6-K
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 6-K

 

 

REPORT OF FOREIGN ISSUER

PURSUANT TO RULE 13A-16 OR 15D-16 OF

THE SECURITIES EXCHANGE ACT OF 1934

For the month of January, 2018

Commission File Number: 1-15224

 

 

Energy Company of Minas Gerais

(Translation of Registrant’s Name Into English)

 

 

Avenida Barbacena, 1200

30190-131 Belo Horizonte, Minas Gerais, Brazil

(Address of Principal Executive Offices)

 

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F  ☒                 Form 40-F  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ☐

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes  ☐                No  ☒

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): N/A

 

 

 

 

 

 


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INDEX

 

Item

 

Description of Items

1.  

SUMMARY OF THE MINUTES OF THE 698TH MEETING OF THE BOARD OF DIRECTORS HELD ON JUNE 27, 2017

2.  

MATERIAL ANNOUNCEMENT DATED AS OF DECEMBER  28, 2017: CEMIG COMPLETES R$ 3.4BN DEBT RE-PROFILING

3.  

NOTICE TO STOCKHOLDERS DATED AS OF JANUARY  8, 2018: FINAL FIGURES FOR R$ 1.2BN CAPITAL INCREASE

4.  

MATERIAL ANNOUNCEMENT DATED AS OF JANUARY  12, 2018: BOARD PROPOSES THE MERGER OF CEMIGTELECOM

5.  

SUMMARY OF THE MINUTES OF THE 720TH MEETING OF THE BOARD OF DIRECTORS HELD ON JANUARY 12, 2018

6.  

CONVOCATION OF EXTRAORDINARY GENERAL MEETING OF STOCKHOLDERS DATED AS OF JANUARY 12, 2018 TO BE HELD ON FEBRUARY 28, 2018

7.  

PROPOSAL BY THE BOARD OF DIRECTORS DATED AS OF JANUARY  12, 2018 TO THE EXTRAORDINARY GENERAL MEETING OF STOCKHOLDERS TO BE HELD ON FEBRUARY 28, 2018

8.  

NOTICE TO STOCKHOLDERS DATED AS OF JANUARY  17, 2018: CANCELATION OF THE CONVOCATION TO THE EXTRAORDINARY GENERAL MEETING OF STOCKHOLDERS SCHEDULED FOR JANUARY 24, 2018

9.  

SUMMARY OF THE MINUTES OF THE 721TH MEETING OF THE BOARD OF DIRECTORS HELD ON JANUARY 17, 2018

10.  

MARKET ANNOUNCEMENT DATED AS OF JANUARY  17, 2018: CANCELATION OF THE EXTRAORDINARY GENERAL MEETING OF STOCKHOLDERS SCHEDULED FOR JANUARY 24, 2018

11.  

MARKET ANNOUNCEMENT DATED AS OF JANUARY 24, 2018: BEGIN OF THE 30-DAY EXTENSION TO THE EXCLUSIVITY PERIOD GRANTED TO BROOKFIELD ENERGIA RENOVÁVEL S.A. TO CONTRIBUTE TO THE CAPITAL STOCK OF RENOVA ENERGIA S.A.

12.  

SUMMARY OF THE MINUTES OF THE 722TH MEETING OF THE BOARD OF DIRECTORS HELD ON FEBRUARY 8, 2018

13.  

MARKET ANNOUNCEMENT DATED AS OF FEBRUARY  16, 2018: REPLY TO CVM INQUIRY LETTER 65/2018-CVM/SEP/GEA-1 OF FEBRUARY 15, 2018

14.  

MARKET ANNOUNCEMENT DATED AS OF FEBRUARY  19, 2018: RESIGNATION OF THE CEO OF RENOVA

 

 


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FORWARD-LOOKING STATEMENTS

This report contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. Actual results could differ materially from those predicted in such forward-looking statements. Factors which may cause actual results to differ materially from those discussed herein include those risk factors set forth in our most recent Annual Report on Form 20-F filed with the Securities and Exchange Commission. CEMIG undertakes no obligation to revise these forward-looking statements to reflect events or circumstances after the date hereof, and claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

COMPANHIA ENERGÉTICA DE MINAS

GERAIS – CEMIG

By:   /S/ JOSÉ MARIA RABELO
 

Name: José Maria Rabelo

Title: Acting Chief Finance and Investor Relations Officer

Date: February 23, 2018

 


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SUMMARY OF THE MINUTES OF THE 698TH MEETING OF THE BOARD OF DIRECTORS HELD ON JUNE 27, 2017

 

 

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LOGO

  

 

 

 

COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG

LISTED COMPANY – CNPJ 17.155.730/0001-64 – NIRE 31300040127

BOARD OF DIRECTORS

SUMMARY OF MINUTES

OF THE

698TH MEETING

 

Date, time and place:   June 27, 2017 at 4 p.m. at the head office.

 

Meeting Committee:   Chair:   José Afonso Bicalho Beltrão da Silva;
  Secretary:   Anamaria Pugedo Frade Barros

Summary of proceedings:

 

I Conflict of interest: The board members listed below declared no conflict of interest in relation to the matters on the agenda of this meeting,

 

II The Board approved:

 

a) The following proposal by the Chair:

 

  that as from June 28, 2017, Mr. Luís Fernando Paroli Santos should no longer be Chief Distribution and Sales Officer and interim Chief Institutional Relations and Communication Officer;

 

  Election as Interim Chief Distribution and Sales Officer, from June 28, 2017, to serve the rest of the present period of office, that is to say until the first meeting of the Board of Directors after the Annual General Meeting of 2018, of

 

   

Mr. Ronaldo Gomes de Abreu

   – Brazilian, married, company manager, domiciled in Belo Horizonte, Minas Gerais, at Av. Assis Chateaubriand 46/1301, Floresta, CEP 30150-100, Bearer of Identity Card MG 2868468-PCMG and CPF 563307236-72;

 

  and, as Chief Officer for Institutional Relations and Communication, on an interim basis while also serving as Chief Finance and Investor Relations Officer, of

 

   

Mr. Adézio de Almeida Lima

   – Brazilian, married, economist, domiciled in Belo Horizonte, MG, at Av. Barbacena 1200, 18º andar, Ala B2, Santo Agostinho, CEP 30190-131, bearer of Identity Card 2514340-SSPDF and CPF 342530507-78.

 

b) The minutes of this meeting.

 

III The Board nominated the Chief Officer Luís Fernando Paroli Santos as Chief Executive Officer of Light S.A., and also as Chief Officer for Business Development and Investor Relations Officer of that company, to complete the present period of office or until his duly elected successor is sworn in.

 

  

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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LOGO

  

 

 

 

 

IV The Chair informed the meeting that as from June 28, 2017 the Executive Board comprises:

 

 

Chief Executive Officer:    Bernardo Afonso Salomão de Alvarenga;
Interim Deputy CEO:    Bernardo Afonso Salomão de Alvarenga;
Chief Trading Officer:    Dimas Costa;
Chief Business Development Officer:    César Vaz de Melo Fernandes;
Interim Chief Distribution and Sales Officer:    Ronaldo Gomes de Abreu;
Chief Finance and Investor Relations Officer, and Interim Chief Institutional Relations and Communication Officer:    Adézio de Almeida Lima;
Chief Generation and Transmission Officer:    Franklin Moreira Gonçalves;
Chief Corporate Management Officer:    José de Araújo Lins Neto;
Chief Officer for Human Relations and Resources:    Maura Galuppo Botelho Martins;
Chief Counsel:    Raul Lycurgo Leite,*

 

  * – to be succeeded on July 1, 2017, as per Board decision of June 9, 2017, by:

 

     Mr. Luciano de Araújo Ferraz.

 

V The Chief Officers elected declared – in advance – that they are not subject to any prohibition on exercise of commercial activity, that they do not occupy any position in a company which could be considered a competitor of the Company, and that they do not have, nor represent, any interest conflicting to Cemig’s interest; and made a formal commitment to become aware of, obey and comply with the principles, ethical values and rules established by the Code of Professional Conduct of Cemig and the Code of Ethical Conduct of Government Workers and Senior Administration of the State of Minas Gerais.

The following were present:

 

Board members:  

José Afonso Bicalho Beltrão da Silva,

Bernardo Afonso Salomão de Alvarenga,

Antônio Dirceu Araújo Xavier,

Arcângelo Eustáquio Torres Queiroz,

Bruno Magalhães Menicucci,

Helvécio Miranda Magalhães Junior,

Marco Antônio de Rezende Teixeira,

Marco Antônio Soares da Cunha Castello Branco,

Patrícia Gracindo Marques de Assis Bentes,

Aloísio Macário Ferreira de Souza,

Carolina Alvim Guedes Alcoforado,

 

Nelson José Hubner Moreira,

José Pais Rangel,

Saulo Alves Pereira Junior,

Marina Rosenthal Rocha,

Agostinho Faria Cardoso,

Antônio Carlos de Andrada Tovar,

Geber Soares de Oliveira,

Luiz Guilherme Piva,

Otávio Silva Camargo,

Ricardo Wagner Righi de Toledo,

Tarcísio Augusto Carneiro,

Wieland Silberschneider;

Secretary:   Anamaria Pugedo Frade Barros.    

(Signed by:)    Anamaria Pugedo Frade Barros.

 

 

  

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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MATERIAL ANNOUNCEMENT DATED AS OF DECEMBER 28, 2017: CEMIG COMPLETES R$ 3.4BN DEBT RE-PROFILING

 

 

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LOGO

  

 

 

 

COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG

LISTED COMPANY – CNPJ 17.155.730/0001-64 – NIRE 31300040127

MATERIAL ANNOUNCEMENT

Cemig completes R$ 3.4bn debt re-profiling

Supplementing the Material Announcement published on November 20, 2017, Cemig (Companhia Energética de Minas Gerais – listed and traded, in São Paulo, New York and Madrid), in compliance with CVM Instruction 358 of January 3, 2002 as amended, hereby reports to the Brazilian Securities Commission (CVM), the São Paulo Stock Exchange (B3) and the market as follows:

Cemig’s wholly-owned subsidiaries Cemig D and Cemig GT have completed the re-profiling of their debt, through: (i) a debenture issuance by Cemig D, and (ii) amendments to loan debt transactions of Cemig D and Cemig GT –changing the maturity dates for debt representing a total of approximately R$ 3.4 billion.

Adding these transactions to the total of R$ 3.2 billion raised in the international market through a Eurobond issuance – as reported to the market on December 1 and 5, 2017 – Cemig D and Cemig GT have balanced their cash flows, lengthened the average tenor of their debt, and enhanced their credit quality.

After such re-profiling, the amortization timetable for Cemig’s consolidated debt is the following (the newly contracted components, replacing previous maturities, are shown in yellow):

 

LOGO

Belo Horizonte, December 28, 2017

Adézio de Almeida Lima

Chief Finance and Investor Relations Officer

 

 

  

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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NOTICE TO STOCKHOLDERS DATED AS OF JANUARY 8, 2018: FINAL FIGURES FOR R$ 1.2BN CAPITAL INCREASE

 

 

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LOGO

  

 

 

 

 

COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG

LISTED COMPANY – CNPJ 17.155.730/0001-64

NOTICE TO STOCKHOLDERS

Final figures for R$ 1.2bn capital increase

Further to the Notice to Stockholders published on December 13, 2017, Cemig (Companhia Energética De Minas Gerais) hereby informs its stockholders and the market as follows:

The period for subscription in the second (and last) apportionment of shares not subscribed in the Preemptive Right Exercise Period of the capital increase approved by the Extraordinary General Meeting of October 26, 2017 ended on December 28, 2017.

The total amount of the funds raised by Cemig through such capital increase, now held by the company in cash, is R$ 1.2 billion.

The following numbers of shares were subscribed in the phases of the capital increase:

 

Numbers of shares

     Subscribed in:      Balance of
shares not
subscribed
 
       Preemptive
right
exercise
period
     1st subsequent
apportionment
period
     2nd subsequent
apportionment
period
    

Type

   Proposed                              

ON

     66,849,505        50,106,730        2,954,905        658,191        13,129,679  

PN

     133,061,442        118,949,754        11,004,208        1,291,730        1,815,750  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     199,910,947        169,056,484        13,959,113        1,949,921        14,945,429  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cemig willdisclose, at the appropriate time, the next phase for the completion of this corporate event.

Belo Horizonte, January 8, 2018

Adézio de Almeida Lima

Chief Finance and Investor Relations Officer

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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MATERIAL ANNOUNCEMENT DATED AS OF JANUARY 12, 2018: BOARD PROPOSES THE MERGER OF CEMIGTELECOM

 

 

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LOGO

  

 

 

 

 

COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG

LISTED COMPANY – CNPJ 17.155.730/0001-64 – NIRE 31300040127

MATERIAL ANNOUNCEMENT

Board proposes the merger of CemigTelecom

Cemig (Companhia Energética de Minas Gerais) (listed and traded in São Paulo, New York and Madrid), in compliance with CVM Instruction 358 of January 3, 2002 as amended, hereby reports to the Brazilian Securities Commission (CVM), the São Paulo Stock Exchange (B3) and the market as follows:

In the meeting held on the date hereof, Cemig’s Board of Directors resolved to present to the Extraordinary General Meeting of Stockholders a proposal concerning the merger of Cemig Telecomunicações S.A. (‘CemigTelecom’) into Cemig. Cemig Telecomunicações S.A. is a wholly-owned subsidiary of Cemig.

The merger will have a positive impact on the involved companies resulting from the optimization of assets and synergies, and will reduce financial, operational and administrative costs through concentration of existing administrative structures, while improving options for use of available funds.

The proposal will be submitted to decision by stockholders at an Extraordinary General Meeting to be called on an appropriate date and time (subject to the terms specified by the law and the by-laws).

To take effect, the merger will need also to be submitted, separately, to Cemig’s Audit Committee, pursuant Sub-item III of Article 163 of Law 6404/1976.

Considering that the proposed transaction involves the merger of a wholly-owned subsidiary, there will be no capital increase, nor issuance of new shares. The shares of CemigTelecom will be canceled and the necessary accounting records will be made.

Cemig reiterates its commitment to keep stockholders and the market timely informed in accordance with applicable law and regulations.

Belo Horizonte, January 12, 2018

Adézio de Almeida Lima

Chief Finance and Investor Relations Officer

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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SUMMARY OF THE MINUTES OF THE 720TH MEETING OF THE BOARD OF DIRECTORS HELD ON JANUARY 12, 2018

 

 

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LOGO

  

 

 

 

 

COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG

LISTED COMPANY

CNPJ 17.155.730/0001-64 – NIRE 31300040127

BOARD OF DIRECTORS

Meeting of January 12, 2018

SUMMARY OF MAIN RESOLUTIONS

At its 720th meeting, held on January 12, 2018, the Board of Directors of Cemig (Companhia Energética de Minas Gerais) resolved the following:

 

1. Budget for 2018.

 

2. Instruction to vote in an Extraordinary General Meeting of Lepsa, on: reduction of the corporate capital, amendment of the by-laws, and execution of legal instruments.

 

3. Instruction to vote in an Extraordinary General Meeting of RME, on: reduction of the corporate capital, amendment of the by-laws, and execution of legal instruments.

 

4. Internal Regulations on Competitive Bids and Contracts.

 

5. Execution of a corporate guaranty letter for agreements between Cemig GT and electricity generators or traders, guaranteed by Cemig.

 

6. Appointment of a Manager for MESA.

 

7. Structure of CemigTelecom.

 

8. Convocation of an Extraordinary General Meeting of Stockholders to discuss CemigTelecom.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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CONVOCATION OF EXTRAORDINARY GENERAL MEETING OF STOCKHOLDERS DATED AS OF JANUARY 12, 2018 TO BE HELD ON FEBRUARY 28, 2018

 

 

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LOGO

  

 

 

 

 

COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG

CNPJ 17.155.730/0001-64 – NIRE 31300040127

EXTRAORDINARY GENERAL MEETING OF STOCKHOLDERS

CONVOCATION

Stockholders are hereby called to an Extraordinary General Meeting of Stockholders to be held on February 28, 2018 at 3 p.m., at the company’s head office, Av. Barbacena 1200, 21st floor, Belo Horizonte, Minas Gerais, Brazil, to decide on the following matters:

 

1 Approval and authorization for execution of a Protocol of Merger and Justification, with Cemig Telecomunicações S.A. – CemigTelecom, which will set out the terms and conditions to govern the merger of CemigTelecom into Cemig.

 

2 Ratification of the nomination of the three experts to provide a valuation, for the purposes of Article 8 of Law 6404/1976, of the net equity of CemigTelecom.

 

3 Approval of the Net Equity Valuation Report of CemigTelecom, at book value, as set forth in 2 above.

 

4 Authorization to the merger CemigTelecom into Cemig, and subsequent termination of CemigTelecom.

 

5 Authorization to Cemig to be the successor of CemigTelecom, in all its rights and obligations, for all purposes of law and otherwise.

 

6 Authorization to the transfer to Cemig, by merger, of all the facilities, tangible and intangible assets and goods, inventories, real estate property, credits, assets, rights, employees, stockholdings, contracts, obligations, liabilities, tax books and invoices, controls, records, accounting, documents, systems and information of CemigTelecom, including its shares in Ativas Data Center S.A. (Ativas), which corresponds to 19.6% of the share capital of Ativas, and the contracts related to this stockholding interest.

Proxy votes

Any stockholder who wishes to be represented by proxy at the above General Meeting of Stockholders shall comply with the provisions of Article 126 of Law 6406 of 1976 and with the sole paragraph of Section 9 of the Company’s by-laws, by presenting at the time or providing Cemig, preferably by February 26, 2018, with evidence of ownership of the shares, issued by a depositary financial institution, and a power of attorney with specific powers, at Cemig’s Corporate Executive Office (Superintendência da Secretaria Geral) at Av. Barbacena 1200 – 19th Floor, B1 Wing, Belo Horizonte, Minas Gerais, Brazil.

Belo Horizonte, January 12, 2018

José Afonso Bicalho Beltrão da Silva

Chair of the Board of Directors

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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PROPOSAL BY THE BOARD OF DIRECTORS DATED AS OF JANUARY 12, 2018 TO THE EXTRAORDINARY GENERAL MEETING OF STOCKHOLDERS TO BE HELD ON FEBRUARY 28, 2018

 

 

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LOGO

  

 

 

 

 

PROPOSAL

BY THE BOARD OF DIRECTORS TO THE

EXTRAORDINARY GENERAL MEETING OF STOCKHOLDERS

TO BE HELD ON FEBRUARY 28, 2018

Dear Stockholders:

The Board of Directors of the Company proposes to you the following:

 

1 Approval and authorization for execution of a Protocol of Merger and Justification, with Cemig Telecomunicações S.A. – CemigTelecom, which will set out the terms and conditions to govern the merger of CemigTelecom into Cemig.

 

2 Ratification, because the transaction involves the merger of a wholly-owned subsidiary into its parent company, of the appointment of the three experts,

Mr. Flávio de Almeida Araújo, CRC/MG 86.861,

Mr. Francisco do Couto, CRC/MG 58.343, and

Mr. Leonardo George de Magalhães, CRC/MG 53.140,

to prepare the valuation, under and for the purposes of Article 8 of Law 6404/1976, of the Net Equity Valuation of CemigTelecom.

 

3 Approval of the Net Equity Valuation Report of CemigTelecom, at book value, prepared by three experts, under and for the purposes of Article 8 of Law 6404/1976.

 

4 Authorization to the merger of CemigTelecom into Cemig and subsequent termination of CemigTelecom.

 

5 Authorization for Cemig to be the successor of CemigTelecom, in all its rights and obligations, for all purposes of law and otherwise.

 

6 Authorization to the transfer to Cemig, by merger, of all the facilities, tangible and intangible assets and goods, inventories, real estate property, credits, assets, rights, employees, stockholdings, contracts, obligations, liabilities, tax books and invoices, controls, records, accounting, documents, systems and information of CemigTelecom, including its shares in Ativas Data Center S.A. (Ativas), which corresponds to 19.6% of the share capital of Ativas, and the contracts related to this stockholding interest.

As can be seen, the purpose of this proposal is to meet the genuine interests of the stockholders and of the Company, therefore the Board of Directors expects that it will be approved by the Stockholders.

Belo Horizonte, January 12, 2018

 

José Afonso Bicalho Beltrão da Silva

   Helvécio Miranda Magalhães Junior

Marco Antônio de Rezende Teixeira

   Hermes Jorge Chipp

Bernardo Afonso Salomão de Alvarenga

   José Pais Rangel

Antônio Dirceu Araújo Xavier

   Marcelo Gasparino da Silva

Arcângelo Eustáquio Torres Queiroz    

   Marco Antônio Soares da Cunha Castello Branco

Arlindo Magno de Oliveira

   Nelson José Hubner Moreira

Carlos Eduardo Lessa Brandão

   Patrícia Gracindo Marques de Assis Bentes

Daniel Alves Ferreira

  

 

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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APPENDICES

APPENDIX I     – Appendix 20A of CVM Instruction 481/2009

APPENDIX II     – Appendix 21 of CVM Instruction 481/2009

APPENDIX III     – Protocol of Merger and Justification

APPENDIX IV     – Opinion of the Auditing Board

APPENDIX V     – Net Equity Valuation Report of CemigTelecom.

APPENDIX VI     – Cemig: Financial Statements for 2016

APPENDIX VII     – Cemig: Quarterly Information (‘ITR’) for 3Q 2017

APPENDIX VIII     – CemigTelecom: Financial Statements for 2016

APPENDIX IX     – CemigTelecom: Quarterly Information (‘ITR’) for 3Q 2017

 

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG

CNPJ 17.155.730/0001-64—NIRE 31300040127

APPENDIX I TO THE PROPOSAL BY MANAGEMENT

INFORMATION ON THE MERGER

(AS PER APPENDIX 20-A OF CVM INSTRUCTION 481)

1. Protocol and justification of the transaction as per Articles 224 and 225 of Law 6404 of 1976.

The protocol and justification of the merger of Cemig Telecomunicações S.A. (‘CemigTelecom’) into Companhia Energética de Minas Gerais – Cemig (‘the Company’ or ‘Cemig’), (‘the Protocol and Justification’) is in Appendix III to the Management Proposal.

2. Any other agreements, contracts or pre-contracts regulating the exercise of the right to vote or transfer of shares in the companies subsisting or resulting from the transaction, filed at the head office of the company or to which the controlling stockholder of the company is a party.

None.

3. Description of the transaction, including:

a. Terms and conditions.

The transaction will consist of the merger of CemigTelecom, a wholly-owned subsidiary, into Cemig, its parent company, at the book value of CemigTelecom, and consequent termination of CemigTelecom; and Cemig will be successor of CemigTelecom in all the goods and assets, rights and obligations of CemigTelecom (‘the Merger’). All of the shares in CemigTelecom are owned by Cemig and will be extinguished, as specified in Article 226, §1, of Law 6404, of December 15, 1976 as amended (‘the Corporate Law’).

The Merger will not result in an increase or reduction of the stockholders’ equity or of the share capital of Cemig, since the stockholders’ equity of CemigTelecom is already reflected in full in the stockholders’ equity of Cemig, as a result of the application of the equity method accounting.

It is intended that the Merger shall not take effect before March 31, 2018, or before completion of the following events:

 

(i) Holding of a General Meeting of Debenture Holders of the 2nd (second) issuance of debentures of CemigTelecom (‘the GMDH’), to be called to take place up to March 16, 2018, including in its agenda the approval of the Merger and of its consequences for the debenture holders.

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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(ii) To be assured, under Article 231, §1 of the Corporate Law, to the debenture holders of CemigTelecom that are dissident or absent to the GMDH, that their debentures will be redeemed within 6 (six) months from the date of publication of the minutes of the General Meeting relating to the Merger.

 

(iii) Approval by a General Meeting of Stockholders of CemigTelecom of:

 

  (a) the execution of the Protocol and Justification; and

 

  (b) the Merger, among other matters.

 

(iv) Holding of a General Meeting of Stockholders of Cemig to:

 

  (a) approve the execution of the Protocol and Justification;

 

  (b) ratify the nomination of the Accounting Experts:

 

  (b.i) Flávio de Almeida Araújo, accountant, registered in the Minas Gerais Regional Accounting Council (‘CRC/MG’) under Nº 86.861;

 

  (b.ii) Francisco do Couto, accountant, registered in the CRC/MG under Nº 58.343; and

 

  (b.iii) Leonardo George de Magalhães, accountant, CRC/MG registration Nº 53.140.

– to be responsible for preparation of the net equity valuation report of CemigTelecom at book value, for the merger of CemigTelecom into the Company (‘the Valuation Report’);

 

  (c) approve the Valuation Report;

 

  (d) approve the Merger and the subsequent termination of CemigTelecom;

 

  (e) authorize Cemig to be the successor of CemigTelecom in all its rights and obligations, howsoever, and for all purposes of law; and

 

  (f) authorize transfer to Cemig, by merger, of all the facilities, tangible and intangible assets and goods, inventories, real estate property, credits, assets, rights, employees, stockholdings, contracts, obligations, liabilities, tax books and tax invoices, controls, records, accounting, documents, systems and information of CemigTelecom, including the shares held by CemigTelecom in Ativas Data Center S.A. (Ativas), which corresponds to 19.6% of the share capital of Ativas, and the contracts related to this stockholding interest.

b. Obligations to indemnify: (i) the managers of any of the companies involved; (ii) in the event that the transaction is not completed.

None.

 

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c. Comparative table of the rights, advantages and restriction applying to shares of the companies involved or the resulting companies, before and after the transaction.

After the Merger, only the common and preferred shares issued by Cemig existing prior to the transaction will remain to exist, which will preserve the same rights and advantages that current are:

 

Common shares in Cemig

Right to dividends:

   The common shares have the same rights as the preferred shares in distribution of bonuses. In fiscal years in which the Company does not generate sufficient profits to pay dividends to its stockholders, the State of Minas Gerais guarantees, for the shares issued by the Company up to August 5, 2004 and held by individual persons, a minimum dividend of 6% (six percent) per year.

Right to vote:

   Full.

Description of any restriction on voting:

   Not applicable.

Convertibility:

   None.

Condition of the convertibility, and effects on the share capital:

   Not applicable.

Right to reimbursement of capital:

   Yes.

Characteristics of the reimbursement of capital:

   The preferred shares have right of preference in the event of reimbursement of shares.

Restrictions on trading:

   None.

Nature of restriction:

   Not applicable.

Redeemable:

   None.

Conditions for alteration of the rights carried by the said securities.

   Under Article 109 of the Corporate Law, neither the by-laws nor the General Meeting of Stockholders may deprive the stockholder of the right to: (i) participate in the profits of the company; (ii) participate in the net equity of the company, in the event of liquidation; (iii) inspect the management of the company’s business, in the manner specified in the Corporate Law; (iv) have first refusal to subscribe shares, founder’s shares convertible into shares, debentures convertible into shares and/or warrants; (v) withdraw from the company in the eventuality specified in the Corporate Law.

Other material characteristics:

   All the information that is relevant and pertinent to this topic has been disclosed in the items above.

 

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Preferred shares in Cemig

Right to dividends:

  

Minimum annual dividend equivalent to the greater of:

(a) 10% (ten per cent) of the nominal value of the shares; or

(b) 3% (three per cent) of the value of the stockholders’ equity corresponding to the shares.

The common shares shall be subject to the same conditions as the preferred shares in distribution of bonuses. In business years in which the Company does not obtain sufficient profit to pay dividends to its stockholders, the State of Minas Gerais guarantees to the shares issued by the Company up to August 5, 2004 and held by individual persons, a minimum dividend of 6% (six per cent) per year.

Right to vote:

   Restricted.

Description of restriction on voting:

   The right to vote is reserved exclusively for the common shares, and each common share has the right to one vote in decisions of the General Meeting of Stockholders.

Convertibility:

   None.

Condition of the convertibility, and effects on the share capital:

   Not applicable.

Right to reimbursement of capital:

   Yes.

Description of the characteristics of the reimbursement of capital:

   The preferred shares will have the right of preference in the event of reimbursement of shares.

Restrictions on trading:

   None.

Nature of restriction:

   Not applicable.

Redeemable:

   None.

Conditions for alteration of the rights carried by the said securities.

   Under Article 109 of the Corporate Law, neither the by-laws nor the General Meeting of Stockholders may deprive the stockholder of the right to: (i) participate in the profits of the company; (ii) participate in the assets and liabilities of the company, in the event of liquidation; (iii) inspect the management of the company’s business, in the manner specified in the Corporate Law; (iv) have first refusal to subscribe shares, founder’s shares convertible into shares, debentures convertible into shares and/or warrants; (v) withdraw from the company in the eventuality specified in the Corporate Law.

Other material characteristics:

   All the information that is relevant and pertinent to this topic has been disclosed in the items above.

 

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As a result of the Merger, all the shares issued by CemigTelecom (100% held by Cemig) will be canceled. Therefore, as there will be no delivery of shares issued by Cemig to stockholders of CemigTelecom, a comparison of the rights and advantages between the shares of the two companies is unnecessary.

d. Is there any need for approval by debenture holders or other creditors?

Not in relation to Cemig.

In relation to CemigTelecom, the Merger will be submitted to the approval of the General Meeting of Debenture Holders, which will state whether or not they are favorable to the Merger. Any of the holders of debentures of CemigTelecom that is dissident or be absent to the General Meeting of Debenture Holders shall have the right to redeem its debentures, under Article 231, §1, of the Corporate Law, for a period of six months from the date of publication of the minutes of the General Meetings relating to the Merger.

e. Any asset or liability elements that will form each portion of the equity, in the event of a split.

Not applicable.

f. Whether the resulting companies have any intention to be listed as issuers of securities.

Not applicable.

4. Plans to conduct of the companies’ businesses, particularly in relation to the specific corporate events that are planned.

After completion of the Merger, Cemig will continue to dedicate itself to the activities covered by its corporate purpose, keeping its registry as a listed company, and to succeeding the rights and obligations of CemigTelecom.

5. Analysis of the following aspects of the transaction:

a. Description of the principal benefits expected, including:

i. Synergies

With the merger, the Company will seek to achieve gains from optimization of assets and synergies, and reduce financial, operational and administrative costs through concentration of existing administrative structures, which will expand the means for Cemig to make use of available resources.

ii. Tax benefits

The Company’s management sees no tax benefits arising from the Merger.

iii. Strategic advantages

One of the important strategic advantages inherent in the Merger is simplification of the current corporate structure and expansion of the means for Cemig to make use of available resources.

b. Costs

The managements of both companies estimate that there will be no additional costs as a result of the Merger. CemigTelecom is today a wholly-owned subsidiary, and all its costs are 100% consolidated by Cemig.

 

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c. Risk factors

One of the goals of the Merger is to integrate the businesses of the companies and improve the use of the synergies obtained from the combination of the businesses of Cemig and CemigTelecom. This process of integration could result in difficulties of operational, regulatory, commercial, financial and contractual nature, which may prevent the expected synergies to be achieved or result in unforeseen losses or expenses.

d. If this is a transaction with a related party, indicate alternatives that could have been used to reach the same objectives, indicating the reasons why those alternatives were discarded.

No alternative structure to the Merger could result in the simplification and integration of the businesses of both companies, with the termination of one of the legal entities and its succession by the remaining company, as it is intended. Additionally, because this case involves the merger of a wholly-owned subsidiary by its parent company, the present question loses its relevance.

e. Exchange ratio

Not applicable, CemigTelecom is a wholly-owned subsidiary of Cemig and thus the Merger will not result in an increase in the net equity of Cemig.

f. For a transaction involving parent companies, subsidiaries or companies under joint control, please provide:

 

(i) The share exchange ratio calculated in accordance with Article 264 of Law 6404 of 1976.

 

(ii) Detailed description of the process of negotiation of the exchange ratio and other terms and conditions of the transaction.

 

(iii) If the transaction was preceded, in the last 12 (twelve) months, by an acquisition of control or acquisition of participation in a controlling stockholding block:

 

  (a) Comparative analysis of the exchange ratio and the price paid in acquisition of control;

 

  (b) Reasons justifying any differences of valuation in the different transactions;

 

(iv) Justification of why the exchange ratio is commutative, with description of the procedures and criteria adopted to guarantee the commutability of the transaction or, if the exchange ratio is not commutative, detailing of the payment or equivalent measures adopted to ensure adequate compensation.

Cemig is the holder of 100% of the share capital of CemigTelecom, so that the transaction does not result in an increase of capital in Cemig, nor any alteration in the participation of its stockholders. Therefore, there is no need to consider any exchange ratio.

6. Copy of the minutes of all the meetings of the Board of Directors, Auditing Board and special committees in which the transaction was discussed, including any dissident votes.

The Opinion of the Auditing Board of Cemig is attached hereto as Appendix IV.

7. Copy of studies, presentations, reports, opinions, professional opinions or valuation reposts of the companies involved in the transaction that have been placed at the disposal of the controlling stockholder at any stage of the transaction.

The Valuation Report is attached hereto as Appendix V.

 

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7.1. Identify any conflicts of interests between the financial institutions, companies and professionals that have prepared the documents referred to in item 7 and the companies involved in the transaction.

None.

8. Plans for by-laws, or changes to by-laws, of the company resulting from the transaction.

No changes to Cemig’s bylaws are being proposed; Cemig will be the successor of CemigTelecom.

9. Financial statements used for the purpose of the transaction, under the applicable rule.

In accordance with Article 6 of CVM Instruction 565 of June 15, 2015, as amended (‘CVM Instruction 565’), the following financial statements have been disclosed:

 

(i) Financial Statements of Cemig of December 31, 2016 (attached hereto as Appendix VI);

 

(ii) Interim Accounting Statements of Cemig of September 30, 2017 (attached hereto as Appendix VII);

 

(iii) Financial Statements of CemigTelecom of December 31, 2016 (attached hereto as Appendix VIII); and

 

(iv) Interim Accounting Statements of CemigTelecom of September 30, 2017 (attached hereto as Appendix IX).

The valuation of the net equity value of CemigTelecom, expressed in the Valuation Report, has been based on CemigTelecom’s balance sheet of November 30, 2017, which comprises the Appendix I to the Valuation Report.

Aiming to ensure the accuracy of the accounting amounts of the assets and liabilities elements comprising the balance sheet of CemigTelecom, on November 30, 2017, the following procedures were adopted in the Valuation Report:

 

  Reading of the Financial Statements of CemigTelecom of December 31, 2016 (attached hereto as Appendix VIII).

 

  Reading of the Independent Auditor’s Report on the Financial Statements issued by Deloitte Touche Tohmatsu Auditores Independentes on April 6, 2017, without qualification in relation to the Balance Sheet of December 31, 2016.

 

  The Interim Accounting Information of CemigTelecom of September 30, 2017 (attached hetero as Appendix IX), combined with the Report of the External Auditors, Ernst & Young Auditores Independentes, on their review of the quarterly information, issued without any qualification on November 10, 2017; and

 

  Analytical review of the movement in the balances of assets and liabilities in the period between September 2017 and November 30, 2017.

10. Pro-forma financial statements prepared for the purposes of the transaction, in the terms of the applicable rule.

Considering that CemigTelecom is a wholly-owned subsidiary of Cemig, and is consolidated in Cemig’s results, we present the Interim Accounting Information of Cemig on September 30, 2017, consolidated and audited (attached hereto as Appendix VII), in compliance with the requirement of Article 7 of CVM Instruction 565 of June 15, 2015 as amended.

11. Document containing information on the non-listed companies directly involved, including:

 

a. Risk factors, in the terms of Items 4.1 and 4.2 of the Reference Form;

 

b. Description of the principal changes in the risk factors that have taken place in the prior business period and expectations in relation to reduction or increase in the exposure to risks as a result of the transaction, in the terms of Item 5.4 of the Reference Form;

 

c. Description of its activities, in the terms of Items 7.1, 7.2, 7.3 and 7.4 of the Reference Form;

 

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d. Description of the economic group, in the terms of Item 15 of the Reference Form;

 

e. Description of the share capital, in the terms of item 17.1 of the Reference Form.

Not applicable.

12. Description of the structure of capital and control after the transaction, in the terms of Item 15 of the Reference Form.

Items 15.1 and 15.2 of the Reference Form of Cemig:

Those items are not subject to any change as a result of the intended transaction.

Item 15.3 of the Reference Form of Cemig:

Those items are not subject to any change as a result of the intended transaction.

Item 15.4 of the Reference Form of Cemig:

 

  Organization diagram before the transaction:

 

LOGO

 

 

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  Organization diagram after the transaction:

 

LOGO

Items 15.5, 15.6, 15.7 and 15.8 of the Reference Form of Cemig:

Those items are not subject to any change as a result of the intended transaction.

13. Number, class, form and type of the securities of each company involved in the transaction held by any other companies involved in the transaction, or by people related to these companies, as defined by the rules that govern public offerings for acquisition of shares

Cemig is, in the present date, holder of 448,340,822 (four hundred forty eight million three hundred and forty thousand eight hundred twenty two) nominal common shares without par value, comprising 100% (one hundred per cent) of the share capital of CemigTelecom.

14. Exposure of the companies involved in the transaction – or any of their related parties, as defined in the rules that govern public offerings for acquisition of shares – to derivatives referenced to securities issued by other companies involved in the transaction.

Not applicable.

15. Report covering all transactions carried out, in the last 6 (six) months, by the following persons with securities issued by the companies involved in the transaction:

a. Companies involved in the transaction:

i. Private purchase transactions

None.

ii. Private sale transactions

None.

 

 

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iii. Purchase transactions in regulated markets

None.

iv. Sale transactions in regulated markets

None.

b. Any persons or entities that are related parties to the companies that are involved in the transaction:

i. Private purchase transactions

None.

ii. Private sale transactions

None.

iii. Purchase transactions in regulated markets

None.

iv. Sale transactions in regulated markets

None.

16. Document by which the Special Independent Committee submitted its recommendations to the Board of Directors, in the event that the transaction has been negotiated in the terms of CVM Orientation Opinion 35 of 2008

Not applicable. Cemig is holder of 100% of the shares corresponding to the share capital of CemigTelecom and, thus, the transaction does not result in an increase of capital of Cemig or in any change to the participation of its stockholders. Therefore, there was no exchange ratio to be negotiated.

*—*—*—*

 

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COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG

CNPJ 17.155.730/0001-64—NIRE 31300040127

APPENDIX II TO THE PROPOSAL OF MANAGEMENT

INFORMATION ON THE VALUER AND PROPOSAL FOR THE VALUATION WORK

(APPENDIX 21 TO CVM INSTRUCTION 481)

 

1. List the valuers recommended by the management.

Expert Accountants:

 

(a) Mr. Flávio de Almeida Araújo, accountant, enrolled with the Minas Gerais State Regional Accounting Council (‘CRC/MG’) under the No. 86,861;

 

(b) Mr. Francisco do Couto, accountant, enrolled with the CRC/MG under the No. 58,343.

 

(c) Mr. Leonardo George de Magalhães, accountant, enrolled with the CRC/MG under the No. 53,140.

 

2. Describe the qualifications of the recommended valuers.

 

  Mr. Flávio de Almeida Araújo has a degree in accountability from Minas Gerais Federal University (UFMG) and a post-graduation MBA with specialization in finance from the Dom Cabral Foundation (FDC). He works at Cemig since 2006, holding, currently, the position ofFinancial Manager for Equity Holdings.

 

  Mr. Francisco do Couto has a degree in accountability from the Newton Paiva University Center, with specialization in external auditing from UFMG, and MBA in Management, Finance, Controllership and Auditing from the Getúlio Vargas Foundation (FGV). His professional life has been almost entirely dedicated to accounting. He has been an independent auditor for 10 years. He has been a professor to undergraduate and extension courses at UFMG. Since February 1999 he has been working as an accountant at Cemig and is currently responsible for the preparation of the Consolidated Financial Statements of the Group. He is also a graduate and undergraduate professor at Centro Universitário UNA, where he has been teaching since 2003.

 

  Mr. Leonardo George de Magalhães has a degree in accountability from UNA Faculdade de Ciências Econômicas, Belo Horizonte, with specialization in accountability from FGV and specialization in business management from UFMG. At Cemig he has been Controller since June 2008. Since September 2017 he has also served as General Manager for Planning and Corporate Control.

 

3. Provide a copy of the proposals for work and remuneration of the recommended valuers.

Appendix I to this document comprises a copy of the work proposal.

 

Scope:    Accounting Net Equity of Cemig Telecomunicações S.A. – CemigTelecom.
Fees:    No remuneration for the valuers further to their normal remuneration as employees of Cemig.

 

 

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4. Describe any material relationship existing in the last three years between the recommended valuers and related parties to the company, as defined in the accounting rules that deal with this subject.

Flávio de Almeida Araújo:

 

  Is currently Cemig’s Financial Manager for Holdings, with the following principal duties:

 

  to promote the financial management of Cemig Group;

 

  to follow the economic and financial results of the companies;

 

  to participate in processes of merger, split, acquisition and disposal of corporate interests.

 

  to act as a member of the Board of Directors in companies of the Cemig Group; and

 

  to prepare accounting opinions for the purposes of spin-offs, mergers and allocations of capital to companies of the group.

Mr. Francisco do Couto:

 

    Works as an accountant at Cemig.

 

    Is currently responsible for the preparation of the Group’s Consolidated Financial Statements.

Mr. Leonardo George de Magalhães:

 

  Is the executive responsible for accounting, management of costs and tax planning of Cemig and its wholly-owned subsidiaries, and also management of budgeting, economic-financial planning, and analysis and monitoring of projects. He is:

 

  Chairman of the Board of Forluz – the pension fund of the employees of Cemig;

 

  a member of the Rate-regulated Activities Consultative Group of IASB – the International Accounting Standards Board;

 

  a member of the Board of Directors of Aliança Norte – stockholder of the Belo Monte power plant;

 

  Coordinator of the Control and Management Committee of Cemig: this body monitors the budgets and results of the businesses and also advises management in control and management analyzes and initiatives.

 

  Coordinator of the Budget Prioritization Committee: a committee supporting management in decisions and management of investment projects, including analyses and prioritization of use of funds; and

 

  represents Cemig in investor relation events in Brazilian and international financial markets.

 

  He participates, jointly with the CFO and the Investor Relations Director, in the quarterly presentations of the Company’s results to investors.

 

  He has participated in various processes of mergers and acquisitions of Cemig.

*—*—*—*

 

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COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG

CNPJ 17.155.730/0001-64—NIRE 31300040127

APPENDIX I TO APPENDIX II

COPY OF THE WORK PROPOSAL OF THE ACCOUNTING EXPERTS

The accounting examination was carried out in accordance with NBC T 13, and comprised:

 

(a) planning of the work;

 

(b) application of procedures judged to be necessary in the circumstances;

 

(c) issuance of the expert opinion on valuation of the equity to be incorporated.

The scope of the work is specified as: valuation of the equity of CemigTelecom, at book value, for the purpose of absorption. The following procedures were adopted:

 

  Reading of the Financial Statements of December 31, 2016.

 

  Reading of the Report of the External Auditors on the Financial Statements, issued by Deloitte Touche Tohmatsu Auditores Independentes on April 6, 2017, with no qualifications, in relation to the Financial Statements of December 31, 2016.

 

  Reading of the Interim Accounting Information of September 30, 2017, jointly with the Report of the External Auditors, Ernst & Young Auditores Independentes, issued on November 10, 2017 on review of that quarterly information, without qualification.

 

  Analytical review of the movement of balances of assets and liabilities in the period from September 30, 2017 to November 30, 2017.

At September 30, 2017 the books of account of CemigTelecom were compliant with the relevant legal formalities, and were written in accordance with the accounting practices adopted in Brazil.

The Accounting Experts used historic information and data audited by third parties and data provided by the management of CemigTelecom, via email or through its website. This being so, we assume that the data and information obtained for this Opinion is true.

*—*—*—*

 

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LOGO

  

 

 

 

 

Appendix III

PROTOCOL OF MERGER AND JUSTIFICATION

By this private instrument and for all purposes of law,

 

(a) COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG, with head office in Belo Horizonte, Minas Gerais State, at Avenida Barbacena 1200, Santo Agostinho, registered in the CNPJ/MF under Nº 17.155.730/0001-64, herein represented in accordance with its by-laws (‘Cemig’) and

 

(b) CEMIG TELECOMUNICAÇÕES S.A., with head office in Belo Horizonte, Minas Gerais State, at Rua Inconfidentes 1051, registered in the CNPJ under Nº. 02.983.428/0001-27, herein represented in accordance with its Articles of Association (‘CemigTelecom’);

– jointly, ‘the Companies” –

have agreed on the terms and decided to execute the present Protocol of Merger and Justification, in the form set forth by Law 6404 of December 15, 1976 (‘the Corporate Law”), to set out the terms and conditions governing the merger of CemigTelecom into Cemig.

CORPORATE PURPOSE AND SHARE CAPITAL OF THE COMPANIES

 

1. Cemig is a Brazilian publicly held company, its corporate purpose encompasses the following activities:

 

  a) to build, operate and exploit systems of generation, transmission, distribution and sale of electricity and related services;

 

  b) to develop activities in various energy related fields, regardless of the source, focusing on the economic and commercial exploitation;

 

  c) to render consulting services, within its fields of operation, to Brazilian and foreign companies; and

 

  d) to carry out activities direct or indirectly related to its corporate purpose, including the development and commercial operation of telecommunication and information systems.

 

2. CemigTelecom is a Brazilian corporation, its corporate purpose encompasses the following activities:

 

  a) to render and commercially operate limited specialized telecommunication services, through an integrated system of fiber optic cables, coaxial cables, and electronic and related equipment for transmission, emission or reception of symbols, characters, signals, written material, images, sound and information of any type;

 

  b) to render telecommunications services, through various technologies;

 

  c) to render consulting services in telecommunications to Brazilian and foreign companies;

 

  d) to grant use of its telecommunications system upon compensation to:

 

  (i) holders of public electricity services concessions, for their use in the management their generation, transmission and distribution activities; and

 

  (ii) companies aiming to commercially operate the system as alternative provider of carriage of signal to companies holding concession, permission or authorization to provide telecommunications services.

 

 

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LOGO

  

 

 

 

 

  (e) to commercial operate its telecommunications system as an alternative provider of carriage of signal to companies holding concession, permission or authorization to provide telecommunications services.

 

  f) to render multimedia communication services (‘SCM’) in all the Brazilian territory.

 

  g) to hold corporate interests in other companies.

JUSTIFICATION AND BASES FOR THE MERGER

 

3. The transaction that is the subject of this protocol is the merger of CemigTelecom into Cemig, with transfer of the totality of the net assets and liabilities of CemigTelecom to Cemig, which will be the sole successor of CemigTelecom in all its goods and assets, rights and obligations, in the terms of Articles 227 et seq. of the Corporate Law (‘the Merger’).

 

4. After implementation of the Merger the credits and debits of CemigTelecom, which currently constitute its assets and liabilities, will become part of the accounts of Cemig, being transferred to the corresponding lines in Cemig’s accounting books, subject to any necessary adaptations.

 

5. The Merger will provide gains from synergies and reduce financial, operational and administrative costs through concentration of existing administrative structures in Cemig, which will increase the possibilities for Cemig to take advantage of all its available resources.

 

6. The Merger will take effect only as from March 31, 2018 (‘the Effective Date’), regardless of the date on which the required approvals are obtained.

 

7. On the Effective Date, CemigTelecom will cease to exist.

ORGANIZATION AND COMPOSITION OF THE COMPANIES

 

8. Cemig is a Brazilian publicly held company, with corporate capital of R$ 6,294,208,270.00 (six billion two hundred ninety four million two hundred and eight thousand two hundred seventy Reais), divided in

 

  a) 420,764,708 (four hundred twenty million seven hundred sixty four thousand seven hundred and eight) nominal common shares each with nominal value of R$ 5.00 (five Reais); and

 

  b) 838,076,946 (eight hundred thirty eight million seventy six thousand nine hundred forty six) nominal preferred shares each with nominal value of R$ 5.00 (five Reais).

 

9. CemigTelecom is a Brazilian corporation, with corporate capital of R$ 292,399,303.29 (two hundred ninety two million three hundred ninety nine thousand three hundred and three Reais and twenty nine centavos), fully paid up, divided in 448,340,822 (four hundred forty eight million three hundred and forty thousand eight hundred twenty two) nominal common shares without par value, all owned by Cemig:

 

Sole stockholder

   Shares      %  

Companhia Energética de Minas Gerais – CEMIG

     448,340,822        100  

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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LOGO

  

 

 

 

 

VALUATION

 

10. Subject to ratification by the stockholders of the Companies, the managers of the Companies have appointed the following Expert Accountants to prepare the valuation of the net equity of CemigTelecom, as per Article 8 of the Corporate Law:

 

Mr. Flávio de Almeida Araújo

   – Brazilian, married, resident and domiciled in Belo Horizonte, Minas Gerais, at Rua José de Alencar 984, Apt. 401, Nova Suíça, holder of Identity Card MG-7.348.434, CPF 045.915.356-06, and CRC/MG (Minas Gerais Regional Council of Accountants) 86.861/O-7;

Mr. Francisco do Couto

   – Brazilian, single resident and domiciled in Belo Horizonte, MG, at Rua Uberlândia 555, Apt. 902, Carlos Prates, holder of Identity Card MG-3.124.729, CPF 525.441.416-20, and CRC/MG 58.343; and

Mr. Leonardo George de Magalhães

   – Brazilian, married, resident and domiciled in Nova Lima, Minas Gerais, at Rua Vega 55, Quintas do Sol, holder of Identity Card 4.303.799 – SSP/MG, CPF 617.665.426-20, and CRC/MG 53.140/O-4.

 

11. For the purposes of the Merger, the elements of the equity of CemigTelecom to be transferred to Cemig have been valued at book value, based on the financial statements of CemigTelecom on November 30, 2017.

 

12. Having been previously informed of their appointment as valuers subject to ratification by the stockholders of the Companies, the Accounting Experts determined, based on the financial statements on November 30, 2017, that the net value of the total assets and liabilities of CemigTelecom is

 

R$ 245,761,413.36

(two hundred forty five million seven hundred sixty one thousand four hundred thirteen Reais and thirty six centavos),

after the adjustments described in Chapter 4 of the Valuation Report and the cancelation of the investment of Cemig in CemigTelecom.

 

13. Any change in the value of the net equity after the date of those financial statements will be absorbed by Cemig on the Effective Date of the Merger.

CORPORATE INTERESTS IN COMMON AND SUBSTITUTION OF SHARES

 

14. Considering that Cemig is the holder of 100% (one hundred per cent) of the share capital of CemigTelecom, there will be no substitution of shares issued by CemigTelecom by shares issued by Cemig.

With the cancelation of the shares issued by CemigTelecom, the value of the investment recorded in the assets of Cemig will be replaced by the equity value of CemigTelecom, as valued by the experts.

The Merger will not result in a change in the net equity of Cemig since the net equity value of CemigTelecom is already reflected in its entirety in the Stockholders’ equity of Cemig, due to application of the equity method accounting. Consequently there will be no increase in the share capital of Cemig, nor any issue of new shares.

 

15. Since this is a merger of a wholly-owned subsidiary into its parent company, with no other stockholders of CemigTelecom, and since there will be no increase of the corporate capital of the Cemig, there is no need to establish parameters for an exchange ratio, and there is no additional information to be made available to the stockholders of Cemig.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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LOGO

  

 

 

 

 

FINAL PROVISIONS

 

16. Approval of this Protocol by the stockholders of CemigTelecom and by the stockholders of Cemig will result in the termination of CemigTelecom on the Effective Date of the Merger, with the cancellation of all the shares issued by CemigTelecom. The management of Cemig will be responsible for filing all the corporate documents required for the registry of the Merger with the relevant entities.

 

17. With the Merger coming into effect on the Effective Date, all the goods and assets, rights, receivables, obligations and liabilities of CemigTelecom will automatically become part of the assets and liabilities of Cemig, which will succeed CemigTelecom in all its rights and obligation, regardless of any formalities other than those specified by law.

 

18. The provisions relating to the withdraw right and reimbursement of shares are not applicable due to the fact that:

 

  (i) in relation to CemigTelecom: Cemig owns the totality of the shares issued by CemigTelecom and, hence, there is no stockholder dissenting in relation to the Merger; and

 

  (ii) in relation to Cemig: there is no provision of law or in the by-laws of the company that grants a withdraw right to any dissenting stockholder.

 

19. Under Article 231 of the Corporate Law, the Merger will be conditional upon:

 

  (i) the approval by the holders of debentures issued by CemigTelecom, in a General Meeting called specifically to approve the Merger; and

 

  (ii) the granting by CemigTelecom of a minimum period of 6 (six) months, from the date of publication of the minutes of the Meetings relating to the Merger, for redemption of its outstanding debentures.

Having agreed with the terms and conditions set forth above, the parties execute this instrument, in six counterparties of equal form and content, for it to produce its legal and regulatory effects.

 

Belo Horizonte,  

            , 2018

By COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG

 

         

By CEMIG TELECOMUNICAÇÕES S.A.

 

         

Witnesses:

 

1.

       

2.

   
 

Name:

      Name:
 

CPF/MF:

      CPF/MF:
 

ID/Issuer:

      ID/Issuer:

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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LOGO

  

 

 

 

 

Appendix IV

OPINION OF THE AUDITING BOARD

The undersigned members of the Auditing Board of the Companhia Energética de Minas Gerais – Cemig, in performance of their role under the law and under the by-laws of the company, have analyzed the Proposal made by the Board of Directors to the Extraordinary General Meeting of Stockholders to be held on February 28, 2018, which is for the following:

 

  1 Approval and authorization for execution of a Protocol of Merger and Justification, with Cemig Telecomunicações S.A. – CemigTelecom, which will set out the terms and conditions to govern the merger of CemigTelecom into Cemig.

 

  2 Ratification of the nomination of the following 3 (three) experts – Mr. Flávio de Almeida Araújo, CRC/MG 86.861, Mr. Francisco do Couto, CRC/MG 58.343, and Mr. Leonardo George de Magalhães, CRC/MG 53.140, that will provide a valuation, for the purposes of Article 8 of Law 6404/1976, of the net equity of CemigTelecom.

 

  3 Approval of the Net Equity Valuation Report of CemigTelecom, at book value, prepared by the three experts, in accordance with Article 8 of Law 6404/1976.

 

  4 Authorization to the merger of CemigTelecom into Cemig and subsequent termination of CemigTelecom.

 

  5 Authorization to Cemig to be the successor of CemigTelecom, in all its rights and obligations, for all purposes of law and otherwise.

 

  6 Authorization to the transfer to Cemig, by merger, of all the establishments, tangible and intangible assets and goods, inventories, real estate property, credits, assets, rights, employees, stockholdings, contracts, obligations, liabilities, tax books and invoices, controls, records, accounting, documents, systems and information of CemigTelecom, including its shares in Ativas Data Center S.A. (Ativas), which corresponds to 19.6% of the share capital of Ativas, and the contracts related to this stockholding interest.

After carefully analyzing the above proposal and considering that the applicable rules governing the maters under discussion have been complied with, it is the opinion of the members of the Auditing Board that the proposal should be approved by the said General Meeting of Stockholders.

Belo Horizonte, January 25, 2018

Signed:

Edson Moura Soares

Camila Nunes da Cunha Pereira Paulino

Manuel Jeremias Leite Caldas

Rodrigo de Mesquita Pereira

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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Appendix V

 

VALUATION REPORT ON THE EQUITY OF CEMIG TELECOMUNICAÇÕES S.A. FOR THE PURPOSES OF MERGER

 

 

35


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Belo Horizonte, December 22, 2017.

To the Management of

Companhia Energética de Minas Gerais – Cemig

Av. Barbacena, 1.200 – 18º Andar

Belo Horizonte, Minas Gerais

In accordance with the provisions of Paragraphs 1 and 6 of Article 8 of Law 6404/75, the Management of Cemig Companhia Energética de Minas Gerais – CEMIG (‘Cemig’) has appointed three expert accountants to prepare a valuation report, at book value, on the net equity of Cemig Telecomunicações S.A. – CemigTelecom (‘CemigTelecom’ or ‘the Company), details of which are in the appendix to this document. This appointment will be ratified in an Extraordinary General Meeting of Stockholders of Cemig.

1. INFORMATION ABOUT THE EXPERTS

The accountants listed below were appointed as experts to carry out the valuation of the Net Equity of CemigTelecom, and have prepared this Valuation Report in accordance with the accounting practices adopted in Brazil, as defined in Item 7 of Accounting Pronouncement NBC TG 26 – Presentation of Accounting Statements:

 

    Flávio de Almeida Araújo, accountant, enrolled with the Minas Gerais State Regional Accounting Council (CRC/MG) under No. 86.861.

 

    Mr. Francisco do Couto, accountant, enrolled with the CRC/MG under No. 58.343.

 

    Mr. Leonardo George de Magalhães, accountant, enrolled with the CRC/MG under No. 53.140.

In compliance with CVM Instruction 319/99, as amended, the expert accountants represent that:

 

  (a) they have no direct or indirect interest in the Company or in the operations carried out by it.

 

  (b) they found no limitations imposed by the controlling stockholders or managers that might have hindered or jeopardized the access to, use or knowledge of information, goods and assets, documents or work methodologies necessary for construction of their conclusions.

The accounting inspection was carried out in accordance with NBC T 13, and comprised:

 

  (a) Planning of the work;

 

  (b) Application of the necessary procedures due to the circumstances;

 

  (c) Issuance of the expert valuation report on the stockholders’ equity to be transferred to the surviving company.

2. GENERAL INFORMATION ON THE COMPANY BEING VALUED, SUBJECT OF THE MERGER

Cemig Telecomunicações S.A. is a listed corporation and a wholly-owned subsidiary of Companhia Energética de Minas Gerais S.A. – Cemig. It offers optical network for services of carriage of telecommunications in the State of Minas Gerais, using the electricity transmission and distribution infrastructure of Cemig.

 

         

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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CemigTelecom was incorporated on January 13, 1999, with the following purposes: to provide telecommunication services, through an integrated system consisting of fiber optic cables, coaxial cables, and electronic and related equipment for transmission, emission and reception of symbols, characters, signals, written material, images, sound and information of any type, and to operate telecommunications systems as an alternative provider of carriage of signal and other services to companies holding concession, permission or authorization to provide telecommunications services.

3. PURPOSE OF THE VALUATION; BASE DATE

The objective of the valuation of the net equity of CemigTelecom, at book value, on the base date of November 30, 2017, is the merger of its total net assets and liabilities into its parent company Cemig, in accordance with Articles 226 and 227 of Law 6404/76.

4. SCOPE OF THE WORK

To ensure accuracy of the accounting values of the asset and liability elements that comprise the balance sheet of CemigTelecom on November 30, 2017, we adopted the following procedures:    

 

  Ø Reading of the Financial Statements at December 31, 2016.

 

  Ø Reading of the Report by the Independent Auditor, Deloitte Touche Tohmatsu Auditores Independentes, issued on April 6, 2017 on the Financial Statements, without qualification in relation to the Balance Sheet of December 31, 2016.

 

  Ø Interim Accounting Statements of September 30, 2017, accompanied by the Report of the external auditor, Ernst & Young Auditores Independentes, issued on November 10, 2017 on the review of the quarterly information, without qualification.

 

  Ø Analytical review of the movement of balances of assets and liabilities in the period between September 30, 2017 and November 30, 2017.

On September 30, 2017 the accounting records of CemigTelecom were in compliance with the pertinent legal formalities and are written in accordance with accounting practices adopted in Brazil.

The experts used historic information and data audited by third parties and data supplied by the management of CemigTelecom, via email or through its website. We, thus, assume that the data and information obtained for this Opinion is true.

This Report was prepared for use solely and exclusively by Cemig, for the purpose mentioned in Item 3.

5. PRESENTATION OF THE BALANCE SHEET

The Balance Sheet of November 30, 2017 was prepared in accordance with accounting practices adopted in Brazil. The experts verified that the assets and liabilities of CemigTelecom are properly accounted in accordance with the Plan of Accounts of the Telecommunications Sector.

 

         

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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6. COMPOSITION OF NET ASSETS AND LIABILITIES

6.1. Accounting Valuation and base date:

The components of net equity of CemigTelecom on November 30, 2017 are represented, in summary, by the following account lines:

 

ASSETS

   In Reais (R$)  

Current and non-current assets

     363,453,288.20  

LIABILITIES

  

Current and non-current liabilities

     117,691,874.84  

TOTAL OF STOCKHOLDERS’ EQUITY

     245,761,413.36  

6.2. Net equity at market price

Since both the companies involved in the transaction, are listed companies, valuation at market price or any other economic-financial valuation technique is not justified, as specified by Article 264 of Law 6404/76, since this is a case of merger of a wholly-owned subsidiary into its parent company, and there is no determination of an exchange ratio that could be the subject to comparison and/or right to withdraw by dissenting shareholders. In other words, there will be no change in the net equity of Cemig, and consequently, no issuance of new shares, for which reason valuation at market price is not applicable.

6.3. Treatment of subsequent variations in the value of equity

Under Article 224, Sub-item III of Law 6404/76, the variations in equity that take place between the base date of this Opinion and the date of the merger of CemigTelecom into Cemig will be appropriated directly by Cemig, and at the time of the actual merger, the balances of existing account lines in the analytical interim balance sheet of CemigTelecom will be reflected, line by line, into Cemig’s balance sheet.

7. CONCLUSION

As a result of the procedures and analyses effected, we conclude that the value of the stockholders’ equity of CemigTelecom, on November 30, 2017 is R$ 245,761,413.36 (two hundred forty five million seven hundred sixty one thousand four hundred thirteen Reais and thirty six centavos).

Expert accountant:              Flávio de Almeida Araújo

Expert accountant:              Francisco do Couto

Expert accountant:              Leonardo George de Magalhães

 

         

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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APPENDIX I – BALANCE SHEET AT NOVEMBER 30, 2017

 

LOGO

 

 

    

LOGO

 

 

CEMIG TELECOMUNICAÇÕES S.A. - CEMIGTELECOM

BALANCE SHEET ON NOVEMBER 30, 2017 AND DECEMBER 31, 2016

(In reais)

          

CEMIG TELECOMUNICAÇÕES S.A. - CEMIGTELEC

BALANCE SHEET ON NOVEMBER 30, 2017 AND DECEMBER 31, 2016

(In reais)

 
                
    Nov. 30, 2017     Dec. 31, 2016     % change                Nov. 30, 2017     Dec. 31, 2016     % change  
    30/11/2017     31/12/2016     AH%                30/11/2017     31/12/2016     AH%  

ASSETS

          

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

CURRENT

           CURRENT:      

Cash and cash equivalents

    12.806.068       1.033.959       1138,5%       

Loans and debentures

    13.132.426       63.751.660       -79,4%  

Securities

    524.834       1.855.029       -71,7%       

Suppliers

    18.778.123       21.750.011       -13,7%  

Accounts receivable from clients

    20.832.186       19.552.443       6,5%       

Tax obligations

    10.597.094       9.572.512       10,7%  

Taxes recoverable

    4.148.829       3.683.818       12,6%       

Salary-related charges

    3.199.241       4.862.624       -34,2%  

Advances

    1.677.037       898.825       86,6%       

Advances from clients

    459.764       459.764       0,0%  

Prepaid expenses

    37.559       33.931       10,7%       

Other

    571.122       973.002       -41,3%  
 

 

 

   

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

Total, current

    40.026.512       27.058.004       47,9%        Total, current     46.737.770       101.369.573       -53,9%  
 

 

 

   

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

NON-CURRENT:

           NON-CURRENT:      

Long term assets

          

Loans and debentures

    55.109.273       37.620.519       46,5%  

Securities held to maturity

    203.143       83.248       144,0%       

Provisions for contingencies

    56.714       82.858       -31,6%  

Accounts receivable from clients

    11.602.136       11.875.973       -2,3%       

Advances from clients

    4.227.688       4.663.107       -9,3%  

Taxes recoverable

    3.184.911       2.997.422       6,3%       

Tax obligations

    1.907.021       2.465.572       -22,7%  

Deferred income tax and Social Contribution

    6.345.656       8.037.818       -21,1%       

Salary-related charges

    3.279.115       2.800.761       17,1%  

Other

    239.113       906.930       -73,6%       

Ativas

    6.374.295       3.409.654       86,9%  
            

 

 

   

 

 

   

 

 

 

Financial assets

    4.483.565       4.586.470       -2,2%        Total, Non-current     70.954.105       51.042.472       39,0%  
            

 

 

   

 

 

   

 

 

 

Investments

    17.598.105       19.744.312       -10,9%             

Net PP&E

    270.145.535       261.612.715       3,3%        STOCKHOLDERS’ EQUITY:      

Intangible

    9.624.612       9.489.877       1,4%       

Share capital

    292.399.303       241.741.866       21,0%  
          

Equity valuation adjustments

    (755.826     (755.826     0,0%  
          

Retained losses

    (45.882.064     (47.005.316     -2,4%  
            

 

 

   

 

 

   

 

 

 
           Total stockholders’ equity     245.761.413       193.980.724       26,7%  
 

 

 

   

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

TOTAL ASSETS

    363.453.288       346.392.769       4,9%        TOTAL LIABILITIES     363.453.288       346.392.769       4,9%  
 

 

 

   

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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Nov. 30, 2017    Dec. 31, 2016 % change

 

Cemig Telecomunicações S.A. – CemigTelecom

 

  

Cemig Telecomunicações S.A. – CemigTelecom

 

BALANCE SHEETS ON NOVEMBER 30, 2017 AND DECEMBER 31, 2016

 

(In Reais—R$)

 

  

BALANCE SHEETS ON NOVEMBER 30, 2017 AND DECEMBER 31, 2016

 

(In Reais—R$)

 

ASSETS   

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

CURRENT    CURRENT:

Cash and cash equivalents

  

Loans and debentures

Securities

  

Suppliers

Accounts receivable from clients

  

Tax obligations

Taxes recoverable

  

Salary-related charges

Advances

  

Advances from clients

Prepaid expenses

  

Other

Total, current   

Total, current

 

NON-CURRENT:   

NON-CURRENT:

 

Long term assets   

Loans and debentures

Securities held to maturity

  

Provisions for contingencies

Accounts receivable from clients

  

Advances from clients

Taxes recoverable

  

Tax obligations

Deferred income tax and Social Contribution

  

Salary-related charges

Other

  

Ativas

Financial assets    Total, Non-current
Investments   
Net PP&E    STOCKHOLDERS’ EQUITY:
Intangible   

Share capital

  

Equity valuation adjustments

TOTAL ASSETS

  

Retained losses

  

Total stockholders’ equity

 

   TOTAL LIABILITIES

 

 

         

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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Appendix VI

 

 

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LOGO

 

Companhia Energética de

Minas Gerais –

CEMIG

Financial Statements as of December 31, 2016 and December

31,2015 and for the Years Ended December 31, 2016, 2015 and

2014 and Report of Independent Registered Public Accounting

Firm

 

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LOGO

 

CONTENTS

 

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

     44  

CONSOLIDATED STATEMENTS OF INCOME

     46  

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

     47  

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

     48  

CONSOLIDATED STATEMENTS OF CASH FLOW

     50  

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

     52  
1.  

OPERATING CONTEXT

     52  
2.  

BASIS OF PREPARATION

     61  
3.  

PRINCIPLES OF CONSOLIDATION

     72  
4.  

CONCESSIONS AND AUTHORIZATIONS

     74  
5.  

OPERATING SEGMENTS

     85  
6.  

CASH AND CASH EQUIVALENTS

     89  
7.  

SECURITIES

     89  
8.  

CONSUMERS, TRADERS AND POWER TRANSPORT CONCESSION HOLDERS

     90  
9.  

RECOVERABLE TAXES

     91  
10.  

INCOME AND SOCIAL CONTRIBUTION TAXES

     91  
11.  

RESTRICTED CASH

     94  
12.  

ESCROW DEPOSITS

     94  
13.  

ENERGY DEVELOPMENT ACCOUNT (CDE)

     95  
14.  

FINANCIAL ASSETS AND LIABILITIES OF THE CONCESSION

     96  
15.  

INVESTMENTS

     103  
16.  

PROPERTY, PLANT AND EQUIPMENT

     125  
17.  

INTANGIBLE ASSETS

     127  
18.  

SUPPLIERS

     129  
19.  

TAXES, INCOME TAX AND SOCIAL CONTRIBUTION TAX

     130  
20.  

LOANS, FINANCINGS AND DEBENTURES

     131  
21.  

REGULATORY CHARGES

     136  
22.  

POST-RETIREMENT LIABILITIES

     137  
23.  

PROVISIONS

     142  
24.  

EQUITY AND REMUNERATION TO SHAREHOLDERS

     150  
25.  

REVENUE

     155  
26.  

OPERATING COSTS AND EXPENSES

     159  
27.  

FINANCIAL REVENUES AND EXPENSES

     162  
28.  

RELATED PARTY TRANSACTIONS

     163  
29.  

FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

     166  
30.  

MEASUREMENT AT FAIR VALUE

     173  
31.  

INSURANCE

     175  
32.  

COMMITMENTS

     176  
33.  

NON-CASH TRANSACTIONS

     176  
34.  

SUBSEQUENT EVENTS

     176  

 

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LOGO

 

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

AS OF DECEMBER 31, 2016 AND 2015

ASSETS

(MILLIONS OF BRAZILIAN REAIS—R$ mn)

 

     Note      2016      2015  

Current

        

Cash and cash equivalents

     6        995        925  

Securities

     7        1,014        2,427  

Consumers and traders and

Concession holders – Transport of electricity

     8        3,425        3,765  

Financial assets of the concession

     14        730        874  

Recoverable taxes

     9        236        175  

Income and social contribution tax credits

     10a        590        306  

Dividends receivable

        11        62  

Restricted cash

     11        367        —    

Inventories

        49        37  

Advance to suppliers

     28        1        87  

Energy Development Account (CDE)

     13        64        72  

Low-income subscriber subsidy

        36        31  

Receivable from Eletrobras – RGR

     21        48        —    

Receivable from Eletrobras – CDE

        90        —    

Other

        630        616  
     

 

 

    

 

 

 

TOTAL, CURRENT

        8,286        9,377  
        

NON-CURRENT

        

Securities

     7        31        84  

Advance to suppliers

     28        229        60  

Consumers and traders and Concession holders – Transport of electricity

     8        146        133  

Recoverable taxes

     9        178        258  

Income and social contribution taxes recoverable

     10a        112        206  

Deferred income and social contribution taxes

     10b        1,797        1,498  

Escrow deposits

     12        1,887        1,813  

Other credits

        1,051        808  

Financial assets of the concession

     14        4,971        2,660  

Investments – Equity method

     15        8,753        9,745  

Property, plant and equipment

     16        3,775        3,940  

Intangible assets

     17        10,820        10,275  
     

 

 

    

 

 

 

TOTAL, NON-CURRENT

        33,750        31,480  
     

 

 

    

 

 

 

TOTAL ASSETS

        42,036        40,857  
     

 

 

    

 

 

 

The Notes are an integral part of these Consolidated Financial Statements.

 

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LOGO

 

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

AS OF DECEMBER 31, 2016 AND 2015

LIABILITIES

(MILLIONS OF BRAZILIAN REAIS—R$ mn)

 

     Note      2016     2015  

CURRENT

       

Suppliers

     18        1,940       1,901  

Regulatory charges

     21        381       517  

Profit sharing

        18       114  

Taxes payable

     19a        794       740  

Income and Social Contribution tax

     19b        27       11  

Interest on equity and dividends payable

     24        467       1,307  

Loans, financings and debentures

     20        4,837       6,300  

Payroll and related charges

        225       221  

Post-retirement liabilities

     22        199       167  

Concessions payable

        3       3  

Financial liabilities of the concession

     14        482       —    

Financial Instruments—put options

     15        1,150       1,245  

Advance sales of power supply

     8        181       —    

Other obligations

        743       548  
     

 

 

   

 

 

 

TOTAL, CURRENT

        11,447       13,074  
       

NON-CURRENT

       

Regulatory charges

     21        455       226  

Loans, financings and debentures

     20        10,342       8,867  

Taxes payable

     19a        724       740  

Deferred income and social contribution tax

     10b        582       689  

Provisions

     23        815       755  

Post-retirement liabilities

     22        4,043       3,086  

Concessions payable

        19       19  

Financial liabilities of the concession

     14        323       —    

Financial Instruments—put options

     15        192       148  

Other obligations

        160       265  
     

 

 

   

 

 

 

TOTAL, NON-CURRENT

        17,655       14,795  
     

 

 

   

 

 

 

TOTAL LIABILITIES

        29,102       27,869  
     

 

 

   

 

 

 
       

EQUITY

     24       

Share capital

        6,294       6,294  

Capital reserves

        1,925       1,925  

Profit reserves

        5,200       4,663  

Accumulated Other Comprehensive Income

        (489     102
     

 

 

   

 

 

 

EQUITY ATTRIBUTABLE TO THE CONTROLLING SHAREHOLDERS

        12,930       12,984  
     

 

 

   

 

 

 

EQUITY ATTRIBUTABLE TO NON-CONTROLLING SHAREHOLDER

        4       4  
     

 

 

   

 

 

 

TOTAL EQUITY

        12,934       12,988  
     

 

 

   

 

 

 

TOTAL LIABILITIES AND EQUITY

        42,036       40,857  
     

 

 

   

 

 

 

The Notes are an integral part of these Consolidated Financial Statements.

 

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LOGO

 

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(MILLIONS OF BRAZILIAN REAIS—R$ mn)

(except Net income per share)

 

     Note      2016     2015
Restated
    2014
Restated
 

NET REVENUE

     25        18,773       21,868       19,595  
         

OPERATING COSTS

         

COST OF ELECTRICITY AND GAS

     26         

Electricity purchased for resale

        (8,273     (9,542     (7,428

Charges for the use of the national grid

        (947     (999     (744

Gas purchased for resale

        (878     (1,051     (254
     

 

 

   

 

 

   

 

 

 
        (10,098     (11,592     (8,426

OTHER COSTS

     26         

Personnel and managers

        (1,348     (1,143     (999

Materials

        (41     (126     (340

Outsourced services

        (720     (740     (736

Depreciation and amortization

        (802     (811     (779

Operating provisions

        (171     (23     (262

Infrastructure construction cost

        (1,193     (1,252     (942

Other

        (57     (96     (318
     

 

 

   

 

 

   

 

 

 
        (4,332     (4,191     (4,376
         

TOTAL COST

        (14,430     (15,783     (12,802
         

GROSS PROFIT

        4,343       6,085       6,793  
         

OPERATING EXPENSES

     26         

Selling expenses

        (382     (175     (128

General and administrative expenses

        (667     (674     (654

Operating provisions

        (5     (1,203     (190

Other operating expenses

        (420     (452     (674
     

 

 

   

 

 

   

 

 

 
        (1,474     (2,504     (1,646
         

Equity in earnings of unconsolidated investees, net

     15        (302     393       210  

Impairment of Investments

     15        (763     —         —    

Fair value gain (loss) on stockholding transaction

     15        —         729       —    

Gain on acquisition of control of investee

     15        —         —         281  
         

Income before Financial income (expenses) and taxes

        1,804       4,703       5,638  
         

Financial revenues

     27        1,041       863       535  

Financial expenses

     27        (2,478     (2,204     (1,694
     

 

 

   

 

 

   

 

 

 

Income before income tax and social contribution tax

        367       3,362       4,479  
         

Current income and social contribution taxes

     10c        (174     (881     (1,259

Deferred income and social contribution taxes

     10c        141       (12     (83
     

 

 

   

 

 

   

 

 

 

NET INCOME FOR THE YEAR

        334       2,469       3,137  
     

 

 

   

 

 

   

 

 

 
         

Total of net income for the year attributed to:

         

Controlling shareholders

        334       2,469       3,137  

Non-controlling shareholder

        —         —         —    
     

 

 

   

 

 

   

 

 

 
        334       2,469       3,137  
         

Basic income per preferred share – R$

     24        0.35       1.96       2.49  

Basic income per common share – R$

     24        0.10       1.96       2.49  

Diluted income per preferred share – R$

     24        0.32       1.96       2.49  

Diluted income per common share – R$

     24        0.07       1.96       2.49  

The Notes are an integral part of these Consolidated Financial Statements.

 

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LOGO

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(MILLIONS OF BRAZILIAN REAIS—R$ mn)

 

     2016     2015     2014  

NET INCOME FOR THE YEAR

     334       2,469       3,137  

OTHER COMPREHENSIVE INCOME

      

Items that will not be reclassified to profit or loss

      

Post retirement liabilities – remesurement of obligations of the defined benefit plans, net of taxes

     (515     (360     (44

Equity gain (loss) on Other comprehensive income in jointly-controlled entities

     4       (1     (7
  

 

 

   

 

 

   

 

 

 
     (511     (361     (51
      

Items that may be reclassified to profit or loss

      

Conversion adjustment of equity gain (loss) in other comprehensive income in subsidiary and jointly-controlled entity

     (3     54       10  

Recycling of conversion adjustments to the Income statement arising from sale of Transchile

     (39     —         —    
  

 

 

   

 

 

   

 

 

 
     (42     54       10  
      
  

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME FOR THE YEAR

     (219     2,162       3,096  
  

 

 

   

 

 

   

 

 

 
      

Total of comprehensive income for the year attributed to:

      

Controlling shareholders

     (219     2,162       3,096  

Non-controlling shareholder

     —         —         —    
  

 

 

   

 

 

   

 

 

 
     (219     2,162       3,096  
  

 

 

   

 

 

   

 

 

 

The Notes are an integral part of these Consolidated Financial Statements.

 

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LOGO

 

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(MILLIONS OF BRAZILIAN REAIS—R$ mn, except where otherwise indicated)

 

     Share
capital
     Capital
reserves
     Profit
reserves
    Accumulated
Other
Comprehensive
Income
    Retained
earnings
    Total
interest of
the
controlling
shareholders
    Total interest
of the
non-controlling
shareholder
     Total
equity
 

AS OF DECEMBER 31, 2013

     6,294        1,925        3,840       579       —         12,638       —          12,638  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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       —         —          —    

ATTRIBUTED TO INTEREST OF THE CONTROLLING SHAREHOLDERS

     6,294        1,925        2,594       468       —         11,281       —          11,281  

Non controlling shareholder

     —          —          —         —         —         —         4        4  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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       —         —          —    
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

ATTRIBUTED TO INTEREST OF THE CONTROLLING SHAREHOLDERS

     6,294        1,925        4,663       102       —         12,984       —          12,984  

Non-controlling shareholder

     —          —          —         —         —         —         4        4  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

AS OF DECEMBER 31, 2015

     6,294        1,925        4,663       102       —         12,984       4        12,988  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

48


Table of Contents

LOGO

 

 

     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, 2015

     6,294        1,925        4,663       102       —         12,984       4        12,988  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net income for the year

     —          —          —         —         334       334       —          334  

Other comprehensive income

                   

Post retirement liabilities – remesurement of obligations of the defined benefit plans, net of taxes

     —          —          —         (515     —         (515     —          (515

Equity gain on Other comprehensive income in subsidiary and jointly-controlled entity

     —          —          —         (39     —         (39     —          (39

Total comprehensive income for the year

     —          —          —         (554     334       (220     —          (220
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Other changes in equity:

                   

Reserve for mandatory dividends not distributed

     —          —          623       —         —         623       —          623  

Dividends under by-laws (R$ 0.16 per share )

     —          —          127       —         (204     (77     —          (77

Interest on equity (R$ 0.30 per share )

     —          —          (380     —         —         (380     —          (380

Constitution of reserves

                   

Tax incentive reserves

     —          —          7       —         (7     —         —          —    

Retained earnings reserve

     —          —          160       —         (160     —         —          —    

Equity valuation adjustments – deemed cost of PP&E

     —          —          —         (37     37       —         —          —    
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

ATTRIBUTED TO INTEREST OF THE CONTROLLING SHAREHOLDERS

     6,294        1,925        5,200       (489     —         12,930       —          12,930  

Non-controlling shareholder

     —          —          —         —         —         —         4        4  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

AS OF DECEMBER 31, 2016

     6,294        1,925        5,200       (489     —         12,930       4        12,934  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

The Notes are an integral part of these Consolidated Financial Statements.

 

49


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LOGO

 

CONSOLIDATED STATEMENTS OF CASH FLOW

FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(MILLIONS OF BRAZILIAN REAIS—R$ mn)

 

     2016     2015     2014  

CASH FLOW FROM OPERATIONS

      

Net income for the year

     334       2,469       3,137  

Expenses (revenues) not affecting cash and cash equivalents

      

Income and social contribution taxes

     33       893       1,342  

Depreciation and amortization

     834       835       801  

Write-offs of PP&E, Intangible assets and Investments

     109       124       105  

Gain on disposal of investments

     (315     —         —    

Impairment of Investments

     763       —         —    

Equity in earnings (losses) of unconsolidated investees, net

     302       (393     (210

Interest and monetary variation

     808       818       1,384  

Fair value gain (loss) on stockholding transaction

     —         (729     —    

Provisions for operating losses

     704       1,401       581  

Net gain on indemnity of assets

     —         —         (420

Financial assets —CVA

     1,455       (1,704     (1,107

Gain on acquisition of subsidiary

     —         —         (281

Post-retirement liabilities

     447       285       311  
  

 

 

   

 

 

   

 

 

 
     5,475       3,999       5,643  

(Increase) / decrease in assets

      

Consumers and traders

     (64     (1,470     (285

Financial assets —CVA

     341       1,529       —    

Energy Development Account (CDE)

     8       273       (170

Recoverable Taxes

     19       167       320  

Income and social contribution tax credit

     (62     (77     (37

Transport of electricity

     8       (5     (5

Escrow deposits

     (28     (67     (305

Dividends received from investments

     683       487       683  

Financial assets

     (1,941     10       6  

Advance to suppliers

     (120     (131     —    

Gas

     (193     (141     (265

Other

     105       (248     74  
  

 

 

   

 

 

   

 

 

 
     (1,244     327       16  

Increase (decrease) in liabilities

      

Suppliers

     38       297       472  

Taxes payable

     38       202       54  

Income and social contribution taxes payable

     24       (105     (22

Payroll and related charges

     4       26       4  

Regulatory charges

     92       386       11  

Post-retirement liabilities

     (239     (208     (195

Financial instruments – Put options

     (150     —         —    

Other

     (167     156       (160
  

 

 

   

 

 

   

 

 

 
     (360     754       164  
  

 

 

   

 

 

   

 

 

 
      

Cash generated by operating activities

     3,871       5,080       5,823  

Interest paid on loans and financings

     (2,369     (1,331     (781

Income and Social Contribution taxes paid

     (289     (741     (1,308
  

 

 

   

 

 

   

 

 

 

NET CASH GENERATED BY OPERATING ACTIVITIES

     1,213       3,008       3,734  
  

 

 

   

 

 

   

 

 

 

 

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     2016     2015     2014  

CASH FLOWS FROM INVESTMENT ACTIVITIES

      

Marketable securities

     1,400       (1,499     116  

Financial assets

     —         (145     (80

Restricted cash

     (367     1       1  
      

Investments

      

Acquisition of equity investees

     —         (310     (2,405

Disposal of Investments

     949       —         —    

Acquisition of subsidiary – Gasmig

     —         —         (465

Capital increase in investees

     (1,455     (181     (546

PP&E

     (120     (126     (122

Intangible assets

     (1,021     (957     (798
  

 

 

   

 

 

   

 

 

 

NET CASH USED IN INVESTMENT ACTIVITIES

     (614     (3,217     (4,299
  

 

 

   

 

 

   

 

 

 
      

CASH FLOW IN FINANCING ACTIVITIES

      

Loans, financings and debentures

     5,737       5,739       4,562  

Payment of loans financings and debentures

     (5,591     (4,696     (1,394

Interest on equity and dividends

     (675     (796     (3,918
  

 

 

   

 

 

   

 

 

 

NET CASH FROM (USED IN) FINANCIAL ACTIVITIES

     (529     247       (750
  

 

 

   

 

 

   

 

 

 
      

NET CHANGE IN CASH AND CASH EQUIVALENTS

     70       38       (1,315
  

 

 

   

 

 

   

 

 

 
      

STATEMENT OF CHANGES IN CASH AND CASH EQUIVALENTS

      

Beginning of the year

     925       887       2,202  

End of the year

     995       925       887  
  

 

 

   

 

 

   

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

     70       38       (1,315
  

 

 

   

 

 

   

 

 

 

The Notes are an integral part of these Consolidated Financial Statements.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2016 AND 2015 AND FOR THE YEARS ENDED ON DECEMBER 31, 2016, 2015 AND 2014

(In Millions of Brazilian Reais—R$ mn—except where otherwise indicated)

 

1. OPERATING CONTEXT

Companhia Energética de Minas Gerais (‘Cemig’, also herein ‘the Company’, ‘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 on the BM&F Bovespa (‘Bovespa’) at Corporate Governance Level 1; on the New York Stock Exchange (‘NYSE’); and on the stock exchange of Madrid (‘Latibex’). It is domiciled in Brazil, with head office at Avenida Barbacena 1200, Belo Horizonte, capital of the state of Minas Gerais. It operates exclusively as a holding company, with interests in subsidiaries or jointly controlled entities, which are engaged in the activities of the construction and operation of systems for generation, transformation, transmission, distribution and sale of electricity, and also activities in the various fields of energy, for the purpose of commercial operation.

In order to finance the capital expenditures needed to meet long-term growth objectives, CEMIG have incurred a substantial amount of debt. As of December 31, 2016, the CEMIG’s Current Liabilities exceeded Current Assets by R$3,162. As of December 31, 2016, the CEMIG total short-term and long-term loans, financing and debentures are R$4,837 and R$10,342, maturing in the first, second, third and fourth quarters of 2017, in the amounts of R$783, R$1,017, R$579 and R$2,458, respectively. Those CEMIG had positive operating cash flows in the amounts of R$1,213, R$3,007 and R$3,733 in 2016, 2015 and 2014, respectively.

CEMIG H’s substantial debt could adversely affect the business, financial condition, and results of operations. Specifically, CEMIG is subject to certain restrictions on its ability to raise funds from third parties, which might prevent it from entering into new contracts for financing of its operations, or for the re-financing of its existing obligations, including the following:

 

  The by-laws of CEMIG express the obligation for the consolidated figures of the group to maintain certain financial indicators, related to factors including debt and Capital Expenditures, within certain limits, and this could affect its operational flexibility. In the years 2015 and 2016, certain limits and financial ratios specified in the bylaws of CEMIG were exceeded, under approval by the General Meeting of Stockholders. CEMIG has obtained its stockholders to exceed these limits and financial ratios applicable for 2017.

 

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  In relation to loans from outside parties: (i) as a state-controlled company, CEMIG is subject to rules and limits relating to the level of credit applicable to the public sector, including rules established by the National Monetary Council (Conselho Monetário Nacional, or CMN), and by the Brazilian Central Bank; (ii) CEMIG operates in the electricity sector, it is subject to the rules and limits established by Aneel which deal with indebtedness for companies of the electricity sector and (iii) state-controlled companies may use funds arising from transactions with commercial banks only for refinancing of financial obligations, or in transactions guaranteed by duplicate trade bills.

 

  The National Treasury Department (part of the Finance Ministry) and by the Central Bank would need to approve certain international financial transactions; this approval is usually given only if the purpose of the transaction is to finance importation of goods or to roll over external debt. These rules have the effect of placing limits on the CEMIG H’s capacity for indebtedness.

 

  CEMIG is subject to certain contractual conditions under existing debt instruments. In the event of non-compliance with an obligation under that financing contract, the CEMIG will be required to strengthen the guarantees for the financing, on penalty of early maturity of the contract. Any default event in our financial instruments might lead creditors to cause all the amounts relating to that debt to become payable immediately. Acceleration of debts might cause significant negative effects on the CEMIG H’s financial situation, and might also cause activation of cross-default clauses in other financial instruments. In the event of a default, CEMIG H’s cash flow might be insufficient to completely settle the debts, or to comply with the servicing of such debts.

 

  The credit risk rating agencies attribute a rating to Brazil, the Company and its debt securities on a Brazilian basis, and also a rating for the Company on the global basis. If ratings are downgraded due to any external factor, operational performance or high levels of debt, it may increase the cost of capital.

In order to amortize scheduled debt maturities, CEMIG will need to raise significant amounts of debt capital from a broad range of funding sources. To service CEMIG debt after meeting our capital expenditure targets, CEMIG have relied upon, and may continue to rely upon, a combination of cash flows provided by our operations, drawdowns under our available credit facilities, our cash and short-term financial investments balance and the incurrence of additional indebtedness.

CEMIG has several initiatives designed to increase liquidity through entering into new contracts for financing or for the re-financing of its existing obligations and potential divestitures of non-core assets. In 2016, CEMIG introduced a divestment program that contemplates the sale of assets for the period of 2017–2018, with the goal of improving our short-term liquidity position by increasing our cash balance and reducing indebtedness.

 

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Although the CEMIG is significantly leveraged, it expects that the current cash balances, liquidity from its revolving credit facility, cash generated from the initiatives described above, and from operations should be sufficient to meet working capital, capital expenditure, debt service, and other cash needs for the next year. Management believes that they will be successful in their plans.

If, for any reason, CEMIG are faced with continued difficulties in accessing debt financing, this could hamper our ability to make capital expenditures in the amounts needed to maintain our current level of investments or our long-term targets and could impair our ability to timely meet our 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. A reduction in our capital expenditure program or the sale of assets could significantly affect our results of operations.

Cemig has interests in the following subsidiaries, jointly-controlled entities and affiliated company (information in MW has not been audited by the external auditors):

Cemig Geração e Transmissão S.A. (‘Cemig GT’) is Cemig’s wholly-owned subsidiary operating in generation and transmission. It is listed, in Brazil, but not traded. Cemig GT has interests in 60 power plants, of which 56 are hydroelectric, 3 are wind power plants and one is a thermal plant, and associated transmission lines, most of which are part of the Brazilian national generation and transmission grid system. Cemig GT has interests in the following jointly-controlled entities and affiliated company:

Jointly-controlled entities and affiliated company:

 

  - Hidrelétrica Cachoeirão S.A. (‘Cachoeirão’) (Jointly controlled): Production and sale of electricity as an independent power producer, through the Cachoeirão 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.

 

  - Central Eólica Praias de Parajuru S.A. (‘Parajuru’) (Jointly controlled): Production and sale of electricity from the Parajuru wind farm at Beberibe, in the State of Ceará, Northern Brazil.

 

  - Central Eólica Praias do Morgado S.A. (‘Morgado’) (Jointly controlled): Production and sale of electricity from the Morgado wind farm at Acaraú in Ceará, Northern Brazil.

 

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  - Central Eólica Volta do Rio S.A. (‘Volta do Rio’) (Jointly controlled): Production and sale of electricity from at the Volta do Rio wind farm also at Acaraú, in the State of Ceará, Northern Brazil.

 

  - Hidroelétrica Pipoca S.A. (‘Pipoca’) (Jointly controlled): Independent production of electricity, through construction and commercial operation of the Pipoca Small Hydro Plant (Pequena Central Hidrelétrica, or PCH), on the Manhuaçu River, in the counties of Caratinga and Ipanema, in the State of Minas Gerais.

 

  - Madeira Energia S.A. (‘Madeira’) (Affiliated): Construction and commercial operation, through its subsidiary Santo Antônio Energia S.A., of the Santo Antônio hydroelectric plant, in the basin of the Madeira River, in the State of Rondônia.

 

  - Lightger S.A. (Jointly controlled): Independent power production through building and commercial operation of the Paracambi 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): 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.

 

  - Retiro Baixo Energética S.A. (‘RBE’) (Jointly controlled): 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): A special-purpose company (SPC) created by Cemig GT (49.9% ownership) and Vale S.A. (50.1% ownership), for acquisition of an interest of 9% in Norte Energia S.A. (‘Nesa’), the company holding the concession for the Belo Monte Hydroelectric Plant, on the Xingu River, in the State of Pará. The first turbine of Belo Monte Plant started operating on April 20, 2016 and the second turbine began operating on July 16, 2016. There are more details on this in Note 15.

 

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  - Aliança Geração de Energia S.A. (‘Aliança’) (Jointly controlled): Unlisted corporation created by Cemig GT and Vale S.A. to become a platform for consolidation of generation assets held by the two parties in generation consortia, and investments in future 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, Aimorés and 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 and Cemig GT respectively hold 55% and 45% of the total capital.

 

  - Cemig Geração Três Marias S.A.: A corporation wholly owned by Cemig GT. Its objects are production and sale of electricity as public service concession holder, by commercial operation of the Três Marias Hydroelectric Plant, and sale and trading of electricity in the Free Market. It has installed capacity of 396 MW, and guaranteed offtake level (‘Assured energy’) of 239 MW average.

 

  - Cemig Geração Salto Grande S.A.: A corporation wholly owned by Cemig GT. Its objects are production and sale of electricity as public concession holder, by commercial operation of the Salto Grande Hydroelectric Plant, and trading in electricity in the Free Market. This company has installed generation capacity of 102 MW, and average offtake guarantee of 75 MW.

 

  - Cemig Geração Camargos S.A.: Corporation wholly owned by Cemig GT. Its objects are production and sale of electricity as public concession holder, by commercial operation of the Camargos Hydroelectric Plant, and trading in electricity in the Free Market. Has installed generation capacity of 46 MW, and average offtake guarantee of 21 MW.

 

  - Cemig Geração Itutinga S.A.: Corporation wholly owned by Cemig GT. Its objects are production and sale of electricity as public concession holder, by commercial operation of the Itutinga Hydroelectric Plant, and trading in electricity in the Free Market. Has installed generation capacity of 52 MW, and average offtake guarantee of 28 MW.

 

  - Cemig Geração Leste S.A.: Corporation wholly owned by Cemig GT. Its objects are production and sale of electricity as public concession holder, by operation of the Dona Rita, Sinceridade, Neblina, Ervália, Tronqueiras and Peti Small Hydroelectric Plants (PCHs), and trading in electricity in the Free Market. Installed generation capacity is 35.16 MW; average offtake guarantee is 18.64 MW.

 

  - Cemig Geração Oeste S.A.: Corporation wholly owned by Cemig GT. Its objects are production and sale of electricity as public concession holder, by commercial operation of the Gafanhoto, Cajuru and Martins Small Hydroelectric Plants, and trading in electricity in the Free Market. Installed generation capacity is 28.90 MW, and average offtake guarantee 11.21 MW.

 

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  - Cemig Geração Sul S.A.: Corporation wholly owned by Cemig GT. Its objects are production and sale of electricity as public concession holder, by commercial operation of the Coronel Domiciano, Marmelos, Joasal, Paciência and Piau Small Hydroelectric Plants and trading in electricity in the Free Market. Installed generation capacity is 39.53 MW; average offtake guarantee is 27.42 MW.

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): Dores de Guanhães, Senhora do Porto and Jacaré, in the county of Dores de Guanhães; and Fortuna II, in the county of Virginópolis, in Minas Gerais. Construction works are 97% completed, and start of commercial generation is scheduled for April 2017.

 

  - Cemig Baguari Energia S.A. (‘Cemig Baguari’) (Subsidiary) – Production and sale of electricity as an independent power producer in future projects.

 

  - Amazônia Energia Participações S.A. (‘Amazônia Energia’) (Jointly controlled) – Unlisted company whose object is to hold and manage equity interest 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. It is jointly controlled by Light S.A. (25.5%) and Cemig (74.5%). Amazônia Energia owns 9.77% of the share capital of Nesa. The first turbine of the Belo Monte Plant started operating on April 20, 2016 and the second turbine began operating on July 16, 2016. There are more details in Note 15.

Cemig Distribuição S.A. (‘Cemig D’ or ‘Cemig Distribution’) (Subsidiary): Wholly-owned subsidiary, listed but not traded; distributes electricity through networks and distribution lines to practically the whole of the Brazilian State of Minas Gerais.

Transmissora Aliança de Energia Elétrica S.A. (‘Taesa’) (Jointly controlled): Construction, operation and maintenance of electricity transmission facilities in 17 states of Brazil through direct and indirect equity interests in investees.

Light S.A. (‘Light’) (Jointly controlled): Holds direct or indirect interests in other companies and directly or indirectly operates electricity services, including generation, transmission, trading or distribution, and other related services. Light S.A. has the following subsidiaries and jointly-controlled entities:

 

  - Light Serviços de Eletricidade S.A. (‘Light Sesa’) (Subsidiary) – A listed company operating primarily in electricity distribution, in various municipalities of Rio de Janeiro State.

 

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  - Light Energia S.A. (Subsidiary) – Plans, builds and operate electricity generation, transmission and sales/trading systems and related services. Owns equity interests in two wind power companies – Central Eólica São Judas Tadeu Ltda. and Central Eólica Fontainha Ltda – and in Guanhães Energia S.A. and Renova Energia S.A.

 

  - Light Esco Prestação de Serviços Ltda. (‘Light Esco’) (Subsidiary) – Purchase, sale, importation and exportation of electricity and consultancy services in the electricity sector. Light Esco has an interest in EBL Companhia de Eficiência Energética S.A.

 

  - Itaocara Energia Ltda. (Subsidiary) – Company and pre-operational phase: principal activity will be construction and operation of generation plants. It is a member of the Itaocara Hydro Plant Consortium for commercial operation of the Itaocara Hydroelectric Plant (51%). Cemig GT owns 49%. There are more details in Note 14.

 

  - Lightger S.A. (Jointly controlled) – Described in the list of jointly controlled entities of Cemig GT, above.

 

  - Light Soluções em Eletricidade Ltda. (Subsidiary): Its main objects are provision of service to low-voltage clients including assembly, overhaul and maintenance of installations in general.

 

  - Instituto Light para o Desenvolvimento Urbano e Social (Light Institute) (Subsidiary): Participation in social and cultural projects, and interest in economic and social development of cities.

 

  - Lightcom Comercializadora de Energia S.A. (Subsidiary): Purchase, sale, importation and exportation of electricity, and general consultancy, in the free and regulated electricity markets.

 

  - Axxiom Soluções Tecnológicas S.A. (Jointly controlled): Unlisted company, providing technology and systems solutions for operational management of public service concession holders, including companies in electricity, gas, water, sewerage, and other utilities. Jointly owned by Light (51%) and Cemig (49%).

 

  - Amazônia Energia Participações S.A. (Jointly controlled) – Described in the list of equity interests of Cemig GT above.

 

  - Renova Energia S.A. (Jointly controlled) – Described in the list of equity interests of Cemig GT above.

 

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Sá Carvalho S.A. (Subsidiary): Production and sale of electricity, as a public electricity service concession holder, through the Sá Carvalho hydroelectric power plant.

Usina Térmica Ipatinga S.A. (‘Ipatinga’) (Subsidiary) – Currently without operational activity.

Companhia de Gás de Minas Gerais (‘Gasmig’) (Subsidiary): Acquisition, transport and distribution of combustible gas or sub-products and derivatives, through a concession for distribution of gas in the State of Minas Gerais.

Cemig Telecomunicações S.A. (‘CemigTelecom’ – previously named Empresa de Infovias S.A.)(Subsidiary): Provision and commercial operation of a specialized telecommunications service through an integrated multi-service network of fiber optic cables, coaxial cables, and electronic and associated equipment. CemigTelecom owns 19.6% of Ativas Data Center (‘Ativas’) (a jointly controlled entity), which operates primarily in supply of IT and communications infrastructure services, including physical hosting and related services for medium-sized and large corporations.

Efficientia S.A. (Subsidiary): Provides electricity efficiency and optimization services and energy solutions through studies and execution of projects; and services of operation and maintenance in energy supply facilities.

Horizontes Energia S.A. (Subsidiary): Production and sale of electricity, as an independent power producer, through the Machado Mineiro and Salto do Paraopeba hydroelectric power plants in the State of Minas Gerais, and the Salto do Voltão and Salto do Passo Velho hydro power plants in the State of Santa Catarina.

Cemig Comercializadora de Energia Incentivada S.A. (‘CCEI’ – previously named Central Termelétrica de Cogeração S.A.) (Subsidiary) – Production and sale of electricity as an independent power producer, in future projects.

Rosal Energia S.A. (Subsidiary): Production and sale of electricity, as a public electricity service concession holder, through the Rosal hydroelectric power plant located on the border between the States of Rio de Janeiro and Espírito Santo.

Empresa de Serviços e Comercialização de Energia Elétrica S.A. (‘ESCE’ – previously named Central Hidrelétrica Pai Joaquim S.A.) (Subsidiary): Production and sale of electricity as an independent power producer, in future projects.

Cemig PCH S.A. (Subsidiary): Production and sale of electricity as an independent power producer, through the Pai Joaquim hydroelectric power plant.

Cemig Capim Branco Energia S.A. (Capim Branco) (Subsidiary): Production and sale of electricity as an independent producer, through the Amador Aguiar I and Amador Aguiar II hydroelectric power plants, built through a consortium with private-sector partners. This company was merged with and into Cemig GT in 2015.

 

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UTE Barreiro S.A. (Subsidiary): Production and sale of thermally generated electricity, as an independent producer, through construction and operation of the UTE Barreiro thermal generation plant, located on the premises of V&M do Brasil S.A., in the State of Minas Gerais.

Cemig Trading S.A. (Subsidiary): Sale and intermediation of business transactions related to energy.

Companhia Transleste de Transmissão (Jointly controlled): Operation of the transmission line connecting the substation located in Montes Claros to the substation of the Irapé hydroelectric power plant.

Companhia Transudeste de Transmissão (Jointly controlled): Construction, operation and maintenance of national grid transmission facilities of the Itutinga–Juiz de Fora transmission line.

Companhia Transirapé de Transmissão (Jointly controlled): Construction, operation and maintenance of the Irapé–Araçuaí transmission line.

Axxiom Soluções Tecnológicas S.A. (Jointly controlled): Described in the investees of Light, above.

Transchile Charrúa Transmisión S.A. (Jointly controlled): Construction, operation and maintenance of the Charrúa-Nueva Temuco transmission line, and two sections of transmission line at the Charrúa and Nueva Temuco substations, in the central region of Chile. The head office of Transchile is in Santiago, Chile. In 2016 Cemig sold the whole of its interest in Transchile to Ferrovial Transco Chile SpA., a company controlled by Ferrovial S.A.

Companhia de Transmissão Centroeste de Minas (Jointly controlled): Construction, operation and maintenance of the Furnas-Pimenta transmission line – part of the national grid.

Participações em Ativos de Energia Elétrica (‘Parati’) (Jointly controlled): Holding company owning interests, through shares or share units, in other companies, Brazilian or foreign, in any business activity. Parati holds an equity interest of 26.03% in Light. Parati was closed down in 2016, following its reverse absorption by RME and Lepsa, with 50% Cemig ownership in each of these two companies.

Where Cemig exercises joint control it does so through shareholders’ agreements with the other shareholders of the investee company.

 

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2. BASIS OF PREPARATION

 

2.1 Statement of compliance

The Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) as issued by the International Accounting Standards Board (IASB).

Management certifies that all the material information in the financial statements, and only that information, is being presented, and that it corresponds to the information used by Management in its administration of the company.

On May 16, 2017, the Company’s Audit Board authorized filing of the Financial Statements for the year ended December 31, 2016.

 

2.2 Bases of measurement

The consolidated financial statements have been prepared based on historical cost, with the exception of the following material items recorded in the Statement of financial position:

 

  Non-derivative financial assets measured at fair value through profit or loss.

 

  Financial assets held for trading measured at fair value.

 

  Financial assets of the Concession measured by the New Replacement Value (VNR), equivalent to fair value.

 

2.3 Functional currency and currency of presentation

These consolidated financial statements are presented in Reais, which is the Company’s presentation and functional currency. All the financial information is presented in millions of Reais, except where otherwise indicated.

 

2.4 Use of estimates and judgments

The preparation of the consolidated financial statements, under IFRS, requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the amounts reported in assets, liabilities, revenues and expenses. Future reported results may differ from these estimates.

Estimates and assumptions are revised continually, using as a reference both historical experience and also any significant changes of scenario that could affect the equity situation of the company or its results in the applicable items. Revisions in relation to accounting estimates are recognized in the period in which the estimates are reviewed, and in any future periods affected.

 

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The principal estimates related to the financial statements refer to recording of effects arising from:

 

  Allowance for doubtful accounts – see Note 8;

 

  Deferred income and social contribution taxes – see Note 10;

 

  Financial assets of the concession – see Note 14;

 

  Investments – See Note 15.

 

  Property, plant and equipment – Note 16.

 

  Intangible assets – see Note 17;

 

  Depreciation – see Note 16;

 

  Amortization – see Note 17;

 

  Employee post-retirement liabilities – see Note 22;

 

  Provisions – see Note 23;

 

  Unbilled electricity supplied – see Note 25; and

 

  Fair value measurement and Derivatives instruments – see Note 30.

 

2.5 Rules, interpretations and changes that came into force on January 1, 2016

The following rules and changes of rules came into effect during 2016

The Changes to IFRS 7 provide additional orientations to clarify whether a service contract constitutes continuous involvement in an asset transferred, for the purposes of the necessary disclosures in relation to the transferred assets.

The changes to IAS 19 clarify that the rate used to discount obligations for post-retirement benefit should be determined based on AA corporate bond yields at the end of the reporting period.

The changes to IFRS 5 introduce specific orientations in relation to when an entity reclassifies an asset (or group of assets held for sale) from ‘held for sale’ to ‘held for distribution to holders’ (or vice-versa).

Changes to IAS 16 and IAS 38 – Clarification of the acceptable methods for depreciation and amortization.

Changes to IAS 1 – Disclosure Initiative – These offer orientations on application of the concept of materiality in practice.

Changes to IFRS 10, IFRS 12 and IAS 28 – Investment entities: Applying exception from consolidation – These clarify that exemption from preparing consolidated financial statements is applicable to a controlling entity that is the subsidiary of an investment entity, even if the investment entity values all its subsidiaries at fair value under IFRS 10.

 

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Changes to IFRS 11 – Joint Arrangements – provides instructions on accounting for the acquisition of a ‘business combination’ as defined by IFRS 3 – Business Combinations.

The application of these changes had no significant impact on the disclosures or the amounts recognized in the financial statements of Cemig.

 

2.6 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, 2017:

 

  Changes to IAS 12 – Recognition of deferred tax assets for non-realized losses.

 

  Disclosure Initiative (Changes to IAS 7) – Alters IAS 7 – Statement of Cash Flows, to clarify that entities should supply disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities. Applicable to annual periods starting on or after January 1, 2017

In effect for annual periods starting on or after January 1, 2018:

 

  Changes to IFRS 10 and IAS 28 – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture – Deals with situations that involve sale or contribution of assets between an investor and its associate or joint venture.

 

  IFRS 9 – Financial instruments – Establishes that all the financial assets recognized that are within the scope of IAS 39 must be subsequently measured at amortized cost or fair value. 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.

 

  IFRS 15 – Revenue from Contracts with Customers: Issued in May 2014, IFRS 15 established a simple and clear model for companies to use in accounting for revenue arising from contracts with clients. When it comes into effect, it will replace the present orientations on recognition of revenue contained in IAS 18 – Revenues, IAS 11 – Construction Contracts and the related interpretations.

In effect for annual periods starting on or after January 1, 2019:

 

  IFRS 16 – Leases – With this new rule, lessors will have to recognize the liability for future payments and the right to use of the leased asset for practically all leasing contracts, including those currently classified as operational leasing contracts.

 

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The Company is still evaluating the effects of application of these new rules, and changes to existing rules, on the amounts and disclosures presented in the financial statements.

 

2.7 Principal accounting policies

The accounting policies described in detail below have been applied consistently to all the periods presented in these consolidated financial statements, in accordance with the rules and regulations described in item 2.1 – Statement of compliance.

The accounting policies relating to the Company’s present operations that require judgment and the use of specific valuation criteria are the following:

 

  a) Financial instruments

Financial liabilities relating to put options – The options to sell units in FIP Melbourne and FIP Malbec (‘the SAAG Put’) and the options to sell shares in RME and Lepsa (‘the Parati PUT’) were valued at fair value using the Black-Scholes-Merton (BSM) method. Both the options were calculated using the discounted cash flow method: for the SAAG Put option, up to the third quarter of 2016; and for the Parati Put option, up to the first quarter of 2016. The method used was changed, in the fourth and second quarters, respectively, to the BSM model. The Company calculated the fair value of these options having as a reference their respective prices obtained by the BSM model, valued on the closing date of the financial statements for the 2016 business year.

Share capital: The rights to minimum dividends as established for the preferred shares are described in Note 24 to the financial statements.

Financial instruments available for sale: As from December 31, 2012, assets in this category include the financial assets of the transmission and distribution concession that were covered by Law 12783 (of January 11, 2013). They are measured at New Replacement Value (Valor Novo de Reposição, or VNR), equivalent to fair value on the date of these financial statements. The Company recognizes a financial asset resulting from a concession contract when it has an unconditional contractual right to receive cash or another financial asset from, or under the direction of, the Concession-granting power for the services of construction or improvement provided.

Loans and receivables – The category includes: Cash equivalents; Consumers and traders; Power transport concession holders; Financial assets of the concession not covered by Law 12783; the CVA Account (for compensation of changes in Portion A costs) and Other financial components of tariff adjustments; Escrow deposits; and Traders – ‘Free Energy’ transactions.

 

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Cash and cash equivalents includes: Balances of cash; Bank deposits; and cash investments with original maturity of three months or less from the date of contracting, which are subject to an insignificant risk of change in value. Cash and cash equivalents are maintained for the purpose of meeting cash commitments in the short term and not for investment or other purposes.

 

  b) Consumers and traders; Power transport concession holders; and Traders – transactions in ‘Free Energy’

Accounts receivable from Consumers and traders, and from power transport concession holders, are initially recorded at value, whether already invoiced or not, and measured by amortized cost. They include any direct taxes for which the company has the tax responsibility, less taxes withheld at source, which are considered to be tax credits.

The provision for doubtful receivables, for low and medium voltage consumers, is recorded based on estimates by Management, in an amount sufficient to cover probable losses. The principal criteria set by the company are: (i) For consumers with significant balances, the balance receivable is analyzed in the light of the history of the debt, negotiations in progress, and real guarantees. (ii) For other consumers, the following are provisioned: Debts from residential consumers more than 90 days past due; debts from commercial consumers more than 180 days past due; and debts more than 360 days past due from other consumers. These criteria are the same as those established by Aneel.

For large consumers an individual analysis is made of the debtors and of the actions in progress for receipt of the credits.

 

  c) Investments

The Company’s investments include the intangible concession assets identified on acquisitions, net of any accumulated losses by impairment.

 

  d) Assets linked to the concessions

Electricity distribution activity: The portion of the assets of the concession that will be totally amortized during the concession period is recorded as intangible and is completely amortized during the concession agreement period.

The amortization reflects the pattern of consumption of the rights acquired. It is calculated on the balance of the assets linked to the concession, by the straight-line method, based on the application of the rates set by Aneel for the electricity distribution activity.

The Company calculates the value of the assets which will not be fully amortized by the end of the concession agreement period, and reports this amount as a financial asset because it is an unconditional right to receive cash or other financial asset directly from the grantor.

Company has measured the parcel of the assets that will be completely amortized by the end of the concession, assuming extension of its concession agreement for a further 30 years, as described in more detail in Note 4.

New assets are recorded initially in Intangible assets, valued at acquisition cost, including capitalized borrowing costs. When the assets start operation they are split into financial assets and intangible assets, according to the criterion mentioned in the previous paragraphs: The portion of the assets that is recorded in financial assets is valued based on the new replacement cost, having as a reference the amounts homologated by Aneel for the Asset Base for Remuneration in the processes of tariff review.

When an asset is replaced, the net book value of the asset is written down as an expense in the Statement of income.

Transmission activity: For the new transmission concessions, granted after the year 2000, the costs related to construction of the infrastructure are recorded in the Statement of income as and when they are calculated, and a Construction Revenue is recorded based on the stage of conclusion of the assets, including the taxes applicable to the revenue and any profit margin.

 

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Since the transmission contracts determine that the concession holders have an unconditional right to receive cash or another financial asset directly from, or in the name of, the Concession-granting power, for the new transmission concessions the Company records a financial asset, during the period of construction of lines, the transmission revenue to be received during the whole period of the concession, at fair value.

Of the invoiced amounts of Permitted Annual Revenue (RAP), the portion relating to the fair value of the operation and maintenance of the assets is recorded as revenue in the Statement of income, and the portion relating to the construction revenue, originally recorded at the time of the formation of the assets, is used to recover the financial assets.

Additional expenditures incurred for purposes of capital expansion and improvements to the transmission assets generate additional cash flow, and hence this new cash flow is capitalized into the financial asset balance.

In counterpart to acceptance of the terms of renewal of the old transmission concessions, as described in more detail in Note 4, the greater part of the transmission assets of the old concessions will be the subject of indemnity by the Concession-granting power, having already been written off on December 31, 2012, and an item in Accounts receivable having been posted corresponding to the estimated indemnity to be received.

Gas distribution activity: The portion of the assets of the concession that will be amortized in full during the concession is recorded as an Intangible asset and fully amortized over the period of the concession contract.

The amortization is calculated on the balance of the assets linked to the concession by the straight line method, applying amortization rates that reflect the estimated useful life of the assets.

The Company calculates the value of the assets which will not be fully amortized by the end of the concession agreement period, and reports this amount as a financial asset, because it is an unconditional right to receive cash or other financial asset directly from the grantor.

New assets are recorded initially in Intangible assets, valued at acquisition cost, including capitalized borrowing costs. When they start operation they are divided into a financial asset and an intangible asset, in accordance with a criterion mentioned in the previous paragraphs. When an asset is replaced, the net book value of the asset is written down as an expense in the Statement of income.

 

  e) Intangible assets

Intangible assets comprise assets relating to: service concession contracts, and software. These are measured at total acquisition cost, less expenses of amortization.

Interest and other financing charges incurred on financings linked to works in progress are appropriated to Intangible assets in progress, and Consortia, during the period of construction.

For borrowings raised for the construction of a specific PP&E asset, the Company allocates all of the financial costs related to the borrowings directly to the respective assets being financed. For other borrowings raised that are not linked directly to a specific PP&E asset, a weighted average rate is established for the capitalization of the costs of those loans.

For intangible assets linked to the concession, the accounting practices described in the item ‘Assets linked to the concession’ above are applied.

 

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  f) Property, plant and equipment

Depreciation and amortization: These are calculated on the balance of property, plant and equipment in service and investments in consortia, on a straight-line basis, using the rates determined by Aneel for the assets related to electricity activities, which reflect the estimated useful life of the assets.

The depreciation rates applied to the Company’s property, plant and equipment assets are shown in Note 16 to the financial statements.

Assets not fully depreciated by the end of the concession will be reverted to the Concession-granting power and this non-depreciated portion will be indemnified.

Interest and other financing charges incurred on financings linked to works in progress are appropriated to PP&E assets in progress, and Consortia, during the period of construction.

For borrowings raised for the construction of a specific PP&E asset, the Company capitalizes all of the financial costs related to the borrowings directly to the respective assets being financed. For other borrowings raised that are not linked directly to a specific PP&E asset, a weighted average rate is established for the capitalization of the costs of those loans.

The residual value is the balance remaining of the asset at the end of the concession, thus, as established in a contract signed between the Company and the federal government, at the end of the concession the assets will be reverted to the federal government which, in turn, will indemnify the Company for those assets that have not yet been totally depreciated. In cases where there is no indemnity at the end of the concession, no residual value is recognized, and the depreciation rates are adjusted so that all the assets are depreciated within the concession period. See more details in Note 14.

 

  g) Impairment

In assessing impairment, the Company uses historic trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for 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.

 

  h) Benefits to employees

For the Company’s retirement benefit pension plan obligations, the liability recorded in the statement of financial position is the greater of: (a) the debt agreed upon with the foundation for amortization of the actuarial obligations, and (b) the present 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. In the business years presented, the expenses related to the debt agreed upon with the pension fund were registered in Financial revenue (expenses), because they represent interest and monetary updating. The other expenses on the pension fund were recorded as operational expenses.

Short-term benefits to employees: Employees’ profit shares specified in the Company’s by-laws are accrued for in accordance with the collective agreement established with the employee unions and recorded in Employees’ and managers’ profit shares in the Statement of income.

 

  i) Income and Social Contribution taxes

Deferred income tax and Social Contribution tax assets are reviewed at each financial position date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

 

  j) Operational revenue

In general, for the Company’s business in the electricity, gas, telecommunications and other sectors, revenues are recognized when there is persuasive evidence of agreements, when delivery of merchandise takes place or when the services are provided, the prices are fixed or determinable, and receipt is reasonably assured, independently of whether the money has actually been received.

 

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Revenues from sale of electricity are recorded based on the electricity delivered and the tariffs specified in the terms of the contract or in effect in the market. Revenues from retail supply of electricity to final consumers are recorded when the delivery has taken place. The billing is carried out monthly. Unbilled retail supply of electricity, from the period between the last billing and the end of each month, is estimated based on the billing from the previous month and is accrued for at the end of the month. The differences between the estimated amounts accrued and the actual revenues realized are recorded in the following month.

Revenue from the supply of electricity to the Brazilian grid system is recorded when the delivery has taken place and is invoiced to consumers on a monthly basis, in accordance with the payment schedules specified in the concession agreement.

For the older transmission concessions, granted before 2000, the fair value of the operation and maintenance of the transmission lines and the remuneration of the financial asset are recorded as revenue in the Statement of income for each period.

The services provided include charges for connection and other related services; the revenues are accounted when the services are provided.

The ‘Portion A’ revenue and the Other financial items related to tariff adjustments are recognized in the statement of income when the costs effectively incurred are different from those incorporated into the electricity distribution tariff. For more details, see Note 14.

The gain on adjustment of expectation of cash flow from the indemnifiable financial asset of the distribution concession arising from the variation in the fair value of the Remuneration Asset Base is presented as operational revenue, together with the other revenues related to the Company’s end-activity.

 

  k) Financial revenue and expenses

Financial revenue includes interest income on funds invested, fee income for consumer payments made late, interest income on financial assets of the concession, and interest income on other financial assets. Interest income is recognized in the Statement of income using the effective interest method.

Financial expenses include: interest expense on borrowings; and foreign exchange and monetary variation on borrowing cost of debt, financings and debentures. Interest expense on the Company’s borrowings that is not capitalized is recognized in the Statement of income using the effective interest method.

 

  l) Segment reporting

The operating results of all operating segments for which discrete financial information is available are reviewed regularly by the Company’s CEO, to make decisions about resources to be allocated to the segment, and to assess its performance.

Segment results that are reported to the CEO include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets (primarily the Company’s headquarters) and head office expenses.

Segment capital expenditure is the total cost incurred during the year to acquire: the Financial assets of the concession; Property, plant and equipment; and Intangible assets other than Goodwill.

 

  m) Determination of the adjustment to present value

The Company has applied adjustment to present value to certain concession contracts held for consideration, and also to the balance of debentures issued by the Company. Discount rates were used that are compatible with the cost of funding in transactions with the same maturity on the date of the transactions. These rates are: 12.50% for the small hydro plants and 5.10% for the conventional hydroelectric plants.

 

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2.8 Restatement of the Income Statement for the years ended December 31, 2015 and 2014

The Company, in order to more adequately present its financial and operational performance, concluded that the adjustment related to the expectation of cash flow from the indemnifiable financial asset of the distribution concession should be presented as an operating revenue, instead of financial revenue, under net financial revenue (expenses), as originally presented, in order to be presented together with the other revenues related to its core business. This classification results in a more adequate presentation of the energy distribution business performance and provides a better presentation of the company’s performance.

This conclusion is based in the following facts:

 

i. Investing in infrastructure is an inherent activity of the energy distribution business, which business model is supported by the construction, maintenance and operation of this infrastructure;

 

ii. Part of the energy distribution industry, as well as the energy transmission industry, already adopts this classification, hence the Company will be increasing the comparability of its financial statements with others;

 

iii. As a result of the inflation increase in the past years faced by the country, which directly impacted the increase in the financial asset of the concession, impacted the importance of this revenue in the income statement.

In accordance with the requirements of IAS 8—Accounting Policies, Changes in Accounting Estimates and Errors, the Company changed the accounting policy previously adopted to an accounting policy that better presents its business performance (as described in the above mentioned topics). Therefore, the corresponding figures in the financial statements relating to the consolidated income statement for the year ended December 31, 2015 and 2014, presented for purposes of comparison, were retrospectively reclassified and are being restated for purposes of comparison. The reclassification does not change the total consolidated assets, consolidated equity, net income, statements of comprehensive income and cash flow.

