**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 20-F**

 

| **o**                                            | **REGISTRATION  STATEMENT PURSUANT TO SECTION 12(b) OR (g)   OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------------------------------------------------|----------------------------------------------------------------------------------------------------------------------|
| **or**                                           |
| ** **                                       | ** **                                                                                                           |
| **x**                                            | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d)   OF THE SECURITIES EXCHANGE ACT OF 1934**                |
| **For the  fiscal year ended December 31, 2007** |
| ** **                                       |
| **or**                                           |
| ** **                                       | ** **                                                                                                           |
| **o**                                            | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d)   OF THE SECURITIES EXCHANGE ACT OF 1934**            |
| ** **                                       | ** **                                                                                                           |
| **or**                                           |
| ** **                                       | ** **                                                                                                           |
| **o**                                            | **SHELL  COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)   OF THE SECURITIES EXCHANGE ACT OF 1934**         |

 

**Date of event requiring this shell company report N/A**

 

**Commission file number  1-15224**

 

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| **COMPANHIA  ENERGÉTICA DE MINAS GERAIS – CEMIG**   |
|---------------------------------------------------------------|
| (Exact name of Registrant as specified in its charter)        |
|                                                          |
| **ENERGY CO OF MINAS GERAIS**                                 |
| (Translation of Registrant’s name into English)          |
|                                                          |
| **BRAZIL**                                                    |
| (Jurisdiction of incorporation or organization)               |
|                                                          |
| **Avenida Barbacena, 1200, Belo Horizonte, M.G.,  30190-131** |
| (Address of principal executive offices)                      |

 

**Securities registered or to be registered pursuant to Section 12(b) ofthe Act.**

 

| **Title  of each class**           | ** ** | **Name of  each exchange on which registered** |
|------------------------------------|------------|------------------------------------------------|
| Preferred Shares, R$5.00 par value |       | New York Stock Exchange*                       |
| American Depositary Shares, each   |       | New York Stock Exchange                        |
| representing 1 Preferred Share,    |       |                                           |
| without par value                  |       |                                           |
|                               |       |                                           |
| Common Shares, R$5.00 par value    |       | New York Stock Exchange*                       |
| American Depositary Shares, each   |       | New York Stock Exchange                        |
| representing 1 Common Share,       |       |                                           |
| without par value                  |       |                                           |

 

Securities registered or to be registered pursuant to Section 12(g) ofthe Act.

 
| **None** |
|----------|

 

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Securitiesfor which there is a reporting obligation pursuant to Section 15(d) ofthe Act.

 
| **None** |
|----------|

 

Indicatethe number of outstanding shares of each of the issuer’s classes of capital orcommon stock as of the close of the period covered by the annual report.
|   | 212,622,503 Common Shares     |
|--------|-------------------------------|
|   | 273,631,568  Preferred Shares |

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.

o Yes   x No

 

Ifthis report is an annual or transition report, indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934.

o Yes   x No

 

Note— Checking the box above will not relieve any registrant required to file reportspursuant to Section 13 or 15(d) of the Securities Exchange Act of1934 from their obligations under those Sections.

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

x Yes   o No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

 

| Large accelerated filer x |   | Accelerated filer o |   | Non-accelerated filer o |
|---------------------------|--------|---------------------|--------|-------------------------|

 

Indicateby check mark which basis of accounting the registrant has used to prepare thefinancial statements included in this filing:

 

| U.S.  GAAP x |   | IFRS o |   | Other o |
|--------------|--------|--------|--------|---------|

 

If“Other” has been checked in response to the previous question, indicate bycheck mark which financial statement item the registrant has elected to follow.

 

 

Indicateby check mark which financial statement item the registrant has elected tofollow.

o Item 17   x Item 18

 

Ifthis is an annual report, indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes   x No

 

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*Not for trading but only in connection with the registration of AmericanDepositary Shares, pursuant to the requirements of the Securities and ExchangeCommission.

 

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**Table ofContents**

 
| PART I                                |                                                                          | 1   |
|---------------------------------------|-------------------------------------------------------------------------------|-----|
| Item 1.                               | Identity of Directors,  Senior Management and Advisers                        | 1   |
| Item 2.                               | Offer Statistics and  Expected Timetable                                      | 1   |
| Item 3.                               | Key Information                                                               | 1   |
| Item 4.                               | Information on  the Company                                                   | 16  |
| Item 4A.                              | Unresolved  Staff Comments                                                    | 58  |
| Item 5.                               | Operating  and Financial Review and Prospects                                 | 58  |
| Item 6.                               | Directors, Senior  Management and Employees                                   | 83  |
| Item 7.                               | Major Shareholders  and Related Party Transactions                            | 92  |
| Item 8.                               | Financial Information                                                         | 93  |
| Item 9.                               | The Offer and Listing                                                         | 104 |
| Item 10.                              | Additional Information                                                        | 108 |
| Item 11.                              | Quantitative  and Qualitative Disclosures about Market Risk                   | 133 |
| Item 12.                              | Description  of Securities Other than Equity Securities                       | 135 |
| PART II                               |                                                                          | 136 |
| Item 13.                              | Defaults,  Dividend Arrearages and Delinquencies                              | 136 |
| Item 14.                              | Material  Modifications to the Rights of Security Holders and Use of Proceeds | 136 |
| Item 15.                              | Controls and Procedures                                                       | 136 |
| Item 16A.                             | Audit  Committee Financial Expert                                             | 137 |
| Item 16B.                             | Code of Ethics                                                                | 137 |
| Item 16C.                             | Principal Accountant  Fees and Services                                       | 137 |
| Item 16D.                             | Not Applicable                                                                | 138 |
| Item 16E.                             | Purchases  of Equity Securities by the Issuer and Affiliated Purchasers       | 138 |
| PART III                              |                                                                          | 139 |
| Item 17.                              | Financial  Statements                                                         | 139 |
| Item 18.                              | Financial Statements                                                          | 139 |
| Item 19.                              | Exhibits                                                                      | 139 |
| ANNEX A THE  BRAZILIAN POWER INDUSTRY | A-1                                                                           |

 

**PRESENTATION OF FINANCIALINFORMATION**

** **

Companhia Energética de Minas Gerais—CEMIG is a *sociedade de economia mista* (astate-controlled mixed capital company) organized and existing with limitedliability under the laws of the Federative Republic of Brazil, or Brazil. Referencesin this annual report to “CEMIG,” “we,” “us,” “our” and the “Company” are toCompanhia Energética de Minas Gerais—CEMIG and its consolidated subsidiaries,except when the reference is specifically to Companhia Energética de MinasGerais—CEMIG (parent company only) or the context otherwise requires.References to the “*real*,” “*reais*” or “R$” are to Brazilian *reais* (plural) and the Brazilian *real* (singular), the official currency ofBrazil, and references to “U.S. dollars,” “dollars” or “US$” are to UnitedStates dollars.

 

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We maintain our books and records in *reais*.We prepare our financial statements in accordance with accounting practicesadopted in Brazil, including the principles that are established primarilythrough Law No. 6,404 of December 15, 1976, as amended, which werefer to as the Brazilian Corporate Law. For purposes of this annual report, wehave presented, and in future reports to be filed with the United StatesSecurities and Exchange Commission, or the Commission, we intend to present,our consolidated financial statements and other financial information in *reais* in accordance with accountingprinciples generally accepted in the United States, or U.S. GAAP. For purposesof this annual report we prepared balance sheets as of December 31, 2007and 2006 and the related statements of operations and comprehensive income,cash flows and changes in shareholders’ equity for the years ended December 31,2007, 2006 and 2005, in *reais* allin accordance with U.S. GAAP. KPMG Auditores Independentes has audited ourconsolidated financial statements as of and for the year ended December 31,2007, as stated in their report appearing elsewhere herein, and Deloitte ToucheTohmatsu Auditores Independentes has audited our consolidated financialstatements at December 31, 2006 and for each of the two years ended December 31,2006 and 2005, as stated in their report appearing elsewhere herein.

 

From and after January 1, 1998, Brazil ceased to be considered ahighly inflationary economy under U.S. GAAP and we have not restated financialinformation to reflect the effects of inflation as from that date. Therefore,for subsequent periods and dates, our financial statements and other financialdata are presented in nominal *reais*and do not reflect effects of inflation. See Note 2(b) to our consolidatedfinancial statements.

 

This annual report contains translations of certain *real* amounts into U.S. dollars atspecified rates solely for the convenience of the reader. Unless otherwiseindicated, such U.S. dollar amounts have been translated from *reais* at an exchange rate of R$1.7790 toUS$1.00, the noon buying rate in New York City for cable transfers in *reais* as certified for customs purposes bythe Federal Reserve Bank of New York, or the noon buying rate, as of December 31,2007. The *real* has historicallyexperienced high volatility. See “Item 3. Key Information—Exchange Rates” foradditional information regarding exchange rates. We cannot guarantee that U.S.dollars can be converted into *reais*,or that *reais* can be convertedinto U.S. dollars, at the above rate or at any other rate.

 

**MARKET POSITION AND OTHERINFORMATION**

** **

The information contained in this annual report regarding our marketposition is, unless otherwise indicated, presented for the twelve-month periodended December 31, 2007 and is based on, or derived from, reports issuedby the Agência Nacional de EnergiaElétrica (The Brazilian National Electric Energy Agency), or ANEEL, andby the Câmara de Comercialização deEnergia Elétrica (the Brazilian Electric Power Trading Chamber), orCCEE.

 

Certain terms are defined the first time they are used in this annualreport. As used herein, all references to “GW” and “GWh” are to gigawatts andgigawatt hours, respectively, references to “MW” and “MWh” are to megawatts andmegawatt-hours, respectively, and references to “kW” and “kWh” are to kilowattsand kilowatt-hours, respectively.

 

References in this annual report to the “common shares” and “preferredshares” are to our common shares and preferred shares, respectively. Referencesto “Preferred American Depositary Shares” or “Preferred ADSs” are to AmericanDepositary Shares, each representing 1,000 preferred shares as of December 31,2006, and one preferred share as of December 31, 2007.  References to “Common American DepositaryShares” or “Common ADSs” are to American Depositary Shares, each representingone common share as of December 31, 2007. Our Preferred ADSs and Common ADSs are referred to collectively as “ADSs,”and Preferred ADRs and Common ADRs are referred to collectively as “ADRs.”

 

On May 3, 2007, we effected a partial stock split in the form of a50% stock dividend of our preferred shares, with a corresponding adjustment toour Preferred ADSs.  Effective on June 11,2007, after giving effect to (i) a reverse stock split of our preferredshares in the form of a consolidation whereby every 500 preferred shares, parvalue R$0.01, were consolidated into one preferred share with a par value ofR$5.00, and (ii) a 100% forward split of the Preferred ADSs, the PreferredADS ratio was changed to one preferred share per Preferred ADS.  In addition, on May 2, 2008, a 2.02%stock dividend was paid on the preferred shares.  On May 8, 2008, a correspondingadjustment was made to the Preferred ADSs through the issuance of additionalPreferred ADS.  The Preferred ADSs areevidenced by American Depositary Receipts, or Preferred ADRs, issued pursuantto a Second Amended and Restated Deposit Agreement, dated as of August 10,2001, as amended on June 11, 2007, by and among us, Citibank, N.A., asdepositary, and the holders and beneficial owners of Preferred ADSs evidencedby Preferred ADRs issued thereunder (the “Second Amended and Restated DepositAgreement”).

 

On May 3, 2007, we effected a partial stock split in the form of a50% stock dividend of our common shares. On June 11, 2007, we effected a reverse stock split of our commonshares in the form of a consolidation whereby every 500 common shares, parvalue R$0.01, were consolidated into one common share with a par value ofR$5.00. On June 12, 2007, we established an American 

 

ii

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DepositaryShare program for our common shares, with each Common ADS representing onecommon share.  In addition, On May 2,2008, a 2.02% stock dividend was paid on the common shares.  On May 8, 2008, a correspondingadjustment was made to the Common ADSs through the issuance of additionalCommon ADS.  The Common ADSs areevidenced by American Depositary Receipts, or Common ADRs, issued pursuant to aDeposit Agreement, dated as of June 12, 2007, by and among us, Citibank,N.A., as depositary, and the holders and beneficial owners of Common ADSsevidenced by Common ADRs issued thereunder (the “Common ADS Deposit Agreement”and, together with the Second Amended and Restated Deposit Agreement, the “DepositAgreements”).

 

**FORWARD-LOOKING INFORMATION**

** **

This annual report includes forward-looking statements, principally in “Item3. Key Information” and “Item 11. Quantitative and Qualitative Disclosuresabout Market Risk.”  We have based theseforward-looking statements largely on our current expectations and projectionsabout future events and financial trends affecting our business. Theseforward-looking statements are subject to risks, uncertainties and assumptionsrelating to, among other things:

 

·                                          generaleconomic, political and business conditions, principally in Latin America,Brazil, the State of Minas Gerais, Brazil, or Minas Gerais, and the state of Riode Janeiro, Brazil, or Rio de Janeiro;

 

·                                          inflationand changes in currency exchange rates;

 

·                                          enforcementof legal regulation in Brazil’s electricity sector;

 

·                                          changesin volumes and patterns of consumer electricity usage;

 

·                                          competitiveconditions in Brazil’s electricity generation, transmission and distributionmarkets;

 

·                                          ourexpectations and estimates concerning future financial performance, financingplans and the effects of competition;

 

·                                          ourlevel of debt;

 

·                                          thelikelihood that we will receive payment in connection with accounts receivable;

 

·                                          trendsin the electricity generation, transmission and distribution industry inBrazil, and in particular in Minas Gerais and Rio de Janeiro;

 

·                                          changesin rainfall and the water levels in the reservoirs used to run ourhydroelectric power generation facilities;

 

·                                          ourcapital expenditure plans;

 

·                                          ourability to serve our consumers on a satisfactory basis;

 

·                                          ourability to renew our concessions;

 

·                                          existingand future governmental regulation as to electricity rates, electricity usage,competition in our concession area and other matters;

 

·                                          ourability to integrate the operations of companies we may acquire;

 

·                                          existingand future policies of the Federal Government of Brazil, which we refer to asthe Federal Government;

 

·                                          existingand future policies of the government of Minas Gerais, which we refer to as theState Government, including policies affecting its investment in us and theplans of the State Government for future expansion of electricity generation,transmission and distribution in Minas Gerais; and

 

iii

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·                                          otherrisk factors as set forth under “Item 3. Key Information—Risk Factors.”

 

The forward-looking statements referred to above also include informationwith respect to our capacity expansion projects that are under way and thosethat we are currently evaluating. In addition to the above risks anduncertainties, our potential expansion projects involve engineering,construction, regulatory and other significant risks, which may:

 

·                                          delayor prevent successful completion of one or more projects;

 

·                                          increasethe costs of projects; and

 

·                                          resultin the failure of facilities to operate or generate income in accordance withour expectations.

 

The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,”“intend,” “expect” and similar words are intended to identify forward-lookingstatements. We undertake no obligation to update publicly or revise anyforward-looking statements because of new information, future events or otherwise.In light of these risks and uncertainties, the forward-looking information,events and circumstances discussed in this annual report might not occur. Ouractual results and performance could differ substantially from thoseanticipated in our forward-looking statements.

 

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** **

**PART I**

** **

**Item 1.**           Identityof Directors, Senior Management and Advisers

** **

Not applicable.

 

**Item 2.**           OfferStatistics and Expected Timetable

** **

Not applicable.

 

**Item 3.**           KeyInformation

** **

**Selected Consolidated Financial Data**

** **

The following tables present our selected consolidated financial andoperating information in U.S. GAAP as of the dates and for each of the periodsindicated. You should read the following information together with our consolidatedfinancial statements, including the notes thereto, included in this annualreport and the information set forth in “Item 5. Operating and Financial Reviewand Prospects.”

 

The selected consolidated financial data as of December 31, 2007and 2006 and for each of the three years ended December 31, 2007, 2006 and2005 have been derived from our audited consolidated financial statements andthe notes thereto included elsewhere in this annual report. The selectedconsolidated data as of December 31, 2005, 2004 and 2003 and for the eachof the two years ended December 31, 2004 and 2003 has been derived fromour audited consolidated financial statements and notes thereto, which are notincluded in this annual report.

 

U.S. dollar amounts in the table below are presented for yourconvenience. Unless otherwise indicated, these U.S. dollar amounts have beentranslated from *reais* at R$1.7790per US$1.00, the noon buying rate as of December 31, 2007. The *real* has historically experienced highvolatility. We cannot guarantee that U.S. dollars can be converted into *reais*, or that *reais* can be converted into U.S. dollars, at the above rateor at any other rate. On June 20, 2008, the noon buying rate for *reais* was R$1.6018****per US$1.00.See “— Exchange Rates.”

 

1

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**SelectedConsolidated Financial Data**

 
| ** **                                                      | ** ** | **As of and for the year ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2007**                                                                              | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                      | ** ** | **(in millions   of US$)(1)(2)**                                       | ** ** | **(In millions of R$ except per share/ADS data or as otherwise   indicated)** | ** ** |
| **Income  Statement Data:**                                     | ** ** | ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net operating  revenues                                         |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Electricity  sales to final consumers                           |       | 5,728                                                                                 |       | 10,191 |   | 9,319 |   | 8,708 |   | 8,541 |   | 7,163 |   |
| Deferred rate  adjustment(3)                                    |       | —                                                                                |       | — |   | — |   | 110 |   | 640 |   | 199 |   |
| Electricity  sales to the interconnected power system           |       | 637                                                                                   |       | 1,134 |   | 884 |   | 237 |   | 36 |   | 56 |   |
| Use of basic  transmission and distribution networks            |       | 958                                                                                   |       | 1,705 |   | 1,780 |   | 1,523 |   | 245 |   | 257 |   |
| Other operating  revenues                                       |       | 133                                                                                   |       | 236 |   | 200 |   | 176 |   | 625 |   | 531 |   |
| Tax on revenues                                                 |       | (2,155                                                                                | )          | (3,836 | ) | (3,543 | ) | (3,241 | ) | (2,608 | ) | (2,190 | ) |
| Total net  operating revenues                                   |       | 5,301                                                                                 |       | 9,430 |   | 8,640 |   | 7,513 |   | 7,479 |   | 6,016 |   |
|                                                            |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Operating costs  and expenses                                   |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Electricity  purchased for resale                               |       | (1,207                                                                                | )          | (2,147 | ) | (1,907 | ) | (1,455 | ) | (1,370 | ) | (1,396 | ) |
| Natural gas  purchased for resale                               |       | —                                                                                |       | — |   | — |   | — |   | (268 | ) | (246 | ) |
| Use of basic  transmission and distribution networks            |       | (317                                                                                  | )          | (564 | ) | (687 | ) | (709 | ) | (538 | ) | (310 | ) |
| Depreciation and  amortization                                  |       | (494                                                                                  | )          | (878 | ) | (810 | ) | (669 | ) | (677 | ) | (686 | ) |
| Personnel                                                       |       | (497                                                                                  | )          | (884 | ) | (1,046 | ) | (779 | ) | (788 | ) | (710 | ) |
| Regulatory  charges                                             |       | (544                                                                                  | )          | (967 | ) | (1,031 | ) | (983 | ) | (861 | ) | (585 | ) |
| Regulatory  liability – special liabilities                |       | —                                                                                |       | — |   | (1,057 | ) | — |   | — |   | — |   |
| Third-party  services                                           |       | (309                                                                                  | )          | (550 | ) | (475 | ) | (420 | ) | (329 | ) | (325 | ) |
| Employee  post-retirement benefits                              |       | (79                                                                                   | )          | (140 | ) | (245 | ) | (257 | ) | (153 | ) | (109 | ) |
| Materials and  supplies                                         |       | (83                                                                                   | )          | (148 | ) | (116 | ) | (95 | ) | (83 | ) | (88 | ) |
| Reversal  (Provision) for loss on deferred regulatory assets(3) |       | (82                                                                                   | )          | (146 | ) | (49 | ) | (183 | ) | (9 | ) | 174 |   |
| Employee profit  sharing                                        |       | (256                                                                                  | )          | (455 | ) | (210 | ) | (260 | ) | (110 | ) | (93 | ) |
| Other                                                           |       | (264                                                                                  | )          | (472 | ) | (234 | ) | (379 | ) | (280 | ) | (313 | ) |
| Total operating  costs and expenses                             |       | (4,132                                                                                | )          | (7,351 | ) | 7,867 |   | 6,189 |   | (5,466 | ) | (4,687 | ) |
|                                                            |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Operating income                                                |       | 1,169                                                                                 |       | 2,079 |   | 773 |   | 1,324 |   | 2,013 |   | 1,329 |   |
|                                                            |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Financial income  (expenses), net                               |       | (27                                                                                   | )          | (48 | ) | 335 |   | 754 |   | 350 |   | 674 |   |
|                                                            |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Non-Operating  Income                                           |       | 153                                                                                   |       | 272 |   | 91 |   | 29 |   | 105 |   | — |   |
|                                                            |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Income before  income taxes and minority interests              |       | 1,295                                                                                 |       | 2,303 |   | 1,199 |   | 2,107 |   | 2,468 |   | 2,003 |   |
| Income taxes  expense                                           |       | (385                                                                                  | )          | (685 | ) | (497 | ) | (300 | ) | (731 | ) | (607 | ) |
| Minority  interests                                             |       | —                                                                                |       | — |   | — |   | 2 |   | 2 |   | — |   |
| Net income  (loss)                                              |       | 910                                                                                   |       | 1,618 |   | 702 |   | 1,809 |   | 1,739 |   | 1,396 |   |
|                                                            |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Other  comprehensive income (loss)                              |       | (225                                                                                  | )          | (400 | ) | 140 |   | 25 |   | (474 | ) | (64 | ) |
| Comprehensive  income                                           |       | 685                                                                                   |       | 1,218 |   | 842 |   | 1,834 |   | 1,265 |   | 1,332 |   |
|                                                            |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Basic earnings  (loss): (5)                                     |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Per common share                                                |       | 1.87                                                                                  |       | 3.33 |   | 1.44 |   | 3.72 |   | 3.58 |   | 2.87 |   |
| Per preferred  share                                            |       | 1.87                                                                                  |       | 3.33 |   | 1.44 |   | 3.72 |   | 3.58 |   | 2.87 |   |
| Per ADS                                                         |       | 1.87                                                                                  |       | 3.33 |   | 1.44 |   | 3.72 |   | 3.58 |   | 2.87 |   |
| Diluted earnings  (loss): (5)                                   |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Per common share                                                |       | 1.83                                                                                  |       | 3.26 |   | 1.41 |   | 3.69 |   | 3.58 |   | 2.87 |   |

 

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| ** **           | ** ** | **As of and for the year ended December 31,** | ** ** |
|----------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **           | ** ** | **2007**                                                                              | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **           | ** ** | **(in millions   of US$)(1)(2)**                                       | ** ** | **(In millions of R$ except per share/ADS data or as otherwise   indicated)** | ** ** |
| Per preferred  share |       | 1.83                                                                                  |       | 3.26 |   | 1.41 |   | 3.69 |   | 3.58 |   | 2.87 |   |
| Per ADS              |       | 1.83                                                                                  |       | 3.26 |   | 1.41 |   | 3.69 |   | 3.58 |   | 2.87 |   |

 

3

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| ** **                                         | ** ** | **As of and for the year ended December 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **2007**                                                                              | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                         | ** ** | **(in millions   of US$)(1)(2)**                                       | ** ** | **(In millions of R$ except per share/ADS data or as otherwise  indicated)** | ** ** |
| ** **                                         | ** ** | ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance  Sheet Data:**                           | ** ** | ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Assets                                             |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Current assets                                     |       | 3,336                                                                                 |       | 5,935 |   | 4,778 |   | 4,778 |   | 3,276 |   | 2,630 |   |
| Property, plant  and equipment, net                |       | 7,777                                                                                 |       | 13,835 |   | 13,426 |   | 11,971 |   | 11,191 |   | 10,917 |   |
| Deferred  regulatory   assets — long-term     |       | 463                                                                                   |       | 823 |   | 1,548 |   | 2,315 |   | 2,929 |   | 2,069 |   |
| Account  receivable from State Government          |       | 991                                                                                   |       | 1,763 |   | 1,726 |   | 1,519 |   | 1,097 |   | 891 |   |
| Other assets                                       |       | 1,122                                                                                 |       | 1,997 |   | 1,841 |   | 763 |   | 504 |   | 612 |   |
| Total assets                                       |       | 13,689                                                                                |       | 24,353 |   | 23,319 |   | 21,346 |   | 18,997 |   | 17,119 |   |
|                                               |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Liabilities                                        |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Current portion  of long-term financing            |       | 529                                                                                   |       | 941 |   | 691 |   | 985 |   | 1,417 |   | 1,660 |   |
| Other current  liabilities                         |       | 2,008                                                                                 |       | 3,572 |   | 3,639 |   | 3,953 |   | 2,286 |   | 1,869 |   |
| Long-term  financing                               |       | 3,301                                                                                 |       | 5,873 |   | 5,833 |   | 3,841 |   | 2,750 |   | 2,331 |   |
| Employee  post-retirement benefits—long-term  |       | 1,227                                                                                 |       | 2,182 |   | 1,666 |   | 1,535 |   | 1,606 |   | 1,023 |   |
| Shareholders’  equity                         |       | 4,623                                                                                 |       | 8,224 |   | 8,370 |   | 9,252 |   | 9,209 |   | 8,524 |   |
| Capital stock                                      |       | 1,259                                                                                 |       | 2,239 |   | 1,428 |   | 1,428 |   | 1,428 |   | 1,428 |   |
| ** **                                         | ** ** | ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other  Data:**                                   | ** ** | ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average  outstanding shares - basic (5)   |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Common                                             |       |                                                                                  |       | 212,622,504 |   | 212,622,504 |   | 212,622,504 |   | 212,622,504 |   | 212,622,504 |   |
| Preferred                                          |       |                                                                                  |       | 273,631,569 |   | 273,631,569 |   | 273,631,569 |   | 273,631,569 |   | 273,631,569 |   |
| Dividends per  share (5)                           |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Common                                             |       | 1.58                                                                                  |       | R$ | 2.81 |   | R$ | 2.77 |   | R$ | 3.68 |   | R$ | 1.19 |   | R$ | 0.51 |   |
| Preferred                                          |       | 1.58                                                                                  |       | R$ | 2.81 |   | R$ | 2.77 |   | R$ | 3.68 |   | R$ | 1.19 |   | R$ | 0.51 |   |
| Dividends per  ADS (5)                             |       | 1.58                                                                                  |       | R$ | 2.81 |   | R$ | 2.77 |   | R$ | 3.68 |   | R$ | 1.19 |   | R$ | 0.51 |   |
| Dividends per  share (4)(5)                        |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Common                                             |       |                                                                                  |       | US$ | 1.58 |   | US$ | 1.30 |   | US$ | 1.58 |   | US$ | 0.45 |   | US$ | 0.18 |   |
| Preferred                                          |       |                                                                                  |       | US$ | 1.58 |   | US$ | 1.30 |   | US$ | 1.58 |   | US$ | 0.45 |   | US$ | 0.18 |   |
| Dividends per  ADS(4)(5)                           |       |                                                                                  |       | US$ | 1.58 |   | US$ | 1.30 |   | US$ | 1.58 |   | US$ | 0.45 |   | US$ | 0.18 |   |
|                                               |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Weighted average  outstanding shares - diluted (5) |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Common                                             |       |                                                                                  |       | 216,925,229 |   | 217,250,274 |   | 214,450,359 |   | 212,622,504 |   | 212,622,504 |   |
| Preferred                                          |       |                                                                                  |       | 279,168,901 |   | 279,587,214 |   | 275,983,902 |   | 273,631,569 |   | 273,631,569 |   |
| Dividends per  share diluted (5)                   |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Common                                             |       | 1.55                                                                                  |       | R$ | 2.75 |   | R$ | 2.71 |   | R$ | 3.65 |   | R$ | 1.19 |   | R$ | 0.51 |   |
| Preferred                                          |       | 1.55                                                                                  |       | R$ | 2.75 |   | R$ | 2.71 |   | R$ | 3.65 |   | R$ | 1.19 |   | R$ | 0.51 |   |
| Dividends per  ADS diluted (5)                     |       | 1.55                                                                                  |       | R$ | 2.75 |   | R$ | 2.71 |   | R$ | 3.65 |   | R$ | 1.19 |   | R$ | 0.51 |   |
| Dividends per  share diluted (4)(5)                |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Common                                             |       |                                                                                  |       | US$ | 1.55 |   | US$ | 1.27 |   | US$ | 1.57 |   | US$ | 0.45 |   | US$ | 0.18 |   |
| Preferred                                          |       |                                                                                  |       | US$ | 1.55 |   | US$ | 1.27 |   | US$ | 1.57 |   | US$ | 0.45 |   | US$ | 0.18 |   |
| Dividends per  ADS diluted (4)(5)                  |       |                                                                                  |       | US$ | 1.55 |   | US$ | 1.27 |   | US$ | 1.57 |   | US$ | 0.45 |   | US$ | 0.18 |   |

 

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(1)                                 Convertedat the exchange rate of US$1.00 to R$1.7790, the noon buying rate as of December 31,2007.  See “—Exchange Rates.”

(2)                                 Inmillions, except per share/ADS data.

(3)                                 SeeNote 4 to our consolidated financial statements.

 

4

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(4)                                 Thisinformation is presented in U.S. dollars at the noon buying rate in effect asof the end of each year.

(5)                                 Pershare numbers have been adjusted to reflect the stock dividend andconsolidation of our shares, and per Preferred ADS numbers have been adjustedto reflect the 100% forward split of our Preferred ADSs, each of which occurredin May and June 2007.

 

**Exchange Rates**

** **

Prior to March 14, 2005 there were two principal foreign exchangemarkets in Brazil - the commercial rate exchange market and the floating rateexchange market. Most trade and financial foreign-exchange transactions werecarried out on the commercial rate exchange market. The floating market rategenerally applied to transactions to which the commercial market rate did notapply. On March 4, 2005, the National Monetary Council (Conselho MonetárioNacional) enacted Resolution No. 3,265 that, effective March 14,2005, consolidated the two foreign exchange markets into one foreign exchangemarket for the general purpose of making foreign exchange transactions simplerand more efficient. All foreign exchange transactions are now carried out inthis single foreign exchange market through financial institutions authorizedto operate in the market.

 

Brazilian law provides that, whenever there (i) is a significantimbalance in Brazil’s balance of payments, or (ii) are major reasons toforesee a significant imbalance in Brazil’s balance of payments, temporaryrestrictions may be imposed on remittances of foreign capital abroad. In thepast, the Central Bank has intervened occasionally to control unstablemovements in foreign exchange rates. We cannot predict whether the Central Bankor the Federal Government will continue to let the *real*float freely or will intervene in the exchange rate market through a currencyband system or otherwise. The *real* maydepreciate or appreciate against the U.S. dollar and other currenciessubstantially in the future. Exchange rate fluctuations may affect the U.S.dollar amounts received by the holders of Preferred ADSs or Common ADSs. Wewill make any distributions with respect to our preferred shares or commonshares in *reais* and thedepositary will convert these distributions into U.S. dollars for payment tothe holders of Preferred ADSs and Common ADSs. Exchange rate fluctuations mayalso affect the U.S. dollar equivalent of the *real*price of the preferred shares or common shares on the Brazilian stock exchangewhere they are traded. Exchange rate fluctuations may also affect our resultsof operations. See “Risk Factors — Exchange rate instability may adversely affect our business, results ofoperations and financial condition and the market price of our shares, thePreferred ADSs and the Common ADSs.”

 

The table below sets forth, for the periods indicated, the low, high,average and period-end noon buying rates for *reais*,expressed in *reais* per US$1.00.

 
| ** **                                   | ** ** | **Reais per US$ 1.00** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|
| **Month**                                    | ** ** | **Low**                               | ** ** | **High** | ** ** | **Average** | ** ** | **Period-end** | ** ** |
| December 2007                           |       | 1.7580                                |       | 1.8204 |   | 1.7852 |   | 1.7790 |   |
| January 2008                            |       | 1.7346                                |       | 1.8175 |   | 1.7710 |   | 1.7578 |   |
| February 2008                           |       | 1.6679                                |       | 1.7655 |   | 1.7414 |   | 1.6845 |   |
| March 2008                              |       | 1.6673                                |       | 1.7441 |   | 1.7090 |   | 1.7441 |   |
| April 2008                              |       | 1.6547                                |       | 1.7410 |   | 1.6863 |   | 1.6950 |   |
| May 2008                                |       | 1.6252                                |       | 1.6880 |   | 1.6585 |   | 1.6252 |   |
| June 2008  (through June 20, 2008) |       | 1.6018                                |       | 1.6405 |   | 1.6246 |   | 1.6018 |   |

 
| ** **                                 | ** ** | **Reais per US$ 1.00** | ** ** |
|--------------------------------------------|------------|---------------------------------------|------------|
| **Year Ended December 31,** | ** ** | **Low**                               | ** ** | **High** | ** ** | **Average** | ** ** | **Period-end** | ** ** |
| 2003                                       |       | 2.8230                                |       | 3.6640 |   | 3.0757 |   | 2.8950 |   |
| 2004                                       |       | 2.6510                                |       | 3.2085 |   | 2.9262 |   | 2.6550 |   |
| 2005                                       |       | 2.1695                                |       | 2.7755 |   | 2.4352 |   | 2.3340 |   |
| 2006                                       |       | 2.0549                                |       | 2.3580 |   | 2.1738 |   | 2.1342 |   |
| 2007                                       |       | 1.7298                                |       | 2.1520 |   | 1.9473 |   | 1.7790 |   |

 

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Source: Federal ReserveBank of New York

 

5

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**Risk Factors**

** **

*You should consider the following risks as well asthe other information in this annual report in evaluating an investment in ourcompany.*

 

**Risks Relating to CEMIG**

** **

*We are controlled by the State Government which mayhave interests that are different from yours.*

 

As our controlling shareholder, the government of the State of MinasGerais exercises substantial influence on the management and orientation of thebusiness of CEMIG. It is not possible to analyze the impact and effects thismay have on us or our results of operations. The government of the State ofMinas Gerais currently holds approximately 51% of our common shares and,consequently, has the right to the majority of votes in decisions of theGeneral Meetings of our Shareholders, and can (i) elect the majority ofthe members of the Board of Directors of CEMIG, and (ii) decide mattersrequiring approval by a specific majority of our shareholders, includingtransactions with related parties, shareholding reorganizations and the dateand payment of any dividends.

 

The operations of CEMIG have had and will continue to have an importantimpact on the commercial and industrial development of the State of MinasGerais, and on its social conditions. In the past, the State Government hasused, and may use in the future, its status as our controlling shareholder todecide that we should engage in certain activities and make certain investmentsaimed, principally, to promote its political, economic or social objectives andnot necessarily to meet the objective of improving our business and/oroperational results.

 

*We are subject to extensive governmentallegislation and regulation.*

 

The Brazilian Federal Government has been implementing policies thathave a far-reaching impact on the Brazilian power industry and, in particular,the electricity industry. As part of the restructuring of the industry, FederalLaw No. 10,848 of March 15, 2004, (“Law No. 10,848/04” or the “NewIndustry Model Law”) introduced a new regulatory framework for the Brazilian electricityindustry.

 

Law No. 10,848/04 and Decree 5,163/04 of July 30, 2004governing the purchase and sale of electricity under the New Industry Model Lawremain subject to the implementation of resolutions by ANEEL. Moreover, theconstitutionality of Law No. 10,848/04 is currently being challengedbefore the Brazilian Supreme Court. The Brazilian Supreme Court has not yetreached a final decision and, therefore, Law No. 10,848/04 is currently inforce. If all or a portion of Law No. 10,848/04 is considered to beunconstitutional by the Brazilian Supreme Court, all or a portion of theregulatory scheme introduced by Law No. 10,848/04 may not come intoeffect, generating uncertainty as to how and when the Federal Government willbe able to introduce changes to the electricity industry. Accordingly, wecannot now evaluate the impact of the new regulation to be issued by ANEEL orthe impact that a decision on the constitutionality of Law No. 10,848/04would have on our future activities, results of operations and financialcondition.

 

*The rules for the sale of electric energy andmarket conditions could affect our generation selling prices.*

 

Under the law creating the new model for the industry, our generationcompany is not allowed to sell energy directly to our distribution company. Asa result, we have to sell our electricity in a regulated market through publicauctions conducted by ANEEL, or in the Free Contracting Environment (the “ACL”). Legislation allows distributors that contractwith our generation company under the Regulated Contracting Environment (the “ACR”)to reduce the quantity of energy contracted under these contracts up to acertain limit, exposing our generation company to the risk of failing topurchase energy at adequate prices.

 

Contracts in the ACL with consumers that are allowedto purchase energy directly from generating companies or from energy traders(these are generally consumers with demand equal to or greater than 3 MW orconsumers with demand between 500 KW and 3 MW if they choose to purchase theirenergy from renewable energy sources, such as small hydroelectric facilities,and referred to as “Free Consumers”) also give such consumers the flexibilityto purchase less energy (nearly 10%) from us than was originally contracted forby such consumers, which may adversely impact our business, results ofoperations and financial condition.

 

6

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If we are unable to sell all of our energy capacityin the auctions or in the ACL, we may be forced to sell it in the spot market,where prices are very volatile. If this occurs in periods of low spot prices,our revenues and results of operations could be adversely affected.

 

*ANEEL has substantial discretion to establish therates we charge to captive consumers and the rates we charge to Free Consumersand to power generating companies for using our distribution system. Such ratesare determined pursuant to concession contracts entered with ANEEL and inaccordance with ANEEL’s regulatory decision-making authority.*

* *

Concession agreements and Brazilian law establish aprice cap mechanism that permits three types of rate adjustments: (1) theannual adjustment; (2) the periodic revision; and (3) theextraordinary revision. We are entitled to apply each year for the annualadjustment, which is designed to offset some of the effects of inflation onrates and allows us to pass through to consumers certain changes in our coststructure that are beyond our control, such as the cost of electricity wepurchase from certain sources and certain other regulatory charges, includingcharges for the use of transmission and distribution facilities. In addition,ANEEL carries out a periodic revision every five years that is aimed atidentifying variations in our costs as well as setting a factor based on ouroperational efficiency that will be applied against the index of our ongoingannual rate adjustments, the intended effect of which is to reward the goodmanagement of our costs while sharing any related gains with our consumers. Weare also entitled to request an extraordinary revision of our rates ifunforeseen events significantly alter our cost structure. The periodic revisionand extraordinary revision are subject to a certain degree of ANEEL’sdiscretion.

 

Although our concession agreement provides that the company must remainin economic and financial balance, we cannotassure you that ANEEL will establish rates that will adequately compensate usand that our revenues and results of operations will not be adversely affectedby such rates. In addition, to the extent any of these adjustments are notgranted by ANEEL in a timely manner, our business, results of operations andfinancial condition may be adversely affected.

 

*We may not be able to collect the full amount of asignificant receivable from the State Government.*

* *

We have an account receivable from the State Government, referred to asthe CRC Account, that totaled R$1,763 million as of December 31, 2007. Theagreement between CEMIG and the State Government that governs the CRC Accountreceivable is referred to as the CRC Account Agreement. Historically we havehad difficulty collecting amounts due from the State Government under the CRCAccount. On January 23, 2006, CEMIG and the State Government executed a FourthAmendment to the CRC Account Agreement, under which the State Government agreedto pay its debt in 61 semi-annual payments and irrevocably authorized us toretain 65% of the dividends and interest on capital due to it through June 30,2035 to offset amounts due under the CRC Account Agreement.  However, no assurance can be given that wewill be able to pay dividends sufficient to allow us to retain dividends due tothe State Government in the amount necessary to cover the repayment of the fullamount of the principal and interest due under the CRC Account.  In addition, on September 12, 2007 aFifth Amendment to the CRC Account was executed by CEMIG and the StateGovernment to adjust the outstanding balance of the CRC Account in accordancewith a provision in the Fourth Amendment in which the parties recognized thatthere was a disagreement regarding the outstanding balance of the CRC Agreementat December 31, 2004. Pursuant to the Fifth Amendment, the outstandingbalance of the CRC Account was adjusted from R$2,942 million to R$2,839million. See “Item 10. Additional Information—Material Contracts—CRC AccountAgreement”.

 

*We are strictly liable for any damages resulting frominadequate rendering of electricity services.*

* *

Under Brazilian law, we are strictly liable for direct and indirectdamages resulting from the inadequate rendering of electricity transmission anddistribution services. In addition, the damages caused to end consumers as aresult of interruptions or disturbances arising from the generation,transmission or distribution systems, whenever these interruptions ordisturbances are not attributed to an identifiable member of the *Operador Nacional do Sistema* (National System Operator, or “ONS”)or the ONS itself, shall be shared among generation, distribution andtransmission companies. Until a final criteria is defined, the liability forsuch damages shall be shared in the proportion of 35.7% to distribution agents,28.6% to transmission agents and 35.7% to generation agents. Therefore, our business, results of operations andfinancial condition may be adversely affected.

 

*We are subject to rules and limits applied tolevels of public sector borrowing and to restrictions on the use of certainfunds we raise, which could prevent us from obtaining financing.*

* *

As a state controlled company, we are subject to rules and limitson the level of credit applicable to the public sector issued by the NationalMonetary Council and by the Central Bank. These rules set certainparameters and conditions for financial institutions 

 

7

----

 

to beable to offer credit to public sector entities. Thus, if our operations do notfall within these parameters and conditions, we may have difficulty inobtaining financing from Brazilian financial institutions, which could createdifficulties in the implementation of our investment plan or in refinancing ourfinancial obligations. Brazilian legislation also establishes that astate-controlled company, in general, may only use proceeds of external orlocal transactions (debt, including bonds) to refinance financial obligations.As a result of these regulations, our capacity to incur debt is again limited,and this could negatively affect the implementation of our investment plan or therefinancing of our obligations.

 

*There are contractual restrictions on our capacity toincur debt.*

* *

We are subject to certain restrictions on our ability to incur debt dueto covenants set forth in our loan agreements. In the event of ournon-compliance with any such covenants in our loan agreements, the totalprincipal, future interest and any penalties due under these agreements maybecome immediately due and payable.  In the past we have, at times,been in non-compliance with our covenants under our loan agreements, andalthough we were able to obtain waivers from our creditors, no assurance can begiven that we would be successful in obtaining any waivers in the future.  Early maturity of our obligationscould adversely affect our financial condition especially in light of crossdefault provisions in several of our loan and financing contracts. Theexistence of limitations on our indebtedness could prevent us from borrowing tofinance our operations or to refinance our existing obligations which could adverselyaffect our business, results of operations and financial condition.

 

*We could be penalized by ANEEL for failing to complywith the terms of our concession agreements, which could result in fines, otherpenalties and, depending on the severity of non-compliance, expropriation ofthe concession agreements.*

* *

We conduct our generation, transmission and distribution activitiespursuant to concession agreements entered into with the Federal Governmentthrough ANEEL. ANEEL may impose penalties on us if we fail to comply with anyprovision of the concession agreements, including compliance with theestablished quality standards. Depending on the severity of the non-compliance,these penalties could include:

 

·                                          finesper breach of up to 2.0% of the concessionaire’s revenues in the year endedimmediately prior to the date of the relevant breach;

 

·                                          injunctionsrelated to the construction of new facilities and equipment;

 

·                                          restrictionson the operation of existing facilities and equipment;

 

·                                          temporarysuspension from participating in bidding processes for new concessions;

 

·                                          interventionby ANEEL in the management of the concessionaire in breach; and

 

·                                          terminationof the concession.

 

In addition, the Federal Government has the power to terminate any ofour concessions prior to the end of the concession term in the case ofbankruptcy or dissolution, or by means of expropriation for reasons related tothe public interest.

 

We cannot assure you that ANEEL will not impose penalties or terminateour concessions in the event of a breach. Any compensation we may receive uponthe termination of the concession contract may not be sufficient to compensateus for the full value of certain investments. If any of our concessionagreements are terminated and we are at fault, the effective amount ofcompensation could be reduced through fines or other penalties. Termination orimposition of penalties could adversely affect our business, results ofoperations and financial condition.

 

*We are uncertain as to the renewal of our concessions.*

* *

We carry out our power generation, transmission and distributionactivities pursuant to concession agreements entered into with the FederalGovernment. The Brazilian Constitution requires that all concessions relatingto public services be awarded through a bidding process. In 1995, in an effortto implement these constitutional provisions, the Federal Government adoptedcertain laws and regulations, known collectively as the Concessions Law,governing bidding procedures in the electricity industry. In accordance withthe Concessions Law, as modified by the New Industry Model Law, uponapplication by the concessionaire, existing concessions may 

 

8

----

 

berenewed by the Federal Government for additional periods of up to 20 yearswithout being subject to the bidding process, provided that the concessionairehas met minimum performance standards and that the proposal is otherwiseacceptable to the Federal Government.

 

In light of the degree of discretion granted to the Federal Governmentby the Concessions Law with respect to new concession contracts and the renewalof existing concessions, and given the lack of long-standing precedents withrespect to the Federal Government’s exercise of such discretion andinterpretation and application of the Concessions Law, we cannot assure youthat new concessions will be obtained or that concessions will be renewed onterms as favorable as those currently in effect. See “Item 4. Information onthe Company—Competition—Concessions” and “The Brazilian PowerIndustry—Concessions” in Annex A. Non-renewal of any of our concessions couldadversely affect our business, results operations and financial condition.

 

*The present structure of the Brazilian electricitysector is highly concentrated in hydroelectric generation, which makes itsubject to certain risks.*

* *

The Brazilian electricity industry is highly concentrated inhydroelectric generation and faces a natural limitation on its generationcapacity, as hydroelectric power plants cannot generate more electricity thanis made possible by the country’s water resources. As a result, natural factorsmay affect our generating capacity, by increasing or reducing the level ofreservoirs. Control of the level of reservoirs by the ONS seeks to optimize thelevel of water available for hydroelectric generation in each of the powerplants associated with the respective reservoirs. In this context, the ONScould, for example, prevent a generating plant located at the beginning of a riverfrom increasing its throughput of water, if this increase were to negativelyaffect other plants further downstream. In the same way, the ONS may decide toincrease thermal generation and reduce hydroelectric generation in order toconserve water in the reservoirs.

 

Shortages and/or rationing due to adverse hydrological conditions notcovered by the Energy Reallocation Mechanism (as described in “The BrazilianPower Industry—Energy Reallocation Mechanism” in Annex A) could result inincreased costs and reduced cash flow. In addition, if the new energy auctions under the NewIndustry Model Law fail to result in an expansion in electricity generationcapacity to adequate levels to meet growing demand, rationing measures could beimplemented. Any limitation on our electricity generation capacity couldadversely affect our business, results of operations and financial condition.

 

*Delays in the expansion of our facilities maysignificantly increase our costs.*

* *

We are currently engaged in the construction of additionalhydroelectric plants and the evaluation of other potential expansion projects.Our ability to complete an expansion project on time, within a determinedbudget and without adverse economic effects, is subject to a number of risks.For instance:

 

·                                          wemay experience problems in the construction phase of an expansion project;

 

·                                          wemay face regulatory or legal challenges that delay the initial operation dateof an expansion project;

 

·                                          ournew or modified facilities may not operate at designated capacity or may costmore to operate than we expect;

 

·                                          wemay not be able to obtain adequate working capital to finance our expansionprojects; and

 

·                                          wemay encounter environmental issues and claims by the local population duringpower plant construction.

 

If we experience these or other problems relating to the expansion ofour electricity generation, transmission or distribution capacity, our abilityto sell electric energy in amounts in line with our projections may be harmedand we may be exposed to increased costs. Consequently, we may fail to producethe revenues we anticipate in connection with such expansion projects.

 

*Impositions and restrictions by the environmentalagencies could cause additional costs for us.*

* *

Our operations related to the generation, transmission and distributionof electricity as well as to the distribution of natural gas, are subject tovarious federal, state and municipal laws and regulations, and also to numerousrequirements relating to the protection of health and the environment.

 

9

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Non-compliance with environmental laws and regulations could,independently of the obligation to redress any damages that may be caused,result in criminal and administrative sanctions being applied. Based onBrazilian legislation, criminal penalties such as restricting rights, and evenimprisonment, may be applied to individuals (including managers of legalentities), and penalties such as fines, restriction of rights or communityservice may be applied to legal entities. With respect to administrativesanctions, depending on the circumstances, the environmental authorities mayimpose warnings and fines, require partial or total suspension of activities;suspend or restrict tax benefits or cancel or suspend financing lines fromgovernmental lending establishments as well as prohibit the entity fromcontracting with governmental agencies, companies and authorities. Any of theseevents could adversely affect our business, results of operations or financialcondition.

 

*Our level of consumer default could adversely affectour business, results of operations and financial condition.*

* *

As of December 31, 2007, our total past due receivables from finalconsumers were approximately R$775 million, corresponding to 8.2% of our netrevenues for 2007.  As of December 31,2007, our allowance for doubtful accounts was R$295 million. Approximately11.2% of the past due receivables were owed by entities in the public sector.We may be unable to recover debts from several municipalities and otherdefaulting clients. If these debts are not totally or partially recovered, wewill experience an adverse impact on our business, results of operations andfinancial condition. In addition, any consumer defaults in excess of our allowancefor doubtful accounts could have an adverse effect on our business, results ofoperations and financial condition.

 

*We may not be able to complete our proposed capitalexpenditure program.*

* *

We plan to spend approximately R$6.4 billion during the period from2008 through 2012 on the construction of new power installations and therefurbishment and maintenance of existing power plants and transmission anddistribution systems. Our ability to carry out this capital expenditure programis dependent upon a number of factors, including our ability to charge adequaterates for our services, our access to domestic and international capitalmarkets and a variety of operating and other factors. In addition, our plans toexpand our generation and transmission capacity are subject to the competitivebidding process governed by the Concessions Law. We cannot give any assurancethat we will have the financial resources to complete this program.

 

*Our ability to distribute dividends is subject tolimitations.*

* *

Whether or not you receive a dividend depends on the amount of themandatory distribution required under our by-laws, whether our financialcondition permits us to distribute dividends under Brazilian law, and whetherour shareholders, on the recommendation of our Board of Directors acting in itsdiscretion, determine that our financial condition warrants a suspension of thedistribution of dividends.

 

Because Companhia Energética de Minas Gerais—CEMIG is a holding companywith no revenue-producing operations other than those of its operatingsubsidiaries, we will be able to distribute dividends to shareholders only ifCompanhia Energética de Minas Gerais—CEMIG receives dividends or other cashdistributions from its operating subsidiaries. The dividends that our regulatedsubsidiaries may distribute to us depend on our subsidiaries generating asufficient profit in any given fiscal year. Dividends can be paid out fromaccumulated profits from previous years or from capital reserves. Such profitsare calculated and paid in accordance with Brazilian Corporate Law and theprovisions of the by-laws of each of our regulated subsidiaries. Any capitalreduction that would enable our shareholders to receive distributions would besubject to the prior approval of ANEEL.

 

*We operate without general third party liability andcatastrophe insurance policies.*

* *

We do not have general third party liability insurance coveringaccidents and have not asked for bids relating to this type of insurance. Inaddition, we have not asked for bids for, nor do we carry, insurance coveragefor major catastrophes affecting our facilities such as earthquakes and floods,for business interruption risk or for operating system failures. Accidents orcatastrophic events may adversely affect our business, results of operations orfinancial condition. See “Item 10. Additional Information—Insurance.”

 

*We will need short-term funds to pay and refinance ourobligations.*

* *

On December 31, 2007, our total debt was R$6,814 million, of whichR$941 million matures in 2008. We will need funds in the short term to pay andrefinance these obligations. For this reason, we intend to refinance our debtprofile in 2008 to lengthen 

 

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maturities.We plan to raise approximately R$507 million in 2008, and expect to pay theremaining obligations due in 2008 with cash on hand, although no assurance canbe given that we will be able to raise such funds or that such cash will beavailable.

 

We cannot assure you that we will be able to raise these funds prior tothe maturities of our current debt obligations, in the amounts necessary or atcompetitive rates. If the refinancing does not successfully take place, we maynot be able to pay our debt. On the other hand, if we simply pay our debtwithout refinancing, our investment program could suffer significant delays,which could adversely affect our business, results of operations or financialcondition.

 

*We may incur losses in connection with pendinglitigation.*

* *

We are currently defending several legal proceedings relating to civil,administrative, environmental, tax and other claims. These claims involve awide range of issues and seek substantial amounts of money. Several individualdisputes account for a significant part of the total amount of claims againstus. Our consolidated financial statements include reserves relating tolitigation claims totaling R$268 million as of December 31, 2007(excluding labor-related matters) for probable and reasonably estimable lossesand expenses we may incur in connection with pending litigation. In the eventthat our reserves for litigation claims prove to be insufficient, the paymentof litigation claims in an amount in excess of the reserved amounts could havean adverse effect on our business, results of operations or financialcondition.

 

*Labor-related legal claims, strikes and/or work stoppages couldhave an adverse impact on our business.*

* *

Substantially all of our employees are covered by Brazilian laborlegislation applicable to private sector employees.  We have entered into a collective bargainingagreement with the labor unions representing most of these employees.

 

We are currently defending a number of labor-relatedclaims brought by our employees that generally relate to overtime andcompensation for occupational hazards. We are also subject to claims related tolabor outsourcing, in which employees of our contractors and subcontractorshave brought actions against us for the payment of outstanding laborliabilities, readjustment of retirement pension payments by Forluz (the entity responsible formanaging our employee pension fund),and salary adjustments. As of December 31, 2007, our labor-relatedclaims totaled, in the aggregate, approximately R$188.6 million, and at thatdate we had accrued a liability of approximately R$78 million for losses weexpect from these claims. For a more detailed discussion of labor-relatedproceedings, see “Item 8. Financial Information—Legal Proceedings—Labor andPension Fund Obligations.”

 

We have not experienced any material labor unrest during the last sixyears, although in 2006 three work stoppages did occur and in 2007 fourwork stoppage occurred. Nevertheless, our operations might be interruptedby a labor disturbance in the future. We do not carry insurance for lossesincurred as a result of business interruptions caused by labor action. In theevent of a strike, we might face an immediate loss of revenue.

 

Contract disputes, strikes, legal claims or other types of conflictsrelating to our employees or the labor unions that represent them may have anadverse effect on our business, results of operations or financial conditionand our ability to maintain ordinary service levels or otherwise operate ourbusiness in the manner that our consumers expect.

 

*Foreign shareholders may not be able to enforcejudgments against our directors or officers.*

* *

All of our directors and officers named in this annual report reside inBrazil. Substantially all of our assets, as well as the assets of thesepersons, are located in Brazil. As a result, it may not be possible for foreignshareholders to effect service of process within the United States or otherjurisdictions outside Brazil upon these persons, attach their assets, orenforce against them or us in United States courts, or the courts of otherjurisdictions outside Brazil, judgments predicated upon the civil liabilityprovisions of the securities laws of the United States or the laws of suchother jurisdictions. See “Item 10. Additional Information—Difficulties ofEnforcing Civil Liabilities Against Non-U.S. Persons.”

 

*Effective control of CEMIG is subject to judicialchallenge.*

* *

In connection with the purchase in 1997 of approximately 33% of ourcommon shares by Southern Electric Brasil Participações Ltda., or Southern, theState Government entered into a shareholders’ agreement with Southern, grantingSouthern control over certain significant corporate decisions. In 1999, theState Government filed a lawsuit seeking to nullify the shareholders’ agreementon constitutional grounds. In August 2001, after several rulings andappeals, the Minas Gerais State Court of Appeals ruled 

 

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thatthe shareholders’ agreement is null and void. In December 2003, thisruling was appealed to the *Superior Tribunal deJustiça* (Superior Court of Justice), which upheld the Minas GeraisState Court of Appeals ruling. The decision of the Superior Court of Justice issubject to review and therefore the effective control of CEMIG remains subjectto further judicial challenge in the *Supremo Tribunal Federal*(Supreme Court). See “Item 8. Financial Information—LegalProceedings—Shareholders’ Agreement” and “Item 10. AdditionalInformation—Material Contracts—Shareholders’ Agreement, dated June 18,1997, between the State Government and Southern.”

 

**Risks Relating to Brazil**

** **

*The Federal Government exercises significant influenceon the Brazilian economy. Political and economic conditions can have a directimpact on our business.*

* *

The Federal Government intervenes frequently in the country’s economyand occasionally makes significant changes in monetary, fiscal and regulatory policy. Our business,results of operations or financial condition may be adversely affected bychanges in government policies, and also by:

 

·                                          fluctuationsin the exchange rate;

 

·                                          inflation;

 

·                                          instabilityof prices;

 

·                                          changesin interest rates;

 

·                                          fiscalpolicy;

 

·                                          otherpolitical, diplomatic, social and economic developments which may affect Brazilor the international markets;

 

·                                          controlon capital flow; and

 

·                                          limitson foreign trade.

 

Measures by the Brazilian government to maintain economic stability,and also speculation on any future acts of the government, can generateuncertainties in the Brazilian economy and increased volatility in the domesticcapital markets, adversely affecting our business, results of operations orfinancial condition. If the political and economic situations deteriorate, wemay face increased costs.

 

*Inflation and certain governmental measures to curbinflation may contribute significantly to economic uncertainty in Brazil andcould harm our business and the market value of our shares, the Preferred ADSsand the Common ADSs.*

* *

Brazil has in the pastexperienced extremely high rates of inflation. Inflation, and some of theFederal Government’s measures taken in an attempt to curb inflation, have hadsignificant negative effects on the Brazilian economy. Since the introductionof the *real* in 1994, Brazil’s inflation ratehas been substantially lower than in previous periods. However, inflationarypressures persist, and action taken in an effort to curb inflation, coupledwith speculation about possible future governmental actions, may contribute toeconomic uncertainty in Brazil and could increase volatility in the Braziliansecurities market. According to the Amplified National Consumer PriceIndex, or IPCA, Brazilian annual inflation rates in 2005, 2006 and 2007 were5.7%, 3.1% and 4.5%, respectively. No assurance can be given that inflationwill remain at these levels.

 

Future measures taken by theFederal Government, including interest rate increases, intervention in theforeign exchange market and actions to adjust or fix the value of the *real* may trigger increases in inflation, and consequently,have adverse economic impacts on our business, results of operations andfinancial condition. If Brazil experiences high inflation in the future, we maynot be able to adjust the rates we charge our consumers to offset the effectsof inflation on our cost structure.

 

Substantially all of ourcash operating expenses are denominated in *reais* and tendto increase with Brazilian inflation. Inflationary pressures may also hinderour ability to access foreign financial markets or may lead to furthergovernment intervention in 

 

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the economy, including theintroduction of government policies that could harm our business, results ofoperations and financial condition or adversely affect the market value of ourshares and as a result, our Preferred ADSs and Common ADSs.

 

*Exchange rate instability may adversely affect ourbusiness, results of operations and financial condition and the market price ofour shares, the Preferred ADSs and the Common ADSs.*

* *

The Brazilian currency hasbeen devalued periodically during the last four decades. Throughout thisperiod, the Federal Government has implemented various economic plans andutilized a number of exchange rate policies, including sudden devaluations,periodic mini-devaluations during which the frequency of adjustments has rangedfrom daily to monthly, floating exchange rate systems, exchange controls anddual exchange rate markets. Although over long periods depreciation of theBrazilian currency generally has correlated with the rate of inflation inBrazil, devaluation over shorter periods has resulted in significantfluctuations in the exchange rate between the Brazilian currency and the U.S.dollar and currencies of other countries.

 

In 2002, the *real* depreciated 52.3% against the U.S. dollar, due in partto political uncertainty surrounding the Brazilian presidential elections andthe global economic slowdown. Although the *real*appreciatednearly 50% against the U.S. dollar since then, no assurance can be given thatthe *real*will not depreciate against thedollar again. On December 31, 2007, the noon buying U.S. dollar/*real* exchange rate was R$1.7790/US$1.00.See “— Exchange Rates”.

 

As of December 31, 2007, approximately 5.7% of our totalindebtedness from loans, financings and debentures was denominated incurrencies other than the *real*(76.9% in U.S. dollars). If the U.S. dollar/*real* exchangerate appreciates, our financing expenses will increase and our results ofoperations and financial condition could be adversely affected. However, 46.9%of our debt denominated in foreign currencies is subject to currency swaps thatconvert our foreign currency obligations into *reais*in order mitigate this risk.

 

We also have entered intocertain power purchase agreements that are dollar denominated.  We cannot assure you that these derivativesinstruments and the proceeds from our dollar-denominated purchase agreementswill be sufficient to avoid an adverse effect on our business, results ofoperations and financial condition in case of unfavorable exchange ratefluctuations. See “Item 11. — Quantitative and Qualitative Disclosures aboutMarket Risk—Exchange Rate Risk” for information about our foreign exchange riskhedging policy.

 

*Changes ineconomic and market conditions in other countries, especially Latin Americanand emerging market countries, may adversely affect our business, results ofoperations and financial condition, as well as the market price of our shares,the Preferred ADS and the Common ADSs.*

* *

The market value ofsecurities of Brazilian companies is affected to varying degrees by economicand markets conditions in other countries, including other Latin American andemerging market countries. Although economic conditions in such countries maydiffer significantly from economic conditions in Brazil, investors’ reactionsto developments in these other countries may have an adverse effect on themarket value of securities of Brazilian issuers. Crises in other emergingmarket countries may diminish investor interest in securities of Brazilianissuers, including us. This could also make it more difficult for us access thecapital markets and finance our operations in the future on acceptable terms orat all. Due to the characteristics of the Brazilian electricity industry (whichrequires significant investments in operating assets) and due to our financingneeds, if access to the capital and credit markets is limited, we could facedifficulties in completing our investment plan and refinancing our obligationswhich could adversely affect our business, results of operations and financialcondition.

 

*Politicaland economic instability in Brazil may affect us.*

* *

During Luis Inácio Lula da Silva’s first term as President of Brazil,allegations of unethical or illegal conduct were made with respect to certainfigures in his government, including legislators and party officials. In 2007,the first year of Lula’s second term, other members of the government wereaccused of corrupt behavior for various reasons, resulting in the resignationof one minister and of the president of the senate. If these events lead to amaterially adverse perception of Brazil among investors, the trading value ofour shares, the Preferred ADSs and the Common ADSs could decline, and ourability to access international markets could suffer. In addition, anypolitical instability resulting from these events could cause us to re-assessour strategies if the Brazilian economy suffers as a result.

 

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** **

**Risks Relating to the Preferred Shares, Preferred ADSsand Common ADSs**

** **

*The preferred shares and Preferred ADSs and the CommonADSs generally do not have voting rights.*

* *

In accordance with the Brazilian Corporate Law and our by-laws, holdersof the preferred shares, and, by extension, holders of the Preferred ADSsrepresenting preferred shares, are not entitled to vote at our shareholders’meetings, except in very limited circumstances. Holders of Preferred ADSs mayalso encounter difficulties in the exercise of certain rights, including limitedvoting rights. Under some circumstances, such as failure to provide thedepositary with voting materials on a timely basis, holders of Preferred ADSsand Common ADSs may not be able to vote by instructing the depositary.

 

*Exchange controls and restrictions on remittancesabroad may adversely affect holders of Preferred ADSs and Common ADSs.*

* *

You may be adversely affected by the imposition of restrictions on theremittance to foreign investors of the proceeds of their investments in Braziland the conversion of *reais* intoforeign currencies. The Federal Government imposed remittance restrictions forapproximately three months in late 1989 and early 1990. Restrictions like thesewould hinder or prevent the conversion of dividends, distributions or the proceedsfrom any sale of preferred shares or common shares from *reais*into U.S. dollars and the remittance of U.S. dollars abroad. We cannot assureyou that the Federal Government will not take similar measures in the future.See “Item 3. Key Information—Exchange Rates.”

 

*Changes in Brazilian tax laws may have an adverseimpact on the taxes applicable to a disposition of our shares, Preferred ADSsor Common ADSs.*

* *

Law No. 10,833 of December 29, 2003 provides that thedisposition of assets located in Brazil by a non-resident to either a Brazilianresident or a non-resident is subject to taxation in Brazil, regardless ofwhether the disposition occurs outside or within Brazil. This provision resultsin the imposition of income tax on the gains arising from a disposition of ourpreferred shares or common shares by a non-resident of Brazil to anothernon-resident of Brazil. There is no judicial guidance as to the application ofLaw No. 10,833 and, accordingly, we are unable to predict whetherBrazilian courts may decide that it applies to dispositions of our PreferredADSs and Common ADSs between non-residents of Brazil. However, in the eventthat the disposition of assets is interpreted to include a disposition of ourPreferred ADSs and Common ADSs, this tax law would accordingly result in theimposition of withholding taxes on the disposition of our Preferred ADSs andCommon ADSs by a non-resident of Brazil to another non-resident of Brazil.

 

*Exchanging Preferred ADSs or Common ADSs forunderlying shares may have unfavorable consequences.*

* *

The Brazilian custodian for the preferred shares and common shares mustobtain an electronic certificate of registration from the Central Bank to remitU.S. dollars abroad for payments of dividends, any other cash distributions, orupon the disposition of the shares and sales proceeds related thereto. If youdecide to exchange your Preferred ADSs or Common ADSs for the underlyingshares, you will be entitled to continue to rely, for five business days fromthe date of the exchange, on the depositary bank’s electronic certificate ofregistration. Thereafter, you may not be able to obtain and remit U.S. dollarsabroad upon the disposition of the shares, or distributions relating to theshares, unless you obtain your own certificate of registration under ResolutionNo. 2,689 of January 26, 2000, of the Brazilian *Conselho Monetário Nacional*, or NationalMonetary Council, which entitles foreign investors to buy and sell on theBrazilian stock exchanges. If you do not obtain this certificate, you will besubject to less favorable tax treatment on gains with respect to the preferredor common shares. If you attempt to obtain your own certificate ofregistration, you may incur expenses or suffer significant delays in theapplication process. Obtaining a certificate of registration involvesgenerating significant documentation, including completing and filing variouselectronic forms with the Central Bank and the *Comissãode Valores Mobiliários* (the Brazilian securities regulatory body),or the CVM. In order to complete this process, the investor will usually needto have a consultant or attorney who has expertise in Central Bank and CVMregulations. Any delay in obtaining this certificate could adversely impactyour ability to receive dividends or distributions relating to the preferredshares or common shares abroad or the return of your capital in a timelymanner. If you decide to exchange your preferred shares or common shares backinto Preferred ADSs or Common ADSs, respectively, once you have registered yourinvestment in the preferred shares or common shares, you may deposit yourpreferred shares or common shares with the custodian and rely on the depositarybank’s certificate of registration, subject to certain conditions. See “Item10. Additional Information—Taxation—Brazilian Tax Considerations.”

 

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We cannot assure you that the depositary bank’s certificate ofregistration or any certificate of foreign capital registration obtained by youmay not be affected by future legislative or other regulatory changes, or thatadditional Brazilian restrictions applicable to you, the disposition of theunderlying preferred shares or the repatriation of the proceeds fromdisposition could not be imposed in the future.

 

*The r*elative volatility andilliquidity of the Brazilian securities market may adversely affect our shareholders.

* *

Investing in Latin American securities, such as the preferred shares,common shares, Preferred ADSs or Common ADSs, involves a higher degree of riskthan investing in securities of issuers from countries with more stablepolitical and economic environments and such investments are generallyconsidered speculative in nature. These investments are subject to certaineconomic and political risks, such as, among others:

 

·                                          changesto the regulatory, tax, economic and political environment that may affect theability of investors to receive payment, in whole or in part, with respect totheir investments; and

 

·                                          restrictionson foreign investment and on repatriation of capital invested.

 

The Brazilian securities market is substantially smaller, less liquid,more concentrated and more volatile than major securities markets in the UnitedStates. This may substantially limit your ability to sell the shares underlyingyour Preferred ADSs or Common ADSs at a price and time at which you wish to doso. The *Bolsa de Valores de São Paulo*— *BOVESPA*, or São Paulo StockExchange, the only stock exchange in Brazil upon which shares are traded, had amarket capitalization of approximately US$1.4 trillion as of December 31,2007 and an average daily trading volume of approximately US$2.5 billion for2007. In comparison, the New York Stock Exchange, Inc., or the NYSE, had amarket capitalization of US$30.5 trillion as of December 31, 2007 and anaverage daily trading volume of approximately US$119.2 billion for 2007.

 

There is also significantly greater concentration in the Braziliansecurities market than in major securities markets in the United States. Theten largest companies in terms of market capitalization representedapproximately 54.7% of the aggregate market capitalization of the São PauloStock Exchange as of December 31, 2007. The top ten stocks in terms oftrading volume accounted for approximately 45.8% of all shares traded on theSão Paulo Stock Exchange in 2007. See “Item 9. The Offer and Listing—TradingMarket.”

 

*Shareholders may receive reduced dividend payments ifour net income does not reach certain levels.*

* *

Under the Brazilian Corporate Law and our by-laws, we must pay ourshareholders a mandatory distribution equal to at least 50% of our net incomefor the preceding fiscal year, based on our financial statements prepared inaccordance with the accounting practices adopted in Brazil, with holders ofpreferred shares having priority of payment. In addition, our by-laws requireus to pay holders of our preferred shares annual dividends equal to the greaterof 10% of the par value of our shares or 3% of the book value of our shares. Ifwe do not have net income or our net income is insufficient in a fiscal year,our management may recommend at the annual shareholders’ meeting in respect ofthat year that the payment of the mandatory dividend should not be made.However, under the guarantee of the State Government, our controllingshareholder, a minimum annual dividend of 6% of par value would in any event bepayable to all holders of common shares and preferred shares issued up to August 5,2004 (other than public and governmental holders) in the event that mandatorydistributions were not made for a fiscal year. See “Item 8. FinancialInformation—Dividend Policy and Payments” for a more detailed discussion.

 

*Holders of the Preferred ADSs and Common ADS andholders of our shares have less well-defined shareholders’ rights than holdersof shares in U.S. companies.*

* *

Our corporate governance, disclosure requirements and accountingstandards applicable to Brazilian companies are governed by our by-laws and bythe Brazilian Corporate Law, which may differ from the legal principles thatwould apply if we were incorporated in a jurisdiction in the United States,such as Delaware or New York, or in other jurisdictions outside Brazil. Yourrights to protect your interests relative to actions taken by our Board ofDirectors or by our controlling shareholder may be less well defined and lesswell supported by established rules and judicial precedents than under thelaws of certain jurisdictions outside Brazil.

 

Although Brazilian law imposes restrictions on insider trading andprice manipulation, the Brazilian securities market is not as highly regulatedand supervised as the U.S. securities market or markets in certain otherjurisdictions. In addition, rules and policies 

 

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againstself-dealing and regarding the preservation of shareholder interests are lessdeveloped and enforced in Brazil than in the United States, potentiallydisadvantaging holders of the preferred shares, common shares, Preferred ADSsand Common ADSs.

 

*Shares eligible for future sale may adversely affectthe market price of our shares and the Preferred ADSs and Common ADS.*

* *

Sales of a substantial number of shares or the perception that suchsales could take place could adversely affect the prevailing market price ofour shares, the Preferred ADSs and the Common ADSs. As a consequence of theissuance of new shares or sales by existing shareholders, the market price ofour shares and, by extension, the Preferred ADSs and Common ADSs, may decreasesignificantly.

 

*You may not be able to exercise preemptive rights withrespect to our securities.*

* *

You may not be able to exercise the preemptive rights relating to theshares underlying your Preferred ADSs or Common ADSs unless a registration statementunder the United States Securities Act of 1933, as amended, or the SecuritiesAct, is effective with respect to those rights or an exemption from theregistration requirements of the Securities Act is available. We are notobligated to file a registration statement with respect to the shares relatingto these preemptive rights, and we cannot assure you that we will file any suchregistration statement. Unless we file a registration statement or an exemptionfrom registration applies, you may receive only the net proceeds from the saleof your preemptive rights by the depositary or, if the preemptive rights cannotbe sold, they will be allowed to lapse.

 

**Item 4.**           Information on theCompany

** **

**Organization and Historical Background**

** **

We were organized in Minas Gerais, Brazil on May 22, 1952 as a *sociedade de economia mista* (astate-controlled mixed capital company) with limited liability and indefiniteduration, pursuant to Minas Gerais State Law No. 828 of December 14,1951 and its implementing regulation, Minas Gerais State Decree 3,710 of February 20,1952. Our full legal name is Companhia Energética de Minas Gerais—CEMIG, but weare also known as CEMIG. Our headquarters are located at Avenida Barbacena,1200, Belo Horizonte, Minas Gerais, Brazil. Our main telephone number is (55-31)3506-3711.

 

In orderto comply with legal and regulatory provisions pursuant to which we wererequired to unbundle our vertically integrated businesses, in 2004 weincorporated two wholly-owned subsidiaries of CEMIG — Cemig Geração e Transmissão S.A., referredto as Cemig Generation and Transmission, and Cemig Distribuição S.A., referred to as Cemig Distribution. Cemig Generation and Transmission and Cemig Distribution were created tocarry out the activities of electricity generation and transmission, anddistribution, respectively.  Except asset forth below, this process is substantially complete.  The following chart shows our corporatestructure as of December 31, 2007. There have been no material changes to our corporate structure since December 31,2007.

 

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Throughour subsidiaries, we believe we are the largest integrated concessionaire of electricpower generation, transmission and distribution in Brazil. We operate ourgeneration, transmission and distribution businesses pursuant to concessionagreements with the Federal Government. We are party to concession agreementswith ANEEL that consolidate our various generation concessions into oneagreement and our several distribution concessions into four distributionconcessions covering the northern, southern, eastern and western regions ofMinas Gerais. We are also party to a concession agreement with ANEEL withrespect to our transmission operations. In connection with the unbundling, on September 16, 2005, ourconcession for distribution services was transferred to Cemig Distribution andour concession for transmission services was transferred to Cemig Generationand Transmission. Our generation concession will also be transferred to CemigGeneration and Transmission, although we cannot assure you of the timing ofthat transfer as it will be determined by ANEEL.

 

On December 31, 2007, we generatedelectricity at 52 hydroelectric plants, four thermoelectric plants and one windfarm, and had a total installed capacity of 6,566 MW. At the same date, we ownedand operated 3,081 miles of transmission lines and 273,531 miles ofdistribution lines. We hold concessions to distribute electricity in 96.7% ofthe territory of Minas Gerais.

 

The Brazilian electricity industry has undergone extensive regulatoryrestructuring as a result of which our electric generation, transmission anddistribution businesses have been and will continue to be subject to increasedcompetition. For a more detailed description of regulatory changes that affectour business, see “The Brazilian Power Industry” in Annex A.

 

Pursuant to Minas Gerais state legislation, our by-laws were amended in1984 to allow us to participate in an expanded range of activities relating tothe energy sector through separate companies. In 1986, we created *Companhia de Gás de Minas Gerais*–GASMIG,or Gasmig, as a subsidiary to undertake the distribution of natural gas throughpipelines located in Minas Gerais. In December 2004, we sold a 40% stake in Gasmig to Petrobras Gás S.A. —Gaspetro, or Gaspetro, and TSS Participações S.A., or TSS, both of which arewholly-owned subsidiaries of Petrobras S.A., for approximately R$154 million.See “Item 10. Additional Information—Material Contracts—Gasmig Shareholders Agreement andAssociation Agreement.”

 

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Additional Minas Gerais state legislative changes enacted in 1997authorized us to participate in non-energy activities that can be carried outusing our operating assets. In January 1999, we incorporated *Empresa de Infovias S.A.*, atelecommunication service provider, as a joint venture with *AES Força Empreendimentos Ltda.*, part ofthe AES Corporation Group. In 2002, we purchased *AES Força Empreendimentos Ltda.*’s interest in Empresa deInfovias S.A. We also provide consulting services and have entered intoconsulting agreements with electricity companies in several countries.

 

**Investmentin Light**

** **

Through Rio Minas Energia Participações S.A. (“RME”), we also hold anindirect 13.05% interest in Light S.A. (“Light”).  RME is a company formed by us together withAndrade Gutierrez Concessões S.A., Luce Brasil Fundo de Investimento emParticipações and Equatorial Energia S.A. (as successor to Pactual EnergiaParticipações S.A.), in which each partner has a 25% interest.  On March 28, 2006, RME signed anagreement (the “EDFI Agreement”) with EDF International S.A. (“EDFI”) topurchase from EDFI 88.84% of its shares of Light, which represented 79.39% ofthe total registered capital of Light at the time of the purchase.

 

Completion of the transaction was subject to approval by ANEEL,issuance of a Ministerial Decree in France after a Statement of Opinion by theCommission des Participants et des Transferts of France (CPT), and alsoagreement of third parties, under contracts signed by Light or by LightServiços de Electricidade S.A. (“Light SESA”), including BNDES ParticipaçõesS.A. - BNDESPar.  On August 10, 2006the transfer to RME of the shares in Light and in Lidil Comercial owned by EDFIwas completed. The restructuring and change in the controlling block was dulyauthorized by ANEEL, through Authorizing Resolution 641/06.

 

On May 16, 2007, the Brazilian Development Bank (“BNDES”), whichheld convertible debentures issued by Light, exercised its option and converted90% of the convertible debentures into shares. As a result of this conversion,representing approximately R$713 million, BNDES became the holder of31.44% of the total capital of Light. The conversion by BNDES of its convertible debentures of Light intoshares of Light diluted the percentage holdings of the other stockholders ofLight.  RME, which controls Light, hadits percentage holding reduced from 79.39% to 54.17%. BNDES became the secondlargest stockholder, outside the control block, and held a larger percentage thanthe previous controlling stockholder, EDFI, which had its interest reduced from9.98% to 6.82%. On October 26, 2007 BNDES converted the remaining 10% ofits convertible debentures into shares of Light, and as a result held 33.69% ofthe total capital of Light, diluting RME’s percentage stake in Light from54.17% to 52.25%.

 

We recognize our interest in Light as an investment and we recordedR$158 million in income from our investment in Light in 2007.

 

In March 2006, CEMIG entered into an agreement with its partnersin one of CEMIG’s unconsolidated equity investments, which gave CEMIG an optionto purchase its partners’ interests in the power generation assets of theunderlying equity investee.  The optionprice amounted to R$1,374 million as of December 31, 2007. The optionprice is restated based on the IGP-M variation plus interest of 13.44% peryear.  This option expired on March 23,2008, and CEMIG is currently negotiating with the partners of RME the terms ofsuch option.

 

*TheBusiness*

* *

Light**was created on May 31, 1905, to provide gastransmission and supply services in the city of Rio de Janeiro. In the sameyear it acquired the city’s gas lighting concession holder. Light has headoffices and is incorporated in the city of Rio de Janeiro, in the State of Riode Janeiro, at Avenida Marechal Floriano 168, 2nd Floor, Corridor A,Centro, and its corporate purpose is to provide electricity generation,transmission and distribution services, and other related services, directly orindirectly though other companies.

 

*OwnershipStructure*

* *

Thefollowing chart shows our ownership interest in Light and Light’s corporatestructure as of December 31, 2007. There have been no material changes to Light’s corporate structure sinceDecember 31, 2007.

 

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* *

*LightActivities*

* *

The main activities of Light are as follows:

 

Generation. Light Energia S.A. (“Light Energia”) is involved inthe generation of electricity.  LightEnergia uses the hydroelectric energy of the Paraíba do Sul and Ribeirão dasLajes rivers for its generation plants located in the States of Rio de Janeiroand São Paulo. The maximum total capacity of the generating system of LightEnergia is 855 MW. This installed system is made up of five generating plants,two elevation plants and other hydraulic structures such as reservoirs, dams,canals, dykes, spillways, tunnels, rotor channels and dam gates.

 

Distribution. Light SESA is involved in the distribution ofelectricity.  Light SESA serves a totalarea of 10,970 km2 of the State of Rio de Janeiro, supplyingapproximately 10 million people.  Thecompany distributes energy to 3.8 million clients, operating in a concessionarea that covers 31 municipalities of the State of Rio de Janeiro.

 

In 2007 the company invoiced a total of 18,307 GWh. The breakdown ofthese sales by consumer group was approximately 40% from the residentialsegment, 31% from the commercial segment, 11% from the industrial segment and18% from other consumers.

 

Energy trading. Light Esco Ltda. (“Light Esco”), a wholly ownedsubsidiary of Light, is an energy trading company which operates in the ACL(free market) and also deals with alternative energy sources and is an “ESCO”(Energy Services Company), a provider of energy and infrastructure services,focused on energy solutions for its clients. In 2007, Light Esco operated as anenergy trader and broker and as a consultant for Free Consumers. With aportfolio of 30 clients (an increase of 28 clients from the previous year) inthe trading segment, Light Esco sold 390 GWh in 2007.  Light Esco began operating as an energybroker as well in 2007, and 1,200 GWh were traded with a portfolio of tenclients.  In 2007, additional electricitysale agreements were also signed, whose energy delivery will commence in 2008and 2010, corresponding to 40 average MW per year. These contracts lock inconsolidated revenue of R$280 million for Light Esco over the next ten years.In 2007, Light Esco, which also provides energy efficiency consulting services,

 

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entered into threenew projects in this area, related to the installation of central airconditioning and the illumination of major commercial centers, which involve atotal investment of R$3.5 million and have an expected average rate of returnof 20%.

 

Operational Data

 

The following table shows Light’s principal operational data as of December 31,2007 and 2006.

 

 
| ** **                                          | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|-----------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Concession area (km2)                          |       | 10,970                     |       | 10,970                     |       |
| Municipalities served                               |       | 31                         |       | 31                         |       |
| Consumer units billed                               |       | 3,880,527                  |       | 3,801,692                  |       |
| Sourced energy (GWh)                                |       | 25,622                     |       | 25,264                     |       |
| Energy billed and internal  consumption (GWh)       |       | 18,307                     |       | 18,260                     |       |
| Installed generation  capacity (MW)                 |       | 855                        |       | 852                        |       |
| Assured energy (average  MW)                        |       | 637                        |       | 637                        |       |
| Number of substations                               |       | 96                         |       | 96                         |       |
| DEC – Consumer Outage Time  per 12 months      |       | 9.08                       |       | 7.98                       |       |
| FEC – Consumer Outage  Frequency per 12 months |       | 6.3                        |       | 6.3                        |       |

 

*TheMarket*

* *

Electricity invoiced by Light SESA in 2007 totaled 18,307 GWh, comparedto 18,260 GWh in 2006, an increase in sales volume of 0.2%, mainly due to theresidential and commercial consumption growth within its concession area.

 
| **Number of Light consumers by  category** | ** ** | **December 31,   2007** | ** ** | **December 31,   2006** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Residential                                |       | 3,575,553                    |       | 3,495,597                    |       |
| Industrial                                 |       | 12,794                       |       | 13,380                       |       |
| Commercial, services and  others           |       | 269,905                      |       | 271,568                      |       |
| Rural                                      |       | 10,900                       |       | 10,641                       |       |
| Public authorities                         |       | 9,502                        |       | 8,844                        |       |
| Public illumination                        |       | 195                          |       | 148                          |       |
| Public service                             |       | 1,251                        |       | 1,187                        |       |
| Own consumption                            |       | 427                          |       | 328                          |       |
| Total                                      |       | 3,880,527                    |       | 3,801,692                    |       |

 

 

The highest percentage of Light’s energy sales are to residentialconsumers. The total number of clients billed by Light in 2007 was 3,880,527consumer units, 2.1%more than in 2006, with 78,835 new clients linked to Light’s distributionnetwork in 2007.

 

Energy sourced by Light in 2007 totaled 25,622.3 GWh, of which 8,306.7GWh came from energy purchases from Itaipu; 11,532.6 GWh from auctions; 6,351GWh from Norte Fluminense Thermoeletric Power Plant, 222.3 GWh from the *Program to Encourage Alternative Energy Sources – PROINFA*,302.8 GWh from CCEAR Light Energia and 1,093 GWh from CCEE.  Through an auction held on December 7,2004, quantities of 380 average MW and 130 average MW were contracted, under8-year contracts, with supply beginning in January of 2005 and 2006,respectively. These amounts make up 95% of the limit of energy to be sold byLight (assured energy).

 

*PerformanceIndicators*

* *

At the end of 2007 the indicators that measure quality of supply byLight SESA (DEC – Consumer Outage Duration in hours per year, and FEC, Numberof Outages Per Year) were 9.08 and 6.3 respectively, compared to 7.98 and 6.3in 2006.

* *

*20*

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* *

*Lossesand Default*

* *

Light’s energy losses in 2007 totaled 6,834 GWh, representing 27.18% ofLight’s total load, in comparison to a loss of 6,251 GWh in 2006, or 25.5% ofLight’s total load.

 

The increase in the total percentage of losses from 2006 to 2007 wasdue to a change in Light’s strategy with respect to its actions to combatlosses, with the objective of ensuring effective gains in the long term.Accordingly, in 2007, more than 290,000 consumers were inspected by theelectricity theft combat teams, resulting in 72 GWh of energy recovered throughretroactive charges and 170 GWh of energy incorporated to the billing after theinspections.  At the end of 2007, Lightacquired a new software system to support its fraud combat activities.  Light also instituted a plan to protect itsdistribution network and combat losses. This plan involves applying new technologies to 140,000 low voltagecustomers and the construction of a Measurement Control Center.  Installation of new measurement equipment isexpected to begin in 2008.  Lightcontinues to invest in inspections and the replacement of obsolete meters.

 

Light’s focus on the recovery of outstanding customer balances in 2007resulted in a collection rate of 99.4% of Light’s gross electricity salesrevenue, compared to 93% in 2006. This increase in the collection rate was dueto the receipt of outstanding debts and the reversal of prior year allowancesfor doubtful accounts.  The allowance fordoubtful accounts was reduced by R$145.5 million from 5.4% of Light’s grosselectricity sales revenue in 2006 to 2.8% in December 2007.  These changes resulted in an improvement inthe collection profile in 2007, achieved principally through the regularizationof outstanding debt payments from the public authorities and Light’s mainclients.  A highlight of this was thereversal of an allowance for doubtful accounts for Supervia (Rio de JaneiroUrban Trains Company), in the amount of R$86.9 million, as a result of anagreement with Supervia for the payment of its outstanding debt through aninstallment plan.

 

*CapitalExpenditure*

* *

Light invested a total of R$354.7 million in 2007 in the acquisition offixed assets, improvements to and expansion of its distribution system andtransmission network for generating facilities. This amount represented a 10.1%increase over the R$322 million of capital expenditures in 2006. In thedistribution system, the highlights were investments involving new connections,an increase of capacity and corrective maintenance, in the amount of R$233.6million; improvement in quality (optimization of structure and preventivemaintenance) in the amount of R$30.0 million; and actions to combat losses inthe amount of R$48 million.  Thegeneration investments were focused on the development of the transmissionnetwork and the quality improvements, which accounted for approximately R$18.3million.

 

*ConcessionAgreement*

* *

On June 4, 1996, Light signed Concession Agreement 001/96 with theFederal Government, regulating commercial operation by Light of publicelectricity generation, distribution and transmission services in the State ofRio de Janeiro, under the terms of a decree issued on May 28, 1996.

 

The electricity distribution concession area under Light’s ConcessionAgreement 001/96 is the metropolitan region of the city of Rio de Janeiro. Thecontract expires 30 years from the date of its signature, on June 4,2026.  This contract can be renewed uponapplication by Light, which must be presented 36 months or more before thetermination of the period of the contract, accompanied by proofs of regularityand compliance with tax and Social Security obligations and the liabilities andcharges undertaken with the Federal Government.

 

**Acquisitionof Transmission Concession Holders**

** **

In 2006, CEMIG, in partnership with MDU Brasil Ltda. and Brascan BrasilLtda., acquired a 50% ownership of the voting share capital of electricitytransmission concession holders Empresa Amazonense de Transmissão de EnergiaS.A., Empresa Paraense de Transmissão de Energia S.A., Empresa Norte deTransmissão de Energia S.A. and Empresa Regional de Transmissão de Energia S.A.and a 40% ownership of the voting capital of electricity transmissionconcession holder ECTE – Empresa Catarinense de Transmissão de Energia S.A. forR$802 million.

 

21

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In these companies’ concession contracts, revenues to be earned in thefinal 15 years are 50.0% lower than those in the first 15 years of theconcession.  We recognize revenue onthese contracts on a straight-line basis, in accordance with the nature of theservices provided, and in 2007, we recognized income on these contracts of R$17million.

 

*Descriptionof the transmission concession holders*

* *

*Empresa Amazonense de Transmissão de Energia S.A. – EATE*

* *

Empresa Amazonense de Transmissão de Energia S.A. (“EATE”) wasincorporated in March 2001 and began operations in March 2003, withthe specific purpose of operating electricity transmission lines.  By a concession contract dated July 12,2001, granted by the Federal Government through ANEEL, EATE acquired the rightto commercial operation of public electricity transmission service for a periodof 30 years, renewable for the same period. This concession consists of a 500kV transmission line connecting thesubstations of Tucuruí, Marabá, Açaílândia, Imperatriz and Presidente Dutra, inthe states of Pará and Maranhão, totaling 577 miles. The provision of servicesof operation and maintenance of the transmission lines is carried out byEletronorte. In 2007, we recorded income from our investment in EATE of R$9million.

 

The ownership structure of EATE is as follows:

 

 

On April 16, 2008, CEMIG, through its subsidiary EATE, executedwith Alupar Investimento S.A. two share purchase agreements related to theacquisition of 80% of the capital stock of the following companies: Lumitrans-Companhia Transmissora de Energia Elétrica and STC – Companhia Transmissora deEnergia Elétrica, which have transmission lines in the State of Santa Catarina.Pursuant to the terms established on these agreements, EATE will payapproximately R$28.0 million and R$49.0 million for the Lumitrans’ shares andthe STC’s shares, respectively. The acquisition of the shares by EATE is stillsubject to the prior approval of ANEEL, Banco Nacional de DesenvolvimentoEconomico e Social – BNDES and the Brazilian antitrust authorities, among otherconditions.

 

*Empresa Catarinensede Transmissão de Energia S.A. – ECTE*

* *

Empresa Catarinense de Transmissão de Energia S.A. (“ECTE”) wasincorporated in August 2000 and began operating in March 2002, withthe specific purpose of commercial operation of electricity transmissionlines.  By a concession contractdated November 1, 2000, granted bythe Federal Government through ANEEL, ECTE acquired the right to commercialoperation of public electricity transmission service for a period of 30 years,renewable for the same period.  Thisconcession consists of a 525kV transmission line connecting the substations ofCampos Novos and Blumenau, in the State of Santa Catarina, totaling 157 miles.The provision of services of operation and maintenance of the transmissionlines is carried out by Celesc. In 2007 we recorded income from our investmentin ECTE of R$1 million.

 

22

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Theownership structure of ECTE is as follows:

**

* *

*Empresa Norte deTransmissão de Energia S.A – ENTE*

* *

Empresa Norte de Transmissão de Energia S.A. (“ENTE”) was incorporatedin September 2002 and began operating in February 2005, with thespecific purpose of commercial operation of electricity transmissionlines.  By a concession contract dated December 11, 2002, granted by theFederal Government through ANEEL, ENTE acquired the right to commercialoperation of public electricity transmission service for a period of 30 years,renewable for the same period.  This concessionconsists of a 500kV transmissionline linking the substations of Tucuruí, Marabá and Açailândia, in the State ofPará, totaling 285 miles. The provision of services of operation andmaintenance of the transmission lines will be executed by Eletronorte. In 2007,we recorded income from our investment in ENTE of R$4 million.

 

The ownership structure of ENTE is as follows:

 

* *

*23*

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* *

*Empresa Regional deTransmissão de Energia S.A - ERTE*

* *

Empresa Regional de Transmissão de Energia S.A. (“ERTE”) wasincorporated in September 2002 and began operating in September 2004,with the specific purpose of operating electricity transmission lines.  By a concession contract dated December 11, 2002, granted by theFederal Government through ANEEL, ERTE acquired the right to commercialoperation of public electricity transmission service for a period of 30 years,renewable for the same period.  Thisconcession consists of a 230kV transmission line linking the substations ofVila do Conde and Santa Maria, in the State of Pará, passing through the futuresubstation to be built in Castanhal, totaling 96 miles. The provision ofservices of operation and maintenance of the transmission lines is carried outby Eletronorte. In 2007, we recorded income from our investment in ERTE of R$1million.

 

The ownership structure of ERTE is as follows:

 

 

*Empresa Paraense deTransmissão de Energia S.A - ETEP*

* *

Empresa Paraense de Transmissão de Energia S.A. (“ETEP”) wasincorporated in March 2001 and began operating in August 2002, withthe specific purpose of operating electricity transmission lines.  By a concession contractdated July 12, 2001, granted by theFederal Government through ANEEL, ETEP acquired the right of commercialoperation of public electricity transmission service for a period of 30 years,renewable for the same period.  Thisconcession consists of a 500kV transmission line linking the substations ofTucuruí and Vila do Conde, in the State of Pará, totaling 201 miles. Theprovision of services of operation and maintenance of the transmission lines iscarried out by Eletronorte. In 2007, we recorded income from our investment inETEP of R$2 million.

 

24

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The ownership structure of ETEP is as follows:

 

 

**Brazil’s EnergyMarket**

** **

*General*

* *

Traditionally, in the Brazilian electricity sector,generation, transmission and distribution activities were conducted by a smallnumber of companies that had always been the property of either the FederalGovernment, or of governments of Brazil’s individual states. In the last tenyears, several companies controlled by the state were privatized, in an effortto increase efficiency and competition. The previous administration, ruled byFernando Henrique Cardoso (1995-2002), stated its objective to privatize thestate-controlled part of the electricity sector, but the present administrationhas stopped this process, and has implemented a “new industry model” for theBrazilian electricity sector as set forth in Law No. 10,848, of March 15,2004.

 

*The* New Industry Model

* *

The main objectives****of the newindustry model are to guarantee:  (i) security of supply; and (ii) reasonableness****of rates. To guarantee supply, the newmodel creates the requirements (a) that distributors must contract theirentire load, and will be responsible for making realistic projections of demandrequirements and (b) that building new hydroelectric and thermal plantswill be determined in ways that best balance security of supply andreasonableness of rates. The means of achieving reasonableness of rates includethe following:  (a) all purchases ofelectricity by distributors will occur by auction, based on the lowest-ratecriterion; (b) contracting is to be through the Pool system, as describedbelow; and (c) contracting of load will be separated into two types oftransactions, both of which will always be by auction: (i) contracting ofthe electricity of the new plants, which will target expansion; and (ii) contractingof the electricity of the existing plants, which will target the existingelectricity demand.

 

The new industry model also creates twoenvironments for the contracting of electricity supply:  (i) the Regulated ContractingEnvironment (the “ACR”), for contracting of electricity to meet the demands of distributorssupplying captive consumers under regulated rates; and (ii) the FreeContracting Environment (the “ACL”), for contracting of energy to supply FreeConsumers, through freely negotiated contracts. Distributors will be allowed tooperate only in the regulated environment, while generators may operate inboth, maintaining their competitive characteristics.

 

Expansionrequirements of the sector****will be evaluated by theFederal Government through the Ministry of Mines and Energy (the “MME”). Twonew institutional agents have been created: (i) the Energy ResearchCompany (the “EPE” ), a state-controlled company responsible for execution ofthe planning of expansion of generation and transmission; and (ii) theElectricity Trading Chamber (the “CCEE”), a private company, which is thesuccessor of the Wholesale Energy Market, (formerly the MAE), and isresponsible for the accounting and settlement of the short term energy.  The CCEE is also responsible, through delegationby ANEEL, for organizing and conducting the public power auctions in the ACR inwhich all distributors buy energy, referred to as the Pool system.

 

25

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* *

*Regulation under the newindustry model*

* *

The Brazilian electricity industry is regulated andsupervised by ANEEL.After the enactment of Law No. 10,848, ANEEL’s primary responsibility isto regulate and supervise the power industry in line with the policy to bedictated by the MME and to respond to matters which are delegated to it by the FederalGovernment and by theMME. ANEEL’s current responsibilities include, among others, (i) administeringconcessions for electricity generation, transmission and distributionactivities, including the approval of electricity rates, (ii) enacting regulations for theelectricity industry,(iii) implementing and regulating the exploitation of hydroelectricresources, (iv) promoting the public bidding process for new concessions, (v) settlingadministrative disputes among electricity generation entities and electricitypurchasers, (vi) defining the criteria and methodology for thedetermination of distribution and transmission rates, and (vii) settlingadministrative disputes among electricity distributors and captive consumers.

 

*Rates*

* *

Electric energy rates inBrazil are set by ANEEL, which has the authority to readjust and review ratesin accordance with the provisions under the relevant concession contracts. Eachdistribution company’s concession contract provides for an annual rateadjustment (*reajuste anual*). In general, Parcel Acosts are fully passed through to consumers. Parcel A costs are the portion ofthe regular rate calculation formula, which provides for the recovery ofcertain costs that are not within the control of the distribution company.Parcel B costs, which are costs that are under the control of the distributors,are restated for inflation in accordance with the General Market Price Index (*Indice Geral de Preços do Mercado*), or IGP-M index.  The average annual rate adjustment includescomponents such as the inter-year variation of fixed costs (CVA) and otherfinancial adjustments, which compensate for changes in the company’s costs thatwere not previously taken into account in the rate we charged the yearbefore.  Since this inter-year variationis to reimburse changes in costs that took place in the previous year, itshould not be part of next year’s annual adjustment.

 

As described below, wewere subject to a periodic rate revision *(revisãoperiódica*) in April 2008, and therefore an annual rateadjustment will not occur in 2008.  On April 3,2007, through Resolution No. 446, ANEEL established an average rateincrease of 9.43%. This adjustment included a component of 1.47% representingan increase to recoup revenue we did not achieve in 2004 as stated above.  Our next annual rate adjustment will takeplace in April 2009.

 

 Concessionaires of electricity distributionare also entitled to periodic revisions *(revisãoperiódica)*. Our concession agreements establish a five-year periodbetween periodic revisions. These revisions are aimed at (i) assuringnecessary revenues to cover efficient Parcel B operational costs and adequatecompensation for investments deemed essential for the services within the scopeof each such company’s concession and (ii) determining the X factor, whichis calculated based on expected productivity gains from increases in scale,evaluations by consumers (verified by ANEEL) and labor costs.

 

On April 7, 2008,ANEEL established the results of our second periodic rate revision.  Based on the financial components of thisrate adjustment, the rates decreased, on average, 7.14%.  For more detailed information, see “Item 5.Operating and Financial Review and Prospects – Rates”.

 

On April 8, 2003, wewent through our first periodic rate revision and ANEEL established a 31.53%temporary average increase to be applied to our rates. On April 4, 2005,through Resolution No. 71, ANEEL reconsidered such decision andestablished a 44.41% average increase to be applied to our rates. In order toguarantee low rates to our end consumers, ANEEL only allowed us to repositionour rates up to 31.53% retroactive to April 8, 2003. ANEEL has alsoindicated that the rate adjustments expected for the years from 2004 to 2007would be adjusted to recover the difference between the average rate increaseof 44.41% we were entitled to and the 31.53% rate adjustment that wasauthorized. Our rate adjustments on April 8, 2005, April 8, 2006 and April 3,2007 each included a recovery of a portion of the difference between theaverage rate increase of 44.41% we were entitled to by the periodic revisionand the rate adjustment of 31.53% that was authorized.  However, during the process of the annualrate adjustment for 2007, ANEEL postponed the recovery of the portion we wereentitled to receive in 2007 to the April 2008 periodic adjustment.

 

In addition, concessionaires of electricity distribution are entitledto extraordinary review of rates (*revisãoextraordinária*), on a case by case basis, to ensure their financialequilibrium and compensate them for unpredictable costs, including taxes, thatsignificantly change their cost structure.

 

ANEEL has also issued regulations that govern the access to thedistribution and transmission facilities and establish the rate for use of thelocal distribution grid, or Distribution Usage Rates (“TUSD”), and the rate forthe use of the interconnected transmission grid, or Transmission Usage Rates (“TUST”).The rates to be paid by distribution companies, generators and Free Consumersfor use 

 

26

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of the interconnectedpower system are reviewed annually. The review of the TUST takes into accountthe revenues that are permitted of transmission concessionaires pursuant totheir concession contracts. For more detailed information regarding therate-setting structure in Brazil, see “The Brazilian Power Industry—Rates forthe Use of the Distribution and Transmission Systems” in Annex A.

 

*Concessions*

* *

Under the Brazilian Constitution, companies seeking to construct oroperate a generation, transmission or distribution facility in Brazil arerequired to apply for an authorization or a concession from the FederalGovernment which is generally granted through a public bidding processconducted by ANEEL. Concessions grant exclusive rights to generate electricityin a particular plant, and to transmit or distribute electricity in aparticular area for a specified period of time, generally 35 years for newgeneration concessions, 30 years for new transmission and distributionconcessions, and 20 years for the renewal of existing concessions. For moredetailed information regarding concessions, see “The Brazilian Power Industry—Concessions”in Annex A.

 

*Land Acquisition*

* *

The concessions granted to us by the Federal Government do not includea grant of the land upon which the plants are located. Electricityconcessionaires in Brazil typically have to negotiate with the individuallandowners to obtain needed land. However, in the event that a concessionaireis unable to obtain needed land in this way, such land may be condemned for theconcessionaire’s use through specific legislation. In cases of governmentalcondemnation, the concessionaires may have to participate in negotiationsrelating to the amount of compensation with landowners and the resettlement ofcommunities to other locations. We make all efforts to negotiate with thecommunities before applying to the judiciary.

 

**Unbundlingunder the New Industry Model**

** **

Law No. 10,848/04, which provides for the new industry model,prohibits holders of distribution concessions, permissions or authorizationsthat operate in the interconnected power system from:  (i) performing activities related togeneration, transmission and sale of energy to Free Consumers at freelynegotiated prices; (ii) holding interests in other companies, directly orindirectly, other than (a) in companies whose corporate purpose is tomanage financial resources necessary for rendering of services or (b) asprovided in the concession contracts; or (iii) performing activitiesoutside their corporate purpose, except as provided by law and the concessioncontracts. These restrictions do not apply to distributors: (i) supplyingenergy to isolated electricity systems; (ii) supplying their own market,provided such market has a demand of less than 500 GWh/year and the totality ofenergy produced is destined to such market; or (iii) when funding,investing or borrowing funds destined to the distributor itself or a company ofthe same economic group, subject to prior agreement by ANEEL. Holders ofgeneration concessions or authorizations that operate in the interconnectedsystem may not be affiliates or controlling shareholders of companies which areresponsible for distribution activities.

 

In order to comply with regulatory provisions pursuant to which we wererequired to unbundle our vertically integrated businesses, we have incorporatedtwo wholly-owned subsidiaries of CEMIG —Cemig Generation and Transmission and CemigDistribution – created to carry out the activities ofelectricity generation and transmission, and distribution, respectively. Formore detailed information regarding these entities and the corporaterestructuring of CEMIG, see “—Organization and Historical Background.”

 

**CapitalExpenditures**

** **

Capital expenditures for the years ended December 31, 2007, 2006and 2005, in millions of *reais*, are asfollows:

 

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| ** **                                                            | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                            | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Acquisition of interest in Light through RME                          |       | —                                     |       | 174 |   | — |   |
| Acquisition of interests in transmission companies                    |       | —                                     |       | 349 |   | — |   |
| Other investments                                                     |       | 26                                         |       | 45 |   | 32 |   |
| Sale of Way TV                                                        |       | (49                                        | )          | — |   | — |   |
| Total capital  expenditures under affiliates                          |       | (23                                        | )          | 568 |   | 32 |   |
| Generation power projects — under Property, plant  and equipment |       | 242                                        |       | 264 |   | 575 |   |
| Transmission network expansion                                        |       | 64                                         |       | 55 |   | 48 |   |
| Distribution network expansion                                        |       | 790                                        |       | 983 |   | 868 |   |
| Others                                                                |       | 24                                         |       | 26 |   | 20 |   |
| Total capital  expenditures under property, plant and equipment       |       | 1,120                                      |       | 1,328 |   | 1,511 |   |
| Total Capital  expenditures                                           |       | 1,097                                      |       | 1,896 |   | 1,543 |   |

 

We currently projecttotal capital expenditures of approximately R$1,561 million in 2008. Theprincipal uses of these expenditures are expected to be for the expansion ofour distribution infrastructure and increases in our generation capacity.

 

**Business Overview**

** **

*General*

* *

We are required, like other Brazilian electric utilities, to purchaseelectricity from Itaipu in an amount determined by the Federal Government basedon our electricity sales. See “—Generation and Purchase of Electric Power—Purchaseof Electric Power—Itaipu.”  In addition,we purchase energy from other concessionaires and the interconnected powersystem. See “—Generation and Purchase of Electric Power—Purchase of ElectricPower–Interconnected Power System.”  Wealso purchase energy generated by self power producers, or SPPs, andindependent power producers, or IPPs, that are located within our concessionarea.

 

The following table sets forth certain information, in GWh, pertainingto the electricity that we generated, purchased from other sources anddelivered during the periods specified:

 

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CEMIG’S ELECTRIC ENERGYBALANCE

 
| ** **                                                         | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| **(GWh)**                                                          | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| RESOURCES                                                          |       | 67,698                           |       | 63,964 |   | 52,748 |   |
| Electricity generated by CEMIG(1)                                  |       | 33,150                           |       | 32,187 |   | 30,411 |   |
| Electricity generated by auto-producers                            |       | 1,047                            |       | 1,147 |   | 1,098 |   |
| Electricity generated by Ipatinga                                  |       | 362                              |       | 300 |   | 299 |   |
| Electricity generated by Barreiro                                  |       | 82                               |       | 51 |   | 18 |   |
| Electricity generated by Sá Carvalho                          |       | 322                              |       | 395 |   | 467 |   |
| Electricity generated by Horizontes                                |       | 36                               |       | 41 |   | 76 |   |
| Electricity generated by Cemig PCH                                 |       | 10                               |       | 7 |   | 16 |   |
| Electricity generated by Rosal                                     |       | 264                              |       | 326 |   | 417 |   |
| Electricity generated by Amador Aguiar                             |       | 505                              |       | 243 |   | — |   |
| Electricity bought from Itaipu                                     |       | 12,135                           |       | 12,109 |   | 12,144 |   |
| Electricity bought from CCEE and other  companies(2) (3)      |       | 19,785                           |       | 17,158 |   | 7,802 |   |
|                                                               |       |                             |       |   |   |   |   |
| REQUIREMENTS                                                       |       | 67,698                           |       | 63,964 |   | 52,748 |   |
| Electricity delivered to final consumers(4)                        |       | 39,056                           |       | 37,707 |   | 38,068 |   |
| Electricity delivered to auto-producers                            |       | 990                              |       | 1,013 |   | 974 |   |
| Electricity delivered by Ipatinga                                  |       | 362                              |       | 300 |   | 299 |   |
| Electricity delivered by Barreiro                                  |       | 100                              |       | 97 |   | 76 |   |
| Electricity delivered by Sá Carvalho                          |       | 472                              |       | 472 |   | 472 |   |
| Electricity delivered by Horizontes                                |       | 84                               |       | 95 |   | 84 |   |
| Electricity delivered by Cemig PCH                                 |       | 122                              |       | 105 |   | 61 |   |
| Electricity delivered by Rosal                                     |       | 263                              |       | 262 |   | 263 |   |
| Electricity delivered to the CCEE and other  companies(2) (3) |       | 20,621                           |       | 18,476 |   | 8,355 |   |
| Losses                                                             |       | 5,629                            |       | 5,437 |   | 4,096 |   |

 

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| (1) |   | Discounting the  losses attributed to generation (634 GWh in 2007) and the internal  consumption of the generating plants.                                                                             |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Beginning in  2004, this amount refers to contracts, purchases and sales of electricity  under the CCEE, including the Energy Reallocation Mechanism (*Mecanismo de Realocação de Energia*). |
| (3) |   | Includes bilateral contracts with other agents of the CCEE.                                                                                                                                            |
| (4) |   | Includes  electricity delivered to consumers outside the concession area.                                                                                                                              |

 

*Generation*

* *

According to ANEEL, at December 31, 2007, we were the sixthlargest electric power generation concessionaire in Brazil as measured by totalinstalled capacity. At December 31, 2007, we generated electricity at 52hydroelectric plants, four thermoelectric plants and one wind farm and had atotal installed generation capacity of 6,566 MW, of which hydroelectric plantsaccounted for 6,382 MW, thermoelectric plants accounted for 183.0 MW and ourwind farm accounted for 1 MW. Eight of our hydroelectric plants accounted forapproximately 81.9% of our installed electric generation capacity in 2007. Wesupplied approximately 96.4% of the electricity consumed in Minas Gerais during2007. During the year ended December 31, 2007, we recorded expensestotaling R$564 million relating to transmission charge payments made to the ONSand to transmission concession holders. See “Item 5. Operating and FinancialReview and Prospects” and “The Brazilian Power Industry” in Annex A.

 

*Transmission*

* *

We are engaged in the electric power transmission business, whichconsists of transporting electric power from the facilities where it isgenerated to the distribution networks for delivery to end users. We transportenergy produced at our own generation facilities as well as energy that we purchasefrom Itaipu, the interconnected power system and other concessionaires. Ourtransmission network is comprised of power transmission lines with a voltagecapacity equal to or greater than 230 kV and is part of the nationaltransmission grid regulated by the ONS. See “The Brazilian Power Industry” inAnnex A. As of December 31, 2007, our transmission network in Minas Geraisconsisted of 1,352 miles of 500 kV lines, 1,244 miles of 345 kV lines and 485miles of 230 kV lines, as well as 35 substations with a total of 94transformers and an aggregate transformation capacity of 15,503 MVA.

