CEMIG 2020 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing. Financial statements are consolidated, prepared under IFRS as issued by the IASB, and reported principally in Brazilian reais (R$ millions unless noted). 2019 and 2018 comparatives were retrospectively restated for an accounting-policy change affecting transmission concession assets.
Business context
Companhia Energética de Minas Gerais (CEMIG) is a Minas Gerais state-controlled utility group. Its businesses include electricity generation, transmission, distribution and trading, natural-gas distribution, and energy solutions. Hydroelectric assets accounted for 98.1% of its installed generation capacity. Its electricity distribution concession covers most of Minas Gerais.
Key financial metrics
| Metric | 2020 | 2019, restated | Change |
|---|---|---|---|
| Net revenue | R$25,228m | R$25,486m | -1.0% |
| Operating costs and expenses | R$21,432m | R$22,474m | -4.6% |
| Income before finance and taxes | R$4,706m | R$3,210m | +46.6% |
| Net finance expense | R$906m | Net finance income R$1,360m | Shift to expense |
| Income before tax | R$3,800m | R$4,570m | -16.8% |
| Net income attributable to CEMIG shareholders | R$2,864m | R$3,194m | -10.3% |
| Operating cash flow | R$8,607m | R$2,036m | Increased |
| Cash and cash equivalents at year-end | R$1,680m | R$536m | Increased |
| Loans, financing and debentures | R$15,020m | R$14,777m | +1.6% |
Gross profit was R$5,383m (about 21.3% of revenue); income before finance and taxes was about 18.7% of revenue, and net income attributable to shareholders was about 11.4%. Current assets were R$15,456m and current liabilities R$9,690m, giving a current ratio of about 1.60. Cash plus current marketable securities totaled R$5,040m. Investing cash flow was negative R$5,076m and financing cash flow negative R$2,387m; cash increased R$1,144m during the year.
Debt included R$7,825m denominated in foreign currencies, primarily U.S. dollars, and R$7,195m in reais. Approximately R$4,076m of debt was due within three years. The filing reports compliance with financial covenants except for non-financial covenant non-compliance at two wind subsidiaries, for which R$2m was reclassified to current liabilities. The company reported R$17,478m of total equity.
Material changes versus 2019
- Revenue declined modestly as final-customer energy sales fell 4.3%; energy sales to final customers by volume fell 6.7%, reflecting the pandemic’s impact, especially on industrial and commercial demand.
- Operating costs and expenses declined 4.6%, largely because 2019 included higher provisions and impairment. Energy purchased for resale rose 7.3%, while gas purchase expense fell 24.6%.
- Income before finance and taxes increased, but the result was offset by a swing from net finance income to net finance expense. The real’s depreciation contributed to higher foreign-exchange expense on foreign-currency debt; hedge gains partly offset the effect.
- Operating cash flow increased sharply, supported by R$1,404m received through the Covid-account, R$1,383m from released tax-related escrow deposits, and lower tax cash payments following use of tax credits.
- Capital expenditure was R$1,599m, versus R$1,303m in 2019, with most investment directed to distribution. CEMIG acquired full ownership of transmission subsidiary Centroeste and invested in distributed solar generation through CEMIG SIM.
- The 2020 tariff adjustment for CEMIG D was ultimately recalculated to have no average customer impact after a R$714m negative tariff component was approved. A 2020 transmission tariff review generated R$502m of periodic tariff review revenue.
Outlook, commentary, risks and unusual items
- Outlook and investment: Management planned approximately R$2,347m of 2021 capital investment, principally for distribution expansion, and R$196m of capital injections into subsidiaries. CEMIG expects to fund investment mainly from operating cash flow and, to a lesser extent, financing. These are plans, not guarantees.
- COVID-19: Management cited lower energy demand, collection pressure and reduced industrial and commercial gas volumes, alongside increased residential consumption. It restrained 2020 capital spending by about R$349m, reduced other planned expenses by about R$164m, deferred distributions and negotiated customer and supplier arrangements. Management said significant long-term effects were not expected, but the pandemic’s duration and future financial impact remained uncertain.
- Currency and debt: The real depreciated about 29% against the U.S. dollar in 2020, increasing foreign-currency debt expense. Eurobond hedges protect interest payments, but principal protection is capped at R$5.00 per U.S. dollar through December 2024; a higher exchange rate at maturity could leave residual exposure.
- Hydrology and regulation: Generation depends heavily on rainfall. Law 14,052/2020 provides compensation for certain hydrological-risk costs through concession extensions, but extension calculations were awaiting regulatory ratification. The company also cited tariff-setting discretion, concession renewal, energy-market liquidity and regulatory changes as risks.
- Contingencies and collections: Provisions for probable legal losses totaled R$1,892m. Customer, trader and power-transport receivables past due were approximately R$1,510m, or 5.99% of 2020 net revenue; the doubtful-account allowance was R$712m. Separately, possible-loss claims included substantial tax, regulatory and other matters; their outcomes are uncertain.
- Investments and divestments: Renova was in court-supervised reorganization; CEMIG’s equity investment was reduced to zero and R$688m of related receivables had been fully impaired. CEMIG sold its remaining Light shares in January 2021 for R$1,372m; the transaction was subsequent to year-end. A possible Taesa divestment was under evaluation, not a completed sale.
- Accounting and controls: The company retrospectively changed its accounting policy for transmission concession contract assets, affecting comparative statements. The financial-statement audit opinion was unqualified, but management and the auditor concluded internal control over financial reporting was ineffective due to a material weakness in business and financial-reporting controls and IT general controls. Disclosure controls were also deemed ineffective.
- Other unusual items: The filing reports a ransomware-related anomaly detected on December 25, 2020; CEMIG said critical industrial-control systems and main databases were not affected and no data was exfiltrated. Anti-corruption investigations involving the company or investees remained a risk. The 2020 statements also included R$502m of periodic tariff review adjustments and R$51m of gains from a business combination and remeasurement.
- Shareholder distributions: The 2020 allocation included R$553m of interest on equity and R$929m of proposed dividends, payable in 2021 subject to the stated approvals and terms. The filing also notes covenant and regulatory constraints on subsidiary distributions.
Most important facts for investors to verify
- Reconcile the year’s reported earnings and cash generation to audited financial-statement notes, particularly the foreign-exchange and hedge effects, tax-credit recovery and Covid-account support.
- Review the debt maturity profile, foreign-exchange exposure beyond the hedge cap, covenant headroom, and the wind subsidiaries’ covenant non-compliance.
- Track customer arrears, the R$712m allowance, and the collectability and tariff treatment of tax credits and customer reimbursements.
- Confirm ANEEL’s final approval and accounting treatment of hydrological-risk concession extensions and transmission tariff-review amounts.
- Assess remediation of the material weakness in internal controls and whether the control deficiencies affect future reporting reliability or timeliness.
- Monitor the R$1,892m probable-loss provisions, material possible-loss claims, anti-corruption inquiries, and Renova’s restructuring and impaired exposures.
- Confirm execution and proceeds of the January 2021 Light sale, planned 2021 investment, and the status of any potential Taesa divestment.