 

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The consolidated income statement for the year ended December 31, 2015, presented for purposes of comparison, is as follows:

 

     2015     Ajustment     2015
Restated
 

NET REVENUE

     21,292       576       21,868  

OPERATING COSTS

      

COST OF ELECTRICITY AND GAS

      

Electricity purchased for resale

     (9,542     —         (9,542

Charges for use of the national grid

     (999     —         (999

Gas bought for resale

     (1,051     —         (1,051
  

 

 

   

 

 

   

 

 

 
     (11,592     —         (11,592

OTHER COSTS

      

Personnel and managers

     (1,143     —         (1,143

Materials

     (126     —         (126

Outsourced services

     (740     —         (740

Depreciation and amortization

     (811     —         (811

Operating provisions

     (23     —         (23

Infrastructure construction cost

     (1,252     —         (1,252

Other

     (96     —         (96
  

 

 

   

 

 

   

 

 

 
     (4,191     —         (4,191

TOTAL COST

     (15,783     —         (15,783

GROSS PROFIT

     5,509       576       6,085  

OPERATING EXPENSES

      

Selling expenses

     (175     —         (175

General and administrative expenses

     (674     —         (674

Operating provisions

     (1,203     —         (1,203

Other operating expenses

     (482     30       (452
  

 

 

   

 

 

   

 

 

 
     (2,534     30       (2,504

Equity method gains in non-consolidated investees

     393       —         393  

Fair value results in Corporate Operation

     729       —         729  

Income before Financial income (expenses) and taxes

     4,097       606       4,703  

Financial revenues

     1,469       (606     863  

Financial expenses

     (2,204     —         (2,204
  

 

 

   

 

 

   

 

 

 

Income before income tax and social contribution tax

     3,362       —         3,362  

Current income tax and Social Contribution tax

     (881     —         (881

Deferred income tax and Social Contribution tax

     (12     —         (12
  

 

 

   

 

 

   

 

 

 

NET INCOME FOR THE YEAR

     2,469       —         2,469  
  

 

 

   

 

 

   

 

 

 

Total of net income for the year attributed to:

      

Interest of the controlling shareholders

     2,469       —         2,469  

Interest of non-controlling shareholder

     —         —         —    
  

 

 

   

 

 

   

 

 

 
     2,469                2,469  
  

 

 

   

 

 

   

 

 

 

Basic and diluted income per preferred share

     1.96       —         1.96  

Basic and diluted income per common share

     1.96       —         1.96  

 

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The consolidated income statement for the year ended December 31, 2014, presented for purposes of comparison, is as follows:

 

     2014     Ajustment     2014
Restated
 

NET REVENUE

     19,540       55       19,595  

OPERATING COSTS

      

COST OF ELECTRICITY AND GAS

      

Electricity purchased for resale

     (7,428     —         (7,428

Charges for the use of the national grid

     (744     —         (744

Gas purchased for resale

     (254     —         (254
  

 

 

   

 

 

   

 

 

 
     (8,426     —         (8,426

OTHER COSTS

      

Personnel and managers

     (999     —         (999

Materials

     (340     —         (340

Outsourced services

     (736     —         (736

Depreciation and amortization

     (779     —         (779

Operating provisions

     (262     —         (262

Infrastructure construction cost

     (942     —         (942

Other

     (318     —         (318
  

 

 

   

 

 

   

 

 

 
     (4,376     —         (4,376

TOTAL COST

     (12,802     —         (12,802

GROSS PROFIT

     6,738       55       6,793  

OPERATING EXPENSES

      

Selling expenses

     (128     —         (128

General and administrative expenses

     (654     —         (654

Operating provisions

     (190     —         (190

Other operating expenses

     (677     3       (674
     (1,649     3       (1,646

Equity in earnings of unconsolidated investees, net

     210       —         210  

Gain on acquisition of control of investee

     281       —         281  

Income before Financial income (expenses) and taxes

     5,580       58       5,638  

Financial revenues

     593       (58     535  

Financial expenses

     (1,694     —         (1,694
  

 

 

   

 

 

   

 

 

 

Income before income tax and social contribution tax

     4,479       —         4,479  

Current income and social contribution taxes

     (1,259     —         (1,259

Deferred income and social contribution taxes

     (83     —         (83
  

 

 

   

 

 

   

 

 

 

NET INCOME FOR THE YEAR

     3,137       —         3,137  
  

 

 

   

 

 

   

 

 

 

 

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3. PRINCIPLES OF CONSOLIDATION

The financial statements date of the subsidiaries and jointly-controlled entities, used for the purposes of calculation of consolidation and equity in earnings of unconsolidated investees coincide with those of the Company.

The Company uses the criteria of full consolidation for the following companies which are direct equity investments of Cemig:

 

     Dec. 31, 2016      Dec. 31, 2015      Dec. 31, 2014  
   Direct interest %      Direct interest %      Direct interest %  

Cemig Geração e Transmissão

     100.00        100.00        100.00  

Cemig Distribuição

     100.00        100.00        100.00  

Gasmig

     99.57        99.57        99.57  

CemigTelecom

     100.00        100.00        100.00  

Rosal Energia

     100.00        100.00        100.00  

Sá Carvalho

     100.00        100.00        100.00  

Horizontes Energia

     100.00        100.00        100.00  

Usina Térmica Ipatinga

     100.00        100.00        100.00  

Cemig PCH

     100.00        100.00        100.00  

Cemig Capim Branco Energia

     —          —          100.00  

Cemig Trading

     100.00        100.00        100.00  

Efficientia

     100.00        100.00        100.00  

Cemig Comercializadora de Energia Incentivada

     100.00        100.00        100.00  

UTE Barreiro (Barreiro Thermal Plant)

     100.00        100.00        100.00  

Empresa de Serviços e Comercialização de Energia Elétrica

     100.00        100.00        100.00  

 

a) Subsidiaries and jointly-controlled entities

The financial statements of subsidiaries are included in the consolidated financial statements as from the date on which the control starts until the date on which the control ceases to exist. The assets, liabilities and profit (loss) of the subsidiaries were consolidated using full consolidation. The accounting policies of the subsidiaries and jointly-controlled entities are aligned with the policies adopted by the Company. The financial information of the jointly-controlled entities is recognized by the equity method of accounting.

 

b) Consortia

The assets, liabilities, and profits (losses) of a consortium are recorded in accordance with the percentage interest held in the consortium, since these investments are considered to be ‘joint operations’ in accordance with the requirements of IFRS11.

 

 

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c) Transactions eliminated in consolidation

Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealized gains arising from transactions with investee companies recorded by the equity method are eliminated against the investment in proportion to the Company’s equity interests in the investee. Unrealized losses are eliminated in the same way as unrealized gains are eliminated, but only up to the point at which there is no evidence of impairment.

The financial statements of Transchile, for the purposes of calculations by the equity method, are converted from US dollars (the functional currency of Transchile) to Reais based on the exchange rate at last quoted day of the year, since Cemig’s functional currency is the Real. Foreign currency differences are recognized in Other comprehensive income and presented in equity up to the date of the sale of the interest in Transchile. After conclusion of the sale, the amount recognized in Other comprehensive income, in Equity, was transferred in full to the Income statement. In 2016, the whole of Cemig’s interest in Transchile was sold to Ferrovial Transco Chile SpA., a company controlled by Ferrovial S.A. For fuller details please see Note 15.

The consolidated financial statements include the balances and transactions of the investment funds in which the Company and its subsidiaries and jointly-held subsidies are the sole unit holders. These funds comprise public securities, private securities and debentures of companies which have low risk classification, ensuring high liquidity.

These investment funds, the financial statements of which are regularly reviewed/audited, are subject to limited obligations, namely payment for services provided by the administrators of the assets, attributed to the operation of the investments, such as charges for custody, auditing and other expenses, and there are no significant financial obligations, nor are there assets of the unit holders to guarantee those obligations.

 

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4. CONCESSIONS AND AUTHORIZATIONS

Cemig and its subsidiaries hold the following concessions and authorizations, from the National Electricity Agency, Aneel:

 

    

Location

   Date of
concession or
authorization
     Expiration
date
 

GENERATION

        

Hydroelectric plants

        

São Simão (1)

   Rio Paranaíba      01/1965        01/2015  

Emborcação

   Rio Paranaíba      07/1975        07/2025  

Nova Ponte

   Rio Araguari      07/1975        07/2025  

Jaguara (1)

   Rio Grande      08/1963        08/2013  

Miranda (1)

   Rio Araguari      12/1986        12/2016  

Três Marias

   Rio São Francisco      01/2015        01/2045  

Volta Grande

   Rio Grande      02/1967        02/2017  

Irapé

   Rio Jequitinhonha      01/1999        02/2035  

Salto Grande

   Rio Santo Antônio      01/2015        01/2045  

Queimado

   Rio Preto      11/1997        01/2033  

Itutinga

   Rio Grande      01/2015        01/2045  

Camargos

   Rio Grande      01/2015        01/2045  

Piau

   Rio Piau / Pinho      01/2015        01/2045  

Gafanhoto

   Rio Pará      01/2015        01/2045  

Cachoeirão SHP

   Rio Manhuaçu      07/2000        07/2030  

Santo Antônio

   Madeira      06/2008        06/2043  

Baguari

   Rio Doce      08/2006        08/2041  

Pipoca SHP

   Rio Manhuaçu      09/2001        09/2031  

Other

   Various      Various        Various  
        

Wind farms (2)

        

Morro do Camelinho

   Gouveia – Minas Gerais      03/2000        01/2017  

Praias do Parajuru

   Beberibe – Ceará      09/2002        08/2029  

Volta do Rio

   Acaraú – Ceará      12/2001        08/2034  

Praia de Morgado

   Acaraú – Ceará      12/2001        08/2034  
        

Thermal plants

        

Igarapé

   Juatuba – Minas Gerais      01/2001        08/2024  

Barreiro

   Belo Horizonte, Minas Gerais      02/2002        04/2023  
        

TRANSMISSION

        

National grid

   Minas Gerais      07/1997        07/2015  

Itajubá Substation

   Minas Gerais      10/2000        10/2030  
        

DISTRIBUTION

   Minas Gerais      01/2016        12/2045  

 

(1) The extension of the concession specified in the concession contract is not included in these figures. See details in this Note.
(2) Permission to operate the activity of wind power generation is given by means of authorizations.

Generation concessions

In the generation business, the Company sells electricity: (1) through auctions to distributors to meet the demands of their captive markets; and (2) to Free Consumers in the Free Market (Ambiente de Contratação Livre, or ACL). In the Free Market, electricity is traded by generation concession holders, Small Hydro Plants (SHPs), self-producers, traders, and importers of electricity.

Free Consumers are those that have demand of more than 3MW at a voltage of 69kV or higher, or at any voltage if their supply began after July 1995.

 

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A consumer that has opted for the Free Market may return to the regulated system only if it gives its distributor five years’ prior notice. The purpose of this period of notice is to ensure that if necessary the distributor will be able to buy additional electricity to supply the re-entry of Free Consumers into the Regulated Market. The state-controlled generators can sell electricity to Free Consumers but, unlike the private generators they are obligated to do so through an auction process.

Auctions of electricity generation concessions

In November 2015, Cemig GT took part in Auction 12/2015 and won the concessions for Lot D. This was for 18 plants – shown below – for five of which the concession had been previously held by Furnas S.A.:

 

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 (1)

     Jan. 2045        5.04        3.59  

Dona Rita Small Hydroelectric Plant (1)

     Jan. 2045        2.41        1.03  

Ervália Small Hydroelectric Plant (1)

     Jan. 2045        6.97        3.03  

Neblina Small Hydroelectric Plant (1)

     Jan. 2045        6.47        4.66  

Sinceridade Small Hydroelectric Plant (1)

     Jan. 2045        1.42        0.35  
     

 

 

    

 

 

 
        699.60        420.27  
     

 

 

    

 

 

 

 

(1) Plants for which the concession was previously held by Furnas.

Please note that the information presented in this table on installed capacity, guaranteed average offtake, 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.

For more information please see Note 14.

 

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Renewal of the concessions of the Jaguara, São Simão and Miranda Hydroelectric Plants

The company believes that it has the right to completion of periods of these concessions, based on the original terms of the Concession Contracts, and is currently arguing this in the courts.

The Jaguara hydroelectric plant

As specified in the Concession Contract for the Jaguara Plant, the Company applied for the extension of the concession. The Mining and Energy Ministry (‘MME’) refused the Company’s application, on the grounds that the application was made outside the time limits set by Law 12783/13.

On June 20, 2013, Cemig GT obtained an interim injunction in its application to the Higher Appeal Court (Superior Tribunal de Justiça, or STJ) for order of mandamus No. 20.432/2013, against the decision of the MME not to entertain the application for extension of the period of concession of the Jaguara plant (424MW capacity, with average 336 MW assured offtake), which had an expiration date on August 28, 2013. The interim remedy, given by Reporting Justice Sérgio Kukina, ensured that Cemig GT would continue to operate the concession for the Jaguara plant until final judgment in the action. On August 23, 2013, Reporting Justice Sérgio Kukina ruled that the application for mandamus had failed.

On August 30, 2013 the STJ granted an interim order, published on September 3, 2013, in a new application for mandamus in the STJ, against the decision by the Mining and Energy Ministry which, in a dispatch published on August 23, 2013, refused, on its merits, the application by Cemig GT for extension of the concession of the Jaguara Plant under its Concession Agreement. This interim order gave Cemig GT the right to remain in control of the Jaguara Plant, commercially operating the public service concession granted to it, until final judgment of the case.

On June 24, 2015 the judgment on the application for mandamus brought by Cemig GT was completed. With all the votes given by the Justices of the first Section of the STJ, the applications made by Cemig GT were defeated by six judgment votes to 2.

On September 22, 2015, Cemig GT filed a further action, for Provisional Remedy, with the Federal Supreme Court (Supremo Tribunal Federal, or STF), to maintain ownership of the concession for the Jaguara plant, on the initial bases of the concession agreement.

On November 3, 2015, the Reporting Justice of the Federal Supreme Court published a Dispatch requesting a position from the parties on their interest in holding a reconciliation hearing, due to the complexity and importance of the debate on the subject in the action for Provisional Remedy. On November 4, 2015, Cemig filed a statement with the Court stating its interest in such a hearing.

On December 21, 2015, Supreme Court Justice Dias Toffoli, rapporteur of the case, granted the application for interim injunction made by the Company, to suspend the effects of the judgment of the First Section of the STJ, and keep Cemig GT in possession of the concession to operate the Jaguara plant, on the initial bases of the concession agreement, until such time as the Supreme Court might make a decision to the contrary. On February 1, 2016, the decision granting the application for interim injunction applied for was published.

 

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On February 15, 2016 the Panel Judgment of the STJ was published, containing the decision of the First Section of that Court, which refused to grant mandamus and refused the Special Appeal.

On February 22, 2016, in the STF, the Reporting Justice issued a Dispatch extending continuity of the Reconciliation Hearing between Cemig GT and the federal government; the parties are currently awaiting a further dispatch to set a new date for continuation of that hearing, begun on December 15, 2015.

On March 1, 2016 the Company filed an Ordinary Appeal with the STJ against the panel judgment of February 15, 2016, and on April 11, 2016 the Justice Deputy Chair of the STJ issued a decision accepting that this Ordinary Appeal should be heard, and ordered it to be submitted to the STF.

On March 21, 2017 the Federal Supreme Court revoked the interim order given in the case in which Cemig GT is requesting suspension, until final judgment on the Ordinary Appeal by the Supreme Court, of the effects of the judgment of the First Section of the Supreme Court which refused to grant an order to maintain Cemig GT’s ownership of the concession for the Jaguara Plant on the initial bases of Concession Contract 007/97. The judgment remitted the case records to the office of the Procurator-General of the Republic (PGR), for that body to state its opinion.

On December 31, 2016 the asset, at book value of R$ 41, is posted in PP&E, and in 2016 the Company recognized the plant’s revenues from sales of power supply, and operational costs, since it remained in control of the asset during this period.

On March 29, 2017 Cemig GT filed an Internal Appeal against the decision that repealed the remedy, requesting a revision of judgment, to allow cognizance to be taken of a Special Appeal.

The São Simão hydroelectric plant

On June 3, 2014, the Company filed a request for extension of the concession of the São Simão Hydroelectric Plant, since it believes that the concession contract for this plant is not subject to the new rules created by Provisional Measure 579 (which became Law 12783/2013).

On August 5, 2014, the Council of Aneel decided to recommend to the Mining and Energy Ministry (MME) that renewal of the concession for the São Simão plant should be refused.

On August 29, 2014, the Mining and Energy Minister decided to refuse the request for extension of the period of concession of the São Simão plant, based on Opinion 559/2014/CONJURMME/CGU/AGU.

 

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On September 10, 2014, Cemig GT filed a Hierarchy Appeal with the MME, with request for reconsideration, for the Mining and Energy Minister to reconsider his decision and to grant the Company’s request based only on the Concession Contract; and, successively, that the appeal should be sent to the President of the Republic, so that the President should issue a decision in favor of the Company’s request in the same terms. This appeal is still pending, awaiting consideration by the MME.

Notwithstanding this, on December 15, 2014 Cemig GT filed an application for mandamus (No. 21465/DF), with the Higher Appeal Court (STJ), requesting interim relief, against an illegal act by the Mining and Energy Minister, violating net and certain right of the plaintiff, for the purpose of obtaining extension of the period of concession of the São Simão plant, based on the Concession Contract.

On December 17, 2014, Justice Mauro Campbell granted an interim order (published on December 19, 2014) that Cemig GT should remain in control of the plant, commercially operating the public service concession conceded to it, until the final judgment on application for mandamus governing the Jaguara plant, or until a re-examination of the remedy just refused.

When the judgment in the application for mandamus governing the Jaguara plant was concluded, with rejection of the application, the Reporting Justice revoked the interim remedy given in the Application for mandamus relating to the São Simão plant, the decision on which was published on June 30, 2015.

On July 3, 2015, Cemig GT filed a Special Appeal for retraction of the decision by the Reporting Justice, or, if the court should not be of that opinion, that the appeal referred to should be submitted to consideration by the First Section of the STJ, for an interim remedy ordering that the Company should continue to hold the concession for the São Simão Plant, on the initial bases of the Concession Contract.

On July 10, 2015, the Energy Planning and Development Department (Secretaria de Planejamento e Desenvolvimento Energético) sent an official letter to Cemig GT requiring it to state whether the Company would be interested in remaining in possession of the São Simão Plant, on the new bases of Law 12783/13, until its assumption by the winner of a new tender to be held, in view of the repeal of the interim remedy.

In response to this new event, on July 22, 2015 Cemig GT filed a petition with the Chair of the STJ requesting the application for retraction made within the Special Appeal, in such a way that, through reconsideration of the decision appealed against, an interim remedy should be granted, to keep the Company as holder of the concession of the São Simão Plant, on the initial basis of the Concession Agreement, until final judgment be given on this application for mandamus, or, subsidiarily, that, at least, suspension effect should be attributed to the Special Appeal.

 

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On August 20, 2015 it was stated that the MME would take the necessary measures to designate Cemig GT as provider of electricity generation service through the São Simão plant, under the quota regime, on the basis that the revocation of the interim order given in the application for mandamus had immediate enforceability.

In response, Cemig GT stated interest in remaining responsible for the provision of the electricity generation service of the São Simão plant, but pointed out that there are doubts as to the type, and legal security, of this provision of services, since the matter was still pending court and administrative decisions.

The MME, by Ministerial Order 432/2015, published on September 15, 2015, designated Cemig GT as the party responsible for provision of electricity generation service through the São Simão plant, under the quota regime (being responsible for the operation and maintenance of the plant without, however, having the right to its output of electricity, which will be allocated to the Guaranteed Power Offtake Auctions) until the taking over of the concession by the winner of the auction.

Further, in the judiciary, Cemig GT filed a further application for mandamus, to Justice Mauro Campbell Marques, requesting an annulment of the act of coercion, and assertion of the interim remedy that authorized the applicant to remain in possession and operation of the concession of the São Simão plant, on the initial bases of the contract, until final judgment was given on the application for mandamus governing the São Simão plant or, subsidiarily, until the merit of the Special Appeal would be considered.

On September 8, 2015, the decision of the Reporting Justice (Justice Herman Benjamin) was published, refusing the application for interim remedy applied for by the Company.

Also on September 8, 2015, a Special Appeal was filed against the decision of Justice Herman Benjamin that refused the application for interim remedy that had been made. During the Session of the Special Court of the STJ, on November 4, 2015, the Special Appeal was unanimously refused, in the terms of the judgment of the Reporting Justice.

On November 25, 2015, the Special Appeal filed by Cemig GT against the decision that overturned the interim remedy, in application for mandamus N° 21.465/DF, was, unanimously, refused by the first Section of the STJ, the said Appeal Court Judgment being published on December 1, 2015, the judgment on the merits of this application for mandamus remaining to be heard.

On March 6, 2017 the STJ granted an interim remedy maintaining Cemig GT in possession of the concession to operate the São Simão plant on the initial terms of its Concession Contract 007/1997, until conclusion of the judgment of the Company’s application for mandamus.

 

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On March 28, 2017 the interim remedy was revoked in the case in which Cemig GT seeks, in the STJ, annulment of the decision of the Mining and Energy Ministry (MME) which refused, on its merits, the application by Cemig GT for extension of the period of concession of the São Simão hydro Plant, in the terms of its Concession Contract.

Considering the present status of the legal dispute, the Company:

 

  recognized, up to the date of September 15, 2015, the operational revenues from sales of power supply and costs of this plant, in accordance with current accounting practices, in view of the fact that it remained in control of the asset up to that date;

 

  considering the requirements of Ministerial Order 432/2015, as from September 16, 2015, ceased to recognize the expenses of depreciation on the São Simão plant, and began to recognize revenues relating to the provision of services of operation and maintenance of the plant, in accordance with the regime of quotas;

 

  transferred, on September 16, 2015, the amount of R$ 220 from its PP&E to the account line ‘Other long term assets’, considering that it is still under decision in the Courts. Based on the terms of the concession agreement, this asset is considered as having a recovery value higher than the value at which it is recorded.

Concession of the Miranda Hydroelectric Plant

On June 10, 2016, Cemig Geração e Transmissão filed application to the regulator, Aneel, to extend the period of the concession for the Miranda Hydroelectric Plant for 20 years. On July 12, 2016, Aneel, complying with the judgment vote of the Reporting Council Member in the case, José Jurhosa Junior, decided to submit the case “to the Mining and Energy Ministry with the recommendation not to give cognizance to the request by Cemig Geração e Transmissão S.A. – Cemig GT for extension of the period of concession of the Miranda Hydroelectric Plant, since that request was made outside the period stipulated by Law 12783/2013”.

Cemig GT filed a request with the Concession-granting power requesting extension of the concession for the Miranda Hydroelectric Plant under Concession Contract 007/1997 – this plant had a period of the concession expiring on December 23, 2016.

Considering that this request was not accepted by the Mining and Energy Ministry, Cemig GT applied to the Higher Appeal Court (STJ) for an interim remedy. This was granted on December 22, 2016, ordering that control of the Miranda hydroelectric plant should remain with the Company, on the initial bases of Concession Contract 007/1997, until completion of the judgment in the application for Mandamus made by the Company.

On December 31, 2016 the asset, with book value of R$ 756, is posted in PP&E, and in 2016 the Company recognized the revenue from sales of power supply, and operational costs, of this plant, since it remained in control of the asset during that period.

 

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On March 29, 2017, the interim remedy (injunction) given in application for mandamus number 23.042/DF, before the Higher Appeal Court (STJ), brought by the Company to annul the decision by the Mining and Energy Ministry (MME) which refused, on merits Cemig GT’s request for ratification of the extension of its concession for the Miranda Hydroelectric Plant, under its Concession Contract, number 007/97, was revoked.

Administrative proceedings – Material Announcement of February 21, 2017

Subsidiarily to its request for extension for 20 years of the concessions of the Jaguara, São Simão and Miranda Hydroelectric Plants, the Company requested opening of an Administrative Proceeding under Paragraph 1-C of Article 8 of Law 12783/2013, in benefit of Cemig GT.

Paragraph 1-C was added to Article 8 of Law 12783, of 2013, by Law 13360, of November 17, 2016, and enables the federal government to grant a concession contract for electricity generation for a period of 30 (thirty) years when there is transfer of control of a legal entity that is already providing this service (in this case, one of the subsidiaries of Cemig GT), and is under direct or indirect control of an individual State, or the Federal District, or the municipality, provided that:

I – the tender, which may be by auction or by competitive bidding, is held by the controlling shareholder on or before February 28, 2018; and

II – the transfer of control takes place by June 30, 2018.

The subsidiary request was made on the grounds of the spirit of conciliation and cooperation that should govern the relationship between a concession holder and the concession-granting power, and the constant quest, at all times, for alternatives that present the best solution for consumers, for the country and for the shareholders of the Company – who in this case include the people of the state of Minas Gerais.

Thus, in the event that the Ministry decides to maintain its position, and if all the court judgments that have determined that Law 12783/2013 should prevail to the detriment of the provisions of the Second Subclause of Clause 4 of Contract CEMIG 007 of 1997 are maintained, Cemig GT has requested, for the benefit of one of its subsidiaries, application of the rule that is now contained in §1-C of Article 8 of Law 12783 of 2013.

We would point out that the presentation of the Subsidiary Request does not result in any waiver by Cemig GT of its right – which is the subject of the legal actions that it currently has in progress against the federal government – that is to say its right to guaranteed extension of the concessions as specified in Clause 4 of Concession Contract 007/1997.

 

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On the same date the Company filed with the MME a response to the formal question as to its interest in remaining as provider of electricity generation service after the ending of the concession period of the Volta Grande Hydroelectric Plant, which took place on February 23, 2017. In this response, and adding a request of its own, the Company stated its interest in remaining responsible for the provision of electricity generation service by this hydroelectric plant, and also requested opening of an administrative proceeding for the purposes of §1-C of Article 8 of Law 12783/2013, also to the benefit of one of the service providing subsidiaries of Cemig GT.

Management continues to be confident of its right in relation to the Jaguara, São Simão and Miranda plants, supported by a contractual clause, by the legislation in force, and by opinions issued by renowned jurists. The Company’s internal and external legal advisers have categorized the chance of success in the court dispute as ‘possible’.

Transmission concessions

Under its transmission concession contracts, the Company is authorized to charge the Tariff for Use of the Transmission System (Tarifa de Uso do Sistema de Transmissão, or TUST). Tariffs are adjusted annually on the same date as the adjustments of the Permitted Annual Revenue (Receitas Anuais Permitidas, or RAP) of the holders of transmission concessions. This tariff period starts on July 1 of the year of publication of the tariffs and runs until June 30 of the subsequent year.

The service of transport of large quantities of electricity for long distances, in Brazil, is provided by a network of transmission lines and substations operating at a voltage of 230kV or higher, referred to technically as the Basic Grid (Rede Básica), or National Grid.

Any agent of the electricity sector that produces or consumes electricity has the right to use the National Grid, as does the consumer, provided certain technical and legal requirements are met. This is referred to as Open Access, and in Brazil is guaranteed by law and by the regulator, Aneel.

The payment for use of transmission service also applies to generation provided by Itaipu Binacional. However, due to the legal characteristics of that plant, the corresponding charges are assumed by a number of holders of distribution concessions that hold quotas of its output.

For the newer transmission concessions – granted after the year 2000 – the portion of the assets that will not be used up during the concession is recorded as a financial asset, because there is an unconditional right to receive cash or other financial assets directly from the grantor at the end of the concession agreement period.

 

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For the older transmission concessions, granted before the year 2000, renewals have been applied for as from January 1, 2013 in accordance with Law 12783, under which the assets are the property of the Concession-granting Power, and the Company is remunerated, as from 2013, for the operation and maintenance of these assets.

Distribution of electricity concessions

Cemig D has the concession from Aneel for commercial exploration of the activity of distribution of electricity in the greater part of the State of Minas Gerais, expiring in December 2045.

As determined by the concession contract, all assets and facilities that are linked to the provision of the distribution service and which have been created by the concession holder are considered reversible and part of the assets of the related concession. These assets are automatically reverted to the Grantor at the end of the contract, and are then valued to determine the amount of the indemnity payable to the concession holder, subject to the amounts and the dates on which they were incorporated into the electricity system.

The Company does not have obligations to make payment in compensation for commercial operation of the distribution concessions, but is required to comply with requirements related to quality, and investments made, in accordance with the concession contract.

The concession contracts, and the Brazilian legislation, establish a mechanism of maximum prices that allows for three types of adjustment to tariffs: (i) an annual tariff adjustment; (ii) periodic review of tariffs; and (iii) extraordinary reviews.

Each year the Company has the right to request the annual adjustment, the purpose of which is to compensate for the effects of inflation on the tariffs, and to allow for certain changes in costs that are outside the Company’s control to be passed through to clients – for example the cost of electricity purchased for resale, and sector charges, including charges for the use of the transmission and distribution facilities.

Also, Aneel makes a Periodic Review of tariffs every five years, which aims to identify changes in the Company’s costs, and to establish a factor based on scale gains, which will be applied in the annual tariff adjustments, for the purpose of sharing such gains with the Company’s consumers.

The Company also has the right to request an extraordinary review of tariffs, in the event that any unforeseen development significantly alters the economic-financial equilibrium of the concession. The Periodic Review and the Extraordinary Review are subject, to a certain degree, to the discretion of Aneel, although there are pre-established rules for each cycle of revision. When the Company requests an annual tariff adjustment, it becomes necessary to prove the resulting financial impact of these events on operations.

 

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Under the distribution concession contracts, the Company is authorized to charge consumers a tariff consisting of two components: (i) One part relating to electricity purchased for resale, charges for use of the transmission grid and charges for use of the distribution system that are not under its control (‘Portion A costs’); and (ii) a portion relating to operating costs (‘Portion B costs’).

Renewal of concessions

On December 21, 2015 the Company 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 principal characteristics and terms of the Amendment are as follows:

 

  The annual tariff adjustment will take place on May 28 of each year, the first to be in 2016. For this first adjustment the rules specified in the previous concession contract will be applied. For the subsequent tariff adjustments the rules in Clause 6 of the Amendment will be applied.

 

  Limitation of distribution of dividends and/or payment of Interest on Equity to the minimum established by law, if there is non-compliance with the annual indicators for outages for two consecutive years, or for three in any five years, until the regulatory parameters are restored.

 

  Requirement for injections of capital from the controlling shareholder in an amount sufficient to meet the minimum conditions for economic and financial sustainability.

 

  Subject to the right to full defense and right of reply, for the concession to be maintained, compliance is required with efficiency criteria for continuity of supply and for economic and financial management, as follows: (i) for five years from January 1, 2016, any non-compliance for two consecutive years, or non-compliance with any of the conditions at the end of five years, will result in extinction of the concession; (ii) as from January 1, 2021, any non-compliance for three consecutive years with the criteria of efficiency in continuity of supply, or for two consecutive years with the criteria of efficiency in economic and financial management, will result in proceedings to establish expiration of the concession.

Distribution of gas concessions

The concessions for distribution of natural gas are given by Brazilian states, and in the state of Minas Gerais the tariffs for natural gas are set by the regulatory body, the State’s Economic Development Secretariat, by market segment. The tariffs comprise a portion for the cost of gas and a portion for the distribution of gas. Every 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.

In addition to these adjustments, in April 2015 the Economic Development Secretariat sent Gasmig Official Letter SEDE/GAB/Nº303/2014 stating the timetable set for the first Tariff Review cycle. The decision process is still in progress; the latest estimated date for its completion is the beginning of the second half of 2017. These reviews occur every five years, to evaluate the changes in the costs of the Company, and to adapt the tariffs. The Concession Contract also specifies the possibility of an extraordinary review of tariffs if any event occurs that puts the economic-financial balance of the Concession at risk.

On December 26, 2014 the Second Amendment to the Concession Contract was signed by Gasmig and the Minas Gerais State Government, extending by 30 years the period of concession in which Gasmig may commercially operate the services of industrial, commercial, institutional and residential piped gas in the state of Minas Gerais. The expiration date of the contract is thus now extended from January 10, 2023 to January 10, 2053.

 

 

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Concessions payable

In obtaining the concessions for construction of certain generation projects, the Company undertook to make payments to Aneel, over the period of the contract, as compensation for the commercial operation. The information on the concessions and the amounts to be paid is as follows:

 

Enterprise

   Percentage
interest
     Nominal
value in
2016
     Present
value
in 2016
     Amortization period      Updating
indexor
 

Irapé

     100.00        35        14        03/2006 to 02/2035        IGP-M  

Queimado (Consortium)

     82.50        9        4        01/2004 to 12/2032        IGP-M  

Salto Morais Small Hydro Plant

     100.00        —          —          06/2013 – 07/2020        IPCA  

Rio de Pedras Small Hydro Plant

     100.00        1        1        06/2013 – 09/2024        IPCA  

Various Small Hydro Plants (*)

     100.00        4        3        06/2013 – 08/2025        IPCA  

 

(*) Luiz Dias, Poço Fundo, São Bernardo and Xicão.

The concessions to be paid to the concession-granting power provide for monthly portions with different values over time. For the purposes of accounting and recognition of costs, due to the understanding that they represent an Intangible Asset related to the right of commercial operation, they are recorded as from the date of signature of the contracts at the present value of the payment obligation.

The portions paid to the Concession-granting power in 2016, the present value and the nominal value of the portions to be paid in the forthcoming period of 12 months, are as follows:

 

Enterprise

   Percentage
interest
     Amounts
paid in
2016
     Present
value of
amounts
to be
paid in
12
months
     Nominal
value of
amounts
to be
paid in
12
months
 

Irapé

     100.00        2        2        2  

Queimado (Consortium)

     82.50        1        —          1  

 

(*) Luiz Dias, Poço Fundo, São Bernardo and Xicão.

The rates used for discounting of liabilities to present value, of 12.50% for the small hydro plants and 5.10% for the conventional hydroelectric plants, are the average rates for raising of funds in normal conditions on the date of registration of each concession.

 

5. OPERATING SEGMENTS

The operating segments of Cemig reflect the structure of the regulatory framework for the Brazilian electricity sector, with different legislation for the sectors of generation, transmission and distribution of electricity. The Company also operates in gas, telecommunications, and other businesses, which have a smaller impact on the results from its operations.

These segments are reflected in the Company’s management, organizational structure, and monitoring of results. In accordance with the regulatory framework of the Brazilian electricity sector, there is no segmentation by geographical area.

 

 

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These tables show the operating revenues, costs and expenses for 2016, 2015 and 2014 in consolidated form:

 

OPERATING SEGMENTS, 2016

 
     ELECTRICITY     TELECOMS     GAS     OTHER (*)     ELIMINATIONS     TOTAL  
   GENERATION     TRANSMISSION     DISTRIBUTION            

ASSETS OF THE SEGMENT

     14.414       4.267       18.166       338       2.737       2.389       (276     42.035  

ADDITIONS TO THE SEGMENT

     916       —         1.602       163       56       —         —         2.737  

ADDITIONS TO FINANCIAL ASSETS

     2.217       54       —         —         —         —         —         2.271  

INVESTMENTS IN SUBSIDIARIES AND JOINTLY-CONTROLLED ENTITIES

     5.292       1.670       1.754       18       —         19       —         8.753  

NET REVENUE

     5.875       1.113       10.597       125       1.181       116       (234     18.773  

COST OF ELECTRICITY AND GAS

     —         —         —         —         —         —         —         —    

Electricity bought for resale

     (3.071     —         (5.260     —         —         —         59       (8.272

Charges for use of the national grid

     (321     —         (760     —         —         —         134       (947

Gas bought for resale

     —         —         —         —         (877     —         —         (877
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operational costs, total

     (3.392     —         (6.020     —         (877     —         193       (10.096
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATIONAL COSTS AND EXPENSES

     —         —         —         —         —         —         —         —    

Personnel

     (271     (111     (1.147     (23     (47     (45     —         (1.644

Employees’ and managers’ profit shares

     (1     —         (10     (1     —         4       —         (8

Post-retirement obligations

     (54     (23     (231     —         —         (37     —         (345

Materials

     (11     (3     (42     —         (2     —         —         (58

Outsourced services

     (129     (30     (674     (23     (16     (32     37       (867

Depreciation and amortization

     (202     —         (525     (38     (54     (16     —         (835

Operational provisions (reversals)

     (88     (10     (544     (4     —         (67     —         (713

Construction costs

     —         (54     (1.102     —         (37     —         —         (1.193

Other operational expenses, net

     (57     (13     (395     11       (8     313       4       (145
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of operation

     (813     (244     (4.670     (78     (164     120       41       (5.808
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATIONAL COSTS AND EXPENSES

     (4.205     (244     (10.690     (78     (1.041     120       234       (15.904

OPERATIONAL PROFIT BEFORE EQUITY GAINS (LOSSES) AND FINANCIAL REVENUE (EXPENSES)

     1.670       869       (93     47       140       236       —         2.869  

Equity in earnings of unconsolidated investees, net

     (448     362       (180     (31     —         (5     —         (302

Adjustment for loss of value in Investments

     (763     —         —         —         —         —         —         (763

Financial revenues

     190       7       743       4       15       82       —         1.041  

Financial expenses

     (1.320     (4     (1.078     (9     (49     (18     —         (2.478
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

PRE-TAX PROFIT

     (671     1.234       (608     11       106       295       —         367  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax and the Social Contribution tax

     (24     5       103       (6     (8     (103     —         (33
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET PROFIT ( LOSS)

     (695     1.239       (505     5       98       192       —         334  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (92     —         (380     —         —         (43     —         (515

Equity gain (loss) on Other comprehensive income in jointly-controlled entities

     —         —         —         —         —         4       —         4  

Items that may be reclassified to profit or loss

                

Conversion adjustment of equity gain (loss) in other comprehensive income in subsidiary and jointly-controlled entity

     —         —         —         —         —         (3     —         (3

Recycling of conversion adjustments to the Income statement arising from sale of Transchile

     —         (39     —         —         —         —         —         (39
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME FOR THE YEAR

     (92     (39     (380     —         —         (42     —         (553
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total of comprehensive income for the year attributed to:

                

Controlling shareholders

     (787     (1,200     (885     5       98       150       —         (219
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-controlling shareholder

     —         —         —         —         —         —         —         —    

 

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Table of Contents

LOGO

 

 

OPERATING SEGMENTS, 2015 (RESTATED)

 

ITEM

   GENERATION     TRANSMISSION     DISTRIBUTION     TELECOM     GAS     OTHER (*)     ELIMINATIONS     TOTAL  

SEGMENT ASSETS

     13,382       4,880       17,738       317       2,530       2,986       (976     40,857  

ADDITIONS TO THE SEGMENT

     577       —         1,044       42       62       1       —         1,726  

ADDITIONS TO FINANCIAL ASSETS

       146                 146  

INVESTMENTS IN ASSOCIATES AND JOINTLY-CONTROLLED ENTITIES

     5,751       2,423       1,547       —         —         24       —         9,745  

NET REVENUE

     7,047       519       12,962       123       1,395       90       (268     21,868  

OPERATING COSTS

                

Electricity purchased for resale

     (2,669     —         (6,993     —         —         —         120       (9,542

Charges for the use of the national grid

     (297     —         (814     —         —           112       (999

Gas purchased for resale

     —         —         —         —         (1,051     —         —         (1,051
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (2,966     —         (7,807     —         (1,051       232       (11,592

OTHER COSTS

                

Personnel

     (224     (113     (1,000     (15     (43     (40     —         (1,435

Employees’ and managers’ profit shares

     (24     (12     (95     (2     —         (4     —         (137

Post-retirement liabilities

     (21     (10     (121     —         —         (4     —         (156

Materials

     (95     (5     (52     —         (2     —         —         (154

Outsourced services

     (143     (37     (697     (25     (15     (13     31       (899

Depreciation and amortization

     (273     —         (444     (49     (54     (15     —         (835

Operating provisions (reversals)

     (109     2       (209     (1     —         (1,084     —         (1,401

Construction costs

     —         (146     (1,044     —         (62     —         —         (1,252

Other operating expenses. net

     (62     (16     (283     (20     (9     (42     5       (426
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of operation

     (951     (337     (3,945     (112     (185     (1,202     36       (6,695

TOTAL COSTS AND EXPENSES

     (3,917     (337     (11,752     (112     (1,236     (1,202     268       (18,287

Operating profit before Equity gains (losses) and Financial revenue (expenses)

     3,130       182       1,210       11       159       (1,112       3,581  

Equity in earnings of unconsolidated investees, net

     17       410       (6     (28     —         —         —         393  

Fair value results in Corporate Operation

     729       —         —         —         —         —         —         729  

Financial revenues

     199       22       543       4       23       73         863  

Financial expenses

     (984     (7     (1,130     (6     (42     (35     —         (2,204
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax and social contribution taxes

     3,091       607       617       (19     140       (1,074     —         3,362  

Income and social contribution taxes

     (836     (71     (256     (16     (23     309       —         (893
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME FOR THE YEAR

     2,255       536       361       (35     117       (765     —         2,469  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (84     —         (170     —         —         (106     —         (360

Equity gain (loss) on Other comprehensive income in jointly-controlled entities

     —         —         —         —         —         (1     —         (1

Items that may be reclassified to profit or loss

                

Equity gain (loss) on Other comprehensive income in jointly-controlled entitie

     14       —         —         —         —         40       —         54  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME FOR THE YEAR

     2,171       536       194       (35     117       (821     —         2,162  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total of comprehensive income for the year attributed to:

                

Controlling shareholders

     2,171       536       194       (35     117       (821     —         2,162  

Non-controlling shareholder

     —         —         —         —         —         —         —         —    

 

(*) The expense of R$ 1,084 recorded as operating provisions in the Others column refers substantially to expenses on the option to purchase investments held by the parent company and described in Note 15.

 

 

87


Table of Contents

LOGO

 

 

OPERATING SEGMENTS. 2014 (RESTATED)

 

ITEM

   GENERATION     TRANSMISSION     DISTRIBUTION     TELECOM     GAS     OTHER     ELIMINATIONS     TOTAL  

SEGMENT ASSETS

     11,528       3,882       15,064       327       2,549       2,007       (357     35,000  

ADDITIONS TO THE SEGMENT

     2,995         792       29       501       19       —         4,336  

ADDITIONS TO FINANCIAL ASSETS

       80                 80  

INVESTMENTS IN ASSOCIATES AND JOINTLY-CONTROLLED ENTITIES

     4,036       2,315       1,199       —         —         490       —         8,040  
     —         —         —         —         —         —         —         —    

NET REVENUE

     7,339       708       11,296       119       340       90       (297     19,595  

OPERATING COSTS

     —         —         —         —         —         —         —         —    

Electricity purchased for resale

     (1,833     —         (5,747     —         —         —         152       (7,428

Charges for the use of the national grid

     (282     —         (573     —         —         —         111       (744

Gas purchased for resale

     —         —         —         —         (254     —         —         (254
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (2,115     —         (6,320     —         (254     —         263       (8,426
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OTHER COSTS

                

Personnel

     (201     (105     (886     (13     (11     (36     —         (1,252

Employees’ and managers’ profit shares

     (39     (16     (184     (1     —         (9     —         (249

Post-retirement liabilities

     (34     (14     (153     —         —         (11     —         (212

Materials

     (295     (5     (80     —         (1     —         —         (381

Outsourced services

     (159     (39     (737     (23     (2     (23     30       (953

Depreciation and amortization

     (324     —         (428     (34     (4     (11     —         (801

Royalties for use of water resources

     (127     —         —         —         —         —         —         (127

Operating provisions (reversals)

     (62     (26     (300     —         —         (193     —         (581

Construction costs

     —         (81     (861     —         —         —         —         (942

Other operating expenses, net

     (130     (34     (297     (27     (11     (29     4       (524
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of operation

     (1,371     (320     (3,926     (98     (29     (312     34       (6,022
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL COSTS AND EXPENSES

     (3,486     (320     (10,246     (98     (283     (312     297       (14,448

Operating profit before Equity gains (losses) and Financial revenue (expenses)

     3,853       388       1,050       21       57       (222     —         5,147  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity in earnings of unconsolidated investees, net

     (386     386       150       (28     47       41       —         210  

Gain on acquisition of control of investee

     —         —         —         —         —         281       —         281  

Financial revenues

     119       46       300       5       21       44       —         535  

Financial expenses

     (396     (291     (751     (3     (6     (247     —         (1,694
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax and social contribution taxes

     3,190       529       749       (5     119       (103     —         4,479  

Income and social contribution taxes

     (1,116     (44     (169     (7     (12     6       —         (1,342
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME FOR THE YEAR

     2,074       485       580       (12     107       (97     —         3,137  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     —         —         (36     —         —         (8     —         (44

Equity gain (loss) on other comprehensive income in jointly-controlled entities

     —         —         —         —         —         (7     —         (7

Items that may be reclassified to profit or loss

                

Equity gain (loss) on other comprehensive income in jointly-controlled entities

     —         —         —         —         —         10       —         10  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME FOR THE YEAR

     2,074       485       544       (12     107       (102     —         3,096  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total of comprehensive income for the year attributed to:

                

Controlling shareholders

     2,074       485       544       (12     107       (102     —         3,096  

Non-controlling shareholder

     —         —         —         —         —         —         —         —    

 

88


Table of Contents

LOGO

 

 

6. CASH AND CASH EQUIVALENTS

 

     2016      2015  

Bank accounts

     101        52  

Cash investments

     

Bank certificates of deposit

     524        723  

Repos (‘Overnight’ market)

     370        128  

Other

     —          22  
  

 

 

    

 

 

 
     894      873  
  

 

 

    

 

 

 
     995      925  

Bank certificates of deposit (Certificados de Depósito Bancário, or CDBs), with fixed or floating rates, are remunerated at a percentage varying from 75% to 106% in 2016 (75% to 111% in 2015) of the CDI rate (Interbank Rate for Certificates of Deposit – Certificados de Depósito Interbancário, or CDIs), published by the Custody and Settlement Chamber (Câmara de Custódia e Liquidação, or Cetip).

Overnight repo transactions are short-term cash investments, with availability for redemption on the day following the date of investment. They are usually backed by treasury bills, notes or bonds and referenced to a fixed rate of approximately 13.64% p.a. in 2016 (14.3% p.a. in 2015).

The Company’s exposure to interest rate risk and a sensitivity analysis of financial assets and liabilities are given in Note 29 to the consolidated financial statements.

 

7. SECURITIES

 

     2016      2015  

Cash investments

     

Current

     

Bank certificates of deposit

     46        1,717  

Financial Notes – Banks

     728        461  

Treasury Financial Notes (LFTs)

     193        88  

Debentures

     45        160  

Other

     2        1  
  

 

 

    

 

 

 
     1,014      2,427  

Non-current

     

Bank certificates of deposit

     —          43  

Financial Notes – Banks

     14        41  

Other

     17        —    
  

 

 

    

 

 

 
     31      84  
     1,045      2,511  

Fixed-rate or floating-rate Bank certificates of deposit (Certificados de Depósito Bancário, or CDBs) are remunerated at a percentage of the rate for interbank deposits (Certificado de Depósito Interbancário, or CDI rate), which is published by the Custody and Settlement Chamber (Câmara de Custódia e Liquidação, or Cetip). This percentage ranges from 100.5% to 105.25% in 2016 (75% to 105% in 2015) depending on the transaction.

Bank Financial Bills (Letras Financeiras, or LFs) are fixed-rate fixed-income securities, issued by banks and remunerated at a percentage of the CDI rate published by Cetip. The remuneration rate on the LFs in Cemig’s portfolio varies between 104.25% to 112.7% of the CDI rate in 2016 (105% to 116.7% of the CDI rate in 2015).

Treasury Financial Notes (LFTs) are fixed rate securities, the yield on which follows the daily variation of the Selic rate between the date of purchase and the date of purchase of the security.

 

 

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Debentures are medium and long term debt securities, which give their holders a right of credit against the issuing company. The debentures have remuneration rates varying between 104.25% to 113% of the CDI rate in 2016 (105.4% to 113% of the CDI rate in 2015).

Note 29 gives a classification of these securities. Cash investments in securities of related parties are shown in Note 28.

 

8. CONSUMERS, TRADERS AND POWER TRANSPORT CONCESSION HOLDERS

 

     Balances
not yet
due
     Up to
90 days
past due
     More than
90 days
past due
    2016     2015  

Invoiced supply

     1,067        710        791       2,568       2,413  

Supply not yet invoiced

     920        —          —         920       1,125  

Wholesale supply to other concession holders

     390        20        13       423       99  

CCEE (Electricity Trading Chamber)

     —          —          1       1       516  

Concession holders – Transport of electricity

     233        11        75       319       370  

(–) Allowance for doubtful accounts

     —          —          (660     (660     (625
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     2,610        741        220       3,571       3,898  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Current assets

             3,425       3,765  

Non-current assets

             146       133  

The Company’s exposure to credit risk related to Consumers and traders is given in Note 29.

The provision for the allowance for doubtful receivables is considered to be sufficient to cover any losses in the realization of these assets, and breaks down by type of consumer as follows:

 

     2016      2015  

Residential

     245        211  

Industrial

     133        136  

Commercial, services and others

     152        117  

Rural

     24        19  

Public authorities

     10        12  

Public illumination

     5        5  

Public service

     15        10  

Charges for use of the network—TUSD

     68        112  

Other

     8        3  
  

 

 

    

 

 

 
     660        625  
  

 

 

    

 

 

 

Changes in the provision for doubtful receivables in 2016, 2015 and 2014 were as follows:

 

Balance on December 31, 2013

     585  
  

 

 

 

New provisions

     127  

Reversals

     (62
  

 

 

 

Balance on December 31, 2014

     650  
  

 

 

 

New provisions

     175  

Reversals

     (200
  

 

 

 

Balance on December 31, 2015

     625  
  

 

 

 

New provisions (reversals)

     382  

Written off

     (347
  

 

 

 

Balance at December 31, 2016

     660  
  

 

 

 

 

 

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Advance sales of power supply

Cemig GT made a transaction with a large client for an advance on sales of power supply, receiving the amount of R$ 181 in advance, in relation to the quantity of supply contracted for the period January 1, 2017 to December 31, 2017.

 

9. RECOVERABLE TAXES

 

     2016      2015  

Current

     

ICMS tax recoverable

     155        113  

PIS and Pasep taxes

     12        9  

Cofins tax

     58        44  

Other

     11        9  
  

 

 

    

 

 

 
     236      175  
  

 

 

    

 

 

 

Non-current

     

ICMS tax recoverable

     171        183  

PIS and Pasep taxes

     1        13  

Cofins tax

     5        60  

Other

     1        2  
  

 

 

    

 

 

 
     178      258  
  

 

 

    

 

 

 
     414      433  
  

 

 

    

 

 

 

The credits of the PIS, Pasep, Cofins and ICMS taxes, recorded in Non-current assets, arise from acquisitions of property, plant and equipment and can be offset over 48 months. The transfer to Non-current was made in accordance with estimates by management of the amounts which will likely be realized up to December 2017.

 

10. INCOME AND SOCIAL CONTRIBUTION TAXES

 

a) Income and social contribution taxes recoverable

The balances of income and social contribution taxes refer to tax credits in corporate income tax returns of previous years and to advance payments in 2016, which will be offset against federal taxes payable for the year 2017. These are posted in Taxes and contributions.

 

     2016      2015  

Current

     

Income tax

     436        226  

Social Contribution tax

     154        80  
  

 

 

    

 

 

 
     590      306  
  

 

 

    

 

 

 

Non-current

     

Income tax

     98        192  

Social Contribution tax

     14        14  
  

 

 

    

 

 

 
     112      206  
  

 

 

    

 

 

 
     702      512  
  

 

 

    

 

 

 

 

 

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b) Deferred income and social contribution taxes

Cemig and its subsidiaries have tax credits for income tax, constituted at the rate of 25%, and the social contribution tax, constituted at the rate of 9%, as follows:

 

     2016     2015  

Deferred tax assets

    

Tax loss carryforwards

     290       236  

Provisions

     1,027       713  

Post-retirement liabilities

     1,175       831  

Allowance for doubtful receivables

     229       210  

Taxes payable – suspended liability (1)

     202       200  

Paid concession

     8       9  

Other

     22       54  
  

 

 

   

 

 

 

Total

     2,953       2,253  
  

 

 

   

 

 

 

Deferred tax liabilities

    

Funding cost

     (45     (20

Deemed cost

     (268     (280

Adjustment to present value

     —         —    

IRT

     —         —    

Cost of acquisition of equity interests

     (481     (499

Borrowing costs, capitalized

     (149     (108

Taxes on revenues from unredeemed cash investments – Presumed Profit accounting method

     (2     (2

Updating of indemnity value assets

     (517     (262

Adjustment of expectation of cash flow from the indemnifiable Financial asset of distribution concession

     (271     (273

Other

     (5     —    
  

 

 

   

 

 

 

Total

     (1,738     (1,444
  

 

 

   

 

 

 

Total, net

     1,215       809  
  

 

 

   

 

 

 

Total assets

     1,797       1,498  

Total liabilities

     (582     (689

 

(1) Refers to court escrow deposit of PIS, Pasep and Cofins taxes charged on amounts of ICMS tax.

 

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The changes in Deferred income and social contribution taxes were as follows:

 

Balance on December 31, 2013

     965  
  

 

 

 

Effects allocated to Statement of income

     (83

Deferred taxes recognized in business combination

     (269

Effects allocated to Statement of comprehensive income

     22  
  

 

 

 

Balance on December 31, 2014

     635  
  

 

 

 

Effects allocated to Statement of income

     (12

Effects allocated to Statement of comprehensive income

     191  

Realized

     (5
  

 

 

 

Balance on December 31, 2015

     a
  

 

 

 

Effects allocated to Statement of income

     141  

Effects allocated to Statement of comprehensive income

     265  
  

 

 

 

Balance at December 31, 2016

     1,215  
  

 

 

 

The Board of Directors, in a meeting held on April 11, 2017 approved a technical study prepared by the Financial Department, on the forecast for the Company’s future profitability. This study was also submitted to examination by the Audit Board on April 11, 2017.

Under the current Brazilian tax legislation deductible temporary differences and accumulated tax losses do not expire by limitation of time. Deferred tax assets have been recognized in relation to these items, because it is probable that the future taxable profits will be available for the Company to be able to use for the benefits of these items.

According to the individual estimates of the Company and its subsidiaries, the future taxable profits enable the Deferred tax asset existing on December 31, 2016 to be realized, as follows:

 

2017

     394  

2018

     387  

2019

     437  

2020

     404  

2021

     598  

2022-2024

     490  

2025-2026

     243  
  

 

 

 
     2,953  
  

 

 

 

 

 

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c) Reconciliation of the expense on income and social contribution taxes

This table reconciles the nominal expense on income tax (rate 25%) and the Social Contribution tax (rate 9%) with the actual expense, presented in the Statement of income:

 

     2016     2015     2014  

Profit before income tax and Social Contribution tax

     367       3,362       4,479  

Income tax and Social Contribution tax – nominal expense

     (125     (1,143     (1,523

Tax effects applicable to:

      

Gain (loss) in subsidiaries by equity method (net of Interest on Equity)

     (132     105       25  

Interest on Equity

     129       68       78  

Gain on formation of Aliança Geração

     —         87       —    

Deduction of amortized intangible concession assets – capital gain, Taesa

     20       —         —    

Non-deductible contributions and donations

     (4     (7     (13

Tax incentives

     3       43       66  

Tax credits not recognized

     5       (1     (1

Difference between Presumed Profit and Real Profit

     126       25       8  

Non-deductible penalties

     (16     (10     (5

Excess on reactive power and demand levels

     (12     (11     (12

Write-down for part of allowance for doubtful debtors

     (22     (32     —    

Other

     (5     (17     35  
  

 

 

   

 

 

   

 

 

 

Income tax and Social Contribution – effective gain (expense)

     (33     (893     (1,342
  

 

 

   

 

 

   

 

 

 

Effective rate

     8.99%       26.56%       29.96%  

Current tax

     (174     (881     (1,259

Deferred tax

     141       (12     (83

Tax incentives – Sudene

The federal tax authority (Receita Federal) recognized the right to a reduction of 75% in income tax, including the part paid at the additional rate, calculated based on the operating profit made in the region under the aegis of Sudene (the Development Authority for the Northeast), for 10 years from 2014. The incentive amounts recorded in the Income statement were: R$ 7 in 2016, R$ 21 in 2015 and R$ 25 in 2014. These items were all subsequently transferred to the Tax Incentive Reserve.

 

11. RESTRICTED CASH

The total recorded as Restricted cash, R$ 367, refers mainly to the amount deposited with Banco Santander, in accordance with the shareholders’ agreement of RME and Luce, as guarantee for settlement of the put options. The contract for the account with the depositary bank is in effect until December 15, 2017.

 

12. ESCROW DEPOSITS

These payments are mainly for legal actions relating to employment-law contingencies and tax obligations.

The most important escrow deposits for tax obligations refer to the Pasep and Cofins taxes – in actions seeking to exclude the ICMS tax itself from the calculation base of the Pasep and Cofins taxes.

 

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     2016      2015  

Employment law cases

     381        367  

Tax issues

     

Income tax on Interest on Equity

     15        15  

Pasep and Cofins tax (1)

     746        751  

ICMS credits on PP&E

     37        36  

Donations and legacy tax (ITCD)

     46        34  

Urban property tax (IPTU)

     80        68  

Finsocial tax

     37        23  

Other

     202        185  
  

 

 

    

 

 

 
     1,163        1,112  
  

 

 

    

 

 

 

Other

     

Monetary updating on AFAC from Minas Gerais State Government (2)

     239        239  

Regulatory

     60        57  

Third party

     13        10  

Consumer relations

     6        4  

Court embargo

     8        12  

Other

     17        12  
  

 

 

    

 

 

 
     343        334  
  

 

 

    

 

 

 
     1,887        1,813  
  

 

 

    

 

 

 

 

(1) The escrow deposits relating to Pasep and Cofins taxes refer to the case challenging the constitutionality of inclusion of the ICMS tax, which has been charged, within the amount on which the Pasep and Cofins taxes are calculated. They have a corresponding provision in Taxes. See more details in Note 19.

 

(2) Administrative deposit in case seeking suspension of enforceability of the credit charged by the Minas Gerais State Government for a difference in the monetary updating on the Advance against Future Capital Increase (Adiantamento contra Futuro Aumento de Capital, or AFAC). See more details in Note 23.

 

13. ENERGY DEVELOPMENT ACCOUNT (CDE)

Reimbursment of tariff subsidy payments

The subsidies applicable to tariffs charged to users of public electricity distribution service, which are reimbursed through payments of funds from the Energy Development Account (CDE).

In 2016, the amount appropriated as incoming subsidies was R$ 792 (R$ 801 in 2015 and R$ 579 in 2014). Of the amount provisioned, the Company has R$ 64 receivable (R$ 72 in 2015). This is recognized in current assets.

Payments from the Tariff Flag Funds Centralizing Account

The ‘Flag Account’ (Conta Centralizadora de Recursos de Bandeiras Tarifárias – CCRBT or ‘Conta Bandeira’) manages the funds collected from captive customers of utilities of the national grid holding electricity distribution concessions and permissions – these were paid, on behalf of the CDE, directly to the Flag Account. The resulting funds are passed through by the Wholesale Trading Chamber (CCEE) to distribution agents, based on the differences between (i) realized costs of thermal generation and exposure to short-term market prices, and (ii) the amounts covered by the tariff.

In 2016 the amounts Paid by the Flag Account totaled R$ 341 (R$ 1,124 in 2015). This was recognized as a partial realization of the CVA receivable previously constituted.

 

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14. FINANCIAL ASSETS AND LIABILITIES OF THE CONCESSION

 

Financial assets of the concession

   2016      2015  

Assets related to infrastructure (a)

     

Distribution concessions

     215        137  

Transmission concessions

     482        401  

Transmission Indemnity receivable

     1,805        1,054  

Generation Indemnity receivable

     547        546  

Generation —Assets remunerated by tariff

     —          46  

Concession Grant Fee – Plants contracted at Auction 12/2015

     2,254        —    
  

 

 

    

 

 

 
     5,303        2,184  

CVA (Portion A Variation Compensation Account) and Other financial components in tariff adjustments (b)

     398        1,350  
  

 

 

    

 

 

 

Total

     5,701        3,534  
  

 

 

    

 

 

 

Current assets

     730        874  

Non-current assets

     4,971        2,660  

 

Financial liabilities of the concession

   2016      2015  

CVA (Portion A Variation Compensation Account) and Other financial components in tariff adjustments (b)

     805        —    

Current liabilities

     482        —    

Non-current liabilities

     323        —    

 

a) Assets related to infrastructure

The distribution of energy, transmission of energy and gas contracts of the Company and its subsidiaries are within the criteria for application of Technical Interpretation IFRIC 12, which governs accounting of concessions. These contracts refer to the investment made in infrastructure, which will be the subject of indemnity by the Concession-granting power, during the period and at the end of the concessions, as specified in the regulations of the electricity sector and in the concession contract signed between Cemig and its subsidiaries and the related concession-granting powers.

Transmission Indemnity receivable

The Company’s transmission concession contracts are within the criteria for application of Technical Interpretation IFRIC 12, which deals with accounting of concessions, and refer to invested infrastructure that will be the subject of indemnity by the Concession-granting power during and at the end of their concession periods, as laid down in the regulations for the electricity sector, and in the concession contract.

Aneel Normative Resolution 589, of December 10, 2013, laid down the criteria for calculation of the New Replacement Value (Valor Novo de Reposição, or VNR) of the transmission facilities, for the purposes of indemnity.

On August 16, 2016 Aneel, through its Dispatch 2181, homologated the amount of R$ 892, in currency of November 2012, for the portion of the reversible assets not yet amortized, for the purposes of indemnity to Cemig GT.

 

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On April 22, 2016 the Mining and Energy Ministry (MME) published its Ministerial Order 120, setting the deadline and method of payment of the remaining amount of the indemnity.

The Ministerial Order determined that the amounts homologated by Aneel should become part of the Regulatory Remuneration Asset Base (Base de Remuneração Regulatória, or BRR) and that the cost of capital should be added to the related Permitted Annual Revenues (‘RAP’).

The portions of remuneration and depreciation not paid in the period from the extensions of the concessions up to the tariff-setting process of 2017 are to be updated by the IPCA index and remunerated at the real cost of own capital of the transmission segment of the industry as decided by Aneel in the methodologies for Periodic Tariff Reviews of Revenues for Existing Concession Holders, currently 10.44% per year, to be paid over eight years by reimbursement through the RAP.

The Ministerial Order still awaits certain decisions, and as a result Public Hearing 068/2016 was opened on October 14, 2016 to obtain input for improvement of the regulations for calculation of the cost of capital to be added to the RAP (Permitted Annual Revenue) of the transmission concession holders.

Considering that MME Ministerial Order 120 specifies that cost of capital is to comprise two portions – Remuneration; and Depreciation (QRR) – the Company, based on the best information available, made the necessary adjustments, arriving at the following values as indemnity:

 

Regulatory Remuneration Base (BRR) – Dispatch 2181/2016

     1,177  

Amount of the indemnity received so far

     (285
  

 

 

 

Net value of the assets for purposes of indemnity

     892  
  

 

 

 

Updating in accordance with MME Order 120/16 – IPCA index / Cost of own capital – Period Jan. 2013 to Dec. 2016

     913  
  

 

 

 

Total indemnity

     1,805  
  

 

 

 

Transmission – Assets remunerated by tariff

For the new assets consisting of improvements and strengthening of facilities implemented by the transmission concession holders, Aneel calculates an additional portion of Permitted Annual Revenue (RAP) in accordance with a methodology specified in the Tariff Regulation Procedures (Procedimentos de Regulação Tarifária, or Proret).

 

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Under the Proret procedure, the revenue established in the Resolutions is payable to the transmission companies as from the date of start of commercial operation of the facilities. In the periods between reviews, the revenues associated with the improvements and strengthening of facilities are provisional. They are then definitively decided in the review immediately subsequent to the start of commercial operation of the facilities; this review then has effect backdated to the date of start of commercial operation.

Distribution assets

The Fifth Amendment to the Public Electricity Distribution Service Concession Agreements was signed on December 21, 2015, extending the concessions for a further 30 years, from January 1, 2016 to December 31, 2045. As a result, for determining Financial Assets, the new Amendment signed has been used as a reference, and the portion of Financial assets that will be used during the period of the new concession has been transferred to Intangible assets.

Generation Indemnity receivable

In July 2015 termination dates for several of the plants operated by the Company was reached under Concession Contract 007/97. As from the termination of the concession, the Company held the indemnity rights of the assets not yet depreciated/amortized, as specified in the concession contract referred to. The accounting balances corresponding to these assets, including the Deemed Cost, were transferred from Fixed assets to Financial assets on the date of termination of the concession, and total R$ 547.

 

Generating plant

   Concession
expiration
date
     Installed
capacity
(MW)
     Net balance of assets
on Dec. 31, 2016 based
on historic cost
     Net balance of assets
on Dec. 31, 2016 based
on deemed cost
 

Três Marias Hydroelectric Plant

     July 2015        396        71        414  

Salto Grande Hydroelectric Plant

     July 2015        102        10        39  

Itutinga Hydroelectric Plant

     July 2015        52        4        7  

Camargos Hydroelectric Plant

     July 2015        46        8        23  

Piau Small Hydroelectric Plant

     July 2015        18,01        2        9  

Gafanhoto Small Hydroelectric Plant

     July 2015        14        1        10  

Peti Small Hydroelectric Plant

     July 2015        9,4        1        8  

Dona Rita Small Hydroelectric Plant

     Sep. 2013        2,41        1        1  

Tronqueiras Small Hydroelectric Plant

     July 2015        8,5        2        12  

Joasal Small Hydroelectric Plant

     July 2015        8,4        1        8  

Martins Small Hydroelectric Plant

     July 2015        7,7        2        4  

Cajuru Small Hydroelectric Plant

     July 2015        7,2        4        4  

Paciência Small Hydroelectric Plant

     July 2015        4,08        1        4  

Marmelos Small Hydroelectric Plant

     July 2015        4        1        4  
     

 

 

    

 

 

    

 

 

 
        679,70        109        547  
     

 

 

    

 

 

    

 

 

 

 

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As specified in Aneel Normative Resolution 615/2014, the Valuation Opinions proposing the amounts of the indemnity of the assets were delivered to Aneel by December 31, 2015. Based on the discussions and valuations currently in progress, management believes that the amount recorded is the best estimate of indemnity taking into account the information available up to the reporting date of the accounting statements at December 31, 2016.

From the termination of the concession contract until January 4, 2016, the plants were operated by the Company under the Quota regime, with remuneration by a tariff only to cover costs of operation and maintenance of the assets. On January 5, 2016 the plants began to be operated in accordance with the terms of the Auction won by Cemig GT on November 25, 2015 (‘Auction 12/2015’) as described in more detail below:

Concession Grant Fee – Auction 12/2015

Under Provisional Measure 579/2012, enacted as Law 12783/2013, the concessions of 14 plants of Cemig GT (Cajuru, Camargos, Gafanhoto, Itutinga, Joasal, Marmelos, Martins, Paciência, Peti, Piau, Salto Grande, Três Marias, Tronqueiras and Volta Grande), and those of the Jaguara, São Simão and Miranda plants were made subject to acceptance of predefined tariffs, and indemnity of the yet unamortized investments made for each plant. At the time, Cemig GT did not accept the terms for renewal.

In November 2015, Cemig GT took part in Auction 12/2015 and won the concessions of Lot D. This lot comprises 18 plants – for five of which the concession had been previously held by Furnas S.A..

The contract for these plants gives Cemig the concession for their commercial operation for the next 30 years, and requires that: in 2016 the whole of the output will be sold in the Regulated Market, under the Physical Guarantee Quota System (Sistema de Cotas de Garantia Física, or CGF); and in 2017, 70% of the output will be sold in the Regulated Market and 30% in the Free Market.

Cemig’s offer for acquisition of grant of the 30-year concession for the 18 hydroelectric plants was R$ 2,216. Of this fee, 65% was paid on January 4, 2016, and the remaining 35% (initially R$ 776) was paid on July 1, 2016 (updated by the Selic rate to a total payment of R$ 828). The contract was signed by Cemig GT on January 5, 2016.

 

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In June 2016, title to Concession Contracts 08 to 16/2016, relating to the Auction won by Cemig GT on November 25, 2015, was transferred to the related specific-purpose companies (SPCs), wholly-owned subsidiaries of Cemig GT, as follows:

 

     Balances
transferred on
May 31, 2016
     Monetary
updating
     Amounts
received
    Balance at
Dec. 31, 2016
 

Cemig Geração Três Marias S.A.

     1,260        192        (169     1,283  

Cemig Geração Salto Grande S.A.

     396        60        (53     403  

Cemig Geração Itutinga S.A.

     148        25        (23     150  

Cemig Geração Camargos S.A.

     110        18        (16     112  

Cemig Geração Sul S.A.

     145        26        (24     147  

Cemig Geração Leste S.A.

     98        19        (18     99  

Cemig Geração Oeste S.A.

     59        12        (11     60  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     2,216        352        (314     2,254  
  

 

 

    

 

 

    

 

 

   

 

 

 

The amount of the concession grant fee was recognized as a financial asset, due to the Company having the unconditional right to receive the amount paid, plus updating by the IPCA Index and remuneratory interest, during the period of the concession.

The changes in Financial assets of the concession related to infrastructure are as follows:

 

     Transmission     Generation     Distribution     Gas     Total  

Balance on December 31. 2013

     779       —         5,064       —         5,843  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Additions

     80       —         —         —         80  

Written off

     —         —         (19     —         (19

Updating of indemnifiable value of assets

     420       —         —         —         420  

Asset acquired in business combination

     —         —         —         656       656  

Transfers

     (1     —         844       (656     187  

Amounts received

     (6     —         —         —         (6

Adjustment to expectation of cash flow from the indemnifiable Financial asset of the distribution concession

     —         —         55       —         55  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance on December 31. 2014

     1,272       —         5,944       —         7,216  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Additions

     146       —         —         —         146  

Written off

     (6     —         (31     —         (37

Transfer from Financial assets to Intangible assets on renewal of concessions

     —         —         (7,162     —         (7,162

Transfers

     (2     —         808       —         806  

Generation Indemnity receivable

     —         546       —         —         546  

Amounts received

     (10     —         —         —         (10

Adjustment to expectation of cash flow from the indemnifiable Financial asset of the distribution concession

     —         —         578       —         578  

Updating of indemnifiable value of assets

     101       —         —         —         101  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance on December 31. 2015

     1,501       546       137       —         2,184  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Additions

     54       1       —         —         55  

Addition – Grant Fee – Plants

     —         2,216       —         —         2,216  

Written off

     (3     0       —         —         (3

Amounts received

     (16     (315     —         —         (331

Transfer from Financial to Intangible assets

     —         —         71       —         71  

Updating of the Concession Grant Fee

     —         352       —         —         352  

Adjustment to expectation of cash flow from the indemnifiable Financial asset of the distribution concession

     —         —         8       —         8  

Monetary updating

     751       —         —         —         751  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

     2,287       2,800       216       —         5,303  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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b) CVA Account (Compensation of Portion A items) and Other Financial Components in tariff adjustments

The Amendment that extended the period of the concession of Cemig D guarantees that, in the event of extinction of the concession, for any reason, the remaining balances (assets and liabilities) of any shortfall in payment or reimbursement through the tariff must also be included by the Concession-granting power in the total of the indemnity.

The balances on (i) the CVA Account, (ii) the account for Neutrality of Sector Charges, and (iii) Other financial items in the tariff calculation, refers to the positive and negative differences between the estimate of the Company’s non-manageable costs and the payments actually made. The variations found are the subject of monetary updating based on the Selic rate and compensated in the subsequent tariff adjustments.

The balances of these financial assets and liabilities are shown below. Please note that in the Interim Accounting Information the balances of each line are presented at net value in assets or liabilities in accordance with the tariff adjustments homologated or to be homologated:

 

Balances at December 31, 2016

   Current     Non-current     Total
assets
     Total
liabilities
 
   Assets      Liabilities     Assets      Liabilities       

Items of ‘Portion A’

               

Quota for the Energy Development Account (CDE)

     203        (145     —          (100     203        (245

Tariff for use of transmission facilities of grid participants

     7        —         3        —         10        —    

Tariff for transport of electricity provided by Itaipu

     8        —         2        —         10        —    

Program to encourage alternative sources of electricity – Proinfa

     15        —         2        —         17        —    

System Service Charges (ESS) and

Reserve Energy Charge (EER)

     —          (167     —          (77     —          (244

Electricity purchased for resale

     1,676        (1,300     370        (402     2,046        (1,702
               

Other financial components

               

Overcontracting of supply

     —          (137     —          (23     —          (160

Neutrality of Portion A

     79        (46     1        (33     80        (79

Other financial items

     3        (266     —          (66     3        (332

Tariff Flag balances (1)

     —          (14     —          —         —          (14
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

TOTAL

     1,991        (2,075     378        (701     2,369        (2,776
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Billing arising from the Tariff Flag System not yet homologated by Aneel.

 

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Balances at December 31, 2015

   Current     Non-current     Total
assets
     Total
liabilities
 
   Assets      Liabilities     Assets      Liabilities       

Items of ‘Portion A’

               

Quota for the Energy Development Account (CDE)

     249        —         88        —         337        —    

Tariff for use of transmission facilities of grid participants

     42        —         3        —         45        —    

Tariff for transport of electricity from Itaipu

     8        —         3        —         11        —    

Program to encourage alternative sources of electricity – Proinfa

     5        (1     2        —         7        (1

System Service Charges (ESS) and Reserve Energy Charge (EER)

     —          (255     —          (53     —          (308

Electricity purchased for resale

     2,021        (739     572        (204     2,593        (943
               

Other financial components

               

Overcontracting of supply

     —          (408     —          (122     —          (530

Neutrality of Portion A

     88        (2     31        —         119        (2

Other financial items

     11        (1     170        —         181        (1

‘Tariff Flag’ amounts (1)

     —          (158     —          —         —          (158
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

TOTAL

     2,424        (1,564     869        (379     3,293        (1,943
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Billing arising from the Tariff Flag System not yet homologated by Aneel.

 

Balance

   Amounts homologated
by Aneel in the last
tariff adjustment
    Amounts to be
homologated by Aneel
in the next tariff
adjustment
    2016     2015  

Assets

     1,444       925       2,369       3,293  

Liabilities

     (1,046     (1,730     (2,776     (1,943
  

 

 

   

 

 

   

 

 

   

 

 

 
     398       (805     (407     1,350  
  

 

 

   

 

 

   

 

 

   

 

 

 

This table shows changes in balances of financial assets and liabilities in 2016, 2015 and 2014:

 

Balance on December 31, 2013

     —    

New financial assets constituted

     1,107  
  

 

 

 

Balance on December 31, 2014

     1,107  
  

 

 

 

(+) New financial assets constituted

     2,285  

(–) Amortization

     (581

(–) Receipt of funds from the ACR Account and from the Centralizing Account for Funds from the Tariff Flag System—CCRBT (1)

     (1,529

(+) Updating – Selic rate

     68  
  

 

 

 

Balance on December 31, 2015

     1,350  
  

 

 

 

(–) Net constitution of financial assets

     (858

(–) Amortization

     (597

(–) Payments from the Tariff Flag Funds Centralizing Account (1)

     (341

(–) Transfer (2)

     (165

(+) Updating – Selic rate (3)

     204  
  

 

 

 

Balance at December 31, 2016

     (407
  

 

 

 

 

(1) See more details in Note 13.
(2) The financial component constituted to be passed through to the tariff at the next tariff adjustment, arising from judgments (injunctions/provisional remedy) in legal actions challenging part of the amount of the CDE (Energy Development Account) charge, was reclassified to Credits owed by Eletrobras, and will be amortized with counterpart in deductions from the monthly CDE charges to be paid to Eletrobras, in accordance with a Dispatch issued by Aneel in 2016.
(3) Includes adjustment for homologation of the CVA by Aneel which took place in May 2016.

 

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15. INVESTMENTS

This table gives a summary of the financial information on the affiliated companies and jointly-controlled enterprises. The information below reflects the percentage of the Company’s equity interest in each item.

 

     2016     2015  

Hidrelétrica Cachoeirão

     50       42  

Guanhães Energia

     —         19  

Hidrelétrica Pipoca

     32       27  

Retiro Baixo

     162       148  

Aliança Norte (Belo Monte plant through Norte Energia)

     527       354  

Madeira Energia (Santo Antônio plant through Madeira Energia)

     644       676  

FIP Melbourne (Santo Antônio plant through Madeira Energia)

     677       703  

Lightger

     42       37  

Baguari Energia

     162       187  

Renova

     689       1,527  

Aliança Geração

     1,319       1,327  

Central Eólica Praias de Parajuru

     63       63  

Central Eólica Volta do Rio

     81       85  

Central Eólica Praias de Morgado

     60       62  

Amazônia Energia (Belo Monte plant through Norte Energia)

     781       495  

Usina Hidrelétrica Itaocara S.A.

     3       —    

Light

     1,070       1,188  

TAESA

     1,583       2,242  

Ativas Data Center

     18       —    

Epícares Empreendimentos e Participações Ltda

     —         —    

Luce

     344       —    

RME

     339       —    

Companhia Transleste de Transmissão

     22       18  

Companhia Transudeste de Transmissão

     21       18  

Companhia Transirapé de Transmissão

     24       19  

Transchile

     —         108  

Companhia de Transmissão Centroeste de Minas

     21       18  

Axxiom Soluções Tecnológicas

     19       24  

Parati

     —         358  
  

 

 

   

 

 

 

Total of investments

     8,753       9,745  
  

 

 

   

 

 

 

Ativas Data Center – excess of liabilities over assets of jointly-controlled entity

     —         (28

Guanhães – excess of liabilities over assets of jointly-controlled entity

     (59     —    
  

 

 

   

 

 

 

Total

     8,694       9,717  
  

 

 

   

 

 

 

 

The Company’s investees that are not consolidated are jointly-controlled entities, with the exception of the interest in the Santo Antônio power plant, and Ativas Data Center, which are affiliated companies in which the Company has significant influence. It was as from the fourth quarter of 2016 that Ativas Data Center became an investee in which Cemig has significant influence.

a) Right to commercial operation of the regulated activity

In the process of allocation of the acquisition price of the jointly-controlled subsidiaries, a valuation was made of the intangible assets relating to the right to operate the regulated activity. This asset is presented jointly with the historic value of the investments in the table above. These assets will be amortized over the remaining period of the concessions on the straight-line basis.

 

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     Dec. 31,
2013
     Additions      Amortization     Dec. 31,
2014
     Amortization     Dec. 31,
2015
     Additions      Amortization     Written
off
    Dec. 31,
2016
 

Rosal

     6        —          (6     —          —         —          —          —         —         —    

TAESA

     452        —          (19     433        (18     415        —          (18     (109     288  

Light

     275        —          (22     253        (22     231        —          (22     —         209  

Gasmig

     24        203        (7     220        (5     215        —          (8     —         207  

LUCE

     —          —          —         —          —         —          50        (1     —         49  

RME

     —          —          —         —          —         —          49        (1     —         48  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     757        203        (54     906        (45     861        99        (50     (109     801  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

b) The movement of Investments in the jointly-controlled entities in 2016, 2015 and 2014, is as follows:

 

     Dec. 31,
2015
    Equity
method gain
(Statement
of income)
    Gain (loss) by
equity method
(Other
comprehensive
income)
    Dividends     Injections /
acquisitions
     Sales     Incorporation     Other     Dec. 31,
2016
 

Companhia Transleste de Transmissão

     18       6       —         (2     —          —         —         —         22  

Companhia Transudeste de Transmissão

     18       4       —         (1     —          —         —         —         21  

Companhia Transirapé de Transmissão

     19       5       —         —         —          —         —         —         24  

Transchile

     108       2       (23     —         —          (87     —         —         —    

Companhia de Transmissão Centroeste de Minas

     18       5       —         (2     —          —         —         —         21  

Light

     1,188       (121     3       —         —          —         —         —         1,070  

Axxiom Soluções Tecnológicas

     24       (5     —         —         —          —         —         —         19  

Luce

     —         (18     1       (57     252        —         166       —         344  

RME

     —         (20     —         (58     247        —         169       1       339  

Hidrelétrica Cachoeirão

     42       10       —         (2     —          —         —         —         50  

Guanhães Energia (1)

     19       (103     —         —         25        —         —         59       0  

Hidrelétrica Pipoca

     27       5       —         —         —          —         —         —         32  

Madeira Energia (Santo Antônio Plant through Madeira Energia)

     676       (71     —         —         39        —         —         —         644  

FIP Melbourne (Santo Antônio Plant through Madeira Energia)

     703       (63     —         —         40        —         —         (3     677  

LightGer

     37       5       —         —         —          —         —         —         42  

Baguari Energia

     187       41       —         (14     —          —         —         (52     162  

Central Eólica Praias de Parajuru

     63       —         —         —         —          —         —         —         63  

Central Eólica Volta do Rio

     85       (4     —         —         —          —         —         —         81  

Central Eólica Praias de Morgado

     62       (2     —         —         —          —         —         —         60  

Amazônia Energia (Belo Monte Plant through Norte Energia)

     495       (6     —         —         292        —         —         —         781  

Ativas Data Center (2)

     —         (31     —         —         99        —         —         (50     18  

Parati

     358       (24     1       —         —          —         (335     —      

Taesa

     2,242       342       —         (382     —          (619     —         —         1,583  

Renova (3)

     1,527       (372     19       —         278        —         —         (763     689  

Usina Hidrelétrica Itaocara S.A.

     —         —         —         —         3        —         —         —         3  

Aliança Geração

     1,327       104       —         (112     —          —         —         —         1,319  

Aliança Norte (Belo Monte Plant through Norte Energia)

     354       (7     —         —         180        —         —         —         527  

Retiro Baixo

     148       16       —         (2     —          —         —         —         162  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total of investments

     9,745       (302     1       (632     1,455        (706     —         (808     8,753  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ativas Data Center – Uncovered liabilities of jointly-controlled entity

     (28     —         —         —         —          —         —         —         (28

Guanhães – Uncovered liabilities of jointly-controlled entity

     —         —         —         —         —          —         —         (59     (59
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

     9,717       (302     1       (632     1,455        (706     —         (867     8,666  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Transfer to uncovered liabilities.
(2) The amount of R$ 50 refers to the dilution of shareholding interest arising from subscription of share capital by a new shareholder.
(3) The amount of R$ 763 refers to the impairment of intangible concession assets resulting from the financial difficulties of Renova.

 

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     2014      Equity
method
gain
(Statement
of income)
    Equity method
gain (Other
comprehensive
income)
     Dividends     Injections /
acquisitions
     Other     2015  

Companhia Transleste de Transmissão

     14        8       —          (4     —          —         18  

Companhia Transudeste de Transmissão

     13        5       —          —         —          —         18  

Companhia Transirapé de Transmissão

     13        6       —          —         —          —         19  

Transchile

     67        5       36        —         —          —         108  

Companhia de Transmissão Centroeste de Minas

     22        2       —          (6     —          —         18  

Light

     1,198        (11     2        (1     —          —         1,188  

Axxiom Soluções Tecnológicas

     23        1       —          —         —          —         24  

Hidrelétrica Cachoeirão

     34        8       —          —         —          —         42  

Guanhães Energia

     69        (49     —          (1     —          —         19  

Hidrelétrica Pipoca

     28        2       —          (3     —          —         27  

Madeira Energia (Santo Antônio plant through Madeira Energia)

     674        2       —          —         —          —         676  

FIP Melbourne (Santo Antônio plant through Madeira Energia)

     708        (5     —          —         —          —         703  

Lightger

     38        (1     —          —         —          —         37  

Baguari Energia

     193        12       —          (18     —          —         187  

Central Eólica Praias de Parajuru

     62        2       —          (1     —          —         63  

Central Eólica Volta do Rio

     84        2       —          (1     —          —         85  

Central Eólica Praias de Morgado

     62        —         —          —         —          —         62  

Amazônia Energia (Belo Monte Plant through Norte Energia)

     395        (19     —          (1     120        —         495  

Ativas Data Center

     —          (28     —          —         —          28       —    

Epícares Empreendimentos (1)

     92        1       —          1       —          (94     —    

Parati

     372        3       —          (17     —          —         358  

Taesa

     2,188        383       —          (329     —          —         2,242  

Renova

     1,538        (25     15        (1     —          —         1,527  

Aliança Geração

     3        107       —          (93     581        729       1,327  

Aliança Norte (Belo Monte Plant through Norte Energia)

     —          (13     —          —         367        —         354  

Retiro Baixo

     150        (5     —          —         3        —         148  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total do Investimento

     8,040        393       53        (475     1,071        663       9,745  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Ativas Data Center – Uncovered liabilities of jointly-controlled entity

     —          —         —          —         —          (28     (28
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     8,040        393       53        (475     1,071        635       9,717  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) The amount of R$ 94 refers to the assets subscribed to constitute Aliança Geração;

 

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     2013      Equity
method
gain
(Statement
of income)
    Equity method
gain (Other
comprehensive
income)
    Dividends     Injections /
acquisitions
     Other     2014  

Gasmig (1)

     577        47       —         (55     —          (569     —    

Companhia Transleste de Transmissão

     29        2       —         (17     —          —         14  

Companhia Transudeste de Transmissão

     14        1       —         (2     —          —         13  

Companhia Transirapé de Transmissão

     14        —         —         (1     —          —         13  

Transchile

     55        2       10       —         —          —         67  

Companhia de Transmissão Centroeste de Minas

     18        5       —         (1     —          —         22  

Light

     1,190        150       (6     (136     —          —         1,198  

Axxiom Soluções Tecnológicas

     8        (1     —         —         16        —         23  

Hidrelétrica Cachoeirão

     34        8       —         (8     —          —         34  

Guanhães Energia

     69        —         —         —         —          —         69  

Hidrelétrica Pipoca

     24        5       —         (1     —          —         28  

Madeira Energia (Santo Antônio plant through Madeira Energia) (2)

     643        (398     —         —         429        —         674  

FIP Melbourne (Santo Antônio plant through Madeira Energia) (2)

     —          10       —         —         698        —         708  

Lightger

     39        —         —         (1     —          —         38  

Baguari Energia

     199        8       —         (14     —          —         193  

Central Eólica Praias de Parajuru

     61        2       —         (1     —          —         62  

Central Eólica Volta do Rio

     78        6       —         —         —          —         84  

Central Eólica Praias de Morgado

     61        2       —         (1     —          —         62  

Amazônia Energia (Belo Monte Plant through Norte Energia)

     311        (17     —         —         101        —         395  

Ativas Data Center

     4        (26     —         —         —          22       —    

Epícares Empreendimentos

     103        3       —         (14     —          —         92  

Parati

     380        41       (1     (48     —          —         372  

Taesa

     2,250        376       —         (438     —          —         2,188  

Renova

     —          (12     —         —         1,550        —         1,538  

Aliança

     —          —         —         —         3        —         3  

Retiro Baixo

     —          (4     —         —         154        —         150  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     6,161        210       3       (738     2,951        (547     8,040  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Consolidation of Gasmig began as from October 2014, and as a result the value of the investment, of R$ 569 was eliminated.
(2) Acquisition of 7.87% interest on Madeira Energia trough FIP Melbourne for R$697,796. Cemig also has a directly-held stockholding interest of 10.00% on Madeira Energia. Cemig made a capital increase of R$429,367 in 2016.

Cemig GT enters into controlling block of Renova

In 2013 Cemig GT’s entered into an Investment Agreement with Renova Energia S.A. (‘Renova’), RR Participações S.A. (‘RR’), Light Energia S.A. (‘Light Energia’) and Chipley SP Participações S.A. (‘Chipley’), governing the entry of Cemig GT, directly or indirectly, into the control block of Renova through subscription of new common shares in Renova. As a result of this transaction, Cemig GT acquired 27.37% interest in Renova Energia S.A. for R$1,550,071 in 2014, which result in recognition of the concession intangible asset of R$855,354.

Acquisition of equity interest

In the process of allocation of the acquisition prices of investments, intangible assets were identified relating to the rights of commercial operation of the regulated activities, and these were supported by economic and financial valuation opinions.

These amounts, adjusted for tax effects, will be amortized, on the straight-line basis, over the remaining periods of the authorizations for operation of each facility.

 

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This table gives the principal information on the subsidiaries and jointly-controlled entities, not adjusted for the percentage represented by the Company’s ownership interest:

 

Company

   Number of
shares
     2016      2015      2014  
      Cemig
Interest
%
     Share
capital
     Equity      Cemig
Interest
%
     Share
capital
     Equity      Cemig
Interest
%
     Share
capital
     Equity  

Cemig Geração e Transmissão

     2,896,785,358        100.00        1,838        4,583        100.00        1,838        4,684        100.00        1,700        3,487  

Hidrelétrica Cachoeirão

     35,000,000        49.00        35        103        49.00        35        83        49.00        35        69,991  

Guanhães Energia

     137,608,000        49.00        186        —          49.00        138        38        49.00        138        137,608  

Hidrelétrica Pipoca

     41,360,000        49.00        41        65        49.00        41        54        49.00        41        58,789  

Retiro Baixo

     222,850,000        49.90        223        264        49.90        223        296        49.90        217        300  

Aliança Norte

(Usina de Belo Monte)

     34,715,961,339        49.00        1,014        1,077        49.00        647        723        —          —          —    

Madeira Energia

(Usina de Santo Antônio)

     9,730,201,137        18.13        10,152        6,419        18.05        9,762        7,642        17.76        9,456        7,782  

Lightger

     79,078,937        49.00        79        85        49.00        79        76        49.00        79        79  

Baguari Energia (1)

     26,157,300,278        69.39        187        248        69.39        262        270        69.39        262        279  

Renova (2)

     360,815,313        34.15        2,856        1,956        27.37        2,526        5,581        27.37        2,568        5,620  

Aliança Geração

     1,291,582,500        45.00        1,291        1,973        45.00        1,291        2,949        —          —          —    

Central Eólica Praias de Parajuru

     70,560,000        49.00        71        89        49.00        71        129        49.00        71        127  

Central Eólica Volta do Rio

     117,230,000        49.00        117        137        49.00        117        174        49.00        117        171  

Central Eólica Praias de Morgado

     52,960,000        49.00        53        65        49.00        53        127        49.00        53        127  

Amazônia Energia (1)

(Usina de Belo Monte)

     1,039,491,023        74.50        1,116        1,048        74.50        723        665        74.50        563        529  

Usina Hidrelétrica Itaocara S.A.

     5,677,000        49.00        6        6        —          —          —          —          —          —    

Cemig Distribuição

     2,359,113,452        100.00        2,362        2,500        100.00        2,362        2,696        100.00        2,262        2,482  

Light

     203,934,060        26.06        2,226        3,354        26.06        2,226        4,558        26.06        2,226        4,602  

Cemig Telecom

     397,683,385        100.00        242        192        100.00        225        169        100.00        225        225  

Rosal Energia

     46,944,467        100.00        47        141        100.00        47        122        100.00        47        121  

Sá Carvalho

     361,200,000        100.00        37        106        100.00        37        103        100.00        37        107  

Gasmig

     409,255,483        99.57        665        1,426        99.57        665        1,408        99.57        665        1,437  

Horizontes Energia

     39,257,563        100.00        39        52        100.00        64        71        100.00        64        70  

Usina Térmica Ipatinga

     174,281        100.00        0        4        100.00        —          4        100.00        14        24  

Cemig PCH

     35,952,000        100.00        36        92        100.00        36        85        100.00        31        67  

Cemig Capim Branco Energia

     87,579,000        —          —          —          100.00        —          —          100.00        88        130  

LUCE

     1,379,839,905        66.62        438        443        —          —          —          —          —          —    

RME

     1,365,421,406        66.27        434        440        —          —          —          —          —          —    

Companhia Transleste de Transmissão

     49,569,000        25.00        50        81        25.00        50        73        25.00        50        54  

UTE Barreiro

     30,902,000        100.00        31        39        100.00        31        30        100.00        31        29  

Companhia Transudeste de Transmissão

     30,000,000        24.00        30        85        24.00        30        73        24.00        30        53  

Empresa de Comercialização de Energia Elétrica

     486,000        100.00        —          20        100.00        —          9        100.00        —          9  

Companhia Transirapé de Transmissão

     22,340,490        24.50        22        98        24.50        22        79        24.50        22        56  

Transchile

     —          —          —          —          49.00        237        221        49.00        161        135  

Efficientia

     6,051,994        100.00        6        5        100.00        6        6        100.00        6        5  

Cemig Comercializadora de Energia Incentivada

     1,000,000        100.00        1        2        100.00        5        6        100.00        5        5  

Companhia de Transmissão Centroeste de Minas

     28,000,000        51.00        28        42        51.00        28        34        51.00        28        41  

Cemig Trading

     1,000,000        100.00        1        29        100.00        —          30        100.00        —          31  

Axxiom Soluções Tecnológicas

     17,200,000        49.00        47        39        49.00        47        49        49.00        17        48  

Parati

     1,432,910,602        —          —          —          25.00        1,433        1,431        25.00        1,433        1,481  

TAESA

     1,033,496,721        31.54        3,042        4,308        43.36        3,042        5,171        43.36        3,042        5,045  

 

(1) Control shared under a Shareholders’ Agreement.
(2) Due to the increase in the equity interest in Renova, there was a loss item of R$2 million reflecting the fact that Renova reported a loss for the year 2016.

 

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On December 31, 2016, the current liabilities of some indirectly jointly-controlled entities were higher than their current assets, as follows:

Guanhães Energia: This was mainly due to issuance of the second series of the sixth commercial Note issue with short-term maturity. The management of Guanhães Energia has obtained funding from the financial market and from the shareholders, allocating it principally to management of its cash for working capital, investments and financial commitments.

Light: On December 31, 2016, Light had a negative working capital balance of R$ 1,259 (R$ 423 on December 31, 2015). The operational cash flow of Light has been improving during the year due to the tariff adjustments obtained during the year ended December 31, 2015, its operational performance in 2016, reduction of investments in 2016, and the improvement of the hydrological situation. Additionally, Light has been negotiating renewal of short-term loans and financings and lengthening of its debt profile, and also expects higher operational cash flow following the tariff review. Management believes that success in these steps will reverse the current scenario of negative net working capital. It can also be noted that Light has reported positive consolidated operational cash flow from operations of R$ 1,118 in 2016 (and R$ 979 in 2015 and R$585 em 2014), which has enabled it to amortize loans, financings and debentures in the amount of R$ 319 in the year ended December 31, 2016. (In 2015 it raised funding of R$ 160.) Further, on March 14, 2017, Aneel approved the result of the fourth Periodic Tariff Review (‘RTP’) of the subsidiary Light SESA, which resulted in an average increase of 10.45% in electricity bills from March 15, 2017, ensuring renewed economic and financial balance for the distribution company.

Madeira Energia (‘Mesa’): The excess of current liabilities over current assets, equal to R$ 1,611 in 2016 (R$543 in 2015), arises mainly from the account lines Suppliers, Other liabilities, Loans and financings, and Contingency provisions. To deal with the situation of negative working capital, Mesa has the benefit of a favorable decision by Aneel to revert, in liabilities, the FID (Availability Factor) account, and release of funds from the debt servicing reserve account which will be replaced by a bank guarantee, with generation of operational cash flow and, if necessary, injections of funds to be made by the shareholders.

Renova Energia: In the year ended December 31, 2016, Renova Energia reported a loss of R$ 1,101 in 2016 (R$ 93 in 2015), and on that date its current liabilities exceeded its current assets by R$ 3,211 in 2016 (R$ 946 in 2015) (consolidated). Further, Renova Energia has reported negative operational cash flow. The main reasons for this scenario are: (i) transactions to purchase supply of electricity, to honor commitments related to the delays in wind farms coming into operation; (ii) significant investments that are being allocated in the construction of the Alto Sertão III wind farm complex; (iii) delay in release of the long-term financing agreement with the BNDES; (iv) certain long-term financings being reclassified as current due to some ratios in covenants not being achieved, and waivers from creditors not being obtained, in 2016; and (iv) losses arising from the transaction with Terraform.

The management of Renova Energia is taking a range of measures to rebalance its liquidity and cash flow structure. These actions include: sale of certain assets; reduction of the administrative and operational structure, reducing administrative costs; financial support from shareholders, contracting of a long-term financing with the Brazilian Development Bank (BNDES); postponement of certain projects, to balance cash flow; requests to creditors for waivers, which will make possible reclassification of the debt to non-current, ensuring liquidity. The Management of Renova Energia believes that with the success of these measures it will be possible to recover economic and financial equilibrium and the Company’s liquidity.

Aliança Geração: This was mainly due to lending transactions with short maturities. Management of Aliança Geração has been taking steps to improve its financial structure and working capital.

 

108


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LOGO

 

The following table provides summarized financial information of the Company’s equity investees in 2016, 2015 and 2014:

 

2016

   Parati     Transleste     Transirapé     Centroeste     Transudeste     Luce     RME     Light     Taesa     Axxiom     Aliança Norte  

Assets

                      

Current

     12       50       41       61       32       6       3       3,612       1,955       66       2  

Cash and cash equivalents

     8       3       2       20       4       —         —         668       102       9       2  

Non-current

     1,327       123       122       1       78       437       437       10,718       6,456       13       1,075  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

     1,339       173       163       62       110       443       440       14,330       8,411       79       1,077  
     —         —         —         —         —         —         —         —         —         —         —    

Liabilities

     —         —         —         —         —         —         —         —         —         —         —    

Current

     —         28       33       5       22       —         —         4,871       1,074       32       —    

Suppliers

     —         —         —         —         —         —         —         1,342       37       1       —    

Loans and financings – Current

     —         18       19       3       19       —         —         15,568       9       10       —    

Non-current

     —         63       32       15       3       —         —         6,105       3,029       8       —    

Equity

     1,339       82       98       42       85       443       440       3,354       4,308       39       1,077  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     1,339       173       163       62       110       443       440       14,330       8,411       79       1,077  
     —         —         —         —         —         —         —         —         —         —         —    

Statement of income

     —         —         —         —         —         —         —         —         —         —         —    

Net sales revenue

     —         34       45       13       22       —         —         9,645       1,391       57       —    

Cost of sales

     —         (2     (19     (2     (1     —         —         (8,042     (149     (64     —    

Depreciation and amortization

     —         —         —         (1     —         —         —         (452     (1     (2     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —         32       26       11       21       —         —         1,603       1,242       (7     —    

General and administrative expenses (SG&A):

     (6     —         (1     —         (1     (1     (1     (753     (107     (8     (2

Financial revenues

     4       2       1       4       1       —         1       148       58       1       —    

Financial expenses

     (60     (11     (5     (3     (4     (41     (41     (1,281     (223     —         (7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operational profit

     (62     23       21       12       17       (42     (41     (283     970       (14     (9

Income tax and the Social Contribution tax

     —         (2     (2     (1     (1     —         —         (30     (108     5       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net profit for the year

     (62     21       19       11       16       (42     (41     (313     862       (9     (9
                      

Other comprehensive income for the year

                      

Net profit for the year

     (62     21       19       11       16       (42     (41     (313     862       (9     (9

Gain (loss) on conversion of financial statements

     —         —         —         —         —         —         —         (86     —         —         —    

Actuarial gains (losses)

     —         —         —         —         —         —         —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income for the year

     (62     21       19       11       16       (42     (41     (399     862       (9     (9

 

109


Table of Contents

LOGO

 

 

2016

   Cachoeirão     Baguari
Energia
    Guanhães
Energia
    Madeira
Energia
    Pipoca     Retiro
Baixo
    Renova     Parajuru     Morgado     Volta
do
Rio
    LightGer     Amazônia
Energia
    Aliança
Geração
 

Assets

                          

Current

     43       45       16       1,520       20       30       136       38       24       37       35       —         388  

Cash and cash equivalents

     40       11       1       58       17       19       36       18       17       27       32       —         147  

Non-current

     86       220       65       23,557       98       377       5,765       128       142       245       152       1,048       2,512  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

     129       265       81       25,077       118       407       5,901       166       166       282       187       1,048       2,900  
     —         —         —         —         —         —         —         —         —         —         —         —         —    

Liabilities

     —         —         —         —         —         —         —         —         —         —         —         —         —    

Current

     9       12       191       3,131       8       25       3,347       19       27       37       16       —         592  

Suppliers

     2       6       —         662       —         1       547       1       1       1       6       —         101  

Non-current

     17       5       11       15,527       45       118       598       58       74       108       86       —         335  

Equity

     103       248       (121     6,419       65       264       1,956       89       65       137       85       1,048       1,973  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     129       265       81       25,077       118       407       5,901       166       166       282       187       1,048       2,900  
     —         —         —         —         —         —         —         —         —         —         —         —         —    

Statement of income

     —         —         —         —         —         —         —         —         —         —         —         —         —    

Net sales revenue

     34       65       —         2,803       25       62       484       27       22       29       36       —         804  

Cost of sales

     (10     (12     —         (1,845     (6     (29     (454     (17     (17     (27     (17     —         (314

Depreciation and amortization

     (3     (9     —         (673     (3     (9     (93     (10     (10     (17     (11     —         (125
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     24       53       —         958       19       33       30       10       5       2       19       —         490  

General and administrative expenses (SG&A)

     —         (1     —         (146     (2     —         (41     (1     (1     (2     (1     (1     (58

Impairment of PP&E

     —         —         —         —         —         —         (281     —         —         —         —         —         —    

Adjustment for losses on investment

     —         —         —         —         —         —         (455     —         —         —         —         —         —    

Financial revenues

     4       15       —         146       2       2       16       3       3       5       3       —         46  

Financial expenses

     (3     (1     (208     (1,552     (6     (15     (424     (7     (10     (15     (10     (8     (58
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operational profit

     25       66       (208     (594     13       20       (1,155     5       (3     (10     11       (9     420  

Income tax and the Social Contribution tax

     (2     (7     —         (23     (2     (3     54       (2     1       3       (3     —         (127
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net profit for the year

     23       59       (208     (617     11       17       (1,101     3       (2     (7     8       (9     293  

Comprehensive income for the year

                          

Net profit for the year

     23       59       (208     (617     11       17       (1,101     3       (2     (7     8       (9     293  

Gain (loss) on conversion offinancial statements

     —         —         —         —         —         —         (182     —         —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income for the year

     23       59       (208     (617     11       17       (1,283     3       (2     (7     8       (9     293  

 

110


Table of Contents

LOGO

 

 

2015

   Parati     Transleste     Transirapé     Centroeste     Transudeste     Transchile     Light     Taesa     Axxiom     Aliança
Norte
    Cachoeirão  

Assets

                      

Current

     59       47       34       58       32       39       3,976       2,082       74       1       28  

Cash and cash equivalents

     46       8       6       16       6       36       447       132       7       1       23  

Non-current

     1,408       128       114       1       81       299       11,818       7,574       14       726       89  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

     1,467       175       148       59       113       338       15,794       9,656       88       727       117  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                      

Liabilities

                      

Current

     36       18       20       4       17       21       4,399       1,008       34       —         10  

Suppliers

     —         —         —         —         —         —         1,450       34       2       —         2  

Loans and financings – current

     —         6       3       2       —         10       1,629       628       5       —      

Non-current

     —         84       49       21       23       96       6,838       3,477       5       4       24  

Equity

     1,431       73       79       34       73       221       4,557       5,171       49       723       83  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     1,467       175       148       59       113       338       15,794       9,656       88       727       117  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                      

Statement of Income

                      

Net sales revenue

     —         33       34       14       22       28       1,222       1,973       66       —         30  

Cost of sales

     —         (4     (13     (4     (2     (10     (460     (287     (59     —         (14

Depreciation and amortization

     —         —         —         (1     —         (9     (412     (15     (1     —         (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —         29       21       10       20       18       762       1,686       7       —         16  

General and administrative expenses

     —         —         —         —         —         —         (91     —         (6     —         —    

Net financial revenue (expenses)

     11       (9     (5     (3     (5     (6     (672     (562     —         (27     (1

Financial revenues

     48       2       1       2       1       —         1,371       769       1       —         2  

Financial expenses

     (37     (11     (6     (5     (6     (6     (2,043     (1,331     (1     (27     (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     11       20       16       7       15       12       (1     1,124       1       (27     15  

Income tax and Social Contribution tax

     —         (2     (1     (1     (1     —         (40     (241     —         —         (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net profit for the year

     11       18       15       6       14       12       (41     883       1       (27     13  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                      

Comprehensive income for the year

                      

Net profit for the year

     11       18       15       6       14       12       (41     883       1       (27     13  

Actuarial gain (loss)

     1       —         —         —         —         —         8       —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income for the year

     12       18       15       6       14       12       (33     883       1       (27     13  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

111


Table of Contents

LOGO

 

2015

   Baguari
Energia
    Guanhães
Energia
    Madeira
Energia
    Pipoca     Retiro
Baixo
    Renova     Parajuru     Morgado     Volta
do
Rio
    Lightger     Amazônia
Energia
    Aliança
Geração
 

Assets

                        

Current

     72       2       1,608       13       10       551       21       31       46       23       —         243  

Cash and cash equivalents

     9       1       300       —         1       66       12       12       20       14       —         70  

Non-current

     220       248       23,754       101       443       8,425       192       209       290       161       666       3,093  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

     292       250       25,362       114       453       8,976       213       240       336       184       666       3,336  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                        

Liabilities

                        

Current

     16       212       2,151       10       25       1,497       18       28       36       14       —         113  

Suppliers

     6       —         384       —         6       570       —         —         1       4       —         36  

Non-current

     6       —         15,569       50       132       1,898       66       85       126       94       —         274  

Equity

     270       38       7,642       54       296       5,581       129       127       174       76       666       2,949  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     292       250       25,362       114       453       8,976       213       240       336       184       666       3,336  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                        

Statement of Income

                        

Net sales revenue

     59       —         2,605       22       53       458       31       34       47       32       —         797  

Cost of sales

     (46     —         (1,103     (11     (40     (5     (16     (18     (28     (25     —         (442

Depreciation and amortization

     (9     —         (471     (3     (9     (4     (10     (10     (17     (10     —         (69
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     13       —         1,502       11       13       453       15       16       19       7       —         355  

General and administrative expenses

     —         (86     (816     (2     (11     —         (5     (6     (2     (1     (2     (69

Net financial revenue (expenses)

     9       (14     (967     (3     (13     (355     (5     (8     (11     (7     (23     (18

Financial revenues

     10       —         950       2       1       41       2       2       3       2       —         9  

Financial expenses

     (1     (14     (1,917     (5     (14     (396     (7     (10     (14     (9     (23     (27
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     22       (100     (281     6       (11     98       5       2       6       (1     (25     268  

Income tax and Social Contribution tax

     (5     —         266       (1     1       (191     (1     (1     (2     (2     —         (30
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net profit for the year

     17       (100     (15     5       (10     (93     4       1       4       (3     (25     238  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                        

Comprehensive income for the year

                        

Net profit for the year

     17       (100     (15     5       (10     (93     4       1       4       (3     (25     238  

Gain (loss) on conversion of financial statements

     —         —         —         —         —         54       —         —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income for the year

     17       (100     (15     5       (10     (39     4       1       4       (3     (25     238  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

112


Table of Contents

LOGO

 

 

2014

   Parati     Transleste     Transirapé     Centroeste     Transudeste     Transchile     Light     Taesa     Axxiom     Ativas     Epícares  

Assets

                      

Current

     125       47       35       67       30       24       2,466       2,292       70       40       31  

Cash and cash equivalents

     42       7       7       19       4       22       506       329       9       16       14  

Non-current

     1,390       121       101       —         80       208       12,141       7,197       13       71       157  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

     1,515       168       136       67       110       232       14,607       9,489       83       111       188  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                      

Liabilities

                      

Current

     34       6       16       8       12       15       2,963       940       26       59       1  

Suppliers

     —         —         3       —         —         —         1,945       53       2       5       —    

Loans and financings – current

     —         —         —         —         —         —         580       723       —         —         —    

Non-current

     —         108       64       18       45       82       7,042       3,504       9       79       2  

Equity

     1,481       54       56       41       53       135       4,602       5,045       48       (27     185  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     1,515       168       136       67       110       232       14,607       9,489       83       111       188  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                      

Statement of Income

                      

Net sales revenue

     —         30       52       14       20       20       9,223       1,924       57       26       41  

Cost of sales

     —         (4     (34     (4     (2     (13     (7,798     (295     (54     (29     (15

Depreciation and amortization

     —         —         —         —         —         (5     (415     (3     1       7       8  

Gross profit

     —         26       18       10       18       7       1,425       1,629       3       (3     26  

General and administrative expenses

     (6     —         —         —         —         —         (163     (29     —         (10     (12

Net financial revenue (expenses)

     143       (5     (4     —         (5     (3     (325     (469     (1     (14     1  

Financial revenues

     143       1       1       2       1       —         577       276       1       2       1  

Financial expenses

     —         (6     (5     (2     (6     (3     (902     (745     (2     (16     —    

Operating profit

     137       21       14       10       13       4       937       1,131       2       (27     15  

Income tax and Social Contribution tax

     (2     (13     (12     (1     (9     (1     (273     (239     —         —         (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net profit for the year

     135       8       2       9       4       3       664       892       2       (27     13  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                      

Comprehensive income for the year

                      

Net profit for the year

     135       8       2       9       4       3       664       892       2       (27     13  

Gain (loss) on translation

     —         —         —         —         —         19       —         —         —         —         —    

Actuarial gains (losses)

     —         —         —         —         —         —         (17     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income for the year

     135       8       2       9       4       22       647       892       2       (27     13  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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2014

   Cachoeirão     Baguari
Energia
    Guanhães
Energia
     Madeira
Energia
    Pipoca     Retiro
Baixo
    Renova     Parajuru     Morgado     Volta
do
Rio
    Lightger     Amazônia
Energia
 

Assets

                         

Current

     23       96       34        1,477       19       12       847       15       27       41       21       —    

Cash and cash equivalents

     19       15       27        241       13       3       596       4       4       4       16       —    

Non-current

     91       228       511        22,151       104       453       8,402       204       223       304       170       529  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

     114       324       545        23,628       123       465       9,249       219       250       345       191       529  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                         

Liabilities

                         

Current

     14       39       407        1,961       7       20       656       17       22       26       10       —    

Suppliers

     2       9       1        1,282       —         —         130       2       2       2       1       —    

Loans and financings – current

     —         —         —          406       —         —         —         —         —         —         —         —    

Non-current

     30       6       —          13,885       57       145       2,973       75       101       148       102       —    

Equity

     70       279       138        7,782       59       300       5,620       127       127       171       79       529  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     114       324       545        23,628       123       465       9,249       219       250       345       191       529  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                         

Statement of Income

                         

Net sales revenue

     30       56       —          1.858       25       55       163       27       35       55       32       —    

Cost of sales

     (10     (46     —          (3.194     (9     (29     (141     (13     (16     (25     (24     —    

Depreciation and amortization

     (3     (9     —          (296     (3     (3     (31     (9     (10     (17     (11     —    

Gross profit

     20       10          (1.336     16       26       22       14       19       30       8    

General and administrative expenses

     (1     —         —          (202     (1     (4     (14     (4     (5     (5     —         (23

Net financial revenue (expenses)

     (1     8       —          (602     (3     (26     (45     (5     (8     (11     (6     —    

Financial revenues

     2       9       —          57       1       1       24       1       1       1       2       —    

Financial expenses

     (3     (1     —          (659     (4     (27     (69     (6     (9     (12     (8     —    

Operating profit

     18       18          (2.140     12       (4     (37     5       6       14       2       (23

Income tax and Social Contribution tax

     (2     (6     —          5       (1     (2     (6     (1     (1     (1     (2     —    
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net profit for the year

     16       12          (2.135     11       (6     (43     4       5       13         (23
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                         

Comprehensive income for the year

                         

Net profit for the year

     16       12       —          (2.135     11       (6     (43     4       5       13       —         (23
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income for the year

     16       12       —          (2.135     11       (6     (43     4       5       13       —         (23
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Investments in jointly controlled entities and affiliated companies

Investment in the Santo Antônio Hydroelectric Plant, through Madeira Energia S.A. (Mesa) and FIP Melbourne

The Company has direct and indirect investments in Madeira Energia S.A. (which holds an investment in Santo Antônio Energia S.A.), of R$ 1,321 on December 31, 2016 (R$1,379 in 2015).

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 asset constituted by these expenditures totaled R$ 22,440 (consolidated) on December 31, 2016, and this amount, according to financial projections prepared by its management, is to be absorbed by future revenues generated as from January, 2017, when all the generator rotors of that entity came into operation.

Investigations and other legal measures are in progress, conducted by the Federal Public Attorneys’ Office, which involve other indirect shareholders of Madeira Energia S.A. and certain executives of those other indirect shareholders.

Arbitration proceedings

In 2014, SAAG Investimentos S.A. (SAAG) and Cemig GT opened arbitration proceedings, in camera, in the Market Arbitration Chamber, challenging the following: (a) the increase approved in the capital of Mesa of approximately R$ 750 partially destined to payment of the claims by the Santo Antonio Construction Consortium (‘CCSA’), based on absence of investigative quantification of the amounts supposedly owed, and absence of prior approval by the Board of Directors, as required by the bylaws and Shareholders’ Agreement of Mesa; and also on the existence of credits owed to Mesa by CCSA, able to be offset, in an amount greater than the claims; and (b) the adjustment for impairment carried out by the Executive Board of Mesa, in the amount of R$ 750, relating to certain credits owed to Mesa by CCSA, on the grounds that these credits, under an express contractual provision, are owed in their entirety. Posting of this impairment contributed to Mesa’s situation of negative Net working capital on December 31, 2016, as described above.

The shareholders SAAG and Cemig GT successfully filed an action for provisional remedy for exercise of the right of first refusal to subscribe the additional portion of the capital of Mesa, in the amount of R$ 175, that was approved in the Extraordinary General Meeting of Stockholders of Mesa held on October 21, 2014. The judgment also suspended 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 shareholders’ Agreement of Mesa.

In 2016 the arbitration judgment given by the Market Arbitration Chamber recognized in full the right of Cemig and SAAG, and ordered annulment of the acts being impugned. SAAG and CEMIG are in the process of adopting measures to implement the decision referred to.

Investment in the Belo Monte Plant through Amazônia Energia S.A. and Aliança Norte

Amazônia Energia 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 11.74%.

Nesa will still require significant funds for costs of organization, development and pre-operational costs for completion of the plant. According to estimates and forecasts these costs will be repaid by the revenues from future operations.

On April 7, 2015, Nesa was awarded interim judgment ordering Aneel to “abstain, until hearing of the application for an injunction made in the origin case, from applying to Appellant any penalties or sanctions in relation to the Belo Monte Hydroelectric Plant not coming into operation on the date established in the original timetable for the project, including those specified in an Aneel Normative Resolution and in the Concession Contract for the Belo Monte Hydroelectric Plant”. The amount of the estimated loss in Belo Monte up to December 31, 2016 is R$ 74.

Based on this injunction, all records and the accounting provisions inherent to compliance with the requirements of the concession contract were suspended, but Aliança Norte Energia continues to purchase electricity on the spot market to avoid any future penalties.

 

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Investigations and other legal measures are in progress, conducted by the Federal Public Attorneys’ Office, which involve other shareholders of Norte Energia S.A. and certain executives of those other shareholders.

Any changes in the existing scenario will have their impacts reflected in the financial statements.

Summary of the conclusions of the independent investigation

Centrais Elétricas Brasileiras S.A. (‘Eletrobras’) owns an equity interest of 49.98% in Nesa, and has contracted a specialized law office to carry out an independent internal investigation for the purpose of finding any irregularities that may have taken place in projects in which it has an equity interest, including NESA. The motive for this procedure was investigations that were being carried out by the Public Attorneys’ Office on irregularities involving some of the contractors and suppliers in investments where Eletrobras was a shareholder, including the company Nesa.

The final reports of the independent internal investigation include certain findings with estimated impacts on the financial statements of Nesa. It was found that certain contracts with some contractors and suppliers of the Belo Monte Hydroelectric Plant contain impacts estimated at 1% of the price of a contract, and other estimates of certain fixed amounts, to include bribes and activities of manipulation of bids considered to be of an unlawful nature.

Based on the conclusions and results identified in the independent internal investigation, the management of NESA referred to IAS 16 – Assets and Equipment, and concluded that the amount of R$ 183, attributable to possible overinvoicing, bribes and/or fraudulent bids or activities considered to be of an unlawful nature should not have been included in the historic cost of its assets, because such amounts would not have been necessary to establish the assets at the location and in the condition necessary for their functioning.

The management of Nesa also concluded that it was impracticable to attempt precisely to identify the periods of the prior financial statements in which the excess of capitalized costs might have occurred, due to the fact that the information made available by the independent internal investigation does not individually specify the contracts, payments ad reporting periods in which these excesses could have occurred. It is also emphasized that the alleged undue payments were not made by Nesa, but by contractors and suppliers of the Belo Monte hydroelectric plant, which also impeded identification of the precise amounts and period of the payments.

Thus, Nesa applied the procedure specified in IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors, making adjustments for the estimated amounts of the excesses of capitalized costs, in a total of R$ 183, referring to illegal payments in the financial statements at December 31, 2015, due to the impracticability of identifying the adjustments for each previous period affected.

As a result of the adjustment made by NESA, on December 31, 2015 Cemig recognized an adjustment in the amount of R$ 23, in Investments with counterpart in the account Gain (loss) in subsidiaries by the equity method. Of this total, R$ 21 arises from the adjustment made by Cemig GT, and R$ 2 arises from the adjustment made by Light S.A., in accordance with the specifications of IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors.

Investment in Guanhães Energia S.A. – Adjustment for impairment

Based on analysis of the cash flow expected for the investment, Guanhães Energia made an adjustment for impairment of value in the amount of R$ 139. The effect of this in the accounts of Cemig GT was an expense of R$ 68, corresponding to its 49% interest in Guanhães, and this was recognized in the statement of income by the equity method, on December 31, 2016.

Investment in Renova

Option contract

On September 18, 2015 a contract was signed giving Renova the option to sell to SunEdison, on or after March 31, 2016, up to 7,000,000 shares in TerraForm Global, which Renova had received under the agreement governing the first phase of the transaction for sale and exchange of assets.

The exercise price of this option was set at R$ 50.48 or US$15.00 at the exchange rate of the day, at SunEdison’s choice. The contract also gave SunEdison an option to buy the same 7 million shares in TerraForm Global on the same terms.

 

 

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Renova also reported that it had notified SunEdison and TerraForm Global of its intention to exercise its option to sell 7 million shares in TerraForm Global owned by Renova, as specified by contract and publicly stated in a Material Announcement published by Renova on September 18, 2015.

In April 2016 there was a restructuring of the Company’s capital, which altered Cemig GT’s equity interest in the company.

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 credit risk.

In the first half of 2016 Renova recognized a loss of R$ 111, for the variation in the price of the option, taking credit risk into account. In addition it recognized a loss of R$ 63 relating to the extinction of the option, and opened arbitration proceedings seeking, among other items, indemnity for losses.

The figures above refer to the full impact on the financial statements of Renova. The effect for Cemig was proportional to its 34.15% interest in the investee, valued by the equity method at R$ 60.

Investment in TerraForm – pricing of the shares

Renova Energia has investments in Class A shares (GLBL) in TerraForm (‘the TERG Shares’), recorded as financial assets available for sale. Renova Energia adopts this designation because the nature of the investment is not included in any of the other categories of financial instrument (loans, accounts receivable, investments held to maturity, or financial assets at fair value through profit or loss). The asset is classified, in Renova Energia, as a non-current asset under the line Investments and is recorded at fair value, based on the market price on a stock exchange (Nasdaq). Under the policy of Renova Energia, gains and losses arising from variation in stock prices are posted directly in Equity under Other comprehensive income. Considering the volatility of the prices of the TERG Shares, Renova Energia evaluates, quarterly, whether there is objective evidence of impairment of these financial assets, that is to say, the management of Renova Energia evaluates whether the fall in the market value of the TERG Shares should be considered ‘significant’ or ‘prolonged’. This evaluation calls for a judgment based on a Renova Energia policy, prepared according to practices used in the Brazilian and international markets, and consists of analysis, instrument by instrument, based on quantitative and qualitative information available in the market as from the moment that an instrument shows a fall in its market value of 20% or more (a ‘Significant Fall’) or a fall smaller than a Significant Fall, but greater than 5% of its market value in comparison with its acquisition cost for more than 12 months (a ‘Prolonged Fall’). If a Significant Fall or a Prolonged Fall in the market value of the instrument is found, the corresponding accumulated portion previously classified in Other comprehensive income will be posted in the Profit and loss account as an impairment.

Impairments, previously recognized in the Profit and loss account, are not reversed through the profit and loss account. Any increase in fair value after an impairment is recognized in Other comprehensive income.

In 2016 the negative adjustments in the fair values that took place in the first and fourth quarter in the amount of R$ 281 (impact in Cemig: R$ 96) were recognized in the income statement; and the positive adjustment of R$ 99 (impact for Cemig: R$ 34), referring to the second and third quarters, was recognized in Other comprehensive income in Renova Energia.

Rescission of share purchase agreement

On April 1, 2016 Renova Energia S.A. (‘Renova’) informed its shareholders and the market in general that the share purchase agreement for sale to TerraForm Global, Inc. of the assets of the Espra Project (‘the Espra Contract’) owned by Renova had been canceled. Thus the assets of the Espra project, comprising three small hydroelectric plants (SHPs), which placed generation contracts under the Proinfa regime, with aggregate installed capacity of 41.8 MW, remain in the Company as part of Renova’s portfolio of operational assets. As a result of the cancellation, TerraForm Global paid Renova a penalty payment of R$ 36 on April 1, 2016 (effect in Cemig: R$ 12).

 

 

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The Espra Contract was included in the first phase of the transaction with TerraForm Global and SunEdison, Inc. (‘SunEdison’), announced on July 15, 2015.

Adjustment for impairment

Renova carried out studies to value the balance of PP&E assets in relation to the generation of economic benefits expected from those assets at December 31, 2016, and made an adjustment for impairment of assets in the amount of R$ 264 (impact on Cemig R$ 90), This was recognized in a specific account line in the statement of income for 2016. This result arose from projection of cash flow of these assets, discounted, at December 31, 2016.

Cemig had reported in its financial statements the net amount of R$ 763 for goodwill on the concessions, calculated at the time of the injections of capital into Renova. As a result of the studies on impairment related to discounted cash flow of the investee, management of Cemig GT judged it to be necessary to make a full adjustment of the amount referred to, in the statement of income for 2016.

Investment in Light through Parati, RME and Lepsa

Corporate reorganization of Parati

In 2016 the shareholders decided to put in place a series of measures to simplify the stockholding structure of the Parati group, as follows:

 

    Extinction of Redentor Energia S.A., through reverse absorption by Rio Minas Energia Participações S.A. (‘RME’);

 

    Total split of Parati, with absorption by RME and Luce Empreendimentos e Participações S.A. (‘LEPSA’) of the separated assets and liabilities;

 

    Extinction of Parati, through reverse absorption by RME and LEPSA;

In November 2016, RME and LEPSA declared an aggregate total of R$ 463 in dividends, using retained earnings reserves from prior years. In the same month both companies called for an aggregate capital subscription of R$ 446, which was paid up exclusively by Cemig.

As a result of these alterations, Cemig had the following stockholdings:

 

    In RME: 50.00% of the common shares and 50.00% of the preferred shares, representing 66.27 of the total share capital.

 

    In Lepsa: 50.00% of the common shares and 50.00% of the preferred shares, representing 66.62 of the total share capital.

Exercise of put option

On September 6, 2016 Cemig received from Banco BTG Pactual (‘BTG Pactual’) Notice of Intention to Exercise a Put Option, informing irrevocable exercise of BTG Pactual’s right to sell to Cemig 153,634,195 preferred shares held by Pactual in Parati (‘Shares subject of the Put Option’).

In October 2016, due to the extinction of Parati, the Put Option was divided between RME and Lepsa in the proportion of 50% each, with all the conditions of the original Put Option being maintained, except the items modified in the amendments, including alteration to their bylaws.

On November 30, 2016, Cemig paid R$ 222 for the portion of BTG Pactual in RME and LEPSA, under exercise of the first ‘window’ of the put.

Further details of the put option are given below in this Note.

