities was R$1,203 million, including R$4,883 million of debt repayments, R$4,477 million of new financing, R$96 million of lease principal payments and R$701 million of dividends and interest on equity paid.
At year-end, current loans, financing and debentures were R$2,747 million and non-current debt was R$12,030 million. R$6,110 million of debt was U.S.-dollar denominated. CEMIG reported R$536 million of cash and cash equivalents and R$753 million of current marketable securities. Current assets were R$10,138 million and current liabilities R$7,913 million; current assets included R$1,258 million of assets held for sale. The filing reports total assets of R$49,926 million and equity of R$15,891 million.
Material changes versus prior periods
- Revenue rose 14.0%, led by final-customer energy sales, which increased 9.9% to R$24,052 million. Average tariffs increased, while billed final-customer energy volume was nearly flat. Industrial energy sales fell 9.4%; commercial sales rose 14.2%.
- Net income increased substantially, with higher operating income and a swing to net finance income. Comparisons include significant tax-credit and financial-valuation effects, so reported earnings growth should not be viewed as solely recurring operating improvement.
- Light’s July 2019 share offering reduced CEMIG’s interest from 49.99% to 22.58%; CEMIG lost control, stopped consolidating Light, and classified its remaining interest as held for sale. Discontinued operations contributed R$224 million to 2019 net income.
- CEMIG adopted IFRS 16 using the modified retrospective method. At January 1, 2019, it recognized R$342 million of right-of-use assets and lease liabilities; prior periods were not restated, limiting comparability.
- The company reported energy-distribution losses of 13.57% of energy injected, above ANEEL’s 2019 regulatory target of 11.49% and up from 12.82% in December 2018.
Outlook, management commentary, risks and unusual items
CEMIG’s 2020 fixed-asset capital-investment plan was approximately R$2,042 million, principally for distribution, plus R$295 million planned for capital injections into subsidiaries. In response to COVID-19 and liquidity concerns, management planned to defer R$266 million, or 13%, of the fixed-asset program to 2021. Funding was expected mainly from operating cash flow and, to a lesser extent, financing. The filing provides no formal earnings guidance.
Management reported an 18.3% decline in Brazilian interconnected-grid energy demand from the second half of March 2020 and an approximately 11% reduction in CEMIG D’s captive-customer market measured through early May. It warned of lower energy revenue, increased expected credit losses, liquidity pressure and uncertainty about the duration and effects of the downturn. For the first quarter of 2020, the company reported a R$438 million net loss on derivative fair-value changes and an estimated R$609 million negative remeasurement effect on its Light interest. Management said the pandemic’s full financial impact was not yet reliably estimable and expected any liquidity effect to be temporary, while acknowledging uncertainty.
Notable items include R$6,070 million of recognized PIS/Pasep and Cofins credits over ICMS, alongside a R$3,038 million liability for customer refunds; the company also reported R$1,428 million of operating revenue and R$1,580 million of finance income related to these credits and their updating. CEMIG recorded a full R$688 million impairment of receivables from Renova, which entered court-supervised reorganization; its investment in Renova had already been reduced to zero. The filing reports R$1,888 million of provisions for probable legal losses. Generation-concession renewals, hydrology and spot-market exposure, regulatory tariff decisions, customer arrears, foreign-exchange movements and debt covenant compliance remain material risks.
Auditors issued an unqualified opinion on the consolidated financial statements. However, management and EY concluded that internal control over financial reporting was ineffective at December 31, 2019 because of a material weakness involving identification, design and execution of relevant controls over business and financial-reporting processes. Management described remediation work underway, including external consulting support, restructuring and additional accounting staff.
Most important facts for investors to verify
- How much 2019 earnings and cash flow depended on the ICMS-related tax credits, hedge valuation gains, asset-sale classification and other non-recurring or timing-related items.
- The timing and collectability of the R$3,038 million customer-refund liability and the final treatment of the related tax credits by ANEEL and tax authorities.
- Debt maturities, access to refinancing, financial covenants and the R$178 million CEF covenant-related balance classified as current; management said payment was not expected but resources were available if required.
- COVID-19 effects on energy demand, collections, expected credit losses, liquidity and the planned R$266 million capital-spending deferral, including whether sector support measures were implemented and sufficient.
- Progress on internal-control remediation, and developments in Renova’s reorganization, pending investigations, litigation provisions and concession-related disputes.