* *

*29*

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* *

*Distribution*

* *

We have a distribution concession in Minas Gerais that grants us rightsto supply electric energy to consumers within our concession area except forconsumers that may be eligible, in accordance with the legislation, to becomeFree Consumers (currently consumers with demand equal to or greater than3 MW). Our concession area covers approximately 219,103 square miles, or96.7% of the territory of the state. As of December 31, 2007, we owned andoperated 273,531 miles of distribution lines, through which we suppliedelectricity to approximately 6.4 million consumers. At December 31, 2007,we were the largest electricity distribution concessionaire in Brazil in termsof GWh transported.  Of the total amountof electricity we supplied to final consumers as of December 31, 2007,60.3% was to industrial consumers, 17.0% was to residential consumers, 10.3%was to commercial consumers and 12.4% was to rural and other consumers.

 

*Other Businesses*

* *

While our main business consists of the generation, transmission anddistribution of electric power, we also engage in the following businesses: (i) distributingnatural gas in Minas Gerais through our equity investee Gasmig;  (ii) telecommunications through ourconsolidated subsidiary Empresa de Infovias S.A., a company created to providefiber-optics and coaxial cable network installed along our transmission anddistribution lines through which telecommunication services can be provided; (iii) nationaland international consulting business through our subsidiary Efficientia S.A.,whose focus is to provide our largest customers in the industrial, service andcommercial sectors with energy solutions; and (iv) implementation andmanagement of systems for electricity sector companies (generation,distribution and transmission) through our subsidiary Focus SoluçõesTecnológicas S. A., incorporated on August 27, 2007.

 

**RevenueSources**

** **

The following table shows the revenues attributable to each of ourprincipal revenue sources, for the periods indicated:

 
| ** **                                           | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Electricity sales to final consumers                 |       | 10,191                                     |       | 9,319 |   | 8,708 |   |
| Deferred rate adjustment                             |       | —                                     |       | — |   | 110 |   |
| Electricity sales to the interconnected power system |       | 1,134                                      |       | 884 |   | 237 |   |
| Use of basic transmission and distribution networks  |       | 1,705                                      |       | 1,780 |   | 1,523 |   |
| Services rendered                                    |       | 61                                         |       | 32 |   | 34 |   |
| Telecommunication and other                          |       | 175                                        |       | 168 |   | 142 |   |
| Total                                                |       | 13,266                                     |       | 12,183 |   | 10,754 |   |

** **

**30**

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** **

**Generation**

** **

*Generation*

* *

Thefollowing table sets forth certain operating information concerning ourelectric power generation plants as of December 31, 2007:

 
| **Facility**                 | ** ** | **Installed  Capacity  (MW)** | ** ** | **Assured  Energy(1)  (average MW)** | ** ** | **Year  Commenced  Operations** | ** ** | **Installed  Capacity  % of Total** | ** ** | **Date  Concession  Expires** | ** ** |
|------------------------------|------------|-------------------------------|------------|-------------------------------------------|------------|---------------------------------|------------|-----------------------------------------------|------------|-------------------------------|------------|
| Major Hydroelectric Plants   |       |                          |       |                                      |       |                            |       |                                          |       |                          |       |
| São Simão          |       | 1,710                         |       | 1,281.0                                   |       | 1978                            |       | 26.0                                          |       | January 2015             |       |
| Emborcação         |       | 1,192                         |       | 497.0                                     |       | 1982                            |       | 18.1                                          |       | July 2025                |       |
| Nova Ponte                   |       | 510                           |       | 276.0                                     |       | 1994                            |       | 7.8                                           |       | July 2025                |       |
| Jaguara                      |       | 424                           |       | 336.0                                     |       | 1971                            |       | 6.5                                           |       | August 2013              |       |
| Miranda                      |       | 408                           |       | 202.0                                     |       | 1998                            |       | 6.2                                           |       | December 2016            |       |
| Três Marias             |       | 396                           |       | 239.0                                     |       | 1962                            |       | 6.0                                           |       | July 2015                |       |
| Volta Grande                 |       | 380                           |       | 229.0                                     |       | 1974                            |       | 5.8                                           |       | February 2017            |       |
| Irapé                   |       | 360                           |       | 206.3                                     |       | 2006                            |       | 5.5                                           |       | February 2035            |       |
| Aimorés                 |       | 161.7                         | (7)        | 84.3                                      | (7)        | 2005                            |       | 2.5                                           |       | December 2035            |       |
| Salto Grande                 |       | 102                           |       | 75.0                                      |       | 1956                            |       | 1.6                                           |       | July 2015                |       |
| Funil                        |       | 88                            | (5)        | 43.6                                      | (5)        | 2002                            |       | 1.3                                           |       | December 2035            |       |
| Queimado                     |       | 86.6                          | (6)        | 47.8                                      | (6)        | 2004                            |       | 1.3                                           |       | January 2033             |       |
| Sá Carvalho             |       | 78                            |       | 58.0                                      |       | 2000                            | (2)        | 1.2                                           |       | December 2024            |       |
| Rosal                        |       | 55                            |       | 30.0                                      |       | 2004                            | (2)        | 0.8                                           |       | May 2032                 |       |
| Itutinga                     |       | 52                            |       | 28.0                                      |       | 1955                            |       | 0.8                                           |       | July 2015                |       |
| Amador Aguiar I              |       | 50.5                          | (8)        | 32.6                                      | (8)        | 2006                            |       | 0.8                                           |       | August/2036                   |       |
| Amador Aguiar II             |       | 44.21                         | (8)        | 27.6                                      | (8)        | 2007                            |       | 0.7                                           |       | August/2036                   |       |
| Camargos                     |       | 46                            |       | 21.0                                      |       | 1960                            |       | 0.7                                           |       | July 2015                |       |
| Porto Estrela                |       | 37                            | (3)        | 18.6                                      | (3)        | 2001                            |       | 0.6                                           |       | July 2032                |       |
| Igarapava                    |       | 30.4                          |       | 24.4                                      | (4)        | 1999                            |       | 0.5                                           |       | December 2028            |       |
| Pai Joaquim (11)             |       | 23                            |       | 13.9                                      |       | 2004                            |       | 0.4                                           |       | April 2032               |       |
| Piau                         |       | 18                            |       | 8.0                                       |       | 1955                            | (2)        | 0.3                                           |       | July 2015                |       |
| Gafanhoto                    |       | 14                            |       | 6.7                                       |       | 1946                            |       | 0.2                                           |       | July 2015                |       |
| Smaller Hydroelectric Plants |       | 116                           |       | 68.4                                      |       | —                          |       | 1.8                                           |       | —                        |       |
| Thermoelectric Plants        |       |                          |       |                                      |       |                            |       | 0.0                                           |       |                          |       |
| Igarapé                 |       | 131                           |       | 71.3                                      | (9)        | 1978                            |       | 2.0                                           |       | August 2024              |       |
| Ipatinga                     |       | 40                            |       | —                                    |       | 2000                            | (2)        | 0.6                                           |       | December 2014            |       |
| Barreiro                     |       | 11.4                          |       | 11.5                                      |       | 2004                            |       | 0.2                                           |       | April 2023               |       |
| Formoso                      |       | 0.4                           |       | 0.2                                       |       | 1992                            |       | 0.0                                           |       | Indefinite                    |       |
| Wind Farm                    |       | 1                             |       | 0.3                                       |       | 1994                            |       | 0.0                                           |       | Indefinite                    |       |
|                         |       |                          |       |                                      |       |                            |       |                                          |       |                          |       |
| Total                        |       | 6,566.2                       | (10)       | 3,973.5                                   | (10)       | —                          |       | 100.0                                         | %          | —                        |       |

 

----

| (1)  | Assured  Energy is the plant’s long-term average output, as established by EPE in  accordance with studies conducted by the ANEEL and the ONS. Calculation of  Assured Energy considers such factors as reservoir capacity and connection to  other power plants. Contracts with final consumers and other concessionaires  do not provide for amounts in excess of a plant’s Assured Energy. |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  | Indicates  our acquisition date.                                                                                                                                                                                                                                                                                                                                                                        |
| (3)  | Represents  our interest in the Porto Estrela plant (33.3%).                                                                                                                                                                                                                                                                                                                                            |
| (4)  | Represents  our interest in the Igarapava plant (14.5%). The amount of 5.49 average MW of  assured energy, representing the agreement with a consortium formed by Cemig  Generation and Transmission and Companhia Vale do Rio Doce, Companhia  Siderúrigica Nacional, Votorantim Metais e Zinco S.A and Anglogold Ashanti  Brasil Ltda., is included.                                             |
| (5)  | Represents  our interest in the Funil plant (49.0%).                                                                                                                                                                                                                                                                                                                                                    |
| (6)  | Represents  our interest in the Queimado plant (82.50%).                                                                                                                                                                                                                                                                                                                                                |
| (7)  | Represents  our interest in the Aimorés Plant (49%).                                                                                                                                                                                                                                                                                                                                               |
| (8)  | Represents  our interest in the Amador Aguiar I and Amador Aguiar II plants (21.05%)                                                                                                                                                                                                                                                                                                                    |
| (9)  | Represents  the assured energy established by the MME.                                                                                                                                                                                                                                                                                                                                                  |
| (10) | This amount does not  include the Light acquisition.                                                                                                                                                                                                                                                                                                                                                    |
| (11) | On December 19,  2005, ANEEL approved the transfer of the authorization to produce and sell  the energy of the Pai Joaquim small power plant from Central Hidrelétrica Pai  Joaquim S.A to CEMIG PCH S.A.                                                                                                                                                                                     |

 

31

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Thefollowing tables set forth certain additional operating information pertainingto our electricity generation operations as of the dates indicated:

 
| ** **                                     | ** ** | **Circuit Length of Generation Lines in Miles  (from power plants to generation substations)** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **As of December 31,**                                                                                                                 | ** ** |
| **Voltage of Connection Lines** | ** ** | **2007**                                                                                                                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| 500 kV                                         |       | 7                                                                                                                                                     |       | 4 |   | 4 |   |
| 345 to 230 kV                                  |       | 15                                                                                                                                                    | (1)        | 10 |   | 8 |   |
| 161 to 138 kV                                  |       | 112                                                                                                                                                   | (2)        | 69 |   | 43 |   |
| 69 to 13.8 kV                                  |       | 102                                                                                                                                                   |       | 102 |   | 102 | (3) |
| Total                                          |       | 236                                                                                                                                                   | (4)        | 185 |   | 157 |   |

 
| ** **                      | ** ** | **Step-Down Transformation Capacity(5)  of Generation Substations** | ** ** |
|---------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| ** **                      | ** ** | **As of December 31,**                                                   | ** ** |
| ** **                      | ** ** | **2007**                                                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                      | ** ** | ** **                                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Number of step-down substations |       | 57                                                                                      |       | 56 | (4) | 54 | (3) |
| MVA                             |       | 7,125                                                                                   |       | 7,078 | (4) | 6,604 |   |

 

----

| (1) |   | We increased the  circuit length of our 345 kV connection line in 2006, because the Irapé  Facility began operations.                                                      |
|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | We increased the  circuit length of our 138 kV connection lines in 2007, because the Amador  Aguiar II Facility began operations.                                               |
| (3) |   | We increased the circuit length of our 69 kV connection lines in 2004,  because we bought the Rosal Facility and the Queimado Facility began  operations.                       |
| (4) |   | This amount does not include the Light  acquisition.                                                                                                                            |
| (5) |   | Step-down transformation capacity refers to the ability of a transformer to receive energy  at a certain voltage and release it at a reduced voltage for further  distribution. |

 

*Generation Assets*

* *

We have formed in Minas Gerais and other states of Brazil, thefollowing subsidiaries to operate certain of our generation facilities and tohold the related concessions:

 

*Usina Térmica Ipatinga S.A.*We operate the Ipatinga thermoelectricplant through our subsidiary Usina Térmica Ipatinga S.A. This plant is an SPP(self power producer) installed and operated within the premises of UsinasSiderúrgicas de Minas Gerais S.A.—USIMINAS, or Usiminas, a large Braziliansteel manufacturer. The plant supplies power to a large steel mill owned byUsiminas located in eastern Minas Gerais. We acquired the Ipatinga plant in2000 for R$90 million from Usiminas as payment for outstanding power supplydebts. We have signed a power purchase agreement with Usiminas for powerproduced at Ipatinga. The plant currently has an installed capacity of 40 MW,generated by two units that began operating in 1986 and that use blast furnacegas as fuel.

 

*Sá Carvalho S.A.*We operate the Sá Carvalho hydroelectricpower plant, located on the Piracicaba River in the municipality of AntônioDias in the State of Minas Gerais, through our subsidiary Sá Carvalho S.A.,which we acquired in 2000 for R$87 million from Acesita S.A., or Acesita, asteel company. This acquisition was funded by an issuance of debentures by aspecial trust, UHESC S.A., which we are obligated to repay. On June 5,2003, we renegotiated the interest rate applicable to 46.67% of the aggregateprincipal amount of these debentures for the following two year period and theremaining 53.33% was redeemed for R$64 million.

 

*Rosal Energia S.A.*In December 2004 we bought the Rosal**hydroelectricplant, which has installed capacity of 55 MW, from Caiuá Serviços deEletricidade S.A., or Caiuá, for a payment of R$134 million. The Rosal plant,the sole asset of Rosal Energia S.A**.**,is located on the Itabapoana River, which runs along the border between thestates of Espírito Santo (Municipality of Guaçuí) and Rio de Janeiro(Municipality of Bom Jesus de Itabapoana). It operates in integrated connectionwith the *Alegre*and *Mimoso do Sul*electricity systems, whichare owned by the electricity utility of the State of Espírito Santo, Escelsa(Espírito Santo Centrais Elétricas S.A.). The plant’s first and second rotorsstarted operating in December 1999 and January 2000, respectively. Ithas a concession contract for 35 years, maturing in 2032. ANEEL approved thetransfer of control on December 20, 2004.

 

32

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*Cemig Capim Branco Energia S.A.*We incorporated Cemig Capim BrancoEnergia S.A. to develop the Capim Branco Generating Complex in partnership withCompanhia Vale do Rio Doce, or CVRD, a mining company, Comercial e AgrícolaPaineiras, an agricultural company, and Companhia Mineira de Metais, or CMM, ametallurgical company. ANEEL Resolution 314 of April 11, 2006, allowed thetransfer of the electricity generation concession of CMM (through CMM’sparticipation in Cemig Capim Branco Energiga S.A.) to Votorantim Metais ZincoS.A., or VMZ; and ANEEL Resolution 478 of June 12, 2007 ratified thetransaction. On March 16, 2007, ANEEL published Ruling No. 683approving the change of the name of the Capim Branco Generating Complex to theAmador Aguiar Generating Complex. The project consists of the Amador Aguiar Iand Amador Aguiar II hydroelectric power plants, with installed capacity of 240MW and 210 MW, respectively. See “Capim Branco Power Facility”, under “Expansionof Generation Capacity” below. We have entered into a purchase contract withCemig Capim Branco Energia S.A. under which Cemig Distribution will purchasethe energy produced by Amador Aguiar I and Amador Aguiar II for 20 years fromthe start date of each plant’s commercial operations, which in the case ofAmador Aguiar I was February 21, 2006, and in the case of Amador Aguiar IIwas March 9, 2007. This contract was submitted to ANEEL in 2003 and wasapproved in December 2004. For information regarding a legal proceeding wehave been involved in related to the Amador Aguiar I and Amador Aguiar IIhydroelectric plants, see “Item 8. Financial Information—Legal Proceedings —Legal Proceedings Related to Environmental Matters.”

 

*Horizontes Energia S.A.*We formed Horizontes Energia S.A., orHorizontes Energia, to generate and trade electricity as an IPP (independentpower producer) through the commercial operation of the following of oursmaller hydroelectric plants: the Machado Mineiro Power Plant (located on thePardo River in the municipality of Ninheira in the State of Minas Gerais, withan installed capacity of 1.72 MW); the Salto do Paraopeba Power Plant (locatedon the Paraopeba River in the town of Jeceaba in the State of Minas Gerais,with an installed capacity of 2.37 MW; the Salto Voltão Power Plant (located onthe Chapecozinho River in the city of Xanxerê in the State of Santa Catarina,with an installed capacity of 8.2 MW); and the Salto do Passo Velho Power Plant(also located on the Chapecozinho River in Xanxerê, Santa Catarina, with aninstalled capacity of 1.8 MW), as well as other generating projects to beacquired or built with our participation. The concession relating to theMachado Mineiro Power Plant expires on July 7, 2025; the concessionsrelating to the other plants expire on October 4, 2030. All theelectricity generated by Horizontes Energia S.A. is allocated for sale in theACL (Free Market), and part of this electricity has been sold up to the year2010. The Salto do Paraopeba Power Plant is currently out of service forrefurbishment. We expect that this power plant will resume its operations in2010.

 

*Usina Termelétrica Barreiro S.A.*We formed Usina Termelétrica BarreiroS.A. to participate, in partnership with Vallourec &Mannesmann—V&M do Brasil S.A., or Vallourec & Mannesmann, ametallurgic company, in the construction and operation of the 12.9 MW Barreirothermoelectric power plant, located on Vallourec & Mannesmann’spremises in the Barreiro section of the city of Belo Horizonte in MinasGerais.  Construction started in July 2002and commercial generation began in February 2004.  Usina Termelétrica Barreiro S.A. holds theassets of the Barreiro thermoelectric power plant and trades its production ofenergy.

 

*CEMIG PCH S.A.*We formed CEMIG PCH S.A. to generate andtrade electric energy as an IPP. Its main activity is the production and saleof electricity through the Pai Joaquim small hydroelectric power plant, as anIPP. This plant, located on Araguari River, has an installed capacity of 23 MWand begin its commercial operation on March 31, 2004. CEMIG PCH S.A. holdsthe assets of the Pai Joaquim small hydroelectric power plant,  and trades the energy produced by this plant.

 

Cemig Generation and Transmission also operates the following powerplants:

 

*Queimado Hydroelectric PowerPlant. *Ourpartner in this project is Companhia Energética de Brasília, or CEB, astate-controlled electricity company. CEB has a 17.5% interest and we have theremaining 82.5%. The plant, with an installed capacity of 105 MW, is located onthe Preto River, and encompasses areas in the states of Minas Gerais and Goiásand in Brazil’s Federal District. The power plant began its commercialgeneration on April 9, 2004, with the operation of its first unit. Thecommercial operation of the second and third units began on June 16, 2004,and July 8, 2004, respectively. As of December 31, 2007, we hadinvested R$135.8 million in the project. The concession relating to this plantexpires on January 02, 2033.

 

*Aimorés Hydroelectric PowerPlant. *TheAimorés hydroelectric power plant, located on the Doce River, has an installedcapacity of 330 MW. We have a 49% interest in this enterprise and our partner,Valesul Alumínio S.A., has a 51% interest. Partial commercial generation began on July 30, 2005, and the plantbegan operating at full capacity in November 2005, when we obtained theoperational license from the Brazilian Institute of the Environment andRenewable Natural Resources, or IBAMA. As of December 31, 2007, we hadinvested R$412.0 million in this project. We are a defendant in a class actionlawsuit concerning the Aimorés hydroelectric power plant. See “Item 8.Financial Information—Legal Proceedings—Legal Proceedings Related toEnvironmental Matters.”

 

33

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*Irapé Hydroelectric Power Plant.*The Irapé hydroelectric power plant,which has installed capacity of 360 MW, is located on the Jequitinhonha River,in northern Minas Gerais. Construction began in April 2002 and its threeunits began to generate electricity commercially on July 20, 2006, August 5and October 3, 2006, respectively. At December 31, 2007, we hadinvested R$1,173.2 million in this project, including R$120 million fromdebentures that were acquired by the State Government, using dividends thatwould otherwise have been payable to the State Government under an agreementbetween the State Government and our company. The concession relating to thisplant expires on February 28, 2035. For information regarding a legal proceeding we have been involved inrelated to the Irapé hydroelectric power plant, see “Item 8. FinancialInformation—Legal Proceedings—Legal Proceedings Related to EnvironmentalMatters.”

 

*Amador Aguiar Power Facility. *This project consists of the AmadorAguiar I and Amador Aguiar II hydroelectric power plants, with installedcapacity of 240 MW and 210 MW, respectively. These power plants are located onthe Araguari River in western Minas Gerais. Construction of Amador Aguiar Ibegan in****September 2003, and constructionof the Amador Aguiar II began in March 2004.  Commercial generation at Amador Aguiar Ibegan on February 21, 2006, and at Amador Aguiar II on March 9,2007.  As of December 31, 2007, wehad invested R$50.8 million in this project. The concessions relating to theseplants expire on August 29, 2036. We are a defendant in two lawsuitsconcerning the environmental licensing of the Amador Aguiar I and Amador AguiarII hydroelectric power plants. See “Item 8. Financial Information—LegalProceedings—Legal Proceedings Related to Environmental Matters.”

 

*Expansion of Generation Capacity*

* *

We are currently involved in the construction of eight hydroelectricplants, Baguari, Pipoca, Cachoeirão, Dores de Guanhães, Senhora do Porto,Fortuna II, Jacaré and Santo Antônio, that will increase the installedgeneration capacity of our hydroelectric facilities by 92.19 MW during the nextthree years. The following is a brief description of these projects, thecompletion of which are subject to various contingencies, certain of which arebeyond our control.

 

*BaguariHydroelectric Power Plant*.* *A consortiumformed by Cemig Generation and Transmission, Furnas Centrais Elétricas S.A., orFurnas, an electricity concessionaire of generation and transmission controlledby the Federal Government, and Baguari I Geração de Energia Elétrica S.A, aspecial purpose company (“SPC”) that belongs to Neoenergia S.A., a privateintegrated electricity sector holding company, has the concession to build andoperate the Baguari hydroelectric power plant and sell its energy. The powerplant will have an installed capacity of 140 MW and will be located on the DoceRiver, in the State of Minas Gerais. Cemig Generation and Transmission has a34% interest in this consortium. The energy generated will be commercialized inthe ACR.  On December 15, 2006 theState of Minas Gerais Environmental Policy Council (“COPAM”), issued the powerplant installation license. Construction began on May 9, 2007.  Commercial generation at Baguari is expectedto begin in September 2009. The concession relating to this plant expireson August 15, 2041.

 

*Pipoca Small Hydroelectric PowerPlant*. CemigGeneration and Transmission has also negotiated a stake in the construction andoperation of the *Pipoca Small Hydroelectric Power Plant*,in partnership with HP2 do Brasil S.A., founded by Hydro Partners, a USinvestment company, to implement and operate the project. We will have a 49%interest in this SPC. The plant, with installed capacity of 20 MW, will belocated on the Manhuaçu River, in the eastern part of the State of MinasGerais. Construction began in the first half of 2008 and commercial generationis expected to begin at the end of 2009. The concession relating to this plantexpires on September 10, 2031.

 

*Cachoeirão Small Hydroelectric PowerPlant*. CemigGeneration and Transmission has negotiated an ownership interest in theconstruction and operation of Cachoeirão Small Hydroelectric Power Plant. Ourpartner in this project is Santa Maria Energética S.A. (“Santa Maria Energética”),which formed, with us, the company SPC Hidrelétrica Cachoeirão S.A., to buildand operate the Cachoeirão power plant. This plant, with an installed capacityof 27 MW, will be located on the Manhuaçu River, in the eastern part of MinasGerais. Cemig Generation and Transmission has a 49% ownership interest in theSPC and Santa Maria Energética has a 51% ownership interest. Santa MariaEnergética is a special-purpose company owned by a group based in the state ofEspírito Santo which engages in cattle raising, meat packing and energydistribution. Santa Maria Energética, which holds the authorization forcommercial operation of the Cachoeirão small hydro power plant, applied toANEEL at the end of January 2007 for permission to transfer thisauthorization to Hidrelétrica Cachoeirão S.A. Construction began in March 2007and commercial generation is expected to begin in October 2008. Theconcession relating to this plant expires on July 27, 2030.

 

*SPE Guanhães Energia S.A.*Cemig Generation and Transmission hasnegotiated an ownership interest in the construction and operation of the SmallHydro Plants, or PCHs, of Dores de Guanhães, Senhora do Porto, Fortuna II andJacaré. Our partner in this project is Investminas Participações S. A., awholly owned subsidiary of GlobalBank Participações e Investimentos S.A, which 

 

34

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formed,with us, the company SPC Guanhães Energia S.A, or Guanhães Energia. The purposeof Guanhães Energia is to build and operate these four PCHs, namly: Dores deGuanhães, with 14 MW installed capacity; Senhora do Porto, with 12 MW capacity;Jacaré, with 9 MW; and Fortuna II, with 9 MW. Dores de Guanhães, Senhora doPorto and Jacaré will be built on the Guanhães River, located in themunicipality of Dores de Guanhães, State of Minas Gerais, and Fortuna II willbe built on the Corrente Grande River, located in the municipalities ofGuanhães and Virginópolis, State of Minas Gerais. Cemig Generation andTransmission has a 49% ownership interest in Guanhães Energia, whileInvestminas Participações has the remaining 51%. In June 2007, ConstrutoraBarbosa Mello S.A,, which has the authorization for commercial operation of theGuanhães, Senhora do Porto, Fortuna II and Jacaré PCHs, requested that ANEELapprove the transfer of its authorization to Guanhães Energia, which wasapproved. Construction began in March 2008, and commercial operation isexpected to begin in August 2009. The concessions relating to these plantsexpire in December 2031 with respect to Fortuna II, November 2032with respect to Dores de Guanhães and October 2032 with respect to Senhorado Porto and Jacaré.

 

*Madeira Energia S.A. – MESA*.  MESA is a special purpose company created toimplement, build, operate and maintain the Santo Antônio hydroelectric plant,in the basin of the Rio Madeira, in the Northern region of Brazil. Thisfacility will have a generating capacity of 3,150 MW.  MESA is expected to begin operations in 2012.

 

*Co-generation Joint Ventures with Consumers*

* *

We intend to enter into joint ventures with industrial consumers todevelop co-generation facilities. These facilities would be built on consumers’premises and would generate electricity using fuel supplied by the consumers’industrial processes. Each co-generation project would be funded in partthrough an agreement with the particular consumer to purchase the electricitygenerated in that consumer’s facility. We would assume the responsibility foroperating and maintaining the co-generation facility.

 

*Wind Farm*

* *

Our wind farm, Morro do Camelinho, began operating in 1994. It islocated in Gouveia, a municipality in northern Minas Gerais. This project isthe first wind farm in Brazil to be connected to the national electricitytransmission grid and it is connected to CEMIG’s distribution system. It has atotal generation capacity of 1 MW, powered by four turbines with a capacity of250 kW each. Morro do Camelinho was built through a technical and scientificcooperation arrangement with the government of Germany. The cost of the projectwas US$1.5 million, with 51% of the cost provided by us and the remaining 49%provided by the government of Germany.

 

**Transmission**

** **

*Overview*

* *

Our transmission business consists of the bulk transfer of electricityfrom the power plants where it is generated to the distribution system, whichcarries the electricity to final consumers, and others consumer agentsconnected directly in the basic transmission grid. Our transmission system iscomprised of transmission lines and step-down substations with voltages rangingfrom 230 kV to 500 kV.

 

In 1998, ANEEL created the ONS, a non-profit legal entity underprivate law, authorized to carry out the activities of coordination and controlof the operation of generation and transmission of electricity in Brazil’snational electricity grid in relation to Free Consumers, energy utilitiesengaged in power generation, transmission and distribution, and other privateparticipants such as importers and exporters. The ONS’s primary role is tocoordinate and control the generation and transmission operations in theinterconnected power system, subject to ANEEL’s regulation and supervision.Until the enactment of Law No. 10,848, the ONS was a self-regulated entityand its management was not subject to interference from the Federal Government.Law No. 10,848 granted the Brazilian government the power to nominate themain directors of the ONS. One of the main objectives of the ONS is toguarantee that all parties in the industry have access to the transmissionnetwork in a non-discriminatory manner. Under ANEEL regulations, holders ofconcessions to operate facilities belonging to the national transmission grid,linking the electricity systems at voltages higher than 230 kV in Brazil, musttransfer coordination of the operation of their transmission facilities to theONS.  We complied with this requirementby entering into a transmission service agreement on December 10, 1999.Pursuant to this agreement, the ONS may represent us in contracts withgeneration companies, distribution companies and Free Consumers for use of thebasic transmission network. The users of the basic transmission network pay usa portion of the revenues we are permitted to receive (as determined by ANEEL)pursuant to our concession agreements.

 

35

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During the year ended December 31, 2007, werecorded revenue totaling R$437 million as a result of this arrangement. Inturn, because we are also a distribution company and because we purchaseelectricity from Itaipu and others, our use of the basic transmission networkrequires us to pay scheduled rates to the ONS and owners of different parts ofthe basic transmission network. During the year ended December 31, 2007,we recorded expenses totaling R$564 million relating to payments made to theONS and transmission concession holders. See “Item 5. Operating and FinancialReview and Prospects” and “The Brazilian Power Industry” in Annex A.

 

We transmit both the energy that we generate and theenergy that we purchase from Itaipu, the interconnected power system and othersources. On December 31, 2007, we also had 10 industrial consumers whom wesupplied directly with high voltage (equal to or greater than 230 kV perindustrial consumer) energy through their connections to our transmissionlines. Nine of these industrial consumers are our clients and accounted forapproximately 10.4% of the total volume of electricity we sold in the yearended December 31, 2007. We also transmit energy to distribution systemsthrough the South/Southeast linked system of the grid.

 

The following tables set forth certain operatinginformation pertaining to our transmission capacity for the dates indicated:

 
| ** **                                       | ** ** | **Circuit Length of Transmission Lines in Miles  (from generation substations to distribution substations)** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **As of December 31,**                                                                                                                               | ** ** |
| **Voltage of Transmission Lines** | ** ** | **2007**                                                                                                                                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| 500 kV                                           |       | 1,352                                                                                                                                                               |       | 1,352 |   | 1,345 |   |
| 345 kV                                           |       | 1,244                                                                                                                                                               |       | 1,202 |   | 1,228 |   |
| 230 kV                                           |       | 485                                                                                                                                                                 |       | 467 |   | 467 |   |
| Total                                            |       | 3,081                                                                                                                                                               |       | 3,021 |   | 3,040 |   |

 
| ** **                       | ** ** | **Step-Down Transformation Capacity(1)  of Transmission Substations** | ** ** |
|----------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **                       | ** ** | **As of December 31,**                                                     | ** ** |
| ** **                       | ** ** | **2007**                                                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Number of  step-down substations |       | 35                                                                                        |       | 33 |   | 32 |   |
| MVA                              |       | 15,503                                                                                    |       | 15,393 |   | 15,393 |   |

 

----

| (1) |   | Step-down transformation capacity refers to the  ability of a transformer to receive energy at a certain voltage and release  it at a reduced voltage for further distribution. |
|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

*Expansion of TransmissionCapacity*

* *

We believe that our transmission system will need tobe reinforced and expanded through the construction of new substations andtransmission lines within the next five years.

 

In accordance with the new regulatory framework in theBrazilian electricity sector, concessions for the expansion of the electricitytransmission infrastructure in Brazil are awarded by means of public biddingsor are authorized by ANEEL. The following is a brief description of our currenttransmission projects, the completion of which are subject to variouscontingencies, certain of which are beyond our control:

 

*Montes Claros - Irapé. *InSeptember 2003, a consortium formed by Companhia Técnica de EngenhariaElétrica — ALUSA, or ALUSA, Furnas, Orteng Equipamentos e Sistemas Ltda., orOrteng and CEMIG, won the concession auctioned by ANEEL to the Montes Claros —Irapé transmission line. As required in the bidding process, the partnersformed the Companhia Transleste de Transmissão, which is responsible forbuilding and operating the transmission line. We have a 24.5% interest in thiscompany. This 345 kV transmission line connects a substation located in MontesClaros, a city in northern Minas Gerais, and the substation of the IrapéHydroelectric Power Plant, with a length of approximately 86 miles.Construction of the project began in January 2005 and transmission lineoperations began on December 18, 2005. The concession expires on February 18,2034. As of December 31, 2007, we had invested R$12.3 million in thisproject.

 

*Furnas - Pimenta. *InSeptember 2004, a consortium formed by Furnas and CEMIG, with interests of49%, and 51%, respectively, won the concession auctioned by ANEEL to the Furnas— Pimenta transmission line. As required in the bidding process,

 

36

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the partners formed the Companhia de TransmissãoCentroeste de Minas, which will be responsible for building and operating thetransmission line. This 345 kV transmission line, with a length ofapproximately 47 miles, will connect the substation of the Furnas HydroelectricPower Plant and a substation located in Pimenta, a city in the Center Westregion of Minas Gerais. We began the project in March 2005 and the transmissionline operation is expected to begin in January 2009. As of December 31,2007, we had invested R$6.7 million in this project.

 

*Itutinga — Juiz de Fora. *InSeptember 2004, a consortium formed by Alusa, Furnas, Orteng and CEMIG,with interests of 41%, 25%, 10%, and 24% respectively, won the concessionauctioned by ANEEL to the Itutinga — Juiz de Fora transmission line. Asrequired in the bidding process, the partners formed the Companhia Transudestede Transmissão, which will be responsible for building and operating thistransmission line. This 345 kV transmission line, with a length ofapproximately 89 miles, will connect the substation of the ItutingaHydroelectric Power Plant and a substation located in Juiz de Fora, a city inthe southeastern Minas Gerais. We began the project in March 2005 andcommercial operations began on February 23, 2007. As of December 31,2007, we had invested R$7.3 million in this project.

 

*Irapé - Araçuaí. *InNovember 2004, a consortium formed by Alusa, Furnas, Orteng and CEMIG withinterests of 41%, 24.5%, 10% and 24.5% respectively, won the concessionauctioned by ANEEL to the Irapé — Araçuaí transmission line. As required in thebidding process, the partners formed the Companhia Transirapé de Transmissão,which will be responsible for building and operating this transmission line.This 230 kV transmission line, with a length of approximately 38 miles, willconnect the substation of the Irapé Hydroelectric Power Plant and a substationto be built in Araçuaí, a city located in the northeastern Minas Gerais. Webegan the project in March 2005 and commercial operations began on May 23,2007. As of December 31, 2007, we had invested R$5.5 million in thisproject.

 

*Charrúa — Nueva Temuco*.* *In April 2005 a consortiumformed by Alusa and CEMIG, with interests of 51% and 49%, respectively, won theconcession auctioned by Centro de Despacho Económico de Carga del SistemaInterconectado Central (CDEC — SIC) of Chile to build, operate and maintain theCharrúa — Nueva Temuco 220 kV transmission line for 20 years. This was animportant event in CEMIG’s history, as it was our first asset outside ofBrazil. We and Alusa formed Transchile Charrúa Transmisión S.A., a specialpurpose company incorporated in Chile and responsible for building andoperating the transmission line. With a length of approximately 116 miles, thetransmission line will connect the substations of Charrúa and Nueva Temuco incentral Chile. We began the project in June 2005 and construction began inApril 2007. On July 18, 2007, Transchile Charrúa Transmisión S.A.entered into a project finance agreement with the Inter-American DevelopmentBank in the amount of US$51.0 million related to the transmission line andsubstations. Commercial operations are expected to begin in 2008. As of December 31,2007, we had invested R$13.4 million in this project.

 

*Distribution and Purchase of Electric Power*

 

*Overview*

* *

Our distribution operations consist of the transfer ofelectricity from distribution substations to final consumers. Our distributionnetwork is comprised of a widespread network of overhead and underground linesand substations with voltages lower than 230 kV. We supply electricity tosmaller industrial consumers at the higher end of the voltage range andresidential and commercial consumers at the lower end of the range.

 

During the year ended December 31,2007, we recorded expenses totaling R$564 million relating to transmissionpayments made to the ONS and other transmission concession holders. See “Item5. Operating and Financial Review and Prospects” and “The Brazilian PowerIndustry” in Annex A.

 

From January 1, 2002 through December 31,2007, we invested approximately R$1,120 million in the construction andacquisition of property, plant and equipment used to expand our distributionsystem.

 

The following tables provide certain operatinginformation pertaining to our distribution system (other than Light), as of thedates presented:

 

37

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| ** **                                       | ** ** | **Circuit Length of Distribution Lines in Miles  (from distribution substations to final consumers)** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **As of December 31,**                                                                                                                        | ** ** |
| **Voltage of Distribution Lines** | ** ** | **2007**                                                                                                                                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| 161 kV                                           |       | 34.2                                                                                                                                                         |       | 34.2 |   | 34.2 |   |
| 138 kV                                           |       | 6,756.8                                                                                                                                                      |       | 6,736.9 |   | 6,537.4 |   |
| 69 kV                                            |       | 2,802.4                                                                                                                                                      |       | 2,804.2 |   | 2,784.4 |   |
| 34.5 kV + Others                                 |       | 600.2                                                                                                                                                        |       | 600.2 |   | 610.8 |   |
| Total                                            |       | 10,193.6                                                                                                                                                     |       | 10,175.5 |   | 9,966.8 |   |

 
| ** **                                    | ** ** | **Circuit Length of Distribution Lines in Miles  (from distribution substations to final consumers)** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **As of December 31,**                                                                                                                        | ** ** |
| **Type of Distribution Lines** | ** ** | **2007**                                                                                                                                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| Overhead urban  distribution lines            |       | 53,064.8                                                                                                                                                     |       | 52,642.9 |   | 52,086.9 |   |
| Underground  urban distribution lines         |       | 257.9                                                                                                                                                        |       | 471.6 |   | 471.6 |   |
| Overhead rural  distribution lines            |       | 210,014.4                                                                                                                                                    |       | 191,809.9 |   | 183,188.9 |   |
| Total                                         |       | 263,337.1                                                                                                                                                    |       | 244,924.4 |   | 235,747.4 |   |

 
|                   |       |                                                                                      |       |     |       |     |       |
|------------------------|------------|-------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **             | ** ** | **Step-Down Transformation Capacity(1)  of Distribution Substations** | ** ** |
| ** **             | ** ** | **As of December 31,**                                                     | ** ** |
| ** **             | ** ** | **2007**                                                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Number of  substations |       | 358                                                                                       |       | 355      |       | 354      |       |
| MVA                    |       | 8,145                                                                                     |       | 8,162    |       | 8,070    |       |

 

----

| (1) |   | Step-down transformation capacity refers to the  ability of a transformer to receive energy at a certain voltage and release  it at a reduced voltage for further distribution. |
|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Physical data for the Control and ManagementInvestment Program, or PROOBRA, were calculated by projection from the existingnetwork. In 2003, we began to calculate this as the sum of the linear extensionof the medium-voltage network and the low-voltage network available in theGEMINI system, double counting (in relation to the previous criterion) wherejoint medium and low voltage networks are in existence. The GEMINI system isthe manager of CEMIG’s distribution network. With the inclusion and startup ofthe Operation, Projects, Client Registry and Planning modules, all thedistributor’s assets are now being managed by the GEMINI system and are now thesource of information for ANEEL in assembling the data on assets for the ratereviews.

 

As a result, the statistics on extent of networks,number of transformers, public illumination and quantity of transmission postsare now supplied by the GEMINI system on a geo-referenced basis. We believethis has resulted in more precise data, reduction of errors in valuing fixedassets, and increased reliability.

 

*Expansion of DistributionCapacity*

* *

Our distribution expansion plan for the next fiveyears is based on projections of market growth. We anticipate that this growthwill be fueled by new consumer connections, increased electricity usage amongour existing consumers and additional electricity distribution needs from newIPP projects. According to applicable law, IPPs have the right to use ourdistribution network upon payment of certain fees. During the next five years,we anticipate connecting approximately 900,000 new urban consumers and 122,000rural consumers. In order to accommodate this growth, we expect that we willneed to add 235,400 medium-voltage poles, 1,518 miles of transmission lines and34 step-down substations (1,269 MVA) to our distribution network, increasingthe network’s installed capacity by 2,190 MVA, including reinforcement. Overthe next five years, we expect to invest approximately R$4.27 billion to expandour distribution system. See “Item 5. Operating and Financial Review andProspects—Liquidity and Capital Resources.”

 

We have adopted a ruralelectricity development program, with the participation of the FederalGovernment and the State Government, called the *Luz Para Todos*program(Light for All Program). Our plan is to use the *Luz Para Todos* program to meet our targetfor supply of electricity to 100% of rural consumers in Minas Gerais. To meetthis objective, we will need funding in the amount of approximately R$1,642million.  The *Luz Para Todos* program includes the *Luz no Saber* sub-program, which uses solarenergy to light schools, community centers and rural homes in remote locationsnot yet reached by the distribution network.

 

38

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The *Projeto Noroeste.*In 2003 and 2004,planning was made for the electricity system to receive injection of 150 MVA inthe Northeastern region of Minas Gerais state, starting in 2004. This increasesthe current availability to 300 MVA, aiming to supply energy through the end of2008 to replace the diesel fuel traditionally used by rural producers, with theobjective of contributing to local growth in a sustainable manner. The cost of the project is R$153million.

 

The *Cresce Minas* program. This project willbenefit approximately 340 municipalities (41% of the total) of MinasGerais, a population of approximately 4.1 million and around 1.1 millionconsumers throughout the state. The amount of capital expenditures coming fromCEMIG’s own funds for 2007, exclusively to strengthen the medium-voltagedistribution system, was R$94.4 million, of a total of R$270.8 million, whichwill be completed with turnkey projects in 2008 and 2009.  In order to strengthen the sub-transmissionsystem, the amount of R$45.7 million was invested in 2007. In the next threeyears, we expect to invest an aggregate of R$438.2 million in our sub-transmissionand transmission systems.

 

*Purchase of ElectricPower*

* *

During the year ended December 31, 2007, wepurchased 12,135 GWh of electricity from Itaipu, which representedapproximately 30.3% of the electricity we sold to end users. In addition to theelectricity purchased from Itaipu, we have two other basic types of supplyarrangements: (i) purchases through public auctions, which accounted forapproximately 56.3% of the electricity we purchased for resale during the yearended December 31, 2007, and (ii) long-term agreements existing priorto the New Industry Model Law, with represented approximately 6.6% of theelectricity we purchased in 2007.

 

*Itaipu. *Itaipuis one of the largest operating hydroelectric plants in the world, with aninstalled capacity of 14,000 MW. CentraisElétricas Brasileiras S.A., or Eletrobrás, a holding company controlledby the Federal Government, owns a 50% interest in Itaipu, while the remaining50% is owned by the government of Paraguay. Brazil, pursuant to its 1973 treatywith Paraguay, has the option to purchase all of the electricity generated byItaipu that is not consumed by Paraguay. In practice, Brazil generallypurchases more than 95% of the electricity generated by Itaipu.

 

We are one of the 19 electric power distributioncompanies operating in the South, Southeast and Center West regions of Brazilthat are jointly required to purchase all of Brazil’s portion of theelectricity generated by Itaipu. The Federal Government allocates Brazil’sportion of Itaipu’s power among these electric companies in amountsproportionate to their respective historical market share of total electricitysales. We are currently required to purchase approximately 17.3% of the totalamount of electricity purchased by Brazil from Itaipu at rates fixed to defrayItaipu’s operating expenses and payments of principal and interest on Itaipu’sdollar-denominated borrowings and the cost in *reais*of transmitting such power to the interconnected power system. These rates havebeen above the national average for bulk supply of power and are calculated inU.S. dollars. Therefore, fluctuations in the U.S. dollar/*real* exchange rate affect the cost, inreal terms, of electricity we are required to purchase from Itaipu.  Historically, we have been able to recoverthe cost of such electricity by charging supply rates to consumers. Accordingto our concession agreement, increases in the supply rate may be transferred tothe final consumer upon approval by ANEEL.

 

In the second half of 2007, ANEEL determined thedecrease in the amount of energy to be purchased by distribution companies fromItaipu. Beginning in January 2008, the amount of electricity purchasedfrom Itaipu by each of the electric power distribution companies in South,Southeast and Center West regions of Brazil is being reviewed and reallocatedbased on the actual consumption of each of these companies in 2004. This changewill result in either an increase or decrease in the energy required to bepurchased from Itaipu by each of these electric power distribution companies.In CEMIG’s case, this resulted in a reduction of approximately 326 average MWof the total amount of energy we purchase from Itaipu We cannot yet predict theimpact of such changes on the rates charged to the final consumer.

 

*Auction Contracts. *We purchased electricity in public auctions atthe CCEE. These contracts were formalized between CEMIG and the several sellersin accordance with the terms and conditions established in the invitation tobid. The following table sets forth the amounts of electricity contracted,average tariff and prices related to the CCEAR contracts arising from theelectricity acquired by CEMIG in the auctions that happened during 2007. Italso includes contracts signed before 2007, but still effective during thatyear.

 

39

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| **Avarage Tariff** | ** ** | **Electricity Contracted  (MW — average per year)** | ** ** | **Term of the Contract** | ** ** |
|--------------------|------------|----------------------------------------------------------|------------|--------------------------|------------|
| 57.51              |       | 530.17                                                   |       | 2005  to 2012            |       |
| 67.33              |       | 919.14                                                   |       | 2006  to 2013            |       |
| 57.51              |       | 530.17                                                   |       | 2005  to 2012            |       |
| 67.33              |       | 919.14                                                   |       | 2006  to 2013            |       |
| 138.74             |       | 3.50                                                     |       | 2008  to 2008            |       |
| 83.13              |       | 105.47                                                   |       | 2008  to 2015            |       |
| 106.95             |       | 4.47                                                     |       | 2008  to 2037            |       |
| 132.27             |       | 35.31                                                    |       | 2008  to 2022            |       |
| 114.28             |       | 3.16                                                     |       | 2009  to 2038            |       |
| 126.77             |       | 60.41                                                    |       | 2009  to 2038            |       |
| 129.26             |       | 41.32                                                    |       | 2009  to 2023            |       |
| 132.39             |       | 38.43                                                    |       | 2009  to 2023            |       |
| 115.05             |       | 91.77                                                    |       | 2010  to 2039            |       |
| 134.99             |       | 20.12                                                    |       | 2010  to 2039            |       |
| 121.81             |       | 88.98                                                    |       | 2010  to 2024            |       |
| 138.85             |       | 61.23                                                    |       | 2010  to 2024            |       |
| 134.67             |       | 431.17                                                   |       | 2010  to 2024            |       |
| 120.86             |       | 24.71                                                    |       | 2011  to 2040            |       |
| 137.44             |       | 23.24                                                    |       | 2011  to 2025            |       |
| 129.14             |       | 56.57                                                    |       | 2012  to 2041            |       |
| 128.37             |       | 126.34                                                   |       | 2012  to 2026            |       |
| 78.87              |       | 122.83  (*)                                              |       | 2012  to 2041            |       |

 

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*(*) Refers to the auctionof the Santo Antônio Power Plant, and this energy will be fully delivered in2016.*

* *

*Bilateral Agreements.* Weentered into bilateral agreements with various suppliers prior to the enactmentof the New Industry Model Law. Such agreements are valid under their originalterms but cannot be renewed. During the year ended December 31, 2007, wepurchased 2,910 GWh, which represented 14.7% of the total electricity purchasedby us during the year.

 

**Energy Losses**

** **

We recognize energy losses in connection with ouroperations on the Basic Grid, as described below, and our technical andnon-technical losses.

 

In 2004, the rules under the New Industry Modelfor the electricity sector resulted in a change in our method of calculatinglosses resulting from the energy that passes through our system. Under the NewIndustry Model for the electricity sector, as an incentive for competition,there is now free access to the transmission and distribution networks,enabling certain consumers to buy their electricity freely from othersuppliers. Consumers who opt for this free-negotiation mode of supply now havetwo contracts: one with the owner of the distribution or transmission networkfor the use of the networks, and the other with the selling agent or generatorfor the electricity. Also, under the new regulations, (i) our transmissionassets with voltage of greater than or equal to 230 kV became part of thenational basic grid which is operated by the ONS, referred to as the BasicGrid; and (ii) energy losses occurring in this Basic Grid are dividedequally so that 50% is allocated among generation agents in proportion to eachof their levels of energy generation and the other 50% is allocated amongconsumption agents (distributors and Free Consumers) in proportion to each oftheir energy loads. As a result, the losses in the Basic Grid attributed to agiven agent now have no direct relationship with its Basic Grid assets, nor canthe agents have control over them. Therefore, these losses take on the statusof an electricity transmission service charge for the agents of the sector, andbecome part of the cost structure covered by the distributors’ retail rate,substantially reducing the risk of financial losses.

 

In 2005, CEMIG was de-verticalized, or “unbundled”,and its activities of (a) generation and transmission and (b) distributionbegan to be managed in two separate companies, thus complying with the legalrequirements instituted by the new regulatory framework for the Brazilianelectricity sector.  Due to thisunbundling, and in accordance with a commercial strategy of CEMIG, in 2005 asignificant portion of consumers migrated from being captive market customersof Cemig Distribution to being free market customers of Cemig Generation andTransmission.  This event resulted in anon-recurring charge to sales revenue for Cemig

 

40

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Distribution in January 2005.  Since the calculation of non-technical lossestakes into account the amounts billed in the calendar year, this change inrevenue affected the amount of the non-technical losses calculated in 2005.

 

2005 was the first year in which we had 12 months ofsales revenue as an unbundled company, free from non-recurring effects.  We believe that the calculation of losses in2006 serves as a reference point for losses in future years since it (i) isfree of non-recurring effects and (ii) is calculated using the new methodof calculation of losses put in place in 2004 to improve the calculation andrepresentation of losses in the new regulatory environment.

 

CEMIG’s total energy losses in 2007 were 5,629 GWh,compared to 5,437 GWh in 2006. Of this total in 2007, 369 GWh related to lossesin the Basic Grid attributed to CEMIG by the ONS. The remaining 5,259 GWh werelosses in CEMIG’s own local distribution system and represent 11.8% of thetotal energy (44.745 GWh) that passed through that local system. Losses in theBasic Grid are allocated to the operators in proportion to each operator’s owntotal load. Thus, the migration of captive clients to the free market, whichreduced the total load of Cemig Distribution, reduced the amount of nationalgrid system losses attributed to CEMIG, contributing to the reduction in ourtotal energy loss.

 

We divide our energy losses into two basic categories:technical losses and non-technical losses. Technical losses accounted forapproximately 78% of our energy losses in the distribution grid in 2007. Theselosses are the inevitable result of the step-down transformation process andthe transportation of electric energy through the 3,081 miles of transmissionlines and 273,531 miles of distribution lines that we operate.

 

We attempt to minimize technical losses by performingrigorous and regular evaluations of the quality of our electricity supply. Weroutinely upgrade and expand our transmission and distribution systems in orderto maintain quality and reliability standards, and consequently, reducetechnical losses. In addition, we operate our transmission and distributionsystems at certain specified voltage levels in order to minimize losses.

 

Other measures to combat technical losses that can behighlighted include:

 

•                                          Planning ofupgrades and improvements to the system based on the expected reduction of losslevels and the expected costs of investments;

 

•                                          Planning ofexpansions and reductions of losses in components of the system based on aten-year horizon, taking into account the levels of electricity losses expectedfor transmission lines, for regional systems and for the CEMIG system as awhole;

 

•                                          Evaluatingthe expansion of the reactive compensation capacity of the high voltageelectricity system; and

 

•                                          Replacementof old cables with thicker cables, and substitution of the lower voltage levels(34.5 kV to 69 kV) with high voltage levels (138 kV).

 

Non-technical losses accounted for the remaining 22%of our energy losses in 2007 in the distribution grid and result from fraud,illegal connections, metering errors and meter defects. These non-technicallosses accounted for 2.56% of the electricity that passed through ourdistribution grid during 2007. In order to minimize non-technical losses, weregularly take preventive actions, including:

 

•                                          inspection ofconsumers’ meters and connections;

 

•                                          modernizationof metering systems;

 

•                                          training ofmeter-reading personnel;

 

•                                          standardizationof meter installation and inspection procedures;

 

•                                          installationof meters with quality control warranties;

 

•                                          consumerdatabase updating; and

 

41

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•                                          developmentof a theft-protected distribution network.

 

Additionally, we have developed an integrated systemdesigned to help detect and measure controllable losses in all parts of ourdistribution system.

 

At the end of 2007, the indicators that measure thequality of supply by Cemig Distribution (DEC – Consumer Outage Duration inhours per year, and FEC – Number of Outages Per Year) were 13.14 and 6.39,respectively, compared to 13.02 and 6.42 in 2006.

 

**Consumers and Billing**

** **

*Consumer Base*

* *

Our distribution business consumers, all of whom arelocated within our concession area in Minas Gerais, are divided into fiveprincipal categories: industrial (including mining, manufacturing andprocessing activities); residential; commercial (including service-orientedbusinesses, universities and hospitals); rural; and other (includinggovernmental and public entities). During the year ended December 31,2007, we sold 40,079 GWh of energy.

 

For 2007, as compared to 2006, the volume of electricpower sold by us to industrial and commercial consumers increased by 1.9% and6.3%, respectively, and the volume of electric power sold by us to ruralconsumers increased by 13.6%. The other consumer category grew 4.0% (thisexcludes wholesale supply). The residential consumption increased 2.5% from2006 to 2007.  The following tableprovides information regarding the number of our consumers as of December 31,2007 and consumption by consumer category for the years ended December 31,2007, 2006 and 2005.

 
| ** **                 | ** ** | **Number of**    | ** ** | **Consumption (GWh)** |       |
|----------------------------|------------|-----------------------|------------|----------------------------|------------|
| ** **                 | ** ** | **consumers at** | ** ** | **Years ended**       |       |
| ** **                 | ** ** | **December 31,** | ** ** | **December 31,**      |       |
| **Consumer Category** | ** ** | **2007**              | ** ** | **2007**                   | ** ** | **2006** | ** ** | **2005** |   |
| Industrial                 |       | 73,600                | (1)        | 24,183                     | (2)        | 23,759 | (2) | 23,472 | (2) |
| Residential                |       | 5,188,604             |       | 6,813                      |       | 6,647 |   | 6,590 |   |
| Commercial                 |       | 560,913               |       | 4,111                      |       | 3,851 |   | 3,754 |   |
| Rural                      |       | 554,269               |       | 2,200                      |       | 1,938 |   | 1,941 |   |
| Own consumption            |       | 829                   | (3)        | 34                         |       | 30 |   | 29 |   |
| Other                      |       | 61,997                | (4)        | 2,738                      |       | 2,666 |   | 2,573 |   |
| Total                      |       | 6,440,212             |       | 40,079                     |       | 38,891 |   | 38,359 |   |

 

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| (1) |   | Includes subsidiaries and affiliated companies.                                                                                                                                                     |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | The industrial consumer category includes  consumption by Sá Carvalho S.A., Usina Térmica Ipatinga S.A., Horizontes  Energia S.A., Cemig PCH S.A and Usina Termelétrica Barreiro S.A |
| (3) |   | Does not include consumption through supply to other  concessionaires.                                                                                                                              |
| (4) |   | Refers to the number of our plants, facilities and  offices that use our energy, each of which is considered a consumer pursuant  to ANEEL regulations.                                             |

 

In 2007, we added and billed 200,023 new finalconsumers, representing growth of 3.2% compared to 2006, through the expansionof our transmission and distribution systems.

 

The largest portion of the energy we sell is purchasedby large industrial consumers. At December 31, 2007, ten of our industrialconsumers had high voltage electrical energy supplied through directconnections to our transmission lines. These consumers constituted 14.5% of ourtotal volume of electrical power sales during 2007, and approximately 6.6% ofour revenues. In the same period, our ten largest industrial consumersaccounted for nearly 19.0% of energy consumed. None of our ten largestconsumers is owned by the State Government or by the Federal Government.

 

As of December 31, 2007, we had entered intopower purchase agreements with 2,970 of our industrial consumers, of which 536had demand above 500 kW. Our power purchase agreement with industrial consumershave terms of three or five years and contain a minimum demand clause thatrequires the consumer to pay for the contracted demand, which represents thesystem capacity

 

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reserved for that consumer, as well as the consumer’sactual consumption. We believe that this billing method provides us with arelatively stable source of revenue.

 

The following table shows our industrial energy salesvolumes by type of industrial consumer as of December 31, 2007:

 
| **Industrial Consumers  (1)** | ** ** | **Energy Sales Volume   in GWh** | ** ** | **Consumption as a  Percentage of Total  Industrial Energy Sales  Volume** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| Steel industry                     |       | 6,953                                                |       | 28.75                                                                                                    |       |
| Ferroalloy  industry               |       | 4,535                                                |       | 18.75                                                                                                    |       |
| Chemical  industry                 |       | 2,779                                                |       | 11.49                                                                                                    |       |
| Non-ferrous  metal industry        |       | 1,023                                                |       | 4.23                                                                                                     |       |
| Mining industry                    |       | 1,904                                                |       | 7.87                                                                                                     |       |
| Food processing                    |       | 1,451                                                |       | 6.00                                                                                                     |       |
| Cement industry                    |       | 899                                                  |       | 3.72                                                                                                     |       |
| Others                             |       | 4,639                                                |       | 19.18                                                                                                    |       |
| Total                              |       | 24,183                                               |       | 100.00                                                                                                   |       |

 

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(1)   Theindustrial consumer category includes consumption by Sá Carvalho S.A., UsinaTérmica Ipatinga S.A., Horizontes Energia S.A., Cemig PCH S.A. and UsinaTermelétrica Barreiro S.A.

 

The following table sets forth the names and relatedindustries of our ten largest consumers in 2007:

 
| **Ten  Largest Consumers  (listed in order of total GWh of electricity purchased from us in 2007)** | ** ** | **Industry** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------|------------|
| Companhia Siderúrgica Paulista – COSIPA                                                   |       | Steel        |       |
| Usinas Siderúrgicas de Minas Gerais S.A. — USIMINAS                                       |       | Steel        |       |
| Ligas de Alumínio S.A.                                                                         |       | Ferroalloys  |       |
| Companhia Brasileira de Carbureto de Cálcio – CBCC                                        |       | Ferroalloys  |       |
| White Martins Gases  Industriais S.A.                                                               |       | Chemical     |       |
| Italmagnésio Nordeste S.A.                                                                     |       | Ferroalloys  |       |
| Companhia Ferro Ligas Minas Gerais                                                                  |       | Ferroalloys  |       |
| Saint Gobain Materiais Cerâmicos Ltda                                                          |       | Chemical     |       |
| Belgo Siderurgia S.A                                                                                |       | Steel        |       |
| Votorantim Metais e Zinco S.A.                                                                      |       | Non-ferrous  |       |

 

As a result of our strategy to maintain and capture alarger market share in the free market, we have entered into contracts withlarge Free Consumers within and outside of Minas Gerais leading to electricitysales volume in 2007 of 17,904 GWh to those customers. As a result of theunbundling, most of our contracts with large consumers within our concessionarea were assigned to Cemig Generation and Transmission in 2007. Most of our largeclients, that represent almost 50% of the MWh volume of our energy sold, havealready contracted to buy electricity from Cemig Generation and Transmissionfor the next several years. Consumers that opt to become Free Consumers areprimarily industrial consumers whose demand generally exceeds 3 MW. Consumersthat consume between 500 kW and 3 MW may opt to purchase energy from othersources, if such source is a renewable energy source, such as smallhydroelectric facilities or biomass. A total of 791 of our clients whichcurrently purchase electricity at regulated rates (“captive consumers”)representing annual sales revenue of R$853 million (or 7.8% of our annual salesrevenue), may elect to become Free Consumers or opt to purchase energy fromalternative sources.

 

In 2008, we entered into two relevant groups ofcontracts with large Free Consumers. The first group of contracts was with theVotorantim Group, through which we will provide variable amounts of energy,from the current 145 average MW up to 670 average MW in some years. The totalamount of this group of contracts is approximately R$10.5 billion, and willexpire in 2028. These contracts are expected to generate revenue to CEMIG ofapproximately R$500 million per year through their expiration in 2028. Thesecond group of contracts was signed on May 26, 2008, with theArcelorMittal Group, for the provision of up to 313.5 average MW (twice thevolume we currently provide to the ArcelorMittal Group). The total amount ofthis second group of contracts is approximately R$4.4 billion and will expirein 2020. This group of contracts represents revenue to CEMIG of approximately R$360million per year through the expiration of the contracts in 2020.

 

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*Billing*

* *

Our monthly billing and payment procedures for electricity supply varyby consumer category. Our large consumers with direct connections to ourtransmission network are generally billed on the same day their meters areread. Payment is required within five days after delivery of the bill. Otherconsumers receiving high and medium voltage electricity (approximately 8,000consumers supplied at a voltage level equal to or greater than 2.3 kV orconnected by underground distribution lines, with the exception of publicsector entities) are billed within one (70%) or two (30%) days of their meterreading and payment is required within five days after delivery of the bill.Our remaining consumers are billed within seven days of their meter reading andpayment is required within 10 days after delivery of the bill or 15 days afterdelivery of the bill in the case of public sector entities. Bills are preparedfrom meter readings or on the basis of estimated consumption.

 

*Seasonality*

* *

Our sales are affected by market seasonality. Usually, an increase inconsumption by industrial and commercial consumers occurs in the third fiscalquarter due to increases in industrial and commercial activities. In addition,there is generally an increase in usage across all consumer categories duringthe summer months of January, February and March due to the increase intemperatures. Certain figures representing fiscal quarterly consumption byfinal consumers from 2005 through 2007, in GWh, are set forth below:

 
| **Year**         | ** ** | **First Quarter** | ** ** | **Second Quarter** | ** ** | **Third Quarter** | ** ** | **Fourth Quarter** | ** ** |
|------------------|------------|------------------------|------------|-------------------------|------------|------------------------|------------|-------------------------|------------|
| 2005(1) (2) |       | 8,622                  |       | 9,730                   |       | 9,867                  |       | 10,140                  |       |
| 2006 (1) (2)     |       | 9,485                  |       | 9,619                   |       | 9,901                  |       | 9,886                   |       |
| 2007 (1) (2)     |       | 9,337                  |       | 10,016                  |       | 10,238                 |       | 10,488                  |       |

 

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(1)            Includes consumption by Sá Carvalho S.A., UsinaTérmica Ipatinga S.A., Usina Térmica Barreiro S.A., Cemig PCH S.A. andHorizontes Energia S.A.

(2)            Does notinclude supply to other concessionaires.

 

Consumption byresidential consumers remains sluggish and has not returned to pre-rationinglevels.

 

**Competition**

** **

*Contracts with Free Consumers*

* *

We had 154 contracts with Free Consumers at December 31, 2007. 16 ofthese contracts are with companies located outside of our distributioncompany’s concession area and represent 2,210 GWh of energy per year. Thesecontracts with Free Consumers have an average term of three to ten years, andrepresent a total volume of approximately 17,500 GWh/year. Of our previouscaptive consumers, only 17 did not sign contracts with us and instead opted tobecome Free Consumers. These 17 formerly captive consumers represented anannual volume of 882 GWh, equivalent to 5.0% of the total volume of electricitywe sold during 2007. Another 21 consumers, representing approximately 2,923GWh/year, elected to opt out of the ACR and choose their own generationsubsidiary as a supplier.

 

In addition to our sales in the ACL auctions, we have been successfulin entering into agreements in the ACR that represent a total volume of 12,379GWh/year. These contracts have a term of eight years, beginning in 2006, andthirty years beginning on January 1, 2008 and 2012.

 

Through this strategy we have been successful in the sale of thegreater part of our existing generation capacity through contracts which willmostly be renewed beginning in 2010. At that time, demand of electricity inBrazil is expected to exceed supply, which should result in better priceconditions than in the current market where supply exceeds demand.

 

*Concessions*

* *

Each concession that we currently hold is subject to a competitive biddingprocess upon its expiration. However, in accordance with the Concessions Law,existing concessions may be renewed without a bidding process by the FederalGovernment for an additional period of up to 20 years upon application by theconcessionaire, provided the concessionaire has met minimum performancestandards and the proposal is otherwise acceptable to the Federal Government. On September 22, 2004, we applied to

 

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ANEEL for a 20-yearrenewal of the concessions of the Emborcação and Nova Ponte HydroelectricPlants. On June 14, 2007, the Federal Government published MinisterialOrder 124, extending the concessions of these power plants for a period of 20years, beginning on July 24, 2005.

 

In addition, it is possible that a number of our large industrialclients may become SPPs pursuant to the Concessions Law in order to obtain theright to generate electricity for their own use. The granting of certainconcessions to our large industrial clients could adversely affect our resultsof operations.

 

**Raw Materials**

** **

Our principal raw materials expense is the purchase of fuel oil, whichis consumed by our three thermoelectric plants in the electricity generationprocess. Fuel oil consumption for the year ended December 31, 2007represented an expense of R$58.4 million. See “Item 5. Operating and FinancialReview and Prospects” and “The Brazilian Power Industry—Regulatory Charges” inAnnex A. We believe that supplies of fuel oil are readily available.

 

**Other Businesses**

** **

*Natural Gas Distribution*

* *

Gasmig was established in Minas Gerais, Brazil in 1986 for the purposeof developing and implementing the distribution of natural gas in Minas Gerais.We own approximately 55% of Gasmig and Petrobras, through its subsidiaryGaspetro—Petrobras Gas S.A., owns 40% of Gasmig. The remaining shares are ownedby Minas Gerais Participações S.A., or MGI, the investing body of the StateGovernment, and by the city of Belo Horizonte.

 

In January 1993, the State Government granted Gasmig an exclusive30-year concession for distribution of natural gas covering the entireState of Minas Gerais and consumers located within it. Gasmig’s marketingefforts focus on its ability to provide a more economically efficient andenvironmentally friendly alternative to oil, liquefied petroleum gas (LPG) andwood. In 2007, Gasmig supplied approximately 1.8 million cubic meters of gasper day to 276 consumers: 177 industrial and commercial clients, 90 vehiclenatural gas (VNG) retail distribution stations, two thermal power plants andseven distributors of compressed natural gas (GNC). Gasmig supplied 0.08million cubic meters of gas per day to thermal power plants and 1.72 millioncubic meters of gas per day to retail consumers. In addition to serving theconventional market and the thermal power plants, Gasmig also supplied eightclients with re-gasified liquefied natural gas (LNG). In 2007, Gasmigdistributed approximately 4.0% of all natural gas distributed in Brazil.

 

On August 25, 2004, CEMIG, Gasmig, Gaspetro and Petrobras enteredinto an Association Agreement, pursuant to which CEMIG agreed to sell a 40%equity interest in Gasmig to Gaspetro, a subsidiary of Petrobras. Under theterms of the Association Agreement, Petrobras agreed to make investments toexpand the capacity of the current pipelines connected to the Gasmigdistribution network as well in the construction of new pipelines, and CEMIGand Gaspetro agreed to fund Gasmig’s capital expenditure plan to expand itsdistribution network.

 

The transaction was implemented on December 15, 2004 whenPetrobras, through its subsidiaries Gaspetro and TSS, concluded its acquisitionof a 40% equity interest in Gasmig. On July 26, 2006, TSS was merged intoGasmig. As a condition to such investment, Petrobras and CEMIG entered into aShareholders Agreement in which CEMIG agreed with Petrobras and itssubsidiaries to share in the management of Gasmig. See “Item 10. AdditionalInformation—Material Contracts—Gasmig Shareholders Agreement and Association Agreement”.On December 15, 2004, Gasmig executed an additional supply contract withPetrobras which guarantees a gradual increase in supply of up to 5.1 millionm3/day of natural gas, in addition to the 3.5 million m3/day that waspreviously contracted for. This additional supply agreement is for the supplyof natural gas to the regions of the “Steel Valley” (*Vale do Aço*)and the South of Minas Gerais, and also for expansion of service to the regionsof Greater Belo Horizonte, the *Zona da Mata*(in the Southeast of Minas Gerais) and the *Campos das Vertentes*(historic region), in the industrial, commercial, automotive and residentialmarkets. The additional supply agreement has a term of 20 years, and isscheduled to begin the commercial supply in 2009, under this agreement theprice will be established based on the international oil price in the New Yorkmarketplace.

 

We expect that the association with Petrobras will expand Gasmig’sdistribution capacity, as our ability to offer natural gas to our consumers willincrease significantly with the implementation of Petrobras’s investments inpipelines. We expect that Gasmig’s capital expenditures for 2008 and 2009 willbe mostly used for the expansion of our distribution network in highlyindustrialized areas 

 

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of Minas Gerais. Gasmig has already begun thenecessary expansions to serve the regions of the “Steel Valley” and theSouthern region of the State of Minas Gerais.

 

Gasmig is not a consolidated investment in our financial statements inaccordance with Emerging Issues Task Force (“EITF”) Issue No. 96-16,“Investor’s Accounting for an Investee When the Investor Has a Majority of theVoting Interest but the Minority Shareholder or Shareholders Have Certain Approvalor Veto Rights.”  We consolidatedGasmig’s revenues and expenses for the period from January 1, 2004 toDecember 15, 2004, the date of our sale of a 40.00% equity interest inGasmig to Petrobras.

 

Other than with respect to the liquefied natural gas (LNG) supplied toGasmig by a joint venture between Petrobras and White Martins Gases IndustriaisLtda. (“White Martins”), Gasmig purchases all its natural gas needs fromPetrobras, and such gas is mainly provided by Petrobras’ own natural gasdeposits. Our relationship with Petrobras is governed by two long termagreements, expiring in 2020 and 2028. The price Gasmig charges its clients isbased on the price charged by Petrobras plus a margin. Therefore, all the costsrelated to the purchase of natural gas are passed to the clients through thetariff.

 

Minas Gerais accounted for approximately 11% of the total energyconsumption in Brazil in 2007. Many energy-intensive industries such as thecement, steel, ferroalloys and metallurgy have significant operations in thestate. We estimate that the total demand for natural gas in Minas Gerais willamount to nearly 5 million cubic meters of gas per day by 2010, which exceedsthe projected available supply.  Gasmig’skey strategy is to expand its distribution network in order to serve theportion of the demand yet not reached. Gasmig is engaged in the development ofnew projects to extend its natural gas distribution systems to reach consumersin other areas of Minas Gerais, mainly in heavily industrialized areas. In 2006,Gasmig began supplying natural gas to three industrial companies and twovehicle natural gas (VNG) retail distribution stations in the region of the *Vale do Aço* (“Steel Valley”), thus concluding the firstphase of service to that region of the State of Minas Gerais. The averagevolume of natural gas that has been distributed in this first stage isapproximately 200,000 cubic meters/day. Gasmig brought forward its start date,in August 2006, for service to the Southern region of the State of Minas Gerais,through re-gasification of the liquefied natural gas (LNG) contracted withGaslocal, a company formed between association of Petrobras and WhiteMartins.  

 

In 2007, Gasmig had gross revenues of approximately R$539 million andnet income of approximately R$84 million. We recognized R$46.1 million as income from Gasmig in 2007.

 

                In2007, Gasmig invested approximately R$16 million in the expansion of its gaspipeline network to serve more clients in the State of Minas Gerais. The fundsto finance the expansion came primarily from its own cash flow and reinvestmentof the dividends payable to CEMIG. Currently, the natural gas pipeline whichbrings natural gas from the Campos oil basin (State of Rio de Janeiro, Brazil)operates at full capacity and further investment by the Federal Government willbe necessary to expand the capacity or construct a new pipeline to supply thegrowing natural gas demand in the State of Minas Gerais.

 

*Telecommunications, Internet and Cable Television*

* *

On January 13, 1999, we incorporated Empresa de Infovias S.A. inMinas Gerais, Brazil, as a joint venture with AES Força Empreendimentos Ltda.,an affiliate of AES Corporation Group. Currently, we own 100.00% of the commonshares of Empresa de Infovias S.A., which has an optical fiber-basedlong-distance communications backbone installed along our power grid usingoptical ground wire cables. This communications backbone is connected to anaccess network that is based on hybrid fiber-coaxial cable technology and isdeployed along our power grid. Pursuant to Brazilian telecommunications law, wealso make our network infrastructure available to other telecommunicationsproviders interested in leasing it.

 

Empresa de Infovias S.A. started its business operations inJanuary 2001. The main telecommunication services provided by Empresa deInfovias S.A. through its network are signal transportation and access, bothfor point-to-point and point-to-multipoint applications, delivered mainly totelecommunications operators and Internet service providers on a clear channelbasis. Empresa de Infovias S.A. is also extending its broadband Internetservices, currently available in the cities of Belo Horizonte, Poços de Caldas,Barbacena, Contagem, Sete Lagoas, Ipatinga and Uberaba, to other cities in MinasGerais.  

 

Empresa de Infovias S.A. provides the network for cable televisionservice in 12 cities in Minas Gerais pursuant to a 15-year serviceagreement with WAY TV Belo Horizonte S.A. (“WAY TV”) and BrasilTelecomunicações S.A., each a holder of concessions to provide cable televisionand Internet service in certain cities in Minas Gerais, under which Empresa deInfovias S.A. allows these companies to use its network infrastructure. Inreturn, WAY TV and Brasil Telecomunicações are obligated to deliver to Empresade 

 

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Infovias S.A. a percentage of the revenues derivedfrom their cable television and Internet subscribers. At December 31,2007, these two companies had approximately 83,923 cable television subscribersand 69,887 Internet service subscribers.

 

Empresa de Infovias S.A. held a 69.25% equity interest in WAY TV,including 49.9% of its common shares.  OnNovember 12, 2007, Empresa de Infovias S.A. received final approval from theNational Telecommunications Agency (*Agência Nacional deTelecomunicações*) for the sale of its equity interest in WAY TV toTNL PCS Participações S.A., an affiliate of the OI Group.  The sale was consummated on November 14, 2007for approximately R$103.4 million, which represented the R$91.4 millionpurchase price plus interest due to such purchase price being held in escrowsince the signing of the sale contract on August 1, 2006.  

 

On June 4, 2008, CADE approved the sale, subject tocertain restrictions.  Among otherthings, the new owner may not demand exclusiveness in the use ofthe  network infrastructure used to distribute WAY TV’ssignal.  In addition, for a two-yearperiod the new owner will not be able to use, in the cities where WAY TV hadoperations, wireless Internet frequencies, and will be prohibited, during thesame period, to use MMDS (microwave) frequencies or buy any company that has anauthorization, permission or concession for that purpose.

 

Empresa de Infovias S.A. also provides intra-company data transmissionservices to us pursuant to a five-year agreement signed in 2001 and renewed inOctober 2007.  We use this service for internalcommunications as well as for certain communications with our consumers. In2007, Empresa de Infovias S.A.’s gross revenues were R$79.8 million, while itsnet income was R$56.9 million.

 

Empresa de Infovias S.A.’s capital expenditures for the past five yearswere an aggregate of R$88 million, and its capital expenditures for 2008 areexpected to be mostly used for expansion of its telecommunications network.

 

*Consulting and Other Services*

* *

We provide consulting services to governments and public utilitycompanies in the electricity industry in order to derive additional revenuesfrom the technology and expertise we have developed through our operations.During the past ten years, we have provided such services to governmentagencies and utilities in ten countries, including Canada, Paraguay, Hondurasand El Salvador and to the government of Panama.

 

On January 9, 2002 we created Efficientia S.A., or Efficientia, inMinas Gerais, to provide project efficiency optimization solutions andoperational and management services to energy supply facilities. We have a 100%interest in Efficientia, which began operating in 2003. Efficientia hasincreased its market share and revenues in the Brazilian market for specializedconsultancy services every year since it began operations. Such servicesinclude consultancy in the areas of efficiency, energy solutions, reduction ofnon-technical losses in other electricity distribution concession holders andthe provision of preventive maintenance services.

 

In 2007, Efficientia had net income of R$1.2 million. Efficientia’sgross revenues in 2007 were R$6.5 million, a 51.2% increase from 2006. Thisincrease in gross revenue was achieved with operational costs of R$4.4 million,25.71% more than in 2006. Highlights of the consultancy projects of Efficientiain 2007 include consulting with respect to the implementation of twocogeneration power plants that use residual gas from metallurgy facilitiesoperations and of three energy savings solutions for electrical systems. 

 

In partnership with Concert Technologies S.A.,Nansen S.A. Instrumentos de Precisão, Leme Engenharia Ltda. and FIR CapitalPartners Ltda, we created Focus Soluções Tecnológicas S.A. in August 27, 2007,which name was changed in 2008 to Axxiom Soluções Tecnológicas S.A., tooffer solutions in technology and systems for operationalmanagement of public service concession holders, including electricity, gas,water, and sewerage and other public utility companies. We expect thiscompany to be fully operational in the last quarter of 2008.

 

The Strategic Technology Management Center (CGET), created in 2005, isa non-profit entity whose objectives include: studies and research, developmentof alternative technologies, production of technical and scientific informationand knowledge, encouragement of industrial development measures, plans andprograms, projects for research and incorporation of developed or adaptedtechnological innovations, and implementation of centers of excellence andinstitutions for the development of studies and provision of technologicalservices.

 

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**Environmental Matters**

** **

*Overview*

* *

Our generation, transmission and distribution activities are subject tocomprehensive federal and state legislation relating to the preservation of theenvironment. See “The Brazilian Power Industry—Environmental Regulations” inAnnex A. The primary environmental authorities in the State of Minas Gerais are*Fundação Estadual do Meio Ambiente*(State of Minas Gerais Environmental Foundation, or FEAM), *InstitutoMineiro de Gestão das Águas* (State of Minas Gerais Water ManagementInstitute, or IGAM), *Secretaria de MeioAmbiente e Desenvolvimento Sustentável* (State of Minas GeraisEnvironmental and Sustainable Development, or SEMAD), and *Conselho Estadual de Política Ambiental*(State of Minas Gerais Environmental Policy Council, or COPAM). 

 

At the Federal level, the main authorities are *Conselho Nacional de Meio Ambiente*(National Environment Council, or CONAMA), *InstitutoBrasileiro do Meio Ambiente e dos Recursos Naturais**Renováveis* (the Brazilian Institute of theEnvironment and Natural Renewable Resources, or IBAMA), *InstitutoChico Mendes de Conservação da Biodiversidade* (Chico MendesInstitute of Biodiversity Conservation, or ICMBIO) and *Agência Nacional de Águas*(National WaterAgency, or ANA).

 

We believe that we are in compliance in all material respects with therelevant laws and regulations. In 2007, the Itutinga and Nova Pontehydroelectric plants maintained their NBR ISO 14001/2004 environmentalcertifications. We are certified under the Cemig Environmental ManagementSystem (EMS) for our operations in a total of 180 municipalities, and for ourmaterials storage and logistics warehouses, the Camargos, Jaguara, Volta Grandeand Três Marias hydroelectric power plants, the Igarapé thermal power plant,the Volta Grande environmental station, the Galheiros Environmental Reserve,and the management of the industrial safety, property management andoperational contingency services.

 

Of our transmission lines working at above 230 kV, 1,026km arecertified under the Cemig Environmental Management System (EMS), and 2,120kmare certified under our Integrated Management System, under the 9001:2000 and18001 standards, and under the Cemig Environmental Management System (EMS).

 

In addition we obtained the following new certifications for CEMIG’sgenerating facilities in 2007: 

 

•                  for the São Simão, Miranda andRosal hydroelectric power plants ( 2,173 MW): NBR ISO 14001:2004, valid until2010; 

 

•                  for the Emborcação and Salto Grandehydroelectric plants (1,296 MW): Cemig Environmental Management System (EMS).

 

Our installed generationcapacity certified under the Cemig Environmental Management System (EMS)increased from 1,939 MW in 2006 to 5,406 MW in 2007, representing 82.3% of ourtotal generating capacity as of December 31, 2007. 

 

In 2007, for the eighth consecutive year, we were selected to be acomponent of the Dow Jones Sustainability Index (DJSI World Index) and thisyear we were selected as the world leader in the “utilities supersector” ofthat index – which includes providers of electricity, gas distribution, watertreatment, distribution and sewage services, and other public utility services.We were also selected for the third consecutive year for inclusion in the SãoPaulo Stock Exchange Sustainability Index (*Índice de SustentabilidadeEmpresarial*). 

 

In accordance with our environmental policy, we have establishedvarious programs for prevention and control of damage, aiming to limit ourrisks related to environmental issues.

 

In 2007, we invested approximately R$7.3 million in environmental complianceprojects for plant and equipment, and in the implementation of new projects,and also spent R$36.8 million on operational and maintenance expenses for ourcurrent activities, such as final disposal of waste, putting environmentalmanagement systems in place, audits, planting of riverside forests, fishcultivation, putting tree pruning and oil policies in place, environmentaleducation programs, maintenance of conservation units, training and otheractivities. We also invested R$858 thousand in environmental research and development projects carried out jointlywith universities and research institutes.

 

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*Environmental Licensing*

* *

Applicable law in Brazil requires that licenses be obtained in connectionwith the construction, installation, expansion and operation of any facilitythat utilizes environmental resources, causes environmental degradation, orpollutes or has the potential to cause environmental degradation or pollutionor to harm archaeological heritage. Generally, state governments manage theenvironmental licensing process for facilities that are expected to impact onlythat state. However, the Federal Government manages the environmental licensingprocess for facilities that are expected to have an environmental impact onmore than one state and/or are located between two or more states.

 

COPAM Regulatory Ordinances No. 17, dated December 17, 1996,and No. 23, dated October 21, 1997, provide that operational licensesshall be renewed from time to time for periods of four to eight years dependingon the size and pollution potential of the facility. Aimed at surveying andrescuing archaeological wealth that has not been previously considered, theprovisions of Ordinance No. 28, dated January 31, 2003, of *Instituto do Patrimônio**Histôrico e Art**ísticoNacional* (National Historical and Artistic Heritage Institute), or IPHAN,set forth that the renewal of operational licenses for hydroelectric powerplants shall be conditioned on a favorable opinion of IPHAN concerningarchaeological studies on the depletion area of the reservoir. These studiesare to be sponsored by the plant operator.

 

Gasmig’s distribution of natural gas through pipelines in Minas Geraisis also subject to environmental control. We believe that all licenses for theregular operation of Gasmig’s activities have been obtained.

 

The environmental licenses for the operation of the Natural GasDistribution Network were duly issued by the State Environmental Foundation(FEAM). 

 

*Corrective Environmental Operation Licensing*

* *

Pursuant to Resolution No. 6, dated September 16, 1987, ofCONAMA, environmental impact assessment studies must be undertaken, and acorresponding environmental impact assessment report must be prepared, for allmajor electric generation facilities built in Brazil after February 1,1986. While studies are not required for facilities built prior toFebruary 1, 1986, such facilities must obtain corrective environmentaloperation licenses, which may be acquired by filing a form containing certaininformation regarding the facility in question. Obtaining the correctivelicenses for the projects which began operations before February 1986 requirespresentation to the competent environmental body of an environmental report containingthe characteristics of the project, the environmental impacts of theconstruction and operation, and also the mitigating and compensatory measuresadopted or in the process of being adopted by the organization carrying out theproject.

 

Federal Law No. 9,605, dated February 12, 1998, sets forthpenalties for facilities that operate without environmental licenses. In 1998,the Federal Government issued Provisional Measure No. 1,710 (currentlyProvisional Measure No. 2,163/41), which establishes the potential forproject operators to enter into agreements with relevant environmentalregulators for the purpose of coming into compliance with Federal LawNo. 9,605/98. Accordingly, we have been negotiating with IBAMA and FEAM toobtain the corrective environmental operation licensing for all our plants thatbegan operating prior to February 1986. Generation facilities locatedwithin the State of Minas Gerais fall within the jurisdiction of FEAM forpurposes of corrective licensing. We have agreed with FEAM to bring ourfacilities located in Minas Gerais into compliance on a gradual basis. We donot currently anticipate any costs and commitments in connection with anyrecommendations that may be made by IBAMA and FEAM.

 

Currently, those CEMIG generation and transmission facilities thatstarted operations before the Brazilian environmental legislation was passed,and which have not obtained corrective licensing, have already  filed applications before the appropriate environmentalbodies. 

 

We currently have operating licenses for the following facilities:(i) hydroelectric plants: São Simão, Aimorés, Amador Aguiar I, AmadorAguiar II, Igarapava, Irapé, Itutinga, Miranda, Nova Ponte, Porto Estrela,Rosal,  Funil, Queimado and SáCarvalho,  (ii) small hydroelectricplants: Pai Joaquim, Rio de Pedras, Santa Luzia, Salto dos Moraes, Poquim andPiçarrão, (iii) thermoelectric plants: Barreiro and Formoso, and(iv) the wind farm: Morro do Camelinho.

 

The environmental licenses, either issued by state or federal bodies,are subject to several conditions imposed in light of the foreseenenvironmental impacts. In extreme circumstances, the failure to comply withsuch conditions may result in the revocation of the license. We believe we arein compliance with the requirements mentioned in our licenses. Environmentallicenses are obtained upon conditional requirements which have to be met duringthe period of their validity. Non-compliance with these conditionalrequirements can result in application of administrative penalties, includingfines and repeal of the environmental license. CEMIG has 

 

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been complying with the demands of the environmentalconditions of the licenses, and periodically sends reports to the environmentalregulatory authorities.

 

*Compensation measures*

* *

According to Federal Law No. 9,985, dated July 18, 2000, andcorresponding Decree No. 4,340, dated August 22, 2002, the companieswhose activities are deemed to cause high environmental impacts are required toinvest in protected areas in order to offset those impacts.  Originally, these companies were required toinvest at least 0.5% of total amounts invested in implementation of itscorresponding project in activities and areas defined by environmental agents.However, a decision from the Brazilian Supreme Court ruled for theunconstitutionality of such minimum percentage. Accordingly, each enterpriseshall have its environmental compensation stipulated depending on its specificdegree of pollution or harm to the environment.

 

Therefore, during the licensing procedure, in light of theenvironmental impacts identified by the environmental assessment studiespresented by the operator, environmental bodies shall determine the amount tobe invested and which protected areas shall be benefited.

 

The criteria for environmental and social compensation have not beenclearly defined, and there is a possibility that requests from environmentalagencies, the Public Attorneys’ Office, NGOs or affected populations may beadded to those traditionally proposed. Due to these uncertainties, licensing(including corrective licensing), timing and budgets of new projects, and eventheir feasibility, may be affected. Discussions are currently in progress withofficial environmental bodies (at both the federal and state level) for thepurpose of establishing criteria to govern environmental compensations.

 

A work group created by the Brazilian Federal Government approvedResolution No. 371, dated April 5, 2006, by the National EnvironmentalCouncil which set forth criteria for charging environmental compensation. Inthe approved resolution, the maximum percentage to be applied to the totalvalue of a project for calculation of the compensation is not stated, however arange between 0.5% and 5% of the value of the project is currently beingdebated. The resolution does not state whether the payment of environmentalcompensation will cover projects put in place before the legislation, whichwould include the majority of CEMIG’s facilities. As a result, any decision tobackdate compensation may result in additional costs for us.

 

In the state of Minas Gerais, where CEMIG has most of its facilitiesand enterprises, the Chairman of the state’s Environmental Policy Council(COPAM) issued Regulatory Ordinance No. 94 in April 2006, applying anenvironmental compensation charge, at rates between 0.5% and 1.1% of the totalamounts invested in the implementation of the projects that cause environmentalimpacts. This regulatory ordinance also indicated that the compensation chargeapplies to projects implemented before the issuance of the new legislation. Wehave not yet assessed what effects such legislation will have on CEMIG, butdepending on the manner in which it is applied, it could result in additionalcosts for CEMIG.

 

*Fishways*

* *

The dams at each of our hydroelectric generation facilities canendanger fish that inhabit the adjoining reservoirs. To reduce the impact ofthese facilities on nearby fish populations, the State Government enacted StateLaw 12488 on April 9, 1997, requiring that migratory fish that passthrough dams will be redirected to fishways, through which they can passsafely. As of December 31, 2007, we had fishway projects installed at ourAimorés, Funil, Igarapava, Igarapé, Pandeiros and Salto de Moraes generatingplants. In April 2002 we sent COPAM a study relating to our dams. InJuly 2002 we received a response from SEMAD that requires us to provideadditional studies on the feasibility of installing fishways in our damslocated in Minas Gerais. Additional studies will be necessary at the followingplants: Pandeiros, Salto Paraopeba, Luiz Dias, Sá Carvalho, Sumidouro, and BomJesus do Galho. In 2008, we commenced a new project, the R&D200 project, which will studymigratory routes of the species that spawn in the lower to middle sectors ofthe Rio Grande, which may provide information on the need for transpositionmechanisms in the area. 

 

There has been no decision by the environmental authorities regardingthe building of fishway projects at CEMIG’s hydroelectric plants; andthere is a possibility that future decisions by the environmental authorities, orchanges in the environmental legislation, or even new information obtained fromthe studies that are in progress, may lead to a need for theconstruction of fishways at our hydroelectric plants.

 

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*Fish Management*

* *

In view of its policy for environmental conservation and sustainabledevelopment, CEMIG carries out numerous procedures to mitigate accidentsinvolving fish in its hydroelectric power plants, such as use of sonar andcounting to detect shoals; monitoring of oxygen in solution; and use of teamsof professional divers to assess shoals during activities with greaterenvironmental risk, such as startup and shutdown of rotors. Furthermore, we arecurrently developing research projects in partnership with universities tostudy more effective techniques to control the impact of our operations onfish.

 

In spite of these effortstwo incidents occurred, one in 2006 and one in 2007, at the Três Mariashydroelectric power plant, resulting in the death of approximately 17 tons offish in 2007 due to lack of oxygenation, according to the State ForestsInstitute and environmental police estimates (8.2 tons by our estimate).  The volume of dead fish was not estimated ormeasured in 2006. As a result the State Forests Institute imposed two fines onus, totaling approximately R$5.5 million. We are disputing the fines. Althoughwe do not believe the amount is a material liability for us, we areimplementing an environmental project in the affected region as a way ofresponding to the event and reaffirming our commitment to economic and socialdevelopment of the regions where we operate and where our projects are located.Monitoring of fish in the exit canals of several of our plants is being carriedout by specialist biologists, with the objective of becoming familiar with thedynamics of fish population over time, the periods of their greatest activityover the day, and also the locations of greatest density. With thisinformation, more effective techniques may be developed in the control of theimpact of the operation of the plant on fish.

 

CEMIG has a hydroelectric operation on the Pandeirosriver in the municipality of Januária, in the State of Minas Gerais, named thePandeiros Small Hydro Plant, operating since 1958, with installed generatingcapacity of 4.2 MW.  Due to theenvironmental characteristics of the Pandeiros river and its importance as alocation for the reproduction of fish that populate the São Francisco River,Minas Gerais State passed various items of legislation in 1995 and subsequentyears, for the protection of the river, which affected normal operation of thePandeiros plant.

 

In October 2007, at the end of a prolonged drought,fish deaths occurred in a lake associated with the Pandeiros River, 50kmdownstream from the Pandeiros plant. Since the area is downstream from thePandeiros plant, the Minas Gerais State Forests Institute associated theproblem with the operation of the plant, and, together with the Minas GeraisState Public Attorneys' Office, brought a legal action against CEMIG to providetechnical explanations about the event. In accordance with State ForestsInstitute Notice No. 251016 of October 18, 2007, the Pandeiros plant wasindicted and its operations were ceased.

 

CEMIG hired specialists who issued two technicalreports to assess the matter, from the point of view of river flows and fishpopulations, and has sent these studies to the State Forests Institute and tothe Public Attorneys' Office for consideration. Both reports concluded that thefish deaths resulted from natural causes arising from the natural dynamics ofthe Pandeiros River, relieving CEMIG of any responsibility for the events.  Operations at the Pandeiros plant  have not yet resumed.

 

**Urban occupation of rights of way and reservoir banks**

** **

*Gas pipelines*.  Our piped natural gas distribution networksare underground, crossing through inhabited areas, and using public rights ofway in common with underground piping utilities operated by other publicconcession holders and public agencies. This increases the risk of unauthorizedwork without prior communication and consultation of our gas distributionnetwork registers, and there is a possibility of this causing accidents, withpotentially significant personal, property and environmental damage. However,all our gas networks are explicitly, and intensively, marked and signaled.Gasmig, through its “Dig Safely” (“*Escavecom Segurança*”) program, has been building partnerships with thecommunity, mainly with public authorities and holders of concessions, inaddition to the companies which carry out digging in public rights of way, toensure that before digging close to the natural gas network, they telephoneGasmig’s 24-hour helpline and request support for safe execution of theirwork.

 

*Transmission lines*.  Several of the areas to which we have a rightof way in relation to our transmission lines have been occupied by unauthorizedfacilities (buildings, etc.) and dwellings. These occupations generate risks ofelectric shock and accidents involving people living at the location, andconstitute an obstacle for the maintenance of our electricity system. It isthus necessary to solve this situation over the coming years, either removingsome of the occupants, or introducing improvements to make it possible to livewith these occupations. Faced with the risks associated with this situation, weplanned two lines of action for the coming years. The first is preparation of adocument entitled “Diagnosis of areasinvaded and under risk of invasion, for strengthening of inspection activities,including installation of improvements in locations classified as having highinvasion risk”.  The company isidentifying the areas with potential for invasion, making possible decisions onmeasures and procedures in relation to control, monitoring and inspection ofthe transmission line paths where there is a high risk of invasion. The secondline of action involves the evacuationof areas already invaded. The withdrawal of people from these areasinvolves payment of indemnities, regularization of electricity connections andthe opening of areas for the construction of squares and streets.

 

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*Invasion of reservoir areas owned by CEMIG*

* *

Our power plants have security services to protect their properties,using both fixed and mobile units, as well as an electronic surveillance system(“SVE”). The banks of the reservoirs of our hydroelectric power plants havesigns indicating ownership, and advising of the existence of security systems.Trespassers are deterred by the mobile inspection unit’s periodic patrol of thereservoir banks. When trespassers are apprehended, police reports are filed,which are then sent to the Company’s legal department for review. Due to thevery large area and number of our reservoirs, the we are continually subject tonew invasions.  However, we are committedto preventing these invasions and any environmental damage to the PermanentPreservation Areas (*Áreas de PreservaçãoPermanente*, or “APPs”) around the reservoirs. 

 

In April 2006, our headquarters was invaded by social protesters, whowere participating in a meeting being held in connection with the 47th Meeting of the Governors of the Inter-AmericanDevelopment Bank (IADB). Minor damage was done to the Company’s property andfacilities. After this incident, we took measures to increase the protection ofour premises.

 

**Environmental regulations**

** **

Environmental issues can significantly impact the operations of ourcompany. For example, large hydroelectric power plants can require flooding ofconsiderable areas and as a result relocation of a considerable population. TheBrazilian Constitution gives the Federal Government, states and municipalitiespowers to enact laws designed to protect the environment and issue enablingregulations under these laws. While the Federal Government has the power to promulgategeneral environmental regulation, state governments have the power to enactspecific and even more stringent environmental regulation.

 

The “Brazilian National Environment System” (SISNAMA—*Sistema Nacional do Meio Ambiente*) wascreated for the purpose of protecting the Brazilian environment. It consistsof: an administrative body, the Governing Council (*Conselho Governamental*); a consultative and decision-makingbody, CONAMA; a central body, the Environment Ministry, or MMA (*Ministério do Meio Ambiente*); an executivebody, IBAMA and various local and sectorial bodies. The agencies that meritspecial attention are CONAMA and IBAMA. CONAMA carries out or approves studiesand assists and advises the Government Council on the official orders forgovernment policy on environmental and natural resources, and on decisions,within its attributed scope, on regulations and other legislativerules applicable to the Brazilian environment. IBAMA enforces the nationalenvironment policy and inspects, preserves and supports the use of naturalresources.

 

Law No. 6,938/81, of August 31, 1981, is known as theEnvironmental Policy Law, and regulates civil liability for damage to theenvironment. In legal terms, this responsibility has an “objective” nature, andis not only strict but also expands the list of liable parties adopting theprinciple of joint and several responsibilities. Irrespective of the nature ofthe offending act, demonstration of a cause-and-effect relationship between thedamage caused and an action or omission is enough to create a legal obligation,on the party responsible for the contamination, to redress the environmentaldamage. Also, compliance with environmental licenses does not eliminateenvironmental liability.

 

Activities which cause damage to the environment may also lead toadministrative and criminal fines, under Law No. 9,605, ofFebruary 12, 1998 (the Environmental Crimes Law). The effects of theaforementioned law apply to any person, individual or legal entity, who by anymeans contributes to damage caused to the environment to the extent of his/herfault, in the amount of the damage caused. This law provides that a legalentity may be held liable for conduct deemed harmful to the environment,provided that the infraction was committed in its interest or benefit, upon thedecision of its legal or contractual representatives or of its plenary board.Management and members of the board who are aware of any criminal conduct ofanother and are thus able to prevent it but do not do so, are, by theiromission, also considered participants in the crime.

 

The Federal Decree No. 3,179, issued in September 1999,established administrative fines applicable to conduct or activities damagingto the environment and to the regulations governed by the Environmental CrimesLaw. This Decree sets forth penalties, such as fines of up to R$50 million, andauthorizes facilities to be closed down.

 

In relation to water resources, Law No. 9,433 of January 8,1997 created the National Water Resources Policy, which was organized inaccordance with the various river basins of Brazil. This policy is implementedby the governmental and non-governmental agencies, and classifies water as apublic asset. Thus, no individual or company may appropriate the use of water,and any use of water does not result in absolute exclusion of all potentialusers.

 

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Also, public authorities must supply a justification for the concessionof rights to use water.

 

The right to use federal water is given by the National Waters Agency,or ANA (*Agência Nacional de Águas*),created by Law No. 9,984 of July 17, 2000, and regulated by DecreeNo. 3,692 of December 19, 2000, in collaboration with ANEEL. As wellas granting these rights, ANA also regulates and supervises the use of federalwater resources and implements the collection of charges for the use of water,at a ratio of 0.75% of the value of the energy generated. Permission for use ofnon-federal water resources must be obtained from the respective state-levelenvironmental/water resource agency.

 

The National Water Resources Policy also created the need for the grantof permission for the use of water in the production of electricity. At thephase of planning of the plant, application must be made by ANEEL to the waterresources authorities for reservation of water availability, which will betransformed into permission to use water resources and granted together withthe grant of concession for commercial operation of hydroelectric energy. Theplants which already are in operation, and have the concession grant,automatically also have the grant of the water resources right. However, whenapplication is made for renewal of the concession for commercial use ofhydroelectric energy, grant of the right to use the water resources must alsobe applied for.

 

For the construction of the hydroelectric power plant, Brazilianelectricity companies have to comply with several environmental protectionmeasures. First, an environmental impact study must be prepared by externalexperts, who should make recommendations on how to minimize the impact of theplant on the environment. The study, in conjunction with a environmental impactassessment report on the project prepared by the company, is then submitted tothe state or federal-level governmental authorities for analysis and approval.The project undergoes a process of licensing in three stages, which includes aPrior License which indicates the viability of the project, an InstallationLicense for the beginning of construction, and an Operation License for startupof the plant. Environmental licenses also have to be obtained for expansion ofthe plant or installation of new equipment. It should be mentioned that onbasis of the environmental impact studies conclusions, the issued license issubject to several conditions or requirements that must be observed; otherwisethe licenses may be revoked.

 

Installations that are considered to represent a considerableenvironmental impact are obliged by law to allocate a minimum of 0.5% of theirtotal investment costs to the creation of environmental preservation areas.However, a decision from the Brazilian Supreme Court ruled for theunconstitutionality of such minimum percentage. Accordingly, each enterpriseshall have its environmental compensation stipulated depending on its specificdegree of pollution or harm to the environment.

 

Under the Brazilian Forest Code (*Código FlorestalBrasileiro* – Law No. 4,771 of September 15, 1965), theland area surrounding water reservoirs, whether it is natural or artificial, isconsidered to be a permanent preservation area, imposing restriction on use.The amendments to the Brazilian Forest Code introduced by Provisional Measure2,166-67 of August 24, 2001 provide that the operator of a reservoir isobliged to acquire such surrounding areas with respect to any newprojects. The Forest Policy of the State of Minas Gerais (LawNo. 14,309 of June 19, 2002) and Decree No. 43,710 ofJanuary 8, 2004 does not oblige the operator to acquire the land areasurrounding the reservoir, but it does demand indemnity for the restriction onuse, in forms provided for by law. These rules will result in additional costsin connection with the installation of new hydroelectric power plants.

 

State Law 15,972 of January 12, 2006, governing environmentalinspection, changed the structure of the environmental agencies of Minas Geraisand made several provisions increasing the amounts of fines to be paid in theState and broadening the inspection mechanisms, which now include the MinasGerais Environmental Police. Some of its articles have not yet been regulated.We believe the promulgation and regulation of this law will strengthen theenvironmental inspection in the State of Minas Gerais, where the majority ofour facilities are located.

 

Any corporate entity involved in activities which cause pollutanteffects, or the potential for pollutant effects, or which involve productswhich are considered dangerous to the environment, is obliged to register withIBAMA. This registry involves quarterly payments of an environmental controland inspection charge—TCFA, which for our activities is approximately R$10thousand per year.

 

**Carbon Market**

** **

The KyotoProtocol came into effect on February 16, 2005. Under the Kyoto Protocol,reduction of greenhouse gas emissions through projects designed under the CleanDevelopment Mechanism, or CDM, may be converted into “Carbon Credits” andtraded worldwide. Legislation that would govern the carbon market in Brazil,with related tax incentives, is currently before the National 

 

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Congress in Brazil. We believe Brazil has great potential to generateCarbon Credits arising from clean energy projects that comply with the CDM.

 

We haveimplemented a strategy to study CDM project development opportunities in thecarbon market. In order to undertake CDM projects, we are training ourprofessionals, including through courses administered by USAID and the WorldBank.  We sponsored a course organized byUSAID and the World Bank at the State of Minas Gerais Industry Federation todiscuss CDM projects in the State of Minas Gerais.  In addition, we created amultidisciplinary task force to mobilize our wholly-owned subsidiaries andaffiliated companies, and retained consultants to identify projects that wouldallow us to obtain certificates of reduction of greenhouse gases.

 

Additionally, in 2007 weresponded to the Carbon Disclosure Project (CDP) Questionnaire, regardinginformation on risks and opportunities presented by climate change andgreenhouse gas emissions data on our business. Every year, we seek to quantifyour emissions and to publish our main initiatives regarding the reduction ingreenhouse gas emissions. Moreover, since water is our main raw material forthe production of energy (representing 97% of total raw materials), andconsidering the whole infrastructure required to transport the energy producedby the hydroelectric plants to the final consumer (transmission and distributionlines, towers, substations, plants, etc.), we believe that climate change couldaffect our business. In this regard, we are studying the possibility ofimplementing more CDM projects and evaluating carbon projects for each of ournew enterprises. 

 

**Operational Technologies**

** **

We continue to invest in automated monitoring and control equipment inconnection with our strategy of increasing efficiency and further modernizingand automating our generation, distribution and transmission systems.

 

*Load Dispatch Center*

* *

CEMIG’s System Operation Center (“COS”), located at our head office inBelo Horizonte, is the nerve center of our operations. It coordinates theoperations of our entire electricity and energy system, in real time, providingoperational integration of the generation and transmission of our energy. Italso provides the link with other generation, transmission and distributioncompanies. The supervision and control executed by the COS now extends to 44extra high and high voltage substations and 27 major generating power plants.

 

Through its activities the COS permanently guarantees the security,continuity and quality of our supply of electricity. The activities of the COSare supported by up-to-date telecommunications, automation and informationtechnology resources, and executed by highly qualified personnel.  The COS has a Quality Management System, withISO 9001:2000 certification.  

 

*Regional Distribution Operation Centers*

* *

Our distribution network is managed through seven *Centros de Operações Regionais de Distribuição*(Regional Distribution Operation Centers), or CODs. The CODs monitor andcoordinate our distribution network operations in real time. The CODs areresponsible for the supervision and control of 358 distribution substations,263,337 miles of medium voltage distribution lines, 10,194 miles ofsub-transmission lines and 6.4 million consumers in our concession area,comprising 774 municipalities of Minas Gerais.

 

We provided an average of 16,500 services a day in 2007. All of theCODs are certified according to the Quality Standard ISO 9001: 2000. There arevarious systems in use to automate and support the CODs processes includingtrouble call, field crew management, distribution substation supervision andcontrol, restoration of power, emergency switching, network disconnection andinspection. Technologies like geographic information system and radio/satellitedata communication help to reduce the consumer restoration time and to providebetter consumer attendance. In 2007, we automated over 400 reclosers, which aredevices that senseand interrupt fault currents and automatically restoreservice after momentary outages,installed along our distribution network, improving operation performance andreducing restoration time and costs. 

 

*Geospatial Information & Technology*

* *

We are intensively using geospatial and technical document managementtechnology to support and improve engineering processes. Geo-referencedinformation of the electrical network, satellite and aerial photographs of theconcession area, diagrams and technical document images are stored ingeospatial databases and can be easily retrieved by computers connected to ourcorporate 

 

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network, helping technicians to plan, design,construct, operate and maintain the generation, transmission and distributionnetwork. We are using mobile technology in service dispatch for distributionnetwork maintenance and medium and high-voltage network data acquisition.

 

*Internal Telecommunications Network*

* *

Our telecommunications network is one of the largest in Brazil. Itincludes high performance microwave links with 203 communication stations, anoptical system with 2,500 km of optical fibers and a mobile communicationsystem with 480 trunking radios.

 

*Corporate Data Network*

* *

Our corporate network integrates enterprise servers (one 649 MIPSMainframe processing the billing system and eight Risc machines for the ERP andthe new commercial systems), more than 8,000 Intel microcomputers, 359 serversand 1,450 units of connectivity equipment, serving 190 sites in 126 cities ofMinas Gerais. The centralized infrastructure uses modern servers and deviceswith service level agreements for hardware maintenance and software support.The process of reception of meter reading data, digital calculation ofelectricity bills, and issuance of electricity bills to consumers in CEMIG’ssecondary network is ISO-9001:2000 certified since 2005. In 2007, newtechnologies were implemented, improving the network performance andavailability. 

 

*IT Governance Program*

* *

We started an IT governance program in 2005.  It is based on two main principles: (i)aligning IT strategy with the overall strategy of the business; and (ii)helping the Company to manage the risks associated with implementing newtechnologies.

 

Numerous actions have been taken in recent years. The most importantwas the adoption of ITIL® best practices.  The following ITIL® processes and functions were prioritizedfor implementation: Incident Management, Configuration Management, ChangeManagement, Problem Management, Capacity Management, Service Level Management,and Service Desk.  In 2007, actions weretaken to establish an important functional area: the Project Management Office.The implementation of each of these functions and processes will help CEMIGensure that it is in compliance with the controls and procedures requirementsof the Sarbanes-Oxley Act.

 

*Call Centers*

* *

We have two call centers, both in Belo Horizonte. Clients can use atoll-free number to get information on their accounts and report serviceproblems. Both call centers are integrated with the technologies available inthe CODs, allowing us to give clients up-to-date information on service issues.The call centers have modern facilities, with a staff of over 1,100, and areable to receive about 100,000 calls per day. Clients can also contact us bye-mail, by fax or via our website. As an indication of the service qualityprovided, our call centers have had ISO 9001 Quality Certification since 2001. 

 

*Commercial Management System*

* *

To update the technology of our Consumer Information System (SICO),which has been on a mainframe platform since the 1970s, Cemig Distribution isinvesting R$178 million in a new Commercial Management System (SGC), based onthe CCS (Customer Care & Service), CRM (Customer Relationship Management)and BW (Business Warehouse) systems. This new system will serve not only low-voltage clients but medium- andhigh-voltage clients as well.  In 2007,through the “Evolution Project”, involving more than 200 specialists from CEMIGand the Aliança Consortium (Accenture, Newcom, Indra and BearingPoint), weadopted these systems.  

 

This process involved approximately 28,000 hours of development. A highvolume of tests, including stand-alone tests, assembly, software (assembly),integration, performance comparison and user acceptance, were performed toassure the quality of the SGC system. All high and medium voltage customers ofthe State of Minas Gerais and the low voltage customers of Divinópolis Countywere transferred to the new system by January 2008.  The remaining low voltage customers weretransferred in May 2008.

 

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*Maintenance and Repair Systems*

* *

The 10,194 miles of high voltage transmission lines in CemigDistribution’s network, operating at 34.5 kV to 161 kV, are supported by 53,495structures, mainly metal.  CemigGeneration and Transmission’s network has 3,081 miles of high voltagetransmission lines supported on 11,676 structures.  The majority of the service interruptions toour distribution and transmission lines are due to lightening, fire, vandalism,wind, and corrosion.  Cemig Distribution’sand Cemig Generation and Transmission’s entire high voltage transmission linesystems are inspected from the air once a year, using a helicopter equippedwith a gimbal-gyro-stabilized camera, followed by simultaneous visual andthermographic (infra-red) inspection. Land-based inspections are also carried out at intervals of between oneand three years, depending on the characteristics and age of the transmissionline, number of outages, type of structure, and the line’s importance to theelectricity system as a whole.  

 

To support emergencies involving fallen towers, we have used modernmodular aluminum structures. Most of our intervention on transmission lines isdone using live line methods. Being the first company in Brazil to use barehand live line techniques in the maintenance of transmission lines andsubstations, we have accumulated, through the last 31 years, significantexperience in this area. We have trained our staff in this area and havespecial vehicles and other necessary tools to support live and dead linemaintenance.

 

As a result of our partnership with Asea Brown Boveri (ABB) and DuPont, we have developed a retrofit project for the use of vegetable insulationoil in substation transformers. In 2007, we have successfully implemented thisproject and installed three of these vegetable oil filled transformers in theContagem 1, Itabiro and Pará de Minas 1 substations (two operating at 138 kVand 25 MVA and another operating between 69 kV and 15 MVA). In 2007, we havealso developed a retrofit of a mobile substation used in the process ofrestoration of a failing transformer, or to carry out preventive maintenance insubstations, that will be equipped with vegetable insulation oil.  Vegetal oil creates a revolution ininsulating fluids for transformers, because it has excellent features forelectrical insulation with high thermal stability and an ignition point farabove mineral oils. It is not a toxic product, and provides safe loading,increased transformer lifetime, more safety in use, and reduction of the riskof fire in electrical substations. It is 97% biodegradable in 21 days and doesnot have components that can adversely affect the environment.

 

Due to the special design features, combined with the vegetable oil andinsulating materials technology, CEMIG’s transformer, which was initiallydesigned for 25 MVA, at 138 kV, now can be overloaded until 43 MVA, during fourconsecutive hours, without loss of lifetime. These new values correspond topower reserve of 70%, increasing the reliability of the power supply toconsumers connected to the substation in which it is installed. These specialfeatures also provide higher lifetime expectancy for the transformer.

