REPORT OF MANAGEMENT FOR 2013 MESSAGE FROM MANAGEMENT

Transcription

1 CONTENTS REPORT OF MANAGEMENT FOR MESSAGE FROM MANAGEMENT... 2 CEMIG: A BRIEF HISTORY... 4 OUR BUSINESSES... 8 FINANCIAL RESULTS THE REGULATORY ENVIRONMENT RELATIONSHIP WITH OUR CLIENTS INVESTMENTS DIVIDEND POLICY PROPOSAL FOR ALLOCATION OF NET PROFIT CORPORATE GOVERNANCE RELATIONSHIP WITH EXTERNAL AUDITORS RISK MANAGEMENT TECHNOLOGICAL MANAGEMENT AND INNOVATION SOCIAL RESPONSIBILITY AWARDS FINAL REMARKS SOCIAL STATEMENT - CEMIG, CONSOLIDATED MEMBERS OF BOARDS STATEMENTS OF FINANCIAL POSITION STATEMENTS OF INCOME STATEMENTS OF COMPREHENSIVE INCOME STATEMENTS OF CHANGES IN EQUITY - CONSOLIDATED STATEMENTS OF CASH FLOW STATEMENTS OF VALUE ADDED EXPLANATORY NOTES TO THE FINANCIAL STATEMENTS OPERATIONAL CONTEXT BASES OF PREPARATION PRINCIPLES OF CONSOLIDATION CONCESSIONS AND THE EFFECTS OF PROVISIONAL MEASURE 579 OF SEPTEMBER 11, 2012 (ENACTED AS LAW OF JAN. 11, 2013) OPERATIONAL SEGMENTS CASH AND CASH EQUIVALENTS SECURITIES CONSUMERS AND TRADERS RECOVERABLE TAXES INCOME TAX AND SOCIAL CONTRIBUTION TAX ESCROW PAYMENTS INTO COURT ACCOUNTS RECEIVABLE FROM MINAS GERAIS STATE GOVERNMENT; THE RECEIVABLES INVESTMENT FUND ENTRY OF FUNDS FROM THE ENERGY DEVELOPMENT ACCOUNT (CDE) FINANCIAL ASSETS OF THE CONCESSION INVESTMENTS PROPERTY, PLANT AND EQUIPMENT INTANGIBLE ASSETS SUPPLIERS TAXES, INCOME TAXES AND SOCIAL CONTRIBUTION TAXES LOANS, FINANCINGS AND DEBENTURES REGULATORY CHARGES POST-RETIREMENT LIABILITIES PROVISIONS EQUITY AND REMUNERATION TO STOCKHOLDERS REVENUE OPERATIONAL COSTS AND EXPENSES FINANCIAL REVENUES AND EXPENSES RELATED PARTY TRANSACTIONS FINANCIAL INSTRUMENTS AND RISK MANAGEMENT MEASUREMENT AT FAIR VALUE INSURANCE COMMITMENTS SUBSEQUENT EVENTS REPORT BY THE EXTERNAL AUDITORS ON THE FINANCIAL STATEMENTS OPINION OF THE AUDIT BOARD STATEMENT BY THE MEMBERS OF THE BOARD OF DIRECTORS OF REVIEW OF THE FINANCIAL STATEMENTS STATEMENT BY THE MEMBERS OF THE BOARD OF DIRECTORS OF REVIEW OF THE REPORT BY THE EXTERNAL AUDITORS ON THE FINANCIAL STATEMENTS...181

2 REPORT OF MANAGEMENT FOR 2013 Dear stockholders, Companhia Energética de Minas Gerais ( Cemig or the Company ) submits for your consideration the Report of Management, the Financial Statements, and the Opinions of the Audit Board and of the Company s external auditors on the business year ended December 31, MESSAGE FROM MANAGEMENT Once again we complete a year certain of having done our duty, adding value for our stockholders, and by our actions reaffirming our vocation as a company consolidating the Brazilian electricity sector. We were aware of the challenges we would face in 2013, with various factors: the Tariff Review for our distribution company ( Cemig D ); reduction of our transmission revenues as a result of the new rules in Provisional Measure 579; the expiry of the first period of our concession to operate the Jaguara plant; and the likely need for discussion on its extension for an additional period, as specified in our concession contract. But even with all these challenges, we are able to report profit of over R$ 3.1 billion in The profit in 2012 was R$ 4.3 billion, apparently indicating a reduction, but in that year we had the extraordinary contribution to profit from early settlement of the CRC contract (receipt of long-established receivables from the State of Minas Gerais). Without that non-recurring event, our performance improved from 2012 to 2013, continuing to show Cemig s consistency in presenting ever-growing results. 2 The 2013 profit indicates earnings per share of R$ During 2013 we paid dividends of R$ 4.6 billion, showing a dividend yield of 9.9%. Over the long term - with its outlook for diminishing interest rates - these figures make our shares an investment with a return that is attractive to our thousands of stockholders. In spite of the good results, our shares were also affected in 2013 by regulatory uncertainties for Brazil s electricity sector, arising from Provisional Measure 579, and also by the outflow of capital from emerging markets, including Brazil, in search of securities with a lower risk perception, such as US federal debt. Even in this relatively adverse context, our common shares (ON) rose 4.00% in the year, and our preferred shares (PN) fell 0.2% - while the Bovespa index was down 15.50% in the year, and the Brazilian electricity sector index down 8.83%. In terms of new investments, 2013 was a significant year: Renewables: In generation from renewable sources, the highlight was our acquisition of 51% of Brasil PCH, an investment of R$ 740 million, with the investment agreement Page 2 of 181

3 under which our wholly-owned subsidiary Cemig GT (generation and transmission) will become a member of the controlling stockholding block of Renova Energia ( Renova ), making a significant investment program by that company possible over the coming years, and consolidating our position among Brazilian groups with the largest holdings in renewable electricity sources. Generation assets: Another highlight our alliance with Vale S.A. for generation assets, to create the new company Aliança Geração de Energia S.A., holding combined assets worth more than R$ 4 billion. By combining the experience of the two companies in operational, financial and project management, this association increases the potential for generating new business and maximizing results in generation. Distribution investment: In distribution, our wholly-owned distribution subsidiary Cemig D invested R$ 884 million in 2013, as part of an investment schedule of R$ 3.7 billion for Improving service indices: A continuing highlight, as ever, was our commitment to the general public to improve the quality and reliability of service to our consumers. The average duration of outages for Cemig D consumers, expressed as the SAIDI Index, was hours in 2013, compared to hours in an improvement of 15.26%. Also, the frequency of consumer outages, measured as SAIFI, which was already below the minimum required by the Regulator, also improved: by 11.08%, from 7.04 in 2012 to 6.26 in These successes - growth, consistent financial results and our commitment to quality in serving our clients - are a materialization of our strategic vision, based on principles of sustainability and social responsibility. This continuing success is demonstrated by the inclusion of Cemig, for the 14 th year running, in the Dow Jones Sustainability World Index. Further, Cemig was selected in 2013 for inclusion in the UN s Global Compact 100 (GC100) Index, a group of companies from all over the world committed to corporate sustainability linked to optimum performance in the capital markets - bearing witness to Cemig s efforts to align its strategy to the principles of the Global Compact. The year of 2014 will also present our company, and the Brazilian electricity sector, with some major challenges: The low level of reservoirs of hydroelectric plants throughout Brazil at the end of 2013 and in early 2014 increased prices of electricity in the wholesale market to above R$ 800/MWh, resulting in pressure on the cash positions of the distribution companies, forced to pay a high cost to acquire electricity. This situation made it unavoidable for the federal government and regulatory bodies to provide support in building solutions to maintain the financial equilibrium of the sector s companies and enable transactions between distributors and generators to be settled. Page 3 of 181

4 In this context, Brazilian rainfall in the coming months will be a determining factor for the country s energy policy and prices of electricity throughout the year. Another component of 2014 is the Soccer World Cup, an event with worldwide repercussions - in which the electricity sector has an important role to play in maintaining reliable supply during the games. Thanks This report is not complete without stating our thanks to our employees, a group of professionals whose competence is recognized throughout Brazil. It is the commitment, competence and talent of all our workers that makes Cemig continue to be a provider of Brazil s best energy. Also, our results would not have been possible without the support of all our stockholders, whom we thank for their support and the confidence shown during the year. 4 CEMIG: A BRIEF HISTORY Cemig is a company with mixed public-and private-sector ownership, controlled by the government of the Brazilian state of Minas Gerais. Its shares are traded on the exchanges of São Paulo, New York and Madrid (Latibex). Its market valuation at the end of 2013 was approximately R$ 17.6 billion. Cemig s shares have been in the Dow Jones Sustainability World Index for fourteen years. In 2012 it was the only company in the sector in Latin America chosen for the DJSI World, reflecting its sustainable management practices, and it continues to be the only company in the electricity sector in Latin America that has been a part of this select group of companies since the DJSI was created in In January 2013 Cemig was elected the world s 43rd most sustainable company, in the ninth annual Global 100 ranking, published by the Canadian magazine Corporate Knights. In the utilities sector - electricity, gas and water services - Cemig was considered to be the world s fourth most sustainable company. The Cemig Group comprises 153 companies, and 18 consortia. It is controlled by a holding company, with assets and businesses in 23 of Brazil s states, the Brazilian federal district, and Chile. Cemig also operates in data transmission, through Cemig Telecom, and in the provision of energy solutions, through Efficientia. Page 4 of 181

5 Our mission, vision and values Mission: To operate in the energy sector with profitability, quality and social responsibility. Vision: To consolidate Cemig s position, over the course of this decade, as the largest group in the Brazilian electricity sector by market value, with a presence in the natural gas market, and as a global leader in sustainability, admired by its clients and recognized for its solidity and performance. 5 Values: Integrity, ethics, wealth, social responsibility, enthusiasm for the work, and entrepreneurial spirit. The Cemig Statement of Ethical Principles and Code of Professional Conduct To provide a background of discipline for defining working behavior and decisions, Cemig has, since 2004, adopted its Statement of Ethical Principles and Code of Professional Conduct, which is available on the internet at This brings together 11 principles setting out the ethical conduct and values that are incorporated into our culture. Anti-fraud Policy In its business and activities, Cemig does not accept practice or concealment of any fraud or corruption, in any of its forms, from anyone, including members of the Board of Directors, the Audit Board, the Executive Board, employees and outsourced contractors. Any suspicions or accusations of this nature are rigorously investigated and if proven, disciplinary procedures specified in the Company s internal rules are applied, as well as legal actions and criminal proceedings when appropriate. The Sarbanes-Oxley Law and Certification of Internal Controls Cemig has obtained unqualified Certification of its Internal Controls relating to procedures for publication of the Consolidated Financial Statements in 2012, according to an opinion from its external auditors, continuing a line of these approvals since the process began in Every year, based on an analysis and review of the mapping of risks of processes, Cemig s management documents and tests the effectiveness of the controls at business and entity level, including the controls supported by information technology, in accordance with the rules of the Securities and Exchange Commission (SEC) and based on the criteria of the Public Company Accounting Oversight Board (PCAOB), the Page 5 of 181

