UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
| ☐ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
or
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20152020
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
or
| ☐ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report: N/A
Commission file number 1-15224
COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG
(Exact name of Registrant as specified in its charter)
ENERGY CO OF MINAS GERAIS
(Translation of Registrant’s name into English)
BRAZIL
(Jurisdiction of incorporation or organization)
1200, Avenida Barbacena, 1200,Barbacena; Belo Horizonte, M.G.,Horizonte/MG, Brazil CEP 30190-131
(Address of principal executive offices)
Leonardo George de Magalhães
Chief Officer for Finance and Investor Relations
ri@cemig.com.br – +55 (31) 3506-5024
1200, Avenida Barbacena; Belo Horizonte/MG, Brazil CEP 30190-131
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class: | Trading Symbol (s) | Name of exchange on which registered: |
| Preferred Shares, R$5.00 par value | CIG | New York Stock Exchange* |
| American Depositary Shares, each | ||
| representing 1 Preferred Share, without par value | New York Stock Exchange | |
| Common Shares, R$5.00 par value | CIG.C | New York Stock Exchange* |
| American Depositary Shares, each | ||
| representing 1 Common Share, without par value | New York Stock Exchange |
*Not for trading but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.
Securities registered or to be registered pursuant to Section 12(g) of the Act:None
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:None
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stockshare as of the close of the period covered by the annual report:
420,764,708566,036,634 Common Shares
838,076,9461,127,325,434 Preferred Shares
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x☒ No ¨☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ☐¨No x☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes x☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ¨☒ No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | Accelerated | Non accelerated filer | Emerging growth company ☐ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards* provided pursuant to Section 13(a) of the Exchange Act. ☐
* The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| U.S. GAAP | International Financial Reporting Standards as issued by the International Accounting Standards Board | ☒ | Other |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 ☐ ¨Item 18 ¨☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes ¨☐ No x☒
EXPLANATORY NOTE
The filing of this annual report on Form 20-F for the year 2015 was delayed because we required additional time to complete disclosures related to the ongoing internal investigation of Norte Energia S.A. (‘NESA’), the owner of the concession for the construction and operation of Belo Monte Hydroelectric Plant, on Xingu River, State of Pará, Brazil. Cemig indirectly holds a 12.5% interest in NESA through its ownership of Aliança Norte and Amazonia Energia.
In March 2014, while conducting an investigation involving a local gas station/carwash in the city of Brasília (Federal District, Brazil), the Brazilian Federal Police and Public Prosecutors uncovered evidence of a much larger corruption and bribery scheme involving Brazil’s state owned oil company, Petrobras. As a result, a federal investigation, calledOperação Lava Jato (‘Operation Carwash’), was initiated and is being conducted by Federal Prosecutors and the Federal Police under the supervision of a Federal Judge. Over the course of the investigation into Operation Carwash, a number of companies and individuals have entered into cooperation agreements with the Brazilian Federal Prosecutor’s Office (Ministério Público Federal, or MPF), whereby suspects choose to collaborate with the authorities in exchange for a lighther sentence. Some of these cooperation agreements contained allegations involving the Belo Monte Hydroelectric Plant, on Xingu River in State of Pará. No criminal charges have been brought against Cemig as part of Operation Carwash.
In response to the allegations, Centrais Elétricas Brasileiras S.A. – Eletrobras (‘Eletrobras’), which owns 49.98% of the share capital of NESA, hired an international investigation team to search for irregularities in projects in which it is a shareholder, including NESA (the ‘Independent Investigation’). The Independent Investigation team has completed the investigation designed to identify misstatements to Eletrobras’ consolidated financial statements, which included an analysis of NESA. The Independent Investigation team is still in the process of performing some procedures, focusing on internal compliance matters. There are also ongoing investigations and other legal measures being conducted by the MPF involving other shareholders of NESA and some of their executives. Based on our current knowledge, Cemig does not expect these additional procedures provide any additional relevant information that would materially impact its consolidated financial statements in future periods.
The investigation concluded that certain contracts with some contractors and suppliers of the Belo Monte Hydroelectric Plant project included bribes estimated at 1% of the price of the contract plus some other fixed amounts.
Based on the conclusions and results identified by the independent internal investigation, the management of NESA has evaluated the impact on the financial statements according to International Accounting Standard IAS-16—Property, Plant and Equipment, and concluded that the amount of R$ 183 million is attributable to overpricing due to bribes deemed to be of an illicit nature and should not have been capitalized as part of the cost of its property, plant and equipment considering that such amount is not a cost attributable to operating and maintaining the plant.
NESA is not able to identify an accurate manner to estimate the periods of prior Financial Statements in which excessive capitalized costs may have occurred, because of the fact that the information made available by the independent internal investigation does not individually specify the contracts, payments and the periods of disclosure in which such excesses may have occurred. It is also emphasized that the alleged undue payments were not made by NESA, but by contractors and suppliers of Belo Monte Power Plant, and this factor also prevents identification of the exact amounts and periods of the payments.
Hence, NESA has applied the procedure specified in IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors, adjusting the estimated amounts of excessive capitalized costs in the amount of R$183 million, related to illegal payments in the Financial Statements as of December 31, 2015, due to the impracticability of identification of the adjustments for each prior period affected.
As a consequence of the adjustment recorded by NESA, Cemig recorded in the year ended December 31, 2015, as part of its equity method accounting in NESA, the amount of R$23 million on account line Investment in counterpart to the equity in its Statement of Income. Of this total amount, R$21 million was made by Cemig GT and R$2 million was made by Light S.A., according to IAS-8—Accounting Policies, Changes in Accounting Estimates and Errors.
The following sections of this annual report contain disclosures related to the NESA investigation:
Under its code of ethics, the Company does not tolerate corruption or other any illegal business practices of its employees, contractors or suppliers.
The investigations under Operation Carwash are still ongoing and the MPF may take a considerable amount of time to conclude its procedures. Therefore, new relevant information may be disclosed in the future, which could cause NESA and, therefore, Cemig, to recognize additional adjustments in its financial statements. The Company will continue to monitor the results of the investigations and the availability of other information concerning the allegations and will make appropriate disclosures if warranted.
RECENT DEVELOPMENTS
Payments to debenture holders
On February 15, 2016 Cemig made payments of interest on the first, second and third Series of the 3rd Issue of Debentures by Cemig D and Cemig GT, in the amounts of R$162 million and R$139 million, respectively.
Issue of Bank Credit Note
On March 22, 2016 Cemig D issued a Bank Credit Note in favor of Caixa Econômica Federal, in the amount of R$695 million, to be used for the payment of interest and principal on existing debt, represented by Bank Credit Notes issued in favour of both Banco do Brasil and Caixa Econômica Federal, as well as the 8th issuance of Promissory Notes of the Company due in the first half of 2016. The interest rate is 132.14% of the CDI rate, p.a., with maturity of 48 months, grace period of 18 months for payment of the principal, payment of interest in a quarterly basis during this period, and amortization over 30 months, with monthly payments in installments of principal and interest. Caixa Econômica Federal disbursed the funds over the months of March 2016 through May 2016. Of this total, R$355 million was released in March 2016, R$300 million in April 2016 and R$40 million in May 2016.
Issue of debentures
On March 28, 2016 Cemig D completed its fourth issue of non-convertible debentures, in the amount of R$1,615 million, in a single series, with an issue date of December 15, 2015 and a maturity of 3 years. The interest rate on the debentures is the CDI rate + 4.05% p.a.; withprincipal to be amortized in two equal installments due in December 2017 and December 2018. The proceeds were used for payment of the Company’s eighth issue of promissory notes, which matured on March 26, 2016.
Exchange of Shareholders’ Debentures owned by AGC Energia for shares in Cemig
On March 3, 2016, BNDES Participações (‘BNDESPar’) exchanged 100% of its holding of debentures issued under the Deed of the First Private Issue by AGC Energia of Non-convertible Permanent Asset-guaranteed Exchangeable Shareholders’ Debentures, in a Single Series, dated February 28, 2011 and amended January 17, 2012, for 54,342,992 common shares and 16,718,797 preferred shares in Cemig, owned by AGC Energia.
After the exchange, the equity interests held by BNDESPar in Cemig — which on March 2, 2016 totaled 0% of the common shares ,1.13% of the preferred shares and .75% in the total capital of Cemig,— increased to 12.9% ,3.13% and 6.4% respectively. This characterizes a material transaction in the stock of Cemig in the terms of Article 12, §1º, of CVM Instruction 358/02.
Increase in capital of Renova Energia S.A.
Cemig increased its capital in Renova through its wholly-owned subsidiary Cemig GT in the amount of R$240 million. Of this total, R$85 million was subscribed and paid up in February 2016, R$115 million was subscribed and paid up in March 2016 and the remaining amount of R$40 million was subscribed and paid up in May 2016.
Investment in Renova – Loss on impairment of assets available for sale
Put options contract
On September 18, 2015 a contract was signed providing Renova the option to sell to SunEdison, Inc. (‘SunEdison’), on or after March 31, 2016, up to 7,000,000 shares in TerraForm Global.
The exercise price of this option was contractually established at R$50.48 or US$15.00 at the exchange rate of the day, at the election of SunEdison. The contract also gaveSunEdison an option to buy 7 million shares on the same terms.
Renova notified SunEdison and TerraForm Global of its intention to exercise its option to sell 7 million shares in TerraForm Global owned by Renova, on the terms specified by contract and publicly stated in the Material Announcement published by Renova on September 18, 2015.
On April 21, 2016, SunEdison applied for Chapter 11 protection in the United States. On June 1, 2016, the period for payment of the option by SunEdison expired.
Renova priced the option using the Black-Scholes-Merton mathematical model, the future expectation for the exchange rate, and the credit risk.
In the first half of 2016 Renova recognized a loss of R$111 million, resulting in the change in the fair value of the option, considering the credit risk. In addition, it recognized a loss of R$63 million relating to the expiration of the option, and commenced an arbitration proceeding seeking, among other items, indemnity for losses. At the date of issuance of this report, Sun Edison and Renova had not settled this arbitration.
The figures above refer to the impact of the option expiration on Renova’s interim financial statements. The effect for Cemig is proportional to its interest of 34.2%, in Renova, valued by the equity method, in the amount of R$60 million.
Investment in TerraForm Global – pricing of the shares
Renova also recognized a loss, in the first half of 2016, of R$272 million, reflecting the negative volatility in the share price of TerraForm in the period, in which Renova has an equity interest of 11.65%, valued on the basis of the market price of the shares.
The figures above refer to the impact on Renova’s interim financial statements. The effect on Cemig is proportional to its interest of 34.2%, in Renova, valued by the equity method, in the amount of R$93 million.
Rescission of share purchase agreement
On April 1, 2016 Renova announced that the share purchase agreement dated July 15, 2015 for the sale to TerraForm Global of the assets of the Espra Project (‘the Espra Contract”) owned by Renova had been terminated by an agreement between the parties, with payment by TerraForm Global to Renova of a break-up fee of US$10.0 million. As a result of the termination of this agreement, the assets of the Espra project, comprising three small hydroelectric plants (SHPs), with aggregate installed capacity of 41.8 MW, remain in as part of Renova’s portfolio of operational assets.
Issue of Bank Credit Note – Banco do Brasil
On April 22, 2016 Cemig D signed amendments to two Bank Credit Notes issued in favor of Banco do Brasil, for a total of R$600 million. The interest rate is 128.00% of the CDI rate, p.a., and the funds will be paid in four six-monthly installments commencing in October 2016 with final repayment and maturity due in April 2018.
Mining and Energy Ministry Ministerial Order 120
On April 22, 2016 the Mining and Energy Ministry published its Ministerial Order 120, setting the deadline and method of payment of the remaining amount of the transmission indemnity related to the acceptance of the terms established by Federal Law No. 12,783/13.
The Ministerial Order determined that the amounts approved by Aneel should become part of the Regulatory Asset Base for Remuneration (Base de Remuneração Regulatória, or BRR), that is the basis for the payment of transmission revenue, and that the cost of capital should be added to the related Permitted Annual Revenues (‘RAP’).
The amount will be indexed to the Expanded Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo, or IPCA). The capital cost remuneration and the depreciation of the Regulatory Asset Base not incorporated since 2013, the date of the extensions of the concessions up to the tariff-setting process of 2017, is to be adjusted by the real cost of capital of the transmission segment, as set by Aneel in the methodologies of the Periodic Tariff Review of the Revenues of Existing Concessions – currently 10.44% p.a. – to be paid over a period of eight years, through the RAP.
The Ministerial Order will be submitted to Public Hearings to be held by Aneel scheduled for the second half of 2016 and the first half of 2017.
The Company made its estimate and recognized, in its June 2016 Statement of Income, the amount of R$548 million, as follows:
Aneel decides annual tariff adjustment of Cemig D
On May 24, 2016, Aneel announced the Annual Tariff Adjustment to be applied to the tariffs of Cemig D. The result was an average increase in consumer electricity rates by 3.78%, in effect on May 28, 2016, through May 27, 2017.
For industrial and service sector consumers, served at medium and high voltage, the average increase in their electricity bills will be 2.06%. For those served at low voltage, the average increase will be 4.63%.
Changes in the Stockholders’ Agreement of Parati
In the second quarter of 2016, certain amendments were signed to the stockholders’ agreement of Parati. The principal changes arising from these amendments are as follows:
| 3 |
Miranda Plant: Aneel recommends against acceptance of Cemig GT’s application to extend concession
On June 10, 2016, Cemig’s wholly-owned subsidiary Cemig GT filed an application with Aneel for a 20 year extension of its concession period for the Miranda hydroelectricPlant (‘the Miranda Plant’), which is scheduled to expire in December 2016. On July 12, 2016, Aneel, accepting the vote of its rapporteur, decided to refer the application “to the Mining and Energy Ministry, with the recommendation that the application made by Cemig GT for extension of the period of the concession for the Miranda Hydroelectric Plant should not begranted, due to having been made after the deadline stipulated by Law 12,783/2013”.
The Company is considering any possible administrative or legal measures, and will keep its shareholders and the market updated on any material developments.
Issues of Promissory Notes
On July 1, 2016 Cemig GT concluded its seventh issuance of Commercial Promissory Notes, for a total of R$620 million. The net proceeds will be used to pay the second portion of the concession grant fee for the hydroelectric plants in Lot D of Aneel Auction 12/2015, and to improvethe Company’s working capital. The Promissory Notes have a maturity of 360 days, and mature on June 26, 2017, and pay interest equal to 128% of the average one-day ‘DI’ rate, the daily interbank deposit rate, to be paid on the maturity date. This issuance is guaranteed by Cemig.
Disposal by Cemig of shares in Taesa
On August 31, 2016, the Board of Directors of Cemig authorized the sale of up to 40,702,230 Units in Transmissora Aliança de Energia Elétrica S.A (‘Taesa’), consisting of 40,702,230 common shares and 81,404,460 preferred shares in Taesa, owned by Cemig.
On September 29, 2016, Taesa publically announced the launch of a restricted offering (“Restricted Offering”) of its units. In the offering, each unit will be evidenced bycertificados de depósito de ações, each of which represents one outstandingação ordinária(common share) and two outstandingações preferenciais (preferred shares) of Cemig (the “Units”). The Units were offered and sold by Fundo de Investimento em Participações Coliseu (“FIP Coliseu”), the equity investment fund that is part of the controlling block of Taesa, and Cemig.
The Restricted Offering was a secondary offering, with restricted placement efforts of 65,702,230 Units, at a price per Unit of R$19.65. The total amount of the Restricted Offering was R$1,291 million, of which R$800 million was received by Cemig.The settlement of the Restricted Offering occurred on October 24, 2016.
The Restricted Offering of the Units of Taesa has not been registered under the Securities Act, or any other U.S. federal and state securities laws (the “Securities Act”), and the Units cannot be offered, sold, pledged or otherwise transferred in the United States or to U.S. investors, unless they are registered, or exempt from, or not subject to, registration under the Securities Act.
Because this was a secondary offering with restricted placement efforts Taesa did not receive any proceeds. The Selling Shareholders were the beneficiaries of the net proceeds arising from the sale of Units and are responsible for the payment of all costs and fees of the Restricted Offering.
With the settlement of the Restricted Offering, FIP Coliseu holds 153,775,790 common shares issued by Taesa, representing 26.03% of the voting capital of Taesa and 14.88% of the capital stock of Taesa and CEMIG holds 252,369,999 common shares issued by Taesa, representing 42.72% of the voting capital of Taesa and 73,646,184 preferred shares issued by Taesa, which, together with the common shares represents 31.54% of the capital stock of Taesa. The outstanding Units (other than Units held by FIP Coliseu, CEMIG, Taesa’s management and treasury shares) represents 53,58% of Taesa’s capital stock and 31.24% of Taesa’s voting stock.
Promissory Notes Payment
On March 28, 2016, Cemig D paid off its 8th issuance of Promissory Notes. The amount of R$1.958 billion was paid to the holders of the notes, R$1.7 billion of principal and R$258 million of interest.
Cemig Telecom signs investment agreement for subscription of capital in Ativas
On August 25, 2016, Cemig Telecom signed an Investment Agreement with Sonda Procwork Outsourcing Informática Ltda., a company of the Chilean group Sonda S.A. (‘Sonda’), for the subscription of capital in Ativas Data Center S.A. (‘Ativas’), in partnership with Ativas Participações S.A. (‘Ativas Participações’), a company controlled by the Asamar Group.
Sonda is a leading company providing IT services in Latin America, with a presence in 10 countries, and 17,000 employees. This strategic alliance strengthens the commitment of Cemig and Ativas to its present and future clients, continuing to ensure high standards of security and availability.
On October 19, 2016 the transaction was completed in compliance with certain conditions precedent.
Sonda, has subscribed capital totaling R$ 114 million, and now holds an equity interest of 60% in Ativas, while Cemig Telecom holds 19.6% and Ativas Participações holds 20.4%.
Notice of intention to exercise put option
On September 6, 2016 Cemig received from Banco BTG Pactual (‘BTG Pactual’) a Notice of Intention to Exercise a Put Option, giving irrevocable notice of exercise of BTG Pactual’s right to sell to Cemig 153,634,195 preferred shares held by Pactual in Parati S.A. – Participações em Ativos de Energia Elétrica (‘Parati’), under the ‘First Exercise Window’ specified in Clauses 6.1 and 6.2 of the Stockholders’ Agreement of the Parati, signed on April 11, 2011 between Cemig, Banco Santander (Brasil) S.A., BV Financeira S.A. – Crédito, Financiamento e Investimento, BB – Banco de Investimento S.A., and Banco BTG Pactual S.A., with Parati as consenting party, as amended. Cemig has until November 30 to settle the put option and acquire the shares or indicate a third party which will do so.
Sale of interest in Transchile
On September 12, 2016, Cemig signed a share purchase agreement for sale of the whole of its interest in Transchile Charrúa Transmisión S.A. – corresponding to 49% of the company’s share capital – to Ferrovial Transco Chile SpA, a company controlled by Ferrovial S.A., for US$56.6 million. On October 6, 2016, all of the shares in Transchile Charrúa Transmisión S.A. previously held by Cemig, were transferred to Ferrovial Transco Chile SpA, concluding the sale.
Advances to Renova under Power Purchase Agreement
On September 6, 2016, our Board of Directors approved an advance payment of R$118 million by Cemig to Renova for future contracted electricity supply under the Power Purchase Agreement between Renova Comercializadora de Energia S.A. and Cemig GT, which was signed in 2013.
The agreement provides for the parties to elect to make advance payments for power. The advance payments will be allocated to the Alto Sertão III project, and also to meet other needs of Renova. The amount due will be settled by delivery of power supply, in the amounts specified in such agreement, starting in May 2021.
In June 2016 Cemig GT made an advance payment to Renova Trading of R$94 million under the Agreement, and at that time signed an agreement placing a security interest on 100% of the shares in Enerbrás S.A. and 100% of the shares in the specific-purpose companies of Phase B of the Alto Sertão III Project on behalf of Cemig GT to guarantee the advance payment. An option was also granted to Cemig GT to purchase 100% of the shares of Enerbrás S.A.
A Share Purchase Agreement has been signed which will enable Cemig GT to convert the total amount advanced into a shareholding interest in Alto Sertão Participações S.A. (“Alto Sertão”), the controlling shareholder of the companies that comprise Phase A of the Alto Sertão III project; up to a limit of 49.9% of the shares in Alto Sertão, and also an agreement placing a security interest upon 100% of the shares in Bahia Holding S.A. and 49% of the shares in Ventos de São Cristóvão Energias Renováveis S.A., which holds certain of Renova’s wind power projects. Exercise of the call option is conditional upon prior approval by the BNDES. Settlement of the share option transactions referred to above will require the prior approval of BNDES, Banco do Brasil S.A. – where applicable, Aneel, and the Brazilian Monopolies Authority (CADE).
Payment of loans
On October 21, 2016 Cemig Distribuição S.A. repaid to Banco do Brasil S.A. two Commercial Credit Notes (including their amendments) with final maturities in April 2018, paying the principal amount of R$ 600 million, plus interest, calculated up to the date of settlement, of R$ 25 milliom. The payment was made from the Company’s own funds.
Statutory Covenants
The Company’s by-laws define certain targets related to indebtedness and capital expenditures that shall be attend by the Management. However, in the ordinary Shareholders Meeting held on May 30, 2016, the Management was authorized to exceed such targets for 2016 year, as follows:
| By-laws Targets | Exceeding authorized in the Ordinary Shareholders Meeting | |||||||
Indebtedness / Ebitda | 2.00 | 4.12 | ||||||
Net debt / Net debt + Shareholders’ equity | 40.00% | 52.00% | ||||||
Capital Expenditures / Ebitda | 40.00% | 146.00% | ||||||
Payment of dividends below the mandatory minimum
On April 29, 2016, the Annual and Extraordinary General Meetings of Cemig approved the payment of R$ 634 million as dividends, relating to the net profit for the 2015 business year, an amount below the minimum obligatory dividend.
Refinanciang of Banco do Brasil credits
On October 24, 2016, Cemig GT paid to Banco do Brasil S.A. the installments of two Fixed Credit Contracts, in the amount of R$286 million, and Bank Credit Notes in the amount of R$430 million, totaling R$716 million. The payments were made with funds from a new lending transaction, also with Banco do Brasil S.A., and with the Company’s own funds.
On October 24, 2016, Cemig GT issued a Bank Credit Note in favor of Banco do Brasil S.A., in the total amount of R$600 million, in order to refinance certain notes previously extended by Banco do Brasil. This loan has an annual interest rate of 132.90% of the CDI rate, and will be paid in four half-yearly installments, with the last payment to be made in October 2018.
Review of compliance and corporate governance system
Cemig has undertaken a number of initiatives to booster its compliance and corporate governance system, including revising its code of ethics in light of the Brazilian Anticorruption Law (Law no. 12.846/2013), the new Brazilian Public Companies Law (Law no. 13.303/2016), creating a Compliance Superintendence and providing anticorruption and fraud training to all of its employees.
Criminal proceedings involving members of our Board of Directors
On January 5, 2016, Mr. José Afonso Bicalho Beltrão da Silva, the Chair of the Company’s Board of Directors, was convicted in the Federal Court (1st Federal Circuit) for reckless management in connection with the granting of irregular loans when he was the CEO of the Banco do Estado de Minas Gerais, between 1995 and 1998. As a result of this conviction, Mr. Da Silva was prohibited from holding executive or management positions at financial institutions in Brazil for a period of eight years. Immediately thereafter, Mr. Da Silva appealed to the Court of Appeals of the 1st Federal Circuit, on the grounds that the ruling judge did not have the necessary authority to hear the case, as Mr. Da Silva is currently a Secretary of State and, therefore, the case should have been heard and trialed by the Minas Gerais State Court of Appeals, and not by a Federal Court. The appeal is currently pending.
On October 1, 2015, Mr. Mauro Borges Lemos, the former Minister of Development and current CEO and vice-chair of the Company’s Board of Directors, and on September 23, 2016, Mr. Marco Antônio de Rezende Teixeira, the Secretary of State in Minas Gerais (Secretário da Casa Civil de MinasGerais) and a member of the Company’s Board of Directors, were subjected to search and seizure and coercive hearing orders carried out by the Federal Police in connection withOperação Acrônimo (‘Operation Acronym’). Operation Acronym began in October 7, 2014 when a private plane landed in Brasília/DF with three passengers (Benedito Rodrigues de Oliveira Neto, Marcier Trombiere Moreira and Pedro Medeiros) and the authorities found an undeclared amount of R$116,000 in cash belonging to the owner of the aircraft, Benedito Rodrigues de Oliveira Neto. The companies owned by Benedito Rodrigues de Oliveira Neto had provided services to certain Brazilian political parties during the 2014 Presidential Elections, therefore, the Federal Police started to investigate a money laundering scheme involving the funding of political campaigns by Brazilian companies, including those who have received loans from the Brazilian National Development Bank (Banco Nacional de Desenvolvimento Econômico e Social, or BNDES). The reasons for the search and seizure orders are still unclear, as the investigation records are sealed by the Superior Court of Justice (Superior Tribunal de Justiça, or STJ). Operation Acronym still ongoing and as of the date of this annual report no arrest warrants have been issued against Mr. Lemos or Mr. Teixeira.
PRESENTATION OF FINANCIAL INFORMATION
The Companhia Energética de Minas Gerais–Gerais – CEMIG isa state-controlled mixed capital company (‘sociedade por ações, de economia mistamista’ (a state-controlled mixed capital company)) organized under the laws of the Federative Republic of Brazil, or Brazil. References in this annual report to “CEMIG,” “we,” “us,” “our”‘CEMIG’, “ourselves”the ‘CEMIG Group’, the ‘Company’, ‘we’, ‘us’, ‘our’ and the “Company”‘ourselves’ are to Companhia Energética de Minas Gerais–Gerais – CEMIG and its consolidated subsidiaries, except when the reference is specificallyand references to ‘CEMIG Holding’ are to Companhia Energética de Minas Gerais–Gerais – CEMIG (parent company only) or on an individual basis, except when the context otherwise requires. References to the “real,” “reais”‘Real,’ ‘Reais’ or “R$”‘R$’ are to Brazilian reaisReais (plural) and the Brazilian realReal (singular), the official currency of Brazil, and referencesBrazil. References to “U.S. dollars,” “dollars”‘U.S. dollars’, ‘dollars’ or “US$”‘US$’ are to United States dollars.
We maintain our books and records in reais.Reais. We prepare our statutory financial statements in accordance with generally accepted accounting practices adopted in Brazil, and with International Financial Reporting Standards (or “IFRS”)(IFRS), as issued by the International Accounting Standards Board (IASB). For purposes of this annual report, we prepared the consolidated statements of financial position as of December 31, 2015 and 2014 and the related consolidated statements of income and comprehensive income, cash flows and changes in shareholders’ equity for the years ended December 31, 2015, 2014 and 2013, in reais in accordance with IFRS, as issued by the IASB.
Deloitte Touche Tohmatsu Auditores Independentes audited our Our consolidated financial statements as of December 31, 2015 and 2014 and for the years ended December 31, 2015, 20142019 and 2013; Deloitte Touche Tohmatsu2018 and the opening balance as of January 1, 2019 have been restated to reflect the change in accounting policy disclosed in note 2.8 of our annual consolidated financial statements.
Ernst & Young Auditores Independentes did not auditS.S. (‘EY’) audited the consolidated statement of financial position of Companhia Energética de Minas Gerais – CEMIG as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2020. The consolidated balance sheets of Madeira Energia S.A. as of December 31, 2020 and 2019, and the related consolidated statement of operations, of comprehensive (loss) income, of changes in equity and of cash flows for each of the three years in the period ended December 31, 2020 were audited by PricewaterhouseCoopers Auditores Independentes (‘PWC’) whose report related to this financial statement has been presented to EY and are the sole base for the opinion of EY on the financial statements of Madeira Energia S.A (a 18.05% percent owned direct and indirectS.A., which is a significant investment of the Company accounted for under the equity method investee company) and Norte Energia S.A (a 12.50% percent owned indirect equity method investee company). The financial statements of Madeira Energia S.A. and Norte Energia S.A. were audited by PricewaterhouseCoopers Auditores Independentes, whose reports related to financial statements as of and for the years ended December 31, 2015 and 2014 and December 31, 2015, respectively have been furnished to Deloitte Touche Tohmatsu Auditores Independentes, and Deloitte Touche Tohmatsu Auditores Independentes opinion, insofar as it relates to the amounts included for Madeira Energia S.A. and Norte Energia S.A., is based solely on the reports of PricewaterhouseCoopers Auditores Independentes. The above mentioned auditors reports appear elsewhere in this annual report on Form 20-F.method.
This annual report contains translations of certainrealReal amounts into U.S. dollars at specified rates solely for the convenience of the reader. Unless otherwise indicated, such U.S. dollar amounts have been translated fromreaisReais at an exchange rate of R$3,18115.1935 to US$1.00, as certified for customs purposes by the U.S. Federal Reserve Board as of OctoberDecember 31, 2016.2020. See “Item 3. Key Information–Information – Exchange Rates” for additional information regarding exchange rates. We cannot guarantee that U.S. dollars can be converted into reais,Reais, or that reaisReais can be converted into U.S. dollars, at the above rate or at any other rate.
| 4 |
MARKET POSITION AND OTHER INFORMATION
The information contained in this annual report regarding our market position is, unless otherwise indicated, presented for the year ended December 31, 2015 and2020. It is based on, or derived from, reports issued by the Brazilian National Electric Energy Agency (Agência Nacional de Energia Elétrica (the Brazilian National Electric Energy Agency), or ANEEL,‘ANEEL’), and by the Brazilian Electric Power Trading Chamber (Câmara de Comercialização de Energia Elétrica (the Brazilian Electric Power Trading Chamber), or CCEE.‘CCEE’).
Certain terms are defined the first time they are used in this annual report. As used herein, all references to “GW”‘GW’ and “GWh”‘GWh’ are to gigawatts and gigawatt hours, respectively, references to “MW”‘MW’ and “MWh”‘MWh’ are to megawatts and megawatt-hours, respectively, and references to “kW”‘kW’ and “kWh”‘kWh’ are to kilowatts and kilowatt-hours, respectively.
References in this annual report to the “common shares”‘common shares’ and “preferred shares”‘preferred shares’ are to our common shares and preferred shares, respectively. References to “Preferred‘Preferred American Depositary Shares”Shares’ or “Preferred ADSs”‘Preferred ADSs’ are to American Depositary Shares, each representing one preferred share. References to “Common‘Common American Depositary Shares”Shares’ or “Common ADSs”‘Common ADSs’ are to American Depositary Shares, each representing one common share. Our Preferred ADSs and Common ADSs are referred to collectively as “ADSs,”‘ADSs,’ and our Preferred American Depositary Receipts, or Preferred ADRs, and Common American Depositary Receipts, or Common ADRs, are referred to collectively as “ADRs.”
On April 30, 2012, a 25.00% stock dividend was paid on the preferred shares and common shares. On May 11, 2012, a corresponding adjustment was made to the ADSs through the issuance of additional ADSs. On April 30 2013, a 12.85% stock dividend was paid on the preferred and common shares. On May 14, 2013, a corresponding adjustment was made to the ADSs through the issuance of additional ADSs. On January 3, 2014, a 30.76% stock dividend was paid on the preferred and common shares (in each case paid in preferred shares). On January 10, 2014, a corresponding adjustment was made to the ADSs through the issuance of additional Preferred ADSs to holders of Preferred ADSs and Common ADSs.‘ADRs.’
The Preferred ADSs are evidenced by Preferred ADRs, issued pursuant to a Second Amended and Restated Deposit Agreement, dated as of August 10, 2001, as amended on June 11, 2007, by and among us, Citibank N.A., as depositary, and the holders and beneficial owners of Preferred ADSs evidenced by Preferred ADRs issued thereunder (the “Second‘Second Amended and Restated Deposit Agreement”Agreement’). The Common ADSs are evidenced by Common ADRs, issued pursuant to a Deposit Agreement, dated as of June 12, 2007, by and among us, Citibank, N.A., as depositary, and the holders and beneficial owners of Common ADSs evidenced by Common ADRs issued thereunder (the “Common‘Common ADS Deposit Agreement”Agreement’ and, together with the Second Amended and Restated Deposit Agreement, the “Deposit Agreements”‘Deposit Agreements’).
| 5 |
FORWARD-LOOKING INFORMATION
This annual report includes certain forward-looking statements, principallymainly in “Item 3. Key Information,”Information”, “Item 5,4. Information on the Compay”, “Item 5. Operating and Financial Review and Prospects” and “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”Risk”. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting our business. These forward-looking statements are subject to risks, uncertainties and assumptions relating to, among other things:
The forward-looking statements referred to above also include information with respect to our capacity expansion projects that are under way and those that we are currently evaluating. In additionbut not limited to, the above risks and uncertainties, our potential expansion projects involve engineering, construction, regulatory and other significant risks, which may:following:
| · | General economic, political and business conditions, principally in Brazil, the State of Minas Gerais (‘Minas Gerais’), as well as other states in Brazil; |
| · | Inflation and fluctuations in exchange rates and in interest rates; |
| · | Increases in the costs of projects and delays or the failure to successfully complete projects; |
| · | Result in the failure of facilities to operate or generate income in accordance with our expectations; |
| · | Existing and future governmental regulation as to energy rates, energy usage, competition in our concession area and other matters; |
| · | Existing and future policies of the Federal Government of Brazil, which we refer to as the Federal Government; |
| · | On-going high-profile anticorruption investigations in Brazil; |
| · | Our expectations and estimates concerning future financial performance and financing plans; |
| · | Our level, or maturity profile, of indebtedness; |
| · | Our ability to comply with financial covenants; |
| · | The likelihood that we will receive payment in connection with accounts receivable; |
| · | Our capital expenditure plans; |
| · | Our ability to implement our divestment program; |
| · | Failure or hacking of our security and operational infrastructure or systems; |
| · | Our ability to renew our concessions, approvals and licenses on terms as favorable as those currently in effect or at all; |
| · | Our ability to integrate the operations of companies we have acquired and that we may acquire; |
| · | Changes in volumes and patterns of customer energy usage; |
| · | Competitive conditions in Brazil’s energy generation, transmission and distribution markets; |
| · | Trends in the energy generation, transmission and distribution industry in Brazil, particularly in Minas Gerais; |
| · | Changes in rainfall and the water levels in the reservoirs used to run our hydroelectric power generation facilities; |
| · | Existing and future policies of the government of Minas Gerais (the ‘State Government’), including policies affecting its investment in us and its plans for future expansion of energy generation, transmission and distribution in Minas Gerais; |
| · | Impacts of the Covid-19 global pandemic on our businesses and on our results of operations, financial condition and cash flows and our ability to timely and efficiently implement measures to address these impacts; and |
| · | Other risk factors identified in “Item 3. Key Information—Risk Factors”. |
The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect”‘believe,’ ‘may,’ ‘could,’ ‘will,’ ‘plan,’ ‘estimate,’ ‘continue,’ ‘anticipate,’ ‘seek,’ ‘intend,’ ‘expect’ and similar words are intended to identify forward-looking statements. We do not undertake to publicly update or revise any forward-looking statements because of new information, future events or otherwise. In light ofConsidering these risks and uncertainties, the forward-looking information, events and circumstances discussed in this annual report might not materialize as described. Our actual results and performance could differ substantially from those anticipated in our forward-looking statements.
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| Item 1. | Identity of Directors, Senior Management and Advisers |
Not applicable.
| Item 2. | Offer Statistics and Expected Timetable |
Not applicable.
| Item 3. | Key Information |
Selected Consolidated Financial Data
The following tables present our selected consolidated financial and operating information prepared in accordance with IFRS as of the dates and for each of the periods indicated. You should read the following information together with our consolidated financial statements, including the notes thereto, included in this annual report and the information set forth in “Item 5. Operating and Financial Review and Prospects” and “Presentation of Financial Information.”Information”.
The selected consolidated financial data as of December 31, 20152020 and 20142019 and for each of the years ended December 31, 2015, 20142020, 2019 and 2013,2018, prepared in accordance with IFRS, has been derived from our audited consolidated financial statements and the notes thereto included elsewhere in this annual report. U.S. dollar amounts in the table below are presented for your convenience. Unless indicated otherwise, these U.S. dollar amounts have been translated from reais at R$3.1811 per US$1.00, the exchange rate as of October 31, 2016. The real has historically experienced high volatility. We cannot guarantee that U.S. dollars can be converted into reais, or that reais can be converted into U.S. dollars, at the above rate or at any other rate. The selected consolidated financial data as of December 31, 2013, 20122018, 2017 and 20112016 and for each of the years ended December 31, 20122017 and 20112016 has been derived from our audited consolidated financial statements not included in this annual report on Form 20-F.
We20-F, which have not been restated our consolidated financial statements as of and forto reflect the year ended December 31, 2012 and 2011 as a result of the adoption, on January 1, 2013, of IFRS 11 (Joint Arrangements). We retroactively applied IFRS 11 to 2012 and 2011 for comparison purposes. The adoption of these newchange in accounting standards impacted several line items of our consolidated financial statements.
Selected Consolidated Financial Data in IFRSpolicy.
| Year ended December 31, | ||||||||||||||||||||||||
| 2015 | 2015 | 2014 | 2013 | 2012(4) | 2011(4) | |||||||||||||||||||
| (in millions of US$)(1) | (in millions of R$ except per share/ADS data or otherwise indicated) | |||||||||||||||||||||||
Income Statement Data: | ||||||||||||||||||||||||
Net operating revenues: | ||||||||||||||||||||||||
Electricity sales to final consumers | 6,387 | 20,319 | 14,922 | 12,597 | 13,691 | 12,522 | ||||||||||||||||||
Revenue from wholesale supply to other concession holders | 694 | 2,208 | 2,310 | 2,144 | 1,689 | 1,504 | ||||||||||||||||||
Revenue from use of the electricity distribution systems (TUSD) | 461 | 1,465 | 855 | 1,008 | 1,809 | 1,771 | ||||||||||||||||||
CVA (compensation for changes in ‘Portion A’ items) account and Other financial components of tariffs | 536 | 1,704 | 1,107 | — | — | — | ||||||||||||||||||
Revenue from use of the concession transmission system | 82 | 261 | 557 | 404 | 662 | 612 | ||||||||||||||||||
Transmission indemnity revenue | 32 | 101 | 420 | 21 | 192 | — | ||||||||||||||||||
Construction revenues | 394 | 1,252 | 941 | 975 | 1,336 | 1,232 | ||||||||||||||||||
Transactions in electricity on the CCEE | 762 | 2,425 | 2,348 | 1,193 | 387 | 175 | ||||||||||||||||||
Other operating revenues | 976 | 3,106 | 1,706 | 1,047 | 506 | 362 | ||||||||||||||||||
Taxes on revenue and regulatory charges | (3,631 | ) | (11,549 | ) | (5,626 | ) | (4,762 | ) | (6,135 | ) | (5,785 | ) | ||||||||||||
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Total net operating revenues | 6,693 | 21,292 | 19,540 | 14,627 | 14,137 | 12,393 | ||||||||||||||||||
Operating costs and expenses: | ||||||||||||||||||||||||
Electricity purchased for resale | (3,000 | ) | (9,542 | ) | (7,428 | ) | (5,207 | ) | (4,683 | ) | (3,330 | ) | ||||||||||||
Charges for the use of the national grid | (314 | ) | (999 | ) | (744 | ) | (575 | ) | (883 | ) | (748 | ) | ||||||||||||
Depreciation and amortization | (262 | ) | (835 | ) | (801 | ) | (824 | ) | (763 | ) | (786 | ) | ||||||||||||
Personnel | (451 | ) | (1,435 | ) | (1,252 | ) | (1,284 | ) | (1,173 | ) | (1,104 | ) | ||||||||||||
Gas purchased for resale | (330 | ) | (1,051 | ) | (254 | ) | — | — | — | |||||||||||||||
Royalties for usage of water resources | — | — | (127 | ) | (131 | ) | (185 | ) | (153 | ) | ||||||||||||||
Outsourced services | (283 | ) | (899 | ) | (953 | ) | (917 | ) | (906 | ) | (858 | ) | ||||||||||||
Post-retirement obligations | (49 | ) | (156 | ) | (212 | ) | (176 | ) | (134 | ) | (124 | ) | ||||||||||||
Materials | (48 | ) | (154 | ) | (381 | ) | (123 | ) | (73 | ) | (81 | ) | ||||||||||||
Provisions for operating losses | (441 | ) | (1,402 | ) | (581 | ) | (305 | ) | (671 | ) | (166 | ) | ||||||||||||
Employee’ and managers’ profit shares | (43 | ) | (137 | ) | (249 | ) | (221 | ) | (239 | ) | (219 | ) | ||||||||||||
Construction costs | (394 | ) | (1,252 | ) | (942 | ) | (975 | ) | (1,336 | ) | (1,232 | ) | ||||||||||||
Other operating expenses, net | (143 | ) | (455 | ) | (527 | ) | (493 | ) | (481 | ) | (327 | ) | ||||||||||||
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Total operating costs and expenses | (5,758 | ) | (18,317 | ) | (14,451 | ) | (11,231 | ) | (11,527 | ) | (9,128 | ) | ||||||||||||
Equity in Subsidiaries | 124 | 393 | 210 | 764 | 865 | 539 | ||||||||||||||||||
Gain on disposal of investment | — | — | — | 284 | — | — | ||||||||||||||||||
Unrealized gain on disposal of investment | — | — | — | (81 | ) | — | — | |||||||||||||||||
Gain on acquisition of control of investee | — | — | 281 | — | — | — | ||||||||||||||||||
Fair value in corporate operation | 229 | 729 | — | — | — | — | ||||||||||||||||||
Operational profit before Financial revenue (expenses) and Taxes | 1,288 | 4,097 | 5,580 | 4,363 | 3,475 | 3,804 | ||||||||||||||||||
Financial revenues (expenses), net | (231 | ) | (735 | ) | (1,101 | ) | (309 | ) | 1,629 | (640 | ) | |||||||||||||
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Pretax profit | 1,057 | 3,362 | 4,479 | 4,054 | 5,104 | 3,164 | ||||||||||||||||||
Income taxes expense | (280 | ) | (892 | ) | (1,342 | ) | (950 | ) | (832 | ) | (749 | ) | ||||||||||||
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Net profit for the year | 777 | 2,469 | 3,137 | 3,104 | 4,272 | 2,415 | ||||||||||||||||||
Other comprehensive income (loss) | — | — | — | 213 | (412 | ) | (74 | ) | ||||||||||||||||
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Comprehensive income | 777 | 2,469 | 3,137 | 3,317 | 3,860 | 2,41 | ||||||||||||||||||
Basic earnings (loss): (2) | ||||||||||||||||||||||||
Per common share | 0.50 | 1.96 | 2.49 | 2.47 | 3.40 | 1.92 | ||||||||||||||||||
Per preferred share | 0.50 | 1.96 | 2.49 | 2.47 | 3.40 | 1.92 | ||||||||||||||||||
Per ADS | 0.50 | 1.96 | 2.49 | 2.47 | 3.40 | 1.92 | ||||||||||||||||||
Diluted earnings (loss): (2) | ||||||||||||||||||||||||
Per common share | 0.50 | 1.96 | 2.49 | 2.47 | 3.40 | 1.92 | ||||||||||||||||||
Per preferred share | 0.50 | 1.96 | 2.49 | 2.47 | 3.40 | 1.92 | ||||||||||||||||||
Per ADS | 0.50 | 1.96 | 2.49 | 2.47 | 3.40 | 1.92 | ||||||||||||||||||
| 7 |
Balance sheet data: Assets: Current assets Property, plant and equipment, net Intangible assets Financial assets of concessions Account receivable from the Minas Gerais State Government Other assets Total assets Liabilities: Current portion of long-term financing Other current liabilities Total current liabilities Non-current financing Post-retirement liabilities non-current Other non-current liabilities Total non-current liabilities Share capital Capital reserves Profit reserves Accumulated other comprehensive income Equity attributable to non-controlling shareholder Total equity Total liabilities and equity Year ended December 31, 2015 2015 2014 2013 2012(4) 2011(4) (in millions
of US$)(1) (in millions of R$ except per share/ADS
data or otherwise indicated) 2,948 9,377 6,554 6,669 8,804 5,768 1,239 3,940 5,544 5,817 6,109 6,392 3,230 10,275 3,379 2,004 1,874 2,779 836 2,660 7,475 5,841 5,475 3,834 — — — — — 1,830 4,591 14,605 12,048 9,483 10,308 9,018 12,844 40,857 35,000 29,814 32,570 29,621 1,980 6,300 5,291 2,238 6,466 4,504 1,935 6,152 4,832 3,684 6,332 3,595 3,915 12,452 10,123 5,922 12,798 8,099 2,787 8,866 8,218 7,219 3,950 6,000 970 3,086 2,478 2,311 2,575 1,956 894 2,843 2,896 1,724 1,697 1,900 4,651 14,795 13,592 11,254 8,222 9,856 1,979 6,294 6,294 6,294 4,265 3,412 605 1,925 1,925 1,925 3,954 3,954 1,661 5,285 2,594 3,840 2,856 3,293 32 102 468 579 475 1,007 1 4 4 — — — 4,278 13,610 11,285 12,638 11,550 11,666 12,844 40,857 35,000 29,814 32,570 29,621
Year Ended December 31, 2020 2020 2019 (4)(5) (Restated) 2018 (3)(5) (Restated) 2017 (6) 2016 (6) (57) (297) (494) (405) (393) (155) (in millions of US$) (1) (in millions of R$, except per share/ADS data or otherwise indicated) NET REVENUE 4,858 25,228 25,486 22,299 21,712 18,773 Operating costs and expenses Energy purchased for resale (2.332) (12,111) (11,286) (11,084) (10,919) (8,273) Charges for use of the national grid (337) (1,748) (1,426) (1,479) (1,174) (947) Depreciation and amortization (190) (989) (958) (835) (850) (834) Personnel (246) (1,276) (1,272) (1,410) (1,627) (1,643) Gas purchased for resale (209) (1,083) (1,436) (1,238) (1,071) (877) Outsourced services (244) (1,265) (1,239) (1,087) (974) (867) Post-employment obligations (84) (438) (408) (337) 229 (345) Materials (15) (79) (91) (104) (61) (58) Operating provisions (reversals) (81) (423) (2,401) (467) (854) (704) Employee’s and managers’ profit sharing (27) (142) (263) (77) (5) (7) Infrastructure construction costs (304) (1,581) (1,200) (897) (1,119) (1,193) Other operating expenses, net Total operating costs and expenses (4,127) (21,432) (22,474) (19,420) (18,818) (15,903) Periodic Tariff Review, net 97 502 - - - - Share of profit (loss), net, of affiliates and jointly-controlled entities 69 357 125 (104) (252) (302) Dividends declared by investee classified as held for sale - - 73 - - - Remeasurement of previously held equity interest in subsidiaries acquired - - - (119) - - Impairment loss on Investments - - - (127) - (763) Result of business combinations 10 51 - - - - Income before finance income (expenses) and taxes 906 4,706 3,210 2,529 2,642 1,805 Finance income (expenses), net (174) (906) 1,358 (518) (996) (1,437) Income before income tax and social contribution tax 732 3,800 4,570 2,011 1,646 368 Income taxes expense (180) (936) (1,600) (599) (644) (34) Net income for the year from continuing operations 552 2,864 2,970 1,379 1,002 334 Net income after tax from discontinued operations - - 224 363 - - Net income for the year 552 2,864 3,195 1,742 1,002 334 Non-controlling interests: Non-controlling interests from continuing operations - (1) (1) (1) (1) - Non-controlling interests from discontinued operations - - - (41) - - Net income for the year attributed to equity holders of the parent 551 2,863 3,194 1,700 1,001 334 Net income for the year 552 2,864 3,195 1,742 1,002 334 Other comprehensive income (loss) (1) (7) (1,055) (463) (302) (553) Comprehensive income for the year 550 2,857 2,139 1,279 700 (219) Basic earnings: Per common share (7) 0.33 1.69 1.89 1.02 0.37 0.10 Per preferred share (7) 0.33 1.69 1.89 1.02 0.84 0.35 Per ADS common share (7) 0.33 1.69 1.75 0.83 0.37 0.10 Per ADS preferred share (7) 0.33 1.69 1.75 0.83 0.84 0.35 Diluted earnings: Per common share (7) 0.33 1.69 1.89 1.02 0.37 0.07 Per preferred share (7) 0.33 1.69 1.89 1.02 0.84 0.32 Per ADS common share (7) 0.33 1.69 1.75 0.83 0.37 0.07 Per ADS preferred share (7) 0.33 1.69 1.75 0.83 0.84 0.32
| 8 |
Statement of Financial Position Data
Year Ended December 31, | 2020 | 2020 | 2019 (4)(5) (Restated) | 2018 (3)(5) (Restated) | 2017 (6) | 2016 (6) |
| in millions of US$ (1) | (in millions of R$ except per share/ADS data or otherwise indicated) | |||||
| Assets | ||||||
| Assets classified as held for sale | 242 | 1,258 | 1,258 | 19,446 | - | - |
| Other current assets | 2,734 | 14,198 | 9,096 | 8,520 | 8,537 | 8,285 |
| Total current assets | 2,976 | 15,456 | 10,354 | 27,966 | 8,537 | 8,285 |
| Property, plant and equipment, net | 463 | 2,407 | 2,450 | 2,662 | 2,762 | 3,775 |
| Intangible assets | 2,274 | 11,810 | 11,624 | 10,777 | 11,156 | 10,820 |
| Concession financial assets | 731 | 3,799 | 3,759 | 3,812 | 6,605 | 4,971 |
| Other assets | 3,969 | 20,611 | 22,339 | 15,122 | 13,180 | 14,185 |
| Total assets | 10,414 | 54,083 | 50,526 | 60,339 | 42,240 | 42,036 |
| Liabilities | ||||||
| Current loans, financing and debentures | 396 | 2,059 | 2,747 | 2,198 | 2,371 | 4,837 |
| Liabilities directly associated to assets held for sale | - | - | - | 16,272 | - | - |
| Other current liabilities | 1,469 | 7,631 | 5,218 | 4,967 | 6,292 | 6,610 |
| Total current liabilities | 1,866 | 9,690 | 7,965 | 23,437 | 8,663 | 11,447 |
| Non-current loans, financing and debentures | 2,496 | 12,961 | 12,030 | 12,574 | 12,027 | 10,342 |
| Non-current post-employment obligations | 1,259 | 6,538 | 6,421 | 4,736 | 3,954 | 4,043 |
| Other non-current liabilities | 1,428 | 7,416 | 8,007 | 3,507 | 3,266 | 3,270 |
| Total non-current liabilities | 5,183 | 26,915 | 26,458 | 20,817 | 19,247 | 17,655 |
| Share capital | 1,462 | 7,594 | 7,294 | 7,294 | 6,294 | 6,294 |
| Capital reserves | 433 | 2,250 | 2,250 | 2,250 | 1,925 | 1,925 |
| Profit reserves | 1,937 | 10,061 | 8,750 | 6,362 | 5,729 | 5,200 |
| Equity valuation adjustments | (468) | (2,431) | (2,407) | (1,327) | (837) | (489) |
| Subscription of shares to be capitalized | - | - | - | - | 1,215 | - |
| Retained earnings………………………………………………………….. | - | - | 212 | 146 | ||
| Equity attributable to non-controlling interest | 1 | 4 | 4 | 1,360 | 4 | 4 |
| Total equity | 3,365 | 17,478 | 16,103 | 16,085 | 14,330 | 12,934 |
| Total liabilities and equity | 10,414 | 54,083 | 50,526 | 60,339 | 42,240 | 42,036 |
| 9 |
Other data
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
Outstanding shares basic: (2) | ||||||||||||||||||||
Common | 420,764,639 | 420,764,639 | 420,764,639 | 420,764,639 | 420,764,639 | |||||||||||||||
Preferred | 837,516,297 | 837,516,297 | 837,516,297 | 837,516,297 | 837,516,297 | |||||||||||||||
Dividends per share (2) | ||||||||||||||||||||
Common | R$0,50 | R$0.63 | R$1.28 | R$2.20 | R$1.03 | |||||||||||||||
Preferred | R$0,50 | R$0.63 | R$1.28 | R$2.20 | R$1.03 | |||||||||||||||
Dividends per ADS (2) | R$0,50 | R$0.63 | R$1.28 | R$2.20 | R$1.03 | |||||||||||||||
Dividends per share (3)(2) | ||||||||||||||||||||
Common | US$0.13 | US$0.24 | US$0.48 | US$0.83 | US$0.39 | |||||||||||||||
Preferred | US$0.13 | US$0.24 | US$0.48 | US$0.83 | US$0.39 | |||||||||||||||
Dividends per ADS (3)(2) | US$0.13 | US$0.24 | US$0.48 | US$0.83 | US$0.39 | |||||||||||||||
Outstanding shares—diluted: (2) | ||||||||||||||||||||
Common | 420,764,639 | 420,764,639 | 420,764,639 | 420,764,639 | 420,764,639 | |||||||||||||||
Preferred | 837,516,297 | 837,516,297 | 837,516,297 | 837,516,297 | 837,516,297 | |||||||||||||||
Dividends per share diluted (2) | ||||||||||||||||||||
Common | R$0.50 | R$0.63 | R$1.28 | R$2.20 | R$1.03 | |||||||||||||||
Preferred | R$0.50 | R$0.63 | R$1.28 | R$2.20 | R$1.03 | |||||||||||||||
Dividends per ADS diluted (2) | R$0.50 | R$0.63 | R$1.28 | R$2.20 | R$1.03 | |||||||||||||||
Dividends per share diluted (3)(2) | ||||||||||||||||||||
Common | US$0.13 | US$0.24 | US$0.48 | US$0.83 | US$0.39 | |||||||||||||||
Preferred | US$0.13 | US$0.24 | US$0.48 | US$0.83 | US$0.39 | |||||||||||||||
Dividends per ADS diluted (3)(2) | US$0.13 | US$0.24 | US$0.48 | US$0.83 | US$0.39 | |||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | |
| Outstanding shares basic: | ||||||
| Common | 566,036,634 | 566,036,634 | 566,036,634 | 487,614,144 | 420,764,639 | |
| Preferred | 1,127,325,434 | 1,127,325,434 | 1,127,325,434 | 970,577,739 | 837,516,297 | |
| Dividends per share: | ||||||
| Common | R$0.99 | R$0.52 | R$0.59 | R$0.03 | - | |
| Preferred | R$0.99 | R$0.52 | R$0.59 | R$0.50 | R$0.50 | |
| Dividends per ADS common | R$0.99 | R$0.52 | R$0.59 | R$0.03 | - | |
| Dividends per ADS preferred | R$0.99 | R$0.52 | R$0.59 | R$0.50 | R$0.50 | |
| Dividends per share: (2) | ||||||
| Common | US$0.19 | US$0.13 | US$0.15 | US$0.01 | - | |
| Preferred | US$0.19 | US$0.13 | US$0.15 | US$0.15 | US$0.15 | |
| Dividends per ADS common | US$0.19 | US$0.13 | US$0.15 | US$0.01 | - | |
| Dividends per ADS preferred | US$0.19 | US$0.13 | US$0.15 | US$0.15 | US$0.15 | |
| Outstanding shares—diluted: | ||||||
| Common | 566,036,634 | 566,036,634 | 566,036,634 | 487,614,144 | 420,764,639 | |
| Preferred | 1,127,325,434 | 1,127,325,434 | 1,127,325,434 | 970,577,739 | 837,516,297 | |
| Dividends per share diluted: | ||||||
| Common | R$0.99 | R$0.52 | R$0.59 | R$0.03 | - | |
| Preferred | R$0.99 | R$0.52 | R$0.59 | R$0.50 | R$0.50 | |
| Dividends per ADS diluted common | R$0.99 | R$0.52 | R$0.59 | R$0.03 | - | |
| Dividends per ADS diluted preferred | R$0.99 | R$0.52 | R$0.59 | R$0.50 | R$0.50 | |
| Dividends per share diluted: (2) | ||||||
| Common | US$0.19 | US$0.13 | US$0.15 | US$0.01 | - | |
| Preferred | US$0.19 | US$0.13 | US$0.15 | US$0.15 | US$0.15 | |
| Dividends per ADS diluted common | US$0.19 | US$0.13 | US$0.15 | US$0.01 | - | |
| Dividends per ADS diluted preferred | US$0.19 | US$0.13 | US$0.15 | US$0.15 | US$0.15 | |
| (1) | Converted at R$ |
| This information is presented in U.S. dollars at the exchange rate in effect as of the end of each year. |
| From January 1, 2018, we adopted IFRS 9 and IFRS 15. Since we used the modified retrospective approach when adopting such standards, we did not restate our financial statements as of and for the years ended December 31, 2017 and 2016. |
| (4) | From January 1, 2019, we adopted IFRS 16. Since we used the modified retrospective approach when adopting such standard, we did not restate our financial statements as of and for the years ended December 31, 2018, 2017 and 2016. |
| (5) | Data for the years ended December 31, 2019 and 2018, have been restated to reflect to retrospective application of a change in an accounting policy, as described in note 2.8 to our consolidated financial statements. |
| (6) | We have not restated data for 2017 and 2016 to reflect retrospective application of a change in an accounting policy, as described in note 2.8 to our consolidated financial statements. |
| (7) | For the year ended December 31, |
| 10 |
Exchange Rates
On March 4, 2005, the National Monetary Council (Conselho Monetário Nacional), or CMN,‘CMN’), consolidated the commercial rate exchange market and the floating rate market into a single exchange market. Such regulation, as restated in 2008, allows subject to certain procedures and specific regulatory provisions, the purchase and sale of foreign currency and the international transfer of reaisReais by a foreign person or company, without restriction as to the amount. Additionally, all foreign exchange transactions must be carried out by financial institutions authorized by the Brazilian Central Bank (Banco Central do Brasil), or the Central Bank,‘Central Bank’), to operate in this market.
Brazilian law provides that whenever there (i) is a significant deficit in Brazil’s balance of payments or (ii) are major reasons to foresee a significant deficit in Brazil’s balance of payments, temporary restrictions may be imposed on remittances of foreign capital abroad. In the past, the Central Bank has occasionally intervened to control unstable movements in foreign exchange rates. We cannot predict whether the Central Bank or the Federal Government will continue to let the realReais float freely or will intervene in the exchange rate market. The realReais may depreciate or appreciate against the U.S. dollar and other currencies substantially in the future, Exchange rate fluctuations may affect the U.S. dollar amounts received by the holders of Preferred ADSs or Common ADSs. We will make any distributions with respect to our preferred shares or common shares in realsReais and the depositary will convert these distributions into U.S. dollars for payment to the holders of Preferred ADSs and Common ADSs. We cannot make assurances that such measures will not be undertaken by the Brazilian Government in the future, which could prevent us from making payments to the holders of our ADSs. Exchange rate fluctuations may also affect the U.S. dollar equivalent of the realReais price of the preferred shares or common shares on the Brazilian stock exchange on which they are traded. Exchange rate fluctuations may also affect our results of operations. For more information see “Risk Factors — ‘Risk Factors—Risks Relating to Brazil — Brazil—Exchange rate instability may adversely affect our business, results of operations and financial condition and the market price of our shares, the Preferred ADSs and the Common ADSs”ADSs’.
The table below sets forth, for the periods indicated the low, high, average and period-end exchange rates for reais,Reais, expressed in reaisReais per US$1.001.00.
| Reais per US$1.00 | ||||||||||||||||
Month | Low | High | Average | Period-end | ||||||||||||
October 2015 | 3.7339 | 4.0003 | 3.8752 | 3.8439 | ||||||||||||
November 2015 | 3.7048 | 3.8982 | 3.7858 | 3.8982 | ||||||||||||
December 2015 | 3.7264 | 4.0231 | 3.8808 | 3.9593 | ||||||||||||
January 2016 | 3.9893 | 4.1299 | 4.0556 | 4.0364 | ||||||||||||
February 2016 | 3.8785 | 4.0564 | 3.9644 | 3.9793 | ||||||||||||
March 2016 | 3.5500 | 3.9475 | 3.6980 | 3.5500 | ||||||||||||
April 2016 | 3.4547 | 3.7106 | 3.5634 | 3.4547 | ||||||||||||
May 2016 | 3.4594 | 3.6122 | 3.5403 | 3.6074 | ||||||||||||
June 2016 | 3.2003 | 3.6030 | 3.4234 | 3.2003 | ||||||||||||
July 2016 | 3.2350 | 3.3436 | 3.2781 | 3.2380 | ||||||||||||
August 2016 | 3.1292 | 3.2650 | 3.2086 | 3.2470 | ||||||||||||
September 2016 | 3.1962 | 3.3274 | 3.2532 | 3.2434 | ||||||||||||
October (1) | 3.1193 | 3.2359 | 3.1858 | 3.1811 | ||||||||||||
Reais per US$1.00 | ||||
| Year Ended December 31, | Low | High | Average | Period-end |
| 2016 | 3.1142 | 4.1299 | 3.4839 | 3.2532 |
| 2017 | 3.0557 | 3.3823 | 3.1916 | 3.3121 |
| 2018 | 3.1470 | 4.2016 | 3.6513 | 3.8804 |
| 2019 | 3.6501 | 4.2594 | 3.9440 | 4.0190 |
| 2020 | 4.0378 | 5.9204 | 5.1587 | 5.1935 |
Reais per US$1.00 | ||||
Month | Low | High | Average | Period end |
| October 2020 | 5.5220 | 5.7790 | 5.6253 | 5.7588 |
| November 2020 | 5.3069 | 5.7425 | 5.4482 | 5.3785 |
| December 2020 | 5.0538 | 5.3016 | 5.1447 | 5.1935 |
| January 2021 | 5.2304 | 5.4809 | 5.3673 | 5.4479 |
| February 2021 | 5.3153 | 5.5724 | 5.4132 | 5.5724 |
| March 2021 | 5.4750 | 5.8084 | 5.6351 | 5.6590 |
| April 2021 (through April 27, 2021) | 5.4971 | 5.7075 | 5.6144 | 5.5011 |
Source: U.S. Federal Reserve Board.
| Reais per US$1.00 | ||||||||||||||||
Year Ended December 31, | Low | High | Average | Period-end | ||||||||||||
2011 | 1.5375 | 1.8865 | 1.6723 | 1.8627 | ||||||||||||
2012 | 1.6997 | 2.1141 | 1.9535 | 2.0476 | ||||||||||||
2013 | 1.9480 | 2.4464 | 2.1570 | 2.3608 | ||||||||||||
2014 | 2.1940 | 2.7306 | 2.3498 | 2.6563 | ||||||||||||
2015 | 2,5644 | 4.1638 | 3.3360 | 3,9593 | ||||||||||||
Risk factorsFactors
The investor should take into account the risks described below, and the other information contained in this Annual Report, when evaluating an investment in our Company.Company.
Risks relatingRelating to CEMIG
The Covid-19 pandemic and its ongoing effects could adversely affect our business, operational results and financial condition.
The Company is closely monitoring the impacts of the Covid-19 pandemic on the Brazilian macroeconomic environment, especially in relation to its business and the market in which it operates, and deciding on actions to maintain the sustainability of its operations, mitigate economic and financial effects, and protect the health of its employees. The Company established the Coronavirus Crisis Management Committee (‘Comitê Diretor de Gestão da Crise do Coronavírus’) in March 2020, to ensure its readiness to making decisions in light of the fast-changing situation, which has become more widespread, complex and systemic. Several measures were taken to protect the Company´s liquidity, such as capital expenditure restraint and expenses reduction, payment of only minimum mandatory dividends to shareholders, and deferral of dividends and interest on equity to the end of 2020 and the negotiating of contracts with its customers on the free market.
In order to cope with the reduction in collections resulting from the economic crises, measures to support the sector have been implemented by the Grantor and regulated by ANEEL, with a view to ensure that companies maintain adequate liquidity, and are able to comply with contracts in the electricity sector supply chain. This scenario resulted in the need for internal reassessment by the Company of its Investment Program, revision of the budgets for revenue and expenses, and alteration of the assumptions used in calculating the fair and recoverable value of certain financial and non-financial assets. Among the measures implemented by ANEEL having a greater financial impact on us was the creation of the ‘Covid-account’, issued on May 18, 2020, to support the energy distribution sector, which, as the customer interface, is the basis of the energy sector financial flow, aimed either to cover the distribution agents revenue/cash flow deficit or to anticipate sector receivables. The ‘Covid-account’ increased CEMIG D cash flow by R$1.4 billion in 2020 enabling it to meet its financial obligations, in spite of the collection reduction resulting from the economic crisis.
The total load carried by the Brazilian electricity system fell by approximately 1.5%, comparing 2020 to the year before, with gradual recovery since that period. The effects for the Company in the energy Market were also observed on a similar scale to these national effects with a consequent decrease in its revenue.
The most critical period to date of the pandemic regarding the energy supply in Brazil occurred in the second and third quarters of 2020. The Company cannot foresee the duration of these effects on the economic condition arising from social isolation, and its future impact on its market and revenue, nor the effectiveness of the ongoing actions that are being implemented by the federal government, such as the beginning of the population´s vaccination program, as well as the mitigation of the effects of the crisis. The continuing duration or a worsening of the pandemic could have a material adverse effect on our business, liquity, capital resources, results of operations and financial condition.
We cannot beare not certain thatwhether new generation concessions or authorizations, as applicable, will be granted,obtained, nor that our present concessions or authorizations will be extended on terms similar to those currently in effect, nor that the indemnities receivedany compensation we receive in the event of non-extension will correspondbe sufficient to cover the expected value.full value of our investment.
We operate most of our power generation, transmission and distribution activities under concession contractsagreements entered into with the Brazilian federal government.Federal Government or pursuant to authorizations granted to companies of the CEMIG Group. The Brazilian Constitution requiresdetermines that all concessions relatingrelated to public services must be awardedgranted through a bidding process. In 1995, in an effort to implement these constitutional provisions, the Brazilian federal governmentFederal Government adopted certain laws and regulations, which are collectively known as the “Concessions Law”,‘Concessions Law,’ which govern thegoverns bidding procedures in the electric power industry.
| 12 |
On September 11, 2012, the Brazilian federal governmentFederal Government issued Provisional MeasureAct No. 579 (“PM 579”(‘PA 579’), later converted into Law No. 12,783 of January 11, 2013 (“(‘Law No. 12,783/2013”13’), which governs extensionthe extensions of the concessions granted prior to Law No. 9,0749,074/95. Law No. 12,783/13 determines that, as of July 7, 1995. Under that law, as from September 12, 2012, these concessions prior to Law No. 9,074/95 can be extended only once, for up to 30 years, at the option ofprovided that the concession authority.
On December 4, 2012,operators accept and meet certain conditions described in such Law. With respect to generation activities, the Company signed the second amendment to Transmission Concession Contract 006/1997, extending this concession contract for 30 years under the terms of Law No. 12,783/2013, to be calculated from January 1, 2013. The concession extension resulted in a reduction of the Permitted Annual Revenue (Receita Anual Permitida, or RAP), which decreased our anticipated revenue with respect to those concessions. The Brazilian federal government has indemnified the Company for the RAP reduction in connection with part of the extended concessions. However, the Company has not been indemnified for the RAP reduction in connection with assets the operation of which began before the year 2000. According to Law No. 12,783/2013, the indemnification that is pending will be paid by the concession authority within 30 years and will be, adjusted for the Amplified National Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo, or IPCA) until it is fully paid.
The Company optedchose not to requestaccept the extension ofmechanism offered to extend the generation concessions that would expire withinin the period from 2013 to 2017. ForThese concessions are: Três Marias, Salto Grande, Itutinga, Volta Grande, Camargos, Peti, Piau, Gafanhoto, Tronqueiras, Joasal, Martins, Cajuru, Paciência, Marmelos, Dona Rita, Sumidouro, Poquim and Anil.
Following publication of the tender documents for Generation Auction No. 12/2015, on October 7, 2015 (‘Auction 12/2015’), which was held under the revised regulatory structure for renewal of concessions of existing power plants that have yetas set forth in Law No. 13,203 of December 8, 2015 (‘Law No. 13,203/15’), the Company’s Board of Directors authorized CEMIG Geração e Transmissão S.A. (CEMIG GT) to undergobid at an auction, held on November 25, 2015, in which CEMIG GT was successful. In the auction, CEMIG GT won the concessions for the 18-hydroelectrical plants comprising ‘Lot D’, for 30 years: Três Marias, Salto Grande, Itutinga, Camargos, Cajuru, Gafanhoto, Martins, Marmelos, Joasal, Paciência, Piau, Coronel Domiciano, Tronqueiras, Peti, Dona Rita, Sinceridade, Neblina and Ervália. The total installed capacity of these plants is 699.5 MW, and their first extension, includingofftake guarantee is 420.2 MW average.
In relation to the Jaguara, São Simão and Miranda power plants, which the date of the first contractual extension of their concessions fell after the issuance of PA 579, the Company understood that the Generation Concession Contract No. 007/1997 guaranteesenables the extension of the concessions of these concessionspower plants for a further 20 years, under their existing termsi.e. until 2033, 2035 and conditions.2036 respectively, without any restrictions.
Based on this understanding, Cemig Generation and Transmission (“Cemig GT”) appliedon February 21, 2017, CEMIG GT filed for a judicial order of mandamus (Application for Mandamus No. 20,432/DF) against the actions of the Brazilian Mining and Energy Ministry with the objective of safeguarding(MME) to safeguard its rights to an extension of the concession period ofterm for the Jaguara, São Simão and Miranda Hydroelectric Power Plant, , under the terms of Clause 4 of the Generation Concession Contract No. 007/1997, and in accordance with the original terms and conditions of that Contract,agreement, which was signed prior to Law No. 12,783/ 2013.13.
Nevertheless, on September 27, 2017, the Brazilian Federal Government auctioned the concessions of Jaguara, São Simão, Miranda and Volta Grande hydroelectric power plants formerly owned by CEMIG GT with a total capacity of 2,922 MW for a total of R$12.13 billion. In each case, the winning bidder of the concessions is unrelated to CEMIG. Volta Grande power plant concession was transferred to the winning bidder on November 30, 2017, Jaguara and Miranda power plants concession were transferred on December 30, 2017 and São Simão power plant concession was transferred on May 9, 2018.
The Superior Courtapplications for mandamus relating to the Jaguara and Miranda hydroelectric plants have now reached final judgment against the Company and further appeal is not possible. Because of Justice (“STJ”) affirmedthese judgments, the Mining and Energy Ministry’s denialCompany assesses that the chances of success in the merits of Cemig GT’s application for an extension of the Jaguara Hydroelectric Plant concession and rejected Cemig GT’s application by a majority of 6 votesmandamus in relation to 2.
On December 21, 2015, Brazil’s Federal Supreme Court (“STF”) granted an interim judgment in the Application for Provisional Remedy No. 3980/DF brought against the Brazilian federal government by Cemig GT, which granted Cemig GT the right to retain the control of the Jaguara Hydroelectric Plant commercial operation until a final decision is made by the STF. Application for Provisional Remedy No. 3,980/DF seeks on the merits the suspension of the effects of STJ’s decision on the Application for Mandamus No. 20,432/DF described above.
On the same basis, due to the imminent expiry of the period originally specified in the São Simão Hydroelectric Plant concession, Cemig GT filed for an injunction againsthydroelectric plant, which has not yet reached final judgment, is remote.
In parallel to the actionsdiscussions on extension of the Mining and Energy Minister, withgeneration concessions, because the objective of ensuring its right to extend the period of that concession for various plants operated by CEMIG under Clause 4 of Concession Contract 007/1997 in accordance with the original terms of this contract, which was signed prior to Law No. 12,783/2013 Cemighave expired, CEMIG GT obtained an initial interim relief from the court, in which recognized Cemig GT’shas a right to retain controlbe reimbursed for the assets not yet amortized, as set out in the concession contract. The accounting balances corresponding to these assets are recorded as financial assets and are analyzed by Brazilian Regulatory Agency (ANEEL).
On August 31, 2018, CEMIG received R$1,139 million as indemnification for the basic project of the São Simão Hydroelectric Plant’s commercial operations until a final decision was made by the court. However On June 30, 2015, Minister Mauro Campbell of the STJ revoked that injunction. The São Simão Hydroelectric Plant is provisionally under the responsibility of Cemig GT until a public tender is held for its concession.
Based on the classification adopted by the Company of the risk of loss involved in legal actions (where the chances of loss for the Company are assessed as “probable”, “possible”, or “remote”) the Company has classified the chance of loss in the actions mentioned above as “possible”, due to the nature and complexity of those specific cases. The cases have several particular elements characterizing the contingency, such as: (i) the singular nature of Concession Contract 007/1997; (ii) the unprecedented nature of the subject matter; and (iii) the fact that the actions will regarded as leading cases when extension of concessions is considered by the Brazilian Courts.
On June 10, 2016, Cemig’s wholly-owned subsidiary Cemig GT filed an application with Aneel for a 20 year extension of the concession period for the Miranda hydroelectricPlant (the‘Miranda Plant’), which is scheduled to expire in December 2016. On July 12, 2016, Aneel decided to refer the application “to the Mining and Energy Ministry, with the recommendation that the application made by Cemig GT for extension of the period of the concession for the Miranda Hydroelectric Plant should not be granted, due to its application havingplants. This amount had been made after the deadline stipulated by Law 12,783/2013”. The Company is considering any possible administrative or legal measures, and will keep its shareholders and the market informed of any material developments.
For the other generation plants that have concessions that expire during the period from 2013 to 2017, which have already undergone an extension according to the conditions established in Concession Contract 007/1997related to Três Marias, Salto Grande, Itutinga, Camargos, Piau, Gafanhoto, Peti, Tronqueiras, Joasal, Martins, Cajuru, Paciência, Marmelos, Sumidouro, Anil, Poquim, Dona Rita and Volta Grande generation plants, we have opted to return them to the concession authority (i.e. not to request extension, under the terms of PM 579).
In relation to Sumidouro, Anil, Poquim, ANEEL decided to extinguish the concession and, considering the capacity of such plants (less than 3 MW), they qualified for a registration regime and the assets were not returned to the federal government.
Further, CEMIG GT took part in the Hydroelectric Plant Concessions Auction under the Regime of Quotas, held on November 25, 2015 and won generation concessions for 18 hydroelectric power plants. CEMIG GT already operated 14 of those 18 hydroelectric power plants (Três Marias, Salto Grande, Itutinga, Camargos, Piau, Gafanhoto, Peti, Tronqueiras, Joasal, Martins, Cajuru, Paciência, Marmelos and Dona Rita). The remaining four concessions are new and include the following hydroelectric power plants: Ervália, Coronel Domiciano, Sinceridade and Neblina. These new assets added almost 50 MW to the Cemig’s power generation facilities. The total capacity of the 18 hydroelectric power plants is approximately 700 MW.
The percentage of the physical guarantee allocated to the Regulated Market (Ambiente de Contratação Regulado, or ACR) was 100% from January 1, 2016 to December 31, 2016 and will be 70% as of January 1, 2017. Contracts were executed after the payment of a concession grant fee of R$2,216 million, as follows: the first installment on December 31, 2015 and the second installment within 180 calendar days of the execution of the contracts. The amount is updatedadjusted by the Selic rate fromup to the date of payment of the first installment until the second installment payment date.its receipt.
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| Table of Contents |
Cemig GT will receive in total R$498.7 million per year for generation services related to the plants, which is comprised of two components: (i) Fee for Management of Generation Assets (Custo de Gestão dos Ativos de Geraçãoor GAG), and (ii) Yield on the Concession Grant Fee (Retorno da Bonificação pela Outorga, or RBO).
Regarding distribution concessions, the new concession agreement, with a 30-year term, imposes efficiency conditions on distribution companies under two categories: (i) service quality, and (ii) economic-financial sustainability. Non-compliance with the conditions for two consecutive years or any of the limits at the end of the first five years will result in the termination of the concession. Additionally, non-compliance with the global collective continuity indicator targets (global annual limits of collective continuity indicators) may lead to restrictions in the payment of dividends and/or interest on equity, while non- compliance with the economic-financial sustainability indicators may require capital contributions from the controlling shareholders.
In 2014, after a decision by ANEEL to amend the concession and permission contracts of Brazilian electricity distributors, we signed a Fourth Amendment to each of our distribution concession contracts, which established a guarantee that amounts recorded in the Offsetting Account for Variation in Parcel “A” Items (Conta de Compensação de Variação de Valores de Itens da Parcela “A”, or CVA Account), and other financial components, would be incorporated into the basis of the indemnity we would be entitled to receive if a distribution concession were to be terminated for any reason.
On December 21, 2015, Cemig Distribuição S.A. (“Cemig D”) executed the fifth amendment to each of the distribution concession contracts it is a party to. Under the fifth amendment, the concessions granted under the Concession Contract 002/1997, Concession Contract 003/1997, Concession Contract 004/1997, and Concession Contract 005/1997, were consolidated and granted an extension from January 1, 2016 to December 31, 2045.
In light ofConsidering the degree of discretion granted to the Brazilian federal governmentFederal Government in relation to new concession contracts or new authorizations, as applicable, and renewal of existing concessions and authorizations, and due to the new provisions established by PM 579 (and subsequent Law No. 12,783/2013)13 and amendments, for renewals of generation, transmission and distribution generation and transmission concession contracts,agreements, we cannot guarantee:guarantee that: (i) that new concessions and authorizations will be obtained; nor (ii) that our existing concessions and authorizations will be extended on the same terms assimilar to those currently in effect; nor (iii) that the indemnitiescompensation received in the event of non-extension of a concession or authorization will be in an amount sufficient to cover the amount expected. In this context, unfavorable events in relationfull value of our investment. Our inability to theobtain new or extended concessions or authorizations could adversely affecthave a material adverse effect on our business, results of operations and financial condition. For more information about the renewal of our concessions and authorizations, see “Item 8. Financial Information – Legal and Administrative Proceedings”.
On September 9, 2020, the Law 14,052 was issued, changing the Law 13,203/2015 and establishing new conditions for renegotiation of hydrological risk in relation to the portion of costs incurred due to the GSF, borne by the holders of hydroelectric plants participating in the Energy Reallocation Mechanism (MRE) since 2012, when there was a serious crisis in water sources.
The compensation to the holders of hydroelectric occurs through the extension of the concession period for generation grants and will be recognized as an intangible asset in exchange for a compensation of electricity costs.
This renegotiation represents important progress for the electricity sector, reducing levels of litigation – and also for CEMIG, in that it enables extension of the periods of its generation concessions.
The periods of extension, published by the CCEE, which are still awaiting approval by ANEEL, indicate an extension of approximately two years for two of our principal power plants, Emborcação and Nova Ponte, and also extensions of seven years for the plants of Lot D – as well as extensions for the other plants where we hold an equity interest directly or through investees.
Our subsidiaries might suffer intervention by Brazilian public authorities to ensure adequate levels of service, or be sanctioned by ANEEL for non-compliance with their concession agreements, or the authorizations granted to them, which could result in fines, other penalties and/or, depending on the severity of the non-compliance, legal termination of concession agreements or revocation of authorizations.
We conduct our generation, transmission and distribution activities pursuant to concession agreements entered into with the Brazilian Federal Government, through ANEEL, and pursuant to authorizations granted to companies of the CEMIG Group, as the case may be.
ANEEL may impose penalties or revoke a concession or authorization if we fail to comply with any provision of the concession agreements or authorizations, including those relating to compliance with the established quality standards. Depending on the severity of the non-compliance, these penalties could include:
| · | Fines for breach of contract of up to 2.0% of the concession holder’s revenues in the financial year immediately prior to the date of the breach; |
| · | Injunctions related to the construction of new facilities and equipment; |
| · | Temporary suspension from participating in bidding processes for new concessions for a period of up to two years; |
| · | Intervention by ANEEL in the management of the concession holder that is in breach; |
| · | Revocation of the concession; and |
| · | Execution of the guarantees related to the concession. |
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Further, the Brazilian Federal Government can revoke any of our concessions or authorizations before the expiration of the concession term, in the event of bankruptcy or dissolution, or by legal termination, if determined to be in the public interest. It can also intervene in concessions to ensure adequate provision of the services, full compliance with the relevant provisions of agreements, authorizations, regulations and applicable law; and where it has concerns about the operations of the facilities of the Company.
Delays in the implementation and construction of new energy infrastructure can trigger the imposition of regulatory penalties by ANEEL, which, under ANEEL’s Normative Resolution No. 846 of June 11, 2019, can vary from warnings to the termination of concessions or withdrawal of authorizations.
Any compensation we may receive upon rescission of the concession agreement or revocation of an authorization may not be sufficient to compensate us for the full value of certain investments. If we are responsible for the rescission of any concession agreement, the effective amount of compensation could be lower, due to fines or other penalties. The imposition of fines or penalties or the early termination or revocation by ANEEL of any of our concession agreements or authorizations, or any failure to receive sufficient compensation for investments we have made, may have a material adverse effect on our business, financial condition and results of operations, and on our ability to meet our payment obligations.
Rules under the Fifth Amendment to the distribution concession contract came into effect in 2016. They contain new targets for service quality, and requirements related to CEMIG D’s economic and financial sustainability. These targets must be complied with over the 30 years of the concession. Compliance with these targets is assessed annually, and non-compliance could result in an obligation for CEMIG to inject capital into CEMIG D or a limitation on distribution of dividends or the payment of interest on equity by CEMIG D to CEMIG. According to ANEEL regulations, in case of failure to comply with global annual targets for collective continuity indicators for two consecutive years, or three times in five years, or at any time in the last five years of the agreement term, distribution of dividends or payment of interest on equity may be limited until compliance is resumed.
We are subject to extensive and uncertain governmental legislation and regulation which may be subject to change, and any changes to such legislation and regulation could have a materiallymaterial adverse effect on our business, results of operations and financial situation.
Our operations are highly regulated and supervised by the Brazilian Federal Government, through the MME, ANEEL, the National System Operator (Operador Nacional do Sistema, or ‘ONS’), and other regulatory authorities. These authorities have a substantial degree of influence on our business. MME, ANEEL and ONS have discretionary authority to implement and change policies, interpretations and rules applicable to different aspects of our business, particularly operations, maintenance, health and safety, consideration to be received and inspection. Any significant regulatory measure implemented by such authorities may result in a significant burden on our activities, which may have a material adverse effect on our business, results of operations and financial condition.
The Brazilian federal governmentFederal Government has been implementing policies that have a far-reaching impact on the Brazilian energy sector and, in particular, the electricity industry.sector. As part of the restructuring, Law No. 10,848, of the industry, the New Industry Model LawMarch 15, 2004 introduced a new regulatory regime for the Brazilian electricityenergy industry.
This regulatory structure has undergone several changes overin recent years, the most recent being the changes added by PMPA 579 (which was converted into Law No. 12,783/2013), which governs the extension of some concessions governed by Law No. 9,074 of July 7, 9,074/1995. Under this law, such concessions can, as from September 12, 2012, be extended only once, for up to 30 years, at the option of the concession authority.
Currently, the Law Project 232/2016 is under evaluation by the Congress. This draft law proposes changes in the legislation, arising from the former Public Consultation No. 33/2017, which includes some proposals for changes in the current regulatory model of the sector. These changes consist of subsidy reductions and revision of the allocation of costs, among others, creating the basis for a more open market.
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Amendments in the legislation and/or the regulations relating to the Brazilian electricityenergy industry could adversely affect our business strategy and the conduct of our activities if we are not able to anticipate the new conditions or if we are unable to absorb the new costs or pass them on to customers.
Our subsidiaries may suffer intervention In addition, we cannot guarantee that measures taken in the future by public authoritiesthe Brazilian Federal Government, in relation to ensure appropriate provision of services, or imposition of fines by ANEEL, for failing to comply with their concession agreements and/or authorizations, which could result in penalties or, depending on the severitydevelopment of the non-compliance, expiration of the concession agreements or revocation of the authorizations.
WeBrazilian energy system, will not have a negative effect on our activities. Further, we are unable to predict to what extent such measures might affect us. If we are required to conduct our generation, transmissionbusiness and distribution activities pursuant to concession agreements entered into with the Brazilian federal government, through ANEEL, and/or pursuant to authorizations granted our portfolio companies, as the case may be. ANEEL may impose penalties if we fail to comply with any provision of the concession agreements, including those relating to compliance with the established standards of quality. Depending on the severity of the non-compliance, these penalties could include:
In addition, the Brazilian federal government has the power to revoke any one of our concessions or authorizations, prior to the end of their term, in the event of bankruptcy or dissolution, or by a procedure of bringing forward expiration, for reasons related to the public interest. It can also intervene in concessions for the purpose of ensuring adequacy in provision of services, and faithful compliance with relevant provisions of contracts, regulations or law, and may also interfere in the operations of, and revenues arising from, the operations of the facilities of the Company and its subsidiaries.
Delays in the implementation and construction of new electricity undertakings can trigger the imposition of regulatory penalties by ANEEL, which, under ANEEL’s Resolution No. 63 of May 12, 2004, can vary from warnings to the termination of concessions or withdrawal of authorizations.
ANEEL may impose penalties or even repealbusiness plan, our concessions or authorizations in the event of a breach of a concession contract or authorization conditions. Any compensation we may receive upon rescission of the concession contract and/or withdrawal of an authorization may not be sufficient to compensate us for the full value of certain investments. If any concession contract is rescinded due to a fault of ours, the effective amount of compensation could be smaller, due to fines or other penalties. Rescission of our concession contracts, or imposition of penalties, could adversely affect the Company’s business, results of operations or financial position may be negatively affected.
Changes in Brazilian tax law or conflicts regarding its interpretation may adversely affect us.
The Brazilian Federal, state and financial condition.
Further, rulesmunicipal governments regularly implement changes in tax policies that affect us. These changes include the creation and alteration of taxes and charges, permanent or temporary, related to specific purposes of the new distribution contract come into effectgovernment. Some of these governmental measures can increase our tax burden, which could affect our profitability, and consequently our financial situation. We cannot guarantee that we will be able to maintain our cash flow and profitability after an increase in 2016. These rules contain new standards for service qualitytaxes and economic-financial sustainability of distribution companies, which must be complied with during the 30 years of the concessions. The evaluation of the standards will happen annuallycharges that apply to us, and in the event of non-compliance, it may become obligatory for the controlling stockholders of the distribution company to contribute additional capital; or this might result in limitation on dividends payment, or payment of interest on equity.
It is possible that we may not succeed in implementing, in a timely fashion, or without incurring unforeseen costs, the strategies contained in our Long-term Strategic Plan(1), and this could have adverse consequences for our businesses, results of operations and financial condition.
Our ability to achieve strategic objectives depends, largely, on successful, timely implementation with positive cost-benefit ratio, of our Long-term Strategic Plan. The following are some of the factors that could affect this implementation:
Any delays, such as those described above, or significant increases in our costs for another reason, could delay or prevent the successful implementation of our long-term strategic plan, which could cause anmaterial adverse effect on our businesses, results of operations and financial condition.the Company.
It is possible that the Company might face difficulties
We are subject to deliver the results expected in the business plan, at the time of acquisition of companies or those recently acquired, which might be adverse for its business, results of operations and financial condition.
The Company and its subsidiaries have been acquiring interests in other companies, and they intend to maintain this profile of their business expansion in the future. However, there is a possibility that the benefits expected from these acquisitions may not be achieved. The process of integrating an acquired business might subject the Company to certain risks, such as: unexpected expenses, not being able to integrate the activities of the acquired company, not realizing the economies of scale and the expected efficiency gains, potential delays related to the integration of the operations of the acquisitions, exposure to unexpected contingencies, and prior legal claims made against an acquired business. The Company and/or its subsidiaries might not be successful in dealing with these and other risks or problems related to the most recent acquisitions or any future acquisition transaction. The Company’s and/or its subsidiaries inability to integrate its operations successfully, or any significant delay in achieving such integration, could adversely affect our business, financial condition or operational results.
There are restrictions on our capacity for re-investmentability to make capital investments and to incur indebtedness, which could adversely affect our business, results of operations and financial condition.
We are subject to certain restrictions on our ability to re-invest and raise funds from third parties, which might prevent us from entering into new contracts for financing of our operations, or for the re-financing of our existing obligations, and which may adversely affect our business, results of operations and financial condition.
In relation to reinvestment, our by-laws state that we may use up to 40.0% of our annual EBITDA (earnings before interest, income taxes, depreciation and amortization), each fiscal year, on capital investments and acquisitions. Our ability to carry out our capital expenditure program is dependent upon a number of factors, including our ability to charge adequate rates for our services, access to the domestic and international capital markets, and a variety of operational and other factors. Further, our plans to expand our generation and transmission capacity are subject to thecompliance with competitive bidding processprocesses. These bidding processes are governed by Law No. 8,666/199313,303/2016 (the “Tenders Law”‘State Companies Law’).
RegardingIn relation to loans from unrelated parties. we note thatthird parties: (i) as a state-controlled company, we are subject to rules and limits onrelating to the level of credit that may be contracted byapplicable to the public sector, setincluding rules established by the National Monetary Council (Conselho Monetário Nacional, orCMN ‘CMN’), and by the Brazilian Central Bank – BACEN (the “Central Bank”),Bank; and also for operating in the electricity sector which(ii) we are also subject to the rules and limits established by ANEEL which govern thethat regulate indebtedness of electricity sector companies. Those bodies set certain parameters and indicators for financial institutions to be able to offer credit to companies in the public sector orenergy sector. Also, although we may access both the electricity industry. State-controlled companies, for example, may use the proceeds of external transactionsinternational and local capital markets, we, as a state-controlled company, can only be financed with funds extended by local commercial banks (debt, including bonds) only for the purpose of refinancing financial obligations. When it comes to local banks, state-controlled companies can enter into transactionsif such debt is guaranteed by duplicates of trade bills or forreceivables, as well as with funds extended by Brazilian federal banks in transactions with the purpose of refinancing financial obligations (federal banks only).
In addition, prior approval by the Finance Ministry the Central Bank is required before carrying out certain international financial transactions. Such approval is usually being given only if the purposecontracted with entities of the transaction isBrazilian financial system.
Further, we are subject to finance importation of goods or refinancecertain contractual conditions under our external debt. As a result of these rules, our ability to incurexisting debt is limited.
Further,instruments, and we may enter into financial agreementsnew loans that contain restrictive covenants whichor similar clauses that could restrainrestrict our operational flexibility. AsThese restrictions might also affect our ability to obtain new loans that are necessary for financing our activities and our growth strategy, and for meeting our future financial obligations when they become due, and this could adversely affect our ability to comply with our financial obligations. We have financing contracts and other debt obligations containing restrictive covenants, including Brazilian local market debentures and Eurobonds on international market.
We have approximately R$12.6 billion of this date,outstanding debt with financial covenant restrictions, and any breach could have severe negative consequences to us. See ‘– The Company has a considerable amount of debt, and it is exposed to limitations on its liquidity – a factor that might make it more difficult for the Company to obtain financing for investments that are planned and might negatively affect its financial condition and its results of operation.’
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If, for example, we breach a financial covenant under the CEMIG GT’s 9.25% Senior Notes due 2024 (the ‘Eurobonds’), we would be subject to an interest increase or acceleration of certain debt as a result of cross-default provisions under certain of our outstanding debt agreements. Similarly, if the Company violates a covenant under our debenture issuance, the debenture holders may accelerate the maturity of the debt in a meeting organized by the Fiduciary Agent (‘Trustee’), unless 75% of the debenture holders decide not to do so. Any acceleration of our outstanding debt could have entered intoa material adverse effect on our financial agreements with this profile with the Brazilian Development Bank (Banco Nacional de Desenvolvimento Econômico e Social, orBNDES). situation and may trigger cross-default clauses in other financial instruments.
In the event of non-compliance by ourselvesa default and acceleration, our assets and cash flow might be insufficient to repay amounts due, or to comply with an obligation contained in anythe servicing of these financing agreements, we are required to strengthen the guarantees of the financing, on penalty of early maturity of the contract.such debt. In the past, there have been occasions when we have, been non-complianton certain occasions, failed to comply with certain financial covenants whichthat had conditions that were more restrictive than the present ones.those currently in place. Although we have beenwere able to obtain waivers from our creditors in relation to such non-compliances, nopast non-compliance, we cannot guarantee can be given that we will be successful in obtaining any particular waiver in the future.
Our by-laws require us
The Company could suffer adverse effects in connection with its minority interest in Renova Energia S.A. if such entity is unable to keep certain financial indicators, including ratios relatedcontinue as a going concern
We have a 36.23% investment in Renova, which is currently in a court-supervised reorganization, and has reported recurring losses and equity deficit for the year ended December 31, 2020.
However, in view of the investee’s equity deficit, the Company reduced the carrying value of its equity interests in Renova to debt and reinvestment, within certain limits. In 2014 and 2015, certain financial limits and indicators required by our by-laws were exceeded pursuantzero. No further losses have been recognized, considering the non-existence of any legal or constructive obligations to the relevant approvals giveninvestee. Additionally, since June 30, 2019, considering Renova's financial situation the Company recorded an impairment of the full amount of credits with the jointly controlled entity in the amount of R$688 million.
On October 16, 2019, the request for processing the court-supervised reorganization of Renova Group was granted by our stockholdersSão Paulo Bankruptcy Court and the respective court-supervised reorganization plans were approved by Renova goup of creditors at the general stockholders’ meetingsGeneral Meeting of Creditors held on December 18, 2020 and ratified by the Second Bankruptcy and Court-Supervised Reorganization Court of São Paulo. The main effects of the the court-supervised reorganization plan were recorded on Renova’s financial statements at December 2020 and its measures are in progress. See Note 16 to our Financial Statements.
Further, Renova is being investigated by the Civil Police of Minas Gerais State and the Brazilian Federal Police, see risk factor ‘Anti-corruption investigations currently in progress in Brazil, which have received wide public exposure, and any allegations against CEMIG or anti-corruption investigations of CEMIG, could have adverse effects on perception of Brazil and of CEMIG’.
Since the Company´s investment in Renova is fully impaired at December 31, 2020, and since no contractual or constructive obligations in relation to the investee have been assumed by the Company, it is not expected that effects resulting from the court-supervised reorganization process (the plan was approved and if its implementation is successful), or the investigations, or the operational activities of this investee can significantly impact the Company’s financial statements (refer to Note 16 to our consolidated financial statements for those years. Such limits could affect our operational flexibility.more detail).
ProgramsRenova signed with the Company Debtor in Possession (DIP) loan agreements in the total amount of investmentR$37 million. The funds of these loans, made under specific rules of court-supervised reorganization proceedings, were necessary to support the expenses of maintaining the activities of Renova, and acquisitions will require additional capital, which might not be available on acceptable terms.
We will need funds to finance acquisitionswere authorized by the second State of São Paulo Bankruptcy and investments. However, we cannot guarantee that we will have our own funds or that we will be able to raise such fundsthe Court-supervised Reorganization Court. They are guaranteed by a fiduciary assignment of shares in a timely mannercompany owning assets of a wind power project owned by Renova, and they also have priority of receipt in the court-supervised reorganization process.
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On May 2, 2020, the State of São Paulo Bankruptcy and Court-supervised Reorganization Court issued a decision ordering that the DIP loan, in the total amount of R$37 million, with asset guarantee, already constituted and registered, would be subscribed as a capital increase in Renova. Company has filed a Motion for Clarification and in a virtual and permanent session of the necessary amounts, or at competitive rates (by issuance2nd Chamber of debt securities, or incurrenceBusiness Law of loans)the São Paulo Court of Justice, decided to finance investments and acquisitions. If weuphold the appeal. Thus, the clauses of the court-supervised plan that deal with the loan contracts signed by the Company are unable to obtain funds as planned, we may be unable to meet our acquisition commitments, and our investment program could suffer delays or significant changes, which could adversely affect our business, financial situation or future prospects.maintained.
A reduction in our credit risk rating or in Brazil’s sovereign credit ratings could adversely affect the availability of new financingsfinancing and increase our cost of capital.
The credit risk rating agencies Fitch Ratings, Moody’s, and Standard and Poor’s attribute a rating to the Company and its debt securities on a Brazilian basis, and also a rating for the Company on thea global basis.
Ratings reflect, among other factors, the outlook for the Brazilian electricityenergy sector, the hydrological conditions of the country,Brazil, the political and economic conditions, country risk, and the rating and outlook for the Company’sCompany controlling stockholder,shareholder, the State of Minas Gerais. If our ratings are downgraded
In the event of a downgrade due to any external factor,factors, our operational performance or high levels of debt, it may increase theour cost of capital and/or result in the inclusion of or breach ofcould increase and our ability to comply with existing financial covenants in the instruments that regulate our debt.debt could be adversely affected. Further, our operationaloperating or financial results and/orand the availability of future financingsfinancing could be adversely affected.
In addition, probable reductions in Brazilian sovereign ratings could adversely affect the perception of risk in relation to securities of Brazilian issuers, and, as a result, increase the cost of any future issues of debt securities. Any reductions in our ratings or Brazil’s sovereign ratings could adversely affect our operating and financial results, and our access to future financing.
Disruptions in the operation of, or deterioration of the quality of, our services, or those of our subsidiaries, could have an adverse effect onadversely affect our business, operating results and financial situation and results of operations.condition.
The operation of a complex electricitysystem that interconnects numerous power generation plants with large transmission lines and distribution systems and networks involves various risks, such as operational difficulties and unexpected interruptions, caused by accidents, breakage orequipment failure, of equipment or processes, performance below expected levels of availability and efficiency of assets,underperformance or disasters (such as explosions, fires, natural phenomena,climate events, floods, landslides, sabotage, terrorism, vandalism orand other similar events). Furthermore,In the event of any such occurrence, the insurance coverage for operational risks may be insufficient to fully repay the asset damage or service interruption costs incurred. In addition, National Grid Operator decisions, by the authorities responsible for the electricity network, environment matters, operationsRegulatory Agency acts, and other issues that affect electricity generation, transmission or distributionEnvironmental Authority demands could adversely affect the functioningour business.
The Company's income is strongly dependent on equipment availability, service quality and profitabilityregulatory compliance of the operations of our generation,assets and facilities it builds, operates and maintains. Failing to comply may lead to business losses. For example, the distribution business may be penalized in the tariff revision process with a higher "X-factor", reducing its expected annual revenue requirement; the transmission and distribution systems. If such factors occur, our insurance could be insufficient to cover in full the costs and losses that we might incurbusiness may have its annual permitted revenue reduced due to damage causedany asset unavailability; and the generation business may have its earnings affected if a power plant does not meet a minimum availability, since that when hydro generation is less than the previously contracted energy, the equivalent shortfall has to our assets, or due to outages.
Further, the revenues that the Company’s subsidiaries generate from establishing, operating and maintaining its facilities are related to the availability of the equipment and assets, and to the quality of the services (continuity and service in accordance with levels demanded by the regulations). Under the related concession contracts, the Company and its subsidiaries are subject to: (i) a reduction of their “Portion B” allocation (due to increase of the component Q in the formula for the “X Factor”be acquired at the time of the tariff review for the distributors; (ii) a reduction of the Permitted Annual Revenue (Receita Anual Permitida, orRAP), for the transmission companies; (iii) effects on the Availability Factor (Fator de Disponibilidade, orFID)spot price, which is highly volatile.
Penalties and the offtake guarantee levels for the generation facilities; and (iv) application of penalties and payment offinancial compensation amounts,are applicable depending on the scope, severity and duration of non-availability of the services and equipment. Therefore, outagesservice or stoppagesequipment unavailability. Thus, disruptions in our generation,power plants, transmission and distribution facilities, or in substations or networks, may causehave a material adverse effect on our business, financial situation and results of operations.operating results.
The operational and financial results of the affiliated companies in which we invested may adversely affect our strategies, results of operations and financial condition.
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We hold equity interests in, and conduct business through, a number of affiliated companies, including the acquisition of significant power generation and transmission assets (for further information, please refer to “Item 4. Information on the Company – Organization and Historical Background”). The performance of our affiliated companies, such as Taesa, Light, Renova and Aliança Geração, can have a significant impact in our businessconsiderable amount of debt, and results of operations, as our ability to meet financial obligations is related in part to the cash flow and earnings of our subsidiaries and the distribution or other transfer of those earnings to us in the form of dividends or other advances and payment.
In addition, some of our subsidiaries may in the future be subject to loan agreements that require that any indebtedness of these subsidiaries to us be subordinate to the indebtedness under those loan agreements. Our subsidiaries are separate legal entities. Any right we may have to receive assets of any subsidiary or other payments upon their liquidation or reorganization will be effectively subordinated to the claims of that subsidiary’s creditors (including tax authorities, trade creditors and lenders to such subsidiaries), except to the extent that we are a creditor of that subsidiary, in which case our claims would still be subordinated to any security interest in the assets of that subsidiary and indebtedness of that subsidiary senior to that held by us.
Further, as we do not control the management of several of these subsidiaries, their management practices may not be aligned with ours. Any deterioration in the results of operations or financial condition of any subsidiary or any sanctions or penalties imposed on them may have a negative effect on our results of operations or financial condition.
Delays in the process of construction of projects, or in the expansion of facilities, in new investments and in capitalizations in our generation, transmission and distribution companies could adversely affect our business results of operations and financial condition.
We are currently engaged in the construction and expansion of plants, transmission lines, distribution lines, distribution networks and substations, and also studying other potential expansion projects. Conclusion of the projects, within deadlines and budget, within the assumptions established in our Business Plan, and without adverse economic effects, and also of the projects of expansion, new investments, and the required capitalizations, is subject to various risks. For instance, we may encounter the following:
If we face any of these problems or other problems related to the new investments or to the expansion of our generation, transmission or distribution capacity, there is the possibility that we might suffer increases of costs, or, perhaps, lower profitability than originally projected for the projects.
We have substantial liabilities and are exposed to short-termlimitations on our liquidity constraints, which could– a factor that might make it more difficult for us to obtain financing for ourinvestments that are planned, investments and adverselymight negatively affect our financial condition and our results of operations.
In order to finance the capital expenditures needed to meet our long-term growth objectives, we have incurred a substantial amount of debt. As of December 31, 2020, our cash flow from operations in recent years has not been sufficienttotal loans, financing and debentures (including interest) was R$15,020 million; an increase of 1.64% compared to fund our capital expenditures, debt service and payment of dividends, our debt has significantly increased since 2012. Our total debt (including accrued interest) increased by 12.2 % tothe R$15,16714,777 million reported as of December 31, 2015,2019 and an increase of 1.68% compared to R$13,50914,772 million reported as of December 31, 2014 and to R$9,457 million as of December 31, 2013. Our debt, net of cash, cash equivalents and marketable securities, increased by 1.6% to R$11,815 million as of December 31, 2015 compared to R$11,628 million as of December 31, 2014 and to R$6,322 million as of December 31, 2013. 87.0%2018. Currently, 27.14 % of our existing debt (principal), orloans, financing and debentures - totaling R$13,1904,076 million, will maturehave maturities in the next fivethree years. In order toTo meet our growth objectives, maintain our ability to fund our operations and amortizecomply with scheduled debt maturities, we will need to raise significant amounts of debt capital from a broad range of funding sources.
To service ourits debt after meeting ourthe capital expenditure targets, we havethe Company has relied upon, and may continue to rely upon a combination of cash flows provided by ourits operations, sale of assets, drawdowns under ourits available credit facilities, ourits cash and short-term financial investments balance and the incurrence of additional indebtedness. Any further lowering of ourits credit ratings may have adverse consequences on ourthe Company’s ability to obtain financing or may impact ouraffect its cost of financing, also making it more difficult or costly to refinance maturing obligations. If, for any reason, we are faced with continuedthe Company were to face difficulties in accessing debt financing, this could hamper ourits ability to make capital expenditures in the amounts needed to maintain ourits current level of investments or ourits long-term targets and could impair ourits ability to timely meet ourits principal and interest payment obligations with our creditors, as our cash flow from operations is currently insufficient to fund such both planned capital expenditures and all of our debt service obligations.its creditors. A reduction in ourthe Company’s capital expenditure program or the sale of assets could significantly and adversely affect its results of operations.
Our strategy for maximizing value for CEMIG’s shareholdings depends on external factors that could impede its successful implementation.
CEMIG’s strategy for shareholdings is the maximization of value and capital recycling based on three pillars:
| · | Divestments: non-strategic or low synergy assets, and opportunistic offerings; |
| · | Expansion: mainly through investments in our distribution and transmission concessions, greenfield projects in renewable sources and with the renewing of power generation concessions; and |
| · | Management: synergy improvement, capital structure and distribution policy and governance enhancing. |
All those pillars can be affected by external factors, especially divestment that has to take into consideration particular risks associated to each business such as performance (technical, operational, commercial and financial), market risks, sectorial risks and national and international macroeconomic risks (e.g. market volatility). Furthermore, closing of divestment operations will depend on favorable development of negotiations with potential investors regarding the conditions of the possible transactions.
We might be unable to implement the strategies in our long-term strategic planning within a desired time, or without incurring unforeseen costs, which could have adverse consequences for our business, results of operations and financial condition.
Our ability to meet strategic objectives depends, largely, on successful, cost-effective and timely implementation of our Long-term Strategy and our Multi-year Business Plan. The following are some of the factors that could negatively affect this implementation:
| · | Inability to generate cash flow, or obtain the future financing, necessary for implementation of the projects; |
| · | Inability to obtain necessary governmental licenses and approvals; |
| · | Unexpected engineering and environmental problems; |
| · | Unexpected delays in the processes of eminent domain and establishment of servitude rights; |
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| · | Unavailability of the necessary workforce or of equipment; |
| · | Labor strikes; |
| · | Delay in delivery of equipment by suppliers; |
| · | Delay resulting from failings of suppliers or third parties in compliance with their contractual obligations; |
| · | Interference by climate factors, or environmental restrictions; |
| · | Changes in the environmental legislation creating new obligations and causing additional costs for projects; |
| · | Legal instability caused by political issues; |
| · | Substantial changes in economic, regulatory, hydrological or other conditions; and |
| · | The extension of the duration and severity of the coronavirus (Covid-19) pandemic and its impacts on our business. |
The occurrence of the above factors, separately or taken together, might lead to a significant increase of costs, and might delay or impede implementation of initiatives, and consequently compromise the execution of the strategic plan, negatively affecting our operating and financial results.
Furthermore, as we are a mixed-capital company controlled by the State of Minas Gerais, we are subject to changes to our board of directors and executive officers because of change in the political agents of the Executive Branch of government due to the electoral process and due to political instability. These types of changes may adversely affect the continuity of the Company’s strategy.
The operating and financial results of our subsidiaries, jointly controlled entities and affiliates, minority investees or from those companies, which may be acquired in the future, might negatively affect our strategies, operating results and financial situation.
We own equity in and do business through various subsidiaries and investees, including companies with assets in energy generation and transmission, energy and natural gas distribution and other correlated business. The future development of our subsidiaries, jointly-controlled entities and affiliates, such as Transmissora Aliança de Energia Elétrica S.A. (‘Taesa’) and Aliança Geração de Energia S.A. (‘Aliança’) as well as Renova Energia S.A. (Renova), Guanhães Energia S.A., Norte Energia S.A. (‘NESA’) and Madeira Energia S.A. (‘MESA’), in which the Company has significant financial commitments, could have a significant impact on our business and operating results. The Company’s ability to meet its financial obligations is correlated, in part, to the cash flow and the profits of its subsidiaries and investees, and the consequent distribution to the Company of such profits in the form of dividends or other advances or payments. If these companies’ abilities to generate profit and cash flow are reduced, this might cause a reduction of dividends and interest on capital paid to the Company, which could have a material adverse effect on our results of operations and financial position.
In addition, the investees might not reach the results expected when they were acquired. The process of integration for any acquired business could subject the Company to certain risks, such as, for example, the following: (i) unexpected expenses; (ii) inability to integrate the activities of the companies acquired with a view to obtaining the expected economies of scale and efficiency gains; (iii) possible delays related to integration of the operations of companies; (iv) exposure to potential contingencies; (v) legal claims made against the acquired business that were unknown at the moment of its acquisition, might negatively affect our strategies, operating results and financial situation, (vi) environmental licensing and liabilities, (vii) hydrological risk, (viii) power system operation and control, and (ix) general claims. The Company might be unsuccessful in dealing with these or other risks, or problems related to any other operation of a future acquisition and be negatively affected by the companies acquired or which may be acquired in the future.
Further, some of our subsidiaries and investees might, in the future, enter into agreements with creditors that could restrict dividend payments or other transfers of funds to the Company.
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Due to the Covid-19 pandemic, results of subsidiaries and investees might be affected, since the reduction on economic activity has the potential to decrease energy consumption, leading some of those companies to lose their abilities to generate profit, reducing cash flow and dividends and interest on capital paid to the Company. These subsidiaries are separate legal entities. Any right that we might have in relation to receipt of assets or other payments in the event of liquidation or reorganization of any subsidiary, will likely be in fact structurally subordinated to the demands of the creditors of such subsidiary (including tax authorities, commercial creditors and lenders to those subsidiaries).
Any deterioration in the operating results or financial conditions of these subsidiaries, and any sanctions or penalties imposed on them, could have a material adverse effect on the Company’s results of operations or financial condition.
Delayed completion of construction projects or late capitalization of new investments in our generation, transmission and distribution companies could adversely affect our business, operation results and financial condition.
We are constantly engaged in the construction and expansion of our plants, transmission lines, distribution networks and substations, and studying other potential load expansion projects. The company’s capability to complete projects within deadlines and on budget, without adverse economic effects, is subject to various risks. For instance, we may encounter the following:
| · | Numerous complications in the planning and execution stages of load expansion projects and other new investments may occur, such as strikes, lagging suppliers of materials and services, delays in tender processes, embargos on work, unexpected geological and climate conditions, political and environmental uncertainties, financial instability of our partners, contractors and subcontractors; |
| · | Regulatory or legal challenges that delay the date expansion projects are put into operation; |
| · | New assets might operate below the planned capacity, or their operation/installation costs might be greater than planned; |
| · | Difficulty to obtain adequate working capital to fund the expansion projects; |
| · | The unintentional shutdown of the transmission assets during the execution of the load expansion projects can reduce the revenue of the Transmission business; |
| · | ONS’s (‘Operador Nacional do Sistema’, Brazil’s ISO) refusal to authorize the execution of work on the transmission grid, due to power system restrictions; |
| · | Environmental demands and claims by local communities during construction of power generation plants, transmission lines, distribution lines, distribution networks and substations; and |
| · | Depletion of the outage duration indicator limit – SAIDI-i (known as Duração Equivalente de Interrupção por Unidade Consumidora - DECi) forcing construction to halt. If SAIDI-i limit is violated (either by system fault, equipment failure or construction work) for two years in a row between 2016 and 2020, or violated specifically in the year 2020, this will result in the Regulator initiating a legal process for the termination of the concession agreement. In 2020, CEMIG did not exceed the limit for the SAIDI-I limit, and in the fifth year of the concession, the Company achieved the best result in its history, 9.58 hours, compared to the limit of 10.44 hours set by the Regulator (‘ANEEL’). |
If faced with any of these or similar issues related to the new investments or to the expansion of our generation, transmission or distribution capacity, the Company might incur increased costs or lower profitability than originally expected for the projects.
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The level of default by our customers could adversely affect our business, operating results and/or financial situation as well as those of our subsidiaries.
On December 31, 2020, the total of our past-due receivables owed by customers, traders and power transport concession holders was approximately R$1,510 million (R$1,635 million in 2019), corresponding to 5.99% of our consolidated net revenue in 2020 (6.42% in 2019). We have recorded in 2020 an allowance for doubtful accounts in the amount of R$712 million (R$810 million in 2019). The possibility exists that we might be unable to collect amounts receivable from various customers, which are in arrears. If such debts are not totally or partially settled, we will suffer an adverse impact on our business, operation results and/or financial situation. Additionally, the amount of debts in arrears from our customers that exceeds the allowance could cause an adverse effect on our business, operating results and/or financial condition.
CEMIG D’s economic and financial sustainability is directly related to the effectiveness of the actions to control energy losses, and the regulatory limits established for it. If CEMIG D fails in successfully controlling energy loss, its business, operations, profit and financial situation could be substantially and adversely affected.
The energy losses of a distribution company comprise two types of losses: technical losses and non-technical (commercial) losses. Technical losses are inherent to the process of transporting and transformation of electric power and occur in the cables and equipment of the energy system. Non-technical losses comprise energy that is supplied and not invoiced, which may be the result of illegal connections (theft), fraud, metering errors or failures in internal processes.
CEMIG’s Total Losses Index as of December 31, 2020, using a 12-month window was 12.57%. This percentage is in relation to the total energy injected into the distribution system (the total volume of losses was 6,545 GWh). Of that percentage, 8.77% comprised technical losses, and 3.80% comprised non-technical losses. This result was 0.16 percentage points lower than the result for December 2019 (12.73%), and above the regulatory target set by ANEEL for 2020 (11.43%).
From a regulatory point of view, ANEEL has been increasingly rigorous in establishing target caps for distribution losses. The target caps for non-technical losses are set based on a benchmarking model that compares using an index, which measures the social-economic complexity of each concession area and how efficient the distributors are in combating non-technical energy losses. For the targets for technical losses, ANEEL uses metering measurements and power flow software.
In light of this complex scenario, involving regulatory uncertainties, even with the implementation of a strategy to reduce technical and commercial losses, CEMIG cannot guarantee that the target caps for losses established by ANEEL will be met in the short term, and this could affect the Company’s financial situation and operating results, since the portion of a distribution company’s power losses that exceeds the regulatory cap cannot be passed through to the customer as an expense in the form of an increase in tariffs.
Dams are part of the critical and essential infrastructure in the Brazilian energy sector. Dam failures can cause serious damage to affected communities and to the Company.
There is an intrinsic risk of dam failure, due to factors that may be internal or external to the structure (such as, for example, failure of a dam upstream from the site). The scale, and nature, of the risk are not entirely predictable. Thus, we are subject to the risk of a dam failure that could have repercussions far greater than the loss of hydroelectric generation capabilities. The failure of a dam could result in economic, social, regulatory, and environmental damage and potential loss of human life in the communities downstream from dams, which could have a material adverse effect on the Company’s image, business, results of operations and financial condition.
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We might be held responsible for impacts on our own workforce, on the population and the environment, due to accidents related to our generation, transmission and distribution systems and facilities.
Our operations, especially those related to transmission and distribution lines, present risks that may lead to accidents, such as electrocutions, explosions and fires. These accidents may be caused by natural occurrences, human errors, technical failures and other factors. As a significant part of our operations is conducted in urban areas, the population is a factor to be constantly considered. Any incident that occurs on our facilities or in human occupied areas, whether regularly or irregularly, can result in serious damages such as human losses, environmental and material damage, loss of production and liability in civil, criminal and environmental lawsuits. These events may also result in reputational damage, financial compensations, penalties for the Company and its officers and directors, and difficulties in obtaining or maintaining concession contracts and operating licenses.
Requirements and restrictions imposed by environmental agencies might require the Company to incur additional costs.
Our operations relating to generation, distribution and transmission of energy and distribution of natural gas are subject to various Federal, state and municipal laws and regulations, and to numerous requirements relating to the protection of health and the environment. Delays by the environmental authorities, or the refusal of license requests by them, or any inability on our part to meet the requirements set by these bodies during the environmental licensing process, may result in additional costs, or even, depending on the circumstances, prohibit or restrict the construction or maintenance of these projects.
Any non-compliance with environmental laws and regulations, such as construction and operation of a potentially polluting facility without a valid license or authorization, could give rise to the obligation to remedy any damages that are caused (third party liability) and result in criminal and administrative sanctions. Under Brazilian legislation, criminal penalties, such as imprisonment and restriction of rights, may be applied to individuals (including managers of legal entities), and penalties such as fines, restriction of rights or community service may be applied to companies. With respect to administrative sanctions, depending on the circumstances, the environmental authorities may: (i) impose warnings, or fines, ranging from R$50,000 to R$50 million; (ii) require partial or total suspension of activities; (iii) suspend or restrict tax benefits; (iv) cancel or suspend lines of credit from governmental financial institutions; or (v) prohibit us from contracting with governmental agencies, companies or authorities. Any of these actions could adversely affect our business, results of operations and financial condition.
We are also subject to Brazilian legislation that requires payment of compensation if our activities have polluting effects. According to Federal Law No. 9,985/2000, Federal Decree No. 6,848/2009, and Minas Gerais State Decree No. 45,175/2009, up to 0.5% of the total amount invested in the implementation of a project that causes significant environmental impact should be used to pay for offsetting, based on the project’s specific level of pollution and environmental impact. State Decree 45,175/2009 (‘Decree 45,175’) also indicated that the compensation rate will be applied retroactively to projects implemented prior to promulgation of the present legislation.
Among the provisions of law that can lead to operating investments and expenses, one is compliance with the Stockholm Convention on Persistent Organic Pollutants (the ‘Convention’), to which Brazil is a signatory, assuming the international commitment to withdraw the use of PCB by 2025, and its complete prohibition by 2028, through Decree No. 5,472, of June 20, 2005. The legislation to be enacted for this purpose could have a major effect on the energy industry and on CEMIG, due to the possibility of obligations to list, replace and dispose of equipment and materials containing substances included in the Convention such as Polychlorinated Biphenyls (PCBs).
If we are unable to meet the technical requirements established by the environmental agencies during the process of licensing, this might prejudice the installation and operation of our projects, or make carrying out of our activities more difficult, which could negatively affect our results of operations.
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We are controlled by
Finally, the Governmentadoption or implementation of new safety, health and environmental laws, new interpretations of existing laws, increased rigidity in the application of the Brazilian Stateenvironmental laws, or other developments in the future might require us to make additional capital expenditure or incur additional operating expenses in order to maintain our current operations. They might also restrain our production activities or demand that we take other action that could have an adverse effect on our business, results of Minas Gerais, which may have interests that are different from thoseoperations or financial condition.
Cyber-attacks, or violation of the other investors or of the Company.
As our controlling shareholder, the government of the Brazilian State of Minas Gerais exercises substantial influence on the strategic orientationsecurity of our business. Currently it holds 51%data might lead to an interruption of our common shares and, consequently, has the majorityoperations, or a leak of votes in decisions of the General Meetings of Shareholders, and can: (i) elect the majority of the members of the Board of Directors; and (ii) approve matters that require a specific quorum of our shareholders. The latter include transactions with related parties, shareholding reorganizations and the date and payment of any dividends.
The state government, as our controlling shareholder, has the capacity to cause the Company to concentrate on activities and make investments that are intended to promote its own economic or social objectives, which may not be aligned with the strategyconfidential information either of the Company, or the interests of our customers, third parties or interested parties, might cause financial losses, legal exposure, damage to reputation or other shareholders.severe negative consequences for the Company.
We manage and store personal and sensitive or confidential data related to our business. Our information technology systems may be vulnerable to a variety of and cybersecurity breaches and incidents. Computer hackers may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third parties, create system disruptions, or cause shutdowns. Computer hackers also may be able to develop and deploy viruses, worms and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our products.
The costs we may incur to eliminate or address the security problems and security vulnerabilities before or after a cyber-related incident could be significant. Our remediation efforts may not be successful and could result in interruptions, delays or cessation of service, and loss of existing or potential customers that may impede our critical functions.
Successful cybersecurity attacks, breaches, employee malfeasance, or human or technological error may result in unauthorized access to, disclosure, modification, improper use, loss or destruction of data or systems, including those belonging to us, our customers or third parties; theft of sensitive, regulated or confidential data including personal information; the loss of access to critical data or systems through ransomware, destructive attacks or other means; transaction errors; business delays; and service or system disruptions. We have observed an increase in cybersecurity attacks worldwide in 2020, and the remote working arrangements that we have implemented due to the Covid-19 pandemic have increased our dependence on information technology systems and infrastructure, and they may further expand our vulnerability to this risk. In the event of such actions, we, our customers or other third parties could be exposed to risk of loss or improper use of this information, resulting in litigation and potential liability, damage to our brand and reputation, or otherwise harm our business. In addition, we rely on third-party infrastructure providers whose potential security vulnerabilities could have impact in our business.
On December 25, 2020 an anomalous behavior, related to ransomware attacks, was detected by our Security Operation Center (SOC). Due to a quick and efficient response by CEMIG Cyber Security Team (CSIRT) the Industrial Control System (ICS) related to our critical infrastructure and the main databases (customers, billing and enterprise management) were not affected and no data was exfiltrated, causing no impact to customer services this way.
The regulatory environment with regards to cybersecurity, privacy and data protection issues is increasingly complex and may have impacts on our business, including increased risk, costs and expanded compliance obligations.
Failures in the security of our databases containing customer personal data, as well as events related to non-compliance with data privacy and protection legislation may have an adverse effect on our business, results of operation and reputation.
We have databases containing collected personal data from our customers, partners and collaborators. Any improper use of this data, or failures in the correct use of our security protocols may negatively affect the integrity of those databases. Unauthorized access to information concerning our customers, or unauthorized disclosure of sensitive information, may subject us to lawsuits, and as consequence, we might incur financial liabilities, penalties and reputational damage.
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The Brazil General Data Protection Law (Lei Geral de Proteção de Dados Pessoais, or LGPD), was signed into law in August 2018 and came into effect on September 18, 2020, with the exception of the administrative sanctions, which are expected to come into effect in August 2021. This law establishes rules and obligations regarding the collection, processing, storage and use of personal data and will affect all economic sectors including the relationship between customers and suppliers of goods and services, employees and employers and other relationships in which personal data is collected, whether in a digital or physical environment. Violations of the LGPD carry financial risks due to penalties for data breach or improper processing of personal data. The new legislation establishes penalties for non-compliance that include application of fines of up 2% of revenues, limited to R$50 million, for the most serious infringements. An increased number of data protection laws around the globe may continue to result in increased compliance costs and risks. The potential costs of compliance with or imposed by new or existing regulations and policies that are applicable to us may affect our business and could have a material adverse effect on our results of operations.
Increases in energy purchase prices could cause an imbalance in CEMIG D’s cash flows.
The expense on purchase of power from the distributors is currently strongly linked to the PLD price (Availability Contracts, Physical Guarantee quotas, and Itaipu Hydroelectric Plant quotas) and to MRE’s adjustment factor (Physical Guarantee quotas, Itaipu quotas and Hydrological Risk of the plants that have been renegotiated).
In 2018, a combination of negative factors affected purchases by the distributors, including (i) an adverse period in terms of rainfall, resulting in high spot prices from May to October; and (ii) seasonalization of the physical guarantee of the MRE, allocating a large volume of energy in the second half of 2018, resulting in very low MRE adjustment factors between June and October. In 2019, the spot prices were not as high as in 2018.
The ‘Flag Account’ (Conta Centralizadora de Recursos de Bandeiras Tarifárias – CCRBT or ‘Conta Bandeira’) manages the funds that are collected from captive customers of distribution concession and permission holders operating in the national grid, and are paid, on behalf of the CDE, directly to the Flag Account. The resulting funds are passed through by the CCEE to distribution agents, based on the difference between the realized amounts of costs of thermal generation and the exposure to short term market prices, and the amount covered by the tariff in force.
The first half of 2019 had a smaller deficit on the Tariff Flag account compared to same period in the previous year and, as of June, 2019, the account no longer presented a deficit and 2019 ended with an accumulated surplus of R$745 million for all distribution companies in Brazil. This positive result was due to the better hydrological conditions of the system.
In 2020, the surplus lasted for almost the entire year, but started a declining trend from October, reaching a deficit of around R$3 billion in November for all distribution companies. The reason for the deficit was the increase in energy costs, mainly due to a considerable increase in PLD prices in that month. Due to the actions undertaken to mitigate the impacts of the pandemic, ANEEL suspended the application of tariff flags in 2020, but with the scenario getting worse, there was a necessity to reapply it in December 2020 at its maximum value.
The methodology of the Tariff Flag system is reviewed every year, always seeking improvements, but under the present methodology, when very adverse situations occur the system cannot respond sufficiently, resulting in negative effects on the distributors’ cash position. This factor could have an adverse effect on our business, operating results and financial condition.
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Brazil’s supply of electricityenergy is heavily dependent on hydroelectric plants, which in turn depend on climatic conditions to produce electricity.energy. Adverse hydrological conditions that result in lower generation of hydroelectric power could adversely affect our business, results of operations and financial condition.
As is widely known, hydroelectricHydroelectric generation is predominant in Brazil – constituting approximately 65% of total installed capacity.Brazil. The advantages of hydroelectric power have also been widely publicized:publicized due to it is a renewable resource and enablesavoids substantial expenditures on fuels in thermal generation plants to be avoided.plants. At the same time, the main difficulty in the use of this resource arises from the variability of the flows to the plants. There are substantial seasonal variations in monthly flows and in the total ofannual flows, over the year, which depend fundamentally on the volume of rain that falls in each rainy season. Adverse hydrological conditions in the Brazilian Southeast resulted insoutheast region caused drought and water scarcity of water in the states of São Paulo, Minas Gerais and Rio de Janeiro.Janeiro in recent past. These conditions may get evenmight become worse during the dry period, –which occurs from April tothrough September. This could also lead tocause rationing of water consumption –and/or energy, which could have a material adverse effect on the Company’s business and consequently,results of electricity.operations.
To deal with this problem,difficulty, the Brazilian system has a complementary thermalcomponent of thermoelectric generation system – with about 28% of the total power generation capacity (and has increased the useplants, and a growing portfolio of wind power).farms and Photovoltaic solar farms. It also has accumulatedaccumulation reservoirs, the purpose of which is to secure water reserves, for the purposes of maintaining the necessary water supply from the rainy season to the dry seasonperiod and from one year to the next. However, these measuresmechanisms are to date, not able to handleabsorb all the adverse consequences of a prolonged water shortages, such ashydrological shortage, like the one that which occurredwe have seen in 2014.the recent past.
The operation of the whole system is coordinated by the National Energy System Operator (Operador Nacional do Sistema, or ONS).‘ONS’) coordinates the operation of the Brazilian energy system. Its primary function is to achieve optimal operation of the resources available, minimizing operating cost, and minimize operational costs andthe risks of electricity shortages.shortage of energy. In periods when the hydrological situation is unfavorable,adverse, a decision by the ONS can (as it did in 2014) reducesmight, for example, reduce generation by hydroelectric plants and increase thermal generation, which results in higher costs for the hydroelectric generators. Forgenerating agents, as happened in 2014. In the distribution companies,distributors, this increase in costs increasesgenerates an increase in the purchase price of their electricity purchases whichenergy that is not always passed through immediately to the consumer, causingcustomer at the same moment, generating mismatches in cash flows, which haswith an adverse effect on the business and financial conditions. Further,situation of those distributors. In addition, in the eventextreme cases of extreme shortagesscarcity of electricityenergy due to unfavorableadverse hydrological conditions,situations, the system experiencesmight undergo rationing, which could result principally in a reduction of cash flow.
ToThe MRE aims to mitigate the effectimpact of the seasonalityvariability of generation of the hydroelectric plants, the Energy Reallocation Mechanism (Mecanismo de Realocação de Energia,or MRE) was created.hydroelectrical plants. This mechanism shares the generation of all the hydroelectrichydroelectrical plants in the system in such a way as to supplement the shortage of generation of one plant with excess generation by another. However, this mechanism is not able to eliminate the risk of the generation players, because when there is an extremely unfavorable hydrological situation, to the extent that that all the plants in aggregate are unable to reach the sum of their Physical Guarantee levels of powerenergy output, this mechanism makes an adjustment to the Physical Guarantee of each plant through the Physical Guarantee Adjustment Factor (Fator de Ajuste da Garantia Física, or GSF)‘GSF’), resulting in the generating companies being exposed to the short-term (“spot”(‘spot’) market.
In 2014, factors such as a reduction in consumption, low storage levels inThe company transferred to captive customers the reservoirs, low hydrology (rainfall levels and other sources of water) and increased capacity and use of thermoelectric plants have led to a reduction in hydroelectric generation which, in turn, led to a lower GSF. Hydroelectric Generation Companies are aware of thishydrological risk and, as such, they typically separate approximately 5% of their physical guarantee levels to mitigate the levels of the GSF. However, extraordinary conditions with respect to a lack of rainfall led to a GSF below the values expected by Hydroelectric Generation Companies, closing the year 2014 at a GSF of 0.91. In 2015, in spite of the small improvement in hydrological conditions, continuous dispatching of the thermal plants, and the lower load, resulted in a GSF of 0.84 at the close of the year. This means that there has been a reduction of more than 15% in the output of the Hydroelectric Generation Companies – and when there is no excess to compensate this reduction it results in increased exposure to the spot market. The exposures to the spot market, and the balance between requirements and resources, are measured monthly by the Electricity Trading Chamber (Câmara de Comercialização de Energia Elétrica, orCCEE). These exposures, negative or positive, are valued by the spot price (Preço de Liquidação de Diferenças—PLD). If the exposures are negative the generator will have a debit in the CCEE, thus affecting its cash flow.
This unexpected exposure of hydroelectric generation companies to spot prices, resulting from low GSF values, caused these companies to seek legal injunctions to avoid exposure to the spot prices, which led to a large number of injunctions which had the effect of paralyzing the CCEE market.
In 2015, to correct this situation, the federal government published Provisional Measure 688, enacted as Law No. 13,203, of December 8, 2015, which created the mechanism of voluntary re-negotiation of hydrological risks as they affect the hydroelectric generation companies. In this process, the generator was allowed to transfer their costs and revenues related to hydrological risk to consumersQueimado and Irapé power plants (Regulated Market Contracts), in exchange for the payment of a “risk premium” to be deposited in the so-called tariff band deposit account (the tariff band surcharges are deposited in such account and transfers to the distribution concessionaires are made from this account as well) and would be indemnified‘risk premium’, while also receiving indemnity for the losses suffered in 2015 by means of, among other measures, an extension of their power generation grants (concessions or authorizations, as the case may be) for up to 15 years. In other words, hydroelectric power plants would recover the costs incurred with GSF deficits retroactively to January 2015, and such recovery would form a “regulatory asset” which would be amortized over the term of the concession with a postponement of the risk premium. If the remaining concession/authorization period is insufficient (i.e. not long enough to amortize the regulatory asset), then generators would have a concession/authorization extension (limited to 15 years). To be able to use the mechanism the companies have to waive all claims filed and all injunctions obtained, as well as waive any further rights they would have in connection such lawsuits. This mechanism enables plants with contracts signed in the regulated market and the free market to renegotiate them. However, the system and mechanism for renegotiating are different in the two markets. In both, this mechanism functions as a hedge – in which the generators bear the high cost of reserve of energy, and for their generation they receive the amount stipulated by the spot market price.through.
In the free market, the system didwe do not receivehave the same acceptance,process, since even with the payment of the premium, generation companies would have had to continue assuming the hydrological risk at moments of critical hydrology. In this environment,Thus, no plant that sells energy in the system required contractingfree market signed up for any renegotiation of reserve energy, which has very high prices, for mitigationhydrological risk.
Those operators that did not subscribe to the renegotiation continued to have injunctions preventing charging of the hydrological risk. Forrisk in full. These injunctions are causing a deficit of approximately R$10.030 billion in the short-term market as of December 2020. This position increases the level of default calculated by the CCEE, thus reducing the amounts received by creditor agents in the short-term market. To avoid this reason this mechanism became inefficienteffect, some creditor agents filed for further injunctions to acquire the right to priority in receipt. This effect leads to uncertainty in the market, reduction of liquidity, increase of default, and reduction in amounts received in the short-term market, representing a risk for the Company.
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Any substantial seasonal variation in the monthly flows and in the total of flows over the year could limit hydroelectric generation, companies. Acceptancemaking it necessary to use alternative generation systems, which could have a significant adverse effect on the Company’s costs, including court fees and expenses relating to the subject.
Law 14,052/2020 and Resolution 895/2020, proposed the reimbursement of agents holding the concession of hydraulic plants in the MRE of the mechanism byeffects: (i) generation in disregard of the regulatedmerit order which means dispatching energy to the grid in disregard of the ascending price ranking for energy generation, (ii) anticipation of delivery of firm energy to the system of relevant power plants, and (iii) restriction to the supply of energy to the grid due to delay in the transmission system. These effects will be calculated retroactively from 2012 to 2020, updated and remunerated at the ANEEL rate of 9.63%. The amount will then be paid through extension of the plants' concession. With this new agreement, injunctions are expected to be withdrawn and market was, approximately, 90%. However, it was not accepted bydeficits to be settled. In this way, the free market.liquidity of the market in the short term and the default in the CCEE should return to their historical values.
The rules for electricityenergy trading and market conditions may affect the sale prices of electricity.energy.
Under the applicable law,laws, our generation companies are not allowed to sell electricityenergy directly to our distribution companies:distributors. Thus, the power producedgenerated by our generation companies is sold in the ACRRegulated Market (Ambiente de Contratação Regulado, or ‘ACR’) – also referred to as the ‘Pool’ – through public auctions conductedheld by ANEEL, or inthrough the Free Market (Ambiente de Contratação Livre, or ACL).‘ACL’) through bilateral negotiations with customers and traders. The applicable legislation allows the distributors that enter intosign contracts for existing energy supply (‘energia existente’) with the generation companies in the (ACR)Regulated Market to reduce the quantity of energy contracted by up to 4%, per year, (calculated onin relation to the valueamount of the original contract)contract, for the entire period of the contract. This exposes Brazilianour generation companies to the risk of not being able to sellselling the power that has been de-contracted supply at adequate prices.
