Business Context and Reporting Period
Company: Energy Company of Minas Gerais (CEMIG)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Six months ended June 30, 2004 (Interim)
Submission Date: August 24, 2004
Business Overview: CEMIG is a publicly traded electric power utility concessionaire controlled by the Government of the State of Minas Gerais, Brazil. Its principal activities include the production, transformation, transmission, distribution, and sale of electric energy, as well as natural gas distribution and telecommunications services through subsidiaries.
Key Financial Metrics (Consolidated)
All figures in thousands of Brazilian reais (R$) unless otherwise noted.
| Metric | Six Months Ended June 30, 2004 |
Six Months Ended June 30, 2003 |
|---|---|---|
| Net Operating Revenues | 3,395,672 | 2,543,515 |
| Net Income | 556,813 | 535,463 |
| Earnings Per Share (per 1,000 shares) | R$ 3.44 | R$ 3.30 |
| Cash Provided by Operating Activities | 618,078 | 556,553 |
| Total Assets (June 30, 2004) | 15,900,050 | 15,507,972 (Mar 31, 2004) |
| Total Liabilities (June 30, 2004) | 10,957,672 | 10,625,784 (Mar 31, 2004) |
| Shareholders' Equity (June 30, 2004) | 6,915,382 | 6,854,992 (Mar 31, 2004) |
| Current Ratio | 0.80 | 0.67 (June 30, 2003) |
Material Changes vs. Prior Period
- Revenue Growth: Electricity gross sales increased 23.32% to R$4.12 billion, driven by a 31.53% rate increase effective April 2003 and a 19.13% (later reduced to 14%) rate increase effective April 2004, alongside a 4.50% volume increase.
- Operating Expenses: Increased 20.39% to R$2.54 billion. Key drivers included a 33.77% rise in personnel expenses (due to salary adjustments and a voluntary termination program), a 125% increase in post-retirement benefit expenses, and an 85.79% increase in gas purchased for resale.
- Financial Results: Net financial results shifted from a net revenue of R$431 million in 2003 to a net expense of R$198 million in 2004. This was primarily due to net exchange losses of R$123 million (vs. gains in 2003) caused by the devaluation of the Brazilian real against the U.S. dollar, and higher interest costs on loans.
- Deferred Rate Adjustment: A regulatory asset of R$299.8 million was recorded in 2004 to compensate for the difference between the rate adjustment applied in 2003 and the higher rate CEMIG was entitled to apply.
Guidance, Outlook, Risks, and Contingencies
- Regulatory Disputes: CEMIG has filed a regulatory procedure against ANEEL to maintain the originally issued 19.13% rate adjustment, arguing the reduced 14% rate is insufficient for financial equilibrium. The company is currently applying the reduced rate pending resolution.
- Legal Contingencies: Significant reserves (R$415.4 million) exist for civil lawsuits (consumer refunds), labor claims, and tax disputes. Notable litigation includes challenges to the "Special Rate Adjustment" methodology and disputes over the "Emergency Capacity Charge."
- State Government Receivables: A receivable of R$1.02 billion from the Minas Gerais State Government (CRC Account) is partially overdue. While a full allowance was recorded for a portion of this debt in 2002, a guarantee allows CEMIG to retain dividends due to the State to settle these credits.
- Corporate Reorganization: CEMIG is in the process of unbundling its generation, transmission, and distribution operations into separate subsidiaries to comply with Brazilian law, with a deadline of 18 months from March 2004.
- Debt Issuance: A program for the issuance of non-convertible debentures totaling R$400 million was authorized, with subscription expected in August 2004.
Investor Verification Checklist
- Regulatory Rate Resolution: Verify the outcome of the regulatory procedure against ANEEL regarding the 19.13% vs. 14% rate adjustment, as this directly impacts future revenue streams.
- State Government Debt Recovery: Monitor the status of negotiations regarding the R$1.02 billion receivable from the Minas Gerais State Government and the effectiveness of the dividend retention guarantee.
- Exchange Rate Exposure: Assess the impact of continued Brazilian real devaluation on the company's significant foreign currency-denominated debt (approx. R$1.7 billion).
- Unbundling Progress: Track the timeline and costs associated with the mandatory unbundling of generation, transmission, and distribution assets.
- Legal Provisions: Review updates on major litigation, specifically consumer lawsuits regarding historical rate adjustments and the "Emergency Capacity Charge."