Table of Contents

** **

**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, 2008** | ** ** |
|       |       | ** **                                                                                                                                        | ** ** |
|       |       | **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 MINASGERAIS – CEMIG

**(Exactname of Registrant as specified in its charter)**

ENERGY CO OF MINASGERAIS

**(Translationof Registrant’s name into English)**

BRAZIL

**(Jurisdictionof incorporation or organization)**

Avenida Barbacena, 1200, Belo Horizonte, M.G.,30190-131

**(Addressof principal executive offices)**

 

Securitiesregistered or to be registered pursuant to Section 12(b) of the Act:

| **Title of each class:**           | ** ** | **Name of 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                  |       |                                      |

** **

**Securitiesregistered or to be registered pursuant to Section 12(g) of the Act:**

**None**

**Securities forwhich there is a reporting obligation pursuant to Section 15(d) ofthe Act:**

**None**

Indicate the number of outstandingshares of each of the issuer’s classes of capital or common stock as of theclose of the period covered by the annual report:

216,923,394 Common Shares

279,166,540****Preferred Shares

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes x  No o

If this report is anannual or transition report, indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934. Yes o No x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports) and (2) has been subject to such filing requirementsfor the past 90 days. Yes x No o

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of accelerated filer and large accelerated filer in Rule 12b-2of the Exchange Act. (Check one):

Large acceleratedfiler x  AcceleratedFiler o Non accelerated filer o

 

Indicate by check markwhich basis of accounting the registrant has used to prepare the financialstatements included in this filing:

 

U.S. GAAP x  IFRS o  Other o

 

Indicate by check markwhich financial statement item the registrant has elected to follow:Item 17 o Item 18 x

 

If this is an annualreport, indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act)  Yes o No x

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* Not for trading but onlyin connection with the registration of American Depositary Shares, pursuant tothe requirements of the Securities and Exchange Commission.

 

 

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Table of Contents

 

**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                                                   | 14 |
|          |                                                                          |   |
| Item 4A.      | Unresolved  Staff Comments                                                    | 59 |
|          |                                                                          |   |
| Item 5.       | Operating  and Financial Review and Prospects                                 | 59 |
|          |                                                                          |   |
| Item 6.       | Directors,  Senior Management and Employees                                   | 78 |
|          |                                                                          |   |
| Item 7.       | Major  Shareholders and Related Party Transactions                            | 86 |
|          |                                                                          |   |
| Item 8.       | Financial  Information                                                        | 88 |
|          |                                                                          |   |
| Item 9.       | The Offer  and Listing                                                        | 93 |
|          |                                                                          |   |
| Item 10.      | Additional  Information                                                       | 96 |
|          |                                                                          |   |
| Item 11.      | Quantitative  and Qualitative Disclosures about Market Risk                   | 109 |
|          |                                                                          |   |
| Item 12.      | Description  of Securities Other than Equity Securities                       | 111 |
|          |                                                                          |   |
| PART II  | 112                                                                           |
|          |                                                                          |   |
| Item 13.      | Defaults,  Dividend Arrearages and Delinquencies                              | 112 |
|          |                                                                          |   |
| Item 14.      | Material  Modifications to the Rights of Security Holders and Use of Proceeds | 112 |
|          |                                                                          |   |
| Item 15.      | Controls  and Procedures                                                      | 112 |
|          |                                                                          |   |
| Item 16A.     | Audit Committee Financial  Expert                                             | 114 |
|          |                                                                          |   |
| Item 16B.     | Code of Ethics                                                                | 114 |
|          |                                                                          |   |
| Item 16C.     | Principal  Accountant Fees and Services                                       | 114 |
|          |                                                                          |   |
| Item 16D.     | Not Applicable                                                                | 115 |
|          |                                                                          |   |
| Item 16E.     | Purchases  of Equity Securities by the Issuer and Affiliated Purchasers.      | 115 |
|          |                                                                          |   |
| PART III | 117                                                                           |
|          |                                                                          |   |
| Item 17.      | Financial  Statements                                                         | 117 |
|          |                                                                          |   |
| Item 18.      | Financial  Statements                                                         | 117 |
|          |                                                                          |   |
| Item 19.      | Exhibits                                                                      | 117 |

 

**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.

 

We maintain our books and records in *reais*. We prepare our financial statementsin accordance with accounting practices adopted in Brazil, including theprinciples that are established primarily through Law No. 6,404 of December 15,1976, as amended, including by Law 11,638 of December 28, 2007, which werefer to as the Brazilian Corporate Law. For purposes of this annual report weprepared balance sheets as of December 31, 2008 and 2007 and the relatedstatements of operations and comprehensive income, cash flows and changes inshareholders’ equity for the years ended December 31, 2008, 2007 and 2006,in *reais* all in accordance withaccounting principles generally accepted in the United States, or U.S. GAAP.KPMG Auditores Independentes has audited our consolidated financial statementsas of and for the years ended December 31, 2008 and 2007, as stated intheir report appearing 

 

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elsewhereherein, and Deloitte Touche Tohmatsu Auditores Independentes has audited ourconsolidated financial statements for the year ended December 31, 2006, as stated in their report appearingelsewhere herein.

 

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$2.313 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 31,2008. See “Item 3. Key Information—Exchange Rates” for additional informationregarding exchange rates. We cannot guarantee that U.S. dollars can beconverted into *reais*, or that *reais* can be converted into U.S. dollars,at the above rate or at any other rate.

 

**MARKET POSITION AND OTHERINFORMATION**

** **

The information contained in this annual reportregarding our market position is, unless otherwise indicated, presented for theyear ended December 31, 2008 and is based on, or derived from, reportsissued by the *Agência Nacional de EnergiaElétrica* (The Brazilian National Electric Energy Agency), or ANEEL,and by the *Câmara de Comercialização deEnergia Elétrica* (the Brazilian Electric Power Trading Chamber), orCCEE.

 

Certain terms are defined the first time they are usedin this annual report. As used herein, all references to “GW” and “GWh” are togigawatts and gigawatt hours, respectively, references to “MW” and “MWh” are tomegawatts and megawatt-hours, respectively, and references to “kW” and “kWh”are to kilowatts and kilowatt-hours, respectively.

 

References in this annual report to the “common shares”and “preferred shares” are to our common shares and preferred shares,respectively. References to “Preferred American Depositary Shares” or “PreferredADSs” are to American Depositary Shares, each representing one preferred share.References to “Common American Depositary Shares” or “Common ADSs” are toAmerican Depositary Shares, each representing one common share. Our PreferredADSs and Common ADSs are referred to collectively as “ADSs,” and Preferred ADRsand Common ADRs are referred to collectively as “ADRs.”

 

On May 3, 2007, we effected a stock split in theform of a 50% stock dividend of our preferred shares, with a correspondingadjustment to our Preferred ADSs. Effective June 11, 2007, after givingeffect to (i) a reverse stock split of our preferred shares in the form ofa consolidation whereby every 500 preferred shares, par value R$0.01, wereconsolidated into one preferred share with a par value of R$5.00, and (ii) a100% forward split of the Preferred ADSs, the Preferred ADS ratio was changedto one preferred share per Preferred ADS. In addition, on May 2, 2008, a2.02% stock dividend was paid on the preferred shares. On May 8, 2008, acorresponding adjustment was made to the Preferred ADSs through the issuance ofadditional Preferred ADSs. On April 30, 2009, a 25.000000151% stockdividend was paid on the preferred shares, and a corresponding adjustment wasmade to the Preferred ADSs through the issuance of additional Preferred ADSs.The Preferred ADSs are evidenced by American Depositary Receipts, or PreferredADRs, issued pursuant to a Second Amended and Restated Deposit Agreement, datedas of August 10, 2001, as amended on June 11, 2007, by and among us,Citibank, N.A., as depositary, and the holders and beneficial owners ofPreferred ADSs evidenced by Preferred ADRs issued thereunder (the “SecondAmended and Restated Deposit Agreement”).

 

On May 3, 2007, we effected a partial stock splitin 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 aconsolidation whereby every 500 common shares, par value R$0.01, wereconsolidated into one common share with a par value of R$5.00. On June 12,2007, we established an American Depositary Share program for our commonshares, with each Common ADS representing one common share. In addition, On May 2,2008, a 2.02% stock dividend was paid on the common shares. On May 8,2008, a corresponding adjustment was made to the Common ADSs through theissuance of additional Common ADS. On April 30, 2009, a 25.000000151%stock dividend was paid on the common shares. On May 13, 2009, acorresponding adjustment was made to the Common ADSs through the issuance ofadditional Common ADSs. The Common ADSs are evidenced by American DepositaryReceipts, or Common ADRs, issued pursuant to a Deposit Agreement, dated as of June 12,2007, by and among us, Citibank, N.A., as depositary, and the holders andbeneficial owners of Common ADSs evidenced by Common ADRs issued thereunder(the “Common ADS Deposit Agreement” and, together with the Second Amended andRestated Deposit Agreement, the “Deposit Agreements”).

 

**FORWARD-LOOKING INFORMATION**

** **

This annual report includes forward-lookingstatements, principally in “Item 3. Key Information” and “Item 11. Quantitativeand Qualitative Disclosures about 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:

 

·                                          general economic, political and businessconditions, principally in Latin America, Brazil, the State of Minas Gerais, inBrazil, or Minas Gerais, the State of Rio de Janeiro, in Brazil, or Rio deJaneiro, as well as other states in Brazil;

 

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·                                          inflation and changes in currencyexchange rates;

 

·                                          enforcement of legal regulation in Brazil’selectricity sector;

 

·                                          changes in volumes and patterns ofconsumer electricity usage;

 

·                                          competitive conditions in Brazil’selectricity generation, transmission and distribution markets;

 

·                                          our expectations and estimates concerningfuture financial performance, financing plans and the effects of competition;

 

·                                          our level of debt and its maturity;

 

·                                          the likelihood that we will receivepayment in connection with accounts receivable;

 

·                                          trends in the electricity generation,transmission and distribution industry in Brazil, and in particular in MinasGerais and Rio de Janeiro;

 

·                                          changes in rainfall and the water levelsin the reservoirs used to run our hydroelectric power generation facilities;

 

·                                          our capital expenditure plans;

 

·                                          our ability to serve our consumers on asatisfactory basis;

 

·                                          our ability to renew our concessions;

 

·                                          existing and future governmentalregulation as to electricity rates, electricity usage, competition in ourconcession area and other matters;

 

·                                          our ability to integrate the operationsof companies we may acquire;

 

·                                          existing and future policies of theFederal Government of Brazil, which we refer to as the Federal Government;

 

·                                          existing and future policies of thegovernment of Minas Gerais, which we refer to as the State Government,including policies affecting its investment in us and the plans of the StateGovernment for future expansion of electricity generation, transmission and distributionin Minas Gerais; and

 

·                                          other risk factors as set forth under “Item3. Key Information—Risk Factors.”

 

The forward-looking statements referred to above alsoinclude information with respect to our capacity expansion projects that areunder way and those that we are currently evaluating. In addition to the aboverisks and uncertainties, our potential expansion projects involve engineering,construction, regulatory and other significant risks, which may:

 

·                                          delay or prevent successful completion ofone or more projects;

 

·                                          increase the costs of projects; and

 

·                                          result in the failure of facilities tooperate or generate income in accordance with our expectations.

 

The words “believe,” “may,” “will,” “estimate,” “continue,”“anticipate,” “intend,” “expect” and similar words are intended to identifyforward-looking statements. We undertake no obligation to update publicly orrevise any forward-looking statements because of new information, future eventsor otherwise. In light of these risks and uncertainties, the forward-lookinginformation, events and circumstances discussed in this annual report might notoccur. Our actual results and performance could differ substantially from thoseanticipated in our forward-looking statements.

 

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**PART I**

** **

**Item 1.**         Identity of Directors, Senior Management and Advisers

** **

Not applicable.

 

**Item 2.**         Offer Statistics and Expected Timetable

** **

Not applicable.

 

**Item 3.**         Key Information

** **

**SelectedConsolidated Financial Data**

** **

The following tables present our selected consolidatedfinancial and operating information in U.S. GAAP as of the dates and for eachof the periods indicated. You should read the following information togetherwith our consolidated financial statements, including the notes thereto,included in this annual report and the information set forth in “Item 5.Operating and Financial Review and Prospects.”

 

The selected consolidated financial data as of December 31,2008 and 2007 and for each of the three years ended December 31, 2008,2007 and 2006 have been derived from our audited consolidated financialstatements and the notes thereto included elsewhere in this annual report. Theselected consolidated data as of December 31, 2006, 2005 and 2004 and forthe each of the two years ended December 31, 2005 and 2004 has beenderived from our audited consolidated financial statements and notes thereto,which are not included in this annual report.

 

U.S. dollar amounts in the table below are presentedfor your convenience. Unless otherwise indicated, these U.S. dollar amountshave been translated from *reais*at R$2.313 per US$1.00, the noon buying rate as of December 31, 2008. The *real* has historically experienced high volatility.We cannot guarantee that U.S. dollars can be converted into *reais*, or that *reais* can be converted into U.S. dollars, at the above rateor at any other rate. On June 5, 2009, the noon buying rate for *reais* was R$1.9606****per US$1.00.See “—Exchange Rates.”

 

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**SelectedConsolidated Financial Data**

 
| ** **                                                       | ** ** | **As of and for the year ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **2008**                                                                              | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                       | ** ** | **(in millions**                                                                 | ** ** | **(In millions of R$ except per share/ADS data or as otherwise** | ** ** |
| ** **                                                       | ** ** | **of US$)(1)(2)**                                                                | ** ** | **indicated)** | ** ** |
| **Income Statement Data:**                                       | ** ** | ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  operating revenues:                                         |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Electricity  sales to final consumers                            |       | 4,538                                                                                 |       | 10,497 |   | 10,191 |   | 9,319 |   | 8,708 |   | 8,541 |   |
| Deferred  rate adjustment (3)                                    |       | —                                                                                |       | — |   | — |   | — |   | 110 |   | 640 |   |
| Electricity  sales to the interconnected power system            |       | 462                                                                                   |       | 1,069 |   | 1,134 |   | 884 |   | 237 |   | 36 |   |
| Use of basic  transmission and distribution networks             |       | 806                                                                                   |       | 1,865 |   | 1,705 |   | 1,780 |   | 1,523 |   | 245 |   |
| Other  operating revenues                                        |       | 104                                                                                   |       | 241 |   | 236 |   | 200 |   | 176 |   | 625 |   |
| Tax  on revenues                                                 |       | (1,662)                                                                               |       | (3,844) |   | (3,836) |   | (3,543) |   | (3,241) |   | (2,608) |   |
| Total  net operating revenues                                    |       | 4,248                                                                                 |       | 9,828 |   | 9,430 |   | 8,640 |   | 7,513 |   | 7,479 |   |
|                                                             |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Operating  costs and expenses:                                   |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Electricity  purchased for resale                                |       | (980)                                                                                 |       | (2,267) |   | (2,147) |   | (1,907) |   | (1,455) |   | (1,370) |   |
| Natural  gas purchased for resale                                |       | —                                                                                |       | — |   | — |   | — |   | — |   | (268) |   |
| Use of basic  transmission and distribution networks             |       | (274)                                                                                 |       | (634) |   | (564) |   | (687) |   | (709) |   | (538) |   |
| Depreciation  and amortization                                   |       | (332)                                                                                 |       | (769) |   | (878) |   | (810) |   | (669) |   | (677) |   |
| Personnel                                                        |       | (434)                                                                                 |       | (1,004) |   | (884) |   | (1,046) |   | (779) |   | (788) |   |
| Regulatory  charges                                              |       | (443)                                                                                 |       | (1,024) |   | (967) |   | (1,031) |   | (983) |   | (861) |   |
| Special  liabilities                                             |       | —                                                                                |       | — |   | — |   | (1,057) |   | — |   | — |   |
| Third-party  services                                            |       | (262)                                                                                 |       | (605) |   | (550) |   | (475) |   | (420) |   | (329) |   |
| Employee  post-retirement benefits                               |       | (120)                                                                                 |       | (277) |   | (140) |   | (245) |   | (257) |   | (153) |   |
| Materials  and supplies                                          |       | (73)                                                                                  |       | (170) |   | (148) |   | (116) |   | (95) |   | (83) |   |
| Reversal  (Provision) for loss on deferred regulatory assets (3) |       | (8)                                                                                   |       | (19) |   | (146) |   | (49) |   | (183) |   | (9) |   |
| Employee  profit sharing                                         |       | (157)                                                                                 |       | (362) |   | (455) |   | (210) |   | (260) |   | (110) |   |
| Other                                                            |       | (177)                                                                                 |       | (410) |   | (472) |   | (234) |   | (379) |   | (280) |   |
| Total  operating costs and expenses                              |       | (3,260)                                                                               |       | (7,541) |   | (7,351) |   | (7,867) |   | (6,189) |   | (5,466) |   |
|                                                             |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Operating  income                                                |       | 988                                                                                   |       | 2,287 |   | 2,079 |   | 773 |   | 1,324 |   | 2,013 |   |
|                                                             |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Financial  income (expenses), net                                |       | 7                                                                                     |       | 17 |   | (48) |   | 335 |   | 754 |   | 350 |   |
|                                                             |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Non-Operating  Income                                            |       | 88                                                                                    |       | 204 |   | 272 |   | 91 |   | 29 |   | 105 |   |
|                                                             |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Income  before income taxes and minority interests               |       | 1,083                                                                                 |       | 2,508 |   | 2,303 |   | 1,199 |   | 2,107 |   | 2,468 |   |
| Income  taxes expense                                            |       | (326)                                                                                 |       | (755) |   | (685) |   | (497) |   | (300) |   | (731) |   |
| Minority  interests                                              |       | —                                                                                |       | — |   | — |   | — |   | 2 |   | 2 |   |
| Net  income (loss)                                               |       | 757                                                                                   |       | 1,753 |   | 1,618 |   | 702 |   | 1,809 |   | 1,739 |   |
|                                                             |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Other  comprehensive income (loss)                               |       | 129                                                                                   |       | 299 |   | (400) |   | 140 |   | 25 |   | (474) |   |
| Comprehensive  income                                            |       | 886                                                                                   |       | 2,052 |   | 1,218 |   | 842 |   | 1,834 |   | 1,265 |   |
|                                                             |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Basic  earnings (loss): (5)                                      |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Per  common share                                                |       | 1.53                                                                                  |       | 3.53 |   | 3.33 |   | 1.44 |   | 3.72 |   | 3.58 |   |
| Per  preferred share                                             |       | 1.53                                                                                  |       | 3.53 |   | 3.33 |   | 1.44 |   | 3.72 |   | 3.58 |   |
| Per  ADS                                                         |       | 1.53                                                                                  |       | 3.53 |   | 3.33 |   | 1.44 |   | 3.72 |   | 3.58 |   |
| Diluted  earnings (loss): (5)                                    |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Per  common share                                                |       | 1.52                                                                                  |       | 3.51 |   | 3.26 |   | 1.41 |   | 3.69 |   | 3.58 |   |
| Per  preferred share                                             |       | 1.52                                                                                  |       | 3.51 |   | 3.26 |   | 1.41 |   | 3.69 |   | 3.58 |   |
| Per  ADS                                                         |       | 1.52                                                                                  |       | 3.51 |   | 3.26 |   | 1.41 |   | 3.69 |   | 3.58 |   |

 

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| ** **                                               | ** ** | ** **             | ** ** | **As of and for the year ended December 31,**                              | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **2008**               | ** ** | **2008**                                                                                                           | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                               | ** ** | **(in millions**  | ** ** | **(In millions of R$ except per share/ADS data or as otherwise** | ** ** |
| ** **                                               | ** ** | **of US$)(1)(2)** | ** ** | **indicated)**                                                                                                     | ** ** |
| ** **                                               | ** ** | ** **             | ** ** | ** **                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance Sheet Data:**                                  | ** ** | ** **             | ** ** | ** **                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Assets:                                                  |       |                   |       |                                                                                                               |       |   |   |   |   |   |   |   |   |
| Current  assets                                          |       | 2,687                  |       | 6,216                                                                                                              |       | 5,935 |   | 4,778 |   | 4,778 |   | 3,276 |   |
| Property,  plant and equipment, net                      |       | 6,058                  |       | 14,011                                                                                                             |       | 13,835 |   | 13,426 |   | 11,971 |   | 11,191 |   |
| Deferred  regulatory assets—long-term               |       | 143                    |       | 332                                                                                                                |       | 823 |   | 1,548 |   | 2,315 |   | 2,929 |   |
| Account  receivable from State Government                |       | 779                    |       | 1,801                                                                                                              |       | 1,763 |   | 1,726 |   | 1,519 |   | 1,097 |   |
| Other  assets                                            |       | 1,047                  |       | 2,421                                                                                                              |       | 1,997 |   | 1,841 |   | 763 |   | 504 |   |
| Total  assets                                            |       | 10,714                 |       | 24,781                                                                                                             |       | 24,353 |   | 23,319 |   | 21,346 |   | 18,997 |   |
|                                                     |       |                   |       |                                                                                                               |       |   |   |   |   |   |   |   |   |
| Liabilities:                                             |       |                   |       |                                                                                                               |       |   |   |   |   |   |   |   |   |
| Current portion  of long-term financing                  |       | 518                    |       | 1,197                                                                                                              |       | 941 |   | 691 |   | 985 |   | 1,417 |   |
| Other current  liabilities                               |       | 1,596                  |       | 3,692                                                                                                              |       | 3,572 |   | 3,639 |   | 3,953 |   | 2,286 |   |
| Long-term  financing                                     |       | 2,297                  |       | 5,314                                                                                                              |       | 5,873 |   | 5,833 |   | 3,841 |   | 2,750 |   |
| Employee  post-retirement benefits—  long-term      |       | 763                    |       | 1,765                                                                                                              |       | 2,182 |   | 1,666 |   | 1,535 |   | 1,606 |   |
| Shareholders’  equity                               |       | 4,035                  |       | 9,333                                                                                                              |       | 8,224 |   | 8,370 |   | 9,252 |   | 9,209 |   |
| Capital  stock                                           |       | 989                    |       | 2,288                                                                                                              |       | 2,239 |   | 1,428 |   | 1,428 |   | 1,428 |   |
| ** **                                               |       |                   |       |                                                                                                               |       |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other Data:**                                          |       |                   |       |                                                                                                               |       |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average  outstanding shares—  basic: (5)   |       |                   |       |                                                                                                               |       |   |   |   |   |   |   |   |   |
| Common                                                   |       |                   |       | 216,923,395                                                                                                        |       | 212,622,504 |   | 212,622,504 |   | 212,622,504 |   | 212,622,504 |   |
| Preferred                                                |       |                   |       | 279,170,735                                                                                                        |       | 273,631,569 |   | 273,631,569 |   | 273,631,569 |   | 273,631,569 |   |
| Dividends  per share (5)                                 |       |                   |       |                                                                                                               |       |   |   |   |   |   |   |   |   |
| Common                                                   |       |                   |       | R$1.90                                                                                                             |       | R$2.81 |   | R$2.77 |   | R$3.68 |   | R$1.19 |   |
| Preferred                                                |       |                   |       | R$1.90                                                                                                             |       | R$2.81 |   | R$2.77 |   | R$3.68 |   | R$1.19 |   |
| Dividends  per ADS (5)                                   |       |                   |       | R$1.90                                                                                                             |       | R$2.81 |   | R$2.77 |   | R$3.68 |   | R$1.19 |   |
| Dividends  per share (4)(5)                              |       |                   |       |                                                                                                               |       |   |   |   |   |   |   |   |   |
| Common                                                   |       |                   |       | US$0.82                                                                                                            |       | US$1.58 |   | US$1.30 |   | US$1.58 |   | US$0.45 |   |
| Preferred                                                |       |                   |       | US$0.82                                                                                                            |       | US$1.58 |   | US$1.30 |   | US$1.58 |   | US$0.45 |   |
| Dividends  per ADS (4)(5)                                |       |                   |       | US$0.82                                                                                                            |       | US$1.58 |   | US$1.30 |   | US$1.58 |   | US$0.45 |   |
|                                                     |       |                   |       |                                                                                                               |       |   |   |   |   |   |   |   |   |
|                                                     |       |                   |       |                                                                                                               |       |   |   |   |   |   |   |   |   |
| Weighted average  outstanding shares—  diluted: (5) |       |                   |       |                                                                                                               |       |   |   |   |   |   |   |   |   |
| Common                                                   |       |                   |       | 218,140,931                                                                                                        |       | 216,925,229 |   | 217,250,274 |   | 214,450,359 |   | 212,622,504 |   |
| Preferred                                                |       |                   |       | 280,737,646                                                                                                        |       | 279,168,901 |   | 279,587,214 |   | 275,983,902 |   | 273,631,569 |   |
| Dividends  per share diluted (5)                         |       |                   |       |                                                                                                               |       |   |   |   |   |   |   |   |   |
| Common                                                   |       |                   |       | R$1.89                                                                                                             |       | R$2.75 |   | R$2.71 |   | R$3.65 |   | R$1.19 |   |
| Preferred                                                |       |                   |       | R$1.89                                                                                                             |       | R$2.75 |   | R$2.71 |   | R$3.65 |   | R$1.19 |   |
| Dividends  per ADS diluted (5)                           |       |                   |       | R$1.89                                                                                                             |       | R$2.75 |   | R$2.71 |   | R$3.65 |   | R$1.19 |   |
| Dividends  per share diluted (4)(5)                      |       |                   |       |                                                                                                               |       |   |   |   |   |   |   |   |   |
| Common                                                   |       |                   |       | US$0.82                                                                                                            |       | US$1.55 |   | US$1.27 |   | US$1.57 |   | US$0.45 |   |
| Preferred                                                |       |                   |       | US$0.82                                                                                                            |       | US$1.55 |   | US$1.27 |   | US$1.57 |   | US$0.45 |   |
| Dividends  per ADS diluted (4)(5)                        |       |                   |       | US$0.82                                                                                                            |       | US$1.55 |   | US$1.27 |   | US$1.57 |   | US$0.45 |   |

 

(1)                                 Convertedat the exchange rate of US$1.00 to R$2.313, the noon buying rate as of December 31,2008. See “—Exchange Rates.”

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

(3)                                 SeeNote 4 to our consolidated financial statements.

(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.

 

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**Exchange Rates**

** **

In March 2005, the National Monetary Council (*ConselhoMonetário Nacional*) consolidated the commercial rate exchange marketand the floating rate exchange market into a single floating rate exchangemarket, where all foreign exchange transactions are now carried out byfinancial institutions authorized to operate in this 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. The *real* may depreciate or appreciate against the U.S. dollarand other currencies substantially in the future. Exchange rate fluctuationsmay affect the U.S. dollar amounts received by the holders of Preferred ADSs orCommon ADSs. We will make any distributions with respect to our preferred sharesor common shares 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. For more information see “Risk Factors — Exchange rate instability may adversely affectour business, results of operations and financial condition and the marketprice of our shares, the Preferred 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 2008                          |       | 2.2905                          |       | 2.6187 |   | 2.3954 |   | 2.3130 |   |
| January 2009                           |       | 2.1895                          |       | 2.3698 |   | 2.3079 |   | 2.3130 |   |
| February 2009                          |       | 2.2375                          |       | 2.3898 |   | 2.3230 |   | 2.3750 |   |
| March 2009                             |       | 2.2371                          |       | 2.4420 |   | 2.3161 |   | 2.3007 |   |
| April 2009                             |       | 2.1617                          |       | 2.2860 |   | 2.2027 |   | 2.1724 |   |
| May 2009                               |       | 1.9680                          |       | 2.1730 |   | 2.0689 |   | 1.9678 |   |
| June 2009  (through June 5, 2009) |       | 1.9402                          |       | 1.9606 |   | 1.9478 |   | 1.9606 |   |

 
| ** **                                 | ** ** | **Reais per US$1.00** | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|
| **Year Ended December 31,** | ** ** | **Low**                         | ** ** | **High** | ** ** | **Average** | ** ** | **Period-end** | ** ** |
| 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 |   | 1.9449 |   | 1.7790 |   |
| 2008                                       |       | 1.5580                          |       | 2.6190 |   | 1.8322 |   | 2.3130 |   |

 

----

Source: U.S. FederalReserve Board

 

**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 strategic 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 

 

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majorityof the 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 and uncertaingovernmental legislation 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, or the New Industry Model Law,introduced a new regulatory framework for the Brazilian electricity industry.