We conduct trading activities through power purchase and sale agreements, mainly in the ACL,Free Market, through our generation and trading companies. Contracts in the ACLFree Market may be entered into with other generating entities, energy traders, or mainly, with “Free Consumers”.‘free customers.’ Free Consumerscustomers are consumerscustomers with a demand of 3MW1.5 MW or more: they are allowed to choose their electricity supplier.energy supplier, this limit will be reduced to 1.0 MW in 2022 and 0.5 MW in 2023 (Ordinance 465, published by the Ministry of Mines and Energy in December 2019). Some contracts allow this type of consumerhave flexibility in the amount sold, allowing the customer to buyconsume a higher or lower volume of electricityamount (5% on average) from our generationgenerating companies than originallythe original amount contracted, for (by 5%which might cause an adverse impact on average), and this could adversely affect our business, operating results of operations andand/or financial situation.
Other contracts do not allow for this kind of flexibility in the purchase of electricity,energy, but increased competition in the Free Market could influence the occurrence of this type of arrangement in purchase contracts in the ACL.contracts.
In addition to the Free Consumersfree customers referred to above, there is a category of clientscustomers referred to as “Special Consumers”‘Special Customers’, which are those with contracted demand between 500kW0.5 MW and 3MW.1.5 MW. Special ConsumersCustomers are eligible to participate in the Free Market provided they buy electricityenergy from incentive-bearing alternative sources, such as Small Hydroelectric Plants,plants, biomass plants or wind farms. As envisaged by the Ordinance 465/ 2019, by 2023 the demand restriction for free consumers will suffer reduction from 3.0 MW to 0.5 MW, and consider there will be no more separation of free and special consumers. The companyCompany has conducted sales transactions for this category of electricityenergy from specific electricityenergy resources in particular companies of the groupCEMIG Group and, since 2009,2009; the volume of these sales has gradually increased. The Company has formed a portfolio of purchase contracts, which now occupies an important space in the Brazilian electricityenergy market for incentive-bearing alternative power sources. Contracts for the sale of electricityenergy to these clientscustomers have specific flexibilities to serve their needs, and these flexibilities of greater or lesser consumption are linked to the historic behavior of these loads. Higher or lower levels of consumption by these clientscustomers may cause purchase or sale exposures to spot prices, which can have an adverse impact on our business, operationaloperating results and/or financial situation. Market variations, such as variations of prices for signature of new contracts, and of volumes consumed by our clientscustomers in accordance with flexibilities previously contracted, can lead to spot market positions, which can potentially have a negative financial impact on our results.
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The Energy Reallocation Mechanism (MRE) was createdMRE aims to reduce the exposure of generators of hydroelectric power, such as our generation companies, to the uncertainties of hydrology. It functions as a pool of hydroelectric Generation Companies, in which the generation of all the plants participating in the MRE is shared in such a way as to meet the demand of the pool. When the totality of the plants generates less than the amount demanded, the mechanism reduces the assured offtake levels of the plants, causing a negative exposure to the short-term (“spot”(‘spot’) market and, as a consequence, the need to purchase power supply at the “spot” price (thePreço de Liquidação de Diferenças,or PLD).spot price. Correspondingly, when the total generation of the plants is morehigher than the volume demanded, the mechanism increases the guaranteed offtake level of the plants, leading to a positive exposure, permitting the saleliquidation of power at the spot rate (PLD).PLD. In years of poor rainfall, the reduction factor, which applies to the assured energy levels, can reduce the levels of the hydroelectric plants by up to 20% or more.
In 2015 the Brazilian federal government proposed a system of voluntary renegotiation relating to hydrological risk. This process enabled the generating companies to transfer their costs and revenues related to hydrological risk to consumers in exchange for the payment of a “risk premium” to be deposited in the so-called tariff band deposit account (the tariff band surcharges are deposited in such account and transfers to the distribution concessionaires are made from this account as well) and would be indemnified for the losses suffered in 2015 by means of, among other measures, an extension of their power generation grants (concessions or authorizations, as the case may be) for up to 15 years. In other words, hydroelectric power plants would recover the costs incurred with GSF deficits retroactively to January 2015, and such recovery would form a “regulatory asset” which would be amortized over the term of the concession with a postponement of the risk premium. If the remaining concession/authorization period is insufficient (i.e. not long enough to amortize the regulatory asset), then generators would have a concession/authorization extension (limited to 15 years).
In the free market, the system was not favorable enough to gain acceptance: even with the payment of the risk premium, generation companies would have been required to continue assuming the hydrological risk at moments of critical hydrology. In this environment, the system required contracting of reserve power, which has very high prices, for mitigation of the hydrological risk.
Low liquidity or volatility in future prices, due to market conditions and/or perceptions, could negatively affect our results of operations. Further, if we are unable to sell all the power that we have available (our own generation capacity plus contracts under which we have bought supply of power) in the regulated public auctions or in the Free Market, the unsold capacity will be sold in the CCEE at the spot price (PLD),PLD, which tends to be very volatile. If this occurs in periods of low spot prices, our revenues and results of operations could be adversely affected.
IncreasesThe PLD’s value is calculated through the results of the optimization models of the operation of the national grid used by the ONS and by the CCEE. The PLD is currently published weekly by the CCEE for three load levels (light, medium and heavy). The models depend on entry data revised by the ONS at each period of four months, monthly, and weekly. In this system, there is the possibility that errors occur during the input of data into the model, which can lead to an unexpected change in the PLD. Alteration of these models, and errors in data input, constitute risks for the trading business, because they cause uncertainty in the market, reducing liquidity, and financial losses due to the unexpected change of price. To mitigate the risk of change of the models during the current year, the National Energy Policy Council (CNPE) published a note in 2016 which established that changes in the mathematical models used in the sector will need to be approved by the CPAMP (‘Comissão Permanente para Análise de Metodologias’ – Standing Committee for Methodologies Analysis and Energy Industry Computer Programs) by July 31 of each year in order to be in force in the subsequent year.
The Covid-19 pandemic has put the world on alert, prompting countries to take measures to contain people to reduce the spread of the virus. In Brazil, these measures started in Mid-March of 2020 and their impacts on the Brazilian energy market were noticed almost immediately with a reduction in the energy consumption of the National Integrated System of approximately 13% in the week following the implementation of these measures. The reduction in consumption, with the consequent deceleration of the economy, lead to an increase in the levels of the reservoirs, since less hydroelectric generation is necessary to meet the lower consumption. Thus, the combination of these factors led to a reduction in prices in the short-term market. With regard to market prices, the evolution of systemic conditions and the revision in market forecasts led to a reduction in contract prices in the medium term. In this sense, the increase or decrease in exposure will depend on the contractual position and contract flexibility at each moment.
In 2020, the frequency of changes in the PLD were increased to hourly. Having an hourly PLD improves the PLD’s adherence to the real operation of the system, which will then better capture the hourly changes in the intermittent sources (solar and wind). This better alignment of price with operation tends to reduce the System and Service Charges (‘ESS’), and to remunerate the thermoelectric generation plants more efficiently when they are activated. On the other hand, the quality of the entry data when input on an hourly basis, especially for solar and wind sources, introduces one more element of uncertainty to the pricing of the market.
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The anticorruption investigations currently in progress in Brazil, which have had large-scale public exposure, and any allegations against or anticorruption investigations of CEMIG, might have adverse effects on the perception of the country, and on us.
Certain anti-corruption investigations could have adverse effects on CEMIG or other companies of the CEMIG Group. Investors’ perception about Brazil has been adversely affected by investigations of public corruption in large Brazilian companies, and by political events, which might represent potential risks to the social and economic outlooks for Brazil.
Among the Brazilian companies involved in these investigations are state-controlled companies in the oil and gas, electricity purchase prices could cause imbalanceand infrastructure sectors, and private companies in the construction and equipment supplier sectors, which are being submitted to investigations due to accusations of corruption by the Brazilian Securities Commission (‘CVM’), the Federal Police, the Brazilian Public Attorneys, the Federal Audit Board, the U.S. Securities and Exchange Commission (‘SEC’) and the U.S. Department of Justice (‘DOJ’), among others.
In the energy industry, Eletrobrás has set up an independent internal investigation into possible non-compliances with law and/or regulations indicated by media reports that alleged illegal acts related to service providers of Norte Energia S.A. (NESA) and of Madeira Energia S.A. (MESA) for the construction of Belo Monte and Santo Antônio hydroelectrical plants, respectively and some other special purposes entities, in which Eletrobras holds a minority stake. There have been no direct findings against NESA or MESA nor against any of its managers or employees, and the supposed illegal acts are in fact alleged to have taken place before NESA was formed. The internal investigation, however, estimated the economic and financial impact of these alleged illegal acts, related to NESA’s service providers at R$183 million, and this was considered by Eletrobras and by NESA in accounting analyses and conclusions for the year ended December 31, 2015. This total supposedly represents amounts estimated in excess for acquisition of machines, equipment, services, capitalized charges and administrative expenses, since the alleged improper payments were not made by NESA, but by contractors and suppliers of the Belo Monte hydroelectrical plant; and this impedes identification of the amount and precise periods of the payments.
CEMIG holds, through CEMIG GT, an 11.69% indirect minority stake in NESA, through the jointly-controlled entities Aliança Norte Energia Participações S.A. and Amazônia Energia S.A. and the estimated amount of losses has already been recorded in CEMIG’s consolidated financial statements as of and for the year ended December 31, 2015.
The independent internal investigation of MESA, concluded in February 2019, in the absence of any future developments such as any leniency agreements by third parties that may come to be signed or collaboration undertakings that may be signed by third parties with the Brazilian authorities, found no objective evidence enabling it to be affirmed that there were any supposed undue payments by MESA that should be considered for possible accounting write-off, pass-through or increase of costs to compensate undue advantages and/or linking of MESA with the acts of its suppliers, in the terms of the witness accusations and/or cooperation statements that have been made public.
Since 2017, Renova, a company in which CEMIG has a direct stake of 36.23%, is part of a formal investigation conducted by the Civil Police of Minas Gerais State in relation to certain injections of capital made by some of its controlling shareholders, including the Company, and capital injections made by Renova in certain projects under development in previous years.
On April 11, 2019, the Brazilian Federal Police commenced the ‘Operation E o Vento Levou’ as part of the Lava Jato Investigation, and executed a search and seizure warrant issued by a Federal Court of São Paulo at Renova’s head office in São Paulo, based on allegations and indications of misappropriation of funds harmful to the interests of CEMIG. Based on the allegations being investigated, these events are alleged to have taken place before 2015. On July 25, 2019, the second phase of such investigation initiated.
The ‘Operation E o Vento Levou’ and the police investigation of the Minas Gerais State Civil Police have not yet been concluded. Thus, there is a possibility that material information may be revealed in the future. If a criminal action is filed against agents who damaged Renova, Renova intends to act as auxiliary to the prosecution in any criminal proceedings, and subsequently sue for civil recovery of the damages suffered.
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In 2019, the tax authority issued infraction notices against Renova, questioning the calculation of income tax and social contribution tax, and payment of withholding income, relating to contracts of services which allegedly did not have the due perfomance, in the estimated amount of R$89 million. Based on the opinion of its legal advisors, Renova provided for this amount as contingency on its financial statements.
Due to these third party investigations, the governance bodies of Renova requested the opening of an internal investigation, conducted by an independent company with the support of an external law firm. The internal investigation was concluded on February 20, 2020, and according to a statement Renova issued at the time, no concrete evidence of acts of corruption or diversion of funds to political campaigns was identified.
However, the independent investigators identified irregularities in the conducting of business and agreement of contracts by Renova, including: (i) payments without evidence of the performance of services, in the total amount of approximately R$40 million; (ii) payments not in accordance with the company’s internal policies and best governance practices, in the total amount of approximately R$137 million; and (iii) deficiencies in the internal controls of the investee.
As a result of the analysis of the above mentioned values, Renova concluded that R$35 million relates to effective assets and therefore no impairment was necessary. The remaining amount of R$142 million was already impaired in previous years, producing no impact on the consolidated financial statements for the year ended December 31, 2019.
In response to the irregularities found, and based on the recommendations of the Monitoring committee and legal advisers, the Board of Directors of Renova decided to take all the steps necessary to preserve the rights of the investee, continue with the measures to obtain reimbursement of the losses caused, and strengthen Renova’s internal controls. Additionally, the Executive Board of Renova hired a Chief Officer for Governance, Risk and Compliance, who will be responsible, among other duties, for ensuring the effiectiveness of Renova´s internal controls and compliance processes.
Since our investment at Renova is fully impaired at December 31, 2020, and since no contractual or constructive obligations in relation to the investee have been assumed by the Company, it is not expected that effects resulting from the investigations can significantly impact the Company’s financial statements, even if such effects may not yet be recorded by Renova.
In addition to the cases above, there are investigations being conducted by the Public Attorneys’ Office of the State of Minas Gerais (MPMG) and by the Civil Police of the State of Minas Gerais (PCMG), which aim to investigate possible irregularities in the investments made by CEMIG in Guanhães Energia S.A. and in MESA (Santo Antônio Energia S.A. or ‘SAESA’). Additionally, on April 11, 2019 agents of the Brazilian Federal Police were in the Company’s cash flows.head office in Belo Horizonte to execute a search and seizure warrant issued by a São Paulo Federal Court in connection with the ‘Operation E o Vento Levou’, as described above. These proceedings are being investigated by reviewing of documents requested by the respective authorities, and by hearing of witnesses. At present, it is not possible to determine what the results of the MPMG and PCMG’s investigations will be.
Taking into account these investigations, we contracted specialized independent advisers to analyze the internal procedures related to these investments, as well as the Company internal proceedings related to the acquisition of Light’s interest in Enlighted (see Note 25 of the Financial Statements). The pricesspecialized independent company’s investigation was subject to oversight of electricity purchase contracts signedan independent investigation committee whose creation was approved by electricity distribution concession holders suchour Board of Directors. The specialized independent advisers’ investigation was completed in May 2020 and identified no objective evidence substantiating illegal acts made by Company in the Company’s investments that were the subjects of the investigation. Therefore, there was no impact in the consolidated financial statements as ourselves are linked to certain variablesof December 31, 2020.
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By the end of 2020, CEMIG initiated internal investigations into allegations that are not under their control, such as hydrological conditions and dispatchingthe subjects of thermoelectric plants. Although any increases in costs for purchasing of electricity arising from adverse hydrological conditions and from higher than forecast dispatching of the thermal plants are passed through to the electricity distribution concession holders in the form of tariff increases at the time of the distribution concession holders’ tariff adjustments, this situation could result in mismatches of cash flow, with an adverse impact on the Company’s business, results of operations and financial condition.
In recent years, the Brazilian federal government and Aneel have created mechanisms to reduce the mismatch in the distributors’ cash flow arising from the increase in prices for purchase of electricity.
In 2013, funds from the Energy Development Account (Conta de Desenvolvimento Energético, or CDE) were used; and in 2014 a series of bank loans were made in the name of the CCEE, the funds from which were passed through to the distributors through an account which received the name of the “ACR Account” (Conta ACR). As from 2015, these costs began to be incorporated into the electricity tariffs paid by consumers. In 2015 there was also an Extraordinary Review of tariffs to compensate the increased costs of higher contributions to the CDE, and of electricity purchased from Itaipu, among other factors. Finally, as from January 2015, the “tariff flag” system was finally put in place on a permanent basis. This system increases the tariff for the final consumer when the generation system is undergoing adverse hydrological conditions, and thus transfers part of the costs to these consumers more rapidly. The “Red Flag” was in force for the whole of the year 2015 – this is the highest rate, indicating higher electricity acquisition costs for the distributors and constantly higher charges for the consumer. Even with this mechanism, there is the risk of increase in electricity purchase prices being on such a scale that the Company’s cash is significantly pressured until the next tariff adjustment. Also, the recovery of higher costs for purchase of electricity via pass-through to tariffs takes place gradually over the 12 months between tariff adjustments.
Starting in 2014, the Brazilian federal government undertook another round of funding support transactions, with funds from the CDE. These funds relate to subsidies, including those for low-income consumers, and other components, including access for irrigation, access to water and water services, and rural consumption, which had been withdrawn from the tariff adjustment process at the implementation of Law No. 12,783/2013. These funds were sourced from the Brazilian federal government, among other sources, and paid through Eletrobrás. We note that if there is a delay in these payments it could cause problems of mismatch in the cash flow of our distribution company (Cemig D).
The current economic downturn in Brazil contributed to several factors resulting in the increase in rates charged from captive consumers, and the migration of customers to the free market. This could lead to a revenue decrease during 2016 and possible financial exposure due to an electricity inventory greater than 5% of demand. In order to mitigate these effects, distributors can assign contracts for the purchase of electricity provided by existing generation facilities through the Surpluses and Deficits Compensation Mechanism (Mecanismo de Compensação de Sobras e Déficits, or MCSD), which is available to distributors who have deficits. If, after using this mechanism, distributors still have an excessive inventory of more than 5% of current consumption, such excess can be sold in the spot market, which can result in a loss for the distributor if the PLD is lower than the costs of the purchase contracts. This loss cannot be passed on to the consumer and is baredinquiries conducted by the concessionaire. Such losses could have an effect on our business and results from operations.
Requirements of, and restrictions by, the environmental agencies could result in our Company having additional costs.
Our operations relating to generation, distribution and transmission of electricity, and distribution of natural gas, are subject to various federal, state and municipal laws and regulations, and also to numerous requirements relating to the protection of health and the environment. Delays by the environmental authorities, or the refusal of license requests by them, and/or any inability on our part to meet the requirements set by these bodies during the environmental licensing process, may result in additional costs, or even, depending on the circumstances, prohibit or restrict the construction or maintenance of these projects.
Non-compliance with environmental laws and regulations, such as building and operation of a potentially polluting facility without a valid environmental license or authorization, can as a consequence, in addition to the obligation to redress any damages that may be caused, result in criminal, civil and/or administrative sanctions being applied. Under Brazilian legislation, criminal penalties, such as imprisonment and restriction of rights, may be applied to individuals (including managers of legal entities), and penalties such as fines, restriction of rights or community service may be applied to legal entities. With respect to administrative sanctions, depending on the circumstances, the environmental authorities may: (i) impose warnings, or fines, ranging from R$50,000 to R$50 million; (ii) require partial or total suspension of activities; (iii) suspend or restrict tax benefits; (iv) cancel or suspend lines of credit from governmental financial institutions; or (v) prohibit us from contracting with governmental agencies, companies or authorities. Any of these actions could adversely affect our business, results of operations and financial condition.
We are also subject to Brazilian legislation that requires payment of compensation in the event that our activities have polluting effects. Under Federal Law No. 6,848/2009 and Minas Gerais State Decree No. 45,175/2009 (“Decree No. 45,175/2009”Public Attorneys´ Office, regarding certain alleged irregularities in public bidding and purchasing processes. The investigations are being conducted by a new Special Investigation Committee (Comitê Especial de Investigação – ‘CEI’), upwith support from specialized independent advisers.
The Executive Board determined the establishment of a disciplinary administrative process (‘Processo Administrativo Disciplinar) to 0.5%verify the veracity of the total amount investedallegations and to pursue the preventive removal of certain personnel from the Supply and Logistics area, which aims to ensure impartiality and exemption in implementation of a project that causes significant environmental impact must be appliedthe investigations.
CEMIG is and has been fully cooperating with any and all investigation and inspection by competent authorities, whether in mitigating measures,the United States or Brazil. For example, in an amount to be determined on a case-by-case basis by environmental authorities accordingJuly 2019, pursuant to the specific level of pollutionDOJ’s Corporate Enforcement Policy, the Company disclosed the above-described investigation to the DOJ and the environmental impactSEC and has been cooperating with those agencies. We cannot guarantee that CEMIG or companies of the project. Decree No. 45,175/2009 also indicated that the compensation rateCEMIG Group will be applied retrospectively to projects implemented prior to promulgation of the present legislation. That State Decree was altered by Decree No. 45,629/2011, which established that, for the reference value of the projects that cause significant environmental impact:
Among the provisions of law that can lead to operational investments and expenses, one is compliance with the Stockholm Convention on Persistent Organic Pollutants (the “Convention”), to which Brazil is a signatory, assuming the international commitment to withdraw the use of PCB by 2025, and its complete prohibition by 2028, through Decree No. 5,472, of June 20, 2005. The legislation to be passed for this purpose could have a major effect on the electricity industry and on Cemig, due to the possibility of obligations to list, replace and dispose of equipment and materials containing substances included in the Convention such as Polychlorinated Biphenyls (PCBs).
Finally, the adoption or implementation of new safety, health and environmental laws, new interpretations of existing laws, increased rigidity in the application of the environmental laws, or other developmentsnot in the future become target of legal actions based on these or future investigations, whether in the United States or Brazil.
Any future anti-corruption actions, which might require usfind failures of conduct by the management of the Company or by third parties, might result in fines, penalties or significant negative postings in the accounts, or intangible damage, such as damage to make additional capital expenditure reputation, and/or incur additional operational expensesother significant, unforeseen, adverse effects.
We may be exposed to behaviors that are incompatible with our standards of ethics and compliance, and we might be unable to prevent, detect or remedy them in order to maintain our current operations; or to curtail our production activities or take other actions that could have antime, which might cause material adverse effecteffects on our business, results of operations, financial condition and reputation.
Our businesses, including our relationships with third parties, are oriented by ethical principles and rules of conduct. We have a range of internal rules that aim to orient our managers, employees and contractors, and to reinforce our ethical principles and rules of professional conduct. Due to the wide distribution and outsourcing of the production chains of our suppliers, we are unable to control all the possible irregularities of the latter. This means that we cannot guarantee that the financial, condition.
Dams are criticaltechnical, commercial and essential elementslegal evaluations that we use in our selection processes will be sufficient for preventing our suppliers from having problems related to employment law, or sustainability, or in the electricity sector. Dam failures can cause serious impacts on society as a whole and onoutsourcing of the Company.
In all dams there is an intrinsic risk of dam failure, due to internal and external factorsproduction chain with inadequate safety conditions. We also cannot guarantee that these suppliers, or third parties related to the structures. The measure and naturethem, will not involve themselves in irregular practices. If a significant number of the risk are not always foreseeable. Absolute security, as an absolute value, is unattainable. Thus, although Cemig complies with the legislation relating to dam safety, and applies best national and international engineeringour suppliers involve themselves in irregular practices, in management of its portfolio of dams,we might be adversely affected.
Further, we are subject to the risks that our employees, contractors or any person who may do business with us might become involved in activities of fraud, corruption or bribery, circumventing our internal controls and procedures, misappropriating or using our assets for private benefit to the detriment of the Company’s interests. This risk is exacerbated by the fact that there are some affiliates, such as special-purpose companies and joint ventures, in which we do not have control.
Our internal controls systems to identify, monitor and mitigate risks may not be effective in all circumstances, especially in relation to companies that are not under our control. In the case of a dam failure. The failurecompanies we have acquired, our internal controls systems might be incapable of a damidentifying fraud, corruption or bribery that took place prior to the acquisition. Any failing in our capacity to prevent or detect non-compliance with the applicable rules of governance or of regulatory obligation could result in unavailability of hydroelectric generation, causing economic, social, regulatory, and environmental damage and potential loss of human lives in the communities downstream from dams, which could have acause harm to our reputation, limit our capacity to obtain financing, or otherwise cause material adverse effecteffects on our, business, results of operations, financial condition and reputation.
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Two members of our board of directors are party to administrative and judicial proceedings and ongoing corruption investigations.
One member of our board of directors is a defendant in two "Civil Actions of Administrative Impropriety due to Damages to the Public Treasury" and another member of our board of directors is a defendant in a ‘Tax Evasion Action’, all in pre-trial proceeding stage. For more information, see “Item 6. Significant Civil and Criminal Proceedings Involving Key Management Members”. We cannot assure you that judicial and administrative proceedings, or even the commencement of new judicial and administrative proceedings against any members of our management or board of directors, will not impose limitations or restraints on the Company’s image, businessperformance of the members of our management and results from operations.board of directors that are a party to these proceedings. In addition, we cannot assure you that these limitations will not adversely affect us and our reputation.
The multiple uses of water and the various interests related to this natural resource might give rise to conflicts of interest between the CompanyCEMIG and Societysociety as a whole, which might cause losses to our business, operational results of operations or financial situation.condition.
Cemig’s generation facilities are predominantly hydroelectric plants. In the last 15 years, 44 projects have been added, comprising approximately 1,831 MW. At present, taking into account also theconsidering projects undertakenand companies that are jointly a total of 80controlled, CEMIG has more than 70 hydroelectric power plants, with 7,3305,969 MW correspond to 95.53%and representing 98.1% of the Company’sour installed capacity, and more than 3,500 km2 of reservoirs administrated. Because watercapacity.
Water is the principalmain raw material for Cemig’sCEMIG’s production of electricity,energy, and is a resource that is sensitive to climate change and vulnerable to the consequences of exploration of other natural resources, significantly impacted by anthropichuman actions and subject to a regulatory environment, management and conservation of water are subjects of great importance to Cemig.environment.
Decisions on dispatching of the thermal generation plants in Brazil’s national grid system (Sistema Interligado Nacional, or SIN) are made by the National Electricity System Operator (Operador Nacional do Sistema Elétrico, or ONS). The ONS is a non-profit legal entity under private law, in the form of a civil association, created on August 26, 1998, by Law No. 9,648/98, with amendments by the New Industry Model Law and regulation by Decree No. 5.081/04. It is responsible for coordination and control of the operation of generation and transmission facilities in the national grid, under inspection and regulation by the National Electricity Agency (Agência Nacional de Energia Elétrica, or ANEEL).
TheCEMIG’s operation of reservoirs for generation of electricity by Cemig results,hydroelectric power essentially inrequires consideration of the multiple uses of water by other users of thein a river basin,basin; and this in turn, leads to the need to considertake into account a seriesrange of restrictions in terms of the environment, security,constraints — environmental, safety, irrigation, systems, human supply,consumption, waterways and bridges, and others – all of which are rigidly respected and complied with by Cemig.among others. In periods of severe drought, like those of 2013 until 2015,2019, monitoring and forecasting the levels of reservoirs and the constant dialogue with the public authorities, civil society and users were essential for ensuring the generation of electricity,energy, and also the other uses of this resource.
Finally, CEMIG uses a Risk Management System to analyze scenarios and determine the degree of financial exposure to risks, considering the probability of occurrence and its effect. In the scenarios relating to potential conflicts with other users, CEMIG evaluates both the effects arising from prolonged droughts, which can lead to an increase of competition between the energy sector and other users, and the effects of flood events occurring due to excessive rain. While the CompanyCEMIG engages with other essential users, and takes steps to analyze community input and studies regardingon issues relating to the impact of water use, in order to address concerns regarding the use of water, competing interests with respectrelating to thewater use of water could, subject to certain minimum limits previously established by law, affect its availability to us for use in the operations of certain of our projects, which could adversely affect our operationalbusiness results of operations and financial condition.
We are controlled by the government of the State of Minas Gerais, which might have interests that are different from the interests of the other investors, or even of the Company.
As our controlling shareholder, the government of the State of Minas Gerais exercises substantial influence on the strategic orientation of our business. Currently it holds 51% of the common shares of CEMIG and as majority shareholder has full powers to decide on business relating to the Company’s objects as stated in the by-laws, and to adopt whatever decisions it deems to be necessary for the defense of its interests and development.
The government of the State of Minas Gerais can elect the majority of our senior management and has the competency to approve, among other subjects, matters that require a qualified quorum of shareholders. The latter include transactions with related parties, shareholding reorganizations and the date and payment of dividends.
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The government of the State of Minas Gerais, as our controlling shareholder, has the capacity to direct us to engage in activities and to make investments that promote the controlling shareholder’s economic or social objectives, and these might not be strictly aligned with the Company’s strategy, adversely affecting the direction of our business.
Our processes of governance, risk management, compliance and compliance couldinternal controls might fail to avoid regulatory penalties, damages to our reputation, or other adverse effects on our businesses,business, results of operations andor financial condition.
Our Company is subject to various different regulatory schemes, such as: (i)structures, of which the following are examples: (a) laws and regulations of the Brazilian electricity industry, including the New Industry Modelenergy sector, such as Law No. 10,848/04 (on trading in energy), regulations of the Brazilian regulator (ANEEL), among others; (ii)by ANEEL; (b) the laws and regulations that apply to listed companies with securities traded on the Brazilian capital markets,market, such as Law NºNo. 6,404/1976,76 (the ‘Corporate Law’), regulations of the Brazilian Securities Commission (Comissão de Valores Mobiliários, orCVM), among others; (iii) theCVM; (c) laws and regulations that apply to Brazilian companies which havewith majority public-sector ownership,state-owned shareholdings, such as the Tenders Law among others; and (iv) theNo. 13,303/2016 (the ‘State Companies Law’); (d) laws and regulations that apply to Brazilian companies that have securities traded inregistered with the US capital markets,SEC, such as the Sarbanes-Oxley Act of 2002, the Foreign Corrupt Practices Act of 1977 (FCPA), and regulations of the United States SecuritiesSEC; and Exchange Commission (SEC)(e) laws and regulations regarding privacy and data protection, such as Law no. 13,709/2018 (the ‘General Data Protection Law, LGPD’), among others.
Due to the majority interest held by the State Government in our stockholding structure, we are required to contract the greater part of our works, services, advertising, purchases, disposals and rentals, through competitive tenders and administrative contracts which are ruled by the Tenders Law and other complementary legislation. Also, we operate in a sector in which there is frequent use of competitive tenders and high value administrative contracts with a large number of suppliers and clients. This exposes us to the risks of fraud and administrative impropriety that are inherent in these forms of contracting.
In recent yearsFurthermore, Brazil has intensified and improved its legislation and structures relating to maintaining competition, combat of improbity and prevention of corrupt practices. For instance, Law No. 12,846/2013 holds13 (the ‘Anticorruption Law’) established objective liabilities for Brazilian companies strictly liable if theythat commit acts against Brazilian or foreign governmental entities,public administration, including acts relating to tender processes of competitive tenders and administrative contracts, and has laid down heavyestablished tough penalties for those companies that contravene this law.are punished.
The Company has a high number of administrative contracts with high values and a large number of suppliers and customers, which increases its exposure to risks of fraud and administrative impropriety.
Our Company has structures and policies for the prevention and combat of fraud and corruption, audit and internal controls, and has adopted the recommendations for Best Corporate Governance Practices recommended by the Brazilian Corporate Governance Institute (Instituto(Instituto Brasileiro de Governança Coorporativa,Corporativa, orIBGC ‘IBGC’) and the framework of COSO (Committeethe Committee of Sponsoring Organizations of the Treadway Commission)Commission (COSO). Furthermore, due to the majority interest held by the State Government in our shareholding structure, we are required to contract the greater part of our works, services, advertising, purchases, disposals and rentals, through competitive tenders and administrative contracts, which are ruled by the Tenders Law, State Companies Law and other complementary legislation.
However, ourdespite the Company having processes of governance, risk management and compliance, we might be unable to avoid future violations of the laws and regulations to which we are subject (regarding labor, tax, environment, energy, among others), or violations of our internal control mechanisms, our Declaration of Ethical Principles and Code of Professional Conduct, or the occurrence of fraudulent or dishonest behavior by employees, or individuals or legal entities that are contracted, or other agents that may represent the company in dealings with third parties, especially with the Public Authorities. Non-compliance with laws
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Our management has identified material weaknesses in internal control over financial reporting, and regulations, among other rules, might resulthas concluded that our internal control over financial reporting was not effective on December 31, 2016, 2017, 2018, 2019 and 2020, which may have a material adverse effect on the Company’s results of operations and financial condition.
Our management identified material weaknesses in fines, loss of licenses, damage to our reputation or significantinternal control over financial losses.
Ongoing high profile anti-corruption investigations in Brazil may affect us,reporting for the perception of Brazillast 5 years. For further information on the material weakness identified by our management, see “Item 15 - Controls and domestic growth prospects.
Political events in Brazil have affected the developmentProcedures - Management’s Annual Report on Internal Control over Financial Reporting”. Because of the Brazilian economyidentified material weaknesses, our management concluded that our internal control over financial reporting was not effective as of December 31, for the last 5 years. Although we have developed and investors’ perceptions about Brazil. For example, mass street protests, which startedimplemented several measures to remedy these material weaknesses, we cannot be certain that we will remedy our existing material weakness or that there will be no other material weaknesses in mid-2013, and have continued in 2014 and 2015 (albeit to a lesser degree than in 2013) and demonstrated the public’s dissatisfaction with corruption and certain political measures, and represent a potential risk to the Brazilian social and economic outlook.
Additionally, certain Brazilian companiesour internal control over financial reporting in the oil & gas, energyfuture.
If our efforts to remediate the material weaknesses are not successful, we may be unable to report the Company’s results of operations for future periods accurately and infrastructure sectors are facing corruption probes by the CVM, the Brazilian Federal Police, the Brazilian Judiciary,in a timely manner and make our required filings with government authorities, including the SEC and the U.S. DepartmentCVM. Due to its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements, and we cannot be certain that in the future additional material weaknesses will not exist or otherwise be discovered. Any of Justice (DOJ). Some issues are including Norte Energia S.A.,these occurrences could adversely affect our and the ownerCompany’s business, results of the concession for the constructionoperations and operation of Belo Monte Hydroelectric Plant, on Xingu River, State of Pará, Brazil, in which Cemig is a minority shareholder through Aliança Norte and Amazônia Energia with an interest of 12.5%. For further information, please refer to “Explanatory Note” and “Item 4. Information on the Company – Note 4 – Acquisition of a 9.77% interest in Norte Energia S.A.: the Belo Monte Hydroelectric Plant – Investigation of Norte Energia S.A.”financial condition.
Potential shortages of skilled personnel in operational areas could adversely affect our business and results of operations.
DependingIt is possible that we will experience shortages of qualified key personnel. In recent years, we have been carrying out voluntary severance incentive programs open to all of our employees. Such programs may reduce our employees’ headcount by more than our ability to hire new ones to fill key positions. Our success depends on our ability to continue to successfully train our personnel so they can assume key positions in the developments and outcome of such investigations, as well as the time it takes to conclude them, Cemig may be required to further adjust its financial statements, as well as face downgrades from rating agencies, civil and criminal penalties, funding restrictions, reduction in revenues, liquidity issues, reputational issues and other unforeseen material adverse effects. In addition, weorganization. We cannot assure you that Cemigwe will not becomebe able to properly train, qualify or retain key staff, or do so without costs or delays. Nor can we assure you that we will be able to hire new qualified personnel, in particular in operational areas, should the subjectneed arise. Any such failure could adversely affect our results of any criminal or civil anti-corruption action brought under U.S. or Brazilian law if any illegal acts or regulatory failures come to light. Any potential future anti-corruption-related action brought against us could result in charges against us, members ofoperations and our management, significant fines and penalties, reputational harm, distraction from our ongoing business and other unforeseen material adverse effects.business.
Our ability to distribute dividends is subject to limitations.
Whether or not the investor receives dividends depends on whether our financial situation permits us to distribute dividends under Brazilian law, and whether our shareholders, on the recommendation of our Board of Directors, acting in their discretion, determine suspension, due to our financial circumstances, of the distribution of dividends in excess of the amount of mandatory distribution required under our by-laws in the case of the preferred shares.
Because we are a holding company with no revenue-producing operations other than those of our operating subsidiaries, we can only distribute dividends to shareholders if the Company receives dividends or other cash distributions from its operating subsidiaries. The dividends that our subsidiaries can distribute depend on our subsidiaries generating sufficient profit in any given fiscal year. Dividends can be paid out fromyear and on restrictive covenant clauses in contracts for loans and financing of these subsidiaries as well as by any restriction imposed by the profit accruedregulator, all of which place limits upon their payments of dividends. Similarly, we have a limitation on the payment of dividends which cannot exceed the mandatory minimum of 50% of the net income for the business year, as contained in each fiscal year or fromour by-laws, due to restrictive covenant clauses in the accumulated profitscontracts for loans and financing of previous years, or from accumulated profit reserves.the subsidiaries in which we are guarantors. Dividends are calculated and paid in accordance with applicable Brazilian corporate law (“Brazilian Corporate Law”Law’) and the provisions of the by-laws of each of our regulated subsidiaries.
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Under our by-laws, we must pay our shareholders a mandatory annual dividend equal to at least 50% of our net profit for the preceding fiscal year, based on our financial statements (which are prepared in accordance with IFRS and the accounting practices adopted in Brazil), and holders of preferred shares have priority of payment. Our by-laws also require that the mandatory annual dividend we pay to holders of our preferred shares must be equal to at least the greater of (a) 10% of the par value of our shares, or (b) 3% of the value of the portion of stockholders’ equity represented by our shares, in the event that such amount is greater than 50% of our net profit. If in a given fiscal year we do not have net profit, or our net profit is insufficient, our management may recommend at the Annual Shareholders’ Meeting that the payment of the mandatory dividend should not be made in respect of that year. However, there is also a guarantee given by the government of the State of Minas Gerais, our controlling shareholder, that a minimum annual dividend of 6% will in any event be payable to all holders of common shares and preferred shares issued up to August 5, 2004 (other than public and governmental holders) in the event that mandatory distributions have not been made in a given fiscal year.
The level of default by our consumers could adversely affect our business, operational results and/or financial situation as well as those of our subsidiaries.
On December 31, 2015, the total of our past-due receivables owed by final consumers, excluding the allowance for doubtful receivables, was approximately R$919 million, corresponding to 4.31% of our consolidated net revenue in 2015, and our provision for doubtful receivables was R$625 million. The possibility exists that we might be unable to collect amounts payable by various consumers which are in arrears. If such debts are not totally or partially settled, we will suffer an adverse impact on our business, operation results and/or financial situation. Additionally, the amount of debts in arrears from our consumers that exceeds the provision that we have made could cause an adverse effect on our business, operational results and/or financial condition.
Instability of inflation rates and interest rates could adversely affect our economic results and financial situation.
The Company and its subsidiaries are exposed to losses linked to fluctuations in domestic interest rates and inflation rates, due to the existence of assets and liabilities indexed to the variations in the Selic and CDI rates, and the IPCA and IGP-M inflation indices.
A significant increase in interest rates or inflation would have an adverse effect on our financial expenses and financial results as a whole. At the same time, a significant reduction in the CDI rate, or in inflation, could negatively affect the revenue generated by our financial investments, but also have the positive effect of revaluing adjustments to the balances of Financial Assets of our Concessions(2).
ANEEL has discretion to establish the rates that distribution companiesdistributors charge their consumers.customers. These rates are determined by ANEEL in such a way as to preserve the economic and financial balance of concession contracts entered into with ANEEL.
Concession agreements and Brazilian law have established a mechanism that permits three types of rate adjustment: (i)(a) the Annual Adjustment; (ii)(b) the Periodic Review; and (iii)(c) the Extraordinary Review. The purpose of the Annual Adjustment ((‘Reajuste AnualAnnual’) is to compensate for changes in costs that are beyond the Company’sa company’s control, such as the cost of electricityenergy for supply to consumers,customers, the sector charges that are set by the federal government,Federal Government, and charges for use of the transmission and distribution facilities of other companies. Manageable costs, on the other hand, are adjusted by the IGP–MIPCA inflation index, less ana productivity and efficiency factor, known as the X Factor.Factor, which considers aspects such as distribution productivity and service quality standards. Every five years, there is a Periodic Tariff Review (Revisã(Revisão Periódica Tarifária,, or RTP)‘RTP’), the purpose of which is to: identify the variations in costs referred to above; provide an adequate return on the assets that the company has constructed during the period; andperiod, establish a factor based on economies of scale, which will be taken into account in the subsequent annual tariff adjustments.adjustments and define the efficient operational costs. An Extraordinary Tariff Review takes place whenever there is any unforeseen development that significantly alters the economic/financial equilibrium of the concession. Thus, although ourCEMIG D’s concession contracts specify that thepreservation of their economic and financial balance, of the contract shall be preserved, we cannot guarantee that ANEEL will set tariffs that adequatelydo remunerate us adequately in relation to the investments made or in relationthe operating costs incurred due to the operational costs incurred by reason of the concession.concession, and this might have a material adverse effect on our business, financial situation and operating results.
ANEEL has discretion in settingestablished the Permitted Annual Revenue (Receita AnnualAnual Permitida or “RAP”‘RAP’) of our transmission companies; if any adjustments result in a reduction of the RAP, this could have a material adverse effect on our results of operations and financial condition.
TheANEEL defines the RAP that we receive through our transmission companies, is determined by ANEEL, on behalf of the federal government.Federal Government. The concession contracts provide for two mechanisms for the adjustment of revenues: (i)(a) the annual tariff adjustments; and (ii)(b) the Periodic Tariff Review ((‘Revisão Tarifária Periódicadica’). The annual tariff adjustment of our transmission revenues takes place annually in June and is effective in July of the same year. The annual tariff adjustments take into account the permitted revenues of the projects that have come into operation, and the revenue from the previous period is adjusted by the IPCA index.inflation index (IPCA for Contract No. 006/1997 and IGP-M for Contract No. 079/2000). The periodic tariff review previously tooktakes place every four years, but Law No. 12,783/2013 changed the tariff review period to five years. Our last tariff review was in July, 2009, and the next is estimated for 2018 due to the fact that an Extraordinary Review occurred in 2013 as a result of Law No. 12,783/2013. During the periodic tariff review, the investments made by a concession holder in the period and the operationaloperating costs of the concession are analyzed by ANEEL, takingANEEL. The regulator takes into account only investments that it deems to be prudent, and operationaloperating costs that it assesses as having been efficient, using a benchmarking methodology developed by employing an efficiency model which compares the data the various transmission companies in Brazil. Therefore,methodology. Thus, the tariff review mechanism is subject to some extent to the discretionary power of ANEEL, since it may omit to include investments that have been made, and could recognize operationalrevenues for operating costs as being lower than those actually incurred. This could result in a material adverse effect on our business results.
An Extraordinary Tariff Review takes place whenever there is any unforeseen development that significantly alters the economic/financial equilibrium of the concession. Thus, although our concession agreements specify that the economic and financial balance of the contract shall be preserved, we cannot guarantee that ANEEL will set tariffs that adequately compensate us in relation to the investments made or in relation to the operating costs incurred because of the concession. This may have a material adverse effect on our business, financial condition and results of operations and financial condition.operations.
As previously mentioned, the renewal of concessions of the transmission assets of Cemig GT, under Law No. 12,783/2013, resulted in a reduction of the Permitted Annual Revenue (RAP) of this concession, and gives rise to payment of indemnity for the assets of that concession that had not be amortized. The federal government has already paid indemnity for part of the assets, but the assets in operation prior to the year 2000
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We have not yet been indemnified. According to Law No. 12,783/2013, full indemnity will be made for the assets based on a calculation of the assets not yet amortized, using the methodology of New Replacement Value (Valor Novo de Reposição, or VNR). Normative Resolution 589/2013 set the criteria for calculation, by concession holders, of the amount to be indemnified for these assets. The companies have calculated the value of the indemnities, but there is still no decision or statement by the concession authority of how this indemnity will be put into effect.
We are strictly liablestrict liability for any damages caused to third parties resulting from inadequate renderingprovision of electricity servicesenergy services.
Under Brazilian law, we are strictly liable for direct and indirect damages resulting from the inefficient rendering of electricityenergy generation, transmission and distribution services. In addition, when damages are caused to final consumerscustomers as a result of outages or disturbances in the generation, transmission and distribution system, whenever these outages or disturbances are not attributed to an identifiable member of the National System Operator (Operador Nacional do Sistema, orONS) or to the ONS itself, the liability for such damages is shared among generation, distribution and transmission companies. Until a party with final responsibility has been identified, the liability for such damages will be shared in the proportion of 35.7% to the distribution agents, 28.6% to the transmission agents and 35.7% to the generation agents. These proportions are established by theThe number of votes establishes these proportions that each of these types of electricityenergy concession holders receives in the general meetings of the ONS, and as such, are subject to change in the future. Consequently, our business, operational results and/orof operations and financial situationcondition might be adversely affected as a result ofin the event we are held liable for any such damages.
We may incur losses and reputational damage in connection with pending litigationlitigation.
We are currently defendingparty to several legal and administrative proceedings relating to civil, administrative, environmental, tax, regulatory, labor and other claims. These claims involve a wide range of issues and seek indemnities and restitution in money and by specific performance. Several individual disputes account for a significant part of the total amount of claims against the Company. TheSee “Item 8. Financial Information – Legal and Administrative Proceedings”. Our consolidated financial statements include provisionprovisions for risks in a total amount of R$755 million,1.9 billion, as of December 31, 2015,2020, for actions in which the chancesprobability of loss have been assessed as “probable” (i.e.,‘probable’.
One or more likely than not).unfavorable decisions against us in any legal or administrative proceeding may have a material adverse effect on us. In addition to making provisions and the costs associated with legal fees, we may be required by the court to provide collateral for the proceedings, which may adversely affect our financial condition. In the event that our provisions for legal actions are insufficient, payments for actions in excess of the amounts provisioned could adversely affect our operational results of operations and financial situation.condition.
In addition, certain members of our management are involved as defendants in criminal proceedings that are currently pending, which may distract our management and negatively affect us and our reputation. See “Item 6. Significant Civil and Criminal Proceedings Involving Key Management Members”.
Environmental regulations require us to perform environmental impact studies on future projects and obtain regulatory permits.
For reasons of obligations imposed by Brazilian environmental law, we must conduct environmental impact studies and obtain regulatory and environmental permits and licenses for our current and future projects. We cannot assure that these environmental impact studies will be approved by environmental agencies, that environmental licenses will be issued, that public opposition will not result in delays or modifications to any proposed project, or that laws or regulations will not change or be interpreted in a manner that could materially adversely affect our operations or plans for the projects in which we have an investment. We believe that concern for environmental protection is also an increasing trend in our industry. Although we consider environmental protection when developing our business strategy, changes in environmental regulations, or changes in the policy of enforcement of existing environmental regulations, could have a material adverse effect on our results of operations and our financial condition by delaying the implementation of energy projects, increasing the costs of expansion.
Furthermore, the implementation of investments in the transmission sector has suffered delays due to the difficulty in obtaining the necessary regulatory and environmental permits and approvals. This has led to delays in investments in generation due to the lack of transmission lines to provide for the outflow of the energy generated. If we experience any of these or other unforeseen risks, we may not be able to generate, transmit and distribute energy in amounts consistent with our projections, which may have a material adverse effect on our financial condition and results of operations.
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We operate without insurance policies against natural disasterscatastrophes and third partythird-party liability.
Other than in connection with flying,Except for use of aircraft, we do not have third partythird-party liability insurance coveringthat covers accidents and we havedo not soughtseek proposals for this type of insurance. We haveCEMIG has not sought a proposal for, and dohas not maintain,contracted, insurance coverage against natural disasters, such as earthquakes or floods, that might affect our facilities. Occurrence ofAny events of this naturetype could cause usgenerate unexpected additional unexpected costs, resulting in an adverse effecteffects on our business, operational results of operations and financial condition.
The insurance coverage heldcontracted by the Company mayus might be insufficient to pay compensationreimburse costs of damage.
Our business is normally subject to a range of risks, including industrial accidents, labor disputes, unexpected geological conditions, changes in the regulatory environment, environmental and climatic risks, and other natural phenomena. In addition, we and our subsidiaries might be found responsible for possible damages.losses and damages caused to third parties as a result of failures to provide generation, transmission and/or distribution service.
CemigWe only maintainsmaintain insurance for fire, risks involving our aircraft, and operational risks, , as well as those types of insurance covercoverage that are required by law, such as transport insurance of goods belonging to legal entities.
We cannot guarantee that insurancesthe insurance contracted areby us will be sufficient to cover in full or at all any liabilities that may arise in the course of our business nor that these insurance policies will continue to be available in the future. The occurrence of claims in excess of the amount insured, or which are not covered by our insurance policies, might generate significant and unexpected additional costs, which could have an adverse effect on our business, operational results of operations and/or financial situation.
We could suffer a loss of revenue and increased costs, exposure to significant liability, reputational harm and other serious negative consequences ifcondition. Further, we sustain cyber-attacks or other data security breachescannot guarantee that disrupt our operations or result in the dissemination of proprietary or confidential information about us or our clients or other third parties.
We manage and store various proprietary information and sensitive or confidential data relating to our operations. We may be subject to breaches of the information technology systems we use for these purposes. Experienced computer programmers and hackers maywill be able to penetratemaintain our network security and misappropriateinsurance coverage at favorable or compromiseacceptable commercial prices in the future.
Strikes, work stoppages or labor unrest by our confidential informationemployees or that of third parties, create system disruptions, or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms and other malicious software programs that attack our products or otherwise exploit any security vulnerabilitiesby the employees of our products.suppliers or contractors could adversely affect our results of operations and our business.
All of our employees are represented by labor unions. Disagreements on issues involving divestments or changes in our business strategy, reductions in our personnel, as well as potential employee contributions, could lead to labor unrest. We cannot ensure that strikes affecting our production levels will not occur in the future. Strikes, work stoppages or other forms of labor unrest at any of our major suppliers, contractors or their facilities could impair our ability to operate our business, complete major projects and adversely affect our ability to achieve our long-term objectives.
A substantial portion of the Company’s assets is tied to the provision of public services and would not be available for attachment as collateral for the enforcement of any court decision.
A substantial portion of the Company’s assets is tied to the provision of public services. These assets can not be attached as collateral for the enforcement of any court decision because the assets revert to the concession-granting authority to ensure continuity in the provision of public services, according to applicable legislation and our concession agreements. Although the Brazilian Federal Government would be obligated to compensate us for early termination of our concessions, we cannot assure you that the amount ultimately paid by the Brazilian Federal Government would be equal to the market value of the reverted assets. These restrictions on liquidation may lower significantly the amounts available to holders of the notes in the event of our liquidation and may adversely affect our ability to obtain adequate financing.
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Loss by our subsidiary Gasmig of its concession could cause losses in Gasmig’s results.
In 1993, Gasmig obtained the concession for commercial operation of supply of piped gas to the industrial, automotive, commercial, institutional and residential sectors in the state of Minas Gerais for a period of 30 years (‘the Concession Contract’). The concession was extended to January 10, 2053 under the Second Amendment to the Concession Contract, dated December 26, 2014.
On September 19, 2019, Gasmig executed the Third Amendment to the Concession Contract, which replaced the obligation of Gasmig to build a gas pipeline from the city of Queluzito, in Minas Gerais, in the direction of the city of Uberaba, Minas Gerais, for a compensatory grant payment of R$852 million to the State of Minas Gerais, and confirmed extension of the Concession Contract to January 10, 2053. In addition, Gasmig committed to reach a total of 100,000 clients served by the end of 2022, and to build networks to serve the seven meso-regions of the State of Minas Gerais. Currently, Gasmig serves five of these meso-regions.
Under Article 35 of Law 8987 of February 13, 1995 (‘the Concessions Law’), the concession is subject to termination under certain circumstances, including the following: (i) expiration of the contractual term; (ii) the operation being taken over by the state; (iii) termination for other reasons, usually of time, arising from law; (iv) rescission of the contract (amicably, or by the courts); (v) annulment of the concession contract as a result of a failing or irregularity found in a tender or public bid procedure or in the manner of its grant; or (vi) bankruptcy or extinction of the concession holder. In any of these circumstances, the concession assets will revert to the Concession-granting Power, the state of Minas Gerais (‘the Grantor’). In the event that Gasmig loses its concession for any reason, we cannot guarantee that any indemnity payable to Gasmig will be sufficient to compensate its investments, the implicit rate of return, nor loss of future profits relating to the assets not yet totally amortized or depreciated.
The activities carried out by Gasmig are subject to interruptions, disturbances and risks in the distribution system, caused by accidents, operational difficulties, damage, failure of equipment or processes, natural causes or catastrophes (such as explosions, fires, floods, landslides, sabotage, terrorism, vandalism, and others), which might result in Gasmig having an obligation to indemnify clients that suffer damages and might expose it to administrative or court proceedings.
In addition, sophisticated hardware and operating system software and applications that we produce or procure from third partiesGasmig may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere withsuffer the operationintervention of the system.
The costs to us to eliminate or addressGrantor in the foregoing security problems and security vulnerabilities before or after a cyber-incident could be significant. Our remediation efforts may not be successful and could resultevent that, in interruptions, delays or cessation of service, and loss of existing or potential clients that may impede our critical functions.
In addition, breaches of our security measures and the dissemination of proprietary information or sensitive or confidential data about us or our customers or other third parties could expose us, our clients or other third parties affected toGrantor´s opinion, there is a risk of lossGasmig failing to perform the services, or misuseif Gasmig has failed to perform its obligations under the concession contract or the applicable law. In such events, the Grantor could also levy fines against Gasmig or even revoke its concession.
Early termination of the Concession contract, and penalties in connection with such termination, would generate significant impacts on Gasmig’s results, and affect its capacity to pay and comply with its financial obligations. Gasmig’s concession will expire in January 2053, and may be extended, at the sole discretion of the Grantor.
Changes in the methodology and parameters adopted by the regulatory authorities in connection with the tariff review cycles of Gasmig may adversely impact our operations and financial condition
The general parameters of tariff regulation are specified in the Concession Contract, which: (i) determines the general guidelines for adjustment of tariff; (ii) guarantees pass-through of the cost of acquisition of gas and of the tariff review; and (iii) determines the distribution margin, which enables the economic and financial sustainability of Gasmig in accordance with the best practices used by Brazilian and international regulatory agencies for the natural gas distribution sector.
The concession contract also provides that the tariff will be reviewed if events occur that put the economic and financial equilibrium of the Concession Contract at risk, in the form of and for the periods necessary to avoid losses due to tariffs becoming inadequate.
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In November 2019 the Economic Development Department of Minas Gerais State (SEDE), a division of the Minas Gerais State Government, responsible for regulating the distribution of piped gas, completed the first tariff review cycle, in which the parameters for the remuneration rate, expectations of investments, costs and volumes for determining the tariffs in the 2018-2022 cycle were determined. In addition, SEDE included the impact of the payment of the Compensatory Grant in tariffs.
Changes in the tariff review cycles could cause a material adverse effect on Gasmig’s activities, affecting its financial condition and the results of its operations. These changes may also impact on market conditions and the prices of securities in Brazil, consequently adversely affecting Gasmig, and could change the price of gas or increase the costs of its activities.
Gasmig might not succeed in implementing the strategies in its long-term strategic plan at the desired moment, or might incur unexpected costs, which could have adverse consequences for its business, operational results and financial condition.
Gasmig’s capacity to comply with the strategic objectives depends, largely, on timely and successful implementation, with a good cost-benefit ratio, of its long-term strategy.
The following are some of the factors that could negatively affect this implementation:
| · | Substantial alterations in the economic conditions; |
| · | Substantial alterations in regulatory matters; |
| · | Capacity to generate cash flow, or obtain future financings, necessary for implementation of projects; |
| · | Inability to obtain necessary governmental licenses and approvals; |
| · | Unexpected engineering problems; |
| · | Unexpected investments in environmental matters arising from alterations in legislation and/or incidents that demand indemnities for environment damage; |
| · | Unexpected delays in the processes of expropriation and establishment of easements; |
| · | Non-availability of the workforce or of the necessary equipment; |
| · | Strikes; |
| · | Delay in delivery of equipment by suppliers; |
| · | Inappropriateness of the physical facilities and equipment for ensuring uninterrupted activities of the business and protecting the critical processes against failures and accidents; |
| · | Delay resulting from failings by suppliers or third parties to comply with their contractual obligations; |
| · | Interference by climate factors, or environmental restrictions; |
| · | Significant variations of hydrological conditions from the historic average, that is to say, occurrence of rains in a volume or frequency not in accordance with the historic average; |
| · | Changes in the environmental legislation, creating new obligations and causing additional costs for projects; |
| · | Legal instability caused by political issues; |
| · | Continuation, for a long period, of the restrictive conditions imposed by Covid-19; and |
| · | Occurrence of any of the above factors could result in significant increases in costs, or delay or inhibit implementation of initiatives, and consequently compromise the execution of Gasmig’s strategic plan, with negative effect on the operational and financial results of Gasmig and CEMIG. |
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The existence of a single supplier of natural gas in Brazil affects competitiveness in the market in which Gasmig operates.
The Brazilian gas market is undergoing a process of opening, but there are still some obstacles to be overcome. Currently, Petrobras holds the monopoly on supply and transport of natural gas. Gasmig and Petrobras entered into a Purchase Agreement for the supply of natural gas under the ‘Firm Inflexible’ regime, specifying the quantity contracted, the price of gas, and other factors. The price of gas acquired from Petrobras varies according to a contractual formula, and is adjusted in accordance with changes in the price of Brent oil, and the US dollar exchange rate. In 2020, the price of acquisition for gas other than for thermoelectric power varied significantly, decreasing by as much as 27.4%, but later increased at the end of the year to a price 3.7% lower than at the end of 2019.
The contract is for the period up to 2023, and the pricing of the molecule portion may be altered only by agreement between the parties. The price of the transportation of natural gas is regulated by, and may be revised by, the National Oil, Natural Gas and Biofuels Agency (ANP). If ANP changes the pricing, the difference is passed through to the distributors.
Changes in the prices and/or pricing policies of products that are substitutes for the product that Gasmig sells could affect the price of the energy products sold by Gasmig.
Petrobras also controls the prices of the principal energy substitutes that compete with natural gas. In 2017, Petrobras revised its pricing policy for energy sources that compete with natural gas. The prices of LPG (‘Liquefied Petroleum Gas’) and Fuel Oil fluctuated significantly during the last year. The prices of these energy products also vary in accordance with the oil price, and the US dollar exchange rate, which might result in their maintaining their competitiveness in relation to gas.
Petrobras may revise its pricing policy at any time. Any changes could influence the market´s demand for natural gas and its competing fuels, such as LPG, petroleum gas, and/or Fuel Oil, which could positively or negatively impact Gasmig’s operational results and financial situation.
Opening of the gas market or measures to encourage reduction of the price could affect the profitability of Gasmig.
In 2016 the Brazilian federal government launched the ‘Gás para Crescer’ (‘Gas for Growth’) program, with the objective of fostering the natural gas market in Brazil, through implementation of changes in the regulatory environment of the natural gas sector, preparing it for a reduction in the participation of Petrobras. The proposals of the Gás para Crescer program were incorporated into a draft law, which has been going through Brazil´s Congress for some years. Also because of this information, resultprogram, the National Oil, Natural Gas and Biofuels Agency (ANP) issued Requests for Public Contributions, with a view to receiving contributions from agents in litigationthe natural gas chain to enable the entry of new players in the market.
The ‘Gás para Crescer’ program was succeeded by the ‘Novo Mercado de Gás’ (‘New Gas Market’) program. The main directives of the program are consolidated in CNPE Resolution 16/2019, which sets principles and potential liabilityobjectives for us, damage our brandthe promotion of free competition in Brazil’s natural gas market.
Among the directives, it is established that there should be an incentive for the States and reputation,the Federal District to adopt good regulatory practices that contribute to effective liberalization of the market, increase in transparency and efficiency, de-verticalization of the sector, and appropriate pricing in the supply of natural gas, by segment of users. This will likely also involve an incentive for the States and the Federal District to adopt reforms and structuring measures, including a possible amendment to concession contracts to reflect good regulatory practices, which include the regulatory principles for Free Consumers, independent producers and independent importers. Finally, there would be an incentive for the States to arrange for privatization of the local state piped gas concession holders.
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In July 2019, Petrobras and the Brazilian antitrust authority CADE (‘Conselho Administrativo de Defesa Econômica’, or otherwise harm our business. In addition, we relyEconomic Defense Administrative Council) signed an Undertaking for Cessation (‘Termo de Compromisso de Cessação –TCC’), under which Petrobras undertook to sell the holdings that it presently owns in the transporters Nova Transportadora do Sudeste S. A. – NTS (10%), and TBG - Transportadora Brasileira Gasoduto Bolívia-Brasil S.A. (51%). Petrobras will also sell indirect equity interest in distributors, by selling either its shares in Gaspetro or Gaspetro’s equity interests in the distributors. Petrobras also made an undertaking to adopt certain limited capacitiesmeasures to give more transparency to the contracts for transport, and for third parties to have access to the capacity of the existing assets.
These measures, if implemented, might affect Gasmig, and there could be a variation in the cost price of gas and in the competitiveness of natural gas compared to other energy sources, generating a possible devaluation of natural gas in the market and altering Gasmig’s operational cash flow – i.e. it might have to pay a higher price than expected for the same product, generating negative financial consequences for Gasmig.
The renewal or extension of the gas supply contracts is not guaranteed, and the growth strategy might be adversely affected.
The gas supply contracts have specific periods of validity, and Gasmig might be adversely affected if this renewal and/or extension does not take place on third-party data management providers whose possible security problemsterms that are favorable to Gasmig’s growth strategy – this might occur in view of the possibility of entry of new agents into the gas market.
Further, Gasmig will have to comply with certain requirements for the renewal of the gas supply contract, and security vulnerabilities may have similar effectsfor this reason cannot guarantee that this contract will be renewed, or that it will be renewed on us.the same terms. If the supply contract is not renewed, or if it is renewed on less favorable terms, the business, financial situation and operational results of Gasmig could be negatively affected.
The volumes of natural gas supplied by Gasmig are concentrated in few sectors, and few clientsclients.
The volumes of sales to the non-thermoelectric generation sector are based on the large-volumelarge-scale industrial market which represents 94.41%sustains the sales volume, and constituted 77% of the volume of gas not sold to this sectorthermal electricity generation plants in 2015. While we serve clients in the steel, metallurgical and mining industries, our 202020. Gasmig’s largest clients responsible for 82.41% of the volume of gas sold in 2015, are in the industrial sector.
The Brazilian manufacturing sector is undergoing a severe crisis, with strong reductions since 2014 (down 3.1% from 2014 to 2013), intensifying in 2015 with a reductionsteel, metallurgy, mining, and manufacture of 8.3% from 2014 – according to data on industrial production volumes from the IBGE (Monthly Industrial Production – Physical Production (Pesquisa Industrial Mensal / Produção Física or PIM–PF).wood pulp.
In 2015, sales to the industrial sector, which comprises steel, metallurgical and mining companies, were down 14.97% from the previous year, due to the economic recession, exacerbated in the middleevent of the year by the policyreversal of increasing gas prices adopted by Petrobras.
Perpetuation of thisexpectations and/or an adverse economic scenario, could negatively affectcontinuity of the business, operational results andstructure of the financial condition of Gasmig.
The existence in Brazil of a sole supplier of natural gas affects competitiveness
In 1994, Petrobras andmarket served by Gasmig entered into a gas supply contract, which was supplemented in 2004 by an Additional Supply Contract (Contrato de Suprimento Adicional, or CSA) under which Gasmig would increase the volume of gas it purchased from Petrobras as of 2010. Since 2011, Petrobras had been providing discounts on the price of gas specified in the CSA. Beginning in June 2015, Petrobras published a gradual reduction of these discounts. Accordingly, from November 2015, the price in effect is the pice set forth in the CSA (without discount). As a result, throughout 2015, the average acquisition price for the non-thermal market increased by approximately 25.7%.
This policy of Petrobras to increase gas prices in 2015, combined with the discounts offered by Petrobras in earlier years, has led to the loss of competitiveness of natural gas vis-à-vis other forms of energy such as LPG (liquid petroleum gas) and fuel oil. If this trend continues, it could negatively affect the demand for natural gas, as it creates incentives to use other sources of energy, which wouldmight have a negative impacteffect on theGasmig’s business, operational results and financial conditionsituation.
Discussions in progress on the new directives of Gasmig.public policies in relation to the gas market in Brazil could negatively affect Gasmig’s business, if implemented.
There are uncertainties aboutSince the methodologysecond half of 2016, Petrobras has been reducing its presence in the natural gas supply chain. In 2017 it sold 90% of its stockholding interest in Nova Transportadora do Sudeste S.A. – NTS, to the Canadian company Brookfield Infrastructure Partners, and parametersin June 2020, completed the sale of 100% of its interest in Transportadora Associada de Gás S.A. – TAG, to the group comprising Engie and the Canadian fund Caisse de Dépôt et Placement du Québec (CPDQ).
Even with these divestitures, Petrobras continues to have a dominant position in the market, because it has a contract for the transport of gas from these assets, and continues to be adoptedthe monopoly supplier in the Brazilian gas market.
In 2019 the ‘Novo Mercado de Gás’ (‘New Gas Market’) program, developed by the regulatory authoritiesMining and Energy Ministry in partnership with the Economy Ministry, ANP, CADE and EPE, was instituted, with four sectors: Promotion of competition; Integration of natural gas with the electricity and industrial sectors; Harmonization of the state and federal regulations; and Removal of tax barriers. As practical results of the program, we highlight Resolution 16 of June 24, 2019, enacted by the National Energy Policy Council (CNPE) and the signature of the Cessation Undertaking (TCC) between the monopolies authority CADE (‘Conselho Administrativo de Defesa Econômica’) and Petrobras. CNPE Resolution 16 details guidelines of energy policy to achieve the objectives of the ‘New Gas Market’, especially in relation to promotion of competition. The TCC signed by CADE and Petrobras aims to stimulate competition in the first Tariff Review cycle to be applied to Gasmig
Gasmig obtainedsector and prevent future occurrence of anticompetitive conduct, covering total disposal of transport assets by the concession for distributiondominant agent, release of piped gas in the state of Minas Gerais for 30 years from the date of publication of State Law 11.021, of January 11, 1993, with the possibility of extension provided certain requirements are met. On December 26, 2014 the Second Amendmentexcess transport capacity to the respective Concession Contractmarket, and negotiation of non-discriminatory access for third parties to the infrastructures of outflow and processing of natural gas.
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Finally, Draft Law 6407/2013, known as ‘The New Gas Law’ (‘Nova Lei do Gás’), which brings together some measures that are necessary for formation of an open natural gas market, was signedpassed by the Senate on December 10, 2020, and now requires only passage by the periodChamber of Deputies (the lower house of Congress) and signature by the concession was extended until January 10, 2053.President.
UnderThe proposed changes could contain negative impacts on the Concession Contract, the Company will continue its natural gas distribution activities untilbusiness, and generate uncertainties on some aspects. The adoption of systems of entry and exit to the endtransport activity generates uncertainties in relation to the future cost of the service of transport. The incentive for the States to adopt harmonized regulatory principles for free agents (independent producers, independent importers) could represent risks to the distribution concession being compensated through tariffs paidholders of having to bear the burden of commitments to minimum withdrawals included in supply contracts, or even suffer physical bypass by the users of distribution services.
The Minas Gerais State Economic Development Department (Secretaria de Estado de Desenvolvimento Econômico, or SEDE), the body of the Minas Gerais State Government responsible for regulating piped gas distribution, will be undertaking the first tariff review of Gasmig. The process of tariff review is still being structured and at the moment there is no decision as to how long the review will take or to what methodology will be adopted. At some point during this process there will be a decision on the regulatory compensation rate, which might cause a change in the profit margin for gas distribution and affect our expected results.
In addition, given that this is Gasmig’s first tariff review, there can be no assurances as to the methodology for the valuation of Cemig’s assets, which could negatively impact the expected return for the business.
The regulatory agency responsible for the distribution of piped gas distribution is controlled by the government of Minas Gerais State, Government,whose interests might conflict with the interests of which might conflict with those of economic equilibriumbalance of the concession granted to Gasmig.
The Brazilian Federal Constitution establisheslays down that itthe commercial operation of local piped gas services is thea function of the States, to exploit local piped gas services, directly or through concession.
concessions. Gasmig is under the indirect control ofindirectly controlled by the State of Minas Gerais, through the majority shareholdingstockholding position held by CemigCEMIG in Gasmig. The Minas Gerais State Economic Development SecretariatDepartment (SEDE) is an instrumentalitya division of the State and in Minas Gerais exercisesState government, responsible for the rolefunction of regulator of the servicesregulation of piped gas distribution.distribution services. Further, SEDE is also responsible for promoting investmentsthe promotion of sustainable development in the State of Minas Gerais.
The Government of the State of Minas Gerais asState.
As indirect controlling stockholdershareholder of Gasmig, and at the same time regulator of the public service, through SEDE, the government of Minas Gerais State has the authority to direct the efforts and investments of the CompanyGasmig in accordance with its own interests – political, economic or social interests and thesewhich could have a negative impact on the economic equilibrium of the concession.
Risks Relating to Brazil
Political and economic instability in Brazil could have effects on the economy and affect us.
Historically, the Brazilian political environment has influenced, and continues to influence, the performance of the country’s economy. Political crises have affected and continue to affect investor confidence and that of the general public, which resulted in economic deceleration and heightened volatility in the securities issued by Brazilian companies. The President of Brazil has power to determine the governmental policies and actions related to the Brazilian economy and, consequently, to affect the operations and financial performance of companies, including ours.
Further, Brazilian markets have experienced low economic growth and increasing tension in the political environment,a high level of volatility due to the impeachment of former president ofuncertainties arising from on-going anti-corruption and other investigations being carried out by the Brazil, Dilma Rouseff,Brazilian Federal Prosecutors, and their impact on the relatedeconomy and on the Brazilian political environment. Such events and repercussions.
The current government of President Michel Temer is experiencing low levels of popularity. The government’s low level of popularity could result in political instability in Brazil, which could in turn result in a reduction of the credibility of public institutions.
Further, the country is suffering the effects on public opinion related to the irregularities that are being investigated in important Brazilian companies, which could result in a significant deterioration in the markets.
If such events result in a negative image being caused for investors,cause the trading value of our shares, preferred and common, and of our preferred and common ADSs, mightand our other securities to be reduced, and this could negatively affect our access to the international financial markets. Furthermore, any political instability resulting from such events, including upcoming political elections at the federal and state levels, if it affects the Brazilian economy, could cause us to re-evaluate our strategy.
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The Brazilian federal governmentFederal Government has exercised, and continues to exercise, significant influence on the Brazilian economy. Political and economic conditions can have a direct impact on our business, financial condition, results of operations and prospects.
The Brazilian federal governmentFederal Government frequently intervenes in the country’s economy and occasionally makes significant changes in monetary, fiscal and regulatory policy. Our business, results of operations and financial condition may be adversely affected by changes in government policies, as well as other factors including, without limitation:
| · | Fluctuations in the exchange rate; |
| · | Regulatory policy for the energy sector; |
| · | Inflation; |
| · | Changes in interest rates; |
| · | Fiscal policy; |
| · | Other political, diplomatic, social and economic developments which may affect Brazil or the international markets; |
| · | Liquidity of the domestic markets for capital and loans; |
| · | Development of the energy sector; |
| · | Controls on foreign exchange and restrictions on remittances out of the country; and/or |
| · | Limits on international trade. |
Uncertainty on whether the Brazilian Federal Government will make changes in policy or regulation that affect these or other factors in the exchange rate;
by companies. Measures by the Brazilian federal governmentFederal Government to maintain economic stability, and also speculation on any future acts of the Brazilian federal government,Federal Government, might generate uncertainties in the Brazilian economy, and increase the volatility of the domestic capital market,markets, adversely affecting our business, results of operations and financial condition. If the political and economic situations deteriorate, we may also face increased costs.
Taking into accountAdditionally, there are uncertainties regarding the Brazilian presidential systemfederal government's capacity to promote actions in 2021 that minimize the impacts of government,Covid-19 and promote a faster economic recovery.
These uncertainties, together with the considerable influence of the executive power, itcurrent economic crisis that Brazil is not possible to predict whether the present government or any successive governments will have an adverse effect onundergoing and other future developments in the Brazilian economy, may adversely affect our business, results of operations and consequently on our business.financial condition.
The stability of the Brazilian realReal is affected by its relationship with the U.S. dollar, inflation and Brazilian federal governmentFederal Government policy regarding exchange rates. Our business could be adversely affected by any recurrence of volatility affecting our foreign currency-linked receivables and obligations.obligations as well as increases in prevailing market interest rates.
The Brazilian currency has experienced high degrees of volatility in the past. The Brazilian federal governmentFederal Government has implemented several economic plans, and has used a wide range of foreign currency control mechanisms, including sudden devaluation, small periodic devaluation during which the occurrence of the changes varied from daily to monthly, floating exchange market systems, exchange controls and parallel exchange market. From time to time, there was a significant degree of fluctuation between the U.S. dollar and the Brazilian realReal and other currencies. On December 31, 2015,2020, the exchange rate between the realReal and the U.S.US dollar was R$3.95935.1935 for US$ 1.00. There is no guarantee that the Real will not depreciate, or appreciate, in relation to U.S.$1.00.the US dollar, in the future.
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The real may not maintain its current value orinstability of the Brazilian federal government may implement foreign currency control mechanisms. Any governmental interference with theReal/U.S. Dollar exchange rate orcould have a material adverse effect on us. Depreciation of the implementationReal against the United States dollar and other principal foreign countries could create inflationary pressures in Brazil and cause increases in interest rates, which could negatively affect the growth of the Brazilian economy, and consequently, our growth. Depreciation of the Real could cause an increase in financial and operating costs, since we have payment obligations under financing contracts and import contracts indexed to exchange control mechanisms, could lead to arate variations. In addition, depreciation of the real,Real could cause inflationary pressure that might result in abrupt increases in the inflation rate, which could reduce the value ofwould increase our receivablesoperating costs and make our foreign currency-linked obligations more expensive. Other than in respect of our revenues and receivables denominated in U.S. dollars, such devaluation could materiallyexpenses, which might adversely affect our business, results of operations, or prospects.outlook.
On December 31, 2015, approximately 0.31%We generally do not enter into derivative contracts or similar financial instruments or make other arrangements with third parties to hedge against the risk of an increase in interest rates. To the extent that such floating rates rise, we may incur additional expenses. Additionally, as we refinance our existing debt in the coming years, the mix of our consolidated indebtedness (which equaled approximately R$15,167 million) wasmay change, specifically as it relates to the ratio of fixed to floating interest rates, the ratio of short-term to long-term debt, and the currencies in which our debt is denominated in foreign currencies, ofor to which approximately R$33 million (or approximately 0.22%it is indexed. Changes that affect the composition of our consolidated indebtedness) was denominateddebt and cause rises in U.S. dollars.
Risks relating to the preferred and common shares, and the preferred and common ADSs
Inflation and certain governmentalgovernment measures aimed to curb inflation maycontrol it might contribute significantly to economic uncertainty in Brazil, and could harmhave a material adverse effect on our business, results of operations, financial condition and the market valueprice of our shares, the preferred ADSs and the common ADSs.shares.
Brazil has historically experienced extremely high rates of inflation. Inflation, and some of the federal government’sFederal Government’s measures taken in an attempt to curb inflation, have had significant negative effects on the Brazilian economy. Since the introduction of the realReal in 1994, Brazil’s inflation rate has been substantially lower than in previous periods. AsBrazilian annual inflation as measured by the IPCA index Brazilian annual inflation rates in 2013, 2014the years 2018, 2019 and 2015 were 5.91%2020 was, respectively, 3.75%, 6.41%4.31% and 10.67%, respectively.4.52%. No assurance can be given that inflation will remain at these levels.
Future measures taken by the federal government,Federal Government, including increases in interest rates, intervention in the foreign exchange market or actions intended to adjust the value of the real,Real, might cause an increase in the rate of inflation, and consequently, have an adverse economic impact on our business, results of operations and financial condition. If Brazil experiences high inflation rates in the future, we might be unable to adjust the rates we charge our consumerscustomers to offset the effects of inflation on our cost structure.
A significant increase in interest rates or inflation would have an adverse effect on our finance expenses and financial results as a whole. At the same time, a significant reduction in the CDI rate, or in inflation, could negatively affect the revenue generated by our financial investments, but also have the positive effect of revaluing adjustments to the balances of our concession financial assets. Substantially all of our cash operating expenses are denominated in reaisReais and tend to increase with Brazilian inflation. Inflationary pressures might also hinder our ability to access foreign financial markets or might lead to further government intervention in the economy, including the introduction of government policies that could harm our business, results of operations and financial condition or adversely affect the market value of our shares and as a result, of our preferred ADSs, common ADSs and common ADSs.other securities.
Risks relating to the Preferred and Common Shares, and the Preferred and Common ADSs Instability of the exchange rate could adversely affect the value of remittances of dividends outside Brazil, and also the market price of the ADSs.
Many Brazilian and global macroeconomic factors have an influence on the exchange rate. In this context, the Brazilian federal government,Federal Government, through the Central Bank, has in the past occasionally intervened for the purpose of controlling unstable variations in exchange rates. We cannot predict whether the Central Bank or the federal governmentFederal Government will continue to allow the realReal to float freely or whether it will intervene through a system involving an exchange rate band, or the use of other measures.
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This being so, the realReal might fluctuate substantially in relation to the United States dollar, and other currencies, in the future. That instability could adversely affect the equivalent in US dollars of the market price of our shares, and as a result the prices of our ADSs, common and preferred, and also outward dividends remittances from Brazil.
For more information, see the section “Exchange rates”“Item 3. Key Information – in Part I, Item 3 – Selected Consolidated Financial Information.Exchange Rates”.
Changes in economic and market conditions in other countries, especially Latin American and emerging market countries, may adversely affect our business, results of operations and financial condition, as well as the market price of our shares, preferred ADS and common ADSs.
The market value of the securities of Brazilian companies is affected to varying degrees by economic and market conditions in other countries, including other Latin American countries and emerging market countries. Although the economic conditions of such countries may differ significantly from the economic conditions of Brazil, the reactions of investors to events in those countries may have an adverse effect on the market value of the securities of Brazilian issuers. Crises in other emerging market countries might reduce investors’ interest in the securities of Brazilian issuers, including our Company. In the future, this could make it more difficult for us to access the capital markets and finance our operations on acceptable terms or at all. Due to the characteristics of the Brazilian power industry (which requires significant investments in operating assets) and due to our financing needs, if access to the capital and credit markets is limited, we could face difficulties in completing our investment plans and the refinancing our obligations, and this could adversely affect our business, results of operations and financial condition.
The relative volatility and illiquidity of the Brazilian securities market may adversely affect our shareholders.
Investing in Latin American securities, such as the preferred shares, common shares, preferred ADSs or common ADSs, involves a higher degree of risk than investing in securities of issuers from countries with more stable political and economic environments and such investments are generally considered speculative in nature. These investments are subject to certain economic and political risks, including, as examples, the following:
| · | Changes to the regulatory, tax, economic and political environment that may affect the ability of investors to receive payment, in whole or in part, related to their investments; and |
| · | Restrictions on foreign investment and on repatriation of capital invested. |
The Brazilian securities market is substantially smaller, less liquid, more concentrated and more volatile than the major securities markets in the United States. This might substantially limit an investor’s ability to sell the shares underlying his preferred or common ADSs for the desired price and within the desired period. In 20152020, the São Paulo Stock Exchange (BM&FBovespa S.A. —(Brasil, Bolsa, de Valores, Mercadorias e Futuros,Balcão S.A or BM&FBovespa)‘B3’), the only stock exchange in Brazil on which our shares are traded, had an annual market capitalization of approximately R$1.675.14 trillion, and average daily trading volume of approximately R$6.7929.8 billion.
Holders of the preferred and common ADSs, and holders of our shares, may have different shareholders’ rights than holders of shares in U.S. companies.
Our corporate governance, disclosure requirements and accounting practices are governed by our by-laws, by the Level 1 Differentiated Corporate Governance Practices Regulations (‘Regulamento de Práticas Diferenciadas de Governança Corporativa Nível 11’) of the BM&FBovespa,B3 (the main Brazilian stock exchange) by the Brazilian Corporate Law (Federal Law No. 6,404/76) and by the rules issued by the CVM. These regulations may differ from the legal principles that would apply if our Company were incorporated in a jurisdiction in the United States, such as Delaware or New York, or in other jurisdictions outside Brazil. In addition, the rights of an ADS holder, which are derived from the rights of holders of our common or preferred shares, as the case may be, to have his interests protected in relation to decisions by our board of directors or our controlling shareholder, may be different under the Brazilian Corporate Law than underfrom the rules of other jurisdictions. Rules against insider trading and self-dealing and other rules for the preservation of shareholder interests may also be different in Brazil than inif compared to the United States rules, potentially establishing a disadvantage for holders of the preferred shares, common shares, or preferred or common ADSs.
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Exchange controls and restrictions on remittances from Brazil might adversely affect holders of preferred and common ADSsADSs.
The investor may be adversely affected by the imposition of restrictions on the remittance to foreign investors of the proceeds of their investments in Brazil and the conversion from reaisReais (R$) into foreign currencies. Restrictions of this type would hinder or prevent the conversion of dividends, distributions or the proceeds from any sale of preferred shares or common shares from reaisReais (R$) into U.S. dollars (US$). We cannot guarantee that the federal governmentFederal Government will not take restrictive measures in the future.
Changes in Brazilian tax laws may have an adverse impact on the taxes applicable to the sale of our shares, preferred ADSs or common ADSs.
Law No. 10,833 of December 29, 2003 (“Law No. 10,833/2003”) provides that the sale of assets located in Brazil is subject to taxation in Brazil, regardless of whether the sale occurs inside or outside Brazil. This rule applies whether the vendor is a Brazilian resident or a person not resident in Brazil, and also when both are resident outside Brazil.
There is no clear instruction as to the application of Law No. 10,833/2003. Accordingly, we are unable to predict whether Brazilian courts will decide whether it applies to sales of our preferred ADSs and common ADSs between non-residents of Brazil. However, in the event that the concept of the sale of assets is interpreted to include a sale of our preferred ADSs and common ADSs, application of this tax law would result in the imposition of withholding taxes on sales of our preferred ADSs and common ADSs by a non-resident to either a resident or a non-resident of Brazil.
Foreign shareholders may be unable to enforce judgments given in non-Brazilian courts against the Company, or against members of its Board of Directors or Executive Board.
All of our directors and officers reside in Brazil. ourOur assets, as well as the assets of these individuals, are located mostly in Brazil. As a result, it may not be possible for foreign shareholders to effect service of process on them within the United States or other jurisdictions outside Brazil, or to attach their assets, or to enforce against them, or against the Company in United States courts, or in the courts of other jurisdictions outside Brazil, judgments that are predicated upon the civil liability provisions of the securities laws of the United States or the respective laws of such other jurisdictions.
In order to have a judgment rendered outside of Brazil enforced in Brazil, the party seeking enforcement would need to obtainbe recognized in the confirmationcourts of Brazil (to the extent that Brazilian courts may have jurisdiction) and such courts would enforce such judgment without any retrial or reexamination of the merits of the original action only if such judgment had been previously ratified by the Brazilian Superior Court of Justice (Tribunal Superior de Justiça, or STJ),STJ, in complianceaccordance with the Constitution of Brazil, the requirements of Articles 15 and 17216-A to 216- X of the Law of Introduction to the Rules of Brazilian Law, Law No. 9,307/1996 (the Arbitration Law) and the internal regulationsInternal Regulations of the STJ.STJ (RISTJ), introduced by Regulatory Amendments No. 18/2014 and No. 24/2016. Notwithstanding the foregoing, no assurance can be given that ratification will be obtained.
Exchange of preferred ADSs or common ADSs for underlying shares may have adverse consequences.
The Brazilian custodian for the preferred shares and common shares must obtain an electronic certificate of foreign capital registration from the Central Bank to remit U.S. dollars from Brazil to other countries for payments of dividends, or any other cash distributions, or to remit the proceeds of a sale of shares.
If the investor decides to exchange his preferred ADSs or common ADSs for the underlying shares, the investor will be able to continue to rely, for five business days from the date of the exchange, on the depositary bank’s electronic certificate of registration in order to receive any proceeds distributed in connection with the shares. Thereafter,After that period, the investor may perhaps not be able to obtain and remit U.S. dollars abroad upon a sale of theour common/preferred shares, or distributions of proceeds relating to theour common/preferred shares, unless the investorhe or she obtains his or her own certificate of registration or registers the investment under CMN Resolution No. 2,689 of January 26, 2000,4,373/2014, dated September 29, 2014, which entitles registered foreign investors (‘Resolution No. 4,373/2014’) to buy and sell on thea Brazilian stock exchanges.exchange. If the investor does not obtain thisa certificate heof registration or register under Resolution No. 4,373/2014, the investor will generally be subject to less favorable tax treatment on gains with respect to the preferred orour common shares.
If thean investor attempts to obtain his or her own certificate of registration, certificate hethe investor may incur expenses or suffer significant delays in the application process.
Obtaining a registration certificate involves generating significant documentation, including completing and filing various electronic forms with the Central Bank and the CVM. In order to complete this process, the investor will usually need to engage a consultantwhich could delay his or attorney who has expertise in Central Bank and CVM regulations. Any delay in obtaining this certificate could adversely impact the investor’sher ability to receive dividends or distributions paidrelating to our common shares or the return of his or her capital in a timely manner. The custodian’s certificate of registration or any foreign capital registration obtained by an investor may be affected by future legislative changes, and additional restrictions applicable to the investor, the disposition of the underlying common/preferred shares or common shares outside Brazil, or to receive timelythe repatriation of the investor’s capital.proceeds of disposition may be imposed in the future.
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If the investor decides to exchange his preferred or common shares back into preferred ADSs or common ADSs, respectively, once he has registered his investment in preferred shares or common shares, he may deposit his preferred or common shares with the custodian and rely on the depositary bank’s registration certificate, subject to certain conditions. We cannot guarantee that the depositary bank’s certificate of registry or any certificate of foreign capital registration obtained by an investor may not be affected by future legislative or other regulatory changes, nor that additional Brazilian restrictions applicable to the investor, or to the sale of the underlying preferred shares, or to repatriation of the proceeds from the sale, will not be imposed in the future.
An investor of our common shares and ADSs might be unable to exercise preemptive rights and tag-along rights with respect to the common shares.
U.S. investors of common shares and ADSs may not be able to exercise the preemptive rights and tag-along rights relating to common shares unless a registration statement under the U.S. Securities Act of 1933, as amended, or the Securities Act, is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to our common shares relating to these rights, and we cannot assure you that we will file any such registration statement. Unless we file a registration statement or an exemption from registration is available, an ADR investor may receive only the net proceeds from the sale of his or her preemptive rights and tag-along rights or, if these rights cannot be sold, they will lapse and the ADR investor will receive only the net proceeds from the sale of his or her preemptive rights and tag-along rights or, if these rights cannot be sold, they will lapse and the ADR holder will receive no value for them.
Judgments of Brazilian courts with respect to our shares will be payable only in Reais.
If proceedings are brought in the courts of Brazil seeking to enforce our obligations in respect of our common shares, we will not be required to discharge any such obligations in a currency other than Reais. Under Brazilian exchange control limitations, an obligation in Brazil to pay amounts denominated in a currency other than Reais may only be satisfied in Brazilian currency at the exchange rate, as determined by the Central Bank, in effect on the date the judgment is obtained, and any such amounts are then adjusted to reflect exchange rate variations through the effective payment date. The then prevailing exchange rate may not afford non-Brazilian investors full compensation for any claim arising out of, or related to, our obligations under our common shares.
Sales of a substantial number of shares, or the perception that such sales might take place, could adversely affect the prevailing market price of our shares, or of the preferred or common ADSs.
As a consequence of the issuance of new shares, sales of shares by existing shareholders,share investors, or the perception that such a sale might occur, the market price of our shares and, by extension, of the preferred and/or common ADSs, may decrease significantly.
The preferred shares and preferred ADSs generally do not have voting rights, and the common ADSs can only be voted by proxy by providing voting instructions to the depositary.
Under the Brazilian Corporate Law and our by-laws, holders of our preferred shares, and, consequently, holders of our ADSs representing preferred shares, are not entitled to vote at our shareholders’ meetings, except in very specific circumstances.
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Holders of our preferred ADSs may also encounter difficulties in the exercise of certain rights, including the limited voting rights. Holders of the ADSs for our common shares do not have automatic entitlement to vote in our General Meetings of Stockholders,Shareholders, other than by power of attorney, by sending a voting instruction to the depositary. Where there is not enough time to send the form with voting instructions to the depository, or in the event of omission to send the voting instruction, the holders of ADSs for Cemig’sCEMIG’s preferred and common shares may be unable to vote by means of instructions to the depository.
Future equity issuances may dilute the holdings of current holders of our common shares or ADSs and could materially affect the market price for those securities.
We may in the future decide to offer additional equity to raise capital or for other purposes. Any such future equity offering could reduce the proportionate ownership and voting interests of holders of our common shares and ADSs, as well as our earnings and net equity value per common share or ADS. Any offering of shares and ADSs by us or our main shareholders, or a perception that any such offering is imminent, could have an adverse effect on the market price of these securities.
The Brazilian Government may assert that the ADS taxation for Non- Resident Holders shall be payable in Brazil.
Pursuant to Section 26 of Law No. 10,833, published on December 29, 2003, the sale of property located in Brazil involving non-resident investors is subject to Brazilian income tax as of February 1, 2004. Currently, the Company understands that ADSs do not qualify as property located in Brazil and, thus, should not be subject to the Brazilian withholding tax; nevertheless, the Brazilian Tax Authorities may try to assert Brazilian tax jurisdiction in such situation, incurring on the payment of tax income in Brazil for the Non-Resident Holders.
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| Item 4. | Information on the Company |
Organization
Organizational and Historical Background
The Company was established on May 22, 1952 inCompanhia Energética de Minas Gerais Brazil as– CEMIG is a state-controlled mixed capital company (‘sociedade por ações de economia mistamista’ (a state-controlled mixed capital company) with indefinite duration, pursuant to Minas Gerais State Law No. 828 of December 14, 1951 and). CEMIG has its implementing regulation, Minas Gerais State Decree 3,710 of February 20, 1952. The Company’s full legal name is Companhia Energética de Minas Gerais–CEMIG, but is also known as CEMIG. Our headquarters areregistered office located at Avenida Barbacena, 1200, Belo Horizonte, Minas Gerais, Brazil. The Company’s main telephone numberU.S. Securities and Exchange Commission (the “SEC”) maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as us, that file electronically with the SEC. Our internet address is (55-31) 3506-3711.https://www.cemig.com.br. The information posted on our website or that could be accessed through our website is not an integral part of, or attached to or incorporated by reference into, this Form 20-F.
In order to comply with legalCEMIG built its first three hydroelectric power plants in the 1950s and regulatory provisions pursuant to which we were required to unbundle our vertically integrated businesses, in 2004, we incorporated two wholly-owned subsidiaries of CEMIG: Cemig Geração e Transmissão S.A., referred to as Cemig Generation and Transmission, and Cemig Distribuição S.A., referred to as Cemig Distribution which were established to carry on the business of electricity generation andcommenced its energy transmission and distribution respectively.
Cemig’s locationoperations in 1960. CEMIG was a factor inincorporated on May 22, 1952 and is organized and existing under the decisions by several major companies to be headquartered in Minas Gerais – such as Mannesmann, a steel company producing seamless tubes, due to the guarantee given by the state government that Cemig would be able to supply Mannesmann’s electricity requirements (at that time, equal to halflaws of the entire consumption of the state of Minas Gerais).
The first three hydroelectric plants built by Cemig were commissioned in the 1950s- Tronqueiras, ItutingaBrazil and Salto Grande.
In 1960, Cemig commenced its electricity transmission and distribution operations. During the same period the “Canambra” consortium was formed, by a group of Canadian, American and Brazilian technical experts, who between 1963 and 1966 identified and evaluated the hydroelectric potential of the State of Minas Gerais. This study – at that time – was already aligned with the concept of sustainable development – it revolutionized the focus of construction of power plants in Brazil, as well as defined which projects could be developed to supply future electric power needs.
In the 1970s, CemigCEMIG took over responsibility for the distribution of electricityenergy in the region of the city of Belo Horizonte, and incorporated Companhia Força e Luz de Minas Gerais, and embarked on the construction of more major power plants. In 1978 Cemig commissioned the São Simão hydroelectric power plant at that time its largest plant. This decade saw major progress inand advanced the transmission of energy with the construction of 6,000 km (3,728 miles) of distribution lines being laid inpower lines.
In the state of Minas Gerais.
The Minas-Luz Program,1980s, a partnership between Cemig, Eletrobrás (CEMIG, Centrais Elétricas Brasileiras S.A. (‘Eletrobras’) and the Brazilian federal government, was created inFederal Government launched the 1980sMinas-Luz Program, to expand service to low-income populations in rural areas and outer urban suburbs, including the shantytowns. The Emborcação hydroelectric power plant, onat the Paranaíba River, started operationoperating in 1982 – at the1982. At that time, it was the Company’s second largest power plant, and together with the São Simão plant, itthe Emborcação plant tripled the Company’s generation capacity. In 1983, Cemig establishedCEMIG created its Ecological Program Coordination Management Unit, –which is responsible for the planning and development of a specific policy fordeveloping the Company’s environmental protection – enablingpolicies. This new unit fostered the research of alternative energy sources, such as wind power and solar generation, biomass and natural gas, to become a focus ofgas. Since then, the Company’sCompany has focused its research projects.projects on such alternative energy sources.
TheIn 1986, CEMIG’s subsidiary Gasmig (Companhia de Gás de Minas Gerais), was established in 1986, for purposes of distributing natural gas. On September 18, 1986 the Company changed its name from Cemig – Centrais Elétricas de Minas Gerais to Companhia EnergéticaGas de Minas Gerais – Cemig to reflect the expansion of its area of operation to include multiple sources of electricity.Gasmig, a natural gas distribution company, was incorporated. By the end of the 1980s, Cemig was distributing electricity to 96% ofCEMIG’s energy distribution business had a market share in the State of Minas Gerais according to ANEEL (Agência Nacional de Energia Elétrica), the Brazilian electricity regulator.
In the 1990s, despite the economic crisis, Cemig, according to its records, served approximately 5 million consumers. At that time Cemig added 237,000 new connections to the electricity supply in a single year – a record in its history. Also in the 1990s, Cemig began to build hydroelectric plants in partnership with the private sector. It was through this structure, for example, that the Igarapava hydroelectric plant, in the ‘Minas Triangle’ region, was built. It was commissioned in 1998.of 96%.
In 2000, CemigCEMIG was includedlisted in the Dow Jones Sustainability Index for the first time- a recognition which it has received repeatedly in recent years. Cemig seestime and continues to be listed since then. We believe this as confirmation of itsto confirm our dedication to the balance between the threeeconomic, environmental and social pillars of corporate sustainability: economic, social and financial. The year 2000 was also marked by (i) the parallel construction of three hydroelectric plants – Porto Estrela, Queimado and Funil – and (ii) the number of Cemig’s consumers growing to more than 5 million for the first time in its history.
sustainability. In 2001, Cemig began construction on 12 hydroelectric plants and intensifiedCEMIG’s ADRs representing its investments in its distribution and transmission systems. In the same year, Cemig’spreferred shares were listedupgraded to Level 2 on the New York Stock Exchange.
In 2002, according2004, due to new legal and regulatory requirements, CEMIG transferred its records,operations to two wholly owned subsidiaries: the number of Cemig’s consumers exceeded 6 million for the first time – and it began construction on the Irapé hydroelectric plant, in the Valley of the Jequitinhonha River. In that year, trading began in Cemig’s shares on the Latibex segment of the stock exchange of Madrid.
In 2003, Cemig began simultaneous construction of several hydroelectric plants, as part of an effort to avoid the rationing of electricity, and established several centers of excellence and research – focusing on climatology, thermoelectric generation, electricity efficiency and renewable electricity sources.
The year 2004 presented the Company with some major challenges: that year the structure of the new Brazilian regulatory framework came into force – its main requirement being the ‘unbundling’ of Cemig’s distribution,energy generation and transmission activities. In 2005, as a consequence of this ‘unbundling’, Cemig operated as a holding company with two wholly-owned subsidiaries: Cemig Distribuição S.A. and CemigCEMIG Geração e Transmissão S.A.(‘CEMIG GT’) and the energy distribution company CEMIG Distribuição S.A. (‘CEMIG D’).
In 2006, Cemig connected a further 230,000 new consumers in the State of Minas Gerais, and its investment in protecting the environment totaled R$60 million. The Irapé hydroelectric plant was inaugurated in July of 2006, and in that year the CompanyCEMIG began to operate in other states, with the acquisition of a significant interest in Light S.A. (“Light”(‘Light’), which operatedconcession is in the state of Rio de Janeiro, and Transmissoras Brasileiras de Energia – TBE, which operatedowned transmission lines in Northern, Midwest and Southern Brazil. Also, a consortium in which Cemig is a leading member began construction of a transmission line in Chile.
In 2008, the Company acquired a stockholding in wind farms in the northern Brazilian state of Ceará, with total potential generating capacity of approximately 100MW. In addition, the CompanyCEMIG initiated its participation in the generation project at UHE Santo Antônio ongeneration project at the Madeira River.
In April 2009, CemigCEMIG GT acquired Terna Participações S.A., now called Transmissora Aliança de Energia Elétrica S.A. – Taesa.(‘Taesa’). In May 2013, it increased its holdings in the electricityenergy transmission sector with the acquisition of equity interests in the following companies:
five other transmission companies. This increased Cemig’sCEMIG’s market share in Brazilian electricityenergy transmission from 5.4% to 12.6%, making it the third largest transmission company in Brazil by Permitted Annual Revenue (RAP), according to ANEEL figures.
In December 2009 the Company signed a share purchase agreement with Andrade Gutierrez Concessões S.A., to acquire up to 13.03% of at that company’s holding in Light. This acquisition was completed in 2010, starting the process of building its position within the controlling stockholding group of Light.
The year of 2009 was the tenth year in which Cemig was included in the worldwide Dow Jones Sustainability Index – and in that year it was elected as the world leader in sustainability among utilities. It continues to be the only company in the electricity sector of Latin America that has been included in the “DJSI World” since the inception of that index.
In 2010, Cemig formed a partnership with Light for the development of smart grid technology – with a view to increasing operational efficiency, and reducing commercial losses. Also in 2010 – for the second year running – Cemig was rated Prime (B–) by Oekom Research, a German agency that issues sustainability ratings. In the same year Cemig GT (generation and transmission) signed a contract with Light for the acquisition of 49% of the share capital of Lightger S.A., a special-purpose company (“SPC”) holding the authorization for the commercial operation of the Paracambi Small Hydroelectric Plant.
time. In 2011, CemigCEMIG GT expanded its participation in relevant generation and transmission assets, including the acquisition, by means of:
In 2012, Taesa completed an agreement with Abengoa for the acquisition of the remaining 50% of the share capital of Unisa. In the same year Cemig concluded the consolidation of its investments in the transmission sector, by transfer of assets of this sector to Taesa. In 2012 Cemig was selected for the eighth consecutive year to be included in the ISE Corporate Sustainability Index (Índice de Sustentabilidade Empresarial) of the São Paulo Stock Exchange (BM&FBovespa).
In 2012, Cemig also started the following activities:
The following describes some activities of Cemig subsidiaries and jointly-controlled subsidiaries during 2013, which includes the acquisition of significant power generation and transmission assets:
The following describes certainour total activities relating to subsidiaries and jointly-controlled subsidiaries during 2014:
The following describe certain activities relating to subsidiaries and jointly-controlled subsidiaries during 2015:
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Companies
On July 17, 2019, in connection with the public offering of shares by Light, the Company sold 33,333,333 shares that it held in that investee, at the price per share of R$18.75, in the total amount of R$625 million.
On January 22, 2021, the Company sold 68,621,264 shares that it held in that investee, at the price per share of R$20.00, in the total amount of R$1,372 million. The transaction is part of the execution of CEMIG’s divestment program. With the completion of this transaction, CEMIG is no longer a stockholder of Light.
2020 Capital Increase
On July 31, 2020, the Shareholders’ Ordinary General Meeting approved an increase in the Company’s capital, of R$0.3 million, from R$7,294 million to R$7,594 million, through issuance of 60 million new shares, each with nominal value of R$5.00, comprising 20,056,076 common shares and 39,943,924, preferred shares. The shares that were subscribed in the capital increase of July 31, 2020, were considered in full in the calculation of basic and diluted profit for 2020, since these new shares already had potential for subscription since that date, as decided by the shareholders.
2021 Capital Increase
Considering that on December 31, 2020 the profit reserves, with the exclusion of the Tax Incentive reserves, exceeded the registered share capital by R$1,529 million, the Annual General Meeting of Shareholders approved on April 30, 2021, the Management´s proposal for increase of the registered share capital to R$8,467 million, as per Article 199 of the Brazilian Corporate Law through the issuance of new shares through a stock dividend available only to the Company’s existing shareholders, with the following terms and conditions (the ‘Capital Increase’):
| · | Amount of the Capital Increase through stock dividend: R$873 million through the issuance of 174,609,467 new shares (58,366,345 nominal common shares and 116,243,122 nominal preferred shares) each with nominal value of R$5.00, for both common and preferred shares; and |
| · | The new shares have the same rights of the shares of the same class, including with respect to dividends and/or distributions on equity that may be declared by the Company. |
Auction of Former CEMIG GT Generation Concessions and Indemnification
The concessions of the Jaguara, São Simão, Miranda and Volta Grande hydroelectric plants, operated by CEMIG GT, expired in August 2013, January 2015, December 2016 and February 2017, respectively.
As per the original terms of the concession contracts of Jaguara, São Simão and Miranda plants, CEMIG GT believed that it had the right for the renewal of such concessions and filed administrative and court proceedings requesting for the extension the contracts. These requests, however, were rejected by the MME on the view that the request was made out of time in relation to the period/rules set by Law 12,783/13.
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As part of the court decision, in March 2017 the preliminary injunctions that had maintained CEMIG GT in possession and operation of the concessions of the Jaguara and Miranda plants were revoked. CEMIG GT remained in control of the assets, and recognized revenues from the sale of energy and the operating costs of the assets through the date that the preliminary injunction was revoked. From that date onwards, CEMIG GT ceased to recognize any depreciation on the assets and began to recognize revenues relating to the provision of services of operation and maintenance of these plants in accordance with the regime of quotas specified by Law 12,783/13 (the ‘Quotas Regime’). As ordered by the MME Order 432/2015, the São Simão plant was operated under the Quotas Regime since September 2015.
Despite the ongoing court legal proceedings involving the São Simão, Jaguara and Miranda plants, on September 27, 2017, the Brazilian Federal Government tendered the concessions for the São Simão, Jaguara, Miranda and Volta Grande plants. The Volta Grande plant concession contract expired in February 2017. These plants have total generation capacity of 2,922 MW, and the concession price in the bid amounted to R$12,131 million. The parties that won these concessions are not related to CEMIG.
The new concession contracts were signed on November 10, 2017, and on this date extension of the periods in which CEMIG GT was engaged to temporarily continue to operate the assets was agreed upon as follows:
| · | Volta Grande plant: until November 30, 2017. |
| · | Jaguara and Miranda plants: until December 28, 2017. |
| · | São Simão plant: until May 9, 2018. |
On August 3, 2017, the MME Order 291/17 determined the amount payable to CEMIG GT for the residual value of the infrastructure assets of the São Simão and Miranda plants at the end of the contract, at R$1,028 million, of which R$244 million relates to the residual value of the São Simão Plant, and R$784 million for the residual value of the Miranda Plant – these amounts being expressed in Reais as of September 2015 and December 2016, respectively. The amounts had been adjusted by the Brazilian Selic rate for federal securities, and the total adjustment recognized in 2018 as an operating income amounted to R$55 million. On August 31, 2018, CEMIG GT received the amounts of reimbursement relating to the assets not previously amortized or depreciated in the basic plans of the São Simão and Miranda hydroelectric plants, as specified in MME Order 291/2017. The total amount received was R$1,139 million. As of December 31, 2020, investments made after the Jaguara, São Simão and Miranda plants came into operation, in the amounts of R$174 million, R$2.7 million and R$23 million, respectively, are recorded as concession financial assets, and the final determination of the amounts to be paid to CEMIG GT are under discussions with the regulator. Management does not expect losses in the realization of these amounts.
The MME has not yet established indemnification amounts with respect to the Jaguara and Volta Grande power plants.
Wind Farms in the State of Ceará
On May 17, 2018, CEMIG GT signed an agreement with Energimp S.A. (‘Energimp’).
On December 20, 2018, following compliance with the conditions specified in the transaction agreement, CEMIG GT and Energimp signed the related Memorandum of Conclusion of Elimination of Cross-holdings. With the signature of this document: (i) the cross-holdings previously existing between the parties in Parajuru, Volta do Rio and Morgado were eliminated; (ii) all shareholding partnership between the parties was terminated; and (iii) CEMIG GT now owns 100% of the share capital of Parajuru and Volta do Rio, and Energimp owns 100% of the share capital of Morgado.
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The following describe certain activities relating to CEMIG subsidiaries, jointly controlled entities and associates during 2020, 2019 and 2018 (aggregated by business):
RENOVA GROUP
Change in control of Renova
On October 15, 2019, Light sold, for R$1.00, the totality of its shares in the jointly controlled entity Renova, equivalent in total to 17.17% of the share capital of the company, to CG I Fundo de Investimento em Participações Multiestratégia, namely 7,163,074 shares and 98 preferred shares. Additionally, Lightcom Comercializadora de Energia S.A. signed an Assignment Agreement through which it assigned all the credits held against Renova to CG I. With the expiry of the period specified in the Shareholders’ Agreement of Renova, the subsidiary CEMIG GT did not exercise its right of first refusal nor its right of joint sale, and thus there has been no change in its direct equity interest in Renova.
Application by Renova for a court-supervised reorganization plan
On October 16, 2019, the second State of São Paulo Bankruptcy and Court-supervised reorganization Court granted the application for in-court reorganization applied for by Renova, and by the other companies of the group (‘the Renova Group’), and determined, among other measures, the following: (i) Appointment of an independent company to act as judicial administrator; (ii) Suspension of actions and executions against the companies of the Renova Group for 180 days, under Article 6 of Law 11,101/2005; (iii) Presentation of accounts by the 30th of each month, while the in-court reorganization proceedings continue, on penalty of the controlling shareholders of the companies of the Renova Group being removed, and replaced by administrator, under Article 52, IV, of Law 11,101/2005; (iv) Waiver to present tax debt clearance certificates so that the companies of the Renova Group can carry on with their activities; and (v) Order to publish a list of creditors, with 15 day term for presentation of qualifications and/or divergences of credits in relation to the court-supervised reorganization.
On December 18, 2020, the General Meeting of Creditors approved the court-supervised reorganization plans submitted to the court by Renova. In this sense, the plans describe the means of recovery in detail, give details of the DIP bridge loan, identify the Isolated Production Units (UPIs) and specify the procedure for resources disposal and allocation. For more details related to the court-supervised reorganization plans, see Item.3 – Risck Factors and see note 16 to our Financial Statements.
Considering the non-existence of any legal or constructive obligations to the investee, the Company has concluded that the court-supervised reorganization filed by Renova does not have any additional impact on its financial statements.
LIGHT
Divestiture of Light
On June 21, 2017, CEMIG started a process to sell all its equity interest in Light S.A. (‘Light’). On July 14, 2017, Rio Minas Energia Participações S.A. (‘RME’) and Luce Empreendimentos e Participações S.A. (‘Lepsa’) also decided to start a process to sell all their interest in Light. This formalized the joint decision of CEMIG, RME and Lepsa to divest of their aggregate 52.12% controlling interest in Light at the time.
On November 27, 2018, RME sold 4,350,000 of its common shares in Light, reducing its holding to 10.90% of Light, thus reducing the combined interest of CEMIG, RME and LEPSA from 52.12% to 49.99% of Light's share capital.
On July 17, 2019, Light announced the closing of the primary and secondary public offering of common, nominative and book-entry shares issued by Light, with no par value, free and unencumbered of any charges or liens. In the context of the offering, there were (i) 100,000,000 (one hundred million) newly issued shares of Light, following an increase in Light’s capital stock, and (ii) 33,333,333 (thirty-three million, three hundred thirty-three thousand, three hundred thirty-three) shares held by CEMIG at a price per share of R$18.75.
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With the settlement of the restricted offering, the Company’s equity interest in the total share capital of Light was reduced from 49.99% to 22.58%, limiting its voting rights in Shareholders’ Meetings and, as a result, its ability to direct the relevant activities of the investee.
Thus, as from that date, the Company no longer had power that gave it control of this investee. In accordance with IFRS 10 – Consolidated financial statements, the investee was no longer considered a subsidiary, and therefore was no longer consolidated in the Company’s financial statements.
On January 22, 2021, in the public offering of common shares of Light, CEMIG sold its entire remaining holding of shares in Light at R$20.00 (twenty Reais) per share for a total of R$1,372 million. With the completion of this transaction, CEMIG is no longer a stockholder of Light.
TAESA
Acquisition of 11.624% of the shares of Brasnorte Transmissora de Energia S.A. (‘Brasnorte’)
On August 30, 2019, Taesa concluded the acquisition of 11.624% of Brasnorte increasing its equity interest from 88.376% to 100.00%. For the acquisition, Taesa will pay to the seller R$18,024 million.
Acquisition by Taesa of 100% of the shares of Rialma Transmissora de Energia 1 S.A. (‘Rialma’)
On March 13, 2020, Taesa concluded the acquisition of 100% of the shares of Rialma. The asset located in the State of Rio Grande do Norte, interconnected with one of Taesa’s substations – SE Lagoa Nova of Paraíso Açu Transmissora de Energia S.A., will allow operational advantages in maintaining the new asset, and consequently contributing to Taesa´s growth plan and its consolidation in the Brazilian transmission sector. Rialma comprises the transmission line LT Lagoa Nova II – Currais Novos II, voltage of 230 kV, double circuit, with an extension of 28km and Annual Permitted Revenues (RAP) of R$12.6 million (2019-2020 cycle).
For the acquisition, Taesa will pay to the seller R$60,482 million, subject to positive or negative adjustments resulting from the variation between the net debt and the working capital between the base date and the closing date, as well as other adjustments after the closing.
Taesa – Closing of Eletrobras Auction Process
On January 15, 2019, Taesa was informed about the formal closing of the process of Eletrobras Auction No. 01/2018, regarding the lots L, N and P, for which it placed the minimum bid. Through a notice, the Sale Committee of the Eletrobras Auction No. 01/2018 stated that, on January 14, 2019, Eletrobras’s Executive Board unanimously approved, without any reservations the ratification of Eletrobras Auction No. 01/2018, referring to lot L (‘Brasnorte’) and lot N (‘ETAU’). Concerning Lot P (‘Centroeste’), CEMIG, which was already a shareholder along with Eletrobras, exercised its right of first refusal, as detailed along this document.
On April 29, 2019, Taesa concluded the acquisition of shares of ETAU, with the payment of R$32.9 million.
On May 31, 2019, Taesa concluded the acquisition of Brasnorte with payment of R$75.6 million and of Transmineiras, with payment of R$77.5 million.
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Taesa wins dispute for Lot 12 On December 20, 2018, Taesa won the dispute for the lot 12 related to the Transmission Auction 004/2018, promoted on this date by ANEEL. The volume of investments (CAPEX) and the construction period mentioned above are based on the call notice of the auction published by ANEEL. However, Taesa expects a reduction in the estimated volume of investments as well as in the period to conclude and energize the project. |  |
Taesa signs a SPA for the acquisition of four operational transmission assets
On December 17, 2018, Taesa entered into a Sales and Purchase Agreement with Âmbar Energia Ltda. (‘Âmbar’) and Fundo de Investimento em Participações Multiestratégia Milão (‘FIP’ and, together with Âmbar, the ‘Sellers’), for the acquisition by Taesa of (i) all shares representing the total and voting capital of São João Transmissora de Energia S.A. (‘SJT’) and São Pedro Transmissora de Energia S.A. (‘SPT’), and (ii) of 51% of the shares representing the total and voting capital of Triangulo Mineiro Transmissora de Energia S.A. (‘TMT’) and Vale do São Bartolomeu Transmissora de Energia S.A. (‘VSB’).
On January 3, 2019, Taesa´s Extraordinary General Meeting approved the acquisition of SJT, SPT, TMT and VSB. The completion of the acquisition is subject to certain conditions precedent, including, among others: (i) regulatory authorizations of ANEEL and CADE; (ii) the non-exercise of the preemptive right by Furnas Centrais Elétricas S.A. (‘Furnas’) in relation to shares issued by TMT and the non-exercise of the preemptive right by Furnas and CELG Geração e Transmissão S.A. in relation to shares issued by VSB; (iii) confirmation of fulfillment of the obligations set forth in the Leniency Agreement signed by J&F Investimentos S.A. and the Sellers, including the commitment that no indemnifying or sanctioning measures be proposed against the purchaser; and (iv) non-occurrence of any material adverse effect.
On February 14, 2020, Taesa completed the acquisitions of SJT and SPT for an adjusted amount of R$753.2 million. The acquisitions of TMT and VSB were cancelled due to the failure to obtain the consent by the creditors.
CEMIG SIM
Launch of CEMIG Soluções Inteligentes em Energia – CEMIG SIM
On October 08, 2019, CEMIG Soluções Inteligentes em Energia – CEMIG SIM was launched. It comprises the activities developed by Efficientia and CEMIG Geração Distribuída – CEMIG GD. Efficientia's by laws were modified in order to adapt to the new object of CEMIG SIM and change of corporate name. On October 19, 2020, a CEMIG’s Extraordinary General Meeting of Shareholders approved the merger of Geração Distribuída – CEMIG GD (wholly-owned subsidiary), at book value, and as a result the investee ceased to exist and the Company took over of all its rights and liabilities.The proposal is for CEMIG SIM to act, in this first moment, but not limited, in the following segments: distributed generation, account services, cogeneration, energy efficiency (with PEE resources), and supply and storage management.
On November 25, 2020, the Company’s wholly-owned subsidiary CEMIG Sim acquired 49% of interest in seven special-purpose companies operating in photovoltaic solar generation for the distributed generation market (‘geração distribuída’), with total installed capacity of 29.45MWp, for R$55 million. On August 19, 2020 and on September 30, 2020, this wholly-owned subsidiary also acquired 49% of interest in two others SPCs operating in the same market segment for R$8 million and R$10 million, respectively, with total installed capacity of 11.62 MWp.
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CENTROESTE
On December 20, 2018, CEMIG notified Eletrobras stating its interest in exercising its right of first refusal to acquire the interest held by Eletrobras in Companhia Transmission Centroeste de Minas Gerais S.A. - Centroeste, which constituted Lot P of Eletrobras Auction 01/2018. As officially reported by Eletrobras on October 22, 2018, the winning bid was for R$43.2 million.
The first refusal right was exercised on the same terms as contained in the Auction Announcement. The amount stated above will be adjusted by the accumulated variation in the Selic rate over the period from the reference date to the closing date of this transaction, less dividends and/or interest on capital paid or declared in favor of Eletrobras in the period.
On January 15, 2019, CEMIG announced that it had been informed of the acceptance and ratification by Eletrobras of the exercise by CEMIG of its right of first refusal.
On January 13, 2020, Centroeste became a wholly own subsidiary of the Company through the acquisition of the remaining equity interest of 49% held by Eletrobras.
Centroeste operates in construction, operation and maintenance of the transmission facilities of the Furnas-Pimenta transmission line – part of the national grid.
The cash consideration paid amounts to R$45 million, which was the price in the Tender Announcement, adjusted by the accumulated variation of the Selic rate up to the date of conclusion of the transaction and adjusted by the dividends and/or Interest on Equity paid or declared by Centroeste in favor of Eletrobras in the period.
Prior to the acquisition above and as of December 31, 2019, the Company held a 51% share of the investee, and did not control the entity according to its shareholders agreement, therefore, the investments in Centroeste was accounted for under the equity method. See more information on Note 16 to our consolidated financial statement - Investments.
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The companies incorporated in Brazil described below are our major subsidiaries and affiliates. The jointly controlledsubsidiary companies were recorded byunder the equity method:method (*):
Cemig’s principal* As of March 31, 2021 the only change in our major subsidiaries and jointly-controlledaffiliates from December 31, 2020 to March 31, 2021 was the sale of the interest on Light which was already configured as an asset held for sale. For more information, see “Divestment of Light."
CEMIG’s main subsidiaries and jointly controlled entities and affiliates include the following:
| · | CEMIG Geração e Transmissão S.A. (‘CEMIG GT’) – 100% owned: operates in energy generation and transmission; |
| · | CEMIG Distribuição S.A. (‘CEMIG D’) – 100% owned: operates in energy distribution; |
| · | Companhia de Gás de Minas Gerais (‘Gasmig’) – 99.57% owned: acquires, transports, distributes and sells natural gas; |
| · | SPEs of Lot D – 100% owned: Geração Camargos S.A., CEMIG Geração Itutinga S.A., CEMIG Geração Leste S.A., CEMIG Geração Oeste S.A., CEMIG Geração Salto Grande S.A., CEMIG Geração Sul S.A. and CEMIG Geração Três Marias S.A.; Lot D is comprised of 13 plants, previously owned by CEMIG, and an additional 5 plants, which belonged to other companies. The aggregate installed generation capacity of these 18 plants is 699.57 MW; |
| · | SPEs – Wind Energy - 100% owned: Central Eólica Praias de Parajuru S.A. and Central Eólica Volta do Rio S.A., wind farms with 47 wind turbines with 71.20 MW; |
| · | CEMIG SIM - 100% owned: distributed generation, account services, cogeneration, energy efficiency, and supply and storage management; |
| · | Centroeste – 100% owned: operates in construction, operation and maintenance of the transmission facilities of the Furnas-Pimenta transmission line – part of the national grid; |
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| · | Transmissora Aliança de Energia Elétrica S.A. (‘Taesa’) – jointly-controlled entity, with ownership of 36.97% of the voting stock and 21.68% of the total stock: construction, operation and maintenance of energy transmission facilities in 17 states of Brazil and in the Federal District; |
| · | Aliança Geração de Energia S.A. (‘Aliança’) – jointly controlled entity, with direct ownership of 45% of the voting and total share. Aliança is privately owned and operates as a platform for consolidation of generation assets and investments in future generation projects; |
| · | Investment in the Belo Monte Plant through Amazônia Energia S.A. and Aliança Norte: Amazônia Energia S.A. and Aliança Norte are shareholders in Norte Energia S.A.-NESA, which holds the concession to operate the Belo Monte Hydroelectric Plant, on the Xingu River, in the State of Pará. Through the jointly controlled entities referred to above, CEMIG GT owns an indirect equity interest in NESA of 11.69%. After its completion, with the installation of its 18th turbine, on November 2019, the installed capacity of the dam complex is 11,233 megawatts (MW). Belo Monte Hydroelectric Plant is the largest 100% Brazilian hydroelectric plant and one of the largest in the world; and |
| · | Investment in the Santo Antônio Plant through Madeira Energia S.A (‘MESA’) which owns 100% of Santo Antônio Energia S.A., hydroelectric plant in the Madeira River in the state of Rondônia with an installed capacity of 3,568 megawatts (MW). CEMIG GT's holds 15.51% of MESA´s total shares. |
Long-Term Strategic Plan
The long-term strategy and the multiannual business plan, reviewed and approved by the Board of Directors in electricity generation2018, defined that our mission is to provide integrated solutions for clean power, accessible to society, in an innovative, sustainable and transmission.
| · | Transform the customer experience to become one of the top companies in customer satisfaction; |
| · | Execute the program of disinvestment of non-core assets, assets that do not provide returns, assets in which holdings are non-material in scale, and assets with liquidity, to leverage new investment; |
| · | Investing to modernize core businesses, expand operations and develop new line of businesses for the future creating superior value; |
| · | Redesign and digitize internal processes as well as customer interactions; |
| · | Ensure operational efficiency of the businesses; |
| · | Consolidate competencies, increase productivity and optimize personnel costs; |
| · | Consolidate Health and Safety as a value; |
| · | Be innovative in the quest for technological solutions for the businesses; |
| · | Comply with the regulatory requirements; and; |
| · | Reinforce the practices of environmental, social, and governance – ESG. |
A process of evaluation of structures for disinvestment of the total stock: construction, operation and maintenance of electricity transmission facilities in 18 states of Brazil;
Strategy
Our vision and goal is to consolidate our position as the largest group in the Brazilian electricity sector in this decade, with a presence in the natural gas industry, and becoming a world leader in sustainability, admired by clients and recognized for our strength and performance.
In order to achieve our vision of the future and to follow our Long Term Strategic Plan, we have the following goals:
In 2015 and in the last 5 years, the Company’s installed capacity experienced constant growth. Cemig’s actions on climate change are in line with its business strategy through a commitment entitled “10 initiatives for the climate.” Published the Inventory of Greenhouse Gas Emissions Greenhouse verified by independent audit. Growing involvement all its stakeholders is the social responsibility strategy of Cemig which is present in more than 774 cities and 23 states of Brazil, generating, transmitting and distributing electricity, with quality services, for millions of Brazilians.
We have taken part in several transactions in recent years, which includes among others, the following:
Acquisitions involving Light and Parati
On March 14, 2013, Parati S.A. – Participações em Ativos de Energia Elétrica (“Parati”) made a public tender offer in order to the cancel Redentor Energia S.A.’s Listing Registration allow it to exit the Novo Mercado segment. As a result of this public offer, Redentor Energia exits form the Novo Mercado segment, but it had to remain listed in BM&FBovespa.
Acquisition of interest in Guanhães Energia
In February 2014, inclusion in Guanhães Energia S.A. by the creation of four special purpose companies for hydroelectric power generation, with 100% equity interest: PCH Fortuna II S.A., PCH Jacaré S.A, PCH Dores de Guanhães S.A. and PCH Senhora do Porto S.A.
In August 2015, the four wholly-owned subsidiaries of Guanhães Energia, all of which hold authorizations to build and operate small hydroelectric plants (SHPs), won the A-3 ‘New-build’ auction No. 04 of 2015, carried out by ANEEL. This gives them the right to sign contracts for electricity supply at prices higher than those currently in effect and also guarantees predictable revenues during the period of the concessions for all of the SHPs. Construction of these projects are 97% completed, and the start of commercial operations is scheduled for the end of 2016.
For more information about Guanhães Energia, see the section “Expansion of Generation Capacity.”
Acquisition of equity interest in Brasil PCH and Investment Agreement with Renova Energia SA
On June 14, 2013 Cemig GT signed a share purchase agreement with Petróleo Brasileiro S.A. (“Petrobras”) in connection with the purchase of 49% of the common shares of Brasil PCH (the “Brasil PCH Share Purchase Agreement”).
On August 8, 2013 Cemig GT approved the signing of an Investment Agreement with Renova, RR Participações S.A. (“RR”), Light Energia S.A. (“Light Energia”), and Chipley, governing the admission of Cemig GT into the controlling stockholding block of Renova, through a subscription by Cemig GT of new shares to be issued by Renova, the structuring of Chipley as a growth vehicle, owned by Cemig GT and by Renova, and the assignment to Chipley of the Agreement for Purchase of Shares in Brasil PCH S.A.
The issue price for the shares in Renova was set at R$16.2266 per common share, resulting in a value of R$1.41 billion for the portion of the increase in the share capital of Renova to be subscribed by Cemig GT. These amounts are to be updated byTAESA is in progress, within the CDI Rate from December 31, 2012 until the dateoverall concept of optimization of the capital increase.
The transaction to acquire an interest in Brasil PCH was subject to rightsCompany’s allocation of first refusal and/or joint sale by the other stockholders of Brasil PCH. At the expiration of the period for that exercise of the right of first refusal, none of the stockholders holding that right had decided to do so; and only one stockholder, Jobelpa S.A. (‘Jobelpa’), holder of 2% of the equity of Brasil PCH, decided to exercise its (‘tag-along’) right of joint sale.capital.
The transaction was completed on February 14, 2014, with payment by Chipley of R$739.94 million, funded by an Advance Against Future Capital Increase in Chipley made by Cemig GT.
On March 31, 2014, Cemig GT made the Advance Against Future Capital Increase in Renova, in the amount of R$810.12 million.
In October 2014, Cemig GT entered the controlling stockholding block of Renova Energia S.A. – Renova, acquiring 36.62% of Renova’s voting stock and 27.37% of its total capital, by subscription of 87,186,035 common shares. For the capital increase to take place, RR and Light Energia assigned their rights of preference to Cemig GT. The issue price of the shares in Renova was R$17.7789 per common share. The transaction was realized by use of two Advances against Future Capital Increase (Adiantamentos para Futuro Aumento de Capital,referred to as AFACs), with a total value of R$1.55 billion: the first, of R$739.94 million, was made on February 14, 2014, in Chipley; and the second, of R$810.12 million, on March 31, 2014.
Other corporate events relating to Renova Energia S.A. in 2014 and 2015:
In January 2014, the addition by Renova Energia S.A. of 9 special-purpose companies operating in wind generation, holding 99% equity interest: Centrais Eólicas Bela Vista II Ltda.; Centrais Eólicas Bela Vista III Ltda.; Centrais Eólicas Bela Vista IV Ltda., Centrais Eólicas Bela Vista V Ltda.; Centrais Eólicas Bela Vista VI Ltda.; Centrais Eólicas Bela Vista VII Ltda.; Centrais Eólicas Bela Vista IX Ltda.; Centrais Eólicas Bela Vista X Ltda. and Centrais Eólicas Bela Vista XI Ltda.;
In April 2014, the formation by Renova Energia, of 17 special-purpose companies operating in wind generation, with its head office in Guanambi, Bahia state: Centrais Eólicas Umburanas 1 Ltda., Centrais Eólicas Umburanas 2 Ltda; Centrais Eólicas Umburanas 3 Ltda; Centrais Eólicas Umburanas 4 Ltda; Centrais Eólicas Umburanas 5 Ltda; Centrais Eólicas Umburanas 6 Ltda; Centrais Eólicas Umburanas 7 Ltda; Centrais Eólicas Umburanas 8 Ltda; Centrais Eólicas Umburanas 9 Ltda; Centrais Eólicas Umburanas 10 Ltda; Centrais Eólicas Umburanas 11 Ltda; Centrais Eólicas Umburanas 12 Ltda; Centrais Eólicas Umburanas 13 Ltda; Centrais Eólicas Umburanas 14 Ltda; Centrais Eólicas Umburanas 15 Ltda; Centrais Eólicas Umburanas 16 Ltda; and Centrais Eólicas Umburanas 18 Ltda.
In August 2014, creation of the Renova Moinhos de Vento Consortium, in which Renova Energia has a 99.99% interest. The purpose of this consortium is to participate in public auctions for renewable energy projects and develop the projects it wins.
In November 2014, the formation of 2 sub-holding companies, called Diamantina Eólica Participações S.A. and Alto Sertão Participações S.A., each in which Renova Energia S.A. holds a 99.99% equity interest. The sub-holding companies purposes are to hold interests in other companies in the areas of electrical power generation and trading electricity.
Securities Contribution Agreement between Renova, TerraForm Global and SunEdison Inc.
In May 2015, a securities contribution agreement (the “Securities Contribution Agreement”) between Renova, TerraForm Global and SunEdison Inc. was entered into pursuant to which each party thereto agreed to contribute certain specific operational assets to TerraForm Global.
The first phase of the operation included the execution of the following agreements:
The second phase of the Securities Contribution Agreement consisted of an exchange agreement with respect to shares of Renova’s subsidiaries that holds assets with 2,204.2 MW of installed capacity for shares of TerraForm Global at a R$13.4 billion enterprise value. One of the conditions to the completion of the second phase of the Securities Contribution Agreement was the conclusion of the sale of Light’s equity interest in the control group from Renova to SunEdison. Such sale did not occur and consequently the second phase of the Securities Contribution Agreement was terminated.
Acquisition of a 9.77% interest in Norte Energia S.A.: the Belo Monte Hydroelectric Plant
The Belo Monte Hydroelectric Plant (“Belo Monte”) is the largest power plant currently under construction in the world, and when completed it will have installed capacity of 11,233 MW and takeoff guarantee level of 4,571 MW average. The start of the commercial operation is scheduled for April 2016, and the concession period is 35 years. Commercial operations of a number of generators commenced during the first quarter of 2016, representing an aggregate capacity of 593 MW for distribution through the National Interconnect System. The concession for construction and operation of the Belo Monte Hydroelectric Plant, on the Xingu River, in the Brazilian state of Pará, is held by Norte Energia S.A. (“Norte Energia”), which won the auction held in April 2010.
The Northern Region of Brazil is the principal frontier for expansion of Brazil’s hydroelectric power generation, and more than 60% of the hydroelectric potential for expansion is still available. Thus, we believe that participation in the project has a strategic value. The Belo Monte Hydroelectric Plant is the second project in the region in which Cemig GT is participating, the first being its 10% interest in the consortium for the construction of the Santo Antônio Hydroelectric Plan in the Brazilian state of Rondônia.
Amazônia Energia Participações S.A. “Amazônia Energia” is a SPC in which the stockholders are: Light S.A., with 51% of the voting stock and 25.5% of the total capital; and Cemig Generation and Transmission (Cemig GT), with 49% of the voting stock and 74.5% of the total capital.
Investigation of Norte Energia S.A.
In March 2014, while conducting an investigation involving a local gas station/carwash in the city of Brasília (Federal District, Brazil), the Brazilian Federal Police and Public Prosecutors uncovered evidence of a much larger corruption and bribery scheme involving Brazil’s state owned oil company, Petrobras. As a result, a federal investigation, calledOperação Lava Jato (‘Operation Carwash’), was initiated and is being conducted by Federal Prosecutors and the Federal Police under the supervision of a Federal Judge. Over the course of the investigation into Operation Carwash, a number of companies and individuals have entered into cooperation agreements with the Brazilian Federal Prosecutor’s Office (Ministério Público Federal, or MPF), whereby suspects choose to collaborate with the authorities in exchange for a lighther sentence. Some of these cooperation agreements contained allegations involving the Belo Monte Hydroelectric Plant, on Xingu River in State of Pará. No criminal charges have been brought against Cemig as part of Operation Carwash.
In response to the allegations, Centrais Elétricas Brasileiras S.A. – Eletrobras (‘Eletrobras’), which owns 49.98% of the share capital of NESA, hired an international investigation team to search for irregularities in projects in which it is a shareholder, including NESA (the ‘Independent Investigation’). The Independent Investigation team has completed the investigation designed to identify misstatements to Eletrobras’ consolidated financial statements, which included an analysis of NESA. The Independent Investigation team is still in the process of performing some procedures, focusing on internal compliance matters. There are also ongoing investigations and other legal measures conducted by MPF involving other shareholders of NESA and some of their executives. Based on our current knowledge, Cemig does not expect these additional procedures provide any additional relevant information that would materially impact its consolidated financial statements in future periods.
The investigation concluded that certain contracts with some contractors and suppliers of the Belo Monte Hydroelectric Plant project included bribes estimated at 1% of the price of the contract plus some other fixed amounts.
Based on the conclusions and results identified by the independent internal investigation, the management of NESA has evaluated the impact on the financial statements according to International Accounting Standard IAS-16—Property, Plant and Equipment, and concluded that the amount of R$ 183 million is attributable to overpricing due to bribes deemed to be of an illicit nature and should not have been capitalized as part of the cost of its property, plant and equipment considering that such amount is not a cost attributable to operating and maintaining the plant.
NESA is not able to identify an accurate manner to estimate the periods of prior Financial Statements in which excessive capitalized costs may have occurred, because of the fact that the information made available by the independent internal investigation does not individually specify the contracts, payments and the periods of disclosure in which such excesses may have occurred. It is also emphasized that the alleged undue payments were not made by NESA, but by contractors and suppliers of Belo Monte Power Plant, and this factor also prevents identification of the exact amounts and periods of the payments.
Hence, NESA has applied the procedure specified in IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors, adjusting the estimated amounts of excessive capitalized costs in the amount of R$183 million, related to illegal payments in the Financial Statements as of December 31, 2015, due to the impracticability of identification of the adjustments for each prior period affected.
As a consequence of the adjustment recorded by NESA, Cemig recorded in the year ended December 31, 2015, as part of its equity method accounting in NESA, the amount of R$23 million on account line Investment in counterpart to the equity in its Statement of Income. Of this total amount, R$21 million was made by Cemig GT and R$2 million was made by Light S.A., according to IAS-8—Accounting Policies, Changes in Accounting Estimates and Errors.
For additional information, please refer to “Explanatory Note,” “Recent Developments – Allocation of Net Income for 2015,” “Item 18. Financial Statements – Note 14 – Investments” and “Item 18. Financial Statements – Note 23 – Equity and Remuneration to Shareholders – (c) Dividends – Allocation of Net Income for 2015 – Proposal by Management.”
Acquisition by Taesa of equity interests in the Abengoa Transmission Companies
Transfer of equity interests of the TBE transmission assets, held by Cemig and Cemig Generation and Transmission, to TAESA and Transfer of TAESA’S Control.