6 Committee of Sponsoring Organizations of the Treadway Commission (Coso) and the Control Objectives for Information and Related Technology (Cobit). As well as complying with the Sarbanes-Oxley Law ( SOX ), the activities related to the Certification of Internal Controls help maximize the efficiency of the processes of risk management and corporate control and governance; They are carried out and monitored systematically and permanently. Area of operation As the map below shows, Cemig operates in many regions of Brazil, with activity most highly concentrated in the country s Southeast. It also shows Cemig s first operation outside Brazil: the Charrúa-Nueva Temuco transmission line, in Chile, which began to operate in #1 Largest power distributor* + 3 rd largest power transmission group + 3 rd largest power generation group #1 Integrated utility 6 Power Generation RR AP AC Power Generation (under construction) Power Transmission Power Transmission (under construction) Electricity Distribution Cemig Free Consumer Clients Wind Power Generation Natural Gas Distribution Telecom Backbone Provider AC AM Present in States of Brazil And in Chile RO PA TO MT DF GO MS SP PR SC MA CE PI BA MG RN PB PE AL SE RJ ES * By number of consumers, and by length of electricity distribution lines. RS The Cemig brand In 2013 the valuation of Cemig s brand declined by 3% from We believe that much of this reduction reflects the impacts of Provisional Measure 579 (of September 2012, converted into Law 12783/13), which imposed profound changes in the operations of all the companies of the sector. This situation underlines the need for Cemig to continue working on essential issues in terms of brand and reputation, related mainly to price, tariffs, technical support, service and quality, and the price of the share. Page 6 of 181

7 1,550 1,500 Value of the Cemig Brand R$ million 1,503 Presidential elections GDP growth 7.5% 1,450 1,400 Municipal elections 1,409 GDP growth 0.9% 1,350 1,300 1,250 1, GDP growth 0.3% negative 1,285 1,368 Provisional Measure 579/ Reputation The Reputation Institute uses a specialized method to evaluate the degree of the public s respect, admiration, trust and empathy in relation to Cemig, resulting in its Pulse general reputation index. In 2013 Cemig s Pulse index score was 61.9, an increase of 3.1 points from 58.8 in but we still have the challenge of returning to our index of the high point since these measurements began. Cemig s Pulse (reputation) index, Since 2011 Cemig has had a Brand and Reputation Management Committee. It object is to analyze actions to be put in place for improvement of the company s performance. Arising from suggestions by this Committee, focus groups were held in 2013 with Free Clients and medium-voltage clients. The findings of the surveys and the focus groups will serve as the basis for actions to be taken in Page 7 of 181

8 Operating profit in 2013 OUR BUSINESSES Operating profit, , Generation Transmission Distribution Telecoms Gas Others 8 Hydroelectric generation Including its subsidiaries and affiliated companies, the Cemig Group has 70 generating plants in operation, of which 63 are hydroelectric, 3 thermal and 4 are wind plants - a total of 7,158 MW of installed capacity. This places the Cemig Group as Brazil s third largest electricity generator. Plant Installed capacity, Effective output MW (Average MW) São Simão 1,710 1,281 Emborcação 1, Nova Ponte Jaguara Miranda Três Marias Volta Grande Irapé Aimorés Others 1, Generation - Light Wind plants Thermal plants Total 7,158 4,375 In line with Cemig s growth strategy, its total installed generation capacity has grown constantly over the last five years. Installed capacity (MW) 6,896 6,964 7,032 7,158 6, Page 8 of 181

9 The company has generation projects in progress, among which we highlight: Plant Installed capacity (MW) Cemig interest Scheduled date for operation at full capacity Santo Antônio 3, % 2016 Belo Monte 11, % 2018 Wind power Cemig was a pioneer in Brazilian wind power: its first wind plant, the Morro do Camelinho plant, was connected to the national grid in Brazil has theoretical total wind power generation potential of GW. This is more than the country s current total installed generation capacity, of 107 GW. In 2011 Cemig became a member of the stockholding group controlling Renova, through its interest in Light. Renova is the owner of the largest wind power complex in Latin America, located in the central region of the state of Bahia. 9 In 2013 Cemig signed an Investment Agreement governing the entry of Cemig GT into the controlling stockholding block of Renova by subscribing new shares in Renova. Renova will use these funds for further investments, consolidating its position as one of the largest companies generating from renewable electricity sources in Brazil. Cemig also has a 49% interest in three major wind farms already in operation, in the State of Ceará, with total potential generation capacity of approximately 100 MW. Transmission At the end of 2013 Cemig GT was operating 4,889 km of transmission lines that were part of the Brazilian National Grid. Distribution We are Brazil s largest electricity distribution company - operating in distribution primarily in the states of Minas Gerais and Rio de Janeiro, through Cemig D and Light S.A. (Light), serving more than 10 million consumers. Cemig D Cemig Distribuição (Cemig D) is the largest distribution company in Latin America, with 486,045km of distribution networks (98,175km in urban areas and 387,870km of rural networks), and also 17,218km of high- and medium-voltage sub-transmission lines. It serves 7.8 million consumers. Cemig D has one of the highest indices of consumers benefited by the Brazilian Social Tariff. Of the total of residential consumers invoiced in 2013, 15.53% were classified as low-income, a total of approximately 967,000 consumers. Page 9 of 181

10 Average MW CEMIG The chart below shows the growth of Cemig D s sub-transmission and distribution lines over the last five years. Subtransmission and distribution lines (Km) 467, , , , , Electricity sales and trading 10 Companies of the Cemig Group are leaders in trading on the Free Market. We have expanded our area of activity to other states, while consolidating our position with new clients in states in which we were already operating - the most important being Minas Gerais, São Paulo and Bahia. In service to large Free Clients, Cemig s leadership arises from a volume of sales equivalent to twice the volume sold by the nearest competitor. In serving Special Clients, Cemig s position has grown each year, especially from 2008 through Brazil s market for Special Clients; sales by Cemig (MW average) Special Clients consumption on CCEE Cemig sales (right axis) Page 10 of 181

11 Performance of our businesses in 2013 Net profit for the period FINANCIAL RESULTS Cemig reports profit of R$ 3,104 million for 2013, 27.34% lower than its 2012 profit of R$ 4,272 million. The lower figure reflects an extraordinary effect on net profit in 2012 from the early settlement of the CRC contract with the government of Minas Gerais State, as described in more detail below. Net Profit 4, ,206 2,258 2,415 3, Operational revenue Breakdown of Cemig s operational revenues: R$ million Change % Revenue from supply of electricity Revenue from Use of Distribution Systems (the TUSD charge) 14,741 1,008 15,380 1,808 (4.15) (44.25) Transmission revenue Transmission concession revenue (38.97) Transmission construction revenue (14.79) Transmission indemnity revenue (89.23) Distribution construction revenue 884 1,229 (28.09) Transactions in electricity on the CCEE 1, Other operational revenues 1, Sector / Regulatory charges - deductions from revenue (4,763) (6,135) (22.36) Net operational revenue 14,627 14, Revenue from supply of electricity Cemig s gross revenue from supply of electricity was R$ 14,741 million in 2013, compared to R$ 15,380 million in 2012, a reduction of 4.15%. Page 11 of 181

12 Final consumers Revenue from electricity sold to final consumers, excluding Cemig s own consumption, was R$ 12,597 million in 2013, compared to R$ 13,691 million in 2012, a reduction of 7.99%. The main factors: A reduction of 18.14% in the average tariff paid by captive consumers of Cemig D (Distribution) under the Extraordinary Tariff Review established by Provisional Measure 579/12. These rates were applied from January 24 to April 7, 2013, when the Ordinary Tariff Review of Cemig D was completed. Annual tariff adjustment with average effect on captive consumers of Cemig D of +3.85%, from April 8, 2012 (full effect in 2013). 12 Tariff review with average effect for Cemig D s captive consumers of +2.99%, from April 8, Quantity of electricity sold to final consumers 1.78% lower. Adjustments in contracts for sale of electricity to Free Consumers in most of these contracts are indexed to variation of the IGP-M Index. Cemig s market Cemig s market consists of sales of electricity: (i) to captive consumers in its concession area in the State of Minas Gerais; (ii) to Free Clients in the state of Minas Gerais and in other states of Brazil in the Free Market (Ambiente de Contratação Livre, or ACL); (iii) to other agents of the electricity sector (traders, generators and independent power producers), in the Free Market; (iv) to distributors in the Regulated Market (Ambiente de Contratação Regulada, or ACR); and (v) in the Electricity Trading Chamber (CCEE), - eliminating transactions between companies of the Cemig Group. Page 12 of 181

13 This table summarizes Cemig s total market, in 2013 and 2012: MWh Residential 9,473,426 8,870,990 Industrial 23,451,590 25,472,685 Commercial, Services and Others 6,035,454 5,722,581 Rural 3,028,459 2,857,117 Public authorities 860, ,705 Public illumination 1,267,202 1,241,928 Public service 1,241,897 1,185,781 Subtotal 45,358,737 46,181,787 Own consumption 35,162 34,126 45,393,899 46,215,913 Wholesale supply to other concession holders (*) 16,127,376 13,368,096 Total 61,521,275 59,584,009 (*) Includes Regulated Market Electricity Sale Contracts (CCEARs) and bilateral contracts with other agents. The total volume of electricity sold by Cemig in 2013 was 3.25% more than in Sales of electricity to final consumers were 1.78% lower in 2013, reflecting a reduction in productive activity, in line with the country s low rate of growth in the year. The following notes describe the performance of each consumer category: Residential: Cemig s residential consumption was 6.79% higher in 2013 than 2012, mainly reflecting connection of new consumer units and the growth in private consumption of goods and services, boosted by government policies on employment and income, and stimulation of acquisition of goods associated with supply of financing lines. Industrial: Electricity consumed by captive and free industrial clients was 7.93% lower in 2012, basically reflecting the reduction in industrial activity, resulting from a lower growth in the country in Commercial: Electricity consumed by Cemig s captive and free commercial clients in the concession area of Minas Gerais and outside the state, was up 5.47% in 2013, reflecting connection of new consumer units and increased consumption of services by private individuals and the various economic sectors. Rural: Consumption by Cemig s rural client category was 6.00% higher in 2013 than 2012, reflecting increased demand for electricity for irrigation, due to the atypical climate conditions in the year, with less rain. Other consumer categories: Total consumption by Public authorities, Public illumination, Public services and Cemig s own consumption was 3.41% higher in Page 13 of 181