 

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Disposal of shares in Taesa owned by Cemig

On September 29, 2016, Taesa published announcement of commencement of a secondary public offering with restricted placement efforts, for placement of certificates of deposit of nominal, book-entry shares without par value, each representing one common and two preferred nominal, book-entry shares without par value, free and unencumbered by any lien or charge (‘Units’), issued by Taesa and owned by Fundo de Investimentos em Participações Coliseu (FIP Coliseu), and Cemig.

The offering comprised secondary public distribution, with restricted placement efforts, of 65,702,230 Units owned by the Vendor shareholders, at the price of R$ 19.65 per Unit, resulting in a total amount of R$ 1,291. The offering transaction was settled on October 24, 2016.

Since this was a public offering with restricted efforts exclusively for secondary distribution, there was no inflow of funds to Taesa. The Vendor shareholders received all of the proceeds from the sale of the Units net of the costs of the offering, i.e. a total of R$ 1,276, and of this total R$ 791 was received by Cemig, representing a gross gain of R$ 181. Cemig recognized this in its Income Statement in October 2016.

Investment Agreement for subscription of capital in Ativas

On August 25, 2016, Cemig Telecom S.A., a wholly-owned subsidiary of Cemig, signed an investment agreement with Sonda Procwork Outsourcing Informática Ltda., a member of the Chilean group Sonda S.A., for subscription of capital in Ativas Data Center, in partnership with Ativas Participações S.A., a company controlled by the Asamar Group.

Sonda is the leading company providing IT services in Latin America, with a presence in 10 countries, and 17,000 employees.

On October 19, 2016, after the conditions precedent specified in the Investment Agreement had been complied with, the transaction was completed.

Sonda, through providing cash of R$ 114, became the holder of a 60% equity interest in Ativas, with Cemig Telecom holding 19.6%, and Ativas Participações holding 20.4% of the company’s total capital. This represented a gain of R$ 25 in the financial statements of Cemig Telecom.

Disposal of interest related to Transchile

On September 12, 2016, Cemig signed an agreement for sale of the whole of its stockholding interest relating to Transchile Charrúa Transmisión S.A. – corresponding to 49% of the share capital – to Ferrovial Transco Chile SpA., a company controlled by Ferrovial S.A., for US$57. On October 6, 2016, all of the shares in Transchile Charrúa Transmisión S.A. held by Cemig, corresponding to 49% (forty nine percent) of the total capital, were transferred to Ferrovial Transco Chile SpA., a company controlled by Ferrovial S.A., and the sale completed in the amount of R$180, representing a gross gain of R$ 94.

Put options

In the calculation of the fair value of the option based on the BSM model, the following variables are taken into account: exercise price of the option; closing price of the underlying asset on December 31, 2016; the risk-free interest rate; the volatility of the price of the underlying asset; and the time to maturity of the option.

Analytically, calculation of the exercise price of the options, the risk-free interest rate and the time to maturity is primarily deterministic, so that the main divergence in the put options is in the measurement of the closing price and the volatility of the underlying asset.

Put options for shares in Parati

Cemig granted to Fundo de Participações Redentor, which is a shareholder of Parati, an option to sell the totality of the shares which that fund holds in Parati, exercisable in May 2016. The exercise price of the option is calculated from the sum of the value of the amounts injected by the Fund into Parati, plus the running expenses of the fund, less Interest on Equity, and dividends, distributed by Parati.

 

 

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The exercise price is subject to monetary updating by the CDI (Interbank CD) Rate plus financial remuneration at 0.9% per year.

The Equity Fund owns common and preferred shares in Light, and at present exercises joint control, with the Company, over the activities of that company. This being so, this option has been considered to be a derivative instrument which should be accounted at fair value through profit or loss.

For the purposes of determination of the method to be used in measuring the fair value of this option, the Company, up to the first quarter of 2016, observed the daily trading volume of the shares of Light, and also the fact that such option, if exercised by the Fund, will require the sale to the Company, in a single transaction, of shares in Light in a quantity higher than the daily exchange trading averages. Thus, the Company had adopted the discounted cash flow method for measurement of the fair values of the shares. Up to March 31, 2016, the fair value of this option was calculated on the basis of the estimated exercise price on the day of exercise of the option, less the fair value of the shares that are the subject of the put option, also estimated for the date of exercise, brought to present value at the effective rate of 7.5% p.a. (discounting inflation effects). As a result of the changes in the shareholders’ Agreement of Parati in the second quarter of 2016, described below, with consequences for the conditions and periods for exercise of the put option, the Company then began to use the Black-Scholes-Merton method for measurement of the fair value of the options.

In the second quarter of 2016 Amendments were signed to the shareholders’’ Agreement of Parati. The principal changes arising from these amendments are as follows:

 

  1) The maturity of the Put Option granted in 2011 by Cemig in favor of the unit holders of FIP Redentor, initially specified to be May 31, 2016, was postponed, to two separate exercise dates:

 

  a) First option exercise window: The intention to exercise may be stated by any direct shareholder/s who decide to do so, independently of the exercise of the Put Option by the other direct shareholders, up to September 23, 2016, inclusive, and shall cover only preferred shares in Parati, up to a limit of 153,634,195 shares, representing 14.30% of the total shares in Parati held by the other direct shareholders. Cemig had to make payment by November 30, 2016.

 

  b) Second payment window: The intention to exercise may be stated by any direct shareholder/s who decide to do so, independently of the exercise of the Put Option by the other direct shareholders, up to September 23, 2017, inclusive, and may cover the totality of the shares in Parati, being independent of any exercise, or not, of the Put Option in the first payment window. Cemig must make payment by November 30, 2017.

 

  2) The Put Option may now be exercised not only by FIP Redentor, but also by the direct shareholders of Parati, including but not limited to the unit holders of FIP Redentor, and/or their affiliates, who shall become holders of a Put Option and/or of the rights arising therefrom, under which each one of the direct shareholders shall individually have the right to sell any shares in Parati that they own.

 

  3) Conditions were included for bringing forward the date of exercise of the put option: in the event of any occurrence resulting in bringing forward of the option referred to, any direct shareholder may present to Cemig a notice of bringing forward of the option, at which moment the option shall be considered exercised by all the direct shareholders, over the totality of their shares.

 

  4) As guarantee for the full payment of the Put Option, on May 31, 2016 Cemig offered to the holders of the put option 55,234,637 common shares and 110,469,274 preferred shares that Cemig directly holds in Transmissora Aliança de Energia S.A. (Taesa), and as further guarantee, 53,152,298 shares that Cemig directly holds in Light.

Amount of the Company’s exposure

The change in the value of the options – the difference between the estimated fair value for the assets and the corresponding exercise price, has been as follows:

 

     Dec. 31, 2016     Dec. 31, 2015      Dec. 31, 2014  

Initial balance

     1,245       166        —    

Additions

     55       1,079        166  

Reductions

     (150     —          —    
  

 

 

   

 

 

    

 

 

 

Final balance

     1,150       1,245        166  

 

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In the calculation of the fair value of the option based on the Black-Scholes-Merton analysis, the following variables are taken into account: exercise price of the option; closing price of the stock of Light on December 31, 2016 (as a reference for the value of the indirect equity interest held by the direct stockholders of RME and Lepsa in Light); the risk-free interest rate; the volatility of the price of the underlying asset; and the time to maturity of the option.

RME and Lepsa are non-operational holding companies, whose primary purpose is management of their direct equity interest in Light. Consequently, the revenues of these holding companies arise from their interests in the earnings of Light and, residually, from the financial revenue obtained from investment of the amounts available in the cash position. Further, considering that: (i) distribution of the whole of the profit for the period is in the interest of the shareholders of both companies; and (ii) the operational profit, the total of financial revenue (expenses) and changes in the reserve accounts of RME and Lepsa are immaterial for the purposes of calculation of the put option; it becomes clear that the only uncertainty in the flow of these companies is associated with the uncertainty of Light itself, and as a result of this consideration the shares of both companies are valued as if they were direct equity interests in Light itself. Thus, the ‘underlying’ asset of the options is Light S.A., and the closing price of the underlying asset is the price found for one share of Light on the last business day of the 2016 business year, multiplied by the number of equivalent shares of indirect ownership of the holders of the Parati Put option in Light. The volatility is calculated using a conditional volatility model based on the continuously capitalized series of returns of Light S.A.

The Company has made an analysis of the sensitivity of the exercise price of the option, varying the risk-free interest rate and the volatility, keeping the other variables of the model unchanged. In this context, scenarios for the risk-free interest rate at 6.6% p.a. and 16.4% p.a., and for volatility between 15% and 63.2% p.a., were used, resulting in estimates of minimum and maximum price for the put option of R$ 1,126 and R$ 1,260, respectively.

Put options for Units in FIP Melbourne and FIP Malbec

In the calculation of the fair value of the option based on the BSM model, the following variables are taken into account: exercise price of the option; closing price of the underlying asset on December 31, 2016; the risk-free interest rate; the volatility of the price of the underlying asset; and the time to maturity of the option.

Cemig GT and the private pension plan entities participating in the investment structure of SAAG (comprising FIP Melbourne, Parma Participações S.A. and FIP Malbec – jointly, ‘the Investment Structure’) signed put option contracts for units in the entities that comprise the Investment Structure (‘the Put Options’), which the private pension plan entities may exercise in the eighty fourth month after June 2014. The exercise price of the put options correspond to the amount invested by each private pension plan in the Investment Structure, updated pro rata temporis, by the Expanded National Consumer Price (IPCA) index published by the IBGE, plus interest at 7% per year, less such dividends and Interest on Equity as shall have been paid by SAAG to the pension plan entities. This option has been considered to be a derivative instrument which should be accounted at fair value through profit or loss.

In the fourth quarter of 2016 the Company altered the methodology used in measuring the fair value of the put option of SAAG, and adopted the BSM model, replacing the model of discounted cash flow less the exercise price of the option. This change is in line with best market practices, since the Black-Scholes-Merton method not only calculates the difference between the exercise price of the option and the share price, brought to present value, but also incorporates an important random component that weights these amounts.

We work on the assumption that the future expenditures of FIP Malbec and FIP Melbourne are insignificant, so that the options are valued as if they were direct equity interests in Mesa. However, neither SAAG nor Mesa are traded on a securities exchange, so that some adaptions are necessary for calculation of the price of the asset and its volatility for application of the BSM model. The closing price of the share of Mesa on December 31, 2016 is ascertained on the basis of Free cash flow to equity holders (FCFE), expressed by equivalence of the indirect equity interests held by the FIPs. Volatility, in turn, is measured as an average of historic volatility (based on the hypothesis that the series of the difference of continuously capitalized returns follows a normal distribution) of comparable companies in the electricity generation sector that are traded on the Bovespa.

Based on the studies made, a liability of R$ 196 is recorded in the Company’s consolidated financial statements, for the difference between the exercise price and the estimated fair value of the assets.

 

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The changes in the value of the options are as follows:

 

     Dec. 31, 2016      Dec. 31, 2015      Dec. 31, 2014  

Initial balance

     148        29        —    

Adjustment to fair value

     48        119        29  
  

 

 

    

 

 

    

 

 

 

Final balance

     196        148        29  

The Company has made an analysis of the sensitivity of the exercise price of the option, varying the risk-free interest rate and the volatility, keeping the other variables of the model unchanged. In this context, scenarios for the risk-free interest rate at 6.6% p.a. to 16.4% p.a., and for volatility between 15% and 63.2% p.a., were used, resulting in estimates of minimum and maximum price for the put option of R$ 126 and R$ 321, respectively.

Sonda options

As part of the process of shareholding restructuring, CemigTelecom and Sonda signed a Purchase Option Agreement (issued by CemigTelecom) and a Sale Option Agreement (issued by Sonda).

These resulted in CemigTelecom simultaneously having a right (put option) and an obligation (call option). The exercise price of the put option will be equivalent to fifteen times the adjusted net profit of Ativas in the business year prior to the exercise date. The exercise price of the call option will be equivalent to sixteen times the adjusted net profit of Ativas in the business year prior to the exercise date. Both options, if exercised, result in the sale of the shares in Ativas currently owned by the Company, and the exercise of one of the options results in nullity of the other. The options may be exercised as from January 1, 2021.

The put and call options in Ativas (‘the Ativas Options’) were measured at fair value and posted at their net value, i.e. the difference between the fair values of the two options on the reporting date of the financial statements for the business year 2016. Depending on the value of the options, the net value of the Ativas Options may be an asset or a liability of the Company.

The measurement has been made using the Black-Scholes-Merton (BSM) model. In the calculation of the fair value of the Ativas Options based on the BSM model, the following variables are taken into account: closing price of the underlying asset on December 31, 2016; the risk-free interest rate; the volatility of the price of the underlying asset; the time to maturity of the option; and the exercise prices on the exercise date.

The closing price of the underlying asset was based on the value of the transaction in shares of Ativas by Sonda, which took place on October 19, 2016. The calculation of the risk-free interest rate was based on yields of National Treasury Bills. The time to maturity was calculated assuming exercise date on March 31, 2021. Considering that the exercise prices of the options are contingent upon the future financial accounting results of Ativas, the estimate of the exercise prices on the date of maturity was based on statistical analyses and on information of comparable listed companies.

The net effect of the calculation of the call and put options in shares of Ativas amounted to a credit amount of R$ 5 in the income statement for 2016.

 

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Formation of Aliança Geração de Energia

For the formation of Aliança Geração de Energia, the Company transferred, in 2015, to Aliança, its interests in the electricity generation consortia, and the interests of the subsidiary Capim Branco Energia S.A., as shown below:

 

     Dec. 31, 2015  

Assets

  

Aimorés Hydroelectric Plant Consortium

     404  

Funil Hydroelectric Plant Consortium

     124  

Igarapava Hydroelectric Plant Consortium

     37  

Porto Estrela Hydroelectric Plant Consortium

     34  
  

 

 

 
     599  

Liabilities

  

Porto Estrela – Paid Concession – current

     (16

Porto Estrela Paid Concession – non-current

     (134
  

 

 

 
     (150

Net value of assets and liabilities of Cemig GT

     450  

Net value of assets and liabilities of Capim Branco

     131  
  

 

 

 
     581  

Cemig GT recognized in its financial statements the gain relating to the valuation at fair value of the investment in Aliança, excluding the effects of valuation of fair value of the company’s own assets that were subscribed as capital in Aliança.

This table shows the effects of the transaction in the Company’s financial statements at December 31, 2015:

 

     Cemig     Vale      Total  

Fair value of the assets transferred to Aliança

     1,867       2,331        4,198  

Book value of the assets transferred to Aliança

     581       1,277        1,858  

Equity interest of the companies in Aliança

     —         1        1  

Stake held by Cemig, valued at fair value

     1,889       —          —    

Book value of the assets subscribed (Note 14)

     (581     —          —    
  

 

 

   

 

 

    

 

 

 

Goodwill premium – businesses subscribed as capital of Aliança (100%)

     1,308       —          —    

Portion of goodwill premium not recognized, relating to the equity interest held by the Company (45%)

     (579     —          —    
  

 

 

   

 

 

    

 

 

 

Gain on the transaction to be reported in the Statement of income for 2015 (55% of the premium)

     729       —          —    

 

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Additional equity interest in Gasmig

In October 2014, Cemig concluded the acquisition under its share purchase agreement with Petróleo Brasileiro S.A. (Petrobras) for acquisition of the 40% interest held by its subsidiary Gaspetro in Companhia de Gás de Minas Gerais (Gasmig), which had been approved by the Boards of Directors of both Cemig and Petrobras. The amount paid was R$ 570,976, being the result of R$ 600,000 specified in the share purchase agreement, updated by the IGP-M index, less the dividends paid between the base date and the closing of the agreement.

Business combination carried out in stages – additional effects

Up to the date of the acquisition of the controlling interest in Gasmig, Cemig had an equity interest of 59.57% in the share capital of Gasmig. However, Cemig did not consolidate Gasmig since there was a shareholders’ agreement which gave Petrobras significant participating rights.

With the acquisition of the 40% interest in Cemig, referred to above, Cemig obtained control over Gasmig, and began to consolidate Gasmig as from the date of this acquisition.

As specified in IFRS 3 (Business combinations), it was necessary for the Company to value its previous interest in Gasmig at fair value, recognizing the difference in the profit and loss account for the period.

Considering that the valuation opinion for the acquisition of the additional interest of 40% in Gasmig represents the fair value of the assets on the date of acquisition, Cemig made the measurement of its original interest in the investment, as follows:

 

     Fair value of the
original interest (59.60%)
 

Fair value of Gasmig on the date of acquisition of control

     1,427  

Cemig’s original interest, of 59.57%, valued at fair value on the acquisition date

     850  

Book value

     569  

Gain recorded in 2014

     281  

Generation companies constituted – Lot D of Auction 12/2015 won by the company in 2015

As described in more detail in Note 14, as a result of Cemig GT having won Lot D of Auction 12/2015 – an award of concessions for 18 plants – in June 2016 the Company transferred ownership of the concessions of these plants to 7 new specific-purpose generation companies, wholly-owned subsidiaries of Cemig GT, which began to be consolidated in the second quarter of 2016.

 

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16. PROPERTY, PLANT AND EQUIPMENT

 

     2016      2015  
   Historic
cost
     Accumulated
depreciation
    Net
value
     Historic
cost
     Accumulated
depreciation
    Net
value
 

In service

               

Land

     287        (8     279        287        (8     279  

Reservoirs, dams and water courses

     5,347        (3,586     1,761        4,867        (3,037     1,830  

Buildings, works and improvements

     1,789        (1,371     418        1,577        (1,140     437  

Machinery and equipment

     4,518        (3,347     1,171        3,862        (2,670     1,192  

Vehicles

     29        (25     4        29        (21     8  

Furniture and utensils

     16        (12     4        15        (11     4  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
     11,986        (8,349     3,637        10,637        (6,887     3,750  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Under construction

     138        —         138        190        —         190  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net PP&E

     12,124        (8,349     3,775        10,827        (6,887     3,940  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

This table shows the movement in property, plant and equipment:

 

     2015      Addition      Written off     Depreciation     Transfers
Capitalizations
    2016  

In service

              

Land

     279        —          —         —         —         279  

Reservoirs, dams and watercourses

     1,830        —          —         (99     30       1,761  

Buildings, works and improvements

     437        —          (1     (23     5       418  

Machinery and equipment

     1,192        —          (42     (110     132       1,172  

Vehicles

     8        —          —         (2     (2     4  

Furniture and utensils

     4        —          —         —         (1     3  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     3,750        —          (43     (234     164       3,637  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Under construction

     190        120        (13     —         (159     138  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net property, plant and equipment

     3,940        120        (56     (234     5       3,775  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

     2014      Additions      Write-offs     Transfer of
assets to
Aliança
Geração de
Energia
    Indemnity
receivable
    Depreciation     Transfers
to Other
long term
assets
    Transfers /
capitalizations
    2015  

In service

                    

Land

     372        —          (12     (41     (16     (3     (17     (4     279  

Reservoirs, dams and water courses

     2,261        —          —         (163     (46     (127     (102     7       1,830  

Buildings, works and improvements

     609        —          (1     (116     (17     (32     (13     7       437  

Machinery and equipment

     2,053        —          (3     (308     (466     (149     (69     134       1,192  

Vehicles

     9        —          —         —         —         (3     —         2       8  

Furniture and utensils

     5        —          —         —         —         —         —         (1     4  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     5,309        —          (16     (628     (545     (314     (201     145       3,750  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Under construction

     235        126        (4     (3     (1     (1     (22     (140     190  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net PP&E

     5,544        126        (20     (631     (546     (315     (223     5       3,940  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     2013      Additions      Write-offs     Depreciation     Transfers /
capitalizations
    2014  

In service

              

Land

     377        —          —         (5     —         372  

Reservoirs, dams and water courses

     2,395        —          —         (134     —         2,261  

Buildings, works and improvements

     712        —          (1     (25     (77     609  

Machinery and equipment

     2,079        —          (6     (177     157       2,053  

Vehicles

     12        —          —         (3     —         9  

Furniture and utensils

     2        —          —         —         3       5  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     5,577        —          (7     (344     83       5,309  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Under construction

     240        122        (49     —         (78     235  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net PP&E

     5,817        122        (56     (344     5       5,544  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

The average annual depreciation rate is 3.51%. The average annual depreciation rates, by activity, are:

 

Hydroelectric generation

  

Thermal generation

  

Management and other

  

Telecoms

3.30%

   3.85%    10.04%    4.61%

The Company has not identified evidence of impairment of its Property, plant and equipment assets. The generation concession contracts provide that at the end of each concession the Concession-granting power shall determine the amount to be indemnified to the Company. Management believes that the indemnity of these assets will be greater than the amount of: their historic cost after depreciation over their useful lives.

Under the Brazilian regulatory framework Aneel, the regulator, is responsible for establishing the useful economic life of the generation and transmission assets in the electricity sector, and for periodically reviewing the estimates. The rates established by Aneel are used in the processes of reviewing tariff rates and calculating of the indemnity due at the end of the concession period, and are recognized as a reasonable estimate of the useful life of the assets of the concession. Thus, these rates were used as the basis for depreciation of the Company’s property, plant, and equipment assets.

The depreciation of the items of property, plant and equipment assets is calculated on the total of property, plant and equipment in service, by the straight-line method, using the rates determined by Aneel for the assets related to electricity activities, and reflects the estimated useful life of the assets. The residual value of the assets is the remaining balance of the assets at the end of the concession. As established in the contract signed between the Company and the Nation, at the end of the concession the assets will revert to the Nation, which in turn will indemnify the Company for those assets that have not yet been totally depreciated. In cases where there is no indemnity, or there is uncertainty related to the indemnity, at the end of the concession, such as thermal generation, and hydroelectric generation as an independent power producer, no residual value is recognized, and the depreciation rates are adjusted so that all the assets are depreciated within the concession.

The company transferred to Financial assets the remaining accounting balances of the plants at July 2015 which will be the subject of indemnity by the concession-granting power. For more information please see Note 14.

 

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Consortia

The Company is a partner in an electricity generation consortium for the Queimado plant, for which no separate company with independent legal existence was formed to manage the object of the concession, the controls being kept in Fixed assets and Intangible assets. The Company’s portion in the consortium is recorded and controlled individually in the respective categories of PP&E and Intangible assets. This table shows the accumulated investments in the consortium, in which Companhia Energética de Brasília has an interest of 17.50%:

 

     Stake in
energy
generated, %
    Average annual
depreciation
rate, %
     2016     2015  

In service

         

Porto Estrela plant

     33.33     3.68        —         —    

Igarapava plant

     14.50     2.5        —         —    

Funil plant

     49.00     4.21        —         —    

Queimado plant

     82.50     4        217       212  

Aimorés plant

     49.00     3.75        —         —    

Capim Branco Energia Consortium

     21.05     3.75        —         —    

Accumulated depreciation

          (90     (74
       

 

 

   

 

 

 
          127       138  

Under construction

         

Queimado plant

     82.50        —         4  

Porto Estrela plant

     33.33        —         —    

Capim Branco Energia Consortium

     21.05        —         —    
       

 

 

   

 

 

 
                4  
       

 

 

   

 

 

 

Total, consortia

          127       142  
       

 

 

   

 

 

 

 

17. INTANGIBLE ASSETS

Assets of the concession

In accordance with Interpretation IFRIC 12 – Service Concession Arrangements, the portion of the distribution infrastructure that will be amortized during the concession, comprising the distribution assets, net of the interests held by consumers (‘Special Obligations’), is reported in Intangible assets.

Under the Brazilian regulatory framework Aneel is responsible for setting the economic useful life of the distribution assets of the electricity sector, periodically establishing a review in the valuation of these assets. The rates established by Aneel are used in the processes of reviewing tariff rates and calculating of the indemnity due at the end of the concession period, and are recognized as a reasonable estimate of the useful life of the assets of the concession. These rates, therefore, were used as a basis for valuation and amortization of intangible assets.

The intangible assets Temporary easements, Paid concessions, Right of commercial operation of concessions, and Others, are amortized on the straight-line basis and the rates used are those set by Aneel. The Company has not identified any indications of impairment of its intangible assets, which have defined useful lives.

 

 

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a) Composition of the balance at December 31, 2016 and 2015

 

     2016      2015  
   Historic
cost
     Accumulated
amortization
    Residual
value
     Historic
cost
     Accumulated
amortization
    Residual
value
 

In service

               

Useful life defined

               

Temporary easements

     12        (2     10        11        (1     10  

Paid concession

     19        (10     9        19        (10     9  

Assets of concession

     16,288        (7,040     9,248        15,607        (6,642     8,965  

Other

     77        (59     18        71        (55     16  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
     16,396        (7,111     9,285        15,708        (6,708     9,000  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Under construction

     1,535        —         1,535        1,275        —         1,275  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net intangible assets

     17,931        (7,111     10,820        16,983        (6,708     10,275  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

b) Changes in Intangible assets

 

     Balance at
Dec. 31,
2015
     Additions      Special
obligations
– write-
down (1)
     Write-offs     Amortization     Transfer     Balance at
Dec. 31,
2016
 

In service

                 

Useful life defined

                 

Temporary easements

     10        —          —          —         —         —         10  

Paid concession

     9        —          —          —           —         9  

Assets of concession

     8,967        6        98        (32     (595     804       9,248  

Other

     14        —          —          —         (4     8       18  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     9,000        6        98        (32     (599     812       9,285  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Under construction

     1,275        1,157        —          (8     —         (889     1,535  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net intangible assets – Consolidated

     10,275        1,163        98        (40     (599     (77     10,820  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) This write-down of a Special Obligation arises from signature of a Debt Recognition Contract by Eletrobras, in the amount of R$ 98,236, for restitution of amounts calculated in the final settlement of Financing and Subsidy Contracts for the Luz Para Todos (‘Light for Everyone’) program, with funds from the CDE account, and return of funds related to the Global Reversion Reserve (RGI).

 

     Balance
at Dec.
31, 2014
     Additions      Transfer
of assets
to Aliança
Geração
de Energia
    Indemnity
– plants
not
renewed
     Write-offs     Amortization     Transfer
from
Financial to
Intangible on
renewal of
concessions(*)
     Transfers     Balance
at Dec.
31, 2015
 

In service

                      

Useful life defined

                      

Temporary easements

     12        —          (1     —          —         —         —          —         11  

Paid concession

     24        —          (13     —          —         (2     —          —         9  

Assets of concession

     2,223        8        —         —          (21     (512     7,162        107       8,967  

Other

     17        —          —         —          —         (5     —          1       13  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     2,276        8        (14     —          (21     (519     7,162        108       9,000  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Under construction

     1,103        1,108        —         —          (17     —         —          (919     1,275  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net intangible assets – Consolidated

     3,379        1,116        (14     —          (38     (519     7,162        (811     10,275  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(*) See comments in Note 13.

 

 

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     Balance
at Dec.
31, 2013
     Adjustment
due to
business
combination
     Additions      Write-offs     Amortization     Transfers     Balance
at Dec.
31, 2014
 

In service

                 

Useful life defined

                 

Temporary easements

     12        —          —          —         —         —         12  

Paid concession

     27        —          —          —         (3     —         24  

Assets of concession

     866        1,073        —          —         (448     732       2,223  

Other

     25        —          —          —         (6     (2     17  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     930        1,073        —          —         (457     730       2,276  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Under construction

     1,074        109        868        (25     —         (923     1,103  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net intangible assets – Consolidated

     2,004        1,182        868        (25     (457     (193     3,379  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

The annual average amortization rate is 3.51%. The average rates of annual amortization, by activity, set by the legislation for the sector, are:

 

Hydroelectric generation

  

Thermal generation

  

Distribution

  

Management and other

  

Telecoms

20.00%

   19.35%    3.85%    23.29%    11.56%

The Company has not identified indications of impairment of its intangible assets, which have defined useful lives. The Company has no intangible assets with non-defined useful life. The amount of additions, R$ 1,163, includes R$ 142 (R$ 159 in 2015, and R$ 70 in 2014) under the heading Capitalized Financial Costs, as presented in Note 20.

 

18. SUPPLIERS

 

     2016      2015  

Electricity on spot market – CCEE

     168        308  

Charges for use of electricity network

     78        81  

Electricity purchased for resale

     677        647  

Itaipu Binacional

     207        315  

Gas purchased for resale

     462        236  

Materials and services

     348        314  
  

 

 

    

 

 

 
     1,940        1,901  
  

 

 

    

 

 

 

 

 

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19. TAXES, INCOME TAX AND SOCIAL CONTRIBUTION TAX

 

a) Taxes payable

The non-current Pasep and Cofins obligations refer to the legal proceedings challenging the constitutionality of inclusion of the ICMS tax, which has been charged, within the amount on which the Pasep and Cofins taxes are calculated; and seeking authorization to offset the amounts paid over the last ten years. The Company and its subsidiaries Cemig D (Distribution) and Cemig GT (Generation and Transmission) obtained interim relief from the court allowing them not to make the payment, and authorizing payment through court deposits (starting in 2008), and maintained this procedure until July 2011. After that date, while continuing to challenge the basis of the calculation in court, they opted to pay the taxes monthly. Additionally, in July 2015 the Company began to make provision for Pasep and Cofins taxes on updating of Financial assets, in accordance with tax legislation coming into force on that date.

 

     2016      2015  

Current

     

ICMS

     502        462  

Cofins

     128        157  

Pasep

     28        33  

INSS

     25        22  

Other

     111        66  
  

 

 

    

 

 

 
     794        740  

Non-current

     

Cofins

     595        609  

Pasep

     129        131  
  

 

 

    

 

 

 
     724        740  
  

 

 

    

 

 

 
     1,518        1,480  
  

 

 

    

 

 

 

 

b) Income tax and Social Contribution tax:

 

     2016      2015  

Current

     

Income tax

     19        8  

Social Contribution tax

     8        3  
  

 

 

    

 

 

 
     27        11  
  

 

 

    

 

 

 

 

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20. LOANS, FINANCINGS AND DEBENTURES

 

Financing source

   Principal
maturity
     Annual financing
cost %
     Currency      2016      2015  
            Current      Non-current      Total      Total  

FOREIGN CURRENCY

                    

Banco do Brasil – Various bonds (1)

     2024        Various        US$                 33  

KFW

     2016        4.50        EURO        —          —          —          3  

KFW

     2024        1.78        EURO        4        3        7        11  
           

 

 

    

 

 

    

 

 

    

 

 

 

Debt in foreign currency

              5        25        30        47  

Brazilian currency

              —          —          —       

Banco do Brasil

     2017        108.33% of CDI        R$        72        —          72        144  

Banco do Brasil

     2017        108.00% of CDI        R$        151        —          151        433  

Banco do Brasil

     2016        104.10% of CDI        R$        285        270        555        925  

Banco do Brasil (6)

     2016        104.25% of CDI        R$        —          —          —          804  

Banco do Brasil

     2017        111.00% of CDI        R$        50        —          50        100  

Banco do Brasil

     2020        114.00% of CDI        R$        8        494        502        499  

Banco do Brasil

     2018        132.90% of CDI        R$        291        292        583     

Brazilian Development Bank (BNDES)

     2026        TJLP+2.34        R$        8        66        74        81  

Brazilian Development Bank (BNDES)

     2026        TJLP+2.48        R$        —          —          —          11  

CEF

     2018        119.00% of CDI        R$        100        9        109        201  

CEF

     2020        132.14% of CDI        R$      65        616        681        —    

Eletrobras

     2023       

Ufir, RGR +

6.00 to 8.00

 

 

     R$        19        49        68        185  

Large consumers

     2018        Various        R$        4        2        6        8  

Finep

     2018       

TJLP + 5 and

TJLP + 2.5

 

 

     R$        3        3        6        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  

Promissory Notes – 7th Issue (2)

     2017        128.00% of CDI        R$      667        —          667        —    

BASA

     2018        CDI+1.9        R$        2        120        122        121  

Sonda (4)

     2021        110% of CDI        R$      46        37        83        —    

Promissory Notes –1st Issue (4)

     2015        110.40% of CDI        R$        —          —          —          23  
           

 

 

    

 

 

    

 

 

    

 

 

 

Debt in Brazilian currency

              1,771        1,958        3,729        6,874  
           

 

 

    

 

 

    

 

 

    

 

 

 

Total of loans and financings

              1,776        1,983        3,759        6,921  
           

 

 

    

 

 

    

 

 

    

 

 

 

Debentures, 2nd Issue (3)

     2017        IPCA + 7.96        R$        235        —          235        441  

Debentures—3rd Issue, 1st Series (2)

     2017        CDI + 0.90        R$        543        —          543        540  

Debentures—3rd Issue, 3rd Series (2)

     2022        IPCA + 6.20        R$        50        933        983        923  

Debentures—3rd Issue, 2nd Series (2)

     2019        IPCA + 6.00        R$        15        278        293        275  

Debentures—3rd Issue, 2nd Series (3)

     2021        IPCA + 4.70        R$        59        1,436        1,495        1,403  

Debentures—3rd Issue, 3rd Series (3)

     2025        IPCA + 5.10        R$        38        857        895        839  

Debentures—3rd Issue, 1st Series (3)

     2018        CDI + 0.69        R$        53        411        464        462  

Debentures

     2018        CDI+1.60        R$        553        485        1,038        1,037  

Debentures

     2020        IPCA+8.07        R$        1        30        31        29  

Debentures – 7th Issue, 1st Series (2)

     2021        140.0% of CDI        R$      (7)        2,204        2,197        —    

Debentures, 4th Issue (3)

     2018        CDI + 4.05%        R$      805        793        1,598        —    

Debentures—4th Issue, 2nd Series (2)

     2016        CDI+0.85        R$        —          —          —          501  

Debentures—5th Issue, 1st Series (2)

     2018        CDI+1.70        R$        711        700        1,411        1,412  

Debentures (5)

     2016        TJLP+3.12        R$        —          —          —          41  

Debentures (5)

     2018        CDI + 1.60        R$        1        100        101        103  

Debentures (5)

     2018        CDI+0.74        R$        33        34        67        100  

Debentures (5)

     2022       

TJLP+7.82 (75%) and

Selic+1.82(25%)

 

 

     R$        20        114        134        125  

Cemig Telecom—1st Issue, 1st Series (4)

     2018        TJLP+2.62        R$        —          —          —          8  

Cemig Telecom—1st Issue, 2nd Series (4)

     2018        TJLP+3.32        R$        —          —          —          3  

Cemig Telecom—1st Issue, 3rd Series (4)

     2018        TJLP+1.72        R$        —          —          —          2  

Cemig Telecom—1st Issue, 4th Series (4)

     2018        TJLP+2.62        R$        —          —          —          2  
           

 

 

    

 

 

    

 

 

    

 

 

 

(–) FIC Pampulha: Securities of subsidiary companies (7)

              (49)        (16)        (65)        —    
           

 

 

    

 

 

    

 

 

    

 

 

 

Total. debentures

              3,061        8,359        11,420        8,246  
           

 

 

    

 

 

    

 

 

    

 

 

 

Overall total – Consolidated

              4,837        10,342        15,179        15,167  
           

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Interest rates vary from 2.00 to 8.00% p.a. Six-month Libor plus spread of 0.81% to 0.88% p.a.
(2) Cemig GT (Cemig Geração e Transmissão).
(3) Cemig D (Cemig Distribuição).
(4) Cemig Telecom.
(5) Gasmig.
(6) 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, to roll over existing debt. The interest rate is 128.00% of the CDI rate, p.a., and the funds will be paid in four six-monthly installments with the last maturity in April 2018.
(7) FIC Pampulha has financial investments in securities issued by subsidiaries of the Company. For more information, and characteristics of the fund, see Note 28.

 

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Guarantees

The guarantees of the debtor balance on loans and financings, on December 31, 2016, were as follows:

 

     2016  

Promissory Notes and Sureties

     11,023  

Receivables

     3,840  

Without guarantee

     316  
  

 

 

 

TOTAL

     15,179  
  

 

 

 

The consolidated composition of loans, financings and debentures, by currency and indexor, with the respective amortization, is as follows:

 

     2017      2018      2019      2020      2021      2022      2023      After
2024
     Total  

Currency

                          

US dollar

     1        —          —          —          —          —          —          22        23  

Euro

     4        3        —          —          —          —          —          —          7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total by currency

     5        3        —          —          —          —          —          22        30  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Indexors

                          

IPCA index (1)

     399        139        628        797        796        531        214        429        3,933  

UFIR / RGR (2)

     19        17        13        11        3        4        2        —          69  

CDI Rate (Bank CD rate) (3)

     4,379        3,685        1,155        954        755        —          —          —          10,928  

URTJ / TJLP (4)

     31        34        31        32        32        26        8        19        213  

IGP–DI (5)

     2        1        1        —          —          —          —          —          4  

TR Rate (6)

     2        —          —          —          —          —          —          —          2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total by indexor

     4,832        3,876        1,828        1,794        1,586        561        224        448        15,149  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Overall total

     4,837        3,879        1,828        1,794        1,586        561        224        470        15,179  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Expanded National Consumer Price (IPCA) Index.
(2) Fiscal Reference Unit (UFIR / RGR).
(3) Interbank Rate for Certificates of Deposit.
(4) URTJ: Interest rate reference unit.
(5) IGP-DI (‘General Domestic Availability Price Index’).
(6) TR Reference Interest Rate

The principal currencies and indexors used for monetary updating of loans and financings had the following variations:

 

Currency

   2016 (%)     2015 (%)      Indexor      2016 (%)      2015 (%)  

US dollar

     (16.54     47.01        IPCA        6.29        10.67  

Euro

     (19.10     31.71        CDI        14.06        13.23  

 

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The changes in loans, financings and debentures were as follows:

 

Balance on December 31, 2013

     9,457  
  

 

 

 

Loans and financings obtained

     4,562  

Funding costs

     —    
  

 

 

 

Financings obtained net of funding costs

     4,562  

Liabilities assumed in business combinations(*)

     392  

Monetary and exchange rate variation

     266  

Financial charges provisioned

     1,007  

Financial charges paid

     (781

Amortization of financings

     (1,394
  

 

 

 

Balance on December 31, 2014

     13,509  
  

 

 

 

Loans and financings obtained

     5,817  

Funding costs

     (78
  

 

 

 

Financings obtained net of funding costs

     5,739  

Monetary and exchange rate variation

     400  

Financial charges provisioned

     1,545  

Financial charges paid

     (1,331

Amortization of financings

     (4,695
  

 

 

 

Balance on December 31, 2015

     15,167  
  

 

 

 

Loans and financings obtained

     5,878  

Funding costs

     (141

Financings obtained net of funding costs

     5,737  

Monetary and exchange rate variation

     231  

Borrowing costs provisioned

     2,070  

Borrowing costs paid

     (2,369

Amortization of financings

     (5,592

(–) FIC Pampulha: Securities of subsidiary companies

     (65
  

 

 

 

Balance at December 31, 2016

     15,179  
  

 

 

 

 

(*) Balance arising from consolidation of Gasmig starting in October 2014.

Borrowing costs, capitalized

The Company transferred to Intangible assets the costs of loans and financings linked to works, as follows:

 

     2016     2015     2014  

Costs of loans and financings

     2,070       1,545       1,007  

Financial costs transferred to Intangible assets

     (142     (159     (70
  

 

 

   

 

 

   

 

 

 

Net effect in Profit or loss

     1,928       1,386       937  
  

 

 

   

 

 

   

 

 

 

The value of the charges capitalized, R$ 142 (R$ 159 in 2015 and R$70 in 2014), has been excluded from the Statement of Cash Flow, and from the additions to the Cash flow in investment activities, because it does not represent an outflow of cash for acquisition of the related asset.

The average rate of capitalization of the loans and financings whose costs were transferred to works was 18.02% (15.25% in 2015 and 11.62% in 2014).

 

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Funding raised

This table gives the consolidated totals of funds raised in 2016:

 

2016

   Principal maturity      Annual financial cost, %      Amount raised  

Brazilian currency

        

Caixa Econômica Federal – Cemig D

     2020        132.14% of CDI        674  

Debentures (Cemig D)

     2018        CDI + 4.05%        1,575  

KfW (Cemig GT)

     2018        1.78%        2  

Promissory Notes – Cemig GT – 7th Issue

     2017        128% of CDI        606  

Debentures – 4th Issue, 7th Series (Gasmig)

     2020        TJLP        24  

Debentures: 7th Issue (CEMIG GT)

     2021        140% of CDI        2,195  

Banco do Brasil

     2018        132.90% of CDI        580  

Sonda (Cemig Telecom)

     2021        110% of CDI        81  
        

 

 

 

Financings obtained net of funding costs

           5,737  
        

 

 

 

 

2015

   Principal maturity      Annual financial cost, %      Amount raised  

Brazilian currency

        

Banco do Brasil (Cemig GT)

     2015        106.90% of CDI        593  

Debentures 6th Issue – 1st Series (Cemig GT)

     2018        CDI + 1.60%        967  

Debentures 6th Issue – 2nd Series (Cemig GT)

     2020        IPCA + 8.07%        27  

Promissory Notes – 6th Issue (Cemig GT)

     2016        120% of CDI        1,407  

Banco da Amazônia (Cemig GT)

     2018        CDI + 1.90%        118  

Caixa Econômica Federal (Cemig D)

     2018        119% of CDI        200  

Promissory Notes – 8th Issue (Cemig D)

     2016        111.70% of CDI        1,685  

Banco do Brasil (Cemig D)

     2020        114% of CDI        487  

Banco do Brasil (Cemig D)

     2017        111% of CDI        98  

Debentures – 4th Issue (Gasmig)

     2022       
TJLP + 7.82 (75%) and
Selic + 1.82 (25%)
 
 
     34  

Debentures – 5th Issue (Gasmig)

     2018        CDI + 1.60%        100  

Itaú Unibanco/Banco BBM (Cemig Telecom)

     2016        120% of CDI        23  
        

 

 

 

Total funding

           5,739  
        

 

 

 

 

2014

   Principal maturity      Annual financial cost, %      Amount raised  

Foreign currency

        

KfW (GT)

     2024        1.78%        10  
        

 

 

 

Total in foreign currency

           10  
        

 

 

 

Brazilian currency

        

Debentures – 4th Issue (GT)

     2016        CDI + 0.85%        505  

Promissory Notes – 5th Issue (GT)

     2015        106.85% of the CDI Rate        1,400  

Debentures – 5th Issue (GT)

     2018        CDI + 1.70%        1,400  

Finep (GT)

     2018        TJLP + 2.5%        3  

Brazilian Development Bank (BNDES) (D)

     2020        TJLP + 2.48%        14  

Promissory Notes – 7th Issue (D)

     2015        105.00% of the CDI Rate        1,210  

Promissory notes – 1st Issue – Cemig Telecom

     2015        110.4% of the CDI Rate        20  
        

 

 

 

Total in Brazilian currency

           4,552  
        

 

 

 

Total raised

           4,562  
        

 

 

 

 

 

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7th Issue of Commercial Promissory Notes

On July 1, 2016 Cemig GT concluded its seventh issue of Commercial Promissory Notes, totaling R$ 620.. The proceeds were allocated to payment of the second portion of the Concession Grant Fee for the hydroelectric plants in Lot D of Aneel Auction 12/2015, and to strengthen the Company’s working capital. The notes have maturity at 360 days, on June 26, 2017, and pay remuneratory interest of 128% of the accumulated variation resulting from the average one-day interbank over extra grupo DI rate, which will be paid on the maturity date. This issue has a surety guarantee from the holding company, Cemig.

Issue of Bank Credit Note

On October 24, 2016 Cemig GT issued a Bank Credit Note in favor of Banco do Brasil, in the total amount of R$ 600, for the purpose of payment and/or amortization of transactions entered into with Banco do Brasil itself. 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 maturity in October 2018.

7th debenture issue

On December 29, 2016, Cemig Geração e Transmissão S.A. made its seventh issue of non-convertible debentures, for a total of R$ 2,240, after funding costs, in a single series, with maturity at five years. This issue has guarantees of real assets and an additional surety guarantee. Interest will be paid monthly, with no grace period, at 140% of the CDI rate, up to the 23rd month. Starting at the 24th month, principal and interest will be paid, with final maturity on December 29, 2021. The proceeds were used for payment of Cemig GT’s sixth issue of promissory notes, and also for replenishment of the Company’s cash position.

Debentures

The debentures issued by the Company are not convertible into shares, and have the following characteristics:

 

Issuer

   Guarantee      Annual cost (%)      Maturity      2016      2015  

Cemig GT – 2nd Issue – 2nd Series

     None        IPCA + 7.68        2015        —          —    

Cemig GT – 3rd Issue – 1st Series

     Unsecured        CDI + 0.90        2017        543        540  

Cemig GT – 3rd Issue – 3rd Series

     Unsecured        IPCA + 6.20        2022        983        923  

Cemig GT – 3rd Issue – 2nd Series

     Unsecured        IPCA + 6.00        2019        293        275  

Cemig GT – 4th Issue

     Unsecured        CDI + 0.85        2016        —          501  

Cemig GT – 5th Issue

     Unsecured        CDI*1.70        2018        1,411        1,412  

Cemig D – 3rd Issue – 1st Series

     Surety        CDI + 0.69        2018        464        462  

Cemig D – 3rd Issue – 2nd Series

     Surety        IPCA + 4.70        2021        1,495        1,403  

Cemig D – 3rd Issue – 3rd Series

     Surety        IPCA + 5.10        2025        895        839  

Debentures

     Surety        CDI+1.6        2018        1,038        1,037  

Debentures

     Surety        IPCA+8.07        2020        31        29  

Cemig D – 2nd Issue

     None        IPCA + 7.96        2017        235        441  

Cemig D – 4th Issue

     Surety        CDI + 4.05%        2018        1,598     

Debentures – 7th Issue, 1st Series (2)

     Receivables (Revenue)        140.0% of CDI        2021        2,197     

Gasmig

     Unsecured        TJLP+3.12        2016        —          41  

GASMIG

     Unsecured        CDI + 1.60        2018        101        103  

Gasmig

     Unsecured        CDI+0.62        2015           —    

Gasmig

     Unsecured        CDI+0.74        2018        67        100  

Gasmig

     Unsecured       
TJLP+7.82 (75%) and
Selic+1.82(25%)
 
 
     2022        134        125  

Cemig Telecom—1st Issue, 1st Series (4)

     Receivables (Revenue)        TJLP+2.62        2018        —          8  

Cemig Telecom—1st Issue, 2nd Series (4)

     Receivables (Revenue)        TJLP+3.32        2018        —          3  

Cemig Telecom—1st Issue, 3rd Series (4)

     Receivables (Revenue)        TJLP+1.72        2018        —          2  

Cemig Telecom—1st Issue, 4th Series (4)

     Receivables (Revenue)        TJLP+2.62        2018        —          2  

Cemig Telecom—1st Issue, 5th Series (4)

     Receivables (Revenue)        TJLP+3.32        2018        —          —    

Cemig Telecom—1st Issue, 6th Series (4)

     Receivables (Revenue)        TJLP+1.72        2018        —          —    
           

 

 

    

 

 

 

Subtotal

              11,485        8,246  

(-)FIC Pampulha-Títulos de empresas controladas

              (65)        —    
           

 

 

    

 

 

 

TOTAL

              11,420        8,246  
           

 

 

    

 

 

 

 

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For the debentures issued by the Company, there are no agreements for renegotiation, nor debentures held in treasury. There is an early maturity cross-default clause in the event of non-payment of any pecuniary obligation with individual or aggregate value, by Cemig GT or its parent company, Cemig, greater than R$ 50.

Restrictive covenants

The Company has contracts with covenants linked to financial indices, as follows:

 

Transaction

  

Ratio

  

Ratio requirement –
Issuer

  

Ratio requirement

– Cemig (Guarantor)

  

Timing

requirement

 

BNDES Financing

– Cemig GT (1)

  

Equity of Guarantor /

Total assets of Guarantor

   —      30% or more    Annual
Banco do Brasil Credit Note – Cemig GT (2)   

Net debt of Surety /

Ebitda of Surety

   —     

Less than or =

6.00 in 2016

5.26 in 2017

5.00 in 2018

  

Quarterly,

from

December 2016

7th Debenture Issue

– Cemig GT (3)

  

Net debt /

(Ebitda + Dividends received)

  

Less than or =

5.5 in 2017

5.0 in 2018

4.5 in 2019

3.0 in 2020

2.5 in 2021

  

Less than or =

4.5 in 2017

4.25 in 2018

3.5 in 2019

3.0 in 2020

2.5 in 2021

  

Half-yearly,

from June 2017

Gasmig Debentures (4)   

Total debt / Total assets

Ebitda / Debt servicing

  

Less than 0.6

1.30 or more

   —      Annual

 

(1) If the Company does not succeed in achieving the required ratio, it will have six months from the end of the business year in which the ratio was found, to: (i) constitute real guarantees which in the assessment of the BNDES represent 130.00% of the value of the debtor balance of the contract; or (ii) present an interim balance sheet, audited by an auditor accredited by the CVM, that indicates the return to the index required.
(2) Bank Credit Note issued in favor of Banco do Brasil in October 2016, for R$ 600. If additional or more restrictive financial covenants are agreed with other creditors, they will automatically be incorporated into the Bank Credit Note.
(3) 7th Issue of Debentures by Cemig GT, in December 2016, of R$ 2,240.
(4) If it does not succeed in achieving the required ratio, Gasmig will have 120 days from the date of a communication in writing from BNDESPar or BNDES to constitute guarantees that are acceptable to the debenture holders for the total amount of the debt, obeying the rules of the National Monetary Council, unless in that period the required ratios have been re-established. Cross-default: Certain contractually specified situations can cause early maturity of other debts.

On December 31, 2016 all the restrictive covenants relating to financial ratios of the Company were complied with.

21.    REGULATORY CHARGES

 

     2016      2015  

Assets

     

Global Reversion Reserve (RGR) (1)

     48        —    
     48        —    

Liabilities

     

Global Reversion Reserve – RGR

     35        48  

Energy Development Account – CDE

     189        280  

Eletrobrás – Compulsory loan

     0        1  

Aneel inspection charge

     3        3  

Energy Efficiency

     288        207  

Research and Development

     234        160  

Energy System Expansion Research

     3        2  

National Scientific and Technological Development Fund

     5        3  

Proinfa Alternative Energy Program

     8        7  

Royalties for use of water resources

     23     

Emergency capacity charge

     31        31  

Consumer charges – ‘Tariff Flag’ amounts

     17        1  
  

 

 

    

 

 

 
     836        743  
  

 

 

    

 

 

 

Current assets

     48        —    

Current liabilities

     381        517  

Non-current liabilities

     455        226  

 

(1) Cemig GT requested from Aneel a review of the amounts paid for the RGR Contribution in previous years, due to the basis of calculation used at the time for calculation of that charge. Cemig GT recognized the right to recover the amount of R$ 119, to be offset against RGR payable, only after the conclusion, in 2016, of a judgment by Aneel, as per Aneel Technical Note 162/2016, which accepted Cemig GT’s request.

 

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22.    POST-RETIREMENT LIABILITIES

Forluz Pension plan (a Supplementary retirement pension plan)

Cemig is a sponsor of Forluz – Forluminas Social Security Foundation, a non-profit legal entity whose object is to provide its associates and participants and their dependents with a financial income to complement retirement and pension, in accordance with the Forluz pension plan that they are subscribed in.

Forluz makes the following supplementary pension benefit plans available to its participants:

The Mixed Benefits Plan (‘Plan B’): This plan operates as a defined-contribution plan during the fund accumulation phase for retirement benefits for normal time of service, and as a defined-benefit plan for disability or death of participants still in active employment, and for receipt of benefits for time of contribution. The Sponsors match the basic monthly contributions of the participants. This is the only plan open for joining by new participants.

Pension Benefits Balances Plan (‘Plan A’): This plan includes all currently employed and assisted participants who opted to migrate from the Company’s previously sponsored defined benefit plan, and are entitled to a benefit proportional to those balances. For participants who are still working, this benefit has been deferred to the retirement date.

Cemig, Cemig GT and Cemig D also maintain, independently of the plans made available by Forluz, payments of part of the life insurance premium for the retirees, and contribute to a health plan and a dental plan for the active employees, retired employees and dependents, administered by Cemig Saúde.

Amortization of the actuarial obligations and recognition in the financial statements

In this Note the Company states its obligations and expenses incurred for purposes of the Retirement Plan, Health Plan, Dental Plan and the Life Insurance Plan in accordance with the standards specified by the IAS 19 – Employee Benefits, and an independent actuarial opinion issued as of December 31, 2016.

The Company has recognized an obligation for past actuarial deficits relating to the pension fund in the amount of R$ 787 on December 31, 2016 (R$ 812 on December 31, 2015). This amount has been recognized as an obligation payable by Cemig, its subsidiaries and jointly-controlled entities, and is being amortized by June 2024, through monthly installments calculated by the system of constant installments (known as the ‘Price’ table), and adjusted by the IPCA (Expanded National Consumer Price) inflation index (published by the Brazilian Geography and Statistics Institute – IBGE) plus 6% per year. Because the Company is required to pay this debt even if Forluz has a surplus, the Company decided to record the debt in full, and record the effects of monetary updating and interest in Financial revenue (expenses) in the Statement of income.

Independent Actuarial Information

The consolidated actuarial information is as follows:

 

2016

   Pension plans and
retirement
supplement plans
    Health
Plan
     Dental
Plan
     Life
insurance
     Total  

Present value of funded obligations

     9,743       1,711        38        814        12,306  

Fair value of plan assets

     (8,128     —          —          —          (8,128
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Initial net liabilities

     1,615       1,711        38        814        4,178  

Adjustment to asset ceiling

     64       —          —          —          64  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Net liabilities in the statement of financial position

     1,679       1,711        38        814        4,242  

 

 

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2015

   Pension plans and
retirement
supplement plans
    Health
Plan
     Dental
Plan
     Life
insurance
     Total  

Present value of funded obligations

     8,049       1,323        30        554        9,956  

Fair value of plan assets

     (6,703     —          —          —          (6,703
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Net liabilities in statement of financial position

     1,346       1,323        30        554        3,253  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

The changes in the present value of the defined benefit obligation are as follows:

 

     Pension plans and
retirement
supplement plans
    Health
Plan
    Dental
Plan
    Life
insurance
    Total  

Defined-benefit obligation on December 31,2013

     7,352       1,012       28       600       8,992  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of current service

     6       6       —         4       16  

Interest on the actuarial obligation

     869       125       4       73       1,071  

Actuarial losses (gains) recognized

          

Due to changes in financial assumptions

     241       38       1       33       313  

Due to adjustments based on experience

     329       12       1       (19     323  
     570       50       2       14       636  

Benefits paid

     (673     (73     (2     (11     (759
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Defined-benefit obligation on December 31,2014

     8,124       1,120       32       680       9,956  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of current service

     6       7       1       3       17  

Interest on the actuarial obligation

     934       135       3       81       1,153  

Actuarial losses (gains) recognized

          

Due to changes in demographic assumptions

     8       43       1       (71     (19

Due to changes in financial assumptions

     (822     128       (1     (122     (817

Due to adjustments based on experience

     533       (33     (4     69       565  
     (281     138       (4     (124     (271

Plan amendment—Past service

     —         —         —         (74     (74

Benefits paid

     (734     (77     (2     (12     (825
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Defined-benefit obligation on December 31,2015

     8,049       1,323       30       554       9,956  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of current service

     5       9       0       3       17  

Interest on the actuarial obligation

     1,013       174       4       72       1,263  

Actuarial losses (gains) recognized

     0       0       0       0       0  

Due to changes in demographic assumptions

     (1     0       0       0       (1

Due to changes in financial assumptions

     1,253       391       9       175       1,828  

Due to adjustments based on experience

     231       (87     (3     21       162  
     1,483       304       6       196       1,989  

Benefits paid

     (807     (99     (2     (11     (919
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Defined-benefit obligation on December 31, 2016

     9,743       1,711       38       814       12,306  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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Changes in the fair values of the plan assets were as follows:

 

     Pension plans and
retirement
supplement plans
 

Fair value at December 31. 2013

     7,728  
  

 

 

 

Real return on the investments

     889  

Contributions from the Employer

     107  

Benefits paid

     (673
  

 

 

 

Fair value at December 31. 2014

     8,051  
  

 

 

 

Real return on the investments

     (730

Contributions from the Employer

     116  

Benefits paid

     (734
  

 

 

 

Fair value at December 31. 2015

     6,703  
  

 

 

 

Real return on the investments

     2,105  

Contributions from the Employer

     127  

Benefits paid

     (807
  

 

 

 

Fair value at December 31. 2016

     8,128  
  

 

 

 

The amounts recognized in the 2016, 2015 and 2014 Statement of income are as follows:

 

2016

   Pension plans and
retirement
supplement plans
    Health
Plan
     Dental
Plan
     Life
insurance
     Total  

Cost of current service

     5       9        —          3        17  

Interest on the actuarial obligation

     1,014       173        4        72        1,263  

Expected return on the assets of the Plan

     (833     —          —          —          (833
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total expense in 2016 according to actuarial calculation

     186       182        4        75        447  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

2015

   Pension plans and
retirement
supplement plans
    Health
Plan
     Dental
Plan
     Life
insurance
    Total  

Cost of current service

     6       7        1        3       17  

Interest on the actuarial obligation

     934       135        3        81       1,153  

Expected return on the assets of the Plan

     (933     —          —          —         (933

Past service cost

     —         —          —          (74     (74
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Expense as per actuarial opinion

     7       142        4        10       163  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Adjustment relating to debt to Forluz

     122       —          —          —         122  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Expense in 2015

     129       142        4        10       285  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

2014

   Pension plans and
retirement
supplement plans
    Health
Plan
     Dental
Plan
     Life
insurance
     Total  

Cost of current service

     6       6        —          4        16  

Interest on the actuarial obligation

     869       125        4        73        1,071  

Expected return on the assets of the Plan

     (922     —          —          —          (922
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Expense as per actuarial opinion

     (47     131        4        77        165  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Adjustment to the asset ceiling

     47       —          —          —          47  

Adjustment relating to debt to Forluz

     99       —          —          —          99  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Expense in 2014

     99       131        4        77        311  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

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The company made changes to its life insurance, coming into effect on 2015, which result in changes to the maximum limit of the capital insured. This change resulted in a reduction of R$ 74 in the post-retirement liabilities, with counterpart in the Statement of income for 2015.

Changes in net liabilities:

 

     Pension plans and
retirement
supplement plans
    Health
Plan
    Dental
Plan
    Life
insurance
    Total  

Net liabilities on December 31. 2013

     808       1,012       29       600       2,449  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expense Recognized in Statement of income

     99       131       4       77       311  

Contributions paid

     (109     (73     (2     (11     (195

Actuarial losses (gains)

     —         50       2       14       66  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net liabilities on December 31. 2014

     798       1,120       33       680       2,631  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expense Recognized in Statement of income

     129       142       4       84       359  

Contributions paid

     (116     (77     (3     (12     (208

Plan amendment—Past service

     —         —         —         (74     (74

Actuarial losses (gains)

     535       138       (4     (124     545  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net liabilities on December 31. 2015

     1,346       1,323       30       554       3,253  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expense recognized in Income statement

     187       182       4       75       448  

Contributions paid

     (128     (99     (2     (11     (240

Actuarial losses (gains) ( * )

     274       305       6       196       781  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net liabilities on December 31, 2016

     1,679       1,711       38       814       4,242  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                 2016     2015     2014  

Current liabilities

         199       167       153  

Non-current liabilities

         4,043       3,086       2,478  

 

(*) Recognized directly in Equity

In 2016, 2015 and 2014, the expenses related to the debt agreed upon with Forluz were registered in Financial revenue (expenses), because they represent interest and monetary updating. The other expenses on the pension fund and on health, dental, and life insurance plans are recorded in the Other operating expenses line.

The independent actuary’s estimate for the expense amount to be recognized for the 2017 business year is as follows:

 

     Pension plans and
retirement
supplement plans
    Health
Plan
     Dental
Plan
     Life
insurance
     Total  

Cost of current service

     4       11        —          4        19  

Interest on the actuarial obligation

     980       178        4        85        1,247  

Expected return on the assets of the Plan

     (810     —          —          —          (810
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Expense in 2017 as per actuarial opinion

     174       189        4        89        456  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

The expectation for payment of benefits for the 2017 business year is as follows:

 

     Pension plans and
retirement
supplement plans
     Health
Plan
     Dental
Plan
     Life
insurance
     Total  

Estimate of payments of benefits

     843        104        2        11        960  

The Company and its subsidiaries have the expectation of making contributions of R$ 133 to the pension fund in 2017 for amortization of the agreed debt, and R$ 107 to the Defined Contribution Plan (recorded directly in the Statement of income for the year).

 

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The average periods of maturity of the obligations under the benefit plans, in years, are as follows:

 

Pension and retirement supplement plans

    Health Plan     Dental Plan     Life insurance  

Plan A

    Plan B                    
  9.58       11.83       13.38       13.38       11.83  

The principal categories of assets of the plan, as a percentage of the total of the plan’s assets, are as follows:

 

     2016     2015  

Shares of Brazilian companies

     3.84     6.90

Fixed income securities

     74.96     66.38

Real estate property

     8.14     9.66

Other

     13.06     17.06
  

 

 

   

 

 

 

Total

     100.00     100.00
  

 

 

   

 

 

 

The assets of the Pension Plan include the following assets, valued at fair value, of Cemig, Cemig GT and Cemig D:

 

     2016      2015  

Non-convertible debentures issued by the Sponsor and subsidiaries

     397        418  

Shares issued by the Sponsor

     7        6  

Real estate properties of the Foundation occupied by the Sponsors

     710        230  
  

 

 

    

 

 

 
     1,114        654  
  

 

 

    

 

 

 

This table gives the main actuarial assumptions:

 

     2016   2015   2014

Annual discount rate for present value of the actuarial liability

   10.50%   13.20%   12.00%

Annual expected return on plan assets

   10.50%   13.20%   12.00%

Long-term annual inflation rate

   4.50%   5.50%   5.50%

Annual salary increases

   6.59%   7.61%   7.61%

Mortality rate

   AT-2000   AT-2000   AT-2000

Disability rate

   Álvaro vindas   Álvaro vindas   Álvaro Vindas

Disabled mortality rate

   AT 49   AT 49   AT 49

Below is a sensitivity analysis of the effects of changes in the principal actuarial assumptions used to determine the defined-benefit obligation on December 31, 2016:

 

Effects on the defined-benefit obligation

   Pension and retirement
supplement plan
     Health
Plan
     Dental
Plan
     Life
insurance
     TOTAL  

Reduction of one year in the mortality table

     278        26        1        —          305  

Increase of one year in the mortality table

     —          —          —          30        30  

Reduction of 1% in the discount rate

     981        222        5        153        1,361  

In the presentation of the sensitivity analysis, the present value of the defined-benefit obligation was calculated using the Unit Projected Credit method, the same method used to calculate the defined-benefit obligation recognized in the Statement of financial position. The Company has not made changes in the methods used to calculate its post-retirement obligations for the business years ending December 31, 2016 and 2015.

 

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23.    PROVISIONS

The Company and its subsidiaries are parties in certain legal and administrative proceedings before various courts and government bodies, arising in the normal course of business, regarding employment-law, civil, tax, environmental and regulatory matters, and other issues.

The Company and its subsidiaries have made Provisions for contingencies in relation to the legal actions in which, based on the assessment of the Company and its legal advisors, the chances of loss are assessed as ‘probable’ (i.e. that an outflow of funds to settle the obligation will be necessary), as follows:

 

     2015      Additions      Reversals     Closed     2016  

Employment-law cases

     290        125        (5     (60     350  

Civil cases

     —          —          —         —         —    

Consumer relations

     18        15        (3     (15     15  

Other civil actions

     28        18        —         (6     40  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     46        33        (3     (21     55  

Tax

     67        3        (1     (1     68  

Environmental

     —          —          —         —         —    

Regulatory

     46        3        (3     (2     44  

Corporate (1)

     269        —          (30     —         239  

Other

     37        35        (4     (9     59  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

     755        199        (46     (93     815  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

     2014      Additions      Reversals     Closed     2015  

Employment-law cases

     323        39        (35     (37     290  

Civil cases

            

Consumer relations

     19        14        (2     (13     18  

Other civil actions

     24        10        —         (6     28  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     43        24        (2     (19     46  

Tax

     72        5        (9     (1     67  

Environmental

     1        —          (1     —         —    

Regulatory

     36        13        (3     —         46  

Corporate (1)

     239        30        —         —         269  

Other

     41        6        (9     (1     37  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL

     755        117        (59     (58     755  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

     2013      Additions      Reversals     Closed     Liabilities assumed
in business
combination¹
     2014  

Employment-law cases

     146        250        (7     (66     —          323  

Civil cases

               

Consumer relations

     29        10        (10     (10     —          19  

Other civil actions

     23        12        (6     (5     —          24  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
     52        22        (16     (15     —          43  

Tax

     26        30        (18     (16     50        72  

Environmental

     1        1        (1     —         —          1  

Regulatory

     50        8        (22     —         —          36  

Corporate (1)

     —          239        —         —         —          239  

Other

     31        14        (2     (2     —          41  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL

     306        564        (66     (99     50        755  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

(1) The difference in monetary updating of the Advance against Future Capital Increase made by the government of Minas Gerais State, subject of dispute, has been provisioned with a counterpart in Financial revenue (expenses). There are more details in Note 27.

 

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The Company’s management, in view of the long periods and manner of working of the Brazilian judiciary and tax and regulatory systems, believes that it is not practical to supply information that would be useful to the users of these financial statements about the time when any cash outflows, or any possibility of reimbursements, might take place in fact. The Company’s management believes that any disbursements in excess of the amounts provisioned, when the respective processes are completed, will not significantly affect the Company’s result of operations or financial position.

The details on the principal provisions and contingent liabilities are given below, these being the best estimates of expected future disbursements for these contingencies:

Provisions, made for legal actions in which the chances of loss have been assessed as ‘probable’; and contingent liabilities, for actions in which the chances of loss are assessed as ‘possible’

Employment-law cases

The Company and its subsidiaries are parties in various legal actions brought by its employees and by employees of service providing companies. Most of these claims relate to overtime and additional pay, severance payments, various benefits, salary adjustments and the effects of such items on a supplementary retirement plan. In addition to these actions, there are others relating to outsourcing of labor, complementary additions to or re-calculation of retirement pension payments by Forluz, and salary adjustments.

The value of the contingency is approximately R$ 1,544 (R$ 972 on December 31, 2015), of which R$ 349 has been provisioned (R$ 290 on December 31, 2015) – this being the probable estimate for funds needed to settle these disputes.

The increase in the amount of the contingency is due, among other factors, to the larger volume of legal actions being taken by former employees, arising from severances over recent years, and also the higher volume of actions on remuneration for hazardous work, due to new legal arguments which have emerged following recent legislative changes.

Consumer relations

The Company and its subsidiaries are parties in various civil actions relating to indemnity for pain and suffering and for material damages, arising, principally, from allegations of irregularity in measurement of consumption, and claims of undue charging, in the normal course of business, totaling R$ 33 (R$ 18 on December 31, 2015), of which R$ 15 (R$ 17 on December 31, 2015) has been provisioned – this being the probable estimate for funds needed to settle these disputes.

Other civil cases

Cemig and its subsidiaries are parties in various civil actions claiming indemnity for pain and suffering and for material damages, among others, arising from incidents occurring in the normal course of business, in the amount of R$ 227 (R$ 185 on December 31, 2015), of which R$ 40 (R$ 29 on December 31, 2015) – the amount estimated as probably necessary for settlement of these disputes – has been provisioned.

Tax

The Company and its subsidiaries are parties in numerous administrative and court actions relating to taxes, including, among other matters, subjects relating to the ICMS (Value Added) tax on goods and services; the Urban Property Tax (Imposto sobre a Propriedade Territorial Urbana, or IPTU); the Rural Property Tax (ITR); the tax on donations and legacies (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 Tax (Contribuição Social sobre o Lucro Líquido, or CSLL) and applications to stay tax execution on tax matters. The amount of the contingency is approximately R$ 295 (R$ 257 on December 31, 2015). Of this total, R$ 70 has been provisioned (R$ 69 on December 31, 2015) – this being the best probable estimate for funds needed to settle these disputes.

 

 

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Environmental

The Company and its subsidiaries are involved in environmental matters, in which the subjects include protected areas, environmental licenses, recovery of environmental damage, and other matters, in the approximate total amount of R$ 34 (R$ 26 on December 31, 2015).

Regulatory

The Company and its subsidiaries are parties in numerous administrative and court proceedings in which the main issues disputed are: (i) the tariff charges in invoices relating to the use of the distribution system by a self-producer; (ii) violation of targets for indicators of continuity in retail supply of electricity; (iii) the tariff increase made during the federal government’s economic stabilization plan referred to as the ‘Cruzado Plan’, in 1986.

The value of the contingency is approximately R$ 236 (R$ 202 on December 31, 2015), of which R$ 43 has been provisioned (R$ 45 on December 31, 2015) – this being the best probable estimate for funds needed to settle these disputes.

Corporate

Difference of monetary updating on the Advance against Future Capital Increase (AFAC) made by the Minas Gerais State Government

On December 19, 2014 the Finance Secretary of Minas Gerais State sent an Official Letter to Cemig requesting recalculation of the amounts relating to the Advances against Future Capital Increase made in 1995, 1996, and 1998, which were returned to Minas Gerais State in December 2011, for review of the criterion used by the Company for monetary updating, arguing that application of the Selic rate would be more appropriate, replacing the IGP-M index.

On December 29, 2014 the Company made an administrative deposit applying for suspension of enforceability of the credit being requested by the state, and for its non-inclusion in the Register of Debts owed to the state and in the Registry of Defaulted Payments owed to the state (CADIN).

Based on the opinion of the Company’s legal advisors, the chances of loss have been assessed as ‘probable’ and the amount provisioned, with a counterpart in Financial revenue (expenses) of R$ 239 (R$ 269 on December 31, 2015), which is the estimated probable amount of funds that might be used to settle the matter.

Other legal actions in the normal course of business

Breach of contract – provision of services of cleaning power line paths and accesses

The Company is a party in disputes alleging losses suffered as a result of supposed breach of contract at the time of provision of services of cleaning of power line pathways and firebreaks. The amount provisioned is R$ 28 (R$ 24 on December 31, 2015), this being estimated as the likely amount of funds necessary to settle this dispute.

Other legal actions

In addition to the issues described above, the Company is involved, on plaintiff or defendant side, in other cases, of smaller scale, related to the normal course of its operations, with an estimated total amount of R$ 179 (R$ 126 on December 31, 2015), of which R$ 30 (R$ 12 on December 31, 2015) – the amount estimated as probably necessary for settlement of these disputes – has been provisioned. Management believes that it has appropriate defense for these actions, and does not expect these issues to give rise to significant losses that could have an adverse effect on the Company’s financial position or profit.

 

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Contingent liabilities – for cases in which the chances of loss are assessed as ‘possible’, and the Company believes it has arguments of merit for legal defense

Tax and similar charges

The Company is a party in numerous administrative and court proceedings in relation to taxes. Below are details of the principal cases:

Indemnity of the employees’ future benefit – the ‘Anuênio’

In 2006, the Company paid an indemnity to its employees, totaling R$ 178, in exchange for rights to future payments (referred to as the Anuênio) for time of service, which would otherwise be incorporated, in the future, into salaries. The company did not pay income tax nor Social Security contributions in relation to these amounts because it considered that those obligations are not applicable to amounts paid as an indemnity. However, to avoid the risk of a future fine, the Company decided to apply for an order of mandamus, and the court permitted payment into Court of R$ 122 which, updated, represents the amount of R$ 255 (R$ 237 on December 31, 2015). This was posted in Escrow deposits in litigation. The amount of the contingency, updated, is R$ 290 (R$ 264 on December 31, 2015) and, based on the arguments above, Management has classified the chance of loss as ‘possible’.

Social Security contributions

The Brazilian federal tax authority (Secretaria da Receita Federal) has brought administrative proceedings against the Company, under various headings: employee profit shares (Participação nos Lucros e Resultados, or PLR), the Workers’ Food Program (Programa de Alimentação do Trabalhador, or PAT), overtime payments, hazardous occupation payments, matters related to Sest/Senat (transport workers’ support programs), and fines for non-compliance with accessory obligations. The Company has presented defenses and awaits judgment. The amount of the contingency is approximately R$ 1,510 (R$ 1,361 on December 31, 2015). The Company has assessed the chances of loss as ‘possible’ – reflecting among other considerations the assessment that these legal actions against the company are likely to be unsuccessful, grounded on evaluation of the claims and the related case law.

Non-homologation of offsetting of tax credit

In several administrative cases, the federal tax authority did not accept (and ratify) the Company’s declared offsetting of federal taxes using credits arising from undue or excess payment of federal taxes. The amount of the contingency is R$ 317 (R$ 663 on December 31, 2015). The Company has assessed the chance of loss as ‘possible’, since it believes that it has met the requirements of the National Tax Code (Código Tributário Nacional, or CTN).

The federal tax authority adjusted the debit balance in Cemig GT and Cemig D of the lawsuits in which the PIS and COFINS calculation base is discussed, with a current value of R$ 121 (R$ 448 as of December 31, 2015). This is the main factor in reducing the value of contingency.

Corporate tax return – restitution and offsetting

The Company is a party in an administrative case involving requests for restitution and compensation of credits arising from tax carryforward balances indicated in the tax returns (DIPJs) for the calendar years from 1997 to 2000, and also for excess payments identified by the corresponding tax payment receipts (DARFs and DCTFs). Due to completion of all appeals in the administrative sphere, an ordinary legal action has been filed, for the approximate total amount of R$ 535 (R$ 482 on December 31, 2015). The chances of loss in this action are assessed as ‘possible’, due to nullities in the conduct of the administrative proceedings and mistaken assumptions made by the inspectors in the administrative judgment, and also based on analysis of the Company’s argument and documents of proof.

 

 

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Income tax withheld at sourced (IRRF) on capital gain in a stockholding transaction

The federal tax authority issued an infringement notice on Cemig as a jointly responsible party with its jointly-controlled entity Parati S.A. Participações em Ativos de Energia Elétrica (Parati), relating to income tax withheld (Imposto de Renda Retido na Fonte, or IRRF) allegedly applicable to returns paid by reason of a capital gain in a stockholding transaction relating to the purchase by Parati of 100.00% of the equity interest held by Enlighted in Luce LLC (a company with head office in Delaware, USA), holder of 75.00% of the shares in the Luce Brasil equity investment fund (FIP Luce), which was indirect holder, through Luce Empreendimentos e Participações S.A., of approximately 13.03% of the total and voting shares of Light S.A. (Light). The amount of the contingency is approximately R$ 198 (R$ 202 on December 31, 2015), and the chances of loss have been assessed as ‘possible’.

Social Contribution tax (‘CSLL’) on net income

The federal tax authority issued a claim for incorrect payment against the Company for the business years 2012 and 2013, alleging non-addition, or deduction, by the Company, of amounts relating to the following items in calculating the Social Contribution tax on net income: (i) Taxes with liability suspended; (ii) donations and sponsorship (Law 8313/91); and (iii) fines for various alleged infringements. The amount of this contingency is R$ 280 (R$ 227 on December 31, 2015). The Company has classified the chances of loss as ‘possible’, in accordance with the analysis of the case law.

ICMS (value added) Tax

The tax authority of Minas Gerais state has opened several administrative actions against Cemig D, raising a supposed divergence in the classification, for tax purposes, of certain consumers in the years 2011 through 2015. The amount of this contingency is R$ 82. The company has classified the chance of loss as ‘possible’, because it believes that it has arguments on the merit for defense in the court, and because of the absence of case law precedent.

Regulatory matters

Public Lighting Contribution (CIP)

Cemig is defendant in several public civil actions (class actions), claiming nullity of the clause in the Electricity Supply Contracts for public illumination, signed between the Company and the various municipalities of its concession area, and restitution by the Company of the difference representing the amounts charged in the last 20 years, in the event that the courts recognize that these amounts were unduly charged. The actions are grounded on a supposed mistake by Cemig in the estimate of time that was used for calculation of the consumption of electricity for public illumination, funded by the Public Illumination Contribution (Contribuição para Illuminação Pública, or CIP).

The Company believes it has arguments of merit for defense in these claims, since the charge at present made is grounded on Aneel Normative Resolution 456/2000. As a result it has not constituted a provision for this action, the amount of which is estimated at R$ 1,305 (R$ 1,232 on December 31, 2015). It has assessed the chances of loss in this action as ‘possible’, due to the Consumer Defense Code (Código de Defesa do Consumidor, or CDC) not being applicable, because the matter is governed by the specific regulation of the electricity sector, and because Cemig complied with Aneel Resolutions 414 and 456, which deal with the subject.

Accounting of electricity sale transactions in the Electricity Trading Chamber (CCEE)

In an action dating from August 2002, AES Sul Distribuidora challenged in the courts the criteria for accounting of electricity sale transactions in the wholesale electricity market (Mercado Atacadista de Energia, or MAE) (predecessor of the present Electricity Trading Chamber – Câmara de Comercialização de Energia Elétrica, or CCEE), during the period of rationing in 2001–2. It obtained an interim judgment in its favor in February 2006, which ordered Aneel, working with the CCEE, to comply with the claim by AES Sul and recalculate the settlement of the transactions during the rationing period, leaving out of account Aneel’s Dispatch 288 of 2002.

 

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This was to be put into effect in the CCEE as from November 2008, resulting in an additional disbursement for Cemig, referring to the expense on purchase of energy in the spot market on the CCEE, in the approximate amount of R$ 264 (R$ 230 on December 31, 2015). On November 9, 2008 the Company obtained an interim remedy in the Regional Federal Appeal Court (Tribunal Regional Federal, or TRF) suspending the obligatory nature of the requirement to pay into court the amount that would have been owed under the Special Financial Settlement made by the CCEE.

The Company has classified the chance of loss as ‘possible’, since this is a unique action (no similar action has previously been judged), and because it deals with the General Agreement for the Electricity Sector, in which the Company has the full documentation to support its arguments.

System Service Charges (ESS) – Resolution of the National Energy Policy Council

Resolution 3 of March 6, 2013 issued by the National Energy Policy Council (Conselho Nacional de Política Energética, or CNPE) established new criteria for the prorating of the cost of the additional dispatch of thermal plants. Under the new criteria, the costs of the System Service Charges for Electricity Security (Encargos do Serviço do Sistema, or ESS), which were previously prorated in full between Free Consumers and Distributors, was now to be prorated between all the agents participating in the National Grid System, including generators and traders.

In May 2013, the Brazilian Independent Electricity Producers Association (Associação Brasileira dos Produtores Independentes de Energia Elétrica, or Apine), with which the Company is associated, obtained an interim court remedy suspending the effects of Articles 2 and 3 of CNPE Resolution 3, exempting generators from payment of the ESS under that Resolution.

As a result of the interim remedy, the CCEE (Wholesale Training Chamber) carried out the financial settlement for transactions in April through December 2013, using the criteria prior to the said Resolution. As a result, the Company recorded the costs of the ESS in accordance with the criteria for financial settlement published by the CCEE, without the effects of CNPE Resolution 3.

The applications by the plaintiff (Apine) were granted in the first instance, confirming the interim remedy granted in favor of its associates, including Cemig GT and its subsidiaries. This decision was the subject of an appeal, distributed to the 7th Panel of the TRF (Tribunal Federal Regional – Regional Federal Court) of the 1st Region, in which judgment is awaited.

The amount of the contingency is approximately R$ 182 (R$ 155 on December 31, 2015). In spite of the successful judgment at the first instance, the Association’s legal advisers still considered the chances of loss in this contingency as ‘possible’. The Company agrees with this, since there are not yet elements to enable foreseeing the outcome of the Appeal filed by the federal government.

PPE assets in service

In August 2014 Aneel filed a notice of infringement alleged the Company had not met all the requirements for appropriation of costs in works and other procedures adopted and its compliance with the current legislation. This is a type of inspection relating as it does to the Electricity Sector Property Control Manual. The amount of the contingency is R$ 3 (R$ 66 on December 31, 2015). The Company has classified the chances of loss as ‘possible’, because it believes it has arguments of merit for legal defense, due to the regularity and legality of the Normative Acts issued by Aneel, which orient the actions of the Company, and also due to compliance with the Normative Resolutions of Aneel in relation to the requirements of law; and also the public interest in the transfer of electricity assets; and has therefore not constituted a provision for this action.

Tariff increases

Exclusion of consumers inscribed as low-income

The Federal Public Attorneys’ Office filed a class action against the Company and Aneel, to avoid exclusion of consumers from classification in the Low-income Residential Tariff Sub-category, requesting an order for the Company to pay 200% of the amount allegedly paid in excess by consumers. Judgment was given in favor of the plaintiffs, but the Company and Aneel have filed an interlocutory appeal and await judgment. On December 31, 2016 the amount of the contingency was approximately R$ 254 (R$ 222 on December 31, 2015). The Company has classified the chances of loss as ‘possible’ due to other favorable judgments on this theme.

 

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Periodic Tariff Adjustment – Neutrality of ‘Portion A’

The Municipal Association for Protection of the Consumer and the Environment (Associação Municipal de Proteção ao Consumidor e ao Meio Ambiente, or Amprocom) filed a class action against the Company and against Aneel, for identification of all the consumers allegedly damaged in the processes of Periodic Review and Annual Adjustment of tariffs, in the period 2002 to 2009, and restitution, through credits on electricity bills, of any amounts unduly charged, arising from non-consideration of the impact of future variations in consumer electricity demand on non-manageable cost components, from the distributor’s non-manageable costs (‘Portion A’ costs), and the allegedly undue inclusion of these gains in manageable costs of the distributor (‘Portion B’’ costs), causing economic/financial imbalance of the contract. This is an action that could affect all distribution concession holders, which could thus lead to a new Electricity Sector Agreement. The estimated amount of the contingency is R$ 317 (R$ 276 on December 31, 2015). The Company has classified the chance of loss as ‘possible’, because it believes it has arguments of merit for legal defense and therefore has not made a provision for this action.

Environmental issues

Impact arising from construction of plants

An environmental association, in a class action, has claimed indemnity for supposed collective environmental damages as a result of the construction and operation of the Nova Ponte Hydroelectric Plant.

Due to the changes made in the environmental legislation and the trend toward a consensus in case law, the Company has re-evaluated the amounts and probabilities of loss on the claims in this action from: R$ 376 (R$ 314 on December 31, 2015). Based on the first instance decision, which ruled against the plaintiff’s applications, Management has re-evaluated the probability of loss, classifying it as ‘remote’.

The Public Attorney’s Office of the State of Minas Gerais has brought class actions requiring the Company to invest at least 0.5% of the gross annual operational revenue, since 1997, of the Emborcação, Pissarrão, Funil, Volta Grande, Poquim, Paraúna, Miranda, Nova Ponte, Rio de Pedras and Peti plants, in environmental protection and preservation of the water tables of the municipalities where Cemig’s power plants are located, and proportional indemnity for allegedly irreparable environmental damage caused, arising from omission to comply with Minas Gerais State Law 12503/97.

The Company has filed appeals to the Higher Appeal Court (STJ) and the Federal Supreme Court (STF). Based on the opinions of its legal advisers, the Company believes that this is a matter involving legislation at sub-constitutional level (there is a Federal Law with an analogous object) and thus a constitutional matter, on the issue of whether the state law is constitutional or not, so that the final decision is a matter for the national Higher Appeal Court (STJ) and the Federal Supreme Court (STF). No provision has been constituted. The estimated amount of the contingency is R$ 113 (R$ 99 on December 31, 2015).

The Public Attorneys’ Office of Minas Gerais State has filed class actions requiring the formation of a Permanent Preservation Area (APP) around the reservoir of the Capim Branco hydroelectric plant, suspension of the effects of the environmental licenses, and recovery of alleged environmental damage. Based on the opinion of its legal advisors in relation to the changes that have been made in the new Forest Code and in the case law on this subject, the Company has classified the probability of loss in this dispute as ‘possible’. The estimated value of the contingency is R$ 71 (R$ 64 on December 31, 2015).

Other contingent liabilities

Early settlement of the CRC (Earnings Compensation) Account

The Company is a party in an administrative proceeding before the Audit Court of the State of Minas Gerais which challenges (i) a difference of amounts relating to the discount offered by Cemig for early repayment of the credit owed to Cemig by the State under the Receivables Assignment Contract in relation to the CRC Account (Conta de Resultados a Compensar, or Earnings Compensation Account) – this payment was completed in the first quarter of 2013 – and also (ii) possible undue financial burden on the State after the signature of the Amendments that aimed to re-establish the economic and financial balance of the Contract. The amount of the contingency is approximately R$ 390 (R$ 363 on December 31, 2015), and the Company believes that it has met the legal requirements, having based its actions on the Opinion of the Public Attorneys’ Office of the Audit Board of the State of Minas Gerais. Thus, it has assessed the chances of loss as ‘possible’, since it believes that the adjustment was made in faithful obedience to the legislation applicable to the case.

 

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Contractual imbalance

The Company is a party in disputes alleging losses suffered as a result of supposed breach of contract at the time of implementation of part of the rural electrification program known as Luz Para Todos (‘Light for Everyone’). The estimated amount is R$ 237 (R$ 202 on December 31, 2015) and no provision has been made. The Company has classified the chances of loss as ‘possible’ as a result of the analysis that has been made of the argument and documentation used by the contracted parties in attempting to make the Company liable for any losses that allegedly occurred.

The Company is also a party in other disputes arising from alleged non-compliance with contracts in the normal course of business, for an estimated total of R$ 71 (R$ 33 on December 31, 2015). The Company has classified the chance of loss as ‘possible’, after analysis of the case law on this subject.

Irregularities in competitive tender proceedings

The Company is a party in a dispute alleging irregularities in competitive tender proceedings, governed by an online invitation to bid. The estimated amount is R$ 26 (R$ 24 on December 31, 2015), and no provision has been made. The Company has classified the chances of loss as ‘possible’, after analysis of the case law on this subject.

Alteration of the monetary updated index of employment-law cases

The Higher Employment Law Appeal Court (Tribunal Superior do Trabalho, or TST), considering a position adopted by the Federal Supreme Court (Supremo Tribunal Federal, STF) in two actions on constitutionality that dealt with the index for monetary updating of federal debts, decided on August 4, 2015 that employment-law debts in actions not yet decided that discuss debts subsequent to June 30, 2009 should be updated based on the variation of the IPCA-E (Expanded National Consumer Price Index), rather than of the TR reference interest rate. On October 16, 2015 an interim injunction was given by the STF that suspended the effects of the TST decision, on the grounds that decisions on matters of general constitutional importance should exclusively be decided by the STF.

The estimated value of the difference between the monetary updating indices of the employment-law cases is R$ 176 (R$ 140 on December 31, 2015). No additional provision has been made, since the Company, based on the assessment by its legal advisers, has assessed the chances of loss in the action as ‘possible’, as a result of the decision by the STF, and of there being no established case law, nor analysis by legal writers, on the subject, after the injunction given by the Federal Supreme court.

 

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24. EQUITY AND REMUNERATION TO SHAREHOLDERS

The Company’s registered share capital on December 31, 2016 and 2015 is R$ 6,294, in 420,764,708 common shares and 838,076,946 preferred shares, all with nominal value of R$ 5.00 (reais), as follows:

 

Shareholders

   Number of shares on December 31, 2016  
   Common      %      Preferred      %      Total      %  

State of Minas Gerais

     214,414,739        51        —          —          214,414,739        17  

Other entities of Minas Gerais State

     56,703        —          4,860,228        1        4,916,931        1  

AGC Energia S.A.

     84,357,856        20        —          —          84,357,856        7  

Other

     —          —          —          —          —          —    

In Brazil

     112,584,011        27        252,478,755        30        365,062,766        28  

Rest of world

     9,351,399        2        580,737,963        69        590,089,362        47  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     420,764,708        100        838,076,946        100        1,258,841,654        100  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Shareholders

   Number of shares on December 31,2015  
   Common      %      Preferred      %      Total      %  

Minas Gerais State

     214,414,739        51        —          —          214,414,739        17  

Other entities of M.G. State

     56,703        —          10,418,812        1        10,475,515        1  

AGC Energia S.A.

     138,700,848        33        42,671,763        5        181,372,611        15  

Others

                 

In Brazil

     58,127,167        14        179,358,041        21        237,485,208        18  

Rest of world

     9,465,251        2        605,628,330        73        615,093,581        49  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     420,764,708        100        838,076,946        100        1,258,841,654        100  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Earnings per share

The number of shares used in the calculation of basic profit and diluted profit per share, including the effect of the new shares, is as follows:

 

Number of shares

   2016     2015     2014  

Common shares

     420,764,708       420,764,708       420,764,708  

Held in treasury

     (69     (69     (69
  

 

 

   

 

 

   

 

 

 
     420,764,639       420,764,639       420,764,639  
      

Preferred shares

     838,076,946       838,076,946       838,076,946  

Held in treasury

     (560,649     (560,649     (560,649
  

 

 

   

 

 

   

 

 

 
     837,516,297       837,516,297       837,516,297  
      
  

 

 

   

 

 

   

 

 

 

Total

     1,258,280,936       1,258,280,936       1,258,280,936  

Basic profit per share

The Company’s preferred shares carry the right to a minimum mandatory dividend, as shown in more detail in item ‘c’.

 

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The following is the calculation of the basic profit per share:

 

     2016      2015      2014  

Profit for the period

     334        2,469        3,137  
        

Minimum mandatory dividend for the preferred shares arising from the profit for the period (item c)

     204        422        531  

Profit not distributed arising from the profit for the period – preferred shares

     87        1,221        1,557  
  

 

 

    

 

 

    

 

 

 

Total of the profit for the preferred shares (A)

     291        1,643        2,088  
        

Minimum mandatory dividend for the common shares

     —          212        266  

Profit not distributed arising from the profit for the period – common shares

     44        614        783  
  

 

 

    

 

 

    

 

 

 

Total profit for the common shares (B)

     44        826        1,049  
        

Basic profit per preferred share ( A / number of preferred shares )

     0.35        1.96        2.49  

Basic profit per common share ( B / number of common shares )

     0.10        1.96        2.49  

Diluted profit per share

The call and put options in shares of investees, described in more detail in Note 15, have potential to dilute the Company’s shares. The following shows the calculation of diluted profit per share:

 

     2016     2015      2014  

Profit for the period

     334       2,469        3,137  
       

Total basic profit for the preferred shares

     291       1,643        2,088  

Dilutive effect related to the RME/Lepsa Option

     (22     —          —    

Dilutive effect related to the Ativas Option

     (5     —          —    
  

 

 

   

 

 

    

 

 

 

Diluted profit for the preferred shares (C)

     264       1,643        2,088  
       

Total profit for the year for the common shares (B)

     44       826        1,049  

Dilutive effect related to the RME/Lepsa Option

     (11     —          —    

Dilutive effect related to the Ativas Option

     (2     —          —    
  

 

 

   

 

 

    

 

 

 

Diluted profit for the common shares (D)

     30       826        1,049  
       

Diluted profit per preferred share ( C / No. of preferred shares )

     0.32       1.96        2.49  

Diluted profit per common share ( D / No. of common shares )

     0.07       1.96        2.49  

Shareholders’ agreement

On August 1, 2011, the government of Minas Gerais State signed a Shareholders’ Agreement with AGC Energia S.A., with BNDES Participações S.A. as consenting party, valid for 15 years. The agreement maintains the State of Minas Gerais as dominant, sole and sovereign controlling shareholder of the Company, and attributes to AGC Energia certain prerogatives for the purpose of contributing to the sustainable growth of the Company, among other provisions.

 

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(b) Reserves

The account lines Capital Reserves and Profit Reserves are made up as follows:

 

Capital reserves and shares in Treasury

   2016     2015     2014  

Investment-related subsidies

     1,857       1,857       1,857  

Goodwill on issuance of shares

     69       69       69  

Shares in Treasury

     (1     (1     (1
  

 

 

   

 

 

   

 

 

 
     1,925       1,925       1,925  
  

 

 

   

 

 

   

 

 

 

The Reserve for investment-related subsidies basically refers to the compensation by the federal government for the difference between the profitability obtained by Cemig up to March 1993 and the minimum return guaranteed by the legislation in effect at the time.

The reserve for treasury shares refers to the pass-through by Finor of shares arising from funds applied in Cemig projects in the area covered by Sudene (the development agency for the Northeast) under tax incentive programs.

 

Profit reserves

   2016      2015      2014  

Legal reserve

     853        853        853  

Reserve under the By-laws

     57        57        57  

Retained earnings reserve

     2,813        2,906        1,655  

Tax incentives reserve

     57        50        29  

Reserve for obligatory dividends not distributed

     1,420        797        —    
  

 

 

    

 

 

    

 

 

 
     5,200        4,663        2,594  
  

 

 

    

 

 

    

 

 

 

Legal reserve

Constitution of the Legal Reserve is obligatory, up to the limits established by law. The purpose of the Reserve is to ensure the security of the share capital, its use being allowed only for offsetting of losses or increase in the share capital. The Company did not deposit in the Legal Reserve in 2016 due to its having reached its legal limit.

Reserve under the by-laws

The Reserve under the By-laws is for future payment of extraordinary dividends, in accordance with Article 28 of the by-laws.

Retained Earnings reserve

The Retained Earnings Reserves are for profits not distributed in previous years, to guarantee execution of the Company’s Investment Program, and amortizations of loans and financings planned for the 2016 business year. The retentions are supported by capital budgets approved by the Board of Directors in the periods in question.

Tax Incentives Reserve

The federal tax authority (Receita Federal) recognized the Company’s right to reduction of 75% in income tax, including the tax paid at the additional rate, calculated on the basis of the operating profit in the region of Sudene (the Development Agency for the Northeast), for 10 years starting in 2014. The amount of the tax incentive gain recorded was R$ 57 in 2016 (R$50 in 2015 and R$29 in 2014). This reserve cannot be used for payment of dividends.

 

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(c) Dividends

Ordinary dividends

Under its by-laws, Cemig is required to pay to its shareholders, as obligatory dividends, 50% of the net profit of each business year.

The preferred shares have preference in the event of reimbursement of capital and participate in profits on the same conditions as the common shares. They have the right to a minimum annual dividend equal to the greater of:

 

  (a) 10% of their par value and

 

  (b) 3% of the portion of equity that they represent.

Under the by-laws, Cemig’s shares held by private individuals have the right to a minimum dividend of 6% per year on their par value in all years when Cemig does not obtain sufficient profits to pay dividends to its shareholders. This guarantee is given by the State of Minas Gerais by Article 9 of State Law 828 of December 14, 1951 and Article 1 of State Law 8796 of April 29, 1985.

Under the Company’s by-laws, if the Company is able to pay dividends higher than the obligatory minimum dividend required for the preferred shareholders, and the remainder of net profit is sufficient to offer equal dividends for both the common and preferred shares, then the dividend per share will be the same for the holders of common shares and the holders of preferred shares. Dividends declared are paid in two equal installments, the first by June 30 and the second by December 30, of the year following the generation of the profit to which they refer. The Executive Board decides the location and processes of payment, subject to these periods.

The calculation of the dividends proposed for distribution to shareholders based on the profit for the business year is as follows:

 

Calculation of the Minimum Dividends required by the Bylaws for the preferred shares

   2016      2015      2014  

Nominal value of the preferred shares

     4,190        4,190        4,190  

Percentage applied to the nominal value of the preferred shares

     10.00%        10.00%        10.00%  
  

 

 

    

 

 

    

 

 

 

Amount of the dividends by the First payment criterion

     419        419        419  
        

Equity

     12,930        12,984        11,281  

Preferred shares as a percentage of Equity (net of shares held in Treasury)

     66.58%        66.58%        66.58%  
  

 

 

    

 

 

    

 

 

 

Portion of Equity represented by the preferred shares

     8,609        8,645        7,511  
  

 

 

    

 

 

    

 

 

 

Percentage applied to the portion of Equity represented by the preferred shares

     3.00%        3.00%        3.00%  
  

 

 

    

 

 

    

 

 

 

Amount of the dividends by the Second payment criterion

     258        259        225  
  

 

 

    

 

 

    

 

 

 
        
  

 

 

    

 

 

    

 

 

 

Calculation of the Minimum Dividends required by the Bylaws for the preferred shares

     419        419        419  
  

 

 

    

 

 

    

 

 

 
        

Obligatory Dividend

        

Net profit for the year

     334        2,469        3,137  

Obligatory dividend – 50.00% of net income

     167        1,235        1,568  

In 2016, 2015 and 2014 the mandatory minimum dividend under the by-laws for the preferred shares is R$ 419.

In December 2016 the Company declared payment of R$ 380 in the form of Interest on Equity, to be paid in two equal installments, by June 30 and December 30, 2017, to holders of preferred and common shares whose names were on the Company’s Nominal Share Registry on December 26, 2016. The total amount of this Interest on Equity will have counterpart in the Retained Earnings Reserve.

 

Interest on Equity

   2016  

Interest on Equity – preferred shares and common shares

  

– Common shares

     127  

– Preferred shares

     253  
  

 

 

 
     380  
  

 

 

 

Sub-item III of CVM Decision 683/2012 establishes that Interest on Equity paid or credited may only be imputed against the minimum obligatory dividend at its value net of withholding income tax.

 

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Based on this, the following is the proposal for allocation of profit, with the guarantee of minimum dividends for the preferred shares:

 

Calculation of dividends to be distributed

   Holding
company
 
   2016  

Interest on Equity paid to holders of the preferred shares

     253  
  

Additional dividends to guarantee the minimum payment for the preferred shares

  

– Dividends to meet the minimum amount specified in the by-laws

     166  

– Withholding income tax on Interest on Equity paid for the preferred shares (253.004 x 15%)

     38  
  

 

 

 
     204  
  

Total of Interest on Equity paid to the preferred shares from profit reserves

     253  

Total of Additional Dividends to guarantee the Minimum Payment for the preferred shares paid from the profit for the year

     204  
  

 

 

 
     457  
  

Unit value of dividends – R$

  

Minimum Dividends required by the by-laws for the preferred shares

     0.5  

Dividends proposed – preferred shares (net of withholding tax)

     0.5  

Allocation of Net profit for 2016 – Proposal by management

The Board of Directors decided to propose to the Annual General Meeting to be held on May 12, 2017 that the profit for 2016, in the amount of R$ 334, and the balance of Retained earnings, of R$ 37, should be allocated as follows:

 

  R$ 204 to be paid as minimum obligatory dividend, to the Company’s shareholders, in two equal installments, by June 30 and December 30, 2017 to holders of preferred shares whose names were on the Company’s Nominal Share Registry.

 

  R$ 161 to be held in Equity in the Retained earnings reserve, to guarantee for the Company’s consolidated investments planned for the 2017 business year, in accordance with a capital budget.

 

  R$ 7 to be held in Equity in the Tax incentives reserve, in reference to the tax incentive amounts obtained in 2016 in relation to the investments made in the region of Sudene.

 

(d) Accumulated Other Comprehensive Income

 

Equity valuation adjustments

   2016     2015     2014  

Adjustments to actuarial liabilities – Employee Retirement Benefits

     (170     (121     (14
      

Other comprehensive income in subsidiary and jointly-controlled entities

      

Deemed cost of PP&E

     685       720       780  

Change in fair value of financial asset available for sale in jointly controlled entity

     38       18       —    

Cumulative translation adjustments

     —         63       26  

Adjustments to actuarial liabilities – Employee Retirement Benefits

     (1,041     (578     (324
  

 

 

   

 

 

   

 

 

 
     (318     223       482  
  

 

 

   

 

 

   

 

 

 

Accumulated Other Comprehensive Income

     (488     102       468  
  

 

 

   

 

 

   

 

 

 

 

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The amounts reported as deemed cost of the generation assets are due to the valuation of the generation assets, with the assessment of their fair value at replacement cost in the initial adoption of international financial standards on January 1, 2009. The new valuation of the generation assets resulted in an increase in their value, posted in the specific line of Equity, net of the tax effects.

This table shows the adjustments arising from conversion of the financial statements:

 

Balance at December 31, 2014

     27  
  

 

 

 

Conversion adjustment of equity method gain in Other comprehensive income of Transchile

     36  
  

 

 

 

Balance on December 31, 2015

     63  
  

 

 

 

Conversion adjustment of equity method gain in Other comprehensive income of Transchile

     (23

Recycling to Income statement due to the sale of Transchile

     (40
  

 

 

 

Balance at December 31, 2016

     —    
  

 

 

 

 

25. REVENUE

 

     2016     2015
Restated
    2014
Restated
 

Revenue from supply of electricity (a)

     23,430       22,526       17,232  

Revenue from use of the electricity distribution systems (TUSD) (b)

     1,705       1,465       855  

CVA and Other financial components in tariff increases (c)

     (1,455     1,704       1,107  

Transmission revenue

      

Transmission concession revenue (d)

     312       261       557  

Transmission construction revenue (e)

     54       146       80  

Transmission indemnity revenue (g)

     751       101       420  

Distribution construction revenue (e)

     1,139       1,106       861  

Adjustment to expectation of cash flow from the indemnifiable Financial asset of the distribution concession (i)

     8       576       55  

Revenue from financial updating of the Concession Grant Fee (f)*

     300       —         —    

Transactions in electricity on the CCEE (h)

     161       2,425       2,348  

Supply of gas

     1,444       1,667       422  

Other operating revenues (i)

     1,421       1,440       1,284  

Deductions from revenue (k)

     (10,497     (11,549     (5,626
  

 

 

   

 

 

   

 

 

 

Net operating revenue

     18,773       21,868       19,595  
  

 

 

   

 

 

   

 

 

 

 

* Net of financial updating of the remaining balance payable of the concession grant fee

 

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a) Revenue from supply of electricity

This table shows supply of electricity by type of consumer:

 

     GWh (1)      R$  
   2016      2015      2014      2016     2015     2014  

Residential

     9,916        9,830        10,014        7,819       7,297       5,183  

Industrial

     19,494        22,969        26,026        5,396       5,781       4,793  

Commercial, Services and Others

     6,573        6,434        6,395        4,359       3,956       2,786  

Rural

     3,575        3,380        3,390        1,463       1,407       908  

Public authorities

     886        892        891        545       548       381  

Public illumination

     1,350        1,326        1,298        528       533       358  

Public service

     1,252        1,204        1,273        547       540       369  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Subtotal

     43,046        46,035        49,287        20,657       20,062       14,778  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Own consumption

     37        38        37        —         —         —    

Supply not yet invoiced, net

     —          —          —          (199     257       144  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     43,083        46,073        49,324        20,458       20,319       14,922  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Wholesale supply to other concession holders (2)

     12,509        10,831        14,146        2,713       2,358       2,251  

Wholesale supply not yet invoiced, net

     —          —          —          259       (151     59  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

     55,592        56,904        63,470        23,430       22,526       17,232  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) Data not audited by external auditors.
(2) Includes Regulated Market Electricity Sale Contracts (CCEARs) and ‘bilateral contracts’ with other agents.

 

b) Revenue from Use of Distribution Systems (the TUSD charge)

A significant part of the large industrial consumers in the concession areas of Cemig D and Light are now ‘Free Consumers’ – energy is sold to theme by the Cemig group’s generation and transmission company, Cemig GT, as well as other generators. When these users became Free Consumers, they began to pay separate charges for use of the distribution network. This line (‘TUSD’) records those charges.

 

c) The CVA (Portion A Costs Variation Compensation) Account, and Other financial components, in tariff adjustments

The gains arising from variations in the CVA Account (Portion ‘A’ Costs Variation Compensation Account) and Other financial components in calculation of tariffs, refer to the positive and negative differences between the estimate of the Company’s non-manageable costs and the payments actually made. The amounts recognized arise from balances constituted in the current period, homologated or to be homologated in tariff adjustment processes. For more information see Note 14.

 

d) Transmission Concession Revenue

Transmission Revenue comprises the following:

 

  Concession Transmission Revenue, which includes the portion received from agents of the electricity sector relating to operation and maintenance of the transmission lines;

 

  Generation Connection System Revenue, arising from the transmission assets belonging to the generating units.

 

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e) Construction revenue

Construction Revenue is substantially offset by Construction costs, and corresponds to the Company’s investments in assets of the transmission and distribution concessions in the period.

 

f) Gain on financial updating of the Concession Grant Fee

Represents updating by the IPCA index, plus remuneratory interest, on the Concession Grant Fee for the concession awarded as Lot D of Auction 12/2015. For more details please see Note 14.

 

g) Transmission indemnity revenue

In 2016 the Company recognized revenue of R$ 751, in relation to the following events:

 

R$ 20 relating to the difference between the amount of the Preliminary Revision made by Aneel – R$ 1,157 – on February 23, 2015, of the Opinion sent by the Company, and the Final Revision.

 

R$ 44 for monetary updating of the balance of indemnity receivable by the IGP-M index, up to May 2016.

 

R$ 90 representing the difference between the variations resulting from application of the IGP-M index and the IPCA index – since the Company had updated the balance receivable, up to May 2016, by the IGP-M.

 

R$ 438, representing the cost of own capital, calculated on the basis of 10.44% p.a.

 

R$ 159 for updating of the balance of indemnity receivable, by the IPCA index, in accordance with Mining and Energy Ministry Order 120, in the period July through December 2016.

 

h) Revenue from transactions in electricity on the CCEE (Wholesale Trading Chamber)

The revenue from transactions made through the Electricity Trading Chamber (Câmara de Comercialização de Energia Elétrica, or CCEE) is the monthly positive net balance of settlements of transactions for purchase and sale of electricity in the Spot Market, through the CCEE.

 

i) Adjustment to expectation of cash flow from the indemnifiable Financial asset of the distribution concession

This arises from the gain on the Adjustment made to the expectation of cash flow from the indemnifiable Financial asset of the distribution concession, due to monetary updating of the Regulatory Remuneration Base of assets.

 

j) Other operating revenues

 

     2016      2015      2014  

Charged service

     6        14        11  

Telecoms services

     137        134        135  

Services rendered

     167        131        118  

Subsidies (*)

     1,001        996        790  

Rental and leasing

     105        93        81  

Other

     5        72        149  
  

 

 

    

 

 

    

 

 

 
     1,421        1,440        1,284  
  

 

 

    

 

 

    

 

 

 

 

(*) Revenue recognized for the tariff subsidies applicable to users of distribution services, reimbursed by Eletrobras.

 

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k) Deductions from revenue

 

     2016     2015      2014  

Taxes on revenue

       

ICMS tax (1)

     5,211       4,487        3,198  

Cofins tax

     2,041       2,263        1,628  

PIS and Pasep taxes

     443       491        353  

Other

     7       6        6  
  

 

 

   

 

 

    

 

 

 
     7,702       7,247        5,185  

Charges to the consumer

       

Global Reversion Reserve – RGR

     (18     36        39  

Energy Efficiency Program (P.E.E.)

     58       45        47  

Energy Development Account – CDE

     2,074       2,870        211  

Research and Development – P&D

     48       47        49  

National Scientific and Technological Development Fund – FNDCT

     48       47        48  

Energy System Expansion Research – EPE

     24       24        24  

Consumer charges – Proinfa alternative sources program

     43       27        29  

Electricity Services Inspection Charge

     35       37     

Royalties for use of water resources

     123       102     

0.30% additional payment (Law 12111/09) (2)

     —         —          (6

Consumer charges – ‘Tariff Flag’ amounts

     360       1,067        —    
     2,795       4,302        441  
  

 

 

   

 

 

    

 

 

 
     10,497       11,549        5,626  
  

 

 

   

 

 

    

 

 

 

 

(1) As from January 1, 2016, the rate for consumers in the Commercial, services and other activities category was changed from 18% to 25% (Decree nº 46.924, of December 29, 2015).
(2) Reimbursement recognized by the Company in first quarter 2014, as per Official Letter 782/2013 authorized by Aneel, due to excess payment.

 

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26.    OPERATING COSTS AND EXPENSES

 

     2016      2015
Restated
     2014
Restated
 

Personnel (a)

     1,643        1,435        1,252  

Employees’ and managers’ profit shares

     7        137        249  

Post-retirement liabilities – Note 22

     345        156        212  

Materials

     58        154        381  

Outsourced services (b)

     867        899        953  

Electricity purchased for resale (c)

     8,273        9,542        7,428  

Depreciation and amortization

     834        835        801  

Operating provisions (d)

     704        1,401        581  

Charges for the use of the national grid

     947        999        744  

Gas purchased for resale

     877        1,051        254  

Construction costs (e)

     1,193        1,252        942  

Other operating expenses. net (f)

     156        426        651  
  

 

 

    

 

 

    

 

 

 
     15,904        18,287        14,448  
  

 

 

    

 

 

    

 

 

 

 

a) Personnel expenses

 

     2016     2015     2014  

Remuneration and salary-related charges and expenses

     1,350       1,273       1,098  

Supplementary pension contributions

– Defined-contribution plan

     100       85       80  

Assistance benefits

     175       142       144  
  

 

 

   

 

 

   

 

 

 
     1,625       1,500       1,322  
      

Provision for retirement premium (Reversal)

     (12     2       4  

Voluntary retirement program

     93       —         —    

( – ) Personnel costs transferred to Assets

     (63     (67     (74
  

 

 

   

 

 

   

 

 

 
     18       (65     (70
  

 

 

   

 

 

   

 

 

 
     1,643       1,435       1,252  

Programmed Voluntary Retirement Plan (PDVP)

In April 2016, the Company created the PDVP (Voluntary Employee Severance Program). Those eligible to take part were any employees who would have worked with Cemig for 25 years or more by December 31, 2016. For voluntary retirement, the PDVP offered the much more advantageous severance payments which are specified by law only for the case of dismissal without just cause – including payment for the period of notice, but especially deposit of an amount equal to the ‘penalty’ payment of 40% of the Base Value of the employee’s FGTS fund, as well as the other payments specified by the legislation.

 

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b) Outsourced services

 

     2016      2015      2014  

Meter reading and bill delivery

     140        122        184  

Communication

     55        64        67  

Maintenance and conservation of electrical facilities and equipment

     246        238        230  

Building conservation and cleaning

     97        100        91  

Contracted labor

     13        6        7  

Freight and airfares

     7        10        11  

Accommodation and meals

     13        17        18  

Security services

     25        28        26  

Consultancy

     15        17        24  

Maintenance and conservation of furniture and utensils

     53        46        37  

Maintenance and conservation of vehicles

     8        11        12  

Disconnection and reconnection

     7        26        19  

Environment

     19        22        29  

Legal services and procedural costs

     30        24        33  

Tree pruning

     14        23        23  

Cleaning of power line pathways

     8        30        29  

Copying and legal publications

     16        14        9  

Inspection of consumer units

     1        4        4  

Printing of tax invoices and electricity bills

     3        4        5  

Other

     97        93        95  
  

 

 

    

 

 

    

 

 

 
     867        899        953  
  

 

 

    

 

 

    

 

 

 

 

c) Electricity purchased for resale

 

     2016     2015     2014  

From Itaipu Binacional

     1,144       1,734       830  

Physical guarantee quota contracts

     537       252       221  

Quotas from Angra I and II Nuclear Plants

     217       200       179  

Spot market

     761       935       1,263  

Proinfa Program

     323       253       262  

‘Bilateral contracts’

     292       326       380  

Electricity acquired in Regulated Market auctions

     2,540       3,978       3,242  

Electricity acquired in the Free Market

     3,279       2,762       1,762  

Credits of Pasep and Cofins taxes

     (820     (898     (711
  

 

 

   

 

 

   

 

 

 
     8,273       9,542       7,428  
  

 

 

   

 

 

   

 

 

 

 

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d) Operating provisions (reversals)

 

     2016     2015     2014  

Allowance for doubtful receivables

     382       175       127  
      

Contingency provision

      

Employment-law cases

     120       4       242  

Civil cases

     30       22       6  

Tax

     2       (4     13  

Environmental

     —         (1     —    

Regulatory

     —         10       (14

Other

     31       (3     12  
  

 

 

   

 

 

   

 

 

 
     183       28       259  

Provision for losses on

      

Other accounts receivable

     40      

Put option—Parati (Note 15)

     55       1,079       166  

Put option—SAAG (Note 15)

     49       119       29  

Put option—Sonda (Note 15)

     (5    
  

 

 

   

 

 

   

 

 

 
     704       1,401       581  
  

 

 

   

 

 

   

 

 

 

 

e) Construction cost

 

     2016      2015      2014  

Personnel and managers

     58        65        60  

Materials

     534        521        415  

Outsourced services

     448        504        385  

Other

     153        162        82  
  

 

 

    

 

 

    

 

 

 
     1,193        1,252        942  
  

 

 

    

 

 

    

 

 

 

 

f) Other operating expenses (revenues), net

 

     2016     2015
Restated
     2014
Restated
 

Leasings and rentals

     112       102        112  

Advertising

     13       11        19  

Own consumption of electricity

     22       21        17  

Subsidies and donations

     17       31        50  

Paid concession

     3       7        23  

Insurance

     9       9        9  

CCEE annual charge

     8       8        7  

Net loss on deactivation and disposal of assets

     112       30        97  

Forluz – Administrative running cost

     25       22        22  

Gain on disposal of shares in Taesa

     (181     —          —    

Gain on disposal of Transchile

     (134     —          —    

Other expenses

     150       185        295  
  

 

 

   

 

 

    

 

 

 
     156       426        651  
  

 

 

   

 

 

    

 

 

 

Operating Leases

The Company has operating lease contracts relating, mainly, to vehicles and buildings used in its operational activities. Their amounts are not material in relation to the Company’s total costs.

 

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27.    FINANCIAL REVENUES AND EXPENSES

 

     2016     2015
Restated
    2014
Restated
 

FINANCIAL REVENUES

      

Income from cash investments

     317       251       298  

Late charges on overdue electricity bills

     277       230       166  

Foreign exchange variations

     62       76       15  

Monetary variations

     106       36       53  

Monetary variations – CVA

     204       68       —    

Monetary updating on Court escrow deposits

     46       212       —    

Pasep and Cofins taxes charged on financial revenues

     (88     (84     (38

Contractual penalty payments

     12       16       10  

Adjustment to present value

     —         2       —    

Other

     105       56       31  
  

 

 

   

 

 

   

 

 

 
     1,041       863       535  
  

 

 

   

 

 

   

 

 

 

FINANCIAL EXPENSES

      

Costs of loans and financings

     (1,928     (1,386     (931

Foreign exchange variations

     (35     (172     (26

Monetary updating – Loans and financings

     (245     (387     (271

Monetary updating – concession agreements

     (3     (11     (17

Charges and monetary updating on Post-retirement liabilities

     (103     (129     (99

Monetary updating – CCEE obligations

     (10     —         —    

Adjustment to present value

     —         —         —    

Other

     (154     (119     (350
  

 

 

   

 

 

   

 

 

 
     (2,478     (2,204     (1,694
  

 

 

   

 

 

   

 

 

 

NET FINANCIAL REVENUE (EXPENSES)

     (1,437     (1,341     (1,159
  

 

 

   

 

 

   

 

 

 

The Pasep and Cofins expenses apply to Interest on Equity.

 

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28.    RELATED PARTY TRANSACTIONS

Cemig’s principal balances and transactions with related parties are shown here:

 

COMPANY

   ASSETS      LIABILITIES      REVENUE      EXPENSES  
   2016      2015      2016      2015      2016      2015      2014      2016     2015     2014  

Controlling shareholder

                           

MINAS GERAIS STATE GOVT.

                           

Current

                           

Consumers and Traders (1)

     71        19        —          —          152        150        105        —         —         —    

Financings – BDMG

     —          —          4        9        —          —          —          (1     (2     (1

Debentures (2)

     —          —          —          —          —          —          —          —         —         (30

Non-current

                           

Financings – BDMG

     —          —          23        50        —          —          —          —         —         —    
                           

Jointly-controlled entities

                           

Aliança Geração

                           

Current

                           

Transactions in electricity (2)

     —          —          7        11        —          —          —          (142     (106     —    

Provision of services (3)

     4        —          —          —          14        6        —          —         —         —    
                           

Baguari Energia

                           

Current

                           

Transactions in electricity (2)

     —          —          1        1        —          —          —          (7     (6     (6

Interest on Equity, and dividends

     —          6        —          —          —          —          —          —         —         —    
                           

Madeira Energia

                           

Current

                           

Transactions in electricity (2)

     —          —          18        16        8        —          —          (574     (638     (124

Advance against future electricity supply (4)

     —          87        —          —          —          12        —          —         —         —    
                           

Norte Energia

                           

Current

                           

Transactions in electricity (2)

     —          —          4        —          2        —          —          (49     —         —    
                           

Pipoca

                           

Current

                           

Transactions in electricity (2)

     —          —          1        1        —          —          —          (16     (11     —    

Interest on Equity, and dividends

     —          1        —          —          —          —          —          —         —         —    
                           

Retiro Baixo

                           

Current

                           

Dividends, and Interest on Equity

     2        —          —          —          —          —          —          —         —         —    
                           

Guanhães Energia

                           

Current

                           

Adjustment for losses (5)

     —          —          59        —          —          —          —          —         —         —    
                           

Renova

                           

Current

                           

Transactions in electricity (2)

     —          —          —          2        —          —          —          (159     (12     (12

Non-current

                           

Accounts receivable (6)

     74        —          —          —          14        —          —          —         —         —    

Advance for future delivery of power supply (7)

     229        60        —          —          17        —          —          —         —         —    
                           

TAESA

                           

Current

                           

Transactions in electricity (2)

     —          —          10        11        —          —          —          (110     (94     (33
                           

Empresa Amazonense de Transmissão de Energia -EATE

                           

Current

                           

Transactions in electricity (2)

     —          —          3        3        —          —          —          (25     (28     (6
                           

 

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     ASSETS      LIABILITIES      REVENUE      EXPENSES  

COMPANY

   2016     2015      2016      2015      2016      2015      2014      2016     2015     2014  

Light

                          

Current

                          

Transactions in electricity (2)

     —         1        —          —          59        47        9        (1     (1     —    

Interest on Equity, and dividends

     7       44        —          —          —          —          —          —         —         —    
                          

Parati

                          

Current

                          

Interest on Equity, and dividends

     —         9        —          —          —          —          —          —         —         —    
                          

Axxiom

                          

Current

                          

Provision of services (8)

     —         —          7        6        —          —          —          —         —         —    
                          

Other related parties

                          

FIC Pampulha

                          

Current

                          

Securities

     1,455       1,031        —          —          197        115        181        —         —         —    

(-) Securities issued by subsidiary companies of Cemig (9)

     (49     —          —          —          —          —          —          —         —         —    

Non-current

                          

Securities

     46       17        —          —          —          —          —          —         —         —    

(-) Securities issued by subsidiary companies of Cemig (9)

     (15     —          —          —          —          —          —          —         —         —    
                          

FORLUZ

                          

Current

                          

Post-retirement obligations (10)

     —         —          86        76        —          —          —          (186     (129     (99

Personnel expenses (11)

     —         —          —          —          —          —          —          (100     (85     (80

Administrative running costs (12)

     —         —          —          —          —          —          —          (25     (22     (22

Operational leasing (13)

     —         —          10        2        —          —          —          (39     (18     (17

Non-current

                          

Post-retirement obligations (10)

     —         —          1,593        1,270        —          —          —          —         —         —    
                          

CEMIG SAÚDE (HEALTH)

                          

Current

                          

Health Plan and Dental Plan (14)

     —         —          102        79        —          —          —          (187     (146     (135

Non-current

                          

Health Plan and Dental Plan (14)

     —         —          1,647        1,275        —          —          —          —         —         —    

 

The main conditions relating to the related party transactions are as follows:

(1) Refers to sale of electricity to the government of the State of Minas Gerais. The price of the electricity is defined by Aneel through a Resolution which decides the Company’s annual tariff adjustment.
(2) Transactions in electricity between generators and distributors were made in auctions organized by the federal government; transactions for transport of electricity, made by transmission companies, arise from the centralized operation of the National Grid carried out by the National System Operator (ONS).
(3) Refers to contract to provide plant operation and maintenance services.
(4) Effected in February 2015, in accordance with a condition of the power purchase agreement between Cemig GT and Saesa signed on March 19, 2009. For the purpose of settlement, this amount will be updated at a rate of 135% of the CDI rate, and will be offset against invoicing by Saesa for supply of electricity. The offsetting was completed on March 15, 2016.
(5) A liability was recognized corresponding to the Company’s interest in the share capital of Guanhães, due to its negative equity (see Note 15).
(6) Cemig GT has an item of R$ 60 receivable from Renova Energia, which will be paid in 12 monthly installments, the first on January 10, 2018 and the last becoming due in December 2018, with monetary updating at 150% of the CDI rate.
(7) In June 2016, under an electricity supply contract with Renova, Cemig GT advanced R$ 94 to Renova’s trading company, Renova Comercializadora, after guarantees of certain assets of Renova had been provided. Subsequently further advances were made, of R$ 40 in September, and R$ 15, R$ 25 and R$ 38 on October 3, 17 and 27, 2016, respectively. For the purpose of settlement, this amount will be updated at a rate of 155% of the CDI rate, and offset by invoicing, by Renova, for supply of electricity provided.
(8) Refers to obligations and expenses on development of management software.
(9) FIC Pampulha has financial investments in securities issued by subsidiary companies of the Company. There is more information, and characteristics of the fund, in the descriptive text below.
(10) The contracts of Forluz are updated by the Expanded Consumer Price Index (IPCA) calculated by the Brazilian Geography and Statistics Institute (Instituto Brasileiro de Geografia e Estatística, or IBGE) (See Note 22) and will be amortized up to the business year of 2024.
(11) The Company’s contributions to the pension fund for the employees participating in the Mixed Plan, and calculated on the monthly remuneration (see Explanatory Note 26), in accordance with the regulations of the Fund.
(12) 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.
(13) Rental of the head office building.
(14) Contribution by the sponsor to the employees’ Health Plan and Dental Plan (See Note 22).

For more information on the principal transactions, please see Notes 8, 18 and 25.

 

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Guarantees and sureties for loans, financings and debentures

Cemig is provider of surety or guarantee of loans, financings and debentures of the following related parties – not consolidated in the financial statements because they relate to jointly-controlled entities or affiliated companies:

 

Related party

   Relationship    Type    Object of
guarantee
   2016      Expiration  

Norte Energia S.A. (‘Nesa’)

   Affiliated    Surety    Financing      2,357        2042  

Light (1)

   Jointly-controlled entity    Counter-guarantee    Financing      684        2042  

Santo Antônio Energia S.A.

   Jointly-controlled entity    Surety    Financing      1,995        2034  

Santo Antônio Energia S.A.

