CIG

Business Context and Reporting Period

Company: Companhia Energetica de Minas Gerais (CEMIG)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2001
Business Overview: CEMIG is a state-controlled mixed-capital company and the largest concessionaire for electric power generation, transmission, and distribution in the state of Minas Gerais, Brazil. It operates 40 hydroelectric plants, three thermoelectric plants, and one wind farm with a total installed capacity of 5,675 MW. The company serves approximately 5.4 million customers, supplying about 84% of the electricity consumed in Minas Gerais.

Key Financial Metrics (Year Ended Dec 31, 2001)

Note: Financial data is presented in Brazilian Reais (R$). The exchange rate used for convenience in the filing was R$2.3120 to US$1.00 as of December 31, 2001.

Material Changes vs. Prior Period

• Revenue Increase: Total net operating revenues increased 33.3% to R$5,006 million, primarily driven by a R$789 million "regulatory extraordinary rate adjustment" recorded to reimburse revenue losses from the 2001 government-mandated electricity rationing plan.
• Operating Loss: The company swung from an operating income of R$440 million in 2000 to an operating loss of R$593 million in 2001. This was caused by a 68.9% increase in operating costs.
• Significant Provisions: Operating costs included a R$754 million provision for loss on an account receivable from the Minas Gerais State Government (CRC Account) and a R$150 million provision for loss on deferred regulatory assets.
• Net Loss: Net income turned into a net loss of R$719 million, compared to a profit of R$366 million in 2000.
• Debt Increase: Total indebtedness increased to R$2,328 million (net of escrow) from R$1,605 million in 2000, due to new long-term financing to fund capital expenditures and settle spot market obligations.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

Management expects the Federal Government to modify the regulatory framework, potentially eliminating the requirement to "unbundle" (separate) generation, transmission, and distribution operations. The company plans capital expenditures of approximately R$825 million in 2003, funded by cash flow from operations and financings. A 10.51% rate increase was approved in April 2002 to offset exchange rate devaluation impacts.

Key Risks and Contingencies

• State Government Receivable: The State Government has not made payments on the CRC Account since 2001. A R$754 million provision was recorded for future installments due to uncertainty of collection. The company is permitted to offset dividends owed to the State against past-due amounts.
• Electricity Rationing: The 2001 rationing plan reduced sales volumes. While a regulatory agreement allows for rate increases to recover losses over 72 months, there is no assurance full recovery will occur.
• Exchange Rate Volatility: The Brazilian Real has experienced significant devaluation against the U.S. dollar (from R$2.31 in Dec 2001 to R$3.42 in March 2003). Approximately 54% of the company's debt is foreign currency-denominated, creating exposure to exchange losses.
• Unbundling Delays: The company missed the deadline to separate its operations into distinct subsidiaries and was fined R$5.5 million by the regulator (ANEEL) in November 2002. The company has appealed the fine.
• Insurance Lapse: Insurance policies covering fire and equipment failure expired on December 31, 2001. The company is currently soliciting bids for new policies and lacks coverage for major catastrophes or business interruption.
• Customer Concentration: Industrial customers account for approximately 60% of total volume sold. The loss of large customers (e.g., ALCOA becoming a self-power producer) poses a risk.

Investor Verification Checklist

• CRC Account Collectibility: Verify the status of negotiations with the Minas Gerais State Government regarding the R$1.2 billion receivable and the likelihood of future payments or successful set-offs against dividends.
• Regulatory Rate Recovery: Confirm the actual collection rates of the "extraordinary rate adjustment" intended to recover 2001 rationing losses and whether the R$150 million provision for deferred regulatory assets remains adequate.
• Foreign Exchange Exposure: Assess the impact of continued Real devaluation on the R$1.335 billion of foreign currency-denominated debt and the resulting financial expenses.
• Unbundling Status: Monitor legislative progress in Minas Gerais regarding the unbundling of operations and the potential for further regulatory fines or penalties.
• Insurance Coverage: Confirm the execution of new insurance policies to cover fire, equipment failure, and third-party liability risks following the expiration of coverage in late 2001.
• Capital Expenditure Funding: Evaluate the company's ability to fund its R$3.3 billion capital plan (2002-2005) given the net loss in 2001 and reliance on external financing.