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1 Challenges of a new time. 2 Agenda 1.New State administration 2.The CRC affair 3.CVM and SEC 4.The new Federal Administration 5.Energy auctions 6.The.

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Presentation on theme: "1 Challenges of a new time. 2 Agenda 1.New State administration 2.The CRC affair 3.CVM and SEC 4.The new Federal Administration 5.Energy auctions 6.The."— Presentation transcript:

1 1 Challenges of a new time

2 2 Agenda 1.New State administration 2.The CRC affair 3.CVM and SEC 4.The new Federal Administration 5.Energy auctions 6.The rate review process 7.Earning preview

3 3 Disclaimer Certain statements contained in this presentation are “Forward-Looking Statements” within the meaning of the US Securities Laws, and are thus prospective and subject to risks and uncertainties. “Forward-Looking Statements” are matters that are not historical facts and are beyond our control. For a discussion of risks and uncertainties as they relate to us, please refer to our 2000 Form 20F, and in particular Item 3 under “Key information - Risk Factors”.

4 4 The new governor is a young congressman who is the House of Representatives S peaker 1.New State administration a.The new governor is Mr. Aécio Neves i.A first round win, with 57% of total votes ii.Congressman iii.A large and comfortable majority at the local Legislature b.Major proposals i.Create Cemig holding company 1.Expand generating capacity 2.Energy trading ii.Expand the transmission and distribution systems aiming at improving service quality iii.Expand natural gas supply iv.100% penetration in rural areas v.Develop and consolidate an excellence center on energy vi.No plans to privatize Cemig

5 5 The Board of Directors 11 members 7 appointed by MG 4 appointed by SEB The Auditing Committee* 5 members 3 appointed by MG 1 appointed by SEB 1 appointed by PN holders Decisions are made on a 50% majority basis * Organized under Brazilian legislation The new Administration will appoint new members of Board

6 6 The executive officers mostly are career employees or retired employees who are able to respond the challenge of a competitive industry. Professional team is expected to be appointed

7 7 Final decision will come at the long run * SEB : the legal proceeding a.Case Update i.Still in the State Appeal Courts, pending on appeal filed last year ii.Next step: Federal Appeal Court b.What changes with the new State Administration i.Nothing : the legal proceeding must be finally ruled by the Courts ii.There is no perspective of an earlier agreement * SEB : AES, Mirant and Opportunity Fund joint venture

8 8 Negotiations with government to settle the industry agreement 2.The CRC affair a.Negotiations with the Federal Government i.Total amount : R$ 1.1 billion ii.Discount rate : 12% iii. Use of proceeds: a.Expenses derived from the rationing related agreement b.Debt of any sort b.Negotiation with the State of Minas Gerais i.R$ 510 million ii.Tenor : 12 years iii.Interest rate : 12% p.a. iv.Guarantees: dividends

9 9 Cemig is taking the proper measures to resolve the CRC case 3.CVM and SEC a)ANIMEC i.The Brazilian Association of minority shareholders notified CVM, complaining about the lack of action of the executive officers on the CRC case. Therefore, those officers should be sued. ii.The CVM, after the company’s defense be accepted, ruled on the company’s officer favor saying the management had taken proper measures to collect the CRC receivables. b)CRC bad debt accrual i.CVM notified Cemig on CRC overdue payment determining a bad debt accrual for those payments and the re-filing of the second quarter ITR. ii.Cemig filed a administrative appeal aiming at the suspension of the required measure. c)Minority shareholder appointed Director letter to CVM i.The SEB appointed Directors filed a complaint against the State appointed Directors alleging inaction or omission on the CRC case. The company is preparing a defense letter. d)20 F a)With the closing of the CRC negotiation, the 20F filing will be resumed

10 10 The PT’s view on the electricity industry 4.The new Federal Administration 1.There is no official statement on the industry yet: Change on the approach : market oriented regulation may be discarded. Deep concern on prices may result in attempt to establish price control. Deeper changes may require Congressional approval. 2.The team responsible for the industry restructuring is not appointed yet: The policymakers who made the PT’s campaign proposal are likely to take responsibility: The key person is Luiz Pinguelli Rosa

11 11 “ It is necessary to unravel the big confusion the industry is.” Luiz Pinguelli Rosa PT energy industry policymaker The insights to follow were selected from an interview granted to an energy specific electronic newspaper

12 12 The approach will be changed Change the approach so that it is focused on public service rather than privatization and liberalization; –Notwithstanding, previously signed contracts will be honored; Electricity system expansion planning will be centralized and will be conducted by the existing energy planning committee, the CNPE ; oThe responsibility to handle growing demand is that of the Federal Government ; oThe private investor role is supplementary;

13 13 Deep concern with the capacity expansion Assure the capacity expansion through state owned and private generators: oThe needed investment is approximately R$ 10 billion per year of which R$ 5 billion will be invested by the Eletrobras group; oThe state owned utilities are under-leveraged and there may raise funds in the capital markets; oThe restrictions on state owned companies’ ability to raise funds will be lifted. oThe MAE, the wholesale energy market, will have a complementary role: oThe generators will be committed to the capacity expansion; The ROI will be set through transmission fixed revenue like approach; It will be assured inflation based adjustments ;