14 Revenue from wholesale supply to other concession holders This revenue was 26.94% higher in 2013, at R$ 2,144 million, compared to R$ 1,689 million in 2012, mainly on the following factors: Volume of electricity sold to other concession holders at 16,127,376 MWh in 2013, up 20.64% from 13,368,096 MWh in 2012; Average price of electricity sold 5.22% higher, at R$ /MWh in 2013, compared to R$ /MWh in Revenue from use of the Distribution Systems (TUSD) The Tariff for Use of the Distribution System (TUSD) is charged to Free Consumers on their volume of electricity sold. In 2013 this revenue was R$ 1,008 million, compared to R$ 1,808 million in a reduction of 44.25%, reflecting the average reduction of the tariff charged by Cemig D to Free Consumers, from April 8, 2013, and also reduction in industrial consumption of large clients in Revenue from transactions in electricity on the CCEE This revenue in 2013 was R$ 1,193 million, an increase of % from R$ 387 million in 2012, reflecting various factors: mainly, greater availability of electricity for sale through the CCEE in the year, principally arising from consumers migrating to the status of Free Consumers and also from excess volumes of electricity under availability contracts - but also because the spot price (Preço de Liquidação de Diferenças, or PLD) was 57.81% higher in 2013, at R$ /MWh, than in 2012 (R$ /MWh). Other operational revenues These break down as follows: R$ million Consolidated Charged service Telecoms services Services rendered Subsidies (*) Rental and leasing Other , (*) Revenue recognized for the tariff subsidies applicable to certain users of distribution services, reimbursed by Eletrobras. The variation mainly reflects inflow of subsidy funds from the Energy Development Account (CDE), to compensate for subsidies relating to the reduced TUSD charge which were not incorporated into the tariff, in the amount of R$ 488 million in the 2013 business year. Page 14 of 181

15 Sector and other charges on revenue These various regulatory deductions from operational revenue totaled R$ 4,763 million in 2013, compared to R$ 6,135 million in 2012, a reduction of 22.36%. This is primarily the result of Provision Measure 579/12, which reduced sector charges: The Global Reversion Reserve (RGR) This is an annual quota embedded in the costs of concession holders to generate funds for expansion and improvement of public electricity services - the amounts are set by an Aneel Resolution. The charges for the RGR in 2013 were R$ 70 million, compared to R$ 217 million in 2012, a reduction of 67.74%, caused primarily by Law 12783/13, which exempted Cemig D from paying the RGR from February, The Energy Development Account (CDE) The charge for the CDE in 2013 was R$ 132 million, compared to R$ 498 million in a reduction of 73.49%. Law 12783/13 reduced CDE charges by 75.00%. This is a non-controllable cost: The difference between the amounts used for referencing calculating tariffs and the costs actually incurred is compensated in the subsequent tariff adjustment. The other significant deductions and charges reducing operational revenue are taxes calculated as a percentage of amounts invoiced, and their variations are thus substantially in line with the changes in revenue. The Fuel Consumption Account (CCC) This charge is made to fund costs of operation of the thermal plants of both the grid and the isolated systems, pro-rated in accordance to the size of market served, between the electricity concession holders, by an Aneel Resolution. Law 12783/13 exempted Cemig from payment of the CCC, starting in February and thus its total CCC charges in 2013 were R$ 25 million, compared to R$ 458 million in 2012 (a reduction of 94.54%). Operational costs and expenses (excluding Financial Revenue (expenses)) Operational costs and expenses (excluding financial revenue/expenses) totaled R$ 11,232 million in 2013, compared to R$ 11,528 million in 2012, a reduction of 2.57%. There is more information on the breakdown of operational costs and expenses in Explanatory Note 26 to the consolidated financial statements. The main variations in the expenses are as follows: Page 15 of 181

16 Electricity bought for resale This expense totaled R$ 5,207 million in 2013, compared to R$ 4,683 million in 2012, an increase of 11.19%, mainly on the following factors: The total value of electricity bought in the free market was R$ 578 million higher in 2013, reflecting higher sales activity by Cemig GT, and a higher cost of acquisition due to the higher price of electricity in the Brazilian market. This increase was compensated, partially, by reduction in expenditure on spot market electricity arising from exposure in the CCEE, as a result of the federal government reimbursing Cemig for these expenses in a total of R$ 1,008 million, as follows: - R$ 489 million to reduce the effect of the tariff adjustment, limited to 3.00%, by the federal government, with the portion for expenses of purchase of electricity exceeding the amount of revenue in the period April 2012 to April 2013 being paid at sight R$ 519 million for relief of the Company s financial exposure to the spot market, which covered: the tariff deficit arising from the quotas, in relation to the hydrological risk; the involuntary exposure arising from non-acceptance of extension of concessions; and the Electricity Security System Charge ( ESS - Segurança Energética ). The expense on electricity from Itaipu Binacional was 14.80% higher. This expense is indexed to the dollar, and was R$ 1,016 million in 2013, compared to R$ 885 million in 2012, arising among other factors from the depreciation of the Real against the dollar in 2013, compared to appreciation in The average dollar applied to invoices in 2013 was R$ , compared to R$ in an increase of 27.78%. Charges for use of the transmission and network These charges totaled R$ 575 million in 2013, 34.88% less than in 2012 (R$ 883 million). This arises from application of Law 12783/13, which reduced the sector charges and also renewed old electricity transmission concessions, with reduction of the remuneration of concession holders - reflected in reduction of transmission charges. This charge is payable by distribution and generation agents for use of the facility comprising the national grid, and the amounts to be paid by the Company are set by an Aneel Resolution. This is a non-controllable cost: The difference between the amounts used as reference for decision on tariffs and the costs actually incurred is compensated in the subsequent tariff adjustment. Page 16 of 181

17 Operational provisions Operational provisions in 2013 totaled R$ 305 million, 54.55% less than in 2012 (R$ 671 million) - reflecting several factors: A provision of R$ 403 million constituted in 2012 for the Term of Settlement between Cemig and the federal government in an action related to the now extinct CRC Account - this accord was part of the terms for early settlement of the CRC Account with the government of Minas Gerais State. A provision for doubtful debtors of R$ 121 million in 2013, compared to R$ 227 million in 2012, reflecting a provision in 2012 of R$ 159 million for a loss related to ICMS tax on charges for use of the distribution system (TUSD). In 2013 there was an increase of R$ 168 million in employment-law provisions due to revisions of contingencies for losses legal actions. Personnel 17 Expense on personnel in 2013 was R$ 1,284 million, which compares with R$ 1,174 million in 2012, 9.37% higher in the year. Main factors are: Acceptance by employees of the new (PID) voluntary retirement program, with a provision of R$ 78 million in 2013, compared to a provision of R$ 34 million in Salary increase of 6.00% agreed with the employees in 2012 under the Collective Work Agreement (full effect in 2013), and of 6.85% in November 2013, under the Collective Work Agreement. Lower cost of personnel transferred to works in progress in a reduction of R$ 50 million - due to a lower investment program this year. Construction costs Infrastructure Construction Costs were R$ 975 million in 2013, compared to R$ 1,336 million in 2012, a reduction of 27.02%. This cost is fully offset by Construction Revenue, in the same amount, and represents the Company s investment in assets of the concession in the period. Net financial revenue (expenses) Cemig reports Net financial expenses of R$ 308 million in 2013, compared to Net financial revenues of R$ 1,630 million in the main factors being: Court judgment in favor: Cemig was awarded judgment, against which there is no further appeal, in its legal action challenging the legality of 1 of Article 3 of Law 9718 of November 27, 1998, which sought to expand the calculation base of the Pasep and Cofins taxes on Financial Revenue and Other non-operational revenues, relating to the period from 1999 to January Subsequently authorization was Page 17 of 181

18 given for transfer of the credit to its subsidiaries, as to 51.93% to Cemig D and 48.07% to Cemig G - these credits being able to be offset against other taxes payable to the federal tax authority. The company s total gain was R$ 313 million. This was recorded as to: R$ 81 million in Financial revenues, as a reversal of Pasep and Cofins taxes; and R$ 232 million as revenue from monetary updating. CRC Contract: Revenue from monetary updating of the CRC Contract, in 2012, of R$ 2,383 million arising from its early settlement - for more information see Note 12. Lower expenses on loans and financings in 2013: R$ 698 million, compared to R$ 811 million in The reduction basically reflects a lower total of debt linked to the CDI rate in 2013 than in the previous year. A point to note is that when debt is indexed to the CDI rate, the full variation of the index is allocated as costs, whereas when debt is indexed to an inflation index, only the interest is allocated as costs, and the variation resulting from the inflation indexor is allocated as cost of monetary updating. 18 The breakdown of Financial revenues and expenses is given in Explanatory Note 27 to the consolidated financial statements. Income tax and Social Contribution tax In 2013, the Company had expenses on income tax and the Social Contribution tax of R$ 950 million, in relation to pre-tax profit of R$ 4,054 million, representing a percentage of 23.44%. In 2012, the Company paid income tax and Social Contribution tax of R$ 833 million on pre-tax profit of R$ 5,104 million, a percentage of 16.31%. These effective tax rates are reconciled with the nominal rates in Explanatory Note 10 to the consolidated financial statements. Ebitda Ebitda - R$ million Change % Net profit for the period 3,104 4,272 (27.34) + Income tax and Social Contribution tax Financial revenue (expenses) 308 (1,630) (118.90) + Amortization and depreciation = EBITDA 5,186 4, Ebitda is a non-accounting measure prepared by the Company, extracted from its financial statements, following the specifications in CVM Circular SNC/SEP 01/2007 and CVM Instruction 527 of October 4, It comprises: net profit, adjusted for 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. The higher Ebitda in 2013 than 2012 mainly reflects operational revenue R$ 490 million higher, with operational costs (excluding depreciation and amortization) R$ 357 million lower. On this result, Cemig s Ebitda margin increased from 29.98% in 2012 to 35.46% in Page 18 of 181

