CIG

Business Context and Reporting Period

This Form 6-K filing by Companhia Energética de Minas Gerais (CEMIG) covers the first quarter of 2009 (ended March 31, 2009). CEMIG is a Brazilian holding company operating in electricity generation, transmission, and distribution, with significant state ownership (State of Minas Gerais holds 51% of common shares). The period was characterized by the global economic recession, which impacted industrial electricity demand, and the finalization of a regulatory tariff review for its distribution subsidiary.

Key Financial Metrics (1Q09 vs. 1Q08)

Material Changes and Drivers

• Tariff Review Impact: The primary driver for the decline in reported EBITDA and Net Income was the final homologation by the regulator (Aneel) of the second tariff review for Cemig Distribuição. This resulted in a non-recurring negative adjustment of approximately R$ 127 million to net income and R$ 193 million to EBITDA, reflecting a final tariff reduction of 19.62% (vs. a provisional 18.09%).
• Operational Volume: Total electricity sold increased by 4% to 14,552 GWh. However, sales to final consumers dropped 1.6% due to an 8.3% decline in industrial consumption caused by the economic recession. This was offset by a 447% increase in sales on the wholesale Electricity Trading Chamber (CCEE) and a 1.3% increase in supply to other concession holders.
• Cost Management: Operational costs decreased 6.3% year-over-year. Notable reductions included post-employment obligations (-45%) and depreciation (-15%). Personnel expenses increased 4.8% due to a 7.26% salary adjustment implemented in late 2008.
• Financial Results: Net financial expenses improved significantly, dropping 52% to R$ 38 million, driven by higher revenue from cash investments and a reversal of provisions for losses on "free energy" assets.

Guidance, Outlook, and Risks

• Strategic Plan: Management reaffirmed adherence to its Long-term Strategic Plan, maintaining capital expenditure and dividend policies despite the global economic downturn. The company highlighted its diversified portfolio and financial discipline as key strengths.
• Acquisitions: CEMIG successfully concluded two major acquisitions in the prior period and announced a subsequent event: the acquisition of 65.86% of Terna Participações S.A. (a transmission holding) for R$ 2.33 billion in April 2009.
• Voluntary Dismissal Program: A temporary Voluntary Dismissal Program (PDV) was launched in April 2009 to optimize costs. The company expects annual savings exceeding R$ 100 million after 2010.
• Risks:
  • Regulatory: Risks related to the non-renewal of concessions or imposition of additional costs ("concessions for consideration").
  • Financial: Exposure to foreign exchange rates (USD, Euro, Yen) and interest rate fluctuations (CDI/Selic), though hedging strategies are in place.
  • Operational: Energy scarcity risk due to hydroelectric dependence and potential rainfall shortages.
  • Legal: Significant contingencies exist regarding tax disputes (ICMS, PIS/Cofins) and labor laws, with total provisions for probable losses totaling R$ 691 million.

Investor Verification Checklist

• Tariff Review Finality: Verify the full impact of the Aneel tariff review adjustments on future cash flows and the timeline for the new tariff rates (effective April 2009).
• Debt Covenants: Confirm compliance with restrictive covenants on loans and financings, particularly regarding Debt/EBITDA ratios, given the economic environment.
• State Government Receivables: Review the status of the R$ 1.77 billion receivable from the State of Minas Gerais (CRC Account) and the mechanism for its amortization via dividend retention.
• Legal Contingencies: Assess the potential impact of the R$ 691 million in provisions for legal proceedings, specifically tax disputes and the "Cruzado Plan" tariff litigation.
• Acquisition Integration: Monitor the closing and integration of the Terna Participações acquisition and its impact on the consolidated balance sheet.