14 14 Concerns on price levels The electricity price must be affordable for the consumers: oChange the way the concessions are granted oThe idea is to have lowest rate bid win rather than the highest licensed fee; o The rate review process will be revised to change the inflation adjustment index, the IGP-M, which reflects the impact of the depreciated real; oExtend initial contracts through negotiation among the various parties; onevertheless, the utilities must be profitable but not excessively so; oThe negotiation process will not be extensive with the Government in the role of arbitrator;

15 15 Other points to watch The ANEEL will have an industry oversight role assuring regulation enforcement; The rationing loss recovery mechanism will be preserved and other points will be revised : oEnergy supply insurance; oThe CBEE ( Government owned trader) role; Thermal generation projects will have a supplementary role to the hydro-generation and a progressive growth in the country’s energy matrix. Points to be revised are: oNatural gas high price ( dollar denominated contracts); oTake or pay contracts; The use of alternate energy sources is one of the highest priorities of the PT’s energy industry strategy;

16 16 Low demand turned prices low 5.Energy auctions What went wrong? a.Disappointing demand. b.Low asked prices for energy to deliver in the SE and MW region. c.Buyers unsure on price trend. d.Overcapacity on the short term e.Uncertainty on the regulatory framework

17 17 Federal auction final results

18 18 The pricing outlook –The VN, R$ 85 per MWh, is the price reference –Marginal cost is around VN –For the long run, price will range from R$ 70 to 85 per MWh –Good rainfalls may affect spot market price keeping it down for the short term –Subsidies on the natural gas price will turn thermal projects competitive Electricity price linked to capacity expansion cost

19 19 Still pending decision on the methodology to be used 6.The rate review process a.The rate base asset value to be calculated by a replacement price approach. b.CNPE’s request on the criteria taken by the ANEEL. c.Cemig’s process supposed to be completed until April 2003 d.Subject to public hearings

20 20 Year of volatility 7.Earning preview Major highlights Devaluation of the Br R$ was very sharp : 30% in the quarter, 40% year to September. Sale volume growth is still sluggish because of the weak economic activity and rationing impact. Subsidies granted to the low income consumers.

21 21 Energy Retail Sale Volume Growth Analysis Estimated retail sales in 2002 are: Match 1998 and % lower than % higher than 2001 See disclaimer slide 2

22 22 Energy Retail Sale Volume Growth Analysis 3Q 02 retail sale volume is: –4.8% lower than 2000 –16.8% stronger than 2001

23 23 Energy Retail Sale Volume Growth Analysis In the 2 and 3Q 02, the monthly average retail sales volume was 10% higher than 1Q 02

24 24 September 2002 retail sales were: –Approximately 16% stronger compared to September 2001 –4% lower than 2000 Energy Retail Sales Volume Growth Analysis

25 energy retail sale estimate is still higher than the 2001 energy retail sales Nonetheless, 2002 estimates match 1998 and 1999 retail sales The impact of 2001/2002 rationing will persist for at least 3 years 2000 retail sale level will be matched only in 2005 Energy Retail Sales Volume Growth Analysis

26 26 Retail Sales Volume Growth Estimate Reflects Impact of Rationing For the period the estimated annual growth rate is 2.2% CAGR is 0.4% See disclaimer slide 2

27 27 The major reasons for slower growth are: –Change in average residential and commercial consumption: 1 st half 2002 averages are 16% and 13% lower than 2001; –Change in industrial consumption pattern: Some consumers are replacing utility supply by self-generation (hydropower projects at aluminum industry, cogeneration projects at steel and fertilizer plants) and diesel fired generators or other alternatives during peak hours. Energy Retail Sales Volume Growth Analysis

28 28 Therefore, we are revising our estimate for 2002 New requirements for low income consumer subsidy brought a R$5 million monthly revenue loss. Reduction of the initial contract volume rose from 2.4% to 6.3%, resulting in a lower revenue loss recovery. Consumption growth estimate now is 2.3% down from 4%, previously predicted.

29 29 R$3.4 Billion Planned for the Next 4 Years Economic Basis CAPEX Values in million of reais All financial information in Brazilian GAAP

30 30 Major Projects Aimorés Funil Queimado Porto Estrela All financial information in Brazilian GAAP

31 31 BOVESPA Level I : CMIG3 and CMIG4BOVESPA Level I : CMIG3 and CMIG4 NYSE Level II ADR: CIGNYSE Level II ADR: CIG Latibex : XCMIGLatibex : XCMIG Dow Jones Sustainability Index 2000, 2001 and 2002Dow Jones Sustainability Index 2000, 2001 and 2002 Committed to the best Corporate Governance practices Best Electricity Industry Corporate Governance Practices in Latim America


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