19 Financial statements separated by company FINANCIAL STATEMENTS SEPARATED BY COMPANY AT DECEMBER 31, 2013 Other jointly Subsidiaries and CEMIG SÁ Other Eliminations / TOTAL Eliminations / HOLDING CEMIG GT CEMIG D ROSAL TAESA LIGHT MADEIRA GASMIG controlled jointly-controlled TELECOM CARVALHO Subsidiaries transfers CONTROLADAS transfers subsidiaries subsidiaries ASSETS 14,130,504 10,475,039 12,497, , , , ,989 (8,533,676) 29,814,142 4,713,360 4,271,513 2,001,991 1,053,624 2,298,997 (5,918,418) 38,235,209 Cash and cash equivalents 286,183 1,107, ,969 28,900 7,114 6,808 79,679-2,201, , ,673 29,837 29, ,599-3,115,036 Accounts receivable - 745,753 1,626,984-7,301 4,267 27,963 (28,805) 2,383,463 85, ,496 19, ,615 37,955 (5,509) 3,121,182 Securities - cash investments 180, ,606 87,650 4,460 16,241 5, ,377-1,023,294 82, ,246 39,313-1,167,328 Taxes 511, ,587 1,676,262 28, ,019-2,510, , ,056 7,638 68,107 6,602-3,238,558 Other assets 1,386, ,495 1,436,371 26,136 4, ,595 (1,279,764) 1,869,747 89, ,546 62, ,141 78,636 (111,437) 2,587,070 Investments / Fixed / Intangible / Financial Assets of Concession 11,766,509 7,489,424 6,984, , , , ,356 (7,225,107) 19,825,182 4,007,522 2,458,742 1,882, ,374 2,000,892 (5,801,472) 25,006,035 Liabilities 14,130,504 10,475,039 12,497, , , , ,989 (8,533,676) 29,814,142 4,713,360 4,271,513 2,001,991 1,053,624 2,298,997 (5,918,418) 38,235,209 Suppliers and supplies 15, , ,825 19,090 1,032 1,557 9,793 (48,504) 1,066,358 22, ,750 39,341 74,458 23,167 (8,277) 1,512,540 Loans, financings and debentures - 4,092,806 5,247,919 32, ,474-9,457,364 2,106,490 1,889,274 1,189, , ,429-15,410,232 Interest on Equity, and dividends 1,107, , ,127-5,544 5,090 33,605 (1,195,053) 1,107,664 8, ,094 7,232 (16,640) 1,107,664 Post-retirement liabilities 125, ,243 1,768, ,448, , ,846,566 Taxes 66, ,992 1,164,910 9,744 48,758 2,162 33,779-1,841, , ,794 31,606 66,686 21,256-2,898,883 Other liabilities 176, , ,129 29, ,083 8,578 (65,018) 1,254,447 28, ,759 99, ,404 1,404 (750) 1,820,967 Equity 12,638,357 3,815,017 2,492, , , , ,760 (7,225,101) 12,638,357 1,875,978 1,140, , ,627 1,680,509 (5,892,751) 12,638, PROFIT AND LOSS ACCOUNT Net operational revenue 321 5,230,134 9,205, ,739 58,920 44, ,785 (318,396) 14,627, ,505 2,522, , , ,951 (107,032) 18,966,068 Operational costs and expenses (110,822) (2,870,098) (8,334,522) (86,875) (18,251) (25,113) (99,145) 312,870 (11,231,956) (153,517) (2,096,620) (102,861) (597,781) (146,632) 80,354 (14,249,013) Electricity bought for resale - (1,244,499) (4,089,448) - (1,058) (11,176) (37,524) 176,422 (5,207,283) - (1,361,537) (40,544) - (5,210) 35,290 (6,579,284) Charges for the use of the national grid - (256,610) (410,290) - - (2,593) (5,039) 99,482 (575,050) - - (22,873) - (4,404) 42,234 (560,093) Gas bought for resale (536,670) - - (536,670) Construction cost - (91,176) (883,801) (974,977) (43,127) (266,493) - - (4,490) - (1,289,087) Personnel (52,612) (315,285) (893,619) (13,739) (1,363) (1,499) (5,965) - (1,284,082) (31,074) (105,188) (4,107) (16,603) (47,194) - (1,488,248) Employee profit shares (13,486) (58,798) (146,437) (1,544) (252) (183) (699) - (221,399) (4,890) - (458) - (225) - (226,972) Post-retirement liabilities (16,758) (39,809) (118,840) (175,407) (175,407) Materials (494) (67,977) (52,581) (721) (291) (455) (376) - (122,895) (26,820) (5,941) (306) (871) (156,589) Outsourced services (17,586) (166,897) (720,655) (20,812) (3,135) (3,135) (23,328) 38,558 (916,990) (38,097) (148,203) (7,741) (3,906) (30,403) 816 (1,144,524) Royalties for use of water resources - (125,751) - - (1,747) (1,298) (2,099) - (130,895) - - (1,753) - (569) - (133,217) Depreciation and amortization (491) (343,364) (416,096) (30,783) (5,537) (4,369) (17,502) (5,526) (823,668) (807) (127,008) (23,192) (22,201) (51,769) (8,647) (1,057,292) Operational provisions 27,866 (54,864) (274,942) (17) 7 (8) (3,281) - (305,239) 898 (66,650) - - (236) - (371,227) Other expenses, net (37,261) (105,068) (327,813) (19,259) (4,875) (397) (3,332) 3,934 (494,071) (9,600) (15,600) (1,887) (17,530) (2,336) 10,621 (530,403) Operational profit before Equity gains (losses) and Financial revenue (expenses) (110,501) 2,360, ,410 26,864 40,669 19, ,640 (5,526) 3,395, , ,030 27, , ,319 (26,678) 4,717,055 Gain (loss) on dilution of interest in jointly-controlled subsidiaries 378,378 (94,080) , ,298 Gain (loss) in subsidiaries by equity method 2,944, ,177 - (19,986) - - 7,347 (2,518,160) 763, (1,772) ,070 (869,374) 4,941 Unrealized profit (80,959) (80,959) (80,959) Financial revenue 98, , ,099 6,377 1,898 1,511 21, ,503 85, ,533 1,812 31,977 11,133-1,134,073 Financial expenses (28,412) (506,053) (646,877) (3,970) (296) (90) (8,280) - (1,193,978) (256,047) (265,960) (32,528) (21,531) (50,553) 14 (1,820,583) Profit before income tax and Social Contribution tax 3,201,295 2,413, ,632 9,285 42,271 21, ,765 (2,523,686) 4,053, , ,831 (3,518) 129, ,969 (896,038) 4,238,825 Income tax and Social Contribution tax (59,288) (673,089) (198,315) (4,231) (15,678) (1,987) (41,353) - (993,941) (40,428) (39,637) - (35,757) (28,504) - (1,138,267) Deferred income tax and Social Contribution tax (38,152) 71,182 10,937 (1,491) 1, (49) - 43,800 (1,397) (46,381) (1,255) - 8,530-3,297 Profit (loss) for the period 3,103,855 1,811, ,254 3,563 27,946 19, ,363 (2,523,686) 3,103, , ,813 (4,773) 93, ,995 (896,038) 3,103,855

20 Regulatory assets and liabilities Following the alignment of Brazilian accounting practices with IFRS, as from 2010 regulatory assets and liabilities are no longer recorded in the Company s financial statements. Also, all amounts relating to regulatory items are recognized in the Profit and loss account only as from the moment they are included in the Company s tariff. This table shows the effects that regulatory assets and liabilities would have had if they had been recognized in the Company s financial statements: STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) Amounts already included in tariff increases Amounts yet to be included in tariff increases 31/12/ /12/ /01/2012 Assets 105,359 1,202,611 1,307, , ,490 Liabilities (52,304) (911,565) (963,869) (297,013) (698,402) Equity method gains (losses) arising from Regulatory Assets and Liabilities 76,899 81,400 10,557 53, , , ,144 (306,355) 31/12/ /12/ /01/2012 Assets Prepaid expenses - CVA (1) 1,257, , ,771 TUSD discounts - Source with incentive - 59,390 24,746 TUSD discounts - Self-Producers and Independent Producers - 7,254 29,341 Reduction of Tariff for Use of Transmission and Distribution Systems 26, Discounts for irrigation clients 4,913 8,338 20,321 Other regulatory assets 19,232 3,193 4,311 1,307, , ,490 Equity method gains (losses) arising from Regulatory Assets and Liabilities 76,899 81,400 10,557 Deferred income tax and Social Contribution tax (128,556) (218,911) 132,107 1,256, , ,154 Liabilities Portion A - - (9,646) Regulatory liabilities - CVA (1) (950,346) (293,542) (537,620) Low-income tariff subsidy - (1,493) (147,695) Other regulatory liabilities (13,523) (1,978) (3,441) (963,869) (297,013) (698,402) 292, ,233 (174,248) 20 (1) Portion A Costs Variation Compensation Account (CVA). The main features of the regulatory assets and liabilities are described below: Account to Compensate Portion A Costs Variation (CVA); neutrality of sector charges The balance on the Account for Compensation of Variation of Portion A items ( the CVA ) and Neutrality of the Sector Charges 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. TUSD and Irrigation Discounts This comprises the concession holder s loss of revenue as a result of granting of discounts to Free Consumers that use electricity from incentive-bearing sources, self- Page 20 of 181

21 producers and independent power producers, and as a result of the special discounts on the tariff for supply for activities of irrigation and fish farming. Low-income subsidy Subsidies granted to consumers that have the right to the Social Electricity Tariff (Tarifa Social de Energia Elétrica, or TSEE), to be reimbursed, to the Company, by the other consumers. Other financial components This refers to the other positive or negative differences between the estimate of nonmanageable costs, not defined as CVA, and the payments actually made, compensated in the subsequent tariff adjustments. The net effects of regulatory assets and liabilities on the Company s Profit and loss account, if they had been recorded, would have been as follows: 21 31/12/ /12/2012 Net profit for the period 3,103,855 4,271,685 Operational profit of the Regulatory Assets and Liabilities (247,410) 839,208 Net financial revenue (expenses) arising from Regulatory Assets and Liabilities 46,973 (32,180) Equity method gains (losses) arising from Regulatory Assets and Liabilities (4,501) 70,843 Income tax and Social Contribution on Regulatory Assets and Liabilities 68,148 (274,390) Net profit for the period taking into account Regulatory Assets and Liabilities 2,967,065 4,875,166 REGULATORY EBITDA - R$ million Change, % Net profit for the period taking into account Regulatory Assets and Liabilities 2,967 4,875 (39.14) + Income tax and Social Contribution tax 882 1,107 (20.33) + Financial revenue (expenses) 261 (1,598) (116.33) + Amortization = EBITDA 4,934 5,147 (4.14) Liquidity and capital resources Our business is capital-intensive. Historically, we have a need for capital to finance the construction of new generation facilities and expansion and modernization of the existing generation, transmission and distribution facilities. Our liquidity requirements are also affected by our dividend policy. We finance our liquidity and capital needs principally with cash generated by operations and, on a lesser scale, with funds from financing. We believe that our present cash reserves, generated by operations and expected funds from financings, will be sufficient to meet our liquidity needs over the next 12 months. Cash and cash equivalents Cash and cash equivalents at December 31, 2013 totaled R$ 2,202 million, compared to R$ 1,919 million at December 31, On December 31, 2013 neither our cash Page 21 of 181

22 position nor our cash equivalents were maintained in any other currencies than the Real. Below are the main reasons for the changes: Cash flow from operations The totals of Net cash generated by operational activities in 2013 and 2012 were, respectively, R$ 3,515 million and R$ 2,829 million. The higher net cash from operational activities in 2013 than 2012 mainly reflects the higher net profit in 2013, after adjustment for items not affecting cash flow. Cash flows from investment activities Net cash flow from investment activities in 2013 totaled R$ 2,503 million, compared to net cash of R$ 906 million used in investment activities in The difference reflects incoming funds in 2013, related to the disposal of the TBE Group to Taesa. There are more details on this in Explanatory Note 15. Cash flows in financing activities Net cash flow consumed by financing activities in 2013 totaled R$ 5,735 million, comprising amortizations of financings totaling R$ 3,601 million, and payments of R$ 4,600 million in dividends and Interest on Equity, partially offset by receipt of funds from financings totaling R$ 2,467 million. 22 Net cash flow generated by financing activities in the previous year totaled R$ 2,107 million, comprising amortizations of financings totaling R$ 5,275 million, and payments of R$ 1,748 million in dividends and Interest on Equity, partially offset by receipt of funds from financings totaling R$ 4,916 million. Funding and debt management policy The Company has sought to maintain its credit quality at satisfactory levels that denote investment grade, that is to say investment of low risk, to enable it to benefit from financial costs that are compatible with the profitability of the business, and to demonstrate that the process of expansion of Cemig s activities has taken place - and will take place in the future - in a sustainable manner. In 2013, Cemig D raised a total of R$ 2,394 million, of which: R$ 191 million was through issue of a Credit Note in favor of Banco do Brasil for acquisition of electricity; R$ 2,179 million through the third debenture issue, used to redeem the fifth and sixth issues of Promissory Notes, and for investments; and R$ 24 million in a financing from Eletrobrás for the Cresce Minas program. Additionally, Cemig D extended part of its debt via renewal of loan transactions in a total of R$ 600 million, contracted via commercial credit notes with Banco do Brasil. Page 22 of 181