 

We also have crews strategically located throughout the State of MinasGerais to provide prompt service for the needs of our transmission anddistribution system, and to carry out routine maintenance and inspections atsubstations in accordance with technical requirements defined by ourengineering staff.

 

*Information Security Management*

* *

As part of the Corporate Information Security Project Plan for 2007, twoprojects to improve security needs and to address the requirements of theSarbanes-Oxley Act were prioritized and developed:  Classification and Handling of Informationand Computer Network Protection, which required a total investment of R$5.0million. 

 

An awareness program called “Information Security Update” was developedfocusing on the classification of Information, which involved 941 employees.

 

**Management Tools**

** **

*Enterprise Resource Planning*

* *

Our current Enterprise Resource Planning (SAP R/3), or ERP, was updatedin 2005 and has functions covering the following: accounting, cost and fundscontrol, budgeting, investment management, treasury, cash flow management,quality control, project management, inventory management, maintenance, assetcontrol, human resources management (including payroll, time management andpersonnel development), travel management, financial consolidation, salesmanagement, business information warehouse, corporate finance management, realestate, sales and distribution and a workflow functionality covering thefinance and supply chains. The ERP also includes data warehouse functionality,balanced scorecard and long-term cash flow monitoring.

 

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*QualityManagement Systems*

* *

We have been increasing our certification program in order to ensurethe functionality in our activities and greater efficiency in our results. Wehave received ISO 9001/2000 certification for, among others, the followingaspects of our business: consumer service offices, call centers, laboratories,maintenance of remote protection system equipment, data reception, billing, andour subsidiary Efficientia, the first and only Brazilian ESCO to receive ISO9001/2000 certification. Products and services certified include: new consumerconnections; billing; collection; product sales and services; network expansionand improvement; network operation; public lighting maintenance andrestoration; overhead lines and network maintenance and inspection; electricsystem planning; and substation and equipment maintenance and inspection.

 

Other processes have received NBR ISO 9001:2000 certification,including: processing, control and accounting of our payroll; planning,management and predictive engineering of the generation system; and monitoringof the safety of dams and built structures of generation, operated andmaintained by us.

 

In 2007, the following processes were certified under the ISO 9001:2000Quality Management System: (i) in Legal Proceedings Management: data bankmanagement for information, contracts and legal proceedings; and (ii) inHuman Resources: for union relations, and health, safety and well-being in theworkplace, and the Professional Education and Training Center. Other areas thatreceived certification include: Industrial safety, property assets andcontingency systems management; and Management of real estate property –acquisition, valuation and administration.

 

Currently more than 67% of our employees carry out their activities ina systematized form, in processes certified in conformity with internationalstandards.

 

In 2007, we maintained ISO 9001, OHSAS 18001 and Cemig EMS(Environmental Management System) certification for the Commercial Relationshipand Services Management unit at Montes Claros, for the Jaguara, Volta Grande,Três Marias and Camargos hydroelectric power plants and the Igarapé thermalplant. The Nova Ponte and Itutinga plants maintained their ISO 9001, OHSAS18001 and ISO 14001 certifications.

 

In 2007, the São Simão, Miranda and Rosal hydroelectric power plantsobtained certification under the Integrated Management System, ISO 9001, ISO14001 and OHSAS 18001. The Emborcação and Salto Grande hydroelectric powerplants received certification under ISO 9001, OHSAS 18001and Cemig EMS(Environmental Management System) — representing a total of 83% of ourinstalled generating capacity on December 31, 2007.

 

*Enterprise-wideRisk Management*

* *

With the assistance of a leading consulting firm chosen through a formalselection process, we began establishment of a Corporate Risk Management Systemin 2003, and consolidated it during the period of 2004 through 2006 inconnection with our unbundling process. As holder of a concession in theBrazilian electricity sector, we operate in environments where factors such ascorporate restructurings, regulations issued by energy sector governmentagencies, technological development, globalizations and changes in the consumermarket generate uncertainties and threats.

 

The implementation of a coherent risk vision and strategy at thecorporate level is a new management trend, encouraged not only by therequirements of the Sarbanes-Oxley Act and the methods recommended by theCommittee of Sponsoring Organizations (COSO II), but also by the perceptionthat management of risk is an essential part of a sustainable developmentphilosophy which aims to create value for shareholders.

 

Our Corporate Risk Management System aims to achieve the following:operate as an auxiliary in achievement of the objectives set by the strategicplan; create awareness among shareholders of the possible events that couldconstitute a risk of loss of value; structure the company to be able to takeproactive stances in relation to its risk environment; provide the company’sexecutives with a methodology and tools for effective management of risk; andprovide other areas of strategic management with input concepts and procedures,and factors that strengthen the company’s organizational control infrastructure.

 

CEMIG is working to provide the major risk management objective of anopen environment conducive to effective communications about risks and riskmanagement up, down and across the enterprise, so that a truly holistic,integrated, proactive, forward-looking and process-oriented approach is takento assess all key business risks and opportunities, not only those of afinancial

 

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nature.  During 2005 and 2006, CEMIG’s Corporate RiskManagement System was revised and updated for a second time in order to adaptto the regulatory changes implemented by the New Industry Model Law. We alsoinitiated the activities of the Corporate Risk Management Committee CGRC, whichwill approve the final version of the Corporate Risks Management Policy andpublished and implemented a Corporate Risk Management Procedures Manual.

 

CEMIG’s Electricity Risks Management Committee, or CGRE, created in2003, continues to propose policies and procedures for approval by the executiveofficers, according to corporate risk policy, to minimize risks in thecontracting (purchase and sale) of energy. The committee has members fromnumerous areas of the Company, including generation, distribution, sales, legaland financial. The CGRE givessupport to the decisions of the executive officers in relation to the Company’senergy commercialization to Free Consumers and participation in the CCEEauctions. Based on risk analyses, the CGRE proposes the maximum volumes thatcould be sold and the amounts purchased by distributors in the auctions.

 

CEMIG’s risk management also has the benefit of a Financial RiskManagement Committee, which was created (i) to monitor the financial risksrelated to volatility and trends of the inflation indices, exchange rates andinterest rates that affect our financial transactions, and which couldnegatively affect the Company’s liquidity and profitability, and (ii) toimplement guidelines for proactive operation in relation to the environment offinancial risks when implementing action plans.

 

**Property, Plant and Equipment and Intangible Assets**

** **

Our principal properties consist of the power generation plants andtransmission and distribution facilities described in this Item 4. Our net bookvalue of total property, plant and equipment, including our investment incertain consortia that operate electricity generation projects, was R$13,835million at December 31, 2007 (including ongoing construction projects).Generation facilities represented 44.3% of this net book value, transmissionand distribution facilities represented 51.04% and other miscellaneous propertyand equipment, including telecommunication facilities and intangible assets,represented 4.63%. The average annual depreciation rate applied to thesefacilities was 2.5% for hydroelectric generation facilities, 3.0% fortransmission facilities, 5.1% for distribution facilities, 14.6% foradministration facilities, and 8.3% for telecommunication facilities.  Apart from our distribution network, nosingle one of our properties produced more than 10% of our total revenues in2007. Our facilities are generally adequate for our present needs and suitablefor their intended purposes. We have rights of way for our distribution lines,which are our assets and do not revert to the landowner upon expiration of ourconcessions.

 

**Item 4A.**                 Unresolved StaffComments

** **

NotApplicable.

 

**Item 5.**           Operating and FinancialReview and Prospects

** **

*You should read the information contained in thissection together with our financial statements contained elsewhere in thisannual report. The following discussion is based on our financial statements,which have been prepared in accordance with U.S. GAAP and presented in reais.*

 

**General**

** **

We are a state-controlled energy company engaged, throughour subsidiaries, primarily in the generation, transmission anddistribution of electricity in Minas Gerais. According to ANEEL, at December 31,2007, we were the sixth largest electric power generation concessionaire inBrazil as measured by total installed capacity, and for the year ended December 31,2007, we were the largest electric power distribution concessionaire in Brazil,as measured by GWh of transported energy. We supplied approximately 96.1% ofthe electricity consumed in Minas Gerais during the year ended December 31,2007. See “Item 4. Information on the Company—Consumers and Billing.”  At December 31, 2007, we generatedelectricity at 52 hydroelectric plants, four thermoelectric plants and one windfarm and had a total installed generation capacity of 6,566 MW, of which thehydroelectric plants accounted for 6,382 MW. See “Item 4. Information on theCompany—Generation and Purchase of Electric Power.”  The State Government as our controllingshareholder establishes our operating and long-term strategy.

 

The following are our principal subsidiaries as of December 31,2007:

 

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·                                          Cemig Geração e Transmissão S.A. (100% interest). CemigGeneration and Transmission, which as of January 1, 2005 is engaged in thegeneration and transmission of energy.

 

·                                          CemigDistribuição S.A. (100% interest): Cemig Distribution, which as of January 1,2005 is engaged in the distribution of energy.

 

·                                          Sá Carvalho S.A. (100% interest). SáCarvalho is engaged in the production and sale of electric energy and holds theconcession to operate the Sá Carvalho hydroelectric power plant.

 

·                                          RosalEnergia S.A. (100% interest). Rosal is engaged in the production and sale ofelectric energy and holds the concession to operate Rosal hydroelectric powerplant.

 

·                                          UsinaTérmica Ipatinga S.A. (100% interest). Usina Térmica Ipatinga is an SPP engagedin the production and sale of electric energy at the Ipatinga thermoelectricand steam power plant.

 

·                                          Empresade Infovias S.A. (100.0% interest). In April 2006, we acquired 100% ofEmpresa de Infovias S.A. The principal activities of Empresa de Infovias S.A.are rendering telecommunications services and developing activities relatedthereto, through multiservice networks using optical fiber cable, coaxial cableand other electronic equipment.

 

·                                          EfficientiaS.A. (100% interest). Efficientia is engaged in rendering efficiency,optimization and energy solutions services, as well as providing operating andmaintenance services, to energy supply facilities. Efficientia initiatedoperations in the first quarter of 2003.

 

·                                          Horizontes Energia S.A. (100%interest). Horizontes Energia operates in the production and sale ofelectricity, as an independent power producer, at the Machado Mineiro and Saltodo Paraopeba hydroelectric power plants, in the State of Minas Gerais, and theSalto Voltão and Salto do Passo Velho hydroelectric plants in the State ofSanta Catarina. Horizontes Energia began operations in the first quarter of2003.

 

·                                          Usina Termelétrica Barreiro S.A.(100% interest). Usina Termelétrica Barreiro is an IPP engaged in theproduction and sale of electric energy of the Barreiro thermoelectric powerplant.

 

·                                          CEMIGPCH S.A. (100% interest). Cemig PCH is an independent power producer engaged inthe production and sale of electric energy of the Pai Joaquim small powerplant.

 

·                                          Cemig Capim Branco Energia S.A.(100% interest). Cemig Capim Branco Energia is engaged in the productionand sale of electric energy of Amador Aguiar Power Facility.

 

·                                          CEMIGTrading S.A. (100% interest).  CEMIGTrading S.A. is engaged in the purchase and sale of energy.

 

Our consolidated financial statements as of and for the years ended December 31,2007, 2006 and 2005 include the financial results of CEMIG and all of oursubsidiaries (operational and pre-operational) described above.  See Notes 2 and 9 to our consolidatedfinancial statements. As of December 31, 2007, we had the followingunconsolidated investments:

 

·                                          Rio Minas Energia Participações S.A.(“RME”) (25.0% interest).  RME isthe controlling shareholder of the Light group, with a 52.25% interest in itstotal registered capital. The main holdings of the Light group are as follows:Light Energia, which is engaged in the generation of electricity, Light SESA,which is engaged in the distribution of electricity, and Light Esco Ltda.,which is engaged in energy trading.

 

·                                          EmpresaParaense de Transmissão de Energia S.A. (“ETEP”) (jointly controlled, 18.19%interest).  ETEP is the holder of apublic service electricity transmission concession for the transmission lineoriginating at the Tucuruí Substation and ending at the Vila do CondeSubstation in the State of Pará. We acquired our interest in ETEP in August 2006.

 

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·                                          Empresa Norte de Transmissão deEnergia S.A. (“ENTE”) (jointly controlled, 18.35% interest).  ENTE is the holder of a public serviceelectricity transmission concession for two 500-kV transmission lines, thefirst from the Tucuruí Substation to the Marabá Substation in the State ofPará, and the second from the Marabá Station to the Açailândia Substation inthe State of Maranhão. We acquired our interest in ENTE in August 2006.

 

·                                          Empresa Regional de Transmissão deEnergia S.A. (“ERTE”) (jointly controlled, 18.35% interest).  ERTE is the holder of a public serviceelectricity transmission concession for the 230-kV transmission line from theVila do Conde Substation to the Santa Maria Substation in the State of Pará. Weacquired our interest in ERTE in August 2006.

 

·                                          Empresa Amazonense de Transmissão deEnergia S.A. (“EATE”) (jointly controlled, 15.79% interest).  EATE is the holder of the publicservice electricity transmission concession for the 500-kV transmission linesbetween the sectionalizing substations of Tucuruí, Marabá, Imperatriz,Presidente Dutra and Açailândia. We acquired our interest in EATE in August 2006.

 

·                                          Empresa Catarinense de Transmissãode Energia S.A. (“ECTE”) (jointly controlled, 7.50% interest).  ECTE is the holder of the publicservice electricity transmission service concession for the 525-kV transmissionline from the Campos Novos Substation to the Blumenau Substation in the Stateof Santa Catarina. We acquired our interest in ECTE in August 2006.

 

·                                          Companhia de Gás de Minas Gerais—GASMIG (jointlycontrolled, 55.19% interest).  Gasmigis engaged in the acquisition, transportation and distribution of natural gas.In December 2004, CEMIG sold 40% of its interest in Gasmig and enteredinto a Shareholders’ Agreement with Petrobras and Gaspetro in connection withsuch sale.

 

·                                          Companhia de Transmissão Centroestede Minas (jointly controlled, 51.00% interest). Companhia de Transmissão Centroeste de Minas is engaged inbuilding, implementing, operating and maintaining the 345 kV transmission linefrom the substation of the Furnas Hydroelectric Power Plant and a substationlocated in Pimenta.

 

·                                          Companhia Transleste de Transmissão(25.0% interest). Companhia Transleste de Transmissão is responsible forbuilding and operating the 345 kV transmission line connecting a substation locatedin Montes Claros and the substation of the Irapé Hydroelectric Power Plant.

 

·                                          Companhia Transudeste de Transmissão(24.0% interest). Companhia Transudeste de Transmissão is responsiblefor building, implementing, operating and maintaining the 345 kV transmissionline from Itutinga to Juiz de Fora.

 

·                                          Companhia Transirapé de Transmissão(24.5% interest). Companhia Transirapé de Transmissão is responsible forconstructing, implanting, operating and maintaining the 230 kV transmissionline LT Irapé — Araçuaí.

 

·                                          Transchile Charrúa Transmisión S.A. (49%interest). Transchile Charrúa Transmisión will be responsible forconstructing, installing, operating and maintaining the 220 kV transmissionline LT Charrúa — Nueva Temuco in Chile.

 

·                                          ConsórcioAHE Baguari**(34% interest). Consórcio AHE Baguariwas formed to build, operate andmaintain the Baguari Hydroelectric Plant, in the Rio Doce River basin,in the State of Minas Gerais, in the municipalities of Fernandes Tourinho,Governador Valadares, Periquito, Alpercata and Sobrália.

 

·                                          Hidrelétrica Cachoeirão S.A. (49%interest). The purpose of Hidrelétrica Cachoeirão S.A. is theconstruction and operation of a Small Hydro Plant (PCH), to be located on theManhuaçu River, in the municipality of Pocrane, in the State of Minas Gerais.The facility is currently under construction and its start-up is scheduled for September 2008.

 

·                                          Focus Soluções Tecnológicas S. A.(currently known as Axxiom Soluções Tecnológicas S. A.) (49% interest).The company was created on August 27, 2007 in order to provide completeservices of implementation and management systems to electricity sectorcompanies (generation, transmission and distribution). Focus SoluçõesTecnológicas S. A. is expected to begin operations by December 2008.

 

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·                                          GuanhãesEnergia S.A. (jointly controlled, 49% interest). Guanhães Energia S.A.wascreated in October 2007 in order to construct and operate various SmallHydro Plants (PCHs), whose aggregate capacity is 44MW, in the municipalities ofDores de Guanhães, Governador Valadares, Ipatinga and Ponte de Santo Antônio.Guanhães Energia S.A. is expected to begin operations in 2009.

 

·                                          Madeira Energia S.A. – MESA (10%interest). Madeira Energia S.A. – MESA is a special purpose companycreated to implement, build, operate and maintain the Santo Antôniohydroelectric plant, in the basin of the Rio Madeira, in the Northern region ofBrazil. This facility will have a generating capacity of 3,150 MW.  Madeira Energia S.A. – MESA is expected tobegin operations in 2012.

 

**Critical Accounting Estimates**

** **

The preparation of our consolidated financial statements in conformitywith U.S. GAAP requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities and the disclosure of contingent assetsand liabilities at the date of the financial statements, as well as thereported amounts of revenues and expenses during the reporting periods. Weevaluate our estimates on an ongoing basis and base them on a combination ofhistorical experiences and various other assumptions that we believe to bereasonable under the circumstances. Actual results could differ materially fromthose estimates. Our critical accounting policies that affect our moresignificant judgments used in the preparation of our consolidated financialstatements are set forth below.

 

*Regulatory assets*

* *

Due to changes in the electric utilities sector in Brazil in 2001 and2002 and related acts by regulatory bodies of the Federal Government, we haveconcluded that because the rate-setting structure in Brazil was designed torecover certain allowable costs, we are subject to the provisions of Statementof Financial Accounting Standards No. 71 “Accounting for the Effects ofCertain Types of Regulation,” or SFAS No. 71.

 

SFAS No. 71 requires rate-regulated public utilities such as CEMIGto record certain costs and credits allowed in the rate-setting process indifferent periods than for non-regulated entities. These costs and credits aredeferred as regulatory assets and are recognized in the consolidated statementof operations at the time they are reflected in rates. Accordingly, wecapitalize allowable incurred costs as deferred regulatory assets when there isa probable expectation that future revenue equal to the costs incurred will be billedand collected as a direct result of the inclusion of the costs in an increasedrate set by the regulator. The deferred regulatory asset is realized when wecollect the related costs through billings to consumers. ANEEL performs a ratereview on an annual basis. If ANEEL excludes all or part of a cost fromrecovery, that portion of the deferred regulatory asset is impaired and isaccordingly reduced to the extent of the excluded cost. We evaluate and revisethe accounting for our regulatory assets on an ongoing basis as new regulatoryorders are properly issued and account for our activities under SFAS No. 71.As we recognize regulatory assets in accordance with rulings of the regulatoryauthorities of the Federal Government, future regulatory rulings may impact thecarrying value and accounting treatment of our regulatory assets.

 

During 2001, the electricity markets in significant portions of Brazilexperienced rationing, or reduced availability of electricity to consumers, dueto low rainfall, reduced reservoir levels and Brazil’s significant dependenceon electricity generated from hydrological resources. These factors resulted inlower sales. In December 2001, electricity concessionaires in Brazil,including us, reached an industry-wide agreement with the Federal Governmentthat provided resolution to rationing related issues as well as certainelectricity rate-related issues. This agreement, known as the General Agreementof the Electricity Sector, generally allows for increased rates to be charged toelectric power consumers until the amounts lost by the power generation anddistribution concessionaires as a result of the rationing are recovered. Therate increases set forth in the General Agreement of the Electricity Sectorintended to reimburse rationing-related losses are expected to remain in effectfrom January 2002 for an average of 74 months. However, we do not expectto be able to collect the full amount of the rationing-related losses over thisperiod.

 

In addition, we are subject to the provisions of Emerging Issues TaskForce Issue No. 92-07 “Accounting by Rate-Regulated Utilities for theEffects of Certain Alternative Revenue Programs,” or EITF 92-07, whichestablishes a 24-month limit for collection of regulatory assets related tobilling losses. Accordingly, we were required to estimate this asset recoverybased on assumptions of future billings.

 

We perform periodic evaluations of the recoverability of our deferredregulatory assets in order to determine whether impairment provisions arenecessary based on applicable ANEEL regulations. We record loss provisions asnecessary. These

 

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provisionsare based on projections prepared by us, which projections may change inresponse to regulatory changes and other developments. See Notes 2(p) and4 to our consolidated financial statements. If ANEEL disallows a materialamount of capitalized costs to be included in future rates, the write-off ofthe regulatory assets may have a material adverse impact on our operatingresults.

 

*Valuation of assets*

* *

We have long-lived assets, including power generation plants. Many ofthese assets are the result of recent capital investments and have not yetreached a mature life cycle in construction. We assess the carrying amount andpotential impairment of these long-lived assets whenever events or changes incircumstances indicate that the carrying value may not be recoverable. Factorswe consider in determining whether an impairment review is necessary include asignificant underperformance of the assets relative to projected futureoperating results and significant negative industry or economic trends. Wedetermine when an impairment review is necessary through a comparison betweenthe expected undiscounted future cash flows and the carrying amount of theasset. If the carrying amount of the asset is the larger of the two amounts, animpairment loss is recognized by the amount that the carrying amount of theasset exceeds the fair value of the asset. The fair value is determined byquoted market prices, appraisals or the use of valuation techniques such asexpected discounted future cash flows. We must make assumptions regarding theseestimated future cash flows and other factors to determine the fair value ofthe respective assets. In determining estimated future cash flows, we considerhistorical experience as well as future expectations and estimated future cashflows are based on expected future rates and expected future consumer demand. Asignificant reduction in actual cash flows and estimated cash flows may have amaterial adverse impact on our operating results and financial condition.

 

*Accrual for contingencies*

* *

We are party to certain legal proceedings in Brazil arising in thenormal course of business regarding tax, labor, civil and other issues.

 

We account for contingencies in accordance with SFAS No. 5 “Accountingfor Contingencies.”  Such accruals areestimated based on historical experience, the nature of the claims, as well asthe current status of the claims. Accounting for contingencies requiressignificant judgment by management concerning the estimated probabilities andranges of exposure to potential liability. Management’s assessment of ourexposure to contingencies could change as new developments occur or moreinformation becomes available. The outcome of the contingencies could varysignificantly and could materially impact our consolidated results ofoperations, cash flows and financial position. Management has applied its bestjudgment in applying SFAS No. 5 to these matters.

 

*Employee post-retirement benefits*

* *

We sponsor a defined-benefit pension plan and defined-contributionpension plan covering substantially all of our employees. We have alsoestablished post-retirement health and dental care plans and pay life insurancepremiums. We account for these benefits in accordance with SFAS No. 87 “Employers’Accounting for Pensions” and SFAS No. 106 “Employers’ Accounting forPost-retirement Benefits other than Pensions.” We have applied SFAS 132I “Employers Disclosures about Pensions andOther Post-retirement Benefits” to disclose information about pension plans andother post-retirement benefit plans and have also applied SFAS No. 158 “EmployersAccounting for Defined Benefit Pension and Other Postretirement Plans”.

 

The determination of the amount of our obligations for pension andother post-retirement benefits depends on certain actuarial assumptions. Theseassumptions are described in note 16 to our consolidated financial statementsand include, among others, the expected long-term rate of return on plan assetsand increases in salaries and healthcare costs. In accordance with U.S. GAAP,actual results that differ from our assumptions are accumulated and amortizedover future periods and generally affect our recognized expenses and recordedobligations in such future periods. While we believe that our assumptions areappropriate, significant differences in actual results or significant changesin our assumptions may materially affect our pension and other post-retirementobligations.

 

*Deferred taxes*

* *

We account for income taxes in accordance with SFAS No. 109 “Accountingfor Income Taxes,” which requires an asset and liability approach to recordingcurrent and deferred taxes. Accordingly, the effects of differences between thetax basis of assets and liabilities and the amounts recognized in ourconsolidated financial statements have been treated as temporary differencesfor the purpose of recording deferred income tax.

 

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We regularly review our deferred tax assets for recoverability andestablish a valuation allowance based on historical taxable income, projectedfuture taxable income, and the expected timing of the reversals of existingtemporary differences. If we are unable to generate sufficient future taxableincome, or if there is a material change in the actual effective tax rates ortime period within which the underlying temporary differences become taxable ordeductible, we could be required to establish a valuation allowance against allor a significant portion of our deferred tax assets resulting in a substantialincrease in our effective tax rate and a material adverse impact on ouroperating results.

 

We have also adopted FIN 48, “Accounting for Uncertainty in IncomeTaxes”, that prescribes a recognition threshold and measurement attribute forthe financial statement of a tax position taken or expected. FIN 48 resulted inincreased relevance and comparability in financial reporting of income taxesbecause all tax positions accounted for in accordance with FASB Statement 109,Accounting for Income Taxes, will be evaluated for recognition, derecognition,and measurement using consistent criteria. The adoption of FIN 48 did notresult in any adjustments in our financial statements.

 

*Depreciation*

* *

Depreciation is computed using the straight-line method, at annualrates based on the estimated useful lives of the assets, in accordance withANEEL regulations and industry practice in Brazil. To the extent that theactual lives differ from these estimates, there would be an impact on theamount of depreciation accrued in our consolidated financial statements. Asignificant decrease in the estimated useful life of a material amount ofproperty, plant and equipment, or in the assets of the electricity generationproject consortium in which we are a partner, could have a material adverseimpact on our operating results in the period in which the estimate is revisedand in subsequent periods.

 

*Allowance for doubtful accounts*

* *

We record an allowance for doubtful accounts in an amount that weestimate to be sufficient to cover presently foreseeable losses.

 

We continuously monitor collections and payments from consumers andreview and refine our estimation process. A future change in our estimatescould result in an increase in the allowance for doubtful accounts which couldhave a material adverse impact on our operating results and financialcondition.

 

**Recently Issued U.S. GAAP Pronouncements**

** **

**SFAS 157 – Fair Value Measurements**

** **

In September 2006,the FASB issued SFAS 157, “Fair Value Measurements”, that establishes aframework for measuring fair value in generally accepted accounting principles(GAAP), and expands disclosures about fair value measurements. This Statementapplies under other accounting pronouncements that require or permit fair valuemeasurements and will change some current practice because of the need forincreased consistency and comparability in fair value measurements and forexpanded disclosures about fair value measurements. It applies for derivativesand other financial instruments measured at fair value under Statement 133 atinitial recognition and in all subsequent periods and should provide users offinancial statements with information that is useful in making investment,credit, and similar decisions . This Statement is effective for financialstatements issued for fiscal years beginning after November 15, 2007, andinterim periods within those fiscal years. Earlier application is encouraged,provided that the reporting entity has not yet issued financial statements forthat fiscal year, including financial statements for an interim period withinthat fiscal year. CEMIG is evaluating the potential impacts of this interpretation incompany’s consolidated financial statements.

 

**SFAS 159 – The Fair Value Optionfor Financial Assets and Financial Liabilities**

** **

In February 2007, the FASB issued SFAS 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities - Including an amendment of FASBStatement No.FAS 115”, SFAS 159. This Statement permits entities to choose, atspecified election dates, to measure many eligible financial instruments assetsand liabilities and certain other items at fair value that are not otherwiserequired to be measured at fair value. If a company elects the fair valueoption for an eligible item, changes in that item’s fair value in subsequentreporting periods must be recognized in current earnings.  SFAS 159 also establishes presentation and disclosurerequirements designed to draw comparison between entities that elect differentmeasurement attributes for similar assets and 

 

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liabilities.  SFAS 159 is effective for the Company on January 1,2008.  As allowed by the standard, theCompany has elected not to adopt SFAS 159 for the measurement of any eligibleassets and liabilities as of January 1, 2008.

 

SFAS 141 - Business Combinations

 

In December 2007, the FASB revised SFAS 141, “Business Combinations”.This statement applies to all transactions or other events in which an entity(the acquirer) obtains control of one or more businesses, including thosesometimes referred to as “true mergers” or “mergers of equals” and combinationsachieved without the transfer of consideration, for example, by contract aloneor through the lapse of minority veto rights. This statement applies to allbusiness entities, including mutual entities that previously used thepooling-of-interests method of accounting for some business combinations. Thisstatement retains the guidance in Statement 141 for identifying and recognizingintangible assets separately from goodwill. The main feature of this statementare the more significant improvements it makes to how the acquisition methodwas applied in accordance with Statement 141. This statement appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15,2008. An entity may not apply this statement before that date.

 

SFAS 160 - Noncontrolling Interests in Consolidated FinancialStatements

 

In December 2007, the FASB issued SFAS 160, “NoncontrollingInterests in Consolidated Financial Statements – an Amendment of ARB No. 51”.This statement improves the relevance, comparability, and transparency of thefinancial information that a reporting entity provides in its consolidatedfinancial statements by establishing accounting and reporting standards. Thisstatement applies to all entities that prepare consolidated financialstatements, except not-for-profit organizations, but will affect only thoseentities that have an outstanding noncontrolling interest in one or moresubsidiaries or that deconsolidate a subsidiary. This statement is effectivefor fiscal years, and interim periods within those fiscal years, beginning onor after December 15, 2008 (that is, January 1, 2009, for entitieswith calendar year-ends). Earlier adoption is prohibited.

 

SFAS 161 - Disclosures about Derivative Instruments and HedgingActivities

 

In March 2008, the FASB issued SFAS 161, “Disclosures aboutDerivative Instruments and Hedging Activities – an Amendment of FASB Statement No. 133”.This statement requires enhanced disclosures about an entity’s derivative andhedging activities and thereby improves the transparency of financialreporting. This statement is effective for financial statements issued forfiscal years and interim periods beginning after November 15, 2008, withearly application encouraged. This statement encourages, but does not require,comparative disclosures for earlier periods at initial adoption.

 

**Analysis of Electricity Sales and Cost of ElectricityPurchased**

** **

Electricity rates in Brazil are set by ANEEL, which has the authorityto readjust and review rates in accordance with the applicable provisions ofthe concession contracts. See Annex A —“The Brazilian Power Industry—Rates forthe Use of the Distribution and Transmission Systems”.

 

We charge captive consumers for their actual electricity consumptionduring each 30-day billing period at specified rates. Certain large industrialconsumers are charged according to the electricity capacity contractually madeavailable to them by us, with adjustments to those rates according toconsumption during peak demand time as well as capacity requirements thatexceed the contracted amount.

 

In general, rates on electricity that we purchase are determined byreference to the capacity contracted for as well as the volumes actually used.In the case of Itaipu, we are committed to purchase 17.3% of the amount of itscapacity that Brazil is required to purchase at a fixed price denominated indollars paid three times a month at exchange rates determined at the time ofeach payment.

 

The following table sets forth the average rate (in *reais* per MWh) and volume (by GWh)components of electricity sales and purchases for the periods indicated. Theterm “average rate” refers to revenues for the relevant class of consumersdivided by the MWh used by such class and does not necessarily reflect actualrates and usage by a specific class of end-users during any particular period.

 

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| ** **                               | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Electricity Sales:**                   | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Average rate to final consumers (R$/MWh) |       |                                       |       |   |   |   |   |
| Industrial rate                          |       | 132.99                                     |       | 123.62 |   | 121.42 |   |
| Residential rate                         |       | 517.98                                     |       | 488.04 |   | 463.04 |   |
| Commercial rate                          |       | 453.66                                     |       | 429.50 |   | 401.17 |   |
| Rural rate                               |       | 268.64                                     |       | 260.58 |   | 243.69 |   |
| Public services rate and others          |       | 313.73                                     |       | 288.82 |   | 270.01 |   |
|                                     |       |                                       |       |   |   |   |   |
| Total sales to final consumers (GWh)     |       |                                       |       |   |   |   |   |
| Industrial consumers                     |       | 24,183                                     |       | 23,759 |   | 23,472 |   |
| Residential consumers                    |       | 6,813                                      |       | 6,647 |   | 6,589 |   |
| Commercial consumers                     |       | 4,111                                      |       | 3,851 |   | 3,754 |   |
| Rural consumers                          |       | 2,200                                      |       | 1,938 |   | 1,941 |   |
| Public services and other consumers      |       | 2,738                                      |       | 2,666 |   | 2,574 |   |
|                                     |       |                                       |       |   |   |   |   |
| Average rate (R$/MWh)                    |       | 254.49                                     |       | 236.61 |   | 223.72 |   |
| Total revenues (millions of R$)          |       | 10,191                                     |       | 9,319 |   | 8,708 |   |
| Sales to distributors:                   |       |                                       |       |   |   |   |   |
| Volume (GWh)                             |       | 12,755                                     |       | 10,914 |   | 1,255 |   |
| Average rate (R$/MWh)                    |       | 86.87                                      |       | 63.86 |   | 90.84 |   |
| Total revenues (millions of R$)(1)       |       | 1,108                                      |       | 697 |   | 114 |   |
|                                     |       |                                       |       |   |   |   |   |
| **Electricity Purchases from Itaipu:**   | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Volume (GWh)                             |       | 12,135                                     |       | 12,109 |   | 12,144 |   |
| Average cost (R$/MWh)                    |       | 82.40                                      |       | 67.88 |   | 67.93 |   |
| Total cost (millions of R$)              |       | 1,000                                      |       | 822 |   | 825 |   |

 

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| (1) |   | Does  not include R$26 million, R$187 million and R$123 million relating to energy  transactions on the CCEE during 2007, 2006 and 2005, respectively. |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Rates**

** **

Our results of operations in the past have been significantly affectedby fluctuations in the levels of rates that Cemig Distribution is permitted tocharge for the generation and distribution of electricity. The rate-settingprocess in Brazil has historically been influenced by government attempts tocontrol inflation. With the restructuring of the electric power sector inBrazil that commenced in 1995 and under the terms of the renewal of theconcession agreement that we signed with ANEEL in 1997, the process by whichrates are set has changed to a significant degree. Electricity that CemigDistribution distributes to captive consumers (those consumers that have demandlower than 3 MW and connected at voltage levels lower than 69 kV, includingresidential, commercial and some industrial consumers) is provided at rates thatare adjusted and revised by ANEEL in accordance with the provisions of ourconcession contract. Cemig Distribution has entered into electricity supplycontracts at freely negotiated rates with our Free Consumers (those consumersthat have a demand of 3 MW or more of electricity at voltage levels of 69 kV ormore that have chosen to become Free Consumers) that elected not to be subjectto ANEEL’s rate-setting structure. Under Law No. 10,848, distributioncompanies are no longer allowed to enter in new contracts for sale ofelectricity to Free Consumers at non-regulated prices. See “The Brazilian PowerIndustry—Rates for the Use of the Distribution and Transmission Systems” inAnnex A.

 

ANEEL has approved extraordinary rate increases designed to compensategeneration and distribution companies for losses incurred as a result of theElectricity Rationing Plan. See “—Power Rationing and Government Measures toCompensate Electric Utilities.”

 

On April 8, 2003,  we wentthrough our first periodic rate revision and on April 4, 2005 ANEEL,through Resolution No. 71, reconsidered such decision.  The average rate adjustment applied to ourrates on April 8, 2003 as part of our periodic rate review was 31.53%.However, according to Resolution No. 71, such rate adjustment was entitledto be 44.41%. ANEEL has indicated that the rate adjustments expected for theyears from 2004 to 2007 would be adjusted in order to recover the differencesbetween the 44.41% rate adjustment we were entitled to and the 31.53% rateadjustment that was authorized. However during the last annual readjustment, in

 

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April of2007, ANEEL postponed the recovery of the last portion we were in entitled toreceive in 2007 to the April 2008 periodic rate revision.  From more information see “Item 8. FinancialInformation—Legal Proceedings—Regulatory Matters.”

 

The difference between the revenue under the 31.53% rate adjustment andthe revenue that would have been earned based on the 44.41% rate adjustment wasrecorded by CEMIG as a deferred regulatory asset of R$545 million as of December 31,2007, including monetary variation and accrued interest at a rate of11.26%.  See Note 4 to our consolidatedfinancial statements.

 

ANEEL issued Resolution No. 626 on April 7, 2008, whichestablished the results of our second periodic rate revision. The componentswere as follows: (i) an 18.09% decrease in the Rate Adjustment Index (*Reposicionamento Tarifário)*; (ii) a 1.84% decrease dueto intra-annual variation of fixed costs, or CVA; (iii) a 7.25% increasedue to the deferred regulatory asset; and (iv) a 5.54% increase due toother financial adjustments.  Whenconsidering these financial components, the rates decreased, on average, by7.14%. We expect to experience such rate decreases periodically as ourconcession contracts are regulated under a price cap regime. Through theperiodic rate revisions, our productivity gains are passed on to consumersthrough reductions in the rates. The 2008 periodic rate adjustment and the lasttwo average annual rate adjustments with their respective components arepresented in the table below:

 
| ** **                                                                                                                                                                                                                                                 | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                                                                                                                                                                                                                       |       |       |       |       |       |       |       |
| **Rate adjustment**                                                                                                                                                                                                                                        |       | (7.14      | )%         | 9.43       | %          | 16.19      | %          |
|                                                                                                                                                                                                                                                       |       |       |       |       |       |       |       |
| **Components**                                                                                                                                                                                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Adjustment to Rate Index                                                                                                                                                                                                                                   |       | (18.09     | )%         | 3.42       | %          | 5.31       | %          |
|                                                                                                                                                                                                                                                       |       |       |       |       |       |       |       |
| Deferred regulatory asset                                                                                                                                                                                                                                  |       | 7.25       | %          | 0.00       | %          | 5.82       | %          |
|                                                                                                                                                                                                                                                       |       |       |       |       |       |       |       |
| Intra-annual variation of fixed costs (CVA)                                                                                                                                                                                                                |       | (1.84      | )%         | 0.48       | %          | 1.24       | %          |
|                                                                                                                                                                                                                                                       |       |       |       |       |       |       |       |
| Increases in the Programa de Formação do  Patrimônio do Servidor (a fund for the benefit of public employees), or  PASEP, and the Contribuição para Seguridade Social (a federal social security  contribution), or COFINS, taxes |       | —     |       | 3.26       | %          | 1.81       | %          |
|                                                                                                                                                                                                                                                       |       |       |       |       |       |       |       |
| Other  financial adjustments                                                                                                                                                                                                                               |       | 5.54       | %          | 0.80       | %          | 0.56       | %          |

** **

**Power Rationing and Government Measures to CompensateElectric Utilities**

** **

Low amounts of rainfall in 2000 and early 2001, vigorous growth indemand for energy and Brazil’s significant dependence on electricity generatedfrom hydrological resources resulted in abnormally low water levels in manyreservoirs that are used to power Brazil’s major hydroelectric generationfacilities. In May 2001, the Federal Government announced several measuresin response to these conditions. First, the President of Brazil passedProvisional Measure No. 2,147 on May 15, 2001 (as updated byProvisional Measure No. 2,152-2 on June 1, 2001), creating the *Câmara de Gestão da Crise de Energia Elétrica*,or Energy Crisis Committee. The Energy Crisis Committee resolved on May 16,2001 to require certain electricity distributors, including us, to suspenddistribution of electricity to new consumers (except residential and ruralconsumers) and for certain non-essential purposes such as nighttime sportingevents and advertising use, and to reduce distribution for the illumination ofpublic areas by 35%. Second, the President passed Decree No. 3,818, on May 15,2001, requiring the Federal Government to reduce its electricity consumption by35% beginning July 1, 2001. Third, on May 18, 2001, the FederalGovernment announced additional power rationing measures to be imposed onindustrial, commercial and residential consumers in the most industrialized andheavily populated areas of Brazil beginning on June 1, 2001. Thesemeasures required most residential consumers to reduce their electricity consumptionby 20% of the average consumption in May, June and July 2000.Industrial and commercial consumers also had to reduce their consumption by 15%to 25% of the average consumption during the same period. Further measuresprovided that bonuses would be paid to residential consumers whose energyconsumption was lower than the requisite target and that power cuts andsurcharges would be imposed on consumers whose energy consumption exceeded therequisite target. ANEEL established specific accounts and controls to recordthe effect of the rationing measures relating to the bonus, surcharge and otherrelated costs. The power rationing measures ultimately ceased on February 28,2002.

 

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On October 17, 2001, the Federal Government, through ProvisionalMeasure No. 4, approved by Law No. 10,310 of November 22, 2001,stated that electric utilities, including us, would be reimbursed for expensesassociated with payment of bonuses to consumers and other related costs thatexceeded certain surcharges. In 2002, we received approximately R$132 millionas reimbursement for a portion of the expenses we incurred in connection withpayment of bonuses to consumers. In addition, we are currently negotiating withANEEL our reimbursement of approximately R$23 million relating to surchargesthat were not paid by certain consumers because their surcharges are underdispute. There is no assurance that ANEEL will reimburse us, and therefore thetotal estimated exposure to the Company for this matter is fully reserved. Inaccordance with ANEEL Resolution No. 600, dated October 31, 2002, wehave been reimbursed for operating costs of approximately R$28 million thatrelate to the adoption of the Electricity Rationing Plan and that exceedamounts received from surcharges on consumer rates. Reimbursement of theseoperating costs was made through rate increases in force since April 8,2003, April 8, 2004 and April 8, 2005.

 

On December 12, 2001, through Provisional Measure No. 14,approved on April 26, 2002 by Law No. 10,438, the Federal Governmentauthorized the creation of the General Agreement of the Electricity Sector. TheGeneral Agreement of the Electricity Sector provides that electric powerdistribution and generation companies in Brazil, such as us, will becompensated for revenue losses caused by the reduction in amounts of energysold and the purchase of energy on the CCEE, as applicable, due to the FederalGovernment-mandated rationing measures. Compensation is made by means of anextraordinary increase in the energy rate applicable to future power sales andcompanies are entitled to use this increased rate for an average period of 74months, beginning January 2002. See Note 4 to our consolidated financialstatements.

 

**Impact of Our Account Receivable from the StateGovernment**

** **

As described further in “Additional Information—Material Contracts”,we have an account receivable from the State Government, referred to as the CRCAccount, that totaled R$1,540 million as of January 27, 2006, the date oftransfer of the CRC credits into a Receivables Investment Fund – FIDC, andR$1,763 million as of December 31, 2007. Our liquidity and net income areaffected by payments made by theState Government in connection with the CRC Account. The agreement betweenCEMIG and the State Government that governs the CRC Account receivable isreferred to as the CRC Account Agreement. The CRC Account Agreement has beenamended five times, as described below.

 

On January 24, 2001, the First Amendment to the CRC AccountAgreement replaced the monetary adjustment index of UFIR with the IGP-DI,retroactive to November 2000, since the UFIR was eliminated in October 2000.

 

The State Government did not make any payments to us under the CRC AccountAgreement in 2001 or 2002 and therefore, in October 2002, the Second andThird Amendments to the CRC Account Agreement were signed, which separated thedebt into two amounts and established new payment terms. In 2003 and 2004, weoffset a portion of these overdue amounts from 2001 and 2002 against paymentsof interest on capital that we are required to make to the State Government asour shareholder. We had recorded a provision for losses as of December 31,2004 for the total amount of the Second Amendment, since the State Governmenthad not made payments on this balance since January 2003 and the SecondAmendment did not provide for any guarantees. The Third Amendment stipulatedthat the guarantee relating to the dividends payable to the State Governmentwould remain in force even after the original term of the Third Amendment. Ourlong-term estimates of future net income indicated that the dividends payableto the State Government would be sufficient to recover the amounts due underthe Third Amendment and, consequently, no provision for losses was recorded.

 

Given the prior default by the State Government in the payment ofamounts due under the CRC Account Agreement since 2001, and in order to ensurethe full payment to us of the installments due by the State Government underthe CRC Account balance, the Fourth Amendment to the CRC Account Agreement wassigned on January 23, 2006. Under the Fourth Amendment, the StateGovernment irrevocably agreed to pay the outstanding CRC Account balance,corresponding to R$2,942 million at December 31, 2004, plus interest, byauthorizing CEMIG to retain 65% of the ordinary dividends and interest oncapital due to the State Government. The outstanding balance is subject tomonetary correction for inflation by the variation in the IGP-DI inflationindex and will bear interest at 8.18% per year, compounded semi-annually.

 

Under the Fourth Amendment to the CRC Account Agreement, the State isrequired to make 61 semi-annual payments due on June 30 and December 31of each year. The Fourth Amendment applies retroactively to December 31,2004, at which time there was an outstanding balance of R$2,941.6 million underthe CRC Account, with the first payment date being June 30, 2005 and thefinal payment being due on June 30, 2035. The semi-annual payments will beadjusted for inflation by the IGP-DI inflation index. The 65% of dividends andinterest on capital retained by CEMIG are to be applied in the following order:(i) the settlement of any past due 

 

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installments,(ii) the settlement of the installment relating to the half-year in whichdividend or interest on capital takes place, (iii) pre-payment of up totwo installments and (iv) amortization of the outstanding balance dueunder the CRC Account.

 

A Fifth Amendment to the CRC Account Agreement was executed by CEMIGand the State Government on September 12, 2007.  The Fifth Amendment adjusts the outstandingbalance of the CRC Agreement to R$2,839.5 million in accordance with aprovision in the Fourth Amendment in which the parties recognized that therewas a disagreement regarding the outstanding balance of the CRC Agreement at December 31,2004.  Approval for the Fifth Amendmentto the CRC Account Agreement was also obtained from the Cemig CRC AccountSecuritization Fund (*Cemig—Fundo deInvestimento em Direitos Creditorios Conta CRC*), or FIDC, to whichthe CRC Account receivables were transferred in January 2006.

 

If the retention of ordinary dividends and interest on capital is notsufficient to cover the applicable installment, beginning on January 1,2008, CEMIG is entitled to retain up to 65% of any extraordinary dividends orinterest on equity due to the State Government for the payment of thatinstallment. Furthermore, if the sum of 65% of the ordinary dividends andinterest and capital and extraordinary dividends on interest and capital is notsufficient to cover an installment due, CEMIG is entitled to retain 100% ofsuch dividends and interest on capital, beginning in the six-month periodimmediately following that of the past due date of the past due installment. Inaddition, if there is a reduction in the ownership of CEMIG by the StateGovernment, the retention percentage will be automatically adjusted upward suchthat the amount of the dividend retained will remain the same as the amountequal to 65% of dividends based on the current ownership of CEMIG by the StateGovernment.

 

In January 2006, we created the Cemig CRC Account SecuritizationFund (*Cemig—Fundo de Investimento em Direitos CreditoriosConta CRC*), or the FIDC. We assigned all our receivables under theCRC Account Agreement to the FIDC. The value of the CRC Account receivablestransferred to the FIDC was R$1,659 million, as of January 27, 2006 andthe capital structure of the FIDC is composed of R$900 million of senior quotasheld by third parties and approximately R$759 million of subordinated quotasheld by us.  The FIDC is fullyconsolidated by us and the senior quotas are recorded as long-term financing.

 

The Company has recorded a provision for losses on the CRC Accountreceivable under the Fourth Amendment of the CRC Account Agreement in theamount of R$372 million in 2007 and a reversal provision for losses of R$99million and R$223 million in 2006 and 2005, respectively. Our estimate offuture net income to calculate such provision did not take into account the newasset acquisitions foreseen in our long-term strategic plan.

 

For additional information regarding the FIDC, see “AdditionalInformation—Material Contracts”.

 

**Exchange Rates**

** **

Substantially all of our revenues and operating expenses aredenominated in *reais*. Althoughour electricity purchases from Itaipu are denominated in U.S. dollars, therelated foreign exchange risk is no longer reflected in our operating revenuesand operating expenses due to rate legislation changes in 2001 which allowelectricity utilities such as us to record exchange rate losses related toItaipu purchases as deferred regulatory assets. However, we have foreign currency-denominateddebt. As a result, in reporting periods when the *real* declines against the dollar or other foreign currenciesin which our debt is denominated, our operating results and financial positionare adversely affected. Foreign exchange gain or loss and monetary variationgain or loss may impact our results of operations in periods in which there arewide swings in the value of the *real*relative to the dollar or high inflation. We have a number of financial and other contracts under which we owe, orare entitled to, amounts in respect of monetary variation as measured by anindex of price inflation in Brazil. In 2007, we used financial instruments suchas interest rate swaps in order to reduce the risk from exchange ratefluctuations. As of December 31, 2007, we had entered into swap agreementsin the notional amount of US$69 million and, with respect to the Japaneseyen, in the amount of ¥3,879 million (equivalent to US$34.7 million), in orderto change the original interest rate of certain financing from an interest ratecalculated based on the U.S. dollar and Japanese yen variations to an interestrate calculated based on the *Certificado deDepósito Interbancário*—CDI (Interbank Certificates of Deposit) rate,or CDI. See Notes 2(d), 14, 22, 24 and 25 to our consolidated financialstatements.

 

**Unbundling**

** **

In 2004, we undertook a reorganization of our corporate structure tocomply with Law 10,848/04, which establishes that a distribution company maynot exercise other activities such as the generation and transmission ofelectric energy. Two wholly-owned subsidiaries were created, Cemig Generation and Transmission****and CemigDistribution, which carry out the activities of electricity generationand transmission and electricity distribution, respectively. This process wasfinalized by ANEEL with respect to our 

 

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distributionand transmission concessions through amendments to the existing concessioncontracts, and will be finalized with respect to the generation concession uponANEEL’s convocation to sign amendments to the existing generation contracts.

 

Following the unbundling of CEMIG’s operations, ANEEL determined thatCEMIG, Cemig Distribution and Cemig Generation and Transmission must prepare aformal ‘cooperation agreement’ and submit it for approval by ANEEL. Thisagreement is to govern common use of human or physical resources when they areshared by the concession holders and the division and reimbursement of costsincurred by each company.

 

*FinancialReporting and Tax Considerations*

* *

The unbundling has not resulted in material differences in thepresentation of our reporting for financial purposes in accordance with U.S.GAAP or Brazilian GAAP since the financial results of the new generation, transmissionand distribution subsidiaries are consolidated with ours. Our marginal taxrate, on a consolidated basis, has not changed materially as a result of theunbundling. However, our operating results were adversely affected as aconsequence of the application of certain Brazilian revenue taxes. The revenuetaxes which caused the adverse effect on operating results include the *Contribuição para Seguridade Social* (afederal social security contribution), or COFINS, and the *Programa de Formação do Patrimônio do Servidor*(a fund for the benefit of public employees), or PASEP, and were assessedagainst our consolidated revenues at a combined rate of approximately 4.65%from December 2002 to January 2004 and 3.65% from January throughNovember 2002. Since February 2004, the combined tax rate for thesecontributions is 9.25% of a tax base equal to the gross revenue less certaindeductions. Due to the unbundling, the revenue taxes were assessed at thesubsidiary level with respect to revenues of the generation subsidiary and,separately, revenues of the distribution subsidiary.

 

**Year Ended December 31, 2007 Compared to YearEnded December 31, 2006**

** **

*Netoperating revenues*

* *

Net operating revenues increased 9.1% from R$8,640 million in 2006 toR$9,430 million in 2007.

 
| ** **                                            | ** ** | **2007**                 | ** ** | **%**** of net  operating  revenues** | ** ** | **2006**                 | ** ** | **%**** of net  operating  revenues** | ** ** | **2007  versus  2006 - %** | ** ** |
|-------------------------------------------------------|------------|--------------------------|------------|-------------------------------------------------|------------|--------------------------|------------|-------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                            | ** ** | **(in millions of  R$)** | ** ** | ** **                                      | ** ** | **(in millions of  R$)** | ** ** | ** **                                      | ** ** | ** **                           | ** ** |
| Electricity  sales to final consumers                 |       | 10,191                   |       | 108.10                                          |       | 9,319                    |       | 107.9                                           |       | 9.4                                  |       |
|                                                  |       |                     |       |                                            |       |                     |       |                                            |       |                                 |       |
| Electricity sales  to the interconnected power system |       | 1,134                    |       | 12.0                                            |       | 884                      |       | 10.2                                            |       | 28.3                                 |       |
|                                                  |       |                     |       |                                            |       |                     |       |                                            |       |                                 |       |
| Use of basic  transmission and distribution networks  |       | 1,705                    |       | 18.1                                            |       | 1,780                    |       | 20.6                                            |       | (4.2                                 | )          |
|                                                  |       |                     |       |                                            |       |                     |       |                                            |       |                                 |       |
| Other operating  revenues                             |       | 236                      |       | 2.5                                             |       | 200                      |       | 2.3                                             |       | 18.0                                 |       |
|                                                  |       |                     |       |                                            |       |                     |       |                                            |       |                                 |       |
| Tax on revenues                                       |       | (3,836                   | )          | (40.7                                           | )          | (3,543                   | )          | (41.0                                           | )          | 8.3                                  |       |
|                                                  |       |                     |       |                                            |       |                     |       |                                            |       |                                 |       |
| Total net  operating revenues                         |       | 9,430                    |       | 100.0                                           |       | 8,640                    |       | 100.0                                           |       | 9.1                                  |       |

 

Revenues from electricity sales to final consumers increased 9.4% fromR$9,319 million in 2006 to R$10,191 million in 2007 due to rate adjustments of7.1% in April 2006 (full effect in 2007) and 5.2% in April 2007, anda 3.1% increase in the volume of our electricity sales to final consumers in2007. The TUSD charges related to the use of the local distribution network ofthe Free Consumers, which began to be charged separately in 2004 and recordedunder the item “Use of basic transmission and distribution networks”, wereR$1,173 million in 2007 compared to R$1,122 million in 2006. This increase wasdue to a shift in certain industrial consumers to the category of FreeConsumers in 2007. Electricity sales to final customers and the TUSD revenuestogether increased 8.8% in 2007 compared to 2006.

 

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Electricity sales to the interconnected power system were R$1,134million in 2007, a 28.3 % increase compared to R$884 million in 2006. Thissignificant increase arises primarily from the start up of the Irapé plant inthe second half of 2006, a higher volume of electricity traded through contractswith electricity traders, and better prices negotiated by Cemig Generation andTransmission in 2007. We also increased our exportation of electricity toArgentina and Uruguay in 2007, providing revenue of approximately R$64 million.

 

Income from the use of the basic transmission network decreased R$75million, or 4.2%, from R$1,780 million in 2006 to R$1,705 million in 2007. Thisdecrease was primarily due to the lower TUSD revenues of Cemig Distribution,which totaled R$1,173 million in 2007 compared to R$1,261 million in 2006,resulting mainly from the charges paid by Cemig Generation and Transmission’sconsumers to Cemig Distribution for the use of the distribution network. Inaddition, there was an increase in revenues related to use of the facilitiesthat are part of CEMIG’s basic transmission network by electric powergenerators and distributors that comprise the national grid, in the amount ofR$437 million in 2007 compared to R$417 million in 2006.

 

Other operating revenues increased 18.0%, from R$200 million in 2006 toR$236 million in 2007. The variation in our other operating revenues in 2007 isprimarily due to an increase in services rendered, which was R$61 million in2007 compared to R$31 million in 2006.

 

Taxes on revenues increased 8.3% to R$3,836 million in 2007, comparedto R$3,543 million in 2006, as a result of the increase in our electricitysales to final consumers in 2007 as compared to 2006. Taxes on revenues consistof:  (i) VAT, assessed at an averagerate of 21% on electricity sales to final consumers, and VAT billed toconsumers related to the deferred regulatory assets; (ii) COFINS, assessedat a rate of 7.6%; and (iii) PASEP, assessed at a rate of 1.65%.  See Note 19 to our consolidated financialstatements.

 

*Operating costs and expenses*

* *

Operating costs and expenses decreased 6.6 % to R$7,351 million in 2007from R$7,867 million in 2006. This decrease was principally due to anextraordinary expense recorded in 2006 related to a regulatory liability –special obligations in the amount of R$1,057 million and also a reduction inpersonnel, employee post-retirement benefits expenses and the use of the basictransmission network.  The decrease waspartially offset by an increase in Electricity purchased for resale, Employeesprofit sharing and Other expenses.

 

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| ** **                                           | ** ** | **2007**                  | ** ** | **% of net  operating  revenues** | ** ** | **2006**                      | ** ** | **%**** of net  operating  revenues** | ** ** | **2007 versus  2006 - %** | ** ** |
|------------------------------------------------------|------------|---------------------------|------------|---------------------------------------------|------------|-------------------------------|------------|-------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                           | ** ** | **(in millions   of R$)** | ** ** | ** **                                  | ** ** | **(in millions  of R$)** | ** ** | ** **                                      | ** ** | ** **                               | ** ** |
|                                                 |       |                      |       |                                        |       |                          |       |                                            |       |                                     |       |
| Electricity purchased  for resale                    |       | (2,147                    | )          | (22.8                                       | )          | (1,907                        | )          | (22.1                                           | )          | 12.6                                     |       |
|                                                 |       |                      |       |                                        |       |                          |       |                                            |       |                                     |       |
| Use of basic  transmission and distribution networks |       | (564                      | )          | (6.0                                        | )          | (687                          | )          | (8.0                                            | )          | (17.9                                    | )          |
|                                                 |       |                      |       |                                        |       |                          |       |                                            |       |                                     |       |
| Depreciation and  amortization                       |       | (878                      | )          | (9.3                                        | )          | (810                          | )          | (9.4                                            | )          | 8.4                                      |       |
|                                                 |       |                      |       |                                        |       |                          |       |                                            |       |                                     |       |
| Personnel                                            |       | (884                      | )          | (9.4                                        | )          | (1,046                        | )          | (12.1                                           | )          | (15.5                                    | )          |
|                                                 |       |                      |       |                                        |       |                          |       |                                            |       |                                     |       |
| Regulatory  charges                                  |       | (967                      | )          | (10.3                                       | )          | (1,031                        | )          | (11.9                                           | )          | (6.2                                     | )          |
|                                                 |       |                      |       |                                        |       |                          |       |                                            |       |                                     |       |
| Regulatory  liability – special liabilities     |       | —                    |       | —                                      |       | (1,057                        | )          | (12.2                                           | )          | —                                   |       |
|                                                 |       |                      |       |                                        |       |                          |       |                                            |       |                                     |       |
| Third-party  services                                |       | (550                      | )          | (5.8                                        | )          | (475                          | )          | (5.5                                            | )          | 15.8                                     |       |
|                                                 |       |                      |       |                                        |       |                          |       |                                            |       |                                     |       |
| Employee  post-retirement benefits                   |       | (140                      | )          | (1.5                                        | )          | (245                          | )          | (2.8                                            | )          | (42.9                                    | )          |
|                                                 |       |                      |       |                                        |       |                          |       |                                            |       |                                     |       |
| Materials and  supplies                              |       | (148                      | )          | (1.6                                        | )          | (116                          | )          | (1.3                                            | )          | 27.6                                     |       |
|                                                 |       |                      |       |                                        |       |                          |       |                                            |       |                                     |       |
| Provision for  loss on deferred regulatory assets    |       | (146                      | )          | (1.5                                        | )          | (49                           | )          | (0.6                                            | )          | 198.0                                    |       |
|                                                 |       |                      |       |                                        |       |                          |       |                                            |       |                                     |       |
| Employee profit  sharing                             |       | (455                      | )          | (4.8                                        | )          | (210                          | )          | (2.5                                            | )          | 116.7                                    |       |
|                                                 |       |                      |       |                                        |       |                          |       |                                            |       |                                     |       |
| Other                                                |       | (472                      | )          | (5.0                                        | )          | (234                          | )          | (2.7                                            | )          | 101.7                                    |       |
|                                                 |       |                      |       |                                        |       |                          |       |                                            |       |                                     |       |
| Total operating  costs and expenses                  |       | (7,351                    | )          | (78.0                                       | )          | (7,867                        | )          | (91.1                                           | )          | (6.6                                     | )          |

 

Electricity purchased for resale consists primarily of purchases fromItaipu through Eletrobrás and competitive biddings. We are required underapplicable regulations to purchase 17.3% of Itaipu’s capacity at U.S.dollar-denominated prices. We also purchase electricity from the CCEE andthrough bilateral contracts. Electricity purchased for resale increased 12.6%from R$1,907 million in 2006 to R$2,147 million in 2007. The amounts ofelectricity purchased for resale reported in the income statement refer to theamounts that were in fact included in the calculation of the tariff to beapplied, in accordance with SFAS 71 “Accounting for the Effects of CertainTypes of Regulation”. See Note 20 to our consolidated financial statements.

 

Charges for use of the basic transmission network mainly correspond tothe cost of transporting electricity in the Brazilian basic transmissionnetwork which is prorated among the Brazilian distribution companies. Chargesfor use of the basic transmission network are fixed costs, which decreased 17.9%from R$687 million in 2006 to R$564 million in 2007. The amount reported in theincome statement refers to the amounts that were in fact included in thecalculation of the tariff to be applied, in accordance with SFAS 71 “Accountingfor the Effects of Certain Types of Regulation”.

 

Depreciation and amortization expense increased 8.4% from R$810 millionin 2006 to R$878 million in 2007. This increase was primarily due to anincrease in depreciable assets in service in 2007 due to the investments in the*Luz para Todos* program and thestartup of the Irapé plant in the second half of 2006.

 

Personnel expense decreased 15.5% from R$1,046 million in 2006 to R$884million in 2007. This variation is primarily due to the R$178 million expenserecorded in 2006 for an upfront payment to employees in exchange for theirrelinquishment of future benefits for time of service, partially offset by the4% and 5% salary increase granted to CEMIG’s employees in November of 2006and 2007, respectively, and the 1.5% increase in the number of employees ofCEMIG, Cemig Generation and Transmission and Cemig Distribution, which totaled10,658 in December 2006 and 10,818 in December 2007.

 

71

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Regulatory charges decreased 6.2% from R$1,031 million in 2006 to R$967million in 2007, primarily due to the decrease of R$176 million in the fuelusage quota, partially offset by an increase of R$108 million in globalreserves for reversion quota. The fuel usage quota represents contributionsmade by the electricity company concessionaires to subsidize the cost of fuelused in the thermoelectric energy generating process in the Brazilian energysystem. The amounts reported in the income statement related to regulatorycharges refer to the amounts that were in fact included in the calculation ofthe tariff to be applied, in accordance with SFAS 71 “Accounting for theEffects of Certain Types of Regulation”.

 

We recorded an expense in 2006, in the amount of R$1,057 million,related to special obligations, which are resources obtained by us fromconsumer contributions, federal budget allocations, as well as federal, stateand municipal funds, and special credits relating to investments made inprojects linked to the concession.  Theresources represent either infrastructure assets or cash to fund theacquisition and/or construction of such assets usually to obtain connection toour distribution network or to extend the existing network.  For regulatory purposes, the depreciation ofthese assets was included in the tariff rate setting process and thecorresponding liability was recorded for the amount of the totalcontributions.  Under U.S. GAAP, thecontributions were considered reimbursements of construction costs and creditedagainst the cost of the related fixed assets. On October 31, 2006, ANEELissued a new regulation which changed the treatment of special obligations withrespect to the tariff setting process. The regulation establishes, among other items, that beginning on thedate of the next respective tariff revision, the special obligations will beamortized as a reduction of net allowable costs over future periods, therebyreducing tariffs. Consequently, in accordance with SFAS No. 71 “Accountingfor the Effects of Certain Types of Regulation”, the special obligations becamea regulatory liability as a result to this new regulation.  Therefore, we recorded an expense in the 2006statement of operations, with an offset to deferred regulatory liabilities.  See more information on Note 4, item “f” toour consolidated financial statements.

 

Third-party services expense increased 15.8% from R$475 million in 2006to R$550 million in 2007. The increase was due mainly to higher costs in 2007related to maintenance and conservation of installations and equipment andmarketing.

 

Employee post-retirement benefits expenses decreased 42.9% from R$245million in 2006 to R$140 million in 2007. These expenses primarily representinterest on the actuarial liabilities net of the expected return on plan assets,as estimated by an external expert. The reduction reflects higher growth of theassets of the pension plan than the growth of the obligations to theparticipants. See Note 16 to our consolidated financial statements.

 

We recorded a provision for losses on deferred regulatory assets ofR$146 million in 2007 compared to R$49 million in 2006. The provision recordedis related to the amounts that CEMIG receives from other distribution companiesin connection with energy transactions on the CCEE/MAE during the ElectricityRationing Plan. These distribution companies have a limited time, as stipulatedby ANEEL, to transfer the amounts owed to us. See Note 4 to our consolidatedfinancial statements.

 

Employees profit sharing increased 116.7% from R$210 million in 2006 toR$455 million in 2007. This increase is a result of a higher payment amountestablished under the collective labor agreements entered into by CEMIG and thelabor unions in November 2007.

 

Other expenses increased 101.7% from R$234 million in 2006 to R$472million in 2007. The increase in other expenses was primarily due to R$118million of provisions for legal contingencies in 2007, compared to the reversalof a  provision of R$78 million in 2006related to labor claims and civil lawsuits. See Note 20 to our consolidatedfinancial statements.

 

*Operatingincome*

* *

As a result of the foregoing, we had operating income of R$2,079million in 2007 compared to operating income of R$773 million in 2006.

 

*Financialincome, net*

* *

Financial income net, includes (i) financial income, which ismainly comprised of interest and a monetary restatement of our accountreceivable from the State Government, investment income earned, late charges onoverdue electricity bills, foreign exchange gains, monetary restatement ondeferred regulatory assets and (ii) financial expenses, which are mainlycomprised of interest expense on loans and financing, the *Contribuição Provisória sobre a Movimentação ouTransmissão de Valores e de Créditos e Direitos de Natureza Financeira*(a financial transaction tax), or CPMF, foreign exchange losses, monetaryrestatement losses, monetary restatement of deferred regulatory liabilities andother expenses. We had net financial expense of R$48 million in 2007 comparedto 

 

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netfinancial income of R$335 million in 2006, principally due to a reduction ofR$127 million on accrued interest on our account receivable from the StateGovernment, net of provision (reversion provision) for losses recorded mentionedin Note 3 to our consolidated financial statements, and a decrease of 22.0% inmonetary restatement on deferred regulatory assets net of liabilities in 2007.This decrease is mainly due to a reduction in assets related to the deferredrate adjustment in 2007 compared to 2006 as a result of the increases in theelectricity energy accounts. Additionally, there was an increase of 21.7% in the charges on loans andfinancings from R$529 million in 2006 to R$644 million in 2007, due mainly tothe increase in our debt in 2007 compared to 2006, and also an increase of47.4% in losses on derivative contracts to R$171 million in 2007 from R$116million in 2006.

 

*Non-Operatingincome*

* *

We had non-operating income of R$272 million in 2007 compared tonon-operating income of R$91 million in 2006.

 

Equity in results of investments was R$223 million of income in 2007,compared to R$91 million of income in 2006. This variation was mainly due toour investments in RME, a holding which controls Light, which had income ofR$158 million in 2007 compared to R$35 million in 2006.

 

At an auction held on July 27, 2006, we sold Empresa de InfoviasS.A.’s equity interest in WAY TV Belo Horizonte S.A for R$91.4 million. Theconclusion of the sale depended on the authorization by the NationalTelecommunications Agency, ANATEL, which approved the transaction on October 23, 2007. Empresa de InfoviasS.A.’s profit from this sale, in the amount of R$49 million, was recognized inthe fourth quarter of 2007, when the approval was published in the FederalOfficial Gazette.

 

*Incometaxes*

* *

Income taxes were an expense of R$685 million on pre-tax income ofR$2,303 million in 2007, compared to an expense of R$497 million on pre-taxincome of R$1,199 million in 2006. The main difference in 2007 between incometax calculated at the statutory rate and the income tax expense recorded is thetax benefit mainly due to equity in investees. See Note 5 to our consolidated financial statements.

 

*Netincome*

* *

As a result of the foregoing, we had a net income of R$1,618 million in2007 compared to net income of R$702 million in 2006.

 

*Othercomprehensive income (loss)*

* *

Other comprehensive loss was R$400 million in 2007 compared to othercomprehensive income of R$140 million in 2006. This variation was due to anincrease in the unfunded status of post-retirement benefits in 2007, as aresult of a higher increase in the projected benefit obligation compared to theincrease in the plan assets.

 

*Comprehensiveincome*

* *

As a result of the factors stated above, comprehensive income wasR$1,218 million in 2007 compared to R$842 million in 2006.

 

**Year Ended December 31, 2006 Compared to YearEnded December 31, 2005**

** **

*Netoperating revenues*

* *

Net operating revenues increased 15.0% from R$7,513 million in 2005 toR$8,640 million in 2006.

 

73

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| ** **                                            | ** ** | **2006**          | ** ** | **%**** of net  operating  revenues** | ** ** | **2005**          | ** ** | **%**** of net  operating  revenues** | ** ** | **2006  versus  2005 - %** | ** ** |
|-------------------------------------------------------|------------|-------------------|------------|-------------------------------------------------|------------|-------------------|------------|-------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                            | ** ** | **(in millions)** | ** ** | ** **                                      | ** ** | **(in millions)** | ** ** | ** **                                      | ** ** | ** **                           | ** ** |
| Electricity  sales to final consumers                 |       | 9,319             |       | 107.9                                           |       | 8,708             |       | 115.9                                           |       | 7.0                                  |       |
|                                                  |       |              |       |                                            |       |              |       |                                            |       |                                 |       |
| Deferred rate  adjustment                             |       | —            |       | —                                          |       | 110               |       | 1.5                                             |       | (100.0                               | )          |
|                                                  |       |              |       |                                            |       |              |       |                                            |       |                                 |       |
| Electricity  sales to the interconnected power system |       | 884               |       | 10.2                                            |       | 237               |       | 3.2                                             |       | 273.0                                |       |
|                                                  |       |              |       |                                            |       |              |       |                                            |       |                                 |       |
| Use of basic  transmission and distribution networks  |       | 1,780             |       | 20.6                                            |       | 1,523             |       | 20.3                                            |       | 16.9                                 |       |
|                                                  |       |              |       |                                            |       |              |       |                                            |       |                                 |       |
| Other operating  revenues                             |       | 200               |       | 2.3                                             |       | 176               |       | 2.3                                             |       | 13.6                                 |       |
|                                                  |       |              |       |                                            |       |              |       |                                            |       |                                 |       |
| Tax on revenues                                       |       | (3,543            | )          | (41.0                                           | )          | (3,241            | )          | (43.2                                           | )          | 9.3                                  |       |
|                                                  |       |              |       |                                            |       |              |       |                                            |       |                                 |       |
| Total net  operating revenues                         |       | 8,640             |       | 100                                             |       | 7,513             |       | 100.0                                           |       | 15.0                                 |       |

 

Revenues from electricity sales to final consumers increased 7.0% fromR$8,708 million in 2005 to R$9,319 million in 2006 due to rate adjustments of20.7% in April 2005 (full effect in 2006) and 7.1% in April 2006 anda 1.4% increase in the volume of our electricity sales to final consumers in2006. The TUSD charges related to the use of the local distribution network ofthe Free Consumers, which began to be charged separately in 2004 and recordedunder the item “Use of basic transmission and distribution networks”, were R$1,122million in 2006 compared to R$942 million in 2005. This increase was due to ashift in certain industrial consumers to the category of Free Consumers in2006. Electricity sales to final customers and the TUSD revenues togetherincreased 8.2% in 2006 compared to 2005.

 

Revenues related to the deferred rate adjustment were R$110 million in2005. ANEEL Resolution No. 71, dated April 4, 2005, disclosed theresults of CEMIG’s periodic rate review. According to this resolution, the rateadjustment to be applied to CEMIG’s rates beginning on April 8, 2003 was44.4%, instead of the 31.5% previously applied. The difference is beingincluded by ANEEL in our rate adjustments. The deferred rate adjustmentrecorded in 2005 represents the difference between the tariff adjustment thatCEMIG is entitled to and the rate previously applied.  See Note 4 to our consolidated financialstatements.

 

Electricity sales to the interconnected power system were R$884 millionin 2006, a 273.0% increase compared to R$237 million in 2005. This increase wasprimarily due to the sale of energy by Cemig Generation and Transmission toother distributors in 2006 as a result of the energy auction. In 2005, asubstantial portion of the sale of energy by Cemig Generation and Transmissionwas to Cemig Distribution and was thus eliminated as inter-company transactionsin the consolidated financial statements of CEMIG.

 

Income from the use of the basic transmission network increased R$257million, or 16.9%, from R$1,523 million in 2005 to R$1,780 million in 2006.This increase was primarily due to the higher TUSD revenues of CemigDistribution, which totaled R$1,261 million in 2006 compared to R$1,058 millionin 2005, resulting from the charges paid by Free Consumers for the power soldby Cemig Generation and Transmission.  Inaddition, there was an increase in revenues related to use of the facilitiesthat are part of CEMIG’s basic transmission network by electric powergenerators and distributors that comprise the national grid, in the amount of R$417million in 2006 compared to R$403 million in 2005.

 

Other operating revenues increased 13.6%, from R$176 million in 2005 toR$200 million in 2006. The variation in our other operating revenues in 2006 isprimarily due to an increase in telecommunications and cable TV servicesrevenues which was R$121 million in 2006 compared to R$92 million in 2005.Additionally, we recorded revenue relating to the regulatory extraordinary rateadjustment in accordance with the terms of the General Agreement of the ElectricitySector, which provides for reimbursement of revenue losses incurred during theperiod of the Electricity Rationing Plan and related spot market transactionsthrough special rate increases to be billed to final consumers, and inaccordance with EITF Issue No. 92-07, “Accounting by Rate-RegulatedUtilities for the Effects of Certain Alternative Revenue Programs,” whichestablishes a 24-month limit for the recovery of revenue losses incurredduring the Electricity Rationing Plan. See Note 4 to our consolidated financialstatements.

 

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Taxes on revenues increased 9.3% to R$3,543 million in 2006, comparedto R$3,241 million in 2005, as a result of the increase in our electricitysales to final consumers (including TUSD revenue) in 2006 as compared to 2005.Taxes on revenues consist of:  (i) VAT,assessed at an average rate of 21% on electricity sales to final consumers, andVAT billed to consumers related to the deferred regulatory assets; (ii) COFINS,assessed at a rate of 7.6%; and (iii) PASEP, assessed at a rate of 1.65%.Through the end of 2005, the *Encargo deCapacidade Emergencial* (Emergency Capacity Charge), a chargeestablished in 2002 that was prorated among final consumers of electric energyand relates to the *ComercializadoraBrasileira de Energia Elétrica*—CBEE, or CBEE, a Federal Governmentagency set up to supply energy to utilities in the event of future shortages,was also assessed. Due to the high reservoir levels of Brazilian hydroelectricplants in 2006, such charge was eliminated beginning in 2006. See Notes 15 and19 to our consolidated financial statements.

 

*Operatingcosts and expenses*

* *

Operating costs and expenses increased 27.1% to R7,867 million in 2006from R$6,189 million in 2005. This increase was principally due to increases inour electricity purchased for resale, personnel expenses and our provision forloss on deferred regulatory assets and an expense recorded in 2006 related to aregulatory liability – special obligations.

 
| ** **                                           | ** ** | **2006**          | ** ** | **% of net  operating  revenues** | ** ** | **2005**          | ** ** | **%**** of net  operating  revenues** | ** ** | **2006 versus  2005 - %** | ** ** |
|------------------------------------------------------|------------|-------------------|------------|---------------------------------------------|------------|-------------------|------------|-------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                           | ** ** | **(in millions)** | ** ** | ** **                                  | ** ** | **(in millions)** | ** ** | ** **                                      | ** ** | ** **                               | ** ** |
|                                                 |       |              |       |                                        |       |              |       |                                            |       |                                     |       |
| Electricity  purchased for resale                    |       | R$                | (1,907     | )                                           | (22.1      | )                 | R$         | (1,455                                          | )          | (19.4                                    | )          | 31.1 |   |
|                                                 |       |              |       |                                        |       |              |       |                                            |       |                                     |       |
| Use of basic  transmission and distribution networks |       | (687              | )          | (8.0                                        | )          | (709              | )          | (9.4                                            | )          | (3.1                                     | )          |
|                                                 |       |              |       |                                        |       |              |       |                                            |       |                                     |       |
| Depreciation and  amortization                       |       | (810              | )          | (9.4                                        | )          | (669              | )          | (8.9                                            | )          | 21.1                                     |       |
|                                                 |       |              |       |                                        |       |              |       |                                            |       |                                     |       |
| Personnel                                            |       | (1,046            | )          | (12.1                                       | )          | (779              | )          | (10.4                                           | )          | 34.3                                     |       |
|                                                 |       |              |       |                                        |       |              |       |                                            |       |                                     |       |
| Regulatory  charges                                  |       | (1,031            | )          | (11.9                                       | )          | (983              | )          | (13.1                                           | )          | 4.9                                      |       |
|                                                 |       |              |       |                                        |       |              |       |                                            |       |                                     |       |
| Regulatory  liability –special liabilities      |       | (1,057            | )          | (12.2                                       | )          | —            |       | —                                          |       | —                                   |       |
|                                                 |       |              |       |                                        |       |              |       |                                            |       |                                     |       |
| Third-party  services                                |       | (475              | )          | (5.5                                        | )          | (420              | )          | (5.6                                            | )          | 13.1                                     |       |
|                                                 |       |              |       |                                        |       |              |       |                                            |       |                                     |       |
| Employee  post-retirement benefits                   |       | (245              | )          | (2.8                                        | )          | (257              | )          | (3.4                                            | )          | (4.7                                     | )          |
|                                                 |       |              |       |                                        |       |              |       |                                            |       |                                     |       |
| Materials and  supplies                              |       | (116              | )          | (1.3                                        | )          | (95               | )          | (1.3                                            | )          | 22.1                                     |       |
|                                                 |       |              |       |                                        |       |              |       |                                            |       |                                     |       |
| Provision for  loss on deferred regulatory assets    |       | (49               | )          | (0.6                                        | )          | (183              | )          | (2.4                                            | )          | (73.2                                    | )          |
|                                                 |       |              |       |                                        |       |              |       |                                            |       |                                     |       |
| Employee profit  sharing                             |       | (210              | )          | (2.5                                        | )          | (260              | )          | (3.5                                            | )          | (19.2                                    | )          |
|                                                 |       |              |       |                                        |       |              |       |                                            |       |                                     |       |
| Other                                                |       | (234              | )          | (2.7                                        | )          | (379              | )          | (5.0                                            | )          | (38.3                                    | )          |
|                                                 |       |              |       |                                        |       |              |       |                                            |       |                                     |       |
| Total operating costs  and expenses                  |       | R$                | (7,867     | )                                           | (91.1      | )                 | R$         | (6,189                                          | )          | (82.4                                    | )          | 27.1 |   |

 

Electricitypurchased for resale consists primarily of purchases from Itaipu through *Eletrobrás*. We are required underapplicable regulations to purchase 17.0% of Itaipu’s capacity at U.S.dollar-denominated prices. We also purchase electricity from the CCEE, Furnasand through competitive biddings. Electricity purchased for resale increased31.1% to R$1,907 million in 2006 from R$1,455 million in 2005. The amounts ofelectricity purchased for resale reported in the income statement refer to theamounts that were in fact included in the calculation of the tariff to beapplied, in accordance with SFAS 71 “Accounting for the Effects of CertainTypes of Regulation”. See Note 20 to our consolidated financial statements.

 

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Charges for use of the basic transmission network mainly correspond tothe cost of transporting electricity in the Brazilian basic transmissionnetwork which is prorated among the Brazilian distribution companies. Chargesfor use of the basic transmission network are fixed costs, which decreased 3.1%from R$709 million in 2005 to R$687 million in 2006. The amount reported in theincome statement refers to the amounts that were in fact included in thecalculation of the tariff to be applied, in accordance with SFAS 71 “Accountingfor the Effects of Certain Types of Regulation”.

 

Depreciation and amortization expense increased 21.1% from R$669million in 2005 to R$810 million in 2006. This increase was primarily due todepreciable assets in service in 2006 in the amount of R$23,699 million,compared to R$18,875 million in 2005.

 

Personnel expense increased 34.3% from R$779 million in 2005 to R$1,046million in 2006. This variation was due to the following factors: (i) a7.6% salary increase granted to CEMIG’s employees in November 2005 (fulleffect in 2006) and a 4.0% salary increase granted in November 2006; (ii) aR$178 million expense recorded in 2006 for an upfront payment to employees inexchange for their relinquishment of future benefits for time of service; (iii) anincrease of 3.8% in the number of employees of CEMIG and its subsidiaries CemigGeneration and Transmission and Cemig Distribution, and (iv) an increasein fixed personnel costs from R$92 million in 2005 to R$158 million in 2006 dueto work on the “Luz Para Todos” program.

 

Regulatory charges increased 4.9% from R$983 million in 2005 to R$1,031million in 2006, primarily due to the increase of R$90 million in the fuelusage quota. The fuel usage quota represents contributions made by theelectricity company concessionaires to subsidize the cost of fuel used in thethermoelectric energy generating process in the Brazilian energy system. Theamounts reported in the income statement related to regulatory charges refer tothe amounts that were in fact included in the calculation of the tariff to beapplied, in accordance with SFAS 71 “Accounting for the Effects of CertainTypes of Regulation”.

 

We recorded an expense in 2006, in the amount of R$1,057 million,related to special obligations, which are resources obtained by us fromconsumer contributions, federal budget allocations, as well as federal, stateand municipal funds, and special credits relating to investments made inprojects linked to the concession.  Theresources represent either infrastructure assets or cash to fund theacquisition and/or construction of such assets usually to obtain connection toour distribution network or to extend the existing network.  For regulatory purposes, the depreciation ofthese assets was included in the tariff rate setting process and thecorresponding liability was recorded for the amount of the total contributions.  Under U.S. GAAP, the contributions wereconsidered reimbursements of construction costs and credited against the costof the related fixed assets. On October 31, 2006, ANEEL issued a newregulation which changed the treatment of special obligations with respect tothe tariff setting process.  Theregulation establishes, among other items, that beginning on the date of thenext respective tariff revision, the special obligations will be amortized as areduction of net allowable costs over future periods, thereby reducing tariffs.Consequently, in accordance with SFAS No. 71 “Accounting for the Effectsof Certain Types of Regulation”, the special obligations became a regulatoryliability as a result to this new regulation. Therefore, we recorded an expense in the 2006 statement of operations,with an offset to deferred regulatory liabilities.  See more information on Note 4, item “f” toour consolidated financial statements.

 

Third-party services expense increased 13.1% from R$420 million in 2005to R$475 million in 2006. The increase was due to higher costs in 2006 relatedto meter reading, delivery of bills to consumers, maintenance and conservationof vehicles and contracted labor.

 

Employee post-retirement benefits expenses decreased 4.7% from R$257million in 2005 to R$245 million in 2006 due to the reduction in payments forour Defined Contribution Plan from R$68 million in 2005 to R$53 million in2006. See Note 16 to our consolidated financial statements.

 

We recorded a provision for losses on deferred regulatory assets ofR$49 million in 2006 compared to R$183 million in 2005. The provision recordedis related to the amounts that CEMIG receives from other distribution companiesin connection with energy transactions on the CCEE/MAE during the ElectricityRationing Plan. These distribution companies have a limited time, as stipulatedby ANEEL, to transfer the amounts owed to us. See Note 4 to our consolidatedfinancial statements.

 

Employees profit sharing decreased 19.2% from R$260 million in 2005 toR$210 million in 2006. This decrease is a result of a lower payment amountestablished under the collective labor agreements entered into by CEMIG and thelabor unions in November 2006.

 

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Other expenses decreased 38.3% from R$379 million in 2005 to R$234million in 2006. The decrease in other expenses was primarily due to thereversal of provisions of R$97 million in 2006 compared to provisions recordedin 2005 of R$31 million, related to labor claims and civil lawsuits. See Note20 to our consolidated financial statements.

 

*Operatingincome*

* *

As a result of the foregoing, we had operating income of R$773 millionin 2006, compared to operating income of R$1,324 million in 2005.

 

*Financialincome, net*

* *

Financial income net, includes (i) financial income, which ismainly comprised of interest and a monetary restatement of our accountreceivable from the State Government, investment income earned, late charges onoverdue electricity bills, foreign exchange gains, monetary restatement ondeferred regulatory assets and (ii) financial expenses, which are mainlycomprised of interest expense on loans and financing, the *Contribuição Provisória sobre a Movimentação ouTransmissão de Valores e de Créditos e Direitos de Natureza Financeira*(a financial transaction tax), or CPMF, foreign exchange losses, monetaryrestatement losses, monetary restatement of deferred regulatory liabilities andother expenses. We had net financial income of R$335 million in 2006 comparedto net financial income of R$754 million in 2005, principally due to a R$99million reversal provision for losses on accrued interest on our accountreceivable from the State Government in 2006 compared to a reversal provisionof R$223 million in 2005 due to the execution of the Fourth Amendment to theCRC Account Agreement mentioned in Note 3 to our consolidated financialstatements. Additionally, there was an increase of 61.3% in the charges onloans and financings from R$328 million in 2005 to R$529 million in 2006, duemainly to the increase in our debt in 2006 compared to 2005.

 

*Non-Operatingincome*

* *

We had non-operating income of R$91 million in 2006 compared tonon-operating income of R$29 million in 2005. The non-operating income recordedin 2006 is related to our equity investment in RME and other jointly controlledcompanies. See Note 9 to our consolidated financial statements.

 

*Incometaxes*

* *

Income taxes were an expense of R$497 million on pre-tax income ofR$1,199 million in 2006, compared to an expense of R$300 million on pre-taxincome of R$2,107 million in 2005. The main difference between income taxcalculated at the statutory rate and the income tax expense recorded is the taxbenefit mainly due to interest and monetary variation on our provision forlosses on our account receivable from the State Government. See Note 5 to ourconsolidated financial statements.

 

*Netincome*

* *

As a result of the foregoing, we had a net income of R$702 million in2006 compared to net income of R$1,809 million in 2005.

 

*Othercomprehensive income (loss)*

* *

Other comprehensive income was R$140 million in 2006 compared to othercomprehensive income of R$25 million in 2005. This variation was due to areduction in the additional minimum liability related to post-retirementbenefits in 2006, as a result of a higher increase in plan assets compared tothe increase in the projected benefit obligation.

 

*Comprehensiveincome*

* *

As a result of the factors stated above, comprehensive income was R$842million in 2006 compared to R$1,834 million in 2005.

 

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**Liquidity and Capital Resources**

 

Our business is capital intensive. Historically, we have requiredcapital to finance the construction of new generation facilities and theexpansion and modernization of existing generation, transmission and distributionfacilities. Our liquidity requirements are also affected by our dividendpolicy. See “Item 8. Financial Information—Dividend Policy and Payments.”  We have funded our liquidity and capitalrequirements primarily with cash provided by operations and, to a lesserextent, with proceeds of financings. We believe that our current cash reserves,cash provided by operations and anticipated proceeds from financings will besufficient during the next 12 months to meet our liquidity requirements.

 

*Cashand cash equivalents*

* *

Cash and cash equivalents as of December 31, 2007 were R$1,784million compared to R$1,108 million as of December 31, 2006 and R$1,349million as of December 31, 2005. None of our cash or cash equivalents washeld in currencies other than *reais* as of December 31,2007.

 

*Cashflow from operating activities*

* *

Net cash provided by operating activities in 2007, 2006 and 2005totaled R$2,836 million, R$2,286 million and R$1,775 million, respectively. Theincrease in cash provided by operating activities in 2007 compared to 2006 wasdue mainly to the higher net income in 2007 and higher amount of taxes paidfrom cash in 2006. The increase in 2006 compared to 2005 was due primarily tohigher amounts received related to deferred regulatory assets and higher netincome in 2006 adjusted by non-cash revenues and expenses. Significant non-cashitems affecting earnings included depreciation and amortization expense as aresult of our on-going capital improvements projects, recognition of deferredregulatory assets and liabilities, the effects of monetary variation andexchange rate variations and deferred income taxes Cash flow from investingactivities

 

Net cash used in investing activities during 2007, 2006 and 2005amounted to R$1,114 million, R$2,086 million and R$1,548 million, respectively,principally relating to the acquisition of property, plant and equipment andthe modernization of existing generation, transmission and distributionfacilities, as well as the acquisition of an interest in Light and varioustransmission companies in 2006. A gain on the sale of WAY TV was recognized in2007 in the amount of R$49 million, and investments in affiliates amounted toR$26 million, R$568 million and R$32 million in 2007, 2006 and 2005,respectively. Capital expenditures from the acquisition of property, plant andequipment amounted to R$1,120 million, R$1,328 million and R$1,511 million in2007, 2006 and 2005, respectively. See “Item 4. Information on theCompany—Capital Expenditures” for more detail regarding how these capitalexpenditures were applied by us.

 

*Cashflow from financing activities*

* *

Net cash used by financing activities during 2007 was R$1,046 million,comprised of the repayment of R$1,134 million of *real*andforeign currency-denominated long-term financing and the payment of R$1,334million in dividends and interest on capital, partially offset by R$589 millionand R$833 million in proceeds from long-term financings and short-term loans,respectively.

 

Net cash used by financing activities during 2006 was R$441 million,comprised of the repayment of R$1,817 million of *real*andforeign currency-denominated long-term financing and the payment of R$2,072million in dividends and interest on capital, partially offset by R$2,248million and R$1,200 million in proceeds from long-term financings andshort-term loans, respectively.

 

Net cash provided by financing activities during 2005 was R$206million, comprised of R$1,515 million in proceeds from long-term financing,offset by the repayment of R$818 million of real- and foreigncurrency-denominated long-term financing and the payment of R$491 million individends and interest on capital.

 

Our indebtedness from loans, financings and debentures as of December 31,2007 was R$6,814 million, composed of R$5,873 million of long-term debt andR$941 million of the current portion of long-term debt. This compares withindebtedness from loans, financings and debentures as of December 31, 2006of R$6,524 million, composed of R$5,833 million of long-term debt and R$691 millionof the current portion of long-term debt. Of our long-term debt (including thecurrent portion) at December 31, 2007, R$390 million was denominated inforeign currencies (R$300 million of which was U.S. dollar-denominated) andR$6,424 million was denominated in *reais*. Of ourtotal indebtedness from loans, financings and debentures of R$6,814 million asof December 31, 2007, R$6,191 million is subject to variable interestrates. See Notes 13 and 22 to our consolidated financial statements.

 

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We are subject to financial covenants contained in some of our debtagreements that require us to maintain certain financial ratios. These ratiosare computed based on our financial statements prepared in accordance withaccounting practices adopted in Brazil. These and other covenants could limitour ability to support our liquidity and capital requirements.

 

Given the current portion of our financings in the amount of R$941million due in 2008, we need funds in the short term to pay and refinance theseobligations. For this reason, we are refinancing our debt in 2008 to lengthenmaturities. We plan to raise approximately R$507 million in 2008, which will beused not only to repay debt but also to finance the capital expenditure. Wecannot assure you that we will successfully consummate this refinancing.

 

As a state-controlled company, we are subject to restrictions undercurrent financing laws and regulations in Brazil on our ability to obtainfinancing in certain situations. For example, we must obtain approval from theBrazilian Ministry of Finance and the Central Bank prior to certaininternational financial transactions and such approval is typically grantedonly if the purpose of the transaction is to finance the import of goods or toroll over our external debt. In addition, financial institutions in Brazil aresubject to risk exposure restrictions with regard to state governments,governmental agencies and state-controlled companies such as us. The restrictionsmentioned in this paragraph have not prevented us from obtaining financing,although there is no assurance that our ability to obtain financing will not behindered in the future. See “Item 3. Key Information—Risk Factors—RisksRelating to Brazil—We currently face limitations on our ability to obtainfinancing.”

 

We currently plan to make capital expenditures aggregatingapproximately R$1,561 million in 2008. The principal uses of these expendituresare expected to be for expansion of our distribution infrastructure andincreases in our generation capacity. In 2007, we funded our capitalexpenditures and met our liquidity requirements through a combination of cashflow from operations and financings. We expect that we will fund our proposedcapital expenditures and meet our other liquidity requirements in 2008 througha combination of cash flow from operations and financings. Because we relyprimarily on cash generated from operations to fund our liquidity and capitalrequirements, factors that cause our revenues and net income to increase ordecrease could have a corresponding effect on our access to sources ofliquidity.

 

Over the long term, we anticipate that it will be necessary to makesignificant capital expenditures in connection with the maintenance andupgrading of our generation, transmission and distribution facilities, and weexpect to employ a variety of liquidity sources, such as cash flow fromoperations and financings, in connection with such requirements. See “Item 3.Key Information—Risk Factors” for a discussion of certain matters that mightadversely affect our liquidity position.

 

The senior quotas of Cemig CRC Account Securitization Fund (“FIDC”) inthe amount of R$900 million that were sold to third parties in January 2006were co-obligations of ours which increased our liabilities in this sameamount. For additional information regarding the FIDC, see “AdditionalInformation – Material Contracts”.

 

**Off-Balance Sheet Arrangements**

** **

We do not have any off-balance sheet arrangements.

 

**Tabular Disclosure of Contractual Obligations**

** **

We have outstanding contractual obligations and commitments whichinclude principal debt payment provisions, the obligation to purchaseelectricity for resale from Itaipu, the obligation to transfer and transport electricpower from Itaipu as well as construction commitments. The following tableprovides information, as of December 31, 2007, about our contractualobligations and commitments in millions of *reais*.

 

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| ** **                                            | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **2014  and  beyond** | ** ** | **Total** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|-----------------------|------------|-----------|------------|
|                                                  |       |     |       |     |       |     |       |     |       |     |       |     |       |                  |       |      |       |
| Long-Term debt  (1)                                   |       | 941      |       | 874      |       | 675      |       | 776      |       | 931      |       | 1,051    |       | 1,566                 |       | 6,814     |       |
| Derivative  financial instruments (“swaps”) |       | 25       |       | 102      |       | 17       |       | 15       |       | 13       |       | 12       |       | —                |       | 184       |       |
| Purchase of  Electricity from Itaipu (2)              |       | 1,074    |       | 787      |       | 854      |       | 887      |       | 906      |       | 386      |       | —                |       | 4,894     |       |
| Transportation  of Electric Power from Itaipu (2)     |       | 71       |       | 61       |       | 63       |       | 66       |       | 68       |       | 29       |       | —                |       | 358       |       |
| Baguari  hydroelectric power plant (3)                |       | 25       |       | —   |       | —   |       | —   |       | —   |       | —   |       | —                |       | 25        |       |
| Aimorés  hydroelectric power plant (3)           |       | 20       |       | —   |       | —   |       | —   |       | —   |       | —   |       | —                |       | 20        |       |
| Guanhães  hydroelectric power plant (3)          |       | 16       |       | —   |       | —   |       | —   |       | —   |       | —   |       | —                |       | 16        |       |
| Sales Management  System I                            |       | 59       |       | —   |       | —   |       | —   |       | —   |       | —   |       | —                |       | 59        |       |
| Furnas-Pimenta  Transmission line                     |       | 16       |       | —   |       | —   |       | —   |       | —   |       | —   |       | —                |       | 16        |       |
| Pension Plan  Debt - Forluz                           |       | 89       |       | 82       |       | 83       |       | 72       |       | 69       |       | 48       |       | 620                   |       | 1,063     |       |
| Concession  Granted (4)                               |       | 1        |       | 2        |       | 2        |       | 2        |       | 6        |       | 12       |       | 305                   |       | 330       |       |
| Unrecognized tax  benefits (5)                        |       | 4        |       | —   |       | —   |       | —   |       | —   |       | —   |       | —                |       | 4         |       |
| Purchase of  Energy — Spot Market                |       | 1,086    |       | 1,349    |       | 2,009    |       | 2,337    |       | 2,626    |       | 2,927    |       | 15,536                |       | 27,870    |       |
| Total                                                 |       | 3,427    |       | 3,257    |       | 3,703    |       | 4,155    |       | 4,619    |       | 4,465    |       | 18,027                |       | 41,653    |       |

 

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| (1) |   | In the event of  our non-compliance with certain covenants in our loan agreements, the total  principal, future interest and any penalties due under these agreements may  become immediately due and payable. These amounts do not include interest  payments on debt or payments under interest rate swap agreements. We expect  to pay approximately R$617 million in interest payments on debt in 2008.  Interest payments on debt for years following 2008 have not been estimated  since they are subject to future variations in variable interest rates and  foreign currency exchange rates. We do not believe projections of interest  payments and payments under interest rate swap agreements would be  meaningful. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Contract with  Furnas, denominated in U.S. dollars, to supply electric power purchased from  Itaipu until May 2013. Amounts are calculated based on the U.S. dollar  exchange rate as of December 31, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (3) |   | Contractual  obligations with contractors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (4) |   | In obtaining the  concessions for construction of some generation projects, the CEMIG Geração e  Transmissão S,A, undertook to make payments to the concession-granting power,  over the period of validity of the contract, as compensation for commercial  operation.                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (5) |   | CEMIG had unrecognized  tax benefits of R$28 million as of December 31, 2007 that are not  included in the table above, since it is not possible to estimate the timing  of such cash payments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

**Research and Development**

** **

We are engaged in projects that explore technological advances not onlyin electric power systems but in all energy-related fields such as thedevelopment of the use of alternative energy sources, environmental control andpower system performance, and safety optimization.

 

In 2007, of the R$30 million that we allocated for use in R&Dprojects, we have only spent R$7 million due to delays by ANEEL in approvingour R&D programs. Nevertheless, R$26 million has been transferred to the *Fundo Nacional de Desenvolvimento Científico eTecnológico*, or FNDCT,a federal research and development fund; and R$33 million has been transferredto *Empresa de Pesquisa Energética*,or EPE (the federal power planning company). During the years ended December 31,2007, 2006 and 2005, we spent an aggregate of approximately R$44 million onresearch and development projects, and we transferred R$63 million to FNDCTduring that time. We expect to spend a total of approximately R$67 million onresearch and development in 2008. We conduct these efforts in accordance withFederal Law 9,991, which requires Brazilian power utilities to spend at least1% of their net revenue on research and development projects and energyefficiency programs (including transfers to FNDCT and EPE), as well as inaccordance with our strategic corporate plans.

 

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In accordance with ANEEL instructions, we recorded a liability in 2007for future expenditures on research and development programs and energyefficiency programs in the amount of R$87 million relating to amounts that hadalready been included in the determination of our tariffs in 2007.

 

We have dedicated a substantial portion of our research and developmentactivities to the development of the use of alternative energy sources,including wind, solar and biomass power generation. For example, ourexperimental Morro do Camelinho wind farm, with installed capacity of 1 MW,began operating in 1994. See “Item 4. Information on the Company—Generation andPurchase of Electric Power—Wind Farm.” We are currently involved in alternative energy research and developmentthrough projects that involve:

 

·                                          developmentof the first Latin American 500W and 1,000W prototypes of hydrogen fuel cells(Direct Hydrogen Proton Exchange Membrane Fuel Cells) and research ondevelopment of cells fueled directly by ethanol without external transformation(Direct Ethanol Proton Exchange Membrane Fuel Cell);

 

·                                          useof low cost technologies for electricity generation such as Stirling motors,internal combustion engines, photovoltaic panels, micro turbines, hightemperature fuel cells, biomass gasification, and bio-gas from animal biomass;

 

·                                          creationof an experimental laboratory for production of hydrogen as an energy source;

 

·                                          ajoint research program with the *Universidade Federal de Itajubá* relating to smallhydroelectric plants, thermal generation and distributed energy resources;

 

·                                          ajoint research program with *CentroTecnológico de Minas Gerais* focusing on the development of alow-cost photovoltaic cell;

 

·                                          ajoint research program with the *Universidade Federal de Viçosa* relating to plantedbiomass for electricity generation; and

 

·                                          ajoint research program with *Centro Federalde Educação Tecnológica* focusing on development of small solarthermal power plants using low-cost materials.

 

Our research and development projects in areas other than alternativeenergy sources include:

 

·                                          projectsrelating to minimization of environmental impact in several areas includingfish safety, limnology, aquifers replenishment, geology-related research,riparian vegetation and environmental problems caused by turbines;

 

·                                          projectsfor monitoring and optimizing of thermal and hydroelectric plants;

 

·                                          meteorologyprojects, especially related to flood and lightning forecasts, the major causesof power outages;

 

·                                          projectsfor the optimization and improvement of the performance of transmission anddistribution systems, such as development of new computer tools, equipment andmaterials;

 

·                                          projectsfor the development of new equipment for energy efficiency; and

 

·                                          projectsfor the optimization of supervision, control and protection systems for thetransmission and distribution control centers.

 

We have also been instrumental in developing programs relating to thegeneration of electricity in remote areas and for low-income consumers, such asour *Lumiar* and *Luz Solar* programs.

 

In view of the importance of technology in relation to our businessstrategy, the annual increase in funds allocated by us to technologicalresearch and development, and the need to maximize results achieved throughthese initiatives, we implemented the 

 

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StrategicTechnology Management Center *(Centro deGestão Estratégica de Tecnologia* — CGET), an independent nonprofitentity whose partners are subsidiaries of CEMIG. In 2007, CGET executed about60 scientific and technological agreements with universities, research centersand the equipment industry to support the implementation of our research anddevelopment projects.

 

**Trends**

** **

The purchase of energy from the Itaipu power plant and our generationresources were sufficient to meet almost 70.8% of our own load and our salecontracts in 2007. To complement our remaining energy needs (29.2%) in 2007, webought energy under “Bilateral Contracts”, through contracts with otherparticipants in the CCEE, and through contracts in the Regulated ContractingEnvironment (ACR).   For more detailsabout the energy purchased and sold in the ACR, see “Item 10. AdditionalInformation—Material Contracts—ElectricitySale Contracts in the Regulated Environment (CCEARs).”

 

As a public service utility, we are subject to regulations issued bythe Federal Government as described in “Item 4. Information on theCompany—Brazil’s Energy Market—Regulation.” Therefore, any change in the regulatory framework may affect ussignificantly either with respect to our revenue if the change relates toprices or with respect to our operating expenses if the change relates to costsincurred to provide service to consumers.

 

We do not anticipate any significant change in revenues in respect ofthe transmission and distribution businesses since the regulation in placemeets the plans of the Federal Government administration.

 

The rate readjustment was applied differently to different clientcategories with industrial clients having higher readjustments than residentialclients. For more information, see “Item 4. Information on the Company—Brazil’sEnergy Market—Rates” and “Annex A—The Brazilian Power Industry—Rates for theUse of the Distribution and Transmission Systems”. This difference inapplication may have an impact on sales volume growth in the future since largeindustrial clients tend to develop co-generation projects to supply energy tothemselves at a lower cost. We are taking steps to mitigate this impact throughthe connection of new clients of different categories as well as clients basedin other states. In the coming years, we expect electricity consumption to growtoward the pre-rationing level based on an assumption that economic activity inBrazil will return to the levels it reached prior to the FederalGovernment-imposed rationing in 2001. However, there can be no assurance thatthis will occur.

 

We expect that our Parcel A costs will increase at a rate well aboveinflation, which will require further rate increases. We expect our Parcel Bcosts to rise more or less at the rate of inflation since most of these costitems are adjusted for inflation according to contractual terms. We have takenmeasures to cut operating costs so as to meet benchmarks proposed by ANEEL inthe periodic rate review process.

 

With respect to expansion, we believe a significant trend is theuniversalization of client service. Utilities are currently required to provideservice to all clients according to a schedule settled by ANEEL. Thelegislation establishes that financing for universalization of the serviceswill come from the funds of the Energy Development Account (*Conta de Desenvolvimento Energético*), or CDE, and the GlobalReversion Fund (*Reserva Global de Reversão*), orRGR. According to the *Luz Para Todos Program*,launched by the MME and Eletrobrás for the universalization of electricservices in rural areas, 21.0% of the necessary funds will come from CDE, 17.9%from RGR, 9.8% from the State Government and the remaining 51.3% will come fromCEMIG.

 

An important project that CEMIG invests in is the Minas PCH Program.This project aims to build hundreds of small hydroelectric power plants in theState of Minas Gerais, and will guarantee a diversified and higher energysupply for the growth of the regional economy.

 

Another highlight in new investment in distribution is the *Cresce Minas* program. This program willrun from 2006 to December 2008 and will provide infrastructure and improvements tothe electricity distribution system throughout Minas Gerais to improvethe quality of electricity supply and adapt it to the new conditions of themarket.

 

 With respect to energy supply,we expect the current capacity and favorable reservoir levels to prevail in thenear term.  However, there are concernsabout supply conditions in the mid term, since Brazil’s production andimporting of natural gas is not sufficient to meet all the consumption ofthermal units in the case of a severe drought. Investment in new generatingcapacity is one of the major concerns of the Federal Government and it isexpected that the new regulatory framework will encourage investment in newgeneration capacity.

 

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**Item 6.**           Directors, SeniorManagement and Employees

** **

**Directors and Senior Management**

** **

We are managed by our Board of Directors (*Conselho de Administração)*, which consists of 14 directors(currently 13 due to an unfilled vacancy as a result of the resignation of theChairman of the Board effective May 30, 2008), with each director having acorresponding alternate, and our Board of Executive Officers (*Diretoria)*, which consists of eightexecutive officers. As our majority shareholder, the State Government has theright to elect the majority of our Board of Directors and, therefore, cancontrol the outcome of Board of Director meetings. Each holder of our commonshares is entitled to vote to elect members of our Board of Directors. Pursuantto the Brazilian Corporate Law, any shareholder holding at least 5% of ouroutstanding common shares may request that a cumulative voting procedure beadopted that would entitle each share to a number of votes equal to the currentnumber of members of our Board of Directors and giving each shareholder theright to either vote cumulatively for a candidate or to distribute its votesamong several candidates.

 

Pursuant to the Brazilian Corporate Law, holders of preferred sharesrepresenting at least 10% of our share capital or holders of common sharesrepresenting at least 15% of our voting capital (other than our controllingshareholder) have the right to appoint one member and an alternate to the Boardof Directors. If none of the holders of common shares or preferred shares meetsthe respective thresholds described above, shareholders representing in theaggregate at least 10% of our share capital will be able to combine theirholdings to appoint one member and an alternate to the Board of Directors.

 

CEMIG and its wholly-owned subsidiaries, Cemig Generation andTransmission and Cemig Distribution, all have the same Board of Directors,Board of Executive Officers and Fiscal Council.

 

**Board of Directors**

** **

Our Board of Directors ordinarily meets once every two months. Itsresponsibilities include the establishment of corporate strategy, the generaldirection of our business and the election, dismissal and supervision of ourexecutive officers.

 

Each regular member of the Board of Directors has an alternate member,who is elected at general shareholder meetings in the same manner as a regularmember. Alternate directors act as substitutes for their respective directorsfrom time to time when the directors are not available to perform normaldirector functions, or, in the case of a vacancy on the Board of Directors,until a replacement director is appointed to fill such vacancy. No member oralternate member of our Board of Directors has a service contract with us orany subsidiary that provides for benefits upon termination of employment.

 

The members of our Board of Directors are elected to serve three-yearterms and may be reelected. Our full Board of Directors is elected every threeyears. Of the 14 members of our Board of Directors, eight are elected by theState Government, five are elected by Southern and one is elected by ourpreferred shareholders. The terms of the current members of our Board ofDirectors expire in April 2009. The names, positions and dates of initialappointment of our directors and their respective alternates are as follows:

 
| **Name**                                   | ** ** | **Position**                        | ** ** | **Date of Initial  Appointment** | ** ** |
|--------------------------------------------|------------|-------------------------------------|------------|----------------------------------|------------|
| Vacancy (1)                                |       | Director and Chairman of the  Board |       |                             |       |
| Paulo Sérgio Machado Ribeiro          |       | Alternate                           |       | April 25, 2008              |       |
| Djalma Bastos de Morais                    |       | Director                            |       | January 14, 1999            |       |
| Lauro Sérgio Vasconcelos  David       |       | Alternate                           |       | April 28, 2006              |       |
| Francelino Pereira dos  Santos             |       | Director                            |       | February 27, 2003           |       |
| Luiz Antonio Athayde  Vasconcelos          |       | Alternate                           |       | February 27, 2003           |       |
| Antônio Adriano Silva                 |       | Director                            |       | January 14, 1999            |       |
| Marco Antônio Rodrigues da  Cunha     |       | Alternate                           |       | February 27, 2003           |       |
| João Camilo Penna                     |       | Director                            |       | April 25, 2008              |       |
| Guilherme Horta Gonçalves Júnior |       | Alternate                           |       | February 27, 2003           |       |
| Britaldo Pedrosa Soares (2)                |       | Director                            |       | April 25, 2008                   |       |

 

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| Jeffery Atwood Safford  (2)                    |   | Alternate |   | April 25,  2008   |   |
|------------------------------------------------|--------|-----------|--------|------------------------|--------|
| André  Araújo Filho (2)              |   | Director  |   | April 25,  2008   |   |
| Maria  Amália Delfim de Melo Coutrim(2)   |   | Alternate |   | April 28,  2006   |   |
| Roberto  Pinto Ferreira Mameri Abdenur (2)     |   | Director  |   | April 25,  2008   |   |
| Airton  Ribeiro de Matos (2)                   |   | Alternate |   | April 25,  2008   |   |
| Evandro  Veiga Negrão de Lima (2)         |   | Director  |   | April 28,  2006   |   |
| Andréa  Leandro Silva (2)                 |   | Alternate |   | May 07,  2004     |   |
| José  Castelo Branco da Cruz (2)          |   | Director  |   | April 25,  2008   |   |
| Sérgio  Ladeira Furquim Werneck Filho (2) |   | Alternate |   | April 25,  2008   |   |
| Aécio Ferreira da Cunha                   |   | Director  |   | May 28, 2003      |   |
| Eduardo Lery Vieira                            |   | Alternate |   | May 28, 2003      |   |
| Maria Estela Kubitschek  Lopes                 |   | Director  |   | February 27, 2003 |   |
| Fernando Henrique Shuffner  Neto               |   | Alternate |   | June 22, 2007     |   |
| Alexandre Heringer Lisboa                      |   | Director  |   | February 27, 2003 |   |
| Franklin Moreira Gonçalves                |   | Alternate |   | February 27, 2003 |   |
| Wilton de Medeiros Daher(3)                    |   | Director  |   | April 28, 2006    |   |
| Guy Maria Villela Paschoal                     |   | Alternate |   | April 25, 2008    |   |

 

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| (1) |   | The Chairman of  the Board of Directors resigned effective May 30, 2008 to pursue other  opportunities. The Vice President of the Board of Directors is acting as  President of the Board of Directors at the Board meetings until a new  Chairman of the Board of Directors is elected. |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Elected by Southern.                                                                                                                                                                                                                                                                          |
| (3) |   | Elected by our  preferred shareholders.                                                                                                                                                                                                                                                       |

 

Set forth below is briefbiographical information for each member of our Board of Directors.