In August 2014, the following changes in the stockholding structure of the companies of the TBE group took place:
At a meeting held on October 30, 2014, the Board of Directors approved an injection of capital by ENTE into ERTE, of R$37,557, represented by 21,732,203 preferred shares (29.41% interest in the total capital), in such a way as to give ERTE the funds necessary for payment of dividends that had been retained in corporate reserves. This meeting also authorized signature by the company, and Alupa, EATE and ENTE, of the Term of Assignment of First Refusal Right in the subscription of new shares and other securities in ERTE, under which transfer was made, free of financial consideration, in proportion to their respective shares in the total capital of ERTE. After this injection the totally paid-up share capital of ERTE was R$109,471, represented by 36,940,800 common shares and 36,940,800 preferred shares, without par value. Thus, Taesa then held a direct interest in ERTE of 24.99% and an indirect interest of 25.00% (taking into account that Taesa holds an interest of 49.98% in EATE and 49.99% in ENTE), continuing a direct and indirect holding in ERTE of 49.99%. This change in equity interest did not result in any goodwill premium nor discount or any impact on the Company’s profit.
Transfer of control of Taesa from Cemig GT to Cemig
On October 24, 2013 the General Meetings of Debenture Holders of Cemig GT consented, in the terms of Article 174, §3º of the Brazilian Corporate Law, to a reduction of the Share Capital of Cemig GT from R$3,296,785 to R$893,192 as a result of the transfer of the shares in Taesa (Transmissora Aliança de Energia Elétrica S.A.) to Cemig (Companhia Energética de Minas Gerais – Cemig), the latter being the guarantor of the debenture issues of Cemig GT, in accordance with the consent given by the electricity regulator, ANEEL, in ANEEL Authorizing Resolution No. 4108/2013, of May 14, 2013, and as decided by the Extraordinary General Meeting of Stockholders of Cemig GT on September 26, 2013.
Because this was a transaction between entities under common control, the transfer was carried out at historic cost of the investments on that date, without any effect on the results of Cemig or of its subsidiary Cemig GT.
Acquisition of the São Gotardo substation by TAESA
On June 6, 2012, TAESA won Lot E of ANEEL Auction 005/2012, TAESA formed a SPC named São Gotardo Transmissora de Energia S.A. to which ANEEL granted the right to commercial operation of the concession comprising two transmission functions within the São Gotardo 2 substation in the state of Minas Gerais. TAESA did not offer a discount in relation to the initial base RAP of R$3.74 million. The company commenced its operations in February, 2014.
TAESA follow-on equity offering
The holders of units in Fundo de Investimento em Participações Coliseu (“FIP Coliseu”), the equity investment fund that is part of the controlling stockholding block of Taesa, approved, at its nineteenth General Meeting of Unit Holders, held on October 21, 2014, an extension of the period of duration of FIP Coliseu, which would otherwise have been terminated on October 26, 2014, for up to 720 calendar days from October 21, 2014.
Clause 16.1.1 of the First Amendment to the Stockholders’ Agreement of Taesa (the “Stockholders’ Agreement”) provides that Santander Participações S.A. (“Santander”), a unit holder of FIP Coliseu and, therefore, an indirect stockholder of Taesa, will cease to be part of the Stockholders’ Agreement on October 30, 2014. To effect this separation from the Stockholders’ Agreement, and also because of the extension of the period of duration of FIP Coliseu referred to above, the twentieth General Meeting of Unit Holders of FIP Coliseu was held, and approved the partial split of FIP Coliseu, with reversion of the common shares of Taesa indirectly owned by Santander, then held by FIP Coliseu, to Fundo de Investimento em Participações Resling (the sole unit holder of which is Santander itself, hereinafter referred to as “FIP Resling”).
As a result of this, FIP Resling held 76,258,597 common shares of Taesa. At the request of Santander, the Board of Directors of Taesa, on October 30, 2014, approved the conversion of 50,839,064 common shares held by FIP Resling into preferred shares.
Immediately following this, the Board of Directors of the Company, at the request of Santander, approved the issuance of 25,419,532 Units in Taesa in favor of FIP Resling, through the conversion of 50,839,064 preferred shares into 25,419,532 common shares held by FIP Resling on October 30, 2014.
After the split of the shares held by Santander and the issuance of the Units in its possession, the composition of the total capital of the Company was as follows:
| ON shares | % | PN shares | % | Total capital | % | |||||||||||||||||||
FIP Coliseu | 228,775,790 | 35.7% | — | 0.0% | 228,775,490 | 22.1% | ||||||||||||||||||
Cemig | 293,072,229 | 45.7% | 155,050,644 | 39.5% | 448,122,873 | 43.4% | ||||||||||||||||||
Market | 93,446,517 | 14.6% | 186,892,944 | 47.6% | 280,339,461 | 27.1% | ||||||||||||||||||
FIP Resling | 25,419,533 | 4.0% | 50,839,064 | 12.9% | 76,258,597 | 7.4% | ||||||||||||||||||
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Total | 640,714,069 | 100.0% | 392,782,652 | 100.0% | 1,033,496,721 | 100.0% | ||||||||||||||||||
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The other clauses of the Stockholders’ Agreement of the Company remain valid up to the end of the concessions, and thus the shared management of the Company by Cemig and FIP Coliseu, or its successors, is continued.
Increase of stockholding in Gasmig
On July 29, 2014, acquisition of the 40% interest held by the subsidiary Gaspetro in Companhia de Gás de Minas Gerais (Gasmig) was agreed. This transaction was approved by the Boards of Directors of both Cemig and Petrobrás, at a purchase price of R$600 million, subject to certain usual conditions precedent, including the approval by the Brazilian monopolies authority (Conselho Administrativo de Defesa Econômica – CADE), and consent from the State of Minas Gerais, the grantor of Gasmig’s gas distribution concession. This acquisition is part of the Cemig’s strategy for the establishment, in partnership with Gás Natural Fenosa (‘GNF’), of Gas Natural do Brasil S.A. (‘GNB’), the platform for consolidating investments in natural gas projects.
In October 2014, a change in the equity interest of Companhia Energética de Minas Gerais in Gasmig’s voting capital, from 58.71% to 98.71%; and in the total capital, from 59.57% to 99.57%.
Association with Gás Natural Fenosa (GNF)
On June 13, 2014, Cemig signed agreements with Gas Natural Fenosa (“GNF”) formalizing an association for the creation of the company Gás Natural do Brasil S.A. (“GNB”), the platform for consolidating assets and investment in natural gas projects.
Acquisition of interest in the Capim Branco Plant Consortium
On May 28, 2013, Cemig Capim Branco Energia S.A., a wholly-owned subsidiary of Cemig, completed the acquisition of an equity interest of 30.3030% in the SPC Epícares Empreendimentos e Participações Ltda., a company in the Suzano Group, which holds an interest of 17.89% in the Capim Branco Energia Consortium (the “Consortium”). This acquisition represents an additional interest of 5.42% in the Consortium.
The interest acquired has been valued at R$94 million. The value of this acquisition was calculated by the discounted cash flow method. The difference between the consideration transferred and the fair value of the assets was allocated to the concession for the project, based on the cash expected to be generated during the concession period. This intangible asset will be amortized on a straight-line basis from June 2013 until August 2036, the date of termination of the concession.
On February 27, 2015 an Extraordinary General Meeting of the Stockholders of Cemig decided to authorize the incorporation by Cemig GT of Cemig Capim Branco Energia S.A., and the subsequent dissolution of the latter company. The incorporation consists of the transfer from Cemig to Cemig GT of the direct and indirect equity interests held by Cemig Capim Branco Energia S.A., equivalent to 26.4752% of the Amador Aguiar I and II Hydroelectric Plants. Of this total, Capim Branco directly holds 21.0526% of the Amador Aguiar I and II Plants and Capim Branco hold 30.3030% of the share capital of Epícares Empreendimentos e Participações Ltda., which, in turn, holds 17.8947% of the Amador Aguiar I and II Plants. The Brazilian regulator, ANEEL, approved the transfer.
This incorporation was one of the conditions precedent for subscription of shares in Aliança Geração de Energia S.A., by transfer of the interests held by Vale and Cemig GT in the following generation assets: Porto Estrela, Igarapava, Funil, Capim Branco I, Capim Branco II, Aimorés and Candonga (“the Association”).
As a result of the incorporation, there was an increase of R$1.7 billion in the share capital of Cemig GT, and an amendment of the head paragraph of Clause 5 of the by-laws of Cemig GT.
Partnership for consolidation of interests in generation holdings and creation of Aliança Geração de Energia S.A.
On December 19, 2013, Cemig GT signed commercial and stockholding documents with Vale, formalizing an association for creation of the company Aliança Geração de Energia S.A., intended to be a platform for consolidation of assets in generation consortia held by the parties, and investments in future electricity generation projects.
On August 5, 2014 Cemig GT and Vale signed the Definitive Association Agreement, regulating among other matters acquisition by Cemig GT of share capital in Aliança Geração de Energia S.A. by the subscription of 98,029 (ninety eight thousand twenty nine) nominal common shares without par value, such that following this Cemig GT will own a 45% interest in the total and voting stock of Aliança Geração, and Vale will own 55% of the total and voting stock. The Definitive Agreement provides that after fulfillment of certain conditions precedent, the second increase in the capital of Aliança will take place on the Closing Date of the transaction: the shares to be issued will be subscribed by Cemig GT and by Vale, preserving the proportion of a 55% holding by Vale and a 45% holding by Cemig GT.
On February 27, 2015, after approval by the Extraordinary General Meeting of Stockholders of Cemig, Vale and Cemig GT completed the transaction for the subscription of shares in Aliança Geração de Energia S.A. (‘Aliança’). The two companies subscribed the shares in Aliança by transfer to it of the equity interests they held in the assets of the Association.
Aliança now has hydroelectric installed capacity in operation of 1,158 MW (assured offtake level 652 MW), as well as other generation projects, which, at the time of the transaction approval, were valued at R$4.5 billion. Vale owns 55% and Cemig GT 45% of Aliança’s the equity capital.
The Consortia for the Aimorés and Funil plants and Cemig Capim Branco Energia S.A. with the Brazilian Federal Revenue Service have now been canceled.
Cemig GT undertook to also acquire for approximately R$310 million, 49% of Aliança Norte Energia Participações S.A., which holds the 9% interest owned by Vale in Norte Energia S.A. The acquisition price, corresponding to the capital injections made by Vale up to December 27, 2015, will be paid on the closing date, adjusted by the IPCA inflation index. With the acquisition Cemig GT becomes the indirect holder of a further 4.41% of Norte Energia, representing an installed generation capacity of 495.39 MW (201 average MW).
Under the existing contracts of the Association and of the Acquisition the Parties established that control will be shared between them and that there will be full alignment in the taking of all decisions in connection with the operation of the companies.
On March 31, 2015 the acquisition (the “Aliança Norte Acquisition”) involving the transfer of Vale’s 49% stockholding interest in Aliança Norte Energia Participações S.A., was completed. Aliança Norte Energia Participações S.A. owns 9% of Nesa – this corresponds to an indirect holding in NESA of 4.41%. The condition precedent referred to in the Material Announcement of February 27, 2015 was thus fulfilled.
The acquisition price was R$310 million, referring to the amount of funds placed by Vale into the share capital of Nesa up to the closing date, after monetary updating by the IPCA index from the date of each injection of funding up to February 28, 2015, in proportion to the indirect stockholding in Nesa of 4.41%.
Investment in the Santo Antônio plant through Madeira Energia S.A. (MESA) and FIP Melbourne
Madeira Energia S.A. (MESA) and its subsidiary Santo Antônio Energia S.A. (SAESA) are incurring establishment costs related to the construction of the Santo Antônio Hydroelectric Plant. The property, plant and equipment assets constituted by these expenditures totaled R$22.18 billion on December 31, 2015, and this amount, in accordance with financial projections prepared by its management, is to be incorporated by future revenues generated as from the start of operations of all the generator rotors of that entity. On December 31, 2015, the amount of PP&E proportional to the Company’s interest in this jointly-controlled subsidiary was R$4 billion.
The physical average offtake guarantee level for the Santo Antônio Hydroeletric Plant is 2,218 MW. This was reached in September 2014 with the start of commercial operation of the 32nd generating rotor. The Plant had 35 rotors in operation at the end of 2015. In November 2016, when completed and operating at full capacity, it is expected to have 50 rotors operating and generation capacity of 3,568 MW.
On November 19, 2014 SAAG Investimentos S.A. (SAAG) and Cemig GT filed an action for provisional remedy against Mesa, requesting an interim order to suspend, until consideration of the merits by the Arbitration Tribunal, the period for exercise, by SAAG and by Cemig GT, of the right of first refusal to subscribe the additional portion of the capital of Mesa, in the amount of R$174.72 million, approved in the Extraordinary General Meeting of Stockholders of Mesa held on October 21, 2014.
The action also requested suspension of all the effects of the decisions as they relate to SAAG and Cemig GT and to their interests in Mesa, including in relation to the dilution and the penalties specified in the Stockholders’ Agreement of Mesa.
The application for provisional remedy was granted on November 21, 2014, by the 39th Civil Court of the Central Jurisdiction of São Paulo. Arbitration proceedings were filed against Mesa in the Market Arbitration Chamber (Câmara de Arbitragem do Mercado, or CAM) in accordance with the regulations of the CAM. On December 31, 2015, these arbitration proceedings were waiting for a ruling.
There are ongoing investigations and other legal measures conducted by the MPF involving other indirect shareholders of Madeira Energia S.A. and some executives of these other indirect shareholders.
An Increase in equity stake through acquisition of an indirect position via Fundo de Investimento em Participações Melbourne (‘the Melbourne Equity Fund’ or ‘FIP Melbourne’)
On June 6, 2014 Andrade Gutierrez Participações S.A. (‘AGP’) transferred nominal preferred shares and nominal common shares corresponding to 83% of the total stock and 49% of the voting stock in SAAG Investimentos S.A. (‘SAAG’) to the Melbourne equity investment fund (‘FIP Melbourne’), an investment fund administered by Banco Modal, in which Cemig GT and private pension plan entities are investors through an equity investment fund structure (‘the Funds’) and as SPC when referred to jointly with the Funds, ‘the Investment Structure’).
Cemig GT holds less than 50% of the NAV of the Funds and less than 50% of the voting shares in the SPC, preserving the private-sector nature of the Investment Structure. SAAG owns 12.4% of the total share capital of Madeira Energia S.A. (‘Mesa’).
With the conclusion of the transaction on August 25, 2014, and certain stockholding changes made on March 31, 2016, Cemig GT now has a direct equity interest of 8.13% in Mesa, over and above its indirect interest of 10%.
The valuation for the acquisition was determined by the discounted cash flow method, and the difference between the book value and fair value of the assets was allocated to the concession of the project, having as its basis the cash generation expected during the period of the concession. This intangible asset will be amortized on the straight-line basis from the acquisition date until June 2043, the date of termination of the concession.
Other corporate events in 2014 and 2015
In March 2014, Cemig Overseas S.L, a wholly-owned subsidiary with its head office in Spain, was included in the Company’s organizational chart and Lajes Energia S.A was included in Light Energia S.A. as a wholly-owned subsidiary.
In May 2014, SPC Energia Olímpica was included in Light S.A.’s organizational chart. Light S.A. owns 50.10% of SPC Energia Olímpica total capital, whose corporate purposes are to build, operate and maintain the Vila Olímpica substation and two underground lines of 138kV, which will connect to the Vila Olímpica substation.
On August 4, 2014, at a meeting of the Board of Directors of the Company, authorization was given to constitute the wholly-owned subsidiary Cemig Participações Minoritárias S.A. – CemigPar, the objects of which are exclusively the holding of minority interests in the share capital of other companies, whose activities are related to services in energy, oil and gas, in their various fields, and developments and exploration of telecommunication and information systems, with initial capital of R$1,000 represented by one thousand nominal common shares without par value.
In October 2014, the Company incorporated Cemig Participações Minoritárias S.A.
In October 2014, inclusion in Cemig GT, of 33.33% equity interest in the SLT Project Consortium, the object of which is to manage and account for the contracting of legal, environmental, technical, and any other external consultants necessary for preparation of studies to ascertain the attractiveness of the São Luiz do Tapajós Hydroelectric Plant, located in the State of Pará.
In December 2014, Cemig Geração e Transmissão was removed from the Consortium Cosama, where it had a 49.00% stake.
In February 2015: elimination of Light Esco Prestação de Serviço S.A.’s 33.00% participation in EBL Companhia de Eficiência Energética S.A.
In April 2015, the Itaocara Hydroelectric Plant Consortium, the capital of which is owned by Cemig GT (49%) and Itaocara Energia Ltda. (a wholly-owned subsidiary of Light S.A.) (51%), won the concession for the Itaocara I hydroelectric plant, which has an installed capacity of 150 MW. This project is expected to be built on the Paraíba do Sul River and will cover areas in the counties of Aperibé, Cantagalo, Itaocara and Santo Antônio de Pádua, in the state of Rio de Janeiro, and Pirapetinga, in the state of Minas Gerais. Construction is planned to start in 2016 and is expected to create 1,200 direct jobs and 2,200 indirect jobs, at the peak of construction. The consortium has already obtained an environmental Installation License (Licença de Instalação, or LI), issued by the Brazilian environmental authority Ibama, and a Public Utility Declaration (Declaração de Utilidade Pública, or DUP), issued by ANEEL.
December 2015 auction by Aneel bid with respect to operating power plants
On November 25, 2015, Cemig GT won the auction for Batch D of the Aneel Bid 12/2015, consisting of 18 hydroelectric plants. The auction was for hydroelectric concessions in a quota allocation system to the concessionaires and licensees for distribution of electric energy of the National Interconnected System.
Among the hydroelectric plants to which Cemig obtained the relevant concessions are Três Marias, Itutinga and Salto Grande. Três Marias was a landmark in Brazilian engineering because its construction in the 1960s, allowed the country to gain knowledge for the construction of large dams of electricity generation. Salto Grande has generated the energy that allowed the installation of large steel complexes of the Steel Valley.
Of the 18 hydroelectric plants included in the concessions obtained by Cemig, 14 are already operated by Cemig, but their concession by the Brazilian federal government had been terminated. Apart from those, Cemig won concessions with respect to four new hydroelectric plants: Ervália, Coronel Domiciano, Sinceridade and Neblina. The new assets added almost 50 MW of capacity to Cemig Generation and Transmission’s generating units. Overall, the 18 power plants generate approximately 700 MW. Cemig will invest R$2.26 billion over the next 6 months, for the payment of the Bonus for Grant necessary for the execution of the Concession Agreement (established by paragraph 7 of Art. 8 of Law No. 12,783/2013 and increased by MP No. 688/2015). This will guarantee an income of R$500 million per year for Cemig for the next 30 years.
The Company’s board believes victory in the auction enables the Company to safely plan for its future, both to consolidate itself as the largest integrated group of electric energy in the country and to move towards new technological frontiers of the power sector, both within and outside Brazil.
The list of the 18 power plants of Batch D is as follows:
Power Plant | Installed power (MW) | Power Plant | Installed power (MW) | Power Plant | Installed power (MW) | |||||||||||
Três Marias | 396 | Sinceridade | 1.42 | Paciência | 4.08 | |||||||||||
Itutinga | 52 | Neblina | 6.47 | Piau | 18.012 | |||||||||||
Salto Grande | 102 | Cajuru | 7.2 | Peti | 9.40 | |||||||||||
Camargos | 46 | Gafanhoto | 14 | Dona Rita | 2.41 | |||||||||||
Ervália | 6.97 | Marmelos | 4 | Tronqueiras | 8.5 | |||||||||||
Coronel Domiciano | 5.04 | Joasal | 8.4 | Martins | 7.7 | |||||||||||
Increase in Renova’s capital
On February 2, 2016, Renova’s Board of Directors voted to increase Renova’s capital up to R$731 million by the issuance of 81,587,997 new common shares and up to 28,208,946 new preferred shares, being all nominal book-entry shares without a par value, for the issue price of R$6.66 per common share, R$6.66 per preferred share, and R$19.98 per unit. Each common or preferred share, and each unit, will carry the preemptive right to subscribe to 0.344436239 of a new share or unit. Cemig participated in this capital increase through its wholly-owned subsidiary Cemig GT, which has approved a capital contribution of up to R$240 million in Renova. Of this total amount, R$85 million was subscribed and paid in on February 3, 2016, R$115 million was subscribed and paid in in March 2016, and up to R$40 million may be subscribed and paid in during a round of subscription of leftover shares if there is one.
Exchange of Debentures owned by AGC Energia for shares Issued by Cemig
On March 3, 2016, BNDES Participações (“BNDESPar”) exchanged the totality of its debentures in the Non-convertible Permanent Asset-guaranteed Exchangeable Shareholders’ Debentures of the First Series issued by AGC Energia, for 54,342,992 common shares and 16,718,797 preferred shares issued by Cemig and previously owned by AGC Energia. After the exchange, the equity interest held by BNDESPAR in Cemig — which on March 2, 2016 comprised no common shares and 1.13% of the preferred shares — increased to 12.9% of Cemig’s common shares and 3.13% of Cemig’s preferred shares. This increased the interest of BNDESPAR in the total equity of Cemig from 0.75%, before the exchange, to 6.4% immediately thereafter.
Rescission of the contract between Renova and TerraForm for the sale of Espra
On April 2, 2016, the share purchase agreement for sale of the assets owned by Renova in the Espra project to TerraForm Global, Inc. was rescinded by an agreement between the Renova and TerraForm Global. TerraForm Global paid a breakup fee of US$ 10 million to Renova. As a result, Renova’s interests in the Espra project, which is comprised of three small hydroelectric plants (SHPs) with aggregate installed capacity of 41MW, are part of Renova’s operational assets portfolio.
Capital expendituresExpenditures
Capital expenditures for the years ended December 31, 2015, 20142020, 2019 and 20132018 in millions ofreaisReais, were as follows:
| Year ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
Distribution network | 894 | 792 | 884 | |||||||||
Power Generation | 567 | 2,990 | 358 | |||||||||
Transmission network | 146 | 80 | 91 | |||||||||
Others | 111 | 553 | 184 | |||||||||
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Total capital expenditures (1) | 1,718 | 4,415 | 1,517 | |||||||||
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Year ended December 31, | 2020 | 2019 | 2018 |
| Distribution network | 1,319 | 986 | 861 |
| Power Generation (1) | 58 | 26 | 479 |
| Transmission network (2) | 153 | 223 | 96 |
| Others | 68 | 68 | 79 |
| Total capital expenditures (3) | 1,599 | 1,303 | 1,515 |
| (1) | Includes borrowing costs, capitalized in the amount of R$55 million, R$23 million and R$31 million in 2020, 2019 and 2018, respectively. Includes the consideration paid for a 51% interest in Parajuru and Volta do Rio in the amount of R$166 million in 2018. |
| (2) | Includes additions in transmission financial assets in the amount of R$153 million, R$223 million and R$96 million in 2020, 2019 and 2018, respectively. |
| (3) | The capital expenditures are presented in our Consolidated Statement of Cash Flow mainly on account lines related to |
At present
For 2021, we plan to make capital investments in relation to our fixed assets in the amount of approximately R$1,2252,347 million, in 2016 – corresponding to our capital investment program funded through our cash flows.basic program. We expect to allocate these expenditures primarily to expandthe expansion of our distribution system. We will also allocate R$3,438196 million for injection of capital into subsidiaries in 2016,2021, to meet specific capital needs.
The amounts planned for 20162021 do not include investments in acquisitions, and other projects, that are not remunerated by the concession authorityconcession-granting power – which are not recognized in the calculations of tariffs made by Aneel (the regulator).
WeANEEL and we expect to fund our capital expenditures in 20162021 mainly from ourthe cash flow from operations and, to a lesser extent, through financing. We expect to finance our expansion and projects by commercial bank loans through debt rollover and by issuing promissory notes and debentures in the local market.
Business Overview
General
We run aOur business related toinvolves the generation, transmission, distribution and sale of electricity,energy, gas distribution telecommunications and the provisionto provide of energy solutions.
Cemig
Cemig engagesCEMIG
We are engaged in transactions to buy and sell of electricityenergy through itsour subsidiaries. The total volume of electricityenergy resourced in 20152020 was 83,75082,552 GWh or 6.8% less0.7% more than the volume sourced in 2014.2019 of 81,993 GWh or 2.9% more than in 2018 of 80,190 GWh. The amount of energy produced by us in 2020 was 9,080 GWh or 34.4% more than the Group in2015 was 14,6656,756 GWh 41% lessproduced in 2019 or 86.5% more than the 4,871 GWh produced in 2014; and the2018. The amount of energy purchased by us in 2020 was 73,471 GWh or 2.3% less than the Group totaled 69,08575,237 GWh 6% morepurchased in 2019 or 2.5%, less than the 75,319 GWh purchased in 2014.2018. These figures include electricity5,835 GWh purchased from Itaipu (6,190 GWh),in 2020, 5,659 GWh in 2019; and 5,738 GWh in 2018, and through the ElectricityEnergy Trading Chamber (Câ(Câmara de Comercialização de Energia Elétrica, or CCEE) and from other companies, (62,896 GWh).we purchased 67,601GWh in 2020; 69,577 GWh in 2019 and 69,581 GWh in 2018.
The energy traded in 20152020 totaled 83,75082,552 GWh, an amount 6.8% lower0.7% more than traded2019 in 2014, and 58%which, 47% of that volume (48,710(39,026 GWh), was traded to final consumers,customers, both captive and free.
Total losses of energy in the core network and distribution networks in 20152020 totaled 6,4617,012 GWh, which corresponds to 78%8% of total resources and 3% more7.2% less than the losses7,554 GWh loss in 2014 (6,282 GWh).
2019. The table below showspresents the breakdown of resources and power requirements by CemigCEMIG traded in the last three years:
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CEMIG’S ELECTRIC ENERGY BALANCE
| (GWh) | 2020 | 2019 | 2018 |
| RESOURCES | 82,552 | 81,993 | 80,190 |
| Energy generated by CEMIG | 7,132 | 5,533 | 3,770 |
| Energy generated by Sá Carvalho | 420 | 295 | 326 |
| Energy generated by Horizontes | 53 | 48 | 61 |
| Energy generated by CEMIG PCH | 75 | 96 | 481 |
| Energy generated by Rosal Energia | 389 | 192 | 182 |
| Energy generated by SPE | 1,011 | 592 | 451 |
| Energy bought from Itaipu | 5,835 | 5,659 | 5,738 |
| Energy bought from CCEE and other companies | 67,637 | 69,577 | 69,581 |
(GWh) | 2015 | 2014 | 2013 | |||||||||
RESOURCES | 83,750 | 89,856 | 85,884 | |||||||||
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Electricity generated by CEMIG (1) | 14,068 | 22,983 | 24,525 | |||||||||
Electricity generated by auto-producers | 0 | 632 | 841 | |||||||||
Electricity generated by Ipatinga | 0 | 247 | 243 | |||||||||
Electricity generated by Barreiro | 54 | 80 | 69 | |||||||||
Electricity generated by Cachoeirão | 51 | |||||||||||
Electricity generated by Sá Carvalho | 207 | 252 | 338 | |||||||||
Electricity generated by Horizontes | 62 | 63 | 76 | |||||||||
Electricity generated by Cemig PCH | 63.2 | 49.3 | 87 | |||||||||
Electricity generated by Rosal Energia | 97 | 190 | 261 | |||||||||
Electricity generated by Amador Aguiar | 62 | 401 | 406 | |||||||||
Electricity bought from Itaipu | 6,190 | 6,255 | 8,374 | |||||||||
Electricity bought from CCEE and other companies | 62,896 | 58,704 | 50,664 | |||||||||
REQUIREMENTS | 83,750 | 89,856 | 85,884 | |||||||||
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Electricity delivered to final consumers | 48,710 | 52,505 | 45,883 | |||||||||
Electricity delivered to auto-producers | 10 | 967 | 969 | |||||||||
Electricity delivered by Ipatinga | 0 | 247 | 243 | |||||||||
Electricity delivered by Barreiro | 63 | 93 | 81 | |||||||||
Electricity delivered by Cachoeirao | 131 | |||||||||||
Electricity delivered by Sá Carvalho | 472 | 472 | 472 | |||||||||
Electricity delivered by Horizontes | 76 | 80 | 85 | |||||||||
Electricity delivered by Cemig PCH | 82 | 99 | 94 | |||||||||
Electricity delivered by Rosal Energia | 201 | 263 | 263 | |||||||||
Electricity delivered to the CCEE and other companies | 27,543 | 28,848 | 31,504 | |||||||||
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Losses | 6,461 | 6,282 | 6,290 | |||||||||
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| REQUIREMENTS | 82,552 | 81,993 | 80,190 |
| Energy delivered to final customers | 39,026 | 42,397 | 42,707 |
| Energy delivered by Sá Carvalho | 522 | 472 | 472 |
| Energy delivered by Horizontes | 85 | 89 | 87 |
| Energy delivered by CEMIG PCH | 121 | 121 | 124 |
| Energy delivered by Rosal Energia | 249 | 213 | 235 |
| Energy delivered by SPEs | 940 | 706 | 882 |
| Energy delivered to the CCEE and other companies | 34,597 | 30,441 | 28,802 |
| Losses (1) | 7,012 | 7,554 | 6,881 |
| (1) | Discounting the losses attributed to generation |
Generation
According to ANEEL, at December 31, 2015 we were the fourth largestThe electric power generation groupbusiness consists of the generation of energy using renewable energy sources (water, wind, sun and biomass).
As of December 31, 2020, we were one of the largest energy generation groups in Brazil, by total installed capacity. OnAs of that date, we were generating electricityenergy at 79over 89 hydroelectric plants two thermoelectric(small hydroelectric power plants (‘PCH’) and hydroelectric power plants (‘UHE’)), wind plants and 27 wind farms,solar plants, with total installed capacity of 8,112MW. Of thisover 6,000 MW, with plants present in 10 states of Brazil. The vast majority of our capacity theis generated at hydroelectric plants had(98.1% of installed capacity), with the remaining being generated by wind plants and a total of 7,716 MW, the thermalsolar plant.
Our top five power plants 144 MW, and the wind farms 252 MW. Nine of our hydroelectric plants had 72%accounted for over 66% of our installed electricityenergy generation capacity in 2015.2020 are:
Rank (Installed Capacity) | Generation Power Plant | CEMIG Group Company Holding Stake | Restricted / Unrestricted Group | Installed Capacity (MW)(*) | Start of Comm. Operations | Expiration of Concession or Authorization | Type of Power Plant | CEMIG´s Stake |
| 1st | Belo Monte | Norte Energia | Unrestricted | 1,376 | 2016 | 08/26/2045 | UHE | 12.25% |
| 2nd | Emborcação | CEMIG GT | Restricted | 1,192 | 1982 | 07/23/2025 | UHE | 100% |
| 3rd | Santo Antônio | SAESA | Unrestricted | 553 | 2012 | 06/12/2043 | UHE | 15.51% |
| 4th | Nova Ponte | CEMIG GT | Restricted | 510 | 1994 | 07/23/2025 | UHE | 100% |
| 5th | Irapé | CEMIG GT | Restricted | 399 | 2006 | 02/28/2035 | UHE | 100% |
| Sub-Total (Top 5) | 4,030 | |||||||
| Total (All Plants) | 6,086 | |||||||
(*) the installed capacity presented refers to the CEMIG’s stake
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Transmission
The electric power transmission business consists of transporting energy power from the facilities where it is generated to points of consumption, distribution networks and Free Consumers.free customers (which are customers with demand equal to or greater than 3 MW, or customers with demand equal to or greater than 0.5 MW from alternative energy sources, such as wind, biomass or small hydroelectric plants. In 2021, this range will start from 1.5 MW, reaching 1.0 MW in 2022. Its revenue depends directly on the availability of its assets. TransmissionThe transmission network comprises powerenergy transmission lines and substations with voltage of 230kV230 kV or more, and is part of the Brazilian Grid regulated by ANEEL and operated by the ONS. See the section “The‘The Brazilian Power Industry”Industry’. On December 31, 2015 the Cemig GenerationJanuary 27, 2021, CEMIG GT and Transmission network consisted ofother CEMIG transmission networks had approximately 1,355 miles of 500 kV lines, 1,228 miles of 345 kV lines, and 478 miles of 230 kV lines, located in Minas Gerais.
On December 31, 2015, Cemig’s Group transmission network, considering its proportional interest in each concession, corresponded to approximately 1174,374 miles of lines, >525 kV, 1,290 miles of 500 kV lines, 136 miles of 440 kV lines, 67 miles of 345 kV lines, 513 miles of 230 kV lines and 62 miles of 220 kV lines.as follows:
CEMIG GT and other CEMIG transmission networks lines in miles | ||
Classification | CEMIG GT | Other CEMIG Group Companies (1) |
| > 525 kV Lines | - | 70 |
| 500 kV Lines | 1,355 | 740 |
| 440 kV Lines | - | 68 |
| 345 kV Lines | 1,230 | 67 |
| 230 kV Lines | 477 | 367 |
| 220 kV Lines | - | - |
| Total | 3,062 | 1.312 |
| (1) | Proportional to CEMIG’s stake in the relevant concession |
Distribution
CemigWithin the CEMIG Group, energy distribution activities are conducted by a wholly owned subsidiary, CEMIG Distribution (‘CEMIG D’).
CEMIG D has four public service electricityenergy distribution concession contracts in the State of Minas Gerais, granting rights to the commercial operation of services related to the supply of electricityenergy to captive consumerscustomers in the regulated ACR market in municipalities in its concession area, including consumerscustomers that may be eligible, under the legislation, to become Free Consumers (consumers with demand equal to or greater than 3 MW, or consumers with demand equal to or greater than 500 kW from alternative energy sources, such as wind, biomass or small hydroelectric plants)customers in the free market (Ambiente de Contratação Livre-ACL, the ‘Free Market’).
TheCEMIG D’s concession area of Cemig Distribution covers approximately 219,103219,104 square miles, or 96.7% of the territory of the State of Minas Gerais. On December 31, 2015 Cemig Distribution’s electricity2020, CEMIG D’s energy system comprised 419,432339,086 miles of distribution lines, through which it supplied 26,45324,240 GWh to 8.079 million captive consumers8,695,421 regulated customers and transported15,671GWhtransported 20,078 GWh to 422 Free Consumers1,774 free customers that use the Company’sour distribution networks. The total volume of electricityenergy distributed was 42,12444,318 GWh, of which 44.3%45.6% was distributed to captiveregulate and free industrial consumers,15.4%customers, 12.8% to captiveregulate and free commercial consumers 23.3%customers, 24.8% to captiveregulated residential consumers,customers, and 16.2%16.8% to other captive consumersregulated and 0.8% to be used by distributors.free customers.
Cemig owns a directly held equity interest of 26.06% and an indirectly held equity interest of 6.41% in Light, which owns 100% of Light Serviços de Eletricidade S.A. (Light Sesa). In 2015 Light Sesa handled a total of 6,694 GWh in the concession area (captive clients + transport of electricity for Free Consumers). This figure was 2.5% higher than in 2014. There was growth in each of the consumption categories from 2013 to 2014, led by the commercial user category, whose consumption was 32% of the total, and 6% higher than in 2014.
Other businessesBusinesses
While our main business consists of the generation, transmission and distribution of electricity,energy, we also engage in the following businesses: (i) telecommunications, through our consolidated subsidiary Cemig Telecomunicações S.A.; (ii)distributed generation, account services, cogeneration, energy solutions consulting business for both Brazilianefficiency (with PEE resources), supply and international clients,storage management, through our subsidiary Efficientia S.A. (iii) exploitation of natural gas, through five consortia: (a) Exploration Consortium SF-T-104, (b) Exploration Consortium SF-T-114, (c) Exploration Consortium SF-T-120, (d) Exploration Consortium SF-T-127, and (e) Exploration Consortium REC-T-163; (iv)CEMIG Soluções Inteligentes em Energia-CEMIG SIM; (ii) sale and trading of electricity,energy, through structuring and intermediation of purchase and sale transactions, trading electricityenergy in the Free Market, through our wholly-owned subsidiaries CemigCEMIG Trading S.A. and Empresa de Serviços de Comercialização de Energia Elétrica S.A. and Cemig Comercializadora de Energia Incentivada S.A.; (v)(iii) acquisition, transport and distribution of gas and its subproductssub products and derivatives through Companhia de Gás de Minas Gerais (Gasmig)(‘Gasmig’); (iv) cloud solution, IT infrastructure, IT management services and (vi)cybersecurity through Ativas Data Center; and (v) technology systems and systems for operational management of public service concessions, including companies operating in electricity,energy, gas, water and sewerage and other utility companies, through Axxiom Soluções Tecnológicas S.A.
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Revenue sourcesSources
The following table illustrates the revenues attributable to each of our principal revenue sources, in millionsmillion ofreaisReais, for the periods indicated:
Year ended December 31, | 2020 | 2019 (Restated) | 2018 (Restated) |
| Energy sales to final customers | 23,018 | 24,052 | 21,882 |
| Revenue from wholesale supply to other concession holders | 3,414 | 2,876 | 2,990 |
| CVA (compensation for changes in ‘Parcel A’ items ) and other financial components | 455 | 58 | 1,973 |
| Financial component arising from PIS/Pasep and Cofins taxes refunded to customers– realization | 266 | - | - |
| Revenue from use of the energy distribution systems – TUSD | 3,022 | 2,722 | 2,045 |
| Transmission operation and maintenance revenue | 280 | 352 | 343 |
| Interest revenue arising from the financing component in the transmission contract asset | 438 | 328 | 311 |
| Adjustment to expectation of cash flow from the indemnifiable financial asset of the distribution concession | 16 | 18 | - |
| Revenue from financial adjusting of the Concession Grant Fee | 347 | 318 | 321 |
| Construction revenues | 1,637 | 1,292 | 940 |
| Transactions with energy on the CCEE | 154 | 432 | 217 |
| Mechanism for the sale of surplus | 234 | - | - |
| Supply of gas | 2,011 | 2,298 | 1,995 |
| Fine for violation of service continuity indicator | (51) | (58) | (44) |
| Recovery of PIS/Pasep and Cofins taxes credits over ICMS | - | 1,428 | - |
| Other | 1,709 | 1,721 | 1,640 |
| Deductions from revenue | (11,722) | (12,351) | (12,314) |
| Total net revenues | 25,228 | 25,486 | 22,299 |
| Year ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
Electricity sales to final consumers | 20,319 | 14,922 | 12,597 | |||||||||
Revenue from wholesale supply to other concession holders and PROINFA | 2,207 | 2,310 | 2,144 | |||||||||
Revenue from use of the basic electricity distribution system (TUSD) | 1,465 | 855 | 1,008 | |||||||||
CVA (compensation for changes in ‘Portion A’ items ) account and Other financial components of tariffs | 1,704 | 1,107 | — | |||||||||
Revenue from use of the transmission system | 261 | 557 | 404 | |||||||||
Indemnity transmission revenues | 101 | 420 | 21 | |||||||||
Construction revenues | 1,252 | 941 | 975 | |||||||||
Revenue from sale on the spot market | 2,425 | 2,348 | 1,193 | |||||||||
Supply of gas | 1,667 | 422 | — | |||||||||
Other operating revenues | 1,440 | 1,284 | 1,047 | |||||||||
Tax on revenues | (11,549 | ) | (5,626 | ) | (4,762 | ) | ||||||
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Total | 21,292 | 19,540 | 14,627 | |||||||||
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Power generationGeneration and tradingTrading
Overview
The table below gives operational information on ourCEMIG’s top five power plants accounted for over 66% of its installed energy generation plants atcapacity as of December 31, 2015:2020.
Generation Power Plant | Cemig Group Company | Installed Capacity (MW) | Assured power level (avg. MW) | Start of Commercial Operations | % of the Total Installed Capacity | Expiration of Concession or Authorization | Type of Power Plant | CEMIG’s stake | ||||||||||||||||||
Amador Aguiar I (Capim Branco I) | ALIANÇA | 94.36 | 60.94 | 2006 | 1.16% | August 29, 2036 | UHE | 39% | ||||||||||||||||||
Amador Aguiar II (Capim Branco II) | ALIANÇA | 82.56 | 51.50 | 2007 | 1.02% | August 29, 2036 | UHE | 39% | ||||||||||||||||||
Aimorés | ALIANÇA | 148.50 | 77.40 | 2005 | 1.83% | December 20, 2035 | UHE | 45% | ||||||||||||||||||
Baguari | BAGUARI ENERGIA | 47.60 | 27.27 | 2009 | 0.59% | August 15, 2041 | UHE | 34% | ||||||||||||||||||
Camargos | CEMIG GT | 46.00 | 21.00 | 1960 | 0.57% | July 8, 2045 | UHE | 100% | ||||||||||||||||||
Emborcação | CEMIG GT | 1192.00 | 497.00 | 1982 | 14.69% | July 23, 2025 | UHE | 100% | ||||||||||||||||||
Funil | ALIANÇA | 81.00 | 40.05 | 2002 | 1.00% | December 20, 2035 | UHE | 45% | ||||||||||||||||||
Igarapava | ALIANÇA | 49.75 | 32.22 | 1999 | 0.61% | December 30, 2028 | UHE | 24% | ||||||||||||||||||
Itutinga | CEMIG GT | 52.00 | 28.00 | 1955 | 0.64% | July 8, 2045 | UHE | 100% | ||||||||||||||||||
Irapé | CEMIG GT | 399.00 | 210.70 | 2006 | 4.92% | February 28, 2035 | UHE | 100% | ||||||||||||||||||
Jaguara | CEMIG GT | 424.00 | 336.00 | 1971 | 5.23% | August 28, 2013 | UHE | 100% | ||||||||||||||||||
Miranda | CEMIG GT | 408.00 | 202.00 | 1998 | 5.03% | December 23, 2016 | UHE | 100% | ||||||||||||||||||
Nova Ponte | CEMIG GT | 510.00 | 276.00 | 1994 | 6.29% | July 23, 2025 | UHE | 100% | ||||||||||||||||||
Porto Estrela | ALIANÇA | 33.60 | 16.74 | 2001 | 0.41% | July 10, 2032 | UHE | 30% | ||||||||||||||||||
Queimado | CEMIG GT | 86.63 | 47.85 | 2004 | 1.07% | January 2, 2033 | UHE | 83% | ||||||||||||||||||
Rosal | Rosal Energia S.A | 55.00 | 30.00 | 1999 | 0.68% | May 8, 2032 | UHE | 100% | ||||||||||||||||||
Sá Carvalho | Sá Carvalho S.A | 78.00 | 58.00 | 1951 | 0.96% | December 1, 2024 | UHE | 100% | ||||||||||||||||||
Salto Grande | CEMIG GT | 102.00 | 75.00 | 1956 | 1.26% | July 8, 2045 | UHE | 100% | ||||||||||||||||||
São Simão | CEMIG GT | 1710.00 | 1281.00 | 1978 | 21.08% | January 11, 2015 | UHE | 100% | ||||||||||||||||||
Três Marias | CEMIG GT | 396.00 | 239.00 | 1962 | 4.88% | July 8, 2045 | UHE | 100% | ||||||||||||||||||
Volta Grande | CEMIG GT | 380.00 | 229.00 | 1974 | 4.68% | February 23, 2017 | UHE | 100% | ||||||||||||||||||
Santo Antônio | CEMIG GT | 449.74 | 392.22 | 2012 | 5.54% | June 12, 2046 | UHE | 18% | ||||||||||||||||||
Retiro Baixo | Retiro Baixo Energética S.A. | 20.46 | 9.61 | 2010 | 0.25% | August 25, 2041 | UHE | 25% | ||||||||||||||||||
Anil | CEMIG GT | 2.08 | 1.16 | 1964 | 0.03% | Indefinite | PCH | 100% | ||||||||||||||||||
Bom Jesus do Galho | CEMIG GT | 0.36 | 0.13 | 1931 | 0.00% | N.A | PCH | 100% | ||||||||||||||||||
Cachoeirão | Hidrelétrica Cachoeirão | 13.23 | 8.02 | 2008 | 0.16% | July 25, 2030 | PCH | 49% | ||||||||||||||||||
Cajuru | CEMIG GT | 7.20 | 3.48 | 1959 | 0.09% | January 4, 2046 | PCH | 100% | ||||||||||||||||||
Gafanhoto | CEMIG GT | 14.00 | 6.68 | 1946 | 0.17% | January 4, 2046 | PCH | 100% | ||||||||||||||||||
Jacutinga | CEMIG GT | 0.72 | 0.47 | 1948 | 0.01% | Indefinite | PCH | 100% | ||||||||||||||||||
Joasal | CEMIG GT | 8.40 | 5.20 | 1950 | 0.10% | January 4, 2046 | PCH | 100% | ||||||||||||||||||
Lages | CEMIG GT | 0.68 | 0.54 | 2005 | 0.01% | Indefinite | PCH | 100% | ||||||||||||||||||
Luiz Dias | CEMIG GT | 1.62 | 0.61 | 1914 | 0.02% | August 19, 2025 | PCH | 100% | ||||||||||||||||||
Machado Mineiro | Horizontes Energia S.A | 1.72 | 1.14 | 1992 | 0.02% | July 8, 2025 | PCH | 100% | ||||||||||||||||||
Marmelos | CEMIG GT | 4.00 | 2.88 | 1915 | 0.05% | January 4, 2046 | PCH | 100% | ||||||||||||||||||
Martins | CEMIG GT | 7.70 | 2.52 | 1947 | 0.09% | January 4, 2046 | PCH | 100% | ||||||||||||||||||
Paciência | CEMIG GT | 4.08 | 2.36 | 1930 | 0.05% | January 4, 2046 | PCH | 100% | ||||||||||||||||||
Pai Joaquim | CEMIG PCH S.A | 23.00 | 2.41 | 2004 | 0.28% | April 1, 2032 | PCH | 100% | ||||||||||||||||||
Pandeiros | CEMIG GT | 4.20 | 0.47 | 1957 | 0.05% | September 22, 2021 | PCH | 100% | ||||||||||||||||||
Paraúna | CEMIG GT | 4.28 | 1.90 | 1927 | 0.05% | N.A | PCH | 100% | ||||||||||||||||||
Peti | CEMIG GT | 9.40 | 6.18 | 1946 | 0.12% | January 4, 2046 | PCH | 100% | ||||||||||||||||||
Pissarrão | CEMIG GT | 0.80 | 0.55 | 2001 | 0.01% | Indefinite | PCH | 100% | ||||||||||||||||||
Piau | CEMIG GT | 18.01 | 13.53 | 1955 | 0.22% | January 4, 2046 | PCH | 100% | ||||||||||||||||||
Pipoca | Hidrelétrica Pipoca | 9.80 | 5.83 | 2010 | 0.12% | September 10, 2031 | PCH | 49% | ||||||||||||||||||
Poço Fundo | CEMIG GT | 9.16 | 5.79 | 1949 | 0.11% | August 19, 2025 | PCH | 100% | ||||||||||||||||||
Poquim | CEMIG GT | 1.41 | 0.58 | 2002 | 0.02% | Indefinite | PCH | 100% | ||||||||||||||||||
Rio de Pedras | CEMIG GT | 9.28 | 2.15 | 1928 | 0.11% | September 19, 2024 | PCH | 100% | ||||||||||||||||||
Salto Morais | CEMIG GT | 2.39 | 0.74 | 1957 | 0.03% | July 1, 2020 | PCH | 100% | ||||||||||||||||||
Salto do Paraopeba | Horizontes Energia S.A | 2.46 | 0.00 | 2001 | 0.03% | October 4, 2030 | PCH | 100% | ||||||||||||||||||
Salto do Passo Velho | Horizontes Energia S.A | 1.80 | 1.48 | 2001 | 0.02% | October 4, 2030 | PCH | 100% | ||||||||||||||||||
Salto Voltão | Horizontes Energia S.A | 8.20 | 6.63 | 2001 | 0.10% | October 4, 2030 | PCH | 100% | ||||||||||||||||||
Santa Luzia | CEMIG GT | 0.70 | 0.23 | 2001 | 0.01% | February 25, 2026 | PCH | 100% | ||||||||||||||||||
Santa Marta | CEMIG GT | 1.00 | 0.58 | 1944 | 0.01% | Indefinite | PCH | 100% | ||||||||||||||||||
São Bernardo | CEMIG GT | 6.82 | 3.42 | 1948 | 0.08% | August 19, 2025 | PCH | 100% | ||||||||||||||||||
Sumidouro | CEMIG GT | 2.12 | 0.34 | 1956 | 0.03% | Indefinite | PCH | 100% | ||||||||||||||||||
Tronqueiras | CEMIG GT | 8.50 | 4.14 | 1955 | 0.10% | January 4, 2046 | PCH | 100% | ||||||||||||||||||
Xicão | CEMIG GT | 1.81 | 0.61 | 1941 | 0.02% | August 19, 2025 | PCH | 100% | ||||||||||||||||||
Paracambi | Lightger | 16.40 | 12.81 | N.A | 0.20% | N.A | PCH | 66% | ||||||||||||||||||
Generation Power Plant Fontes Nova Ilha dos Pombos Nilo Peçanha Pereira Passos Santa Branca Bonfante Calheiros Funil Jataí Retiro Velho São Joaquim São Simão Fumaça IV Carangola Irara Monte Serrat Santa Fé I São Pedro Cachoeira da Lixa Colino 1 Colino 2 Praias de Parajuru Praia do Morgado Volta do Rio Candiba Igaporâ Ilhéus Licínio de Almeida Pindaí Planaltina Porto Seguro Rio Verde Serra do Salto Pajeú do Vento Nossa Senhora da Conceição Guanambi Guirapá Alvorada Morrão Da Prata Dos Araçás Seraíma Tanque Ventos do Nordeste Ametista Dourados Maron Pilôes Igarapé Candonga Barreiro Cel. Domiciano Sinceridade Neblina Ervália Cemig Group
Company Installed
Capacity
(MW) Assured
power
level
(avg.
MW) Start of
Commercial
Operations % of the
Total
Installed
Capacity Expiration of
Concession or
Authorization Type
of
Power
Plant CEMIG’s
stake Lightger 86.60 68.23 N.A 1.07% N.A UHE 66% Lightger 122.80 75.45 N.A 1.51% N.A UHE 66% Lightger 249.34 219.79 N.A 3.07% N.A UHE 66% Lightger 65.54 33.46 N.A 0.81% N.A UHE 66% Lightger 36.77 21.00 N.A 0.45% N.A UHE 66% Brasil PCH 3.63 2.58 2008 0.04% N.A PCH 19% Brasil PCH 3.63 2.09 N.A 0.04% N.A PCH 19% Brasil PCH 4.30 2.51 N.A 0.05% N.A PCH 19% Brasil PCH 5.74 3.89 N.A 0.07% N.A PCH 19% Brasil PCH 3.44 2.51 N.A 0.04% N.A PCH 19% Brasil PCH 4.01 2.54 N.A 0.05% N.A PCH 19% Brasil PCH 5.16 2.91 N.A 0.06% N.A PCH 19% Brasil PCH 0.86 0.50 N.A 0.01% N.A PCH 19% Brasil PCH 2.87 1.83 N.A 0.04% N.A PCH 19% Brasil PCH 5.74 3.48 N.A 0.07% N.A PCH 19% Brasil PCH 4.78 3.49 N.A 0.06% N.A PCH 19% Brasil PCH 5.74 4.99 N.A 0.07% N.A PCH 19% Brasil PCH 5.74 3.52 N.A 0.07% N.A PCH 19% Renova Energia 5.20 2.62 2008 0.06% N.A PCH 35% Renova Energia 3.86 2.45 2008 0.05% N.A PCH 35% Renova Energia 5.62 3.50 2008 0.07% N.A PCH 35% CEMIG GT 14.11 4.11 2009 0.17% September 24, 2032 EOL 49% CEMIG GT 14.11 6.47 2010 0.17% December 26, 2031 EOL 49% CEMIG GT 20.58 9.02 2010 0.25% December 26, 2031 EOL 49% Renova Energia 3.37 1.50 2014 0.04% August 5, 2045 EOL 35% Renova Energia 10.68 4.90 2014 0.13% August 5, 2045 EOL 35% Renova Energia 3.93 1.77 2014 0.05% August 5, 2045 EOL 35% Renova Energia 8.43 3.84 2014 0.10% August 5, 2045 EOL 35% Renova Energia 8.43 3.88 2014 0.10% August 5, 2045 EOL 35% Renova Energia 9.55 4.31 2014 0.12% August 5, 2045 EOL 35% Renova Energia 2.25 0.96 2014 0.03% August 5, 2045 EOL 35% Renova Energia 10.68 5.83 2014 0.13% August 19, 2045 EOL 35% Renova Energia 6.74 2.62 2014 0.08% August 5, 2045 EOL 35% Renova Energia 8.99 4.15 2014 0.11% August 5, 2045 EOL 35% Renova Energia 10.12 4.37 2014 0.12% August 5, 2045 EOL 35% Renova Energia 7.31 2.98 2014 0.09% August 6, 2045 EOL 35% Renova Energia 10.12 4.78 2014 0.12% August 19, 2045 EOL 35% Renova Energia 2.81 1.39 2014 0.03% August 5, 2045 EOL 35% Renova Energia 10.62 5.66 2014 0.13% April 20, 2046 EOL 35% Renova Energia 7.67 3.55 2014 0.09% March 25, 2046 EOL 35% Renova Energia 11.19 5.44 2014 0.14% April 7, 2046 EOL 35% Renova Energia 10.62 6.15 2014 0.13% March 25, 2046 EOL 35% Renova Energia 10.54 4.88 2014 0.13% May 26, 2046 EOL 35% Renova Energia 8.26 3.55 2014 0.10% March 18, 2046 EOL 35% Renova Energia 10.03 0.00 2015 0.12% March 14, 2047 EOL 35% Renova Energia 10.03 0.00 2015 0.12% March 13, 2047 EOL 35% Renova Energia 10.62 0.00 2015 0.13% March 8, 2047 EOL 35% Renova Energia 10.62 0.00 2015 0.13% March 13, 2047 EOL 35% CEMIG GT 131.00 71.30 1978 1.7% August 13, 2024 UTE 100% ALIANÇA 31.50 14.51 2004 N.A N.A UHE 23% Usina Termelétrica Barreiro S.A 12.90 11.37 2004 0.17% April 30, 2023 UTE 100% CEMIG GT 2.40 0.00 NA 0.03% January 4, 2046 PCH 100% CEMIG GT 5.04 0.00 NA 0.06% January 4, 2046 PCH 100% CEMIG GT 1.42 0.00 NA 0.02% January 4, 2046 PCH 100% CEMIG GT 6.47 0.00 NA 0.08% January 4, 2046 PCH 100%
Cemig’sCEMIG’s market consists of sales of electricityenergy to:
| Regulated customers in |
| · | Free |
| · | Other agents of the |
| · | Distributors in the Regulated |
| CCEE (eliminating transactions between companies of the |
The total volume of transactions in electricityenergy in 20152020 was 83,750 MWh,82,552 GWh, an decreaseincrease of 6,7 % from0.7% in comparison to the total of 89,856 MWh81,993 GWh in 2014.2019.
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Generation Assets
On February 27, 2015, the transaction of association between Vale S.A. and Cemig GT by subscription of shares in Aliança Geração de Energia S.A. was completed. As for consideration for their subscription of shares in Aliança, the two companies transferred to Aliança the following equity interests they held in the following electricity generation assets:Porto Estrela, Igarapava, Funil, Capim Branco I, Capim Branco II, Aimorésand Candonga. As a result of the Association Aliança now has installed hydroelectric generation capacitydate of 1,158 MW in operation (assured offtake level 652 MW), as well as other generation projects. Vale owns 55% of the equity in Aliança, and Cemig GT owns 45%. Aliança is valued at R$4.5 billion. For Cemig GT the association increases its potential to generate new business and maximize results, due to the combination of the two companies’ experiences in operational, financial and project management.
On March 31, 2015 the acquisition by Cemig GT of Vale’s 49% stockholding interest in Aliança Norte Energia Participações S.A., was concluded. Aliança Norte Energia Participações S.A. owns 9% of Norte Energia S.A. (“Nesa”) – the acquisition thus corresponded to an indirect holding in Nesa of 4.41%, representing installed capacity of 495.39MW (201 MW average).
On December 31, 2015this annual report, the subsidiaries, jointly controlled entities and jointly-controlled subsidiariesaffiliates of the Cemig Group holding company (Companhia Energética de Minas Gerais – Cemig)CEMIG operated 79 hydroelectric80 hydro plants, 2 thermal plants and 27 wind farms, totalizing 8,112 MW, corresponding respectively to 7,716 MW, 144 MW and 252 MW respectively. These figures make the Cemig Group the third largest generating group in Brazil by generating capacity.
In line with Cemig’s growth strategy, the group’s total installed generation capacity has grown constantly over the last five years.
Light has a total installed generation capacity of 282 MW, and an effective average output of 210totaling 5,937.07 MW.
We have incorporated subsidiaries in the State of Minas Gerais and other states in Brazil to operate certain of our generation facilities and to hold the related concessions.
In addition to our own plants, Cemig Generation and Transmission has theThe following interestsare companies in consortia, as of December 31, 2015:
| · | CEMIG Geração Camargos S.A., CEMIG Geração Itutinga S.A., CEMIG Geração Leste S.A., CEMIG Geração Oeste S.A., CEMIG Geração Salto Grande S.A., CEMIG Geração Sul S.A. and CEMIG Geração Três Marias S.A.; CEMIG GT incorporated these companies in 2016 to hold the concession contracts for 18 hydroelectric plants won in the auction the year before. The total installed generation capacity secured to CEMIG GT’s portfolio was 699,6 MW; |
| · | CEMIG PCH S.A. – Independent power producer, operating the Pai Joaquim small hydroelectric power plant; |
| · | Horizontes Energia S.A. – An independent power producer, operating the Machado Mineiro and Salto do Paraopeba SHPs in Minas Gerais; and the Salto do Voltão and Salto do Passo Velho hydroelectric plants, in the State of Santa Catarina; |
| · | Rosal Energia S.A. – Concession holder operating the Rosal hydro plant, on the border between the States of Rio de Janeiro and Espírito Santo; |
| · | Sá Carvalho S.A. – Production and sale of energy as a public energy service concession holder, through the Sá Carvalho hydroelectric power plant. |
The generation companies in which CemigCEMIG GT has joint participationcontrol are:
| · | Aliança Geração de Energia S.A. (45%) – Platform of growth and consolidation of generation assets held by CEMIG GT and Vale (55%). The assets involved in the formation of the Aliança include the Aimorés and Funil hydroelectric plants and the following generation consortia: Porto Estrela, Igarapava, Capim Branco I, Capim Branco II and Candonga. In addition to the hydroelectric plants in operation, there are four wind plants, which compose the Complexo Eólico Santo Inácio in northeastern Brazil. The company has installed capacity of 1,257 MW in operation, and will be responsible for investments in future projects of energy generation; |
| · | Aliança Norte Energia Participações S.A. (49%) – Together with Vale (51%), the company holds participation of 9% of Norte Energia S.A., holder of the concession to operate the Belo Monte hydroelectric plant, corresponding to an indirect equity interest of 4.41% and representing an installed capacity of 495 MW; |
| · | Amazônia Energia Participações S.A. (49% of voting share, 74.5% of total capital) – Owned jointly with Light (25.5%), holds 9.77% of Norte Energia S.A., representing an installed capacity of 818 MW indirectly held by CEMIG GT; |
| · | Renova (48.21% of voting stock, 36.23% of total capital) –As of December 31, 2020, Renova had generation supply contracts totaling 627.8 MW of generation capacity, of which 190.5 MW were already in commercial operation; |
| · | Baguari Energia S.A. (69.39%) – The Company operates the Baguari Hydroelectric Plant through the Baguari Hydro Plant Consortium, together with Furnas Centrais Elétricas S.A. (30.61%). Baguari Energia S.A. owns 49% of the plant in partnership with Neoenergia, which owns the remaining 51%, through Baguari I Geração de Energia Elétrica; |
| · | Retiro Baixo Energética S.A. (49.9%) – Holds the concession for the operation of the hydroelectric power plant Retiro Baixo, located in the lower course of the Paraopeba River in the State of Minas Gerais, which has installed capacity of 82 MW and assured energy of 36.6 MW; |
| · | Hidrelétrica Cachoeirão S.A. (49%) – An independent power producer operating the Cachoeirão SHP, located at Pocrane, in the State of Minas Gerais. The other 51% is held by Santa Maria Energética; |
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| Table of Contents |
| · | Hidrelétrica Pipoca S.A. (49%) – An independent power producer that built and operates the Pipoca SHP, on the Manhuaçu River, in the municipalities of Caratinga and Ipanema, in the State of Minas Gerais. The other 51% is held by Asteri Energia S.A.; |
| · | Lightger S.A. (49%) – Independent power producer, formed to build and operate the Paracambi SHP (or PCH), on the Ribeirão das Lages river in the county of Paracambi, in the state of Rio de Janeiro. The remaining 51% shareholding is owned by Light; |
| · | Guanhães Energia S.A. (49%) – Guanhães Energia S.A. is jointly-controlled entity, which has four wholly-owned subsidiaries – PCH Dores de Guanhães S.A., PCH Senhora do Porto S.A., PCH Jacaré S.A. and PCH Fortuna II S.A.. Guanhães Energia S.A. is engaged in commercial operation of these four SHPs. Three of them – Dores de Guanhães, Senhora do Porto and Jacaré – are in the municipality of Dores de Guanhães; and one, Fortuna II, is in the municipalities of Virginópolis and Guanhães, all in the State of Minas Gerais. In July 2019, the project reached its 44MW aggregate installed capacity; |
| · | Madeira Energia S.A (‘MESA’) (8.54%) – MESA owns 100% of Santo Antônio Energia S.A., hydroelectric plant in the Madeira River in the state of Rondônia. CEMIG GT´s indirect holding in MESA amounts to 6.97% and takes place through the following companies: SAAG, FIP Melbourne (33.12%), Parma (56.75%) and FIP Malbec (49.92%); and |
| · | Queimado Hydroelectric Power Plant – CEMIG GT holds an 82.5% interest in this entity and our partner in this project is CEB Participações S.A. (‘CEBPar’), a subsidiary of Companhia Energética de Brasília (‘CEB’), which owns 17.5% equity interest in the plant. |
Retiro Baixo Energética S.A.—(49.9%) – Holds the concession for the operation of the hydroelectric power plant Retiro Baixo, located in the lower course of the Paraopeba River in the State of Minas Gerais, which has installed capacity of 83,7MW and assured energy of 38.5 MW.
The following are other companies in which Cemig (at the holding company level, Companhia Energética de Minas Gerais – Cemig) owns 100% of the equity:consortia were established to develop future projects:
| · | Tapajós Consortium – The Tapajós Consortium was created to develop technical and environmental feasibility studies of hydro plants in the Tapajos river basin. Technical studies have already been finished and sent to ANEEL for analysis while environmental studies depend on certain licenses to be concluded. In December 2020, due to lack of predictability of a bidding process to be conducted by ANEEL, CEMIG GT formalized its withdrawal from the Consortium; and |
| · | Davinópolis Hydroelectric Plant (49%) – Consortium formed with Neoenergia (51%) to study the project's feasibility. Due to the lack of predictability regarding the holding of the ANEEL Auction and considering the economic and financial unfeasibility of the project with data previously collected, CEMIG GT intends to formalize its withdrawal from the Consortium in 2021. |
The holding company (Companhia Energética de Minas Gerais – Cemig) also has interests in jointly-controlled subsidiaries that operate generation assets. These include:
Wind Farms
Wind farms have become one of the most promising power generation sources in Brazil. In addition to their low environmental impact, this source of electricityenergy is completely renewable and widely available in Brazil, according to numerous studies of potential wind power. Its rapid technical development over recent decades has successfully reduced costs per MWh when comparedin comparison to other power generation sources. CemigCEMIG has monitored and observed the rapid evolution of wind energy and its inclusion in the range of Brazilian energy supply sources.
Our firstCEMIG GT owns 100% of the equity in the following companies with wind farm, Morrofarms investments:
Central Eólica Praia de Parajuru S.A and Central Eólica Volta do Camelinho, began operatingRio - Wind farms located in 1994 in Gouveia, a town in northern Minas Gerais. It was the first wind farm in Brazil to be connected to the national electricity transmission grid. WithState of Ceará with a total generationinstalled capacity of 1 MW, Morro do Camelinho was built through a technical70.8 MW.
CEMIG GT has joint participation in the following companies with wind farms investments:
Renova (48.21% of voting share and scientific cooperation agreement with the government36.23% of Germany. Taking into account the experimental naturetotal capital) - The Alto Sertão III Phase A Wind Complex, currently under implementation and approximately 85% completed, will consist of the facility, and the fact that the equipment used is now obsolete, Cemig applied to ANEEL for permission to de-activate the plant, which was granted on September 2, 2010. On August 15, 2009, Cemig Generation and Transmission purchased from Energimp S.A. a 49% interest in three26 wind farms located in the State of Ceará, for R$223 million. The threeBahia with a generation capacity of 432.6 MW.
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Aliança Geração de Energia S.A. (45%) – Four wind farms, named UEE Praia do Morgado, UEE Praias de Parajuruwhich compose the Santo Inácio Wind Project. The project, located at Icapuí, in the State of Ceará, started its commercial operation in December of 2017 and UEE Volta do Rio,has an installed capacity of 98.7 MW. There are also two projects under construction: Projeto Eólico Acauã and Central Eólica Gravier. The latter is located at the State of Ceará, it will have a total installed capacity of 99.671.4 MW and its commercial operation is estimated to start at the beginning of 2022. The former is composed of Acauã I, Acauã II and Acauã III wind farms, it is located at the State of Rio Grande do Norte and has a total installed capacity of 109.2 MW.
On September 29, 2014 Cemig took its most significant step Its commercial operation is also estimated to start in making wind power a major component of its generation sources, with the acquisition by its generation company, Cemig Generation (Cemig GT) of a stake in the controlling stockholding group of Renova (Renova Energia S.A.) – acquiring 36.6% of Renova’s voting stock and 27.4% of its total capital, by subscription of 87,186,035 common shares. At the end of 2015 Renova had more than 2.5 GW of generating capacity placed under contract – the great majority being wind power, as follows:2022.
This chart shows the majority of our electricity generation companies, including their subsidiaries and affiliated companies:
Expansion of Generation Capacity
We currently are involvedPoço Fundo
On February 5, 2019, Brazilian electricity regulatory agency ANEEL approved an expansion of installed capacity of Poço Fundo, a Small Hydroelectric Power Plant located on the Machado River, in the constructionstate of seven hydroelectric plants – Dores de Guanhães, Senhora do Porto, Fortuna II, Jacaré, Itaocara, Santo Antônio and Belo Monte. These plants will increase our total installed hydroelectric generation capacity by 1,353 MW overMinas Gerais, from 9.16MW to 30MW. Additionally, the coming six years. Theconcession was extended until May 29, 2045. Upon completion of a numberexpansion, the plant will consist of these plants is currently subject to a varietytwo generating units of contingencies, some of which are outside of our control. Below is a brief description of these projects:15MW each.
Guanhães Energia S.A.: Has four wholly-owned subsidiaries – PCH Dores de Guanhães S.A., PCH Senhora do Porto S.A., PCH Jacaré S.A.On January 6, 2020, expansion works started and PCH Fortuna II S.A., engaged in construction andthe commercial operation of 4 small hydroelectric plants (referred to as PCHs, forPequenas Centrais Hidrelétricas, or SHPs). Three of them – Dores de Guanhães, Senhora do Porto and Jacaré – are in the municipality of Dores de Guanhães; and one, Fortuna II,its first generation unit is in the municipalities of Virginópolis and Guanhães, all in the State of Minas Gerais. They will have an aggregate installed capacity of 44 MW. Construction schedules have been delayed by unforeseeable government environmental requirements, as well as delays in obtaining certain mechanical components. The delays by the construction consortium led to a recision in the construction contract and a restructuring of the implementation of the project, which is currently in progress. Senhora do Porto and Dores de Guanhães are now scheduled to produce their first power in the second half of 2016, and Jacaré and Fortuna II are expected to startbegin by June 21, 2022.
CEMIG SIM
CEMIG SIM, a wholly owned subsidiary of CEMIG that operates in distributed generation and energy solutions, invested in theits first halfyear of 2017. As of December 31, 2015 Cemig GT had subscribed capital totalingactivity (2020), approximately R$67.4373.5 million in the project,acquisition of 49% stakes in proportion to its 49% interest in this enterprise. The company is jointly-controlled, with Light Energia owning the remaining 51%.
On March 31, 2014 ANEEL transferred ownership of the rights to operate the small hydro plants of Guanhães Energia to the wholly-owned subsidiaries referred to above,nine photovoltaic plants. Currently CEMIG SIM has reached 3,000 customers in the terms of ANEEL Authorizing Resolutions Nºs 4,583, 4,584, 4,585commercial and 4,586, of March 18, 2014. industrial low voltage segments, which consume 6.2 GWh monthly.
In August 2015, the four wholly-owned subsidiaries of Guanhães Energia S.A. were the winning bidders in Auction A-3 of New Energy of Aneel No. 04/15. The successful bids guarantee the execution of contracts for the purchase and sale of energy at higher prices than current prices, during 30 years beginning on January 1, 2018.
Madeira Energia S.A. – MESA: Mesa is a special-purpose company, created2021, CEMIG SIM plans to construct and operate the Santo Antônio Hydroelectric Plant on the Madeira Riverinvest R$113 million in the municipality of Porto Velho, Rondônia, whichcommercial and industrial segments and will have generating capacity of 3,568 MW. The plant began operating in March 2012. Cemig GT owns 10% of Mesa, and has an indirect ownership of 8.13%. On December 31, 2015 the total value of the fixed assets representing the proportion of Cemig GT’s holdings in this indirectly-held subsidiary was R$4,003,560. At the end of 2015 the Santo Antônio Plant had 35 rotors in operation, representing capacity to generate approximately 2,495 MW. During 2015, the plant brought three more generating units into operation. The plant is expected to be completed in November 2016, and, when operating at full capacity, it will have 50 rotors in operation. The total investmentalso operate in the plant will amount to more than R$20 billion. The operation currently employs 457 people. The International Hydropower Association (IHA), a nonprofit founded nearly 20 years ago which measures the sustainability of hydroelectric plants undertakings and is supported by Unesco, awarded the Santo Antônio Plant the largest number of maximum scores in the Implementation category of all the projects it has analyzed over its 20-year history. The IHA’s assessment is based on four protocols: Early stage; Preparation; Implementation; and Operation. The assessment awarded to the Santo Antônio Plant in the Construction category was given after analysis of twenty topics in various areas: Assessment, Management, Stakeholder engagement, Stakeholder support, Conformance / compliance, and Outcomes. All these topics required technical documentation, internal/external interviews, and proof of the evidence for sustainability. The assessment underlines and confirms the commitment of the Santo Antônio Hydroelectric Plant to best global practices in sustainability.residential segment.
Norte Energia S.A. – Nesa: Since October 2011 Cemig GT has owned 74.5% of the special-purpose company Amazônia Energia Participações S.A., in partnership with Light Energia, which owns the remaining 25.5%. Amazônia Energia in turn holds 9.77% of Norte Energia S.A., another special-purpose company, which holds the concession to build, operate and maintain the Belo Monte Hydroelectric Plant. At the end of December 2015 the plant was approximately 82% complete. It is located on the Xingu River, in the Amazon Region, in the North of Brazil. When it is completed – scheduled for In 2019, it will have a full capacity of 11,233 MW, and will be one of the largest hydroelectric plants in the world. By the end of 2015 the Brazilian Development Bank (BNDES), together with the Federal Savings Bank (Caixa Econômica Federal, “CEF”, or “Caixa”) and the investment bank BTG Pactual, the financiers of the enterprise through a loan planned to total R$22.5 billion, had released a total of R$20.5 billion for its construction. Also by the end of 2015, Cemig had injected approximately R$590 million in this enterprise. Belo Monte started operating on April 20, 2016. The Belo Monte Power Plant, currently under construction, finished the year of 2015 with around 82% of its construction project completed. At the end of 2015, two of its power stations, Belo Monte e Pimental had been completed: (i) the first one is the plant principal power station, with eighteen turbines and a generation capacity of approximately 11,000 MW and (iii) the second, an auxiliary power station having a generation capacity of approximately 233 MW. Considering the completed parts of the Belo Monte Power Plant, 8.7% of the installed potential in Brazil is attributable to the plant, being the largest entirely Brazilian hydroelectric power plant and the fourth largest hydroelectric plant in the world, behind of the Chinese Three Gorges Plant (22,000 MW) and Xiluodu Plant (13,860 MW), and the Brazilian and Paraguayan Itaipu Plant (14,000 MW). The project requires a total investment of R$25.8 billion. (April 2010 currency)Considering the various environmental programs and projects that make up the Basic Environmental conditions of the Belo Monte Power Plant project, it was possible in 2015 to consolidate the compliance with the general and specific conditions of the Installation License of the enterprise. At the end of 2015, Ibama officially informed Norte Energia of the decision of the Federal Environmental Clearing Office regarding resources to be attributed in accordance with current legislation for the creation and deployment of conservation units. According to the determination, about 90% of the amount was distributed among the implementation of four existing protected areas under federal administration (ICMBio), and about 10% for the establishment or implementation of seven state conservation units (SEMA- PA). Two contemplated units, that are located in the plant’s area, are noteworthy- one of them is a wildlife refuge located in the Tabuleiro do Embaubal and the other unit will be created in Volta Grande do Xingu, one of the areas that Norte Energia proposed for environmental protection.
The UHE Itaocara Consortium: Since 2008, Cemig GT has held a 49% interest, with Itaocara Energia Ltda., a special-purpose company owned by Light S.A. (holder of 51%), the purpose of which is to build and operate the Itaocara power plant, a 151-MW small hydroelectric plant, to be constructed on the Paraíba do Sul river, between the municipalities of Itaocara and Aperibé, in the State of Rio De Janeiro. However, the reduction in the effective period regarding the original concession, and the impossibility of taking part in auctions in the regulated market, led the consortium to apply for rescission of the concession contract (Concession Contract Nº 012/2001) – a procedure that was made permissible by Law No. 12,893/2013 of July 9, 2013. On April 30, 2015 the Itaocara Power Plant Consortium, consisting of Cemig GT (49%) and Itaocara Energia Ltda. (51%), a consolidated subsidiary of Light S.A., took part in the 21st Bid of Energy From New Generation Projects (“Bid A-5”) for concessions regarding new projects of hydraulic and thermal power generation sources, with supply beginning on January 1, 2020 and a concession period of 30 years. The winning bidder was the Itaocara I Power Plant, with an installed power capacity of 150 MW. Through the success of the Bid A-5, the Itaocara Power Plant Consortium recovered the concession that had been previously rescinded in November 2013. The construction is planned to start in 2016 and it is expected to generate over 1,200 direct jobs and 2,200 indirect jobs in its peak working period. The Consortium UHE Itaocara already has an Installation License (LI), issued by the Brazilian Authority (IBAMA) and it has also the Declaration of Public Utility (DUP), issued by the Aneel.
Transmission
Overview
The transmission business consists of the transfer of electricityenergy from generation power plants to consumerscustomers directly connected to the basic transmission grid, free consumerscustomers and distribution companies.distributors. The transmission system comprises transmission lines and step-down substations with voltages ranging from 230 kV to 500 kV.
All the basic transmission grid users, including generators, distributors, free consumers,customers, and others, execute contracts for the use of the transmission system – CUST with the National System Operator (Operador Nacional do Sistema – ONS,), and make payments to the transmission companies for making available the use of their basic transmission grid equipment. See “-The‘The Brazilian Power Industry”Industry’ and “Item 5. Operating and Financial Review and Prospects.”Prospects”.
The following tables give operating information on our transmission capacity for the dates indicated:
Circuit Length of Transmission Lines in Miles as of December 31, | |||
Voltage of Transmission Lines | 2020 | 2019 | 2018 |
| 500 kV | 1,355 | 1,355 | 1,355 |
| 345 kV | 1,230 | 1,231 | 1,231 |
| 230 kV | 477 | 478 | 478 |
| Total | 3,062 | 3,064 | 3,064 |
| Circuit length of transmission lines in miles | ||||||||||||
| As of December 31, | ||||||||||||
Voltage of Transmission Lines | 2015 | 2014 | 2013 | |||||||||
>525 kV | ||||||||||||
500 kV | 1,355 | 1,355 | 1,355 | |||||||||
345 kV | 1,228 | 1,228 | 1,217 | |||||||||
230 kV | 478 | 478 | 475 | |||||||||
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Total | 3,061 | 3,061 | 3,047 | |||||||||
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| Table of Contents |
| Transformation capacity (2) of Transmission substations | ||||||||||||
| As of December 31, | ||||||||||||
Substations | 2015 | 2014 | 2013 | |||||||||
Number of transmission substations (3) | 37 | 36 | 36 | |||||||||
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MVA | 17178 | 16718 | 16285 | |||||||||
Transformation Capacity (1) of Transmission Substations as of December 31, | |||
Substations | 2020 | 2019 | 2018 |
| Number of transmission substations (2) | 39 | 38 | 38 |
| MVA | 18,854.65 | 18,104.65 | 17,615 |
| (1) | Transformation capacity refers to the ability of a transformer to receive energy at a certain voltage and release it at a reduced voltage for further distribution. |
| (2) | Shared substations are not included. |
The tables below showpresent operational information on the transmission capacity of the joint venture (subsidiaries and affiliates transmission Cemig)CEMIG), proportional to the equity interest held by the CemigCEMIG Group in each case, on the dates indicated:
| Transmission Network Extension in Miles as of December 31, | |||
Voltage of Transmission Lines | 2020 | 2019 | 2018 |
| >525 kV | 70 | 59 | 59 |
| 500 kV | 740 | 685 | 654 |
| 440 kV | 68 | 68 | 68 |
| 345 kV | 67 | 67 | 31 |
| 230 kV | 367 | 307 | 258 |
| Total | 1,312 | 1,186 | 1,070 |
| Transmission Network Extension in miles | ||||||||||||
| As of December 31 | ||||||||||||
Voltage of Transmission Lines | 2015 | 2014 | 2013 | |||||||||
>525 kV | 117 | 117 | 117 | |||||||||
500 kV | 1.289 | 1.290 | 1.290 | |||||||||
440 kV | 136 | 136 | 136 | |||||||||
345 kV | 67 | 67 | 67 | |||||||||
230 kV | 518 | 514 | 513 | |||||||||
220 kV | 62 | 62 | 62 | |||||||||
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Total | 2.189 | 2.210 | 2.208 | |||||||||
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Transmission assets
LT 345 kV The Montes Claros–Irapé lineFurnas–Pimenta Transmission Line (Companhia Transleste de Transmissão)– In September 2003, a consortium comprising Alusa (Companhia Técnica de Engenharia Elétrica – Alusa), with a 41% interest, Furnas (with a 24% interest), Orteng (Orteng Equipamentos e Sistemas S.A.)(with a 10% interest) and Cemig (with a 25% interest), won the bid for the concession from ANEEL for the Montes Claros–Irapé Transmission Line. As required by the tender rules, the partners formed a company,Companhia Transleste de Transmissão S.A., responsible for the construction and operation of the line. This 345-kV transmission line, of about 87 miles, connects the substation at Montes Claros, a city in the North ofCentroeste de Minas Gerais, with the substation of theIrapé hydroelectric plant. The line began operating in December 2005. The concession expires in February 2034. On October 9, 2013, ANEEL consented to the transfer of the 10% interest held by Orteng Equipamentos e Sistemas S.A. toAmazonense de Transmissão de Energia S.A–EATE.
LT 345 kV The Itutinga–Juiz de Fora Transmission Line (Companhia Transudeste de Transmissão ‘Centroeste’) – In September 2004, a consortium formed by Alusa, Furnas Orteng and Cemig –CEMIG, holding 49% and 51%, respectively, owning 41%, 25%, 10% and 24% – won the bid for the concession from ANEEL forof theItutinga–Juiz de Fora Furnas–Pimenta transmission line. As required by the tender rules, the partners formed a company,Companhia Transudeste de Transmissão S.A., which is responsible for construction and operation of the line. This 345-kV transmission line, of approximately 90 miles, links the substation of theItutinga hydroelectric plant to a substation at Juiz de Fora, a city in the Southwest of Minas Gerais. Commercial operation started in February 2007. The concession expires in March 2035. On October 9, 2013 ANEEL consented to the transfer of the 10% interest owned by Orteng toEATE.
LT 230 kV The Irapé–Araçuaí Transmission Line (Companhia Transirapé de Transmissão)– In November 2004 ,a consortium comprising of Alusa, Furnas, Orteng and Cemig, holding respectively 41%, 24,5%, 10% and 24.5%, won the bid for the concession from ANEEL for the Irapé–Araçuaí transmission line. As required by the tender rules, the partners constituted a company,Companhia Transirapé de Transmissão S.A., which has the responsibility for building and operating the line. This 230-kV line, of approximately 39 miles, connects the substation of the Irapé Hydroelectric Plant to a substation in Araçuaí, a city in the Northwest of Minas Gerais. Commercial operation began in May 2007 and the concession expires in 2035. On February 19, 2013, ANEEL Resolution of Authorization 3094/2013 authorized Transirapé to bolster the system with the installation of autotransformers with a power of 3 X 75MVA on the Irapé electrical substation, and another, with the same characteristics, on the Araçuaí 2 electrical substation. On October 9, 2013 ANEEL consented to the transfer of the 10% interest owned by Orteng to Empresa Amazonense de Transmissão de Energia S.A – EATE.
LT2 345 kV The Furnas–Pimenta Transmission Line (Companhia de Transmissão Centroeste de Minas)– In September 2004 a consortium formed by Furnas and Cemig, holding 49% and 51%, respectively, won the bid for the concession of theFurnas–Pimenta transmission line. As required by the tender rules, the partners formed a company,Companhia de Transmissão Centroeste de Minas S.A., which is responsible for the construction and operation of the transmission line. This 345-kV transmission line ofextending for approximately 39 miles connects the substation of the Furnas hydroelectric plant to a substation at Pimenta, a city in the Center-West region of Minas Gerais. It began commercial operation in March 2010. The2010 and the concession expires in March 2035.
LT 220 kV The Charrúa–Nueva Temuco Transmission Line in Chile (Transchile)– In April 2005 a consortium On January 13, 2020, the Company concluded the acquisition of Alusa and Cemig (51% and 49% respectively) wonof the tendershare capital held by theCentro de Despacho Económico de Carga del Sistema Interconectado Central, or CDEC–SIC, of Chile, to build, operate and maintainEletrobras in Centroeste, becoming the 220-kVCharrúa–Nueva Temuco transmission line for a period of 20 years. This was a landmark in Cemig’s history, since it was the Company’s first asset outside Brazil. With Alusa, we incorporatedTranschile Charrúa Transmisión S.A., an SPC created in Chile, which was responsible for the construction and now operates the line. The line is around 127 miles, connecting the substations ofCharrúa andNueva Temuco in the central region of Chile. We began the project in June 2005; construction started in April 2007. On July 18, 2007 Transchile Charrúa Transmisión S.A. signed a project finance contract for US$51 million with the Inter-American Development Bank (IADB) to construct the line and substations. Commercial operation began in January 2010.
Empresa de Transmissão Serrana S.A. – This is a special-purpose company created in January 2012 by ECTE, a jointly-controlled company owned by Taesa (with a 19.09% interest), Alupar Investimento S.A. (with a 42.51% interest), Centrais Elétricas de Santa Catarina S.A. (with a 30.89% interest) and MDU Resources Luxembourg II LLC, S.à.r.l. (with a 7.51% interest). It was formed to build and operate two substations: (i) the 525/230 kVAbdon Batistasubstation,with transformation capacity of 1,568 MVA; and (ii) the 230/138kVGaspar 2 substation, with 300 MVA capacity, both in the state of Santa Catarina. ECTE won the concession at ANEEL Auction 006 of 2011. The purposesole owner of the substation is to connect theGaribaldi andSão Roque power plants to the Brazilian National Grid, and expand the supply of electricity in the Itajaí Valley region. In 2015, the project construction was 100% completed.
Empresa Santos Dumont de Energia S.A. (‘ESDE’) – This is a special-purpose company created in November 2009 by ETEP, a jointly-controlled company owned by Taesa (with a 49.98% interest) and Alupar Investimento S.A. (with a 50.01% interest), to build and operate two facilities in the state of Minas Gerais: (i) the 345/138 kVSantos Dumont 2 substation, with transformation capacity of 375 MVA; and (ii) a -88/+100 Mvar Static Var Compensator (SVC). ESDE won the concession at ANEEL Auction 001/2009. The 345 kV and 138 kV components were completed in February 2013; the SVC was completed in January 2014.
São Gotardo Transmissora de Energia S.A. – Taesa was awarded the concession (Lot E) to build, operate and maintain the 345/138 kVSão Gotardo 2 substation (300 MVA), in Minas Gerais, in June 2012, at ANEEL Auction 005/2012, representing an Annual Permitted Revenue (Receita Anual Permitida, or RAP) of R$3.8 million. The operations started on March 19, 2014.investee since then.
Transmissora Aliança de Energia Elétrica S.A. – Taesa is a private company jointly controlled by Cemig,CEMIG, which holds 45.74%36.97% of the voting capital and 43.36%21.68% of the total capital of Taesa, and by Coliseu, a private investment fund.ISA Investimentos e Participações do Brasil S.A. which holds 14.88% of the total capital. Taesa has led Cemig’sCEMIG’s growth vector in the transmission segment, dedicated to the construction, operation and maintenance of transmission lines in all regions of the country. In 2013, Taesa incorporated several companies intoIt represents the group,main interest that we have in which it had 100% holdings and where the incorporation would provide economic gains and simplify the stockholding structure. This took place in January 2013 for the wholly-owned subsidiariesSul Transmissora de Energia S.A. (STE),ATE Transmissora de Energia S.A. (ATE) andNordeste Transmissora de Energia S.A. (NTE); and in June 2013 forATE II. On May 31 the transfer to Taesa of the totality of the stockholding interests held by Cemigone Transmission Company in the share capital of the transmission concession holders of the TBE Group was completed. On October 17, 2013 the purchase was completed, by its affiliated company EATE, of the 10% stockholding interests held by Orteng in each of: (i) Companhia Transleste de Transmissão, (ii) Companhia Transirapé de Transmissão; and (iii) Companhia Transudeste de Transmissão. On December 13, 2013, Taesa won the bid for Lot A at ANEEL Auction 013/2013, and as a result constitutedMariana Transmissora de Energia S.A. (MTE) – to operate a 30-year concession to operate the 85-km, 500-kV transmission line in Minas Gerais, which links theItabirito 2 andVespasiano 2 substations, which belong to Cemig.
This table shows the percentage holdings in the transmission companies as of the date hereof:
| Subsidiary and affiliate transmission companies | % equity interest (Direct and Indirect) | |||||||
As of December 31, 2015 | Cemig | Taesa | ||||||
TAESA | 43.36 | — | ||||||
ATE III | 43.36 | 100.00 | ||||||
EATE | 21.67 | 49.98 | ||||||
Lumitrans | 17.34 | 39.98 | ||||||
EBTE | 32.30 | 74.49 | ||||||
ERTE | 21.67 | 49.99 | ||||||
STC | 17.34 | 39.98 | ||||||
ENTE | 21.67 | 49.99 | ||||||
ECTE | 8.28 | 19.09 | ||||||
ETSE | 8.28 | 19.09 | ||||||
ETEP | 21.67 | 49.98 | ||||||
ESDE | 21.67 | 49.98 | ||||||
São Gotardo | 43.36 | 100.00 | ||||||
Brasnorte | 16.77 | 38.67 | ||||||
ETAU | 22.80 | 52.58 | ||||||
Mariana | 43.36 | 99.99 | ||||||
Transleste | 27.17 | 5.00 | ||||||
Transirapé | 26.67 | 5.00 | ||||||
Transudeste | 26.17 | 5.00 | ||||||
Centroeste | 51.00 | — | ||||||
Transchile | 49.00 | — | ||||||
This map illustrates the transmission assets of the Cemig Group:Brazilian electric sector.
Expansion of transmission capacity
The Itabirito 2–Vespasiano 2 Transmission Line – Taesa was awarded this concession (Lot A) at ANEEL Auction 013/2013 in December 2013 – to build, operate and maintain the 52-mile, 500-kVItabirito 2–Vespasiano 2 transmission line, in Minas Gerais. Annual Permitted Revenue (RAP) is R$11 million. The project construction is scheduled for completion in 2017.
Distribution and purchasePurchase of electric powerElectric Power
Overview
Our distribution operation consists of transfers of electricityenergy from distribution substations to final consumers.customers. Our distribution network comprises a widespread network of overhead and underground lines and substations with voltages lower than 230 kV. We supply electricityenergy to small industrial consumers,customers, at the higher end of the voltage range, and to residential and commercial consumerscustomers at the lower end of the range.
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In 20152020, we invested approximately R$2051,273 million in the construction and acquisition of the property, plant and equipment needed to supply energy to our customers, expand and increase the capacity of our distribution system.
The following tables provide certain operating information pertaining to our distribution system, on the dates indicated:
Circuit length of distribution lines in miles – High voltage (from distribution substations to final customers) as of December 31, | ||||
Voltage of distribution lines | 2020 | 2019 | 2018 | |
| 161 kV | 30.25 | 30.25 | 30.25 | |
| 138 kV | 7,946.62 | 7,970.98 | 7,945.68 | |
| 69 kV | 2,223.91 | 2,221.78 | 2,221.78 | |
| 34.5 kV + 230 kV | 633.78 | 633.75 | 633.75 | |
| Total | 10,834.55 | 10,856.76 | 10,831.46 | |
| Circuit length of distribution lines in miles – High voltage (from distribution substations to final consumers) | ||||||||||||
| As of December 31, | ||||||||||||
Voltage of distribution lines | 2015 | 2014 | 2013 | |||||||||
161 kV | 33.86 | 34.20 | 34.20 | |||||||||
138 kV | 7,531.71 | 7,321.72 | 7,271.70 | |||||||||
69 kV | 2,605.43 | 3,088.90 | 3,088.90 | |||||||||
34.5 kV + Others | 594.97 | 609.40 | 609.40 | |||||||||
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Total | 10,765.97 | 11,054.22 | 11,004.20 | |||||||||
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Circuit length of distribution lines in miles – Medium and low voltage (from distribution substations to final customers) | ||||
As of December 31, | ||||
Voltage of distribution network | 2020 | 2019 | 2018 | |
| Overhead urban distribution lines. | 67,527.30 | 66,223.50 | 65,999.52 | |
| Underground urban distribution lines | 1,524.16 | 1,539.70 | 1,535.05 | |
| Overhead rural distribution lines | 259,200.32 | 256,819.88 | 255,024.50 | |
| Total | 328,251.78 | 324,583.08 | 322,559.07 | |
| Circuit length of distribution lines in miles – Medium and low voltage (from distribution substations to final consumers) | ||||||||||||
| As of December 31, | ||||||||||||
Voltage of distribution network | 2015 | 2014 | 2013 | |||||||||
Overhead urban distribution lines | 63,334.64 | 62,020.26 | 60,682.25 | |||||||||
Underground urban distribution lines | 426.90 | 426.97 | 426.90 | |||||||||
Overhead rural distribution lines | 244,904.15 | 242,998.48 | 241,122.49 | |||||||||
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Total | 308,665.69 | 305,445.63 | 302,231.64 | |||||||||
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| Step-down transformation capacity (1) of distribution substations | ||||||||||||
| As of December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
Number of substations | 388 | 374 | 373 | |||||||||
MVA | 10,099.18 | 9,585.50 | 9,365.60 | |||||||||
Step-down transformation capacity (1) of distribution substations as of December 31, | |||
2020 | 2019 | 2018 | |
| Number of substations | 414 | 409 | 405 |
| MVA | 10,884.05 | 10,742.00 | 10,681.35 |
| (1) | Step-down transformation capacity refers to the ability of a transformer to receive energy at a certain voltage and release it at a reduced voltage for further distribution. |
Expansion of Distribution Capacity
Our distribution expansion plan for the nextperiod of five years, comprising from 2018/ 2022, is based on projections of market growth. In the next five years, we anticipate an increase of approximately 1.25 million new urban consumers and approximately 59,500 rural consumers. In order to accommodate this growth, we expect that we will needplan to add 247,160 medium-voltage poles, 578on distribution lines, up to 7,389 miles of transmission linesmedium and 15low-voltage, and 1,838 miles of high-voltage; 80 step-down substations, adding 1,1232,150 MVA to our distribution network.
Purchase of Electric Power
During the year ended December 31, 20152020, we purchased 6,1895,835 GWh of electricityenergy from Itaipu, which represented approximately 23%15% of the electricityenergy we sold to final users, and 663610 GWh (3%(1.6%) of electricityenergy from Proinfa.PROINFA. We also purchased 1,1041,091 GWh under Nuclear Energy Quota Contracts (- Contratos de Cotas de Energia Nuclear,or CCENs), 4%‘CCENs’. (2.8%) and 7,7307,507 GWh of electricityenergy under Assured Energy Quota Contracts (- Contratos de Cota de Garantia Física,or CCGFs, 29%‘CCGFs’. (19%). In addition to this compulsory purchase, we have two other types of supply arrangements: (i) purchases through public auctions, which accounted for approximately 63%24% of the electricityenergy purchased for resale during the year ended December 31, 2015;2020; and (ii) long-term agreements existing prior to the New Industry Model Law, which represented approximately 6%2% of the electricityenergy purchased in 2015.2020.
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Itaipu — Itaipu is one of the largest operational hydroelectric plants in the world, with an installed capacity of 14,000 MW. Centrais Elétricas Brasileiras S.A. (‘Eletrobras’), or Eletrobrás, a holding company controlled by the Federal Government, owns a 50% interest in Itaipu, while the remaining 50% is owned by the government of Paraguay owns the remaining 50%. Brazil, pursuant to its 1973 treaty with Paraguay, has the option to purchase all of the electricityenergy generated by Itaipu that is not consumed by Paraguay,Paraguay. Brazil generally purchases more than 95% of the electricityenergy generated by Itaipu.
We are one of the power distribution companiesdistributors operating in the south, southeast and west-central regions of Brazil that are jointly required to purchase all of Brazil’s portion of the electricityenergy generated by Itaipu, in accordance with the Law No. 5,899/1973. The Federal Government allocates Brazil’s portion of Itaipu’s power among these electricityenergy companies in amounts proportionate to their respective historical market share of total electricityenergy sales. ANEEL enacted Resolution 1,386/2012No. 2,178/2016, which set 13.31%10.39% as the percentage the totalof Itaipu’s power produced by Itaipuproduction bestowed upon CCEE that Cemig DistributionCEMIG D would have to purchase in 2013,2017. For 2018, Resolution No. 2,355/2017 set it at 10.09% and for 2019 it was set at 10.03% (Resolution No. 2,500/2018). For 2020 the Resolution no 2,642/2019 set it at 10.32% for CEMIG-D. These rates that are fixed to defray Itaipu’s operating expenses and payments of principal and interest on Itaipu’s dollar-denominated borrowings and the cost inreaisReais of transmitting such power to the Brazilian grid. These rates are above the national average for bulk supply of power and are calculated in U.S. dollars. Therefore, fluctuations in the U.S. dollar/realReal exchange rate affect the cost, in realReal terms, of electricityenergy we are required to purchase from Itaipu. Historically, we have been able to recover the cost of such electricityenergy by charging supply rates to consumers.customers. According to our concession contract, increases in the supply rates may be transferred to the final consumercustomer upon approval by ANEEL.
Since 2007, ANEEL publishes at the end of each year the amount of electricityenergy to be purchased from Itaipu by each of the electric power distribution companiesdistributors for the following year, as guidance for the five subsequent years. Based on this, the distribution companiesdistributors can estimate their remaining energy needs in advance of the next public auctions.
Nuclear Energy Quota Contracts (CCENs):CCENs: These are contracts that formalize the purchase of energy and power as established in Law No. 12,111/200909 and REN N°ANEEL Resolution No. 530/201212 between distributors and Electronuclear for the energy produced by the Angra I and Angra II plants.
Assured Energy Quota Contracts (CCGFs):CCGFs: Decree No. 7,805/201212 regulated Provisional Measure (PM)Act No. 579/201212 and created contractual arrangements governing contracting of energy and power from the plants whose concessions were extended under Law No. 12,783/2013.13.
Auction Contracts —We: We have purchased electricityenergy in public auctions on the CCEE. These contracts are formalized between CemigCEMIG and the various vendors in accordance with the terms and conditions in the invitation to bid. The following table gives the amounts of electricity contracted, and average original tariff and prices related to the CCEAR contracts for electricity acquired by Cemig. See “—The Brazilian Power Industry” for more information on CCEEs and CCEARs.
Average Tariff (R$/MWh) 83.13 106.95 132.27 114.28 126.77 129.26 132.39 115.05 134.99 121.81 138.85 134.67 120.86 137.44 128.42 129.14 128.37 78.87 77.97 102.00 80.10 262.00 270.81 99.48 67.31 129.70 121 133.29 117.51 135.58 96.28 119.03 121.00 129.96 161.89 205.19 136.00 183.66 278.46 205.01 212.75 181.14 Electricity Contracted
(MW —average per year) Term of the
Contract 105.47 2005 to 2012 4.47 2006 to 2013 35.31 2008 to 2015 3.16 2012 to 2014 60.41 2008 to 2037 40.36 2008 to 2022 31.02 2009 to 2038 91.77 2009 to 2038 20.12 2009 to 2023 88.98 2009 to 2023 61.23 2010 to 2039 431.17 2010 to 2039 24.71 2010 to 2024 23.24 2010 to 2024 63.89 2010 to 2024 56.57 2011 to 2040 126.34 2011 to 2025 122.83 2011 to 2025 457.75 2012 to 2041 52.76 2012 to 2026 336.40 2012 to 2041 27.00 2015 to 2044 69.03 2014 to 2044 46.80 2014 to 2033 136.73 2015 to 2044 25.09 2015 to 2044 15.68 2016 to 2035 32.13 2018 to 2047 16.27 2018 to 2037 19.30 2018 to 2047 16.41 2018 to 2037 2.62 2018 to 2042 15.68 2017 to 2046 32.13 2017 to 2036 3.20 2019 to 2048 311.11 2019 to 2043 56.06 2019 to 2038 4.94 2020 to 2049 23.21 2020 to 2044 0.535 2018 to 2047 0.701 2018 to 2037 3.843 2018 to 2037
‘Bilateral Contracts’ — Cemig DistributionCEMIG D entered into ‘bilateral contracts’ with various suppliers prior to the enactment of the New Industry Model Law in 2004. Such agreements are valid under their original terms but cannot be renewed. During the year endingended December 31, 2015 Cemig Distribution purchased 1,644 GWh under these contracts, which represented 6% of the total electricity purchased by Cemig Distribution in 2015.
Other businessesBusinesses
Natural gas distributionGas Distribution
Gasmig was established in Minas Gerais, Brazil, in 1986, for the purpose of developing and implementing the distribution of natural gas in the State of Minas Gerais. CemigCEMIG holds 99.57% of the shares of Gasmig and the remaining shares are owned by the Municipality of Belo Horizonte.
On August 25, 2004 Cemig, Gasmig, Gaspetro and Petrobras signed an Association Agreement, later amended on November 5, 2004, December 14, 2004 and August 15, 2007, forHorizonte owns the implementation of a plan to develop the natural gas market in the State of Minas Gerais. The plan provided for (i) the expansion of the existing gas pipeline network, under the responsibility of Petrobras, (ii) the expansion of the natural gas distribution network, under the responsibility of Gasmig, and (iii) the acquisition by Gaspetro of equity in Gasmig.
On October 10, 2014, a share purchase agreement was signed for acquisition by Cemig of Gaspetro’s 40% interest in Gasmig (previously approved by the Boards of Directors of Cemig and Petrobras), for R$570.93 million. This amount was the result of monetary update of R$600 million by the IGP–M inflation index, after discounting of the dividends paid, over the period from the base-date of the agreement to the closing of the transaction. The acquisition was completed after approval by the Brazilian Monopolies Authority (Conselho Administrativo de Defesa Econômica, orCADE) and consent from the concession authority, the State of Minas Gerais.remaining shares.
In July 1995, the State Government granted Gasmig an exclusive 30-year concession (from(as from January 1993) for distribution of piped gas covering the entire State of Minas Gerais and consumerscustomers located within it. On December 26, 2014, the Second Amendment to the Concession Contract was signed. This document extended Gasmig’s concession for commercial operation of piped gas services for industrial, commercial, institutional and residential use in the State of Minas Gerais for 30 years. As a result, the expiration of this concession was extended from January 10, 2023, to January 10, 2053.
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Gasmig’s marketing efforts focus on its ability to provide a more economically efficient and environmentally friendly alternative to oil products, like diesel and liquefied petroleum gas (LPG)(‘LPG’), wood, wood products and charcoal. In 2015,From January to December 2020, Gasmig supplied approximately 3.92,584 million cubic meters of natural gas per day to 4,215 consumers61,414 customers in thirty fiveforty cities: 11195 large and medium-sized industrial plants, 2181,121 small industrial plants and commercial consumers,customers, 57 retail distribution stations supplying vehicle natural gas (VNG) to vehicles, two thermoelectric electricity generation plants, three co-generation projects, four distributors of compressed natural gas (CNG),(‘CNG’) to vehicles, 2 gas fired power generation plants, 5 co-generation projects, 4 distributors of CNG to industrial customers and 3,820 homes. In 2015vehicular retail stations, and 60,128 homes, 2 thermoelectric plants.
From January to December 2020, Gasmig distributed approximately 4% of all natural gas distributed in Brazil.
Currently, Gasmig serves the following regions of the State of Minas Gerais: (i) Greater Belo Horizonte (the Metropolitan Region), (ii) the Rio Doce region (Vale do Aço), (iii) the South of Minas region (theSul de Minasregion), (iv) theZona da Mata region (in the southeast of the State), and (v) the Campos das Vertentes region – in all of them supplying the industrial, commercial, automotive, residential, co-generation markets, and thermoelectric power plants.
For distribution to the market other than thermoelectric electricity generation, Gasmig hasregistered an Additional Supply Contract (Contrato de Suprimento Adicional, orCSA) with Petrobras, signed on December 15, 2004, in effect until 2030 and with a sliding supply level rising to 5 million m³/day in 2018. In 2015 the Contractual Quantity was 4.02 million m³/day. There was previously another gas supply contractexpense for the non-thermoelectric market, referred to as the ‘Contrato Convencional’ (or “Contract Agreement”), signed on July 6, 1994, which was dissolved in 2013. The remaining balance of quantity of gas paid for under that contract was recovered during the year 2014.
For supply of gas to the thermoelectric plants, Gasmig has contracts for a total of 1.6 million m³/day, in effect until 2022.
The sales tariffs consist of a full pass-through of the cost of the acquisition of gas of R$1,083 million compared to an expense of R$1,436 million in the gas, plusperiod from January to December 2019, a reduction of 24.58%. Although the number of customers has increased 18.18% (mainly residential), the volumes have decreased 4% and 28% for industrial plants and retail distribution cost (margin) and taxes.
Capital expendituresstations supplying Compressed Natural Gas (‘CNG’) to vehicles respectively mainly due to pandemic negative side effects in 2013 and 2014, totaling R$117.93 million, was focused on expansion and densification of the existing networks, with a focus on serving the residential market. In 2015, capital expenditures totaled R$62 million and maintained a focus on serving the residential market, and 51.4 kilometers were added to our natural gas network.that sector.
Many energy-intensive industries, such as cement, steel, ferro-alloysiron-alloys and metallurgical plants, operate at significant volume in Minas Gerais. Gasmig’s principal strategy is expansion of its distribution network to cover the part of demand that has not yet been met. Gasmig dedicates efforts to development of new projects for expansion of its natural gas distribution system, to supply consumerscustomers in other areas of Minas Gerais, especially those that are densely industrialized. The first phase of service
From January to theVale do Aço region was completed in 2006. Also in 2006,December 2020, capital expenditures totaled R$42.6 million and 67.68 kilometers were added to our natural gas network. In 2018, Gasmig began to provide service tosupply theSul residential market in the city of Juiz de Minas region throughFora, built the pipeline for supplying a local network supplied with liquefiednew large industrial plant at the city of Jacutinga and acquired the site in which the operational center is located.
In the city of Belo Horizonte, the main projects developed were those aimed at serving the Urban Market. High Density Polyethylene (‘HDPE’) densification networks were implemented in the São Pedro, Santo Antônio, Luxembourg, Prado and Cidade Nova neighborhoods.
Gas distribution concessions
The concessions for distribution of natural gas (LNG).are granted by each Brazilian state. In 2009, after Petrobras completed the state of Minas Gerais the regulator, the State’s Economic Development Secretariat, sets the tariffs for natural gas pipelinesby market segment. The tariffs are comprised of a portion for the cost of gas and a portion for the distribution of gas. Each quarter the tariffs are adjusted to pass through the cost of gas, and once a year they are adjusted to update the portion allocated to cover the costs relating to the provision of the distribution service – remuneration of invested capital and to cover all the operating, commercial and administrative expenses of the concession holder.
The rate reviews occur every five years, from the end of the first cycle, from 2018 to 2022, to evaluate the changes in the costs of Gasmig, and to adjust the tariffs. The concession contract also specifies the possibility of an extraordinary review of tariffs if any event occurs that transportputs the economic-financial balance of the concession at risk.
On December 14, 2018, the Minas Gerais State Department for Economic, Scientific, Technological and Higher Education Development (‘Sedectes’ actually ‘SEDE’) or (‘the grantor’) presented a study, prepared by Fundação Getulio Vargas Business school (‘FGV’), related to financial economic rebalancing of the Gasmig concession agreement, also supported by consultation from General Attorney’s Office of the State. The rebalancing that has been requested by the grantor is based on the contractual obligation to build a gas from Paulínia, State of São Paulo,pipeline to Jacutinga,serve the Nitrogen Fertilizers Unit (UFN), which should have been built by Petrobras. Due to this reason Gasmig was requested to pay the State of Minas Gerais the local networks were connectedamount of which Sedectes estimates at R$852 million. Based on the study, SEDECTES requested a response from Gasmig and began discussion for solution related to imbalance referred to, considering that one of its conditions for extension of the concession contract (from 2023 to 2053, as specified in the second amendment to the nationalcontract) was execution of investments for construction of the gas transport network. In 2010pipeline.
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On September 19, 2019, the second phase of providing service toCompany entered into, with theVale do Aço region was completed.
In 2013, Gasmig began distributing natural gas to residential and small commercial consumers in the municipalities of Nova Lima, Belo Horizonte and Poços de Caldas.
Through a structuring project in 2013, Gasmig began to serve the municipalities of Governador Valadares and Itabira, from a facility to supply compressed natural gas (CNG) in the municipality of Ipatinga. In 2014 Gasmig began to service the municipality of Pouso Alegre through another structured project supplied with liquefied natural gas (LNG).
Natural gas exploration
Cemig, in partnership with other companies, won in the 10th Brazilian Round, promoted by the National Agency of Oil, Natural Gas and Biofuels (Agência Nacional do Petróleo, Gás Natural e Biocombustíveis) – ANP, in December 2008, the concession rights for natural gas exploration in four blocks in the São Francisco Basin, one block in the Recôncavo Basin, and one block in the Potiguar Basin, located in the states State of Minas Gerais, Bahiaas Grantor, the Third Amendment to the Concession Agreement for Industrial, Institutional and Rio Grande do Norte, respectively.
Block POT-T-603Residential Exploration of Piped Gas Services in the Potiguar Basin was given back to ANP afterState of Minas Gerais, which represents the conclusion of all planned activities, which demonstrated the absenceeconomic and financial rebalancing process of hydrocarbon that could be commercially produced.
Cemig hasthe concession contract, upon payment of a stakegrant fee in the following consortia:amount of R$852 million, updated from January 1, 2019 to the date of its payment at by the DI rate (Interbank Deposits, extra group) and ensures that Gasmig maintains the extension of the term of its concession until the year 2053.
On September 26, 2019, the Company issued Commercial Promissory Notes, in a single series, totaling R$850 million with a maturity of 12 months and interest of 107% of the DI rate, without any guarantees or endorsement. The activities committedproceeds from this issue were fully used, on September 26, 2019, to pay the granting bonus due to the Granting Authority updated by the variation of the DI rate since January 1, 2019 in the concession agreement are in progress,amount of R$891.2 million.
Also under Third Amendment to the Concession Agreement, the total amount paid for the compensatory grant will be added to the Company's asset remuneration base and include geological studies to assess the real potential to produce natural gasconsidered in the region. Those studies encompass seismic acquisition, surface geochemical survey, drilling of exploratory wells and rock petrophysical evaluation, among others, CEMIG’s projected investment is not expectedtariff review process by the grantor as an intangible asset to exceed R$30 million in the exploratory phase.
Atbe amortized until the end of the exploratory phaseconcession contract, with immediate effects on the consortia will decide to move on tosetting and review of tariffs.
With the development and production phase, if previous assessment demonstrates thatconclusion of Gasmig's First Periodic Tariff Review (1st RTP), in November 2019, SEDE confirmed the resources eventually identified have technical and economic feasibility for production.
Telecommunications, internet and cable television
Cemig Telecomunicações S.A. – CEMIGTelecom (“CEMIGTelecom”) is a Corporation registered for listing, a wholly owned subsidiaryinclusion of Companhia Energética de Minas Gerais S.A. – CEMIG. It offers an optical network for transport of telecommunications servicesthe grant bonus in the state of Minas Gerais using Cemig’s electricity transmissionregulatory asset base. The review resulted in guidance on investment and distribution infrastructure.
It is domiciled in Brazil, with its address at Rua dos Inconfidentes 1051—Térreo, Funcionários, Belo Horizonte, Minas Gerais. It has authorization from the Brazilian telecoms regulator, the National Telecommunications Agency (Agência Nacional de Telecomunicações, orAnatel), granted by Anatel Act No. 41.002 of December 3, 2003, for commercial operation of multimedia communications services, for an undefined period.
It was constituted on January 13, 1999, in partnership with AES Força Empreendimentos Ltda., a memberquality goals, service expansion and definition of the AES Corporation Group, and at that time was given the name Empresa de Infovias S.A. Its purpose is to provide servicesnew tariff design, offered by Gasmig, in the area2018 to 2022 cycle.
Among the approved changes is the creation of telecommunications, through an integrated system comprising fiber optic cables, coaxial cablesnew tariff classes, new consumption ranges, absorption of customers from other classes and electronic and associated equipment, for transmission, broadcasting and reception of symbols, characters, written signals, images, sound and information of any type, and also to provide telecoms serviceschanges in the wholesalecollection cascades, in order to meet market creating specialized circuits, in particular to other telecommunications companies such as fixed-linedemands and mobile telephone operators, and providerssimplify the classification of services such as cable TV, business carrier signals, data centers, broadband, etc.
CemigTelecom’s core business is provision of telecommunications servicescustomers in the operator segment,respective categories. The proposed new tariff design includes the following categories: Industrial, Commercial and provision of specialized services to the corporate market, providing networkIndustrial with lower consumption, Individual Residential, Residential Collective, Cogeneration, Thermoelectric, Compressed Natural Gas or Liquefied Natural Gas and Internet access connectivity solutions. It provides the largest optical network for telecommunications transport services in Minas Gerais, with a presence in more than 70 cities of the State, which contribute to approximately 90% of the State’s GDP. Also, in its expansion project, it makes optical network services available in the metropolitan regions of Salvador, Recife, Goiânia and Fortaleza, and has presence in the cities of São Paulo e Rio de Janeiro.Natural Gas.
CemigTelecom has a 19.6% interest in the joint venture Ativas Data Center S.A. (“Ativas”). Management and principal decisions are shared with an investor partner, governed by a stockholders’ agreement.
The corporate purpose of Ativas is the provision of ITC – Information and Communication Technology – infrastructure services. These comprise physical hosting of IT environments, database and site backup, storage, professional information security and availability services, ITC consultancy, connectivity and sale of access and Internet bandwidth. The construction of the data center, classified in category “Tier III” (by the Uptime Institute), to serve large and medium-sized corporations, was concluded in January 2011.
Consulting and Other servicesServices
CreatedCEMIG SIM was created in October 2019, as before the company Efficientia, to operate in the markets of: distributed generation, energy efficiency and energy solutions. As well as the branding and marketing strategy focused on the retail sector, and on digital transformation of the electricity sector, the organizational culture of SIM, which has a wholly-owned subsidiarystrong character of innovation and technology, is being constructed so that clients are always at the center of decisions.
In 2019, CEMIG SIM sold supply totaling 2,656 MWh/month, generated by three photovoltaic plants (the Janaúba, Corinto, Manga, Mirabela, Porteirinha I and Porteirinha II plants). CEMIG SIM achieved 810 clients as of December 31, 2019.
In 2020, CEMIG SIM sold supply totaling 3,962 MWh/month, generated by ten photovoltaic plants (the Janaúba, Corinto, Manga, Bonfinópolis II, Lagoa Grande, Lontra, Mato Verde, Mirabela, Porteirinha I and Porteirinha II plants). CEMIG SIM achieved 2,024 clients as of December 31, 2020.
In energy solutions, CEMIG SIM will operate in 2002, Efficentia S.A., a Brazilian sociedade por ações, created and implemented its own business model, launching an2021 in implementation of projects based on performance contracts, with reflects an innovative approach to the implementation of projectsphotovoltaic plants at medium-voltage clients, and also in the Brazilian market. The principal source of revenue for Efficientia has been the implementation of energy efficiency projects through performance contracts. Sixty such projects have already been implemented.
In 2015, Efficientia entered into contracts with customers in the industrial and services sectorsprojects. Business models are also being developed for the implementation of projects for the modernization of lightingmarkets of: energy storage, electric vehicles, and photovoltaic power generation systems, as listed below:cogeneration.
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Energy efficiency projects implemented by the Efficientia, promote effective energy savings, provide for the reduction of power usage during peak hours, as well as providing management of electricity demand.
In addition, the photovoltaic power generation projects developed by Efficientia are configured as investments in distributed energy generation. In 2015, contracts were entered into by Efficientia for the supply of photovoltaic generation systems with respect to the following projects:
Sale and tradingTrading of electricityEnergy
We provide services related to the sale and trading of electricityenergy in the Brazilian electricityenergy sector, such as evaluation of scenarios, representation of consumerscustomers in the CCEE, (Câmara de Comercialização de Energia Elétrica), structuring and intermediating of electricityenergy purchase and sale transactions, and consultancy and advisory services, besides services related to the purchase and sale of electricityenergy in the Free Market through our wholly-owned subsidiary companies CemigCEMIG Trading S.A., ESCEE (Empresa and Empresa de Serviços de Comercialização de Energia Elétrica S.A.) and CCEI (Cemig Comercialização de Energia Incentivada S.A. (‘ESCEE’).
Energy lossesLosses
CEMIG
The total recorded by CemigCEMIG as electricityenergy losses has two components: (i) an allocated portion of the losses arising in the National Grid; and (ii) the total of technical and non-technical losses (commercial losses) in the local distribution network of Cemig Distribution (Cemig D).CEMIG D.
As shown in the table of Cemig’s Electric Energy Balance, theThe total energy losses recorded by CemigCEMIG in the year of 2015 were 6,4612020 was 7,012 GWh, an increase of 2.9%a 7.2 % decrease in comparison to 2014.2019 (7,554 GWh). The Electricity Trading Chamber (CCEE)CCEE apportioned losses in the national grid totaling 528467 GWh to Cemig Distribution. The otherCEMIG D. Other energy losses, totaling 5,9336,545 GWh, include technical and non-technical losses in the local distribution system.
Technical losses were approximately 76.0%70% of the total losses related to Cemig DistributionCEMIG D for the year ended December 31, 2015.2020. Losses in distribution are inevitable as a resultbecause of transport of electricityenergy and its transformation betweeninto different levels of voltage. We seek to minimize technical losses by rigorous and regular assessments of the operational conditions of the distribution facilities, and investment to expand distribution capacity, for the purpose of maintaining quality and reliabilityreliable levels, thus reducing technical losses; we also operate the system in accordance with certain specific voltage levels, to reduce the level of losses. Technical losses are not strictly comparable: longer distribution distances (for example, in countryrural areas), naturally have higher technical loss levels.
Non-technical losses were approximately 24.0%30% of CemigCEMIG D’s total electricityenergy losses in 2015. They2020. Such losses are caused by consumercustomer fraud, illegal connections to the distribution network, and errors in metering and defects in meters. To minimize non-technical losses, preventive actions are taken regularly: consumers’customers’ meters and connections are inspected; meter readers are trained; metering systems are modernized; procedures for installation and inspection of meters are standardized; meters with quality control guarantees are installed; and the database of consumerscustomers is updated.
The non-technical losses of different distribution companiesdistributors can be partially comparable, taking into account the social complexities in the concession area and the effectiveness of efforts to combatprevent losses.
Quality indicators – DEC and FEC (SAIDI and SAIFI)
At the end of 2015,2020, the indicators that measure the quality of supply by CemigCEMIG D – (i) SAIDI (SystemSystem Average Interruption Duration Index)Index (‘SAIDI’), expressed as a figure per consumer,customer, in hours per year; and (ii) SAIFI (SystemSystem Average Interruption Frequency Index)Index (‘SAIFI’), also expressed as a consumer-experiencedcustomer-experienced average, were 11.549.64 and 5.88,5.05, respectively. In 2014,2019, the figures with respect to Cemig D for SAIDI and SAIFI were 10.7710.64 and 5.58,5.06, respectively. AtThe indicator calculation process is certified according to ISO Quality Standard 9001.
The result achieved in 2020 shows the endefficiency in the application of 2015,resources, as well as the SAIDIcommitment to continuous improvement and SAIFI for Light were 12.25 and 6.56, respectively, compared to 12.35 and 6.60 in 2014.customer service.
In the 12 months ending in December 2015, Light’s total losses totaled 8,766 GWh, or 23.2%CEMIG D signed the contractual amendment that unified its concession contracts for the provision of public electricity distribution services, which extended the concessions from January 1, 2016 until December 31, 2045. The contract defined limits for the internal portion of the total load, a reductioncontinuity indicators, Internal System Average Interruption Duration Index (‘SAIDI-i’) and Internal System Average Interruption Frequency Index (‘SAIFI-i’), and since 2016 CEMIG has been complying with the contract limits, as shown in the table below.
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SAIDI-i (hours) | SAIFI-i. (Interruption) | |||||||||
| Year | 2016 | 2017 | 2018 | 2019 | 2020 | 2016 | 2017 | 2018 | 2019 | 2020 |
| Limit | 11.62 | 11.32 | 11.03 | 10.73 | 10.44 | 8.12 | 7.76 | 7.39 | 7.03 | 6.67 |
| Performed | 11.57 | 11.18 | 10.42 | 10.56 | 9.58 | 5.37 | 5.44 | 5.13 | 4.85 | 4.86 |
In 2020, CEMIG did not exceed the limit for the SAIDI-i and SAIFI-i limit, and in the fifth year of 0.5 percentage pointsthe concession, the Company achieved the best result in its history, 9.58 hours, compared to the December 2014 index.limit of 10.44 hours set by the Regulator (‘ANEEL’).
Consumers and billing
Consumer base
The Cemigconcession contracts has limitation of in the distribution of dividends and/or payment of Interest on Equity to the minimum established by law, in the envent of non-compliance with the annual indicators for outages (SAIDI and SAIFI) for two consecutive years, or three times in a period of five years, until the regulatory parameters are restored. CEMIG D was non-complaint for three times in the past five years, and, in such circumstances, CEMIG D limited the amount of dividend and interest on equity, to 25% of net income.
Customers and Billing
Customer base
The CEMIG Group sells electricityenergy through the companies Cemig Distribuição (Cemig Distribution, referred to as “Cemig D”), Cemig Geração e Transmissão (Cemig Generation and Transmission, or “Cemig GT”),CEMIG D, CEMIG GT and other wholly-owned subsidiaries – Horizontes Energia, Termelétrica Ipatinga (until January 2015), Sá Carvalho, Termelétrica de Barreiro, CemigCEMIG PCH, Rosal Energia, CEMIG Geração Camargos, CEMIG Geração Itutinga, CEMIG Geração Salto Grande, CEMIG Geração Três Marias, CEMIG Geração Leste, CEMIG Geração Oeste, CEMIG Geração Sul, CE Praias de Parajuru and Cemig Capim Branco Energia (until March 2015).CE Volta do Rio.
This market comprises sales of electricityenergy to:
| Regulated customers in |
| · | Free |
| Other participants of the |
| · | Distributors, in the Regulated Market. |
In 2015, The Cemig Group traded2020, we sold a total of 56,90453,309 GWh, or 10.3%-1.52% less than in 2014.
The volume2019, while the total of electricity soldpower we transported for free customers was 3.8% higher, at 20,078 GWh. Sales of energy to final consumers,customers plus our own consumption in 2015,2020 totaled 46,07339,402 GWh, or 6.6%6.7% less than in 2014.
Electricity consumption in general, in 2015, was affected by the adverse Brazilian political and economic scenario and, in the captive market, by the successive increases in electricity tariffs, associated with application of the ‘tariff flag’ system – resulting in a significant increase in most consumers’ electricity bills.
2019. Sales to distributors, traders, generatorsother generating companies and independent power producers totaled 10,831in 2020-totaled 13,907 GWh in 2015 – or 23.4% less16.7% higher than 2014 (in volume).in 2019.
In December 20152020, CEMIG Group invoiced 8,698,095 customers – a growth of 1.9% in the Cemig Group billed 8,079,771 clients. The figure is 0.9% higher thancustomer base in the year since December 2014.2019. Of this total, 8,079,719these, 8,697,714 are final consumers, or represent the Group’scustomers, including CEMIG’s own consumption,consumption; and 52381 are other agents ofin the Brazilian electricityenergy sector.
Sales to Final Consumers
ResidentialCustomers
Residential consumption, which accounts
The residential customer category accounted for 17.3%20.6% of theCEMIG’s energy sold by Cemigsales in 2015, totaled 9,8302020, totaling 10,981 GWh – or 1.8% less4.2% more than in 2014.
A lower consumption by households can be attributed to a hike in electricity rates paid by consumers, including application of the ‘tariff flag’ rates in 2015. Also, there was a decrease in the real earnings of the population over the course of the 2015.
The2019 and average monthly consumption per consumercustomer in 20152020 was 126.5128.6 kWh/month, or 3.6% less2.0% more than in 2014 (131.22019 (126,1 kWh/month) – this was.
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This higher consumption by the first year-to-year reductionresidential customer category can be explained by the growth of 2.1% in this figure since 2008.the number of customers and also because people stayed at home more in 2020 due to the social distancing measures due to the Covid-19 pandemic.
Industrial
ElectricityIndustrial
Energy billed to regulated and free industrial customers with whom we have exclusive supply contracts (captive clients) and industrial customers with whom we do not have exclusive supply contracts (free industrial clients) in the State of Minas Gerais and other States, in 2015, represented 40.4%states was 23.9% of the total volume of electricity soldenergy traded by the Cemig Group during the year, and totaled 22,969us in 2020, at 12,731 GWh, or 11.7%14.4% less than in 2014.2019.
We attributeThis decline is the result of a 25.6% reduction in consumptionthe captive market, and a 12.3% reduction in the Free Market.
This category was strongly affected by this client categorythe crisis caused by the Covid-19 pandemic.
In the captive market the number of customers was 1.2% lower than in 2019, a reduction of 350 customers. This reduction is due to the following factors:migration of customers to the free market and a reclassification of customers to other classes (registration adequacy process).
Commercial and Services
ElectricityEnergy sold to captiveregulated and free consumerscustomers in this category in Minas Gerais and other States of Brazil, totaled 6,433 GWh., which represented 11.3% of the total volume sold by the Cemig Group in 2015 – 0.6% higher than in 2014.
The increase with respect to this category is attributed with:
The lower consumption by captive clients reflects a lower number of consumers invoiced, as some commercial establishments and services ceased to trade, in our view due either to the reduction of economic activity or to consumers taking measures to reduce electricity consumption due to its increased cost during the year.
The increase of consumption by our free consumer clients is associated with 25 contracts for incentive-bearing supply entered into between Cemig and Free Consumers, mainly in States other than Minas Gerais.
Rural consumers
Consumption by Rural Consumers totaled 3,380 GWh, in 2015, which represents 5.9%states was 16.1% of the total volume of electricity soldenergy traded by Cemigus in that year, or 0.3% lower in terms of volume than in 2014. Consumption by irrigation users was down 1.9% year to year, and use in agriculture and the raising of livestock was up 0.6%.
The lower consumption was due to a lesser use of irrigation systems and higher prices of electricity in 2015, which affected production costs.
Other consumer categories
The total of electricity sold to the other consumer categories – Public Authorities, Public Lighting, Public Services, and the Company’s own consumption totaled 3,4602020, at 8,571 GWh, or 1.1%8.2% less than in 2014.2019. This reflects a decrease of 15.9% in the volume billed to regulated customers of CEMIG D, and an increase of 1.6% in the volume billed by CEMIG GT and its wholly owned subsidiaries to free customers in Minas Gerais and other Brazilian states.
The main factor that explains the behavior of the commercial category is the reflection of the restrictions and measures of social distancing caused by the Covid-19 pandemic. In the captive market the migration of customers to the free market and to distributed microgeneration also contributed to the reduction. The free market grew due to the increase in customers.
Rural Customers
Energy consumed by the rural customer category in 2020, at 3,766 GWh, was 0.8% less than in 2019, and 7.1% of the total in 2020.
Other customer categories
Supply to other categories – government, public lighting, public services, and our own consumption – totaled 3,353 GWh in 2020 or 8.7% less than in 2019. In the public lighting category, there was an impact of an adjustment made in the billing calendar (ANEEL – Resolution nº 888/2020) and the insertion of LED lamps is some cities.
Sales in the Free Market, and ‘Bilateral Contracts’
TotalIn 2020, total sales of energy were 11,808 GWh, or 20.3% higher than in 2019.
At CEMIG GT there was a higher volume of short-term sales to traders in the first months of 2020, aiming redeeming part of the high credit that a company has at CCEE. In addition, there were also sales acquired with supply in the second half of 2020, with the expectation of recovering part of the reduction caused by the Cemig Groupdrop in the Free Market, in 2015, totaled 6,579 GWh, or 25.2% lower than in 2014 as a result of the termination of some contracts.consumption by free customers.
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Sales in the Regulated Market
Sales in the Regulated Market during 2015, were 20.5% lowerin 2020 totaled 2,099 GWh or 0.4% less than in 2014 as a result of the termination of contracts related to Regulated Market auctions held by Aneel in 2011, which had been entered into between Cemig GT and distributors for supply of electricity from 2012 to 2014.2019.
In 2015, Cemig GT participated in the 18th Adjustment Auction, with sales of supply for delivery in the first half of 2015, partially offsetting the reduction in other sales to the Regulated Market.
Sales of electricity generated by Cemig GT in 2015 were affected by the termination of generation plant concessions. This supply was redirected to the Physical Guarantee Quota mode and to settlement in the spot market.
The tablestable below show the Cemigpresents CEMIG Group’s market in more detail, itemizing transactions in 20152020 compared with 2014:to 2019:
| Type of Sale | 2020 | 2019 | Variation YoY | |||||||
| Customers | Energy | Customers | Energy | Customers | Energy | |||||
Amount (un) | Participation (%) | Amount (GWh) | Participation (%) | Amount (un) | Participation (%) | Amount (GWh) | Participation (%) | Variation (%) | Variation (%) | |
| Traded Energy | 8,698,095 | 100.00 | 53,309 | 100.00 | 8,537,540 | 100.00 | 54,134 | 100.00 | 1.88 | -1.52 |
| Sales to final customers | 8,697,006 | 99.99 | 39,368 | 73.85 | 8,536,459 | 99.99 | 42,176 | 79.13 | 1.88 | -6.66 |
| Residential | 7,113,837 | 81.79 | 10,981 | 20.60 | 6,966,696 | 81.60 | 10,538 | 19.14 | 2.11 | 4.20 |
| Industrial | 30,630 | 0.35 | 12,731 | 23.88 | 30,657 | 0.36 | 14,873 | 29.11 | -0.09 | -14.40 |
| - Captive | 29,525 | 0.34 | 1,773 | 3.33 | 29,875 | 0.35 | 2,383 | 4.33 | -1.17 | -25.61 |
| - Free | 1,105 | 0.01 | 10,958 | 20.56 | 782 | 0.01 | 12,490 | 24.78 | 41.30 | -12.26 |
| Commercial | 778,119 | 8.95 | 8,571 | 16.08 | 806,602 | 9.45 | 9,335 | 17.38 | -3.53 | -8.19 |
| - Captive | 776,942 | 8.93 | 4,384 | 8.22 | 805,811 | 9.44 | 5,214 | 9.47 | -3.58 | -15.93 |
| - Free | 1,177 | 0.01 | 4,187 | 7.85 | 791 | 0.01 | 4,121 | 7.91 | 48.80 | 1.61 |
| Rural | 688,212 | 7.91 | 3,766 | 7.06 | 647,066 | 7.58 | 3,795 | 6.90 | 6.36 | -0.76 |
| - Captive | 688,201 | 7.91 | 3,749 | 7.03 | 647,064 | 7.58 | 3,792 | 6.89 | 6.36 | -1.13 |
| - Free | 11 | 0.00 | 17 | 0.03 | 2 | 0.00 | 3 | 0.01 | 450.00 | 453.45 |
| Other Categories | 86,208 | 0.99 | 3,319 | 6.23 | 85,438 | 1.00 | 3,634 | 6.60 | 0.90 | -8.67 |
| Own Consumption | 708 | 0.01 | 34 | 0.06 | 715 | 0.01 | 38 | 0.07 | -0.98 | -9.88 |
| Wholesale sales | 381 | 0.00 | 13,907 | 26.09 | 366 | 0.00 | 11,920 | 20.80 | 4.10 | 16.67 |
| - Contracts in Regulated Market | 27 | 0.00 | 2,099 | 3.94 | 27 | 0.00 | 2,108 | 3.83 | 0.00 | -0.44 |
| - Free and bilateral contracts | 354 | 0.00 | 11,808 | 22.15 | 339 | 0.00 | 9,812 | 16.97 | 4.42 | 20.35 |
Type of sale | 2015 | 2014 | Variation(%) | |||||||||||||||||||||||||||||||||||||
| Clients | Energy | Clients | Energy | Clients % | Energy % | |||||||||||||||||||||||||||||||||||
| Amount (units) | Participation (%) | Amount (MWh) | Participation (%) | Amount (units) | Participation (%) | Amount (MWh) | Participation (%) | |||||||||||||||||||||||||||||||||
Traded Energy | 8,079,771 | 100.0 | 56,903,594 | 100.0 | 8,008,205 | 100.0 | 63,470,475 | 100.0 | 0.9 | (10.3 | ) | |||||||||||||||||||||||||||||
Sales to final consumers | 8,078,963 | 100.0 | 46,034,739 | 8.9 | 8,007,405 | 100.0 | 49,286,776 | 77.7 | 0.9 | (6.6 | ) | |||||||||||||||||||||||||||||
Residential | 6,532,169 | 80.8 | 9,829,992 | 17.3 | 6,455,960 | 80.5 | 10,013,757 | 15.8 | 1.3 | (1.8 | ) | |||||||||||||||||||||||||||||
Industrial | 75,475 | 0.9 | 22,968,931 | 40.4 | 77,132 | 1.0 | 26,025,584 | 41.0 | (2.1 | ) | (11.7 | ) | ||||||||||||||||||||||||||||
Captive | 75,085 | 0.9 | 3,757,203 | 6.6 | 76,728 | 1.0 | 4,076,645 | 6.4 | (2.1 | ) | (7.8 | ) | ||||||||||||||||||||||||||||
Free | 390 | 0.0 | 19,211,728 | 33.8 | 404 | 0.0 | 21,948,939 | 34.6 | -3,5 | (12.5 | ) | |||||||||||||||||||||||||||||
Comercial | 714,433 | 8.8 | 6,433,728 | 11.3 | 719,955 | 9.0 | 6,395,473 | 10.1 | (0.8 | ) | 0.6 | |||||||||||||||||||||||||||||
Captive | 714,433 | 8.8 | 6,026,533 | 10.6 | 719,874 | 9.0 | 6,030,715 | 9.5 | (0.8 | ) | (0.1 | ) | ||||||||||||||||||||||||||||
Free | 106 | 0.0 | 407,194 | 0.7 | 81 | 0.0 | 364,758 | 0.6 | 30.9 | 11.6 | ||||||||||||||||||||||||||||||
Rural | 678,742 | 8.4 | 3,379,734 | 5.9 | 687,778 | 8.6 | 3,390,096 | 5.3 | (1.3 | ) | (0.3 | ) | ||||||||||||||||||||||||||||
Others | 78,038 | 1.0 | 3,422,354 | 6.0 | 76,58 | 1.0 | 3,461,865 | 5.5 | 1.9 | (1.1 | ) | |||||||||||||||||||||||||||||
Own Consumption | 756 | 0.0 | 37,661 | 0.1 | 748 | 0.0 | 37,59 | 0.1 | 1.1 | 0.2 | ||||||||||||||||||||||||||||||
Wholesale sales | 52 | 0.0 | 10,831,194 | 19.0 | 52 | 0.0 | 14,146,109 | 22.3 | 0.0 | (23.4 | ) | |||||||||||||||||||||||||||||
Sales on the CCEE | 46 | 0.0 | 4,252,099 | 7.5 | 35 | 0.0 | 5,346,833 | 8.4 | 31.4 | (20.5 | ) | |||||||||||||||||||||||||||||
Free and Bilateral Contracts | 6 | 0.0 | 6,579,095 | 11.6 | 17 | 0.0 | 8,799,275 | 13.9 | (64.7 | ) | (25.2 | ) | ||||||||||||||||||||||||||||
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This table showspresents the CemigCEMIG’s Group’s sales to the Industrial user category as a whole in 2015,2020, by sector of activity:
Sector of activity | Volume invoiced (GWh) | (%) |
| Mining | 1,940 | 15.2 |
| Foods | 1,769 | 13.9 |
| Metallurgy | 1,650 | 13.0 |
| Nonmetallic minerals | 1,469 | 11.5 |
| Chemicals | 1,014 | 8.0 |
| Plastic Products | 998 | 7.8 |
| Automotive | 808 | 6.4 |
| Textile | 654 | 5.1 |
| Cellulose and Paper | 425 | 3.3 |
| Other sectors | 2,002 | 15.7 |
| Total, industrial customers | 12,731 | 100.0 |
Sector of activity | Volume invoice, GWh | % | ||||||
Metallurgy | 6,163 | 26.8 | ||||||
Mining | 4,608 | 20.1 | ||||||
Non metallic minerals | 2,502 | 10.9 | ||||||
Foods | 1,869 | 8.1 | ||||||
Chemicals | 1,646 | 7.2 | ||||||
Automotive | 1,228 | 5.3 | ||||||
Machinery and equipment | 1,053 | 4.6 | ||||||
Plastic Products | 767 | 3.3 | ||||||
Textile | 673 | 2.9 | ||||||
Other sectors | 2,461 | 10.7 | ||||||
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Total, industrial consumers | 22,969 | 100 | ||||||
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The ten largest industrial clientscustomers served by the CemigCEMIG Group, located in Minas Gerais and other states of Brazil, in orderterms of revenue, are:
Customer | Activity | |
| ||
| Metallurgy and Mining | |
| Chemicals | |
| NOVELIS DO BRASIL | Metallurgy | |
| COMPANHIA BRAS DE METALURGIA E MINERACAO | Metallurgy |
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| ||
| ||
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| and Mining | |
| Non-metallic mineral product manufacturing | |
| WHITE MARTINS | Chemicals | |
| SAINT GOBAIN | Non-metallic mineral product manufacturing | |
| ANGLOGOLD ASHANTI | Metallic Mining | |
| Metallic Mining | |
| CIMENTO TUPI |
Billing
OurNormative Resolution 414/2010, published by the ANEEL, regulates billing of customers who have active supply contracts with CEMIG D, among other instruments.