 

Law No. 10,848/04 and Decree 5,163 of July 30, 2004 governingthe purchase and sale of electricity under the New Industry Model Law remainsubject 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 into effect,generating uncertainty as to how and when the Federal Government will be ableto introduce changes to the electricity industry. Accordingly, we cannot nowevaluate the impact of new regulation to be issued by ANEEL or the impact thata decision on the constitutionality of Law No. 10,848/04 would have on ourfuture activities, results of operations and financial condition.

 

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

 

Under applicable law, our generationcompanies are not allowed to sell energy directly to our distributioncompanies. As a result, our generation companies have to sell electricity in aregulated market through public auctions conducted by ANEEL (the “RegulatedMarket,” the “ACR,” or the “Pool”) or in the Free Market (the “ACL”).Legislation allows distributors that contract with our generation companiesunder the Regulated Market to reduce the quantity of energy contracted undersome contracts up to a certain limit, exposing our generation companies to therisk of failing to sell its remaining energy at adequate prices.

 

We also perform trading activities throughpower purchase and sale contracts, mainly in the ACL market, through ourgeneration and trading subsidiaries. Contracts in the ACL with consumers that are allowed to purchase energydirectly from generating companies or from energy traders, referred to as “FreeConsumers,” are generally consumers with demand equal to or greater than 3 MWor consumers with demand between 500 KW and 3 MW from so-called “renewableenergy sources,” such as small hydroelectric facilities. Older contracts withconsumers greater than 3MW give them the flexibility to purchase more or lessenergy (by 5% on average) from us than was originally contracted for by suchconsumers, which may adversely impact our business, results of operations andfinancial condition. Newer contracts, signed after 2005 generally do not allowfor this kind of flexibility.

 

If we are unable to sell all our energy inthe auctions or in the ACL, our energy will be placed in the CCEE at asettlement price (Preço de Liquidação de Diferenças), or PLD, which has beenvery volatile. If this occurs in periods of low settlement prices, our revenuesand 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 readjustment; (2) the periodic revision; and (3) theextraordinary revision. We are entitled to apply each year for the annualreadjustment, 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 and certain other regulatory charges, including charges for the use oftransmission and distribution facilities. In addition, ANEEL carries out aperiodic revision every five years that is aimed at identifying variations inour costs as well as setting a factor based on our operational efficiency thatwill be applied against the index of our ongoing annual rate adjustments, theintended effect of which is to reward the good management of our costs whilesharing any related gains with our consumers. We are also entitled to requestan extraordinary revision of our rates if unforeseen events significantly alterour cost structure. The periodic revision and extraordinary revision aresubject to a certain degree of ANEEL’s discretion.

 

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Although our concession agreements provide 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$1,801 million as of December 31, 2008. Theagreement between CEMIG and the State Government that governs the CRC Accountreceivable is referred to as the CRC Account Agreement. Historically we havehad and continue to have difficulty collecting amounts due from the StateGovernment under the CRC Account. We have renegotiated and amended the terms ofthe CRC Account on a number of occasions in connection with this difficulty. Wecannot assure you we will be paid on a timely basis in the future or at all.See “Item 5. Operating and Financial Review and Prospects—Impact of Our AccountReceivable from the State Government.”

 

*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 NationalSystem Operator (*Operador Nacional do Sistema*, orONS) 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 to be able to offer creditto public sector entities. Thus, if our operations do not fall within theseparameters and conditions, we may have difficulty in obtaining financing fromBrazilian financial institutions, which could create difficulties in theimplementation of our investment plan or in refinancing our financialobligations. Brazilian legislation also establishes that a state-controlledcompany, in general, may only use proceeds of external transactions withcommercial banks (debt, including bonds) to refinance financial obligations. Asa result of these regulations, our capacity to incur debt is again limited, andthis 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 ourcovenants under our loan agreements, and although we were able to obtainwaivers from our creditors, no assurance can be given that we would besuccessful in obtaining any waivers in the future. Early maturity of ourobligations could adversely affect our financial condition especially in lightof cross default 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 couldadversely affect 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;

 

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·                                          temporary suspension from participatingin bidding processes for new concessions;

 

·                                          intervention by ANEEL in the managementof the concessionaire in breach; and

 

·                                          termination of 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 be renewed by theFederal Government for additional periods of up to 20 years without beingsubject to the bidding process, provided that the concessionaire has metminimum performance standards and that the proposal is otherwise acceptable tothe 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 “Item 4. The Brazilian PowerIndustry—Concessions.” Non-renewal of any of our concessions could adverselyaffect 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 ariver from increasing its throughput of water, if this increase were tonegatively affect other plants further downstream. In the same way, the ONS maydecide to increase thermal generation and reduce hydroelectric generation inorder to conserve water in the reservoirs.

 

Shortages and/or rationing due to adverse hydrological conditions notcovered by the Energy Reallocation Mechanism (as described in “Item 4. TheBrazilian Power Industry—Energy Reallocation Mechanism”) could result inincreased costs and reduced cash flow. In addition, if the new energy auctionsunder the New Industry Model Law fail to result in an expansion in electricitygeneration capacity to adequate levels to meet growing demand, rationingmeasures could be implemented. Any limitation on our electricity generation capacitycould adversely affect our business, results of operations and financialcondition.

 

*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:

 

·                                          we may experience problems in theconstruction phase of an expansion project;

 

·                                          we may face regulatory or legalchallenges that delay the initial operation date of an expansion project;

 

·                                          our new or modified facilities may notoperate at designated capacity or may cost more to operate than we expect;

 

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·                                          we may not be able to obtain adequateworking capital to finance our expansion projects; and

 

·                                          we may encounter environmental issues andclaims by the local population during power 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.

 

Non-compliance with environmental laws and regulations could,independently of the obligation to redress any damages that may be caused,result in the application of criminal and administrative sanctions beingapplied. Based on Brazilian legislation, criminal penalties such as restrictingrights, and even imprisonment, may be applied to individuals (includingmanagers of legal entities), and penalties such as fines, restriction of rightsor community service may be applied to legal entities. With respect toadministrative sanctions, depending on the circumstances, the environmentalauthorities may impose warnings and fines ranging from R$50 thousand to R$50million, require partial or total suspension of activities; suspend or restricttax benefits or cancel or suspend lines of credit from governmental financialinstitutions as well as prohibit the entity from contracting with governmentalagencies, companies and authorities. Any of these events could adversely affectour business, results of operations or financial condition.

 

In addition, CEMIG is subject to Brazilian legislation requiring thepayment of compensation in relation to the polluting effects of its activities.Pursuant to such legislation, up to 0.5% of the total amount invested in theimplementation of a project that causes significant environmental impact mustbe directed towards environmental compensation measures. CEMIG has not yetassessed the effects that this legislation may have on it. See “Item 4.Information on the Company—Environmental Matters—Compensation Measures.” Anycharges on CEMIG, as a result of this regulation, could be significant and mayimpact our business, results of operations or financial condition.

 

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

* *

As of December 31, 2008, our total past due receivables from finalconsumers were approximately R$917 million, corresponding to 9.3% of our netrevenues for 2008, and our allowance for doubtful accounts was R$244 million.Approximately 11.7% of the past due receivables were owed by entities in thepublic sector. We may be unable to recover debts from several municipalitiesand other defaulting clients. If these debts are not totally or partiallyrecovered, we will experience an adverse impact on our business, results ofoperations and financial condition. In addition, any consumer defaults inexcess of our allowance for doubtful accounts could have an adverse effect onour business, results of operations and financial condition.

 

*The current global recession may have significanteffects on our customers, which could adversely affect our business, operatingresults and financial condition.*

* *

The current global recession, as well as slow recovery period, may leadto lower demand for our services, increased incidences of our customers’inability to pay for our services, or the insolvency of our customers. Manyeconomists are now predicting that the current recession in the global economymay be prolonged as a result of the deterioration in the credit markets andrelated financial crisis, as well as a variety of other factors. Any of theseevents may negatively impact our sales, revenue generation and margins, andconsequently adversely affect our business, operating results and financialcondition.

 

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

* *

Our by-laws contemplate that we spend up to 40.0% of our annual EBITDA(earnings before interest, income taxes, depreciation and amortization), duringthe period from 2009 through 2013, on the construction of new powerinstallations and the refurbishment and maintenance of existing power plantsand transmission and distribution systems. Our ability to carry out thiscapital expenditure program is dependent upon a number of factors, includingour ability to charge adequate rates for our services, our access to domesticand international capital markets and a variety of operating and other factors.In addition, our plans to expand our generation and transmission capacity aresubject to the competitive bidding process governed by the Concessions Law. Wecannot give any assurance that we will have the financial resources to completethis program.

 

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*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 oursubsidiaries 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-termfunds to pay our obligations and to fund our current and expected acquisitions.*

* *

On December 31, 2008, our total debt was R$6,511 million, of whichR$1,197 million matures in 2009. We will need funds in the short term to pay orrefinance these obligations and to fund our current and expected acquisitions.However, no assurance can be given that we will be able to raise such funds ina timely manner and in the amounts necessary or at competitive rates, or thatwe will otherwise have supplemental cash-on-hand available to pay ourobligations or finance our acquisitions. If we are unable to successfully raisefunds as planned, we may not be able toentirely pay our debt or meet all our acquisition commitments, including thepurchase of Terna Participações S.A., and our investment program could suffer significant delays,which could adversely affect our business, financial condition and prospects.

 

*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$390 million as of December 31, 2008(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 acollective bargaining agreement with the labor unions representing most ofthese 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. As of December 31,2008, our labor-related claims totaled, in the aggregate, approximately R$193.8million, and at that date we had accrued a liability of approximately R$82million for losses we expect from these claims. For a more detailed discussionof labor-related proceedings, see “Item 8. Financial Information—LegalProceedings—Labor and Pension Fund Obligations.”

 

We have not experienced any material labor unrest during the last sevenyears, although in 2006 three work stoppages did occur, in 2007 four workstoppages occurred and in 2008, one minor work stoppage occurred. Ouroperations might be interrupted by a labor disturbance in the future. We do notcarry insurance for losses incurred as a result of business interruptionscaused by labor action. In the event of a strike, we might face an immediateloss of revenue.

 

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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 that the shareholders’agreement is null and void. In December 2003, this ruling was appealed tothe *Superior Tribunal de Justiça* (SuperiorCourt of Justice), which upheld the Minas Gerais State Court of Appeals ruling.The decision of the Superior Court of Justice is subject to review andtherefore the effective control of CEMIG remains subject to further judicialchallenge in the *Supremo Tribunal Federal* (SupremeCourt). For a more detailed discussion of this proceeding, see “Item 8. FinancialInformation—Legal Proceedings—Shareholders’ Agreement.”

 

**Risks Relating toBrazil**

** **

*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 ofoperations or financial condition may be adversely affected by changes ingovernment policies, and also by:

 

·                                          fluctuations in the exchange rate;

 

·                                          inflation;

 

·                                          instability of prices;

 

·                                          changes in interest rates;

 

·                                          fiscal policy;

 

·                                          other political, diplomatic, social andeconomic developments which may affect Brazil or the international markets;

 

·                                          control on capital flow; and

 

·                                          limits on 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. According to the Amplified NationalConsumer Price Index, or IPCA, Brazilian annual inflation rates in 2006, 2007and 2008 were 3.1%, 4.5% and 5.9%, respectively. No assurance can be given thatinflation will remain at these levels.

 

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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 the economy, including the introduction ofgovernment policies that could harm our business, results of operations andfinancial condition or adversely affect the market value of our shares and as aresult, 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. dollarand currencies of other countries.

 

In 2008, the *real* depreciated 30.0% against the U.S. dollar, due in partto the global credit crisis and economic slowdown. Between December 31,2008 and May 31, 2009, the *real*appreciated15.0% against the U.S. dollar. Considering the volatility the world economy isfacing, no assurance can be given that the *real*will notdepreciate against the dollar again. On December 31, 2008, the noon buyingU.S. dollar/*real* exchange ratewas R$2.313/US$1.00.See “—Exchange Rates.”

 

As of December 31, 2008, approximately 6.8% of our totalindebtedness from loans, financings and debentures was denominated incurrencies other than the *real*(70.8% of that in U.S. dollars). If the *real*depreciatesagainst the U.S. dollar, our related financial expenses will increase and ourresults of operations and financial condition could be adversely affected.However, 36.6% of our debt denominated in foreign currencies is hedged undercurrency swaps that convert our foreign currency obligations into *reais*. Our foreign exchange lossesincreased from R$12 million in 2007 to R$126 million in 2008. However, despitethe depreciation of the *real* againstthe U.S. dollar in 2008, our financial income (expenses) in 2008 improved froman expense of R$48 million in 2007 to income of R$17 million in 2008.

 

We also have entered intocertain power purchase agreements that are dollar denominated. We cannot assureyou that these derivatives instruments and the proceeds from ourdollar-denominated purchase agreements will be sufficient to avoid an adverseeffect on our business, results of operations and financial condition in caseof unfavorable exchange rate fluctuations. See “Item 11. Quantitative andQualitative Disclosures about Market Risk—Exchange Rate Risk” for informationabout our foreign exchange risk hedging 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 market 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.*

* *

Periodically, allegations of unethical or illegal conduct are made withrespect to figures in the Brazilian government, including legislators and/orparty officials. In 2007, the first year of Lula’s second term, other membersof the government were accused of corrupt behavior for various reasons,resulting in the resignation of one minister and of the president of thesenate. If these events lead to a materially adverse perception of Brazil amonginvestors, the trading value of our shares, the Preferred ADSs and the 

 

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CommonADSs could decline, and our ability to access international markets couldsuffer. In addition, any political instability resulting from these eventscould cause us to re-assess our strategies if the Brazilian economy suffers asa result.

 

**Risks Relating tothe Preferred Shares, Preferred ADSs and 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, includinglimited voting 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 theproceeds from any sale of preferred shares or common shares from *reais* into U.S. dollars and the remittance of U.S. dollarsabroad. We cannot assure you that the Federal Government will not take similarmeasures 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 foreign capital registration from theCentral Bank to remit U.S. dollars abroad for payments of dividends, any othercash distributions, or upon the disposition of the shares and sales proceedsrelated thereto. If you decide to exchange your Preferred ADSs or Common ADSsfor the underlying shares, you will be entitled to continue to rely, for fivebusiness days from the date of the exchange, on the depositary bank’selectronic certificate of registration in order to receive any proceedsdistributed in connection with the shares. Thereafter, you may not be able toobtain and remit U.S. dollars abroad upon the disposition of the shares, ordistributions relating to the shares, unless you obtain your own certificate ofregistration under Resolution No. 2,689 of January 26, 2000, of theBrazilian *Conselho Monetário Nacional*,or National Monetary Council, which entitles foreign investors to buy and sellon the Brazilian stock exchanges. If you do not obtain this certificate, youwill be subject to less favorable tax treatment on gains with respect to thepreferred or common shares. If you attempt to obtain your own certificate ofregistration, you may incur expenses or suffer significant delays in the applicationprocess. Obtaining a certificate of registration involves generatingsignificant documentation, including completing and filing various electronicforms 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 engage 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.”

 

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 

 

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applicableto you, the disposition of the underlying preferred shares or the repatriationof the proceeds from disposition could not be imposed in the future.

 

*The r*elative volatility and illiquidity of the Braziliansecurities 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:

 

·                                          changes to the regulatory, tax, economicand political environment that may affect the ability of investors to receivepayment, in whole or in part, with respect to their investments; and

 

·                                          restrictions on foreign investment and onrepatriation 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 BM&F BOVESPA—*Bolsa deValores, Mercadorias e Futuros*, or São Paulo Stock Exchange, theonly stock exchange in Brazil upon which shares are traded, had a marketcapitalization of approximately US$1.4 trillion as of December 31, 2008and an average daily trading volume of approximately US$2.5 billion for 2008.In comparison, the operating companies listed on the New York Stock Exchange, Inc.,or the NYSE, had a market capitalization of approximately US$15 trillion as of December 31,2008 and an average daily trading volume of approximately US$110.9 billion for2008.

 

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

* *

Under our by-laws, we must pay our shareholders a mandatory annualdividend equal to at least 50% of our net income for the preceding fiscal year,based on our financial statements prepared in accordance with the accountingpractices adopted in Brazil, with holders of preferred shares having priorityof payment. Our by-laws also require that the mandatory annual dividend we payto holders of our preferred shares equal a least the greater of 10% of the parvalue of our shares or 3% of the book value of our shares, should the paymentbased on 50% of our net income not surpass this amount. If we do not have netincome or our net income is insufficient in a fiscal year, our management mayrecommend at the annual shareholders’ meeting in respect of that year that thepayment of the mandatory dividend should not be made. However, under theguarantee of the State Government, our controlling shareholder, a minimumannual dividend of 6% of par value would in any event be payable to all holdersof common shares and preferred shares issued up to August 5, 2004 (otherthan public and governmental holders) in the event that mandatory distributionswere not made for a fiscal year. See “Item 8. Financial Information—DividendPolicy 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 against self-dealing andregarding the preservation of shareholder interests are less developed andenforced in Brazil than in the United States, potentially disadvantagingholders of the preferred shares, common shares, Preferred ADSs and 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.

* *

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*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 registrationstatement under the United States Securities Act of 1933, as amended, or theSecurities Act, is effective with respect to those rights or an exemption fromthe registration 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 the Company

** **

**Organizationand 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 as set forth below, this process is substantiallycomplete. The following chart shows our corporate structure as of December 31,2008.

 

Since December 31, 2008, there have been no material stockholdingchanges to our corporate structure as reflected in the chart below. Thematerial changes expected to take place in the near future relate to theacquisition of the transmission company Terna Participações S.A. and thestockholdings in three wind farms. These acquisitions are still subject toregulatory approval and other conditions. See “—Recent Developments.”

 

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The following are our principal subsidiaries,consolidated in our financial statements as of and for the year ended December 31,2008:

 

·                                          Cemig Geração e Transmissão S.A., or Cemig Generation andTransmission (100% interest) engages in electricity generation and transmissionand has been in operation since January 1, 2005.

 

·                                          Cemig Distribuição S.A., or Cemig Distribution (100%interest) engages in electricity distribution and has been in operation since January 1,2005.

 

·                                          Sá Carvalho S.A. (100% interest) producesand sells electricity, holding the concession to operate the Sá Carvalhohydroelectric power plant, with installed capacity of 78 MW. The plant startedoperating in 1951, and its concession expires in December 2024 but can beextended for a period of up to 20 years. CEMIG acquired control of Sá CarvalhoS.A. from Acesita S.A. in December 2000.

 

·                                          Rosal Energia S.A. (100% interest)produces and sells electricity, holding the concession to operate the Rosalhydroelectric power plant, with installed capacity of 55 MW. Its concessionexpires in May 2032 but can be extended for a period of up to 20years.  The company was formed in October 1999and the plant began operating on December 30, 1999. CEMIG acquired 100% ofthe shares of Rosal Energia S.A. from the Rede Group in December 2004.

 

·                                          Usina Térmica Ipatinga S.A. (100%interest) is a special-purpose company producing and selling electricity at theIpatinga thermoelectric and steam power plant, with installed capacity of 40MW. This company was formed in August 2000, began operating in 1986, andis on loan, without consideration, to CEMIG, for 15 years, until December 2014.

 

·                                          Horizontes Energia S.A. (100% interest)produces and sells electricity as an independent power producer, or IPP, at theMachado Mineiro and Salto do Paraopeba hydroelectric power plants, in the Stateof Minas Gerais, and the Salto Voltão and Salto do Passo Velho hydroelectricplants in the State of Santa Catarina, with total installed capacity of 14.1MW. The company was formed in April 2001.

 

·                                          Usina Termelétrica Barreiro S.A. (100%interest) is an IPP producing and selling energy from the Barreirothermoelectric power plant, with installed capacity of 12.9 MW. The company wasformed in April 2001 and began operating in February 2004 with itsauthorization extending until 2023.

 

·                                          Central Termelétrica de CogeraçãoS.A.(100% interest) operated the Barreiro thermoelectric power plant but is nowa non-operational company, since operation of the plant was subsequentlytransferred to Usina Termelétrica Barreiro S.A. Central Termelétrica deCogeração S.A.was formed in July 2002.

 

·                                          Cemig PCH S.A. (100% interest) is an IPPoperating the 23MW Pai Joaquim small hydro plant and selling the electricityproduced. The company was formed in October 2001 and  began operating in March 2004 under anauthorization that expires in April 2032.

 

·                                          Central Hidrelétrica Pai Joaquim S.A.(100% interest) operates the Pai Joaquim small hydro plant but is now anon-operational company after the plant was subsequently transferred to CemigPCH S.A. Central Hidrelétrica Pai Joaquim S.A. was formed in July 2002.

 

·                                          Cemig Capim Branco Energia S.A. (100%interest) operates the two-plant Capim Branco generating complex, through theCapim Branco Energia Consortium. The complex, renamed the Amador AguiarComplex, has potential total installed capacity of 450 MW. The company wasformed in May 2001 and the Capim Branco I plant began operating in February 2006,and Capim Branco II in March 2007. The concession runs until August 2036.

 

·                                          CemigBaguari Energia S.A. (100% interest) is CEMIG’s vehicle for participation in the BaguariHydro Plant consortium, operating the Baguari Hydro Plant. This company wasformed in July 2006 and CEMIG later decided to take part in the consortiumthrough the company Baguari Energia S.A.

 

·                                          Cemig Trading S.A. (100% interest) tradeselectricity and was formed in July 2002.

 

·                                          Efficientia S.A. (100% interest) provideselectricity efficiency and optimization services, consultancy and solutions,and also operating and maintenance services to electricity supplyfacilities.  The company was formed in January 2002.

 

·                                          Empresa de Infovias S.A. (100% interest)provides telecommunications and related services, through multiservice networksusing fiber optic cable, coaxial cable and other electronic equipment.  The company was formed in January 1999,andin 2002, CEMIG acquired a stake in Empresa de Infovias S.A. held by AES.

 

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Our consolidated financial statements for the years ended December 31,2008, 2007 and 2006 include the financial results of CEMIG and all itssubsidiaries (operational and pre-operational) described above.  (See Notes 2 and 9 to the consolidatedfinancial statements.) At December 31, 2008, the following investmentswere not consolidated:

 

·                                          Rio Minas Energia Participações S.A., orRME (25.0% interest) is the controlling stockholder of Light S.A., with a52.13% interest in its total capital. The main holdings of Light S.A. are LightEnergia, a generator of electricity, Light Serviços de Eletricidade S.A., anelectricity distributor, and Light Esco Ltda., which operates in energy tradingand energy efficiency.  RME was formed inMarch 2006.

 

·                                          Companhia de Gás de Minas Gerais – Gasmig (jointly controlled, 55.19% interest) acquires, transports, distributesand sells natural gas. Gasmig was formed in July 1986 and in December 2004,CEMIG sold 40% of its interest in Gasmig to, and entered into a Stockholders’Agreement with, Petrobras and Gaspetro. Gasmig holds a concession fordistribution of piped gas throughout the whole of Minas Gerais State for aperiod of 30 years beginning in January 1993, and this period may beextended.

 

·                                          Empresa Paraense de Transmissão deEnergia S.A., or ETEP (jointly controlled, 19.25% interest) 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. The company was formed in March 2001 andCEMIG acquired its interest in ETEP in August 2006.

 

·                                          Empresa Norte de Transmissão de EnergiaS.A., or ENTE (jointly controlled, 18.35% interest) is the holder of a publicservice electricity transmission concession for two 500-kV transmission lines,the first 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. The company was formed in September 2002 and CEMIGacquired its interest in ENTE in August 2006.

 

·                                          Empresa Regional de Transmissão deEnergia S.A., or ERTE (jointly controlled, 18.35% interest) is the holder of apublic service electricity transmission concession for the 230-kV transmissionline from the Vila do Conde Substation to the Santa Maria Substation in theState of Pará. The company was formed in September 2002 and CEMIG acquiredits interest in ERTE in August 2006.

 

·                                          Empresa Amazonense de Transmissão deEnergia S.A., or EATE (jointly controlled, 17,17 % interest) is the holder ofthe public service electricity transmission concession for the 500-kVtransmission lines between the sectionalizing substations of Tucuruí, Marabá,Imperatriz, Presidente Dutra and Açailândia. The company was formed in March 2001,and CEMIG acquired its interest in EATE in August 2006.

 

·                                          Empresa Catarinense de Transmissão deEnergia S.A., or ECTE (jointly controlled, 7.50% interest) is the holder of thepublic service electricity transmission service concession for the 525-kVtransmission line from the Campos Novos Substation to the Blumenau Substationin the State of Santa Catarina. The company was formed in August 2000, andCEMIG acquired its interest in ECTE in August 2006.

 

·                                          Companhia de Transmissão Centroeste deMinas (jointly controlled, 51.00% interest) engages in building, implementing,operating and maintaining the 345-kV transmission line from the substation ofthe Furnas hydroelectric power plant to a substation located in Pimenta. Thecompany was formed in October 2004 and the period of the concession forthe Furnas–Pimenta transmission line is 30 years,,beginning in March 2005,and it may be extended to 2065.

 

·                                          Companhia Transleste de Transmissão(25.0% interest) built and operates the 345-kV transmission line connecting asubstation in Montes Claros to the substation of the Irapé hydroelectric powerplant. This company was formed in October 2003 and began operating in December 2005.The concession period of the Irapé-Montes Claros transmission line is 30 years,beginning in February 2004, and it may be extended to 2064.

 

·                                          Companhia Transudeste de Transmissão(24.0% interest) built, operates and maintains the 345-kV transmission linefrom Itutinga to Juiz de Fora. The company was formed in October 2004 andbegan operating in February 2007. The period of the concession for theItutinga–Juiz de Fora transmission line is 30 years, beginning in March 2005,and it may be extended to 2065.

 

·                                          Companhia Transirapé de Transmissão(24.5% interest) built, operates and maintains the 230-kV Irapé—Araçuaítransmission line. The company was formed in December 2004 and beganoperating in May 2007.  The periodof the concession for the transmission line is 30 years, beginning in March 2005,and it may be extended until 2065.

 

·                                          Transchile Charrúa Transmisión S.A. (49%interest) is engaged in building, operating and maintaining the 220 kV Charrúa—NuevaTemuco transmission line in Chile. This company was formed in July 2005.  The period of the concession for the line is20 years, beginning in May 2005, and it may be extended for an equalperiod.

 

·                                          BaguariEnergia S.A. (69.39% interest) is a special-purpose company formed in April 2008to operate the electricity generation concession of the Baguari power plant(140 MW), through the Baguari AHE Consortium, in which it has a 49% interest.The period of the concession is 35 years, beginning in August 2006.

 

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·                                          Hidrelétrica Cachoeirão S.A. (49%interest) built and operates the Cachoeirão small hydro plant (PCH) , on theManhuaçu River, in the municipalities of Pocrane and Alvarenga, in the State ofMinas Gerais, with installed capacity of 27 MW. This company was formed in January 2007and began operating in December 2008. Its concession period is 30 years,beginning in July 2000.

 

·                                          Axxiom Soluções Tecnológicas S. A. (49%interest) provides complete services of systems implementation and managementto electricity sector companies (generation, transmission anddistribution).  This company was formedon August 27, 2007 and began operating in the second half of 2008.

 

·                                          Hidrelétrica Pipoca S.A. (49% interest) isengaged in building, operating and selling electricity generated by the Pipocapower plant on the Manhuaçu River, in the municipalities of Caratinga andIpanema.  The company was formed in June 2004and CEMIG acquired its interest in May 2008. The plant has installedcapacity for 20 MW, with startup planned for May 2010. Its authorizationperiod is 30 years, beginning in September 2001.

