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: Three months ended March 31, 2008
Filing Date: May 27, 2008
Operational Context: CEMIG operates as a holding company with primary subsidiaries including CEMIG Distribuição S.A. (distribution), CEMIG Geração e Transmissão S.A. (generation and transmission), and significant interests in transmission companies and Light S.A. (via Rio Minas Energia). The company serves approximately 97% of the state of Minas Gerais.

Key Financial Metrics (Consolidated)

Note: All figures are in thousands of Brazilian Reais (R$). Net profit per share was R$ 1.01 for Q1 2008.

Material Changes vs. Prior Period

• Profit Growth: Net profit increased by 20.57% year-over-year, driven by a 19.67% increase in net operational revenue.
• Revenue Drivers: Gross revenue from electricity supply rose 17.81% due to tariff adjustments (average 5.16% increase effective April 2007), a 5.73% increase in energy volume invoiced, and higher wholesale prices due to supply scarcity (average wholesale tariff increased 84.69% to R$ 109.02/MWh).
• Cost Increases: Operational costs rose 16.09%. Key drivers included a 20.84% increase in electricity purchased for resale (passed through to tariffs) and a 18.77% increase in personnel expenses (due to a 5% salary adjustment and a new voluntary dismissal program).
• Financial Expenses: Net financial expenses increased to R$ 79.112 million (from R$ 66.906 million), primarily due to foreign exchange losses on Yen-denominated debt (Yen appreciated 10.78%) and lower revenue from monetary updating of regulatory assets.
• Regulatory Changes: The Extraordinary Tariff Recomposition (RTE) period expired in February 2008. Recovery of "Portion A" credits began in March 2008.

Guidance, Outlook, and Risks

• Tariff Review: ANEEL published the results of the second periodic tariff review for CEMIG Distribuição on April 7, 2008. This resulted in an average reduction of 12.24% in consumer bills effective April 8, 2008. Residential consumers saw a 17.11% reduction, while high-voltage consumers saw an 8.02% reduction.
• Capital Increase: On April 25, 2008, the General Meeting approved a capital increase of R$ 49,201,000 via capitalization of reserves, issuing a 2.02% bonus of new shares.
• Acquisitions: CEMIG (via subsidiary EATE) initiated the acquisition of 80% interests in LUMITRANS and STC for a total of R$ 77,155,000, pending regulatory approvals.
• Legal Contingencies: The company maintains provisions of R$ 712,274,000 for legal proceedings deemed "probable" to result in loss. Significant contingencies include tax disputes (PIS/Cofins base widening), labor claims, and regulatory proceedings with ANEEL regarding low-income consumer subsidies.
• Accounting Law Transition: The filing notes the implementation of Law 11,638/07 (effective Jan 1, 2008), which aligns Brazilian accounting with IFRS. The company is currently in a transition phase and has not fully adopted all new valuation criteria (e.g., present value adjustments) pending further CVM regulation.

Investor Verification Checklist

• Tariff Impact: Verify the long-term impact of the 12.24% tariff reduction approved by ANEEL on future revenue streams for the distribution subsidiary.
• Regulatory Asset Realization: Confirm the recoverability of the R$ 1.1 billion in "Extraordinary Tariff Recomposition" and "Portion A" assets, noting the expiration of the RTE period and ongoing litigation regarding free energy transactions.
• Foreign Exchange Exposure: Assess the impact of currency fluctuations, specifically the Yen appreciation, on financial expenses and the effectiveness of existing swap hedging strategies.
• Legal Provisions: Review the status of the R$ 162 million provision for PIS/Cofins tax disputes and the R$ 105 million provision for tariff increase civil actions.
• Debt Covenants: Monitor compliance with bylaws requiring consolidated debt to remain below 2x EBITDA and the debt-to-equity ratio below 40%.