According to the Resolution, consumption of energy, and other items charged, are billed monthly, billingbased on the voltage level delivered to the customer unit and payment procedures for the distributioninstalled load at that unit. ‘Installed load’ means the sum of electricity vary bythe nominal potentials of the electrical equipment installed in the customer unit that is in a condition to operate, expressed in kilowatts (‘kW’). ‘Customer unit’ means the group of items comprising installations, facilities, branch connection, electrical equipment, cables and accessories (including the substation, in cases of supply at primary voltage), with receipt of energy at only one point of delivery, and individualized metering corresponding to a single customer located in one single property or in contiguous properties.
CEMIG D’s customers are divided into Low, Medium and High Voltage.
Invoices of High voltage of supply. Our large-scale customers, which have direct connectionsare connected directly to ourthe transmission network, are generally billed withinpayable five working days after the reading of their meters and receiptthe meter. These customers receive the payment document – the energy invoice – by email.
Medium Voltage customers are those that receive supply at a voltage of their invoices by e-mail. Payment is required within five days of delivery of the bill.
Other customers who receive medium voltage electricity (approximately 13,780 consumers receive electricity at 2.3 kV or above)more, which amount to about 13,570 customers, which are billed within two business days ofafter the reading of their meters, with payment to be made at least five business days from delivery of the invoice. This group of consumersmeter reading. They receive their invoices both in printed form and by email.
In 2013 we completed the implementation of the meter reading automation for consumers who receive medium voltage electricity.
Our low-voltage customers are billed within five business days of the reading of their meters, with payment to be made at leastemail, payable five business days from the date of delivery at the customer’s address. Due to modernization and automation of the meter reading of these customer units, by using remote metering, CEMIG D now has approximately 96.34% of its billing automated. This enables the customer unit to be metered in Real time – so that CEMIG D records and updates consumption of energy at regular intervals.
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Low Voltage customers are billed in cycles, which vary between 27 and 33 days. The bill is delivered simultaneously with the meter reading. A total of 7,983 million customer units are billed using this technology, which is known as ‘On Site Billing’. These bills are payable five business days from the date of their invoice, ordelivery (or 10 business days after delivery of their bill infor the caseestablishments of public sector institutions. Billsentities and bodies). The great majority of the amounts billed to this category of customers are prepared from meter readings orfor energy actually consumed. Only 0.97% of these customers are billed based on estimated consumption.consumption (i.e., on the arithmetic mean of the amounts recorded for the 12 months prior to the consumption that is not measured).
We areIn addition to the implementation of ‘On Site Billing’, CEMIG D has invested to increase the number of bills sent by email, which grew by 54% in 2020, with approximately 471 thousand customers now receiving their billing online. CEMIG intensify campaigns to incentivize customers to choose this way of receiving their monthly bills. The reduction in the processvolume of implementingprinted-paper used for billing helps reduce its global cost to the modalityCompany and contributes to environmental sustainability for the planet.
In 2020, CEMIG D saved approximately R$918 thousand with the electronic invoices sent monthly. Modernization of immediate billing for low voltage consumers, with simultaneous reading and printing of invoices. We utilized thisthe billing system on approximately 5,022,074 customersand the distribution network has significantly contributed to customers’ satisfaction and the quality of CEMIG’s energy supply. CEMIG intends to continue with improvement in 2015this and we expect this number to be increased to 7,000,000 customers by the end of 2016.related fields.
In June 2013, we implemented the option for low-voltage residential clients to receive invoices by email. As of December 31, 2015, approximately 65,000 low-voltage residential customers were registered to receive their invoices by e-mail.
Seasonality
Cemig’sCEMIG’s sales of electricityenergy are affected by seasonality. Historically, consumption by industrial and commercial consumerscustomers increases in the fourth quarter due to their increase in activity. The seasonality of rural consumption is usually associated with rainfall periods. During the dry season between the months of May and November, more electricityenergy is used to irrigate crops. The table below showspresents quarterly figures for electricityenergy billed by the CemigCEMIG Group to final users, captive consumersregulated customers and Free Consumersfree customers from 20132018 to 2015,2020, in MWh:GWh:
Year | First Quarter | Second Quarter | Third Quarter | Fourth Quarter |
| 2020 | 10,119 | 9,267 | 9,754 | 10,227 |
| 2019 | 10,343 | 10,339 | 10,656 | 10,838 |
| 2018 | 10,309 | 11,090 | 11,014 | 11,110 |
Year | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
2015 | 11,698 | 11,343 | 11,323 | 11,707 | ||||||||||||
2014 | 11,963 | 12,242 | 12,435 | 12,683 | ||||||||||||
2013 | 10,805 | 11,125 | 11,545 | 11,918 | ||||||||||||
Competition
Contracts with Free ConsumersCustomers
On December 31, 2015 Cemig2020 CEMIG GT had a portfolio of contracts with 482 industrial and commercial Free Consumers, a decrease of 2.1% from December 2014.2,693 free customers. Of this total, 225 clients1,664 customers were located outside of the stateState of Minas Gerais, amounting to 34.5%59% of the total volume of electricityenergy sold by CemigCEMIG GT in 2015.2020.
The strategy adopted by CemigCEMIG in the Free Market is to negotiate and enter into long-durationlong-term contracts, thus establishing and maintaining a long-term relationship with clients.customers. We seek to differentiate ourselves in the free marketFree Market from our market competitors by the type of relationship we have with our customers and the quality of our services, which have added value for Cemig Generation and Transmission.CEMIG GT. This strategy, together with a sales strategy that seeks to minimize exposure to short-term prices and contracts with a minimum demand on a take-or-pay basis, translates into lower risk and greater predictability of the Company’sour results.
Concessions
We conduct the majority of our activities in generation, transmission and distribution of electricity through concession contracts executed with the Brazilian Federal Government. The Brazilian Constitution requires that all concessions for public services must be the subject of competitive tenders. In 1995, in an effort to implement these provisions of the Constitution, the Federal Government instituted certain laws and regulations, referred to collectively as the Concessions Law, which govern the procedures for competitive tenders in the electricity sector.
On September 22, 2004, while the rules established by Law No. 9,074 on July 7, 1995 were still in effect, we requested from Aneel an extension for 20 years of the concessions of the Emborcação and Nova Ponte Hydroelectric Plants. On January 14, 2007, the Federal Government approved the extension of these concessions for a period of 20 years from July 24, 2005 until July 24, 2025. The related concession contract was amended on October 22, 2008, to reflect the extension granted to Cemig GT.
On September 11, 2012, the Federal Government issued Provisional Measure 579 of 2012 (‘PM 579’), which became Law No. 12,783 of January 11, 2013 (“Law No. 12,783”), governing the extension of concessions granted before Law No. 9,074 of July 7, 1995 (“Law No. 9,074/1995”). Under PM 579, concessions granted before Law No. 9,074/1995 could be extended for a single time, for a period of up to 30 years.
On December 4, 2012, the Company signed the second amendment to transmission contract 006/1997, which extended the concessions under such contract for 30 years, in accordance with PM 579, beggining in January 1, 2013. This resulted in an adjustment to the Permitted Annual Revenue (‘RAP’) from these concessions, which will reduce the revenue which we will receive arising from those concessions. The Brazilian government has compensated us for the reduction of the RAP in part but the assets in operation before the year of 2000 have not yet been compensated. In accordance with Law No. 12,783, we are required to be compensated for the reduction of the RAP of the assets in operation before 2000, over a period of 30 years, the amounts being adjusted by the IPCA inflation index.
Also on December 4, 2012, the Company elected not to accept the extension of the generation concessions that expired in the years 2013 to 2017, namely Três Marias, Salto Grande, Itutinga, Volta Grande, Camargos, Peti, Piau, Gafanhoto, Tronqueiras, Joasal, Martins, Cajuru, Paciência, Marmelos, Dona Rita, Sumidouro, Poquim and Anil. In relation to the power plants which had their first extension of the related concessions after the issuance of PM 579, namely Jaguara, São Simão and Miranda, the Company believes that Generation Concession Contract 007/1997 enabled the Company to extend these concessions for a further 20 years, until 2033, 2035 and 2036, respectively, without restrictions.
Based on this understanding Cemig GT applied for a writ of mandamus against an act of the Mining and Energy Minister with the objective of ensuring its right to extend the concession of the Jaguara hydroelectric plant, pursuant to the terms of Clause 4 of Concession Contract 007/1997. The Company was granted an interim injunction on September 3, 2013, which is still in effect, to continue commercial operation of the Jaguara plant until a judgment was issued by the courts on the writ of mandamus. Judgment was issued on this action, denying Cemig GT’s writ of mandamus application. Before the result of that judgment was published, Cemig GT petitioned to the Federal Supreme Court (Supremo Tribunal Federal, or STF) seeking provisional remedy and asking for an interim injunction permitting it to continue operating and managing the plant. The interim injunction was granted on December 21, 2015, but the STF has not issued a final rulling on the provisional remedy yet.
In addition to the litigation relating to the Jaguara plant, Cemig GT has also applied for a writ of mandamus with respect to the São Simão plant against an act of the Mining and Energy Minister, in order to ensure its right to extend the concession of this plant.
The interim injunction originally obtained by the Company on December 19, 2014, to remain in control of commercial operation of the São Simão plant until the judgment on the writ of mandamus, was reviewed, and overturned, by the Reporting Judge on June 30, 2015. While this proceeding is ongoing, Cemig GT is still in control of the plant, and since September 2015 the power generated by the São Simão plant has been allocated to the Regulated Market and has been paid for under the ‘quota’ regime, whereby Cemig GT is entitled to receive an amount equal to the costs of operating and maintaining the plant and it subject to adjustments related to the performance of the generation of electricity, instead of being able to sell the energy in the Free Market. On September 23, 2016 Cemig GT appealed the reversal of the interim injunction to the Superior Court (Superior Tribunal de Justiça, or STJ), but there has been no judgement on the appeal yet, nor on the merits of the writ of mandamus.
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| Table of Contents |
For other hydroelectric plants, the concessions of which would expire for the second time by the year 2017, which include Três Marias, Salto Grande, Itutinga, Camargos, Piau, Gafanhoto, Peti, Tronqueiras, Joasal, Martins, Cajuru, Paciência, Marmelos, Dona Rita and Volta Grande,the company elected, in December 2012, not to accept the extension of their contracts under the terms of PM 579, and to continue to operate these facilities commercially until the termination of their respective concessions. As a result, with respect to the foregoing plants, with the exception of the Volta Grande plant, termination of the applicable concession occurred in July 2015.
During 2013 and 2014 Brazil experienced hydroelecrical shortages. A new regulatory framework was established by Provisional Measure 688/2015 (‘PM 688’), which became Law No. 13,203/2015. Among other matters, PM 688 and Law No. 13,203/2015 significantly altered Law No. 12,783/2013. Following publication of the tender documents for Generation Auction 12/2015 on October 7, 2015, which included the new regulatory provisions for renewal of concessions of existing plants stipulated by Law No. 13,203/2015, Cemig’s Board of Directors authorized our participation in Generation Auction 12/2015, and Cemig GT was successful at this auction, held at the BM&F Bovespa on November 25, 2015. Cemig won concessions for Lot D – which comprises the concessions for 18 hydroelectric plants: Três Marias, Salto Grande, Itutinga, Camargos, Cajuru, Gafanhoto, Martins, Marmelos, Joasal, Paciência, Piau, Coronel Domiciano, Tronqueiras, Peti, Dona Rita, Sinceridade, Neblina and Ervália. The total installed capacity of these plants is 699.5 MW, and their guaranteed basic offtake is 420.2 MW average.
These concession contracts have a period of 30 years beginning in January 2016 and expiring in January 2046 and, during the first half of 2016, were assigned by Cemig GT to 7 wholly-owned subsidiaries created for commercial operation of these concessions.
Distribution contracts: In relation to the extension of the distribution concession contracts, Cemig D, in accordance with Decree No. 7,805/2012 and Decree No. 8,461/2015, indicated acceptance of the extension of its concession contracts, and signed the Fifth Amendment to its Concession Contract in December 2015. This amendment guarantees extension of the foregoing concessions for a further 30 years from January 1, 2016 until January 2, 2046, but also requires the Company’s compliance with more stringent rules regarding service quality and with respect to the Company’s economic and financial sustainability, that must be met during the full 30 years of the concession.
Such compliance will be annually assessed by ANEEL, and if there is non-compliance the concession holder may be obliged to arrange for capital contributions by its controlling stockholders. Non-compliance for two consecutive years, or for a total of five non-consecutive years, will result in legal termination (caducidade) of the concession.
Raw materials
Fluvial water is the main raw material used by Cemig for hydroelectric generation of electricity. As of December 31, 2015, 79 of the group’s 108 plants use this source and provide 96% of our generation.
The cost of the water may be considered as nil, since water is a natural resource that comes from rivers and rain.
In a smaller proportion, the company also produces energy from wind (also with a nil cost) and in thermoelectric plants, burning fuel oil (the cost varies with the price of oil on the international market).
Environmental Matters
Overview
Our generation, transmission and distribution of electricityenergy and our distribution of natural gas are subject to federalfederal and statestate legislation relating to preservation of the environment. The Brazilian Constitution gives the federal government, statesFederal Government, states and municipalitiesmunicipalities powers to enact laws designed to protect the environment and issue enabling regulations under these laws. WhileGenerally, while the federal governmentFederal Government has the power to promulgate general environmental regulations, state governmentsstate governments have the power to enact specific and even more stringent environmental regulation and municipalitiesmunicipalities also have the power to enact laws in their local interest. A violator of Law No. 9,605/1998 – the Law on Environmental Crime (Lei de Crimes Ambientais) – may be subject to administrative and criminal sanctions, and willWe have an obligation to repair and/or provide compensation for environmental damages, Federal Decree No. 6,514/2008 specifies the penalties applicable to each type of environmental infraction, setting fines that vary between a minimum of R$50.00 and a maximum of R$50 million, as well as suspension of activities. Criminal sanctions applicable to legal entities may include fines and restriction of rights, whereas, for individuals, they may include imprisonment, which can be imposed against executive officers and employees of companies that commit environmental crimes.
We believe that we are in compliancecomplied with the relevant environmental laws and regulations in all material aspects.
In accordance with our environmental policy, we have established various programs to prevent and minimize damage, aiming to limit our risks related to environmental issues.
Management of vegetation in the electricityenergy system
The Environmental Management unitUnit of Cemig Distribution,CEMIG D, among other activities, develops methods and procedures for dealing with urban trees in relationthat are adjacent to distribution networks.the electric power system. Vegetation management is necessary due to the obligation to ensure the operational security of the system, and from the high number of interruptions in supply of electricityenergy caused by trees. In 2015,2020, trees were the cause of 39,328 electricityapproximately 33,010 energy supply outages, in both urban and rural areas, and were the fifthsixth largest cause of unscheduled outages in the Company’s distribution system.
Investments have been directed towards technical improvements in tree pruning, so that the process can take place in such a way as to reduce risks to the employee, the system and the population.or third parties. The interventions are carried out by directional pruning, a technique considered to be more appropriate for coexistence between large trees and electricityenergy distribution networks.
Through working partnerships between its own staff and external agents, CemigCEMIG has been developing digital applications to improve management of the process of handling vegetation and to reduce supply outages in urban areas. CemigCEMIG also has an initiativenew contracts to improve the handling of vegetation in power line pathways (its Integrated Vegetation Handling methodology) to reduce costs, improve the performance of the system and help improve environmental quality.
Environmental Licensing
The purpose of environmental licensing is to ensure the quality of life of the populationestablish conditions, restrictions and continuous monitoring of humanenvironmental control measures that should be complied with by entities and individuals to install, expand and operate entities or activities that generate impacts onuse environmental resources or have the potential to cause damage to the environment.
Brazilian law requires thatobtaining licenses be obtained for various activities, including construction, installation, expansion and operation of any facility that utilizesuses environmental resources, causes significant environmental degradation, or pollutespolluting degradation or has the potential to cause environmental degradation or pollution or to harm historic, cultural and archaeological heritage.
Failure to obtain and comply with the requirements of an environmental license to construct, implement, operate, expand or enlarge an enterpriseentity that causes significant environmental impact, such as the energy plants operated and in implementation by Cemig,CEMIG, is subject to administrative sanctions, such as thefines, suspension of activities and the payment of a fine, varying according to the competent authority,operations, as well as the before mentioned criminal sanctions, which include the payment of a fine,such as fines and imprisonment for individuals and restriction of rights for legal entities. We have projects licensed at both the federal and state levels.
The State of Minas Gerais
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Environmental Policy Council (Conselho de Política Ambiental) (“Copam”) Regulatory Ordinances No. 17, of December 17, 1996, and 23, of October 21, 1997, provide that operation licenses shall be renewed from time to time.Operating Licensing
The validity of the operational environmental licenses is controlled by a specific system and is verified annually.
Corrective Environmental Operation Licensing
Resolution No, 1, of January 23, 1986, issued by the National Environmental Council (Conselho Nacional do Meio Ambiente, or Conama), requires that environmental impact assessment studies be undertaken, and a corresponding environmental impact assessment report to be prepared, for all major electricity generation facilities built in Brazil after February 17, 1986. Facilities built prior to that year do not require these studies, but must obtain corrective environmental operation licenses, which can be acquired by filing a form containing specific information regarding the facility in question. Obtaining the corrective licenses for the projects which began operations before February 1986, under Resolution No. 6, of September 16, 1987, requires the presentation to the competent environmental body of an environmental report containing the characteristics of the project, the environmental impacts of the construction and operation, and also the mitigating and compensatory measures adopted or that are in the process of being adopted by the organization carrying out the project.
Federal Law No. 9,605, ofenacted on February 12, 1998, stipulates penalties for facilities that operate without environmental licenses. In 1998, the federal governmentFederal Government issued Provisional MeasureAct No. 1,710 (currently Provisional MeasureAct No. 2,163-41/2001)01), which allows project operators to enter into agreements with the relevant environmental regulators in order to comply with Federal Law No. 9,605/98. Accordingly, we have been negotiating with the Brazilian Environmental(i) IBAMA; and Renewable Natural Resources Institute (Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis, or Ibama) and(ii) the Regional Environmental Management Units (‘Suprams’Suprams’), which is the environmental authority of the State of Minas Gerais to obtain the corrective environmental operation licensingoperating licenses for all our plants and transmission lines that began operating prior to February 1986. We have agreed with
For theSupram to bring our generation facilities located in the State of Minas Gerais, which are subject to the environmental licensing under state level, we have agreed with Supram and IBAMA to bring our facilities into compliance on a gradual basis. We do not currently anticipate any costs and commitments in connection with any recommendations that may be made by Ibama and by theSuprams.
For those facilities of Cemig Generation and TransmissionCEMIG GT that started operations before the Brazilian environmental legislation was enacted, although we have not yet obtained corrective licensing,February 1986, we have prepared the required environmental assessments, filed applications before the appropriate environmental bodies, and submitted them for analysis.
At present there are 22 separate proceedings which have been formalized for obtaining Corrective Operational Licenses. Of these, 21 are Under the applicable law, the Company is allowed to operate while awaiting the requisition appreciation. In order to comply with theSupram and 1 is with Ibama, All conditions, we used the related studies have been prepared and presented to the relevant regulatory bodies. With the enactment of the new Minas Gerais State Forest Law, consideration of the Corrective Operational Licenses that are under consideration by theSuprams will be resumed with a request for preparation of an Environmental Plan for Conservation and Use of the Surroundings of an Artificial Lake (Plano Ambiental de Conservação e Uso do Entorno do Reservatório Artificial, or ‘Pacuera’) for each reservoir. ThePacueras are being prepared, for subsequent formal submission. There are also a total of 10 proceedings to obtain renewal of Operational Licenses that have been formalized with variousSupramCondition Compliance Index – ‘ICC’. No demand of this type has been formalized with Ibama.
In 2015, 332020, 9 licenses and authorizations for regularization of projects of Cemig Distribution (Cemig D)CEMIG D were obtained, as follows: 07 Environmental Authorizations for Functioning (Autorizações Ambientais de Funcionamento, or AAFs); 14 Certificates Not Subject to Licensing (Certidões Não Passiveis de Licenciamento); 12in the category of Authorizing Documents for Environmental Interventions (Documentos Autorizativos para Intervenção Ambiental, or DAIAs), of which 02 were related to the support parties accessing power facilities.Interventions. All the above projects have been regularized in theSuprams IEFs agencies (State Institute of Forests – Minas Gerais State Environmental Agencies) spread out over the stateState of Minas Gerais.
With respect to the Corrective Operating Licenses (Licenças de Operações Corretivas, or LOCs) Cemig Distribution (Cemig D) has reached agreement withSuprams for regularization of the transmission lines which had been built before Normative Resolution 74/2004 was enacted, dividing its projects into seven regional grids: North South, Mantiqueira, East, Triângulo, West and Center. Cemig currently has five such licenses of which two are at the renewal phase: those in connection with the Triângulo Regional Grid. (application submitted on January 16, 2015) and the West Network (application submitted on August 12, 2015). A further two applications for regularization have been submitted, for the Center and East Networks, and are currently awaiting a decision with respect thereto.
Distribution of natural gas by Gasmig through pipelines throughout Minas Gerais is also subject to environmental control. AllIn most cases the environmental authority of the State of Minas Gerais (Secretary of State for Environment and Sustainable Development – ‘SEMAD’) has issued all licenses necessary for the regular operation of Gasmig’s activities have been obtained.activities.
Environmental licenses and authorizations issued by relevant statemunicipal, state and federalfederal bodies usually impose conditions relating to environmental impactimpacts inherent to our activities, which canmust be complied with in order for the environmental licenses to remain valid. They have to be complied with overas long as the period of validity of the applicable license. Cemiglicense is in force. To this end, CEMIG is taking appropriate steps for full compliance, and to provide proofevidence of compliance to the relevant environmental authorities, in each case to avoid any subsequent administrative or criminal penalties, such aswhich can include fines, suspension of activitiesoperations or revocation of licenses. One highlight in this process has been the signature of a Cooperation Working Agreement between Cemig Distribuição S.A, and the Municipality of Jequitinhonha in the State of Minas Gerais, for compliance with the environmental conditions imposed for the facilities built in the region, which has been awarded the ‘Cultivating Good Water’ (Cultivando Água Boa) Program by the Government of Minas Gerais.
We note, finally, that distribution of natural gas by Gasmig, through the gas pipelines in Minas Gerais, is also subject to environmental control, and all licenses necessary for regular operation of its activities have been obtained.
Environmental Legal Reserves
Under Article No. 12 of Federal Law No. 2,651,12,651, of May 25, 20132012 (the “new Braziliannew ‘Brazilian Forest Code”Code’), a Legal Reserve (the term in Brazilian legislation is “Reserva Legal”) is an area located inside a rural property or holding that is necessary for the sustainable use of natural resources, conservation or rehabilitation of ecological processes, conservation of biodiversity or for shelter or protection of native fauna and flora. As a general rule,Generally, all owners of rural properties have to preserve an area as a Legal Reserve. However, Article 12, §7 of the new Brazilian Forest Code establishes that a Legal Reserve will not be required for areas acquired or expropriated by the holder of a concession, permission or authorization to exploit hydroelectric power potential, in which projects for electric power generation, or electricityenergy substations or transmission or distribution lines are operating.
In Minas Gerais, State Law No. 20,922, enacted on October 17,16, 2013, made provisions in the Forest Policy and the Biodiversity Protection Policy in the state, adapting the environmental legislation to the provisions of the Forest Code. This had the effect of revoking the requirement for a Legal Reserve in the case of hydroelectric generation projects, enabling the processes of the Corrective Environmental Licensing that had been held up in the previous year for this reason to be resumed. In the federal sphere, Ibama’sIBAMA’s technical licensing team, in the corrective licensing of Cemig’sCEMIG’s plants, expressed an opinion, in correspondence sent to the Companyus on July 29, 2008, stating that in Cemig’sCEMIG’s case there was no need for the constitution of Legal Reserves.
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The approval of the new Forestry LawBrazilian Forest Code and the exclusion of the hydropower projects from the need to register a Legal Reserve settled this issue allowing for the continuation of the process of the environmental licensing of the several projects of the company, with the acquisition of the pending Operation Licensesoperating licenses and the maintenance of its legal compliance.
Permanent Preservation Areas
The vegetation surrounding the reservoir is statutorily classified as Permanent Preservation Areas or APPs. The length of the APP varies depending on whether the reservoir is located in rural or urban areas. In rural areas, at least 30 meters should be preserved, while in urban areas, at least 15 meters should be preserved.
Lack of preservation areasof vegetation in APPs or unauthorized suppression of vegetation in APPs may lead to administrative sanctions, such as fines ranging from R$5,000 to R$50,000 per hectare, limited to R$50 million and criminal liability.
As set forth byLaw 12,651/12 regulates that the Federal Law No. 12,651,APPs of May 25, 2012, among others cases, there are permanent preservation areas around artificial reservoirs. In orderreservoirs should be subject to enablea specific program created to regulate the protectionuse and conservation measures of those preservation areas, preparation of anthe area surrounding the reservoir. Such program is called Environmental Plan for ConservationUse and UseConservation of the Surroundings of an Artificial LakeReservoir Surrounding Area (Plano Ambiental de Conservação e Uso do Entorno dedo Reservatórios Artificiaisrio, or Pacuera) is required‘PACUERA’) and should be prepared according to the minimum requirements determined by the competent environmental authority in order to regulate conservation, restoration, usage and occupation of areas around artificial reservoirs. the environmental licensing proceeding.
With the new Forest Policy Law of Minas Gerais State, itthe requirement above was decided thatincorporated into state legislation and the preparation and approval of thePacuera is PACUERA should be in a condition offor the grant of Operational Licenses. Hence this requirement isoperating licenses.
We have now incorporated the performance of PACUERA into the proceedings for obtaining Corrective Licensesthe operating licenses of the projects subject to environmental licensing on the state level. CEMIG GT prepared and renewal of Operational Licenses.filed applications before the environmental bodies relating to all the required environmental assessments, including PACUERA, in respect to all facilities using artificial reservoir as required by law.
Compensation Measures
According to Federal Law No. 9,985, ofenacted on July 18, 2000, and to Decree No. 4,340, of Septemberenacted on August 22, 2002, companies whose activities result in major environmental impacts are required to invest in protected areasand maintain conservation units in order to mitigate those impacts. Conservation units are areas that are subject to special protection and include ecological stations, biological reserves, national parks and relevant ecological interest areas. The environmental authority that is competent environmental bodyto license the project stipulates the environmental compensation for each company depending on the specific degree of pollution or damage to the environment.
Federal Decree No. 6,848/2009, ofenacted on May 14, 2009, and Minas Gerais State Decree No. 45,175, ofenacted on September 17, 2009, regulate the methodology for deciding thethese compensation measures. Upmeasures, requiring that up to 0.5% of the total amount invested in the implementation of a project that causes significant environmental impact must be applied in compensation measures.
State Decree No. 45,175/2009 was amended by Decree No. 45,629/2011, which established the reference value of projects that cause significant environmental impact, as follows:
I – For projects executed before the publication of Federal Law No. 9,985, ofenacted in 2000, the net book value (Valor Contábil Líquido or ‘VCL’) will be used, excluding revaluations or, in its absence, the value of the investment presented by the representative ofmade to the project; and
II – Compensation for environmental projects executed after the publication of Federal Law No. 9,985, ofenacted in 2000, will use the reference established in Item IV of Article 1 of Decree No. 45,175, ofenacted in 2009, calculated at the time of execution of the project, and updated based on an inflation-linked adjustment index.
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Due to the impact of the 2013 ElectricityEnergy Concessions Law (Law NºNo. 12,783, ofenacted on January 11, 2013) on the business of CemigCEMIG GT, the Company filed a consultation with the Minas Gerais State Forests Institute (Instituto Estadual de Florestas, orIEF,), to be informed about the environmental compensation payable in relation to the Transmission System. The IEF passedsubmitted the inquiry on to the Federal General Attorneys’ Office (Advocacia Geral da União, orAGU ‘AGU’). AtAs of the timedate of writing Cemig GTthis annual report, the Company has not received a reply to this consultation.
In addition to the environmental compensation referred to above, forest compensations for cleaning of electricityenergy tower paths and accesses in which vegetation has been suppressed are included as routine.
Other environmental requirements can be applied based onbecome applicable due to the impacts arising from implementation of projects,various projects; such asrequirements could include the structuring and operation of programs to monitor fauna and flora of regions surrounding facilities of the electricityenergy system, environmental education programs, and programs for recovery of degraded areas (Programas de Recuperação de Áreas Degradadas, orPRADs ‘PRADs’).
Fish Management – ThePeixe Vivo Program
Construction of hydroelectric plants canmay create a risk for fish that inhabit rivers, due to various changes in the aquatic environment caused by the useoperation of dams.plants. One of our environmental area’s principalthe main activities of CEMIG’s Environmental Management Department is to ensure thatprevent and mitigate environmental accidents involving the native fish population do not take place at ourits hydroelectric power plants. Further, to mitigate the impacts caused by the operation of our plants, CemigCEMIG has developed a methodology for evaluating the risk of fish mortality at the plants to mitigate the impacts caused by the operation of its plants. WeThe company also carrycarries out research projects in partnership with universities and research centers to develop scientific knowledge to serve as a basis for more effective fish population conservation programs to be implemented by the Company.CEMIG.
In spite of these efforts, an incident occurred in 2007, at theTrês Marias Hydroelectric Power Plant, resulting in the death of approximately 17 tons of fish, as estimated by the Environmental Police (8.2 tons, by our estimate). The volume of dead fish was not measured. As a result of the event, the Minas Gerais State Forests Institute imposed two fines, totaling approximately R$5.5 million, and on April 8, 2010 Cemig and the Public Attorneys’ Office of Minas Gerais State signed a Conduct Adjustment Commitment (Termo de Ajuste de Conduta, or TAC), for R$6.8 million in compensatory measures to be used for environmental improvements in the area affected by the Três Marias power plant, in Três Marias, Minas Gerais. Both these financial commitments have now been settled, and the environmental improvements in the affected area, such as automation of the fish protection grids, are being implemented.
In this context, in June 2007, we created thePeixe Vivo (Program (‘‘Fish Alive’Programa Peixe Vivo’) Program as a result of members of senior management believing that it was necessary to take more effective measures to preserve fish populations of the rivers where the company has operations. The Program’sprogram’s main activities are summed up in its mission, which is: “To‘To minimize the impact on fish species, seeking handling solutions and technologies that will integrate electricityenergy generation by CemigCEMIG with conservation of native fish species, promoting involvement of the community”community’. Since its creation, the program has been operating on two fronts – one seeking preservation of fish populations in the stateState of Minas Gerais, and the other focusing on forming protection strategies to avoid and prevent fish deaths at Cemig’sCEMIG’s hydroelectric plants. The adoption of scientific criteria for decision-making, establishment of partnerships with other institutions and modification of practices adopted as a resultbecause of the information generated are the principles that guide the work of thePeixe Vivo team. Also, publication
Since 2018, the members of Peixe Vivo Program develop the fish death risk assessment program (Programa de Avaliação do Risco de Morte de Peixes – ‘PARMP´) aiming to mitigate potential risks related to maintenance and operation of hydroelectric plants. Fish fauna monitoring executed periodically and before operational procedures of plants is the main action of Peixe Vivo Program team to reach the goal of PARMP. Biologists evaluate fish density and environmental conditions based on monitoring data. The PARMP has been developed and validated during two consecutive research projects and is now implemented as a continually optimizing program of the resulting information to society is important – ensuring transparencyCompany. So far, a 77.7% reduction of mean monthly fish biomass impacted by operation of plants has been observed since the program, and creating opportunities for the community to express its concerns and suggestions.beginning of PARMP.
On average, over the period 2007 to 2015 Cemig2020 CEMIG spent R$6.86 million per year in activities and research projects in relation to thePeixe Vivo program. It invested a further R$6 million in physical barriers to prevent fish from entering the draft tube, and modernization of the main hatchery station at theVolta GrandeEnvironmental Station.
In spite of all the advances in fish management achieved by thePeixe Vivo Program, there are still major challenges to be studied and understood. In 2012, an estimated 1.8 tons of fish died in an occurrence at the Três Marias hydroelectric plant. The cause of death is still unknown, and the event was not expected – there was no precedent for the particular circumstances of this accident. However, with the adoption of measures to control this environmental incident, and as a result of our prompt reporting to the environmental authorities, the fine that we were charged for the accident, a total of R$50,000, was reduced by 45%, as provided by law due to immediate communication of the damage or danger to the environmental authority, and collaboration with the environmental bodies in solving the problems arising from our conduct. The fine imposed in 2012 (per kilogram of fish killed) was one-fortieth of the fine applied by the Minas Gerais State Forests Institute (Instituto Estadual de Florestas, orIEF) in the 2007 accident. ThePeixe Vivo Program studied the circumstances of the accident to decide optimum forms of control to avoid similar occurrences.
In 2015, there were several fish deaths near the Nova Ponte Hydroelectric Plant, which generated complaints by local citizens. Cemig’s Peixe Vivo program was utilized to investigate the cause of the deaths. A total biomass of approximately 650kg was affected. The Peixe Vivo program proposed a generation test to find the cause of the incidents and propose action to avoid recurrence. The cause identified was a decision to run at a low level of generation due to low flow in the basin of the Araguari River at the time. After completion of the tests, safe bands for operation were specified, and a bar placed on certain operational maneuvers (such as reversal of the synchronous generator) at the plant during this period of low flow. There were no further environmental episodes after the recommendations were implemented. The event gave rise to a fine totaling R$7,512.69, which qualified for a discount of 50% for recognition of the attenuating action taken by Cemig, in accordance with Article 68, sub-item I, subclauses ‘A’ and ‘E’ of Decree No. 44,844/08. This reduced the final amount of the fine to R$3,756.35.
In 2015, the Peixe Vivo program presented its research at a number of important meetings, including the 21st Brazilian Ichthyology Conference, and the 23rd National Electricity Production and Transmission Seminar (SNPTEE), and also to the Ferreira Gomes Consortium and Aliança Energia. It also held the course Topics in Management and Conservation of Ichthyofauna for the Electricity Sector, with participation by professionals from Cemig, the IEF, the Minas Gerais State Environment and Sustainable Development Departments (DEAMB and SEMAD), the Fish Inspection Directorate, LightGer, Retiro Baixo Energética S.A., the Cemig–CEB Consortium and Minas Gerais Federal University (UFMG). Participants were able to learn about the work of the Peixe Vivo program at Cemig’s hydroelectric plants, and about fish and their interaction with hydroelectric plants, as well as being given a guided tour of the Três Marias Hydroelectric Plant. Practical and theoretical teaching sessions dealt with subjects such as fish anatomy, physiology, systematics and genetics; limnology; legislation; operational procedures of Cemig plants, and environmental events. The lectures given also showed the importance of conservation of native fish species, and what we can do to minimize environmental impact on the bodies of water. The course also led to closer relationships with the environmental analysts of the State of Minas Gerais environmental oversight body (Sisema), facilitating dialogue regarding Cemig’s actions to deal with environmental risks.
ThePeixe Vivo program runs 10five scientific projects in partnership with research institutions, involving more than 22964 students and researchers.
These partnerships, which have been operating since 2007, have resulted in more than 364656 technical publications up to today’s date, and have also been referenced nationally and internationally for the practices of fish conservation and dialog with the community, presenting Cemig’sCEMIG’s work in several countries, and various states of Brazil. These academic results, jointly with the involvement of the community, have been used to create more efficient and practical conservation programs that make it possible for fish to coexist with generation plants in Brazilian rivers.
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Since it was created thePeixe Vivo Program has also received external recognition in awards. In 2009/2010, it was awarded the Brazil Environment Prize (Prêmio Brasil de Meio Ambiente) in the categoryBest fauna and flora preservation work. In 2010, it was placed first in the Aberje Award in the categoryCommunication about programs centered on corporate sustainability, a first for Cemig. In 2011 a work presented by thePeixe Vivo Program, entitledDevelopment of a methodology for evaluating risks of fish mortalities in Cemig’s plants, presented at the 21st Brazilian National Seminar on Production and Transmission of Electricity (Seminário Nacional de Produção e Transmissão de Energia Elétrica, or SNPTEE), was selected as the best work presented in theEnvironmental Impact group. In 2013 it was the finalist in theBrasil 2013 Green Project Awards, in the categoryProducts or Services. In 2014, it was among the ten first-placed competitors for the 12th Brazil Benchmarking Award and, in recognition of having developed best practices for fish protection, was the winner in theBest, Fauna category of the fifth annual award of the Hugo Werneck Prize. In 2015 the Peixe Vivo program won two awards in presentations of technical papers during the 23rd SNPTEE, in the Environmental Impacts Group: (i) the paper Fish behavior downstream from a hydroelectric plant: mitigating impacts of generation, presented by Raquel Loures (GIA2), won first place as the best paper presented; and (ii) Use of a Quantitative Tool for environmental management of river basins: applicability of the technique to the Brazilian electricity sector, presented by João Lopes (GIA4), won third place in the same group.
Urban Occupation of Rights of Way and Reservoir Banks
Gas Pipelines — Our pipedGasmig’s natural gas distribution networks are underground crossingand run through inhabited areasrural and usingurban areas. Pipes are usually installed on public rightsroads near pluvial drainage, sanitation, energy and telecommunications, among other utilities. Installation of waythe networks in common with underground piping utilities operated by other public concession holders and public agencies. This increases the riskurban subsoil presents risks of unauthorized work without prior communication and consultation of our natural gas distribution network registers, and there is a possibility that accidents may occur, causing significant personal, property and environmental damage in case of ignition or a leak.to the pipelines from third party maintenance workers. However, all of our gas networks are explicitly,flagged according to national standards and intensively, markedinternal procedures. In addition to security signaling, the presence of the GASMIG network in roads, streets and signaled.other areas is shown on the Company’s website, where the network map is made available in a complete and up-to-date manner. Gasmig has several inspectors monitoring its network daily, to prevent illegal orprovides free on- site guidance services for third parties excavations in urban roads, invasions or constructions erosions, as applicable, or any other problem that might cause risk to the pipeline. Gasmig, through its Dig Safely ((‘Escave com Segurança’) program, has been building partnerships with the community, mainly with public authorities and holders of concessions, to disclose their registrations to companies that perform excavation on urban roads, to ensure that before digging close to the natural gas network, they call Gasmig’s 24-hour helpline, and request guidanceprogram. Guidance and support for safe execution of their work.
Gasmig also has network inspection plans, in order to verify the security conditions of the system and prevent illegal intrusions, constructions or erosions nearby the pipelines.
In 2015 Gasmig had accidental emissions2019, mitigation measurements adopted by GASMIG reduced third parties’ damages flaws comparing prior numbers. The efficiency of a low volumethird parties’ damages prevention was about 99.5%, considering the total number of interventions executed near the pipelines. The loss of natural gas caused by unauthorized excavations by outside parties who had not previously examined ourwas reduced because of the low pressure used on damages ducts and because of the short time response to leak containment. In collaboration to shorten the response of incidents, safe zones (blockades) were created, making the attendance more effective. Gasmig also implemented a Management Plan of the Integrity of Metallic Gas Pipeline. From that plan, appropriate techniques are being used to a direct assessment threats to external and internal corrosion of gas network maps. There was also an event in which a truck collided with measurement equipment on a customer’s property.pipelines. In parallel, Gasmig is preparing to perform the internal inspection via PIGs electronics from Linha Tronco Vale do Aço, one of the main gas pipelines of the Company.
Transmission LinesIrregular occupation of high-voltage overhead lines — We– we have easements for our transmission and subtransmissiondistribution networks over land with approximately 16,756 miles in length.subject to restrictions. A significant portion of such land isareas, however, has been occupied by unauthorized construction, includingmajority residential constructions. This type of activity causes risks of electric shock and accidents involving local residents, and constitutes an obstacle to the maintenance and operation of our electricityenergy system. We are currently seeking solutions for this problem,these problems, which will involve either removalresettlement of these occupants or improvements that would make it possible to maintain our electricityenergy system safely and efficiently. The Security Monitoring Committee on Invasion Risk in the Transmission and Subtransmission Lines was created to
To mitigate these risks, bywe have been monitoring and recording invasions and by taking action to prevent invasions on the paths of the transmission and subtransmissionsub transmission lines. A number of measures have been adopted to preserve the security of these lines, including: contracting of a company for systematic inspection, and implementation of security measures and works to minimize the risks of accidents; education of communities about the risks of accidents involving electric shocks arising from the invasion of sites and the building of homes; creation of community vegetable gardens; and removal of occupation of the transmission line pathways through agreements with local residents and other authorities, and/or through court actions.partnerships with the municipalities in our concession area.
Reservoir AreasIrregular occupation in Generation assets — We have implemented safety– security measures are adopted to protect our electricitypower generation facilities against invasions, using observation posts and mobile patrols to control the banks of reservoirs. Electronic security systems to monitor the generation power plant installations are also planned. Any invadersinvasions. Invaders found inside the facilitiesfacility are detainedincluded by the surveillance team and takenremoved from the site, which occurs without resistance or violence.
The plants are marked with fences and warning signs, indicating that the property is private, that hunting, fishing and swimming are prohibited on site.
In order to police stations, where police complaints are filed. There are signs onoptimize security at the banksplants, the implementation of electronic security systems is planned.
In the reservoirsrisk areas of our hydroelectric generation facilities, there are signs indicating ownership. Periodicownership of the prohibition on fishing and swimming, due to the possibility of a sudden rise in the water level causing fatal accidents. The use of nautical signaling buoys close to large dams indicates a safe area and prohibits the entry of vessels.
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The Company maintains a team to carry out periodic inspections byin its areas, advising the mobile patrol units operatingcommunity on the reservoir areas report any invadersprohibition of reservoir banks. We frequently have to takeconstruction and removal of irregular occupants, before the company takes legal action for repossession.
The Company is implementing in its inspection methodology the use of satellite images to recover possession of invaded areas. Due to the vast area and number of reservoirs, we are continually subjected to new trespasses and occupation of the banks of the reservoirs by unauthorized construction. However, we are making our best efforts to prevent these invasions, and prevent any environmental damage to the Permanent Preservation Areas (Áreas de Preservação Permanente, orAPPs), around the reservoirs. To patrol the reservoir areas, we have driven approximately 185,131 km in vehicles, spent 1,064 hours navigating on reservoirs and waterways and made over 13,507 surveys. We have recently added one more inspection post for monitoring reservoir banks.identify irregular occupations.
The Carbon Market
We believe that Brazil has a significant potential to generate carbon credits arising from clean energy projects that comply withobserve the Clean Development Mechanism, (CDM)or ‘CDM’, or the Voluntary Markets. Every year, we collect dataseek to quantify our emissions and publish our main initiatives on reductionin reducing the emission of greenhouse gas emissions, by means,carbon dioxide, for example ofthrough the Carbon DisclosureEmission Project.
The Cemig group takes partCEMIG Group participates in CDM projects at various stages of development, includingregistered in the United Nations Framework Convention on Climate Change (UNFCCC), which includes seven Small Hydroelectric PlantsSHPs with aggregatea capacity of 116 MW and two hydroelectric power plants with aggregatea combined generation capacity of 3,708 MW several wind plants with capacity totaling 375 MW, and a solar power plant with a capacity of 3 MW.
Cemig began the The process of measurementverification and saleemission of part of the carbon credits of the Cachoeirão Hydroelectric Plant, estimated at 181,000 tonSHP and UHEs Baguari and Santo Antônio has been completed, corresponding to approximately 1,402 tons of CO2 eqemissions avoided over the period of 2012 through 2015.this program.
Management of equipment and wasteswaste contaminated with Polychlorinated Biphenyls, or ‘PCBs’
Brazil has signed and ratified the Stockholm Convention (‘SC’) that includes goals related to the management of PCBs (Polychlorinated Biphenyls)
At Cemig, the large-scale equipment that contained PCBs and was manufactured before 1981 was withdrawn from the electricity system and sent for incineration in 2001.
Brazilian lawwithin electrical equipment. Brazil has prohibited the production, import and sale of PCBs since 1981 but allows its use in equipment that is still in operation. The Stockholm Convention,and it has been making efforts towards the goals of which Brazil is a signatory and which was ratified by Decree No. 5,472/2005, requires operationthe SC.
At CEMIG, almost all of the large equipment contaminated with PCB were removed from the electrical system and sent for incineration. The few large equipment contaminated with PCB still under operation are going to be removed by 2025, and finallyproperly disposed of by 2028.
A Normative Resolution is being prepared, underwithin the aegisdeadlines of the National Environment Council (Conselho Nacional de Meio Ambiente, orConama), which will “govern appropriate and controlled environmental management of Polychlorinated Biphenyls (PCBs) and their related wastes.”
All holders of contaminated equipment and materials will have staggered periods, up to a final deadline of 2025, to withdraw them from operation/use, and must finally dispose of them by 2028.
The draft of the Normative Resolution is being considered by the Legal Subjects Technical Board (CTAJ) of Conama, having been discussed in the Conama workgroup and by the Environmental Quality and Waste Management Technical Board (CTQAGR). There have been six meetings of the Conama workgroup, with no final consensus between members on a number of points. The CTQAGR has met eight times, and the text was considered to be approved in September 2014, in spite of several points that had extreme impact on the electricity sector. There were two meetings of the CTAJ, in September 2014 and March 2015, with further progress stayed on the matter until publication of procedural guides and manuals, which were published in June 2015. If there is approval at the next meeting the matter will go to the plenary meeting of Conama for voting.
There is a draft law on the same subject currently before Congress: No. 1,075/2011, put forward by Congressmen Penna and Sarney Filho. ItCEMIG has been reviewed by the Trade, Industry and Economic Development Committee (in 2011), and the Mining and Energy Committee (in 2014), and is under review by the Environment and Sustainable Development Committee (as of 2015), awaiting Opinion by the Rapporteur, Congressman Daniel Coelho (PSDB party). It still requiresmaintaining its historical good practices in order to be reviewed by the Constitution, Justice and Citizenship Committee, after which it would go onto the full lower house of Congress.avoid further contamination.
Cemig considers this information to be important. The control flow diagram currently followed in the Company may undergo some complementary adjustments necessary for full compliance with the requirements of the Resolution. This may result in high operational costs.
Cemig has participated in the discussions through the Brazilian Electricity Distributors’ Association (Associação Brasileira de Distribuidores de Energia, orAbradee) and the Electricity Industry Environment Forum (Fórum de Meio Ambiente do Setor Elétrico, orFMASE),through ABRADEE and FMASE.Operational Technologies – CEMIG
Operational technologies
We continue to investCEMIG invests in automated monitoring and control equipment, in connection with ourthe strategy of increasing efficiency and further modernizing and automating ourthe generation, distribution and transmission grids. CEMIG keeps developing and implementing new systems, with the purpose of optimizing its internal activities and increasing the availability of its infrastructure and applications that support CEMIG’s business.
Load Dispatch Center
CEMIG’s System Operation Center (Centro de Operação do Sistema, orCOS ‘COS’), located at ourthe head office in Belo Horizonte, is the nerve center of ourthe transmission and generation operations. ItWith a modern control room, it coordinates the operations of ourthe entire electricity and energy system, in realReal time, providing operational integration of the generation and transmission of energy.power. It also operates the interconnectioninterconnections with other generation, transmission and distribution companies. The supervision and control executed by the COS now extends to more than 50 high and51 extra high voltage substations, approximately 2416 major generating power plants, 15 minor generating power plants and 9 Small Hydroelectric Plants.1 wind farm.
Through its activities, the COS permanently guarantees the security, continuity and quality of ourthe energy supply of energy.to its clients and to the system. The activities of the COS are supported by up-to-date telecommunications, automation and information technology resources, and executed by highly qualified personnel. The COS has a Quality Management System, with ISO 9001:20082015 certification.
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Distribution Operation Center
Our distribution network is managed by a Distribution Operation Center (Centro de Operações de Distribuição, orCOD ‘COD’), located in Belo Horizonte. The COD monitors and coordinates our distribution network operations in realReal time. The COD isThey are responsible for the supervision and control of 388414 distribution substations, 306,159328,252 miles of medium and low voltage distribution lines, and 10,76610,835 miles of sub-transmission lines and 8,078.71 million customers and operates in 774 municipalities of Minas Gerais.
We provided an average of 10,92315,158 operating services in the field a day in 2015. The COD is certified according to ISO Quality Standard 9001: 2000.2020. There are various systems in use to automate and support the COD’s processes, including:including trouble call, field crew management, distribution substation supervision and control, restoration of power, emergency switching, network disconnection, and inspection. Technologies, including a geographic information systemGeographic Information System and satellite data communication helplineSatellite Data Communication Helpline, to reduce customer service restoration time and provide better customer service. These are devices, installed along our distribution network, that sense and interrupt fault currents, and automatically restore service after momentary outages, improving operational performance and reducing restoration time and costs.
GeospatialGeoscience Information & TechnologySystem
The operationalAtlantis Project aims at modernizing and engineeringunifying CEMIG’s system of geoprocessing of distribution lines and networks. The new system enables management of resources with a geospatial vision, allows the planning of expansions, records electrical equipment to the analysis of electrical networks, and assists in compliance with ANEEL’s normative resolutions.
The Geographic Information System (‘GIS’) will enable us to give support to the processes of our business are strongly supported by geo-referenced information management technologies, makingregistry and design, as well as supporting the planning, construction, operationfollowing corporate processes: network expansion and maintenance, protection of revenues, planning and supplies, property services and management of assets through full integration with the Enterprise Resource Planning (‘ERP’) system, besides supporting the operations.
Additionally, it provides support to engineering through integration with the electrical and mechanical calculations system that offers network analysis and suitable network sizing. The Atlantis project began in 2015 and part of the generation, transmissionsolution was deployed in August 2017. Since this time, the system is used by CEMIG's high, medium and distribution network more efficient. Additionally,low voltage asset registration teams.
In 2019, we´ve implemented the usereconciliation of mobilethe grid registration units with the elements registered in SAP/ERP, the consultation module and the electrical calculation module.
In 2020 the system was fully deployed.
There are another IT solutions based in GIS technologies, reduces costssuch as, geographic panels with data available in tabular and allows usmap views, automation panels for distribution's operations, system to provide more efficient servicesmanagement, inspection and security of dams and integrations to our customers.permit access to simple map views.
Internal Telecommunications Network
We believe we have oneCEMIG’s telecommunications network is composed of the largest telecommunication networks of all the Brazilian energy utility companies. Made up of high performancehigh-performance microwave links provided by more than 344376 communication stations, and an optical system of approximately 1,7471,161 miles of optical fiber it provides forproviding a mix of telecomtelecommunications. Our robust data network also contains communications facilities that share the site with more than 418 substations, 44-generation plants and 172 high and extra high voltage transmission and distribution lines.
The solutions provided range from corporate telephonic toand corporate networks – and alsoto mission critical telecommunications grid dedicated to monitoring, protection and control of substations, generation plants, substations, transmission and distribution lines, dispatching of field teamscrews to carry out mission-critical technical services and commercial contacts,services, lightning and storm prediction and hydro meteorological system to operate reservoirs.
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Our robust data network also contains the communications facilities that share the site with more than 300 substations, 39 generation plants and 172 transmission and distribution lines. For
In order to support for supervision and control of the medium-voltage mission critical distribution system, a proprietary radio communication system is in place, installed in approximately 300 key terminals1,023 reclosers and more than 1,61077 automated switches. Other 12,087 reclosers are monitored and controlled utilizing third part solution; begin 11,187 supported by cellular solution and 910 by satellite media.
Commercial and technical service dispatch are supported by 1,200 vehicle mobile terminals connected by a hybrid satellite and Cellular Solution. Solution and 400 handhelds equipped with cellular solution.
Approximately 39,118 energy meters are equipped with cellular solution and dedicated to revenue protection. Additionally, more than 5,000 meters utilizing RF Mesh and PLC solution are installed in low voltage customers and medium voltage transformers at Sete Lagoas region constituting a complete proof-of-concept of Advanced Metering Infrastructure (‘AMI’).
The corporate data network serves more than 240230 offices and units within the State of Minas Gerais.concession area.
The TelecomsTelecommunications Network Management Center (Centro de Gerência de Rede de Telecomunicações, or CGR), in Belo Horizonte,Operation monitors and operates the telecoms infrastructure of Cemig Generation and Transmission and Cemig Distribution, operating 24 hours x 7 x 365days a week to guarantee continuity for perfect functioning of the telecoms services, aimingand reliability, according to meet the requirements forBrazilian regulations and in compliance with ANEEL regulations, National Grid Operator (‘ONS’) operational performanceprocedures and service quality specified in operational agreements and concession contracts, regulations of ANEEL (the Brazilian electricity regulator), Anatel (the Brazilian telecom regulator), ANA (the Brazilian National Water Agency) as well as the procedures of the ONS (the National System Operator).other specific regulations.
Corporate Data Network
Our corporate data network has 295 sitesservices 377 units in 145 towns275 cities of Minas Gerais linked by an infrastructure, which includes microwave links, optical fibers and metal cables, owned either by ourselves or by contracted operators. The architecture is in Minas Gerais. line with market standards, using state-of-the-art equipment, which is monitored, operated and managed using the latest technological solutions.
The physical and logical architecture of the network employstopologies employ security resources such as firewalls, Intrusion Prevention Systems (IPSs)intrusion prevention system (IPS), Data Loss Prevention Systems (DLP)access control, antivirus and anti-virus and anti-spamantispam systems, which are continuallycontinuously updated to protect information against unauthorized access, in complianceaccordance with ISO 27002. A security information and event management system of event logs(SIEM) makes it possible to investigate occurrences andadverse events, while also guaranteeproviding a historical record base to meet legal requirements.
The Network and Security Operations Centers (‘NOC’ and ‘SOC’), at the Company’s head office, in Belo Horizonte, monitors, operates and manages the whole network and security infrastructure in Real time (24 hours per day, 7 days a week), maintaining confidentiality, integrity and availability of the data throughout the whole network.
Information Security Management
Information security, a permanent concern of ours, is ensured by a management system based on the Brazilian Standard (‘ABNT’) NBR ISO/IEC 27001:2013, which is aligned with best market practices. Our information security management system includes processes for policy, risk, communication, information classification and information security management and control. In addition, recurring actions for improvement in processes, communication, awareness and training strengthen our information security practices.
CEMIG maintains an ongoing safety awareness program for its employees through annual campaigns.
IT Governance Program
Our Information & Technology Governance Program aims to continually align ITprogram seeks alignment with ourthe business, adding value by applying information technology,through the application of the appropriate resource management risk managementof resources and risks, constantly monitoring performance and compliance, withensuring adherence to legal, regulatory and Sarbanes-Oxley requirements.
Our information technology Project Management Office (or PMO) has been responsible since 2008 for ensuring that management of information technology projects is systematic, using dedicated software methodology, processes and tools.
Considering the central role of Information Technology Governance in our business, a dedicated management unit was created in 2009 to concentrate, plan and implement all the actionscompliance requirements that are specificcontinuously audited. In order to information technology governance, including results arising fromexecute corporate strategy strategicand objectives, the company aligns interests and goals with control objectives and with governance and management processes, translating business opportunities and needs into results with compliance and within the appropriate levels of risk. To support this governance
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program and ensure that the strategy is implemented, the processes employed by the IT planning, legaldepartment are directly related to the control objectives and regulatory compliance, qualityare based on IT service management budget and financial management, services management and project management.
Customer Relationship ChannelsCommercial Management System
We have fiveestablished and consolidated an efficient customer service system, based on SAP CCS (‘Customer Care Solution’)/ CRM (‘Customer Relationship Management’) platform, fully integrated with the Business Intelligence (‘BI’) database, which supports our customer service processes.
The employees use CCS/CRM to manage and serve approximately 9 million customers who receive high, medium and low voltage energy supply. Both corporate tools offer security, quality and productivity to our processes of energy distribution with efficiency in accordance with the regulatory and Market requirements.
In 2019, we configured a new solution based in Salesforce software to improve the efficiency and reliability of energy trading and trading actions related for the use of distribution system assets. We aim improvements in controls over energy sales processes, greater traceability of information, management of customer portfolios with mapping of new opportunities, use of mobile devices such as tablets and smartphones and greater agility for customer billing.
The Salesforce solution was increased by the deployment of a portal accessed by specific customers. This portal offers an interface so that customers can make their requests and claims regarding energy quality.
During 2020, due to the emergencies caused by the Covid-19 pandemic, we implemented several adjustments focusing the automation and availability of our customer system and offering services by the internet and mobile app.
Management Tools
In 2019, we started a project to install new IT products to improve engineering processes, based on the Cyme Platform (‘CYME’), provided by Cooper Power Systems.
The CYME platform is an expert system that includes complex electrical calculations for the planning and study of distribution networks. In the case of CEMIG, which has an extensive and integrated distribution network and a significant level of complexity, the activities for implementing the technology solution are even more challenging and demanding, requiring considerable effort to complete the steps.
The project continued in 2020, although affected by pandemic. Interfaces and integrations were developed and customized to connect to Geographic Information System (‘GIS’) GE Smallworld, Outage Management System (‘OMS’) application, Advanced Metering Infrastructure (‘AMI’) and other systems. The CymDIS application that performs electric calculations based on our electric network was also delivered.
New mobile solution for collection of readings and simultaneous printing of invoices in the field: Since August 2020, we have readers using the new application "SGL Collector" (SGL is a reading management system) on smartphones. The new solution provides benefits of an application with a more intuitive graphical interface that makes it easy for the reader to learn and perform activities, associated with handling smaller, lighter equipment and with lower costs compared to the PDAs previously used. The installation and updating of versions of the application on the readers' smartphones is done remotely and centrally, through a UEM (‘Unified Endpoint Management’) platform that guarantees all the security and integrity of the equipment and applications used by the field teams in the execution of the activities throughout CEMIG's concession area.
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Customer Relationship Channels
We have nine major channels of service to our Minas Gerais customers. Customer service contact, whether of an emergency nature or to deal with, normal service requests, can be made via: (i) our call center, which can handle up to 250,000an average of 40,000 daily calls, in an atypical day, and also operates with an efficient electronic service through Interactive Voice Response (IVR,(‘IVR’, orUnidade de Resposta Audível – URA)); (ii) in person at branches in the 774 municipalities of our concession; (iii) through our Virtual Branch, on the site www.cemig.com.br,our website, which offers all of our 2046 types of service; (iv) via SMS; (v) via the social networks Facebook, (CEMIG. ATENDE)WhatsApp and Twitter (@ CEMIG_ATENDE;Twitter; (vi) smartphone application “Cemig Atende” ‘CEMIG Atende’ which offers 167 types of service and more recently Telegram Messenger application which offers 612 types of services.
Commercial Management System
We have established and consolidated an efficient customer care system, based on our SAP CCS/CRM platform which is totally integrated into our ERP and BI that support our decision-making processes. The CCS serves approximately 8 million customers who receive supply at high, medium and low voltage. It is a competitive tool, adding safety, quality and productivity to Cemig’s business processes, and adapts itself with great efficiency and speed to legal, regulatory and market changes and requirements.
Maintenance and Repair Systems
The 10,76610,835 miles of high voltage distribution lines in Cemig Distribution’sCEMIG D’s network, operating at from 34.5kV34.5 kV to 161kV,230 kV, are supported by approximately 54,23053,151 structures, mainly made of metal.
The network of Cemig Generation and TransmissionCEMIG GT has 3,0513,062 miles of high voltage transmission lines, operating at from 230 kV to 500 kV, supported by approximately 11,50711,754 structures.
The majority of the service interruptions to our distribution and transmission lines are the result of lightning, farmers’farm surface fires, vandalism, wind, and corrosion.
The entire high voltage transmission line system of Cemig DistributionCEMIG D is inspected once a year by helicopter, using a ‘Gimbal’ gyro-stabilized system with conventional and infra-redinfrared cameras, allowing for simultaneous visual and thermographic (infra-red)(infrared) inspections. Land-based inspections are also made at intervals of between one and three years, depending on the characteristics of the line, such as time in operation, number of outages, type of structure, and the line’s importance to the electricityenergy system as a whole.
All the extra high voltage transmission lines of Cemig Generation and TransmissionCEMIG GT are inspected twice a year by helicopter. Land-based inspections are made every two years to inspect the supporting structures. Line pathways are inspected annually, aiming to keep the areas free of vegetation that could lead to surface fires.
We use modern modular aluminum structures to minimize the impact of emergencies involving fallen structures. Most of our maintenance work on transmission lines is done using live-wire methods. We have a well-trained staff and special vehicles and tools to support live- and dead-wire work. In 2015, Cemig GT acquired 37 extra structures to be used in case of emergency. Cemig has a well-trained and equipped team to provide support whenever necessary.
Our set of spare equipment (transformers, breakers, arresters, etc.) and mobile substations isare of great importance in prompt reestablishment of power to our customers in the event of emergencies involving failed substations.
Information security management
Information security, a permanent concern of ours, is ensured by a management system based on the Brazilian Standard (ABNT) NBR ISO/IEC 27001:2013, which is aligned with best market practices. Our information security management system includes processes for policy, risk, communication, information classification and information security management and control. In addition, recurring actions for improvement in processes, communication, awareness and training strengthen the Company’s information security practices.
Management tools
In 2015, improvements were made to the SAP integrated ERP management system, involving the processes of human resources, maintenance, logistics and projects, solely to comply with federal regulatory requirements. An ‘opportunity databank’ was developed for allocation, promotion and development of employees, ensuring greater transparency for internal reallocations, and that better use would be made of the human resources available.
Our IT is developing a solution to automate freight costs in the processes of internal logistics, to meet the needs of the electricity sector regulatory body (Aneel) and also increase transparency.
A solution was developed aiming to optimize costs and time in planning and programing of maintenance of the various associated resources. This was done using the standard Multi-Resource Scheduling (MRS) functionality of SAP.
Different software programs that deal with maintenance of the protection equipment of the electricity system were integrated, to increase standardization, automation and execution of maintenance. To improve and clarify the physical and financial control of projects of the generation and transmission companies, a solution to analyze economic value added (EVA) was developed in the project management module.
Property, plant,Plant, and equipment; intangible assetsEquipment and Intangible Assets
Our principalmain assets are theour power generation plants, and transmission and distribution facilities described in this Item 4.infrastructure. Our net book value of total property, plant and equipment and intangible assets, including our investment in certain consortiaconsortium that operate electricityenergy generation projects, including projects under construction, was R$14,21514,217 million on December 31, 2015.2020.
Generation facilities represented 26%16.93% of this net book value, intangible assets represented 72%83.07%, of this net book value, (distributiondistribution facilities in intangible assets represented 82%77.96%, and other intangible, including our gas distribution system represented 18%)15.35% and other miscellaneous property and equipment, including transmission and telecommunication facilities, represented 2%6.69%.
The average annual depreciation rates applied to these facilities were: 2.76%2.96% for hydroelectric generation facilities, 6.15%6.19% for administration facilities, 7.65%and 4.94% for telecommunication facilities and 7.35% for thermoelectricwind facilities.
Apart from our distribution and generation network, no single one of our assets produced more than 10% of our total revenues in 2015.2020. Our facilities are in generalinfrastructure is adequate for our present needs and suitable for their intended purposes. We have rights of way for our distribution lines, which are our assets and do not revert to the landowner upon expiration of our concessions.
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The Brazilian PowerEnergy Industry
General
In the Brazilian electricityenergy sector, generation, transmission and distribution activities were traditionally conducted by a small number of companies that had always been owned by either the federal governmentFederal Government or the governments of individual states. Since the 1990s, several state-controlled companies were privatized, in an effort to increase efficiency and competition. The Fernando Henrique Cardoso administration (1995–(1995 – 2002) aimed to privatize the state-controlled part of the electricityenergy sector, but the Luis Inácio Lula da Silva administration (2003–(2003 – 2010) ended this process and implemented a “New‘New Industry Model”Model’ for the Brazilian electricityenergy sector, expressed in Law No. 10,848, ofenacted on March 15, 2004, referred to as the “New‘New Industry Model Law”Law’.
Subsequently, significantSignificant changes were implemented during Dilma Rousseff’s administration (i.e., since 2011)(2011 – 2016), by means of Provisional MeasureAct No. 579/2012, which became12, converted into Law No. 12,783/2013,13, establishing new rules for renewal of concessions, including rebidding for hydroelectric power generation concessions.
Subsequently, under the administration of Michel Temer (2016–2018), other changes were introduced in the sector by Provisional Act 735/16, enacted as Law No. 13,360/16, including a change of the bidding rules for energy generation, transmission and distribution concessions as well as addressing the renegotiation of hydrological risk. In addition, in 2017, a series of public consultations, which discussed proposals for modernization, and expansion of the Free Market in electric power supply with the industry (Public Consultation No. 33) began.
During the first year under Jair Bolsonaro (2019 – present), the government proceeded with the studies proposed by public consultation n. 33, holding several workshops and meetings with agents to study the following topics: separation of energy contracts into capacity and energy contracts, pricing, definition of price limits and reduction of the spot price time base.
Main Regulatory Authorities
National Energy Policy Council – CNPE
In August 1997, the CNPE was created to advise the Brazilian president regarding the development and creation of the national energy policy. CNPE is presided over by the MME, and the majority of its members are officials of the Federal Government. CNPE was created to optimize the use of Brazil’s energy resources and to assure the supply of energy to the country.
Ministry of Mines and Energy – MME
The MME is the Brazilian Federal Government’s primary regulator of the power industry. Following the adoption of the New Industry Model Law, the Brazilian Federal Government, acting primarily through the MME, undertook certain duties that were previously under the responsibility of ANEEL, including the drafting of guidelines governing the granting of concessions and the issuance of directives governing the bidding process for concessions related to public services and public assets.
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National Electric Energy Agency – ANEEL
The Brazilian power industry is regulated by ANEEL, an independent federal regulatory agency. After enactment of the New Industry Model Law, ANEEL’s primary responsibility is to regulate and supervise the power industry in line with the policy issued by MME and to respond to matters which are delegated to it by the Brazilian Federal Government.
National System Operator – ONS
The ONS was created in 1998 as a non-profit private entity comprising free customers, energy utilities engaged in the generation, transmission and distribution of energy, and other private participants such as importers and exporters. The New Industry Model Law granted the Brazilian Federal Government the power to appoint three directors of the ONS, including the Director-general. The primary role of the ONS is to coordinate and control the generation and transmission operations in the interconnected power system, subject to ANEEL’s regulation and supervision.
Brazilian Electric Power Trading Chamber– CCEE
One of the main roles of the CCEE is to run public auctions in the regulated market, including the auction of existing energy and new energy. Additionally, the CCEE is responsible, among other things, for: (1) registering all the power purchase agreements within the Regulated Market (CCEARs), and the agreements within the Free Market, and (2) accounting for and settling short-term transactions.
Under the New Industry Model Law, the price of energy in the spot market, known as the Differences Settlement Price (Preço de Liquidação de Diferenças, or ‘PLD’), takes into account factors similar to the ones used to determine the Wholesale Energy Market spot prices prior to the New Industry Model Law. Among these factors, the variation of the PLD will mainly vary according to the balance between the market supply and demand for energy, as well as the impact that any variation on this balance may have on the optimal use of the energy generation resources by the ONS.
The members of the CCEE are generators, distributors, trading agents and free customers, and its board of directors comprises four members appointed by these agents and one appointed by the MME, who is the chairperson of the board of directors.
Energy Research Company – EPE
The Brazilian Federal Government created EPE by a decree enacted on August 16, 2004. It is a state-owned company, responsible for carrying out strategic research on the energy industry – including energy, oil, gas, coal and renewable energy sources. EPE is responsible for: (i) studying projections for the Brazilian energy matrix; (ii) preparing and publishing the national energy balance; (iii) identifying and quantifying energy resources; and (iv) obtaining the required environmental licenses for new generation concessionaires. EPE’s research supports the MME in its policymaking role in the domestic energy industry. EPE is also responsible for approving the technical qualification of new energy projects to be included in the related auctions.
Energy Sector Monitoring Committee – CMSE
Decree No. 5,175 enacted on August 9, 2004, established the Energy Sector Monitoring Committee, or CMSE, which acts under the direction of the MME. The CMSE is responsible for monitoring and permanently evaluating the continuity and security of energy supply conditions and for indicating necessary steps to correct identified problems.
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Permanent Commission for Analysis of Methodologies and Computation Programs of the Electric Sector – CPAMP
Ordinance No. 47, enacted on February 19, 2008, created the Permanent Committee for Analysis of Methodologies and Computation Programs of the Electric Sector (‘CPAMP’), with the purpose of guaranteeing coherence and integration of the methodologies and computational programs used by MME, EPE, ONS and CCEE.
Ownership Limitations
On November 10, 2009, ANEEL issued Resolution No. 378, requiring it to notify the Economic Law Secretariat of the Ministry of Justice (‘SDE’) if it identifies any act that may cause unfair competition or may result in significant market control (under Article 54 of Law 8,884 enacted on June 11, 1994). After the notification, SDE must inform CADE. On November 30, 2011, Law No. 8,884 was revoked and replaced by Law No. 12,529, which terminated the SDE and replaced it with the Competition General Management Unit (‘Superintendência Geral’). Such unit, if necessary, will require ANEEL to analyze any such events, upon which CADE will decide if there should be any sanctions applied. Under Articles 37 and 45 of Law No. 12,529, these may vary from pecuniary penalties to dissolution or other disposition of the offending company.
The New Industry Model
The primary objective of the New Industry Model was to guarantee security of supply and reasonableness of rates. With the objectiveIn terms of guaranteeingensuring security of supply, the New Industry Model Law (a) requires distributors to contract their entire electricityenergy production, (loads), and to be responsible for making realistic projections of demand requirements; and (b) aims to arrange for the construction of new hydroelectric and thermal plants to be decided in ways that best balance security of supply and reasonableness of rates. To achieve reasonable rates, the New Industry Model Law requires (a)that all purchases of electricityenergy by distributors to be by auction, based on lowest price; (b)price criteria, and that contracting to be carried out through the Regulated Market (Ambiente de Contratação Regulada, orACR), or the Pool system; and (c) contracting of load to be separatedMarket. Auctions are categorized into two types of transactions, both always to be by auction:types: (i) contractsauctions for supply from new plants, to be built according to the contract (“new source” contracts) – for theaimed at expansion of the system; and (ii) contracting of theauctions for power generated by existing plants, (“existing source” contracts) – aiming to meet existing demand.
The New Industry Model created two environments for the purchase and sale of electricity:energy: (i) the ACR, or the Pool,Regulated Market, in which distribution companiesdistributors purchase through public auctions all of the power they need to supply their customers; and (ii) the Free Market, (Ambiente de Contratação Livre, orACL), to include all purchases of electricityenergy by non-regulated entities, (suchsuch as Free Consumersfree customers and electricity traders).trading companies. Distributors are allowed to operate only in the regulated environment,Regulated Market, whereas generators may operate in both, maintaining their competitive characteristics.
Requirements for expansion of the sector are evaluated by the federal governmentFederal Government through the Mining and Energy Ministry, or MME. Two entities were created to provide structure for the sector: (i) the Energy Research Company or EPE (Empresa(Empresa de Pesquisa Energética)tica or ‘EPE’), a state-controlled company responsible for planning expansion of generation and transmission; and (ii) the Electricity Trading Chamber (Câmara de Comercialização de Energia Elétrica, orCCEE,), a private companyentity responsible for the accounting and settlement of short-term (spot) electricity sales. Theenergy transactions. CCEE is also responsible, through delegation by ANEEL, for organizing and conducting the PoolRegulated Market public power auctions, in which allthe distributors purchase energy.
The New Industry Model eliminated self-dealing, forcing distributors to purchase electricityenergy at the lowest available price rather than from related parties. The New Industry Model exempted contracts executed prior to the enactment of the law, in order to provide regulatory stability to transactions carried out before it was enacted.
Several categories of power supply are not subject to the requirement for public auction via the Pool:Regulated Market: (1) certain low capacity generation projects located near consumption points (such as certain co-generation plants and the Small Hydroelectric Power Plants)SHPs); (2) plants qualified under the Proinfa (alternative generation sources) Program;PROINFA program; (3) power from Itaipu and, as from January 1, 2013, from Angra I and II; (4) power purchase and sale agreements entered into before the New Industry Model Law; and (5) the concessions extended by Law No. 12,783, are not subject to the public auctions for the supply of electricity at the Pool, Power generated by Itaipu (on the border of Brazil with Paraguay), is traded by Eletrobrás.12,783. The rates at which the Itaipuenergy generated electricityby Itaipu is traded are denominated in U.S. dollars and established by ANEEL pursuant to a treaty between Brazil and Paraguay, and there are also compulsory procurement volumes. As a consequence,Consequently, the price of energy from Itaipu rises or falls inaccording to the U.S. Dollar/realReal exchange rate. Changes in the price of Itaipu-generated electricityItaipu-generated energy are, however, neutralized by the federal government,Brazilian Federal Government, which buys all the energy credits from Eletrobrás.
Challenges to the constitutionality of the New Industry Model Law
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The New Industry Model Law is currently being challenged on constitutional grounds before the Brazilian Federal Supreme Court. The Brazilian federal governmentFederal Government moved to dismiss the actions, arguing that the constitutional challenges were moot because they relatedrelate to a provisional measureact that had already been converted into law. To date, the Brazilian Supreme Court has not reached a final decision upon the merits of this action and we do not know when such a decision may be reached. Thus, the New Industry Model Law is currently in force. Regardless of the Supreme Court’s final decision, certain portions of the New Industry Model Law relatingrelated to restrictions on distributors performing activities unrelated to the distribution of electricity,energy, including salessale of energy by distributors to Free Consumersfree customers and the elimination of agreements between related parties, are expected to remain in full force and effect.
Coexistence of two ElectricityTwo Energy Trading Environments
Under the New Industry Model Law, electricityenergy purchase and sale transactions are carried out in two different market segments: (1) the regulated market, or the Pool,Regulated Market, in which distribution companiesdistributors buy all their power supply needs through public bids; and (2) the free market,Free Market, for all purchases of electricityenergy by non-regulated entities (suchsuch as Free Consumers,free customers, energy traders and energy importers).importers.
The Regulated Market (the ACR or the Pool)
In the regulated market, distribution companiesRegulated Market, distributors purchase electricityenergy for their captive consumersregulated customers through public auctionauctions regulated by ANEEL and conducted by the CCEE.
Energy purchases take place through two types of bilateral contract:contracts: (i) Energy Agreements (Contrato de Quantidade de Energia) and (ii) Capacity Agreements (Contratos de Disponibilidade de Energia). Under an Energy Agreement, a generator commits to supply a certain amount of electricityenergy and assumes the risk that electricityenergy supply could be adversely affected by hydrological conditions and low reservoir levels, among other conditions, that could interrupt the supply of electricity,energy, in which case the generator will be required to purchase the electricity elsewhereenergy from third parties to meet its supply commitments. Under a Capacity Agreement, a generator commits to make a certain amount of capacity available to the ACR.Regulated Market. In this case, the revenue of the generator is guaranteed under the contractual conditions and the distributor must assumeassumes the hydrological risk. However, if there are additional costs to the distributors, these are passed on to consumers.customers. Together, these agreements comprise the energypower purchase agreements in the ACR (Contratos de Comercialização de Energia no Ambiente Regulado, or CCEARs).‘CCEARs’) in the Regulated Market.
The regulations under the New Industry Model Law stipulateestablish that distribution companiesdistributors that contract less than 100% of their total load consumption,demand, accounted in the CCEE, will be subject to fines.penalties. There are mechanisms to reduce thisthe possibility of penalties, such as participation in the MCSD mechanism (‘Mechanism of compensation of surpluses and deficits’), which allows for the managing of surpluses and deficits between distribution companies,among distributors, or purchase of supply in auctions during the year. Any remaining shortfall from 100% of total load consumption candemand may be purchased at the spot market price.market. If a company contracts more than 105% of its load consumption,total demand, it would be subject to price risk if it sells that supply in the spot market in the future. To reduce this price risk, a company may reduce its purchase contracts made at “existing source”‘existing source’ auctions by up to 4% each year, by bilateral negotiation through Regulation 711, through MCSD ‘New Energy contracts’, and reduce those contracts due tothrough loss of consumerscustomers that have opted to become Free Consumersfree customers (and are thus supplied by generators directly).
With the renewal of the hydroelectric power plant’splant concessions, the CCGF – Contracts for the Physical Accounts Security (‘CCGF’) were created. These contracts take into account 95%90% of the energy generated by the plants whose concessions were renewed in order to mitigate the hydrological risk. The execution of CCGF is mandatory and each distributor received an amount according to the assessment made by ANEEL.
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The Free Market (the “ACL”)
In the Free Market, electricityenergy is traded by power generators. The Free Market also includes certain grandfathered existing bilateral contracts between generators and distributors until the expiration of thetheir current terms thereof.terms. Upon expiration, suchnew contracts would have to be renewed or executed under the New Industry Model Law.
Potentially Free Consumersfree customers are those whose energy demand exceeds 3 (three) MW at a voltage equal to or higher than 69kV or at any voltage level if their supply began after July 1995. Also,Since January 2019, customers whose supply began before 1995 were also able to migrate to the Free Market pursuant to Law No. 13,360/16. In July 2019, the restriction to be a free customer will be reduced to 2.5 MW and in January 2020 to 2 MW (Ministerial Order 514/2018). On December 12, 2019, Ministerial Order no. 465/2019 reduced the restriction to be free consumer to 1.5 MW in January 2021, to 1.0 MW in January 2022 and to 0.5 MW in January 2023. This order also gave ANEEL and CCEE a dead line (January 2022) to finish and present regulatory measures necessary to allow the free market to be opened for consumers with a load below 0.5 MW, including the regulated energy trader and proposed opening schedule beginning January 1, 2024.
Until the total opening, customers with contracted demand of 500kW500 kW or more may be serviced by suppliers other than their local distribution company if they move to supplypurchase from certain alternative energy sources, such as SHPs, wind or biomass or Small Hydroelectric Plants.of a certain size.
Once a consumercustomer has opted for the free market,Free Market, it may only return to the regulated system after giving theits regional distributor of its region five years’ notice. – The distributor may reduce this term at its discretion. The aim of the extended notice period is to ensure that, if necessary, the distributor canis able to purchase additional energy to supply the re-entry of Free Consumersfree customers into the Regulated Market. Also,Moreover, distributors may also reduce the amount of energy purchased according to the volume of energy that they will no longer distribute to Free Consumers.free customers. State-owned generators may also sell electricityenergy to Free Consumers,free customers, but unlike private-sector generators, they are obliged to do so through an auction process.
Restricted Activities for distributorsDistribution companies
DistributorsDistribution companies in the Brazilian Interconnected Grid (Sistema Interligado Nacional, orSIN ‘SIN’) are not permitted to: (1) operate in the business of the generation or transmission of electricity;energy; (2) sell electricityenergy to Free Consumers,free customers, except for those in their concession area and under the same conditions and rates as captive consumersregulated customers in the ACR;Regulated Market; (3) directly or indirectly hold any interest in any other company, except entities incorporated for raising, investment and management of funds necessary for the distributor (or its parent company or related companies or partnerships); or (4) engage in activities that are unrelated to their respective concessions, except for those permitted by law or in the concession agreement.
Contracts executed priorExecuted Prior to the New Industry Model Law
Under the New Industry Model Law, contracts executed by distribution companiesdistributors and approved by ANEEL before the enactment of that law will not be amended to reflect any extension of their terms or change in prices or volumes of electricityenergy already contracted.
Reduction of the Level of Contracted Electricity
Decree 5,163/2004, which regulates trading in electricity under the New Industry Model Law, allows distribution companies to reduce their CCEARs: (1) to compensate for the exit of Potentially Free Consumers from the regulated market, pursuant to a specific declaration delivered to the Mining and Energy Ministry, (2) by up to 4.0% per year of the initial contracted amount due to market deviations from their estimated market projections, at each distribution company’s discretion, starting two years after the initial electricity demand was declared; and (3) in the event of increases in the amounts of electricity acquired under contracts entered into before March 17, 2004. This reduction can be made only with CCEARs of existing power plants.
The circumstances in which the level of contracted electricity may be reduced must be stated in CCEARs, and distribution companies may make such reductions at their own sole discretion, in compliance with the provisions described above, and ANEEL regulations.
ANEEL regulations require any reduction of the level of contracted energy under the CCEARs of existing energy to be preceded by the Mechanism of Compensation of Surplus and Deficits, or MCSD, by means of which distribution companies that have contracted energy in excess of their demand may assign a portion of their CCEARs to distribution companies that have contracted less energy than needed to meet their consumers’ demand.
Limitations on pass-throughPass-Through
The New Industry Model also limits the pass-through of costs of electricityenergy to final consumers.customers. The Annual Reference Value corresponds to the weighted average of the electricityenergy prices in “A–5”‘A - 5’ and “A–3”‘A - 3’ auctions, calculated for all distribution companies,distributors, and creates an incentive for distribution companiesdistributors to contract for their expected electricityenergy demands in the A–A - 5 auctions, where prices are expected to be lower than in A–A - 3 auctions. The Annual Reference Value is applied in the first three years of power purchase agreements from new power generation projects. After the fourth year, the electricityenergy acquisition costs from these projects will be allowed to be passed through in full. The decreeDecree No. 5,163/04 establishes the following limitations on the ability of distribution companiesdistributors to pass through costs to consumers:customers:
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| · | No pass-through of costs for |
| · | Limited pass-through of costs for |
| · | Limited pass-through of |
| Energy purchases from existing facilities in the |
| Energy purchases in |
| · | If distributors fail to comply with the obligation to fully contract their demand, the pass-through of the costs from energy acquired in the short-term market will be the equivalent to the lower of the PLD or the Annual Reference Value. |
Rationing under the New Industry Model Law
The New Industry Model Law establishes that, in a situation wherein which the federal governmentFederal Government decrees a compulsory reduction in the consumption of electricityenergy in a certain region, all energy amountquantity agreements in the regulated market, registered within the CCEE in which the buyer is located, shall have their volumes adjusted in the same proportion to the required reduction of consumption.
Rates
Electric energy rates in Brazil are set by ANEEL, which has the authority to adjust and review rates in accordance with applicable concession contracts.contracts and regulations. Each distribution company’s concession contract provides for an annual rate. In general, “Parcel‘Parcel A costs”costs’ are fully passed through to consumers. “Parcelcustomers. ‘Parcel A costs”costs’ are the portion of the rate calculation formula which provides for the recovery of certain costs that are not within the control of the distribution company. “Parcel‘Parcel B costs”costs’, which are costs that are under the control of the distributors, are restatedadjusted for inflation in accordance with the National Consumers Price Index (Índice Nacional de Preços, or IPCA index(1)).index. The average annual rate adjustment includes components such as the inter-year variation of Parcel A costs (CVA)(‘CVA’) and other financial adjustments, which compensate for changes in the company’s costs, upupward or downdownward, that could not be previously taken into account in the rate charged in the previous period.
Holders of electricity distribution concessionsDistribution concessionaires are also entitled to periodic revisions.reviews. Our concession agreements establish a five-year period between periodic revisions.reviews. These revisionsreviews mainly aim: (i) to ensure necessary revenues to cover efficient operationaloperating costs, determined by the regulator, and adequate compensationreturn for investments deemed essential for the services within the scope of each company’s concession; and (ii) to determine the “X factor”‘X factor’, which is calculated based on the average productivity gains from increases in scale, and on labor costs.scale. The X factor is a result of three components: a productivity factor representing those productivity gains (Xpd); the quality factor XQ, which punishes or rewards the distribution company depending on the quality of the service provided, and the factor Xt, which has the objective of reducing or increasing the regulatory operationaloperating costs during thefive-year period between the rates revisions,reviews, to reach the level defined for the last year ofefficient operating cost determined by the revision cycle.regulator.
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In 2011, ANEEL completedconcluded the Public Hearing No. 040/2010, in which it dealt with the methodology for the third periodic revision.review. To calculate the rate of return, ANEEL used the methodology of weighted average costWeighted Average Cost of capital (WACC)Capital (‘WACC’), which resulted in a yearly rate of 7.50% after tax, compared to the rate of 11.25% applied in the previous cycle. This rate of return iswas applicable to the investments made by CemigCEMIG D until the next tariff cycle, which will bewas conducted in 2018. After that, the new rate of return calculated by the regulator is 8.09% after tax.
ANEEL also changed the methodology used to calculate the X Factor: from a method based on discounted cash flow to the Total Factor Productivity (TFP)(‘TFP’) method, which consists of defining potential productivity gains for each company based on average productivity gains.gains in the later years. It also included the other two components, as mentioned above: XQ and Xt. The components of the X factor, determined in the 2013 revision,2018 review, for the period 2013/2018,2018/2023, were: Xt = 0.68%-1.33%, which is applicable on each annual readjustment, Xpd and Xpd=1.15%. On each revision an XQ is calculated which are defined ex-post and added to the previous values.value based, respectively, on the productivity gains from the last year and from changes in the quality of services provided.
ANEEL has also issued regulations governing access to the distribution and transmission facilities, and establishing the rate for use of the local distribution system – Distribution Usage Rates, or TUSD;TUSD and the rate for the use of the transmission grid, or Transmission Usage Rates, or TUST. The rates to be paid by distribution companies, generators and Free Consumersfree customers for use of the interconnected power system are reviewed annually. The review of the TUST takes into account the “permitted annual revenues” (RAP)RAP of transmission concession holdersconcessionaires under their concession contracts.contracts For more detailed information on the rate-setting structure, see “—The Brazilian Power Industry—Rates‘Rates for the Use of the Distribution and Transmission Systems.”’
In 2015, ANEEL separated part of the variable energy costs of distributors, which were previously agreed to be applied in 2016, and created an additional fee that would be passed on to consumerscustomers through their electricityenergy bills. This system becameis known as “tariff‘tariff flags.”’ The system provides consumerscustomers with a system disclosing the realReal costs of electricityenergy generation. The system is a simple one: the colors of flags (green, yellow or red) indicate whether, based on the conditions of electricityenergy generation, whether the cost of electricityenergy to consumerscustomers will increase or decrease. When the system provides a green flag, the hydrological conditions for power generation are favorable and there should be no increaseadditional fee included in the associated costs.customers’ rate. If the conditions are somewhat less favorable, the system will indicate a yellow flag and there will be additional charges proportional to consumption, at a ratio of R$2.50 per 100 kWh (or fractions thereof).consumption. If conditions are even less favorable, the system will indicate a red flag, and there will be anwhich has two levels.
In 2019, the additional tariff imposed on consumers proportionalcharges remain the same as 2018 until July when the additional charges corresponding to each flag were adjusted as follows: the consumption rate ofyellow flag was set to R$4.501.50 per 100 kWh, (or fractions thereof). Throughout the year 2015red flag level 1 was set to R$4.00 per 100 kWh and the red flag level 2 was set to R$6.00 per 100 kWh. Those additional charges were adjusted again in November 1st when the additional charges corresponding to each flag were adjusted as follows: the yellow flag was set to R$1.343 per 100 kWh, the red flag level 1 was set to R$4.169 per 100 kWh and the red flag level 2 was set to R$6.243 per 100 kWh. During 2020, due to the Covid 19 pandemic, the tariff flags were suspended from June/2020 until November/2020 (ANEEL’s dispatch nº 1,511/2020). ANEEL’s Dispatch nº 3,364/2020 restored the tariff flags on December/2020 there was a red flag remainedlevel 2 in the red.December, a yellow flag in January and a green flags in all other months.
ANEEL, when determining tariff adjustment applicable to energy distributors, estimates the costs considering a favorable scenario for power generation. However, during 2015 such adjustments were delayed to the following year, to the date
Acquisition of next tariff adjustment.
Land acquisitionland
The concessions granted to the CompanyCEMIG by the Federal Government do not include a grantassign to the concessionaire the acquisition of the land uponlands in which the power plants are located. In general, electricity utilitiesand substations will be implanted. Energy companies in Brazil have to negotiate with each property owner of property to obtain the land needed land.for the implementation of the entity. However, in the event that a concessionaire is unable to obtain neededthe necessary land in this way, such landamicably, these lands may be condemnedacquired for use by the concessionaire’s useconcessionaire through specific legislation. In cases of governmental condemnation,acquisition, through legal proceedings, the concessionaires may have to participate in negotiations relating toregarding the amountvalue of compensation with landownersto owners and the resettlement of communities to other locations. We make all effortsin legal proceedings. The Company makes every effort to negotiate with the owners and affected communities before applying to the judiciary.taking legal action.
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The Brazilian electric power systemElectric Power System – operational overviewOperational Overview
Brazil’s powerenergy production and transmission is a large-scale hydroelectric and thermal system made up predominantly of hydroelectric power stations, with many separate owners. The Brazilian Interconnected Grid linksconnects companies in the Southern, Southeastern, Center-West, and Northeastern Regions and part of the Northern Region of Brazil. Approximately 2% of the country’s electricityenergy production capacity is not connected to the Brazilian Grid, in small isolated systems located mainly in the Amazon region. Brazil’s abundant hydrological resources are managed through storage reservoirs. It is estimated that Brazil has hydroelectric power generation potential of close to 247,465246,241 MW, of which only 43%44% has been developed or is under construction, according to Eletrobrás studies compiled in July 2014.December 2018.
Source: Banco de Informações de Geração (SIGA ANEEL – 16/02/2021)
By April 2021, Brazil hashad an installed capacity in the interconnected power system of 150.24175.35 GW, approximately 61.34%51% of which is hydroelectric, according to the ‘Matriz de Energia Elétricatrica’ (Eletric Power Matrix) available at theBancoSistemas de Informaçõesão de Geração – BIG‘SIGA’, published by ANEEL. This installed capacity includes half of the installed capacity of Itaipu – a total of 14,000MW14,000 MW owned equally by Brazil and Paraguay. There are approximately 78,189 miles of transmission lines operating at 230 kV or above in Brazil.
Approximately 34% of Brazil’s installed generating capacity and 55% of Brazil’s high voltage transmission lines are operated by Eletrobrás, a company owned by the federal government.Federal Government, operate approximately 30% of Brazil’s installed generating capacity and 49% of Brazil’s high voltage transmission lines. Eletrobrás has historically been responsible for implementing electricityenergy policy, and conservation and environmental management programs. The remaining high voltage transmission lines are owned by state-controlledState-controlled or local electric power companies.companies own the remaining high-voltage transmission lines. Distribution is conducted by approximately 60 state or local utilities, a majority of which havehas been privatized by the federal governmentFederal Government or state governments.
Historical backgroundBackground
The Brazilian Constitution provides that the development, use and sale of energy may be undertaken directly by the federal governmentBrazilian Federal Government or indirectly through the granting of concessions, permissions or authorizations. Since 1995, the federal governmentBrazilian Federal Government has taken a number of measures to restructure the power industry. In general, these have aimed to increase the role of private investment and eliminate restrictions on foreign investment, thus increasing overall competition in the power industry.
In particular, the federal governmentBrazilian Federal Government has taken the following measures:
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| · | The Brazilian Constitution was amended in 1995 to authorize foreign investment in power generation. Prior to this amendment, all generation concessions were held either by a Brazilian individual, or by an entity controlled by Brazilian individuals, or by the Brazilian Federal Government or a state government; |
| · | The Federal Government enacted Law No.8,987 on February 13, 1995, or the Concessions Law, and Law No.9,074 on July 7, 1995, or the Power Concessions Law, that together: |
| o | required that all concessions for the provision of energy-related services be granted through public bidding processes; |
| o | gradually allowed certain energy customers with significant demand (generally greater than 3 MW), referred to as free customers, to purchase energy directly from suppliers holding a concession, permission or authorization; |
| o | provided for the creation of generation entities, or Independent Power Producers, which, by means of a concession, permission or authorization, may generate and sell all or part of their energy to free customers, distribution concessionaires and trading agents, among others; |
| o | granted free customers and energy suppliers open access to the distribution and transmission grids; |
| o | eliminated the need for a concession to construct and operate power projects with capacity from 1 MW to 30 MW, or Small Hydroelectric plants, (SHPs), which was amended on May 28, 2009 by Law No. 11,943 and further by Law No. 13,360/16, raising the limit from 30 MW to 50 MW, regardless of being characterized as an SHP or not; |
The Brazilian Constitution was amendedcurrent regulator, ANEEL, and the Conselho Nacional de Política Energética (National Energy Policy Council, or ‘CNPE’), were created in 1995 to authorize foreign investment in power generation. Prior to this amendment, all generation concessions were held either by a Brazilian individual, or by an entity controlled by Brazilian individuals, or by1997.
In 1998, the federal government or a state government.
The Federal Government enacted Law No. 8,987 on February 13, 1995, or the Concessions Law, and Law No. 9,074 on July 7, 1995, or the Power Concessions Law, that together:
In 1998 the federal government enacted Law No. 9,648 or the (‘Power Industry Law,Law’), to overhaul the basic structure of the electricityenergy industry, providing as follows:
| · | Establishment of a self-regulated body responsible for operation of the short-term energy market, or Wholesale Energy Market, replacing the prior system of regulated generation prices and supply contracts; |
| · | Creation of the ONS a non-profit, private entity responsible for the operational management of the generation and transmission activities of the interconnected power system; |
| · | Establishment of public bidding processes for concessions for construction and operation of power plants and transmission facilities, in addition to the bidding process requirements under the Concessions Law and the Power Concessions Law, On March 15, 2004, the Brazilian Federal Government enacted Law No. 10,848, (or the ‘New Industry Model Law’), in an effort to further restructure the power industry, with the ultimate goal of providing customers with security of supply combined with fair rates. On July 30, 2004, the Brazilian Federal Government published Decree No. 5,163, governing trading rules under the New Industry Model Law, as well as the granting of authorizations and concessions for energy generation projects. These include rules relating to auction procedures, the form of power purchase agreements and the method of passing costs through to final customers. |
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In June 22, 2016, the Brazilian Federal Government issued Provisional Act No. 735, which was converted into Law No. 13,360, enacted on November 17, 2016, which, among other measures, altered Chapter III of Law 12,783, governing competitive bids for energy generation, transmission and distribution concessions.
On July 2017, the MME organized two public consultation proceedings with the purpose of gathering contributions from sectorial agents to improve the national electric energy sector and update its regulatory framework.
On February 9, 2018, the MME submitted for analysis by the Brazilian President a draft bill including several proposed changes to the industry regulation. Among other issues addressed by the MME in the draft of the bill, we highlight:
| · | Divestment of hydro power plants. In case of divestment of hydro power plants, the new concession would be granted by means of payment of compensation to the government and it would not be subject to the quota regime established by Law No. 12,783/2013 (for generation concessions renewed in accordance with Law No. 12,783/2013, the energy produced by the power plant must be sold to all distributors in Brazil according to a quota system); |
| · | Expansion of the free market. The consumption requirement for the characterization of free customers would be reduced. Currently, free customers must have an energy load of 3MW. Between 2020 and 2024, the load criteria qualifying the free customer would vary from 2 MW to 300kW. By 2026, there would not be a minimum energy load required, as long as the free customer is connected to tension equal or higher than 2,3kV; |
| · | Incentives for renewable energy. MME’s proposal tends to reduce incentives granted to renewable energies through discount over connection tariffs. Such discount may be subject to certain conditions; |
| · | Hydrological risk. The hydrological risk of differences in power production due to a hydrological scenario would exclude: (i) generation in disregard of the merit order which means dispatching energy to the grid in disregard of the ascending price raking for energy generation, (ii) anticipation of delivery of firm energy to the system of relevant power plants, and (iii) restriction to the supply of energy to the grid due to delay in the transmission system; and |
| · | Separation between energy consumption and firm energy. A timeline for implementation of the legislative model that separates the charges for firm energy added to the grid and energy consumption. |
Furthermore, it is under analysis in Congress the Bill of Law nº 622/2015, which establishes a deadline, defined in 2017, for the application of discounts not lower than 50% in tariffs for use of the transmission and distribution systems (TUST and TUSD) for projects using alternative energy sources such as solar, wind, biomass and qualified cogeneration, as stated in Article 26 and paragraphs of Law 9,427/1996. In its status, the bill states that such discounts will stay valid for current grants, even if extended, and for future grants up to December 31, 2027. The bill also imposes on the Federal Government the obligation to create a market mechanism to encourage investments in low-carbon energy sources, to be implemented on January 1, 2027.Currently, Bill of Law nº 622/2015 is in the Infrastructural Services Commission, awaiting appointment of a rapporteur.
The publication of Law 14.052/2020 and Resolution 895/2020, proposed the reimbursement of agents holding the concession of hydraulic plants in the MRE of the effects: (i) generation in disregard of the merit order which means dispatching energy to the grid in disregard of the ascending price ranking for energy generation, (ii) anticipation of delivery of firm energy to the system of relevant power plants, and (iii) restriction to the supply of energy to the grid due to delay in the transmission system. These effects will be calculated retroactively from 2012 to 2020, updated and remunerated at the ANEEL rate of 9.63%. The amount will then be paid through extension of the plants' concession. With this new agreement, injunctions are expected to be withdrawn and market deficits to be settled. In this way, the liquidity of the market in the short term and the default in the CCEE should return to their historical values.
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Rationing and Extraordinary Rate Increases
Rationing of electricity; government measures to compensate electricity concession holders.
In late 2000 and early 2001, low levels of rainfall, significant growth in demand for electricity, and Brazil’s significant dependence on electricity generated from hydroelectric sources resulted in an abnormal fall in levels at several of the reservoirs used by Brazil’s largest hydroelectric generation plants. In May 2001 the Brazilian federal government announced a group of measures requiring reduction in consumption of electricity in response to those conditions (the “Brazilian electricity rationing plan”). Under this agreement electricity distribution and generation companies (such as our Company) were compensated for the losses of revenue resulting from the rationing imposed by the federal government – either due to lower volume of sales, or reduction in electricity selling prices, or purchases of electricity on the CCEE. This compensation was given in the form of the right to charge extraordinary increases in electricity tariffs to consumers over a future period, which averaged 74 months, and ended in March 2008.
However, the New Industry Model (its main purpose being to guarantee the supply of electricity) created auctions for the Regulated Market (Ambiente de Contratação Regulado, orACR), in which it is possible to buy electricity from new plants to guarantee supply. Since the New Industry Model was introduced, approximately 47,000MW of capacity have been placed in these auctions, for installation between 2008 and 2017.
Of this amount, a total of 5.97MW was contracted in “Reserve Auctions” – that is to say, this power capacity is not committed to any contract, or to any minimum supply.
In the rainy season of late 2012 and early 2013, there was much less rainfall than expected in Brazil’s Southeastern region (November to March), and in this situation the thermoelectric plants were activated to generate complementary supply to meet the system’s electricity consumption needs. During this period the principal strategy of the national system operator (ONS) –Operador Nacional do Sistema Elétrico) was to preserve storage capacity at the reservoirs of hydroelectric plants, to ensure supply of the system’s energy needs over the whole of the year 2013. This resulted in a high level of expenses on thermoelectric generation, and a sustained increase in the spot market price – which averaged R$121.29/MWh in July 2013.
Once again, in the rainy season of late 2013 and early 2014, rainfall in the Southeast was lower than the expected averages, an all-time low. This placed the system in a state of alert during the whole of 2014, concentrating the efforts of the operators on how to maintain the capacity of the system to supply consumption needs. The ONS continued to dispatch all the thermal plants, and introduced some flexibility to hydroelectric restrictions so as to maintain the levels of storage and meet demand. Over the year the price of electricity reached the regulatory limit, with the spot price rising to R$822/MWh for several months. Its average in the year was R$688/MWh. At the end of 2014, the levels of storage once again reached their lowest level, putting great pressure on the ONS to guarantee full operation of the system.
In order to maintain the requisite supply during 2015, the ONS continued to utilize the full capacity of thermoelectric plants, as there was no improvement in hydrology during the rainy season. In order to avoid possible rationing, the Brazilian federal government revised the applicable tariffs by removing subsidies and passing the cost of thermoelectric generation directly to consumers, the effect of which was an increase in the cost of energy by 50%. The effect of the increase in energy prices, coupled with the poor performance of the economy led to a drop in energy consumption of 1.3% compared to 2014. With lower power consumption, additional thermal utilization and the improvement in the hydrology of the second half of 2015, the Brazilian electricity system met the demand and there was no need for rationing. Once again, we ended the year with low levels of water being stored in reservoirs.
In the spot market, the spot price closed December 31, 2015 with a yearly average of R$287.20/MWh. The price cap for 2015 was R$388.48/MWh.
Conflicts of interest between the CompanyCEMIG and other users of water.water
The operation of reservoirs for generation of electricityenergy by CemigCEMIG requires CEMIGit to assess the multiple uses of water by other users of the relevant river basin, and this in turn requires CEMIGit to consider the applicability of a number of factors, including environmental factors, irrigation, , waterways bridges, and .bridges. In periods of severe drought, such as the one frombeginning in 2013, through CEMIG was actively involved in monitoring and forecasting the levels of reservoirs and in maintaining a dialogue with the public authorities, civil society and users. While the CompanyCEMIG engages other essential users and takes into account societal interests with respect to its water use, competing interests with respect to the use of water could, subject to certain minimum limits established by law, affect the use of water in our operations, which in turn could affect our operationaloperating results andor financial condition. Potential conflicts between CemigCEMIG and other usersareusers are monitored through the Company’sCEMIG’s active participation in River Basin Committees, and also in the related Technical Boards and Working GroupswhereGroups, where users of water, organized civil society and public authorities arerepresented. Cemigare represented. CEMIG participates in 5 River Basin Committees of rivers under federal control, and 20 River Basin Committees of rivers under local State control. The CompanyCEMIG also monitors news published in various media outlets, receives comments and complaints during the periods of floods or drought, and acts to resolve any conflicts with communities living in the river basins where it has hydroelectric plants.
For new projects, CemigCEMIG prepares a socio-environmental impact study, and carries out public hearings with all interested parties, where suggestions in assessing any potential conflicts are analyzed. When the project is operational, a Plan for Environmental Conservation and Use of the Artificial Reservoir Surroundings ((‘Plano Ambiental de Conservação e Uso do Entorno de Reservatório ArtificialArtificial’) is prepared with the participation of stakeholders. This plan is intended to govern conservation, recovery, use and environmental protection of the reservoir and its surrounding area in a balanced way, complying with the applicable legislation, the needs of the project and the demands of society.
CemigCEMIG also conducts a program calledProximityProximidade (‘Proximidade’(‘Proximity’), which coordinates activities aimed at improving the relationship with affected communities. Through this program, the CompanyCEMIG hosts public meetings whichthat cover topics such as the operational and security procedures in its hydroelectric plants; climate conditions; and environmental aspects. The CompanyCEMIG also provides opportunities for the public to take guided tours of plant facilities. ViaBy means of theProximityProximidade program, CemigCEMIG also receives comments and complaints from the affected population and establishes partnerships with local community leaders, publicentities,public entities, the local media and other actors responsible for safety and flood, including Civil Defense associations, the Fire Brigade and the Military Police.
Finally, the CompanyCEMIG uses a risk management system to analyze scenarios and estimate the degree of financial exposure to risks, considering the probability of each event, and its impact. In the scenarios related to potential conflicts with other users, CemigCEMIG also evaluates the effects arising from prolonged droughts, which canmay lead to an increase in competition for water between the electricityenergy sector and other users, and also the risks arising from consequences of floods due to excessive rain.
Concessions
We conduct the majority of our activities in generation, transmission and distribution of electricityenergy through concession contracts executed with the Brazilian Federal Government. The Brazilian Constitution requires that all concessions for public services must be the subject ofto competitive tenders. In 1995, in an effort to implement these provisions of the Constitution, the Federal Government instituted certain laws and regulations, referred to collectively as the Concessions Law, which governgoverns the procedures for competitive tenders in the electricityenergy sector.
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On September 22, 2004, while the rules established by Law No. 9,074 on July 7, 1995 were still in effect, we requested from Aneel an extension for 20 years of the concessions of the Emborcação and Nova Ponte Hydroelectric Plants. On January 14, 2007, the Federal Government approved the extension of these concessions for a period of 20 years from July 24, 2005 until July 24, 2025. The related concession contract was amended on October 22, 2008, to reflect the extension granted to Cemig GT.
On September 11, 2012, the Federal Government issued Provisional Measure 579 of 2012 (‘PM 579’), which became Law No. 12,783 of January 11, 2013 (“Law No. 12,783”), governing the extension of concessions granted before Law No. 9,074 of July 7, 1995 (“Law No. 9,074/1995”). Under PM 579, concessions granted before Law No. 9,074/1995 could be extended for a single time, for a period of up to 30 years.Transmission:
On December 4, 2012, the CompanyCEMIG signed the second amendment to transmission contract No. 006/1997,97, which extended the concessions under such contract for 30 years, in accordance with PMPA 579, beggining inbeginning on January 1, 2013. This resulted in an adjustment to the Permitted Annual Revenue (‘RAP’)RAP from these concessions, which will reducereducing the revenue which we will receive arising from those concessions. The Brazilian governmentFederal Government has compensated us for the reduction of the RAP in part, but we have not yet been compensated for the assets in operation before the year of 2000 have not yet been compensated.2000. In accordance with Law No. 12,783, we are required to be compensated for the reduction of the RAP of the assets in operation before 2000, over a period of 30 years, the amounts being adjusted by the IPCA inflation index.
Also on December 4, 2012, the Company elected not to accept the extension This compensation was addressed by Mining and Energy Ministry Order No. 120/16, which determined that recognition of the generation concessions that expiredamounts owed would take place as from the tariff adjustment process of 2017.
The amounts payable of the indemnities corresponding to the portions of investments linked to revertible goods not amortized or depreciated, recognized by MME in Ministerial Order 291/2017, were impugned in the years 2013administrative sphere (still awaiting decision – a hierarchy appeal), and, in the judiciary. CEMIG GT applied for a Prior Provisional Decision, on November 27, 2016, with the objective of obtaining an order for the Federal Government to 2017, namely Três Marias, Salto Grande, Itutinga, Volta Grande, Camargos, Peti, Piau, Gafanhoto, Tronqueiras, Joasal, Martins, Cajuru, Paciência, Marmelos, Dona Rita, Sumidouro, Poquim and Anil. In relation toexhibit the power plants which had their first extensiondocumentation that supported its calculation of the related concessions afterindemnity for reversion of the issuanceassets of PM 579, namely Jaguara, Miranda, São Simão and Miranda,Volta Grande hydroelectric plants. The Federal Government immediately deposit the Company believes that Generation Concession Contract 007/1997 enablednon-contested portion of the Companyindemnity, which had been set at R$1,028 million. In this case, the application for interim decision was refused and CEMIG GT filed an Interlocutory Appeal (currently pending judgment). Additionally, on January 17, 2018, CEMIG amended the writ: (i) to extend these concessionsreiterate the need for a further 20 years, until 2033, 2035exhibition of documents; (ii) applying for declaration of nullity of Article 1, §1 and 2036, respectively, without restrictions.
Based on this understanding Cemig GT applied for a writ2, and Article 2, of mandamus against an act of the Mining and Energy Minister withMinistry Order 291/2017, and consequent payment of indemnity to include all the objective of ensuring its right to extendinvestments made by CEMIG GT in the concessionconcessions referred to; and (iii) requesting immediate payment of the Jaguara hydroelectric plant, pursuantnon-contested amount.
Generation contracts:
In the years 2014 and 2015, Brazil experienced a severe drought culminating in further alterations to the terms of Clause 4 of Concession Contract 007/1997. The Company was granted an interim injunction on September 3, 2013, which is still in effect, to continue commercial operation of the Jaguara plant until a judgment was issued by the courts on the writ of mandamus. Judgment was issued on this action, denying Cemig GT’s writ of mandamus application. Before the result of that judgment was published, Cemig GT petitioned to the Federal Supreme Court (Supremo Tribunal Federal, or STF) seeking provisional remedy and asking for an interim injunction permitting it to continue operating and managing the plant. The interim injunction was granted on December 21, 2015, but the STF has not issued a final rulling on the provisional remedy yet.
In addition to the litigation relating to the Jaguara plant, Cemig GT has also applied for a writ of mandamus with respect to the São Simão plant against an act of the Mining and Energy Minister, in order to ensure its right to extend the concession of this plant.
The interim injunction originally obtained by the Company on December 19, 2014, to remain in control of commercial operation of the São Simão plant until the judgment on the writ of mandamus, was reviewed, and overturned, by the Reporting Judge on June 30, 2015. While this proceeding is ongoing, Cemig GT is still in control of the plant, and since September 2015 the power generated by the São Simão plant has been allocated to the Regulated Market and has been paid for under the ‘quota’ regime, whereby Cemig GT is entitled to receive an amount equal to the costs of operating and maintaining the plant and it subject to adjustments related to the performance of the generation of electricity, instead of being able to sell the energy in the Free Market. On September 23, 2016 Cemig GT appealed the reversal of the interim injunction to the Superior Court (Superior Tribunal de Justiça, or STJ), but there has been no judgement on the appeal yet, nor on the merits of the writ of mandamus.
For other hydroelectric plants, the concessions of which would expire for the second time by the year 2017, which include Três Marias, Salto Grande, Itutinga, Camargos, Piau, Gafanhoto, Peti, Tronqueiras, Joasal, Martins, Cajuru, Paciência, Marmelos, Dona Rita and Volta Grande,the company elected, in December 2012, not to accept the extension of their contracts under the terms of PM 579, and to continue to operate these facilities commercially until the termination of their respective concessions. As a result, with respect to the foregoing plants, with the exception of the Volta Grande plant, termination of the applicable concession occurred in July 2015.
During 2013 and 2014 Brazil experienced hydroelecrical shortages. A new regulatory framework, was established by Provisional MeasureAct No. 688/2015 (‘PM 688’), which became15 and later converted into Law No. 13,203/2015. Among15. This law, among other matters, PM 688 and Law No. 13,203/2015measures, significantly altered Law No. 12,783/2013. 13, creating a mechanism of voluntary renegotiation of hydrological risks, since they affect the hydroelectric generation companies, and changing the rules for bidding for certain hydroelectric generation concessions. Subsequently, in 2016, other changes were introduced to the sector by Provisional Act No. 735/16, enacted as Law No. 13,360/16, which, among other measures, changed Chapter III of Law No. 12,783/13, which relates to bidding for energy generation, transmission and distribution concessions.
Following publication of the tender documents for Generation Auction No. 12/201515 on October 7, 2015, which included the new regulatory provisions for renewal of concessions of existing plants stipulated by Law No. 13,203/2015, Cemig’s15, CEMIG’s Board of Directors authorized our participation in Generation Auction No. 12/2015, and CemigCEMIG GT was successful at this auction, held at the BM&F BovespaB3 on November 25, 2015. Cemig CEMIG won concessions for Lot D’D’ – which comprises the concessions for 18 hydroelectric plants: Três Marias, Salto Grande, Itutinga, Camargos, Cajuru, Gafanhoto, Martins, Marmelos, Joasal, Paciência, Piau, Coronel Domiciano, Tronqueiras, Peti, Dona Rita, Sinceridade, Neblina and Ervália. The total installed capacity of these plants is 699.5 MW, and their guaranteed basic offtake is 420.2 MW average.
These concession contracts have a period of 30 years beginning in January 2016 and expiring in January 2046 and, during the first half of 2016, were assigned by CemigCEMIG GT to 7 wholly-owned subsidiaries created for commercial operation of these concessions.concessions (CEMIG Geração Camargos, CEMIG Geração Itutinga, CEMIG Geração Três Marias, CEMIG Geração Volta Grande, CEMIG Geração Leste, CEMIG Geração Oeste and CEMIG Geração Sul).
On September 9, 2020, the Law 14,052 was issued, changing the Law 13,203/2015 and establishing new conditions for renegotiation of hydrological risk in relation to the portion of costs incurred due to the GSF, borne by the holders of hydroelectric plants participating in the MRE between 2012 and 2017, when there was a serious crisis in water sources.
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The aim of this new law is to compensate the holders of hydroelectric plants participating in the MRE for non-hydrological risks caused by:
(i) Generation ventures classified as structural, related to bringing forward of physical guarantee of the plants;
(ii) The restrictions on start of operation of the transmission facilities necessary for outflow of the generation output of structural projects; and
(iii) Generation outside the merit order system, and importation.
This compensation will take the form, of extension of the grant of concession or authorization to operate, limited to 7 years, calculated on the basis of the parameters applied by ANEEL.
On December 1, 2020, ANEEL issued its Normative Resolution 895, which established the methodology for calculation of the compensation, and the procedures for renegotiation of hydrological risk. To be eligible for the compensations under Law 14,052, the holders of hydroelectric plants participating in the MRE are required to:
(i) Cease any legal actions which claimed exemption from, or mitigation of hydrological risks related to the MRE;
(ii) Relinquish any claims and/or further legal actions in relation to exemptions from or mitigation of hydrological risks related to the MRE; and
(iii) Not to have renegotiated hydrological risk under Law 13,203/2015.
On March 2, 2021 the CCEE sent to ANEEL the calculations for the concessions extensions in the Free Market (ACL) that have opted to accept the conditions proposed by ANEEL Normative Resolution 895/2020 and Law 14,052/2020. The Company’s management is awaiting ratification and publication by ANEEL of its extensions of the concession grants, for subsequent submission to the Company’s governance bodies for approval. Thus, no impact arising from this subject has been recorded in the financial statements at December 31, 2020.
Based on the preliminary data supplied by CCEE to ANEEL, the Company’s plants will have the right to the following periods of extension:
| Power plant | Physical Guarantee (average MW) | Preliminary expectation of Concession extension (months) |
| Emboração | 500 | 23 |
| Nova Ponte | 270 | 25 |
| Sá Carvalho | 56 | 22 |
| Rosal | 29 | 46 |
| Others (1) | 399 | - |
(1)Includes 11 power plants, of which 7 are owned by CEMIG GT, 1 is owned by CEMIG PCH and 3 are owned by Horizontes. The average concession extension in months varies between 1 and 84 months.
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With the approval of Law 14,120/2021, the right to reimbursement for the generation plants of Lot D was recognized, enabling the CCEE to make a new calculation, including these plants, indicating the right to their concession extension by the allowed maximum (seven years). Official confirmation of these amounts is pending regulations to be issued by ANEEL.
Distribution contractscontracts::
In relation to the extension of the distribution concession contracts, CemigCEMIG D, in accordance with Decree No. 7,805/2012 and Decree No. 8,461/2015, indicated acceptance of the extension of its concession contracts, and signed the Fifth Amendment to its Concession Contract in December 2015. This amendment guarantees extension of the foregoing concessions for a furtheran additional 30 years, from January 1, 2016 until January 2, 2046, but2046. The new amendment also requires the Company’sCEMIG’s compliance with more stringent rules regarding service quality and with respect to the Company’sCEMIG’s economic and financial sustainability, thatwhich must be met during the full 30 years of the concession.
Such compliance will be annually assessed by ANEEL, and if there is non-compliance, the concession holderconcessionaire may be obliged to arrange for capital contributions by its controlling stockholders.shareholders. Non-compliance for two consecutive years, or for a total of fivenon-consecutive years, will result in legal termination (caducidade)forfeiture of the concession
Principal Regulatory Authorities
National Energy Policy Council – CNPE
In August 1997, the National Energy Policy Council (Conselho Nacional de Política Energética, orCNPE), was created to advise the Brazilian president regarding the development and creation of the national energy policy. The CNPE is presided over by the MME, and the majority of its members are officials of the Federal Government. The CNPE was created to optimize the use of Brazil’s energy resources and to assure the supply of electricity to the country.
Mining and Energy Ministry – MME
The MME is the federal government’s primary regulator of the power industry. Following the adoption of the New Industry Model Law, the federal government, acting primarily through the MME, undertook certain duties that were previously under the responsibility of ANEEL, including the drafting of guidelines governing the granting of concessions and the issuance of directives governing the bidding process for concessions relating to public services and public assets.
National Electric Energy Agency – ANEEL
The Brazilian power industry is regulated by ANEEL, an independent federal regulatory agency. After enactment of the New Industry Model Law, ANEEL’s primary responsibility is to regulate and supervise the power industry in line with the policy to be dictated by MME and to respond to matters which are delegated to it by the Brazilian Federal Government and or the MME.
National System Operator – ONS
The ONS was created in 1998 as a non-profit private entity comprising Free Consumers, electricity utilities engaged in the generation, transmission and distribution of electricity, and other private participants such as importers and exporters. The New Industry Model Law granted the federal government the power to appoint three directors of the ONS, including the Director-general. The primary role of the ONS is to coordinate and control the generation and transmission operations in the interconnected power system, subject to ANEEL’s regulation and supervision.
Electricity Trading Chamber – CCEE
One of the main roles of the CCEE is to conduct public auctions in the regulated market, including the auction of existing electricity and new electricity. Additionally, the CCEE is responsible, among other things, for (1) registering the volume of all the energy purchase agreements within the regulated market (Contratos de Comercialização de Energia no Ambiente Regulada, orCCEAR), and the agreements resulting from the free market, and (2) the accounting for and clearing of short-term transactions.
Under the New Industry Model Law, the price of electricity bought or sold in the spot market, known as the Differences Settlement Price (Preço de Liquidação de Diferenças, orPLD), takes into account factors similar to the ones used to determine the Wholesale Energy Market spot prices prior to the New Industry Model Law. Among these factors, the variation of the PLD will be mainly linked to the equilibrium between the market supply and demand for electricity as well as the impact that any variation on this equilibrium may have on the optimal use of the electricity generation resources by the ONS.
The members of the CCEE are generators, distributors, trading agents and Free Consumers, and its board of directors comprises four members appointed by these agents and one appointed by the MME, who is the chairman of the board of directors.
Energy Research Company – EPE
The Brazilian federal government created the Electricity Research Company, or EPE, by a decree of August 16, 2004. It is a state-owned company, responsible for carrying out strategic research on the energy industry – including electricity, oil, gas, coal and renewable energy sources. EPE is responsible for: (i) studying projections for the Brazilian energy matrix; (ii) preparing and publishing the national energy balance; (iii) identifying and quantifying energy resources; and (iv) obtaining the required environmental licenses for new generation concession holders. EPE’s research is used to support the MME in its policymaking role in the domestic energy industry. EPE is also responsible for approving the technical qualification of new electricity projects to be included in the related auctions.
The Electricity Sector Monitoring Committee – CMSE
Decree No. 5,175 of August 9, 2004 established the Electricity Sector Monitoring Committee, or CMSE, which acts under the direction of the MME. The CMSE, is responsible for monitoring and permanently evaluating the continuity and security of electricity supply conditions and for indicating necessary steps to correct identified problems.
Ownership limitations
On November 10, 2009, ANEEL issued Resolution No. 378, requiring it to notify the SDE (the Economic Law Secretariat –Secretaria de Direito Econômico – of the Ministry of Justice) if it identifies any act that may cause unfair competition or may result in significant market control – under Article 54 of Law 8,884 of June 11, 1994. After the notification, SDE must inform CADE. On November 30, 2011, Law No. 8,884 was revoked and replaced by Law No. 12,529 – which terminated the SDE and replaced it with the Competition General Management Unit (Superintendência Geral) – which, if necessary, will require ANEEL to analyze any such events, upon which CADE will decide if there should be any sanctions applied. Under Articles 37 and 45 of Law No. 12,529 these may vary from pecuniary penalties to dissolution or other disposition of the offending company.
Incentives for Alternative Sources of Power
In 2000, a federal decree created the Thermoelectric Priority Program (Programa Prioritário de Termeletricidade, orPPT), for the purpose of diversifying the Brazilian energy matrix and decreasing its strong dependency on hydroelectric plants.
In 2002, the Proinfa Program was established by the federal government to create certain incentives for development of alternative sources of energy, such as wind energy projects, Small Hydroelectric Power Plants and biomass projects.
Law No. 9,427/96, as amended by Law No. 10,762/03, further established that hydroelectric plants with an installed capacity of 1MW or less, generation plants classified as Small Hydroelectric Plants, and those with qualifying solar, wind, biomass or cogeneration sources, with capacity to supply 30MW or less, used for independent production or self-production, will have the right to a discount of at least 50% on the rates for use of the transmission and distribution system, charged on production and consumption of the energy sold. This legal provision was regulated by ANEEL through its Resolutions 077/2004, 247/2006 and 271/2007.
Also the government held two alternative energy generation auctions and four backup regulated auctions, for power from wind energy projects, SHP projects, or biomass projects.
Regulatory chargesCharges
Global Reversion Fund and Public Use Fund – RGR and UBP
In certain circumstances, power companies are compensated for assets used in connection with a concession if this concession is eventually revoked or is not renewed. In 1971, the Brazilian Congress created a Global Reversion Fund (Reserva Global de Reversão, orRGR ‘RGR’), designed to provide funds for such compensation. In February 1999, ANEEL revised the assessment of a fee requiring all distributors, transmission companies and certain generators operating under public service regimes to make monthly contributions to the RGR at an annual rate equal to 2.5% of the company’s fixed assets in service, but not to exceed 3.0% of total operating revenues in any year. In recent years, the RGR has been used principallymainly to finance generation and distribution projects.
The federal governmentBrazilian Federal Government has imposed a fee on IPPs reliant on hydrological resources, except for Small Hydroelectric Power PlantsSHPs and generators under the public services regime, similar to the fee levied on public-industry companies in connection with the RGR. IPPs are required to make contributionscontribute to the Public Use Fund (Fundo de Uso de Bem Público, orUBP ‘UBP’), according to the rules of the corresponding public bidding process for the granting of concessions. Until December 31, 2002, Eletrobrás received the UBP payments. Since then they have been paid directly to the federal government.Brazilian Federal Government.
Since January 2013, the Global Reversion Fund has not been charged to: (i) any distribution companies;distributors; (ii) any transmission or generation utilities whose concessions have been extended under Law No. 12,783; or (iii) any transmission utilities that started their bidding procedure on or after September 12, 2012.
Fuel Consumption Account – CCC
The Fuel Consumption Account (Conta de Consumo de Combustível, or CCC)‘CCC’), was created in 1973 to generate financial reserves to cover the high costs associated with the use of thermoelectric energy plants, especially in the Northern Region of Brazil, due to the higher operating costs of thermoelectric plants compared to hydroelectric plants. All electricityenergy companies were required to contribute annually to the CCC. Annual contributions were calculated on the basis of estimates of the cost of fuel needed by the thermoelectric energy plants in the following year. The CCC was then used to reimburse generators operating thermoelectric plants for a substantial portion of their fuel costs. TheStarting in 2013, CCC's expenditures are included in the annual budget of the CDE. Eletrobrás managed the CCC was administeredand, as of May 2017, it has been managed by Eletrobrás.
Since January 2013, with the enactment ofCCEE pursuant to Law No. 12,783/2013, utilities and market participants are no longer required to contribute to the CCC.13,360/2016.
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Charge for the Use of Water Resources
With the exception of Small Hydroelectric Plants, all hydroelectric utilities in Brazil must pay fees to Brazilian states and municipalities for the use of hydrological resources. The amounts are based on the amount of electricityenergy generated by each utility and are paid to the states and municipalities where the plant or the plant’s reservoir is located.
Energy Development Account – CDE
In 2002, the federal government institutedBrazilian Federal Government created the Energy Development Account (Conta de Desenvolvimento Energético, orCDE), to be in effect for 25 years, funded by: (i) annual payments made by concession holdersconcessionaires for the use of public assets; (ii) penalties and fines imposed by ANEEL; and, (iii) since 2003, the annual fees to be paid by agents offering electricityenergy to final consumers,customers, by means of a charge to be added to the rates for the use of the transmission and distribution system. The amounts are adjusted annually. The CDE was created to support: (1) development of electricityenergy production throughout the country; (2) production of electricityenergy from alternative sources; and (3) universalization of energy services throughout Brazil. With the enactment of Law No. 12,783/2013, these fees were used to contribute to reduction of electricity tariffs.energy rates. The CDE is managed by Eletrobrás.CCEE.
Under the New Industry Model Law, failure to pay the contribution to the RGR, the ProinfaPROINFA Program, the CDE or any payments for purchases of electricityenergy in the regulated market prevents the non-payingdefaulting party from receiving a rate readjustment (except for an extraordinary revision)review), or receiving resources arising from the RGR or CDE.
ANEEL Inspection Charge – TFSEE
The Energy Services Inspection Charge, or TFSEE, is an annual tax charged by ANEEL for its administrative and operationaloperating costs. It is calculated according to the Tariff Regulation Procedure (Procedimento de Regulação Tarifária, orProret ‘Proret’) – (Subsection 5.5: Energy Services Inspection Charge – TFSEE)Charge) based on the type of service provided (including independent production), and is proportional to the size of the concession, permission or authorization. It is limited to 0.4% of the annual economic benefit, considering the installed capacity, earned by the concessionaire, permit holder or authorized party and must be paid directly to ANEEL in 12 monthly installments.
The ACRRegulated Market Account
Contracts held by distribution companiesdistributors for a total supply of approximately 8,600 MW expired in December 2012. These contracts had been executed in the first auctions of energy from existing supply sources – in 2005, and the energy should have beenre-contracted in a further auction, but the Brazilian Federal governmentGovernment did not hold the auction in 2012, because it expected that, with the renewal of the concession contracts this supply would come from Assured Energy Quota Contracts. However, the energy supply that was renewed was lower than expected and the distribution companiesdistributors were under-contracted by 2,000 MW in 2013,2014 and by 2,500 MW in 2014.2015. By 20152016, the lowerdecrease of consumption of electricity fixedenergy resulted in a balance between the under-contracted scenario leadpower purchase agreements and the distribution to a regular energy balance situation.demand from distributors. The ACRRegulated Market Account was established in 2014 to cover the exposure that distribution companiesdistributors could have as a result of under-contracted amounts. By 2015, the lower consumption of electricityenergy eliminated the under-contracted shortfall and resulted in a more regular contract.contracting level. Thus, the ACRRegulated Market Account was not needed to cover the exposure of distribution companiesdistributors during 2015.
This situation was further exacerbated by the fact that certain power plants did enter into operation when expected, and by the low level of contracting in the auctions held in 2013 and 2014. The result was that the total level of under contracting in 2014 was 3,500 MW. In this scenario the only option for the distribution companies,distributors, in a situation of under contracting, iswas to purchase the required supply in the spot market.
The hydrological situation of the system in 2013 and 2014, as explained above, raised the energy cost in the spot market to its highest level, causing the financial exposure of the distribution companiesdistributors to reach billions of Reais. Reais.
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Since the cost of the distribution companies’distributors’ exposure is passed through to consumerscustomers only in the following year, this gap caused a problem in the companies’ cash flow. By 2015, the new price cap was lower than in 2014 and the “tariff flags”‘tariff flags’ mechanism helped the distribution companiesdistributors to balance their exposure so no new loan was necessary.
To deal with this, the government created the ACRRegulated Market Account, by Decree No. 8,221/2014 (of14 enacted on January 1, 2014),2014, regulated by ANEEL Resolution No. 612/2004,04, which created an account to be managed by the CCEE, aiming to cover part or all of the costs resulting from the involuntary exposure to the spot market and of the dispatching of the thermal plants linkedrelated to the availability contracts in the regulated market. To cover these costs, the CCEE obtained a financing from a group of private and public institutions. These funds were then passed to the distribution companies,distributors, as determined by Decree No. 8,221/201414 and ANEEL Resolution No. 612/2014. In 2014 and 2015, R$21 billion was raised by this account and passed through to the distribution companies.distributors.
Starting in The ANEEL Resolution No. 1,863/15 defined the charges to be applied on the energy customers and the Resolution No. 2004/2015 the total amount of theselater updated those charges. These loans contracted was paid in 24 months,were charged by means of the payment of charges through CDE, by alland were inserted in the energy rates after the Annual Tariff Adjustment of each distribution companiescompany proportionally to their captive markets. This chargeInitially CEMIG D had 59 months to pay the loan, and in December 2015, that period was addedupdated to the electricity rates charged by the distribution companies to their consumers.47 months.
Tariffs Flags
In 2015, ANEEL separated part of the variable energy costs of distributors, which were previously agreed to be applied in 2016, and created an additional fee on that would be passed on to consumers through their electricity bills. This system became known as “tariff flags.” The system provides consumers with a system disclosing the real costs of electricity generation. The system is a simple one: the colors of flags (green, yellow or red) indicate whether based on the conditions of electricity generation whether the cost of electricity to consumers will increase or decrease. When the system provides a green flag, the hydrological conditions for power generation are favorable and there should be no increase in the associated costs. If the conditions are somewhat less favorable, the system will indicate a yellow flag and there will be additional charges proportional to consumption, at a ratio of R$2.50 per 100 kWh (or fractions thereof). If conditions are even less favorable, the system will indicate a red flag and there will be an additional tariff imposed on consumers proportional to the consumption rate of R$4.50 per 100 kWh (or fractions thereof). Throughout the year 2015 the tariff flag remained in the red.
Energy Reallocation Mechanism
The Energy Reallocation Mechanism (Mecanismo de Realocação de Energia, orMRE ‘MRE’), attempts to mitigate the risks involved in the generation of hydroelectric power by mandating that all hydrohydroelectric power generators share the hydrological risks within the Brazilian Grid.grid. Under Brazilian law, the revenue from sales by generators does not depend on the amount of energy they in fact generate, but on the “Guaranteed Energy”‘Guaranteed Energy’ or “Assured Energy”‘Assured Energy’ of each plant, indicated in each concession agreement.
Any imbalances between the power energy actually generated and the Assured Energy is covered by the MRE. In other words, the MRE reallocates the energy, transferring a surplus from those who generated in excess of their Assured Energy to those who generated less than their Assured Energy. The volume of electricityenergy actually generated by the plant, either more or less than the Assured Energy, is priced pursuant to an “Energy‘Energy Optimization Tariff”Rate,’ which covers the operation and maintenance costs of the plant. This additional revenue or expense is accounted for on a monthly basis by each generator.
The MRE is efficient in mitigating the risks of individual plants that have adverse hydrological conditions in a river basin, but it does not succeed in mitigating this risk when low hydrological levels affect the whole Grid,grid, or large regions of it. In extreme situations, even with the MRE, the aggregate generation of the whole Systemsystem will not attain the levels of the total Assured Energy, and hydrological generators may be exposed to the spot market. In these situations, the shortage in hydro resources will be compensated by greater use of thermal generation, and spot prices will be higher.