   Jointly-controlled entity    Surety    Debentures      736        2037  

Guanhães

   Jointly-controlled entity    Surety    Promissory Note      67        2016  

Centroeste

   Jointly-controlled entity    Surety    Financing      9        2023  
           

 

 

    
              5,848     
           

 

 

    

 

(1) Related to execution of guarantees of the Norte Energia financing.

At December 31, 2016, Management believes that there is no need to recognize any provisions in the Company’s financial statements for the purpose of meeting any obligations arising under these sureties and/or guarantees.

Cash investments in FIC Pampulha – investment fund of Cemig and its subsidiaries and affiliates

Cemig and its subsidiaries and affiliates invest part of their financial resources in an investment fund which has the characteristics of fixed income and obeys the Company’s cash investment policy. The amounts invested by the fund Presented in the table below are accounted under Securities in Current and Non-current assets, or presented as deductions in the account line Debentures in Current or Non-current assets, on December 31, 2016.

The funds applied in this investment fund are allocated only in public and private fixed income securities, subject only to credit risk, with various maturity periods, obeying the unit holders’ cash flow needs.

The financial investments in securities of related parties, in the investment fund, on December 31, 2016 and 2015, are as follows:

 

Issuer of security

  

Type

  

Annual
contractual
conditions

   Maturity      Cemig Holding
Company 10.12%
     Cemig GT
20.86%
     Cemig D
24.94%
     Other
subsidiaries

22.39%*
     Total
2016
 

Axxiom

   Debentures    109.00% of CDI Rate      1/29/2017        1        1        1        1        4  

ETAU

   Debentures    108.00% of CDI      12/1/2019        1        2        3        2        8  
           

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
              2        3        4        3        12  
           

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(*) Refers to the other companies consolidated by Cemig, which also have participation in the investment funds.

 

Issuer of security

  

Type

  

Annual
contractual
conditions

   Maturity      Cemig Holding
Company 10.12%
     Cemig GT
20.86%
     Cemig D
24.94%
     Other
subsidiaries

22.39%*
     Total
2015
 

Axxiom

   Debentures    109.00% of CDI Rate      1/29/2017        1        3        3        4        11  

Ativas

  

Debentures

   CDI + 3.50%      7/1/2017        2        7        5        8        22  

Ativas

  

Debentures

   CDI + 3.50%      7/1/2017        3        8        6        10        27  

ETAU

  

Debentures

   108.00% of CDI Rate      12/1/2019        1        3        2        4        10  

Brasnorte

  

Debentures

   108.00% of CDI Rate      6/22/2016        —          1        1        1        3  
           

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
              7        22        17        27        73  
           

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(*) Refers to the other companies consolidated by Cemig, which also have participation in the investment funds.

 

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Remuneration of key management personnel

The total costs of key management personnel, in 2016, 2015 and 2014, are shown in this table:

 

     2016     2015      2014  

Remuneration

     25       19        11  

Profit shares (reversals)

     (1     2        3  

Assistance benefits

     2       1        1  
  

 

 

   

 

 

    

 

 

 
     26       22        15  
  

 

 

   

 

 

    

 

 

 

29.    FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

The financial instruments of the Company and its subsidiaries are restricted to the following: cash and cash equivalents, securities, Consumers, traders, and power transport concession holders; Financial assets of the concession related to infrastructure; Linked funds; Escrow deposits in litigation; the CVA (Portion A Costs Variation Compensation) Account and Other Financial Components in tariff adjustments; Loans and financings; Concession obligations payable; Suppliers; and Post-employment obligations. The gains and losses on transactions are recorded in full in the profit or loss for the business year or in Equity, by the accrual method.

The Company’s financial instruments and those of its subsidiaries are recorded at fair value and measured in accordance with the following classifications:

 

  Loans and receivables: This category contains: Cash equivalents; Credits receivable from Consumers, Traders, and power transport concession holders; Linked funds; Financial assets related to the CVA account, and Other financial components, in calculation of tariffs; the Low-income subscriber subsidy; Reimbursement of tariff subsidies and Other credits owed by Eletrobras; Escrow deposits in litigation; Financial assets of the concession not covered by Law 12783/1; and Financial assets related to Auction 12/2015 for award of generation plants. They are recognized at their nominal realization value, which is similar to fair value.

 

  Financial instruments at fair value through profit or loss: Securities held for trading, and Put options, are in this category. They are valued at fair value and the gains or losses are recognized directly in the Profit and loss account.

 

  Financial instruments held to maturity: These include Securities, in the amount of R$ 50 on December 31, 2016 and R$ 225 on December 31, 2015, included in Note 7. There is positive intention to hold them to maturity. They are measured at amortized cost using the effective rates method. Fair value, of R$ 50 on December 31, 2016 and R$ 224 on December 31, 2015, was measured using information of Level 2.

 

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  Financial instruments available for sale: In this category are Financial assets of the concession related to distribution infrastructure covered by Law 12783/13. They are measured at New Replacement Value (Valor Novo de Reposição, or VNR), which is equivalent to fair value on the date of these financial statements.

 

  Other financial liabilities – Non-derivative financial liabilities: In this category are Loans and financings; Obligations under debentures; Debt agreed with the Pension Fund (Forluz); Concessions payable; and Suppliers. They are measured at amortized cost using the effective rates method. The Company has calculated the fair value of its Loans, financings and debentures using 140% of the CDI rate – based on its most recent funding. For the following, the Company considered fair value to be substantially equal to book value: Loans, financings and debentures with annual rates between IPCA + 6.00% to 8.07% and CDI + 2.00% to 4.05%. For the financings from the BNDES and Eletrobras, fair value is conceptually similar to book value, due to the specific characteristics of the transactions.

 

  Liabilities measured at fair value – Financial liabilities for the put options: The options to sell units in FIP Melbourne and FIP Malbec (‘the SAAG Put’); the options to sell shares in RME and Lepsa (‘the Parati PUT’); and the Sonda Options, were valued at fair value using the Black-Scholes-Merton (BSM) model. Both the options were calculated using the discounted cash flow method: for the SAAG Put option, up to the third quarter of 2016; and for the Parati Put option, up to the first quarter of 2016. The method used was changed, in the fourth and second quarters, respectively, to the BSM model. The Company calculated the fair value of these options having as a reference their respective prices obtained by the BSM model, valued on the closing date of the financial statements for the 2016 business year.

The accounting balances of the financial instruments are similar to the fair values, except for loans, of which the accounting balance is R$ 15,179 (R$ 15,167 on December 31, 2015) and fair value is R$ 14,711 (R$ 15,544 on December 31, 2015), being measured as Level 2, using similar liabilities as reference.

 

a) Risk management

Corporate risk management is a management tool that is an integral part of the Company’s corporate governance practices, and is aligned with the process of planning, which sets the Company’s strategic business objectives.

 

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The Company has a Financial Risks Management Committee, the purpose of which is to implement guidelines and monitor the financial risk of transactions that could negatively affect the Company’s liquidity or profitability, recommending hedge protection strategies to control the Company’s exposure to foreign exchange rate risk, interest rate risk, and inflation risks.

The principal risks to which the Company is exposed are as follows:

Exchange rate risk

Cemig and its subsidiaries are exposed to the risk of increase in exchange rates, with impact on Loans and financings, Suppliers, and cash flow.

This table gives the net exposure to exchange rates:

 

Exposure to exchange rates

   2016      2015  
     
     Foreign
currency
     R$      Foreign
currency
     R$  

US dollars

           

Loans and financings (Note 20)

     7        23        8        33  

Suppliers (Itaipu Binacional)

     62        207        83        315  
  

 

 

    

 

 

    

 

 

    

 

 

 
     69        230        91        348  
  

 

 

    

 

 

    

 

 

    

 

 

 

Euro

           

Loans, financings and debentures – Euros (Note 20)

     2        7        3        14  
     

 

 

       

 

 

 

Net liabilities exposed

        237           362  
     

 

 

       

 

 

 

(*) BNDES monetary unit – reflects the weighted average of the FX variations in the BNDES Basket of Currencies.

Sensitivity analysis

Based on its financial consultants, the Company estimates that in a probable scenario, at December 31, 2017 the US dollar will have appreciated by 2.82%, to an exchange rate of R$ 3.351/US$; and the Euro will have appreciated by 1.95%, to R$ 3.505/Euro. The Company has made a sensitivity analysis of the effects on the Company’s profit arising from depreciation of the Real exchange rate by 25%, and by 50%, in relation to this scenario 1:

 

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Risk: foreign exchange rate exposure

   Base
scenario
Dec. 31.
2016
     Scenario 1
USD: R$ 3.351
Euro: R$ 3.505
     Scenario 2
FX depreciation 25%
USD: R$ 4.189
Euro: R$ 4.381
     Scenario 3
FX depreciation 50%
USD: R$ 5.027
Euro: R$ 5.258
 

US dollar

           

Loans and financings (Note 20)

     23        24        30        36  

Suppliers (Itaipu Binacional)

     207        212        266        319  
  

 

 

    

 

 

    

 

 

    

 

 

 
     230        236        296        355  
  

 

 

    

 

 

    

 

 

    

 

 

 

Euro

           

Loans and financings (Note 20)

     7        8        9        11  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net liabilities exposed

     237        244        305        366  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net effect of exchange rate variation

        7        68        129  

Interest rate risk

Cemig and its subsidiaries are exposed to the risk of increase in international interest rates, affecting loans and financings in foreign currency with floating interest rates (principally Libor), in the amount of R$ 60 (R$ 72 on December 31, 2015).

The Company is exposed to the risk of increase in domestic Brazilian interest rates through its net liabilities, indexed to the variations in the Selic and CDI rates, as follows:

 

Exposure to domestic interest rate changes

   2016     2015  

Assets

    

Cash equivalents – Short-term investments (Note 6)

     894       873  

Securities (Note 7)

     1,045       2,511  

Restricted cash

     367       —    

CVA and Other financial components in tariffs – Selic rate * (Note 14)

     398       1,350  

Credits owed by Eletrobras

     138       —    
  

 

 

   

 

 

 
     2,842       4,734  
  

 

 

   

 

 

 

Liabilities

    

Loans. financings and debentures – CDI rate (Note 20)

     (10,928     (10,734

Loans. financings and debentures – TJLP (Note 20)

     (213     (283

CVA and Other financial components in tariffs – Selic rate * (Note 14)

     (805     —    
  

 

 

   

 

 

 
     (11,946     (11,017
  

 

 

   

 

 

 

Net liabilities exposed

     (9,104     (6,283

 

(*) Amounts of CVA and Other financial components, indexed to the Selic rate.

Sensitivity analysis

The Company estimates that, in a probable scenario, on December 31, 2017 the Selic rate will be 9.00% p.a. and the TJLP will be 6.75% p.a. The Company has made a sensitivity analysis of the effects on its profit arising from increases in rates of 25% and 50% in relation to this scenario 1. Variation in the CDI rate accompanies the variation in the Selic rate.

Estimation of the scenarios for the path of interest rates will consider the projection of the Company’s scenarios, based on its financial consultants.

 

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Risk: Increase in Brazilian interest rates

   2016     December 31, 2017  
    
     Book
value
   

Scenario 1

Selic 9.00%

TJLP 6.75%

   

Scenario 2

Selic 11.25%

TJLP 8.44%

   

Scenario 3

Selic 13.50%

TJLP 10.13%

 

Assets

        

Cash investments (Note 6)

     894       974       994       1,014  

Securities (Note 7)

     1,045       1,139       1,163       1,186  

Restricted cash

     367       401       409       417  

CVA and Other financial components of tariff – Selic rate

     398       434       442       451  

Credits owed by Eletrobras

     138       151       154       157  
  

 

 

   

 

 

   

 

 

   

 

 

 
     2,842       3,099       3,162       3,225  
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

        

Loans, financings and debentures – CDI rate (Note 20)

     (10,928     (11,912     (12,158     (12,404

Loans and financings – TJLP (Note 20)

     (213     (227     (231     (235

CVA and Other financial components in

tariff adjustments (Note 14)

     (805     (877     (896     (914
  

 

 

   

 

 

   

 

 

   

 

 

 
     (11,946     (13,016     (13,285     (13,553
  

 

 

   

 

 

   

 

 

   

 

 

 

Net liabilities exposed

     (9,104     (9,917     (10,123     (10,328
    

 

 

   

 

 

   

 

 

 

Net effect of variation in interest rates

       (813     (1,019     (1,224
    

 

 

   

 

 

   

 

 

 

Risk of increase in inflation

This table shows the Company’s net exposure to inflation rates:

 

Exposure to increase in inflation

   2016     2015  

Assets

    

Financial assets of the concession related to infrastructure –Distribution – IPCA Index (Note 14)

     128       121  

Financial assets of the concession related to infrastructure Transmission– IPCA index (note 14)*

     1,805       1,054  

Concession Grant Fee – IPCA (Note 14)

     2,254       —    
  

 

 

   

 

 

 
     4,187       1,175  
  

 

 

   

 

 

 

Liabilities

    

Loans, financings and debentures – IPCA index (Note 20)

     (3,933     (3,910

Debt agreed with pension fund (Forluz) – IPCA

     (787     (812
  

 

 

   

 

 

 
     (4,720     (4,722
  

 

 

   

 

 

 

Net assets (liabilities) exposed

     (533     (3,547
  

 

 

   

 

 

 

 

(*) Value of the Financial assets of the concession homologated by Aneel in Dispatch 729 of March 25, 2014.

Sensitivity analysis

In relation to the most significant risk of increase in inflation, the Company estimates that, in a probable scenario, on December 31, 2017 the IPCA inflation index will be 4.70%. The Company has made a sensitivity analysis of the effects on its profit arising from increases in inflation of 25% and 50% in relation to this scenario 1:

 

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Risk: increase in inflation

   2016     December 31, 2017  
   Book
value
    Scenario 1
IPCA 4.70%
    Scenario 2
IPCA 5.88%
    Scenario 3
IPCA 7.05%
 

Assets

        

Financial assets of the concession related to infrastructure – Distribution – IPCA Index (Note 14)

     128       134       136       137  

Financial assets of the concession related to infrastructure Transmission – IPCA index (note 14)*

     1,805       1,890       1,911       1,932  

Concession Grant Fee – IPCA (Note 14)

     2,254       2,360       2,386       2,413  
  

 

 

   

 

 

   

 

 

   

 

 

 
     4,187       4,384       4,433       4,482  
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

        

Loans, financings and debentures – IPCA index (Note 20)

     (3,933     (4,118     (4,164     (4,210

Debt agreed with pension fund (Forluz) – IPCA

     (787     (824     (833     (842
  

 

 

   

 

 

   

 

 

   

 

 

 
     (4,720     (4,942     (4,997     (5,052
  

 

 

   

 

 

   

 

 

   

 

 

 

Net liabilities exposed

     (533     (558     (564     (570
    

 

 

   

 

 

   

 

 

 

Net effect of variation in IPCA / IGP – M indices

       (25     (31     (37
    

 

 

   

 

 

   

 

 

 

Liquidity risk

Cemig has sufficient cash flow to cover the cash needs related to its operating activities.

The Company manages liquidity risk with a group of methods, procedures and instruments that are coherent with the complexity of the business, and applied in permanent control of the financial processes, to guarantee appropriate risk management.

Cemig manages liquidity risk by permanently monitoring its cash flow in a conservative, budget-oriented manner. Balances are projected monthly, for each one of the companies, over a period of 12 months, and daily liquidity is projected over 180 days.

Short-term investments must comply with certain rigid investing principles established in the Company’s Cash Investment Policy, which was approved by the Financial Risks Management Committee. These include applying its resources in private credit investment funds, without market risk, and investment of the remainder directly in bank CDs or repo contracts which earn interest at the CDI rate.

In managing cash investments, the Company seeks to obtain profitability on its investment transactions through performing a rigid analysis of financial institutions’ credit, obeying operational limits with banks based on assessments that take into account the financial institutions’ ratings, risk exposures and equity position. It also seeks greater returns on investments by strategically investing in securities with longer investment maturities, while bearing in mind the Company’s minimum liquidity control requirements.

The greater part of the electricity produced by the Company is generated by hydroelectric plants. A prolonged period of scarce rainfall can result in lower water volumes in the plants’ reservoirs, possibly causing losses due to increased costs of purchasing electricity, due to replacement by thermoelectric generation, or reduction of revenues due to reduction in consumption caused by implementation of wide-ranging programs for saving of electricity. Prolongation of generation by thermoelectric plants can pressure costs of acquisition of electricity for the distributors, causing a greater need for cash, and can impact future tariff increases – as indeed has happened with the Extraordinary Tariff Review granted to the distributors in March 2015.

On December 31, 2016 the Company had excess of current liabilities over current assets.

Please refer to note 1 about the Company’s several initiatives designed to increase liquidity through entering into new contracts for financing or for the re-financing of its existing obligations and potential divestitures of non-core assets. Any further lowering of credit ratings may have adverse consequences on CEMIG ability to obtain financing or may impact the cost of financing, also making it more difficult and/or costly to refinance maturing obligations. Any financing or refinancing of the CEMIG indebtedness could be at higher interest rates and may require the Company to comply with more onerous covenants, which could further restrict business operations.

 

 

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The flow of payments of the Company’s obligations, for debt agreed with the pension fund, and under loans, financings and debentures, for floating and fixed rates, including the interest specified in contracts, is shown in the table below:

 

     Up to 1
month
     1 to 3
months
     3 months
to 1 year
     1 to 5
years
     Over 5
years
     Total  

Financial instruments at (interest rates):

                 

- Floating rates

                 

Loans, financings and debentures

     50        1,226        4,834        11,275        2,203        19,588  

Concessions payable

     —          1        2        10        14        27  

Debt agreed with pension fund (Forluz)

     11        33        89        596        431        1,160  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     61        1,260        4,925        11,881        2,648        20,775  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

- Fixed rate

                 

Suppliers

     1,771        169        —          —          —          1,940  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     1,832        1,429        4,925        11,881        2,648        22,715  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Credit risk

The risk arising from the possibility of Cemig and its subsidiaries incurring losses as a result of difficulty in receiving amounts billed to its clients is considered to be low. The Company carries out monitoring for the purpose of reducing default, on an individual basis, with its consumers. Negotiations are also entered into for receipt of any receivables in arrears. The risk is also reduced by the extremely wide client base.

The allowance for doubtful debtors constituted on December 31, 2016, considered to be adequate in relation to the credits in arrears receivable by the Company and its subsidiaries and jointly-controlled entities, was R$ 660.

In relation to the risk of losses resulting from insolvency of the financial institutions at which the Company or its subsidiaries have deposits, a Cash Investment Policy was approved and has been in effect since 2004.

Cemig manages the counterparty risk of financial institutions based on an internal policy approved by its Financial Risks Management Committee. This Policy assesses and scales the credit risks of the institutions, the liquidity risk, the market risk of the investment portfolio and the Treasury operational risk.

All investments are made in financial securities that have fixed-income characteristics, always indexed to the CDI rate. The Company does not carry out any transactions that would bring volatility risk into its financial statements.

As a management instrument, Cemig divides the investment of its funds into direct purchases of securities (own portfolio) and investment funds. The investment funds invest the funds exclusively in fixed income products, and companies of the Group are the only unit holders. They obey the same policy adopted in the investments for the Company’s directly-held own portfolio.

The minimum requirements for concession of credit to financial institutions are centered on three items:

 

  1. Rating by three risk rating agencies.
  2. Equity greater than R$ 400.
  3. Basel ratio above 12.

 

 

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Banks that exceed these thresholds are classified in three groups, by the value of their equity; and within this classification, limits of concentration by group and by institution are set, as follows:

 

Group

   Equity    Concentration      Limit per bank
(% of Equity)*
 

A1

   Over R$ 3.5 billion      Minimum 80%        6% to 9%  

A2

   R$ 1.0 billion to R$ 3.5 billion      Maximum 20%        5% to 8%  

B

   R$ 400 million to R$ 1.0 billion      Maximum 20%        5% to 7%  

 

* The percentage assigned to each bank depends on an individual assessment of indicators such as liquidity, quality of the credit portfolio, and other aspects.

Further to these points, Cemig also establishes two concentration limits:

 

  1. No bank may have more than 30% of the Group’s portfolio.
  2. No bank may have more than 50% of the portfolio of any individual company.

Risk of early maturity of debt

The Company has financing contracts with restrictive covenants normally applicable to this type of transaction, complying with a financial index. Non-compliance with these covenants could cause early maturity of the debt. See Note 20.

On December 31, 2016, all restrictive covenants on the contracts for loans and financings of CemigTelecom were complied with. Those contracts that contained these clauses during the year 2016 have been settled in their entirety.

On December 31, 2016 all the restrictive covenants relating to financial ratios of the Company were complied with.

Capital management

This table shows the Company’s net liabilities in relation to its Equity at December 31, 2016 and 2015:

 

     2016     2015  

Total liabilities

     29,102       27,869  

(–) Cash and cash equivalents

     (995     (925

(–) Restricted cash

     (367     —    
  

 

 

   

 

 

 

Net liabilities

     27,740       26,944  
  

 

 

   

 

 

 

Total of equity

     12,934       12,988  
  

 

 

   

 

 

 

Net liabilities / Equity

     2.14       2.07  

 

30. MEASUREMENT AT FAIR VALUE

The Company measures its financial assets and liabilities at fair value. Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The Fair Value Hierarchy aims to increase consistency and comparability: it divides the inputs used in measuring fair value into three broad levels, as follows:

Level 1 – Active market – Quoted prices: A financial instrument is considered to be quoted in an active market if the prices quoted are promptly and regularly made available by an exchange or organized over-the-counter market, by operators, by brokers or by a market association, by entities whose purpose is to publish prices, or by regulatory agencies, and if those prices represent regular arm’s length market transactions.

Level 2 – No active market – Valuation technique: For an instrument that does not have an active market, fair value should be found by using a method of valuation/pricing. Criteria such as data on the current fair value of another instrument that is substantially similar, or discounted cash flow analysis or option pricing models, may be used. The objective of the valuation technique is to establish what would be the transaction price on the measurement date in an arm’s-length transaction motivated by business considerations.

 

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Level 3 – No active market: Unobservable inputs: The fair value of investments in securities for which there are no prices quoted on an active market, and/or of derivatives linked to them which are to be settled by delivery of unquoted securities, is determined based on generally accepted valuation techniques, mainly related to discounted cash flow analysis.

This is a summary of the instruments that are measured at fair value:

 

     Balance
At Dec. 31, 2016
    Fair value at December 31, 2016  
     Active market –
quoted price
(Level 1)
     No active market –
Valuation technique
(Level 2)
    No active market –
Unobservable inputs

(Level 3)
 

Assets

         

Held for trading

         

Securities

         

Bank certificates of deposit

       —            —    

Treasury Financial Notes (LFTs)

     193       193        —         —    

Financial Notes – Banks

     724       —          724       —    

Debentures

     45       —          45       —    
  

 

 

   

 

 

    

 

 

   

 

 

 
     995       193        802        
  

 

 

   

 

 

    

 

 

   

 

 

 

Loans and receivables

         

Concession Grant Fee

     2,254       —          2,254       —    

Restricted cash

     367       —          367       —    
  

 

 

   

 

 

    

 

 

   

 

 

 
     2,621       —          2,621       —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Available for sale

         

Financial assets of the concession related to infrastructure

     216       —          —         216  
  

 

 

   

 

 

    

 

 

   

 

 

 
     3,832       193        3,423       216  
  

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities

         

Fair value through profit or loss

         

Put options: (1)

     (1,342     —          (1,150     (192
  

 

 

   

 

 

    

 

 

   

 

 

 
     2,490       193        2,273       24  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) After 2016 the Company is using the Black-Scholes-Merton method for measuring the fair value of the options. See more details in Note 15.

 

     Balance at
December 31, 2015
    Fair value at December 31, 2015  
     Active market –
Quoted price

(Level 1)
     No active market –
Valuation technique

(Level 2)
     No active market –
Unobservable inputs

(Level 3)
 

Assets

          

Held for trading

          

Securities

          

Bank certificates of deposit

     1,577       —          1,577        —    

Treasury Financial Notes (LFTs)

     88       88        —          —    

Financial Notes – Banks

     460       —          460        —    

Debentures

     161       —          161        —    
  

 

 

   

 

 

    

 

 

    

 

 

 
     2,286       88        2,198         

Available for sale

          

Financial assets of the concession

     137       —          —          137  
  

 

 

   

 

 

    

 

 

    

 

 

 
     2,423       88        2,198        137  

Liabilities

          

Fair value through profit or loss

          

Put options

     (1,393     —          —          (1,393
  

 

 

   

 

 

    

 

 

    

 

 

 
     1,030       88        2,198        (1,256
  

 

 

   

 

 

    

 

 

    

 

 

 

 

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Fair value calculation of financial positions

Financial assets of the concession related to infrastructure: Measured at New Replacement Value (valor novo de reposição, or VNR), according to criteria established in regulations by the Concession-granting power (‘Grantor’), based on fair value of the assets in service belonging to the concession and which will be revertible at the end of the concession, and on the Weighted average cost of capital (WACC) used by the Grantor, which reflects the concession holder’s return on the operations of the concession. The VNR and the WACC are public information disclosed by the Grantor and by Cemig. The movement in Financial assets of the concession is shown in Note 14 to the financial statements.

Cash investments: The fair value of cash investments is calculated taking into consideration the market prices of the security, or market information that makes such calculation possible, and future rates in the fixed-income and FX markets applicable to similar securities. The market value of the security is deemed to be its maturity value discounted to present value by the discount factor obtained from the market yield curve in Reais.

Put options: The Company has adopted the Black-Scholes-Merton method for measurement of the fair value of the options of SAAG, Parati and Sonda. The fair value of these options was calculated on the basis of the estimated exercise price on the day of exercise of the option, less the fair value of the shares that are the subject of the put option, also estimated for the date of exercise, brought to present value at the reporting date. The movement in relation to the put options, and other information is given in Note 15 to the financial statements.

 

31.    INSURANCE

Cemig and its subsidiaries maintain insurance policies to cover damages to certain items of their assets, in accordance with orientation by specialists, as listed below (item relating to the policy of Cemig – the holding company), taking into account the nature and the degree of risk, for amounts considered sufficient to cover any significant losses related to its assets and liabilities. The risk assumptions adopted, due to their nature, are not part of the scope of an audit of the financial statements, and consequently were not examined by the external auditors.

 

     Cover      Dates of cover      Amount
insured (**)
     Annual
premium (**)
 

Cemig Geração e Transmissão

           
Air transport / Aircraft      Fuselage Third party liability        Apr. 29, 2016 to Apr. 29, 2017       

US$4,675

U$14,000

 

 

     US$84  
Warehouse stores      Fire        Oct. 2, 2016 to Oct 2, 2017        R$16,921        R$25  
Facilities in buildings      Fire        Jan. 8, 2017 to Jan. 8, 2018        R$451,860        R$98  
Telecoms equipment (1)      Fire        Jan. 8, 2017 to Jan. 8, 2018        R$11,514        R$5  
Operational risk      —          Dec. 7, 2016 to Dec. 7, 2017        R$1,438,338        R$1,795  

Cemig D (Distribution)

           
Air transport / Aircraft     

Fuselage

Third party liability

 

 

     Apr. 29, 2016 to Apr. 29, 2017       

US$3,613

U$14,000

 

 

     US$60  
Warehouse stores      Fire        Oct. 2, 2016 to Oct 2, 2017        R$94,930        R$143  
Facilities in buildings      Fire        Jan. 8, 2017 to Jan. 8, 2018        R$1,073,416        R$232  
Telecoms equipment      Fire        Jan. 8, 2017 to Jan. 8, 2018        R$17,208        R$7  

Operational risk – Transformers above 15MVA and other power distribution equipment with value above R$ 1,000 (2)

     Total        Dec. 7, 2016 to Dec. 7, 2017        R$563,637        R$703  

Gasmig

           
Gas distribution network / Third party      Third party liability        Dec. 15, 2016 to Dec. 15, 2017        R$60,000        R$429  
Own vehicle fleet (Operation)      Third party only        Jul. 7, 2016 to Jul. 7, 2017        R$400        R$4  
Own vehicle fleet (Directors)      Full cover        Oct. 25, 2016 to Oct. 25, 2017        R$100        R$1  
Facilities – multirisk      Robbery, theft, fire        Jan. 1, 2017 to Jan. 1, 2018        R$41,375        R$50  

 

(**) Amounts expressed in R$ ’000 or US$’000.
(1) The new period of validity is from January 8, 2017 to January 8, 2018.
(2) The new period of validity is from December 7, 2016 to December 7, 2017.

Cemig does not have general third-party liability insurance covering accidents, except for its aircraft, and is not seeking proposals for this type of insurance. Additionally, Cemig has not sought proposals for, and does not have current policies for, insurance against events that could affect its facilities, such as earthquakes, floods, systemic failures or business interruption risk. The Company has not suffered significant losses as a result of the above-mentioned risks.

 

 

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32. COMMITMENTS

Cemig and its subsidiaries have contractual obligations and commitments that include, principally, amortization of loans and financings, contracts with contractors for construction of new projects, and purchase of electricity from Itaipu and other sources, as follows:

 

     2017      2018      2019      2020      2021      After 2022      Total  

Loans and financings

     4,837        3,880        1,828        1,794        1,586        1,254        15,179  

Purchase of electricity from Itaipu

     1,266        1,426        1,578        1,754        1,829        98,574        106,427  

Purchase of electricity – auctions

     3,010        3,084        3,478        3,667        4,295        101,896        119,430  

Purchase of electricity – ‘bilateral contracts’

     298        314        328        346        361        1,347        2,994  

Quotas for Angra 1 and Angra 2

     239        251        259        277        284        11,377        12,687  

Physical quota guarantees

     580        612        640        671        700        28,052        31,255  

Transport of electricity from Itaipu

     162        232        238        243        226        8,129        9,230  

Other electricity purchase contracts

     3,736        3,411        2,776        2,887        3,201        30,267        46,278  

Purchase of gas for resale

     1,006        1,198        1,470        1,817        2,098        0        7,589  

Paid concession

     3        3        2        2        2        10        22  

Debt to pension plan – Forluz

     86        91        97        103        109        301        787  

Operational leasing contracts

     96        91        91        91        91        93        553  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     15,319        14,593        12,785        13,652        14,782        281,300        352,431  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

33. NON-CASH TRANSACTIONS

In the business years 2016, 2015 and 2014, the Company made the following transactions not involving cash, which are not reflected in the Cash flow statements:

 

     2016      2015      2014  

Transfer from PP&E to Other long-term assets (São Simão plant)

     —          223        —    

Assets transferred to Aliança Geração de Energia S.A.

     —          581        —    

Financial charges capitalized

     142        159        70  

 

34. SUBSEQUENT EVENTS

Homologation of Annual Generation Revenue (RAG) of Volta Grande Hydroelectric Plant

In February 2017 there was a concession expiry date for the Volta Grande plant, and on March 21, 2017, by its Resolution 2208, Aneel homologated the RAG of the Volta Grande Hydroelectric Plant under the ‘quotas’ regime, for temporary provision of the service of electricity generation by Cemig GT until it is taken over by the concession holder winning the tender for the plant.

Applications to Energy Ministry for opening of administrative proceedings: Concessions of the Volta Grande, Jaguara, São Simão and Miranda Plants:

In February 2017, Cemig GT reiterated to the Mining and Energy Ministry (‘MME’), its request for extension, for 20 (twenty) years, of concessions of the Jaguara, São Simão and Miranda hydroelectric plants, as specified by Clause 4 of its Concession Contract 007/1997. Subsidiarily, it requested opening of an Administrative Proceeding under Paragraph 1-C of Article 8 of Law 12783/2013, to the benefit of one of the service providing subsidiaries of Cemig GT. The terms of Cemig’s request is presente below:

Paragraph 1-C was added to Article 8 of Law 12783, of 2013, by Law 13360, of November 17, 2016, and enables the federal government to grant a concession contract for electricity generation for a period of 30 (thirty) years when there is transfer of control of a legal entity that is already providing this service (in this case, one of the subsidiaries of Cemig GT), and is under direct or indirect control of an individual State, or the Federal District, or the municipality, provided that: I – the tender, which may be by auction or by competitive bidding, is held by the controlling stockholder on or before February 28, 2018; and II – the transfer of control takes place by June 30, 2018.

 

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The subsidiary request is made on the grounds of the spirit of conciliation and cooperation that should govern the relationship between a concession holder and the concession-granting power, and the constant quest, at all times, for alternatives that present the best solution for consumers, for the country and for the stockholders of the Company – who in this case include the people of the state of Minas Gerais. Thus, in the event that the Ministry decides to maintain its position, and if all the court judgments that have determined that Law 12783/2013 should prevail to the detriment of the provisions of the Second Subclause of Clause 4 of Contract CEMIG 007 of 1997 are maintained, Cemig GT has requested, for the benefit of one of its subsidiaries, application of the rule that is now contained in §1-C of Article 8 of Law 12783 of 2013.

We would point out that the presentation of the Subsidiary Request does not result in any waiver by Cemig GT of its right – which is the subject of the legal actions that it currently has in progress against the federal government – to guaranteed extension of the concessions as specified in Clause 4 of Concession Contract 007/1997.

On the same date the Company filed with the MME a response to the formal question as to its interest in remaining as provider of electricity generation service after the ending of the concession period of the Volta Grande Hydroelectric Plant, which took place on February 23, 2017. In this response, and adding a request of its own, the Company stated its interest in remaining responsible for the provision of electricity generation service by this hydroelectric plant, and also requested opening of an administrative proceeding for the purposes of §1-C of Article 8 of Law 12783/2013, also to the benefit of one of the service providing subsidiaries of Cemig GT.

Interim Injunction granted on São Simão Plant

The Higher Appeal Court (‘STJ’) granted an interim injunction to maintain Cemig GT as holder of the concession for the São Simão Hydroelectric Plant, in Minas Gerais, on the initial bases of Concession Contract 007/97, until conclusion of judgment in the Company’s application for mandamus No. 21465, in the STJ.

According to the position report on the STJ website and STJ certificate 1783814, “... the interim injunction applied for by Cemig Geração e Transmissão S.A. is granted, until conclusion of judgment on the current application for mandamus, enabling the now applicant to remain in ownership of the concession for the São Simão Plant, on the initial bases of the concession contract, Nº 007/97.”

On March 28, 2017, the interim remedy (injunction) given in Application for Mandamus No. 21.465/DF, before the Higher Appeal Court (‘STJ’), brought by the Company for annulment of the decision by the Mining and Energy Ministry (MME) which refused, on merits, the request by Cemig GT for extension of the concession period of the São Simão Hydroelectric Plant, in the terms of its concession contract 007/97, was revoked.

Interim injunction in Supreme Court action for Provisional Remedy 3980 on Jaguara Plant revoked

The Federal Supreme Court (‘STF’) refused the order to maintain Cemig GT in possession of the concession for the Jaguara Hydroelectric Plant under the initial terms of Concession Contract 007/97.

The section of the website of the STF that records the current situation of cases stated on March 21, 2017: “the interim remedy previously given has been revoked, with an order that the demand should be sent to the Procurator-general of the Republic, for statement on the case, Mandamus Appeal 34203”.

Repeal of interim remedy – Miranda plant

On March 29, 2017, the interim remedy (injunction) given in application for mandamus number 23.042/DF, before the Higher Appeal Court (STJ), brought by the Company to annul the decision by the Mining and Energy Ministry (MME) which refused, on merits Cemig GT’s request for ratification of the extension of its concession for the Miranda Hydroelectric Plant, under its Concession Contract, number 007/97, was revoked.

Disposal of wind farms by Renova

On April 18, 2017 a share purchase agreement was signed for sale of the Alto Sertão II Wind Farm Complex. The parties to the agreement are Cemig’s affiliated company Renova Energia S.A. (‘Renova’), Renovapar S.A. and AES Tietê Energia S.A., with Nova Energia Holding S.A. as consenting party.

 

 

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Under the agreement AES undertakes to acquire 100% of the shares of Nova Energia for R$ 600 million. Nova Energia controls the sub-holding company Renova Eólica Participações S.A., which owns 100% of the 15 special-purpose companies which comprise the Alto Sertão II Wind Power Complex.

Completion of the Transaction is subject to certain conditions precedent stated in the Agreement, including approval by government bodies and creditors.

Renova’s management emphasizes that the Transaction is aligned to its new Directional Strategy, the goals of which are: (i) restoration of the balance of its capital structure; and (ii) sustainability of the business in the long term.

Changes in the bylaws of Light

On March 28, 2017 the Board of Directors of Light approved convocation of an Extraordinary General Meeting of Shareholders to:

 

(i) Decide on changes to the bylaws; and

 

(ii) Consider the possibility of carrying out a primary public offering of shares, with restricted distribution efforts: in Brazil, based on CVM Instruction 476, of January 16, 2009, as amended; and outside Brazil, to qualified institutional investors in the United States, and to investors considered not to be resident or domiciled in the United States, Under Rule 144A and Regulation S of the U.S. Securities Act of 1933, as amended (‘the Securities Act’; ‘the Offering’), with the possibility of a secondary offer, and possible participation by shareholders of Light.

Light added the following note to its Material Announcement:

 

This Material Announcement is not for publication or distribution, directly or indirectly, in the United States, and does not constitute an offer to sell securities in the United States; and the securities mentioned in it have not been and will not be registered under the Securities Act, or any other law referring to securities, and shall not be offered or sold in the United States of America without the due registry of an exemption from registry applicable under the Securities Act. On the date of publication, no public offering is being carried out in Brazil or in the United States.

No security shall be sold in any state or jurisdiction, including Brazil or the United States of America, in which offering, application for or sale of such security is considered illegal before registry or qualification under the securities laws of such state or jurisdiction.

This Material Announcement is for merely informative purposes, and should not under any circumstances be interpreted as, nor constitute, an investment recommendation or an offer for sale, or a bid or offer to purchase, any securities of the Company in Brazil, including shares issued by it.    ”

Payment of debentures by Cemig GT

On February 15, 2017, Cemig GT amortized in full the First Series of its 3rd Debenture Issue, in the amount of R$ 553 (principal, plus interest, calculated up to the date of the actual amortization). The interest on the Second and Third Series of the 3rd Debenture Issue, totaling R$ 76, was paid on the same date. These payments were made from the Company’s own funds.

 

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PDVP Programmed Voluntary Retirement Plan (PDVP 2017)

In March 2017, the Company created the 2017 Employee Voluntary Severance Program (‘the 2017 PDVP’). Those eligible to take part were any employees who will have worked with Cemig for 25 years or more by December 31, 2017. Employees will be able to accept the 2017 PDVP from April 3 through September 29, 2017. It provides for payment of an additional premium of five monthly salaries to employees who join in April 2017, to leave the Company in May 2017; the premium diminishes progressively depending on the month of acceptance. An employee who accepts the plan in August 2017, for severance in September 2017, will have the right to a premium corresponding to one monthly remuneration. Employees using the plan to leave on or after September 1, 2017, will have no premium. There will also be payment for voluntary retirement: the PDVP offers the much more advantageous severance payments which are specified by law only for the case of dismissal without just cause – including: payment for the period of notice, and especially, an amount equal to the ‘penalty’ payment of 40% of the Base Value of the employee’s FGTS fund, as well as the other payments specified by the legislation.

Due to the variable period for acceptance by the employees, it is not possible to estimate the effect on Cemig’s financial statements in 2017.

Authorization for Cemig to exceed financial ratios specified in the bylaws

The Company’s bylaws establish certain target levels for debt and investments which the Company’s management must obey. However, the Extraordinary General Meeting of Shareholders of March 31, 2017 gave authorization to exceed these indicators, exceptionally for the year 2017, as follows:

 

     Target
in the by-laws
    Higher limit
authorized by the Meeting
 

Consolidated debt / Ebitda

     2.00       4.44  

(Net debt) / (Net debt + Equity)

     40.00     55.00

(Capex including acquisition of any assets) / Ebitda

     40.00     192.00

These new limits approved for 2017 must be reviewed at the time of the approval of the budget for 2017 by the Board of Directors, and must again be submitted to the shareholders in a General Meeting.

Amendments to contracts of Gasmig

On February 10, 2017, Gasmig signed amendments 07 and 02 (general rules) to its additional gas supply contract (CSA) with Petróleo Brasileiro S.A. – Petrobras, which have changed the expectations of Gasmig’s future results. The principal elements of the new gas supply contract, and its consequences in Gasmig’s results, are as follows:

 

  In effect from January 1, 2017, through December 2021.

 

  Alteration of the Daily Contracted Quantity, and the commitments for daily offtake of gas, adapting to expectations for consumption in the Minas Gerais market until December 2021.

 

  The Annual Take or Pay commitment will now be on monthly basis, with automatic recovery of the volume of gas paid for and not yet taken.

 

  Payment by installments of the Take or Pay contract for the year 2015: in up to 36 installments, which may be brought forward.

 

  Adjustment of the price for acquisition of the gas supplied by Petrobras

 

  Clauses for programming of more restricted offtake of gas.

 

  The Take or Pay commitment for annual minimum offtake for the year 2016 will not be calculated/paid.

 

 

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Arising from the provisions of the previous contract, Gasmig reported R$ 225 in an account line Advance to supplier rights to offtake gas, in Current assets, with counterpart in Suppliers of gas, in Current liabilities. This caused a negative impact in the net working capital of Gasmig, which posted a net negative value of R$ 354. With the signature of the new contractual amendment, the annual minimum offtake commitment for the year 2016 was extinguished.

Gasmig and Petrobras further negotiated rescission of the Distribution Contract to Supply the Nitrogen Fertilizers Unit (UFN-V), with no financial charge for either side.

Taesa signs concession contracts from Aneel Auction 13/2015 (2nd phase)

On February 10, 2017, Taesa signed the 30-year concession contracts 17/2017 (Janaúba), 04/2017 (Aimorés), 03/2017 (Paraguaçú) and 19/2017 (ESTE).

Indemnification of Transmission assets – Injunction relieve by industrial costumers

On April 10, 2017, the Associação Brasileira de Grandes Consumidores Livres, da Associação Técnica Brasileira das Indústrias Automáticas de Vidro e da Associação Brasileira dos Produtores de Ferroligas e de Silicio Metálico obtained a injunctive relief (tutela antecipada) in judicial claims against Aneel and the Federal Government aiming to suspend the effects on their tariffs of the indemnification payment due to energy companies that adered to law 12.783/13.

The injunctive relief (tutela antecipada) was partially granted, with its effects related to the suspension of the inclusion in the tariffs charged to the consumers that are members of those associations of the indemnification related to the remuneration of the cost of capital included since the extension of the concessions.

The Company does not expect to incur in losses in realization of transmission indemnification assets. Please refer to note 14 for more detail about the asset and the criteria for update.

Taesa Wins Principal Lot at Aneel Auction 005/2016

On Monday, April 24, 2017, the Columbia Consortium, formed by the companies Taesa and CTEEP, won the Lot 1 in Transmission Auction 5/2016, held by the Brazilian electricity regulator, Aneel. The consortium offered Permitted Annual Revenue (RAP) of R$ 267 million.

The undertaking will require investment of R$ 1.936 billion, and comprises the following 525 kV transmission lines: Guaíra—Sarandi, with 266,3 KM of extension; Foz do Iguaçu—Guaíra, with 173 KM of extension; Londrina—Sarandi, with 75,5 KM of extension. It comprises also 230 kV transmission line Sarandi—Paranavaí Norte, with 85 KM of extension and three substations: (Guaíra, Sarandi e Paranavaí Norte), in the state of Paraná.

The tender specified completion of the works in 60 months, for start of commercial operation in August 2022.

International securities issue by Cemig GT

As per the Material Announcement issued by the Company on April 28, 2017, Cemig GT is preparing a possible international issue of securities. The Board of Directors of Cemig GT has authorized such an issue in the amount of up to US$1 billion, with maturity of 7 years, the proceeds to be used to refinance existing financial obligations. Also, the Board of Directors of Cemig has made the decision to authorize a surety guarantee.

Carrying out of the Issue is subject, among other factors, to the conditions of the Brazilian and international capital markets, and to obtaining of the related approvals; and if the issue is made it will be carried out in accordance with the applicable law and regulations.

This Material Announcement is for information purposes only. It should not under any circumstances be (i) understood as an offer or solicitation of an offer to acquire any securities of the Company or of Cemig GT, including but not limited to such securities as may at any time be issued in the international market by Cemig GT as part of the Issue; nor (ii) interpreted as an investment recommendation. If the Issue takes place, any decision to purchase securities arising from the Issue should be made exclusively on the basis of the information contained in an offering memorandum which will be prepared in relation to the Issue.

The Company will keep the market and its stockholders informed on any developments relating to the Issue in accordance with the applicable regulations.

 

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* * * * * * * * * * * * *

(The original is signed by)

 

Bernardo Afonso Salomão de Alvarenga    Bernardo Afonso Salomão de Alvarenga    Adézio de Almeida Lima
Chief Executive Officer        Deputy CEO    Chief Finance and Investor Relations Officer
     
Luís Fernando Paroli Santos    Franklin Moreira Gonçalves    Maura Galuppo Botelho Martins
Chief Distribution and Sales Officer    Chief Generation and Transmission Officer    Chief Officer for Human Relations and Resources
     
José de Araújo Lins Neto    Luís Fernando Paroli Santos    Dimas Costa
Chief Corporate Management Officer    Chief Institutional Relations and Communication Officer    Chief Trading Officer
     
César Vaz de Melo Fernandes         Raul Lycurgo Leite
Chief Business Development Officer       Chief Counsel
     
Leonardo George de Magalhães         Leonardo Felipe Mesquita

Controller

CRC-MG 53.140

      Accounting Manager
Accountant – CRC-MG-85.260

 

 

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Appendix VII

 

 


Table of Contents

LOGO

      LOGO  

 

CONTENTS

 

BALANCE SHEETS      184  
CONSOLIDATED PROFIT AND LOSS ACCOUNTS      186  
STATEMENTS OF COMPREHENSIVE INCOME      188  
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY – CONSOLIDATED      190  
STATEMENTS OF CASH FLOW      191  
STATEMENTS OF ADDED VALUE      193  

 

CONDENSED NOTES TO THE INTERIM FINANCIAL INFORMATION

     194  
1.  

OPERATING CONTEXT

     194  
2.  

BASIS OF PREPARATION

     196  
3.  

PRINCIPLES OF CONSOLIDATION

     198  
4.  

CONCESSIONS AND AUTHORIZATIONS

     198  
5.  

CASH AND CASH EQUIVALENTS

     200  
6.  

SECURITIES

     200  
7.  

CONSUMERS, TRADERS AND POWER TRANSPORT CONCESSION HOLDERS

     201  
8.  

RECOVERABLE TAXES

     202  
9.  

INCOME AND SOCIAL CONTRIBUTION TAXES

     203  
10.  

RESTRICTED CASH

     205  
11.  

ACCOUNTS RECEIVABLE FROM THE STATE OF MINAS GERAIS

     205  
12.  

ESCROW DEPOSITS

     205  
13.  

REIMBURSEMENT OF TARIFF SUBSIDIES

     206  
14.  

FINANCIAL ASSETS AND LIABILITIES OF THE CONCESSION

     206  
15.  

INVESTMENTS

     214  
16.  

PROPERTY, PLANT AND EQUIPMENT

     226  
17.  

INTANGIBLE ASSETS

     228  
18.  

SUPPLIERS

     229  
19.  

TAXES, INCOME TAX AND SOCIAL CONTRIBUTION TAX

     230  
20.  

LOANS, FINANCINGS AND DEBENTURES

     231  
21.  

REGULATORY CHARGES

     236  
22.  

POST-RETIREMENT OBLIGATIONS

     236  
23.  

PROVISIONS

     238  
24.  

EQUITY AND REMUNERATION TO STOCKHOLDERS

     246  
25.  

REVENUE

     249  
26.  

OPERATING COSTS AND EXPENSES

     254  
27.  

FINANCIAL REVENUE (EXPENSES)

     260  
28.  

RELATED PARTY TRANSACTIONS

     261  
29.  

FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

     264  
30.  

MEASUREMENT AT FAIR VALUE

     271  
31.  

OPERATING SEGMENTS

     274  
32.  

THE ANNUAL TARIFF ADJUSTMENT

     277  
33.  

NON-CASH TRANSACTIONS

     277  
34.  

SUBSEQUENT EVENTS

     277  

 

REPORT ON THE REVIEW OF INTERIM INFORMATION

     279  
CONSOLIDATED RESULTS      282  
RESULTS FOR 9M17      282  
RESULTS FOR THIRD QUARTER 2017      289  
OTHER INFORMATION THAT THE COMPANY BELIEVES TO BE MATERIAL      294  

 

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BALANCE SHEETS

AT SEPTEMBER 30, 2017 AND DECEMBER 31, 2016

ASSETS

(In thousands of Brazilian Reais – R$ ’000)

 

     Note      Consolidated      Holding company  
      Sept.30,
2017
     Dec. 31, 2016      Sept.30,
2017
     Dec. 31, 2016  

CURRENT

              

Cash and cash equivalents

     5        582,382        995,132        131,541        69,352  

Securities

     6        690,991        1,014,188        21,641        133,359  

Consumers, Traders, Electricity transport concession holders

     7        3,602,934        3,425,018        —          —    

Financial assets of the concession

     14        665,674        730,488        —          —    

Recoverable taxes

     8        246,954        236,284        122        —    

Income tax and Social Contribution taxes recoverable

            557,307        589,519        37,872        78,174  

Dividends receivable

        3,742        11,386        711,423        673,239  

Restricted cash

     10        405,494        367,474        396,038        366,568  

Inventories

        48,605        49,473        9        12  

Advances to suppliers

        140,541        1,059        —          —    

Accounts receivable from the State of Minas Gerais

     11        254,579        —          254,579        —    

Funding from Energy Development Account (CDE)

     13        73,345        63,751        —          —    

Low-income subsidy

        40,759        36,261        —          —    

Credits owed by Eletrobras – RGR

        —          48,379        —          —    

Credits owed by Eletrobras – CDE

        901        90,065        —          —    

Other

        541,374        626,993        28,162        20,435  
     

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL, CURRENT

        7,855,582        8,285,470        1,581,387        1,341,139  

NON-CURRENT

              

Securities

     6        12,123        31,040        693        5,959  

Advances to suppliers

        319,913        229,053        —          —    

Consumers, Traders, Electricity transport concession holders

     7        174,252        146,367        —          —    

Recoverable taxes

     8        189,675        178,288        1,810        1,816  

Income and Social Contribution taxes recoverable

     9a        63,639        112,060        63,639        112,060  

Deferred income tax and Social Contribution tax

     9b        2,003,908        1,797,453        745,028        789,318  

Accounts receivable from the State of Minas Gerais

     11        23,144           23,144     

Escrow deposits

     12        1,743,060        1,886,879        265,243        499,868  

Generation concession assets

     4        195,611        206,566        —          —    

Other

        612,847        843,589        10,939        37,743  

Financial assets of the concession

     14        6,163,319        4,971,244        —          —    

Investments

     15        8,620,126        8,753,088        12,605,561        12,627,857  

Property, plant and equipment

     16        2,797,191        3,775,076        1,900        2,201  

Intangible assets

     17        11,057,685        10,819,680        1,777        1,852  
     

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL, NON-CURRENT

        33,976,493        33,750,383        13,719,734        14,078,674  
     

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL ASSETS

        41,832,075        42,035,853        15,301,121        15,419,813  
     

 

 

    

 

 

    

 

 

    

 

 

 

The Condensed Notes are an integral part of the Interim Financial Statements.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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BALANCE SHEETS

AT SEPTEMBER 30, 2017 AND DECEMBER 31, 2016

LIABILITIES

(R$ ’000)

 

     Note      Consolidated     Holding company  
      Sept.30,
2017
    Dec. 31, 2016     Sept.30,
2017
    Dec. 31, 2016  

CURRENT

           

Suppliers

     18        2,186,448       1,939,593       23,571       20,936  

Regulatory charges

     21        351,246       380,586       —         —    

Taxes

     19a        983,993       793,587       4,941       83,634  

Income and Social Contribution taxes

     19b        99,684       26,866       —         —    

Interest on Equity, and dividends, payable

     24        198,264       466,987       196,004       466,689  

Loans, financings and debentures

     20        5,199,471       4,836,923       —         —    

Payroll and related charges

        247,655       224,741       11,358       9,970  

Post-retirement obligations

     22        224,137       198,867       12,584       11,143  

Financial liabilities of the concession

     14        704,418       481,835       —         —    

Financial instruments – Put options

     15        1,242,818       1,149,881       1,242,818       1,149,881  

Advance sales of power supply

     7        245,367       181,200       —         —    

Other obligations

        666,426       766,394       5,573       7,192  
     

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL, CURRENT

        12,349,927       11,447,460       1,496,849       1,749,445  

NON-CURRENT

           

Regulatory charges

     21        544,443       454,625       —         —    

Loans, financings and debentures

     20        8,856,104       10,342,357       —         —    

Taxes

     19a        722,102       723,922       —         —    

Deferred income tax and Social Contribution tax

     9b        682,757       582,206       —         —    

Provisions

     23        713,973       815,017       75,259       309,995  

Post-retirement obligations

     22        4,156,202       4,042,544       405,611       386,321  

Financial liabilities of the concession

     14        —         323,140       —         —    

Financial instruments – Put options

     15        259,655       191,587       —         —    

Advance sales of power supply

     7        66,745       —         —         —    

Other obligations

        192,960       178,624       40,293       43,771  
     

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL, NON-CURRENT

        16,194,941       17,654,022       521,163       740,087  
     

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES

        28,544,868       29,101,482       2,018,012       2,489,532  

STOCKHOLDERS’ EQUITY

     24           

Share capital

        6,294,208       6,294,208       6,294,208       6,294,208  

Capital reserves

        1,924,503       1,924,503       1,924,503       1,924,503  

Profit reserves

        5,199,855       5,199,855       5,199,855       5,199,855  

Equity valuation adjustments

        (575,873     (488,285     (575,873     (488,285

Retained earnings

        440,416       —         440,416       —    
     

 

 

   

 

 

   

 

 

   

 

 

 

ATTRIBUTABLE TO CONTROLLING STOCKHOLDERS

        13,283,109       12,930,281       13,283,109       12,930,281  
     

 

 

   

 

 

   

 

 

   

 

 

 

ATTRIBUTABLE TO NON-CONTROLLING STOCKHOLDER

        4,098       4,090       —         —    
     

 

 

   

 

 

   

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

        13,287,207       12,934,371       13,283,109       12,930,281  
     

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES AND EQUITY

        41,832,075       42,035,853       15,301,121       15,419,813  
     

 

 

   

 

 

   

 

 

   

 

 

 

The Condensed Notes are an integral part of the Interim Financial Statements.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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CONSOLIDATED PROFIT AND LOSS ACCOUNTS

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2017 AND 2016

(In thousands of Brazilian Reais – R$ ’000 – except Net profit per share)

 

     Note
No.
     Consolidated     Holding company  
      30/09/2017     30/09/2016     30/09/2017     30/09/2016  

NET REVENUE

     25        15,153,781       14,106,738       250       582  

OPERATING COSTS

           

COST OF ELECTRICITY AND GAS

     26           

Electricity purchased for resale

        (7,685,392     (6,126,458     —         —    

Charges for use of the national grid

        (791,339     (741,416     —         —    

Gas bought for resale

        (789,861     (623,503     —         —    
     

 

 

   

 

 

   

 

 

   

 

 

 
        (9,266,592     (7,491,377     —         —    

OTHER COSTS

     26           

Personnel and managers

        (992,908     (981,505     —         —    

Materials

        (30,589     (28,792     —         —    

Outsourced services

        (542,357     (521,118     —         —    

Depreciation and amortization

        (570,031     (578,255     —         —    

Operating provisions (net of reversions)

        (195,345     (121,302     —         —    

Infrastructure construction cost

        (736,754     (917,855     —         —    

Other

        (58,101     (57,683     —         —    
     

 

 

   

 

 

   

 

 

   

 

 

 
        (3,126,085     (3,206,510     —         —    

TOTAL COST

        (12,392,677     (10,697,887     —         —    

GROSS PROFIT

        2,761,104       3,408,851       250       582  

OPERATING EXPENSES

     26           

Selling expenses

        (191,343     (282,915     —         —    

General and administrative expenses

        (548,075     (473,230     (43,214     (33,248

Operating provisions

        (172,105     (310,020     (104,037     (280,532

Other operational expenses

        (505,239     (471,889     (40,435     (35,809
     

 

 

   

 

 

   

 

 

   

 

 

 
        (1,416,762     (1,538,054     (187,686     (349,589

Equity method gains in non-consolidated investees

     15        (20,680     47,260       320,979       842,337  

Operational profit before Financial income (expenses) and taxes

        1,323,662       1,918,057       133,543       493,330  

Financial revenues

     27        550,065       835,191       84,893       77,057  

Financial expenses

     27        (1,271,951     (1,888,015     236,553       (4,332
     

 

 

   

 

 

   

 

 

   

 

 

 

Pre-tax profit

        601,776       865,233       454,989       566,055  
       

 

 

     

 

 

 

Current income tax and Social Contribution tax

     9c        (305,956     (148,460     (13,949     (11,480

Deferred income tax and Social Contribution tax

     9c        101,362       (75,940     (44,290     85,988  
     

 

 

   

 

 

   

 

 

   

 

 

 

PROFIT (LOSS) FOR THE PERIOD

        397,182       640,833       396,750       640,563  
     

 

 

   

 

 

   

 

 

   

 

 

 

Total of net profit for the period attributed to:

           

Attributable to controlling shareholders

        396,750       640,563       396,750       640,563  

Attributable to non-controlling stockholder

        432       270       —         —    
     

 

 

   

 

 

   

 

 

   

 

 

 
        397,182       640,833       396,750       640,563  
     

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted profit per preferred share – R$

     24        0.32       0.51       0.32       0.51  

Basic and diluted profit per common share – R$

     24        0.32       0.51       0.32       0.51  

The Condensed Notes are an integral part of the Interim Financial Statements.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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CONSOLIDATED PROFIT AND LOSS ACCOUNTS

FOR THE QUARTERS ENDED SEPTEMBER 30, 2017 AND 2016

(In thousands of Brazilian Reais – R$ ’000 – except Net profit per share)

 

     Note
No.
     Consolidated     Holding company  
      3Q17     3Q16     3Q17     3Q16  

NET REVENUE

     25        5,135,822       4,895,606       72       129  

OPERATING COSTS

           

COST OF ELECTRICITY AND GAS

     26           

Electricity purchased for resale

        (2,942,974     (2,170,348     —         —    

Charges for use of the national grid

        (387,078     (215,504     —         —    

Gas bought for resale

        (304,698     (196,494     —         —    
     

 

 

   

 

 

   

 

 

   

 

 

 
        (3,634,750     (2,582,346    

OTHER COSTS

     26           

Personnel and managers

        (304,061     (297,678     —         —    

Materials

        (13,035     (11,704     —         —    

Outsourced services

        (200,960     (167,146     —         —    

Depreciation and amortization

        (184,576     (195,286     —         —    

Operating provisions (net of reversions)

        (23,266     (34,468     —         —    

Infrastructure construction cost

        (295,720     (334,122     —         —    

Other

        (36,742     (18,720     —         —    
     

 

 

   

 

 

   

 

 

   

 

 

 
        (1,058,360     (1,059,124     —         —    

TOTAL COST

        (4,693,110     (3,641,470     —         —    

GROSS PROFIT

        442,712       1,254,136       72       129  

OPERATING EXPENSES

     26           

Selling expenses

        (50,458     (108,349     —         —    

General and administrative expenses

        (110,181     (164,201     (14,921     (11,957

Operating provisions

        (115,151     162,192       (88,726     165,669  

Other operational expenses

        (191,538     (185,548     (15,405     (12,272
     

 

 

   

 

 

   

 

 

   

 

 

 
        (467,328     (295,906     (119,052     141,440  

Equity method gains in non-consolidated investees

     15        (80,798     33,218       (190,646     339,631  

Operational profit before Financial income (expenses) and taxes

        (105,414     991,448       (309,626     481,200  

Financial revenues

     27        201,164       231,256       51,875       5,602  

Financial expenses

     27        (188,750     (654,168     238,514       (1,128
     

 

 

   

 

 

   

 

 

   

 

 

 

Pre-tax profit

        (93,000     568,536       (19,237     485,674  

Current income tax and Social Contribution tax

     9c        (13,234     (69,593     (11,416     757  

Deferred income tax and Social Contribution tax

     9c        22,568       (65,441     (53,175     (53,034
     

 

 

   

 

 

   

 

 

   

 

 

 

PROFIT (LOSS) FOR THE PERIOD

        (83,666     433,502       (83,828     433,397  
     

 

 

   

 

 

   

 

 

   

 

 

 

Total of net profit for the period attributed to:

           

Interest of the controlling shareholders

        (83,828     433,397       (83,828     433,397  

Interest of non-controlling stockholder

        162       105       —         —    
     

 

 

   

 

 

   

 

 

   

 

 

 
        (83,666     433,502       (83,828     433,397  
     

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted profit per preferred share – R$

     24        (0.06     0.34       (0.06     0.34  

Basic and diluted profit per common share – R$

     24        (0.06     0.34       (0.06     0.34  

The Condensed Notes are an integral part of the Interim Financial Statements.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

187


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STATEMENTS OF COMPREHENSIVE INCOME

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2017 AND 2016

R$ ’000

 

     Consolidated     Holding company  
    
     9M17     9M16     9M17     9M16  

PROFIT (LOSS) FOR THE PERIOD

     397,182       640,833       396,750       640,563  

OTHER COMPREHENSIVE INCOME

        

Items that will not be reclassified to the Profit and loss account in subsequent periods

        

Adjustment of actuarial liabilities – restatement of obligations of defined benefit plans, net of taxes

     (680     (115     —         —    

Equity gain on Other comprehensive income in jointly-controlled entity

     (4,851     7,415       (5,531     7,300  
  

 

 

   

 

 

   

 

 

   

 

 

 
     (5,531     7,300       (5,531     7,300  

Items that may be reclassified to the Profit and loss account in subsequent periods

        

Equity gain on Other comprehensive income, in jointly-controlled entity, relating to fair value of financial asset available for sale

     (38,134     (2,441     (38,134     (2,451

Conversion adjustment on transactions outside Brazil

     —         (10     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 
     (38,134     (2,451     (38,134     (2,451
  

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL COMPREHENSIVE INCOME FOR THE PERIOD

     353,517       645,682       353,085       645,412  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total of comprehensive income attributed to:

        

Interest of the controlling shareholders

     353,085       645,517       353,085       645,412  

Interest of non-controlling stockholder

     432       165       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 
     353,517       645,682       353,085       645,412  
  

 

 

   

 

 

   

 

 

   

 

 

 

The Condensed Notes are an integral part of the Interim Financial Statements.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

188


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LOGO

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STATEMENTS OF COMPREHENSIVE INCOME

FOR THE QUARTERS ENDED SEPTEMBER 30, 2017 AND 2016

R$ ’000

 

     Consolidated      Holding company  
     
     3Q17     3Q16      3Q17     3Q16  

PROFIT (LOSS) FOR THE PERIOD

     (83,666     433,502        (83,828     433,397  

OTHER COMPREHENSIVE INCOME

         

Items that will not be reclassified to the Profit and loss account in subsequent periods

         

Equity gain on Other comprehensive income in jointly-controlled entity

     —         612        —         612  
  

 

 

   

 

 

    

 

 

   

 

 

 
     —         612        —         612  

Items that may be reclassified to the Profit and loss account in subsequent periods

         

Equity gain on Other comprehensive income, in jointly-controlled entity, relating to fair value of financial asset available for sale

     —         23,607        —         23,607  

Conversion adjustment on transactions outside Brazil

     —         —          —         —    
  

 

 

   

 

 

    

 

 

   

 

 

 
     —         23,607        —         23,607  
  

 

 

   

 

 

    

 

 

   

 

 

 

TOTAL COMPREHENSIVE INCOME FOR THE PERIOD

     (83,666     457,721        (83,828     457,616  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total of comprehensive income attributed to:

         

Interest of the controlling shareholders

     (83,828     457,721        (83,828     457,616  

Interest of non-controlling stockholder

     162       —          —         —    
  

 

 

   

 

 

    

 

 

   

 

 

 
     (83,666     457,721        (83,828     457,616  
  

 

 

   

 

 

    

 

 

   

 

 

 

The Condensed Notes are an integral part of the Interim Financial Statements.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

189


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STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY – CONSOLIDATED

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2017 AND 2016

R$ ’000 – except where otherwise stated

 

     Share
capital
     Capital
reserves
     Profit
reserves
     Equity
valuation
adjustments
    Retained
earnings
    Total
interest of
controlling
stockholders
    Interest of
non-controlling
stockholder
    Total
equity
 

BALANCES ON DECEMBER 31, 2015

     6,294,208        1,924,503        4,662,723        102,264       —         12,983,698       3,978       12,987,676  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) for the period

     —          —          —          —         640,563       640,563       270       640,833  

Other comprehensive income

                   

Adjustment of actuarial liabilities – restatement of obligations of the defined benefit plans, net of taxes

     —          —          —          (115     —         (115     —         (115

Equity gain (loss) on Other comp. income in subsidiary and jointly-controlled entity

     —          —          —          4,974       —         4,974       —         4,974  

Foreign exchange conversion differences on transactions outside Brazil

     —          —          —          (10     —         (10     —         (10
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income for the period

     —          —          —          4,849       640,563       645,412       270       645,682  

Other changes in Stockholders’ equity:

                   

Tax incentives reserve

     —          —          445        —         (445     —         —         —    

Portion of mandatory dividends that will not be distributed – Reversal of provision

     —          —          622,530        —         —         622,530       —         622,530  

Realization of reserves

                   

Equity valuation adjustments – deemed cost of PP&E

     —          —          —          (29,147     29,147       —         —         —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCES AT SEPTEMBER 30, 2016

     6,294,208        1,924,503        5,285,698        77,966       669,265       14,251,640       4,248       14,255,888  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ATTRIBUTABLE TO MINORITY STOCKHOLDERS

     —          —          —          —         —         —         4,248       4,248  

ATTRIBUTABLE TO CONTROLLING STOCKHOLDERS

     6,294,208        1,924,503        5,285,698        77,966       669,265       14,251,640       —         14,251,640  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCES ON DECEMBER 31, 2016

     6,294,208        1,924,503        5,199,855        (488,285     —         12,930,281       4,090       12,934,371  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) for the period

     —          —          —          —         396,750       396,750       432       397,182  

Other comprehensive income

                   

Adjustment of actuarial liabilities – restatement of obligations of the defined benefit plans, net of taxes

     —          —          —          (680     —         (680     —         (680

Equity gain (loss) on Other comp. income in jointly-controlled entity

     —          —          —          (42,985     —         (42,985     —         (42,985
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income for the period

     —          —          —          (43,665     396,750       353,085       432       353,517  

Other changes in Stockholders’ equity:

                   

Additional dividends to minority stockholders proposed

     —          —          —          —         —         —         (424     (424

Realization of reserves

                   

Equity valuation adjustments – deemed cost of PP&E

     —          —          —          (43,923     43,666       (257     —         (257
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCES AT SEPTEMBER 30, 2017

     6,294,208        1,924,503        5,199,855        (575,873     440,416       13,283,109       4,098       13,287,207  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ATTRIBUTABLE TO MINORITY STOCKHOLDERS

     —          —          —          —         —         —         4,098       4,098  

ATTRIBUTABLE TO CONTROLLING STOCKHOLDERS

     6,294,208        1,924,503        5,199,855        (575,873     440,416       13,283,109       —         13,283,109  

The Condensed Notes are an integral part of the Interim Financial Statements.

 

  

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

190


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STATEMENTS OF CASH FLOW

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2017 AND 2016

R$ ’000

 

     Consolidated     Holding company  
     9M17     9M16     9M17     9M16  

CASH FLOW FROM OPERATIONS

        

Net profit for the period

     397,182       640,833       396,750       640,563  

Expenses (revenues) not affecting cash and cash equivalents

        

Income tax and Social Contribution tax

     204,594       224,400       58,239       (74,508

Depreciation and amortization

     616,783       601,197       351       382  

Losses on write-offs of PP&E and Intangible assets

     23,060       61,932       25       41  

Equity method gains in non-consolidated investees

     20,680       (47,260     (320,979     (842,337

Interest and monetary variation

     834,151       589,132       (44,696     (39,610

Monetary updating—AFAC

     (239,445     —         (239,445     —    

Provisions (reversals) for operational losses

     558,793       714,237       104,037       280,532  

CVA (Compensation of Portion A items) Account and Other Financial Components in tariff adjustments

     (148,216     937,053       —         —    

Adjustment of indemnity – plants with non-renewed concessions (Ministerial Order 291)

     (259,516     —         —         —    

Post-retirement obligations

     342,018       335,365       31,863       31,458  
  

 

 

   

 

 

   

 

 

   

 

 

 
     2,350,084       4,056,889       (13,855     (3,479

(Increase) / decrease in assets

        

Consumers and Traders

     (397,144     16,995       —         —    

CVA (Compensation of Portion A items) Account and Other Financial Components in tariff adjustments

     304,841       341,259       —         —    

Funding from Energy Development Account (CDE)

     (9,594     7,944       —         —    

Recoverable taxes

     (22,057     (34,078     (116     3  

Income tax and Social Contribution tax recoverable

     (24,460     (129,246     88,723       29,316  

Transport of electricity

     —         (27,416     —         —    

Escrow deposits in litigation

     (47,440     (35,383     1,598       (3,210

Dividends received from equity holdings

     247,824       445,178       361,293       713,900  

Financial assets of the concession

     314,473       (2,174,997     —         —    

Advances to suppliers

     (199,400     (41,929     —         —    

Gas drawing rights

     658,444       —         —         —    

Other

     (155,307     (64,848     19,077       (1,080
  

 

 

   

 

 

   

 

 

   

 

 

 
     670,180       (1,696,521     470,575       738,929  

Increase (reduction) in liabilities

        

Suppliers

     246,855       (280,945     2,635       (310

Taxes

     188,586       (185,477     (78,693     (32,369

Income tax and Social Contribution tax payable

     175,273       75,934       (9,191     2,314  

Payroll and related charges

     22,914       59,758       1,388       3,247  

Regulatory charges

     60,478       (10,789     —         —    

Post-retirement obligations

     (203,090     (173,731     (11,132     (9,476

Other

     (29,786     (189,349     (11,488     (17,002
  

 

 

   

 

 

   

 

 

   

 

 

 
     461,230       (704,599     (106,481     (53,596
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash generated by Operations

     3,481,494       1,655,769       350,239       681,854  

Interest paid on loans and financings

     (1,030,773     (1,320,119     —         —    

Income tax and Social Contribution tax paid

     (307,860     (106,956     (4,758     (13,794
  

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH FROM OPERATIONAL ACTIVITIES

     2,142,861       228,694       345,481       668,060  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

191


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     Consolidated     Holding company  
     9M17     9M16     9M17     9M16  

CASH FLOW IN INVESTMENT ACTIVITIES

        

Securities – Cash investments

     331,069       1,465,227       116,984       11,385  

Financial assets

     (160,481     —         —         —    

Restricted cash

     (38,020     (874     (29,470     1  

Investments

        

Cash injection in Investees

     (228,205     (724,750     (100,121     (426,660

In PP&E

     (53,883     (61,332     —         (484

In Intangible assets

     (691,017     (779,462     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH FLOW FROM (USED IN) INVESTMENT ACTIVITIES

     (840,537     (101,191     (12,607     (415,758
  

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOW IN FINANCING ACTIVITIES

        

New loans and debentures

     60,108       2,858,644       —         —    

Loans and debentures paid

     (1,506,459     (2,106,248     —         —    

Interest on Equity, and dividends

     (268,723     (111,453     (270,685     (111,453
  

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH FROM (USED IN) FINANCING ACTIVITIES

     (1,715,074     640,943       (270,685     (111,453
  

 

 

   

 

 

   

 

 

   

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

     (412,750     768,446       62,189       140,849  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalentes at start of period

     995,132       924,632       69,352       256,484  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalentes at end of period

     582,382       1,693,078       131,541       397,333  
  

 

 

   

 

 

   

 

 

   

 

 

 

The Condensed Notes are an integral part of the Interim Financial Statements.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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STATEMENTS OF ADDED VALUE

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2017 AND 2016

R$ ’000

 

     Consolidated      Holding company  
     9M17            9M16            9M17           9M16        

REVENUES

                  

Sales of electricity, gas and services

     21,927,158          20,211,783          276         641    

Distribution construction revenue

     725,528          881,450          —           —      

Transmission construction revenue

     11,226          36,405          —           —      

Gain on financial updating of the Concession Grant Fee

     240,420          212,185          —           —      

Adjustment to expectation of cash flow from the indemnifiable Financial assets of the distribution concession

     2,277          6,638          —          

Transmission indemnity revenue

     295,749          692,211          —           —      

Generation indemnity revenue

     259,516          —            —           —      

Investments in PP&E

     24,549          40,287          —           —      

Other revenues

     1,479          3,905          —           —      

Estimated Provision for Doubtful Receivables (PECLD)

     (191,343        (282,915        —           —      
  

 

 

      

 

 

      

 

 

     

 

 

   
     23,296,559          21,801,949          276         641    

INPUTS ACQUIRED FROM THIRD PARTIES

                  

Electricity purchased for resale

     (8,424,585        (6,734,311        —           —      

Charges for use of national grid

     (882,536        (825,611        —           —      

Outsourced services

     (983,908        (904,721        (6,796       (6,226  

Gas bought for resale

     (789,861        (623,503        —           —      

Materials

     (392,871        (521,118        (89       (52  

Other operational costs

     (587,938        (740,543        (107,183       (291,438  
  

 

 

      

 

 

      

 

 

     

 

 

   
     (12,061,699        (10,349,807        (114,068       (297,716  

GROSS VALUE ADDED

     11,234,860          11,452,142          (113,792       (297,075  

RETENTIONS

                  

Depreciation and amortization

     (616,783        (601,197        (351       (382  
  

 

 

      

 

 

      

 

 

     

 

 

   

NET ADDED VALUE PRODUCED BY THE COMPANY

     10,618,077          10,850,945          (114,143       (297,457  

ADDED VALUE RECEIVED BY TRANSFER

                  

Equity method gains in non-consolidated investees

     (20,680        47,260          320,979         842,337    

Financial revenues

     550,065          835.191          84.893         77.057    
  

 

 

      

 

 

      

 

 

     

 

 

   

ADDED VALUE TO BE DISTRIBUTED

     11,147,462          11.733.396          291.729         621.937    
  

 

 

      

 

 

      

 

 

     

 

 

   

DISTRIBUTION OF ADDED VALUE

                  
           %            %            %           %  

Employees

     1,507,087       13.52        1,386,236       11.81        65,849       22.57       48,232       7.76  

Direct remuneration

     850,936       7.63        856,959       7.3        26,795       9.18       13,137       2.12  

Benefits

     406,373       3.65        371,145       3.16        31,928       10.94       28,511       4.58  

FGTS fund

     52,452       0.47        65,213       0.56        1,891       0.65       1,261       0.2  

Voluntary retirement program

     197,326       1.77        92,919       0.79        5,235       1.79       5,323       0.86  

Taxes

     7,833,994       70.28        7,631,496       65.04        62,821       21.53       (71,696     (11.53

Federal

     3,351,706       30.07        3,746,798       31.93        62,186       21.32       (71,965     (11.57

State

     4,472,137       40.12        3,875,582       33.03        485       0.17       77       0.01  

Municipal

     10,151       0.09        9,116       0.08        150       0.05       192       0.03  

Remuneration of external capital

     1,409,199       12.64        2,074,831       17.69        (233,691     (80.11     4,838       0.78  

Interest

     1,326,887       11.90        2,004,756       17.09        (236,553     (81.09     4,332       0.7  

Rentals

     82,312       0.74        70,075       0.6        2,862       0.98       506       0.08  

Remuneration of own capital

     397,182       3.56        640,833       5.46        396,750       136.00       640,563       102.99  

Retained earnings

     396,750       3.56        640,563       5.46        396,750       136.00       640,563       102.99  

Non-controlling stockholders’ interest in Retained earnings

     432       —          270       —          —         —         —         —    
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     11,147,462       100.00        11,733,396       100.00        291,729       100.00       621,937       100.00  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

The Condensed Notes are an integral part of the Interim Financial Statements.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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CONDENSED NOTES TO THE INTERIM FINANCIAL INFORMATION

FOR THE QUARTER ENDED SEPTEMBER 30, 2017

(In thousands of Brazilian Reais – R$ ’000 – except where otherwise indicated)

 

1. OPERATING CONTEXT

 

a) The Company

Companhia Energética de Minas Gerais (‘Cemig’, ‘Parent company’, ‘Holding company’ or ‘the Company’) is a listed corporation registered in the Brazilian Registry of Corporate Taxpayers (CNPJ) under number 17.155.730/0001-64, with shares traded on the BM&F Bovespa (‘Bovespa’) at Corporate Governance Level 1; on the New York Stock Exchange (‘NYSE’); and on the stock exchange of Madrid (‘Latibex’). It is domiciled in Brazil, with head office at Avenida Barbacena 1200, Belo Horizonte, Minas Gerais. It operates exclusively as a holding company, with interests in subsidiaries or jointly controlled entities, which are engaged in the activities of the construction and operation of systems for generation, transformation, transmission, distribution and sale of electricity, and also activities in the various fields of energy, for the purpose of commercial operation.

The Company has assumed a significant amount of debt to finance the capital expenses that are necessary for compliance with its long term growth objectives. On September 30, 2017 the consolidated current liabilities of Cemig GT exceeded its consolidated current assets by R$ 4,494,345. On September 30, 2017, its aggregate totals of loans, financings and debentures, were: R$ 5,199,471, short-term; and R$ 8,856,104 long-term. In its consolidated result, the Company reports positive consolidated operational cash flow for the first nine months of 2017 (9M17) of R$ 2,142,861. In 9M16 this result was positive consolidated operational cash flow of R$ 228,694.

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.

The substantial volume of Cemig’s debt could negatively affect its business, financial situation and operational results. More specifically, Cemig is subject to certain restrictions on its capacity to raise funds from third parties, which could be an impediment when entering into new contracts for financing of its operations, or for refinancing of existing obligations, and this might adversely affect its business, financial situation and operational results, as follows:

 

  The Company’s bylaws require certain consolidated financial ratios to be maintained, on factors including debt and capital expenditure, with consolidated limits for the Group. This could affect the Group’s operational flexibility. In 2016 and on September 30, 2019, certain financial limits and indices established in the bylaws were exceeded. These were previously approved by the General Meeting of Stockholders. Cemig obtained approval from its stockholders for the Company to exceed these financial limits and indices as applicable for 2017.

 

  The following points relate to contracting of loans: (i) as a state-controlled company, Cemig is subject to rules and limits on lending applicable to the public sector, including rules established by the National Monetary Council (CMN) and the Brazilian Central Bank; and (ii) since the Company operates in the electricity sector it is subject to rules and limits established by Aneel governing indebtedness of companies in the electricity sector. Additionally, (iii) state-controlled companies may use funds from transactions with commercial banks only for refinancing of financial obligations, or in transactions guaranteed by trade bills.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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  Another rule in force is the requirement for certain international financial transactions to be approved by the Brazilian Federal Treasury (part of the Finance Ministry) and the Central Bank, before their execution; this approval is usually given only if the objective is to finance importation of merchandize or roll over foreign debt. The objective of these rules is to impose limits on the Company’s capacity for indebtedness.

 

  Cemig is subject to the restrictive covenants contained in its contracts for loans, financings and debentures. In the event of non-compliance with an obligation under the terms of the financing contract, Cemig will be required to reinforce the guarantees of the financing, on penalty of early maturity of the contract. Any default event on our financial instruments could lead creditors to cause all amounts related to that debt to become immediately payable. Early maturity of debt could have a significant adverse effect on the Company’s financial situation, and could also result in activation of cross-default clauses in other financial instruments. In the event of default, the Company’s cash flows could be insufficient to completely satisfy the debt or to comply with the service of those debts.

 

  The credit risk rating agencies attribute a rating to Brazil, to the Company, and to its debt securities on the Brazilian basis, and also issue a rating for the Company on a global basis. If ratings are reduced due to any factor that is not related to the Company’s operational performance or the high level of the debt, the cost of capital could increase.

For the purposes of amortization of the programed debt maturities, Cemig will raise significant amounts of capital from third parties through a wide range of financing sources available in the market. For the purposes of complying with services of the debt after meeting its investment targets, Cemig depended, and may continue to depend, on a combination of cash flows from operational activities, drawdowns on our available credit lines, the balance of our cash position and financial investments, and contracting of additional debts.

Cemig has a range of initiatives for increasing liquidity by entering into new financing contracts, refinancing existing obligations, and possibly disposal of assets that are not part of its end-activity. In 2016, Cemig presented a program of disinvestment for sale of assets in the period 2017–2018, with the objective of improving its liquidity position in the short term through creation of liquidity and reduction of debt.

Although Cemig has significant leverage, it expects that the balances of current cash, liquidity of the rotating credit line, cash generated by the initiatives described above, and cash flow from operational activities will be sufficient to supply the needs of working capital, investments, debt servicing, and other cash needs of the coming business year. Management believes that its plans will be successful.

If, for any reason, Cemig has difficulty in obtaining financings, this could negatively affect its conditions for making investments in the amounts necessary to maintain the present level of investments or its long-term objectives, and could compromise its ability to pay financial obligations for principal and debt to creditors, considering that the cash flow from its operations might be insufficient to cover its investment program and all of its debt servicing. A reduction in the investment program or the sale of assets could significantly affect the result of its operations.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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2. BASIS OF PREPARATION

 

2.1 Statement of compliance

The individual and consolidated Interim Accounting Information has been prepared in accordance with IAS 34 – Interim Financial Reporting, issued by the International Accounting Standards Board (IASB) and Technical Pronouncement 21 – Interim Reporting (Pronunciamento Técnico 21 – Demonstração Intermediária, or CPC21) ; and is also presented in a form compliant with the rules issued by the Brazilian Securities Commission (Comissão de Valores Mobiliários, or CVM), applicable to preparation of Quarterly Information (Informações Trimestrais, or ITR).

The Company has opted to present the individual and the consolidated Interim Financial Statements in a single group, since there is no difference in the values stated for (a) Stockholders’ equity and (b) Net profit (loss) between the individual and the consolidated Interim Financial Statements.

This Interim Quarterly Information has been prepared according to principles, practices and criteria consistent with those adopted in the preparation of the annual accounting statements at December 31, 2016. Thus, this Interim financial information should be read in conjunction with the said financial statements, approved by the Company’s management on April 11, 2017.

The added value statement is not required by IFRS, but is obligatory for listed companies in Brazil. Its purpose is to show the wealth created by the Company, and its distribution in the reporting period. It is provided as supplementary information to the individual and consolidated quarterly information.

The Company also takes into account the orientations provided by Technical Orientation OCPC07 in preparation of its financial statements. Thus, the material information in the Interim accounting information, and only that information, is being presented, and corresponds to the information used by Management in its administration of the company.

The Executive Board authorized conclusion and publication of this Interim financial information on November 13, 2017.

 

2.2 Correlation between the Explanatory Notes published in the annual financial statements and those in the Interim Financial Information

The table below shows the correlation between the Explanatory Notes published in the consolidated annual financial statements at December 31, 2016 and the consolidated interim financial accounting information at September 30, 2017.

The Company believes that this Interim accounting information presents the material updating of information relating to its equity situation, and its results for the three-month and nine-month period ended September 30, 2017, in compliance with the requirements for disclosure stated by the CVM.

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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Number of the Note   

Title of the Note

Dec. 31,
2016
   Sep. 30,
2017
  
1    1   

Operational context

2    2   

Basis of preparation

3    3   

Consolidation principles

4    4   

Concessions and authorizations

5    31   

Operational segments

6    5   

Cash and cash equivalents

7    6   

Securities

8    7   

Consumers and traders; Concession holders – Transport of electricity

9    8   

Recoverable taxes

10    9   

Income and Social Contribution taxes

11    10   

Restricted cash

12    12   

Escrow deposits in litigation

13    13   

Passthrough funding from the Energy Development Account (Conta de Desenvolvimento Energético, or CDE) and the Flag Tariff Centralizing Account

14    14   

Financial Assets and Liabilities of the Concession

15    15   

Investments

16    16   

Property, plant and equipment

17    17   

Intangible assets

18    18   

Suppliers

19    19   

Taxes and social security

20    20   

Loans, financings and debentures

21    21   

Regulatory charges

22    22   

Post-retirement obligations

23    23   

Provisions

24    24   

Stockholder’s equity and remuneration to stockholders

25    25   

Revenue

26    26   

Operational costs and expenses

27    27   

Financial revenue and expenses

28    28   

Related party transactions

29    29   

Financial instruments and risk management

30    30   

Measurement at fair value

33    33   

Transactions not involving cash

34    34   

Subsequent events

The Notes to the 2016 annual statements that have not been included in these consolidated interim financial statements because they had no material changes, and/or were not applicable to the interim information, are as follows:

 

Number

  

Title of the Note

31   

Insurance

32   

Commitments

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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3. PRINCIPLES OF CONSOLIDATION

The reporting dates for the interim accounting information on the subsidiaries and jointly-controlled subsidiaries, used for the purposes of calculation of consolidation and equity method gains (losses) coincide with those of the Company.

The Company uses the criteria of full consolidation for the following companies which are direct equity investments of Cemig:

 

Subsidiary

   Form of
valuation
     Sep. 30, 2017  
      Direct stake, %  

Cemig Geração e Transmissão

     Consolidation        100.00  

Cemig Distribuição

     Consolidation        100.00  

Gasmig

     Consolidation        99.57  

CemigTelecom

     Consolidation        100.00  

Rosal Energia

     Consolidation        100.00  

Sá Carvalho

     Consolidation        100.00  

Horizontes Energia

     Consolidation        100.00  

Usina Térmica Ipatinga

     Consolidation        100.00  

Cemig PCH

     Consolidation        100.00  

Cemig Trading

     Consolidation        100.00  

Efficientia

     Consolidation        100.00  

Cemig Comercializadora de Energia Incentivada

     Consolidation        100.00  

UTE Barreiro

     Consolidation        100.00  

Empresa de Serviços e Comercialização de Energia Elétrica

     Consolidation        100.00  

 

4. CONCESSIONS AND AUTHORIZATIONS

Renewal of the concessions of the Jaguara, São Simão, Miranda and Volta Grande Hydroelectric Plants

The concession contracts (under Concession 007/97) of the Jaguara, São Simão and Miranda hydroelectric plants, of the subsidiary Cemig GT, reached a maturity date in August 2013, January 2015 and December 2016, respectively. The subsidiary, since it believes that it has the right to renewal of these concessions under the original Concession Contracts, filed administrative and court actions requiring renewal/extension of the concessions. These applications, however, were rejected by the Mining and Energy Ministry, on the view that the request was made out of time in relation to the period/rules set by Law 12783/13.

As part of the legal dispute in the courts, in March 2017 the interim judgments that had maintained Cemig GT in possession of the concession of the plants on the initial basis of the Concession Contract 007/97, were revoked.

Up to the date of lifting of the interim injunctions for each one of the plants, the Subsidiary Cemig GT recognized revenue from sales of electricity and operational costs of this plant, since it remained in control of the asset up to that date. From that date onward, Cemig GT ceased to recognize the expenses of depreciation on the plants, and began to recognize revenues relating to the provision of services of operation and maintenance of the plant, in accordance with the regime of quotas.

Management of the subsidiary continues to argue for its right in relation to the Jaguara, São Simão and Miranda plants, supported by a contractual clause, by the legislation in force, and by opinions issued by renowned jurists. The subsidiary’s internal and external legal advisers have categorized the chance of success in the court disputes as ‘possible’.

Since there are legal disputes pending, involving the São Simão, Jaguara and Miranda plants, on September 27, 2017 the Brazilian federal government auctioned the concessions of those three plants, and also the concession of Volta Grande plant, which concession expired in February, 2017. Those concessions were previously held by Cemig GT. The plants have an aggregate generation capacity of 2,922 MW. The concessions were auctioned for a total of R$ 12,130,784. The parties that won these concessions are not related to Cemig.

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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Until the signature of the new concession contracts with the concession holders that won Auction 01/2017, and the actual transfer of possession of the related facilities, as long as the period of assisted operation specified in the tender of Auction 01/2017 continues, the Mining and Energy Ministry maintains Cemig GT as the party responsible for provision of service of generation at the Jaguara, Miranda, São Simão and Volta Grande Plants, to guarantee continuity of service. The Annual Generation Revenue (RAG) of the plants totals R$ 433,243 per year and was recorded a revenue of R$330,369 in the nine-month period ended on September 30, 2017 (R$238.641 in the same period of 2016). The period of assisted operation may not exceed 180 days from the signature of the new concession contracts.

On August 3, 2017 Mining and Energy Ministry Order 291/17 established the values of indemnity, payable to Cemig GT, for the investments made in the São Simão and Miranda plants that have not been amortized up to the end of the contract. The total amount of the indemnity is R$ 1,027,751, of which R$ 243,599 relates to indemnity for the São Simão Plant, and R$ 784,152 is for indemnity for the Miranda Plant – these figures being expressed in September 2015 and December 2016 currency, respectively. The amounts are being updated, pro rata die, by the IPCA (Expanded Consumer Price) index, up to the date of signature of the Concession Contract by whichever party wins the tender for the concession of the Plants and also by the Selic Reference Rate for Federal securities, as from the date of signature of the Concession Contract up to the date of actual payment of the indemnity. The balances not yet amortized of the concessions of the São Simão and Miranda Plants, in relation to their Basic Plans, were adjusted to reflect the matters defined in Ministerial Order 291/17. Updating ains of R$ 259,516 were recognized in this quarter (see more details in Notes 13 and 24). The subsidiary transferred the balances referred to to Financial Assets of the concession.

On September 30, 2017, the balance not yet amortized of the Jaguara Plant concession, with accounting value of R$ 169,822, and also the amounts of the investments made after the São Simão and Miranda plants started operation, respectively with book value of R$ 3,243 and R$ 22,546, reported under the heading Generation Concession Assets.

Cemig GT is discussing with the Mining and Energy Ministry the criteria used for deciding the amounts states in Ministerial Order 291/17 and also the fact that this Order did not take into consideration the as yet non-amortized balance of the Jaguara Plant and the balances of investments carried out to the São Simão and Miranda Plants after their coming into operation. The Company does not expect to see loss of value in realization of these assets.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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5. CASH AND CASH EQUIVALENTS

 

R$ ’000

   Consolidated      Holding company  
     
     Sep, 30, 2017      Dec. 31, 2016      Sep, 30, 2017      Dec. 31, 2016  

Bank accounts

     33,631        101,419        4,527        4,414  

Cash investments

           

Bank certificates of deposit (‘CDBs’) (1)

     421,000        523,673        123,382        17,098  

Overnight (2)

     125,726        370,040        3,632        47,840  

Other

     2,025        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 
     548,751        893,713        127,014        64,938  
  

 

 

    

 

 

    

 

 

    

 

 

 
     582,382        995,132        131,541        69,352  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

1) Bank Certificates of Deposit (Certificados de Depósito Bancário, or CBDs), are remunerated at a percentage varying from 60% to 106% at September 30, 2017 (75% to 106% at December 31, 2016) of the CDI Rate (Interbank Rate for Interbank Certificates of Deposit or ‘Certificados de Depósito Inter-bancário’ – CDIs) published by the Custody and Settlement Chamber (Câmara de Custódia e Liquidação, or Cetip). Repo transactions state, in their trading notes, the Bank’s commitment to repurchase the security, at sight, on the maturity date of the transaction, or earlier, at the client’s option.
2) Overnight transactions are repos available for redemption on the following day. They are usually backed by Treasury Bills, Notes or Bonds and referenced to a pre-fixed rate of 10.14% on September 30, 2017 (13.64% on December 31, 2016); their purpose is to settle obligations of the unit holders of the Fund or to be used in the purchase of other assets with better remuneration to replenish the portfolio.

The Company’s exposure to interest rate risk and an analysis of sensitivity of financial assets and liabilities are given in Note 29 to this Interim Consolidated Accounting Information.

 

6. SECURITIES

 

R$ ’000

   Consolidated      Holding company  
     
     Sep. 30, 2017      Dec. 31, 2016      Sep. 30, 2017      Dec. 31, 2016  

Cash investments

           

Current

           

Bank certificates of deposit (‘CDBs’) (1)

     40,139        46,011        257        4,238  

Financial Notes (LFs) – Banks (2)

     532,265        728,293        15,377        94,156  

Treasury Financial Notes (LFTs) (3)

     103,954        192,995        3,003        24,951  

Debentures (4)

     12,737        45,289        2,204        9,403  

Other

     1,896        1,600        800        611  
  

 

 

    

 

 

    

 

 

    

 

 

 
     690,991        1,014,188        21,641        133,359  

Non-current

           

Financial Notes – Banks

     —          14,134        —          1,820  

Debentures

     12,123        16,906        693        4,139  
  

 

 

    

 

 

    

 

 

    

 

 

 
     12,123        31,040        693        5,959  
  

 

 

    

 

 

    

 

 

    

 

 

 
     703,114        1,045,228        22,334        139,318  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

1) Bank Certificates of Deposit (Certificados de Depósito Bancário, or CBDs), are remunerated at a percentage, varying from 100.8% to 105.25% on September 30, 2017 (the range on December 31, 2016 was from 100.5% to 111%). of the CDI Rate.
2) Bank Financial Notes (Letras Financeiras, or LFs) are fixed-rate fixed-income securities, issued by banks and remunerated at a percentage of the CDI rate published by Cetip. The LFs in Cemig GT’s portfolio have a remuneration rate varying between 102% and 112% of the CDI in 2017 (104.25% to 112.7% at December 31, 2016).
3) Treasury Financial Notes (LFTs) are fixed rate securities, the yield on which follows the daily variation of the Selic rate between the date of purchase and the date of maturity.
4) Debentures are medium and long term debt securities, which give their holders a right of credit against the issuing company. The debentures have remuneration varying between 103% and 128% of the CDI rate in 2017 (104.25% to 113% at December 31, 2016).

Note 29 gives a classification of these securities. Cash investments in securities of related parties are shown in Note 28.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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7. CONSUMERS, TRADERS AND POWER TRANSPORT CONCESSION HOLDERS

 

R$’000

   Consolidated  
   Balances
not yet due
     Up to 90
days past
due
     More than
90 days
past due
    Sep. 30,
2017
    Dec. 31,
2016
 

Invoiced supply

     1,447,494        675,175        800,736       2,923,405       2,568,823  

Supply not yet invoiced

     904,714             904,714       919,531  

Other concession holders – wholesale supply

     350,748        17,482        10,136       378,365       422,981  

CCEE (Electricity Trading Chamber)

     40,248        38,075        168       78,491       1,432  

Power transport concession holders

     238,710        8,519        96,430       343,659       318,723  

(-) Estimated loss on doubtful receivables

     —          —          (851,448     (851,448     (660,105
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     2,981,914        739,251        56,022       3,777,186       3,571,385  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Current assets

             3,602,934       3,425,018  

Non-current assets

             174,252       146.367  

The Company’s exposure to credit risk related to Consumers and traders is given in Note 29.

The allowance for estimated doubtful receivables is considered to cover any losses in the realization of these assets, and breaks down by type of consumer as follows:

 

R$ ’000

   Sep. 30, 2017      Sep. 30, 2016  

Residential

     358,373        244,964  

Industrial

     156,151        132,586  

Commercial, services and others

     165,257        152,297  

Rural

     36,956        23,764  

Public authorities

     40,129        9,672  

Public lighting

     5,008        5,392  

Public services

     14,900        15,408  

Charges for use of the network – TUSD

     67,762        67,733  

Other

     6,912        8,289  
  

 

 

    

 

 

 
     851,448        660,105  
  

 

 

    

 

 

 

The changes in the adjustment for estimated losses on doubtful receivables in the nine-month period ended in September, 30 is as follows:

 

     R$ ’000  

Balance on December 31, 2015

     625,445  
  

 

 

 

Constitution of provision

     282,915  

Reversals of provisions

     (321,581
  

 

 

 

Balance at September 30, 2016

     586,779  
  

 

 

 

Balance at December 31, 2016

     660,105  
  

 

 

 

Constitution of provision

     191,343  
  

 

 

 

Balance at September 30, 2017

     851,448  
  

 

 

 

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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Advance sales of power supply

Cemig made various transactions, with various clients, for advance payment for power supply. The amounts receivable for power not yet delivered are as follows:

 

R$ ’000

   Consolidated  

Balance at December 31, 2016

     181,200  
  

 

 

 

Addition

     282,601  

Supply completed

     (189,355

Monetary updating

     37,666  
  

 

 

 

Balance at September 30, 2017

     312,112  
  

 

 

 

Current liabilities

     245,367  

Non-current liabilities

     66,745  

 

8. RECOVERABLE TAXES

 

R$’000

   Consolidated      Holding company  
   Sep. 30, 2017      Dec. 31, 2016      Sep. 30, 2017      Dec. 31, 2016  

Current

           

ICMS tax recoverable

     162,624        155,306        —          —    

PIS and Pasep taxes

     12,484        12,480        20        —    

Cofins tax

     57,659        57,634        102        —    

Other

     14,187        10,864        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 
     246,954        236,284        122        —    

Non-current

           

ICMS tax recoverable

     184,010        170,551        —          —    

PIS and Pasep taxes

     534        914        3        4  

Cofins tax

     2,905        4,597        11        16  

Other

     2,226        2,226        1,796        1,796  
  

 

 

    

 

 

    

 

 

    

 

 

 
     189,675        178,288        1,810        1,816  
  

 

 

    

 

 

    

 

 

    

 

 

 
     436,629        414,572        1,932        1,816  
  

 

 

    

 

 

    

 

 

    

 

 

 

The credits of ICMS, reported in Current assets, arise from acquisitions of property, plant and equipment and intangible assets, and can be offset over 48 months.

The credits of the PIS, Pasep and Cofins taxes arise from acquisitions of property, plant and equipment and intangible assets, and can be offset immediately, according to the law 11,774/08. The transfer to Non-current was made in accordance with estimates by Management of the amounts that will be realized after September 30, 2018.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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9. INCOME AND SOCIAL CONTRIBUTION TAXES

 

a) Income and Social Contribution taxes recoverable

The balances of income tax and Social Contribution tax refer to tax credits in corporate income tax returns of previous years and to advance payments which will be offset against federal taxes payable yet to be calculated.

 

R$ ’000

   Consolidated      Holding company  
   Sep. 30, 2017      Dec. 31, 2016      Sep. 30, 2017      Dec. 31, 2016  

Current

           

Income tax

     417,368        436,167        36,846        78,174  

Social Contribution tax

     139,939        153,352        1,026        —    
  

 

 

    

 

 

    

 

 

    

 

 

 
     557,307        589,519        37,872        78,174  

Non-current

           

Income tax

     49,709        98,132        49,709        98,132  

Social contribution tax

     13,930        13,928        13,930        13,928  
  

 

 

    

 

 

    

 

 

    

 

 

 
     63,639        112,060        63,639        112,060  
  

 

 

    

 

 

    

 

 

    

 

 

 
     620,946        701,579        101,511        190,234  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

b) Deferred income tax and Social Contribution tax

Cemig and its subsidiaries have income tax credits, constituted at the rate of 25%, and Social Contribution tax credits, at the rate of 9%, on tax losses/carryforwards and temporary differences, as follows:

 

R$ ’000

   Consolidated     Holding company  
    
     Sep. 30, 2017     Dec. 31, 2016     Sep. 30, 2017     Dec. 31, 2016  

Deferred tax assets

        

Tax loss carryforwards

     357,381       290,272       196,784       202,797  

Provisions

     1,048,698       1,027,279       499,064       547,277  

Post-retirement obligations

     1,239,740       1,175,074       129,862       121,973  

Estimated provision for doubtful receivables

     323,483       228,801       7,192       7,192  

Taxes payable – suspended liability (1)

     203,388       201,711       —         —    

Paid concession

     8,152       8,262       —         —    

Other

     15,637       22,096       363       190  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     3,196,479       2,953,495       833,265       879,429  
  

 

 

   

 

 

   

 

 

   

 

 

 

Deferred tax liabilities

        

Funding cost

     (30,864     (44,835     —         —    

Deemed cost

     (277,890     (268,009     —         —    

Purchase price allocation adjustments

     (468,052     (481,488     (88,237     (90,111

Borrowing costs capitalized

     (159,738     (148,559     —         —    

Taxes on revenues not redeemed –

Presumed Profit accounting method

     (576     (1,549     —         —    

Transmission assets: Indemnity gain

     (666,143     (516,985     —         —    

Adjustment to expectation of cash flow from the indemnifiable Financial assets of the distribution concession

     (264,588     (270,553     —         —    

Other

     (7,477     (6,270     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     (1,875,328     (1,738,248     (88,237     (90,111
  

 

 

   

 

 

   

 

 

   

 

 

 

Total, net

     1,321,151       1,215,247       745,028       789,318  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

     2,003,908       1,797,453       745,028       789,318  

Total liabilities

     (682,757     (582,206     —         —    

 

(1) Refers to court escrow deposit of PIS, Pasep and Cofins taxes charged on amounts of ICMS tax.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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The changes in deferred income and Social Contribution taxes were as follows:

 

R$ ’000

   Consolidated     Holding company  

Balance on December 31, 2015

     809,232       778,120  

Effects allocated to Profit and loss account

     (75,940     85,987  

Effects allocated to Statement of comprehensive income

     38       —    

Variations in deferred tax assets and liabilities

     73       —    
  

 

 

   

 

 

 

Balance at September 30, 2016

     733,403       864,107  
  

 

 

   

 

 

 

Balance at December 31, 2016

     1,215,247       789,318  

Effects allocated to Profit and loss account

     101,362       (44,290

Variations in deferred tax assets and liabilities

     4,543       —    
  

 

 

   

 

 

 

Balance at September 30, 2017

     1,321,152       745,028  
  

 

 

   

 

 

 

 

c) Reconciliation of the expense on income and Social Contribution taxes

This table reconciles the nominal expense on income tax (rate 25%) and the Social Contribution tax (rate 9%) with the actual expense, presented in the Statement of income:

 

R$ ’000

   Consolidated     Holding company  
    
     9M17     9M16     9M17     9M16  

Pre-tax profit

     601,776       865,233       454,989       566,055  

Income and Social Contribution taxes – nominal expense

     (204,604     (294,179     (154,696     (192,459

Tax effects applicable to:

        

Gain (loss) in subsidiaries by equity method (net of effects of Interest on Equity)

     (34,968     (19     95,207       265,726  

Non-deductible contributions and donations

     (2,171     (2,580     —         —    

Tax incentives

     4,053       3,184       66       69  

Difference in taxable base amount – Presumed profit Vs. Real profit method

     59,692       79,861       —         —    

Non-deductible penalties

     (10,077     (12,194     (11     (14

Excess reactive power and demand

     (9,229     (9,268     —         —    

Other

     (7,290     10,795       1,195       1,186  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax and Social Contribution tax – effective credit (expense)

     (204,594     (224,400     (58,239     74,508  
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective rate

     34.00%       25.94%       12.80%       13.16%  

Current tax

     (305,956     (148,460     (13,949     (11,480

Deferred tax

     101,362       (75,940     (44,290     85,988  

 

R$ ’000

   Consolidated     Holding company  
    
     3Q17     3Q16     3Q17     3Q16  

Pre-tax profit

     (93,000     568,536       (19,237     485,674  

Income and Social Contribution taxes – nominal expense

     31,620       (193,302     6,541       (165,129

Tax effects applicable to:

        

Gain (loss) in subsidiaries by equity method (net of effects of Interest on Equity)

     (44,064     9,832       (71,617     112,486  

Non-deductible contributions and donations

     (659     (776     —         —    

Tax incentives

     (2,035     2,075       23       19  

Tax credits not recognized

     —         1,586       —         66  

Difference in taxable base amount – Presumed profit Vs. Real profit method

     20,873       45,575       —         —    

Non-deductible penalties

     (1,672     (4,612     —         —    

Excess reactive power and demand

     (3,117     (3,111     —         —    

Other

     8,388       7,699       462       281  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax and Social Contribution tax – effective credit (expense)

     9,334       (135,034     (64,591     (52,277
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective rate

     10.04%       23.75%       335.77%       10.76%  

Current tax

     (13,234     (69,593     (11,416     757  

Deferred tax

     22,568       (65,441     (53,175     (53,034

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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10. RESTRICTED CASH

The total recorded as Restricted cash, R$ 405,494 in the Consolidated accounts and R$ 396,038 in the Holding company accounts, refers mainly to the amount deposited with Banco Santander, in accordance with the stockholders’ agreement of RME and Lepsa, as guarantee for settlement of the put options, described in Note 15. The contract for the account with the depositary bank is in effect until December 15, 2017.

 

11. ACCOUNTS RECEIVABLE FROM THE STATE OF MINAS GERAIS

According to the disclosure on note 23, An agreement was reached between Cemig’s management and the government of the State of Minas Gerais in the third quarter, expressed in a Debt Recognition Undertaking signed on October 25, 2017 between Cemig and the Finance Department of Minas Gerais State, in which the State undertook to reimburse the total amount of a deposit made by Cemig, with monetary updating by the IGP–M index related to the administrative proceeding related to the criterium to update the amounts transferred to the State of Minas Gerais Government as advance for capital increase in previous years.

The Debt Recognition Undertaking specified that the State will make payment of R$ 277,723, of which R$ 238,445 refers to the original amount of the deposit, and R$ 38,278 relates to its monetary updating to September 30, 2017 – this amount will be returned to the Company by the State in 12 consecutive monthly installments, each updated by the IGP–M index up to the date of actual payment, the first such payment to become due on November 10, 2017. Also, Clause 3 of this Undertaking specifies that, In the event of arrears or default by the State in payment of the agreed consecutive monthly installments, Cemig is authorized to retain dividends or Interest on Equity distributable to the State in proportion to the State’s equity interest, for as long as the arrears and/or default continues.

 

12. ESCROW DEPOSITS

These payments are mainly for legal actions relating to employment-law contingencies and tax obligations.

The most important escrow deposits refer to tax disputes, mainly on the Pasep and Cofins taxes – in actions seeking exclude the ICMS tax itself from the taxable amount on which the Pasep and Cofins taxes are charged.

 

R$ ’000

   Consolidated      Holding company  
   Sep. 30, 2017      Dec. 31, 2016      Sep. 30, 2017      Dec. 31, 2016  

Employment-law cases

     320,950        259,415        38,483        31,231  

Tax issues

           

Income tax on Interest on Equity

     26,601        24,130        238        510  

Pasep and Cofins taxes (1)

     750,839        746,340        —          —    

ICMS credits on PP&E

     37,249        36,657        —          —    

Donations and legacy tax (ITCD)

     48,365        45,620        47,926        45,181  

Urban property tax (IPTU)

     64,498        80,345        53,602        65,694  

Finsocial tax

     39,083        37,399        39,083        37,399  

Income and Social Contr. Tax on the indemnity for employees’ ‘Anuênio’ benefit

     265,178        255,127        12,745        12,262  

Other

     80,895        59,247        30,975        28,702  
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,312,708        1,284,865        184,569        189,748  

Other

           

Monetary updating on AFAC from Minas Gerais State Government (2)

     239,445        239,445        239,445        239,445  

Regulatory

     51,614        60,227        29,237        27,374  

Third party

     14,149        13,484        5,979        6,015  

Consumer relations

     5,975        5,598        1,561        1,548  

Court embargo

     12,348        7,877        4,071        3,118  

Other

     25,316        15,968        1,343        1,389  
  

 

 

    

 

 

    

 

 

    

 

 

 
     109,402        342,599        42,191        278,889  
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,743,060        1,886,879        265,243        499,868  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The payments into court relating to Pasep and Cofins taxes refer to the case challenging the constitutionality of inclusion of the ICMS tax, which has been charged, within the amount on which the Pasep and Cofins taxes are calculated. They have a corresponding provision in Taxes. See more details in Note 18.
(2) Administrative deposit in case seeking suspension of enforceability of the credit charged by the Minas Gerais State Government for a difference in the monetary updating on the Advance against Future Capital Increase (Adiantamento contra Futuro Aumento de Capital, or AFAC). More details in Note 22.
(3) See more details in Note 22 – Provisions on ‘Anuênio’ indemnity.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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13. REIMBURSEMENT OF TARIFF SUBSIDIES

The subsidies applicable to tariffs charged to users of public electricity distribution service are reimbursed through payments of funds from the Energy Development Account (Conta de Desenvolvimento Energético, or CDE).

In 9M17 the total appropriated as incoming subsidies was R$ 621,731 (R$ 600,356 in 9M16). Of the amount provisioned, the Company has R$ 73,345 receivable (R$ 63,751 at December 31, 2016). This is recognized in Current assets.

 

14. FINANCIAL ASSETS AND LIABILITIES OF THE CONCESSION

 

Consolidated

   Sep. 30, 2017      Dec. 31, 2016  

Assets related to infrastructure (1)

     

Distribution concessions

     271,612        216,107  

Transmission concessions (1.2)

     473,374        482,281  

Indemnity receivable – Transmission (1.1)

     1,975,775        1,805,230  

Indemnity receivable – Generation (1.3)

     1,685,958        546,624  

Concession Grant Fee – Generation concessions (1.4)

     2,321,817        2,253,765  
  

 

 

    

 

 

 
     6,728,536        5,304,007  
  

 

 

    

 

 

 

CVA (Compensation of Portion A items) Account and Other Financial Components in tariff adjustments (2)

     100,457        397,725  
  

 

 

    

 

 

 

Total

     6,828,993        5,701,732  
  

 

 

    

 

 

 

Current assets

     665,674        730,488  

Non-current assets

     6,163,319        4,971,244  

 

Financial liabilities of the concession

   Sep. 30, 2017      Dec. 31, 2016  

CVA (Compensation of Portion A items) Account and Other Financial Components in tariff adjustments (2)

     704,418        804,975  

Current liabilities

     704,418        481,835  

Non-current liabilities

     —          323,140  

1) Assets related to infrastructure

The electricity distribution and transmission contracts and the gas distribution contracts of the subsidies are within the criteria for application of Technical Interpretation ICPC 01 (IFRIC 12), which governs accounting of concessions. They refer to the investment made in infrastructure that will be the subject of indemnity by the Concession-granting power, during the period and at the end of the concessions, as specified in the regulations of the electricity sector and in the concession contracts signed by Cemig and its subsidiaries with the related concession-granting powers.

1) Transmission – Indemnity receivable

Aneel Normative Resolution 589, of December 10, 2013, set the criteria for calculation of the New Replacement Value (Valor Novo de Reposição, or VNR) of the transmission facilities, for the purposes of indemnity.

On August 16, 2016 Aneel, by its Dispatch 2181, homologated the amount of R$ 892,050, in currency of November 2012, for the portion of the reversible assets not yet amortized, for the purposes of indemnity to Cemig GT.

On April 22, 2016 the Mining and Energy Ministry (Ministério de Minas e Energia, or MME) published its Ministerial Order 120, setting the deadline and method of payment for the remaining amount of the indemnity.

The Order determined that the amounts homologated by Aneel should become part of the Regulatory Asset Base for Remuneration (Base de Remuneração Regulatória, or BRR) and that the cost of capital should be added to the related Permitted Annual Revenues (‘RAP’).

The portions of remuneration and depreciation not paid in the period from the extensions of the concessions up to the tariff-setting process of 2017 are to be updated by the IPCA inflation index and remunerated at the real cost of capital of the transmission segment of the industry as decided by Aneel in the methodologies for Periodic Tariff Reviews of Revenues for Existing Concession Holders, currently 10.44% per year, to be paid over eight years by reimbursement through the RAP. (More details in Note 25 (g).)

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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Indemnity for transmission assets – adjustment to Remuneration Base of the transmission assets – Aneel Technical Note 183/2017

In the tariff review processes of Cemig GT, ratified on June 23, 2009 (backdated to July 1, 2005) and June 8, 2010 (backdated to July 1, 2009), certain conducting cables, which have been the subject of an application by the subsidiary, were not included in the tariff calculation. Cemig GT applied for inclusion of these assets in the Remuneration Assets Base and, consequently, for backdated calculation of the amounts not considered in the prior tariff reviews.

Aneel ruled in favor of Cemig GT’s application, and calculated the differences between the amounts of revenue ratified in the above-mentioned tariff reviews and the new values calculated for inclusion of the said conducting cables for the period from July 2005 to December 2012. Updated, these amounts were calculated to total R$ 149,255, at June 2017 prices, to be received by Cemig GT over the next 12 months. On September 30, 2017 the balance receivable was R$ 111,941.

Indemnity for transmission assets – Injunction obtained by industrial consumers:

On April 10, 2017, an interim court remedy was granted to the Brazilian Large-scale Free Consumers Association (Associação Brasileira de Grandes Consumidores Livres), the Brazilian Auto Glass Industry Technical Association (Associação Técnica Brasileira das Indústrias Automáticas de Vidro) and the Brazilian Ferro-alloys and Silicon Metal Producers’ Association (Associação Brasileira dos Produtores de Ferroligas e de Silicio Metálico) in their legal action against Aneel and the federal government requesting suspension of the effects on their tariffs of payment of the indemnity for transmission assets payable to agents of the electricity sector who accepted the terms of Law 12783/2013.

The preventive remedy was partial, with effects related to suspension of the inclusion in the consumer tariffs paid by these associations of the portion of the indemnity corresponding to the remuneration on capital included since the date of extension of the concessions.

Cemig GT has the expectation of realization in full of the credits receivable in relation to the transmission indemnity, and has calculated the following amounts as indemnity:

 

     R$ ’000  

Regulatory Remuneration Base (BRR) – Dispatch 2181/2016

     1,177,488  

Amount of the indemnity received so far

     (285,438
  

 

 

 

Net value of the assets for purposes of indemnity

     892,050  
  

 

 

 

Updating in accordance with MME Order 120/16 – IPCA index / Cost of capital – Period Jan. 2013 to June 2017.

     1,033,780  

Adjustment of the BRR of Transmission Assets – Aneel Technical Note 183/2017

     149,255  

Monetary updating

     25,894  

Amounts received

     (125,204
  

 

 

 

Total at September 30, 2017

     1,975,775  
  

 

 

 

Normative Resolution 762, of February 21, 2017, set the procedures and criteria to be used in the calculation of the cost of capital to be added to the Permitted Annual Revenue of each transmission concession holder covered by Law 12783/2013, in harmony with Mining and Energy Ministry Order 120/2016. Under this legislation, Cemig GT began to receive this indemnity as from July, 2017.

1.2) Transmission – Assets remunerated by tariff

For new assets that consist of improvements and strengthening of facilities implemented by transmission concession holders, Aneel calculates an additional portion of Permitted Annual Revenue (RAP) in accordance with a methodology specified in the Proret Tariff Regulation Procedures.

Under the Proret procedure, the revenue established in the Resolutions is payable to the transmission companies as from the date of start of commercial operation of the facilities. In the periods between reviews, the revenues associated with the improvements and strengthening of facilities are provisional. They are then definitively decided in the review immediately subsequent to the start of commercial operation of the facilities; this review then has effect backdated to the date of start of commercial operation. On September 30, 2017 the balance by the subsidiary Cemig GT receivable was R$ 473,374.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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1.3) Generation – Indemnity receivable

Plants operated under the ‘Quotas’ regime as from January 1, 2016

In July 2015 termination dates for concession periods, under Concession Contract 007/97, of several of the plants operated by the subsidiary Cemig GT were reached. As from the termination of the concession, the subsidiary held the indemnity rights of the assets not yet depreciated/amortized, as specified in that concession contract. The accounting balances corresponding to these assets, including the Deemed Cost, were transferred from Fixed assets to Financial assets on the date of termination of the concession, and total R$ 616,876 on September 30, 2017 (R$ 546,624 on September 30, 2017).

 

Generating plant

   Concession
expiration date
     Installed
capacity
(MW)
     Net
balance
of assets
based on
historic
cost

R$ ’000
     Net
balance
of assets
based on
deemed
cost

R$ ’000
 

Lot D:

           

Três Marias Hydroelectric Plant

     July 2015        396        71,694        413,450  

Salto Grande Hydroelectric Plant

     July 2015        102        10,835        39,379  

Itutinga Hydroelectric Plant

     July 2015        52        3,671        6,589  

Camargos Hydroelectric Plant

     July 2015        46        7,818        23,095  

Piau Small Hydroelectric Plant

     July 2015        18.01        1,531        9,005  

Gafanhoto Small Hydroelectric Plant

     July 2015        14        1,232        10,262  

Peti Small Hydroelectric Plant

     July 2015        9.4        1,346        7,871  

Dona Rita Small Hydroelectric Plant

     Sep. 2013        2.41        534        534  

Tronqueiras Small Hydroelectric Plant

     July 2015        8.5        1,908        12,323  

Joasal Small Hydroelectric Plant

     July 2015        8.4        1,379        7,622  

Martins Small Hydroelectric Plant

     July 2015        7.7        2,132        4,041  

Cajuru Small Hydroelectric Plant

     July 2015        7.2        3,576        4,252  

Paciência Small Hydroelectric Plant

     July 2015        4.08        728        3,936  

Marmelos Small Hydroelectric Plant

     July 2015        4        616        4,265  

Other:

           

Volta Grande

     February 2017        380        25,621        70,252  
     

 

 

    

 

 

    

 

 

 
        1.060        134,621        616,876  
     

 

 

    

 

 

    

 

 

 

As specified in Aneel Normative Resolution 615/2014, the Valuation Opinions for the assets to be indemnified were delivered to Aneel in December 2015, including the Opinion for the Volta Grande Plant, which had a concession period expiring on February 23, 2017. The Company and its subsidiary do not expect any losses on the realization of this asset.

From the termination of the concession contract until January 4, 2016, the plants were operated by the Company under the regime of quotas, with remuneration by a tariff only to cover costs of operation and maintenance of the assets.

In November 2015 Cemig GT took place in Auction 12/2015, and won Lot D. As from January 5, 2016, with the signature of the new concession contracts, the assets began to be operated in accordance with the terms of that Auction.

As mentioned in Note 4, on September 27, 2017 the Volta Grande Hydroelectric Plant was auctioned by the federal government. The transfer of the operational assets of the plant may not take place later than 180 days from the date of signature of the new concession contracts.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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1.4) Concession grant fee – Generation concessions

In June 2016, title to Concession Contracts 08 to 16/2016, relating to 18 hydroelectric plants of Lot D of Aneel Auction 12/2015, won by Cemig GT, was transferred to the related specific-purpose companies (SPCs), wholly-owned subsidiaries of Cemig GT, as follows:

 

R$ ’000

  

Plant

   Balance at
Dec. 31,
2016
     Monetary
updating
     Amounts
received
     Balance at
Sep. 30,
2017
 

Cemig Geração Três Marias S.A.

   Três Marias      1,283,197        129,986        (92,612      1,320,571  

Cemig Geração Salto Grande S.A.

   Salto Grande      402,639        40,973        (29,207      414,405  

Cemig Geração Itutinga S.A.

   Itutinga      149,904        17,193        (12,418      154,679  

Cemig Geração Camargos S.A.

   Camargos      112,447        12,809        (9,244      116,012  

Cemig Geração Sul S.A.

  

Coronel Domiciano, Joasal,

Marmelos, Paciência, Piau

     146,553        17,884        (13,007      151,430  

Cemig Geração Leste S.A.

  

Dona Rita, Ervália, Neblina,

Peti, Sinceridade, Tronqueiras

     99,315        13,424        (9,876      102,863  

Cemig Geração Oeste S.A.

   Cajurú, Gafanhoto, Martins      59,710        8,151        (6,004      61,857  
     

 

 

    

 

 

    

 

 

    

 

 

 

Total

        2,253,765        240,420        (172,368      2,321,817  
     

 

 

    

 

 

    

 

 

    

 

 

 

Cemig’s offer for acquisition of grant of the 30-year concession for the 18 hydroelectric plants was R$ 2,216,353. Of this fee, 65% was paid on January 4, 2016, and the remaining 35% (initially R$ 775,724) was paid on July 1, 2016 (updated by the Selic rate to a total payment of R$ 827,921). The amount of the concession grant fee was recognized as a financial asset, due to Cemig GT having the unconditional right to receive the amount paid, plus updating by the IPCA Index and remuneratory interest, during the period of the concession.

In 2016, all of the output of the plants was sold in the Regulated Market under the Physical Guarantee Quotas system. Starting in 2017, the second phase of the contract came into effect: 70% of this output was sold in the Regulated Market and 30% in the Free Market.

The Miranda and São Simão plants

On August 3, 2017, the Mining and Energy Ministry published Ministerial Order 291, setting the amounts of indemnity for the São Simão and Miranda Hydroelectric Plants, the concessions of which had expiry dates in January 2015 and December 2016 respectively.

The Order specifies that the payment shall be made by December 31, 2018, after receipt by the federal government, from the auction concession winners, of the payment of the Concession Grant Fee, resulting from the competitive tender for the concessions. The amount of the indemnity will be updated by the IPCA index (Expanded Consumer Price) index, up to the date of the signature of the Concession Contract by the party that won the tender for the concession of the Plants, and also by the Selic Reference Rate for Federal securities, as from the date of signature of the Concession Contract up to the date of actual payment of the indemnity.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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The amounts of the Basic Plan of the plants were transferred to the account Indemnity receivable, and subjected to monetary updating, as follows:

 

Plant

   Concession
termination
date
     Net balance of
assets based
on Historic
Cost at
September 30,
2017
     Net value of
assets based
on Deemed
Cost at
September 30,
2017
     Net value of
the assets of
the Basic Plan
based on
Deemed
Cost at
September 30,
2017

(A)
     Adjustment
(1)

(B)
     Amounts
based on
MME
Order 291

(A)+(B)
     Monetary
updating

(C)
     Net balance
of the assets
of the Basic
Plan at Sep.
30, 2017

(A)+(B)+(C)
 

Miranda

     Dec. 2016        750,836        629,368        606,822        177,330        784,152        13,978        798,130  

São Simão

     Jan. 2015        61,959        205,987        202,744        40,855        243,599        27,353        270,952  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
        812,795        835,355        809,566        218,185        1,027,751        41,331        1,069,082  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Adjustment of the non-amortized balance of the concessions of the São Simão and Miranda plants, under MME Order 291/17, that plus the monetary updating of R$41,331 correspond to the total amount of R$259.516 .