23 We highlight the third public debenture issue, in which 2,160,000 non-convertible, unsecured debentures were issued in three series totaling R$ 2,179 million. The net proceeds from the debenture issue were used for 100% redemption of the commercial Promissory Notes of Cemig D s 5 th and 6 th issues, placed on January 13, 2012, for their nominal value plus remuneratory interest, and for investments in distribution infrastructure. a total of 410,817 debentures of the first series, 1,095,508 debentures of the second series and 653,675 debentures of the third series were issued, with maturity respectively at 5, 8 and 12 years from the issue date. The debentures of the first series carry remuneratory interest at the rate of CDI % p.a.; the debentures of the second and third series will have their nominal unit value adjusted by the IPCA index (published by the IBGE) plus remuneratory interest of 4.70% p.a. and 5.10% p.a. respectively. 23 This issue has a surety guarantee from Cemig, and was held under the aegis of the Fixed Income Novo Mercado, regulated by Anbima, the Brazilian Association of Financial and Capital Market Entities. This New Market (Novo Mercado) is the result of a joint effort, implemented by the CVM, the Central Bank, the Brazilian Development Bank (BNDES), the Finance Ministry and companies, to foster a more liquid trading environment in the secondary market, able to expand the base of investors (including foreign investors) and, more importantly, to achieve longer-term transactions linked to price indices, compatible with the investments in infrastructure that are necessary for the growth of the country, thus creating financing alternatives complementary to those of the BNDES. Cemig GT extended part of its debt through a total of R$ 600 million in renewal of loan transactions contracted with Banco do Brasil, via bank credit notes. It also concluded, on January 30, 2014, its fourth issue of non-convertible debentures, for R$ 500 million, with a single maturity in December 2016 and cost of CDI % p.a. These funds were used to replenish cash used in payment of previous debt. Main indexors of Cemig s debt at December 31, % 4% 5% 48% 42% IPCA CDI IGP-M RGR URTJ Page 23 of 181

24 The composition of Cemig s debt is a reflection of: the sources of funding available to it (bank credit, used for rolling over of debt; and issues of debentures and promissory notes, in which a significant demand has been allocated in issues indexed to the local interest rate); and also of its intention to avoid exposure to debt in foreign currency (currently 0.5%). The average cost of Cemig s debt is 5.94% p.a. in real terms (i.e. at constant prices). The Company s debt management centers on: lengthening of tenors; limitation of indebtedness to the levels specified by the by-laws; reduction of the cost of financing; and preservation of the Company s payment capacity, while avoiding pressures on cash flows such as might suggest refinancing risk. At December 31, 2012 the amortization timetable of the Company s debt was satisfactorily spread out over the years, with an average tenor of 4.3 years. This chart shows the present amortization timetable: 2,238 Debt amortization timetable Position at December R$ mn 24 1,306 1,464 1, After 2020 The risk rating agency Standard & Poor s ( S&P ) raised Cemig s credit rating on both the global scale - from braa- to braa+, and also on the Brazilian scale, from braa- to braa+, with outlook stable in both cases. S&P also raised the ratings of the subsidiaries Cemig D and Cemig GT, to BB+ on the global scale and braa+ on the Brazilian scale, as well as upgrading its evaluation of Cemig s risk profile from Fair to Satisfactory. Moody, on the other hand, placed its ratings of Cemig and its subsidiaries under review for possible downgrade; while Fitch maintained its ratings of Cemig companies unchanged. Page 24 of 181

25 THE REGULATORY ENVIRONMENT Electricity generation The company opted not to accept the terms laid down by Provisional Measure 579/2012 for renewal of the 18 electricity generation concessions that had already been renewed once by the Concession-granting power, and as a result it will continue to earn revenues from these assets under the terms of the concession contracts. For the concessions of the São Simão and Miranda hydroelectric plants, which have expiry dates in January 2015 and December 2016, respectively, the Company believes that it has the right to extension of these concessions under the conditions prior to PM 579, under clauses in the concession contracts and in Article 19 of Law 9074/ The concession period of the Jaguara plant expired in August On August 30, 2013 the Higher Appeal Court (Tribunal Superior de Justiça, or STJ) granted an interim injunction to Cemig GT in Cemig GT s action against the recent decision by the Mining and Energy Ministry which, in a dispatch published on August 23, refused, on its merits, the application by Cemig GT for extension of the concession of the Jaguara Hydroelectric Plant under its Concession Contract, Nº. 007/97. This interim injunction gives Cemig GT the right to remain in control of the Jaguara Hydroelectric Plant, commercially operating the public service concession granted to it, until final judgment of the case. The decisions taken by Cemig in relation to Provisional Measure 579 reflect its commitment to the Company s stockholders, employees and other stakeholders, to maintain the sustainability and growth of the company. Electricity distribution In compliance with PM 579, on October 15, 2012 Cemig advised Aneel of its interest in extending the electricity distribution contracts which in the Company s view were within the criteria of the PM, without prejudice to any rights specified in the law into which Congress may convert the Provisional Measure. The expiry dates of the distribution concessions of Cemig D, which will be extended for 30 years, are in February The Extraordinary Tariff Review - Cemig D Articles 21 and 24 of Provisional Measure 579 (of September 11, 2012) released electricity distribution concessions from paying the quotas of the Global Reversion Reserve (Reserva Global de Reversão, or RGR), and also from sharing of costs of the Fuel Consumption Account (Conta de Consumo de Combustíveis, or CCC), representing the costs of consumption for generation of electricity in the isolated systems (those not connected to the national grid). The payment required for the Energy Development Account (Conta de Desenvolvimento Energético, or CDE) was reduced by 75%. Page 25 of 181

26 Provisional Measure 579 also resulted in reduction of the costs of transmission and generation of electricity in the national grid system. Provisional Measure 579 was converted into Law 12783, of January 11, As the method of passing on all the effects of that Law to the distribution tariffs, there was an Extraordinary Revision in January This Extraordinary Revision reduced the average tariff paid by Cemig D s residential consumers by 18.14%. Overall the impact for all consumers including Free Consumers was an average of almost 22%. The new tariffs were in effect from January 25 to April 7, 2013, when Cemig D completed the Ordinary Tariff Review specified in the concession contract. The Ordinary Tariff Review - Cemig D These reviews take place every five years, and aim to adjust the situation to their findings about the Company s economic-financial equilibrium. Cemig D s Third Ordinary Tariff Review took place in April 2013: Aneel set the average percentage for increase of electricity tariffs of Cemig D s consumers at 2.99%, and this is in effect from April 8, 2013 to April 7, For medium and low voltage captive consumers, such as industrial companies and the service sector, the adjustment was a reduction of 4.83%. For low voltage consumers there was an average increase of 6.98%: For normal residential consumers 4.87%, and for Low-income Residential Consumers, 6.30%. Since there was the Extraordinary Tariff Review at the beginning of the year, which changed tariffs, the comparison figures in the paragraph are between those established in April 2013 and those set in January Of the amount charged in the tariff, only 27% remains in Cemig D, to cover manageable costs - remunerate the investment, compensate for depreciation and the running costs of the distribution company. The other 73% goes to non-manageable costs: Bought energy 38%, taxes 26%, sector charges 6%, and transmission charges 3%. Among the main factors affecting this year s adjustment percentage, taking into account the extraordinary review of January, is the increase of 30.1% in bought energy. In the other direction, manageable costs were reduced, by 7.7% in operational costs, 39.7% in remuneration, and 24.8% in depreciation. The sector charges were reduced by 4.8%. By decision of the courts, Cemig D is obliged to charge taxes directly on the consumer s electricity bill and pass them on to the appropriate authorities. The PIS, Pasep and Cofins taxes are examples of these taxes charged directly on the electricity bill - all three have the intention of maintaining federal government social programs - as well as those related to workers. Page 26 of 181

27 The ICMS tax, charged by states, is charged directly on the consumer s invoice, and passed on in full to the state s government. In Minas Gerais state, there are more than 2.5 million residential clients consuming less than 90kWh/month, who are exempt from this tax. Another charge made directly to the consumer is the Contribution to Finance Public Illumination (Contribuição para Custeio do Serviço de Iluminação Pública, or CIP), which is decided by the municipal administration. Cemig merely collects this portion and passes it on to the municipality. The payment of this amount by the consumer passes the responsibility for services of planning, building, expansion, operation and maintenance of public illumination facilities to the municipal prefectures. Electricity transmission Cemig GT - Extraordinary Review of transmission revenues 27 Cemig GT applied for renewal of its concession contact, and was given an annual revenue relating to operation and maintenance of transmission lines, in the amount of R$ million, annually, up to June In July 2013, the transmission revenue was adjusted, the initial value of R$ million was updated, and amounts relating to new works that had come into operation were added, increasing the total revenue to R$ million. Taking into account the revenue from Itajubá, the total value to be earned for transmission was increased to R$ million for the period July 2013 to June These amounts are net of taxes. Management of power losses Cemig D s Overall Loss Index as measured up to September 2013 was 11.23%. Of this total percentage, 8.72% represented technical losses and 2.51% non-technical losses. This index is better (lower) than the quality indices required by the Regulator in the last Tariff Review. In 2013, specific actions were taken to mitigate Technical Losses. These included continuity of the medium-voltage reactive power compensation plan, and replacement of old and overloaded conventional transformers with new amorphous core transformers, in which technical losses are 75% lower. In 2014 automatic capacitors will be installed on the medium-voltage networks. The investments made in strengthening the electricity system at high, medium and low voltage have helped in the control of technical losses (which are inherent in the process of transport and transformation of electricity). In the management of non-technical losses, regularization of 24,000 consumer units has provided a recovery of energy totaling 107 GWh, and a gain in energy of 112 GWh - corresponding to aggregate revenues of R$ 62 million and R$ 27 million, respectively. The additional revenue from charges of administrative costs made for irregularities and damages caused to measuring equipment totaled R$ 1.8 million. Thus the process of regularization provided a total additional revenue of R$ 90.8 million. Page 27 of 181

28 Further to this: improvements were made to the tool for selection of inspection targets (SGC/SAP): productivity was increased in the process of charging for irregular consumption; revenue from medium- and large-scale consumers was bulletproofed ; approximately 340,000 obsolete meters were replaced; and 2,630 clandestine connections were removed - reducing losses by 6.2 GWh or R$ 0.66 million. Retail supply quality RELATIONSHIP WITH OUR CLIENTS Cemig is continuously taking action to improve its operational management, the organization of the logistics of its emergency services, and its permanent regime of preventive inspection and maintenance of substations, lines and distribution networks. It also invests in improving the qualifications of its professionals, state-of-the-art technologies, and standardization of work processes. In Cemig D s indicators, in the calculation of the figures for SAIDI (System Average Interruption Duration Index) the distinction should be noted between outages caused by accidents and those that are programmed in the occasional event of need to suspend supply for new investments to improve networks. 28 These charts show Cemig s indicators of duration (SAIDI) and frequency (SAIFI - System Average Interruption Frequency Index) in the last 3 years, showing significant reductions in Outage duration indicator (System Average Interruption Duration Index SAIDI) Outage frequency indicator (System Average Interruption Frequency Index SAIFI) Component for programmed outages Programmed outages Component for outages caused by accidents Outages due to accidents SAIDI SAIFI Page 28 of 181