In 2014, Brazil was subject to very adverse hydrological conditions, which resulted in a lower level of hydroelectric generation, and on the full utilization of thermoelectric plants of the system, as noted above. This led the plants of the MRE to generate at levels below their physical guarantee levels, causing an exposure for the generation companies to the short-term market. The proportion of the exposure is calculated by the ratio between the electricityenergy generated by all the plants of the MRE and the total of all the physical guarantees. This ratio is called the Generation Scaling Factor or GSF(‘GSF’) (Fator de ajuste da energia). In 2014, the GSF was 0.91, which indicates that the generation companies had their physical guarantee reduced by 9% in that year. In 2015, this exposure continued to occur, despite of a slightly better hydrology, but with the continued thermal dispatch and lower energy consumption the GSF closed the year at 0.84.
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During 2015, the low values of GSF’s in conjunctionGSFs along with high spot prices again left producers of hydroelectric generation with high financial exposure. Thus, starting in March 2015, generators began to obtain court injunctions to prevent such exposure. Such injunctions claimed that the GSF’s calculation methodology was wrong whichincorrect and that it caused undue exposure to producers. From March to September, there was an exponential increase in the number of injunctions issued, which led to a paralysis of the market. In order to address this situation, the Brazilian federal governmentFederal Government proposed (by means of MPProvisional Act No. 688) the renegotiation of the hydrological risk, enabling generators with ACR’sFree Market contracts to transfer the exposure to consumerscustomers in exchange for a risk’s premium payment to be deposited in the so-called tariff band deposit account (the tariff band surcharges are deposited in such account and transferstransferred to the distribution concessionaires are made from this account as well)concessionaires) and would be indemnified for the losses suffered in 2015 by means of, among other measures, an extension of their power generation grants (concessions or authorizations, as the case may be) for up to 15 years. In other words, hydroelectric power plants would recover the costs incurred with GSF deficits retroactively to January 2015, and such recovery would form a “regulatory asset”‘regulatory asset,’ which would be amortized over the term of the concession/authorization. If the remaining concession/authorization period is insufficient (i.e., not long enough to amortize the regulatory asset), then generating companies would have a concession/authorization extension (limited to 15 years). To be able to use the mechanism the companies have to waive all claims filed and all injunctions obtained, as well as waive any further rights they would have in connection with any such legal action. This mechanism enablesenabled plants with contracts signed in the regulated market and the free market to renegotiate them. However, the system and mechanism for renegotiating are different in the two markets. In both, this mechanism functions as a hedge, – in which the generators bear the high cost of reserve of energy, and for their generation they receive the amount stipulated by the spot market price.price for their generation.
In the free market,Free Market, the system did not have the same acceptance levels that were present in the regulated market, since the value of the risk premium was too high and, in order to hedge their GSF exposure, the generation companies would have to acquire reserve energy contracts. For these reasons, and considering that and there are other alternatives available in the free market to mitigate the hydrological risk,risks, generation companies deemed the voluntary negotiation in general, was deemed inefficient by generation companies.
inefficient. Consequently, acceptance of the mechanism by the regulated market was, approximately 90%. However, it was not accepted by the free market.
In 2020, the average GSF stood at 0.83 still impacted by a hydrological condition below the historical average and lower reservoir levels. The chart below presents the average price and GSF for the periods shown:
Charges for Use of the Distribution and Transmission Systems
ANEEL oversees rate regulations that govern access to the distribution and transmission systems and establish rates: (i) for the use of the local distribution system – Distribution Usage Rates, or TUSD;TUSD and (ii) for the use of the interconnected transmission grid – Transmission Usage Rates, or TUST. Additionally, distribution companiesdistributors of the South, South-EastSoutheast and Midwest parts of the grid pay specific charges for transmission of electricityenergy generated at Itaipu.Itaipu Hydro Plant. All these rates and charges are set by ANEEL. The following is a summary of each rate or charge:
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TUSD
The TUSD is paid to a distribution company by generation companies, other distribution companiesdistributors and consumers,customers, for the use of the distribution system to which they are connected. It is adjusted annually according to an inflation index, the variation in transmission costs, and regulatory charges. This adjustment is passed to customers of the Distributiondistribution network in the Annual Rate Adjustment or Revisions.
Law 9,427/96 defines the application of discounts not lower than 50% in tariffs for use of the distribution and transmission systems (TUSD and TUST) for projects using alternative energy sources such as solar, wind, biomass and qualified cogeneration, as stated in his Article 26 and paragraphs.
TUST
The TUST is paid by generators, distributors and Free Consumers,free customers, for the use of the basic transmission grid to which they are connected. It is adjusted annually according to an inflation index and taking into account any adjustment to the annual revenue of the transmission companies. According to criteria established by ANEEL, owners of the different parts of the transmission grid were required to transfer the coordination of their facilities to the ONS in return for receiving regulated payments from the transmission system users. Generation and distribution companies,distributors, and Free Consumers,free customers, also pay a fee for exclusive transmission connections to some transmission companies. The fee is set byregulator sets the regulatorfee for a 12-month period and it is paid monthly through the issuance of invoices.
As mentioned above, this tariff may suffer changes regarding the application of discounts for generators using the low-carbon energy sources defined in Article 26 and paragraphs of Law 9,427/1996.
Distribution rates
Distribution rates are subject to review by ANEEL, which has the authority to adjust and review rates in response to changes in electricityenergy purchase costs, charges payments or transmissions payments, or other factors related to market conditions. ANEEL divides the costs of all distribution companiesdistributors into: (1) costs that are beyond the control of the distributor, or “Parcel A”‘Parcel A’ costs; and (2) costs that are under the control of the distributor, or “Parcel B”‘Parcel B’ costs. The rate adjustment is based on a formula that takes into account the division of costs between the two categories.
Parcel A costs include, among others, the following:
| · | Regulatory Charges (CDE, TFSEE and PROINFA); |
| · | Costs of energy purchased for resale (CCEARs, power from Itaipu, and bilateral agreements); and |
| · | Transmission charges (National grid, the Transmission Frontier grid, transport of energy from Itaipu, use of network for connection to other transmission companies, use of networks of other distributors, and the ONS). |
Parcel B costs are those that are within the utility’s control, and include:
| · | Return on investment; |
| · | Taxes; |
| · | Regulatory default; |
| · | Depreciation costs; and |
| · | Costs of operation of the distribution system. |
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In general, Parcel A costs are fully passed through to consumers.customers. Parcel B costs,costs; however, are restatedadjusted for inflation in accordance with the IGP–MIPCA inflation index (General Market Price Index – Índice Geral de Preços do Mercado), adjusted by the X Factor. Electricity distribution companies,Energy distributors, according to their concession contracts, are also entitled to periodic revisions.reviews. These revisionsreviews mainly aim: (i) to ensure necessary revenues to cover efficient PortionParcel B operationaloperating costs and adequate compensation for investments deemed essential for the services within the scope of each company’s concession; and (2)(ii) to determine the X factor.
The X factor is used to adjust the proportion of the change in the IGP-MIPCA index that is used in the annual adjustments and to share the company’s productivity gains with final consumers.customers.
In addition, holders of electricity distribution concessionsconcessionaires are entitled to an extraordinary review of rates, on a case-by-case basis, in the event of unusual circumstances, to ensure their financial equilibriumbalance and compensate them for unpredictable costs, including taxes that significantly change their cost structure.
| Item 4A. | Unresolved Staff Comments |
Not Applicable.
| Item 5. | Operating and Financial Review and Prospects |
You should read the information contained in this section together with our consolidated financial statements as of December 31, 2020, 2019 and January 1, 2019 and for the years ended December 31, 2020, 2019 and 2018, contained elsewhere in this annual report. The following discussion is based on our consolidated financial statements, which have been prepared in accordance with IFRS and presented in reais.million of Reais.
Our consolidated financial statements for the years ended December 31, 2019 and the opening balance as of January 1, 2019 have been restated to reflect the application of change in accounting policy disclosed in note 2.8 of our annual consolidated financial statements.
Basis of Preparation
Statement of compliance
Our consolidatedThe financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”(‘IFRS’), as issued by the International Accounting Standards Board (IASB)(‘IASB’).
Company’s management certifies that all relevant and material information in the financial statements is being disclosed, which is used by management in its administration of the Company.
As part of its normal operations, the Company receives written comments and/ or requests from local regulators (i.e. ANEEL and CVM) regarding some of the information reported by the Company on its quarterly and annual reports, as well as on its regulatory financial statements filled locally in Brazil. The Company responds to such requests timely and its management believes that these comments and/ or requests would not have a material impact on the current or previously issued financial statements.
On April 30, 2021, the Company’s Audit Committee authorized the issuance of the consolidated financial statements as of December 31, 2020, 2019 and January 1, 2019 and for the years ended December 31, 2020, 2019 and 2018.
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Basis of measurement
The consolidated financial statements have beenwere prepared based on a historical cost basis, except in the case of certain financial instruments and assets as held for sale, which are measured at fair value and fair value less costs to sell, in accordance with the exceptionstandards applicable, as detailed in Note 31 and 32, respectively.
Functional currency and presentation currency
The consolidated financial statements are presented in Reais, which is the functional currency of the followingCompany and its subsidiaries, joint ventures and affiliates, and all amounts are rounded to the nearest million, except when otherwise indicated.
Transactions in foreign currency were converted to Reais at the exchange rate as of the transaction date. Balances of monetary assets and liabilities denominated in foreign currency are translated to Reais at the exchange rates at the reporting date. Foreign exchange gains and losses resulting from the settlement or translation of assets and liabilities denominated in foreign currency are recorded in finance income and costs in the consolidated statement of income.
Use of estimates and judgments
Preparation of the consolidated financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, revenues and expenses. Uncertainties about these assumptions and estimates could result in outcomes that could require a material itemsadjustment to the carrying amount of assets or liabilities affected in future periods.
Estimates and assumptions are periodically reviewed, using as a reference both historical experience and any significant change in scenarios that could affect the Company’s financial position or results of operations. Revisions in relation to accounting estimates are recognized in the period in which the estimates are reviewed, and in any future periods affected.
The main estimates and judgments that have a significant effect on the amounts recognized in the financial statements are as follows:
| · | Adjustments for loss on doubtful accounts – Note 8 to the Financial Statements; |
| · | Deferred income tax and social contribution tax – Note 10 to the Financial Statements; |
| · | Financial assets and liabilities of the concession – Note 14 to the Financial Statements; |
| · | Concession contract assets – Note 15 to the Financial Statements; |
| · | Investments – Note 16 to the Financial Statements; |
| · | Property, plant and equipment (‘PP&E’) and useful life of assets – Note 17 to the Financial Statements; |
| · | Intangible assets and useful life of assets – Note 18 to the Financial Statements; |
| · | Leasing transaction – Note 19 to the Financial Statements; |
| · | Amounts to be refunded to customers – Note 21 to the Financial Statements; |
| · | Employee post-employment obligations –Note 24 to the Financial Statements; |
| · | Provisions – Note 25 to the Financial Statements; |
| · | Unbilled revenue – Note 27 to the Financial Statements; |
| · | Financial instruments measurement and fair value measurement – Note 31 to the Financial Statements; |
| · | Assets held for sale measurement – Note 32 to the Financial Statements. |
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The settlement of the transactions involving those estimates may result in amounts that are significantly different from those recorded in the Statement of financial position (balance sheet):statements due to the uncertainty inherent to the estimation process. The Company reviews its significant estimates at least annually.
The main new accounting standards and interpretations
| a) | New accounting standards, interpretation or amendments of accounting standards, applied for the first time in 2020 |
The new accounting standards, interpretation or amendments of accounting standards, applied for the first time in 2020 had no impact on the consolidated financial assetsstatements of the Company. (See Note 2 of the financial statements).
| b) | Standards issued but not yet effective |
The new and amended standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Company’s financial statements are disclosed in the financial statements. The Company intends to adopt these new and amended standards and interpretations, if applicable, when they become effective. (See Note 2 of the financial statement).
Summary of significant accounting policies
The significant accounting policies described in the financial statements have been applied consistently to all the periods presented in the consolidated financial statements, except for the practices, which were applied prospectively as from 2020, in accordance with the standards and regulations previously described in this section. (See Note 2 of the financial statement)
The main accounting policies relating to the Company´s present operations that require judgment and the use of specific valuation criteria are the following:
Financial instruments
Financial instruments are classified, at initial recognition, as subsequently measured at amortized cost, fair value through other comprehensive income (‘OCI’), and fair value through profit or loss.
Fair value through profit or loss: this includes the concession financial assets held for tradingrelated to distribution segment infrastructure. The financial assets related to energy distribution infrastruture are measured at fair value.
This category also includes cash equivalents, marketable securities not classified at amortized cost, derivative financial instruments and indemnities receivable from the generation assets.
Cash and cash-equivalents comprise cash at banks and on hand and short-term highly liquid deposits, subject to an insignificant risk of changes in value, maintained to carry out the Company’s short-term cash management. The disclosures about the main assumptions used in fair value measurement are summarized in the respective notes.
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Derivative financial instruments (Swap transactions and call spread): The Company maintains derivative instruments to manage its exposure to the risks of changes in foreign currency exchange rates (US dollar). Derivative instruments are recognized initially at their fair value and the related to put options,transaction costs are recognized in the Statement of income when they are incurred. After initial recognition, derivatives are measured at fair value through discountedand changes in fair value are recorded in the Consolidated Statement of Income.
Derivative financial instruments (Put options) – The options to sell to CEMIG GT units of the FIP Melbourne and FIP Malbec funds (‘the SAAG PUT’) were measured at fair value using the Black-Scholes-Merton (BSM) method, using as reference the related put options obtained by the BSM model valued on its exercise date. See note 31 to the Financial Statements for further details.
Amortized cost: This includes accounts receivables from customers, traders and power transport concession holders; accounts receivable from Minas Gerais State; restricted cash; escrow deposits in litigation; marketable debt securities with the intention of holding them until maturity and the terms of their contracts originate known cash flow.
Critical Accounting PoliciesAmortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate (‘EIR’).
Gains and losses are recognized in profit or loss when the asset is derecognized, modified or impaired.
Receivables from customers, traders and power transport concession holders
Accounts receivable from customers, traders and power transport concession holders are initially recognized at the sales value and subsequently measured at amortized cost. These receivables are stated including sales tax and net of withholding taxes, which are recognized as recoverable taxes.
In order to estimate future losses on receivables, the Company adopted a simplified approach, considered that the accounts receivable from customers do not have significant financial components, and calculated the expected loss considering the historical average of non-collection over the total billed in each month (based on the last 24 months of billing), segregated by type of customer and projected for the next 12 months, taking into account the age of maturity of invoices, including those not yet due and unbilled.
The following discussion describes those areas that requireAnnual Permitted Revenue (‘RAP’) is the most judgment or involve a higher degree of complexityconsideration received as revenue from the investment in the applicationnational grid as well as the construction or upgrades, operation and maintenance services. The revenue from the energy transmission concession contracts is recognized when the performance obligation is satisfied. The contract asset is transferred to the financial asset, falling within the scope of IFRS 9, after the issuance of the accounting policiescredit notice, monthly issued by ONS, authorizing RAP billing, which is when the right to consideration is unconditional. The revenue is recognized at the transaction price and the assets are subsequently measured at amortized cost, using the effective interest method, adjusted by impairment losses, when applicable, and recognizing the deferred taxes. As required by IFRS 9 – Financial Instruments, the financial asset carrying amount is analyzed and, when applicable, a loss allowance for expected credit losses is recognized.
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The expected losses for overdue accounts of customers that currently affect our financial condition and results of operations. The accounting estimates we make in these contexts require us to make assumptions about matters that are highly uncertain.
The discussion addresses only those estimates that we consider most importantrenegotiated their debt is measured based on the degreematurity date of uncertainty and the likelihoodoriginal invoice, despite the new terms negotiated. Expected losses are fully recognized for accounts overdue for more than 12 months.
Expected losses for invoices unbilled, not yet due or less than 12 months past due are measured according to the potential default events, or losses of credit expected for the whole life of a material impactfinancial instrument, if we used a different estimate. There are many other areas in which we use estimates about uncertain matters, but the reasonably likely effect of changed or different estimates is not material to our financial presentation. credit risk has significantly increased since its initial recognition.
For more detailed information about our Critical Accounting Policies and Estimates, please refer to Note 2 to our audited consolidated financial statements as of December 31, 2015 (the “Financial Statements”).
Allowancelarge customers, the provision for doubtful accounts
We record an allowance for doubtful accountsreceivables is recorded based on estimates by Management, in an amount that we estimate to be sufficient to cover presently foreseeable losses, as follows:probable losses. The main criteria used by the Company are: (i) customers with significant open balances, the receivable balance is analyzed based on the debt history, negotiations in progress, and asset guarantees; and (ii) for consumers with material debts,large customers, an individual analysis of the balance is made, taking into accountdebtors and the history of default, negotiationsinitiatives in progress to realize the receivables.
Concession assets
Energy and the existence of real guarantees; (ii) for other consumers, the debts thatGas Distribution segment: Concession infrastructure under construction are more than 90 days past due for residential consumers, or more than 180 days past due for commercial consumers, or more than 360 days past due for the other consumer categories, are provisioned at 100%. These criteria are the sameinitially recorded as those established by ANEEL.
We continuously monitor collections and payments from consumers and review and refine our estimation process. A future change in our estimates could result in an increase in the allowance for doubtful accounts which could have a material adverse impact on our operating results and financial condition.
Deferred income tax and Social Contribution tax
We account for income taxescontract assets, in accordance with IFRS. IFRS requires an asset15 and liability approachIFRIC 12, considering that the Company is entitled to recording currentconsideration for performance completed to date, and, deferred taxes. Accordingly,only when the effects of differences betweenconstruction phases ends, has the tax basis of assets and liabilities and the amounts recognized in our consolidated financial statements have been treated as temporary differencesright to charge for the purpose of recording deferred income tax.
We regularly review our deferred tax assets for recoverability and establish a valuation allowance based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. If we are unableservices provided to generate sufficient future taxable income,customers or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to establish a valuation allowance against all or a significant portion of our deferred tax assets resulting in a substantial increase in our effective tax rate and a material adverse impact on our operating results.
Property, plant and equipment
The assets in Property, plant and equipment are valuedreceive an indemnity at the cost incurred on the date of their acquisition or formation, including deemed cost, and capitalized financial costs, less accumulated depreciation. The cost includes expenditures that are directly attributable to the acquisition of an asset. The cost of self-constructed assets includes the cost of materials and direct labor, and any other costs directly attributable to bringing the assets to a working condition for their intended use.
Intangible assets
The following criteria are applied to individual cases: (i) Intangible assets acquired from third parties are measured at total acquisition cost, less expenses of amortization; and (ii) intangible assets generated internally are recognized as assets in the phase of development, provided that the technical feasibility of using them is demonstrated and that the future economic benefits are probable. They are measured at cost, net of accumulated amortization and accumulated impairment losses.
Financial Assets of the Concession
Our accounting treatment for financial assets of the concession depends on the valuation criteria for the assets linked to the concession.
For the distribution activity assets – We measure the value of the assets which will not be fully amortized by the end of the concession agreement period for assets not yet amortized. In accordance with IFRS 15 and report this amountIFRIC 12, construction revenues equivalent to new infrastructure are initially recorded as a financial asset ofcontract assets, measured at construction cost plus margin (which, for the concession because itconstruction business, is an unconditional right to receive cash or other financial assets directly from the concession-granting power (“the grantor”)deemed as zero). Construction cost include borrowing costs.
The portion of the assets of the concession that willinfrastructure to be fully amortized during the concession period is recorded as an intangible asset, as provided for in IFRIC 12 – Concession contracts, and is amortized in full duringsubsequently measured at cost less amortization. The amortization rates reflect the concession agreement period.
New assetsexpected pattern of their consumption and are recorded initially as Intangible assets, valued at acquisition cost, including capitalized borrowing costs. When the assets are brought into operation they are split into financial assets and intangible assets, according to the criterion mentioned in the previous paragraph: the portion of the assets that is recorded in financial assets is valuedmeasured based on the new replacement cost, having as a referenceasset carrying amount using the amounts homologatedstraight-line method, using the rates based on the expected useful life of the energy distribution assets that are used by the grantor as the Remuneration Base of Assets (Base Regulatória de Remuneração, or BRR) inRegulator during the tariff review process.
ForThe Company recognizes a financial asset for the transmission activity assets – Sinceresidual value of the transmission contracts determine thatinfrastructure at the end of the concession, holders haverepresenting an unconditional right to receive cash or another financial asset directly from the grantor. This portion is subsequently measured at the estimated fair value, which represents the New Replacement Value (Valor Novo de reposição, or VNR), based on the Regulatory Remuneration Base of Assets ratified by the regulator (‘ANEEL’) in the nametariff processes.
Transmission segment: When construction is finalized, concession infrastructure assets remains as contract asset, considering the existence of performance obligations during the concession period, represented by the network construction, operation and maintenance, as there is no unconditional right to receive the consideration for the construction service unless the company operates and maintains the infrastructure. The contract asset is reclassified as a financial asset (accounts receivable) only after the performance obligation to operate and maintain the infrastructure is satisfied, since from that point nothing more than the passage of time is necessary for the consideration to be received. The costs related to the infrastructure construction are recognized as incurred in the statement of income. The construction or upgrade services revenues are recognized in accordance with the stage of completion of the grantor,construction service, based on the costs actually incurred, including construction margin.
The margin added to the performance obligation related to the construction and improvements is based on Company’s expectations regarding its projects profitability.
When adjusting the amount of consideration for the concession contract asset financing component, the Company uses the discount rate which reflects the Company’s estimation of the financing of the transmission infrastructure investments. This reflects the rate that discounts the nominal amount of the consideration to the price that the customer would pay in cash for the goods or services when (or as) they transfer to the customer. The interest rates implicit in the contract are defined at the beginning of the investments and take into account the credit risk of the counterparties.
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When the tariff set is changed at the time of the periodic tariff reviews, the contract asset is remeasured, discounting the future revenue (RAPs) using the contract original discount rate, implicit in the contract. The amount remeasured is confronted to the carrying amount and the difference is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) at the date of the contract modification (the adjustment to revenue is made on a cumulative catch-up basis).
Consideration monthly received is allocated to revenue related to the operation and maintenance service and to the collection of the contract asset related to the construction service based on their relative fair value. Costs of expansion and upgrades of the infrastructure are recorded as contract assets.
Financial portion of remuneration and depreciation unpaid since the extensions of concessionsin in accordance with Law 12,783/2013: corresponding to the portion of remuneration and depreciation unpaid from the date of the extension of the concessions until it was incorporated into the Assets Remuneration Base (January 1, 2013 until June 30, 2017), to be paid over a period of eight years through the RAP.
The amounts to be received are subject to the applicable regulatory rules in the tariff process, including the mechanisms that monitor and measure efficiency. In this new transmission concessions, we recordedcontext, the unconditional right to consideration depends on the satisfaction of the performance obligation to operate and maintain, and is, thus, characterized as a contractual asset.
Generation segment:The concession fee right paid for the concession contracts granted by ANEEL in November 2015 are classified as a financial asset, at fair value, correspondingamortized cost, as it represents an unconditional right to receive cash, adjusted by the transmission revenue to be receivedIPCA index, and remuneratory interest, during the whole period of the concession.
Auctions
Impairment
In assessing impairment of electricity generation concessions
Provisional Measure 579/2012, enacted as Law 12,783/2013 on January 11, 2016, conditionedfinancial assets, the acceptanceCompany uses historical trends of the concessionsprobability of 15 plantsdefault, timing of Cemig GT (Cajuru, Camargos, Gafanhoto, Itutinga, Joasal, Marmelos, Martins, Paciência, Peti, Piau, Salto Grande, Trêrecovery and the amounts of loss incurred, adjusted to reflect management’s judgment as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends.
Additionally, management revises, annually, the carrying amount of non-financial assets, for the purpose of assessing if there is any indication, such as events or changes in the economic, operational or technological conditions that an asset may be impaired. If any indication exists, or when annual impairment testing of an asset is required, the Company estimates the asset´s Marias, Tronqueiras, Dona Ritarecoverable amount. The recoverable amount of an asset or cash generating unit is defined as the higher between its value in use and Volta Grande), and thoseits fair value less costs to sell. When the carrying amount of an asset or cash generating unit exceeds its recoverable amount, an impairment loss is recognized, adjusting the carrying amount of the Jaguara, São Simão and Miranda plantsasset or cash generating unit to acceptance byits recoverable amount.
Employee benefits
The liability recorded in the concession holderconsolidated statement of predefined tariffs, although under certain circumstances concession holders couldfinancial position related the Company’s retirement benefit pension plan obligations, is the greater of: (a) the amount to be compensated for the investments madepaid in each plant and not yet amortized. Cemig GT did not agreeaccordance with the terms of the pension plan for renewalamortization of the actuarial obligations, and therefore, did not renew(b) the concession at that time.
In November 2015, Cemig GT took partpresent value of the actuarial obligation, as calculated by a qualified actuary, less the fair value of the plan’s assets, and adjusted for unrecognized actuarial gains and losses. Expenses related to the debt agreed upon with the pension trust fund were recorded in Auction 12/2015finance income (expenses), because they represent financial interest and woninflation adjustment. Other expenses related to the concessionspension fund were recorded as operating expenses.
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The Company offers post-employment healthcare benefits to its employees as well as life insurance for Lot D. Lot D comprised the concessions for 18 plants. For fiveactive and retired employees. The expected costs of these benefits are accrued over the concession had been previously heldperiod of employment using the same accounting methodology that is used for defined benefit pension plans. These obligations are measured annually by Furnas S.A. The total assured average power offtakea qualified independent actuary.
Actuarial gains and losses arising as a result of changes in actuarial assumptions are recognized in other comprehensive income.
Short-term benefits to employees: Employees’ profit sharing as determined in the 18 plants is 420 MW, as follows:Company’s by-laws are recorded in accordance with the collective agreement established with the employees’ union and recorded in employees’ and managers’ profit sharing in the statement of income.
Generating plant | Concession expiry date | Installed capacity (MW) | Average physical offtake guarantee level (‘Assured Energy’)—MW | |||||||||
Três Marias Hydroelectric Plant | Jan.2045 | 396.00 | 239.00 | |||||||||
Salto Grande Hydroelectric Plant | Jan.2045 | 102.00 | 75.00 | |||||||||
Itutinga Hydroelectric Plant | Jan.2045 | 52.00 | 28.00 | |||||||||
Camargos Hydroelectric Plant | Jan.2045 | 46.00 | 21.00 | |||||||||
Piau Small Hydroelectric Plant | Jan.2045 | 18.01 | 13.53 | |||||||||
Gafanhoto Small Hydroelectric Plant | Jan.2045 | 14.00 | 6.68 | |||||||||
Peti Small Hydroelectric Plant | Jan.2045 | 9.40 | 6.18 | |||||||||
Tronqueiras Small Hydroelectric Plant | Jan.2045 | 8.50 | 3.39 | |||||||||
Joasal Small Hydroelectric Plant | Jan.2045 | 8.40 | 5.20 | |||||||||
Martins Small Hydroelectric Plant | Jan.2045 | 7.70 | 1.84 | |||||||||
Cajuru Small Hydroelectric Plant | Jan.2045 | 7.20 | 2.69 | |||||||||
Paciência Small Hydroelectric Plant | Jan.2045 | 4.08 | 2.36 | |||||||||
Marmelos Small Hydroelectric Plant | Jan.2045 | 4.00 | 2.74 | |||||||||
Coronel Domiciano Small Hydroelectric Plant | Jan.2045 | 5.04 | 3.59 | |||||||||
Dona Rita Small Hydroelectric Plant | Jan.2045 | 2.41 | 1.03 | |||||||||
Ervália Small Hydroelectric Plant | Jan.2045 | 6.97 | 3.03 | |||||||||
Neblina Small Hydroelectric Plant | Jan.2045 | 6.47 | 4.66 | |||||||||
Sinceridade Small Hydroelectric Plant | Jan.2045 | 1.42 | 0.35 | |||||||||
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| 699.59 | 420.27 | |||||||||||
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Please note that the information presented on installed capacity, guaranteed average offtake,Income tax and other operational information, is not part of the scope of an audit of financial statements, and has thus not been examined by the external auditors.social contribution tax
The contract for these plants provided Cemig withincome tax and social contribution tax expenses represents the concession for their commercial operationtotal amount of current and deferred taxes, which are presented separately in the financial statements. The Company is subject to the regular tax regime ‘Lucro Real’. However, its subsidiaries that can benefit from the favorable tax regime, according to tax law, analyze the payable tax projection for the next 30 years until 2046,year, in order to determine the tax regime that reduces its taxes payment.
Deferred and requires that for 2016current tax related to items recognized directly in equity or in other comprehensive income (OCI) are recognized directly in equity.
Periodically, in accordance with IFRIC 23, the entirety of the output must be soldCompany and its subsidiaries evaluate positions taken in the Regulated Market, undertax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.
Current
Current income tax assets and liabilities are measured at the Physical Guarantee Quota System (Sistema de Cota de Garantia Física,amount expected to be recovered from or CGF);paid to the taxation authorities. The tax rates and from 2017 untiltax laws used to compute the end ofamount are those that are enacted or substantively enacted at the concessions, 70% of the output will be sold in the Regulated Market and 30% in the Free Market.reporting date.
Cemig’s offer for the annual payment was R$499, and the single fee paid for the grant of the 30-year concession for the 18 hydroelectric plants was R$2.2 billion. Of this fee, 65% was paid on January 4, 2016, and the remaining 35% was paid on July 1, 2016. The contract was signed on January 5, 2016.
Depreciation and amortization
Depreciation and amortization is computed using the straight-line method, at annual rates based on the estimated useful lives of theAdvances, or tax credits, are presented as current or non-current assets, in accordance with ANEEL regulationsthe expected date of their realization at the balance sheet date, when the tax amounts are duly calculated and industry practice in Brazil.offset against advances made.
Our accounting treatment
Deferred
Deferred tax is recognized for amortizationtemporary differences between the carrying amount of intangible assets depends on the nature of the intangible asset. Intangible assets linked to a service concession agreement, net of residual value, are amortized in accordance with IFRIC 12 on a straight-line basis over the concession period stipulatedan asset or liability in the concession contract. Other intangiblestatement of financial position and its tax base at the reporting date.
Deferred tax liabilities are recognized for all the inter-temporal tax differences. Deferred tax assets are amortized on a straight-line basis overrecognized for all the estimated useful economic lives of the assets in conformity with the amortization rates established by the concession authority.
Totemporary differences deductible, to the extent that it is probable that future taxable profit will be available for the actual lives differtemporary differences to be offset, except:
| · | When the deferred tax (asset or liability) arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; |
| · | In respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint arrangements, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; |
| · | In respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint arrangements, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized; |
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| · | Theses taxes are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. |
Deferred income tax and social contribution tax assets are reviewed at the reporting date, and are reduced to the extent that their realization is no longer probable.
The Company offsets deferred tax assets and deferred tax liabilities if and only if it has a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity.
Non-current assets classified as held for sale and discontinued operations
The Company classify non-current assets as held for sale when their carrying amount will be recovered, principally, through a sale transaction rather than through continuous use. This condition is met only when the asset (or group of assets) is available for immediate sale in its current condition subject only to usual and customary terms for the sale of the asset (or group of assets) and its sale is considered highly probable. Management must be committed to the sale which is expected to be completed within one year from these estimates, there wouldthe date of classification. Assets held for sale are measured at the lower of its carrying amount and fair value less costs to sell. Costs to sell are the incremental costs directly attributable to the disposal of an asset, excluding finance expenses and income tax expenses.
Fixed assets (PP&E) and Intangible assets are not depreciated or amortized as long as they are classified as held for sale. Assets and liabilities classified as held for sale are presented separately as current items in the Statement of financial position.
Dividends received from jointly controlled entities and affiliates, classified as held for sale, are recognized in the Income statement, in view of the discontinuation of measurement by the equity method, under IFRS 5.
A disposal group qualifies as discontinued operation if it is a component of an entity that either has been disposed of, or is classified as held for sale, and:
| · | Represents a separate major line of business or geographical area of operations; |
| · | Is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or |
| · | Is a subsidiary acquired exclusively with a view to resale. |
Discontinued operations are excluded from the reported profit from continuing operations, and are presented as a single amount, after taxes, based on discontinued operations, in the statement of income.
Additional disclosures are presented in Note 32. All the other notes to the financial statements include amounts for continuing operations, except when otherwise stated.
Revenue recognition
In general, revenue from contracts with customers is recognized when the performance obligation is satisfied, at an amount that reflects the consideration to which the Company expects to be an impactentitled in exchange for the goods or services transferred, which must be allocated to that performance obligation. The revenue is recognized only when it is probable that the Company will collect the consideration to which it is entitled in exchange for the goods or services transferred to the customer, considering the customer’s ability and intention to pay that amount of consideration when it is due.
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Revenues from the sale of energy are measured based on the amount of depreciationenergy supplied and amortization accrued in our consolidated financial statements. A significant decreasethe tariffs specified in the estimated useful lifeterms of a material amount of property, plant and equipment, intangibles,the contract or in the assets of the electricity generation project consortium in which we are a partner, could have a material adverse impact on our operating resultseffect in the period in which the estimate is revised and in subsequent periods.
Employee post-retirement benefits
We sponsor a defined-benefit pension plan and defined-contribution pension plan covering substantially all of our employees.
The determination of the amount of our obligations for pension and other post-retirement benefits depends on certain actuarial assumptions. These assumptions are described in Note 21 to our consolidated financial statements and include, among others, the expected long-term rate of return on plan assets and mortality rate. While we believe that our assumptions are appropriate, significant differences in actual results or significant changes in our assumptions may materially affect our pension and other post-retirement obligations.
Provision for risks
We are party to certain legal proceedings in Brazil arising in the normal course of business regarding tax, labor, civil and other issues.
Such provisions are estimated based on historical experience, the nature of the claims, as well as the current status of the claims. Accounting for contingencies requires significant judgment by management concerning the estimated probabilities and ranges of exposure to potential liability. Management’s assessment of our exposure to contingencies could change as new developments occur or more information becomes available. The outcome of the contingencies could vary significantly and could materially impact our consolidated results of operations, cash flows and financial position.
Unbilled electric power supplied
Unbilled retailmarket. Revenues from supply of electric power,energy to final customers are recorded when the delivery has taken place. The billing is carried out monthly. Unbilled supply of energy, from the period between the last billing and the end of each month, is estimated based on the supply contracted and on the volume of energy delivered but not yet billed.
Historically, the differences between the estimated amounts and the actual revenues recognized are not significant.
Revenues from use of the distribution system (TUSD) received by the Company from other concession holders and other customers that use the distribution network are recognized in the period in which the services are provided. Unbilled retail supply of energy, from the period between the last measured consumption, according to the schedules specified in the concession regulation, and the end of each month, is estimated based on the billing from the previous month or the contractual amount.
The ‘Parcel A’ revenue and other financial components in tariff adjustments are recognized in the Statement of income when the energy acquisition costs effectively incurred are different from those considered by the Grantor to stablishes the energy distribution tariff.
Any adjustment of expected cash flows from the concession financial asset of the energy distribution concession contract is accruedpresented as operating revenue, together with the other revenues related to the energy distribution services.
Construction revenue – corresponds to the performance obligation to build the infrastructure, by the investments in concession assets made by the Company in the reporting period. Recognition of this revenue is directly related to the expenditure incurred on the addition of contractual assets.
Revenues from the sale of gas are measured based on the volume of gas sold and the tariffs specified in the terms of the contract. Revenues from supply of gas are recorded when the delivery has taken place, based on the volume measured and billed. The billing is carried out monthly. In addition, unbilled supply of gas, from the period between the last billing and the end of each month, is estimated based on the supply contracted and on the volume of gas delivered but not yet billed. Historically, the differences between the estimated amounts and the actual revenues recognized are not significant and are recorded in the following month.
Revenues from transmission concession services are recognized in the statement of income monthly, and includes:
| · | Construction revenue corresponds to the performance obligation to build the transmission infrastructure, recognized based on the satisfaction of performance obligation over time. They are measured based on the cost incurred, including PIS/Pasep and Cofins taxes over the total revenues and the profit margin of the project. |
| · | Operation and maintenance revenue corresponds the performance obligation of operation and maintenance specified in the transmission concession contract, after termination of the construction phase. They are recognized when the services are rendered and he invoices for the RAPs are issued. |
| · | Interest revenue in the contract asset recognized, recorded as transmission concession gross revenue in statement income. Revenue corresponds to the significant financing component in the contractual asset, and is recognized by the linear effective interest rate method based on the rate determined at the beginning of the investments, which is not subsequently changed. The average of the implicit rates is 6.68%. The rates are determined for each authorization and are applied on the amount to be received (future cash flow) over the contract duration. This includes financial updating by the inflation index specified for each transmission contract. |
The services provided include charges for connection and other related services; the revenues are recognized when the services are rendered.
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The profit margin on operation and maintenance of transmission infrastructure is determined based on the individual sale price of the service, based on available information on the value of the consideration that the entity expects to have the right to, in exchange for the services promised to the client, in cases where the Company’s transmission subsidiaries have the right, separately, to the remuneration for the activity of operation and maintenance, as per IFRS 15 – Revenue from contracts with clients, and the costs incurred for the provision of services of operation and maintenance.
The Resolution ANEEL 729/2016 regulates the Variable Portion (‘Parcela Variável’ or ‘PV’), which is the pecuniary penalty applied by the grantor as a result of any unavailability’s or operational restrictions on facilities that are part of the National Grid and the surcharge corresponding to the pecuniary bonuses provided to concessionaries as an incentive to improve the transmissions facilities availability. The Company assessed the PV effects, based on historical data, and concluded that recognizing the occasional variable consideration arising from the PV estimated would not result in relevant account information. Therefore, for the both situations described, it is recognized as an adjustment to revenue, either as an increase in or a reduction of operation and maintenance revenue, when it occurs.
Leases
As from the IFRS 16 first adoption, on January 01, 2019, the Company assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Company applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets.
When recording a lease operation, the lessee recognizes a liability to make the payments (a leasing liability) and an asset, representing the right to use the subject asset during the period of the leasing (an asset of right to use).
Right-of-use assets:Company recognizes right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated amortization and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are amortized on a straight-line basis over the shorter of the lease term and the estimated useful lives of the assets; as described in Note 19 to the Financial Statements.
If ownership of the leased asset transfers to the Company at the end of the month. While we believe that our accruals are appropriate, significant differences in actual resultslease term or significant changes in our assumptions may materially affect our receivables from consumers.
Derivative instruments
Accounting for derivative transactions requires us to employ judgment to compute fair market values, which are used as the basis for recognitioncost reflects the exercise of a purchase option, amortization is calculated using the estimated useful life of the derivative instrumentsasset.
Lease liabilities:At the commencement date of the lease, the Company recognizes lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in our consolidated financial statements. Such measurement maysubstance fixed payments) less any lease incentives receivable, variable lease payments that depend on the use of estimates such as long-term interest rates, foreign currenciesan index or a rate, and inflation indices, and becomes increasingly complex whenamounts expected to be paid under residual value guarantees. The lease payments also include the instrument being valued does not have counterparts with similar characteristics traded in an active market. For more detailed information about Derivative Instruments please refer to Note 28 to our Financial Statements.
Cemig granted to Fundo de Participações Redentor, which is a stockholder in Parati, a put option to sell the totality of its shares in Parati, exercisable in May 2016. The exercise price of a purchase option reasonably certain to be exercised by the Company and payments of penalties for terminating the lease, if the lease term reflects the Company exercising the option is calculated from the sum of the value of the amounts injected by the Fund into Parati, plus the runningto terminate. Variable lease payments that do not depend on an index or a rate are recognized as expenses of the fund, less Interest on Equity, and dividends, distributed by Parati. The exercise price is subject to monetary updating by the CDI (Interbank CD) Rate plus financial compensation at 0.9% per year. For more details please see note 14 to the financial statements.
Cemig GT and the private pension plan entities participating in the investment of SAAG entered into put option agreements exercisable byperiod in which the funds in July 2021. The exercise price ofevent or condition that triggers the put options will correspond to the amount invested by each private pension plan, updatedpro rata temporis by the IPCA index as published by the IBGE (Instituto Brasileiro de Geografia e Estatística), plus interest at 7% p.a., discounting dividends and interest on equity that have already been paid by SAAG to the private pension plan entities. For more details please see Note 14 to our financial statements.
Rules, interpretations and changes that came into effect on January 1, 2015, with possible impacts on the Company
The following rules and changes of rules came into effect during the business year:
payment occurs.
The Company has analyzed impacts of these changes and did not have material impacts in its financial statements.
New and revised rules and interpretations already issued and not yet adopted, with possible impacts for the Company
In effect for annual periods starting on or after January 1, 2016:
In calculating the present value of lease payments, the Company uses its incremental borrowing rate at the lease commencement date because the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to IAS 16reflect the accretion of interest and IAS 38: Provide clarification with respectreduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the lease payments (e.g., changes to acceptable methods for depreciation and amortization.
future payments resulting from a change in an index or rate used to determine such lease payments) or a change in the assessment of an option to purchase the underlying asset.
The Company is still evaluatingrecognize separately the impacts that these new rules and alterationsexpenses of existing rules will haveinterest on the amountsleasing liability and disclosures presented in its consolidated financial statements.
In effect for annual periods starting on or after January 1, 2017:the expense of depreciation of the asset of the right to use.
Short-term leases and leases of low-value assets:The Company applies the short-term lease recognition exemption to IAS 12 – Recognitionits short-term leases. It also applies the lease of deferred taxlow-value assets for non-realized losses.
In effect for annual periods startingrecognition exemption to leases that are considered to be low value. Lease payments on or after January 1, 2018:short-term leases and leases of low value assets are recognized as expense on a straight-line basis over the lease term.
In relation to the impairment of financial assets, IFRS 9 requires use of a forward-looking ‘expected loss’ impairment model, in contrast to the model of actual impairment stated in IAS 39.
In effect for annual periods starting on or after January 1, 2019:
The Company is still evaluating the impacts that these new rules and alterations of existing rules will have on the amounts and disclosures presented in its consolidated Financial Statements.
Principal factors affectingFactors Affecting our financial condition and results of operationsFinancial Performance
Analysis of electricity salesEnergy Sales and costCost of electricity purchasedEnergy Purchased
ElectricityEnergy rates in Brazil, related to electricity distribution companies’energy distributors’ sales to captiveregulated customers, are set by ANEEL, which has the authority to readjust and review rates in accordance with the applicable provisions of the concession contracts. See “Item 4: The Brazilian Power Industry—Rates”Tariffs”.
We charge captive consumersregulated customers for their actual electricityenergy consumption during each 30-day billing period at specified rates. Certain large industrial consumerscustomers are charged according to the electricityenergy capacity contractually made available to them by us, with adjustments to those rates according to consumption during peak demand time, as well as capacity requirements that exceed the contracted amount.
In general, rates on electricityenergy that we purchase are determined by reference to the capacity contracted for as well as the volumes actually used.
The following table sets forth the average rate (in reaisReais per MWh) and volume (by GWh) components of electricityenergy sales and purchases for the periods indicated. The term “average rate”‘average rate’ refers to revenues for the relevant class of consumerscustomers divided by the MWh used by such class and does not necessarily reflect actual rates and usage by a specific class of end-users during any particular period.
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| Table of Contents |
| Year ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
Electricity sales: | ||||||||||||
Average rate to final consumers (R$/MWh) | ||||||||||||
Industrial rate | 251.69 | 184.16 | 171.54 | |||||||||
Residential rate | 742.42 | 517.58 | 476.93 | |||||||||
Commercial rate | 614.86 | 435.65 | 390.06 | |||||||||
Rural rate | 416.27 | 267.85 | 244.72 | |||||||||
Public services rate and others | 473.41 | 320.05 | 284.49 | |||||||||
Total sales to final consumers (GWh) | ||||||||||||
Industrial consumers | 22,969 | 26,026 | 23,452 | |||||||||
Residential consumers | 9,830 | 10,014 | 9,473 | |||||||||
Commercial consumers | 6,434 | 6,395 | 6,035 | |||||||||
Rural consumers | 3,380 | 3,390 | 3,028 | |||||||||
Public services and other consumers | 3,422 | 3,462 | 3,371 | |||||||||
Average rate (R$/MWh) | 441.03 | 302.53 | 277.50 | |||||||||
Total revenues (R$million) | 20,319 | 14,922 | 12,597 | |||||||||
Sales to distributors: | ||||||||||||
Volume (GWh) | 10,831 | 14,146 | 16,127 | |||||||||
Average rate (R$/MWh) | 203.77 | 163.30 | 132.94 | |||||||||
Total revenues (R$million) | 2,207 | 2,310 | 2,144 | |||||||||
Year ended December 31, | 2020 | 2019 (Restated) | 2018 (Restated) |
| Energy sales: | |||
| Average rate to final customers (R$/ MWh) | |||
| Industrial rate | 327.62 | 320.04 | 276.61 |
| Residential rate | 899.31 | 917.41 | 843.28 |
| Commercial rate | 580.91 | 582.62 | 558.83 |
| Rural rate | 581.49 | 542.26 | 496.27 |
| Public services rate and others | 540.52 | 548.43 | 505.74 |
| Total sales to final customers (GWh) | |||
| Industrial customers | 12,731 | 14,873 | 17,689 |
| Residential customers | 10,981 | 10,538 | 10,267 |
| Commercial customers | 8,571 | 9,335 | 8,380 |
| Rural customers | 3,766 | 3,795 | 3,615 |
| Public services and other customers | 3,319 | 3,634 | 3,571 |
| Average rate (R$/ MWh) | 584,18 | 569,76 | 501.32 |
| Total revenues (R$million) | 23,018 | 24,052 | 21,882 |
| Sales to concession holders: | |||
| Volume (GWh) | 13,907 | 11,920 | 11,992 |
| Average rate (R$/ MWh) | 241.82 | 246.90 | 250.33 |
| Total revenues (R$million) | 3,363 | 2,943 | 3,002 |
Distribution ratesRates
Our operational results have been significantly affected by fluctuations inCEMIG D's periodic tariff review takes place every five years and has the levelsobjective of rates that Cemig Distribution (Cemig D) is authorized to charge for distribution of electricity. The process of setting rates in Brazil has been influenced, historically, by government attempts to control inflation. Withre-evaluating the restructuring ofcompany's manageable costs, which primarily include the Brazilian electricity sector, which began in 1995,operating costs and under the terms of the renewal of the concession contract that we signed with ANEEL in 1997, there have been significant changes in the process of setting tariffs.
Every year, in April, ANEEL issues a resolution that establishes the average annual rate adjustment for Cemig D (our distribution company). This rate (usually a positive figure, indicating increase) was 3.06% in 2013, 16.3% in 2014 and 41.41 % in 2015.
In January 2013 the Brazilian federal government enacted Law Nº 12,783, which removed some charges imposed on providers of electricity, reducing (i) the prices of electricity sold by those generators that had their concession agreements renewed, and also (ii) the prices for transmission of electricity, due to reduction of the Permitted Revenue of those transmission companies that had their concessions renewed. On January 24 of that year, ANEEL set new tariffs for the distributors, to pass through the effects of that law to consumers. This adjustment was made by an Extraordinary Tariff Review, for all the distributors. For Cemig, this tariff adjustment represented a reduction of invoiced revenue by 22%.
However, this adjustment did not affect our operational revenue, because it was applied only in the costs of Portion A, which arefixed assets that comprise the remuneration and depreciation of these assets. In the tariff review, the regulator applies the methodology for defining efficient operating costs which are not controllable.and evaluates the incremental investments made in the asset base since the last review, as well as the write-offs and depreciation of the existing assets, composing a new remuneration base.
On April 7, 2015May 15, 2020, in view of the public calamity scenario resulting from the Covid-19 pandemic, CEMIG submitted a request to ANEEL definedto defer the annualapplication of the result of its tariff process until June 30, 2020, in order to mitigate the effects on consumers in its concession area, the tariff that was in force since May 2019 remaining. On June 25, 2020, ANEEL’s Board approved the result of CEMIG's readjustment with an average impact of 4.27%.
On August 5, 2020, CEMIG submitted to ANEEL a proposal for the reversal of R$714 million, for consumers in its concession area, regarding the financial component of reimbursement of Pasep / Cofins, with the objective of complying with contribute to low tariffs at a time when society as a whole was seeking to reduce the impacts of the pandemic. On August 18, 2020, ANEEL approved the readjustment with the insertion of this negative component reducing the average effect of CEMIG D’s 2020 tariff adjustment for Cemig D (Distribution): an increase of 35.83%. Thisto zero. Such rate was effective starting on August 19, 2020 and it remains the same until May 27, 2021. Such updating had the following components: (i) an increase of 29.99%,6.07% due to the Tariff Adjustment Index; (ii) an increasedecrease of 6.97%14.31% due to the variation in PortionParcel A costs (CVA – non-manageable costs); and (iii) ana increase of -1.12%8.24% related to other financial adjustments. Starting in 2013, subsidies given to certain consumers have been treated externally to the tariff figures, and no longer appear as a component of the tariff adjustment index.
The average annual tariff adjustments of CemigCEMIG D in 2015, 20142020, 2019 and 2013,2018, and the revisions of their respective components are givenwere as follows:
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2020 | 2019 | 2018 | |
| Average annual/periodic tariff adjustment | 0.00% | 8.73% | 23.19% |
Components | |||
| Tariff adjustment index | 6.07% | 1.94% | 13.30% |
| Inter-year variation in fixed costs (CVA) | -14.31% | 15.98% | 4.59% |
| Other financial adjustments | 8.24% | -9.18% | 5.30% |
Transmission Rates
In January 2013, our transmission concession was renewed for another 30 years in this table:accordance with the rules defined in Law 12,783/2013. At that time, there was an Extraordinary Review and transmission revenue was strictly reduced to the amount necessary to cover operation and maintenance costs, being part of the non-reversible assets indemnified.
| 2015 | 2014 | 2013 | ||||||||||
Average annual/periodic rate adjustment | 35.83% | 14.76% | 2.99% | |||||||||
Components | ||||||||||||
Tariff adjustment index | 29.99% | 10.77% | 0.47% | |||||||||
Inter-year variation in fixed costs (CVA) | 6.97% | 2.78% | 1.03% | |||||||||
Subsidies | 0.00% | 0.00% | 1.45% | |||||||||
Other financial adjustments | -1.12% | 1.23% | 0.11% | |||||||||
On February 27, 2015, ANEELIn 2017, the capital cost of the reversible assets not yet amortized at the time of renewal of the transmission became part of the Allowed Annual Revenue (‘RAP’) of transmission concessionaires covered by Law 12,783/2013, according to rules defined new ratesin MME Administrative Rule no. 120/2016. This revenue consists of two components. One refers to the financial component, which corresponds to the cost of capital of the non-indemnified assets for the distributors. This adjustment was made by an Extraordinary Tariff, applicable to all distributors. This adjustment was applied a specific and simplified calculation procedure to treat material change costs of CDE and power purchase. For Cemig this tariff adjustment represented an increase of 28.8% in their tariffs, effective from March 2, 2015 to April 7, 2015.
On April 8, 2015, ANEEL determined the annual tariff adjustment to be applied to Cemig D. This adjustment resulted in an average increase of 12.61% in electricity tariffs paid by CEMIG D’s customers, effective from April 8, 2015 to April 7, 2016.
On May 24, 2016, Aneel determined that the Annual Tariff Adjustment should be applied to the tariffs of Cemig D. The result was an average increase in consumer electricity rates by 3.78%, in effect as of May 28, 2016 until May 27, 2017.
Transmission rates
The revenue adjustment of the electricity transmission grids owned by Cemig, as specified by the concession contract, is made annually in June. The concession contract previously established a four-year period between periodic revisions. Law No. 12,783/2013 (Extension of Concessions) amended the term to provide for a frequency of every five years, from 2013 onward.
In 2010, ANEEL approved the results for the second periodic revision, again with a reassessment of the entire asset base of Cemig GT. The results were released by means of Resolution 988 of June 18, 2010, setting a decrease in annual revenue of 15.88%. This was retroactively applied to 2009, since the regulator had been working on the definition of the rules to be applied for this revision.
The concession contract provides that revenues must be restated for inflation annually. Until January 2013, the index used to restate for annual inflation was the General Market Price inflation Index, or IGP–M. The IGP-M posted inflation of 4.26% from June 2011 to May 2012, increasing the revenue for the 2012–2013 cycle. In June 2011, ANEEL approved an increase in the transmission revenue of 5.0%. After the implementation of Law 12,783/2013, from 2013 onward concession contracts are amended to set IPCA inflation as the index used for the annual adjustment of transmission companies’ Permitted Annual Revenue (Receita Annual Permitida, orRAP).
At the end of 2012, the federal government renewed Cemig’s transmission concession and reduced its revenue, from January 2013 to June 2017. During this period, the transmission company remained without any revenue for the assets made available that had not yet been indemnified. The second component, called the economic component, refers to the cost of capital to be paid to the end of the asset lifespan.
According to Technical Note No. 183/2017, appended to Resolution No. 2,258/2017, which ratified the RAP calculation for the 2017-2018 cycle, the total value of the cost of capital of assets not indemnified for this cycle was R$148 million per year. It also removed370.8 million.
Concerning the readjustment processes, the transmission concession agreement provides for a review every five years. The first review after the concession renewal was to occur in July 2018. However, this review occurred only in 2020 with a retroactive effect from July 2018. The methodology for this review was approved by Normative Resolution No. 816/2018, which covers a new criterion for valuation of the amount of revenue two taxes previously included:asset base and captures other revenues for tariff moderation. A new model for calculating operating costs is being discussed with the “Government Employees” Pension Fund Contribution’ (Programa de Formação do Patrimônio do Servidor Público, orPasep) and the “Contribution to Finance Social Security” (Contribuição para o Financiamento da Seguridade Social, or “Cofins”).
regulator. In July 2013, as a result of the annual tariff adjustment, Cemig2020, CEMIG GT’s RAP was increased to R$199 million, resulting from the addition of revenue from new works, a portion for adjustments related to the previous year, and the inflation adjustment by the IPCA index.15.7%. The total variationmain positive variations were observed in the RAP from January to JulyEconomic and Financial Component of 2013 was 11.66%.
In July 2014, the annual tariff adjustment increased Cemig GT’s RAP to R$224 million – a further increaseAnnual Cost of 12.30%.
In July 2015, Cemig GT’s RAP was adjusted by 23.6%Assets (‘CAA’) of Basic Network of the Existing System (‘BNES’), due to the applicationchange of IPCAthe WACC and the reinclusion of the Ke parameter on revenue already approved and also duethe Financial Component, both effects of the Review process of the 2018-2023 cycle. The postponement of the RAP Review of the 2018-2023 cycle (which took place, as expected, in 2020) generated an Adjustment Portion of R$165 million, referring to the recognitionpositive effects of new reinforcements. Cemigthe review on the revenue of the 2018-2019 and 2019-2020 cycles. This amount will be paid in three installments of R$55 million (June 2020 prices) in the 2020-2021, 2021-2022, and 2022-2023 cycles, adjusted by the IPCA. In CEMIG Itajubá, in turn, had case (concession contract No. 079/2000) there was awarded an increaseadjustment of 4.1% of revenue approved for the 2015-2016 cycle, relating to the two concessions, totaling R$270.7 million.
In July 2016, the RAP of Cemig GT was increased by 26.2%6.5%, as athe result of the application of the IPCAan inflation indexadjustment to the revenue previously approved and also due to recognition of new improvements strengthening the network. The substation that had been put out to tender, Cemig Itajubá, ,which is No. 079/2000, was awarded a positive adjustment of 3.0%. The increase for the Itajubá facility was lower than average inflation as measured bybased on the IGP-M index, due to the reduction of the RAP for this concession starting on the first half of 2017. The approved revenue for the 2016-17 period, for the two concessions, is an aggregate of R$340 million.index.
Rationing of electricity – and government measures to compensate electricity concession holders
In late 2000 and early 2001, low levels of rainfall, significant growth in demand for electricity, and Brazil’s significant dependence on hydroelectric generation sources resulted in an abnormal fall in levels at several of the reservoirs used by Brazil’s largest hydroelectric generation plants. In May 2001 the federal government announced a group of measures mandating reduction in consumption of electricity in response to those conditions. Under these measures, electricity distribution and generation companies (such as our Company) were reimbursed for the losses of revenue resulting from the rationing imposed by the federal government – arising either from lower sales volume, or lower sales prices of electricity, or from having purchases of electricity made on the CCEE. This compensation was given in the form of the right to charge extraordinary increases in electricity tariffs to consumers over a future period, which averaged 74 months, and ended in March 2008.
However, the New Industry Model (one of the principal purposes of which is to guarantee supply of electricity) created auctions for the Regulated Market (Ambiente de Contratação Regulado – ACR), in which it is possible to buy electricity from new plants to be built to guarantee supply. Since the New Industry Model was introduced, contracts for supply of approximately 47MW from new generation capacity to be provided by new-build plants have been placed in these auctions, supply to start over the period from 2008 through 2017.
Of this amount, a total of 5.97MW was contracted in ‘Reserve Auctions’ – that is to say, this power capacity is not committed to any contract, or to any minimum supply level.
In the rainy season of late 2012 and early 2013 (November 2012 to March 2013), there was much less rainfall than expected in Brazil’s Southeastern region, and due to this situation the thermoelectric plants were activated to generate complementary supply to meet the system’s electricity consumption needs. In this period the principal strategy of the National System Operator (Operador Nacional do Sistema Elétrico – ONS) was to preserve storage capacity in the reservoirs of hydroelectric plants, to ensure supply of the system’s energy needs over the whole of the year 2013.
This resulted in a high level of expenses on thermoelectric generation, and a sustained increase in the spot market price – which averaged R$121.29/MWh in July 2013.
In the rainy season of late 2013 and early 2014, rainfall in the Southeast was again significantly lower than the expected averages. This placed the system in a state of alert at the beginning of 2014, focusing on means of maintaining the capacity to supply the system’s consumption needs. Storage levels were again lower than expected for the period, and final figures for rainfall and flows in the period were awaited, to give a complete picture of the need for adjustments of load to preserve the capacity to serve the market.
Again in the rainy season of late 2014 and early 2015the rainfall in the Southeast was below the historic average, completing two consecutive rainy seasons with low precipitation in the Southeast. As the reservoirs finished 2014 with the lowest recorded historic level, the ONS continued to dispatch all the thermoelectric generation through 2015 and hope for a load reduction. By March 2015 the government decided to remove some subsidies in the energy tariff leading it to a rise of 50%, this tariff rise and the industrial load reduction due to the effect of economy recession gave the system a relief in the first semester of 2015.
During the winter (dry season) of 2015, the climate began to change due to the effect of El Niño (climate phenomenon that occurs when Pacific Ocean gets warmer than average). This phenomenon affects the rain in Brazil bringing more rain to the south and less to the north and northeast. With rain in the south being above average from June to December, the system ended 2015 with a reservoir condition better than it did in 2014. By 2016, still under El Niño’s effect the Southeast had an above historic average rainfall in January leading to a great recover in the south east reservoir. Due to these improved conditions for hydroelectric generation, in February 2016 the ONS began to reduce thermoelectric generation.
Exchange ratesRates
Substantially all of our revenues and operating expenses are denominated in reais.Reais. However, we have some foreign currency-denominated debt. As a result, in reporting periods when the realReal declines against the U.S. dollar or other foreign currencies in which our debt is denominated, our operating results and financial position arecan be adversely affected.affected even with such foreign currency-denominated debt being hedged. Foreign exchange gain or loss and monetary variation gain or loss may impactaffect our results of operations in periods in which there are wide swings in the value of the realReal relative to the U.S. dollar or high inflation. We have a number of financial and other contracts under which we owe, or are entitled to, amounts in respect of monetary variation as measured by an index of price inflation in Brazil. In 2012,
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Impacts of Covid-19
Overview
On March 11, 2020, the World Health Organization characterized Covid-19 as a pandemic, reinforcing the restrictive measures recommendations to prevent the virus dissemination worldwide. These measures are based, mainly, on social distancing, which have been causing major negative impact on entities, affecting their production process, interrupting their supply chains, causing workforce shortages and closing of stores and facilities. The economies around the world are developing measures to handle the economic crisis and reduce any possible effect, especially by their central banks and fiscal authorities.
Government measures aimed at Brazilian energy sector
Several measures were implemented by the Brazilian government, specifically aimed at energy sector, which include:
| · | The provisional normative act. 950/2020 issued on April 8, 2020, which provides for 100% discount in the calculation of social energy tariff (‘Tarifa Social de Energia Elétrica’), from April 1, 2020 to June 30, 2020, applicable to customers included in low-income residential subclass, with energy consumption less than or equal to 220 kWh/month. The act also authorizes the Federal Government to allocate resources to Energy Development Account (CDE), limited to R$900 million, to cover the tariff discounts established. |
| · | Expansion on the limit of total amount of energy that can be declared by energy distributors in the process of the mechanism for the sale of surplus (‘Mecanismo de Venda de Excedentes’ - MVE), during 2020, from 15% to 30%, for the purpose of facilitating contractual reductions. |
| · | Provision of financial resources available in the reserve fund in April 2020, by CCEE, in accordance with ANEEL Dispatch 986/2020, dedicated to reduce future regulatory fees. CEMIG D was granted with R$122 million. |
| · | Under Resolution 878/2020, issued on March 24, 2020, the regulator has implemented some measures in an attempt to maintain the public service of energy supply, which include: prohibiting energy supply suspension due to default of certain categories of customers (residential), for 90 days, extended to July 31, 2020, prioritizing emergency assistance and energy supply to services and activities regarded as essential, drawing up specific contingency plans to assist health care units and hospital services, among others. Under Resolution 879/2020, issued in July 21, 2020, the regulator changed the Resolution 878/2020, as of August, 2020, maintaining the prohibition of energy supply suspension only to low income residential subclass, revoking the provisions applied to the other residential subclasses and related to services and activities regarded as essential. |
| · | Authorization to create the ‘Covid-Account’ under the Decree 10,350/2020 issued on May 18, 2020, as detailed in the following topic. |
Company’s initiatives
On March 23, 2020, the Company had swap contractsestablished the Coronavirus Crisis Management Committee (‘Comitê Diretor de Gestão da Crise do Coronavírus’) to ensure its readiness to making decisions because of the fast-changing situation, which became more widespread, complex and systemic.
Also, in line with recommendations to maintain social-distancing measures, the Company has implemented an operational contingency plan and several precautionary measures to keep its employees healthy and safe, including: security and health technicians contacting operational staff on a daily basis; interacting daily with subcontractors Social Service department to monitor the evolution of suspicious cases; changing the schedule to prevent gatherings; restricting national and international travel; suspending technical visits and events at Company’s facilities; using remote means of communication; adopting work-from-home policies for a substantial number of employees, providing face masks for employees in external service or in service into its facilities, and requiring outsourcings providers to put the same procedures in place.
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In August 2020 the Company started the plan for the purposegradual return-to-office, which is in compliance with measures for prevention, control and mitigation of convertingrisks of Covid-19 transmission in work environments.
In-person service to the originalgeneral public was suspended temporarily, and resumed, subject to appointment, from August 3, 2020, in the municipalities that subscribed to the plan created by the State of Minas Gerais, called ‘Plano Minas Consciente’, and which are in the ‘Green Wave’ phase of the program. The decision to serve the public in person by appointment obeys the rules of the plan, and is in accordance with responsible resumption of the economy in Minas Gerais state, following the Covid-19 pandemic.
The Company maintains the communication with its customers on virtual channels and essential assistance in customers’ facilities, ensuring the appropriate energy supply.
The Company also adopted the following measures in order to contribute with society:
| · | Providing payment flexibility to low-income residential subclass customers, registered as social tariff, who will be able to pay their debts in up to six installments, without interest or penalties, applied until July 1, 2020; |
| · | Providing payment flexibility to public and philanthropic hospitals as well as to emergency rooms units, without interest or penalties, conditions applied until July 1, 2020; |
| · | Offering the entities regarded as small business by Brazilian law the option for payment in up to six installments, without interest or penalties, conditions applied until July 1, 2020; |
| · | A negotiation campaign was launched, in effect until October 31, 2020, enabling customers to pay debt by installments in up to 12 months without interest. |
In addition, the Company Executive Board approved the following measures, in order to support the fight against the Covid-19 during the critical period named “purple wave” (‘onda roxa’) instituted by the Extraordinary Covid-19 Committee of the State of Minas Gerais, through the Deliberation n. 138, of March 16, 2021, in the State of Minas Gerais:
| · | Suspending the interruption in supply of energy of customers classified as low income residential subclass; |
| · | Providing payment in installments to customers classified as low income residential subclass, under the specific conditions of the program, available in the Company website. |
| · | Providing payment in installments to customers from other classes, including commercial customers classified as as small business by Brazilian law, operating in the sectos affected by the crises, under the specific conditions of the program, available in the Company website; |
| · | Prioritizing emergency assistance and energy supply to health care units and hospital services and others activities regarded as essential; and |
| · | Communication initiatives aimed at raising awareness of the population about the importance of staying at home, rational use of energy, and electronic equipment use, preventing overload, short-circuit and fires. |
The Company is working diligently to mitigate the crisis impacts on its liquidity, implementing the following measures, among others:
| · | Restraint of the capital expenditure planned for 2020, in the approximate amount of R$349 million and a budget review, which reduced the expenses related to labor, material, outsourced services and others, in the approximate amount of R$164 million; |
| · | Reduction in dividends payments to shareholders, and deferral dividends and interest on equity payments to the end of 2020; |
| · | Negotiating with its customers on the free market their contracts; |
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| · | Negotiating the terms and conditions established in contracts signed with gas suppliers, including Petrobrás; |
| · | Deferral, during the year, payment of taxes and social charges payment, as authorized by legislation. |
“Covid-account” (‘Conta-Covid’)
On May 18, 2020, in order to mitigate the financial effects caused by the Covid-19 pandemic, the Decree n. 10,350/20 authorized the creation of Covid account, to support the energy distribution sector, which is the basis of the energy sector financial flow, aimed to either cover the distribution agents revenue/cash flow deficit or to anticipate their revenues, related to (i) over-contracted purchases due to market retraction, (ii) “CVA” sector assets (iii) maintaining the neutrality of regulatory charges, (iv) compensation for the delay in applying tariff adjustments until June 30, 2020 and (v) anticipation of “parcel B” revenues as determined by ANEEL regulation.
On June 23, 2020, the regulator issued the Normative Resolution n. 885/2020, which set out the criteria and procedures to manage the “Covid-account”, as well as regulated the use of the CDE regulatory charge.
On January 26, 2021, ANEEL issued the Despatch nº 181/2021, which defined the monthly charge to be paid in order to amortize the loan, as well as the respective coverage to be included into the tariff to pay the charge. The annual quote of ‘CDE-Covid-Account’ will be paid by the distribution agents through the tariff charge included in the energy tariff and in the tariff of use of distribution system (‘TUSD’).
The amount received by CEMIG D will be converted, updated by Selic rate, as a tariff negative financial component in the tariff processes of 2021, ensuring the neutrality.
CEMIG D joined the financial compensation mechanism under the Covid-account (‘Conta-Covid’), in order to boost its cash flow enabling it to meet its financial obligations, in spite of the collection reduction resulting of the economic crises. The total total amount from the “Covid-Account”received by CEMIG D, in installments, was R$1,404 million.
There are some rules applied to distribution agents entitled to the Covid-account resources, such as (i) relinquishing any intention to reduce or end the purchase of energy from generators because of a particular financing,reduction in the sales caused by the pandemic crises, until December 2020; (ii) in the event of default on payments, limiting their dividend payments to the legal minimum of 25% of net income and (iii) renounce the right to complain in court or arbitral tribunals on the conditions, procedures or obligations determined in legal and regulatory provisions on Covid-account. Notwithstanding, the right to request an extraordinary tariff review is fully preserved.
Due to the statements of renunciations established in the Acceptance Document under the Normative Resolution 885/2020, on July 3, 2020 CEMIG D’s Shareholders Extraordinary General Meeting approved alteration to its by-laws, to include §4 on Clause 33 limiting the distribution of mandatory dividend or interest on equity to the legal minimum, exceptionally for the cases and conditions that the regulator may demand, by rule or by contract, in order to mitigate a situation of financial imbalance caused by any fact or event attributable to a third party, or overriding government rulings, or expressly recognized force majeure.
Impact of Covid-19 on Financial Statements
Since March 2020, the Company has been monitoring the Covid-19 pandemic impact on its business and the market in which it operates. The Company has implemented a series of precautionary measures to protect the health of its employees and to prevent the spread of the novel coronavirus in its operational and administrative facilities. The measures are in accordance with the recommendations of World Health Organization (WHO) and Brazilian Ministry of Health and aim to contribute with the populations and Brazilian Authorities efforts, in order to help prevent the virus dissemination.
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The Coronavirus crises made an impact on the Company operations, especially related to energy distribrution market, due to the contraction of the economic activities and the social distancing measures, affecting entities production process, interrupting their supply chains, causing workforce shortages and closing of stores and facilities. These effects might result in lower energy consumption and an increase in delinquency.
In this scenario intervention in market policies, and the initiatives to reduce transmission of Covid-19, also led to lower consumption of natural gas in 2020 than in 2019: consumption by the industrial sector was 3% lower year-on-year, and consumption by the automotive sector was 28% lower. At the same time, consumption in 2020 by residential users was 20% higher year-on-year, and by commercial users was 14% higher – reflecting the natural motivation of increased use of natural gas as a safer option when supply is continuous.
As of December 31, 2020, from an interestthe observation of the pandemic’s economic effects, the Company assessed the assumptions used for calculating fair value and recoverable amount of certain financial and non-financial assets, as follows:
| · | The subsidiary CEMIG GT assessed whether the greater pressure on the exchange rate, combined with a lack of financial market liquidity, will have a negative impact on derivative financial instruments entered into to protect its operations against the risks arising from foreign exchange rate changes. At this point, given the current market conditions, the change in derivative instrument’s fair value, based on the forecasts of future interest and exchanges rates, cannot offset the Company’s total exposure to foreign exchange rate variability, resulting in a net loss of R$4 million in the period of January to December of 2020. The long-term projections carried out for the foreign exchange rate are lower than the current dollar quotation, which may represent a decrease in Company’s foreign exchange variation expense, if the projected scenario occurs; |
| · | The Company is assessing the circumstances arising from Covid-19 pandemic and associated measures aimed at reducing the impact of the economic contraction on customer delinquency when measuring expected credit losses. The Company has intensified measures to mitigate the risks of delinquency, such as a campaign of negotiation with clients in arrears whose energy supply the Company was temporarily prohibited from suspending as well as intensifying the usual collection measures; |
| · | The Company also reviewed the financial assets and liabilities measured at fair value to reflect the conditions and current rates projected, which impacts are presented in Note 31 to the Financial Statements; |
| · | The total load on the Brazilian national grid fell in 2020, especially from March to May, and has been recovering gradually since. Year to date, the energy transported and sold to CEMIG D customers increased 4.42% and reduced 5.31%, respectively. In the second semester of 2020, the energy transported increased 10.29% and the energy sold expanded 94.66%, compared with the same period of the last year, reflecting the easing of social distancing rules; |
| · | The accumulated variation of the CEMIG D’s captive customers market, measured from the pandemic outbreak until December 2020, reduced by 8%. It is important to mention that the effects of the financing expenses arising from energy purchase were minimized by the ‘Covid-Account’ creation; and |
| · | The Company is starting negotiations and deferrals with its customers and energy and gas suppliers, in order to maintain CEMIG GT and Gasmig liquidity during the economic crisis. |
The impacts of the Covid-19 pandemic disclosed are based on the variation inCompany’s best estimates. Despite the exchange rateimpact of the U.S. dollar, to an interest rate basedpandemic on the Brazilian Interbank CD Rate (the Certificado de Depósito Interbancário, or CDI, Rate). These transactions were settled during 2013.Company’s liquidity in 2020, significant long-term effects are not expected.
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Operating Results
Year Ended December 31, 2020 compared to the Year Ended December 31, 2019
Net revenues
Our consolidated financial statements for the years ended December 31, 2015 compared2019 and 2018 have been restated to reflect the year ended December 31, 2014change in an accounting policy and its impacts are disclosed in note 2.8 of our consolidated financial statements.
Net operating revenues
Net operating revenues increased 8.97%decreased by 1.02% from R$19,54025,486 million in 20142019 (restated) to R$21,29225,228 million in 2015.2020, as follows.
2020 | Net revenues | 2019 (Restated) | Net revenues | 2020 vs 2019 | |
| (in million of R$) | (%) | (in million of R$) | (%) | (%) | |
| Energy sales to final customers | 23,018 | 91.24 | 24,052 | 94.37 | (4.30) |
| Revenue from wholesale supply to other concession holders | 3,414 | 13.53 | 2,876 | 11.28 | 18.71 |
| CVA (compensation for changes in ‘Parcel A’ items ) and Other financial components | 455 | 1.80 | 58 | 0.23 | 684.48 |
| Financial component arising from PIS/Pasep and Cofins taxes refunded to customers– realization | 266 | 1.05 | - | - | - |
| Revenue from use of the electricity distribution systems – TUSD | 3,022 | 11.98 | 2,722 | 10.68 | 11.02 |
| Transmission operation and Maintenance revenue | 280 | 1.11 | 352 | 1.38 | (20.45) |
| Interest revenue arising from the financing component in the transmission contract asset | 438 | 1.74 | 328 | 1.29 | 33.54 |
| Adjustment to expectation of cash flow from indemnifiable financial asset of the distribution concession | 16 | 0.06 | 18 | 0.07 | (11.11) |
| Revenue on financial updating of the Concession Grant Fee | 347 | 1.38 | 318 | 1.25 | 9.12 |
| Construction revenues | 1,637 | 6.49 | 1,292 | 5.07 | 26.70 |
| Energy transactions on the CCEE | 154 | 0.61 | 432 | 1.69 | (64.35) |
| Mechanism for the sale of surplus | 234 | 0.93 | - | - | - |
| Supply of gas | 2,011 | 7.97 | 2,298 | 9.02 | (12.49) |
| Fine for violation of service continuity indicator | (51) | (0.20) | (58) | (0.23) | (12.07) |
| Recovery of PIS/Pasep and Cofins taxes credits over ICMS | - | - | 1,428 | 5.60 | - |
| Other revenue | 1,709 | 6.77 | 1,721 | 6.76 | (0.75) |
| Deductions on revenue | (11,722) | (46.46) | (12,351) | (48.46) | (5.09) |
| Total net revenue | 25,228 | 100.00 | 25,486 | 100.00 | (1.02) |
| 2015 | % of net operating revenues | 2014 | % of net operating revenues | 2015 versus 2014 % | ||||||||||||||||
| (in millions of R$) | (in millions of R$) | |||||||||||||||||||
Electricity sales to final consumers | 20,319 | 95.4 | 14,922 | 76.4 | 36.2 | |||||||||||||||
Revenue from wholesale supply to other concession holders | 2,207 | 10.4 | 2,310 | 11.8 | (4.5 | ) | ||||||||||||||
CVA (compensation for changes in ‘Portion A’ items ) account and Other financial components of tariffs | 1,704 | 8.0 | 1,107 | 5.7 | 53.9 | |||||||||||||||
Revenue from use of the electricity distribution grid – TUSD | 1,465 | 6.9 | 855 | 4.4 | 71,3 | |||||||||||||||
Revenue from use of the concession transmission system | 261 | 1.2 | 557 | 2.9 | (53.1 | ) | ||||||||||||||
Transmission indemnity revenue | 101 | 0.5 | 420 | 2.1 | (76.2 | ) | ||||||||||||||
Construction revenues | 1,252 | 5.9 | 941 | 4.8 | 33.0 | |||||||||||||||
Transactions in electricity on the CCEE | 2,425 | 11.4 | 2,348 | 12.0 | 3.3 | |||||||||||||||
Supply of gas | 1,667 | 7.8 | 422 | 2.2 | 295.0 | |||||||||||||||
Other operating revenues | 1,440 | 6.7 | 1,284 | 6.5 | 12.1 | |||||||||||||||
Taxes on revenue and regulatory charges | (11,549 | ) | (54.2 | ) | (5,626 | ) | (28.8 | ) | 105.3 | |||||||||||
Total net operating revenues | 21,292 | 100.0 | 19,540 | 100.0 | 9.0 | |||||||||||||||
ElectricityEnergy sales to final consumerscustomers
Total revenue from electricity salesenergy sold to final consumers (excluding Cemig’s own consumption)customers in 2020 was R$20,31923,018 million, in 2015, representing an increaseor 4.30% lower than the figure for 2019 of 36.17% over 2014 (R$14,922 million).R$24,052 million.
The variation mainly reflects the following insights:main items that affected total revenue from energy sold to final customers were:
| · | The annual tariff adjustment for CEMIG D effective as from May 28, 2019, with an average upward effect of 8.73% on customer tariffs, in comparison an average upward effect on customer tariffs of 23.19% effective as from May 28, 2018; and |
| · | Volume of energy sold to final customers 6.66% lower year-on-year. |
The annual tariff adjustment for CemigCEMIG D, effective July 1, 2020, with average upward effect on consumercustomer tariffs of 14.76%, effectivewas 4.27% and from April 8, 2014 (full effectAugust 19, 2020, the adjustment was recalculated, resulting in 2015).
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Market Evolution
The total for sales of Cemig’sin CEMIG’s consolidated electricityenergy market comprises sales to: (i) captive consumersCaptive customers in Cemig’sCEMIG’s concession area in the State of Minas Gerais,Gerais; (ii) Free ConsumersCustomers in both the State of Minas Gerais and other States of Brazil, in the Free Market (Ambiente de Contratação Livre, or ACL),; (iii) other agents of the electricityenergy sector – traders, generators and independent power producers, also in the Free Market,Market; (iv) distributors,Distributors, in the Regulated Market (Ambiente de Contratação Regulada, or ACR);ACR Market; and (v) sales in the Wholesale Trading ChamberExchange (Câmara de Comercialização de Energia Elétrica, or – CCEE), eliminating transactions between companies of.
As illustrated in the Cemig Group.
Thetable below, the total volume of electricityenergy sold by CemigCEMIG in 2015 was 10.3% less than in 2014.2020 decreased by 1.52% as compared to 2019:
| GWh | ||||||||||||
| 2015 | 2014 | Var % | ||||||||||
Residential | 9,830 | 10,014 | (1.8 | ) | ||||||||
Industrial | 22,969 | 26,026 | (11.7 | ) | ||||||||
Commercial, Services and Others | 6,434 | 6,395 | 0.6 | |||||||||
Rural | 3,380 | 3,390 | (0.3 | ) | ||||||||
Public Power | 892 | 891 | 0.1 | |||||||||
Public Illumination | 1,326 | 1,298 | 2.2 | |||||||||
Public Service | 1,204 | 1,273 | (5.4 | ) | ||||||||
Subtotal | 46,035 | 49,287 | (6.6 | ) | ||||||||
Own Consumption | 38 | 37 | 2.7 | |||||||||
| 46,073 | 49,324 | (6.6 | ) | |||||||||
Supply to Other Concessionaires (1) | 10,831 | 14,146 | (23.4 | ) | ||||||||
Total | 56,904 | 63,470 | (10.3 | ) | ||||||||
| GWh (2) | 2020 | 2019 | Var % |
| Residential | 10,981 | 10,538 | 4.20 |
| Industrial | 12,731 | 14,873 | (14.40) |
| Commercial, Services and Others | 8,571 | 9,335 | (8.18) |
| Rural | 3,766 | 3,795 | (0.76) |
| Public Power | 714 | 905 | (21.10) |
| Public Illumination | 1,243 | 1,357 | (8.40) |
| Public Service | 1,362 | 1,373 | (0.80) |
| Subtotal | 39,368 | 42,176 | (6.66) |
| Own Consumption | 34 | 38 | (10.53) |
39,402 | 42,214 | (6.66) | |
| Supply to Other Concessionaires (1) | 13,907 | 11,919 | 16.68 |
| Total | 53,309 | 54,134 | (1.52) |
| (1) | Includes Regulated Market |
Comments on the various consumer categories:
| (2) |
Residential:Residential consumption in 2020 was 4.20% higher than in 2019. This increase is primarily due to new customer connections made in 2020, in CEMIG D.
Industrial:Total volume of energy consumed by regulated and free industrial customers was 14.40% lower in 2020 than in 2019. This decrease was due primarily to industrial activity not resuming growth due to the Covid-19 pandemic during the year.
Commercial, Services and Others:Consumption was 8.18 % lower in 2020, mainly due to the Covid-19 pandemic during the year.
Rural:Consumption by rural users increased by 0.76 % in 2020.
Supply to Other concessionaires:The energy sale to other concessionaires increased 16.68% compared to 2019 due to a higher volume of energy available sold in this segment, to redeem part of the high credit that those companies have at CCEE.
Revenue from wholesale supply to other concession holders
Revenue from wholesale supply to other concession holders was R$2,207 million in 2015, or 4.46% less than in 2014 (R$2,310 million). It reflects a decrease involumeUse of electricity sold to other concession holders of 23.43% compared to in the previous year: 10,831 GWh in 2015, compared to 14,146 GWh in 2014.
Revenue from use of the electricity distribution grid (TUSD)
Distribution Systems (the TUSD charge):This is revenue from the charging ofFree Customers the Tariff for Use of the Distribution System (Tarifa de Uso do Sistema de Distribuição, or TUSD), to Free Consumers, for transport(TUSD) on the volume of electricity sold.energy distributed. In 20152020, this revenue was R$1,4653,022 million, 71.35% more thancompared to R$2,722 million in 2014 (R$855 million).2019, an increase of 11.02% year-on-year, mainly reflecting the following:
| · | Upward adjustment of 15.47% in the TUSD, in CEMIG D’s 2019 annual tariff adjustment, effective from May 28, 2019 added to an upward adjustment of 5.74% in the TUSD, in CEMIG D’s 2020 annual tariff adjustment, effective from May 28, 2020. |
The increase reflects the increase in the tariff for free consumers, as from April 8, 2014, of 8.79% (full effect in 2015), and the further impact of tariff increases of 96.21% in 2015. The 2015 increases were mainly due to passing through of the increase in the quota payable for the Energy Development Account (Conta de Desenvolvimento Energético, or CDE) (See Note 10 of the Financial Statements). The effect of the increase in tariffs was partially offset by the effect of lower activity in the industrial sector – which consumed 11.74% less electricity than in 2014.
The CVA Account and Other financial components, in tariff increases
Cemigrate increases:CEMIG recognizes the difference between actual non-controllable costs (in which the CDE, and electricityenergy bought for resale, are significant components) and the costs that were used as the basis for determiningof decision of the rates charged to consumers. This balance – thecustomers. The amount that will beof this difference is passed through to clientscustomers in CemigCEMIG D’s next tariff adjustment – has been recorded as an operationalin 2020 this represented a revenue item of R$1,704455 million, in 2015, compared to the R$1,107 million58 million. The higher figure in 2014.
Revenue from use of the concession transmission system
Revenue from use of the concession transmission system totaled R$261 million in 2015,2020 compared to R$557 million in 2014, a decrease of 53.1%. This was2019 is mainly due to a reductionhigher cost of energy and the estimated figures used for future cost of energy in the revenues relatedtariff calculation (this difference generates a financial asset to be reimbursed to the conection fromCompany through the generation system to the transmission system.next tariff adjustment).
Transmission indemnityconcession revenue
| · | Construction revenue corresponds to the performance obligation to build the transmission infrastructure, recognized based on the satisfaction of obligation performance over time. They are measured based on the cost incurred, including PIS/Pasep and Cofins taxes over the total revenues and the profit margin of the project. For more information, see note 15 to the Financial Statements. |
| · | Operation and maintenance revenue correspondes to the performance obligation of operation and maintenance specified in the transmission concession contract, after termination of the construction phase. They are recognized when the services are rendered and the invoices for the RAPs are issued. |
| · | Interest revenue in the contract asset recognized, recorded as transmission concession gross revenue in statement income. Revenue corresponds to the significant financing component in the contractual asset, and is recognized by the linear effective interest rate method based on the rate determined at the start of the investments, which is not subsequently changed. The average of the implicit rates is 6.68%. The rates are determined for each authorization and are applied on the amount to be received (future cash flow) over the contract duration. This includes financial updating by the inflation index specified for each transmission contract. |
Transmission indemnity revenue totaled R$101 million in 2015, compared to R$420 million in 2014, a decrease of 76.2%. The higher revenue recorded in 2014 is due to the diference between the accounting amounts previously recorded by Cemig related to the transmission assets and the preliminary indemnity amount approved by Aneel related to such assets. The amount recorded in 2015 represents an adjustment of the amount recorded in 2014 and in prior years.
Revenue from transactions in electricityenergy on the CCEE
CCEE:Revenue from transactions in electricityenergy on the CCEE was R$2,425154 million in 2015,2020, compared to R$2,348432 million in 2014, representing an increase2019, a decrease of 3.28%. The components64.35% year-on-year. This reflects lower volume of this figure were: (i) Higher total volume sold, at 7,157,641 MWh in 2015, compared to 3,354,224 MWh in 2014; and (ii) the Spot Price (Preço de Liquidação de Diferenças, or PLD)energy available for settlement in the wholesale market 58.31% lower (at R$287.20/MWh in 2015, compared R$688.89/MWh in 2014).2020 considering the low level of Brazilian reservoirs and energy allocated to be sold to other segments.
Revenue from supply of gas
Cemiggas:CEMIG reported revenue from supply of gas totaling R$1,6672,011 million in 2015,2020, compared to R$4222,298 million in 2014, representing2019, a decrease of 12.49%. This mainly reflects the decrease on the volume of gas sold to the wholesale market in 2020, mainly in the thermal and industrial segment.
Construction revenues:Distribution and transmission infrastructure construction revenues totaled R$1,637 million in 2020, compared to R$1,292 million in 2019 (restated), an increase of 295.02%. The variation reflects the fact that results for Gasmig began to be consolidated into Cemig’s results in October 2014 (in 2014 the revenue reported corresponds to only 3 months).
Construction revenues
Construction and infrastructure revenue (in transmission and distribution) totaled R$1,252 million in 2015, compared to R$942 million in 2014, an increase of 32.91%26.70%. This revenue is fully offset by Construction costs in the distribution segment, of the same amount, and corresponds to the Company’s investments in assets of the concession duringin the period.year. For the transmission segment, this represents investment in small improvements in 2020, due to regulatory changes and the suspension of contracts with works suppliers’ reinforcements.
Other operating revenues
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Recovery of PIS/Pasep and Cofins taxes credits over ICMS:The credits of PIS/Pasep and Cofins totaling R$1,428 million in 2019, resulted from the success in the Company’s legal action questioning the inclusion of ICMS tax in these amounts since July 2003.
Revenue from the mechanism for the sale of energy surplus:The revenue from the mechanism for the sale of energy surplus (MVE) were R$234 million in 2020, relating to offers of supply made at the end of 2019 by CEMIG D. This mechanism is an instrument regulated by ANEEL enabling distributors to sell overcontracted supply – the energy amount that exceeds the quantity required to supply captive customers.
Other:Other operating revenues totaled R$1,4401,709 million in 2015,2020, compared to R$1,2841,721 million in 2014, an increase2019, 0.75% lower year-on-year. The breakdown of 12.1%. This was mainly duethe other revenues is presented on Note 27 to an increase in the revenue from subsidies applicable to users of distribution services, which amount was reimbursed by Eletrobras. Those subsidies totaled R$996 million in 2015, compared to R$790 million in 2014.Financial Statements.
Deductions from RevenueRevenue:
Taxes and charges applied to operational revenue in 20152020 were R$11,54911,722 million, or an increase of 105.30% from 20145.09% lower than in 2019 (R$5,62612,351 million). This was (restated), mainly due to an increase inreflecting the CDE costs (explained in more detail below) and also higher net revenues (most of these charges are calculated simply as percentages of revenue).following:
The Energy Development Account – CDE
Payments to the Energy Development Account (CDE) are decided by an Aneel Resolution. The purpose of the CDE is to cover costs of concession indemnities, tariff subsidies, the subsidy for balanced tariff reduction, the low-income consumer subsidy, the coal consumption subsidy, and the Fuels Consumption Account (CCC).
Charges for the CDE in 2015 were R$2,870 million, compared to R$211 million in 2014. This is the result of the new budget for the CDE in 2015, in which Aneel increased the annual amount to be paid by Cemig D, which is passed through to the consumer in the Sector Charges component of tariffs.
This is a non-manageable
| · | CDE: The amounts of payments to the Energy Development Account (CDE) are decided by an ANEEL Resolution. The purpose of the CDE is to cover costs of concession indemnities, tariff subsidies, and the subsidy for balanced tariff reduction, the low-income customer subsidy, the coal consumption subsidy, and the Fuels Consumption Account (CCC). Charges for the CDE in 2020 were R$2,443 million, compared to R$2,448 million in 2019. This is a non-controllable cost: the difference between the amounts used as a reference for setting of tariffs and the costs actually incurred is compensated for in the subsequent tariff adjustment. |
| · | Customer charges – the ‘Tariff Flag’ system: The Tariff Flag bands are activated because of low levels of water in the system’s reservoirs – tariffs are temporarily increased due to scarcity of rain. The ‘Red’ band has two levels – Level 1 and Level 2. Level 2 comes into effect when scarcity is more intense. Activation of the tariff flags generates an impact on billing in the subsequent month. Income from charges to the customer related to the Tariff Flag bands was 49.32% lower in 2020, at R$149 million, compared to R$294 million in 2019. This reflects application of the Green band for the whole year of 2020, due to reduction of the demand due to the Covid-19 Pandemic effects. |
| · | Other taxes and charges on revenue: The other significant deductions from revenue are taxes, which are calculated as a percentage of sales revenue. Thus, their variations arise, substantially, from the changes in revenue. |
Periodic Tariff Review
The tariff review effected in June 2020 for Contract 006/1997 resulted in recognition of revenue of R$529 million, comprising R$322 million for new assets in the National Grid, and R$207 million for existing assets in the National Grid, corresponding to the extension of the concessions, under Law 12,783/13, which were included in the regulatory remuneration base. In December 2020, contract 079/2020 was also submitted to the periodic tariff review, and this resulted in recognition of revenue of R$23 million (R$22 million net of PIS/Pasep and Cofins taxes). The revenues resulting from the periodic tariff reviews reflect, principally, the change in the rate of regulatory remuneration for the transmission activity, and remeasurement of the New Replacement Value (Valor Novo de Reposição – VNR) of the regulatory remuneration base (BRR).
Additionally, these revenues were impacted by the increase in annual RAP, in July 2020, and includes the effects of inflation and also new revenues resulting from investments authorized.
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Operating costs and expenses
Operating costs and expenses in 2020 were R$21,432 million, a decrease of 4.64% as compared to 2019 (R$22,475 million).
The following table illustrates the components of operating costs and expenses in 2020 and 2019 expressed as a percentage of net revenues:
2020 | Net revenues | 2019 (Restated) | Net revenues | 2020 vs 2019 | |
| (in million of R$) | (%) | (in million of R$) | (%) | (%) | |
| Energy bought for resale | (12,111) | 48.01 | (11,286) | 44.28 | 7.32 |
| Charges for use of the national grid | (1,748) | 6.93 | (1,426) | 5.60 | 22.58 |
| Depreciation and amortization | (989) | 3.92 | (958) | 3.76 | 3.24 |
| Personnel | (1,276) | 5.06 | (1,272) | 4.99 | 0.31 |
| Gas bought for resale | (1,083) | 4.29 | (1,436) | 5.63 | (24.58) |
| Outsourced services | (1,265) | 5.01 | (1,239) | 4.86 | 2.10 |
| Post-employment benefits | (438) | 1.74 | (408) | 1.60 | 7.35 |
| Materials | (79) | 0.31 | (91) | 0.36 | (13.19) |
| Operating provisions and impairment……….. | (423) | 1.68 | (2,401) | 9.42 | (82.38) |
| Employees’ and managers’ profit sharing….. | (142) | 0.56 | (263) | 1.03 | (46.01) |
| Infrastructure construction costs | (1,581) | 6.27 | (1,200) | 4.71 | 31.75 |
| Other operating expenses, net | (297) | 1.17 | (494) | 1.94 | (40.20) |
| Total operating costs and expenses | (21,432) | 84.95 | (22,474) | 88.18 | (4.64) |
The following are the main variations in operating costs and expenses between 2020 and 2019 (restated):
Employees´and managers´ profit sharing
The expense on employees and managers profit sharing was R$142 million in 2020, compared to R$263 million in 2019. The decrease was due to a lower consolidated net income of CEMIG – the basis of calculation for this expense.
Energy purchased for resale
Expenses due to energy purchased for resale in 2020 were R$12,111 million, compared to R$11,286 million in 2019, representing an increase of 7.31%. The main factors contributing to such increase were:
| · | Expenses on energy acquired in regulated market auctions increased by 10.36%, totalling R$3,334 million in 2020, as compared to R$3,021 million in 2019, mainly due to the increase in the volume of energy acquired; |
| · | Expense on supply from Itaipu was 39.26% higher, at R$1,990 million in 2020, compared to R$1,429 million in 2019. The difference is mainly due to the increase of 31.80% in the average dollar quotation in 2020 compared to 2019 (R$5.23 and R$3.97, respectively), which has contributed to the rise in dollar energy price per KW (US$28.41/KW in 2020 and US$27.71/KW in 2019); |
| · | The expenses on distributed generation (‘geração distribuída’) acquired was R$678 million in 2020, compared to R$207 million in 2019, 227.54% higher. This reflects the higher number of generation units installed (63,845 in December 2020, compared to 31,172 in December 2019); and the higher volume of energy injected into the grid (1,008,589,663 MWh in 2020, compared to 412,290,475 MWh in 2019); |
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| · | The cost of purchases of supply in the spot market was at R$1,497 million in 2020, compared to R$1,886 million in 2019. The result expressed for spot-price supply is the net balance between revenues and expenses of transactions on the Power Trading Chamber (CCEE). The lower figure is mainly due to the average spot price (PLD) being 22.06% lower, at R$177.00/MWh in 2020, compared to R$227.10/MWh in 2019. |
This is a non-controllable cost for CEMIG Distribution: the difference between the amounts used as a reference for calculation of tariffs and the costs actually incurred is compensated for in the subsequent tariff adjustment.
Consumer charges – For further details see Note 29 to the “Tariff Flag” system
In 2015, with the creation of the Tariff Flag mechanism, Cemig attributed, within Consumer charges, a total of R$1,067 million arising from the Tariff Flag system.
Operating costs and expenses
Operational costs and expenses, excluding Financial Revenue (expenses) in 2015 were R$ 18,317 million, 26.8% more than in 2014 (R$ 14,451 million). For more information please refer to Note 25 to our Financial Statements.
| 2015 | % of net operating revenues | 2014 | % of net operating revenues | 2015 versus 2014 % | ||||||||||||||||
| (in millions of R$) | (in millions of R$) | |||||||||||||||||||
Electricity purchased for resale | (9,542 | ) | (44.8 | ) | (7,428 | ) | (38.0 | ) | 28.5 | |||||||||||
Gas purchased for resale | (1,051 | ) | (4.9 | ) | (254 | ) | (1.3 | ) | 313.8 | |||||||||||
Charges for the use of transmission facilities of the basic grid | (999 | ) | (4.7 | ) | (744 | ) | (3.8 | ) | 34.3 | |||||||||||
Depreciation and amortization | (835 | ) | (3.9 | ) | (801 | ) | (4.1 | ) | 4.2 | |||||||||||
Personnel | (1,435 | ) | (6.7 | ) | (1,252 | ) | (6.4 | ) | 14.6 | |||||||||||
Employees’ and managers’ profit shares | (137 | ) | (0.6 | ) | (249 | ) | (1.3 | ) | (45.0 | ) | ||||||||||
Outsourced services | (899 | ) | (4.2 | ) | (953 | ) | (4.9 | ) | (5.7 | ) | ||||||||||
Post-employment obligations | (156 | ) | (0.7 | ) | (212 | ) | (1.1 | ) | (26.4 | ) | ||||||||||
Materials | (154 | ) | (0.7 | ) | (381 | ) | (1.9 | ) | (59.6 | ) | ||||||||||
Provisions for operating losses | (1,402 | ) | (6.5 | ) | (581 | ) | (3.0 | ) | 141.3 | |||||||||||
Construction costs | (1,252 | ) | (5.9 | ) | (942 | ) | (4.8 | ) | 32.9 | |||||||||||
Other operating expenses, net | (455 | ) | (2.1 | ) | (654 | ) | (3.3 | ) | (30.4 | ) | ||||||||||
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Total operating costs and expenses | (18,317 | ) | (86.0 | ) | (14,451 | ) | (74.0 | ) | 26.8 | |||||||||||
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The following are the main variations in expenses between 2015 and 2014:
The expense on electricity purchased for resale in 2015 was R$9,542 million. Compared to R$7,428 million in 2014, representing an increase of 28.46%. The main factors contributing to such increase are:
Charges for use of the transmission facilitiesnational grid
Charges for use of the basicnational grid totaledin 2020 were R$9991,748 million, compared to R$1,426 million in 2015, compared to R$744 million in 2014, represents2019, representing an increase of 34.27%22.58%.
This expense is payable by electricityenergy distribution and generation agents for use of the facilities that are components of the national grid. The amounts to be paid are set by an Aneel.ANEEL Resolution. The higher figure is mainly due to the annual adjustment in charges for use of the National Grid, which usually takes place in July, and had an effect of approximately 27.4% in 2020.
This is a non-manageable cost:cost for CEMIG Distribution: the difference between the amounts used as a reference for calculation of tariffs and the costs actually incurred is compensated for in the subsequent tariff adjustment.
Provisions for operating losses
Operating provisions and impairment
Operating provisions in 20152020 totaled R$ 1,402423 million, compared to R$ 5812,401 million in 2014, an increase2019, a decrease of 141.31%82.38%. This changeThe decrease was mainly reflecteddue to:
| · | Provisions for employment-law legal actions amounting R$46 million in 2020, compared to a provisions of R$136 million in 2019. This arises mainly from reassessment of the probability of loss in existing actions, based on application of the IPCA-E inflation index instead of the TR reference rate in monetary adjustment for employment-law legal actions dealing with debts. |
| · | Variation of provisions for taxes, which represented the recognition of R$75 million in 2020, compared to R$1,228 million in 2019. This variation results, mainly, of the Company’s reassessment, based on the opinion of its legal advisers, of the probability of loss on administrative and court proceedings opened against the Company relating to social security contributions on the payment of profit shares to its employees, alleging that Company did not previously establish clear and objective rules for the distribution of these amounts. For further details see Note 28 to the Financial Statements. |
| · | Expected losses on doubtful receivables from clients 38.24% lower, at R$147 million in 2020, compared to R$238 million in 2019. This difference mainly reflects reversal of expected losses for debts for energy consumption and services owed by the direct and indirect administration of Minas Gerais State of R$210 million, in 2020, that the Company will be able to be offset against ICMS tax owed to the state, under State Decree 47,908/2020. For more information, see Note 11to the Financial Statements. Also, default in 2020 declined due to clients’ acceptance of the negotiation rules approved by the Company for dealing with the impacts of the Covid-19 pandemic. |
| · | This was partially offset by the recognition of an estimated loss on realization of the receivables from Renova, in the amount of R$688 million, after an assessment of the investee’s credit risk, which deteriorated in the current year, that increased the cost with operating provisions in 2019. |
For further Information see Note 25 to the Financial Statements.
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Infrastructure construction costs
Infrastructure construction costs in 2020 totaled R$1,581 million, or 31.75% more than in 2019 (R$1,200 million).
Construction revenues for energy and gas distribution segment are equivalent to new infrastructure are initially recorded as contract assets, measured at construction cost plus margin (which, for the construction business, is deemed as zero). Construction cost include borrowing costs.
Construction revenues for transmission segment are recorded when construction is finalized, concession infrastructure assets remains as contract asset, considering the existence of performance obligations during the concession period, represented by the network construction, operation and maintenance, as there is no unconditional right to receive the consideration for the construction service unless the company operates and maintains the infrastructure.
Gas bought for resale
In 2020 the Company reported expense of R$ 1,0791,083 million andon acquisition of gas, 24.58% less than the expense of R$ 119 million, respectively, made in 2015 for losses relating to put options on equity interests in Parati, and SAAG (theSanto Antônio plant investment). More details on the criteria for making of these provisions are in Note 14 to our Financial Statements (UnderPut options).
Personnel expenses were R$1,4351,436 million in 2015, compared to R$1,252 million in 2014, an increase of 14.62%.2019. This increase is primarily due to the following items:decrease of 16.28% in the volume of gas bought from Petrobras, related to the impacts of the Covid-19 pandemic in the thermal and industrial sector demand.
Post-employment obligations
The Company’s post-retirement obligations were 7.35% higher in 2020, than 2019, being R$438 million and R$408 million, respectively. This mainly reflects a higher cost for the Collective Agreemententered into between us and the unions which represent our employees (“Collective Agreement”) of 6.34%, coming into effectHealth Plan in November 2014 (full effect in 2015).
Expenses on raw materials and inputs for production of electricity in 2015 totaled R$84 million, compared to R$282 million in 2014 , representing a reduction of 70.21%. This reflects lower acquisition of fuel oil in 2015 for burning by theIgarapé thermal plant because that plant was shut down during the year for maintenance and the installation of new equipment.
Infrastructure construction costs totaled R$1,252 million in 2015, compared to R$942 million in 2014, an increase of 32.91%. This line records the Company’s investment in assets of the concessiondiscount rate used in the period, and is fully offset by the line “Construction Revenue”,actuarial valuation made in the same amount.December 2019.
Outsourced services totaled R$899 million in 2015, compared to R$953 million in 2014, a decrease of 5.7%. This was mainly due to a R$62 million reduction in outsourced services related to collections and meter reading of the distribution business.
Employees’ and managers’ profit shares totaled R$137 million in 2015, compared to R$249 million in 2014, a decrease of 45.0%. This was mainly due to a reduction in Cemig’s net income in 2015 compared to 2014, since this is the main determinantShare of profit sharing.(loss), net, of associates and joint ventures
In 2015, the company recorded an expense of R$1,051 million on acquisition of gas, compared to an expense of R$254 million in 2014, an increase of 313.78%. This increase can be explained by the fact that results and data for Gasmig began to be consolidated into Cemig’s results in October 2014 (in 2014 the revenue2020, CEMIG reported corresponds to only 3 months).
Fair value results in corporate operation
In 2015 the Company posted a gain of R$729 million relating to valuation at fair value of the assets of Aliança Geração de Energia. This is described in more detail in Note 14 to our Financial Statements.
Equity gain (loss) in subsidiaries
In 2015 Cemig posted a net gain by the equity method of R$393357 million, compared to a net loss of R$210125 million reported in 2019. This primarily reflects higher gains in 2020 on the investments in TAESA compared to losses on the investments in Santo Antônio Energia and Itaocara in 2019. See Note 16 to the Financial Statements for details on the results from the investees recognized under this line.
Net finance income (expense)
Net finance income totaled R$905 million in 2014. This was mainly due Madeira Energia reporting a loss of R$2 million in 2015, compared to a loss of R$388 million in 2014. In 2015, as a result of the Eletrobras’ internal investigation, Cemig recorded a loss of R$23 million in Cemig’s equity in earnings of unconsolidated investees for Aliança Norte, Amazônia Energia and Light, from its interest in Amazonia Energia. This variation is mainly due to a specific loss registered by Madeira in the previous year related to the contract with the construction company and also to losses in electricity operations in the investee.
Net Financial Expenses
Cemig had net financial expenses of R$735 million in 2015,2020, compared to net financialfinance expenses of R$1,101$1,360 million in 2014.2019. The main factors affecting ourcontributing to this change in net financialfinance income and expenses were:
| · | Recognition, |
| · | Revenue of Monetary updating of the |
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This was partially offset by the following:
| Higher interest on loans in foreign currency – which in 2020 represented a financial expense of R$850 million, compared a financial expense of R$664 million in 2019. This higher increase is due to 29% higher exchange rate in effect in in 2020 (R$5.19 in 2020, compared to R$4.03 in 2019); |
| · | Higher foreign exchange variation on loans in foreign currency – which in 2020 represented a financial expense of R$1,742 million, compared a financial expense of R$226 million in 2019. This higher increase is due to the higher exchange rate in effect in the |
Please see the Net Financial Expenses and Incomes composition at Note 26 to our financial statements.
Income taxTax and the Social Contribution taxTax
In 2015,2020, the Company’s expense on income tax and the Social Contribution tax totaled R$893936 million, on pre-tax profit of R$ 3,3623,801 million, an effective rate of 26.56%24.63%.
In 2014,2019, the Company’s expense on income tax and the Social Contribution tax totaled R$1,3431,599 million (restated), on pre-tax profit of R$4,4794,570 million (restated), an effective rate of 29.98%34.99%. There is a reconciliation of these effective rates with
Operating Results
Year Ended December 31, 2019 compared to the nominal tax rates in Note 10 to our Financial Statements.
YearOur consolidated financial statements for the years ended December 31, 2014 compared2019 and 2018 have been restated to reflect the change in accounting policy disclosed in note 2.8 of our annual consolidated financial statements.
From January 1, 2019, we were required to adopt IFRS 16 – Leases. IFRS 16, establishes principles for recognition, measurement, presentation and disclosure of leasing transactions and requires that lessees account all the leasing transactions in accordance with a single balance sheet model, similar to the accounting of financial leasing. At the leasing operation beginning date, the lessee recognizes a liability to make the payments (a lease liability) and an asset, representing the right of use the subject asset during the period of the leasing (a right-of-use asset). Lessees are required to recognize separately the expenses of interest on the leasing liability and the expense of depreciation of the asset of the right to use.
Lessees are also required to revalue the leasing liability when certain events occur (for example, change in the period of leasing, a change in the future payments of the leasing as a result of a change in an index, or a rate used to determine such payments). In general, the lessee will recognize the amount of the revaluation of the lease liability as an adjustment to the right-of-use asset.
The Company has made an analysis of the initial application of IFRS 16 in their financial statements as from January 1, 2019, and elected to apply the recognition exemptions for short-term leases (contracts that, at the commencement date, have a lease term of 12 months or less and do not contain a purchase option), and leases for which the underlying asset is of low value. We used the modified retrospective approach when adopting such standards; thus, we did not restate our financial statements as of and for the year ended December 31, 20132018 and 2017 for the adoption of IFRS 16. Accordingly, our financial statements as of and for the year ended December 31, 2019 and our financial statements for the comparative periods are not directly comparable when it comes to such standard. For more information regarding the adoption of IFRS 16 and its effects on our financial statements, see note 2.4 to the Financial Statements included in “Item 18. Financial Statements”.
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Net operating revenues (restated)
Net operating revenues increased 33.6%by 14.30% from R$14,62722,299 million in 20132018 to R$19,54025,486 million in 2014.2019, as follows.
2019 (restated) | Net revenues | 2018 (restated) | Net revenues | 2019 vs 2018 | |
| (in million of R$) | (%) | (in million of R$) | (%) | (%) | |
| Energy sales to final customers | 24,052 | 94.37 | 21,882 | 98.13 | 9.92 |
| Revenue from wholesale supply to other concession holders | 2,876 | 11.28 | 2,990 | 13.41 | (3.81) |
| CVA (compensation for changes in ‘Parcel A’ items ) and Other financial components | 58 | 0.23 | 1,973 | 8.85 | (97.06) |
| Revenue from use of the electricity distribution systems – TUSD | 2,722 | 10.68 | 2,045 | 9.17 | 33.11 |
| Transmission operation and maintenance revenue | 352 | 1.38 | 343 | 1.54 | 2.62 |
| Interest revenue arising from the financing component in the transmission contract asset | 328 | 1.29 | 311 | 1.39 | 5.47 |
| Generation assets - indemnity revenue | - | - | 55 | 0.25 | - |
| Adjustment to expectation of cash flow from indemnifiable financial asset of the distribution concession | 18 | 0.07 | - | - | - |
| Revenue on financial updating of the Concession Grant Fee | 318 | 1.25 | 321 | 1.44 | (0.93) |
| Construction revenues | 1,292 | 5.07 | 940 | 4.22 | 37.45 |
| Energy transactions on the CCEE | 432 | 1.69 | 217 | 0.97 | 99.08 |
| Supply of gas | 2,298 | 9.02 | 1,995 | 8.95 | 15.19 |
| Fine for violation of service continuity indicator | (58) | (0.23) | (44) | (0.20) | 31.82 |
| Recovery of PIS/Pasep and Cofins taxes credits over ICMS | 1,428 | 5.6 | - | - | - |
| Other revenue | 1,721 | 6.76 | 1,585 | 7.11 | 8.64 |
| Deductions on revenue | (12,351) | (48.46) | (12,314) | (55.22) | 0.30 |
| Total net revenue | 25,486 | 100.0 | 22,299 | 100.0 | 14.30 |
| 2014 | % of net operating revenues | 2013 | % of net operating revenues | 2014 versus 2013 % | ||||||||||||||||
| (in millions of R$) | (in millions of R$) | |||||||||||||||||||
Electricity sales to final consumers | 14,922 | 76.4 | 12,597 | 86.1 | 18.5 | |||||||||||||||
Revenue from wholesale supply to other concession holders and Proinfa | 2,310 | 11.8 | 2,144 | 14.7 | 7.7 | |||||||||||||||
CVA (compensation for changes in ‘Portion A’ items ) account and Other financial components of tariffs | 1,107 | 5.7 | — | — | — | |||||||||||||||
Revenue from use of the electricity distribution grid – TUSD | 855 | 4.4 | 1,008 | 6.9 | (15.2 | ) | ||||||||||||||
Revenue from use of the concession transmission system | 557 | 2.9 | 404 | 2.8 | 37.9 | |||||||||||||||
Transmission indemnity revenue | 420 | 2.1 | 21 | 0.1 | 1,900.9 | |||||||||||||||
Construction revenues | 941 | 4.8 | 975 | 6.7 | (3.4 | ) | ||||||||||||||
Transactions in electricity on the CCEE | 2,348 | 12.0 | 1,193 | 8.2 | 96.8 | |||||||||||||||
Other operating revenues | 1,706 | 8.7 | 1,047 | 7.2 | 62.8 | |||||||||||||||
Taxes on revenue and regulatory charges | (5,626 | ) | (28.8 | ) | (4,762 | ) | (32.6 | ) | 18.1 | |||||||||||
Total net operating revenues | 19,540 | 100.0 | 14,627 | 100.0 | 33.6 | |||||||||||||||
ElectricityEnergy sales to final consumerscustomers
RevenueTotal revenue from electricity salesenergy sold to final consumers (excluding Cemig’s own consumption) increasedcustomers in 2019 was R$2,32524,052 million, or 18.5% from9.92 % higher than the figure for 2018 of R$12,597 million in 2013 to R$14,922 million in 2014.21,882 million.
The variation mainly reflects the following factors:
| · | The annual tariff adjustment for CEMIG D effective as from May 28, 2019, with an average upward effect of 8.73% on customer tariffs, in comparison an average upward effect on customer tariffs of 23.19% effective as from May 28, 2018; |
| · | Lower revenues from the ‘Tariff flag’ components of customer bills: R$294 million in 2019, compared to R$655 million in 2018. This reflects the level of reservoirs, activating the ‘green Flag’ for most of the months in 2019, as a consequence of the best hydrological conditions compared to the year of 2018; |
| · | Volume of energy sold to final customers 0.08% higher year-on-year. |
Market Evolution
The total of Cemig’sfor sales in CEMIG’s consolidated electricityenergy market comprises sales toto: (i) captive consumersCaptive customers in Cemig’sCEMIG’s concession area in the State of Minas Gerais; (ii) Free ConsumersCustomers in both the State of Minas Gerais and other States of Brazil, in the Free Market (Ambiente(Ambiente de Contratação Livre, or ACL); (iii) other agents of the electricityenergy sector – traders, generators and independent power producers, also in the ACL;Free Market; (iv) distributors,Distributors, in the Regulated Market (Ambiente de Contratação Regulada, or ACR);ACR Market; and (v) the wholesale trading chamberWholesale Trading Exchange (Câmara de Comercialização de Energia Elétrica, or (CCEE) eliminating transactions between companies – CCEE).
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As illustrated in the Cemig Group).
Thetable below, the total volume of electricityenergy sold by CemigCEMIG in 2014 was 3.2% more than in 2013.2019 decreased by 2.56% as compared to 2018:
| GWh (2) | 2019 | 2018 | Var % |
| Residential | 10,538 | 10,267 | 2.64 |
| Industrial | 14,873 | 17,689 | (15.92) |
| Commercial, Services and Others | 9,335 | 8,380 | 11.40 |
| Rural | 3,795 | 3,615 | 4.98 |
| Public Power | 905 | 871 | 3.90 |
| Public Illumination | 1,357 | 1,384 | (1.95) |
| Public Service | 1,373 | 1,316 | 4.33 |
| Subtotal | 42,176 | 43,522 | (3.09) |
| Own Consumption | 38 | 41 | (7.32) |
42,214 | 43,563 | (3.10) | |
| Supply to Other Concessionaires (1) | 11,920 | 11,992 | (0.60) |
| Total | 54,134 | 55,555 | (2.56) |
Includes Regulated Market Energy Sale Contracts (CCEARs) and ‘bilateral contracts’ with other agents.
Data not audited by external auditors; includes Regulated Market Energy Sale Contracts (CCEARs) and ‘bilateral contracts’ with other agents.
| GWh | ||||||||||||
| 2014 | 2013 | Var % | ||||||||||
Residential | 10,014 | 9,473 | 5.7 | |||||||||
Industrial | 26,026 | 23,452 | 11.0 | |||||||||
Commercial, Services and Others | 6,395 | 6,036 | 5.9 | |||||||||
Rural | 3,390 | 3,028 | 12.0 | |||||||||
Public Power | 891 | 861 | 3.5 | |||||||||
Public Illumination | 1,298 | 1,267 | 2.4 | |||||||||
Public Service | 1,273 | 1,242 | 2.5 | |||||||||
Subtotal | 49,287 | 45,359 | 8.7 | |||||||||
Own Consumption | 37 | 35 | 5.7 | |||||||||
| 49,324 | 45,394 | 8.7 | ||||||||||
Supply to Other Concessionaires (*) | 14,146 | 16,127 | (12.3 | ) | ||||||||
Total | 63,470 | 61,521 | 3.2 | |||||||||
Comments on the various consumer categories:
Industrial: Total volume of electricity invoicedenergy consumed by regulated and free industrial customers was 15.92% lower in 2019 than in 2018. This decrease was due primarily to Free Consumers 13.7%industrial activity not resuming growth at the rate expected for the year.
Commercial, Services and Others: Consumption was 11.40 % higher in the year, as new clients were added, and as available supply was redirected following the termination, in December 2013, of supply contracts in the Regulated Market, to the Free Market.
Revenue from wholesale supply to other concession holders and Proinfa
Revenue from wholesale supply to other concession holders increased by R$166 million or 7.7% from R$2,144 million in 2013 to R$2,310 million in 2014.
Although the volume of electricity sold to other concession holders was 12.3% lower in the year, at 14,146,109 MWh, vs. 16,127,376 MWh in 2013, the increase in revenue resulted from the average sale price being 20.7% higher, at R$159.16 per MWh in 2014, compared to R$132.94/MWh in 2013.
The increase in average price was2019, mainly due to the reductionincorporation of supplynew customers in CEMIG GT’s portfolio.
Rural: Consumption by rural users increased by 4.98 % in 2019.
Supply to Other concessionaires: The energy sale to other concessionaires decreased 0.60 % compared to 2018 due to a lower volume of electricityenergy available sold in 2014, which in turn wasthis segment, considering the result of the lowerlow level of reservoirs.Brazilian reservoirs in 2019 and the allocation of energy sold to final customers.
Revenue from useUse of the electricity distribution grid (TUSD)
Distribution Systems (the TUSD charge):This is revenue from charging ofFree Customers the Tariff for Use of the Distribution System (Tarifa de Uso do Sistema de Distribuição, or TUSD), to Free Consumers, for transport of electricity sold. Revenue from(TUSD) on the use of the electricity distribution system (TUSD) decreased 15.18%, from R$1,008 million in 2013 to R$855 million in 2014.The difference is mainly caused by the factors affecting Cemig D, such as (a) lower industrial activity in the sector – reflected in 10.3% lower volume of energy transported; and (b) the tariff impact for Free Consumers as from April 8, 2013, with reduction of the TUSD by 33.2%, which begandistributed. In 2019, this revenue was R$2,722 million, compared to be offset by theR$2,045 million in 2018, an increase of 8.8% as from April 8, 2014.33.11% year-on-year, mainly reflecting the following:
| · | upward adjustment of 17.44% in the TUSD, in CEMIG D’s 2018 annual tariff adjustment, effective from May 28, 2018 in comparison to a upward adjustment of 17.28% in the TUSD, in CEMIG D’s 2019 annual tariff adjustment, effective from May 28, 2019. |
The CVA Account and Other financial components, in tariff increases
Due torate increases: CEMIG recognizes the alteration indifference between actual non-controllable costs (in which the concession contractsCDE, and energy bought for resale, are significant components) and the costs that were used as the basis of decision of the electricity distributors, the Company beganrates charged to recognize the balancescustomers. The amount of non-manageable costs to bethis difference is passed through to customers in CEMIG D’s next tariff adjustment – in 2019 this represented a decrease in revenue of R$58 million, compared to an increase in 2018 of R$1,973 million. The lower figure in 2019 than 2018 is mainly due to a lower difference in 2019 than 2018 between actual costs of energy and the estimated figures used for future cost of energy in the tariff calculation (this difference generates a financial asset to be reimbursed to the Company through the next tariff adjustment of Cemig D, representing aadjustment).
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Transmission concession revenue of R$1,107 million in 2014. This is explained in detail in Explanatory Note 13 to the financial statements.
| · | Construction revenue corresponds to the performance obligation to build the transmission infrastructure, recognized based on the satisfaction of obligation performance over time. They are measured based on the cost incurred, including PIS/Pasep and Cofins taxes over the total revenues and the profit margin of the project. For more information, see note 15 to the Financial Statements. |
| · | Operation and maintenance revenue correspondes to the performance obligation of operation and maintenance specified in the transmission concession contract, after termination of the construction phase. They are recognized when the services are rendered and the invoices for the RAPs are issued. |
| · | Interest revenue in the contract asset recognized, recorded as transmission concession gross revenue in statement income. Revenue corresponds to the significant financing component in the contractual asset, and is recognized by the linear effective interest rate method based on the rate determined at the start of the investments, which is not subsequently changed. The average of the implicit rates is 6.68%. The rates are determined for each authorization and are applied on the amount to be received (future cash flow) over the contract duration. This includes financial updating by the inflation index specified for each transmission contract. |
Revenue from transactions in electricityenergy on the CCEE
CCEE:Revenue from transactions in energy on the wholesale electricity market through the Electricity Trading Chamber (Câmara de Comercialização de Energia, orCCEE) totaled was R$2,348432 million in 2014,2019, compared to R$1,193217 million in 2013–2018, an increase of 96.8% from the previous year.99.08% year-on-year. This basically reflects the increasehigher volume of 161.88% in the average priceenergy available for settlement in the wholesale market resulting fromin 2019 considering the low level of Brazilian reservoirs and energy allocated to be sold to other segments.
Revenue from supply of the hydroelectric plants in 2014 (R$688.89/MWh in 2014, compared to R$263.06/MWh in 2013).
Transmission indemnity revenue
Transmission indemnity revenue totaled R$420 million in 2014, compared to R$21 million in 2013, an increase of 1,900.9%. The higher revenue recorded in 2014 is due to the diference between the accounting amounts previously recorded by Cemig related to the transmission assets and the preliminary indemnity amount disclosed by Aneel related to such assets.
Construction revenues
Construction revenues were R$34 million lower, compared to R$975 million in 2013 and R$941 million in 2014, due to a smaller investment in concession assets. These revenues represent the investments in concession assets. See Note 25 to our financial statements.
Other operating revenues
Other operating revenue increased by R$659 million, or 62.9%, from R$1,047 million in 2013 to R$1,706 million in 2014. Our other operating revenues are:
| 2014 | 2013 | |||||||
| (in millions of reais) | ||||||||
Supply of Gas | 422 | — | ||||||
Charged service | 11 | 10 | ||||||
Telecommunications services | 135 | 127 | ||||||
Services rendered | 118 | 122 | ||||||
Grants (*) | 790 | 673 | ||||||
Rentals and leasing | 81 | 57 | ||||||
Other | 149 | 58 | ||||||
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Total | 1,706 | 1,047 | ||||||
The higher figure in 2014 was mainly due to inclusion of thegas: CEMIG reported revenue from supply of gas totaling R$422 million, because of the change in the accounting system to consolidation of Gasmig, as from October 2014.
Taxes and charges applicable to revenues
Taxes and charges on revenues were R$5,6262,298 million in 20142019, compared to R$4,7631,995 million in 2013, representing a growth rate2018, an increase of 18.1%15.19%. This mainly reflects the increasesincrease in Revenue,the cost of gas, which was passed through to which theycustomers of 6.74% higher year-on-year.
Construction revenues: Distribution infrastructure construction revenues totaled R$1,292 million in 2019 (restated), compared to R$940 million in 2018 (restated), an increase of 37.45%. This revenue is fully offset by Construction costs, of the same amount, and corresponds to the Company’s investments in assets of the concession in the year.
Recovery of PIS/Pasep and Cofins taxes credits over ICMS: The credits of PIS/Pasep and Cofins taxes (previously erroneously charged to include the amounts of ICMS taxes paid or due), totaling R$1,428 million, resulted from the success in the Company’s legal action questioning the inclusion of ICMS tax in these amounts, and is backdated to July 2003.
Other revenues: Other revenues was R$1,721 million in 2019, compared to R$1,585 million in 2018, 8.64% higher year-on-year. This was primarily due to an increase in revenues related to subsidies and reimbursement for decontracted supply that are applied.reimbursed by Eletrobras. The breakdown of the other revenues is presented on Note 29 to the Financial Statements.
Deductions from Revenue: Taxes and charges applied to revenue in 2019 were R$12,351 million (restated), or 0.30% higher than in 2018 (R$12,314 million) (restated), mainly reflecting the following:
| · | CDE:The amounts of payments to the Energy Development Account (CDE) are decided by an ANEEL Resolution. The purpose of the CDE is to cover costs of concession indemnities, tariff subsidies, and the subsidy for balanced tariff reduction, the low-income customer subsidy, the coal consumption subsidy, and the Fuels Consumption Account (CCC). Charges for the CDE in 2019 were R$2,448 million, compared to R$2,603 million in 2018. This is a non-manageable cost: the difference between the amounts used as a reference for setting of tariffs and the costs actually incurred is compensated for in the subsequent tariff adjustment. |
| · | Customer charges – the ‘Tariff Flag’ system: The Tariff Flag bands are activated because of low levels of water in the system’s reservoirs – tariffs are temporarily increased due to scarcity of rain. The ‘Red’ band has two levels – Level 1 and Level 2. Level 2 comes into effect when scarcity is more intense. Activation of the tariff flags generates an impact on billing in the subsequent month. Income from charges to the customer related to the Tariff Flag bands was 55.11% lower in 2019, at R$294 million, compared to R$655 million in 2018. This reflects less application of the Red band in 2019 than in 2018, due to (i) stabilized reservoir levels, and (ii) slightly higher expectations of rain. |
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| · | Other taxes and charges on revenue: The other significant deductions from revenue are taxes, which are calculated as a percentage of sales revenue. Thus, their variations arise, substantially, from the changes in revenue. |
Operating costs and expenses
Operating costs and expenses, excluding Financial Revenue (expenses) in 20142019 were R$14,45122,475 million 28.6% more than(restated), an increase of 15.73% as compared to 2018 (R$19,420 million).
The following table illustrates the components of operating costs and expenses in 2013 (R$11,232 million). For more information please refer to Note 25 to our financial statements.2019 and 2018 expressed as a percentage of net revenues:
2019 (restated) | Net revenues | 2018 | Net revenues | 2019 vs 2018 | |
| (in million of R$) | (%) | (in million of R$) | (%) | (%) | |
| Energy bought for resale | (11,286) | (44.28) | (11,084) | (49.71) | 1.82 |
| Gas bought for resale | (1,436) | (5.63) | (1,238) | (5.55) | 15.99 |
| Charges for use of the national grid | (1,426) | (5.60) | (1,480) | (6.64) | (3.65) |
| Depreciation and amortization | (958) | (3.76) | (835) | (3.74) | 14.73 |
| Personnel | (1,272) | (4.99) | (1,410) | (6.32) | (9.79) |
| Employees’ and managers’ profit sharing | (263) | (1.03) | (77) | (0.35) | 241.56 |
| Outsourced services | (1,239) | (4.86) | (1,087) | (4.87) | 13.98 |
| Post-employment benefits | (408) | (1.60) | (337) | (1.51) | 21.07 |
| Materials | (91) | (0.36) | (104) | (0.47) | (12.50) |
| Operating provisions and impairment | (2,401) | (9.42) | (466) | (2.09) | 415.24 |
| Construction costs | (1,200) | (4.71) | (897) | (4.02) | 33.78 |
| Other operating expenses, net | (494) | (1.94) | (405) | (1.82) | 22.22 |
| Total operating costs and expenses | (22,474) | (88.18) | (19,420) | (87.09) | 15.73 |
| 2014 | % of net operating revenues | 2013 | % of net operating revenues | 2013 versus 2012 % | ||||||||||||||||
| (in millions of R$) | (in millions of R$) | |||||||||||||||||||
Electricity purchased for resale | (7,428 | ) | (38.0 | ) | (5,207 | ) | (35.6 | ) | 42.7 | |||||||||||
Gas purchased for resale | (254 | ) | — | — | — | — | ||||||||||||||
Charges for the use of transmission facilities of the basic grid | (744 | ) | (3.8 | ) | (575 | ) | (3.9 | ) | 29.4 | |||||||||||
Depreciation and amortization | (801 | ) | (4.1 | ) | (824 | ) | (5.6 | ) | (2.8 | ) | ||||||||||
Personnel | (1,252 | ) | (6.4 | ) | (1,284 | ) | (8.8 | ) | (2.5 | ) | ||||||||||
Employees’ and managers’ profit shares | (249 | ) | (1.3 | ) | (221 | ) | (1.5 | ) | 12.7 | |||||||||||
Outsourced services | (953 | ) | (4.9 | ) | (917 | ) | (6.3 | ) | 3.9 | |||||||||||
Post-employment obligations | (212 | ) | (1.1 | ) | (176 | ) | (1.2 | ) | 20.5 | |||||||||||
Materials | (381 | ) | (1.9 | ) | (123 | ) | (0.8 | ) | 209.8 | |||||||||||
Royalties for usage of water resources | (127 | ) | (0.6 | ) | (131 | ) | (0.9 | ) | 3.1 | |||||||||||
Provisions for operating losses | (581 | ) | (3.0 | ) | (305 | ) | (2.1 | ) | 90.5 | |||||||||||
Construction costs | (942 | ) | (4.8 | ) | (975 | ) | (6.7 | ) | 3.4 | |||||||||||
Other operating expenses, net | (527 | ) | (2.7 | ) | (493 | ) | (3.4 | ) | 6.5 | |||||||||||
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Total operating costs and expenses | (14,451 | ) | (74.0 | ) | (11,231 | ) | (76.8 | ) | 28.7 | |||||||||||
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The following are the main variations in expenses:operating costs and expenses between 2019 and 2018:
Personnel
Personnel expenses were R$1,272 million in 2019, compared to R$1,410 million in 2018, a decrease of 9.79%. The was mainly due to a reduction of 10% in the avarage number of employees in 2019 compared to 2018 (5,796 in 2019 and 5,923 in 2018).
Employees´and managers´ profit sharing
The expense on electricityemployees and managers profit sharing was R$263 million in 2019, compared to R$77 million in 2018. The increase was due to a higher consolidated net income of CEMIG – the basis of calculation for this expense.
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Energy purchased for resale was
Expenses due to energy purchased for resale in 2019 were R$7,42811,286 million, compared to R$11,084 million in 2014, compared to R$5,207 million in 2013,2018, representing a growthan increase of 42.7%1.82%. The main factors in this difference are:contributing to such were:
| · | The cost of purchases of supply in the spot market was at R$1,886 million in2019, compared to R$1,818 million in 2018, reflecting CEMIG D’s exposure to the wholesale market in 2019. |
| · | Expenses on supply acquired through physical guarantee quota contracts were 5.30% higher, at R$715 million in 2019, compared to R$679 million in 2018. This mainly reflects CEMIG D’s average quota tariff being in 2019, at R$102.22/MWh, compared to R$92.51/MWh in 2018. |
| · | Expenses on energy acquired in regulated market auctions by 9.71% lower, totalling R$3,021 million in 2019, as compared to R$3,346 million in 2018, mainly due to level of the water reservoirs of the hydroelectric plants in the system, the number of thermoelectric plants dispatched was larger in– with a consequent higher expense on fuel for these plants. |
ExpenseExpenses on purchase of electricitysupply acquired in the free market and ‘bilateral contracts’ were, at R$4,098 million in 2014 was2019, compared to R$4773,871 million higher, duein 2018. This mainly reflects CEMIG GT’s expenses being (R$4,097 million in 2019, compared to higher trading activity, and also the higher price of electricityR$4,055 million in 2014 due to low reservoir levels at the hydroelectric plants.
Involuntary exposure of Cemig D (Distribution) to the spot market in 2014, together with the higher price of electricity,2018) due to the low levels of the hydroelectric plants’ reservoirs. This resulted in the company having an expense in this market of R$1,263 million in 2014, compared to R$304 million in 2013.
The expense on electricity from Itaipu Binacional was 18.3% lower in 2014, at R$830 million in 2014, than in 2013 (R$1,016 million), reflecting a volume of electricity purchased 28.7% lower, at 6,254,980 MWh in 2014, compared to 8,777,227 MWh in 2013. This electricity is priced in dollars, and the effect of this reduction in quantity was partially offset by the appreciation of the dollar against the Real in 2014. The average exchange rate for the dollar in invoices in 2014 was R$2.4, compared to R$2.16 in 2013 – an increase of 8.8%.
Charges for use of the transmission network, which are set by ANEEL, were 29.4% higher in 2014, at R$744 million, compared with R$575 million in 2013. These rates, which are set by an ANEEL resolution, are paid by the distribution and generation agents, for use of the facilities that comprise the National Grid. This is a non-manageable cost:cost for CEMIG Distribution: the difference between the amounts used as a reference for calculation of tariffs and the costcosts actually incurred is compensated for in the nextsubsequent tariff adjustment. For further details see Note 28 to the Financial Statements.
Provisions
Charges for operating lossesuse of the national grid
Charges for use of the national grid in 2019 were 90.5 higher in 2014, at R$5811,426 million, compared to R$3051,480 million in 2013.2018, representing a decrease of 3.65%.
This expense is payable by energy distribution and generation agents for use of the facilities that are components of the national grid. The main factorsamounts to be paid are set by an ANEEL Resolution. The amounts in 2019 are due to increased transmission costs related to the payment of the transmission indemnities to the agents of the energy sector that accepted the terms of Law 12,783/13.
This is a non-manageable cost in the reduction were:
A provisionenergy distribution business: the difference between the amounts used as a reference for calculation of R$195 million made in 2014, comprising: R$166 million ontariffs and the valuation of the put optioncosts actually incurred is compensated for shares in Parati, and R$29 million from the same effect in the put options for sharessubsequent tariff adjustment.
Operating provisions and impairment
Operating provisions in SAAG (investment in Madeira Energia), signed between Cemig GT and private pension plan entities. For more details please see Explanatory Note 14 to our financial statements.
Provisions for employment-law legal actions2019 totaled R$71 million higher in 2014 (at R$2422,401 million, compared to R$171466 million in in 2013). This mainly reflects a provision of R$127 million in 2014 resulting from the salary increase of 3% in real terms for the employees, resulting from the judicial arbitration, sought by representatives of the employees, on an annual collective employment agreement. More details are in note 22 to our financial statements.
Personnel expenses were 2.5% lower in 2014 at R$1,252 million, compared with R$1,284 million in 2013. This mainly reflects an extraordinary expense of R$78 million in 2013 on the PID Voluntary Retirement Program.