Cemig GT Is holding talks with the Mining and Energy Ministry, on the criteria used for the decision on the amounts stated in Ministerial Order 291/17, and also the fact that this Order did not take into consideration the as yet non-amortized balance of the Jaguara Plant in the amount of R$ 169,822, and the balances of investments carried out to the São Simão and Miranda Plants after their coming into operation, in the amounts (before monetary updating) of R$ 3,243 and R$ 22,546, respectively.

The changes in Financial assets of the concession related to infrastructure are as follows:

 

R$’000

   Distribution     Transmission     Generation     Consolidated  

Balance on December 31, 2015

     135,983       1,501,441       546,424       2,183,848  

Additions

     —         36,405       534       36,939  

Addition of Grant Fee – Plants

     —         —         2,255,027       2,255,027  

Written off

     (291     —         —         (291

Amounts received

     —         (11,327     (105,642     (116,969

Transfer between Financial Assets, PP&E and Intangible

     57,650       (426     —         57,224  

Updating of the Concession Grant Fee

         96,911       6,638  

Adjustment of expectation of cash flow from the indemnifiable Financial assets of the concession

     6,638       —           96,911  

Monetary updating

       692,211       —         698,849  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2016

     199,980       2,218,304       2,793,254       5,211,538  
  

 

 

   

 

 

   

 

 

   

 

 

 
        

Balance at December 31, 2016

     216,107       2,287,511       2,800,389       5,304,007  

Additions

     —         160,481       —         160,481  

Write-offs

     (25     (3,232     —         (3,257

Items received

     —         (142,105     (172,368     (314,473

Transfer to Financial assets of concession – Indemnity on non-renewed plant – Volta Grande hydroelectric plant

     —         —         879,818       879,818  

Adjustment to indemnity – plants not renewed (M. Order 291) – including the monetary updating

         259,516       259,516  

Transfer between Financial, PPE and Intangible assets

     53,252       —         —         53,252  

Adjustment of expectation of cash flow from the indemnifiable Financial assets of the concession

     2,278           2,278  

Monetary updating

     —         146,494       240,420       386,914  

Balance at September 30, 2017

     271,612       2,449,149       4,007,775       6,728,536  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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2) CVA (Compensation of Portion A items) Account and Other Financial Components in tariff adjustments

The Amendment that extended the period of the concession of Cemig D guarantees that, in the event of extinction of the concession, for any reason, the remaining balances (assets and liabilities) of any shortfall in payment or reimbursement through the tariff must also be included by the Concession-granting power in the total of the indemnity.

The balances on (i) the CVA Account (Compensation for Variation of Portion A items), (ii) the account for Neutrality of Sector Charges, and (iii) Other financial components in the tariff calculation, refer to the positive and negative differences between the estimate of the Cemig D’s non-manageable costs and the payments actually made. The variations found are the subject of monetary updating based on the Selic rate and compensated in the subsequent tariff adjustments.

The balances of these financial assets and liabilities are shown below. Please note that in the interim accounting information the balances of each line are presented at net value in assets or liabilities in accordance with the tariff adjustments homologated or to be homologated:

 

STATEMENT OF FINANCIAL POSITION R$ ’000

   Sep. 30, 2017     Dec. 31, 2016  
   Amounts
ratified by
Aneel in the
last tariff
adjustment
    Amounts to
be ratified by
Aneel in
the next tariff
adjustments
    Total     Amounts
ratified by
Aneel in the
last tariff
adjustment
    Amounts to
be ratified by
Aneel in
the next tariff
adjustments
    Total  

Assets

     685,966       1,376,925       2,062,891       1,443,964       924,914       2,368,878  

Current assets

     685,966       466,625       1,152,591       1,443,964       547,241       1,991,205  

Non-current assets

       910,300       910,300       —         377,673       377,673  
            

Liabilities

     (1,339,692     (1,327,160     (2,666,852     (1,046,239     (1,729,889     (2,776,128

Current liabilities

     (1,339,692     (517,317     (1,857,009     (1,046,239     (1,029,076     (2,075,315

Non-current liabilities

       (809,843     (809,843       (700,813     (700,813
            
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current, net

     (653,726     (50,692     (704,418     397,725       (481,835     (84,110
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-current, net

       100,457       100,457       —         (323,140     (323,140
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total, net

     (653,726     49,765       (603,961     397,725       (804,975     (407,250
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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Financial components R$ ’000

   Sep. 30, 2017     Dec. 31, 2016  
   Amounts
ratified by
Aneel in
the last
tariff
adjustment
    Amounts to
be ratified
by Aneel in
the next
tariff
adjustments
    Total     Amounts
ratified by
Aneel in
the last
tariff
adjustment
    Amounts to
be ratified
by Aneel in
the next
tariff
adjustments
    Total  

Items of ‘Portion A’

            

Quota for the Energy Development Account (CDE)

     (245,409     (87,471     (332,880     202,801       (244,840     (42,039

Tariff for use of transmission facilities of grid participants

     13,963       (10,784     3,179       1,923       8,103       10,026  

Tariff for transport of electricity provided by Itaipu

     3,560       (3,070     490       5,254       3,926       9,180  

Program to encourage alternative electricity sources – Proinfa

     (8,178     —         (8,178     13,080       4,247       17,327  

System Service Charges (ESS) and Reserve Energy Charge (EER)

     (64,501     (438,468     (502,969     (54,989     (189,063     (244,052

Electricity bought for resale (1)

     (138,684     671,226       532,542       422,852       (78,922     343,930  

Other financial components

            

Overcontracting of supply

     13,372       (49,569     (36,197     (104,671     (55,834     (160,505

Neutrality of Portion A

     (48,929     70,089       21,160       78,254       (76,367     1,887  

Other financial items

     (178,920     —         (178,920     (166,779     (162,614     (329,393

‘Flag Tariff’ items (2)

       (80,986     (80,986     —         (13,611     (13,611

Excess demand /reactive power (3)

     —         (21,202     (21,202     —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL

     (653,726     49,765       (603,961     397,725       (804,975     (407,250
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Due to unfavorable hydrological conditions since July 2017, there has been less hydroelectric generation and more dispatching of thermal plants, increasing the spot price (PLD), and affecting the level of reduction of the physical power offtake guarantee of the hydroelectric plants. For the distributors, this results in higher costs of CCEAR contracts, with thermal plants, and higher hydrological risk costs for the Itaipu plant, for those that trade power supply under Physical Guarantee Quotas, and for those that sold CCEARs and renegotiated the Hydrological Risk. In view of these factors, the difference from the cost taken into account in setting the tariff if greater, resulting in an increase in the deferred asset related to purchase of power supply on September 30,2017.
(2) Billing arising from the Flag Tariff System in Cemig D not yet homologated by Aneel.
(3) In accordance with PRORET 2.1A, from this point onward amounts of excess of demand and excess of reactive power were appropriated to sector financial liabilities, and will be amortized only at the time of homologation of the 5th periodic tariff review cycle of Cemig D.

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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Movement in balances of financial assets and liabilities:

 

     R$ ’000  

Balance on December 31, 2015

     1,349,656  

(–) Net constitution of financial assets

     (572,483

(–) Realized

     (364,570

(–) Payments from the Tariff Flag Funds Centralizing Account

     (341,259

(–) Transfer (1)

     (164,957

(+) Updating – Selic rate (2)

     206,967  
  

 

 

 

Net liabilities on September 30, 2016

     113,354  
  

 

 

 

Balance at December 31, 2016

     (407,250

(+) Net constitution of financial assets

     222,233  

(–) Realized

     (74,017

(–) Payments from the Flag Tariff Centralizing Account

     (304,841

(+) Updating – Selic rate

     (40,086
  

 

 

 

Net liabilities on September 30, 2014

     (603,961
  

 

 

 

 

(1) The financial component constituted to be passed through to the tariff at the next tariff adjustment, arising from judgments (injunctions/provisional remedy) in court actions challenging part of the amount of the CDE (Energy Development Account) charge, was reclassified to Other credits, and will be amortized with counterpart in deductions from the monthly CDE charges to be paid to Eletrobras, in accordance with a Dispatch issued by Aneel in 2016.
(2) Includes adjustment for homologation of the CVA by Aneel which took place in May 2016.

Payments from the Flag Tariff Funds Centralizing Account

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 have been paid, on behalf of the CDE, directly to the Flag Account. The resulting funds are passed through by the Wholesale Trading Chamber (CCEE) to distribution agents, based on the differences between (i) realized costs of thermal generation and exposure to short-term market prices, and (ii) the amounts covered by the tariff.

In 9M17 funds passed through by the Flag Account totaled R$ 304,841 (R$ 341,259 in 9M16), and were recognized as a partial realization of CVA receivables constituted.

The amount referred to above includes the receipt of the ‘Flag’ tariff amounts for December 2016, totalling R$ 2,406, which was posted in sector Financial liabilities only in January 2017 when approved by Aneel. The remaining balance of R$ 302,435 refers to the periods of January through August 2017.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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15. INVESTMENTS

This table shows the investments in affiliates, subsidiaries and jointly-controlled subsidiaries.

 

Investments

   Control    Consolidated     Holding company  
      Sep. 30,
2017
     Dec. 31,
2016
    Sep. 30,
2017
     Dec. 31,
2016
 

Cemig Geração e Transmissão

   Subsidiarie      —          —         5,161,385        4,583,195  

Hidrelétrica Cachoeirão

   Jointly-controlled      56,720        50,411       —          —    

Guanhães Energia

   Jointly-controlled      25,172        —         —          —    

Hidrelétrica Pipoca

   Jointly-controlled      33,753        31,809       —          —    

Retiro Baixo

   Jointly-controlled      159,126        161,848       —          —    

Aliança Norte (Belo Monte Plant)

   Jointly-controlled      567,829        527,498       —          —    

Madeira Energia (Santo Antônio Plant)

   affiliate      559,337        643,890       —          —    

FIP Melbourne (Santo Antônio Plant)

   affiliate      603,973        677,182       —          —    

Lightger

   Jointly-controlled      41,254        41,543       —          —    

Baguari Energia

   Jointly-controlled      145,719        162,106       —          —    

Renova

   Jointly-controlled      622,725        688,625       —          —    

Aliança Geração

   Jointly-controlled      1,307,456        1,319,055       —          —    

Central Eólica Praias de Parajuru

   Jointly-controlled      61,608        63,307       —          —    

Central Eólica Volta do Rio

   Jointly-controlled      75,789        81,228       —          —    

Central Eólica Praias de Morgado

   Jointly-controlled      55,595        59,586       —          —    

Amazônia Energia (Belo Monte Plant)

   Jointly-controlled      850,743        781,022       —          —    

Usina Hidrelétrica Itaocara S.A.

   Jointly-controlled      2,733        2,782       —          —    

Cemig Distribuição

   Subsidiarie      —          —         1,961,175        2,499,867  

Light

   Jointly-controlled      1,068,712        1,070,477       1,068,712        1,070,477  

Taesa

   Jointly-controlled      1,576,156        1,582,633       1,576,156        1,582,633  

CemigTelecom

   Subsidiarie      —          —         190,823        191,515  

Ativas Data Center

   affiliate      17,794        17,741       —          —    

Gasmig

   Subsidiarie      —          —         1,410,047        1,419,492  

Rosal Energia

   Subsidiarie      —          —         102,163        141,038  

Sá Carvalho

   Subsidiarie      —          —         106,840        106,111  

Horizontes Energia

   Subsidiarie      —          —         55,714        52,396  

Usina Térmica Ipatinga

   Subsidiarie      —          —         3,928        4,009  

Cemig PCH

   Subsidiarie      —          —         95,708        91,969  

Lepsa

   Jointly-controlled      342,033        343,802       342,033        343,802  

RME

   Jointly-controlled      338,249        340,063       338,249        340,063  

Companhia Transleste de Transmissão

   Jointly-controlled      24,394        21,588       24,394        21,588  

UTE Barreiro

   Subsidiarie      —          —         37,790        39,266  

Companhia Transudeste de Transmissão

   Jointly-controlled      23,600        20,505       23,600        20,505  

Empresa de Comercialização de Energia Elétrica

   Jointly-controlled      —          —         9,386        20,154  

Companhia Transirapé de Transmissão

   Jointly-controlled      27,567        23,952       27,567        23,952  

Efficientia

   Subsidiarie      —          —         7,001        4,868  

Cemig Comercializadora de Energia Incentivada

   Subsidiarie      —          —         2,342        1,867  

Companhia de Transmissão Centroeste de Minas

   Jointly-controlled      19,355        21,171       19,355        21,171  

Cemig Trading

   Subsidiarie      —          —         14,953        28,635  

Axxiom Soluções Tecnológicas

   Jointly-controlled      12,734        19,264       12,734        19,264  

Cemig Overseas (*)

   Subsidiarie      —          —         141        20  
     

 

 

    

 

 

   

 

 

    

 

 

 

Total of investments

        8,620,126        8,753,088       12,605,561        12,627,857  
     

 

 

    

 

 

   

 

 

    

 

 

 

Guanhães – Uncovered liabilities of jointly-controlled entity

   Jointly-controlled      —          (59,071     —          —    
     

 

 

    

 

 

   

 

 

    

 

 

 

Total

        8,620,126        8,694,017       12,605,561        12,627,857  
     

 

 

    

 

 

   

 

 

    

 

 

 

 

(*) Cemig Overseas: company formed in Spain for assessment of investment opportunities outside Brazil. As of September 30, 2017, it has no operations.

The Company’s investees that are not consolidated are jointly-controlled entities, with the exception of the interest in the Santo Antônio power plant, and Ativas Data Center, which are affiliated companies in which the Company has significant influence: the subsidiaries Cemig GT and Cemig Telecom, respectively. It was as from the fourth quarter of 2016 that Ativas Data Center became an investee in which Cemig has significant influence.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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a) Right to commercial operation of the regulated activity

In the process of allocation of the acquisition price of the jointly-controlled subsidiaries, a valuation was made of the intangible assets relating to the right to operate the regulated activity. This asset is presented jointly with the historic value of the investments in the table above. These assets will be amortized over the remaining period of the concessions on the straight-line basis.

 

Holding company R$ ’000

   Dec. 31,
2015
     Amortization     Sep. 30,
2016
     Dec. 31,
2016
     Amortization     Sep. 30,
2017
 

Renova (1)

     805,458        (32,076     773,382        —          —         —    

Retiro Baixo

     30,706        (888     29,818        29,525        (888     28,637  

Central Eólica Praias de Parajuru

     20,868        (1,146     19,722        19,341        (1,146     18,195  

Central Eólica Volta do Rio

     14,818        (756     14,062        13,807        (756     13,051  

Central Eólica Praias de Morgado

     29,461        (1,542     27,919        27,406        (1,542     25,864  

Madeira Energia (Santo Antônio Plant)

     163,296        (4,467     158,829        157,340        (4,467     152,873  

Aliança Norte (Belo Monte Plant)

     58,489        (1,479     57,010        56,518        (1,479     55,039  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total, Cemig GT

     1,123,096        (42,354     1,080,742        303,937        (10,278     293,659  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Taesa

     414,774        (13,982     400,792        288,146        (10,170     277,976  

Light

     231,163        (16,772     214,391        208,800        (16,772     192,028  

Gasmig

     215,410        (5,934     209,476        207,498        (5,934     201,564  

Lepsa

     —          —         —          48,429        (3,798     44,631  

RME

     —          —         —          48,429        (3,798     44,631  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

OVERALL TOTAL

     1,984,443        (79,042     1,905,401        1,105,239        (50,750     1,054,489  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) At December 31, 2016 there was a downward adjustment of Intangible assets of the concession as a result of the financial difficulties of Renova.

 

Consolidated R$ ’000

   Dec. 31,
2015
     Amortization     Sep. 30,
2016
     Dec. 31,
2016
     Amortization     Sep. 30,
2017
 

Taesa

     414,774        (13,982     400,792        288,146        (10,170     277,976  

Light

     231,163        (16,772     214,391        208,800        (16,772     192,028  

Gasmig

     215,410        (5,934     209,476        207,498        (5,934     201,564  

Lepsa

     —          —         —          48,429        (3,798     44,631  

RME

     —          —         —          48,429        (3,798     44,631  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL

     861,347        (36,688     824,659        801,302        (40,472     760,830  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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b) This table shows changes in investments in subsidiaries and jointly-controlled subsidiaries:

 

Holding company R$ ’000

   Dec. 31, 2016      Equity
method
gain
(Profit
and loss
account)
    Equity method
gain (Other
comprehensive
income)
    Dividends     Injections
/ AFAC
     Other     Sep. 30, 2017  

Cemig Geração e Transmissão

     4,583,195        525,407       (33,852     —         100,000        —         5,174,750  

Cemig Distribuição

     2,499,867        (538,692     —         —         —          —         1,961,175  

CemigTelecom

     191,515        (12     (680     —         —          —         190,823  

Rosal Energia

     141,038        (7,907     —         (30,968     —          —         102,163  

Sá Carvalho

     106,111        19,360       —         (18,631     —          —         106,840  

Gasmig

     1,419,492        88,634       —         (98,079     —          —         1,410,047  

Horizontes Energia

     52,396        11,136       —         (7,818     —          —         55,714  

Usina Térmica Ipatinga

     4,009        254       —         (335     —          —         3,928  

Cemig PCH

     91,969        13,804       —         (10,065     —          —         95,708  

Lepsa

     343,802        234       (1,876     —         —          (127     342,033  

RME

     340,063        128       (1,815     —         —          (127     338,249  

Companhia Transleste de Transmissão

     21,588        4,071       —         (1,265     —          —         24,394  

UTE Barreiro

     39,266        (2,400     —         924       —          —         37,790  

Companhia Transudeste de Transmissão

     20,505        3,095       —         —         —          —         23,600  

Empresa de Comercialização de Energia Elétrica

     20,154        26,679       —         (37,447     —          —         9,386  

Companhia Transirapé de Transmissão

     23,952        3,615       —         —         —          —         27,567  

Efficientia

     4,868        3,304       —         (1,171     —          —         7,001  

Cemig Comercializadora de Energia Incentivada

     1,867        559       —         (84     —          —         2,342  

Companhia de Transmissão Centroeste de Minas

     21,171        3,828       —         (5,644     —          —         19,355  

Light

     1,070,477        3,677       (5,442     —         —          —         1,068,712  

Cemig Trading

     28,635        41,873       —         (55,555     —          —         14,953  

Axxiom Soluções Tecnológicas

     19,264        (6,530     —         —         —          —         12,734  

Taesa

     1,582,633        126,862       —         (133,339     —          —         1,576,156  

Cemig Overseas

     20        —         —         —         121        —         141  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     12,627,857        320,979       (43,665     (399,477     100,121        (254     12,605,561  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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Consolidated R$ ’000

   Dec. 31,
2016
    Equity
method
gain
(Profit
and loss
account)
    Equity method
gain (Other
comprehensive
income)
    Dividends     Injections /
acquisitions
     Other     Sep. 30,
2017
 

Companhia Transleste de Transmissão

     21,588       4,071       —         (1,265     —          —         24,394  

Companhia Transudeste de Transmissão

     20,505       3,095       —         —         —          —         23,600  

Companhia Transirapé de Transmissão

     23,952       3,615       —         —         —          —         27,567  

Companhia de Transmissão Centroeste de Minas

     21,171       3,828       —         (5,644     —          —         19,355  

Light

     1,070,477       3,677       (5,442     —         —          —         1,068,712  

Axxiom Soluções Tecnológicas

     19,264       (6,530     —         —         —          —         12,734  

Lepsa

     343,802       234       (1,876     —         —          (127     342,033  

RME

     340,063       128       (1,815     —         —          (127     338,249  

Hidrelétrica Cachoeirão

     50,411       8,950       —         (2,641     —          —         56,720  

Guanhães Energia (1)

     —         (2,037     —         —         86,280        (59,071     25,172  

Hidrelétrica Pipoca

     31,809       3,228       —         (1,284     —          —         33,753  

Madeira Energia (Santo Antônio Plant)

     643,890       (84,553     —         —         —          —         559,337  

FIP Melbourne (Santo Antônio Plant)

     677,182       (73,209     —         —         —          —         603,973  

Lightger

     41,543       2,280       —         (2,569     —          —         41,254  

Baguari Energia

     162,106       13,887       —         (30,274     —          —         145,719  

Central Eólica Praias de Parajuru

     63,307       (1,293     —         (406     —          —         61,608  

Central Eólica Volta do Rio

     81,228       (5,439     —         —         —          —         75,789  

Central Eólica Praias de Morgado

     59,586       (3,991     —         —         —          —         55,595  

Amazônia Energia (Belo Monte Plant)

     781,022       (6,965     —         —         76,686        —         850,743  

Ativas Data Center

     17,741       (1,950     —         —         —          2,003       17,794  

Taesa

     1,582,633       126,862       —         (133,339     —          —         1,576,156  

Renova

     688,625       (50,048     (33,852     —         18,000        —         622,725  

Usina Hidrelétrica Itaocara S.A.

     2,782       (581     —         —         532        —         2,733  

Aliança Geração

     1,319,055       39,977       —         (51,576     —          —         1,307,456  

Aliança Norte (Belo Monte Plant)

     527,498       (6,376     —         —         46,707        —         567,829  

Retiro Baixo

     161,848       8,460       —         (11,182     —          —         159,126  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total of investments

     8,753,088       (20,680 )      (42,985 )      (240,180 )      228,205        (57,322 )      8,620,126  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Guanhães – Uncovered liabilities of jointly-controlled entity (1)

     (59,071     —         —         —         —          59,071       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

     8,694,017       (20,680     (42,985     (240,180     228,205        1,749       8,620,126  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Transfer of uncovered liabilities;

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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c) This table gives the principal information on the subsidiaries and jointly-controlled subsidiaries, not adjusted for the percentage represented by the Company’s ownership interest:

 

Company R$ ’000

   Number of
shares
     Sep. 30, 2017      Dec. 31, 2016  
      Cemig
interest
%
     Share
capital
     Stockholders’
equity
     Cemig
interest
%
     Share
capital
     Stockholders’
equity
 

Cemig Geração e Transmissão

     2,896,785,358        100.00        1,837,710        5,161,385        100.00        1,837,710        4,583,195  

Hidrelétrica Cachoeirão

     35,000,000        49.00        35,000        115,755        49.00        35,000        102,880  

Guanhães Energia

     330,536,000        49.00        330,536        51,371        49.00        185,647        —    

Hidrelétrica Pipoca

     41,360,000        49.00        41,360        68,884        49.00        41,360        64,916  

Retiro Baixo

     222,850,000        49.90        222,850        261,501        49.90        222,850        263,680  

Aliança Norte (Belo Monte Plant)

     38,261,538,617        49.00        1,109,355        1,046,510        49.00        1,014,111        1,076,527  

Madeira Energia (Santo Antônio Plant)

     9,730,201,137        18.13        9,546,672        5,573,287        18.13        10,151,952        6,418,617  

Lightger

     79,078,937        49.00        79,232        84,192        49.00        79,232        84,781  

Baguari Energia S.A. (1)

     26,157,300,278        69.39        186,573        210,000        69.39        186,573        247,662  

Renova

     417,197,244        36.23        2,960,776        1,718,810        34.15        2,856,255        1,955,598  

Aliança Geração

     1,291,582,500        45.00        1,291,488        2,905,457        45.00        1,291,488        1,972,519  

Central Eólica Praias de Parajuru

     70,560,000        49.00        70,560        88,598        49.00        70,560        88,897  

Central Eólica Volta do Rio

     117,230,000        49.00        117,230        128,037        49.00        117,230        136,886  

Central Eólica Praias de Morgado

     52,960,000        49.00        52,960        60,676        49.00        52,960        65,128  

Amazônia Energia (Belo Monte Plant) (1)

     1,176,194,023        74.50        1,218,672        1,141,937        74.50        1,115,739        1,048,351  

Usina Hidrelétrica Itaocara S.A.

     5,677,000        49.00        6,762        5,578        49.00        5,677        5,677  

Cemig Distribuição

     2,359,113,452        100.00        2,771,998        1,961,175        100.00        2,361,998        2,499,867  

Light

     203,934,060        26.06        2,225,822        3,364,098        26.06        2,225,822        3,353,796  

CemigTelecom

     397,683,385        100.00        241,742        190,823        100.00        241,742        191,515  

Rosal Energia

     46,944,467        100.00        46,944        102,163        100.00        46,944        141,038  

Sá Carvalho

     361,200,000        100.00        36,833        106,840        100.00        36,833        106,111  

Gasmig

     409,255,483        99.57        665,429        1,213,702        99.57        665,429        1,425,622  

Horizontes Energia

     39,257,563        100.00        39,258        55,714        100.00        39,258        52,396  

Usina Térmica Ipatinga

     174,281        100.00        174        3,928        100.00        174        4,009  

Cemig PCH

     35,952,000        100.00        35,952        95,708        100.00        35,952        91,969  

Lepsa

     1,379,839,905        66.62        437,638        446,415        66.62        437,638        443,370  

RME

     1,365,421,406        66.27        433,770        443,063        66.27        433,770        440,069  

Companhia Transleste de Transmissão

     49,569,000        25.00        49,569        97,576        25.00        49,569        81,293  

UTE Barreiro

     30,902,000        100.00        30,902        37,790        100.00        30,902        39,266  

Companhia Transudeste de Transmissão

     30,000,000        24.00        30,000        98,333        24.00        30,000        85,438  

Empresa de Comercialização de Energia Elétrica

     486,000        100.00        486        9,386        100.00        486        20,154  

Companhia Transirapé de Transmissão

     22,340,490        24.50        22,340        112,518        24.50        22,340        97,763  

Efficientia

     6,051,994        100.00        6,052        7,001        100.00        6,052        4,868  

Cemig Comercializadora de Energia Incentivada

     1,000,000        100.00        1,000        2,342        100.00        1,000        1,867  

Companhia de Transmissão Centroeste de Minas

     28,000,000        51.00        28,000        37,951        51.00        28,000        41,512  

Cemig Trading

     1,000,000        100.00        1,000        14,953        100.00        1,000        28,635  

Axxiom Soluções Tecnológicas

     17,200,000        49.00        46,600        25,988        49.00        46,600        39,314  

Taesa

     1,033,496,721        31.54        3,042,034        4,115,980        31.54        3,042,034        4,307,588  

 

(1) Control shared under a Stockholders’ Agreement.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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On September 30, 2017, the current liabilities of some jointly-controlled entries were higher than their current assets, as follows:

Light: On September 30, 2017, Light had consolidated negative net working capital of R$ 1,960,665 (R$ 1,258,928 on December 31, 2016). Light has been negotiating renewal of its short-term loans and financings, and is engaged in lengthening its debt profile. It also expects greater operational cash flow as from the periodic tariff review, which took place on March 15, 2017 and resulted in an average increase in consumer electricity bills of 10.45%. The management of Light believes that success in these phases will reverse the present situation of negative net working capital; and that there is no material uncertainty such as might put operational continuity in doubt.

Madeira Energia (‘Mesa’): The excess of current liabilities over current assets, equal to R$ 2,164,237, arises mainly from the account lines Suppliers, Other liabilities, Loans and financings, and Contingency provisions. To deal with the situation of negative working capital, Mesa has the benefit of a favorable decision by Aneel to revert, in liabilities, the FID (Availability Factor) account, and release of funds from the debt servicing reserve account which will be replaced by a bank guarantee, with generation of operational cash flow and normalization of funds subscribed by certain stockholders under a decision by the EGM – and which are, thus, not demandable immediately.

Renova Energia: In the nine-month period ended September 30, 2017, Renova Energia reported accumulated losses of R$ 1,255,587, and current liabilities R$ 1,273,273in excess of current assets (consolidated), and has a need to obtain capital to comply with the construction commitments of wind and solar generating plants. The main reasons for this situation are: a) significant investments that are being allocated in construction of the wind farms of the Alto Sertão III complex; and b) delay in release of the long-term financing with the Brazilian Development Bank (BNDES).

In response to this scenario, the management of Renova is taking a range of measures to rebalance its liquidity structure and cash flow. Renova’s actions and plan are as follows:

 

  (1) On August 3, 2017, with completion of the sale of the Alto Sertão II wind farm complexes to AES Tietê Energia, Renova settled the balance of the debentures and transferred the balance of the debt of those complexes (R$ 1,115,750, at June 30, 2017), reducing its indebtedness by R$ 1,480,684.

 

  (2) Renova is in negotiations with the BNDES for signature of a long-term financing contract for approximately R$ 900,000, which will replace the existing bridge loan – reported in Current liabilities up to September 30, 2017 – of R$ 860,149 (principal plus interest). The remainder will be used for works related to the Alto Sertão III complex – Phase A. As soon as the long-term financing is contracted, part of current liabilities will be reclassified to non-current. So far a total of R$ 2.1 billion has been invested in Phase A of Alto Sertão III – corresponding to 87% (information not reviewed by external auditors) of physical completion, without there having been any release of a long-term financing from the BNDES.

 

  (3) The stockholders continue to be engaged in providing financial support, to enable Renova to achieve rebalancing of liquidity. In 2017 they provided cash injections of R$ 62,764.

 

  (4) Optimization of the portfolio of contracts – with permanent cancellation of projects totaling 210 MW average.

 

  (5) Possible routes for feasibility of new funding include: optimization of the portfolio; sale of projects and/or operational assets; and entry of new stockholders.

The Management of Renova Energia believes that with the success of these measures it will be possible to recover the Company’s equilibrium in economic and financial terms and in terms of liquidity.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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Investment in the Santo Antônio Hydroelectric Plant, through Madeira Energia S.A. (Mesa) and FIP Melbourne

The Company has direct and indirect investments in Madeira Energia S.A. (which holds an investment in Santo Antônio Energia S.A.), of R$ 1,163,310 at September 30, 2017 (R$ 1,321,072 at December 31, 2016).

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 asset constituted by these expenditures totaled R$ 21,850,585 (Mesa, consolidated) on September 30, 2017, and this amount, in accordance with financial projections prepared by its management, is to be absorbed by future revenues generated as from January 2017, when the plant began operating with all its generator rotors.

Investigations and other legal measures are in progress, conducted by the Federal Public Attorneys’ Office, which involve other indirect shareholders of Madeira Energia S.A. and certain executives of those other indirect shareholders.

Arbitration proceedings

In 2014, SAAG Investimentos S.A. (SAAG) and Cemig GT opened arbitration proceedings, in camera (in confidentiality), in the Market Arbitration Chamber, challenging the following: (a) the increase approved in the capital of Mesa of approximately R$ 750,000 partially destined to payment of the claims by the Santo Antonio Construction Consortium (‘CCSA’), based on absence of quantification of the amounts supposedly owed, and absence of prior approval by the Board of Directors, as required by the bylaws and Stockholders’ Agreement of Mesa; and also on the existence of credits owed to Mesa by CCSA, able to be offset, in an amount greater than the claims; and (b) the adjustment for impairment carried out by the Executive Board of Mesa, in the amount of R$ 750 million, relating to certain credits owed to Mesa by CCSA, on the grounds that those credits are owed in their totality by express provision of contract.

In 2016 the arbitration judgment by the Market Arbitration Chamber recognized the right of Cemig GT and SAAG in full, and ordered annulment of the acts being impugned. As a consequence of this decision, Mesa reversed the impairment, and posted a provision for receivables in the amount of R$ 678.551 in its Interim Accounting Information at September 30, 2017.

To resolve the question of the liability of the CCSA consortium to reimburse the costs of re-establishment of the collateral and use of the contractual limiting factor, the Subsidiary applied to open arbitration proceedings with the International Chamber of Commerce (ICC) against CCSA, which are in progress. Under the Arbitration Regulations of the ICC, this procedure is taking place in camera (in secret).

Investment in the Belo Monte Plant through Amazônia Energia S.A. and Aliança Norte

Amazônia Energia 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, and manages that interest.

Through the jointly-controlled entities referred to above, Cemig GT owns an indirect equity interest in Nesa of 11.74%.

Nesa will still require significant funds for costs of organization, development and pre-operational costs for completion of the plant. According to estimates and forecasts these costs will be repaid by the revenues from future operations.

On April 7, 2015, Nesa was awarded interim judgment ordering Aneel to abstain, until hearing of the application for an injunction made in the origin case, from applying to Appellant any penalties or sanctions in relation to the Belo Monte Hydroelectric Plant not coming into operation on the date established in the original timetable for the project, including those specified in Aneel Normative Resolution 595/2013 and in the Concession Contract 01/2010-MME, of the Belo Monte Hydroelectric Plant. The legal advisers of Nesa have classified the probability of loss as ‘possible’, and the value of the estimated loss in Belo Monte up to September 30, 2017 is R$ 250,316.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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Investigations and other legal measures are in progress, conducted by the Federal Public Attorneys’ Office, which involve other shareholders of Norte Energia S.A. and certain executives of those other shareholders.

The effects of any alterations to the existing scenario will be reflected in the Company’s accounting statements.

Investment in Renova

Investment in TerraForm Global

The indirectly jointly-controlled entity Renova had investments in class A (GLBL) shares in TerraForm (‘the TERG Shares”‘, which were designated as financial assets available for sale, reported at fair value, based on the market trading price on the NASDAQ exchange. Gains and losses arising from variations in the share price were reported directly into Stockholders’ equity under Other comprehensive income.

In 9M17 there was a positive adjustment of R$ 73,224 (the effect on Cemig was R$ 26,470), recognized in Other comprehensive income in Renova Energia. In 9M16, the investee posted a loss of R$ 271,509 (the impact on Cemig GT was R$ 74,258), reflecting the negative volatility in the stock price of TerraForm in the period, based on the market price of the shares.

On May 15, 2017 Renova and Brookfield Asset Management (‘Brookfield’), through its vehicle Orion US Holding 1 L.P., signed a share purchase agreement for the shares that the investee held in TerraForm Global Inc. On May 26, 2017, Renova published a material announcement reporting sale of its shares in TerraForm to Brookfield. The total price of the acquisition was R$ 305,766 for completion on July 3, 2017, after compliance with certain conditions precedent.

In June, 2017, Renova entered into an agreement with TerraForm Global (SUNEDISON) in which the parties agree to terminate the arbitration proceedings by compensating Renova for R$ 48,559, which was paid together with the financial settlement of the sale of Terraform shares.

Adjustment for impairment

For the period of 9M17, Renova posted an impairment to its PP&E assets, which resulted in a loss of R$ 119,681 (impact on Cemig: R$ 52,276) for Phase A of the Alto Sertão III wind farms complex. This was posted in the Profit and loss account for the period.

Grant of exclusivity

At its meeting of its Board of Directors on July 17, 2017, Cemig GT oriented vote by its representatives in the meeting of the Board of Directors of the investee Renova Energia S.A. (‘Renova’), also held on July 17, 2017, in favor of approval of grant of exclusivity to Brookfield Energia Renovável S.A., including realization of due diligence and negotiation of final documents for a primary subscription in Renova and the sale of the interest held by Light Energia in Renova, as proposed in a non-binding offer. The period of exclusivity of 60 days from July 17, 2017, subsequently extended for 30 days, ended on October 17, 2017. This does not alter the stage of negotiation with Brookfield for the transaction referred to.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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Sale of assets – Umburanas wind complex

On August 23, 2017 Renova signed a Contract for Assignment of Rights and Obligations of the Umburanas Wind Power Complex, with total installed capacity of 605 MW, with Engie Brasil S.A. (‘Engie’). The base price of the transaction was R$ 15,000, subject to adjustments if certain conditions precedent of the transaction are satisfied.

On October 24, 2017, the 40th Public Meeting of the Council of Aneel (the electricity regulator) approved the transfer of the Umburanas Wind Complex to Engie.

However, since the negotiation involved an application for cancellation of four concession grants in this Complex, it was decided: (i) to apply a penalty fine of R$ 3.8 million to Renova; and (ii) to suspend Renova’s right to contract with or participate in tenders/competitive bids held by Aneel for a period of one year. The decision does not affect the controlling stockholders of Renova.

Put options

The Company has granted certain put options for which it calculates the fair value of the option based on the Black and Scholes Merton (BSM) model, in which the following variables are taken into account: exercise price of the option; closing price of the underlying asset on September 30, 2017; the risk-free interest rate; the volatility of the price of the underlying asset; and the time to maturity of the option.

Analytically, calculation of the exercise price of the options, the risk-free interest rate and the time to maturity is primarily deterministic, so that the main divergence in the put options takes place in the measurement of the closing price and the volatility of the underlying asset.

At September 30, 2017 the Company was party to the following options:

 

Consolidated

   Balance on
Sep. 30, 2017
    Balance on
Dec. 31, 2016
 

Put option—RME and LEPSA

     1,242,818       1,149,881  

SAAG put option

     264,138       196,173  

Put / Call option – Ativas and Sonda

     (4,483     (4,586
  

 

 

   

 

 

 
     1,502,473       1,341,468  
  

 

 

   

 

 

 

Put options in shares of RME and Lepsa

Cemig granted a put option, to Fundo de Participações Redentor (‘Redentor’), a stockholder of both Luce Empreeendimentos e Participações S.A. (Lepsa) and RME (Rio Minas Energia Participações S.A.), giving Redentor the right to sell to Cemig all of Redentor’s shares in Parati (which following a reorganization are now shares in RME and Lepsa), exercisable in May 2016. The exercise price of the option is calculated from the sum of the value of the amounts injected by the Fund into Parati, plus the running 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 remuneration at 0.9% per year.

RME and Lepsa own common and preferred shares in Light, and at present exercise joint control, with the Company, over the activities for that company. This being so, this option has been considered to be a derivative instrument, accounted at fair value through profit or loss.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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In the second quarter of 2016 Amendments were signed to the shareholders’’ Agreement of Parati. The principal changes arising from these amendments are as follows:

 

  1) The maturity of the Put Option granted in 2011 by Cemig in favor of the unit holders of FIP Redentor, initially specified to be May 31, 2016, was postponed, to two separate exercise dates:

 

  a) First option exercise window: The intention to exercise may be stated by any direct shareholder/s who decide to do so, independently of the exercise of the Put Option by the other direct shareholders, up to September 23, 2016, inclusive, and shall cover only preferred shares in Parati, up to a limit of 153,634,195 shares, representing 14.30% of the total shares in Parati held by the other direct shareholders.

On September 6, 2016 Cemig received from Banco BTG Pactual (‘BTG Pactual’) Notice of Intention to Exercise a Put Option, informing irrevocable exercise of BTG Pactual’s right to sell to Cemig 153,634,195 preferred shares representing its stockholding in Parati (‘Shares subject of the Put Option’).

In October 2016, due to the extinction of Parati, the Put Option was divided between RME and Lepsa in the proportion of 50% each, with all the conditions of the original Put Option being maintained, except the items modified in the amendments, including alteration to their bylaws.

On November 30, 2016, Cemig paid R$ 221.8 million for the portion of BTG Pactual in RME and Lepsa, under exercise of the first ‘window’ of the put.

 

  b) Second payment window: The intention to exercise may be stated by any direct shareholder/s who decide to do so, independently of the exercise of the Put Option by the other direct shareholders, up to September 23, 2017, inclusive, and may cover the totality of the shares in Parati, being independent of any exercise, or not, of the Put Option in the first payment window. Cemig must make payment by November 30, 2017.

On September 15, 2017 Cemig received Notices of Intention to Exercise Put Options, under the ‘Second Exercise Window’, from

 

  BB–Banco de Investimento S.A. (‘BB-BI’),

 

  BV Financeira S.A. – Crédito, Financiamento e Investimento (‘BV Financeira’), and

 

  Banco Santander (Brasil) S.A. (‘Santander’)

(jointly, ‘the Stockholder Banks’), giving notice of irrevocable decision to exercise their right to sell to Cemig the totality of their holdings of common and preferred shares (‘the Shares Subject of the Put Option’), comprising the totality of their equity interests, in RME and Lepsa.

 

  2) The Put Option may now be exercised not only by FIP Redentor, but also by the direct shareholders of Parati, including but not limited to the unit holders of FIP Redentor, and/or their affiliates, who shall become holders of a Put Option and/or of the rights arising therefrom, under which each one of the direct shareholders shall individually have the right to sell any shares in Parati that they own.

 

  3) Conditions were included for bringing forward the date of exercise of the put option: in the event of any occurrence resulting in bringing forward of the option referred to, any direct shareholder may present to Cemig a notice of bringing forward of the option, at which moment the option shall be considered exercised by all the direct shareholders, over the totality of their shares.

 

  4) As guarantee for the full payment of the Put Option, on May 31, 2016 Cemig offered to the holders of the Put Option 55,234,637 common shares and 110,469,274 preferred shares in Transmissora Aliança de Energia S.A. (Taesa), and as further guarantee, 53,152,298 shares that Cemig directly holds in Light.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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Amount of the Company’s exposure

The change in the value of the options – the difference between the estimated fair value for the assets and the corresponding exercise price, in the nine-month periods ended September 30, 2017 and 2016, has been as follows:

 

     R$ ’000  

Balance at December 31, 2016

     1,149,881  

Variation in fair value

     100,957  

Reversals

     (8,020
  

 

 

 

Balance at September 30, 2017

     1,242,818  
  

 

 

 

Balance on December 31, 2015

     1,245,103  

Variation in fair value

     267,585  
  

 

 

 

Balance at September 30, 2016

     1,512,688  
  

 

 

 

In the calculation of the fair value of the option based on the Black-Scholes-Merton analysis, the following variables are taken into account: exercise price of the option; closing price of the stock of Light on September 30, 2017 (as a reference for the value of the indirect equity interest held by the direct stockholders of RME and Lepsa in Light); the risk-free interest rate; the volatility of the price of the underlying asset; and the time to maturity of the option.

The Company has made an analysis of the sensitivity of the exercise price of the option, varying the risk-free interest rate and the volatility, keeping the other variables of the model unchanged. In this context, scenarios for the risk-free interest rate at 6.6% p.a. to 16.4% p.a., and for volatility between 15% and 63.2% p.a., were used, resulting in estimates of minimum and maximum price for the put option of R$ 1,116,760 and R$ 1,180,151, respectively.

SAAG Put options

Option Contracts (‘the Put Option’) were signed between Cemig GT and the private pension entities that participate in the investment structure of SAAG (comprising FIP Melbourne, Parma Participações S.A. and FIP Malbec, jointly, ‘the Investment Structure’), giving those entities the right to sell units in the entities that comprise the Investment Structure, which may be exercised at the option of the private pension plan entities, in the 84th (eighty-fourth) month from June 2014. The exercise price of the put options will correspond to the amount invested by each private pension plan in the Investment Structure, updated pro rata temporis by the Expanded National Consumer Price (IPCA) index published by the IBGE, plus interest at 7% per year, less such dividends and Interest on Equity as shall have been paid by SAAG to the pension plan entities. This option was considered to be a derivative instrument, accounted at fair value through profit or loss.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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In the fourth quarter of 2016 Cemig GT altered the methodology used in measuring the fair value of the put option of SAAG, and adopted the Black-Scholes-Merton (BSM) model, replacing the model of discounted cash flow less the exercise price of the option. This change is in line with best market practices, since the BSM method not only calculates the difference between the exercise price of the option and the share price, brought to present value, but also incorporates an important random component that weights these amounts.

The assumption was made that the future expenditures of FIP Malbec and FIP Melbourne are insignificant, so that the options are valued as if they were direct equity interests in Mesa. However, neither SAAG nor Mesa are traded on a securities exchange, so that some adaptions are necessary for calculation of the price of the asset and its volatility for application of the BSM model. The closing price of the share of Mesa on September 30, 2017 is ascertained on the basis of Free cash flow to equity holders (FCFE), with its equivalence in indirect equity interests held by the FIPs. Volatility, in turn, is measured as an average of historic volatility (based on the hypothesis that the series of the difference of continuously capitalized returns follows a normal distribution) of comparable companies in the electricity generation sector that are traded on the Bovespa.

Based on the studies made, a liability of R$ 264,138 is recorded in the Company’s Interim accounting information, for the difference between the exercise price and the estimated fair value of the assets (R$ 196,173 at December 31, 2016).

The movement in the value of the options in the nine-month periods ended September 30, 2015 and 2016 is as follows:

 

     R$ ’000  

Balance at December 31, 2016

     196,173  

Variation in fair value

     73,299  

Reversals

     (5,334
  

 

 

 

Balance at September 30, 2017

     264,138  
  

 

 

 

Balance on December 31, 2015

     147,614  

Variation in fair value

     29,488  
  

 

 

 

Balance at September 30, 2016

     177,102  
  

 

 

 

Cemig GT has made an analysis of the sensitivity of the exercise price of the option, varying the risk-free interest rate and the volatility, keeping the other variables of the model unchanged. In this context, scenarios for the risk-free interest rate at 6.19% p.a. to 10.19% p.a., and for volatility between 16% and 76% p.a., were used, resulting in estimates of minimum and maximum price for the put option of R$ 226,188 and R$ 341,307, respectively.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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16. PROPERTY, PLANT AND EQUIPMENT

 

Consolidated R$ ’000

   Sep. 30, 2017     Dec. 31, 2016  
   Historic
cost
     Accumulated
depreciation
    Net value     Historic cost      Accumulated
depreciation
    Net value  

In service

              

Land

     225,081        (13,126     211,955       286,368        (7,718     278,650  

Reservoirs, dams and watercourses

     3,324,692        (2,068,844     1,255,848       5,347,448        (3,586,435     1,761,013  

Buildings, works and improvements

     1,102,157        (766,382     335,775       1,789,111        (1,370,631     418,480  

Machinery and equipment

     2,939,964        (2,069,474     870,490       4,518,403        (3,347,214     1,171,189  

Vehicles

     28,816        (25,431     3,385       28,816        (24,586     4,230  

Furniture and utensils

     15,830        (12,669     3,161       15,781        (12,373     3,408  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     7,636,540        (4,955,926     2,680,614     11,985,927        (8,348,957     3,636,970  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Under construction

     116,577        —         116,577       138,106        —         138,106  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net property, plant and equipment

     7,753,117        (4,955,926     2,797,191       12,124,033        (8,348,957     3,775,076  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

This table shows the movement in property, plant and equipment:

 

Consolidated R$ ’000

   Balance at
Dec. 31,
2016
     Addition      Jaguara, Miranda
and Volta Grande
Plants (1)
    Written
off
    Depreciation     Transfers /
capitalizations
    Balance at
Sep. 30,
2017
 

In service

                

Land

     278,650        —          (61,287     —         (5,408     —         211,955  

Reservoirs, dams and watercourses

     1,761,013        —          (440,923     300       (64,913     371       1,255,848  

Buildings, works and improvements

     418,480        39        (68,971     —         (14,546     773       335,775  

Machinery and equipment

     1,171,189        253        (297,471    
-
5,343
 
 
    (69,864     71,726       870,490  

Vehicles

     4,230        —          —         —         (845     —         3,385  

Furniture and utensils

     3,408        58        —         —         (305     —         3,161  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     3,636,970        350        (868,652     (5,043     (155,881     72,870       2,680,614  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Under construction

     138,106        53,533        (130     (2,062     —         (72,870     116,577  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net property, plant and equipment

     3,775,076        53,883        (868,782     (7,105     (155,881     —         2,797,191  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Amounts transferred to the account line Generation concession assets, for the Jaguara and Miranda Plants, (more details in Note 4) and to Financial assets of the concession, for the Volta Grande Plant (more details in Note 13).

 

Consolidated R$ ’000

   Balance at
Dec. 31,
2015
     Addition      Written
off
    Depreciation     Transfers /
capitalizations
    Balance at
Sep. 30,

2016
 

In service

              

Land

     278,609        —          (351     (2,248     89       276,099  

Reservoirs, dams and watercourses

     1,830,045        —          (3     (74,450     26,852       1,782,444  

Buildings, works and improvements

     437,311        —          (697     (17,823     4,348       423,139  

Machinery and equipment

     1,192,099        —          (23,128     (76,748     83,647       1,175,870  

Vehicles

     8,082        —          (58     (1,943     (1,518     4,563  

Furniture and utensils

     4,473        —          (1     (240     (713     3,519  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     3,750,619        —          (24,238     (173,452     112,705       3,665,634  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Under construction

     189,704        61,332        (6,237     —         (112,279     132,520  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net property, plant and equipment

     3,940,323        61,332        (30,475     (173,452     426       3,798,154  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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The average annual depreciation rate for the year 2017 is 3.51% (3.39% in 2016). By activity, the average annual depreciation rates are:

 

Hydroelectric generation

  

Thermal generation

  

Management and other

  

Telecoms

3.30%    3.85%    10.04%    4.61%

The Company has not identified any evidence of impairment of its Property, plant and equipment assets. The generation concession contracts provide that at the end of each concession the Concession-granting power shall determine the amount to be indemnified to the Company and its subsidiaries. Management believes that the indemnity of these assets will be greater than the amount of: their historic cost after depreciation over their useful lives.

Under the Brazilian regulatory framework Aneel, the regulator, is responsible for establishing the useful economic life of the generation and transmission assets in the electricity sector, and for periodically reviewing the estimates. The rates established by Aneel are used in the processes of reviewing tariff rates and calculating of the indemnity due at the end of the concession period, and are recognized as a reasonable estimate of the useful life of the assets of the concession. Thus, these rates were used as the basis for depreciation of the Company’s property, plant, and equipment assets.

The residual value of the assets is the remaining balance of the assets at the end of the concession. As established in the contract signed between the Company, and its subsidiaries, and the Nation, at the end of the concession the assets will revert to the Nation, which in turn will indemnify the Company for those assets that have not yet been totally depreciated. In cases where there is no indemnity, or there is uncertainty related to the indemnity, at the end of the concession, such as thermal generation, and hydroelectric generation as an independent power producer, no residual value is recognized, and the depreciation rates are adjusted so that all the assets are depreciated within the concession.

Consortium

Cemig GT is a partner in the electricity generation consortium for the Queimado plant, for which no separate company with independent legal existence was formed to manage the object of the concession, the controls being kept in Fixed assets and Intangible assets. Cemig GT’s portion in the consortium is recorded and controlled individually in the respective categories of PP&E and Intangible assets.

 

Consolidated R$ ’000

   Stake in power
output, %
     Average annual
depreciation rate %
     Sep. 30,
2017
    Dec. 31,
2016
 

In service

          

Queimado plant

     82.50        3.73        217,061       217,061  

Accumulated depreciation

           (86,260     (81,911
        

 

 

   

 

 

 

Total in operation

           130,801       135,150  
        

 

 

   

 

 

 

Under construction

          

Queimado plant

     82.50        —          233       233  
        

 

 

   

 

 

 

Total under construction

           233       233  
        

 

 

   

 

 

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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17. INTANGIBLE ASSETS

 

a) Composition of the balance at September 30, 2017 and December 31, 2016

 

Consolidated R$ ’000

   Sep. 30, 2017      Dec. 31, 2016  
   Historic cost      Accumulated
amortization
    Residual
value
     Historic cost      Accumulated
amortization
    Residual
value
 

In service

               

Useful life defined

               

Temporary easements

     11,749        (1,820     9,929        11,749        (1,315     10,434  

Paid concession

     19,169        (11,082     8,087        19,169        (10,572     8,597  

Assets of concession

     17,388,860        (7,437,712     9,951,148        16,287,763        (7,039,840     9,247,923  

Other

     79,171        (63,832     15,339        76,864        (59,434     17,430  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
     17,498,949        (7,514,446     9,984,503        16,395,545        (7,111,161     9,284,384  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Under construction

     1,073,182        —         1,073,182        1,535,296        —         1,535,296  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net intangible assets

     18,572,131        (7,514,446     11,057,685        17,930,841        (7,111,161     10,819,680  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

Holding company R$ ’000

   Average
amortization
rate
    Sep. 30, 2017      Dec. 31, 2016  
     Historic
cost
     Accumulated
amortization
    Residual
value
     Historic
cost
     Accumulated
amortization
    Residual
value
 

In service

                 

Useful life defined

                 

Software use rights

     20     3,789        (3,724     65        3,789        (3,649     140  

Brands and patents

     10     9        (7     2        9        (7     2  
    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
       3,798        (3,731     67        3,798        (3,656     142  
    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Under construction

       1,710        —         1,710        1,710        —         1,710  
    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net intangible assets

       5,508        (3,731     1,777        5,508        (3,656     1,852  
    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

b) Changes in Intangible assets

 

Consolidated R$ ’000

   Balance at
Dec. 31, 2016
     Addition      Write-off of
‘Special
Obligations’
     Jaguara, Volta
Grande and
Miranda Plants
    Written
off
    Amortization     Transfer (1)     Balance at
Sep. 30, 2017
 

In service

                   

Useful life defined

                   

Temporary easements

     10,434        —          —          —         —         (505     —         9,929  

Paid concession

     8,597        —          —          —         —         (510     —         8,087  

Assets of concession

     9,247,923        —          17,069        —         (5,878     (455,379     1,147,413       9,951,148  

Other

     17,430        —          —          (80     —         (4,508     2,497       15,339  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     9,284,384        —          17,069        (80     (5,878     (460,902     1,149,910       9,984,503  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Under construction

     1,535,296        747,868        —          —         (6,820     —         (1,203,162     1,073,182  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net intangible assets – Consolidated

     10,819,680        747,868        17,069        (80     (12,698     (460,902     (53,252     11,057,685  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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Consolidated R$ ’000

   Balance at
Dec. 31, 2015
     Addition      Written off     Amortization     Transfer (1)     Balance at
Sep. 30, 2016
 

In service

              

Useful life defined

              

Temporary easements

     10,434        —          —         —         —         10,434  

Paid concession

     9,275        —          —         (509     —         8,766  

Assets of concession

     8,965,474        75        (19,501     (422,948     613,564       9,136,664  

Other

     15,290        —          (6,225     (4,288     12,810       17,587  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     9,000,473        75        (25,726     (427,745     626,374       9,173,451  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Under construction

     1,274,631        899,785        (5,440     —         (684,024     1,484,952  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net intangible assets – Consolidated

     10,275,104        899,860        (31,166     (427,745     (57,650     10,658,403  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The residual balance of transfer refers to balances transferred to the Financial assets.

The average annual depreciation rate for the year 2017 is 3.81% (4.12% in 2016). The average rates of annual amortization, by activity, set by the legislation for the sector, are:

 

Hydroelectric generation

  

Thermal generation

  

Distribution

  

Management and other

  

Telecoms

20.00%    19.35%    3.85%    23.29%    11.56%

The Company has found no indications of impairment of its intangible assets that have defined useful lives. The Company has no intangible assets with non-defined useful life. Among the additions made in the nine-month period ended in September 30, 2017, in the amount of R$747.868, is included R$ 56,851 (R$ 120,398 in 9M16) under the heading Capitalized Financial Costs, as presented in Note 20.

 

18. SUPPLIERS

 

R$ ’000

   Consolidated  
   9M17      9M16  

Electricity on spot market – CCEE

     237,732        167,860  

Charges for use of electricity network

     156,323        78,407  

Electricity purchased for resale

     1,037,427        676,563  

Itaipu Binacional

     246,453        206,827  

Gas bought for resale

     216,954        461,589  

Materials and services

     291,559        348,347  
  

 

 

    

 

 

 
     2,186,448        1,939,593  
  

 

 

    

 

 

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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19. TAXES, INCOME TAX AND SOCIAL CONTRIBUTION TAX

 

a) Taxes

 

R$’000

   Consolidated      Holding company  
   9M17      9M16      9M17      9M16  

Current

           

ICMS tax (I)

     828,897        501,535        —          —    

Cofins tax

     93,452        128,030        1,965        32,332  

Pasep tax

     20,012        27,701        319        6,987  

Social security contributions

     15,368        24,865        1,869        1,933  

Other

     26,264        111,456        788        42,382  
  

 

 

    

 

 

    

 

 

    

 

 

 
     983,993        793,587        4,941        83,634  

Non-current

           

Cofins tax (II)

     593,296        594,866        —          —    

Pasep tax (II)

     128,806        129,056        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 
     722,102        723,922                
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,706,095        1,517,509        4,941        83,634  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(I) The Tax Credits Regularization Plan (Plano de Regularização de Créditos Tributários – PRCT):

During 3Q17 the subsidiaries Cemig D and Cemig GT recognized in their Profit and loss accounts the effects of adhesion to the Minas Gerais State Tax Credits Regularization Plan (PRCT), for settlement of ICMS tax totaling R$ 557,673 and R$ 29,951, respectively.

The main tax issue that led to the decision of Cemig D to subscribe to the PRCT relates to ICMS tax on the CDE subvention over the period January 2013 to October 2016, and also the classification of residential condominiums in the commercial category, which has a different ICMS rate, generating disagreement with the tax authority on interpretation, over the period 2013 to 2015. The amount of ICMS claimed from Cemig D will be settled, under the PRCT, in six installments, with value updated at 50% of the Selic rate and a reduction of 90% on fine and interests. The first instalment, of R$ 93,539, was settled on October 31, 2017.

The issue that led to Cemig GT adopting the PRCT relates to ICMS tax on transfers of power supply received from a consortium, where there was a difference in understanding between the Company and the tax authority in relation to the moment of payment. The amount claimed from Cemig GT, under the PRCT, was R$ 29,951, and was settled in full on October 31, 2017 and represented a reduction of 95% on fine and interests.

 

(II) The non-current obligations for Pasep and Cofins taxes refer to the legal proceedings challenging the constitutionality of inclusion of the ICMS tax as part of the taxable amount for calculation of the amounts of Pasep and Cofins taxes payable, and seeking authorization to offset the amounts paid over the last ten years. The Company and its subsidiaries Cemig D (Distribution) and Cemig GT (Generation and Transmission) obtained interim relief from the court allowing them not to make the payment, and authorizing payment through court deposits (starting in 2008), and maintained this procedure until July 2011. After that date, while continuing to challenge the basis of the calculation in court, they opted to pay the taxes monthly.

 

(III) On March 15, 2017, the Federal Supreme Court (Supremo Tribunal Federal, or STF) issued a ruling, with the status of general precedent (‘repercussão geral’) governing all similar cases, in favor of the Company’s argument. The Company and its subsidiaries await the results of any changes arising from the decision by the Supreme Court before measuring these effects and reflecting them in its financial statements.

 

b) Income tax and Social Contribution tax

 

R$’000

   Consolidated  
   9M17      9M16  

Current

     

Income tax

     73,762        18,381  

Social contribution tax

     25,922        8,485  
  

 

 

    

 

 

 
     99,684        26,866  
  

 

 

    

 

 

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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LOGO

      LOGO  

 

 

20. LOANS, FINANCINGS AND DEBENTURES

 

Financing source

   Principal
maturity
     Annual financial cost %      Currency      Consolidated  
           

 

 

 
            September 30, 2017     Dec. 31,
2016
 
                          Current     Non-current     Total     Total  

FOREIGN CURRENCY

                 

Banco do Brasil: Various Bonds (1)

     2024        Various        US$        3,021       20,169       23,190       23,049  

KfW

     2019        1,78        Euros        3,967       2,162       6,129       7,416  
           

 

 

   

 

 

   

 

 

   

 

 

 

Debt in foreign currency

              6,988       22,331       29,319       30,465  

BRAZILIAN CURRENCY

                 

Banco do Brasil

     2017        108.33% of the CDI Rate        R$        —         —         —         72,242  

Banco do Brasil

     2017        108.00% of CDI        R$        153,650       —         153,650       150,683  

Banco do Brasil

     2018        112.00% of CDI Rate        R$        295,581       270,000       565,581       554,748  

Banco do Brasil

     2017        111.00% of CDI        R$        —         —         —         50,308  

Banco do Brasil

     2020        114.00% of the CDI Rate        R$        185,319       329,144       514,463       501,352  

Banco do Brasil

     2018        132.90% of CDI        R$        290,442       149,317       439,759       583,043  

BNDES

     2026        TJLP+2.34%        R$        8,065       61,361       69,426       74,095  

Caixa Econômica Federal

     2018        119.00% of CDI        R$        33,407       —         33,407       108,792  

Caixa Econômica Federal

     2020        132.14% of CDI        R$        272,631       411,457       684,088       681,417  

Eletrobras

     2023       
UFIR; RGR + 6.00 to
8.00%
 
 
     R$        16,886       37,449       54,335       68,043  

Large consumers

     2024        Various        R$        1,860       2,305       4,165       6,317  

Finep

     2018       
TJLP + 5% and
TJLP + 8%

 
     R$        3,145       —         3,145       5,505  

Pipoca Consortium

     2018        IPCA        R$        185       —         185       185  

Promissory Notes – 7th Issue

     2017        128.00% of CDI        R$        588,319       —         588,319       667,143  

Banco da Amazônia S.A.

     2018        CDI + 1.90%        R$        13,786       119,961       133,747       121,601  

Sonda (4)

     2021        110% of CDI        R$        50,482       40,904       91,386       83,238  

(–) FIC Pampulha: Securities of subsidiary companies (6)

              (49,936     —         (49,936     —    
           

 

 

   

 

 

   

 

 

   

 

 

 

Debt in Brazilian currency

              1,863,822       1,421,898       3,285,720       3,728,712  
           

 

 

   

 

 

   

 

 

   

 

 

 

Total of loans and financings

              1,870,810       1,444,229       3,315,039       3,759,177  
           

 

 

   

 

 

   

 

 

   

 

 

 

Debentures – 3rd Issue, 1st series (2)

     2017        CDI Rate + 0.90%        R$        —         —         —         543,208  

Debentures – 3rd Issue, 2nd series (2)

     2019        IPCA + 6.00%        R$        152,272       141,923       294,195       293,122  

Debentures – 3rd Issue, 3rd series (2)

     2022        IPCA + 6.20%        R$        35,809       950,808       986,617       983,506  

Debentures – 5th Issue, 1st series (2)

     2018        CDI + 1.70%        R$        844,159       700,000       1,544,159       1,411,295  

Debentures – 6th Issue, 1st series (2)

     2018        CDI + 1.60%        R$        495,573       —         495,573       1,037,973  

Debentures – 6th Issue, 2nd series (2)

     2020        IPCA +8.07%        R$        475       30,658       31,133       31,117  

Debentures – 7th Issue, 1st series (2)

     2021        140.00% of CDI Rate        R$        (5,042     2,210,853       2,205,811       2,196,841  

Debentures, 2nd Issue (3)

     2017        IPCA + 7.96%        R$        253,769       —         253,769       235,136  

Debentures – 3rd Issue, 2nd Series (3)

     2021        IPCA + 4.70%        R$        41,685       1,464,025       1,505,710       1,495,108  

Debentures – 3rd Issue, 3rd Series (3)

     2025        IPCA + 5.10%        R$        27,041       873,250       900,291       894,918  

Debentures – 3rd Issue, 1st series (3)

     2018        CDI + 0.69%        R$        438,571       —         438,571       463,880  

Debentures, 4th Issue (3)

     2018        CDI + 4.05%        R$        988,160       804,371       1,792,531       1,597,690  

Debentures (5)

     2018        CDI + 1.60%        R$        412       100,000       100,412       100,629  

Debentures (5)

     2018        CDI + 0.74%        R$        33,351       —         33,351       66,706  

Debentures (5)

     2022       
TJLP+1.82% (75%);
Selic+1.82% (25%)
 
 
     R$        27,593       129,963       157,556       133,502  

Debentures (4)

     2019        128.50% of CDI        R$        8,605       17,887       26,492       —    

(–) FIC Pampulha: Securities of subsidiary companies (6)

              (13,772     (11,863     (25,635     (64,528
           

 

 

   

 

 

   

 

 

   

 

 

 

Total, debentures

              3,328,661       7,411,875       10,740,536       11,420,103  
           

 

 

   

 

 

   

 

 

   

 

 

 

Overall total – Consolidated

              5,199,471       8,856,104       14,055,575       15,179,280  
           

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Net balance of the Restructured Debt comprising the bonds at par and discounted, with balance of R$ 144,396, less the amounts given as Deposits in guarantee, with balance of R$ 121,206. Interest rates vary – from 2 to 8% p.a.; six-month Libor plus spread of 0.81% to 0.88% p.a.
(2) Cemig Geração e Transmissão
(3) Cemig Distribuição
(4) CemigTelecom
(5) Gasmig;
(6) FIC Pampulha has financial investments in securities issued by subsidiary companies of the Company. For more information and characteristics of the fund, see Note 27.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

231


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LOGO

      LOGO  

 

Guarantees

The debtor balance of loans and financings is guaranteed as follows:

 

R$ ’000

   Sep. 30, 2017  

Promissory Notes and Sureties

     10,310,897  

Receivables

     1,399,655  

Shares

     1,947,197  

Without guarantee

     397,826  
  

 

 

 

TOTAL

     14,055,575  
  

 

 

 

The composition of loans, financings and debentures, by currency and indexor, with the respective amortization, is as follows:

 

Consolidated R$ ’000

   2017      2018      2019      2020      2021      2022      2023      After 2023      Total  

Currency

                          

US dollar

     3,021        —          —          —          —          —          —          20,169        23,190  

Euros

     1,997        3,939        193        —          —          —          —          —          6,129  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total, currency denominated

     5,018        3,939        193        —          —          —          —          20,169        29,319  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Indexors

                          

IPCA index (1)

     369,476        141,642        640,175        812,065        811,619        541,688        218,379        436,856        3,971,900  

Ufir / RGR (2)

     4,806        16,357        12,912        11,210        3,407        3,264        2,379        —          54,335  

CDI Rate (3)

     3,197,710        3,694,695        1,163,134        951,657        758,533        —          —          —          9,765,729  

URTJ / TJLP (4)

     7,609        40,809        38,455        38,647        38,202        38,336        7,833        20,236        230,127  

IGP–DI (5)

     1,486        375        377        603        54        508        508        254        4,165  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total governed by indexors

     3,581,087        3,893,878        1,855,053        1,814,182        1,611,815        583,796        229,099        457,346        14,026,256  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Overall total

     3,586,105        3,897,817        1,855,246        1,814,182        1,611,815        583,796        229,099        477,515        14,055,575  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Expanded National Consumer Price (IPCA) Index.
(2) Fiscal Reference Unit (Ufir / RGR).
(3) CDI: Interbank Rate for Certificates of Deposit.
(4) URTJ: Interest rate reference unit.
(5) IGP-DI (‘General – Domestic Availability’) Price Index.

The principal currencies and indexors used for monetary updating of loans and financings had the following variations:

 

Currency

  

Accumulated variation
in 9M17, %

  

Accumulated variation
in 9M16, %

  

Indexor

  

Accumulated variation
in 9M17, %

  

Accumulated variation
in 9M16, %

US dollar

   (2.80)    (16.87)    IPCA    1.78    5.51

Euros

   8.86    (14.16)    CDI    8.03    10.42

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

232


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LOGO

      LOGO  

 

Changes in loans, financings and debentures were as follows:

 

R$’000

   Consolidated  

Balance on December 31, 2015

     15,166,537  

Loans and financings obtained

     2,933,271  

Transaction costs

     (74,627
  

 

 

 

Financings obtained net of transaction costs

     2,858,644  

Monetary and exchange rate variation

     216,243  

Borrowing costs provisioned

     1,504,865  

Amortization of transaction cost

     47,471  

Borrowing costs paid

     (1,320,119

Amortization of financings

     (2,106,248

Subtotal

     16,368,031  

(–) FIC Pampulha: Securities of subsidiary companies

     (98,980
  

 

 

 

Balance at September 30, 2016

     16,269,051  
  

 

 

 

Balance at December 31, 2016

     15,179,280  

Loans and financings obtained

     60,870  

Transaction costs

     (762
  

 

 

 

Financings obtained net of transaction costs

     60,108  

Monetary and exchange rate variation

     73,833  

Borrowing costs provisioned

     1,217,735  

Amortization of transaction cost

     41,090  

Borrowing costs paid

     (998,967

Amortization of financings

     (1,506,459

Subtotal

     14,066,620  
  

 

 

 

(–) FIC Pampulha: Securities of subsidiary companies

     (11,045
  

 

 

 

Balance at September 30, 2017

     14,055,575  
  

 

 

 

Borrowing costs capitalized

The subsidiaries transferred to Intangible assets the costs of loans and financings linked to works, as follows:

 

R$’000

   9M17     9M16  

Costs of loans and financings

     1,217,735       1,504,865  

Financial costs transferred to Intangible assets

     (56,851     (120,398
  

 

 

   

 

 

 

Net effect in Profit or loss

     1,160,884       1,384,467  
  

 

 

   

 

 

 

The value of the charges capitalized, R$ 56,851 (R$ 120,398 in 2016), has been excluded from the Statement of cash flows, in the additions to Cash flow from investment activities, because it does not represent an outflow of cash for acquisition of the related asset.

The average rate applied to capitalization of the loans and financings whose costs were transferred to works was 11.07% in 9M17 – and 13.13% in 9M16.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

233


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LOGO

      LOGO  

 

Funding raised

This table shows the funding raised, on Consolidated basis, in 9M17:

 

Financing source

  

Signature date

  

Principal maturity

  

Annual financial cost, %

  

Amount(*)

R$ ’000

Brazilian currency

           

Debentures (1)

   November 4,2013    2022    CDI + 0.74%    33,870

Debentures (2)

   April 22, 2017    2019    128.50% of CDI    26,238
           

 

Total raised

            60,108
           

 

 

* Net of funding cost.
(1) Subscription by BNDESPar of Gasmig’s fourth Debenture Issue, in June 2017, to support the plan for investment in expansion of the gas distribution network.
(2) Cemig Telecom completed its second issue of non-convertible debentures in May 2017 with real guarantees and additional surety, in a single series, to roll over debt and strengthen cash position.

Debentures

The debentures issued by the Company’s subsidiaries are not convertible into shares, and have the following characteristics:

 

Issuer

  

Type of guarantee

  

Annual cost, %

   Maturity      Sep. 30, 2017     Dec. 31, 2016  

Cemig GT – 3rd Issue – 1st Series

   Unsecured    CDI Rate + 0.90%      2017        —         543.208  

Cemig GT – 3rd Issue – 2nd Series

   Unsecured    IPCA + 6.00%      2019        294.195       293.122  

Cemig GT – 3rd Issue – 3rd Series

   Unsecured    IPCA + 6.20%      2022        986.617       983.506  

Cemig GT – 5th Issue, 1st Series

   Unsecured    CDI + 1.70%      2018        1.544.159       1.411.295  

Cemig D – 6th Issue – 1st Series

   Surety    CDI + 1.60%      2018        495.573       1.037.973  

Cemig D – 6th Issue – 2nd Series

   Surety    IPCA +8.07%      2020        31.133       31.117  

Cemig GT – 7th Issue – 1st Series

   Receivables (Revenue)    140.00% of CDI Rate      2021        2.205.811       2.196.841  

Cemig D – 2nd Issue

   None    IPCA + 7.96%      2017        253.769       235.136  

Cemig D – 3rd Issue – 2nd Series

   Surety    IPCA + 4.70%      2021        1.505.710       1.495.108  

Cemig D – 3rd Issue – 3rd Series

   Surety    IPCA + 5.10%      2025        900.291       894.918  

Cemig D – 3rd Issue – 1st Series

   Surety    CDI + 0.69%      2018        438.571       463.880  

Cemig D – 4th Issue

   Surety    CDI + 4.05%      2018        1.792.531       1.597.690  

Gasmig

   Unsecured    CDI + 1.60%      2018        100.412       100.629  

Gasmig

   Unsecured    CDI + 0.74%      2018        33.351       66.706  

Gasmig

   Unsecured   

TJLP+1.82% (75%);

Selic+1.82% (25%)

     2022        157.556       133.502  

CemigTelecom

   Receivables    128.50% of CDI      2019        26.492       —    
           

 

 

   

 

 

 

Subtotal

              10.766.171       11.484.631  
           

 

 

   

 

 

 

(–) FIC Pampulha: Securities of subsidiary companies

              (25.635     (64.528
           

 

 

   

 

 

 

TOTAL

              10.740.536       11.420.103  
           

 

 

   

 

 

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

234


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LOGO

      LOGO  

 

For the debentures issued by the Company, there are no renegotiation clauses, nor debentures held in treasury. There is an early maturity clause for cross-default in the event of non-payment of any pecuniary obligation with individual or aggregate value greater than R$ 50 million.

Restrictive covenants

The Company has contracts with covenants linked to financial indices, as follows:

 

Title   

Parameter

  

Issuer ratio required

  

Ratio required

Cemig (guarantor)

  

Required compliance
frequency

 

BNDES financing – Cemig GT (1)

   Stockholders’ equity of Guarantor / Total assets of Guarantor    —      30% or more    Annual
Banco do Brasil Credit Note and fixed credit line – Cemig GT (2)    Net debt / (Ebitda + Dividends received)   

Maximum:

5.5 in 2017

5.0 in 2018

4.5 in 2019

3.0 in 2020

2.5 in 2021-

  

Maximum:

4.5. in 2017

4.25 in 2018

3.5 in 2019

3.0 in 2020

2.5 in 2021

   Half-yearly, from December 2017
7th debenture issue – Cemig GT (3)    Net debt / (Ebitda + Dividends received)   

Maximum:

5.5 in 2017

5.0 in 2018

4.5 in 2019

3.0 in 2020

2.5 in 2021

  

Maximum:

4.5 in 2017

4.25 in 2018

3.5 in 2019

3.0 in 2020

2.5 in 2021

  

Half-yearly,

from June 2017

Debentures (Gasmig) (4)   

Total liabilities / Total assets

Ebitda / Debt servicing

  

Less than 0.6

1.3 or more

   —      Annual

 

(1) If the Company does not achieve the required ratio, it will have six months from the end of the business year in which the ratio was found, to:
  (i) constitute real guarantees which in the assessment of the BNDES represent 130.00% of the value of the debtor balance of the contract; or
  (ii) present an interim balance sheet, by a CVM-registered auditor, indicating return to the index required.
(2) Through contractual amendments, a further early maturity clause was added to Cemig GT’s Bank Credit Notes and Fixed Credit Line with Banco do Brasil S.A., requiring compliance with a financial ratio similar to that demanded by the 7th Debenture Issue.
(3) 7th Issue of Debentures by Cemig GT, in December 2016, of R$ 2,240,000.
(4) If Gasmig does not achieve the required ratio, Cemig shall, within 120 days from the sate of notice in writing from BNDES or BNDESPar, constitute guarantees acceptable to 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. Cross-default: Certain contractually specified situations can cause early maturity of other debts.

The covenant requiring half-yearly compliance relating to the financial ratio for GT (issuer) and Cemig (guarantor) was complied with on June 30, 2017.

The covenants requiring compliance annually were complied with on December 31, 2016.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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21. REGULATORY CHARGES

 

R$ ’000

   Consolidated  
   9M17      9M16  

Current assets

     

Credits owed by Eletrobras (1)

     —          48,379  
  

 

 

    

 

 

 
     —        48,379  
  

 

 

    

 

 

 

Liabilities

     

Global Reversion Reserve (RGR)

     46,217        34,659  

Energy Development Account (CDE)

     180,823        189,330  

Aneel inspection charge

     2,171        2,877  

Energy Efficiency

     337,251        287,571  

Research and development

     271,228        233,560  

Energy System Expansion Research

     1,419        2,724  

National Scientific and Technological Development Fund

     2,546        5,146  

Proinfa – Alternative Energy Program

     6,778        7,720  

Royalties for use of water resources

     16,244        23,404  

Emergency capacity charge

     30,996        30,996  

Consumer charges – ‘Flag Tariff’ amounts

     16        17,224  
  

 

 

    

 

 

 
     895,689        835,211  
  

 

 

    

 

 

 

Current liabilities

     351,246        380,586  

Non-current liabilities

     544,443        454,625  

 

(1) Cemig GT requested from Aneel a review of the amounts paid for the RGR Contribution in previous business years, due to the basis of calculation used at the time for calculation of the charge. Cemig GT recognized the right to recover the amount paid in excess, to be offset against RGR payable, only after the conclusion, in 2016, of a judgment by Aneel, as per Aneel Technical Note 162/2016, which accepted Cemig GT’s claim. On September 30, 2017 the RGR payable is presented net of the remaining balance receivable, of R$ 15,073.

 

22. POST-RETIREMENT OBLIGATIONS

Changes in net liabilities were as follows:

 

Holding company R$ ’000

   Pension plans and retirement
supplement plans
    Health
Plan
    Dental
Plan
    Life
insurance
    Total  

Net liabilities on December 31, 2015

     199,183       74,034       1,958       28,016       303,191  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expense recognized in Profit and loss account

     20,817       7,604       206       2,831       31,458  

Contributions paid

     (4,664     (4,172     (104     (536     (9,476
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net liabilities on September 30, 2016

     215,336       77,466       2,060       30,311       325,173  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net liabilities on December 31, 2016

     257,933       95,655       2,452       41,424       397,464  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expense recognized in Profit and loss account

     20,338       7,828       207       3,490       31,863  

Contributions paid

     (5,838     (4,898     (118     (278     (11,132
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net liabilities on September 30, 2017

     272,433       98,585       2,541       44,636       418,195  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
           30/09/2017       31/12/2016  
        

 

 

   

 

 

 

Current liabilities

           12,584       11,143  

Non-current liabilities

           405,611       386,321  

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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Consolidated R$ ’000

   Pension plans and retirement
supplement plans
    Health
Plan
    Dental
Plan
    Life
insurance
    Total  

Net liabilities on December 31, 2015

     1,346,388       1,323,516       30,090       553,377       3,253,371  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expense recognized in Profit and loss account

     139,289       136,805       3,111       56,160       335,365  

Contributions paid

     (94,770     (68,034     (1,681     (9,246     (173,731
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net liabilities on September 30, 2016

     1,390,907       1,392,287       31,520       600,291       3,415,005  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net liabilities on December 31, 2016

     1,679,154       1,710,787       37,549       813,921       4,241,411  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expense recognized in Profit and loss account

     130,471       141,947       3,128       66,472       342,018  

Contributions paid

     (118,638     (76,868     (1,816     (5,768     (203,090
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net liabilities on September 30, 2017

     1,690,987       1,775,866       38,861       874,625       4,380,339  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
           30/09/2017       31/12/2016  
        

 

 

   

 

 

 

Current liabilities

           224,137       198,867  

Non-current liabilities

           4,156,202       4,042,544  

The amounts recorded as Current liabilities refer to the contributions to be made by Cemig and its subsidiaries in the next 12 months for amortization of the actuarial liabilities.

The amounts reported as expenses in the Consolidated profit and loss account refer to the tranches of post-employment obligations, totaling R$ 293,617 (R$ 248,583 for 9M16), plus the financial costs and monetary updating on the debt agreed with Forluz, in the amount of R$ 48,401 (R$ 86,782 in 9M16).

Contract for solution to the deficit on Forluz Pension Plan ‘A’

In May 2017 Forluz and the sponsors Cemig, Cemig GT and Cemig D signed an Instrument of Assumption of Debt for Coverage of Deficit in accordance with the deficit solution plan for Plan A (the Retirement Benefits Balances Plan) approved by the Governing Council of Forluz on December 15, 2016.

On September 30, 2017 the total amount payable by Cemig and its subsidiaries as a result of the deficit found in Plan A is R$ 284,166, with monthly amortizations up to June 2031, calculated by the system of constant installments (known as the ‘Price Table’).

Remuneratory interest applicable to the outstanding balance is 6% p.a., plus the effect of the IPCA (Expanded National Consumer Price) index published by the IBGE.

If the plan reaches actuarial balance before the full period of amortization of the contract, the Company is dispensed from payment of the remaining installments and the contract is extinguished.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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23. PROVISIONS

The Company and its subsidiaries are parties in certain legal and administrative proceedings before various courts and government bodies, arising in the normal course of business, regarding employment-law, civil, tax, environmental and regulatory matters, and other issues.

The Company and its subsidiaries have made provisions as follows for contingencies relating to legal actions in which the Company and its legal advisors have assessed the chances of loss as ‘probable’ (i.e. an outflow of funds to settle the obligation will be necessary):

 

R$’000

   Consolidated  
   Dec. 31, 2016      Additions      Reversals     Settled     Sep. 30, 2017  

Employment-law cases

     349,273        191,670        (3,657     (47,727     489,559  

Civil cases

            

Consumer relations

     14,741        11,856        (1,320     (11,855     13,422  

Other civil actions

     40,443        7,844        (238     (4,274     43,775  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     55,184        19,700        (1,558     (16,129     57,197  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Tax

     69,922        6,033        (3,632     (588     71,735  

Environmental

     39        4        —         —         43  

Regulatory

     43,100        2,833        (13,811     (766     31,356  

Corporate

     239,445        —          (239,445     —         —    

Other

     58,054        8,863        —         (2,834     64,083  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

     815,017        229,103        (262,103     (68,044     713,973  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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R$’000

   Consolidated  
   Dec. 31, 2015      Additions      Reversals     Settled     Sep. 30, 2016  

Employment-law cases

     289,841        73,343        (3,380     (34,613     325,191  

Civil cases

            

Consumer relations

     17,378        12,900        (490     (10,860     18,928  

Other civil actions

     28,792        16,398        (76     (3,461     41,653  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     46,170        29,298        (566     (14,321     60,581  

Tax

     69,014        3,832        (1,216     (763     70,867  

Environmental

     60        38        (59     (1     38  

Regulatory

     45,180        5,475        (1,611     (1,995     47,049  

Corporate

     268,953        —          (29,502     —         239,451  

Other

     35,355        33,133        (4,038     (7,359     57,091  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

     754,573        145,119        (40,372     (59,052     800,268  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

R$’000

   Holding company  
   Dec. 31, 2016      Additions      Reversals     Settled     Sep. 30, 2017  

Employment-law cases

     34,928        15,569        (3,016     (6,039     41,442  

Civil cases

               —    

Consumer relations

     1,435        8        (26     (8     1,409  

Other civil actions

     3,238        771        (31     (44     3,934  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     4,673        779        (57     (52     5,343  

Tax

     8,869        4,170        (2,817     (255     9,967  

Regulatory

     21,614        —          (4,241     —         17,373  

Corporate

     239,445        —          (239,445     —         —    

Other

     466        714        (1     (45     1,134  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

     309,995        21,232        (249,577     (6,391     75,259  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

R$’000

   Holding company  
   Dec. 31, 2015      Additions      Reversals     Settled     Sep. 30, 2016  

Employment-law cases

     29,169        11,463        —         (5,578     35,054  

Civil cases

            

Consumer relations

     3,294        5        (491     —         2,808  

Other civil actions

     1,289        2,208        (75     (45     3,377  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     4,583        2,213        (566     (45     6,185  

Tax

     10,306        1,283        (1,078     (681     9,830  

Regulatory

     21,696        1,157        (1,611     (89     21,153  

Corporate

     268,953        —          (29,502       239,451  

Other

     427        87        (1     (24     489  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

     335,134        16,203        (32,758     (6,417     312,162  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

In view of the long periods involved in, and the manner of working of, the Brazilian judiciary, tax and regulatory systems, the managements of the Company and its subsidiaries believe that it is not possible in practice to supply information that would be useful to the users of these interim financial statements about the time when any cash outflows, or any reimbursements, might take place in fact. The Company and its subsidiaries believe that any disbursements in excess of the amounts provisioned, when the respective processes are completed, will not significantly affect the Company’s result of operations or financial position.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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The details on the principal provisions and contingent liabilities are given below, these being the best estimates of expected future disbursements for these contingencies:

Provisions, made for legal actions in which the chances of loss have been assessed as ‘probable’; and Contingent liabilities, for actions in which the chances of loss are assessed as ‘possible’.

Employment-law cases

The Company and its subsidiaries are parties in various legal actions brought by its employees and by employees of service providing companies. Most of these claims relate to overtime and additional pay, severance payments, various benefits, salary adjustments and the effects of such items on a supplementary retirement plan. In addition to these actions, there are others relating to outsourcing of labor, complementary additions to or re-calculation of retirement pension payments by Forluz, and salary adjustments.

The aggregate amount of these contingencies is approximately R$ 1,556,075 (R$ 1,543,946 on December 31, 2016), of which R$ 489,559 (R$ 349,273 on December 31, 2016) has been provisioned – the amount estimated as probably necessary for settlement of these disputes.

Consumer relations

The Company and its subsidiaries are parties in various civil actions relating to indemnity for pain and suffering and for material damages, arising, principally, from allegations of irregularity in measurement of consumption, and claims of undue charging, in the normal course of business, totaling R$ 38,765 (R$ 33,178 on December 31, 2016), of which R$ 13,422$(R$ 14,741 on December 31, 2016) has been provisioned – this being the probable estimate for funds needed to settle these disputes.

Other civil cases

Cemig and its subsidiaries are parties in various civil actions claiming indemnity for pain and suffering and for material damages, among others, arising from incidents occurring in the normal course of business, in the amount of R$ 241,156 (R$ 227,043 on December 31, 2016), of which R$ 43,775 (R$ 40,443 on December 31, 2016) has been provisioned – the amount estimated as probably necessary for settlement of these disputes.

Tax

The Company and its subsidiaries are parties in numerous administrative and court actions relating to taxes, including, among other matters, subjects relating to the ICMS (Value Added) tax on goods and services; the Urban Property Tax (Imposto sobre a Propriedade Territorial Urbana, or IPTU); the Rural Property Tax (ITR); the Tax on Donations and Legacies (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 Tax (Contribuição Social sobre o Lucro Líquido, or CSLL); and applications to stay execution on tax matters. The aggregate amount of the contingency is approximately R$ 338,287 (R$ 295,373 on December 31, 2016), of which R$ 71,735 (R$ 69,922 on December 31, 2016) has been provisioned – the amount estimated as probably necessary for settlement of these disputes.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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Environmental

The Company and its subsidiaries are involved in environmental matters, in which the subjects include protected areas, environmental licenses, recovery of environmental damage, and other matters, in the approximate total amount of R$ 14,312 (R$ 34,031 on December 31, 2016), of which R$ 43 (R$ 39 on December 31, 2016) has been provisioned – the amount estimated as probably necessary for settlement of these disputes.

Regulatory

The Company and its subsidiaries are parties in numerous administrative and court proceedings, challenging, principally:(i) tariff charges in invoices for use of the distribution system by a self-producer; (ii) alleged violation of targets for continuity indicators in retail supply of electricity; and (iii) the tariff increase made during the federal government’s economic stabilization plan referred to as the ‘Cruzado Plan’, in 1986. The aggregate amount of the contingency is approximately R$ 242,386 (R$ 235,886 on December 31, 2016), of which R$ 31,356 (R$ 43,100 on December 31, 2016) has been provisioned – the amount estimated as probably necessary for settlement of these disputes.

Corporate

Difference of monetary updating on the Advance against Future Capital Increase (AFAC) made by the Minas Gerais State Government

On December 19, 2014 the Finance Secretary of Minas Gerais State sent an Official Letter to Cemig requesting recalculation of the amounts relating to the Advances against Future Capital Increase made in 1995, 1996, and 1998, which were returned to Minas Gerais State in December 2011, for review of the criterion used by the Company for monetary updating, arguing that application of the Selic rate would be more appropriate, replacing the IGP-M index.

On December 29, 2014 the Company made an administrative deposit applying for suspension of enforceability of the credit being requested by the state, and for its non-inclusion in the Register of Debts owed to the state and in the Registry of Defaulted Payments owed to the State (Cadin).

In the nine-month period ended on September 30, 2017, the management developed negociations with the State of Minas Gerais and on October 25, 2017, a Debt Recognition Undertaking was signed with the State of Minas Gerais, through its Financial Department, and by Cemig, under which the State undertook to return to the company the total amount deposited, with monetary updating by the IGP-M inflation index. In view of this new situation, the probability of loss was reassessed to ‘remote’ . Therefore, the Company made a reversion provision of R$239,445 considering there is no expectation related to future outflows to settle the obligation that was previously recorded in the future. More details on note 11.

Other legal actions in the normal course of business

Breach of contract – Power line pathways and accesses cleaning services contract

The Company and its subsidiaries are parties in disputes alleging losses suffered as a result of supposed breaches of contract at the time of provision of services of cleaning of power line pathways and firebreaks. The amount provisioned is R$ 30,808 (R$ 28,389 at December 31, 2016), this being estimated as the likely amount of funds necessary to settle this dispute.

Other legal actions

The Company and its subsidiaries are parties in a lawsuit disputing the removal of residents in areas of access to transmission lines or under transmission line towers. The amount provisioned is R$ 23,286 (R$ 21,407 at December 31, 2016), estimated as the likely amount of funds necessary to settle this dispute, based on the opinion of the Company’s legal advisors.

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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In addition to the issues described above, the Company is involved, on plaintiff or defendant side, in other cases, of smaller scale, related to the normal course of its operations, with an estimated total amount of R$ 170,045 (R$ 129,563 on December 31, 2016), of which R$ 9,989 (R$ 8,297 on December 31, 2016) – the amount estimated as probably necessary for settlement of these disputes – has been provisioned. Management believes that it has appropriate defense for these actions, and does not expect these issues to give rise to significant losses that could have an adverse effect on the Company’s financial position or profit.

Contingent liabilities – for cases in which the chances of loss are assessed as ‘possible’, and the company believes it has arguments of merit for legal defense

Tax and similar charges

The Company and its subsidiaries are parties in numerous administrative and court proceedings in relation to taxes. Below are details of the principal cases:

Indemnity of employees’ future benefit (the ‘Anuênio’)

In 2006 the Company paid an indemnity to its employees, totaling R$ 177,686, in exchange for rights to future payments (referred to as the Anuênio) for time of service, which would otherwise be incorporated, in the future, into salaries. The Company and its subsidiaries did not pay income tax nor Social Security contributions in relation to these amounts because it considered that those obligations are not applicable to amounts paid as an indemnity. However, to avoid the risk of a future fine, the Company decided to apply for However, to avoid the risk of a future fine, the Company decided to apply for orders of mandamus, which permitted payment into Court of R$ 121,834, which updated now represents the amount of R$$265,178 (R$ 255,127 at December 31, 2016). This was posted in Escrow deposits in litigation. The updated amount of the contingency is R$ 307,446 (R$ 290,216 on December 31, 2016) and, based on the arguments above, management has classified the chance of loss as ‘possible’.

Social Security contributions

The Brazilian federal tax authority (Secretaria da Receita Federal) has brought administrative proceedings under various headings: employee profit shares; the Workers’ Food Program (Programa de Alimentação do Trabalhador, or PAT); education benefit; food benefit; Special Additional Retirement payment; overtime payments; hazardous occupation payments; matters related to Sest/Senat (transport workers’ support programs); and fines for non-compliance with accessory obligations. The Company and its subsidiaries have presented defenses and await judgment. The amount of the contingency is approximately R$ 1,689,042 (R$ 1,509,940 on December 31, 2016). Management has classified the chance of loss as ‘possible’, also taking into account assessment of the chance of loss in the judicial sphere (the cases mentioned are in the administrative sphere), based on the evaluation of the claims and the related case law.

Non-homologation of offsetting of tax credit

The federal tax authority did not ratify the Company’s declared offsetting, in Corporate income tax returns, of carryforwards and undue or excess payment of federal taxes – IRPJ, CSLL, PIS and Cofins – identified by official tax deposit receipts (‘DARFs’ and ‘DCTFs’). The Company and its subsidiaries are contesting the non-homologation of the amounts offset. The amount of the contingency is R$ 242,839 (R$ 317,032 on December 31, 2016). The Company has assessed the chance of loss as ‘possible’, since the relevant requirements of the National Tax Code (CTN) have been complied with.

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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Corporate tax return (DIPJ) – restitution and offsetting

The Company was a party in an administrative case involving requests for restitution and compensation of credits arising from tax carryforward balances indicated in the corporate tax returns for the calendar years from 1997 to 2000, and also for excess payments identified by the corresponding tax payment receipts (DARFs and DCTFs). Due to completion of all appeals in the administrative sphere, an ordinary legal action has been filed, for the approximate total amount of R$ 568,910 (R$ 535,465 on December 31, 2016). The chances of loss in this action are assessed as ‘possible’, due to nullities in the conduct of the administrative proceedings and the understanding that mistaken assumptions were used by the inspectors in the administrative judgment, and also based on analysis of the Company’s argument and documents of proof.

Income tax withheld at source (IRRF) on a capital gain in a stockholding transaction

The federal tax authority issued an infringement notice on Cemig as a jointly responsible party with its jointly-controlled entity Parati S.A. Participações em Ativos de Energia Elétrica (Parati), relating to withholding income tax (Imposto de Renda Retido na Fonte, or IRRF) allegedly applicable to returns paid by reason of a capital gain in a stockholding transaction relating to the purchase by Parati, and sale, by Enlighted, on July 7, 2011, of 100.00% of the equity interests in Luce LLC (a company with head office in Delaware, USA), holder of 75.00% of the shares in the Luce Brasil equity investment fund (FIP Luce), which was indirect holder, through Luce Empreendimentos e Participações S.A., of approximately 13.03% of the total and voting shares of Light S.A. (Light). The amount of the contingency is approximately R$ 209,739 (R$ 197,911 on December 31, 2016). The chance of loss has been assessed as ‘possible’.

The Social Contribution tax on net profit (CSLL)

The federal tax authority issued a tax infringement claim against the Company for the business years 2012 and 2013, alleging undue non-addition, or deduction, by the Company, of amounts relating to the following items in calculating the Social Contribution tax on net profit: (i) taxes with liability suspended; (ii) donations and sponsorship (Law 8313/91); and (iii) fines for various alleged infringements. The amount of this contingency is R$ 276,810 (R$ 279,914 on December 31, 2016). The Company has classified the chances of loss as ‘possible’, in accordance with the analysis of the case law on the subject.

ICMS (value added) Tax

The tax authority of Minas Gerais state has opened several administrative actions against Cemig D, raising a supposed divergence in the classification, for tax purposes, of certain consumers in the years 2011 through 2015. The amount of this contingency is R$ 88,904 (R$ 82,130 on December 31, 2016). The subsidiary has classified the chance of loss as ‘possible’, because it believes that it has arguments on the merit for defense in the court, and because of the absence of case law precedent.

Regulatory matters

Public Lighting Contribution (CIP)

Cemig and Cemig D are defendants in several public civil actions (class actions) claiming nullity of the clause in the Electricity Supply Contracts for public illumination signed between the Company and the various municipalities of its concession area, and restitution by the Company of the difference representing the amounts charged in the last 20 years, in the event that the courts recognize that these amounts were unduly charged. The actions are grounded on a supposed error by Cemig in the estimate of the period of time that was used in calculation of the consumption of electricity for public illumination, funded by the Public Lighting Contribution (Contribuição para Iluminação Pública, or CIP).

The Company and its subsidiaries believe they have has arguments of merit for defense in these claims, since the charge at present made is grounded on Aneel Normative Resolution 456/2000. As a result it has not constituted a provision for this action, the amount of which is estimated at R$ 1,239,409 (R$ 1,304,705 on December 31, 2015). The Company has assessed the chances of loss in this action as ‘possible’, due to the Consumer Defense Code (Código de Defesa do Consumidor, or CDC) not being applicable, because the matter is governed by the specific regulation of the electricity sector, and because Cemig complied with Aneel Resolutions 414 and 456, which deal with the subject.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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Accounting of electricity sale transactions in the Electricity Trading Chamber (CCEE)

In an action dating from August 2002, AES Sul Distribuidora challenged in the courts the criteria for accounting of electricity sale transactions in the wholesale electricity market (Mercado Atacadista de Energia, or MAE) (predecessor of the present Electricity Trading Chamber – Câmara de Comercialização de Energia Elétrica, or CCEE), during the period of rationing, in 2001-2. It obtained an interim judgment in its favor in February 2006, which ordered Aneel, working with the CCEE, to comply with the claim by AES Sul and recalculate the settlement of the transactions during the rationing period, leaving out of account Aneel’s Dispatch 288 of 2002. This was to be put into effect in the CCEE as from November 2008, resulting in an additional disbursement for Cemig GT, referring to the expense on purchase of electricity in the spot market on the CCEE, in the approximate amount of R$ 279,904 (R$ 263,847 on December 31, 2016). On November 9, 2008 Cemig GT obtained an interim remedy in the Regional Federal Appeal Court (Tribunal Regional Federal, or TRF) suspending the obligatory nature of the requirement to pay into court the amount that would have been owed under the Special Financial Settlement made by the CCEE.

Cemig GT has classified the chance of loss as ‘possible’, since this action deals with the General Agreement for the Electricity Sector, in which it has the full documentation to support its arguments.

System Service Charges (ESS) – Resolution of the National Energy Policy Council

Resolution 3 of the National Energy Policy Council (Conselho Nacional de Política Energética, or CNPE) of March 6, 2013 established new criteria for the prorating of the cost of additional dispatch of thermal plants. Under the new criteria, the costs of the System Service Charges for Electricity Security (Encargos do Serviço do Sistema, or ESS), which were previously prorated in full between Free Consumers and Distributors, was now to be prorated between all the agents participating in the National Grid System, including generators and traders.

In May 2013, the Brazilian Independent Electricity Producers’ Association (Associação Brasileira dos Produtores Independentes de Energia Elétrica, or Apine), of which Cemig GT is a member, obtained an interim court remedy suspending the effects of Articles 2 and 3 of CNPE Resolution 3, exempting generators from payment of the ESS under that Resolution.

As a result of the interim remedy, the CCEE carried out the financial settlement for transactions in April through December 2013 using the criteria prior to the said Resolution. As a result, Cemig GT recorded the costs of the ESS in accordance with the criteria for financial settlement published by the CCEE, without the effects of CNPE Resolution 3.

The applications by the plaintiff (Apine) were granted in the first instance, confirming the interim remedy granted in favor of its members, which include Cemig GT and its subsidiaries. This decision was the subject of an appeal, distributed to the 7th Panel of the Regional Federal Court (Tribunal Federal Regional, or TRF) of the 1st Region, in which judgment is awaited.

The amount of the contingency is approximately R$ 195,280 (R$ 182,232 on December 31, 2016). In spite of the successful judgment at first instance, the Association’s legal advisers still considered the chances of loss in this contingency as ‘possible’. The Company agrees with this, since there are not yet elements to make it possible to foresee the outcome of the Appeal filed by the federal government.

Tariff increases

Exclusion of consumers inscribed as low-income

The Federal Public Attorneys’ Office filed a class action against the Company and Aneel, to avoid exclusion of consumers from classification in the Low-income Residential Tariff sub-category, requesting an order for Cemig D to pay 200% of the amount allegedly paid in excess by consumers. Judgment was given in favor of the plaintiffs, but the Company and Aneel have filed an interlocutory appeal and await judgment. The amount of the contingency is approximately R$ 268,489 (R$ 253,731 on December 31, 2016). Cemig D has classified the chances of loss as ‘possible’ due to other favorable judgments on this theme.

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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Periodic Tariff Adjustment – Neutrality of ‘Portion A’

The Municipal Association for Protection of the Consumer and the Environment (Associação Municipal de Proteção ao Consumidor e ao Meio Ambiente, or Amprocom) filed a class action against Cemig D and Aneel, requiring identification of all consumers allegedly damaged in the processes of Periodic Review and Annual Adjustment of tariffs in the period 2002 to 2009, and restitution, through credits on electricity bills, of any amounts unduly charged arising from non-inclusion in the distributor’s non-manageable costs components (‘Portion A’ costs) of the impact of future variations in consumer electricity demand, and the allegedly undue inclusion of these gains in the distributor’s manageable costs (‘Portion B’ costs), causing economic/financial imbalance of the contract. This is an action that could affect all distribution concession holders, which could thus lead to a new Electricity Sector Agreement.

As a result of a judgment being given in favor of Cemig D, and no appeal being made against that decision, the case has been written off (on December 31, 2016 the amount of the action was R$ 316,675).

Environmental issues

Impact arising from construction of power plants

The Public Attorneys of Minas Gerais State, together with an association and individuals, have brought class actions requiring the Company to invest at least 0.5% of the annual gross operating revenue of the Emborcação, Pissarrão, Funil, Volta Grande, Poquim, Paraúna, Miranda, Nova Ponte, Rio de Pedras and Peti plants in environmental protection and preservation of the water tables of the counties where these power plants are located, and proportional indemnity for allegedly irrecoverable environmental damage caused, arising from omission to comply with Minas Gerais State Law 12503/1997. Cemig GT has filed appeals to the Higher Appeal Court (STJ) and the Federal Supreme Court (STF). Based on the opinions of its legal advisers, Cemig GT believes that this is a matter involving legislation at infra-constitutional level (there is a Federal Law with an analogous object) and thus a constitutional matter, on the issue of whether the state law is constitutional or not, so that the final decision is one for the national Higher Appeal Court (STJ) and the Federal Supreme Court (STF). No provision has been made, since based on the opinion of its legal advisors management has classified the chance of loss as ‘possible’. The amount of the contingency is R$ 127,358 (R$ 112,704 on December 31, 2016).

The Public Attorneys’ Office of Minas Gerais State has filed class actions requiring the formation of a Permanent Preservation Area (APP) around the reservoir of the Capim Branco hydroelectric plant, suspension of the effects of the environmental licenses, and recovery of alleged environmental damage. Based on the opinion of its legal advisors in relation to the changes that have been made in the new Forest Code and in the case law on this subject, Cemig GT has classified the chance of loss in this dispute as ‘possible’. The estimated value of the contingency is R$ 77,372 (R$ 73,169 on December 31, 2016).

Other contingent liabilities

Early settlement of the CRC (Earnings Compensation) Account

The Company is a party in an administrative proceeding before the Audit Court of the State of Minas Gerais which challenges: (i) a difference of amounts relating to the discount offered by Cemig for early repayment of the credit owed to Cemig by the State under the Receivables Assignment Contract in relation to the CRC Account (Conta de Resultados a Compensar, or Earnings Compensation Account) – this payment was completed in the first quarter of 2013; and also (ii) possible undue financial burden on the State after the signature of the Amendments that aimed to re-establish the economic and financial balance of the Contract. The amount of the contingency is approximately R$ 395,797 (R$ 390,307 on December 31, 2016), and, based on the Opinion of the Public Attorneys’ Office of the Audit Board of the State of Minas Gerais, the Company believes that it has met the legal requirements. Thus, it has assessed the chances of loss as ‘possible’, since it believes that the adjustment was made in faithful obedience to the legislation applicable to the case.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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Contractual imbalance

Cemig D is a party in disputes alleging losses suffered by third parties as a result of supposed breach of contract at the time of implementation of part of the rural electrification program known as Luz para Todos (‘Light for Everyone’). The estimated amount is R$ 253,279 (R$ 236,703 on December 31, 2016). No provision has been made. Cemig D has classified the chances of loss as ‘possible’ as a result of the analysis that has been made of the argument and documentation used by the contracted parties in attempting to make the Company liable for any losses that allegedly occurred.

The Parent company is also a party in other disputes arising from alleged non-compliance with contracts in the normal course of business, for an estimated total of R$ 77,176 (R$ 71,396 on December 31, 2016). Cemig D has classified the chance of loss as ‘possible’, after analysis of the case law on this subject.

Irregularities in competitive tender proceedings

Cemig D is a party in a dispute alleging irregularities in competitive tender proceedings, governed by an online invitation to bid. The estimated amount is R$ 26,011 (R$ 25,650 on December 31, 2016). No provision has been made. Cemig D has classified the chance of loss as ‘possible’, after analysis of the case law on this subject.

Alteration of the monetary updating index of employment-law cases

The Higher Employment-Law Appeal Court (Tribunal Superior do Trabalho, or TST), considering a position adopted by the Federal Supreme Court (Supremo Tribunal Federal, STF) in two actions on constitutionality that dealt with the index for monetary updating of federal debts, decided on August 4, 2015 that employment-law debts in actions not yet decided that discuss debts subsequent to June 30, 2009 should be updated based on the variation of the IPCA-E (Expanded National Consumer Price Index), rather than of the TR reference interest rate. On October 16, 2015 an interim injunction was given by the STF that suspended the effects of the TST decision, on the grounds that decisions on matters of general constitutional importance should be decided exclusively by the STF.

The estimated value of the difference between the monetary updating indices of the employment-law cases is R$ 174,351 (R$ 175,839 on December 31, 2016). No additional provision has been made, since the Company and its subsidiaries, based on the assessment by its legal advisers, has assessed the chances of loss in the action as ‘possible’, as a result of the decision by the STF, and of there being no established case law, nor analysis by legal writers on the subject after the injunction given by the Federal Supreme Court.

 

24. EQUITY AND REMUNERATION TO STOCKHOLDERS

The Company’s registered share capital on September 30, 2017 is R$ 6,294,208, in 420,764,708 common shares and 838,076,946 preferred shares, all with nominal value of R$ 5.00.

Profit (loss) per share

The number of shares used in the calculation of basic and diluted profit (loss) per share is as follows:

 

Number of shares

   9M17     9M16     3Q17     3Q16  

Common shares

     420,764,708       420,764,708       420,764,708       420,764,708  

Preferred shares

     838,076,946       838,076,946       838,076,946       838,076,946  
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,258,841,654       1,258,841,654       1,258,841,654       1,258,841,654  

Shares in treasury

     (560,718     (560,718     (560,718     (560,718
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     1,258,280,936       1,258,280,936       1,258,280,936       1,258,280,936  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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The following is the calculation of the basic and diluted profit per share:

 

     9M17      9M16      3Q17     3Q16  

Net profit (loss) (A)

     397,182        640,833        (83,666     433,502  

Total number of shares (B)

     1,258,280,936        1,258,280,936        1,258,280,936       1,258,280,936  
  

 

 

    

 

 

    

 

 

   

 

 

 

Basic and diluted profit (loss) per share (A/B) – R$

     0.32        0.51        (0.06     0.34  
  

 

 

    

 

 

    

 

 

   

 

 

 

The purchase and sale options of investments described in Note 14 could potentially dilute basic profit per share in the future; however, they have not caused dilution of profit per share in the periods presented here.

Equity valuation adjustments

 

Equity valuation adjustments R$ ’000

   Consolidated  
   Sep. 30,
2017
    Dec. 31,
2016
 

Adjustments to actuarial liabilities – Employee benefits – Parent company

     (169,719     (169,719

Other comprehensive income in subsidiary and jointly-controlled entity

    

Deemed cost of PP&E

     641,414       685,339  

Variation in the fair value of a financial asset available for sale in a jointly-controlled entity

     140       38,273  

Cumulative translation adjustments

     397       398  

Adjustments to actuarial liabilities – Employee benefits

     (1,048,192     (1,042,663

Cash flow hedge instruments

     87       87  
  

 

 

   

 

 

 
     (406,154     (318,566
  

 

 

   

 

 

 

Equity valuation adjustments

     (575,873     (488,285
  

 

 

   

 

 

 

Reserves

The account lines Capital reserves and Profit reserves are made up as follows:

 

Capital reserves and shares in Treasury R$ ’000

   Sep. 30,
2017
    Dec. 31,
2016
 

Investment-related subsidies

     1,856,628       1,856,628  

Goodwill on issuance of shares

     69,230       69,230  

Monetary updating of capital

     7       7  

Shares in treasury

     (1,362     (1,362
  

 

 

   

 

 

 
     1,924,503       1,924,503  
  

 

 

   

 

 

 

The Reserve for investment-related donations and subsidies basically refers to the compensation by the federal government for the difference between the profitability obtained by Cemig up to March 1993 and the minimum return guaranteed by the legislation in effect at the time.

The reserve for treasury shares refers to the pass-through by Finor of shares arising from funds applied in Cemig projects in the area covered by Sudene (the development agency for the Northeast) under tax incentive programs.

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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Profit reserves R$ ’000

   Sep. 30,
2017
     Dec. 31,
2016
 

Legal Reserve

     853,018        853,018  

Reserve under the by-laws

     57,214        57,214  

Retained Earnings reserve

     2,812,943        2,812,943  

Tax incentives reserve

     56,834        56,834  

Reserve for obligatory dividends not distributed

     1,419,846        1,419,846  
  

 

 

    

 

 

 
     5,199,855        5,199,855  
  

 

 

    

 

 

 

Legal reserve

Constitution of the Legal Reserve is obligatory, up to the limits established by law. The purpose of the Reserve is to ensure the security of the share capital, its use being allowed only for offsetting of losses or increase in the share capital. The Company did not deposit in the Legal Reserve in 2013 due to its having reached its legal limit.

Reserve under the by-laws

The Reserve under the By-laws is for future payment of extraordinary dividends, in accordance with Clause 28 of the by-laws.

Retained Earnings reserve

The Retained Earnings reserve refers to profits not distributed in prior years, to guarantee execution of the Company’s Investment Program, and amortizations of loans and financings. The retentions are supported by capital budgets approved by the Board of Directors in the periods in question.

Reserve for obligatory dividends not distributed

 

     Sep. 30,
2017
 

Dividends withheld, arising from the profit for 2015

     622,530  

Dividends withheld, arising from the profit for 2014

     797,316  
  

 

 

 
     1,419,846  
  

 

 

 

These dividends were retained in Stockholders’ equity, in the business years 2015 and 2014, in the account Reserve for obligatory dividends not distributed; and as per the proposal approved in the Annual General Meetings of 2016 and 2015, the dividends retained will be paid as soon as the Company’s financial situation permits.

Tax incentives reserve

The federal tax authority (Receita Federal) recognized the Company’s right to reduction of 75% in income tax, including the tax paid at the additional rate, calculated on the basis of the operating profit in the region of Sudene (the Development Agency for the Northeast), for 10 years starting in 2014. The amount of the Tax incentives reserve on September 30, 2017 was R$ 56,834. This reserve cannot be used for payment of dividends.

Interest on capital and dividends

On June 27, 2017, the Company paid dividends and interest on capital in the amount of R$270,261 that were aproved on Ordinary and extraordinary shareholders meetings held on May 12, 2017. On September 30, 2017 remained the balance of R$196,302 to be paid.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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25. REVENUE

 

R$ ’000

   Consolidated  
   9M17     9M16  

Revenue from supply of electricity (a)

     17,387,754       17,315,733  

Revenue from use of the electricity distribution systems (TUSD) (b)

     1,230,623       1,348,132  

CVA, and Other financial components in tariff increases (c)

     148,216       (937,053

Transmission revenue

    

Transmission concession revenue (d)

     221,422       228,030  

Transmission construction revenue (e)

     11,226       36,405  

Transmission indemnity revenue (g)

     295,749       692,211  

Generation Indemnity revenue (h)

     259,516       —    

Distribution construction revenue (e)

     725,528       881,450  

Adjustment to expectation of cash flow from the indemnifiable Financial assets of the distribution concession (j)

     2,277       6,638  

Gain on financial updating of the Concession Grant Fee (f)

     240,420       212,185  

Transactions in electricity on the CCEE (i)

     536,507       138,870  

Supply of gas

     1,305,636       1,037,126  

Other operating revenues (k)

     1,097,001       1,080,945  

(h) Taxes and charges applied to Revenue

     (8,308,094     (7,933,934
  

 

 

   

 

 

 

Net operating revenue

     15,153,781       14,106,738  
  

 

 

   

 

 

 

 

R$’000

   Consolidated  
   3Q17     3Q16  

Revenue from supply of electricity (a)

     5,815,621       5,787,568  

Revenue from use of the electricity distribution systems (TUSD) (b)

     330,147       511,552  

CVA, and Other financial components in tariff increases (c)

     480,112       (273,498

Transmission revenue

    

Transmission concession revenue (d)

     43,985       80,261  

Transmission construction revenue (e)

     4,201       4,771  

Transmission indemnity revenue (g)

     25,894       99,742  

Generation Indemnity revenue (h)

     259,516       —    

Distribution construction revenue (e)

     291,519       329,351  

Adjustment to expectation of cash flow from the indemnifiable Financial assets of the distribution concession (j)

     766       1,313  

Gain on financial updating of the Concession Grant Fee (f)

     89,944       63,491  

Transactions in electricity on the CCEE (i)

     111,330       87,198  

Supply of gas

     484,491       339,634  

Other operating revenues (k)

     379,369       374,093  

(h) Taxes and charges applied to Revenue

     (3,181,073     (2,509,870
  

 

 

   

 

 

 

Net operating revenue

     5,135,822       4,895,606  
  

 

 

   

 

 

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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a) Revenue from supply of electricity

This table shows supply of electricity, and revenue from it, by type of consumer:

 

     MWh (1)      R$ ’000  
   9M17      9M16      9M17     9M16  

Residential

     7,489,980        7,406,095        5,797,313       5,818,783  

Industrial

     13,162,944        14,541,717        3,633,866       4,042,707  

Commercial, Services and Others

     5,581,213        4,907,884        3,218,839       3,270,334  

Rural

     2,769,082        2,699,294        1,203,749       1,073,290  

Public authorities

     644,621        659,997        389,945       404,713  

Public lighting

     1,030,199        1,012,312        397,147       395,771  

Public services

     977,757        930,708        430,943       404,743  
  

 

 

    

 

 

    

 

 

   

 

 

 

Subtotal

     31,655,796        32,158,007        15,071,802       15,410,341  
  

 

 

    

 

 

    

 

 

   

 

 

 

Own consumption

     26,946        27,614        —         —    

Supply not yet invoiced

        —          (44,741     (105,308
  

 

 

    

 

 

    

 

 

   

 

 

 
     31,682,742        32,185,621        15,027,061       15,305,033  
  

 

 

    

 

 

    

 

 

   

 

 

 

Wholesale supply to other concession holders (2)

     9,167,876        8,813,064        1,289,188       1,884,424  

Wholesale supply not yet invoiced, net

        —          1,071,505       126,276  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     40,850,618        40,998,685        17,387,754       17,315,733  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     MWh (1)      R$ ’000  
   3Q17      3Q16      3Q17      3Q16  

Residential

     2,456,908        2,389,353        1,878,293        1,859,109  

Industrial

     4,458,794        5,031,850        1,210,358        1,379,561  

Commercial, Services and Others

     1,776,377        1,522,936        982,345        985,574  

Rural

     1,016,897        1,015,555        424,366        394,504  

Public authorities

     207,967        208,314        120,600        128,652  

Public lighting

     354,299        338,892        132,691        129,015  

Public services

     338,415        318,605        144,190        136,068  
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     10,609,657        10,825,505        4,892,843        5,012,483  
  

 

 

    

 

 

    

 

 

    

 

 

 

Own consumption

     8,896        8,528        0     

Supply not yet invoiced

     —          —          -10,305        13,261  
  

 

 

    

 

 

    

 

 

    

 

 

 
     10,618,553        10,834,033        4,882,538        5,025,744  
  

 

 

    

 

 

    

 

 

    

 

 

 

Wholesale supply to other concession holders (2)

     3,427,498        3,006,675        401,091        677,340  

Wholesale supply not yet invoiced, net

     —          —          531,992        84,484  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     14,046,051        13,840,708        5,815,621        5,787,568  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Information not reviewed by the external auditors.
(2) Includes a CCEAR (Regulated Market Sales Contract), ‘bilateral contracts’ with other agents, and the revenues from to management of generation assets (GAG) for the 18 hydroelectric plants of Lot D of Auction no 12/2015.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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b) Revenue from Use of Distribution Systems (the TUSD charge)

A significant part of the large industrial consumers in the concession areas of Cemig D are now ‘Free Consumers’ – energy is sold to them by the Cemig group’s generation and transmission company, Cemig GT, as well as other generators. When these users became Free Consumers, they began to pay separate charges for use of the distribution network. This line (‘TUSD’) records those charges.

 

c) The CVA Account (Portion ‘A’ Costs Variation Compensation Account), and Other financial components, in tariff adjustments

The gains arising from variations in (i) the CVA Account (‘Portion A Costs Variation Compensation Account’), and in (ii) Other financial components in calculation of tariffs, refer to the positive and negative differences between the estimate of non-manageable costs of the subsidiary Cemig D and the payments actually made. The amounts recognized arise from balances constituted in the current period, homologated or to be homologated in tariff adjustment processes. For more information see Note 14.

 

d) Transmission Concession revenue

Transmission revenue comprises the amount received from agents of the electricity sector for operation and maintenance of transmission lines of the national grid, represented by the Permitted Annual Revenue (Receita Anual Permitida, or RAP).

 

e) Construction Revenue

Construction Revenue is substantially offset by Construction costs, and corresponds to the investments of the Company’s subsidiaries in assets of the transmission and distribution concessions in the period.

 

f) Gain on financial updating of the Concession Grant Fee

Represents updating by the IPCA index, plus remuneratory interest, on the Concession Grant Fee for the concession awarded as Lot D of Auction 12/2015. For more details see Note 14.

 

g) Transmission Indemnity revenue

In 9M17 the Company recognized revenue of R$ 295,749, of which R$ 146,494 corresponded to updating, by the IPCA index, of the balance of indemnity existing at December 2016, and R$ 149,255 relating to the adjustment to the BRR (Remuneration Base of Assets) of the transmission assets, as per Aneel Technical Note 183/2017. For more details see Note 14.

 

h) Generation Indemnity revenue

In 9M17 the Company recognized revenue of R$ 259,516, for the adjustment to the balance of non-amortized indemnities for the concessions of the São Simão and Miranda Hydroelectric Plants, as per Ministerial Order 291/17, also taking into account the updating of the amounts. For more details see Notes 4 and 14.

 

i) Revenue from transactions in electricity in the CCEE (Wholesale Trading Chamber)

The revenue from transactions in the Electricity Trading Chamber (Câmara de Comercialização de Energia Elétrica, or CCEE) is the monthly positive net balance of settlements of transactions for purchase and sale of electricity in the Spot Market, through the CCEE.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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j) Adjustment to expectation of cash flow from the indemnifiable Financial assets of the distribution concession

Gain on Adjustment to expectation of cash flow from the indemnifiable Financial asset of the distribution concession, due to monetary updating of the Regulatory Remuneration Base of assets

 

k) Other operating revenues

 

     Consolidated  

R$ ’000

   9M17      9M16  

Charged service

     7,723        4,533  

Telecoms services

     111,342        117,906  

Services rendered

     116,167        120,149  

Subsidies (*)

     769,505        757,213  

Rental and leasing

     88,869        73,423  

Other

     3,395        7,721  
  

 

 

    

 

 

 
     1,097,001        1,080,945  
  

 

 

    

 

 

 

 

     Consolidated  

R$ ’000

   3Q17      3Q16  

Charged service

     3,124        1,593  

Telecoms services

     38,520        59,608  

Services rendered

     40,635        39,127  

Subsidies (*)

     266,485        246,636  

Rental and leasing

     30,531        24,582  

Other

     74        2,547  
  

 

 

    

 

 

 
     379,369        374,093  
  

 

 

    

 

 

 

 

(*) Revenue recognized for the tariff subsidies applied to users of distribution services, including low-income subsidies, which are reimbursed by Eletrobras.

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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l) Taxes and charges reported as deductions from revenue

 

     Consolidated  

R$ ’000

   9M17      9M16  

Taxes on revenue

     

ICMS tax

     4,470,557        3,873,741  

Cofins tax

     1,654,269        1,529,044  

PIS and Pasep taxes

     359,137        331,964  

Other

     5,942        5,238  
  

 

 

    

 

 

 
     6,489,905        5,739,987  

Charges to the consumer

     

Global Reversion Reserve (RGR) (Recovery of expense)

     9,418        (26,420

Energy Efficiency Program

     37,422        44,873  

Energy Development Account (CDE)

     1,326,946        1,596,577  

Research and Development (R&D)

     26,914        35,936  

National Scientific and Technological Development Fund (FNDCT)

     26,914        35,936  

Energy System Expansion Research (EPE of MME)

     13,457        17,968  

Consumer charges – Proinfa alternative sources program

     29,626        31,385  

Electricity Services Inspection Charge

     22,983        26,149  

Royalties for use of water resources

     66,449        88,754  

Consumer charges – the ‘Flag Tariff’ system

     258,060        342,789  
  

 

 

    

 

 

 
     1,818,189        2,193,947  
  

 

 

    

 

 

 
     8,308,094        7,933,934  
  

 

 

    

 

 

 

 

     Consolidated  

R$’000

   3Q17      3Q16  

Taxes on revenue

     

ICMS tax (1)

     1,819,209        1,259,453  

Cofins tax

     584,676        516,259  

PIS and Pasep taxes

     126,932        112,078  

Other

     2,115        1,794  
  

 

 

    

 

 

 
     2,532,932        1,889,584  

Charges to the consumer

     

Global Reversion Reserve (RGR) (Recovery of expense)

     9,468        (42,033

Energy Efficiency Program

     11,732        10,978  

Energy Development Account (CDE)

     467,576        571,148  

Research and Development (R&D)

     7,927        11,240  

National Scientific and Technological Development Fund (FNDCT)

     7,927        11,240  

Energy System Expansion Research (EPE of MME)

     3,963        5,620  

Consumer charges – Proinfa alternative sources program

     10,049        11,363  

Electricity Services Inspection Charge

     6,347        8,467  

Royalties for use of water resources

     21,527        32,692  

Consumer charges – the ‘Flag Tariff’ system

     101,625        (429
  

 

 

    

 

 

 
     648,141        620,286  
  

 

 

    

 

 

 
     3,181,073        2,509,870  
  

 

 

    

 

 

 

 

(1) In 3Q17 the subsidiaries Cemig GT and Cemig D adhered to the terms of the Minas Gerais State Tax Credits Regularization Plan (Plano de Regularização de Créditos Tributários, or PRCT). For more information see Note 19.