 

·                                          Guanhães Energia S.A. (jointlycontrolled, 49% interest) is engaged in building and operating the Dores deGuanhães, Senhora do Porto and Jacaré small hydro plants in the municipality ofDores de Guanhães, and the Fortuna II plant in the municipalities of Guanhãesand Virginópolis, with aggregate capacity of 44 MW. This company was formed in June 2006and CEMIG acquired its interest in October 2007. Operational startup isplanned for  2010. The period of theauthorization for the small hydro plants is 30 years.

 

·                                          Madeira Energia S.A. – MESA (10%interest) is a special-purpose company, formed in August 2007 to  build, operate and maintain the Santo Antôniohydroelectric plant, through its wholly owned subsidiary Santo Antônio S.A. Theplant is being built in the basin of the Rio Madeira, in the Northern region ofBrazil. It will have generating capacity of 3,150 MW and is expected to startoperating in 2012. Its concession period runs for 35 years, beginning in June 2008.

 

·                                          *Empresa Brasileira de Transmissãode Energia S.A.*,or**EBTE (49% interest) was formed as aspecial-purpose company to build, operate and maintain the 230-kV transmissionproject made up of the 134 miles Juína–Maggi double-circuit transmission line;144 miles Maggi–Juba double-circuit transmission line; the 66 miles Maggi–Parecisdouble-circuit transmission line; the 138 miles Nova Mutum–Sorriso–Sinopsingle-circuit transmission line; and the new Parecis and Juína 230/138/13.8 kVsubstations, to transmit hydroelectrically generated electricity from theDardanelos and Juruena complexes and strengthen the regional transmissionsystem. Operational startup is planned for June 2010.

 

·                                          Cemig Serviços S.A. (100% interest) wasformed in April 2008 to provide services related to generation,transmission and distribution of electric power.

 

On July 3, 2008, CEMIG’s Board of Directors authorized CemigGeneration and Transmission to acquire a 49% stake in the ItaocaraHydroelectric Power Plant and the Paracambi and Lajes Small Hydroelectric PowerPlants and to join, by contract, the UHE Itaocara Consortium, in partnershipwith Itaocara Energia Ltda., the PCH Paracambi Consortium, in partnership withLightger Ltda., and the PCH Lajes Consortium, in partnership with Light EnergiaS.A. The object of each consortium is the same: to produce technical andeconomic feasibility studies and plan, build, operate and maintain therespective power plants. On December 31, 2008 no construction had beenbegun on these projects and all were still in the planning stage.

 

Through oursubsidiaries, we believe we are the largest integrated concessionaire of electric power generation,transmission and distribution in Brazil. We operate our generation,transmission and distribution businesses pursuant to concession agreements withthe Federal Government. We are party to concession agreements with ANEEL thatconsolidate our various generation concessions into one agreement and ourseveral distribution concessions into four distribution concessions coveringthe northern, southern, eastern and western regions of Minas Gerais. We arealso party to a concession agreement with ANEEL with respect to ourtransmission operations. Inconnection with the unbundling, on September 16, 2005, ANEEL approved thetransfer of our concession for distribution services to Cemig Distribution andthe transfer of our concession for transmission services to Cemig Generationand Transmission. On October 22, 2008, ANEEL approved the transfer of ourgeneration concession to Cemig Generation and Transmission.

 

On December 31, 2008, we generatedelectricity at 53 hydroelectric plants, four thermoelectric plants and one windfarm and had a total installed capacity of 6,580 MW. At the same date, we ownedand operated 3,081 miles of transmission lines and 281,756 miles ofdistribution lines. We hold concessions to distribute electricity in 96.7% ofthe territory of Minas Gerais.

 

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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.”

 

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, of which we sold a 40% stake in 2004.

 

Additional Minas Gerais state legislative changesenacted in 1997 authorized us to participate in non-energy activities that canbe carried out using our operating assets. In January 1999, weincorporated Empresa de Infovias S.A.,a telecommunication service provider, as a joint venture with AES Força Empreendimentos Ltda., partof the 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.

** **

**RecentDevelopments**

** **

On May 28, 2009, our shareholders approved the execution of ashare purchase agreement between Cemig Generation and Transmission andTerna—Rete Ellettrica Nazionale S.p.A., or Terna S.p.A., for the acquisition ofapproximately 82.27% of the voting and 65.86% of the total capital of TernaParticipações S.A., or Terna, for approximately R$2,330.5 million.

 

Terna is a holding company with interests in six electricity transmissioncompanies with operations in eleven Brazilian states. Terna’ssubsidiaries include Transmissora Sudeste Nordeste S.A., or TSN; NovatransEnergia S.A.; Empresa de Transmissão de Energia do Oeste S.A., or ETEO; Empresade Transmissão do Alto Uruguai S.A., or ETAU; Brasnorte Transmissora de EnergiaS.A.; and Terna Serviços Ltda.; which, jointly, control over 2,069 miles oftransmission lines.

 

The closing of the acquisition and the payment of the purchase price isexpected to occur on or after September 30, 2009, and Cemig Generation andTransmission shall, upon the closing, carry out a mandatory tender offer forthe acquisition of the outstanding shares of Terna, for the same purchase priceand subject to the same conditions as the purchase or shares from Terna S.p.A.(for an expected amount of approximately R$1,207.8 million), as required by theBrazilian Corporate Law, Terna by-laws, CVM Instruction No. 361/2002 andthe Special Corporate Governance Level 2 of the São Paulo Stock Exchange. Theacquisition remains subject to the approval of Brazilian antitrust authoritiesand the waiver by financial institutions of restrictive covenants to whichCEMIG and Terna are subject relative to their indebtedness.

 

On February 5, 2009, Cemig Generation and Transmission executed ashare purchase agreement with Energimp S.A. to purchase a 49% interest in threewind farms located in the State of Ceará, Brazil for the amount of R$213million (to be adjusted at the closing of the transaction). The three wind farms,named UEE Praias de Parajurú, UEE Praia do Morgado and UEE Volta do Rio, areexpected to be operating in the second half of 2009 and have a total installedcapacity of 99.6 MW. The acquisition is subject to the approval of ANEEL, theFederal Savings Bank  (*Caixa Econômica Federal*), Eletrobrás and the antitrustauthorities (*Conselho Administrativo de Defesa Econômica*),or CADE.

 

**Investmentin Light**

** **

Through Rio Minas Energia Participações S.A., or RME, we hold anindirect 13.03% interest in Light S.A., or Light, which generates, transmitsand distributes electricity in Rio de Janeiro. On March 28, 2006, RMEsigned an agreement with EDF International S.A., or EDFI, to purchase from EDFI88.84% of its shares of Light, which represented 79.39% of the total registeredcapital of Light at the time of the purchase.

 

On May 16, 2007, the Brazilian Development Bank, or 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, thereby reducing the percentage holdingof RME from 79.39% to 54.17%. On October 26, 2007, BNDES converted theremaining 10% of its convertible debentures into shares of Light, and as aresult held 33.69% of the total capital of Light, diluting RME’s percentageholding in Light from 54.17% to 52.25% (2.7% through its wholly ownedsubsidiary Lidil Comercial Ltda.).

 

In the second quarter of 2008, CEMIG recognized as revenue R$82.7million from financial compensation to be paid by the other RME shareholdersfor CEMIG’s waiver of its right to exercise an option to purchase the other RMEshareholders’ holdings in the generation assets of Light, which option had beenpurchased by CEMIG for a agreed upon amount. One RME shareholder made fullpayment, according to its part of the agreement, in July 2008, and theothers will make their payments over a maximum of nine years, with the amountsof such payments subject to adjustment based on the SELIC rate plus 1.00% peryear. Payments to CEMIG by the other RME shareholders must equal at least10.00% of the dividends paid by Light to those shareholders each year.

 

We recognize our interest in Light as an investment and we recordedR$132 million in income from our investment in Light in 2008.

 

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*LightActivities*

 

The main activities of Light are:

 

·                  Generation—utilizing hydroelectric energyfrom the Paraíba do Sul and Ribeirão das Lajes rivers, with maximum totalcapacity of 855 MW.

 

·                  Distribution of electricity—serving atotal area of 4,236 square miles of the State of Rio de Janeiro, supplyingelectricity to 3.6 million consumers, representing approximately 10 millionpeople in 31 municipalities and invoicing a total of 18,292 GWh in 2008.

 

·                  Energy trading—operating in the ACL anddealing with alternative energy sources.

 

·                  Energy services—providing energy andinfrastructure services and focusing on energy solutions for its clients as anEnergy Services Company, or ESCO.

 

Light invested a total of R$546.7 million in 2008 in the acquisition offixed assets, improvements to and expansion of its distribution system andtransmission network for generating facilities. This amount represented a51.11% increase over the R$361.8 million of capital expenditures in 2007.

 

Light’s concession agreement to provide electricity generation,distribution and transmission services in the State of Rio de Janeiro expireson June 4, 2026 but may be renewed upon application.

 

**Acquisitionof Transmission Concession Holders**

** **

In 2006, CEMIG, in partnership with MDU Brasil Ltda. and Brascan BrasilLtda., acquired 50% ownership of the voting stock of the electricitytransmission concession holders Empresa Amazonense de Transmissão de EnergiaS.A., or EATE, Empresa Norte de Transmissão de Energia S.A., or ENTE, EmpresaParaense de Transmissão de Energia S.A., or ETEP, and Empresa Regional deTransmissão de Energia S.A., or ERTE, and 40% of the voting stock of thetransmission concession holder Empresa Catarinense de Transmissão de EnergiaS.A., or ECTE, for R$802 million. Together, we refer to the companies as theBrazilian Power Transmitters (*Transmissoras Brasileirasde Energia*), or TBE.

 

*Descriptionof the transmission concession holders*

* *

On December 31,2008, Cemig had the following investments in EATE, ECTE, ENTE, ERTE and ETEP,shown in the table below.

 
| Company  |   | Connection                                                        |   | Length  (Miles) |   | Capacity  (kV) |   | Operation    |   | Annual Permitted Revenue (1)  (R$million) |   | Concession contract (3) |   | Concession  Expiration Date |   |
|----------|--------|-------------------------------------------------------------------|--------|-----------------|--------|----------------|--------|--------------|--------|-------------------------------------------|--------|-------------------------|--------|-----------------------------|--------|
| EATE (2) |   | Tucuruí (Pará) to  Presidente Dutra (Maranhão)     |   | 577             |   | 500            |   | March/03     |   | 240.3                                     |   | June 12,  2001     |   | June 11, 2031          |   |
| ECTE (2) |   | Campos Novos (Santa  Catarina) to Blumenau (Santa Catarina)       |   | 157             |   | 525            |   | March/02     |   | 54.0                                      |   | November 1, 2000   |   | October 31, 2030       |   |
| ENTE (2) |   | Tucuruí (Pará) to  Açailândia (Maranhão) |   | 285             |   | 500            |   | February/05  |   | 123.0                                     |   | December 11, 2002  |   | December 10, 2032      |   |
| ERTE (2) |   | Vila do Conde (Pará) to  Santa Maria (Pará)             |   | 96              |   | 230            |   | September/04 |   | 22.0                                      |   | December 11, 2002  |   | December 10, 2032      |   |
| ETEP (2) |   | Tucuruí (Parã) to Vila do  Conde (Pará)            |   | 201             |   | 500            |   | August/02    |   | 55.7                                      |   | June 12, 2001      |   | June 11, 2031          |   |

 

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(1)                                Annual revenue set by ANEEL and adjustedfor inflation.

(2)                                The operation and maintenance oftransmission lines of EATE, ENTE, and ERTE are carried out byEletronorte-Centrais Elétricas do Norte do Brasil S.A., or Electronorte, and ofECTE by Centrais Elétricas de Santa Catarina S.A., or Celesc.

(3)                                Right acquired for commercial operationof public electricity transmission services for 30 years, renewable for thesame period of time.

 

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Under the concession contracts for these lines, the annual revenue inthe last 15 years of the contracts is 50% less than the annual revenue for thefirst 15 years, though the annual revenue is adjusted each year for inflationin connection with the transmission companies’ annual review. The annual reviewand revenue adjustment usually takes place in the month of July. We recognizerevenue on these contracts on a straight-line basis in accordance with thenature of the services provided. In 2008, we recognized R$22 million of incomeon these contracts.

 

On September 24, 2008 Brookfield Brasil TBE Participações Ltda.,partner of CEMIG in the TBE companies, exercised its option to sell to CEMIGand Alupar Investimento S.A., 95% and 5%, respectively, its shares representingvoting stockholdings of 24.99% in EATE, 24.99% in ETEP, 18.35% in ENTE, 18.35%in ERTE and 7.49% in ECTE. The amount to be paid by CEMIG for its share will beR$330.6 million, adjusted for inflation through the closing date. Theacquisition of the shares by CEMIG has been approved by ANEEL, BNDES and otherfinancing institutions.

 

On April 16, 2008, CEMIG, through its subsidiary EATE, executedtwo share purchase agreements with Alupar Investimento S.A. for acquisition of80% of the capital of two companies operating transmission lines in the Stateof Santa Catarina: Lumitrans—Companhia Transmissora de Energia Elétrica, orLumitrans, and Companhia Transmissora de Energia Elétrica, or STC. Under theterms of these agreements, EATE paid R$32.4 million, and R$56.7 million,respectively, for the holdings in Lumitrans and STC. The transaction wasapproved on October 28, 2008 by ANEEL.

 

In ANEEL Auction 004/2008, the TBE Centro-Oeste Consortium, made up ofEATE (51%) and Cemig Generation and Transmission (49%), bid for and won theconcession to build and operate the following transmission lines comprising LotD of that auction: Maggi–Juba, Parecis–Maggi and Juína–Maggi (double-circuit,230 kV); Nova Mutum–Sorriso (230 kV), Sorriso–Sinop (230 kV); and the Parecis230/138/13.8 kV–300 MVA substation and the Juína 230/138/13.8 kV–100 MVAsubstation. In accordance with the auction requirements to receive theconcession, the special-purpose company Empresa Brasileira de Transmissão deEnergia S.A. was formed, with the same composition as that of the TBECentro-Oeste Consortium. The concession contracts were signed on October 16,2008.

 

**CapitalExpenditures and Investments in Affiliates**

** **

Capital expenditures and investments in affiliates for the years ended December 31,2008, 2007 and 2006 in millions of *reais*, are asfollows:

 
|                                                                |   | Year ended December 31, |   |
|---------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                |   | 2008                                   |   | 2007 |   | 2006 |   |
| Acquisition of interest in Light through RME                        |   | -                                      |   | - |   | 174 |   |
| Acquisition of interests in transmission companies                  |   | 37                                     |   | - |   | 349 |   |
| Other investments                                                   |   | 183                                    |   | 26 |   | 45 |   |
| Sale of Way TV                                                      |   | -                                      |   | (49) |   | - |   |
| Total investments in affiliates                                     |   | 220                                    |   | (23) |   | 568 |   |
| Generation power projects—under property, plant and  equipment |   | 121                                    |   | 242 |   | 264 |   |
| Transmission network expansion                                      |   | 12                                     |   | 64 |   | 55 |   |
| Distribution network expansion                                      |   | 792                                    |   | 790 |   | 983 |   |
| Others                                                              |   | 46                                     |   | 24 |   | 26 |   |
| Total capital expenditures under property, plant and  equipment     |   | 971                                    |   | 1,120 |   | 1,328 |   |
| Total capital expenditures and investments in affiliates            |   | 1,191                                  |   | 1,097 |   | 1,896 |   |

 

We currently projectcapital expenditures in 2009 related to property, plant and equipment ofapproximately R$970 million. The principal uses of these capital expendituresare expected to be for the expansion of our distribution infrastructure andincreases in our generation capacity.

 

We currently projectinvestments in affiliates of approximately R$820 million in 2009. Thisprojection does not include the acquisition of Terna discussed above. See “—RecentDevelopments.”

 

We expect to fund ourcapital expenditures and investments in affiliates in 2009 mainly from our cashflow from operations and, to a lesser extent, through financing. As thefinancial markets improve, we expect to finance our expansion and projects byissuing debentures as well as through commercial paper to meet short termobjectives.

 

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**Business Overview**

** **

*General*

* *

We are required, like other Brazilian electric utilities, to purchaseelectricity from the Itaipu Hydroelectric Power Plant in an amount determinedby the Federal Government based on our electricity sales. See “—Distributionand Purchase of Electric Power—Purchase of Electric Power—Itaipu.” In addition,we purchase energy from other concessionaires and the interconnected powersystem. See “—Distribution and Purchase of Electric Power—Purchase of ElectricPower—Auction Contracts.” We also purchase energy generated by self powerproducers, or SPPs, and independent power producers, or IPPs, that are locatedwithin our concession area.

 

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

 

CEMIG’S ELECTRIC ENERGYBALANCE

 
| **(GWh)**                                                    | ** ** | **Year  ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                   | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| RESOURCES                                                    |       | 68,318                            |       | 67,698 |   | 63,964 |   |
| Electricity  generated by CEMIG (1)                          |       | 31,291                            |       | 33,150 |   | 32,187 |   |
| Electricity  generated by auto-producers                     |       | 1,062                             |       | 1,047 |   | 1,147 |   |
| Electricity  generated by Ipatinga                           |       | 355                               |       | 362 |   | 300 |   |
| Electricity  generated by Barreiro                           |       | 75                                |       | 82 |   | 51 |   |
| Electricity  generated by Sá Carvalho                   |       | 349                               |       | 322 |   | 395 |   |
| Electricity  generated by Horizontes                         |       | 41                                |       | 36 |   | 41 |   |
| Electricity  generated by Cemig PCH                          |       | 22                                |       | 10 |   | 7 |   |
| Electricity  generated by Rosal                              |       | 230                               |       | 264 |   | 326 |   |
| Electricity  generated by Amador Aguiar                      |       | 610                               |       | 505 |   | 243 |   |
| Electricity  bought from Itaipu                              |       | 12,323                            |       | 12,135 |   | 12,109 |   |
| Electricity  bought from CCEE and other companies (2)(3)     |       | 21,960                            |       | 19,785 |   | 17,158 |   |
|                                                         |       |                              |       |   |   |   |   |
| REQUIREMENTS                                                 |       | 68,318                            |       | 67,698 |   | 63,964 |   |
| Electricity  delivered to final consumers (4)                |       | 42,940                            |       | 39,056 |   | 37,707 |   |
| Electricity  delivered to auto-producers                     |       | 982                               |       | 990 |   | 1,013 |   |
| Electricity  delivered by Ipatinga                           |       | 355                               |       | 362 |   | 300 |   |
| Electricity  delivered by Barreiro                           |       | 98                                |       | 100 |   | 97 |   |
| Electricity  delivered by Sá Carvalho                   |       | 473                               |       | 472 |   | 472 |   |
| Electricity  delivered by Horizontes                         |       | 84                                |       | 84 |   | 95 |   |
| Electricity  delivered by Cemig PCH                          |       | 122                               |       | 122 |   | 105 |   |
| Electricity  delivered by Rosal                              |       | 263                               |       | 263 |   | 262 |   |
| Electricity  delivered to the CCEE and other companies(2)(3) |       | 17,211                            |       | 20,621 |   | 18,476 |   |
| Losses                                                       |       | 5,790                             |       | 5,629 |   | 5,437 |   |

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(1)                                Discounting the losses attributed togeneration (606 GWh in 2008) and the internal consumption of the generatingplants.

(2)                                Beginning in 2004, this amount refers tocontracts, purchases and sales of electricity under the CCEE, including theEnergy Reallocation Mechanism (*Mecanismo de Realocação deEnergia*).

(3)                                Includesbilateral contracts with other agents of the CCEE.

(4)                                Includes electricity delivered toconsumers outside the concession area.

 

*Generation*

* *

According to ANEEL, at December 31, 2008, we were the seventhlargest electric power generation concessionaire in Brazil as measured by totalinstalled capacity. At December 31, 2008, we generated electricity at 53hydroelectric plants, four thermoelectric plants and one wind farm and had atotal installed generation capacity of 6,580 MW of which hydroelectric plantsaccounted for 6,397 MW, thermoelectric plants accounted for 182 MW and our windfarm accounted for 1 MW. Eight of our hydroelectric plants accounted forapproximately 81.7% of our installed electric generation capacity in 2008. During theyear ended December 31, 2008, we recorded expenses totaling R$634 millionrelating to transmission charge payments made to the ONS and to transmissionconcession holders. See “Item 5. Operating and Financial Review and Prospects”and “The Brazilian Power Industry.”

 

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*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 final users. Wetransport energy produced at our own generation facilities as well as energythat we purchase from Itaipu, the interconnected power system and otherconcessionaires. Our transmission network is comprised of power transmissionlines with a voltage capacity equal to or greater than 230 kV and is part ofthe Brazilian Grid regulated by the ONS. See “—The Brazilian Power Industry.”As of December 31, 2008, 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 15,506 MVA.

 

*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 (consumers with demand equal to or greater than 3 MW orconsumers with demand equal to or greater than 500 KWh from alternative energy sources, such as wind, biomass orSmall Hydroelectric Power Plants). Our concession area covers approximately 219,103square miles, or 96.7% of the territory of the state. As of December 31,2008, we owned and operated 281,756 miles of distribution lines, through whichwe supplied electricity to approximately 6.6 million consumers. At December 31,2008, we were the largest electricity distribution concessionaire in Brazil interms of GWh transported. Of the total amount of electricity we supplied tofinal consumers as of December 31, 2008, 60.1% was to industrialconsumers, 16.7% was to residential consumers, 10.3% was to commercialconsumers and 12.9% was to rural and other consumers.

 

*Other Businesses*

* *

While our main business consists of the generation, transmission anddistribution of electricity, we also engage in the following businesses: (i) distributingnatural gas in Minas Gerais through our consolidated subsidiary, Gasmig, (ii) telecommunicationsthrough our consolidated subsidiary Empresa de Infovias S.A., a company createdto provide fiber-optics and coaxial cable network installed along ourtransmission and distribution lines through which telecommunication servicescan be provided; (iii) national and international consulting businessthrough our subsidiary Efficientia S.A., whose focus is to provide our largestcustomers in the industrial, service and commercial sectors with energysolutions; and (iv) implementation and management of systems forelectricity sector companies (generation, distribution and transmission)through our subsidiary Axxiom Soluções Tecnológicas S.A., incorporated on August 27,2007. We also seek to strengthen our business in gas and the developmentof alternative sources of energy, particularly oil. On February 9, 2009,our by-laws were amended to create the Office of the Chief Officer for the GasDivision, who is responsible for coordinating all the policies and processesfor exploration, acquisition, storage, transportation, transmission,distribution and sale of oil and gas and their sub-products, whether deriveddirectly or through third parties.

 

**Revenue Sources**

 

Thefollowing table shows the revenues attributable to each of our principalrevenue sources, for the periods indicated:

 
| ** **                                           | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Electricity sales to final consumers                 |       | 10,497                                     |       | 10,191 |   | 9,319 |   |
| Electricity sales to the interconnected power system |       | 1,069                                      |       | 1,134 |   | 884 |   |
| Use of basic transmission and distribution networks  |       | 1,865                                      |       | 1,705 |   | 1,780 |   |
| Services rendered                                    |       | 82                                         |       | 61 |   | 32 |   |
| Telecommunication and other                          |       | 159                                        |       | 175 |   | 168 |   |
| Total                                                |       | 13,672                                     |       | 13,266 |   | 12,183 |   |

 

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**Generation andPower Trading**

 

*Overview*

* *

Thefollowing table sets forth certain operating information concerning ourelectric power generation plants as of December 31, 2008:

 
| **Facility**                  | ** ** | **Installed  Capacity  (MW)** | ** ** | **Assured  Energy (1)  (average MW)** | ** ** | **Year  Commenced  Operations** | ** ** | **Installed  Capacity  % of Total** | ** ** | **Date  Concession or  Authorization  Expires** | ** ** | **CEMIG’s  Interest** |
|-------------------------------|------------|-------------------------------|------------|--------------------------------------------|------------|---------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------|------------|----------------------------|
| Major  Hydroelectric Plants   |       |                          |       |                                       |       |                            |       |                                          |       |                                            |       |                       |
| São Simão           |       | 1,710                         |       | 1,281.0                                    |       | 1978                            |       | 26.0                                          |       | January 2015                               |       | 100%                       |   |
| Emborcação          |       | 1,192                         |       | 497.0                                      |       | 1982                            |       | 18.1                                          |       | July 2025                                  |       | 100%                       |   |
| Nova Ponte                    |       | 510                           |       | 276.0                                      |       | 1994                            |       | 7.8                                           |       | July 2025                                  |       | 100%                       |   |
| Jaguara                       |       | 424                           |       | 336.0                                      |       | 1971                            |       | 6.5                                           |       | August 2013                                |       | 100%                       |   |
| Miranda                       |       | 408                           |       | 202.0                                      |       | 1998                            |       | 6.2                                           |       | December 2016                              |       | 100%                       |   |
| Três Marias              |       | 396                           |       | 239.0                                      |       | 1962                            |       | 6.0                                           |       | July 2015                                  |       | 100%                       |   |
| Volta Grande                  |       | 380                           |       | 229.0                                      |       | 1974                            |       | 5.8                                           |       | February 2017                              |       | 100%                       |   |
| Irapé                    |       | 360                           |       | 206.3                                      |       | 2006                            |       | 5.5                                           |       | February 2035                              |       | 100%                       |   |
| Aimorés                  |       | 161.7                         |       | 84.3                                       |       | 2005                            |       | 2.5                                           |       | December 2035                              |       | 49%                        |   |
| Salto Grande                  |       | 102                           |       | 75.0                                       |       | 1956                            |       | 1.6                                           |       | July 2015                                  |       | 100%                       |   |
| Funil                         |       | 88                            |       | 43.6                                       |       | 2002                            |       | 1.3                                           |       | December 2035                              |       | 49%                        |   |
| Queimado                      |       | 86.6                          |       | 47.8                                       |       | 2004                            |       | 1.3                                           |       | January 2033                               |       | 82.5%                      |   |
| Sá Carvalho              |       | 78                            |       | 58.0                                       |       | 2000                            |  (2)  | 1.2                                           |       | December 2024                              |       | 100%                       |   |
| Rosal                         |       | 55                            |       | 30.0                                       |       | 2004                            |  (2)  | 0.8                                           |       | May 2032                                   |       | 100%                       |   |
| Itutinga                      |       | 52                            |       | 28.0                                       |       | 1955                            |       | 0.8                                           |       | July 2015                                  |       | 100%                       |   |
| Amador Aguiar I               |       | 50.5                          |       | 32.6                                       |       | 2006                            |       | 0.8                                           |       | August/2036                                     |       | 21.05%                     |   |
| Amador Aguiar II              |       | 44.21                         |       | 27.6                                       |       | 2007                            |       | 0.7                                           |       | August/2036                                     |       | 21.05%                     |   |
| Camargos                      |       | 46                            |       | 21.0                                       |       | 1960                            |       | 0.7                                           |       | July 2015                                  |       | 100%                       |   |
| Porto Estrela                 |       | 37                            |       | 18.6                                       |       | 2001                            |       | 0.6                                           |       | July 2032                                  |       | 33.3%                      |   |
| Igarapava                     |       | 30.4                          |       | 24.4                                       |  (3)  | 1999                            |       | 0.5                                           |       | December 2028                              |       | 14.5%                      |   |
| Pai Joaquim (5)               |       | 23                            |       | 13.9                                       |       | 2004                            |       | 0.4                                           |       | April 2032                                 |       | 100%                       |   |
| Cachoeirão               |       | 13,23                         |       | 8.02                                       |       | 2008                            |       | 0.2                                           |       | July 2030                                  |       | 49%                        |   |
| Piau                          |       | 18                            |       | 8.0                                        |       | 1955                            |  (2)  | 0.3                                           |       | July 2015                                  |       | 100%                       |   |
| Gafanhoto                     |       | 14                            |       | 6.7                                        |       | 1946                            |       | 0.2                                           |       | July 2015                                  |       | —                     |   |
| Smaller  Hydroelectric Plants |       | 115.2                         |       | 62.4                                       |       | —                          |       | 1.6                                           |       | —                                          |       | —                     |   |
| Thermoelectric  Plants        |       |                          |       |                                       |       |                            |       |                                          |       |                                            |       |                       |   |
| Igarapé                  |       | 131                           |       | 71.3                                       |       | 1978                            |       | 2.0                                           |       | August 2024                                |       | 100%                       |   |
| Ipatinga                      |       | 40                            |       | 40                                         |       | 2000                            |  (2)  | 0.6                                           |       | December 2014                              |       | 100%                       |   |
| Barreiro                      |       | 12.9                          |       | 11.4                                       |       | 2004                            |       | 0.2                                           |       | April 2023                                 |       | 100%                       |   |
| Formoso                       |       | 0.4                           |       | 0.2                                        |       | 1992                            |       | 0.0                                           |       | Indefinite                                      |       | 100%                       |   |
| Wind Farm                     |       | 1                             |       | 0.3                                        |       | 1994                            |       | 0.0                                           |       | Indefinite                                      |       | 100%                       |   |
| Total                         |       |                          |       |                                       |       |                            |       |                                          |       |                                            |       |                       |   |
|                          |       | 6,580.8                       |  (4)  | 3,979.4                                    |  (4)  | —                          |       | 100.0                                         | %          | —                                          |       | —                     |   |

 

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| (1) |   | Assured Energy is the  plant’s long-term average output, as established by MME in accordance with  studies conducted by the EPE. 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 date of  acquisition.                                                                                                                                                                                                                                                                                                                                                       |
| (3) |   | The amount of 5.49  average MW of Assured Energy, as set forth in 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.                                                                                     |
| (4) |   | This amount does not  include energy related to our investment in Light, since we do not have  ownership or operational control of any of Light’s energy assets.                                                                                                                                                                                                                     |
| (5) |   | On December 19, 2005, ANEEL approved the transfer  of the authorization to produce and sell the energy of the Pai Joaquim Small  Hydroelectric Power Plant from Central Hidrelétrica Pai Joaquim S.A. to CEMIG  PCH S.A.                                                                                                                                                        |

 

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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** | ** ** | **2008**                                                                                                                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| 500 kV                                         |       | 7                                                                                                                                                     |       | 7 |   | 4 |   |
| 345 to 230 kV                                  |       | 15                                                                                                                                                    |       | 15 |  (1) | 10 |   |
| 161 to 138 kV                                  |       | 112                                                                                                                                                   |       | 112 |  (2) | 69 |   |
| 69 to 13.8 kV                                  |       | 134                                                                                                                                                   |  (4)  | 102 |   | 102 |   |
| Total                                          |       | 268                                                                                                                                                   |       | 236 |  (3) | 185 |   |
| ** **                                     | ** ** | ** **                                                                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Step-Down Transformation Capacity(5)  of Generation Substations**                                                               | ** ** |
| ** **                                     | ** ** | **As of December 31,**                                                                                                                 | ** ** |
| ** **                                     | ** ** | **2008**                                                                                                                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                           |       |                                                                                                                                                  |       |   |   |   |   |
| Number  of step-down substations               |       | 58                                                                                                                                                    |       | 57 |   | 56 |  (3) |
| MVA                                            |       | 7,141                                                                                                                                                 |  (3)  | 7,125 |   | 7,078 |  (3) |

 

----

(1)                                We increased the circuit length of our345 kV connection line in 2006 because the Irapé Facility began operations.