Expenses on raw materials and inputs for production of electricity in 2014 totaled R$282 million, compared with R$56 million in 2013 –2018, an increase of 403.6%415.24%. The increase was mainly due to:
| · | Recognition of an estimated loss on realization of the receivables from Renova, in the amount of R$688 million, after an assessment of the investee’s credit risk, which deteriorated in the current year; |
| · | Provisions for employment-law legal actions amounting R$136 million in 2019, compared to a reversal of provisions of R$42 million in 2018. This arises mainly from new actions, or from reassessment of the probability of loss in existing actions, based on adverse court decisions taking place in the period. Also, a difference was recognized for application of the IPCA-E inflation index instead of the TR reference rate in monetary adjustment for employment-law legal actions dealing with debts arising from March 25, 2015 to November 10, 2017. These are at the advanced execution phase and now have probability of loss assessed as ‘probable’, due to the recent decision by the Regional Employment-law Appeal Court of the Minas Gerais region (3rd Region) to apply the decision of the Higher Employment-law Appeal Court, ordering use of the IPCA-E index. For further Information see Note 25 to the Financial Statements; and |
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| · | Variation of provisions for taxes, which represented the recognition of R$1,228 million in 2019, compared to the reversion of R$5 million in 2018. This variation results, mainly, of the Company’s reassessment, based on the opinion of its legal advisers, of the probability of loss on administrative and court proceedings opened against the Company relating to social security contributions on the payment of profit shares to its employees, alleging that Company did not previously establish clear and objective rules for the distribution of these amounts. For further Information see Note 25 to the Financial Statements. |
Infrastructure construction cost
Infrastructure construction costs in 2019 totaled R$1,200 million, or 33.78% more than in 2018 (R$897 million). This mainly reflectscost is fully offset by Construction revenue, of the need for acquisition of a higher quantity of fuel oil in 2014, for the Igarapé thermoelectric plant, which was dispatched more in this year duesame amount, and corresponds to the low level of water in the hydroelectric reservoirs.
Infrastructure Construction Costs in 2014 were R$942 million, 3.38% less than in 2013 (R$975 million).This line records the Company’s investment in assets of the concession in the period.
Construction revenues for energy and gas distribution segment are equivalent to new infrastructure are initially recorded as contract assets, measured at construction cost plus margin (which, for the construction business, is deemed as zero). Construction cost include borrowing costs.
Construction revenues for transmission segment are recorded when construction is finalized, concession infrastructure assets remains as contract asset, considering the existence of performance obligations during the concession period, represented by the network construction, operation and maintenance, as there is fullyno unconditional right to receive the consideration for the construction service unless the company operates and maintains the infrastructure.
Gas bought for resale
In 2019 the Company reported expense of R$1,436 million on acquisition of gas, 15.99% more than the expense of R$1,238 million in 2018. This is primarily due to the increase of 23.11% in the cost of gas bought from Petrobras.
Post-employment obligations
The Company´s post-retirement obligations were 21.07% higher in 2019, than 2018, being R$408 million and R$337 million, respectively. This mainly reflects a higher cost for the Health Plan in 2019, due to reduction of the discount rate used in the actuarial valuation made in December 2018.
Share of profit (loss), net, of associates and joint ventures
In 2019, CEMIG reported a gain by the equity method of R$125 million, compared to a loss of R$104 million reported in 2018. This primarily reflects higher losses in 2018 on the investments in Renova and Santo Antônio Energia. See Note 16 to the Financial Statements for details on the results from the investees recognized under this line.
Net finance income (expense)
Net finance income totaled R$1,360 million in 2019, compared to net finance expenses of R$518 million in 2018. The main factors contributing to this in net finance expenses were:
| · | Revenue of Monetary updating of the PIS/Pasep and Cofins taxes credits over ICMS, adding up to R$1,580 million. CEMIG, CEMIG GT and CEMIG D filed an Ordinary Action for a declaration that it was unconstitutional to include the ICMS value added tax within the taxable amount for calculation of PIS/Pasep and Cofins; and for recognition of these companies’ right to offsetting of amounts unduly paid for the 10 years prior to the action being filed, with monetary adjustment by the Selic rate. For more information see Note 9. |
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The increase was partially offset by the line Construction Revenue,following:
| · | Recognition, in 2019, of R$998 million from the hedge transaction related to the Eurobond Issue, compared to recognition of a gain of R$893 million in 2018. The adjustment of the hedge transaction to fair value resulted in a positive effect, due to a lower variation in the future curve for the DI (Interbank Deposit) rate than in the future curve for the US dollar exchange rate. This gain should be considered together with the expense on foreign exchange variation arising from the Eurobond, as described below; |
| · | Lower foreign exchange variation on loans in foreign currency – which in 2019 represented a financial expense of R$226 million, compared a financial expense of R$582 million in 2018. This reduction is due to the lower exchange rate in effect in the period (4.02% in 2019, compared to 17.03% in 2018). |
The breakdown of financial income and expenses is in the same amount.
Net Financial Expenses
Net financial expenses were R$1,101 million in 2014 compared to net financial revenues of R$309 million in 2013. The main factors that impacted our net financial results in 2014 were:
In 2013 Cemig recorded a gain of R$313 million, recognized in Financial Revenue (expenses), comprising R$81 million as reversal of Pasep and Cofins taxes, and R$232 million as revenue from monetary updating. This resulted from final judgment (i.e. subject to no further appeal) on Cemig’s court challenge claiming illegality of expansion of the calculation basis for the Pasep and Cofins taxes to include Financial revenue and other Non-operational revenue, for the period 1999 to January 2004.
Charges for loans and finances were 33.38% higher, at R$931 million, in 2014, compared to R$698 million in 2013, dueNote 29 to the higher volume of funds indexed to the CDI rate in 2014, and also the CDI itself being higher (10.81% in 2014, vs. 8.05% in 2013).Financial Statements.
A financial expense of R$239 million was recognized in 2014 for complimentary monetary updating representing the difference between the Cemig rate and the IGP-M rate applied to the amount of the Advance against Future Capital Increase made by the Minas Gerais State government in previous years. For more details please see Explanatory Note 22 to our consolidated financial statements.
Please see the Net Financial Expenses and Incomes composition at Note 26 to our consolidated financial statements.
Income taxTax and the Social Contribution taxTax
In 2014, Cemig’s2019, the Company’s expense on income tax and the Social Contribution tax was an expense oftotaled R$1.3431,599 million (restated), on pretaxpre-tax profit of R$4,4794,568 million representing a(restated), an effective rate of 30.0%35.00%. In 2013 this2018, the Company’s expense wason income tax and the Social Contribution tax totaled R$950610 million (restated), on pretaxpre-tax profit of R$4,0542,011 million a(restated), an effective rate of 23.4%30.33%. There is a reconciliation of these effective rates with the nominal tax rates in Explanatory Note 10
Year Ended December 31, 2020 compared to the financial statements.Year Ended December 31, 2019
Liquidity and capital resourcesCapital Resources
Our business is capital-intensive. Historically, we have had a need for capital to finance the construction of new generation facilities and expansion and modernization of the existing generation, transmission and distribution facilities.
Our liquidity requirements are also affected by our dividend policy. We finance our liquidity and capital needs principally with cash generated by operations and, on a lesser scale, with funds from financing.
On December 31, 2015 the Company’s consolidated current liabilities exceeded its consolidated current assets by R$3,697 million. The reason for this working capital deficiency was, primarily, new financings with short-term maturities for the Company’s Investment Program, and transfer of debentures from long term to short term, associated with the provision for dividends and Interest on Equity in the amount of R$1,256 million, in December 2015 and the loss on put options in the amount of R$1,245 million.
Management monitors the Company’s cash flow, and for this purpose assesses measures to adjust the present situation of its financial assets and liabilities to the levels considered appropriate to meet its needs. In this specific case, negotiations are in progress with financial institutions to extend of the debt becoming due in 2016, for long-term maturities.
Cash and Cash Equivalents
On December 31, 2015 neither our cash position nor our cash equivalents were maintained in any other currencies than the Real.
Cash and cash equivalents on December 31, 20152020 totaled R$9251,680 million, compared to R$887536 million on December 31, 2014. Below are2019 and R$891 million on December 31, 2018. No cash nor cash equivalents were held in any other currency than the Real. The main components of this variation:
Net Cash flowflows from operationaloperating activities
The totals of net cash generated by operationaloperating activities in 20152020 and 20142019 were, respectively, R$3,0078,607 million and R$3,7342,036 million. The decreasehigher net cash from operationaloperations in 2020 was mainly due to the receipt of R$1,404 referring to the Covid account, in addition to the amounts raised from judicial deposits referring to the Pasep/ Cofins action on the ICMS, in the amount of R$1,383 million. In addition, in 2020 the Company started to offset Pasep/Cofins credits on ICMS against federal taxes payable, which caused a lower cash outflow to pay taxes in comparison with 2019, being R$240 million in 2020 compared to R$1,767 million in 2019.
The totals of net cash generated by operating activities in 2015 than 20142019 and 2018 were, respectively, R$2,036 million and R$1,008 million. The higher net cash from operations in 2019 was mainly reflectsdue to the reduction net profitCompany’s higher profitability, and the ratio between non-manageable costs and the tariff receipts for CEMIG D, expressed in 2015, after adjustment forthe change in the “CVA” account (“Parcel A” items not affecting cash flow. variation compensation) and the item “Other financial components”.
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Net profit adjusted for items not affecting cash flow in 2015 was R$3,998 million, or 29.15% lower than the figure of R$5,643 million for 2014.
Cash flow used in investmentinvesting activities
The Company used net cash of R$3,2175,076 million in investmentinvesting activities in 2015,2020, compared to net cash used in investing activities of R$4,2991,188 million generated by investmentin 2019. The increase reflects the high volume of the Company’s investments in the marketable securities – which totaled R$3,368 million in 2020, and R$79 million in 2019, mainly due to more cash available.
The Company used net cash of R$1,188 million in investing activities in 2014.2019, compared to net cash used of R$211 million in 2018. This mainly representsfigure results from: payment by Gasmig of the acquisitionsconcession grant fee, of equity interests in 2014, in whichR$891 million, with the highlights were Renova, Madeira Energiaobjective of re-establishing the economic-financial equilibrium of the concession contract, and Gasmig. See more details in Note 14its extension up to our Financial Statements.
Net Cash flow used in financing activities
NetIn 2020, cash flow generatedused in financing activities totaled R$2,387 million primarily related to the payment of loans, financing and debentures in the amount of R$2,531 million, R$84 million related to leasing payments and R$598 million related to dividends and interest on capital paid, which were partially offset by an inflow from loans, financing and debentures of R$826 million.
Cash used in financing activities in 20152019 totaled R$2471,203 million, comprising amortizationscomprising: R$4,883 million in amortization of financings, totaling R$4,6964,477 million in new funding received; R$96 million in leasing payments; and payments of R$796701 million in dividends and Interestinterest on Equity, offset by receipt of funds from financings totaling R$5.739 billion.equity paid to shareholders.
NetIn 2018, cash flow consumed byused in financing activities in 2014 totaled R$750936 million, comprising amortizations of financings totaling R$1,394509 million and payments of R$3,917 million inrelated to dividends and Interestinterest on Equity,capital paid, amortization of financing totaling R$3,527 million partially offset by receiptnew financing of funds from financing totaling R$4,5622,990 million and subscription of capital by shareholders in the amount of R$110 million.
Indebtedness
Our indebtedness from loans, financingsfinancing and debentures (current and non-current) as of December 31, 20152020 was R$15,16715,020 million, composedwhich was comprised of R$6,3002,059 million of current debt and R$8,867 million of non-current debt. Our indebtedness from loans, financings and debentures as of December 31, 2014 was R$13,509 million, composed of R$5,291 million of current debt and R$8,21812,961 million of non-current debt. Of our debt as of December 31, 20152020, R$477,825 million was denominated in foreign currencies (R$33 million of which was U.S. dollar-denominated and R$14 million of which was Euro-denominated) and R$8,8287,195 million denominated in reais. See Note 19 to our financial statements.Reais.
Our indebtedness from loans, financingsfinancing and debentures (current and non-current) as of December 31, 20142019 was R$13,50914,777 million, composedwhich was comprised of R$5,2912,747 million of current debt and R$8,218 million of non-current debt. Our indebtedness from loans, financings and debentures as of December 31, 2013 was R$9,457 million, composed of R$2,238 million of current debt and R$7,21912,030 million of non-current debt. Of our debt atas of December 31, 20142019, R$396,061 million was denominated in foreign currencies (R$25 million of which was U.S. dollar-denominated)dollar-denominated and R$13,4708,716 million denominated inreaisReais. See Note 19 to our Financial Statements.
Our main financial contracts, on a consolidated basis,indebtedness as of December 31, 2015, are2020, is shown in the following table:table (in millions of Reais):
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Amounts in thousands of reais: LENDER | Principal Maturity | Annual Financial Cost (%) | Currency | Total consolidated in 31/12/2015 | ||||||||||||
Foreign currency | ||||||||||||||||
Banco do Brasil S.A. – Various Bônus (1) | 2024 | Various | US$ | 33 | ||||||||||||
KFW | 2016 | 4.50 | EURO | 3 | ||||||||||||
KFW | 2024 | 1.78 | EURO | 11 | ||||||||||||
Debt in foreign currency | 47 | |||||||||||||||
BRAZILIAN CURRENCY | ||||||||||||||||
Banco do Brasil | 2017 | 108.33% do CDI | R$ | 144 | ||||||||||||
Banco do Brasil | 2017 | 108.00% do CDI | R$ | 433 | ||||||||||||
Banco do Brasil | 2016 | 104.10% do CDI | R$ | 925 | ||||||||||||
Banco do Brasil | 2016 | 104.25% do CDI | R$ | 804 | ||||||||||||
Banco do Brasil | 2017 | 111.00% of CDI | R$ | 100 | ||||||||||||
Banco do Brasil | 2020 | 114.00% of CDI | R$ | 499 | ||||||||||||
BNDES | 2026 | TJLP+2.34 | R$ | 81 | ||||||||||||
BNDES | 2026 | TJLP+2.48 | R$ | 11 | ||||||||||||
CEF | 2018 | 119.00% of CDI | R$ | 201 | ||||||||||||
Eletrobrás | 2023 | UFIR. RGR + 6.00 a 8.00 | R$ | 185 | ||||||||||||
Large consumers | 2018 | Various | R$ | 8 | ||||||||||||
Finep | 2018 | TJLP + 5 e TJLP + 2.5 | R$ | 9 | ||||||||||||
Promissory Notes—8th Issue (3) | 2016 | 111.70 of CDI | R$ | 1,889 | ||||||||||||
Promissory Notes—6th Issue (2) | 2016 | 120.00 of CDI | R$ | 1,441 | ||||||||||||
BASA | 2018 | CDI+1.9 | R$ | 121 | ||||||||||||
Promissory Notes—1st Issue (4) | 2015 | 110.40% do CDI | R$ | 23 | ||||||||||||
Debt in Brazilian currency | 6,874 | |||||||||||||||
Total of loans and financings | 6,921 | |||||||||||||||
Debentures, 2nd Issue (3) | 2017 | IPCA + 7.96 | R$ | 441 | ||||||||||||
Debentures – 2nd Issue, 2nd Series (2) | 2017 | CDI + 0.90 | R$ | 540 | ||||||||||||
Debentures—3rd Issue, 3rd Series (2) | 2022 | IPCA + 6.20 | R$ | 923 | ||||||||||||
Debentures—3rd Issue, 2nd Series (2) | 2019 | IPCA + 6.00 | R$ | 275 | ||||||||||||
Debentures—3rd Issue, 2nd Series (3) | 2021 | IPCA + 4.70 | R$ | 1,403 | ||||||||||||
Debentures—3rd Issue, 3rd Series (3) | 2025 | IPCA + 5.10 | R$ | 839 | ||||||||||||
Debentures—3rd Issue, 1st Series (3) | 2018 | CDI + 0.69 | R$ | 462 | ||||||||||||
Debentures | 2018 | CDI+1.60 | R$ | 1,037 | ||||||||||||
Debentures | 2020 | IPCA+8.07 | R$ | 29 | ||||||||||||
Debentures—4th Issue, 2nd Series (2) | 2016 | CDI +0.85 | R$ | 501 | ||||||||||||
Debentures—5th Issue, 1st Series (2) | 2018 | CDI + 1.70 | R$ | 1,412 | ||||||||||||
Debêntures (5) | 2016 | TJLP+3.12 | R$ | 41 | ||||||||||||
Debentures (5) | 2018 | CDI + 1.60 | R$ | 103 | ||||||||||||
Debêntures (5) | 2018 | CDI+0.74 | R$ | 100 | ||||||||||||
Debêntures (5) | 2022 | | TJLP+7.82(75%) e Selic +1.82 (25%) | | R$ | 125 | ||||||||||
CEMIG TELECOM—1st Issue, 1st Series (4) | 2018 | TJLP+3.62 | R$ | 8 | ||||||||||||
CEMIG TELECOM—1st Issue, 2nd Series (4) | 2018 | TJLP+4.32 | R$ | 3 | ||||||||||||
CEMIG TELECOM—1st Issue, 3rd Series (4) | 2018 | TJLP+1.72 | R$ | 2 | ||||||||||||
CEMIG TELECOM—1st Issue, 4th Series (4) | 2018 | TJLP+3.62 | R$ | 2 | ||||||||||||
Total de Debêntures | 8,246 | |||||||||||||||
Overall total – Consolidated | 15,167 | |||||||||||||||
| Principal maturity | Annual financial cost % | Currency | 2020 | 2019 | |||
| Current | Non-current | Total | Total | ||||
| FOREIGN CURRENCY | |||||||
| Banco do Brasil: Various Bonds (1) (4) | 2024 | Diverse | US$ | 2 | 10 | 12 | 18 |
| Eurobonds (2) | 2024 | 9.25% | US$ | 59 | 7,795 | 7,854 | 6,092 |
| (-)Transaction costs | - | (16) | (16) | (19) | |||
| (±) Interest paid in advance (3) | - | (25) | (25) | (30) | |||
| Debt in foreign currency | 61 | 7,764 | 7,825 | 6,061 | |||
| BRAZILIAN CURRENCY | |||||||
| Caixa Econômica Federal (5) | 2021 | TJLP + 2.50% | R$ | 17 | - | 17 | 61 |
| Caixa Econômica Federal (6) | 2022 | TJLP + 2.50% | R$ | 14 | - | 14 | 118 |
| Eletrobrás (4) | 2023 | UFIR + 6.00% at 8.00% | R$ | 3 | 5 | 8 | 20 |
| Large customers (4) | 2024 | IGP-DI + 6.00% | R$ | - | - | - | 5 |
| Sonda (7) | 2021 | 110.00% of CDI | R$ | 50 | - | 50 | 49 |
| Promissory Notes – 1st Issue - Single series (8) | 2020 | 107.00% of CDI | R$ | - | - | - | 875 |
| (-) FIC Pampulha - Marketable securities of subsidiary companies (9) | - | - | - | (3) | |||
| Debt in Brazilian currency | 84 | 5 | 89 | 1,125 | |||
| Total of loans and financings | 145 | 7,769 | 7,914 | 7,186 | |||
| Debentures - 3th Issue – 3rd Series (2) | 2022 | IPCA + 6.20% | R$ | 395 | 367 | 762 | 1,088 |
| Debentures - 6th Issue – 2nd Series (2) | 2020 | IPCA + 8.07% | R$ | - | - | - | 17 |
| Debentures - 7th Issue – Single series (2) (11) | 2021 | 140.00% of CDI | R$ | 289 | - | 289 | 578 |
| Debentures - 3th Issue – 2nd Series (4) | 2021 | IPCA + 4.70% | R$ | 588 | - | 588 | 1,109 |
| Debentures - 3th Issue – 3rd Series (4) | 2025 | IPCA + 5.10% | R$ | 43 | 992 | 1,035 | 991 |
| Debentures - 7th Issue – 1st Series (4) | 2024 | CDI + 0.45% | R$ | 542 | 1,350 | 1,892 | 2,165 |
| Debentures - 7th Issue – 2nd Series (4) | 2026 | IPCA + 4.10% | R$ | 3 | 1,585 | 1,588 | 1,520 |
| Debentures – 4th Issue – 1st Series (8) | 2022 | TJLP+1.82% | R$ | 10 | 10 | 20 | 31 |
| Debentures – 4th Issue – 2nd Series (8) | 2022 | Selic + 1,82% | R$ | 5 | 4 | 9 | 14 |
| Debentures – 4th Issue – 3th Series (8) | 2022 | TJLP + 1,82% | R$ | 12 | 10 | 22 | 34 |
| Debentures – 4th Issue – 4th Series (8) | 2022 | Selic + 1,82% | R$ | 5 | 5 | 10 | 15 |
| Debentures – 7th Issue – Single series (8) | 2023 | CDI + 1.50% | R$ | 20 | 40 | 60 | 80 |
| Debentures – 8th Issue – Single series (8) | 2031 | IPCA + 5.27% | R$ | 14 | 876 | 890 | - |
| (-) Discount on the issuance of debentures (10) | - | (18) | (18) | (22) | |||
| (-) Transaction costs | (12) | (29) | (41) | (29) | |||
| Total, debentures | 1,914 | 5,192 | 7,106 | 7,591 | |||
| Total | 2,059 | 12,961 | 15,020 | 14,777 | |||
| (1) | Net balance of the Restructured Debt comprising bonds at par and discounted, with balance of R$234 million, less the amounts given as Deposits in guarantee, with balance of R$222 million. Interest rates |
| (2) |
| (3) |
| (4) |
| (5) |
| (6) | Central Eólica Volta do Rio – result of elimination of cross-shareholdings between CEMIG GT and Energimp. For more details see Note 18 to the financial statements; |
| (7) | CEMIG Company. Arising from merger of CEMIG Telecom; |
| (8) | Gasmig. The proceeds from the 8th debenture issue, concluded by Gasmig on September 10, 2020, in the amount of R$850 million, were used to redeem the Promissory Notes issued on September 26, 2019, with maturity at 12 months, whose proceeds were used in their entirety for payment of the concession grant fee for the gas distribution concession contract; |
| (9) | FIC Pampulha has financial investments in securities issued by subsidiary companies of the Company. For more information and characteristics of this fund, see Note 30 to the financial statements; |
| (10) | Discount on sale price of the 2nd series of the 7th Issue by CEMIG Distribution (CEMIG D). |
The following financing contracts were entered into in 2015:
In April 2015, Cemig D finishedOn February 2, 2021, CEMIG GT effected extraordinary amortization of its 8th Commercial Notes Public Issue, whereby 340 Commercial Notes were issued, with a unit face value7th issue of R$5 million at the issue date of April 1st, 2015,non-convertible debentures, in the total amount of R$1,700 million. The net funds obtained with the issue were allocated to the payment of debts and to the purchase of energy. The commercial notes expire 360 days after the issue date, maturing on March 26, 2016, and it pays an interest equivalent to 111.7% of CDI. The Cemig D’s 8th Commercial Notes Issue relies on the guarantee of its controlling company, Companhia Energética de Minas Gerais – Cemig.
In July 2015, Cemig GT finished its 6th Non-Convertible, Unsecured Debentures Public Issue, whereby 100,000 non-convertible, unsecured debentures were issued in two series, being 97,275 debentures of the 1st series and 2,725 debentures of the 2nd series, with unit face value of R$10,000 at the issue date of July 15, 2015, in a total amount of R$1.0 billion. The net proceeds from this issue were allocated in replenishment of the Company’s cash position, following payment of debts. The debentures expire 3 years (1st series) and 5 years (2nd series) after the issue date and it pays an interest equivalent to 100% of capitalized CDI with a spread of 1.6%/year (1st series) and inflation index plus 8.067%/year. Cemig GT’s 6th Non-Convertible Unsecured Debentures Public Issue relies on the guarantee of its controlling company, Companhia Energética de Minas Gerais – Cemig.
In December 2015, Cemig GT finished its 6th Commercial Notes Public Issue, whereby 144 Commercial Notes were issued, with a unit face value of R$10265 million, at the issue date of December 30, 2015, in the total amount of R$1.4 billion. The net funds obtained with the issue were allocated to the payment of the first installment of the concession fees of the power plants related to Aneel’s Lot D Auction 12/2015. The commercial notes expire 360 days after the issue date, maturingwhich had final maturity in December 24, 2016, and it pays an interest equivalent to 120% of CDI. Cemig GT’s 6th Commercial Notes Issue relies on the guarantee of its controlling company, Companhia Energética de Minas Gerais – Cemig.2021.
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The following financing contracts were entered into during the year ended December 31, 2020 (in millions of Reais):
| Financing source 2019 | Date | Principal maturity | Annual financial cost % | Amount |
| BRAZILIAN CURRENCY | ||||
| Debentures – 8th Issue – single Series (1) | September, 2020 | 2031 | IPCA + 5.27% | 850 |
| (-)Transactions costs | (24) | |||
| Total raised | 826 |
| (1) | Gasmig |
On September 10, 2020, Gasmig concluded its 8th issue of simple debentures, not convertible into shares, in 2014:
In April 2014, Cemig D completed its 7ththe amount of R$850 million, in a single series, with an 11-year term and monetary restatement by the IPCA plus interest of 5.27% per year, based on 252 working days. The total net funds raised were allocated to Gasmig, on the present date, of the mandatory early redemption of the 1st Issue of Commercial Notes Public Issue, whereby it issued 121 CommercialPromissory Notes, in a single series, with a unit face value of R$10 million by the issue date of April 8, 2014, in the total amount of R$1,210 million. The net funds obtained from850 million on the issue date.
The following financing contracts were allocatedentered into during the year ended December 31, 2019 (in millions of Reais):
| Financing source 2019 | Date | Principal maturity | Annual financial cost % | Amount |
| BRAZILIAN CURRENCY | ||||
| Debentures – 7th Issue – 1st Series (1) | July, 2019 | 2024 | CDI + 0.454% | 2,160 |
| Debentures – 7th Issue – 2nd Series (1) | July, 2019 | 2026 | 4.10% of IPCA | 1,500 |
| Promissory Notes – 1st Issue (2) | September, 2019 | 2020 | 107.00% of CDI | 850 |
| (-)Transactions costs | (10) | |||
| (-)Discount on the issuance of debentures (3) | (23) | |||
| Total raised | 4,477 |
| (1) | CEMIG Distribuição |
| (2) | Gasmig |
| (3) | Discount on the sale price of the 2nd series of the debentures issued by CEMIG Distribuição. |
On July 22, 2019, the Company completed the distribution of its 7th issue of simple debentures, non-convertible secured debentures, in the amount of R$3,685 million, in two series. The 1st series, with a term of 5 years, for R$2,160 million and paying interest of CDI + 0.45%. The 2nd series, with a 7 year term, in the amount of R$1,500 million and paying monetary restatement by the IPCA plus interest of 4.10%, making an average equivalent cost estimated at 108.61% of CDI.
The Company used the proceeds to prepay the outstanding balance of the 9th issue of promissory notes, with final maturity in October 2019, of the 6th issue of simple debentures, with final maturity in June 2020, of the 5th issue of simple debentures, with final maturity in June 2022, and Bank Credit Notes, with final maturities in June 2022, totaling R$3,644 million in principal, interest and charges.
Issuance of Commercial Promissory Notes
In May 2018, CEMIG D issued Commercial Promissory Notes for R$400 million, due on October 24, 2019. The promissory notes bear interest at 151% of the CDI Rate, which will be paid on the maturity date. The proceeds will be used to recompose CEMIG D’s cash, due to the payment of debtsthe 3rd issuance of debentures, and to enhance working capital. The issuance is guaranteed by CEMIG and benefits from collateral composed of a fiduciary assignment (alienação fiduciária) of shares issued by Gasmig. The Commercial Promissory Notes have restrictive financial covenants, requiring the accomplishmentmaintenance of investments in constructions meant to increase, renewa Net Debt/EBITDA ratio less than or equal to: (A) for CEMIG: (i) 4.5x for June 2018; (ii) 4.25x for the fiscal year 2018; and improve(iii) 4.25x for June 2019; and (B) for CEMIG D (i) 7.5x for June 2018; (ii) 4.5x for the Company energy distribution structure. The commercial notes expire 360 days afterfiscal year 2018; and (iii) 3.8x for June 2019.
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On December 19, 2018, CEMIG D completed the issue date, maturing in April 3, 2015, and it pays an interest equivalent to 105%public offering of CDI. The interest will be paid by the expiry date along with the amortization. The Cemig D’s 7th Commercial Notes Issue relies on the guarantee6th issuance of its controlling company, the Companhia Energética de Minas Gerais – Cemig.
In April 4, 2014, Cemig D extended a part of its debt through a renewal of credit transactions in the total amount of R$200 million, contracted with Banco do Brasil. The maturity date was April 4, 2014, and has been postponed until April 4, 2015. The interest rate on this loan is 108.5% of CDI/year.
In January 2014, Cemig GT completed its 4th Non-Convertible, Unsecured Debentures Public Issue, whereby it were issued 50,000simple non-convertible unsecuredsecured debentures, in a single series, under which 550,000 debentures, with par value unit face value of R$10,000 by1,000, at the issue date of December 23, 2013,3, 2018, in a total amount of R$500 million. The net proceeds from the issuance were allocated to recuperate the cash due to payment of debts. The debentures have maturity three years from the issuance date, on December 23, 2016, and pay compensatory interest of 100% of the CDI rate, capitalized by a spread of 0.85% per year. The interest will be paid yearly and the amortization will550 million that shall be paid in a single installment in the expiry date. The Cemig GT’s 7th Non-Convertible Unsecured Debentures Public Issue relies12 monthly installments, maturing on the guarantee of its controlling company, the Companhia Energética de Minas Gerais – Cemig.
In June 2014, Cemig GT completed its 5th Commercial Notes Public Issue, whereby it were issued 140 Commercial Notes, in a single series, with unit face value of R$10,000 by the issue date of June 27, 2014, in a total amount of R$1.4 billion. The net funds obtained with the Commercial Notes issue were used to debt payment and for equity acquisition (Retiro Baixo, Santo Antônio and Aliança) by the Company. The Commercial Notes expire 360 days after the issue date, maturing in June 22, 2015, and it pays an interest equivalent to 106.85% of CDI. The interest will be paid by the expiry date along with the amortization. The Cemig GT’s 5th Commercial Notes Public Issue relies on the guarantee of its controlling company, the Companhia Energética de Minas Gerais – Cemig.
In December, 2014, Cemig GT completed its 5th Non-Convertible, Unsecured Debentures Public Issue, whereby it were issued 140,000 non-convertible, unsecured debentures, in a single series, with unit face value of R$10,000 by the issue date of December 10, 2014, in a total amount of R$1.4 billion.3, 2020. The net proceeds from the issuance were used for replenishment of the CEMIG D’s cash position due to expenses related to purchase energy and for the payment of debt, investmentdebts maturating in equity interests (Renova and Aliança) and replenishment of cash expended on equity interests during 2014.February 2019. The debentures have a maturity at four years from the issue date, on December 10, 2018, and pay an interest equal to 100%interests of the CDI rate capitalized by a spread of 1.70%plus 1.75% per year. The interest will be paid yearlymonthly, with the first installment due on January 3, 2019 and the amortization is to be paid in 2 equal and consecutive installments. The first, equivalent to 50% of the unit face value, is to be paid in December 10, 2017, and the second, equivalent of the balance of the unit face value, will be paid in December 10, 2018. Cemig GT’s 5th Non-Convertible, Unsecured Debentures Public Issue relylast installment on the guarantee of its controlling company, the Companhia Energética de Minas Gerais – Cemig.
The following financing contracts were entered into in 2013:
Cemig D (Distribution) raised R$2.981 billion in 2013. This comprised R$200 million under a Bank Credit Note in favor of Banco do Brasil, for the acquisition of electricity; R$600 million through amendment to a Bank Credit Note; R$2,160 million through the third issue of debentures, to redeem the fifth and sixth issues of Promissory Notes and for investments; and R$21.2 million in financings from Eletrobrás for the Cresce Minas Program.
On February 15, 2013 Cemig D made its third debenture issue in the Brazilian market. This was for a total of R$2.16 billion, with three levels of interest rates: (i) the CDI rate + 0.69% p.a., for the debentures with maturity at five years; (ii) the IPCA inflation index + 4.70% p.a., for the debentures with maturity at eight years; and (iii) the IPCA inflation index + 5.10% p.a. for the debentures with maturity in 12 years. The proceeds were used to redeem the fifth and sixth issues of promissory notes, and for investment in distribution infrastructure.date. The debentures are guaranteed by Cemig.
On October 24, 2013, Cemig GT signed amendments to Bank Credit Notes(i) CEMIG´s Guaranty; (ii) fiduciary assignment (alienação fiduciária) of 33.37% common shares issued in favor of Banco do Brasil in 2006, extending the maturity of the tranches payable in 2013, in the amount of R$600 million, to the years 2014 (20%), 2015 (20%) and 2016 (60%), maintaining the other maturities and the cost of 104.1% of the variation of the CDI rate, and paying a fee of 0.99% on the transaction on the date of signature of the amendments. These renewals will continue to have the guarantee of Cemig (the holding company), and Cemig GT will continue to have the option of making early settlement, without additional costs.
On December 31, 2013, all the financings contracts signed with Banco Santander and Banco Itaú BBA which hadby Gasmig. The indenture also has restrictive financial covenants, requiring Cemig to maintain certain indices within contractually established limits, otherwise the creditor could demand early maturitymaintenance of the debt, had been terminated.
At present, Cemig GT has a financing contract with the BNDES, which was used for injection of capital into its subsidiary Baguari Energia S.A., for construction of the Baguari hydroelectric complex, with a restrictive financial covenant requiring Cemig, guarantor of the financing, to maintain a minimum capitalization rate as expressed by Stockholder’s equity / Total assetsNet Debt/EBITDA plus dividends received that shall be equal or below (A) for CEMIG D: (i) 4.50x for the fiscal year of 30%2018; (ii) 3.80x for June 2019; (iii) 3.80x for the fiscal year of 2019; inclusive. and (B) for CEMIG (i) 4.25x for the fiscal year of 2018; (ii) 4.25x for June 2019; (iii) 3.50x for the fiscal year of 2019; inclusive.
CEMIG GT’s retap of Eurobonds
On July 18, 2018, CEMIG GT issued an additional US$500 million of its Eurobonds. The proceeds were used to repay debt. As with the original issuance of Eurobonds by CEMIG GT in December 2017, the issuance was hedged by a coupon swap and a call spread on the principal, in order to protect the company against foreign exchange volatility.
CEMIG GT’s issuance of Eurobonds
CEMIG GT issued the Eurobonds in December 2017. The issuance was priced in December with a 9.25% coupon and 9.5% yield and the proceeds were used to repay existing short-term debt. The bonds will pay interests semiannually and the principal will fall due in December 2024, with an option for prepayment, without premium after 6 years from issue. The issuance was hedged by a coupon swap and a call spread on the principal, in order to protect the company against foreign exchange volatility.
The Eurobonds contain certain restrictive covenants which, among other things, limit CEMIG GT’s ability to (i) incur additional debt; (ii) make certain dividend payments, redeem capital stock and make certain investments; (iii) transfer and sell assets; (iv) enter into any agreements that would limit the ability of subsidiaries to pay dividends or make distributions; (v) create liens on assets; (vi) effect a consolidation, merger or sale of assets; and (vii) enter into transactions with affiliates. The Eurobonds also contain certain financial maintenance covenants applicable to CEMIG and CEMIG GT. The indenture governing the Eurobonds contains customary events of default. CEMIG GT has the right, at its option, to redeem any of the Eurobonds, in whole or in part, at any time on or after December 5, 2023, at the absence of which Cemig is obliged to provide collateral whichredemption prices set forth in the BNDES’s assessment represent 130%indenture governing the Eurobonds. Prior to December 5, 2023, CEMIG GT has the right, at its option, to redeem the Eurobonds, in whole but not in part, at a redemption price equal to the greater of (i) 100% of the debtor balanceprincipal amount of such Eurobonds and (ii) the sum of the contract, within six months frompresent value at such redemption date of (a) the endredemption price of the business year in whichEurobonds on December 5, 2023 plus (b) all required interest payments on the required capitalization ratio was not obtained, or to present an interim balance sheet, audited by an auditor registered with the Securities Commission, that indicates returnEurobonds through December 5, 2023 (excluding accrued but unpaid interest to the required minimum capitalization rate. This covenant isdate of redemption), discounted to be measuredthe redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the end of every business year. AtTreasury Rate plus 50 basis points, plus in each case any accrued interest on the end of 2015 there was no non-compliance with this clause.
Cemig GT also has a financing contract with the German development bank KfW, used for constructionprincipal amount of the solar generation plant installedEurobonds to, but excluding, the date of redemption.
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CEMIG Financing Guarantees
CEMIG has provided total financing guarantees for R$15,020 million on the roofloans, financing and debentures, on December 31, 2020, were as follows: (in millions of the Mineirão football stadium. This contract does not have a restrictive covenant clause, but makes referenceReais)
| 2020 | |
| Promissory notes and Sureties | 10,197 |
| Guarantee and Receivables | 3,454 |
| Receivables | 112 |
| Shares | 330 |
| Unsecured | 927 |
| TOTAL | 15,020 |
Restricted Covenant Clauses
The Company has contracts with covenants linked to such financial ratios, as follows:
| Title - Security | Covenant | Ratio required – Issuer | Ratio required CEMIG (guarantor) | Compliance required |
7th Debentures Issue CEMIG GT (1) | Net debt / (Ebitda + Dividends received) | The following or less: 3.0 in 2020 2.5 in 2021 | The following or less: 3.0 in 2020 2.5 in 2021 | Semi-annual and annual |
Eurobonds CEMIG GT (2) | Net debt / Ebitda adjusted for the Covenant (6) | The following or less: 3.0 on Dec. 31, 2020 3.0 on June 30, 2021 2.5 on/after Dec. 31, 2021 | The following or less: 3.0 on Dec. 31, 2020 3.0 on June 30, 2021 3.0 on/after Dec. 31, 2021 | Semi-annual and annual |
7th Debentures Issue CEMIG D | Net debt / Ebitda adjusted | The following or less than 3.5 | The following or less than 3.0 | Semi-annual and annual |
Debentures GASMIG (3) | Overall indebtedness (Total liabilities/Total assets) | Less than 0.6 | - | Annual |
| Ebitda / Debt servicing | 1.3 or more | - | Annual | |
| Ebitda / Net finance income (expenses) | 2.5 or more | - | Annual | |
| Net debt / Ebitda | The following or less than 2.5 on Dec, 31.2020 | - | Annual | |
8th Debentures Issue Gasmig Single series (4) | Ebtida/Debt servicing Net debt/Ebitda | 1.3 or more as of Dec, 31.2020 3.0 or less as of Dec, 31.2020 | - - | Annual Annual |
Financing Caixa Econômica Federal Parajuru and Volta do Rio (5) | Debt servicing coverage index Equity / Total liabilities Share capital subscribed in investee / Total investments made in the project financed | 1.20 or more 20.61% or more (Parajuru) 20.63% or more (Volta do Rio) 20.61% or more (Parajuru) 20.63% or more (Volta do Rio) | - - - | Annual (during amortization) Always Always |
| (1) | 7th Issue of Debentures by CEMIG GT, as of December 31, 2016, of R$2,240 million. |
| (2) | In the event of a possible breach of the financial covenants, interest will automatically be increased by 2% p.a. during the period in which they remain exceeded. There is also an obligation to comply with a ‘maintenance’ covenants – that the consolidated debt, shall have a guarantee for debt of 1.75x Ebitda (2.0 as of December 31, 2017); and a ‘damage’ covenant, requiring real guarantee for debt at CEMIG GT of 1.5x Ebitda. |
| (3) | If Gasmig does not achieve the required covenants, it must, within 120 days from the date of notice in writing from BNDES or BNDESPar, constitute guarantees acceptable by the debenture holders for the total amount of the debt, subject to the rules of the National Monetary Council (CMN), unless the required ratios are restored within that period. Certain contractually specified situations can cause early maturity of other debts (cross-default). |
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| (4) | Non-compliance with the financial covenants results in automatic early maturity. If early maturity is declared by the debenture holders, Gasmig must make the payment after receipt of notification. |
| (5) | The financing contracts with Caixa Econômica Federal for the Praias de Parajuru and Volta do Rio wind power plants have financial covenants with compliance relating to early maturity of the debt remaining balance. Compliance with the debt servicing coverage index is considered to be demandable only annually and during the period of amortization, which begins in July 2020. |
| (6) | The adjusted Ebtida arises from earings before interest, income taxes and social contribution on net income, depreciation and amortization in accordance with CVM Instruction No 527 from October 4, 2012. |
The Company is in compliance with all covenants as may be agreedof December 31, 2020, except for non-compliance with any other creditor of the company. Since the financing contracts that had contained financial covenants, with Itaú and Santander, have been terminated, and the financial covenant inof the contractloan contracts with the BNDES does not applyCEF of the subsidiaries Central Eólica Praias de Parajuru and Central Eólica Volta do Rio. Thus, exclusively to comply with the requirement of item 69 IAS 1, the Company reclassified R$2 million, to current liabilities, referring to the contract signed with KfW, because it makes reference to an indexloans of Cemig itself,those subsidiaries, which were originally classified in non-current liabilities. Additionally, the financing contract with Banco KfW at present does not impose any restriction on Cemig GT.
InCompany assessed the financialpossible consequences arising from this matter in their other contracts of Cemig Dfor loans, financings and of Cemig GT there are standard clauses restricting payment of dividends, if the companies are in default; restricting asset disposals that might adversely affect their activities; and restricting disposal of stockholding control of the companies involved.
Cemig D entered into a loan agreement with the BNDES in October 2014, which was used for the financing of some investments in projects related to enhancethe reliability of the electric system during the FIFA World Cup in 2014, with a restrictive financial covenant requiring Cemig, guarantor to the financing, to maintain a minimum capitalization rate of Stockholder’s equity / Total assets of 30%, as well as a Net Debt/EBITDA less or equal to 4x, in the absence of which Cemig is obliged, in 30 days from BNDES’s notice, to provide collateral which in the BNDES’s assessment represent 130% of the debt’s balance under the contract, unless in such period the ratios have returned to the agreed levels. This covenant is to be measured at the end of every business year. At the end of 2015 Cemig was in compliance with this covenant. On August 12, 2016, Cemig prepaid the loan.
Issuance of securities by Cemig D and Cemig GT requires the prior authorization of the Brazilian Development Bank (Banco Nacional de Desenvolvimento Econômico e Social, or BNDES).
Because we have a significant portion of our financings, totaling R$6,300 million, due for payment in 2016, we need short-term funds to pay and refinance these obligations. As a state company, we are subject to restrictions, under present laws and regulations, in relation to financing and our capacity to obtain financing in certain situations. For example, we need to obtain approval from the Finance Ministry and the Central Bank before making any international financial transaction: such approval is usually given only if the purpose of the transaction is to finance the importation of goods or to rollover our existing foreign debt. In addition, financial institutions in Brazil are subject to restrictions on exposure to the risks related to State governments, governmental bodies and state-controlled companies such as Cemig. Still, such restrictions do not prohibit local financial institutions from acquiring debentures, and other local debt instruments issued by the Company. However, there can beconcluded that no assurance that these restrictions may not be amended as to include the acquisition of local debt instruments by financial institutions and, therefore, hinder our ability to obtain financing in the future. See the section “Item 3. Material information – Risk factors – Risks relating to Cemig – We are subject to rules and limits applied to levels of public sector borrowing and to restrictions on the use of certain funds we raise, which could prevent us from obtaining financing.”further reclassifications were necessary.
The recent changes in the regulations of the electricity sector, especially those introduced for generation and the transmission by Law No.12,783/2013, and the tariff review of Cemig D, which occurred in April 2013, have demanded more precise budget planning. In 2014 and 2015 we covered our expenditure on capital and investments in acquisitions and met our needs for liquidity through a combination of cash flow from operations and financings. For the year 2016, we expect to finance the necessary funding for the proposed investments in acquisitions, and to meet our other liquidity needs, through a combination of cash flow from operations and financings. Since we principally use cash generated by operations to provide funding for our liquidity and capital needs, factors that result in an increase or reduction of our revenues and net profit could have a corresponding effect on our access to sources of liquidity.
In the long term, we foresee that it will be necessary to make significant capital expenditures on maintenance and updating of our generation, transmission, and distribution facilities, and we expect to employ various sources of liquidity, such as cash flow from operations and financings, in relation to such needs. See the section “Item 3. Material information – Risk factors” for an explanation on certain questions that could adversely affect our liquidity position.
Research and Development
We dedicate ourselves to projects that use technological advances not only in electricityenergy systems, but also in all fields related to energy, such as development of alternativeenvironmental control, storage energy sources, environmental control,systems, performance of energy systems and safety optimization.
In 2015, we invested CEMIG currently invests around R$30.043 million in research projects and development, andDevelopment (‘R&D’).
In 2020, CEMIG transferred R$47.19 million to the FNDCT, and R$23.6 million to EPE.
In 2014 we invested R$60.7 million in research and development, and transferred R$47.643 million to the National Scientific and Technological Development Fund (Fundo(Fundo Nacional de Desenvolvimento Científico e Tecnológico, or FNDCT)‘FNDCT’), a federal fund to support research and development, and R$23.821 million to the federal Energy PlanningResearch Company EPE (Empresa(Empresa de Pesquisa Energética)tica, or ‘EPE’).
In 20132019, we invested R$73 million in research and development, and transferred R$3641 million to the FNDCT, and R$1820 million to the federal Energy Planning Company, EPE.
In 2018, we transferred R$38 million to the FNDCT, and R$19 million to the EPE.
Trends
As a public service utility, we are subject to regulations issued by the Brazilian federal governmentFederal Government as described in “Item 4: Information on the Company –The– The Brazilian power industry.”Power Industry”. Therefore, any change in the regulatory framework may affect us significantly either with respect to our revenue, if the change relates to prices or with respect to our operating expenses if the change relates to costs incurred to provide service to consumers.customers.
As to the question of reliability of supply of electricity,energy, the structural capacity of the system is adequate to meet the market’s needs for consumption of electricity,energy, and the expansion of generation and transmission capacity currently in development will be able to meet the expected demand for consumption from the market. Rates of growth of electricityenergy consumption in Brazil in recent years have been 2.21% (2012-2013)-0.9% (2015-2016), 2.42% (2013–2014)4.2% (2016-2017), 3.73% (2017-2018), 1.92% (2018-2019) and 2.1 % (2014-2015) reduction due to-1.56% (2019-2020), as a result of strong recovery of energy consumption after two years of economic recession and high energy tariffs.recession. The Brazilian governmentFederal Government has been successful with the “new supply”‘new supply’ auctions starting in 2005 – which have made possible the construction of new projects such as the Santo Antônio hydroelectric plant (3,150 MW) and the Jirau hydroelectric plant (3,750 MW), on the Madeira River; the Belo Monte plant (11,233 MW) on the Xingu River; and the Teles Pires plant (1,820 MW) on the Teles Pires River, in accordance with the needs of the distribution companiesdistributors for purchase of electricity.
Commitments
In a contract that regulate the partnership of Cemig with FIP Redentor in the acquisition of 100% of the sharesenergy.
Regarding capital expenditures, for 2021 we planned to make capital investments in Light indirectly held by both Enlighted and FIP PCP, Cemig has granted FIP Redentor the rightrelation to sell all of its sharesour fixed assets in Parati to Cemig, in the fifth year after FIP Redentor’s acquisition of such shares, for a price equal to the amount of approximately R$2,347 million, corresponding to our basic program. We expect to allocate these expenditures primarily to the expansion of our distribution system. We will also allocate R$196 million for injection of capital invested by FIP Redentor ininto subsidiaries to meet specific capital needs. For more details see item 4 ‘Capital Expenditures’.
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In the acquisition of these shares, adjusted in accordance with the variationmatter of the CDI plus 0.9% per annum netpandemic situation, caused by the new coronavirus, see ‘Risk Factors’ and ‘Impacts of Covid-19’, where the dividendsCompany addresses its initiatives and benefits received by FIP Redentor.possible impacts on its business.
Cemig
Commitments
CEMIG GT and the private pension plan entities participating in the investment structure of SAAG signedentered into put options (‘the Put Options’) whichoption agreements exercisable by the funds could exercise in the eighty-fourth month after June 2014 the right to sell all of tis shares in SAAG to Cemig. The entities participating in that investment structure are FIP Melbourne, Parma Participações S.A. and FIP Malbec.July 2021. The exercise price of the Put Optionsput options will correspond to the amount invested by each private pension plan, in the Investment Structure, updated adjusted pro rata temporis, by the Expanded National Consumer Price (IPCA)IPCA index as published by the IBGE, plus interest at 7% per year, less suchp.a., discounting dividends and Interestinterest on Equity as shallcapital that have already been paid by SAAG to the private pension plan entities.
Contractual obligations
CemigCEMIG and its subsidiaries have contractual obligations and commitments that mainly include amortizationacquisition of loans and financings, purchase of electricityenergy from Itaipu, purchaseacquisition of electricityenergy at auctions, physical quota guarantees and other commitments, as follows:follows as of December 31, 2020: (in millions of Reais)
| 2021 | 2022 | 2023 | 2024 | 2025 | After 2026 | Total | |
| Purchase of energy from Itaipu | 1,515 | 1,548 | 1,595 | 1,595 | 1,595 | 33,499 | 41,347 |
| Purchase of energy – auctions | 3,416 | 3,387 | 3,378 | 3,536 | 3,328 | 47,855 | 64,900 |
| Purchase of energy – ‘bilateral contracts’ | 332 | 332 | 332 | 222 | 67 | 80 | 1,365 |
| Quotas of Angra 1 and Angra 2 | 288 | 291 | 299 | 301 | 300 | 6,340 | 7,819 |
| Transport of energy from Itaipu | 189 | 215 | 218 | 222 | 159 | 521 | 1,524 |
| Other energy purchase contracts | 4,450 | 4,723 | 4,622 | 3,478 | 3,310 | 28,777 | 49,360 |
| Physical quota guarantees | 812 | 812 | 812 | 812 | 812 | 17,043 | 21,103 |
| Total | 11,002 | 11,308 | 11,256 | 10,166 | 9,571 | 134,115 | 187,418 |
| 2016 | 2017 | 2018 | 2019 | 2020 | After 2020 | Total | ||||||||||||||||||||||
Purchase of electricity at auctions | 2,453 | 3,005 | 3,225 | 3,686 | 4,561 | 91,075 | 108,005 | |||||||||||||||||||||
Other electricity purchase contracts | 3,359 | 3,612 | 3,149 | 2,510 | 2,525 | 32,311 | 47,466 | |||||||||||||||||||||
Purchase of electricity from Itaipu | 1,408 | 1,475 | 1,425 | 1,389 | 1,450 | 37,219 | 44,366 | |||||||||||||||||||||
Physical quota guarantees | 637 | 677 | 698 | 717 | 698 | 30,707 | 34,134 | |||||||||||||||||||||
Purchase of gas for resale | 1,091 | 1,139 | 1,289 | 1,289 | 1,293 | 12,031 | 18,132 | |||||||||||||||||||||
Loans and financings | 6,300 | 2,628 | 2,493 | 806 | 963 | 1,977 | 15,167 | |||||||||||||||||||||
Quotas for Angra 1 and Angra 2 | 223 | 238 | 262 | 272 | 290 | 11,762 | 13,047 | |||||||||||||||||||||
Transport of electricity from Itaipu | 81 | 89 | 95 | 102 | 111 | 7,172 | 7,650 | |||||||||||||||||||||
Purchase of energy – ‘bilateral contracts’ | 280 | 295 | 314 | 331 | 345 | 1,711 | 3,276 | |||||||||||||||||||||
Debt to pension plan – Forluz | 76 | 81 | 85 | 90 | 96 | 384 | 812 | |||||||||||||||||||||
Operating lease contracts | 63 | 21 | 23 | 22 | — | — | 129 | |||||||||||||||||||||
Paid concession | 3 | 2 | 2 | 2 | 2 | 10 | 21 | |||||||||||||||||||||
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Total | 15,974 | 13,262 | 13,060 | 11,216 | 12,334 | 226,359 | 292,205 | |||||||||||||||||||||
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| Table of Contents |
The Company does not
CEMIG and its subsidiaries have any material off-balance sheet arrangements.loans, financing and debentures, by currency and index, with the respective amortization, as follows: (in millions of Reais)
2026 And thereafter - 7,866 - - - (25) - - (25) - - - - (9) (9) (18) 2,060 1,207 809 8,371 1,124 1,449 15,020 2021 2022 2023 2024 2025 Total Currency US dollar 61 - - 7,805 - Total, currency denominated 61 - - 7,805 - - 7,866 Index IPCA (1) 1,043 615 248 341 1,138 1,478 4,863 UFIR/RGR (2) 3 3 2 - - - 8 CDI (3) 912 570 560 268 - - 2,310 URTJ/TJLP (4) 53 20 - - - - 73 Total by index 2,011 1,208 810 609 1,138 1,478 7,254 (-)Transaction costs (12) (1) (1) (18) (5) (20) (57) (±)Interest paid in advance (-) Discount Overall total
| (1) | Expanded National Customer Price (IPCA) Index, |
| (2) | Fiscal Reference Unit (Ufir / RGR) |
| (3) | CDI: Interbank Rate for Certificates of Deposit, |
| (4) | Interest rate reference unit (URTJ) / Long-Term Interest Rate (TJLP) |
| (5) | IGP-DI (‘General – Domestic Availability’) Price Index, |
CEMIG and its subsidiaries have contracts containing a lease that are, in their majority, indexed to the IPCA inflation index on an annual basis. Below is an analysis of maturity of lease contracts:
| (R$ million) | Consolidated (nominal) |
| 2021 | 56 |
| 2022 | 27 |
| 2023 | 26 |
| 2024 | 26 |
| 2025 | 26 |
| 2026 at 2045 | 483 |
| Undiscounted values | 644 |
| Embedded interest | (417) |
| Leasing liabilities | 227 |
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| Item 6. | Directors, Senior Managers and Employees |
Directors and Senior Management
CemigThe Company is managed by itsthe Board of Directors composed of 15 members, each with a respective alternate, and by the Executive Board. The Board which consists of 11 Executive Officers. The Minas Gerais State Government, since it is the majority shareholder, has the right to elect the majorityDirectors of the Company comprises nine members, of which one shall be the Chair and another the Deputy Chair. The Executive Board has seven Executive Officers, who may be shareholders, resident in Brazil, elected by the Board of Directors. Every holderDirectors for a period of Cemig common shares has the right to vote in an election for members of our Board of Directors. Under the Brazilian Corporate Law, any shareholder holding at least 5% of Cemig’s common shares in circulation may request the adoption of a multiple vote procedure, which confers upon each share a number of votes equaltwo years, subject to the present numberrequirements of membersthe applicable law and regulations. Re-election for a maximum of three further consecutive periods of office is permitted. The structure and composition of the Board of Directors and gives the shareholderExecutive Board shall be identical in the right to accumulate his or her votes in one sole candidate, or distribute them among several.
Under the Brazilian Corporate Law, holders of preferred shares representing at least 10% of Cemig’s share capital,wholly-owned subsidiaries CEMIG Distribuição S.A and also holders of common shares representing at least 15% of its registered capital (other than the controlling shareholder) have the right to appoint a member ofCEMIG Geração e Transmissão S.A., with occasional exceptions if approved by the Board of Directors and his or her respective substitute member in a separate election. If none of the holders of common shares or preferred shares qualifies under the minimum limits specified above, shareholders representing, in the aggregate, a minimum of 10% of the share capital may combine their holdings to appoint a member of the Board of Directors, and that member’s substitute member.Directors.
Cemig and its wholly-owned subsidiaries Cemig Generation and Transmission and Cemig Distribution all have the same Board of Directors, Audit Board and Executive Board, except that, in the Executive Boards of those two wholly-owned subsidiaries, only Cemig Distribution has a Chief Distribution and Sales Officer, and only Cemig Generation and Transmission has a Chief Generation and Transmission Officer.
Board of Directors
Cemig’sThe Board of Directors meets, ordinarily, at least once a month and, extraordinarily, whenever called by its Chairman, Vice-Chairman,Chair, Deputy Chair, or by one-thirdone third of its members, or by the Executive Board (Board of Executive Officers).Board. Its responsibilities includeinclude: setting the corporate strategy, general orientation of Cemig’sCEMIG’s businesses, approval of certain significant transactions, and the election, dismissal and monitoring of ourthe Chief Officers (members of the Executive Officers.Board).
All members and substitutethe members of the Board of Directors are elected by the General Meeting of Stockholders. A substitute member replacesShareholders. With the respective permanent member whenever there is a temporary absenceexception of the permanent member, or that member’s post is vacant, in which case the substitute remains in the post until the appointment of a permanent member to fill the vacancy. No member of the Board of Directors permanent or substitute,representing the Employees, no other member of the Board of Directors has any employmenta work contract with the Company,CEMIG or with any subsidiary that provides for any benefit in the event of its termination.
Under our by-laws,The following rules apply to the members of our Board of Directors are elected for a concurrent period of two years, and may be re-elected. Our Board of Directors is made up of 15 permanent members, and their respective substitutes, of whom eight are elected by the Minas Gerais State Government and FIA Dinâmica Energia, one by BNDES Participações S.A.—BNDESPAR (alternate is empty), four by FIA Dinâmica and AGC Energia S.A, one by the shareholder José Pais Rangel and Geração Futuro L. Par FIA, and one by the holders of preferred shares. The period of office of the present memberscomposition of the Board of Directors expires at the Annual General Meeting of Stockholders to be held in April 2018. The names, positions and dates of initial appointment of the present board members and their respective substitute members are as follows:
Directors:
| a) | The following two groups of shareholders each have the right to elect one member, in a separate vote, in accordance with the applicable legislation: (i) the minority holders of common shares, and (ii) the holders of preferred shares; |
| b) | At least 25% (twenty five per cent) of the members must be independent, or, under Article 141 of Law 6,404/1976, at least one of them if there is a decision for the minority shareholders to exercise their option to use the multiple vote mechanism; |
| c) | The employees have the right to elect one member, subject to the terms of Federal Law 12,353 of December 28, 2010, as applicable; |
| d) | In any event, the majority of the members shall be elected by the controlling shareholder of the Company. |
Composition of the Board of Directors:
Board of Directors | ||||
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| Chair | |||
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| (Seat vacant) (1) | Member | - | ||
| Paulo César de Souza e Silva (2) | Member | July 31, 2020 | ||
| José João Abdalla Filho (3) | Member | April 30, | ||
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| (1) | Elected by State of Minas Gerais and |
| (2) | Elected by |
| (3) |
| (4) | Elected by a representative of the |
Below is some brief biographical information about each member of the Board of Directors:
Arcângelo Eustáquio Torres QueirozMárcio Luiz Simões Utsch – Mr. Queiroz graduated with, born in 1959, has a degreelaw degree. Principal executive positions: Mesbla S.A. (department store): General Manager, Purchasing and Operations; Gradiente Entertainment (electronics, games): Chief Officer for Sales and Distribution Logistics. Alpargatas S.A.: Joined 1997. CEO from 2003 until retirement, age 60, in History from the University Center of Belo Horizonte – UNIBH. Since 1988 he has worked for the Cemig Group, first at Cemig, and then, at Cemig Distribution, where he currently occupies the position of Technical Administrator. From 2006 to 2010, he was a regular member of the Pro-Health Committee (Comitê Prosaúde) of Forluminas Seguridade Social – Forluz, the pension fund of some of the Cemig Group’s companies. Currently, he is Director of the Intermunicipal Union of Electricity and Fuel Gas Industry Workers of the State of Minas Gerais (Sindieletro/MG). He is a member of our Career and Compensation Committee and, since 2009, has been a member of our Board of Directors and also the Boards of Directors of Cemig D and Cemig GT.2019.
Nelson José HubnerAfonso Henriques Moreira Santos – Mr. Hubner, born in 1957, has a degree in engineering from Universidade Federal Fluminense (Rio de Janeiro) with specialization in mathematics from Centro de Ensino Unificado de Brasília. He was Brazil’s interim Mining and Energy Minister from May 2007electric engineering. From April, 2019 to January 2008, and Director-generalDecember of the Brazilian electricity regulator, ANEEL, from 2009 to 2013.
Allan Kardec de Melo Ferreira – From 1993 to 2014 Mr. Ferreirasame year he was a member of the Audit Board of Directors of Light S.A. Board member at IX Estudos e Projetos LTDA from October, 2006 to April, 2019. He served as full time professor at the Oi Group, and a partner-consultantFederal University of PJF. He has a law degreeItajubá from the Pontifícia Universidade Católica of Minas Gerais, with a postgraduate degree in mathematics from the Centro de Ensino Unificado de Brasília.January 1980 to March 2016.
José Afonso Bicalho Beltrão da SilvaCledorvino Belini – Born, born in 1948, Mr. da Silva1949, has a degree in economicsbusiness administration from Mackenzie University, a master's degree and postgraduate degree from São Paulo University (USP), and MBA from FDC/ Insead. In a 44-year career at Fiat, he served as its CEO in Brazil and Latin America for 11 years (2004-2015), and in 2009 joined the Federal UniversityFiat Group Executive Council (‘GEC’), the highest governing body of Minas Gerais (UFMG)the Fiat Group worldwide. In 2010–2013, he was president of the Brazilian Vehicle Manufacturers’ Association (‘Anfavea’). Since October 2017, he has been an Independent Member of the Board of Directors of the JBS group.
José Reinaldo Magalhães, a master’s degreeborn in Regional Economics1956, was manager of private equity FIP funds at BR-Investimentos and Bozano Investimentos Gestoras de Recursos from Cedeplar of UFMG,2009 to 2015 – the team member responsible for the Funds’ investment and Ph.D in economics from the University of Manchester, England. He was CEO of Credireal (Banco de Crédito Real de Minas Gerais) in 1994–7, and of BEMGEdisinvestment decisions. At PREVI (Banco do Estado de Minas Gerais)Brasil pension fund), he was Director of Investments, Institutional Investor Department, from – 2006–2018. At Banco do Brasil, he was New York Branch Assistant Manager in 1994–8. He was Secretary of Finance2004–2005, Deputy Manager of the prefecture of Belo HorizonteChicago Representative Office (2002-4), and Executive Manager in the Director’s Department for Planning and Risk Management, from January 2006 to July 2012. From March 2009 to July 20141998 to2002. At PREVI, he was CEO of PBH Ativos S.A.Division Manager, International Financial Institutions Management, from 1995 to 1998. From April 2013 to December 20141994–1998, he was Advisora Trainee in the Overseas Manager Training Program, in São Paulo, Austin, Texas and London, and from 1990 to 1994, an analyst in the MinisterTechnical Department (‘DETEC’) of Development, IndustryBB-B1 Banco de Investimentos. He joined DETEC in October 1975, and Foreign Trade. Hefrom 1983–1989 was also AdvisorTechnical Adviser to the Brazilian Development Bank (BNDES) from April 2013 to December 2014. Currently, Mr. da Silva holds the position of Secretary of Minas Gerais State Treasury.Supervision Office.
Paulo César de Souza e Silva, born in 1955, graduated in economics at Mackenzie University in São Paulo. He took part of the executive board of Embraer from October 1997 to May 2019.
José João Abdalla Filho, born in 1945, is CEO and controlling shareholder of Banco Clássico S.A.; Substitute Member of the Board of Directors of CEG (Companhia Distribuidora de Gás do Rio de Janeiro); Substitute Member of the Board of Directors of Tractebel Energia S.A.; CEO of Dinâmica Energia S.A.; and CEO of Social S.A. Mineração e Intercâmbio Comercial e Industrial.
Marcelo Gasparino da Silva, —Mr. Silva was born in 1971. He is a lawyer specializing in corporate tax law, with a degree from ESAG, and MBA in Controllership, Auditing and Finance. He began his executive career in 2007 as Legal and Institutional Director of Celesc. He is the Coordinator of the Santa Catarina Chapter, Holder of Board Member Certification from, and a member of the Council of, IBGC (the Brazilian Corporate Governance Institute). He is Chair of the Board of Directors of Usiminas, and is a member of the Board of Directors of Bradespar and Eternit. He has served as a Member of the Boards of Directors of:of Eletrobras, Celesc, AES Eletropaulo, Tecnisa and SC Gás, and as a member of the Audit BoardsFiscal councils of Bradespar, AES Eletropaulo, AES Tietê and Renuka do Brasil. He is Coordinator of the Legal and Compliance Committee of Eternit. He is the spokesperson of the GGCGGG (Corporate Governance Group).
Marco Antônio de Rezende TeixeiraAurélio Dumond Porto– Mr. Rezende Teixeira was, born in 1956. Since 1983 he has been a lawyer for Companhia Brasileira de Trens Urbanos. He was Solicitor-general of Belo Horizonte City, from 1997 to 2012. Since 2012 he has been manager and partner of Rezende Teixeira Sociedade de Advogados. He has a law degree from Universidade Federal de Minas Gerais (UFMG).
Mauro Borges Lemos– Mr. Borges Lemos has been the Professor of Economics at the Federal University of Minas Gerais since 1980. He has been working with the Development, Industry and Foreign Trade Ministry since 2013 – and served as Minister from February 2014 to January 2015. He was President of Brazil’s Industrial Development Agency (ABTI) from 2011 to 2014. He has1968, earned a degree in economicscivil engineering from Fumec University in 1994, before pursuing postgraduate studies and specialization in project management, and innovation and knowledge management, at IETEC, He has an MBA in business management from Centro Universitário Newton Paiva. Working at CEMIG since March 1986, initially via CEMIG Senai, he became Assistant Engineer, Project Engineer, Generation Projects Manager; and Technical and Commercial Director of the Federal University of Minas Gerais, with a doctorate in economics from London University,two SPCs Hidrelétrica Cachoeirão S.A and post-doctorate from the University of Illinois, USA, and the University of Paris.
Marco Antonio Soares da Cunha Castello Branco—Mr. Castelo Branco was CEO of Usiminas from 2008 to 2010. Since then he has been a Board Member of Hydac Tecnologia do Brasil Ltda., and since 2011, of Diferencial Energia ParticipaçõesHidrelétrica Pipoca S.A. He has served as Alternative Energy Sources Manager, Quality and Special Projects Manager, and Management and Internal Controls Manager; and is currently a degreeQuality Analyst in engineering from the Federal University of Minas Gerais (UFMG).
José Pais Rangel—Diretor Vice-President of Banco Clássico S.A.; MemberOffice of the Board of Directors of Companhia Distribuidora de Gás do Rio de Janeiro – CEG; Member of the Board of Directors of Tractebel Energia S.A.; Member of the Board of Directors of Kepler Weber S.A.; Manager of investment funds, licensed by the CVM. Member of the Board of Directors of each of Cemig, Cemig DCEO.
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Significant Civil and Cemig GT.Criminal Proceedings Involving Key Management Members
Ricardo Coutinho de Sena – Mr. Sena has a degree in Civil Engineering from Minas Gerais Federal University, and completed his postgraduate studies in Financial Administration at the Getúlio Vargas Foundation in Rio de Janeiro. He worked at the construction company M. Roscoe from 1972 to 1981, after which he joined Andrade Gutierrez, where he was Head of Budgets and, beginning in 1993, General Manager of the New Business Unit. Since 2000 he has been CEO of Andrade Gutierrez and a member of its Board of Directors. He represents Andrade Gutierrez S.A. Concessões on the Board of Directors of several of its subsidiaries. Since 2010, he has been a member of the Boards of Directors of Cemig, Cemig D and Cemig GT.
Paulo Roberto Reckziegel Guedes – Mr. Guedes has a degree in Civil Engineering from Rio Grande do Sul Federal University, and a Corporate MBA from the Dom Cabral Foundation. He joined the Andrade Gutierrez Group in 1993, working as assistant engineer, supervisory engineer, general manager of operations and project manager. Since 2000 he has been Executive Director of Andrade Gutierrez S.A. Concessões (“AG Concessões”), a listed company holding concessions for public works and services, and also represented AG Concessões on the Board of Directors of several subsidiaries of the group. Since 2010, he has beenMarcelo Gasparino da Silva, a member of the Board of Directors of Cemig, Cemig DCEMIG, is a defendant in two "Civil Action of Administrative Impropriety due to Damages to the Public Treasury" proceedings (not criminal cases), both of which were filed before the 1st Public Treasury Court of Florianópolis in Santa Catarina State, Brazil.
In the first case, the prosecutor in Santa Catarina State, Brazil has alleged irregularities regarding a specific business purchase by Celesc Distribuição S.A. approved on December 11, 2008 without the required auction proceeding. Such purchase was made in reliance on an emergency decree by the State Governor. Mr. Marcelo Gasparino da Silva was named as a defendant as a result of his role as Celesc Distribuição's Legal Officer from 2007 to 2009. In the other civil action involving Mr. Marcelo Gasparino da Silva, the prosecutor has alleged irregularities in the agreement entered into by Celesc Distribuição S.A. and Cemig GT. HeMonreal Corporação Nacional de Serviços e Cobranças S/C Ltda. Almost all former members of the Celesc Distribuição’s board of directors between 2003 and 2009 were named as defendants in the case. Both actions are in the pre-trial proceeding stage, and the relevant complaints have not been accepted by the Court yet. Since the last report in 2021, there hasn't been significant development on these cases and there's no verdict, they are still on the pre-trial proceeding stage.
Mr. José João Abdalla Filho, a member of the Company’s Board of Directors, is defendant in a criminal action pending before the 2nd Federal Criminal Court of Rio de Janeiro, for which he is accused of having committed the crime of tax evasion, for alleged omission of information in his 2010 income tax return. Mr. Abdalla Filho presented his defense, in which he alleges that the Court is unfit to proceed with the criminal action, and non-occurrence of the criminal practice, considering that the facts found (sale of real estate) occurred in the 1910s and 1940s, and not in the year 2001, according to the accusatory view. On August 3, 2020, the Court gave judgment “ruling the criminal action to be extinct, without decision on the merit, due to recognition of absence of process, namely, absence of correct, and consequently valid, constitution of the tax credit”. The Federal Public Attorneys then filed an appeal, on September 8, 2020. At this time, the case was remitted to the regional Federal Appeal Court of the 2nd Region. The regional Attorneys of the Republic presented an opinion on September 19, 2020. A date for hearing by the Court for judgment on the appeal is pending.
In another criminal action, before the first Federal Court of Araçatuba – Judiciary of São Paulo State, Mr. Abdalla Filho is accused of the crime of tax evasion, for alleged false declaration of the totality of his revenues, and omission of revenues in a company in which he was CEO, majority shareholder and manager during the years 2006–2008. In preliminary defense, Mr. Abdalla stated the view that the accusation should be rejected, due to the case being null in its entirety, and that on the merit, the accusation is without grounds, and a ruling of complete acquittal should be given. On June 5, 2019, the Federal Public Attorneys presented an amendment to the accusation to include the allegation that Mr. Abdalla Filho had committed the same offenses for the years 2010 and 2011. However, by an interim decision of the Chair of the Federal Supreme Court on July 15, 2019, the exclusion applied for by Mr. Abdalla was granted. On December 10, 2019, a further judgment ordered the case to go forward, due to the view taken by the full Supreme Court in the final judgment on the Special Appeal referred to. On the same occasion, the court determined issuance of Letters Rogatory to the federal judiciary of Rio de Janeiro to serve notice on Mr. Abdalla for presentation of a new preliminary defense due to the amendment to the accusation. With the case being digitalized, a writ pointing to failures in the digitalization was presented on January 1, 2021, and a judgment was given ordering the secretariat to check the digitalization, to correct the failings, and subsequently serve notice on the defendant to present preliminary defense. This regularization of the digitalization, and service of notice on the defendant for presentation of a new preliminary defense, is still pending.
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A third criminal action, also about tax evasion, was presented in the first Federal Court of Americana – judiciary of São Paulo State. The Federal Public Attorneys allege omission of information, false declaration to the tax authorities, and attempt to defraud tax inspection. The case involves more than one company chaired and managed by Mr. Abdalla. After the preliminary defense, Mr. Abdalla is of the view that the accusation should be rejected, that the case is null in its entirety, and that on the merit the accusation cannot proceed, since an acquittal judgment has been given. However, due to the interim decision by the Chair of the Federal Supreme Court on July 15, 2019, in the Special Appeal RE 1.55.941/SP, with ergo omnes effect as precedent over all other cases, dismissal of the criminal action was requested, and granted. On January 30, 2020, a memberfurther decision ruled that the case should be resumed, due to the understanding stated by the Full Supreme Court in the final judgment on the said Special Appeal. The case records in the criminal action have been digitalized, and designation of the date for hearing of evidence and judgment is pending.
Executive Board
The Executive Board comprises seven Executive Officers, who may be shareholders, resident in Brazil, elected by the Board of Directors for a period of two years, subject to the requirements of the applicable legislation and regulations. Re-election for a maximum of three consecutive periods of office is permitted. The periods of office of the present members of the Board of Directors of Light S.A. and Light Serviços de Eletricidade S.A.
Daniel Alves Ferreira—Mr. Ferreira was born in 1972. He is the lawyer responsible for Mass Litigation, and Capital markets,expire at the MPMAE law office, working in law on Consumer relations, Civil Law and Corporate Law. He took part in the Civil Procedure Law Conferences of the Bar Institute of São Paulo on: Aspects of the Reform of the Code of Civil Procedure; Stable Union; and Alterations to the Code of Civil Procedure.
Saulo Alves Pereira Junior – Mr. Pereira has a degree in Electrical Engineering from the Pontifícia Universidade Católica of Minas Gerais (PUC-MG), and postgraduate degrees in Works and Services Budget Planning from the Instituto de Educação Continuada of PUC–MG and Business Administration from the Federal University of Bahia. He also concluded a Corporate MBA from the Dom Cabral Foundation. He began his career in 1993 as an intern in Cemig’s Operations Center. In 1995 he joined Construtel Projetos e Construções Ltda, as an engineer in planning and budget coordination, and in 1998 he became General Manager of that company’s Business Unit in Bahia. In 2000, he joined the Andrade Gutierrez Group, and in 2004 became Chief Sales Officer of Construtora Andrade Gutierrez S.A. Since 2007, at Andrade Gutierrez Concessões S.A., he has been actively participating in the group’s consolidation in the electricity sector. Since 2010 he has been a member of the Boards of Directors of Cemig, Cemig D and Cemig GT.
Helvécio Miranda Magalhães – Mr. Magalhães, born in 1963, was Health Secretary of the Municipality of Belo Horizonte from 2003 to 2008, Municipal Secretary for Budget, Planning and Information of the municipality of Belo Horizonte in 2009 and 2010; and Healthcare Secretary of the National Health Ministry from 2011 to 2014. He has a degree in medicine, with specialization in epidemiology, from Minas Gerais Federal University (UFMG), and a doctorate in Community Health from Unicamp.
Patrícia Gracindo Marques de Assis Bentes – Mrs. Bentes, born in 1965, graduated the course of Business Administration of the Federal University of Rio de Janeiro (“UFRJ”) and earned a master degree in Finances and Marketing from the University of São Paulo (“USP”) in 1996. Obtained certifications Series 7 and 63 from the U.S. National Association of Securities Dealers (NASD) in 1996 and operated in the American capital market under such licenses until 2001. Independent Investment Agent registered at the Comissão de Valores Mobiliarios (“CVM”) since 2008. Worked at CITIGROUP between September/88 – September/01, where participated of privatization processes with use of privatization currencies for debt conversion. Organized and managed the department responsible for elaborating industry studies and risk analysis involving debt and capital for publicly traded companies in Brazil, Chile and Argentina. Was transferred in 1995 to New York where structured operations for the capital market, such as: Structuring of the 1st Credit Rights Investment Fund (“FIDC”) with CDC portfolios, personal credit and credit cards combined, in the amount of BRL 1 billion for Unibanco; Structuring of a USD 200 million financing for the construction of a thermoelectric power plant at the Southern Cone for Maire Engineering, multinational construction company, with Brazilian Development Bank (“BNDES”), Eximbank and Hermes resources; Structuring of the acquisition of CEEE distributor of energy, located at the south east region, by foreign investors, in the amount of USD 75 million, including the leveraged funding (LBO); Structuring of the fund raise in the amount of BRL 40 million for Canguru Embalagens, through a securitization covered by future receivables, without a supply agreement, the FIDC Canguru, with S&P rating; Structuring and distribution of Negresco CFI 1st FIDC, in the amount of BRL 60 million with an S&P brAAAf rating; Structuring of Risk Participation Agreements for Volvo (Mexico) and Bematech (Brazil); Structuring and distribution of Banco Volvo 1st fund raise through a subordinated Certificate of Deposit (“CDB”) of BRL 60 million, with a 10 years term and payment of principal at the final due date. Worked at BANCO BRACCE between March/11 and September/12, as the Executive Vice-President, where hired, shaped and trained the relationships team; Defined and executed strategies for the disclosure and consolidation of the Bank’s brand; Proposed and implemented the organization’s cultural bases (mission, vision and values) and codes of conduct for all employees. Worked in a partnership with the Bank’s controlling partners in the fundraising process from local investors and high income international investors. The efforts resulted in the entry of foreign investors from Southern Cone, Europe and Silicon Valley that acquired a relevant share of the Bank’s controlling holding. In 18 months, formed a portfolio with 553 names, among prospects and issuer clients, and 215 investors, with a dealflow of 47 operations in the approximate amount of BRL 2 billion. Executive-Partner at ESTATICE HOLDINGS, since October/12, where works in the structuring of fundraisings for corporate clients through FIDCs, FII, CRA, CRI and other securities. Projects in which provides consulting services for the World Bank with respect to the structuring of a fundraising for a Project of Energy Efficiency developed in association with the Municipal Administrations of the cities of Rio de Janeiro and Belo Horizonte.
Board of Executive Officers
Our Executive Board, made up of eleven Executive Officers, is responsible for putting into effect the decisions of our Board of Directors and for day-to-day management. The members of the Executive Board – the Executive Officers – have individual responsibilities established in our by-laws and hold their positions for a period of office of three years. The period of office of the present Executive Officers expires at the first Meeting of the Board of Directors following the Annual General Meeting of StockholdersShareholders to be held in April 2016.2022. The Executive Officers are elected by the Board of Directors. Ordinary meetings are heldmeets ordinarily at least twice per month; extraordinary meetings are heldmonth, and extraordinarily whenever called by the Chief Executive Officer or CEO, or by two Executive Officers other than the CEO.Officers.
The Executive Officers exercise their positions as full-time occupations in exclusive dedication to the service of the Company. They may simultaneouslyat the same time exercise non-remunerated positions in the management of the Company’s wholly-owned or other subsidiaries, or affiliated companies, at the option of the Board of Directors. They do, however, obligatorily hold and exercise, however, the corresponding positions in the wholly-owned subsidiaries Cemig DistributionCEMIG Distribuição S.A. and Cemig Generation and Transmission.CEMIG Geração e Transmissão S.A.
The Executive Board is responsible for the dailycurrent management of the Company’s business, subject to obedience to the obligation to obey the Long-Term Strategic Plan,Long-term Strategy, the Multi-year Strategic ImplementationBusiness Plan, and the Annual Budget.
Some decisions, as outlinedBudget, which must be prepared and approved in Section 4 of Clause 21accordance with the by-laws. The Annual Budget shall reflect the Company’s Multi-year Business Plan and, consequently, the Long-Term Strategy, and must give details of the by-laws, requireoperational revenue and expenses, costs and capital expenditure, cash flow, the approvalamount to be allocated to the payment of dividends, investments of cash from the Executive Board.
In the eventCompany’s own funds or from funds of absence, leave, resignation or vacancy of the post of the Chief Executive Officer, the Deputy Chief Executive Officer exercises the duties of the Chief Executive Officer, for whatever period the absence or leave may last,third parties, and in the event of vacancy or impediment or resignation, until the post is filled by an appointment made by the Board of Directors. In the event of absence, leave, resignation or vacancy of the post of any of the other members ofdata that the Executive Board considers to be necessary.
Subject to the Executive Board may, by approval of a majority of its members, attribute the exercise of the respective functions to another Executive Officer, for as long as the period of absence or leave – or,provisions in the eventpreceding Clauses and good corporate governance practices, it shall be the duty of vacancy, the impediment or resignation – lasts, until the post is filled by the Board of Directors. The Chief Executive Officer or aeach member of the Executive Board elected into comply with these by-laws, the way described above shall holddecisions of the position forGeneral Meeting of Shareholders, and of the periodBoard of time remaining inDirectors, the substituted officer’s term.Internal Regulations and decisions of the Executive Board, these being duties of the related Chief Officers’ Offices.
The following are the names, positions and dates of initialfirst appointment of ourthe Members of the Executive Officers are as follows:
Board:
Executive Board | ||||||
| Nomination | Date of | ||||
| Chief Executive Officer | Reynaldo Passanezi Filho | January | |||
| Dimas Costa | September | ||||
| Chief | Marney Tadeu Antunes | ||||
| Chief Generation and Transmission Officer | Paulo Mota Henriques | ||||
| Maurício Dall’Agnese | |||||
| Chief | Leonardo George de Magalhães | ||||
| Chief Counsel and Chief Officer for | Eduardo Soares | ||||
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Mauro Borges LemosReynaldo Passanezi Filho – Mr. Borges, born in 1965, is a graduate of the Senior Executive Program, the principal course in the Stanford University Graduate School of Business (July-August 2018); he attended the CEO course of the Getúlio Vargas Foundation in Entrepreneurial Management from March 2015 to July 2017; has beena doctorate in economics from São Paulo University, 1995-2000; a master’s degree in economics from the Professor of Economics at the Federal University of Minas Gerais since 1980. WorkingCampinas, 1987-92, with distinction, for the Development, Industrydissertation in Industrial Organization on the subject ‘financial Solutions and Foreign Trade Ministry since 2013, he served as Brazil’s MinisterPrivatization for Development, Industry and Foreign Trade from February 2014 to January 2015. He was President of Brazil’s Industrial Development Agency (ABTI) from 2011 to 2014. He hasBrazilian Steel’; a degree in economics from the FederalSão Paulo University, of Minas Gerais, with a doctorate1983-86 (sixth-placed in economics from London University, and post-graduate studies at the University of Illinois, USA,Entrance examination); and the University of Paris.
Paulo Roberto Castellari Porchia – Mr. Castellari Porchia has a degree in business managementLaw from the Business Management SchoolPontifícia Universidade Católica of São Paulo, (EASP)1983-89. He is a member of the Brazilian Bar Association (OAB). From 1994 to 1996 he was Personal Assistant to the CFOHe has wide experience in positions of Minorco South America in Brazil. In 1996–98 he was Project Manager for the implementation of SAP at Tarmacsenior leadership in the UK;private sector, the financial sector and the public sector; excellence in 1998–2000 he worked for his MBA at the London Business School while also working as Associated Corporate Finance Director at Minorco Ltd,strategy and management, with a track record of success in England; from 2000 to 2003 he was Personal Assistant to the COOprivatizations, restructurings and growth; solid qualification in finance and mergers and acquisitions, with profound knowledge of AngloGold Ashanti LtdLatin America and infrastructure, especially electricity.
Dimas Costa, born in South Africa. Over the years 2003–2015 he worked for Anglo American plc. From 2003 to 2011 he was Director of the Center of Excellence of Anglo Base Metals in England, and Director for Marketing and New Business in Brazil. In 2009–2011 he was CEO of the Phosphates and Niobium businesses in Brazil; and in 2011–2016 he was CEO of Minério de Ferro Brasil (Minas Rio). Since 2016 he has been a Senior Consultant in the Industrial Group of Boston Consulting Group International.
Dimas Costa – Mr. Costa1954, earned a degree in electrical engineering from PUC Minas in 1978. In 1978–From 1978 to 1980, he was an Engineer in the Water & Energy Department of Minas Gerais, where he was Division Head from 1980 to 1985. From 1978 to 1980, he worked as an engineer in the Minas Gerais State Water and& Energy Department, where he was a Division Head from 1980 to 1985. With Cemig,Department. At CEMIG, in 1985–1987,1985-1987, he was an engineer in the Distribution Senior Management Unit; from 1987 to 1995 he was an Assistantassistant in the Senior Power Planning & Development Management Unit for Energy Planning and Development;Unit; from 1995 to 1998 he was Managermanager of the Energy Development Department; from 1998 to 2007, he was Sales Managermanager for Corporate Clients;sales to corporate clients; from 2007 to 2010, he wasgeneral manager for sales to clients of the Company’s General Manager for Client Sales;company; and fromin 2011 to 2013, hegeneral manager of the company for sales to the company’s clients with incentive benefits. He was the Company’s General Manager for Incentive-bearing Client Sales. Since 2013 he has beenformerly Director and managing partner of Ponta Energia Consultores Associados Ltda.Ltda, from 2013 to 2016.
Franklin Moreira GonçalvesMarney Tadeu Antunes – Born, born in 1970, and affiliated with the CUT group of unions, from 2003 to 2009, Mr. Gonçalves1962, has been Energy Secretary of the National Federation of Urban Workers (FNU), and was President of FNU-CUT , and director of the Electricity Workers’ Unions of Minas Gerais (Sindieletro–MG) from 1993 to 2014. At Cemig, he has been a Technical Officer in System Operations Supervision and Control in the Generation and Transmission Senior Management unit, and in Distribution Operations Engineering, in the Distribution Senior Management unit. He is also a member of the Board of Directors of Cemig, Cemig D and Cemig GT, the Board of Directors of Transmissora Brasileira de Energia (TBE), the Federal Renewable Energy Sources Council of the Brazil Maior plan; the State Energy Council of Minas Gerais; and the Minas Gerais State Science and Technology Council. He earned a degree in systems analysiselectrical engineering from Newton Paiva Unicentrothe College of Belo Horizonte,Engineering of Sorocaba, with specialization and postgraduate degrees and studies in 1996;subjects including Management, Strategy, Project Management, Marginal Costs and completed his MBA in Leadership and Management of State Companies through the FranklinCovey Business School/Coge Foundation, Rio de Janeiro, in 2013.
César Vaz de Melo Fernandes – From 1995 to 1998, Mr. Vaz de Melo worked as Cemig’s General Manager for DistributionElectricity Tariffs. He has 34 years’ experience in the Minas Triangle Region. HeBrazilian electricity sector. Most recently, he was Cemig’s General Manager forChief Distribution Engineering, from 1998Officer of the electricity distributor EDP in São Paulo (from 2015 to 20002020) and General Manager for Distribution Operation and Maintenance, from 2000 to 2002. From 2003 to 2005, he served at Cemig as the General Manager, Distribution, for the Metropolitan Region of Belo Horizonte. Following that period, Mr. Vaz de Melo became the Executive Coordinator of Cemig’s Hydroelectric Projects in Amazônia and served in that position until 2009. From 2005 to 2007 he cumulated the position ofSales Director of Construction for Furnas. In 2009 and 2010, he was the General Manager for Planning and Operationdistribution companies of Cemig GT and was appointed Cemig’s General Manager for Business Developmentthe CPFL Energia Group (2011–2015).
Paulo Mota Henrique, born in 2015. Mr. Vaz de Melo holds1962, has a degree in electrical engineering from the Federal University of Minas Gerais (UFMG), and an MBA in Finance and Management from IBMEC.
Fabiano Maia Pereira – Since 2003 Mr. Pereira has worked as a finance and control analyst in the Federal Treasury Department of the Finance Ministry, operating in the management of domestic and external public debt, and in development of federal programs based on credit transactions. He is also a member of the Audit Boards of BB Cartões S.A., BB Capitalização S.A. and BB DTVM S.A. He has a degree in economics from the Federal University of Juiz de Fora, a master’s degreeMBA from the Getúlio Vargas Foundation, and specialization in economicsIndustrial Automation Engineering from the Federal University of Minas Gerais (UFMG). His professional career began at CEMIG in 1987, where he worked as General Manager for Transmission in Belo Horizonte from 2004 to 2007, and was responsible for the technical, financial and administrative management of the assets of substations and transmissions lines of ultra-high voltage belonging to the national grid, and other transmission facilities. He was General Manager, Generation and Transmission Management Control, CEMIG GT, from 2007 to 2009: - where responsibilities included planning, implementation, coordination and development of Strategy Management in the Chief Generation and Transmission Officer's Office. In 2009, he became General Manager for Coordination, Generation and Transmission, CEMIG GT – responsible for management of corporate processes in the office of the Chief Generation and Transmission Officer’s Office, and planning and management of Generation and Transmission projects in companies and wholly owned subsidiaries. He also served as General Manager of Taesa (from 2009 to 2011) and Director of the Brazilian Power Transmission Companies’ Association (‘Abrate’) (from 2017 to 2019).
Maurício Dall’Agnese, born in 1984, has a doctoratedegree in economics from theSão Paulo University of Brasília (UnB).
Márcio Lucio Serrano – Mr. Serrano has degrees in natural history, biological sciences and medicine from the Federal University of Minas Gerais (UFMG)(USP), and postgraduate degrees:wide experience in employment-related medicine from Minas Gerais Medical College (National Employment Medicine Association);M&A processes in psychiatry from Gama Filho University (Brazilian Psychiatry Association); and in psychoanalysis (Minas Gerais Psychoanalysis Council). He served as Chief Corporate Management Officer of Cemig, Cemig D and Cemig GT in 2015-16. In the municipality of Belo Horizonte, he was Administration Secretary for the Northern Region in 2008-9, and Municipal Human Resources Secretary from 2009 to 2012. He served as director of the Southeastern Region of Fonac, the National Forum of Administration Secretaries of State Capitals. At the Biocor Institute, he was Coordinating Doctor for Occupational Health from 2012 to 2014. In the corporate sector, he has been occupational physician at Mineração Morro Velho (Anglo Gold Corporation). In the Minas Gerais State Industries’ Federation (Fiemg), he created the Occupational Health Program for the Furniture Industry. At Unimed Belo Horizonte he was founder and coordinator of the Occupational Health Department. In the Regional Medical Council (CRM) of Minas Geraiselectric power sector. Since April 2020 he has served as a Member of the Technical CouncilCEMIG’s Associate Director for Employment-related medicine. At V&M do BrasilStrategy and Innovation. Previously he was Health Advisor to the Sidertube Foundationhas served in leadership positions at BBVA, ISA CTEEP and acted as Manager of its Health Self-management Plan, and of Employment-related Medicine. At Vallourec & Sumitomo do Brasil (VSB), he served as consultant to the Human Resources and Occupational Health Department. He is a Member of the Council of the Brazilian Academy for Occupational Medicine.Vale.
Evandro Leite Vasconcelos – Until 2014 Mr. Vasconcelos was the Chief Energy Officer of Light S.A., and also its chief New Business Development Officer. He worked at Cemig from 1983 to 2010, as manager of the Operational Hydro-meteorological Division and the Energy Planning Department. He was General Manager for Coordination of Generation and Transmission, General Manager for Generation, and General Manager for Generation and Transmission Planning and Operation. He was also Chief Generation Officer and CEO for Rosal Energia S.A., a wholly-owned subsidiary of Cemig. Currently he holds a position on the Boards of Directors of Renova Energia S.A., Light Esco PrestaçãoLeonardo George de Serviços S.A. and Cepel. HeMagalhães has a degree in civil engineering fromaccounting, and has been an employee of CEMIG for more than 30 years. Since 2008, he has worked in the Federal UniversityController’s Department, with numerous executive responsibilities in the Finance Department including accounting, tax planning, financial planning, budget, valuation of Minas Gerais (UFMG),investments, cash management and forecasting of results.
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Eduardo Soares is a lawyer, with MBAa career of 30 years in business management from the Getúlio Vargas Foundation (FGV),profession, dedicated to the areas of infrastructure, energy, structured financings, project finance, and a master’s degree in water resources engineering from the COPPE postgraduate school of Rio de Janeiro Federal University (UFRJ).administrative and corporate law. He has lecturedwide experience in physics in the Pitágoras Learning System,financial transactions, M&A, restructurings and in hydrology to the civil engineering course of PUC University of Minas Gerais.stockholding transactions.
Raul Lycurgo Leite – Mr. Leite has worked as a Federal Attorney in the offices of the Brazilian National Procurator-General and Advocate-General since 2002. Since 2011 he has been a legal advisor to the Ministry of Development, Industry and Foreign Trade. He also does work for the office of the Procurator-General of the National Terrestrial Transport Agency (ANTT). He was part of the ‘task force’ formed by the Procurator-General and Advocate-General to organize the 2nd Stage (Phase II) and the 3rd Stage (Phase I) of the program to award federal highway concessions, to combat transport of pirated goods on interstate and international buses, and to put into effect the Pro-Pass Brazil Program, which aims to put 98% of the interstate highway passenger lines out to competitive tender, and create a propitious environment for bidding to develop the High Speed Train (Trem de Alta Velocidade). He is a member of the Audit Boards of the Brazilian Industrial Development Agency (ABDI), the Brazilian Agency for Promotion of Exports and Investments (ApexBrasil), and Finame, and a substitute member of the Audit Board of the BNDES (National Development Bank). He has a degree in law from the Ensino Unificado School of Brasília (CEUB), with post-graduation in tax law and policy; a degree in Economic and Company Law from the Getúlio Vargas Foundation; and a master’s degree in International Law from the Washington College of Law at American University, Washington, DC.
Luís Fernando Paroli Santos – Mr. Paroli served as Chief Administrative Officer of Furnas Centrais Elétricas S.A. from 2008 to January 2016. As from January 2016 he has been the Advisor on Corporate Communication to Cemig’s CEO. From 2011 to 2014 Mr. Santos was Vice-President of the COGE Foundation. From November 2014 to December 2015, he was the President of the Foundation and Chair of the Governing Council of Cemig. He has served on the Board of Directors of the following companies: from May 12, 2010 to April 11, 2012 at Retiro Baixo Energética S.A.; from April 30, 2010 to March 29, 2012 at Companhia Transleste de Transmissão; from April 26, 2011 to March 29, 2012 at Companhia Transirapé de Transmissão, Companhia Transudeste de Transmissão, Companhia de Transmissão Centroeste de Minas, and Companhia de Transmissão Furnas-Pimenta II. Since 2004, Mr. Santos has been proprietor and director of the Capoeira Grande Farm in Elói Mendes, Minas Gerais, handling its financial administration and fund management.
Compensation of Members of the Board of Directors and Executive OfficersBoard
The total compensationcosts of key personnel, comprising the member ofExecutive Board, the Fiscal Council, the Audit Committee and the Board of Directors in 2020, 2019 and 2018, are within the Executive Board,limits approved at a General Shareholders’ Meeting, and Audit Board, including benefitsthe effects on the income statements of any type, is established by the General Meeting of Stockholders, in accordance with the legislation from time to time in force.
In the fiscal yearyears ended, December 31, 2015 the total compensation paid to Cemig’s directors and officers and to the directors and officers of Cemig Distribution and Cemig Generation and Transmission, including health insurance, paid leave, bonuses, post-employment and other benefits, totaled approximately R$15,469 million.are as follows:
The following chart shows the compensation paid to the members of our Board of Directors, Executive Board, Audit Board and Support Committee members in 2015:
| (in millions of Reais) | 2020 | 2019 | 2018 |
| Remuneration | 27 | 25 | 34 |
| Profit sharing (reversal) | 9 | 6 | 4 |
| Assistance benefits | 1 | 1 | 3 |
| Total | 37 | 32 | 41 |
| Compensation in the year ended December 31, 2015 (R$’000) | ||||||||||||
| Board of Directors | Executive Officers | Audit Board | ||||||||||
Number of members (1) | 28 | 11 | 10 | |||||||||
Total compensation | 3,210 | 11,370 | 888 | |||||||||
There is no contract between the CompanyCEMIG or its wholly-owned subsidiaries subsidiaries or affiliated companiesand affiliates and any director or officer of the CompanyCEMIG that grants any kind of post-employmentretirement benefits, other than the retirement plan of Forluz and the healthcare plan CEMIG Saúde, which is applicable to the Executive Officers (as long as they qualify under the rules and regulations of Forluz) on the same terms as for other employees.
The Audit BoardFiscal Council
Under Cemig’sCEMIG’s by-laws, its Audit BoardFiscal Council is established permanently. It is required to meet once every three months, but in practice it has been meeting once a month.sets forth ordinary monthly meetings and extraordinary meetings whenever necessary. It comprises three to five members, and their respective substitute members, elected by the stockholdersshareholders at the Annual General Meeting, for a term of one business year.two years. A member may be re-elected a total of two times. The holders of the preferred shares, as a group, are entitled to elect one member of the Audit BoardFiscal Council and a corresponding substitute. A single minority holder of common shares, or a group of minority holders of common shares, with a joint holdinginterest of at least 10% of the total shares, has the right to elect one member of the Audit BoardFiscal Council and a corresponding substitute. The majority of the members shall be elected by the controlling shareholder and at least one member shall be a public servant. The primary responsibility of the Audit Board,Fiscal Council, which is independent from management and from the independent external auditors appointed by the Board of Directors, is to review the financial statements and report on them to the stockholders.shareholders. The Audit BoardFiscal Council is also responsible for providing opinions on any proposals by management to be submitted to the General Meeting of StockholdersShareholders related to: (i) changes in the share capital; (ii) issue of debentures or warrants; (iii) capital expenditures plans and budgets; (iv) distribution of dividends; (v) changes in the corporate structure; or (vi) corporate reorganization, such as mergers, consolidations and spin-offs
spin-offs. The Audit BoardFiscal Council also examines the activities of management and reports on them to the stockholders.shareholders.
The current members of the Audit Board,Fiscal Council and their substitute members, all of whose terms expire at the Annual General Meeting of StockholdersShareholders to be held in 2016 to approve the financial statements for the fiscal year 2015,2020, are as follows:
Name | Position | Date of initial | ||
| Chair Member | |||
| Substitute member | |||
| Member | |||
| Substitute member | |||
| Member | |||
| Substitute member | |||
| Member | |||
| Substitute member | |||
| Member | |||
| Substitute member |
| (1) | Appointed by |
| (2) | Appointed |
| (3) | Appointed by the minority of the holders of voting shares. |
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Below is a brief biography of each member of our Audit Board:Fiscal Council:
Charles Carvalho Guedes –Gustavo de Oliveira Barbosa, Mr. Guedesborn in 1965, has a degree in data processingaccounting from UNICEUB (‘Centro de Ensino Unificado de Brasília’), and post-graduation, with MBA in executive management of Pension Funds, from the Federal District University Centre (‘ICAT/UDF’). He was Chief Executive Officer of the Rio de Janeiro State Pension Fund (‘Rioprevidência’) from 2010 to 2016. He then served as State Secretary for Finance and Planning of Rio de Janeiro from 2016 to 2018; Technical Banking Advisor in the Regional Headquarters for Public Legal Entities at Caixa Econômica, from 2018 to 2019, and consultant at Barbosa & Mello Consultoria in 2019. He is currently State Secretary for Finance in the Minas Gerais State Government.
Igor Mascarenhas Eto, born in 1991, has a degree in Business Administration from IBMEC Minas Gerais. He was Commercial Annalist in Ceres Finances from October 2012 to jolly 2013, Finance Intern in Libe Construction Company from July 2013 to December 2013, owner-partner of ArteClube Communication Company from January 2015 to November 2016 and of Person Strategic Management and Consulting Company from May 2014 to November 2016 and to January 2018 to august 2019. Igor was also Project Manager in 2LM Strategic Management and Consulting Company from March 2016 to December 2017 and he developed activities in Partido Novo (political party), in Belo Horizonte city, as Secretary of Finances from April 2017 to April 2019, Administration Coordination of Campanha Romeu Zema Governador (‘Governor Romeu Zema Campaign’) from August 2018 to October 2018, Party Expansion Leader of Metropolitan Region of Belo Horizonte city (‘RMBH’) since August 2017. Subsequently, he was General Secretary of Minas Gerais Government from January 2019 to March 2020 and he is currently State Secretary in Minas Gerais Government since March 2020.
Fernando Scharlack Marcato, born in 1978, has a master’s degree in Public Law from Paris University 1 (‘Panthéon-Sorbonne’). He worked for over 12 years in the multidisciplinary structuring of infrastructure projects and he was also Executive Secretary for New Business at SABESP – Basic Sanitation Company of São Paulo state for 5 years. He has been a law teacher for 8 years in law course at Getúlio Vargas Foundation of São Paulo (‘FGV Direito-SP’), having coordinated and organized FGV’s first post-graduate course in infrastructure Law, in addition to coordinating FGV’s PPP’s (Public-Private Partnerships), Concession and Privatizations Study Group and he was co-founder of Infracast, first Portuguese Language podcast and social network channel on the topic PPP’s (‘Public-Private Partnerships’), Concession and Privatizations. He was also founding partner of GO Association, multidisciplinary consultancy in the Brazil’s infrastructure and co-author of the book Infrastructure Law, vol 1, Saraiva Publisher Company in 2017. He is currently the State Secretary for Infrastructure and Mobility in the Minas Gerais Government.
Carlos Eduardo Amaral Pereira da Silva, born in 1969, has a degree in Medicine from the Federal University of Juiz de Fora (UFJF), with MBA in management of Business and Projects from the same university, and MBA in Patient Health and Safety Management from the Juiz de Fora Medicine & Health School (‘Suprema’). Since 1994, he has served as a neurosurgeon at the Minas Gerais State Hospital Foundation (‘FHEMIG’), also serving since 1998 at Juiz de Fora Federal University (‘UFJF’). Since 1996, he has been a neurosurgeon at the Monte Sinai Hospital (‘HMS-NCI’). He is currently State Secretary for Health in the Minas Gerais State Government.
Elizabeth Jucá e Mello Jacometti, born in 1960, has a degree in Economics, specialization course in finance, from Juiz de Fora Federal University (UFJF), and master’s degree in Leadership and management from the Public Leadership Centre (‘CLP’)/��Instituto Singularidade. From 2013 to 2016 she was Planning and Management Secretary of the Prefecture of Juiz de Fora, where she was also Municipal Health Secretary from 2016 to 2018. She is currently State Secretary for Social Development in the Minas Gerais State Government.
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Fernando Passalio de Avelar, born in 1978, has a degree in Business Administration from Estácio de Sá College, postgraduate degree in Government Audit from Gama Filho Foundation and postgraduate degree in Financial Institutions Management from Pontifical Catholic University of Minas Gerais (‘PUC Minas’). Fernando has professional background, included as business person, and an academic experience in private financial institutions as well as in public agencies as government employee of the State Public Finance Secretary since 2008. He worked, since 2009, as internal auditor and, for many years, as public manager working on public projects and public policies aimed at supporting the productive sector.
Michele da Silva Gonsales Torres, born in 1983, is a lawyer specialized in Corporate Law at Mackenzie University and Compliance Specialist at LEC-Legal, Ethics & Compliance. Member of the Compliance Committee of IASP/SP, currently is responsible of contracts and compliance office area and management office since 2015 at the law firm ALFM Advogados. Michele has worked for many years as Legal Manager of a medium-sized construction and engineering company, and has been operating with company risk management, preparing Codes of Conduct and implementing Compliances Program. Moreover, Michele is specialist in analysis, preparation and management of all sort of contracts, elaboration of corporate acts, strategic legal planning for business deals. She was the Fiscal Council Member of COMPANHIA ENERGÉTICA DE MINAS GERAIS-CEMIG (2018-2019) and was elected again in 2020 (2020-2022). She is also the Fiscal Council Member of Light S.A. (2020-2021).
Ronaldo Dias, born in 1946, has a degree in Accounting from Faculdade Moraes Júnior. From 2014 to 2016 he was a substitute member of the Fiscal Council of CEG, the Rio de Janeiro Gas Distribution Company. Subsequently he was a substitute member of the Fiscal Council of CEMIG, from 2016 to 2018. Since 2017 he has been a director of Banco Clássico.
Cláudio Morais Machado, born in 1943, has a degree in Accounting, with updating from 1998 to 2017, and serves as an Accounting Expert Witness for State and Federal Courts of Rio Grande do Sul, with focus on finance. He has lectured at postgraduate courses in accounting and auditing from 1973 to 2015; giving lectures and serving as facilitator in courses of Ibracon (6th Regional Sector), CRCRS and IBGC; and is a university lecturer in postgraduate courses specialized in accounting, auditing and corporate governance, since 1990. He has also served as a Member of the Fiscal Councils of the following companies: Grupo Everest Hotel, do Rio de Janeiro, 2015; Profarma Distribuidora de Produtos Farmacêuticos S.A., Rio, 2015; Tupi S.A., Joinville, Santa Catarina, 2010–2016; Porto Alegre (city of Rio Grande do Sul), which he chaired since 2003; the holding company Paludo Participações S.A., of Porto Alegre (RS), since 2014; and the NGO Fundação Projeto Pescar, Porto Alegre, since 2012. From 2011 to 2015 he served as substitute member of the Fiscal Council of the Management Development Institute (‘IDG’) of Nova Lima, Minas Gerais. He joined the Fiscal Council of CEMIG, nominated by BNDESPar, in 2018.
Carlos Roberto de Albuquerque Sá, born in 1950, has a degree in accounting and economics, and a postgraduate degree in Financefinance, from PUC (‘Pontifícia Universidade Católica’) of Rio de Janeiro. Since 2011 he has been coordinator of the Audit Committee of Lojas Marisa; a since 2016 has been a member of the Fiscal Council of the holding company of Itaú/ Unibanco, and of Marfig Global Foods. He is a partner in the company CS Consult.
The Audit Committee
The Audit Committee is an independent, consultative body, permanently established, with its own budget allocation. Its objective is to provide advice and assistance to the Board of Directors, to which it reports. It also has the responsibility for such other activities as are attributed to it by legislation.
The main activities conducted by the Audit Committee are related to: (i) supervision of independent auditors activities, (ii) supervision of the activities carried out in the areas of internal control, internal audit and preparation of the financial statements of the Company, and (iii) monitor the quality and integrity of the internal control mechanisms, the financial statements, information and measurements disclosed by the Company.
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The Audit Committee has four members, all of which are independent, nominated and elected by the Board of Directors in the first meeting after the Annual General Meeting for periods of office of three years, not to run concurrently. One re-election is permitted.
The Audit Committee has operational autonomy to conduct or order consultations, evaluations and investigations within the scope of its activities, including contracting and use of independent external specialists.
The Audit Committee must have means for receiving accusations, including those of a confidential nature, internal and external to the Company, on subjects related to its area of duties.
The Audit Committee may exercise its duties and responsibilities in relation to such wholly-owned and other subsidiaries of the Company as adopt the structure of joint sharing of an Audit Committee.
Name | Position |
| Pedro Carlos de Mello | Coordinator |
| Afonso Henriques Moreira Santos | Member |
| Márcio de Lima Leite | Member |
| Roberto Tommasetti | Member |
The following is a brief biography of each member of our Audit Committee:
Pedro Carlos de Mello, born in 1952, has a degree in accounting from the Federal District Unified Teaching Association (AEUDF), and a degree in Economics from the Political Sciences and Economics College of Cruz Alta. He has an MBA degree in controllership from Fipecafi (The Accounting, Actuarial and Financial Research Institute Foundation of São Paulo University – USP), MBA in training of executives from Coppead (the Postgraduate Management Research Institute of Rio de Janeiro Federal University – ‘UFRJ’), and postgraduate degree in accounting, costs and auditing from the Getúlio Vargas Foundation (FGV)(‘FGV’). SinceFor the Accounting Management Unit of Banco do Brasil S.A. in Brasília (DF), he was Chief Accountant from April 2007 to March 2007, he has been2009; Executive Manager for Supervision of Brazilian Subsidiaries and Foreign Offices (‘Gesex’) from April 1999 to April 2007; and acted as General Manager for Accounting, in absences of the principal office holder (in Brasília), from 1998 to April 2007. He was General Coordinator of Management Information for Stockholdings. From April 2010 to Aprilthe Technical Analysis Director (‘DITEC’) of the National Pension Plan Authority (‘Previc’) in 2014, he wasand a substitute member of the Audit BoardFiscal Council of Eletrobrás.Usiminas in 2016 and 2017. Since April 2014,2016 he has been a member of the Audit BoardCommittee of Petrobras Biocombustível – Petrobio. Since March 2015,the Minas Gerais Development Bank (‘BDMG’).
Afonso Henriques Moreira Santos, born in 1957, has a degree in Electric Engineering. From April, 2019 to December of the same year he has been an alternatewas member of the Board of Directors of IBR Brasil RessegurosLight S.A. Board member at IX Estudos e Projetos LTDA from October, 2006 to April, 2019. He served as full time professor at the Federal University of Itajubá from January 1980 to March 2016.
Edson Moura Soares –Márcio de Lima Leite Head of the State Office of the Government of the State of Minas Gerais. From June 2007 to December 2010, he was, born in 1971, has a parliamentary assistant to the Chamber of Deputies in Brasília, Federal District. From January 2011 to December 2014 he was the Head of the Office of the Chamber of Deputies in Brasília.
Rafael Amorim de Amorim – Mr. Rafael Amorim de Amorim is a member of the Audit Board of Cemig S.A. He is a lawyer and company manager, and holds a Master’s Degree in Lawlaw degree from the Stricto Sensu Postgraduate Program ofMilton Campos Faculty and in accounting from the Pontifícia Universidade Católica de Brasĺlia (UCB-DF). He is a Legislative Consultant in the area of Public Administrative Law for the Lower House of Congress (the Chamber of Deputies), and Administrative Supervision Sub-comptroller in the Comptroller General’s Department of the State(‘PUC’) of Minas Gerais. He has a postgraduate degree in Strategic Management with specialization in finance from Minas Gerais Federal University (‘UFMG’), and a master’s degree in law, economic and social relations from the Milton Campos Faculty. He is a Lecturer at the Universitycurrently director of the Federal District (UDF)Commercial Association of Minas Gerais (‘ACMinas’); a guest professor at PUC of Minas Gerais; and a course instructor for the Tax Administration SchoolChief Counsel and Business Development Director at Fiat Chrysler Automobiles (‘FIAT’) of the Economy Ministry (ESAF/MF) and the Chamber of Deputies Training Center (Cefor). He has served in a variety of posts in the federal public administration: in the office of the Comptroller-General of the Republic; the Industry, Development and Foreign Trade Ministry; and the Office of the Federal Attorney General. He served on the Audit Board of Light S.A. for 2015–16.Latin America.
Newton Brandão Ferraz Ramos –Roberto Tommasetti,Mr. Ramos born in 1973, has a degree in accountingEconomics from PUC University of Minas Gerais, completed postgraduate studies in management at FUMEC/MG in 1994, and has an MBA in Finance from the Dom Cabral Foundation. From 1993 to 1994 he worked as a supervisor at Branaço Produtos Siderúrgicos S.A.‘Federico II’ (Italy), revalidated by Rio de Janeiro State University (‘UERJ’), and in 1994–5 asaccounting from UFRJ (‘Rio de Janeiro Federal University’). He has a sector manager for Carrefour. In 1995–1997master’s degree in accounting and finance from PUC, São Paulo, and a doctorate in accounting from UFRJ. CPA in Brazil and Italy, he was an accountantis a partner of a consulting firm and expert consultant at ARG Ltda.,lectures financial and management accounting in 1997–8 Financial Managergraduate and postgraduate courses. Member of Visoconsult Engenharia. Since 1998Italian-Brazilian Chamber of Commerce of Rio de Janeiro, where he is part of the Brazil-Italy Energy Council, he has been an executive of Andrade Gutierrez Concessões S.A., including service on the Audit Boards of Companhia de Saneamento do Paraná – Sanepar – and Companhia de Concessões Rodoviárias – CCR.
Manuel Jeremias Leite Caldas –Mr. Caldas is an economist and electrical engineer. He is Financial Advisor to Alto Capital Gestora de Recursos. He has served as Chief Economist of Banco Pebb S.A., and Senior Analyst at Banco Bozano Simonsen S.A. He is a Membermember of the Board of Directors of AES Eletropaulo. He serves onand the Audit Boards of Eletrobras and Contax. He has served as a Member of the Board of Directors of Forjas Taurus, and on the Audit Boards of Oi and Cesp.
Consumer Council
In accordance with Brazilian law we have established a Consumer Council, comprising representatives of consumer groups and advocacy organizations, but not members of our Board of Directors. The Consumer Council advises us in questions of service and other concerns of our consumers.
Audit Committee
Our Audit Board acts as our Audit Committee for the purposes of the Sarbanes-Oxley Act of 2002. Under Section 10A-3 of the SEC rules on Audit Committees of listed companies on the New York Stock Exchange, it is optional for non-U.S. issuers not to have a separate Audit Committee, made up of independent members, if there is an Audit Board established and chosen in accordance with the legal rules of its origin country, when such rules expressly require or allow that such board obey certain obligations; and if such exception is the case, an Audit Board may exercise the obligations and responsibilities of an Audit Committee of the United States up to the limit permitted by Brazilian Law. The financial specialists of our Audit Board are Mr. Newton Brandão Ferraz Ramosdifferent companies and Mr. Ronaldo Dias, an alternate member of of the Audit Board.served as CFO, Chief Controller, and independent auditor.
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Employees
OnAs of December 31, 2015,2020, we had 6,2025,254 employees at Cemig, Cemig DistributionCEMIG, CEMIG D and Cemig Generation and Transmission,CEMIG GT, of which 210179 were management level and 77 were contracted to provide temporary outsoursed services. On December 31, 2014 we had 7,922 employees at Cemig, Cemig Distribution and Cemig Generation and Transmission, of which 219 were at management level, and 139103 were contracted to provide temporary outsourced services. OnAs of December 31, 20132019, we had 7,9225,596 employees at Cemig, Cemig DistributionCEMIG, CEMIG D and Cemig Generation and Transmission,CEMIG GT, of which 221185 were at management level and 40172 were contracted to provide temporary outsourced services. As of December 31, 2018, we had 6,083 employees at CEMIG, CEMIG D and CEMIG GT, of which 244 were management level and 316 were contracted to provide temporary outsourced providers.services. This table showspresents the breakdown of our employees by type on those dates:
| Number of Employees at (1) | ||||||||||||
| December 31, 2015 (2) | December 31, 2014 | December 31, 2013 | ||||||||||
Managers | 210 | 219 | 221 | |||||||||
Professional staff | 1,448 | 1,360 | 1,365 | |||||||||
Operational technical staff and office employees | 6,202 | 6,343 | 6,336 | |||||||||
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Total | 7,860 | 7,922 | 7,922 | |||||||||
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Number of Employees as of December 31, (1) | 2020 (2) | 2019 (3) | 2018 (4) |
| Managers | 179 | 185 | 244 |
| Professional staff | 1,133 | 1,147 | 1,188 |
| Operational technical staff and office employees | 3,942 | 4,264 | 4,651 |
| Total | 5,254 | 5,596 | 6,083 |
| (1) | These figures include only employees of |
| (2) | In |
| (3) | In 2019, 272 employees were |
| (4) | In 2018, 359 employees were hired and 244 left CEMIG. |
Unions
Annual meetings wereMeetings are held throughout the year for collective negotiation with the unions that represent the employees. The Collective Work Agreements (Acordos Coletivos de Trabalho, or ACTs)‘ACTs’) that result from these meetings cover salary adjustments, benefits, rights and duties of the employment relationship, and comescome into effect for the subsequent period of 12 months, starting on November 1 of each year.
year until the end of the validity of each respective Collective Work Agreement. Negotiations between the Company and the Unions for the 2015-20162019-2021 Collective Work AgreementAgreements were finalized. They compriseconcluded.
During the October 2019 to January 2021, negotiations, the company and the unions agreed to a readjustment of economic benefits to ensure replacement of losses due to inflation in the economic clauses, sinceperiod, with an adjustment of 2.55% in line with inflation, in addition to ensuring the negotiations for the 2012–13 Collective Work Agreement did not successfully reach a signed agreement,correction of salaries and required opening of collective salary increase proceedingsbenefits, in November 2020, by the negotiating parties. In July 2013 the Regional Employment Appeals Court (Tribunal Regional do Trabalho, or TRT) of the 3rd Region published the Regulating Judgment resulting from the mediation, with validity over four years, that is to say frominflation index (INPC-IBGE) accumulated between November 1, 2012 to2019 and October 31, 2016. However, the economic clauses may be reviewed annually, through renewed collective negotiations between the various union entities that represent the employees.2020.
The following are highlights of the items agreed for 2015–16:
The Regulating Judgment maintained the same points of the ACTs from previous years:agreement reaffirmed benefits as: payment of day and night overtime; bonuses; setting of a ceiling for grant of financial help for training in technical or graduation courses; advance of the first installment of the annual 13th-salary13th salary payment; assistance benefits; release of union leaders and provisional job stability; and funds for grant of salary alterations in accordance with the Careers and Remuneration Plan (Plano de Cargos e Remunerações, or PCR)‘PCR’).
In health and safety in the workplace, the employees have the following benefits guaranteed: regulated Internal Accident Prevention Committees (Comissões Internas de Prevenção de Acidentes, or CIPAs)‘CIPAs’), with participation by the unions; medical health inventory; inspection of contractors as to their work safety; and notification of serious or fatal accidents.
During the 2019/2021 negotiations, in 2015, there waswasn`t a stoppage of 52 days,stoppage/strike. However, in which approximately 16.15% of the employees took part. In the event of strikes, the CompanyCEMIG has an Operational Emergency Committee, created forwith the basic purposeobjective of establishing a Contingency Plan to maintain our essential services In the Company’sevent of strikes; CEMIG has an Operational Contingency Council aimed at setting forth a Contingency Plan for continuation of its essential services.
After negotiations with the unions, the Collective Work Agreement was signed with 17 union entities, comprising a salary adjustment of 10.33%, definition of criteria for funds distribution for individual salary increases, changes in Group Life Insurance, granting of an extra food ticket and maintenance of jobs and voluntary retirement programs, valid for the period between November 1, 2015 to October 31, 2016.
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Compensation
CEMIG compensates its employees in a competitive way, in line with best market practices.
In order to consolidate the Company’s attractiveness in the market, Cemig’sCEMIG’s compensation strategy reflects a compatible and competitive positioning with the market, with benefits and programs for the welfare of its employees. Thus, CemigCEMIG has a Plan for JobsCareers and Remuneration (PCR),Plan in which the positions are described based on their nature and complexity, as well as the knowledge requirements necessary for the performance of their functions. The fees are set considering the reviews of positions, made according to specific methodology. ThisThe plan is designed to attract, develop, retain and enhance the best talented Company professionals needed to conduct Cemig’sCEMIG’s business while preserving the Company’sour culture, the alignment to its business objectives, competitiveness and longevity in the market where it operates without losing sight of the particularities of its segment and the commitment of the employees with the result of their work. In addition, the PCRCareers and Remuneration Plan establishes criteria for granting horizontal and vertical progressions that include, among other things, employee performance.
The current Careers and Remuneration Plan (Plano de Carreiras e Remuneração, or PCR) was put in place in 2004,September 2018 aiming to provide the Companyus with the instruments of compensation considered to be necessary to maintain an equitable and competitive payment structure and establish criteria for promotions. WithIn order to maintain a current plan that is consistent with the change ofbusiness context, the Executive Board of Cemig held in January 2015Careers and the reformulation of the Company’s StrategicRemuneration Plan the PCRis being revised. The review project hadis expected to be postponed to 2017. The aim it is adapting it tocompleted in the new realityfirst half of the enterprise business, the strategic planning of the Company and aligned to other HR processes.2021.
This table showspresents the monthly average of base salary and of compensation, by job category:category of CEMIG:
December 31, 2020 (R$) | Average base salary as of | Average compensation as of |
| Managers | 20,047.06 | 34,292.17 |
| Professional staff | 10,681.08 | 12,957.84 |
| Operational technical staff and office employees | 5,253.13 | 8,153.58 |
| Average base salary at December 31, 2015 | Average compensation at December 31, 2015 | |||||||
Managers | R$ | 16,756.40 | R$ | 26,795.45 | ||||
Professional staff | R$ | 8,277.10 | R$ | 10,997.37 | ||||
Operational technical staff and office employees | R$ | 3,861.22 | R$ | 6,160.05 | ||||
Program for Sharing in Profit, Results, and Productivity:Productivity
CEMIG has a program for sharing by the employees of profits and results with employees in accordance with the applicable Brazilian employment legislation. Profits are distributed only if, in aggregate, at least 50%70% of the corporate targets are achieved, after relative weighting for each of the corporate and individualoperational indicators.
In 2015,2020, in contrast to previous years, Cemig made no advance payment on account of the employees’ Profit Sharing payment (Participação nos Lucros e Resultados, or PLR). In accordance with the terms of the SpecificCollective Agreement, CEMIG distributed 4.3% of its profits.
In 2019, in accordance with the terms of the Collective Agreement, CEMIG distributed 4% of its profits, with the possibility of an increase of another 20% of the value of this profit that exceeds the budget, reaching the maximum limit to be distributed of 7.5% of the Consolidated Net Income.
The calculation of the profit sharing distribution will be based on the Result of Indicators, and the payment will be made 100% in proportion to the individual remuneration of each employee among all the employees represented by the signatory entities of the referred agreement.
Distribution will occur only if at least 70% of the goals are achieved as a whole, observing the relative weight of each of the indicators. The basket of indicators for the year 2020 contains 10 corporate indicators.
In 2018, in accordance with the terms of the Collective Agreement PLR 2015/2015CE as2017, CEMIG distributed part of its profits to the employees represented by the unions that signed a payment in the agreed amountprogram and simplified the list of R$100 million, forindicators to 7 corporate and 28 operational indicators, facilitating the monitoring of the results by its employees. CEMIG also signed the Collective Agreement PLR for the 2015 business year,that will be made in May 2016, with a condition that no employee will receive less than 120% of his/her monthly compensation.
In 2014 we brought forward payment ofdistribute part of the profit sharesprofits to employees, forbased on the 2014 business year,results in the amount of approximately R$106.2 million, and the remaining part was paid by April 2015.2018.
In 2013, the payment of part of the profit shares to employees for the 2013 business year was brought forward, in the amount of R$96.7 million, and the remaining portion, R$103.4 million, was paid in April 2014, for a total of R$200.1 million paid as participation in profits and results.
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Benefits
The Company givesCEMIG provides its employees a range of benefits, such as reimbursement of disability-related expenses of employees and/or their dependents, funeral assistance in the event of death of an employee or of his or her direct dependents, and payment of part of the employee’s contribution to the complementary pension plan. In 2015,2020, a total of R$237.1183 million was paid in employee benefits, to employees, comprising R$100.2100 million in contributions to the pension plan and R$136.983 million in assistance benefits.
Voluntary Retirement Programs
In January 2013, we introducedApril 2020, the Incentive Severance Program(Programa Incentivado de Desligamento,Company approved the Voluntary Programmed Separation Plan for 2020 (PDVP 2020). Those eligible - all employees who had worked at the Company for 25 years or PID), in responsemore by December 31, 2020 - were able to join from May 4 to May 22, 2020. The program paid the regulatory changesstandard legal severance pay per termination agreement, being 50% of the notice period, an amount equal to 20% of the Base Value of the employee's FGTS fund, an additional premium equal to 50% of the notice period, plus 20% of the Base Value of the FGTS fund, as well as other payments foreseen in the energy sector. It was targetedlegislation. The program has reached 396 employees and the Company expects to save approximately R$100 million per year.
In December 2019, the Company created the Programmed Voluntary Retirement Plan (PDVP 2019). Eligible employees – all employees who worked at the Company for 25 years or more as of 2013, had over 20 years of (i) employment at CemigDecember 31, 2019 – were able to join the program between January 7 and (ii) contributions to Forluz; and who already had retired status underJanuary 31, 2019. The PDVP provided for the National Social Security System(Instituto Nacional de Seguridade Social, or INSS).
In 2013, 854 people left the Company by accepting the terms of the PID. They received (i) payment of up to four times their monthly salary (without exemption from income tax) and (ii) the 40% extra payment on the balance of the employee’s accumulated funds under the FGTS system that would be obligatory if a dismissal were without cause. Additionally, Cemig guaranteed full payment of the group life insurance plan andlegal severance payments, including indemnified notice, deposit of the health planamount corresponding to a fine of 40% of the FGTS base amount for six months commencing onretirement purposes and other charges provided by the datelegislation, with no provision for payment of additional premium. In March 2019, the employee leavesCompany approved the Company.reopening of the PDVP 2019, with the adhesion period between April 1 and 10, 2019, and changes to the requirements for adhesion, keeping the other conditions unchanged. The program reached 613 employees and the Company expects savings of approximately R$150 million per year.
In 2014 two employees leftMarch 2018, CEMIG approved the company under the PID – both were on sick leave and received the full benefit on receiving medical confirmation of recovery.
In November 2015 Cemig introduced its Programmed Voluntary Retirement Offer (Programa de Desligamento Voluntário Programado,Program (the ‘2018 PDVP’). Employees eligible to be part of the 2018 PDVP are those that will have worked for CEMIG for 25 years or PDVP), for employees who, atmore as of December 31, 2015, had been with2018. The period for joining the company,2018 PDVP was April 2 through April 30, 2018. The 2018 PDVP offered payment of the severance amounts specified by law, including payment for the notice period, and contributed todeposit of the Forluz pension plan, for 10 years, and were already qualified for retirement under the INSS national social security system (for men, 35 years’ contribution or age 55; for women, 30 years’ contribution or age 50). The offer included, as extra compensation: (i) thepenalty amount of 40% of the balance onFGTS (Labor Guarantee Fund) Base Value, as well as the employee’s account withother payments specified by the federal retirement system (Fundo de Garantia por Tempo de Serviço, or FGTS) – which would normally apply only for dismissal without just cause; and (ii) forward salary for three months. Thislegislation. The 2018 PDVP was accepted by 175151 employees, who left or will leavefor which the company overestimated cost in the period between March 2016 and the end dateamount of the program in October 2016.R$25.6 million was recorded.
Health and Safety
As a result of the various initiatives and programs from CEMIG, focused on health, hygiene and safety at work, accident indicators have shown a significant reduction over the last seven years. The corporate indicator Frequency Rate of Work Related Injuries with Absence (‘TFA’) of the workforce, which had been stable in recent years, reached 1.66 in December/2020, the last recorded, signaling an increase of 3,75% compared to the result recorded in 2019 and 9.21% above the limit set by the company of 1.52. We also registered a fatal accident that killed 3 employees of one of our partner companies.
In 2015,2019, the indexFrequency Rate of frequency of accidents causing absence from work (Taxa de Frequência de Acidentes com AfastamentoWork Related Injuries with Absence (‘TFA’), or TFA) for ourrelative to the workforce, was 2.561.60 accidents per million man-hourshours worked, 5.26% higher than in 2018, and 18.75% below the 1.90 limit.
It is also important to note that, the Coronavirus pandemic brought about a series of exposuredifficulties for the company's usual activities, generating the need to risk. This is an increaseimplement a series of 21.5% fromadditional measures, led by the previous year, interrupting a continuing reduction trendcompany's health area, to enable business continuity and safeguard the integrity of accidents withinall the last 3 years.
The most frequent causes of work accidents are related to: vehicle traffic; faultsworkers in planning, or in analyses of risk of a task; and faults in compliance with the stages of execution of activities.
Aiming to achieve its policy goal of having zero severe or fatal accidents, after analyzing the high safety ratios achieved by Spanish companies, Cemig sought technical cooperation from the Ibero-American Social Security Organization (OISS), an international agency linked to Latin American, Portuguese and Spanish speaking countries, to put in place a program to monitor Cemig’s preventive actions for workplace health and safety.
A working plan was drawn up under the resulting technical cooperation agreement, for implementation over the period June 2016 to December 2018, involving Cemig’s entireour workforce.
Share ownership
No member of the Board of Directors or Executive Board owns more than 0.03% of our preferred shares or more than 0.03% of our common shares.
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| Item 7. | Major shareholders and related party transactions |
Principal shareholdersShareholders
On DecemberMarch 31, 2015,2021, the government of the State of Minas Gerais was the holder, directly and indirectly of 214,414,739258,759,424 common shares, or 50.96%50.97% of the Company’sCEMIG’s shares carrying the right to vote. As of the same date, AGCFIA Dinâmica Energia, the Company’sour second largest stockholder,shareholder, held 138,700,848129,606,377 common shares, or approximately 32.96%25.53% of that class of shares, and 42,671,76335,328,172 preferred shares, or approximately 5.09%3.49% of that class of shares. AGC Energia is a subsidiary of Andrade Gutierrez Concessões S.A. (“AGC”), an affiliate of the AG Group. The AG Group is one of the largest private groups in Latin America, with a presence in the sectors of engineering, construction, telecoms, electricity and public concessions. The shares held by the principal stockholders have the same voting rights as all the other shares.
The table below provides information about ownership of the common and preferred shares in CemigCEMIG as of April 01, 2016:March 2021:
Shareholder | Common shares | % of the Class | Preferred shares | % of the Class | ||||||||||||
Minas Gerais State Government (1) | 214,414,739 | 50.96% | 10,030,000 | 1.2% | ||||||||||||
AGC Energia S.A. | 84,357,856 | 20.05% | 25,952,966 | 3,09% | ||||||||||||
FIA Dinâmica Energia Fund BNDES Participações S/A- BNDESPAR |
| 39,948,054 54.342.992 |
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| 9.49% 12,92% |
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| 44,220,090 26,220,938 |
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| 5.28% 3,13% |
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Total of all members of Board of Directors, Executive Board and Fiscal Council | 105,920 | 0.03% | 169,289 | 0.02% | ||||||||||||
Others | 27,595,078 | 6.56% | 730,923,014 | 87.95 | ||||||||||||
Total shares | 420,764,639 | 100% | 837,516,297 | 99.93% | ||||||||||||
Shares in treasury | 69 | — | 560,649 | 0.07% | ||||||||||||
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Total shares issued | 420,764,708 | 100% | 838,076,946 | 100% | ||||||||||||
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Shareholder | Common Shares | % of the Class | Preferred Shares | % of the Class |
| Minas Gerais State Government (1) | 258,759,424 | 50.97% | 11,112,048 | 1.10% |
| FIA Dinâmica Energia Fund | 129,606,377 | 25.53% | 35,328,172 | 3.49% |
| BNDES Participações S/A – BNDESPar | 56,578,175 | 11.14% | 27,299,432 | 2.70% |
| Total of all members of Board of Directors, Executive Board and Fiscal Council | 10,313 | - | 67,478 | 0.01% |
| Others | 62,715,929 | 12.35% | 936,691,473 | 92.64% |
| Total shares | 507,670,218 | 100% | 1,010,498,603 | 99.94% |
| Shares in treasury | 71 | - | 583,709 | 0.06% |
| Total shares issued | 507,670,289 | 100% | 1,011,082,312 | 100% |
| (1) | The shares attributed in this line to the State of Minas Gerais include shares held by Minas Gerais Participações S.A., a Brazilian stock company (sociedade por ações), and other agencies of the State government and companies controlled by |
Since CemigCEMIG was formed, its operations have been influenced by the fact that it is controlled by the government of the Brazilian State of Minas Gerais. Its operations have had and will continue to have an important impact in the development of trade and industry of Minas Gerais and on the social conditions in the State. Occasionally in the past the Minas Gerais Statestate government has oriented the company to dedicate itself to certain activities and make certain expenditures specifically designed to promote the social, political or economic objectives of the government of the State of Minas Gerais, and not necessarily destined to generate profit for Cemig,CEMIG, and there is the possibility that the state government may orient us in this direction in the future. See the section “Item 3. Material Information – Risk factors – Risks relatingRelating to CemigCEMIG – We are controlled by the Governmentgovernment of the Brazilian State of Minas Gerais, which maymight have interests that are different from thosethe interests of the other investors, or even of the Company.”Company”.
On DecemberAs of March 31, 2015, we2021 CEMIG had 40 holders1 holder of common shares represented by ADRs who were registered in the United States, holding a total of 7,643,6852,587,491 common shares; and 27612 registered holders of preferred shares represented by ADRs who were registered in the United States, holding a total of 429,369,263227,670,421 preferred shares. These figures do not include the 287,918,816 preferred shares and 462,508 common shares represented by ADRs.
Although the by-laws do not make any restriction on a change in control of the Company,CEMIG, under the legislation of the State of Minas Gerais State such a change would require a state law authorizing the change of control. Because we are a companyCEMIG is controlled by the State, any sale that results in the state government not holding more than 50% of the voting stockshares of CemigCEMIG (or any other transaction that could transfer the control of the company,CEMIG, in whole or in part), requires approval by legislation specifically authorizing this change, made by the legislative power of Minas Gerais, approved by a minimum of 60% of the members of the State Assembly; and this authorization must then also be approved by the local citizens in a referendum.
On April 15, 2010, Lazard Asset Management LLC notified us that it had acquired 17,497,213 shares, or 5.01% of the total shares issued by Cemig. On February 4, 2011, Lazard Asset Management LLC notified us that it had increased its holding in Cemig to 7.46%, a total of 28,673,232 shares. On May 13, 2014, Lazard Asset Management LLC notified us that it held 43,114,404 preferred shares represented by ADRs, or 5.14% of the Company’s total shares outstanding.
On June 06, 2014, Lazard Asset Management LLC notified us that it held 42,475,810 preferred shares represented by ADRs or 5.07% of the Company’s total shares outstanding.
On June 18, 2010 AGC Energia notified occurrence of the transfer of shares under the Share Purchase Agreements signed by Southern and AGC Energia, with AGC as consenting party, on November 12, 2009. AGC Energia acquired from Southern 98,321,592 common shares issued by Cemig, representing 32.96% of the voting capital and 14.41% of the total share capital. AGC Energia emphasized that this transaction does not change the stockholding control or the administrative structure of Cemig.
On August 1, 2011, AGC Energia and the State of Minas Gerais entered into a stockholders’ agreement (recognized by Cemig and with BNDESPar as the third beneficiary), under which AGC Energia has the right to appoint Cemig’s Chief Business Development Officer, subject to approval by the State of Minas Gerais. For more information, see note 23 to our consolidated financial statements.