29 Service policy Aiming to provide a service of quality, and to facilitate consumers access to the Company, Cemig makes a variety of in-person and distance communication channels available to provide a range of means of communication. The Talk to Cemig (Fale com a Cemig) channel enables the consumer to contact the Company via a 116 toll-free phone number, or by internet. In 2013 this channel received approximately 10.6 million telephone contacts, 115,000 contacts by chat and 121,000 by . The in-person service is through the Cemig Fácil service network - which consists of 156 Cemig Fácil Service Branches in cities with more than 10,000 consumer units, and 621 Cemig Fácil Service Points in cities with less 10,000 consumer units, serving a total of 774 municipalities in Cemig s concession area. In 2013, a total of 6.7 million clients service contacts were made in the Cemig Fácil network. 29 Another important channel is the Cemig Text Messaging (Cemig Torpedo) service enabling the consumer to contact Cemig by text message. In 2013, a total of 278,000 messages were received. The Company also seek to offer the optimum possible service and interaction with clients with special needs: the Service Branches comply with the accessibility levels of Brazilian Standard (ABNT) NBR 9050; there are chat facilities in the Online Branch, there is the Cemig Text Messaging facility, and electricity bills in Braille are available. At Cemig s environmental stations, trails are signposted in Braille to help make sure the visually challenged will be included among the visitors. This chart shows the number of the Company s interactions with clients through each medium / channel as a proportion of the total number of interactions in the year: Cemig Torpedo (SMS) 1.08% Public authorities 0.53% Cemig Mais 0.57% Virtual Branch 24.75% Fale com a Cemig 45.51% Cemig Fácil network 27.56% Page 29 of 181

30 INVESTMENTS Investments in generation: Creation of Aliança Geração de Energia S.A. In 2013 Cemig GT and Vale S.A., formalized their association for creation of the company Aliança Geração de Energia S.A., a platform for consolidation of generation assets held by the parties in generation consortia, and investments in future electricity generation projects. The two parties will subscribe their shares in the form of their holdings in the following generation assets: Porto Estrela, Igarapava, Funil, Capim Branco I and II, Aimorés, and Candonga. With these assets the new company will have installed hydroelectric generating capacity in operation of 1,158 MW (652 average MW), among other generation projects. Vale will hold 55%, and Cemig GT 45%, of the total capital of this new company. Cemig GT s participation has been valued at R$ 2.03 billion. With the association, Cemig GT increases its potential to generate new business and maximize results, due to the combination of the two companies experiences in operational, financial and project management. 30 Acquisition of interest in Aliança Norte Energia Participações: Cemig GT will acquire, for approximately R$ 206 million, a 49% interest in the future company Aliança Norte Energia Participações S.A., which will own the 9% equity interest in Norte Energia S.A. currently held by Vale. The acquisition price, corresponding to the capital injections made by Vale up to December 31, 2013, will be paid at sight on the closing date, adjusted by the IPCA inflation index. With the acquisition Cemig GT becomes the indirect holder of a further 4.41% of Norte Energia, representing an installed generation capacity of MW (201 average MW). Signature of Investment Agreement In 2013 Cemig GT approved signature of 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 into the controlling stockholding block of Renova, through subscription by Cemig GT of new shares to be issued by Renova, and structuring of Chipley as a vehicle for growth, in which equity interests would be owned by Cemig GT and Renova, and to which the agreement to purchase shares in Brasil PCH S.A. signed between Cemig GT and Petrobras (Petróleo Brasileiro S.A.) on June 14, 2013, will be assigned. The issue price for the shares in Renova will be R$ per common share; the resulting value of the portion of the increase in the share capital of Renova to be subscribed by Cemig GT will be R$ 1,415 million. These amounts will be updated by the variation in the CDI rate from December 31, Page 30 of 181

31 Investments in expansion of generation Cemig continues to invest in expansion, updating and improvement of its generation plants. The following figures, for the principal projects, refer to investments made in 2013 (not the total value of the project): Amazônia Energia Participações S.A. - R$ 119 million: Cemig GT owns 74.5% of Amazônia Energia, which in turn owns 9.77% of the Belo Monte hydroelectric plant. This project is 24.93% completed. The main machine hall is scheduled to start operation in March Guanhães Energia S.A. (the Minas Gerais PCH Program) - R$ 110 million. Construction of four PCHs in the East of Minas Gerais was begun in 2012, with total installed capacity of 44 MW: Senhora do Porto, Dores de Guanhães and Jacaré, in the municipality of Dores de Guanhães; and Fortuna II, in the municipalities of Guanhães and Virginópolis. The planned total investment in this project is R$ 321 million, and Cemig has a 49% interest. Works are in progress and the first unit will start commercial operation in the second half of Investments in transmission Cemig also continues to invest in expansion, updating and improvement of its transmission system, especially strengthening of the existing physical structure, with investments in 2013 in 12 substations, acquisition of transformers and repowering of the 345-kV Neves 1 transmission line, totaling R$ 42 million. Investments in distribution The Distribution Development Plan (PDD) In August 2013 Cemig s Board approved a series of investments in the electricity system of Cemig D for the current tariff cycle ( ), totaling R$ billion. Of this, R$ million was invested in 2013: R$ million in the High Voltage Distribution System, and R$ 619 million in the Medium and Low voltage Distribution System. The total number of works planned for the cycle includes 800 undertakings on the high voltage network and more than 50,000 in the medium and low tension networks - made possible by the work of more than 5,000 employees. As well as these strong numbers, another highlight is the number of new clients: Cemig D will have a total of more than 1.2 million newly-connected consumers before the end of this period. Of this total investment planned for this five-year cycle, a total of R$ 800 million, serving areas and services relevant to the Soccer World Cup events that will take place Page 31 of 181

32 in the State of Minas Gerais, was given priority in terms of timing and is almost completed. Expansions of the sub-transmission electricity network (69 kv to 161kV) A total of some R$ 150 million was invested in 2013 in expansion, overhaul and improvements of Cemig D s electricity distribution system. R$ 140 million has been spent on works on substations currently being completed, for operational startup in 2014 and these will expand the capacity to supply electricity to various regions of the state of Minas Gerais, providing the capacity to accompany the growth of the market with the optimum quality, reliability and safety. To provide increased strength to the system of greater Belo Horizonte for the 2014 Soccer World Cup, we have invested R$ 159 million in substations, led by a total of R$ 95 million spent on the BH Center substation. Rural Electrification Program The Rural Universalization Program currently in progress has the target of providing one electricity access point per real estate property, for load up to 50 kw - which is budgeted to cost R$ 73 million. 32 In the whole of 2013, Cemig connected approximately 7,000 new consumer units. This includes those that required construction of a new network and those where the existing network already passed the door of the property. Further, some 1,000 requests for increase of load were met, enabling expansion of farming and other rural activities. Fields of Light (Campos de Luz) Program The Fields of Light (Campos de Luz) Program revitalizes and provides illumination and improved equipment for amateur football fields in the state of Minas Gerais - thus providing the practice of sports, entertainment, social events and professional skill acquisition for children and young people of needy income groups in the state, also benefiting local communities. The years 2012 and 2013 were the final 25% of the Program, and in these two years Cemig illuminated 150 amateur football fields, bringing the total of municipalities benefited by this act of public service to out of the total of 774 in Cemig D s concession area. The number of amateur football fields for which Cemig had provided illumination at reduced average cost by the end of 2013 was 865: Cemig and the Segov department of Page 32 of 181

33 the Minas Gerais state government regard this as a successful meeting of the targets laid out for their joint projects. The Urban Market Since 2006, the year in which Cemig s urban concession area was certified as deemed to be universalized - i.e. providing service to every possible potential user - Cemig D has been meeting all new requests for connection. In 2003 it connected more than 280,000 new consumers (as above, the figure includes those that required construction of network, and those where the network already passed the new consumer s door). Natural gas 33 At the end of 2013 Cemig was supplying billion m³ of natural gas, a new record (this includes supply to thermoelectric generation plants), with a daily average of more than 4 million m³/day in the year. This increased its annual gross sales revenue to another record, R$ 1.51 billion. R$ 54.6 million was invested in expanding the natural gas distribution network in the state of Minas Gerais, with construction of 30.3km of network in the metropolitan region of Belo Horizonte, and the regions known as South of Minas (Sul de Minas), and Vale do Aço (Steel Valley) and the Mantiqueira region, around the city of Juiz de Fora. Works on the Southern Ring Project, to serve residential and commercial users in the city districts of Santo Agostinho and Lourdes in Belo Horizonte - homes, restaurants, bars, gyms, for example - were a highlight of the year. We have positive expectations for these market segments, as the South Ring (Anel Sul) Project consolidates in the coming years, significantly expanding the client base, especially with urban networks expanding into the other district such as Sion, Belvedere, Buritis, Vila da Serra, and Vale do Sereno. Gasmig s entry into the residential market in 2013 tripled its client base - from 406 clients connected to the gas pipeline network at the end of 2012, to 1,501 at the end of November. The residential segment alone accounted for 1,137 of these. Conclusion of capacity expansion of the North Branch (Tronco Norte) gas pipeline, the main Gasmig network serving the Northern region of Metropolitan Belo Horizonte - from which various lateral lines branch out - provided an additional supply of one million m³/day to industrial companies in the region. Within Gasmig s Interiorization Project, which aims to increase the supply of natural gas throughout the state, the networks and facility of the compression and liquefaction structures were concluded in the year, enabling trucks to carry gas to the towns of Itabira, Governador Valadares (in the Vale do Aço) and Pouso Alegre (in Sul de Minas - in line with these regions industrial vocation. Seeking to expand the supply of natural gas throughout the state, construction of Brazil s largest-ever gas distribution pipeline is now at the planning stage, to serve the Minas Triangle (Triângulo Mineiro) region, and provide alternative means of transport for GNC and GNL to other bases being served by the Interiorization Project. Page 33 of 181

34 Another highlight project focuses on growth of the Vehicle Natural Gas market segment. Throughout the year Cemig encouraged the use of vehicle natural gas with its I m Going Gas promotion, which provides incentives for conversion of vehicles using up to 600m³ of natural gas. CAPITAL MARKETS AND DIVIDENDS Cemig s shares were initially listed on the Minas Gerais state stock exchange, on October 14, 1960, and since 1972 have been traded on the São Paulo stock exchange (Bovespa), under the tickers CMIG3, for the common (ON) shares, and CMIG4, for the preferred (PN) shares, trading at Corporate Governance Level 1 since October Since 1993 ADRs representing Cemig shares (CIG and CIG/C) have traded on the New York Stock Exchange, becoming Level 2 ADRs in In Europe, Cemig shares have been traded on the Madrid stock exchange (as XCMIG) since Stockholding structure The registered share capital is R$ 6,294 million. This chart shows the Company s stockholding structure on December 31, 2013: Number of shares 1,258,841, Common shares 420,764,708 Preferred shares 838,076,946 The State of Minas Gerais 50.96% The State of Minas Gerais 7.87% AGC Energia S.A % AGC Energia S.A. 5.09% Brazilian investors 13.11% Brazilian investors 26.52% Non-Brazilian investors 2.97% Non-Brazilian investors 60.52% Cemig s share price This table gives the closing prices of Cemig s shares and share securities in São Paulo (Bovespa), New York (NYSE) and Madrid (Latibex) at the close of 2012 and 2013: Security Ticker Currency Close of 2012 Close of 2013 Cemig PN CMIG4 R$ ADR PN CIG US$ 6.75 Cemig ON CMIG3 R$ ADR ON CIG.C US$ 7.16 Cemig PN (Latibex) XCMIG Euro Source: Economática - Prices adjusted for corporate action, including dividends. Page 34 of 181