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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26. OPERATING COSTS AND EXPENSES

 

     Consolidated      Holding company  

R$ ’000

   9M17      9M16      9M17      9M16  

Personnel (a)

     1,275,667        1,217,201        38,796        26,587  

Employees’ and managers’ profit shares

     25,777        30,417        1,195        (3,024

Post-retirement obligations

     293,617        248,583        29,482        27,188  

Materials

     43,248        40,935        89        52  

Raw materials and inputs for production of electricity

     58        35        —          —    

Outsourced services (b)

     680,569        601,806        6,796        6,226  

Electricity bought for resale (c)

     7,685,392        6,126,458        —          —    

Depreciation and amortization

     616,783        601,197        351        382  

Operational provisions (reversals) (d)

     558,793        714,237        104,037        280,532  

Charges for use of the national grid

     791,339        741,416        —          —    

Gas bought for resale

     789,861        623,503        —          —    

Construction costs (e)

     736,754        917,855        —          —    

Other operational expenses, net (f)

     311,581        372,298        6,940        11,646  
  

 

 

    

 

 

    

 

 

    

 

 

 
     13,809,439        12,235,941        187,686        349,589  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Consolidated     Holding company  

R$ ’000

   3Q17      3Q16     3Q17     3Q16  

Personnel (a)

     358,505        373,986       17,730       9,430  

Employees’ and managers’ profit shares

     886        24,217       233       1,210  

Post-retirement obligations

     101,589        89,306       10,010       9,380  

Materials

     16,185        17,057       23       7  

Raw materials and inputs for production of electricity

     13        8       —         —    

Outsourced services (b)

     233,805        201,023       3,194       2,397  

Electricity bought for resale (c)

     2,942,974        2,170,348       —         —    

Depreciation and amortization

     205,983        202,480       115       122  

Operational provisions (reversals) (d)

     188,875        (19,375     88,726       (165,669

Charges for use of the national grid

     387,078        215,504       —         —    

Gas bought for resale

     304,698        196,494       —         —    

Construction costs (e)

     295,720        334,122       —         —    

Other operational expenses, net (f)

     124,127        132,206       (979     1,683  
  

 

 

    

 

 

   

 

 

   

 

 

 
     5,160,438        3,937,376       119,052       (141,440
  

 

 

    

 

 

   

 

 

   

 

 

 

 

a) Personnel expenses

Programmed Voluntary Retirement Plan (PDVP)

In March 2017, the Company created the 2017 Employee Voluntary Severance Program (‘the 2017 PDVP’). Those eligible to take part were any employees who will have worked with Cemig for 25 years or more by December 31, 2017. The period for acceptance of the 2017 PDVP was April 3 through October 17, 2017. It provided for payment of an additional premium of five monthly salaries to employees who join in April 2017, to leave the Company in May 2017; the premium diminished progressively depending on the month of acceptance. Thus, for employees who adhered to the program only in August 2017, for voluntary retirement in September 2017, the corresponding premium payment was only one month’s salary. For those who joined as from September 1, 2017, there was no premium. The program also paid the standard legal severance payments – including: payment for the period of notice, and especially, an amount equal to the ‘penalty’ payment of 40% of the Base Value of the employee’s FGTS fund, as well as the other payments specified by the legislation. On September 30, 2017 the amount appropriated as expense on the premium for retirement under the 2017 PDVP, including the severence amounts, was R$ 197,326, corresponding to acceptance, up to that date, by 1,151 employees.

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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b) Outsourced services

 

     Consolidated      Holding company  

R$’000

   9M17      9M16      9M17      9M16  

Meter reading and bill delivery

     106,526        101,587        —          —    

Communication

     49,163        41,918        239        278  

Maintenance and conservation of electrical facilities and equipment

     186,971        175,003        84        49  

Building conservation and cleaning

     78,739        72,068        496        522  

Contracted labor

     9,252        8,819        —          —    

Freight and airfares

     5,434        5,156        1,357        1,724  

Accommodation and meals

     9,842        9,185        151        157  

Security services

     16,358        18,428        —          —    

Consultancy

     11,792        8,191        737        407  

Maintenance and conservation of furniture and utensils

     2,448        2,282        1        3  

Information technology

     34,289        28,999        771        439  

Maintenance and conservation of vehicles

     1,381        1,254        —          2  

Disconnection and reconnection

     23,528        3,540        —          —    

Environment

     10,058        12,532        —          —    

Legal services

     13,122        14,220        535        1,008  

Legal procedural costs

     2,010        2,664        43        48  

Tree pruning

     14,727        8,888        —          —    

Cleaning of power line pathways

     10,176        5,728        —          —    

Copying and legal publications

     16,949        11,746        200        148  

Inspection of consumer units

     118        613        —          —    

Printing of tax invoices and electricity bills

     121        2,588        —          —    

Other expenses

     77,565        66,397        2,182        1,441  
  

 

 

    

 

 

    

 

 

    

 

 

 
     680,569        601,806        6,796        6,226  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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R$’000

   Consolidated      Holding company  
   3Q17      3Q16      3Q17      3Q16  

Meter reading and bill delivery

     35,375        34,067        –          —    

Communication

     15,074        15,469        126        92  

Maintenance and conservation of electrical facilities and equipment

     60,119        51,512        63        1  

Building conservation and cleaning

     28,637        24,498        71        176  

Contracted labor

     4,146        2,610        –          —    

Freight and airfares

     2,066        2,367        418        893  

Accommodation and meals

     3,405        3,598        51        63  

Security services

     5,422        5,945        –          —    

Consultancy

     3,992        1,234        33        178  

Maintenance and conservation of furniture and utensils

     832        14,321        1        1  

Information technology

     10,137        1,152        143        101  

Maintenance and conservation of vehicles

     457        307        –          1  

Disconnection and reconnection

     11,196        1,775        –          —    

Environment

     1,848        4,189        –          —    

Legal services

     4,321        5,149        95        425  

Legal procedural costs

     780        779        8        22  

Tree pruning

     5,760        3,498        –          —    

Cleaning of power line pathways

     6,126        1,708        –          —    

Copying and legal publications

     7,098        4,186        141        42  

Inspection of consumer units

     61        145        –          —    

Printing of tax invoices and electricity bills

     55        773        –          —    

Other expenses

     26,898        21,741        2,044        402  
  

 

 

    

 

 

    

 

 

    

 

 

 
     233,805        201,023        3,194        2,397  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

c) Electricity purchased for resale

 

R$’000

   Consolidated  
   9M17     9M16  

Supply from Itaipu Binacional

     933,603       880,361  

Physical guarantee quota contracts

     343,458       403,913  

Quotas for Angra I and II nuclear plants

     182,832       162,680  

Spot market

     1,180,780       487,536  

Proinfa Program

     225,965       244,095  

‘Bilateral’ contracts

     269,943       216,963  

Electricity acquired in Regulated Market auctions

     2,201,909       1,862,534  

Electricity acquired in the Free Market

     3,086,096       2,476,229  

Credits of Pasep and Cofins taxes

     (739,194     (607,853
  

 

 

   

 

 

 
     7,685,392       6,126,458  
  

 

 

   

 

 

 

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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      LOGO  

 

R$’000

   Consolidated  
   3Q17     3Q16  

Supply from Itaipu Binacional

     316,786       273,070  

Physical guarantee quota contracts

     119,006       152,753  

Quotas for Angra I and II nuclear plants

     60,944       54,227  

Spot market

     408,859       196,612  

Proinfa Program

     75,321       81,365  

‘Bilateral’ contracts

     121,552       74,872  

Electricity acquired in Regulated Market auctions

     824,699       650,259  

Electricity acquired in the Free Market

     1,299,536       902,338  

Credits of Pasep and Cofins taxes

     (283,729     (215,148
  

 

 

   

 

 

 
     2,942,974       2,170,348  
  

 

 

   

 

 

 

 

d) Operational provisions (reversals)

 

R$’000

   Consolidated     Holding company  
   9M17     9M16     9M17     9M16  

Provision for estimate of doubtful receivables

     191,343       282,915       —         —    

Contingency provisions (reversals)

        

Employment-law cases

     188,013       69,963       12,553       11,463  

Civil cases

     18,142       28,732       722       1,647  

Tax

     2,401       2,616       1,353       205  

Environmental

     4       (21     —         —    

Regulatory

     (10,978     3,864       (4,241     (454

Other

     8,864       29,095       713       86  
  

 

 

   

 

 

   

 

 

   

 

 

 
     206,446       134,249       11,100       12,947  
  

 

 

   

 

 

   

 

 

   

 

 

 
     397,789       417,164       11,100       12,947  
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in fair value of derivatives

        

Put optio – Ativas e Sonda (Note 15)

     102       —         —         —    

Put option – RME and Lepsa (Note 15)

     92,937       267,585       92,937       267,585  

Put option – SAAG (Note 15)

     67,965       29,488       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 
     161,004       297,073       92,937       267,585  
  

 

 

   

 

 

   

 

 

   

 

 

 
     558,793       714,237       104,037       280,532  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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LOGO

      LOGO  

 

R$’000

   Consolidated     Holding company  
   3Q17     3Q16     3Q17     3Q16  

Provision for estimate of doubtful receivables

     50,458       108,349       —         —    

Contingency provisions (reversals)

        

Employment-law cases

     10,288       31,166       532       1,177  

Civil cases

     8,745       10,909       833       175  

Tax

     5,565       (567     3,961       (892

Environmental

     1       36       —         —    

Regulatory

     (143     (9,088     (2,162     614  

Other

     2,230       3,110       256       24  
  

 

 

   

 

 

   

 

 

   

 

 

 
     26,686       35,566       3,420       1,098  
  

 

 

   

 

 

   

 

 

   

 

 

 
     77,144       143,915       3,420       1,098  
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in fair value of derivatives

        

Put option – Sonda (Note 15)

     61       —           —    

Put option – RME and Lepsa (Note 15)

     85,306       (166,767     85,306       (166,767

Put option – SAAG (Note 15)

     26,364       3,477       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 
     111,731       (163,290     85,306       (166,767
  

 

 

   

 

 

   

 

 

   

 

 

 
     188,875       (19,375     88,726       (165,669
  

 

 

   

 

 

   

 

 

   

 

 

 

 

e) Construction cost

 

R$’000

   Consolidated  
   9M17      9M16  

Personnel and managers

     38,297        46,155  

Materials

     334,851        424,240  

Outsourced services

     300,244        321,916  

Other

     63,362        125,544  
  

 

 

    

 

 

 
     736,754        917,855  
  

 

 

    

 

 

 

 

R$’000

   Consolidated  
   3Q17      3Q16  

Personnel and managers

     14,143        13,659  

Materials

     151,691        160,127  

Outsourced services

     109,061        120,164  

Other

     20,825        40,172  
  

 

 

    

 

 

 
     295,720        334,122  
  

 

 

    

 

 

 

 

 

 

Av. Barbacena 1200

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f) Other operating expenses, net

 

R$’000

   Consolidated      Holding company  
   9M17      9M16      9M17      9M16  

Leasing and rentals

     77,095        67,449        2,616        486  

Advertising

     14,331        6,995        276        193  

Own consumption of electricity

     15,581        16,536        —          —    

Subsidies and donations

     9,457        12,364        —          —    

Paid concession

     2,264        2,154        —          —    

Insurance

     6,042        7,254        1,693        2,844  

CCEE annual charge

     6,017        5,802        1        2  

Losses on de-activation and disposal of goods and rights

     44,876        74,798        —          2  

Forluz – Administrative running cost

     19,607        18,951        970        937  

Collection agents

     52,664        53,200        —          1  

Fine for violation of Service Continuity standard

     24,755        31,060        —          —    

Taxes and charges

     6,645        7,590        636        288  

Other expenses

     32,247        68,145        748        6,893  
  

 

 

    

 

 

    

 

 

    

 

 

 
     311,581        372,298        6,940        11,646  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

R$’000

   Consolidated      Holding company  
   3Q17      3Q16      3Q17     3Q16  

Leasing and rentals

     32,188        19,921        1,142       177  

Advertising

     6,017        3,905        100       75  

Own consumption of electricity

     4,768        5,019        —         —    

Subsidies and donations

     2,933        3,286        —         —    

Paid concession

     735        734        —         —    

Insurance

     1,613        2,335        386       894  

CCEE annual charge

     1,972        1,850        —         1  

Losses on de-activation and disposal of goods and rights

     39,538        32,484        —         —    

Forluz – Administrative running cost

     6,574        6,470        325       320  

Collection agents

     17,377        17,652        —         1  

Fine for violation of Service Continuity standard

     3,895        6,035        —         —    

Taxes and charges

     1,259        1,861        93       39  

Other expenses

     5,258        30,654        (3,025     176  
  

 

 

    

 

 

    

 

 

   

 

 

 
     124,127        132,206        (979     1,683  
  

 

 

    

 

 

    

 

 

   

 

 

 

Operational leasing

The Company and its subsidiaries have operational leasing contracts relating, mainly, to vehicles and buildings used in its operational activities. Their amounts are not material in relation to the total costs of the Company and its subsidiaries.

 

 

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27. FINANCIAL REVENUE (EXPENSES)

 

R$’000

   Consolidated     Holding
company
 
    
     9M17     9M16     9M17     9M16  

FINANCIAL REVENUES

        

Income from cash investments

     171,530       220,232       39,214       30,510  

Late charges on overdue electricity bills

     193,057       212,499       —         —    

Foreign exchange variations

     20,207       56,140       —         1  

Monetary variations

     27,125       60,974       1,968       10,278  

Monetary variations – CVA

     —         206,967       —         —    

Monetary updating on Court escrow deposits

     86,464       42,615       44,696       10,108  

Pasep and Cofins taxes charged on financial revenues

     (35,529     (54,349     (8,704     (9,020

Adjustment to present value

     —         325       —         —    

Other

     87,211       89,788       7,719       35,180  
  

 

 

   

 

 

   

 

 

   

 

 

 
     550,065       835,191       84,893       77,057  

FINANCIAL EXPENSES

        

Costs of loans and financings

     (1,201,974     (1,432,576     —         —    

Foreign exchange variations

     (12,633     (19,225     (9     (1

Monetary updating – loans and financings

     (74,655     (232,366     —         —    

Monetary updating – paid concessions

     737       (3,056     —         —    

Charges and monetary updating on Post-retirement liabilities

     (48,401     (86,782     (2,381     (4,270

Monetary updating – CCEE obligations

     —         (13,844     —         —    

Monetary updating – Advance Against Capital Increase (AFAC)

     (40,086     —         —         —    

Monetary updating – AFAC

     239,445       —         239,445       —    

Monetary updating – Advance sales of power supply

     (37,666     —         —         —    

Adjustment to present value

     (2,168     —         —         —    

Other

     (94,550     (100,166     (502     (61
  

 

 

   

 

 

   

 

 

   

 

 

 
     (1,271,951     (1,888,015     236,553       (4,332
  

 

 

   

 

 

   

 

 

   

 

 

 

NET FINANCIAL REVENUE (EXPENSES)

     (721,886     (1,052,824     321,446       72,725  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

R$’000

   Consolidated     Holding company  
    
     3Q17     3Q16     3Q17     3Q16  

FINANCIAL REVENUES

        

Income from cash investments

     46,037       84,755       10,505       15,097  

Late charges on overdue electricity bills

     55,134       70,166       —         —    

Foreign exchange variations

     2,618       12,173       —         —    

Monetary variations

     13,132       33,081       400       3,295  

Monetary variations – CVA

     —         19,403       —         —    

Monetary updating on Court escrow deposits

     63,317       3,348       43,744       (13,067

Pasep and Cofins taxes charged on financial revenues

     (13,207     (15,192     (4,648     (1,573

Adjustment to present value

     —         (396     —         —    

Other

     34,133       23,918       1,874       1,850  
  

 

 

   

 

 

   

 

 

   

 

 

 
     201,164       231,256       51,875       5,602  

FINANCIAL EXPENSES

        

Costs of loans and financings

     (344,297     (524,775     —         —    

Foreign exchange variations

     5,963       (2,046     —         (1

Monetary updating – loans and financings

     (5,682     (46,959     —         —    

Monetary updating – paid concessions

     (5     (301     —         —    

Charges and monetary updating on Post-retirement liabilities

     (12,417     (22,483     (611     (1,106

Monetary updating – CCEE obligations

     —         —         —         —    

Monetary variations – CVA

     (12,006     —         —         —    

Monetary updating – AFAC

     239,445       —         239,445       —    

Monetary updating – Advance sales of power supply

     (12,986     —         —         —    

Adjustment to present value

     (562     —         —         —    

Other

     (46,203     (57,604     (320     (21
  

 

 

   

 

 

   

 

 

   

 

 

 
     (188,750     (654,168     238,514       (1,128
  

 

 

   

 

 

   

 

 

   

 

 

 

NET FINANCIAL REVENUE (EXPENSES)

     12,414       (422,912     290,389       4,474  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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260


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28. RELATED PARTY TRANSACTIONS

Cemig’s principal balances and transactions with related parties and its subsidiaries and jointly-controlled entities are shown here (consolidated):

 

COMPANY R$ ’000

   ASSETS      LIABILITIES      REVENUE      EXPENSES  
           
     Sep. 30, 2017      Dec. 31, 2016      Sep. 30, 2017      Dec. 31, 2016      9M17      9M16      9M17     9M16  

Controlling shareholder

                      

Minas Gerais State Gov.t

                      

Current

                      

Consumers and Traders (1)

     97,779        71,340        —          —          101,085        112,168        —         —    

Administrative deposit – AFAC (2)

     —          —          —          —          38,278          

Non-current

                      

Administrative deposit – AFAC (2)

     277,723        239,445        —          —          —            

Jointly-controlled entity

                      

Aliança Geração

                      

Current

                      

Transactions in electricity (3)

     —          —          7,049        7,037        413        314        (107,335     (110,703

Provision of services (4)

     2,504        3,706        —          —          9,767        8,420        —         —    

Baguari Energia

                      

Current

                      

Transactions in electricity (3)

     —          —          900        710        111        —          (5,379     (5,307

Services (4)

     274        398        —          —          646        665        —         —    

Madeira Energia

                      

Current

                      

Transactions in electricity (3)

     —          —          17,229        17,636        18,213        3,164        (508,741     (449,584

Advance for future power supply (5)

     53,865        —          —          —          —          —          —         —    

Non-current

                      

Advance for future power supply (5)

     17,117        86,941        —          —          —          —          —         —    

Norte Energia

                      

Current

                      

Transactions in electricity (3)

     130        130        3,774        3,755        5,680        741        (89,256     (22,486

Lightger

                      

Current

                      

Transactions in electricity (3)

     —          —          —          —          —          —          (15,188     (14,575

Hidrelétrica Pipoca

                      

Current

                      

Transactions in electricity (3)

     —          —          1,595        1,228        —          —          (12,064     (12,359

Interest on Equity, and dividends

     1,284        —          —          —          —          —          —         —    

Retiro Baixo

                      

Current

                      

Transactions in electricity (3)

     —          —          554        440        —          —          (4,464     (2,210

Interest on Equity, and dividends

     —          2,146        —          —          —          —          —         —    

Guanhães Energia

                      

Current

                      

Adjustment for losses (6)

     —          —          —          59,071        —          —          —         —    

Services (4)

     568        241        —          —          332        —          —         —    

Renova

                      

Current

                      

Transactions in electricity (3)

     —          —          1,773        —          —          —          (140,771     (118,506

Accounts receivable (7)

     62,455        —          —          —          —          —          —         —    

Non-current

                      

Accounts receivable (7)

     20,317        73,722        —          —          —          —          —         —    

Advance for future power supply (8)

     258,166        229,053        —          —          —          —          —         —    

EATE

                      

Current

                      

Transactions in electricity (3)

     —          —          2,962        2,751        —          —          (19,674     (18,475

Light

                      

Current

                      

Transactions in electricity (3)

     1,042        464        481        472        38,203        49,714        (1,106     (623

Interest on Equity, and dividends

     —          6,852        —          —          —          —          —         —    

Taesa

                      

Current

                      

Transactions in electricity (3)

     —          —          12,451        10,326        33        17        (92,905     (82,956

Services (4)

     141        482        —          —          667        220        —         —    

Companhia Transirapé de Transmissão

                      

Current

                      

Transactions in electricity (3)

     —          —          950        878        —          —          (7,310     (6,425

Services (4)

     90        301        —          —          953        755        —         —    

Interest on Equity, and dividends

     678        678        —          —          —          —          —         —    

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

261


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COMPANY R$ ’000

   ASSETS     LIABILITIES      REVENUE      EXPENSES  
          
     Sep. 30, 2017     Dec. 31, 2016     Sep. 30, 2017      Dec. 31, 2016      9M17      9M16      9M17     9M16  

Axxiom

                    

Current

                    

Provision of services (9)

     —         —         2,347        6,980        —          —          —         (38,065

Interest on Equity, and dividends

     —         144       —          —          —          —          —         —    

Transudeste

                    

Current

                    

Transactions in electricity (3)

     —         —         —          —          113        —          (1,166     (1,023

Provision of services (4)

     175       141       196        150        492        419        —         —    

Interest on Equity, and dividends

     213       213       —          —          —          —          —         —    

Transleste

                    

Current

                    

Transactions in electricity (3)

     —         —         316        243        135        —          (1,878     (1,605

Provision of services (4)

     120       178       —          —          819        763        —         —    

Interest on Equity, and dividends

     1,559       294       —          —          —          —          —         —    

Other related parties

                    

FIC Pampulha

                    

Current

                    

Cash and cash equivalents

     257,625       621,203       —          —          —          —          —         —    

Securities

     622,750       833,849       —          —          14,374        128,436        —         —    

(-) Securities issued by subsidiary companies (10)

     (63,708     (49,479     —          —          —          —          —         —    

Non-current

                    

Securities

     24,192       46,092       —          —             —          —         —    

(-) Securities issued by subsidiary companies (10)

     (11,863     (15,049     —          —          —          —          —         —    

Forluz

                    

Current

                    

Post-retirement obligations (11)

     —         —         106,399        86,156        —          —          (130,470     (139,289

Administrative running costs (12)

     —         —         —          —          —          —          (19,606     (18,951

Operational leasing (13)

     —         —         2,872        9,630        —          —          (44,002     (15,292

Non-current

                    

Post-retirement obligations (11)

     —         —         1,584,588        1,592,998        —          —          —         —    

Cemig Saúde (Health)

                    

Current

                    

Health Plan and Dental Plan (14)

     —         —         110,387        101,756        —          —          (145,075     (139,916

Non-current

                    

Health Plan and Dental Plan (14)

     —         —         1,704,340        1,646,580        —          —          —         —    

 

The main conditions relating to the related party transactions are as follows:

 

(1) Refers to sale of electricity to the government of the State of Minas Gerais – the price of the electricity is that defined by Aneel through a Resolution which decides the Company’s annual tariff adjustment.
(2) Refers to recalculation of the monetary updating on the amounts in the Advance against Future Capital Increase (AFAC) returned to Minas Gerais State. The value was transferred to Accounts Receivable from State of Minas Gerais on September 30, 2017 (See Notes 11 and 12)
(3) Transactions in electricity between generators and distributors were made in auctions organized by the federal government; transactions for transport of electricity, made by transmission companies, arise from the centralized operation of the National Grid carried out by the National System Operator (ONS).
(4) Refers to a contract to provide plant operation and maintenance services.
(5) In 2017, advance payments of R$ 71,100 were made to Santo Antônio Energia, subsidiary of Madeira Energia: R$ 51,874 was advanced by Cemig GT; R$ 11,917 by Sá Carvalho; and R$ 6,309 by Rosal. For the purposes of settlement invoices for supply of electricity to be issued by Santo Antônio Energia starting in 2018, in 12 tranches, will be used
(6) A liability was recognized in 2016 corresponding to the Company’s interest in the share capital of Guanhães, due to its negative equity (see Note 15);
(7) Cemig GT has an item of R$ 60,000 receivable from Renova Energia, which will be paid in 12 monthly installments, the first on January 10, 2018 and the last becoming due in December 2018, with monetary updating at 150% of the CDI rate.
(8) In 2016, as specified in the power supply contract, Cemig GT advanced R$ 212,000 to Renova’s trading company, Renova Comercializadora. For settlement, it was agreed that this amount would be updated at a rate of 155% of the CDI rate, and offset by settlement of power supply invoices issued by Renova, from January 2020. Since there are now negotiations by Renova with players interested in buying assets of the Company, renegotiation of the supply contract, and also the form of payment of the advance made by Cemig GT, are also in the process of renegotiation.
(9) This refers to a contract for development of management software between Cemig D and Axxiom Soluções Tecnológicas S.A., instituted in Aneel Dispatch 2657/2017.
(10) FIC Pampulha has financial investments in securities issued by subsidiary companies of the Company. There is more information, and characteristics of the fund, in the description below.
(11) The contracts of Forluz are updated by the Expanded Consumer Price Index (IPCA) calculated by the Brazilian Geography and Statistics Institute (Instituto Brasileiro de Geografia e Estatística, or IBGE) (See Note 22) and will be amortized up to the business year of 2024.
(12) 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.
(13) Rental of the Company’s administrative headquarters, in effect from March 2019 to May 2034.
(14) Post-employment obligations relating to the employees’ health and dental plan (see Note 22).

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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For more information on the principal transactions, please see Notes 7, 18 and 25.

Dividends receivable from subsidiaries

 

Related party

   Consolidado      Controladora  
   Sep. 30, 2017 (*)
R$’000
     Dec. 31, 2016
R$’000
     Sep. 30, 2017 (*)
R$’000
     Dec. 31, 2016
R$’000
 

Cemig GT

     —          —          605.000        605.000  

Gasmig

     —          —          98.079        58.560  

Outras

     3.742        11.386        8.344        9.679  
  

 

 

    

 

 

    

 

 

    

 

 

 
     3.742        11.386        711.423        673.239  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(*) Dividends receivable from subsidiaries, eliminated in the consolidation.

Guarantees: sureties for loans, financings and debentures

Cemig is provider of surety or guarantee of loans, financings and debentures of the following related parties – not consolidated in the financial statements because they relate to jointly-controlled entities or affiliated companies:

 

Related party

   Relationship    Type    Object    9M17
R$ ’000
     Maturity  

Norte Energia (‘Nesa’)

   Affiliated    Surety    Financing      2,476,515        2042  

Light (1)

   Jointly-controlled entity    Counter-guarantee    Financing      683,615        2042  

Santo Antônio Energia S.A. (Saesa)

   Jointly-controlled entity    Surety    Financing      1,974,035        2034  

Santo Antônio Energia S.A. (Saesa)

   Jointly-controlled entity    Surety    Debentures      774,614        2037  

Centroeste

   Jointly-controlled entity    Surety    Financing      8,166        2023  
           

 

 

    
              5,916,945     
           

 

 

    

 

(1) Related to execution of guarantees of the Norte Energia financing.

At September 30, 2017, Management believes that there is no need to recognize any provisions in the Company’s accounting statements for the purpose of meeting any obligations arising under these sureties and/or guarantees.

Cash investments in FIC Pampulha – the investment fund of Cemig and its subsidiaries and affiliates

Cemig and its subsidiaries and affiliates invest part of their financial resources in an investment fund which has the characteristics of fixed income and obeys the Company’s cash investment policy. The amounts invested by the fund at September 30, 2017 are reported in Securities in Current or Non-current assets, or presented after deduction of the account line Debentures in Current or Non-current liabilities.

The funds applied in this investment fund are allocated only in public and private fixed income securities, subject only to credit risk, with various maturity periods, obeying the unit holders’ cash flow needs.

The financial investments of the investment fund in securities of related parties are as follows:

 

Issuer of security

   Type      Annual contractual
conditions
     Maturity      Sep. 30, 2017 – R$ ’000  
            Cemig
1.59%
     Cemig GT
0.21%
     Cemig D
34.10%
     Other
subsidiaries

19.55% (1)
     Total
55.45%
 

ETAU

     Debentures        108.00% of CDI        01/12/2019        164        22        3,529        2.023        5.738  
           

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
              164        22        3,529        2.023        5.738  
           

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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Issuer of security

   Type      Annual contractual
conditions
     Maturity      Dec. 31, 2016 – R$ ’000  
            Cemig
10.12%
     Cemig GT
20.86%
     Cemig D
24.94%
     Other
subsidiaries

22.39% (1)
     Total
78.31%
 

Axxiom

     Debentures        109.00% of CDI        29/01/2017        579        1,194        1,427        1,282        4,482  

ETAU

     Debentures        108.00% of CDI        01/12/2019        1,024        2,110        2,522        2,265        7,921  
           

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
                          1,603      3,304      3,949      3,547      12,403  
           

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Refers to the other companies consolidated by Cemig GT, which also have participation in the investment funds.

Remuneration of key management personnel

The total costs of key management personnel, in 9M17 and 9M16, are shown in this table:

 

R$’000

   9M017      9M16  

Remuneration

     23,171        17,796  

Profit shares (Reversal)

     372        (642

Assistance benefits

     1,209        1,121  
  

 

 

    

 

 

 

Total

     24,752        18,275  
  

 

 

    

 

 

 

 

29. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

The financial instruments of the Company and its subsidiaries are restricted to the following: Cash and cash equivalents; Securities; Consumers and Traders; Concession holders (for transport of electricity); Financial assets of the concession related to infrastructure; Generation concession assets; Restricted funds; Escrow deposits in litigation; the CVA (Portion A Costs Variation Compensation) Account and Other Financial Components in tariff adjustments; Loans and financings; Concession obligations payable; Suppliers; Post-employment obligations; and Put options. Gains and losses on transactions are recorded in full in the profit and loss account for the business year or in Stockholders’ equity, by the accrual method.

The Company’s financial instruments and those of its subsidiaries are recorded at fair value and measured in accordance with the following classifications:

 

  Loans and receivables: This category contains: Cash equivalents; Credits receivable from Consumers, Traders, and power transport concession holders; Restricted funds; Financial assets related to the CVA account and to Other financial components, in calculation of tariffs; the Low-income user subsidy; Reimbursement of tariff subsidies and Other credits owed by Eletrobras; Escrow deposits in litigation; Financial assets of the concession not covered by Law 12783/13; Financial assets related to Auction 12/2015 for award of generation plants; and Generation concession assets. They are recognized at their nominal realization value, which is similar to fair value.

 

  Financial instruments at fair value through profit or loss: Securities held for trading, in the amount of R$ 677,051, and Put options, in the amount of R$ 1,502,473 (respectively R$ 995,340 and R$ 1,341,468 on December 31, 2016) are in this category. They are valued at fair value and the gains or losses are recognized directly in the Profit and loss account.

 

  Financial instruments held to maturity: In this category are Securities, in the amount of R$ 26,064 on September 30, 2017 (R$ 49,888 on December 31, 2016) – included in Note 6. There is positive intention to hold them to maturity. They are measured at amortized cost using the effective rates method. Their fair values, of R$ 26,138 on September 30, 2017, and R$ 49,738 on December 31, 2016, were measured using information of Level 2.

 

  Financial instruments available for sale: In this category are Financial assets of the concession related to distribution infrastructure covered by Law 12783/13. They are measured at New Replacement Value (Valor Novo de Reposição, or VNR), equivalent to fair value on the date of these interim accounting statements.

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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  Other financial liabilities – Non-derivative financial liabilities: In this category are Loans and financings; Obligations under debentures; Debt agreed with the Pension Fund (Forluz); Concessions payable; and Suppliers. They are measured at amortized cost using the effective rates method. The Company has calculated the fair value of its Loans, financings and debentures using 140% of the CDI rate – based on its most recent funding. For the following, the Company considered fair value to be substantially equal to book value: Loans, financings and debentures with annual rates between IPCA + 4.70% to 8.07% and CDI + 0.69% to 5.625%. For the financings from the BNDES and Eletrobras, fair value is conceptually similar to book value, due to the specific characteristics of the transactions.

 

  Liabilities measured at fair value – Financial liabilities relating to put options: The options to sell units in FIP Melbourne and FIP Malbec (‘the SAAG Put’); the options to sell shares in RME and Lepsa (‘the Parati PUT’); and the Sonda Options, were valued at fair value using the Black-Scholes-Merton (BSM) model. Both the options were calculated using the discounted cash flow method: for the SAAG Put option, up to the third quarter of 2016; and for the Parati Put option, up to the first quarter of 2016. The method used was changed, in the fourth and second quarters, respectively, to the BSM model.

The accounting balances of the financial instruments are similar to the fair values, with the exception of loans, financings and debentures, of which the accounting balance is R$ 14,055,575 (R$ 15,179,280 on December 31, 2016) and fair value is R$ 14,053,986 (R$ 14,711,130 on December 31, 2016), being measured as Level 2, using similar liabilities as reference.

Risk management

Corporate risk management is a management tool that is an integral part of the Company’s corporate governance practices, and is aligned with the process of planning, which sets the Company’s strategic business objectives.

The Company has a Financial Risks Management Committee, the purpose of which is to implement guidelines and monitor the financial risk of transactions that could negatively affect the Company’s liquidity or profitability, recommending hedge protection strategies to control the Company’s exposure to foreign exchange rate risk, interest rate risk, and inflation risks.

The principal risks to which the Company is exposed are as follows:

Exchange rate risk

Cemig and its subsidiaries are exposed to the risk of increase in exchange rates, especially with impact on indebtedness, profit and cash flow.

The net exposure to exchange rates is as follows:

 

Exposure to exchange rates

   Sep. 30, 2017      Dec. 31, 2016  
   Foreign
currency
     R$ ’000      Foreign
currency
     R$ ’000  

US dollar

           

Loans and financings (Note 20)

     7,320        23,190        7,072        23,049  

Suppliers (Itaipu Binacional)

     77,717        246,453        62,320        206,827  
  

 

 

    

 

 

    

 

 

    

 

 

 
     85,037        269,643        69,392        229,876  
  

 

 

    

 

 

    

 

 

    

 

 

 

Euros

           

Loans and financings – Euros (Note 20)

     1,638        6,129        2,157        7,416  
     

 

 

       

 

 

 

Net liabilities exposed

        275,772           237,292  
     

 

 

       

 

 

 

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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Sensitivity analysis

Based on information from its financial consultants, the Company estimates that in a probable scenario the variation of the exchange rates of foreign currencies in relation to the Real on September 30, 2018 will be: appreciation of the dollar by 11.14% to R$ 3.521, and depreciation of the Euro by 0.27% (to R$ 3.732). The Company has made a sensitivity analysis of the effects on the Company’s profit arising from depreciation of the Real exchange rate by 25%, and by 50%.

 


Risk: foreign exchange rate exposure

R$ ’000

   Base scenario
Sep. 30, 2017
     Scenario
US$1=R$3.521
EUR1=R$3.732
     Scenario:
FX depreciation of 25%
US$1=R$4.401
EUR1=R$4.665
     Scenario:
FX depreciation of 50%
US$1=R$5.282
EUR1=R$5.598
 

US dollar

           

Loans and financings (Note 20)

     23,190        25,774        32,216        38,665  

Suppliers (Itaipu Binacional)

     246,453        273,914        342,373        410,910  
  

 

 

    

 

 

    

 

 

    

 

 

 
     269,643        299,688        374,589        449,575  
  

 

 

    

 

 

    

 

 

    

 

 

 

Euros

           

Loans and financings (Note 20)

           
     6,129        6,113        7,641        9,170  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net liabilities exposed

     275,772        305,801        382,230        458,745  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net effect of exchange rate variation

        30,029        106,458        182,973  
     

 

 

    

 

 

    

 

 

 

Interest rate risk

Cemig and its subsidiaries are exposed to the risk of increase in international interest rates, affecting loans and financings in foreign currency with floating interest rates (principally Libor), in the amount of R$ 58,759 (R$ $60,066 on December 31, 2016). On September 30, 2017 Cemig was exposed to the risk of increase in Brazilian domestic interest rates, as a result of net liabilities indexed to variation in interest rates, as follows:

 

Risk: Exposure to domestic interest rate changes

R$ ’000

   Consolidated  
     Sep. 30, 2017     Dec. 31, 2016  

Assets

    

Cash equivalents – Cash investments (Note 5)

     548,751       893,713  

Securities (Note 6)

     703,114       1,045,228  

Accounts receivable – Renova (Note 28)

     82,772       74,630  

Advance for future delivery of power supply (Note 28)

     359,227       229,053  

Financial assets of the transmission concession (Note 14)

     473,374       482,281  

Restricted cash

     405,494       367,474  

CVA and Other financial components in tariffs – Selic rate * (Note 14)

     100,457       397,725  

Credits owed by Eletrobras

     901       138,444  
  

 

 

   

 

 

 
     2,674,090       3,628,548  
  

 

 

   

 

 

 

Liabilities

    

Loans, financings and debentures – CDI rate (Note 20)

     (9,765,729     (10,928,261

Loans, financings and debentures – TJLP (Note 19)

     (230,127     (213,102

Advance sales of power supply (Note 7)

     (312,112     (181,200

CVA and Other financial components in tariffs – Selic rate (Note 14)

     (704,418     (804,975
  

 

 

   

 

 

 
     (11,012,386     (12,127,538
  

 

 

   

 

 

 

Net liabilities exposed

     (8,338,296     (8,498,990
  

 

 

   

 

 

 

 

(*) Amounts of CVA and Other financial components are indexed by the Selic rate.

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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Sensitivity analysis:

The Company estimates that, in a probable scenario, on September 30, 2018 the Selic rate will be 7.00% p.a. and the TJLP will be 6.25% p.a. The Company has made a sensitivity analysis of the effects on its profit arising from increases in rates of 25% and 50%. Variation in the CDI rate accompanies the variation in the Selic rate. Estimation of scenarios for the path of interest rates will consider the projections made by the Company and its subsidiaries, based on its financial consultants.

 

Risk: Increase in Brazilian interest rates R$ ’000

   Sep. 30, 2017     Sep. 30, 2018  
     Book value     Scenario
Selic 7.00%
TJLP 6.25%
    Scenario
Selic 8.75%
TJLP +7.81%
    Scenario
Selic 10.50%
TJLP 9.38%
 

Assets

        

Cash equivalents (Note 5)

     548,751       587,164       596,767       606,370  

Securities (Note 6)

     703,114       752,332       764,636       776,941  

Accounts receivable – Renova (Note 28)

     82,772       88,566       90,015       91,463  

Advance for future delivery of power supply (Note 28)

     359,227       384,373       390,659       396,946  

Financial assets of the transmission concession (Note 14)

     473,374       506,510       514,794       523,078  

Restricted cash

     405,494       433,879       440,975       448,071  

CVA + Other financial components in tariff adjustments – Selic

     100,457       107,489       109,247       111,005  

Other credits owed by Eletrobras

     901       964       980       996  
  

 

 

   

 

 

   

 

 

   

 

 

 
     2,674,090       2,861,277       2,908,073       2,954,870  
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

        

Loans and financings – CDI rate (Note 20)

     (9,765,729     (10,449,330     (10,620,230     (10,791,131

Loans and financings – TJLP (Note 20)

     (230,127     (244,510     (248,100     (251,713

Advance sales of power supply (Note 7)

     (312,112     (331,619     (336,488     (341,388

CVA and Other Financial components in tariffs (Note 14)

     (704,418     (753,727     (766,055     (778,382
  

 

 

   

 

 

   

 

 

   

 

 

 
     (11,012,386)       (11,779,186)       (11,970,873)       (12,162,614)  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net assets (liabilities) exposed

     (8,338,296     (8,917,909     (9,062,800     (9,207,744
  

 

 

   

 

 

   

 

 

   

 

 

 

Net effect of variation in interest rates

       (579,613     (724,504     (869,448
    

 

 

   

 

 

   

 

 

 

Risk of increase in inflation

On September 30, 2017 the Company is exposed to the risk of increase in inflation, as follows:

 

Exposure to increase in inflation

R$ ’000

   Sep. 30, 2017     Dec. 31, 2016  

Assets

    

Financial assets of the concession – Distribution infrastructure – IPCA (Note 14)

     130,340       128,071  

Financial assets of the concession – Transmission infrastructure – IPCA (Note 14)

     1,975,775       1,805,230  

Concession Grant Fee – IPCA (Note 13)

     2,321,817       2,253,765  
  

 

 

   

 

 

 
     4,427,932       4,187,066  

Liabilities

    

Loans, financings and debentures – IPCA (Note 20)

     (3,971,900     (3,933,092

Debt agreed with pension fund (Forluz) – IPCA

     (736,774     (787,003

Forluz solution plan

     (284,165     —    
  

 

 

   

 

 

 
     (4,992,839     (4,720,095
  

 

 

   

 

 

 

Net liabilities exposed

     (564,907     (533,029
  

 

 

   

 

 

 

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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Sensitivity analysis

In relation to the most significant inflation risk, the Company estimates that, in a probable scenario, on September 30, 2018 the IPCA inflation index will be 4.55%. The Company has made a sensitivity analysis of the effects on its profit arising from increases in inflation of 25% and 50%.

 

Risk: increase in inflation

   Sep. 30,
2017
    Sep. 30, 2018  
   Book value     Scenario
IPCA
4.55%
    Scenario
IPCA
5.69%
    Scenario
IPCA
6.82%
 

Assets

        

Financial assets of the concession

– Distribution infrastructure – IPCA (Note 14)

     130,340       136,265       137,743       139,229  

Financial assets of the concession

– Transmission infrastructure – IPCA (Note 14)

     1,975,775       2,065,594       2,087,999       2,110,523  

Concession Grant Fee – IPCA (Note 14)

     2,321,817       2,427,367       2,453,696       2,480,165  
  

 

 

   

 

 

   

 

 

   

 

 

 
     4,427,932       4,629,226       4,679,438       4,729,917  

Liabilities

        

Loans, financings and debentures – IPCA (Note 20)

     (3,971,900     (4,152,463     (4,197,504     (4,242,784

Debt agreed with pension fund (Forluz) – IPCA

     (736,774     (770,268     (778,623     (787,022

Forluz solution plan

     (284,165     (297,083     (300,306     (303,545
  

 

 

   

 

 

   

 

 

   

 

 

 
     (4,992,839     (5,219,814     (5,276,433     (5,333,351
  

 

 

   

 

 

   

 

 

   

 

 

 

Net liabilities exposed

     (564,907     (590,588     (596,995     (603,434
    

 

 

   

 

 

   

 

 

 

(Net effect of variation in IPCA index)

       (25,681     (32,088     (38,527
    

 

 

   

 

 

   

 

 

 

Liquidity risk

Cemig has sufficient cash flow to cover the cash needs related to its operating activities.

The Company manages liquidity risk with a group of methods, procedures and instruments that are coherent with the complexity of the business, and applied in permanent control of the financial processes, to guarantee appropriate risk managemen – including permanent monitoring of its cash flow in a conservative, budget-oriented manner. Balances are projected monthly, for each one of the companies, over a period of 12 months, and daily liquidity is projected over 180 days.

Short-term investments must, similarly, comply with certain rigid investing principles established in the Company’s Cash Investment Policy, which was approved by the Financial Risks Management Committee. These include applying its resources in private-securities investment funds, without market risk, and investment of the remainder directly in bank CDs or repo contracts which earn interest at the CDI rate.

In managing cash investments, the Company seeks to obtain profitability through a rigid analysis of financial institutions’ credit, applying operational limits for each bank, based on assessments that take into account their ratings, exposures and balance sheets. It also seeks greater returns on investments by strategically investing in securities with longer investment maturities, while bearing in mind the Company’s minimum liquidity control requirements.

On the reporting date of these interim accounting statements, the Company (holding company and consolidated) had an excess of current liabilities over current assets.

Note 1 refers to the various measures taken by the Company and its subsidiaries to increase its liquidity, through new financings, refinancing of existing obligations or, potentially, disinvestment of assets that are not part of the Company’s core business. Any reduction in the Company’s ratings could result in a reduction of its ability to obtain new financings and could also make refinancings of debts not yet due more difficult or more costly. In this situation, any financing or refinancing of the Company’s debt could have higher interest rates or might require compliance with more onerous covenants, which could additionally cause restrictions to the operations of the business.

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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The flow of payments of the obligations of the Company and its subsidiaries, under debts agreed with the pension fund, loans, financings and debentures, for floating and fixed rates, including future interest up to contractual maturity dates, is shown in the table below:

 


Consolidated

R$ ’000

   Up to 1
month
     1 to 3
months
     3 months
to 1 year
     1 to 5 years      Over 5
years
     Total  

Financial instruments at (interest rates):

                 

- Floating rates

                 

Loans, financings and debentures

     662,888        2,948,205        2,122,983        9,622,053        1,380,435        16,736,564  

The Tax Credits Regularization Plan

     123,510        187,694        284,143        —          —          595,347  

Paid concessions

     249        492        2,103        9,440        14,428        26,712  

Debt agreed with pension fund (Forluz)

     11,002        22,134        101,653        602,259        299,272        1,036,320  

Forluz solution plan (Note 22)

     2,515        7,540        20,551        136,579        394,613        561,798  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     800,164        3,166,065        2,531,433        10,370,331        2,088,748        18,956,741  

- Fixed rate

                 

Suppliers

     2,175,293        11,155        —          —          —          2,186,448  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2,975,457        3,177,220        2,531,433        10,370,331        2,088,748        21,143,189  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Holding company

R$ ’000

   Up to
1
month
     1 to 3
months
     3 months to
1 year
     1 to 5 years      Over 5
years
     Total  

Financial instruments at (interest rates):

                 

- Floating rates

                 

Debt agreed with pension fund (Forluz)

     541        1,089        5,001        29,631        14,724        50,986  

Forluz solution plan (Note 22)

     124        371        1,011        6,720        19,415        27,641  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     665        1,460        6,012        36,351        34,139        78,627  

- Fixed rate

                 

Suppliers

     23,571        —          —          —          —          23,571  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     24,236        1,460        6,012        36,351        34,139        102,198  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Credit risk

The risk arising from the possibility of Cemig and its subsidiaries incurring losses as a result of difficulty in receiving amounts billed to its clients is considered to be low. The Company carries out monitoring for the purpose of reducing default, on an individual basis, with its consumers. Negotiations are also entered into for receipt of any receivables in arrears. The risk is also reduced by the extremely wide client base.

The allowance for doubtful debtors constituted on September 30, 2017, considered to be adequate in relation to the credits in arrears receivable by the Company and its subsidiaries, was R$ 851,448.

In relation to the risk of losses resulting from declaration of insolvency of a financial institutions at which the Company has deposits, a Cash Investment Policy was approved and has been in effect since 2004, and is reviewed annually.

Cemig manages the counterparty risk of financial institutions based on an internal policy approved by its Financial Risks Management Committee.

This Policy assesses and scales the credit risks of the institutions, the liquidity risk, the market risk of the investment portfolio and the Treasury operational risk.

All investments are made in financial securities that have fixed-income characteristics, always indexed to the CDI rate. The Company and its subsidiaries make no securities investment transactions that could bring any volatility risk into its financial statements.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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As a management instrument, Cemig divides the investment of its funds into direct purchases of securities (own portfolio) and investment funds. The investment funds invest the funds exclusively in fixed income products, and companies of the Group are the only unit holders. They obey the same policy adopted in the investments for the Company’s directly-held own portfolio.

The minimum requirements for concession of credit to financial institutions are centered on three items:

 

  1. Rating by three risk rating agencies.

 

  2. Equity greater than R$ 400 million.

 

  3. Basel ratio above 12.

Banks that exceed these thresholds are classified in three groups, by the value of their equity; and within this classification, limits of concentration by group and by institution are set:

 

Group

  

Stockholders’ equity

  

Concentration

  

Limit per bank (% of Equity)**

A1

   Over R$ 3.5 billion    Minimum of 80%    Between 6% and 9%

A2

   R$ 1.0 billion to R$ 3.5 billion    Maximum 20%    Between 5% and 8%

B

   R$ 400 million to R$ 1.0 billion    Maximum 20%    Between 5% and 7%

 

(1) The percentage assigned to each bank depends on an individual assessment of indicators such as liquidity, quality of the credit portfolio, and other aspects.

Further to these points, Cemig also sets two concentration limits:

 

  1. No bank may have more than 30% of the Group’s portfolio.

 

  2. No bank may have more than 50% of the portfolio of any individual company.

Risk of over-contracting and under-contracting of power supply

Sale or purchase of power supply in the spot market to cover a positive or negative exposure of supply contracted, to serve the captive market of Cemig D, is a risk inherent to the electricity distribution business. The regulatory limit for 100% pass-through to consumers of exposure to the spot market, valued at the difference between the distributor’s average purchase price and the spot price (PLD), is only the margin between 100% and 105% of the distributor’s contracted supply. Any exposure that can be proved to have arisen from factors outside the distributor’s control (‘involuntary exposure’) may also be passed through in full to consumers. The Company’s Management is continually managing its contracts for purchase of power supply to mitigate the risk of exposure is to the spot market.

Risk of continuity of the concession

The risk to continuity of the distribution concession arises from the new terms included in the extension of Cemig D’s concession for 30 years from January 1, 2016, as specified by Law 12783/13. The extension is subject to new conditions not in the previous concession contract, making continuation of the concession conditional upon compliance by Cemig D with new criteria for quality and economic/financial sustainability, without which the extension may be subject to cancellation in the first five years of the contract – in that not meeting the criteria in any two consecutive years, or in the fifth year, results in cancellation of the concession.

Additionally, as from 2021, non-compliance with the quality criteria for three consecutive years, or with the minimum parameters for economic/financial sustainability for two consecutive years, results in opening of proceedings with a view to termination of the distribution concession.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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Hydrological risk

The greater part of the electricity sold by the Company’s subsidiaries is generated by hydroelectric plants. A prolonged period of scarce rainfall can result in lower water volumes in the plants’ reservoirs, possibly causing losses due to increased costs of purchasing electricity, due to replacement by thermoelectric generation, or reduction of revenues due to reduction in consumption caused by implementation of wide-ranging programs for saving of electricity. Prolongation of the generation of electricity using the thermal plants potentially could lead to cost increases for the electricity distributors, causing a greater need for cash, and could result in future increases in tariffs.

Risk of early maturity of debt

The Company and its subsidiaries have contracts for loans, financings and debentures with restrictive covenants normally applicable to this type of transaction, related to compliance with a financial index. Non-compliance with these covenants could result in earlier maturity of debts. For more details please see Note 20.

The covenant requiring half-yearly compliance , relating to the financial ratios of Cemig and of Cemig (guarantor), were complied with on June 30, 2016. The covenants requiring compliance annually were complied with on December 31, 2016. For fuller details please see Note 20.

Capital management

This table shows the Company’s consolidated net liabilities in relation to its Equity:

 

     Sep. 30, 2017     Dec. 31, 2016  

Total liabilities

     28,544,868       29,101,482  

(–) Cash and cash equivalents

     (582,382     (995,132

(–) Restricted cash

     (405,494     (367,474
  

 

 

   

 

 

 

Net liabilities

     27,556,992       27,738,876  
  

 

 

   

 

 

 

Total equity

     13,287,207       12,934,371  
  

 

 

   

 

 

 

Net liabilities / equity

     2.07       2.14  

 

30. MEASUREMENT AT FAIR VALUE

In the initial recognition, Cemig and its subsidiaries measure their financial assets and liabilities at fair value; after initial recognition, financial assets and liabilities are classified into the categories defined for financial instruments. Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. We adopt the ‘Fair Value Hierarchy’, to maximize coherence and comparability; this separation divides the inputs potentially used in measuring fair value into three broad levels, as follows:

 

Level 1 – Active market – Quoted prices: A financial instrument is considered to be quoted in an active market if the prices quoted are promptly and regularly made available by an exchange or organized over-the-counter market, by operators, by brokers or by a market association, by entities whose purpose is to publish prices, or by regulatory agencies, and if those prices represent regular arm’s length market transactions made without any preference.

 

Level 2 – No active market – Valuation technique: For an instrument that does not have an active market, fair value should be found by using a method of valuation/pricing. Criteria such as data on the current fair value of another instrument that is substantially similar, or discounted cash flow analysis or option pricing models, may be used. The objective of the valuation technique is to establish what would be the transaction price on the measurement date in an arm’s-length transaction motivated by business considerations.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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Level 3 – No active market – No observable inputs: The fair value of investments in securities for which there are no prices quoted on an active market, or of derivatives linked to them which are to be settled by delivery of unquoted securities, is determined based on generally accepted valuation techniques, mainly related to discounted cash flow analysis.

The following is a summary of the instruments that are measured at fair value:

 

R$’000

   Balance
at Sep. 30,
2017
    Fair value at Sep. 30, 2017  
     Active
market –
quoted
price
(Level 1)
     No active
market –
Valuation
technique
(Level 2)
    No active
market –No
observable
inputs

(Level 3)
 

Assets

         

Held for trading

         

Securities

         

Bank certificates of deposit

     40,133       —          40,133       —    

Financial Notes – Banks

     521,896       —          521,896       —    

Treasury Financial Notes (LFTs)

     103,954       103,954        —         —    

Debentures

     11,068       —          11,068       —    
  

 

 

   

 

 

    

 

 

   

 

 

 
     677,051       103,954        573,097        

Loans and receivables

         

Concession Grant Fee

     2,321,817       —          2,321,817       —    

Restricted cash

     405,494       —          405,494       —    
  

 

 

   

 

 

    

 

 

   

 

 

 
     2,727,311              2,727,311    

Available for sale

         

Financial assets of the concession related to infrastructure

     271,612       —          —         271,612  
  

 

 

   

 

 

    

 

 

   

 

 

 
     3,675,974       103,954        3,300,408       271,612  

Liabilities

         

Fair value through profit or loss

         

Put options – Assets (Liabilities)

         

Sonda

     4,484       —          —         4,484  

RME and Lepsa

     (1,242,818     —          (1,242,818     —    

SAAG

     (264,139     —          —         (264,139
  

 

 

   

 

 

    

 

 

   

 

 

 
     (1,502,473     —          (1,242,818     (259,655
  

 

 

   

 

 

    

 

 

   

 

 

 
     2,173,501       103,954        2,057,590       11,957  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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R$’000

   Balance
at Dec. 31,
2016
    Fair value at December 31, 2016  
     Active
market –
quoted
price
(Level 1)
     No active
market –
Valuation
technique
(Level 2)
    No active
market – No
observable
inputs

(Level 3)
 

Assets

         

Held for trading

         

Securities

         

Bank certificates of deposit

     32,782       —          32,782       —    

Treasury Financial Notes (LFTs)

     192,995       192,995        —         —    

Financial Notes – Banks

     724,274       —          724,274       —    

Debentures

     45,289       —          45,289       —    
  

 

 

   

 

 

    

 

 

   

 

 

 
     995,340       192,995        802,345       —    

Loans and receivables

         

Concession Grant Fee

     2,253,765       —          2,253,765    

Restricted cash

     367,474       —          367,474       —    
  

 

 

   

 

 

    

 

 

   

 

 

 
     2,621,239       —          2,621,239       —    

Available for sale

         

Financial assets of the concession related to infrastructure

     216,107       —          —         216,107  
  

 

 

   

 

 

    

 

 

   

 

 

 
     3,832,686       192,995        3,423,584       216,107  

Liabilities

         

Fair value through profit or loss

         

Put options – Assets (Liabilities)

         

Sonda

     4,586       —          —         4,586  

RME and Lepsa

     (1,149,881     —          (1,149,881     —    

SAAG

     (196,173     —          —         (196,173
  

 

 

   

 

 

    

 

 

   

 

 

 
     (1,341,468     —          (1,149,881     (191,587
  

 

 

   

 

 

    

 

 

   

 

 

 
     2,491,218       192,995        2,273,703       24,520  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) As from 4Q16 the Company began to use the Black-Scholes-Merton method for measuring the fair value of the options. For more details please see Note 15.

Calculation of fair value of financial positions

Financial assets of the concession related to infrastructure: Measured at New Replacement Value (Valor novo de reposição, or VNR), according to criteria established in regulations by the Concession-granting power (‘Grantor’), based on fair value of the assets in service belonging to the concession and which will be revertible at the end of the concession, and on the Weighted average cost of capital (WACC) used by the Grantor, which reflects the concession holder’s return on the operations of the concession. The VNR and the WACC are public information disclosed by the Grantor and by Cemig. The movement in financial assets of the concession is shown in Note 13.

Cash investments: The fair value of cash investments is calculated taking into consideration the market prices of the security, or market information that makes such calculation possible, and future rates in the fixed income and FX markets applicable to similar securities. The market value of the security is deemed to be its maturity value discounted to present value by the discount factor obtained from the market yield curve in Reais.

Put options: the Company adopted the Black-Scholes-Merton method for measuring fair value of the SAAG, Parati and Sonda options. The fair value of these options was calculated on the basis of the estimated exercise price on the day of exercise of the option, less the fair value of the underlying shares, also estimated for the date of exercise, brought to present value at the reporting date. The movement in relation to the put options, and other information, is given in Note 15.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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31. OPERATING SEGMENTS

The operating segments of Cemig reflect the structure of the regulatory framework for the Brazilian electricity sector, with different legislation for the sectors of generation, transmission and distribution of electricity. The Company also operates in gas, telecommunications, and other businesses, which have a smaller impact on the results from its operations.

These segments are reflected in the Company’s management, organizational structure, and monitoring of results.

These tables show the costs and expenses for the nine-month periods ended on September 30, 2017 and 2016:

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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INFORMATION BY MARKET SEGMENT AT SEPTEMBER 30, 2017

 
     ELECTRICITY     TELECOMS     GAS     Other     ELIMINATIONS     TOTAL  
   GENERATION     TRANSMISSION     DISTRIBUTION            

ASSETS OF THE SEGMENT

     16,270,364       4,147,643       18,430,584       334,918       2,049,736       3,369,322       (2,772,454     41,830,113  

INVESTMENTS IN AFFILIATED AND JOINTLY-CONTROLLED ENTITIES

     4,565,559       1,671,072       1,748,994       —         —         634,501       —         8,620,126  

ADDITIONS TO THE SEGMENT

     249,826       —         705,295       34,738       40,097       —         —         1,029,956  

ADDITIONS TO FINANCIAL ASSETS

     —         11,226       —         —         —         —         —         11,226  

NET REVENUE

     5,307,670       547,179       8,281,712       88,389       1,061,564       83,160       (215,893     15,153,781  

COST OF ELECTRICITY AND GAS

                

Electricity purchased for resale

     (3,021,466     —         (4,717,386     —         —         (9     53,469       (7,685,392

Charges for use of the national grid

     (261,295     (262     (661,101     —         —         —         131,319       (791,339

Gas bought for resale

     —         —         —         —         (789,861     —         —         (789,861

Operational costs, total

     (3,282,761     (262     (5,378,487     —         (789,861     (9     184,788       (9,266,592

OPERATING COSTS AND EXPENSES

                

Personnel

     (218,933     (84,022     (877,192     (14,559     (36,286     (44,675     —         (1,275,667

Employees’ and managers’ profit shares

     (4,182     (1,871     (18,131     (380     —         (1,213     —         (25,777

Post-retirement obligations

     (42,539     (19,850     (201,745     —         —         (29,483     —         (293,617

Materials

     (7,468     (2,110     (32,089     (107     (1,434     (112     14       (43,306

Outsourced services

     (97,890     (21,278     (550,614     (20,624     (12,231     (7,278     29,346       (680,569

Depreciation and amortization

     (136,400     —         (400,754     (25,974     (41,836     (11,819     —         (616,783

Operational provisions (reversals)

     (97,543     (9,148     (347,608     (456     —         (104,038     —         (558,793

Construction costs

     —         (11,226     (705,296     —         (20,232     —         —         (736,754

Other operating expenses, net

     (35,323     (6,550     (240,405     (18,501     (7,506     (7,178     3,882       (311,581
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of operation

     (640,278     (156,055     (3,373,834     (80,601     (119,525     (205,796     33,242       (4,542,847

OPERATING COSTS AND EXPENSES

     (3,923,039     (156,317     (8,752,321     (80,601     (909,386     (205,805     218,030       (13,809,439

OPERATIONAL PROFIT BEFORE EQUITY GAINS (LOSSES) AND FINANCIAL REVENUE (EXPENSES)

     1,384,631       390,862       (470,609     7,788       152,178       (122,645     2,137       1,344,342  

Equity method gains in non-consolidated investees

     151,126       —         —         (1,951     —         (169,855     —         (20,680

Financial revenues

     126,202       5,013       302,727       2,149       24,240       89,734       —         550,065  

Financial expenses

     (847,998     (1,886     (616,487     (11,450     (30,594     236,464       —         (1,271,951

PRE-TAX PROFIT

     813,961       393,989       (784,369     (3,464     145,824       33,698       2,137       601,776  

Income and Social Contribution taxes

     (215,688     (120,333     245,677       307       (45,316     (69,241     —         (204,594
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET PROFIT ( LOSS)

     598,273       273,656       (538,692     (3,157     100,508       (35,543     2,137       397,182  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest of the controlling shareholders

     598,273       273,656       (538,692     (3,157     100,076       (35,543     2,137       396,750  

Interest of non-controlling shareholder

     —         —         —         —         432       —         —         432  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     598,273       273,656       (538,692     (3,157     100,508       (35,543     2,137       397,182  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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INFORMATION BY MARKET SEGMENT AT SEPTEMBER 30, 2016

 
     ELECTRICITY     TELECOMS     GAS     Other     ELIMINATIONS     TOTAL  
   GENERATION     TRANSMISSION     DISTRIBUTION            

ASSETS OF THE SEGMENT

     14,414,449       4,267,418       18,165,610       337,745       2,737,182       2,388,972       (275,523     42,035,853  

INVESTMENTS IN AFFILIATED AND JOINTLY-CONTROLLED ENTITIES

     5,291,892       1,669,849       1,754,342       17,741       —         19,264       —         8,753,088  

ADDITIONS TO THE SEGMENT

     740,337       —         854,060       27,630       27,390       —         —         1,649,417  

ADDITIONS TO FINANCIAL ASSETS

     2,255,561       36,405                 2,291,966  

NET REVENUE

     4,268,400       953,846       8,000,957       99,711       847,565       89,562       (153,303     14,106,738  

COST OF ELECTRICITY AND GAS

                

Electricity purchased for resale

     (2,305,000     —         (3,857,716     —         —         (3     36,261       (6,126,458

Charges for use of the national grid

     (232,477     (243     (605,478     —         —         —         96,782       (741,416

Gas bought for resale

     —         —         —         —         (623,503     —         —         (623,503
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operational costs, total

     (2,537,477     (243     (4,463,194     —         (623,503     (3     133,043       (7,491,377

OPERATING COSTS AND EXPENSES

                

Personnel

     (202,412     (81,019     (852,103     (17,546     (30,424     (33,697     —         (1,217,201

Employees’ and managers’ profit shares

     (4,095     (2,311     (26,939     —         —         2,928       —         (30,417

Post-retirement obligations

     (39,975     (15,575     (165,845     —         —         (27,188     —         (248,583

Materials

     (8,118     (2,115     (29,226     (74     (1,387     (78     28       (40,970

Outsourced services

     (91,502     (21,295     (472,356     (16,523     (11,135     (6,752     17,757       (601,806

Depreciation and amortization

     (156,261     —         (367,753     (24,949     (40,402     (11,832     —         (601,197

Operational provisions (reversals)

     (56,512     (6,935     (370,553     294       —         (280,531     —         (714,237

Construction costs

     —         (36,405     (854,060     —         (27,390     —         —         (917,855

Other operating expenses, net

     (48,224     (7,898     (284,938     (13,406     (7,651     (12,656     2,475       (372,298
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of operation

     (607,099     (173,553     (3,423,773     (72,204     (118,389     (369,806     20,260       (4,744,564

OPERATING COSTS AND EXPENSES

     (3,144,576     (173,796     (7,886,967     (72,204     (741,892     (369,809     153,303       (12,235,941

OPERATIONAL PROFIT BEFORE EQUITY GAINS (LOSSES) AND FINANCIAL REVENUE (EXPENSES)

     1,123,824       780,050       113,990       27,507       105,673       (280,247     —         1,870,797  

Equity method gains in non-consolidated investees

     (155,226     301,402       (69,934     (25,648     —         (3,334     —         47,260  

Financial revenues

     134,676       4,100       597,394       3,275       11,548       84,198       —         835,191  

Financial expenses

     (998,640     (3,673     (847,214     (5,047     (29,073     (4,368     —         (1,888,015
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

PRE-TAX PROFIT

     104,634       1,081,879       (205,764     87       88,148       (203,751     —         865,233  

Income and Social Contribution taxes

     (65,006     (217,859     23,223       (1,962     (25,250     62,454       —         (224,400
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET PROFIT ( LOSS)

     39,628       864,020       (182,541     (1,875     62,898       (141,297     —         640,833  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest of the controlling shareholders

     39,628       864,020       (182,541     (1,875     62,628       (141,297     —         640,563  

Interest of non-controlling shareholder

     —         —         —         —         270       —         —         270  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     39,628       864,020       (182,541     (1,875     62,898       (141,297     —         640,833  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* The expense of R$ 280,531 recorded as operating provisions in the Others column refers substantially to expenses on the option to purchase investments held by the parent company and described in Note 14.

 

 

  

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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32. THE ANNUAL TARIFF ADJUSTMENT

On May 23, 2017 Aneel approved the result of the Annual Tariff Adjustment for the subsidiary Cemig D. It represented an average decrease in tariffs of 10.66%, in effect on May 28, 2017, through May 27, 2018.

The average negative affect of 10.66% arises from the following factors:

 

  Adjustment of the cost items of Portions A and B, contributing 1.29% to the average effect.

 

  Inclusion of the financial components calculated in the current tariff adjustment for offsetting in the subsequent 12 months, resulting in a reduction of 4.68%.

 

  Removal of the financial components established in the 2016 tariff adjustment process, which remained in effect up to the date of the adjustment being processed, contributing 7.28% reduction.

 

  Offsetting of CDE: Offsetting between the amounts payable and receivable, in the amount of R$ 974,680 in 9M17 (R$ 761,145 in 9M16).

 

33. NON-CASH TRANSACTIONS

In the half-year periods ended September 30, 2017 and 2016, the Company had the following transactions not involving cash, which are not reflected in the Cash flow statements:

 

Capitalized Finance Costs in the amount of R$ 56,851 in 9M17 (R$ 120,398 in 9M16).

 

Offsetting of CDE: Offseting between the amounts payable and receivable, in the amount of R$ 974,680 in 9M17 (R$ 761,145 in 9M16).

 

34. SUBSEQUENT EVENTS

Amendments to contracts for loans with Banco do Brasil

On October 23, 2017, the subsidiary Cemig GT signed amendments to loan contracts signed with Banco do Brasil, in the total amount of R$ 549 million, for the purpose of postponing payment of the tranches maturing on October 24, 26 and 30, 2017, for 60 days. The interest to be calculated on the debtor balance was increased from 108% of the CDO rate and 112% of the CDI rate, to 128% of the CDI rate; one of the amendments maintained the original interest rate, of 132.9% of the CDI rate. The early maturity events were also altered, to be in line with the clauses in Cemig GT’s 7th Issue of Non-convertible Debentures.

binding proposal for capitalization in Renova

On November 12, 2017, Renova received a binding proposal for primary investment of R$ 1.4 billion in Renova, at a price of R$ 6 per unit. The offer further includes an earn-out of up to R$ 1.00 (one Real) per unit, for any amount that Renova receives in the future as adjustment to the sale price of the Alto Sertão II Wind Power Complex.

The proposal also specifies conditions precedent that are usual in this type of transaction. In the event of acceptance, Brookfield will be given a period of exclusivity of 60 days, able to be extended for 30 days, to finalize the documents of the transaction.

The transaction will then be subject to consideration and approval by the governance bodies of Renova and its controlling stockholders.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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Non-binding offers related to the process of disinvestment

On November 13, 2017, in continuity with the relevant facts disclosed on August 28, 2017 and October 02, 2017, Cemig has received non-binding proposals related to its process of disinvestment, as a result of the first phase of access to the documents and information contained in the Data Room made available to potential investors in relation to the Light group.

Cemig is analyzing these proposals for possible selection for inclusion in the next phase. If a selection is made, conclusion of the disinvestment process will also be subject to: a phase of due diligence, including technical visits; submission of binding proposals; negotiations; final approvals for signature of definitive agreements for the transaction referred to; and approvals of conditions precedent that are usual in this type of transaction.

Considering the stage of the discussions, no modification was made in the accounting treatment of the investment in the jointly controlled subsidiary Light.

Capital increase proposal in Cemig

On October 26, 2017, the Extraordinary General Meeting of Stockholders approved an increase of the Company’s share capital, by up to R$ 1,000,000, through issuance of up to 66,849,505 (sixty six million eight hundred forty nine thousand five hundred five) new common shares and up to 133,150,495 (one hundred thirty three million one hundred fifty thousand four hundred ninety five) new preferred shares, all nominal, book-entry shares, each with nominal value of R$ 5.00 (five Reais), for issue price per share, for both common and preferred shares, of R$ 6.57 (six Reais and fifty seven centavos) (‘the Capital Increase’). After such increase, the subscribed and paid-in capital stock of the Company will increase from R$ 6,294,208 to 7,294,208.

All the shares resulting from this subscription will have the same rights as the shares of the same class on which the capital increase is based. The Capital Increase will be by private subscription, with present shareholders having preference to participate in proportion to their current equity holdings, on the basis of 0.1588762172 of a new share for each share held at the close of market on the day of the EGM that authorizes the Capital Increase.

Such capital increase action will allow the Company to obtain funds in the amount of up to R$ 1,314,000, being sure that the difference, in the amount of up to R$ 314,000, will be allocated to the capital reserve account. The potential dilution resulting from the issue, if any shareholder does not join the subscription, is 13.704239283% for common shares and preferred shares. The current shareholders may exercise the preemptive right to subscribe, in the period from October 30, 2017 to November 29, 2017, at 15.887624200% on the shares of the same type that they own at the end of the day of the extraordinary general meeting that deliberates on this subject.

 

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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Report on the review of interim information

The Shareholders, Board of Directors and Officers

Companhia Energética de Minas Gerais

Belo Horizonte—MG

Introduction

We have reviewed the accompanying individual and consolidated interim financial information of Companhia Energética de Minas Gerais (“Company”), contained in the Quarterly Information Form (ITR) for the quarter ended September 30, 2017, which comprise the statement of financial position as at September 30, 2017 and the related statement of profit or loss, of comprehensive income for the three-month and nine-month periods then ended, and statement of changes in equity and cash flow statement for the nine-month period then ended, including other explanatory information.

Management is responsible for the preparation of the individual interim financial information in accordance with Accounting Pronouncement CPC 21 (R1) – Interim Financial Reporting, and of the consolidated interim financial information in accordance with IAS 34 – Interim Financial Reporting, issued by the International Accounting Standards Board (IASB), as well as for the fair presentation of this information in conformity with the standards issued by the Brazilian Securities and Exchange Commission (CVM) applicable to the preparation of Quarterly Information (ITR). Our responsibility is to express a conclusion on this interim financial information based on our review.

Scope of review

We conducted our review in accordance with Brazilian and International Standards on Review Engagements (NBC TR 2410—Review of Interim Financial Information Performed by the Independent Auditor of the Entity, and ISRE 2410—Review of Interim Financial Information Performed by the Independent Auditor of the Entity, respectively). A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion on the individual and consolidated interim financial information

Based on our review, nothing has come to our attention that causes us to believe that the accompanying individual and consolidated interim financial information included in the quarterly information referred to above is not prepared, in all material respects, in accordance with CPC 21(R1) and IAS 34, applicable to the preparation of Quarterly Financial Information (ITR), consistently with the rules issued by the Brazilian Securities and Exchange Commission.

 

 

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Emphasis of matters

Renewal of the concession for Jaguara, São Simão and Miranda

As disclosed in note 4 to the interim financial information, the Company is challenging the renewal of the concession contracts for the Jaguara, São Simão and Miranda hydroelectric plants. These concession contracts were terminated in August 2013, January 2015 and December 2016, respectively and were auctioned by the granting authority on September 27, 2017. Additionally, the Company is discussing administratively the amounts of the financial assets indemnifiable relative to the plants in question. The Company does not expect to incur losses arising from this matter. Our conclusion is not modified in respect of this matter.

Risks related to compliance with laws and regulations

As mentioned in Note 14 to the interim financial information, the Company holds indirect non-controlling interests in Madeira Energia S.A. (which has an investment in Santo Antônio Energia S.A.) and Norte Energia S.A. (the “Investees”), valued by the equity method. Investigations and certain legal actions conducted by the Federal Prosecution Office (MPF) involving other indirect shareholders of the Investees and certain executives of these shareholders are underway. At present, it is not possible to determine whether the results of referred to investigations and their respective developments may eventually have future consequences to the investees beyond the effects mentioned in Note 14. The Company’s interim financial information does not include any other effects that may arise from this matter. Our conclusion is not modified in respect of this matter.

Risk of continuity of the investee Renova Energia S.A. business operations

As disclosed in Note 14 to the interim financial information, the Company has indirect non-controlling interest in Renova Energia S.A. (“Renova”), which is accounted for under the equity method, and whose conditions indicate the existence of material uncertainty that may raise significant doubt as to the ability of Renova and its subsidiaries to continue as a going concern. Our conclusion is not modified in respect of this matter.

Other matters

Statements of value added

We have also reviewed the individual and consolidated Statements of Value Added (SVA) for the nine-month period ended September 30, 2017, prepared under the responsibility of Company management, the presentation of which in the interim financial information is required by the rules issued by the Brazilian Securities and Exchange Commission (CVM) applicable to the preparation of Quarterly Information (ITR), and as supplementary information under the IFRS, whereby no SVA presentation is required. These statements have been subject to the same review procedures previously described and, based on our review, nothing has come to our attention that causes us to believe that they are not consistently prepared, in all material respects, in relation to the overall accompanying interim financial information.

 

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Audit and review of prior year/period corresponding figures

The amounts corresponding to the statement of financial position as at December 31, 2016, and the statements of profit or loss and comprehensive income for the three-month and nine-month periods ended September 30, 2016, changes in equity, cash flows and value added for the nine-month period then ended, and presented for comparative purposes, were previously audited and reviewed, respectively, by other independent auditors, who issued an unmodified opinion on their independent auditor’s report on the individual and consolidated financial statements dated April 11, 2017, and an unmodified conclusion on their review report on the individual and consolidated interim financial information dated April 27, 2017, both containing emphasis of matters on the issues described above.

Belo Horizonte (MG), November 14, 2017

ERNST & YOUNG

Auditores Independentes S.S.

CRC-2SP015199/O-6

Shirley Nara S. Silva

Accountant CRC 1BA022650/O-0

 

 

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CONSOLIDATED RESULTS

(Figures in R$ ’000 unless otherwise indicated)

Results for 9M17

Net profit

For the first nine months of 2017 (9M17) Cemig reported net profit of R$ 397,182 – compared to net profit of R$ 640,833 in 9M16. The following pages describe the main variations between the two periods in revenues, costs, expenses and financial items.

We highlight that in 9M17 the subsidiaries Cemig GT and Cemig D adhered to the Minas Gerais State Tax Credits Regularization Plan (PRCT), for settlement of the ICMS tax, which totals an estimated R$ 582,956 (the amount is to be updated until the date of actual payment). This is to be paid in six equal installments, starting on October 31, 2017. The net effect posted in the third quarter results in 2017 is R$ 587,624. The amount of R$ 562,406 is recorded as deductions from revenue; and R$ 25,218 is posted as expenses (operational and financial).

As further non-recurring items in 3Q17, the Company recognized a gain on updating of the indemnity of generation assets, in the amount of R$ 259,516; and reversal of the provision relating to an Advance against future capital increase (AFAC), the effect of which in the Profit and loss account was R$ 277,723 – comprising a reversal of provision of R$ 239,445, and an item in Financial revenue of R$ 38,278 arising from monetary updating of the administrative deposit. For more details please see Notes 11 and 23.

Ebitda

(Earnings before interest, tax, depreciation and amortization)*

Cemig’s consolidated Ebitda in 9M17 was 22.98% below its Ebitda of 9M16:

 

Ebitda – R$ ’000

   9M17      9M16      Change,%  

Net profit for the period

     397,182        640,833        (38.02

+ Income tax and Social Contribution tax

     204,594        224,400        (8.83

+ Financial revenue (expenses)

     721,886        1,052,824        (31.43

+ Depreciation and amortization

     616,783        601,197        2.59  
  

 

 

    

 

 

    

 

 

 

= EBITDA

     1,940,445        2,519,254        (22.98
  

 

 

    

 

 

    

 

 

 

 

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* Ebitda is a non-accounting measure prepared by the Company, reconciled with the Interim accounting information in accordance with CVM Circular SNC/SEP 1/2007 and CVM Instruction 527 of October 4, 2012. It comprises Net profit adjusted by the effects of net Financial revenue (expenses), Depreciation and amortization, and Income tax and the Social Contribution tax. Ebitda is not a measure recognized by Brazilian GAAP nor by IFRS; it does not have a standard meaning; and it may be non-comparable with measures with similar titles provided by other companies. Cemig publishes Ebitda because it uses it to measure its own performance. Ebitda should not be considered in isolation or as a substitution for net profit or operational profit, nor as an indicator of operational performance or cash flow, nor to measure liquidity nor the capacity for payment of debt.

 

  

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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The most significant factors in the Ebitda 22.98% lower than in 9M16 are difference are set out below. In line with the variation in Ebitda, Ebitda margin in 9M17 was lower – at 12.80% – in 2017, than 9M16 (17.86%).

Revenue from supply of electricity

Revenue from sales of electricity in 9M17 totaled R$ 17,387,754, compared to R$ 17,315,733 in 9M16, a year-on-year increase of 0.42%.

Final consumers

Total revenue from electricity sold to final consumers, excluding Cemig’s own consumption, was R$ 15,027,061 in 9M17 – this was 1.82% lower than the figure for 9M16, of R$ 15,305,033.

The main factors in this revenue were:

 

  Lower revenues from the ‘Flag’ tariff, at R$ 258,060 in 9M17, compared to R$ 342,789 in 9M16. This mainly reflects lower amounts under the ‘red flag’ tariff in 9M17.

 

  Volume of electricity sold in 9M17 was 1.56% lower than in 1H16.

 

  The Annual Tariff Adjustment for Cemig D, with average effect on consumer tariffs of 3.78%, effective from May 28, 2016 (full effect in 2017).

 

  The Annual Tariff Adjustment for Cemig D, with average effect on consumer tariffs of 10.66%, effective from May 28, 2017.

Cemig’s electricity market

The total for sales in Cemig’s consolidated electricity market comprises sales to:

 

(I) Captive consumers in Cemig’s concession area in the State of Minas Gerais;

 

(II) Free Consumers 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 electricity sector – traders, generators and independent power producers, also in the Free Market;

 

(IV) Distributors, in the Regulated Market (Ambiente de Contratação Regulada, or ACR); and

 

(V) the Wholesale Trading Exchange (Câmara de Comercialização de Energia Elétrica, or CCEE)

( – eliminating transactions between companies of the Cemig Group).

The tables below show Cemig’s market in more detail, itemizing transactions in 9M17 compared with 9M16.

 

  

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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Consumption itemized by type of consumer:

 

     MWh  
   9M17      9M16      Change, %  

Residential

     7,489,980        7,406,095        1.13  

Industrial

     13,162,944        14,541,717        (9.48

Commercial, Services and Others

     5,581,213        4,907,884        13.72  

Rural

     2,769,082        2,699,294        2.59  

Public authorities

     644,621        659,997        (2.33

Public lighting

     1,030,199        1,012,312        1.77  

Public services

     977,757        930,708        5.06  
  

 

 

    

 

 

    

 

 

 

Subtotal

     31,655,796        32,158,007        (1.56
  

 

 

    

 

 

    

 

 

 

Own consumption

     26,946        27,614        (2.42
  

 

 

    

 

 

    

 

 

 
     31,682,742        32,185,621        (1.56
  

 

 

    

 

 

    

 

 

 

Wholesale supply to other concession holders (1)

     9,167,876        8,813,064        4.03  
  

 

 

    

 

 

    

 

 

 

Total

     40,850,618        40,998,685        (0.36
  

 

 

    

 

 

    

 

 

 

 

(1) Includes Regulated Market Electricity Sale Contracts (CCEARs) and ‘bilateral contracts’ with other agents.

We highlight the volume of electric power sold to the industrial consumer category, which was 9.48% lower YoY, basically due to consumers leaving the status of captive consumer and moving to become consumers in the Free Market.

Revenue from Use of Distribution Systems (the TUSD charge)

This is revenue from charging Free Consumers the Tariff for Use of the Distribution System (Tarifa de Uso do Sistema de Distribuição, or TUSD). In 9M 2017 this revenue was R$ 1,230,623, compared to R$ 1,348,132 in 9M16 – a year-on-year reduction of 8.72%. This primarily reflects the reduction of approximately 40% in the TUSD, which took place in the 2017 Annual Tariff Adjustment, applied from May 28, 2017.

CVA and Other financial components in tariff adjustment

In its interim accounting information Cemig recognizes the difference between actual non-controllable costs (in which the CDE, and electricity bought for resale, are significant components) and the costs that were used as the basis of decision of the rates charged to consumers. This balance is the amount that will be passed through to the Company, or reimbursed to the consumer through Cemig D’s next subsequent tariff adjustments. In 9M17 the amount for reimbursement was R$ 148,216, compared to R$ 937,053 reimbursable in 9M16.

This variation was mainly due to increased costs of power supply in 9M17 due to the low level of the reservoirs, with a greater difference between the amounts spent and the costs recognized in the tariff. For more details please see Note 14.

Transmission indemnity revenue

Transmission indemnity revenue was R$ 295,749 in 9M17, compared to R$ 692,211 in 9M16. In 2Q17, as a result of the Mining and Energy Ministry setting the criteria for updating of the transmission indemnity, a posting was made, backdated to 2013, of the amount of the updating of the indemnity receivable based on the regulatory cost of own capital, which had a significant impact on the revenue reported.

 

 

  

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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We highlight the amount recorded in 2017, of R$ 149,255, for the backdated difference of transmission concession assets the values of which were not included in the calculation basis for revenues in the previous tariff reviews. For more details see Note 14 – Financial assets of the concession.

Generation Indemnity revenue

In 9M17 the Company recognized revenue of R$ 259,516, for the adjustment to the balance of non-amortized indemnities for the concessions of the São Simão and Miranda Hydroelectric Plants, as per Ministerial Order 291/17. For more details see Note 4.

Revenue from transactions in the Wholesale Trading Chamber (CCEE)

The revenue from electricity transactions in the CCEE in 9M17 was R$ 536,507, compared to R$ 138,870 in 9M16 – in other words, R$ 397,637 higher. This difference is mainly due to the increase of 322.61% in the average Spot Price (Preço de Liquidação de Diferenças – PLD), which averaged R$ 299.42/MWh in 9M17, and R$ 70.85/MWh in 9M16; and the volume of power supply available for settlement in the wholesale market in 2017.

Revenue from supply of gas

Cemig reports revenue from supply of gas totaling R$ 1,305,636 in 9M17, compared to R$ 1,037,126 in 9M16 – i.e. 25.89% higher YoY. This basically reflects volume of gas sold 32.10% higher YoY (982,235m³ in 9M17, vs. 743,534m³ in 9M16).

Construction Revenue

Distribution Infrastructure Construction Revenue in 9M17 was R$ 736,754, which was 19.73% less than in 9M16 (R$ 917,855). 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 period.

Other operating revenues

The items in the Other Operating Revenues line comprise: Transmission Concession revenue; Adjustment to expectation of cash flow from the indemnifiable Financial assets of the distribution concession; Gain on financial updating of the Concession Grant Fee; and Other operating revenues. Their total in 9M17 was R$ 1,561,119, or 2.18% more than in 9M16 (R$ 1,527,798). See Note 25 for the composition of operational revenues.

 

 

  

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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Sector / Regulatory charges reported as Deductions from revenue

The charges that are recorded as deductions from operational revenue totaled R$ 8,308,094 in 9M17, or 4.72% more than in 9M16 (R$ 7,933,934).

The Company adhered to the Minas Gerais State Tax Credits Regularization Plan (Plano de Regularização de Créditos Tributários – PRCT), for settlement of ICMS (state value-added tax). The effect reported in 3Q17 was R$ 562,406 on ICMS from operational revenue.

The Energy Development Account – 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, 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 9M17 were R$ 1,326,946, which compares to R$ 1,596,577 in 9M16.

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.

Consumer charges – the ‘Flag’ Tariff system

Charges to the Consumer related to the ‘Flag’ Tariffs were lower, at R$ 258.060 in 9M17, compared to R$ 342,789 in 9M16 – a reduction of 24.72% – mainly reflecting a decrease of the ‘red flag’ revenue in the comparative periods.

Operational costs and expenses (excluding Financial revenue/expenses)

Operational costs and expenses in 9M17 totaled R$ 13,809,439, or 12.86% more than in 9M16 (R$ 12,235.941). For more on the components of Operational costs and expenses see Note 26.

The following paragraphs comment on the main variations:

Electricity purchased for resale

This expense in 9M17 was R$ 7,685,392, 24.45% higher than in 9M16 (R$ 6,126,458).

This is mainly due to expense on purchase of supply in the spot market being 166.70% higher, at R$ 1,180,780 in 9M17, compared to R$ 487,536 in 9M16 – reflecting the higher cost of power supply in the wholesale market in 2017 as a result of the low level of reservoirs, with less volume of production by hydroelectric plants. The result was a higher volume of operation of the thermal plants, for which the increase in expenditure was financed principally by the electricity distributors, which is a feature of the present regulatory model in Brazil.

 

 

  

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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Charges for Use of the Transmission Network

Charges for use of the transmission network in 9M17 totaled R$ 791,339, an increase of 6.73% year-on-year, compared to R$ 741,416 in 9M16.

This expense is payable by electricity 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 Resolution.

This is a non-manageable cost: 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.

Operating provisions

Operational costs and expenses in 9M17 totaled R$ 558,793, or 21.76% less than in 9M16 (R$ 714,237). The main factors are:

 

  Variation in fair value of the investment options related to Parati and SAAG, in the amount of R$ 160,903 in 9M17, compared to a total provision of R$ 297,073 in 9M16. More details on the criteria for making of these provisions are in Note 15 (Put options).

 

  Lower provisions for consumer default – at R$ 191,343 in 9M17, compared to R$ 282,915 in 9M16 – mainly reflecting the Company’s increased efforts in collection of overdue receivables in 2017.

 

  Within contingencies, there was an increase in contingencies for employment-law cases – to R$ 188,013 in 9M17, compared to R$ 69,963 in 9M16. The increase in the amount provisioned reflects re-evaluations of potential losses in various legal actions as a result of the change in the procedural phase to provisional execution, in relation to actions disputing: the basis for calculation of hazardous work remuneration; argument for a principle of equal payment for alleged unlawful outsourcing; and subsidiary/joint liability. For more information see Note 23.

Personnel

Personnel expenses in 9M17 were R$ 1,275,667, or 4.80% more than in 9M16 (R$ 1,217,201). This arises mainly from the following items:

 

  Salary increase of 8.50%, as from November 2016, under the Collective Work Agreement.

 

  Recognition, in 2017, of an expense of R$ 197,326 on the voluntary retirement program, which compares with R$ 92,919 in 9M16.

 

  The average number of employees was down 13.49% in the comparison between the periods: 6,631 in 9M17, compared to 7,666 in 9M16.

Construction cost

Distribution Infrastructure Construction Costs in 9M17 totaled R$ 736,754, or 19.73% less than in 9M16 (R$ 917,855). This line records the Company’s investment in assets of the concession in the period, and is fully offset by the line Construction Revenue, in the same amount.

 

 

  

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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Gas bought for resale

In 9M17 the Company recorded an expense of R$ 789,861 on acquisition of gas, 26.68% more than its comparable expense of R$ 623,503 in 9M16. This mainly reflects a volume of gas bought for resale 33.72% higher (987,442m³ in 9M17, compared to 738,42m³ in 9M16), partially offset by lower charges under the new agreement between Gasmig and Petrobras, which reduced the daily gas offtake obligation.

Equity method gains in non-consolidated investees

The result of equity method valuation of interests in investees in 9M17 was a negative item of R$ 20,680, compared to a gain of R$ 47,260 in 9M16. The difference mainly reflects negative equity income contributions from Madeira Energia (R$ 84,553), from Fip Melbourne (Santo Antônio Plant) (R$ 73,209) and from Renova (R$ 50,048); and a lower positive gain in Taesa, due to reduction of the equity interest held in that company, which was 43.36% in September 2016, and 31.54% in September 2017. For more details see Note 15.

Net financial revenue (expenses)

Cemig reports net financial expenses in 9M17 of R$ 721,886, compared to net financial expenses of R$ 1,052,824 in 9M16. The main factors are:

 

  The financial expense on monetary variation in loans and financings was R$ 157,711 lower, due to the IPCA inflation index (indexor for the debt) being lower in 9M17, at 1.78%, than in 9M16 (5.51%).

 

  Costs of loans and financings were R$ 230,602 lower, mainly due to lower CDI rate (main indexor of the debt), which was 8.03% over the period of 9M17, compared to 10.42% in the whole of 9M16.

 

  Reversion provision related to the monetary updating of AFAC in the amount of R$239.445. For more information please see Note 23;

 

  In 9M17 the result of monetary updating of the balances of CVA was a loss of R$ 40,086 in 9M17, compared to a gain of R$ 206,967 in 9M16. The positive and negative balances of CVA are updated by the Selic rate. This difference arises from a net payable amount of CVA on September 30, 2017. In 9M16 the corresponding amount was a credit. For more information please see Note 14.

 

  The expense of monetary variation on the debt agreed with Forluz was R$ 38,381 lower, also due to the lower value of the IPCA index (indexor of the debt), as mentioned above.

For a breakdown of financial revenues and expenses please see Note 27.

Income and Social Contribution taxes

In 9M17 the expense on income tax and the Social Contribution totaled R$ 204,594, on pre-tax profit of R$ 601,776, an effective rate of 34.00%.

In 9M16, the expense on income tax and the Social Contribution tax totaled R$ 224,400, on pre-tax profit of R$ 865,233, representing an effective rate of 25.94%. These effective rates are reconciled with the nominal tax rates in Note 9.

 

  

 

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  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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Results for third quarter 2017

For the third quarter of 2017 (3Q17) Cemig reports a net loss of R$ 83,666, which compares to net profit of R$ 433,502 in 3Q16. The following pages describe the main variations between the two periods in revenues, costs, expenses and financial items.

We highlight that in 9M17 Cemig GT and Cemig D adhered to the Minas Gerais State Tax Credits Regularization Plan (PRCT), for settlement of the ICMS tax, which totals an estimated R$ 582,956 (the amount is to be updated until the date of actual payment). This is to be paid in six equal installments, starting on October 31, 2017. The net effect posted in the third quarter results in 2017 is R$ 587,629. The amount of R$ 561,411 is recorded as deductions from revenue; and R$ 25,218 is posted as expenses (operational and financial).

As further non-recurring items in 3Q17, the Company recognized a gain on updating of the indemnity of generation assets, in the amount of R$ 259,516; and reversal of the provision relating to an Advance against future capital increase (AFAC), the effect of which in the Profit and loss account was R$ 277,723 – comprising a reversal of provision of R$ 239,445, and an item in Financial revenue of R$ 38,278 arising from monetary updating of the administrative deposit. For more details please see Notes 11 and 23.

Ebitda (Earnings before interest, tax, depreciation and amortization*)

Cemig’s consolidated Ebitda in 9M17 was 91.58% below its Ebitda of 9M16:

 

Ebitda – R$ ’000

   3Q17     3Q16      Change,%  

Net profit for the period

     (83,666     433,502        —    

+ Income tax and Social Contribution tax

     (9,334     135,034        —    

+ Financial revenue (expenses)

     (12,414     422,912        (37.69

+ Depreciation and amortization

     205,983       202,480        1.73  
  

 

 

   

 

 

    

 

 

 

= EBITDA

     100,569       1,193,928        (91.58
  

 

 

   

 

 

    

 

 

 

 

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* Ebitda is a non-accounting measure prepared by the Company, reconciled with its financial statements in accordance with the specifications in CVM Circular SNC/SEP 01/2007 and CVM Instruction 527 of October 4, 2012. It comprises: net profit adjusted for the effects of net financial revenue (expenses), depreciation, amortization and income tax and the Social Contribution tax. Ebitda is not a measure recognized by Brazilian GAAP nor by IFRS; it does not have a standard meaning; and it may be non-comparable with measures with similar titles provided by other companies. Cemig publishes Ebitda because it uses it to measure its own performance. Ebitda should not be considered in isolation or as a substitution for net profit or operational profit, nor as an indicator of operational performance or cash flow, nor to measure liquidity nor the capacity for payment of debt.

 

  

 

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Cemig’s Ebitda 91.58% lower year-on-year in 3Q17 mainly reflects the comparison of the 3Q17 loss of R$ 265,788 with the 3Q16 profit of R$ 433,502. The Company’s Ebitda margin in 3Q17 was 1.97%, which compares with 24.39% in 3Q16.

Revenue from supply of electricity

Revenue from supply of electricity was R$ 5,815,621 in 3Q17, or 0.48% higher than in 3Q16 (R$ 5,787,568).

Final consumers

Total revenue from electricity sold to final consumers, excluding Cemig’s own consumption, in 3Q16 was R$ 4,882,538 in 3Q17, compared to R$ 5,025,744 in 9M16 – a YoY reduction of 2.85%.

The main factors in this revenue were:

 

  The Annual Tariff Adjustment for Cemig D, with average effect on consumer tariffs of 3.78%, effective from May 28, 2016 (full effect in 2017).

 

  The Annual Tariff Adjustment for Cemig D, with average effect on consumer tariffs of 10.66%, effective from May 28, 2017.

 

  Volume of electricity sold to final consumers 1.99% higher year-on-year.

Cemig’s electricity market

The total for sales in Cemig’s consolidated electricity market comprises sales to:

 

(I) Captive consumers in Cemig’s concession area in the State of Minas Gerais;

 

(II) Free Consumers 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 electricity sector – traders, generators and independent power producers, also in the Free Market;

 

(IV) Distributors, in the Regulated Market (Ambiente de Contratação Regulada, or ACR); and

 

(V) the Wholesale Trading Exchange (Câmara de Comercialização de Energia Elétrica, or CCEE)

( – eliminating transactions between companies of the Cemig Group).

The table below shows the Cemig Group’s market in more detail, itemizing transactions in 3Q17 compared with 3Q16.

This table shows consumption itemized by type of consumer:

 

     MWh (1)  
   3Q17      3Q16      Change,%  

Residential

     2,456,908        2,389,353        2.83  

Industrial

     4,458,794        5,031,850        (11.39

Commercial, Services and Others

     1,776,377        1,522,936        16.64  

Rural

     1,016,897        1,015,555        0.13  

Public authorities

     207,967        208,314        (0.17

Public lighting

     354,299        338,892        4.55  

Public services

     338,415        318,605        6.22  
  

 

 

    

 

 

    

 

 

 

Subtotal

     10,609,657        10,825,505        (1.99
  

 

 

    

 

 

    

 

 

 

Own consumption

     8,896        8,528        4.32  
  

 

 

    

 

 

    

 

 

 
     10,618,553        10,834,033        (1.99
  

 

 

    

 

 

    

 

 

 

Wholesale supply to other concession holders (2)

     3,427,498        3,006,675        14.00  
  

 

 

    

 

 

    

 

 

 

Total

     14,046,051        13,840,708        1.48  
  

 

 

    

 

 

    

 

 

 

 

(1) Information in MWh has not been reviewed by external auditors.
(2) Includes Regulated Market Electricity Sale Contracts (CCEARs) and ‘bilateral contracts’ with other agents.

 

  

 

Av. Barbacena 1200

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We highlight the volume of electric power sold to the industrial consumer category, which was 11.39% lower YoY, basically due to consumers leaving the status of captive consumer and moving to become consumers in the Free Market.

Revenue from Use of Distribution Systems (the TUSD charge)

This is revenue from charging Free Consumers the Tariff for Use of the Distribution System (Tarifa de Uso do Sistema de Distribuição, or TUSD), for transport of electricity sold. In 3Q17 it totaled R$ 330,147, compared to R$ 511,552 in 3Q16 – a year-on-year reduction of 35.46%.

CVA and Other financial components in tariff adjustment

In its interim accounting information Cemig recognizes the difference between actual non-controllable costs (in which the CDE, and electricity bought for resale, are significant components) and the costs that were used as the basis of decision of the rates charged to consumers. This balance is the amount that will be passed through to the Company, or reimbursed to the consumer through Cemig D’s next subsequent tariff adjustments.    In 3Q17 amounts to be passed through to the Company in the next tariff adjustment were recognized totaling R$ 480,112, compared to the amount of R$ 273,498 to be reimbursed, arising in 3Q16.

This variation is mainly due to the higher costs of electricity in 3Q17, with a larger difference between the amounts spent and the costs recognized in the tariff. For more details please see Note 14.

Transmission indemnity revenue

Transmission indemnity revenue in 3Q17 was R$ 25,894, compared to R$ 99,742 in 3Q16.

In 2Q16, as a result of the Mining and Energy Ministry setting the criteria for updating of the transmission indemnity, a posting was made, backdated to 2013, of the amount of the updating of the indemnity receivable based on the regulatory cost of own capital, and this had a significant impact on the revenue reported.

Generation Indemnity revenue

In 3Q17 the Company recognized revenue of R$ 259,516 for the adjustment to the balance not yet amortized of indemnity for the concessions for the São Simão and Miranda Hydroelectric Plants, as per Ministerial Order 291/17. For more details see Note 4.

Revenue from supply of gas

The Company reported revenue from supply of gas 42.65% higher year-on-year in 3Q17, at R$ 484,491, compared to R$ 339,634 in 3Q16 – mainly reflecting the higher volume of gas sold: 375,870m³ in 3Q17, compared to 238,440m³ in 3Q16.

Construction Revenue

Construction and infrastructure revenues (transmission, distribution and gas) totaled R$ 295,720 in 3Q17, 11.49% more than their total of R$ 334,122 in 3Q16. 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 period.

Other items of operational revenues

The items in Other Operating Revenues – comprising Transmission Concession revenue; Adjustment to expectation of cash flow from the indemnifiable Financial assets of the distribution concession; Gain on financial updating of the Concession Grant Fee; and Other operating revenues – were 1.85% lower in 9M17, at R$ 514,064, than in 9M16 (R$ 519,158).

Sector / Regulatory charges reported as Deductions from revenue

The total of the taxes and charges reported as deductions from revenue in 3Q17 was R$ 3,181,073 – an increase of 26.74% in relation to their total of R$ 2,509,870 in 3Q16.

 

  

 

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The Company adhered to the Minas Gerais State Tax Credits Regularization Plan (PRCT), for settlement of ICMS (state value-added tax). The effect reported in 3Q17 was an expense on ICMS of R$ 587,629.

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). The charges for the CDE in 3Q17 were R$ 467,576, compared to R$ 571,148 in 3Q16.

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.

Consumer charges – the ‘Flag’ Tariff system

There was an increase in the Consumer Charges related to the ‘Flag’ tariff system: The figure for 3Q17 was an expense of R$101,625, compared to a reversal, in 3Q16, of R$ 429. This variation is due to the change in the tariff ‘Flag’ – it was ‘yellow’ in July, and ‘red’ in August, 2017, which compares to ‘green’ in 3Q16 which implies a larger incoming amount in 3Q17.

Operational costs and expenses (excluding Financial revenue/expenses)

Operational costs and expenses were 31.06% higher YoY: R$ 5,160,438 in 3Q17, and R$ 3,937,376 in 3Q16. For more on the components of Operational costs and expenses see Note 26.

The following paragraphs comment on the main variations in expenses:

Electricity purchased for resale

The expense on electricity brought for resale in 3Q17 was R$ 2,942,974, or 35.60% more than in 3Q16 (R$ 2,170,348). The main factors are:

 

  The expense on purchase of electricity at auctions was 26.83% higher – at R$ 824,699 in 3Q17, compared to R$ 650,259 in 3Q16. This reflected new power purchasing agreements made in the regulated market in 2017.

 

  The expense on purchase of supply in the spot market was 107.95% higher, at R$ 408,859, in 3Q17, compared to R$ 196,612 in 3Q16 – reflecting the higher cost of supply in the wholesale market in 2017 as a result of the low level of the reservoirs, and lower output of supply by the hydroelectric plants. The result was a higher volume of operation of the thermal plants, for which the increase in expenditure was financed principally by the electricity distributors, which is a feature of the present regulatory model in Brazil.

Charges for Use of the Transmission Network

Charges for use of the transmission network in 3Q17 totaled R$ 387,078, compared to R$ 215,504 in 3Q16, a year-on-year increase of 79.62%.

This expense is payable by electricity 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 Resolution.

This is a non-manageable cost: 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.

 

 

  

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

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Operational provisions

Operational provisions were R$ 188,875 in 3Q17, compared to a reversal of provisions totalling R$ 19,375 in 3Q16. The main factors are:

 

  Reversal of provision on the investment options related to RME and LEPSA, in the total amount of R$ 166,767, in 3Q16, which compares with provisions of R$ 85,306 made in 3Q17. More details on the criteria for making of these provisions are in Note 15 (Put options).

 

  Lower provisions for default on receivables: R$ 50,458 in 3Q17, compared to R$ 108,349 in 3Q16 – mainly reflecting a lower level of default in the period.

Personnel

The expense on personnel in 3Q17 was R$ 358,505, or 4.14% lower than in 3Q16 (R$ 373,986). This arises mainly from the following factors:

 

  A decrease of 17.39% on average number of employees in 3Q17, 6,166 compared to 7,464 in 3Q16 (7,464), partially compensated by a salary increase of 8.50% under the Collective Work Agreement, as from November 2016.

 

  Recognition, in 3Q17, of an expense of R$ 31,904 on the voluntary retirement program, which compares with R$ 29,034 in the same period of 2016.

In counterpart to the items above, the average number of employees in 3Q17 was 17.39% lower, at 6,166, than in 3Q16 (7,464).

Employees’ and managers’ profit shares

This expense in 3Q17 was R$ 886, compared to R$ 24,217 in 3Q16. The difference reflects the Company’s lower profit – since profit shares are calculated as a percentage of profit.

Construction cost

Infrastructure construction cost in 3Q17 was R$ 295,720, compared to R$ 334,122 in 3Q16 (465,924). This line records the Company’s investment in assets of the concession in the period, and is fully offset by the line Construction Revenue, in the same amount.

Gas bought for resale

In 3Q17 the Company recorded an expense of R$ 304,698 on acquisition of gas, 55.07% higher than its comparable expense of R$ 196,494 in 3Q16. This is basically reflects a higher volume of gas purchased (385,467m³ in 3Q17, compard to 234,926m³ in 3Q16).

Equity method gains in non-consolidated investees

In 3Q17 Cemig posted a net equity method loss of R$ 80,798, which compares with a net gain of R$ 33,218 in 3Q16. This principally arises from the effect of the equity effect of the equity interest in Renova, which provided an equity loss of R$ 86,601 in 3Q17, compared with a loss of R$ 26,179 in 2016 and the interest in Taesa, which provided an equity gain of R$ 45,006 in 3Q17, compared with a gain of R$ 90,873 in 2016. For more details please see Note 15.

 

 

  

 

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Net financial revenue (expenses)

Cemig reported net financial revenue in 3Q17 of R$ 12,414, compared to net financial expenses of R$ 422,912 in 3Q16. The main factors are:

 

  Reversion provision related to the monetary updating of AFAC in the amount of R$239.445. For more information please see Note 23;

 

  In 3Q17 the result of monetary updating of the balances of CVA was a loss of R$ 12,006, compared to a gain of R$ 19,403 in 3Q16. The positive and negative balances of CVA are updated by the Selic rate. This difference arises from a net payable amount of CVA on September 30, 2017. In 3Q16 the corresponding amount was a credit. For more information please see Note 14.

 

  Income from cash investments was R$ 38,718 lower, due mainly to a lower volume of cash invested.

 

  Financial expense on monetary variation in loans and financings was R$ 41,277 lower, due to the lower variation of the IPCA inflation index (indexor for the debt) in the quarter – 0.59% in 3Q17, compared to 1.04% in 3Q16.

 

  Costs of loans and financing was 34.39% lower, at R$ 344,297 in 3Q17, compared to R$ 524,775 in 3Q16, due to the lower CDI rate over the period (principal indexor of the debt), of 2.29% in 3Q17, compared to 3.47% in 3Q16.

For a breakdown of financial revenues and expenses please see Note 27.

Income and Social Contribution taxes

In 3Q17 the expense on income tax and the Social Contribution tax totaled R$ 9,334, in relation to the pre-tax loss of R$ 93,000 – representing a percentage proportion of 10.04%.

In 3Q16, the expense on income tax and the Social Contribution tax was R$ 135,034, on pre-tax profit of R$  568,536 an effective rate of 23.75%. These effective rates are reconciled with the nominal tax rates in Note 9.

OTHER INFORMATION THAT THE COMPANY BELIEVES TO BE MATERIAL

The Board of Directors

Meetings

Our Board of Directors met 25 times up to September 30, 2017, for matters of strategic planning, projects, acquisition of new assets, investments, and other subjects.

Membership, election and period of office

The present period of office began with the AGM on April 29, 2016, with election by the multiple voting system.

The periods of office of the present members of the Board of Directors expire at the Annual General Meeting of Stockholders to be held in 2018.

Principal responsibilities and duties:

The Board of Directors has the following responsibilities and duties, as well as those conferred on it by law:

 

  Decision, before signing, on any contract to be entered into between Cemig and any stockholder or a parent company of such stockholder.

 

  Decision on any sale of assets, loans or financings, charge on the company’s property, plant or equipment, guarantees to third parties, or other legal acts or transactions, with value of R$ 17,355 or more.

 

 

  

 

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  Authorization for issuance of securities in the domestic or external market to raise funds.

 

  Approval of the Long-term Strategic Plan, and revisions of it, and of the Multi-year Strategic Implementation Plan and revisions of it, and the Annual Budget.

Committees

 

  These committees are made up of members of the Board of Directors, to carry out prior discussion and analysis on matters to be decided by the Board, as follows:

 

  1. Board of Directors’ Support Committee;

 

  2. Corporate Governance and Sustainability Committee;

 

  3. Human Resources Committee;

 

  4. Strategy Committee;

 

  5. Committee for New Business Development and Corporate Control of Subsidiaries and Affiliates; and

 

  6. Finance, Audit and Risks Committee.

Qualification and remuneration

The members of the Board of Directors have training and experience in a wide range of areas (business administration, engineering, law, economics, etc.), and very broad experience in business management. The global or individual amount of the remuneration of the Board of Directors is set by the General Meeting of Stockholders, in accordance with legislation in force at the time.

A list with the names of the members of the Board of Directors and their résumés is on our website at: http://ri.cemig.com.br.

The Audit Committee

Our Audit Board (see below) has attributions and duties specified in the Brazilian Corporate Law (Law 6404). In addition to these, in relation to the requirements of the Sarbanes-Oxley Law, to which we are subject due to our shares being registered with the US Securities and Exchange Commission (SEC – the capital markets regulator of the United States), we opted to exercise the exemption allowed by rule 10-3A of the Exchange Act regulated by SEC Release 82–1234, which accepts the activity of the Audit Board as an alternative to the Audit Committee specified by the Sarbanes-Oxley law.

The Executive Board

The Executive Board is made up of eleven members whose individual functions are set by the company’s by-laws. They are elected, and may be dismissed at any time, by the Board of Directors for periods of office of three years. They may also be re-elected.

Members are allowed simultaneously also to hold non-remunerated positions in the management of wholly-owned subsidiaries, subsidiaries or affiliates of Cemig, upon decision by the Board of Directors. They are also, obligatorily, members, with the same positions, of the Boards of Directors of Cemig GT (Generation and Transmission) and Cemig D (Distribution).

The period of office of the present Chief Officers expires at the first meeting of the Board of Directors held after the Annual General Meeting of 2018.

The members of the Executive Board and brief résumés are on our website: http://ri.cemig.com.br

 

 

  

 

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The members of the Executive Board (the Company’s Chief Officers) have individual responsibilities established by the Board of Directors and the by-laws. These include:

 

  Current management of the company’s business, complying with the by-laws, the Long-term Strategic Plan, the Multi-year Strategic Implementation Plan and the Annual Budget.

 

  Decision on any disposal of goods, loans or financings, pledge of the company’s property, plant or equipment, or guarantees to third parties or other legal acts or transactions, with value of less than R$ 17.355 million.

 

  The Executive Board normally meets weekly. It held 37 meetings in the nine months to September 30, 2017.

The Audit Board

Meetings

 

  Ten meetings have been held in 2017 up to September 30.

Membership, election and period of office

 

  We have a permanent Audit Board, made up of five sitting members and their respective substitute members. They are elected by the Annual General Meeting of Stockholders, for periods of office of one year, and may be reelected. They comprise:

 

- one member elected by the holders of the preferred shares;

 

- one member elected by holders of at least 10% of the common shares outside the controlling group; and

 

- three members elected by the majority stockholder.

 

  The members of the Audit Board are listed on our website: http://ri.cemig.com.br

 

  Principal responsibilities and duties:

 

- As well as the attributions specified by Law 6404 of December 15, 1976, as amended, in relation to the Sarbanes-Oxley law, to which we are subject due to our shares being registered with the Securities and Exchange Commission (SEC – the capital markets regulator of the United States), we opted to exercise the exemption allowed by Rule 10-3A of the Exchange Act, regulated by SEC Release 82-1234, which accepts the activity of the Audit Board as an alternative to the Audit Committee as defined by the Sarbanes-Oxley Law.

Qualification and remuneration

The Audit Board is a multi-disciplinary body, made up of members with various competencies (in accounting, economics, business administration, and other areas). The remuneration of the members of the Audit Board shall be set by the General Meeting of Stockholders which elects it, in accordance with the legislation from time to time in force.

Résumé information on its members is on our website: http://ri.cemig.com.br.

The Sarbanes-Oxley Law

Cemig obtained the first certification of its internal controls for mitigation of risks involved in the preparation and disclosure of the financial statements, issued in accordance with Section 404 of the Sarbanes-Oxley Law and the rules of the Public Company Accounting Oversight Board (PCAOB), which is included in the annual 20–F Report relating to the business year ended December 31, 2006, filed with the US Securities and Exchange Commission (SEC) on July 23, 2007.

 

 

  

 

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Corporate risk management

Corporate risk management is a management tool that is an integral part of Cemig’s corporate governance practices. It identifies the events that can interfere in the process of the Company achieving its strategic objectives.

The intention is to provide senior management with information for taking of decisions, thus preserving the Company’s value. The practice of risk management is thus a competitive differentiation factor to be used not only defensively, but also as an opportunity for improvement. The structuring and analysis of operations from the point of view of risk management are factors that optimize investment in the control of the activity. They reduce costs, improve performance, and consequently help the Company achieve its targets.

Also, the need to put in place structural elements of the risk management system is one of the aspects that is evaluated for the Company’s inclusion in indices such as the DJSI World and the ISE Corporate Sustainability Index.

Cemig’s system of risk management was initially implemented in 2003, and has been constantly improved since then. A further element of the organizational structure, the Corporate Risk Management Committee (CMRC), created in 2012, has the following responsibilities: (i) to propose, for approval by the Executive Board, guidelines, policies and procedures to be adopted in the Corporate Risks Management Process, ensuring continuous improvements of the process, and arranging for it to be disseminated; (ii) to analyze and to propose to the Executive Board priority actions dealing with the risks characterized as ‘critical’, in the final exposure matrix; and (iii) to submit to the approval of the Executive Board mechanisms to make strategic monitoring operational for the corporate risks identified and effective actions to reduce financial exposure and impact on intangible assets to acceptable levels, taking into account the mitigating plans of action, which are to be in line with the Company’s Long-term Strategic Plan. The CMRC meets every two months.

In 2013 a new technological platform was installed exclusively for risk management – the SAP RM (Risk Management) module. This enabled the process of mapping of risks to take place continuously, since updating of information, verifications and assessments of the controls and plans of action become scheduled tasks to be executed by the people responsible within the system itself. This results in all the agents involved in risk management having clearly specified roles and responsibilities, also minimizing costs and use of employee time for these activities and controls. In addition, there is a flow analysis carried out by an independent group in the Company, for periodic evaluation of the controls for the purpose of auditing the effectiveness of the process.

In 2015 this platform came into full operation, generating reliable reports and providing perception of relationships between the risks that are mapped.

Several new steps were taken in 2015. The most significant of these include:

 

  Adjustments in the standard methodology for management of risks (new model for segmentation of risks, method of quantification of impacts, and approach used in raising information, also incorporating the ‘Top-down’ approach).

 

  Review and updating of the Risk Management Policy.

 

  Mapping of the principal corporate risks (‘Top Risks’), and some related to Cemig’s Socio-environmental Adaptation Program.

 

  Approval by the Board of Directors of the matrix of corporate risks and of the risk appetite assumptions.

In the process of the collection of the ‘Top Risks’ information, a survey was made with the Company’s General Managers to establish the principal subjects to be monitored, such as: Loss of concession; degree of indebtedness; liquidity; availability and reliability indicators; and omissions. This produced a matrix that expresses the joint assessment of the impact and probability of occurrence of the risk.

In particular, in relation to Cemig’s socio-environmental Adaptation Program, the risks relating to the following aspects, among others, were identified: use of water, handling of vegetation, fish deaths, environmental accidents with oils/material logistics, and compliance with environmental requirements. Cemig adopts measures to mitigate and manage exposure that are aligned with the risk appetite assumptions.

 

  

 

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In 2016 Cemig created the Compliance and Corporate Risks (‘GC’) Management Department, under a General Manager – responsible to the CEO’s Office – enabling a greater degree of autonomy in this work.

In risk management processes, in planning of operations and in development of new business initiatives, Cemig always acts in consideration of the precautionary principle. During planning, all the factors that might present risks to health and/or safety of employees, suppliers, clients, the general population or the environment are taken into account.

Statement of Ethical Principles and Code of Professional Conduct

Cemig’s Board of Directors approved the Cemig Statement of Ethical Principles and Code of Professional Conduct in May 2004. It can be seen at http://ri.cemig.com.br . The Code aims to orient and discipline everyone acting in the name of, or interacting with, Cemig, to ensure ethical behavior at all times, and always in accordance with the law and regulations. It was updated in 2016.

Cemig’s Ethics Committee was created on August 12, 2004, to coordinate all actions relating to management of the Cemig Statement of Ethical Principles and Code of Professional Conduct. This includes assessment of and decision on any possible non-compliances with the document.

After the Ethics Channel (Canal de Denúncia Anônima, as we name it) was created in December 2006, to be used only by Cemig employees and workers, the Ethics Committee began to accept anonymous reports through this anonymous reporting channel, which is available on the company’s Intranet. These reports may involve irregular practices that are contrary to the Company’s interest, such as: financial fraud, including adulteration, falsification or suppression of financial, tax or accounting documents; misappropriation of goods or funds; receipt of undue advantages by managers or employees; irregular contracting; and other practices considered to be illegal.

The Ethics Committee

This was created on August 12, 2004, with three sitting members and three substitute members, and is responsible for management (interpretation, publicizing, application and updating) of the Code of Professional Conduct.

The Committee receives and analyzes all reports of violation of ethical principles and standards of conduct, that are presented in a written document and signed by the interested party, accompanied by indications of the corresponding means of proof (witnesses, documentation or other effective method). They can also be sent by email or telephone – the address and phone number are well known to all the company’s employees.

Our Ethics Channel – the anonymous reporting channel on the corporate intranet that we put in place in December 2006, to receive and process accusations of irregular practices, such as financial fraud, undue appropriation of assets, receipt of irregular advantages or illegal contracting – is one more step in improving transparency, and in correcting behavior, and a support in the concept of corporate governance in the Company. As a new instrument of corporate governance it improves the management of our employees and of our business, and reaffirms our ethical principles.

STOCKHOLDING POSITION OF

HOLDERS OF MORE THAN 5% OF THE VOTING STOCK

ON SEPTEMBER 30, 2017

 

     COMMON
SHARES
     %      PREFERRED
SHARES
     %      TOTAL
SHARES
     %  

State of Minas Gerais

     214,414,739        50.96        —          —          214,414,739        17.03  

Other entities of Minas Gerais State

     56,703        0.01        4,860,228        0.58        8,649,862        0.39  

Total, controlling stockholder group

     214,471,442        50.97        4,860,228        0.58        223,064,601        17.42  

AGC Energia S.A. (1)

     68,545,756        16.29        —          —          68,545,756        5.45  

FIA Dinâmica Energia S.A.

     41,635,754        9.90        62,469,590        7.45        104,105,344        8.27  

BNDESPar

     54,342,992        12.92        26,220,938        3.13        80,563,930        6.40  

 

(1) AGC Energia S.A. is a wholly-owned subsidiary of Andrade Gutierrez Concessões S.A., a company registered with the CVM.

 

  

 

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CONSOLIDATED STOCKHOLDING POSITION OF

THE CONTROLLING STOCKHOLDERS AND MANAGERS,

AND FREE FLOAT,

ON SEPTEMBER 30, 2017

 

     September 30, 2017  
   Common
(ON) shares
     Preferred
(PN) shares
 

Controlling shareholder

     214,471,442        4,860,228  

Board of Directors

     103,606        181,473  

The Executive Board

     3        83  

Shares in Treasury

     69        560,649  

Free float

     206,189,588        832,474,513  
  

 

 

    

 

 

 

TOTAL

     420,764,708        838,076,946  
  

 

 

    

 

 

 

Investor Relations

In 2016, through strategic actions intended to enable investors and stockholders to make a correct valuation of our businesses and our prospects for growth and addition of value, we have increased Cemig’s exposure to the Brazilian and global capital markets.

We maintain a constant and proactive flow of communication with Cemig’s investor market, continually reinforcing our credibility, seeking to increase investors’ interest in the Company’s shares, and to ensure their satisfaction with our shares as an investment.

Our results are published through presentations transmitted via video webcast and telephone conference calls, with simultaneous translation in English, always with members of the Executive Board present, developing a relationship that is increasingly transparent and in keeping with best corporate government practices.

To serve our stockholders – who are spread over more than 40 countries – and to facilitate optimum coverage of investors, Cemig has been present in and outside Brazil at a very large number of events, including seminars, conferences, investor meetings, congresses, roadshows, and events such as Money Shows; as well as holding phone and video conference calls with analysts, investors and others interested in the capital markets.

At the beginning of June 2017 we held our 22nd annual Meeting between Cemig and the Capital Markets in the city of Belo Horizonte, Minas Gerais – where these professionals had the opportunity to interact with the Company’s Directors and principal executives.

Corporate governance

Our corporate governance model is based on principles of transparency, equity and accountability, focusing on clear definition of the roles and responsibilities of the Board of Directors and the Executive Board in the formulation, approval and execution of policies and guidelines for managing the company’s business.

We seek sustainable development of the Company through balance between the economic, financial, environmental and social aspects of our enterprises, aiming always to improve the relationship with our stockholders, clients, and employees, the public at large and other stakeholders.

 

  

 

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Cemig’s preferred and common shares (tickers: CMIG4 and CMIG3 respectively) have been listed at Corporate Governance Level 1 on the São Paulo Stock Exchange since 2001. This classification represents a guarantee to our stockholders of optimum reporting of information, and also that stockholdings are relatively widely dispersed. Because Cemig has ADRs (American Depositary Receipts) listed on the New York Stock Exchange, representing preferred (PN) shares (with ticker CIG) and common (ON) shares (ticker CIG.C), it is also subject to the regulations of the US Securities and Exchange Commission (SEC) and the New York Stock Exchange Listed Company Manual. Our preferred shares have also been listed on the Latibex of the Madrid stock exchange (with ticker XCMIG) since 2002.

Our by-laws include our dividend policy, and also the following targets from our Long-term Strategic Plan:

 

  Consolidated indebtedness: limited to 2 times Ebitda;

 

  Consolidated (Net debt) / (Net debt + Stockholders’ equity): limited to 40%.

 

  Consolidated funds in Current assets – limited to 5% of Ebitda.

 

  Consolidated funds allocated to capital expenditure in each business year – limited to 40% of Ebitda.

 

  Investment only in distribution, generation and transmission projects that offer real minimum internal rates of return equal to or greater than those specified in the Long-term Strategic Plan, subject to the legal obligations.

 

  Limitation of the expenses of the subsidiary Cemig D (Cemig Distribuição S.A.), and of any subsidiary which operates in distribution of electricity, to amounts not greater than the amounts recognized in the official tariff Adjustments and Reviews.

 

  In response to temporary situations the Board of Directors may authorize figures in excess of these standards, up to the following limits:

 

- Consolidated debt: maximum of 2.5 times Ebitda.
- Consolidated (Net debt) / (Net debt + Stockholders’ equity): maximum of 50%.
- Consolidated funds in Current assets: maximum of 10% of Ebitda.

* * * * * * * * * * * *

 

  

 

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(The original is signed by the following signatories:)

 

Bernardo Afonso Salomão de Alvarenga    Bernardo Afonso Salomão de Alvarenga    Adézio de Almeida Lima
Chief Executive Officer        Deputy CEO (interim)    Chief Finance and Investor Relations Officer
     
Ronaldo Gomes de Abreu    Franklin Moreira Gonçalves    Maura Galuppo Botelho Martins
Interim Chief Distribution and Sales Officer    Chief Generation and Transmission Officer    Chief Officer for Human Relations and Resources
     
José de Araújo Lins Neto    Thiago de Azevedo Camargo    Dimas Costa
Chief Corporate Management Officer    Chief Institutional Relations and Communication Officer    Chief Trading Officer
     
José Maria Rabelo         Luciano de Araújo Ferraz
Chief Business Development Officer       Chief Counsel
     
Leonardo George de Magalhães         Leonardo Felipe Mesquita

Controller

CRC-MG 53.140

      Accounting Manager
Accountant – CRC-MG-85.260

 

  

 

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Appendix VIII

 


Table of Contents

Cemig Telecomunicações S.A.

(‘Cemig Telecom’)

 

Financial statements for the year ended December 31, 2016

and Report of External Auditors

 

Deloitte Touche Tohmatsu Auditores Independentes

 


Table of Contents

REPORT OF THE EXTERNAL AUDITORS ON THE FINANCIAL STATEMENTS

To the Shareholders, Members of the Board of Directors, and Managers of

Cemig Telecomunicações S.A. (‘Cemig Telecom’),

Belo Horizonte, MG

Opinion

We have reviewed the financial statements of Cemig Telecomunicações S.A. – CemigTelecom (‘the Company’), which comprise the statement of financial position at December 31, 2016, and the related Profit and loss accounts, statement of comprehensive income, statement of changes in stockholders’ equity and statements of cash flow, for the business year ended on that date, and the summary of the principal accounting practices and other explanatory notes.

In our opinion, the financial statements referred to above adequately present, in all material aspects, the equity and financial position of Cemig Telecomunicações S.A. – CemigTelecom on December 31, 2016, the consolidated performance of its operations, and its consolidated cash flows, for the business year ended on that date, in accordance with accounting practices adopted in Brazil, and with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).

Basis for opinion

Our audit was conducted in accordance the Brazilian and international rules of auditing. Our responsibilities, in accordance with those rules, are described in the section below entitled “Responsibilities of the auditor for the audit of the financial statements”. We are independent in relation to the Company, in accordance with relevant ethical principles specified in the Accountants’ Code of Professional Ethics and in the professional rules issued by the Federal Accounting Council (CFC), and we comply with the other ethical responsibilities in accordance with these rules. We believe that the auditing evidence obtained is sufficient and appropriate as grounds for our opinion.

Emphasis of matter

Re-presentation of corresponding amounts

As mentioned in Explanatory Note 5, as a result of certain adjustments made to the financial statements of the affiliated company Ativas Data Center S.A., which affected the result of accounting for holdings by the equity method and the Company’s uncovered liabilities, the amounts corresponding to the financial statements for the period ended December 31, 2015, presented for the purpose of comparison, have been adjusted and are being re-presented as specified in CPC 23 and IAS 8 – Accounting Policies, Changes in Accounting Estimates and Correction of Errors. Our opinion regarding this matter is unqualified.