(2)                                We increased the circuit length of our138 kV connection lines in 2007 because the Amador Aguiar II Facility beganoperations.

(3)                                This amount does not include the Light acquisition.

(4)                                We increased the circuit length of our 69kV connection lines in 2008 because the Cachoeirão Facility began operations.

(5)                                Step-downtransformation capacity refers to the ability of a transformer to receive energy ata certain voltage and release it at a reduced voltage for further distribution.

 

*Generation Assets*

* *

We have incorporated the following subsidiaries in the State of MinasGerais and other states of Brazil to operate certain of our generationfacilities and to hold the related concessions:

 

*Usina Térmica Ipatinga S.A. —*We operate the Ipatinga ThermoelectricPower Plant through our subsidiary Usina Térmica Ipatinga S.A. This plant is anSPP (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.

 

*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 Energia S.A.) to Votorantim Metais ZincoS.A., or VMZ; and ANEEL Resolution 478 of June 12, 2007 ratified the 

 

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transaction.On March 16, 2007, ANEEL published Ruling No. 683 approving thechange of the name of the Capim Branco Generating Complex to the Amador AguiarGenerating Complex. The project consists of the Amador Aguiar I and AmadorAguiar II Hydroelectric Power Plants, with installed capacity of 240 MW and 210MW, respectively. We have entered into a purchase contract with Cemig CapimBranco Energia S.A. under which Cemig Distribution will purchase the energyproduced by Amador Aguiar I and Amador Aguiar II for 20 years from the startdate of each plant’s commercial operations, which in the case of Amador AguiarI was February 21, 2006, and in the case of Amador Aguiar II was March 9,2007. This contract was submitted to ANEEL in 2003 and was approved in December 2004.

 

*Horizontes Energia S.A. —*We formed Horizontes Energia S.A., or HorizontesEnergia, to generate and trade electricity as an IPP (independent powerproducer) through the commercial operation of the following of our smallerhydroelectric plants: the Machado Mineiro Power Plant (located on the PardoRiver in the municipality of Ninheira in the State of Minas Gerais, with aninstalled capacity of 1.72 MW); the Salto do Paraopeba Power Plant (located onthe Paraopeba River in the town of Jeceaba in the State of Minas Gerais, withan installed capacity of 2.37 MW; the Salto Voltão Power Plant (located on theChapecozinho River in the city of Xanxerê in the State of Santa Catarina, withan 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, and part of this electricity has been sold up to the year 2010. The Saltodo Paraopeba Power Plant is currently out of service for refurbishment. Weexpect that this power plant willresume its operations in 2010.

 

*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 neighborhood of the city of Belo Horizonte in MinasGerais. Construction started in July 2002 and commercial generation beganin February 2004. Usina Termelétrica Barreiro S.A. holds the assets of theBarreiro Thermoelectric Power Plant and trades its production of energy.

 

*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 theenergy produced by this plant.

 

Cemig Generation and Transmission also operates the following powerplants:

 

*Queimado Hydroelectric Power Plant —*Our partner inthis project is Companhia Energética de Brasília, or CEB, a state-controlledelectricity company. CEB has a 17.5% interest and we have the remaining 82.5%.The plant, with an installed capacity of 105 MW, is located on the Preto River,and encompasses areas in the States of Minas Gerais and Goiás and in Brazil’sFederal District. The power plant began its commercial generation on April 9,2004, with the operation of its first unit. The commercial operation of thesecond and third units began on June 16, 2004, and July 8, 2004,respectively. As of December 31, 2008, we had invested R$209 million inthe project. The concession relating to this plant expires on January 02,2033.

 

*Aimorés Hydroelectric Power Plant —*The Aimorés Hydroelectric Power Plant,located on the Doce River, has an installed capacity 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 theplant began operating at full capacity in November 2005, when we obtainedthe operational license from the Brazilian Institute of the Environment andRenewable Natural Resources, or IBAMA. As of December 31, 2008, we hadinvested R$692 million in this project.

 

*Funil***Hydroelectric PowerPlant***—***Also referred to as the**José Mendes Junior Hydroelectric Plant,the Funil Hydroelectric Power Plant**has generating capacity of 180 MW and is located on the Rio Grande river, inthe southern part of Minas Gerais.**We have a 49%interest in this enterprise.**Construction began in September 2000, and its three rotors began togenerate commercially on 2002 and 2003. The total investment was approximatelyR$211 million (in currency of 2002). The concession relating to this plantexpires on December 20, 2035.**

 

*Porto Estrela Hydroelectric Plant —*This plant is a project of the PortoEstrela Hydroelectric Consortium, located in the Serra da Estrela mountains inthe State of Minas Gerais. It has two generating units, with total installedcapacity of 112 MW. We have a 33% interest in this enterprise. The start dateof the concession was July, 1997, and it will end 35 years from the start date,in July, 2032. Construction began on July 9, 1999, and was completed on November 9,2001, with an investment of R$101 million. The plant’s operational license wasobtained on June 29, 2001, and the first and second generating unitsstarted operating on September 4, 2001, and November 5, 2001,respectively.

 

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*Irapé Hydroelectric Power Plant —*The Irapé Hydroelectric Power Plant, whichhas installed capacity of 360 MW, is located on the Jequitinhonha River, innorthern 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, 2008, we hadinvested R$1,173.2 million in this project, including R$33 million, recorded atthe present value, from debentures that were acquired by the State Government,using dividends that would otherwise have been payable to the State Governmentunder an agreement between the State Government and our company. The concessionrelating to this plant expires on February 28, 2035.

 

*Cachoeirão Small Hydroelectric PowerPlant —*CemigGeneration and Transmission negotiated an ownership interest in theconstruction and operation of Cachoeirão Small Hydroelectric Power Plant. Togetherwith our partner in this project, Santa Maria Energética S.A., or Santa MariaEnergética, we formed SPC Hidrelétrica Cachoeirão S.A., to build and operatethe Cachoeirão Small Power Plant. This plant, with an installed capacity of 27MW, will be located on the Manhuaçu River, in the eastern part of Minas Gerais.Cemig Generation and Transmission has a 49% ownership interest in the SPC andSanta Maria Energética has a 51% ownership interest. Santa Maria Energética isa special-purpose company which holds the authorization for commercial operation of the Cachoeirão SmallHydroelectric Power Plant and at the end of January 2007 applied toANEEL for permission to transfer this authorization to Hidrelétrica CachoeirãoS.A. Construction began in March 2007 and the facility began operating in December 30,2008. The concession relating to this plant expires on July 27, 2030.

 

*Expansion of Generation Capacity*

* *

We are currently involved in the construction of seven hydroelectricpower plants—Baguari, Pipoca, Dores de Guanhães, Senhora do Porto, Fortuna II,Jacaré and Santo Antônio—that will increase the installed generation capacityof our hydroelectric facilities by 92.19 MW over the next three years. Thefollowing is a brief description of these projects, the completion of which aresubject to various contingencies, certain of which are beyond our control.

 

*BaguariHydroelectric Power Plant**—*A consortium formed by Cemig Generation andTransmission, Furnas Centrais Elétricas S.A., or Furnas, an electricity concessionaireof generation and transmission controlled by the Federal Government, andBaguari I Geração de Energia Elétrica S.A, a special purpose company, or SPC,that belongs to Neoenergia S.A., a private integrated electricity sectorholding company, has the concession to build and operate the BaguariHydroelectric Power Plant and sell its energy. The power plant will have aninstalled capacity of 140 MW and will be located on the Doce River, in theState of Minas Gerais. Cemig Generation and Transmission has a 34% interest inthis consortium. The energy generated will be commercialized in the ACR. On December 15,2006, the State of Minas Gerais Environmental Policy Council *(Conselho Estadual de Política Ambiental)*, or COPAM, issuedthe power plant installation license. Construction began on May 9, 2007.Commercial generation at Baguari is expected to begin in September 2009.The concession relating to this plant expires on August 15, 2041. As of December 31,2008, we had invested R$140 million in this project of a total projectedinvestment of R$158 million.

 

*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 withHP2 do Brasil S.A., founded by Hydro Partners, a US investment company, toimplement and operate the project. We will have a 49% interest in this SPC. Theplant, with installed capacity of 20 MW, will be located on the Manhuaçu River,in the eastern part of the State of Minas Gerais. Construction began in thefirst half of 2008 and commercial generation is expected to begin at the end of2009. The concession relating to this plant expires on September 10, 2031.As of December 31, 2008, we had invested R$4 million in this project.

 

*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, whichformed, with us, the company SPC Guanhães Energia S.A, or Guanhães Energia. Thepurpose of Guanhães Energia is to build and operate these four PCHs, namly:Dores de Guanhães, with 14 MW installed capacity; Senhora do Porto, with 12 MWcapacity; Jacaré, with 9 MW; and Fortuna II, with 9 MW. Dores de Guanhães,Senhora do Porto 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 and Transmissionhas a 49% ownership interest in Guanhães Energia, while InvestminasParticipações has the remaining 51%. In June 2007, Construtora BarbosaMello 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. As of December 31, 2008, we had invested R$10 millionin this project.

 

*Madeira Energia S.A.**—*Madeira Energia S.A., or 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 beginoperations in 2012. Cemig Generation and Transmission has a 10% interest inMESA, and based on our ownership interest, we expect to invest R$1,220 millionin the development of the project.

 

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* *

*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 Farms*

* *

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.

 

On February 5, 2009, Cemig Generation and Transmission executed ashare purchase agreement with Energimp S.A. to purchase a 49% interest in threewind farms located in the State of Ceará, Brazil for the amount of R$213million (to be adjusted at the closing of the transaction). The three windfarms, named UEE Praia do Morgado, UEE Praias de Parajurú and UEE Volta do Rio,are expected to be operating in the second half of 2009 and will have a totalinstalled capacity of 99.6 MW. The acquisition is subject to the approval ofANEEL, the Federal Savings Bank  (*Caixa Econômica Federal*), Eletrobrás, and CADE.

 

*Power Trading*

* *

Under the presentregulations of the Brazilian electricity sector, power generation companies areallowed to operate in trading as well as the sale of their own production.CEMIG intensified this activity in 2009, which is complementary to the activityof the sale of its own generation, buying electricity for future sale, aiming furtherto increase the company’s results. CEMIG’s wholesale commercialization policyis approved by the Board of Directors and the transactions are individuallyapproved by the Executive Board. These transactions are also submitted toanalysis by the Energy Risks Management Committee, in which representatives ofvarious areas of CEMIG — financial, legal, commercial, regulatory and planning —participate, for the purpose of determining the risks and results expected,using, for this, analysis of market conditions, hydrology simulation models,energy risk models, estimates of spot prices and calculation of the profit atrisk.

 

**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.

 

During the year ended December 31, 2008, we recorded revenuetotaling R$472 million as a result of our transmission business. In turn,because we are also a distribution company and because we purchase electricityfrom Itaipu and others, our use of the basic transmission network requires usto pay scheduled rates to the National System Operator (*OperadorNacional do Sistema*), or ONS, and owners of different parts of thebasic transmission network. See “Item 5. Operating and Financial Review andProspects” and “—The Brazilian Power Industry.”

 

We transmit both the energy that we generate and the energy that wepurchase from Itaipu, the interconnected power system and other sources. On December 31,2008, we also had 13 industrial consumers whom we supplied directly with highvoltage (equal to or greater than 230 kV per industrial consumer) energythrough their connections to our transmission lines. Ten of these industrialconsumers are our clients and accounted for approximately 17.6% of the totalvolume of electricity we sold in the year ended December 31, 2008. We alsotransmit energy to distribution systems through the south/southeast-linkedsystem of the grid.

 

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Thefollowing tables set forth certain operating information pertaining to ourtransmission 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** | ** ** | **2008**                                                                                                                                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| 500 kV                                           |       | 1,352                                                                                                                                                      |       | 1,352 |   | 1,352 |   |
| 345 kV                                           |       | 1,244                                                                                                                                                      |       | 1,244 |   | 1,202 |   |
| 230 kV                                           |       | 485                                                                                                                                                        |       | 485 |   | 467 |   |
| Total                                            |       | 3,081                                                                                                                                                      |       | 3,081 |   | 3,021 |   |

 
| ** **                       | ** ** | **Step-Down Transformation Capacity(1)  of Transmission Substations** | ** ** |
|----------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **                       | ** ** | **As of December 31,**                                                     | ** ** |
| ** **                       | ** ** | **2008**                                                                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| Number  of step-down substations |       | 35                                                                                        |       | 35 |   | 33 |   |
| MVA                              |       | 15,503                                                                                    |       | 15,503 |   | 15,393 |   |

 

----

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

 

*Transmission Assets*

* *

*Montes Claros—Irapé —*In September 2003, a consortiumformed by Companhia Técnica de Engenharia Elétrica—ALUSA, or ALUSA, Furnas,Orteng Equipamentos e Sistemas Ltda., or Orteng, and CEMIG, won the concessionauctioned by ANEEL to the Montes Claros—Irapé transmission line. As required inthe bidding process, the partners formed the Companhia Transleste deTransmissão, which is responsible for building and operating the transmissionline. We have a 25% interest in this company. This 345 kV transmission lineconnects a substation located in Montes Claros, a city in northern MinasGerais, and the substation of the Irapé Hydroelectric Power Plant, with alength of approximately 86 miles. Construction of the project began in January 2005and transmission line operations began on December 18, 2005. Theconcession expires on February 18, 2034. As of December 31, 2008, wehad invested R$12.4 million in this project.

 

*Itutinga—Juiz de Fora —*In September 2004, a consortiumformed by ALUSA, Furnas, Orteng and CEMIG, with interests of 41%, 25%, 10%, and24% respectively, won the concession auctioned by ANEEL to the Itutinga—Juiz deFora transmission line. As required in the bidding process, the partners formedthe Companhia Transudeste de Transmissão, which will be responsible forbuilding and operating this transmission line. This 345 kV transmission line,with a length of approximately 89 miles, will connect the substation of theItutinga Hydroelectric Power Plant and a substation located in Juiz de Fora, acity in southeastern Minas Gerais. We began the project in March 2005, andcommercial operations began on February 23, 2007. As of December 31,2008, we had invested R$7.3 million in this project.

 

*Irapé—Araçuaí —*In November 2004, a consortiumformed by ALUSA, Furnas, Orteng and CEMIG with interests of 41%, 24.5%, 10% and24.5% respectively, won the concession auctioned by ANEEL to the Irapé—Araçuaítransmission line. As required in the bidding process, the partners formed theCompanhia Transirapé de Transmissão, which will be responsible for building andoperating this transmission line. This 230 kV transmission line, with a lengthof approximately 38 miles, will connect the substation of the IrapéHydroelectric Power Plant and a substation to be built in Araçuaí, a citylocated in northeastern Minas Gerais. We began the project in March 2005,and commercial operations began on May 23, 2007. As of December 31,2008, we had invested R$5.5 million in this project.

 

*Expansion of Transmission Capacity*

* *

We believe that our transmission system will need to be reinforced andexpanded through the construction of new substations and transmission lines withinthe next five years.

 

In accordance with the new regulatory framework in the Brazilianelectricity 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:

 

*Furnas—Pimenta —*In September 2004, a consortiumformed by Furnas and CEMIG, with interests of 49%, and 51%, respectively, wonthe concession auctioned by ANEEL to the Furnas—Pimenta transmission line. Asrequired in the bidding process, the partners formed the Companhia deTransmissão Centroeste de Minas, which will be responsible for building andoperating the 

 

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transmissionline. This 345 kV transmission line, with a length of approximately 47 miles,will connect the substation of the Furnas Hydroelectric Power Plant and asubstation located in Pimenta, a city in the west-central region of MinasGerais. We began the project in March 2005, and we expect the transmissionline operation to begin in December 2009. As of December 31, 2008, wehad invested R$6.8 million in this project.

 

*Charrúa—Nueva Temuco —*In April 2005 a consortium formed byALUSA and CEMIG, with interests of 51% and 49%, respectively, won theconcession auctioned by Centro de Despacho Económico de Carga del SistemaInterconectado Central, or CDEC—SIC, of Chile to build, operate and maintainthe Charrúa—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., an SPCincorporated in Chile and responsible for building and operating thetransmission line. With a length of approximately 116 miles, the transmissionline will connect the substations of Charrúa and Nueva Temuco in central Chile.We began the project in June 2005 and construction began in April 2007.On July 18, 2007, Transchile Charrúa Transmisión S.A. entered into aproject finance agreement with the Inter-American Development Bank in theamount of US$51.0 million related to the transmission line and substations.Commercial operations are expected to begin in 2009. As of December 31,2008, we had invested R$34 million in this project.

 

**EBTE—Transmission Lines in the State of  Mato Grosso —** In June 2008, an SPC formed by EATEand Cemig Generation and Transmission, with interests of 51%, and 49%,respectively, won the concession auctioned by ANEEL to a group of fivetransmission lines and two substations. As required in the bidding process, thepartners formed the Empresa Brasileira de Transmissão de Energia S.A., or EBTE,which will be responsible for building and operating the transmission lines.The 230 kV transmission lines and substations consist of three double-circuitlines extending 344 miles and two simple-circuit lines extending 138 miles,reaching a total length of 775 482 miles, and will connect seven substations indistricts of Juína, Brasnorte, Sapezal, Nova Mutum, Sorriso, Sinop, Tangará daSerra, Campo Novo dos Parecis, Lucas do Rio Verde and Vera, all located in thenorthern region of the State of Mato Grosso. The project was initiated in January 2009,and we expect the transmission lines operation to begin in July 2010. Asof December 31, 2008, we had invested R$11.8 million in this project.

 

**Distributionand Purchase of Electric Power**

 

*Overview*

* *

Our distribution operation consists of electricity transfers fromdistribution substations to final consumers. Our distribution network iscomprised of a widespread network of overhead and underground lines andsubstations with voltages lower than 230 kV. We supply electricity to smallindustrial consumers at the higher end of the voltage range and residential andcommercial consumers at the lower end of the range.

 

During the year ended December 31,2008, we recorded expenses totaling R$634 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.”

 

From January 1, 2002 through December 31, 2008, we investedapproximately R$971 million in the construction and acquisition of property,plant and equipment used to expand our distribution system.

 

Thefollowing tables provide certain operating information pertaining to ourdistribution system (other than Light), as of the dates presented:

 
| ** **                                       | ** ** | **Circuit Length of Distribution Lines in Miles  - High Voltage  (from distribution substations to final consumers)** |
|--------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                       | ** ** | **As of December 31,**                                                                                                                                        |
| **Voltage of Distribution Lines** | ** ** | **2008**                                                                                                                                                                     | ** ** | **2007** | ** ** | **2006** |
| 161  kV                                          |       | 34.2                                                                                                                                                                         |   | 34.2 |   | 34.2 |
| 138  kV                                          |       | 6,824.5                                                                                                                                                                      |   | 6,756.8 |   | 6,736.9 |
| 69  kV                                           |       | 2,817.7                                                                                                                                                                      |   | 2,802.4 |   | 2,804.2 |
| 34.5  kV + Others                                |       | 600.2                                                                                                                                                                        |   | 600.2 |   | 600.2 |
| Total                                            |       | 10,276.6                                                                                                                                                                     |   | 10,193.6 |   | 10,175.5 |

 

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| ** **                           | ** ** | **Circuit Length of Distribution Lines in Miles - Medium and Low  Voltage  (from distribution substations to final consumers)** |
|--------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|
| ** **                           | ** ** | **As of December 31,**                                                                                                     |
| **Type of Distribution Lines**       | ** ** | **2008**                                                                                                                        | ** ** | **2007** | ** ** | **2006** |
| Overhead urban distribution lines    |       | 53,685.9                                                                                                                        |   | 53,064.8 |   | 52,642.9 |
| Underground urban distribution lines |       | 426.9                                                                                                                           |   | 257.9 | ‘ | 471.6 |
| Overhead rural distribution lines    |       | 217,366.8                                                                                                                       |   | 210,014.4 |   | 191,809.9 |
| Total                                |       | 271,479.6                                                                                                                       |   | 263,337.1 |   | 244,924.4 |

 
|                  |   | **Step-Down Transformation Capacity(1)  of Distribution Substations** |
|-----------------------|--------|-----------------------------------------------------------------------|
|                  |   | **As of December 31,**                                           |
|                  |   | **2008**                                                              | ** ** | **2007** | ** ** | **2006** |
| Number of substations |   | 360                                                                   |   | 358 |   | 355 |
| MVA                   |   | 8,160                                                                 |   | 8,145 |   | 8,162 |

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

 

Physical data for the Control and Management Investment Program, orPROOBRA, were calculated by projection from the existing network. In 2003, webegan to calculate this as the sum of the linear extension of themedium-voltage network and the low-voltage network available in the GEMINIsystem, double counting (in relation to the previous criterion) where jointmedium and low voltage networks are in existence. The GEMINI system is themanager of CEMIG’s distribution network. With the inclusion and startup of theOperation, Projects, Client Registry and Planning modules, all the distributor’sassets are now being managed by the GEMINI system and are now the source ofinformation for ANEEL in assembling the data on assets for the rate reviews.

 

As a result, the statistics on extent of networks, number oftransformers, public illumination and quantity of transmission posts are nowsupplied by the GEMINI system on a geo-referenced basis. We believe this hasresulted in more precise data, reduction of errors in valuing fixed assets, andincreased reliability.

 

*Expansion of Distribution Capacity*

* *

Our distribution expansion plan for the next five years is based onprojections of market growth. For the next five years, we anticipate anincrease of approximately 930,500 new urban consumers and 103,000 ruralconsumers. In order to accommodate this growth, we expect that we will need toadd 238,200 medium-voltage poles, 1,002 miles of transmission lines and 24step-down substations, adding 816.5 MVA to our distribution network, increasingthe network’s installed capacity by 1,553 MVA, including reinforcement. Ongoingprojects for development of our distribution capacity include the following:

 

*Luz para Todos —*We haveadopted a rural electricity development program called the Light for All program (*Luz para Todos*) sponsored by theFederal Government and the State Government of Minas Gerais. We plan to use theprogram to meet our goal of providing electricity to 100% of the ruralconsumers in the State of Minas Gerais. The program includes the Light in theKnow sub-program (*Luz no Saber*), which uses solar energy toilluminate schools, community centers and rural homes in remote locations notyet connected to the distribution network. The first phase of the Light for All programsupplied electricity to 190,000 additional rural residences in the State ofMinas Gerais and required a total investment of approximately R$1.7 billion, ofwhich CEMIG invested R$375.8 million. In 2009, the Federal Government, theState Government and the concessionaires launched a second phase of theprogram. A total investment of R$491 million is projected for the second phaseof the program, of which CEMIG is responsible for approximately R$80 million.

 

*Projeto Noroeste —* Planned in 2003 and 2004,we launched the Northwest Project (*Projeto Noroeste*)in 2004 with the goal ofadding 150 MVA of installed capacity to our distribution system in thenortheastern region of the State of Minas Gerais, increasing the totalavailable distribution capacity to 300 MVA. We aim to supply energy to theregion to replace the diesel fuel traditionally used by rural producers, withthe objective of contributing to local growth in a sustainable manner. The cost of the project is estimated tobe R$154 million, of which we have funded R$133 million to date.

 

*Cresce Minas*— The Grow Minas (*Cresce Minas*) project was launched in 2007 to revitalize andexpand the distribution system in the northern region of the State of MinasGerais, improving the reliability of the system and increasing the quality ofservice to consumers. The project is expected to benefit approximately 340 municipalities (41% of the total) ofthe State of Minas Gerais, encompassing a total population of approximately 4.1million, including approximately 1.1 million consumers. In 2008, CEMIG investedR$167.5 million in capital expenditures exclusively to strengthen themedium-voltage distribution system, out of a total of R$270.8 millionprojected, the balance of which is expected to be invested in turn-key projectsin 2010. CEMIG also invested R$118.9 million in 2008 to strengthen thesub-transmission system. In the next three years, we expect to invest anaggregate of R$132.3 million in our sub-transmission and transmission systems.

 

*MinasGerais**Administrative Center —*On December 24, 2008, through Dispatch No. 4,795,ANEEL consented to the execution of the convention for technical and financialcooperation between Cemig Distribution and the Companhia de 

 

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Desenvolvimento Econômico de Minas Gerais, orCodemig, providing for the construction of electricity distribution facilities to supply energy tothe new administrative center of the State of Minas Gerais at a totaldevelopment cost to Cemig Distribution of R$41.6 million. Pursuant to theconvention, Cemig Distribution is required to expend R$10.5 million on a26-month term in development of the project.

 

*Purchase of Electric Power*

* *

During the year ended December 31, 2008, we purchased 9,021 GWh ofelectricity from Itaipu, which represented approximately 36.0% of theelectricity we sold to final users. In addition to the electricity purchasedfrom Itaipu, we have two other basic types of supply arrangements: (i) purchasesthrough public auctions, which accounted for approximately 55.0% of theelectricity purchased for resale during the year ended December 31, 2008,and (ii) long-term agreements existing prior to the New Industry ModelLaw, which represented approximately 9.0% of the electricity purchased in 2008.