 

*Djalma Bastos de Morais*— Mr. Morais holds a bachelor’s degree in engineering from the MilitaryInstitute of Engineering and has completed additional post-graduate studies intelephony and computers at the same institute. Since January 1999 he hasbeen our Chief Executive Officer, and since July 2002 he has been theChief Executive Officer of Empresa de Infovias S.A. From January 1999 to December 2004he was the Chief Executive Officer of Gasmig. From May 1999 to August 2001he was the Chief Executive Officer of Empresa de Infovias S.A. From 1995 to1998, he was Vice-President of Petrobrás Distribuidora S.A., the Brazilian oilcompany. From 1993 to 1994, Mr. Morais served as Brazilian Minister ofCommunications. He has also held various other positions, such as chiefexecutive officer of Telecomunicações de Minas Gerais S.A.—Telemig; manager ofTelecomunicações Brasileiras S.A.—Telebrás; chief operating officer ofTelecomunicações de Mato Grosso—Telemat; chief operating officer ofTelecomunicações do Amazonas—Telemazon; and manager of Telefônica MunicipalS.A.—Telemusa.

 

*Francelino Pereira dos Santos*— Mr. Santos earned a law degree from the Law School of the FederalUniversity of Minas Gerais in 1949. Mr. Santos was a Minas Gerais statesenator from 1995 to 2002 and the Governor of Minas Gerais from 1979 to 1983.He also was a congressional representative for four successive terms from 1963to 1979 and alderman for the city of Belo Horizonte from 1951 to 1954. From1961 to 1966 he was Chief of Cabinet of the Minas Gerais State Secretary ofInternal Affairs and Justice, Chief of the Minas Gerais State General ManagementDepartment and Chief Counselor for Municipalities Affairs of the Cabinet of theGovernor. From 1985 to 1990, he was vice-president of management of Banco doBrasil S.A. and the chief executive officer of Acesita from October 1983to August 1984. Mr. Santos was also a professor and director of theMunicipal Accounting High School in Belo Horizonte from 1955 to 1959.

 

*Antônio Adriano Silva*— Mr. Silva holds a business administration degree with a specializationin marketing. He has workedfor several private entities, including Mesbla S.A., Empresa Brasileira deVarejo S.A.—Embrava, Agência Jornalística Imagem, Associação Comercial deMinas, Asa Criação de Publicidade, and Coteminas.

 

*JoãoCamilo Penna* — Mr. Penna earned his degree inengineering in 1948 from Minas Gerais Federal University (UFMG). He was a worksengineer with CVRD from January 1949 to April 1951; Planning andWorks Officer at CEMIG from May 1951 to March 1961; and TechnicalDirector of CEMIG from March 1961 to March 1967. He was Chairman ofCEMIG from March 1967 to March 1975. He served as Finance Secretaryof Minas Gerais State in the governments of Aureliano Chaves and Oznam Coelhofrom March 1975 to March 1979, as Brazil’s Trade and IndustryMinister in the Figueiredo government from March 1979 to August 1984,and was Chairman of Furnas Centrais Elétricas from May 1985 to August 1989.During these same periods he was interim Administration Secretary of MinasGerais State, a Member of the National Monetary Council (CMN), member of theBoard of 

 

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Directors of Eletrobrás,Vice-Chairman of the Brazilian Technical Standards Association, Director of theLarge Dams Committee, and of the Brazilian Group for the World EnergyConference. From 1990 he was a consultant and member of boards of organizationssuch as Mannesmann, the Dom Cabral Foundation, Copersucar, CompanhiaSiderúrgica do Pará, Companhia Força e Luz Cataguazes-Leopoldina,Biobrás, Copasa, and the Minas Gerais Industries’ Federation (Fiemg). From 1984to 1992 he was a member of the Board of Directors of Itaipu Binacional, andChairman of the Board of the Horizontes Institute at Atech—Sivam. At Coopersand Lybrand, he was president of the Supervision Committee of the BrazilianIndustry Competitiveness Study. In 2002 he was Consultant in the preparation ofthe study “Minas Gerais in the 21st Century”, an initiative of the Minas GeraisDevelopment Bank (BDMG); and President of the organization “Economy and Energy —E&E”. He was a member of the President of the Republic’s Ethics Committee,from September 2000 to March 2005, and from April 2004 to April 2005was a member of the Public Ethics Committee of the Minas Gerais Stategovernment.

 

*Britaldo Pedrosa Soares —* Mr. Soaresearned his degree in Metallurgical Engineering from Minas Gerais FederalUniversity, with postgraduate studies in Engineering Economics from theDom Cabral Foundation, and an extension course in Management and Leadershipfrom Darden School of Business of the University of Virginia. He began hiscareer with Citibank/Citigroup in 1980, where he was Corporate Bank andInternational Corporate Finance Vice-President from 1988 to 1992. From 1992 to1998 he was Financial Director of the pulp area of the Caemi/Jari Companies, andCEO of Jari Celulose. He was Vice-President for Finance of Enron South America,and Prisma Energy, the holding company of the electricity distributor Elektro,from February 1999 to August 2005. At Elektro he was Finance andInvestor Relations Manager from February 1999 to December 2003. In September 2005he became Vice-President for Finance and Investor Relations of the companies ofthe AES Group in Brazil (Eletropaulo, AES Tietê, AES Uruguaiana, AES Sul andothers). Since July 2007 he has been CEO of the AES Group of companies inBrazil.

 

*André Araújo Filho* —  Mr. Filho received a law degree fromMackenzie Law Faculty in 1968, with postgraduation in Labor Law from theGetúlio Vargas Foundation. He studied in the Global Leadership course at theInternational Strategic Studies Center at Georgetown University, Washington DC,and has published 3 books: A Escola do Rio – Fundamentos Políticos da NovaEconomia Brasileira, pubished by Editora Alfa Omega, in 1998; MercadosSoberanos – Globalização, Poder e Nação, pubished by Editora Alfa Omega, in1999; and Moeda e Prosperidade – O Impasse do Crescimento na Política deEstabilização, pubished by Editora Top Books, in 2005. He was Treasury Directorof The Brazilian Household Appliances Industry Association (Abinee) for threeperiods of office, from 1974 to 1983, and First Treasurer of the NationalHoushold Appliances Manufacturers’ Association (Sinaees) from 1974 to 1985,also for three periods of office. He was Chairman of Emplasa, Empresa de Planejamento Metropolitano daGrande São Paulo S.A., in 1994; Financial Director of Prodam – Companhia deProcessamento de Dados do Município de São Paulo, in 2000; and from 1972 to1983 was Financial Director and CEO of Búfalo Motores S.A.

 

*Roberto Pinto Ferreira Mameri Abdenur*—  Mr. Abdenur has a law degree fromthe PUC University of Rio de Janeiro and a degree in economics from the LondonSchool of Economics. From 1964 to 1983 he was in the Diplomatic Service, asThird, Second, and First Secretary, Counselor, Minister and Ambassador. At theForeign Relations Ministry, he worked in the Communications and ArchivesDivision from 1964 to 1965, the Commercial Policy Division from 1966 to 1967,as Interim Head of the Technical Analysis and Planning Sector in 1968, Officialof the Minister’s Office in 1969, Assistant to the Secretary-General from 1975to 1978, Coordinator for Economic and Trade Affairs to the Office of theForeign Relations Minister from 1979 to 1984 and Secretary General for Foreignrelations from 1993 to 1995. He has been Assistant Consul-General in Londonfrom 1969 to 1973, First Secretary in the Brazilian Embassy in Washington from1973 to 1975; and was Brazilian Ambassador to Ecuador from 1985 to 1988, toChina from 1989 to 1993, to Germany from 1995 to 2002, to Austria from 2002 to2004, and to the USA from 2004 to 2007. Since 2007 he has acted as consultanton international political and economic subjects related to Brazil.

 

*Evandro Veiga Negrão de Lima*— Mr. Negrãode Lima graduated with a degree in medicine with a specialization in psychiatryfrom the medical faculty of Minas Gerais Federal University in 1964, where,after hospital and university experience in Colorado, USA, he later became alecturer and subsequently Monitor in Forensic Medicine. He was a clinicalpsychiatrist for the private social security institute of the employees ofMinas Gerais state, retiring as head of medical services for the interior ofthe state. He has been Director of the Minas Gerais Commercial Association,Vice-president of the Real Estate Company Managers’ Club, Vice-president ofAmérica Football Club, director of the two steel trading companies, Cobraço andCobrafer, and a licensed aircraft pilot since 1968. He is currently chairman ofthe planning and engineering company Sancruza, president of the Pampulha yachtclub in Belo Horizonte, and chairman of the construction and developmentcompany, NL, and two real estate management companies.

 

*José Castelo Branco da Cruz*—** **Mr. Branco daCruz earned his law degree from Rio de Janeiro State University in 1983,withpostgraduation studies in Economic Law and Business Contracts from the GetúlioVargas Foundation of São Paulo. Since 1992 he has worked on contracts, inrestructuring of companies, and stockholding and capital markets issues at theCastelo Branco & 

 

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Diaslaw office. He was Counsel and legal manager for the Lorentzen Group from 1986to 1992. He was also Assistant Executive Attorney to the government of theState of Maranhão from 1983 to 1986.

 

*Aécio Ferreira da Cunha*— Mr. Cunha earned his law degree from the National Law Faculty of theUniversity of Brazil, in Rio de Janeiro, in 1951. He was certified by theBrazilian Superior School of War in 1973. Presently, Mr. Cunha is an agribusinessentrepreneur in northern Minas Gerais. Since 1993, he has been a director ofFurnas. In 1993 he was the chairman of BNDES. He was the congressionalrepresentative for six terms from 1963 to 1987, and representative of the MinasGerais House of Representatives for two terms from 1955 to 1962. Prior to that,Mr. Cunha was the Chief of the Cabinet of the Minas Gerais State Secretaryof Agriculture, Commerce and Labor. In 1988 Mr. Cunha was nominatedMinister of the Brazilian Court of Audit, having his name approved by theBrazilian Congress, but for personal reasons, he declined before taking office.

 

*Maria Estela Kubitschek Lopes*— Mrs. Lopes holds a degree in architecture and is an interior designerand entrepreneur. She is a managing partner of DF Consultores Ltda. and ofSanta Júlia Importação, Exportação e Participações. Mrs. Lopes is also theadviser to the president of the Municipal Theater Foundation of the City of Riode Janeiro, to the president of the Friends of the State of Rio de Janeiro—AME-RIOand to the president of the board of Casa Santa Ignez (a philanthropicassociation responsible for the nourishment and education of children and aidto low-income families in the Rocinha neighborhood in Rio de Janeiro). She wasone of the founders of Memorial JK, an organization founded in the memory ofJuscelino Kubitschek de Oliveira (former President of Brazil), and served asits vice-president from September 1981 to May 2000 and as actingpresident since October 2000. Mrs. Lopes has also served as presidentof the council of the Cultural Institute Cesgranrio, vice-president of thecouncil of the Women’s Bank, president of the Beneficent Institutions of theState of Rio de Janeiro and a member of the council of Casa das Palmeiras, acultural institution. Mrs. Lopes has received several cultural and socialmerit awards.

 

*Alexandre Heringer Lisboa*— Mr. Lisboa holds a degree in electrical engineering from the PolytechnicInstitute of the Pontifical Catholic University of Minas Gerais and a master’sdegree in mechanical engineering with an emphasis in solar energy from theFederal University of Paraíba, in the city of João Pessoa (State of Paraíba).He also has received specialized wind energy training from the DeutschesWindenergie-Institut and from the Summer School on Wind Energy Technology atthe University of Oldenburg in Germany. Mr. Lisboa has worked as anengineer for CEMIG since May 1985 and he is a director of SENGE as well asa counselor of the Regional Council of Engineering and Architecture. Mr. Lisboaserved as an alternate member of the board of directors of CEMIG from January 1999to December 2000. He was a researcher for and a consultant to theTechnological Foundation Center of Minas Gerais—CETEC from November 1983to April 1985. From January 1977 to May 1979, he was a traineeat Usiminas, Companhia Siderúrgica Belgo-Mineira and Delle-Alstom S.A.—DASA.

 

*Wilton de Medeiros Daher***— Mr. Daher graduated with a degree in economics in1972 and a degree in business management in 1975, from the University of RioGrande do Norte, followed by post-graduation studies in foreign trade at theUniversity of Brasília in 1984. He earned an MBA from the Economics Faculty ofSão Paulo University in 1994 and a masters’ degree in administration(specializing in international trade) from the University of Fortaleza in 2005.At Banco de Brasil, he served as International Business Advisor to thePresident’s Office (from 1979-1985), joint manager of the bank’s branchesin Lisbon and Porto (1986-7), and Joint Managing Director and ManagingDirector for the state of Ceará (1988-1995). In the private sector, hehas served as Executive Director of Intercredit Fomento Mercantil Ltda., hasbeen a member of the Audit Board of Neoenergia S.A. (formerly Guaraniana S.A.),which is a company controlling six electricity utilities in the states of RioGrande do Norte, Pernambuco and Bahia, has been a representative of Previ, theBanco do Brasil pension fund (2003), has been a member of the Audit Board ofDuratex S.A., of the Itaúsa group, representing Previ (2004-2006), hasbeen a member of the Brazilian Corporate Governance Institute (IBGC) in SãoPaulo, and has served as Vice-president of the Ceará State Federation of Trade,Industry, Services and Farming Associations (Facic) for the period 2006-2009.

 

**Board of Executive Officers**

** **

Our Board of Executive Officers is responsible for the execution ofdecisions made by our Board of Directors and for our day-to-day management. Ourexecutive officers have individual responsibilities established by our by-lawsand serve for three-year terms. The terms of the current executive officersexpire in April 2009. They are elected by our Board of Directors.Generally, ordinary meetings are held at least twice monthly and specialmeetings are held whenever called by the Chief Executive Officer or by twoexecutive officers other than the Chief Executive Officer.

 

The names, positions and dates of initial appointment of our executiveofficers are as follows:

 

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| **Name**                                  | ** ** | **Position**                                                                 | ** ** | **Date of Initial  Appointment** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------------------------------|------------|----------------------------------|------------|
| Djalma Bastos de Morais                   |       | Chief Executive  Officer                                                     |       | January 14, 1999            |       |
| Djalma Bastos de Morais(1)                |       | Executive  Vice-President                                                    |       | May 25, 2006                |       |
| José Carlos de  Mattos               |       | Chief New  Business Development Officer                                      |       | January 9, 2007             |       |
| Fernando Henrique Schuffner Neto          |       | Chief Energy  Generation and Transmission Officer                            |       | January 9, 2007             |       |
| José Maria de Macedo                 |       | Chief Energy  Distribution and Commercialization Officer                     |       | February 11, 2003           |       |
| Luiz Fernando  Rolla                      |       | Chief Financial  Officer, Investor Relations and Control of Holdings Officer |       | January 9, 2007             |       |
| Marco Antonio Rodrigues da Cunha          |       | Chief Corporate  Management Officer                                          |       | January 9, 2007             |       |
| Bernardo Afonso Salomão de Alvarenga |       | Chief Trading  Officer                                                       |       | April 27, 2007              |       |

 

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(1)                                 Temporarily,in addition to serving as Chief Executive Officer.

 

Set forth below is briefbiographical information for each member of the Board of Executive Officers.

 

*Djalma Bastos de Morais*— For biographical information regarding Mr. Morais, see “— Board ofDirectors.”

 

*José Carlos de Mattos*— Mr. Mattos received a degree in literature from Uni-BH (Belo HorizonteCentral University) in 1972. He is currently the Chief Executive Officer ofGasmig. From 2004 to 2007 he was Director-President of Previminas, the MinasGerais Social Security Foundation. In 2003 and 2004 he was the financialdirector of Codemig, the Minas Gerais Development Company. From 1983 to 1992 hewas Regional Superintendent of the Federal Savings Bank (*CaixaEconômica Federal*) in the states of São Paulo, Rio de Janeiro andMinas Gerais, and was also Financial Director of the Federal Savings Bank from1992 to 1994. From 1992 to 1994 he was also the Director of BIAPE – theInter-American Savings and Loan Bank. From 1995 to 1996, he was Vice-Presidentof Bemge – the State Bank of Minas Gerais. He was appointed Chief Planning,Projects and Construction Officer of CEMIG in January 2007.

 

*Fernando Henrique Schuffner Neto*— Mr. Schuffner has a degree in electrical engineering from PUC Universityof Minas Gerais (1982), a master’s degree from Unicamp (1984), and an MBA fromIbmec in 2000. After working in university research he joined CEMIG in 1985,working as a regional manager and administrator before becoming Superintendentfor Coordination of Planning and Management, successively, for Distribution,Distribution Expansion, and Distribution Market Expansion. He then became CEMIG’sExecutive Coordination Superintendent of the *Lightfor All* Program. He has lectured at universities, and published manyscientific articles over the period from 1983 to 2005, from work on topologiesof commutating circuits (1983) to joint authorship of *Fuzzy Preference Relations and MultiobjectiveDecision Making —*presented to**theFourth IEEE International Workshop on Soft Computing as TransdisciplinaryScience and Technology, in Muroran, Japan, May 2005. His work presented tointernational congresses includes three works on control of induction motors.Courses he has taken include the Amana Key APG management course in Sao Pauloin 2004. He was appointed Chief Energy Generation and Transmission Officer ofCEMIG in January 2007.

 

*José Maria de Macedo*— Mr. Macedo earned a degree in electrical engineering from the FederalUniversity of Minas Gerais in 1967 and has completed several specializationcourses on electricity and management. He was a trainee at the Bonneville PowerAdministration in Portland, Texas, at the Tennessee Valley Authority, at theBureau of Reclamation in Denver, Colorado and Southern California Edison inCalifornia. Since March 2003, he has been the Executive Officer of CemigTrading S.A. and since December 2005 he has been the Executive Officer ofCentral Hidrelétrica Pai Joaquim S.A. Mr. Macedo worked at CEMIG from September 1969to May 1994, when he retired as superintendent of electricitytransmission. After his retirement from CEMIG, Mr. Macedo was an organizerof Cooperativa de Prestação de Serviços de Engenharia Ltda., where he currentlyserves as president. Prior to joining CEMIG, Mr. Macedo served as anengineer at Sociedade Instalações Técnicas—SIT. Mr. Macedo has conductedseveral studies and seminars on the electricity field in Brazil.

 

*Luiz Fernando Rolla*— Mr. Rolla joined CEMIG in 1974. Mr. Rolla earned a degree inelectrical engineering from the Federal University of Minas Gerais in 1974 andobtained several specialization courses. He became CEMIG’s Investor RelationsManager in 1986, and was appointed Chief Financial and Investor RelationsOfficer in January 2007.  As CEMIG’sInvestor Relations Manager, Mr. Rolla was responsible for the formulationand implementation of CEMIG’s investor relations strategy beginning in 1986,including the structuring of the Level I and II ADR programs in 1993 and 2001,share sale transactions, prospectuses, investor presentations, roadshows, CVMregistrations, detailed corporate governance matters, stockholders’ meetings,shareholder services, the 

 

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AnnualReport, our website, earnings releases and conference calls, market analystmeetings, and presentations at many of the most important emerging marketsconferences in the last 15 years. In his 32 years with the company he has alsobeen involved in other responsibilities including coordination of long-term planning,structured company-wide budget control and cost analysis, project financetransactions, and negotiation of important debt rollover contracts and issues.Recognition of Mr. Rolla’s wide experience and present outstanding statusin Brazilian investor relations includes Apimec’s “Best IR Professional” in1999 and 2005; “Best Brazilian IRO” from *IR*Magazinein 2006; Honorable Mention in *IR*Magazine’s“Best Latin American IRO” in 2004, naming of CEMIG as “Best Listed Company” byApimec in 2006; recognition by Abrasca for “Best Annual Report” in 2005; and “BestPresentation of 2006” by the Apimec organizations of both São Paulo and RioGrande do Sul.

 

*Marco Antonio Rodrigues da Cunha*— Mr. Rodrigues da Cunha obtained a degree in civil engineering from MinasGerais Federal University in 1978, with later specialization in structures andtransportation, and in engineering valuation, accounting, and economics. He hassubsequently gained numerous qualifications in quality management, finance,accounting and related subjects. Among university lecturing activities, hasgiven a course in Creation of Companies and Business, at Una University, since2001. He joined BDMG (the Minas Gerais State Development Bank) in 1978, workingin assessment of public projects, including major infrastructure developmentprojects. He served as President of the Employees’ Association from 1998 to1990, and Manager of the Financial Division from 1988 to 1991. From 1988 to1990 he was also President of the National Association of Official Banks’Representative Associations. From 1991 to 1995 he was chairman of Minas GeraisSilos and Warehouses Company, the public-sector company coordinating the state’sfarming infrastructure facilities, and from 1995 to 1999 was Chairman of INDI –the Minas Gerais Development Institute — which provides support for numerousimportant industrial development projects in the state of Minas Gerais. Duringthis time he negotiated international missions to Spain, France, Belgium,Holland, Canada, Argentina, Korea, Japan, and the USA to promote cooperationwith Minas Gerais industry. He returned to the BDMG in 1999 to handledevelopment planning, coordinating the state’s economic and social developmentbudgeting, and other important strategic studies. He was appointed ChiefCorporate Management Officer of CEMIG in January 2007.

 

*Bernardo Afonso Salomão de Alvarenga*—**Mr. Alvarenga earned a degree in electricalengineering from Minas Gerais Federal University in 1978, and an MBA from theGetúlio Vargas Foundation in 2001.  Hejoined CEMIG in 1980, and worked in operational and pre-operational sales,sales to transmission consumers, and large client operational sales, beforebecoming our Sales Superintendent for Large Clients from 1998 to 2001, and forcorporate clients from 2001 to 2005. From March 2006 to April 2007,he was our Superintendent for Wholesale Electricity Purchases and Sales, and inApril 2007 he was appointed our Chief Commercial Officer.  Mr. Alvarenga has been involved inseveral strategic projects at CEMIG, including the pioneering system fordifferentiated tariffs based on the season and time of day, from 1980 to1982.  His renegotiations in 1998 withindustrial clients in default resulted in defaults being brought to near-zero,improving CEMIG’s financial position and resulting in the acquisition ofseveral small hydroelectric plants and one thermal plant.

 

**Compensation of Directors and Executive Officers**

** **

For the year ended December 31, 2007, the aggregate amount ofcompensation, including pension and other retirement benefits, that we paid toall directors and executive officers was approximately R$4.5 million.

 

**Fiscal Council**

** **

Our Fiscal Council is requiredto meet once every quarter, but in practice it has been meeting once a month.Our Fiscal Council  consists of three to fivemembers and their respective alternates elected by our shareholders at theannual meeting for a one-year term. Holders of the preferred shares as a groupare entitled to elect one member of the Fiscal Council and a corresponding alternate.Holders of common shares representing at least 10%, individually or in theaggregate, are entitled to elect one member of the Fiscal Council and acorresponding alternate. The primary responsibility of the Fiscal Council,which is independent from management and from the independent publicaccountants appointed by the Board of Directors, is to review our financialstatements and report on them to our shareholders. The Fiscal Council is alsoentitled to give opinions on any proposals from our management to be submittedto the shareholders’ meeting related to (i) changes in our share capital, (ii) issuancesof debentures or rights offerings entitling the holder to subscribe for equity(bonus de subscrição), (iii) investment plans and capital expendituresbudgets, (iv) distribution of dividends, (v) changes to our corporateform and (vi) corporate restructurings such as mergers, consolidations andspin-offs. The Fiscal Council also examines the activities of management andreports these activities to the shareholders.

 

Thecurrent members of the Fiscal Council and their alternates, all of whose termsexpire in April 2009, are as follows:

 

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** **
| **Name**                                            | ** ** | **Position** | ** ** | **Date of Initial  Appointment** | ** ** |
|-----------------------------------------------------|------------|--------------|------------|----------------------------------|------------|
| Luiz Guaritá Neto                              |       | Member       |       | February 27, 2003           |       |
| Aristóteles Luiz Menezes Vasconcellos Drummond |       | Member       |       | April 27, 1999              |       |
| Luiz Otávio Nunes West(1)                      |       | Member       |       | April 27, 1999              |       |
| Thales de Souza Ramos Filho                         |       | Member       |       | February 27, 2003           |       |
| Celene Carvalho de Jesus (2)                        |       | Member       |       | April 26, 2007              |       |
| Ari Barcelos da Silva                               |       | Alternate    |       | April 29, 2005              |       |
| Marcus Eolo de Lamounier  Bicalho                   |       | Alternate    |       | February 27, 2003           |       |
| Leonardo Guimarães Pinto (1)                   |       | Alternate    |       | April 26, 2007              |       |
| Aliomar Silva Lima                                  |       | Alternate    |       | February 27, 2003           |       |
| Benedito José Ferreira (2)                     |       | Alternate    |       | April 25, 2008              |       |

 

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(1)           Elected by Southern.

(2)           Elected by shareholders holding ourpreferred shares.

 

**Consumer Council**

** **

We have established a Consumer Council pursuant to Brazilian law, whichis comprised of representatives of consumer groups and advocacy organizations,but not members of our Board of Directors. The Consumer Council advises us asto service and other concerns of our consumers.

 

**Audit Committee**

** **

Our Fiscal Council acts as our audit committee for purposes of theSarbanes-Oxley Act of 2002.  Under Section 10A-3of the SEC rules on Audit Committees of listed companies, non-U.S. issuersare permitted not to have a separate Audit Committee made up of independentmembers if there is a Fiscal Council established and chosen in accordance withthe legal rules of its origin country, expressly requiring or allowingthat such council follow certain obligations. Also in accordance with thisexemption, a Fiscal Council may exercise the obligations and responsibilitiesof an Audit Committee of the United States up to the limit permitted byBrazilian Law.  The financialexperts of our Fiscal Council are Luiz Otávio Nunes West and Ari Barcelos daSilva.

 

**Employees**

** **

As of December 31, 2007, we had 10,818 employees,of which 236 were at management level. During the year ended on that date, wehad an average of 225 temporary employees. As of December 31, 2006 we had10,658 employees, of which 180 were at the management level. During the yearended on that date we had an average of 111 temporary employees. As of December 31,2005, we had 10,271 employees, of which 176 were at the management level.During the year ended on that date we had an average of 168 temporaryemployees.  This table shows thebreakdown of our employees by type on those dates:

 
| ** **                                       | ** ** | **Number of Employees at** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                       | ** ** | **December 31, 2007**           | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
| Managers                                         |       | 236                                       |       | 180 |   | 176 |   |
| Professional staff                               |       | 1,427                                     |       | 1,451 |   | 1,191 |   |
| Operational technical staff and office employees |       | 9,155                                     |       | 9,027 |   | 8,904 |   |
| Total                                            |       | 10,818                                    |       | 10,658 |   | 10,271 |   |

 

In 2007, 259 employees were hired and 99 employees left the Company.

 

*Unions*

* *

Once a year we hold collective negotiation meetings with the unionsthat represent our employees. The resulting contract remains in effect for thesubsequent 12-month period beginning on November 1. About 12 years agoCEMIG ceased to follow the previous market practice in Brazil of automaticallyadjusting salaries based on inflation.

 

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In November 2006, we concluded the annual collective wageagreement for the period from November 1, 2006 to October 31, 2007after negotiation all the terms and conditions with the Unions that representall of our employees. The collective agreement established an extraordinarydistribution of amounts under the profit sharing program totaling 2.8 times themonthly base of salary of each employee and a salary increase of 3.98%.

 

In December 2007, we completed the annual collective wageagreement for the period from November 1, 2007 to October 31 2008,after wide-ranging discussion of all the terms and conditions with the unionentities that represent our employees. The resulting collective agreementestablished an increase of 5.0% for all salaries, effective November 1,2007. It also established an extraordinary distribution of amounts under theprofit sharing program totaling 6.4 times the value of the monthly remunerationof each employee, plus an individual amount of R$1,000, which was paid in December 2007.

 

In the collective agreement for 2007 and 2008, it was established thatthe employees hired after November 1, 2007 will not be entitled to thespecial bonus called “Maria Rosa”, applied on the salary base by the rate of16.67%.

 

In the first half of 2007, we signed two collective agreements dealingexclusively with subjects related to union organization, one allowing access toour facilities, and the other allowing sector meetings to be held on ourpremises.

 

We have not experienced any material labor unrest in the last sixyears. In 2007, four work stoppages did occur during the collectiveagreement negotiations for 2007/2008: for eight hours on October 24, 2007;for eight hours on October 31, 2007; for eight hours on November 1,2007; and for eight hours on November 28, 2007. Few employees participatedin the work stoppages, and these stoppages did not have any negativeeffects on us.  We cannot predict whateffect, if any, future litigation under the labor laws may have on ouroperating results or our financial condition.

 

*Remuneration*

* *

In 2003, the Careers and Remuneration Plan was approved. The goal ofthis plan is to provide us with the remuneration tools necessary to maintain anequitable and competitive pay structure and establish criteria for promotions.The plan was implemented in January 2004 for professional staff, and in March 2004for the administrative and operational employees. An internal committee, withrepresentatives of both CEMIG and the labor unions, was created in connectionwith the plan.

 

Under a program referred to as the *Anuênio*, CEMIGprovides its employees hired on or before October 31, 2005 with an annual1% increase in monthly base salary for each year of employment with CEMIG, upto a limit of 35 years.  Based on anagreement with our labor unions, on April 27, 2006, CEMIG offered each ofits employees hired on or before October 31, 2005 an up-front payment inexchange for the relinquishment by the employee of its rights to the *Anuênio*.  Under theterms of this offer, CEMIG pays the employee an amount equal to: (i) anestimate of the future amounts to be paid to the employee under the *Anuênio*, but based on the number of years remaining for theemployee to complete its contributions to the National Social SecurityInstitute, or INSS, rather than the remaining years to reach up to the limit of35 years under the *Anuênio*, (ii) multipliedby a 12% discount rate and (iii) reduced by the application of a variablereduction factor stipulated by the Company for each individual employee.  The total amount paid to our employees as aresult of this offer was approximately R$178 million.

 

Over the last 3 years, we have been negotiating changes in ourremuneration policies with our labor unions, aiming to integrate the processesof management of human resources to our business strategy as follows:

 

·             The 2005/2006 collective labor agreementinstituted the plan for an indemnity to replace future rights relating to theAnuênio, which 87% of our employees accepted; and established that employeeshired on or after November 1, 2005 will no longer be entitled to theAnuênio.

 

·             In 2007, the collective labor agreementwith our labor unions established that employees hired on or after November 1,2007 will not be entitled to the 16.67% special bonus previously applied totheir base salary.

 

*ProfitSharing Plan*

* *

In 1995, we established a profit-sharing program for the employees inaccordance with the applicable Brazilian labor legislation. Under this program,we may not contribute an amount to the employee profit sharing plan that is inexcess of 25% of the total dividends proposed for that year. In 2007, the payment ofemployees’ profit shares, including mandatory charges and payments 

 

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based on payroll, totaledR$455 million. In 2006, payment of employees’ profit shares, includingthe mandatory charges and payments based on payroll, totaled R$210.0 million.

 

*Benefits*

* *

As of January 1, 2003, we implemented changes to our existingemployee health care plans. The changes are a result of an agreement we enteredinto with our employees’ labor unions, most of which are represented bySindieletro. The changes modified the contributions that we, our employees andour retirees are responsible for and the types of benefits covered by eachplan. As of December 31, 2007, a total of R$150.9 million was paid inbenefits to employees, consisting of pension plan contributions and assistancebenefits.

 

*VoluntaryEmployee Termination Program*

* *

In December 2003, in order to effectively manage our employmentrelations while following our strategic guidelines for growth and the additionof value, we implemented a voluntary employee termination program.

 

In 2004, a total of 1,101 employees accepted the terms of our voluntarytermination program. Of these, 656 left the company in 2004, and another 318completed the procedures and left in 2005. Of the 127 remaining employees, fourretired in 2006 and four retired in 2007, five lost the right to take part inthe program due to medical leave, and 114 were withdrawn from the program inaccordance with the terms of the contract signed between the company and eachemployee due to the fact that the INSS did not accept their early retirement.

 

*Voluntary* Dismissal Program

* *

In March 2008, CEMIGimplemented a Voluntary Retirement Program, which sets the rules andconditions applicable to free and voluntary rescissions of employment contractsby employees, and also criteria applicable to specific situations of employeeswho meet certain requirements for retirement. Employees who opt for theVoluntary Retirement Program receive a payment equal to three times theirmonthly salary and leave the company a maximum of 90 days after opting for theprogram.

 

*Program for Sharing* in Profit, Results, andProductivity

* *

CEMIG authorized a distributionequal to 3% of its consolidated operational results for the year ended December 31,2007 under its Program for Sharing in Profit, Results, and Productivity, whichwas paid in May 2008.

 

*Healthand Safety*

* *

With the establishment of our Health and Safety Management System in2006, our standards for classifying work accidents became more rigorous.  This has resulted in a higher number ofaccidents being recorded, but generally of a less serious nature than accidentsin previous years.  The increase insafety reflects the increased safety measures taken by the Company, and alsobetter management by contractors.  In2007, the number of our work accidents, including of those related to employeesof our contractors, was 26.76% lower than in 2006.

 

We took several actions in 2007 to ensure the safety, health andwellbeing of our own employees and those of contracted entities. Theseincluded: creation of the intranet Portal for Specialized Safety Engineeringand Work-related Medicine Services (SESMT) to disseminate information andorientations for prevention of accidents; and the “Safety Moment”, in which allemployees are invited, on the first Monday of each month, to reflect on Safety,Health and Wellbeing for at least one hour, generating reports with suggestionsfor continuous improvement in the work environment.

 

**Share Ownership**

** **

Each of our directors and executive officers beneficially owns lessthan 1% of our preferred shares and less than 1% of our common shares.

** **

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**Item 7.**           Major Shareholders and Related PartyTransactions

** **

**Principal Shareholders**

** **

As of December 31, 2007, the State Government owned, directly orindirectly, 108,377,571 common shares, or 50.97% of our outstanding votingstock, and 5,329,764 preferred shares, or approximately 1.95% of thoseoutstanding. As of the same date, Southern, our second largest shareholder,owned 70,088,868 common shares, or approximately 32.96% of those outstanding. Southern is a joint venture formedin 1994. We believe that a principal participant in Southern is Cayman EnergyTraders, a subsidiary of Mirant Corporation (formerly Southern Energy Inc.), alarge United States-based power company. We believe that the other significantmember of Southern is, as of December 31, 2007, AES Corporation, a globalpower company based in Arlington, Virginia that is engaged in the energygeneration, distribution and retail supply businesses. We believe that theOpportunity Fund, a Brazilian investment fund, has a minority interest inSouthern through 524 Participações S.A. Our principal shareholders do not havedifferent voting rights with respect to the shares they own.

 

The following table sets forth certain information regarding theownership of our outstanding common shares and preferred shares at December 31,2007.

 
| **Shareholder**                                 | ** ** | **Common  Shares (2)** | ** ** | **%  of Class** | ** ** | **Preferred  Shares (3)** | ** ** | **%  of Class** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|----------------------|------------|---------------------------|------------|----------------------|------------|
| State Government (1)                            |       | 108,377,571            |       | 50.97                | %          | 5,329,764                 |       | 1.95                 | %          |
| Southern                                        |       | 70,088,868             |       | 32.96                | %          | —                    |       | —               |       |
| All directors and executive officers as a group |       | 6,686                  |       | —               |       | 1,548                     |       | —               |       |
| Other                                           |       | 34,149,378             |       | 16.06                | %          | 268,300,256               |       | 97.98                | %          |
| Total of outstanding shares                     |       | 212,622,503            |       | 100                  | %          | 273,631,568               |       | 99.92                | %          |
| Treasury shares                                 |       |                   |       | —               |       | 207,385                   |       | 0.08                 | %          |
| Total of authorized and issued shares           |       | 212,622,503            |       | 100                  | %          | 273,838,953               |       | 100                  | %          |

 

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| (1) |   | The shares in  this line item attributed to the State Government include shares held by MGI,  other State Government agencies and state controlled companies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | On May 3,  2007, we effected a partial stock split in the form of a 50% stock dividend  of our common shares. On June 11, 2007, we effected a reverse stock  split of our common shares in the form of a consolidation whereby every 500  common shares, par value R$0.01, was consolidated into one common share with  a par value of R$5.00. In addition, On May 2, 2008, a 2.02% stock  dividend was paid on the common shares, resulting in an adjustment to the  price per common share. On May 8, 2008, a corresponding adjustment was  made to the Common ADSs through the issuance of additional Common ADS,  resulting in an adjustment to the price per Common ADS.                            |
| (3) |   | On May 3,  2007, we effected a partial stock split in the form of a 50% stock dividend  of our preferred shares. On June 11, 2007, we effected a reverse stock  split of our preferred shares in the form of a consolidation whereby every  500 preferred shares, par value R$0.01, was consolidated into one preferred  share with a par value of R$5.00. In addition, on May 2, 2008, a 2.02%  stock dividend was paid on the preferred shares, resulting in an adjustment  to the price per preferred share. On May 8, 2008, a corresponding  adjustment was made to the Preferred ADSs through the issuance of additional  Preferred ADS, resulting in an adjustment to the price per Preferred ADS. |

 

Since our incorporation, our operations have been influenced by thefact that the State Government controls us. Our operations have had and willcontinue to have an important impact on the development of business andindustry in Minas Gerais and on social conditions in the state. The StateGovernment has from time to time in the past directed us to engage in certainactivities and make certain expenditures designed primarily to promote thesocial, political or economic goals of the State Government and not necessarilydesigned with a view to our profitability, and it may direct us to do so in thefuture. See, “Item 3. Key Information—Risk Factors—Risks Relating to CEMIG—Weare controlled by the State Government.”

 

As of December 31, 2007, we had 33 common shareholders of recordin the United States, holding a total of 6,287,364 common shares. We also had209 preferred shareholders of record in the United States, holding a total of134,697,929 preferred shares. These numbers do not include the 79,684,904preferred shares and 14,300 common shares converted into ADRs.

 

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We are not aware of any significant changes in the percentage ownershipof any shareholders that held 5% or more of our outstanding voting sharesduring the past three years.

 

Based on publiclyavailable filings with the SEC, we are aware of the following changes inownership of our outstanding preferred shares. On March 8, 2005, CapitalGroup International, Inc., or CGII, a foreign investment managementcompany, acquired, on behalf of its clients, Preferred ADRs that increased itsholdings of preferred shares of CEMIG to 4,598,610,000, corresponding to 5.03%of CEMIG’s preferred shares. On February 8, 2008, Capital Research andManagement Company owned 13,644,250 preferred shares of CEMIG, corresponding to4.98% of our preferred shares and, as a result of buying transactions on February 8,2008, now owns a total of 13,990,050 preferred shares of CEMIG, correspondingto 5.11% of our preferred shares. On April 12, 2005, the aggregateproprietary position of the UBS Group****inpreferred shares of CEMIG increased to 6,098,366,579 preferred shares,representing 6.68% of the Company’s total preferred shares. On September 21,2005 the position of Morgan Stanley Uruguay Ltda., a foreign investor underResolution 2,689/00 of the Brazilian National Monetary Council, increased to5.03% of CEMIG’s total preferred shares. This position included both2,603,500,952  nominal preferred sharesand 1,983,984 Preferred ADRs (corresponding to 1,983,984,000  nominal preferred shares).  We are not aware of any changes in ownershipof our outstanding preferred shares by majority shareholders in 2006 or 2007.

 

Although our by-laws do not provide any restrictions concerning achange in our control, a state law authorizing a change of control would berequired for a change of control to take place. Because we are astate-controlled company, the sale of more than 50% of the voting stock ofCEMIG by the State Government requires the passage of specific authorizinglegislation by the legislature of Minas Gerais.

 

**Related Party Transactions**

** **

We are party to the following related-party transactions:

 

·              Ouragreement with the State Government with respect to the CRC Account and relatedfinancial income and provision for loss and VAT advance payments, expenses,assets and liabilities;

 

·              Ouragreement with Forluz, the entity responsible for managing our employee pensionfund, pertaining to the fund and related balances; and

 

·              Ouragreement with COPASA, a Minas Gerais state-controlled company, related toaccounts receivable from energy sales.

 

For a more detailed discussion of these and other related partytransactions, see Notes 3, 7, 8, 13, 14, 16, 19 and 22 to our consolidatedfinancial statements.

 

**Item 8.**    Financial Information

** **

**Consolidated Financial Statements and Other FinancialInformation**

** **

Please refer to our financial statements that appear beginning on page F-1of this document as well as “Item 3. Key Information—Selected ConsolidatedFinancial Data.”

 

**Legal Proceedings**

** **

We are affected by an ongoing dispute between our shareholders. We arealso defending several judicial proceedings involving rate increases, taxes andcontributions, labor and pension fund obligations and civil liabilities, aswell as several administrative proceedings regarding tax obligations,environmental penalties and other charges imposed by governmental agencies,including ANEEL. We recognize contingencies only when a loss is probable andestimable. The most relevant proceedings in which we are involved aresummarized below. See also Notes 17 and 26 to our consolidated financialstatements.

 

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* *

*Shareholders’ Agreement*

 

In connection with the sale in 1997 of approximately 33% of our sharesto Southern as described in “Item 7. Major Shareholders and Related PartyTransactions—Principal Shareholders,” Southern and the State Government enteredinto a shareholders’ agreement that contained special quorum and vetoprovisions granting Southern expanded control over certain decisions. In 1999,after a new State Government administration took office, the State Governmentfiled a lawsuit seeking to nullify the shareholders’ agreement on the groundsthat these special provisions constituted an unlawful transfer of control fromus to Southern under principles of Brazilian constitutional law and theconstitutional law of the State of Minas Gerais, and claiming in particularthat the State Government may only cede control of us pursuant to specificstate legislation providing for the same.

 

On March 21, 2000, the First Court of *FazendaPública e Autarquias* in Belo Horizonte rendered a decision declaringthe shareholders’ agreement null and void, and this decision was ratified on August 7,2001 by the Minas Gerais State Court of Appeals. At present, the StateGovernment has been restored to its position as our sole controllingshareholder and none of the special quorum or veto provisions are in effect.This decision was appealed to the Superior Tribunal de Justiça (Superior Courtof Justice), which upheld the decision of the Minas Gerais State Court ofAppeals in December 2003. The decision of the Superior Tribunal de Justiçais subject to a bill of review and therefore the effectiveness of theshareholders’ agreement and control of CEMIG remain subject to further judicialchallenge in the Supreme Court (*SupremoTribunal Federal*).

 

*Rate Increases*

* *

We are the defendant in several lawsuits brought by industrialconsumers alleging that increases in electricity rates during a price freezeimposed by the Federal Government from March through November 1986,known as the Cruzado Plan, were illegal. Some of the plaintiffs further allegethat all our rates after the Cruzado Plan period were illegal in part becausethey included the Cruzado Plan period increases in the amounts that served asthe basis for calculating the further increases. Some of these claims have beendecided at the trial court level in our favor, whereas others have been decidedin favor of our consumers. All of the cases that have been decided at the trialcourt level have been appealed to the Superior Tribunal de Justiça (SuperiorCourt of Justice), which ruled, in most of the cases, that the plaintiffs wereentitled only to reimbursement for rate increases introduced during the CruzadoPlan. We are actively contesting all of the aforementioned rate increaseclaims. In the aggregate, these rate increase claims brought against usamounted to R$202 million as of December 31, 2007, out of which R$72million was provisioned.

 

We are also a defendant in lawsuits and class actions brought byconsumers, consumer rights groups and the office of the public prosecutor ofMinas Gerais contesting the rates we charge our consumers, the application ofthe rate increases determined by ANEEL, the inflationary index used to increaseour rates and the rate subsidies granted to low income consumers. Theselawsuits involve claims for the suspension of the rate increases and for thereimbursement to our consumers of twice the amount of any additional rates wecollected. All our rate increases are granted based on ANEEL’s priorauthorization and we believe we have a meritorious defense to each of theselawsuits. It is not possible at the present time to estimate the amountsinvolved in these claims. We have not accrued any liability related to theseclaims.

 

In addition, the Federal Public Auditing Court is challenging thecriteria used by ANEEL to calculate the adjustments we applied to our rates in2003 and in connection with the energy reduction emergency program. See “—RegulatoryMatters.”

 

*Taxes and Other Contributions*

 

We are party to a numberof proceedings and claims involving the Federal Government as well as otherproceedings and claims arising in the ordinary course of business. Theseproceedings and claims include judicial disputes regarding the payment of taxesand contributions, including three disputes regarding the possibility ofoff-setting the amounts paid as social contribution tax against the tax basisof the corporate income tax, for which we have accrued a total liability ofapproximately R$47 million as of December 31, 2007.

 

We also are involved indisputes regarding the *Imposto Sobre Serviços deQualquer Natureza – ISSQN* (services tax) involving R$38 million, the*Imposto de Transmissão Causa Mortis e Doação —ITCMD* (inheritance and donation tax) involving R$131 million, the *Imposto Predial Territorial Urbano — IPTU* (real state tax)involving R$8 million, PIS/PASEP involving R$12 million and the *Contribuição para o Financiamento da Seguridade Social – COFINS*involving R$373 million. We have not recorded any reserve for these disputessince we do not believe that the likelihood of loss on anyof these claims is probable. In relation to COFINS disputes, our defense isbased primarily on the fact that we timely joined a tax amnesty program thatgranted taxpayers relief from any outstanding interest and penalties providedthat the outstanding principal amount of tax debt was paid.

 

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Furthermore, we are alsoparty in two proceedings discussing the *CPMF* (bankingtax) in the total amount of approximately R$18 million. In relation to one ofsuch proceedings, which involves approximately R$6.6 million, the likelihood ofloss is deemed as probable, due to an unfavorable decision already issued againstus. However, we deposited part of the disputed amount, in the amount of R$4.6million. The likelihood of loss in relation to the other proceeding is “possible”.

 

Inaddition, we are party to two *Fundo deInvestimento Social* (“Finsocial”)contribution disputes. We received an unfavorable decision in connection with aclaim initiated in 1990 related to Finsocial contributions, and incurred a lossequivalent to R$110 million, which had been deposited. We filed a motion for anew trial seeking to nullify that decision and recover the amount involved. Wehave also filed a writ of mandamus contesting the *Imposto sobre Circulação de Mercadorias* — ICMS (value-addedtax) assessed on that deposit, for which we have accrued a reserve ofR$21.1 million, the full amount involved.

 

Wehave also contested a number of administrative proceedings brought by federaltax authorities with respect to an income tax off-set. Such off-set derivedfrom an adjustment made in 2001 to our consolidated financial statements, whichwere prepared in accordance with general accounting practices adopted in Brazilfor the years ended December 31, 1997, 1998 and 1999. The adjustmentrelated to new accounting rules for pension fund obligations, asestablished by CVM Instruction No. 371 of December 13, 2000. Wereceived a favorable decision relative to the years 1997 and 1998; with respectto the year 1999, for which we received an unfavorable decision, we filed awrit of mandamus. We estimate the amount involved in these claims to beapproximately R$26 million. No reserve has been recorded as a result of thisclaim, since the Company believes that the procedures which generated the taxcredits were carried out in accordance with the legal dispositions regulatingthe matter. An adverse outcome in this mater has been deemed remote.

 

Several municipalities of the State ofMinas Gerais have assessed us for the payment of the tax referred to as *Taxa de Ocupação do Solo*(“Land Occupation Tax”). There are several administrativeproceedings and lawsuits related to this matter, in the total amount ofapproximately R$8.7 million, for which we have not accrued any reserves. TheCompany assesses the likelihood of an adverse outcome in this matter as “remote”.

 

The State ofMinas Gerais assessed us, as co-defendant, in relation to the transference ofICMS credits between CEMIG and Rima Industrial Ltda., in the total amount ofapproximately R$62 million. After the administrative discussion, suchassessment was maintained by the Highest Administrative Court. However, theState of Minas Gerais filed a tax foreclosure only against Rima IndustrialLtda.  For this reason, we have filed anOrdinary Action aiming at the elimination of the ICMS debit derived from thetax assessment, under the argument that the amounts supposedly due are alreadybeing charged from Rima Industrial Ltda. A preliminary injunction was grantedsuspending the enforceability of the ICMS debit until a final decision on thetax foreclosure filed against Rima Industrial Ltda. is issued.  We have not accrued any reserves in relationto this proceeding since we assess our chance of loss in this dispute as “remote”.

 

There are also anumber of administrative proceedings filed by the State of Minas Gerais againstCEMIG as co-defendant related to the ICMS, in the total amount of approximatelyR$33 million. Such proceedings are related to the taxation of some commercialoperations (“*Transações Bilaterais”*)carried out during the rationing period. The Company assesses thelikelihood of an adverse outcome in this matter as “probable”.

 

We have alsocontested many tax assessments issued by federal tax authorities regarding thealleged absence of payment of the rural real estate tax (*ImpostoTerritorial Rural* — ITR), in the total amount of approximately R$900million. We have not accrued reserves in connection with these administrativeproceedings since we believe that the likelihood of an adverse outcomein this matter is remote, considering that in several other cases thejudgments, in the highest administrative level, were favorable to the Company.

 

Since2002, we have been receiving a subsidy from Eletrobrás toreimburse us for losses incurred as a result of the discount we were requiredto provide to low-income consumers, under the provisions of Federal Law 10604/02.In 2005, the State of Minas Gerais issued Decree 43999/05 determining theimposition of ICMS on this subsidy. We believe that the subsidy is not taxableand therefore we are not collecting the ICMS on the subsidy. However, the Stateof Minas Gerais filed a court action against us on this matter. We estimate thecontingency to be approximately R$102 million. No provision has been recordedwith respect to this dispute, since the Company assesses the likelihood of anadverse outcome in this matter as “remote”.

 

In 2006, we madean advance payment to certain of our employees in exchange for their rights tofuture payments, referred to as the “Anuênio”. We did not pay income tax or social security contributions on thosepayments, since it is our opinion that these taxes and contributions are notimposed on such payments. As a result, we received assessment notices from theFederal Revenue Service and from the INSS (National Social SecurityInstitute).  In order to avoid the riskof the imposition of penalties, we filed a writ 

 

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of mandamus, receiving an adverse judgment at the first instance. An appealwas filed in February, 2007 and we are still waiting for a second-instancedecision. We estimate the amount involved in these claims to be R$141million. No provision has been made for this case, since we havemade a deposit for the full amount involved. The Company assesses the likelihood of an adverse outcome in this matteras “possible”.

 

We were assessedby the INSS in 2006 due to the non-payment of the social security contributionon the amounts paid to our employees as profit sharing in the periodbetween 2000 and 2004. In 2007, we filed a writ of mandamus to obtain ajudicial decision declaring that such payments were not subject to theimposition of social security contributions. The total amount involved isapproximately R$101.2 million. Notwithstanding the judicial proceeding, we are alsocontesting the assessment at the administrative level. No provision has beenrecorded since the Company believes that the likelihood of an adverse outcomein these discussions is “possible”.

 

Alsoin 2006, the Federal Revenue Service brought a tax assessment against Cesibaand CEMIG (as co-defendant) alleging the non-payment of PIS and COFINS tax onforeign exchange variations related to a credit facility agreement. Wesubmitted an administrative defense requesting the cancellation of suchassessment notice and are still waiting for a decision. The total amount involvedis R$24 million. No provision has been made since the Company assesses thelikelihood of an adverse outcome as “remote”.

 

In 2007, we fileda writ of mandamus, with a request for a preliminary injunction, in order tosuspend the withholding income tax due on the payment of Interest on Equity.The Company’s right was recognized on an interim basis. The amount involved isR$25.4 million, and no provision has been made since the possibility of loss isassessed as “remote”.

 

In legal cases relating to the Single Taxon Electricity (IUEE), CEMIG, jointly with the Federal Government, is beingordered by the Court to pay the tax due to the municipalities in cash, and notin common or preferred shares. However, the municipalities will have to returnthe shares received as payment to this point, including the dividends andbonuses. For this reason, the expectation is that CEMIG, at the execution stageof such proceedings, will have amounts receivable, not payable, in view of theincrease in the value of the Company’s shares. The amount involved correspondsto approximately R$13.4 million, and the possibility of loss is assessed as “possible”.This amount, however, is only an estimate, since it can only be ascertained atthe execution stage.

 

Finally, in 2007, Gasmig,a subsidiary of CEMIG in which it holds a 55% interest, was assessed by theFederal Revenue Service for the payment of PIS and COFINS contributions imposedon the sale of natural gas for the production of electricity under the program “*termoeletricidade PPT*”. The tax authorities alleged thatCEMIG misunderstood Law N. 10.312/01, which provided for a 0% tax rate on thosetransactions but was subject to further regulations by theMinistry of Finance and Ministry of Mines and Energy. The amount involved in suchclaim is approximately R$46 million. We estimate the chance of loss in relationto this proceeding as “probable”. However, an eventual loss in this proceedingwill not directly impact CEMIG’s results, as it will only affect the results ofGasmig and, consequently, the capacity of dividend distributions.

 

*Labor Obligations*

* *

CEMIG is a defendant in several claimsfiled by our employees and third parties (outsourced workers). These claimsgenerally relate to overtime and compensation for occupational hazards. Inaddition to these actions, there are others relating to outsourcing of labor,readjustment of retirement pension payments by Forluz and salary adjustments.In the fourth quarter of 2006 we reviewed the labor-law cases and theexpectation of loss with respect to these cases, and changed the criterion forprovisioning from a percentage of the total amount of the cases to anindividual analysis of the cases, which resulted in a reduction of the amountsprovisioned.

 

Under Brazilian labor laws, claimantsmust file a labor claim for unpaid services within two years of the terminationof their employment agreement (limited to rights which arose no more than fiveyears prior to termination). As of December 31, 2007, the amount indispute involved in the aforementioned claims was approximately R$188.6million, and we had provisioned R$78 million for the payment of these laborcontingencies.

 

There are some administrative labor-lawproceedings which, in general, relate to the Workers’ Retirement Fund (FGTS), compensatoryindemnities relating to past government economic plans, and other matters. Thevalue involved in the cases is R$4.4 million, and the chance of loss isassessed as “probable”.

 

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In June 2007, a judgment wasrendered against CEMIG in a civil public action brought by the Labor PublicAttorneys’ Office at the beginning of 2003, aiming to prevent the Company fromincreasingly using outsourcing for its end-activities. In the judgment, whichis being contested in the higher levels of the courts, a period of nine monthsfrom the judgment was given for CEMIG to abstain from contracting employeesthrough outsourced companies.  In March 2008,the Higher Labor Appeal Court (TST) granted a preliminary injunction suspendingthe effects of the prior decision and its consequences until such court reachesthe final decision, based on the fact that this replacement of the outsourcedworkforce may jeopardize our employees’ safety and training, as well as theguarantee of a regular supply of energy. The amount involved in the case is R$33.5 million, with the contingencyfor loss being assessed as “probable”. This amount takes into consideration the fact that, if CEMIG is notsuccessful in the Higher Labor Appeal Court (TST), the effects of the decisionmay be retroactive to March 1, 2008.

 

*Claims in the Ordinary Course of Business*

* *

We are a party to several civil claims brought by people who havesuffered damages arising mainly from accidents that occurred during theordinary course of our business and damages suffered as a result of theinterruption of the supply of energy to them. We are also a party to claimsunder contractual and other commercial obligations. As of December 31,2007, we had accrued a liability of R$143.3 million with respect to theseclaims.

 

*Legal Proceedings Related to Environmental Matters*

* *

We are party to a number of proceedings and claims involvingenvironmental matters. These proceedings and claims include court andadministrative disputes regarding certain environmental matters, includingfauna and flora issues, disposal of waste, protected areas and environmentallicenses. These claims totaled an estimated R$736.5 million on December 31,2007. We have not accrued any liability related to the following claims, exceptin one case of fish deaths described below, since we do not believe thelikelihood of a loss on any of these claims is probable.

 

We are defendant in a public civil action filed on February 5,2007 by the Regional Environmental Association of Patrocínio against us,Southern Electric and FEAM, which involves a claim for a R$691.1 million as of March 31,2008 in damages due to alleged environmental damage caused by the Nova PonteHydroelectric Plant. The likelihood of loss under this lawsuit is evaluated aspossible.

 

We are also a defendant in two class actions which involve claims forthe suspension or cancellation of the environmental licenses of the CapimBranco I and II power plants, now named the Amador Aguiar I and II plants. Asof December 31, 2007 the amount involved in each one of these actions wasR$292 million. In the event the defendants lose one or both of the actions, theburden of payment will be shared among the seven defendants in these classactions. CEMIG is also a defendant, together with seven other defendants, in apublic civil action brought by the Federal Public Attorneys’ Office and thePublic Attorneys’ Office for Minas Gerais State involving the Amador Aguiar Iand II plants, claiming environmental damages plus R$23 million (at December 31,2007) for pain and suffering and property damages, or, alternatively, an orderagainst the defendants for the loss of environmental and mineral resources, andthe implementation of environmental programs. The licenses of the Amador AguiarI and II plants have not been suspended or cancelled by reason of any of theseactions. In the event of loss in this action, the amount to be paid will beshared among all the defendants in that case. Also, following a court decision, these three lawsuits are now under thejurisdiction of same federal court and will be decided together.

 

We are also a co-defendant, along with CVRD, in a public civil actionlawsuit brought by the Federal Public Attorneys’ Office, concerning the Aimoréshydroelectric power plant. The plaintiffs allege that we did not obtain properlicensing for this project, and seek to recover damages and annul theenvironmental licenses relating to this plant and those of the relatedconcessions. We have not accrued any liability related to this claim. We havealso contested a lawsuit related to this power plant brought by themunicipality of Resplendor that alleges that the project authorizations havenot been duly approved and seeks to stop construction of the power plant.

 

The Federal Public Attorneys’ Office filed a suit against CEMIGalleging irregularities in the installation of the Irapé hydroelectric powerplant, which allegedly would result in material adverse impacts on theenvironment and the local population. The action was settled after CEMIG signedan undertaking called Conduct Adjustment Agreement (*Termo deAjustamento de Conduta*, or “TAC”), and committed to implement socialand environmental measures. Recently, the Federal Public Attorneys’ Officefiled another action alleging non-compliance with the obligations assumed andclaiming foreclosure on the guarantee that CEMIG had given. FEAM has concludedthat CEMIG has been regularly performing its obligations under the TAC and thiswas ratified by the 

 

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localcourts, resulting in the end of the lawsuit. The Federal Public Attorney’sOffice appealed against such decision, and CEMIG counter-appealed, to thefederal court of appeals. The estimated value of the case is R$6.5 million.

 

CEMIG also received an infringement notice from the EnvironmentalAgency of the State of Goiás, claiming that CEMIG operated the São Simão plantwithout the appropriate Operational License. An administrative appeal waspresented against the infringement notice. CEMIG’s defense alleged that theGoiás State Environment and Natural Resources Office did not have standing tosue our company in this case. The preliminary argument was accepted and thecase was submitted to the Brazilian Environmental Authority, IBAMA, in 2001.That agency has not yet made any decision on the case. The project was licensedby IBAMA in 2006.  The estimated value ofthe fine is R$4.4 million.

 

There is also a Civil Public Action brought by the organization S.O.S.São Francisco against CEMIG (and others), alleging pollution of the waters ofthe São Francisco River supposedly caused by Votorantim Metais e Zinco S.A.’sdischarge of zinc into the river. CEMIG is a party to the action because theopening of the spillways of our Três Marias Plant allegedly exacerbated thedamage by agitating the substances on the river’s bottom. There has been adecision by the First Level Federal Court in Minas Gerais, Judicial Sub-Section andSingle Court of Sete Lagoas, granting the request for interim relief made bythe plaintiff. CEMIG was duly served notice and answered in a timely manner.The plaintiff presented an interlocutory appeal which was denied by the FederalAppeal court. The approximate value of the claim is R$7.5 million.

 

We are defendant in a Civil Public Action in which the Municipality ofRaposos is requesting the adoption of preventive measures by CEMIG to avoiddamage such as that caused by the Rio das Pedras plant in the floods of 1995and 1997, and for the defendant to be ordered to control and monitor theenvironmental impact of the dam and to update its safety standards by desiltingof the Rio das Velhas River, recomposing the upstream and downstream forest onthe banks of the river, and other actions. The plaintiff filed an interlocutoryappeal, requesting suspension of the effect of the interlocutory decision thatprevented it from shifting the burden of proof in the matter.  CEMIG presented its answer to the appeal in atimely manner. The 8th Civil Chamber of the Minas Gerais State Appeal Courtrefused to grant the interlocutory appeal. The municipality of Raposos filed amotion for declaration against the Appeal Court judgment that refused theinterlocutory appeal. This motion was rejected. The approximate value of theclaim is R$31.5 million.

 

A public civil action was brought by the Federal Public Attorneys’Office requesting an order that CEMIG be required to provide water to the sevenmunicipalities downstream from the Irapé dam that have no clean water due to possiblecontamination of the Jequitinhonha River. The action also sought an analysis ofthe river’s water and, if contamination is found, an order requiring thedefendant to take measures necessary to re-establish the water parametersindicated by Conama Resolution 357/2005 which sets forth the water bodies’classification and standards/parameters for the discharge of liquid effluents.A preliminary injunction was granted requiring CEMIG to provide water to theriver bank population and carry out a water analysis of the JequitinhonhaRiver. CEMIG filed an interlocutory appeal against the injunction and obtaineda decision temporarily suspending the preliminary injunction until a finaldecision is rendered by the court of appeals. The approximate value of the claimas of December 31, 2007 was R$117 thousand.

 

In view of the Brazilian environmental legislation, weare carrying out environmental works in our facilities to avoid contaminationof the soil by insulating mineral oil. On October 20, 2005 CEMIG was imposedan infringement notice by FEAM, alleging inappropriate storage of high-voltagetransformers and direct leaks of insulating mineral oil into the soil of one ofour facilities named the Materials Distribution Center, located in theMunicipality of Juatuba. CEMIG appealed from this notice arguing that suchequipment consists of powerful transformers which are part of its inventory,being in perfect technical condition, to be used only in replacement of similartransformers to avoid electricity supply outages in the event of an eventualemergency situation in substations throughout the State of Minas Gerais. Thesetransformers were built with high-technology sealing to avoid oil leaks. Aninvestigative study was carried out in 2006 in this area seeking for any soilcontamination by mineral oil. The study concluded that the levels ofconcentration of mineral oil found in the soil were within the environmentalquality standards used in benchmark references such as the “Dutch List” – VROM2000. This study was submitted to FEAM, which requested another undergroundwater investigation No undergorund water contamination was identified.

 

On September 14, 2007, CEMIG received another infringement noticefor operating the Materials Distribution Center without the requiredenvironmental license, resulting in the imposition of a R$30,001 fine. CEMIGfilled its administrative appeal requesting the cancellation of theinfringement notice, arguing that since such facility started its operations in1970, prior to the legal obligation of carrying out any environmental licensingprocedure, it was under corrective environment licensing. On November 13,2007, the corrective operation license was issued. Currently, CEMIG is awaitingits appeal to be judged.

 

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In 2006, we voluntarily carried out an environmental investigation atthe Conselheiro Lafaiete substation in Minas Gerais seeking for soilcontamination by polychlorinated biphenyls (BCPs). The contaminated area of thesubstation was marked out and the volume of soil contaminated was estimated tobe 10.20 m3. We are arranging for the removal and incineration ofthis material.

 

Two administrativelawsuits were brought in 2006 and 2007 by the State Forests Institute, in whichit alleges that the irregular operation of the Três Marias Hydroelectric Plantcaused the death of fish of approximately 17 tons of fish in 2007 due to lackof oxygenation, according to the State Forests Institute and environmentalpolice estimates (8.2 tons by our estimate). The volume of dead fish was not estimated or measured in 2006. As aresult the State Forests Institute imposed two fines on us, totalingapproximately R$6.0 million, out of which R$5.4 million was provisioned, as anunfavorable outcome for us in these lawsuits is considered probable. Wepresented an administrative defense, which was not accepted by theenvironmental agency. We have filed a reconsideration request before the StateForests Institute Council. Although the amount is not a material liability forus, we are implementing an environmental project in the affected region as away of responding to the event and reaffirming our commitment to economic andsocial development of the regions where we operate and where our projects are located.Monitoring of fish in the exit canals of several of our plants is being carriedout by specialist biologists, with the objective of becoming familiar with thepopulation dynamics of fish over time, the periods of their greatest activityover the day, and also the locations of greatest density. With thisinformation, more effective techniques may be developed in the control of theimpact of the operation of the plant on fish.

 

The Fishermen Colony of São Francisco de Buritizeiro, Pirapora andIbiaí filed suit for damages against us, the State of Minas Gerais, themunicipality of Três Marias and Votorantim Metais, in which they request thedefendants to pay damages in order to compensate fishermen for the reduction intheir working capacity and to restore the environment, due to an alleged misuseof the waters of the São Francisco River, which allegedly caused the death offish. The amount involved in this lawsuit is R$21.1 million. No provision wasmade for a potential loss as we assess it as “possible”.

 

The Minas Gerais Public Attorney Office filed, on February 22,2007, a class action against CEMIG, requesting it to invest 0.5% of its totaloperational revenue from 1997 to 2006 and subsequent years in protection andenvironmental preservation of watercourses located in the Municipality of OuroPreto. Moreover, at least one third of this amount should be allocated toregrow the vegetation on the banks of the watercourses. The Plaintiff’s mainrequest is based on the Law of the State of Minas Gerais 12,503, dated May 30,1997, which requires enterprises that produce hydroelectric energy to invest atleast 0.5% of its operational revenue on environmental protection of thewatercourse where it develops its activities. Finally, we consider that theFederal Supreme Court (*Supremo Tribunal Federal,*or“STF”) decision on the Direct Unconstitutionality Action no. 3,378, declaringunconstitutional the provision that orders that at least 0.5% of the costs forimplementing the project shall be allocated on environmental compensation, mayinfluence the decision of this case to our benefit, even though it was based ondifferent facts.

 

*Regulatory Matters*

* *

Prior to 1993, electric utilities in Brazil were guaranteed a rate ofreturn on investments in assets used to provide electric service to consumers,the rates charged to consumers were uniform throughout the country, and profitsfrom more profitable utilities were reallocated to less profitable ones so thatthe rate of return for all companies would equal the national average.Shortfalls experienced by most electric utilities in Brazil were accounted forin each company’s CRC Account. When the CRC Account and the guaranteed returnconcept were abolished, we used our positive balances in the CRC Account tooffset our liabilities to the Federal Government.

 

ANEEL has broughtan administrative proceeding against us, contesting a credit related to suchpositive balance. On October 31, 2002 ANEEL issued a final administrativedecision. On January 9, 2004, the Brazilian Federal Treasury Departmentissued an Official Collection Letter to us in the amount of R$516.2 million tobe paid by January 30, 2004. We filed a writ of mandamus to suspend itsinclusion in the national non-payers registry (“Cadin”). Although the reliefwas denied by the lower court, we appealed to the Federal Court of the FirstRegion which granted us a temporary injunction to suspend the inclusion in theCadin. Therefore, we have not accrued any liability related to this claim. Theamount of this proceeding, as of December 31, 2007, is approximatelyR$896.7 million. No provision has been recorded for this matter since we assessthe chance of an adverse outcome as “possible”.

 

We are a defendant in an administrative proceeding brought by ANEEL onthe basis that we allegedly did not meet the September 21, 2002 deadlinefor completion of the unbundling process. On November 11, 2002, ANEELimposed a fine of R$5.5 million upon us. However we believe we should not beresponsible for any non-compliance with the restructuring requirements and, forthis reason, on November 28, 2002, we appealed against ANEEL’s fine. On February 23,2005 ANEEL issued a ruling reducing the fine to R$2.7 million. On March 7,2005 we filed an appeal requesting the cancellation of the fine and theinfringement notice. In a new meeting of its board, ANEEL maintained the fineapplied, completing the administrative phase of the contesting of the fine. 

 

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Accordingly,on October 9, 2006, a legal action was brought for annulment of the fineapplied, and there has so far been no judgment on the matter. As of December 31,2007, the amount of the fine is approximately R$7.8 million. No provision hasbeen recorded with respect to this matter since we believe that the likelihoodof an adverse outcome is possible.

 

On November 14, 2003, the Federal Audit Court, which has theauthority to audit any decision by ANEEL that may impact public finance, beganadministrative proceedings against ANEEL to evaluate the criterion adopted byANEEL in the Energy Consumption Reduction Emergency Program (*Programa Emergencial de Redução de Consumo de Energia Elétrica*),or PERCEE. The Federal Audit Court has asked us to provide certain informationwith respect to our rates, which according to the Federal Audit Court weremistakenly approved by ANEEL. If we cannot provide support for these rates andANEEL fails to confirm the legality of the criterion adopted, we may incurlosses in the amount of approximately R$128.7 million. Noprovision has been made for this matter since we believe that we canprovide the necessary support and that ANEEL can confirm the legality of therates. We assess the likelihood of an adverse outcome as remote.

 

We are the defendant in suits challenging the charging of tax on publiclighting. The plaintiffs allege that we supplied only 11 hours and 8 minutes ofpublic lighting and charged the municipalities for 12 hours. The approximatevalue of these claims is R$527 million. We believe we have sound arguments indefense of these claims, and therefore have made no provisions for the suits.  We assess the likelihood of a loss in theseactions as “possible”, since they are distributed to separate courts, invarious legal districts of Minas Gerais, and also due to the fact that a studyis in progress to develop a software able to calculate, based on the specificdata and characteristics of each municipality, the number of hours in whichartificial illumination is used.

 

We are currently contesting a Class Action(*Ação Popular*) in which ourprocedures related to a public bid concerning the *Luz ParaTodos* program are being challenged. Due to some legal requirementsrelated to the bidding notice not being met, we declared the bid void. Theclass action seeks to have the bidding notice altered and the public bidprocedures restarted. A request for summary judgment was denied and we thuspresented pleadings. The case was dismissed at the first instance, withjudgment in favor of the Company. The amount involved in this case is R$26.1million as of December 31, 2007. The Company assesses the likelihood of anadverse outcome as “remote”.

 

A class action was brought against CEMIGand nine other defendants, requesting nullification of the Conduct AdjustmentUndertaking (TAC) signed between the Public Attorneys’ Office and the Company,ordering the restitution to public funds of the amounts transferred to thedefendant companies for implementation of the *Luzpara Todos* program. The application for interim remedy was refused,and the plaintiff appealed to the *Tribunal Regional Federal*(the Regional Federal Appeal Court, or “TRF”). The amount involved, of R$1.214billion, refers to the request for restitution of the amounts received by thecompanies that carried out the services contracted by CEMIG in order to complywith such governmental program, and fees of counsel. The chance of loss isassessed as “possible”.

 

On June 12, 2003, ANEEL imposed afine on CEMIG for alleged failure to comply with certain electric power supply qualitystandards (DEC and FEC) with respect to its consumers in 2001 and 2002. CEMIGhas filed a suit to suspend the fine, and suspend its inclusion in the Cadin(registry of unpaid debt owed to the Federal Government) and in the list ofFederal Government debt receivables (*DívidaAtiva da União*). After depositing the fine, we obtained aprovisional decision suspending our inclusion in those debt listings. Theapproximate amount of this claim is R$9.0 million. We assess the likelihood ofan adverse outcome as “possible” and have made no provisions for this suit, dueto the amount being guaranteed by the deposit.

 

ANEEL gave notice to CEMIG of violationof limits for the DEC and FEC duration and frequency outage indices for theyears 2005 and 2006. The administrative decision was brought against thecompany, seeking annulment of the penalty payment application and removal ofthe obstacle to issuance by ANEEL of the certificate of non-default andnon-inclusion of CEMIG in the list of Federal Government debt receivables (*Dívida Ativa da União*). The amountinvolved is R$744.3 thousand and the chance of loss is assessed as “possible”.

 

On January 9, 2007, CemigDistribution received a notification from ANEEL pursuant to a possible breachof the applicable electricity legislation concerning differentiated tariffs forlow-income consumers. On February 27, 2007 Cemig Distribution answeredANEEL’s notification stating that consumers should be classified as low-incomepursuant to Administrative Act No. 242/96 of the National Water andElectricity Department (DNAEE – *DepartamentoNacional de Energia Elétrica*) (Ministerial Order DNAEE 242/96) andthat, therefore, CEMIG’s tariffs were correctly applied. On March 1, 2007,ANEEL responded to Cemig Distribution stating that the differences between theamounts considered adequate by ANEEL and those defined by Cemig Distributionwere not legally ratified by ANEEL. The historic value of the fine is R$143million. The Company recorded a provision on December 31, 2007 of R$36million, which, according to its estimates, represents the potential lossrelating to these matters.

 

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ABRADEE – the Brazilian Association ofElectricity Distributors – filed a lawsuit to compel the regulator, ANEEL, tofulfill its obligation in relation to the non-regulation of charging ofpayments representing the Extraordinary Tariff Recomposition (RTD) to Free andIncentive-receiving Consumers, in accordance with Law 10438 of April 26,2002. In such lawsuit, CEMIG is represented by ABRADEE, and in the event ofsuccess in the case, Cemig Distribution and CEMIG will be beneficiaries in theamounts of R$100.6 million and R$244.1 million, respectively. The chance ofloss is assessed as “possible”.

 

On December 11,2007, ANEEL issued Resolution No. 294, which established the methodologyand procedures applicable to compensate the costs incurred by the distributionconcessionaires by reason of the *Luz Para Todos*program. On December 27, 2007, we filed an appeal requesting themodification in the procedures set forth in such Resolution. Further to this,there is an amount of approximately R$534.3 million to be considered in ourrate review. No provision has been recorded regarding this matter since CEMIGis a plaintiff in this administrative proceeding.

 

CEMIG has also filed aprecautionary action in order to suspend the final decision taken in anordinary lawsuit brought by ANEEL, which determined that CEMIG no longer isbound to the Minas Gerais Development Institute (*Instituto deDesenvolvimento Integrado de Minas Gerais* – INDI), as well as thefine of R$3.12 million imposed in connection with this matter. The total amountinvolved in this lawsuit as of December 31, 2007 is approximately R$8.9million and the Company believes that the likelihood of an adverse outcome isprobable.

 

Twoclass actions were brought against CEMIG by the *Movimentodas Donas de Casa e Consumidores*requiring, respectively (i) thenullification of the rate readjustment of electric energy published on April 8,2004 and substitution of the General Market Price Index *(ÍndiceGeral de Preço de Mercado – IGPM) *bythe National Extended Consumer Price Index *(Índice Nacional de Preçosao Consumidor Amplo – IPCA*), as well as determining the applicationof the X Factor as the valid calculation basis to the calculation of the rate,and (ii) the nullification of the increase of 23.88% in the electricenergy rate and substitution of the General Market Price Index *(Índice Geral de Preço de Mercado – IGPM) *by the National Extended ConsumerPrice Index *(Índice Nacional de Preços ao Consumidor Amplo –IPCA*) in connection with the annual rate readjustment of 2005.Respectively, the amount involved of the lawsuits is approximately R$178million and R$2.0 billion. The Company believes that the loss possibility forthese both process shall be classified as “remote”.

 

Inaddition, the Public Attorney’s Office of the State of Minas Gerais *(Ministério Público do Estado de Minas Gerais)*brought aclass action against CEMIG requiring the substitution of the General MarketPrice Index *(Índice Geral de Preço de Mercado – IGPM)*bythe National Extended Consumer Price Index *(Índice Nacional de Preçosao Consumidor Amplo – IPCA*) in connection with the annual ratereadjustment of 2003, and restitution of double the amount wrongfully collectedfrom the consumers in the State of Minas Gerais. The claim was dismissed, sothe Public Attorney’s Office filed an appeal, which was partially dismissed bythe Court of Appeals of the State of Minas Gerais and the Supreme Court. ThePublic Attorney’s Office filed an interlocutory appeal, which is still pending.The total amount involved is R$1.3 billion. The risk of loss is evaluated as “remote”.

 

CEMIGis a defendant in a class action brought by the Public Attorney’s Office inwhich it is required that CEMIG issue an invoice of electric energy consumptionwith two bar codes individually to consumers of the cities where CEMIG providesservice of *Contribuição de Iluminação Pública –*CIP. The value involved in this lawsuit is approximately R$9.3 million and theCompany believes that the loss possibility is evaluated as “probable”.

 

**Dividend Policy and Payments**

** **

*Obligatory dividend; priority and amount of dividends*

* *

Under our by-laws, we are required to pay to our shareholders, asobligatory dividends, 50% of the net income of the fiscal year ending December 31.Our preferred shares have priority in the allocation of the obligatory dividendfor the period in question. The order of priority of the distribution ofdividends is as follows:

 

·              Theannual minimum dividend for the preferred shares: These have preference in theevent of reimbursement of shares, and have an annual minimum dividend equal tothe greater of the following:

 

·     10%of their par value; or

 

·     3%of the shareholders’ equity associated with it.

 

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·              Thedividends on the common shares, up to the minimum percentage for the preferredshares.

 

If a portion of the obligatory dividend remains after the payment ofthe common dividend, the remaining funds are to be distributed on an equal, prorata basis with respect to all preferred shares and common shares.

 

Without prejudice to the obligatory dividend, beginning in fiscal year2005, every two years, or shorter period if the company’s cash positionpermits, we will distribute extraordinary dividends, up to the limit of thecash available, as determined by the Board of Directors, under the Company’sStrategic Guidelines Plan and the dividend policy specified in that plan.

 

The annual dividends declared shall be paid in two equal installments,the first by June 30 and the second by December 30 of each year. Theextraordinary dividends shall be paid as decided by the Board of Directors.

 

Under the Brazilian Corporate Law, the Board of Directors may declareinterim dividends, in the form of interest on capital, to be paid from retainedearnings, income reserves or income reported in semi-annual or quarterlyfinancial statements. Any interim dividends paid shall be calculated based onthe dividend to be paid in the fiscal year in which the interim dividend wasdeclared. Our by-laws authorize our Board of Directors to declare interimdividends. Any interim dividend paid may be set off against the amount of theobligatory dividend payable for the fiscal year in which the interim dividendwas paid.

 

In the fiscal years in which we do not have sufficient income to paydividends to our preferred and common shareholders, the State of Minas Geraisguarantees a minimum dividend of 6% of the par value of the preferred or commonshares, respectively, per year to all shares of the Company issued up to August 5,2004 and held by individuals.

 

*Amounts available for distribution*

* *

The amount available for distribution is calculated on the basis of thefinancial statements prepared in accordance with accounting practices adoptedin Brazil and the procedures described below.

 

The obligatory dividend is calculated on the basis of *adjusted net income*, defined as net income after addition orsubtraction of: (a) amounts allocated to the legal reserve, (b) amountsallocated to the formation of the contingency reserves and reversal of thesereserves formed in previous fiscal years, and (c) any unrealized incometransferred to the unrealized income reserve account, and any amountspreviously posted to this reserve account which have been realized in thefiscal year and used to offset losses.

 

We are obliged to maintain a legal reserve, to which 5% of the netincome of each fiscal year must be allocated until the reserve’s total value isequal to 20% of the company’s total paid-in capital. However, we are notobliged to make any allocation to the legal reserve in relation to any fiscalyear in which the sum of the legal reserve and the other established capitalreserves exceeds 30% of the company’s total paid-in capital. Any net losses maybe charged against the legal reserve.

 

Under the Brazilian Corporate Law, income in subsidiaries or affiliatedcompanies reported by the equity method, and income on term sales, realizableafter the end of the next fiscal year, are also considered to be unrealizedincome.

 

The total of income reserves (with the exception of the reserve forcontingencies relating to expected losses and the unrealized income reserve),the legal reserve, the special reserves, the reserve for investment projects,and retained earnings may not be greater than the company’s registered capital.The amount in excess of our registered capital must be used to increase our registeredcapital or be distributed as cash dividends.

 

Under the Brazilian Corporate Law and our by-laws, dividends notclaimed within three years from the date on which they are distributed revertto us.

 

*Interest on equity*

* *

Under Brazilian law we may pay interest on equity as an alternative forthe distribution of funds to shareholders. Funds distributed as interest onequity qualify within the calculation of minimum dividend established in theby-laws. These amounts may be paid in cash; and the company may treat them asan expense for purposes of the calculation of the income tax and the socialcontribution tax. The total amount paid in interest on equity is limited to theresult of application to the company’s shareholders’ equity of the Long TermInterest Rate (TJLP), published by BNDES and may not exceed the greater of (i) 50%of the net income 

 

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(beforetaxes for social contribution on net profits, income tax, and the deduction ofthe interest attributable to shareholders’ equity) for the period in respect ofwhich the payment is made or (ii) 50% of retained earnings as of the dateof the beginning of the period in respect of which the payment is made.  Shareholders who are not resident in Brazilmust register with the Brazilian Central Bank so that the foreign currencyproceeds of their dividend payments, or of sale or other amounts relating totheir shares, may be remitted to them outside Brazil. The preferred sharesunderlying our Preferred ADSs and the common shares underlying our Common ADSsare held in Brazil by the custodian bank, as agent for the depositary bank,which is the registered owner of the shares.

 

*Currency Exchange*

* *

Payments of cash dividends and distributions, if any, will be made in *reais* to the custodian on behalf of the depositary bank,which will then convert such proceeds into U.S. dollars and will cause suchU.S. dollars to be delivered to the depositary bank for distribution to holdersof ADRs. In the event that the custodian is unable to immediately convert the *reais* received as dividends into U.S. dollars, the amount ofU.S. dollars payable to holders of ADRs may be adversely affected bydevaluations of the *real* that occurbefore such dividends are converted and remitted. The real appreciatedapproximately 16.65% relative to the U.S. dollar in 2007. See “Item 3. KeyInformation—Risk Factors—Risks Relating to Brazil—The Brazilian governmentexercises a significant influence on the Brazilian economy. Political andeconomic conditions can have a direct impact on our business.”

 

Dividends in respect of the preferred shares and common shares paid toholders who are not Brazilian residents, including holders of Preferred ADSsand Common ADSs, are generally not subject to Brazilian withholding tax,although in general payments of interest on capital are subject to withholdingtax. See “Item 10. Additional Information—Taxation—Brazilian TaxConsiderations—Taxation of Dividends” and “—U.S. Tax Considerations—Taxation ofDistributions.”  There is no specificrecord date upon which the depositary bank will determine the exchange rate tobe used in connection with converting cash dividends or other cashdistributions. Pursuant to the Deposit Agreements, the depositary bank willarrange for the funds to be converted into U.S. dollars upon receipt of noticeof cash dividends or other cash distributions.

 

*History of Dividend Payments*

* *

Thefollowing table sets forth the recent history of declarations of dividends andinterest on capital on our common shares and preferred shares. For each year inthe table, the payment of the dividends occurred during the year followingdeclaration. For the periods indicated, the dividends paid per 1,000 commonshares and per 1,000 preferred shares (per one common share and per onepreferred share, subsequent to the share consolidation on June 11, 2007)were the same.  See “Item 3. KeyInformation—Selected Consolidated Financial Data.”

 

**Declaration History of Dividends and Interest onCapital (1)**

 
| **Dividend Year** | ** ** | **Common Shares** | ** ** | **Preferred Shares** | ** ** |
|------------------------|------------|------------------------|------------|---------------------------|------------|
| ** **             | ** ** | **(R$)(2)**            | ** ** | **(US$)(3)**              | ** ** | **(R$)(2)** | ** ** | **(US$)(3)** | ** ** |
| 2003                   |       | 140,081,485            |       | 47,630,144                |       | 180,412,546 |   | 61,343,408 |   |
| 2004                   |       | 302,634,209            |       | 119,476,593               |       | 389,766,059 |   | 153,875,270 |   |
| 2005                   |       | 904,951,727            |       | 432,991,257               |       | 1,165,497,675 |   | 557,654,390 |   |
| 2006                   |       | 603,948,640            |       | 297,394,445               |       | 777,832,359 |   | 383,017,706 |   |
| 2007 (4)               |       | 379,426,703            |       | 227,365,000               |       | 488,297,923 |   | 292,604,220 |   |

 

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(1)           In accordance with theaccounting practices adopted in Brazil, dividends and interest on capital areaccounted for as having been paid in the dividend year in which they areproposed, even if such dividends or interest on capital were formally approvedby a shareholders’ meeting in the following year.

(2)           *Real*amounts are expressed in nominal *reais*.

(3)           U.S. dollar amounts are calculated by dividing the amount ofdividends paid, expressed in nominal *reais*, by thenoon buying rate on April 25, 2008.

(4)           The 2007 dividends wereapproved at the ordinary and special general shareholders’ meetings held on April 25,2008. The 2007 dividends will be paid in two equal installments in June 2008and December 2008. The first installment was paid on June 27, 2008.

 

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**Significant Changes**

 

A significant change in our financial condition since the date of ourfinancial statements that are included in this annual report on Form 20-Fis an average decrease in our rates of 7.14% as a result of our second periodicrate revision which took place in April 2008, which has had a negativeeffect on our electricity sales revenues. . For more detailed information aboutsuch decrease in our rates, see “Item 5. Operating and Financial Review andProspects – Rates”

 

**Item 9.**    The Offer and Listing

** **

**Trading Market**

** **

The principal trading market for our preferred shares is the São PauloStock Exchange. Our Preferred ADSs, each representing one preferred share as ofDecember 31, 2007, have traded on the NYSE under the symbol “CIG” since September 18,2001. Prior to that date, our Preferred ADSs were traded in theover-the-counter, or OTC, market in the United States. The Preferred ADSs areevidenced by Preferred ADRs issued by Citibank, N.A., as depositary, pursuantto a Second Amended and Restated Deposit Agreement, dated as of August 10,2001, as amended on June 11, 2007, by and among us, the depositary and theholders and beneficial owners of Preferred ADSs evidenced by Preferred ADRsissued thereunder. As of December 31, 2007, there were approximately79,684,904 Preferred ADSs outstanding (each representing one preferred share),representing approximately 29.1% of our 273,631,568****outstanding preferredshares.

 

The principal trading market for our common shares is the São PauloStock Exchange.  Our Common ADSs, eachrepresenting one common shares as of December 31, 2007, have traded on theNYSE under the symbol “CIG.C” since June 12, 2007, when we established anAmerican Depositary Shares program for our common shares.  The Common ADSs are evidenced by Common ADRsissued by Citibank, N.A., as depositary, pursuant to a Deposit Agreement, datedas of June 12, 2007, by and among us, the depositary and the holders andbeneficial owners of Common ADSs evidenced by Common ADRs issued thereunder. Asof December 31, 2007, there were approximately 14,300 Common ADSs outstanding(each representing one common share), representing approximately 0.01% of our212,622,503 outstanding common shares.

 

The following table sets forth the reported high and low closing saleprices for the preferred shares on the São Paulo Stock Exchange and thePreferred ADSs on the NYSE for the periods indicated.

 
| ** **         | ** ** | **Preferred Shares(1)**                 | ** ** | **Preferred ADSs (1)** | ** ** |
|--------------------|------------|----------------------------------------------|------------|----------------------------------|------------|
| ** **         | ** ** | **Price in Nominal R$ ** | ** ** | **Price in US$**       | ** ** |
| **Period**         | ** ** | **High**                                     | ** ** | **Low**                          | ** ** | **High** | ** ** | **Low** | ** ** |
| 2003               |       | 17.23                                        |       | 7.15                             |       | 6.13 |   | 2.02 |   |
| 2004               |       | 22.22                                        |       | 12.03                            |       | 8.34 |   | 3.81 |   |
| 2005               |       | 31.03                                        |       | 17.47                            |       | 13.70 |   | 6.55 |   |
| 2006               |       | 37.24                                        |       | 26.13                            |       | 17.55 |   | 11.53 |   |
| 2007               |       | 41.95                                        |       | 31.60                            |       | 22.54 |   | 15.18 |   |
|               |       |                                         |       |                             |       |   |   |   |   |
| 2006               |       |                                         |       |                             |       |   |   |   |   |
| First quarter      |       | 37.25                                        |       | 30.55                            |       | 17.55 |   | 13.12 |   |
| Second quarter     |       | 34.58                                        |       | 26.14                            |       | 17.15 |   | 11.53 |   |
| Third quarter      |       | 31.80                                        |       | 27.18                            |       | 14.92 |   | 12.53 |   |
| Fourth quarter     |       | 34.80                                        |       | 27.71                            |       | 16.44 |   | 12.94 |   |
|               |       |                                         |       |                             |       |   |   |   |   |
| 2007               |       |                                         |       |                             |       |   |   |   |   |
| First quarter      |       | 34.73                                        |       | 31.60                            |       | 16.92 |   | 15.18 |   |
| Second quarter     |       | 41.95                                        |       | 32.51                            |       | 22.36 |   | 16.27 |   |
| Third quarter      |       | 41.36                                        |       | 33.62                            |       | 22.54 |   | 16.16 |   |
| Fourth quarter     |       | 38.85                                        |       | 31.71                            |       | 22.43 |   | 17.85 |   |
|               |       |                                         |       |                             |       |   |   |   |   |
| 2008               |       |                                         |       |                             |       |   |   |   |   |
| First quarter      |       | 33.82                                        |       | 27.41                            |       | 20.50 |   | 15.80 |   |
|               |       |                                         |       |                             |       |   |   |   |   |
| January 2008  |       | 33.82                                        |       | 27.41                            |       | 19.65 |   | 15.80 |   |
| February 2008 |       | 39.60                                        |       | 31.21                            |       | 19.80 |   | 15.92 |   |
| March 2008    |       | 33.23                                        |       | 28.43                            |       | 20.50 |   | 16.84 |   |

 

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| April 2008    |   | 35.43 |   | 31.21 |   | 21.73 |   | 18.69 |   |
|--------------------|--------|-------|--------|-------|--------|-------|--------|-------|--------|
| May 2008      |   | 38.50 |   | 34.48 |   | 23.64 |   | 20.85 |   |
| June 2008 (2) |   | 39.60 |   | 37.90 |   | 24.70 |   | 23.43 |   |

 

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(1)           On May 3, 2007, a50% stock dividend was paid on the preferred shares, resulting in an adjustmentto the price per preferred share.  On May 7,2007, a corresponding adjustment was made to the ADSs through the issuance ofone additional ADS for every two ADSs, resulting in an adjustment to the priceper ADS. The last day of trading of the preferred shares in lots of 1,000shares was June 1, 2007.  A reversestock split of the****preferredshares was effected in the form of a share consolidation on June 4, 2007whereby every 500 preferred shares, par value of R$0.01, were consolidated intoone preferred share with a par value of R$5.00. In addition, a 100% forward split of the ADSs was effected on June 11,2007.  The price per preferred share andpre ADS were adjusted accordingly.  Inaddition, on May 2, 2008, a 2.02% stock dividend was paid on the preferredshares, resulting in an adjustment to the price per preferred share.  On May 8, 2008, a correspondingadjustment was made to the Preferred ADSs through the issuance of additionalPreferred ADS, resulting in an adjustment to the price per Preferred ADS.  The preferred share prices and Preferred ADSprices have been adjusted to reflect all of the above items.

(2)           Through June June 20,2008.

 

On June 20, 2008, the closing price per preferred share on the SãoPaulo Stock Exchange was R$38.40 and the closing price per Preferred ADS on theNYSE was US$23.99.

 

On June 12, 2007, our common share ADSs begantrading on the NYSE.  The following tablesets forth the reported high and low closing sale prices for the common shareson the São Paulo Stock Exchange and the Common ADSs on the NYSE for the periodsindicated.
| ** **         | ** ** | **Common Shares (1)**              | ** ** | **Common ADSs (1)** | ** ** |
|--------------------|------------|----------------------------------------------|------------|-------------------------------|------------|
| ** **         | ** ** | **Price in Nominal R$ ** | ** ** | **Price in US$**    | ** ** |
| **Period**         | ** ** | **High**                                     | ** ** | **Low**                       | ** ** | **High** | ** ** | **Low** | ** ** |
| 2003               |       | 17.23                                        |       | 7.15                          |       | — |   | — |   |
| 2004               |       | 22.22                                        |       | 12.02                         |       | — |   | — |   |
| 2005               |       | 31.04                                        |       | 17.47                         |       | — |   | — |   |
| 2006               |       | 31.01                                        |       | 23.07                         |       | — |   | — |   |
| 2007               |       | 43.13                                        |       | 28.43                         |       | 23.74 |   | 17.00 |   |
|               |       |                                         |       |                          |       |   |   |   |   |
| 2006               |       |                                         |       |                          |       |   |   |   |   |
| First quarter      |       | 31.01                                        |       | 24.41                         |       | — |   | — |   |
| Second quarter     |       | 28.75                                        |       | 23.65                         |       | — |   | — |   |
| Third quarter      |       | 27.64                                        |       | 23.07                         |       | — |   | — |   |
| Fourth quarter     |       | 30.06                                        |       | 24.17                         |       | — |   | — |   |
|               |       |                                         |       |                          |       |   |   |   |   |
| 2007               |       |                                         |       |                          |       |   |   |   |   |
| First quarter      |       | 33.65                                        |       | 28.43                         |       | — |   | — |   |
| Second quarter     |       | 41.18                                        |       | 32.58                         |       | 21.25 |   | 19.30 |   |
| Third quarter      |       | 43.13                                        |       | 34.11                         |       | 23.74 |   | 17.00 |   |
| Fourth quarter     |       | 39.10                                        |       | 31.86                         |       | 22.74 |   | 18.25 |   |
|               |       |                                         |       |                          |       |   |   |   |   |
| 2008               |       |                                         |       |                          |       |   |   |   |   |
| First quarter      |       | 32.75                                        |       | 25.66                         |       | 18.87 |   | 15.21 |   |
|               |       |                                         |       |                          |       |   |   |   |   |
| January 2008  |       | 32.75                                        |       | 26.39                         |       | 18.75 |   | 16.00 |   |
| February 2008 |       | 29.91                                        |       | 25.97                         |       | 18.16 |   | 15.50 |   |
| March 2008    |       | 30.88                                        |       | 25.66                         |       | 18.87 |   | 15.21 |   |
| April 2008    |       | 31.72                                        |       | 27.45                         |       | 19.25 |   | 16.52 |   |
| May 2008      |       | 33.69                                        |       | 30.00                         |       | 20.40 |   | 17.25 |   |
| June 2008 (2) |       | 34.26                                        |       | 33.15                         |       | 20.25 |   | 20.75 |   |

 

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(1)    On May 3,2007, a 50% stock dividend was paid on the common shares, resulting in anadjustment to the price per common share. The last day of trading of the common shares in lots of 1,000 shares wasJune 1, 2007.  A reverse stock splitof the****common shares was effected in the formof a share consolidation on June 4, 2007 whereby every 500 common shares,par value of R$0.01, were consolidated into one common share with a par valueof R$5.00.  The price per common sharewas adjusted accordingly.  In addition,On May 2, 2008, a 2.02% stock dividend was paid on the common shares,resulting in an adjustment to the price per common share.  On May 8, 2008, a correspondingadjustment was made to the Common ADSs through the issuance of additionalCommon ADS, resulting in an adjustment to the price per Common ADS.  The common share prices and Common ADS priceshave been adjusted to reflect all of the above items.

(2)    Through June 20,2008.

 

On June 20, 2008, the closing price per commonshare on the São Paulo Stock Exchange was R$32.85 and the closing price perCommon ADS on the NYSE was US$20.75.

 

Since July 12, 2002, our depositary receipts have traded on theLATIBEX, under the ticker symbol “XCMIG.” The LATIBEX is an electronic trading market created in 1999 by theMadrid Stock Exchange in order to facilitate the trading market of LatinAmerican Securities in Euros.

 

**Trading on the São Paulo Stock Exchange**

** **

The preferred shares and common shares are traded on the São PauloStock Exchange, the only Brazilian stock exchange that trades shares. Trading onthe São Paulo Stock Exchange is limited to brokerage firms and a limited numberof authorized entities. The CVM and São Paulo Stock Exchange have discretionaryauthority to suspend trading in shares of a particular issuer under certaincircumstances.

 

If you were to trade in the preferred shares or common shares on theSão Paulo Stock Exchange, your trade would settle in three business days afterthe trade date. Delivery of and payment for shares is made through thefacilities of a separate clearinghouse, which maintains accounts for brokeragefirms. The seller is ordinarily required to deliver the shares to the exchangeon the second business day following the trade date. The clearinghouse for the São PauloStock Exchange is Companhia Brasileira de Liquidação e Custódia.

 

In order to better control volatility, the São Paulo Stock Exchange hasadopted a “circuit breaker” system pursuant to which trading sessions may besuspended for a period of 30 minutes whenever the index of this stock exchangefalls more than 10% from the index registered for the previous trading session,and an additional period of one hour if the index falls 5% or more after thereopening of trading.

 

The São Paulo Stock Exchange is less liquid than the NYSE and othermajor exchanges in the world. As of December 31, 2007, the aggregatemarket capitalization of the 404 companies listed on the São Paulo StockExchange was equivalent to approximately US$1.4 trillion and the 10 largestcompanies listed on the São Paulo Stock Exchange represented approximately49.69% of the total market capitalization of all listed companies. Although anyof the outstanding shares of a listed company may trade on a Brazilian stockexchange, in most cases fewer than half of the listed shares are actually availablefor trading by the public. The remainder of these shares is held by smallgroups of controlling persons, governmental entities or one principalshareholder. As of December 31, 2007, we accounted for approximately 0.73%of the total market capitalization of all listed companies on the São PauloStock Exchange.

 

Our preferred shares and common shares have daily liquidity on the SãoPaulo Stock Exchange and have had no suspension of trading in the past fiveyears

 

We have been a member of Special Corporate Governance Level 1 of theSão Paulo Stock Exchange since October 2001. As a result, we have agreedto do the following:

 

·      presenta consolidated balance sheet, a consolidated statement of results and theaccompanying letter to shareholders;

 

·      include,in the explanatory notes to our financial statements, a cash flow statement;

 

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·      discloseany direct or indirect ownership interest, including beneficial ownershipinterest, exceeding five percent of our capital stock;

 

·      disclosethe amount and characteristics of our securities held directly or indirectly byinsiders;

 

·      disclosechanges in the amount of securities held by insiders within the preceding 12months;

 

·      disclosethe amount of free float shares and their respective percentage in relation tototal shares outstanding, which shall be of at least 25% of shares representingour capital stock;

 

·      disclose,at the end of January of each year, an annual schedule of corporateevents, and any subsequent changes to the schedule;

 

·      discloseany agreements which we have executed with any of our affiliates, subsidiaries,managers (or any company owned or controlled by our managers) or controllingshareholders (or any affiliate or subsidiary of our controlling shareholders),whenever the aggregate value of such agreement exceeds either R$200 thousand or1% of our net equity.  For each suchagreement we must disclose the purpose, term, amounts, provisions fortermination and expiration and, if applicable, the influence the agreement mayhave over our management or business;

 

·      holdat least one annual meeting with market analysts and any other interestedparties; and

 

·      adoptmechanisms that provide for capital dispersion in any public share offerings.

 

*Disclosure of Trading by Insiders*

* *

Brazilian securities regulations require our controlling shareholders,management, members of our Fiscal Council and any other technical or advisorybody to disclose to us, the CVM and the São Paulo Stock Exchange the number andtypes of securities issued by us, our subsidiaries and our controllingcompanies that are held by them or by persons closely related to them and anychanges in their respective ownership positions during the preceding 12 months.The information regarding the acquisition of such securities (amount, price anddate of acquisition) must be provided to us within 10 days of the end of themonth in which they were acquired.

 

*Disclosure of Material Developments*

* *

Under Brazilian securities regulations, we must disclose any materialdevelopment related to our business to the CVM and the São Paulo StockExchange. We are also required to publish a notice of those materialdevelopments. A development is deemed material if it has a material impact onthe price of our securities, the decision of investors to trade in oursecurities or the decision of investors to exercise any rights as holders ofany of our securities. Under special circumstances, we may submit to the CVM arequest for confidential treatment for certain material developments.

 

Trading on Brazilian stock exchanges by non-residents of Brazil issubject to limitations under Brazilian foreign investment legislation. See “Item 10. AdditionalInformation—Exchange Controls.”

 

**Regulation of Brazilian Securities Markets**

** **

The Brazilian securities markets are principally governed by Law No. 6,385,dated December 7, 1976, and the Brazilian Corporate Law, each as amendedand supplemented, and by regulations issued by the CVM, the National MonetaryCouncil and the Central Bank, which has, among other powers, licensingauthority over brokerage firms and which regulates foreign investments andforeign exchange transactions.

 

Under the Brazilian Corporate Law, a corporation is either publiclyowned , such as we are, or closely held (*companhia fechada*).All publicly owned companies, including us, are registered with the CVM and aresubject to reporting requirements. Our shares are traded on the São Paulo StockExchange, but may be traded privately subject to certain limitations. TheBrazilian OTC market consists of direct trades and trades between individualsin which a financial institution registered with the CVM serves asintermediary.

 

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We have the option to ask that trading in our securities on the SãoPaulo Stock Exchange be suspended in anticipation of a material announcement.Trading may also be suspended on the initiative of the São Paulo Stock Exchangeor the CVM based on or due to, among other reasons, a belief that a company hasprovided inadequate information regarding a material event or has providedinadequate responses to inquiries by the CVM or the stock exchange.

 

Brazilian law provides general restrictions on unfair trading practicesand market manipulation, although in Brazil there may be fewer instances ofenforcement actions and judicial precedent is less well defined than in certainother countries. The Brazilian Corporate Law provides that the controllingshareholders, any shareholder that appoints members to the board of directorsand to the fiscal council, members of the board of directors, members of thefiscal council and executive officers will be required to disclose any purchaseor sale of shares to the CVM and the São Paulo Stock Exchange.

 

Trading on the São Paulo Stock Exchange by non-residents of Brazil issubject to limitations under Brazilian foreign investment and tax legislation.The Brazilian custodian for the preferred shares or the common shares and the depositarybank must obtain a certificate of registration from the Central Bank of Brazilto be eligible to remit U.S. dollars abroad for payments of dividends, anyother cash disbursements, or upon the disposition of the shares and salesproceeds thereof. In the event that a holder of Preferred ADSs exchanges itsPreferred ADSs for preferred shares or a holder of Common ADSs exchanges itsCommon ADSs for common shares, the holder will be entitled to continue to relyon the depositary bank’s certificate of registration for five business daysafter the exchange. Thereafter, the holder may not be able to obtain and remitU.S. dollars abroad upon the disposition of the preferred shares or commonshares, or distributions relating to the preferred shares or common shares,unless the holder qualifies for and obtains a new certificate of registration. See “Item 10. AdditionalInformation—Exchange Controls.”

 

**Item10.**         Additional Information

** **

**Corporate Governance Differences from NYSE Practices**

** **

On November 4, 2003, the New York Stock Exchange (“NYSE”)established new corporate governance rules. Under the rules, foreign privateissuers are subject to a more limited set of corporate governance requirementsthan U.S. domestic issuers. Under these rules, we are required to set forth inour annual report to shareholders a description of the significant differencesbetween CEMIG’s corporate governance practices and those that would apply to aU.S. domestic issuer under the NYSE corporate governance rules. The followingtable summarizes these differences.

 

 
| **Section** | ** ** | **NYSE Corporate Governance Rule for U.S.  Domestic Issuers**                                                                                                                                                                                   | ** ** | **Our Approach**                                                                                                                                                                                                                                                                                                                                                                      |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 303A.01     |       | A listed company must have a majority of independent  directors. “Controlled companies” are not required to comply with this  requirement.                                                                                                                          |       | CEMIG is a controlled company because more than a  majority of its voting power is controlled by the government of the State of  Minas Gerais. As a controlled company, CEMIG would not be required to comply  with the majority of independent directors requirements if it were a U.S.  domestic issuer. There is no legal provision that requires CEMIG to have  independent directors. |
|        |       |                                                                                                                                                                                                                                                                          |       |                                                                                                                                                                                                                                                                                                                                                                                       |
| 303A.03     |       | The non-management directors of a listed company  must meet at regularly scheduled executive sessions without management.                                                                                                                                                     |       | The non-management directors of CEMIG do not meet at  regularly scheduled executive sessions without management.                                                                                                                                                                                                                                                                           |
|        |       |                                                                                                                                                                                                                                                                          |       |                                                                                                                                                                                                                                                                                                                                                                                       |
| 303A.04     |       | A listed company must have a nominating/corporate  governance committee composed entirely of independent directors, with a  written charter that covers certain minimum specified duties. “Controlled  companies” are not required to comply with this requirement. |       | As a controlled company, CEMIG would not be required  to comply with the nominating/corporate governance committee requirements if  it were a U.S. domestic issuer. CEMIG does not have a nominating/corporate  governance committee.                                                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                          |       |                                                                                                                                                                                                                                                                                                                                                                                       |
| 303A.05     |       | A listed company must have a compensation                                                                                                                                                                                                                                     |       | As a controlled company, CEMIG would not be                                                                                                                                                                                                                                                                                                                                                |

 

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|                |   | committee composed entirely of independent  directors, with a written charter that covers certain minimum specified  duties. “Controlled companies” are not required to comply with this  requirement.                                                                          |   | required to comply with the compensation committee  requirements if it were a U.S. domestic issuer. CEMIG does not have a  compensation committee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|---------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 303A.06 and 303A.07 |   | A listed company must have an audit committee with a  minimum of three independent directors that satisfy the independence  requirements of Rule 10A-3 under the Securities Exchange Act of  1934, as amended, with a written charter that covers certain minimum  specified duties. |   | CEMIG has a permanent Conselho Fiscal, or Fiscal  Council in accordance with the applicable provisions of Brazilian Corporate  Law. As required by Brazilian Corporate Law, our Fiscal Council is  independent of our management and external auditors. The primary  responsibility of the Fiscal Council is to review management’s activities and  the financial statements, and to report its findings to the shareholders. Our  Fiscal Council acts as our audit committee for purposes of the Sarbanes-Oxley  Act of 2002. Under Section 10A-3 of the SEC rules on Audit  Committees of listed companies, non-U.S. issuers are permitted not to have a  separate Audit Committee made up of independent members if there is a fiscal  council established and chosen in accordance with the legal rules of its  origin country, expressly requiring or allowing that such council follow certain  obligations. Also in accordance with this exemption, a fiscal council may  exercise the obligations and responsibilities of an Audit Committee of the  United States up to the limit permitted by Brazilian Law. |
|                |   |                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 303A.08             |   | Shareholders must be given the opportunity to vote  on all equity-compensation plans and material revisions thereto, with limited  exemptions set forth in the NYSE rules.                                                                                                                |   | Under Brazilian Corporate Law, shareholder  preapproval is required for the adoption of equity compensation plans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                |   |                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 303A.09             |   | A listed company must adopt and disclose corporate  governance guidelines that cover certain minimum specified subjects.                                                                                                                                                                  |   | CEMIG does not have formal corporate governance  guidelines.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                |   |                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 303A.12             |   | Each listed company Chief Executive Officer must  certify to the NYSE each year that he or she is not aware of any violation by  the company of NYSE corporate governance listing standards.                                                                                              |   | CEMIG’s Chief Executive Officer will promptly notify  the NYSE in writing after any executive officer of CEMIG becomes aware of any  material non-compliance with any applicable provisions of the NYSE corporate  governance rules.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

**By-laws**

** **

We are a state-controlled company registered under the laws of Brazil.The registration number given to us by Junta Comercial do Estado de MinasGerais, or the Board of Trade of Minas Gerais, is 3130004012. Set forth belowis a brief summary of certain significant provisions of (i) our by-laws,as amended by our general and special shareholders’ meeting on April 25,2008, and (ii) Brazilian Corporate Law. The description of our by-lawscontained herein does not purport to be complete and is qualified by referenceto our by-laws, which have been filed as an exhibit to this annual report.

 

*Object and Purpose*

* *

As described in Article 1 of our by-laws, we have four mainpurposes: (i) to construct and operate electric power generation,transformation, transmission and distribution systems and to trade electricpower and related services; (ii) to develop commercial 

 

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activitiesin the energy field; (iii) to render consulting services to companies inBrazil and abroad; and (iv) to perform activities directly or indirectlyrelating to our corporate purposes.

 

*Preferred Shares*

* *

Holders of preferred shares have the right to receive annual minimumdividends in an amount equal to the greater of 10% of the par value of eachpreferred share or 3% of the shareholders’ equity associated with eachpreferred share. Holders of our preferred shares also will have priority overany other class of shares if we decide to redeem shares. A preferred share doesnot entitle its owner to vote at the general shareholders’ meetings.

 

*Share Subscription*

* *

Shares purchased by the State Government, which must constitute at alltimes the majority of our voting shares, are paid for in accordance with theBrazilian Corporate Law. Shares purchased by other shareholders (whethernatural persons or companies) shall be paid for in accordance with the decisionresulting from the general meeting of shareholders that addresses the matter.

 

Article 171 of the Brazilian Corporate Law provides that eachshareholder has a general preemptive right to subscribe for new shares orconvertible securities issued in any capital increase, in proportion to thatshareholder’s shareholding, except in the event of the exercise of any optionto acquire shares of our capital stock. Shareholders must exercise theirpreemptive rights within 30 days after the publication of the notice of capitalincrease.

 

In the event of a capital increase, holders of Preferred ADSs, whichrepresent preferred shares, and holders of Common ADSs, which represent commonshares, would have preemptive rights to subscribe only to newly issuedpreferred shares or common shares, as the case may be, in proportion to theirshareholdings but may not be able to exercise these rights because of U.S.securities law limitations. See “Item 3. Risk Factors—Risks Relating to thePreferred Shares, Preferred ADSs and Common ADSs—You may not be able toexercise preemptive rights with respect to our securities.”