On March 26, 2013 the FIA Dinâmica Energia Fund notified us that it had acquired 19,078,800 preferred shares. With this acquisition, FIA Dinâmica Energia held at that time 5.1% preferred shares issued by Cemig.
On October 22, 2015 MGI – Minas Gerais Participações notified us that it had reduced its holding in the share capital of Cemig from 9.38% of the preferred shares to 1.20% of the preferred shares.
On January 20, 2016, FIA Dinâmica Energia Fund acquired 2,360,000 preferred shares of the Company.With this acquisition, FIA Dinâmica Energia held at that time 5.28% of the preferred shares issued by Cemig.
On March 3, 2016, BNDES Participações S.A exchanged the totality of its holding of debentures issued under the Deed of the First Private Issue by AGC Energia of Non-convertible Permanent Assetguaranteed Exchangeable Shareholders’ Debentures, in a Single Series, dated February 28, 2011 and amended January 17, 2012, for 54,342,992 common shares and 16,718,797 preferred shares in Cemig, owned by AGC Energia. After the exchange, the equity interest held by BNDESPar in Cemig — which on March 2, 2016 totaled 0% of the common shares and 1.13% of the preferred shares — increased to 12.9% of the common shares and 3.13% of the preferred shares.
We are not aware of any other significant alterations in percentages of shares held by holders of 5% or more of our voting shares in circulation during the last three years.
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Related partyParty Transactions
During the regular course of our business, we engage in transactions with related parties, some of which are of a recurring nature. The following summarizes the material transactions we engage in with our principal shareholders and their affiliates.
The CompanyCEMIG is party to the following transactions with related parties:
Financial Statements for more details):
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| · | Inflation advance against Future Capital Increase (AFAC), which were returned to the State of Minas Gerais. These receivables have guarantee in the form of CEMIG´s right to retain dividends and Interest on Equity otherwise payable to the State (in proportion to the State’s equity interest in the Company), for as long as any payments are overdue or in default. The balance receivable on December 31, 2020, is R$12 million (R$115 million on December 31, 2019); |
| · | Transactions in energy between generators and distributors were made in auctions organized by the Federal Government; transactions for transport of energy, made by transmission companies, arise from the centralized operation of the National Grid carried out by the National System Operator (ONS); |
| · | Contract to provide plant operation and maintenance services related to transmission services; |
| · | Legal actions realized and legal actions provisioned arising from the agreement made between Aliança Geração (jointly controlled entity), Vale S.A. (company which we have joint ventures in common) and CEMIG. The action is provisioned in the amount of R$119 million, of which CEMIG’s portion is R$41 million; |
| · | Advance payments for energy supply made in 2019 to Norte Energia (jointly controlled entity), established by auction and by contract registered with the CCEE (Wholesale Trading Exchange). Norte Energia delivered contracted supply until December 31, 2020, starting on January 01, 2020. There is no financial updating of the contract; |
| · | CEMIG GT (subsidiary) has an R$688 million receivable from Renova (jointly-controlled entity) that due to the uncertainties related to continuity of Renova (jointly-controlled entity), an estimated loss on realization of the receivables was recorded for the full value of the balance; |
| · | On November 25, 2019, December 27, 2019 and January 27, 2020, DIP loan contracts under the court-supervised reorganization proceedings, referred to as ‘DIP’, ‘DIP 2’ and ‘DIP 3’, were entered into between the Company and Renova (jointly-controlled entity), which is in-court reorganization , in the amounts of R$10 million, R$6.5 million, and R$20 million respectively. The contracts specify interest equal to 100% of the accumulated variation in the DI rate, plus an annual spread, applied pro rata die (on 252-business-days basis), of 1.083% for the DIP contract, 2.5% for the DIP2 contract and 1.5% for the DIP3, up to the date of respective full payment. The Company recognized an impairment loss for the receivables from Renova, of its total carrying amount of R$37 million, in the second semester of 2020. For further information, see note 16 (c) to our consolidated financial statements; |
| · | Liability recognized relating to the Company’s interest in the share capital of Hidrelétrica Itaocara, due to its negative equity (see Note 16 to the Financial Statements); |
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| · | Contract for development of management software between CEMIG D (subsidiary) and Axxiom Soluções Tecnológicas S.A., instituted in ANEEL Dispatch 2657/2017. The liability on December 31, 2020, is R$4 million (R$3 million on December 31, 2019); |
| · | The contracts of Forluz are updated by the Expanded |
| · | The Company’s contributions to the pension fund for the employees participating in the Mixed Plan, and calculated on the monthly remuneration, in accordance with the regulations of the Fund; |
| · | Funds for annual current administrative costs of the Pension Fund in accordance with the specific legislation of the sector. The amounts are estimated as a percentage of the Company’s payroll; |
| · | Rental of the Company’s administrative head offices from Forluz (the employee pension fund), in effect up to November 2020 and August 2024 (able to be extended every five years, up to 2034), with annual inflation adjustment by the IPCA index and price reviewed every 60 months. Aiming at costs reduction, in November 2019, CEMIG returned the Aureliano Chaves building to Forluz and in November, 2020, CEMIG decided to renew with Forluz and returned the remaining leased floors of Aureliano Chaves building; |
| · | Post-employment obligations relating to the employees’ health and dental plan (CEMIG Saúde). (See Note 24 to the Financial Statements); |
| · | The relationship between CEMIG and its investees are described in Note 16 – Investments to the Financial Statements; |
| Item 8. | Financial |
Consolidated financial statementsFinancial Statements and other financial informationOther Financial Information
Please consultFind our consolidated financial statements, which begin on page F-1 of this document, and “Item 3. Key Information – Selected Consolidated Financial Data.”Data”.
Legal and administrative proceedingsAdministrative Proceedings
The Company, and its subsidiaries, in particular Cemig Geração e Transmição S.A. (“Cemig GT”)CEMIG GT and Cemig Distribuição S.A. (“Cemig D”),CEMIG D, are partiesinvolved in certain legal and administrative proceedings regarding tax, regulatory, consumer,customer, administrative, environmental, employment-law and other issues, in relation to its business. In accordance with IFRS, we record and disclose the amounts of the proceedings that we have determined a loss to “probable”‘probable’, and disclose the amounts of the proceedings in which we have determined a loss to be “possible”,‘possible’; to the extent, these amounts can be reasonably estimated. For more information regarding such contingencies, see Note 25 to the Notes to our consolidated financial statements.Financial Statements.
Regulatory mattersMatters
CemigCEMIG and CemigCEMIG D are parties in lawsuits claimingarising from clauses in electricityof energy supply contracts for public illumination,lighting, signed with various municipalities in the concession area. These actions also request restitution of a portion of amounts charged in the last 20 years, in the event that the courts recognize that these amounts were unduly charged. The casesproceedings are based on an alleged mistake by CemigCEMIG in the estimate of time used for the calculation of the consumption of electricityenergy by public lighting paid for by the Public Lighting Contribution (Contribuição de Iluminação Pública, or CIP)‘CIP‘). On December 31, 2015,2020, the amount involved in these actions was approximately R$1.31.072 billion, and the chancesprobability of loss have been establishedwere assessed as possible, due to‘possible’, since, although the lack of consistent precedentscase law is amply in favor of the companies’ arguments.CEMIG, it has not been definitively consolidated.
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| Table of Contents |
Cemig
CEMIG GT filed an application to be included a joint defendant in a lawsuit brought by AES Sul against ANEEL, seeking annulment of ANEEL Dispatch No. 288/2002, which set the guidelines for interpretation of ANEEL Resolution No. 290/2000, and thus changed the situation of AES Sul Distribuidora, from creditor to debtor of the Wholesale Energy Market (Mercado(Mercado Atacadista de Energia,, or MAE)‘MAE’), predecessor of the present Electricity Trading Chamber (CCEE). CemigCCEE. CEMIG GT obtained an interim remedydecision to suspend the deposit that had been ordered in favor of AES, determined in the process of financial settlement, for the historic amount.
The application to be joined as a party was granted and CemigCEMIG GT is a co-litigant with Centrais Elétricas de Santa Catarina S.A. (Celesc)(‘CELESC’) in the principal case (the “Ordinary Action”(‘Ordinary Action’), resulting in CemigCEMIG D being able to present petitions and appeals in that action if necessary. A Special Appeal was filed against the decision allowing for CemigCEMIG D’s joinder before the Higher Appeal Court (Superior Tribunal de Justiça, or STJ),STJ, which awaits judgment. This appeal does not prevent CemigCEMIG GT from acting in the case to which it was admitted. Judgment at first instance was given against said Ordinary Action, and AES filed an appeal, which was granted. The Appeal Court Judgment on the appeal was the subject of a Motion for Clarification by CemigCEMIG GT, on which judgment was given (cognizance taken, and appeal granted in part as to confirmation that only AneelANEEL should bear the costs of loser’s fees). As to the merits of the date of this annual report, noquestion, an appeal has been filed against this decision.was lodged (against non-unanimous decision by an appellate court), which awaits judgment. On December 31, 2015,2020, the amount involved in the action was R$230376 million, and the chancesprobability of loss were assessed as possible,‘possible’ since there is still the possibility of the second instance decision being modified in the appeals that are currently awaiting judgment.
Cemig GTCompany and its subsidiaries are represented by the Brazilian Independent Electricity Producers Association (Associação Brasileira dos Produtores Independentes de Energia Elétrica, or Apine)involved in a legal actionnumerous administrative and judicial proceedings, challenging, principally: (i) tariff charges in which Apine seeks a declaration of nullity of Articles 2 and 3 of CNPE Resolution 3, of March 6, 2013, which states – in summary – that the National System Operator (Operador Nacional do Sistema, or ONS) shall have the power, in addition to what is indicated by the computer programs, to dispatch electricity resources or change the direction of exchange between sub-markets, and that the costinvoices for use of the additional dispatch will be prorated between all the agentsdistribution system by a self-producer; (ii) alleged violation of the market,targets for continuity indicators in proportion to the electricity traded. The ability to make such rulings represents impositionretail supply of a burden on the Generating Agents of the market, which led them, through their associations, including Apine, to question the legality of this Resolution in the Courts. The Plaintiff’s request was granted by the trial court, with interim remedy in favor of members of Apine, including Cemig GT and its subsidiaries. The updated amount of this demand for Cemig GT and its subsidiaries on December 31, 2015, was approximately R$155 million, and the chances of loss were assessed as possible, in view of the unprecedented nature of the subject matter.
Cemig GT applied for an order of mandamus against an act of the Mining and Energy Minister with the objective of ensuring Cemig GT’s right to an extension of the period of the concession of the Jaguara hydroelectric plant, under Clause 4 of Concession Contract 007/1997, obeying the original bases of this contract, which were prior to Law Nº 12783/2013. Cemig GT was granted an interim injunction, which is still in effect, to continue commercial operation of the Jaguara hydroelectric plant until a final judgment is rendered on this application for mandamus. Judgment was then given on this Action, refusing the applications made by Cemig GT. Before the result of that judgment was published, which would have prevented filing of an appropriate appeal, Cemig GT applied to the Federal Supreme Court (Supremo Tribunal Federal, or STF) for a Provisional Remedy with interim injunction permitting it to continue operating and managing the plant. Although this judgment has not yet been published, which prevents filing of the appropriate appeal, the Company applied to the STF for provisional remedy with interim injunction permitting it to continue operating and managing the plant. The interim injunction was granted. Judgment has not yet been given in this action for provisional remedy.With the publication of the result of the judgment, the Company filed an ordinary appeal to the Federal Supreme Court on March 1, 2016. The chance of loss in this action has been classified as possible, due to its nature and the complexity involved in this particular case. The case has a number of elements to be considered: (i) the singular nature of Concession Contract No. 007/1997; (ii) the unprecedented nature of the subject matter;energy; and (iii) the fact thattariff increase made during the action would be a leading case regardingfederal government’s economic stabilization plan referred to as the extension of concession periods by the Brazilian Courts.
Cemig GT applied for an order of mandamus against an act‘Cruzado Plan’, in 1986. The aggregate amount of the Mining and Energy Minister with the objectivecontingency is approximately R$293 million (R$280 million at December 31, 2019), of ensuring its right to extend the period of its concession for the São Simão Hydroelectric Plant, under Clause 4 of Concession Contract 007/1997, in accordance with the original terms of this contract, which were prior to Law Nº 12,783/2013. The interim relief originally obtained by Cemig GT – empowering it to continue in control of the commercial operation of the São Simão Plant until judgment is given in the application for mandamus – was reviewed, and overturned, by the Reporting Justice. At present, the electricity generated by the São Simão Plant is being paid for under the ‘quota shares’ system. Judgment on the merit of this action has not begun until the judgment on the mandamus in relation to the Jaguara Hydroelectric Plant, referred to above; and the Reporting Justice of the Court stated in his interim decision that he might re-examine the case in the event that the judgment on the mandamus in the Jaguara case was not given within 45 days after the start of the activities of the First Section of the Higher Appeal Court (Tribunal Superior de Justiça, or STJ) in 2015. The chance of loss in this actionR$52 million (R$36 million at December 31, 2019) has been classifiedrecorded as possible, due to its nature and the complexity involved in this particular case. It should be noted that this case has a number of elements to be considered: (i) the singular nature of Concession Contract No. 007/1997; (ii) the unprecedented nature of the subject matter; and (iii) the fact that the action will be a leading case in consideration of the extension of concessions by the Brazilian Courts, side by side with the Jaguara case, since both have the same issues to be considered and facts, they are being considered by the same judicial body.
Cemig D is party in an administrative action brought by the Brazilian electricity regulator, ANEEL (Agência Nacional de Energia Elétrica) in which ANEEL claims that accounting procedures required by the sector regulations were not complied with in the valuation of certain Fixed assets in service, following an inspection of those assets by ANEEL, leading to Infringement Notice Nº 014/2014. The Company’s defense seeks to cancel or significantly reduce the penalty applied by ANEEL. As of December 31, 2015,provision – the amount involved in this action was R$66 million. The chancesestimated as probably necessary for settlement of loss in this action have been assessed as possible.these disputes.
Tariff increasesIncreases
The Federal Public Attorneys’ Office filed a class action against the CompanyCEMIG D and ANEEL, to avoid exclusion of consumerscustomers from classification in the Low-income Residential Tariff Sub-category, and also requesting an order for the CompanyCEMIG D to pay 200% of the amount allegedly paid in excess by consumers.customers in that sub-category. Judgment at first instance was given in favor of the plaintiffs. CemigFederal Public Attorneys, and CEMIG D and ANEEL have filed an interlocutory appeal with the Regional Federal Appeal Court.TRF. A decision by the Court in this case has been pending since March 2008. OnAs of December 31, 20152020 the amount of the contingencyinvolved in this case was approximately R$222 million.357 million The Company has classified the chanceschance of loss has been classified as possible‘possible’ due to the existence of other favorable precedents,judgments, both in the judiciary and in the administrative sphere, that are in favor of the argument put forward by CemigCEMIG D.
Cemig
Tax and Similar Charges
CEMIG, CEMIG GT and CEMIG D is defendantare parties in severalvarious legal actions and in particular a class action files bydisputing the Municipal Association for Protectionapplicability of the Consumer and the EnvironmentUrban Land Tax (Associação Municipal de Proteção ao Consumidor e ao Meio AmbienteImposto Territorial Urbano, or Amprocom)‘IPTU’), challenging amounts of tariffs chargedon Real estate properties designed for public service concessions. This is a matter on which case law has not been established by the Company after 2002 and its methodhigher courts. There is an Extraordinary Appeal awaiting judgment by the Federal Supreme Court which, because it will give rise to a global precedent, will be applied to the other legal actions involving the same question. As of calculation, and applying for restitution, to all the consumers allegedly damaged in the processes of Periodic Review and Annual Adjustment of tariffs, in the period 2002 to 2009, of any amounts allegedly unduly charged. At December 31, 2015,2020 the amount involved in this action was R$276 million. The chancesthese actions for which probability of loss in this action have beenwere assessed as possible, due to‘probable’ totaled approximately R$4 million and the fact that there is no precedent.
Tax and similar charges
Cemig and its wholly-owned subsidiaries, especially Cemig GT and Cemig D, are partiesproceedings in several administrative and judicial tax-related proceedings concerningwhich the impositionprobability of state sales tax (Imposto Sobre a Circulação de Mercadorias e Serviços, or ICMS), rural real estate ownership tax (Imposto Sobre a Propriedade Territorial Rural, or ITR), the Contribution for Social Integration (Programa de Integração Social, or PIS), Pasep and Cofins (taxes on gross sales revenue), the Social Contribution tax on net profit (Contribuição Social Sobre o Lucro Líquido, or CSLL), and federal corporate income tax (Imposto de Renda da Pessoa Jurídica, or IRPJ), among others.loss were assessed ‘possible’ totaled approximately R$81 million.
In 2006, Cemig, CemigCEMIG, CEMIG GT and CemigCEMIG D advanced funds to some of their employees in exchange for their rights to future payments, referred to as the “Anuênio.”‘Anuênio.’ No income tax or social security contributions were collected in connection with those payments, since it is our opinion that they are not applicable The Brazilian Federal Revenue Service, however, initiated an administrative proceeding seeking to levy taxes on such payments. In order to avoid the risk of imposition of penalties, we filed two writs for mandamus, which were decided unfavorably to us in the lower court. The Company hasWe have appealed and waits forare awaiting the ruling of the Court of Appeals ruling on whether the income tax is applicable. Regarding the social security contributions, the Regional Federal Court decidedTRF ruled against the Company. The Companyus. We appealed to the Superior Courts, which hashave not yet rendered a decision.
On December 31, 2015,2020, the amount involved in these actions was, approximately, R$264295 million, and we have assessed the chance of loss as possible,‘possible’, in view of the indemnity nature of the advance payments made to the employees and the absence of specific case law in Brazilian Superior Court of Justice (Superior Tribunal de Justiça, or STJ)STJ and the Regional Federal Court (“TRF”)TRF of the First Region. We emphasize that, in relation to Income Tax, both the STJ and the TRF of the First Region adopt the position that there is no tax levied on payments arising from the suppression of employees’ collective bargaining rights when agreed through a collective agreement, since such amounts are considered as being of an indemnity nature.
The Brazilian Social Security Institute (Instituto Nacional de Seguridade Social –
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INSS) initiated an administrative proceeding against CemigCEMIG in 2006 alleging non-payment of the social security contribution on the amounts paid to the Company’sour employees and directors as profit-sharing in the period 1998 to 2004. In 2007, we filed a writ of mandamus seeking declaration that such profit-sharing payments were not subject to social security contributions. We received a partial favorable decision in 2008, which declared non-applicability of the contribution of social security on the profit-sharing amounts paid for employees, and its applicability on the profit-sharing amounts paid to directors. We have appealed the decision and, are waiting foron August 23, 2019, the upper courtTRF of the 1st Region issued a ruling giving partial approval to decide. Ondeclare the decay of tax credits related to taxable events that occurred up to August 2001, but denying the other requests. As a result of that decision, on December 31, 2015,2020, the amount involved in this action was assessed as approximately R$160139 million, and we have assessed the chance of loss as possible, based on the result of judgments of the Administrative Tax Appeals Committee (Conselho Administrativo de Recursos Fiscais, or CARF), on similar cases.‘probable’.
The Brazilian federal tax authority (Federal Tax Authority (‘Secretaria da Receita Federal’) has brought, in addition to the process mentioned above, other administrative proceedings against Cemig, CemigCEMIG, CEMIG GT, CemigCEMIG D and Rosal Energia S.A., in relation to Social Security contributions under various headings: employee profit shares,sharing, the Workers’ Food Program (Programa de Alimentação do Trabalhador, or PAT)‘PAT’), the education support contribution (auxí(‘auxílio-educação)o’), time-of-service bonuses, Special Additional Retirement payments, taxes under suspended enforcement, overtime payments, hazardous occupation payments, matters related to Sest/Senat (transport workers’ support programs), donations, sponsorships, and fines for non-compliance with accessory obligations. We have presented defenses and wait for judgment. OnAs of December 31, 2015, proceedings2020, the amount involved in these actions was approximately R$1.5 billion. As a result of the decision by the TRF of the 1st Region mentioned above, the amounts for which we assessed the chancesprobability of loss were assessed as possible‘probable’ totaled approximately R$1.361.137 billion and the proceedings where we assessedin which the chancesprobability of loss as probablewere assessed ‘possible’ totaled approximately R$1354 million.
The federal tax authority has filed several administrative proceedings against Cemig, CemigCEMIG, CEMIG GT, CemigCEMIG D and Sá Carvalho S.A., are parties in administrative proceedings in relation to Corporate Income Tax (IRPJ)(‘IRPJ’) and the Social Contribution on Net Profit (CSLL)income (‘CSLL’). InAs of December 2015,31, 2020, the amount involved in these actions were assessed as approximately R$227425 million, and the chancesprobability of loss assessed as possible .The federal‘possible’. The infringement notices for the Social Contribution (CSLL) tax authority (are due in particular to the companies having excluded, from their declared basis of calculation for this tax, amounts relating to: (i) cultural and artistic donations and sponsorship; (ii) payments of punitive fines; (iii) taxes with liability suspended; and (iv) expenses on amortization of goodwill, since there is no provision in law that supports taxation of amounts reported under this heading. The infringement notices for corporate income tax are due to the fact that when calculating the Secretaria da ReceitaReal Profit the companies considered as expenses the amounts spent on technological innovation, under Law 11,196/05. The Trade and Industry Ministry (‘MCTI’), which initially, due to lack of information, had not recognized this legal categorization of these amounts, is reviewing its legal opinions now that it is in possession of the information sent by the companies.
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The Federal) served Tax Authority issued an infringement notice on Parati – Participações em Ativos de Energia Elétrica (Parati)(‘Parati’), a CemigCEMIG affiliated company, and on the basis of beingas a jointly responsible party, on Cemig,CEMIG, in relation to the withholding income taxWithholding Income Tax (Imposto de Renda Retido na Fonte, or IRRF‘IRRF’) allegedly applicable to capital gains arising from the disposal of assets or rights in Brazil by a non-resident, on the basis of allegedly being the legal entity responsible for the withholding and payment of the tax. The transaction in question was in regards to the purchase by Parati, and sale by Enlighted, on July 7, 2011, of a 100% interest in LuceLepsa LLC (a company headquartered in Delaware, USA),. Lepsa LLC was also the owner of 75% of the quotas of Luce Brasil Fundo de Investimento em Participações (“(‘FIP Luce”Luce’), which in turn was the indirect holder, through Luce Empreendimentos e Participações S.A., of approximately 13.03% of the total and voting stockshare of Light S.A. (Light, which has only issuesissued common shares). At present, afterAfter certain transactions, Parati has becomebecame the direct holder of 100% of the shares of Luce Empreendimentos e Participações S.A. (LEPSA), which in turn iswas the holder of approximately 13.03% of the voting stockshare and total share capital of Light. FIP LuceAfter successive corporate transactions, Parati was liquidatedmerged into CEMIG and, consequently, succeed its position in this process. On May 2, 2016, the Delegated Judgment office of the Federal Tax Authority decided on December 6, 2012the challenge presented by Parati and Luce LLC on May 18, 2012. OnCEMIG: it maintained the posting of the tax credit against Parati, and in relation to CEMIG, it upheld the principle of joint liability. The companies then appealed, and the Voluntary Appeal is pending judgment by CARF. As of December 31, 2015,2020, the amount involvedclaimed in this case wastotaled approximately R$202 million. We have assessed234 million and the chance of loss was assessed as ‘possible’, mainly due to the matters of fact: (i) on the question of simulation, the situation in this specific case is more favorable than that in the precedents that are found in the case law. If the allegation of simulation is overturned, we believe that there will be no legal case for the demand for payment; (ii) on the merit, because this is a very specific transaction, there are no similar precedents; and (iii) with regards to the fine, the same arguments hold as possible.
CemigCEMIG and its wholly-owned subsidiaries, in particular Cemigespecially CEMIG GT and CemigCEMIG D, are parties in several judicialvarious court and administrative proceedings dealing with offsetting of credits of IRPJ, CSLL,arising from tax losses in corporate income tax returns, and also payments made in excess, identified by Federal Revenue Payment or Credit Receipts, involving corporate income tax, the Social Contribution on net income and the PIS and Cofins taxes. The companies are contesting the claimsnon-ratification by the authorities of these taxes madeoffsetting, and attempts by the federal tax authority.authorities to recover the amounts of these taxes to be compensated. On December 31, 20152020, the amount involved in these for which the chanceprobability of loss waswere assessed as possible was‘possible’ totaled approximately R$663.2203 million.
The Company is a partyCEMIG and its subsidiaries are involved in onenumerous administrative and judicial proceeding involving requests for restitutionclaims actions relating to taxes, including, among other matters, subjects relating to the Rural Property Tax (‘ITR’); the Tax on Donations and offsettingLegacies (‘ITCD’); the Social Integration Program (Programa de Integração Social, or ‘PIS’); the Contribution to Finance Social Security (Contribuição para o Financiamento da Seguridade Social, or ‘Cofins’); Corporate Income tax (‘Imposto de Renda Pessoa Jurídica’, or ‘IRPJ’); the Social Contribution (‘Contribuição Social sobre o Lucro Líquido’, or ‘CSLL’); and motions to tax enforcement. As of credits arising from tax carryforward balances indicated in the tax returns (DIPJs), and also for excess payments identified by the corresponding tax payment receipts (DARFs and DCTFs) for the calendar years from 1997 to 2000. On December 31, 20152020, the total amount involved in this proceeding was approximately R$482 million. The chancesthese actions for which probability of loss were assessed as possible, because‘probable’ totaled approximately R$14 million and the final decision will be based above all on examinationproceedings in which the probability of loss were assessed ‘possible’ totaled approximately R$152 million.
ICMS (local state value added tax)
From December 2019 to November 2020 the Tax Authority of Minas Gerais State issued infraction notices against the subsidiary Gasmig, in the total amount of R$55 million, relating to reduction of the ample documentationcalculation base of ICMS tax in the sale of natural gas to its customers over the period from December 2014 to December 2016, alleging a divergence between the form of calculation used by Gasmig and the opinion of that tax authority. The claims comprises: principal of R$17 million, penalty payments of R$27 million and interest of R$11 million.
Considering that the State of Minas Gerais, over a period of more than 25 years, has never made any allegations against the methodology of calculation by the Company, the managers, together with their legal advisers, believe that there is a defense under Article 100, III of the administrative proceedingsNational Tax Code, which removes claims for penalties and interest; and that the contingency for loss related to these amounts is ‘remote’. In relation to the argument on the difference between the amount of ICMS tax calculated by Gasmig and the new interpretation by the state tax authority, the probability of loss was considered ‘possible’. On December 31, 2020 the amount of the contingency for the period relating to the action, when we believe elements will be identified that are able to support Cemig’s arguments.rules on expiry by limitation of time is R$107 million.
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Contracts
CemigCEMIG D is a party in court disputes involving claims for rebalancing of contracts to implement part of the rural electrification program known asLuz Para Todos (“(‘Light for Everyone”All’). As of December 31, 2015,2020, the amount involved in these actions was approximately R$202356 million. The chancesamounts for which probability of loss in these actions have beenwere assessed as possible.
Cemig is a party in a State Credit Administrative Proceeding (Processo Administrativo de Crédito Estadual, or PACE), brought by the State of Minas Gerais, on December 29, 2014, claiming an additional amount in excess of the amount returned by Cemig to the State of Minas Gerais in December 2011 as restitution of an Advance against Future Capital Increase. In response to the filing of the PACE proceedings, the Board of Directors at its meeting of December 29, 2014 decided to authorize the Executive Board to urgently take the measures necessary to apply for suspension of demandability of the credit being demanded by the State in the PACE, and that this may be made by means of an administrative or court deposit. On December 29, 2014, Cemig made the administrative deposit of the amount claimed by the State of Minas Gerais, of R$239.4 million. On December 31, 2015, the amount involved in this administrative action was‘probable’ totaled approximately R$269 million. The chances1 million and the proceedings in which the probability of loss in this action have beenwere assessed as probable.‘possible’ totaled approximately R$355 million.
The CompanyCEMIG and the State of Minas Gerais are parties in an administrative proceeding beforefiled by the Audit Court of the State of Minas Gerais (‘TCMG’), on a representation of supposed irregularities in the manner used for application of arrears interest, and in the percentage of discount given, at the time of the settlement of the debt owed by the State of Minas Gerais to CemigCEMIG in relation to the Contract for Assignment of the Outstanding Balance Receivable on the CRC (Earnings Compensation) Account. OnEarnings Compensation Account (‘CRC’). In June 2018, the Court’s Technical Unit and the Public Attorneys’ Accounting Department gave opinions, against the Representation. The principal arguments presented by CEMIG were accepted. Proceedings in the case before the Reporting Member of the Court have been completed, and will be included in a judgment agenda for decision by the full Court sitting in session. As of December 31, 2015,2020, the amount involved in this action was approximately R$363448 million, and the chancesprobability of loss in the action were assessed as possible.‘possible’.
Employment-law obligations
Cemig, CemigEmployment Law Obligations
CEMIG, CEMIG GT and CemigCEMIG D are parties in various legal actions broughtlabor claims filed by their employees and by employees of companies that provide them with services. Most of these claims relate to overtime and additional pay, severance payments, various benefits, salary adjustments and the effects of such matters on a supplementary retirement plan, and the use of outsourced labor. Under Brazilian employment laws, claimants must file claims for any unpaid amounts to which they are entitled within two years from the relevant termination of the employment contract, and such rights are limited to a period of five years prior to the filing of the claim. On December 31, 2015,2020, the value of the claims for which the chancesprobability of loss had been assessed as probable‘probable’ was approximately R$290 million, and427 million; for those with chancesprobability of loss assessed as possible‘possible’ the amount was approximately R$682 million, including959 million.
Alteration of the amount with respect to the Action for Executionmonetary updating index of Judgment referred to below.labor claims
Additionally, Cemig, Cemig D and Cemig GT are parties in proceedings before the Employment-Law Courts forThe Higher Labor Appeal Court (Tribunal Superior do Trabalho, or ‘TST’), considering a Collective Salary Adjustment filedposition adopted by the Minas Gerais Electricity Industry Workers’ UnionFederal Supreme Court (Sindicato dos Trabalhadores no Indústria Energética de Minas Gerais – SindieletroSupremo Tribunal Federal), and a further 13 federations/unions. The final decision subject‘STF’) in two actions on constitutionality that dealt with the index for monetary updating of federal debts, decided on August 4, 2015 that labor claims not yet decided that discuss debts subsequent to no further appeal in this caseJune 30, 2009 should be updated based on the variation of the IPCA-E (‘Expanded National Customer Price’) Index, rather than of the TR reference interest rate. On October 16, 2015, an interim injunction was given on February 23, 2015, requiringby the three companies to increaseSTF that suspended the salarieseffects of their employees, for productivity,the TST decision, on the basisgrounds that decisions on matters of 3% (three percent) (calculated on the amount receivedgeneral constitutional importance should be decided exclusively by the employee after the applicable deductions), to be applied retroactively for the period commencing on November 1, 2012.STF. In March 2015, these companies implemented the increase of 3% (three percent) in their payroll, and on October 6, 2015, signed an agreement with the union entities, with the exception of the Workers’ Union of the South of Minas (Sindicato dos Trabalhadores do Sul de Minas – Sindisul), for payment by installments, in the payroll, of the amounts for the perioda public joint judgment of November 1, 20122018, the Higher Employment Appeal Court decided that the IPCA-E should be adopted as the index for inflation adjustment of employment-law debts for cases proceedings filed from March 25, 2015 to February 28, 2015. On April 6, 2015, Sindisul filed an ActionNovember 10, 2017 and the TR continue to be used for Executionthe other periods.
However, in December 2020, the Federal Supreme Court, aiming to end the discussion around the topic involving the updating index of Judgment,labor claims, gave partial judgment in favor of two actions for receiptdeclaration of constitutionality, deciding for the unconstitutionality of Reference Rate (TR) and ruled that monetary adjustment applied to employment-law liabilities should be by the IPCA-E index until the stage of service of notice in a legal action, and thereafter by application of the amount owedSelic rate,. The effects of this decision were modulated as follows: (a) payments already made in due time and in the appropriate manner, using application of the TR, the IPCA-E or any other indexer, will remain valid and may not be the subject of any further contestation; (b) actions in progress that are at the discovery phase, should be subject to each employeebackdated application of the Selic rate, on penalty of future allegation of non-demandability of judicial title based on an interpretation contrary to the position of the Supreme Court; and; (c) the decision is automatically applicable to actions in its membership basewhich final judgment has been given against which there is no appeal, provided that there is no express submission in relation to the period referred to. On December 31, 2015,monetary adjustment indices and interest rates; and this also applies to cases of express omission, or simple consideration of following the amount involved in this action was approximately R$13 million, and the chances of loss in the action were assessed as possible.
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Environmental issues
Cemig, Cemig GT, Southern Electric and FEAM are defendants in a class action filed on February 5, 2007 by the Regional Environmental Association of Patrocínio, which involves a claim for indemnifying and redressing environmental damages caused by theNova Ponte hydroelectric power plant. On March 11, 2016 the judge ruled in favour of the defendants. On May 5, 2016 the Regional Environmental Association of Patrocínio appealed and is currently awaiting judgement by the Minas Gerais State Court of Appeals. As of December 31, 2013, the amount involved in this action was approximately R$1.8 billion. However, taking into account the phase of the case, and the changes in the legislation subsequent to the filing of the action, it was possible for the technical staff to reappraise the claims and the amount to be disbursed in the event of loss in the action. On December 31, 2015, the amount involved in this action was approximately R$314 million and the chances of loss have been assessed as possible; however, due to a favorable decision on March 11, 2016 from the judge in the class action the Company has revised the chances of loss to remote.Issues
The Public Attorneys’ Office of the State of Minas Gerais and other parties, have brought civil public actions against Cemig, CemigCEMIG, CEMIG GT and CemigCEMIG D requiring them to invest at least 0.5% of their annual operationaloperating revenue since 1997 in environmental protection and preservation of the water tables of the municipalities where hydroelectrichydro electrical plants are located, and to indemnify the State of Minas Gerais, proportionately, for environmental damage allegedly caused, arising from omission to comply with Minas Gerais State Law No.°12,503/97. Partial judgment has been given in favor of the plaintiffs in four of these actions by the Minas Gerais State Court of Appeals, ordering CemigCEMIG and CemigCEMIG GT to invest 0.5% of gross annual revenue since 1997 in measures for preservation and protection of the water tables. The Companies have filed appeals towith the STJ and towith the Federal Supreme Court (Supremo Tribunal Federal, or STF),STF, since the actions involve federal laws and constitutional matters. On February 9, 2015, the STF recognized the general repercussion of the dispute. In May / 2020, the virtual trial by the STF was concluded, which, by majority, considering theme 774 of general repercussion, granted the extraordinary appeal, considering the unconstitutionality of State Law No. 12,503 / 1997, as it constituted an undue State intervention in the contract of concession of the exploitation of the energy use of water courses, an activity of the Union's competence, according to art. 21, XII, ‘b’, of the Federal Constitution. As of December 31, 2015,2020, the amount involved in these actions was approximately R$99186 million, and the chancesprobability of loss were assessed as possible.‘remote’.
Additionally, Cemig, CemigCEMIG, CEMIG GT and CemigCEMIG D are party to a number of other administrative and judicial proceedings and claims involving environmental matters, regarding certain protected areas, environmental licenses and remediation of environmental damages, among others. OnAs of December 31, 20152020, the amount for which chance of loss was assessed as probable‘probable’ was approximately R$60,000131.4 thousand and the total of casesproceedings in which chancesprobability of loss were assessed as possible‘possible’ was approximately R$90165 million. These proceedings also include other public civil actions in which the amounts involved cannot be precisely assessed, in our view, since most of these lawsuits are related to alleged environmental damages and claim indemnity, remediation of damaged areas and compensation measures that will be defined in the course of the proceedings, by expert verification of the amounts involved. Also, since public civil actions relatelawsuits are related to collective rights, individual actions may be filed seeking reparations or damages arising from judicial decisions to be issued under the public civil actions.
Property and liabilityLiability
Cemig, CemigCEMIG, CEMIG GT and CemigCEMIG D are party in several legal proceedings, mainly as defendant, relating to realReal property and to indemnity arising from accidents taking place in the ordinary course of the business. On December 31, 20152020 the amount for which chancesprobability of loss were assessed as probable‘probable’ was approximately R$5141 million and the total of casesproceedings in which chancesprobability of losses were assessed as possible‘possible’ was approximately R$189 million.448million.
Additionally, Cemig Distribution is a
Other proceedings
Company and its subsidiaries are involved as plaintiff or defendant, in fifteen legal actions in which the plaintiffs seek indemnity for pain and suffering and property damagesother less significant claims, related to the accident that took placenormal course of their operations including: provision of cleaning service in power line pathways and firebreaks, indemnities for rescission of contracts, on February 27, 2011, ina lesser scale, and disputes alleging losses suffered as a result of supposed breaches of contract at the towntime of Bandeira do Sul, which resulted from coiled metal carnival decorations being thrown over electricity distribution cables, causing a short-circuit which severed medium-voltage cablesprovision of services of cleaning of power line pathways and resulted, when the cables hit the ground, in the deathfirebreaks. As of 16 people, with dozens of other people injured. On December 31, 2015, the amount involved was approximately R$14 million. The chances of loss in these actions have been assessed as possible. The greater significance of these actions for Cemig is not related to their financial impacts, but to the negative exposure of the Company’s image, since the accident was widely publicized by the media.
Questions involving the Company’s equity holdings
Cemig GT is party to an arbitration proceeding in the Market Arbitration Chamber (Câmara de Arbitragem do Mercado, or CAM) where it is seeking the annulment of the capital increase approved on October 21, 2014 in an Extraordinary General Meeting of Stockholders of its affiliated company Madeira Energia S.A. (Mesa). On December 31, 20152020, the amount involved in relation to the capital contribution by Cemig GT was approximately R$177 million and the chancesthese actions for which probability of loss were assessed as possible. In September 2016, however,‘possible’ totaled approximately R$591 million and the arbitration panel issued a rulig favorable to Cemig GT, thereforeproceedings in which the chancesprobability of loss were revisedassessed ‘probable’ totaled approximately R$54 million.
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Customer’s claims
Company and its subsidiaries are involved in various civil actions relating to remote.
Renova: Application to override corporate identity
A Receivables Investment Fund (Fundo de Investimento em Direitos Creditórios – FIDC) filed an application for Override of Legal Identity (Incidente de Desconsideração da Personalidade Jurídica – IDPJ) in relation to certain companies of the Renova group, aiming to include some shareholders of Renova, including the Company and its subsidiary CEMIG GT, as defendants jointly and severally liable. The amount involved in this dispute is estimated at R$76 million at December 31, 2020. The probability of loss have been assessed as ‘possible’.
Dividend Policy and Payments
Mandatory Dividend—Priority and Amount of Dividends
Under our by-laws, we are required to pay to our shareholders, as mandatory dividends, 50% of the net profitincome of each fiscal year ending December 31, determined in accordance with Law No. 6,404, datedenacted on December 15, 1976, or “Brazilian‘Brazilian Corporate Law”Law’. Our preferred shares have priority in the allocation of the minimum mandatory dividend for the period in question. The order of priority of the dividend distribution is as follows:
| · | 10% of their par value; or |
| · | 3% of the shareholders’ equity associated with it; |
| · | The dividends on the common shares, up to the minimum percentage for the preferred shares. |
The Annual General Meeting of Shareholders held on April 30, 2018 approved payment of dividends for the year 2017, of R$486 million, to holders of preferred shares and R$15 million to holders of common shares. The payment of dividends was made in a single tranche on December 30, 2018.
On December 18, 2018, the Company declared payment of Interest on Capital in the amount of R$210 million, on account of the amount of the minimum mandatory dividend for 2018, and payable to shareholders whose names were on the Company’s Nominal Share Registry on December 21, 2018. This amount was paid in two installments, the first on June 28, 2019 and the second on December 27, 2019. The Board of Directors proposed to the Annual General Meeting (AGM) held on May 3, 2019 the payment of dividends for the year 2018 of R$437 million, to holders of preferred shares and R$220 million to holders of common shares. The payment of dividends was made in a single tranche on December 27, 2019.
On December 18, 2019, the Company declared payment of Interest on Capital in the amount of R$400 million, on account of the amount of the minimum mandatory dividend for 2019, and payable to shareholders whose names were on the Company’s Nominal Share Registry on December 23, 2019. This amount will be paid in two installments, the first by June 30, 2020 and the second by December 30, 2020. The Board of Directors decided to propose to the Annual General Meeting (AGM) to be held on July 31, 2020 the payment of dividends for the year 2019 of R$364 million, to holders whose names are in the Company´s Nominal Share Registry on the date of the AGM. The payment of dividends was made in a single tranche on December 30, 2020.
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On September 22 and December 23, 2020, the Company declared payment of Interest on Capital in the amount of R$553 million, on account of the amount of the minimum mandatory dividend for 2020, and payable to shareholders whose names were on the Company’s Nominal Share Registry on September 22 and December 30, 2020. This amount will be paid in two installments, the first by June 30, 2021 and the second by December 30, 2021. The Board of Directors decided to propose to the Annual General Meeting (AGM) to be held on April 30, 2021. The payment of dividends for the year 2020 of R$929 million, to holders whose names are in the Company´s Nominal Share Registry on the date of the AGM. The payment of dividends will be paid in two installments, the first by June 30, 2021 and the second by December 30, 2021.
Unrealized profit reserve: Article 197 of the Brazilian corporate law nº 6,404/76 allows the Company to pay the mandatory dividend, calculated as required by the Bylaws, up to the minimum percentageamounts of the realized portion of the net income for the preferred shares.
Anyyear (received in cash). The excess between such mandatory dividend amount remaining afterand the paymentdividends that will be actually paid was recorded in the ‘Unrealized profit reserve’.
In 2020, Company presented a positive net share of profit of subsidiaries, jointly controlled entities and affiliates of R$2,704 million, which can be regarded as unrealized portion of net income for the year, in accordance with the Brazilian corporate law. The share of profit of subsidiaries and joint ventures might not be realized in 2021, which means it might not be converted into cash, considering the macro-economic scenario and the fact that the impacts of Covid-19 – coronavirus on investees’ cash flows and financial results may continue in 2021.
In light of the realized profit for the year, as stated above, Management proposed the constitution of unrealized profit reserve will be maintained with a balance in the amount of R$835 million, considering the reversal of the reserve constituted in 2019 and the new constitution of the same amount in 2020.
The unrealized profit reserve amounts can only be used to pay mandatory dividends. Hence, when the Company realizes such profits in cash, it must distribute the corresponding dividend on common stock must be distributed on an equal,pro rata basis with respect to all preferred shares and common shares.in the subsequent period, after offsetting of any losses in subsequent years.
Without prejudice to the mandatory dividend, beginning in fiscal year 2005, every two years, or shorter period if the Company’s cash position permits, we distribute extraordinary dividends, up to the limit of the cash available, as determined by the Board of Directors, under the Company’s Strategic Guidelines Plan and the dividend policy specified in that plan.
The annual dividends declared shall be paid in two equal installments, the first by June 30 and the second by December 30 of each year. Extraordinary dividends shall be paid as decided by the Board of Directors.Directors, according to the same deadline.
Under Brazilian Corporate Law, the Board of Directors may declare interim dividends, in the form of interest on capital, to be paid from retained earnings, accumulated reserves or profit reported in semi-annual or quarterly financial statements. Any interim dividend paid may be set off against the amount of the mandatory dividend payable for the fiscal year in which the interim dividend was paid.
In the fiscal years in which we do not have sufficient profit to pay dividends to our preferred and common shareholders, the State of Minas Gerais guarantees a minimum dividend of 6% of the par value of the preferred or common shares, respectively, per year to all shares of the Company issued as ofuntil August 5, 2004 and held by individuals.
Amounts Available for Distribution
The amount available for distribution is calculated on the basis of the financial statements prepared in accordance with generally accepted accounting practices adopted in Brazil and the procedures described below.
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The mandatory dividend is calculated on the basis ofadjusted net profitincome, defined as net profitincome after taking onto account: (a) amounts allocated to the legal reserve, (b) amounts allocated to the formation of therecord contingency reserves and reversal of these reserves accumulated in previousprior fiscal years, and (c) any unrealized profit transferred to the unrealized profitunrealizedprofit reserve account, and any amounts previously posted to this reserve account which have been realized in the fiscal year and used to offset losses.
We are obligated to maintain a legal reserve of 5% of the net profitincome of each fiscal year until it reaches 20% of the Company’s social capital.capital according to Article 193 of Brazilian Corporate Law. However, we are not obligated to make any allocation to the legal reserve in relation to any fiscal year in which the sum of the legal reserve and the other established capital reserves exceeds 30% of the Company’s total paid-in capital. Any net lossesloss for the year may be charged against the legal reserve.
Under Brazilian Corporate Law, profits of subsidiaries or affiliated companiesaffiliates are reportedaccounted by the equity method and income from term sales, realizable after the end of the next fiscal year, are accounted for as unrealized profit.
The total of profitincome reserves (with the exception of the reserve for contingencies relating to expected losses, tax benefits and the unrealized profit reserve), the legal reserve, the special reserves, the reserve for investment projects, and retained earnings may not be greater than the Company’s registered capital. The amount in excess of our registered capital must be used to increase our registered capital or be distributed as cash dividends.
Under Brazilian Corporate Law and the by-laws of the Company, dividends not claimed within three years of the date on which they are distributed revert to the Company.
Interest on CapitalEquity
Under Brazilian law we may pay interest on capital as an alternativecorporations are permitted to the distribution ofdistribute dividends to shareholders. Funds distributed as interest on equity qualify within the calculation of minimum dividend established in the by-laws. These amountsform of a tax-deductible notional interest expense on shareholders’ equity in accordance with Law No. 9,249/1995 of December 26, 1995, as amended. The amount of tax-deductible interest that may be paid in cash; andis calculated by applying the Company may treat them as an expense for the purposesdaily pro rata variation of the calculation ofTJLP on the income tax and social contribution. The total amount paid in interest on capital is limited to the result of application to the Company’s shareholders’ equity ofduring the Long Term Interest Rate (“TJLP”), determined byConselho Monetário Nacional (CMN)relevant period and may notcannot exceed the greater of (i) 50% of the net profit (after the social contribution on net profits, and before income tax, and the deduction of the interest attributable to shareholders’ equity) for the period in respect of which the payment is made or (ii) 50% of retained earnings and profit reserve as of the date of the beginning of the period in respect of which the payment is made. of:
| · | 50.0% of net income (before taking into account such distribution and any deductions for income taxes and after taking into account any deductions for social contributions on net income) for the period in respect of which the payment is made; or |
| · | 50.0% of earnings reserves and retained earnings. |
Non-residents shareholders must register with the Central Bank so that the foreign currency proceeds of their dividend, interestInterest on equityCapital payments, or of sale or other amounts relating to their shares, may be remitted to them outside Brazil. The preferred shares underlying our Preferred ADSs and the common shares underlying our Common ADSs are held in Brazil by the custodian bank, as agent for the depositary bank, which is the registered owner of the shares.
Dividends and interest on shareholders’ equity over the minimum established in a Company’s by-laws are recognized when approved by the shareholders in the general meeting.
Currency Exchange
Payments of cash dividends and distributions, if any, will be made inreaisReais to the custodian on behalf of the depositary bank, which will then convert such proceeds into U.S. dollars and transfer such U.S. dollars to the depositary bank for distribution to holders of ADRs. In the event that the custodian is unable to immediately convert thereaisReais received as dividends into U.S. dollars, the amount of U.S. dollars payable to the holders of ADRs may be adversely affected by devaluations of therealReal that occur before such dividends are converted and remitted. TherealReal depreciated approximately 49.05% relative22.61% in comparison to the U.S. dollar in 2015.2020. See “Item 3, Key Information—Risk Factors—Risks Relating to Brazil— The Federal Government exercises significant influence on the Brazilian economy, Political and economic conditions can have a direct impact on our business.”business”.
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Dividends in respect of the preferred shares and common shares paid to non-resident holders, including holders of Preferred ADSs and Common ADSs, are generally not subject to Brazilian withholding tax, although in general payments of interest on capital are subject to withholding tax. See “Item 10, Additional Information—Taxation—Information - Taxation - Brazilian Tax Considerations—Considerations - Taxation of Dividends”Dividends’ and “—‘- U.S. Tax Considerations—Considerations - Taxation of Distributions.” There is no specific record date upon which the depositary bank will determine the exchange rate to be used in connection with converting cash dividends or other cash distributions. Pursuant to the Deposit Agreements, the depositary bank will arrange for the funds to be converted into U.S. dollars upon receipt of notice of cash dividends or other cash distributions.
History of Dividend Payments
The table below gives the history of recent declarations of dividends and Interest on EquityCapital to holders of our common and preferred shares. In each case, the payment takes place in the year following the year for the results of which the dividend was declared. For the periods indicated, the dividends paid per common share and per preferred share are the same. Please seeSee the section “Item 3 – Material information – Selected Consolidated Financial Information”.
Declaration History of Dividends and Interest on EquityCapital (1)
Dividend Year | Common Shares | Preferred Shares | ||||||||||||||
| (R$)(2) | (US$)(3) | (R$)(2) | (US$)(3) | |||||||||||||
2013 | 553,627,379 | 232,031,592 | 1,101,974,620 | 461,850,217 | ||||||||||||
2014 | 266,619,949 | 87,019,795 | 530,697,050 | 173,209,651 | ||||||||||||
2015(4) | 211,996,628 | 61,364,700 | 421,971,371 | 122,144,143 | ||||||||||||
Dividend Year | Common Shares | Preferred Shares | ||
(in millions R$) (2) | ( in millions US$) (3) | (in millions R$) (2) | (in millions US$) (3) | |
| 2018 (4) | 290 | 75 | 577 | 149 |
| 2019 (5) | 255 | 49 | 509 | 99 |
| 2020 (6) | 496 | 88 | 986 | 176 |
| (1) | Under Brazilian accounting practices, dividends and Interest on |
| (2) | Amounts expressed in |
| (3) | The amounts in USD displayed above are for illustrative purposes only and were calculated by dividing the amount of dividends and interest on capital paid, expressed in nominal |
| (4) |
| (5) | On December 18, 2019, the Company declared payment of Interest on Capital in the amount of R$400 million, on account of the amount of the minimum mandatory dividend for 2019, and payable to shareholders whose names were on the Company’s Nominal Share Registry on December 23, 2019. This amount will be paid in two installments, the first by June 30, 2020 and the second by December 30, 2020. According to the proposal of the Ordinary and Extraordinary General Meetings of Shareholders to be held on July 31, 2020, the Company proposed payment of R$364 million as mandatory minimum dividend to holders of common and preferred shares whose names are on the Company’s Nominal Share registry on the date on which the Ordinary (Annual) General Meeting is held. |
| (6) | On September 22, 2020, the Company declared payment of Interest on Capital in the amount of R$120 million, on account of the amount of the minimum mandatory dividend for 2020, and payable to shareholders whose names were on the Company’s Nominal Share Registry on September 25, 2020. This amount will be paid in two installments, the first by June 30, 2021 and the second by December 30, 2021. On December 23, 2020, the Company declared payment of Interest on Capital in the amount of R$433 million, on account of the amount of the minimum mandatory dividend for 2020, and payable to shareholders whose names were on the Company’s Nominal Share Registry on December 30, 2020. This amount will be paid in two installments, the first by June 30, 2021 and the second by December 30, 2021. According to the proposal of the Ordinary and Extraordinary General Meetings of Shareholders to be held on April |
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| Item 9. | Offer and Listing Details |
Trading Market
The principal trading market for our preferred shares is the BM&FBovespa.Brazilian Stock Exchange (B3). Our Preferred ADSs, each representing one preferred share as of December 31, 20152020 have traded on the NYSE under the symbol “CIG”‘CIG’ since September 18, 2001. Prior to that date, our Preferred ADSs were traded in the over-the-counter, or OTC, market in the United States. The Preferred ADSs are evidenced by Preferred ADRs issued by Citibank, N.A., as depositary, pursuant to a Second Amended and Restated Deposit Agreement, dated August 10, 2001, as amended on June 11, 2007 and on September 11, 2012 by and among the Company, the depositary and the holders and beneficial owners of Preferred ADSs evidenced by Preferred ADRs issued thereunder. As of DecemberMarch 31, 20152021 there were approximately 287,918,816227,670,421 Preferred ADSs outstanding (each representing one preferred share), representing approximately 34.35%20.19% of our 826,957,231 outstanding1,011,082,312 preferred shares (Free Float)(without considering the effect of the capitalization of 116,243,122 preferred shares approved on April 30).
The principal trading market for our common shares is the BM&FBovespa.B3. Our Common ADSs, each representing one common share as of December 31, 20152020 have traded on the NYSE under the symbol “CIG.C”‘CIG.C’ since June 12, 2007, when we established an American Depositary Shares program for our common shares. The Common ADSs are evidenced by Common ADRs issued by Citibank, N.A., as depositary, pursuant to a Deposit Agreement, dated June 12, 2007, by and among Company, the depositary and the holders and beneficial owners of Common ADSs evidenced by Common ADRs issued thereunder. As of DecemberMarch 31, 20152021 there were approximately 462,5082,587,491 Common ADSs outstanding (each representing one common share), representing 0,11%0.51% of our 206,187,821 outstanding507,670,289 common shares (Free Float)(without considering the effect of the capitalization of 58,366,345 common shares approved on April 30). The following prices are net of earnings, including dividends:
On September 30, 2016,As of December 31, 2020, the closing price per preferred share on the BM&FBovespaB3 was R$8.5814.27 and the closing price per Preferred ADS on the NYSE was US$ 2.59.2.82.
On September 30, 2016,As of December 31, 2020, the closing price per common share on the BM&FBovespaB3 was R$8.5616.11 and the closing price per Common ADS on the NYSE was US$2.82.3.18.
The following table sets forth the reported high and low closing sale prices adjusted for dividends for the preferred and common shares on the BM&FBovespaB3 and the Preferred and common ADSs on the NYSE for the periods indicated.
| Common Shares | Common ADSs | Preferred Shares | Preferred ADS | |||||||||||||||||||||||||||||
Period | Price in Nominal R$ | Price in US$ | Price in Nominal R$ | Price in US$ | ||||||||||||||||||||||||||||
| High | Low | High | Low | High | Low | High | Low | |||||||||||||||||||||||||
2010 | 6.23 | 4.92 | 3.82 | 2.78 | 8.75 | 6.86 | 5.48 | 3.89 | ||||||||||||||||||||||||
2011 | 8.95 | 5.81 | 5.81 | 3.22 | 11.11 | 7.75 | 6.87 | 4.57 | ||||||||||||||||||||||||
2012 | 14.94 | 8.57 | 7.72 | 4.28 | 17.40 | 9.65 | 8.88 | 4.65 | ||||||||||||||||||||||||
2013 | 14.50 | 10.45 | 7.09 | 4.76 | 14.09 | 10.32 | 6.99 | 4.67 | ||||||||||||||||||||||||
2014 | 19.29 | 10.1 | 8.46 | 4.42 | 18.46 | 10.04 | 8.35 | 4.25 | ||||||||||||||||||||||||
2015 | 15.86 | 5.85 | 5.50 | 1.30 | 15.66 | 5.61 | 5.19 | 1.40 | ||||||||||||||||||||||||
2013 | ||||||||||||||||||||||||||||||||
1 Q | 12.63 | 10.45 | 6.67 | 5.64 | 13.06 | 10.32 | 6.88 | 5.23 | ||||||||||||||||||||||||
2 Q | 14.50 | 10.93 | 7.09 | 4.89 | 14.09 | 11.06 | 6.99 | 4.98 | ||||||||||||||||||||||||
3 Q | 13.50 | 11.00 | 6.13 | 4.76 | 13.18 | 10.75 | 5.92 | 4.71 | ||||||||||||||||||||||||
4 Q | 12.38 | 11.19 | 5.74 | 4.82 | 12.23 | 10.99 | 5.72 | 4.67 | ||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||||||||
1 Q | 12.93 | 10.16 | 5.77 | 4.42 | 12.69 | 10.04 | 5.70 | 4.25 | ||||||||||||||||||||||||
2 Q | 15.49 | 12.40 | 7.31 | 5.66 | 15.88 | 11.94 | 7.20 | 5.33 | ||||||||||||||||||||||||
3 Q | 19.29 | 13.74 | 8.46 | 6.04 | 18.46 | 13.25 | 8.35 | 5.50 | ||||||||||||||||||||||||
4 Q | 16.25 | 12.70 | 6.83 | 4.83 | 16.02 | 11.85 | 6.74 | 4.40 | ||||||||||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||
1 Q | 14.12 | 11.60 | 5.33 | 3.46 | 13.37 | 10.95 | 4.97 | 3.51 | ||||||||||||||||||||||||
2 Q | 16.26 | 11.65 | 5.50 | 3.60 | 16.08 | 11.50 | 5.35 | 3.71 | ||||||||||||||||||||||||
3 Q | 12.00 | 6.57 | 3.72 | 1.65 | 11.97 | 6.48 | 3.86 | 1.61 | ||||||||||||||||||||||||
4 Q | 7.93 | 6.00 | 2.61 | 1.30 | 8.06 | 5.76 | 2.14 | 1.44 | ||||||||||||||||||||||||
2016 | ||||||||||||||||||||||||||||||||
1 Q | 8.62 | 4.39 | 2.43 | 1.08 | 8.70 | 4.10 | 2.42 | 1.02 | ||||||||||||||||||||||||
2 Q | 8.30 | 5.43 | 2.30 | 1.43 | 8.26 | 5.16 | 2.30 | 1.40 | ||||||||||||||||||||||||
3 Q | 10.03 | 7.12 | 3.20 | 2.15 | 9.97 | 7.09 | 3.08 | 2.08 | ||||||||||||||||||||||||
Common Shares | Common ADSs | Preferred Shares | Preferred ADS | |||||
Price in Nominal R$ | Price in US$ | Price in Nominal R$ | Price in US$ | |||||
| Year | High | Low | High | Low | High | Low | High | Low |
| 2016 | 9.08 | 3.94 | 3.03 | 0.98 | 8.26 | 3.43 | 2.63 | 0.86 |
| 2017 | 13.45 | 6.05 | 4.44 | 1.81 | 10.23 | 5.92 | 3.34 | 1.76 |
| 2018 | 15.03 | 5.97 | 4.26 | 1.54 | 13.86 | 6.09 | 3.56 | 1.58 |
| 2019 | 18.71 | 13.73 | 4.83 | 3.21 | 15.09 | 12.24 | 3.95 | 2.86 |
| 2020 | 16.33 | 7.10 | 4.06 | 1.37 | 14.61 | 7.25 | 3.40 | 1.24 |
Common Shares | Common ADSs | Preferred Shares | Preferred ADS | |||||
| Quarter | Price in Nominal R$ | Price in US$ | Price in Nominal R$ | Price in US$ | ||||
| 2019 | High | Low | High | Low | High | Low | High | Low |
| 1 Q | 17.03 | 14.45 | 4.40 | 3.65 | 14.13 | 12.43 | 3.74 | 3.21 |
| 2 Q | 18.71 | 14.62 | 4.77 | 3.79 | 14.94 | 12.24 | 3.81 | 3.00 |
| 3 Q | 18.56 | 15.23 | 4.83 | 3.59 | 15.09 | 13.62 | 3.95 | 3.24 |
| 4 Q | 15.82 | 13.73 | 3.90 | 3.21 | 14.21 | 12.30 | 3.37 | 2.86 |
| 2020 | ||||||||
| 1 Q | 16.30 | 7.10 | 4.06 | 1.45 | 14.61 | 7.46 | 3.40 | 1.42 |
| 2 Q | 11.57 | 7.19 | 2.51 | 1.37 | 11.03 | 7.25 | 2.30 | 1.24 |
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| 3 Q | 11.71 | 9.98 | 2.31 | 1.84 | 11.35 | 9.90 | 2.24 | 1.80 |
| 4 Q | 16.33 | 10.76 | 3.22 | 1.89 | 14.27 | 9.95 | 2.84 | 1.80 |
Common Shares | Common ADSs | Preferred Shares | Preferred ADS | |||||
Price in Nominal R$ | Price in US$ | Price in Nominal R$ | Price in US$ | |||||
| Month | High | Low | High | Low | High | Low | High | Low |
| October 2020 | 12.18 | 10.76 | 2.19 | 1.89 | 10.78 | 9.95 | 1.99 | 1.80 |
| November 2020 | 13.91 | 11.57 | 2.65 | 1.98 | 12.38 | 10.13 | 2.37 | 1.82 |
| December 2020 | 16.33 | 14.09 | 3.22 | 2.67 | 14.27 | 12.41 | 2.84 | 2.50 |
| January 2021 | 17.37 | 15.82 | 3.27 | 2.85 | 15.25 | 13.46 | 2.93 | 2.50 |
| February 2021 | 16.92 | 14.50 | 3.17 | 2.57 | 14.42 | 11.96 | 2.67 | 2.11 |
| March 2021 | 15.79 | 13.67 | 2.85 | 2.39 | 13.03 | 11.36 | 2.27 | 1.99 |
| April 2021 (until April 26,2021) | 15.80 | 15.26 | 2.90 | 2.77 | 13.50 | 12.51 | 2.43 | 2.13 |
* Source: Economatica – net earnings prices, including dividends.
The table below represents the stock dividends paid on the common and preferred shares and their respective Common and Preferred ADSs, resulting in an adjustment to the price per share and ADS:
Record of dividends paid on common and preferred shares and Common and Preferred ADSs | |||||
Year | Declaration | Record date Brazil | Payment date Brazil | Record date NYSE | Payment date NYSE |
| 2018 | 04/30/2018 | 04/30/2018 | 12/28/2018 | 05/03/2018 | 01/08/2019 |
| 2019 | 05/03/2019 | 05/03/2019 | 12/26/2019 | 05/07/2019 | 01/07/2020 |
| 2020 | 07/31/2020 | 07/31/2020 | 12/30/2020 | 08/14/2020 | 01/08/2021 |
Record of stock dividends paid on common and preferred shares and Common and Preferred ADSs | ||||||||||||||||||||||||
Year | % | Declaration | Record date Brazil | Payment date Brazil | Record date NYSE | Payment date NYSE | ||||||||||||||||||
2010 | 10.00% | 04/29/2010 | 04/29/2010 | 05/05/2010 | 05/04/2010 | 05/10/2010 | ||||||||||||||||||
2012 | 25.00% | 04/27/2012 | 04/27/2012 | 05/04/2012 | 05/02/2012 | 05/11/2012 | ||||||||||||||||||
2013 | 12.85% | 04/30/2013 | 04/30/2013 | 05/07/2013 | 05/06/2013 | 05/14/2013 | ||||||||||||||||||
2014 | 30.76% | 12/26/2013 | 12/26/2013 | 01/03/2014 | 12/26/2013 | 01/10/2014 | ||||||||||||||||||
2015 | 25.00% | 04/30/2015 | 04/30/2015 | 12/28/2015 | 05/06/2015 | 01/05/2016 | ||||||||||||||||||
The shares price and ADSs price were adjusted to the new number of shares, after the stock dividend.
Since July 12, 2002, our shares have been traded on the LATIBEX, under the ticker symbol “XCMIG,”‘XCMIG,’ The LATIBEX is an electronic trading market created in 1999 by the Madrid Stock Exchange in order to facilitate the trading market of Latin American Securities in Euros.
Trading on the BM&FBovespaB3 S.A. - BRASIL, BOLSA, BALCÃO (‘B3’)
The preferred shares and common shares are traded on the BM&FBovespa,B3, the only Brazilian stock exchange that trades shares. Trading on the BM&FBovespaB3 is limited to brokerage firms and a limited number of authorized entities. The CVM and BM&FBovespaB3 have discretionary authority to suspend trading in shares of a particular issuer under certain circumstances.
Trading on the B3 is conducted between 10:00 a.m. and 5:00 p.m. or from 11:00 a.m. to 6:00 p.m. (during daylight savings time in Brazil). The B3 also permits trading from 5:30 p.m. to 6:00 p.m. during a different trading period called the ‘after market’, except during daylight time. Trading during aftermarket is subject to regulatory limits on price volatility and on the volume of shares transacted through internet brokers.
If you were to trade in the preferred shares or common shares on the BM&FBovespa,B3, your trade is settled in three business days after the date of the trade. Delivery of and payment for shares is made through the facilities of a separate clearinghouse, which maintains accounts for brokerage firms. The seller is ordinarily required to deliver the shares to the exchange on the second business day following the date of the trade. The clearing house for the BM&FBovespaB3 is theCâmara de Ações (previously organized as Companhia Brasileira de Liquidação e Custódia, CBLC) or ‘CBLC’).
In order to better control volatility, the BM&FBovespaB3 has adopted a “circuit breaker”‘circuit breaker’ system pursuant to which trading sessions may be suspended (i) for a period of 30 minutes whenever the index of this stock exchange falls more than 10% from the index registered for the previous day; (ii) for one hour if the index of this stock exchange falls 15% or more from the index registered for the previous day, after the reopening of trading; and (iii) for a
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certain period of time to be defined by the BM&FBovespa,B3, if the index of this stock exchange falls 20% or more from the index registered for the previous day, after the reopening of trading.
B3 settles the sale of shares three business days after they have taken place, without monetary adjustment of the purchase price. The shares are paid for and delivered through a settlement agent affiliated with the B3. The B3 performs multilateral compensation for both the financial obligations and the delivery of shares. According to the B3’s regulations, financial settlement is carried out by the Central Bank’s reserve transfer system. The securities are transferred by the B3’s custody system. Both delivery and payment are final and irrevocable.
BM&FBovespaTrading on the B3 is significantly less liquid than trading on the NYSE andor other major exchanges in the world. As of December 31, 2015, the aggregate market capitalization of the 358 companies listed on the BM&FBovespa was equivalent to approximately R$1.91 trillion and the 10 largest companies listed on the BM&FBovespa represented approximately 50% of the total market capitalization of all listed companies. Although any of the outstanding shares of a listed company may be tradedtrade on a Brazilian stock exchange,the B3, in most cases fewer than half of the listed shares are actually available for trading by the public. Thepublic, the remainder of these shares isbeing held by small groups ofa controlling persons, governmental entitiesgroup or one principal shareholder.by government entities.
Our preferred shares and common shares have daily liquidityTrading on the BM&FBovespaB3 by a holder not deemed to be domiciled in Brazil for Brazilian tax and have had no suspensionregulatory purposes, or a ‘non Brazilian holder,’ is subject to certain limitations under Brazilian foreign investment regulations. With limited exceptions, non-Brazilian holders may trade on Brazilian stock exchanges in accordance with the requirements of tradingCMN Resolution No. 4,373/2014, which requires that securities held by non-Brazilian holders be maintained in the past five years other than duecustody of financial institutions authorized by the Central Bank and by the CVM or in deposit accounts with financial institutions. In addition, Resolution No. 4,373/2014 requires non Brazilian holders to BM&FBovespa utilizing circuit breakers on a few occasions in 2008 with respectrestrict their securities trading to the trading of all sharestransactions on the BM&FBovespa.B3 or qualified over the counter markets. With limited exceptions, non-Brazilian holders may not transfer the ownership of investments made under Resolution No. 4,373/2014 to other non-Brazilian holders through a private transaction.
We have been a member of Special Corporate Governance Level 1 of the BM&FBovespaB3 since October 2001. The rules regarding such corporate governance segment are comprised by the Special Corporate Governance Level 1 Regulations (“(‘Regulamento de Listagem do Nível 1 de Governança Corporativa”’), which were amended on March 21, 2011 by BM&FBovespaB3 and approved by the CVM. Such revised set of rules became effective on May 10, 2011. Among the obligations that are contemplated by such regulations, we are required to:
| · | Present our consolidated statement of financial position, Standardized Financial Statements – DFP, consolidated statement of income, quarterly financial statements – ITR, and the Reference Form (‘Formulário de Referência’); |
| · | Include, in the notes to our quarterly financial statements, a note regarding related party transactions, containing the disclosure provided in the applicable accounting rules to annual financial statements; |
| · | Disclose any direct or indirect ownership interest per type and class exceeding 5% of each type and class |
| · | Disclose the amount of free float shares and their respective percentage in relation to total shares outstanding, which shall be of at least 25% of shares representing our capital share; |
| · | Disclose, by December 10th of each year, an annual timetable of corporate events, containing, at a minimum, the date of (a) acts and corporate events, (b) public meetings with analysts and other applicable parties, and (c) disclosure of financial information scheduled for the next fiscal year, Any changes in scheduled events must be notified to the B3 and to the public at least 5 days in advance; |
| · | Hold at least one annual meeting with market analysts and any other interested parties to disclose information about their economic and financial situation, projects and perspectives; |
| · | Prepare, disclose and submit to the B3, a securities trading policy and a code of conduct establishing the values and principles that guide the Company, the controlling shareholder, the members of the |
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board of directors and chief executive officerof the Fiscal Council, when installed, and members of any bodies with technical or main executive officer of our company;
| · | Establish that the term of office of our board of directors shall not exceed two years, with reelection being permitted; |
| · | Have different persons occupying the positions of chairman of the board of directors and chief executive officer or main executive officer of our company; |
| · | Adopt mechanisms that provide for capital dispersion in any public share offerings through the adoption of special procedures, such as guaranteeing access to all interested investors or distributing to non-institutional individuals or investors of at least 10% of the total to be distributed; and |
| · | Include in our by-laws the mandatory provisions required by B3. |
Disclosure of Trading by Insiders
Brazilian securities regulations require our controlling shareholders, management, members of our Fiscal Council and any other technical or advisory body to disclose to us, the CVM and the BM&FBovespaB3 the number and types of securities issued by us, our subsidiaries and our controlling companies that are held by them or by persons closely related to them and any changes in their respective ownership positions during the preceding 12 months. The information regarding the trading of such securities (amount, price and date of acquisition) must be provided to the CVM and the BM&FBovespaB3 by the Company within 10 days of the end of the month in which they occurred or of the month in which the managers of the Company were empowered.
Disclosure of Material Developments
Under the Brazilian securities legislation, we are required to publicly disclose any material act or fact related to our business, to the Brazilian Securities Commission (CVM)CVM and to BM&FBovespa (the São Paulo Stock Exchange).B3. We are also required to publish an announcement of such material acts or facts (in newspapers or on news websites). An act or fact is considered material if it has a material impact on: the price of our securities; the decision of investors to buy, sell or hold our securities; or the decision of investors to exercise any rights as holder of any of our securities. Under extraordinary circumstances, material acts or facts may in practice not be disclosed if the controlling stockholdersshareholders or the management believes that revealing them would put the Company’s legitimate interests at risk, provided that such controlling stockholdersshareholders or managers must immediately publicize the material act or fact if they lose control over the information or in case of atypical alterations on stockshare prices or on the amount of shares traded.
Trading on Brazilian stock exchanges by non-residents in Brazil is subject to limitations under the Brazilian law on foreign investment. See the section “Item 10. Additional information – Foreign exchange controls”.
Regulation of Brazilian Securities Markets
The Brazilian securities markets are principally governed by Law No. 6,385, datedenacted on December 7, 1976, and the Brazilian Corporate Law, each as amended and supplemented, and by regulations issued by the CVM, the CMN,National Monetary Council (CMN), and the Central Bank, which has, among other powers, licensing authority over brokerage firms, and which regulates foreign investments and foreign exchange transactions. These laws and regulations, among others, provide for disclosure requirements applicable to issuers of traded securities, protection of minority shareholders and criminal penalties for insider trading and price manipulation. They also provide for licensing and oversight of brokerage firms and governance of the Brazilian stock exchanges.
Under Brazilian Corporate Law, a corporation is either publicly owned,public (‘companhia aberta’), such as we are, or closely held (a closed company (‘companhia fechadafechada’). All publicly ownedpublic companies, including us, are registered with the CVM and are subject to reporting requirements. Our shares areA company registered with the CVM may have its securities traded on the BM&FBovespa, butBrazilian stock exchanges or in the Brazilian over-the-counter market. Our common shares are listed and traded on the B3 and may be traded privately subject to certain limitations. The Brazilian OTC market consists of direct trades and tradessome limitations between individuals in which a financial institution registered with the CVM serves as intermediary.
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We have the option to request that trading in our securities on the BM&FBovespaB3 be suspended in anticipation of a material announcement. Trading may also be suspended on the initiative of the BM&FBovespaB3 or the CVM based on or due to, among other reasons, a belief that a company has provided inadequate information regarding a material event or has provided inadequate responses to inquiries by the CVM or the stock exchange.
The Brazilian law provides general restrictions on unfair trading practices andover the counter market manipulation, althoughconsists of direct trades between individuals in Brazil there maywhich a financial institution registered with the CVM serves as intermediary. No special application, other than registration with the CVM, is necessary for securities of a public company to be fewer instancestraded in this market. The CVM requires that it be given notice of enforcement actions and judicial precedent is less well defined thanall trades carried out in certain other countries.the Brazilian over the counter market by the respective intermediaries.
Trading on the BM&FBovespaB3 by non-residents of Brazil is subject to limitations under Brazilian foreign investment and tax legislation. The Brazilian custodian for the preferred shares or the common shares must register with the Central Bank of Brazil to be eligible for the remittance of funds in U.S. dollars abroad for payments of dividends, any other cash disbursements, or upon the disposition of the shares and sales proceeds thereof. In the event that a holder of Preferred ADSs exchanges itsit is Preferred ADSs for preferred shares or a holder of Common ADSs exchanges itsit is Common ADSs for common shares, the investor will need to apply for registration, as required by Resolution no.No. 4,373, datedenacted on September 29, 2014, which regulates investments in Brazilian financial and securities markets by foreigners. See “Item 10. Additional Information—Exchange Controls”.
Disclosure Requirements
The CVM Rule No. 358, of January 3, 2002, establishes some requirements regarding the disclosure and use of information related to material facts and acts of publicly held companies, including the disclosure of information on the trading and acquisition of securities issued by publicly held companies. Among others, these requirements include provisions that:
| · | Establish the concept of a material fact that gives rise to reporting requirements. Material facts include decisions made by the controlling shareholders, resolutions of the general meeting of shareholders and of management of the company, or any other facts related to the company’s business (whether occurring within the company or otherwise somehow related thereto) that may influence the price of its publicly traded securities, or the decision of investors to trade those securities or to exercise any of those securities’ underlying rights; |
| · | Specify examples of facts that are considered to be material, which include, among others, the execution of shareholders’ agreements providing for the transfer of control, the entry or withdrawal of shareholders that maintain any managing, financial, technological or administrative function with or contribution to the company, and any corporate restructuring undertaken among related companies; |
| · | Oblige the investor relations officer, controlling shareholders, other officers, directors, members of the audit committee and other advisory boards to disclose material facts; |
| · | Require simultaneous disclosure of material facts to all markets in which the corporation’s securities are admitted for trading; |
| · | Require the acquirer of a controlling stake in a corporation to publish material facts, including its intentions as to whether or not to de-list the corporation’s shares, within one year; |
| · | Establish rules regarding disclosure requirements in the acquisition and disposal of a material shareholding stake; and |
| · | Restrict the use of insider information. |
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| Item 10. | Additional Information |
CEMIG’s Compliance and Corporate Governance System
CEMIG seeks to keep its compliance and corporate governance system aligned to best market practices. Over recent years, the Company has been enhancing its system of governance. This now includes all the requirements specified in Federal Law 13,303/16 (‘the State Companies Law’). Under this law, all companies that are controlled or partly owned by the state, and their subsidiaries, have the obligation to comply with new rules on corporate governance, contracting of outsourced entities or individuals, and public competitions.
CEMIG now includes the following practices of good governance and compliance demanded by this legislation:
1. The Board of Directors is responsible for ensuring implementation and supervision of our systems of risk management and internal controls.
2. At least 25% of the Board of Directors must be independent.
3. We have an Audit Committee.
4. The CEO has the responsibility of directing compliance and corporate risk management.
5. The members of the Board of Directors, the Executive Board and the members of committees formed under the by-laws must be submitted to individual and collective performance evaluation annually.
6. The head of the Internal Audit Unit may be appointed, and dismissed, only by the Board of Directors, in both cases only with due justification, and must be chosen from among the Company’s career employees.
7. Adaptation of the Company to the General Data Protection Law (LGPD), with a structure dedicated to the subject, and designation of an Official Responsible for Data Protection.
As well as adopting good corporate governance and compliance practices, CEMIG has a group of policies that establish directives for related subjects. These include:
CEMIG´s Anti-fraud Policy; the Related Party Transactions Policy; the Nominations and Eligibility Policy; the Governance and Management Policy for Non-controlled Investees; the Conflict of Interests Policy; the Data Privacy Policy for Clients and the Public; the Data Privacy Policy for Employees, Suppliers and Service Providers; and the Corporate Risks Management and Compliance Policy.
CEMIG’s Compliance Policy comprises consolidation of the directives that aim to assure the Company’s commitment to adoption of a high standard of integrity and compliance with rules and the law, in the conduct of its business. CEMIG’s commitment to the concept and principle of Integrity is one of its Values, approved by the Board of Directors. The following are objectives of CEMIG’s Compliance Policy:
| · | To create and maintain an organizational culture that encourages ethical conduct and commitment to best compliance practices, and obedience to internal and external rules (a ‘compliance culture’); |
| · | To prevent, detect and respond to any failings in compliance with CEMIG’s internal and external rules, and any deviations of conduct; and |
| · | To concentrate on mitigation of compliance risks prioritized by the Company. |
The Compliance Policy establishes the directives and means for achieving these objectives, including among other matters: the role of Senior Management and the Company’s leadership; maintenance of documented rules and procedures; training and teaching in communication; implementation of internal controls; and availability of channels for consultations and reports of adverse behavior.
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In terms of anti-corruption action, the Company’s most significant risks relating to fraud and corruption have been mapped, documented and approved by Senior Management. In this mapping process, probabilities of materialization of risks are estimated, in accordance with their causes and the severity of the consequences if they occur, and the internal controls and measures related to mitigation of each risk are mapped.
Three areas – Compliance; Risk Management and Internal Controls; and Privacy and Data Protection – are responsible for coordinating the related processes in the company and supporting the individuals responsible for each area of risk and controls. The Internal Audit unit is responsible for periodically checking the compliance and effectiveness of functioning of the Company’s systems of internal controls, compliance and risk management, including the risks and controls related to prevention of and combating corruption.
On its corporate intranet, CEMIG makes a group of rules and procedures permanently available to employees, which orient appropriate conduct by employees in management of processes and execution of all their activities.
The Company also has an Anonymous Reporting Channel, an Ombudsman, and an Ethics Committee, which are accessible for interactions with their internal and external public and able to record and deal with any ethical irregularities or dilemmas affecting operations.
Matters related to compliance are continually dealt with through the Company’s internal channels and mechanisms for communication and training. For this, we use several internal channels, including email, the intranet, the Leadership Channel, banners and WhatsApp. In 2020, with the impacts of the pandemic on the work environment, online means of communication were extremely important tools for increasing internal communications. We covered a range of subjects through articles, texts and videos, aiming to take highly important contents on the culture of integrity and compliance to everyone in the Company. Internal Policies and Procedures were also widely disseminated through these channels.
Training sessions in compliance are made available periodically to the Company’s employees. Training courses were held in 2020 on Moral and Sexual Harassment in the Workplace, and Prevention of Fraud and Corruption. Also, all employees must mandatorily receive the training on CEMIG’s Code of Conduct, every year.
In 2019 and 2020, CEMIG carried out its Compliance Maturity Survey. The aim of this survey is to assess the levels of knowledge on what compliance is, on CEMIG’s Compliance Policy, on adherence to our values (culture), and on employees’ perception in terms of CEMIG’s procedures for prevention, detection and response that are currently in place. Together, these dimensions express the maturity of compliance in the Company. The data resulting from the survey show us that there is attention and commitment on the part of employees in relation to compliance culture and behavior, recognition of its importance, and growing interest in the subject.
Finally, we highlight that CEMIG is a signatory to the UN Global Compact, of which principle number 10 is: ‘Work against corruption in all its forms, including extortion and bribery’; and of the Entrepreneurs’ Pact for Integrity and Against Corruption, organized by the Ethos Institute of Brazil.
Memorandum and Articles of Association
By-laws
We are a state-controlled company registered under the laws of Brazil. The registration number (‘NIRE’) given to us by the Board of Trade of Minas Gerais (Junta Comercial do Estado de Minas Gerais, or ‘Jucemg’) is 31300040127.7968077. Set forth below is a brief summary of certain significant provisions of (i) our by-laws, as amended by our general and special shareholders’ meeting on June 03, 2014July 31, 2020 and (ii) Brazilian Corporate Law. The description of our by-laws contained herein does not purport to be complete and is qualified by reference to our by-laws, which have been filed as an exhibit to this annual report.
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Objects and purpose
As described in Clause 1 of its by-laws, CemigCEMIG was incorporated with four main objects:
| build, operate and commercially operate systems of generation, transmission, distribution and sale of |
| operate in the various fields of energy, from whatever source, with a view to economic and commercial operation; |
| provide consultancy services within its field of operation to companies in and outside Brazil; and |
| carry out activities directly or indirectly related to its objects, including the development and commercial operation of telecommunication and information |
Preferred Shares
Holders of preferred shares have the right to receive annual minimum dividends in an amount equal to the greater of 10% of the par value of each preferred share or 3% of the net worth value associated with each preferred share. Holders of our preferred shares also have priority over any other class of shares if we decide to redeem shares. A preferred share does not entitle its owner to vote at the general shareholders’ meetings.General Shareholders’ Meetings.
Share Subscription
Shares purchased by the State Government, which must constitute at all times the majority of our voting shares, are paid for in accordance with Brazilian Corporate Law. Shares purchased by other shareholders (whether natural persons or legal entities) shall be paid for in accordance with the decision resulting from the general meeting of shareholders that addresses the matter.
Article 171172 of the Brazilian Corporate Law provides that each shareholder has a general preemptive right to subscribe for new shares or convertible securities issued in any capital increase, in proportion to that shareholder’s shareholding, except in the event of the exercise of any option to acquire shares of our capital stock.share. Shareholders must exercise their preemptive rights within 30 days of the publication of the notice of capital increase.
In the event of a capital increase, holders of Preferred ADSs, which represent preferred shares, and holders of Common ADSs, which represent common shares, have preemptive rights to subscribe only for newly issued preferred shares or common shares, respectively, in proportion to their shareholdings but may be unable to exercise those rights due to U.S. securities law restrictions. See “Item 3, Risk Factors—Risks Relating to the Preferred Shares, Preferred ADSs, Common shares and Common ADSs—You may not be able to exercise preemptive rights with respect to our securities.”securities”.
Minority Shareholders
Our by-laws provide that the preferred and minority common shareholders are entitled to elect one member and an alternate to the Board of Directors, respectively, in a separate vote in accordance with the applicable legislation, as more fully described in “—‘—Rights of Shareholders—Rights of Minority Shareholders”.Shareholders.’
Dividends
For a discussion of our dividend policy, see “Item 8, Financial Information—Dividend Policy and Payments”.
General Meetings of Stockholders
General Meetings of StockholdersShareholders
The general meetings of shareholders are held for the purposes specifiedprovided for by law, specifically in law, as stated inthe Brazilian Corporate Law. Ordinary General Meetings are heldThey take place within the first four months following the end of the business year, and must be are
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called withby prior notice of at least 15 days’ prior notice. Braziliandays. The Corporate Law also specifies that the following decisions maycan be made only be taken at aby the General Meeting of Stockholders:
Shareholders:
| · | To changes the by-laws; |
| · | To elect or dismiss, at any |
| · | Annually, to receive the accounts of management, and to decide on the financial statements presented by them; |
| · | To authorize issuance of debentures; |
| · | To suspend exercise of shareholders’ rights; |
| · | To decide on valuation of goods or assets that a shareholder provides for formation of the share capital; |
| · | To authorize issuance of ‘founder’s shares’; |
| · | To decide on transformation, merger, absorption or split of or by the company, its dissolution or liquidation; To elect or dismiss liquidators, and take decisions on their accounts; and |
| · | To authorize the managers to admit bankruptcy or |
As a general rule, the affirmativea vote of stockholdersin favor by shareholders representing at least the majority of our issuedthe common shares outstanding,in circulation, present in person or represented by proxyholders of power of attorney, at a General Meeting of Stockholders,Shareholders, is required to approvefor approving or ratifyratifying any proposed measure.measure proposed. Abstentions are not taken into account.counted. However, thean affirmative vote by shareholders representing a majority of stockholders representing one half of our outstanding common sharesthe share capital in circulation is required for any decision to:decisions which:
| · | Create preferred shares or increase an existing class of preferred shares in a manner not proportional in relation to the other classes of shares, unless the measure is specified or authorized by the by-laws; |
| · | Change any preference, prerogative or condition of redemption or amortization conferred upon one or more classes of preference shares; or create a class with greater prerogatives than those of the existing classes of preferred shares; |
| · | Reduce the percentage of the obligatory dividends; |
| · | Make any change to the company’s corporate Objects; |
| · | Carry out any transaction of absorption or merger of the company with any other company; |
| · | Carry out a split of part of the company’s assets or liabilities; |
| · | Approve our participation in a group of companies; |
| · | Apply for cancellation of the state of liquidation; |
| · | Approve dissolution of the company; |
| · | Approve the creation of ‘founder’s shares’; and/or |
| · | Approve incorporation of all of our shares into those of another company in such a way as to make us a wholly owned subsidiary of that other company. |
StockholdersShareholders may be represented at a stockholders’ meetingGeneral Meeting of Shareholders by a person holding za power of attorney from the stockholder, appointed nogiven not more than one year prior to the date of the meeting. To be eligiblequalified to represent a stockholder inshareholder at a General Meeting of Stockholders,Shareholders, the person holding aholder of the power of attorney must be a stockholder, or one of our executive officersshareholder, or one of the membersCompany’s directors, or a member of the Board of Directors, or an attorney-at-law. In a publicly held corporation,lawyer. For a listed company, such as ours,CEMIG, the party holdingholder of the Powerpower of Attorneyattorney may also be a financial institution.
Subject to the provisions of the Brazilian Corporate Law and our by-laws, our Board of Directors may ordinarilyroutinely call our General Meetings of Stockholders. These meetingsShareholders. General Meetings of Shareholders may also be called by:called:
| · | By the Fiscal Council, if the Board of Directors omits to call the General Meeting within one month from the date on which this has been requested of it, in accordance with the applicable law, or a General Meeting at any moment in the event that serious and urgent matters affect our Company; |
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| · | By any shareholder, whenever the Board of Directors omits to call the General Meeting of Shareholders within 60 days from the date on which this has been requested of it in accordance with the Brazilian Corporate Law or our by-laws; |
| · | By shareholders holding at least 5% of the share capital, in the event that the Board of Directors omits to call the General Meeting within 8 calendar days from receipt of a request from these shareholders to call a General Meeting, with indication of the matters to be discussed; or, |
| · | By any holders of at least 5% of our voting stock or 5% of the shareholders without the right to vote, if our Board of Directors omits to call the General Meeting of Shareholders within 8 calendar days from receipt of a request from said shareholders to install the Fiscal Council. |
Remote voting procedure
Pursuant to CVM Instruction No. 561, it is mandatory that remote voting – an absentee ballot system – should be available for Ordinary (Annual) General Meetings and Extraordinary General Meetings of Shareholders held to elect members of the Board of Directors fails to call aor the Fiscal Council.
Shareholders may exercise the vote in General Meeting of Stockholders within one calendar month of any date onMeetings by filling in the Remote Voting Statement (Boletim de Voto à Distância, or ‘BVD’), which it has been requested to do so, undermust contain all the applicable laws, or an Extraordinary General Meeting of Stockholders at any time when serious and urgent matters affect the Company;
The Board of Directors
Our by-laws require our Board of Directors to comprise 15 sitting members and 15 alternatehave nine members. One must be appointed Chair of the Board, and one Deputy Chair.
Key functions specific to the Board of Directors include the following:
| · | To set the general orientation of the Company’s business; |
| · | To elect, dismiss and evaluate the Executive Officers of the Company, in accordance with the applicable legislation, subject to the by-laws; |
| · | To approve the policy on transactions with the related parties; |
| · | To decide, upon proposal by the Executive Board, on disposal of, or placement of a charge upon, any of the Company’s property, plant or equipment, and on the Company giving any guarantee to any third party of which the individual value is equal to 1% or more of the Company’s Shareholders’ equity; |
| · | To decide, upon proposal by the Executive Board, on the Company’s investment projects, signing of contracts and other legal transactions, contracting of loans or financing, or the constitution of any obligations in the name of the Company which, individually or jointly, have value equal to 1% or more of the Company’s Shareholders’ equity, including injections of capital into wholly-owned or other subsidiaries or affiliates or the consortia in which the Company participates; |
| · | To call the General Meeting of Shareholders; |
| · | To monitor and inspect the management by the Executive Board: the Board of Directors may, at any time, examine the books and papers of the Company, and request information on contracts entered into or in the process of being entered into, and on any other administrative facts or acts which it deems to be of interest to it; |
| · | To give a prior opinion on the Executive Board’s report of management and accounts of the Company; |
| · | to choose and to dismiss the Company’s auditors, from among companies with international reputation that are authorized by the Securities Commission (CVM) to audit listed companies, subject to statement of position by the Fiscal Council; |
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| · | To authorize, upon proposal by the Executive Board, opening of administrative tender proceedings, or proceedings for dispensation or non-requirement of tender, or of non-applicability of the duty to tender, and the corresponding contracting, when the amount is more than 1% or more of the Company’s Shareholders’ equity, or more than R$100,000,000.00, as adjusted annually by the IPCA Inflation Index, if positive; |
| · | Upon proposal by the Executive Board, to authorize filing of legal actions, or administrative proceedings, or entering into court or out-of-court settlements, for amounts equal to 1% or more of the Company’s Shareholders’ equity; |
| · | To authorize the issuance of securities in the Brazilian or external market, for raising of funding in the form of non-convertible debentures, promissory notes, commercial papers and other instruments; |
| · | To approve the Long-term Strategy, the Multi-year Business Plan and the Annual Budget, and alterations and revisions to them; |
| · | Annually, to set the directives and establish the limits, including financial limits, for spending on personnel, including concession of benefits and collective employment agreements, subject to the competency of the General Meeting of Shareholders and subject to the Annual Budget; |
| · | To authorize the exercise of the right of preference and rights under shareholders’ agreements or voting agreements in wholly-owned or other subsidiaries or affiliates and the consortia in which the Company participates, except in the cases of the wholly-owned subsidiaries CEMIG Distribuição S.A. and CEMIG Geração e Transmissão S.A., for which the General Meeting of Shareholders has the competency for decision on these matters; |
| · | To approve participation in the share capital of, and constitution or extinction of, any company, undertaking or consortium; |
| · | To approve, in accordance with its Internal Regulations, the institution of committees supporting the Board of Directors – the opinions or decisions of which are not a necessary condition for decision on the matters by the Board of Directors; |
| · | To accompany the activities of internal auditing; |
| · | To discuss, approve and monitor decisions that involve corporate governance practices, relationship with interested parties, people management policy and code of conduct; |
| · | To ensure implementation of, and to supervise, the systems for management of risks and internal controls established for the prevention and mitigation of the principal risks to which the Company is exposed, including the risks related to safety and security of accounting and financial information and the occurrence of corruption or fraud; |
| · | To establish an information disclosure policy to mitigate the risk of contradiction between the various areas and the managers of the Company; |
| · | To make statements on any increase in number of the Company’s own staff, concession of benefits or advantages, or revision of a salaries and careers plan, including alteration in the amount paid for commissioned posts or free appointments, and compensation of Chief Officers; |
| · | To appoint, and to dismiss, in both cases with grounds, the head of the Internal Audit Unit, from among the Company’ career employees; |
| · | To elect the members of the Audit Committee, at the first meeting held after the Annual General Meeting, and to dismiss them, at any time, upon vote given with grounds by absolute majority of the members of the Board of Directors; |
| · | To arrange for analysis, every year, of the success in meeting targets and results in execution of the Multi-year Business Plan and the Long-term Strategy, and to publish its conclusions and state them to the Legislative Assembly of Minas Gerais State and to the Minas Gerais State Audit Court; and |
| · | To approve the complementary policies, including the policy on holdings, in accordance with the terms of these by-laws. |
The financial limits for spending on personnel, including grant of benefits and collective employment agreements, subject to the competency of the General Meeting of Stockholders and the Annual Budget approved;
The financial limit referred to above is adjusted, in Januarystatements of each year by the IGP–M inflation index (‘General Price Index – Market’), published by the Getúlio Vargas Foundation. As from January 2016 this limit had been adjusted to R$19.184 millionare approved.
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Under Brazilian Corporate Law, members of the Board of Directors of a company usually have certain duties equivalent to those imposed by the laws of the majority of the States of the USA, including duty of loyalty to the company, duty not to trade in their own personal interest, and the duty diligently attend to the management of the company’s business. The Members of our Board of Directors and our Executive Board may be held liable for failure in these duties to us and to our stockholders,shareholders, and may be subject to legal action in proceedings brought by government bodies or by our stockholders.shareholders.
There are no provisions in our bylaws relating to: (i) power for a board member to vote on proposals or contracts in which he or she has a material interest; (ii) powers that may be exercised by our board members to take on loans; (iii) retirement age for members of the Board of Directors; or (iv) the number of shares necessary for qualification of board members.
The Chair and Vice-Chair of the Board of Directors must be chosen by their peers, at the first meeting of the Board of Directors that takes place after the election of its members, and the Vice-Chair shall take the place of the Chair when the Chair is absent or prevented from exercising his/her functions.
The stockholdersshareholders have the power to set the compensation of the members of boards at the General Meeting of StockholdersShareholders at which the board members are elected.
Rights of Shareholders
We extend to our shareholders all of the rights that are provided under Brazilian law. Our by-laws are in compliance with the Brazilian Corporate Law.
Essential Rights
Article 109 of Brazilian Corporate Law provides that a corporation may not deny certain rights to its shareholders under any circumstances,circumstances. These shareholders’ rights include:
| · | The right to have a share of the corporation’s earnings; |
| · | The right to have a share of the corporation’s assets, in the event of a liquidation of the Company; |
| · | The right to supervise our management according to Brazilian Corporate Law; |
| · | Preemptive rights to subscribe new shares or securities convertible into shares, except for exceptions provided by Brazilian Corporate Law and our by-laws; and |
| · | The right to withdraw from the company under certain circumstances provided in Brazilian Corporate Law. |
Voting Rights
As a general rule, only our common shares are entitled to vote and each common share corresponds to one vote. Holders of preferred shares acquire voting rights if, during three consecutive fiscal years, we fail to pay a fixed or minimum dividend to which the preferred shares are entitled. If a holder of preferred shares acquires voting rights in this manner, such rights will be identical to the voting rights of a holder of common shares and will continue until the dividend is paid. No restrictions exist on the right of a holder of common shares or preferred shares to exercise voting rights with respect to such shares by virtue of such holder being a non-resident of Brazil or a citizen of a country other than Brazil. However, holders of Preferred ADSs may only vote the underlying preferred shares through the depositary according to the terms of the Second Amended and Restated Deposit Agreement, and holders of Common ADSs may only vote the underlying common shares through the depositary according to the terms of the Common ADS Deposit Agreement. In any circumstance in which holders of preferred shares are entitled to vote, each preferred share will entitle its holder to one vote.
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Redemption Rights
Brazilian Corporate Law provides that, under limited circumstances, a shareholder has the right to withdraw his or her equity interest from the company and to receive payment for the portion of shareholder’s equity attributable to his or her equity interest. Our common shares and preferred shares are not redeemable, with the exception that a dissenting stockholdershareholder is entitled under Brazilian Corporate Law to obtain redemption in the event of any of the following decisions being made at a stockholders’shareholders’ meeting by stockholdersshareholders representing at least 50% of the voting shares:
| · | Creating preferred shares or increasing an existing class of preferred shares without maintaining the existing ratio with the remaining class of preferred shares, unless when already set forth in or authorized by the bylaws (1); |
| · | To modify a preference, privilege or condition of redemption or amortization conferred on one or more classes of preferred shares, or to create a new class with greater privileges than the existing classes of preferred shares (2); |
| · | To reduce the mandatory distribution of dividends (3); |
| · | To change the Company’s purpose (4); |
| · | To merge into another company or to consolidate with another company, subject to the conditions set forth in Brazilian Corporate Law (5); |
| · | To transfer all of our shares to another company in order to make us a wholly-owned subsidiary of that company, known as ‘incorporação de ações’ (6); |
| · | To approve acquisition of the control of another company at a price that exceeds certain limits set out in Brazilian Corporate Law (7); |
| · | To split up, subject to the conditions set forth in Brazilian Corporate Law (8); |
| · | To transform the Company into another type of company (9); |
| · | To participate in a centralized group of companies, as defined under Brazilian Corporate Law and subject to the conditions set forth therein (10); |
Only holders of shares adversely affected by the changes mentioned in items (1) and (2) above may require the Company to redeem their shares. The right of redemption mentioned in items (5), (6), (7) and (10) above may only be exercised if our shares do not satisfy certain liquidity ratios or dispersion at the time of the decision by the stockholder.shareholders. The stockholder’sshareholders’ right to withdraw referred to in item (8) may be exercised only if the split results in: (a) a change in the corporate objects, except when the equity value of the assets and liabilities split off is passed to a company whose preponderant activity coincides with that arising from the corporate objects of the company from which it is split; (b) reduction of the mandatory dividend; or (c) participation in a group of companies. Also note that in the case of item (11)(10), the right to withdraw applies to all the Company’s stockholders,shareholders, and not only to those who have been dissident at the related General Meeting of Stockholders.shareholders. The right to redeem shares will expire 30 calendar days from publication of the minutes of the related stockholders’shareholders’ meeting, except: (a) in the case of items (1) and (2) above, if the decision is subject to confirmation by the holders of the preferred shares (which must be given in an Extraordinary General Meeting to be held within one year), in which case the period of 30 days shall be counted from publication of the minutes of the Extraordinary General Meeting; or (b) in the case of item (11)(5), (6) and (7) above, in which case the period of 30 days shall be counted from the end of a period of 120 days, given for the company resulting from the amalgamation, merger or unbundling to obtain a listed company registration and have its shares listed on the secondary market.
Our Company has the right to reconsider any act that gives rise to rights of redemption within 10 calendar days of expiry of such rights if the redemption of shares of dissident stockholdersshareholders places the Company’s financial stability at risk. Law 9,457 ofenacted on May 5, 1997, which altered Brazilian Corporate Law, contains provisions which, among other matters, restrict the rights of redemption in certain cases and allow companies to redeem their shares for their economic value, subject to certain requirements. Our by-laws at present do not specify that our share capital may be redeemed at its economic value and, consequently, any redemption in accordance with Brazilian Corporate Law would be made at a minimum of the book value per share, determined on the basis of the last Statement of financial position approved by the stockholders,shareholders, it being stipulated that, if the General Meeting which gives rise to the rights of redemption has taken place more than 60 calendar days of the date of the last approved Statement of financial position approved, the stockholdershareholder shall have the right to require that its shares be valued based on a new Statement of financial position on a date that falls within a period of 60 calendar days of the General Meeting of Stockholders.Shareholders.
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Rights of Minority Shareholders –
Brazilian Corporate Law provides that shareholders who ownowning at least 5% of the capital stockshare of a corporation are afforded the following rights, among others:
| The right to require that the books of the corporation be made available for review, whenever there is any indication of an act violating the Brazilian legislation or the Company’s by-laws, or whenever these have been violated, or if there are grounds for suspicion that serious irregularities have been committed by the company’s management; the right to require the Company’s managers to reveal: |
| o | The number of securities issued by the company or by subsidiaries, or companies of the same group, that |
| · | The right to require that the members of the Fiscal Council supply information about matters within their sphere of competence; |
| · | The right to call General Meetings of Shareholders, in certain circumstances, whenever the members of the Board of Directors or of the Executive Board omit to do so; and |
| · | The right to file legal actions for indemnity against members of the Board of Directors or the Executive Board, as the case may be, for losses and/or damages caused to the company’s property, whenever it is decided in the General Meeting of Shareholders that such an application for indemnity will not be presented. |
Minority shareholders that own, individually or in aggregate, our outstanding common shares (since at least 10% of our outstanding common shares are held by minority shareholders), and also holders of our preferred shares, have the right to appoint one member of the Fiscal Council and an alternate. All shareholders have the right to attend general meetings of shareholders.
Brazilian Corporate Law also provides that minority shareholders that hold either (i) preferred shares representing at least 10% of the total share capital of a company or (ii) common shares representing at least 15% of the voting capital of a company, have the right to appoint one member and an alternate to the Board of Directors. If no common or preferred shareholder meets these thresholds, shareholders holding preferred shares or common shares representing at least 10% of the total share capital of the company are entitled to combine their holdings to appoint one member and an alternate to the Board of Directors.
Changes in rights of stockholdersshareholders –
A General Meeting of StockholdersShareholders must be held whenever the Company intends to change the rights of holders of our common shares or preferred shares. Under Brazilian Corporate Law the proposed changes must be approved by a majority of the class of stockholdersshareholders that would be affected. Certain changes related to the rights of preferred shares, such as changes in preferences, advantages or conditions of redemption or amortization, may result in the exercise of rights to withdraw by the holders of the shares affected.
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Going Private Transactions and Delisting from the BM&FBovespaB3 –
Our delisting, as a public company, must be preceded by a tender offer by our controlling shareholders or the Company for the acquisition of all of the then outstanding shares, subject to the conditions below:
| · | The price offered for the shares under the public offering must be the fair value of those shares, as established in Brazilian Corporate Law; and |
| · | Shareholders holding more than two thirds of our float shares shall have expressly agreed to the decision to become a private company or accepted the offer. |
Under Brazilian Corporate Law, the fair price shall be at least equal to our valuation as determined by one or more of the following valuation methods: Stockholders’Shareholders’ equity as expressed by book value, Stockholders’Shareholders’ equity valued at market prices, discounted cash flow, comparison of multiples, the quoted price of our shares on the securities market; or based on some other method of valuation accepted by the CVM. The price of the offer may be revised if it is challenged within 15 calendar days of its publication by holders of at least 10% of our outstanding shares, by means of a request sent to our management for an extraordinary General Meeting of StockholdersShareholders to be called to decide on whether to request new valuations, using the same, or another, valuation method. If the new valuation is lower than the valuation challenged, the stockholdersshareholders that requested a new valuation, and those that approved the request, shall reimburse us for the costs incurred. However, if the second valuation is higher, the offering party will have the option to continue the offer, with the new price, or withdraw the offer.
Arbitration
Pursuant toUnder the Brazilian Corporate Law and its related regulations, if provided for in a company’s by-laws, disputes amonglitigation between shareholders will beis subject to arbitration. Ourthe arbitration specified in the by-laws. Under Clause 44 of CEMIG’s by-laws, currently do not providethe Company, its shareholders, managers and members of the Fiscal Council undertake to resolve through arbitration, preceded by mediation, before the Market Arbitration Chamber (CAM) of the B3 or the FGV Mediation and Arbitration Chamber, all and any dispute or controversy that may arise between them related to or arising from, in particular, the application, validity, efficacy, interpretation or violation of the provisions contained in the applicable legislation and regulations, the by-laws, any shareholders’ agreements filed at the head office, the rules issued by the Brazilian Securities Commission (CVM), or the other rules applicable to the functioning of the capital markets in general, as well as those contained in the Level 1 Regulations of the B3. Without prejudice to the validity of this arbitration clause, application for arbitration.urgency measures, before the arbitration tribunal has been constituted, should be remitted to the Judiciary, through the courts of the legal distinct of Belo Horizonte, Minas Gerais.
Material Contracts
For information concerning our material contracts, see “Item 4, Information on the Company” and “Item 5, Operating and Financial Review and Prospects”.
Exchange Controls
There are no restrictions on the ownership of preferred shares or common shares of non-financial institutions by legal entities domiciled outside Brazil. However, the right to convert dividend payments and proceeds from the sale of preferred shares or common shares into foreign currency and to remit such amounts outside Brazil is subject to restrictions under foreign investment legislation, which generally requires, among other things, that you register the relevant investment with the Central Bank and the CVM. Such restrictions on the remittance of foreign capital abroad may hinder or prevent the custodian for our common shares represented by our ADSs or the holders of our common shares from converting dividends, distributions or the proceeds from any sale of these shares into U.S. dollars and remitting the U.S. dollars abroad. Holders of our ADSs couldbe adversely affected by delays in, or refusal to grant any, required government approval to convert Brazilian currency payments on the common shares underlying our ADS and to remit the proceeds abroad.
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Since March 30, 2015, CMN Resolution No. 4,373/2014, of September 29, 2014, has been in full effect, providing for the issuance of depositary receipts in foreign markets in respect to shares of Brazilian issuers. CMN Resolution No. 4,373/2014, among other acts, revoked CMN Resolution No. 1,927/1992, enacted on May 18, 1992, CMN Resolution No. 1,289/1987, of March 20, 1987, and CMN Resolution No. 2,689/2000, enacted on January 26, 2000. Under Brazilian law relating to foreign investment in the Brazilian capital markets, foreign investors registered with the CVM and acting through authorized custodial accounts managed by local agents may buy and sell shares on Brazilian stock exchanges without obtaining separate certificates of registration for each transaction. Foreign investors may register their investment under Law No. 4,131/1962, enacted on September 3, 1962, as amended, or under CMN Resolution No. 4,373, enacted on September 20, 2014.
The Law No. 4,131/1962 is the main legislation concerning investment of direct foreign capital and foreign direct equity in companies based in Brazil. It is applicable to any amount of capital that enters Brazil in the form of foreign currency, goods or services. Foreign investment portfolios are regulated by CMN Resolution No. 4,373/2014, CVM Instruction No. 559/2015, enacted on March 27, 2015, which regulates the approval of ADR programs by the CVM, and CVM Instruction No. 560/2015, enacted on March 27, 2015, which regulates the filing of transactions and disclosure of information by foreign investors, all reflecting the provisions of CMN Resolution No. 4,373/2014.
As of January 1, 2016, foreign investors that intend to be registered with the CVM shall fulfill the requirements under CVM Instruction No. 560/2015. In accordance with CMN Resolution No. 4,373/2014, the definition of a foreign investor includes individuals, legal entities, mutual funds and other collective investment entities, domiciled or headquartered abroad. In order to become a 4,373 Holder, a foreign investor must:
| · | Appoint at least one representative in Brazil, with powers to perform actions relating to its investment; |
| · | Appoint an authorized custodian in Brazil for its investments, which must be a financial institution or entity duly authorized by the Central Bank or CVM; |
| · | Appoint a tax representative in Brazil; |
| · | Through its representative in Brazil, register itself as a foreign investor with the CVM; |
| · | Through its representative in Brazil, register its foreign investment with the Central Bank; and |
| · | Be registered with the Federal Tax Authority (‘Secretaria da Receita Federal’), or the ‘RFB’, pursuant to RFB Normative Instruction 1,634/2016, enacted on May 06, 2016, and RFB Normative Instruction No. 1,548/2015, enacted on February 13, 2015. |
Investments in the preferred shares through the holding of Preferred ADSs, or in the common shares through the holding of Common ADSs, must be made pursuant to Annex II to CMN Resolution No. 4,373 datedenacted on September 29, 2014. Direct investments in the preferred shares upon the cancellation of the Preferred ADSs, or in the common shares upon the cancellation of the Common ADSs, may be held by foreign investors under Law No. 4,131 of September 3, 1962 or CMN Resolution No. 4,373 ofenacted on September 29, 2014, both of which effectively allow registered foreign investors to invest substantially in any capital market instrument in Brazil and extend a favorable tax treatment to all foreign investors registered and qualified under CMN Resolution No. 4,373, who are not resident in a tax haven, as defined by Brazilian tax laws.
Under CMN Resolution No, 4,373, foreign investors may invest in almost all financial assets and engage in almost all transactions available in the Brazilian financial and capital markets, provided that certain requirements are fulfilled. In accordance with CMN Resolution No. 4,373, the definition of foreign investor includes individuals, legal entities, mutual funds and other collective investment entities that are domiciled or headquartered abroad.
Securities and other financial assets held by investors under CMN Resolution No 4,373 must be registered or maintained in deposit accounts or in the custody of an entity duly licensed by the Central Bank or the CVM. Further, any transfer of a security that is held pursuant to CMN Resolution No. 4,373 must be made according to the Central Bank and CVM rules. Holders of Preferred ADSs or Common ADSs who have not registered their investment with the Central Bank could be adversely affected by delays in, or refusals to grant, any required government approval for conversions of payments made inreais and remittances abroad of these converted amounts.
The Annex II Regulations provide for the issuance of depositary receipts in foreign markets in respect of shares of Brazilian issuers. The Preferred ADSs have been approved under the Resolution no.No. 1,289, which was repealed by Resolution no.No. 4,373, by the Central Bank and the CVM, and the Common ADSs have been approved by the CVM (since authorization from the Central Bank is no longer necessary).
Electronic certificates of registration have been issued in the name of Citibank, N.A., the depositary bank, with respect to the Preferred ADSs and the Common ADSs, and are maintained by Citibank Distribuidora de Títulos e Valores Mobiliários S.A., the Brazilian custodian for the preferred shares and the common shares, on behalf of the depositary bank. These electronic certificates of registration are registered through the Central Bank Information System. Pursuant to the certificates of registration, the custodian and the depositary bank are able to convert dividends and other distributions or sales proceeds with respect to the preferred shares represented by Preferred ADSs and the common shares represented by the Common ADSs into foreign currency and remit the proceeds outside Brazil.
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In the event that a holder of Preferred ADSs exchanges such Preferred ADSs for preferred shares, or a holder of Common ADSs exchanges such Common ADSs for common shares, such investment will need to be registered with the Central Bank, according to Resolution No. 4,373. Thereafter, the holder may not be able to convert into foreign currency and remit outside Brazil the proceeds from the disposition of, or distributions with respect to, the preferred shares or the common shares, unless the holder is a duly qualified investor under Resolution No. 4,373 by registering with the CVM and the Central Bank and appointing a representative in Brazil. If not so registered, the holder will be subject to less favorable Brazilian tax treatment than a holder of Preferred ADSs or Common ADSs. Regardless of qualification under Resolution No. 4,373, residents in tax havens are subject to less favorable tax treatment than other foreign investors. See “—‘—Taxation—Brazilian Tax Considerations.”’
Under current Brazilian legislation, the Brazilian Federal Government may impose temporary restrictions of foreign capital abroad in the event of a serious imbalance or an anticipated serious imbalance of Brazil’s balance of payments. For approximately nine months in 1989 and early 1990, the Brazilian Federal Government froze all dividend and capital repatriations held by the Central Bank that were owed to foreign equity investors, in order to conserve Brazil’s foreign currency reserves,reserves. These amounts were subsequently released in accordance with Brazilian Federal Government directives. We cannot assure you that the Brazilin Federal Government will not impose similar restrictions on foreign reparations in the future.
Taxation
The following summary contains a description of certain Brazilian and U.S. federal income tax consequences of the purchase, ownership and disposition of preferred shares, common shares, and Preferred ADSs or Common ADSs by a United States person, as defined in section 7701(a)(30) of the Internal Revenue Code of 1986, or the Code, as amended, or a holder that otherwise will be subject to U.S. federal income tax on a net income basis in respect of preferred shares, common shares, Preferred ADSs or Common ADSs, which we refer to as a U.S. holder, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to purchase preferred shares, common shares, Preferred ADSs or Common ADSs. In particular this summary deals only with U.S. holders that will hold preferred shares, common shares, Preferred ADSs or Common ADSs as capital assets and does not address the tax treatment of U.S. holders that own or are treated as owning 10% or more of the total combined voting power of all classes of stock entitled to vote of the Company or 10% or more of the total value of shares of all classes of stock of the Company or that may be subject to special tax rules, such as banks or other financial institutions, insurance companies, retirement plans, regulated investment companies, real estate investment trusts, dealers in securities or currencies, brokers, traders in securities that elect to mark to market, tax-exempt organizations, persons liable for alternative minimum tax, “pass-through entities”‘pass-through entities’ such as partnerships or persons that will hold preferred shares, common shares, Preferred ADSs or Common ADSs as part of a hedging transaction, constructive sale transaction, position in a “straddle”‘straddle’ or a “conversion transaction”‘conversion transaction’ for tax purposes, and persons that have a “functional currency”‘functional currency’ other than the U.S. dollar. If an entity treated as a partnership for U.S. federal income tax purposes invests in our preferred shares, common shares, Preferred ADSs or Common ADSs, the U.S. federal income tax considerations relating to such investment will depend in part upon the status and activities of such entity and the particular partner. Any such entity should consult its own tax advisor regarding the U.S. federal income tax considerations applicable to it and its partners relating to the purchase, ownership and disposition of such preferred shares or ADSs. This summary, as relates to U.S. tax considerations, does not describe any implications under U.S. state or local tax law, non-U.S. tax law, or the federal estate tax or gift tax. U.S. shareholders should consult their own tax advisors regarding such matters.
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This summary is based upon the tax laws of Brazil and the United States as in effect on the date hereof which are subject to change, possibly with retroactive effect, and to different interpretations. Prospective purchasers of preferred shares, common shares, Preferred ADSs or Common ADSs are encouraged to consult their own tax advisors as to the Brazilian, U.S. or other tax consequences of the purchase, ownership and disposition of preferred shares, common shares, Preferred ADSs or Common ADSs, including, in particular, the effect of any foreign, state or local tax laws.
Although there is currently no income tax treaty in force between Brazil and the United States, the tax authorities of both countries have had discussions that may culminate in such a treaty. No assurance can be given, however, as to whether or when a treaty will enter into force or how it will affect the U.S. holders of preferred shares, common shares, Preferred ADSs or Common ADSs.
Brazilian Tax Considerations
General — The following discussion summarizes the main Brazilian material tax consequences of the acquisition, ownership and disposal of preferred shares, common shares, Preferred ADSs or Common ADSs, as the case may be, by a holder that is not domiciled in Brazil, which we refer to as a non-Brazilian holder for purposes of Brazilian taxation. In the case of a holder of preferred shares or common shares, we assume the investment is registered with the Central Bank. The following discussion does not address all of the Brazilian tax considerations applicable to any particular non-Brazilian holder. Therefore, each non-Brazilian holder should consult his or her own tax adviser concerning the Brazilian tax consequences of an investment in our preferred shares, common shares, Preferred ADSs or Common ADSs.
Taxation of Dividends — Dividends paid by the Company, including stockshare dividends and other dividends paid in property to the depositary in respect of the preferred shares or common shares, or to a non-Brazilian holder in respect of the preferred shares or common shares, are currently exempted from withholding tax in Brazil to the extent that the dividends are paid out of profits generated as of January 1, 1996. Dividends relating to profits generated prior to January 1, 1996 may be subject to Brazilian withholding tax at varying rates, depending on the year the profits were generated.
Payments of ‘Interest on Equity’capital’– Law No. 9,249, ofenacted on December 26, 1995, as amended, enables Brazilian corporations to make distributions to stockholders,shareholders, in Brazilian currency, of a payment referred to as Interest on Equitycapital (‘Juros sobre Capital Próprio’). The payment is calculated based on multiplying the value of the company’s Stockholders’Shareholders’ equity by the federal government’s Long-Term Interest Rate (Taxa de Juros de Longo Prazo or TJLP)Federal Government’s ‘TJLP’, as set forth by the Central Bank, and payments up to such an amount may be deducted by the company as an expense when calculating its profit that will be taxable by income tax and the Social Contribution tax,Tax, subject to the deduction not exceeding the greater of:
| · | 50% of the net income (after deduction of the Social Contribution tax on Net Income, and before the provision for corporate income tax and the amounts attributed to shareholders as Interest on capital) for the period in which the payment will be made; or |
| · | 50% of the sum of retained earnings and earnings reserves as of the date of the beginning of the period in respect of which the payment is made. |
Any payment of interest on capital to shareholders (including holders of Preferred ADSs in respect of preferred shares and Common ADSs in respect of common shares) is subject to a withholding tax at a rate of 15%, or 25% if the non-Brazilian holder is domiciled in a jurisdiction that does not impose income taxNil or where the maximum income tax rate is lower than 20% or where the local legislation imposes restrictions on disclosing the shareholding composition or the ownership of the investment, or a Tax Haven Holder.Low Taxation Jurisdiction. These payments may be included, at their net value, as part of any mandatory dividend.
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Law NºNo. 9,430, ofenacted on December 27, 1996 was amended by Law NºNo. 11,727 ofenacted on June 24, 2008, and later by Law NºNo. 11,941 ofenacted on May 27, 2009, establishing the concept of a ‘privileged tax regime’, to govern transactions involving transfer pricing, and to strict rules for capitalization. This concept has a wider reach than the concept of a tax haven.Nil or Low Taxation Jurisdiction. Under the new laws, a ‘privileged tax regime’ is defined as one which has one or more of the following characteristics: (i) it does not tax income or it taxes it at a maximum rate lower than 20%; (ii) it grants tax advantages to non-resident entities or individuals (a) without requiring substantial economic activity in the country or territory or (b) conditional upon non-exercise of substantive business activity in the country or territory; (iii) it does not generate tax income outside its territory, or taxes such income with a maximum rate lower than 20%; (or 17% if the jurisdiction follows international standards of tax transparency, as defined by Brazilian Internal Revenue Office, especially in what regards to the disclosure of information in respect to corporate structure, ultimate beneficial owner, ownership of assets and business activities carried on in their territory) or (iv) it does not allow access to information on stockholdings,shareholdings, ownership of assets or rights, or to the business transactions carried out.
Although interpretation of the current Brazilian tax legislation might lead to the conclusion that the concept of ‘privileged tax regime’ should apply only for the purposes of rules to govern transfer pricing in Brazil, it is unclear whether such concept would also apply to other types of transaction, such as investments carried out in the Brazilian financial and capital markets for the purposes of this law.
There is no judicial guidance as to the application of Law No. 9,430 of December 27, 1996, as amended, and accordingly we are unable to predict whether the Brazilian Internal Revenue Service or the Brazilian courts might decide that the ‘privileged tax regime’ concept should be applicable in such a way as to deem a Non-Brazilian-Resident Holder to be a Tax Haven Resident when carrying out investments in the Brazilian financial and capital markets. However, in In the event that the ‘privileged tax regime’ concept is interpreted to be applicable to transactions carried out in the Brazilian financial and capital markets, this tax law would accordingly result in the imposition of taxes on a Non-Brazilian-Resident Holder that meets the privileged tax regime requirements in the same way as is applicable to a Tax Haven Resident.Nil or Low Taxation Jurisdiction. Current and prospective investors should consult with their own tax advisors regarding the consequences of the implementation of Law 9,430 ofenacted on December 27, 1996, as amended, and of any related Brazilian tax law or regulation concerning the concepts of “tax haven”‘Nil or “privilegedLow Taxation Jurisdiction’ or ‘privileged tax regimes”regimes’.
To the extent that payments of interest on capital are included as part of a mandatory dividend, we are required to distribute an additional amount to ensure that the net amount received by shareholders, after payment of the applicable withholding tax is at least equal to the mandatory dividend.
Distributions of interest on net equity to foreign holders may be converted into U.S. dollars and remitted outside Brazil, subject to applicable exchange controls, to the extent that the investment is registered with the Central Bank.
We cannot assure you that our Board of Directors will not determine that future distributions should be made by means of dividends or interest on net equity.
Taxation of Gains — According to Law No. 10,833/03, the gains recognized on a disposal of assets located in Brazil, such as CEMIG shares, by a non-Brazilian holder, are subject to withholding income tax in Brazil,Brazil. This rule is applicable regardless of whether the disposal is conducted in Brazil or abroad whether or not the disposal is made to an individual or entity resident or domiciled in Brazil.
As a general rule, capital gains realized as a result of a disposal transaction are the positive difference between the amount realized on the disposal of the asset and the respective acquisition cost.
Capital gains realized by non-Brazilian holders on the disposal of shares sold on the Brazilian stock exchange (which includes the transactions carried out on the official over-the-counter market) are subject to:
| · | Withholding income tax at a zero percent rate, when realized by a non-Brazilian holder that (i) has registered its investment in Brazil whit the Central Bank under the rules of the Brazilian Monetary Council, (‘CMN’) (‘Resolution No. 4,373 enacted on September 29, 2014’), or a Registered Holder, and (ii) is not a Nil or Low Taxation Jurisdiction Holder; |
| · | In all other cases, including gains realized by a Non-Resident Holder that is not a Registered Holder and/or is a resident of or domiciled in a Nil or Low Taxation Jurisdiction, subject to income tax at a 15.0% rate. In this case, a withholding income tax of 0.005% shall be applicable and can be offset against any income tax due on the capital gain. |
Any other gains assessed on the disposition of the Brazilian Monetary Council, (or CMN) (Resolution No. 4373, of September 29, 2014), or a Registered Holder, and (ii) iscommon shares that are not a Tax Haven Holder;
Any other gains realized on the disposal of shares that are sold on the Brazilian stock exchange:
Brazilian individuals up to 22.5% and, such increase, applicable as of January 2017, may affect Non-Resident Holders. Non-Resident Holders should consult with their own tax advisors regarding the consequences of Law 13,259/2016. In the cases above, if the gains are related to transactions conducted on the Brazilian unofficial over-the-counter market with intermediation, the withholding income tax of 0.005% shall also be applicable and can be offset against any income tax due on the capital gain.
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Any exercise of preemptive rights relating to shares will not be subject to Brazilian income tax. Gains realized by a non-Brazilian holder on the disposal of preemptive rights will be subject to Brazilian income tax according to the same rules applicable to the disposal of shares.
There can be no assurance that the current favorable tax treatment of Registered Holders will continue in the future.
Sale of Preferred ADSs and Common ADSs by U.S. Holders to Other Non-Residents in Brazil—Brazil—Pursuant to Section 26 of Law No. 10,833, published on December 29, 2003, the sale of property located in Brazil involving non-resident investors is subject to Brazilian income tax as of February 1, 2004. Our understanding is that ADSs do not qualify as property located in Brazil and, thus, should not be subject to the Brazilian withholding tax.tax; nevertheless, there is a risk that the Tax Authorities will try to assert Brazilian tax jurisdiction in such situation, reason why Non-Resident Holders should consult with their own tax advisors the chances of success in that respect Insofar as the regulatory norm referred to is generic and has not been tested through the administrative or judicial courts, we are unable to assure the final outcome of such situation.
If such argument does not prevail, it is important to mention that with respect to the cost of acquisition to be adopted for calculating such gains, Brazilian law has conflicting provisions regarding the currency in which such amount must be determined, CEMIG’s Brazilian counsel’s view is that the capital gains should be based on the positive difference between the cost of acquisition of the preferred shares or common shares registered with the Central Bank in foreign currency and the value of disposal of those preferred shares or common shares in the same foreign currency. This view has been supported by aA precedent issued by the Brazilian administrative court.court has supported this view. However, considering that the tax authorities are not bound by such precedent, assessments have been issued adopting the cost of acquisition in Brazilian currency.
Gains on the Exchange of Preferred ADSs for Preferred Shares or the Exchange of Common ADSs for Common ShareShares—s—Although there is no clear regulatory guidance, the exchange of ADSs for shares should not be subject to Brazilian tax.tax to the extent that, as described above, ADSs do not qualify as property located in Brazil for the purposes of Law No. 10,833. Non-Brazilian holders may exchange Preferred ADSs for the underlying preferred shares or Common ADSs for the underlying common shares, sell the preferred shares or common shares on a Brazilian stock exchange and remit abroad the proceeds of the sale within five business days of the date of exchange (according to the depositary’s electronic registration), with no tax consequences. Although there is no clear regulatory guidance, the exchange of ADSs for shares should not be subject to Brazilian withholding income tax. Nevertheless, it is important to mention that there is no precedent regarding this matter in administrative or judicial courts.
Upon receipt of the underlying preferred shares in exchange for Preferred ADSs or the underlying common shares in exchange for Common ADSs, non-Brazilian holders may also elect to register with the Central Bank the U.S. dollar value of such preferred shares or common shares as a foreign portfolio investment under CMN Resolution No. 4,373/2014, which will entitle them to the tax treatment referred to above in connection with “U.S.‘U.S. market investors”investors’.
Alternatively, the non-Brazilian holder is entitled to register with the Central Bank the U.S. dollar value of such preferred shares or common shares as a foreign direct investment under Law No. 4,131/62, in which case the respective sale would be subject to the tax treatment referred in the section “Taxation‘Taxation of Gains”Gains’.
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Gains on the Exchange of Preferred Shares for Preferred ADSs or Common Shares for Common ADSsADSs——The With reference to the deposit of preferred shares in exchange for the Preferred ADSs or common shares in exchange for the Common ADSs, may be subject to Brazilian income tax on capital gains if the amount previously registered with the Central Bank as a foreign investment in preferred shares or common shares or, in the case of other market investors under CMN Resolution No. 4,373/2014,difference between the acquisition cost of the preferred shares or common shares as the case may be, is lower than:
The difference between the amount previously registered, or the acquisition cost, as the case may be, and the averagemarket price of the preferred shares or common shares calculated as set forth above, is considered to be a capital gain subject to income tax at a rate from 15% up to 22.5%, depending on the amount of the capital gain, or 25% for Tax HavenNil or Low Taxation Jurisdiction Holders. Although there is no clear regulatory guidance, such taxation should not apply in case of Non-Resident Holders registered under CMN Resolution No. 4373/4,373/2014, except for Tax HavenNil or Low Taxation Jurisdiction Residents. Law No. 13,259 of March 17, 2016 increased the income tax rates applicable to gains derived by Brazilian individuals up to 22.5% and, such increase, applicable as of January 2017, may affect Non-Resident Holders. Non-Resident Holders should consult with their own tax advisors regarding the consequences of Law 13,259/2016.
Taxation of foreign exchange transactions—Brazilian law imposes Financial Transactions Tax (Imposto("Imposto sobre Operações Financeiras, or IOF)‘IOF’) on foreign exchange transactions (known as the IOF/Câmbio, or ‘FX IOF’), on conversion of Reais into foreign currency or vice-versa. The currently applicable rate of this tax for almost all foreign exchange transactions is 0.38%, but different rates. However, exchange transactions carried out for the inflow of funds in Brazil for investments in the Brazilian financial and capital market made by a foreign investor (including a Non-Resident Holder, as applicable) are applicablesubject to certain other transactions,IOF/Exchange at a 0%. The IOF/Exchange rate will also be 0% for the outflow of which the following are examples:
Although there is no clear regulatory instruction, conversion from ReaisBrazil related to dollars for paymentthese types of investments, including payments of dividends to holdersand interest on shareholders’ equity and the repatriation of ADSs is also expected to benefit fromfunds invested in the FX IOF tax at the rate of 0%.Brazilian market.
Notwithstanding the said rates of the FX IOF tax in effect on the date of publication hereof, the Finance Ministry is authorized by law to increase the rate of this tax up to a maximum of 25% of the value of the transaction, but only for future transactions.
Taxation on transactions relating to securities—securities—Brazilian legislation imposes a tax on financial transactions relating to securities (referred to as theIOF tax on Securities, or the‘IOF/‘IOF/Títulos’), including transactions made on Brazilian stock exchanges.
The IOF Tax on Securities may also apply to transactions involving ADSs of preferred shares, or ADSs of common shares, if they are considered by the Brazilian tax authorities to be assets located in Brazil.
The rate of the IOF Tax on Securities applicable to transactions involving shares (preferred shares, ADSs for preferred shares, common shares and ADSs for common shares) is currently zero. Moreover, by Decree NºNo. 8,165 ofenacted on December 24, 2013, the rate of the IOF Tax on Securities applicable on assignment of shares traded on a Brazilian stock exchange for the specific purpose of the underlying issuance of DRs – Depositary Receipts – outside Brazil was reduced to zero.
The Finance Ministry has the power to increase the rates of IOF Tax on Securities to as high as 1.5% per day, but this is applicable only to future transactions.
Other Brazilian Taxes—Taxes — Some Brazilian states impose gift and inheritance tax on gifts or bequests made by individuals or entities not domiciled or residing in Brazil to individuals or entities domiciled or residing within such states. There are no Brazilian stamp, issues, registrations, or similar taxes or duties payable by holders of preferred shares, common shares, Preferred ADSs or Common ADSs.
U.S. Tax Considerations –
In general, and taking into account the earlier assumptions, for U.S. federal income tax purposes, a U.S. holder of ADSs is typically treated as the owner of the underlying common or preferred shares represented by those ADSs. Consequently, exchanges of ADSs into shares, and shares into ADSs, generally, will not be subject to U.S. federal income tax.
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Taxation of Distributions—Subject to the discussion below under “– Passive‘Passive Foreign Investment Company Rules,”Rules’, distributions with respect to the shares or the ADSs (other than distributions in redemption of the shares subject to Section 302(b) of the Code or in a liquidation of the Company) will, to the extent made from current or accumulated earnings and profits of the Company as determined under U.S. federal income tax principles, constitute dividends. A distribution also includes distributions characterized as interest attributable to shareholders’ capital for Brazilian law purposes and the amount of any Brazilian taxes withheld on any such distribution, if any, even though a U.S. holder will not receive such amount as part of their distribution. Whether current or accumulated earnings and profits will be sufficient for all such distributions on the shares or ADSs to qualify as dividends depends on the future profitability of the Company and other factors, many of which are beyond the control of the Company. To the extent that such a distribution exceeds the amount of the Company’s earnings and profits, it will be treated as a non-taxable return of capital to the extent of the U.S. holder’s basis in the shares or ADSs, and thereafter as capital gains. As used below, the term “dividend”‘dividend’ means a distribution that constitutes a dividend for U.S. federal income tax purposes. The Company does not currently intend to continue the calculations of its earnings and profits under U.S. federal income tax principles. Accordingly, U.S. holders should expect that all distributions made with respect to the shares or ADSs will generally be treated as dividends. Cash dividends (including distributions characterized as interest attributable to shareholders’ capital for Brazilian law purposes and amounts withheld in respect of Brazilian taxes) paid with respect to:
| The shares generally will be included in the gross income of a U.S. holder as ordinary income on the day on which the dividends are actually or constructively received by the U.S. holder; or |
| The shares represented by ADSs generally will be included in the gross income of a U.S. holder as ordinary income on the day on which the dividends are received by the depositary bank, and |
in either case, will not be eligible for the dividends received deduction allowed to corporations. Dividends paid inreais in either case, will not be eligible for the dividends received deduction allowed to corporations. Dividends paid in Reais will be included in the income of a U.S. holder in a U.S. dollar amount calculated by reference to the exchange rate in effect on the day they are received by the U.S. holder, in the case of shares, or the depositary bank, in the case of shares represented by ADSs.
If dividends paid inreaisReais are converted into U.S. dollars on the day they are received by the U.S. holder or the depositary bank, as the case may be, U.S. holders generally should not be required to recognize a foreign currency gain or loss in respect of the dividend income. U.S. holders should consult their own tax advisors regarding the treatment of any foreign currency gain or loss if anyreaisReais received by the U.S. holder or the depositary bank are not converted into U.S. dollars on the date of receipt, as well as the tax consequences of the receipt of any additionalreaisReais from the custodianduecustodian due to Brazilian inflation.
Dividends will generally constitute foreign source income and will generally constitute “passive‘passive category income”income’ or, in the case of certain U.S. holders, “general‘general category income,”’ for foreign tax credit purposes. In the event Brazilian withholding taxes are imposed on such dividends, such taxes may be treated as a foreign income tax eligible, subject to generally applicable limitations and conditions under U.S. federal income tax law, for a credit against a U.S. holder’s U.S. federal income tax liability (or at a U.S. holder’s election, may be deducted in computing taxable income). The calculation and availability of foreign tax credits and, in the case of a U.S. holder that elects to deduct foreign taxes, the availability of deductions, involves the application of rules that depend on a U.S. holder’s particular circumstances in the event Brazilian withholding taxes are imposed.circumstances. U.S. holders should consult their own tax advisors regarding the availability of foreign tax credits with respect to Brazilian withholding taxes.
Distributions to U.S. holders of additional common shares of “common stock” or preemptive rights relating to such “common stock”common shares with respect to their common shares or Common ADSs that are made as part of apro rata distribution to all shareholders of the Company generally will not be treated as dividend income for U.S. federal income tax purposes, but could result in additional U.S.-source taxable gain upon the sale of such additional shares or preemptive rights. Non-pro rata distributions of such shares or rights generally would be included in the U.S. holder’s gross income to the same extent and in the same manner as distributions payable in cash. In that event, the amount of such distribution (and the basis of the new shares or preemptive rights so received) generally will equal the fair market value of the shares or preemptive rights on the date of distribution. It is not entirely clear whether the preferred shares will be treated as “preferred stock”preferred shares or “common stock”common shares for this purpose. If the preferred shares are treated as “common stock”common shares for these purposes the treatment above would apply to distributions of shares or preemptive rights with respect to preferred shares or Preferred ADSs. On the other hand, if the preferred shares are treated as “preferred stock”preferred shares a distribution of additional shares or preemptive rights would be included in gross income to the same extent as a cash distribution whether or not such distribution is considered apro rata distribution.