 

*Itaipu —*Itaipu is one of the largest operatinghydroelectric plants in the world, with an installed capacity of 14,000 MW. Centrais Elétricas Brasileiras S.A.,or Eletrobrás, a holding company controlled by the Federal Government, owns a50% interest in Itaipu, while the remaining 50% is owned by the government ofParaguay. Brazil, pursuant to its 1973 treaty with Paraguay, has the option topurchase all of the electricity generated by Itaipu that is not consumed byParaguay. Brazil generally purchases more than 95% of the electricity generatedby Itaipu.

 

We are one of the electric power distribution companies operating inthe south, southeast and west-central regions of Brazil that are jointlyrequired to purchase all of Brazil’s portion of the electricity generated byItaipu. The Federal Government allocates Brazil’s portion of Itaipu’s poweramong these electric companies in amounts proportionate to their respectivehistorical market share of total electricity sales. We are currently requiredto purchase approximately 17.3% of the total amount of electricity purchased byBrazil from Itaipu at rates fixed to defray Itaipu’s operating expenses andpayments of principal and interest on Itaipu’s dollar-denominated borrowingsand the cost in *reais* oftransmitting 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 recover the cost of such electricity bycharging supply rates to consumers. According to our concession agreement,increases in the supply rate may be transferred to the final consumer uponapproval by ANEEL.

 

In the second half of 2007, ANEEL determined the decrease in the amountof energy to be purchased by some distribution companies from Itaipu. Beginningin January 2008, the amount of electricity purchased from Itaipu by eachof the electric power distribution companies 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 our case, this resulted in a reduction of approximately 326 average MW ofthe total amount of energy we purchase from Itaipu, and we purchased theshortfall at MME auctions as well as in the spot market. We cannot yet predictthe impact of such changes on the rates charged to the final consumer.

 

*Auction Contracts —*We purchased electricity in public auctions at theCCEE. These contracts were formalized between CEMIG and the several sellers inaccordance with the terms and conditions established in the invitation to bid.The following table sets forth the amounts of electricity contracted, averagetariff and prices related to the CCEAR contracts arising from the electricityacquired by CEMIG in auctions during 2008. It also includes contracts signedbefore 2008 but still effective during that year. See “—The Brazilian PowerIndustry” for more information on CCEE and CCEAR.

 

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| **Average  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 |   |
|                | 145.77     |                                                      |       |                      | 140.52     |   |   | 2009 to 2009 |   |
|                | 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 |   |
|                | 128.42     |                                                      |       |                      | 63.89      |   |   | 2011 to 2025 |   |
|                | 129.14     |                                                      |       |                      | 56.57      |   |   | 2012 to 2041 |   |
|                | 128.37     |                                                      |       |                      | 126.34     |   |   | 2012 to 2026 |   |
|                | 78.87      |                                                      |       |                      | 122.83     |   |   | 2012 to 2041 |   |

 

*Bilateral Agreements —*Cemig Distribution entered into bilateralagreements with various suppliers prior to the enactment of the New IndustryModel Law in 2004. Such agreements are valid under their original terms butcannot be renewed. During the year ended December 31, 2008, CemigDistribution purchased 1,798 GWh pursuant to these agreements, whichrepresented 6.44% of the total electricity required by Cemig Distributionduring 2008.

 

**OtherBusinesses**

** **

*Natural Gas Distribution*

* *

Companhia de Gás de Minas Gerais, or Gasmig, was established in MinasGerais, Brazil, in 1986 for the purpose of developing and implementing thedistribution of natural gas in Minas Gerais. CEMIG holds approximately 55% ofGasmig and Petrobras, through its subsidiary Gaspetro—Petrobras Gas S.A., holds40%. The remaining shares are owned by Minas Gerais Participações S.A., or MGI,the investing body of the State Government, 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 entire State ofMinas Gerais and consumers located within it. Gasmig’s marketing efforts focuson its ability to provide a more economically efficient and environmentallyfriendly alternative to oil, liquefied petroleum gas, or LPG, and wood. In2008, Gasmig supplied approximately 2.4 million cubic meters of natural gas perday to 271 consumers: 171 industrial and commercial clients, 92 retaildistribution stations for natural gas vehicles, two thermal power plants andsix distributors of compressed natural gas, or CNG. Gasmig supplied 0.8 millioncubic meters of gas per day to thermal power plants and 1.6 million cubicmeters 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, or LNG. In 2008, Gasmigdistributed approximately 4.0% of all natural gas distributed in Brazil.

 

Gaspetro acquired its 40% equity interest pursuant to an AssociationAgreement dated August 25, 2004, among CEMIG, Gasmig, Gaspetro andPetrobras. Under the terms of the Association Agreement, Petrobras agreed tomake investments to expand the capacity of the current pipelines connected tothe Gasmig distribution network and to construct new pipelines, and CEMIG andGaspetro 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. On December 15, 2004, Gasmigexecuted an additional supply contract with Petrobras which guarantees agradual increase in supply of up to 5.1 million m3/day of natural gas, inaddition to the 3.5 million m3/day that was 

 

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previouslycontracted for. This additional supply agreement is for the supply of naturalgas 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 the Greater Belo Horizonte area, 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 we expectto begin commercial supply pursuant to the agreement in the second half of2009, based on market demand. Under this agreement the price will beestablished based on the international oil price in the New York market.

 

We expect that the association with Petrobras will expand Gasmig’sdistribution capacity, as our ability to offer natural gas to our consumers isexpected to increase significantly with the implementation of Petrobras’s investmentsin pipelines. We expect that Gasmig’s capital expenditures for 2009 and 2010will be mostly used for the expansion of our distribution network in highlyindustrialized areas of Minas Gerais. Gasmig has already begun the necessaryexpansions to serve the regions of the Steel Valley and the southern region ofthe State of Minas Gerais.

 

We do not account for our interest in Gasmig as a consolidatedinvestment in our financial statements, in accordance with the Emerging IssuesTask Force, or EITF, Issue No. 96-16, “Investor’s Accounting for anInvestee When the Investor Has a Majority of the Voting Interest but theMinority Shareholder or Shareholders Have Certain Approval or Veto Rights.” Weconsolidated Gasmig’s revenues and expenses for the period from January 1,2004 to December 15, 2004, the date of our sale of a 40.00% equityinterest in Gasmig to Petrobras.

 

Other than with respect to the LNG supplied to Gasmig by a jointventure between Petrobras and White Martins Gases Industriais Ltda., or WhiteMartins, Gasmig purchases all its natural gas needs from Petrobras, and suchnatural gas is mainly provided by Petrobras’s own deposits. Our relationshipwith Petrobras is governed by two long term agreements, expiring in 2020 and2028. The price Gasmig charges its clients is based on the price charged byPetrobras plus a margin. Therefore, all cost increases in Gasmig’s purchase ofnatural gas are passed on to its clients through rates increases.

 

Minas Gerais accounted for approximately 11% of the total natural gasconsumption in Brazil in 2008. Many energy-intensive industries such as cement,steel, ferroalloys and metallurgy have significant operations in the state. Weestimate that the total demand for natural gas in Minas Gerais will amount to nearly5 million cubic meters of gas per day by 2012, which exceeds the availablesupply we project. Gasmig’s key strategy is to expand its distribution networkin order to serve the portion of the demand not yet reached. Gasmig is engagedin the development of new projects to extend its natural gas distributionsystems to reach consumers in other areas of Minas Gerais, mainly in heavilyindustrialized areas. In 2006, Gasmig began supplying natural gas to threeindustrial companies and two VNG retail distribution stations in the region ofthe Steel Valley, thus concluding the first phase of service to that region ofthe State of Minas Gerais. The average volume of natural gas distributed in thefirst phase was approximately 200,000 cubic meters/day. Gasmig accelerated thestart date to August 2006, providing service to the southern region of theState of Minas Gerais, through re-gasification of the LNG contracted withGásLocal, a joint venture of Petrobras and White Martins.

 

In 2008, Gasmig had gross revenues of approximately R$545 million andnet income of approximately R$85 million. We recognized R$47 million as incomefrom Gasmig in 2008.

 

In 2008, Gasmig invested approximately R$126 million in the expansionof its gas pipeline network to serve more clients in the State of Minas Gerais.The funds to finance the expansion came primarily from its own cash flow andreinvestment of the dividends payable to CEMIG. There were no changes in theGasmig ́s shareholder structure. 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 Governmentwill be necessary to expand its capacity or construct a new pipeline to supplythe anticipated growing natural gas demand in the State of Minas Gerais.

 

*Exploitationand Production of Crude Oil and Natural Gas*

 

*On December 18, 2008, a consortium composed of CEMIG,Companhia de Desenvolvimento Econômico de Minas Gerais - Codemig, CompExploração e Produção de Petróleo e Gás S.A., Sipet Agropastoril Ltda. andOrteng Equipamentos e Sistemas Ltda. participated in the Brazil Round 10Auction carried out by the National Agency of Oil, Natural Gas and Biofuels(Agência Nacional do Petróleo, Gás Natural e Biodiesel), or ANP, in order togrant the execution of concession agreements for exploratory blocks. Theconsortium became the concessionaire of four blocks (SF-T-104, SF-T-114,SF-T-120 and SF-T-127) in the São Francisco Basin, one block (POT-T-603) in thePotiguar Basin, and one block (REC-T-163) in the Recôncavo Baiano Basin.  The participation of both CEMIG and Codemigis 24.5% each. The total participation of Comp, Sipet, and Orteng is 51%, butthe individual participation of these three companies varies, depending on theblock. The execution of the concession agreement is scheduled to take place on June 30,2009, and CEMIG’s projected investment is not expected to exceed R$30 millionin the exploitation phase.*

* *

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*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% of the commonshares of Empresa de Infovias S.A., which has an optical fiber-basedlong-distance communications backbone installed along our power grid using opticalground wire cables. This communications backbone is connected to an accessnetwork that is based on hybrid fiber-coaxial cable technology and is deployedalong our power grid. Pursuant to Brazilian telecommunications law, we alsomake our network infrastructure available to other telecommunications providersinterested in leasing it.

 

Empresa de Infovias S.A. started its business operations in January 2001.The main telecommunication services provided by Empresa de Infovias S.A.through its network are signal transportation and access, both forpoint-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 inMinas Gerais.

 

Empresa de Infovias S.A. provides the network for cable television servicein 12 cities in Minas Gerais pursuant to a 15-year service agreement, thatexpires on December 31, 2015, with WAY TV Belo Horizonte S.A., or WAY TV,and Brasil Telecomunicações S.A., each a holder of concessions to provide cabletelevision and Internet service in certain cities in Minas Gerais, under whichEmpresa de Infovias S.A. allows these companies to use its networkinfrastructure. In return, WAY TV and Brasil Telecomunicações are obligated todeliver to Empresa de Infovias S.A. a percentage of the revenues derived fromtheir cable television and Internet subscribers.

 

Empresa de Infovias S.A. held a 69.25% equity interest in WAY TV,including 49.9% of its common shares. On November 12, 2007, Empresa deInfovias S.A. received final approval from the National TelecommunicationsAgency (*Agência Nacional de Telecomunicações*)for the sale of its equity interest in WAY TV to TNL PCS Participações S.A., anaffiliate 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 to certain restrictions.

 

Empresa de Infovias S.A. also provides intra-company data transmissionservices to us pursuant to a five-year agreement signed in 2001 and renewed in October 2007.We use this service for internalcommunications as well as for certain communications with our consumers.

 

In 2008, Empresa de Infovias S.A.’s gross revenues wereR$99.3 million, while its net income was R$24 million.

 

Empresa de Infovias S.A.’s capital expenditures for the past five yearswere an aggregate of R$100.9 million, and its capital expenditures for 2009 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, Honduras,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 2008, Efficientia had net income of R$6.5 million. Efficientia’sgross revenues in 2008 were R$10.7 million, a 24.3% increase from 2007. Thisincrease in gross revenue was accompanied by operational costs of R$2.3million, about 50% lower than in 2007. Highlights of the consultancy projectsof Efficientia in 2008 include consulting with respect to the implementation ofa cogeneration power plant that uses residual gas from metallurgy facilitiesoperations and with respect to five energy savings solutions for electricalsystems. The consultancy projects also included the connection of acogeneration power plant to Cemig Distribution’s grid, which will permitinjection of surplus energy generated by Louis Dreyfus Commodities Bioenergia(sugar and alcohol company) into Cemig Distribution’s grid. The power plantgenerates 100% clean and renewable energy.

 

In partnership with Concert Technologies S.A., Nansen S.A. Instrumentosde Precisão, Leme Engenharia Ltda. and FIR Capital Partners Ltda, we createdFocus Soluções Tecnológicas S.A. in August 27, 2007, which name waschanged in 2008 to Axxiom Soluções Tecnológicas S.A., to offer solutions intechnology and systems for operational management of public service 

 

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concessionholders, including electricity, gas, water, and sewerage and other publicutility companies. The company began operations in the second quarter of 2008.

 

In addition, The Strategic Technology Management Center (*Centro de Gestão Estratégica de Tecnologia*), or CGET,created in 2005, as a non-profit entity whose objectives include studies andresearch, development of alternative technologies, production of technical andscientific information and knowledge, encouragement of industrial developmentmeasures, plans and programs, projects for research and incorporation ofdeveloped or adapted technological innovations, and implementation of centersof excellence and institutions for the development of studies and provision oftechnological services.

 

**Energy Losses**

** **

We recognize energy losses in connection with our operations on thenational basic grid, which is operated by the ONS, referred to as the BasicGrid. These energy losses are divided into “technical” and “non-technical”losses.

 

CEMIG’s total energy losses in 2008 were 5,790 GWh, compared to 5,629GWh in 2007. Of this total in 2008, 606 GWh were related to losses in the BasicGrid attributed to CEMIG by the ONS. The remaining 5,184 GWh were bothtechnical and non-technical losses in CEMIG’s own local distribution system andrepresent 11.6% of the total energy (46.301 GWh) that passed through the localsystem.

 

Technical losses accounted for approximately 80% of our energy lossesin the local distribution grid in 2008. These losses are the inevitable resultof the step-down transformation process and the transportation of electricenergy. We attempt to minimize technical losses by performing rigorous andregular evaluations of the quality of our electricity supply and ourfacilities. We routinely upgrade and expand our transmission and distributionsystems in order to maintain quality and reliability standards, andconsequently, reduce technical losses. In addition, we operate our transmissionand distribution systems at certain specified voltage levels in order tominimize losses.

 

Technical losses are not comparable. Longer stretches of distribution(for example in rural areas) naturally have more technical losses.

 

Non-technical losses accounted for the remaining approximately 20% ofour energy losses in 2008 in the distribution grid and result from fraud,illegal connections, metering errors and meter defects. In order to minimizenon-technical losses, we regularly take preventive actions, includinginspection of consumers’ meters and connections, modernization of meteringsystems, training of meter-reading personnel, standardization of meterinstallation and inspection procedures, installation of meters with qualitycontrol warranties, consumer database updating and development of a theft-protecteddistribution network.

 

Additionally, we have developed an integrated system designed to helpdetect and measure controllable losses in all parts of our distribution system.

 

Non-technical losses arepartially comparable between electricity companies because they indicate asector’s inefficiencies and the social complexities within the concession area.At the end of 2008, the indicators that measure the quality of supply by CemigDistribution, DEC—Consumer Outage Duration in hours per year and FEC—Number ofOutages Per Year, were 13.65 and 6.53, respectively, compared to 13.14 and 6.39in 2007.

 

**Consumersand Billing**

** **

*Consumer Base*

* *

Our distribution and generation business consumers, who are locatedwithin our concession area in Minas Gerais and outside the state, are dividedinto five principal categories: industrial (including mining, manufacturing andprocessing activities); residential; commercial (including service-orientedbusinesses, universities and hospitals); rural; and other (including governmentaland public entities). During the year ended December 31, 2008, we sold42,926 GWh of energy, which includes the energy sold by Cemig Generation andTransmission to the so-called Free Consumers, mainly industrial.

 

For 2008, as compared to 2007, the volume of electric power sold by usto industrial and commercial consumers increased by 8.4% and 7.6%,respectively, and the volume of electric power sold by us to rural consumersincreased by 4.3%. The other consumer category grew 2.6% (this excludeswholesale supply). The residential consumption increased 5.2% from 2007 to2008. The following table provides information regarding the number of ourconsumers as of December 31, 2008 and consumption by consumer category forthe years ended December 31, 2008, 2007 and 2006.

 

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|                       | ** ** | **Number of**                       | ** ** | ** ** | **Consumption  (GWh)**              | ** ** |
|----------------------------|------------|------------------------------------------|------------|------------|-------------------------------------|------------|
|                       | ** ** | **consumers at  December 31,** | ** ** | ** ** | **Years  ended  December 31,** | ** ** |
| **Consumer Category** | ** ** | **2008**                                 | ** ** | ** ** | **2008**                            | ** ** | **2007** | ** ** | ** ** | **2006** | ** ** |
| Industrial                 |       | 74,482                                   |  (1)  |       | 26,198                              |  (2)  | 24,183 |  (2) |   | 23,759 |  (2) |
| Residential                |       | 5,400,214                                |       |       | 7,164                               |       | 6,813 |   |   | 6,647 |   |
| Commercial                 |       | 578,021                                  |       |       | 4,423                               |       | 4,111 |   |   | 3,851 |   |
| Rural                      |       | 482,952                                  |       |       | 2,296                               |       | 2,200 |   |   | 1,938 |   |
| Own consumption            |       | 829                                      |  (3)  |       | 35                                  |       | 34 |   |   | 30 |   |
| Other                      |       | 65,708                                   |  (4)  |       | 2,810                               |       | 2,738 |   |   | 2,666 |   |
| Total                      |       | 6,602,206                                |       |       | 42,926                              |       | 40,079 |   |   | 38,891 |   |
|                            |            |                                          |            |            |                                     |            |  |  |  |  |  |  |

 

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(1)                                Includes subsidiaries and affiliatedcompanies.

(2)                                The industrialconsumer category includes consumption by Sá Carvalho S.A., Usina TérmicaIpatinga S.A., Horizontes Energia S.A., Cemig PCH S.A., Usina TermelétricaBarreiro S.A., Rosal Energia S.A., Cemig Capim Branco S.A.

(3)                                Does not include consumption throughsupply to other concessionaires.

(4)                                Refers to the number of our plants,facilities and offices that use our energy, each of which is considered aconsumer pursuant to ANEEL regulations.

 

In 2008, we added and billed 162,001 new final consumers, representinggrowth of 2.5% compared to 2007, through the expansion of our transmission anddistribution systems.

 

The largest portion of the energy we sell is purchased by largeindustrial consumers. At December 31, 2008, thirteen 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 2008, and approximately 6.6% ofour revenues. In the same period, our thirteen 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, 2008, we had entered into power purchaseagreements with 889 of our industrial consumers. Our power purchase agreementswith industrial consumers have terms of three or five years and contain a minimumdemand clause that requires the consumer to pay for the contracted demand,which represents the system capacity reserved for that consumer, as well as theconsumer’s actual consumption. We believe that this billing method provides usa relatively stable source of revenue.

 

Thefollowing table shows our industrial energy sales volumes by type of industrialconsumer as of December 31, 2008:

 
| **Industrial Consumers (1)** | ** ** | **Energy Sales Volume  in GWh** | ** ** | **Consumption as a  Percentage of Total  Industrial Energy Sales  Volume** | ** ** |
|-----------------------------------|------------|------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| Steel industry                    |       | 7,117                                          |       | 27%                                                                                                      |       |
| Ferroalloy industry               |       | 4,967                                          |       | 19%                                                                                                      |       |
| Chemical industry                 |       | 2,865                                          |       | 11%                                                                                                      |       |
| Non-ferrous metal industry        |       | 1,045                                          |       | 4%                                                                                                       |       |
| Mining industry                   |       | 412                                            |       | 9%                                                                                                       |       |
| Food processing                   |       | 1,528                                          |       | 6%                                                                                                       |       |
| Cement industry                   |       | 954                                            |       | 4%                                                                                                       |       |
| Others                            |       | 7,310                                          |       | 28%                                                                                                      |       |
| Total                             |       | 26,198                                         |       | 100                                                                                                      |       |

 

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(1) The industrial consumer category includesconsumption by Sá Carvalho S.A., Usina Térmica Ipatinga S.A., HorizontesEnergia S.A., Cemig PCH S.A. and Usina Termelétrica Barreiro S.A.

 

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Thefollowing table sets forth the names and related industries of our ten largestconsumers in 2008:

 
| **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 a larger marketshare in the free market, we have entered into contracts with large FreeConsumers within and outside of Minas Gerais, leading to electricity salesvolume in 2008 of 22,609 GWh to those customers. As a result of the unbundling,most of our contracts with large consumers within our concession area wereassigned to Cemig Generation and Transmission in 2008. Most of our largeclients, that represent almost 50% of the MWh of our energy sold, have alreadycontracted to buy electricity from Cemig Generation and Transmission for thenext several years. Consumers that opt to become Free Consumers are primarilyindustrial consumers whose demand generally exceeds 3 MW. Consumers thatconsume between 500 kW and 3 MW may opt to purchase energy from other sources,if the source is a renewable one, such as small hydroelectric facilities orbiomass.

 

In 2008, we entered into two relevant groups of contracts with largeFree Consumers. The first group of contracts was with the Votorantim Group,through which we will provide variable amounts of energy, from the current 145average MW up to 670 average MW in some years. The total amount of this groupof contracts is approximately R$10.5 billion, and will expire in 2028. Thesecontracts are expected to generate revenue to CEMIG of approximately R$500million per year through their expiration in 2028. The second group ofcontracts was signed on May 26, 2008, with the ArcelorMittal Group, for theprovision of up to 313.5 average MW (twice the volume we currently provide tothe ArcelorMittal Group). The total amount of this second group of contracts isapproximately R$4.4 billion and will expire in 2020. This group of contracts isexpected to generate revenue to CEMIG of approximately R$360 million per yearthrough the expiration of the contracts in 2020.

 

*Billing*

 

Ourmonthly billing and payment procedures for electricity supply vary by consumercategory. Our large consumers with direct connections to our transmissionnetwork are generally billed on the same day their meters are read. Payment isrequired within five days after delivery of the bill. Other consumers receivinghigh and medium voltage electricity (approximately 8,000 consumers supplied ata voltage level equal to or greater than 2.3 kV or connected by undergrounddistribution lines, with the exception of public sector entities) are billedwithin one (70%) or two (30%) days of their meter reading and payment isrequired within five days after delivery of the bill. Our remaining consumersare billed within seven days of their meter reading and payment is requiredwithin 10 days after delivery of the bill or 15 days after delivery of the billin the case of public sector entities. Bills are prepared from meter readingsor on the basis of estimated consumption.

 

*Seasonality*

* *

Our sales are affected by 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 increasein temperatures. Certain figures representing fiscal quarterly consumption byfinal consumers from 2006 through 2008, in GWh, are set forth below:

 
| **Year**           | ** ** | **First Quarter** | ** ** | **Second Quarter** | ** ** | **Third Quarter** | ** ** | **Fourth Quarter** | ** ** |
|--------------------|------------|------------------------|------------|-------------------------|------------|------------------------|------------|-------------------------|------------|
| 2006  (1) (2) |       | 9,485                  |       | 9,619                   |       | 9,901                  |       | 9,886                   |       |
| 2007 (1) (2)  |       | 9,337                  |       | 10,016                  |       | 10,238                 |       | 10,488                  |       |
| 2008 (1) (2)  |       | 9,948                  |       | 10,438                  |       | 11,312                 |       | 11,228                  |       |

 

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(1)                                Includesconsumption by Sá Carvalho S.A., Usina Térmica Ipatinga S.A., Usina TérmicaBarreiro S.A., Cemig PCH S.A. and Horizontes Energia S.A.

(2)                                Does not include supply to otherconcessionaires.

 

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**Competition**

 

*Contracts with Free Consumers*

 

We had 157 contracts with Free Consumers as of December 31, 2008.Of these contracts, 16 are with companies located outside the distributioncompany’s concession area and represent 1,870 GWh of energy per year. Thesecontracts with Free Consumers have terms of three to ten years and represent atotal volume of approximately 19,150 GWh/year.

 

CEMIG’s strategy in the Free Market has been to establish contracts oflonger duration, thereby establishing and promoting a long-term relationshipwith our consumers. We seek to differentiate ourselves in consumer market basedon the quality of our service and the added value of Cemig Generation andTransmission. This positioning, together with a sales strategy that seeks tominimize exposure to short-term prices and contracts with high Take or Pay,translates into lower risk and greater predictability of the Company’s results.

 

At the end of 2008 we were the largest seller of energy in the FreeMarket.

 

*Concessions*

* *

Each concession that we currently hold is subject to a competitivebidding process upon its expiration. However, in accordance with theConcessions Law, existing concessions may be extended by the Federal Governmentwithout a bidding process for an additional period of up to 20 years uponapplication by the concessionaire, provided that the concessionaire has metminimum performance standards and that the proposal is otherwise acceptable tothe Federal Government. On September 22,2004, we applied to ANEEL for a 20-year extension of the concessions of theEmborcação and Nova Ponte hydroelectric plants. On June 14, 2007,the Federal Government approved the extension of the concessions of these powerplants for a period of 20 years from July 24, 2005. The related concessioncontract was amended on October 22, 2008 to reflect the extension grantedto Cemig Generation and Transmission.

 

It is possible that a number of our large industrial clients may becomeSPPs pursuant to the Concessions Law in order to obtain the right to generateelectricity for their own use. The granting of certain concessions to our largeindustrial clients could adversely affect our results of operations.

 

**RawMaterials**

** **

Water is our main raw material used for the production of energy,representing 97% of the total raw materials used. Our principal raw materialexpense is the purchase of fuel oil, which is consumed by our threethermoelectric plants in the electricity generation process. Fuel oilconsumption for the year ended December 31, 2008 represented an expense ofR$70 million. See “—The Brazilian Power Industry—Regulatory Charges” and “Item5. Operating and Financial Review and Prospects.” We believe that supplies offuel oil are readily available.

 

**EnvironmentalMatters**

 

*Overview*

 

Our generation, transmission and distribution activities are subject tocomprehensive federal and state legislation relating to the preservation of theenvironment. The Brazilian Constitution gives the Federal Government, statesand municipalities powers to enact laws designed to protect the environment andissue enabling regulations under these laws. While the Federal Government has thepower to promulgate general environmental regulation, state governments havethe power to enact specific and even more stringent environmental regulation. Aviolator of applicable environmental laws may be subject to administrative andcriminal sanctions, and will have an obligation to repair and/or providecompensation for environmental damages. Administrative sanctions may includesubstantial fines and suspension of activities, while criminal sanctions mayinclude fines and, for individuals, possible imprisonment, which can be imposedagainst executive officers and employees of companies that commit environmentalcrimes.

 

Our environmental impact studies are prepared by multi-disciplinaryteams, which analyze the environmental impacts of our projects and proposesolutions to minimize their effects on the environment. Applicable law inBrazil requires that licenses be obtained in connection with the construction,installation, expansion and operation of certain types of facilities.

 

We believe that we are in compliance in all material respects with therelevant laws and regulations.

 

We are certified under the Cemig Environmental Management System (EMS)for our operations in many municipalities, our materials storage and logisticswarehouses, the Volta Grande environmental station, the Galheiros EnvironmentalReserve, and our management units for industrial safety, property managementand operational contingency services.

 

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At the end of 2008, the following plants were certified under the CemigEMS: Camargos, Salto Grande, Volta Grande, Jaguara, Três Marias, Emborcação,and Igarapé—and the following were certified under ISO 14001: São Simão,Miranda, Rosal, Irapé, Nova Ponte and Itutinga. Together, these plantsrepresent 5,767 MW of CEMIG’s installed capacity, and bring the percentage ofCEMIG’s generating plant that is certified to 89%.

 

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 2008, we invested approximately R$28.3 million in environmentalcompliance projects for plant and equipment and in the implementation of newprojects, and also spent R$42.2 million on operational and maintenance expensesfor our current activities, such as final disposal of waste, puttingenvironmental management systems in place, audits, planting of riversideforests, fish cultivation, putting tree pruning and oil policies in place,environmental education programs, maintenance of conservation units, trainingand other activities. We also invested R$476 thousand in environmental researchand development projects carried out jointly with universities and researchinstitutes.