 

*Minority Shareholders*

* *

Our by-laws provide that the preferred and minority common shareholdersare entitled to elect one member and an alternate to the Board of Directors, asmore fully described in “—Rights of Shareholders—Rights of MinorityShareholders.”

 

*Dividends*

* *

For a discussion of our dividend policy, see “Item 8. FinancialInformation—Dividend Policy and Payments.”

 

*General Meetings*

* *

General meetings of shareholders are held for any legal purpose, asprovided by the Brazilian Corporate Law. Ordinary general meetings ofshareholders are held within the first four months of the fiscal year and arecalled upon 15 days prior notice. The Brazilian Corporate Law also provides thatthe following actions may only be taken at a shareholders’ meeting:

 

·                                          amendmentof our by-laws;

 

·                                          increasesor decreases to our issued capital stock or subscription of new shares;

 

·                                          electionof members to our Board of Directors and Fiscal Council;

 

·                                          authorizationof the issuance of debentures or any convertible securities;

 

·                                          suspensionof the rights of a shareholder who has violated Brazilian Corporation Law orour by-laws;

 

·                                          approvalof any merger (*fusão*) or consolidation (*incorporação*) with another company in which we are not thesurviving company or a spin-off (*cisão*);

 

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·                                          acceptanceor rejection of the valuation of in-kind contributions offered by a shareholderin consideration for the issuance of shares of our capital stock;

 

·                                          approvalof our transformation into a limited liability company (*sociedadeempresária limitada*) or any other corporate form;

 

·                                          approvalof any dissolution or liquidation, the appointment and dismissal of therespective liquidator and review of the reports prepared by him or her;

 

·                                          anyaction regarding an application for bankruptcy or compulsory rescheduling ofour debts;

 

·                                          approvalof the financial statements on an annual basis; and

 

·                                          cancellationof registration with the CVM as a publicly-held company or delisting of ourcommon shares from the São Paulo Stock Exchange, except in the case of aprivatization tender offer.

 

As a general rule, the affirmative vote of shareholders representing atleast the majority of our issued and outstanding common shares present inperson or represented by proxy at a shareholders’ meeting is required toapprove or ratify any proposed action, and abstentions are not taken intoaccount. However, the affirmative vote of shareholders representing one half ofour issued and outstanding voting capital is required to:

 

·                                          createpreferred shares or to increase disproportionately an existing class ofpreferred shares relative to the other classes of shares, unless such action isprovided for or authorized by our by-laws;

 

·                                          modifya preference, privilege or condition of redemption or amortization conferred onone or more classes of preferred shares, or to create a new class with greaterprivileges than the existing classes of preferred shares;

 

·                                          reducethe percentage of mandatory dividends;

 

·                                          changeour corporate purpose;

 

·                                          mergeus with another company if we are not the surviving company or consolidate uswith another company;

 

·                                          spinoff a portion of our assets or liabilities;

 

·                                          approveour participation in a group of companies;

 

·                                          applyfor cancellation of liquidation status;

 

·                                          approveour dissolution; and

 

·                                          approvethe compulsory transfer of all of our shares to another company in order tomake us a wholly-owned subsidiary of that other company (*incorporação de ações*).

 

Shareholders may be represented at a shareholders’ meeting by anattorney-in-fact appointed no more than one year prior to the meeting date. Tobe eligible to represent a shareholder in a shareholders’ meeting, theattorney-in-fact must be a shareholder, one of our executive officers ordirectors or an attorney-at-law. In a publicly held corporation, such as ours,the attorney-in-fact may also be a financial institution.

 

Subject to the provisions of the Brazilian Corporate Law and ourby-laws, our Board of Directors may ordinarily call our shareholders’ meetings.These meetings may also be called by:

 

·                                          theFiscal Council, if the Board of Directors fails to call a general shareholders’meeting within one calendar month after the date it was required to do so underapplicable laws or a special shareholders’ meeting in the case of serious 

 

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                                                andurgent matters affecting us; any shareholder, whenever the executive officersfail to call the meeting of shareholders within 60 days of being required to doso by the Brazilian Corporate Law or by our by-laws; and

 

·                                          shareholdersholding at least five percent of our capital stock, if our Board of Directorsfails to call a meeting within eight days after receipt of a request from thatshareholder to call the meeting that indicates the issues to be discussed orcalls for the creation of the Fiscal Council.

 

*Board of Directors*

* *

Our by-laws mandate that our Board of Directors shall be comprised of14 directors and 14 alternates. One director is designated a chairman andanother director is designated the vice-chairman.

 

Our Board of Directors is responsible for:

 

·                                          establishingthe general direction of our business;

 

·                                          electingand dismissing executive officers;

 

·                                          approvingthe execution contracts between us and our shareholders or any entity thatcontrols, is controlled by or is under joint control with our shareholders;

 

·                                          approvingthe sale or pledge of our fixed assets, or the granting of guarantees to thirdparties, with a value of at least R$5 million;

 

·                                          approving,upon proposal by the Board of Executive Officers, the sale or the creation ofany “in rem” guarantees with respect to our permanent assets and the grantingby us of any personal guarantee to any third party in an amount exceeding R$5million;

 

·                                          approving,upon a proposal by the Board of Executive Officers, loans, financings,agreements and any actions which would bind us in an amount exceeding R$5million;

 

·                                          callingthe general meetings of shareholders;

 

·                                          supervisingthe management of the Board of Executive Officers, reviewing our books anddocuments and requesting information regarding executed and soon-to-be executedcontracts, as well as other items of interest;

 

·                                          approvingour annual and interim financial statements;

 

·                                          appointingand dismissing independent auditors annually;

 

·                                          approving,upon proposal by the Board of Executive Officers, the commencement or waiver ofbidding proceedings for the purchase of goods or services with a value of atleast R$5 million;

 

·                                          authorizing,upon proposal by the Board of Executive Officers, legal and administrativeaction to be taken on our behalf and the settlement of judicial and extrajudicial matters in which we are involved with a value of at least R$5 million;

 

·                                          approvingthe issuance of securities (debentures, commercial papers, *notas promissórias*, among others) in thelocal and international capital markets; and

 

·                                          delegatingto Board of Executive Officers the power to authorize signature contracts ofcommercialization of electric energy or rendering distribution and transmissionservices, in terms of legislation.

 

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Under the Brazilian Corporate Law, directors of a corporation generallyhave certain duties equivalent to those imposed under the laws of most statesof the United States, including a duty of loyalty to the corporation, a duty torefrain from self-dealing and a duty to use reasonable care in the managementof the corporation’s affairs. Our directors and officers may be held liable forbreaches of duty to us and our shareholders and may be subject to judicialactions in proceedings brought by government agencies or our shareholders.

 

There are no provisions in our by-laws with respect to (i) adirector’s power to vote on proposals or contracts in which such director ismaterially interested, (ii) borrowing powers exercisable by the directors,(iii) age limits for retirement of board members, and (iv) number ofshares required for director qualification.

 

The chairman and vice-chairman of our Board of Directors are chosen byour Board of Directors at its first meeting following the election of the boardmembers. The vice-chairman of our Board of Directors will act as a temporaryreplacement for our chairman when the chairman is absent from board meetings.

 

Our shareholders determine the remuneration of our directors during thegeneral meeting of shareholders at which our directors are elected to office.

 

**Rights of Shareholders**

** **

We extend to our shareholders all of the rights that are provided underBrazilian law. Our by-laws are in compliance with the Brazilian Corporate Law.

 

*Essential Rights*

* *

Article 109 of the Brazilian Corporate Law provides that acorporation may not deny certain rights to its shareholders under anycircumstances. These shareholders’ rights include:

 

·                                          theright to have a share of the corporation’s earnings;

 

·                                          theright to have a share of the corporation’s assets, in the event of liquidationthereof;

 

·                                          theright to supervise our management according to the Brazilian Corporate Law;

 

·                                          preemptiverights to subscribe new shares or securities convertible into shares, exceptfor exceptions provided by the Brazilian Corporate Law and our by-laws; and

 

·                                          theright to withdraw from the company under certain circumstances provided in theBrazilian Corporate Law.

 

*Voting Rights*

* *

As a general rule, only our common shares are entitled to vote and eachcommon share corresponds to one vote. Holders of preferred shares acquirevoting rights if, during three consecutive fiscal years, we fail to pay a fixedor minimum dividend to which the preferred shares are entitled. If a holder ofpreferred shares acquires voting rights in this manner, such rights will beidentical to the voting rights of a holder of common shares and will continueuntil the dividend is paid. No restrictions exist on the right of a holder ofcommon shares or preferred shares to exercise voting rights with respect tosuch shares by virtue of such holder being a non-resident of Brazil or acitizen of a country other than Brazil. However, holders of Preferred ADSs mayonly vote the underlying preferred shares through the depositary according tothe terms of the Second Amended and Restated Deposit Agreement, and holders ofCommon ADSs may only vote the underlying common shares through the depositaryaccording to the terms of the Common ADS Deposit Agreement. In any circumstancein which holders of preferred shares are entitled to vote, each preferred sharewill entitle its holder to one vote.

 

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*Redemption rights*

 

Our common shares and preferred shares are not redeemable, except thata dissenting shareholder is entitled under Brazilian corporate law to obtainredemption upon a decision made at a shareholders’ meeting by shareholdersrepresenting at least 50% of the voting shares:

 

(1)                                  tocreate a new class of preferred shares or to disproportionately increase anexisting class of preferred shares relative to the other classes of shares(unless such actions are provided for or authorized by the by-laws);

 

(2)                                  tomodify a preference, privilege or condition of redemption or amortizationconferred on one or more classes of preferred shares, or to create a new classwith greater privileges than the existing classes of preferred shares;

 

(3)                                  toreduce the mandatory distribution of dividends;

 

(4)                                  tochange our corporate purposes;

 

(5)                                  tomerge us with another company or consolidate us;

 

(6)                                  totransfer all of our shares to another company in order to make us awholly-owned subsidiary of such company;

 

(7)                                  toapprove the acquisition of control of another company at a price that exceedscertain limits set forth in Brazilian corporate law;

 

(8)                                  toapprove our participation in a centralized group of companies as defined underBrazilian corporate law; or

 

(9)                                  inthe event that the entity resulting from (a) a merger, (b) a transferof shares as described in clause (6) above or (c) a spin-off that weconduct fails to become a listed company within 120 days of the shareholders’meeting at which such decision was taken.

 

Only holders of shares adversely affected by the changes mentioned initems (1) and (2) above may require us to redeem their shares. Theright of redemption mentioned in items (5), (6) and (8) above mayonly be exercised if our shares do not satisfy certain tests of liquidity atthe time of the shareholder resolution. The right of redemption lapses 30 daysafter publication of the minutes of the relevant shareholders’ meeting, unless,in the case of items (1) and (2) above, the resolution is subject toconfirmation by the preferred shareholders (which must be made at a specialmeeting to be held within one year), in which case the 30-day term is countedfrom the publication of the minutes of the special meeting.

 

We would be entitled to reconsider any action giving rise to redemptionrights within 10 days following the expiration of such rights if the redemptionof shares of dissenting shareholders would jeopardize our financial stability.Law No. 9,457 dated May 5, 1997, which amended Brazilian corporatelaw, contains provisions which, among other provisions, restrict redemptionrights in certain cases and allow companies to redeem their shares at theireconomic value, subject to certain requirements. Our by-laws currently do notprovide that our capital stock will be redeemable at its economic value and,consequently, any redemption pursuant to Brazilian Corporate Law would be madeat no less than the book value per share, determined on the basis of the lastbalance sheet approved by the shareholders; provided that if the generalshareholders’ meeting giving rise to redemption rights occurred more than 60days after the date of the last approved balance sheet, a shareholder would beentitled to demand that his or her shares be valued on the basis of a newbalance sheet dated within 60 days of such general shareholders’ meeting.

 

*Rights of Minority Shareholders*

* *

The Brazilian Corporate Law provides that shareholders who own at least5% of the capital stock of a corporation are afforded the following rights,among others:

 

·                                          theright to require that the books of the corporation be made available forreview, whenever these shareholders become suspicious that Brazilian law or thecorporation’s by-laws have been violated, or that irregularities have beencommitted by the management of the corporation;

 

·                                          theright to call a general meeting of shareholders, under certain circumstances,whenever the corporation’s directors or officers, as the case may be, fail todo so; and

 

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·                                          theright to file an action for indemnification by directors or officers, as thecase may be, for damages caused to the assets of the corporation, whenever itis determined at the general meeting of shareholders that such a claim shallnot be filed.

 

Minority shareholders that own, individually or in the aggregate, 10%of our outstanding common shares, and also holders of our preferred shares,have the right to appoint one member of the Fiscal Council and an alternate.All shareholders have the right to attend general meetings of shareholders.

 

The Brazilian Corporate Law also provides that minority shareholdersthat hold either (i) preferred shares representing at least 10% of thetotal share capital of a company or (ii) common shares representing atleast 15% of the voting capital of a company, have the right to appoint onemember and an alternate to the board of directors. If no common or preferredshareholder meets these thresholds, shareholders holding preferred shares orcommon shares representing at least 10% of the total share capital of thecompany are entitled to combine their holdings to appoint one member and analternate to the board of directors.

 

*Changes in Rights of Shareholders*

* *

Any change with respect to the rights of holders of our common sharesor preferred shares requires a shareholders’ meeting. Under the BrazilianCorporate Law, the proposed changes must be approved by a majority of theaffected class. Certain changes with respect to the rights of non-votingshares, including preferred shares, such as a change in payment or votingrights, may give rise to the exercise of redemption rights by the holders ofthe affected shares.

 

*Going Private Transactions and Delisting from the SãoPaulo Stock Exchange*

* *

Our delisting, as a public company, must be preceded by a tender offerby our controlling shareholders or ourselves for the acquisition of all ourthen outstanding shares, subject to the conditions below:

 

·                                          theprice offered for the shares under the public offering must be the fair valueof those shares, as established in Brazilian Corporate Law; and

 

·                                          shareholdersholding more than two thirds of our float shares shall have expressly agreed toour decision to become a private company or accepted the offer.

 

According to Brazilian corporate law, a fair price shall be at least beequal to our valuation, as determined by one or more of the following valuationmethods: book value, net book value assessed by market price, discounted cashflow, multiples, price of our shares in the market or any other valuationmethod accepted by the CVM. This price of the offer may be revised ifchallenged within 15 days of its publication by holders of at least 10% of ouroutstanding shares, by means of a request sent to our management that a specialshareholders` meeting be called to decide on whether to request a newvaluations under the same or different valuation method. Our shareholders thatrequest a new valuation and those who approve such request shall reimburse usfor incurred costs if the new valuation is lower than the challenged valuation.However, if the second valuation is higher, the offeror will have the option tocontinue the offer with the new price or quit the offer.

 

**Arbitration**

** **

Pursuant to the Brazilian Corporate Law and related regulations, ifprovided for in a company’s by-laws, disputes among shareholders will besubject to arbitration. Our by-laws currently do not provide for arbitration.

 

**Material Contracts**

** **

*CRC Account Agreement - Contract for Assignment ofCredit of the Remaining Balance of the Revenue Compensating Account, dated May 31,1995, between the State Government and CEMIG, and Amendments thereto*

* *

Prior to 1993, electric utilities in Brazil were guaranteed a rate ofreturn on investments in assets used to provide electric service to consumers,the rates charged to consumers were uniform throughout the country, and profitsfrom more profitable utilities were reallocated to less profitable ones so thatthe rate of return for all companies would equal the national average.Shortfalls experienced by most electric utilities in Brazil were accounted forin each company’s CRC Account. When the CRC Account and the 

 

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guaranteedreturn concept were abolished, concessionaires with positive balances werepermitted to offset such balances against their liabilities to the FederalGovernment.

 

After all of our eligible payables and debt to the Federal Governmenthad been offset against our CRC Account balance, we entered into an agreementwith the State Government in May 1995 to transfer the right to receive thebalance of our CRC Account from the Federal Government to the State Governmentin return for a promissory note from the State Government payable in monthlyinstallments plus interest. This account receivable had a balance ofapproximately R$2,942 million as of December 31, 2004, which included asignificant amount of overdue installments. The agreement relating to thistransfer, the CRC Account Agreement, originally required the State Governmentto make monthly payments to us over twenty years with an initial three-yeargrace period for interest and principal payments. Interest on the amountreceivable under the CRC Account Agreement accrues at a rate of 6% per yearplus inflation adjustments. Interest began to accrue on May 2, 1995, anddeferred interest during the initial three-year grace period was capitalized.

 

Since May 1995, the CRC Account Agreement has been amended asfollows:

 

(a)           TheCRC Account Agreement was first amended in February 2001 to replace themonetary restatement index originally applicable to the outstanding balancewith the IGP-DI.

 

(b)           TheCRC Account Agreement was next amended by the Second Amendment to the CRCAccount Agreement, signed on October 14, 2002, which refers to 149 monthlyinstallment payments, with maturities from January 1, 2003 through May 1,2015, representing the total amount of R$1,845 million of December 31,2004, bearing interest at 6% per year, with restatement based on the IGP-DI. Weentered into this Second Amendment with the State Government in order topreserve the terms and conditions of the original CRC Account Agreement withrespect to the above-referenced installments. We did not receive any scheduledpayments from the State Government with respect to this Second Amendment. In2001, we recorded a full loss provision with respect to the entire outstandingbalance of the Second Amendment. See Note 3 to our consolidated financialstatements.

 

(c)           TheCRC Account Agreement was next amended by the Third Amendment to the CRCAccount Agreement, signed on October 24, 2002, which refers to outstandinginstallments originally due under the CRC Account Agreement from April 1,1999 through December 1, 1999 and from March 1, 2000 through December 1,2002. These installments, which totaled R$1,097 million as of December 31,2004, bear interest at an annual rate of 12%, with restatement based on theIGP-DI. We were permitted to retain payments of dividends and interest oncapital due to the State Government as our shareholder as a set-off againstamounts that the State Government owes us under this Third Amendment. For thisreason, did not record a loss provision for amounts due thereunder. We paid interest on capital in lieu ofdividends in December 2004, of which R$72 million was due to the StateGovernment. Part of this interest on capital, amounting to R$49 million,was used by the State Government to settle part of the CRC overdue credits andthe remainder, in the amount of R$23 million, to acquire debentures issued byCEMIG for the Irapé power plant construction. See Note 3 to ourconsolidated financial statements.

 

(d)           Giventhe prior default by the State Government in the payment of amounts due underthe CRC Account Agreement and in order to ensure the full payment to CEMIG ofthe installments due from the State Government under the CRC Account balance, aFourth Amendment to the CRC Account Agreement was signed on January 23,2006. Under the Fourth Amendment, the State Government irrevocably agreed topay the outstanding CRC Account balance, corresponding to R$2,942 million at December 31,2004, plus interest, by authorizing CEMIG to retain 65% of the dividends andinterest on capital due to the State Government. The outstanding balance issubject to monetary correction for inflation by the variation in the IGP-DIinflation index and will bear interest at 8.18% per year, compoundedsemi-annually.

 

Under the Fourth Amendment, the State is required to make 61semi-annual payments due on June 30 and December 31 of each year. TheFourth Amendment applies retroactively to December 31, 2004, referring toan outstanding balance of R$2,941.6 million, with the first payment date being June 30,2005 and the final payment being due on June 30, 2035. The semi-annualpayments are adjusted for inflation by the IGP-DI inflation index and rangefrom approximately R$29.4 million for the first five installments andapproximately R$76.5 million for the last installment. The 65% of dividends andinterest on capital retained by CEMIG are to be applied in the following order:(i) the settlement of any past due installments, (ii) the settlementof the installment relating to the half-year in which dividend or interest oncapital takes place, (iii) pre-payment of up to two installments and (iv) amortizationof the outstanding balance due under the CRC Account.

 

If the retention of ordinary dividends and interest on capital is notsufficient to cover the applicable installment, beginning on January 1,2008, CEMIG is entitled to retain up to 65% of any extraordinary dividends orinterest on equity due to the State 

 

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Governmentfor the payment of that installment. Furthermore, if the sum of 65% of theordinary dividends and interest and capital and extraordinary dividends oninterest and capital is not sufficient to cover an installment due, CEMIG isentitled to retain 100% of such dividends and interest on capital, beginning inthe six-month period immediately following that of the past due date of thepast due installment. In addition, if there is a reduction in the ownership ofCEMIG by the State Government, the retention percentage will be automaticallyadjusted upward such that the total dividend amount retained will remain thesame.

 

A fifth amendment to the CRC Account Agreement was executed by CEMIGand the State Government on September 12, 2007, to adjust the outstandingbalance of the CRC Agreement to R$2,839.5 million in accordance with aprovision in the Fourth Amendment in which the parties recognized that therewas a disagreement regarding the outstanding balance of the CRC Agreement at December 31,2004. Approval of the Fifth Amendment to the CRC Account Agreement was alsoobtained from the Cemig CRC Account Securitization Fund (*Cemig—Fundode Investimento em Direitos Creditorios Conta CRC*), or FIDC, towhich the CRC Account receivables were transferred in January 2006.

 

*Contract on Concessions for Generating ElectricEnergy, dated July 10, 1997, between the Federal Government and CEMIG*

* *

In order to provide electric energy generation services to the public,we entered into a contract with the Federal Government. This concession contractestablishes terms of the concessions for each of our generation plants.Although the concessions for different generation plants have differentexpiration dates, these concessions are extendable by the Federal Governmentfor a period of up to 20 years upon our application. This contract grants usfree access to land in the public domain, certain rights of way, and existingtransmission and distribution systems so that we may transmit the energyproduced in our generating stations. In return, among other things, we mustmaintain a minimum level of regularity, continuity, efficiency and safety andwe must set aside funds to account for fuel consumption, use of water resourcesand contributions to the RGR. We do not pay the Charge for Use of Public Assets(*Uso do Bem Público)*,**orUBP, when generating under the public service regime.

 

This contract also provides that ANEEL (formerly DNAEE) or a substituteagency will supervise us in the provision of our energy generation services andthat we will be subject to penalties if we fail to comply with certaincontractual provisions. As a party to this contract, we serve a public utilityfunction and we must receive authorization from the Federal Government prior toentering into any other entrepreneurial activities. The Federal Government mayintervene in our concession at any time in order to ensure that we areproviding our electric energy generation services properly and that we areacting in compliance with this contract.

 

ANEELhas recently approved, by Resolution No. 1,338, dated April 22, 2008,the transfer from CEMIG to Cemig Generation and Transmission of ninehydroelectric power plants, namely Luiz Dias, Pandeiros, Poço Fundo, Rio dasPedras, Xicão, São Bernardo, Emborcação, Nova Ponte and Santa Luzia.  For these transfers to occur, the amendmentto the Generation Concession Agreement must be executed, which is expected tooccur within 45 days from May 9, 2008, the publication date of theResolution 1,338. However, such Resolution contains some errors relatedto the dates of some hydroelectric power plants, which could result in there-issuance of the resolution and consequently affect the term of the executionof the amendment.

 

*Contract for Concessions of Electric EnergyTransmission Services, dated July 10, 1997, between the Federal Governmentand CEMIG*

* *

In July 1997, we entered into a contract with the FederalGovernment authorizing us to provide our electric energy transmission servicesto the public until July 8, 2015. This contract also provides the rates atwhich we may charge our consumers for our services. Upon our application, thiscontract may be extended by the Federal Government, at its own discretion, fora 20-year period. Pursuant to the contract, we are given free access toland in the public domain and certain rights of way in order to operate ourelectric energy transmission service. In return, among other things, we mustmaintain adequate technology, equipment, facilities and operating methods toensure optimization of the use of existing and future electric energy resourcesand we must satisfy the demands of the electric energy market. We are alsorequired to enter into a transmission service agreement with the ONS, pursuantto which we must make the facilities of our transmission service available tothe interconnected power system.

 

These contracts also provide that ANEEL or a substitute agency willsupervise us in the provision of our energy transmission services and that wewill be subject to penalties if we fail to comply with certain contractualprovisions. The Federal Government may intervene in our concession at any timein order to ensure that we are providing our electric energy transmissionservices properly and that we are complying with this contract.

 

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In connection with theunbundling process, this agreement was assigned to Cemig Generation andTransmission. The assignment was approved by ANEEL on November 16, 2005.

 

*Contract on Concessions for Distributing ElectricEnergy, dated July 10, 1997, between the Federal Government and CEMIG*

* *

To enable us to provide electricity distribution service to the public,we have a concession contract with the Brazilian Federal Government. Thiscontract also provides for the rates at which we may charge clients for ourservices. We may apply for a 20-year extension of the period of thiscontract, and the Federal Government has the discretion to grant or refuse thisextension.

 

The contract gives us free access to land in the public domain, andcertain rights of way, in order to operate our electricity distributionservice. In return we are required, among other obligations, to maintaincertain specified minimum levels of regularity, continuity, efficiency andsafety of service; to keep our infrastructure, equipment and servicesup-to-date; and to maintain availability to the population as a whole, courtesyin provision of services, and moderateness in the rates we charge.

 

The concession contract covers the state of Minas Gerais, divided intofour areas (the North, South, East, and West of the state).

 

The rates we charge for our services are regulated by theconcession-granting power, which grants: (i) an annual adjustment; and (ii) anoverall review every five years. The last five-year review took place on April 8,2008, and the next will be on April 8, 2013.

 

This contract also provides that ANEEL or a substitute agency willsupervise us in the provision of our energy generation services and that wewill be subject to penalties if we fail to comply with certain contractualprovisions. As a party to this contract, we serve a public utility function andwe must receive authorization from the Federal Government prior to enteringinto any other entrepreneurial activities. The Federal Government may intervenein our concession at any time in order to ensure that we are providing ourelectric energy generation services properly and that we are acting incompliance with this contract.

 

In connection with theunbundling process, this agreement was assigned to Cemig Distribution. Theassignment was approved by ANEEL on March 31, 2005.

 

*Contract for the Supply and Exchange of Electricity,and Passthrough and Transport of Power from Itaipu, dated 31 May 1993,between Furnas and CEMIG*

* *

In 1993, we signed a contract with Furnas governing the supply andexchange of energy between Furnas and CEMIG, for a period of 10 years, and alsothe transfer of power and energy generated by Itaipu, for a period of 20 years.

 

Since January 2003, Decree 4,550 of December 27, 2002 hasgoverned the sale of energy generated by Itaipu, appointing Eletrobrás as atrader of Itaipu’s output. The volumes of energy purchased by CEMIG and theprices of such energy are, since then, established annually by ANEEL. Underdecree 4,550, contracts executed with Furnas were required to be assigned toEletrobrás.

 

*Shareholder’s Agreement, dated June 18, 1997,between the State Government and Southern*

* *

In 1999, after a new State Government administration took office, theState Government filed a lawsuit to nullify this shareholders’ agreement on thegrounds that it violated the state and federal constitutions because theSpecial Quorum Provisions would constitute an unlawful transfer of the controlof CEMIG to Southern. According to the lawsuit, state legislation would be requiredin order for the State Government to relinquish control of CEMIG to Southern.

 

After some preliminary decisions unfavorable to the State Government bythe lower courts, in 1999 the State Government obtained an injunction from theState Court of Appeals, which suspended the effects of the Special QuorumProvisions pending the result of the lawsuit.

 

In August 2001, the Minas Gerais State Court of Appeals rendered adecision declaring the shareholders’ agreement null and void. Given thisdecision, the voting rights as set forth in our by-laws, not those contained inthe shareholders’ agreement, are currently in effect. Our by-laws provide thateach common share entitles the holder thereof to one vote at shareholders’meetings. The 

 

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by-lawsdo not provide Southern with any extraordinary rights or privileges other thanthe rights it possesses by virtue of its ownership of our common shares. Thedecision of the State Court of Appeals has been appealed to a superior court,the Superior Tribunal de Justiça, and a final decision, subject only to arequest of amendment, was rendered in December 2003. Therefore theeffectiveness of the shareholders’ agreement and control of CEMIG remainsubject to judicial challenge in the Supreme Court.

 

*Indenture Covering the First Public Issuance ofDebentures, Divided into Two Series of the Same Class, Without Guaranteeor Preference, of CEMIG, dated October 4, 2001, between CEMIG and PlannerCorretora de Valores S.A.*

* *

On November 1, 2001, pursuant to an indentureentered into between us and Planner Corretora de Valores S.A, asfiduciary agent, we publicly issued R$625 million of debentures in two seriesof R$312.5 million each. The first series of debentures will mature on November 1,2009 and the second series of debentures will mature on November 1, 2011.The debentures are subject to early redemption at the option of the debentureholders (in 2005 in the case of the first series and in 2006 in the case of thesecond series). Upon maturity, we are obligated to pay to the debenture holdersan amount equal to the indexed par value of any debentures still outstandingplus compensatory interest. These debentures are not convertible and do nothave preferences or guarantees.

 

Should we make a late payment of any amount due to the debentureholders, we will have to pay, in addition to the amount due, a penalty of 10%of the amount due plus interest calculated from the date payment was due to thedate of actual payment at the rate of 1% per month on the amount due. Inaddition, if we do not pay an amount due on a maturity date, the relateddebentures must be accepted by us as payment by the debenture holders forelectricity that we supply to them.

 

The proceeds from this issuance were used to finance generation,transmission and distribution projects, including projects in partnership withprivate sector companies in accordance with our capital investment program for2001 and 2002.

 

At the General Meeting of Holders of the Company’s First Issue ofNon-convertible Debentures held on December 3, 2004, the debenture holdersapproved an amendment to the indenture providing for the compulsory exchange ofthe Company’s First Issue of Debentures for debentures to be issued by CemigGeneration and Transmission, in connection with the implementation of theprocess of “unbundling” of the Company. Such exchange should occur in a 180 dayperiod beginning on the date of the transfer of the concessions to CemigGeneration and Transmission, which date would be considered as the date of thepublication of the amendments to the concession contracts. If CEMIG failed tomake such mandatory exchange in this time period, there would be an automaticearly redemption of the debentures. On the other hand, the time period could beextended if a debenture holders meeting so authorized. In addition, it wasprovided that the debentures to be issued by Cemig Generation and Transmissionwould keep the same characteristics and financial terms of the debentures thatwould be exchanged and would be guaranteed by CEMIG, the holding company.

 

On November 1, 2005, the debentures of the first series weresubject to early redemption at the option of the debenture holders. As analternative to redemption, we proposed the following new terms for thedebentures of the first series: (i) the second remuneration period (theperiod following the early redemption option date) would begin on November 1,2005 and end on November 1, 2009, the date of the final maturity of thedebentures of the first series; (ii) the debentures of the first serieswould earn interest corresponding to 100% of the CDI, plus a spread of 1.20%per year, calculated based on a 252 business day year. Any debenture holdersnot agreeing to the proposed new terms could redeem the debentures of the firstseries in accordance with their terms on November 1, 2005. As a result, weacquired 28.49% of the outstanding debentures of the first series for an amountof R$139.5 million, equal to the monetarily adjusted nominal value plus anyaccrued and unpaid interest. We have not yet decided whether to cancel theacquired debentures or resell them in the market.

 

On November 1, 2006, the debentures of the second series weresubject to early redemption at the option of the debenture holders. As analternative to redemption, we proposed the following new terms for thedebentures of the second series: (i) the second remuneration period (theperiod following the early redemption option date) would begin on November 1,2006 and end on November 1, 2011, the date of the final maturity of thedebentures of the second series; and (ii) the debentures of the secondseries would earn interest corresponding to 104% of the CDI rate, based on ayear of 252 business days. Any debenture holders not agreeing to the proposednew terms could redeem the debentures of the second series in accordance withtheir terms on November 1, 2006. As a result, we acquired 52.63% of theoutstanding debentures of the second series for an amount of R$265.3 million,equal to the monetarily adjusted nominal value plus any accrued and unpaidinterest. We have not yet decided whether to cancel the acquired debentures orresell them in the market.

 

Inconnection with the unbundling process, the indenture, as amended, provided forthe mandatory exchange of the debentures issued by CEMIG for debenturesissued by Cemig Generation and Transmission. Such issuance was approved bythe CVM on April 17, 2007, and the exchange took place on April 27and April 30, 2007. The debentures issued by Cemig Generation and 

 

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Transmission have thesame characteristics and financial terms as the debentures that were exchanged,and are guaranteed by CEMIG, as the holding company. The First Public Issuanceof Common Debentures of CEMIG was cancelled following the exchange. As a consequence, the debentures areno longer listed in the *Câmara de Custódia eLiquidação,*“CETIP”.

 

*Indenture Covering the Third Public Issuance of Common Debentures, WithoutGuarantee or Preference, of CEMIG, dated June 14, 2004, between CEMIG andPavarini Distribuidora de Títulos e Valores Mobiliários*

* *

On June 14, 2004, we and Pavarini Distribuidora de Títulos eValores Mobiliários, as fiduciary agent, executed an indenture covering the publicissuance of 40,000 debentures, in a total amount of R$400 million. Thedebentures issued pursuant to this agreement are unsecured, notconvertible into shares, with a nominal unit value of R$10,000. On August 2,2004, a total of 23,042 debentures were subscribed and fully paid up,representing the total amount of R$230.4 million issued on June 1, 2004.The remaining debentures, which were not subscribed, were cancelled. Thedebentures will mature on the first business day of June 2014. Uponmaturity, we are obligated to pay to the debenture holders an amount equal tothe indexed outstanding par value of the debentures by IGPM (*Índice Geral de Preços do Mercado*) plusannual interest of 10.5%. The proceeds from this issuance were used to rollover part of the debt raised to finance investments in the distributionsegment.

 

Inconnection with the unbundling process, the indenture provided for themandatory exchange of the debentures issued by CEMIG for debenturesissued by Cemig Distribution. Such exchange occurred on November 1,2006. In accordance with the indenture, the debentures issued by Cemig Distributionhave the same characteristics and financial terms as the debentures that wereexchanged and are guaranteed by CEMIG, as the holding company. The Third PublicIssuance of Common Debentures of CEMIG were cancelled following the exchange. As a consequence, the debentures areno longer listed in the *Câmara de Custódia eLiquidação,*“CETIP”.

 

*Loan Agreement, dated July 18,2007, between Transchile Charrúa Transmisión S.A. and Inter-AmercianDevelopment Bank*

 

On July 18, 2007,Transchile Charrúa Transmisión entered into a project finance agreement withInter-Amercian Development Bank for the development and construction of the 220kV transmission line LT Charrúa – Nueva Temuco, in Chile, of the substationsassociated with the transmission line and facilities necessary to the operationand maintenance thereof. The total amount of the loan is US$51.0 million, whichshall be repaid in 37 semi-annual installments, beginning on November 15,2008, with the final payment due on November 15, 2026.

 

Under this agreement,CEMIG and Alusa, as the only shareholders of Transchile Charrúa Trasmisión,have signed a Share Retention and Sponsor Support Agreement. Under the terms ofsuch agreement, CEMIG and Alusa shall at all times continue to own, directly orindirectly, 49% and 51%, respectively, of the total shares of TranschileCharrúa Transmisión. Without limitation to that obligation, CEMIG and Alusa shallnot transfer any of these shares without written approval from theInter-Amercian Development Bank, except if the proposed transferee is awholly-owned subsidiary. Prior to any transfer, the transferee has to assumethe obligations of the transferor under this agreement. In addition, CEMIG andAlusa guarantee, proportionally to their shareholdings, all payments related tothe financing, as well as commit themselves to make additional equitycontributions in case O&M expenses surpass the budget and affect the agreeddebt service coverage ratio. CEMIG and Alusa have also signed a Share PledgeAgreement, pledging their shares in Transchile to the Inter-AmericanDevelopment Bank.

 

*Financing Agreement by Repass of Credit No. 20/04379-1,dated November 1, 2007, between Banco do Brasil S.A. and HidrelétricaCachoeirão S.A., and with Cemig Generation and Transmission and Santa MariaEnergética S.A. as Intervening Third Parties*

 

On November 1, 2007, Hidroelétrica Cachoeirão entered into aproject finance agreement for the construction of the Cachoeirão SmallHydroelectric Power Plant, pursuant to which Banco do Brasil, through BNDESresources, upon satisfaction of certain conditions, provides a credit of R$71.3million, to be used until April 14, 2009. This loan is repayable in 132monthly installments, beginning on April 14, 2009, with the final paymentdue on April 15, 2020.

 

Under this loan, Cemig Generation and Transmission has signed anagreement to guarantee the sale of energy from Hidrelétrica Cachoeirão S.A., inthe amount of 15 average MW, for the minimum price of R$140.00/MWh, as ofDecember, 2006.

 

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*Financing Agreements with Eletrobrás*

 

We areparty to several agreements with Eletrobrás in order to finance in partthe implementation of certain governmental programs in which we take part.Those agreements contain standard terms normally included in project financecontracts and establish a credit line for the company which can only be usedfor the development of governmental programs and expansion of the transmissionnetwork, as determined in each contract. Eletrobrás has the power to inspectthe projects and also suspend the credit in case of default. The contracts aregenerally repayable in 36 to 180 monthly installments, with interest ratesvarying from 5% to 6% per year. As of December 31, 2007, we had anoutstanding balance of approximately R$416.5 million related to thoseagreements.

 

*Agreementfor Granting of Meals and Feeding Vouchers, dated February 9, 2004,between Ticket Serviços Ltda and CEMIG*

 

In February 2004, weentered into a contract with Ticket Serviços Ltda for providing servicesrelated to the granting of meals and feeding vouchers to our employees, internsand outsourced employees in the states of Minas Gerais, Brasília, Rio deJaneiro, Goiás (municipality of São Simão) and São Paulo. The granting of mealsand feeding vouchers is mandatory under Brazilian labor law and under the termsof the collective bargaining agreement to which we are bound. Five amendmentsto the agreement were executed to extend the term of effectiveness and torestate the amount. The fifth amendment established a term of effectiveness of60 months from February 9, 2004 and a contract amount of R$381.2 million.

 

*Second Issuance of Commercial Paper of CemigGeneration and Transmission*

* *

On November 13, 2007, Cemig Generation and Transmission enteredinto a placement agreement with Caixa Econômica Federal relating to the secondpublic issuance of commercial paper of Cemig Generation and Transmission in anaggregate total amount of R$200 million. The commercial paper was subscribedand fully paid up on December 21, 2007. The commercial paper matures 180days after the subscription date, on June 18, 2008. Upon maturity, CemigGeneration and Transmission will be obligated to pay to the holders an amountequal to the par value of the paper plus interest at the rate of 101.5% of CDI.

 

*Indenture Covering the Second Public Issuance of Common Debentures,Without Guarantee or Preference, of Cemig Distribution, dated December 12,2007, between Cemig Distribution and SLW Corretora de Valores e Câmbio Ltda.*

* *

On December 12, 2007, Cemig Distribution and SLW Corretora deValores e Câmbio Ltda., as fiduciary agent, executedan indenture covering the public issuance of 40,000 debentures, in a totalamount of R$400 million. The debentures issued pursuant to this agreement areunsecured, not convertible into shares, with a nominal unit value ofR$10,000. On December 21, 2007, the total of 40,000 debentures weresubscribed and fully paid up, representing the total amount of R$400 millionissued on December 15, 2007. The debentures will be paid in three annualinstallments beginning on December 15, 2015 and will mature on December 15,2017. Cemig Distribution will be obligated to pay to the debenture holders anamount equal to the indexed outstanding par value of the debentures by IPCA (*Índice Nacional de Preços ao Consumidor Amplo*)plus annual interest of 7.96%. The proceeds from this issuance were used toroll over part of the outstanding balance of the Third Issuance of CommercialPaper of Cemig Distribution.

 

*Banknotes (Cédulas de CréditoBancário) to Banco do Brasil S.A. – Cemig Distribution and Cemig Generation andTransmission*

* *

On October 24,2006, Cemig Generation and Transmission issued banknotes (*Cédulas deCrédito Bancário*) to Banco do Brasil S.A. in the aggregate amount ofR$900 million, which were used to repay outstanding obligations previouslyissued by Cemig Generation and Transmission with the same aggregate value. Thebanknotes bear interest equal to 104.1% of the CDI, and are guaranteed byCEMIG.  Payment of the banknotes will bemade in three equal annual installments in 2012, 2013 and 2014.

 

On October 24,2006, Cemig Distribution also issued banknotes (*Cédulas deCrédito Bancário*) to Banco do Brasil S.A. in the aggregate amount ofR$300 million, with the same terms and conditions.

 

*Electricity Sale Contracts in the RegulatedEnvironment (CCEARs)*

* *

In 2004, Law 10,848and Decree 5,163 came into force, altering the structure of the electricitysector, especially the sale of electricity. Under the new regulations, thedistributors must buy energy, to serve their markets, through public auctionsin the regulated environment, in which the CCEARs are signed. In December 2004,the first auction of existing electricity under the new industry model washeld. In this auction Cemig Distribution and Cemig Generation and Transmissionmade electricity purchase and sale contracts.

 

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CemigDistribution purchased, to serve its market, 530 average MW in contracts withterms of eight years, with the supply starting on January 1, 2005, at anaverage price of R$57.51/MWh, and 919 average MW in contracts with terms ofeight years with the supply starting on January 1, 2006 at an averageprice of R$67.33 MWh. The contracts were signed with 12 companies holdinggeneration concessions, including Cemig Generation and Transmission.

 

In the same auctionCemig Generation and Transmission sold 927 average MW in contracts with termsof eight years, with the supply beginning on January 1, 2006. The saleprice of the electricity is R$69.58/MWh, referring to January 2005. Thecontracts were signed with 35 distributors, including Cemig Distribution, whichserve consumers in all the regions of the Brazilian national grid system.

 

In April 2005, the second auction of existing electricity under thenew industry model was held. In this auction Cemig Distribution and Cemig Generationand Transmission signed CCEARs. Cemig Distribution purchased, to serve itsmarket, 105 average MW in contracts with terms of eight years, with the supplystarting on January 1, 2008, at an average price of R$83.13/MWh. Thecontracts were signed with ten companies holding generation concessions,including Cemig Generation and Transmission. In the same auction CemigGeneration and Transmission sold 105 average MW in contracts with terms ofeight years, with the supply beginning on January 1, 2008. The sale priceof the electricity is R$83.50/MWh, referring to April 2005. The contractswere signed with 34 distributors, including Cemig Distribution, which supplyconsumers in all the regions of the Brazilian national grid system.

 

In October 2005, the third and fourth auctions of existingelectricity took place, however Cemig Distribution and Cemig Generation andTransmission did not participate in these auctions.

 

In December 2005 the first auction forelectricity to be produced by the new generation plants was held, and CemigDistribution acquired 282.8 average MWin contracts with terms of 30 and 15 years for hydroelectric and thermalenergy, respectively, which is equivalent to approximately 76% of its energyneeds for 2008, 2009 and 2010 as described in an energy requirements statementprovided by Cemig Distribution to the MME.

 

In June 2006, the second auction forelectricity to be produced by the new generation plants was held, and CemigDistribution acquired 98 average MW in contracts with terms of 30 and 15 yearsfor hydroelectric and thermal energy, respectively. In the same auction, CemigGeneration and Transmission sold 355 average MW in contracts with termsof 30 years. The supply of energy under these contracts will begin on January 1,2009.

 

In October 2006, the third auction for electricity to be producedby new generation plants was held, and Cemig Distribution acquired 48 averageMW in contracts with terms of 30 and 15 years for hydroelectric and thermalenergy, respectively, with the supply beginning on January 1, 2011. CemigGeneration and Transmission did not participate in this auction.

 

In December 2006, the fifthauction of existing electricity was held, but Cemig Distribution and CemigGeneration and Transmission did not participate in that auction.

 

In July 2007, the fourth auction for electricityto be produced by new generation plants took place, and Cemig Distributionacquired 431.17 average MW in contractswith terms of 15 years for thermal energy, with the supply beginning on January 1,2010. Cemig Generation and Transmission did not take place in thatauction.

 

In September 2007, the CCEE conducted the sixth adjustment auctionwith two products: three-month contracts (October to December, 2007) andone-year contracts (January to December, 2008). The auction placed a totalof 6 average MW in three-month contracts, for an average price of R$127.05/MWh,and 163.5 average MW in one-year contracts for an average price ofR$138.34/MWh. Cemig Distribution bought 3.5 average MW in one-year contracts(for 2008) at R$138.74/MWh.  CemigGeneration and Transmission sold 60 average MW at R$139.04/MWh.

 

In October 2007, the CCEE held the fifth auction for electricityto be produced by new generation plants, under the coordination of ANEEL, underprocedures and conditions set by the Federal Government through the Mining andEnergy Ministry (MME). The auction placed a total of 2,312 average MW in15-year (thermal) and 30-year (hydro) contracts, all for supply starting in2012, for an average price of R$128.73/MWh. From hydroelectric sources a totalof 715MW was sold, for R$129.14/MWh. From thermal sources a total of 1,597average MW was sold, for an average price of R$128.37/MWh.  Cemig Distribution bought 182.91 average MWin both products, for an average price equal to the average price of theauction, and Cemig Generation and Transmission sold 43 average MW ofhydroelectric product at R$125.90/MWh.

 

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In December 2007, the CCEE held the auction for the Santo AntônioHydro Power Plant, under the coordination of ANEEL, under procedures andconditions set by the Federal Government through the Mining and Energy Ministry(MME). The auction placed the total of 1,552.60 average MW, corresponding to70% of the physical guarantee of the power plant, in 30-year contracts at theprice of R$78.87/MWh. The contracts are for the supply of energy from onlythese two units, starting in 2012, when the first two generation units will bein commercial operation. Supply will increase together with the availability ofunits during the first three years until 2016, when it is expected that thetotal of the energy sold will be completed. Cemig Distribution boughtapproximately 8% of this energy at the auction price.

 

In December 2007,Cemig Distribution participated in the sixth auction of existing electricity asa potential purchaser, but did not enter into energy contracts.

 

*Purchases of Power by Cemig Distribution:*Atthe end of 2007, acquisitions by Cemig Distribution in the regulatedenvironment totaled 1,504 average MW under contracts for “existing energy”(generated by existing power plants), with start dates ranging from 2005 to2008, and 1,230 average MW in contracts for “new energy” (from new generationprojects) with start dates ranging from 2008 to 2013, to meet part of its needsfor energy in those years.

 

*Sales ofPower by Cemig Generation and Transmission:*Similarly,at the end of 2007, sales made by Cemig Generation and Transmission in theregulated environment totaled 989 average MW in “existing energy” contractswith dates ranging from 2006 to 2008, and 398 average MW in contracts forsupply from new generation projects, with supply starting in 2009 and 2012, and26.18 average MW to be provided by one new hydro power plant, Baguari,with supply starting in 2010. These figures include the reductions under the “Surplusesand Deficits Compensation Mechanism” (MCSD).

 

For more information about the CCEAR and the energy auctions, see “AnnexA—The Brazilian Power Industry”.

 

*Contracts for Sale of Energy to Free Consumers*

* *

Cemig Generation andTransmission sold, through “bilateral” contracts, power capacityaveraging approximately 1,900 MW to a wide range of Free Consumers, themajority of them being in the State of Minas Gerais, under contracts with termsbetween six and ten years. The average price of these transactions for the year2007 is approximately R$77/MWh.

 

Regarding such contracts, in 2008 we entered into two relevant groupsof contracts with large Free Consumers. The first group of contracts was withthe Votorantim Group, through which we will provide variable amounts of energy,from the current 145 average MW up to 670 average MW in some years. This groupof contracts has a value of approximately R$10.5 billion, and will expire in2028. The second group of contracts was signed on May 26, 2008, with theArcelorMittal Group, for the provision of up to 313.5 average MW (twice thevolume we currently provide to the ArcelorMittal Group). The second group ofcontracts has a value of R$4.4 billion and will expire in 2020.

 

These contracts provide for flexibility in the clients’ purchase ofenergy. The revenue of Cemig Generation and Transmission may vary due to thiscontractual flexibility.

 

*Gasmig Shareholders Agreement and Association Agreement*

* *

As acondition to the investment of Petrobras in Gasmig, we and Petrobras enteredinto a Shareholders Agreement, pursuant to which the prior approval ofPetrobras is required in matters related, among others, to new investments tobe conducted by Gasmig, distribution of dividends, nomination of members to theBoard of Directors, the issuance of new shares or debentures, annual budgetinvestment plans and any transaction involving more than R$5.0  million. Under the terms of the GasmigShareholders Agreement, our ability to transfer our shares in Gasmig islimited, and Petrobras shall have a right of first refusal in any futuretransfer of shares. As a result of this Shareholders Agreement, our ability tomanage Gasmig was considerably reduced.

 

On December 15, 2004, CEMIG sold part of its shares in Gasmig,corresponding to 40% of the registered capital, 0.5% to Gaspetro and 39.5% toits subsidiary, TSS Participações S.A. The total value of the transaction wasR$154 million, providing a gain for CEMIG of R$102 million. This gain wasposted in the income statement for 2004 as non-operational revenue. On July 26,2006, TSS, a wholly-owned subsidiary of Gaspetro, was merged into Gasmig, andGaspetro remained with 40% of Gasmig’s registered capital.

 

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Gasmig is not a consolidated subsidiary in our financial statements asof the year ended December 31, 2004, in accordance with the FASB’s EITFIssue No. 96-16, “Investor’s Accounting for an Investee When theInvestor Has a Majority of the Voting Interest but the Minority Shareholder orShareholders Have Certain Approval or Veto Rights.”  We consolidated Gasmig’s revenues andexpenses for the period from January 1, 2004 to December 15, 2004.

 

This sale is the result of the Association Agreement between CEMIG,Gasmig, Gaspetro and Petrobras signed on August 25, 2004, the purpose ofwhich is to develop the market for natural gas throughout the State of MinasGerais. Under the agreement, a Guidelines Plan specifies the markets to beserved, the investment to be made by Petrobras and its subsidiaries in gaspipelines and the investment to be made by Gasmig in expansion of the gasdistribution networks.

 

This capital investment will increase the volume of gas contracted withclients from its present level of 2.2 million m3/day to 5.0 million m3/day atthe end of 2010, and 10.0 million m3/day in 2023. In 2007 Gasmig sold 1.8million m3/day.

 

*Agreement between CEMIG and companies in the New Agreementof the Electric Sector*

* *

Resolution No. 91 of the Electricity Crisis Management Chamber(Câmara de Gestão da Crise de Energia Elétrica), or GCE, of December 21,2001, and Law 10,438 of April 26, 2002, established the procedures forimplementing the General Agreement for the Electricity Sector, which came intoforce on December 27, 2001, and resulted in the repayment by consumers oflosses incurred by distributors and generators during the period of rationingof 2001 to 2002. These repayments are referred to as an extraordinary ratereadjustment, or RTE (Recomposição Tarifária Extraordinária). The RTEs becamepart of the assets of the companies, and are amortized through “extraordinaryrevenue”. See note 4 to our consolidated financial statements.

 

A condition to receipt of the RTE is that the recipient must not to beinvolved in any lawsuit with ANEEL that questions the RTE or any relatedregulation. As CEMIG has contested the clearance process at the CCEE, ANEELissued an order to suspend the payment of the RTE to CEMIG.

 

CEMIG executed a settlement agreement with ANEEL, the CCEE and the CCEEparticipants, to settle the lawsuit CEMIG filed to contest the procedures usedby the CCEE during the settlement process. As a condition to the agreement,CEMIG withdrew its lawsuit against ANEEL. As a result of this agreement, ANEELrevoked the ruling that suspended the payment of the RTE to our distributionsubsidiary, which will result in a payment of approximately R$219 million toCEMIG. CEMIG agreed to repay the other CCEE participants the outstandingamounts that ANEEL calculated as being due by CEMIG during the settlementprocess held by the CCEE between September 2002 and January 2003. Thecalculation of the exact amount due to the participants of the CCEE was determinedby the CCEE to be a total of R$171 million, and such amount is being paid in upto 50 installments, depending on the total amount due to each creditor and areindexed to the SELIC interest rate plus a spread of 1%. We had fully accrued aliability related to this matter. See “Item 8. Financial Information — LegalProceedings — Regulatory Matters.”

 

*The Cemig CRC Account Securitization Fund, dated as ofJanuary 26, 2006.*

* *

As part of our tax planning on January 26, 2006 we created theCemig CRC Account Securitization Fund (*Cemig — Fundo deInvestimento em Direitos Creditorios Conta CRC*), or the FIDC. TheFIDC was arranged and placed by Banco Itaú BBA S.A. and Banco Bradesco S.A.,and it is managed by Intrag Distribuidora de Títulos e Valores MobiliáriosLtda., an affiliate of Banco Itaú BBA S.A. The FIDC will continue until thefull amortization of the receivables under the Fourth Amendment to the CRCAccount Agreement, which is expected to occur no later than June 2035.

 

We assigned all our receivables under the CRC Account Agreement to theFIDC. The present value of the CRC Account receivables transferred to the FIDCas of December 31, 2007 is R$1,763 million. The FIDC is composed of900,000,000 senior quotas and 760,125,012 non-transferable subordinated quotas,with the nominal value of R$1.00 per each quota. The quotas were fullysubscribed and paid in on January 27, 2006 and we subscribed to and holdall the subordinated quotas.

 

The senior quotas have a benchmark return of the CDI plus 1.70% per year,and will be amortized over a 10 year period in 20 semi-annual payments. Each ofthe semi-annual payment dates of the senior quotas match the dates on whichCEMIG pays its semi-annual dividends, and consequently gets repaid under theFourth Amendment to the CRC Account Agreement. 65% of the dividends payable tothe State Government on each dividend payment date are retained by CEMIG andautomatically transferred to the FIDC. In the event that dividends are notsufficient to make a certain scheduled payment with respect to the seniorquotas, CEMIG, as a co-obligor, is required to contribute whatever amount isnecessary to make the scheduled payment. The amortization schedule was 

 

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designedto meet CEMIG’s dividend forecast and to minimize the risk of CEMIG beingrequited to make any additional payment. The subordinated quotas will beamortized with any excess of cash available at the FIDC or upon the terminationof the FIDC.

 

**Exchange Controls**

** **

There are no restrictions on the ownership of preferred shares orcommon shares by legal entities domiciled outside Brazil. However, your rightto convert dividend payments and proceeds from the sale of preferred shares orcommon shares into foreign currency and to remit such amounts outside Brazil issubject to restrictions under foreign investment legislation which generallyrequires, among other things, that you register the relevant investment withthe Central Bank and the CVM.

 

Investments in the preferred shares through the holding of PreferredADSs, or in the common shares through the holding of Common ADSs, must be madepursuant to Annex V to Resolution No. 1,289, as amended, of the NationalMonetary Council, also known as the Annex V Regulations. Direct investments inthe preferred shares upon the cancellation of the Preferred ADSs, or in thecommon shares upon the cancellation of the Common ADSs, may be held by foreigninvestors under Law No. 4,131 of September 3, 1962 or Resolution No. 2,689of the National Monetary Council, both of which effectively allow registeredforeign investors to invest substantially in any capital market instrument inBrazil and extend a favorable tax treatment to all foreign investors registeredand qualified under Resolution No. 2,689, who are not resident in a taxhaven, as defined by Brazilian tax laws.

 

Under Resolution No. 2,689, foreign investors may invest in almostall financial assets and engage in almost all transactions available in theBrazilian financial and capital markets, provided that certain requirements arefulfilled. In accordance with Resolution No. 2,689, the definition offoreign investor includes individuals, legal entities, mutual funds and othercollective investment entities that are domiciled or headquartered abroad.

 

Securities and other financial assets held by Resolution No. 2,689investors must be registered or maintained in deposit accounts or in thecustody of an entity duly licensed by the Central Bank or the CVM. In addition,any transfer of a security that is held pursuant to Resolution No. 2,689must be made through the stock exchanges or organized OTC markets licensed bythe CVM, except for a transfer resulting from a corporate reorganizationoutside of Brazil or occurring upon the death of a foreign investor byoperation of law or will.

 

Holders of Preferred ADSs or Common ADSs who have not registered theirinvestment with the Central Bank could be adversely affected by delays in, orrefusals to grant, any required government approval for conversions of paymentsmade in *reais* and remittancesabroad of these converted amounts.

 

The Annex V Regulations provide for the issuance of depositary receiptsin foreign markets in respect of shares of Brazilian issuers. The PreferredADSs have been approved under the Annex V Regulations by the Central Bank andthe CVM, and the Common ADSs have been approved by the CVM (since authorizationfrom the Central Bank is no longer necessary).

 

Electronic certificates of registration have been issued in the name ofCitibank, N.A., the depositary bank, with respect to the Preferred ADSs and theCommon ADSs, and are maintained by Citibank Distribuidora de Títulos e ValoresMobiliários S.A., the Brazilian custodian for the preferred shares and thecommon shares, on behalf of the depositary bank. These electronic certificatesof registration are registered through the Central Bank Information System.Pursuant to the certificates of registration, the custodian and the depositarybank are able to convert dividends and other distributions or sales proceedswith respect to the preferred shares represented by Preferred ADSs and thecommon shares represented by the Common ADSs into foreign currency and remitthe proceeds outside Brazil. In the event that a holder of Preferred ADSs exchangessuch Preferred ADSs for preferred shares, or a holder of Common ADSs exchangessuch Common ADSs for common shares, such holder will be entitled to continue torely on the depositary bank’s certificate of registration for five businessdays after the exchange. Thereafter, the holder may not be able to convert intoforeign currency and remit outside Brazil the proceeds from the disposition of,or distributions with respect to, the preferred shares or the common shares,unless the holder is a duly qualified investor under Resolution No. 2,689by registering with the CVM and the Central Bank and appointing arepresentative in Brazil. If not so registered, the holder will be subject toless favorable Brazilian tax treatment than a holder of Preferred ADSs orCommon ADSs. Regardless of qualification under Resolution No. 2,689,residents in tax havens are subject to less favorable tax treatment than otherforeign investors. See “—Taxation—Brazilian Tax Considerations.”

 

Under current Brazilian legislation, the Federal Government may imposetemporary restrictions of foreign capital abroad in the event of a seriousimbalance or an anticipated serious imbalance of Brazil’s balance of payments.For approximately nine months 

 

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in1989 and early 1990, the Federal Government froze all dividend and capitalrepatriations held by the Central Bank that were owed to foreign equityinvestors, in order to conserve Brazil’s foreign currency reserves. Theseamounts were subsequently released in accordance with Federal Governmentdirectives. We cannot assure you that the Federal Government will not imposesimilar restrictions on foreign reparations in the future.

 

**Taxation**

** **

The following summary contains a description of the material Brazilianand U.S. federal income tax consequences of the purchase, ownership anddisposition of preferred shares, common shares, Preferred ADSs or Common ADSsby a United States person, as defined in section 7701(a)(30) of the InternalRevenue Code of 1986, or the Code, or a holder that otherwise will be subjectto U.S. federal income tax on a net income basis in respect of preferredshares, common shares, Preferred ADSs or Common ADSs, which we refer to as aU.S. holder, but it does not purport to be a comprehensive description of allof the tax considerations that may be relevant to a decision to purchasepreferred shares, common shares, Preferred ADSs or Common ADSs. In particularthis summary deals only with U.S. holders that will hold preferred shares,common shares, Preferred ADSs or Common ADSs as capital assets and does notaddress the tax treatment of U.S. holders that own or are treated as owning 10%or more of the voting shares of the Company or that may be subject to specialtax rules, such as banks or other financial institutions, insurance companies,regulated investment companies, dealers in securities or currencies, traders insecurities that elect to mark to market, “pass-through entities” such aspartnerships or persons that will hold preferred shares, common shares,Preferred ADSs or Common ADSs as part of a hedging transaction, constructivesale transaction, position in a “straddle” or a “conversion transaction” fortax purposes, and persons that have a “functional currency” other than the U.S.dollar.

 

The summary is based upon tax laws of Brazil and the United States asin effect on the date hereof which are subject to change possibly withretroactive effect. Prospective purchasers of Preferred ADSs or Common ADSs areencouraged to consult their own tax advisors as to the Brazilian, U.S. or othertax consequences of the purchase, ownership and disposition of preferredshares, common shares, Preferred ADSs or Common ADSs, including, in particular,the effect of any foreign, state or local tax laws.

 

Although there is currently no income tax treaty in force betweenBrazil and the United States, the tax authorities of both countries have haddiscussions that may culminate in such a treaty. No assurance can be given,however, as to whether or when a treaty will enter into force or how it willaffect the U.S. holders of preferred shares, common shares, Preferred ADSs orCommon ADSs.

 

*Brazilian Tax Considerations*

* *

*General*. Thefollowing discussion summarizes the main Brazilian material tax consequences ofthe acquisition, ownership and disposition of preferred shares, common shares,Preferred ADSs or Common ADSs, as the case may be, by a holder that is notdomiciled in Brazil, which we refer to as a non-Brazilian holder for purposesof Brazilian taxation. In the case of a holder of preferred shares or commonshares, we assume the investment is registered with the Central Bank. Thefollowing discussion does not address all of the Brazilian tax considerationsapplicable to any particular non-Brazilian holder. Therefore, eachnon-Brazilian holder should consult his or her own tax adviser concerning theBrazilian tax consequences of an investment in our preferred shares, commonshares, Preferred ADSs or Common ADSs.

 

*Taxation of Dividends*.Dividends paid by us, including stock dividends and other dividends paid inproperty to the depositary in respect of the preferred shares or common shares,or to a non-Brazilian holder in respect of the preferred shares or commonshares, are currently exempted from withholding tax in Brazil to the extentthat the dividends are paid out of profits earned after January 1, 1996. Dividends relating to profitsgenerated prior to January 1, 1996 may be subject to Brazilian withholdingtax at varying rates, depending on the year the profits were generated.

 

*Payments of Interest on Capital*.Law No. 9,249, dated as of December 26, 1995, as amended, permitsBrazilian corporations to make distributions to shareholders of interest onequity, or interest attributed to shareholders’ equity. These distributions maybe paid in cash.  Such payments representa deductible expensefrom the payor’s income tax and social contribution tax basis. This interest islimited to the daily pro rata variation of the Federal Government’s long-terminterest rate, as determined by the Central Bank from time to time, and cannotexceed the greater of:

 

·                                          50%of net income (before taxes for social contribution on net profits, income tax,and the deduction of the interest attributable to shareholders’ equity) for theperiod in respect of which the payment is made; or

 

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·                                          50%of retained earnings as of the date of the beginning of the period in respectof which the payment is made.

 

Any payment of interest on capital to shareholders (including holdersof Preferred ADSs in respect of preferred shares and Common ADSs in respect ofcommon shares) is subject to a withholding tax at a rate of 15%. These paymentsmay be included, at their net value, as part of any mandatory dividend.

 

To the extent that payments of interest on capital are included as partof a mandatory dividend, we are required to distribute an additional amount toensure that the net amount received by shareholders, after payment of the applicablewithholding tax is at least equal to the mandatory dividend.

 

Distributions of interest on net equity to foreign holders may beconverted into U.S. dollars and remitted outside Brazil, subject to applicableexchange controls, to the extent that the investment is registered with theBrazilian Central Bank.

 

We cannot assure you thatour Board of Directors will not determine that future distributions should bemade by means of dividends or interest on net equity.

 

*Taxation of Gains.*

* *

For purposes of Brazilian taxation, there are two types ofnon-Brazilian holders of Preferred ADSs or preferred shares and Common ADSs orcommon shares:

 

·                                          marketinvestors, which represent those non-Brazilian residents who register with theCentral Bank and the CVM to invest in Brazil, in accordance with Resolution No. 2,689of the National Monetary Council; and

 

·                                          ordinarynon-Brazilian holders, which include any and all non-residents in Brazil whoinvest in the country through any other means.

 

The comments contained below are applicable to all non-Brazilianholders, including non-Brazilian holders investing under Resolution No. 2,689,except where otherwise noted.

 

Resolution No. 2,689 grants a favorable tax treatment to allnon-Brazilian holders of preferred shares or common shares provided therespective disposal occurs on the Brazilian stock exchange and the followingconditions are met:

 

·                                          toappoint a representative in Brazil with powers to take action relating to theirinvestment;

 

·                                          toappoint an authorized custodian in Brazil for their investments;

 

·                                          toregister as a foreign investor with the CVM; and

 

·                                          toregister their investment with the Central Bank.

 

As mentioned, the sale ofpreferred shares or common shares by U.S. market investors carried out on theBrazilian stock exchange is exempted from the income tax rate. We cannot assureyou that the current preferential treatment for U.S. market investors underResolution No. 2,689 will continue in the future.

 

The sale of preferred sharesor common shares that occurs out of the Brazilian stock exchange will besubject to the same tax treatment applicable to Ordinary U.S. Holders. The redemptionor distribution of proceeds deriving from the liquidation of preferred sharesor common shares will be treated as a sale carried out of the Brazilian stockexchange.

 

*Non-BrazilianHolders*

* *

Non-Brazilian holders aresubject to income tax at a 15% rate, as of January 1, 2005, on gainsrealized on the sale, redemption or distribution of proceeds deriving from theliquidation of preferred shares or common shares.

 

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With respect to the cost ofacquisition to be adopted for calculating such gains, Brazilian law hasconflicting provisions regarding the currency in which such amount must bedetermined. CEMIG’s Brazilian counsel’s view is that the capital gains shouldbe based on the positive difference between the cost of acquisition of thepreferred shares or common shares registered with Brazilian Central Bank inforeign currency and the value of disposition of those preferred shares orcommon shares in the same foreign currency. This view has been supported by aprecedent issued by the Brazilian administrative court. However, consideringthat tax authorities are not bound by such precedent, assessments have beenissued adopting the cost of acquisition in Brazilian currency.

 

As of January 1, 2005the purchase price of preferred shares or common shares sold on the Brazilianstock exchange is subject to a withholding tax rate of 0.005%, except in caseof non-Brazilian holders, which invest in Brazil pursuant to Resolution No. 2,689.This tax may be offset against the 15% income tax due on the gains realizedupon the sale of the preferred shares or common shares. The withholding taxmust be withheld by one of the following entities: (i) the agent receivingthe sale or disposition order from the client; (ii) the stock exchangeresponsible for registering the transactions; or (iii) the entityresponsible for the settlement and payment of the transactions.

 

Any exercise of preemptiverights relating to the preferred shares or common shares will not be subject toBrazilian taxation. Conversely, any gain on the sale or assignment ofpreemptive rights relating to the preferred shares or common shares by thedepositary on behalf of the holders of Preferred ADSs or Common ADSs or by anon-Brazilian holder of preferred shares or common shares will be subject tothe same rules of taxation applicable to the sale or assignment ofpreferred shares or common shares. The maximum rate is currently 15%.

 

*Sale ofPreferred ADSs, Common ADSs, preferred shares and common shares by U.S. Holdersto other non-residents in Brazil*

* *

Pursuant to Article 26of Law No. 10,833, published on December 29, 2003, the sale ofproperty located in Brazil involving non-resident investors is subject toBrazilian income tax as of February 1, 2004. Our understanding is thatADSs do not qualify as property located in Brazil and, thus, should not besubject to the Brazilian withholding tax. The regulatory norm referred to in Article 26is recent and generic and has not been tested through the administrative orjudicial courts, and therefore we are unable to assure the final outcome ofsuch discussion.

 

If such argument does not prevail, it is important to mention that withrespect to the cost of acquisition to be adopted for calculating suchgains,  Brazilian law has conflictingprovisions regarding the currency in which such amount must be determined.CEMIG’s Brazilian counsel’s view is that the capital gains should be based onthe positive difference between the cost of acquisition of the preferred sharesor common shares registered with Brazilian Central Bank in foreign currency andthe value of disposition of those preferred shares or common shares in the sameforeign currency. This view has been supported by a precedent issued by theBrazilian administrative court. However, considering that tax authorities arenot bound by such precedent, assessments have been issued adopting the cost ofacquisition in Brazilian currency.

 

*Gains onthe exchange of Preferred ADSs for preferred shares or the exchange of CommonADSs for common shares*

* *

The exchange of PreferredADSs for preferred shares or Common ADSs for common shares is not subject toBrazilian tax. Non-Brazilian Holders may exchange Preferred ADSs for theunderlying preferred shares or Common ADSs for the underlying common shares,sell the preferred shares or common shares on a Brazilian stock exchange andremit abroad the proceeds of the sale within five business days from the dateof exchange (in reliance on the depositary’s electronic registration), with notax consequences.

 

Upon receipt of theunderlying preferred shares in exchange for Preferred ADSs or the underlyingcommon shares in exchange for Common ADSs, Non-Brazilian Holders may also electto register with the Central Bank the U.S. dollar value of such preferredshares or common shares as a foreign portfolio investment under Resolution No. 2689/00,which will entitle them to the tax treatment referred above in connection with “U.S.market investors”.

 

Alternatively, theNon-Brazilian Holder is also entitled to register with the Central Bank theU.S. dollar value of such preferred shares or common shares as a foreign directinvestment under Law 4,131/62, in which case the respective sale would besubject to the tax treatment referred in the section “Ordinary Non-BrazilianHolders”.

 

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* *

*Gains onthe exchange of preferred shares for Preferred ADSs or common shares for CommonADSs*

* *

The deposit of preferred shares in exchange for the Preferred ADSs orcommon shares in exchange for the Common ADSs may be subject to Brazilianincome tax on capital gains if the amount previously registered with theCentral Bank as a foreign investment in preferred shares or common shares or,in the case of other market investors under Resolution No. 2,689, theacquisition cost of the preferred shares or common shares, as the case may be,is lower than:

 

·                                          theaverage price per preferred share or common share on the Brazilian stockexchange on which the greatest number of such preferred shares or common shareswere sold on the day of deposit; or

 

·                                          ifno preferred shares or common shares were sold on that day, the average priceon the Brazilian stock exchange on which the greatest number of preferredshares or common shares were sold during the 15 preceding trading sessions.

 

The difference between the amount previously registered, or theacquisition cost, as the case may be, and the average price of the preferredshares or common shares, calculated as set forth above, is considered a capitalgain subject to income tax at a rate of 15%.

 

*Beneficiaries Residing or Domiciled in Tax Havens orLow-Tax Jurisdictions.*

* *

Law No. 9,430,dated as of December 27, 1996, defines low-tax jurisdictions as those thatdo not tax income or impose a rate lower than 20%.

 

Law No. 9,779, dated as of January 19, 1999, states that,except under limited circumstances, any income derived from operations by abeneficiary that resides or is domiciled in a country considered to be a taxhaven is subject to income tax to be withheld by the source at a rate of 25%.

 

Accordingly, if the distribution of interest attributed to shareholders’equity is made to a beneficiary residing or domiciled in a tax haven, theapplicable income tax will be at a rate of 25% instead of 15%. The increasedrate also applies for capital gains earned in transactions carried out of theBrazilian stock exchange and paid to residents of low-tax jurisdictions as of February 2004.However, the increased rate does not apply to dividends distributions, whichremain exempted even if the beneficiary resides in a low-tax jurisdiction.

 

In accordance with Law No. 9,959, non-Brazilian holders ofPreferred ADSs, preferred shares, Common ADSs or common shares, which areresident in tax havens are also excluded from the tax incentives granted toholders of ADSs and investors under Resolution No. 2,689 as of January 1,2000 and will be subject to the same tax treatment applicable to holders thatare resident or domiciled in Brazil in case of transactions carried out onthe Brazilian stock exchange.

 

*Temporary Contribution on Financial Transactions (CPMF)**.*All fundtransfers in connection with financial transactions in Brazil used to besubject to the temporary contribution on financial transactions (CPMF), whichwas levied at a rate of 0.38% on any bank account withdrawals/debits. In thissense, any exchange transaction in connection with Preferred ADSs,Common ADSs, preferred shares or common shares, was subject to the CPMF. TheCPMF expired in December 31, 2007, although no assurance can be given thatCPMF will not be imposed again in the future.

 

*Taxation of Foreign Exchange Transactions*.Brazilian law imposes a Tax on Foreign Exchange Transactions, or IOF/ Exchangetax, due on the conversion of *reais*intoforeign currency and on the conversion of foreign currency into*reais.*Currently, as a substitute for the CPMF, IOF ratesfor almost all foreign currency exchange transactions is 0.38%. In the case oftransactions performed in the stock market or under the regulations issued bythe Monetary Council of Brazil, the applicable rate is zero. In any situationthe Brazilian Federal Government**ispermitted to increase the rate at any time, up to 25%. However, any increase inrates may only apply to future transactions.

 

*Tax onTransactions Involving Bonds and Securities.*  Brazilian law imposes a Tax on TransactionsInvolving Bonds and Securities, or IOF/Bonds Tax, including those carried outon a Brazilian stock exchange.  The rateof IOF applicable to transactions involving stocks (such as our preferredshares, Preferred ADSs, common shares and Common ADSs) is currently zero,although the Minister of Finance is permitted to increase such rate at any timeup to 1.5% per day, but only in respect to future transactions.

 

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*Other Brazilian Taxe*s.SomeBrazilian states impose gift and inheritance tax on gifts or bequests made byindividuals or entities not domiciled or residing in Brazil to individuals orentities domiciled or residing within such states. There are no Brazilianstamp, issue, registration, or similar taxes or duties payable by holders ofpreferred shares, common shares, Preferred ADSs or Common ADSs.

 

*U.S. Tax Considerations*

 

In general, for U.S. federal income tax purposes, holders of ADRsevidencing ADSs will be treated as the beneficial owners of the common sharesor preferred shares represented by those ADSs.

 

*Taxation of Distributions*.Distributions with respect to the shares or the ADSs (other than distributionsin redemption of the shares subject to Section 302(b) of the Code orin a liquidation of the Company) will, to the extent made from current oraccumulated earnings and profits of the Company as determined under U.S.federal income tax principles, constitute dividends. Whether such current oraccumulated earnings and profits will be sufficient for all such distributionson the shares or ADSs to qualify as dividends for U.S. federal income taxpurposes depends on the future profitability of the Company and other factors,many of which are beyond the control of the Company. To the extent that such adistribution exceeds the amount of the Company’s earnings and profits, it willbe treated as a non-taxable return of capital to the extent of the U.S. holder’sbasis in the shares or ADSs, and thereafter as capital gain (provided that theshares or ADSs are held as capital assets). As used below, the term “dividend”means a distribution that constitutes a dividend for U.S. federal income taxpurposes. Cash dividends (including amounts withheld in respect of Braziliantaxes) paid with respect to (i) the shares generally will be includible inthe gross income of a U.S. holder as ordinary income on the day on which thedividends are received by the U.S. holder or (ii) the shares representedby ADSs generally will be includible in the gross income of a U.S. holder asordinary income on the day on which the dividends are received by thedepositary bank and, in either case, will not be eligible for the dividendsreceived deduction allowed to corporations. Dividends paid in *reais* will be includible in the income of a U.S. holder in aU.S. dollar amount calculated by reference to the exchange rate in effect onthe day they are received by the U.S. holder, in the case of shares, or thedepositary bank, in the case of shares represented by ADSs.

 

If dividends paid in *reais*are converted into U.S. dollars on the day they are received by the U.S. holderor the depositary bank, as the case may be, U.S. holders generally should notbe required to recognize foreign currency gain or loss in respect of thedividend income. U.S. holders should consult their own tax advisors regardingthe treatment of any foreign currency gain or loss if any *reais* received by the U.S. holder or thedepositary bank are not converted into U.S. dollars on the date of receipt, aswell as the tax consequences of the receipt of any additional *reais* from the custodian on account of Brazilian inflation.

 

Dividends generally will constitute foreign source income andgenerallywill constitute “passive category income” or, in the case of certain U.S.holders, “general category income,” for foreign tax credit purposes. In theevent Brazilian withholding taxes are imposed on such dividends, such taxes maybe treated as a foreign income tax eligible, subject to generally applicablelimitations and conditions under U.S. federal income tax law, for creditagainst a U.S. holder’s U.S. federal income tax liability (or at a U.S. holder’selection, may be deducted in computing taxable income). The calculation andavailability of foreign tax credits and, in the case of a U.S. holder thatelects to deduct foreign taxes, the availability of deductions, involves theapplication of rules that depend on a U.S. holder’s particularcircumstances. In the event Brazilian withholding taxes are imposed, U.S.holders should consult their own tax advisors regarding the availability offoreign tax credits with respect to Brazilian withholding taxes.

 

Distributions to U.S. holders of additional shares of “common stock” orpreemptive rights relating to such “common stock” with respect to their commonshares or Common ADSs that are made as part of a pro rata distribution to allshareholders of the Company generally will not be treated as dividend incomefor U.S. federal income tax purposes, but could result in additionalU.S.-source taxable gain upon the sale of such additional shares or preemptiverights.  Non-pro rata distributions ofsuch shares or rights generally would be includible in the U.S. holder’s grossincome to the same extent and in the same manner as distributions payable incash.  In that event, the amount of suchdistribution (and the basis of the new shares or preemptive rights so received)generally will equal the fair market value of the shares or preemptive rightson the date of distribution..  It is notentirely clear whether the preferred shares will be treated as “preferred stock”or “common stock” for this purpose. If the preferred shares are treated as “commonstock” for this purposes the treatment above would apply to distributions ofshares or preemptive rights with respect to preferred shares or Preferred ADSs,On the other hand, if the preferred shares are treated as “preferred stock” adistribution of additional shares or preemptive rights would be includible ingross income to the same extent as a cash distribution whether or not such distributionis considered a pro rata distribution.

 

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A holder of shares or ADSs that is not a U.S. holder generally will notbe subject to U.S. federal income or withholding tax on dividends received on sharesor ADSs, unless such income is effectively connected with the conduct by theholder of a trade or business in the United States.

 

*Qualified Dividend Income*.Notwithstanding the foregoing, certain dividends received by individual U.S.holders that constitute “qualified dividend income” currently may be subject toa reduced maximum marginal U.S. federal income tax rate. Qualified dividendincome generally includes, among other dividends, dividends received during thetaxable year from “qualified foreign corporations.”  In general, a foreign corporation is treatedas a qualified foreign corporation with respect to any dividend paid by thecorporation with respect to stock of the corporation that is readily tradableon an established securities market in the United States. For this purpose, ashare is treated as readily tradable on an established securities market in theUnited States if an ADR backed by such share is so traded.

 

Notwithstanding this previous rule, dividends received from a foreigncorporation that is a passive foreign investment company (as defined in section1297 of the Code), or in either the taxable year of the corporation in whichthe dividend was paid or the preceding taxable year will not constitutequalified dividend income. In addition, the term “qualified dividend income”will not include, among other dividends, any (i) dividends on any share orADS which is held by a taxpayer for 60 days or less during the 120-dayperiod beginning on the date which is 60 days before the date on which suchshare or the shares backing the ADS become ex-dividend with respect to suchdividends (as measured under section 246(c) of the Code) or (ii) dividendsto the extent that the taxpayer is under an obligation (whether pursuant to ashort sale or otherwise) to make related payments with respects to positions insubstantially similar or related property. Moreover, special rules applyin determining a taxpayer’s foreign tax credit limitation under section 904 ofthe Code in the case of qualified dividend income.

 

Individual U.S. holders should consult their own tax advisors todetermine whether or not amounts received as dividends from us will constitutequalified dividend income subject to a reduced maximum marginal U.S. federalincome tax rate and, in such case, the effect, if any, on the individual U.S.holder’s foreign tax credit.

 

*Taxation of Capital Gains*.Deposits and withdrawals of shares by U.S. holders in exchange for ADSs willnot result in the realization of gain or loss for U.S. federal income taxpurposes.

 

Gain or loss realized by a U.S. holder on the sale, redemption or otherdisposition of shares or ADSs will be subject to U.S. federal income taxationas capital gain or loss in an amount equal to the difference between such U.S.holder’s basis in the shares or the ADSs and the amount realized on thedisposition. Gain realized by a U.S. holder on a sale, redemption or otherdisposition of shares or ADSs, including gain that arises because the U.S.holder’s basis in the shares or ADSs has been reduced because a distribution istreated as a return of capital rather than as a dividend, generally will betreated as U.S. source income for U.S. foreign tax credit purposes.

 

If a Brazilian withholding tax or income tax is imposed on the sale ordisposition of shares or ADSs as described in “—Taxation—Brazilian TaxConsiderations,” the amount realized by a U.S. holder will include the grossamount of the proceeds of such sale or disposition before deduction of theBrazilian withholding tax or income tax if applicable. The availability of U.S.foreign tax credits for these Brazilian taxes and any Brazilian taxes imposedon distributions that do not constitute dividends for U.S. tax purposes issubject to certain limitations and involves the application of rules thatdepend on a U.S. holder’s particular circumstances. U.S. holders should consulttheir own tax advisors regarding the application of the foreign tax credit rules totheir investment in, and disposition of, shares or ADSs.

 

A holder of shares or ADSs that is not a U.S. holder will not besubject to U.S. federal income or withholding tax on gain realized on the saleof shares or ADSs, unless (i) such gain is effectively connected with theconduct by the holder of a trade or business in the United States or (ii) inthe case of gain realized by an individual holder, the holder is present in theUnited States for 183 days or more in the taxable year of the sale and certainother conditions are met.

 

*Information Reporting and BackupWithholding*. Information reporting requirements willgenerally apply to U.S. holders of ADSs and U.S. holders will be required tocomply with applicable certification procedures to establish that they are ntosubject to back up withholding. A holder of ADSs that is not a U.S. holder maybe required to comply with applicable certification procedures to establishthat they are not United States persons in order to avoid the application ofU.S. information reporting requirements and backup withholding tax.

 

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** **

**Dividends and Paying Agents**

** **

We pay dividends on preferred shares and common shares in the amountsand in the manner set forth under “Item 8. Financial Information—DividendPolicy and Payments.”  We will paydividends in respect of preferred shares represented by Preferred ADSs orcommon shares represented by Common ADSs to the custodian for the depositarybank, as record owner of the preferred shares represented by Preferred ADSs orthe common shares represented by Common ADSs. As promptly as practicable afterreceipt of the dividends we pay through Citibank N.A. to the custodian, it willconvert these payments into U.S. dollars and remit such amounts to thedepositary bank for payment to the holders of Preferred ADSs or Common ADSs inproportion to individual ownership.

 

**Documents on Display**

** **

We are subject to the informational requirements of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”). In accordance with theserequirements, we file reports and other information with the Commission. Thesematerials, including this annual report and the accompanying exhibits, may beinspected and copied at the Commission’s Public Reference Room at 100 FStreet, N.E., Room 1580, Washington, D.C. 20549. Copies of the materialsmay be obtained from the Commission’s Public Reference Room at prescribedrates. The public may obtain information on the operation of the Commission’sPublic Reference Room by calling the Commission in the United States at 1-800-SEC-0330.In addition, copies of the exhibits that accompany this annual report may beinspected at our principal executive offices located at Avenida Barbacena,1200, 30190—131 Belo Horizonte, Minas Gerais, Brazil.

 

**Insurance**

** **

We have insurance policies to cover damages to the turbines, generatorsand transformers of our major power plants and substations caused by fire andrisks such as equipment failures. We do not have general third party liabilityinsurance covering accidents and have not solicited bids relating to this typeof insurance. However, we may contract for this type of insurance in thefuture. In addition, we have not solicited bids for, nor do we carry, insurancecoverage for major catastrophes affecting our facilities such as earthquakesand floods or for operating system failures. We do not have insurance coveragefor business interruption risk, which means damages we suffer and consequentialdamages suffered by our consumers resulting from an interruption in powerdistribution are generally not covered by our insurance and we may be subjectto significant related losses. See “Item 3. Key Information—Risk Factors—RisksRelating to CEMIG—We operate without general third party liability andcatastrophe insurance policies.”

 

We believe that, since we have contracted for fire and operational riskinsurance, our insurance coverage will be at a level that is customary inBrazil for the type of businesses in which we are engaged.

 

**Difficulties of Enforcing Civil Liabilities AgainstNon-U.S. Persons**

** **

We are astate-controlled mixed capital company established under the laws of Brazil.All of our executive officers and directors presently reside in Brazil. Inaddition, substantially all of our assets are located in Brazil. As a result,it will be necessary for holders of Preferred ADSs or Common ADSs to complywith Brazilian law in order to obtain an enforceable judgment against ourexecutive officers or directors or our assets. It may not be possible forholders of Preferred ADSs or Common ADSs to effect service of process withinthe United States upon our executive officers and directors, or to realize inthe United States upon judgments against these persons obtained in U.S. courtsbased upon civil liabilities of these persons, including any judgments basedupon U.S. federal securities laws, to the extent these judgments exceed thesepersons’ U.S. assets. We have been advised by Brazilian counsel, Machado,Meyer, Sendacz e Opice Advogados, that judgments of U.S. courts for civilliabilities based upon the federal securities laws of the United States may be,subject to the requirements described below, enforced in Brazil. A judgmentagainst us, or the persons described above obtained outside Brazil withoutreconsideration of the merits, is subject to confirmation by the BrazilianSuperior Court of Justice. That confirmation will occur if the foreignjudgment:

 
| · |   | fulfills all  formalities required for its enforceability under the laws of the country  where the foreign judgment is granted; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                            |
| · |   | is issued by a  competent court after proper service of process is made in accordance with  Brazilian Law;                      |
|   |   |                                                                                                                            |
| · |   | is not subject to appeal;                                                                                                       |

 

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| · |   | is for the  payment of a sum certain;                                                                                                                                  |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                   |
| · |   | is  authenticated by a Brazilian consular officer in the country where the  foreign judgment is issued and is accompanied by a sworn translation into  Portuguese; and |
|   |   |                                                                                                                                                                   |
| · |   | is not contrary  to Brazilian national sovereignty, public policy or public morality.                                                                                  |

 

We cannot assure you the confirmation processdescribed above will be conducted in a timely manner or that Brazilian courtswould enforce a monetary judgment for violation of the United States securitieslaws with respect to the Preferred ADSs and the preferred shares represented bythe Preferred ADSs or the Common ADSs and the common shares represented by theCommon ADSs.

 

We were further advised by respective Braziliancounsel that:

 
| · |   | original actions based on the federal securities laws of  the United States may be brought in Brazilian courts and that, subject to  Brazilian public policy and national sovereignty, Brazilian courts will  enforce liabilities in such actions against us and our officers; and |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                               |
| · |   | the ability of a judgment creditor or the other persons  named above to satisfy a judgment by attaching our assets or those of the  selling shareholders is limited by provisions of Brazilian law.                                                                                |

 

A plaintiff (whether Brazilian or non-Brazilian)residing outside Brazil during the course of litigation in Brazil must providea bond to guarantee court costs and legal fees if the plaintiff owns no realproperty in Brazil that could secure such payment. The bond must have a valuesufficient to satisfy the payment of court fees and defendant’s attorney fees,as determined by a judge in Brazil. This requirement does not apply to aproceeding to enforce a foreign judgment which has been confirmed by theBrazilian Superior Court of Justice.

 

**Item 11.**    Quantitative and QualitativeDisclosures about Market Risk

** **

We are exposed to market risk from changes in foreign currency exchangerates and interest rates.

 

We are exposed to foreign exchange risk because certain of our loansand financings are denominated in currencies (primarily the U.S. dollar) otherthan the currency in which we earn revenues (the *real*). Despite the fact that our electricity purchases fromItaipu, which represented R$1,000 million in 2007, are denominated in U.S.dollars, the related foreign exchange risk is no longer reflected in ouroperating revenues and operating expenses due to rate legislation changes in2001 which allow electricity utilities such as us to record exchange ratelosses related to Itaipu purchases as deferred regulatory assets. See “Item 5.Operating and Financial Review and Prospects—Critical Accounting Estimates.”

 

**Exchange Rate Risk**

** **

At December 31, 2007, approximately 5.7% of our outstandingindebtedness, or R$390 million, was denominated in foreign currencies, of whichapproximately 76.9%, or R$300 million, was denominated in U.S. dollars. We donot have substantial revenues denominated in any foreign currencies and, due toregulations that require us to keep excess cash on deposit in *real*-denominated accounts at Brazilian banks, we do not havemonetary assets denominated in foreign currencies.

 

In 2007, we used financial instruments such as interest rate swaps tohedge our foreign exchange rate exposure. The purpose of the swaps was toreduce our exposure on the original interest rate of certain financing from aninterest rate calculated based on the U.S. dollar/*real* exchange rate to an interest rate calculated based onthe Certificado de Depósito Interbancário—CDI (Interbank Deposit Certificate)rate. See Notes 2(d), 14, 22, 24 and 25 to our consolidated financialstatements.

 

In 2008, the potential loss we would experience in the event of ahypothetical 20% depreciation of the *real* against the U.S. dollar would beapproximately R$60 million related principally to loans and financing andprimarily due to an increase in our *real*-denominatedinterest expense, which would be reflected on our income statement. In 2008, ahypothetical 20% depreciation of the*real* against the U.S. dollar wouldresult in an additional annual cash outflow of approximately R$241.8 million,reflecting the increased cost in *reais*of servicing foreign currency-denominated indebtedness from loans, financingsand debentures and increased purchasing power relating to Itaipu. This sensitivityanalysis assumes a simultaneous unfavorable 20% fluctuation in each of theexchange rates 

 

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affectingthe foreign currencies in which our indebtedness, the related interest expenseand the expenses relating to the purchase of energy from Itaipu aredenominated. This sensitivity analysis also assumes that the unfavorablefluctuation in the exchange rate affecting the purchase of energy from Itaipuwould affect the annual cash payments but would not affect the expense recordedon the statement of operations, since the additional currency exchange expensewould be recorded as a deferred regulatory asset.

 

The tables below provide summary information regarding our exposure toexchange rate risk as of December 31, 2007:

 
| ** **                                     | ** ** | **2007** | ** ** |
|------------------------------------------------|------------|----------|------------|
| U.S. Dollar                                    |       |     |       |
| Financing                                      |       | 300      |       |
|                                           |       |     |       |
| Less Contracted  derivative instruments        |       | (122     | )          |
|                                           |       | 178      |       |
| Japanese Yen                                   |       | 61       |       |
| Financing                                      |       | (61      | )          |
| Less Contracted  derivative instruments        |       | —   |       |
|                                           |       |     |       |
| Other Currencies                               |       |     |       |
| Financing                                      |       | 29       |       |
| Net liabilities  exposed to exchange rate risk |       | 207      |       |

 

**Interest Rate Risk**

** **

At December 31, 2007, we had R$6,814 million in loans andfinancing outstanding, of which approximately R$6,191 million bore interest atfloating rates. Of this R$6,191 million, R$6,087 million is subject to monetaryrestatement through the application of inflation indices established by theFederal Government, principally the IGP-M, and R$104 million is subjectprincipally to LIBOR.

 

At December 31, 2007, we had liabilities, net of other assets,that bore interest at floating rates in the amount of R$1,799 million. Theseassets consisted mainly of our account receivable from the State Government anddeferred regulatory assets, partially offset by CCEE obligations, bearinginterest at rates tied to IGP-DI and SELIC, respectively, as summarized in thetables below.  A hypothetical,instantaneous and unfavorable change of 100 basis points in interest ratesapplicable to floating rate financial assets and liabilities held at December 31,2007 would result in a potential loss of R$17.99 million to be recorded as afinancial expense in our consolidated financial statements.

 

Total Debt Portfolio

 
| ** **                    | ** ** | **R$**        | ** ** |
|-------------------------------|------------|---------------|------------|
| ** **                    | ** ** | **(Million)** | ** ** |
| Floating rate  debt:          |       |          |       |
| *Real-denominated*            |       | 6,087         |       |
| Foreign  currency-denominated |       | 104           |       |
|                          |       | 6,191         |       |
| Fixed rate debt:              |       |          |       |
| Foreign  currency-denominated |       | 286           |       |
|                          |       |          |       |
| Total                         |       | 6,477         |       |

 

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| ** **                                                                          | ** ** | **Total Portfolio  Floating Rate ** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                          | ** ** | **(R$ million)**                              | ** ** |
| Assets:                                                                             |       |                                               |       |
| Cash and cash  equivalents                                                          |       | 1,424                                              |       |
|                                                                                |       |                                               |       |
| Account  receivable from State Government                                           |       | 1,763                                              |       |
| Deferred  regulatory assets                                                         |       | 1,726                                              |       |
| Total                                                                               |       | 4,913                                              |       |
|                                                                                |       |                                               |       |
| Liabilities:                                                                        |       |                                               |       |
|                                                                                |       |                                               |       |
| Account payable  to suppliers-payment to generator for energy purchased on the CCEE |       | (338                                               | )          |
| Financings  (Floating Rate)                                                         |       | (6,191                                             | )          |
| Derivative  instruments(1)                                                          |       | (183                                               | )          |
| Total  liabilities                                                                  |       | (6,712                                             | )          |
|                                                                                |       |                                               |       |
| Total                                                                               |       | (1,799                                             | )          |

 

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| (1) |   | Swaps to reduce our  exposure on the original interest rate of certain financing from an interest  rate calculated based on the U.S. dollar/*real*  exchange rate to an interest rate calculated based on the *Certificado de Depósito Interbancário*-CDI (Interbank  Deposit Certificate) rate. |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Item 12.**    Description of SecuritiesOther than Equity Securities

** **

Not applicable.

 

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**PART II**

** **

**Item 13.**    Defaults, Dividend Arrearagesand Delinquencies

** **

Certain of CEMIG’s loans and financing agreements contain covenantsthat require us to maintain financial ratios, calculated in accordance withBrazilian Corporate Law.  As of December 31,2007, we were in compliance with all such covenants.

 

**Item 14.**    Material Modifications to theRights of Security Holders and Use of Proceeds

** **

Not applicable.

 

**Item 15.**    Controls and Procedures

** **

**(a)**                                  Evaluationof disclosure controls and procedures

** **

Our Executive Board, including our Chief Executive Officer (“CEO”) andChief Financial and Investor Relations Officer (“CFO”), evaluated theeffectiveness of our disclosure controls and procedures, and concluded that on December 31,2007, these disclosure controls and procedures were effective to ensure thatinformation required to be disclosed in our filings and submissions under theExchange Act is (i) recorded, processed, summarized and reported withinthe time periods specified in the Commission’s rules and forms and (ii) accumulatedand communicated to our management, including our CEO and CFO, as appropriateto allow timely decisions regarding required disclosure.

 

**(b)**                                  Management’sannual report on internal control over financial reporting

** **

Our Executive Board, including our CEO and CFO, is responsible forestablishing and maintaining effective internal controls over financial reporting.

 

Our internal controls over financial reporting include policies andprocedures that were implemented to provide reasonable assurance as to: (i) thereliability of the recording accounting and financial information; (ii) thepreparation of accounting records in accordance with U.S. GAAP; (iii) theprocessing of payments and receipts in accordance with management authorization;and (iv) the timely detection of inappropriate acquisitions, and thedisposal or allocation of material assets. We emphasize that due to theirinherent limitations, the possibility exists that these actions may not preventor detect misstatements. Also, projections of any evaluation of theeffectiveness of the internal control over financial reporting to futureperiods are subject to the risk that controls may become inadequate because ofchanges in conditions, or the degree of compliance with the policies orprocedures may decline.

 

Our management evaluated the effectiveness of our internal controlsover financial reporting at December 31, 2007, based on the criteriaestablished in the Integrated Internal Control Framework specified by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO),and concluded that, for the year ended December 31, 2007, our system ofinternal controls over financial reporting is effective.

 

The Company’s independent registered public accounting firm whichaudited our consolidated financial statements for the year ended December 31,2007, KPMG Auditores Independentes, has audited the effectiveness of theCompany’s internal control over financial reporting as of December 31,2007 and issued an attestation report, which is included below.

 

*The Ethics Committee*

* *

Our Ethics Committee was established on August 12, 2004, and ismade up of three permanent members and three alternate members. It isresponsible for the management, interpretation, dissemination, application andupdating of the Code of Professional Conduct.

 

The Committee receives and investigates all reports of violation of theethical principles and standards of conduct, provided they are presented in awritten document signed by the interested party and addressed to: CEMIG, Av.Barbacena 1200, SA/17th Floor/B2, and accompanied by evidentiary proof. TheCommittee may also be contacted by e-mail comissaodeetica@cemig.com.br.

 

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In December 2006 we implemented the Anonymous Reporting Channel,available on our website.  The purpose ofthis program is to receive, channel and process accusations of irregularpractices, such as financial fraud, misappropriation of assets, receipt ofunfair advantages, and the engagement of illegal contracts. This channelrepresents the Company aim of improving transparency, correcting unethical orillegal behavior and enhancing corporate governance, as well as being aninstrument that meets the requirements of the Sarbanes-Oxley Act.

 

**(c)**                                  Attestationreport of the registered public accounting firm

** **

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Report of Independent Registered Public Accounting Firm, On InternalControl Over Financial Reporting

 

To the Board of Directors and Shareholders of

Companhia Energética de MinasGerais – CEMIG

Belo Horizonte – MG, Brazil

 

We have auditedCompanhia Energética de Minas Gerais – CEMIG and subsidiaries (collectively,“the Company”) internal control over financial reporting as ofDecember 31, 2007, based on criteria established in Internal Control –Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). The Company’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting,included in “Management’s Annual Report on Internal Control over FinancialReporting” in Item 15 of this Form 20-F. Our responsibility is to express anopinion on the Company’s internal control over financial reporting based on ouraudit.

We conducted ouraudit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal controlover financial reporting, assessing the risk that a material weakness exists,and testing and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk. Our audit also included performing suchother procedures as we considered necessary in the circumstances. We believethat our audit provides a reasonable basis for our opinion.

A company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that(1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assetsof the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements in accordancewith generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

In our opinion,Companhia Energética de Minas Gerais – CEMIG and subsidiaries maintained, inall material respects, effective internal control over financial reporting asof December 31, 2007, based on criteria established in Internal Control –Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission.

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated balance sheet of CompanhiaEnergética de Minas Gerais – CEMIG and subsidiaries as of December 31,2007, and the related consolidated statements of operations and comprehensiveincome, changes in shareholders’ equity, and cash flows for the year thenended, and our report dated June 27, 2008 expressed an unqualified opinion onthose consolidated financial statements.

BeloHorizonte, Brazil

June 27, 2008

 

/s/ KPMGAuditores Independentes

 

KPMG AuditoresIndependentes

 

**(d)**                                  Changes ininternal control over financial reporting

** **

There has been no change in our internal control over financialreporting during the year ended December 31, 2007 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

**Item 16A.** Audit Committee FinancialExpert

** **

Our Fiscal Council acts as our audit committee for purposes of theSarbanes-Oxley Act of 2002.  Under Section 10A-3of the SEC rules on Audit Committees of listed companies, non-U.S. issuersare permitted not to have a separate Audit Committee made up of independentmembers if there is a Fiscal Council established and chosen in accordance withthe legal rules of its origin country, expressly requiring or allowingthat such council follow certain obligations. Also in accordance with thisexemption, a Fiscal Council may exercise the obligations and responsibilitiesof an Audit Committee of the United States up to the limit permitted byBrazilian Law.  The financial expert ofour Fiscal Council is Luiz Otávio Nunes West.

 

**Item 16B. Code ofEthics**

** **

We have adopted a code of ethics, as defined in Item 16B of Form 20-Funder the Exchange Act. Our code of ethics applies to our Chief ExecutiveOfficer, Chief Financial and Investor Relations Officer and persons performingsimilar functions as well as to our directors and other officers and employees.Our code of ethics was filed with the SEC as Exhibit 11 to our AnnualReport on Form 20-F for the fiscal year ended December 31,2003, and is also available on our website at www.cemig.com.br. If we amend the

provisionsof our code of ethics that apply to our Chief Executive Officer, ChiefFinancial Officer and persons performing similar functions, or if we grant anywaiver of such provisions, we will disclose such amendment or waiver on our website at www.cemig.com.br.

 

**Item 16C.Principal Accountant Fees and Services**

** **

**Audit and Non-Audit Fees**

** **

The following table summarizes the aggregate fees billed to us by KPMGAuditores Independentes and by Deloitte Tohmatsu Auditores Independentes duringthe fiscal years ended December 31, 2007 and 2006:

 
| ** **          | ** ** | **Year ended December 31,** | ** ** |
|---------------------|------------|--------------------------------------------|------------|
| ** **          | ** ** | **2007**                                   | ** ** | **2006** | ** ** |
| ** **          | ** ** | **(thousands of reais)**         | ** ** |
| Audit fees          |       | 912                                        |       | 955 |   |
| Tax fees            |       | 60                                         |       | 47 |   |
| Audit-related  fees |       | —                                     |       | 2,080 |   |
| Total fees          |       | 972                                        |       | 3,082 |   |

 

*Audit fees*. Auditfees in the above table are the aggregate fees billed by KPMG AuditoresIndependents and Deloitte Touche Tohmatsu Auditores Independentes in 2007 and2006, respectively, in connection with the audit of our annual financialstatements 

 

137

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preparedin accordance with the accounting practices adopted in Brazil and the UnitedStates and the review of our quarterly statutory financial statements.

 

*Tax Fees*. Tax feesare fees for professional services in relation to tax compliance.

 

*Audit-related fees*.Audit-related fees for 2007 and 2006 related to internal control review.

 

**Audit Committee Pre-Approval Policies and Procedures**

** **

Our Fiscal Council currently serves as our audit committee for purposesof the Sarbanes-Oxley Act of 2002. However, as required by Brazilianlegislation, we have adopted pre-approval policies and procedures by which allaudit and non-audit services provided by external auditors must be approved bythe Board of Directors. Any service proposals submitted by external auditorsneed to be discussed and approved by the Board of Directors during itsmeetings. Once the proposed service is approved, we formalize the engagement ofservices. The approval of any audit and non-audit services to be provided byour external auditors is specified in the minutes of our Board of Directors.

 

**Item 16D. NotApplicable**

** **

**Item 16E.Purchases of Equity Securities by the Issuer and Affiliated Purchasers.**

** **

None.

 

138

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**PART III**

 

**Item 17. Financial Statements**

 

Not applicable.

 

### **Item18.    Financial Statements**

###  

Reference is made to pages F-1 through F-72 hereof.

 

The following financial statements are filed as part of this annualreport on Form 20-F:

 

·                                          Reportof KPMG Auditores Independentes

 

·                                          AuditedConsolidated Balance Sheets as of December 31, 2007 and 2006

 

·                                          AuditedConsolidated Statements of Operations and Comprehensive Income (Loss) for theyears ended December 31, 2007, 2006 and 2005

 

·                                          AuditedConsolidated Statements of Changes in Shareholders’ Equity for the years ended December 31,2007, 2006 and 2005

 

·                                          AuditedConsolidated Statements of Cash Flows for the years ended December 31,2007, 2006 and 2005

 

·                                          Notesto the Consolidated Financial Statements

 

### **Item19.     Exhibits**

###  

The following documents are included as exhibits to this annual report:

 

 
| Exhibit  Number | ** ** | **Document**                                                                                                                                                                                                                                                                                                                                                                                                |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1               |       | Corporate by-laws of CEMIG, as amended and in effect  since April 25, 2008.                                                                                                                                                                                                                                                                                                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 2.1             |       | Second Amended and Restated Deposit Agreement, dated  as of August 10, 2001, by and among us, Citibank, N.A., as depositary,  and the holders and beneficial owners of ADSs evidenced by ADRs issued  thereunder (incorporated by reference to the Registration Statement on  Form F-6 relating to the ADSs filed on August 20, 2001 (File  No. 333-13826)).                            |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 2.2             |       | Shareholders’ Agreement, dated June 18, 1997,  between the State Government and Southern, relating to the rights and  obligations of owners of our shares (incorporated by reference to Exhibit 2.1  to our Registration Statement on Form 20-F filed on  August 13, 2001 (File No. 1-15224)).                                                                                |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 2.3             |       | Amendment No. 1 to the Second Amended and  Restated Deposit Agreement, dated as of August 10, 2001, by and among  us, Citibank, N.A., as depositary, and the holders and beneficial owners of  ADSs evidenced by ADRs issued thereunder (incorporated by reference to the  Registration Statement on Form F-6 relating to the ADSs filed on  June 11, 2007 (File No. 333-143636)). |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 2.4             |       | Deposit Agreement, dated as of June 12, 2007,  by and among us, Citibank, N.A., as depositary, and the holders and  beneficial owners of ADSs evidenced by ADRs issued thereunder (incorporated  by reference to the Registration Statement on Form F-6 relating to  the common share ADSs filed on May 7, 2007 (File No. 333-142654)).                                                 |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.1             |       | Contract of Concession for Generating Electric  Energy, dated July 10, 1997, between the Federal Government and us,  relating to the provision of electric energy generation services to the  public (incorporated by reference to Exhibit 4.1 to our Registration  Statement on Form 20-F filed on August 13, 2001 (File  No. 1-15224)).                                          |

 

139

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|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.2    |   | Contract of Concession of Electric Energy Transmission  Services, dated July 10, 1997, between the Federal Government and us,  relating to the transmission of electric energy to the public (incorporated  by reference to Exhibit 4.2 to our Registration Statement on  Form 20-F filed on August 13, 2001 (File No. 1-15224)).                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.3    |   | First Amendment to the Electricity Transmission  Concession Contract, dated September 16, 2005 (incorporated by reference  to Exhibit 4.3 to our Registration Statement on Form 20-F  filed on June 30, 2006 (File No. 1-15224)).                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.4    |   | Contracts of Concession of Public Service for  Distribution of Electric Energy, dated July 10, 1997, between the  Federal Government and us, relating to the provision of electric energy  distribution services to the public (incorporated by reference to Exhibit 4.3  to our Registration Statement on Form 20-F filed on  August 13, 2001 (File No. 1-15224)).                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.5    |   | First Amendment to the Electricity Distribution  Concession Contract, dated March 31, 2005 (incorporated by reference to  Exhibit 4.5 to our Registration Statement on Form 20-F filed  on June 30, 2006 (File No. 1-15224)).                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.6    |   | Second Amendment to the Electricity Distribution  Concession Contract, dated September 16, 2005 (incorporated by reference  to Exhibit 4.6 to our Registration Statement on Form 20-F  filed on June 30, 2006 (File No. 1-15224)).                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.7    |   | Contract for the Assignment of CRC Account, dated  May 31, 1995, between the State Government and us, relating to amounts  due to us from the State Government (incorporated by reference to  Exhibit 4.4 to our Registration Statement on Form 20-F filed  on August 13, 2001 (File No. 1-15224)).                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.8    |   | First Amendment to the Contract for the Assignment  of CRC Account, dated February 24, 2001, between the State Government  and us, relating to amounts due to us from the State Government (incorporated  by reference to Exhibit 4.5 to our Annual Report on Form 20-F  filed on March 26, 2003 (File No. 1-15224)).                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.9    |   | Second Amendment to the Contract for the Assignment  of CRC Account, dated October 14, 2002, between the State Government and  us, relating to amounts due to us from the State Government (incorporated by  reference to Exhibit 4.6 to our Annual Report on Form 20-F  filed on March 26, 2003 (File No. 1-15224)).                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.10   |   | Third Amendment to the Contract for the Assignment  of CRC Account, dated October 24, 2002, between the State Government and  us, relating to amounts due to us from the State Government (incorporated by  reference to Exhibit 4.7 to our Annual Report on Form 20-F  filed on March 26, 2003 (File No. 1-15224)).                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.11   |   | Indenture Covering the First Public Issuance of  Common Debentures, dated October 4, 2001, between Planner Corretora de  Valores S.A. and us, relating to the first public issuance of R$625 million  common debentures, divided into two series of the same class, without  guarantee or preference (incorporated by reference to Exhibit 4.8 to our  Annual Report on Form 20-F filed on March 26, 2003 (File  No. 1-15224)). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.12   |   | Summary of Indenture Covering the Third Public  Issuance of Common Debentures, dated June 14, 2004, between CEMIG and  Pavarini Distribuidora de Títulos e Valores Mobiliários (incorporated by  reference to Exhibit 4.10 to our Annual Report on Form 20-F filed  on May 25, 2005 (File No. 1-15224)).                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.13   |   | Fourth Amendment to the Contract for the Assignment  of CRC Account, dated January 23, 2006, between the State Government and  us, relating to amounts due to us from the State Government (incorporated by  reference to Exhibit 4.14 to our Registration Statement on Form 20-F  filed on June 30, 2006 (File No. 1-15224)).                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.14   |   | Announcement of Start of Public Distribution of  Senior Units under CRC Account Securitization Fund, dated as of  January 26, 2006 (incorporated by reference to Exhibit 4.15 to our  Registration Statement on Form 20-F filed on June 30, 2006  (File No. 1-15224)).                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.15   |   | Summary of Indenture Covering the First Issuance of  Commercial Paper Securities, dated July 27, 2006, between CEMIG  Distribuição S.A. and Banco do Brasil Banco de Investimentos S.A. (incorporated  by reference to Exhibit 4.16 to our Registration Statement on Form 20-F filed  on July 23, 2007 (File No. 1-15224)).                                                                                                               |

 

140

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|        |   |                                                                                                                                                                                                                                                                                                                                                                          |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.16   |   | Summary of Indenture Covering the First Issuance of  Commercial Paper Securities, dated July 27, 2006, between CEMIG Geração  e Transmissão S.A. and Banco do Brasil Banco de Investimentos S.A. (incorporated  by reference to Exhibit 4.17 to our Registration Statement on Form 20-F filed  on July 23, 2007 (File No. 1-15224)).                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                          |
| 4.17   |   | Summary of Indenture Covering Public Distribution of  Non-Convertible Unsecured Debentures, dated August 24, 2006, between  CEMIG Distribuição S.A. and Unibanco – União dos Bancos Brasileiros S.A. (incorporated  by reference to Exhibit 4.18 to our Registration Statement on Form 20-F filed  on July 23, 2007 (File No. 1-15224)).             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                          |
| 4.18   |   | Summary of Indenture Covering Public Distribution of  Non-Convertible Unsecured Debentures, dated April 17, 2007, between  CEMIG Geração e Transmissão S.A and Unibanco – União dos Bancos Brasileiros  S.A. (incorporated by reference to Exhibit 4.19 to our Registration Statement  on Form 20-F filed on July 23, 2007 (File No. 1-15224)). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                          |
| 4.19   |   | Summary of Indenture Covering Public Distribution of  the Third Issuance of Commercial Paper Securities, dated June 12, 2007,  between CEMIG Distribuição S.A. and CEF – Caixa Econômica Federal. (incorporated  by reference to Exhibit 4.20 to our Registration Statement on Form 20-F filed  on July 23, 2007 (File No. 1-15224))                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                          |
| 4.20   |   | Summary of Indenture  Covering the Second Issuance of Debentures, dated December 19, 2007,  between CEMIG Distribuição S.A. and BB Banco de Investimento S.A.                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                          |
| 4.21   |   | Summary of Indenture  Covering the Second Issuance of Commercial Paper Securities, dated  December 21, 2007, between CEMIG Geração e Transmissão S.A. and Caixa  Econômica Federal.                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                          |
| 8      |   | List of Subsidiaries (incorporated by reference to  Exhibit 8 to our Annual Report on Form 20-F filed on  May 25, 2005 (File No. 1-15224)).                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                          |
| 11     |   | Code of Ethics (incorporated by reference to  Exhibit 11 to our Annual Report on Form 20-F filed on  July 1, 2004 (File No. 1-15224)).                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                          |
| 12.1   |   | Chief Executive Officer Certification pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002, dated June 30, 2008.                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                          |
| 12.2   |   | Chief Financial Officer, Investor Relations Officer  and Control of Holding Officer Certification pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002, dated June 30, 2008.                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                          |
| 13.1   |   | Chief Executive Officer Certification pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002, dated June 30, 2008.                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                          |
| 13.2   |   | Chief Financial Officer, Investor Relations Officer  and Control of Holding Officer Certification pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002, dated June 30, 2008.                                                                                                                                                                                  |

 

141

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**SIGNATURES**

 

The registrant herebycertifies that it meets all of the requirements for filing on Form 20-Fand that it has duly caused and authorized the undersigned to sign this annualreport on its behalf.

 
|   | COMPANHIA ENERGÉTICA DE MINAS   GERAIS – CEMIG |
|--------|----------------------------------------------------------|
|   |                                                     |   |
|   | By:                                                      | /s/ Djalma Bastos de Morais |
|   | Name:                                                    | Djalma Bastos de Morais |
|   | Title:                                                   | Chief Executive Officer |

 

 

Date:  June 30, 2008

 

142

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** **

**ANNEX A**

** **

**THE BRAZILIAN POWER INDUSTRY**

** **

**The Brazilian Electricity System Overview**

** **

Brazil’s system of electricity production and transmission is alarge-scale hydroelectric and thermal system made up predominantly ofhydroelectric power stations, with multiple owners. The *Sistema Interligado Nacional — SIN* (theNational Interlinked System), or the Brazilian Grid, is comprised of companiesin the southern, southeastern, center-west, and northeastern regions and partof the northern region of Brazil. Only 3.0% of the country’s electricityproduction capacity is outside the National Grid, in small isolated systemslocated mainly in the Amazon region.