Principal subjects of the audit

Principal Subjects of an Audit are those which, in our professional judgment, were the most significant in our audit of the current business period. These subjects have been dealt with in the context of our audit of the financial statements as a whole and in the formation of our opinion on those financial statements and, thus, we do not express a separate opinion on those subjects.

Short-term financial commitments

As mentioned in Notes 1 and 27 to the financial statements at December 31, 2016, the Company had negative net working capital of R$ 74,312,000. This subject was considered to be significant for our audit, because the process of reaching a conclusion that there was not significant uncertainty in relation to the Company’s capacity for operational continuation involved a judgment on the part of Management arising from the need for evaluation of the Company’s capacity to honor its financial commitments in the short term, especially the alternatives available for access to the financial market for long-term debt, future cash flow generation and financial support from its controlling stockholder.

Our auditing procedures addressing this principle subject of audit included: (i) involvement of more experienced and specialized auditing professionals in assessment of the subject; (ii) evaluation of the capacity for generation of operational cash flow arising from the existing concessions; (iii) evaluation of the history of funds raised, fund raising planned, and the present stage of the fund raising processes that have been begun; (v) evaluation of the financial support of Companhia Energética de Minas Gerais – Cemig, the controlling stockholder; and (v) evaluation whether the disclosures made by Management are appropriate.

 

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Cemig Telecomunicações S.A. (‘CemigTelecom’)

 

Financial leasing

As mentioned in Note 9 to the financial statements, the Company entered into a leasing contract as lessee, which was assessed as being financial leasing. This subject was considered to be significant for our audit and to involve a judgment on the part of the Company’s management in the classification of the modality of leasing (operational financial).

Our procedures for addressing this principle subject of audit included: (i) involvement of more experienced and specialized auditing professionals in evaluation of the subject, including our specialists in technical and professional rules of accounting, to assist in the evaluation of the operation and the proper accounting treatment; and (ii) assessment of whether the disclosures made by the Management are appropriate.

Other matters

Added Value Statement

The Added Value Statement (DVA) for the business year ended December 31, 2016 was prepared under the responsibility of the Company’s Management, and presented as supplementary information for the purpose of IFRS. It was submitted to auditing procedures executed jointly with the audit of the Company’s financial statements. For formation of our opinion, we have evaluated whether the statements are reconciled with the financial statements and accounting records, as applicable, and whether their form and content are in accordance with the criteria defined in Accounting Pronouncement CPC 09 – Added Value Statements. In our opinion, the statements of added value have been prepared appropriately, in all their material aspects, according to the criteria defined in that Technical Pronouncement, and are consistent in relation to the financial statements taken as a whole.

Other information that accompanies the financial statements and the auditor’s report.

The Company’s management is responsible for this other information which consists of the Report of Management.

Our opinion on the financial statements does not cover the Report of Management and we do not express any form of auditing conclusion about that report.

In connection with the audit of the financial statements, our responsibility is to read the report of Management and, when doing so, to consider whether that report is in any significant way inconsistent with the financial statements or with our knowledge obtained in the audit, or in any other way appears to be significantly distorted. If, based on the work carried out, we were to conclude that there is a significant distortion in the Report of Management, we are required to communicate this fact. We have nothing to report in this respect.

Responsibilities of Management and of the governance for the financial statements

The management is responsible for the preparation and adequate presentation of these financial statements in accordance with accounting practices adopted in Brazil, and with international financial reporting standards (IFRS) issued by the International Accounting Standards Board (IASB), and for the internal controls that it has decided are necessary to make possible the preparation of financial statements that are free of material distortion, whether caused by fraud or error.

In the preparation of the financial statements, Management is responsible for evaluation of the Company’s capacity to continue operating, disclosing, when applicable, subjects related to its operational continuity and the use of this accounting base in the preparation of the financial statements, unless Management intends to liquidate the company and its subsidiaries or to cease its operations, or has no realistic alternative to avoid termination of operations.

Those responsible for the governance of the Company and its subsidiaries are the parties that have the responsibility for supervision of the process of preparation of the financial statements.

 

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Cemig Telecomunicações S.A. (‘CemigTelecom’)

 

Responsibilities of the auditor for auditing the financial statement

Our objectives are to obtain reasonable certainty that the financial statements, taken as a whole, are free of material distortion, independently of whether caused by fraud or error, and to issue a report of audit containing our opinion. Reasonable certainty is a high level of certainty, but not a guarantee, that an audit carried out in accordance with Brazilian and international auditing rules always detects any existing significant distortions. Distortions may arise from fraud or error and are considered to be material when, individually or jointly, they are able to influence, within a reasonable perspective, a user’s economic decision when taken based on the said financial statements.

As a part of an audit realized in accordance with Brazilian and international auditing rules, we exercise professional judgment and maintain professional skepticism throughout the conduct of the audit. Also:

 

    We identify and evaluate risks of material distortion in the financial statements, independently of whether caused by fraud or error; we plan and execute procedures of auditing in response to such risks, and we obtain appropriate and sufficient auditing evidence to ground our opinion. The risk of non-detection of material distortion resulting from fraud is greater than that resulting from error, since fraud may involve the act of deceiving or avoiding internal controls, conspiracy, falsification, omission or intentional false representations.

 

    We obtain understanding of the material internal controls for the audit for us to be able to plan auditing procedures that are appropriate to the circumstances, but not with the objective of expressing an opinion on the efficacy of the internal controls of the Company and its subsidiaries.

 

    We evaluate the appropriateness of the accounting policies used and the reasonableness of the accounting estimates and respective disclosures made by the Management.

 

    We reach conclusions on the appropriateness of the use by Management of the accounting basis of operational continuity and, based on the evidences of auditing obtained, whether there is a material uncertainty in relation to events that might raise significant doubt in relation to the capacity of operational continuity of the Company and its subsidiaries. If we conclude that there is material uncertainty, we must call attention in our auditing report to the respective disclosures in the financial statements or include a qualification in our opinion, if the disclosures are inadequate. Our conclusions are grounded on the audit evidence obtained up to the date of our report. However, future events or conditions may lead the Company and its subsidiaries to cease to remain in operational continuity.

 

    We evaluate the general presentation, the structure and the content of the financial statements, including the disclosures, and whether the Financial Statements are representative of corresponding transactions and the event in a manner that is compatible with the objective of appropriate presentation.

We communicate with the persons responsible for governance on the matter, among other aspects, of the planned scope, the period of the audit and the significant findings of the audit, including any significant deficiencies in internal controls that we identify during our work.

We also supply, to the persons responsible for governance, a declaration that we have complied with the relevant ethical requirements, including the applicable requirements for independence, and we report any relationships or matters that could considerably affect our independence including, when applicable, the respective safeguards.

Of the matters that were the subject of communication with the persons responsible for governance, we determined those that were considered to be most significant in the audit of the financial statements for the current business year and which, thus, constitute the Principal Subjects of Audit. We describe these matters in our audit report, unless any law or regulations have prohibited public disclosure of the subject, or when, in extremely rare circumstances, we may determine that this subject should not be disclosed in our report because the adverse consequences of such disclosure could, within a reasonable perspective, be greater than the benefits of communication for the public interest.

Belo Horizonte, April 6, 2017

 

DELOITTE TOUCHE TOHMATSU

  

Marcelo Salvador

Auditores Independentes

  

Accountant

CRC-2SP 011.609/O-8 F/MG

  

CRC-1MG 089.422/O-0

 

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CEMIG TELECOMUNICAÇÕES S.A. – CEMIGTELECOM

STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) AT DECEMBER 31, 2016

R$‘000

 

 

ASSETS

   Note      Dec. 31,
2016
     Dec. 31, 2015     

LIABILITIES AND STOCKHOLDERS’ EQUITY

   Note      Dec. 31,
2016
    Dec. 31, 2015  
                   (Re-presented)                        (Re-presented)  

Current liabilities

            Current liabilities        

Cash and cash equivalents

     6        1,034        4,869     

Loans and debentures

     15        63,751       30,519  

Securities – Cash investments

     7        1,855        17,313     

Suppliers

     16        21,750       11,315  

Accounts receivable from clients

     8        19,249        16,173     

Payroll-associated and labor-law  obligations

     17        5,836       4,856  

Financial leasing

     9        303        —       

Tax obligations

     18        9,573       10,476  

Taxes recoverable

     10        3,684        2,787     

Advances from clients

     19        460       460  
                 

 

 

   

 

 

 

Prepaid expenses

        34        32      Total, Current liabilities        

Other

        899        281             
     

 

 

    

 

 

            

Total, Current assets

        27.058        41,455      Non-current liabilities        
     

 

 

    

 

 

            
           

Loans and debentures

     15        37,621       8,504  

Non-current assets

           

Payroll-associated and labor-law obligations

     17, 28        2,801       1.454  

Long term assets

           

Tax obligations

     18        2,466       —    

Securities – Cash investments

     7        83        342     

Advances from clients

     19        4,579       5,069  

Financial leasing

     9        11,876        —       

Provisions for risks

     20        82       313  

‘Guarantee’ overdraft accounts

        —          4,062     

Uncovered liabilities of jointly controlled entity

     12        —         76,708  

Taxes recoverable

     10        2,997        2,749     

Related parties

     21        3,410       —    

Deferred income tax and Social Contribution tax

     11        8,037        11,828     

Other

        84       84  
                 

 

 

   

 

 

 

Derivative financial instruments

     12        4,586        —        Total, Non-current liabilities         51,043       92.132  
                 

 

 

   

 

 

 

Other

        908        953             
            STOCKHOLDERS’ EQUITY        
           

Share capital

     22        241,741       225,081  

Investment in affiliated company

     12        19,744        —       

Equity valuation adjustments

     28        (756     (75

Property, plant and equipment

     13        261,613        249,761     

Retained losses

     22        (47,006     (56,989
                 

 

 

   

 

 

 

Intangible assets

     14        9,490        6,625      Total equity         193,979       168.017  
     

 

 

    

 

 

          

 

 

   

 

 

 

Total, Non-current assets

        319,334        276,320          
     

 

 

    

 

 

         

TOTAL ASSETS

        346,392        317,775      TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY        346,392       317,775  
     

 

 

    

 

 

       

 

 

   

 

 

 

The Notes are an integral part of the Financial Statements.

 

 

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CEMIG TELECOMUNICAÇÕES S.A. – CEMIGTELECOM

PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED DECEMBER 31, 2016

(In thousands of Reais, except net loss per share)

 

 

          Whole period  
     Note    2016     2015  
                (Re-presented)  

NET REVENUE FROM PROVISION OF SERVICES

   23      102,446       120,614  

COST OF SERVICES PROVIDED

   24      (67,868     (83,367
     

 

 

   

 

 

 

GROSS PROFIT

        34,578       37,247  

OTHER OPERATIONAL REVENUES (EXPENSES)

       

General and administrative expenses

   24      (34,184     (26.364

Sales and marketing expenses

   24      (523     (1.280

Other operational revenues

   25      28,891       1.956  

Gain on change in percentage equity holding

   12      24,717       —    

Operational expenses

   24      (7,028     (692

Equity method gains in non-consolidated investees, net

   12, 24      (27,165     (28.833
     

 

 

   

 

 

 

Total

        (15,292     (55.213

NET PROFIT BEFORE FINANC. REV. (EXP.), INCOME TAX AND SOCIAL CONTRIBUTION TAX

       
        19,286       (17,966
     

 

 

   

 

 

 

Financial revenues

   26      3,999       4.053  

Financial expenses

   26      (9,161     (5.778
     

 

 

   

 

 

 

PROFIT BEFORE INCOME AND SOCIAL CONTRIBUTION TAXES

        14,124       (19,691

Current income tax and Social Contribution tax

   11      —         (6.589

Deferred income tax and Social Contribution tax

   11      (4,141     (9.551
     

 

 

   

 

 

 

NET PROFIT (LOSS) FOR THE PERIOD

        9,983       (35,831
     

 

 

   

 

 

 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES IN CIRCULATION (thousands of shares)

        397,683       381,023  
     

 

 

   

 

 

 

BASIC AND DILUTED PROFIT (LOSS) PER SHARE (in Reais)

        25.10       (94.04
     

 

 

   

 

 

 

The Notes are an integral part of the Financial Statements.

 

 

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CEMIG TELECOMUNICAÇÕES S.A. – CEMIGTELECOM

STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE PERIOD ENDED DECEMBER 31, 2016

R$ ‘000

 

 

     Share
capital
     Equity
valuation
adjustment
    Retained
losses
    Total  

BALANCES ON DECEMBER 31, 2014

     225,081        248       (21,158     204,171  

Actuarial losses, net of taxes

     —          (323     —         (323

Net loss for the period

     —          —         (35,831     (35,831
  

 

 

    

 

 

   

 

 

   

 

 

 

BALANCES ON DECEMBER 31, 2015 (RE-PRESENTED)

     225,081        (75     (56,989     168,017  
  

 

 

    

 

 

   

 

 

   

 

 

 

Capital increases

     16,660        —         —         16,660  

Actuarial losses, net of taxes

     —          (681     —         (681

Net profit for the year

     —          —         9,983       9,983  
  

 

 

    

 

 

   

 

 

   

 

 

 

BALANCES ON DECEMBER 31, 2016

     241,741        (756     (47,006     193,979  
  

 

 

    

 

 

   

 

 

   

 

 

 

The Notes are an integral part of the Financial Statements.

 

 

 

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CEMIG TELECOMUNICAÇÕES S.A. – CEMIGTELECOM

STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31, 2016

R$ ’000

 

 

     Whole period  
     2016     2015  
           (Re-presented)  

Net profit (loss) for the period

     9,983       (35,831

Other comprehensive income:

    

Actuarial gains/losses – net of taxes

     (681     (323
  

 

 

   

 

 

 

Total Comprehensive income for the period

     9,302       (36,154
  

 

 

   

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO:

    

Owners of the Company

     9,302       (36,154
  

 

 

   

 

 

 

COMPREHENSIVE INCOME FOR THE PERIOD

     9,302       (36,154
  

 

 

   

 

 

 

The Notes are an integral part of the Financial Statements.

 

 

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CEMIG TELECOMUNICAÇÕES S.A. – CEMIGTELECOM

STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2016

R$‘000

 

 

     Note      2016     2015  
                  (Re-presented)  

CASH FLOW FROM OPERATIONS

       

Net profit (loss) for the period

        9,983       (35,831

Adjustments to reconcile net profit to cash generated by operations:

        29,042       100,593  
     

 

 

   

 

 

 

Depreciation and amortization

     13, 14, 24        37,741       48,968  

Costs of financings

     15        8,481       5,062  

Deferred income tax and Social Contribution tax

     11        4,141       9,551  

Current income tax and Social Contribution tax

     11        —         6,589  

Cost of fixed assets written off

     13        309       170  

Net value of financial leasing transaction

     25        (3,215     —    

Appreciation of assets received from Eletronet

     13, 25        (20,423     —    

Gain on change in percentage of equity holding

     12        (24,717     —    

Gain on financial derivative instrument

     25        (4,586     —    

Reversal of contingency provision

        (231     —    

Addition (reversal) of doubtful receivables

        (182     1,195  

Equity in earnings of unconsolidated investees, net

     12        27,165       28,833  

Provision for indemnity for contingencies in Ativas

     21        3,410       —    

Provision for obsolescence

     13, 24        1,149       225  

Variations in assets and liabilities

        37,741       48,968  

Reduction (increase) in assets:

       

Financing guarantee accounts

        4,062       56  

Accounts receivable from clients

        (2,003     2,673  

Taxes recoverable

        (1,145     5,996  

Other assets

        (575     (69

Increase (reduction) in liabilities:

       

Accounts payable to suppliers and others

        10,435       (2,263

Payroll-related and tax obligations

        3,981       (1,900

Advances from clients

        (490     (491

Other liabilities

        —         (388

Income tax and Social Contribution tax paid

        (1,121     (6,589

Interest paid

     15        (5,342     (4,816
     

 

 

   

 

 

 

Net cash from operational activities

        46,827       56,971  

CASH FLOWS IN INVESTMENT ACTIVITIES

       

Acquisition of fixed assets / PP&E

     13        (41,790     (42,969

Reductions (increase) in securities and cash investments

        15,717       (8,950

Received under financial leasing

        (658     —    

Capital increase in affiliated company

     12        (98,900     —    

Increase in intangible assets

     14        (901     (8
     

 

 

   

 

 

 

Net cash applied in investment activities

        (126,532     (51,927

CASH FLOW FROM FINANCING ACTIVITIES

       

Capital increase

     22        16,660       —    

Loans and financings obtained and debentures issued

     15        98,682       33,000  

Payment of loans, financings and debentures

     15        (39,472     (37,887
     

 

 

   

 

 

 

Net cash from (used in) financing activities

        75,870       (4,887
     

 

 

   

 

 

 

NET INCREASE (REDUCTION) IN CASH AND CASH EQUIVALENTS

        (3,835     157  
     

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS

       

At start of period

        4,869       4,712  

At end of period

        1,034       4,869  
     

 

 

   

 

 

 

INCREASE (REDUCTION) IN CASH AND CASH EQUIVALENTS

        (3,835     157  
     

 

 

   

 

 

 

The Notes are an integral part of the Financial Statements.

 

 

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CEMIG TELECOMUNICAÇÕES S.A. – CEMIGTELECOM

ADDED VALUE STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2016

R$‘000

 

 

     Dec. 31,
2016
    %      Dec. 31,
2015
    %  

1 – REVENUES

     232,031          190,706    
  

 

 

      

 

 

   

1.1) Sale of products and services

     136,523          147,099    

1.2) Reversal (provision) for doubtful receivables

     181          (1,195  

1.3) Additions to fixed assets in progress

     34,338          35,909    

1.4) Gain on change in percentage equity holding

     24,717          —      

1.5) Appreciation of assets of Eletronet realized

     20,423          —      

1.6) Gain on financial derivative

     4,586          —      

1.7) Gain on financial leasing

     3,215          —      

1.8) Others

     8,048          8,893    

2 – INPUTS ACQUIRED FROM THIRD PARTIES

     72,462          72,667    
  

 

 

      

 

 

   

2.1) Cost of goods and services sold

         

2.2) Materials, power, outsourced services and others

         

2.3) Loss / recovery of asset value

         

2.3) Others

         

3 – GROSS VALUE ADDED (1-2)

     159,569          118,039    
  

 

 

      

 

 

   

4 – RETENTIONS

     37,741          48,968    
  

 

 

      

 

 

   

4.1) Depreciation and amortization

     37,741          48,968    
  

 

 

      

 

 

   

5 – NET ADDED VALUE PRODUCED BY THE ENTITY (3-4)

     121,828          69,071    
  

 

 

      

 

 

   

6 – ADDED VALUE RECEIVED BY TRANSFER

     (23,166        (24,780  
  

 

 

      

 

 

   

6.1) Equity method gains in non-consolidated investees, net

     (27,165        (28,833  

6.2) Financial revenues

     3,999          4,053    
  

 

 

      

 

 

   

7 TOTAL ADDED VALUE DISTRIBUTABLE (5+6)

     98,662          44,291    
  

 

 

      

 

 

   

8 – DISTRIBUTION OF ADDED VALUE

     98,662       100%        44,291       100%  
  

 

 

      

 

 

   

8.1) Personnel and payroll-related charges

     28,067       28%        20,825       47%  
  

 

 

      

 

 

   

8.1.1) Direct remuneration

     16,691          13,517    

8.1.2) Benefits

     5,590          3,589    

8.1.3) Workers’ Time of Service Guarantee Fund (FGTS)

     2,746          994    

8.1.4) Others

     3,040          2,725    

8.2) Taxes

     44,513       45%        46,519       105%  
  

 

 

      

 

 

   

8.2.1) Federal

     16,579          27,063    

8.2.2) State

     27,934          19,456    

8.3) Remuneration of external capital

     16,099       16%        12,778       29%  
  

 

 

      

 

 

   

8.3.1) Interest

     9,161          5,778    

8.3.2) Rentals

     6,938          7,000    

8.4) Remuneration of own capital

     9,983       10%        (35,831     -81%  
  

 

 

      

 

 

   

8.4.1) Profit (loss) for the period

     9,983          (35,831  

The Notes are an integral part of the Financial Statements.

 

 

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Cemig Telecomunicações S.A. (‘CemigTelecom’)

Notes to the financial statements

Year ended December 31, 2016

(In thousands of Brazilian Reais – R$ ‘000 – except where otherwise indicated)

 

 

1. Operating context

 

(a) The Company

CEMIG Telecomunicações S.A. – CemigTelecom (‘the Company’) is a listed corporation and a wholly-owned subsidiary of Companhia Energética de Minas Gerais S.A. – Cemig. It offers optical fibers for carriage of telecommunication services, in the State of Minas Gerais and other States of Brazil’s Northeast and Center-West, using the electrical power transmission and distribution infrastructure of power concession holders, principally Cemig.

It is domiciled in Brazil with address at Rua dos Inconfidentes 1051, Ground Floor, Funcionários, Belo Horizonte, MG. It is authorized by the Brazilian telecoms regulator (Agência Nacional de Telecomunicações, or Anatel) to commercially operate Multimedia Communication Services (SCM), for an indeterminate period, by Act No. 41002 of December 3, 2003.

Created on January 13, 1999, CemigTelecom focuses on providing telecommunication services for the corporate segment of internet access providers (ISPs) and telecommunications operators. It operates in the wholesale market renting specialized circuits to providers of fixed telephony, mobile telephony, cable TV, business carriers, datacenters, broadband and other services.

The Company’s core business is provision of telecommunication services in the segment of operators, internet service providers (ISPs) and specialized services for the corporate segment, making network and internet access solutions available such as: Corporate internet access, data communication between head office and branch offices, high capacity, high-quality solutions, rental of specialized circuits (links, IP/MPLS networks AND VPNs), customized service for each business, connectivity solutions, and other services.

CemigTelecom makes available the largest optical network for transport of telecommunications in Minas Gerais, with presence in more than 70 cities of the state, covering approximately 90% of the state’s GDP. Additionally, it makes services available through optical networks in the metropolitan regions of Salvador, Recife, Goiânia and Fortaleza, as well as having points of presence in the cities of São Paulo and Rio de Janeiro.

To provide feasibility for the entry of a new partner into Ativas, CemigTelecom assumed a significant amount in short-term debt. As a result, on December 31, 2016 CemigTelecom’s current liabilities exceeded its current assets by R$ 74,312. On December 31, 2016, CemigTelecom’s short and long-term loans and debentures totaled R$ 63,751 and R$ 37,621 respectively, with maturities in the second and fourth quarters of 2017 in the amounts of R$ 18,134 and R$ 46,827, respectively; however, the Company reported positive operational cash flow in 2016 and 2015 of R$ 46,827 and R$ 56,971 respectively.

For the purpose of amortization of the program debt maturities, the Company expects to raise significant amounts of capital from third parties and/or entry of cash from its stockholder, and it can continue to depend on the contracting of additional debts.

The Company has various initiatives to increase liquidity through signing of new loan contracts to roll over debts, and also has the benefit of financial support from its controlling stockholder, Companhia Energética de Minas Gerais – Cemig.

 

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Management believes that the Company has satisfactory capacity to generate operational cash flow, and the conditions necessary to comply with its short-term obligations and continue to make the necessary investments for continuation of the projects in progress.

 

(b) Investment in affiliated company

Until October 18, 2016, the Company shared control, as a joint venture, of the company Ativas Data Center S.A. (‘Ativas’), with a 49% holding in the share capital of that company. As from this date, with the entry of Sonda Procwork Outsourcing Informática Ltda (‘Sonda’), a new partner in the business, its holding was diluted to 19.6%, and thereafter this interest is classified as being in an affiliated company. The management and the principal corporate decisions are exercised by the new controlling stockholder, under a stockholders’ agreement.

Ativas is an entity domiciled in Brazil. Its headquarters and technological facilities are at Rua Agenério Araújo 20, Camargos, Belo Horizonte, MG, and it has commercial offices in São Paulo, Rio de Janeiro, Porto Alegre and Curitiba. The corporate Objects of Ativas are:

 

(i) provision of ITC (Information Technology and Communication) infrastructure supply services, comprising physical hosting of IT physical environments;

 

(ii) storage of databases and site backup;

 

(iii) provision of professional information and availability security services;

 

(iv) provision of consultancy services in ITC and connectivity with sale of internet access and bandwidth; and

 

(v) licensing and assignment of rights to use computer program

With the entry of the new controlling stockholder, Sonda, various actions were taken to adapt its organizational, operational and financial structure. As part of the restructuring plan of this affiliated company, in October 2016 early settlement was made of a substantial part of its loans, financings and debentures, with a view to obtaining a capital structure compatible with the size of its business

 

2. Basis of preparation

 

(a) Statement of compliance

These financial statements were prepared in accordance with accounting practices adopted in Brazil, which comprise: those included in the Brazilian Corporate Law, and the Pronouncements; the Orientations and Interpretations issued by the Accounting Pronouncements Committee (CPC) and approved by the Federal Accounting Council (CFC) and by the Brazilian Securities Commission (CVM); and International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB).

All the material information used by Management in the management of the Company is shown in the Financial Statements.

On April 6, 2017 the Board of Directors authorized the issuance of these financial statements.

 

(b) Basis of measurement

The financial statements have been prepared based on historic cost as a basis of value and adjusted to reflect the fair value of assets and liabilities, when applicable.

 

(c) Functional currency and currency of presentation

These financial statements are presented in Reais, the Company’s functional currency. All the financial information presented in Reais has been rounded to the closest unit of thousands, except where otherwise indicated.

 

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(d) Use of estimates and judgments

Preparation of financial statements under IFRS and under the rules of the CPC requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the amounts reported in assets, liabilities, revenues and expenses. Future reported results may differ from these estimates.

Estimates and assumptions are continuously reviewed. Revisions in relation to accounting estimates are recognized in the period in which the estimates are reviewed, and in any future periods affected.

The information on uncertainties, assumptions and estimates that have a significant risk of resulting in a material adjustment within the next business period are included in the following explanatory notes:

 

  Note 4 – Fair value of assets and liabilities

 

  Note 8 – Allowance for doubtful accounts

 

  Note 9 – Estimate of realization from financial leasing

 

  Note 11 – Use of tax losses and realization of temporary differences

 

  Note 13 – Results of investment in affiliated company

 

  Notes 14 and 15 – Estimates of useful life and of residual values of fixed and intangible assets

 

  Note 21 – Provisions and contingencies

 

  Note 28 – Financial Instruments

 

  Note 29 – Measurement of actuarial assets and liabilities of post-employment benefits to employees.

 

3. Principal accounting policies

The accounting policies described in detail below have been applied consistently to all the periods presented in these financial statements.

 

(a) Financial instruments

 

(i) Non-derivative financial assets

The Company initially recognizes receivables and deposits on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognized initially on the transaction date, which is the date on which the Company becomes one of the parties to the contractual provisions of the instrument.

The Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or when it transfers the rights to receive the contractual cash flows on a financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred.

Financial assets or liabilities are offset, and the net amount presented in the balance sheet, when, and only when, the Company has the legal right to offset the amounts and has the intention to settle on a net basis or to realize the asset and settle the liability simultaneously.

The company has the following non-derivative financial assets:

 

  Cash and cash equivalents:

This includes balances of cash and cash investments with original maturity of three months or less from the date of contracting, which are subject to an insignificant risk of change in value. Cash and cash equivalents are maintained for the purpose of meeting cash commitments in the short term and not for investment or other purposes.

 

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  Financial assets held to maturity:

Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as held to maturity when the company has a manifest intention, and financial capacity, to hold them to maturity. After the initial evaluation, investments held to maturity are valued at amortized cost using the effective rates method, less any impairments. The amortized cost is calculated taking into consideration any discount or premium on the acquisition, and charges or costs incurred. The amortization of effective interest is included in financial revenue, in the Profit and loss account. Losses due to impairment are recognized as a financial expense in the Profit and loss account.

 

  Financial assets measured at fair value through profit or loss:

A financial asset is classified in this category if it was acquired, principally, for the purpose of sale in the short term. For this reason, they are usually classified in Current assets. However, if these assets are given in guarantee or there is any other restriction on their use in the short term, they may be classified in Non-current assets. Regular purchases and sales of financial assets are recognized on the date of the transaction, the date on which the Company undertakes to buy or sell the asset. Investments are, initially recognized at fair value. Transaction costs incurred in investments measured at fair value through profit or loss are debited to the Profit and loss account, as expenses, on the transaction date. After this date, the variations in their fair value are accounted directly in the Profit and loss account for the business period, in the group Financial revenues and expenses. These assets are written down when the rights to receive cash flows related to the asset have expired or when the Company has, significantly, transferred all the risks and benefits of its ownership.

 

  Receivables:

These are financial assets with fixed or calculable payment which are not quoted on an active market. These assets are recognized initially at fair value plus any attributable transaction costs. After initial recognition, loans and receivables are measured at amortized cost by the effective interest method, less any loss by impairment.

Receivables include accounts receivable from clients and other credits.

 

(ii) Non-derivative financial liabilities

The Company recognizes debt securities issued initially on the date on which they are originated. All other financial assets are recognized initially on the transaction date on which the Company becomes a party to the contractual provisions of the instrument. The Company derecognizes a financial liability when its contractual obligations are withdrawn, are canceled or expire.

The Company has the following non-derivative financial liabilities: Loans, Suppliers, and Other accounts payable.

These liabilities are recognized initially at fair value, plus any attributable transaction costs. After the initial recognition, they are measured at amortized cost using the effective rates method.

 

(iii) Share capital

Common shares – Common shares are classified as stockholders’ equity. Additional costs directly attributable to issuance of shares and options on shares are recognized as deductions from Stockholders’ equity, net of any tax effects. The whole of the Company’s share capital is represented by common shares.

Minimum mandatory dividends, when declared, in accordance with the by-laws, are recognized as a liability.

 

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(iv) Derivative financial instruments

When applicable, derivatives are recognized initially at their fair value and the attributable transaction costs are recognized in the Profit and loss account when they are incurred. After the initial recognition, derivatives are measured at fair value and changes in fair value are accounted in the Profit and loss account.

 

(b) Property, plant and equipment

 

(i) Recognition and measurement.

Items of PP&E are measured at historic cost of acquisition or construction, less accumulated depreciation, and any accumulated impairment losses, when applicable.

The cost includes expenditures that are directly attributable to the acquisition of an asset. The cost of assets built by the entity itself include the cost of materials and direct labor, any other costs, including those of loans on qualifiable assets, that are necessary to placement of the asset in the location and condition necessary for it to be able to operate in the manner intended by the Management.

Any software purchased that is an integral part of the functionality of an item of equipment is capitalized as part of that equipment

When parts of an item of PP&E have different useful lives, they are recorded as individual items (principal components) of PP&E.

Gains or losses on disposal of an item of fixed assets/PP&E are calculated by comparison with the proceeds of the sale with the accounting value of the item, and are recognized, net, in Other revenues, in the Profit and loss account.

 

(ii) Spare part assets

Materials and equipment with the status of spare parts of certain items of PP&E, whose probable future allocation is to replace assets in operation and to be used for more than one business year are classified in Spare part inventory, in PP&E, until their final allocation. New assets acquired for this purpose are incorporated into PP&E in service only at the moment when they are requisitioned. Goods withdrawn from PP&E in service due to replacement are reintegrated into the inventory of spare parts and their depreciation is normally continued, provided that their repair and reuse are possible.

 

(iii) Subsequent costs

The cost of substitution of a component of PP&E is recognized in the book value of the item when it is probable that the economic benefits incorporated into the component will flow to the Company and that their cost can be reliably measured. The book value of a component replaced by another is transferred to the inventory of spare parts of written off, depending on the case. The costs of routine maintenance of PP&E are recognized in the Profit and loss account when incurred, and include the amount paid for the services of de-activation and repair, and also the cost of materials and components necessarily for replacement and re-placement of the asset in a functioning condition.

 

(iv) Depreciation

Depreciation is calculated on the depreciable amount, which is the cost of an asset, or on a substitute amount of cost, less residual value.

 

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Depreciation is recognized in the Profit and loss account based on the straight line method in relation to the estimated useful lives of each part of an item of PP&E, since this method is the one that most closely reflects the pattern of consumption of future economic benefits incorporated into the asset.

As revealed in Note 13, the Company’s management reviews, annually, the estimate of useful lives and of the residual values of assets at least once in each business year, or whenever any indication of alteration in these estimates is identified. Any adjustments are recognized as changes in accounting estimates.

Assets leased are depreciated for the period that is shorter of: The period of the lease and their useful lives; unless it is reasonably certain that the Company will obtain ownership at the end of the period of leasing. Land holdings are not depreciated.

The estimated useful lives for the present and compared periods are presented in Note 14.

When it is possible to identify one or more asset associated with a specific solution that aims to comply with a specific contract for provision of services, their useful lives become limited to the estimated period of validity of the contract.

 

(c) Intangible assets

 

(i) Licenses for use of software

Software use licenses acquired from third parties are recorded in intangible assets and measured based on costs of acquisition and implantation, and are amortized by the respective estimate useful life.

Software acquired as an integral part of the functionality of an item of equipment is recorded as a cost of that equipment and classified in PP&E.

 

(ii) Other intangible assets

Other intangible assets that are acquired by the Company and which have finite useful lives are measured at cost, less accumulated amortization and any accumulated impairment.

 

(iii) Amortization

Amortization of intangible assets is calculated on the cost of an asset or other substituted amount of cost, less residual value.

Amortization is recognized in the Profit and loss account on the straight-line method in relation to the estimated useful lives of intangible assets, with the exception of any goodwill premium, as from the date on which these are available for use, since this method is the one that best reflects the pattern of consumption of future economic benefits incorporated into the asset. The estimated useful lives for the present and compared periods are presented in Note 14.

Methods of amortization, useful lives and residual values are reviewed at each closing of a financial year and adjusted if necessary.

 

(d) Impairment

 

(i) Financial assets

A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect that can be reliably estimated on the estimated future cash flows of that asset.

 

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Objective evidence that financial assets are impaired can include default or delinquency by a debtor, restructuring of the amount payable to the Company on conditions that the Company would not consider in other transactions, indications that a debtor or issuer will enter bankruptcy, or the disappearance of an active market for a security. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment.

The Company considers any impairment of receivables or investments held to maturity individually. All receivables and investments held to maturity that are individually significant are evaluated for impairment.

An impairment loss in relation to a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognized in the Profit and loss account and reflected in an allowance account against receivables. If in a later period an impairment can be objectively related to an event that took place after the impairment having been recognized, the impairment previously recognized is reversed in the Profit and loss account, provided that the book value of the investment on the date of this reversal does not exceed the amortized cost if the impairment had not been recognized.

 

(ii) Non-financial assets

The book values of the Company’s non-financial assets, with the exception of deferred income tax and Social Contribution tax, are reviewed at least on each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. In the case of goodwill premium and intangible assets with undefined useful life, the recoverable value is estimated every year at the same time.

The recoverable value of an asset or a cash-generating unit (unidade geradora de caixa, or UGC) is the greater of: Value in use; and fair value less in estimated sale expenses. When evaluating the value in use, future estimated cash flows are discounted to present values using the pre-tax discount rate that reflects the existing market conditions in relation to the recoverability of the capital and the specific risks of the asset. For the purpose of testing recoverable value, assets that cannot be tested individually are grouped together in the smallest group of assets that generates entry of cash and is in continual use which are largely independent of the cash flows of other assets or groups of assets (UGCs). For testing of impairment of goodwill, the amount of the goodwill ascertained in a business combination is allocated to the UGC or the group of UGCs for which the benefit of synergies from the combination is expected. This allocation reflects the lowest level at which the goodwill is monitored for internal purpose and is not greater than an operational segment, determined in accordance with IFRS 8 and CPC 22.

An impairment is recognized if the book value of an asset or its UGC exceeds its estimated recoverable value. Losses of value are recognized in the Profit and loss account. Impairments related to the UGCs are allocated initially to reduce the book value of each item of goodwill allocated to the UGCs, and then, if there is remaining impairment, to reducing the book value of the other assets within the UGC or group of UGCs, on a pro-rata basis.

The corporate assets of the Company do not generate cash inflow individually. If there is an indication that a corporate asset shows impairment, then the impairment is allocated to the UGC or group of UGCs to which the corporate asset belongs, on a reasonable and consistent basis.

An impairment related to goodwill is not reversed. For other assets, impairments recognized in prior periods are evaluated at each reporting date for any indications that the impairment may have increased, diminished or no longer exist. An impairment is reversed if there has been a change in the estimates used to determine the recoverable value. An impairment is reversed only when the book value of the asset does not exceed the book value that has been ascertained, net of depreciation or amortization, if the impairment had not been recognized.

 

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(e) Benefits to employees

 

(i)    Mixed Benefit Private Pension Plan (‘Plan B’)

This is a defined-benefit contribution plan in the fund accumulation phase for retirement benefits for normal time of service, and as a defined-benefit plan for disability or death of participants still in active employment, and for receipt of benefits for time of contribution.

A defined contribution plan is a post-employment benefits plan under which an entity pays fixed contributions into a separate entity (pension fund) and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognized as an employee benefit expense in the Statement of income in the periods during which services are rendered by employees. Prepaid contributions are recognized as an asset if a cash refund or a reduction in future payments is available.

A defined benefit plan is a post-retirement benefit plan other than a defined contribution plan. The Company’s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their services rendered in the current and prior periods. The future benefit is discounted to present value at an interest-free interest rate. Any unrecognized costs of past service and the fair value of any plan assets are deducted. The discount rate is the yield presented on the reporting date for AA credit-rated bonds, or in their absence based on rates for government securities, that have maturity dates approximating the terms of the Company’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The calculation is performed annually by a qualified actuary using the projected unit credit method. When the calculation results in a benefit to the Company, the asset recognized is limited to the total of any unrecognized costs of past service and the present value of actuarial losses and the present value of the economic benefits available in the form of future reimbursements or reductions in future contributions to the plan.

An economic benefit is available to the Company if it is realizable during the life of the plan.

The costs of passed services are recognized immediately in the Profit and loss account. Actuarial gains and losses arising from adjustment based on experience and on changes in the actuarial assumptions are reported directly in Stockholders’ equity, as Other comprehensive income, when they occur, and are not reclassified for the Profit and loss account.

 

(ii) Other long-term benefits to employees – Health (‘Integrated Pro-Saúde’) Plan and Dental Plan

The Company’s net obligation in respect of employee benefits other than pension plans is the amount of future benefit that employees have earned in return for their service in the current and prior years. That benefit is discounted to determine its present value, and the fair value of any related assets is deducted. The discount rate is the yield at the reporting date on AA credit-rated bonds, or in their absence based on rates for government securities, which have maturity dates approximating the conditions of the Company’s obligations. The calculation is carried out by the projected unit credit method. Actuarial gains and losses are recognized in the Profit and loss account in the period in which they arise.

 

(f) Provisions

A provision is recognized, as a result of a past event, if the Company has a legal or constructive obligation that can reliably be estimated and it is probable that an economic resource will be required to settle the obligation.

 

 

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(g) Recognition of revenue

Operational revenue comprises the fair value of the consideration received or to be received for provision of rental and services in the normal course of the Company’s activities. Operational revenue is recognized when there is convincing evidence that it is probable that the financial economic benefits will flow to the entity, and that the amount of operational revenue and the respective associated costs can be reliably estimated and/or measured. Revenue is presented net of taxes, cancellations and unconditional discounts, and also net of eliminations of transactions not realized between related parties.

 

(i)    Provision of services

The Company considers to have been provided any services which, by formal commercial agreement, result in an irrecoverable obligation to deliver to its clients the benefits arising from the operational activities exercised by the Company, independently of the way in which they are settled.

Services are provided continuously to clients for the period agreed in the contract. Revenues are recognized in the Profit and loss account based on the stage of delivery or availability of the services contracted.

a) Telecoms

Article 60 of the General Telecommunications Law (LGT), Law 9472 of July 16, 1997, defines telecommunication service as: “The group of activities that makes possible the offer of capacity for transmission, emission or reception, by wire, radio, optical means or any other electromagnetic process, of symbols, characters, signals, written matter, images, sounds or information of any type”. Such services are divided into various modalities. The Company is authorized by Anatel to provide telecommunication services in Multimedia Communication Service (Serviço de Comunicação Multimídia, or SCM) modality, under the SCM regulations approved by Anatel Resolution 614 of May 28, 2013. The contracts for provision of services are remunerated on fixed monthly bases, the values of which are negotiated principally as a function of the rate of transmission, distance between the connected points, quantity contracted and fidelity period, which generally varies between one and five years.

Telecommunications revenues comprise the initial amount agreed in the contract, plus any variations arising from additional requests, less any amounts agreed to be omitted and/or other discounts arising from incentive arrangements based on volume of contracting. Revenues are recognized as long as it is probable that they will result in revenue and can be reliably measured.

The amount attributable of revenue in relation to the stage of delivery or availability of the telecommunication services is measured, on a monthly basis, in the manner specified in contracts. Services begun or canceled during the course of the month of reference are valued on a pro-rata-die basis, in proportion to the extent of delivery or having been placed at disposal of clients.

 

(ii)     Other revenues

a)    Rental of networks

Certain commercial agreements provide for use by the client of part of the Company’s fiber optic networks, without, however, any equipment or services of its ownership or responsibility being allocated to these networks. This is not to be confused with telecommunication service, since it does not fulfill the characteristics of the definition in the General Telecommunications Law.

Rental revenue is recognized in the Profit and loss account by the accrual method in the period of a contract.

 

 

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b)    Right of way (sub-rental of transmission and distribution infrastructure)

The Company has a “Right of way” contract on the transmission and distribution lines of Cemig, for which concession it pays monthly to the concession grantor, through a share of revenue, which constitutes a type of royalty varying with the revenue received by the Company. This operational agreement confers on the Company the possibility of subrogation of these rights of passage to third parties, provided there is express agreement by the grantor. The revenue from right of way arising from subrogation of such rights is recognized by the accrual method, according to the essence of the applicable contracts.

c)    Indemnity for early rescission of contract

Contracts for telecommunication services have protection clauses that guarantee for the company the right of indemnity (pre-set penalty representing losses and damages) in the event of early and unilateral cancellation of the agreement by clients, so as to ensure the minimum return on the investment realized by the Company in providing the service contracted.

 

(h) Financial revenue (expenses)

Financial revenues are, principally, revenue from cash investments, late charges on overdue telecoms service account, and interest on other financial assets. Interest income is recognized in the Statement of income using the effective interest method.

Financial expenses are, principally, financial costs on debentures and loans. Interest expense on the Company’s borrowings is recognized in the Profit and loss account using the effective interest method.

 

(i) Leasing transactions

 

1) Operational leasing transactions

Leasings in which a significant portion of the risks and benefits of the ownership is retained by the lessor are classified as ‘operational leasing’. Payments made under operational leasing agreements (net of any incentive amounts received from the lessor) are recognized by the lessee in the Profit and loss account by the straight-line method during the period of contracting of the leasing.

 

2) Financial leasing – assets and liabilities

Leasings of PP&E assets in which the Company substantially holds all the risks and benefits inherent to ownership are classified as ‘financial leasings’, the minimum payments of which are systematically and separately allocated between unrealized assets and liabilities and revenues or expenses to be appropriated. Financial expenses are allocated at each period during the period of the leasing, aiming to produce a constant periodic rate of interest on remaining balance of the asset or liability.

At the same time, as shown in Note 9, the Company leased certain assets and liabilities in which the main characteristics of the contract indicated their classification as financial leasing, and as a result recorded the transaction as a disposal.

The assets acquired in the modality of financial leasing, and lessee, are classified in PP&E and depreciated in accordance with their estimated useful life.

 

 

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3) Policy on identification and classification of leasing transactions

At the beginning of a contract, it is defined whether or not the document is or contains a leasing agreement. A specific asset is the object of a leasing agreement if compliance with the contract depends on the use of that specific asset. Leasing agreements in the terms of which the lessee assumes the risks and benefits inherent to ownership are classified as financial leasings. In the initial recognition, asset and liability are recognized at amounts equal to the fair value of the asset leased, or if lower, to the present value of the minimum payments of the leasing contract, each one being determined at the start of the leasing contract. The Company, when it is lessee, depreciates the asset leased in accordance with the expected useful life in the same way as its own assets, or for a shorter period, if applicable, as per terms of the leasing contract in question At the same time, when the Company is lessor, it writes down the asset leased against the profit for the business year. Receipts or minimum payments of financial leasings are segregated into two components: The financial expense, and the reduction of the outstanding asset or liability.

Other leasing agreements are classified as operational leasing and are recognized as an expense on the straight-line basis during the period of the leasing, unless any other systematic basis is more representative of the timing pattern of the benefit.

 

(j) Income tax and Social Contribution tax

Income tax and the Social Contribution tax, current and deferred, are calculated based on the rates of: income tax at 15%, plus the additional rate of 10% on taxable income exceeding R$ 240,000 (two hundred and forty thousand Reais) per year; and for the Social Contribution tax, 9% on taxable profit. They include the offsetting of tax losses/carryforwards for both taxes, the aggregate total of which offsetting is limited to 30% of the real profit.

The expense on Income tax and the Social Contribution tax comprises current and deferred tax. The current tax and the deferred tax are recognized in the Profit and loss account unless they relate to a business combination, or items directly recognized in Stockholders’ equity or in Other comprehensive income.

 

1) Current income tax and Social Contribution tax

The current tax is the expected tax payable or receivable on the taxable profit for the business year, at the rates currently in force or substantially in force on the reporting date, and any adjustment to the taxes payable in relation to prior years. The taxable profit is different from the profit presented in the income statement, because it excludes revenues or expenses that are taxable or deductible in other reporting periods, and also excludes items that are non-taxable or non-deductible permanently. The provision for income tax and Social Contribution tax is calculated based on the rates in force at the close of the reporting period.

 

2) Deferred income tax and Social Contribution tax

This is the effect arising from the difference of treatment between the accounting profit and the taxable profit ascertained in each period – these figures can arise from calculation of tax losses offsetable in future periods or recording of accounting transactions which, due to express provisions of law, have their tax effects (positive or negative) suspended or postponed – also known as temporary differences.

Deferred tax is not recognized for the following temporary differences: initial recognition of assets or liabilities in a transaction that is not a business combination and which does not affect accounting, nor taxable profit or loss; and differences related to investments in subsidiaries and controlled entities, when it is probable that they will not be reversed in a foreseeable future.

 

 

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Positive (receivable) deferred income tax ceases to be recognized in the financial statements when it is probable that, in the light of existing evidence, the economic benefits of tax deductibility of the credits which gave rise to it will not be available for use to offset future taxable profit, or their realization is uncertain, indeterminate, or does not fulfill the requirements for accounting recognition specified in CVM (Securities Commission) Instruction 371/02. Deferred income tax and Social Contribution tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

Deferred tax is measured at the rates that it is expected will be applied to the temporary differences when they are realized, based on the legislation in effect on the reporting date.

Deferred tax assets and liabilities are classified individually as ‘Non-current’ assets or liabilities, independently of whether there is any expectation of realization or reversal in the subsequent business year, and may be set off against each other if there is a legal right to offset current tax liabilities and assets, and if they are related to income taxes posted by the same tax authority on the same taxable entity.

 

(k) Profit per share

 

1) Basic

Basic earnings per share (EPS) is calculated by dividing the profit or loss attributable to the controlling shareholders and non-controlling interest of the Company by the common shares outstanding in the respective period.

 

2) Diluted

Diluted EPS is calculated by the said average number of shares in circulation, adjusted for any instruments potentially convertible into shares, with dilutive effect, in the periods presented, in the terms of CPC 41 (IAS 33).

In view of the non-existence of financial instruments that could cause dilution of the capital, no differences were calculated between basic and diluted profits of the Company.

 

(l) Segment reporting

Operational segments are strategic units of a business that offer different services, whose operations are separately managed and which require the application of different technologies and operational strategies Reportable operational segments are defined based on the reports used by Management for taking decisions and monitoring business, and are frequently reviewed by the Executive Board of the Company.

The financial statements of the Company include only one material operational segment. This being so, for the purpose of these financial statements only the operational segment related to the business of provision of telecommunications infrastructure was considered.

 

(m) Statements of added value

The Company has prepared an Added Value Statement (DVA) in accordance with technical pronouncement CPC 09 – Added Value Statements, which is presented as an integral part of the financial statements in accordance with BRGAAP applicable to listed companies, while under IFRS its status is that of additional information.

 

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(n) Distribution of Interest on Equity, and dividends

Distribution of dividends, and Interest on Equity, to the Company’s stockholders is recognized as a liability in the financial statement at the moment when these benefits are declared. Under the Company’s by-laws, decision on payment of interim Interest on Equity is a decision for the Board of Directors. The tax benefit arising from Interest on Equity is recognized in the Profit and loss account, by reduction of the taxable amount of current income tax and Social Contribution tax.

 

(o) Adoption of new and/or revised accounting pronouncements, orientations and interpretations

 

1) New and revised rules and interpretations, applicable for the business year ending December 31, 2016

The following new and revised elements of IFRS, in effect for business years starting on or after January 1, 2016, were adopted in the financial statement Adoption of these new and revised components of IFRS applicable to the Company had no material effect on the amounts reported and/or disclosed for the current and prior periods.

 

Pronouncement    Description

•  Changes to IFRS 10, IFRS 12 and IAS 28

  

•  Investment entities: Applying the exception of consolidation

•  Alterations to IFRS 11

  

•  Accounting of acquisitions of interests in joint operations

•  Alterations to IAS 1

  

•  Disclosure initiative

•  Alterations to IAS 16 and IAS 38

  

•  Clarification on acceptable methods of depreciation and amortization

•  Alterations to IAS 16 and IAS 41

  

•  Agriculture: Carrying amounts for plants

•  Alterations to IAS 27

  

•  Equity reporting method and separate financial statement

•  Annual Improvements

  

•  2012-2014 IFRS Cycle

 

2) New and revised rules and interpretations already issued and not yet adopted:

 

Pronouncement    Description

•  IFRS 9

  

•  Financial instruments (b)

•  IFRS 15

  

•  Revenue from contracts with clients (b)

•  IFRS 16

  

•  Leasing (c)

•  Alterations to IFRS 2

  

•  Share-based Payment

•  Alterations to IFRS 10 and IAS 28

  

•  Sale or contribution of assets between an investor and its affiliate or joint venture (d)

•  Alterations to IAS 7

  

•  Disclosure initiative (d)

•  Alterations to IAS 12

  

•  Recognition of deferred tax assets for unrealized losses (a)

•  IFRIC 22

  

•  Advances in foreign currencies (b)

•  Annual Improvements

  

•  2014-2016 IFRS Cycle (a) (b)

•  Alterations to IAS 40

  

•  Transfer of investment properties (b)

 

(a) In effect for annual periods starting on or after January 1, 2017, with early adoption allowed.

 

(b) In effect for annual periods starting on or after January 1, 2018, with early adoption allowed.

 

(c) In effect for annual periods starting on or after January 1, 2019, with early adoption allowed.

 

(d) In effect for annual periods starting on or after a date to be decided.

The Company’s Management is evaluating the possible effects arising from the revisions of IFRS 9, 15 and 16, and adjustments to IFRS 12.

 

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4. Determination of fair value of assets and liabilities

Numerous accounting policies and disclosures of the Company call for determination of the fair value of assets and liabilities, financial and non-financial. The fair values have been calculated for the purposes of measurement and/or disclosure based on the methods below. When applicable, the additional information on the assumptions used in calculation of fair values is disclosed in specific notes to the asset or liability concerned.

 

(i) Derivatives

When applicable, derivatives are recognized initially at their fair value; and the attributable transaction costs are recognized in the Profit and loss account when they are incurred. After the initial recognition, derivative are measured at fair value.

 

(ii) Non-derivative financial liabilities

Fair value, which is determined for the purposes of disclosure, is calculated based on the present value of the principal, and future cash flows, discounted at the market interest rate found on the reporting date. For financial leasing transactions, the interest rate is found by reference to similar leasing contracts.

 

5. Re-presentation of the financial statements

The Company’s financial information for the period ended December 31, 2005, presented for the purpose of comparison, has been adjusted and is being re-presented, as specified in CPC 23 – Accounting policies, changes in estimates and correction of errors, and CPC 26(R1) – Presentation of accounting statements, due to certain adjustments made in the financial statements of the affiliated company Ativas. The effects resulting from these adjustments have an impact on the gain accounted by the equity method on holdings in non-consolidated investees, in the Profit and loss account, and the balances of accounts of uncovered liabilities of the subsidiary, and retained losses in the Statement of financial position (Balance sheet). The Management of CemigTelecom believes that this change presents its operations in the most reliable form and results in reliable and material information. These alterations have no effect on the initial balances at January 1, 2015, which is why the column relating to the balances on that base date has not been presented.

The effects on the financial statements of the Company can be demonstrated as follows:

STATEMENT OF FINANCIAL POSITION

 

     Dec. 31, 2015  
     Initial
balance
    Adjustments     Balance
Re-presented
 

Current assets

     41,455       —         41,455  

Non-current assets

     276,320       —         276,320  
  

 

 

   

 

 

   

 

 

 

Total assets

     317,775       —         317,775  
  

 

 

   

 

 

   

 

 

 

Current liabilities

     57,626       —         57,626  

Non-current liabilities

     90,127       —         92,132  

Uncovered liabilities of jointly controlled entity

     74,703       2,005       76,708  

Other non-current liabilities

     15,424       —         15,424  

Stockholders’ equity

      

Share capital

     225,081       —         225,081  

Equity valuation adjustments

     (75     —         (75

Retained losses

     (54,984     (2,005     (56,989
  

 

 

   

 

 

   

 

 

 

Total equity

     170,022       (2,005     168,017  
  

 

 

   

 

 

   

 

 

 

Total liabilities and Stockholders’ equity

     317,775       —         317,775  
  

 

 

   

 

 

   

 

 

 

 

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PROFIT AND LOSS ACCOUNT

 

     Dec. 31, 2015  
     Initial
balance
    Adjustments     Balance
Re-presented
 

Net revenue from provision of services

     120,614       —         120,614  

Cost of services provided

     (83,367     —         (83,367
  

 

 

   

 

 

   

 

 

 

Gross profit

     37,247       —         37,247  

Net operational revenue (expenses)

     (26,380     —         (26.380

Equity method gains in non-consolidated investees, net

     (26,828     (2,005     (28.833
  

 

 

   

 

 

   

 

 

 

Total

     (53,208     (2,005     (55.213
  

 

 

   

 

 

   

 

 

 

Operational profit before Financial revenue (expenses)

     (15,961     (2,005     (17,966

Net financial revenues (expenses)

     (1,725     —         (1.725
  

 

 

   

 

 

   

 

 

 

Profit before income and Social Contribution taxes

     (17,686     (2,005     (19,691

Current income tax and Social Contribution tax

     (6,589     —         (6.589

Deferred income tax and Social Contribution tax

     (9,551     —         (9.551
  

 

 

   

 

 

   

 

 

 

Net loss for the period

     (33,826     (2,005     (35,831
  

 

 

   

 

 

   

 

 

 

STATEMENT OF COMPREHENSIVE INCOME

 

     Dec. 31, 2015  
     Initial
balance
    Adjustments     Balance
Re-presented
 

Net loss for the period

     (33,826     (2,005     (35,831

Other comprehensive income:

      

Actuarial losses, net of taxes

     (323     —         (323
  

 

 

   

 

 

   

 

 

 

Total Comprehensive income for the period

     (34,149     (2,005     (36,154
  

 

 

   

 

 

   

 

 

 

STATEMENTS OF CASH FLOW

 

     Dec. 31, 2015  
     Initial
balance
    Adjustments     Balance
re-presented
 

Net loss for the period

     (33,826     (2,005     (35,831

Adjustments to reconcile net profit to cash generated by operations:

     98,588       2,005       100,593  
  

 

 

   

 

 

   

 

 

 

Provision made for doubtful receivables

     1,195       —         1,195  

Equity method gains in non-consolidated investees, net

     26,828       2,005       28,833  

Depreciation and amortization

     48,968       —         48,968  

Other adjustments for reconciliation of Net profit for the period

     22,792       —         22,792  

Variations in assets and liabilities

     (7,791     —         (7,791
  

 

 

   

 

 

   

 

 

 
  

 

 

   

 

 

   

 

 

 

Net cash from operational activities

     56,971       —         56,971  

Net cash applied in investment activities

     (51,927     —         (51,927

Net cash applied in financing activities

     (4,887     —         (4,887
  

 

 

   

 

 

   

 

 

 

INCREASE IN CASH AND CASH EQUIVALENTS

     157       —         157  
  

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS

      

At start of period

     4,712       —         4,712  

At end of period

     4,869       —         4,869  
  

 

 

   

 

 

   

 

 

 

INCREASE IN CASH AND CASH EQUIVALENTS

     157       —         157  
  

 

 

   

 

 

   

 

 

 

 

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6. Cash and cash equivalents

 

     Dec. 31, 2016      Dec. 31, 2015  

Cash and bank deposits

     261        1.359  

Fixed-income funds

     

Bank certificates of deposit (a)

     105        872  

Overnight (b)

     668        2.638  
  

 

 

    

 

 

 

Total

     1,034        4,869  
  

 

 

    

 

 

 

On December 31, 2016, the Company had 100.00% of its cash investments (cash equivalents and securities – Note 7) in the Pampulha Fund (Fundo Pampulha), an exclusive investment fund of the Cemig Group. The weighted average profitability of the financial investments of the Pampulha Fund in this period was approximately 106.31% of the rate for interbank certificates of deposit, published by Cetip S.A. – the CDI Rate (this percentage was 103.0% on December 31, 2015).

 

(a) Floating rate bank CDs, remunerated at a percentage of the CDI Rate (which varies between 100.5% and 105.25%, depending on the transaction).

 

(b) Short-term (overnight) transactions (usually Treasury bonds, notes, etc., referenced to a fixed rate), with availability for redemption on the next day after investment.

 

7. Securities

Securities refers to: (i) fixed-income securities, comprising units in funds managed by financial institutions that meet the requirements for reputation, reliability and solidity established by the controlling stockholder group; and (ii) investments in securities and bank CDs (CDBs), with maturities of more than 90 days, the amounts of which, reported in Current assets, take into account the expectation of realization in the short term.

 

Fixed income securities

   Dec. 31, 2016      Dec. 31, 2015  

Current

     

Fixed-income funds

     

Bank certificates of deposit (a)

     59        2,873  

Debentures (b)

     131        3,242  

Treasury Financial Notes (c)

     349        1,890  

Financial Notes – Banks (d)

     1,316        9,308  
  

 

 

    

 

 

 

Subtotal

     1,855        17,313  
  

 

 

    

 

 

 

Non-current

     

Financial Notes – Banks (d)

     25        338  

Other

     —          4  

Debentures and Notes

     58        —    
  

 

 

    

 

 

 

Subtotal

     83        342  
  

 

 

    

 

 

 

Total

     1,938        17,655  
  

 

 

    

 

 

 

 

(a) Floating-rate bank CDs, remunerated at a percentage of the CDI rate (varying between 100.5% and 105.25%, depending on the transaction).
(b) Floating-rate debentures, remunerated at a percentage of the CDI rate (varying between 100% and 113%, depending on the transaction).
(c) Floating-rate treasury Financial Notes, the remuneration of which is given by the variation of the daily Selic rate recorded between the date of settlement of the purchase and date of maturity of the security plus, if any, premium or discount at the moment of purchase.
(d) Floating-rate bank Financial Notes, remunerated at a percentage of the CDI (between 104.25% and 112.7%, depending on the transaction).

 

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8. Accounts receivable from clients

 

     Dec. 31, 2016     Dec. 31, 2015  

Related parties (Note 21) (*)

     5,210       1,919  

Third parties

     15,464       16,713  

Allowance for doubtful accounts

     (1,425     (2,459
  

 

 

   

 

 

 

Total

     19,249       16,173  
  

 

 

   

 

 

 

 

(*) Excluding the amounts of ICMS tax of the entities linked to the Government.

Below is a summary of past due accounts receivable, by time overdue:

 

     Dec. 31, 2016        

Past due accounts receivable

   Related parties      Third parties     Total     Dec. 31, 2015  

1 to 30 days

     1,059        1,847       2,906       1,880  

31 to 60 days

     1,070        311       1,381       179  

61 to 90 days

     543        100       643       85  

91 to 180 days

     201        223       424       242  

Over 180 days

     766        1,749       2,515       2,456  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

     3,639        4,230       7,869       4,842  
  

 

 

    

 

 

   

 

 

   

 

 

 

Provision for doubtful receivables)

     —          (1,425     (1,425     (2,459
  

 

 

    

 

 

   

 

 

   

 

 

 

Percentage loss recognized on past due accounts receivable

     0%        34%       18%       51%  

The estimate for losses on doubtful receivables is recorded after individual assessment of the receivables. Those on which there is doubt as to realization have their losses recognized in the Profit and loss account in the amount expected to be incurred.

The change in the estimate for losses on accounts receivable can be expressed as follows:

 

     2016     2015  

Balance on January 1

     (2,459     (1,264

Provision permanently written off

     853       —    

New provisions

     (101     (1,195

Reversals

     282       —    
  

 

 

   

 

 

 

Balance at December 31

     (1,425     (2,459
  

 

 

   

 

 

 

On December 31, 2016 the Company had a total of R$ 5,354 in accounts receivable from clients up to 180 days past due, of which R$ 4,504 was settled by February 2017. The other credits are in negotiation.

 

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9. Financial leasing

Leasing transactions in which the Company is lessor and substantially transfers the risks and benefits of ownership to the lessee are classified as financial leasings. These transactions are recognized as a receivable at the lower of: Fair value of the asset leased; and Present value of the flow of receipts specified in the contract, discounted at a risk-free interest rate. Interest related to leasing is recognized in the Profit and loss account as Financial revenue during the period that the contract is in force.

 

     Dec. 31, 2016  

GPON network – condominiums

     12,179  
  

 

 

 

Total

     12,179  
  

 

 

 

Current

     303  
  

 

 

 

Non-current

     11,876  
  

 

 

 

GPON network – condominiums

On July 5, 2016 Cemig signed an irrecoverable leasing contract with Algar Telecom S.A. (Algar) for the FTTH GPON Network owned by CemigTelecom, located in 39 residential districts and condominiums in the Southern Zone of the Metropolitan Region of Belo Horizonte. The contract, signed for a period of 15 years, specifies monthly remuneration of R$ 112 in the first 60 months, and R$ 132 as from the 61st month, with annual adjustment by the IGP-M inflation index.

The nominal value of the flows of receipts specified in the contract was as follows:

 

     Dec. 31, 2016  

Up to 1 year

     1,344  

1 to 5 years

     7,080  

After 5 years

     13,494  
  

 

 

 

Total

     21,918  
  

 

 

 

The value of the considerations receivable on the transaction date was R$ 12,306, discounted to present value based on a real interest rate of 9% per year.

 

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10. Taxes recoverable

 

     Dec. 31, 2016      Dec. 31, 2015  

ICMS (local state value added tax) (a)

     4,929        4,695  

Income tax and Social Contribution tax recoverable

     595        426  

Income tax withheld at source

     1,098        401  

Other

     59        14  
  

 

 

    

 

 

 

Total

     6,681        5,536  
  

 

 

    

 

 

 

Current

     3,684        2,787  
  

 

 

    

 

 

 

Non-current

     2,997        2,749  
  

 

 

    

 

 

 

 

(a) This refers, basically, to ICMS tax credits recoverable, stated separately on tax invoices for acquisitions of PP&E assets. These can be used in up to 48 months from their being recording in the CIAP (Fixed Assets ICMS Tax Credit Monitoring) book.

 

11. Current and deferred income tax and Social Contribution tax

The item Deferred income tax and Social Contribution tax refers to the deferred tax credit constituted, principally, on temporary differences, tax losses and negative balances of Social Contribution tax ascertained up to the reporting date. Reporting of the deferred income tax is based on a technical study of viability made by the Executive Board and approved by the Audit Board and the Board of Directors on March 18, 2016.

The assumptions used in the preparation of that technical feasibility study were based on the projection of future taxable profits. On December 31, 2015, considering the Company’s business plan and the outlook for the macroeconomic scenario, the feasibility study indicated that future taxable profits foreseen for the period of 10 years would not be sufficient to exhaust the totality of tax credits recorded, and for this reason the Company reverted part of the deferred income tax and Social Contribution tax recognized in prior years, in the amount of R$ 13,491, of which R$ 12,057 referred to the tax loss and negative base for Social Contribution tax, and R$ 1,434 in temporary differences. Since this is a change of estimate, the adjustment was recognized in the Profit and loss account with a counterpart in Expenses on income tax and deferred Social Contribution tax.

On December 31, 2016 a further technical study was made, which indicated the possibility of complementing the balance of deferred income tax and Social Contribution tax with the amount of R$ 1,569.

The portion of tax credits not recognized amounts to R$ 10,385. This amount will be maintained under monitoring in the tax records until it satisfies the technical requirements for its accounting recognition.

The accounting value of the deferred tax asset is reviewed periodically, and the forecasts, annually. If there are material factors that change the forecasts, the technical feasibility study will be reviewed by the Company during the business year.

 

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     Dec. 31, 2016     Dec. 31, 2015  

Assets

    

Deferred tax credits

    

Tax losses and negative Social Contribution balances

     4,973       1,599  

Allowance for doubtful accounts

     451       425  

Provision for swap balance in the assets of Ativas

     1,159       —    

Voluntary retirement program

     539       —    

Profit sharing (‘PLR’)

     —         844  

Depreciation – Law 11941/09

     7,018       6,834  

Actuarial loss recorded in Other comprehensive income

     390       38  

Provision for obsolescence

     390       —    

Provision for impairment of investment

     1,495       1,495  

Other temporary additions

     623       593  
  

 

 

   

 

 

 

Total, deferred income tax/Social Contribution receivable

     17,038       11,828  
  

 

 

   

 

 

 

Liabilities

    

Deferred tax obligations

    

GPON network condominium leasing

     (764     —    

Gain on derivative financial instruments

     (1,559     —    

Appreciation of assets received from Eletronet

     (6,678     —    
  

 

 

   

 

 

 

Total, deferred income tax and Social Contribution payable

     (9,001     —    
  

 

 

   

 

 

 

Net non-current assets

     8,037       11,828  
  

 

 

   

 

 

 

The reconciliation of the expense calculated by application of the nominal tax rates and of the expense of income tax and Social Contribution reported in the Profit and loss account for the year is as follows:

 

     Year  
   2016     2015  

Profit (loss) before income tax and Social Contribution tax

     14,124       (19,691

Gain on change in percentage equity holding

     (24,717     —    

Equity in earnings of unconsolidated investees, net

     27,165       28,833  
  

 

 

   

 

 

 

Profit before income and Social Contribution taxes

     16,572       9,142  

Nominal rate of income and Social Contribution tax

     34%       34%  
  

 

 

   

 

 

 

Income tax and the Social Contribution tax

     (5,635     (3,108

Adjustments to obtain effective rate:

    

Tax effects applicable to:

    

Deductions for tax incentives

     —         312  

Other additions and exclusions, net

     (75     147  

Partial posting (reversal) of deferred income tax and Social Cont.

     1,569       (13,491
  

 

 

   

 

 

 

Income and social contribution taxes – effective expense

     (4,141     (16,140
  

 

 

   

 

 

 

Income tax and Social Contribution tax

    

Current

     —         (6,589

Deferred

     (4,141     (9,551
  

 

 

   

 

 

 

Total

     (4,141     (16,140
  

 

 

   

 

 

 

 

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The Company’s statements of the Company’s earnings are subject to review by the tax authorities for a period of five years. Other taxes, charges and contributions are also subject to the conditions, under applicable legislation.

The changes in the deferred tax assets during the 2016 business year can be shown as follows:

 

     Balance on
Dec. 31, 2015
     Accumulated in the year     Balance on
Dec. 31, 2016
 

Deferred tax credits

      Inclusions     Utilization    

Tax losses and negative Social Contribution balances

     1,599        3,374       —         4,973  

Allowance for doubtful accounts

     425        26       —         451  

Provision for swap balance in the assets of Ativas

     —          1,159       —         1,159  

Voluntary retirement program

     —          539       —         539  

Profit sharing (‘PLR’)

     844        —         (844     —    

Depreciation – Law 11941/09

     6,834        184       —         7,018  

Provision for obsolescence

     —          390       —         390  

Provision for impairment of investment

     1,495        —         —         1,495  

Other temporary additions

     593        30       —         623  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

     11,790        5,750       (844     16,648  
  

 

 

    

 

 

   

 

 

   

 

 

 

Deferred tax obligation

         

GPON network condominium leasing

     —          (764     —         (764

Gain on derivative financial instruments

     —          (1,559     —         (1,559

Appreciation of assets received from Eletronet

     —          (6,678     —         (6,678
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

     —          (9,298     —         (9,001
  

 

 

    

 

 

   

 

 

   

 

 

 

Tax credit (obligation) recognized in Profit and loss account

     11,790        (3,548     (844     7,647  
  

 

 

    

 

 

   

 

 

   

 

 

 

Actuarial loss recorded in Other comprehensive income

     38        352       —         390  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total of tax credit (obligation) recognized

     11,828        (3,196     (844     8,037  
  

 

 

    

 

 

   

 

 

   

 

 

 

 

12. Investment in affiliated company

On December 31, 2015 the Company was holder of 49% (forty nine per cent) of the voting stock of the company Ativas Data Center S.A. On December 31, 2015 the Company was holder of 49% (forty nine per cent) of the voting stock of the company Ativas Data Center S.A. On October 19, 2016 entry of the new strategic stockholder, Sonda Procwork Outsourcing Informática Ltda. (‘Sonda’) as one of the stockholders of Ativas Data Center S.A. was concluded. The closing took place after approval of the transaction without restrictions by Brazil’s Monopolies Authority, Cade, and compliance with the other conditions precedent, on October 19, 2016.

Following the subscription by Sonda of R$ 114,000, through a capital increase, Sonda holds 60% of the equity of Ativas; CemigTelecom holds 19.6% (representing share capital of R$ 98,900); and Ativas Participações holds 20.4% (representing share capital of R$ 102,937). Since after the transaction CemigTelecom no longer had shared control of Ativas, its interest was from that point onward recognized as investment in an affiliated company.

Until the finalization of the phase of construction of its datacenter, in January 2011, Ativas was pre-operational and by December 31, 2016 it had reported accounting losses of R$ 323,867 since its constitution in 2009 (R$ 194,040 up to Dec. 31, 2015).

 

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The principal information on this affiliated company is given below, aligning the accounting practice of Ativas with those of CemigTelecom:

 

     Dec. 31, 2016     Dec. 31, 2015  
           (Re-presented)  

Assets

     180,449       230,698  

Liabilities

     51,735       292,450  

Net equity (uncovered liability)

     128,714       (61,752

Net revenue

     67,557       59,212  

Profit (loss) for the period

     (126,744     (39,047

The development of the investment in the capital of Ativas in 2015 and 2016 is as follows:

 

Dec. 31, 2015

  

Dec. 31, 2016

     Re-presented                              

Jan. 1, 2015

  

Equity income

  

Dec. 31, 2015

  

Balance Jan. 1,
2016

  

Equity income

  

Gain on
dilution of
holding

  

Capital increase

  

Balance Dec.
31, 2016

(47,875)

   (28,833)    (76,708)    (76,708)    (27,165)    24,717    98,900    19,744

The value of the investment on December 31, 2016 and 2015 can be shown as follows:

 

     Dec. 31,
2016
    Dec. 31,
2015
 

Stockholders’ equity of the investee as per company’s accounts

     128,714       (61,752

Effect of deferred income tax asset recognized by investee

     (27,979     (94,796

Adjusted stockholders’ equity of investee

     100,735       (156,548

Percentage interest (%)

     19,6%       49%  
  

 

 

   

 

 

 

Investments valued by the equity method

     19,744       (76,708

Premium paid on subscription

     4,397       4.397  

Provision for impairment of the premium

     (4,397     (4,397
  

 

 

   

 

 

 

Balance of the investment (uncovered liability)

     19,744       (76,708
  

 

 

   

 

 

 

Loss by equity method

     (27,165     (28,833
  

 

 

   

 

 

 

This shows the stockholding structure of Ativas on December 31, 2016 and 2015:

 

     Dec. 31, 2016      Dec. 31, 2015  

Stockholder

   Thousand
shares
     Stake,
%
     Thousand
shares
     Stake,
%
 

Ativas Participações S.A.

     93,134        20.40%        68,144        51.00%  

Cemig Telecomunicações S.A.

     89,482        19.60%        65,472        49.00%  

Sonda Procwork Outsourcing Informática Ltda.

     273,925        60.00%        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     456,541        100%        133,616        100%  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Capital increase

Injections of capital in 2016

 

                   October 19, 2016         
     Feb. 16, 2016      Mar. 14, 2016      1st tranche      2nd tranche      Total  

CemigTelecom

     3,800        12,860        45,000        37,240        98,900  

Ativas Participações

     3,955        13,385        46,837        38,760        102,937  

Sonda Procwork

     —          —          —          114,000        114,000  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     7,755        26,245        91,837        190,000        315,837  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial assets/liabilities relating to sale/purchase options

On October 19, 2016, Cemig Telecomunicações S.A. – ‘CemigTelecom’, Ativas Participações S.A. (‘Ativas Participações’) and Sonda Procwork Outsourcing Informática Ltda. (‘Sonda’) signed an investment contract, for entry of Sonda as stockholder of the investee Ativas Data Center S.A. (‘Ativas Data Center’), which until that date was an exclusive investee of CemigTelecom (49%) and Ativas Participações (51%).

After the entry of the new partner Sonda, by dilution of CemigTelecom and Ativas Participações, Sonda assumed stockholding control, as owner of 60.0% of the shares of Ativas Data Center, the stockholder CemigTelecom and Ativas Participações S.A. now holding 19.6% and 20.4%, respectively.

As part of the process of stockholding restructuring, CemigTelecom and Sonda signed a Purchase Option Agreement (issued by CemigTelecom) and a Sale Option Agreement (issued by Sonda).

These resulted in CemigTelecom simultaneously having a right (put option) and an obligation (call option). The exercise price of the put option will be equivalent to fifteen times the adjusted net profit of Ativas in the business year prior to the exercise date. The exercise price of the call option will be equivalent to sixteen times the adjusted net profit of Ativas in the business year prior to the exercise date. Both options, if exercised, result in the sale of the shares in Ativas currently owned by the Company, and the exercise of one of the options results in nullity of the other. The options may be exercised as from January 1, 2021.

The put and call options in Ativas (‘the Ativas Options’) were measured at fair value and posted at their net value, i.e. the difference between the fair values of the two options on the reporting date of the financial statements for the business year 2016. Depending on the value of the options, the net value of the Ativas Options may be an asset or a liability of the Company.

The measurement was carried out by specialized consulting company through the use of the Black-Scholes-Merton (BSM) model, it being ensured that its results were consistent with other stochastic approaches involving numerical procedures.

In the calculation of the fair value of the Ativas Options based on the BSM model, the following variables are taken into account: closing price of the underlying asset on December 31, 2016; the risk-free interest rate; the volatility of the price of the underlying asset; the time to maturity of the option; and the exercise prices on the exercise date.

 

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The closing price of the underlying asset was based on the value of the transaction in shares of Ativas by Sonda, which took place on October 19, 2016. The calculation of the risk-free interest rate was based on yields of National Treasury Bills (Letras do Tesouro Nacional – LTNs). The time to maturity was calculated assuming exercise date on March 31, 2021. Considering that the exercise prices of the options are contingent upon the future financial accounting results of Ativas, the estimate of the exercise prices on the date of maturity was based on statistical analyzes and on information of comparable listed companies. The exercise prices of adopted in the BSM method were corroborated with statistical distributions analyzed through numerical procedures. On December 31, 2016, the derivative financial instrument is recorded, with the amount of R$ 4,586, in the account line Derivative financial instrument, in Assets.

 

13. Property, plant and equipment

 

     Dec. 31, 2016     Dec. 31,
2015
 
     Cost     Accumulated
depreciation
    Net value     Net value  

Land

     82       —         82       82  

Real estate property

     55       (16     39       40  

Facilities

     68       (25     43       102  

Machinery and equipment

     11       (2     9       10  

Furniture and utensils

     1,524       (1,074     450       472  

Computers and peripherals

     1,953       (1,760     193       270  

Test instruments

     2,833       (2,674     159       238  

Improvements

     246       (227     19       33  

Satellite reception system

     9,283       (9,282     1       2  

Telecoms network equipment

     361,943       (266,084     95,859       94,869  

Materials

     61,098       (38,694     22,404       25,009  

Cable

     192,373       (91,632     100,741       106,141  

OPGW cables

     18,894       (630     18,264       —    

ADSS cables

     1,529       (153     1,376       —    

Network infrastructure

     19,342       (13,140     6,202       7,869  

Fixed assets in progress

     17,146       —         17,146       14,849  
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     688,380       (425,393     262,987       249,986  
  

 

 

   

 

 

   

 

 

   

 

 

 

Provision for obsolescence

     (1,374     —         (1,374     (225
  

 

 

   

 

 

   

 

 

   

 

 

 

Total, net

     687,006       (425,393     261,613       249,761  
  

 

 

   

 

 

   

 

 

   

 

 

 

The depreciation rates and remaining useful lives were determined through technical opinions issued by engineers of the Company, and reflect the expectation of useful life of the goods and assets, as follows:

 

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Depreciation rates and useful lives of the assets:

 

Class of asset

   Average percentage
depreciated up to
Dec. 31, 2016
    Average remaining
useful life (years)
     Annual average
depreciation rates
 
       

Real estate property

     29     35.5        2

Facilities

     37     6.3        10

Machinery and equipment

     18     8.2        10

Furniture and utensils

     70     3.0        10

Computers and peripherals

     90     0.5        20

Test instruments

     94     0.6        10

Improvements

     92     0.4        20

Satellite reception system

     100     0.0        8

Telecoms network equipment

     74     2.4        11

Materials

     63     5.2        7

Cable

     48     10.5        5

OPGW cables

     3     14.5        7

ADSS cables

     10     4.5        20

Network infrastructure

     68     5.8        3 to 10

The movement in PP&E in 2016 can be shown as follows:

 

     Dec. 31, 2015      Additions           Written off             Transfers             Dec. 31, 2016  

Land

     82        —             —             —             82  

Real estate property

     55        —             —             —             55  

Facilities

     152        —             (84)           —             68  

Machinery and equipment

     11        —             —             —             11  

Furniture and utensils

     1,469        55           —             —             1,524  

Computers and peripherals

     1,934        19           —             —             1,953  

Test instruments

     2,833        —             —             —             2,833  

Improvements

     246        —             —             —             246  

Satellite reception system

     9,283        —             —             —             9,283  

Telecoms network equipment

     342,087        —             (7,684)        (d)        27,540           361,943  

Materials

     61,301        —             (2,560)        (d)        2,357           61,098  

Cable

     190,788        —             (3,983)        (d)        5,568           192,373  

OPGW cables

     —          18,894      (c)      —             —             18,894  

ADSS cables

     —          1,529      (c)      —             —             1,529  

Network infrastructure

     19,342        —             —             —             19,342  

Fixed assets in progress

     14,849        41,716      (a)      (225)           (39,194)           17,146  
  

 

 

    

 

 

       

 

 

       

 

 

       

 

 

 

Total cost

     644,432        62,213           (14,536)           (3,729)           688,380  
  

 

 

    

 

 

       

 

 

       

 

 

       

 

 

 

Accumulated depreciation

     (394,446)        (35,976)           5,029        (d)        —             (425,393)  

Provision for obsolescence

     (225)        225           (1,374)           —             (1,374)  
  

 

 

    

 

 

       

 

 

       

 

 

       

 

 

 

Net amount depreciable

     249,761        26,462           (10,881)           (3,729)        (b)        261,613  
  

 

 

    

 

 

       

 

 

       

 

 

       

 

 

 

 

(a) Spending relating to projects in progress for expansion of telecommunications networks and inventories.
(b) Transfers made between PP&E lines and intangible assets (Note 14).
(c) Assets transmitted by Eletronet S.A.
(d) The write-offs made in the period are as described in Note 9, goods which the Company has leased, the main characteristics of the contract of which indicated their classification as financial leasing, the transaction consequently being posted as a disposal.

 

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The Company periodically evaluates the useful lives applied to its assets that have defined useful life. The evaluation of useful lives of the assets are carried out by professionals of the Company’s technical engineering team, and they consider, among other aspects, the following principal indications for formation of their opinion: (i) technical information related to the use and maintenance of the assets; (ii) outlook for technological and market changes; (iii) the Company’s capacity to obtain services and parts in the market for replacement of goods; and (iv) the possibility of realizing upgrades in the related equipment and software, and also of the capacity for its combination with future technologies.    

For tax purposes, the useful lives of the assets accepted by the tax legislation were maintained, and the difference between the accounting and tax bases are treated as temporary differences, the effects resulting from which are recognized as a deferred tax credit or debit in the period in which those differences occur.

Receipt of assets by reason of a contract

In the third quarter of 2016 the Company recognized ownership of certain assets transferred by Eletronet S.A, comprising 715 Km of OPGW cables, in the amount of R$ 18,894 and ADSS cables in the amount of R$ 1,529, by reason of a provision in a contract which transferred ownership and domain over these assets to CemigTelecom.

During the period of the contract, bankruptcy of Eletronet was declared, on May 16, 2003, with continuity of its operations being maintained. This fact had no effect on compliance with the contract signed between the parties, but the legal uncertainty caused by the possibility of these assets being confiscated by the receiver and the unpredictable consequences, led to a scenario of uncertainty that continued even after the date of extinction of the contract in 2015.

In the first quarter of 2016 a Rio de Janeiro court gave judgment ratifying the settlement with the creditors governing the assets of the company, and the bankruptcy was ended. Due to the complexity of the case, the Company’s legal advisors, for prudence, recommended that these assets should be recorded in the accounts only when all the elements indicating that the risks of loss of this right, and of the legal uncertainties, were no longer present.

In view of the present stage of the process and the expiration of the period for a contrary statement by the creditors and the Public Attorneys’ office, and also the acceptance of the conditions of payment ratified in the court agreement referred to, the Company’s legal advisors concluded that the chance of modification of the judgment could be considered improbable.

The Company’s management, based on the existing evidence as a whole and on the conviction of its internal and external legal advisors as to the remoteness of the possibility of reversal of the legal situation of Eletronet, decided in favor of accounting recognition of these assets, and contracted a specialized company for their valuation. That Company’s opinion, issued on June 30, 2016, indicated the total amount of R$ 20,423, and remaining useful economic life of 15 years, for the OPGW cables and five years for the ADSS cables.

 

14. Intangible assets

 

     Dec. 31, 2015     Accumulated in the
year
           Dec. 31, 2016  
     Additions     Transfers           

Software use license

     1,137       901       —            2,037  

Grant of radio concession

     230       —         —            230  

Management systems

     9,268       —         3,729          12,998  
  

 

 

   

 

 

   

 

 

      

 

 

 

Total cost

     10,635       901       3,729          15,265  
  

 

 

   

 

 

   

 

 

      

 

 

 

Accumulated amortization

     (4,010     (1,765     —            (5,775
  

 

 

   

 

 

   

 

 

      

 

 

 

Net value amortizable

     6,625       (864     3,729        (a)       9,490  
  

 

 

   

 

 

   

 

 

      

 

 

 

 

(a) The remaining balances in the transfers shown in the table above refer to the transfers made between the accounts Fixed assets and Intangible assets (Note 13).

 

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Amortization rates and useful lives: The annual amortization rates practiced for the 2016 business year were as follows:

 

Class of asset

  

Estimated
useful life
(years)

   Average
percentage
amortized
up to

Dec. 31,
2016
    Average
remaining
useful life
(years)
     Annual
average
depreciation
rates
 
          

Software use license

   5 years      83     0.8        20

Grant of radio concession

   15 years      11     13.4        6.7

Management systems

   10 years      30     7.0        10

 

15. Loans and debentures

 

     Dec. 31,
2016
     Dec. 31,
2015
 

Debentures (a)

     —          16,414  

Promissory Notes (b)

     —          22,609  

Loan (c)

     101,372        —    
  

 

 

    

 

 

 

Total

     101,372        39,023  
  

 

 

    

 

 

 

Current

     63,751        30,519  
  

 

 

    

 

 

 

Non-current

     37,621        8,504  
  

 

 

    

 

 

 

 

(a) Debentures

The movement of the financing via BNDES – Debentures in the year was as follows:

 

Debentures          Accumulated in the year         
BNDES    Balance on     Payment of
interest
    Amortization     Charges
appropriated
     Balance on  
     Dec. 31,
2015
           Dec. 31,
2016
 

1st. Series

     8,157       (524     (8,157     524        —    

2nd. Series

     3,003       (606     (3,003     606        —    

3rd. Series

     1,119       (60     (1,119     60        —    

4th. Series

     2,434       (145     (2,434     145        —    

5th. Series

     1,001       (79     (1,001     79        —    

6th. Series

     758       (39     (758     39        —    
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Subtotal

     16,472       (1,453     (16,472     1,453        —    
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Funding costs

     (58     —         —         58        —    
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total

     16,414       (1,453     (16,472     1,511        —    
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

On October 14, 2016, the Company made early settlement of the debtor balance on the First Debenture Issue, as specified in Clause 15 of the Debenture Deed. The debtor balance including financial charges on the date of payment was R$ 10,741. On October 17, 2016 the BNDES issued the term of quittance and release of the guarantees. On November 3, 2016 the guarantee account in the amount of R$ 4,187 was redeemed.

 

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Table of Contents
(b) Promissory Notes

On December 23, 2015, under CVM Instructions 566 (of July 31, 2015) and 476 (January 16, 2009), the Company made its second issue, in a single series, of commercial Promissory Notes (‘2nd NP’) in the total amount of R$ 23,000, represented by 46 (forty six) Promissory Notes with nominal unit value of R$ 500, guaranteed by a surety from Companhia Energética de Minas Gerais – Cemig, under the regime of firm guarantee of subscription, through public distribution, with restricted distribution efforts, and maturity at 360 (three hundred and sixty) days from issue date, paying remuneratory interest at 120.0% (one hundred and twenty per cent) of the CDI Rate. The proceeds from the issue were used to replenish the Company’s cash position.

The movement of the loan in the modality Promissory Notes in the year was as follows:

 

           Accumulated in the year         
     Dec. 31,
2015
    Payment of
interest
    Amortization     Charges
appropriated
     Dec. 31,
2016
 

Single Series

     23,073       (3,889     (23,000     3,816        —    

Funding costs

     (464     —         —         464        —    
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total

     22,609       (3,889     (23,000     4,280        —    
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

On December 19, 2016, the Company made settlement of the debtor balance on the promissory notes. On the date of payment the total of the amount due and financial charges was R$ 26,889.

 

(c) Loans

 

     Dec. 31,
2015
     Funds
raised
    Charges
appropriated
     Dec. 31,
2016
 

Sonda Procwork (1)

     —          45,000       1,310        46,310  

Sonda Procwork (2)

     —          37,240       1,086        38,326  

Cemig Holding company (3)

     —          18,000       134        18,134  
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal

     —          100,240       2,530        102,770  
  

 

 

    

 

 

   

 

 

    

 

 

 

Funding transaction costs

     —          (1,558     160        (1,398
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     —          98,682       2,690        101,372  
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Loan from Sonda, at 110% of CDI, due October 19, 2017, to support the investment in Ativas Datacenter.
(2) Loan from Sonda, rate 110% of CDI, to support the investment in Ativas Datacenter. The loan becomes due on date of exercise of the put option by the Company, as regulated by the Stockholders’ Agreement.
(3) Loan from Cemig Holding company, at 132.9% of CDI, due April 30, 2017, to support working capital.

 

16. Suppliers

 

     Dec. 31,
2016
     Dec. 31,
2015
 

Third parties

     11,606        6,369  

Related parties (Note 21) (*)

     10,144        4,946  
  

 

 

    

 

 

 

Total

     21,750        11,315  
  

 

 

    

 

 

 

 

(*) Leaves out of account the amounts of ICMS tax of the entities linked to the Government, and indemnity for contingencies in Ativas.

The Company’s exposure to currency and liquidity risks on suppliers and accounts payable is given in Note 27.

 

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17. Payroll-associated and employment-law obligations

 

     Dec. 31,
2016
     Dec. 31,
2015
 

Vacation pay, 13th salary and charges payable

     2,906        2,284  

Employee profit shares

     1,257        2,483  

Long-term benefits to employees (Note 28)

     2,801        1,454  

Voluntary retirement program

     1,583        —    

Other

     90        89  
  

 

 

    

 

 

 

Total

     8,637        6,310  
  

 

 

    

 

 

 

Current

     5,836        4,856  
  

 

 

    

 

 

 

Non-current

     2,801        1,454  
  

 

 

    

 

 

 

Voluntary retirement program

On March 18, 2016 the Company’s management launched the Incentivated Voluntary Retirement Program (PDVI) for 2016, with the objective of adapting the workforce to the needs of the Company’s Business Plan, for preservation of the staff necessary for optimization of its processes and costs, maintaining the focus on achieving the targets of its strategic plan and generation of value. Employees could accept the terms of the plan as from March 21, to May 19, 2016.

12% of the Company’s staff joined the program. It was available to employees with administrative and technical careers with at least 13 years’ work at CemigTelecom or with any other company provided they were retired or qualified for retirement. The retirement dates were programmed at the Company’s option, and may occur in up to 18 months after the termination of the acceptance period. The plan provides a financial incentive equivalent to 0.4 times the monthly salary for each year of employment relationship with the company, for those who joined in the first 30 days of the joining period, and of 0.2 times the salary for those who joined between the 31st day of the period and its closing date. Additionally, the program grants those with eligible employment the right to receive the 40% ‘penalty’ payment on the balance of the employee’s FGTS account, as well as receipt of the other dismissal amount specified by law.

 

18. Tax obligations

 

     Dec. 31,
2016
     Dec. 31,
2015
 

Income tax withheld at source (IRRF)

     341        284  

Corporate income tax (IRPJ)

     —          497  

The Social Contribution tax on net profit (CSLL)

     —          269  

ICMS (local state value added tax)

     2,560        1,838  

The Contribution to Finance Social Security – Cofins

     1,320        459  

Social Integration Program (PIS)

     286        99  

Telecommunication Services Universalization Fund (FUST)

     90        77  

Telecoms Technical Development Account – FUNTTEL

     7,137        6,722  

Other

     305        231  
  

 

 

    

 

 

 

Total

     12,039        10,476  
  

 

 

    

 

 

 

Current

     9,573        10,476  
  

 

 

    

 

 

 

Non-current

     2,466        —    
  

 

 

    

 

 

 

 

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(a) As from January 2016, various Brazilian states increased the rate of ICMS tax on telecommunication service to improve the cash situation of the states, as follows:

 

State

   Change in rate (from – to)    Legislation

Minas Gerais

   25% – 27%    Law 21781/2015

Pernambuco

   28% – 30%    Law 15599/2015

Ceará

   27% – 30%    Law 5892/2015

Rio de Janeiro

   27% – 30%    Law 7175/2015

Rio Grande do Norte

   27% – 30%    Law 9991/2015

 

(b) With the conversion of Provisional Measure 638/14 into Law 12996/14, and consequent renewal of permission for payment in installments as per Laws 11941/09 and 12249/10, the Company sought to include the debits to FUNTTEL for the years 2006 to 2013 within the REFIS program. This was however negated on administrative basis, due to its not being inscribed in the national receivable debt.

The Company reacted to this by seeking an order of mandamus against the act of an allegedly coercive authority, seeking to force those debits into the debt refinancing program referred to, but the case and the application for mandamus were refused and the case set aside. This case awaits judgment in appeal to the Regional Federal Appeal Court of the 1st Region.

The accumulated value of the tax obligation on December 31, 2016 is R$ 7,137, including interest and penalty payments calculated up to that date on the debts past due.

The debits incurred as from 2014 are being paid regularly.

Due to the remote possibility of inclusion of the FUNTTEL debits in the REFIS program, the company awaits the inscription of these debits in the Federal Receivable Debt register, with a view to arrangement for payment of the outstanding balance in installments, directly with the federal government. Until December 31, 2016, the debits for the years 2008 and 2009 were inscribed in the Federal Receivable Debt. The amounts receivable were agreed to be paid in ordinary installment in 60 months.

The movement on the installment payment of debits to FUNTTEL, inscribed in the Federal Receivable Debt, was as follows:

 

     Accumulated in the period  

Tax year

   Consolidated
costs
     Amortization     Charges
appropriated
     Balances at
December 31,
2016
 

2008

     1,006        (132     44        918  

2009

     880        (90     45        835  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     1,886        (222     89        1,753  
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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19. Advances from clients

 

     Contract
Signed
    

Period of

contract

   Amount
contracted
     Dec. 31, 2016      Dec. 31, 2015  
              Accumulated revenue      Accumulated revenue  

Contract

            Appropriated      To be
appropriated
     Appropriated      to be
appropriated
 

1 optical fiber pair for 181 km

     08/08/2011      10 years      2,187        1,149        1,041        930        1,257  

1 optical fiber pair for 46 km

     12/10/2012      20 years      925        185        740        138        787  

1 optical fiber pair for 231 km

     12/04/2013      20 years      3,822        584        3,238        392        3,430  

Other

           515        495        20        460        55  
        

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

           7,449        2,413        5,039        1,920        5,529  
        

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Current

                 460           460  
              

 

 

       

 

 

 

Non-current

                 4,579           5,069  
              

 

 

       

 

 

 

The contracts related to the advances from clients are for irrevocable concession of dark fiber pairs, not including the grant of any equipment or provision of any telecommunication services.

The contracts have average duration of 17 years and do not contain clauses for renewal or option for sale of the assets. The revenue linked to these contracts, recognized in the year ended December 31, 2016, was R$ 493.

 

20. Provisions for risks

 

     Dec. 31,
2016
     Dec. 31,
2015
 

Civil cases

     —          313  

Employment-law cases

     82        —    
  

 

 

    

 

 

 
     82        313  
  

 

 

    

 

 

 

On December 31, 2016, the Company had a provision for risks and contingencies identified by management of R$ 83 (R$ 313 on December 31, 2015), representing employment-law claims, in which the chances of loss have been assessed as ‘probable’.

Classification of the contingencies in relation to expectation of loss

 

     Chances of loss assessed as:  
     ‘Remote’      ‘Possible’      ‘Probable’      Total  

Tax cases (a)

     80        —          —          80  

Employment-law cases (b)

     188        1,801        82        2,071  

Civil cases (c)

     31        479        —          510  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     299        2,280        82        2,661  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) The tax cases are for claims of incorrect allocation of tax liabilities in charging of social contributions in the telecommunication sector (Fust/Funtel), which Anatel has the responsibility for collecting. There are also tax disputes on the legitimacy of the manner of joint charging of federal and state taxes, and also defenses in tax execution.
(b) A great majority of the employment law cases are from employees of other companies, contractual partners of CemigTelecom, in which CemigTelecom is included as defendant, in which the plaintiff requests concession of salary equality and the same advantages that the Company pays to its employees.
(c) The civil cases include a class action by the Public Attorney’s Office of Minas Gerais, questioning the legality of outsourcing of services, where the manpower employed is alleged to be related to the Company’s end-activity. Judgment was given against CemigTelecom at first instance and it was ordered to pay a fine of R$ 200, and prohibited from continuing to employ outsourced labor in these activities. In 2014, the Company obtained an injunction from the Higher Employment Law Appeal Court, suspending the effects of the first instance judgment until the result of a General Precedent Case currently before the Federal Supreme Court. The Company’s lawyers have assessed the chances of loss as ‘possible’ and in the event of the judgment against it being upheld the Company may be compelled to carry out part or all of those activities with direct employees. On March 22, 2017, the lower house of Congress approved Draft Law 4302/1998, which closes the discussion by allowing companies to outsource their end-activities. This Draft Law was sanctioned by the President of the Republic and published in the Federal Official Gazette on March 31, 2017.

 

 

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21. Related party transactions

CemigTelecom is a wholly-owned subsidiary of Companhia Energética de Minas Gerais S.A – Cemig, which has as its principal stockholders, with the right to vote, the Government of the State of Minas Gerais (51%) and Andrade Gutierrez Concessões Energia (20%). The controlling group, Cemig, also has direct stockholding interests in the following principal companies: Axxiom Soluções Tecnológicas S.A. (49%), Cemig Geração e Transmissão S.A. (100%), Cemig Distribuição S.A. (100%), Companhia de Gás do Estado de Minas Gerais S.A. – Gasmig (99.57%), Rosal Energia (100%), Sá Carvalho (100%), Light S.A. (26.06%) and Transmissora Aliança de Energia Elétrica – TAESA (31.54%).

The Company considers as related parties, as well as its affiliated company (‘Ativas’), the controlling stockholder and its related legal entity, companies or people that directly or indirectly have significant influence of the management of the Company, the private pension plan entities (Forluz) and the administrator of the health and dental plan (Cemig Saúde), in which the Company is co-sponsor jointly with the other companies of the Cemig Group and the managers and employees of the Company.

Asset transactions (sales) – The principal asset commercial transactions maintained by the Company with related parties concern the sale of circuits and other telecommunication services in general, in which the companies of the controlling group, Cemig, currently account for 15.11% of the Company’s billing (12.79% in 2015).

Liability transactions (purchases) – The principal liability transactions of the Company with related parties are the supply of electricity to feed the telecommunications equipment, provision of services of management and maintenance of the telecommunications network, and rental (sharing) of the power transmission and distribution infrastructure for installation of telecommunication cables and equipment.

The affiliated company Ativas has an item in its accounts receivable, from the minority stockholders, in the amount of R$ 6,958, relating to the indemnity clause arising from liabilities pre-existing, or not revealed, on the date of the transaction, as specified in the investment contract signed on August 25, 2016 between CemigTelecom, Ativas and Sonda Procwork Outsourcing Informática Ltda. Of this amount recorded, 49% is attributed as the responsibility of CemigTelecom, and a provision was constituted of R$ 3,410 in relation to this.

The principal balances of assets and liabilities on December 31, 2016 and the transactions that influenced the result for the period, in relation to transactions with related parties, arise from transactions made for conditions and periods agreed between the parties for the respective types of operation.

 

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Balances on December 31, 2016

 

     Dec. 31, 2016      Accumulated in
the year
 

Companhia Energética de Minas Gerais

   Assets      Liabilities      Sales      Bought  

Telecoms services

     26        —          —          —    

Reimbursement of costs of seconded personnel

     1,170        2,566        1,653        1,878  

Other

     3        —          3        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,199        2,566        1,656        1,878  
  

 

 

    

 

 

    

 

 

    

 

 

 

Cemig Distribuição S.A.

                           

Telecoms services

     3,399        —          11,870        —    

Revenue from supply of electricity

     —          263        —          3,158  

Network maintenance services

     —          3,319        —          1,878  

Right of way/infrastructure

     —          2,771        —          3,955  

Other

     38        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3,437        6,353        11,870        8,991  
  

 

 

    

 

 

    

 

 

    

 

 

 

Cemig Geração e Transmissão S.A.

                           

Telecoms services

     272        —          3,255        —    

Network maintenance services

     —          328        —          187  

Other

     23        —          —          16  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     295        328        3,255        203  
  

 

 

    

 

 

    

 

 

    

 

 

 

Fundação Forluminas de Seguridade Social (‘Forluz’)

                           

Telecoms services

     4        —          61        —    

Private pension plan

     —          482        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     4        482        61        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Cemig Saúde (Health)

                           

Communication services

     2        —          63        —    

Medical and dental care

     —          228        —          9  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2        228        63        9  
  

 

 

    

 

 

    

 

 

    

 

 

 

Companhia de Gás de Minas Gerais (Gasmig),

                           

Communication services

     21        —          193        —    

Reimbursement of costs of seconded personnel

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     21        —          193        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Dec. 31, 2016      Accumulated in
the year
 
     Assets      Liabilities      Sales     Bought  

Entities linked to the Minas Gerais State Government

                          

Current

          

Communication services

     94        —          659       —    

Recoverable taxes – ICMS

     1,552        2,034        (25,851     —    

Non-current

          

Recoverable taxes – ICMS

     2,020        —          —         —    
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     3,666        2,034        (25,192     —    
  

 

 

    

 

 

    

 

 

   

 

 

 

Axxiom

          

Communication services

     3        —          40       —    

Software maintenance

     —          131        —         1,078  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     3        131        40       1,078  
  

 

 

    

 

 

    

 

 

   

 

 

 

Ativas Data Center S.A.

                          

Communication services

     249        —          2,474       —    

Indemnity for contingencies in Ativas

     —          3,410        —      

Data Center Outsourcing Service

     —          56        —         739  

Reimbursement of costs of seconded personnel

     —          —          318       —    
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     249        3,466        2,792       739  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total at December 31, 2016

     8,876        15,588        (5,262     12,898  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

Balances on December 31, 2015

   Dec. 31, 2015      Accumulated in
the period
 
     Assets      Liabilities      Sales      Bought  

Companhia Energética de Minas Gerais

                           

Communication services

     26        —          —          —    

Reimbursement of costs of seconded personnel

     389        1,286        1,132        1,065  

Other

     3        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     418        1,286        1,132        1,065  
  

 

 

    

 

 

    

 

 

    

 

 

 

Cemig Distribuição S.A.

                           

Communication services

     955        —          11,655        —    

Revenue from supply of electricity

     —          861        —          5,124  

Network maintenance services

     —          1,418        —          1,890  

Sharing of infrastructure

     —          647        —          4,786  

Other

     38        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     993        2,926        11,655        11,800  
  

 

 

    

 

 

    

 

 

    

 

 

 

Cemig Geração e Transmissão S.A.

                           

Communication services

     273        —          3,410        —    

Network maintenance services

     —          141        —          188  

Other

     23        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     296        141        3,410        188  
  

 

 

    

 

 

    

 

 

    

 

 

 

Fundação Forluminas de Seguridade Social (‘Forluz’)

                           

Communication services

     9        —          102        —    

Private pension plan

     —          374        —          1,097  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     9        374        102        1,097  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Balances on December 31, 2015

   Dec. 31, 2015      Accumulated in
the period
 
     Assets      Liabilities      Sales     Bought  

Cemig Saúde (Health)

                          

Communication services

     2        —          56       —    

Medical and dental care

     —          176        —         408  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     2        176        56       408  
  

 

 

    

 

 

    

 

 

   

 

 

 

Companhia de Gás de Minas Gerais (Gasmig),

                          

Communication services

     19        —          172       —    

Reimbursement of costs of seconded personnel

     —          —          —         —    
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     19        —          172       —    
  

 

 

    

 

 

    

 

 

   

 

 

 

Entities linked to the Minas Gerais State Government

                          

Current

          

Recoverable taxes – ICMS

     3,099        1,425        (17,927     —    
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     3,099        1,425        (17,927     —    
  

 

 

    

 

 

    

 

 

   

 

 

 

Axxiom

                          

Communication services

     3        —          37       —    

Software maintenance

     —          21        —         460  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     3        21        37       460  
  

 

 

    

 

 

    

 

 

   

 

 

 

Ativas Data Center S.A.

                          

Communication services

     150        —          1,736       —    

Data Center Outsourcing Service

     —          22        —         988  

Reimbursement of costs of seconded personnel

     29        —          347       22  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     179        22        2,083       1,010  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total at December 31, 2015

     5,018        6,371        720       16,028  
  

 

 

    

 

 

    

 

 

   

 

 

 

Fixed income fund – Pampulha – The Company is a unit holder of the Pampulha Fund, which has the characteristics of fixed income and follows the investment policy of the Company. On December 31, 2016 the amounts invested by the fund, corresponding to CemigTelecom’s participation, are recorded in Cash and cash equivalents, and Securities, in Current and Non-Current assets.

The Cemig Group has investments in the Pampulha Fund (see breakdown below), which in turn has investments in promissory notes and debentures of companies of the Cemig Group.

 

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               Assets corresponding
to CemigTelecom’s
participation
 

Pampulha Fund

  

Period of validity

  

Contractual conditions

   Dec. 31,
2016
     Dec. 31,
2015
 

CemigTelecom investment in Pampulha Fund – ref. Axxiom (Debentures)

   April 2013 to Jan. 2016    112.0% of CDI + 1.3% p.a.      —          173  
  

 

  

 

  

 

 

    

 

 

 

CemigTelecom investment in Pampulha Fund – ref. CEMIG GT (Debentures)

   Jan. 2014 to Dec. 2016    CDI + 0.8% p.a.      —          761  
  

 

  

 

  

 

 

    

 

 

 

CemigTelecom investment in Pampulha Fund – ref. CEMIG GT (Debentures)

   Apr. 2013 to Feb. 2017    CDI + 0.9% p.a.      15        165  
  

 

  

 

  

 

 

    

 

 

 

CemigTelecom investment in Pampulha Fund – ref. CEMIG GT (Debentures)

   Jul. 2015 to Jul 2018    CDI + 1.60%      74        817  
  

 

  

 

  

 

 

    

 

 

 

CemigTelecom investment in Pampulha Fund – ref. ATIVAS (Notes)

   Jul. 2014 to Oct. 2016    CDI + 3.5% p.a.      —          332  
  

 

  

 

  

 

 

    

 

 

 

CemigTelecom investment in Pampulha Fund – ref. ATIVAS (Notes)

   Jul. 2014 to Oct. 2016    CDI + 3.5% p.a.      —          415  
  

 

  

 

  

 

 

    

 

 

 

CemigTelecom investment in Pampulha Fund – ref. ETAU (Debentures)

   Dec. 2014 to Dec. 2019    108% of the CDI Rate      14        154  
  

 

  

 

  

 

 

    

 

 

 

CemigTelecom investment in Pampulha Fund – ref. CEMIG GT (Debentures)

   Mar. 2016 to Dec. 2018    CDI + 3.9%      14        —    
  

 

  

 

  

 

 

    

 

 

 

CemigTelecom investment in Pampulha Fund – ref. CEMIG GT (Debentures)

   Jul. 2016 to Dec. 2018    CDI + 4.2% p.a.      13        —    
  

 

  

 

  

 

 

    

 

 

 

CemigTelecom investment in Pampulha Fund – ref. Axxiom (Debentures)

   April 2016 – Jan. 2017    112.00% of CDI Rate      8        —    
  

 

  

 

  

 

 

    

 

 

 

The return of the Pampulha Fund, in the year ended December 31, 2016, was R$ 2,325 (R$ 1,566 in December 31, 2015).

Loan – On December 16, 2016, CemigTelecom signed a loan contract with Cemig in the amount of R$ 18,000, to complement the funds necessary for full payment of the first Promissory Note. This was for 137 days, with payment scheduled for April 30, 2017, in a single payment, plus interest at 132.9% of the average DI (Interbank Deposit) rate. The balance recorded at December 31, 2016, plus financial charges, calculated pro-rata temporis was R$ 18,134 – see Note 15.

Remuneration of Managers – In 2016 the Company paid remuneration and other benefits to the Managers totaling R$ 3,579 (R$ 2,934 in 2015), as follows:

 

Position

   Remuneration      Benefits      Total  
     Dec. 31,
2016
     Dec. 31,
2015
     Dec. 31,
2016
     Dec. 31,
2015
     Dec. 31,
2016
     Dec. 31,
2015
 

Chief Officers

     2,489        2,213        291        189        2,780        2,402  

Board members

     799        532        —          —          799        532  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3,288        2,745        291        189        3,579        2,934  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

On April 29, 2016 a General Meeting of Stockholders of the Company set the global annual limit for the 2016 business year of R$ 5,450 (R$ 3,900 for the 2015 business year) for remuneration of Chief Officers, the Board of Directors and the Audit Board.

 

 

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Private Pension Plans and other benefits to employees – As per Note 28, the Company is co-sponsor of the private pension plan for Forluz and Cemig Saúde, which is responsible for management of medical and dental plan of the employees. The contributions by the Company were as follows:

 

     Dec. 31, 2016      Dec. 31, 2015  
     Forluz      Cemig
Saúde
     Forluz      Cemig
Saúde
 

Mixed Benefit Private Pension Plan (‘Plan B’)

     3,235        —          2,549        —    

Pró-Saúde Integrado (PSI) Plan

     —          1,469        —          1,077  

Dental Plan

     —          52        —          43  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3,235        1,521        2,549        1,120  
  

 

 

    

 

 

    

 

 

    

 

 

 

Additionally, as well as the benefits specified in Law, the Company also gave its employees: access to a day-care center, group life insurance, restaurant and food meal tickets, and culture vouchers.

Employees’ profit shares – The Company’s bylaws specify distribution to the employees as profit shares of an annual amount as a way of incentivizing the employees to achieve better results. The indicators and targets are established periodically in a collective working negotiation. In the year 2016, the Company made a profit for distribution, and the amount provisioned was of the order of R$ 1,856, for payment of profit shares by April 2017. A tranche, of R$ 599, was paid in 2016, and on December 31, 2016 the amount of the provision for employees’ profit shares was R$ 1,257.

 

22. Stockholders’ equity

 

(a) Share capital

On February 18, 2016 Cemig mad a capital increase in CemigTelecom of R$ 16,660, having subscribed 16,660 new nominal shares without par value, thus altering the Company’s share capital from R$ 225,081 to R$ 241,741 from that date.

The capital subscribed and paid up on December 31, 2016 and 2015, is in nominal common shares, as follows:

 

December 31, 2016

                    

Shareholders

   Shares      Amount      Stake  

Companhia Energética de Minas Gerais

     397,683,384        241,741        100

Other

     1        —          —    
  

 

 

    

 

 

    

 

 

 

Total

     397,683,385        241,741        100
  

 

 

    

 

 

    

 

 

 

 

 

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December 31, 2015

                    

Shareholders

   Shares      Amount      Stake  

Companhia Energética de Minas Gerais

     381,023,384        225,081        100

Other

     1        —          —    
  

 

 

    

 

 

    

 

 

 

Total

     381,023,385        225,081        100
  

 

 

    

 

 

    

 

 

 

 

(b) Remuneration to stockholders

The stockholders are guaranteed a minimum mandatory dividend of 50% of the adjusted net profit of each year.

 

(c) Legal reserve

This is constituted as 5% of the net profit found in any business year in accordance with Article 193 of Law 6404/76, up to the limit of when it totals 20% of the share capital.

As a result of a balance of accumulated losses, no constitution of the legal reserve was made in 2016.

 

(d) Retained earnings reserve

This aims to strengthen working capital and meet needs for funds for the Company’s investment in the subsequent years.

 

(e) Profit (loss) per share

The profit (loss) and the weighted average number of common shares used in the calculation of the basic and diluted profit per share are as follows:

 

     2016      2015  

Basic and diluted profit (loss) per share

     9,983        (35,831
  

 

 

    

 

 

 

Profit (loss) for the period

     397,683        381,023  
  

 

 

    

 

 

 

Weighted average number of common shares in circulation

     

(thousands of shares)

     
  

 

 

    

 

 

 

Basic and diluted profit (loss) per share (in Reais)

     25.10        (94.04
  

 

 

    

 

 

 

The Company does not have any dilutive instruments. Hence diluted profit (loss) is the same as basic profit (loss).

 

23. Net revenue

 

     2016     2015  

Dedicated circuits

     103,698       91,541  

Transport of signal

     7,374       34,634  

Integrated services

     21,973       17,497  

Other

     3,478       3,427  
  

 

 

   

 

 

 

Gross revenue

     136,523       147,099  
  

 

 

   

 

 

 

Taxes, returns, adjustment to present value and discounts

     (34,077     (26,485
  

 

 

   

 

 

 

Net revenue

     102,446       120,614  
  

 

 

   

 

 

 

 

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24. Costs and expenses

 

Classification by type

   2016      2015  

Network infrastructure

     (13,258)        (14,413)  

Electricity

     (3,342)        (5,298)  

Depreciation and amortization

     (37,741)        (48,968)  

Maintenance and repair service

     (17,553)        (19,680)  

Personnel

     (25,479)        (17,517)  

Outsourced services

     (3,293)        (3,159)  

Real estate properties rented

     (1,701)        (1,976)  

Equity method gains in non-consolidated investees, net

     (27,165)        (28,833)  

PIS and Cofins taxes on financial leasing

     (1,636)        —    

Indemnity for contingencies in Ativas

     (3,410)        —    

Provision for obsolescence

     (1,149)        —    

Other

     (1,041)        (692)  
  

 

 

    

 

 

 

Total

     (136,768)        (140,536)  
  

 

 

    

 

 

 

 

(*) Expenses on personnel allocates in telecommunications network construction projects were recorded in Fixed Assets. They totaled R$ 7,865 in 2016, and R$ 6,923 in 2015.

 

Classification by function

   2016      2015  

COST OF SERVICES PROVIDED

     (67,868)        (83,367)  

Selling expenses

     (523)        (1,280)  

General and administrative expenses

     (34,184)        (26,364)  

Equity method gains in non-consolidated investees, net

     (27,165)        (28,833)  

Other expenses

     (7,028)        (692)  
  

 

 

    

 

 

 

Total

     (136,768)        (140,536)  
  

 

 

    

 

 

 

 

25. Other operational revenues

 

Other operational revenues

      
     2016      2015  

Appreciation of assets received from Eletronet (Note 13)

     20,423        —    

Gain on financial leasing

     3,215        —    

Gain on financial derivative (Note 27)

     4,586        —    

Fines and penalty payments

     283        1,956  

Other revenues

     384        —    
  

 

 

    

 

 

 

Total

     28,891        1,956  
  

 

 

    

 

 

 

 

 

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26. Financial revenue and expenses recognized in the P&L

 

Financial revenues

      
     2016      2015  

Revenue from cash investments

     2,792        2,185  

Interest (received)

     169        640  

Other financial revenues

     1,038        1,228  
  

 

 

    

 

 

 

Total

     3,999        4,053  
  

 

 

    

 

 

 

 

Financial expenses

      
     2016     2015  

Interest (paid)

     (7,956     (5,408

Other financial expenses

     (1,205     (370
  

 

 

   

 

 

 

Total

     (9,161     (5,778
  

 

 

   

 

 

 

 

27. Financial instruments

 

(a) Financial risk management

The Company has exposure to the following risks arising from the use of financial instruments:

 

    Credit risk

 

    Market risk

 

    Liquidity risk

This note presents information on the Company’s exposure to each of these risks, the Company objectives, policies and processes for measurement and management of risk, and the Company’s capital management.

Risk management structure

The Board of Directors has the global responsibility for establishment and supervision of the Company’s risk management structure. The risk management policies applied by the Company and its jointly-controlled subsidiary entity are subordinated to those of the Cemig Group, which is responsible for development and monitoring of the risk management policies of the Company as a whole.

The Company’s risk management policies are established to identify and analyze the risks faced, to define appropriate risk limits and controls and to monitor risks and adherence to the limits established. The risk management policies and systems are frequently reviewed to reflect changes in market conditions and in the Company’s activities. The Company, through its training and management rules and procedures, is to develop a disciplined and constructive control environment, in which all the employees understand their roles and obligations.

 

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CREDIT RISK

Credit risk is the risk of financial loss in the event that a client or counterparty in a financial instrument fails to comply with its contractual obligation, which arise principally from the Company’s receivables from clients and investment securities.

The Company’s sales policies are subordinated to the credit policies set by its Management and aimed to minimize any problems arising from default by its clients. The portfolio of clients is mainly in large fixed and mobile telephone operators and operators of cable TV and internet broadband, and also corporate clients and internet service providers, as well as the parent company itself. In view of the change of focus of the Company aiming to increase its market share in the corporate and ISP providers market, and the gradual decline in operators’ market share, since 2015, the risk of loss on receipt of credit by the Company has been significantly diluted through diversification of its portfolio of clients. The sales efforts for the corporate market have been sufficient to offset the losses of cancellation of circuits by operators and to significantly reduce the market risk. The share of CemigTelecom’s gross revenue provided by operators fell from 58% in 2015 to 35% in 2016, while the number of corporate clients, including internet service providers, increased from 216 in January 2016 to 755 in December 2016. Further, as from 2015 the Company’s management has reviewed the policy for granting of credit. Even so, the main instrument that guarantees minimization of credit risk continues to be the Company’s right to interrupt supply of signal in the event of noncompliance with a contract (including lack of payment).

The Company’s exposure to credit risk is principally influenced by the individual characteristics of each client. However, Management also takes into account the market segment in which clients operate, since this factor can influence credit risk, especially through the sensitivity of the telecommunication sector to the economic services of the country. The maximum concentration of the Company’s revenue attributable to a single client is approximately 15%.

The level of losses arising from lack of payment is insignificant. This can be attributed to the fact that the policy established by the Company specifies constant monitoring of default, in which contractual penalties are applied in the event of delay in payment, and can in extreme cases even culminate in discontinuation of services to clients.

The Company establishes a provision for impairment, which represents its estimate of losses in relation to accounts receivable from clients and other creditors. The sensitivity and the expectation of losses related to significant individual risks are the only parameters considered in this analysis. This is because the Company is substantially centered on the market of service to the large telecoms operators and the corporate market, and for this reason historic losses or global, geographical sector analysis do not usually provide a reasonable basis to estimate losses on accounts receivable. At December 31, 2016 the Company has a provision for losses on doubtful receivables of R$ 1,425 (R$ 2,459 in 2015), which represents 7% (13% in 2015) of the total balance of accounts receivable and not received, and 18% (51% in 2015) of past due accounts receivable.

In relation to the risk of losses arising from insolvency of the financial institutions at which the Company has deposits, the Cemig Group has had a cash investment policy in effect since 2004, in which each institution is analyzed according to criteria of current liquidity, degree of leverage, level of default, profitability, and costs. Additionally, the Company takes into consideration the ratings given by three financial risk rating agencies. The Company assigns each financial institution a maximum fund allocation limit, which is reviewed for appropriateness both periodically and also in the event of any change in the macroeconomic scenarios of the Brazilian economy.

 

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MARKET RISK

Market risk is the risk that exposes the Company to changes in market prices, such as exchange rates and interest rates, which can have a significant financial impact on the Company. The objective of market risk management is to keep exposures to market risks under control, within acceptable parameters, and at the same time to optimize return.

 

1. Currency risk

The Company is not subject to currency risk in the balances payable to suppliers or loans denominated in a currency other than its functional currency.

 

2. Interest rate risk

Interest rate risk arises from issuance of non-convertible securities. These liabilities, when linked to variable interest rates, expose the Company to cash flow risk. At the same time, liabilities linked to fixed interest rates expose the Company to the risk of fair value associated with interest rates.

The Company is permanently evaluating its exposure to interest rate risk. Various scenarios are simulated, taking into account the alternatives of refinancing, renewal of existing positions or acquisition of new financing’s and alternative hedges.

The Company has exposure to the risk of increase in interest rates, with an effect on loans with floating interest rates linked principally to indices referenced to the basic interest rate in Brazilian economy, in the amount of R$ 101,372 (Note 15).

In relation to the most significant interest rate risk, the Company estimates that, in a probable scenario, the CDI rate will be approximately 10.40%, and the TJLP will be 7.10%. The Company has made a sensitivity analysis of the effects on the Company’s profit arising from higher values for the indicators in relation to this ‘probable’ scenario. As part of the definitions of this analysis, the expected variation in the CDI rate has been considered to be similar to the variation in the Selic rate.

The table below shows the sensitivity of the financial instruments. It is prepared in accordance with CVM Instruction 475/2008, to show the balances of the principal assets and liabilities, calculated at a rate projected up to the final settlement date of each contract, considering a probable scenario (Scenario I), appreciation of 25% (Scenario II), and appreciation of 50% (Scenario III).

The purpose of this sensitivity analysis is to measure the impact of the changes in market variables on the Company’s financial instruments referred to, assuming all other market indicators are constant. These amounts may be different, at the time of settlement, from the figures shown above, due to the estimates used in their preparation. The table below includes the amounts of principal and interest.

 

     Book      Risk of increase in domestic interest
rates – scenarios (percent p.a.)
 
     value      Base      Scenario I      Scenario II      Scenario III  
            CDI      CDI      CDI      CDI  
            14.00%      9.38%      11.73%      14.07%  

Assets

              

Cash and cash equivalents

              

Fixed-income funds

     773        881        846        864        882  

Securities

              

Fixed-income funds

     1,938        2,209        2,120        2,165        2,211  
     

 

 

    

 

 

    

 

 

    

 

 

 

Positive net exposure

        3,090        2,966        3,029        3,093  
     

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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3. Price risk

The Company operates in a business segment where prices are freely agreed, thus there is no need to maintain a policy of mitigation of this type of risk.

Fair value of financial instruments

The balances of financial instruments used by the Company on December 31, 2016 are, mostly, recorded at accounting cost, which does not significantly differ from the corresponding estimated market value. They are classified as follows:

 

Financial assets held to maturity: This category includes financial assets which are expected to be held to maturity. These are valued at amortized cost using the effective rates method, less any impairments. After the initial evaluation, investments held to maturity are valued at amortized cost using the effective rates method, less any impairments.

 

Financial assets measured at fair value through profit or loss: Fixed-income security held for trading are in this category. They are valued at fair value through profit or loss, as per Level 2.

 

Loans and receivables: Balances receivable from clients are in this category. They are recognized at their nominal realization value, which is similar to fair value.

 

Loans: Measured at amortized cost, using the effective interest method.

 

Suppliers: These are balances payable to suppliers, and are recognized at nominal settlement value, similar to fair value.

Fair value is a market-based measurement based on assumptions that market participants would use in pricing an asset or liability. The Fair Value Hierarchy aims to increase consistency and comparability: it divides the inputs used in measuring fair value into three broad levels, as follows:

 

Level 1 – Active market – Quoted prices: A financial instrument is considered to be quoted in an active market if the prices quoted are promptly and regularly made available by an exchange or organized over-the-counter market, by operators, by brokers or by a market association, by entities whose purpose is to publish prices, or by regulatory agencies, and if those prices represent regular arm’s length market transactions made without any preference.

 

Level 2 – No active market – Valuation technique: For an instrument that does not have an active market, fair value should be found by using a method of valuation/pricing. Criteria such as data on the current fair value of another instrument that is substantially similar, or discounted cash flow analysis or option pricing models, may be used. The objective of the valuation technique is to establish what would be the transaction price on the measurement date in an arm’s-length transaction motivated by business considerations.

 

Level 3 – No active market – No observable inputs: The fair value of investments in securities for which there are no prices quoted on an active market, or of derivatives linked to them which are to be settled by delivery of unquoted securities,

In the 2015 business year the Company did not operate with derivatives.