 

*Environmental Licensing*

* *

Brazilian law requires that licenses be obtained for construction,installation, expansion and operation of any facility that utilizesenvironmental resources, causes environmental degradation, or pollutes or hasthe potential to cause environmental degradation or pollution or to harmarchaeological heritage. Usually, governments of individual states manage theenvironmental licensing process for facilities that are expected to impact onlythat state. The Federal Government manages the environmental licensing processfor facilities that are expected to have an environmental impact on more thanone state and/or are located in two or more states.

 

COPAM Regulatory Ordinances Nos. 17, of December 17, 1996, and 23,of October 21, 1997, provide that operational licenses shall be renewedfrom time to time for periods of four to eight years, depending on the size andpollution potential of the facility.

 

With the purpose of surveying and saving archaeological assets thathave not been previously considered, Ordinance 28, of January 31, 2003,issued by the National Historical and Artistic Heritage Institute**(*Institutodo Patrimônio**Histórico e Art**í**stico Nacional*), or Iphan, provides that renewals of operationallicenses for hydroelectric power plants are subject to a condition requiring afavorable opinion from Iphan in relation to archaeological studies on thedepletion area of the reservoir, which studies are to be sponsored by the plantoperator.

 

Distribution of natural gas by Gasmig 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 operation ofthe Natural Gas Distribution Network were duly issued by the EnvironmentalFoundation (*Fundação Estadual do Meio Ambiente*),**or FEAM, of the State of Minas Gerais.

 

*Corrective Environmental Operation Licensing*

* *

Resolution No. 6, of September 16, 1987, issued by theEnvironmental National Council (*Conselho Nacional do MeioAmbiente*) or CONAMA, requires environmental impact assessmentstudies to be undertaken, and a corresponding environmental impact assessmentreport to be prepared, for all major electricity generation facilities built inBrazil after February 1, 1986. Facilities built prior to February 1,1986 do not require these studies, but 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 1986requires presentation to the competent environmental body of an environmentalreport containing the characteristics of the project, the environmental impactsof the construction and operation, and also the mitigating and compensatorymeasures adopted or that are in the process of being adopted by theorganization carrying out the project.

 

Federal Law No. 9,605, of February 12, 1998, sets penaltiesfor facilities that operate without environmental licenses. In 1998, theFederal Government issued Provisional Measure 1,710 (currently ProvisionalMeasure 2,163/41), which allows project operators to enter into agreements withthe relevant environmental regulators for the purpose of coming into compliancewith Federal Law No. 9,605/98. Accordingly, we have been negotiating withIBAMA and FEAM to obtain the corrective environmental operation licensing forall our plants that began operating prior to February 1986. Generationfacilities located within the State of Minas Gerais fall within thejurisdiction of FEAM for purposes of corrective licensing. We have agreed withFEAM to bring our facilities located in Minas Gerais into compliance on agradual basis. We do not currently anticipate any costs and commitments inconnection with any recommendations that may be made by IBAMA and FEAM.

 

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Currently, those Cemig Generation and Transmission facilities thatstarted operations before the Brazilian environmental legislation was passed,and which have not obtained corrective licensing, have now filed applicationsbefore the appropriate environmental bodies.

 

We currently have operating licenses for the following facilities: (i) hydroelectricplants: São Simão, Aimorés, Amador Aguiar I, Amador Aguiar II, Igarapava, Irapé,Itutinga, Miranda, Nova Ponte, Porto Estrela, Rosal,  Funil, Queimado andSá Carvalho; (ii) small hydroelectric plants: Joasal, Paciência,Gafanhoto, Pai Joaquim, Rio de Pedras, Santa Luzia, Salto dos Moraes, Poquimand Piçarrão; (iii) thermoelectric plants: Barreiro and Formoso; (iv) theMorro do Camelinho wind power plant; and (v) the Transmission System ofthe Eastern Region of the State of Minas Gerais.

 

The environmental licenses issued by state or federal bodies aresubject to certain conditions imposed in light of foreseen environmentalimpacts. In extreme circumstances, failure to comply with these conditions mayresult in revocation of the license. We believe we are in compliance with therequirements mentioned in our licenses. Environmental licenses are obtainedsubject to conditional requirements that have to be met during the period oftheir validity. Non-compliance with these conditional requirements can resultin administrative penalties, including fines and the repeal of theenvironmental license. CEMIG has been complying with the demands of theenvironmental conditions of its licenses and periodically sends reports to theenvironmental regulatory authorities.

 

**Legal Forest Reserves**

 

Under Article 1o,§ 2o, sub-item III, of Federal Law No. 4,771, of September 15, 1965(the Federal Forest Code), a Legal Forest Reserve is an area located inside arural property or holding, other than any area of permanent preservation, thatis necessary for the sustainable use of natural resources, conservation orrehabilitation of ecological processes, conservation of biodiversity or shelteror protection of native fauna and flora.

 

In Minas Gerais, wherethe greater part of CEMIG’s undertakings are located, State Law No. 14,309,of July 19, 2002, implemented in regulation by Decree 43,710, of January 8,2004, which instituted the Forest and Biodiversity Protection Policy, ratifiedthe obligation contained in the Federal Forest Code, requiring the constitutionof a Legal Forest Reserve corresponding to 20% of the total area of a ruralproperty, as an instrument for protection of biodiversity and shelter for floraand fauna in the state.

 

However, both Federal LawNo. 4,771/65 and State Law No. 14,309/02 omit the concept of a ruralproperty or holding. The regulatory concept found in the Brazilian legislationfor rural properties is in the “Land Statute” instituted by Federal Law No. 4,504,of November 30, 1964, in which Article 4, I, defines a rural realestate property as “a rustic real estate property, of continuous area, whateverits location, allocated for extractive agricultural, livestock raising oragro-industrial commercial operation.”

 

In the federal sphere,IBAMA’s technical licensing team, in the corrective licensing of CEMIG’splants, expressed an opinion, in correspondence sent to the Company, on July 29,2008, taking a position against the need for the constitution of a Legal ForestReserve.

 

In the State of MinasGerais, with the objective of deciding whether the obligation to constitute aLegal Forest Reserve applies to undertakings of the electricity sector, a LegalOpinion was issued by the Office of the General Attorney of the State of MinasGerais, or AGE, on October 30, 2008, in response to a consultation fromthe Minas Gerais State Environment and Sustainable Development Department, orSEMAD, and the State’s Economic Development Department, or SEDE, presenting theopinion that “allocation of a Legal Forest Reserve is obligatory forundertakings of the electricity sector, both for those under construction andfor those to be put in place in the future.”

 

Grounded on differentlegal opinions, SEDE submitted a new consultation to the AGE, requesting arevision of the said Legal Opinion.

 

In agreement with theopinion put forward by SEDE, CEMIG supports the view that it is not obligatedto constitute a Legal Forest Reserve for its undertakings, based on thefollowing arguments:

 

1.               The undertakings of the electricitysector are public utility activities, operating commercially under federalconcession or authorization, for commercial operation of hydroelectricpotential, and transmission and distribution of electricity, and are certainlynot characterized as being a rural property or possession.

 

2.               The acquisition of the real estateproperties for putting in place the undertakings occurs as a function of theconcession authorization by the concession-granting power, through ANEEL asintermediary, and is given on a temporary basis, which is to say that at theend of the concession or authorization, the assets revert to nationalownership.

 

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3.               The environmental impacts caused tobiodiversity by the implementation of the electricity sector’s undertakingshave already been amply compensated for. As an example of the environmentalcompensation specified in Brazilian legislation, already applying to thesector, we refer to the following: (I) the Environmental Compensationspecified by Federal Law No. 9,985, of July 18, 2000 (the SNUC Law); (II) theForest Compensation for suppression of vegetation or intervention in an area ofpermanent preservation, specified in §4o of Article 4 of Federal Law No. 4,771,of September 15, 1965 (including by Provisional Measure 2166-67, of 2001);(III) the Environmental Compensation for cutting or suppression of theAtlantic Forest biome, under Federal Law No. 11,458, of December 22,2006; and (IV) the Forest Charge for removal of vegetation forinstallation of the undertakings, as specified in State Law No. 4,747, of May 9,1968.

 

4.               The principle of *non bis inidem* cannot thus be violated. Such an obligation would characterizea double charge imposed on concession holders.

 

CEMIG has submitted itsjustifications to SEDE, presenting the arguments in opposition to the said obligationof establishing Legal Forest Reserves.

 

To date, the AGE has notresponded to the request for revision of the Legal Opinion formulated by SEDE.CEMIG has not yet evaluated the effects of such decision on its business andactivities.

 

*Compensation Measures*

* *

According to Federal Law No. 9,985, of July 18, 2000, andcorresponding Decree No. 4,340, of 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. Each company shallhave its environmental compensation stipulated by the relevant environmentalagency, depending on the specific degree of pollution or harm to theenvironment resulting from its activities.

 

Federal Decree No. 6,848/2009, issued on May 14, 2009,regulates the methodology for defining compensation measures. Accordingly, upto 0.5% of the total amount invested in the implementation of a project thatcauses significant environmental impact must be reverted for compensation measures.The exact amount of compensation measures will be defined by the environmentalagency, based on the project’s specific degree of pollution and environmentalharm.

 

In the State of Minas Gerais, where CEMIG has most of its facilitiesand enterprises, the Chairman of COPAM issued Regulatory Ordinance No. 94in April 2006, applying an environmental compensation charge, at ratesbetween 0.5% and 1.1% of the total amounts invested in the implementation ofthe projects that cause environmental harm. This regulatory ordinance alsoindicated that the compensation charge applies to projects implemented beforethe issuance of the new legislation. We have not yet assessed the effects suchlegislation will have on CEMIG, but it could result in additional costs forCEMIG.

 

*Fishways*

 

Among other environmental programs, we are operating and developing theFishways program. The dams at each of our hydroelectric generation facilitiescan endanger fish that inhabit the adjoining reservoirs. To reduce the impactof these facilities, fish that pass through our dams will be redirected tofishways, through which they can pass safely.

 

There has been no decision by the environmental authorities regardingthe building of fishway projects at CEMIG’s hydroelectric plants; and thereis a possibility that future decisions by the environmentalauthorities, or changes in the environmental legislation, or even newinformation obtained from the studies that are in progress, may leadto a need for the construction of fishways at all of CEMIG’s hydroelectricplants.

 

*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. Also, we arecurrently developing research projects in partnership with universities tostudy more effective techniques to control the impact of our operations onfish.

 

In spite of theseefforts, two incidents occurred, one in 2006 and one in 2007, at the TrêsMarias Hydroelectric Power Plant, resulting in the death of approximately 17tons of fish in 2007 due to lack of oxygenation, according to the State ForestsInstitute and estimates by the Environmental Police (8.2 tons by our estimate).The volume of dead fish was not estimated or measured in 2006. As a result, theState Forests Institute imposed two fines on us, totaling approximately R$5.5million. We paid 50% of the fine and the rest is being negotiated with theenvironmental authority for application in research projects.

 

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Although the amount isnot a material liability for us, we are implementing an environmental projectin the affected region as a way of responding to the event and reaffirming ourcommitment to economic and social development of the regions where we operateand where our projects are located. Fish in the exit canals of several of ourplants are being monitored by specialist biologists, with the objective ofbecoming familiar with the dynamics of fish populations over time, the periodsof their greatest activity during the day, and the locations of their greatestdensity. With this information, more effective techniques may be developed tocontrol the impact of the operation of the plants on fish.

 

In 2008, two research projects were contracted for continuousmonitoring of fish densities and environmental conditions in strategicstretches of the drainage basins influenced by CEMIG’s plants; studying ofaspects of the biology (reproduction, feeding, distribution, migration, etc.)of the fish species most affected by the procedures of maintenance of thegenerating units; creation of standardized databases for the information generatedby the monitoring of the fish populations that will be carried out at CEMIG’splants; determination of temporal and spatial variations in the abundance offish upstream from the plants and correlation with the water flow and qualityfactors that can govern their behavior, making it possible to take measures toreduce the risk of accidents from fish entering suction tubes, and also tofacilitate the appropriate choice of locations for fish transpositionmechanisms.

 

CEMIG has a hydroelectric operation on the Pandeiros River in themunicipality of Januária, in the State of Minas Gerais, named the PandeirosSmall Hydro Plant, operating since 1958, with installed generating capacity of4.2 MW.  Due to the environmentalcharacteristics of the Pandeiros river and its importance as a location for thereproduction of fish that populate the São Francisco River, Minas Gerais Statepassed various items of legislation in 1995 and subsequent years for theprotection of the river, which affected normal operation of the Pandeirosplant.

 

In October 2007, at the end of a prolonged drought, fish deathsoccurred in a lake associated with the Pandeiros River, 50 km downstream fromthe Pandeiros plant. Since the area is downstream from the Pandeiros plant, theMinas Gerais State Forests Institute associated the problem with the operationof the plant, and, together with the Minas Gerais State Public Attorneys’Office, brought a legal action against CEMIG to provide technical explanationsabout the event. In accordance with State Forests Institute Notice No. 251016,of October 18, 2007, the Pandeiros plant was indicted and its operationswere ceased.

 

Cemig hiredspecialists who issued two technical reports to assess the matter, from thepoints of view of river flows and fish populations, and sent these studies tothe State Forests Institute and to the Public Attorneys’ Office forconsideration. Both reports concluded that the fish deaths resulted fromnatural causes arising from the natural dynamics of the Pandeiros River,relieving CEMIG of any responsibility for the events. Nevertheless, CEMIG entered into a Commitment Agreement (*Termo de Compromisso*,**or “TC”) with the State ForestsInstitute and to the Public Attorneys’ Office. The TC sets forth several measures that must be adopted by CEMIG,amounting to R$8 million over 10 years. Among the measures provided for in theTC, there is the management of a Conservation Unit (*Unidade de Conservação,*or “UC”) and the establishment of aconsensual solution for the lawsuit filed by the MP.

 

Operations at the Pandeiros plant have not yet been resumed, and thecompetent environmental agency refused to grant the corrective environmentaloperation license for this facility.

 

**Urban Occupationof Rights of Way and Reservoir Banks**

 

*Gas Pipelines —* Our piped natural gas distribution networks areunderground, crossing through inhabited areas, and using public rights of wayin common with underground piping utilities operated by other public concessionholders and public agencies. This increases the risk of unauthorized workwithout prior communication and consultation of our natural 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” (*Escave comSegurança*) 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 their work.

 

*Transmission Lines*— Several of the areas to which we have a right of wayin 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 tosafely and efficiently maintain our electricity system with these occupationsintact. Faced with the risks associated with this situation, we have plannedtwo approaches for the coming years. The first is preparation of a reportentitled “Diagnosis of areas invaded and under risk of invasion, forstrengthening of inspection activities, including installation of improvementsin locations classified as having high invasion risk,” for which CEMIG isidentifying the areas with potential for invasion and making possible decisionson measures and procedures in relation to the control, monitoring andinspection of the transmission line paths where there is a high risk ofinvasion. The second line of action involves the evacuation of areas alreadyinvaded. The removal of people from these areas 

 

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involvespayment of indemnities, regularization of electricity connections and theopening of areas for the construction of parks and streets.

 

*Reservoir Areas —*We have implementedsecurity measures to protect our generation facility properties from trespass,using both fixed security posts and mobile patrol units, as well as electronicsurveillance systems, or ESSs, where appropriate. The banks of the reservoirsof our hydroelectric generation facilities have signs indicating ownership andadvising of the existence of security systems. Trespassers are deterred by themobile patrol unit’s periodic patrol of the reservoir banks. When trespassersare apprehended, police reports are filed, which are sent to the Company’slegal department for review. Due to the vast area and number of reservoirs, weare continually subjected to new trespasses and occupation of margins byunauthorized constructions. However, we are committed to preventing theseinvasions and any environmental damage to the Permanent Preservation Areas(Áreas de Preservação Permanente), or APPs, around the reservoirs.

* *

**TheCarbon Market**

** **

We believe Brazil has significant potential to generate Carbon Creditsarising from clean energy projects that comply with the Clean DevelopmentMechanism, or CDM. Every year, we seek to quantify our emissions and to publishour main initiatives in reduction of greenhouse gas emissions. We are studyingthe possibility of implementing more CDM projects and evaluating carbonprojects for each of our new enterprises. In 2008 we began the process ofobtaining carbon credits under the CDM for the following projects: (i) co-generationof electricity using blast furnace gas; and (ii) the smallhydroelectric plants of Cachoeirão (27 MW), Dores de Guanhães (12 MW), Senhorado Porto (14 MW), Fortuna II (9 MW) and Jacaré (9 MW).

 

**OperationalTechnologies**

** **

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 (*Centrode Operação do Sistema*), or COS, located at our head office in BeloHorizonte, is the nerve center of our operations. It coordinates the operationsof our entire electricity and energy system, in real time, providing operationalintegration of the generation and transmission of our energy. It also providesthe link with other generation, transmission and distribution companies. Thesupervision and control executed by the COS now extends to more than 44 extrahigh and high voltage substations and approximately 27 major generating powerplants.

 

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 aQuality Management System, with ISO 9001:2000 certification.

 

*Regional Distribution Operation Centers*

 

Our distribution network is managed through seven Regional DistributionOperation Centers**(*Centrosde Operações Regionais de Distribuição*), or CODs. The CODsmonitor and coordinate our distribution network operations in real time. TheCODs are responsible for the supervision and control of 360 distributionsubstations, 271,480 miles of medium voltage distribution lines, 10,277 milesof sub-transmission lines and 6.6 million consumers in our concession area,comprising 774 municipalities of Minas Gerais.

 

We provided an average of 16,500 services a day in 2008. All of theCODs are certified according to ISO Quality Standard 9001: 2000. There arevarious systems in use to automate and support the CODs’ processes including:trouble call, field crew management, distribution substation supervision andcontrol, restoration of power, emergency switching, network disconnection, andinspection. Technologies including a geographic information system andradio/satellite data communication help to reduce consumer service restorationtime and provide better consumer service. These are devices, installed alongour distribution network, that sense and interrupt fault currents, andautomatically restore service after momentary outages, improving operationalperformance and reducing restoration time and costs.

 

*Geospatial Information & Technology*

* *

We are intensively using geospatial and technical document managementtechnology to support and improve engineering processes. Geo-referencedinformation on 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 network, helping technicians to plan, design, construct, operate andmaintain the generation, transmission and distribution network. 

 

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We areusing mobile technology in service dispatch for distribution networkmaintenance and medium and high-voltage network data acquisition.

 

We have developed the Enterprise Image ManagementSystem—GeoImagem—which organizes and publishes the georeferenced images to GIS(Geographic Information System) users. We continue to invest in enterprise georeferenced applications based onGIS technology for advanced spatial analysis.

 

*Internal Telecommunications Network*

* *

Our telecommunications network is one of the largest in Brazil. Itincludes high performance microwave links with more than 200 communicationstations, an optical system with 1,557 miles of optical fibers and a mobilecommunication system with 811 radios including 644 trunking and VHF radios and167 UHF and VHF portable radios. A total of 338 mobile radios have data interfaceto mobile terminals installed in vehicles for dispatch systems (operation andmaintenance), which also have 940 mobile terminals connected throughsatellites.

 

*Corporate Data Network*

* *

Our corporate network integrates enterprise servers (eight Risc machinesfor the ERP and the new commercial systems), 9,774 Intel microcomputers, 480servers and 1,500 connectivity devices, serving 200 sites in 130 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 has been ISO 9001:2000 certified since 2005. In 2008, newnetwork and storage technologies were put in place, improving the network’sperformance and availability of applications. Our information security systemsare constantly updated for access control, firewalls, antispam and antivirus,to protect all data and functionalities against unauthorized access. We usemobile solutions, such as wireless devices, PDAs and cellular phones for easyaccess to data and field operations.

 

*IT Governance Program*

* *

We started an IT governance program in 2005. It is based on two mainprinciples: (i) aligning IT strategy with the overall strategy of thebusiness; and (ii) helping the Company to manage the risks associated withimplementing new technologies.

 

Numerous actions have been taken in recent years. The most importantwas the adoption of ITIL® best practices. The following ITIL® processes andfunctions were prioritized for implementation: Incident Management,Configuration Management, Change Management, Problem Management, CapacityManagement, Service Level Management, and Service Desk

 

In 2008, we improved certain IT processes and as a result of thiseffort, the Change Management and Incident Management processes receivedrecommendation for ISO 9001:2000 certification. A certification plan has now beenset up for the other ITIL processes. Actions to establish IT strategy and ITsteering commities were also taken, to serve initiatives defined by thecorporate strategic planning.

 

*Call Centers*

 

We have one call center, in Belo Horizonte. Clients can use a toll-freenumber to get information on their accounts, and report service problems. Thecall center is integrated with the technologies available in the CODs, allowingus to give clients up-to-date information on service issues. The call centerhas modern facilities, with a staff of over 1,200, and is able to receive about100,000 calls per day. Clients can also contact us by e-mail, by fax or via ourwebsite. As an indication of the service quality provided, our call center hashad ISO 9001 Quality Certification since 1999.

 

*Commercial Management System*

 

To update the technology of our Consumer Information System, or SICO,which has been on a mainframe platform since the 1970s, Cemig Distribution hasinvested R$178 million in a new Commercial Management System, or SGC (*Sistema de Gestão de Clientes*), based on the CCS (CustomerCare & Service), CRM (Customer Relationship Management) and BW(Business Warehouse) SAP systems. This new system serves low, medium andhigh-voltage clients. It was implemented in 24 months, from April 2006 to May 2008,through the “Evolution Project,” which employed a team of, on average, 250specialists from CEMIG and the Aliança Consortium (Accenture, Newcom, andIndra).

 

This process involved approximately 28,000 hours of program codedevelopment. A large number of tests, including stand-alone tests, assembly,software integration, performance, comparison and user acceptance tests,were performed to assure the quality 

 

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of theSGC system. All high, medium and low voltage customers of the State of MinasGerais were successfully transferred to the new system by May 2008.

 

We believe that benefits from the new systeminclude better quality of client registry data and better information accesstools, yielding greater information reliability and allowing tracking of alloperations conducted by system users; better integration with other systems andincreased simplicity, due to a reduction from 74 subsystems to just 14; more upto date technology, including the replacement of the mainframe computers,ensuring lower maintenance costs; and better controls. Benefits from SGC to theclient include a greater focus on customer relationships; registration of allcontacts, resulting in faster services and improved information quality;integration of the Virtual Agency into the new system, with a greater number ofservices offered; better interaction among all client communication channels,including e-mail, telephone, electricity bill messages, etc.; new electricitybill layout, allowing for better information visualization; and new meterreading management system, including the simultaneous printing of theelectricity bill.

 

*Maintenance and Repair Systems*

* *

The 10,277 miles of high voltage transmission lines in CemigDistribution’s network, operating at 34.5 kV to 161 kV, are supported byapproximately 53,495 structures, mainly made of metal. Cemig Generation andTransmission’s network has 3,081 miles of high voltage transmission lines,supported by approximately 11,676 structures. The majority of the serviceinterruptions to our distribution and transmission lines are due to lightning,fire, vandalism, wind, and corrosion. The entire high voltage transmission linesystems of Cemig Distribution and Cemig Generation and Transmission areinspected from the air once a year, using a helicopter equipped with agimbal-gyro-stabilized camera, followed by simultaneous visual andthermographic (infra-red) inspections. Land-based inspections are also carriedout at intervals of between one and three years, depending on thecharacteristics and age of the transmission line, number of outages, type ofstructure, and the line’s importance to the electricity system as a whole.

 

We use modern modular aluminum structures to minimize the impact ofemergencies involving fallen towers. Most of our maintenance work ontransmission lines is done using live-line methods. Being the first company inBrazil to use bare-hand, live-line techniques in the maintenance oftransmission lines and substations, we have accumulated, over the last 31years, significant experience in this area. We have trained our staff in thisarea and have special vehicles and other necessary tools to support live- anddead-line maintenance.

 

We also maintain spare transformers and mobile substations to promptlyreestablish power to our customers in case of emergencies involving failedsubstations. In December 2008, as a result of a partnership with ABB, wedeveloped the first mobile, green substation, in 138/13.8 kV and 15 MVA, whichis completely insulated with vegetable oil. We are also a pioneer in the use of138 kV power transformers that are completely insulated with vegetable oil.

 

*InformationSecurity Management*

 

As part of our Corporate Information Security Project Plan for2008, we have prioritized and developed three projects to improveinformation security and to address the requirements of the Sarbanes-Oxley Act,including specifying information security management processes, developing aninformation security project plan, and revising the IT service continuity plan.

 

We also developed the “Information Security Update” awareness program,involving 1,248 employees, which focuses on social engineering, basic conceptsof security and phishing threats.

 

**Management Tools**

 

Our current Enterprise Resource Planning software (SAP R/3), or ERP,provides functions covering accounting, costs and funds control, budget,project management and human resources management. The ERP also includes datawarehouse functionality, balanced scorecard methodology and long-term cash flowmonitoring. In quality management, we have received ISO 9001/2000 certificationfor, among other things, the following aspects of our business: consumerservice offices, call centers, laboratories, maintenance of remote protectionsystem equipment, data reception, and billing.

 

In 2008, we implemented a self-service employee portal to allowemployees easy access to information in the SAP/R3 HR Module.

 

*Enterprise-Wide Risk Management*

 

With the assistance of a leading consulting firm chosen through aformal selection process, we began establishment of a Corporate Risk ManagementSystem in 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 as 

 

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corporaterestructurings, regulations issued by energy sector government agencies,technological development, globalization and changes in the consumer marketgenerate 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, or COSO II, but also by the perceptionthat management of risk is an essential part of a sustainable developmentphilosophy that 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,including the ability to aggregate individual risks, the ability to comparerisks in different business units and a tool to accurately evaluate themeasures introduced to minimize risks; provide other areas of strategicmanagement with input concepts and procedures, and factors that strengthen thecompany’s organizational control infrastructure.

 

CEMIG is working to achieve the major risk managementobjective of an open environment conducive to effective communications aboutrisks and risk management up, down and across the enterprise, so that a trulyholistic, integrated, proactive, forward-looking and process-oriented approachis taken to assess all key business risks and opportunities, not only those ofa financial nature. During 2008, the most important facts were that: (i) thethird update of CEMIG’s Corporate Risks Matrix was initiated, considering thereview of its risks position, the risks control environment and its mitigationplans in order to adapt to the regulatory changes and economic and marketcontext, and (ii) the improvement of the Corporate Risk Matrix from theshareholder’s perspective, allowing management to understand what stakeholderssee as strategic threats and to identify risks that do not exist in theCorporate Risks Matrix.

 

CEMIG’s Electricity Risks Management Committee, or CGRE, created in2003, continues to propose policies and procedures for approval by theexecutive officers, according to corporate risk policy, to minimize risks inthe contracting (purchase and sale) of energy. The committee has members fromnumerous areas of the Company, including generation, distribution, sales, legaland financial. The CGRE gives support to the decisions of the executiveofficers in relation to the Company’s energy commercialization to FreeConsumers and participation in the CCEE auctions. Based on risk analyses, theCGRE proposes the maximum volumes that could be sold and the amounts purchasedby 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.

 

The next step we intend to take is to improve the Corporate RiskManagement System, with the assistance of a consulting firm, by developing newproducts and mathematical and statistical methods used to calculate and monitorthe Corporate Risks Matrix’s risk positions, thereby increasing transparencyand safety in strategic decisions.

 

**Property, Plantand 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$14,011million at December 31, 2008 (including ongoing construction projects).Generation facilities represented 42.2% of this net book value, transmissionand distribution facilities represented 52.7% and other miscellaneous propertyand equipment, including telecommunication facilities and intangible assets,represented 5.1%. The average annual depreciation rate applied to thesefacilities was 2.5% for hydroelectric generation facilities, 3.0% fortransmission facilities, 4.7% for distribution facilities, 12.1% foradministration facilities, and 8.3% for telecommunication facilities. Apartfrom our distribution network, no single one of our properties produced morethan 10% of our total revenues in 2008. Our facilities are generally adequatefor our present needs and suitable for their intended purposes. We have rightsof way for our distribution lines, which are our assets and do not revert tothe landowner upon expiration of our concessions.