 

Since the electricity system has been growing at a high rate in termsof both generation and transmission, the process of integration is advancingfast, and its operational complexity is growing proportionately.

 

Brazil’s abundant hydrological resources are managed through storagereservoirs. It is estimated that Brazil has a hydroelectric power generationpotential close to 246,621 MW, of which only 29% has been developed, accordingto the Energy Research Company, or EPE.

 

The table below shows the installed capacity of electric powergeneration in the interconnected power system (excluding non-connected systemsand self-production capacities), divided into hydroelectric and thermoelectricgeneration capacity, from 1991 through 2007 in MW.

 

 
| **Year** | ** ** | **Hydroelectric** | ** ** | **Thermoelectric** | ** ** | **Proinfa(*)** | ** ** |
|----------|------------|-------------------|------------|--------------------|------------|----------------|------------|
| 1991     |       | 45,808            |       | 3,789              |       | —         |       |
| 1992     |       | 46,995            |       | 3,672              |       | —         |       |
| 1993     |       | 47,834            |       | 3,514              |       | —         |       |
| 1994     |       | 49,136            |       | 3,490              |       | —         |       |
| 1995     |       | 50,582            |       | 3,490              |       | —         |       |
| 1996     |       | 52,266            |       | 3,724              |       | —         |       |
| 1997     |       | 53,664            |       | 3,730              |       | —         |       |
| 1998     |       | 55,519            |       | 3,903              |       | —         |       |
| 1999     |       | 57,724            |       | 4,135              |       | —         |       |
| 2000     |       | 59,452            |       | 6,217              |       | —         |       |
| 2001     |       | 61,044            |       | 7,096              |       | —         |       |
| 2002     |       | 63,739            |       | 10,223             |       | —         |       |
| 2003     |       | 66,321            |       | 11,000             |       | —         |       |
| 2004     |       | 67,012            |       | 12,090             |       | —         |       |
| 2005     |       | 69,760            |       | 12,363             |       | —         |       |
| 2006     |       | 71,411            |       | 12,701             |       | 612            | (**)       |
| 2007     |       | 75,656            |       | 13,115             |       | 1,021          |       |

 

Sources : National SystemOperator- ONS, Annual Energy Planning

 

----

(*)                                 Proinfa— the Program to Support Alternative Electricity Sources — was created to workwith the Mining and Energy Ministry (MME) by Law 10348 of April 26, 2002.Its purpose is to help diversify Brazil’s sources of energy, and also to seekregional solutions through advantageous economic use of renewable sources,using available resources and applicable technologies. Initially the aim is toincrease the proportional contribution to the National Grid System ofelectricity output produced from wind energy by Small Hydroelectric Plants(PCHs) and from biomass.

(**)                          SmallHydroelectric Plant – SHP, Small Thermal Plant – STP and Wind Power Plants

 

Brazil has an installed capacity in the interconnected power system of89.79 GW, approximately 85% of which is hydroelectric. This installed capacityincludes half of the installed capacity of Itaipu — 14,000 MW owned equally byBrazil and Paraguay. According to data from the National System Operator — ONS,Brazil’s installed capacity is projected to increase to 

 

A-1

----

 

approximately101.703 GW by 2012, of which 20% is projected to be thermoelectric and 80% isprojected to be hydroelectric. There are approximately 49,723 miles oftransmission lines with voltages equal to or higher than 230 kV in Brazil.

 

Approximately 35% of Brazil’s installed generating capacity and 64% ofBrazil’s high voltage transmission lines are operated by Centrais ElétricasBrasileiras S.A., or Eletrobrás, a company owned by the federal government ofBrazil, or the Federal Government. Eletrobrás has historically been responsiblefor implementing electric policy, conservation and environmental managementprograms. It controls five subsidiaries responsible for the generation,transmission and distribution of electricity in the north, northeast andsoutheast of Brazil: Centrais Elétricas do Norte do Brasil S.A., orEletronorte; Companhia Hidroelétrica do São Francisco, or CHESF; FurnasCentrais Elétricas S.A., or Furnas; Companhia de Geração Térmica de EnergiaElétrica — CGTEE and Empresa Transmissora de Energia Elétrica do Sul do BrasilS.A. — Eletrosul;  As a result of therestructuring of the Brazilian electric sector, however, these federally—ownedcompanies have been changing their roles from regional development utilities togeneration and/or transmission companies acting in a competitive market.Eletrobrás also controls Eletrobrás Termonuclear S.A., or Eletronuclear, acompany formed following a partial split-up of Furnas. The remaining highvoltage transmission lines are owned by state-controlled electric powercompanies. Distribution is conducted by approximately 60 state or localutilities, a majority of which have been privatized by the Federal Governmentor state governments.

 

*Electricity Supply and Demand*

* *

Between 1986 and 2007, the consumption of electricity in Brazil grew byapproximately 4.0% per year (from 166.7 GWh to 376.9 GWh), the number ofconsumers increased by approximately 3.4% per year (from 25,900 thousand to61,178 thousand) and the total installed capacity increased by more than 3.9%per year (from 44,953 MW to 100,346 MW). The following table sets forth thegrowth in Brazil’s energy consumption, population and growth rate of the grossdomestic product, or GDP, from 1986 through December 31, 2007.

 
| **Year** | ** ** | **Energy   Consumption   (in GWh) (4)** | ** ** | **Energy   Consumption   (% Growth)   (4)** | ** ** | **GDP  Growth (%)   (5)** | ** ** | **Population   (in millions)   (5)** | ** ** |
|----------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------------------------|------------|
| 1986     |       | 166.7                                                       |       | 10.6                                                            |       | 7.5                                 |       | 137.7                                               |       |
| 1987     |       | 181.3                                                       |       | 7.4                                                             |       | 3.5                                 |       | 140.3                                               |       |
| 1988     |       | 191.8                                                       |       | 5.8                                                             |       | (0.1                                | )          | 142.8                                               |       |
| 1989     |       | 200.5                                                       |       | 4.5                                                             |       | 3.2                                 |       | 145.2                                               |       |
| 1990     |       | 204.4                                                       |       | 2.0                                                             |       | (4.3                                | )          | 147.6                                               |       |
| 1991     |       | 213.5                                                       |       | 4.4                                                             |       | 1.0                                 |       | 149.9                                               |       |
| 1992     |       | 217.4                                                       |       | 1.8                                                             |       | (0.5                                | )          | 152.2                                               |       |
| 1993     |       | 226.2                                                       |       | 4.0                                                             |       | 4.7                                 |       | 154.5                                               |       |
| 1994     |       | 231.6                                                       |       | 2.4                                                             |       | 5.3                                 |       | 156.8                                               |       |
| 1995     |       | 248.7                                                       |       | 7.4                                                             |       | 4.4                                 |       | 159.0                                               |       |
| 1996 (1) |       | 259.3                                                       |       | 4.3                                                             |       | 2.2                                 |       | 161.2                                               |       |
| 1997     |       | 276.8                                                       |       | 6.7                                                             |       | 3.4                                 |       | 163.4                                               |       |
| 1998     |       | 287.5                                                       |       | 3.9                                                             |       | 0.0                                 |       | 165.7                                               |       |
| 1999     |       | 292.7                                                       |       | 1.8                                                             |       | 0.3                                 |       | 167.9                                               |       |
| 2000     |       | 307.5                                                       |       | 5.1                                                             |       | 4.3                                 |       | 170.0                                               |       |
| 2001     |       | 283.3                                                       |       | (7.9                                                            | )          | 1.3                                 |       | 172.4                                               | (2)        |
| 2002     |       | 290.5                                                       |       | 2.5                                                             |       | 2.7                                 |       | 174.6                                               | (2)        |
| 2003     |       | 307.0                                                       |       | 5.7                                                             |       | 1.1                                 |       | 176.9                                               | (2)        |
| 2004     |       | 320.8                                                       |       | 4.5                                                             |       | 5.7                                 |       | 181.6                                               | (2)        |
| 2005     |       | 334.6                                                       |       | 4.3                                                             |       | 3.2                                 |       | 184.2                                               | (2)        |
| 2006     |       | 357.5                                                       |       | 3.5                                                             |       | 3.8                                 |       | 187.0                                               | (2)        |
| 2007     |       | 376.9                                                       | (4)        | 5.4                                                             |       | 5.4                                 |       | 184.0                                               | (3)        |

 

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| (1) |   | Figures were  changed in the data series from 1996 to 2006, due to a new method of  calculation for GDP introduced by the IBGE (Brazilian Statistics Institute).  In 2007, according IBGE’s revision, GDP growth for the period 1993-1995, 2005  and 2006 changed. |
|-----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | IBGE forecast                                                                                                                                                                                                                                                           |

 

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| (3) |   | IBGE 2007 – Population  Count                                              |
|-----|--------|---------------------------------------------------------------------------------|
| (4) |   | EPE (Energy Research  Company), linked to the Mining and Energy Ministry (MME). |

 

Between 1986 and the end of 2007, consumption of electricity in Brazilgenerally grew at a faster rate than Brazil’s GDP, with the exception of 1993and 1994, during which labor intensive industries lowered their output. Even inyears in which the GDP had negative growth, electricity consumption increased.Overall electricity consumption growth averaged 5.6% per year from 1970 to2007. According to the energy consumption forecast studies of EPE (EnergyResearch Company) for the 2007 Planning Cycle, the Brazilian consumption growthrate should reach an average of 5.0% per year for the next -five-year period.The following table illustrates the forecasted breakdown of the consumptiongrowth rate per region:

 
| **Period** | ** ** | **North   Integrated** | ** ** | **Northeast   Integrated** | ** ** | **Southeast/   Midwest   Integrated** | ** ** | **South   Integrated** | ** ** | **Brazilian   Average** | ** ** |
|------------|------------|-----------------------------|------------|---------------------------------|------------|-------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| 2007-2012  |       | 5.8                         | %          | 5.3                             | %          | 4.4                                             | %          | 5.0                         | %          | 4.8                          | %          |

 

----

Source: —EPE — PlanningCycle 2007

 

The following tableprovides information on the risks of an energy deficit of more than 5% of themarket of each subsystem in the south, southeast-center-west, north andnortheast regions in the coming years.

 
| ** **        | ** ** | **Probability of Electricity Shortfalls (%)** | ** ** |
|-------------------|------------|-------------------------------------------------------------------|------------|
| **Region**        | ** ** | **2008**                                                          | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** |
| South             |       | 6.3                                                               |       | 9.1 |   | 5.4 |   | 6.9 |   | 5.9 |   |
| Southeast/Midwest |       | 5.8                                                               |       | 8.8 |   | 4.6 |   | 6.6 |   | 5.5 |   |
| North             |       | 11.6                                                              |       | 7.1 |   | 4.4 |   | 5.5 |   | 3.3 |   |
| Northeast         |       | 8.7                                                               |       | 8.7 |   | 4.6 |   | 5.9 |   | 3.8 |   |

 

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Source: National SystemOperator — ONS, Monthly Operation Planning, January 2008

 

The increase in the risk of an energy deficit to more than 5% in 2008,shown in the above table, is due to exclusion from the study of part of thecapacity of some natural gas thermal power plants that did not have sufficientfuel to generate energy, based on the test made by the National SystemOperator, in December 2006. In the forthcoming years, the Braziliancompanies that supply oil and natural gas will have a challenge in building thesupply of natural gas to meet the needs of the thermal power plants and othersconsumers of natural gas. In April 2007 Petrobras proposed a plan toincrease the production of natural gas, and import LNG, to build the supply ofnatural gas to meet the needs of the consumption that is forecast. This planaims to supply the entire needs of the thermal power plants until 2010.

 

The risks shown in the above table are the result of the operationsdecision that resulted in the recovery of the reservoir levels in connectionwith the increase of the thermal generation during the first three months of2008.  As a result, in 2008 the capacityto meet the load is completely guaranteed, and the risks of a deficit in thenext years are approximately 5%.

 

**Historical Background**

** **

The Brazilian Constitution provides that the development, use and saleof energy may be undertaken directly by the Federal Government or indirectlythrough the granting of concessions, permissions or authorizations.Historically, the Brazilian power industry has been dominated by generation,transmission and distribution concessionaires controlled by the Federal andState Governments. In recent years, the Federal Government has taken a numberof measures to restructure the power industry. In general, these measures wereaimed at increasing the role of private investment and eliminating foreigninvestment restrictions, thus increasing overall competition in the powerindustry.

 

In particular, the Federal Government has taken the following measures:

 

·                                          In1990, the Federal Government created the National Privatization Program aimedat transferring certain companies controlled by it to the private sector,including those from the power industry.

 

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·                                          TheBrazilian Constitution was amended in 1995 to authorize foreign investment inpower generation. Prior to this amendment, all generation concessions were heldeither by a Brazilian individual or an entity controlled by Brazilianindividuals or by the Federal or State Governments.

 

·                                          TheFederal Government enacted Law No. 8,987 on February 13, 1995, or theConcessions Law, and Law No. 9,074 on July 7, 1995, or the PowerConcessions Law, that together

 
| · |   | required  that all concessions for the provision of energy-related services be granted  through public bidding processes;                                                                                                                                                                    |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                         |
| · |   | gradually  allowed certain electricity consumers with significant demand (generally  greater than 3 MW), referred to as Free Consumers, to purchase electricity  directly from suppliers holding a concession, permission or authorization;                                                  |
|   |   |                                                                                                                                                                                                                                                                                         |
| · |   | provided  for the creation of generation entities, or Independent Power Producers,  which, by means of a concession, permission or authorization, may generate  and sell all or part of their electricity to Free Consumers, distribution  concessionaires and trading agents, among others; |
|   |   |                                                                                                                                                                                                                                                                                         |
| · |   | granted  Free Consumers and electricity suppliers open access to all distribution and  transmission systems; and                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                         |
| · |   | eliminated  the need for a concession to construct and operate power projects with  capacity from 1 MW to 30 MW, or Small Hydroelectric Power Plants.                                                                                                                                        |

 

·                                          Beginningin 1995, a portion of the controlling interests held by Eletrobrás and variousstates in generation and distribution companies were sold to private investors.At the same time, certain state governments also sold their stakes in majordistribution companies. While the majority of the distribution companies havebeen privatized, most generation capacity is still controlled by Eletrobrás, bymeans of its subsidiaries Chesf, Eletronorte and Furnas.

 

·                                          In1998, the Federal Government enacted Law No. 9,648, or the Power IndustryLaw, to overhaul the basic structure of the electricity industry. The PowerIndustry Law provided for the following:

 
| · |   | the  establishment of a self-regulated body responsible for the operation of the  short-term electricity market, or the Wholesale Energy Market, which replaced  the prior system of regulated generation prices and supply contracts;                                                                                                                                                                                                                                                                                                                                                                          |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| · |   | a  requirement that distribution and generation companies enter into initial energy  supply agreements, or the Initial Contracts, generally “take or pay”  commitments, at prices and volumes approved by the Brazilian National  Electric Energy Agency — ANEEL. The main purpose of the Initial Contracts was  to ensure distribution companies have access to a stable electricity supply  at prices that guarantee a fixed rate of return for the electricity  generation companies during the transition period leading to the  establishment of a free and competitive electricity market; |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| · |   | the  creation of the National Integrated System Operator (Operador Nacional do  Sistema, or ONS), a non-profit, private entity responsible for the  operational management of the generation and transmission activities of the  interconnected power system; and                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| · |   | the  establishment of public bidding processes for concessions for the  construction and operation of power plants and transmission facilities, in  addition to the bidding process requirements under the Concessions Law and  the Power Concessions Law.                                                                                                                                                                                                                                                                                                                                                      |

 

·                                          In2001, Brazil faced a serious energy crisis that lasted until the end of thefirst quarter of 2002. As a result, the Federal Government implemented measuresthat included:

 

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·                                                aprogram for the rationing of electricity consumption in the most adverselyaffected regions, namely the southeast, central-west and northeast regions ofBrazil; and

 

·                                                thecreation of the Electricity Crisis Management Chamber (Câmara de Gestão daCrise de Energia Elétrica, or GCE), which passed a series of emergency measuresthat provided for reduced electricity consumption targets for residential,commercial and industrial consumers in the affected regions by introducingspecial rate regimes that encouraged the reduction of electricity consumption.

 

·                                          InMarch 2002, the GCE terminated the emergency measures and electricityrationing as a result of large increases in supply (due to a significant risein reservoir levels) and a moderate reduction in demand.  Accordingly, the Federal Government enacted newmeasures in April 2002 that, among other things, stipulated anextraordinary rate readjustment, or RTE, to compensate financial lossesincurred by the electricity suppliers as a result of the mandatory electricityrationing. For additional information regarding the rationing, see “Rationingand Extraordinary Rate Increases”.

 

·                                          On December 17, 2002, with the enactmentof Law 10,604, the Federal Government granted a subsidy for distributioncompanies in order to contributeto the moderation of the rates charged to low-income consumers.

 

·                                          OnMarch 15, 2004, the Federal Government enacted Law No. 10,848, or theNew Industry Model Law, in an effort to further restructure the power industrywith the ultimate goal of providing consumers with secure electricity suppliescombined with low rates. On July 30, 2004the Federal Government published Decree 5,163, governing the purchase and saleof electricity under the New Industry Model Law, as well as the granting ofauthorizations and concessions for electricity generation projects. Theseinclude rules relating to auction procedures, the form of power purchaseagreements and the method of passing costs through to final consumers.

 

**Rationing and Extraordinary Rate Increases**

** **

Below average rainfall in the years preceding 2001 resulted in lowreservoir levels and low hydroelectric capacity in the southeast, central westand northeast regions. Attempts to offset dependence on hydroelectric plantswith gas-fired thermal generation plants delayed due to regulatory and otherissues. In response to the energy shortage, on May 15, 2001, the Federal Governmentcreated the GCE to regulate and administer the program for reduction of energyconsumption to avoid the interruption of electricity supply. This program,known as the Electricity Rationing Program, established limits for energyconsumption for industrial, commercial and residential consumers, which rangedfrom a 15% to a 25% reduction in energy consumption, and lasted from June 2001until February 2002.

 

As a result of the end of the rationing measures, the FederalGovernment, through Decree No. 4,261 of June 6, 2002, terminated theGCE and created the *Câmara de Gestão do SetorElétrico* (the Electricity Sector Management Committee), or CGSE, toreplace the GCE as coordinator of the electricity sector revitalizationmeasures, and to lend support to the Federal Government with respect to relatedissues.

 

Law No. 10,438 of April 26, 2002 authorized the creation ofthe General Agreement of the Electricity Sector, which was designed to resolveissues related to the Electricity Rationing Plan by providing for compensationfor rationing-related losses to generation and distribution companies in Braziland restoring the economic equilibrium of the concession agreements, which wasthrown out of balance during the rationing period.

 

Such Law authorized an extraordinary rate increase, or RTE, applicableto final consumers that would compensate both generators and distributors forsuch rationing-related losses. The increased rates will be in force for anaverage period of 72 months beginning January 2002. The RTE also coversfinancial losses resulting from those costs that are beyond the control of thedistributor, referred to as Parcel A costs, from January 2001 to October 2001as well as losses of generators incurred as a result of payment of free energycosts above the Initial Contract average price. The RTE percentage charged forresidential consumers (excluding low-income consumers), rural consumers, publicstreet lighting and high-tension industrial consumers whose costs related toelectric energy represent at least 18% of average production cost and fulfillcertain other criteria was 2.9% and the RTE percentage charged to all otherconsumers was 7.9%, producing a weighted average increase of 5.87%.

 

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Pursuant to Law 10,438, the National Bank for Economic Development (*Banco Nacional de Desenvolvimento Econômico e Social*, orBNDES), created a special program to finance 90% of the amounts recoverable bymeans of the RTE. The loans are repayable over the rate increase collectionperiod.

 

In April 2003, the Federal Government, fearing that rate increasesmay contribute to overall inflation in Brazil, decided to delay a rate increaseto which distribution companies were entitled under ANEEL resolutions torecover intra-annual variation of Parcel A costs. On November 11, 2003,with the enactment of Law 10,792, the Federal Government implemented anemergency program designed to compensate distribution companies for the lossesincurred due to the non-consideration of the intra-annual variation of Parcel Acosts on occasion of the annual rate readjustments that took place from April 2003to April 2004. Such program guaranteed to the applicable companies a loanfrom BNDES under special conditions.

 

**Concessions**

** **

The companies or consortia that wish to build or operate facilities forgeneration, transmission or distribution of electricity in Brazil must apply tothe MME or to ANEEL, by delegation of MME, as granting authority, for aconcession, permission or authorization, as the case may be. Concessions grantrights to generate, transmit or distribute electricity in the relevantconcession area for a specified period. This period is usually 35 years for newgeneration concessions, and 30 years for new transmission or distributionconcessions. An existing concession may be renewed at the granting authority’sdiscretion.

 

The Concession Law establishes, among other things, the conditions thatthe concessionaire must comply with in rendering electricity services, theconsumer’s rights and the obligations of the concessionaire and the grantingauthority. Furthermore, the concessionaire must comply with regulations inforce governing the electricity sector. The main provisions of the ConcessionLaw are summarized as follows:

 

·                                          *Adequate service*. The concessionaire mustrender an adequate service to satisfy, among other things, regularity,continuity, efficiency, safety and accessibility of the service.

 

·                                          *Use of Land.*The concessionaire may usepublic land or request the granting authority to declare the public interest ofprivate real estate, so as to benefit the concessionaire. In such case theconcessionaire shall compensate the affected owners.

 

·                                          *Strict liability.*The concessionaire isstrictly liable for all damages arising from the performance of its servicesand caused to consumers, to third parties or to the granting authority.

 

·                                          *Changes in controlling interest*. Thegranting authority must previously approve any direct or indirect change in theconcessionaire’s controlling interest.

 

·                                          *Intervention by the Granting Authority*.The granting authority may intervene in the concession, by means of apresidential decree, to ensure the concessionaire’s adequate performance ofservices, as well as the full compliance with applicable contractual,regulatory and legal provisions incase the concessionaire fails to do so. Within 30 days after the decree date,the granting authority’s representative is required to commence anadministrative proceeding in which the concessionaire is entitled to dueprocess of law. During the term of the administrative proceeding, a personappointed by the granting authority’s decree becomes responsible for carryingon the concession. If the administrative proceeding is not completed within 180days after the decree date, the intervention ceases and the concession isreturned to the concessionaire. The concession is also returned to theconcessionaire if the granting authority’s representative decides not toterminate the concession and the concession term has not yet expired.

 

·                                          *Termination of the concession*. Theconcession termination agreement may be terminated through expropriation and/orforfeiture. Expropriation isthe early termination of a concession for reasons related to the publicinterest that must be expressly declared by law and based on publicinterest grounds. Following the expropriation, the concessionaire is entitledto receive an indemnification, which may or may not adequately compensateinvestments made by the concessionaire in expropriated assets that have notbeen fully amortized or depreciated by the time of the expropriation.Forfeiture must be declared by the granting authority after ANEEL, or MME, hasmade a final administrative ruling that the concessionaire has failed toadequately perform its obligations under the concession agreement. Theconcessionaire is entitled todue process of law in the administrative proceeding declaring the 

 

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                                                forfeiture of the concession andcan resort to the courts . The concessionaire is entitled to receive an indemnification for theinvestments made by the concessionaire in expropriated assets that have notbeen fully amortized or depreciated, after deduction of any amountscorresponding to outstanding fines and damages due by the concessionaire.

 

·                                          *Expiration.*When the concession expires,all assets, rights and privileges that are materially related to the renderingof the electricity services revert to the Brazilian government. Following theexpiration, the concessionaire isentitled to receive an indemnification for the investments made by theconcessionaire in expropriated assets that have not been fully amortizedor depreciated by the time of the expiration.

 

**Penalties**

** **

ANEEL’s Resolution 63, enacted on May 12, 2004 (which revokedResolution 318 enacted on October 6, 1998), governs the imposition ofsanctions against the operators in the electricity sector, defines conductconstituting violations of the law and classifies the appropriate penaltiesbased on the nature and gravity of the violation (including warnings, fines,temporary suspension from the right to participate in bidding procedures fornew concessions, licenses or authorizations and forfeiture). Depending on theviolation, the fines can be up to two per cent of the amount invoiced by theconcessionaires in the 12-month period preceding any assessment notice.Some infractions that may result in fines relate to the failure of the operatorto request ANEEL ́s approval in case of:

 

·                                          Executionof contracts with related parties in the cases provided by regulation;

 

·                                          Sale or assignment of the assets or revenues related to the services renderedas well as the imposition of any encumbrances (including any security, bond,guarantee, pledge and mortgage) on them or any other assets related to theconcession or the revenues of the electricity services; and

 

·                                          Changesin controlling interest of the holder of the authorization or concession.

 

**Principal Regulatory Authorities**

** **

*National Energy Policy Council*

* *

In August 1997, the National Energy Policy Council (*Conselho Nacional de Política Energética*, or CNPE) wascreated to advise the Brazilian president regarding the development andcreation of the national energy policy. The CNPE is presided over by the MME,and the majority of its members are officials of the Federal Government. TheCNPE was created to optimize the use of Brazil’s energy resources and to assurethe supply of electricity to the country.

 

*Ministry of Mines and Energy*

* *

The MME is the Federal Government’s primary regulator of the powerindustry. Following the adoption of the New Industry Model Law, the FederalGovernment, acting primarily through the MME, undertook certain duties thatwere previously under the responsibility of ANEEL, including the drafting ofguidelines governing the granting of concessions and the issuance of directivesgoverning the bidding process for concessions relating to public services andpublic assets.

 

*ANEEL*

* *

The Brazilian power industry is regulated by ANEEL, an independentfederal regulatory agency. After enactment of the New Industry Model Law, ANEEL’sprimary responsibility is to regulate and supervise the power industry in linewith the policy to be dictated by the MME and to respond to matters which aredelegated to it by the Federal Government and by the MME. ANEEL’s currentresponsibilities include, among others,

 

·                                          administeringconcessions for electricity generation, transmission and distributionactivities, including the approval of electricity rates;

 

·                                          enactingregulations for the electricity industry;

 

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·                                          implementingand regulating the exploitation of energy sources, including the use ofhydroelectric energy;

 

·                                          promotingthe public bidding process for new concessions;

 

·                                          settlingadministrative disputes among electricity generation entities and electricity purchasers;and

 

·                                          definingthe criteria and methodology for the determination of transmission rates.

 

*ONS*

* *

The ONS was created in 1998 as a non-profit private entity comprised ofFree Consumers and energy utilities engaged in the generation, transmission anddistribution of electricity, in addition to other private participants such asimporters and exporters. The New Industry Model Law, regulated by Decree 5,163of July 2004, and Decree 5,081 of May 14, 2004, granted the FederalGovernment the power to appoint three directors of the ONS, including theDirector-general. The primary role of the ONS is to coordinate and control thegeneration and transmission operations in the interconnected power system,subject to ANEEL’s regulation and supervision. The objectives and principalresponsibilities of the ONS include, among others:

 

·                                          planning andscheduling of the operation and the centralized dispatching of the generationin order to optimize the interconnected power system;

 

·                                          supervision andcoordination of the electric system operation centers;

 

·                                          supervision andcontrol of the national interconnected electric and energetic systems and theinternational interconnections;

 

·                                          retaining and managing of the electric energytransmission services and respective access conditions, as well as theancillary services;

 

·                                          proposing to ANEEL the expansion and reinforcement ofthe basic transmission network facilities; and

 

·                                          submitting rules for the operation of thetransmission system for ANEEL’s approval. Generators must declare theiravailability to the ONS, which then attempts to establish an optimalelectricity dispatch program.

 

The active participation of the ONS to ensure access to transmissiongrids occurs by means of contractual relationships established between the ONS,the owners of the basic transmission grid and the users of the transmissiongrid. Such contractual relationships comprise the following:

 

·                                          the*Contratode Prestação de Serviços de Transmissão*(Operating Agreement)*,*a contract entered into by the ONS withthe concessionaires which regulates the technical and financial terms forengaging in transmission activities;

 

·                                          the*Contrato de Uso do Sistema de Transmissão*(GridUtilization Contract), a contract entered into by the ONS and the transmissiongrid users that regulates the use of the Brazilian grid, as well as proceduresfor invoicing and payment);

 

·                                          the*Contrato de Constituição de Garantia*(GuaranteeContract, or CCG)*,*a contractwhich gives the ONS access to available funds in banks accounts designated bytransmission grid users for the purpose of providing funds in case such usersfail to make their monthly payments to the concessionaires;

 

·                                          the*Contrato de Conexão à Rede Básica*(ConnectionContract)*,*a contract between theconcessionaires and the transmission grid users which establishes the technicalterms required to connect to the Brazilian grid; and

 

·                                          the*Contrato de Compartilhamento de Instalações*(InfrastructureSharing Agreement)*,*a contractbetween the concessionaires for the sharing of the Brazilian grid facilities.

 

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* *

*Wholesale Energy Market and its successor, the EnergyTrading Chamber – CCEE*

* *

Originally a self-regulated entity, theWholesale Energy Market became subject to the authorization, supervision andregulation of ANEEL in 2002. Participants in the Wholesale Energy Marketinclude all of the large energy generating entities, distribution agents,importers and exporters of electricity and other entities authorized by ANEELto trade electric energy, or Energy Traders. Smaller generation entities arealso eligible to participate in the Wholesale Energy Market.

 

On August 12, 2004, the Federal Governmentenacted a decree setting forth the regulations applicable to the new EnergyTrading Chamber (*Câmara de Comercializaçãode Energia Elétrica*), or CCEE and, accordingly, on November 10,2004 the Wholesale Energy Market was substituted by CCEE and its activities andassets were absorbed by this new entity. One of the main roles of the CCEE is to conduct public auctions in theregulated market, including the auction of existing electricity and newelectricity. Additionally, the CCEE is responsible, among other things, for (1) registeringthe volume of all the energy purchase agreements within the regulated market (*Contratos de Comercialização de Energia no AmbienteRegulado*), or CCEAR, and the agreements resulting from the freemarket, and (2) the accounting for and clearing of short-termtransactions.

 

Under the New Industry Model Law, the price ofelectricity bought or sold in the spot market, known as the Price ofLiquidation of Differences (*Preço deLiquidação de Diferenças*), or PLD, will take into account factorssimilar to the ones used to determine the Wholesale Energy Market spot pricesprior to the New Industry Model Law. Among these factors, the variation of thePLD will be mainly linked to the equilibrium between the market supply anddemand for electricity as well as the impact that any variation on thisequilibrium may have on the optimal use of the electricity generation resourcesby the ONS.

 

The CCEE is comprised of power generation,distribution, trading agents and free consumers, and its board of directors iscomprised of four members appointed by these agents and one by the MME, who isthe Chairman of the board of directors.

 

*Energy Research Company – EPE*

* *

On August 16, 2004, the FederalGovernment enacted the decree that created the Electricity ResearchCompany, or EPE,**a state-ownedcompany, which is responsible for conducting strategic research on the energyindustry, including, among others, electric energy, oil, gas, coal andrenewable energy sources. EPE is responsible for (i) studying projectionsof the Brazilian energy matrix, (ii) preparing and publishing the nationalenergy balance, (iii) identifying and quantifying energy resources and (iv) obtainingthe required environmental licenses for new generation concessionaires. The research carried out by EPE will be used tosubsidize MME in its policymaking role in the domestic energy industry. EPE isalso responsible for approving the technical qualification of new electricenergy projects to be included in the related auctions.

 

*TheElectricity Sector Monitoring Committee (CMSE)*

* *

Decree 5,175 dated August 9, 2004 establishedthe Electricity Sector Monitoring Committee, or CMSE, which acts underthe direction of the MME. The CMSE is responsible for monitoring and permanently evaluating the continuity and security of theelectricity supply conditions and for indicating necessary steps to correctidentified problems.

 

**Independent Power Producer**

** **

An Independent Power Producer, or IPP, is a legalentity or a consortium which is granted an authorization or concession togenerate electric energy at its own account and risk.

 

An IPP may sell energy to (i) distributioncompanies by means of public auctions held by ANEEL or CCEE upon termination ofthe existing contracts, (ii) consumers with a demand of at least 3MWsupplied at a voltage level equal to or greater than 69 kV, (iii) newconsumers with a demand of at least 3MW supplied at any voltage, (iv) consumerswho are part of an industrial or commercial complex to which the IPP alsosupplies steam or some other by-product resulting from the co-generationprocess, (v) any group of consumers subject to agreement with the localdistribution concessionaire, and (vi) any consumer to which the localdistribution concessionaire is unable to supply energy prior to 180 days afteran initial request.

 

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** **

**Free Consumers**

** **

Law No. 9,074 of July 7, 1995, as amendedby Law Nos. 9,648/98 and 10,848/04, partially abolished the exclusivity ofsupply of electricity that distribution concession holders had previouslyenjoyed within their concession areas. Consumers that qualify as Free Consumersmay choose their energy supply between generators and traders of electricity.Currently, such consumers are the ones (i) connected prior to July 1995with a demand equal to or greater than 3 MW, supplied at a voltage level equalto or greater than 69 kV or (ii) connected after July 1995 with ademand equal to or greater than 3 MW, supplied at any voltage level or (iii) thatconsume between 500kW and 3MW if they choose to purchase their energyfrom renewable energy sources, such as small hydroelectric facilities orbiomass, also referred to as “special consumers”.  On December 21, 2006, ANEEL issuedResolution 247, which regulates activities related to special consumers.

 

Law No. 10,848prevents distribution companies from selling power to Free Consumers at freelynegotiated prices. Supply to captive consumers must be made only at regulatedrates. In order to exercise the option to be a Free Consumer, a consumer thatcomplies with the legal requirements and does not have a previously agreed termin the contract with the local distributor must deliver a prior notice to suchconcessionaire, not exceeding 36 months, unless the distributionconcessionaire, at its discretion, agrees to a shorter term. Law No. 10,848exceptionally allows that, until December 31, 2009, those consumers thatintend to become self-producers of power or even IPPs may do so upon deliveryof a written notice to the supplier, at least 180 days in advance.

 

Additionally,those who choose to be Free Consumers may only return to the status of captiveconsumers, i.e., to be once again subject to regulated rates, upon a five-yearprior communication to the local distribution company, unless such company, atits discretion, agrees to a shorter term. With the publication of Decree 5,163,of July 30, 2004, Free Consumers became subject to penalties if they donot contract all of their demand under the so-called “bilateral” contracts.Also, under the new market rules, Free Consumers are obliged to join andsubscribe to the CCEE. Presidential Decree 4,413 and ANEEL’s Resolution 665, ofNovember of 2002, set directives for the separation of the wholesalesupply contracts of large electricity consumers whose supply voltage is 2.3 kVor higher. Such legislation determined that these large electricity consumerssplit their current supply contracts into three types: (i) a supplyagreement, (ii) a main transmission grid connection and use agreement and (iii) adistribution grid connection and use agreement. The deadlines established forcompliance with this resolution are (i) July 1, 2003, for thoseconsumers whose purchased demand is higher than 3 MW, (ii) July 1,2004, for those consumers whose purchased demand is higher than 1 MW and (iii) July 1,2005, for all other consumers.

 

**Ownership Limitations**

** **

In 2000, ANEEL established new limits on the concentration of certainservices and activities within the power industry. Under these limits, with theexception of companies participating in the National Privatization Program(which need only comply with such limits once their final corporaterestructuring is accomplished) no power company (including both its controllingand controlled companies) may (1) own more than 20% of Brazil’s installedcapacity, 25% of the installed capacity of the South/Southeast/Central-Westregion or 35% of the installed capacity of the North/Northeast region, exceptif such percentage corresponds to the installed capacity of a single generationplant, (2) own more than 20% of Brazil’s distribution market, 25% of theSouth/Southeast/Central-West distribution market or 35% of the North/Northeastdistribution market, except in the event of an increase in the distribution ofelectricity exceeding the national or regional growth rates or (3) ownmore than 20% of Brazil’s trading market with final consumers, 20% of Brazil’strading market with non-final consumers or 25% of the sum of the abovepercentages.

 

On February 6, 2007 ANEEL issued Resolution No. 252, whichrevoked some of the above mentioned limits on the concentration of certainservices and activities within the power industry.  Resolution No. 252 revoked the limitsapplicable to power companies owning installed capacity in Brazil, as describedin item (1) above. The limits applicable to the distribution and tradingmarkets pursuant to (2) and (3) above remain in force.

 

**Incentives for Alternatives Sources of Power**

** **

In 2000, a federal decree created the Thermoelectric Priority Program (*Programa Prioritário de Termeletricidade*, or PPT), forpurposes of diversifying the Brazilian energy matrix and decreasing its strongdependency on hydroelectric plants. The benefits granted to thermoelectricplants under the PPT include (1) guaranteed gas supply for 20 years, (2) assuranceof the application of the normative value by distribution companies whopurchase their electricity for 20 years, according to regulation from ANEEL,thereby assuring that costs related to the acquisition of the electricityproduced by thermoelectric plants will be transferred to rates and (3) guaranteedaccess to a BNDES special financing program for the power industry.

 

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In 2002, the Proinfa Program was established by the Federal Governmentto create certain incentives for the development of alternative sources ofenergy, such as wind energy projects, Small Hydroelectric Power Plants andbiomass projects. Under the Proinfa Program, Eletrobrás will purchase theelectricity generated by these alternative sources for a period of 20 years and will pass iton to distributors. In its initial phase, the Proinfa Program is limitedto a total contracted capacity of 3,300 MW. Projects seeking to qualify for thebenefits offered by the Proinfa Program must be fully operational by December 31,2008.

 

Law 9,427/96, as amended by Law 10,762/03, further established thathydroelectric plants with installed capacity of 1,000 kW or less, generationplants classified as small hydroelectric plants, and those with qualifyingsolar, wind, biomass or cogeneration sources with installed capacity of 30,000kW or less, used for independent production or self-production, will have theright to a discount of 50% on the rates for use of the transmission anddistribution systems, charged on production and consumption of the energy sold.This article of the law was regulated by ANEEL through its Resolutions077/2004,********247/2006 and 271/2007.****

 

**Regulatory Charges**

** **

In certain circumstances, power companies are compensated for assetsused in connection with a concession if the concession is eventually revoked oris not renewed. In 1971, the Brazilian Congress created a Global Reversion Fund(*Reserva Global de Reversão*, or RGR Fund)designed to provide funds for such compensation. In February 1999, ANEELrevised the assessment of a fee requiring all distributors and certaingenerators operating under public service regimes to make monthly contributionsto the RGR Fund at an annual rate equal to 2.5% of the company’s fixed assetsin service, but not to exceed 3.0% of total operating revenues in any year. Inrecent years, the RGR Fund has been used principally to finance generation anddistribution projects. The RGR Fund is scheduled to be phased out by 2010, andANEEL is required to revise the rate so that the consumer will receive somebenefit from the termination of the RGR Fund.

 

The Federal Government has imposed a fee on IPPs reliant onhydrological resources, except for small Hydroelectric Power Plants andgenerators under the public services regime, similar to the fee levied onpublic-industry companies in connection with the RGR Fund.  IPPs are required to make contributions tothe Public Use Fund (*Fundo de Uso de BemPúblico*, or UBP Fund) according to the rules of thecorresponding public bidding process for the granting of concessions.Eletrobrás received the UBP Fund payments until December 31, 2002. Allpayments to the UBP Fund since December 31, 2002 are paid directly to theFederal Government.

 

Distribution companies must contribute to the Fuel Consumption Account(*Conta de Consumo de Combustível*, or CCCAccount). The CCC Account was created in 1973 to generate financial reserves tocover elevated costs associated with the increased use of thermoelectric energyplants, in the event of a rainfall shortage, given the higher marginaloperating costs of thermoelectric energy plants compared to hydroelectricenergy plants. Each energy company is required to contribute annually to theCCC Account. The annual contributions are calculated on the basis of estimatesof the cost of fuel needed by the thermoelectric energy plants in the followingyear. The CCC Account, in turn, reimburses energy companies for a substantialportion of the fuel costs of their thermoelectric energy plants. The CCCAccount is administered by Eletrobrás.

 

In February 1998, the Federal Government provided for the phasingout of the CCC Account. Subsidies from the CCC Account will be phased out overa three-year period beginning in 2003 for thermoelectric energy plantsconstructed prior to February 1998 and currently belonging to theInterconnected Power System. Thermoelectric energy plants constructed afterthat date will not be entitled to subsidies from the CCC Account. In April 2002,the Federal Government established that subsidies from the CCC Account wouldcontinue to be paid to those thermoelectric plants located in isolated systemsfor a period of 20 years in order to promote generation of electricity in theseregions.

 

With the exception of Small Hydroelectric Power Plants, allhydroelectric utilities in Brazil must pay fees to Brazilian states andmunicipalities for the use of hydrological resources. Such amounts are based onthe amount of electricity generated by each utility and are paid to the statesand municipalities where the plant or the plant’s reservoir is located.

 

In 2002, the Federal Government instituted the Energy DevelopmentAccount (*Conta de Desenvolvimento Energético*, orCDE), which is funded through annual payments made by concessionaires for theuse of public assets, penalties and fines imposed by ANEEL and, since 2003, theannual fees to be paid by agents offering electricity to final consumers, bymeans of a charge to be added to the rates for the use of the transmission anddistribution systems. These fees are adjusted annually. The CDE was created tosupport the (1) development of electricity production throughout thecountry, (2) production of electricity by alternative energy sources and (3) universalizationof energy services throughout Brazil. The CDE shall be in effect for 25 yearsand shall be managed by Eletrobrás.

 

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The New Industry Model Law establishes that the failure to pay thecontribution to RGR, Proinfa Program, the CDE, the CCC Account, or payments dueby virtue of purchase of electricity in the regulated market will prevent thenon-paying party from receiving a rate readjustment (except for anextraordinary revision) or receiving resources arising from the RGR, CDE or CCCAccounts.

 

**Energy Reallocation Mechanism**

** **

Under the Wholesale Energy Market, protection from hydrological risksfor centrally dispatched hydrogenerators is provided through an EnergyReallocation Mechanism, or ERM, which attempts to mitigate the risks involvedin the generation of hydrological electricity by mandating that hydrogeneratorsshare the hydrological risks of the Interconnected Power System. According toBrazilian Law, the revenue arising from the sale of energy by generators doesnot depend on the energy effectively generated by them, but rather on theAssured Energy (the “Effective Power,” a reference amount of electricityestablished by the MME in accordance with studies conducted by the ONS) of eachnew plant, which is determined by the government in each relevant concessionagreement. Any imbalances between the energy actually generated and the AssuredEnergy is covered by the ERM. The purpose of the ERM is to mitigatehydrological risks, guaranteeing that all participant plants in the ERM receiverevenue related to their Assured Energy, irrespectively of the volume of energygenerated by them. In other words, the ERM reallocated the energy, transferringsurplus energy from those who generated in excess of their Assured Energy tothose who generated less than their Assured Energy. However, it is possiblethat this reallocation may correspond to an amount less than 100% of theAssured Energy of the participant plant and, if all the Assured Energy has beensold through long-term contracts, the participant plants would then be exposedto the short-term market, paying for the balance at the PLD Price (theDifferences Settlement Price). Such a situation may happen, as periods ofdrought could lead to a reduction of the hydro generating capacity of theBrazilian system as a whole. In this case, the ERM mechanism will not be ableto guarantee the Assured Energy to all hydro producers. As a result, we wouldbe forced to buy energy in the wholesale market to meet the selling contractswe have made.

 

**Rates for the Use of the Distribution and TransmissionSystems**

** **

ANEEL oversees rate regulations that govern access to the distributionand transmission systems and establish rates (i) for the use of the localdistribution grid, or Distribution Usage Rates (“TUSD”), and (ii) for theuse of the interconnected transmission grid, or Transmission Usage Rates (“TUST”).Additionally, distribution companies of the South/South-East interconnectedsystem pay specific charges for the transmission of electricity generated atItaipu. In recent years, the Federal Government has had a goal of improving thenational transmission system, and as a result, certain transmission companieshave engaged in significant expansion programs, which have been paid for byincreases in transmission rates and charges. The increase in transmission ratesand charges paid by distribution concessionaires are passed on to theirrespective consumers through Annual Rate Adjustments. The following is asummary of each rate or charge:

 

*TUSD*

* *

The TUSD is paid by generation companies, distribution concessionaireswhich use the distribution grid of others and Free Consumers for the use of thedistribution system of the distribution concessionaire to which they areconnected and are revised annually according to an inflation index andinvestments made by the distributors in the preceding year for the maintenanceand expansion of the grid. The amount to be paid by the user connected to thedistribution system is calculated by multiplying the amount of electricitycontracted with the distribution concessionaire for each connection point, inkW, by the rate in R$/kW which is set by ANEEL.

 

*TUST*

* *

The TUST is paid by generation companies and Free Consumers for the useof the basic transmission grid to which they are connected and are readjustedannually according to an inflation index and the annual revenue of thetransmission companies adjustment. According to criteria established by ANEEL,owners of the different parts of the transmission grid have transferred thecoordination of their facilities to the ONS in return for receiving regulatedpayments from the transmission system users. Network users, includinggeneration companies, distribution companies and Free Consumers, have signedcontracts with the ONS entitling them to use the transmission grid in returnfor the payment of published rates. Other parts of the grid that are owned bytransmission companies but which are not considered part of the transmissiongrid are made available directly to the interested users who pay a specifiedfee.

 

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The TUST is currently based on the nodal costs calculated according tothe long-range incremental costs methodology. Regulation by ANEEL changed thecurrent criteria for determination of the TUST so that the physical location ofthe users of the transmission grid (near or far from the center of load) wastaken into consideration. This change did not affect CEMIG Generation andTransmission.

 

In accordance with Law 9,648/98 power purchase contracts, known asInitial Contracts, have being reduced 25% since 2002. As of January, 2006,CEMIG does not have the amount of power contracted under the Initial Contracts.With this reduction the responsibility for payment of the TUST, which waspreviously paid by the distribution companies, has been transferred togeneration companies. Generation companies are paying transmission charges onthe basis of the amount of power demand sold to consumers. Charges for loadwill be determined on the basis of maximum use of the transmission systemduring periods of peak usage.

 

**ANEEL Inspection Charge**

* *

Energy Services Inspection Charge (TFSEE) was instituted by Law No. 9,427/96and is regulated by Decree No. 2,410/97. TFSEE is an annual tax calculatedbased on the type of service (including independent production), and isproportional to the size of the concession, permission or authorization. TheTFSEE is limited to 0.5% of the annual economic benefit earned by theconcessionaire, permit holder or authorized party and must be paid directly to ANEELin twelve monthly installments.

 

#### *Distribution*

####  

Until early 1993, two important principles dominated the rate-settingprocess in Brazil: (i) that electric utilities should be guaranteed anannual real rate of return of between 10% and 12%, known as the guaranteedreturn, on service-related assets included in the rate base and (ii) thatthe rates charged to each class of consumer for electricity should be uniformthroughout Brazil, notwithstanding the high costs of distribution to remoteareas of the country. In cases where the rates set by the Federal Governmentresulted in returns below 10% or above 12%, shortfalls or excesses werecredited or debited to each company’s CRC Account. In general, until 1975,rates were set at levels that afforded the guaranteed return to companies inthe sector. From 1975 through early 1993, however, rates were fixed at levelsthat in nearly all cases did not permit electric utilities to achieve theguaranteed return because the Federal Government sought to use lower rates tocombat inflation. The practical effects of this rate-setting and compensationsystem were significant fluctuations in real terms in the level of rates duringthe period and a substantial increase in the CRC Account balances of mostutilities.

 

Legislative changes in 1993 abolished the guaranteed return concept andthe requirement that electricity rates be uniform throughout Brazil. Instead,each utility was to propose a rate structure based on its particularcircumstances for approval by federal regulatory authorities. The proposed ratewas to be calculated taking into account the concessionaire’s desired level ofremuneration as well as, among other things, operating expenditures, includingpersonnel costs, the costs of electricity purchased from other concessioncompanies, certain construction costs, depreciation and amortization charges,taxes other than income taxes and other charges. This legislation abolished theCRC Accounts and permitted concessionaires with positive CRC Account balancesto offset such balances against obligations of such concessionaires to theFederal Government, to federal financial institutions and to otherconcessionaires in the electricity sector. In connection with these regulatoryreforms, the authorities granted electric utilities significant real rateincreases and established a mechanism for automatic adjustments in rates totake account of inflation.

 

The concession agreements for distribution services executed with theFederal Government establish the maximum rates distribution concessionaires areallowed to charge their consumers.

 

Distribution rates are subject to review by ANEEL, which has theauthority to adjust and review rates in response to changes in electricitypurchase costs and market conditions. When adjusting distribution rates, ANEELdivides the costs of distribution companies between (1) costs that arebeyond the control of the distributor, or Parcel A costs, and (2) coststhat are under the control of the distributor, or Parcel B costs. The rateadjustment is based on a formula that takes into account the division of costsbetween the two categories.

 

Parcel A costs include, among others, the following:

 

·                                          costsof electricity purchased for resale pursuant to Initial Contracts;

 

·                                          costsof electricity purchased pursuant to bilateral agreements that are freelynegotiated between parties; and

 

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·                                          certainother charges for the transmission and distribution systems.

 

The pass-through of electricity purchase costs undersupply agreements negotiated before the enactment of the New Industry Model Lawis subject to a ceiling based on a normative value established by ANEEL foreach different source of energy (such as hydroelectric, thermoelectric andalternative sources of energy). The normative value applied to the supplycontracts is adjusted annually in order to reflect increases in costs incurredby generators. Such adjustment takes into account (1) inflation, (2) costsincurred in hard currency and (3) fuel related costs (such as supply ofnatural gas). Costs incurred in IGP-M shall correspond to at least 25% of allcosts incurred by generators.

 

Parcel B costs are those that are within our control and include, amongothers:

 

·                                          return on investment related to the concession areaand its expansion;

 

·                                          taxes on revenue;

 

·                                          depreciation costs; and

 

·                                          operation and maintenance costs of the distributionsystem.

 

Each distribution company’s concession agreement provides for an annualrate adjustment (*reajuste I*). In general, Parcel Acosts are fully passed through to consumers. Parcel B costs, however, arerestated for inflation in accordance with General Market Price Index (IndiceGeral de Preços do Mercado), or IGP-M index, adjustedby an X Factor.Electricity distribution companies, according to theirconcession contracts, are also entitled to periodic revisions (*revisão periódica*) every few years. These revisions areaimed at (1) assuring necessary revenues to cover efficient Parcel Boperational costs and adequate compensation for investments deemed essentialfor the services within the scope of each such company’s concession and (2) determiningthe X factor, which is based on three components (i) Xc, which is a factor based on our consumersatisfaction as surveyed by ANEEL and is set each year; (ii) Xa, which isa factor based on the difference between the IPCA and IGP-M inflation indexesmultiplied by our total personnel costs (since our labor increases are based onthe IPCA and our tariff increases are based on the IGP-M) and is set each year;and (iii) Xe, which is a factor based on our productivity gains over afive-year period and is set every five years.

 

The X factor is used to adjust the proportion of the change in theIGP-M index that is used in the annual adjustments. Accordingly, upon thecompletion of each periodic revision, application of the X factor requiresdistribution companies to share their productivity gains with final consumers.

 

In addition, concessionaires of electricity distribution are entitledto extraordinary review of rates (*revisão extraordinária*),on a case by case basis, to ensure their financial equilibrium and compensatethem for unpredictable costs, including taxes, that significantly change theircost structure.

 

Low-income consumers benefit from a special rate established by theFederal Government (through ANEEL), subsidized by regular consumers. Since2002, the deficit generated by the application of this special rate for newlow-income consumers has been financed by Eletrobrás with funds from the RGR(Global Reversion Reserve) and the CDE (the Energy Development Account). In2002, Decree 4336/02 determined that the distribution companies would becompensated for the revenue loss resulting from the Special rate, withfunds from Eletrobrás.

 

**The New Industry Model Law**

** **

The New Industry Model Law introduced material changes to theregulation of the power industry with a view to providing incentives to privateand public entities to build and maintain generation capacity that will assurethe supply of electricity within Brazil at low rates through competitiveelectricity public bidding processes. The key features of the New IndustryModel Law include:

 

·                                          Creation of two environments for the sale ofenergy with (i) a more stable market in terms of supply of energy, so asto provide an additional guarantee of supply to captive consumers, referred toas the Regulated Contracting Environment (ACR) or regulated market; and (ii) amarket especially destined for certain participants (that is to say, FreeConsumers and selling companies) which will permit a certain degree ofcompetition in the context of the regulated market, known as the FreeContracting Environment (ACL), or free market.

 

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·                                          Restrictionson certain activities of distributors, so as to permit them to focus on theircore business to promote more efficient and reliable services to captiveconsumers.

 

·                                          Eliminationof self-dealing, in order to provide an incentive to distributors to purchaseelectricity at the lowest available prices rather then buying electricity fromrelated parties.

 

·                                          Respectfor contracts executed prior to the New Industry Model Law, in order to provideregulatory stability to transactions carried out before its enactment.

 

The New Industry Model Law also excluded Eletrobrás and itssubsidiaries from the National Privatization Program, which is a programoriginally created by the Federal Government in 1990 with a view to promote theprivatization process of state-owned companies.

 

***Challengesto the Constitutionality of the New Industry Model Law***

** **

The New IndustryModel Law is currently being challenged on constitutional grounds before theBrazilian Supreme Court. The Federal Government moved to dismiss the actionsarguing that the constitutional challenges were moot because they related to aprovisional measure that had already been converted into law. However, on August 4,2004, the Brazilian Supreme Court denied the government’s motion and decided tohear the actions and rule on their merits. On March 30th, 2005, afterthe vote by two (2) Justices in favor of a preliminary injunction tosuspend the effects of the New Industry Model Law, five (5) other Justicesvoted against such suspension and the New Industry Model is currently in fullforce and effect. In such vote, the Justices appreciated the main challenge ofthe lawsuit, which is based on the fact that the New Industry Model Law wasestablished by a Provisional Measure, instead of a Law, approved by NationalCongress. Thus a trend for the vote of the constitutionality of the NewIndustry Model Law has been demonstrated. Notwithstanding such trend, themerits of the lawsuit has not yet been appreciated and a final decision uponthe matter is subject to the favorable vote of the majority of the 11Justices, provided that a quorum of at least eight Justices must be present. Todate, the Brazilian Supreme Court has not reached a final decision upon themerits of such lawsuit and we do not know when such a decision may be reached.Therefore, the New Industry Model Law is currently in force. Regardless of theSupreme Court’s final decision, certain portions of the New Industry Model Lawrelating to restrictions on distributors performing activities unrelated to thedistribution of electricity, including sales of energy by distributors to FreeConsumers and the elimination of contracts between related parties are expectedto remain in full force and effect.

 

If all or aportion of the New Industry Model Law is determined unconstitutional by theBrazilian Supreme Court, the regulatory scheme introduced by the New IndustryModel Law may not come into effect, generating uncertainty as to how and whenthe Federal Government will be able to introduce changes to the electric energysector. We have already contracted a significant portion of our electricitycapacity and needs until 2013, and the pass-through to rates of suchelectricity is expected to continue to be governed by the regulation in effecton the date of the contract. As such, irrespective of the outcome of theSupreme Court’s decision, we believe that in the short term, the effects of anysuch decision on our activities will be limited. Nevertheless, the exact effectof an unfavorable outcome of the legal proceedings on us is difficult topredict and it could have an adverse impact on our business and results ofoperations.

 

*Coexistenceof Two Electricity**Trading Environments.*Underthe New Industry Model Law, electricity purchase and sale transactions will becarried out in two different market segments: (1) the regulated market, orthe Pool, which contemplates the purchase by distribution companies throughpublic bids of all electricity necessary to supply their consumers and (2) thefree market, which encompasses purchase of electricity by non-regulatedentities (such as the Free Consumers and energy traders).

 

The electricity arising from (1) low capacity generation projectslocated near the consumption points (such as certain co-generation plants andthe Small Hydroelectric Power Plants), (2) plants qualified under theProinfa program, as defined below,(3) Itaipu and (4) purchaseand sale agreements entered into before the New Industry Model Law,  will not be subject to the public biddingprocess for the supply of electricity to the Pool. The electricity generated byItaipu, located on the border of Brazil and Paraguay, is traded by Eletrobrásand the Federal Government, by means of ANEEL, and determines the volumes thatshall be mandatorily purchased by each distribution concessionaire. The ratesat which the Itaipu-generated electricity is traded are denominated in U.S.dollars and established by ANEEL pursuant to a treaty between Brazil andParaguay. As a consequence, Itaipu rates rise or fall in accordance with thevariation of the U.S. Dollar/real exchange rate. Changes in the price ofItaipu-generated electricity are, however, subject to the Parcel A costrecovery mechanism.

 

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* *

*The Regulated Market (the ACR)*

* *

In the regulatedmarket, distribution companies will buy purchase electricity for their captiveconsumers through public bids regulated by ANEEL and conducted by CCEE.

 

Energy purchases,will take place through two types of bilateral contract: (i) EnergyAgreements (*Contrato de Quantidade deEnergia*) to be executed with hydroelectric generating units and (ii) CapacityAgreements (*Contratos de Disponibilidade deEnergia*). Under an Energy Agreement, a generator commits to supply acertain amount of electricity and assumes the risk that electricity supplycould be adversely affected by hydrological conditions and low reservoirlevels, among other conditions, that could interrupt the supply of electricity,in which case the generator will be required to purchase the electricityelsewhere in order to comply with its supply commitments. Under a CapacityAgreement, a generator commits to make a certain amount of capacity availableto the ACR. In this case, the revenue of the generator is guaranteed and thehydrological risk is passed on to distributors. However potential additionalcosts of the distributors are passed on to consumers. Together, theseagreements comprise the energy purchase agreements in the ACR (*Contratos de Comercialização de Energia no AmbienteRegulado*), or CCEAR).

 

Under the New Industry Model Law, the estimate of demand from distributorsis the principal factor in determining how much electricity the system as awhole will contract. Under the new system, distributors are obligated tocontract 100% of their projected electricity needs, as opposed to 95% under theprevious regime.

 

The regulation under the New Industry ModelLaw stipulates that distribution companies that contract less than 100% oftheir total captive consumption may be subject to fines. There are mechanismsto reduce this possibility, such as the purchase of energy from otherdistribution companies whose energy purchases exceeded forecasted demand, orthe purchase of energy in auctions during the year. Any remaining shortfallfrom 100% of total captive consumption can be bought at the spot market priceand the concessionaire would be subject to a penalty payment equivalent to theshortfall multiplied by the reference value rate established by ANEEL. If acompany contracts more than 103% of its captive consumption, it would besubject to price risk if it sells this energy in the spot market in the future.To reduce such price risk, a company may reduce the purchase contracts in the “existingenergy” auction by up to 4% each year, and reduce those contracts due to lossof consumers that became free and are supplied by generators directly. Anysurplus may be negotiated in the spot market.

 

According to the New Industry Model Law, electricity distribution concessionaireswill be entitled to pass on to their respective consumers, in costs related toelectricity purchased through public bids, limited to the equivalent of 103% oftheir verified annual load, as well as any taxes and industry charges relatedto the public bids.

 

*The Free Market (the “ACL”)*

* *

In the free market electricity is traded between generationconcessionaires, IPPs, self-generators, energy traders, importers of energy andFree Consumers. The free market will also include existing bilateral contractsbetween generators and distributors until they expire. Upon expiration, suchcontracts must be executed under the New Industry Model Law guidelines.

 

A consumer thatis eligible to choose its supplier, known as “potentially free consumer”, andthat has a contract with a distribution company for an undetermined duration,may only be able to purchase electricity from other suppliers in the yearfollowing the declaration of its intention to terminate such contract, whichdeclaration is required to be sent to the distributor at least 15 days beforethe day such distributor is required to state its electricity needs for thenext auction, except as otherwise provided in the contract.

 

Potentially freeconsumers are those whose demand exceeds 3 MW at a voltage equal to or higherthan 69kV or at any voltage level, so long as the supply began after July 1995.In addition, consumers with contracted demand equal to or higher than 500kW ormore may be serviced by suppliers other than their local distribution companyif they move to energy from alternative energy sources, such as wind, biomassor small hydroelectric plants.

 

Once a consumer has opted for the free market, it may only return tothe regulated system once it has given the distributor of its region five yearsnotice, provided that the distributor may reduce such term at its discretion,except for special consumers, which may provide 180 days’ notice. This extendednotice period seeks to assure that, if necessary, the construction of costefficient new generation could be finalized in order to supply the re-entry ofFree Consumers into the regulated market. In addition, distributors may also reduce theamount of energy purchased according to the volume of energy that they will nolonger distribute to free consumers. 

 

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State-ownedgenerators may sell electricity to Free Consumers, but as opposed to privategenerators, they are obliged to do so through an auction process.

 

Currently, hightension consumers who purchase their electricity from distributors in theregulated market do so at a subsidized price. This subsidy, known as the “cross-subsidy,”is being gradually eliminated by ANEEL, and its full termination is scheduledfor 2007. The potentially free consumers are required to enter into separatecontracts for the connection and use of the transmission or distribution linesand for the purchase of power.

 

*Restricted Activities of Distributors*

* *

Distributors in the interconnected Brazilian grid are not permitted to (1) developactivities related to the generation or transmission of electricity, (2) sellelectricity to Free Consumers, except for those in their concession area andunder the same conditions and rates maintained with respect to captive consumersin the ACR, (3) hold, directly or indirectly, any interest in any othercompany, except interest in entities incorporated for raising,investment and management of funds necessary for the distributor or itscontrolled, controlling or under common control companies,  corporation or partnership or (4) developactivities that are unrelated to their respective concessions, except for thosepermitted by law or in the relevant concession agreement. Such requirement isalso not applicable for distributors with respect to services rendered forisolated power systems and for its own market when demand is up to 500 GWh peryear. The rationale of this requirement is to (1) preserve each concession’sidentity, enabling specific analysis of generation, transmission anddistribution activities and (2) stimulate competition in generation andtrading activities and, at the same time, to improve regulation in transmissionand distribution activities. The New Industry Model Law has granted atransition period of 18 months for companies to adjust to these rules, andANEEL can extend such term for another 18 months in the event that companiesare unable to comply with such requirements within the prescribed timeframe.

 

*Elimination of Self-Dealing*

* *

Since the purchase of electricity for captive consumers will beperformed through the ACR, so-called self-dealing, when distributors werepermitted to meet up to 30% of their electricity needs through electricity thatwas acquired from affiliated companies, is no longer permitted, except in thecontext of agreements that were duly approved by ANEEL before the enactment ofthe New Industry Model Law. Distributors may, however, make purchases fromaffiliated companies if the distributor participates in the public biddingprocess through the ACR, and the generator that bids the lowest price is anaffiliated party.

 

*Contracts Executed prior to the New Industry Model Law*

* *

The New Industry Model Law provides that the contracts executed byelectricity distribution companies and approved by ANEEL before the enactmentof the New Industry Model Law will not be amended to reflect any extension intheir terms or modification in prices or volumes of electricity alreadycontracted, with the exception of Initial Contracts, as described below.

 

During the transition period to a free and competitive energy market(1998-2006) that was established by the Power Industry Law, purchases andsales of electricity between generation and distribution concessionaires mustoccur pursuant to Initial Contracts. The purpose of the transition period wasto permit the gradual introduction of competition in the industry and toprotect market participants against exposure to potentially volatile spotmarket prices.

 

Under the Power Industry Law, electricity committed to InitialContracts is reduced by 25% each year from 2002 to 2005. Generation companieswill be allowed to trade their excess, non-contracted electricity in the ACR orin the free electricity market and may conduct public auctions to trade anynon-contracted volumes with Free Consumers or energy traders “The “Initial Contracts” expired in December 2005,and all the released energy was renegotiated in the ACR or in the ACL.

 

***Electricity Purchases under the New Industry ModelLaw***

* *

Decree 5,163/04provides that**distributors mustcontract all of their electricity demand necessary to serve 100% of theirmarkets under the guidelines of the New Industry Model Law. Electricity-sellingagents *(agentes vendedores)*mustprovide evidentiary support linking the allotted energy to be sold to existingor planned power generation facilities. Agents that do not comply with suchrequirements are subject to penalties imposed by ANEEL.

 

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Beginning in2005, all electricity distribution companies are required to notify MME, by August 1of each year, of their estimated electricity demand for each of the subsequentfive years. In addition, distribution companies will be required to specify theportion of the amount they intend to contract to supply its Potentially FreeConsumers.

 

The MME willestablish the total amount of energy to be traded in the regulated market andthe list of generation facilities that will be allowed to participate in theauctions in each year.

 

The newregulations provide for electricity distribution companies to fulfill theirelectricity supply obligations primarily through public auctions, in accordancewith the procedures described below.

 

In addition tothese auctions, a distribution company may purchase electricity:  (1) from generation companies that areconnected directly to the distribution company other than hydroelectriccompanies with capacity higher than 30MW and certain thermogenerationcompanies, (2) from electricity generation projects participating in theProinfa Program, and (3) power purchase agreement entered into before theNew Industry Model Law was enacted.

 

***EnergyAuctions in the Regulated Contracting Environment***

 

Since August 2005,all electricity distribution companies and free consumers are required to notifyMME, by August 1 of each year, of their estimated electricity demand orestimated electricity generation, as the case may be, for each of thesubsequent ten years. Each distribution company will be required to notify MME,within the 60 day period preceding each electricity auction, of the amounts ofelectricity that it intends to contract in the auction. In addition,distribution companies will be required to specify the portion of the contractedamount they intend to use to supply potentially free consumers.

 

On December 7,2004, CCEE, under the coordination of ANEEL, conducted the first existingenergy auction, under the procedures and conditions established by the NewIndustry Model Law.

 

Distributorsdelivered by December 2, 2004 their declaration of estimated contractingdemand for the next five years (including a portion related to the PotentiallyFree Consumers). Based on these declarations, the MME established the totalamount of energy to be traded in the 2004 auction. The auction was held in twophases, through an electronic system.

 

Following theconclusion of the 2004 auction, the distribution companies and sellers signedCCEARs setting forth the terms, conditions, prices and contracted amounts ofelectricity. The distributor was also required to provide security interests inconnection with the CCEARs. Generally, the seller will be granted an interestin receivables in an amount equal to 110.0% of the average amount of the lastthree invoices under the CCEAR.

 

During theauction, a total of 17,008 MW were sold, corresponding to 96.0% of thedistribution companies’ total demand, of which 9,054 MW were sold at an averageprice of R$57.51/MWh for eight-year contracts beginning in 2005; 6,782 MW weresold at an average price of R$67.33/MWh for eight-year contracts beginning in2006; and 1,172 MW were sold at an average price of R$75.46/MWh for eight-yearcontracts beginning in 2007- all prices refer to December, 2004.

 

We sold65,008,656 MWh through our generation company at an average price ofR$69.58/MWh for eight-year contracts beginning in 2006 and acquired 37,180,042MWh at an average price of R$57.51/MWh for eight-year contract beginning in2005; and 64,457,335 MWh at an average price of R$67.33/MWh for eight-yearcontracts beginning in 2006.

 

The security interests offered by the distributors to the generators inconnection with the CCEARs are usually in the form of receivables or bankcertificates of deposit. In a few cases, bank guarantees have been used.

 

The second existing energy auction under the New Industry Model Law washeld in April 2005. CemigDistributionand Cemig Generation and Transmissionentered into electricity purchase and sale contracts in this auction.During theauction, a total of 1,325 MW were sold, corresponding to only 42% of the energy initially foreseen by the MME for 2008, at anaverage price of R$83.13/MWh for eight-year contracts beginning in 2008. Theenergy to be sold with delivery initiating in 2009 was automatically excludedfrom the auction in accordance with the rules determined by MME, as theprice for this product during the auction reached a value that was below themarket expectations.

 

A-18

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Cemig Distribution purchased, to serve its market, 105 average MW incontracts with eight-year terms, with the supply starting on January 1,2008, at an average price of R$83.13/MWh. The contracts were signed with 10companies holding generation concessions, including Cemig Generation andTransmission.

 

In the same auction, Cemig Generation and Transmission sold 105 averageMW in contracts with eight-year terms, with the supply beginning on January 1,2008. The sale price of the electricity is R$83.50/MWh. The contracts weresigned with 34 distributors, including Cemig Distribution, which serveconsumers in all the regions of the Brazilian national grid system.

 

The third auction took place on October 11, 2005. It was designedfor distributors to buy the energy they were not able to buy in the previousauctions. Two products were offered: (i) a three year contract for theperiod 2006-2008 and (ii) a eight year contract beginning in 2009.The demand of 102 MW for the three year contract was fully served, and the averageprice was R$ 62.95/MWh. For the contract beginning in 2009, 1,166 MW (59% ofthe total demand for that year) were sold at an average price of R$ 94.91/MWh.Our companies did not sell or purchase energy in this auction.

 

New EnergyAuctions will be held (1) five years before the initial delivery date(referred to as “A-5” auctions), and (2) three years before theinitial delivery date (referred to as “A-3” auctions). There will also beelectricity auctions from existing power generation facilities (1) heldone year before the initial delivery date (referred to as “A-1” auctions)and (2) held no longer than four months before the delivery date (referredto as “market adjustments”), in which the total amount contracted may notexceed 1% of the distribution concessionaire’s total demand.  The invitations to bid in the auctions willbe prepared by ANEEL, in compliance with guidelines established by the MME.

 

Each generationcompany that participates in the auctions will execute a power purchaseagreement with each distribution company, in proportion to the distributioncompanies’ respective estimated demand for electricity. The only exception tothese rules relates to the market adjustment auction, where the contractswill be between specific selling and distribution companies. The CCEAR of both “A-5”and “A-3” auctions will have terms between 15 and 30 years, and the CCEARof “A-1” auctions will have a term between five and 15 years. Contractsarising from market adjustment auctions will be limited to a two-year term.

 

The first auction for the expansion of thegeneration capacity, also referred to as the “New Energy Auction”, under the NewIndustry Model Law was held in December 2005.A total of 3,286 average MW was sold, corresponding to 49 plants, 20 of whichare yet to be built, 11 hydroelectric plants and 9 thermal plants. The term ofthese contracts is 30 years for hydroelectric plants and 15 years for thermalplants, with supply to begin in 2008, 2009 and 2010.

 

As a result ofthe First New Energy Auction, Cemig Generation and Transmission has beengranted the right to construct a new 140MW hydroelectric plant, in the State ofMinas Gerais, named UHE Baguari, in a consortium with Furnas Centrais ElétricasS.A and Neoenergia. S.A.

 

CemigDistribution participated in this auction, purchasing an amount of 39.8 averageMW for initial supply in 2008, 62 average MW for initial supply in 2009, and181 average MW for initial supply in 2010, at respective average prices of R$127.15/MWh, R$ 127.77/MWh and R$ 117.11/MWh.

 

Only 855 average MW, that is to say 26% of the volume sold in the firstNew Energy Auction, actually refers to new power plants that did not have anyconcession or authorization previously granted. Of these new projects, 53% arehydroelectric. Only 70% of the purchasing needs declared by the distributorswere sold at the auction.

 

At the auction 64% of the participants were public-sector companies,Petrobras representing 38%, and Eletrobrás 20%. Of the 855 average MW of newconcessions and authorizations, only 29% of the investments are from theprivate sector.

 

One of the factors that contributed to the low participation by privateinvestors in the total amount sold at the First New Energy Auction was themaximum price stipulated by the government for contracting of hydroelectricenergy, R$116.00/MWh. Investors considered this amount to be insufficient forthe return on investment in almost all the hydroelectric plants. At the sametime, all the new projects tendered for were contracted, basically by public-sectorcompanies.

 

Brazil needs significant investments for expansion of the supply ofelectricity compatible with the demand growth. For these investments to befeasible, participation by private-sector capital is essential. In this contextthe results of the first New Energy 

 

A-19

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Auctionare not yet enough to represent attractiveness for the new model for theelectricity sector. However, the new sector regulations put in place importantmechanisms necessary for expansion of generation capacity — including long-termenergy purchase contracts.

 

In 2006, CCEE, under the coordination of ANEEL, conducted two newenergy auctions. In the second new energy auction the total amount of energysold was on average 1,682 MWs. The start date for the supply of this energy isin 2009 and recorded in 15-year (thermal plants) and 30-year (hydro plants)contracts according to the source of the energy. Only 49% of the energy sold inthis auction was from new power plants, which are still not operating. Theother 51% was from existing plants, which participated in the auction like “botox”plants. The average price of the energy sold at the auction was R$128.95/MWh.The average price for hydro was R$126.77/MWh and the average price for thermalwas R$132.39/MWh. These prices were the result of the auction’s rules whichgive a maximum price for hydroelectric plants that is less than the maximumprice for thermal plants. Cemig Generation and Transmission sold an average of355 MWs in a 30-year contract at an average price of R$125.48/MWh. The energysold is from “botox” hydro plants like Irapé, Queimado, Porto Estrela andAimorés. Cemig Distribution bought an average of 98 MWs at an average price ofR$128.12 from different sellers and different sources (hydro and thermalplants).

 

In the third new energy auction, it were sold an average of 1,104 MWsin 15-year (thermal) and 30-year (hydro) contracts each beginning in 2011. Theaverage price of this auction was R$128.90/MWh. The average hydroelectric pricewas R$120.86/MWh and an average of 569 MWs were sold fromthis source. The average thermal price was R$ 137.44/MWh and with an average of535 MWs sold from this source.  CemigGeneration and Transmission did not sell energy in this auction. CemigDistribution bought an average of 48 MW at the average price of the auction.

 

CCEE also conducted two existing energy auctions in 2006. In the fifthexisting energy auction the total amount of energy sold was 204 MW ineight-year contracts beginning in 2007. The average price of this auction wasR$ 104.74/MWh. According to the commercial strategy of the Company, CemigGeneration and Transmission and Cemig Distribution did not participate in thisauction.

 

The other existing auction was only a market adjustment auction withthree-month contracts with average sales of 10 MW. Cemig Generation andTransmission and Cemig Distribution did not participate in this auction,according to the commercial strategy.

 

In June 2007, the Electricity Trading Chamber (CCEE), under thecoordination of ANEEL, conducted the first Alternative-Sources ElectricityAuction, under procedures and conditions set by the Federal Government throughthe Mining and Energy Ministry (MME). The auction placed a total of 186 averageMW — all for supply starting in 2010, under contracts for 30 years (for SmallHydro Plants) and 15 years (for biomass, wind, and other sources). Of the totalcontracted, 75% was for supply from alternative sources (biomass) and 25% fromSmall Hydro Plants. The average price of the energy sold at this auction wasR$137.90/MWh (R$134.99/MWh for the hydroelectric product and R$138.85/MWh foralternative-sources product).

 

The total amount of power offered was about 515 average MW, of whichonly 36% was contracted. Cemig Generation and Transmission did not participatein this auction as a seller; Cemig Distribution bought 81.35 average MW, at theaverage price of the auction.

 

In July 2007 CCEE held the fourth new energy auction under thecoordination of ANEEL, under procedures and conditions set by the FederalGovernment through the Mining and Energy Ministry (MME). The auction placed atotal of 1,304 average MW — all for 15-year thermal supply contracts startingin 2010. The average price was R$134.67/MWh. Cemig Distribution bought 431.17average MW. Cemig Generation and Transmission did not sell in this auction.

 

In September 2007, CCEE conducted the sixth adjustment auctionwith two products: three-month contracts (October to December, 2007) andone-year contracts (January to December, 2008). The auction placed a totalof 6 average MW in three-month contracts, for average price of R$127.05/MWh,and 163.5 average MW in one-year contracts for average price of R$138.34/MWh.Cemig Distribution bought 3.5 average MW in one-year contracts (for 2008) atR$138.74/MWh. Cemig Generation and Transmission sold 60 average MW atR$139.04/MWh.

 

In October 2007, CCEE held the fifth auction for electricity to beproduced by new generation plants, under the coordination of ANEEL, underprocedures and conditions set by the Federal Government through the Mining andEnergy Ministry (MME). The auction placed a total of 2,312 average MW in15-year (thermal) and 30-year (hydro) contracts, all for supply starting in2012, for average price of R$128.73/MWh. From hydroelectric sources a total of715MW was sold, for R$129.14/MWh. From thermal sources a total of 1,597 averageMW was sold, for average price of R$128.37/MWh. Cemig Distribution bought182.91 average MW in both 

 

A-20

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products,for average price equal to the average price of the auction, and CemigGeneration and Transmission sold 43 average MW of hydroelectric product atR$125.90/MWh.

 

In December 2007 CCEE held the auction for the Santo Antônio HydroPower Plant, under the coordination of ANEEL, under procedures and conditionsset by the Federal Government through the Mining and Energy Ministry (MME). Theauction placed the total of 1,552.60 average MW, corresponding to 70% of thephysical guarantee of the power plant, in 30-year contracts at the price ofR$78.87/MWh. The contracts are for supply of energy from only these 2 units,starting in 2012, when the first 2 generation units will be in commercialoperation. Supply will increase together with the availability of units duringthe first 3 years until 2016, when it is expected that the total of the energysold will be completed. Cemig Distribution bought approximately 8% of thisenergy at the price of the auction.

 

***Reductionof the Level of Contracted Electricity***

 

Decree No. 5,163/04,which regulates the trade of electricity under the New Industry Model Law,allows distribution companies to reduce their CCEARs:  (1) to compensate for the exit ofPotentially Free Consumers from the regulated market, pursuant to a specificdeclaration delivered to MME, (2) by up to 4.0% per year of the initialcontracted amount due to market deviations from the estimated marketprojections, at the distribution companies’ discretion, beginning two yearsafter the initial electricity demand was declared and (3) in the event ofincreases in the amounts of electricity acquired pursuant to contracts enteredinto before March 17, 2004.

 

The circumstancesin which the reduction of the level of contracted electricity will occur willbe duly set forth in the CCEARs, and may be exercised at the sole discretion ofthe distribution company and in compliance with the provisions described aboveand ANEEL regulations.

 

Pursuant to ANEEL’sregulations, the reduction of the level of contracted energy under the CCEARsof existing energy shall be preceded by the so-called Mechanism of Compensationof Surplus and Deficits, or MCSD, by means of which distribution companieswhich have contracted energy in excess of their demand may assign a portion oftheir CCEARs to distribution companies which have contracted less energy thanneeded to meet their consumer’s demand.

 

*Limitation on Pass-Through*

* *

The rules alsolimit the pass-through of costs of electricity to final consumers. The AnnualReference Value corresponds to the weighted average of the electricity pricesin the “A-5” and “A-3” auctions, calculated for all distributioncompanies, and creates an incentive for distribution companies to contract fortheir expected electricity demands in the “A-5” auctions, where theprices are expected to be lower than in “A-3” auctions. The AnnualReference Value will be applied in the first three years of the power purchaseagreements from new power generation projects. After the fourth year, theelectricity acquisition costs from these projects will be allowed to be fullypassed-through. The decree establishes the following limitations on the abilityof distribution companies to pass through costs to consumers:

 

·                                          nopass-through of costs for electricity purchases that exceed 103% of regulatorydemand;

 

·                                          limitedpass-through of costs for electricity purchases made in an “A-3” auction,if the volume of the acquired electricity exceeds 2.0% of the demand verifiedin “A-5” auctions;

 

·                                          limitedpass-through of electricity acquisition costs from new electricity generationprojects if the volume re-contracted through CCEARs of existing generationfacilities is below a “Contracting Limit” defined by Decree No. 5,163;

 

·                                          from2005 to 2009, electricity purchases from existing facilities in the “A-1”auction is limited to 1.0% of distribution companies’ demand. If the acquiredelectricity in the “A-1” auction exceeds 1.0%, pass-through of costs ofthe exceeding portion to final consumers is limited to 70.0% of the averagevalue of such acquisition costs of electricity generated by existing generationfacilities. The MME will establish the maximum acquisition price forelectricity generated by existing projects;

 

A-21

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·                                          electricitypurchases in “market adjustment” auctions are limited to 1% of a distributionconcessionaire’s total demand and passthrough of costs is limited to annualreference value; and

 

·                                          ifdistributors fail to comply with the obligation to fully contract their demand,the pass-through of the costs from energy acquired in the short-term marketwill be the equivalent to the lower of the PLD or the Annual Reference Value.

 

*Rationing under the New Industry Model Law*

* *

The New Industry Model Law establishes that, in a situation where theFederal Government decrees a compulsory reduction in the consumption ofelectricity in a certain region, all energy amount agreements in the regulatedmarket, registered within the CCEE in which the buyer is located, shall havetheir volumes adjusted in the same proportion to the consumption reduction.

 

**Environmental Regulations**

** **

Brazilian environmental legislation requires that environmentallicenses must be obtained wherever there is construction, installation,expansion or operation of any undertaking that uses natural resources, causesenvironment degradation, pollutes or has the potential to cause degradation orpollution to the environment.

 

New generation, transmission or distribution projects or activitiesthat expand the electricity sector require a series of environmental proceduresto be complied with. Environmental impact studies are prepared bymulti-disciplinary teams, which analyze the environmental impact and proposesolutions to minimize the effects of these projects on the environment.

 

The environmental impact studies are then submitted to the federal orstate authorities for examination, and also, in public hearings, to thepopulation of the communities affected by the project.

 

The process of licensing of undertakings with significant environmentalimpact follows a three-phase procedure, in which the following licenses have tobe acquired:

 

·                                          *prior license*, attesting that the projectis environmentally viable;

 

·                                          *installation license*, enabling the work tobe built; and

 

·                                          *operation license*, for actual startup ofthe project.

 

For the following undertakings, the application must be made to thefederal environmental body:

 

·                                          thoselocated on international borders or developed in conjunction with an adjoiningcountry, or in territorial waters, on the continental shelf, in an exclusiveeconomic zone, on indigenous lands or in federal protected areas;

 

·                                          locationsor developments in more than one Brazilian state;

 

·                                          wherethe direct environmental impacts surpass the country’s territorial limits orthe limit of one or more Brazilian state; or

 

·                                          whereradioactive material is involved, or nuclear energy used.

 

Applications for the following types of project have to be made to theenvironmental bodies of the relevant Brazilian state:

 

·                                          thoselocated or developed in more than one municipality, or in state or FederalDistrict conservation areas;

 

·                                          thoselocated or developed in forests or other forms of natural vegetation subject topermanent preservation;

 

·                                          thosewhose direct environmental impacts exceed the territorial limits of one or moremunicipalities; or

 

A-22

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·                                          whendelegated, by legal instrument or agreement, by the union to the states or tothe Federal District.

 

The municipalenvironmental body, after acquiring a position statement from the competentbodies of the Federal Government, and the states or Federal District, asapplicable, gives the environmental license for projects and activities withlocal environmental impact, and for any which are delegated by the state, bylegal instrument or agreement.

 

A-23

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**Exhibit Index**

 
| **Exhibit  Number** | ** ** | **Document**                                                                                                                                                                                                                                                                                                                                                                                                |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1                   |       | Corporate by-laws of  CEMIG, as amended and in effect since April 25, 2008.                                                                                                                                                                                                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 2.1                 |       | Second Amended and  Restated Deposit Agreement, dated as of August 10, 2001, by and among  us, Citibank, N.A., as depositary, and the holders and beneficial owners of  ADSs evidenced by ADRs issued thereunder (incorporated by reference to the  Registration Statement on Form F-6 relating to the ADSs filed on  August 20, 2001 (File No. 333-13826)).                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 2.2                 |       | Shareholders’  Agreement, dated June 18, 1997, between the State Government and  Southern, relating to the rights and obligations of owners of our shares  (incorporated by reference to Exhibit 2.1 to our Registration Statement  on Form 20-F filed on August 13, 2001 (File No. 1-15224)).                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 2.3                 |       | Amendment No. 1 to  the Second Amended and Restated Deposit Agreement, dated as of  August 10, 2001, by and among us, Citibank, N.A., as depositary, and the  holders and beneficial owners of ADSs evidenced by ADRs issued thereunder  (incorporated by reference to the Registration Statement on Form F-6  relating to the ADSs filed on June 11, 2007 (File No. 333-143636)). |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 2.4                 |       | Deposit Agreement,  dated as of June 12, 2007, by and among us, Citibank, N.A., as  depositary, and the holders and beneficial owners of ADSs evidenced by ADRs  issued thereunder (incorporated by reference to the Registration Statement on  Form F-6 relating to the common share ADSs filed on May 7,  2007 (File No. 333-142654)).                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.1                 |       | Contract of Concession  for Generating Electric Energy, dated July 10, 1997, between the Federal  Government and us, relating to the provision of electric energy generation  services to the public (incorporated by reference to Exhibit 4.1 to our  Registration Statement on Form 20-F filed on August 13, 2001  (File No. 1-15224)).                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.2                 |       | Contract of Concession  of Electric Energy Transmission Services, dated July 10, 1997, between  the Federal Government and us, relating to the transmission of electric  energy to the public (incorporated by reference to Exhibit 4.2 to our  Registration Statement on Form 20-F filed on August 13, 2001  (File No. 1-15224)).                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.3                 |       | First Amendment to the  Electricity Transmission Concession Contract, dated September 16, 2005  (incorporated by reference to Exhibit 4.3 to our Registration Statement  on Form 20-F filed on June 30, 2006 (File No. 1-15224)).                                                                                                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.4                 |       | Contracts of Concession  of Public Service for Distribution of Electric Energy, dated July 10,  1997, between the Federal Government and us, relating to the provision of  electric energy distribution services to the public (incorporated by  reference to Exhibit 4.3 to our Registration Statement on Form 20-F  filed on August 13, 2001 (File No. 1-15224)).                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.5                 |       | First Amendment to the  Electricity Distribution Concession Contract, dated March 31, 2005  (incorporated by reference to Exhibit 4.5 to our Registration Statement  on Form 20-F filed on June 30, 2006 (File No. 1-15224)).                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.6                 |       | Second Amendment to the  Electricity Distribution Concession Contract, dated September 16, 2005  (incorporated by reference to Exhibit 4.6 to our Registration Statement  on Form 20-F filed on June 30, 2006 (File No. 1-15224)).                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.7                 |       | Contract for the  Assignment of CRC Account, dated May 31, 1995, between the State  Government and us, relating to amounts due to us from the State Government  (incorporated by reference to Exhibit 4.4 to our Registration Statement  on Form 20-F filed on August 13, 2001 (File No. 1-15224)).                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.8                 |       | First Amendment to the  Contract for the Assignment of CRC Account, dated February 24, 2001,  between the State Government and us, relating to amounts due to us from the  State Government (incorporated by reference                                                                                                                                                                                 |

 

----

 
|   |   | to Exhibit 4.5 to  our Annual Report on Form 20-F filed on March 26, 2003 (File  No. 1-15224)).                                                                                                                                                                                                                                                                                                                                      |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.9    |   | Second Amendment to the  Contract for the Assignment of CRC Account, dated October 14, 2002,  between the State Government and us, relating to amounts due to us from the  State Government (incorporated by reference to Exhibit 4.6 to our Annual  Report on Form 20-F filed on March 26, 2003 (File No. 1-15224)).                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.10   |   | Third Amendment to the  Contract for the Assignment of CRC Account, dated October 24, 2002,  between the State Government and us, relating to amounts due to us from the  State Government (incorporated by reference to Exhibit 4.7 to our Annual  Report on Form 20-F filed on March 26, 2003 (File No. 1-15224)).                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.11   |   | Indenture Covering the  First Public Issuance of Common Debentures, dated October 4, 2001,  between Planner Corretora de Valores S.A. and us, relating to the first  public issuance of R$625 million common debentures, divided into two series  of the same class, without guarantee or preference (incorporated by reference  to Exhibit 4.8 to our Annual Report on Form 20-F filed on  March 26, 2003 (File No. 1-15224)). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.12   |   | Summary of Indenture  Covering the Third Public Issuance of Common Debentures, dated June 14,  2004, between CEMIG and Pavarini Distribuidora de Títulos e Valores  Mobiliários (incorporated by reference to Exhibit 4.10 to our Annual  Report on Form 20-F filed on May 25, 2005 (File No. 1-15224)).                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.13   |   | Fourth Amendment to the  Contract for the Assignment of CRC Account, dated January 23, 2006,  between the State Government and us, relating to amounts due to us from the  State Government (incorporated by reference to Exhibit 4.14 to our  Registration Statement on Form 20-F filed on June 30, 2006  (File No. 1-15224)).                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.14   |   | Announcement of Start  of Public Distribution of Senior Units under CRC Account Securitization Fund,  dated as of January 26, 2006 (incorporated by reference to  Exhibit 4.15 to our Registration Statement on Form 20-F filed  on June 30, 2006 (File No. 1-15224)).                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.15   |   | Summary of Indenture  Covering the First Issuance of Commercial Paper Securities, dated  July 27, 2006, between CEMIG Distribuição S.A. and Banco do Brasil Banco  de Investimentos S.A.(incorporated  by reference to Exhibit 4.16 to our Registration Statement on Form 20-F filed  on July 23, 2007 (File No. 1-15224)).                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.16   |   | Summary of Indenture  Covering the First Issuance of Commercial Paper Securities, dated  July 27, 2006, between CEMIG Geração e Transmissão S.A. and Banco do  Brasil Banco de Investimentos S.A.(incorporated by reference to Exhibit 4.17 to our  Registration Statement on Form 20-F filed on July 23, 2007 (File No.  1-15224)).                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.17   |   | Summary of Indenture  Covering Public Distribution of Non-Convertible Unsecured Debentures, dated  August 24, 2006, between CEMIG Distribuição S.A. and Unibanco – União  dos Bancos Brasileiros S.A.(incorporated by reference to Exhibit 4.18 to our  Registration Statement on Form 20-F filed on July 23, 2007 (File No.  1-15224)).                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.18   |   | Summary of Indenture Covering Public Distribution of  Non-Convertible Unsecured Debentures, dated April 17, 2007, between  CEMIG Geração e Transmissão S.A. and Unibanco – União dos Bancos Brasileiros  S.A.(incorporated  by reference to Exhibit 4.19 to our Registration Statement on Form 20-F filed  on July 23, 2007 (File No. 1-15224)).                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.19   |   | Summary of Indenture  Covering Public Distribution of the Third Issuance of Commercial Paper  Securities, dated June 12, 2007, between CEMIG Distribuição S.A. and CEF  – Caixa Econômica Federal.(incorporated by reference to Exhibit 4.20 to our Registration  Statement on Form 20-F filed on July 23, 2007 (File No. 1-15224))                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.20   |   | Summary of Indenture  Covering the Second Issuance of Debentures, dated December 19, 2007,  between CEMIG Distribuição S.A. and BB Banco de Investimento S.A.                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.21   |   | Summary of Indenture  Covering the Second Issuance of Commercial Paper Securities, dated  December 21 , 2007, between CEMIG Geração e Transmissão S.A. and Caixa  Econômica Federal.                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 8      |   | List of Subsidiaries  (incorporated by reference to Exhibit 8 to our Annual Report on  Form 20-F filed on May 25, 2005 (File No. 1-15224)).                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 11     |   | Code of Ethics  (incorporated by reference to Exhibit 11 to our Annual Report on  Form 20-F filed on July 1, 2004 (File No. 1-15224)).                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 12.1   |   | Chief Executive Officer  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,  dated June 30, 2008.                                                                                                                                                                                                                                                                                                                        |

 

----

 
| 12.2   |   | Chief Financial  Officer, Investor Relations Officer and Control of Holding Officer  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,  dated June 30, 2008. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                          |
| 13.1   |   | Chief Executive Officer  Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,  dated June 30, 2008.                                                             |
|   |   |                                                                                                                                                                                          |
| 13.2   |   | Chief Financial  Officer, Investor Relations Officer and Control of Holding Officer  Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,  dated June 30, 2008. |

 

----

 

***Companhia Energética***

***de Minas Gerais —***

***CEMIG***

** **

***Financial Statements as of December 31, 2007 and***

***December 2006 and for the Years Ended December 31,***

***2007, 2006 and 2005 and Report of Independent***

***Registered Public Accounting Firm***

 

----

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

Tothe Board of Directors and Shareholders of

CompanhiaEnergética de Minas Gerais – CEMIG

BeloHorizonte – MG, Brazil

 

Wehave audited the accompanying consolidated balance sheet of CompanhiaEnergética de Minas Gerais – CEMIG and subsidiaries (collectively, “the Company”)as of December 31, 2007, and the related consolidated statements ofoperations and comprehensive income, changes in shareholders’ equity, and cashflows for the year then ended. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audit.

 

Weconducted our audit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit also includes examining,on a test basis, evidence supporting the amounts and disclosures in thefinancial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudit provide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of CompanhiaEnergética de Minas Gerais – CEMIG and subsidiaries as of December 31,2007, and the result of their operations and their cash flows for the year thenended in conformity with U.S. generally accepted accounting principles.

 

Asdiscussed in Note 5 to the consolidated financial statements, the Companyadopted the provisions of FASB Interpretation No. 48, Accounting forUncertainty in Income Taxes, as of January 1, 2007.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the Company’s internal control overfinancial reporting as of December 31, 2007, based on criteria establishedin Internal Control – Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO) and our report datedJune 27, 2008, expressed an unqualified opinion on the effectiveness ofthe Company’s internal control over financial reporting.

 

 

BeloHorizonte, Brazil

June 27,2008

 

 

/s/KPMG Auditores Independentes

KPMGAuditores Independentes

 

F-2

----

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

Tothe Shareholders and Management of

CompanhiaEnergética de Minas Gerais - CEMIG

BeloHorizonte – MG, Brazil

 

Wehave audited the accompanying consolidated balance sheet of CompanhiaEnergética de Minas Gerais – CEMIG and subsidiaries (the “Company”) as of December 31,2006, and the related consolidated statements of income, shareholders’ equity,and cash flows for each of the two years in the period ended December 31,2006.  These financial statements are the responsibility of the Company’smanagement.  Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.

 

Inour opinion, such consolidated financial statements present fairly, in allmaterial respects, the financial position of the Companhia Energética de MinasGerais – CEMIG and subsidiaries as of December 31, 2006, and the resultsof their operations and their cash flows for each of the two years in theperiod ended December 31, 2006, in conformity with accounting principlesgenerally accepted in the United States of America.

 

Asdiscussed in Notes 2 and 16 to the consolidated financial statements, theCompany adopted Statement of Financial Accounting Standards No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans – anamendment of FASB Statements No. 87, 88, 106, and 132(R)”, effective December 31,2006. Also, as discussed in Note 2 to the consolidated financial statements,the Company adopted the Securities and Exchange Commission’s Staff AccountingBulletin 108 “Considering the Effects of Prior Year Misstatements whenQuantifying Misstatements in Current Year Financial Statements”, effective January 1,2006.

 

 

/s/Deloitte Touche Tohmatsu Auditores Independentes

 

BeloHorizonte, Brazil

June 29,2007

 

F-3

----

 

**COMPANHIAENERGÉTICA DE MINAS GERAIS - CEMIG**

 

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2007 AND 2006**

 

**(Expressed in millions of Brazilian *reais*)**

 
| ** **                                                      | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|------------|------------|
| **ASSETS**                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| CURRENT ASSETS:                                                 |       |       |       |       |       |
| Cash  and cash equivalents (note 6)                             |       | 1,784      |       | 1,108      |       |
| Accounts  receivable, net (note 7)                              |       | 1,684      |       | 1,692      |       |
| Accounts  receivable - use of basic transmission network        |       | 458        |       | 350        |       |
| Deferred  regulatory assets (note 4)                            |       | 903        |       | 1,149      |       |
| Deferred  income taxes benefits (note 5)                        |       | 71         |       | 14         |       |
| Recoverable  taxes (note 8)                                     |       | 689        |       | 205        |       |
| Materials  and supplies                                         |       | 35         |       | 29         |       |
| Other                                                           |       | 311        |       | 231        |       |
|                                                            |       | 5,935      |       | 4,778      |       |
|                                                            |       |       |       |       |       |
| INVESTMENTS IN  AFFILIATES (note 9)                             |       | 869        |       | 762        |       |
|                                                            |       |       |       |       |       |
| PROPERTY, PLANT,  EQUIPMENT AND INTANGIBLES, NET (note 10)      |       | 13,835     |       | 13,426     |       |
|                                                            |       |       |       |       |       |
| OTHER ASSETS:                                                   |       |       |       |       |       |
| Deferred  regulatory assets (note 4)                            |       | 823        |       | 1,548      |       |
| Account  receivable from Minas Gerais State Government (note 3) |       | 1,763      |       | 1,726      |       |
| Recoverable  taxes (note 8)                                     |       | 316        |       | 559        |       |
| Accounts  receivable, net (note 7)                              |       | 44         |       | 50         |       |
| Deferred  income taxes benefits (note 5)                        |       | 452        |       | 175        |       |
| Escrow  deposits (note 11)                                      |       | 282        |       | 273        |       |
| Other                                                           |       | 34         |       | 22         |       |
|                                                            |       | 3,714      |       | 4,353      |       |
| Total  assets                                                   |       | 24,353     |       | 23,319     |       |

 

The accompanying notes are an integral part of theconsolidated financial statements.

 

F-4

----

 

**COMPANHIAENERGÉTICA DE MINAS GERAIS - CEMIG**

 

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2007 AND 2006**

 

**(Expressed in millions of Brazilian *reais*, except share amounts)**

 
| ** **                                                                                                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                          |       |     |       |     |       |
| ** **                                                                                                                              |       |     |       |     |       |
| CURRENT LIABILITIES:                                                                                                                    |       |     |       |     |       |
| Accounts  payable to suppliers (note 12)                                                                                                |       | 784      |       | 768      |       |
| Payroll  and related charges                                                                                                            |       | 222      |       | 174      |       |
| Taxes  payable (note 13)                                                                                                                |       | 559      |       | 501      |       |
| Deferred  income taxes (note 5)                                                                                                         |       | 140      |       | 331      |       |
| Dividends  and interest on capital                                                                                                      |       | 874      |       | 877      |       |
| Current  portion of long-term financing (note 14)                                                                                       |       | 941      |       | 691      |       |
| Regulatory  charges payable (note 15)                                                                                                   |       | 384      |       | 420      |       |
| Employee  post-retirement benefits (note 16)                                                                                            |       | 89       |       | 120      |       |
| Employee  profit sharing (note 21)                                                                                                      |       | 100      |       | 74       |       |
| Derivative  contracts (note 24)                                                                                                         |       | 184      |       | 187      |       |
| Other                                                                                                                                   |       | 236      |       | 187      |       |
|                                                                                                                                    |       | 4,513    |       | 4,330    |       |
| LONG-TERM LIABILITIES:                                                                                                                  |       |     |       |     |       |
| Long-term  financing (note 14)                                                                                                          |       | 5,873    |       | 5,833    |       |
| Employee  post-retirement benefits (note 16)                                                                                            |       | 2,182    |       | 1,666    |       |
| Deferred  income taxes (note 5)                                                                                                         |       | 162      |       | 130      |       |
| Accrued  liability for contingencies (note 17)                                                                                          |       | 346      |       | 280      |       |
| Accounts  payable to suppliers (note 12)                                                                                                |       | 341      |       | 264      |       |
| Taxes  payable (note 13)                                                                                                                |       | 2        |       | 41       |       |
| Regulatory  charges payable (note 15)                                                                                                   |       | 15       |       | —   |       |
| Deferred  regulatory liability – special obligations (note 4)                                                                      |       | 2,459    |       | 2,194    |       |
| Other                                                                                                                                   |       | 236      |       | 192      |       |
|                                                                                                                                    |       | 11,616   |       | 10,600   |       |
|                                                                                                                                    |       |     |       |     |       |
| MINORITY INTEREST                                                                                                                       |       | —   |       | 19       |       |
| SHAREHOLDERS’ EQUITY:  (note 18)                                                                                                   |       |     |       |     |       |
| Capital  stock -                                                                                                                        |       |     |       |     |       |
| Preferred  – 273,838,953 thousand shares authorized and issued and 273,631,569  outstanding as of December 31, 2007 and 2006. |       | 1,258    |       | 804      |       |
| Common  – 212,622,504 thousand shares authorized, issued and outstanding as of  December 31, 2007 and 2006.                   |       | 981      |       | 624      |       |
|                                                                                                                                    |       | 2,239    |       | 1,428    |       |
| Additional  paid-in capital                                                                                                             |       | 3,170    |       | 3,170    |       |
| Appropriated  retained earnings                                                                                                         |       | 2,155    |       | 2,879    |       |
| Unappropriated  retained earnings                                                                                                       |       | 1,670    |       | 1,503    |       |
| Accumulated  other comprehensive loss                                                                                                   |       | (1,010   | )          | (610     | )          |
|                                                                                                                                    |       | 8,224    |       | 8,370    |       |
| Total  liabilities and shareholders’ equity                                                                                        |       | 24,353   |       | 23,319   |       |

 

The accompanying notes are an integral part of theconsolidated financial statements.

 

F-5

----

 

**COMPANHIAENERGÉTICA DE MINAS GERAIS – CEMIG**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE INCOME**

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND2005**

 

**(Expressed in millions of Brazilian *reais*, except share and per share amounts)**

 
| ** **                                                                                                                                   | ** ** | **2007**    | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| NET OPERATING REVENUES:                                                                                                                      |       |        |       |        |       |        |       |
| Electricity  sales to final customers (note 19)                                                                                              |       | 10,191      |       | 9,319       |       | 8,708       |       |
| Deferred  rate adjustment (note 4)                                                                                                           |       | —      |       | —      |       | 110         |       |
| Electricity  sales to the interconnected power system (note 19)                                                                              |       | 1,134       |       | 884         |       | 237         |       |
| Use  of basic transmission network (note 19)                                                                                                 |       | 1,705       |       | 1,780       |       | 1,523       |       |
| Other  operating revenues (note 19)                                                                                                          |       | 236         |       | 200         |       | 176         |       |
| Taxes  on revenues (note 19)                                                                                                                 |       | (3,836      | )          | (3,543      | )          | (3,241      | )          |
| Total  net operating revenues                                                                                                                |       | 9,430       |       | 8,640       |       | 7,513       |       |
|                                                                                                                                         |       |        |       |        |       |        |       |
| OPERATING COSTS AND  EXPENSES:                                                                                                               |       |        |       |        |       |        |       |
| Electricity  purchased for resale (note 20)                                                                                                  |       | (2,147      | )          | (1,907      | )          | (1,455      | )          |
| Use  of basic transmission network                                                                                                           |       | (564        | )          | (687        | )          | (709        | )          |
| Depreciation  and amortization                                                                                                               |       | (878        | )          | (810        | )          | (669        | )          |
| Personnel  (note 20)                                                                                                                         |       | (884        | )          | (1,046      | )          | (779        | )          |
| Regulatory  charges (note 20)                                                                                                                |       | (967        | )          | (1,031      | )          | (983        | )          |
| Regulatory  liability – Special obligations (note 4)                                                                                    |       | —      |       | (1,057      | )          | —      |       |
| Third-party  services (note 20)                                                                                                              |       | (550        | )          | (475        | )          | (420        | )          |
| Employee  post-retirement benefits (note 16)                                                                                                 |       | (140        | )          | (245        | )          | (257        | )          |
| Materials  and supplies                                                                                                                      |       | (148        | )          | (116        | )          | (95         | )          |
| Provision  for loss on deferred regulatory assets (note 4)                                                                                   |       | (146        | )          | (49         | )          | (183        | )          |
| Employees  profit sharing (note 21)                                                                                                          |       | (455        | )          | (210        | )          | (260        | )          |
| Other  (note 20)                                                                                                                             |       | (472        | )          | (234        | )          | (379        | )          |
| Total  operating costs and expenses                                                                                                          |       | (7,351      | )          | (7,867      | )          | (6,189      | )          |
| Operating  income                                                                                                                            |       | 2,079       |       | 773         |       | 1,324       |       |
|                                                                                                                                         |       |        |       |        |       |        |       |
| FINANCIAL (EXPENSE)  INCOME, NET (note 22)                                                                                                   |       | (48         | )          | 335         |       | 754         |       |
|                                                                                                                                         |       |        |       |        |       |        |       |
| NON-OPERATING INCOME                                                                                                                         |       |        |       |        |       |        |       |
| Equity  in results of Investments                                                                                                            |       | 223         |       | 91          |       | 29          |       |
| Gain  on sale of Way TV                                                                                                                      |       | 49          |       | —      |       | —      |       |
|                                                                                                                                         |       | 272         |       | 91          |       | 29          |       |
| Income  before income taxes and minority interests                                                                                           |       | 2,303       |       | 1,199       |       | 2,107       |       |
| INCOME TAXES (note 5)                                                                                                                        |       |        |       |        |       |        |       |
| Current                                                                                                                                      |       | (941        | )          | (575        | )          | (271        | )          |
| Deferred                                                                                                                                     |       | 256         |       | 78          |       | (29         | )          |
|                                                                                                                                         |       | (685        | )          | (497        | )          | (300        | )          |
| MINORITY INTERESTS                                                                                                                           |       | —      |       | —      |       | 2           |       |
| NET INCOME                                                                                                                                   |       | 1,618       |       | 702         |       | 1,809       |       |
| OTHER COMPREHENSIVE  INCOME (LOSS):                                                                                                          |       |        |       |        |       |        |       |
| Pension  adjustments (note 16)                                                                                                               |       | (605        | )          | 212         |       | 38          |       |
| Deferred  income taxes (expense) benefits                                                                                                    |       | 205         |       | (72         | )          | (13         | )          |
|                                                                                                                                         |       | (400        | )          | 140         |       | 25          |       |
| COMPREHENSIVE INCOME                                                                                                                         |       | 1,218       |       | 842         |       | 1,834       |       |
| Weighted  average number of common and preferred shares outstanding during the year  (thousand) for purposes of calculating basic earnings   |       | 486,254,073 |       | 486,254,073 |       | 486,254,073 |       |
| Weighted  average number of common and preferred shares outstanding during the year  (thousand) for purposes of calculating diluted earnings |       | 496,094,130 |       | 496,837,488 |       | 490,434,261 |       |
| Basic earnings per  thousand common and preferred shares - In Brazilian reais                                                                |       | 3.33        |       | 1.44        |       | 3.72        |       |
| Diluted  earnings per thousand common and preferred shares - In Brazilian reais                                                              |       | 3.26        |       | 1.41        |       | 3.69        |       |

 

The accompanying notes are an integral part of theconsolidated financial statements.