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Qualified Dividend Income –Notwithstanding the foregoing, certain dividends received by individual U.S. holders that constitute “qualified‘qualified dividend income”income’ currently may be subject to a reduced maximum marginal U.S. federal income tax rate. Qualified dividend income generally includes, among other dividends, dividends received during the taxable year from “qualified‘qualified foreign corporations.”corporations’. In general, a foreign corporation is treated as a qualified foreign corporation with respect to any dividend paid by the corporation with respect to stockshares of the corporation that isare readily tradable on an established securities market in the United States. For this purpose, a share is treated as readily tradable on an established securities market in the United States if an ADR backed by such share is so traded.
Notwithstanding this previous rule, dividends received from a foreign corporation that is a passive foreign investment company (as defined in section 1297 of the Code)below under ‘Passive Foreign Investment Company Rules’) in either the taxable year of the corporation in which the dividend was paid or the preceding taxable year will not constitute qualified dividend income. In addition, the term “qualified‘qualified dividend income”income’ will not include, among other dividends, any (i) dividends on any share or ADS which is held by a taxpayer for 60 days or less during the 121-day period beginning on the date which is 60 days before the date on which such share or the shares backing the ADS become ex-dividend with respect to such dividends (as measured under section 246(c) of the Code) or (ii) dividends to the extent that the taxpayer is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property. Moreover, special rules apply in determining a taxpayer’s foreign tax credit limitation under section 904 of the Code in the case of qualified dividend income.
Individual U.S. holders should consult their own tax advisors to determine whether or not amounts received as dividends from us will constitute qualified dividend income subject to a reduced maximum marginal U.S. federal income tax rate and, in such a case, the effect, if any, on the individual U.S. holder’s foreign tax credit.
Taxation of Capital GainsSales, Redemptions and Other Taxable Dispositions — — Deposits and withdrawals of shares by U.S. holders in exchange for ADSs will not result in the realization of gain or loss for U.S. federal income tax purposes.
Subject to the discussion below under “– Passive– ‘Passive Foreign Investment Company Rules”Rules’, gains or losses realized by a U.S. holder on the sale, redemption or other taxable disposition of shares or ADSs will be subject to U.S. federal income taxation as capital gains or losses in an amount equal to the difference between such U.S. holder’s basis in the shares or the ADSs and the amount realized on the disposition.disposition in the case of the shares as determined in U.S. dollars. Gains or losses recognized by a U.S. holder on such a sale, redemption or other taxable disposition generally will be long-term capital gains or losses if, at the time of the sale or other taxable disposition, the shares or ADSs, as applicable, have been held for more than one year. Certain non-corporate U.S. holders (including individuals) may be eligible for preferential rates of U.S. federal income tax in respect of long-term capital gains. The deduction of a capital loss is subject to limitations for U.S. federal income tax purposes.
A gain realized by a U.S. holder on a sale, redemption or other taxable disposition of shares or ADSs, including a gain that arises because the U.S. holder’s basis in the shares or ADSs has been reduced because a distribution is treated as a return of capital rather than as a dividend, generally will be treated as U.S. source income for U.S. foreign tax credit purposes.
Accordingly, if Brazilian withholding tax or income tax is imposed on the sale, redemption or other disposition of shares or ADSs as described in — ‘Taxation—Brazilian Tax Considerations’, such tax generally will not be available as a credit for the U.S. holder against U.S. federal income tax unless the U.S. holder has other income treated as derived from foreign sources, in the appropriate category, for purposes of the foreign tax credit rules.| 190 |
If a Brazilian withholding tax or income tax is imposed on the sale, redemption or other taxable disposition of shares or ADSs, as described in “—Taxation—Brazilian Tax Considerations”, the amount realized by a U.S. holder will include the gross amount of the proceeds of such sale, redemption or other taxable disposition before deduction of the Brazilian withholding tax or income tax if applicable. The availability of U.S. foreign tax credits for these Brazilian taxes is subject to certain limitations and involves the application of rules that depend on a U.S. holder’s particular circumstances. U.S. holders should consult their own tax advisors regarding the application of the foreign tax credit rules to their investment in, and disposition of, shares or ADSs.
Passive Foreign Investment Company Rules – - Certain adverse U.S. federal income tax rules generally, apply to a U.S. person that owns or disposes of stock in a non-U.S. corporation that is classified as a passive foreign investment company (a “PFIC”‘PFIC’). In general, a non-U.S. corporation will be classified as a PFIC for any taxable year during which, after applying relevant look-through rules with respect to the income and assets of subsidiaries, either (i) 75% or more of the non-U.S. corporation’s gross income is “passive income”‘passive income’ or (ii) 50% or more of the gross value (determined on a quarterly basis) of the non-U.S. corporation’s assets produce passive income or are held for the production of passive income. For these purposes, passive income generally includes, among other things, dividends, interest, rents, royalties, gains from the disposition of passive assets and gains from commodities and securities transactions (other than certain active business gains from the sale of commodities). In determining whether a non-U.S. corporation is a PFIC, a pro rata portion of the income and assets of each corporation in which it owns, directly or indirectly, at least a 25% interest (by value) is taken into account.
The Company does not believe that it was a PFIC, for United States federal income tax purposes, for its preceding taxable year and does not expect to be a PFIC in its current taxable year or in the foreseeable future. However, because PFIC status depends upon the composition of a company’s income and assets, the market value of assets from time to time, and the application of rules that are not always clear, there can be no assurance that the Company will not be classified as a PFIC for any taxable year.
If the Company was to be classified a PFIC, a U.S. holder could be subject to material adverse tax consequences including being subject to greater amounts of tax on gains and certain distributions on the shares or ADSs as well as increased reporting requirements. U.S. holders should consult their tax advisors about the possibility that the Company might be classified as a PFIC and the consequences if the Company was classified as a PFIC.
Tax on Net Investment Income – – A U.S. holder that is an individual, an estate or a trust (other than a trust that falls into a special class of trusts that is exempt from such tax) will be subject to a 3.8% tax on the lesser of (i) the U.S. holder’s “net‘net investment income”income’ (in the case of individuals) or “undistributed‘undistributed net investment income”income’ (in the case of estates and trusts) for the relevant taxable year and (ii) the excess of the U.S. holder’s “modified‘modified adjusted gross income”income’ (in the case of individuals) or “adjusted‘adjusted gross income”income’ in the case of estates and trusts) for the taxable year over a certain threshold (which, in the case of individuals, will be between $125,000 and $250,000 depending upon the individual’s circumstances). A U.S. holder’s net investment income will generally include its dividend income on the shares or ADSs, and its net gains from the disposition of the shares or ADSs. U.S. holders that are individuals, estates or trusts should consult their own tax advisors regarding the applicability of this tax to their income and gains in respect of the shares or ADSs.
Information Reporting and Backup Withholding — — Information reporting requirements will generally apply to U.S. holders of ADSs and U.S. holders will be required to comply with applicable certification procedures to establish that they are not subject to backup withholding. Investors who are individuals and fail to report the required information could be subject to substantial penalties. Investors should consult their own tax advisors regarding these requirements. The amount of any backup withholding from a payment to a U.S. holder will be allowed as a credit against the U.S. holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is furnished to the U.S. Internal Revenue Service on a timely basis.
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Disclosure Requirements for Specified Foreign Financial Assets – – Individual Certain U.S. holders that own certain “specified‘specified foreign financial assets”assets’ with an aggregate value in excess of USD $50,000US$50,000 on the last day of the tax year or US$75,000 at any time during the tax year are generally required to file an information statement along with their tax returns, currently on Form 8938, with respect to such assets. “Specified‘Specified foreign financial assets”assets’ generally include any financial accounts held at a non-U.S. financial institution, as well as securities issued by a non-U.S. issuer that are not held in accounts maintained by financial institutions. Higher reporting thresholds apply to certain individuals living abroad and to certain married individuals. Regulations have been proposed that would extend this reporting requirement to certain entities that are treated as formed or availed of to hold direct or indirect interests in specified foreign financial assets based on certain objective criteria. U.S. holders who fail to report on their specified foreign financial assets could be subject to substantial tax penalties. U.S. holders should consult their own tax advisors regarding the application of these information reporting rules to the ADSs or shares, including the application of these rules to their own particular circumstances.
Documents on Display
Disclosure Requirements for Certain U.S. Holders Recognizing Significant Losses— A U.S. Holder that claims significant losses in respectWe are subject to the information requirements of our preferred sharesthe Securities Exchange Act of 1934, as amended, or ADSs for U.S. federal income tax purposes (generally (i) USD $10 million or more in a taxable year or USD $20 million or more in any combination of taxable years for corporations or partnerships all of whose partners are corporations, (ii) USD $2 million or more in a taxable year or USD $4 million or more in any combination of taxable years for allthe Exchange Act. In accordance with these requirements, we file reports and other taxpayers, or (iii) USD $50,000 or more in a taxable year for individuals or trustsinformation with respect to a foreign currency transaction)the SEC. These materials, including this annual report and the accompanying exhibits, may be required to file Form 8886 for “reportable transactions.” U.S. Holders should consult their own tax advisors concerning any possible disclosure obligation with respect toinspected and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington D.C. 20549. Copies of the materials may be obtained from the SEC’s Public Reference Room at prescribed rates. The public may obtain information on the operation of the SEC’s Public Reference Room by calling the SEC in the United States at 1-800-SEC-0330. In addition, copies of the exhibits that accompany this annual report may be inspected at our preferred shares or ADSs.principal executive offices located at Avenida Barbacena, 1219, 30190-131 Belo Horizonte, Minas Gerais, Brazil.
Dividends and Paying Agents
We pay dividends on preferred shares and common shares in the amounts and in the manner set forth under “Item 8, Financial Information—Dividend Policy and Payments”. We will pay dividends in respect of preferred shares represented by Preferred ADSs or common shares represented by Common ADSs to the custodian for the depositary bank, as record owner of the preferred shares represented by Preferred ADSs or the common shares represented by Common ADSs. As promptly as practicable after receipt of the dividends we pay through Citibank N,A,N.A. to the custodian, it will convert these payments into U.S. dollars and remit such amounts to the depositary bank for payment to the holders of Preferred ADSs or Common ADSs in proportion to individual ownership.
Documents on Display
We are subject to the information requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. In accordance with these requirements, we file reports and other information with the SEC. These materials, including this annual report and the accompanying exhibits, may be inspected and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D,C, 20549. Copies of the materials may be obtained from the SEC’s Public Reference Room at prescribed rates. The public may obtain information on the operation of the SEC’s Public Reference Room by calling the SEC in the United States at 1-800-SEC-0330. In addition, copies of the exhibits that accompany this annual report may be inspected at our principal executive offices located at Avenida Barbacena, 1200, 30190-131 Belo Horizonte, Minas Gerais, Brazil.
Insurance
We have insurance policies to cover fire damages to the building in which our head office is located and to other owned or rented buildings. Our operational risk insurance policy covers damages to the rotors,turbines, generators and transformers of our principal generating plants and substations caused by lightning, fire and explosion or risks such as equipment failure.
We also have insurance policies covering damage to or caused by aircraft used in our operations.
We do not have general third party liability insurance to cover accidents, and we do not seek proposals for this type of insurance. There is however a possibility that we may contract this type of insurance in the future.
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| Table of Contents |
Also,
In addition, we do not seek proposals for, nor do we have, insurance cover against major natural disasters that might affect our facilities, such as earthquakes and floods or failures of the operational system.
We do not have insurance coverage for the risk of interruption of business, which means that damages suffered by our company, and consequent damages suffered by our clients as a resultcustomers because of interruption in the supply of electricity,energy are in general not covered by our insurance and we may be subject to significant losses. See the Section “Item 3, Key Information-Risk Factors-Risks relating to CEMIG-WeCEMIG. We operate without insurance policies against natural disasters and third-party liability.”liability”.
We believe that, since we contract insurance against fire and operational risk, our insurance cover is at a level that is usual in Brazil for the type of business that we conduct.
Difficulties of Enforcing Civil Liabilities against Non-U.S. Persons
We are a state-controlled mixed capital company established under the laws of Brazil. All of our executive officers and directors presently reside in Brazil. In addition, substantially all of our assets are located in Brazil. As a result, it will be necessary for holders of Preferred ADSs or Common ADSs to comply with Brazilian law in order to obtain an enforceable judgment against our executive officers or directors or our assets. It may not be possible for holders of Preferred ADSs or Common ADSs to effect service of process within the United States upon our executive officers and directors, or to enforce in the United States judgments against these persons obtained in U.S. courts based upon civil liabilities of these persons, including any judgments based upon U.S. federal securities laws, to the extent these judgments exceed these persons’ U.S. assets. We have been advised by Brazilian counsel, Stocche, Forbes, Padis, Filizzola, Clápis, Pássaro, Meyer e RefinettiRolim, Viotti, Goulart, Cardoso Advogados, that judgments of U.S. courts for civil liabilities based upon the federal securities laws of the United States may be, subject to the requirements described below, enforced in Brazil to the extent Brazilian courts may have jurisdiction. A judgment against the Company, or the persons described above, obtained outside Brazil, is subject to confirmation by the Brazilian Superior Court of Justice, without reconsideration of the merits. That confirmation will occur if the foreign judgment:
| · | Fulfills all formalities required for its enforceability under the laws of the country where the foreign judgment is granted; |
| · | Is issued by a competent court after proper service of process is made, or after sufficient evidence of the parties’ absence has been given, as established pursuant to applicable Law; |
| · | Is not subject to appeal; |
| · | Is for the payment of a specified amount; |
| · | Except if otherwise provided in the Apostille Convention, is authenticated by a Brazilian consular officer in the country where the foreign judgment is issued and is accompanied by a sworn translation into Portuguese; and |
| · | Is not contrary to Brazilian national sovereignty, public policy, public morality or human dignity. |
We cannot be certain that the confirmation process described above will be conducted in a timely manner or that Brazilian courts would enforce a monetary judgment for violation of the United States securities laws with respect to the Preferred ADSs and the preferred shares represented by the Preferred ADSs or the Common ADSs and the common shares represented by the Common ADSs.
We were further advised by the abovementioned Brazilian counsel that:
| · | Original actions based on the federal securities laws of the United States may be brought in Brazilian courts and that, subject to Brazilian public policy and national sovereignty. Brazilian courts will enforce liabilities in such actions against us and our officers; and |
| · | The ability of a creditor or the other persons named above to satisfy a judgment by attaching our assets or those of the selling shareholders is limited by provisions of Brazilian law. |
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A plaintiff (whether Brazilian or non-Brazilian) residing outside Brazil during the course of litigation in Brazil must, , in order to cover court costs and legal fees, provide a bond or if the plaintiff does not own any real property in Brazil, ,aa guarantee. The bond must have a value sufficient to satisfy the payment of court fees and the defendant’s attorney fees, as determined by a judge in Brazil. This requirement does not apply to a proceeding to enforce a foreign judgment, which has been confirmed by the Brazilian STJ (“Superior Court of Justice.
| Item 11. | Quantitative and Qualitative Disclosures about Market Risk |
We are exposed to market risk resulting from foreign currency exchange rates and interest rates fluctuations.
Foreign exchange risk results from certain of our loans and financingsfinancing being denominated in currencies (primarily the U.S. dollar) other than the currency in which we earn revenues (the Brazilian real)Real). See “Item 5,5. Operating and Financial Review and Prospects—Prospects – Critical Accounting Estimates”Policies”.
Exchange Rate Risk
On December 31, 2015 approximately 0.3 %2020, R$7,866 million, representing 52.37% of our outstanding indebtedness, or R$47 million, waswere denominated in foreign currencies, of which approximately 0.2%100.00%, or R$33 million, was denominated in U.S. dollars. We do not have substantial revenues denominated in any foreign currencies and, due to regulations that require us to keep excess cash on deposit in real-denominatedReal-denominated accounts at Brazilian banks,banks; we do not have monetary assets denominated in foreign currencies.
In 2016,2020, a hypothetical 25% and 50% depreciation of the realReal against the U.S. dollar would result in an additional annual rate expense, of approximately R$1201,972 million and R$2163,940 million, respectively, reflecting the increased cost in reaisReais of foreign currency-denominated indebtedness from loans, financingsfinancing and debentures, compared to probable scenario. This sensitivity analysis assumes a simultaneous unfavorable 25% and 50% fluctuation in each of the exchange rates affecting the foreign currencies in which our indebtedness is denominated.
The foreign exchange variations of the acquisition of energy from Itaipu is balanced by the CVA and Other financial components in tariff adjustment. This amount is passed through to customers in next tariff adjustment. Thus, this exposure affects the cash flow of the year, but does not affect the result of the year.
The table below provides summarized information regarding our exposure to exchange rate risk as of December 31, 2015:
2020:
| U.S. Dollar: | (in millions of R$) | |||
| Financing | 7,866 | |||
| Supplier (Itaipu) |
| |||
| Other Currencies: | ||||
Financing | - | |||
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Net liabilities exposed to exchange rate risk | 8,191 |
Swap transactions
On December 31, 2020 we had R$7,854 million in loans and financing outstanding that we use derivative instruments (swaps) to protect the servicing associated with these debts (principal plus interest).
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The derivative financial instruments contracted have the purpose of protecting the operations against the risks arising from foreign exchange variation and are not used for speculative purposes.
The notional amount of derivative transactions are not presented in the Company´s statement of financial position, since they refer to transactions that do not require cash as only the gains or losses actually incurred are recorded.
The table presents the derivative instruments contracted by the Company as of December 31, 2020:
| Assets (1) | Liability (1) | Maturity period | Trade market | Notional amount (2) | Unrealized gain/loss | |
| Carrying amount 2020 | Fair value 2020 | |||||
US$ exchange variation + Rate (9.25% p.y.) | Local currency + R$150.49% of CDI | Interest: Semi-annual Principal: Dec. 2024 | Over the counter | US$1,000 | 1,772 | 2,110 |
US$ exchange variation + Rate (9.25% p.y.) | Local currency + R$125.52% of CDI | Interest: Semi-annual Principal: Dec. 2024 | Over the counter | US$500 | 588 | 839 |
2,360 | 2,949 | |||||
| Current asset | 523 | |||||
| Non-current asset | 2,426 | |||||
| (1) | For the US$1 billion Eurobond issued on December 2017: (i) for the principal, a call spread was contracted, with floor at R$3.25/US$ and ceiling at R$5.00/US$; and (ii) a swap was contracted for the total interest, for a coupon of 9.25% p.a. at an average rate equivalent to 150.49% of the CDI. For the additional US$500 issuance of the same Eurobond issued on July 2018: (1) a call spread was contracted for the principal, with floor at R$3.85/US$ and ceiling at R$5.00/US$; and (2) a swap was contracted for the interest, resulting in a coupon of 9.25% p.a., with an average rate equivalent to 125.52% of the CDI rate. The upper limit for the exchange rate in the hedge instrument contracted by the Company for the principal of the Eurobonds is R$5.00/US$. The instrument matures in December 2024. If the USD/BRL exchange rate is still over R$5.00 in December 2024, the company will disburse, on that date, the difference between the upper limit of the protection range and the spot dollar on that date. The Company is monitoring the possible risks and impacts associated with the dollar being valued above R$5.00, and assessing various strategies for mitigating the foreign exchange risk up to the maturity date of the transaction. The hedge instrument fully protects the payment of six-monthly interest, independently of the USD/BRL exchange rate.” |
| (2) | In million of US$. |
In accordance with market practice, the Company uses a mark-to-market method to measure its derivatives financial instruments for its Eurobonds. The principal indicators for measuring the fair value of the swap are the B3 future market curves for the DI rate and the dollar. The Black & Scholes model is used to price the call spread, and one of parameters of which is the volatility of the dollar, measured on the basis of its historic record over 2 years.
Interest Rate Risk
On December 31, 20152020 we had R$15,16715,020 million in loans and financing outstanding, of which approximately R$15,153 million bore interest at floating rates which, R$15,0952,383 million bear interest at rates tied to inflation indexes and the SELICCDI rate and R$72 million is linked principally to LIBOR.other floating indexes.
AtOn December 31, 20152020, we had liabilities,assets, net of other assets that boreliabilities leaving interest at floating rates in the amount of R$11,7173,296 million. The assets consisted mainly of cash and cash equivalents, as summarized in the tables below. A hypothetical, instantaneous and unfavorable change of 100 basis points in interest rates applicable to floating rate financial assets and liabilities held on December 31, 20152020 would result in a potential lossgain of R$11,71733 million accounted as a financialfinance expense in our consolidated financial statements.
Total Debt Portfolio
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| Total Debt Portfolio | (in millions of R$) | |||
| 7,254 | |||
| ||||
Foreign currency-denominated | 7,866 | |||
| Transaction costs ( - ) | (57) | |||
| Paid interest (-) | (25) | |||
| Discount on the issuance (-) | (18) | |||
| Total | 15,020 | |||
| Total Portfolio | Interest Rate Risk (in millions of R$) | |||
| Assets: | ||||
| Cash equivalents | 1,587 | |||
| Securities | 4,125 | |||
| Restricted Cash | 64 | |||
| CVA and other financial components | 134 | |||
| Total | 5,910 | |||
| Liabilities: | ||||
| Financing | (2,383) | |||
| (231) | |||
| Total liabilities | (2,614) | |||
Total | ||||
| 3,296 | ||||
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| Item 12. | Description of Securities Other than Equity Securities |
American Depositary Shares
Citibank, N.A, serves as the depositary (the “Depositary”‘Depositary’) for both our Common ADSs and Preferred ADSs. Holders of ADSs, any person or entity having a beneficial interest deriving from the ownership of the ADSs, and persons depositing shares or surrendering ADSs for cancellation and withdrawal of Deposited Securities (as defined in the Deposit Agreements) are required to pay to the Depositary certain fees and related charges as identified below.
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The fees associated with our Common ADSs are as follows:
Service | Rate | By Whom Paid | ||
| (1) Issuance of Common ADSs upon deposit of common shares (excluding issuances as a result of distributions described in paragraph (4) below). | Up to $5.00 per 100 Common ADSs (or fraction thereof) issued. | Persons depositing common shares or persons receiving Common ADSs. | ||
| (2) Delivery of Deposited Securities, property and cash against surrender of Common ADSs. | Up to $5.00 per 100 Common ADSs (or fraction thereof) surrendered. | Persons surrendering Common ADSs for purpose of withdrawal of Deposited Securities or persons to whom Deposited Securities are delivered. | ||
| (3) Distribution of cash | Up to $2.00 per 100 Common ADSs (or fraction thereof) held. | Persons to whom a distribution is made. | ||
| (4) Distribution of Common ADSs pursuant to (i) | Up to $5.00 per 100 Common ADSs (or fraction thereof) issued. | Persons to whom a distribution is made. | ||
| (5) Distribution of securities other than Common ADSs or rights to purchase additional Common ADSs (i.e., spin off shares). | Up to $5.00 per 100 Common ADSs (or fraction thereof) issued. | Persons to whom a distribution is | ||
| made. | ||||
| (6) Transfer of ADRs. | $1.50 per certificate presented for transfer. | Persons presenting certificate for transfer. | ||
The fees associated with our Preferred ADSs are as follows:
Service | Rate | By Whom Paid | ||
| (1) Issuance of Preferred ADSs upon deposit of preferred shares (excluding issuances contemplated by paragraphs (3) (b) and (5) below). | Up to $5.00 per 100 Preferred ADSs (or fraction thereof) issued. | Persons for whom deposits are made or persons receiving Preferred ADSs. | ||
| (2) Delivery of Deposited Securities, property and cash against surrender of Preferred ADSs. | Up to $5.00 per 100 Preferred ADSs (or fraction thereof) surrendered. | Persons surrendering Preferred ADSs or making withdrawal. | ||
| (3) Distribution of (a) cash dividend or (b) Preferred ADSs pursuant to | No fee, | Persons to whom a distribution is made. | ||
| (4) Distribution of cash proceeds (i.e., upon sale of rights and other entitlements). | Up to $2.00 per 100 Preferred ADSs (or fraction thereof) held. | Persons to whom a distribution is made. | ||
| (5) Distribution of Preferred ADSs pursuant to exercise of rights. | Up to $5.00 per 100 Preferred ADSs (or fraction thereof) issued. | Persons to whom a distribution is made. | ||
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Direct and indirect depositary paymentspayments.
We have an agreement with the Depositary to reimburse the Company, up to a limited amount, for certain expenses in connection with our ADR programs, including listing fees, legal and accounting expenses, proxy distribution costs and investor relation related expenses. These reimbursements for the year ended December 31, 20152020 totaled a net amount of approximately US$2,6560.958 million, after deduction of applicable USU.S. taxes, in the amount of US$1,1380.404 million.
| Item 13. | Defaults, Dividend Arrears and Delinquencies |
Not applicable.
| Item 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds |
Not applicable.
| Item 15. | Controls and |
(a) Assessment of Controls and Procedures for Disclosure
Our Executive Board, including our Chief Executive Officer (or CEO),(‘CEO’) and Chief Financial and Investor Relations Officer, (or CFO), evaluated the effectiveness of our financial disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31 2020, and have concluded that on December 31, 2015,because of the material weakness in our internal control over financial reporting as discussed below in Item 15 (b), these financial disclosure controls and procedures were sufficientnot effective.
Disclosure controls and procedures are designed to provide reasonable assurance that information in our files and records which mustrequired to be disclosed by us in the reports that we file or submit under the Securities Exchange Act are: (i)of 1934, as amended, is recorded, processed, summarized and reported within the time periodsperiod specified in the SEC’sSEC rules and formsforms. These disclosure controls and (ii) collectedprocedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit is accumulated and communicated to our management of the Company, including our CEOthe principal executive officer and CFO, in anfinancial officer, as appropriate manner to allow timely decisions regarding the required disclosure. In light of the material weaknesses discussed below, we performed additional analysis and other post-closing procedures to ensure our consolidated financial statements are prepared in accordance with generally accepted accounting principles. Accordingly, our management, including our principal executive and financial officer, have concluded that the consolidated financial statements included in this Form 20-F present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with IFRS as issued by the IASB.
Our Executive Board, including our CEO and CFO,(b) Management’s Annual Report on Internal Controls over Financial Reporting
Management is responsible for establishing and maintaining effectiveadequate internal controls over financial reporting.
Our internal controlscontrol over financial reporting, includeas defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act.
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Our internal control system was designed to provide a reasonable assurance as to the integrity and reliability of the published financial statements. Our internal control over financial reporting includes those policies and procedures that were implementedthat:
| (1) | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; |
| (2) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and Chief Officers of the Company; and |
| (3) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. |
All internal control systems, no matter how well designed, have inherent limitations and can provide only reasonable assurance as to: (i)that the reliability of accounting and financial records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (ii) that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles; (iii) that our receipts and expenditures are being made only in accordance with appropriate authorizations of our Management and directors; and (iv) the timely detection of inappropriate purchases, and the disposal or allocation of material assets. We emphasize that due to their inherent limitations, the possibility exists that these actions may not prevent or detect misstatements. Also, projections of any evaluationobjectives of the effectiveness ofcontrol system are met.
Management evaluated the internal controlscontrol over financial reporting for future periods are subject tounder the risk that controls may become inadequate becausesupervision of changes in the conditions in which they operate, or inability to detect matters that are not compliant with the Company’s established policies or procedures.
Our managementour CEO and Chief Financial and Investor Relations Officer, as of December 31, 2020. Management evaluated the effectiveness of our internal control over financial reporting internal controls at December 31, 2015 based on the criteria set forth in the Committee of Sponsoring Organizations of Treadway Commission framework of 2013.
Based on these criteria, a material weakness was identified and management concluded that as of December 31, 2020 our internal control over financial reporting were not effective. As previously highlighted herein, this ineffectiveness has not compromised the consolidated financial statements as of December 31, 2020.
Material Weakness in Internal Control over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in the internal control over financial reporting such that there is a reasonable possibility that a material misstatement in the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Our management has identified a material weakness related to lack of identification, design and execution of relevant controls on business and financial reporting processes and information technology general controls (ITGC), to prevent or detect material misstatements of the Company’s annual or interim financial statements on a timely basis.
Attestation Report of the Registered Public Accounting Firm
The effectiveness of our internal control over financial reporting as of December 31, 2020, has been audited by Ernst & Young Auditores Independentes S.S., the Company’s independent registered public accounting firm. Their audit report on management’s assessment of internal control over financial reporting as of December 31, 2020, is included below in this Form 20-F and expresses an adverse opinion on the effectiveness of our internal control over financial reporting as of December 31, 2020.
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(c) Report of Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
Companhia Energética de Minas Gerais – CEMIG
Opinion on Internal Control over Financial Reporting
We have audited Companhia Energética de Minas Gerais – CEMIG’s internal control over financial reporting as of December 31, 2020, based on criteria established in the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission or(2013 framework) (the COSO (2013)criteria). Our management concluded that, for the year ended December 31, 2015 the system of internal control was effective.
The Company’s registered independent public accounting firm which auditedIn our consolidated financial statements for the year ended December 31, 2015, Deloitte Touche Tohmatsu Auditores Independentes, has audited the effectivenessopinion, because of the Company’s financial reporting internal control as of December 31, 2015 and issued an attestation report, which is included below.
The Ethics Committee
Our Ethics Committee was established on August 12, 2004, and is made up of three permanent members and three alternate members. It is responsible for the management, dissemination and updatingeffect of the Cemig’s Statement of Ethical Principles and Code of Professional Conduct. This Committee receives and investigates all reports of violationmaterial weakness described below on the achievement of the ethical principles and standards of conduct.
In December 2006 we implemented the Anonymous Reporting Channel, available on our intranet. Its purpose is to receive, either anonymously or from identified sources, complaints or accusations of irregular practices, such as financial fraud, misappropriation of assets, receipt of unfair advantages, or making of illegal contracts. It aims to provide improvement in transparency, in correction of unethical or illegal behavior, and in corporate governance, and meet the requirementsobjectives of the Sarbanes-Oxley Act. Complaints or questions may be addressed to: Cemig, Av. Barbacena 1200, 19th Floor/A1, 30190-131, Belo Horizonte, Minas Gerais, Brazil ore-mailed to comissaodeetica@cemig.com.br.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Companhia Energética de Minas Gerais – CEMIG
Belo Horizonte – MG – Brazil
We have audited the internal control over financial reporting ofcriteria, Companhia Energética de Minas Gerais – CEMIG and subsidiaries (the “Company”)Company has not maintained effective internal control over financial reporting as of December 31, 2015,2020, based on the criteria establishedCOSO criteria.
A material weakness is a deficiency, or combination of deficiencies, in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizationsinternal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Treadway Commission. company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. Management has identified a material weakness related to the lack of identification, design and execution of relevant controls on business and financial reporting processes and information technology general controls (ITGC).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statement of financial position of the Company as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2020 consolidated financial statements, and this report does not affect our report dated April 30, 2021, which expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control related toover Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
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Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of theits inherent limitations, of internal control over financial reporting including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be preventedprevent or detected on a timely basis.detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2015 of the Company and our report dated November 11, 2016 expressed an unqualified opinion on those financial statements and included (i) explanatory paragraph related to the fact that the Company is discussing in courts the extension of the concessions agreements of hydroelectric power plants of Jaguara and São Simão that had their concession agreements expired in August 2013 and January 2015, respectively and (ii) explanatory paragraph about going concern of Renova Energia S.A., an equity-method investee of the Company.
\s\
DELOITTE TOUCHE TOHMATSU
/s/ Ernst & Young Auditores Independentes S.S.
Belo Horizonte, MG, Brazil
November 11, 2016
There have been no changes
(d) Plans for Remediation of Material Weakness
Remediation plans are in progress to assure (I) the financial reporting internal control system duringdeployment of a PAM tool (Privileged Access Manager), adoption of procedures to revoke non-revised key-users access’s rights and (III) implementation of EDR (End-point Detection and Response) tool and CSIR (Computer Security Incident Response) procedures. Corroborating the year ending on December 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
During 2015,assertiveness and timeliness of corrections and remedial actions, the Company completedCompany's Internal Controls area validated with Management the implementation processanticipation of the internal controls2021 work schedule, prioritizing actions and completing remedies in order to be tested and audited with compared to the previous years' schedule.In addition, control failures will be stratified, demonstrating the dependence and influence of its subsidiary Gasmig, acquiredother company departments on the appointments in 2014, since it is partorder to act responsibly at all levels and organizational areas, acting on the root cause and mitigating the recurrence of the overall scope of the Company’s internal controls over financial reporting.failure.
| Item 16A. | Financial Specialist of the Audit Committee |
Our Audit Board acts as ourWe established an Audit Committee on June 11, 2018 in compliance with the Brazilian State Companies Law, which operates as an audit committee for the purposespurpose of the Sarbanes-Oxley ActLaw of 2002. Under Section 10A–3 (c) (3) of the SEC rules on Audit Committeesaudit committees of companies listed companies on the New York Stock Exchange, it is optional for non-U.S.non-US issuers can opt not to have a separate Audit Committeeaudit committee made up of independent members ifprovided that they have an Audit Board is established andaudit board or committee that has been chosen in accordance with the legislationlegal rules of its origin country, of origin, when such regulationswhich expressly require or allow thatpermit this committee or board to fulfillshould comply with certain duties; and if such exception is the case, an Audit Board may exercise the duties and responsibilitiesobligations. The Financial Expert of anour Audit Committee is Pedro Carlos de Mello and he also satisfies the independence requirements of the United States to the extent permitted by Brazilian Law. The financial specialists on our Audit Board are Mr. Newton Brandão Ferraz Ramos and Mr. Ronaldo Dias, an alternate member of the audit board.Rule 10A-3.
| Item 16B. | Code of Ethics |
We have adopted thea code of ethics, as defined in Item 16B of Form 20-F under the Exchange Act. Our code of ethics applies to our Chief Executive Officer, Chief FinancialFinance and Investor Relations Officer, and to persons performing similar functions, as well as to our directors,members of the Board of Directors, other officers, and employees. TheIn 2019 we made minor adjustments to our code of ethics wasto comply with Brazilian Law No. 13.303 of 2016, which is filed with the SEC as Item 7 in ouran exhibit to this Form 6-K for the month of September 2016,20-F, and is available on our website at www.cemig.com.br. If we change the provisions of our code of ethics that apply to our Chief Executive Officer, Chief Finance and Investor Relations Officer, and/or persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such change or waiver within five business days following the date of the change or waiver, on our website at the same web address.
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| Item 16C. | Principal Accountant Fees and Services |
Audit and Non-Audit Fees
The following table summarizes the aggregate fees billed to us by Deloitte Touche TohmatsuErnst &Young Auditores Independentes duringacted as our independent registered public accounting firm for the fiscal yearyears ended December 31, 2015, 2014,2020 and 2013:2019. Fees for professional services provided by our independent auditors in each of the last three fiscal years, in each of the following categories are:
(thousands of Reais) | ||
| Year ended December, 31 | 2020 | 2019 |
| Audit fees | 7,327 | 7,116 |
| Audit-related fees | 865 | - |
| Tax fees | 880 | 842 |
| Total | 9,072 | 7,958 |
| Year ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (thousands of reais) | ||||||||||||
Audit fees | 1,536 | 1,489 | 1,444 | |||||||||
Additional services: | ||||||||||||
Review of income tax returns and quarterly provisions for income tax and Social Contribution tax | 78 | 74 | 70 | |||||||||
Audit of Related Fees | 15 | 14 | 13 | |||||||||
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Total fees | 1,629 | 1,577 | 1,527 | |||||||||
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Audit fees — Audit fees in the above table are the aggregate fees billed by Deloitte Touche Tohmatsu Auditores Independentes in 2015, 2014 and 2013 in connection withinclude the audit of our annual consolidated financial statements prepared in accordance with the IFRS standards issued by IASB and of our internal control over financial repoting,reporting, the reviewquarterly reviews of our quarterlyconsolidated interim financial statements, statutory financial statements.
Tax Fees — Tax fees are fees for professional services in relation to tax return reviews (tax compliance).
Audit-Related Fees —audits of our subsidiaries and certain regulatory audits. Audit-related fees are fees forinclude mostly services related to the issuance of comfort letter in connection with regulatory demands.our debentures. Tax fees refers to certain tax compliance services.
Audit Committee Pre-Approval Policies and Procedures
Our Fiscal CouncilAudit Committee currently serves as our audit board or committee for purposes of the Sarbanes-Oxley Act of 2002. However, as required by Brazilian legislation, we have adopted pre-approval policies and procedures whereby all audit and non-audit services provided by external auditors must be approved by the Board of Directors. Any service proposals submitted by external auditors need to be discussed and approved by the Board of Directors during its meetings. Once the proposed service is approved, we formalize the engagement of the relevant services. The approval of any audit and non-audit services to be provided by our external auditors is specified in the minutes of the meetings of the Board of Directors. All services mentioned above were pre-approved by the Board of Directors and Audit Committee.
| Item 16D. | Exemptions from the Listing Standards for Audit Committees |
We rely on the general exemption from the listing standards relating to audit committees contained in Rule 10A-3(c) (3) under the Exchange Act. Our Fiscal Council thatAudit Committee carries out the functions of an audit committee of the United States to the extent permitted under Brazilian law. Brazilian law requires our Fiscal CouncilAudit Committee to be separate from our board of directors, and members of our Fiscal CouncilAudit Committee are not elected by the Company’s management. Brazilian law provides standards for the independence of our Fiscal CouncilAudit Committee from our management. Our Audit Committee is composed of four members, one of which is member of our board of directors.
We do not believe that our reliance on this general exemption will materially affect the ability of our Fiscal CouncilAudit Committee to act independently and to satisfy the other requirements of the listing standards relating to audit committees contained in Rule 10A-3 under the Exchange Act.
We also have a Fiscal Council constituted according to the Brazilian law requirements. See more information on Item 6. Directors, Senior Managers and Employees.
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| Item 16E. | Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
Not applicableapplicable.
| Item 16F. | Change in Registrant’s Certifying Accountant |
Not applicableapplicable.
| Item 16G. | Corporate Governance |
Corporate Governance Differences from NYSE Practices
On November 4, 2003, the New York Stock Exchange, or NYSE established new corporate governance rules. Under the rules, foreign private issuers are subject to a more limited set of corporate governance requirements than U.S. domestic issuers. Under the NYSE rules, we are required only to: (i) have an audit committee or audit board,Fiscal Council, pursuant to an applicable exemption available to foreign private issuers, that meets certain requirements, (ii) provide prompt certification by our chief executive officerCEO of any material noncompliance with any corporate governance rules, and (iii) provide a brief description of the significant differences between our corporate governance practices and the NYSE corporate governance practice required to be followed by U.S. listed companies. The discussion of the significant differences between our corporate governance practices and those required of U.S. listed companies follows below.
For more information on our corporate governance practices, see Item 9. The Offer and Listing Trading Market—Trading on the BM&FBovespa.B3.
Section | NYSE Corporate Governance Rule for U.S. | Our Approach | ||
| 303A.01 | A listed company must have a majority of independent directors; | Under Section 303A of the rules of the | ||
| 303A.03 | The non-management directors of a listed company must meet at regularly scheduled executive sessions without management. | The non-management directors of CEMIG do not meet at regularly scheduled executive sessions without management. | ||
| 303A.04 | A listed company must have a nominating/corporate governance committee composed entirely of independent directors, with a written charter that covers certain minimum specified duties. | As a controlled company, CEMIG is not required to have a nominating/governance committee. Nonetheless, CEMIG has a Corporate Governance Committee, composed of dependent and independent directors, and its responsibilities are clearly defined in the internal regulations of the Board of Directors. | ||
| 303A.05 | A listed company must have a compensation committee composed entirely of independent directors, with a written charter that covers certain minimum specified | As a controlled company, CEMIG would not be required to comply with the compensation committee requirements as if it were a U.S. domestic issuer. CEMIG does not have a compensation committee. | ||
| 303A.06 and 303A.07 | A listed company must have an audit committee with a minimum of three independent directors that satisfy the independence requirements of Rule 10A-3 under the Securities Exchange Act of 1934, as amended, with a written charter that covers certain minimum specified duties. | CEMIG exercised its prerogative under SEC Rule 10A-3 and the Sarbanes Oxley Act of 2002, which allow | ||
| CEMIG’s | ||||
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| 303A.08 | Shareholders must be given the opportunity to vote on all equity-compensation plans and material revisions thereto, with limited exemptions set forth in the NYSE rules. | Under Brazilian Corporate Law, shareholder preapproval is required for the adoption of equity compensation plans. | ||
| 303A.09 | A listed company must adopt and disclose corporate governance guidelines that cover certain minimum specified subjects. | CEMIG’s listing on In addition, CEMIG’s Manual for Disclosure and Use of Information, its Securities Trading Policy, the Internal Regulations of its Board of Directors, and its Code of Ethics outline important rules of corporate governance, which orient its management. | ||
| 303A.12 | Each listed company | CEMIG’s | ||
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| Item 16H. | Mine Safety Disclosure |
Not applicable.
| Item 17. | Financial Statements |
See “Item 18. Financial Statements.”Statements”.
| Item 18. | Financial Statements |
Reference is made to pages F-1 through F-129F- 179 hereof.
The following financial statements are filed as part of this annual report on Form 20-F:
| · | Audited Consolidated Statement of Financial Position as of December 31, 2020, 2019 and January 1, 2019; |
| · | Audited Consolidated Statement of Income for the years ended December 31, 2020, 2019 and 2018; |
| · | Audited Consolidated Statement of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018; |
| · | Audited Consolidated Statement of Changes in Equity for the years ended December 31, 2020, 2019 and 2018; |
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| Table of Contents |
| · | Audited Consolidated Statement of Cash Flow for the years ended December 31, 2020, 2019 and 2018; |
| · | Notes to the Consolidated Financial Statements; |
| · | Ernst & Young Auditores Independentes S.S. (‘EY’) audited our consolidated financial statements as of and for the years ended December 31, 2020, 2019 and 2018. The financial statements of Madeira Energia S.A. as of and for the year ended December 31, 2020, 2019 and 2018 were audited by PricewaterhouseCoopers Auditores Independentes (‘PWC’) |
| Item 19. | Exhibits |
The following documents are included as exhibits to this annual report:
| No. | ||
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| Description | ||
| 1 | Corporate by-laws of CEMIG, as amended and in effect since | |
| July 31, 2020. | ||
| 2.1 | Second Amended and Restated Deposit Agreement, dated as of August 10, 2001, by and among us, Citibank, N.A., as depositary, and the holders and beneficial owners of ADSs evidenced by ADRs issued thereunder (incorporated by reference to the Registration Statement on Form F-6 relating to the ADSs filed on August 20, 2001 (File No. 333-13826)). | |
| (P) | ||
| 2.2 | Shareholders’ Agreement, dated June 18, 1997, between the State Government and Southern, relating to the rights and obligations of owners of our shares (incorporated by reference to Exhibit 2.1 to our Registration Statement on Form 20-F filed on August 13, 2001 (File No. 1-15224)). | |
| (P) | ||
| 2.3 | Amendment | |
| 2.4 | Deposit Agreement, dated as of June 12, 2007, by and among us, Citibank, N.A., as depositary, and the holders and beneficial owners of ADSs evidenced by ADRs issued thereunder (incorporated by reference to the Registration Statement on Form F-6 relating to the common share ADSs filed on May 7, 2007 (File No. 333-142654)). | |
| 2.5 | The total amount of long-term debt securities of CEMIG and its subsidiaries under any one instrument does not exceed 10.0% of our total assets on a consolidated basis. We agree to furnish copies of instruments defining the rights of certain holders of long-term debt to the Securities and Exchange Commission upon request. | |
| 2.6 | Indenture, dated as of December 5, 2017, among CEMIG Geração e Transmissão S.A., as issuer, Companhia Energética de Minas Gerais – CEMIG, as notes guarantor, and the Bank of New York Mellon as trustee, paying agent, transfer agent and registrar and the Bank of New York Mellon SA/NV, Luxembourg Branch, as Luxembourg Paying Agent, Luxembourg Transfer Agent and Luxembourg Listing Agent (incorporated by reference to Exhibit 8 to our Annual Report on Form 20-F filed on May 25, 2005 (File No. 1-15224)). | |
| 4.1 | Contract of Concession for Generating Electric Energy, dated July 10, 1997, between the Federal Government and us, relating to the provision of electric energy generation services to the public (incorporated by reference to Exhibit 4.1 to our Registration Statement on Form 20-F filed on August 13, 2001 (File No. 1-15224)). | |
| (P) | ||
| 4.2 | Contract of Concession of Electric Energy Transmission Services, dated July 10, 1997, between the Federal Government and us, relating to the transmission of electric energy to the public (incorporated by reference to Exhibit 4.2 to our Registration Statement on Form 20-F filed on August 13, 2001 (File No. 1-15224)). | |
| (P) | ||
| 4.3 | Second Amendment to the | |
| 4.4 | Third Amendment to the | |
| 4.5 | Contracts of Concession of Public Service for Distribution of Electric Energy, dated July 10, 1997, between the Federal Government and us, relating to the provision of electric energy distribution services to the public (incorporated by reference to Exhibit 4.3 to our Registration Statement on Form 20-F filed on August 13, 2001 (File No. 1-15224)).(P) | |
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| 4.6 | First Amendment to the | |
| 4.7 | Second Amendment to the | |
| 4.8 | Contract for the Assignment of CRC Account, dated May 31, 1995, between the State Government and us, relating to amounts due to us from the State Government (incorporated by reference to Exhibit 4.4 to our Registration Statement on Form 20-F filed on August 13, 2001 (File No. 1-15224)). | |
| (P) | ||
| 4.9 | First Amendment to the Contract for the Assignment of CRC Account, dated February 24, 2001, between the State Government and us, relating to amounts due to us from the State Government (incorporated by reference to Exhibit 4.5 to our Annual Report on Form 20-F filed on March 26, 2003 (File No. 1-15224)). | |
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| 4.10 | Second Amendment to the Contract for the Assignment of | |
| 4.11 | Third Amendment to the Contract for the Assignment of CRC Account, dated October 24, 2002, between the State Government and us, relating to amounts due to us from the State Government (incorporated by reference to Exhibit 4.7 to our Annual Report on | |
| 4.12 | Fourth Amendment to the Contract for the Assignment of CRC Account, dated January 23, 2006, between the State Government and us, relating to amounts due to us from the State Government (incorporated by reference to Exhibit 4.14 to our Registration Statement on Form 20-F filed on June 30, 2006 (File No. 1-15224)). | |
| 4.13 | Announcement of Start of | |
| 4.14 | Summary of Indenture Covering Public Distribution of Non-Convertible Unsecured Debentures, dated August 24, 2006, between | |
| 4.15 | Summary of Indenture Covering Public Distribution of Non-Convertible Unsecured Debentures, dated April 17, 2007, between | |
| 4.16 | Summary of Indenture Covering the Second Issuance of Debentures, dated December 19, 2007, between | |
| 4.17 | Share Purchase Agreement, dated April 23, 2009, between | |
| 4.18 | English Summary of Share Purchase Agreement between | |
| 4.19 | English Summary of Share Purchase Agreement between | |
| 4.20 | English Summary of Put Option Agreement between | |
| 4.21 | English Summary of Share Purchase Agreement among, | |
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| 4.22 | English Summary of Share Purchase Agreement among, | |
| 4.23 | Summary of Indenture Covering Public Distribution of Non-Convertible Unsecured Debentures, dated March 3, 2010, between | |
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SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
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Date: November 14, 2016
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Exhibit Index
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| 4.24 | English Summary of Share Purchase Agreement between | |
| . | ||
| 4.25 | English Summary of Investment Agreement among RR Participações S.A., Light | |
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| 4.26 | English Summary of Put Option Agreement between Parati S.A. and Fundação de Seguridade Social Braslight dated July 15, 2011 (incorporated by reference to the Form 20-F filed on April 27, 2012 (File No. 1-15224)). | |
| 4.27 | English Summary of Share Purchase and Sale Agreement entered into between Amazônia Energia Participações S.A. and Construtora Queiroz Galvão S.A., Construtora OAS Ltda., Contern Construções e Comércio Ltda., Cetenco Engenharia S.A., Galvão Engenharia S.A. and J. Malucelli Construtora de Obras S.A., for shares in Norte Energia S.A. dated October 25, 2011 (incorporated by reference to the Form 20-F filed on April 27, 2012 (File No. 1-15224)). | |
| 4.28 | English Summary of Share Acquisition Agreement between CEMIG and the State of Minas Gerais dated December 27, 2011 (incorporated by reference to the Form 20-F filed on April 27, 2012 (File No. 1-15224)). | |
| 4.29 | Summary of Indenture Covering the Public Distribution of Non-Convertible Unsecured Debentures, dated March 13, 2012, between | |
| 4.30 | Initial Announcement of Public Distribution, under the Regime of Firm Guarantee of Placement, of Unsecured Debentures Not Convertible into Shares, with Additional Guarantee, in Three Series, of the Third Issue by | |
| 4.31 | Initial Announcement of Public Distribution, under the Regime of Best Efforts for Placement, of Unsecured Debentures Not Convertible into Shares, with Additional Guarantee, in up to Three Series, of the Third Issue by | |
| 4.32 | Summary of Private Contract for Investment in Transmission Assets, among | |
| 1-15224)). | ||
| 4.33 | Summary of the Share Purchase Agreement between | |
| 4.34 | Summary of the Commitment Undertaking for Settlement, signed between the State of Minas Gerais and | |
| 4.35 | Fifth Amendment to Concession Contracts | |
| 4.36 | Excerpts from concession contracts for energy generation Nos. 8, 9, 10, 11, 12, 13, 14, 15 and 16 between the Mining and Energy Ministry and CEMIG GT. | |
| 8 | List of Subsidiaries (incorporated by reference to Exhibit 8 to our Annual Report on Form 20-F filed on May 25, 2005 (File No. 1-15224)). | |
| 11 | Statement of Ethical Principles And Code of | |
| Professional Conduct. | ||
| 12.1 | Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated | |
| April 30, 2021. | ||
| 12.2 | Chief Officer for Finance and Investor Relations Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated | |
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| 13.1 | Chief Executive Officer Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated | |
| April 30, 2021. | ||
| 13.2 | Chief Officer for Finance and Investor Relations Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated | |
| 101.INS | XBRL Instance Document. | |
| 101.SCH | XBRL Taxonomy Extension Schema Document. | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | |
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SIGNATURES
COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG
Date: April 30, 2021
| By: | /s/ Reynaldo Passanezi Filho |
| Name: Reynaldo Passanezi Filho | |
| Title: Chief Executive Officer | |
| By: | /s/ Leonardo George de Magalhães |
| Name: Leonardo George de Magalhães | |
| Title: Chief Officer for Finance and Investor Relations | |
Companhia Energética de
Minas Gerais – CEMIG
CEMIG
Consolidated Financial Statements as of December 31, 20152020, 2019 and December 31,
2014January 1st, 2019 and for each of the Years Ended December 31, 2015, 20142020, 2019 and
2013 2018 and Report of Independent Registered Public Accounting
CONTENTS
 |
Report Of Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Shareholders and the Board of Directors of
Companhia Energética de Minas Gerais – CEMIG
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetsstatement of financial position of Companhia Energética de Minas Gerais—Gerais – CEMIG and subsidiaries (the “Company”)Company) as of December 31, 20152020 and 2014, and2019, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2015. These2020, and the related notes (collectively referred to as the consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express anstatements). In our opinion, on these financial statements based on our audits. audits and the report of other auditors, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB).
We did not audit the financial statements of Madeira Energia S.A (a 18.05% percent owned directS.A., a corporation in which the Company has, directly and indirect equity method investee company) and Norte Energia S.A (a 12.50% percent owned indirect equity method investee company). Theindirectly, 15.5% interest. In the consolidated financial statements, the Company’s investment in Madeira Energia S.A. is stated at R$367 million and R$552 million as of December 31, 20152020 and 2014, after consolidating adjustments, was R$1,379 million and R$1,382 million, respectively, and its loss pick up was, after consolidating adjustments, R$3 million and R$387 million for the years ended December 31, 2015 and 2014,2019, respectively, and the investmentCompany’s equity in Nortethe losses of Madeira Energia S.AS.A., is stated at December 31, 2015, after consolidating adjustments, was R$905185 million in 2020, R$188 million in 2019 and loss pick up, after consolidating adjustments, of R$33302 million for the year ended December 31, 2015.in 2018. Those financial statements were audited by other auditors whose reports havereport has been furnished to us, and our opinion, insofar as it relates to the amounts included for Madeira Energia S.A. and Norte Energia S.A., is based solely on the reportsreport of the other auditors.
We conducted our auditsalso have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated April 30, 2021, expressed an adverse opinion thereon.
Change in Accounting Principle
As discussed in Note 2.8 to the consolidated financial statements, the Company has elected to change its accounting policy for concession contract assets related to the transmission segment in 2020, 2019 and 2018. See below for discussion on our related critical audit matter.
| F-3 |
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.
In
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion based on our audits and the report of the other auditors, such consolidated financial statements, present fairly,taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Concession infrastructure assets
Description of the matter
As described in all material respects,Notes 14, 15 and 18 to the consolidated financial position of Companhia Energética de Minas Gerais—CEMIG and subsidiariesstatements, the Company’s concession infrastructure assets as of December 31, 20152020, which are comprised by concession financial assets, contract assets and 2014,intangible assets, amounted to R$3,924 million, R$4,980 million and the results of their operationsR$11,810 million, respectively. Accounting for concession infrastructure assets is highly dependent on information technology (IT) systems and their cash flows for each of the three years in the period ended December 31, 2015, in accordance with International Financial Reporting Standards—IFRS, as issuedinternal controls which were ineffective due to a material weakness identified by the International Accounting Standards Board—IASB.
management. As discussed above and in Note 42.8 to the consolidated financial statements, the Company is discussing in courtshas elected to change its accounting policy for concession contract assets related to the extensiontransmission segment.
| F-4 |
Auditing the measurement of the concessions agreementsCompany’s concession infrastructure assets, including the information derived from internal controls and IT systems impacted by the material weakness identified, was complex, required the performance of hydroelectric power plantsincremental audit procedures and significant auditor judgement due to the subjectivity of Jaguaramanagement’s judgments when: determining the indemnifiable amounts to be reimbursed by the grantor at the end of the concession period, for concession contracts in the generation segment; determining the impacts of the change on the Company’s accounting policy for concession contract assets related to the transmission segment, including the reassessment of the discount rate for the concession contracts long-term consideration and, São Simãoconsequently, to the margin allocation used when recognizing revenue; and determining which expenditures are eligible for capitalization under concession contracts in the distribution segment.
How we addressed the matter in our audit
To test the measurement of the Company’s concession infrastructure assets, our audit procedures included, among others, designing and performing incremental audit procedures to test the underlying records of transaction data obtained from the IT systems impacted by the material weakness; reading concession agreements; evaluating indemnifiable amounts recorded by the Company; assessing the history of payments related to indemnification clauses made by the grantor to companies that had theiroperate in the generation segment; examining communications between the Company and the grantor throughout the year; evaluating the change in accounting policy for concession agreements expiredcontract assets related to the transmission segment; assessing, with the support of our valuation specialists, the discount rate used in August 2013management calculation, as well as the projected financial information and January 2015, respectively.methodology used when determining margin; performing a sensitivity analysis to evaluate the changes in contract assets that would result from changes in certain key underlying assumptions; testing costs incurred against supporting documentation; testing the mathematical accuracy of cash flow projections; comparing the expected consideration inputs used in management calculation with the respective concession agreement; evaluating expenditures capitalized by comparing with the terms and conditions of the concession agreement and relevant accounting standards; testing expenditures capitalized against supporting documentation and comparing expenditures capitalized against historical data and observable industry trends. We also evaluated the disclosures included in Notes 2.8, 14, 15 and 18 to the consolidated financial statements.
Impairment of investments in associates and joint ventures
Description of the matter
As discusseddescribed in notes 14 and 33Note 16 to the consolidated financial statements, CEMIG has non-controlling interestthe Company periodically assesses for impairment its investments in associates and joint ventures accounted for as investees under the equity method. In 2020, as a result of such analysis, the Company concluded that there was indication of impairment in Madeira Energia S.A., Norte Energia S.A., Renova Energia S.A. which financialand Guanhães Energia S.A. and, consequently, proceeded with the analysis and determination of their recoverable value, recognizing losses when applicable.
Auditing the Company's impairment assessment was complex and required significant auditor judgement as estimates underlying the fair value of evaluated assets are based on assumptions affected by future market and economic conditions, raise substantial doubt about Renova Energia S.A.’s abilityand to continue as a going concern. The Company’s financial statements do not include any adjustments that might result from the outcomeexistence of this uncertaintyspecific circumstances related to Renova Energia S.A.certain associates and joint ventures’ delayed operations start-up and going concern risks.
Deloitte refers
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How we addressed the matter in our audit
To test the Company's impairment assessment our audit procedures included, among others, assessing the significant assumptions and financial and operating data used to one or more of Deloitte Touche Tohmatsu Limited,estimate fair value; comparing the significant assumptions used to estimate prospective cash flows to current industry and economic trends; comparing relevant inputs to Company´s financial and operating data; performing a UK private company limited by guarantee (“DTTL”), its network of member firms,sensitivity analysis to evaluate the fair value estimate and their related entities. DTTLinvolving our valuation specialists to assist in evaluating the discount rate and each of its member firms are legally separate and independent entities. DTTL (also referredmethodology used in the fair value calculation. We also evaluated the disclosures included in Note 16 to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.the consolidated financial statements.
Deloitte provides audit, consulting, financial advisory, risk management, tax and relates services to public and private clients spanning multiple industries. Deloitte serves four out of five Fortune Global 500® companies through a globally connected network of member firms in more than 150 countries bringing world-class capabilities, insights, and high-quality service to address clients’ most complex business challenges. To learn more about how Deloitte’s approximately 225,000 professionals make an impact that matters, please connect with us on Facebook, LinkedIn ou Twitter.
©2016 Deloitte Touche Tohmatsu. All rights reserved.
We have also audited, in accordance withserved as the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 11, 2016 expressed an unqualified opinion on the Company’s internal control over financial reporting.
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DELOITTE TOUCHE TOHMATSU
Auditores IndependentesCompany‘s auditor since 2017.
Belo Horizonte, MG, Brazil
November 11, 2016April 30, 2021
© 2016 Deloitte Touche Tohmatsu. All rights reserved.
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| Table of Contents |
[PwC Office Letterhead]
Madeira Energia S.A. - MESA
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Madeira Energia S.A. –- MESA
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetsheets of Madeira Energia S.A. –- MESA and its subsidiary (the “Company”) as of December 31, 20152020 and 2014,2019, and the related consolidated statementsstatement of operations, of comprehensive loss,(loss) income, of changes in equity and of cash flows for each of the three years then ended. in the period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”) (not presented herein). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe Company’s consolidated financial statements based on our audit.audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the auditing standards generally accepted in the United Statesaudits of America andthese consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. We believe that our audits providesprovide a reasonable basis for our opinion.
In our opinion,
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements referredthat were communicated or required to above present fairly,be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in all material respects,any way our opinion on the consolidated financial positionstatements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
PicewaterhouseCoopers, Av. Tancredo Neves, 2539, Caminho das Árvores, Ed. CEO Salvador Shopping - Torre Nova Iorque |
| F-7 |
Madeira Energia S.A. –- MESA
Assessment of Impairment for long lived non-financial assets
As described in Note 3.8 c), 12 and its subsidiary13 to the consolidated financial statements (not presented herein), the Company’s consolidated long lived non-financial assets balances amounted to R$ 19,316,488 thousand at December 31, 20152020. Management evaluates impairment indicators for long lived non-financial assets. Potential impairment is identified by comparing the carrying value of the cash generating unit (CGU) to its recoverable amount, which is determined at the higher between its value in use and 2014,fair value less cost to disposal. An impairment charge is recognized when the carrying value exceeds the recoverable amount. The recoverable amounts of the CGU were determined by management at their estimated value in use. The process of estimating the recoverable amounts using value in use approach involves management´s significant judgments and assumptions related to revenue growth rates, projected operating profit and the results of their operations and their cash flows for the years then ended in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.discount rate.
The accompanying consolidated statements of operations, comprehensive loss, changesprincipal considerations for our determination that performing procedures relating to the impairment assessment for long lived non-financial assets is a critical audit matter are (i) the significant judgment by management when developing the value in equity and of cash flowsuse of the Company for the year ended December 31, 2013 was not audited, reviewed, or compiled by usCGU; (ii) a high degree of auditor judgment, subjectivity, and accordingly, we do not express an opinion or any other form of assurance on them.
São Paulo – Brazil
October 10, 2016
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PricewaterhouseCoopers
Auditores Independentes
(DC1) Uso Interno na PwC - Confidencial
Report of Independent Registered Public Accounting Firm
To Board of Directorseffort in performing procedures and Shareholders
Norte Energia S.A.
We have audited the balance sheet of Norte Energia S.A. (the “Company”) as of December 31, 2015,evaluating management’s significant assumptions related to revenue growth rates, projected operating profit and the discount rate; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included, among others, understanding management’s process for developing the value in use estimate; evaluating the appropriateness of the discounted cash flow model; testing the completeness and accuracy of underlying data used in the model; and evaluating the reasonableness of the significant assumptions used by management related statementsto the discount rate, revenue growth rates, and projected operating profit. Evaluating management’s assumptions related to revenue growth rates and projected operating profit involved evaluating whether the assumptions used by management were reasonable considering (i) the contractual conditions of operations, comprehensive loss,the concession contract; (ii) the current and past performance of changesthe CGU, (iii) the consistency with external market and industry data, and (iv) the consistency of these assumptions with evidence obtained in equityother areas of the audit. Professionals with specialized skill and of cash flows forknowledge were used to assist in the year then ended. These financial statements are the responsibilityevaluation of the Company’s management. Our responsibility ismanagement discounted cash flow model the discount rate assumption.
Assessment of Recoverability of Deferred taxes
As described in Note 11.2 to express an opinion on thesethe consolidated financial statements based on our audit. The financial statements of(not presented herein), the Company as ofCompany’s consolidated deferred income and social contribution tax assets balances were R$ 507,820 thousand, at December 31, 20142020. Deferred tax assets are recognized for temporary differences, income tax losses carryforwards and negative basis of social contribution, to the extent that they are considered probable by Company´s management, considering sufficient future taxable profits against which the deferred tax assets can be utilized, on individual entity level. The process of estimating the recoverability of deferred tax assets using a cash flow projection involves management´s significant judgments and assumptions related to revenue growth rates, projected operating and taxable profits.
The principal considerations for our determination that performing procedures relating to the year then ended were audited by other auditors whose report dated February 2, 2015 expressed an unqualified opinion on those statements.
We conducted ourrecoverability of deferred tax assets is a critical audit matter are (i) a high degree of auditor judgment, subjectivity, and effort in accordance with the auditing standards generally accepted in the United States of Americaperforming procedures and in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we planevaluating management’s significant assumptions related to revenue growth rates, projected operating and performtaxable profits; and (ii) the audit to obtain reasonable assurance about whethereffort involved the financial statements are freeuse of material misstatement. Anprofessionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit includes examining,evidence in connection with forming our overall opinion on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessingThese procedures included, among others, understanding management’s process for estimating the accounting principlesrecoverability of deferred tax assets; evaluating the appropriateness of the cash flow projection, testing significant assumptions used and significant estimates made by management as well as evaluatingin the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion,projection of recoverability of deferred tax assets and testing the financial statements referrednature and amounts of the tax loss carryforwards, negative tax base and temporary differences. Professionals with specialized skill and knowledge were used to above present fairly,assist in all material respects, the financial positionevaluation of Norte Energia S.A. at December 31, 2015, and the results of its operations andCompany’s management cash flows for the year then ended in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Brasília—Brazil
October 10, 2016.
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PricewaterhouseCoopers
Auditores Independentes
PricewaterhouseCoopers SHS Quadra 6, Cj. A, Bloco C, Ed.Business Center Tower, Salas 801 a 811, Brasĺlia, DF, Brasil 70.322-915
Caixa Postal 08650 T: (61) 2196-1800, F: (61) 2196-1820, www.pwc.com/br
(DC2) Uso Restrito na PwC - Confidencial
CONTENTS/s/ PricewaterhouseCoopers
Auditores Independentes
Salvador-Bahia, Brazil
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We have served as the Company's auditor since 2009.
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CONSOLIDATED STATEMENTSSTATEMENT OF FINANCIAL POSITION
AS OF DECEMBER 31, 20152020, 2019 AND 2014JANUARY 1ST, 2019
ASSETS
(IN MILLIONS OF BRAZILIAN REAIS—REAIS - R$) mn)
| Note | 2020 | 2019 Restated(1) | 01/01/2019 Restated(1) | |||||||||||||
| CURRENT | ||||||||||||||||
| Cash and cash equivalents | 6 | 1,680 | 536 | 891 | ||||||||||||
| Marketable securities | 7 | 3,360 | 740 | 704 | ||||||||||||
| Receivables from customers, traders and power transport concession holders | 8 | 4,373 | 4,524 | 4,092 | ||||||||||||
| Concession financial assets | 14 | 258 | 891 | 890 | ||||||||||||
| Concession contract assets | 15 | 737 | 576 | 482 | ||||||||||||
| Recoverable taxes | 9 | 1,850 | 99 | 124 | ||||||||||||
| Income tax and social contribution tax credits | 10 | 598 | 621 | 387 | ||||||||||||
| Dividends receivables | 16 | 188 | 186 | 120 | ||||||||||||
| Public lighting contribution | 179 | 165 | 148 | |||||||||||||
| Reimbursement of tariff subsidies payments | 13 | 88 | 97 | 91 | ||||||||||||
| Derivative financial instruments | 31 | 523 | 235 | 70 | ||||||||||||
| Others | 364 | 426 | 521 | |||||||||||||
| 14,198 | 9,096 | 8,520 | ||||||||||||||
| Assets classified as held for sale | 32 | 1,258 | 1,258 | 19,446 | ||||||||||||
| TOTAL CURRENT | 15,456 | 10,354 | 27,966 | |||||||||||||
| NON-CURRENT | ||||||||||||||||
| Marketable securities | 7 | 765 | 13 | 109 | ||||||||||||
| Receivables from customers, traders and power transport concession holders | 8 | 161 | 77 | 81 | ||||||||||||
| Recoverable taxes | 9 | 3,442 | 6,349 | 242 | ||||||||||||
| Income tax and social contribution tax recoverable | 10 | 347 | 228 | 6 | ||||||||||||
| Deferred income tax and social contribution tax | 10 | 2,453 | 2,430 | 2,147 | ||||||||||||
| Escrow deposits | 12 | 1,056 | 2,540 | 2,502 | ||||||||||||
| Derivative financial instruments | 31 | 2,426 | 1,456 | 744 | ||||||||||||
| Accounts receivable from the State of Minas Gerais | 11 | 12 | 115 | 246 | ||||||||||||
| Concession financial assets | 14 | 3,799 | 3,759 | 3,812 | ||||||||||||
| Concession contract assets | 15 | 4,243 | 3,307 | 3,026 | ||||||||||||
| Investments – Equity method | 16 | 5,415 | 5,400 | 5,235 | ||||||||||||
| Property, plant and equipment | 17 | 2,407 | 2,450 | 2,662 | ||||||||||||
| Intangible assets | 18 | 11,810 | 11,624 | 10,777 | ||||||||||||
| Leasing – right-of-use assets | 19 | 212 | 277 | — | ||||||||||||
| Others | 79 | 147 | 784 | |||||||||||||
| TOTAL NON-CURRENT | 38,627 | 40,172 | 32,373 | |||||||||||||
| TOTAL ASSETS | 54,083 | 50,526 | 60,339 | |||||||||||||
| Note | 2015 | 2014 | ||||||||||
Current | ||||||||||||
Cash and cash equivalents | 6 | 925 | 887 | |||||||||
Marketable securities | 7 | 2,427 | 994 | |||||||||
Consumers and traders | 8 | 3,581 | 2,142 | |||||||||
Concession holders – Transport of electricity | 8 | 184 | 248 | |||||||||
Financial assets of the concession | 13 | 874 | 848 | |||||||||
Recoverable taxes | 9 | 175 | 214 | |||||||||
Income and social contribution tax credits | 10a | 306 | 295 | |||||||||
Dividends receivable | 62 | 73 | ||||||||||
Inventories | 37 | 40 | ||||||||||
Advance to suppliers | 27 | 87 | 4 | |||||||||
Energy Development Account (CDE) | 12 | 72 | 345 | |||||||||
Other | 647 | 464 | ||||||||||
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TOTAL, CURRENT | 9,377 | 6,554 | ||||||||||
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NON-CURRENT | ||||||||||||
Marketable securities | 7 | 84 | 17 | |||||||||
Advance to suppliers | 27 | 60 | — | |||||||||
Consumers and traders | 8 | 58 | 203 | |||||||||
Concession holders – Transport of electricity | 8 | 75 | 6 | |||||||||
Recoverable taxes | 9 | 258 | 387 | |||||||||
Income and social contribution taxes recoverable | 10ª | 206 | 207 | |||||||||
Deferred income and social contribution taxes | 10b | 1,498 | 1,246 | |||||||||
Escrow deposits | 11 | 1,813 | 1,535 | |||||||||
Other credits | 808 | 407 | ||||||||||
Financial assets of the concession | 13 | 2,660 | 7,475 | |||||||||
Investments | 14 | 9,745 | 8,040 | |||||||||
Property, plant and equipment | 15 | 3,940 | 5,544 | |||||||||
Intangible assets | 16 | 10,275 | 3,379 | |||||||||
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TOTAL, NON-CURRENT | 31,480 | 28,446 | ||||||||||
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TOTAL ASSETS | 40,857 | 35,000 | ||||||||||
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| (1) | For further details of restatement of comparative balances, see Note 2.8 |
The Notes are an integral part of these Consolidated Financial Statements.
| F-9 |
CONSOLIDATED STATEMENTSSTATEMENT OF FINANCIAL POSITION
AS OF DECEMBER 31, 20152020, 2019 AND 2014JANUARY 1ST, 2019
LIABILITIES
(IN MILLIONS OF BRAZILIAN REAIS—REAIS - R$) mn)
| Note | 2015 | 2014 | ||||||||||
Suppliers | 17 | 1,901 | 1,604 | |||||||||
Regulatory charges | 20 | 517 | 106 | |||||||||
Profit sharing | 114 | 116 | ||||||||||
Taxes payable | 18a | 740 | 555 | |||||||||
Income and Social Contribution taxes | 18b | 11 | 43 | |||||||||
Interest on equity and dividends payable | 23 | 1,307 | 1,643 | |||||||||
Loans and financings | 19 | 5,137 | 4,143 | |||||||||
Debentures | 19 | 1,163 | 1,148 | |||||||||
Payroll and related charges | 221 | 195 | ||||||||||
Post-retirement liabilities | 21 | 167 | 153 | |||||||||
Financial Instruments—put options | 14 | 1,245 | — | |||||||||
Other obligations | 551 | 417 | ||||||||||
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TOTAL, CURRENT | 13,074 | 10,123 | ||||||||||
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Regulatory charges | 20 | 226 | 252 | |||||||||
Loans and financings | 19 | 1,784 | 1,816 | |||||||||
Debentures | 19 | 7,083 | 6,402 | |||||||||
Taxes payable | 18a | 740 | 723 | |||||||||
Deferred income and social contribution taxes | 10b | 689 | 611 | |||||||||
Provisions | 22 | 755 | 755 | |||||||||
Post-retirement liabilities | 21 | 3,086 | 2,478 | |||||||||
Financial Instruments—put options | 14 | 148 | 195 | |||||||||
Other obligations | 284 | 360 | ||||||||||
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TOTAL, NON-CURRENT | 14,795 | 13,592 | ||||||||||
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TOTAL LIABILITIES | 27,869 | 23,715 | ||||||||||
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EQUITY | 23 | |||||||||||
Share capital | 6,294 | 6,294 | ||||||||||
Capital reserves | 1,925 | 1,925 | ||||||||||
Profit reserves | 4,663 | 2,594 | ||||||||||
Equity Valuation Reserve | ||||||||||||
Deemed cost of property, plant and equipment | 720 | 780 | ||||||||||
Other Comprehensive Income | (618 | ) | (312 | ) | ||||||||
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EQUITY ATTRIBUTABLE TO THE CONTROLLING SHAREHOLDERS | 12,984 | 11,281 | ||||||||||
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EQUITY ATTRIBUTABLE TO NON-CONTROLLING SHAREHOLDER | 4 | 4 | ||||||||||
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TOTAL EQUITY | 12,988 | 11,285 | ||||||||||
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TOTAL LIABILITIES AND EQUITY | 40,857 | 35,000 | ||||||||||
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| Note | 2020 | 2019 Restated (1) | 01/01/2019 Restated (1) | |||||||||||||
| Suppliers | 20 | 2,358 | 2,080 | 1,801 | ||||||||||||
| Regulatory charges | 23 | 446 | 457 | 514 | ||||||||||||
| Profit sharing | 122 | 212 | 79 | |||||||||||||
| Taxes payable | 21 | 506 | 411 | 453 | ||||||||||||
| Income tax and social contribution tax | 10 | 140 | 134 | 112 | ||||||||||||
| Interest on equity and dividends payable | 26 | 1,449 | 744 | 864 | ||||||||||||
| Loans, financing and debentures | 22 | 2,059 | 2,747 | 2,198 | ||||||||||||
| Payroll and related charges | 213 | 200 | 284 | |||||||||||||
| Public lighting contribution | 305 | 252 | 281 | |||||||||||||
| Post-employment obligations | 24 | 305 | 288 | 253 | ||||||||||||
| Sector financial liabilities | 14 | 231 | — | — | ||||||||||||
| PIS/Pasep and Cofins taxes to be refunded to customers | 21 | 448 | — | — | ||||||||||||
| Put options SAAG | 31 | 536 | — | — | ||||||||||||
| Lease liabilities | 19 | 48 | 85 | — | ||||||||||||
| Others | 524 | 355 | 326 | |||||||||||||
| 9,690 | 7,965 | 7,165 | ||||||||||||||
| Liabilities classified as held for sale | 32 | — | — | 16,272 | ||||||||||||
| TOTAL CURRENT | 9,690 | 7,965 | 23,437 | |||||||||||||
| NON-CURRENT | ||||||||||||||||
| Regulatory charges | 23 | 291 | 147 | 179 | ||||||||||||
| Loans, financing and debentures | 22 | 12,961 | 12,030 | 12,574 | ||||||||||||
| Taxes payable | 21 | 263 | 227 | 249 | ||||||||||||
| Deferred income tax and social contribution tax | 10 | 1,040 | 770 | 803 | ||||||||||||
| Provisions | 25 | 1,892 | 1,888 | 641 | ||||||||||||
| Post-employment obligations | 24 | 6,538 | 6,421 | 4,736 | ||||||||||||
| PIS/Pasep and Cofins taxes to be refunded to customers | 21 | 3,570 | 4,193 | 1,124 | ||||||||||||
| Put options SAAG | 31 | — | 483 | 419 | ||||||||||||
| Lease liabilities | 19 | 179 | 203 | — | ||||||||||||
| Others | 181 | 96 | 93 | |||||||||||||
| TOTAL NON-CURRENT | 26,915 | 26,458 | 20,818 | |||||||||||||
| TOTAL LIABILITIES | 36,605 | 34,423 | 44,255 | |||||||||||||
| EQUITY | 26 | |||||||||||||||
| Share capital | 7,594 | 7,294 | 7,294 | |||||||||||||
| Capital reserves | 2,250 | 2,250 | 2,250 | |||||||||||||
| Profit reserves | 10,061 | 8,750 | 6,362 | |||||||||||||
| Equity valuation adjustments | (2,431 | ) | (2,407 | ) | (1,327 | ) | ||||||||||
| Retained earnings | — | 212 | 145 | |||||||||||||
| EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT | 17,474 | 16,099 | 14,724 | |||||||||||||
| NON-CONTROLLING INTERESTS | 26 | 4 | 4 | 1,360 | ||||||||||||
| TOTAL EQUITY | 17,478 | 16,103 | 16,084 | |||||||||||||
| TOTAL LIABILITIES AND EQUITY | 54,083 | 50,526 | 60,339 | |||||||||||||
| (1) | For further details of restatement of comparative balances, see Note 2.8 |
The Notes are an integral part of these Consolidated Financial Statements.
| F-10 |
CONSOLIDATED STATEMENTSSTATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2015, 20142020, 2019 AND 20132018
(IN MILLIONS OF BRAZILIAN REAIS—REAIS - R$) mn, except earnings per share)
| Notes | 2020 | 2019 Restated (1) | 2018 Restated (1) | |||||||||||||
| CONTINUING OPERATIONS | ||||||||||||||||
| NET REVENUE | 27 | 25,228 | 25,486 | 22,299 | ||||||||||||
| OPERATING COSTS | ||||||||||||||||
| COST OF ENERGY AND GAS | 28 | |||||||||||||||
| Energy purchased for resale | (12,111 | ) | (11,286 | ) | (11,084 | ) | ||||||||||
| Charges for use of the national grid | (1,748 | ) | (1,426 | ) | (1,480 | ) | ||||||||||
| Gas purchased for resale | (1,083 | ) | (1,436 | ) | (1,238 | ) | ||||||||||
| (14,942 | ) | (14,148 | ) | (13,802 | ) | |||||||||||
| OTHER OPERATING COSTS | 28 | |||||||||||||||
| Personnel | (1,012 | ) | (1,002 | ) | (1,098 | ) | ||||||||||
| Materials | (62 | ) | (74 | ) | (81 | ) | ||||||||||
| Outsourced services | (1,087 | ) | (1,043 | ) | (913 | ) | ||||||||||
| Depreciation and amortization | (865 | ) | (815 | ) | (761 | ) | ||||||||||
| Operating provisions, net | (168 | ) | (1,214 | ) | (40 | ) | ||||||||||
| Infrastructure construction cost | (1,581 | ) | (1,200 | ) | (897 | ) | ||||||||||
| Others | (128 | ) | (102 | ) | (85 | ) | ||||||||||
| (4,903 | ) | (5,450 | ) | (3,875 | ) | |||||||||||
| TOTAL COST | (19,845 | ) | (19,598 | ) | (17,677 | ) | ||||||||||
| GROSS PROFIT | 5,383 | 5,888 | 4,622 | |||||||||||||
| OPERATING EXPENSES (REVENUES) | 28 | |||||||||||||||
| Selling expenses | (147 | ) | (238 | ) | (264 | ) | ||||||||||
| General and administrative expenses | (583 | ) | (642 | ) | (672 | ) | ||||||||||
| Operating provisions | (108 | ) | (950 | ) | (167 | ) | ||||||||||
| Other operating (expenses) income, net | (749 | ) | (1,046 | ) | (640 | ) | ||||||||||
| (1,587 | ) | (2,876 | ) | (1,743 | ) | |||||||||||
| Share of profit (loss), net, of affiliates and jointly-controlled entities | 16 | 357 | 125 | (104 | ) | |||||||||||
| Dividends declared by investee classified as held for sale | 32 | — | 73 | — | ||||||||||||
| Result of business combination | 51 | — | — | |||||||||||||
| Periodic Tariff Review adjustments | 502 | — | — | |||||||||||||
| Remeasurement of previously held equity interest in subsidiaries acquired | 16 | — | — | (119 | ) | |||||||||||
| Impairment loss on investments | 16 | — | — | (127 | ) | |||||||||||
| Income before finance income (expenses) and taxes | 4,706 | 3,210 | 2,529 | |||||||||||||
| Finance income | 29 | 2,445 | 3,207 | 1,706 | ||||||||||||
| Finance expenses | 29 | (3,350 | ) | (1,847 | ) | (2,224 | ) | |||||||||
| Income before income tax and social contribution tax | 3,801 | 4,570 | 2,011 | |||||||||||||
| Current income tax and social contribution tax | 10 | (684 | ) | (1,454 | ) | (583 | ) | |||||||||
| Deferred income tax and social contribution tax | 10 | (252 | ) | (145 | ) | (27 | ) | |||||||||
| Net income for the year from continuing operations | 2,865 | 2,971 | 1,401 | |||||||||||||
| DISCONTINUED OPERATIONS | ||||||||||||||||
| Net income after tax for the year from discontinued operations | 32 | — | 224 | 363 | ||||||||||||
| NET INCOME FOR THE YEAR | 2,865 | 3,195 | 1,764 | |||||||||||||
| Total of net income for the year attributed to: | ||||||||||||||||
| Equity holders of the parent | ||||||||||||||||
| Net income from continuing operations | 2,864 | 2,970 | 1,400 | |||||||||||||
| Net income from discontinued operations | 32 | — | 224 | 322 | ||||||||||||
| Net income for the year attributed to equity holders of the parent | 2,864 | 3,194 | 1,722 | |||||||||||||
| Non-controlling interests | ||||||||||||||||
| Net income from continuing operations | 1 | 1 | 1 | |||||||||||||
| Net income from discontinued operations | — | — | 41 | |||||||||||||
| 1 | 1 | 42 | ||||||||||||||
| NET INCOME FOR THE YEAR | 2,865 | 3,195 | 1,764 | |||||||||||||
| Basic and diluted earnings per preferred share – R$ | 26 | 1.69 | 1.89 | 1.02 | ||||||||||||
| Basic and diluted earnings per common share – R$ | 26 | 1.69 | 1.89 | 1.02 | ||||||||||||
| Basic and diluted earnings per preferred share from continuing operations – R$ | 26 | 1.69 | 1.75 | 0.83 | ||||||||||||
| Basic and diluted earnings per common share from continuing operations – R$ | 26 | 1.69 | 1.75 | 0.83 | ||||||||||||
| Basic and diluted earnings per preferred share from discontinued operations – R$ | 26 | — | 0.14 | 0.19 | ||||||||||||
| Basic and diluted earnings per common share from discontinued operations – R$ | 26 | — | 0.14 | 0.19 | ||||||||||||
| (1) | For further details of restatement of comparative balances, see Note 2.8. |
The Notes are an integral part of these Consolidated Financial Statements.
| F-11 |
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
(except Net income per share)IN MILLIONS OF REAIS - R$ mn)
| 2020 | 2019 Restated (1) | 2018 Restated (1) | ||||||||||
| NET INCOME FOR THE YEAR | 2,865 | 3,195 | 1,764 | |||||||||
| OTHER COMPREHENSIVE INCOME | ||||||||||||
| Items not to be reclassified to profit or loss in subsequent periods | ||||||||||||
| Post retirement liabilities – remeasurement of obligations of the defined benefit plans | (10 | ) | (1,599 | ) | (702 | ) | ||||||
| Income tax and social contribution tax on restatement of defined benefit plans | 4 | 544 | 239 | |||||||||
| Others | (1 | ) | — | — | ||||||||
| (7 | ) | (1,055 | ) | (463 | ) | |||||||
| COMPREHENSIVE INCOME FOR THE YEAR | 2,858 | 2,140 | 1,301 | |||||||||
| Total of comprehensive income for the year attributed to: | ||||||||||||
| Equity holders of the parent | 2,857 | 2,139 | 1,259 | |||||||||
| Non-controlling interests | 1 | 1 | 42 | |||||||||
| 2,858 | 2,140 | 1,301 | ||||||||||
| (1) | For further details of restatement of comparative balances, see Note 2.8 |
| Note | 2015 | 2014 | 2013 | |||||||||||
NET REVENUE | 24 | 21,292 | 19,540 | 14,627 | ||||||||||
OPERATING COSTS | ||||||||||||||
COST OF ELECTRICITY AND GAS | 25 | |||||||||||||
Electricity purchased for resale | (9,542 | ) | (7,428 | ) | (5,207 | ) | ||||||||
Charges for the use of the national grid | (999 | ) | (744 | ) | (575 | ) | ||||||||
Gas purchased for resale | (1,051 | ) | (254 | ) | — | |||||||||
|
|
|
|
|
| |||||||||
| (11,592 | ) | (8,426 | ) | (5,782 | ) | |||||||||
OTHER COSTS | 25 | |||||||||||||
Personnel and managers | (1,143 | ) | (999 | ) | (946 | ) | ||||||||
Materials | (126 | ) | (340 | ) | (111 | ) | ||||||||
Outsourced services | (740 | ) | (736 | ) | (672 | ) | ||||||||
Depreciation and amortization | (811 | ) | (779 | ) | (782 | ) | ||||||||
Operating provisions | (23 | ) | (262 | ) | (212 | ) | ||||||||
Infrastructure construction cost | (1,252 | ) | (942 | ) | (975 | ) | ||||||||
Other | (96 | ) | (318 | ) | (368 | ) | ||||||||
|
|
|
|
|
| |||||||||
| (4,191 | ) | (4,376 | ) | (4,066 | ) | |||||||||
TOTAL COST | (15,783 | ) | (12,802 | ) | (9,848 | ) | ||||||||
GROSS PROFIT | 5,509 | 6,738 | 4,779 | |||||||||||
OPERATING EXPENSES | 25 | |||||||||||||
Selling expenses | (175 | ) | (128 | ) | (121 | ) | ||||||||
General and administrative expenses | (674 | ) | (654 | ) | (799 | ) | ||||||||
Operating provisions | (1,203 | ) | (190 | ) | 28 | |||||||||
Other operating expenses | (482 | ) | (677 | ) | (491 | ) | ||||||||
|
|
|
|
|
| |||||||||
| (2,534 | ) | (1,649 | ) | (1,383 | ) | |||||||||
Equity in earnings of unconsolidated investees, net | 14 | 393 | 210 | 764 | ||||||||||
Fair value results in Corporate Operation | 14 | 729 | — | — | ||||||||||
Gain on disposal of equity investment | — | — | 284 | |||||||||||
Unrealized gain on disposal of investment | — | — | (81 | ) | ||||||||||
Gain on acquisition of control of investee | 14 | — | 281 | — | ||||||||||
Income before Financial income (expenses) and taxes | 4,097 | 5,580 | 4,363 | |||||||||||
Financial revenues | 26 | 1,469 | 593 | 885 | ||||||||||
Financial expenses | 26 | (2,204 | ) | (1,694 | ) | (1,194 | ) | |||||||
|
|
|
|
|
| |||||||||
Income before income tax and social contribution tax | 3,362 | 4,479 | 4,054 | |||||||||||
Current income and social contribution taxes | 10c | (881 | ) | (1,259 | ) | (994 | ) | |||||||
Deferred income and social contribution taxes | 10c | (12 | ) | (83 | ) | 44 | ||||||||
|
|
|
|
|
| |||||||||
NET INCOME FOR THE YEAR | 2,469 | 3,137 | 3,104 | |||||||||||
|
|
|
|
|
| |||||||||
Total of net income for the year attributed to: | ||||||||||||||
Controlling shareholders | 2,469 | 3,137 | 3,104 | |||||||||||
Non-controlling shareholder | — | — | — | |||||||||||
|
|
|
|
|
| |||||||||
| 2,469 | 3,137 | 3,104 | ||||||||||||
Basic and diluted income per preferred share – R$ | 23 | 1.96 | 2.49 | 2.47 | ||||||||||
Basic and diluted income per common share – R$ | 23 | 1.96 | 2.49 | 2.47 | ||||||||||
The Notes are an integral part of these Consolidated Financial Statements.
| F-12 |
CONSOLIDATED STATEMENTSSTATEMENT OF COMPREHENSIVE INCOMECHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2015, 20142020, 2019 AND 2013JANUARY 1ST, 2019
(IN MILLIONS OF BRAZILIAN REAIS—REAIS - R$ mn, except where otherwise indicated)
| 2015 | 2014 | 2013 | ||||||||||
NET INCOME FOR THE YEAR | 2,469 | 3,137 | 3,104 | |||||||||
OTHER COMPREHENSIVE INCOME | ||||||||||||
Items that will not be reclassified to profit or loss | ||||||||||||
Post retirement liabilities – restatement of obligations of the defined benefit plans, net of taxes | (360 | ) | (44 | ) | 175 | |||||||
Equity gain (loss) on Other comprehensive income in jointly-controlled entities | (1 | ) | (7 | ) | 31 | |||||||
|
|
|
|
|
| |||||||
| (361 | ) | (51 | ) | 206 | ||||||||
Items that may be reclassified to profit or loss | ||||||||||||
Equity gain (loss) on Other comprehensive income in jointly-controlled entities | 54 | 10 | 7 | |||||||||
|
|
|
|
|
| |||||||
COMPREHENSIVE INCOME FOR THE YEAR | 2,162 | 3,096 | 3,317 | |||||||||
|
|
|
|
|
| |||||||
Total of comprehensive income for the year attributed to: | ||||||||||||
Controlling shareholders | 2,162 | 3,096 | 3,317 | |||||||||
Non-controlling shareholder | — | — | — | |||||||||
|
|
|
|
|
| |||||||
| 2,162 | 3,096 | 3,317 | ||||||||||
|
|
|
|
|
| |||||||
| Attributable to the equity holders of the parent | Non-controlling interests | Total Equity | ||||||||||||||||||||||||||||||
| Share capital | Capital reserves | Profit reserves | Equity valuation adjustments | Retained earnings | Total | |||||||||||||||||||||||||||
| AS OF JANUARY 01, 2020 (Restated) (1) | 7,294 | 2,250 | 8,750 | (2,407 | ) | 212 | 16,099 | 4 | 16,103 | |||||||||||||||||||||||
| Non-controlling interests (Note 26) | — | — | — | — | — | — | (1 | ) | (1 | ) | ||||||||||||||||||||||
| Net income for the year | — | — | — | — | 2,864 | 2,864 | 1 | 2,865 | ||||||||||||||||||||||||
| Subscription of capital | 300 | — | (300 | ) | — | — | — | — | — | |||||||||||||||||||||||
| Other comprehensive income | — | — | — | (7 | ) | — | (7 | ) | — | (7 | ) | |||||||||||||||||||||
| Realization of PP&E deemed cost | — | — | — | (17 | ) | 17 | — | — | — | |||||||||||||||||||||||
| Appropriation of Net income for the year | ||||||||||||||||||||||||||||||||
| Tax incentives reserve (note 26) | — | — | 18 | — | (18 | ) | — | — | — | |||||||||||||||||||||||
| Legal reserve (note 26) | — | — | 142 | — | (142 | ) | — | — | — | |||||||||||||||||||||||
| Proposed dividends | — | — | — | — | (1,482 | ) | (1,482 | ) | — | (1,482 | ) | |||||||||||||||||||||
| Retained earnings reserve (note 26) | — | — | 1,451 | — | (1,451 | ) | — | — | — | |||||||||||||||||||||||
| AS OF DECEMBER 31, 2020 | 7,594 | 2,250 | 10,061 | (2,431 | ) | — | 17,474 | 4 | 17,478 | |||||||||||||||||||||||
| (1) | For further details of restatement of comparative balances, see Note 2.8 |
| Attributable to the equity holders of the parent | Non-controlling interests | Total Equity | ||||||||||||||||||||||||||||||
| Share capital | Capital reserves | Profit reserves | Equity valuation adjustments | Retained earnings | Total | |||||||||||||||||||||||||||
| AS OF JANUARY 01, 2019 (Restated) (1) | 7,294 | 2,250 | 6,362 | (1,327 | ) | 145 | 14,724 | 1,360 | 16,084 | |||||||||||||||||||||||
| Non-controlling interests (Note 26) | — | — | — | — | — | — | (1,357 | ) | (1,357 | ) | ||||||||||||||||||||||
| Net income for the year | — | — | — | — | 3,194 | 3,193 | 1 | 3,195 | ||||||||||||||||||||||||
| Remeasurement of obligations of the defined benefit plans, net of taxes | — | — | — | (1,055 | ) | — | (1,055 | ) | — | (1,055 | ) | |||||||||||||||||||||
| Realization of PP&E deemed cost | — | — | — | (25 | ) | 25 | — | — | — | |||||||||||||||||||||||
| Appropriation of Net income for the year | ||||||||||||||||||||||||||||||||
| Tax incentives reserve (note 26) | — | — | 18 | — | (18 | ) | — | — | — | |||||||||||||||||||||||
| Proposed dividends | — | — | — | — | (764 | ) | (764 | ) | — | (764 | ) | |||||||||||||||||||||
| Retained earnings reserve (note 26) | — | — | 1,535 | — | (1,535 | ) | — | — | — | |||||||||||||||||||||||
| Unrealized profit reserve (note 26) | — | — | 835 | — | (835 | ) | — | — | — | |||||||||||||||||||||||
| AS OF DECEMBER 31, 2019 | 7,294 | 2,250 | 8,750 | (2,407 | ) | 212 | 16,099 | 4 | 16,103 | |||||||||||||||||||||||
| (1) | For further details of restatement of comparative balances, see Note 2.8 |
| F-13 |
| Attributable to the equity holders of the parent | Non-controlling interests | Total Equity | ||||||||||||||||||||||||||||||||||
| Share capital | Subscription of shares to be capitalized | Capital reserves | Profit reserves | Equity valuation adjustments | Retained earnings | Total | ||||||||||||||||||||||||||||||
| AS OF JANUARY 01, 2018 (Restated) (1) | 6,294 | 1,215 | 1,925 | 5,729 | (837 | ) | (34 | ) | 14,292 | 4 | 14,296 | |||||||||||||||||||||||||
| Proposed dividends from prior years | — | — | — | (127 | ) | — | — | (127 | ) | — | (127 | ) | ||||||||||||||||||||||||
| Expired dividends of previous years | — | — | — | — | — | 42 | 42 | — | 42 | |||||||||||||||||||||||||||
| Subscription of shares, to be capitalized | — | 110 | — | — | — | — | 110 | — | 110 | |||||||||||||||||||||||||||
| Subscription of capital | 1,000 | (1,000 | ) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Goodwill on subscription of shares | — | (325 | ) | 325 | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Non-controlling interests | — | — | — | — | — | — | — | 1,314 | 1,314 | |||||||||||||||||||||||||||
| Net income for the year | — | — | — | — | — | 1,722 | 1,722 | 42 | 1,764 | |||||||||||||||||||||||||||
| Remeasurement of obligations of the defined benefit plans, net of taxes | — | — | — | — | (463 | ) | — | (463 | ) | — | (463 | ) | ||||||||||||||||||||||||
| Realization of PP&E deemed cost | — | — | — | — | (27 | ) | 42 | 15 | — | 15 | ||||||||||||||||||||||||||
| Appropriation of Net income for the year | ||||||||||||||||||||||||||||||||||||
| Tax incentives reserve (Note 26) | — | — | — | 9 | — | (9 | ) | — | — | — | ||||||||||||||||||||||||||
| Proposed dividends | — | — | — | — | — | (867 | ) | (867 | ) | — | (867 | ) | ||||||||||||||||||||||||
| Retained earnings reserve (Note 26) | — | — | — | 751 | — | (751 | ) | — | — | — | ||||||||||||||||||||||||||
| AS OF DECEMBER 31, 2018 | 7,294 | — | 2,250 | 6,362 | (1,327 | ) | 145 | 14,724 | 1,360 | 16,084 | ||||||||||||||||||||||||||
| (1) | For further details of restatement of comparative balances, see Note 2.8 |
The Notes are an integral part of these Consolidated Financial Statements.
| F-14 |
CONSOLIDATED STATEMENTSSTATEMENT OF CHANGES IN EQUITY – CONSOLIDATEDCASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2015, 20142020, 2019 AND 20132018
(IN MILLIONS OF BRAZILIAN REAIS—REAIS - R$) mn)
| Share capital | Capital reserves | Profit reserves | Equity Valuation adjustments | Retained earnings | Total interest of the controlling shareholders | Total interest of Non- controlling shareholder | Total equity | |||||||||||||||||||||||||
AS OF DECEMBER 31, 2012 | 4,265 | 3,954 | 2,856 | 475 | — | 11,550 | — | 11,550 | ||||||||||||||||||||||||
Net income for the year | — | — | — | — | 3,104 | 3,104 | — | 3,104 | ||||||||||||||||||||||||
Other comprehensive income | ||||||||||||||||||||||||||||||||
Equity gain on Other comprehensive income in jointly-controlled entity | — | — | — | 38 | — | 38 | — | 38 | ||||||||||||||||||||||||
Post retirement liabilities, net of taxes | — | — | — | 175 | — | 175 | 175 | |||||||||||||||||||||||||
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|
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|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total Comprehensive income for the year | — | — | — | 213 | 3,104 | 3,317 | — | 3,317 | ||||||||||||||||||||||||
Other changes in equity: | — | |||||||||||||||||||||||||||||||
Increase in share capital | 2,029 | (2,029 | ) | — | — | — | — | — | — | |||||||||||||||||||||||
Additional dividends proposed in 2012 (R$ 0.50 per share) | — | — | (628 | ) | — | — | (628 | ) | — | (628 | ) | |||||||||||||||||||||
Interim dividends (R$ 0.85 per share) | — | — | — | — | (1,068 | ) | (1,068 | ) | — | (1,068 | ) | |||||||||||||||||||||
Interest on equity (R$ 0.42 per share) | — | — | — | — | (533 | ) | (533 | ) | (533 | ) | ||||||||||||||||||||||
Additional dividends proposed (R$ 0.04 per share) | — | — | 55 | — | (55 | ) | — | — | — | |||||||||||||||||||||||
Constitution of reserves | — | |||||||||||||||||||||||||||||||
Reserve under By-laws | — | — | 1,557 | — | (1,557 | ) | — | — | ||||||||||||||||||||||||
Realization of reserves | — | |||||||||||||||||||||||||||||||
Equity valuation adjustments – deemed cost of PP&E | — | — | — | (109 | ) | 109 | — | — | — | |||||||||||||||||||||||
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|
|
| |||||||||||||||||
AS OF DECEMBER 31, 2013 | 6,294 | 1,925 | 3,840 | 579 | — | 12,638 | — | 12,638 | ||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Net income for the year | — | — | — | — | 3,137 | 3,137 | — | 3,137 | ||||||||||||||||||||||||
Other comprehensive income | ||||||||||||||||||||||||||||||||
Post retirement liabilities, net of taxes | — | — | — | (44 | ) | — | (44 | ) | — | (44 | ) | |||||||||||||||||||||
Equity gain on Other comprehensive income in jointly-controlled entity | — | — | — | 3 | — | 3 | — | 3 | ||||||||||||||||||||||||
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|
|
|
|
|
|
| |||||||||||||||||
Total Comprehensive income for the year | — | — | — | (41 | ) | 3,137 | 3,096 | — | 3,096 | |||||||||||||||||||||||
Other changes in equity: | ||||||||||||||||||||||||||||||||
Additional dividends proposed in 2013 (R$ 0.04 per share) | — | — | (55 | ) | — | — | (55 | ) | — | (55 | ) | |||||||||||||||||||||
Extraordinary dividends (R$ 2.23 per share) | — | — | (2,804 | ) | — | — | (2,804 | ) | — | (2,804 | ) | |||||||||||||||||||||
Statutory dividends (R$ 1.04 per share) | — | — | — | — | (1,364 | ) | (1,364 | ) | — | (1,364 | ) | |||||||||||||||||||||
Interest on Equity (R$ 0.18 per share) | — | — | — | — | (230 | ) | (230 | ) | — | (230 | ) | |||||||||||||||||||||
Constitution of reserves | — | |||||||||||||||||||||||||||||||
Tax incentives reserve | — | — | 29 | — | (29 | ) | — | — | — | |||||||||||||||||||||||
Profit reserve | — | — | 1,584 | — | (1,584 | ) | — | — | — | |||||||||||||||||||||||
Realization of reserves | ||||||||||||||||||||||||||||||||
Equity valuation adjustments – deemed cost of PP&E | — | — | — | (70 | ) | 70 | — | — | — | |||||||||||||||||||||||
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|
| |||||||||||||||||
ATTRIBUTED TO INTEREST OF THE CONTROLLING SHAREHOLDERS | 6,294 | 1,925 | 2,594 | 468 | — | 11,281 | — | 11,281 | ||||||||||||||||||||||||
Non controlling shareholder | — | — | — | — | — | — | 4 | 4 | ||||||||||||||||||||||||
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|
| |||||||||||||||||
AS OF DECEMBER 31, 2014 | 6,294 | 1,925 | 2,594 | 468 | — | 11,281 | 4 | 11,285 | ||||||||||||||||||||||||
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| |||||||||||||||||
| Note | 2020 | 2019 Restated (1) | 2018 Restated (1) | |||||||||||||
| CASH FLOW FROM OPERATIONS | ||||||||||||||||
| Net income for the year from continuing operations | 2,865 | 2,971 | 1,401 | |||||||||||||
| Net income for the year from discontinuing operations | — | 224 | 363 | |||||||||||||
| Adjustments to reconcile net income to net cash flows: | ||||||||||||||||
| Deferred income tax and social contribution tax | 10 | 252 | 145 | 27 | ||||||||||||
| Depreciation and amortization | 17 and 18 | 989 | 958 | 850 | ||||||||||||
| Loss on write-off of net residual value of unrecoverable concession financial assets, concessional contract asset, PP&E and Intangible assets | 14, 15, 17 and 18 | 39 | 125 | 61 | ||||||||||||
| Impairment of contract asset and intangible assets | 15 and 18 | (12 | ) | 24 | 42 | |||||||||||
| Share of (gain) loss, net, of subsidiaries and joint ventures | 16 | (357 | ) | (125 | ) | 104 | ||||||||||
| Periodic Tariff Review adjustments | (552 | ) | — | — | ||||||||||||
| Result of business combination | (51 | ) | — | 119 | ||||||||||||
| Dividends declared by investee classified as held for sale | 32 | — | (73 | ) | — | |||||||||||
| Impairment loss on investments | — | — | 127 | |||||||||||||
| Generation indemnity revenue | 14 | — | — | (55 | ) | |||||||||||
| Reimbursement of PIS/Pasep and Cofins over ICMS credits to customers– realization | (266 | ) | — | — | ||||||||||||
| Remeasuring of concession financial and concession contract assets | 14 and 15 | (801 | ) | (756 | ) | (677 | ) | |||||||||
| Interest and monetary variation | 1,202 | 1,190 | 1,207 | |||||||||||||
| Recognition of PIS/Pasep and Cofins taxes credits over ICMS | 9 | — | (2,952 | ) | — | |||||||||||
| Exchange variation on loans | 22 | 1,742 | 226 | 582 | ||||||||||||
| Appropriation of transaction costs | 22 | 15 | 38 | 33 | ||||||||||||
| Provisions for operating losses | 28 | 423 | 2,401 | 466 | ||||||||||||
| Provision for reimbursement for suspension of energy supply – Renova | — | — | (60 | ) | ||||||||||||
| Net gain on derivative instruments at fair value through profit or loss | (1,753 | ) | (998 | ) | (893 | ) | ||||||||||
| CVA (Parcel A items Compensation) Account and Other financial components in tariff adjustments | 14 | (455 | ) | (58 | ) | (1,973 | ) | |||||||||
| Post-employment obligations | 24 | 491 | 464 | 405 | ||||||||||||
| Others | 56 | (8 | ) | (28 | ) | |||||||||||
| 3,827 | 3,796 | 2,101 | ||||||||||||||
| Working capital adjustments | ||||||||||||||||
| Increase (decrease) in assets | ||||||||||||||||
| Receivables from customers and traders and Concession holders – Transport of electricity | (78 | ) | (666 | ) | (391 | ) | ||||||||||
| CVA and Other financial components in tariff adjustments | 14 | 1,467 | 362 | 909 | ||||||||||||
| Recoverable taxes | (59 | ) | (12 | ) | 38 | |||||||||||
| Income tax and social contribution tax credits | (162 | ) | (71 | ) | 615 | |||||||||||
| Escrow deposits | 1,538 | 11 | (109 | ) | ||||||||||||
| Dividends received from investees | 16 | 387 | 283 | 311 | ||||||||||||
| Concession contract and financial assets | 14 and 15 | 688 | 511 | 1,761 | ||||||||||||
| Others | 187 | 26 | 77 | |||||||||||||
| 3,968 | 444 | 3,211 | ||||||||||||||
| Increase (decrease) in liabilities | ||||||||||||||||
| Suppliers | 278 | 279 | (553 | ) | ||||||||||||
| Taxes payable | 824 | (162 | ) | (291 | ) | |||||||||||
| Income tax and social contribution tax payable | 690 | 1,433 | (6 | ) | ||||||||||||
| Payroll and related charges | 13 | (84 | ) | 77 | ||||||||||||
| Regulatory charges | 132 | (89 | ) | (70 | ) | |||||||||||
| Advances from customers | — | (81 | ) | (153 | ) | |||||||||||
| Post-employment obligations | 24 | (367 | ) | (343 | ) | (307 | ) | |||||||||
| Derivative financial instruments –Put options | 31 | — | — | (555 | ) | |||||||||||
| Others | 106 | 4 | (165 | ) | ||||||||||||
| 1,676 | 957 | (2,023 | ) | |||||||||||||
| Cash generated by operating activities | 9,471 | 5,197 | 3,289 | |||||||||||||
| Interest paid on loans, financing and debentures | 22 | (1,081 | ) | (1,265 | ) | (1,290 | ) | |||||||||
| Interest paid on leasing contracts | 19 | (4 | ) | (5 | ) | — | ||||||||||
| Income tax and social contribution tax paid | (240 | ) | (1,767 | ) | (650 | ) | ||||||||||
| Cash inflows from settlement of derivatives instruments | 461 | 100 | 37 | |||||||||||||
| Net cash flows from continuing operating activities | 8,607 | 2,260 | 1,386 | |||||||||||||
| Net cash flows used in discontinued operating activities | 32 | — | (224 | ) | (378 | ) | ||||||||||
| NET CASH FLOWS FROM OPERATING ACTIVITIES | 8,607 | 2,036 | 1,008 | |||||||||||||
| F-15 |
| Note | 2020 | 2019 Restated(1) | 2018 Restated(1) | |||||||||||||
| INVESTING ACTIVITIES | ||||||||||||||||
| Marketable securities | (3,368 | ) | 79 | 276 | ||||||||||||
| Restricted cash | (51 | ) | 79 | 15 | ||||||||||||
| Investments | ||||||||||||||||
| Acquisition of equity investees | 16 | — | — | (109 | ) | |||||||||||
| Capital contributions in investees | 16 | (120 | ) | (38 | ) | (241 | ) | |||||||||
| Cash arising from business combination | 27 | — | 71 | |||||||||||||
| Loans to related parties | (27 | ) | (6 | ) | — | |||||||||||
| Property, plant and equipment | 17 | (132 | ) | (70 | ) | (77 | ) | |||||||||
| Intangible assets | 18 | (41 | ) | (932 | ) | (801 | ) | |||||||||
| Contract assets – distribution of gas and energy infrastructure | 15 | (1,364 | ) | (925 | ) | — | ||||||||||
| Net cash flows used in continuing investment activities | (5,076 | ) | (1,813 | ) | (866 | ) | ||||||||||
| Net cash flows from discontinued investment activities | 16 and 32 | — | 625 | 655 | ||||||||||||
| NET CASH FLOWS USED IN INVESTING ACTIVITIES | (5,076 | ) | (1,188 | ) | (211 | ) | ||||||||||
| FINANCING ACTIVITIES | ||||||||||||||||
| Proceeds from Loans, financings and debentures, net from transaction costs | 22 | 826 | 4,477 | 2,990 | ||||||||||||
| Interest on capital and dividends paid | 26 | (598 | ) | (701 | ) | (509 | ) | |||||||||
| Capital increase | — | — | 110 | |||||||||||||
| Payment of loans, financing and debentures | 22 | (2,531 | ) | (4,883 | ) | (3,527 | ) | |||||||||
| Payment of principal portion of lease liabilities | 19 | (84 | ) | (96 | ) | — | ||||||||||
| NET CASH FLOWS USED IN FINANCING ACTIVITIES | (2,387 | ) | (1,203 | ) | (936 | ) | ||||||||||
| Net (decrease) increase in cash and cash equivalents for the year | 1,144 | (355 | ) | (139 | ) | |||||||||||
| Cash and cash equivalents at the beginning of the year | 6 | 536 | 891 | 1,030 | ||||||||||||
| Cash and cash equivalents at the end of the year | 6 | 1,680 | 536 | 891 | ||||||||||||
| Share capital | Capital reserves | Profit reserves | Equity Valuation adjustments | Retained earnings | Total interest of the controlling shareholders | Total interest of the non- controlling shareholder | Total equity | |||||||||||||||||||||||||
AS OF DECEMBER 31, 2014 | 6,294 | 1,925 | 2,594 | 468 | — | 11,281 | 4 | 11,285 | ||||||||||||||||||||||||
Net income for the year | — | — | — | — | 2,469 | 2,469 | — | 2,469 | ||||||||||||||||||||||||
Other comprehensive income | ||||||||||||||||||||||||||||||||
Post retirement liabilities, net of taxes | — | — | — | (361 | ) | — | (361 | ) | — | (361 | ) | |||||||||||||||||||||
Equity gain on Other comprehensive income in jointly-controlled entity | — | — | — | 54 | — | 54 | — | 54 | ||||||||||||||||||||||||
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Total Comprehensive income for the year | — | — | — | (307 | ) | 2,469 | 2,162 | — | 2,162 | |||||||||||||||||||||||
Other changes in equity: | ||||||||||||||||||||||||||||||||
Reserve for obligatory dividends not distributed | — | — | 797 | — | — | 797 | — | 797 | ||||||||||||||||||||||||
Statutory dividends (R$ 0.84 per share) | — | — | — | — | (1,056 | ) | (1,056 | ) | — | (1,056 | ) | |||||||||||||||||||||
Interest on Equity (R$ 0.16 per share) | — | — | — | — | (200 | ) | (200 | ) | — | (200 | ) | |||||||||||||||||||||
Constitution of reserves | ||||||||||||||||||||||||||||||||
Tax incentives reserve | — | — | 21 | — | (21 | ) | — | — | — | |||||||||||||||||||||||
Profit reserve | — | — | 1,251 | — | (1,251 | ) | — | — | — | |||||||||||||||||||||||
Realization of reserves | ||||||||||||||||||||||||||||||||
Equity valuation adjustments – deemed cost of PP&E | — | — | — | (59 | ) | 59 | — | — | — | |||||||||||||||||||||||
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ATTRIBUTED TO INTEREST OF THE CONTROLLING SHAREHOLDERS | 6,294 | 1,925 | 4,663 | 102 | — | 12,984 | — | 12,984 | ||||||||||||||||||||||||
Non-controlling shareholder | — | — | — | — | — | — | 4 | 4 | ||||||||||||||||||||||||
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AS OF DECEMBER 31, 2015 | 6,294 | 1,925 | 4,663 | 102 | — | 12,984 | 4 | 12,988 | ||||||||||||||||||||||||
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| (1) | For further details of restatement of comparative balances, see Note 2.8. |
The Notes are an integral part of these Consolidated Financial Statements.
| F-16 |
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
(MILLIONS OF BRAZILIAN REAIS—R$)
| 2015 | 2014 | 2013 | ||||||||||
CASH FLOW FROM OPERATIONS | ||||||||||||
Net income for the year | 2,469 | 3,137 | 3,104 | |||||||||
Expenses (revenues) not affecting cash and cash equivalents | ||||||||||||
Income and social contribution taxes | 893 | 1,342 | 950 | |||||||||
Depreciation and amortization | 835 | 801 | 824 | |||||||||
Write-offs of PP&E and Intangible assets | 124 | 105 | 33 | |||||||||
Equity in earnings of unconsolidated investees, net | (393 | ) | (210 | ) | (764 | ) | ||||||
Interest and monetary variation | 788 | 1,145 | 942 | |||||||||
Monetary variation on advance for future capital increase from Minas Gerais State government | 30 | 239 | — | |||||||||
Fair value results in Corporate Operation | (729 | ) | — | — | ||||||||
Gain on disposal of investments | — | — | (284 | ) | ||||||||
Unrealized profit | — | — | 81 | |||||||||
Provisions for operating losses | 1,401 | 581 | 305 | |||||||||
Net gain on indemnity of assets | — | (420 | ) | (21 | ) | |||||||
Financial assets —CVA | (1,704 | ) | (1,107 | ) | — | |||||||
Gain on acquisition of subsidiary | — | (281 | ) | — | ||||||||
Provision for losses on financial instruments | — | — | (2 | ) | ||||||||
Post-retirement liabilities | 285 | 311 | 269 | |||||||||
(Increase) / decrease in assets | ||||||||||||
Consumers and traders | (1,470 | ) | (285 | ) | (134 | ) | ||||||
Financial assets —CVA | 1,529 | — | — | |||||||||
Energy Development Account (CDE) | 273 | (170 | ) | — | ||||||||
Recoverable Taxes | 167 | 320 | (255 | ) | ||||||||
Income and social contribution tax credit | (77 | ) | (37 | ) | (223 | ) | ||||||
Transport of electricity | (5 | ) | (5 | ) | 109 | |||||||
Escrow deposits in litigation | (67 | ) | (305 | ) | 120 | |||||||
Dividends received from investments | 487 | 683 | 554 | |||||||||
Financial assets | 10 | 6 | 286 | |||||||||
Advance to suppliers | (131 | ) | — | — | ||||||||
Gas – Take or Pay | (141 | ) | (265 | ) | — | |||||||
Other | (248 | ) | 74 | 7 | ||||||||
Increase (reduction) in liabilities | ||||||||||||
Suppliers | 297 | 472 | (239 | ) | ||||||||
Taxes payable | 202 | 54 | 2 | |||||||||
Income and social contribution taxes payable | (105 | ) | (22 | ) | 3 | |||||||
Payroll and related charges | 26 | 4 | (41 | ) | ||||||||
Regulatory charges | 386 | 11 | (140 | ) | ||||||||
Post-retirement liabilities | (208 | ) | (195 | ) | (181 | ) | ||||||
Other | 156 | (160 | ) | (21 | ) | |||||||
Cash generated by operating activities | 5,080 | 5,823 | 5,284 | |||||||||
Interest paid on loans and financings | (1,331 | ) | (781 | ) | (814 | ) | ||||||
Income and Social Contribution taxes paid | (741 | ) | (1,308 | ) | (955 | ) | ||||||
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NET CASH GENERATED BY OPERATING ACTIVITIES | 3,008 | 3,734 | 3,515 | |||||||||
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| 2015 | 2014 | 2013 | ||||||||||
CASH FLOWS FROM INVESTMENT ACTIVITIES | ||||||||||||
Marketable securities | (1,499 | ) | 116 | (267 | ) | |||||||
Financial assets | (145 | ) | (80 | ) | (91 | ) | ||||||
Accounts receivable from Minas Gerais state government | — | — | 2,466 | |||||||||
Restricted cash | 1 | 1 | 130 | |||||||||
Investments | ||||||||||||
Acquisition of equity investees | (310 | ) | (2,405 | ) | (94 | ) | ||||||
Acquisition of subsidiary – Gasmig | — | (465 | ) | — | ||||||||
Gain on disposal of investments | — | — | 1,691 | |||||||||
Capital increase in investees | (181 | ) | (546 | ) | (355 | ) | ||||||
PP&E | (126 | ) | (122 | ) | (69 | ) | ||||||
Intangible assets | (957 | ) | (798 | ) | (908 | ) | ||||||
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NET CASH FROM (USED IN) INVESTMENT ACTIVITIES | (3,217 | ) | (4,299 | ) | 2,503 | |||||||
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CASH FLOW IN FINANCING ACTIVITIES | ||||||||||||
Loans, financings and debentures | 5,739 | 4,562 | 2,466 | |||||||||
Payment of loans financings and debentures | (4,696 | ) | (1,394 | ) | (3,601 | ) | ||||||
Interest on equity and dividends | (796 | ) | (3,918 | ) | (4,600 | ) | ||||||
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NET CASH FROM (USED IN) FINANCIAL ACTIVITIES | �� | 247 | (750 | ) | (5,735 | ) | ||||||
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NET CHANGE IN CASH AND CASH EQUIVALENTS | 38 | (1,315 | ) | 283 | ||||||||
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STATEMENT OF CHANGES IN CASH AND CASH EQUIVALENTS | ||||||||||||
Beginning of the year | 887 | 2,202 | 1,919 | |||||||||
End of the year | 925 | 887 | 2,202 | |||||||||
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NET CHANGE IN CASH AND CASH EQUIVALENTS | 38 | (1,315 | ) | 283 | ||||||||
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The Notes are an integral part of these Consolidated Financial Statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 20152020 AND 20142019 AND FOR THE YEARS ENDED ON DECEMBER 31, 2015, 20142020, 2019 AND 20132018
(In Millions of Brazilian Reais—IN MILLIONS OF REAIS - R$ mn - except where otherwise indicated)
| 1. | OPERATING CONTEXT |
a)The Company
Companhia Energética de Minas Gerais (‘Cemig’, also herein ‘the Company’, ‘Parent (´Parent company’ or ‘Holding company’) is a listed corporation, registered in the Brazilian Registry of Corporate Taxpayers (CNPJ) under number 17.155.730/0001-64, with shares traded:traded on the BM&F BovespaSão Paulo Stock Exchange (‘Bovespa’B3’), at Corporate Governance Level 1; through ADRs on the New York Stock Exchange (‘NYSE’), through ADRs;; and on the stock exchange of Madrid (‘Latibex’). The Company is a state-controlled mixed capital company controlled by the State of Minas Gerais. It is domiciled in Brazil, with head office at Avenida Barbacena 1200, Belo Horizonte, the capital of the state of Minas Gerais. It operates exclusively as a holding company, with interestssubsidiaries and investments in subsidiariesaffiliates or jointly controlledjointly-controlled entities (collectively refer to as ‘Cemig’ or the ‘Company’), which are engaged in the activities of the construction and operation of systems forinfrastructure used in the generation, transformation, transmission, distribution and sale of electricity,energy, and also activities in the various fields of energy sector and telecommunications,gas distribution, for the purpose of commercial operation.
On December 21, 2015, Cemig D signed, with the Mining and Energy Ministry, the Fifth Amendment to its concession contracts, extending its electricity distribution concessions for a further 30 years, as from January 1, 2016. The new amendment establishes service quality and economic-financial parameters that Cemig D must meet during the new concession period.
On December 31, 2015, the Company’s consolidated current liabilities exceeded its consolidated current assets by R$ 3,697. The reason for this working capital deficiency was, primarily, new financings with short-term maturities for the Company’s Investment Program, and transfer of debentures from long term to short term, associated with the provision for dividends and Interest on Equity of R$ 1,256 in December 2015, and the provision for loss on put options of R$ 1,245. Management monitors the Company’s cash flow, and for this purpose assesses measures to adjust the present situation of its financial assets and liabilities to the levels considered appropriate to meet its needs. In this specific case, negotiations are in progress with financial institutions for rollover of the debt coming due in 2016, for long-term maturities. Additionally, the Company has reported positive cash flow from its operations of R$ 3,008 in 2015, R$ 3,734 in 2014 and R$ 3,515 in 2013.
Cemig has interestequity interests in the following subsidiaries, jointly-controlled entities and jointly-controlled entities:affiliates, all of which principal activities are construction and operation of systems of production, distribution and sale of energy and gas (information in MWh has not been audited by the external auditors):
| Investments | Description | |
| SUBSIDIARIES: | ||
| Cemig Geração e Transmissão S.A. | Subsidiary | Wholly-owned subsidiary |
| Cemig Baguari | Subsidiary | Corporation engaged in the production and sale of energy as an independent power producer and in interests in investees or joint operations that are engaged in the production and sale of energy in future projects. |
| Cemig Geração Três Marias S.A. | Subsidiary | Corporation engaged in the production and sale of energy as public service concession holder, by commercial operation of the Três Marias Hydroelectric Plant, and sale and trading of energy in the Free Market. This subsidiary has installed capacity of 396 MW (5), and guaranteed offtake level of 239 MW (5) average. |
| Cemig Geração Salto Grande S.A. | Subsidiary | Corporation engaged in the production and sale of energy as public service concession holder, by commercial operation of the Salto Grande Hydroelectric Plant, and sale and trading of energy in the Free Market. This subsidiary has installed capacity of 102 MW (5), and guaranteed offtake level of 75 MW (5) average. |
| F-17 |
| Cemig Geração Itutinga S.A. | Subsidiary | Corporation engaged in the production and sale of energy as public service concession holder, by commercial operation of the Itutinga Hydroelectric Plant, and sale and trading of energy in the Free Market. This subsidiary has installed capacity of 52 MW (5), and guaranteed offtake level of 28 MW (5) average. |
| Cemig Geração Camargos S.A. | Subsidiary | Corporation engaged in the production and sale of energy as public service concession holder, by commercial operation of the Camargos Hydroelectric Plant, and sale and trading of energy in the Free Market. This subsidiary has installed capacity of 46 MW (5), and guaranteed offtake level of 21 MW (5) average. |
| Cemig Geração Sul S.A. | Subsidiary | Corporation engaged in the production and sale of energy as public concession holder, by commercial operation of the Coronel Domiciano, Marmelos, Joasal, Paciência and Piau Small Hydroelectric Plants, and trading in energy in the Free Market. Aggregate installed generation capacity is 39.53 MW (5); guaranteed offtake level of 27.42 MW (5) average. |
| Cemig Geração Leste S.A. | Subsidiary | Corporation engaged in the production and sale of energy as public concession holder, by operation of the Dona Rita, Sinceridade, Neblina, Ervália, Tronqueiras and Peti Small Hydroelectric Plants, and trading in energy in the Free Market. Aggregate installed generation capacity of these plants is 35.17 MW (5); guaranteed offtake level of 18.80 MW (5) average. |
| Cemig Geração Oeste S.A. | Subsidiary | Corporation engaged in the production and sale of energy as public service concession holder, by commercial operation of the Gafanhoto, Cajuru and Martins Small Hydroelectric Plants, and sale and trading of energy in the Free Market. It has aggregate installed capacity of 28.90 MW (5), and guaranteed offtake level of 11.21 MW (5) average. |
| Rosal Energia S.A. (‘Rosal’) | Subsidiary | Corporation that holds the concession to generate and sell energy, operating the Rosal Hydroelectric Plant, on the border between the states of Rio de Janeiro and Espírito Santo. |
| Sá Carvalho S.A. (‘Sá Carvalho’) | Subsidiary | Corporation that holds the concession to generate and sell energy, operating the Sá Carvalho Hydroelectric Plant. |
| Horizontes Energia S.A. (‘Horizontes’) | Subsidiary | Corporation that is classified as an independent power |
| Cemig PCH S.A. (‘PCH’) | Subsidiary | Corporation that is classified as an independent power producer operating the Pai Joaquim hydroelectric |
| Cemig Trading S.A. (‘Cemig Trading’) | Subsidiary | Corporation engaged in trading and intermediation of energy. |
| Empresa de Serviços e Comercialização de Energia Elétrica S.A. | Subsidiary | Corporation engaged in the production and sale of energy as an independent power producer, in future projects. |
| Cemig Geração Poço Fundo | Subsidiary | Corporation engaged in the production and sale of energy, as an independent producer, through construction and operation of the hydroelectric power plant Poço Fundo, located in Machado river, in the State of Minas Gerais. |
| Central Eólica Praias de Parajuru S.A. (‘Central Eólica Praias de Parajuru’) | Subsidiary | Corporation engaged in the production and sale of energy at the wind power |
| Central Eólica Volta do Rio S.A. (‘Central Eólica Volta do Rio’) | Subsidiary | Corporation engaged in the production and sale of energy at the wind power plant of the same name in Acaraú, northeastern Brazilian state of Ceará. |
| Cemig Distribuição S.A. (‘Cemig D’ or ‘Cemig Distribuição’) | Subsidiary | Wholly owned subsidiary, whose shares are listed in Brazil but are not actively traded; engaged in the distribution of energy through networks and distribution lines throughout almost the whole of Minas Gerais State. |
| Companhia de Gás de Minas Gerais (‘Gasmig’) | Subsidiary | Corporation engaged in the acquisition, transportation and distribution of combustible gas or sub-products and derivatives, through a concession for the distribution of gas in the State of Minas Gerais. |
| F-18 |
| |
Jointly-controlled entities in operation:
– Hidrelétrica Cachoeirão S.A. (Cachoeirão) (Jointly controlled): Production and sale of electricity as an independent power producer, through theCachoeirão hydroelectric power plant located at Pocrane, in the State of Minas Gerais.
– Baguari Energia S.A. (Baguari Energia) (Jointly controlled): Construction, operation, maintenance and commercial operation of the Baguari Hydroelectric Plant, through participation in the UHE Baguari Consortium (Baguari Energia 49.00%, Neoenergia 51.00%), located on the Doce River in Governador Valadares, Minas Gerais State. The plant began operation of its units from September 2009 to May 2010.
– Central Eólica Praias de Parajuru S.A. (Parajuru) (Jointly controlled): Production and sale of electricity from theParajuru wind farm at Beberibe, in the State of Ceará, Northern Brazil.
– Central Eólica Praias do Morgado S.A. (Praias do Morgado) (Jointly controlled): Production and sale of electricity from theMorgado wind farm at Acaraú, in Ceará, Northern Brazil.
– Central Eólica Volta do Rio S.A. (Volta do Rio) (Jointly controlled): Production and sale of electricity from theVolta do Rio wind farm also at Acaraú, in the State of Ceará, Northern Brazil. The plant began operating in September 2010.
– Hidroelétrica Pipoca S.A. (Pipoca) (Jointly controlled): Independent production of electricity, through construction and commercial operation of thePipoca Small Hydro Plant (Pequena Central Hidrelétrica, or PCH), on the Manhuaçu River, in the Municipalities of Caratinga and Ipanema, in the State of Minas Gerais. This hydroelectric plant began operating in October 2010.
– Madeira Energia S.A. (Madeira) (jointly controlled) – Construction and commercial operation, through its subsidiarySanto Antônio Energia S.A., of theSanto Antônio hydroelectric plant in the basin of the Madeira River, in the State of Rondônia. This started commercial operation in March 2012. There are more details in Note14.
– Lightger S.A. (LightGer) (Jointly controlled): Independent power production through building and commercial operation of theParacambi Small Hydro Plant (or PCH), on the Ribeirão das Lages river in the county of Paracambi, in the State of Rio de Janeiro.
– Renova Energia S.A. (Renova) (Jointly-controlled entities): Listed company operating in development, construction and operation of plants generating power from renewable sources – wind power, small hydro plants (SHPs), and solar energy; sales and trading of electricity, and related activities. There are more details in Note 14.
– Retiro Baixo Energética S.A. (RBE) (Jointly-controlled entities): RBE holds the concession to operate the Retiro Baixo hydroelectric plant, on the Paraopeba River, in the São Francisco river basin, in the municipalities of Curvelo and Pompeu, in Minas Gerais State. The plant has installed capacity of 83.7 MW and assured energy offtake level of 38.5MW average.
–Aliança Norte Energia Participações S.A. (Aliança Norte) (jointly-controlled): Special-purpose company (SPC) created byCemig GT (49.9% ownership) andVale S.A. (50.1% ownership), for acquisition of an interest of 9% inNorte Energia S.A. (‘Nesa’), the company holding the concession for theBelo Monte Hydroelectric Plant, on the Xingu River, in the State of Pará. The first turbine of Belo Monte started operating on April 20, 2016 and the second turbine started operating on july 16, 2016. There are more details on this in Note 14.
–Aliança Geração de Energia S.A. (Aliança) jointly-controlled): Unlisted corporation created byCemig GT andVale S.A. to become a platform for consolidation of generation assets held by the two parties in generation consortia, and investments in future electricity generation projects. The two parties subscribed their shares in the company by transfer of their interests in the following generation assets:Porto Estrela, Igarapava, Funil, Capim Branco I and II, Aimorésand Candonga. With these assets the company has installed hydroelectric generation capacity in operation of 1,158 MW (physical offtake guarantee 652 MW average), and other generation projects.Vale andCemig GT respectively hold 55% and 45% of the total capital. There are more details in Note 14.
Subsidiaries and jointly-controlled entities at development stage:
– Guanhães Energia S.A. (Guanhães Energia) (Jointly controlled): Production and sale of electricity through building and commercial operation of the following Small Hydro Plants (PCHs):
| Cemig Sim (‘Efficientia’) (1) | Subsidiary | Corporation that provides energy efficiency and optimization services and energy solutions through studies and execution of projects; and services of operation and maintenance of energy supply facilities. | ||||||||||||||
| Companhia de Transmissão Centroeste de Minas (‘Centroeste’) (2) | Subsidiary | Corporation engaged in the construction, operation and maintenance of the Furnas-Pimenta transmission line – part of the national grid. | ||||||||||||||
| JOINTLY-CONTROLLED ENTITIES | ||||||||||||||||
| Guanhães Energia S.A. (‘Guanhães Energia’) | Jointly-controlled entity | Corporation engaged in the production and sale of energy through building and commercial operation of the following Small Hydro Plants: Dores de Guanhães, Senhora do Porto andJacaré, in the county of Dores de Guanhães; andFortuna II, in the county of Virginópolis, in Minas Gerais. | ||||||||||||||
| LightGer S.A. (‘LightGer’) | Jointly-controlled entity | Corporation classified as independent power producer, formed to build and | ||||||||||||||
| Usina Hidrelétrica Itaocara S.A. (‘UHE Itaocara’) | Jointly-controlled entity | Corporation, comprising the partners of the UHE Itaocara Consortium, formed by Cemig GT and Itaocara Energia (of the Light group), responsible for
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| Axxiom Soluções Tecnológicas S.A. (‘Axxiom’) | Jointly-controlled entity | Unlisted corporation, providing technology and systems solutions for operational management of public service concession holders, including companies operating in energy, gas, water and sewerage, and other utilities. Jointly controlled by Light (51%) and Cemig | ||||||||||||||
| Hidrelétrica Cachoeirão S.A. | Jointly-controlled entity | Production and sale of
the State of Minas Gerais. | ||||||||||||||
| Hidrelétrica Pipoca S.A. (‘Pipoca’) | Jointly-controlled entity | Independent production of energy, through construction and commercial operation of the Pipoca Small Hydro Plant (SHP, or Pequena Central Hidrelétrica– | ||||||||||||||
| Retiro Baixo Energética S.A. | Jointly-controlled entity | Corporation that holds the concession to operate theRetiro Baixo Hydroelectric Plant, on the Paraopeba River, in the São Francisco river basin, in the municipalities of Curvelo and Pompeu, in Minas Gerais. | ||||||||||||||
| Amazônia Energia Participações S.A (‘Amazônia Energia’) | Jointly-controlled entity | Special-purpose company created by Cemig GT (74.50% ownership) and Light (25.50%), for acquisition of an equity interest of 9.77% in Norte Energia S.A. (‘Nesa’), the company holding the concession for the Belo Monte Hydroelectric Plant, on the Xingu River, in the Northern Brazilian State of Pará. | ||||||||||||||
| Aliança Norte Energia Participações S.A. (‘Aliança Norte’) | Jointly-controlled entity | Special-purpose company created by | ||||||||||||||
| Baguari Energia S.A. (‘Baguari Energia’) | Jointly-controlled entity | Corporation engaged in the construction, operation, maintenance and commercial operation of the
| Jointly-controlled entity | Listed company engaged in the
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| Aliança Geração de Energia S.A. (‘Aliança’) | Jointly-controlled entity | Unlisted company created by Cemig GT and Vale S.A. as a platform for consolidation of generation | ||||||||||||||
| Transmissora Aliança de Energia Elétrica S.A. (‘TAESA’) | Jointly-controlled entity | Corporation engaged in the construction, operation and maintenance of energy transmission facilities all states of Brazil through direct and indirect equity interests in investees | ||||||||||||||
UFV Janaúba Geração de Energia Elétrica Distribuída SA UFV Corinto Geração de Energia Elétrica Distribuída SA UFV Manga Geração de Energia Elétrica Distribuída SA UFV Bonfinópolis II Geração de Energia Elétrica Distribuída SA UFV Lagoa Grande Geração de Energia Elétrica Distribuída SA, UFV Lontra Geração de Energia Elétrica Distribuída SA, UFV Mato Verde Geração de Energia Elétrica Distribuída SA, UFV Mirabela Geração de Energia Elétrica Distribuída SA, UFV Porteirinha Geração de Energia Elétrica Distribuída SA and UFV Porteirinha II Geração de Energia Elétrica Distribuída AS (3) | Jointly-controlled entity | Generation of electric power from photovoltaic solar sources to the Distributed Generation market (‘Geração Distribuída’), with total installed capacity of 46.26MWp. The wholly owned subsidiary Cemig Sim and Mori Energia holds 49% and 51% of the total equity, respectively. |
| F-19 |
| Affiliated Company | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Madeira Energia S.A. (‘Madeira’) | Affiliated company | Corporation engaged in the construction and commercial operation of the
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| Ativas Datacenter S.A.
| Affiliated entity | Corporation engaged in the
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| FIP Melbourne (Usina de Santo Antônio) | Affiliated entity |
Management has assessed the capacity of the Company to continue as a going concern, and believes that its operations will generate sufficient future cash flows to enable continuity of its businesses. In addition, Management is not aware of any material uncertainties that could generate significant doubts about its ability to continue as a going concern. Therefore, these financial statements are prepared on a going concern basis.
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