35 Cemig s preferred shares (CMIG4) traded R$ 18.5 billion in Brazil in 2013, a daily average of close to R$ 75 million. This volume made our preferred share (PN) one of the most traded on the Bovespa - thus providing the security of liquidity to investors. The average daily trading volume of Cemig s preferred ADRs on the New York stock exchange is similar to that on the Brazilian exchange when converted into Reais - which tends to reaffirm Cemig s position as a global investment option. Total trading in the ADR for Cemig s PN (preferred) share (CIG) in 2013 was US$ 6.8 billion, with a daily average of approximately US$ 27.5 million. In Brazil, Cemig s Bovespa-traded shares outperformed the Brazilian electricity sector index, IEE. The preferred shares (CMIG4) closed 0.20% lower on the year, and the common shares (CMIG3) closed 4.0% up on the year. 35 The figure used for market value counts the totality of the Company s shares at the value of the last trading day of each year. The Company s total market capitalization diminished in 2012 and 2013, mainly reflecting the new regulatory conditions imposed by Provisional Measure 579/12. Cemig's market value - R$ Million 19,596 18,220 22,694 19,262 17, Page 35 of 181

36 These charts show comparison of our share with indicators, over several years: % % % % 83.48% 80.00% 30.00% 29.27% % 30/12/ /12/ /12/ /12/ /12/ /12/2013 Source: Economática CMIG4 CMIG3 IBOV % % % 177.6% % % 70.00% 20.00% 91.23% 38.32% % 30/12/ /12/ /12/ /12/ /12/ /12/2013 Source: Economática. CIG CIG.C DJIA DIVIDEND POLICY Cemig, through its by-laws, assumes the commitment to distribute a minimum dividend corresponding to 50% of the net profit for the previous year. Further, extraordinary dividends are to be distributed every other year, or more frequently if availability of cash permits. The dividends are paid, usually, in two equal instalments, by June 30 and December 30 of the year following the year for which they are declared. Dividends declared by the Company total R$ 5.05 billion, as follows: R$ billion for the 2012 business year, as follows: - R$ 1.6 billion in extraordinary dividends (declared on December 20, 2012); Page 36 of 181

37 - R$ 1.7 billion in Interest on Equity (also declared on December 20, 2012); and, - R$ billion in ordinary dividends (declared on April 30, 2013). R$ 533 million of Interest on Equity (declared on December 5, 2013), for the 2013 business year, on account of the obligatory minimum dividend for the 2013 business year which will be declared at the Annual General Meeting in April Dividend yield, % 22.0% 10.4% 12.4% 5.4% 6.6% 9.2% Page 37 of 181

38 PROPOSAL FOR ALLOCATION OF NET PROFIT The Board of Directors will propose to the Annual General Meeting, to be held in April 2014, that the profit for 2013, in the amount of R$ 3,104 million, and the balance of retained earnings, related to realization of the Valuation Adjustments Reserve in the amount of R$ 109 million, should be allocated as follows: R$ 533 million for payment of Interest on Equity. R$ 1,068 million to be paid as ordinary dividends. R$ 54 million to be paid as additional dividends. R$ 1,558 million to be held in Equity in the Reserve under the By-laws, for payment of future dividends. CORPORATE GOVERNANCE 38 Our Board of Directors has 14 members, and an equal number of substitute members, appointed by the stockholders. The by-laws specify that the period of office of all Board Members shall run concurrently, and shall be of two years, and that a member may be reelected at the end of the period of office. In 2013, 28 Board meetings were held to decide on a wide range of matters such as, among others, strategic and budgetary planning, investment projects and acquisitions. Cemig also has six Committees of Support to the Board of Directors. Their purpose is to ensure objectivity, consistency and quality in the decision process, providing an indepth analysis of the matters within their specialization and issuing suggestions for decisions or actions, and opinions, to the Board. Cemig s Audit Board is permanent. It has five members; and in the form constituted, it meets the requirements for exemption from creation of an Audit Committee under the US Securities Act and the Sarbanes-Oxley Law. Cemig s Audit Board held 11 meetings in Page 38 of 181

39 RELATIONSHIP WITH EXTERNAL AUDITORS The Company s policies in contracting of services of external auditors aim to avoid conflict of interest and loss of independence or objectivity, and are based on the principles that preserve the independence of the auditor. To avoid subjectivity in definition of the principles of independence in the services provided by the external auditors, procedures have been established for approval of the contracting of these services, expressly defining: (i) services that are previously authorized; (ii) services that are subject to prior approval by the Audit Board/Audit Committee; and (iii) services that are prohibited. Complying with a ruling of the Brazilian Securities Commission (Comissão de Valores Mobiliários, or CVM), we adopt the system of five-year rotation for our external independent auditors. Our financial statements are audited by Deloitte Touche Tohmatsu Auditores Independentes. The services provided by the external auditors of Cemig and of most of its subsidiaries were as follows: 39 Services 2013 R$ 000 % in relation to audit services 2012 R$ 000 % in relation to audit services Audit services Audit of financial statements , Evaluation of internal controls - SOX , Audit of regulatory assets and liabilities 13 1, , ,00 1, Additional services: Review of income tax returns and quarterly provisions for income tax and Social Contribution tax , Overall total 1, ,48 1, The additional services were contracted for the period June 2012 to March 2015, jointly with the external auditing services, and are restricted to review of the tax procedures adopted by the Company: They do not represent any type of consultancy, tax planning or conflict of interest. It should be noted that any additional services to be provided by the external auditors, including that mentioned above, is subject to obligatory prior approval by the Executive Board and Board of Directors, taking account of any conflict of interest, loss of independence or objectivity of the auditors, in accordance with the terms specified in the Sarbanes-Oxley Law and Article 23 of CVM Instruction 381, of January 14, Page 39 of 181

40 RISK MANAGEMENT Corporate risk management is a management tool that is an integral part of Cemig s corporate governance practices. We identify strategic risks, and process/operational risks. The strategic risks are those related to the Company s objectives and vision, or those involved in strategic decisions that might not achieve the planned success. For these, we create a Matrix in which we identify 24 strategic risks: risks such as difficulty in raising funds, environmental contingencies and incomplete success in control of losses of Cemig D - all these are present in this Matrix. The operational risks arise in the exercise of the functions of the business, that is to say, they are associated with the people, the systems and the processes on which its operation depends. At the last review cycle this structure of risks was finalized with identification and mapping of 160 risks: risks such as breakage of dams, regulatory uncertainties on the sale of electricity by the generating company, and non-reduction of commercial and technical losses to the levels determined by the regulatory body. The process is supervised by the Corporate Risk Monitoring Committee (CMRC), which also has the following attributions: (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 categorized 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 for reduction of the levels of financial exposure and intangible impacts to an acceptable level, taking into account the mitigating plans of action, which are to be in line with the Company s Long-term Strategic Plan. 40 TECHNOLOGICAL MANAGEMENT AND INNOVATION Alternative energy sources; Research and development Historically, constant investment in innovation, technology and efficiency, and the Company s pioneering vocation, have been determining factors in Cemig achieving its present positioning in the market. As a tool for achieving its mission, Cemig employs strategic management of technology, with two main components: coordination of its Research and Development program; and investment in technological development, including successful partnerships. In 2013 Cemig spent approximately R$ 100 million on Research and Development. Page 40 of 181

41 In 2013 the Company continued certain projects and developed new projects: The Mineirão solar project - In 2013 the Photovoltaic Solar Plant on the roof of the iconic Mineirão football stadium at Belo Horizonte, capital of Minas Gerais, was completed. It is the first stadium to host the 2014 Soccer World Cup games that has a generation plant of this type. The plant has installed capacity of 1.42MWp, with approximately 6,000 photovoltaic solar panels, and it will provide electricity to the Stadium and also for sale to the market. It is currently in the phase of commissioning and tests, with operational startup scheduled to take place in time for delivery of the stadium to the World Cup games. The investment was 3.7 million. 41 Photovoltaic solar energy research project in Sete Lagoas - Construction continued in 2013 on the experimental photovoltaic Solar Plant of Sete Lagoas, in a partnership between Cemig, the Spanish company Solaria, the Federal University of Minas Gerais (UFMG) and the Minas Gerais Research Support Foundation (Fapemig), under the Cemig/Aneel research and development program. Its capacity will be 3.3MWp. The plant will ally generation of electricity from this abundant renewable source to a sophisticated solar energy research center. P&D Research projects Mitigation of Atmospheric Effluents at the Barreiro Thermal Plant - This project (No. GT 482), begun in 2013, is a partnership between Cemig, Cefet and the companies Neomatrix and V&M do Brasil. It envisages construction of a plant attached to the Barreiro thermoelectric plant, to capture and immobilize the greenhouse gases being produced by the plant, with a view to reducing emissions of the effluent treated by 25%. Research and Development of Sustainable Motor-generation of Electricity Generators using Effluents from Charcoal produced in the Manufacture of Pig iron - The aim of this project is to generate electricity from the effluents from decomposition of vegetable biomass, considerably reducing pollutant potential and increasing energy efficiency in the production of coal. Gasification of solid urban waste to generate electricity - Construction of a pilot-scale unit for gasification of combustible substances derived from solid urban waste biomass, reducing the environmental impact caused by these wastes deposited in the region. The planned duration of this research is three years. Use of Residual Gases from Wood Burning for Production of Charcoal - The principal objective is to create a system to transport gases resulting from combustion, and a system to use wastes from forest biomass, to generate electricity. In 2013 Cemig invested R$ 1.8 million into this project. Page 41 of 181