 

F-6

----

 

**COMPANHIAENERGÉTICA DE MINAS GERAIS - CEMIG**

 

**CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’EQUITY**

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND2005**

 

**(Expressed in millions of Brazilian *reais*)**

 
| ** **                                                             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| CAPITAL STOCK:                                                         |       |     |       |     |       |     |       |
| Preferred  -                                                           |       |     |       |     |       |     |       |
| Balance,  beginning of year                                            |       | 804      |       | 804      |       | 804      |       |
| Transfer  from appropriated retained earnings                          |       | 454      |       | —   |       | —   |       |
| Balance,  end of year                                                  |       | 1,258    |       | 804      |       | 804      |       |
|                                                                   |       |     |       |     |       |     |       |
| Common  -                                                              |       |     |       |     |       |     |       |
| Balance,  beginning of year                                            |       | 624      |       | 624      |       | 624      |       |
| Transfer  from appropriated retained earnings                          |       | 357      |       | —   |       | —   |       |
| Balance,  end of year                                                  |       | 981      |       | 624      |       | 624      |       |
|                                                                   |       | 2,239    |       | 1,428    |       | 1,428    |       |
| ADDITIONAL PAID-IN  CAPITAL                                            |       | 3,170    |       | 3,170    |       | 3,170    |       |
| APPROPRIATED RETAINED  EARNINGS:                                       |       |     |       |     |       |     |       |
| Fiscal  incentive investment reserve-                                  |       | 45       |       | 45       |       | 45       |       |
|                                                                   |       |     |       |     |       |     |       |
| Rate  shortfall reserve-                                               |       |     |       |     |       |     |       |
| Balance,  beginning of year                                            |       | 2,648    |       | 2,648    |       | 2,648    |       |
| Transfer  to capital stock                                             |       | (811     | )          | —   |       | —   |       |
| Balance,  end of year                                                  |       | 1,837    |       | 2,648    |       | 2,648    |       |
|                                                                   |       |     |       |     |       |     |       |
| Legal  reserve-                                                        |       |     |       |     |       |     |       |
| Balance,  beginning of year                                            |       | 186      |       | 100      |       | —   |       |
| Transfer  from unappropriated retained earnings                        |       | 87       |       | 86       |       | 100      |       |
| Balance,  end of year                                                  |       | 273      |       | 186      |       | 100      |       |
|                                                                   |       | 2,155    |       | 2,879    |       | 2,793    |       |
| UNAPPROPRIATED RETAINED  EARNINGS:                                     |       |     |       |     |       |     |       |
| Balance,  beginning of year                                            |       | 1,503    |       | 2,367    |       | 2,449    |       |
| Cumulative  effect adjustment for adoption of SAB 108, net of tax |       | —   |       | (133     | )          | —   |       |
| Net  income                                                            |       | 1,618    |       | 702      |       | 1,809    |       |
| Transfer  to appropriated retaining earnings                           |       | (87      | )          | (86      | )          | (100     | )          |
| Dividends  and interest on capital                                     |       | (1,364   | )          | (1,347   | )          | (1,791   | )          |
| Balance,  end of year                                                  |       | 1,670    |       | 1,503    |       | 2,367    |       |
| ACCUMULATED OTHER  COMPREHENSIVE INCOME (LOSS):                        |       |     |       |     |       |     |       |
| Balance,  beginning of year                                            |       | (610     | )          | (506     | )          | (531     | )          |
| Adjustment  to initial adoption SFAS No 158, net of tax           |       | —   |       | (244     | )          | —   |       |
| Other  comprehensive income (loss)                                     |       | (400     | )          | 140      |       | 25       |       |
| Balance,  end of year                                                  |       | (1,010   | )          | (610     | )          | (506     | )          |
| Shareholders’  equity at end of year                              |       | 8,224    |       | 8,370    |       | 9,252    |       |

 

The accompanying notes are an integral part of theconsolidated financial statements.

 

F-7

----

 

**COMPANHIAENERGÉTICA DE MINAS GERAIS - CEMIG**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND2005**

 

**(Expressed in millions of Brazilian *reais*)**

 
| ** **                                                                               | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                                   |       |     |       |     |       |     |       |
| Net  income                                                                              |       | 1,618    |       | 702      |       | 1,809    |       |
| Adjustments  to reconcile net income to net cash provided by operating activities        |       |     |       |     |       |     |       |
| Depreciation  and amortization                                                           |       | 878      |       | 810      |       | 669      |       |
| Deferred  regulatory assets and liabilities                                              |       | —   |       | (70      | )          | (186     | )          |
| Monetary  variation and exchange rate variation gain                                     |       | (810     | )          | (309     | )          | (866     | )          |
| Loss  on disposal of property, plant and equipment                                       |       | 37       |       | 21       |       | 52       |       |
| Employee  post-retirement benefits                                                       |       | 106      |       | 193      |       | 189      |       |
| Provision  for contingencies and doubtful accounts receivable                            |       | 70       |       | (97      | )          | 19       |       |
| Regulatory  liability – special obligations                                         |       | —   |       | 1,057    |       | —   |       |
| Provision  (reversal) for loss on account receivables from Minas Gerais State Government |       | 372      |       | (99      | )          | (223     | )          |
| Provision  for loss on deferred regulatory assets                                        |       | 146      |       | 49       |       | 183      |       |
| Deferred  income taxes                                                                   |       | (256     | )          | (78      | )          | 29       |       |
| Equity  in results of investments                                                        |       | (223     | )          | (91      | )          | (29      | )          |
| Other                                                                                    |       | 49       |       | (2       | )          | 1        |       |
|                                                                                     |       |     |       |     |       |     |       |
| Decrease  (increase) in operating assets-                                                |       |     |       |     |       |     |       |
| Accounts  receivable                                                                     |       | 7        |       | (263     | )          | (188     | )          |
| Recoverable  taxes                                                                       |       | (237     | )          | (229     | )          | (311     | )          |
| Accounts  receivable – use of basic transmission network                            |       | (108     | )          | (47      | )          | (275     | )          |
| Regulatory  assets                                                                       |       | 965      |       | 1,053    |       | 601      |       |
| Other                                                                                    |       | 229      |       | 71       |       | 61       |       |
|                                                                                     |       |     |       |     |       |     |       |
| Increase  (decrease) in operating liabilities-                                           |       |     |       |     |       |     |       |
| Accounts  payable to suppliers                                                           |       | (41      | )          | (102     | )          | 89       |       |
| Payroll  and related charges                                                             |       | 48       |       | —   |       | (15      | )          |
| Taxes  payable                                                                           |       | 4        |       | (236     | )          | (259     | )          |
| Regulatory  charges payable                                                              |       | (32      | )          | 79       |       | 153      |       |
| Accrued  interest on long-term financing and short-term loans                            |       | (77      | )          | (38      | )          | 78       |       |
| Other                                                                                    |       | 91       |       | (88      | )          | 194      |       |
| Net  cash provided by operating activities                                               |       | 2,836    |       | 2,286    |       | 1,775    |       |

 

F-8

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| ** **                                                                   | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                         |       |     |       |     |       |     |       |
| CASH  FLOWS FROM INVESTING ACTIVITIES                                        |       |     |       |     |       |     |       |
| Escrow  deposits                                                             |       | (17      | )          | (190     | )          | (5       | )          |
| Acquisition  of investments in affiliates                                    |       | (26      | )          | (568     | )          | (32      | )          |
| Acquisition  of property, plant and equipment                                |       | (1,120   | )          | (1,328   | )          | (1,511   | )          |
| Proceeds  from sale of affiliates                                            |       | 49       |       | —   |       | —   |       |
| Net  cash used in investing activities                                       |       | (1,114   | )          | (2,086   | )          | (1,548   | )          |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                       |       |     |       |     |       |     |       |
| Proceeds  from issuance of long-term financing                               |       | 589      |       | 2,248    |       | 1,515    |       |
| Repayment  of long-term financing and short-term loans                       |       | (1,134   | )          | (1,817   | )          | (818     | )          |
| Proceeds  from short-term loans                                              |       | 833      |       | 1,200    |       | —   |       |
| Dividends  and interest on capital paid                                      |       | (1,334   | )          | (2,072   | )          | (491     | )          |
| Net  cash provided by (used in) financing activities                         |       | (1,046   | )          | (441     | )          | 206      |       |
| NET  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                        |       | 676      |       | (241     | )          | 433      |       |
| CASH  AND CASH EQUIVALENTS:                                                  |       |     |       |     |       |     |       |
| Beginning  of the year                                                       |       | 1,108    |       | 1,349    |       | 916      |       |
| End  of the year                                                             |       | 1,784    |       | 1,108    |       | 1,349    |       |
|                                                                         |       | 676      |       | (241     | )          | 433      |       |
| SUPPLEMENTARY  CASH FLOWS DISCLOSURE:                                        |       |     |       |     |       |     |       |
| Taxes  paid - income taxes                                                   |       | 1,091    |       | 696      |       | 735      |       |
| Interest  paid, net of interest capitalized                                  |       | 672      |       | 756      |       | 500      |       |
| SCHEDULE  OF NONCASH INVESTING AND FINANCING ACTIVITIES:                     |       |     |       |     |       |     |       |
| Accounts  receivables from State Government offset by dividends              |       | 122      |       | 79       |       | 77       |       |
| Debentures  issued related to Irapé power plant offset by dividends     |       | —   |       | 30       |       | 23       |       |
| Property  plant and equipment increase on the special obligation recognition |       | —   |       | 1,137    |       | —   |       |

 

The accompanying notes are an integral part of theconsolidated financial statements.

 

F-9

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**COMPANHIA ENERGÉTICA DEMINAS GERAIS - CEMIG**

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2007, 2006 AND 2005**

 

**(Amounts expressed in millions of Brazilian *reais*, unless otherwise indicated)**

 

**1.****                  THE COMPANY AND ITS OPERATIONS**

 

(a) The Company

 

CompanhiaEnergética de Minas Gerais, “CEMIG” or the “Company”, a listed company, hasoperated solely and exclusively as a holding company as from January 1,2005, with shareholder participations in individually and jointly controlledsubsidiaries. The principal objectives of its subsidiaries are the constructionand operation of systems used in production, transformation, transmission,distribution and sales of electric energy, as well as the development ofactivities in the different fields of energy, with a view to the their economicexploitation.

 

As the majority of itssubsidiaries are concessionaires of electric utility services, they are subjectto regulations set by the Agência Nacional de Energia Elétrica (the BrazilianNational Electric Energy Agency or “ANEEL”), an agency of the Brazilian FederalGovernment (the “Federal Government”).

 

The Company’sconsolidated operating subsidiaries as of December 31, 2007 are as follows(the information related to capacity has not been audited by the independentauditors):

 

·                  CemigGeração e Transmissão S.A. (“Cemig Geração e Transmissão”) (100.00% interest) –Electric power generation and transmission, through 46 plants – (43hydroelectric, 1 wind and 2 thermoelectric plants) – and transmission linesmostly belonging to the basic grid of the Brazilian generation and transmissionsystem. Cemig Geração e Transmissão S.A. has interests in the followingdevelopment-stage companies, of which only Cemig Baguari Energia wasconsolidated.

 

·                  HidrelétricaCachoeirão S.A. (“Cachoeirão”) (jointly controlled - 49.00% interest) –Generation and sale of electric energy as anindependent power producer, through the Cachoeirão hydroelectric power plantlocated at Pocrane, in the State of Minas Gerais. The power plant is underconstruction, with startup expected in September 2008. It will havegeneration capacity of 27 MW;

 

·                  Guanhães Energia S.A. (“Guanhães”) (jointly controlled – 49.00% interest) - Generation and sale of electric energy through theconstruction and commercial operation of the following Small Hydro Plants:Dores de Guanhães; Senhora do Porto; and Jacaré, located in the municipality ofDores de Guanhães; and Fortuna II, located in the municipality of Virginópolis,in Minas Gerais State. The plants are in the construction phase, withoperations scheduled to begin in 2009, and will have aggregate installed capacityof 44 MW;

 

·                  Cemig Baguari Energia S.A. (“Baguari”) (subsidiary – 100.00% interest) - Generation and sale of electric energy as anindependent power producer. Cemig Geração and Transmissão expects to transferthe assets from the Baguari Consortium to this subsidiary. Operational startupof this plant is scheduled for 2009;

 

·                  Madeira Energia S.A. – (jointly controlled –10.00% interest) - Implementation, construction, operation and commercialoperation of the Santo Antônio hydroelectric plant in the Madeira River Basin,in the State of Rondônia, with power of 3,150 MW and commercial start upscheduled for 2012;

 

F-10

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·                  CemigDistribuição S.A. (“Cemig Distribuição”) (100.00% interest) – Electric powerdistribution through distribution grids and lines covering approximately 97.00%of the State of Minas Gerais;

 

·                  SáCarvalho S.A. (“Sá Carvalho”) (100.00% interest) - Generation and sale ofelectric energy from the Sá Carvalho hydroelectric power plant, as an electricenergy public service concessionaire;

 

·                  UsinaTérmica Ipatinga S.A. (“Ipatinga”) (100.00% interest) - Generation and sale ofelectric energy, as an independent power producer, at the Ipatingathermoelectric power plant located at the facilities of Usinas Siderúrgicas deMinas Gerais S.A. – USIMINAS;

 

·                  Empresade Infovias S.A. (“Infovias”) (100.00% interest) - Rendering telecommunicationservices and developing activities related thereto, through multiservicenetworks using optical fiber cable, coaxial cable and other electronicequipment;

 

·                  EfficientiaS.A. (“Efficientia”) (100.00% interest) - Rendering efficiency, optimizationand energy solutions services through studies and carrying out projects, aswell as providing operating and maintenance services, to energy supplyfacilities;

 

·                  HorizontesEnergia S.A. (“Horizontes”) (100.00% interest) - Generation and sale ofelectric energy, as an independent power producer, at the Machado Mineiro andSalto do Paraopeba hydroelectric power plants, located in the State of MinasGerais, and the Salto Voltão and Salto do Passo Velho hydroelectric powerplants, located in the State of Santa Catarina;

 

·                  CentralTermelétrica de Cogeração S.A. (“Cogeração”) (100.00% interest) – Generationand sale of electric energy, as an independent power producer, through theconstruction and operation of the Barreiro thermoelectric power plant, locatedon Vallourec & Mannesmann Tubes’s facilities, in Minas Gerais State.The concession was transferred to UTE Barreiro S.A. in the first quarter of2006;

 

·                  RosalEnergia S.A. (“Rosal”) (100.00% interest) – Generation and sale of electricenergy as an electric energy public service concessionaire through Rosalhydroelectric plant, located on the border between Rio de Janeiro and EspíritoSanto States;

 

·                  CentralHidrelétrica Pai Joaquim S.A.(“Pai Joaquim”) (100.00% interest) – Generationand sale of electric energy, as an independent power producer. The concessionof generation was transferred to Cemig PCH S.A. in the first quarter of 2006;

 

·                  CemigPCH S.A. (100.00% interest) - Generation and sale of electric energy, as anindependent power producer, at the Pai Joaquim hydroelectric power plant,located in the state of Minas Gerais;

 

·                  CemigCapim Branco Energia S.A. (100.00% interest) - Generation and sale of electricenergy, as an independent power producer, at the Capim Branco I and IIhydroelectric power plants, located in the state of Minas Gerais, built througha consortium with private-sector partners;

 

·                  UTEBarreiro S.A. (100.00% interest) - Generation and sale of electric energy, asan independent thermoelectric power producer, at the Central TermelétricaBarreiro (“UTE Barreiro”) located at the facilities of Vallourec &Mannesmann Tubes, in Minas Gerais State. The concession was received fromCentral Termelétrica de Cogeração S.A. in the first quarter of 2006;

 

·                  CemigTrading S.A. (100.00% interest) – a development stage enterprise engaged in thepurchase and sale of energy.

 

The Company also has thefollowing equity interests:

 

·                  RioMinas Energia Participações S.A .(“RME”) (jointly controlled - 25.00% interest)– holding company with 52.25% (see note 9) interest of Light Serviços deEletricidade S.A. (electric power distribution) with 3.9 million consumers andLight Energia S.A.(electric power generation) with 855 MW;

 

F-11

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·                  Companhiade Gás de Minas Gerais - GASMIG (“GASMIG”) (jointly controlled - 55.19%interest) - Acquisition, transportation and distribution of natural gas andrelated products. GASMIG was granted a concession by the State Government todistribute gas in the State of Minas Gerais. GASMIG’s bylaws also permit theperformance of activities related to the exploration, production and storage ofnatural gas; these activities, however, are not currently being performed;

 

·                  CompanhiaTransleste de Transmissão (“Transleste”) (jointly controlled - 25.00% interest)– Operation of the 345 KV transmission line (“TL”) connecting the substationlocated in Montes Claros and the substation of the Irapé Hydroelectric PowerPlant;

 

·                  CompanhiaTransudeste de Transmissão (“Transudeste”) (jointly controlled - 24.00%interest) – Construction and operation of the 345 KV TL Itutinga – Juiz deFora;

 

·                  CompanhiaTransirapé de Transmissão (“Transirapé”) (jointly controlled - 24.50% interest)– Construction and operation of the 230 KV TL Irapé – Araçuaí;

 

·                  EmpresaParaense de Transmissão de Energia S.A.(“ETEP”) (jointly controlled - 18.19%interest) – Electric energy public service concessionaire with 500KVtransmission line (“TL”) from Tucuruí substation to Vila do Conde substation, locatedin the state of Pará. The acquisition of 18.19% of the capital stock of ETEPwas completed in August 2006 (see note 9);

 

·                  EmpresaNorte de Transmissão de Energia S.A.(“ENTE”) (jointly controlled - 18.35%interest) – Electric energy public service concessionaire with two transmissionline (“TL”) of 500 KV, one from Tucuruí substation to Vila do Conde substation,located in the state of Pará and the other from Marabá substation to Açailândiasubstation, located in the state of Maranhão. The acquisition of 18.35% of thecapital stock of ENTE was completed in August 2006 (see note 9);

 

·                  EmpresaRegional de Transmissão de Energia S.A. (“ERTE”) (jointly controlled – 18.35%)- Electric energy public service concessionaire with 230 KV transmission line (“TL”)from Vila do Conde substation to Santa Maria, located in the state of Pará. Theacquisition of 18.35% of the capital stock of ERTE was completed in August 2006(see note 9);

 

·                  EmpresaAmazonense de Transmissão de Energia S.A. (“EATE”) (jointly controlled –15.80%) - Electric energy public service concessionaire with 500 KVtransmission line (“TL”) between its substation of Tucuruí, Marabá, Imperatriz,Presidente Dutra and Açailândia. The acquisition of 15.80% of the capital stockof EATE was completed in August 2006 (see note 9);

 

·                  EmpresaCatarinense de Transmissão de Energia S.A. (“ECTE”) (jointly controlled –7.50%) - Electric energy public service concessionaire with 525 KV transmissionline (“TL”) from Campos Novos substation to Blumenau substation, both locatedin the state of Santa Catarina. The acquisition of 7.50% of the capital stockof ECTE was completed in August 2006 (see note 9).

 

CEMIG also has interestsin the following development-stage companies as of December 31, 2007:

 

·                  Companhiade Transmissão Centroeste de Minas (“Centroeste”) (jointly controlled - 51.00%interest) – Construction and operation of the 345 KV Furnas – Pimentatransmission line;

 

·                  TranschileCharrúa Transmisión S.A. –  (“Transchile”)(jointly controlled – 49.00% interest) – Installation, operation andmaintenance of the Charrúa – Nueva Temuco 220 kV transmission line and twotransmission line sections in the Charrúa and Nueva Temuco sub-stations, in thecentral region of Chile;

 

·                  FocusSoluções Tecnológicas S.A. (“AXXIOM”) (jointly controlled – 49.00% interest) -Formed in August 2007 to provide services of implementation and managementof systems for electricity sector companies. Start of operations is scheduledfor 2008.

 

F-12

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Where Cemig exercisesjoint control it does so through stockholders ́ agreements with the otherstockholders of the investee company that gives CEMIG participating rights insuch investees.

 

(b) Theelectricity sector in Brazil:

 

The electricity sector inBrazil is regulated by the Federal Government, acting through its Ministry ofMines and Energy, which has exclusive authority over the electricity sector.Regulatory policy for the sector is implemented by ANEEL.

 

Retail electricity salesby the Company are made pursuant to provisions of its long-term electricitysales concession agreements. Under the terms of the concession agreements, theCompany is authorized to charge its customers a rate for electricity supplythat consists of two components: (1) a non-controllable energy generation,transmission and distribution cost pass-through component (“Parcel A costs”);and (2) an operating cost component (“Parcel B costs”). Both componentsare established as part of the original concession for certain initial periods.Subsequent to the initial periods, and at regular intervals thereafter, ANEELhas the authority to review the costs of the Company to determine the inflationadjustment (or other similar adjustment factor), if any, to the Parcel B costs(the “Adjustment Escalator”) for the subsequent period. This review can resultin an Adjustment Escalator that has a positive, zero or negative value.

 

In addition to theadjustments of Parcel A and Parcel B costs mentioned above, the electricitysales concessions provide for an annual rate adjustment based on severalfactors, including inflation. In addition, as a result of regulatory changes inDecember 2001, the Company may now request rate adjustments arising fromsignificant events that disrupt the economic and financial equilibrium of itsbusiness. Other normal or recurring factors (such as increases in purchasedpower costs, taxes on revenue generated or local inflation) are also allowed tobe offset through specific rate increases. When making a request for such rateincrease, the Company is required to prove the financial impact of the citedevents in its operations. See notes 2 and 4.

 

Under the law creatingthe new model for the industry, a generation company is not allowed to sellenergy directly to the distribution company. As a result, the Company has tosell its electricity in a regulated market through public auctions conducted byANEEL, or in the Free Contracting Environment (the “ACL”).  Legislation allows distributors that contractwith the generation company under the Regulated Contracting Environment (the “ACR”)to reduce the quantity of energy contracted up to a certain limit.

 

**2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

In preparing financialstatements in accordance with accounting principles generally accepted in theUnited States of America (“U.S. GAAP”), management is required to makeestimates and assumptions that affect reported amounts of assets andliabilities and disclosures of contingent assets and liabilities at the date ofthe financial statements, as well as the reported amounts of revenues andexpenses during the reporting period. Actual results could vary from these estimates. The Company’s financialstatements therefore include various estimates concerning (i) therecoverability of deferred regulatory assets, (ii) valuation allowancesfor accounts receivable, deferred tax assets and the account receivable fromthe State Government, (iii) the useful lives of property, plant andequipment and consortia, (iv) provisions necessary for contingent losses,and (v) estimates of employee post-retirement benefit obligations andother similar estimates.

 

(a)          **Basis of presentation** - The financialstatements have been prepared in accordance with U.S. GAAP, which differ in certainrespects from the Company’s statutory financial statements prepared inaccordance with accounting practices adopted in Brazil (“Brazilian GAAP”),which are prepared and filed in accordance with the specific rules of the *Comissão de Valores Mobiliários* (theBrazilian Securities Commission, or “CVM”) and ANEEL. The Company has madecertain reclassification on prior years balances, in order to improvecomparison with its current Consolidated Financial Statements.

 

F-13

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(b)           **Constant currency remeasurement** - Up to December 31,1997, Brazil was considered a highly inflationary economy (cumulative inflationexceeding a total of 100% over a consecutive three-year period) and, for U.S.GAAP purposes, the Company prepared its financial statements under the constantcurrency method up to that date. CEMIG adopted the IGP-DI (General Price Index- Internal Availability) to restate its financial statements for inflation.

 

Under the constantcurrency method, all relevant non-monetary assets and liabilities, shareholders’equity accounts and components of the statements of operations, cash flows andchanges in shareholders’ equity were expressed in the constant purchasing powerof the currency as of the most recent balance sheet date.

 

Beginning on January 1,1998, Brazil ceased to be considered a highly inflationary economy under U.S.GAAP and, accordingly, the Company ceased to restate its financial statementsin constant *reais* for the effectsof inflation as from that date. The restated balances of non-monetary assetsand liabilities as of December 31, 1997 thus constitute the historicalamounts of such assets and liabilities as from that date.

 

Shareholders’ equitypresented in these financial statements differs from that included in thestatutory accounting records prepared in accordance with Brazilian GAAP as aresult of the following: (i) as of January 1, 1996, indexation ofBrazilian financial statements prepared for Brazilian Corporate Law purposeswas abolished, whereas for U.S. GAAP purposes such indexation was applied up toDecember 31, 1997; (ii) differences between the IGP-DI and theofficial indices mandated for indexation of the financial statements preparedin accordance with Brazillian GAAP; and (iii) adjustments made to reflectthe requirements of U.S. GAAP. Current income taxes and dividend distributioncapacity are determined based on the financial statements prepared inaccordance with Brazilian GAAP.

 

(c)            **Principles of consolidation** - Theconsolidated financial statements include the accounts of all majority-ownedsubsidiaries, except jointly controlled companies.

 

In consolidation, allsignificant intercompany balances and transactions were eliminated. The Companyalso eliminates intercompany gains and losses on transactions with investmentsaccounted for using the equity method. The minority interest in the positiveequity in subsidiaries is shown as a separate caption on the face of thebalance sheet.

 

(d)           **Foreign currencies** - Assets and liabilitiesdenominated in foreign currencies are related principally to financing and aretranslated into *reais* at theofficial exchange rates reported by the Brazilian Central Bank at each balancesheet date. The resulting gains and losses are recognized currently and includedin the statements of operations for the appropriate period.

 

(e)            **Cash and cash equivalents** - The Companyconsiders unrestricted cash on hand, deposits in banks and short-terminvestments with original maturities of three months or less, when purchased,and readily convertible to cash to be cash and cash equivalents.

 

(f)              **Accounts receivable** - Includes both amountsbilled to customers and accrued revenues relating to unbilled energy suppliedto customers as of the balance sheet date. Late fees arising from overdueelectricity bills are accounted for on a cash basis.

 

The allowance fordoubtful accounts is recorded at an amount estimated by management assufficient to cover probable losses, according to the ANEEL criteria, asfollows: (i) for consumers with significant debits, an individual analysisof the balance is made, taking into account the history of default,negotiations in progress and the existence of real guarantees; (ii) forother consumers, the debits that are more than 90 days past due for residentialconsumers, or more than 180 days past due for commercial consumers, or morethan 360 days past due for the other consumer types, are provisioned at 100%.

 

(g)           **Investments in affiliates** - The Company’sinvestments in affiliated companies in which the Company has the ability toexercise significant influence, but not control, are accounted for using theequity method of accounting.

 

F-14

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(h)              **Property, plant and equipment** – Theseassets are recorded at acquisition or construction cost, restated to reflectprice-level changes through December 31, 1997. Interest and otherfinancing charges, excluding foreign exchange losses, incurred during theconstruction period on third-party financing are capitalized, in accordancewith Statement of Financial Accounting Standards SFAS No 34 “Capitalization ofInterest Cost”. Expenditures for maintenance and repairs are charged tooperating costs as incurred. Materials to be used in construction are includedin electric generation, distribution and transmission assets under constructionin progress. The net results of disposals of fixed assets are recorded as partof operating income.

 

Property, plantand equipment are depreciated using the straight-line method, at annual ratesbased on the estimated useful life of assets, in accordance with ANEELregulations and industry practice adopted in Brazil, or residual value at theend of the concession period, and that the residual value at the end of theconcession period will be at least the book value of the property, plant andequipment under Brazilian GAAP, which is equal to the amount to be reimbursedby the Brazilian government at that time. Intangibles are amortizated using thestraight-line method until the end of the concession period.

 

The Company’s investmentsin consortia (groups of organizations participating in joint ventures formed topromote common objectives or engage in projects to benefit all the memberswithout the creation of a legal entity), are recorded at acquisition orconstruction cost less allowance for loss, when applicable. Interest and other financing charges, excluding foreignexchange losses, incurred during the construction period on third-partyfinancing are capitalized, in accordance with SFAS No 34. The consortiumdepreciation is computed on the straight-line method, at annual ratesdetermined by ANEEL, which represent the estimated useful lives of theconsortia’s underlying assets. The consortium expenditures for maintenance andrepairs are charged proportionally to operating costs by the Company asincurred.

 

(i)                 **Impairment of long-lived assets** - CEMIGfollows SFAS No 144, “Accounting for the Impairment or Disposal of Long-LivedAssets”. Whenever events or changes in circumstances indicate that the carryingvalue of long-lived assets may not be recoverable, CEMIG performs calculationsof undiscounted cash flows expected to be derived from assets in service todetermine whether impairment has occurred. In the event such cash flows are notexpected to be sufficient to recover the recorded value of the assets, suchassets are written down to their estimated fair values based on discounted cashflow analyses. The Company has not recognized any impairment as a result of theapplication of this accounting policy for all periods presented.

 

(j)                 **Revenues, costs and expenses** - Revenues,costs and expenses are recognized on an accrual basis. Revenue is recognizedwhen persuasive evidence of an arrangement exists, delivery of goods hasoccurred or services have been rendered, our rates have been fixed or aredeterminable, and collectibility is reasonably assured regardless of when cashis received.

 

Revenues from thesale of electricity generation are recorded based upon the output deliveredprovided at rates as specified under contract terms or prevailing regulatoryrates. Electricity distribution sales to final customers are recognized whenpower is provided. Billings for these sales are made on a monthly basis.Unbilled revenues from the billing cycle up to the end of each month areestimated based on the prior month’s billing and are accrued at the end of themonth. Differences between estimated and actual unbilled revenues, whichhistorically have not been significant, are recognized in the following month.

 

Use of basictransmission network revenues are recorded when earned and billed monthly,according to the revenue established through the concession contracts. Incertain contracts, revenues to be earned in the final 15 years are 50.0% lowerthan those in the first 15 years of the concession. The Company recognizesrevenue on these contracts on a straight-line basis, in accordance with thenature of the services provided.

 

Revenues receivedby the Company from other concessionaires and free consumers using its basictransmission and distribution network are recognized in the month that thenetwork services are provided.

 

Services renderedinclude connection fees and other related services and the revenues arerecognized when the services are provided.

 

F-15

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Taxes on revenueconsist of: (i) value-added tax (“VAT”), which is a state tax due on thesales to final customers, is billed to the consumers and recorded as part ofgross revenue; (ii) COFINS revenue tax; (iii) PIS-PASEP socialcontribution tax on revenues; and (iv) Emergency capacity charge. It isthe Company’s policy to deduct these taxes from gross revenues.

 

(k)              **Income taxes** - CEMIG accounts for incometaxes in accordance with SFAS No 109 “Accounting for Income Taxes”, whichrequires an asset and liability approach to recording deferred tax assets andliabilities for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective income tax bases.

 

                            CEMIGhas adopted FIN48 in 2007, “Accounting for Uncertainty in Income Taxes”, that prescribes arecognition threshold and measurement attribute for the financial statement ofa tax position taken or expected. This Interpretation resulted inincreased relevance and comparability in financial reporting of income taxesbecause all tax positions accounted for in accordance with FASB Statement 109,*Accounting for Income Taxes,* will be evaluated for recognition, derecognition,and measurement using consistent criteria. The adoption of FIN 48 did notresult any adjustment in the financial statements of the Company.

 

(l)      **Contingencies** - The Company recordsprovisions for contingencies when the loss is considered to be probable andreasonably estimable, in accordance with SFAS No 5 “Accounting forContingencies”.

 

(m)    **Employees’ benefit plans** - The Companysponsors a defined-benefit pension plan and a defined-contribution plancovering substantially all of its employees. The Company has also establishedpost-retirement health care plans and dentalplans and pays life insurance premiums for its retirees. The Companyaccounts for the plans according to the provisions of SFAS No 87, “Employers’Accounting for Pensions”, SFAS No 106, “Employers’ Accounting forPost-retirement Benefits Other Than Pensions”. On December 31, 2006, theCompany adopted the provisions of SFAS No 158 “Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans” provisions related torecognition and disclosures, which requires an employer to recognize the overor under-funded status of a defined benefit postretirement plan as an asset orliability in its statement of financial position and to recognize changes inthat funded status in the year in which the changes occur through othercomprehensive income. The impact of the adoption of SFAS No 158 was a charge ofR$244, net of income taxes, recorded directly in accumulated othercomprehensive income (AOCI) in 2006. The Company has disclosed informationabout pension plans and other postretirement benefit plans as required by SFASNo 132(R) “Employers’ Disclosuresabout Pensions and Other Postretirement Benefits.”

 

Under Brazilianlaw, employees are entitled to a minimum of one-month vacation upon conclusionof each year of service. CEMIG fully accrues this liability based on the vestedentitlement of the employees at each period end, plus related social securitycosts.

 

(n)         **Environmental and remediation costs** -CEMIG, in accordance with its environmental policy, has established variousdamage control and prevention programs in order to help limit its risks withrespect to major environmental-related liabilities. The cost of these programsis expensed as incurred. CEMIG’s policy is to provide remediation costs whenthe responsibility to remediate is probable and the amount of associated costsis reasonably determinable. No provision in respect of these matters has beenrequired to date.

 

(o)         **Comprehensive income (loss)** - CEMIG reportscomprehensive income (loss) in accordance with SFAS No 130 “ReportingComprehensive Income” and has elected to present it in the statement ofoperations. The components of accumulated other comprehensive loss are asfollows:

 
| ** **                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                 |       |     |       |     |       |
| Under-funded  status of postretirement benefit plans |       | 1,530    |       | 925      |       |
| Income tax                                           |       | (520     | )          | (315     | )          |
| Total  accumulated other comprehensive loss          |       | 1,010    |       | 610      |       |

 

F-16

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(p)         **Regulation and deferred regulatory assets and liabilities**- As a result of various actions taken by the Federal Government and ANEEL in2001, the Company ́s distribution business is subject to the provisions of SFASNo 71 “Accounting for the Effects of Certain Types of Regulation. Therate-setting structure in Brazil is now designed to provide for recovery of theCompany’s allowable costs, including those incurred as a result of FederalGovernment-mandated power rationing measures imposed in 2001, as describedfurther below. Accordingly, the Company capitalizes incurred allowable costs asdeferred regulatory assets when instructed by ANEEL and there is a probableexpectation that future revenue equal to the costs incurred will be billed andcollected as a direct result of the inclusion of the costs in an increased rateset by the regulator. The deferred regulatory asset is eliminated when theCompany collects the related costs through billings to customers at theincreased rate. ANEEL performs a rate review on an annual basis. If ANEELexcludes all or part of a cost from recovery, that portion of the deferredregulatory asset is impaired and is accordingly reduced to the extent of theexcluded cost. The Company has recorded net deferred regulatory assets that itexpects to pass through to its customers in accordance with and subject toregulatory provisions.

 

During 2001, the Federal Government instituted anelectricity rationing plan in response to an energy shortage caused by lowrainfall, reduced reservoir levels and Brazil’s significant dependence onelectricity generated from hydrological resources. The rationing resulted inlosses for the Company and other electricity distribution companies in Brazil.In December 2001, electricity concessionaires including the Companyreached an industry-wide agreement (the General Agreement of the ElectricitySector or the “General Agreement”) with the Federal Government that providedresolution to rationing-related issues as well as to certain other electricityrate-related issues. The General Agreement provided for a rate increaseintended to reimburse revenues lost as a result of the rationing program in2001 and 2002. The increased rates will be in force in the electricity industryfor an average period of 74 months as from January 2002. As of December 31,2007, the asset of R$35 (note 4) recognized by the Company represents theamount expected to be recovered until February, 2008, in accordance withEmerging Issues Task Force (“EITF”) No. 92-7 “Accounting by Rate RegulatedUtilities for the Effects of Certain Alternative Revenue Programs”. Thebalances of the deferred regulatory assets are periodically compared with theCompany’s recoverability projections, which are reviewed by Managementdepending on market events, changes in regulation and related circumstances.The respective provision for losses is adjusted accordingly.

 

The General Agreement also addressed Parcel A costs,which are certain costs that each distribution company is permitted to deferand pass through to its customers via a future rate adjustment. Parcel A costsare limited by the concession contracts to the cost of purchased power andcertain other costs and taxes not controlled by the Company. ANEEL had grantedrate increases to recover a portion of previously deferred Parcel A costs. TheGeneral Agreement provided a tracking account mechanism, created in October 2001through Executive Order No. 296, to record the variation in the Parcel Acosts for rate adjustment calculation purposes. Parcel A costs incurredprevious to January 1, 2001 are not recoverable through the trackingaccount. As a result, the Company has not recognized any regulatory asset forParcel A costs incurred prior to 2001, except for the system services chargesfrom September 2000 (as allowed by ANEEL). (See note 4).

 

Special obligations represent contributions receivedby concessionaires from customers for the purpose of expanding the electricdistribution system. These contributions are incorporated into the Company’sdistribution assets. For regulatory purposes, the depreciation of these assetswere included in the tariff rate setting process and the correspondingliability was recorded for the amount of the total contributions. Under U.S.GAAP, the contributions were considered reimbursements of construction costsand credited against the cost of the related fixed assets.

 

On October 31, 2006, ANEEL issued a newregulation which changed the treatment of special obligations with respect tothe tariff setting process. The regulation establishes, among other items, thatbeginning on the date of the next respective tariff revision, the specialobligations will be amortized as a reduction of net allowable costs over futureperiods, therefore reducing tariffs. Consequently, in accordance with SFAS No71, the special obligations became a regulatory liability as a result of thisnew regulation.

 

F-17

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(q)         **Earnings per share** - Since each class ofshares participates equally in earnings in the years presented, earnings pershare was computed by dividing net income by the weighted average number ofcommon and preferred shares outstanding during the year. Consistent with manyother Brazilian corporations, CEMIG discloses earnings per one thousand shares,as this is the minimum number that can be traded on the Bolsa de Valores de SãoPaulo (the São Paulo Stock Exchange, or “BOVESPA”).

 

As mentioned in note 3,the Company has a contingent obligation to issue capital stock in connectionwith payments received on the account receivable from the State Government. Theissuance of such capital stock dividend will occur through the transfer of thebalance in the Rate Shortfall Reserve account in appropriated retained earningsto capital stock, having no net effect on shareholders’ equity.

 

This accounts receivableis currently being paid with dividends due to the State Government. Shares tobe issued in connection with this obligation are considered dilutive forpurposes of calculating earnings per share only when all necessary conditionsfor their issuance have been satisfied. The Company believes that as of thebalance sheet date, all of the conditions for issuance of a capital stockdividend in connection with payments received on the accounts receivable fromthe State Government have not been satisfied since (i) the issuance ofshares is still subject to approval by either CEMIG’s annual or extraordinaryshareholders’ meeting, as required by Brazilian Corporate Law and CEMIG’sbylaws and (ii) CEMIG may use the Rate Shortfall Reserve account for otherpurposes, which would relieve the Company of the obligation to issue suchcapital stock dividend. Therefore, the Company has not included these shares inthe computation of basic earnings per share in accordance with paragraph 10 ofSFAS No 128.

 

At December 31, 2007and 2006, the Company has obligation to issue shares in connection withdividends destined to offset the related receivable that are included in theweighted average shares outstanding. The following share information has beenretroactively restated to reflect the stock split:

 
| ** **                                                                                                 | ** ** | **2007**    | ** ** | **2006**    | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| Basic weighted  average shares outstanding                                                                 |       | 486,254,073 |       | 486,254,073 |       |
| Dilutive effect  shares to be issued in connection with the account receivable from the State  Government. |       | 9,840,057   |       | 10,583,415  |       |
| Diluted weighted  average shares outstanding                                                               |       | 496,094,130 |       | 496,837,488 |       |

 

(r)            **Segment information** - The Company currentlyoperates in the power generation and transmission, and distribution of energysegments. Until December 31, 2004, the Company’s electric energy businesswas managed centrally on the basis of the consolidated results of thegeneration, transmission and distribution operations and, accordingly, theelectric energy business represented a single segment per the criteriadescribed in SFAS No 131- “Disclosures about Segments of an Enterprise andRelated Information” at that time. As described in note 30, the Companyrestructured its operations on January 1, 2005 to separate its generationand transmission and distribution activities.

 

(s)          **Derivatives and hedging activities** - Asrequired by SFAS No 133 - Accounting for Derivative Instruments and HedgingActivities” derivative financial instruments are being recorded based on theirfair values as assets or liabilities in the accompanying balance sheet, andcorresponding changes in fair value are being recognized in earnings. Hedgeaccounting has not been applied to any of the Company’s derivative financialinstruments. The Company calculates the fair value of financial instrumentsusing quoted market prices whenever available. When quoted market prices arenot available, the Company uses standard pricing models with market-basedinputs, which take into account the present value of estimated future cashflows.

 

F-18

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(t)            **Effects of correcting prior year misstatements**- In September 2006, the SEC issued Staff Accounting Bulletin No. 108(Topic 1N) “Financial Statements - Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements” (“SAB 108”). SAB 108 provides guidance on how to evaluate priorperiod financial statement misstatements for purposes of assessing theirmateriality. There were two widely recognized methods for quantifying the effectsof financial statement misstatements: the “rollover” or income statement methodand the “iron curtain” or balance sheet method. Historically, the Company usedthe “rollover” method. Under this method the Company quantified its financialstatement misstatements based on the amount of errors originating in thecurrent-year income statement, and as a result did not consider the effects ofprior-year misstatements to be material to the Company’s financial statements.SAB 108 required that the Company must consider both the rollover and ironcurtain methods (“dual method”) when quantifying misstatements in the financialstatements.

 

The iron curtain method quantifies a misstatementbased on the effects of correcting the misstatement existing in the balance sheetat the end of 2006, irrespective of the misstatement’s origination. Uponadoption, SAB 108 permits the Company to adjust for the cumulative effect oferrors that were previously considered immaterial under the rollover methodthat were in the previous year considered material under the dual method.

 

The SAB 108 adjustment affects the carrying amount ofassets and liabilities as of the beginning of 2006, with an offsettingadjustment to the opening balance of retained earnings in the year of adoption.The adoption of SAB 108 resulted in a cumulative effect adjustment of R$133,net of taxes, to the opening balance of unappropriated retained earnings.

 

The cumulative effect adjustment was required tocorrect an error relating to the accounting for certain administrative costswhich were improperly capitalized as Property, plant and equipment in periodsprior to 2005. This adjustment was not deemed to be material, bothquantitatively and qualitatively, prior to the adoption of SAB 108, using therollover method.

 

**3. ACCOUNT RECEIVABLE FROM MINAS GERAIS STATEGOVERNMENT**

 

On March 4, 1993, the Company recorded areceivable with a corresponding credit in the statement of operations, from theFederal Government relating to the remaining balance of the amount of returnguaranteed by the regulatory agency and the actual return recorded by theCompany prior to that date. During 1993 and 1994, the Company recovered part ofthe rate shortfall by offsetting amounts due to Federal Government-ownedentities arising from purchased power and financing. On May 2, 1995, theobligation to pay the remaining balance of this receivable amounting to R$602,was transferred from the Federal Government to the State Government, theCompany’s controlling shareholder, through a credit assignment contract (the “CRCAgreement”). In connection with this assignment, the State Government agreed topay the amount due to the Company over 20 years, with an initial three-yeargrace period, as restated based on the UFIR (Tax Reference Unit Index) plusinterest of 6% per year. In the event that the Company receives payments orretains declared dividends to offset amounts receivable, the Company isobligated to issue shares to all shareholders in proportion to theirshareholdings, transferring the principal amount of the related paidinstallments from Appropriated retained earnings - Rate shortfall reserve toCapital Stock.

 

The CRC Agreement was modified by certainamendments commencing in 2001 that addressed issues relating to remuneration ofthe receivable and certain guarantees relating to dividend retention by theState government. Prior to the Fourth Amendment described below, a portion ofthe receivable was not guaranteed by the State Government. Consequently, theCompany had recognized a provision amounting to the full unguaranteed amountwhich was R$1,845 as of December 31, 2004.

 

F-19

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## **a) Fourth Amendment tothe CRC Agreement**

## ** **

The Extraordinary Shareholders Meeting which commencedon December 30, 2005, and ended on January 12, 2006, approved theFourth Amendment to the CRC Agreement which extended the guarantee relating todividends payable to the State Government to the full balance receivable andchanged the remuneration to IGP-DI plus annual interest of 8.18% per year. Thebalance is payable in 61 semi-annual installments which are due on June 30and December 31 of each year, retroactively as from December 2004.The payments are being made by withholding 65.00% of the regular dividends andinterest on capital due to the State Government. The dividends withheld isbeing used in the following order: (i) the settlement of past dueinstallments, (ii) the settlement of the semi-annual installments, (iii) thepre-payment of up to 2 installments; and (iv) the payment of the remainingprincipal.

 

OnDecember 31, 2007, the installments of the contract coming due on June 30,and December 31, 2008 had been received in advance.

 

Following are the balancesof the CRC Agreement and related provision for losses for 2007 and 2006:

 
| ** **                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
|                                              |       |     |       |     |       |
| CRC Agreement –  balance on December 31 |       | 3,661    |       | 3,252    |       |
| Provision                                         |       | (1,898   | )          | (1,526   | )          |
| Net – balance on  December 31           |       | 1,763    |       | 1,726    |       |

 

The changes in its provision for losses with respect to the accountreceivable from the Minas Gerais State Government are as follows:

 
| ** **                                                        | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                              |       |     |       |     |       |     |       |
| Balance at  beginning of the year                                 |       | 1,526    |       | 1,625    |       | 1,848    |       |
| Provision  (reversion) for the year recorded on financial revenue |       | 372      |       | (99      | )          | (223     | )          |
| Balance at end  of the year                                       |       | 1,898    |       | 1,526    |       | 1,625    |       |

 

The dividends andInterest on Equity to be distributed to stockholders arising from net incomerecorded for the period ended of December 31, 2007, proposed by theExecutive Board and the Board of Directors, and approved by the GeneralStockholders Meeting on April 25, 2008 are recorded as Currentliabilities. Of the dividends to be distributed, R$193 is payable to thegovernment of the State of Minas Gerais, and R$126 will be retained forsettlement of part of the CRC Agreement. The remaining amount of R$67 will bepaid in cash to the government of the State of Minas Gerais.

 

In connection with the Fourth Amendment, the Companycommitted to comply with financial covenants which are calculated based on thefinancial statements prepared in accordance with Brazilian GAAP:

 
| **Target Description – According  to Brazilian GAAP**    | ** ** | **Index Required**                          |
|---------------------------------------------------------------|------------|---------------------------------------------|
| Indebtedness  (1)/EBTIDA (2)                                  |       | Less  than 2                                |
| Indebtedness(1) /  Indebtedness plus Shareholders Equity |       | Less  than or equal to 40.00%               |
| Capital  expenditures                                         |       | Less  than or equal to 40.00% of EBTIDA (3) |

 

----

(1) Indebtedness =total consolidated short-term and long-term financing

(2) EBTIDA =Earnings before interest, income taxes, depreciation and amortization.

(3) For the years of2006 and 2007 the indices required were 65.00% and 55.00% respectively.

 

In the event theCompany does not comply with the above covenants, the non-compliance isreported and addressed by the Company’s Board of Directors. As of December 31,2007, the Company is in compliance with the above covenants.

 

F-20

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**b)****Creation of Cemig CRC Account Securitization Fund**

 

In January 2006, the Company created theCEMIG CRC Account Securitization Fund (FIDC) and assigned the accountsreceivable under the CRC Account Agreement to the fund. The book value of theCRC Account receivables that were transferred to the FIDC in January 2006was R$1,659. A portion of the FIDC was used by the Company to obtain R$900 infinancing in the form of senior quotas issued by the FIDC. The senior quotasaccrue interest based on CDI plus 1.7% per year and are being amortized in 20semi-annual installments. The senior quotas were acquired by financialinstitutions and are guaranteed by CEMIG. Consequently, the FIDC is fullyconsolidated by the Company and the senior quotas are recorded as Long-termfinancing.

 

**4. DEFERRED REGULATORY ASSETS AND LIABILITIES**

 

The components of the deferred regulatory assets and liabilities are asfollows:

 
| ** **                                                   | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                   | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Energy Rationing  Plan - Extraordinary rate adjustment:      |       |                  |       |   |   |
| Revenue losses incurred  during the rationing period         |       | 35                    |       | 209 |   |
| Amounts to be  transferred to generators                     |       | 334                   |       | 337 |   |
|                                                         |       | 369                   |       | 546 |   |
|                                                         |       |                  |       |   |   |
| Energy  transactions on CCEE/MAE during the rationing plan   |       | 413                   |       | 403 |   |
| Provision for  loss on Transactions on the CCEE/MAE          |       | (391                  | )          | (245 | ) |
|                                                         |       | 22                    |       | 158 |   |
| Additional  Parcel A costs:                                  |       |                  |       |   |   |
| - Period from  January 1, 2001 to October 25, 2001 |       | 708                   |       | 632 |   |
| - Period from  October 26, 2001 and thereafter          |       | (35                   | )          | 143 |   |
|                                                         |       |                  |       |   |   |
| Deferred rate  adjustment                                    |       | 545                   |       | 919 |   |
| PIS-PASEP/COFINS                                             |       | 117                   |       | 299 |   |
|                                                         |       |                  |       |   |   |
| Special  obligations                                         |       | (2,459                | )          | (2,194 | ) |
|                                                         |       | (733                  | )          | 503 |   |
|                                                         |       |                  |       |   |   |
| Current assets                                               |       | 903                   |       | 1,149 |   |
| Other assets                                                 |       | 823                   |       | 1,548 |   |
| Long-term  liabilities                                       |       | 2,459                 |       | 2,194 |   |

 

The regulatory assets related to the Energy Rationing Plan,Energy transactions on CCEE/MAE and additional Parcel A costs bear interest atthe SELIC (Brazilian benchmark interest rate) rate. The deferred rateadjustment and PIS-PASEP/COFINS regulatory assets are restated based on IGP-M(General Market Price Index). These assets are being recovered based on therate adjustment on April 8, 2007. CEMIG estimates the remaining recoveryperiod for these assets at December 31, 2007 to be substantially less than24 months, except for a portion of the Parcel A costs, related to the period fromJanuary 1, 2001 to October 25, 2001, for which the recovery period,established by the regulatory agency, will commence in March 2008. TheCompany expects to recover that asset by 2010.

 

The Company has not recorded VAT related to the above items. The VAT, amounting toR$234 as of December 31, 2007 (R$406 as of December 31, 2006), willbe assessed when these amounts are invoiced to the customers as a gross-up tothe revenue invoiced. The VAT collected will then be passed on to the state taxauthorities, resulting in no effect on net operating revenues. VAT is notassessed on Parcel A costs and PIS-PASEP/COFINS.

 

F-21

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(a) Energy RationingPlan – Extraordinary rate adjustment

 

An emergency energy-rationing program (the “Energy Rationing Plan”) wascreated by the Federal Government on May 22, 2001, to reduce energyconsumption and avoid unplanned interruption in power supply. Average reductionin monthly consumption of electricity during the rationing period was estimatedat 20% of the actual consumption for the months of May, June and July 2000.The energy rationing became effective on June 1, 2001 and ended February 28,2002, when the Federal Government determined that the water levels in thereservoirs serving Brazil’s hydroelectric facilities had returned to normal. Asa result of the Energy Rationing Plan, many electric generation anddistribution companies in Brazil, including CEMIG, experienced significantreductions in their profit margins. In December 2001, the FederalGovernment and the electric utilities in Brazil affected by the EnergyRationing Plan signed a General Agreement to re-establish thefinancial-economic equilibrium of the existing concession contracts and recoverrevenues relating to the period during which the Energy Rationing Plan was ineffect.

 

The General Agreement addressed margin losses incurred by the electricdistribution and generation companies during the period of the Energy RationingPlan and the costs of energy purchased in the spot market through the *Mercado Atacadista de Energia* (theWholesale Energy Market or “MAE”), succeeded by the *Câmara de Comercialização de Energia Elétrica* – CCEE (“CCEE/MAE”),up to December 2002. These items are being recovered by an extraordinaryrate adjustment as follows:

 

I.                 an increase of 2.90% for rural and residential consumers(excluding low-income consumers), lighting streets and high-tension industrialconsumers whose costs related to electric energy represent at least 18.00% ofaverage production cost and fulfill certain criteria, related to charge**and demand energy factors which were determined by ANEEL’s Resolution No. 130, dated April 30,2002; and

 

II.          anincrease of 7.90% for all other consumers.

 

These assets, which are being reimbursed through thespecial rate adjustment are monetarily restated based on SELIC from January 1,2002. The extraordinary rate adjustment regulatory asset had its maximumrecovery period, initially established as being 82 months, reduced to 74months, from January 2002 to February 2008, pursuant to ANEEL’sResolution No. 1 dated January 12, 2004. During the years ended December 31,2007, 2006, and 2005, the Company collected R$302, R$257, and R$261,respectively, as a result of application of the extraordinary rate adjustment.Management periodically reviews its projections and, in the event that theestimates change in the future, the allowance will be adjusted as appropriate.

 

The recovery of the credits through the extraordinary rate adjustmentregulatory asset, in accordance with ANEEL ́s Resolution 45, from March 3,2004, is carried out in the ratio of 64.29% and 35.71% for the credits relatingto revenue losses and amounts to be transferred to generators, respectively.

 

(a.1) Recovery of revenue losses incurred during the period of theEnergy Rationing Plan:

 

CEMIG recorded a regulatory asset under U.S. GAAP amounting to R$35 asof December 31, 2007 (R$209 as of December 31, 2006), in accordance with theconsensus reached by the FASB’s - EITF Issue No 92-07, “Accounting byRate-Regulated Utilities for the Effects of Certain Alternative RevenuePrograms”.

 

(a.2)Amounts to be collected from consumers and transferred to generators:

 

Amounts represent losses incurred by the generation companies thatbought power in the MAE, held in 2004 by the Electric Power Trading Chamber (“CCEE/MAE”),in the period from June 1st, 2001 until February 28, 2002, withprices exceeding the amount of R$49.26/MWh (“free energy”). These amounts arebeing collected by the Company and passed on to the generation companies (seenote 12). This asset includes taxes on revenues and regulatory charges. Whenthe amounts are received by the consumers, the amounts relating to taxes onrevenue and regulatory charges are paid directly to the Federal Government.

 

F-22

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(b) Energytransactions on CCEE/MAE during the rationing plan

 

The amounts receivable refer to the difference betweenthe prices paid by CEMIG in the CCEE/MAE energy transactions, during the energyrationing period and the amountof R$49.26/MWh that is recovered through the “extraordinary rate adjustment”(RTE), as defined in the General Agreement. Distribution concessionairescollect and transfer, on amonthly basis, the special rate adjustmentamounts to generators and distributors,including CEMIG, that have amounts receivable, starting in March 2003.

 

The conclusion of certain lawsuits filed by othergenerators that are still in progress may result in future changes in theamounts recorded.

 

Provision for losses

 

As described above, the Company receives RTE amountsfrom other distribution companies. ANEEL established a time limit for thesedistribution companies to collect RTE from their respective consumers. In theevent that these companies do not collect the full amount, the Company will notreceive the recorded asset. During 2007, the Company prepared an analysis toestimate whether these amounts will be collected by the respective distributioncompanies and based on this analysis, a provision for losses was recordedamounting to R$391 as of December 31, 2007.

 

(c) Recovery of additional Parcel A costs:

 

(c.1) Additional Parcel A Costs from January 1, 2001 to October 25,2001

 

The base amount of Parcel A costs to be reimbursed is equal to thedifference between the Parcel A costs actually incurred and the estimatedParcel A costs used for purposes of computing the last annual rate adjustmentprior to the Energy Rationing Plan. This amount bears interest at the SELICrate from the day that the actual cost was paid until the date of recovery. In January 2004,ANEEL declared that the variations in Parcel A costs are not subject to amaximum recovery period. Recovery of Parcel A costs will start immediatelyafter the end of special rate adjustment recovery period, using the samerecovery criteria. Thus, the extraordinary rate adjustment applied to recoverbilling losses and free energy will also be used to recover the Parcel A costs.

 

(c.2) Additional Parcel A Costs from October 26, 2001 andthereafter

 

On October 25, 2001, the Federal Government,through Executive Act No 296, created a tracking account mechanism to controlthe variation of Parcel A costs for rate adjustment calculation purposes. Thisaccount is comprised of the amounts resulting from the difference between theParcel A costs actually incurred, from October 26, 2001 and thereafter,and the estimated Parcel A costs used for purposes of computing the annual rateadjustment as of April 8, 2001.

 

The amounts determined for the Parcel A costs for theperiod from October 26, 2001 and thereafter are recorded as deferredregulatory assets or liabilities, as follows:

 
| **Parcel A Items**                                        | ** ** | **December 31,   2007** | ** ** | **December 31,   2006** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
|                                                                |       |                              |       |                              |       |
| System service  charges                                             |       | 20                                |       | 44                                |       |
| Electricity  purchase rate                                          |       | (36                               | )          | 100                               |       |
| Itaipu  Binacional electricity transport rate                       |       | (1                                | )          | 4                                 |       |
| Fuel usage quota  – CCC                                        |       | (27                               | )          | (10                               | )          |
| Rate for use of  basic transmission network                         |       | (11                               | )          | (21                               | )          |
| Energy  development account quota – CDE                        |       | 10                                |       | 8                                 |       |
| Charges for use  of water resources                                 |       | 3                                 |       | 7                                 |       |
| Incentive  program for Alternative Electric Power Sources - PROINFA |       | 7                                 |       | 11                                |       |
|                                                                |       | (35                               | )          | 143                               |       |

 

The above-mentioned amounts are restated based on the SELIC throughannual rate adjustments.

 

F-23

----

 

(d) Deferred rate adjustment

 

ANEEL Resolution No. 71, dated April 4,2004, determined that the rate adjustment that should have been applied to theCompany’s rates on April 8, 2003 was 44.41%, instead of 31.53% which wasoriginally applied. The difference will be included by ANEEL in the future rateadjustments. Thepercentage difference of 12.88% (in absolute terms) will be offset through anincrease of R$301, in April 2003 values, in each one of the tariffadjustments scheduled to take place in 2004 through 2008, includingmonetary restatement calculated based on IGP-M variation plus 11.26% interest.

 
| ** **                                                | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                                                      |       |                  |       |   |   |
| Deferred rate  adjustment – since April 8, 2003 |       | 950                   |       | 950 |   |
| Interest  (defined by Aneel – 11.26% per year)       |       | 434                   |       | 351 |   |
| Monetary  restatement – IGP-M Index                  |       | 190                   |       | 137 |   |
| (-) Amounts  collected                                    |       | (1,029                | )          | (519 | ) |
|                                                      |       | 545                   |       | 919 |   |

 

**(e) PIS-PASEP/COFINS**

** **

TheFederal Laws No. 10,637 and 10,833, increased the rates and changed thebasis of calculation of PIS/PASEP and COFINS taxes on revenues. As a result ofthose changes, there was an increase in expense relating to PIS/PASEP andCOFINS, from December 2002 to June 2005 and from February of2004 to June 2005, respectively.

 

In view of the fact that this increase in the expenseshould be repaid to the Company through tariffs, the credits were registered,in accordance with a criteria defined by ANEEL, as a regulatory asset and therewas a counterpart reduction in the expense on PIS/PASEP and COFINS taxes.

 

(f) Special obligations

 

Special obligations areresources obtained by the concessionaire from consumer contributions, federalbudget allocations, as well as federal, state and municipal funds, and specialcredits relating to investments made in projects linked to the concession. Theresources represent either infrastructure assets or cash to fund theacquisition and/or construction of such assets usually to obtain connection tothe Company’s distribution network or to extend the existing network. Forregulatory purposes, the depreciation of these assets was included in thetariff rate setting process and the corresponding liability was recorded forthe amount of the total contributions. Under U.S. GAAP, the contributions wereconsidered reimbursements of construction costs and credited against the costof the related fixed assets.

 

On October 31, 2006,ANEEL issued a new regulation which changed the treatment of specialobligations with respect to the tariff setting process. The regulationestablishes, among other items, that beginning on the date of the nextrespective tariff revision, the special obligations will be amortized as areduction of net allowable costs over future periods, thereby reducing tariffs.Consequently, in accordance with SFAS No 71, the special obligations became aregulatory liability as a result of this new regulation.

 

Accordingly, the Companyrecorded a regulatory liability amounting to R$2,194 as of December 31,2006, as follows:

 

(i) The gross-up ofthe net book value of the Company’s assets recorded through consumercontributions for regulatory purposes amounting to R$1,137 recorded asProperty, plant and equipment; and,

 

(ii) The recognitionof the remaining portion of the regulatory liability amounting to R$1,057, witha corresponding operating expense during the year ended December 31, 2006.This amount represents the depreciation that was previously included inhistorical tariff increases prior to the new regulation.

 

F-24

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**5. INCOME TAXES**

 

Income taxes in Brazilinclude federal income tax and social contribution tax on income (which is anadditional federal income tax). The statutory annual rates applicable are 25%for federal income tax and 9% for social contribution tax.

 

The income taxes arecalculated on individual basis for each subsidiary and according to theBrazilian tax law can not be consolidated.

 

(a) Income tax reconciliation:

 

The amounts reported as income tax expense in the financial statementsare reconciled to the statutory rates as follows:

 
| ** **                                                                    | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                    | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                          |       |                                       |       |   |   |   |   |
| Income before  income taxes and minority interests                            |       | 2,303                                      |       | 1,199 |   | 2,107 |   |
| Income taxes (34%)                                                            |       | (783                                       | )          | (407 | ) | (716 | ) |
| Effects of:                                                                   |       |                                       |       |   |   |   |   |
| Tax benefit  (expense)-                                                       |       |                                       |       |   |   |   |   |
| Interest on  capital                                                          |       | —                                     |       | 57 |   | 216 |   |
| Reversal on  account receivable from State Government (1)                     |       | —                                     |       | 143 |   | 76 |   |
| Social  Contribution on Complementary Monetary Restatement                    |       | —                                     |       | (3 | ) | 51 |   |
| Adjustment on  Deferred regulatory liabilities – special obligations (2) |       | —                                     |       | (359 | ) | 38 |   |
| Equity in  Investees                                                          |       | 77                                         |       | 30 |   | 7 |   |
| Valuation  allowance                                                          |       | 14                                         |       | — |   | — |   |
| Others                                                                        |       | 7                                          |       | 42 |   | 28 |   |
| Income tax  expense                                                           |       | (685                                       | )          | (497 | ) | (300 | ) |
| Current                                                                       |       | (941                                       | )          | (575 | ) | (271 | ) |
| Deferred                                                                      |       | 256                                        |       | 78 |   | (29 | ) |
| Income tax  expense                                                           |       | (685                                       | )          | (497 | ) | (300 | ) |

 

The effective rates of theincome tax expense are 30% in 2007, 41% in 2006 and 14% in 2005.

 

Brazilian companies arepermitted to pay interest on capital. The calculation is based on theshareholders’ equity amounts prepared in accordance with Brazilian GAAP. Theinterest rate applied may not exceed the long-term interest rate determined bythe Brazilian Central Bank and interest paid may not exceed the greater of 50%of net income for the year or 50% of retained earnings plus profit reserves.

 

The amount ofinterest on capital is deductible for income taxes purposes. Accordingly, asopposed to a payment of dividends, the benefit to CEMIG is a reduction in itsincome taxes payable equivalent to the statutory tax rate applied to suchamount. The interest on capital is recorded in tax and accounting books asfinancial income, when declared by subsidiaries, and as financial expense whendeclared to be paid to stockholders. However, for financial statementspresentation, the Company considers the substance of the transaction. As such,interest on capital is considered as dividends received or paid, with no effectin the statements on income. In the financial statements, those dividends arereclassified, which means that interest on capital received is credited toinvestments and interest on capital paid is debited to retained earnings, whilethe income tax effects remain in statement of operations.

 

(1) Due tothe transfer of CRC Agreement receivables to the FIDC, described on note 3, theprovision for losses arising from the difference between the gross asset andthe recorded amount of CRC agreement became deductible for income taxespurposes according to the Brazilian Corporate and Taxes Laws.

 

(2) As a consequence of changes in ANEEL’sregulations in 2006, mentioned on Note 4, item “f”, the Company recorded anexpense in the 2006 Statement of operations in the amount of R$1,057 related tothe portion of special obligations previously charged against property, plantand equipment and which were previously depreciated by the Company forregulatory purposes.

 

F-25

----

 

(b) Analysis of deferred tax balances:

 

As of December 31, 2007 and 2006, the deferred tax balances havebeen computed using a 34% rate, which is the enacted tax rate expected to be inforce upon realization. The major components of the deferred income taxesaccount in the balance sheet are as follows:

 
| ** **                                                                           | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                           | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                                                                                 |       |                  |       |   |   |
| Deferred Tax  Assets:                                                                |       |                  |       |   |   |
| Tax loss  carryforwards                                                              |       | 548                   |       | 571 |   |
| Employee  post-retirement benefits                                                   |       | 411                   |       | 199 |   |
| Provision for  contingencies                                                         |       | 95                    |       | 75 |   |
| Provision for  doubtful accounts                                                     |       | 110                   |       | 108 |   |
| Temporary  difference on regulatory assets                                           |       | 451                   |       | 132 |   |
| Other temporary  differences                                                         |       | 2                     |       | 20 |   |
| Total gross  deferred tax assets                                                     |       | 1,617                 |       | 1,105 |   |
|                                                                                 |       |                  |       |   |   |
| Offset balance  between assets and liabilities                                       |       | (657                  | )          | (493 | ) |
|                                                                                 |       |                  |       |   |   |
| Valuation  allowance on realization of deferred tax balances                         |       | (437                  | )          | (423 | ) |
| Net deferred tax  assets                                                             |       | 523                   |       | 189 |   |
|                                                                                 |       |                  |       |   |   |
| Deferred Tax  Liabilities:                                                           |       |                  |       |   |   |
| Temporary  difference on regulatory assets                                           |       | (674                  | )          | (609 | ) |
| Effects of  differences between book and tax basis of property, plant and equipment. |       | (285                  | )          | (334 | ) |
| Other temporary  differences                                                         |       | —                |       | (11 | ) |
| Total gross  deferred tax liabilities                                                |       | (959                  | )          | (954 | ) |
|                                                                                 |       |                  |       |   |   |
| Offset balance between  liabilities and assets                                       |       | 657                   |       | 493 |   |
|                                                                                 |       |                  |       |   |   |
| Net deferred tax  liabilities                                                        |       | (302                  | )          | (461 | ) |
|                                                                                 |       |                  |       |   |   |
| Net deferred tax                                                                     |       | 221                   |       | (272 | ) |
|                                                                                 |       |                  |       |   |   |
| Current Assets                                                                       |       | 71                    |       | 14 |   |
| Other Assets                                                                         |       | 452                   |       | 175 |   |
| Current  Liabilities                                                                 |       | (140                  | )          | (331 | ) |
| Long-term  Liabilities                                                               |       | (162                  | )          | (130 | ) |

 

In assessing the realization of deferred tax assets, managementconsiders whether it is more likely than not that some portion or all of thedeferred tax assets will not be realized. The ultimate realization of deferredtax assets is dependent upon the generation of future taxable income during theperiods in which those temporary differences become deductible. Managementconsiders the scheduled reversal of deferred tax liabilities, projected futuretaxable income, and tax-planning strategies in making this assessment. Based onthe level of historical taxable income and projections for future taxableincome over the periods for which deferred tax assets are deductible,management believes that it is more likely than not that the Company willrealize the benefits of these deductible differences, net of existing valuationallowance at December 31, 2007. The amount of the deferred tax assetsconsidered realizable; however, could be reduced in the near term if estimatesof future taxable income are reduced.

 

Income Tax Loss Carryforwards may be offset against a maximum of 30% ofannual taxable income and do not expire under Brazilian tax law.

 

Considering, as mentioned before, that the Brazilian Tax Law permitscompanies to benefit from the payment of interest on capital and deduct suchpayments from their taxable income, the Company adopted the tax position ofpaying interest on capital to their shareholders. According to our tax planningstrategy, after utilizing a balance of withholding taxes currently recorded as “RecoverableTaxes” in the next few years, we will distribute interest on capital in anamount that will reduce our taxable income to close to or equal to zero.  As a consequence, this alternative shouldeliminate the payment of the income and social contribution taxes by CemigHolding and the tax losses carryforwards would not be recovered.

 

F-26

----

 

As previously mentioned, the Company considers the payment of intereston capital as part of its tax-planning strategies and also considers that thepayment of interest on capital in the future is a better alternative than therecovery of its tax loss carryforwards. Therefore, there is recorded avaluation allowance on its Financial Statements in the amount of R$437 as of December 31,2007 related to tax toss carryforwards not expected to be recovered.

 

The valuation allowance for deferred tax assets as of December 31,2006 and 2005 was R$ 423 and zero, respectively. The net change in the totalvaluation allowance was an increase of R$ 14 in 2007, increase of R$ 423 in2006 and zero in 2005.

 
| ** **                  | ** ** | **Income Tax**   | ** ** | **Social Contribution** | ** ** | **Total**             | ** ** |
|-----------------------------|------------|-----------------------|------------|------------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **December 31,** | ** ** | **December 31,**        | ** ** | **December 31,** | ** ** |
| ** **                  | ** ** | **2007**              | ** ** | **2006**                     | ** ** | **2007**              | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
|                        |       |                  |       |                         |       |                  |       |   |   |   |   |   |   |
| Entity                      |       |                  |       |                         |       |                  |       |   |   |   |   |   |   |
| Basis of NOL  carryforward: |       |                  |       |                         |       |                  |       |   |   |   |   |   |   |
| CEMIG                       |       | 1,521                 |       | 1,576                        |       | 1,539                 |       | 1,576 |   | — |   | — |   |
| Infovias                    |       | 92                    |       | 108                          |       | 92                    |       | 108 |   | — |   | — |   |
|                        |       |                  |       |                         |       |                  |       |   |   |   |   |   |   |
| Tax rate                    |       | 25                    | %          | 25                           | %          | 9                     | %          | 9 | % | — |   | — |   |
|                        |       |                  |       |                         |       |                  |       |   |   |   |   |   |   |
| Deffered Tax  Assets        |       |                  |       |                         |       |                  |       |   |   |   |   |   |   |
| CEMIG                       |       | 380                   |       | 394                          |       | 139                   |       | 142 |   | 519 |   | 536 |   |
| Infovias                    |       | 22                    |       | 26                           |       | 7                     |       | 9 |   | 29 |   | 35 |   |
| Total                       |       | 402                   |       | 420                          |       | 146                   |       | 151 |   | 548 |   | 571 |   |

 

The Company adopted the provisions of FIN 48 on January 1, 2007and recognizes the effect of income tax positions only if those positions aremore likely than not of being sustained. Recognized income tax positions aremeasured at the largest amount that is greater than 50% likely of beingrealized. Changes in recognition or measurement are reflected in the period inwhich the change in judgment occurs. As a result of the implementation of FIN48, the company did not record any further tax benefit related to uncertaintyin income taxes, beyond those already recorded. A reconciliation of thebeginning and ending amount of unrecognized tax benefits is as follows:

 
| ** **                                      | ** ** | **Principal** | ** ** |
|-------------------------------------------------|------------|---------------|------------|
| Balance at  December 31, 2006              |       | 28            |       |
| Increase related  to current year tax positions |       | 4             |       |
| Balance at  December 31, 2007              |       | 32            |       |

 

Includedin the balance of total unrecognized tax benefits at December 31, 2007,are potential benefits of R$32 that has been mentioned above, if recognized,would affect the effective rate on income from continuing operations. Theincreased refers substantially to tax payable - suspended liabilities describedin note 17(c). It was included R$1 of interest and penalties related tounrecognized tax benefits in the statements of operations of the current year,and the cumulative amount of interest and penalties as of December 31,2007 was R$22.

 

TheCompany and its subsidiaries file federal income tax returns only in Brazil (exceptTranschile Charrua Transmission S.A. which domiciled in Chile and is in astart-up phase). All income before taxes is from Brazilian sources. For yearsbefore 2003, the Company is no longer subject to Brazilian federal income taxexaminations. All income before taxes, minority interest and related incometaxes are from Brazilian sources. The main lawsuits challenge by the BrazilianRevenue Service are described in note 17. Management, based on the opinion ofthe legal counsel, considers that there are no significant risks that are notcovered by liabilities already recorded or that would result in a materialchange to its financial position or results of operations. The Company does notpredict that the total amounts of unrecognized tax benefits will significantlyincrease or decrease within the next 12 months.

 

TheCompany’s policy is to record penalties and interests related to unrecognizedtax benefits as financial expenses in the consolidated statements of income.

 

F-27

----

 

**6. CASH AND CASH EQUIVALENTS**

 

The following table sets forth amounts of cashand cash equivalents for the dates indicated:

 
| ** **                                                   | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                   | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                                                         |       |                  |       |   |   |
| Cash on hand and  in banks                                   |       | 360                   |       | 100 |   |
| Short-term  investments, principally certificates of deposit |       | 1,424                 |       | 1,008 |   |
|                                                         |       | 1,784                 |       | 1,108 |   |

 

**7. ACCOUNTSRECEIVABLE, NET**

 

The following table sets forth informationconcerning accounts receivable:

 
| ** **                       | ** ** | **As of December 31, 2007** | ** ** | ** **                   | ** ** | ** **                   | ** ** |
|----------------------------------|------------|-------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                       | ** ** | ** **                                      | ** ** | **Past-due**                 | ** ** | **Total  December 31,** | ** ** |
| ** **                       | ** ** | **Current**                                     | ** ** | **Up to 90  days** | ** ** | **Over 90  days**       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                             |       |                                            |       |                         |       |                         |       |   |   |   |   |
| Residential                      |       | 367                                             |       | 167                          |       | 80                           |       | 614 |   | 626 |   |
| Industrial                       |       | 280                                             |       | 53                           |       | 226                          |       | 559 |   | 531 |   |
| Commercial                       |       | 221                                             |       | 58                           |       | 61                           |       | 340 |   | 338 |   |
| Rural                            |       | 66                                              |       | 22                           |       | 20                           |       | 108 |   | 91 |   |
| Governmental entities            |       | 141                                             |       | 17                           |       | 62                           |       | 220 |   | 191 |   |
| Public services                  |       | 46                                              |       | 3                            |       | 5                            |       | 54 |   | 77 |   |
| Subtotal                         |       | 1,121                                           |       | 320                          |       | 454                          |       | 1,895 |   | 1,854 |   |
| Distributors                     |       | 127                                             |       | —                       |       | 1                            |       | 128 |   | 185 |   |
|                             |       | 1,248                                           |       | 320                          |       | 455                          |       | 2,023 |   | 2,039 |   |
|                             |       |                                            |       |                         |       |                         |       |   |   |   |   |
| Allowance for  doubtful accounts |       | —                                          |       | —                       |       | (295                         | )          | (295 | ) | (297 | ) |
|                             |       | 1,248                                           |       | 320                          |       | 160                          |       | 1,728 |   | 1,742 |   |
| Current assets                   |       |                                            |       |                         |       |                         |       | 1,684 |   | 1,692 |   |
| Other  non-current assets        |       |                                            |       |                         |       |                         |       | 44 |   | 50 |   |

 

No single customer represented more than 10% of total receivables as ofDecember 31, 2007 and 2006 or of electricity sales to final customers forthe years ended December 31, 2007, 2006 and 2005.

 

The accounts receivable,other non-current asset, of R$44 as of December 31, 2007 (R$50 on December 31,2006), refers to renegotiated payment of the debts with COPASA (Minas GeraisWater Company- a company controlled by the Minas Gerais State Government ), up to September 2012, and PBH (the Municipalityof Belo Horizonte), up to March 2010.

 

There are recorded creditsreceivable from an industrial consumer in the amount of R$91, not paid due toan injunction that allowed this payment to be deferred until final judgment ofa legal action challenging the rate increase during the Cruzado Economic Plan,by Ministerial Order 045/86. The Company expects this action to be concludedbefore the end of 2008 and expects the amounts to be received in full.

 

F-28

----

 

The allowance for doubtfulaccounts, by class of consumer, is as follows:

 
| ** **            | ** ** | **Year ended December 31,** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|
| ** **            | ** ** | **2007**                                   | ** ** | **2006** | ** ** |
|                  |       |                                       |       |   |   |
| Residential           |       | 77                                         |       | 102 |   |
| Industrial            |       | 159                                        |       | 106 |   |
| Commercial            |       | 40                                         |       | 62 |   |
| Rural                 |       | 8                                          |       | 13 |   |
| Governmental entities |       | 8                                          |       | 11 |   |
| Public services       |       | 3                                          |       | 3 |   |
|                  |       | 295                                        |       | 297 |   |

 

The changes in allowance for doubtful accounts were as follows:

 
| ** **                                                | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                      |       |                                       |       |   |   |   |   |
| Balance at  beginning of the year                         |       | 297                                        |       | 214 |   | 165 |   |
| Accounts written  off                                     |       | (95                                        | )          | (11 | ) | (5 | ) |
| Provision for  the year recorded as other operating costs |       | 93                                         |       | 94 |   | 54 |   |
| Balance at end  of the year                               |       | 295                                        |       | 297 |   | 214 |   |

 

**8. RECOVERABLE TAXES**

 

The following table sets forth amounts of taxesrecoverable for the dates indicated:

 
| ** **                  | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                        |       |                  |       |   |   |
| Current assets -            |       |                  |       |   |   |
| Income tax                  |       | 254                   |       | 96 |   |
| Social  contribution tax    |       | 99                    |       | 27 |   |
| VAT                         |       | 152                   |       | 9 |   |
| PIS-PASEP                   |       | 27                    |       | 7 |   |
| COFINS                      |       | 135                   |       | 33 |   |
| Other                       |       | 22                    |       | 33 |   |
|                        |       | 689                   |       | 205 |   |
| Other  non-current assets - |       |                  |       |   |   |
| Income tax                  |       | 233                   |       | 260 |   |
| Social  contribution tax    |       | 26                    |       | 29 |   |
| VAT                         |       | 57                    |       | 270 |   |
|                        |       | 316                   |       | 559 |   |

 

The income taxand Social Contribution Tax credits basically refer to amounts calculated inthe Company’s previous years tax returns, and advance payments made in 2007,which will be compensated in the Income Tax and Social Contribution payable in 2008.

 

The credits of ICMS recoverable, recorded as Other Non-Current Assets,arise from acquisitions of fixed assets and are offset in 48 months. TheCompany is in the process of adaptation to the new requirements for electronicinformation demanded by the Minas Gerais State Government, which will enablethe credits to be offset starting in 2008.

 

F-29

----

 

**9. INVESTMENTS IN AFFILIATES**

 

The following table describes the Company equity investments:

 
| ** **           | ** ** | **December 31,** | ** ** |
|----------------------|------------|-----------------------|------------|
| ** **           | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                 |       |                  |       |   |   |
| Rio Minas Energia    |       | 276                   |       | 213 |   |
| GASMIG               |       | 193                   |       | 153 |   |
| EATE                 |       | 186                   |       | 203 |   |
| ENTE                 |       | 63                    |       | 66 |   |
| Transleste           |       | 12                    |       | 14 |   |
| ETEP                 |       | 38                    |       | 42 |   |
| Transchile           |       | 12                    |       | 13 |   |
| Centroeste de  Minas |       | 7                     |       | 7 |   |
| Transudeste          |       | 7                     |       | 7 |   |
| ERTE                 |       | 14                    |       | 15 |   |
| ECTE                 |       | 11                    |       | 12 |   |
| Transirape           |       | 5                     |       | 5 |   |
| Cachoeirão      |       | 17                    |       | — |   |
| Guanhães        |       | 10                    |       | — |   |
| Other  investments   |       | 18                    |       | 12 |   |
|                 |       | 869                   |       | 762 |   |

 

a) Acquisition of capital interest of Light

 

OnMarch 28, 2006, CEMIG, Andrade Gutierrez Concessões S.A., J.L.A.Participações S.A. and Pactual Energia Participações S.A. created Rio MinasEnergia Participações S.A. (“RME”), a newly formed holding company, in whicheach partner holds a stake of 25%. On the same date, RME entered into a SharePurchase Contract (“the Contract”) with EDF International S.A. (“EDFI”) for theacquisition of the interest held by EDFI, directly and indirectly, in LIGHTS.A. (“LIGHT”), corresponding to 79.39% of the total registered capital ofLIGHT, a holding company which owns several electricity companies, includingthe distribution concessionaire Light Serviços de Eletricidade S.A., which has3.8 million consumers (unaudited) (6.4% of the Brazilian market-unaudited) in31 municipalities in the State of Rio de Janeiro, and the generator LightEnergia S.A., which has installed capacity in hydroelectric power 852 MW(unaudited). The purchase was funded equally through capital contributions byeach of RME’s shareholders.

 

Following is the purchase price allocation recorded byRME and percentage recognized by CEMIG (19.85%):

 
| ** **                    | ** ** | **LIGHT** | ** ** |
|-------------------------------|------------|-----------|------------|
|                          |       |      |       |
| Current assets                |       | 2,683     |       |
| Property, plant and equipment |       | 3,863     |       |
| Other assets                  |       | 1,983     |       |
| Total assets acquired         |       | 8,529     |       |
| Current liabilities           |       | (1,624    | )          |
| Long-term financing           |       | (3,063    | )          |
| Other long-term liabilities   |       | (2,963    | )          |
| Total liabilities             |       | (7,650    | )          |
| Net consolidated assets       |       | 879       |       |
| Interest acquired             |       | 19.85     | %          |
| Net assets  acquired          |       | 174       |       |
| Price paid                    |       | 174       |       |

 

OnMay 16,2007 the Brazilian National Development Bank (“BNDES”) converted90% of its debentures into shares/quotas of Light S.A. corresponding to 31.50%of the total registered capital. The consequence of this transaction was areduction in the interest ownership of Rio Minas Energia Participações S.A. (“RME”)in Light S.A. from 79.39% to 54.20% and a decrease in the indirect ownership ofCEMIG from 19.89% to 13.55%.Subsequently, on October 19, 2007, the BNDES exercised 72,727 warrants,which reduced RME’s stake to 52.25%, and the stake held by Cemig to 13.06%.

 

F-30

----

 

b)Acquisition of interest in transmission companies

 

OnAugust 16, 2006, CEMIG, in partnership with MDU Brasil Ltda. (“MDU”)and Brascan Brasil Ltda. (“Brascan”), entered into agreements (“the Agreements”)with Schahin Holding S.A. to purchase interests in the electricity transmissionconcessions Empresa Amazonense de Transmissão de Energia S.A.– EATE, EmpresaParaense de Transmissão de Energia S.A. – ETEP, Empresa Norte de Transmissão deEnergia S.A. – ENTE, Empresa Regional de Transmissão de Energia S.A.– ERTE andEmpresa Catarinense de Transmissão de Energia S.A. – ECTE.

 

Thenet consolidated assets acquired of the transmission companies at July 31,2006 are as follows:

 
| ** **                        | ** ** | **ETEP** | ** ** | **ENTE** | ** ** | **ERTE** | ** ** | **EATE** | ** ** | **ECTE** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |     |       |     |       |     |       |
| Current assets                    |       | 39       |       | 58       |       | 10       |       | 195      |       | 33       |       |
| Property, plant  and equipment    |       | 290      |       | 633      |       | 126      |       | 1,623    |       | 239      |       |
| Other assets                      |       | 20       |       | 15       |       | 2        |       | 111      |       | —   |       |
| Total assets  acquired            |       | 349      |       | 706      |       | 138      |       | 1,929    |       | 272      |       |
| Current  liabilities              |       | (18      | )          | (57      | )          | (8       | )          | (88      | )          | (14      | )          |
| Long-term  financing              |       | (67      | )          | (243     | )          | (41      | )          | (391     | )          | (61      | )          |
| Other long-term  liabilities      |       | (19      | )          | (25      | )          | (2       | )          | (65      | )          | (24      | )          |
| Total  liabilities                |       | (104     | )          | (325     | )          | (51      | )          | (544     | )          | (99      | )          |
| Net consolidated  assets          |       | 245      |       | 381      |       | 87       |       | 1,385    |       | 173      |       |
| Interest  acquired                |       | 17.51    | %          | 18.35    | %          | 18.35    | %          | 14.94    | %          | 7.50     | %          |
| Net consolidated  assets acquired |       | 43       |       | 70       |       | 16       |       | 207      |       | 13       |       |
| Price paid                        |       | 43       |       | 70       |       | 16       |       | 207      |       | 13       |       |

 

(c) Sale of Way TVsubsidiary

 

During 2005, the Company’s Board of Directorsauthorized the sale, through a public auction, of all of Empresa de InfoviasS.A.’s equity interest in WAY TV. At an auction held on July 27, 2006, WayTV Belo Horizonte S.A. was sold in its entirety to TNL PCS Participações S.A.,a subsidiary of Tele Norte Leste Participações S.A., for R$132. The conclusionof the sale depended on the authorization by the National TelecommunicationsAgency, ANATEL.

 

On October 23, 2007 Anatel approved thetransaction, pending publication in the Official Federal Gazette, afterreconsidering a decision made on March 19, 2007, when it had refusedapproval for the transfer of stockholder control.

 

The profit of Infovias from this sale, in the amountof R$49 was recognized in the 4th quarter of 2007, when the approval was publishedin the Official Federal Gazette.

 

F-31

----

 

**10. PROPERTY, PLANT, EQUIPMENTAND INTANGIBLE, NET**

 

The following table describes theconsolidated property, plant and equipment:

 
| ** **                                          | ** ** | **Annual**                    | ** ** | ** **            | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-------------------------------|------------|-----------------------|------------|------------|------------|
| ** **                                          | ** ** | **average rate of** | ** ** | **December 31,** | ** ** |
| ** **                                          | ** ** | **depreciation**              | ** ** | **2007**              | ** ** | **2006**   | ** ** |
| ** **                                          | ** ** | **%**                         | ** ** | ** **            | ** ** | ** ** | ** ** |
| In service                                          |       |                          |       |                  |       |       |       |
| Generation-                                         |       |                          |       |                  |       |       |       |
| Hydroelectric                                       |       | 2.47                          |       | 9,140                 |       | 9,102      |       |
| Hydroelectric-  Consortia                           |       | 2.51                          |       | 1,185                 |       | 1,156      |       |
| Thermoelectric                                      |       | 3.90                          |       | 260                   |       | 260        |       |
|                                                |       |                          |       | 10,585                |       | 10,518     |       |
| Transmission                                        |       | 3.03                          |       | 1,701                 |       | 1,618      |       |
| Distribution                                        |       | 5.08                          |       | 11,522                |       | 10,258     |       |
| Administration                                      |       | 14.57                         |       | 516                   |       | 488        |       |
| Telecom                                             |       | 8.34                          |       | 311                   |       | 351        |       |
|                                                |       |                          |       | 24,635                |       | 23,233     |       |
| Accumulated  depreciation and amortization          |       |                          |       |                  |       |       |       |
| Generation                                          |       |                          |       | (4,707                | )          | (4,556     | )          |
| Generation –  Consortia                        |       |                          |       | (93                   | )          | (63        | )          |
| Transmission                                        |       |                          |       | (981                  | )          | (926       | )          |
| Distribution                                        |       |                          |       | (6,048                | )          | (5,867     | )          |
| Administration                                      |       |                          |       | (408                  | )          | (394       | )          |
| Telecom                                             |       |                          |       | (135                  | )          | (131       | )          |
|                                                |       |                          |       | (12,372               | )          | (11,937    | )          |
| Total in service                                    |       |                          |       | 12,263                |       | 11,296     |       |
| Construction in  progress                           |       |                          |       |                  |       |       |       |
| Generation                                          |       |                          |       | 226                   |       | 155        |       |
| Generation –  Consortia                        |       |                          |       | 122                   |       | 40         |       |
| Transmission                                        |       |                          |       | 61                    |       | 166        |       |
| Distribution                                        |       |                          |       | 806                   |       | 1,488      |       |
| Administration                                      |       |                          |       | 117                   |       | 69         |       |
| Telecom                                             |       |                          |       | 7                     |       | 6          |       |
| Total in  construction in progress                  |       |                          |       | 1,339                 |       | 1,924      |       |
| Total of  property, plant and equipment             |       |                          |       | 13,602                |       | 13,220     |       |
| Intangibles –  gross carrying amount           |       |                          |       | 360                   |       | 318        |       |
| Accumulated  amortization                           |       |                          |       | (127                  | )          | (112       | )          |
| Total of  Intangibles                               |       |                          |       | 233                   |       | 206        |       |
| Total of  property, plant, equipment and intangible |       |                          |       | 13,835                |       | 13,426     |       |

 

Interest cost capitalized during the years ended December 31,2007, 2006 and 2005 was R$120, R$293, and R$237, respectively.

 

Under Brazilian law, CEMIG’s powergeneration, transmission and distribution assets may not be retired, disposedof, transferred, sold or mortgaged without the prior authorization of ANEEL.The proceeds received from the disposal of assets must be deposited in anearmarked bank account and used in the purchase of other concession assets. Inaccordance with normal practice in Brazil for electric utilities, from time totime, CEMIG constructs distribution systems for the benefit of consumers forwhich the consumer reimburses the cost. These reimbursements are accounted foras a reduction to the cost basis of the related assets as they are received.

 

The Company has recordedR$307 as Construction in progress - Distribution on December 31, 2007(R$931 on December 31 2006) related to the “Light for All Program”.

 

F-32

----

 

Under the Light for AllProgram, approximately 180,000 consumers (unaudited information) wereconnected, mainly in rural areas, for a total cost, as of December 31,2007, of R$1,599. The program is being carried out with funds from the federaland state governments, in the amounts, respectively, of R$593 and R$79. Theremaining amount, R$927, was financed with the Company’s own funds.

 

Consortia

 

CEMIG is a partner incertain consortia for electricity generation projects. Each partner has theright to take energy generated by the power plant in an amount proportionate tothe partner’s investment. These projects are governed by executory contractswhich establish the rights and obligations of each party.

 

CEMIG’s participation inconsortia, represented by amounts invested in the projects and which are includedin the previous table, is as follows:

 
| ** **                                    | ** ** | **CEMIG’s**  | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **Participation** | ** ** | **2007**              | ** ** | **2006** | ** ** |
| ** **                                    | ** ** | **%**             | ** ** | ** **            | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | ** **        | ** ** | ** **            | ** ** | ** ** | ** ** |
| In service-                                   |       |              |       |                  |       |   |   |
| Queimado  Hydroelectric Power Plant           |       | 82.50             |       | 207                   |       | 207 |   |
| Funil  Hydroelectric Power Plant              |       | 49.00             |       | 152                   |       | 154 |   |
| Igarapava  Hydroelectric Power Plant          |       | 14.50             |       | 56                    |       | 56 |   |
| Porto Estrela  Hydroelectric Power Plant      |       | 33.33             |       | 55                    |       | 55 |   |
| Aimorés  Hydroelectric Power Plant       |       | 49.00             |       | 661                   |       | 659 |   |
| Cemig Capim  Branco Hydroelectric Power Plant |       | 21.05             |       | 54                    |       | 25 |   |
| (-) Accumulated  depreciation                 |       |              |       | (93                   | )          | (63 | ) |
|                                          |       |              |       | 1,092                 |       | 1,093 |   |
|                                          |       |              |       |                  |       |   |   |
| Construction in  progress-                    |       |              |       |                  |       |   |   |
| Queimado  Hydroelectric Power Plant           |       | 82.50             |       | 14                    |       | — |   |
| Aimorés  Hydroelectric Power Plant       |       | 49.00             |       | 25                    |       | 9 |   |
| Cemig Capim  Branco Hydroelectric Power Plant |       | 21.05             |       | —                |       | 18 |   |
| Funil  Hydroelectric Power Plant              |       | 49.00             |       | 11                    |       | 8 |   |
| Baguari  Hydroelectric Power Plant            |       | 34.00             |       | 72                    |       | 5 |   |
|                                          |       |              |       | 122                   |       | 40 |   |
|                                          |       |              |       | 1,214                 |       | 1,133 |   |

 

Theparticipation of the other partners in energy generation from consortia is asfollows:

 
| **Consortium - Power Plants**     | ** ** | **Consortium participants, other than CEMIG**                | ** ** | **Participation** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------|------------|-------------------|------------|
| ** **                        | ** ** | ** **                                                   | ** ** | **(%)**           | ** ** |
|                              |       |                                                         |       |              |       |
| Porto Estrela  Hydroelectric      |       | Companhia de Tecidos Nortes de Minas Gerais – COTEMINAS |       | 33.34             |       |
|                              |       | Companhia Vale do Rio Doce – VALE                       |       | 33.33             |       |
|                              |       |                                                         |       |              |       |
| Igarapava Hydroelectric           |       | Companhia Vale do Rio Doce – VALE                       |       | 38.15             |       |
|                              |       | Companhia Mineira de Metais – CMN                       |       | 23.93             |       |
|                              |       | Companhia Siderúrgica Nacional - CSN                    |       | 17.92             |       |
|                              |       | Mineração Morro Velho - MMV                        |       | 5.50              |       |
|                              |       |                                                         |       |              |       |
| Funil Hydroelectric               |       | Companhia Vale do Rio Doce - VALE                            |       | 51.00             |       |
|                              |       |                                                         |       |              |       |
| Queimado Hydroelectric            |       | Companhia Energética de Brasília                   |       | 17.50             |       |
|                              |       |                                                         |       |              |       |
| Aimorés Hydroelectric        |       | Companhia Vale do Rio Doce - VALE                            |       | 51.00             |       |
|                              |       |                                                         |       |              |       |
| Cemig Capim Branco  Hydroelectric |       | Companhia Vale do Rio Doce - VALE                            |       | 48.43             |       |
|                              |       | Comercial e Agrícola Paineiras Ltda.                    |       | 17.89             |       |
|                              |       | Companhia Mineira de Metais - CMN                            |       | 12.63             |       |
|                              |       |                                                         |       |              |       |
| Baguari Hydroelectric             |       | Furnas Centrais Elétrica S.A                            |       | 15.00             |       |
|                              |       | Baguari I Geração de Energia Elétrica S.A     |       | 51.00             |       |

 

F-33

----

 

**11. ESCROWDEPOSITS**

 

The escrow deposits relate principally to tax andlabor issues.

 

The escrow deposits related totax refer to ITCMD – Imposto de Transmissão Causa Mortis e Doação (Inheritanceand Donation Tax)  in the amount of R$50,Social Security and income tax obligations – related to indemnity for the “Anuênio”and profit shares in the amount of R$53 and R$69 respectively. The labor claims relate mainly to overtime and hazardous occupationcompensation in the amount of R$33.

 

**12.ACCOUNTS PAYABLE TO SUPPLIERS**

 
| ** **                                                                           | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                           | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Electricity  suppliers-                                                              |       |                  |       |   |   |
| Eletrobrás – Energy from Itaipu                                            |       | 197                   |       | 191 |   |
| Furnas Centrais Elétricas S.A.                                                  |       | 66                    |       | 61 |   |
| Spot market –  CCEE/MAE                                                         |       | 83                    |       | 79 |   |
| Payments to  generators for energy purchased on CCEE/MAE during the rationing period |       | 338                   |       | 328 |   |
| Others                                                                               |       | 148                   |       | 137 |   |
|                                                                                 |       | 832                   |       | 796 |   |
|                                                                                 |       |                  |       |   |   |
| Supplies and  services                                                               |       | 293                   |       | 236 |   |
|                                                                                 |       | 1,125                 |       | 1,032 |   |
|                                                                                 |       |                  |       |   |   |
| Current  liabilities                                                                 |       | 784                   |       | 768 |   |
| Long-term  liabilities                                                               |       | 341                   |       | 264 |   |

 

Due to the agreementestablished between CEMIG, ANEEL and market agents, the amounts due to CCEE/MAEare due September 2009 and are adjusted using the SELIC rate plus annualinterest of 1%. The conclusion of some court proceedings in progress, broughtby market agents, in relation to the interpretation of the rules in forceat the time of the realization of the transactions in the ambit of theCCEE/MAE, may result in changes in the amounts recorded. (See note 4).

 

**13. TAXESPAYABLE**

 

The following table describes accrued taxes payable:

 
| ** **                    | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Short-term -                  |       |                  |       |   |   |
| Income tax                    |       | 40                    |       | 20 |   |
| Social  contribution tax      |       | 13                    |       | 8 |   |
| VAT                           |       | 300                   |       | 256 |   |
| Tax on revenue –  COFINS |       | 125                   |       | 143 |   |
| Tax on revenue –  PASEP  |       | 32                    |       | 35 |   |
| Others                        |       | 49                    |       | 39 |   |
|                          |       | 559                   |       | 501 |   |
| Long-term -                   |       |                  |       |   |   |
| Income tax                    |       | 2                     |       | — |   |
| Tax on revenue –  COFINS |       | —                |       | 34 |   |
| Tax on revenue –  PASEP  |       | —                |       | 7 |   |
|                          |       | 2                     |       | 41 |   |
|                          |       | 561                   |       | 542 |   |

 

F-34

----

 

**14.FINANCING**

 

(a)              The following tables describe the Company ́sfinancings:

 
| ** **                              | ** ** | ** **                          | ** ** | ** **                   | ** ** | ** **   | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|--------------|------------|-----------------------|------------|
| ** **                              | ** ** | ** **                          | ** ** | **Annual**                   | ** ** | ** **   | ** ** | **2007**              | ** ** | **2006** | ** ** |
| **LENDERS**                             | ** ** | **Payments of Principal** | ** ** | **Interest  Rates (%)** | ** ** | **Currency** | ** ** | **Short  Term**       | ** ** | **Long  Term** | ** ** | **Total** | ** ** | **Total** | ** ** |
| ** **                              | ** ** | ** **                          | ** ** | ** **                   | ** ** | ** **   | ** ** | **R$ million**   | ** ** |
| **IN  FOREIGN CURRENCY**                |       |                                |       |                         |       |         |       |                  |       |   |   |   |   |   |   |
| ABN AMRO Bank –  N. II             |       | Annually through 2013               |       | 6.00                         |       | US$          |       | —                |       | 89 |   | 89 |   | 107 |   |
| ABN AMRO Real  S.A. III, IV and V       |       | Semi-annually through 2009          |       | 6.35                         |       | US$          |       | 13                    |       | 13 |   | 26 |   | 47 |   |
| Banco do Brasil S.A. – Various (1) |       | Semi-annually through 2024          |       | Various                      |       | US$          |       | 13                    |       | 80 |   | 93 |   | 132 |   |
| Banco do Brasil S.A. II                 |       | Single payment in 2009              |       | 3.90                         |       | JPY          |       | —                |       | 61 |   | 61 |   | 70 |   |
| Banco Paribas II                        |       | Semi-annually through 2012          |       | 5.89                         |       | EURO         |       | 3                     |       | 10 |   | 13 |   | 17 |   |
| Banco Paribas I and III                 |       | Semi-annually through 2010          |       | Libor + 1.87                 |       | US$          |       | 21                    |       | 31 |   | 52 |   | 63 |   |
| KFW                                     |       | Semi-annually through 2016          |       | 4.50                         |       | EURO         |       | 2                     |       | 14 |   | 16 |   | 19 |   |
| UNIBANCO I, III e VIII             |       | Through various                     |       | 6.50                         |       | US$          |       | —                |       | 8 |   | 8 |   | 153 |   |
| UNIBANCO III and  V                     |       | Single payment in 2009              |       | 5.50                         |       | US$          |       | —                |       | 4 |   | 4 |   | 4 |   |
| UNIBANCO IV and  IX                     |       | Single payment in 2009              |       | 5.00                         |       | US$          |       | —                |       | 15 |   | 15 |   | 18 |   |
| MBK Furukawa Sistemas  S.A. / UNIBANCO  |       | Semi-annually through 2008          |       | Libor + 5.45                 |       | US$          |       | 6                     |       | — |   | 6 |   | 20 |   |
| Toshiba do Brasil S.A.                  |       | Quarterly through 2009              |       | Libor + 6.00                 |       | US$          |       | 6                     |       | 1 |   | 7 |   | 8 |   |
| Other                                   |       | Through various                     |       | Various                      |       | Various      |       | —                |       | — |   | — |   | 3 |   |
| **Total  foreign currency financing**   | ** ** | ** **                          | ** ** | ** **                   | ** ** | ** **   | ** ** | **64**                | ** ** | **326** | ** ** | **390** | ** ** | **661** | ** ** |

 

F-35

----

 
| ** **                                                         | ** ** | ** **                          | ** ** | ** **                          | ** ** | ** **   | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|--------------|------------|-----------------------|------------|
| ** **                                                         | ** ** | ** **                          | ** ** | ** **                          | ** ** | ** **   | ** ** | **2007**              | ** ** | **2006** | ** ** |
| **LENDERS**                                                        | ** ** | **Payments of Principal** | ** ** | **Annual Interest  Rates (%)** | ** ** | **Currency** | ** ** | **Short  Term**       | ** ** | **Long  Term** | ** ** | **Total** | ** ** | **Total** | ** ** |
| ** **                                                         | ** ** | ** **                          | ** ** | ** **                          | ** ** | ** **   | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **IN LOCAL  CURRENCY**                                             | ** ** | ** **                          | ** ** | ** **                          | ** ** | ** **   | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Banco Credit  Suisse First Boston S.A. II                          |       | Single payment in 2010              |       | 106.00% of CDI                      |       | R$           |       | —                |       | 75 |   | 75 |   | 75 |   |
| Banco do Brasil S.A. III and VII                                   |       | Single payment in 2009              |       | 111.00% of CDI                      |       | R$           |       | 2                     |       | 119 |   | 121 |   | 121 |   |
| Banco do Brasil S.A. IV and VIII                                   |       | Annually through 2013               |       | CDI + 1.70                          |       | R$           |       | 4                     |       | 109 |   | 113 |   | 114 |   |
| Banco do Brasil S.A. V and IX                                      |       | Single payment in 2013              |       | 107.60% of CDI                      |       | R$           |       | 10                    |       | 126 |   | 136 |   | 139 |   |
| Banco do Brasil S.A.                                               |       | Annually through 2014               |       | 104.10% of CDI                      |       | R$           |       | 24                    |       | 1,200 |   | 1,224 |   | 1,228 |   |
| Banco Itaú – BBA V                                       |       | Single payment in 2008              |       | IGP-M + 10.48                       |       | R$           |       | 180                   |       | — |   | 180 |   | 174 |   |
| Banco Itaú – BBA  III e VI                               |       | Single payment in 2008              |       | CDI + 2.00                          |       | R$           |       | 41                    |       | — |   | 41 |   | 41 |   |
| Banco Itaú – BBA IV and VII                              |       | Annually through 2013               |       | CD + 1.70                           |       | R$           |       | 14                    |       | 304 |   | 318 |   | 317 |   |
| Banco Itaú – BBA                                         |       | Annually through 2014               |       | CDI + 1.70                          |       | R$           |       | —                |       | — |   | — |   | 4 |   |
| HSBC Bank Brasil S.A.                                              |       | Single payment in 2008              |       | CDI + 2.00                          |       | R$           |       | 61                    |       | — |   | 61 |   | 61 |   |
| Banco Votorantim S.A. I and III                                    |       | Single payment in 2010              |       | 113.50% of CDI                      |       | R$           |       | 3                     |       | 54 |   | 57 |   | 57 |   |
| Banco Votorantim  S.A. II,III, IV                                  |       | Annually through 2013               |       | CDI + 1.70                          |       | R$           |       | 5                     |       | 101 |   | 106 |   | 107 |   |
| Banco WESTL do Brasil                                              |       | Single payment in 2008              |       | IGP-M + 10.48                       |       | R$           |       | 45                    |       | — |   | 45 |   | 43 |   |
| Banco Nacional de Desenvolvimento Econômico e Social  - BNDES |       | Monthly through 2008                |       | SELIC + 1.00                        |       | R$           |       | 26                    |       | — |   | 26 |   | 170 |   |
| Bradesco S.A. II, III                                         |       | Annually through 2013               |       | CDI + 1.70                          |       | R$           |       | 19                    |       | 379 |   | 398 |   | 399 |   |
| Bradesco S.A.                                                      |       | Annually through 2014               |       | CDI + 1.70                          |       | R$           |       | —                |       | — |   | — |   | 2 |   |
| Debentures II                                                      |       | Single payment in 2009              |       | CDI + 1.20                          |       | R$           |       | 6                     |       | 350 |   | 356 |   | 358 |   |
| Debentures II                                                      |       | Single payment in 2011              |       | 104% of CDI                         |       | R$           |       | 4                     |       | 239 |   | 243 |   | 244 |   |
| Debentures  III—Minas Gerais State Government                 |       | Through various                     |       | IGP-M                               |       | R$           |       | —                |       | 18 |   | 18 |   | 14 |   |
| Debêntures IV                                                 |       | Single payment in 2014              |       | IGP-M + 10.50                       |       | R$           |       | 17                    |       | 278 |   | 295 |   | 273 |   |
| Debêntures V                                                  |       | Single payment in 2017              |       | IPCA + 7.96                         |       | R$           |       | 1                     |       | 401 |   | 402 |   | — |   |
| ELETROBRÁS I and III                                          |       | Monthly through 2013                |       | FINEL + 7.50 and 8.50               |       | R$           |       | 19                    |       | 60 |   | 79 |   | 95 |   |
| ELETROBRÁS IV                                                 |       | Quarterly thorough 2023             |       | UFIR + 6.00 to 8.00                 |       | R$           |       | 47                    |       | 290 |   | 337 |   | 213 |   |
| Large consumers –  C.V.R.D.                                   |       | Semi-annually through 2011          |       | Various                             |       | R$           |       | 3                     |       | 2 |   | 5 |   | 7 |   |
| Banco Santander Brasil S.A. I and II                               |       | Annually through 2013               |       | CDI + 1.70                          |       | R$           |       | 1                     |       | 80 |   | 81 |   | 85 |   |
| UNIBANCO V                                                         |       | Single payment in 2009              |       | CDI + 2.98                          |       | R$           |       | 2                     |       | 104 |   | 106 |   | 107 |   |
| UNIBANCO VI and X                                                  |       | Annually through 2013               |       | CDI + 1.70                          |       | R$           |       | 11                    |       | 309 |   | 320 |   | 321 |   |
| UNIBANCO I                                                         |       | Annually through 2013               |       | CDI + 1.70                          |       | R$           |       | 6                     |       | 73 |   | 79 |   | 81 |   |
| Banco Itaú and Bradesco (2)                                   |       | Semi-annually through 2015          |       | CDI + 1.70                          |       | R$           |       | 117                   |       | 873 |   | 990 |   | 982 |   |
| Caixa Econômica Federal                                       |       | Single payment in 2008              |       | CDI + 101.50                        |       | R$           |       | 200                   |       | — |   | 200 |   | — |   |
| Others                                                             |       | Through various                     |       | Various                             |       | R$           |       | 9                     |       | 3 |   | 12 |   | 31 |   |
| **Total local currency**                                           | ** ** | ** **                          | ** ** | ** **                          | ** ** | ** **   | ** ** | **877**               | ** ** | **5,547** | ** ** | **6,424** | ** ** | **5,863** | ** ** |
| **TOTAL**                                                          | ** ** | ** **                          | ** ** | ** **                          | ** ** | ** **   | ** ** | **941**               | ** ** | **5,873** | ** ** | **6,814** | ** ** | **6,524** | ** ** |

 

----

(1)    Theseinterest rates vary from 2.00 to 8.00% per year.

(2)    Refersto senior quotas of the FIDC.

 

F-36

----

 

On December 15, 2007,Cemig Distribuição S.A. concluded its second issue of non-convertibledebentures, issuing a single series of 40,000 non-convertible, unsecureddebentures, totaling R$400. These have a term of 120 months from the issuedate, with interest paid annually and payment of the principal in three equalinstallments in December 2015, 2016 and 2017. The nominal value of thedebentures will be updated by the variation of the IPCA inflation index, plusremuneration interest of 7.96% per year.

 

On December 21, 2007,Cemig Geração e Transmissão S.A. concluded its second issue of Commercial Paperin the amount of R$200, with maturity of 180 days. The nominal value of theComercial Papers will have interest of 101.5% of CDI.