 

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**The Brazilian Power Industry**

 

***General***

 

Traditionally, in the Brazilian electricity sector,generation, transmission and distribution activities were conducted by a smallnumber of companies that had always been owned of either the Federal Governmentor the State Government. In the past, several companies controlled by the statewere privatized, in an effort to increase efficiency and competition. Theprevious administration, ruled by Fernando Henrique Cardoso (1995—2002), statedits objective to privatize the state-controlled part of the electricity sector,but the present administration has stopped this process, and has implemented a “NewIndustry Model” for the Brazilian electricity sector as set forth in Law No. 10,848,of March 15, 2004, or The New Industry Model Law.

 

***The*****NewIndustry Model**

* *

The main objectives****of the NewIndustry Model are to guarantee securityof supply and reasonableness****of rates. Toguarantee supply, The New Industry Model Law requires (a) thatdistributors contract their entire loads, and be responsible for makingrealistic projections of demand requirements and (b) that the constructionof new hydroelectric and thermal plants be determined in ways that best balancesecurity of supply and reasonableness of rates. To achieve reasonable rates,The New Industry Model Law requires (a) all purchases of electricity bydistributors occur by auction, based on the lowest-rate criterion; (b) contractingbe through the ACR, or the Pool system; and (c) contracting of load beseparated into two types of transactions which will always be by auction: (i) contractingof the electricity of the new plants, which targets expansion; and (ii) contractingof the electricity of the existing plants, which targets the existingelectricity demand.

 

The New Industry Model creates twoenvironments for the purchase and sale of electricity: (i) the ACR, or thePool, whichcontemplates the purchase by distribution companies through public auctions ofall energy necessary to supply their consumers; and (ii) the ACL, which encompasses purchase ofelectricity by non-regulated entities (such as Free Consumers and energytraders). Distributors will be allowed to operate only in the regulatedenvironment, whereas generators may operate in both, maintaining theircompetitive characteristics.

 

Expansionrequirements of the sector****are evaluated by theFederal Government through the Ministry of Mines and Energy, or MME. In orderto better organize the electric energy sector, two agencies have been created: (i) theEnergy Research Company, or EPE, a state-controlled company responsible forplanning the expansion of generation and transmission; and (ii) theElectric Energy Trading Chamber (*Câmara de Comercializaçãode Energia Eléctrica*), or CCEE, a private company, which is thesuccessor of the Wholesale Energy Market, responsible for the accounting andsettlement of short-term energy sales. The CCEE is also responsible, throughdelegation by ANEEL, for organizing and conducting the Pool public powerauctions, in which all distributors purchase energy.

 

The New Industry Model eliminates self-dealing, forcing distributors topurchase electricity at the lowest available prices rather then buyingelectricity from related parties. The New Industry Model also exempts contractsexecuted prior to the enactment of the law, in order to provide regulatorystability to transactions carried out before it was enacted.

 

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,(3) Itaipu and (4) purchase and sale agreements entered into before the NewIndustry Model Law, arenot subject to the public auctions for the supply of electricity at the Pool.The electricity generated by Itaipu, located on the border of Brazil andParaguay, is traded by Eletrobrás and the Federal Government, through ANEEL,and determines the volumes that shall be mandatorily purchased by eachdistribution concessionaire. The rates at which the Itaipu generatedelectricity is traded are denominated in U.S. dollars and established by ANEELpursuant to a treaty between Brazil and Paraguay. As a consequence, Itaipu ratesrise or fall in accordance with the variation of the U.S. Dollar/real exchangerate. Changes in the price of Itaipu generated electricity are, however,subject to a cost recovery mechanism.

 

***Challengesto the Constitutionality of the New Industry Model Law***

** **

The New Industry Model Law is currently being challenged onconstitutional grounds before the Brazilian Supreme Court. The FederalGovernment moved to dismiss the actions arguing that the constitutionalchallenges were moot because they related to a provisional measure that hadalready been converted into law. To date, the Brazilian Supreme Court has notreached a final decision upon the merits of such lawsuit and we do not knowwhen such a decision may be reached. Therefore, the New Industry Model Law iscurrently in force. Regardless of the Supreme Court’s final decision, certainportions of the New Industry Model Law relating to restrictions on distributorsperforming activities unrelated to the distribution of electricity, includingsales of energy by distributors to Free Consumers and the elimination ofcontracts between related parties are expected to remain in full force andeffect.

 

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***Coexistence of two Electricity Trading Environments***

 

Under the New Industry Model Law, electricity purchase and saletransactions are carried out in two different market segments: (1) theregulated market, or the Pool, which contemplates the purchase by distributioncompanies through public bids of all electricity necessary to supply theirconsumers and (2) the free market, which encompasses purchase ofelectricity by non-regulated entities (such as the Free Consumers and energytraders).

 

***The Regulated Market (the ACR orthe Pool)*** — In the regulated market, distributioncompanies purchase electricity for their captive consumers through publicauction regulated by ANEEL and conducted by CCEE.

* *

Energy purchaseswill take place through two types of bilateral contract: (i) EnergyAgreements (*Contrato de Quantidade deEnergia*) and (ii) Capacity Agreements (*Contratos de Disponibilidade de Energia*)*.*Under an Energy Agreement, a generatorcommits to supply a certain amount of electricity and assumes the risk thatelectricity supply could be adversely affected by hydrological conditions andlow reservoir levels, among other conditions, that could interrupt the supplyof electricity, in which case the generator will be required to purchase theelectricity elsewhere in order to comply with its supply commitments. Under aCapacity Agreement, a generator commits to make a certain amount of capacityavailable to the ACR. In this case, the revenue of the generator is guaranteedand the distributor must assume the hydrological risk. However potentialadditional costs of the distributors are passed on to consumers. Together,these agreements comprise the energy purchase agreements in the ACR (*Contratos de Comercialização de Energia no AmbienteRegulado*), or CCEAR.

 

Under the New Industry Model Law, theestimate of demand from distributors is the principal factor in determining howmuch electricity the system as a whole will contract. Under the new system,distributors are required to contract 100% of their projected electricityneeds, unlike the 95% under the former regulatory framework.

 

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, orpurchase energy in auctions during the year. Any remaining shortfall from 100%of total captive consumption can be bought at the spot market price and theconcessionaire 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 distributionconcessionaires will be entitled to pass on to their respective consumers, incosts related to electricity purchased through public bids, limited to theequivalent of 103% of their verified annual load, as well as any taxes andindustry charges related to the public bids.

 

***The Free Market (the “ACL”)*** — In the free market, electricity istraded between generation concessionaires, IPPs (Independent Power Producer),self-generators, energy traders, importers of energy and Free Consumers. Thefree market also includes existing bilateral contracts between generators anddistributors until they expire. Upon expiration, such contracts must beexecuted under the New Industry Model Law.

 

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, which isrequired to be sent to the distributor at least 15 days before the day suchdistributor is required to state its electricity needs for the next 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 greater than 500kWmay be serviced by suppliers other than their local distribution company ifthey move to energy from alternative energy sources, such as wind, biomass orsmall 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 distributor can purchaseadditional energy to supply the re-entry of Free Consumers into the regulatedmarket. In addition, distributors may also reduce theamount of energy purchased according to the volume of energy that they will nolonger distribute to free consumers. State-owned generators may sell electricity to FreeConsumers, but as opposed to private generators, they are obliged to do sothrough an auction process.

 

In the past, hightension consumers who purchase their electricity from distributors in theregulated market did it at a subsidized price. This subsidy, known as the “cross-subsidy,”was gradually eliminated by ANEEL, and is now terminated. The 

 

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potentially free consumersare required by law to enter into separate contracts for the connection and useof the transmission or distribution lines and for the purchase of power.

 

***Restricted Activities ofDistributors***

* *

Distributors in the National Interconnected Power System**(*Sistema InterligadoNacional*), or SIN, or the 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 captiveconsumers in the ACR, (3) hold, directly or indirectly, any interest inany other company, except interest inentities incorporated for raising, investment and management of funds necessaryfor the distributor or its controlled, controlling or under common controlcompanies, corporation or partnership or (4) develop activities that areunrelated to their respective concessions, except for those permitted by law orin the relevant concession agreement.

 

***Elimination of Self-Dealing***

* *

Since the purchase of electricity for captive consumers will beperformed through the ACR, the 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 theNew 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 already contracted.

 

***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 compensatefor the exit of Potentially Free Consumers from the regulated market, pursuantto a specific declaration delivered to MME, (2) by up to 4.0% per year ofthe initial contracted amount due to market deviations from the estimatedmarket projections, at the distribution companies’ discretion, beginning twoyears after the initial electricity demand was declared and (3) in theevent of increases in the amounts of electricity acquired pursuant to contractsentered into before March 17, 2004. This reduction can be made only withCCEARs of existing power plants.

 

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 distribution companies, andcreates an incentive for distribution companies to contract for their expectedelectricity demands in the “A-5” auctions, where the prices are expected to belower than in “A-3” auctions. The Annual Reference Value will be applied in thefirst three years of the power purchase agreements from new power generationprojects. After the fourth year, the electricity acquisition costs from theseprojects will be allowed to be fully passed-through. The decree establishes thefollowing limitations on the ability of distribution companies to pass throughcosts to consumers:

 

·                  no pass-through of costs for electricitypurchases that exceed 103% of regulatory demand;

 

·                  limited pass-through of costs forelectricity purchases made in an “A-3” auction, if the volume of the acquiredelectricity exceeds 2.0% of the demand verified in “A-5” auctions;

 

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·                  limited pass-through of electricityacquisition costs from new electricity generation projects if the volumere-contracted through CCEARs of existing generation facilities is below a “ContractingLimit” defined by Decree No. 5,163;

 

·                  from 2007 to 2009, electricity purchasesfrom existing facilities in the “A-1” auction is limited to 1.0% ofdistribution companies’ demand. If the acquired electricity in the “A-1”auction exceeds 1.0%, pass-through of costs of the exceeding portion to finalconsumers is limited to 70.0% of the average value of such acquisition costs ofelectricity generated by existing generation facilities. The MME will establishthe maximum acquisition price for electricity generated by existing projects;

 

·                  electricity purchases in “market adjustment” auctions arelimited to 1% of a distribution concessionaire’s total demand (except for theyears 2008 and 2009, when it will be 5%) and pass-through of costs is limitedto Annual Reference Value; and

 

·                  if distributors fail to comply with theobligation to fully contract their demand, the pass-through of the costs fromenergy acquired in the short-term market will be the equivalent to the lower ofthe PLD or the Annual Reference Value.

 

***Rationing Under The New IndustryModel 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.

 

***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*)*.*Ingeneral, Parcel A costs are fully passed through to consumers. Parcel A costsare the portion of the regular rate calculation formula, which provides for therecovery of certain costs that are not within the control of the distributioncompany. Parcel B costs, which are costs that are under the control of thedistributors, are restated for inflation in accordance with the General MarketPrice Index (*Indice Geral de Preços do Mercado*),or IGP-M index. The average annual rate adjustment includes components such asthe inter-year variation of Parcel A costs (CVA) and other financial adjustments,which compensate for changes in the company’s costs that were not previouslytaken into account in the rate we charged the year before. Since thisinter-year variation is to reimburse changes in costs that took place in theprevious year, it should not be part of next year’s annual adjustment.

 

Concessionaires ofelectricity distribution are also entitled to periodic revisions *(revisão periódica).*Our concessionagreements establish a five-year period between periodic revisions. Theserevisions are aimed at (i) assuring necessary revenues to cover efficientParcel B operational costs and adequate compensation for investments deemedessential for the services within the scope of each company’s concession and (ii) determiningthe X factor, which is calculated based on expected productivity gains fromincreases in scale, labor costs and the grid investment amount planned by thedistribution company during the five-year period.

 

We were subject to aperiodic rate revision *(revisão periódica*)in April 2008, and therefore an annual rate adjustment did not occur in2008.

 

On April 7, 2008,ANEEL established the results of our second periodic rate revision. Based onthe financial components of this rate adjustment, the rates decreased, onaverage, 12.24%. However the legislation that regulates the periodic revisionprocess has changed and these results were considered provisional. For moredetailed information, see “Item 5. Operating and Financial Review andProspects—Rates.”

 

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,  or TUSD, and the rate for the use of the transmissiongrid, or Transmission Usage Rates, or TUST. The rates to be paid bydistribution companies, generators and Free Consumers for use of theinterconnected power system are reviewed annually. The review of the TUST takesinto account the revenues that are permitted of transmission concessionairespursuant to their concession contracts. For more detailed information regardingthe rate-setting structure in Brazil, see “—The Brazilian Power Industry—Ratesfor the Use of the Distribution and Transmission Systems.”

 

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***Land Acquisition***

* *

The concessions granted to us by the Federal Government do not includea grant of the land upon which the plants are located. Electricity concessionairesin Brazil typically have to negotiate with the individual landowners to obtainneeded land. However, in the event that a concessionaire is unable to obtainneeded land in this way, such land may be condemned for the concessionaire’suse through specific legislation. In cases of governmental condemnation, theconcessionaires may have to participate in negotiations relating to the amountof compensation with landowners and the resettlement of communities to otherlocations. We make all efforts to negotiate with the communities beforeapplying to the judiciary.

 

***The Brazilian Electricity System Overview***

** **

Brazil’s power production and transmission is a large-scalehydroelectric and thermal system made up predominantly of hydroelectric powerstations, with multiple owners. The Brazilian Grid is comprised of companies inthe southern, southeastern, west-central, and northeastern regions and part ofthe northern region of Brazil. Only 3.0% of the country’s electricityproduction capacity is not connected to the Brazilian Grid, in small isolatedsystems located mainly in the Amazon region. Brazil’s abundant hydrologicalresources are managed through storage reservoirs. It is estimated that Brazilhas a hydroelectric power generation potential close to 246,695 MW, of whichonly 30% has been developed, according to the Energy Research Company, or EPE,and Eletrobrás.

 

Brazil has an installed capacity in the interconnected power system of92.40 GW, approximately 84% of which is hydroelectric. This installed capacityincludes half of the installed capacity of Itaipu—a total of 14,000 MW ownedequally by Brazil and Paraguay. There are approximately 50,000 miles oftransmission lines with voltages equal to or higher than 230 kV in Brazil.

 

Approximately 42% of Brazil’s installed generating capacity and 64% ofBrazil’s high voltage transmission lines are operated by Eletrobrás, a companyowned by the Federal Government. Eletrobrás has historically been responsiblefor implementing electric policy, conservation and environmental managementprograms. The remaining high voltage transmission lines are owned bystate-controlled or local electric power companies. Distribution is conductedby approximately 60 state or local utilities, a majority of which have beenprivatized by the Federal Government or state governments.

 

***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. Since 1995, the Federal Government has taken a number ofmeasures 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:

 

·                                          The Brazilian Constitution was amended in1995 to authorize foreign investment in power generation. Prior to thisamendment, all generation concessions were held either by a Brazilianindividual or an entity controlled by Brazilian individuals or by the Federalor State Governments.

 

·                                          The Federal Government enacted Law in1995 that:

 

·                                          required that all concessions for theprovision of energy-related services be granted through public biddingprocesses;

 

·                                          gradually allowed certain electricityconsumers with significant demand (generally greater than 3 MW), referred to asFree Consumers, to purchase electricity directly from suppliers holding aconcession, permission or authorization;

 

·                                          provided for the creation of generationentities, or Independent Power Producers, which, by means of a concession,permission or authorization, may generate and sell all or part of theirelectricity to Free Consumers, distribution concessionaires and trading agents,among others;

 

·                                          granted Free Consumers and electricity suppliersopen access to all distribution and transmission systems; and

 

·                                          eliminated the need for a concession toconstruct and operate power projects with capacity from 1 MW to 30 MW, or “SmallHydroelectric Power Plants.”

 

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·                                          Beginning in 1995, a portion of thecontrolling interests held by Eletrobrás and various states in generation anddistribution companies were sold to private investors. At the same time,certain state governments also sold their stakes in major distributioncompanies. While the majority of the distribution companies have beenprivatized, most generation capacity is still controlled by Eletrobrás, bymeans of its subsidiaries Chesf, Eletronorte and Furnas.

 

·                                          In 1998, the Federal Government enactedLaw No. 9,648, or the Power Industry Law, to overhaul the basic structureof the electricity industry. The Power Industry Law provided for the following:

 

·                                          the establishment of a self-regulatedbody responsible for the operation of the short-term electricity market, or theWholesale Energy Market, which replaced the prior system of regulatedgeneration prices and supply contracts;

 

·                                          a requirement that distribution andgeneration companies enter into initial energy supply agreements, or theInitial Contracts, generally “take or pay” commitments, at prices and volumesapproved by the Brazilian National Electric Energy Agency — ANEEL. The mainpurpose of the Initial Contracts was to ensure distribution companies have accessto a stable electricity supply at prices that guarantee a fixed rate of returnfor the electricity generation companies during the transition period leadingto the establishment of a free and competitive electricity market;

 

·                                          the creation of the National IntegratedSystem Operator (Operador Nacional do Sistema, or ONS), a non-profit, privateentity responsible for the operational management of the generation andtransmission activities of the interconnected power system; and

 

·                                          the establishment of public biddingprocesses for concessions for the construction and operation of power plantsand transmission facilities, in addition to the bidding process requirementsunder the Concessions Law and the Law No 9.074 enacted on July 7, 1995.

 

·                                          On March 15, 2004, the FederalGovernment enacted Law No. 10,848, or the New Industry Model Law, in aneffort to further restructure the power industry with the ultimate goal ofproviding consumers with secure electricity supplies combined with low rates. On July 30, 2004 the Federal Governmentpublished Decree 5,163, governing the purchase and sale of electricity underthe New Industry Model Law, as well as the granting of authorizations andconcessions for electricity generation projects. These include rules relatingto auction procedures, the form of power purchase agreements and the method ofpassing 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. A program, know as the Electricity Rationing Program,that lasted from June 2001 until February 2002, was designed by**Electricity Crisis Management Chamber**(*Câmara de Gestăo da Crise de Energia Elétrica*),or GCE,to solve this problem and establish normal levels for reservoirs. As a resultof the end of the rationing measures, the Federal Government terminated the GCEand created the Electricity Sector Management Committee (*Câmara deGestão do Setor Elétrico*), or CGSE, as coordinator of theelectricity sector revitalization measures. The General Agreement of theElectricity Sector was created to provide for compensation forrationing-related losses to generation and distribution companies in Brazil andrestore the economic equilibrium of the concession agreements. An extraordinaryrate increase, or RTE, applicable to final consumers would compensate bothgenerators and distributors for such rationing-related losses. The RTE alsocovers financial losses from January 2001 to October 2001, resultingfrom those costs that are beyond the control of the distributor, referred to asParcel A costs, as well as losses of generators incurred as a result of paymentof free energy costs above the Initial Contract average price.

 

The National Bank of Economic and Social 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,the Federal Government implemented an emergency program designed to compensatedistribution companies for the losses incurred due to the non-consideration ofthe intra-annual variation of Parcel A costs on occasion of the annual ratereadjustments that took place from April 2003 to April 2004. Suchprogram guaranteed to the applicable companies a loan from BNDES under specialconditions.

 

***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 

 

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authorization,as the case may be. Concessions grant rights to generate, transmit ordistribute electricity in the relevant concession area for a specified period.This period is usually 35 years for new generation concessions, and 30 yearsfor new transmission or distribution concessions. For the renewal of existingconcessions, the period is usually 20 years for distribution, 20-30 years fortransmission, depending on the contract, and the period for generation dependson the contracts. An existing concession may be renewed at the grantingauthority’s discretion.

 

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 must render anadequate service to satisfy, among other things, regularity, continuity,efficiency, safety and accessibility of the service.

 

*Use of Land —*The concessionaire may use public land orrequest the granting authority to declare the public interest of private realestate, so as to benefit the concessionaire. In such case the concessionaireshall compensate the affected owners.

 

*Strict Liability —*The concessionaire is strictly liable forall damages arising from the performance of its services and caused toconsumers, to third parties or to the granting authority.

 

*Changes in Controlling Interest —*The granting authority must previouslyapprove any direct or indirect change in the concessionaire’s controllinginterest.

 

*Intervention by the GrantingAuthority —*Thegranting authority may intervene in the concession, by means of a presidentialdecree, to ensure the concessionaire’s adequate performance of services, aswell as the full compliance with applicable contractual, regulatory and legalprovisions in case the concessionaire fails to do so. Within 30 days afterthe decree date, the granting authority’s representative is required tocommence an administrative proceeding in which the concessionaire is entitledto due process of law. During the term of the administrative proceeding, aperson appointed 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 —*The concession termination agreement maybe terminated through expropriation and/or forfeiture. Expropriationis the early termination of a concession for reasons related to the publicinterest that must beexpressly declared by law and based on public interest grounds. Following theexpropriation, the concessionaire is entitled to receive an indemnification,which may or may not adequately compensate investments made by theconcessionaire in expropriated assets that have not been fully amortized ordepreciated by the time of the expropriation. Forfeiture must be declared bythe granting authority after ANEEL, or MME, has made a final administrativeruling that the concessionaire has failed to adequately perform its obligationsunder the concession agreement. The concessionaire is entitled to dueprocess of law in the administrative proceeding declaring the forfeiture of theconcession and can resort to the courts. The concessionaire is entitled to receivean indemnification for the investments made by the concessionaire inexpropriated assets that have not been fully amortized or depreciated, afterdeduction of any amounts corresponding to outstanding fines and damages due bythe concessionaire.

 

*Expiration —*When the concession expires, all assets,rights and privileges that are materially related to the rendering of theelectricity services revert to the Brazilian government. Following theexpiration, the concessionaire is entitled toreceive an indemnification for the investments made by the concessionaire inexpropriated assetsthat have not been fully amortized or depreciated by the time of theexpiration, net of special obligation.

 

***Penalties —***ANEEL’s Resolution 63, enacted on May 12, 2004, governs theimposition of sanctions against the operators in the electricity sector,defines conduct constituting violations of the law and classifies theappropriate penalties based on the nature and gravity of the violation(including warnings, fines, temporary suspension from the right to participatein bidding procedures for new concessions, licenses or authorizations andforfeiture). Depending on the violation, the fines can be up to two per cent ofthe amount invoiced by the concessionaires in the 12-month period preceding anyassessment notice. Some infractions that may result in fines relate to thefailure of the operator to request ANEEL ́s approval in case of:

** **

·                                          Execution of contracts with relatedparties in the cases provided by regulation;

 

·                                          Sale or assignment of the assets or revenues related to theservices rendered as well as the imposition of any encumbrances (including anysecurity, bond, guarantee, pledge and mortgage) on them or any other assetsrelated to the concession or the revenues of the electricity services; and

 

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·                                          Changes in controlling interest of theholder of the authorization or concession.

 

***Principal Regulatory Authorities***

** **

*National Energy Policy Council—CNPE*

* *

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—MME*

* *

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.

 

*National Electric Energy Agency—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 MME and to respond to matters which aredelegated to it by the Federal Government and or MME. ANEEL’s current responsibilitiesinclude, among others:

 

·                                          administering concessions for electricitygeneration, transmission and distribution activities, including the approval ofelectricity rates;

 

·                                          enacting regulations for the electricityindustry;

 

·                                          implementing and regulating theexploitation of energy sources, including the use of hydroelectric energy;

 

·                                          promoting the public bidding process fornew concessions;

 

·                                          settling administrative disputes amongelectricity generation entities and electricity purchasers; and

 

·                                          defining the criteria and methodology forthe determination of transmission rates.

 

*National System Operator—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, 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 and scheduling of the operation and the centralized dispatching of thegeneration in order to optimize the interconnected power system;

 

·                                          supervision and coordination of the electric system operation centers;

 

·                                          supervision and control of the national interconnected powersystem and the international interconnections;

 

·                                          retaining and managingof the electric energy transmission services and respective access conditions,as well as the ancillary services;

 

·                                          proposing to ANEEL theexpansion and reinforcement of the basic transmission grid; and

 

·                                          submitting rules forthe operation of the transmission system for ANEEL’s approval.

 

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*Electric Energy Trading Chamber—CCEE*

 

The CCEE replaced the Wholesale Energy Marketpursuant to the new rules set forth under the New Industry Model Law. Oneof the main roles of the CCEE is to conduct public auctions in the regulatedmarket, including the auction of existing electricity and new electricity.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, takes 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.

 

*The Electricity SectorMonitoring Committee—CMSE*

* *

Decree 5,175, of August 9, 2004, established theElectricity Sector Monitoring Committee, or CMSE, which acts under the direction of the MME. The CMSE isresponsible for monitoring and permanentlyevaluating the continuity and security of the electricity supply conditions andfor indicating necessary steps to correct identified problems.

 

***Ownership Limitations***

** **

In 2000, through Resolution No. 278, ANEELestablished limits, no longer in force, on the concentration of certainservices and activities within the power industry. Under these limits, with theexception of companies participating in the National Privatization Program (whichneed only comply with such limits once their final corporate restructuring isaccomplished) no power company (including both its controlling and controlledcompanies) may (1) own more than 20% of Brazil’s installed capacity, 25%of the installed capacity of the South/Southeast/Central-West region or 35% ofthe installed capacity of the North/Northeast region, except if such percentagecorresponds to the installed capacity of a single generation plant, (2) ownmore 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,which revoked item (1) above, and on January 8, 2008, it issuedResolution No. 299, which revoked items (2) and (3) above. Thesewere limits on the concentration of certain services and activities within thepower industry. Currently there is only one restriction: under the BrazilianGrid, a distribution company may only buy electricity from related companies ordevote energy produced by itself to provide up to 30% of the energy sold to itscaptive consumers. A public hearing is set to discuss the development of aregulatory action to establish the limits, conditions and restrictions to theparticipation of economic agents in the sector of electric energy. There is noguarantee whether or not ANEEL will establish the new restrictions.

 

***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 thermoelectric plantsunder 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 it on to distributors. In its initial phase, the ProinfaProgram is limited to a total contracted capacity of 3,300 MW.

 

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***

** **

*GlobalReversion Fund and Public Use Fund—RGR and UBP*

 

In certain circumstances, power companies are compensated for assetsused in connection with a concession if this concession is eventually revokedor is not renewed. In 1971, the Brazilian Congress created a Global ReversionFund (*Reserva Global de Reversão*), or RGR,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 at an annual rate equal to 2.5% of the company’s fixed assets inservice, but not to exceed 3.0% of total operating revenues in any year. Inrecent years, the RGR has been used principally to finance generation anddistribution projects. The RGR is scheduled to be phased out by 2010, and ANEELis required to revise the rate so that the consumer will receive some benefitfrom the termination of the RGR.

 

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. IPPs are required to makecontributions to the Public Use Fund (*Fundo de Uso de Bem Público*),or UBP, according to the rules of the corresponding public bidding processfor the granting of concessions. Eletrobrás received the UBP payments until December 31,2002. All payments to the UBP since December 31, 2002 are paid directly tothe Federal Government.

 

*FuelConsumption Account—CCC*

 

Distribution companies must contribute to the Fuel Consumption Account(*Conta de Consumo de Combustível*), orCCC. The CCC was created in 1973 to generate financial reserves to coverelevated costs associated to the increased use of thermoelectric energy plants,in the event of a rainfall shortage, given the higher marginal operating costsof thermoelectric energy plants compared to hydroelectric energy plants. Eachenergy company is required to contribute annually to the CCC. The annualcontributions are calculated on the basis of estimates of the cost of fuelneeded by the thermoelectric energy plants in the following year. The CCC, inturn, reimburses energy companies for a substantial portion of the fuel costsof their thermoelectric energy plants. The CCC is administered by Eletrobrás.

 

In February 1998, the Federal Government provided for the phasingout of the CCC. Subsidies from the CCC were phased out over a three-year periodbeginning in 2003 for thermoelectric energy plants constructed prior to February 1998and currently belonging to the Brazilian Grid. Thermoelectric energy plantsconstructed after that date will not be entitled to subsidies from the CCC. In April 2002,the Federal Government established that subsidies from the CCC would continueto be paid to those thermoelectric plants located in isolated systems for aperiod of 20 years in order to promote generation of electricity in theseregions.