42 SOCIAL RESPONSIBILITY Cemig s social responsibility strategy is: to grow, while involving all the publics to which it relates. Cemig is currently present in 774 cities and 22 states of Brazil, delivering electricity with quality to millions of Brazilians. In all its interactions Cemig takes care to respect and hear those who are affected by any of its activities or have any direct contact with it. In new projects or those that Cemig administers, the contact with communities takes place throughout the year, through projects providing education, incentives for artisanal and other local activities, rain warnings, periodic visits, and training activities, all with the purpose of providing assistance and accompanying local development. The following are some of the highlights of 2013: The low-income tariff: Families with per capita income of up to half the minimum wage, registered in the Government Social Programs Register, receive a discount on their electricity bills. So far 920,000 families have registered to obtain this benefit on their accounts with Cemig D, and Cemig estimates that a total of 1.3 million homes may be able to receive this benefit. 42 The AI6% Program: This program encourages employees and retirees to redirect 6% of their income tax payable to the Infancy and Adolescence (FIA) Funds. The Program s campaign had the participation of 1,989 employees, who allocated funds totaling R$ 1.3 million, to be distributed between 191 social institutions registered in 105 cities and towns that work in protection and defense of the rights of children and young people at risk or in socially vulnerable situations. The Energia Inteligente Program: This program expresses Cemig s concern to serve clients with quality, and to orient them as to the correct and rational use of electricity. The investment made in 2013 was R$ 36.4 mn, of which R$ 10.1 mn was invested in the Conviver Project. A total of 36,523 families have been served. The Versol Project: The project trains people to sail. It is a partnership between the Company, the City Hall of Três Marias and the Rumo Náutico Institute, directed by the Grael brothers. The project offers 230 places per half-year, for children and adolescents, of both sexes, from age 9 to 24, that are pupils in the public school network. Participants receive lessons in sailing, canoeing, rowing, swimming, volleyball and other sports and practice activities of play, enjoyment and entertainment. They also learn about nautical mechanics, basic concepts of climate, ecotourism and biology. Page 42 of 181

43 The Proximidade (Proximity) Program: This program focuses on developing a culture on the subject of floods - their origins, the actions and behavior that exacerbate them, actions that reduce their effects, and how the reservoirs work to minimize them. Cemig GT holds meetings over the whole year in various locations, giving lectures about weather forecasting, the Company s activity in control of floods, the procedures that ensure the physical safety of dams and barriers, environmental actions, and other subjects that are important for the local population. The programming also includes a guided tour of a power plant in the region, for people to get to know its structure and how it works. Value added The Value Added Statement (Demonstração do Valor Adicionado, or DVA) is an indicator of the Company s importance for society in general, and its generation of wealth: the added value created in 2013 was measured as R$ 11,568 million, compared to R$ 14,048 million in Distribution of added value in 2013 Distribution of added value in Others 11% Retained 13% Others 10% Retained 14% Stockholders 14% Employees 13% Government 49% Stockholders 17% Employees 10% Government 49% People Cemig believes that its human capital is a fundamental element for fulfillment of its commitment to economic, social and environmental sustainability. With this focus, it adopts best practices in the labor market in its management of people. Personnel development As a result of personnel planning and policy studies, aligned with corporate strategy, Cemig hired 776 new employees in 2013 through public competitions, to replenish the staff of the wholly-owned subsidiaries Cemig D and Cemig GT. The hirings aim to re-establish a technical and quantitative staff balance, following acceptance by just over 900 people of the terms of the Voluntary Retirement Programs. The aim in rebuilding Cemig s field teams with 173 electrical specialists is to ensure quality of electricity for clients, through processes that are safe, healthy environments, and a culture of safety as a value. Page 43 of 181

44 ... TFA CEMIG In its annual program of internships, Cemig provided 336 interns with the opportunity to develop in their area of qualification, associating theory and practice. The Cemig-Cesam Apprenticeship Program provided 255 adolescents in situations of need with the opportunity to achieve professional apprenticeship and development of new competencies, under the supervision of employees of the Company as tutors. Number of employees Number of employees 9,746 8,859 8,706 8,368 7,922 6,055 Employees, by company 1, Cemig Holding Cemig D Distribution Cemig GT Generation and Transmission 202 Safety, health and well-being in the workplace 44 In the last 10 years, Cemig s frequency of accidents with time off work (Taxa de Frequência de Acidentes com Afastamento, or TFA) has reflected the positive results of the preventive action by the Workplace Health, Safety and Well-being (Segurança do Trabalho, Saúde Ocupacional e Bem-estar, or SSO&BE) Unit. Cemig: Frequency of accidents with time off work (TFA) Cemig staff Outsourced Workforce Page 44 of 181

45 UniverCemig Cemig s corporate university (UniverCemig) was created in December 2008, to provide educational development throughout the Company s value chain - serving the needs for training, development and management of corporate knowledge. In 2013 UniverCemig maintained its strong activity in preparation of new training programs and in the qualification of its own and contracted new employees. It provided 930 training course units for outsourced workers, comprising 42,368 personhours of training, and 13,867 course units, totaling 424,469 person-hours of training, for the Company s own employees - in which 382 course units were for qualification and skill acquisition for new employees. Cultural and sporting initiatives 45 In 2013 Cemig s sponsorships were once again guided by its Sponsorship Policy, acting in synergy with current public policies for improvement of culture in the State of Minas Gerais. The Company s two programs - Cemig Cultural and Film it in Minas (Filme em Minas) - supported 185 projects, supporting the State Culture Department s aim of regionalizing production. The total invested in culture, including both sponsorships encouraged by federal laws and the Company s own direct donations, was R$ 22 million - a significant increase from The Film it in Minas Program for supported 44 projects with investment of R$ 2.5 million. Cemig continued its sponsorship of museums (such as the Museu de Artes & Ofícios, in Belo Horizonte, the Instituto de Arte Contemporânea and the Jardim Botânico - Inhotim, in Brumadinho, Minas Gerais, and the Oratório museum in Ouro Preto), permanent culture centers (such as the Artistic Foundation and the Clóvis Salgado Foundation/Palácio das Artes, in Belo Horizonte), and projects to encourage reading (such as Sempre um Papo ( Always a Conversation ), the Literary Festivals of Ouro Preto and São João Del Rei, and maintenance of the State Public Library and the publications of the Mineiro Public Archive). It also maintained the Cemig Popular Art Center, a space that comprises the Praça da Liberdade Cultural Circuit, a strategic project of the Minas Gerais state government: The space has a permanent exhibition of Minas Gerais handcrafts and shows temporary exhibitions on the same subject. In Sport, continuation of the sponsorships for the projects of the four previous years resulted in national prizes and once again the Sport-Friendly Company Award from the Sport Ministry. 30 projects were sponsored in under-20 football, rugby, Olympic swimming, volleyball, Taekwondo, Paralympics gymnastics and water sports, in continuation of the Versol Project at Três Marias, Minas Gerais. Funding of R$ 4.5 million was passed through under the Sport Law; the projects were selected jointly with the Sport and Youth Department of Minas Gerais State. The partnership with the Voluntary Social Assistance Service (Serviço Voluntário de Assistência Social - Servas) was maintained, sponsoring the Vita Vida and Valores de Minas projects. The first of these combats hunger, providing balanced meals to thousands of children per month. The other provides support to strengthen selfesteem and personal growth for thousands of students in the state school network, through culture-related activities. Page 45 of 181

46 Environment In 2013, Cemig invested a total of R$ million in environment-related activity: R$ million in actions to put new projects in place, and R$ 52.9 million in environmental management. R$ 10 million of the total was applied in environmentrelated research projects. Funds invested in the environment (R$ million) Environmental management New projects R$ 11.7 million was applied in Consortia in which Cemig participates. New projects include the Paracambi and Guanhães Small Hydro Plants, and the interests in the Santo Antônio and Belo Monte Hydroelectric Plants. 46 Water resources The quality of the water in Cemig reservoirs is monitored regularly, in a network that includes the main river basins of Minas Gerais (the Rivers: Grande, Paranaíba, Pardo, São Francisco, Doce, Paraíba do Sul, Itabapoana and Jequitinhonha), with a total of 43 reservoirs and more than 200 stations for collection of physical, chemical and biological data. For monitoring water quality, Cemig also uses the Water Quality Index (Índice de Qualidade das Águas, or IQA) produced by the Waters Management Institute (Instituto de Gestão das Águas, or IGAM), which indicates contamination of waters by organic materials, nutrients and solids, which normally are indicators of pollution associated with domestic waste. 54% 31% 26% Reservoir levels at Cemig hydroelectric plants 75% 78% 62% 64% 65% 57% 38% 39% 36% 35% 31% 29% 27% 30% 31% 87% 48% 86% Camargos Nova Ponte Emborcação São Simão Tres Marias Queimado Irapé December 31, 2011 December 31, 2012 December 31, 2013 Page 46 of 181

47 Management of waste In 2013 Cemig dealt with 32,711 tons of waste: 32,443 tons were sold or recycled, and 268 tons were co-processed or incinerated. Of this total, 98.4% was waste disposed of by Cemig D - the distribution company - under its Distribution System Modernization Plan. These figures include 113 tons of insulating mineral oil not appropriate for internal use in the Company, which was sold, 252 tons of oil-impregnated waste that was coprocessed, and 10 tons of EPIs. The total also breaks down into 1,400 tons of hazardous wastes, and 31,310 tons of non-hazardous wastes. Final disposal of wastes (tons) 13,345 7,101 14,799 26,318 32, Sale, recycling and/or regeneration Incineration and co-processing Vegetation management This is a significant factor giving direction to our corporate environmental strategy: Sustainable management of vegetation, developed and continually improved by our Integrated Trees and Networks Handling Program (Programa Especial de Manejo Integrado de Árvores e Redes, or Premiar ). The program was launched in 2009, and its main aims are: (i) (ii) To ensure a solid partnership between concession holders and the public authority in the quest for solutions for compatibility between networks and trees. To promote innovation in the techniques for handling of trees and networks in a sustainable way, and professionalization of the related activities, improving performance of electricity system with reduction of costs. (iii) To improve the quality of electricity supply through continuous maintenance and improvement of the tree handling activities. To execute the actions in the Premiar program, Cemig has signed partnerships with the prefectures of Belo Horizonte and Contagem (in the Belo Horizonte metropolitan areas), and also other municipalities where arborists have provided services to meet the maintenance needs of the Distribution company, indicating and approving services of pruning and power line pathway cleaning for distribution networks and lines. Page 47 of 181

48 The reduction in outages caused by trees since 2009 has been measurable: before the creation of the Premiar program, in , 20% of outages in Belo Horizonte were caused by trees. This percentage had been reduced to 15% in In it is down to 10%, its lowest since Electricity outages caused by trees in Belo Horizonte Cemig adopts technological approaches to optimize the coexistence of urban trees with its above-ground distribution networks (insulated and non-insulated). To this end since 1999 the Company has adopted the Protected Distribution Network (Rede de Distribuição Protegida, or RDP) as its minimum standard for urban service, definitively replacing the conventional bare network - it was the first concession holder in Brazil to adopt RDP as minimum standard. The percentage of networks protected in Cemig is currently 27%. 48 Programs for fish populations With the predominant importance of hydroelectric plants in Cemig s electricity supply, the Company s environmental strategy in relation to biodiversity is directed toward programs for conservation of the group of species of fish that live in the watercourses where Cemig has generation operations. The Peixe Vivo ( Fish Alive ) Program is an example of integration between environmental conservation and social benefits. It was created seven years ago, to achieve effective measures for conservation of fish populations, and also favor neighbor communities that use water resources as a factor in development. The Program aims to expand fish replacement activities, research and preventive actions to make electricity generation have the smallest impact possible on fish populations. Climate change Cemig s activity in relation to climate change is part of its business strategy to lead the world electricity sector in sustainability. Within this entrepreneurial vision, it dedicates special attention to development and consolidation of a predominantly renewable energy source structure, and in identification of the potential risks and opportunities to its businesses, and the quest for solutions for adaptation and mitigation of the possible effects that could impact them. Page 48 of 181