 

(b) Compositionof foreign currency financings and domestic currency financings by indices:

 
| ** **                                                                                                             | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013**  | ** ** | **2014** | ** ** | **2015 and  thereafter** | ** ** | **Total** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|-----------|------------|----------|------------|-------------------------------|------------|-----------|------------|
| Currency -                                                                                                             |       |     |       |     |       |     |       |     |       |     |       |      |       |     |       |                          |       |      |       |
| United States  Dollars                                                                                                 |       | 59       |       | 71       |       | 41       |       | 31       |       | 28       |       | 26        |       | 2        |       | 42                            |       | 300       |       |
| Euro                                                                                                                   |       | 5        |       | 5        |       | 5        |       | 5        |       | 3        |       | 2         |       | 2        |       | 2                             |       | 29        |       |
| Japanese yen                                                                                                           |       | —   |       | 61       |       | —   |       | —   |       | —   |       | —    |       | —   |       | —                        |       | 61        |       |
| ** **                                                                                                             | ** ** | **64**   | ** ** | **137**  | ** ** | **46**   | ** ** | **36**   | ** ** | **31**   | ** ** | **28**    | ** ** | **4**    | ** ** | **44**                        | ** ** | **390**   | ** ** |
| **Index -**                                                                                                            |       |     |       |     |       |     |       |     |       |     |       |      |       |     |       |                          |       |      |       |
| *Certificado de Depósito Interbancário – CDI*(Interbank  deposit rate)                                  |       | 530      |       | 683      |       | 580      |       | 691      |       | 855      |       | 983       |       | 521      |       | 184                           |       | 5,027     |       |
| *Índice Geral de Preços de Mercado –*“IGP-M”**(General Market Price Index)                    |       | 241      |       | —   |       | —   |       | —   |       | —   |       | —    |       | 278      |       | 20                            |       | 539       |       |
| *Sistema Especial de Liquidação e Custódia –*“SELIC” (Brazilian benchmark interest rate) |       | 26       |       | —   |       | —   |       | —   |       | —   |       | —    |       | —   |       | —                        |       | 26        |       |
| *Unidade Fiscal de Referência –*“UFIR” (Tax Reference Unit)                                        |       | 47       |       | 42       |       | 37       |       | 37       |       | 33       |       | 28        |       | 28       |       | 85                            |       | 337       |       |
| *Índice  Interno da Eletrobrás**–*“FINEL”  (Eletrobrás Internal Index)                   |       | 19       |       | 12       |       | 12       |       | 12       |       | 12       |       | 12        |       | —   |       | —                        |       | 79        |       |
| Others                                                                                                                 |       | 14       |       | —   |       | —   |       | —   |       | —   |       | —    |       | 1        |       | 401                           |       | 416       |       |
| ** **                                                                                                             | ** ** | **877**  | ** ** | **737**  | ** ** | **629**  | ** ** | **740**  | ** ** | **900**  | ** ** | **1,023** | ** ** | **828**  | ** ** | **690**                       | ** ** | **6,424** | ** ** |
| ** **                                                                                                             | ** ** | **941**  | ** ** | **874**  | ** ** | **675**  | ** ** | **776**  | ** ** | **931**  | ** ** | **1,051** | ** ** | **832**  | ** ** | **734**                       | ** ** | **6,814** | ** ** |

 

(c) Thefollowing table sets forth the variations for the periods indicated in theforeign currency / Brazilian *real*exchange rates for the principal foreign currencies used to restate financing,expressed as a percentage:

 
| ** **             | ** ** | **Year ended December 31,** | ** ** |
|------------------------|------------|--------------------------------------------|------------|
| ** **             | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Currency-              |       |                                       |       |   |   |   |   |
| United States  Dollars |       | (17.15                                     | )          | (8.66 | ) | (11.82 | ) |
| Japanese Yen           |       | (11.78                                     | )          | (9.47 | ) | (23.43 | ) |
| Euro                   |       | (7.50                                      | )          | 1.85 |   | (23.50 | ) |

 

(d) Thefollowing table sets forth the variations for the periods indicated of theprincipal indices applied to domestic currency financing, in percentages:

 
| ** ** | ** ** | **Year ended December 31,** | ** ** |
|------------|------------|--------------------------------------------|------------|
| ** ** | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Index-     |       |                                       |       |   |   |   |   |
| CDI        |       | 11.82                                      |       | 15.05 |   | 18.15 |   |
| IGP-M      |       | 7.75                                       |       | 3.83 |   | 1.21 |   |
| SELIC      |       | 11.88                                      |       | 15.10 |   | 18.24 |   |
| FINEL      |       | 1.51                                       |       | 0.76 |   | 0.24 |   |

 

F-37

----

 

(e) The movement onloans, financings and debentures is as follows:

 
| ** **                               | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                   | ** ** | **2006** | ** ** |
|                                     |       |                                       |       |   |   |
| Balance at  beginning of year            |       | 6,524                                      |       | 4,826 |   |
| Loans and  financings                    |       | 1,389                                      |       | 3,448 |   |
| Monetary and  Foreign currency variation |       | 63                                         |       | 294 |   |
| Financial  charges provisioned           |       | 649                                        |       | 529 |   |
| Financial  charges paid                  |       | (672                                       | )          | (756 | ) |
| Amortization of  financings              |       | (1,139                                     | )          | (1,817 | ) |
| **Balance  at end of year**              | ** ** | **6,814**                                  | ** ** | **6,524** | ** ** |

 

(f) The consolidatedtotals of funds raised in 2007 are as follows:

 
| **Loans / financing sources**     | ** **   | **Principal  maturity** | ** **   | **Annual cost** | ** **   | **Amount  raised** | ** **   |
|--------------------------------------------------|--------------|-------------------------|--------------|----------------------|--------------|--------------------|--------------|
| **IN  LOCAL CURRENCY**                           | ** **   | ** **              | ** **   | ** **           | ** **   | ** **         | ** **   |
|                                             |         |                    |         |                 |         |               |         |
| ***Cemig Distribuição***               | * *     | * *                | * *     | * *             | * *     | * *           | * *     |
| Citibank                                         |         | 2007                    |         | 102.00% of CDI       |         | 200                |         |
| Caixa Econômica Federal                     |         | 2007                    |         | 101.60% of CDI       |         | 400                |         |
| Debentures                                       |         | 2017                    |         | IPCA + 7.96          | %            | 400                |         |
| ELETROBRÁS                                  |         | 2018                    |         | 6.00                 | %            | 141                |         |
| ELETROBRÁS                                  |         | 2009                    |         | 6.50                 | %            | 16                 |         |
| ELETROBRÁS                                  |         | 2013                    |         | 6.50                 | %            | 1                  |         |
| ELETROBRÁS                                  |         | 2011                    |         | 6.50                 | %            | 1                  |         |
|                                             |         |                    |         |                 |         |               |         |
| ***Cemig Geração e Transmissão*** | *** *** | *** ***            | *** *** | *** ***         | *** *** | *** ***       | *** *** |
| Caixa Econômica Federal                     |         | 2008                    |         | 101.50% of CDI       |         | 200                |         |
| Debentures –  Minas Gerais state government |         | 2031                    |         | IGP-M                |         | 30                 |         |
|                                             |         |                    |         |                 |         |               |         |
| **Total  raised**                                | ** **   | ** **              | ** **   | ** **           | ** **   | **1,389**          | ** **   |

 

(g) RestrictiveCovenants

 

Certain of CEMIG’s loans,financing agreements and debentures contain certain financial covenants whichare calculated using financial statements prepared in accordance with BrazilianGAAP.

 

The main covenants inexistence on December 31, 2007 are as follows:

 
| **Subject of covenant**                | ** ** | **Index required**          |
|----------------------------------------|------------|-----------------------------|
|                                   |       |                        |
| Debt  / Ebitda                         |       | Less  than or equal to 2,5  |
| Debt  / Ebitda                         |       | Less  than or equal to 3,36 |
| Net  debt/Ebitda                       |       | Less  than or equal to 3,25 |
| Current  debt/Ebitda                   |       | Less  than or equal to 90%  |
| Debt/Stockholders’  equity + debt |       | Less  than or equal to 53%  |
| Ebitda/Interest  on debt               |       | More  than or equal to 2,8  |
| Ebitda  / Interest                     |       | More  than or equal to 3,0  |
| Ebitda/(Financial  income (expenses)   |       | More  than or equal to 2,0  |
| CAPITAL  EXPENDITURE                   |       | Less  than or equal to 60%  |

 

Net debt = Total debt less (cash balance plus tradablesecurities)

Ebitda= earnings beforeinterest, taxes on profit, depreciation and amortization. In some contractsspecific criteria are established for calculation of Ebitda, with somevariations from this formula.

 

The Company is incompliance with all debt covenants above on December 31, 2007.

 

F-38

----

 

**15. REGULATORY CHARGES PAYABLE**

 

The following table describes the Company’s accrued regulatory chargespayable:

 
| ** **                             | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Global reserve  for reversion quota    |       | 23                    |       | 10 |   |
| Fuel usage quota                       |       | 30                    |       | 74 |   |
| Emergency capacity  charge             |       | 38                    |       | 40 |   |
| Energy development account             |       | 34                    |       | 32 |   |
| Energy  efficiency and R&D program |       | 267                   |       | 259 |   |
| Other                                  |       | 7                     |       | 5 |   |
|                                   |       | 399                   |       | 420 |   |
| Current  liabilities                   |       | 384                   |       | 420 |   |
| Non current  liabilities – other  |       | 15                    |       | — |   |

 

(a) Global reserve for reversion quota:

 

Theglobal reserve for reversion quota was established as a fund managed byELETROBRÁS (*Centrais ElétricasBrasileiras S.A*., the Federal Government-owned holding company forinvestments in the Brazilian power sector)for the purpose of reimbursement of electricity companies’ investments whentheir concessions expire and assets subject to the concession revert to theFederal Government. It is funded through assessments on power companies and isbased on 2.5% of assets in service, limited to 3% of total annual operatingrevenues, net of value-added tax on sales to final customers.

 

(b) Fuelusage quota:

 

Thefuel usage quota represents contributions made by the electricity companyconcessionaires to subsidize the cost of fuel used in the thermoelectric energygenerating process in the Brazilian power system.

 

(c) Emergency capacity charge:

 

Theemergency capacity charge represents a charge established in 2002, which isprorated among final consumers of electric energy, and relates to theacquisition of energy and contracted generation capacity by the *Comercializadora Brasileira de Energia Elétrica*(The Brazilian Emergency Energy Trader or “CBEE”).

 

(d) Energydevelopment account:

 

Theenergy development account was created by Law No. 10.438/02 to fosterenergy development in the states and to promote competition regarding energyproduced through wind farms, small hydroelectric power plants, biomass, naturalgas and coal. The amounts to be paid by CEMIG were defined by ANEEL Resolution No. 42dated January 31, 2003.

 

(e) Energy efficiency and R&D program

 

Incompliance with the regulation of the electric power sector, the electric powerdistributors and generators are required to spend 1% of their net revenues inenergy efficiency and research and development programs. The percentage isincluded annually in CEMIG’s revenues through a rate adjustment stipulated byANEEL, which should be destined to this program.

 

F-39

----

 

**16. EMPLOYEE POST-RETIREMENT BENEFITS**

 

TheCompany sponsors a pension plan, administered by *Fundação Forluminas de Seguridade Social* - FORLUZ(Forluminas Social Security Foundation, or “FORLUZ”) covering substantially allof its employees. The Company has applied SFAS No 87 “Employers’ Accounting forPensions” as from January 1, 1995. However, amortization of the nettransition obligation existing at January 1, 1995 has been computedretroactively as if it had been established on January 1, 1989, which is thedate that SFAS No 87 first became applicable for non-U.S. pension funds.

 

UntilOctober 1997, the Company sponsored only a defined benefit pension plan.From September 29, 1997 to May 1, 1998, participants were permittedto elect to migrate to a new defined contribution plan. Those participants whoelected to join the new plan had two options. The first was to maintain thebenefit earned up to the date of migration in the defined benefit plan, with nofurther increases for salary increases or future services, and futurecontributions would be made to the new plan to the individual account. Thesecond option for those participants who migrated to the defined contributionplan was to transfer the accumulated benefit as of that date to theirindividual account in the defined contribution plan. In both alternatives, theparticipants became fully vested in the benefits accumulated as of themigration date.

 

Underthe defined contribution plan the Company will match the employees’contributions from 3% to 12% of each employee’s salary, depending on certainfactors. The total assets in the defined contribution plan (which is alsoadministered by FORLUZ) as of December 31, 2007 and 2006 was R$2,131 andR$1,663, respectively, and the contribution expense for the years ended December 31,2007, 2006 and 2005 was R$34, R$53 and R$68, respectively.

 

CEMIGhas also established post-retirement health care and dental plans and pays lifeinsurance premiums for retirees. The accounting for these benefits is inaccordance with SFAS No 106 “Employers’ Accounting for Post-retirement Benefitsother than Pensions”.

 

CEMIGuses a December 31 measurement date for its employee post-retirementbenefits.

 

TheCompany adopted SFAS No. 158, effective December 31, 2006, whichrequires recognition of an asset or liability in the balance sheet reflectingthe funded status of pension and other post-retirement benefit plans withcurrent-year changes in the funded status recognized in shareholders’equity.  The Company recognized acumulative adjustment, net of tax, to adopt the recognition provisions of SFAS No. 158as of December 31, 2006.

 

Amortization of deficit inactuarial reserves

 

Part of thepost-retirement benefit liabilities, in the amount of R$1,063, as of December 31,2007 (R$1,317 as of December 31, 2006), was recognized as obligationspayable by the Company. These obligations are being amortized through monthlyinstallments, through June 2024, calculated under the fixed-installmentsystem (“Price Table”). Part of these amounts is restated annuallyaccording to the salary adjustment index for the Company’s employees (notincluding productivity) included in the defined benefit plan, and part isadjusted according to the IPCA – IPEAD (consumer price index calculated by theMinas Gerais Accounting Management and Economic Research Institute of MinasGerais Federal University), plus 6% per year.

 

In case FORLUZ reports asurplus for three consecutive years, such surplus may be used to reduce CEMIG’sobligations mentioned in the previous paragraph, as contractually agreed.Therefore, the surplus presented by FORLUZ in 2006, in the amount of R$207, wasused to reduce the Company’s debt mentioned above and therefore the annualpayments of contributions from CEMIG to Forluz. Such compensation does notrepresent a reduction on CEMIG’s benefit obligation, which is measuredaccording to actuarial criteria.

 

F-40

----

 

Thereconciliation of funded status of the plan is as follows:

 
| ** **                    | ** ** | **Defined benefit pension plan** | ** ** | **Post-retirement health care,  insurance and dental benefits** | ** ** |
|-------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| ** **                    | ** ** | **Year ended December 31,**      | ** ** | **Year ended December 31,**                                               | ** ** |
| ** **                    | ** ** | **2007**                                        | ** ** | **2006**                                                                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| Projected  Benefit obligation |       | 5,789                                           |       | 5,009                                                                                    |       | 900 |   | 790 |   |
| Fair Value of  plan assets    |       | (4,385                                          | )          | (3,983                                                                                   | )          | (33 | ) | (30 | ) |
| Funded status                 |       | 1,404                                           |       | 1,026                                                                                    |       | 867 |   | 760 |   |

 

Thechange in benefit obligations for the years ended December 31, 2007 and2006 is as follows:

 
| ** **                                             | ** ** | **Defined benefit pension plan** | ** ** | **Post-retirement health care,  insurance and dental benefits** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **Year ended December 31,**      | ** ** | **Year ended December 31,**                                               | ** ** |
| ** **                                             | ** ** | **2007**                                        | ** ** | **2006**                                                                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| Projected  Benefit obligation – beginning of year |       | 5,009                                           |       | 4,988                                                                                    |       | 790 |   | 721 |   |
| Service cost                                           |       | 6                                               |       | 6                                                                                        |       | 36 |   | 31 |   |
| Interest cost                                          |       | 546                                             |       | 545                                                                                      |       | 86 |   | 78 |   |
| Actuarial (gain)  loss                                 |       | 601                                             |       | (173                                                                                     | )          | 60 |   | (16 | ) |
| Plan amendment                                         |       | —                                          |       | —                                                                                   |       | — |   | 39 |   |
| Benefits paid to  participants                         |       | (373                                            | )          | (357                                                                                     | )          | (72 | ) | (63 | ) |
| Projected  Benefit obligation – end of year       |       | 5,789                                           |       | 5,009                                                                                    |       | 900 |   | 790 |   |

 

The Accumulated BenefitObligation as of December 31, 2007 and 2006 amounted to R$5,666 andR$4,426, respectively, and the contributions expected to be paid to the definedbenefit pension plan and other plans for the next year are R$190 and R$307,respectively.

 

The implementation of thedental care plan resulted in a plan amendment in the amount of R$39 in2006.

 

The change in planassets for the years ended December 31, 2007 and 2006 is as follows:

 
| ** **                                                 | ** ** | **Defined benefit pension plan** | ** ** | **Post-retirement health care,  insurance and dental benefits** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **Year ended December 31,**      | ** ** | **Year ended December 31,**                                               | ** ** |
| ** **                                                 | ** ** | **2007**                                        | ** ** | **2006**                                                                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| Fair market  value of plan assets – beginning of year |       | 3,983                                           |       | 3,572                                                                                    |       | 30 |   | 30 |   |
| Employer  contributions                                    |       | 191                                             |       | 223                                                                                      |       | 36 |   | 38 |   |
| Employee  contributions                                    |       | —                                          |       | —                                                                                   |       | 33 |   | 22 |   |
| Actual return on  plan assets                              |       | 584                                             |       | 545                                                                                      |       | 5 |   | 3 |   |
| Benefits paid to  participants                             |       | (373                                            | )          | (357                                                                                     | )          | (71 | ) | (63 | ) |
| Fair market  value of plan assets – end of year       |       | 4,385                                           |       | 3,983                                                                                    |       | 33 |   | 30 |   |

 

The changes in benefitobligations (net of taxes) recognized in Accumulated other comprehensive incomefor the years ended December 31, 2007, 2006 and 2005, net of taxes, are asfollows:

 
| ** **                                                   | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Accumulated  other comprehensive income at beginning of year |       | 610      |       | 506      |       | 531      |       |
| Initial adoption  of SFAS No 158, net of taxes          |       | —   |       | 244      |       | —   |       |
| Increase  (decrease) in liability                            |       | 400      |       | (140     | )          | (25      | )          |
| Accumulated  other comprehensive income at the end of year   |       | 1,010    |       | 610      |       | 506      |       |

 

F-41

----

 

Thecomponents of accumulated other comprehensive loss/income (SFAS No158) ended December 31,2007 areas follows:

 
| ** **                                                                       | ** ** | **Defined benefit  pension plan** | ** ** | **Post-retirement  health care,  insurance  and dental** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------------------------------|------------|
| Transition  obligation (asset) not yet recognized in NPPC at beginning of period |       | —                                      |       | 17                                                                 |       |
| Transition  obligation (asset) recognized in NPPC during period                  |       | —                                      |       | (5                                                                 | )          |
| Prior service  cost (credit) not yet recognized in NPPC at beginning of period   |       | 110                                         |       | 63                                                                 |       |
| Prior Service  Cost (credit) recognized in NPPC during period                    |       | (10                                         | )          | (6                                                                 | )          |
| Gain/loss not  yet recognized in NPPC at beginning of period                     |       | 626                                         |       | 108                                                                |       |
| Gain/loss  recognized in NPPC during period                                      |       | —                                      |       | (9                                                                 | )          |
| Total net  actuarial (gain)/ loss arising during period                          |       | 583                                         |       | 52                                                                 |       |
| Total  accumulated in other comprehensive loss as of 12/31/2007                  |       | 1,309                                       |       | 220                                                                |       |

 

The components of netperiodic benefit costs for years ended December 31, 2007, 2006 and 2005are as follows:

 
| ** **                             | ** ** | **Defined benefit pension plan** | ** ** | **Post-retirement health care,  insurance and dental benefits** | ** ** |
|----------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **Year ended December 31,**      | ** ** | **Year ended December 31,**                                               | ** ** |
| ** **                             | ** ** | **2007**                                        | ** ** | **2006**                                                                                 | ** ** | **2005** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                           |       | 5                                               |       | 6                                                                                        |       | 7 |   | 36 |   | 31 |   | 31 |   |
| Interest cost                          |       | 545                                             |       | 545                                                                                      |       | 491 |   | 86 |   | 78 |   | 78 |   |
| Expected return  on plan assets        |       | (566                                            | )          | (506                                                                                     | )          | (437 | ) | (4 | ) | (4 | ) | (5 | ) |
| Amortization of  transition obligation |       | —                                          |       | —                                                                                   |       | — |   | 5 |   | 6 |   | 5 |   |
| Amortization of  loss (gain)           |       | —                                          |       | 33                                                                                       |       | 27 |   | 9 |   | 11 |   | 10 |   |
| Expected  Employee contribution        |       | —                                          |       | —                                                                                   |       | — |   | (26 | ) | (22 | ) | (23 | ) |
| Amortization of  prior service cost    |       | 10                                              |       | 10                                                                                       |       | 3 |   | 5 |   | 2 |   | 2 |   |
| Net periodic  benefit cost             |       | (5                                              | )          | 88                                                                                       |       | 91 |   | 111 |   | 102 |   | 98 |   |

 

The components of theprojected net periodic post-retirement benefit costs for 2008 are as follows:

 
| ** **                             | ** ** | **Defined benefit pension  plan** | ** ** | **Post-retirement health  care, insurance and dental** | ** ** |
|----------------------------------------|------------|---------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| Service cost                           |       | 6                                           |       | 45                                                                         |       |
| Interest cost                          |       | 543                                         |       | 84                                                                         |       |
| Expected return  on plan assets        |       | (481                                        | )          | (4                                                                         | )          |
| Amortization of  prior service cost    |       | 10                                          |       | 6                                                                          |       |
| Amortization of  transition obligation |       | —                                      |       | 5                                                                          |       |
| Amortization of  loss                  |       | 38                                          |       | 12                                                                         |       |
| Expected  Employee contribution        |       | —                                      |       | (34                                                                        | )          |
|                                   |       | 116                                         |       | 114                                                                        |       |

 

The FASB issued SFAS No 158, “Employer’s Accountingfor Defined Benefit Pension and Other Postretirement Plans” in September 2006.As required, the Company adopted this statement effective on December 31,2006.

 

F-42

----

 

Theweighted-average asset allocations by asset category is as follows:

 
| ** **                       | ** ** | **Defined benefit pension plan, Post-retirement health care and Dental** | ** ** |
|----------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|
| ** **                       | ** ** | **Asset allocation  at December 31,**                                                             | ** ** | **Target asset allocation as per  FORLUZ Investment Committee  percentage or range of** | ** ** |
| **Type of investment** | ** ** | **2007**                                                                                                         | ** ** | **2006** | ** ** | **percentages** | ** ** |
|                             |       |                                                                                                             |       |   |   |   |   |
| Debt Securities                  |       | 80.70                                                                                                            | %          | 84.15 | % | From 70% to 100% |   |
| Equity  Securities               |       | 14.57                                                                                                            | %          | 10.61 | % | Up to 20% |   |
| Real Estate                      |       | 1.81                                                                                                             | %          | 2.48 | % | Up to 7% |   |
| Participant  loans               |       | 2.92                                                                                                             | %          | 2.76 | % | Up to 10% |   |
| Total                            |       | 100.00                                                                                                           | %          | 100.00 | % |   |   |

 

Investmentstrategies:

 

·                  FORLUZ Investment Committee determines investmentguidelines;

·                  Investment objectives: achieve the minimumactuarial yield (IPCA/IPEAD plus 6% per year), in both long and short terms;

·                  Types of allowed investments: Fixed income – lowcredit risk assets, stocks, real estate and loans to participants;

·                  Types of investments not allowed: medium and highcredit risk assets, foreign currencies and others according to the Brazilianlegislation;

·                  Use of derivatives: with the purpose of hedgingexposures.

 

Benchmarksfor investing plan assets:

 

·                  Debt securities: Market quotations - CDI, IGP-M, INPC (1), IPCA/IBGE (2);

·                  Equity securities: Market quotations for tradedsecurities and estimated selling price for non-traded securities - AverageIBOVESPA (3);

·                  Real Estate: Estimated selling price, based onexternal appraisal reports - IPCA/IPEAD + 6% per year;

·                  Participant loans: Recorded using contractualterms of the respective participant agreements. These loans have floatingrates, which approximate market rates - IPCA/IPEAD + 10.03% per year.

 

----

(1)          *IndiceNacional de Preços ao Consumidor* – INPC (Consumer Price National Index)

(2)          *Indice de Preços ao ConsumidorAmplo*- IPCA (Consumer PriceIndex calculated by the Brazilian Institute of Geography and Statistics –IBGE)

(3)          *Indice da Bolsa de Valores de São Paulo*–IBOVESPA (Index which represents the variation of the main shares negotiated onSâo Paulo Stock exchange)

 

As of December 31, 2007 and 2006, the pension plan assets includessecurities issued by CEMIG as follows:

 
| ** ** | ** ** | **Defined benefit pension plan** | ** ** |
|------------|------------|-------------------------------------------------|------------|
| ** ** | ** ** | **December 31, 2007**                 | ** ** | **December 31, 2006** | ** ** |
|       |       |                                            |       |   |   |
| Debentures |       | 342                                             |       | 203 |   |
| Shares     |       | 31                                              |       | 27 |   |
|       |       | 373                                             |       | 230 |   |

 

F-43

----

 

Assumptions used by the Company in 2007 and 2006 for its definedbenefit pension plans were as follows (percentage including projected inflationof 5% per annum):

 
| ** **                             | ** ** | **2007**              | ** ** | **2006**              | ** ** |
|----------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| Actuarial method                       |       | Projected Unit Credit |       | Projected Unit Credit |       |
| Annual discount  rate                  |       | 11.28                 |       | 11.30                 |       |
| Annual expected  return on plan assets |       | 9.72                  |       | 14.45                 |       |
| Annual salary  increase                |       | 6.08                  |       | 7.10                  |       |
| Annual increase  in benefits           |       | 4.00                  |       | 5.00                  |       |
| Mortality rate                         |       | AT - 83               |       | AT - 83               |       |
| Disability rate                        |       | Light Medium          |       | Light Medium          |       |
| Disable  mortality rate                |       | IAPB-57               |       | IAPB-57               |       |
| Expected annual  turnover rate         |       | 2.00                  |       | 2.00                  |       |

 

Therationale used in determination of long-term return on assets rate describedabove is based in the asset managers mid to long-term expectations and theBrazilian government bonds rates, reduced by 2% or 3% as the Company deemedreasonable.

 

CEMIG’s obligation related to its post-retirementhealth care plan is calculated using a defined annual contribution per employeeduring the rest of their lives. The contribution amount is not based on theincrease or decrease in medical care cost. If the predetermined contributionsdo not cover future benefit expenses, CEMIG’s employees will be required tomake additional contributions or the related medical benefits will be reduced,in accordance with an agreement between CEMIG and the labor union relating tothe health care plan.

 

Estimated FutureBenefit Payments

 

The followingbenefit payments, which reflect expected future service, as appropriate, areexpected to be paid:

 
| ** **           | ** ** | **Pension benefits** | ** ** | **Post-retirement health  care, insurance and dental  benefits** | ** ** |
|----------------------|------------|---------------------------|------------|--------------------------------------------------------------------------------------|------------|
| 2008                 |       | 409                       |       | 70                                                                                   |       |
| 2009                 |       | 429                       |       | 57                                                                                   |       |
| 2010                 |       | 450                       |       | 59                                                                                   |       |
| 2011                 |       | 473                       |       | 62                                                                                   |       |
| 2012                 |       | 497                       |       | 66                                                                                   |       |
| 2013 and  thereafter |       | 2,746                     |       | 380                                                                                  |       |
|                 |       | 5,004                     |       | 694                                                                                  |       |

 

Contribution

 

The Companyexpects to contribute R$165 to its pension plan and R$40 to post-retirementhealth care, insurance and dental benefits plan in 2008.

 

**17. ACCRUED LIABILITY FOR CONTINGENCIES**

 

CEMIG and its subsidiaries are party to certain legalproceedings in Brazil arising in the normal course of business, regarding tax,labor, civil and other issues. The Company believes that any loss in excess ofthe amounts provided for in respect of such contingencies will not have amaterial adverse effect on the Company’s results of operations or financialposition. For those contingencies for which an adverse outcome has been deemedprobable based on the assessment of management and the Company’s legal counsel,the Company has recorded provisions for losses as follows:

 

F-44

----

 
| ** **                               | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2007**              | ** ** | **2006** | ** ** |
| **Labor Claims**                         |       |                  |       |   |   |
| Various                                  |       | 78                    |       | 35 |   |
|                                     |       |                  |       |   |   |
| **Civil Lawsuits**                       |       |                  |       |   |   |
| Personal Injury                          |       | 8                     |       | 8 |   |
| Rate Increase                            |       | 72                    |       | 104 |   |
| Other                                    |       | 55                    |       | 61 |   |
|                                     |       | 135                   |       | 173 |   |
| **Tax**                                  |       |                  |       |   |   |
| FINSOCIAL                                |       | 21                    |       | 21 |   |
| VAT                                      |       | 2                     |       | 2 |   |
| Taxes payable – Suspended Liability |       | 46                    |       | 40 |   |
| INSS                                     |       | 1                     |       | 1 |   |
| Other                                    |       | 9                     |       | 2 |   |
|                                     |       | 79                    |       | 66 |   |
| **Regulatory**                           |       |                  |       |   |   |
| ANEEL Administrative Proceedings         |       | 54                    |       | 6 |   |
| **Total**                                |       | 346                   |       | 280 |   |

 

Certain details relating tosuch provisions are as follows:

 

(a) Labor Claims:

 

The labor claims relate principally to overtime andhazardous occupation compensation. In the fourth quarter of 2006 the Company reviewed the labor-law casesand the expectation of loss in the actions, changing the criteria forprovisioning from a percentage over the total amount of the actions to anindividual analysis of the cases,which resulted in a reduction of the amounts provisioned.

 

(b) Rate Increase

 

A number of industrialconsumers have brought legal action against the Company seeking refunds ofamounts paid to CEMIG as a result of a rate increase that became effectiveduring the Brazilian government’s economic stabilization “Cruzado Plan” in1986, alleging that such increases violated the price controls instituted aspart of that plan. CEMIG determines the amounts to be reserved based on theamount billed subject to consumers’ claims and recent court decisions.

 

(c) Taxes payable –Suspended Liability

 

The recorded provision ofR$46 as of December 31, 2007 (R$40 as of December 31, 2006) isrelated to the deduction of the social contribution tax paid in the calculationof income tax. CEMIG has a preliminary court order granted by the Eighth CivilCourt of the Federal Justice, on April 17,1998, for the exemption ofpayment.

 

(d) ANEELAdministrative Proceedings

 

On January 9, 2007,Aneel notified Cemig Distribuição S.A. that it considered certain criteriaadopted by the Company in calculation of the revenue from subvention forlow-income consumers to be incorrect, questioning the criteria foridentification of the consumers who should receive the benefit and also thecalculation of the difference to be reimbursed by Eletrobrás, in the estimatedamount of R$143. The Company has made a provision corresponding to the lossthat it considers probable in this dispute, in the amount of R$36.

 

Cemig Geração eTransmissão S.A. was served an infringement notice by the Minas Gerais StateForests Institute (IEF), alleging that it omitted to take measures to protectthe fish population, causing fish deaths, as a result of the flow and operationof the machinery of the Três Marias Hydroelectric Plant. The Company presenteda defense and rates the risk of loss in this action as probable in the amountof R$5.

 

F-45

----

 

(e) Other Civillawsuits

 

Several civil claims werebrought by people who have suffered damages arising mainly from accidents thatoccurred during the ordinary course of CEMIG business and damages suffered as aresult of the interruption of the supply of energy to them. The provision as ofDecember 31, 2007 represents the potential loss relating to these matters.

 

(f) Contingenciesfor which an adverse outcome has been deemed remote or reasonably possible

 

CEMIG has other relevantlegal proceedings against it for which the Company considers an unfavorableoutcome to be remote or reasonably possible. The Company does not expect toincur any material losses with respect to these contingencies and therefore theCompany has not recorded any accruals for such claims. Certain details relatingto such matters are as follows:

 

(I) Income and socialcontribution taxes on post retirement benefits

 

On October 11, 2001,the Brazilian Federal Tax Authorities (Secretaria da Receita Federal) issued anassessment notice, in the updated amount of R$305, arising from the utilizationof tax credits that resulted from the amendment of the Company’s 1997, 1998 and1999 tax returns. The tax returns were amended as a result of a change in theaccounting method for recording post-retirement benefit liabilities. Theadditional liabilities that resulted from the accounting change were recognizedin the revised tax returns, resulting in tax loss carryforwards.

 

Cemig presented anadministrative appeal in the Finance Ministry Taxpayers’ Council (Conselho deContribuintes do Ministério da Fazenda), obtaining a favorable decision for theyears 1997 and 1998 and an adverse decision to 1999. This adverse decisionwould result in a reduction of the tax loss carryforwards, recognized as taxcredits, in the historic amount of R$ 27. No reserve has been recorded as aresult of this assessment notice, since the Company believes that theprocedures which generated the tax credits are legally sound. An adverseoutcome in this matter has been deemed remote.

 

The tax credits mentionedin the preceding paragraph were offset against federal taxes paid in 2002 and2003. Due to this offset, CEMIG is exposed to additional penalties in theamount of R$271. No reserve for contingencies has been made to cover anyliabilities that may result from the tax assessment, since CEMIG believes thatit has solid legal grounds that support the procedures adopted. An adverseoutcome in this matter has been deemed remote.

 

 (II) ITCMD – Imposto deTransmissão Causa Mortis e Doação (Inheritance and Donation Tax)

 

The State of Minas Geraisassessed the Company for the non-payment of the tax named ITCMD – Imposto deTransmissão Causa Mortis e Doação (Inheritance and Donation Tax), in the amountof R$131 as of December 2007. No reserve has been recorded for theseclaims, since the Company believes that the probability of an adverse outcomein this matter has been deemed remote.

 

(III) Regulatoryagency acts

 

ANEEL has filedregulatory proceeding against CEMIG claiming that CEMIG owes the FederalGovernment R$671 due to a miscalculation of credits in the amount of thecumulative rate deficit (CRC) applied to reduce amounts owed to the FederalGovernment. On October 31, 2002, ANEEL issued a final administrativedecision against the Company. On January 9, 2004, the Brazilian TreasuryAuthority (“Secretaria do Tesouro Nacional”) issued an official collectionnotice, in the amount of R$516, to be paid before January 30, 2004. TheCompany did not make such payment since it believes that the likelihood of anadverse outcome is reasonably possible but not probable.

 

F-46

----

 

On November 14,2003, the Federal Public Auditing Court, which has the authority to audit anydecision by ANEEL that may impact public finance, initiated an administrativeproceeding against ANEEL to evaluate the criterion adopted by ANEEL in theEnergy Consumption Reduction Emergency Program (Programa Emergencial de Reduçãode Consumo de Energia Elétrica), or PERCEE. The Federal Public Auditing Courthas asked the Company to provide certain information with respect to its rates,which, according to the Federal Public Auditing Court, were mistakenly approvedby ANEEL. In addition, the Federal Public Auditing Court contested the indexand the X Factor applied by ANEEL in the Company’s rate revision of 2003.  The Company has filed an administrativeproceeding before the Federal Public Auditing Court to challenge this decision.

 

The potential lossresulting from the inability to provide support for these rates amounts toR$85. The Company has not recorded a provision relating to this matter as thelikelihood of an adverse outcome is reasonably possible but not probable.

 

(IV) Social Security and tax obligations –indemnity for the “Anuênio” and profit shares

 

CEMIG and its subsidiaries Cemig Geração e TransmissãoS.A. and Cemig Distribuição S.A. paid an indemnity to the employees in 2006, inthe amount of R$178, in exchange for the rights to future payments known as “Anuênios”which would be incorporated into salaries. The Company and its subsidiaries didnot make the payments of income tax and social security contribution on thisamount because it considered that these obligations are not applicable toamounts paid as indemnity. However, to avoid the risk of a future fine arisingfrom a different interpretation by the Federal Tax Authority and the NationalSocial Security Institution (“INSS”), the Company and its subsidiaries decidedto file for orders of mandamus to allow payment to the Court of the amount ofany obligations, in the amount of R$122, posted in Deposits connected to legalactions in Long term assets. No provision was made for possible losses in thismatter since the company and its subsidiaries classify the risk of loss in thisaction as reasonably possible but not probable.

 

In September 2006CEMIG was notified by the Social Security National Institute, INSS, as a resultof the non-payment of the Social Security contribution on the amounts paid asprofit sharing in the period 2000 to 2004, representing R$101. The Companyappealed in the administrative sphere against the decision. No provision hasbeen constituted since CEMIG believes it has arguments on the merit fordefense, and the adverse outcome in this action is considered to be reasonablypossible but not probable.

 

(V) Value-added tax

 

Since 2002 the Companyhas received a subvention from Eletrobrás in relation to the discounts given tolow income consumers. The Minas Gerais state office of the Federal TaxAuthority served an infringement notice on CEMIG, on the argument that thesubvention should be subject to the value-added tax (ICMS), in the total amountof R$103. No provision was constituted for the result of this dispute, sincethe company believes that it is not a legal obligation and that it hasarguments on the merit for defense against this demand. The Company believesthat the likelihood of an adverse outcome in this matter is reasonably possiblebut not probable.

 

Cemig was served aninfringement notice, as a co-responsible party, in relation to sales of excesselectricity by industrial consumers during the period of electricity rationing,in which the Minas Gerais State Tax Authority demanded payment of the ICMS taxon these transactions, in the amount of R$33. If the Company does have to paythe ICMS on these transactions, it can charge consumers the same amount torecover the amount of the tax plus any possible penalty charge. The expectationof loss in this matter is reasonably possible but not probable.

 

(VI) Civil lawsuits- Consumers

 

Various consumers and thePublic Prosecutor of Minas Gerais have brought civil claims against CEMIGcontesting rate adjustments applied in prior years, including rate subsidiesgranted to low-income consumers, the special rate adjustment, the inflationaryindex used to increase the electric rates in April 2003 and doublereimbursement for any amounts that the Company found to have wrongfullycollected and substitution of current adjustment index contained in theconcession agreement as well as a revision of the methodology for calculationof the “X” Factor. It is not possible at the present time to estimate theamounts involved in these claims. The Company believes that the likelihood ofan adverse outcome in this matter is remote.

 

F-47

----

 

The Company is thedefendant in suits challenging the charging of tax on public lighting. Theseclaims total an estimated amount of R$526 as of December 31, 2007. TheCompany believes that the likelihood of an adverse outcome in this matter isreasonably possible but not probable.

 

(g) EnvironmentalMatters

 

CEMIG has some legal proceedings related toEnvironmental Matters. Certain details relating to such matters are as follows:

 

(I) Aimorés

 

CEMIG is also aco-defendant, along with CVRD, in a public civil action lawsuit brought by theFederal Public Attorneys’ Office, concerning the Aimorés hydroelectricpower plant. The plaintiffs allege that CEMIG did not obtain proper licensingfor this project, and seek to recover damages and annul the environmentallicenses relating to this plant and those of the related concessions. CEMIG hasnot accrued any liability related to this claim since CEMIG believes it has arguments with merit for defense, and anadverse outcome in this action is considered to be reasonably possible.CEMIG also contested a lawsuit related to this power plant brought by amunicipality that alleges that the project authorizations have not been dulyapproved.

 

(II) Nova Ponte

 

We are a defendant in apublic civil action filed on February 5, 2007 by the RegionalEnvironmental Association of Patrocínio against us, Southern Electric and FEAM,which involves a claim for R$691.1 million in damages due to allegedenvironmental damage caused by the Nova Ponte Hydroelectric Plant. Thelikelihood of loss under this lawsuit is evaluated as possible.

 

In addition to the mattersdescribed above, CEMIG and its subsidiaries are involved in other litigationarising from the normal course of business. Management believes that any lossesrelating to these items would not have a material adverse effect on theconsolidated financial position and results of operations of the Company.

 

**18. SHAREHOLDERS’ EQUITY**

 

(a)     Capital stock:

 
| ** **                          | ** ** | **Year ended December 31,****(thousands of shares)** | ** ** |
|-------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **2007**                                                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| PREFERRED  SHARES:                  |       |                                                                          |       |   |   |   |   |
| Balance                             |       | 273,838,953                                                                   |       | 273,838,953 |   | 273,838,953 |   |
|                                |       |                                                                          |       |   |   |   |   |
| COMMON SHARES:                      |       |                                                                          |       |   |   |   |   |
| Balance                             |       | 212,622,504                                                                   |       | 212,622,504 |   | 212,622,504 |   |
|                                |       |                                                                          |       |   |   |   |   |
| TREASURY STOCK  (Preferred shares): |       |                                                                          |       |   |   |   |   |
| Balance                             |       | (207,384                                                                      | )          | (207,384 | ) | (207,384 | ) |
| Total                               |       | 486,254,073                                                                   |       | 486,254,073 |   | 486,254,073 |   |

 

At December 31,2007, the State Government owned 51% of the Company’s common shares and 2% ofits preferred shares, equal to 23% of total capital. The holders of thepreferred shares are not entitled to vote at shareholders’ meetings, but theshares have priority in the repayment of capital upon liquidation and areentitled to a minimum annual dividend as described in note 18 (d.1).

 

On April 26, 2007, theAnnual General Meeting approved an increase in the recorded capital, throughthe use of the Earnings Reserve so as to comply with Article 199 of theCorporate Law, which limits the amount of the reserves to the amount of thecompany’s registered capital. Therefore, the recorded capital of CEMIG, according to the Brazilian Corporate Law,increased from R$1,621 to R$2,432 with issuance of new shares, throughcapitalization of R$811 of the balance on the Retained Earnings Reserve,distributing as a consequence to stockholders a bonus of 50%, in new shares, ofthe same type as those held, and with nominal value R$0.01.

 

F-48

----

 

The Annual General Meetingapproved a reverse split of the shares of the company, of each lot of 500shares of nominal value R$0.01 for one share of nominal value R$5.00. Thereverse split occurred on June 4, 2007. All share and per share data hasbeen retroactively restated to reflect the reverse stock split.

 

As of December 31, 2007, the common andpreferred shares have a par value amount of R$5.00.

 

(b) Additional paid-in capital:

 

The balance refers to premium received by theCompany when shares were issued.

 

(c) Appropriated retained earnings:

 

The following describes certain reserves that are included inshareholders’ equity:

 

Fiscal incentiveinvestment reserve - this reserve results from an option to designate a portionof income tax otherwise payable for investment in government-approved projectsand it is recorded in the following year the taxable income is earned. UnderBrazilian GAAP, the amount designated for investments is recorded as an assetand credited directly to this reserve. This balance is restricted for capitalincrease. Under U.S. GAAP, this investment tax credit was originally creditedto income and then transferred from unappropriate retained earnings to thisreserve.

 

Rateshortfall reserve - this represents the accumulated rate shortfallreimbursement recorded under the rate-setting system in force up to March 1993.

 

Legalreserve - this reserve is a requirement for all Brazilian corporations andrepresents the appropriation of 5% of annual net income up to a limit of20% of share capital. This appropriation is not required in the fiscal year inwhich this legal reserve balance, added to the other established capitalreserves, exceeds 30% of the paid-in capital, which has been the case withrespect to 2006 and 2005. However, the Company opted to appropriate 5.00% of December 31,2007  net income, according to Braziliancorporate law, in the amount of R$87.

 

(d) Unappropriate retained earnings:

 

This balance represents retained earnings determined in accordance withU.S. GAAP after (i) the allocation of the amount for legal reserve (whenrequired) as described in note 18 (c); (ii) allocation or transfer to orfrom other reserves; and (iii) dividends and interest on capital in lieuof dividends as described in note 18 (d.1).

 

(d.1) Dividends and interest on capital inlieu of dividends:

 

The Company pays 50% of adjusted net income as mandatory dividends.Additionally, the Company distributed extraordinary dividends, to the extentthat cash is available, as determined by the Board of Directors, subject to theguidelines of the Company Directive Plan. Declared dividends are paid in twoequal installments, the first on June 30 and the second on December 30of the year subsequent to the profit generation.

 

Each preferred share is entitled to an annual dividend equal to thegreater of 10% of par value per preferred share or 3% of the book value of suchpreferred share, also based on the financial statements prepared in accordancewith Brazilian GAAP. This preferred dividend has priority over the allocationof the mandatory dividend amount for the relevant period.

 

After payment of the preferred dividend, the remainder of the mandatorydividend amount, if any, is allocated first to the payment of an annualdividend to the holders of common shares in an amount up to the annual cashdividend guaranteed to the preferred shares. If a portion of the mandatory dividend amount remains after the paymentof the common dividend, the remaining funds are to be distributed on an equal,pro rata basis with respect to all preferred shares and common shares.

 

The Company may also pay interim dividends to holders of preferredshares and common shares. Any interim dividends paid will count toward thecalculation of the dividend payable for the fiscal year in which the interimdividend was declared. Under the Brazilian Corporate Law, the Company’s Boardof Directors is permitted to recommend, under certain conditions, thenon-payment of the mandatory dividend for any year.

 

F-49

----

 

The State Government guarantees that the amount of dividends receivedby certain holders of preferred shares and common shares with respect to any fiscalyear will equal at least 6% of the par value of the preferred shares and thecommon shares.  Accordingly, even if netincome, based on the Company’s financial statements prepared in accordance withBrazilian GAAP, is zero with respect to any fiscal year, some of CEMIG’sshareholders will receive a dividend of 6%. This guarantee applies only toprivate holders of shares and not to public or governmental holders.

 

Under the Brazilian Corporate Law, if the Company does not distributethe minimum preferred dividends for three consecutive years, the preferredshares become entitled to vote.

 

Effective December 26, 1995, Brazilian law allows thedeductibility of interest on capital paid to shareholders for income taxpurposes, provided such interest is computed based on the Brazilian Long-termInterest Rate (TJLP), effective in the year the interest on capital iscomputed.

 

In 2007, 2006 and 2005, the minimum dividend requirements have been metand dividend distributions have been made on an equal, pro rata basis withrespect to all preferred shares and common shares.

 

UnderUSGAAP, the Company declared dividends and interest on capital in lieu ofdividends as follows:

 
| ** **                    | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|
| ** **                    | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|                          |       |                                       |       |   |   |   |   |
| Regular  Dividends            |       | 867                                        |       | 1,178 |   | 182 |   |
| Extraordinary  dividends      |       | 497                                        |       | — |   | 897 |   |
| 2005  supplementary dividends |       | —                                     |       | — |   | 77 |   |
| Interest on  capital          |       | —                                     |       | 169 |   | 635 |   |
| Total                         |       | 1,364                                      |       | 1,347 |   | 1,791 |   |

 

The Company reverts the dividends not claimed by the shareholderswithin three years of the date they were distributed in accordance with theBrazilian Corporate Law and its by-laws. The amounts of the dividends notclaimed is “de minimis”.

 

**19. NETOPERATING REVENUES**

 

(a) The composition of electricenergy supplied by consumer class is as follows:

 
| ** **                                            | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                            | ** ** | **GWh (unaudited)**                   | ** ** | **R$** | ** ** |
| ** **                                            | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                  |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Residential                                           |       | 6,813                                      |       | 6,647 |   | 6,589 |   | 3,529 |   | 3,244 |   | 3,051 |   |
| Industrial                                            |       | 24,183                                     |       | 23,759 |   | 23,472 |   | 3,216 |   | 2,937 |   | 2,850 |   |
| Commercial                                            |       | 4,111                                      |       | 3,851 |   | 3,754 |   | 1,865 |   | 1,654 |   | 1,506 |   |
| Rural                                                 |       | 2,200                                      |       | 1,938 |   | 1,941 |   | 591 |   | 505 |   | 473 |   |
| Governmental  entities                                |       | 1,678                                      |       | 1,650 |   | 1,593 |   | 562 |   | 512 |   | 464 |   |
| Public services                                       |       | 1,060                                      |       | 1,016 |   | 981 |   | 297 |   | 258 |   | 231 |   |
| Own consumption                                       |       | 34                                         |       | 30 |   | 29 |   | — |   | — |   | — |   |
| Unbilled, net                                         |       | —                                     |       | — |   | — |   | 131 |   | 209 |   | 133 |   |
|                                                  |       | 40,079                                     |       | 38,891 |   | 38,359 |   | 10,191 |   | 9,319 |   | 8,708 |   |
| Electricity  sales to the interconnected power system |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Supply                                                |       | 12,755                                     |       | 10,914 |   | 1,255 |   | 1,108 |   | 697 |   | 114 |   |
| Energy transactions  on CCEE/MAE                      |       | —                                     |       | — |   | — |   | 26 |   | 187 |   | 123 |   |
| Total                                                 |       | 52,834                                     |       | 49,805 |   | 39,614 |   | 11,325 |   | 10,203 |   | 8,945 |   |

 

F-50

----

 
| ** **             | ** ** | **Number of consumers (unaudited)** | ** ** |
|------------------------|------------|----------------------------------------------------|------------|
| ** **             | ** ** | **2007**                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|                   |       |                                               |       |   |   |   |   |
| Residential            |       | 5,188,604                                          |       | 5,064,556 |   | 4,927,966 |   |
| Industrial             |       | 73,606                                             |       | 70,795 |   | 69,207 |   |
| Commercial             |       | 560,910                                            |       | 549,378 |   | 537,656 |   |
| Rural                  |       | 554,286                                            |       | 495,066 |   | 417,026 |   |
| Governmental  entities |       | 54,199                                             |       | 51,929 |   | 49,955 |   |
| Public services        |       | 7,799                                              |       | 7,654 |   | 7,400 |   |
| Own consumption        |       | 829                                                |       | 796 |   | 769 |   |
|                   |       | 6,440,233                                          |       | 6,240,174 |   | 6,009,979 |   |
| Supply                 |       | 47                                                 |       | 43 |   | 8 |   |
| Total                  |       | 6,400,280                                          |       | 6,240,217 |   | 6,009,987 |   |

 

Rate Readjustment

 

The rates of CemigDistribuição S.A. were increased by an average of 5.16% from April 8,2007. The adjustment was applied in different percentages by category ofconsumption for the purpose of gradually eliminating, as stated in a note byANEEL, the cross-subsidies existing between consumer groups. As an example,residential consumers had an increase of 6.50% in their electricity bills,while high-voltage consumers had an increase of 2.89%. The increase of therates do not represent an increase of the CEMIG’s operating revenues in thesame percentage because part of it is used to the regulatory assets settlement.(See note 4).

 

Low-income consumers

 

The Federal Government, through CentraisElétricas Brasileiras – “ELETROBRAS” is reimbursing distributors for billinglosses incurred from 2002 resulting from the new classification criteriaestablished for low income consumers due to the lower rate applied to them.

 

ANEELis reviewing the procedures for calculation by the Company of revenue for thesubsidy for low-income consumers.  As aresult of this review, the amounts posted in 2007 were calculated on the basisof estimate, and their receipt for the period from February through December 2007is pending.

 

There is no individual client that represent morethan 10% of the operating revenues of the Company.

 

(b) The composition of other operatingrevenues is as follows:

 
| ** **                     | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------|------------|
| ** **                     | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|                           |       |                                       |       |   |   |   |   |
| Telecom and  cable TV services |       | 76                                         |       | 121 |   | 92 |   |
| Services  rendered             |       | 61                                         |       | 31 |   | 26 |   |
| Rental and  leasing            |       | 39                                         |       | 29 |   | 31 |   |
| Services rated                 |       | 13                                         |       | 10 |   | 11 |   |
| Others                         |       | 47                                         |       | 9 |   | 16 |   |
|                           |       | 236                                        |       | 200 |   | 176 |   |

 

(c) The composition of taxes on revenuesis as follows:

 
| ** **                 | ** ** | **Year ended December 31,** | ** ** |
|----------------------------|------------|--------------------------------------------|------------|
| ** **                 | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|                       |       |                                       |       |   |   |   |   |
| VAT                        |       | 2,493                                      |       | 2,286 |   | 2,164 |   |
| Emergency  capacity charge |       | —                                     |       | — |   | 176 |   |
| COFINS                     |       | 1,088                                      |       | 1,026 |   | 721 |   |
| PIS-PASEP                  |       | 254                                        |       | 231 |   | 175 |   |
| Others                     |       | 1                                          |       | — |   | 5 |   |
|                       |       | 3,836                                      |       | 3,543 |   | 3,241 |   |

 

F-51

----

 

The emergency capacity charge has not been collected since December 2005,in accordance with ANEEL ́s resolution.

 

(d) The composition of use of basictransmission network is as follows:

 
| ** **                                             | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                             | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                   |       |                                       |       |   |   |   |   |
| TUSD – Tariff  for Use of the Distribution System |       | 1,173                                      |       | 1,261 |   | 1,058 |   |
| Use of basic  transmission network                     |       | 437                                        |       | 417 |   | 403 |   |
| Use of  connection of basic transmission               |       | 95                                         |       | 102 |   | 62 |   |
|                                                   |       | 1,705                                      |       | 1,780 |   | 1,523 |   |

 

**20. OPERATING COSTS AND EXPENSES**

 

Some of the operatingcosts and expenses consist of the following:

 

(a) Electricity purchased for resale:

** **
| ** **                                                           | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                           | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                 |       |                                       |       |   |   |   |   |
| Itaipu Binacional                                                    |       | 1,000                                      |       | 822 |   | 825 |   |
| Initial contracts                                                    |       | 12                                         |       | 128 |   | 151 |   |
| Bilateral  contracts                                                 |       | 149                                        |       | 42 |   | — |   |
| Incentive  Program for Alternative Electric Power Sources -PROINFA - |       | 65                                         |       | 41 |   | — |   |
| From suppliers  though CCEE/MAE                                      |       | 100                                        |       | 26 |   | 23 |   |
| System services  charge                                              |       | 20                                         |       | 50 |   | 67 |   |
| Energy Public  Bids                                                  |       | 780                                        |       | 793 |   | 371 |   |
| From other  sources                                                  |       | 21                                         |       | 5 |   | 18 |   |
|                                                                 |       | 2,147                                      |       | 1,907 |   | 1,455 |   |

 

(b) Personnel:

 
| ** **                                                                    | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                    | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                          |       |                                       |       |   |   |   |   |
| Salary and  payroll charges                                                   |       | 946                                        |       | 911 |   | 788 |   |
| Benefits                                                                      |       | 117                                        |       | 115 |   | 83 |   |
|                                                                          |       | 1,063                                      |       | 1,026 |   | 871 |   |
| Personnel costs  transferred to construction in progress                      |       | (179                                       | )          | (158 | ) | (92 | ) |
|                                                                          |       | 884                                        |       | 868 |   | 779 |   |
| Voluntary  Indemnity for future annual bonus – “ Anuênio” |       | —                                     |       | 178 |   | — |   |
|                                                                          |       | 884                                        |       | 1,046 |   | 779 |   |

 

Removal of certainemployees salary benefits – “Anuênio”

 

CEMIG’semployees had the right to receive an annual 1,00% increase in their salariesover and beyond the normal performance/inflation increase for the remainingterm of their employment (the “Anuênio”). On April 2006, CEMIG made anoffer to settle this future obligation by making a one-time payment to eligibleemployees.

 

F-52

----

 

CEMIG’semployees accepted the offer on June 30, 2006, and the payment of theindemnity of R$178 was made in August 2006 and recorded in operatingexpenses. The amount of this payment represents an estimate of the futureincremental salaries to be received until the employees complete 35 years ofcontribution to the National Social Security System (INSS), discounted at arate of 12.00%, plus the application of a variable discount rate. The entirepayment was recorded as a current period expense in 2006 since the payment wasnon-reimbursable in the event the employee leaves CEMIG, and did not impose anyperformance requirements on employees.

 

(c) Regulatory charges:

 
| ** **                          | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                |       |                                       |       |   |   |   |   |
| Fuel usage quota                    |       | 330                                        |       | 506 |   | 416 |   |
| Global reserve  for reversion quota |       | 126                                        |       | 18 |   | 103 |   |
| Energy  development account         |       | 337                                        |       | 334 |   | 295 |   |
| ANEEL inspection  fee               |       | 37                                         |       | 34 |   | 24 |   |
| Charges for use  of water resources |       | 137                                        |       | 139 |   | 145 |   |
|                                |       | 967                                        |       | 1,031 |   | 983 |   |

 

(d) Third-partyServices

 
| ** **                                                           | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                           | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                 |       |                                       |       |   |   |   |   |
| Tax collecting agents/reading of measurers                           |       | 101                                        |       | 93 |   | 84 |   |
| Marketing                                                            |       | 64                                         |       | 49 |   | 49 |   |
| Maintenance and electric conservation of installations and equipment |       | 101                                        |       | 84 |   | 78 |   |
| Building  maintenance                                                |       | 35                                         |       | 29 |   | 27 |   |
| Outsourcing  services                                                |       | 19                                         |       | 27 |   | 13 |   |
| Transportation  and fares                                            |       | 8                                          |       | 8 |   | 3 |   |
| Lodging and  feeding                                                 |       | 17                                         |       | 16 |   | 16 |   |
| Security                                                             |       | 14                                         |       | 14 |   | 13 |   |
| Management  Consulting                                               |       | 13                                         |       | 22 |   | 16 |   |
| Maintenance of  furniture                                            |       | 26                                         |       | 21 |   | 18 |   |
| Maintenance of  vehicle                                              |       | 19                                         |       | 17 |   | 5 |   |
| Electric service                                                     |       | 26                                         |       | 20 |   | 17 |   |
| Other                                                                |       | 107                                        |       | 75 |   | 81 |   |
|                                                                 |       | 550                                        |       | 475 |   | 420 |   |

 

(e) Other:

 
| ** **                               | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                     |       |                                       |       |   |   |   |   |
| Provision for doubtful accounts          |       | 93                                         |       | 94 |   | 54 |   |
| Disposal of  fixed assets, net           |       | 40                                         |       | 37 |   | 39 |   |
| Provisions for  contingencies-           |       |                                       |       |   |   |   |   |
| Labor claims                             |       | 43                                         |       | (79 | ) | 3 |   |
| Civil lawsuits –  Consumers         |       | 28                                         |       | (18 | ) | 28 |   |
| ANEEL  administrative proceedings        |       | 43                                         |       | — |   | — |   |
| Civil lawsuits –  Other             |       | (6                                         | )          | 19 |   | 34 |   |
| Other                                    |       | 10                                         |       | — |   | — |   |
| Rentals                                  |       | 34                                         |       | 33 |   | 42 |   |
| Grants and  donations                    |       | 41                                         |       | 35 |   | 24 |   |
| Consumption –  electric energy      |       | 17                                         |       | 16 |   | 12 |   |
| Advertising                              |       | 26                                         |       | 21 |   | 29 |   |
| CCEE/MAE  contribution                   |       | 3                                          |       | 3 |   | 3 |   |
| Other taxes  (real estate, vehicle, etc) |       | 39                                         |       | 29 |   | 22 |   |
| General expenses                         |       | 61                                         |       | 44 |   | 89 |   |
|                                     |       | 472                                        |       | 234 |   | 379 |   |

 

F-53

----

 

**21. EMPLOYEE PROFIT SHARING**

 

TheCompany records employee profit sharing based on 3% of the service income,which resulted in an expense of R$96, R$71 and R$76, respectively, for theyears ended December 31, 2007, 2006 and 2005. Additionally, in thecollective labor agreement reached with the unions in November 2007, 2006and 2005, the Company agreed to pay additional installments of R$359, R$139 andR$184, respectively.

 

Underthese agreements, the share in the profits of 2007 and 2006, including thecontribution to the pension plan payable on these amounts, were R$455 andR$210, respectively.

 

**22. FINANCIAL INCOME (EXPENSES), NET**

 

Financial income (expense) consists of the following:

 
| ** **                                                                     | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                     | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Financial  income-                                                             |       |                                       |       |   |   |   |   |
| Interest and  monetary restatement of account receivable from State Government |       | 531                                        |       | 187 |   | 277 |   |
| Reversal  (provision) for losses on account receivable from State Government   |       | (372                                       | )          | 99 |   | 223 |   |
| Interest income                                                                |       | 177                                        |       | 169 |   | 193 |   |
| Late charges on  overdue electricity bills, recorded on the cash basis         |       | 112                                        |       | 129 |   | 81 |   |
| Foreign exchange  gains                                                        |       | 118                                        |       | 90 |   | 164 |   |
| Monetary restatement  on deferred regulatory assets                            |       | 520                                        |       | 574 |   | 672 |   |
| Gains on  derivatives contracts                                                |       | 4                                          |       | 25 |   | 6 |   |
| Taxes on  financial revenues                                                   |       | (65                                        | )          | (69 | ) | (93 | ) |
| Other                                                                          |       | 150                                        |       | 125 |   | 63 |   |
|                                                                           |       | 1,175                                      |       | 1,329 |   | 1,586 |   |
| Financial  expense-                                                            |       |                                       |       |   |   |   |   |
| Interest on  loans and financing                                               |       | (644                                       | )          | (529 | ) | (328 | ) |
| Monetary  restatement on deferred regulatory liabilities                       |       | (176                                       | )          | (133 | ) | (158 | ) |
| Financial  transaction tax (CPMF)                                              |       | (66                                        | )          | (83 | ) | (65 | ) |
| Foreign exchange  losses                                                       |       | (12                                        | )          | (2 | ) | (18 | ) |
| Monetary  restatement losses                                                   |       | (47                                        | )          | (34 | ) | (16 | ) |
| Losses on  derivative contracts                                                |       | (171                                       | )          | (116 | ) | (156 | ) |
| Other expenses                                                                 |       | (107                                       | )          | (97 | ) | (91 | ) |
|                                                                           |       | (1,223                                     | )          | (994 | ) | (832 | ) |
| Financial  income, net                                                         |       | (48                                        | )          | 335 |   | 754 |   |

 

The foreign exchangegains and losses are substantially related to the variation of the *real* in relation to the U.S. dollar.

 

F-54

----

 

**23. RELATED PARTY TRANSACTIONS**

 

The Company enters into avariety of related party transactions, the main transactions are as follows:

 

Consolidated

 
| ** **                                             | ** ** | **ASSETS** | ** ** | **LIABILITIES** | ** ** | **REVENUES** | ** ** | **EXPENSES** | ** ** |
|--------------------------------------------------------|------------|------------|------------|-----------------|------------|--------------|------------|--------------|------------|
| **EMPRESAS**                                           | ** ** | **2007**   | ** ** | **2006**        | ** ** | **2007**     | ** ** | **2006**     | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                   |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| ***Cemig Distribuição S.A.***                |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| Dividends and  interest on Capital                     |       | 674        |       | 670             |       | —       |       | —       |       |   |   |   |   | — |   | — |   |
| Electricity  sales to final consumers                  |       | —     |       | 15              |       | 13           |       | —       |       | — |   | 78 |   | (80 | ) | — |   |
| Others                                                 |       | —     |       | 1               |       | 2            |       | 1            |       | — |   | — |   | — |   | — |   |
|                                                   |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| ***Cemig Geração e  Transmissão S.A.*** |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| Dividends and  interest on Capital                     |       | 541        |       | 379             |       | —       |       | —       |       | 188 |   | 230 |   | — |   | — |   |
| Electricity  sales to final consumers                  |       | 22         |       | —          |       | —       |       | 15           |       | 80 |   | — |   | — |   | 78 |   |
| Others                                                 |       | —     |       | 5               |       | 3            |       | 4            |       | — |   | — |   | — |   | — |   |
|                                                   |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| ***State  Government of Minas Gerais***                |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| Accounts  receivable                                   |       | 2          |       | 3               |       | —       |       | —       |       | 66 |   | 57 |   | — |   | — |   |
| Recoverable  taxes - VAT - current                     |       | 164        |       | 9               |       | 264          |       | 256          |       | (2,493 | ) | (2,286 | ) | — |   | — |   |
| Account  receivable from Minas Gerais State Government |       | 1,763      |       | 1,726           |       | —       |       | —       |       | 123 |   | 140 |   | — |   | — |   |
| Recoverable  taxes – VAT – non current       |       | 57         |       | 270             |       | —       |       | —       |       | — |   | — |   | — |   | — |   |
| Accounts  receivable                                   |       | 37         |       | 37              |       | —       |       | —       |       | — |   | — |   | — |   | — |   |
| Dividends and  interest on Capital                     |       | —     |       | —          |       | 126          |       | 308          |       | — |   | — |   | — |   | (38 | ) |
| Debentures                                             |       | —     |       | —          |       | 18           |       | 14           |       | — |   | — |   | (35 | ) | (1 | ) |
| Account  Securitization Fund (FIDC)                    |       | —     |       | —          |       | 990          |       | 982          |       | — |   | — |   | — |   | — |   |
| Financing - BDMG                                       |       | —     |       | —          |       | 18           |       | 32           |       | — |   | — |   | — |   | — |   |
|                                                   |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| ***Forluz***                                           |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| Employee  post-retirement benefits - current           |       | —     |       | —          |       | 89           |       | 120          |       | — |   | — |   | (140 | ) | (245 | ) |
| Employee  post-retirement benefits – non current  |       | —     |       | —          |       | 2,182        |       | 1,666        |       | — |   | — |   | — |   | — |   |
| Others                                                 |       | —     |       | —          |       | 89           |       | 65           |       | — |   | — |   | — |   | — |   |
| Personnel                                              |       | —     |       | —          |       | —       |       | —       |       | — |   | — |   | (34 | ) | (53 | ) |
| Administrative  Costs                                  |       | —     |       | —          |       | —       |       | —       |       | — |   | — |   | (21 | ) | (14 | ) |
|                                                   |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| ***Other***                                            |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| Interest on  Capital                                   |       | 116        |       | 89              |       | —       |       | —       |       | — |   | — |   | — |   | — |   |

 

F-55

----

 

**24. FINANCIAL INSTRUMENTS**

 

The Company manages its financial instruments through periodicmonitoring of positions, diversification of counterparties and establishment ofcredit limits by counterparty. Financial instruments, which potentially subjectCEMIG to concentrations of credit risk are cash and cash equivalents for 2007and 2006. CEMIG limits its credit risk associated with cash and cashequivalents by placing its investments with highly rated financial institutionsgenerally with short-term maturities.

 

(a) Cash and cashequivalents :

 

Asof December 31, 2007 and 2006, cash and cash equivalents are stated atcost plus accrued interest and approximate fair value, given the short termmaturities of these items.

 

(b) Financing andother financial instruments:

 

Basedon interest rates currently available to CEMIG for bank financings with similarterms and average maturities, the fair value of long-term financing at December 31,2007 and 2006 is R$6,628 and R$5,710, respectively, compared to book values ofR$6,814 and R$6,524 , respectively.

 

(c) Derivative financial instruments:

 

The Company utilizesderivative financial instruments to protect its operations from exchange raterisk. The derivative financial instruments are not used for speculativepurposes. As of December 31, 2007, the Company has derivative financialinstruments (“swaps”) with financial institutions, in connection with potentialexchange losses resulting from the devaluation of the Brazilian real comparedto the U.S. dollar in the net notional amount of US$69 million (US$109 millionin 2006) and the Japanese yen in the notional amount of ¥3,879 million (¥3,879million in 2006). The net realized and unrealized losses from these operationsfor 2007 in the net amounts of R$167 (R$91 in 2006 and R$150 in 2005), wererecorded as financial expenses.

 

The table belowsummarizes the Company’s derivative financial instruments and the unrealizedlosses recorded on these instruments as of December 31, 2007 and December 31,2006:

 
| ** **                                                                 | ** ** | ** **                                                | ** ** | ** **                      | ** ** | **December 31,  2007**                 | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                 | ** ** | ** **                                                | ** ** | ** **                      | ** ** | **Unrealized  Losses**                      | ** ** |
| **CEMIG’s********Right**                                              | ** ** | **CEMIG’s********obligation**                        | ** ** | **Maturity Date**          | ** ** | **Principal  amount  contracted-  million** | ** ** | **Fair Value** | ** ** |
|                                                                       |       |                                                      |       |                            |       |                                        |       |   |   |
| ¥  (Japanese Yen)  exchange gains or losses + rate  (3.90% p.a.) |       | R$pegged to the CDI  variation (111.00% CDI)              |       |  

On12/2009               |       | ¥                                      | 3,879      |   | (48 | ) |
|                                                                       |       |                                                      |       |                            |       |                                        |       |   |   |
| US$  exchange gains or losses + rate  (5.58% p.a. 7.48% p.a.)              |       | R$  100% of the CDI+ rate  from 1.50% p.a. to 3.01%  p.a. |       |  

From04/2008  to 06/2013 |       | US$                                         | 69         |   | (136 | ) |
|                                                                       |       |                                                      |       |                            |       |                                        |       |   |   |   |
|                                                                       |       |                                                      |       |                            |       |                                        |       | (184 | ) |

 

F-56

----

 
| ** **                                                                 | ** ** | ** **                                                                         | ** ** | ** **                  | ** ** | **December 31,  2006**                 | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------------------|------------|
| ** **                                                                 | ** ** | ** **                                                                         | ** ** | ** **                  | ** ** | **Unrealized  Losses**                      | ** ** |
| **CEMIG’s********Right**                                              | ** ** | **CEMIG’s********obligation**                                                 | ** ** | **Maturity Date**      | ** ** | **Principal  amount  contracted-  million** | ** ** | **Fair Value** | ** ** |
|                                                                       |       |                                                                               |       |                        |       |                                        |       |   |   |
| ¥  (Japanese Yen)  exchange gains or losses + rate  (3.90% p.a.) |       | R$pegged to the CDI  variation (111.00% CDI)                                       |       |  

On  12/2009         |       | ¥                                      |       | 3,879 |   | (1 | ) |
|                                                                       |       |                                                                               |       |                        |       |                                        |       |   |   |   |
| US$  exchange gains or losses + rate  (5.58% p.a. 7.48% p.a.)              |       | R$  100% of the CDI + rate  from 1.50% p.a. to 3.01% p.a.                          |       | From  04/2007  to 06/2013   |       | US$                                         | 138        |   | (186 | ) |
|                                                                       |       |                                                                               |       |                        |       |                                        |       |   |   |   |
|  

R$  106% of the CDI                                                |       | R$ or US$  48% of the CDI or exchange  gains or losses (whichever is  higher) |       |  

 

On  04/2010 |       | US$                                         | (29        | ) | — |   |
|                                                                       |       |                                                                               |       |                        |       |                                        |       |   |   |
|                                                                       |       |                                                                               |       |                        |       |                                        |       | (187 | ) |

 

At December 31,2007, the Company had recorded the amount of R$184 as other currentliabilities, representing the fair value of these financial instruments at therespective balance sheet date.

 

(d) Otherfinancial instruments:

 

Thecarrying value of CEMIG’s other financial instruments, in *reais*, approximates fair values at suchdates reflecting the short-term maturity or frequent repricing at December 31,2007 and 2006 of these instruments.

 

**25. EXPOSURE AND RISK MANAGEMENT**

 

As a Brazilian energyconcessionaire, the Company operates in an environment in which factors such ascorporate reorganization, new regulations issued by governmental bodies andconsumer market changes are considered risk factors.

 

The Company established aCorporate Risk Management Program in January 2003, and implemented thisprogram in 2004 in connection with its restructuring. This Corporate RiskManagement Program aims to achieve the following: operate as an auxiliary inachievement of the objectives set by the strategic plan; create awareness amongshareholders of the possible events that could constitute a risk of loss ofvalue; structure the company to be able to take proactive stances in relationto its risk environment; provide the company’s executives with a methodologyand tools for effective management of risk; and provide other areas ofstrategic management with input concepts and procedures, and factors thatstrengthen the company’s organizational control infrastructure.

 

F-57

----

 

The main market riskswhich affect CEMIG’s operations are described as follows:

 

(a) Exchange raterisk

 

CEMIG and itssubsidiaries are exposed to the risk of increases in exchange rates, mainlyU.S. dollar against the real, significantly impacting its financial position,results of operations, and cash flows. In order to protect against increases inexchange rates, the Company has derivative financial instruments (“swaps”) withfinancial institutions in the amount of R$122, equivalent to the notionalamount of US$69 and R$61, equivalent to the notional amount of ¥3,879. Thesefinancial instruments partially offset the exchange variation of the Brazilianreal compared to the U.S. dollar and yen for interest based on the CDI (SeeNote 24(c)). The exchange rate net exposure is as follows:

 
| ** **                                                    | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                    | ** ** | **2007**              | ** ** | **2006** | ** ** |
| **U.S.  Dollar**                                              |       |                  |       |   |   |
| Financing                                                     |       | 300                   |       | 554 |   |
| (-) Contracted  derivative instruments– notional amounts |       | (122                  | )          | (233 | ) |
|                                                          |       | 178                   |       | 321 |   |
| **Japanese  Yen**                                             |       |                  |       |   |   |
| Financing                                                     |       | 61                    |       | 70 |   |
| (-) Contracted  derivative instruments– notional amounts |       | (61                   | )          | (70 | ) |
|                                                          |       | —                |       | — |   |
| **Other  Currencies**                                         |       |                  |       |   |   |
| Financing                                                     |       |                  |       |   |   |
| Euro                                                          |       | 29                    |       | 36 |   |
| Other                                                         |       | —                |       | 1 |   |
|                                                          |       | 29                    |       | 37 |   |
| Net liabilities  exposed to exchange rate risk                |       | 207                   |       | 358 |   |

 

The exposure to exchangerates shown above is reduced by the Company through contracts to sellelectricity to free consumers, through Cemig Geração e Transmissão S.A., whichis indexed to the dollar variation.

 

(b) Interest raterisk

 

CEMIG and certainsubsidiaries are exposed to the risk of increases in international interestrates, impacting their loans and financing denominated in foreign currencieswith floating rates, mainly LIBOR, in the amount of R$104 (R$146 as of December 31,2006).

 

The Company is alsoexposed in 2007 to the risk of increases in interest rates on real denominatedfinancial liabilities, partially offset by real denominated financial assets asfollows:

 
| ** **                                                                           | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **CEMIG’s exposure to domestic interest rates**        | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                                                                                 |       |                  |       |   |   |
| **Asset**                                                                            |       |                  |       |   |   |
| CRC Agreement                                                                        |       | 1,763                 |       | 1,726 |   |
| Short-term  investments                                                              |       | 1,424                 |       | 1,008 |   |
| Deferred  regulatory assets                                                          |       | 1,726                 |       | 2,697 |   |
|                                                                                 |       | 4,913                 |       | 5,431 |   |
| **Liabilities**                                                                      |       |                  |       |   |   |
| Financing (local  currency)                                                          |       | 6,424                 |       | 5,863 |   |
| Payments to  generators for energy purchased on CCEE/MAE during the rationing period |       | 338                   |       | 328 |   |
| Derivative  instruments                                                              |       | 183                   |       | 303 |   |
|                                                                                 |       | 6,945                 |       | 6,494 |   |
| Net liabilities  exposed to interest rate risk                                       |       | (2,032                | )          | (1,063 | ) |

 

F-58

----

 

(c) Credit risk

 

The risk resulting fromlosses on doubtful receivables for CEMIG is considered low. A significant partof electricity sales is dispersed among a large number of customers. TheCompany’s procedures to reduce overdue bills comprise the issuance of noticesthat bills are overdue, phone calls and negotiations to permit thecollectibility of bills that are in arrears. After these efforts are exhausted,CEMIG interrupts the energy supply.

 

(d) Debtacceleration risk

 

The Company and certainof its subsidiaries have contracts for loans, financing and debentures withcertain restrictive clauses (covenants), usually applicable to such operations,related to compliance with economic-financial indices, cash flow generation andother indicators. The creditors have the right to declare the early terminationof CEMIG’s obligations and require the immediate payment of all outstandingdebts in the case of a violation of such restrictive clauses. The restrictiveclauses were complied with in full on December 31, 2007, and throughoutthe whole of the 2007 business year.

 

(e) Risk of non-renewal of concessions

 

TheCompany has concessions for commercial operation of electricity generation,transmission and distribution services with the expectation, by the management,that ANEEL and/or the Mining and Energy Ministry will renew them. If therenewals of the concessions are not granted by the Regulatory Body or if thoseBodies renew them for requirement of additional costs (“concession forconsideration”), the present levels of profitability and activity could bealtered.

 

**26. SHAREHOLDERS’ AGREEMENT**

 

In 1997, the StateGovernment of Minas Gerais sold approximately 33% of the Company’s commonshares to a group of investors led by Southern Electric Brasil ParticipaçõesLtda. (“Southern”). As part of this transaction the State of Minas Gerais andSouthern entered into a Shareholders’ Agreement that provided for, among otherthings, the requirement of a qualified quorum to approve significant corporateacts, certain amendments to CEMIG’s by-laws, the issuance of debentures andconvertible securities, the distribution of dividends other than that providedfor in the by-laws and changes to the corporate structure.

 

On September 1999,the State Government of Minas Gerais brought an annulment action, by way of arequest for interim relief against the shareholders’ agreement entered intowith Southern in 1997. In 2003, the Supreme Court of the State of Minas Geraisannulled the referred to shareholders’ agreement. The appeals filed by Southernare under the Federal Courts consideration.

 

**27. CONCENTRATIONS**

 

(a) Labor:

 

The majority of CEMIG’s work force are members of SINDIELETRO (employeelabor union). CEMIG and SINDIELETRO negotiate a collective bargaining agreementon an annual basis, which includes wage increases and profit sharing, alongwith other matters. The collective bargaining agreement becomes effective in November ofeach year. The 2007 collective bargaining agreement included an 5.0% averagesalary increase.

 

(b) Renewalof concession agreements:

 

At a meeting on October 3,2006 the Board of Directors of ANEEL decided by majority to approve submissionto the Mining and Energy Ministry (MME) of a group of alternatives (dulyinstructed and indicating their advantages and disadvantages), for decision, inrelation to applications for extension of concessions made by the subsidiaryCemig Geração e Transmissão S.A. for the following plants – Pandeiros, Rio dasPedras, Poço Fundo, São Bernardo, Xicão, Luiz Dias, Emborcação, Nova Ponte andSanta Luzia – with total installed capacity of 1,735MW (unaudited).

 

F-59

----

 

On June 14, 2007,the Mining and Energy Ministry (MME) extended such concessions for a period of20 years, indistinctly, from the dates of maturity of the respective grants.The signature of the respective Amendment will be celebrated probably on thefirst half of 2008. The Amendment to the contract of Concession will observethe norms and conditions established for the pertinent legislation, as well asthose included in the Law No 10,848, as of 15 of March of 2004.

 

Seven of the Company’s hydroelectric plants accounted for approximately75% of its installed electric generation capacity as of December 31, 2007.

 
| **GENERATION CONCESSIONS-** | ** ** | **Installed Capacity  (MW)(unaudited)** | ** ** | **Expiration Date**            | ** ** |
|----------------------------------|------------|----------------------------------------------|------------|-------------------------------------|------------|
| São Simão              |       | 1,710                                        |       | January 2015                   |       |
| Emborcação             |       | 1,192                                        |       | July 2025                      |       |
| Nova Ponte                       |       | 510                                          |       | July 2025                      |       |
| Jaguara                          |       | 424                                          |       | August 2013                    |       |
| Miranda                          |       | 408                                          |       | December 2016                  |       |
| Três Marias                 |       | 396                                          |       | July 2015                      |       |
| Volta Grande                     |       | 380                                          |       | February 2017                  |       |
| Irapé                       |       | 360                                          |       | February 2035                  |       |
| Aimorés                     |       | 162                                          |       | December 2035                  |       |
| Salto Grande                     |       | 102                                          |       | July 2015                      |       |
| Others                           |       | 922                                          |       | July 2015 to  August 2036 |       |
| Total installed  capacity        |       | 6,566                                        |       |                                |       |

 
| **DISTRIBUTION CONCESSIONS-** | ** ** | **Date concession  expires** | ** ** |
|------------------------------------|------------|-----------------------------------|------------|
| Northern Region                    |       | February/2016                     |       |
| Southern  Regional                 |       | February /2016               |       |
| Eastern Region                     |       | February /2016               |       |
| Western Region                     |       | February /2016               |       |

 

**28. INSURANCE**

 

The Company has insurance policies for part of its property, plant andequipment, as follows:

 
| **Risk**                                                | ** ** | **Coverage** | ** ** | **Effective  Date**  | ** ** | **Insured  Amount (*)** | ** ** |
|---------------------------------------------------------|------------|--------------|------------|----------------------|------------|------------------------------|------------|
| Aircraft – 2007  to 2008                           |       | Fuselage     |       | 04/28/07 to 04/28/08 |       | 12                           |       |
| Warehouses and  buildings – 2007 to 2008           |       | Fire         |       | 08/10/07 to 08/10/08 |       | 592                          |       |
| Generators,  turbines and equipment – 2007 to 2008 |       | Total        |       | 05/05/07 to 05/05/08 |       | 1,620                        |       |

 

CEMIG does not have general third-party liability insurance coveringaccidents and has not requested bids relating to this type of insurance. TheCompany has not requested bids for, nor does it carry, insurance coverage formajor catastrophes affecting its facilities such as earthquakes and floods, forbusiness interruption risk or system failures. In addition, the Company doesnot have insurance for losses incurred as a result of business interruptioncaused by a strike or other type of labor action.

 

The Company has not experienced significant losses arising from theaforementioned risks.

 

----

**(*)** Unaudited

 

F-60

----

 

**29. COMMITMENTS**

 

Cemig has outstanding contractual obligations and commitments whichinclude principal debt payment provisions, the obligation to purchaseelectricity for resale from Itaipu, the obligation to transfer and transportelectric power from Itaipu as well as construction commitments. The followingtable provides information, as of December 31, 2007, about our contractualobligations and commitments.

 
| ** **                                            | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **2014  and  beyond** | ** ** | **Total** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|-----------------------|------------|-----------|------------|
|                                                  |       |     |       |     |       |     |       |     |       |     |       |     |       |                  |       |      |       |
| Long-Term debt  (1)                                   |       | 941      |       | 874      |       | 675      |       | 776      |       | 931      |       | 1,051    |       | 1,566                 |       | 6,814     |       |
| Derivative  financial instruments (“swaps”) |       | 25       |       | 102      |       | 17       |       | 15       |       | 13       |       | 12       |       | —                |       | 184       |       |
| Purchase of  Electricity from Itaipu (2)              |       | 1,074    |       | 787      |       | 854      |       | 887      |       | 906      |       | 386      |       | —                |       | 4,894     |       |
| Transportation  of Electric Power from Itaipu (2)     |       | 71       |       | 61       |       | 63       |       | 66       |       | 68       |       | 29       |       | —                |       | 358       |       |
| Baguari  hydroelectric power plant (3)                |       | 25       |       | —   |       | —   |       | —   |       | —   |       | —   |       | —                |       | 25        |       |
| Aimorés  hydroelectric power plant (3)           |       | 20       |       | —   |       | —   |       | —   |       | —   |       | —   |       | —                |       | 20        |       |
| Guanhães  hydroelectric power plant (3)          |       | 16       |       | —   |       | —   |       | —   |       | —   |       | —   |       | —                |       | 16        |       |
| Sales Management  System I                            |       | 59       |       | —   |       | —   |       | —   |       | —   |       | —   |       | —                |       | 59        |       |
| Furnas-Pimenta  Transmission line                     |       | 16       |       | —   |       | —   |       | —   |       | —   |       | —   |       | —                |       | 16        |       |
| Pension Plan  Debt - Forluz                           |       | 89       |       | 82       |       | 83       |       | 72       |       | 69       |       | 48       |       | 620                   |       | 1,063     |       |
| Concession  Granted (4)                               |       | 1        |       | 2        |       | 2        |       | 2        |       | 6        |       | 12       |       | 305                   |       | 330       |       |
| Unrecognized tax  benefits (5)                        |       | 4        |       | —   |       | —   |       | —   |       | —   |       | —   |       | —                |       | 4         |       |
| Purchase of Energy  — Spot Market                |       | 1,086    |       | 1,349    |       | 2,009    |       | 2,337    |       | 2,626    |       | 2,927    |       | 15,536                |       | 27,870    |       |
| Total                                                 |       | 3,427    |       | 3,257    |       | 3,703    |       | 4,155    |       | 4,619    |       | 4,465    |       | 18,027                |       | 41,653    |       |

 

----

(1)                                 Inthe event of our non-compliance with certain covenants in our loan agreements,the total principal, future interest and any penalties due under theseagreements may become immediately due and payable. These amounts do not includeinterest payments on debt or payments under interest rate swap agreements. Weexpect to pay approximately R$617 million in interest payments on debt in 2008.Interest payments on debt for years following 2008 have not been estimatedsince they are subject to future variations in variable interest rates andforeign currency exchange rates.  We donot believe projections of interest payments and payments under interest rateswap agreements would be meaningful.

(2)                                 Contractwith Furnas, denominated in U.S. dollars, to supply electric power purchasedfrom Itaipu until May 2013. Amounts are calculated based on the U.S.dollar exchange rate as of December 31, 2007.

(3)                                 Contractualobligations with contractors.

(4)                                 Inobtaining the concessions for construction of some generation projects, theCEMIG Geração e Transmissão S,A, undertook to make payments to theconcession-granting power, over the period of validity of the contract, ascompensation for commercial operation.

(5)                                 TheCompany has unrecognized tax benefits in amount of R$28, on December 31,2007, that was not included in the table above considering that the expectedtiming of cash payment is not reasonably to estimate. The course of litigationdepends on several factors that make it not possible to prediction of its end,for example, the quantity of cases to be dispatched by the judge, thepossibility of bringing many resources of the parties to each judicial decisionand the complexity of the object of demand.

 

**30. SEGMENT INFORMATION**

 

Under CEMIG’sdistribution concession agreements, CEMIG was required to restructure itsoperations in order to place its generation, transmission and distributionoperations into separate subsidiaries, wholly owned by CEMIG. To comply withthis requirement, in 2004, CEMIG incorporated two new wholly-ownedsubsidiaries: CEMIG Geração e Transmissão S.A. and CEMIG Distribuição S.A.. TheCompany’s Extraordinary Shareholders’ General Meeting on December 30, 2004authorized the transfer, as of January 1, 2005, of the Company’sinvestments and separate assets and liabilities to these subsidiaries toseparate its generation, transmission and distribution activities. CemigGeração e Transmissão S.A. and CEMIG Distribuição S.A. began to operate as of January 1,2005. The effective transfer of concessions of electricity transmission,generation and distribution to the new subsidiaries was subject to ANEEL’sapproval, in accordance with Resolution N.o 407, of December 20, 2004. Asof and for the years ended December 31, 2007 and 2006, the main Company’sreportable segments are its generation and transmission, and distributionsegments.

 

The Company’s chiefoperating decision maker utilizes information prepared in accordance withBrazilian GAAP. Consequently, the Company has presented its segment informationin accordance with Brazilian GAAP, reconciled to U.S. GAAP. The operations ofall reportable segments of the Company are conducted substantially in the Stateof Minas Gerais, Brazil. Reportable segments are strategic business units thatoffer different products and services. Each of the reportable segments has aresponsible senior officer. All inter-segment activity has been eliminated.Financial information for each of the Company’s reportable segments is asfollows:

 

F-61

----

 
| ** **                   | ** ** | **BRGAAP   2007** | ** ** | **Adjustment** | ** ** | **USGAAP   2007** | ** ** | **BRGAAP   2006** | ** ** | **Adjustment** | ** ** | **USGAAP   2006** | ** ** |
|------------------------------|------------|------------------------|------------|----------------|------------|------------------------|------------|------------------------|------------|----------------|------------|------------------------|------------|
| Identifiable  assets         |       |                   |       |           |       |                   |       |                   |       |           |       |                   |       |
| Electricity                  |       |                   |       |           |       |                   |       |                   |       |           |       |                   |       |
| Distribution                 |       | 13,207                 |       | 256            |       | 13,463                 |       | 12,687                 |       | 136            |       | 12,823                 |       |
| Generation  and Transmission |       | 8,136                  |       | 797            |       | 8,933                  |       | 7,834                  |       | 829            |       | 8,663                  |       |
| Other                        |       | 1,954                  |       | 3              |       | 1,957                  |       | 1,843                  |       | (10            | )          | 1,833                  |       |
| Total  consolidated assets   |       | 23,297                 |       | 1,056          |       | 24,353                 |       | 22,364                 |       | 955            |       | 23,319                 |       |

 

The Company allocated theaccount receivable from Minas Gerais State Government to the Distributionsegment.

 

F-62

----

 
| **2007**                                    | ** ** | **Power   Generation   and   Transmission** | ** ** | **Distribution of   Energy** | ** ** | **Other** | ** ** | **BRGAAP** | ** ** | **Adjustment** | ** ** | **USGAAP** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------------|------------|----------------------------------------|------------|-----------|------------|------------|------------|----------------|------------|------------|------------|
|                                        |       |                                                       |       |                                   |       |      |       |       |       |           |       |       |       |
| Net operating revenues                      |       | 2,999                                                      |       | 6,368                                  |       | 110       |       | 9,478      |       | (48            | )          | 9,430      |       |
| Operating income                            |       | 1,450                                                      |       | 1,405                                  |       | (51       | )          | 2,804      |       | (274           | )          | 2,530      |       |
| Financial income  (expenses), net           |       | (185                                                       | )          | 10                                     |       | 34        |       | (141       | )          | 93             |       | (48        | )          |
| Income tax – (Expense)  Benefit        |       | (298                                                       | )          | (312                                   | )          | (134      | )          | (744       | )          | 63             |       | (681       | )          |
| Minority interests                          |       |                                                       |       |                                   |       |      |       |       |       |           |       |       |       |
| Net income                                  |       | 857                                                        |       | 771                                    |       | 107       |       | 1,735      |       | (117           | )          | 1,618      |       |
| Depreciation and  amortization charges      |       | 239                                                        |       | 417                                    |       | 16        |       | 672        |       | 206            |       | 878        |       |
| Equity method                               |       | —                                                     |       | —                                 |       | 222       |       | 222        |       | —         |       | 222        |       |
| Additions  to property, plant and equipment |       | 293                                                        |       | 733                                    |       | 24        |       | 1,050      |       | 70             |       | 1,120      |       |

 

F-63

----

 
| **2006**                                    | ** ** | **Power   Generation   and   Transmission** | ** ** | **Distribution of   Energy** | ** ** | **Other** | ** ** | **BRGAAP** | ** ** | **Adjustment** | ** ** | **USGAAP** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------------|------------|----------------------------------------|------------|-----------|------------|------------|------------|----------------|------------|------------|------------|
|                                        |       |                                                       |       |                                   |       |      |       |       |       |           |       |       |       |
| Net operating revenues                      |       | 2,427                                                      |       | 6,246                                  |       | 20        |       | 8,693      |       | (53            | )          | 8,640      |       |
| Operating income                            |       | 1,184                                                      |       | 873                                    |       | (5        | )          | 2,052      |       | (1,279         | )          | 773        |       |
| Financial income  (expenses), net           |       | (270                                                       | )          | 197                                    |       | 120       |       | 47         |       | 288            |       | 335        |       |
| Income tax – (Expense)  Benefit        |       | (208                                                       | )          | (300                                   | )          | 33        |       | (475       | )          | (22            | )          | (497       | )          |
| Net income                                  |       | 706                                                        |       | 770                                    |       | 243       |       | 1,719      |       | (1,017         | )          | 702        |       |
| Depreciation and  amortization charges      |       | 224                                                        |       | 367                                    |       | 38        |       | 629        |       | 181            |       | 810        |       |
| Equity method                               |       | —                                                     |       | —                                 |       | 97        |       | 97         |       | (6             | )          | 91         |       |
| Additions  to property, plant and equipment |       | 152                                                        |       | 918                                    |       | 16        |       | 1,086      |       | 242            |       | 1,328      |       |

 

F-64

----

 
| **2005**                                    | ** ** | **Power   Generation   and   Transmission** | ** ** | **Distribution of   Energy** | ** ** | **Other** | ** ** | **BRGAAP** | ** ** | **Adjustment** | ** ** | **USGAAP** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------------|------------|----------------------------------------|------------|-----------|------------|------------|------------|----------------|------------|------------|------------|
|                                        |       |                                                       |       |                                   |       |      |       |       |       |           |       |       |       |
| Net operating revenues                      |       | 1,475                                                      |       | 6,361                                  |       | 83        |       | 7,919      |       | (406           | )          | 7, 513     |       |
| Operating income                            |       | 853                                                        |       | 1,060                                  |       | (97       | )          | 1,816      |       | (492           | )          | 1, 324     |       |
| Financial income  (expenses), net           |       | (241                                                       | )          | 329                                    |       | 531       |       | 619        |       | 135            |       | 754        |       |
| Income tax – (Expense)  Benefit        |       | (110                                                       | )          | (399                                   | )          | 46        |       | (463       | )          | 163            |       | (300       | )          |
| Minority interests                          |       | —                                                     |       | —                                 |       | 2         |       | 2          |       | —         |       | 2          |       |
| Net income                                  |       | 531                                                        |       | 990                                    |       | 482       |       | 2,003      |       | (194           | )          | 1,809      |       |
| Depreciation and  amortization charges      |       | 194                                                        |       | 364                                    |       | 34        |       | 592        |       | 77             |       | 669        |       |
| Equity method                               |       | —                                                     |       | —                                 |       | 29        |       | 29         |       | —         |       | 29         |       |
| Additions  to property, plant and equipment |       | 425                                                        |       | 890                                    |       | 41        |       | 1,356      |       | 155            |       | 1,511      |       |

 

F-65

----

 

**31.CONDENSED UNCONSOLIDATED FINANCIAL INFORMATION OF CEMIG**

 

The condensedunconsolidated financial information of CEMIG, as of December 31, 2007 and2006 and for each of the two years in the period ending on December 31,2007, under USGAAP is as follows:

 

As discussed in Notes 1and 30, CEMIG was required to restructure its operations in order to place itsgeneration, transmission and distribution operations into separatesubsidiaries, wholly owned by CEMIG. To comply with this requirement, in 2004,CEMIG incorporated two new wholly-owned subsidiaries: Cemig Geração eTransmissão S.A. and Cemig Distribuição S.A.. The Company’s ExtraordinaryShareholders’ General Meeting on December 30, 2004 authorized thetransfer, as of January 1, 2005, of the Company’s investments and separateassets and liabilities to these subsidiaries to separate its generation,transmission and distribution activities. Cemig Geração e Transmissão S.A. andCemig Distribuição S.A. began to operate as from January 1, 2005. As such,CEMIG became a holding company on January 1, 2005, and unconsolidatedfinancial information is presented for the years 2007 and 2006.

 

**BALANCESHEETS AS OF DECEMBER 31, 2007 AND 2006 (UNCONSOLIDATED)**

**(Expressed in millions of Brazilian *reais*)**

** **
| ** **                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
| ASSETS                                            |       |     |       |     |       |
| CURRENT  ASSETS                                   |       |     |       |     |       |
| Cash  and cash equivalents                        |       | 22       |       | 23       |       |
| Tax  recoverable (note 8)                         |       | 33       |       | 13       |       |
| Deferred  income and social contr. Taxes (note 5) |       | 93       |       | 24       |       |
| Dividends  receivable                             |       | 1,384    |       | 1,153    |       |
| Other                                             |       | 10       |       | 7        |       |
|                                              |       | 1,542    |       | 1,220    |       |
| NONCURRENT  ASSETS                                |       |     |       |     |       |
| CRC  Account Securitization Fund (FIDC) (note 3)  |       | 773      |       | 744      |       |
| Deferred  income and social contr. Taxes (note 5) |       | 111      |       | 213      |       |
| Tax  recoverable (note 8)                         |       | 260      |       | 289      |       |
| Other                                             |       | 138      |       | 135      |       |
|                                              |       | 1,282    |       | 1,381    |       |
| PERMANENT  ASSETS                                 |       |     |       |     |       |
| Investments  in subsidiaries and affiliates       |       | 6,745    |       | 6,815    |       |
| Property,  plant and equipment                    |       | 231      |       | 2        |       |
|                                              |       | 6,976    |       | 6,817    |       |
|                                              |       |     |       |     |       |
| TOTAL  ASSETS                                     |       | 9,800    |       | 9,418    |       |
|                                              |       |     |       |     |       |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY        |       |     |       |     |       |
|                                              |       |     |       |     |       |
| CURRENT  LIABILITIES                              |       |     |       |     |       |
| Accounts  payable to suppliers                    |       | 12       |       | 6        |       |
| Payroll  and related charges                      |       | 9        |       | 8        |       |
| Taxes  payable                                    |       | 39       |       | 23       |       |
| Dividends  and interest on capital                |       | 881      |       | 877      |       |
| Current  portion of long-term financing           |       | 6        |       | 7        |       |
| Other                                             |       | 119      |       | 35       |       |
|                                              |       | 1,066    |       | 956      |       |
| LONG  TERM LIABILITIES                            |       |     |       |     |       |
| Long-term  financing (note 14)                    |       | 74       |       | 103      |       |
| Employee  post-retirement benefits (note 16)      |       | 115      |       | 82       |       |
| Accrued  liability for contingencies (note 17)    |       | 292      |       | 277      |       |
| Other                                             |       | 29       |       | 51       |       |
|                                              |       | 510      |       | 513      |       |
|                                              |       |     |       |     |       |
| SHAREHOLDERS’  EQUITY                        |       | 8,224    |       | 7,949    |       |
|                                              |       |     |       |     |       |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY  |       | 9,800    |       | 9,418    |       |

 

F-66

----

 

**STATEMENTS OF OPERATIONS FOR THEYEARS ENDED DECEMBER 31, 2007 AND 2006 (UNCONSOLIDATED)**

**(Expressed in millions of Brazilian *reais*)**

** **
| ** **                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
|                                  |       |     |       |     |       |
| OPERATING  REVENUES                   |       | 37       |       | 1        |       |
| OPERATING  EXPENSES                   |       | (86      | )          | (8       | )          |
| OTHER  INCOME                         |       | —   |       | —   |       |
| EQUITY  IN EARNINGS OF INVESTEES      |       | 1,917    |       | 1,590    |       |
| FINANCIAL  INCOME (EXPENSES), NET     |       | 7        |       | 123      |       |
| INCOME  AND SOCIAL CONTRIBUTION TAXES |       | (245     | )          | 18       |       |
| EMPLOYEE  PROFIT SHARING              |       | (12      | )          | (9       | )          |
| NET  INCOME                           |       | 1,618    |       | 1,715    |       |
|                                  |       |     |       |     |       |
| OTHER  COMPREHENSIVE INCOME           |       | (27      | )          | 8        |       |
| COMPREHENSIVE  INCOME                 |       | 1,591    |       | 1,723    |       |

 

F-67

----

 

**STATEMENTS OF CASH FLOWS (UNCONSOLIDATED)**

**FOR THE YEARS ENDED DECEMBER 31,2007 AND 2006**

 

**(Expressed in millions of Brazilian *reais*)**

** **
| ** **                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                  |       |     |       |     |       |
| CASH  FLOWS FROM OPERATING ACTIVITIES                 |       | 1,399    |       | 1,404    |       |
|                                                  |       |     |       |     |       |
| CASH  FLOWS FROM INVESTING ACTIVITIES                 |       |     |       |     |       |
| Escrow  deposits                                      |       | (10      | )          | 4        |       |
| Acquisition  of investments                           |       | (7       | )          | (570     | )          |
| Net  cash used in investing activities                |       | (17      | )          | (566     | )          |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                |       |     |       |     |       |
| Proceeds  from issuance of long-term financing        |       | —   |       | 30       |       |
| Payment  of long-term financing and short-term loans  |       | (30      | )          | —   |       |
| Sale  of FIDC quotas                                  |       | —   |       | 900      |       |
| FIDC  – amounts received                         |       | 7        |       | 27       |       |
| Dividends  and interest on capital paid               |       | (1,360   | )          | (2,072   | )          |
| Net  cash provided by (used in) financing activities  |       | (1,383   | )          | (1,115   | )          |
| NET  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |       | (2       | )          | (277     | )          |
|                                                  |       |     |       |     |       |
| CASH  AND CASH EQUIVALENTS:                           |       |     |       |     |       |
| Beginning  of the year                                |       | 23       |       | 300      |       |
| End  of the year                                      |       | 22       |       | 23       |       |
|                                                  |       | (1       | )          | (277     | )          |
| SUPPLEMENTARY  CASH FLOWS DISCLOSURE:                 |       |     |       |     |       |
| Taxes  paid - income taxes                            |       | 50       |       | 9        |       |
| Interest  paid, net of interest capitalized           |       | 11       |       | 14       |       |

 

F-68

----

 

Following is information relating to CEMIGunconsolidated condensed financial statements presented above:

 

·**   **Investments — As of December 31, 2007 and 2006, investments insubsidiaries and affiliates are comprised as follows (see note 9):

 
| ** **                                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cemig Geração e Transmissão  S.A.                |       | 3,304    |       | 2,951    |       |
| Cemig Distribuição S.A.                               |       | 2,049    |       | 2,350    |       |
| Companhia de Gás de Minas  Gerais - GASMIG                 |       | 193      |       | 153      |       |
| Empresa de Infovias S.A.                                        |       | 323      |       | 286      |       |
| Sá Carvalho S.A.                                           |       | 94       |       | 92       |       |
| Usina Térmica Ipatinga S.A.                                |       | 66       |       | 65       |       |
| Cemig Capim Branco Energia  S.A.                                |       | 51       |       | 46       |       |
| UTE Barreiro S.A.                                               |       | 7        |       | 10       |       |
| Cemig  PCH S.A.                                                 |       | 52       |       | 51       |       |
| Efficientia S.A.                                                |       | 4        |       | 3        |       |
| Horizontes Energia S.A.                                         |       | 66       |       | 66       |       |
| Companhia Transleste de  Transmissão - Transleste          |       | 12       |       | 14       |       |
| Central Térmica de Cogeração  S.A.               |       | —   |       | 2        |       |
| Rosal Energia S.A.                                              |       | 129      |       | 137      |       |
| Companhia Transudeste de  Transmissão - Transudeste        |       | 7        |       | 7        |       |
| Companhia Transirape de  Transmissão - Transirape          |       | 5        |       | 5        |       |
| Companhia de Transmissão  Centroeste de Minas              |       | 7        |       | 7        |       |
| Transchile Charrúa  Transmisión S.A.                  |       | 12       |       | 13       |       |
| Rio Minas Energia  Participações S.A. - RME           |       | 276      |       | 212      |       |
| Empresa Regional de  Transmissão de Energia S.A. - ERTE    |       | 5        |       | 15       |       |
| Empresa Amazonense de  Transmissão de Energia S.A. - EATE  |       | 38       |       | 204      |       |
| Empresa Catarinense de  Transmissão de Energia S.A. - ECTE |       | 4        |       | 12       |       |
| Empresa Norte de Transmissão  de Energia S.A. - ENTE       |       | 24       |       | 66       |       |
| Empresa Paraense de Transmissão  de Energia S.A. - ETEP    |       | 12       |       | 41       |       |
| Others                                                          |       | 5        |       | 7        |       |
|                                                            |       |     |       |     |       |
|                                                            |       | 6,745    |       | 6,815    |       |

 

F-69

----

 

·**   **Taxes recoverable — As of December 31, 2007 and 2006, taxesrecoverable are mainly comprised as follows (see note 8):

 
| ** **                  | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                        |       |                  |       |   |   |
| Current  assets -           |       |                  |       |   |   |
| Social  contribution tax    |       | —                |       | 7 |   |
| VAT                         |       | 3                     |       | 4 |   |
| COFINS                      |       | 21                    |       | — |   |
| PIS                         |       | 5                     |       | — |   |
| Other                       |       | 4                     |       | 2 |   |
|                        |       | 33                    |       | 13 |   |
| Other  non-current assets - |       |                  |       |   |   |
| Income  tax                 |       | 234                   |       | 260 |   |
| Social  contribution tax    |       | 26                    |       | 29 |   |
|                        |       | 260                   |       | 289 |   |

 

·**  **Deferred income and socialcontribution taxes —As of December 31, 2007 and 2006, the major components of the deferredincome and social contribution taxes are as follows (see note 5):

 
| ** **                                                    | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                    | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                                                          |       |                  |       |   |   |
| Tax  loss carryforwards                                       |       | 519                   |       | 532 |   |
| Employee  post-retirement benefits                            |       | 22                    |       | 11 |   |
| Provision  for contingencies                                  |       | 77                    |       | 74 |   |
| Provision  for doubtful accounts                              |       | 22                    |       | 35 |   |
| Other  temporary differences                                  |       | 1                     |       | 5 |   |
|                                                          |       | 641                   |       | 657 |   |
| Provision  for losses on realization of deferred tax balances |       | (437                  | )          | (423 | ) |
|                                                          |       | 204                   |       | 234 |   |
|                                                          |       |                  |       |   |   |
| Current  Assets                                               |       | 33                    |       | 10 |   |
| Other  Assets                                                 |       | 171                   |       | 224 |   |

 

·** **Accrued liabilities for contingencies — As of December 31,2007 and 2006, accrued liabilities for contingenciesare mainly comprised as follows (see note 17):

 
| ** **                               | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2007**              | ** ** | **2006** | ** ** |
| **Labor Claims**                         |       |                  |       |   |   |
| Various                                  |       | 73                    |       | 32 |   |
|                                     |       |                  |       |   |   |
| **Civil Lawsuits**                       |       |                  |       |   |   |
| Personal Injury                          |       | 7                     |       | 8 |   |
| Rate Increase                            |       | 70                    |       | 104 |   |
| Other                                    |       | 51                    |       | 61 |   |
|                                     |       | 128                   |       | 173 |   |
| **Tax**                                  |       |                  |       |   |   |
| FINSOCIAL                                |       | 21                    |       | 21 |   |
| VAT                                      |       | 2                     |       | 2 |   |
| Taxes payable – Suspended Liability |       | 47                    |       | 40 |   |
| INSS                                     |       | 1                     |       | 1 |   |
| Other                                    |       | 8                     |       | 2 |   |
|                                     |       | 79                    |       | 66 |   |
| **Regulatory**                           |       |                  |       |   |   |
| ANEEL Administrative Proceedings         |       | 12                    |       | 6 |   |
| **Total**                                |       | 292                   |       | 277 |   |

 

F-70

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**32. SUBSEQUENT EVENTS**

 

**(a) Ratesreadjustment**

 

ANEEL ́s Resolution 234 of October 31, 2006,established new concepts and guidelines relating to the second cycle of thePeriodic Review for Distributors of Electricity. The mainly differences are thebase of assets to be used in the second Tariff Review that shall be theprevious base of assets updated by the IGP-M Inflation Index and  the definition of the operational costs to becovered by the rates. ANEEL will continue to use the Reference Company as thecomparative base.

 

The board of director ofANEEL during an extraordinary meeting approved on April 07, 2008, thefinal percentage of the second cycle of the Periodic Tariff Review for CemigDistribuição S.A. The new rates will apply from April 8, 2008 for 6.439million of consumers in 774 cities in Minas Gerais state. This resolution waspublished in the Official Daily Government Newspaper. The impact of this tariffreview will be an average of 12.24% reduction and it will applied in differentpercentages by category of consumption.

 

The negative percentagereflects the increase of efficiency of the Company and the reduction of theaverage cost of capital (what defines the remuneration of the concessionscompany), calculated during the Periodic Tariff Review. This review occursevery 4 years.

 

**(b) Increasein registered capital**

 

The General Meeting of Stockholders held on April 25,2008 approved an increase in Cemig’s registered capital from R$2,432,307 toR$2,481,508, upon capitalization of R$49,201 from the balance on the CapitalRESERVE – Donations and subsidies for investment, distributing to stockholders,as a consequence, a bonus of 2.02% in new shares, of the same type as thoseheld, and with nominal value of R$5.00.

 

This increase in the registered capital complieswith Clause 5 of the agreement for credit assignment of the remaining balanceon the CRC (Results Compensation) Account, which requires that a capitalincrease should be made in an amount corresponding to the total of theprincipal amortized under the CRC Contract, by the government of Minas GeraisState.

 

**(c) Contractof 20 years for supply of electricity**

 

On April 17, 2008CEMIG has signed a 20-year contract (expiring in 2028) for supply ofelectricity to the industrial plants of the Votorantim Group in theSoutheastern and Central-Western Regions of Brazil.

 

Cemig will supply the Votorantim Group with differentannual levels of electrical power varying from 145 MW in the current year to670 MW in some of the years. The overall total value of the contract is R$ 10,5billion.

 

For the Votorantim Group, the agreement guarantees itspresent and future supply of electricity, making it possible for it to expandits business in Minas Gerais and Brazil. For CEMIG, it is part of the corporatestrategy of helping facilitate the industrial growth of its clients.

 

**(d) Acquisitionof capital interest through TBE ( Transmissoras Brasileiras de Energia)**

 

On April 16, 2008 CEMIG through its subsidiaryEmpresa Amazonense de Transmissão de Energia S.A. – “EATE” acquired 80.00% ofthe interest of Companhia Transmissora de Energia Elétrica – “LUMITRANS” for R$28,069 and 80.00% of the interest of Sistema de Transmissão Catarinense S.A. -STC for R$ 49,086. The conclusion of this transaction is still depending onauthorization by ANEEL (the Brazilian electricity regulator), BNDES (theBrazilian Development Bank) and of CADE (the Brazilian antitrust authority).

 

F-71

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**33. RECENTLY  ISSUED U.S. GAAPPRONOUNCEMENTS NOT YET ADOPTED**

 

InSeptember 2006, the FASB issued SFAS 157, “Fair Value Measurements”, thatestablishes a framework for measuring fair value in generally acceptedaccounting principles (GAAP), and expands disclosures about fair valuemeasurements. This Statement applies under other accounting pronouncements thatrequire or permit fair value measurements and will change some current practicebecause of the need for increased consistency and comparability in fair valuemeasurements and for expanded disclosures about fair value measurements. Itapplies for derivatives and other financial instruments measured at fair valueunder Statement 133 at initial recognition and in all subsequent periods andshould provide users of financial statements with information that is useful inmaking investment, credit, and similar decisions . This Statement is effectivefor financial statements issued for fiscal years beginning after November 15,2007, and interim periods within those fiscal years. Earlier application isencouraged, provided that the reporting entity has not yet issued financialstatements for that fiscal year, including financial statements for an interimperiod within that fiscal year. CEMIG is evaluating the potential impacts ofthis interpretation in company’s consolidated financial statements.

 

In February 2007,the FASB issued SFAS 159, “The Fair Value Option for Financial Assets andFinancial Liabilities - Including an amendment of FASB Statement No.FAS 115”,SFAS 159. This Statement permits entities to choose, at specified electiondates, to measure many eligible financial instruments assets and liabilitiesand certain other items at fair value that are not otherwise required to bemeasured at fair value. If a company elects the fair value option for aneligible item, changes in that item’s fair value in subsequent reportingperiods must be recognized in current earnings. SFAS 159 also establishes presentation and disclosure requirementsdesigned to draw comparison between entities that elect different measurementattributes for similar assets and liabilities. SFAS 159 is effective for the Company on January 1, 2008.  As allowed by the standard, the Company haselected not to adopt SFAS 159 for the measurement of any eligible assets andliabilities as of January 1, 2008.

 

In December 2007,the FASB revised SFAS No 141, “Business Combinations”. This Statement applies to alltransactions or other events in which an entity (the acquirer) obtains controlof one or more businesses (the acquirer), including those sometimes referred toas “true mergers” or “mergers of equals” and combinations achieved without thetransfer of consideration, for example, by contract alone or through the lapseof minority veto rights. This Statement applies to all business entities,including mutual entities that previously used the pooling-of-interests methodof accounting for some business combinations. This Statement retains theguidance in Statement 141 for identifying and recognizing intangible assetsseparately from goodwill. The main features of this Statement and the moresignificant improvements it makes to how the acquisition method was applied inaccordance with Statement 141. This Statement applies prospectively to businesscombinations for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning on or after December 15, 2008. Anentity may not apply it before that date.

 

InDecember 2007, the FASB issued SFAS No 160, “Noncontrolling Interests inConsolidated Financial Statements” -an amendment of ARB No. 51. ThisStatement improves the relevance, comparability, and transparency of thefinancial information that a reporting entity provides in its consolidatedfinancial statements by establishing accounting and reporting standards. ThisStatement applies to all entities that prepare consolidated financialstatements, except not-for-profit organizations, but will affect only thoseentities that have an outstanding noncontrolling interest in one or moresubsidiaries or that deconsolidate a subsidiary. This Statement is effectivefor fiscal years, and interim periods within those fiscal years, beginning onor after December 15, 2008 (that is, January 1, 2009, for entitieswith calendar year-ends). Earlier adoption is prohibited.

 

InMarch 2008, the FASB issued SFAS No 161, “Disclosures about DerivativeInstruments and Hedging Activities”—an amendment of FASB Statement No. 133.This Statement requires enhanced disclosures about an entity’s derivative andhedging activities and thereby improves the transparency of financialreporting. This Statement is effective for financial statements issued forfiscal years and interim periods beginning after November 15, 2008, withearly application encouraged. This Statement encourages, but does not require,comparative disclosures for earlier periods at initial adoption.

 

***************ll

 

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