LIQUIDITY RISK

Liquidity risk is the risk that the Company may find difficulties in complying with the obligations associated with the financial liabilities that are settled by payment in cash or with another financial asset. The Company’s approach to management of liquidity is to guarantee, to the maximum possible, that there is always sufficient liquidity to comply with its obligation on maturity, under normal conditions and stress conditions, without causing unacceptable losses or risk of loss to the Company’s reputation.

 

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The Company operates with a profit margin that provides it with positive operational cash flow. Typically, the Company maintains immediate cash availability ensuring it can comply with commitments for at least 60 days’ operation, including financial obligations and investments. Events with potential impact arising from extreme circumstances that cannot be reasonably foreseen, such as natural disasters or major economic crisis, are not taken into consideration in this analysis.

To provide feasibility for the entry of a new partner into Ativas, CemigTelecom assumed a significant amount in short-term debt. As a result, on December 31, 2016 CemigTelecom’s current liabilities exceeded its current assets by R$ 74,312. On December 31, 2016, CemigTelecom’s short and long-term loans and debentures totaled R$ 63,751 and R$ 37,621 respectively, with maturities in the second and fourth quarters of 2017 in the amounts of R$ 18,134 and R$ 46,310, respectively; however, the Company reported positive operational cash flow in 2016 and 2015 of R$ 46,827 and R$ 56,971 respectively.

For the purpose of amortization of the program debt maturities, the Company expects to raise significant amounts of capital from third parties and/or entry of cash from its stockholder, and it can continue to depend on the contracting of additional debts.

The Company has various initiatives to increase liquidity through signing of new loan contracts to roll over debts, and also has the benefit of financial support from its controlling stockholder, Companhia Energética de Minas Gerais – Cemig.

Management believes that the Company has satisfactory capacity to generate operational cash flow, and the conditions necessary to comply with its short-term obligations and continue to make the necessary investments for continuation of the projects in progress.

The Company manages liquidity risk with a group of methods, procedures and instruments that are coherent with the complexity of the business, and applied in permanent control of the financial processes, to guarantee appropriate risk management.

The Company manages liquidity risk by permanently monitoring its cash flow in a conservative, budget-oriented manner. Balances are projected monthly, for a period of 12 months ahead, and daily liquidity balances are projected over 90 days.

Short-term allocations also obey rigid principles established in a Cash Investment Policy, investing in exclusive private credit investment funds. Excess amounts are applied in repos, remunerated by the CDI rate, as per the orientations set by the Cemig Group, with a view to consolidating management of the funds available, and do not depend on any individual analysis by CemigTelecom.

In managing cash investments, the Company seeks to obtain profitability through a rigid analysis of financial institutions’ credit, applying operational limits for each bank, based on assessments that take into account their ratings, exposures and balance sheets.

The table below shows the Company’s financial liabilities, by maturity, including the portions of future principal and interest to be paid in accordance with contractual clauses.

 

Non-derivative financial liabilities

   Dec. 31,
2016
     Contractual
flow
     Up to 1
year
 

Cemig loan

     18,134        18,134        18,134  

Sonda loan

     46,310        45,617        45,617  
  

 

 

    

 

 

    

 

 

 

Total

     64,444        63,751        63,751  
  

 

 

    

 

 

    

 

 

 

 

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(b) Criteria and assumptions used in the calculation of market values

Cash and cash equivalents, securities, accounts receivable from clients, suppliers: due to the short-term nature of these balances, the amounts reported are close to the fair values of the instruments on the reporting date.

Debentures: The fair value of the debentures on December 31, 2015 was R$ 15,345.

 

28. Benefits to employees

The obligations under employee benefit plan include private pension plans, a health plan, a dental plan and group life insurance.

Private pension plan – Forluz

The Company is co-sponsor of Fundação Forluminas de Seguridade Social, or Forluz, a nonprofit legal entity created to provide its participants and related dependents with an income to supplement retirement and other pensions.

The pension plan, co-sponsored by the Company, named the ‘Mixed Benefit Private Pension Plan – Plan B’, comprises benefits such as: (i) Addition to Pension for Time of Service, Special Reasons or Age (MAT); (ii) Addition to Retirement Pension due to Disablement (MAI); (iii) Annual Bonus (AA); (iv) Continuous Income for Death (RCM); and Imprisonment Assistance (AR).

The Sponsor’s contribution to this plan is 27.52% for the portion with defined-benefit characteristics – this refers to coverage for disablement and death for participants still employed, and is used to amortize obligations defined by an actuarial calculation. The remaining 72.48%, for the part of the plan with defined contribution characteristics, goes to the nominal accounts of the participants. These contributions are recognized in the Profit & loss account in accordance with the payments made by the sponsors under Personnel expenses.

Health plan – Cemig Saúde

The Company is co-sponsor of health and dental plans of its employees, which are administered by Cemig Saúde.

The amounts of the contributions to the pension, health and dental plans are determined annually, by the amounts considered to be sufficient for coverage of the respective expenses expected in each business year, as per an evaluation made by an independent actuary contracted for the purpose. The three plans are optional to join, for the employee, and the participants make a contribution equal to that of the employee.

In this Note the Company demonstrates the net actuarial assets/liabilities and the expenses in connection with the Retirement Plan, Health Plan and Dental Plan, in accordance with the terms of CPC Technical Pronouncement 33 (Benefits to employees) and an independent actuarial opinion for base-date December 31, 2016.

 

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This table shows a reconciliation of the actuarial assets and liabilities:

 

     Forluz     Cemig Saúde (Health)  
     Mixed Benefit Private
Pension Plan (‘Plan B’)
    Integrated Pro-Saúde
(PSI) Health Plan
    Dental Plan  

December 31, 2016

      

Fair value of plan assets

     (2,112     —         —    

Present value of the actuarial obligation of the plan, net

     2,112       (2,695     (106
  

 

 

   

 

 

   

 

 

 

Net actuarial assets (liabilities) recognized

     —         (2,695     (106
  

 

 

   

 

 

   

 

 

 

 

     Forluz     Cemig Saúde (Health)  
     Mixed Benefit Private
Pension Plan (‘Plan B’)
    Integrated Pro-Saúde
(PSI) Health Plan
    Dental Plan  

December 31, 2015

      

Fair value of plan assets

     1,350       —         —    

Present value of the actuarial obligation of the plan, net

     (1,578     (1,174     (52
  

 

 

   

 

 

   

 

 

 

Present value of funded obligations (total)

     (228     (1,174     (52

Changes in the limiting effect of the

net defined benefit assets on the asset ceiling

     —         —         —    
  

 

 

   

 

 

   

 

 

 

Net actuarial assets (liabilities) recognized

     (228     (1,174     (52
  

 

 

   

 

 

   

 

 

 

This table shows the changes in the present value of the benefit obligation:

 

     Mixed Benefit Private
Pension Plan (‘Plan B’)
    PSI Health Plan     Dental Plan  

Defined-benefit obligation on December 31, 2015

     (1,578     (1,174     (52

Cost of current service

     (70     (104     (5

Interest on the actuarial obligation

     (204     (154     (7

Actuarial (losses) recognized

     (302     (1,281     (43

Benefits paid

     111       18       1  
  

 

 

   

 

 

   

 

 

 

Defined-benefit obligation on December 31, 2015

     (2,043     (2,695     (106
  

 

 

   

 

 

   

 

 

 

This table shows the changes in the fair value of the assets of the pension benefits plan:

 

     Mixed Benefit Private
Pension Plan (‘Plan B’)
 

Fair value of the plan assets at December 31, 2015

     1,350  

Real return on the investments

     840  

Contributions from the employer

     33  

Benefits paid

     (111
  

 

 

 

Fair value of the plan assets at December 31, 2016

     2,112  
  

 

 

 

 

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This table shows the annual expense on the plans:

 

     Mixed Benefit Private
Pension Plan (‘Plan B’)
    Health Plan     Dental Plan     Total  

Cost of current service

     (70     (104     (5     (179

Net interest on the defined-benefit liabilities (assets)

     (28     (154     (7     (189
  

 

 

   

 

 

   

 

 

   

 

 

 

Expense recognized in the Profit & loss account

     (98     (258     (12     (368
  

 

 

   

 

 

   

 

 

   

 

 

 

Table showing the change in net actuarial assets (liabilities):

 

     Mixed Benefit Private
Pension Plan (‘Plan B’)
    Health Plan     Dental Plan     Total  

Net liabilities on December 31, 2015

     (228     (1,174     (52     (1,454

Expense recognized in Profit and loss account

     (98     (258     (12     (368

Gain (loss) recognized in Other comprehensive income

     363       (1,281     (43     (961

Changes in the limiting effect of the net defined benefit assets on the asset ceiling

     (70     —         —         (70

Contributions paid

     33       18       1       52  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net liabilities on December 31, 2016

     —         (2,695     (106     (2,801
  

 

 

   

 

 

   

 

 

   

 

 

 

Actuarial assumptions used

The assumptions used by the independent actuary in determination of the actuarial calculations are as follows:

 

     Mixed Benefit Private
Pension Plan (‘Plan B’)
Plan B
     Integrated
Pro-Saúde Plan (PSI)
     Dental Plan  
     Dec. 31, 2016      Dec. 31, 2015      Dec. 31, 2016      Dec. 31, 2015      Dec. 31, 2016      Dec. 31, 2015  

Nominal discount rate for the actuarial obligation

     10.50%        13.20%        10.40%        13.14%        10.04%        13.14%  

Nominal expected return on plan assets

     10.50%        13.20%        N/A        N/A        N/A        N/A  

Estimated nominal salary increase index

     6.59%        5.50%        N/A        N/A        N/A        N/A  

Estimated nominal benefit increase index

     4.50%        5.50%        N/A        N/A        N/A        N/A  

Nominal growth rate of medical costs

     N/A        N/A        4.50%        5.50%        4.50%        5.50%  

Estimated long-term inflation

     4.50%        5.50%        4.50%        5.50%        4.50%        5.50%  

General mortality rate table

    

AT-2000M,
20%
smoothing
 
 
 
    

AT-2000M,
20%
smoothing
 
 
 
    

AT-2000M,
20%
smoothing
 
 
 
    

AT-2000M,
20%
smoothing
 
 
 
    

AT-2000M,
20%
smoothing
 
 
 
    

AT-2000M,
20%
smoothing
 
 
 

Disability rate table

    

Álvaro
Vindas
D10%
 
 
 
    
Álvaro
Vindas
 
 
    
Álvaro
Vindas
 
 
    
Álvaro
Vindas
 
 
    
Álvaro
Vindas
 
 
    
Álvaro
Vindas
 
 

Disabled mortality rate

    
Winklevoss
less 30%
 
 
    
Winklevoss
less 30%
 
 
    
Winklevoss
less 30%
 
 
    
Winklevoss
less 30%
 
 
    
Winklevoss
less 30%
 
 
    
Winklevoss
less 30%
 
 

Expected turnover rate

                 

Retirement probability rate

     (a)        (a)        (a)        (a)        (a)        (a)  
        

 

(a) 100% at first age of acquisition of full benefit right.

 

 

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29. Commitments

The Company has contractual obligations and commitments, mainly amortization of loans and financing, contracts to share infrastructure and leasing of dark fiber as follows:

 

R$ ’000

   2017      2018      2019      2020      2021      After 2021      Total  

Sharing of infrastructure

     3,180        2,607        1,178        312        230        —          7,507  

Dark fiber leasing

     2,438        1,966        1,344        83        142        399        6,372  

Loans and financing’s

     69,747        —          —          —          61,944        —          131,691  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     75,365        4,573        2,522        395        62,316        399        145,570  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

30. Insurance

The Company has reassessed the risks involving its telecommunications assets, and the probability of interruption of its operations as a result of potential claim events. This study shows that the probability of simultaneous large-scale adverse events that could represent significant financial operation losses for the Company is significantly remote, due mainly to the diversity of the geographical distribution of the assets exposed to risks. For this reason, the Company’s management has opted, for the moment, not to contract insurance cover against adverse events involving its Operations Center and Headends, and other events that could affect its network equipment, cables and other fixed assets. Since the start of its operations the Company has not experienced any significant losses as a result of the above-mentioned risks. The risk assessment assumptions adopted by the Company, due to their nature, are not part of the scope of an audit of the financial statements, and consequently not examined by the external auditors.

 

31. Subsequent Events

 

i. On March 15, 2017 the Federal Supreme Court, in a judgment on Extraordinary Appeal (RE) 574.706, decided by majority to exclude ICMS tax paid or payable from the base amount on which the PIS and Cofins taxes are calculated, on the grounds that the amount collected as ICMS does not become part of the taxpayer patrimony, so that it cannot be part of the calculation base of the contributions referred to. The Company has Special and Extraordinary Appeals still outstanding on this subject, on which judgment has not yet been given, which indicates good probabilities of success in which it expects to recover amounts unduly paid since 2003, estimated at R$ 7,000. A position statement by the Supreme Court on whether this judgment shall have the effect of obligatory precedent (affecting all cases) is awaited – as is also awaited the application of this understanding to the specific case of CemigTelecom.

 

ii. On January 9, 2017, the Board of Directors of CemigTelecom approved the second issue of nonconvertible debentures, in a single series, for R$ 34,000, with surety guarantee and collateral guarantee by finding assignment of the Issuer receivables in the amount of 130% (one hundred and thirty percent) of the amounts of amortization and remuneration becoming due. On January 20, 2017 the Company’s Board of Directors adjusted the amount to R$ 27,000, and on the same date the Board of Directors of Cemig approved provision of a surety for this transaction. Management believes that receipt of funding from the second debenture issue will be complete by April 15, 2017.

 

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Appendix IX

COMMENTS ON RESULTS FOR

3RD QUARTER 2017

In the quarter ended September 30, 2017 (3Q17), CemigTelecom reports Net operational revenue of R$ 30,593, or 18% more than in 3rd quarter 2016 (R$ 25,952). We attribute this to the Company’s sales efforts, aiming to increase its activities in the segment of internet providers, and the corporate segment, serving both companies and government.

Cost of sales, including depreciation, were 12% higher year-on-year, accompanying the increase in sales; while general and administrative expenses were 29% higher, at R$ 8,051 in 3Q17, vs. R$6,264 in 3rd quarter 2016 (3Q16).

Management’s internal adjusted Ebitda(*) was R$ 13,252, or 11% higher than in 3Q16 (R$11,952), the result of operational efficiency, and was reflected in net profit for the quarter of R$ 535.

As a result of financial leverage, the Company had negative working capital at the end of the quarter of R$ 61,458 (R$ 74,312 on December 31, 2016), improved due to a debenture issue and lengthening of some maturities to 2018 and 2019.

In the first half of 2017 the Company invested R$ 34,734 (R$ 28,459 in the first half 2016), in formation of fixed and intangible assets, with forces concentrated on serving the last mile for clients, who are usually interested in obtaining the associated revenue.

The Management

 

 

(*) Adjusted management Ebitda = Ebitda as per CVM instruction 527/12, adjusted for the effects of equity gain/loss in nonconsolidated investees, and other revenues and expenses that have no effect on cash and cash equivalents.

 

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Cemig Telecomunicações S.A.

Interim Accounting Statements for the quarter ended

September 30, 2017

with external auditor’s report on review of the Quarterly Information

 

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Cemig Telecomunicações S.A.

Interim Accounting information at September 30, 2017

Index

 

External auditor’s report on review of the quarterly information

     1  

Interim accounting information

  

Statement of financial position

     3  

Profit and loss accounts

     4  

Statement of comprehensive income

     5  

Statement of changes in stockholders’ equity

     6  

Statements of cash flow

     7  

Added value statement

     8  

Notes to the interim financial information

     9  

 

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LOGO   

 

 

 

Edifício Phelps Offices Towers

Rua Antônio de Albuquerque, 156 11º andar – Savassi

30112-010 – Belo Horizonte – MG – Brazil

Tel:    +55 31 3232-2100

Fax:    +55 31 3232-2106

ey.com.br

External auditor’s report on review of the quarterly information

To the

Stockholders, Members of the Board of Directors, and Managers of

Cemig Telecomunicações S.A.

Belo Horizonte, Minas Gerais

Introduction

We have reviewed the interim financial statements of Cemig Geração e Telecomunicações S.A. (‘the Company’), contained in the ITR (Quarterly Information) form for the quarter ended September 30, 2017, which comprise the statement of financial position (balance sheet) at September 30, 2017, the related statements of income and comprehensive income for the periods of three and nine months ended on that date, and the statements of changes in equity, and of cash flows, for the period of nine months ended on that date, including the explanatory notes.

The company’s management has the responsibility for preparing the interim financial information in accordance with Technical Pronouncement CPC 21(R1) – Interim Reporting (‘Demonstração Intermediária’), and in accordance with international standard IAS 34 – Interim Financial Reporting, issued by the International Accounting Standards Board (IASB); and also for presenting that information in a manner compliant with the rules issued by the Brazilian Securities Commission (Comissão de Valores Mobiliários, CVM) governing the preparation of Quarterly Information (‘ITR’). Our responsibility is to express a conclusion on this interim accounting information based on our review.

Scope of the review

We conducted our review in accordance with the Brazilian and international rules for review of interim information: respectively, Brazilian Accounting Standard (NBC) TR 2410 – Review of Interim Information Performed by the Auditor of the Entity (Revisão de Informações Intermediárias Executada pelo Auditor da Entidade), and ISRE 2410 – Review of Interim Financial Information Performed by the Independent Auditor of the Entity). A review of interim information consists of questioning, principally of the persons responsible for the financial and accounting matters, and application of analytical procedures and other procedures of review. The scope of a review is significantly less than that of an audit conducted in accordance with the rules of auditing and, consequently, did not enable us to obtain certainty that we had become aware of all the material matters that could be identified in an audit. Thus, we do not express an auditing opinion.

A member company of Ernst & Young Global Limited

 

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LOGO

Conclusion

Based on our review, we are not aware of any fact that could lead us to believe that the interim accounting information included in the Quarterly Information referred to above was not prepared, in all material aspects, in accordance with CPC 21(R1) and IAS 34, applicable to the preparation of Quarterly Information, and presented in a way that is in accordance with the rules issued by the CVM (Comissão de Valores Mobiliários).

Other matters

Added value statement

We have also reviewed the Statement of added value (DVA), for the nine-month period ended September 30, 2017. This was prepared under the responsibility of the Company’s management. Presentation of these statements is required under the rules issued by the CVM for preparation of Quarterly Information (ITR); and is considered to be supplementary information under IFRS – which do not require presentation of the DVA. This statement was submitted to the same procedures of review described above, and based on our review we are not aware of any fact that could lead us to believe that it was not prepared, in all material aspects, in a way consistent with the interim accounting information taken as a whole.

Financial statements of prior periods examined, and interim accounting information reviewed by another independent auditor

The examination of the Statement of financial position on December 31, 2016, and the review of the interim accounting information for the periods of three and nine months ended on September 30, 2016, presented for the purposes of comparison, were conducted under the responsibility of other independent auditors, who issued an audit report and a report on review, without qualifications, dated April 6, 2017 and November 11, 2016, respectively.

Belo Horizonte, November 10, 2017.

Ernst & Young Auditores Independentes S.S.

CRC-2SP015199/O-6

LOGO

 

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CEMIG TELECOMUNICAÇÕES S.A. – CEMIGTELECOM

STATEMENT OF FINANCIAL POSITION

AT SEPTEMBER 30, 2017 AND DECEMBER 31, 2016

R$ ’000    

 

 

ASSETS

   Note      Sep. 30,
2017
     Dec. 31,
2016
     LIABILITIES AND STOCKHOLDERS’ EQUITY    Note      Sep. 30,
2017
    Dec. 31,
2016
 

Current assets Cash and cash equivalents

     3        1,616        1,034      Current liabilities Loans and debentures      12        58,973       63,751  

Securities – Cash investments

     4        6,110        1,855      Suppliers      13        18,723       21,750  

Accounts receivable from clients

     5        17,258        19,249      Payroll-associated and employment-law obligations      14        4,848       5,836  

Financial leasing

     6        323        303      Tax obligations      15        9,525       9,573  

Taxes recoverable

     7        5,181        3,684      Deferred revenues      16        460       460  
     

 

 

    

 

 

          

 

 

   

 

 

 

Prepaid expenses

        62        34      Total, Current liabilities         92,529       101,370  
     

 

 

    

 

 

          

 

 

   

 

 

 

Other

        535        899             
     

 

 

    

 

 

            

Total, Current assets

        31,085        27,058      Non-current liabilities        
     

 

 

    

 

 

            
                          Loans and debentures    12      58,998     37,621  

Current assets

            Payroll-associated and employment-law obligations      14        3,192       2,801  

Long term assets

            Tax obligations      15        1,982       2,466  

Securities – Cash investments

     4        203        83      Deferred revenues      16        4,219       4,579  

Financial leasing

     6        11,631        11,876      Provisions for risks      17        67       82  

Taxes recoverable

     7        3,334        2,997      Related parties      18        6,394       3,410  

Deferred income tax and Social Contribution tax

     8        8,935        8,037      Other         84       84  
     

 

 

    

 

 

          

 

 

   

 

 

 

Derivative financial instruments

     9        4,484        4,586      Total, Non-current liabilities         74,936       51,043  
     

 

 

    

 

 

          

 

 

   

 

 

 

Other

        239        908      STOCKHOLDERS’ EQUITY        

Investment in affiliated company

     9        17,793        19,744      Share capital      19        241,741       241,741  

Property, plant and equipment

     10        269,946        261,613      Equity valuation adjustments         (756     (756

Intangible assets

     11        9,917        9,490      Retained losses         (50,883     (47,006
     

 

 

    

 

 

          

 

 

   

 

 

 

Total, Non-current assets

        326,482        319,334      Total equity         190,102       193,979  
     

 

 

    

 

 

          

 

 

   

 

 

 

TOTAL ASSETS

        357,567        346,392      TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY NET         357,567       346,392  
     

 

 

    

 

 

          

 

 

   

 

 

 

The notes are an integral part of the Interim Accounting Information.

 

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Cemig Telecomunicações S.A. (‘CemigTelecom’)

Profit and loss accounts

FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2017

(R$ ’000, except net loss per share)

 

 

            Third quarter:     Nine months to:  

3Q17

   NOTE      3Q16     Sep. 30, 2017     Sep. 30,2016  

NET REVENUE FROM PROVISION OF SERVICES

     20        30,593       25,952       88,303       74,641  

COSTS OF SERVICES PROVIDED

     21        (17,671     (15,922     (52,624     (46,348
     

 

 

   

 

 

   

 

 

   

 

 

 

GROSS PROFIT

        12,922       10,030       35,679       28,293  

OTHER OPERATIONAL REVENUES (EXPENSES):

           

General and administrative expenses

     21        (8,285     (6,641     (24,881     (23,806

Sales and marketing expenses

     21        (238     (124     (728     (259

Other operational revenues

        76       20,963       87       21,225  

Other operational expenses

     21        (233     (466     (3,522     (572

Equity gain in investees

     9        (459     (10,141     (1,951     (25,647
     

 

 

   

 

 

   

 

 

   

 

 

 

Total

        (9,139     3,591       (30,995     (29,059

NET PROFIT BEFORE FINANCIAL REVENUE (EXPENSES),
INCOME TAX AND SOCIAL CONTRIBUTION TAX

        3,783       13,621       4,684       (766
     

 

 

   

 

 

   

 

 

   

 

 

 

Financial revenues

     22        1,226       844       2,147       3,039  

Financial expenses

     22        (3,857     (1,628     (11,501     (5,047
     

 

 

   

 

 

   

 

 

   

 

 

 

PROFIT BEFORE INCOME TAX AND SOCIAL CONTRIBUTION TAX

        1,152       12,837       (4,670     (2,774

Current income tax and Social Contribution tax

     8        (105     62       (105     (24

Deferred income tax and Social Contribution tax

     8        (512     (7,918     898       (7,766
     

 

 

   

 

 

   

 

 

   

 

 

 

PROFIT (LOSS) FOR THE PERIOD

        535       4,981       (3,877     (10,564
     

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES IN CIRCULATION (thousands of shares)

        397,683       397,683       397,683       397,683  
     

 

 

   

 

 

   

 

 

   

 

 

 

BASIC AND DILUTED PROFIT (LOSS) PER SHARE (Reais)

        0.00       0.01       (0.01     (0.03
     

 

 

   

 

 

   

 

 

   

 

 

 

The notes are an integral part of the Interim Accounting Information.

 

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Cemig Telecomunicações S.A. (‘CemigTelecom’)

 

CEMIG TELECOMUNICAÇÕES S.A. – CEMIGTELECOM

STATEMENT OF COMPREHENSIVE INCOME

FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2017

R$ ’000

 

 

 

     Third quarter:      Nine months:  
     3Q17      3Q16      9M17     9M16  

Profit (loss) for the period

     535        4,981        (3,877     (10,564

Other comprehensive income

     —          —          —         —    
  

 

 

    

 

 

    

 

 

   

 

 

 

Total comprehensive income for the period

     535        4,981        (3,877     (10,564
  

 

 

    

 

 

    

 

 

   

 

 

 

The notes are an integral part of the Interim Accounting Information.

 

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Cemig Telecomunicações S.A. (‘CemigTelecom’)

 

CEMIG TELECOMUNICAÇÕES S.A. – CEMIGTELECOM

STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

R$ ’000

 

 

     Share
capital
     Equity
valuation
adjustment
    Retained
losses
    Total  

BALANCES AT DECEMBER 31, 2015

     225,081        (75     (56,989     168,017  

Capital increase

     16,660        —         —         16,660  

Loss for the period

     —          —         (10,564     (10,564
  

 

 

    

 

 

   

 

 

   

 

 

 

BALANCES AT SEPTEMBER 30, 2016

     241,741        (75     (67,553     174,113  
  

 

 

    

 

 

   

 

 

   

 

 

 

BALANCES AT DECEMBER 31, 2016

     241,741        (756     (47,006     193,979  
  

 

 

    

 

 

   

 

 

   

 

 

 

Loss for the period

     —          —         (3,877     (3,877
  

 

 

    

 

 

   

 

 

   

 

 

 

BALANCES AT SEPTEMBER 30, 2017

     241,741        (756     (50,883     190,102  
  

 

 

    

 

 

   

 

 

   

 

 

 

The Notes are an integral part of the Interim Accounting Information.

 

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Cemig Telecomunicações S.A. (‘CemigTelecom’)

 

CEMIG TELECOMUNICAÇÕES S.A. – CEMIGTELECOM

STATEMENTS OF CASH FLOW

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

R$ ’000    

 

 

     9M17     9M16  

CASH FLOW FROM OPERATIONS

    

Profit (loss) for the period

Adjustments to reconcile net profit to cash generated by operations

    

(3,877

41,143


 

   

(10,564

41,968


 

  

 

 

   

 

 

 

Depreciation and amortization

     25,974       24,947  

Costs of financings

     10,690       4,433  

Deferred income tax and Social Contribution tax

     (898     7,766  

Cost of fixed assets written off

     —         117  

Appreciation of assets received from Eletronet

     —         (20,423

Fair value of financial derivative

     102       —    

Reversal of provision for risks

Net addition (reversal) of provision for doubtful receivables

    

(15

355


 

   

(32

(262


Equity in earnings of unconsolidated investees, net

     1,951       25,647  

Constitution of provision for indemnity

     2,984       —    

Reversal of provision for obsolescence

     —         (225

Variations in assets and liabilities

     (5,814     (5,138
  

 

 

   

 

 

 

Reduction (increase) of assets: Accounts receivable from clients

     1,861       (2,584

Taxes recoverable

     (1,938     (494

Other assets

     1,005       (672

Increase (reduction) in liabilities:

    

Accounts payable to suppliers and others

     (3,028     680  

Payroll-related and tax obligations

     (1,129     371  

Deferred revenues

     (360     (368

Income tax and Social Contribution tax paid

     105       (1,097

Interest paid

     (2,330     (974
  

 

 

   

 

 

 

Net cash from operational activities

     31,452       26,266  

CASH FLOW IN INVESTMENT ACTIVITIES

    

Acquisition of fixed and intangible assets

     (34,734     (28,459

Reductions (increase) in securities and cash investments

     (4,375     8,461  

Capital increase in affiliated company

     —         (16,660
  

 

 

   

 

 

 

CASH FLOW IN FINANCING ACTIVITIES

    

Net cash used in investment activities

Capital increase

    

(39,109

—  


 

   

(36,658

16,660


 

Loans and financings obtained, and debentures issued

Payment of principal of loans, financings and debentures

    

26,239

(18,000

 

   

—  

(5,961

 

  

 

 

   

 

 

 

Net cash from financial activities

     8,239       10,699  
  

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     582       307  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS

    

At start of period

     1,034       4,869  

At end of period

     1,616       5,176  
  

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     582       307  
  

 

 

   

 

 

 

The Notes are an integral part of the Interim Accounting Information.

 

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Cemig Telecomunicações S.A. (‘CemigTelecom’)

 

CEMIG TELECOMUNICAÇÕES S.A. – CEMIGTELECOM

ADDED VALUE STATEMENT

FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

R$ ’000    

 

 

     3Q17     3Q16  

1 – REVENUES

     146,797       153,977  
  

 

 

   

 

 

 

1.1) Sales of services

     117,853       99,087  

1.2) Reversal (provision) for doubtful receivables

     (355     262  

1.3) Additions to fixed assets in progress

     23,973       27,934  

1.5) Appreciation of assets received from Eletronet

1.6) Gain (loss) on financial derivative

    

—  

(102

 

   

20,423

—  

 

 

1.8) Others

     5,428       6,271  

2 – INPUTS ACQUIRED FROM THIRD PARTIES

     58,386       51,282  
  

 

 

   

 

 

 

2.1) Cost of services sold

     12,856       8,279  

2.2) Materials, power, outsourced services and others

     42,392       42,903  

2.3) Loss / recovery of asset value

     2,984       —    

2.3) Others

     154       100  
  

 

 

   

 

 

 

3 – GROSS VALUE ADDED (1–2)

     88,411       102,695  
  

 

 

   

 

 

 

4 – RETENTIONS

     25,974       24,947  
  

 

 

   

 

 

 

4.1) Depreciation and amortization

     25,974       24,947  

5 – NET ADDED VALUE PRODUCED BY THE ENTITY (3–4)

     62,437       77,748  
  

 

 

   

 

 

 

6 – ADDED VALUE RECEIVED BY TRANSFER

     197       (22,608
  

 

 

   

 

 

 

6.1) Equity method gains in non-consolidated investees, net

     (1,951     (25,647

6.2) Financial revenues

     2,148       3,039  
  

 

 

   

 

 

 

7 TOTAL ADDED VALUE DISTRIBUTABLE (5+6)

     62,634       55,140  
  

 

 

   

 

 

 

8 – DISTRIBUTION OF ADDED VALUE

     62,634       55,140  
  

 

 

   

 

 

 

8.1) Personnel and payroll-related charges

     17,635       19,768  
  

 

 

   

 

 

 

8.1.1) Direct remuneration

     10,547       11,067  

8.1.2) Benefits

     3,679       4,059  

8.1.3) Workers’ Time of Service Guarantee Fund (FGTS)

     1,009       2,381  

8.1.4) Others

     2,400       2,261  

8.2) Taxes

     32,095       35,952  
  

 

 

   

 

 

 

8.2.1) Federal

     8,083       16,123  

8.2.2) State

     24,012       19,829  

8.3) Remuneration of external capital

     16,781       9,984  
  

 

 

   

 

 

 

8.3.1) Interest

     11,501       5,047  

8.3.2) Rentals

     5,280       4,937  

8.4) Remuneration of own capital

     (3,877     (10,564
  

 

 

   

 

 

 

8.4.1) Loss for the period

     (3,877     (10,564

The Notes are an integral part of the Interim Accounting Information.

 

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CEMIG TELECOMUNICAÇÕES S.A. – CEMIGTELECOM

EXPLANATORY NOTES TO THE QUARTERLY ACCOUNTING INFORMATION AT SEPTEMBER 30, 2017

(In thousands of Brazilian Reais – R$ ’000 – except where otherwise indicated)

 

 

1. OPERATING CONTEXT

 

a) The Company

Cemig Telecomunicações S.A. – CemigTelecom (‘the Company’) is a listed corporation and a wholly-owned subsidiary of Companhia Energética de Minas Gerais S.A. – Cemig. It offers optical fibers for carriage of telecommunication services, in the State of Minas Gerais and other States of Brazil’s Northeast and Center-West, using the electrical power transmission and distribution infrastructure of power concession holders, principally Cemig.

It is domiciled in Brazil with address at Rua dos Inconfidentes 1051, Ground Floor, Funcionários, Belo Horizonte, MG. It is authorized by the Brazilian telecoms regulator (Agência Nacional de Telecomunicações – Anatel) to commercially operate Multimedia Communication Services (SCM), for an indeterminate period, by Act No. 41002 of December 3, 2003.

Created on January 13, 1999, CemigTelecom focuses on providing telecommunication services for the corporate segment of internet access providers (ISPs) and telecommunications operator It operates in the wholesale market renting specialized circuits to providers of fixed telephony, mobile telephony, cable TV, business carriers, data-centers, broadband and other services.

The Company’s core business is provision of telecommunication services in the segment of operators, internet service providers (ISPs) and specialized services for the corporate segment, making available network and internet access solutions such as: corporate internet access, data communication between head office and branch offices, high capacity, high-quality solutions, rental of specialized circuits (links, IP/MPLS networks AND VPNs), customized service for each business, connectivity solutions, and other services.

CemigTelecom makes available the largest optical network for transport of telecommunications in Minas Gerais, with presence in more than 70 cities of the state. Additionally, it makes services available through optical networks in the metropolitan regions of Salvador, Recife, Goiânia and Fortaleza, as well as having points of presence in the cities of São Paulo and Rio de Janeiro. In total, it is present in more than 100 cities.

In fourth quarter 2016, to provide feasibility for the entry of a new partner into Ativas, CemigTelecom assumed a significant amount in short-term debt, with a guarantee from its controlling stockholder. As a result, on September 30, 2017 CemigTelecom’s current liabilities exceeded its current assets by R$ 61,445 (R$ 74,312 on December 31, 2016). On September 30, 2017, CemigTelecom’s short-term loans totaled R$ 58,973, of which R$ 50,426 had maturities in fourth quarter 2017.

Management increased the Company’s share capital by R$ 50,657 for settlement of the loan, on October 23, 2017, and believes that it has satisfactory operational cash generation capacity with adequate conditions to comply with its short-term obligations and continue to make the investments necessary for maintaining its projects.

 

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b) Investment in affiliated company

Until October 18, 2016, the Company had shared control, as a joint venture, of the company Ativas Data Center S.A. (‘Ativas’), with a 49% holding in the share capital of that company. As from that date, with the entry of Sonda Procwork Outsourcing Informática Ltda. (‘Sonda’), the new partner in the business, its equity interest was diluted to 19.6%, and it classified the investment as an affiliated company. The management and the principal corporate decisions are exercised by the new controlling stockholder, under a stockholders’ agreement.

Ativas is an entity domiciled in Brazil. Its headquarters and technological facilities are at Rua Agenério Araújo 20, Camargos, Belo Horizonte, MG, and it has commercial offices in São Paulo, Rio de Janeiro, Porto Alegre and Curitiba. Its corporate Objects are:

 

  (i) provision of ITC (Information Technology and Communication) infrastructure supply services, comprising physical hosting of IT physical environments;

 

  (ii) storage of databases and site backup;

 

  (iii) provision of professional security services in relation to information and availability ;

 

  (iv) provision of consultancy services in ITC and connectivity with sale of internet access and bandwidth; and

 

  (v) licensing and assignment of rights to use computer programs.

With the entry of the new controlling stockholder, Sonda, various actions were taken to adapt its organizational, operational and financial structure. As part of the restructuring plan of this affiliated company, in October 2016 early settlement was made of a substantial part of its loans, financings and debentures, with a view to obtaining a capital structure compatible with the size of its business

 

2. BASIS OF PREPARATION

 

  2.1. Presentation of the Quarterly Information

The Quarterly Information (ITR) has been prepared in accordance with Technical Pronouncement CPC 21 (R1) – Interim Financial Statements and IAS International Standard 34 – Interim Financial Reporting issued by the International Accounting Standards Board – IASB, and in a manner compliant with the rules issued by the Brazilian Securities Commission (CVM) applicable to preparation of Quarterly Information (ITR).

This Interim Accounting Information has been prepared according to principles, practices and criteria consistent with those adopted in the preparation of the annual financial statements at December 31, 2016. Thus these ITRs should be read in conjunction with those Financial Statements, approved by the Board of Directors and filed with the CVM on April 6, 2017.

Management certifies that all the material information in the Interim accounting information, and only that information, is being presented, and that it corresponds to the information used by Management in its administration of the company.

On November 10, 2017 the Executive Board authorized conclusion and publication of this Interim Accounting Information.

 

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3. CASH AND CASH EQUIVALENTS

 

     Sep. 30, 2017      Dec. 31, 2016  

Cash and bank deposits

     333        261  

Fixed-income funds

     

Bank certificates of deposit (a)

     218        105  

Overnight (b)

     1,065        668  
  

 

 

    

 

 

 

Total

     1,616        1,034  
  

 

 

    

 

 

 

 

On September 30, 2017, the company had 100% of its cash investments (cash equivalents and securities – Note 4) in the Pampulha fund (Fundo Pampulha), an exclusive investment fund of the Cemig Group. The weighted average profitability of the financial investments of the Pampulha Fund in this period was approximately 104.37% of the rate for interbank certificates of deposit, published by Cetip S.A. – the CDI Rate (this percentage was 106.31% on December 31, 2016).

a) Bank Certificates of Deposit with floating rates, remunerated at a percentage of the CDI Rate (Interbank Rate for Certificates of Deposit – which varies between 100.5% and 105.25%, depending on the transaction) published by Cetip S.A. – Mercados Organizados.
b) Short-term (‘overnight’) transactions (usually Treasury bonds, notes, etc., referenced to a fixed rate), with availability for redemption on the next day after investment.

 

4. SECURITIES

Securities refers to: (i) fixed-income securities, comprising units in funds managed by financial institutions that meet the requirements for reputation, reliability and solidity established by the Controlling Group; and (ii) investments in securities and bank CDs (CDBs), with maturities of more than 90 days, the amounts of which, reported in Current assets, take into account the expectation of realization in the short term.

 

Fixed-income securities

   Sep. 30, 2017      Dec. 31, 2016  

Current

Fixed-income funds, with portfolios comprising:

     

Bank certificates of deposit (a)

     75        59  

Repos (b)

     646        131  

Treasury Financial Notes (b)

     881        349  

Financial Notes – Banks (c)

     4,508        1,316  
  

 

 

    

 

 

 

Subtotal

     6,110        1,855  
  

 

 

    

 

 

 

Non-current

     

Financial Notes – Banks (c)

     —          25  

Debentures and Notes (b)

     203        58  
  

 

 

    

 

 

 

Subtotal

     203        83  
  

 

 

    

 

 

 

Total

     6,313        1,938  
  

 

 

    

 

 

 

 

(a) Bank Certificates of Deposit with floating rates, remunerated at a percentage of the CDI Rate (Interbank Rate for Certificates of Deposit – which varies between 100.5% and 105.25%, depending on the transaction) published by Cetip S.A. – Mercados Organizados.
(b) Floating-rate debentures, remunerated at a percentage of the CDI rate (varying between 100% + 0.78% and 113%, depending on the transaction).
(c) Floating-rate treasury Financial Notes, the remuneration of which is given by the variation of the daily Selic rate recorded between the date of settlement of the purchase and date of maturity of the security plus, if any, premium or discount at the moment of purchase.
(d) Floating-rate bank Financial Notes, remunerated at a percentage of the CDI (between 100 + 0.52% and 112%, depending on the transaction).

 

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5.  ACCOUNTS RECEIVABLE FROM CLIENTS

    
     Sep. 30,
2017
    Dec. 31,
2016
 

Related parties (Note 18)

     2,880       5,299  

Third parties

     16,158       15,375  

Doubtful receivables

     (1,780     (1,425
  

 

 

   

 

 

 

Total

     17,258       19,249  
  

 

 

   

 

 

 

Below is a summary of accounts receivable, by time / maturity:

 

     Sep. 30, 2017  
     Related
parties
     Third
parties
     Total      Dec. 31,
2016
 

Accounts receivable

           

Not yet due

     1,010        13,308        14,318        12,805  

1 to 30 days

     76        891        967        2,906  

31 to 60 days

     76        58        134        1,381  

61 to 90 days

     76        39        115        643  

91 to 180 days

     232        185        417        424  

Over 180 days

     1,410        1,677        3,087        2,515  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,880        16,158        19,038        20,674  
  

 

 

    

 

 

    

 

 

    

 

 

 

Provision for doubtful receivables

     —          (1780)        (1780)        (1425)  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,880        14,378        17,258        19,249  
  

 

 

    

 

 

    

 

 

    

 

 

 

Percentage loss recognized on past due accounts receivable

        62%        38%        18%  

The estimate for losses on doubtful receivables is recorded after individual assessment of receivables that are more than 180 days past due. Those on which there is doubt as to realization have their losses recognized in the Profit and loss account in the amount expected to be incurred.

The change in the estimate for losses on accounts receivable can be expressed as follows:

 

     Sep. 30,
2017
    Dec. 31,
2016
 

Balances at start of period

     (1,425     (2,459

Provision permanently written off

     —         853  

New provisions

     (361     (101

Reversals

     6       282  

Balances at end of period

     (1,780     (1,425

 

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6. FINANCIAL LEASING – GPON Networks – condominiums

Leasings in which the Company is lessor and substantially transfers the risks and benefits of ownership to the lessee are classified as financial leasings. These transactions are recognized as a receivable at the lower of: Fair value of the asset leased, and Present value of the flow of receipts specified in the contract, discounted at a risk-free interest rate. Interest related to leasing is recognized in the Profit and loss account as Financial revenue during the period that the contract is in force.

 

     Sep. 30,
2017
     Dec. 31,
2016
 

Current

     323        303  
  

 

 

    

 

 

 

Non-current

     11,631        11,876  
  

 

 

    

 

 

 

Total

     11,954        12,179  
  

 

 

    

 

 

 

GPON network condominiums

On July 5, 2016 CemigTelecom signed an irrecoverable contract with Algar Telecom S.A. (Algar) for the FTTH GPON Network owned by CemigTelecom, located in 39 residential districts and condominiums in the Southern Zone of the Metropolitan Region of Belo Horizonte. The contract, signed for a period of 15 years, specifies monthly remuneration of R$ 112 in the first 60 months, and R$ 132 as from the 61st month, with annual adjustment by the IGP-M inflation index.

The normal value of the flows of receipts specified in the contract was as follows:

 

     Sep. 30,
2017
     Dec. 31,
2016
 

Up to 1 year

     1,345        1,345  

1 to 5 years

     5,678        7,080  

Over 5 years

     13,887        13,493  
  

 

 

    

 

 

 

Total

     20,910        21,918  
  

 

 

    

 

 

 

 

7. TAXES RECOVERABLE

 

     Sep. 30,
2017
     Dec. 31,
2016
 

ICMS (local state value added tax) (a)

     6,053        4,929  

Income tax and Social Contribution tax offsetable

     873        595  

Income tax withheld at source

     1,550        1,098  

Other

     39        59  
  

 

 

    

 

 

 

Total

     8,515        6,681  
  

 

 

    

 

 

 

Current

     5,181        3,684  
  

 

 

    

 

 

 

Non-current

     3,334        2,997  
  

 

 

    

 

 

 

 

(a) This refers, basically, to ICMS tax credits recoverable, stated separately on tax invoices for acquisitions of PP&E assets. These can be used in up to 48 months from their recording in the CIAP book (ICMS tax credits monitoring book).

 

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8. CURRENT AND DEFERRED INCOME TAX AND SOCIAL CONTRIBUTION TAX

The item Deferred income tax and Social Contribution tax refers to the deferred tax credit constituted, principally, on temporary differences, tax losses and negative balances of Social Contribution tax ascertained up to the reporting date. Reporting of the deferred income tax is based on a technical study of feasibility made by the Executive Board and approved by the Audit Board and the Board of Directors on April 6, 2017.

The assumptions used in the preparation of that technical feasibility study were based on the projection of future taxable profits. On December 31, 2015, considering the Company’s business plan and the outlook for the macroeconomic scenario, the feasibility study indicated that future taxable profits foreseen for the period of 10 years would not be sufficient to exhaust the totality of tax credits recorded, and for this reason the Company reverted part of the deferred income tax and Social Contribution tax recognized in prior years, in the amount of R$ 13,491, of which R$ 12,057 referred to the tax loss and negative base for Social Contribution tax, and R$ 1,434 in temporary differences. Since this is a change of estimate, the adjustment was recognized in the Profit and loss account with a counterpart in Expenses on income tax and deferred Social Contribution tax.

On December 31, 2016 a further technical study was made, which indicated the possibility of complementing the balance of deferred income tax and Social Contribution tax with the amount of R$ 1,569. The portion of tax credits not recognized amounts to R$ 10,385. This amount will be maintained under monitoring in the tax records until it satisfies the technical requirements for its accounting recognition.

The accounting value of the deferred tax assets is reviewed periodically, and the forecasts, annually. If there are material factors that change the forecasts, the technical feasibility study will be reviewed by the Company during the business year.

 

     Sep. 30,
2017
    Dec. 31,
2016
 

Assets

    

Deferred tax credits

    

Tax losses and negative Social Contribution balances

     4,920       4,973  

Allowance for doubtful accounts

     573       451  

Tax, social-security, employment-law, third-party provisions

     28       33  

Provision for reimbursement – Ativas

     2,174       1,159  

Voluntary retirement program

     373       539  

Depreciation – Law 11941/09

     6,438       7,018  

Actuarial loss recorded in Other comprehensive income

     390       390  

Provision for obsolescence

     467       390  

Provision for impairment of investment

     1,495       1,495  

Other temporary additions

     723       590  
  

 

 

   

 

 

 

Total, deferred income tax/Social Cont. asset

     17,581       17,038  
  

 

 

   

 

 

 

Liabilities

    

Deferred tax obligations

    

Leasing of GPON Network – Condominiums

     (843     (764

Gain on derivative financial instruments

     (1,524     (1,559

Appreciation of assets received from Eletronet

     (6,279     (6,678
  

 

 

   

 

 

 

Total, deferred income tax and Social Contribution liabilities

     (8,646     (9,001
  

 

 

   

 

 

 

Total non-current assets, net

     8,935       8,037  
  

 

 

   

 

 

 

 

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The reconciliation of the expense calculated by application of the nominal tax rates and of the expense of income tax and Social Contribution reported in the Profit and loss account for the year is as follows:

 

     3Q17     3Q16     9M17     9M16  

Profit before income tax and Social Contribution tax

     1,152       12,837       (4,670     (2,774

Equity in earnings of unconsolidated investees, net

     459       10,141       1,951       25,647  

Adjusted profit before income tax and Social Contribution tax

     1,611       22,978       (2,719     22,873  

Nominal rate of income tax and Social Contribution tax

     34%       34%       34%       34%  

Expectation for Income tax and Social Contribution tax

     (548     (7,813     924       (7,777

Adjustments to obtain effective rate:

        

Tax effects applicable to:

        

Other additions and exclusions, net

     (69     (43     (131     (13

Net effect of income tax and Social Contribution tax

     (617     (7,856     793       (7,790

Income tax and Social Contribution tax

        

Current

     (105     62       (105     (24

Deferred

     (512     (7,918     898       (7,766
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     (617     (7,856     793       (7,790
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s statements of earnings are subject to review by the tax authorities for a period of five years. Other taxes, charges and contributions are also subject to these conditions, under applicable legislation.

The changes in the deferred tax assets in the period can be shown as follows:

 

     Dec. 31.
2016
    Added     Used     Sep. 30,
2017
 

Deferred tax credits

        

Tax losses and negative Social Contribution tax amounts

     4,973       —         (53     4,920  

Allowance for doubtful accounts

     451       122       —         573  

Provisions for tax, social-security, employment-law and civil cases

     33       —         (5     28  

Provision for reimbursement – Ativas

     1,159       1,015       —         2,174  

Voluntary retirement program

     539       —         (166     373  

Depreciation – Law 11941/09

     7,018       —         (580     6,438  

Provision for obsolescence

     390       77       —         467  

Provision for impairment of investment

     1,495       —         —         1,495  

Other temporary differences

     590       133       —         723  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     16,648       1,347       (804     17,191  
  

 

 

   

 

 

   

 

 

   

 

 

 

Deferred tax obligations

        

GPON Network Leasing – Condominiums

     (764     (79     —         (843

Gain on derivative financial instruments

     (1,559     —         35       (1,524

Appreciation of assets received from Eletronet

     (6,678     —         399       (6,279
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     (9,001     (79     434       (8,646
  

 

 

   

 

 

   

 

 

   

 

 

 

Tax credit (obligation) recognized in Profit and loss account

     7,647       1,268       (370     8,545  
  

 

 

   

 

 

   

 

 

   

 

 

 

Actuarial loss recorded in Other comprehensive income

     390       —         —         390  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total of tax credit (obligation) recognized

     8,037       1,268       (370     8,935  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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9. INVESTMENT IN AFFILIATED COMPANY

Up to the third quarter of 2016 the Company was holder of 49% (forty nine per cent) of the voting stock of the company Ativas Data Center S.A. On October 19, 2016 entry of the new strategic stockholder, Sonda Procwork Outsourcing Informática Ltda. (‘Sonda’) as one of the stockholders of Ativas Data Center S.A. was concluded. The closing took place after approval of the transaction without restrictions by Brazil’s Monopolies Authority, CADE, and compliance with the other conditions precedent.

Following the subscription by Sonda of R$ 114,000, through a capital increase, Sonda holds 60% of the equity of Ativas; CemigTelecom holds 19.6% (representing share capital of R$ 98,900); and Ativas Participações holds 20.4% (representing share capital of R$ 102,937). Since after the transaction CemigTelecom no longer had shared control of Ativas, its interest was from that point onward recognized as investment in an affiliated company.

Until the finalization of the phase of construction of its datacenter, in January 2011, Ativas was pre-operational and by September 30, 2017 it had reported accounting losses of R$ 330,065 since its constitution in 2009 (R$ 322,122 up to Dec. 31, 2016).

The principal information on this affiliated company is given below, aligning the accounting practices of Ativas with those of CemigTelecom:

 

     Sep. 30,
2017
    Dec. 31,
2016
 

Assets

     168,873       180,449  

Liabilities

     50,112       51,735  

Stockholders’ equity

     118,761       128,714  
     9M17     9M16  

Net Revenue

     49,370       46,654  

Loss for the period

     (9,954     (52,342
  

 

 

   

 

 

 

The movement of investment in the capital of Ativas in the periods ended September 30, 2017 and 2016 was as follows:

 

9M16

  

9M17

Jan. 1, 2016

  

Equity method gain

  

Capital increase

  

Sep. 30, 2016

  

Jan. 1, 2017

  

Equity
method gain

  

Sep. 30, 2017

(76,708)

   (25,647)    16,660    (85,695)    19,744    (1,951)    17,793

The value of the investment can be shown as follows:

 

     30/09/2017     31/12/2016  

Stockholders’ equity of the investee as per accounting records

     118,761       128,714  

Effect of deferred income tax asset recognized by investee

     (27,979     (27,979

Adjusted stockholders’ equity of the investee

     90,782       100,735  

Percentage interest (%)

     19,6%       19,6%  
  

 

 

   

 

 

 

Investments valued by the equity method

     17,793       19,744  

Premium paid on subscription

     4,397       4,397  

Provision for impairment of the premium

     (4,397     (4,397
  

 

 

   

 

 

 

Balance of the investment

     17,793       19,744  
  

 

 

   

 

 

 

Loss by equity method

     (1,951     (27,165
  

 

 

   

 

 

 

 

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The stockholding structure of Ativas on September 30, 2017 and December 31, 2016 is as follows:

 

Stockholder

   Shares
(thousands)
     Stake%  

Ativas Participações S.A.

     93,134        20,40%  

CEMIG Telecomunicações S.A.

     89,482        19,60%  

Sonda Procwork Outsourcing Informática Ltda

     273,925        60,00%  
  

 

 

    

 

 

 

Total

     456,541        100%  
  

 

 

    

 

 

 

Capital increase

Subscriptions of capital in 2016

 

     Feb.
16,
2016
     Mar.
14,
2016
     1st
tranche
     2nd
tranche
     Total  

CemigTelecom

     3,800        12,860        45,000        37,240        98,900  

Ativas Participações

     3,955        13,385        46,837        38,760        102,937  

Sonda Procwork

     —          —          —          114,000        114,000  
  

 

 

       

 

 

    

 

 

    

 

 

 

Total

     7,755        26,245        91,837        190,000        315,837  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial assets / liabilities relating to sale / purchase options

On October 19, 2016, Cemig Telecomunicações S.A. – ‘CemigTelecom’, Ativas Participações S.A. (‘Ativas Participações’) and Sonda Procwork Outsourcing Informática Ltda. (‘Sonda’) signed an investment contract, permitting entry of Sonda as stockholder of the investee Ativas Data Center S.A. (‘Ativas Data Center’), which until that date was an exclusive investee of CemigTelecom (49%) and Ativas Participações (51%).

After the entry of the new partner Sonda, by dilution of CemigTelecom and Ativas Participações, Sonda assumed stockholding control, as owner of 60.0% of the shares of Ativas Data Center, the stockholders CemigTelecom and Ativas Participações S.A. now holding 19.6% and 20.4%, respectively.

As part of the process of stockholding restructuring, CemigTelecom and Sonda signed a Purchase Option Agreement (issued by CemigTelecom) and a Sale Option Agreement (issued by Sonda).

These resulted in CemigTelecom simultaneously having a right (put option) and an obligation (call option). The exercise price of the put option will be equivalent to fifteen times the adjusted net profit of Ativas in the business year prior to the exercise date. The exercise price of the call option will be equivalent to sixteen times the adjusted net profit of Ativas in the business year prior to the exercise date. Both options, if exercised, result in the sale of the shares in Ativas currently owned by the Company, and the exercise of one of the options results in nullity of the other. The options may be exercised as from January 1, 2021.

The put and call options in Ativas (‘the Ativas Options’) were measured at fair value and posted at their net value, i.e. the difference between the fair values of the two options on the reporting date of the financial statements for the quarter ended September 30, 2017. Depending on the value of the options, the net value of the Ativas Options may be an asset or a liability of the Company.

 

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The measurement was carried out by a specialized consulting company through the use of the Black-Scholes-Merton (BSM) model, it being ensured that its results were consistent with other stochastic approaches involving numerical procedures.

In the calculation of the fair value of the Ativas Options based on the BSM model, the following variables are taken into account: closing price of the underlying asset on September 30, 2017; the risk-free interest rate; the volatility of the price of the underlying asset; the time to maturity of the option; and the exercise prices on the exercise date.

The closing price of the underlying asset was based on the value of the transaction in shares of Ativas by Sonda, which took place on October 19, 2016. The calculation of the risk-free interest rate was based on yields of National Treasury Bills. The time to maturity was calculated assuming exercise date on March 31, 2021. Considering that the exercise prices of the options are contingent upon the future financial accounting results of Ativas, the estimate of the exercise prices on the date of maturity was based on statistical analyzes and on information of comparable listed companies. The exercise prices adopted in the BSM method were corroborated with statistical distributions analyzed through numerical procedures. On September 30, 2017, the derivative financial instrument is recorded, with the amount of R$ 4,484 (R$ 4,586 on December 31, 2016) in the account line Derivative financial instrument – Assets

 

10. PROPERTY, PLANT AND EQUIPMENT

The depreciation rates and remaining useful lives were determined through technical opinions issued by engineers of the Company, and reflect the expectation of useful life of the goods and assets, as follows:

 

     Sep. 30, 2017     Dec. 31, 2016  
     Cost     Accumulated
Depreciation
    Net value     Net value  

Land

     82       —         82       82  

Real estate property

     55       (17     38       39  

Facilities

     107       (32     75       43  

Machinery and equipment

     11       (3     8       9  

Furniture and utensils

     1,582       (1,136     446       450  

Computers and peripherals

     2,206       (1,858     348       193  

Test instruments

     2,833       (2,730     103       159  

Improvements

     246       (233     13       19  

Satellite reception system

Telecoms network equipment

    

9,283

392,054

 

 

   

(9,283

(278,811


   

—  

113,243

 

 

   

1

95,859

 

 

Materials

     64,137       (40,929     23,208       22,404  

Cable

     196,331       (99,263     97,068       100,741  

OPGW cables

     18,894       (1,575     17,319       18,264  

ADSS cables

     1,529       (382     1,147       1,376  

Network infrastructure

     19,342       (13,597     5,745       6,202  

Spare parts

     10,413       —         10,413       9,312  

Fixed assets in progress

     2,064       —         2,064       7,834  
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     721,169       (449,849     271,320       262,987  
  

 

 

   

 

 

   

 

 

   

 

 

 

Provision for obsolescence

     (1,374     —         (1,374     (1,374
  

 

 

   

 

 

   

 

 

   

 

 

 

Total, net

     719,795       (449,849     269,946       261,613  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Depreciation rates and useful lives of the assets:

 

     Average
percentage
depreciated
up to Sep.
30, 2017
     Average
remaining
useful life
(years)
     Annual
average
depreciation
rates
 

Class of assets

        

Real estate property

     31%        34.5        2%  

Facilities

     30%        7.0        10%  

Machinery and equipment

     27%        7.3        10%  

Furniture and utensils

     72%        2.8        10%  

Computers and peripherals

     84%        0.8        20%  

Test instruments

     96%        0.4        10%  

Improvements

     95%        0.3        20%  

Satellite reception system

     100%        0.0        8%  

Telecoms network equipment

     71%        2.6        11%  

Materials

     64%        5.2        7%  

Cable

     51%        9.9        5%  

OPGW cables

     8%        13.7        7%  

ADSS cables

     25%        3.8        20%  

Network infrastructure

     70%        5.4        3 a 10%  

The movement in PP&E can be shown as follows:

 

            Accumulated in nine months
ended Sep. 30, 2017
               
     Dec. 31,
2016
     Additions      Written
off
     Transfers             Sep. 30,
2017
 

Land

     82        —          —          —             82  

Real estate property

     55        —          —          —             55  

Facilities

     68        39        —          —             107  

Machinery and equipment

     11        —          —          —             11  

Furniture and utensils

     1,524        58        —          —             1,582  

Computers and peripherals

     1,953        253        —          —             2,206  

Test instruments

     2,833        —          —          —             2,833  

Improvements

     246        —          —          —             246  

Satellite reception system

     9,283        —          —          —             9,283  

Telecoms network equipment

     361,943        —          —          30,111           392,054  

Materials

     61,098        —          —          3,039           64,137  

Cable

     192,373        —          —          3,958           196,331  

OPGW cables

     18,894        —          —          —             18,894  

ADSS cables

     1,529        —          —          —             1,529  

Network infrastructure

     19,342        —          —          —             19,342  

Spare parts

     9,312        9,500        —          (8,399)           10,413  

Fixed assets in progress

     7,834        23,973        —          (29,713)           2,064  
  

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total cost

     688,380        33,793        —          (1,004)           721,169  
  

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Accumulated depreciation

     (425,393)        (24,456)        —          —             (449,849)  

Provision for obsolescence

     (1,374)        —          —          —             (1,374)  
  

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Net value depreciable

     261,613        9,337        —          (1,004)      (**)        269,946  
  

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

 

(a) Spending relating to projects in progress for expansion of telecommunications networks and inventories.

 

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            Accumulated in nine months ended Sep.
30, 2016
               
     Dec. 31,
2015
     Additions             Written
off
     Transfers             Sep. 30,
2016
 

Land

     82        —             —          —             82  

Real estate property

     55        —             —          —             55  

Facilities

     152        —             (84)        —             68  

Machinery and equipment

     11        —             —          —             11  

Furniture and utensils

     1,469        6           —          —             1,475  

Computers and peripherals

     1,934        10           —          —             1,944  

Test instruments

     2,833        —             —          —             2,833  

Improvements

Satellite reception system

    

246

9,283

 

 

    

—  

—  

 

 

       

—  

—  

 

 

    

—  

—  

 

 

       

246

9,283

 

 

Telecoms network equipment

     342,087        —             (239)        19,552           361,400  

Materials

     61,301        —             —          1,557           62,858  

Cable

     190,788        —             —          4,088           194,876  

OPGW cables

     —          18,894        (**)        —          —             18,894  

ADSS cables

     —          1,529        (**)        —          —             1,529  

Network infrastructure

     19,342        —             —          —             19,342  

Spare parts

     8,030        5,735           (225)        (4,915)           8,625  

Fixed assets in progress

     6,819        21,878           —          (22,561)           6,136  
  

 

 

    

 

 

       

 

 

    

 

 

       

 

 

 

Total cost

     644,432        48,052           (548)        (2,279)           689,657  
  

 

 

    

 

 

       

 

 

    

 

 

       

 

 

 

Accumulated depreciation

     (394,446)        (23,904)           206        —             (418,144)  

Provision for obsolescence

     (225)        —             225        —             —    
  

 

 

    

 

 

       

 

 

    

 

 

       

 

 

 

Net amount depreciable

     249,761        24,148           (117)        (2,279)        (*)        271,513  
  

 

 

    

 

 

       

 

 

    

 

 

       

 

 

 

 

(*) The remaining balances in the transfers shown in the previous table refer to the transfers made between the accounts Fixed assets and Intangible assets (Note 13).
(**) Refers to the assets transferred by Eletronet S.A.

Assets transmitted by Eletronet S.A.

The Company periodically evaluates the useful lives applied to their assets with defined useful life. The works of valuation of useful lives of the assets are carried out by professionals of the Company’s technical engineering team, and they consider, among other aspects, the following principal indications for formation of their opinion: (i) technical information related to the use and maintenance of the assets; (ii) outlook for technological and market changes; (iii) the Company’s capacity to obtain services and parts in the market for replacement of goods; and (iv) the possibility of realizing upgrades in the related equipment and software, and also of the capacity for its combination with future technologies.

For tax purposes, the useful lives of the assets accepted by the tax legislation were maintained, and the difference between the accounting and tax bases are treated as temporary differences, the effects resulting from which are recognized as a deferred tax credit or debit in the period in which those differences occur.

 

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11. INTANGIBLE ASSETS

 

            Accumulated in the
nine months ended
Sep. 30, 2017
        
     Dec. 31,
2016
     Additions      Transfers      Sep. 30,
2017
 

Software use license

     2,037        941        —          2,978  

Grant of radio concession

     230        —          —          230  

Management systems

     12,998        —          1,004        14,002  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cost

     15,265        941        1,004        17,210  

Accumulated amortization

     (5,775)        (1,518)        —          (7,293)  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net value amortizable

     9,490        (577)        1,004        9,917  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

            Accumulated in the
nine months ended
Sep. 30, 2016
               
     Dec. 31,
2015
     Additions      Transfers             Sep. 30,
2016
 

Software use license

     1,137        830        —             1,967  

Grant of radio concession

     230        —          —             230  

Management systems

     9,268        —          2,279           11,547  
  

 

 

    

 

 

    

 

 

       

 

 

 

Total cost

     10,635        830        2,279           13,744  

Accumulated amortization

     (4,010)        (1,043)        —             (5,053)  
  

 

 

    

 

 

    

 

 

       

 

 

 

Net value amortizable

     6,625        (213)        2,279        (*)        8,691  
  

 

 

    

 

 

    

 

 

       

 

 

 

 

(*) The remaining balances in the transfers shown in the previous table refer to the transfers made between the accounts Fixed assets and Intangible assets (Note 10).

Amortization rates and useful lives: The annual rates of amortization were determined as a function of the expectation of use of the asset, and are as follows:

 

Class of asset

   Estimated
useful life
(years)
     Average
percentage
amortized up to
Sep. 30, 2017
    Average
remaining useful
life (years)
     Annual average
depreciation
rates
 

Software use license

     5 years        45     2.8        20
Grant of radio concession      15 years        24     11.3        6.7

Management systems

     10 years        42     5.8        10

 

12. LOANS AND DEBENTURES

 

     Sep. 30, 2017      Dec. 31, 2016  

Loans

     91,479        101,372  

Debentures

     26,492        —    
  

 

 

    

 

 

 

Total

     117,971        101,372  
  

 

 

    

 

 

 

Current

     58,973        63,751  
  

 

 

    

 

 

 

Non-current

     58,998        37,621  
  

 

 

    

 

 

 

 

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The movement of loans and debentures in the nine months ended September 30, 2017 was as follows:

 

     Dec. 31,
2016
     Funds
raised
     Amortizations      Charges
appropriated
in the period
     Sep. 30,
2017
 

Sonda Procwork (1)

     46.310        —          —          4.106        50.416  

Sonda Procwork (2)

     38.326        —          —          3.396        41.722  

Cemig Holding (3)

     18.134        —          (19.235)        1.101        —    

Debentures (4)

     —          27.000        (1.095)        1.159        27.064  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     102.770        27.000        (20.330)        9.762        119.202  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Funding cost

     (1.398)        (761)        —          928        (1.231)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     101.372        26.239        (20.330)        10.690        117.971  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Loan from Sonda, rate 110% of CDI, maturing October 19, 2017, to support the investment in Ativas Data-center.
(2) Loan taken from Sonda, rate 110% of CDI, to support the investment in Ativas Data Center. The loan will become due on the date of exercise of the put option by the Company, as regulated by the Stockholders’ Agreement.
(3) Loan taken from Cemig holding company, at 132.9% of the CDI, maturing May 31, 2017, to support the Company’s working capital – this was settled early, on May 22, 2017.
(4) The Company issued 2,700 debentures, under CVM Instruction 476, in a single series, all known and non-convertible, with floating guarantee and nominal unit value of R$ 10, on May 22, 2017, with maturity May 22, 2019. The debentures issued are remunerated at 128.5% of the CDI rate. This funding was for settlement of loan with the Stockholder Cemig Energética S.A., of R$ 19,235 and to replenish the Company’s cash position.

 

13. SUPPLIERS

 

     Sep. 30,
2017
     Dec. 31,
2016
 

Third parties

     7,945        11,514  

Related parties (Note 18)

     10,778        10,236  
  

 

 

    

 

 

 

Total

     18,723        21,750  

The Company’s exposure to risks of currency and liquidity related to suppliers and accounts payable is given in Note 23.

 

14. PAYROLL-ASSOCIATED AND EMPLOYMENT-LAW OBLIGATIONS

 

     Sep. 30,
2017
     Dec. 31,
2016
 

Vacation pay, 13th salary and charges payable

     3,665        2,906  

Employee profit shares

     —          1,257  

Long-term benefits to employees (Note 24)

     3,192        2,801  

Voluntary retirement program

     1,097        1,583  

Other

     86        90  
  

 

 

    

 

 

 

Total

     8,040        8,637  
  

 

 

    

 

 

 

Current

     4,848        5,836  
  

 

 

    

 

 

 

Non-current

     3,192        2,801  
  

 

 

    

 

 

 

 

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Voluntary retirement program

On March 18, 2016 the Company’s management launched the Incentivated Voluntary Retirement Program (PDVI) for 2016, with the objective of adapting the workforce to the needs of the Company’s Business Plan, for preservation of the staff necessary for optimization of its processes and costs, maintaining the focus on achieving the targets of its strategic plan and generation of value. Employees could accept the terms of the plan as from March 21, to May 19, 2016.

12% of the Company’s staff joined the program. It was available to employees with administrative and technical careers with at least 13 years’ work in CemigTelecom or with any other company provided they were retired or qualified for retirement. The retirement dates were programmed at the Company’s option, and may occur in up to 18 months after the termination of the acceptance period. The plan provides a financial incentive equivalent to 40% of the monthly salary for each year of employment relationship with the company, for those who joined in the first 30 days of the joining period, and 20% times the monthly salary for those who joined between the 31st day of the period and its closing date. Additionally, the program grants those with eligible employment the right to receive the 40% ‘penalty’ payment on the balance of the employee’s FGTS account, as well as receipt of the other dismissal amount specified by law. The PDVI program was concluded, and the last employees left the company on October 18, 2017.

(512) TAX OBLIGATIONS

 

     Sep. 30, 2017      Dec. 31, 2016  

Income tax withheld at source (IRRF)

     173        341  

Corporate income tax (IRPJ)

     90        —    

The Social Contribution tax on net profit (CSLL)

     15        —    

ICMS (local state value added tax) (a)

     2,445        2,560  

The Contribution to Finance Social Security – Cofins

Social Integration Program (PIS)

    

1,339

291

 

 

    

1,320

286

 

 

Telecommunication Services Universalization Fund (FUST)

Telecoms Technological Development Fund (FUNNTEL) (b)

    

99

6,666

 

 

    

90

7,137

 

 

Others

     389        305  
  

 

 

    

 

 

 

Total

     11,507        12,039  
  

 

 

    

 

 

 

Current

     9,525        9,573  
  

 

 

    

 

 

 

Non-current

     1,982        2,466  
  

 

 

    

 

 

 

 

(a) As from January 2016, various Brazilian states increased the rate of ICMS tax on telecommunication service to improve the cash situation of the states, as follows:

 

State

   Change in rate (from – to)    Legislation

Minas Gerais

   25% – 27%    Law 21781/2015

Pernambuco

   28% – 30%    Law 15599/2015

Ceará

   27% – 30%    Law 15892/2015

Rio de Janeiro

   27% – 30%    Law 7175/2015

Rio Grande do Norte

   27% – 30%    Law 9991/2015

 

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(b) With the conversion of Provisional Measure 638/14 into Law 12996/14, and consequent renewal of permission for payment in installments as per Laws 11941/09 and 12249/10, the Company sought to include the debits to FUNTTEL for the years 2006 to 2013 within the REFIS program. However, this right was denied on an administrative basis, on the grounds of the Revenue Service’s allegation that it did not have the standing to manage the funds arising from this revenue specifically.

The Company reacted to this by seeking an order of mandamus against the act of an allegedly coercive authority, seeking to force those debits into the debt refinancing program referred to, but the case and the application for mandamus were refused and the case set aside. This case awaits judgment in appeal to the Regional Federal Appeal Court of the First Region.

The accumulated value of the tax obligation on September 30, 2017 is R$ 6,666, including interest and penalty payments calculated up to that date on the debts past due. The Company joined the PERT program, including the amounts that were in the ordinary agreement for payment by installments, and a tax amnesty in the amount of R$ 465,000 was recognized in September 2017.

The debits incurred as from 2014 are being paid regularly.

The movements in the payments by installments of the debits to Funttel, which are inscribed in the federal receivable debt, are as follows:

 

     Accumulated in the period  

Period

   Consolidated
debits
     Amortization     Charges
appropriated
     Amnesty     Balances at
September 30,
2017
 

2008 and 2009

     1,886        (537     165        (465     1,049  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     1,886        (537     165        (465     1,049  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

The Company joined the PERT program, including the amounts that were in the ordinary agreement for payment by installments, and a tax amnesty in the amount of R$ 465,000 was recognized in September 2017.

 

16. DEFERRED REVENUES

 

                          Sep. 30, 2017      Dec. 31, 2016  

Contract

   Signature of
the contract
     Period of
the contract
     Amount
contracted
     Accumulated
revenue
Appropriated
     To be
appropriated
     Accumulated
revenue
Appropriated
     To be
appropriated
 

1 optical fiber pair, for 181 km

     08/08/2011        10 years        2,187        1,312        875        1,149        1,041  

1 optical fiber pair, for 46 km

     12/10/2012        20 years        925        221        704        185        740  

1 optical fiber pair, for 231 km

     12/04/2013        20 years        3,822        726        3,096        584        3,238  

Other

           515        511        4        495        20  
        

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

           7,449        2,770        4,679        2,413        5,039  
        

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Current

                 460           460  
              

 

 

       

 

 

 

Non-current

                 4,219           4,579  
              

 

 

       

 

 

 

The contracts linked to the advances from clients are for irrevocable assignment of dark optical fiber pairs, not including provision of any equipment or provision telecommunication services.

The contracts have an average period of duration of 17 years, and do not contain clauses for renewal or option for sale of the assets. The revenue linked to these contracts, recognized in the quarter ended September 30, 2017, was R$ 117.

 

 

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17. PROVISION FOR EMPLOYMENT LAW RISK

 

     30/09/2017      31/12/2016  

Employment- law cases

     67        82  
  

 

 

    

 

 

 
     67        82  
  

 

 

    

 

 

 

On September 30, 2017, the Company had a provision for risks and contingencies identified by management of R$ 67 (R$ 82 on December 31, 2016), representing employment-law claims, for which the chances of loss have been assessed as ‘probable’.

The Company also has other cases, claims and disputes in both the courts and the administrative sphere, totaling R$ 2,652 (R$ 2,661 on December 31, 2016), as follows:

Classification of risk by assessed chances of loss

 

 

     Expectation of loss  
     ‘Possible’      ‘Probable’      Total  

Tax (a)

     —          —          —    

Employment-law cases (b)

     2,051        67        2,118  

Civil cases (c)

     601        —          601  
  

 

 

    

 

 

    

 

 

 

Total

     2,652        67        2,719  
  

 

 

    

 

 

    

 

 

 

 

(a) The tax cases are tax claims seeking to impugn allegedly incorrect tax classification for collection of the FUST and FUNTEL social contributions of the telecommunication sector, which are collected by Anatel. To charge and collect the FUST the agency of the federal government has unduly widened the calculation base for the contribution, and this has been regularly impugned in the administrative sphere. In the courts there is a case in progress in the federal courts which disputes the posting for the year 2010. The whole of the debit related to FUNTEL is under dispute in the courts, in a case questioning the standing of the Federal Revenue Service to administer the debt relating to this contribution and included in the federal scheme for payment by installments. The oldest part of this debt (for the years 2008 and 2009) was constituted, and a tax execution relating to it has been suspended, due to grant of permission for payment by installments; the most recent debits await further agreement for payment by installments. There are other tax claims, discussing the legitimacy of the form of joint collection of federal and state taxes, and defenses in tax executions.

 

(b) The employment-law cases are mostly claims by employees of other companies, which had been contractual partners of CemigTelecom in which both companies have been made defendants. The claims for employment-law rights are made against the service providing companies, and in these cases CemigTelecom has been included as defendant solely for the purpose of guaranteeing payment in the case of success in the claim.

 

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(c) Among the civil cases is one in which the Minas Gerais Public Attorneys’ Office for employment-law matters has filed a class action against CemigTelecom on the legality of outsourcing of services when the labor employed is supposedly related to its end-activity. At the court of the first instance, CemigTelecom was ordered to pay a fine of R$200, and prohibited from continuing to employ outsourced labor in these activities. In 2014, CemigTelecom obtained an injunction in the Higher Employment-Law Appeal Court, suspending the effects of the first instance judgment until a judgment by the Federal Supreme Court (STF) – ARE 791.932 – on whether its judgment should be given the status of mandatory precedent for all other judgments on the issue. Management has assessed the chances of loss as ‘possible’. In the event that it loses, CemigTelecom might be compelled to bring part or all of these activities into direct employment relationships. On March 31, 2017 Law 13429/2017 was published, altering Law 6019/74 to enable outsourcing of the end-activity in contracts for temporary labor. With the treatment of the same subject in the text of the recently-passed Law 13429/17, referred to as the Employment Reform Law, and with the increase in disputes that will take place, we believe there is a tendency for the courts to start to see this subject from a different point of view. This reasoning enables management to infer that there is a trend for making contracting of outsourced labor more flexible, which may have a favorable influence on the judgment in this case.

 

18. RELATED PARTY TRANSACTIONS

CemigTelecom is a listed corporation and a wholly-owned subsidiary of Companhia Energética de Minas Gerais S.A. – Cemig.

The principal holders of voting stock in which are the Government of the State of Minas Gerais (51%) and Andrade Gutierrez Concessões Energia (20%). The controlling stockholder, Cemig, has other direct stockholdings in the following main companies, as well as CemigTelecom: Axxiom Soluções Tecnológicas S.A. (49%), Cemig Geração e Transmissão S.A. (100%), Cemig Distribuição S.A. (100%), Companhia de Gás do Estado de Minas Gerais S.A. – Gasmig (99.57%), Rosal Energia (100%), Sá Carvalho (100%), Light S.A. (26.06%) and Transmissora Aliança de Energia Elétrica – Taesa (31.54%).

As well as its affiliated company Ativas, CemigTelecom considers the following to be related parties: the controlling stockholder and its related parties, the companies or persons who directly or indirectly have significant influence of the Management of the Company, the private pension plan (Forluz) and the administrator of the health and dental plan (Cemig Saúde) in which the Company is co-sponsor together with the other companies of the Cemig Group, and the managers and employees of the Company.

 

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Asset transactions (sales)The main commercial transactions between the Company and related parties that generate revenue are commercial transactions relating to circuits and other telecommunication services in general, in which the controlling group, Cemig, currently represents 8.38% of the Company’s sales revenue (14.39% in 2016).

Purchase transactions (purchases)The Company’s principal transactions resulting in outflow with related parties are for supply of electricity to feed the telecommunication equipment, provision of services of management and maintenance of the telecommunications network and rental (sharing) of power transmission distribution infrastructure for installation of telecommunication cables and equipment.

The affiliated company Ativas has an item of R$ 8,959 in its accounts receivable from the minority stockholders, for an indemnity clause arising from liabilities that predated or were not revealed on the transaction date, as specified in the investment contract signed on August 25, 2016 between CemigTelecom, Ativas and Sonda Procwork Outsourcing Informática Ltda. Of this amount recorded, 49% is attributable to the responsibility of CemigTelecom, and a provision for it has been constituted in the amount of R$ 3,410, on December 31, 2016, with a complimentary addition of R$ 2,984 in the nine months ended September 30, 2017, making a total of R$ 6,394.

The main receivable and payable amounts at September 30, 2017, and the transactions that influenced the profit for the period, in relation to related parties, arise from transactions carried out for conditions and periods agreed between the parties for the respective types of operation.

 

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     Sep. 30, 2017      Accumulated in the period ended
Sep. 30, 2017
 
     Assets      Liabilities      Sales     Bought  
Companhia Energética de Minas Gerais S.A.                           

Communications services

     26        —          —         —    

Reimbursement of costs of seconded personnel

     1,780        2,789        1,066       366  

Other

     3        —          —         —    
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     1,809        2,789        1,066       366  
  

 

 

    

 

 

    

 

 

   

 

 

 

Cemig Distribuição S.A

          

Communications services

     554        —          5,090       —    

Supply of electricity

     —          246        —         2,561  

Network maintenance services

     —          4,239        —         945  

‘Right of way’/infrastructure

Other

    

—  

38

 

 

    

2,540

—  

 

 

    

—  

—  

 

 

   

3,208

—  

 

 

  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     592        7,025        5,090       6,714  
  

 

 

    

 

 

    

 

 

   

 

 

 

Cemig Geração e Transmissão S.A.

          

Communications services

     126        —          1,143       —    

Network maintenance services

Other

    

—  

23

 

 

    

422

—  

 

 

    

—  

—  

 

 

   

94

—  

 

 

  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     149        422        1,143       94  
  

 

 

    

 

 

    

 

 

   

 

 

 
Fundação Forluminas de Seguridade Social (‘Forluz’)                           

Communications services

     4        —          38       —    

Private pension plan

     —          226        —         1,308  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     4        226        38       1,308  
  

 

 

    

 

 

    

 

 

   

 

 

 
Cemig Saúde (Health)                           

Communications services

     6        —          53       —    

Medical and dental care

     —          135        —         721  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     6        135        53       721  
  

 

 

    

 

 

    

 

 

   

 

 

 
Companhia de Gás de Minas Gerais – Gasmig                           

Communications services

     —          —          23       —    

Total

     —          —          23       —    
Entities linked to Minas Gerais State Govt. (*)                           

Current

 

Communications services

     95        —          659       —    

Taxes offsettable – ICMS

     1,650        2,023        (25,851     —    

Non-Current

Taxes offsettable – ICMS

     2,640        —          —         —    
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     4,385        2,023        (25,192     —    
  

 

 

    

 

 

    

 

 

   

 

 

 
Axxiom                           

Communications services

     3        —          31       —    

Software maintenance

     —          123        —         1,097  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     3        123        31       1,097  
  

 

 

    

 

 

    

 

 

   

 

 

 
Ativas Data Center S.A.                           

Communications services

     222        —          2,063       —    

Indemnity of contingencies in Ativas

     —          6,394        —         2,984  

Data center outsourcing services

     —          58        —         526  

Reimbursement of costs of seconded personnel

     —          —          118       —    
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     222        6,452        2,181       3,510  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total at Sep. 30, 2017

     7,170        19,195        (15,567     13,810  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(*) Entities linked to Minas Gerais State Government are not part of accounts receivable and suppliers for the purposes of ICMS tax.

 

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     Dec. 31, 2016      Period ended
ended Sep. 30, 2016
 
     Assets     Liabilities      Sales     Bought  

Companhia Energética de Minas Gerais S.A

         

Communications services

     26       —          —         —    

Reimbursement of costs of seconded personnel

     1,170       2,566        1,300       1,355  

Other

     3       —          —         —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

     1,199       2,566        1,300       1,355  
  

 

 

   

 

 

    

 

 

   

 

 

 

Cemig Distribuição S.A

         

Communications services

     3,399       —          7,609       —    

Supply of electricity

     —         264        —         2,335  

Network maintenance services

     —         3,295        —         1,417  

‘Right of way’/infrastructure others

    

—  

38

 

 

   

2,771

—  

 

 

    

—  

—  

 

 

   

2,825

—  

 

 

  

 

 

   

 

 

    

 

 

   

 

 

 

Total

     3,437       6,330        7,609       6,577  
  

 

 

   

 

 

    

 

 

   

 

 

 

Cemig Geração e Transmissão S.A.

         

Communications services

     272       —          2,444       —    

Network maintenance services

     —         328        —         141  

Other

     23       —          —         16  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

     295       328        2,444       157  
  

 

 

   

 

 

    

 

 

   

 

 

 

Fundação Forluminas de Seguridade Social (‘Forluz’)

         

Communications services

     4       —          48       —    

Private pension plan

     —         482        —         —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

     4       482        48       —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Cemig Saúde (Health)

         

Communications services

     (3     —          46       —    

Medical and dental care

     —         228        —         6  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

     (3     228        46       6  
  

 

 

   

 

 

    

 

 

   

 

 

 

Companhia de Gás de Minas Gerais (Gasmig)

         
     21       —          144       —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

     21       —          144       —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Entities linked to Minas Gerais State Govt.(*)

         

Current

 

Communications services

     94       —          660       —    

Taxes off-settable – ICMS

     1,553       2,035        (18,495     —    

Non-Current

         

Taxes off-settable – ICMS

     2,020       —          —         —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

     3,667       2,035        (17,835     —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Axxiom

         

Communications services

     3       —          30       —    

Software maintenance

     —         131        —         744  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

     3       131        30       744  
  

 

 

   

 

 

    

 

 

   

 

 

 

Ativas Data Center S.A.

         

Communications services

     249       —          1,812       —    

Indemnity of contingencies in Ativas

     —         3,410        —         —    

Data center outsourcing service Reimbursement of

costs of seconded personnel

    

—  

—  

 

 

   

171

—  

 

 

    

—  

231

 

 

   

565

—  

 

 

  

 

 

   

 

 

    

 

 

   

 

 

 

Total

     249       3,581        2,043       565  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

     8,872       15,681        (4,171     9,404  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(*) Entities linked to Minas Gerais State Government are not part of accounts receivable and suppliers for the purposes of ICMS.

 

 

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     Sep. 30, 2017      Dec. 31, 2016  
     Assets      Liabilities      Assets      Liabilities  

ACCOUNTS RECEIVABLE FROM CLIENTS

     2,880        —          5,299        —    

Suppliers

     —          10,778        —          10,236  

Taxes recoverable (AC)

     1,650        —          1,553        —    

Taxes recoverable (PC)

     2,640        —          2,020        —    

Tax obligations (PC)

     —          2,023        —          2,035  

Related parties

     —          6,394        —          3,410  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     7,170        19,195        8,872        15,681  
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed income fund – Pampulha: The Company holds units in Fundo Pampulha, which has the characteristics of fixed income and obeys the Company’s cash investment policy. On September 30, 2017 the amounts invested by the fund, corresponding to CemigTelecom’s participation, are accounted under ‘Cash and Cash Equivalents’ and ‘Securities’ in Current and Non-Current assets.

The Cemig Group has cash investments in Pampulha (see breakdown below), which in turn has investments in notes and debentures of companies of the Cemig Group.

 

Fundo Pampulha

             Value of CemigTelecom
position – R$ ’000
     Period    Rate p.a.    Sep. 30
2017
   Dec. 31,
2016
           

CemigTelecom investment in Pampulha Fund – ref.

CEMIG GT (Debentures)

   Aug. – Nov. 2017    128% of CDI rate    28    —  

CemigTelecom investment in Pampulha Fund – ref.

CEMIG GT (Debentures)

   Aug. – Nov. 2017    128% of CDI    84    —  

CemigTelecom investment in Pampulha Fund – ref.

CEMIG GT (Debentures)

   Aug. – Nov. 2017    128% of CDI    56    —  

CemigTelecom investment in Pampulha Fund – ref.

CEMIG GT (Debentures)

   Apr. 2013 –Feb. 2017    CDI + 0.9%    —      15

CemigTelecom investment in Pampulha Fund – ref.

CEMIG GT (Debentures)

   Jul. 2015 – Jul. 2018    CDI + 1.6%    115    74

CemigTelecom investment in Pampulha Fund – ref.

ETAU (Debentures)

   Dec. 2014 –Dec. 2019    108% of CDI    48    14

CemigTelecom investment in Pampulha Fund – ref.

CEMIG GT (Debentures)

   Mar. 2016 –Dec. 2018    CDI + 3.9%    51    14

CemigTelecom investment in Pampulha Fund – ref.

CEMIG GT (Debentures)

   Jul. 2016 – Dec. 2018    CDI + 4.2%    48    13

CemigTelecom investment in Pampulha Fund – ref.

Axxiom (Debentures)

   Apr. 2016 – Jan. 2017    112% of CDI    —      8

CemigTelecom investment in Pampulha Fund – ref.

CEMIG GT (Debentures)

   Jun – Nov. 2017    108% of CDI    251    —  

CemigTelecom investment in Pampulha Fund – ref.

CEMIG GT (Debentures)

   Jun – Aug 2017    108% of CDI    50    —  

The return of the Pampulha Fund, in the nine months ended September 30, 2017, was R$352 (R$2,018 at September 30, 2016).

Loan – On December 16, 2016 CemigTelecom signed a loan contract with Cemig for R$ 18,000, to complement the funds necessary for full payment of the first Promissory Note issue, with maturity at 167 days, for settlement in a single payment on May 31, 2017, plus interest at 132.9% of the average DI (interbank deposit) Rate. The updated balance of R$ 19,235 was settled on May 22, 2017.

 

 

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Remuneration of Managers – In the nine months to September 30, 2017 the Company paid managers a total of R$ 4,034 in remuneration and other benefits (R$ 2,667 up to September 30, 2016), as follows:

 

Post

   Remuneration      Benefits      Total  

R$ ’000

   9M17      9M16      9M17      9M16      9M17      9M16  

Chief Officers

     3,264        1,845        286        230        3,550        2,075  

Board members

     484        592        —          —          484        592  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3,748        2,437        286        230        4,034        2,667  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

On April 28, 2017 the General Meeting of Stockholders set the annual global limit as from 2017 of R$5,850 (R$5,450 for the 2016) for remuneration of Chief Officers, members of the Board of Directors, and the Audit Board.

Private Pension Plan and other employee benefits – As per Note 25, the Company is co-sponsor of the Private Pension Plan for Forluz and Cemig Saúde, responsible for management of the employees’ health and dental plan. The contributions made by the Company were as follows:

 

     3Q17      3Q16      9M17      9M16  
     Forluz      Health plan      Forluz      Health plan      Forluz      Health plan      Forluz      Health plan  

Mixed Benefits Pension Plan (‘Plan B’)

     611        —          695        —          2,273        —          2,401        —    

Integrated health plan (PSI)

     —          388        —          351        —          1,117        —          1,018  

Dental Plan

     —          16        —          14        —          46        —          39  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     611        404        695        365        2,273        1,163        2,401        1,057  
  

 

 

                      

Further to the benefits specified in Law, the Company also provided its employees with: a day-care center, group life insurance, restaurant and food tickets, and Culture Tickets.

Employees’ profit shares – The Company’s bylaws specify distribution to the employees as share of profits an annual amount as a means of incentivating employees to achieve the best results – for which indicators and targets are periodically established in a collective work negotiation.

 

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19. STOCKHOLDERS’ EQUITY

 

a) Share capital

On February 18, 2016 Cemig made a capital increase in CemigTelecom of R$ 16,660, subscribing 16,660 new nominal common shares without par value, increasing the share capital from R$ 225,081 to R$ 241,741 from that date.

The full capital subscribed and paid up at September 30, 2017 and December 31, 2017 comprises common shares, without par value, as follows:

 

Shareholders

   Shares      Amount      Stake
%
 

Companhia Energética de Minas Gerais

     397,683,384        241,741        100%  

Other

     1        —          —    
  

 

 

    

 

 

    

 

 

 

Total

     397,683,385        241,741        100%  
  

 

 

    

 

 

    

 

 

 

 

b) Remuneration to stockholders

Stockholders are guaranteed the minimum mandatory dividend of 50% of the adjusted net profit for each business year.

 

c) Legal reserve

This reserve is constituted from 5% of the net profit of each business year, under Article 193 of Law 6404/76, until the reserve reaches 20% of the share capital.

Since there was a balance of retained losses, no legal reserve was constituted in 2017.

 

d) Retained Earnings reserve

The aim of this reserve is to strengthen working capital and meet needs for funds for the Company’s investments in the subsequent years.

 

e) Profit (loss) per share

The profit (loss) and weighted average number of common shares used in the calculation of the basic and diluted profit per share are as follows:

 

Basic and diluted profit (loss) per share

   3Q17      3Q16      9M17     9M16  

Profit (loss) for the period – R$ ’000

     535        4,981        (3,877     (10,564

Weighted average number of

common shares in circulation – thousands

     397,683        397,683        397,683       397,683  
  

 

 

    

 

 

    

 

 

   

 

 

 

Basic and diluted loss per share – Reais

     0.00        0.01        (0.01     (0.03
  

 

 

    

 

 

    

 

 

   

 

 

 

Since the Company has no dilutive instruments, diluted loss per share is the same as basic loss per share.

 

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20. NET REVENUE

 

    

3Q17

  

3Q16

  

9M18

  

9M16

Dedicated circuits

   33,696    26,590    96,785    74,940

Transport of signal

   1,438    1,792    4,875    5,376

Integrated services

   4,487    5,537    13,431    16,169

Other

   1,177    879    2,762    2,602
  

 

  

 

  

 

  

 

Gross revenue

   40,798    34,798    117,853    99,087
  

 

  

 

  

 

  

 

Taxes, returns, adjustments to present value and discounts

   (10,205)    (8,846)    (29,550)    (24,446)
  

 

  

 

  

 

  

 

Net Revenue

   30,593    25,952    88,303    74,641
  

 

  

 

  

 

  

 

 

21. COSTS AND EXPENSES

 

Classification by type

   3Q7     3Q16     9M17     9M16  

Network infrastructure

     (4,000     (3,289     (12,093     (9,011

Supply of electricity

     (803     (665     (2,757     (2,475

Depreciation and amortization

     (8,966     (8,611     (25,974     (24,947

Maintenance and repair service

     (5,629     (4,300     (16,266     (12,453

Personnel

     (5,574     (4,586     (15,673     (17,842

Outsourced services

     (798     (755     (4,073     (2,222

Real estate property rented

     (417     (427     (1,301     (1,290

Equity method gains in non-consolidated investees, net

     (459     (10,141     (1,951     (25,647

PIS and Cofins taxes on financial leasing

     (168     (151     (353     (393

Loss on financial derivative

     (20     —         (103     —    

Other (Recovery of expenses)

     (52     (369     (3,162     (352
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     (26,886     (33,294     (83,706     (96,632
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Classification by function

   3Q17     3Q16     9M17     9M16  

Cost of services provided

     (17,671     (15,922     (52,624     (46,348

General and administrative expenses

     (8,285     (6,641     (24,881     (23,806

Sales and marketing expenses Equity method gain

    

(238

(459


   

(124

(10,141


   

(728

(1,951


   

(259

(25,647


Other expenses

     (233     (466     (3,522     (572
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     (26,886     (33,294     (83,706     (96,632
  

 

 

   

 

 

   

 

 

   

 

 

 

 

22. FINANCIAL REVENUE (EXPENSES)

 

Financial revenue

   3Q17      3Q16      9M17      9M16  

Revenue from cash investments

     139        741        386        2,431  

Interest (received)

     144        17        177        148  

Other financial revenues

     943        86        1,584        460  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,226        844        2,147        3,039  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Financial expenses

   3Q17     3Q16     9M17     .9M16  

Interest (paid)

     (3,128     (1,434     (10,081     (4,246

Other financial expenses

     (729     (194     (1,420     (801
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     (3,857     (1,628     (11,501     (5,047
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Cemig Telecomunicações S.A. (‘CemigTelecom’)

 

 

23. FINANCIAL INSTRUMENTS

 

a) Financial risk management

The Company has exposure to the following risks arising from the use of financial instruments:

 

    Credit risk

 

    Market Risk

 

    Liquidity risk

This note presents information on the Company’s exposure to each one of the above risks, the Company’s objectives, policies and processes for measurement and management of risk, and the Company’s management of capital.

Risk management structure

The Board of Directors has the global responsibility for establishing and supervising the structure of the Company’s risk management. The risk management policies applied by the Company and its jointly-controlled subsidiary entity are subordinated to those of the Cemig Group, which is responsible for creating and monitoring the risk management policies of the Company as a whole.

The Company’s risk management policies are established to identify and analyze the risks faced, to set appropriate risk in its own controls, and to monitor risks and compliance with the limits established. The risk management policies and systems are frequently reviewed to reflect changes in market conditions and in the Company’s activities. Through its training and management rules and procedures the Company aims to develop a disciplined and constructive control environment, in which all the employees understand their roles and obligations.

CREDIT RISK

Credit risk is the risk of financial loss in the event that a client or counter-party of a financial instrument fails to comply with its contractual obligations, which arise principally from the Company’s receivables from the clients and in investment securities.

The Company’s sales policies are subordinated to the credit policies set by the Management and aimed to minimize any problems arising from default by its clients. The client portfolio comprises large operators of fixed and mobile telephone service, cable TV and internet broadband, also corporate clients and internet service providers, as well as the Company’s own majority stockholder. In view of the Company’s change of focus with a view to increasing its market share in the segments of corporate market and internet providers, and the gradual decline of operators participation in the market since 2015, the risk of losses in receipt of credits by the Company has been significantly diluted through the diversification of its portfolio of clients. The effort of sales to the corporate market have been sufficient to offset the losses from cancellation of circuits by operators and significantly reduces market risk.

By market segment: In September 2017, 37% of CemigTelecom’s sales revenue was from the corporate sector, 34% from ISPs, and 29% from telecoms operators – showing the diversification of revenue, which reduces risk of segment concentration. In September 2017 CemigTelecom had a total of 1,023 clients.

 

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In 2015 management began a review of the Company’s policy for granting credit. Even so, the main instrument that ensures minimization of credit risk continues to be the Company’s right to interrupt supply of signal in the event of contractual default – which includes failure to pay.

The Company’s exposure to credit risk is influenced primarily by the individual characteristics of each client. However, Management also takes into consideration the market segment in which clients operate, since this factor can influence credit risk, especially due to the sensitivity of the telecommunication sector to the economic circumstances of the country. The maximum concentration of the Company’s revenue attributable to a single client is approximately 9%.

The level of losses due to lack of payment is insignificant. This is because the Company’s policy establishes constant monitoring of default, in which contractual penalties are applied in the case of arrears in payment, which may, in the extreme cases culminate in discontinuation of services to clients.

The Company makes a provision for impairment that represents its estimate of losses on accounts receivable from clients and other creditors. Sensitivity, and expectation of losses related to significant individual risks, are the only parameters considered in this analysis. This is because the Company’s business is substantially centered on the market for service to large telecommunications operators and the corporate market, and thus historic losses and global/geographical sector analysis do not usually supply a reasonable basis to estimate losses on accounts receivable. The Company has a provision for doubtful receivables in the amount of R$ 1,780, at September 30, 2017 (R$ 1,425 on December 31, 2017), which represents 9.4% (7% in 2016) of the total unpaid amount of accounts receivable 38% (18% in 2016) of past due accounts receivable.

In relation to the risk of losses arising from insolvency of a financial institution at which the Company has deposits, the Cemig Group’s Cash Investment Policy has been in effect since 2004: under it, each institution is analyzed according to criteria of current liquidity, degree of leverage, level of default, profitability, and costs; and also analysis by three financial risk rating agencies. The Company assigns each financial institution a maximum fund allocation limit, which is reviewed for appropriateness both periodically and also in the event of any change in the macroeconomic scenarios of the Brazilian economy.

 

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Cemig Telecomunicações S.A. (‘CemigTelecom’)

 

MARKET RISK

Market risk is the risk of exposure to changes in market prices, such as exchange rate and interest rates, which can have a significant financial impact on the Company. The aim of market risk management is to keep exposures to market risks under control, within acceptable parameters, and at the same time to optimize return.

 

1. Currency risk

The Company is not subject to currency risk as it does not have balances with suppliers, or loans, denominated in any currency different from its functional currency.

 

2. Interest rate risk

Interest rate risk arises from issuance of non-convertible securities. When these are linked to variable interest rates, they expose the Company to cash-flow risk. Liabilities linked to fixed interest rates expose the Company to risk of fair value associated with the interest rate.

The Company continues to evaluate its exposure to interest rate risk. Various scenarios are simulated, using various refinancing alternatives, renewal of existing positions and acquisition of new financings and alternative hedges.

The Company is exposed to the risk of increase in interest rates, affecting loans and debentures with floating interest rates principally linked to indices referenced to the basic interest rate of the Brazilian economy, in the amount of R$ 117,971 (Note 12).

In relation to the most significant interest rate, the Company estimates that, in a probable scenario, the CDI rate will be close to 8.14% at its future reference date. The Company has made a sensitivity analysis of the effects on its profit arising from increase in these indicators to levels above the ‘probable’ scenario. One of the assumptions of this analysis is that the expected variation in the CDI rate will be similar to the variation in the Selic rate.

Below is a table showing the sensitivity of the financial instruments, prepared in accordance with CVM Instruction 475/2008, to show the balances of the principal financial assets and liabilities, calculated at a projected rate up to the date of final settlement of each contract, assuming a ‘probable’ scenario (Scenario I), a scenario with appreciation of 25% (Scenario II), and one with 50% (Scenario III).

The aim of this sensitivity analysis is to measure the impact of changes in the market variables on the financial instruments referred to, assuming all other market indicators constant. When these amounts are settled they may be different from those shown above, due to the estimates used in the process of preparation. The table below includes the amounts of principal and interest.

 

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Cemig Telecomunicações S.A. (‘CemigTelecom’)

 

 

     Amount      Risk of increase in domestic
interest rates – scenarios (percent
p.a.) scenarios (% p.a.)
 
     Book      Scenario
I CDI
     Scenario
II CDI
     Scenario
III CDI
 
        8.14%        10.18%        12.21%  

Assets

           

Cash and cash equivalents

           

Fixed income funds

     1,283        104        131        157  

Securities

           

Fixed income funds

     6,313        514        642        771  

Liabilities

           

Debentures

     (27,064)        (2,203)        (2,754)        (3,305)  

Loans

     (92,138)        (7,500)        (9,375)        (11,250)  

Net positive (negative) exposure

        (9,085)        (11,356)        (13,627)  

PRICE RISK

The Company operates in a business segment where prices are freely agreed, and thus maintaining risk mitigation policies of this type can be dispensed with.

Fair value of financial instruments

The balances of financial instruments used by the Company at September 30, 2017 are mostly recorded at accounting cost, which is not significantly different from the corresponding estimated market values. They are classified as follows:

 

  Financial assets held to maturity: Cash investments which are expected to be held to maturity are in this category. These are valued at amortized cost using the effective rates method, less any impairments.

 

  Financial asset measured at fair value through profit or loss: Fixed income securities held for trading are in this category. These are valued at fair value through profit or loss, as per Level 2.

 

  Receivables: Balances receivable from clients are in this category. They are recognized at their nominal realization value, which is similar to fair value.

 

  Loans: These are measured at amortized cost, using the effective interest method.

 

  Suppliers: These are balances payable to suppliers, and are recognized at nominal settlement value, similar to fair values.

Fair value is a market-based measurement based on assumptions that market participants would use in pricing an asset or liability. The Fair Value Hierarchy aims to increase consistency and comparability: it divides the inputs used in measuring fair value into three broad levels, as follows:

 

  Level 1 – Active market – Quoted prices: A financial instrument is considered to be quoted in an active market if the prices quoted are promptly and regularly made available by an exchange or organized over-the-counter market, by operators, by brokers or by a market association, by entities whose purpose is to publish prices, or by regulatory agencies, and if those prices represent regular arm’s length market transactions made without any preference.

 

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  Level 2 – No active market – Valuation technique: For an instrument that does not have an active market, fair value should be found by using a method of valuation/pricing. Criteria such as data on the current fair value of another instrument that is substantially similar, or discounted cash flow analysis or option pricing models, may be used. The objective of the valuation technique is to establish what would be the transaction price on the measurement date in an arm’s-length transaction motivated by business considerations.

 

  Level 3 – No active market – No observable inputs: The fair value of investments in securities for which there are no prices quoted on an active market, or of derivatives linked to them which are to be settled by delivery of unquoted securities,

 

     Sep. 30, 2017  
     Level 1      Level 2      Level 3      Total  

Assets

           

Cash and banks

     333        —          —          333  

Bank certificates of deposit

     —          218        —          218  

Repos (‘Overnight’)

     —          1,065        —          1,065  

Securities

     —          6,313        —          6,313  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     333        7,596        —          7,929  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Dec. 30, 2016  
     Level 1      Level 2      Level 3      Total  

Assets

           

Cash and banks

     261        —          —          261  

Bank certificates of deposit

     —          105        —          105  

Overnight

     —          668        —          668  

Securities

     —          1,938        —          1,938  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     261        2,711        —          2,972  
  

 

 

    

 

 

    

 

 

    

 

 

 

LIQUIDITY RISK

Liquidity risk is the risk that the Company will have difficulty complying with the obligations associated with its financial liabilities that are met with payment in cash or another financial asset. The Company’s approach in managing liquidity is to guarantee to the maximum possible that there is always sufficient liquidity to comply with its obligations when they become due, and normal conditions and stress conditions, without causing unacceptable losses or a risk to harm the Company’s reputation.

The Company operates with a profitability margin that results in it having a positive operational cash flow. Typically, the Company maintains immediate financial balances that guarantee compliance with commitments for at least 60 days’ operation, including financial obligations and investments. Events with potential impact of extreme circumstances that cannot be reasonably foreseen, such as natural disasters or large-scale economic crisis, are not taken into consideration in this analysis.

In fourth quarter 2016, to provide feasibility for the entry of a new partner into Ativas, CemigTelecom assumed a significant amount in short-term debt, with a guarantee from its controlling stockholder. As a result, on September 30, 2017 CemigTelecom’s current liabilities exceeded its current assets by R$ 61,445 (R$ 74,312 on December 31, 2016). On September 30, 2017, CemigTelecom’s short-term loans totaled R$ 58,973, of which R$ 50,426 had maturities in fourth quarter 2017.

 

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Management made an increase in the Company’s capital of R$ 50,657 for settlement of the loan, on October 23, 2017, and believes that it has satisfactory operational cash generation capacity, with adequate conditions to comply with its short-term obligations and continue to make the investments necessary for maintaining its projects.

The Company uses a group of methods, procedures and instruments that are coherent with the complexity of the business, and applied in permanent control of the financial processes, to guarantee appropriate risk management.

The Company manages liquidity risk by permanently monitoring its cash flow in a conservative, budget-oriented manner. Balances are projected monthly, for a period of 12 months ahead, and daily liquidity balances are projected over 90 days.

Short-term allocations also obey rigid principles established in a Cash Investment Policy, in which funds are invested in exclusive private credit investment funds, and any balance remaining is invested in repos remunerated at the CDI rate, according to orientations decided by the Cemig Group, with a view to a consolidated management of the available funds, which does not depend on any individual analysis by CemigTelecom.

In managing cash investments, the Company seeks to obtain profitability through a rigid analysis of financial institutions’ credit, applying operational limits for each bank, based on assessments that take into account their ratings, exposures and balance sheets.

The table below analyzes the Company’s financial assets, by period of maturity, including the installments of principal and future interest to be paid in accordance with contractual clauses.

 

 

 

Non-derivative financial liabilities

   Sep. 30, 2017      Contractual cash-flow  
      1 to 2 years      3 to 5 years  

Debentures

     26,492        29,466        —    

Sonda loans

     91,479        51,413        55.663  

Suppliers

     18,723        18,723        —    

Deferred revenues

     4, 679        920        3.759  

Related parties

     6,394        —          6,394  
  

 

 

    

 

 

    

 

 

 

Total

     143,088        100,522        65,816  
  

 

 

    

 

 

    

 

 

 

 

24. BENEFITS TO EMPLOYEES

The obligations related to employee benefit plans, include private pension plans, a health plan, a dental plan and group life insurance.

Private pension plan – Forluz

The Company is co-sponsor of Fundação Forluminas de Seguridade Social (Forluz), a non-profit legal entity created to provide its participants and their dependents with an income to supplement retirement and pension.

The pension plan, co-sponsored by the Company, called the “Mixed Benefit Private Pension Plan – Plan B”, comprises benefits including: (i) Addition to Retirement Pension for Time of Service, Special reasons or Age – MAT; (ii) Improvement to Pension for Disability – MAI; (iii) Annual Bonus – AA; (iv) Continuous Revenue due to Death—RCM; and Prisoner Family Assistance – AR.

 

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The sponsors’ contribution to this plan is 27.52% for the portion with defined-benefit characteristics, relating to the coverage for death or disability of participants still working, and is used to amortize the obligations defined by an actuarial calculation. The remaining 72.48%, referring to the portion of the plan with defined contribution characteristics, is allocated to the participants’ nominal accounts. These contributions are recognized in the Profit & Loss account in accordance with the payments made by the sponsors under Personnel Expenses.

Medical care – Cemig Saúde

The Company is co-sponsor of the health and dental plans of its employees, which are administered by Cemig Saúde.

The amounts of the contributions to the pension plans, the health plan and the dental plan are determined annually, from the amounts considered sufficient to cover the respective expenses expected in each business year, according to an evaluation made by an independent actuary contracted for the purpose. The three plans are optional to join, for the employee, and the sponsors’ contributions match those made by the participants.

In this Note the Company demonstrates the net actuarial assets/liabilities and the expenses in connection with the Retirement Plan, Health Plan and Dental Plan, in accordance with the terms of CPC 33 Technical Pronouncement (Benefits to employees) and an independent actuarial opinion issued as of December 31, 2016.

This table shows a reconciliation of the actuarial assets and liabilities:

 

     Forluz
Plan B
     Cemig Saude
Health
    Dental     Total  

Net actuarial Assets (Liabilities) at December 31, 2016

     —          (2,695     (106     (2,801

Estimated expense recognized in the profit and loss account

     —          (377     (14     (391
  

 

 

    

 

 

   

 

 

   

 

 

 

Net actuarial Assets (Liabilities) at September 30, 2017

     —          (3,072     (120     (3,192
  

 

 

    

 

 

   

 

 

   

 

 

 

 

25. CONTRACTUAL COMMITMENTS

The Company has contractual obligations and commitments, which principally include amortization of loans, contracts for sharing of infrastructure and rental of dark fiber, as follows:

 

     2017      2018      2019      2020      2021      After 2021      Total  

Sharing of infrastructure

     1,198        3,777        1,486        283        212        —          6,956  

Dark fiber rental

     533        1,196        805        22        22        76        2,654  

Loans and financings

     51,413        17,981        11,485        —          55,663        —          136,542  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     53.144        22,954        13,776        305        55,897        75        146,152  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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26. INSURANCE

The Company has reassessed the risks involving its telecommunications assets, and the probability of interruptions of its operations in the event of any adverse concurrences. This study shows that the probability of simultaneous occurrences of claimed events on a large-scale such as might represent significant financial and operational losses to the Company is significantly remote, mainly due to the diversity of the geographical distribution of the assets exposed to risks. For this reason the Company’s management has opted, at present, not to contract insurance cover for claim events involving its Operations Center and Headends, and also events that could affect its network equipment, cables and other goods of its fixed assets. Since its operation started, the Company has never experienced significant losses as a function of the risks mentioned above. The assumptions for evaluation of risks adopted by the Company, due to their nature, are not part of the scope of review of the Quarterly Information (ITR). Consequently they have not been reviewed by the external auditors.

 

27. SUBSEQUENT EVENTS

On November 8, 2017, as provided in the budgets of the stockholder, the Company made a capital increase in the amount of R$ 50,657. The transaction was approved by an Extraordinary General Meeting of Stockholders held on that date and involved issuance of 50,657,437 (fifty million, six hundred fifty seven thousand, four hundred thirty seven) new nominal common shares without par value. The proceeds were entirely used for settlement of Loan I with the creditor Sonda Procwork.

 

 

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NOTICE TO STOCKHOLDERS DATED AS OF JANUARY 17, 2018: CANCELATION OF THE CONVOCATION TO THE EXTRAORDINARY GENERAL MEETING OF STOCKHOLDERS SCHEDULED FOR JANUARY 24, 2018

 

 

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COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG

CNPJ 17.155.730/0001-64 – NIRE 31300040127

EXTRAORDINARY GENERAL MEETING OF STOCKHOLDERS

CANCELLATION OF CONVOCATION

JANUARY 24, 2018

Stockholders are hereby advised that:

The Extraordinary General Meeting of Stockholders called for 3 p.m. on January 24, 2018 at the company’s head office has been canceled.

The agenda of the meeting was: to vote on (1) an authorization for certain limits in the by-laws to be exceeded; and (2) an extension of the current term of office of the members of the Board of Directors.

Belo Horizonte, January 17, 2018.

José Afonso Bicalho Beltrão da Silva

Chief Finance and Investor Relations Officer

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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SUMMARY OF THE MINUTES OF THE 721TH MEETING OF THE BOARD OF DIRECTORS HELD ON JANUARY 17, 2018

 

 

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COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG

LISTED COMPANY – CNPJ 17.155.730/0001-64 – NIRE 31300040127

BOARD OF DIRECTORS

Meeting of January 17, 2018

SUMMARY OF MAIN RESOLUTIONS

At its 721st meeting, held on January 17, 2018, the Board of Directors of Cemig (Companhia Energética de Minas Gerais) resolved the following:

Cancellation of the Convocation to an Extraordinary General Meeting of Stockholders scheduled for January 24, 2018 at 3 p.m. at the Company’s head office, Avenida Barbacena 1200, 21st floor, Belo Horizonte, Minas Gerais, Brazil.

The agenda of the meeting was:

(1) Authorization for certain limits in the by-laws to be exceeded; and

(2) Extension of the current term of office of the members of the Board of Directors.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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MARKET ANNOUNCEMENT DATED AS OF JANUARY 17, 2018: CANCELATION OF THE EXTRAORDINARY GENERAL MEETING OF STOCKHOLDERS SCHEDULED FOR JANUARY 24, 2018

 

 

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COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG

LISTED COMPANY – CNPJ 17.155.730/0001-64 – NIRE 31300040127

MARKET ANNOUNCEMENT

Extraordinary General Meeting

of January 24, 2018 canceled

Cemig (Companhia Energética de Minas Gerais – listed in São Paulo, New York and Madrid), in accordance with CVM Instruction 358 of January 3, 2002 as amended, hereby reports to the Brazilian Securities Commission (CVM), the São Paulo Stock Exchange (B3) and the market as follows:

In the meeting held on the date hereof, the Board of Directors of Cemig decided to cancel the Extraordinary General Meeting of Stockholders scheduled for January 24, 2018.

The resolution of the Board of Directors for the cancellation of the Extraordinary General Meeting, pursuant to the terms of CVM Instruction No. 372 of 2002, results from the CVM Official Letter 11/2018/CVM/SEP/GEA-3, of January 16, 2018, which nformed Cemig about a request for the interruption of the term for calling the Extraordinary General Meeting of Stockholders, filed by a minority stockholder based on Article 124, §5º, II of Law 6404/1976.

Belo Horizonte, January 17, 2018

Adézio de Almeida Lima

Chief Finance and Investor Relations Officer

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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MARKET ANNOUNCEMENT DATED AS OF JANUARY 24, 2018: BEGIN OF THE 30-DAY EXTENSION TO THE EXCLUSIVITY PERIOD GRANTED TO BROOKFIELD ENERGIA RENOVÁVEL S.A. TO CONTRIBUTE TO THE CAPITAL STOCK OF RENOVA  ENERGIA S.A.

 

 

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COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG

LISTED COMPANY – CNPJ 17.155.730/0001-64 – NIRE 31300040127

MARKET ANNOUNCEMENT

BEGIN OF THE 30-DAY EXTENSION TO THE EXCLUSIVITY PERIOD GRANTED TO BROOKFIELD ENERGIA RENOVÁVEL S.A.

Cemig (Companhia Energética de Minas Gerais – listed in São Paulo, New York and Madrid), in accordance with CVM Instruction 358 of January 3, 2002 as amended, hereby reports to the Brazilian Securities Commission (CVM), the São Paulo Stock Exchange (B3) and the market as follows:

Today Cemig’s affiliated company Renova Energia S.A. (“Renova”) released the following Market Announcement:

“Under the scope of the Material Announcement dated as of November 24, 2017, Renova Energia S.A. (RNEW11) (“Renova”), in accordance with CVM Instruction 358/2002 as amended, hereby informs to its stockholders and the market in general the following:

Today begins the 30-day extension to the exclusivity period granted to Brookfield Energia Renovável S.A. to make the capital contribution to the capital stock of Renova as set forth in the binding offer approved by the Board of Directors of Renova.

Renova reaffirm its commitment to keep stockholders and the market in general fully and timely informed in accordance with the applicable legislation.”

Belo Horizonte, January 24, 2018

Adézio de Almeida Lima

Chief Finance and Investor Relations Office

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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SUMMARY OF THE MINUTES OF THE 722TH MEETING OF THE BOARD OF DIRECTORS HELD ON FEBRUARY 8, 2018

 

 

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COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG

LISTED COMPANY – CNPJ 17.155.730/0001-64 – NIRE 31300040127

BOARD OF DIRECTORS

Meeting of February 8, 2018

SUMMARY OF MAIN RESOLUTIONS

At its 722nd meeting, held on February 8, 2018, the Board of Directors of Cemig (Companhia Energética de Minas Gerais) decided the following:

Advance for Future Capital Increase in Cemig D.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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MARKET ANNOUNCEMENT DATED AS OF FEBRUARY 16, 2018: REPLY TO CVM INQUIRY LETTER 65/2018-CVM/SEP/GEA-1 OF FEBRUARY 15, 2018

 

 

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COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG

LISTED COMPANY – CNPJ 17.155.730/0001-64 – NIRE 31300040127

MARKET ANNOUNCEMENT

Reply to CVM Inquiry Letter 65/2018-CVM/SEP/GEA-1, of February 15, 2018

Question made by the Brazilian Securities Commission (CVM)

Rio de Janeiro, February 15, 2018.

To Mr. Adézio de Almeida Lima

Investor Relations Director

Companhia Energética de Minas Gerais – CEMIG

Av. Barbacena 1200 – 5th floor, B1 Wing, Santo Agostinho,

30190131 Belo Horizonte, MG

Fax:         (31) 35065026

Email:      ri@cemig.com.br

cc:            emissores@bvmf.com.br

Subject: Request for information on news report.

Dear Sir,

 

1. We refer to the news report published in the newspaper Valor Econômico, in the section Empresas, under the headline:

Sale of assets of Eletrobras, and losses, affect the process of Light

which contains the following statements:

 

  While negotiating to try to improve the offers already received – from Equatorial and from Enel – Cemig also does not rule out reopening the data room (the computerized ‘information room’), in the expectation that new interested parties may emerge, according to a source close to the subject. In this event, the negotiations would re-start from zero.

According to another source, binding proposals are likely to be received in the second quarter of this year, when the process of due diligence (operational and financial audit) on the company that is offered for sale will take place. Until the end of last year, Cemig expected to complete the transaction in the first half of this year, which now seems increasingly distant.

The offers received for the assets so far do not totally meet Cemig’s financial needs, Valor has ascertained. Equatorial made a proposal for the whole equity stake in Light owned by Cemig, but for part of the payment to be made in shares. With the stock price of Equatorial rising 12% in the last three months, and the stock price of Light falling 9% in the same period, the transaction becomes more attractive for Equatorial. As a result Equatorial – controlling stockholder of Celpa and Cemar – would use fewer shares to complete the purchase of Light.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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However, if it wants to do this, it will need to convince Cemig to negotiate the terms, and accept at least part of the payment in shares.

At the same time, Light is not the only target of Equatorial – which is seen as one of the leading candidates to buy the distributors of Eletrobras. Equatorial has some successful experiences in the recovery of Cemar, of the state of Maranhão, and Celpa, of the state of Pará – both companies that had been previously financially in tatters.

Cemig’s initial plan, however, is to receive only cash. Since it has now succeeded in refinancing a large part of its debt, extending maturities, the sale of Light has become less ‘urgent’. Thus, it is trying to improve the offers received.

Enel of Italy, on the other hand, is interested only in Light’s distribution assets, and thus has an even longer path ahead even though it may be considered to be one of the strongest interested parties. Its proposal would be for an amount implying R$ 17 per share, a source says.

This offer provides more attractive terms than the one made by Equatorial, but it is very unlikely that Cemig would sell only the distribution segment. To do this, the transaction would need to include a split of Light – an operation that is considered to be very complex. Not only would this need to be approved by a stockholders’ meeting, but the company would have to renegotiate covenants with creditors, which might result in early maturity of debts.

Cemig intends to use the proceeds from the sale of Light to pay the put option (option to sell their equity interest in Light to Cemig) that is still held by the banks that are its partners in Light – Santander, Banco do Brasil and Votorantim – which represents an amount of approximately R$ 700 million. Part of the option, which was to become due in November 2017, was extended for one year. If it uses the proceeds from the sale of Light to pay the banks with dividends, Cemig would have a tax advantage. This would only be possible if Light is sold for cash.”

 

2. We request your statement in relation to the veracity of this news report, and if it is true, that you explain the reasons why you believe that this is not a fact of material importance, and also comment on any other information considered to be important on the subject.

 

3. We also remind you of the obligation in the sole sub-paragraph of Article 4 of CVM Instruction 358/02, to question managers and controlling stockholders of the Company, and all other persons with access to material events or facts, to ascertain whether they had knowledge of information that should be disclosed to the market.

 

4. Your statement should be given through the Empresas.NET system, in the category: Market Announcement, under the sub-category: Responses to consultations by CVM/B3; subject heading: Media News Reports, and should include a transcription of this letter.

 

5. Be advised that, by order of our Company Relations Supervision Management, using its legal powers under Sub-item II of Article 9 of Law 6385/1976 and CVM Instruction 452/07, a coercive fine of R$ 1,000 (one thousand Reais) is applicable, without prejudice to other administrative sanctions, for non-compliance, by February 16, 2018, with the requirement contained in this Official Letter, which is sent exclusively by e-mail, notwithstanding the provisions of §1 of Article 6 of CVM Instruction 358/02.

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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Reply by CEMIG

Dear Ms. Nilza Maria Silva de Oliveira,

In reply to Official Letter 65/2018-CVM/SEP/GEA-1, of February 15, 2018, we advise you that, through its Material Announcement of June 1, 2017, subsequently updated on July 7, 2017, Cemig has disclosed and described its disinvestment program. Light, among other assets, is included in the said program.

Additionally, a Material Announcement was published on November 13, 2017, in which it was emphasized that:

 

  Cemig has received non-binding proposals related to the process of disinvestment, as a result of the first phase of access to the documents and information contained in the Data Room of the Light group.

These proposals are undergoing internal analysis for possible selection for inclusion in the next phase.

If any selection is made, conclusion of the process of disinvestment will also be subject to a phase of due diligence and technical visits, submission of binding proposals, negotiations and final approvals for signature of definitive agreements for the transaction referred to, and also approvals of the conditions precedent that are usual in this type of transaction.”

We inform you that, up to the present moment, the process of disposal of the equity interest in Light continues to be under internal analysis by the Company.

Cemig takes this opportunity of reiterating its commitment to opportune and timely disclosure of all and any facts that are of interest to its stockholders, in accordance with Article 2 of CVM Instruction 358/2002.

Belo Horizonte, February 16, 2018

José Maria Rabelo

Acting Chief Finance and Investor Relations Officer

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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MARKET ANNOUNCEMENT DATED AS OF FEBRUARY 19, 2018: RESIGNATION OF THE CEO OF RENOVA

 

 

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COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG

LISTED COMPANY – CNPJ 17.155.730/0001-64 – NIRE 31300040127

MATERIAL ANNOUNCEMENT

Resignation of the CEO of Renova

Cemig (Companhia Energética de Minas Gerais), a listed company with securities traded on the stock exchanges of São Paulo, New York and Madrid, as per CVM Instruction 358 of January 3, 2002, as amended, hereby reports to the Brazilian Securities Commission (CVM), the São Paulo Stock Exchange (B3) and the market as follows:

Today Cemig’s affiliated company Renova Energia S.A. (‘Renova’) published the following Material Announcement:

Renova Energia S.A. (RNEW11) (‘Renova’), in accordance with CVM Instruction 358/2002 as amended, hereby informs its stockholders and the market as follows:

On today’s date Mr. Carlos Figueiredo Santos delivered to the Chairman of the Board of Directors his resignation from the position of Chief Executive Officer of Renova.

He will remain in his position until February 28, 2018. If a new officer to replace him is not elected by that date, the present Chief Financial Officer will assume the position as interim Chief Executive Officer, as per the terms of the by-laws and the Stockholders’ Agreement signed on December 19, 2014.

Belo Horizonte, February 19, 2018

José Maria Rabelo

Acting Chief Finance and Investor Relations Officer

 

 

Av. Barbacena 1200

  Santo Agostinho   30190-131 Belo Horizonte, MG   Brazil   Tel.: +55 31 3506-5024   Fax +55 31 3506-5025

 

This text is a translation, provided for information only. The original text in Portuguese is the legally valid version.

 

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