 

*Chargefor the Use of Water Resources*

 

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.

 

*EnergyDevelopment Account— CDE*

 

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, or payments due byvirtue of purchase of electricity in the regulated market will prevent the non-payingparty from receiving a rate readjustment (except for an extraordinary revision)or receiving resources arising from the RGR, CDE or CCC.

 

*ANEELInspection Charge*

 

Energy Services Inspection Charge, or TFSEE, is an annual tax chargedby ANEEL for its administrative and operational costs. The tax is calculatedbased on the type of service provided (including independent production), andis proportional 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 toANEEL in 12 monthly installments.

 

***Energy Reallocation Mechanism***

** **

The Energy ReallocationMechanism (*Mecanismo de Realocação de Energia*), orMRE, attempts to mitigate the risks involved in the generation of hydrologicalelectricity by mandating that all hydrogenerators share the hydrological riskswithin the Brazilian Grid. According to Brazilian law, the revenue arising fromthe sale of energy by generators does not depend on the energy effectivelygenerated by them, but rather on the Assured Energy (the “Effective Power,” areference amount of electricity established by the MME in accordance withstudies conducted by the ONS, that considers the probability of long termaverage hydrology) of each plant, which is determined by the government in eachconcession agreement. Any imbalances between the power energy actuallygenerated and the Assured Energy is covered by the MRE. In other words, the MREreallocated the energy, transferring surplus from those who generated in excessof their Assured Energy to those who generated less than their Assured Energy.The volume of electricity actually generated by the plant, either more or lessthan the Assured Energy, is priced pursuant to a “Energy Optimization Tariff”which covers the operation and maintenance costs of the plant. This revenue oradditional expense will be accounted for on a monthly basis by each generator.

 

***Rates for the Use of the Distribution andTransmission Systems***

** **

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, or TUSD, and (ii) for theuse of the interconnected transmission grid, or Transmission Usage Rates, orTUST. Additionally, distribution companies of theSouth/South-East interconnected system pay specific charges for thetransmission of electricity generated at Itaipu. In recent years, the FederalGovernment has had a goal of improving the national transmission system, and asa result, certain transmission companies have engaged in significant expansionprograms, which have been paid for by increases in transmission rates andcharges. The increase in transmission rates and charges paid by distributionconcessionaires are passed on to their respective consumers through Annual RateAdjustments. The following is a summary of each rate or charge:

 

*TUSD*

* *

The TUSD is paid by generation companies and customers for the use ofthe distribution system of the distribution concessionaire to which they areconnected. It is reajusted annually according to an inflation index and thevariation of costs for the transmission of energy and regulatory charges. Theamount to be paid by the user connected to the distribution system iscalculated by multiplying the amount of electricity contracted with thedistribution concessionaire for each connection point, in kW, by the rate inR$/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. Its is 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 were required totransfer the coordination of their facilities to the ONS in return forreceiving regulated payments from the transmission system users. Network users,including generation companies, distribution companies and Free Consumers, havesigned contracts with the ONS entitling them to use the transmission grid inreturn for the payment of TUST. 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.

 

#### *Distribution*

####  

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 

 

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thedistributor, or Parcel B costs. The rate adjustment is based on a formula thattakes into account the division of costs between the two categories.

 

ParcelA costs include, among others, the following:

 

·                                          Regulatory Charges (RGR, CCC, CDE, TFSEEand Proinfa);

 

·                                          Costs of electricity purchased for resale(CCEAR, Itaipu’s Energy, PROINFA and bilateral agreements); and

 

·                                          Transmission’s charge (TUST, TUSD,Transport of Electricity from Itaipu, Use of Sites for Connection and ONS).

 

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 investmentrelated to the concession area and its expansion;

 

·                                          taxes on revenue;

 

·                                          depreciation costs; and

 

·                                          operation and maintenance costs of the distribution system.

 

Each distribution company’s concession agreement provides for an annualrate adjustment (*reajuste*)*.*Ingeneral, Parcel A costs are fully passed through to consumers. Parcel B costs,however, are restated for inflation in accordance with General Market PriceIndex (Indice Geral de Preços do Mercado), or IGP-M index, adjusted by an X Factor. Electricity distributioncompanies, according to their concession contracts, are also entitled toperiodic revisions (*revisão periódica*)*.*These revisions are aimed at (1) assuring necessaryrevenues to cover efficient Parcel B operational costs and adequatecompensation for investments deemed essential for the services within the scopeof each company’s concession and (2) determining the X factor, which isbased on two components (i) Xa, which is afactor 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 (ii) 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.

 

**Item 4A.**                 Unresolved Staff Comments

** **

NotApplicable.

 

**Item 5.**           Operating and Financial Review 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.*

 

**CriticalAccounting 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 contingentassets and 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

 

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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.

 

*Fair Value Measurements*

 

On January 1, 2008, we adopted the provisions ofFASB Statement No. 157, “Fair Value Measurements,” for fair valuemeasurements of financial assets and financial liabilities and for fair valuemeasurements of nonfinancial items that are recognized or disclosed at fair valuein the financial statements on a recurring basis. Statement 157 defines fairvalue as the price that would be received to sell an asset or paid to transfera liability in an orderly transaction between market participants at themeasurement date. Statement 157 also establishes a framework for measuring fairvalue and expands disclosures about fair value measurements. FASB StaffPosition FAS 157-2, “Effective Date of FASB Statement No. 157,” delays theeffective date of Statement 157 until fiscal years beginning after November 15,2008 for all nonfinancial assets and nonfinancial liabilities that arerecognized or disclosed at fair value in the financial statements on anonrecurring basis. In accordance with FSP FAS 157-2, we have not applied theprovisions of Statement 157.

 

On January 1, 2009, we will be required to applythe provisions of Statement 157 to fair value measurements of nonfinancialassets and nonfinancial liabilities that are recognized or disclosed at fairvalue in the financial statements on a nonrecurring basis. We are in theprocess of evaluating the impact, if any, of applying these provisions on itsfinancial position and results of operations.

 

In October 2008, the FASB issued FASB StaffPosition FAS 157-3, “Determining the Fair Value of a Financial Asset When theMarket for That Asset is Not Active,” which was effective immediately. FSP FAS157-3 clarifies the application of Statement 157 in cases where the market fora financial instrument is not active and provides an example to illustrate keyconsiderations in determining fair value in those circumstances. We haveconsidered the guidance provided by FSP FAS 157-3 in its determination ofestimated fair values during 2008.

 

*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 bebilled and collected as a direct result of the inclusion of the costs in anincreased rate set by the regulator. The deferred regulatory asset is realizedwhen we collect the related costs through billings to consumers. ANEEL performsa rate review 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 chargedto electric 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 were in effect from January 2002to February 2008. We recorded a loss of R$349 million because this periodwas not long enough to collect the regulatory assets related to billing losses.

 

*Valuation of Long-Lived 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. Factors weconsider in determining whether an impairment review is necessary include asignificant underperformance of the assets relative to 

 

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projectedfuture operating results and significant negative industry or economic trends.We determine when an impairment review is necessary through a comparisonbetween the expected undiscounted future cash flows and the carrying amount ofthe asset. If the carrying amount of the asset is the larger of the twoamounts, an impairment loss is recognized by the amount that the carryingamount of the asset exceeds the fair value of the asset. The fair value isdetermined by quoted market prices, appraisals or the use of valuationtechniques such as expected discounted future cash flows. We must makeassumptions regarding these estimated future cash flows and other factors todetermine the fair value of the respective assets. In determining estimatedfuture cash flows, we consider historical experience as well as futureexpectations and estimated future cash flows are based on expected future ratesand expected future consumer demand. A significant reduction in actual cashflows and estimated cash flows may have a material adverse impact on ouroperating 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 are estimated based on historical experience,the nature of the claims, as well as the current status of the claims.Accounting for contingencies requires significant judgment by managementconcerning the estimated probabilities and ranges of exposure to potentialliability. Management’s assessment of our exposure to contingencies couldchange as new developments occur or more information becomes available. Theoutcome of the contingencies could vary significantly and could materiallyimpact our consolidated results of operations, cash flows and financial position.Management has applied its best judgment in applying SFAS No. 5 to thesematters.

 

*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 “EmployersDisclosures about Pensions and Other Post-retirement Benefits” to discloseinformation about pension plans and other post-retirement benefit plans andhave also applied SFAS No. 158 “Employers Accounting for Defined BenefitPension 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 changes inour 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.

 

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.

 

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* *

*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**

 

In December 2007, the FASB issued FASB Statement No. 141(R),“Business Combinations,” and FASB Statement No. 160, “NoncontrollingInterests in Consolidated Financial Statements”—an amendment to ARB No. 51.Statements 141(R) and 160 require most identifiable assets, liabilities,noncontrolling interests, and goodwill acquired in a business combination to berecorded at “full fair value” and require noncontrolling interests (previouslyreferred to as minority interests) to be reported as a component of equity,which changes the accounting for transactions with noncontrolling interestholders. Both Statements are effective for periods beginning on or after December 15,2008, and earlier adoption is prohibited. Statement 141(R) will be appliedto business combinations occurring after the effective date. Statement 160 willbe applied prospectively to all noncontrolling interests, including any thatarose before the effective date. All of the Company’s subsidiaries are whollyowned, so the adoption of Statement 160 is not expected to impact its financialposition and results of operations. The Company is currently evaluating theimpact of adopting Statement 141(R) on its financial position andresults of operations.

 

In February 2008, the FASB issued FASB Staff Position FAS 140-3, “Accountingfor Transfers of Financial Assets and Repurchase Financing Transactions.” Theobjective of the FASP Staff Position, or FSP, is to provide guidance onaccounting for a transfer of a financial asset and repurchase financing. TheFSP presumes that an initial transfer of a financial asset and a repurchasefinancing are considered part of the same arrangement (linked transaction)under Statement 140. However, if certain criteria are met, the initial transferand repurchase financing shall not be evaluated as a linked transaction andshall be evaluated separately under Statement 140. FSP FAS 140-3 is effectivefor annual and interim periods beginning after November 15, 2008, andearly adoption is not permitted. The Company is currently evaluating theprovisions of this standard, but does not expect adoption to have a materialimpact on its financial position and results of operations.

 

In March 2008, the FASB issued FASB Statement No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities”—an amendment to FASBStatement No. 133. Statement 161 requires entities that utilize derivativeinstruments to provide qualitative disclosures about their objectives andstrategies for using such instruments, as well as any details ofcredit-risk-related contingent features contained within derivatives. Statement161 also requires entities to disclose additional information about the amountsand location of derivatives located within the financial statements, how theprovisions of Statement 133 have been applied, and the impact that hedges haveon an entity’s financial position, financial performance, and cash flows.Statement 161 is effective for fiscal years and interim periods beginning afterNovember 15, 2008. The Company is currently evaluating the impact ofStatement 161 on the disclosures about its hedging activities and use ofderivatives.

 

In April 2008, the FASB issued FASB Staff Position FAS 142-3, “Determinationof the Useful Life of Intangible Assets.” FSP FAS 142-3 amends the factors thatshould be considered in developing renewal or extension assumptions used todetermine the useful life of a recognized intangible asset underStatement 142. FSP FAS 142-3 is effective for fiscal years beginning afterDecember 15, 2008. The Company is currently evaluating the impact, if any,of adopting FSP FAS 142-3 on its financial position and results of operations.

 

In June 2008, the FASB’s Emerging Issues Task Force reached aconsensus on EITF Issue No. 07-5, “Determining Whether an Instrument (orEmbedded Feature) Is Indexed to an Entity’s Own Stock.” This EITF Issueprovides guidance on the determination of whether such instruments areclassified in equity or as a derivative instrument. The Company will adopt theprovisions of EITF 07-5 on January 1, 2009. The Company is currentlyevaluating the impact, if any, of adopting EITF 07-5 on its financial positionand results of operations.

 

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In November 2008, the FASB’s Emerging Issues Task Force reached aconsensus on EITF Issue No. 08-6, “Equity Method Investment AccountingConsiderations.” EITF 08-6 continues to follow the accounting for the initialcarrying value of equity method investments in APB Opinion No. 18, TheEquity Method of Accounting for Investments in Common Stock, which is based ona cost accumulation model and generally excludes contingent consideration. EITF08-6 also specifies that other-than-temporary impairment testing by theinvestor should be performed at the investment level and that a separateimpairment assessment of the underlying assets is not required. An impairmentcharge by the investee should result in an adjustment of the investor’s basisof the impaired asset for the investor’s pro-rata share of such impairment. Inaddition, EITF 08-6 reached a consensus on how to account for an issuance ofshares by an investee that reduces the investor’s ownership share of theinvestee. An investor should account for such transactions as if it had sold aproportionate share of its investment with any gains or losses recorded throughearnings. EITF 08-6 also addresses the accounting for a change in an investmentfrom the equity method to the cost method after adoption of Statement 160. EITF08-6 affirms the existing guidance in APB 18, which requires cessation of theequity method of accounting and application of FASB Statement No. 115,Accounting for Certain Investments in Debt and Equity Securities, or the costmethod under APB 18, as appropriate. EITF 08-6 is effective for transactionsoccurring on or after December 15, 2008. We do not anticipate that theadoption of EITF 08-6 will materially impact the Company’s financial positionor results of operations.

 

In December 2008, the FASB issued FASB Staff Position FAS132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets.”FSP FAS 132(R)-1 provides guidance on an employer’s disclosures about planassets of a defined benefit pension or other postretirement plan. Thedisclosures about plan assets required by FSP FAS 132(R)-1 must be provided forfiscal years ending after December 15, 2009. The Company is currentlyevaluating the impact of the FSP on its disclosures about plan assets.

 

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

** **

Electricity rates inBrazil are set by ANEEL, which has the authority to readjust and review ratesin accordance with the applicable provisions of the concession contracts. See “Item4. The Brazilian Power Industry—Rates.”

 

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,** |
|-------------------------------------------|------------|--------------------------------------------|
| ** **                                | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** |
| **Electricity Sales:**                    |       |                                       |   |   |   |   |
| Average rate to  final consumers (R$/MWh) |       |                                       |   |   |   |   |
| Industrial rate                           |       | 145,09                                     |   | 132.99 |   | 123.62 |
| Residential rate                          |       | 473.06                                     |   | 517.98 |   | 488.04 |
| Commercial rate                           |       | 429.12                                     |   | 453.66 |   | 429.50 |
| Rural rate                                |       | 241.29                                     |   | 268.64 |   | 260.58 |
| Public services  rate and others          |       | 301.42                                     |   | 313.73 |   | 288.82 |
|                                      |       |                                       |   |   |   |   |
| Total sales to final  consumers (GWh)     |       |                                       |   |   |   |   |
| Industrial  consumers                     |       | 26,198                                     |   | 24,183 |   | 23,759 |
| Residential  consumers                    |       | 7,164                                      |   | 6,813 |   | 6,647 |
| Commercial  consumers                     |       | 4,423                                      |   | 4,111 |   | 3,851 |
| Rural consumers                           |       | 2,296                                      |   | 2,200 |   | 1,938 |
| Public services  and other consumers      |       | 2,810                                      |   | 2,738 |   | 2,666 |
|                                      |       |                                       |   |   |   |   |
| Average rate  (R$/MWh)                    |       | 244.74                                     |   | 254.49 |   | 239.80 |
| Total revenues  (millions of R$)          |       | 10,497                                     |   | 10,191 |   | 9,319 |
| Sales to  distributors:                   |       |                                       |   |   |   |   |
| Volume (GWh)                              |       | 11,162                                     |   | 12,755 |   | 10,914 |
| Average rate  (R$/MWh)                    |       | 82.60                                      |   | 86.87 |   | 63.86 |
| Total revenues  (millions of R$) (1)      |       | 922                                        |   | 1,108 |   | 697 |
| **Electricity  Purchases from Itaipu:**   |       |                                       |   |   |   |   |
| Volume (GWh)                              |       | 9,021                                      |   | 12,135 |   | 12,109 |
| Average cost  (R$/MWh)                    |       | 86.02                                      |   | 82.40 |   | 67.88 |
| Total cost  (millions of R$)              |       | 776                                        |   | 1,000 |   | 822 |

----

Doesnot include R$147million, R$26 million and R$187 million relating to energytransactions on the CCEE during 2008, 2007 and 2006, 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 ratesthat are 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 “Item 4. TheBrazilian Power Industry—Rates.”

 

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 went through our first periodic raterevision, and on April 4, 2005, ANEEL, through Resolution No. 71,reconsidered such decision. The average rate adjustment applied to our rates onApril 8, 2003, as part of our periodic rate review, was 31.53%. However,according to Resolution No. 71, such rate adjustment was entitled to be44.41%. ANEEL has indicated that the rate adjustments expected for the yearsfrom 2004 to 2007 would be adjusted in order to recover the differences betweenthe 44.41% rate adjustment we were entitled to and the 31.53% rate adjustmentthat was authorized. However during the last annual readjustment, in April of2007, ANEEL postponed the recovery of the last portion we were in entitled toreceive in 2007 to the April 2008 periodic rate revision.

 

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$133 million as of December 31,2008, including monetary variation and accrued interest at a rate of 11.26%.See Note 4 to our consolidated financial statements.

 

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ANEEL issued Resolution No. 626 on April 7, 2008, whichestablished the results of our second periodic rate revision.   However these results were consideredprovisional since ANEEL, by public auction, had been changing the legislationregarding the revision process.  ANEELre-issued the result of CEMIG ́s second period revision based on the results ofthis public auction.  The finalcomponents were as follows:  (i) a19.62% decrease in the Rate Adjustment Index; (ii) a 1.88% decrease due tointra-annual variation of fixed costs, or CVA; (iii) a 7.38% increase dueto the deferred regulatory asset; (iv) a 4.29% increase due to theanticipation of subsidies on rates and; (v) a 1.35% increase due to otherfinancial adjustments.  When consideringthese financial components, the rates decreased, on average, by 8.48%.  The difference between the final and theprovisional rate revision between April 8, 2008 and the re-issuing on April 7,2009 was considered in the 2009 annual adjustment. We expect to experience suchrate decreases periodically as our concession contracts are regulated under aprice cap regime. Through the periodic rate revisions, our productivity gainsare passed on to consumers through reductions in the rates.

 

ANEEL issued Resolution No. 797 on April 07, 2009, whichestablished our average annual rate adjustment of 20.81%. The components ofthis increase were as follows: (i) a 15.01% increase due to the RateAdjustment Index; (ii) a 4.15% increase due to intra-annual variation offixed costs; (iii) a 3.47% decrease due to the difference between theprovisional and the final result of the second periodic revision; (iv) a3.47% increase due to the anticipation of subsidies on rates granted to sometypes of consumers and (v) a 1.65% increase due to other financialadjustments. The 2008 periodic rate adjustment and the 2009 and 2007 averageannual rate adjustments with their respective components are presented in thetable below:

 
| ** **                                                                                                                                                                                                                                                 | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                                                                                                                                                                                                                       |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Average annual/periodic rate adjustment**                                                                                                                                                                                                                |       | 20.81      | %          | (8.48)     | %          | 9.43       | %          |
|                                                                                                                                                                                                                                                       |       |       |       |       |       |       |       |
| **Components**                                                                                                                                                                                                                                             | ** ** |       |       |       |       |       |       |
| Rate adjustment index                                                                                                                                                                                                                                      |       | 15.01      | %          | (19.62)    | %          | 3.42       | %          |
|                                                                                                                                                                                                                                                       |       |       |       |       |       |       |       |
| Deferred regulatory asset                                                                                                                                                                                                                                  |       |       |       | 7.38       | %          |       |       |
|                                                                                                                                                                                                                                                       |       |       |       |       |       |       |       |
| Intra-annual variation of fixed costs (CVA)                                                                                                                                                                                                                |       | 4.15       | %          | (1.88)     | %          | 0.48       | %          |
|                                                                                                                                                                                                                                                       |       |       |       |       |       |       |       |
| 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       | %          |
|                                                                                                                                                                                                                                                       |       |       |       |       |       |       |       |
| Revenue we did not achieve in 2004, as a result of the re-issuing of  Resolution No. 83 on May 24, 2004, which reduced our rates                                                                                                                 |       |       |       |       |       | 1.47       | %          |
|                                                                                                                                                                                                                                                       |       |       |       |       |       |       |       |
| Adjustment related to the re-issuing of the second periodic revision                                                                                                                                                                                       |       | (3.47)     | %          |       |       |       |       |
|                                                                                                                                                                                                                                                       |       |       |       |       |       |       |       |
| Anticipation of subsidies on rates                                                                                                                                                                                                                         |       | 3.47       | %          | 4.29       | %          |       |       |
|                                                                                                                                                                                                                                                       |       |       |       |       |       |       |       |
| Other financial adjustments                                                                                                                                                                                                                                |       | 1.65       | %          | 1.35       | %          | 0.80       | %          |

** **

**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 generation facilities.In May 2001, the Federal Government announced several measures requiringreductions in electricity consumption in response to these conditions. Thepower rationing measures ultimately ceased on February 28, 2002.

 

On December 12, 2001, the Federal Government authorized thecreation of the General Agreement of the Electricity Sector. The GeneralAgreement of the Electricity Sector provides that electric power distributionand generation companies in Brazil, such as us, will be compensated for revenuelosses caused by the reduction in amounts of energy sold and the purchase ofenergy on the CCEE, as applicable, due to the Federal Government-mandatedrationing measures. Compensation is made by means of an extraordinary increasein the energy rate applicable to future power sales and companies are entitledto use this increased rate for an average period of 74 months, which ended in March 2008.See Note 4 to our consolidated financial statements.

 

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** **

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

** **

We have an account receivable from the State Government, referred to asthe CRC Account, that totaled R$1,801 million as of December 31, 2008. Ourliquidity and net income are affected by payments made by the State Government in connection with the CRC Account. Theagreement between CEMIG and the State Government that governs the CRC Accountreceivable is referred to as the CRC Account Agreement. The CRC AccountAgreement has been amended 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 CRCAccount Agreement in 2001 or 2002 and therefore, in October 2002, theSecond and Third Amendments to the CRC Account Agreement were signed, whichseparated the debt into two amounts and established new payment terms. In 2003and 2004, we offset a portion of these overdue amounts from 2001 and 2002against payments of interest on capital that we are required to make to the StateGovernment as our 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 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.

 

A Fifth Amendment to the CRC Account Agreement was executed by CEMIGand the State Government on September 12, 2007. The Fifth Amendmentadjusts the outstanding balance of the CRC Agreement to R$2,839.5 million inaccordance with a provision in the Fourth Amendment in which the partiesrecognized that there was a disagreement regarding the outstanding balance ofthe 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 State Government,the retention percentage will be automatically adjusted upward such that theamount of the dividend retained will remain the same as the amount equal to 65%of dividends based on the current ownership of CEMIG by the State Government.

 

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 fully consolidated by us and the senior quotas arerecorded 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$492 million in 2008 and R$372 million in 2007 and a reversalprovision for losses of R$99 million in 2006. Our estimate of future net incometo calculate such provision did not take into account the new assetacquisitions foreseen in our long-term strategic plan.

 

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**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 foreigncurrency-denominated debt. As a result, in reporting periods when the *real* declines against the dollar or otherforeign currencies in which our debt is denominated, our operating results andfinancial position are adversely affected. Foreign exchange gain or loss andmonetary variation gain or loss may impact our results of operations in periodsin which there are wide swings in the value of the *real* relative to the dollar or high inflation. We have anumber of financial and other contracts under which we owe, or are entitled to,amounts in respect of monetary variation as measured by an index of priceinflation in Brazil. In 2008, we used financial instruments such as interestrate swaps in order to reduce the risk from exchange rate fluctuations. As of December 31,2008, we had entered into swap agreements in the notional amount ofUS$163 million and, in order to change the original interest rate of certainfinancing from an interest rate calculated based on the U.S. dollar andJapanese yen variations to an interest rate calculated based on the InterbankCertificates of Deposit rate (*Certificado deDepósito Interbancário*), orCDI rate. See Notes 2(d), 14, 22, 24 and 25 to our consolidatedfinancial statements.

 

**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 distribution and transmissionconcessions through amendments to the existing concession contracts, and wasfinalized with respect to the generation concession upon ANEEL’s convocation tosign amendments to the existing generation contracts, on October 22, 2008.

 

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. The agreement was approved on October 29, 2008,by means of ANEEL’s Dispatch No. 3924-SFF.

 

*Financial Reporting 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,transmission and distribution subsidiaries are consolidated with ours. Ourmarginal tax rate, on a consolidated basis, has not changed materially as aresult of the unbundling. However, our operating results were adverselyaffected as a consequence of the application of certain Brazilian revenuetaxes. The revenue taxes which caused the adverse effect on operating resultsinclude the *Contribuição para SeguridadeSocial* (a federal 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, 2008 Compared to YearEnded December 31, 2007**

** **

*Net Operating Revenues*

* *

Netoperating revenues increased 4.2 % from R$9,430 million in 2007 to R$9,828million in 2008.

 

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| ** **                                           | ** ** | **2008**             | ** ** | **%** of net  operating  revenues | ** ** | **2007**             | ** ** | **%** of net  operating  revenues | ** ** | **2008  versus  2007 - %** | ** ** |
|------------------------------------------------------|------------|----------------------|------------|---------------------------------------------|------------|----------------------|------------|---------------------------------------------|------------|--------------------------------------|------------|
| ** **                                           | ** ** | (in millions of  R$) | ** ** | ** **                                  | ** ** | (in millions of  R$) | ** ** | ** **                                  | ** ** | ** **                           | ** ** |
|                                                 |       |                 |       |                                        |       |                 |       |                                        |       |                                 |       |
| Electricity sales to final consumers                 |       | 10,497               |       | 106.81                                      |       | 10,191               |       | 108.10                                      |       | 3.00                                 |       |
|                                                 |       |                 |       |                                        |       |                 |       |                                        |       |                                 |       |
| Electricity sales to the interconnected power system |       | 1,069                |       | 10.9                                        |       | 1,134                |       | 12.0                                        |       | (5.7)                                |       |
|                                                 |       |                 |       |                                        |       |                 |       |                                        |       |                                 |       |
| Use of basic transmission and distribution networks  |       | 1,865                |       | 19.0                                        |       | 1,705                |       | 18.1                                        |       | 9.4                                  |       |
|                                                 |       |                 |       |                                        |       |                 |       |                                        |       |                                 |       |
| Other operating revenues                             |       | 241                  |       | 2.4                                         |       | 236                  |       | 2.5                                         |       | 2.1                                  |       |
|                                                 |       |                 |       |                                        |       |                 |       |                                        |       |                                 |       |
| Tax on revenues                                      |       | (3,844)              |       | (39.1)                                      |       | (3,836)              |       | (40.7)                                      |       | 0.2                                  |       |
|                                                 |       |                 |       |                                        |       |                 |       |                                        |       |                                 |       |
| Total net operating revenues                         |       | 9,828                |       | 100.0                                       |       | 9,430                |       | 100.0                                       |       | 4.2                                  |       |

 

Revenues from electricity sales to final consumersincreased 3.00% from R$10,191 million in 2007 to R$10,497 million in 2008 dueto rate adjustments of a 5.2% increase in April 2007 and a 6.4% increasein the volume of our electricity sales to final consumers in 2008, offset bythe 3.83% decrease in the average tariff in 2008, as per the reduction in thetariffs of Cemig Distribution by the Tariff Review on April 8, 2008. TheTUSD charges related to the use of the local distribution network of the FreeConsumers, which began to be charged separately in 2004 and recorded under theitem “Use of basic transmission and distribution networks,” were R$1,266million in 2008 compared to R$1,173 million in 2007. Electricity sales to finalcustomers and the TUSD revenues together increased 4.6% in 2008 compared to2007.

 

Electricity sales to the interconnected power systemwere R$1,069 million in 2008, a 5.7% decrease compared to R$1,134 million in2007. The volume of energy sold to interconnected power system supply in 2008was 11,162 MWh, which compares with 12,755 MWh in 2007. The average sale tariffin 2008 was R$82.60/MWh compared to R$86.87/MWh in 2007.

 

Income from the use of the basic transmission networkincreased R$160 million, or 9.4%, from R$1,705 million in 2007 to R$1,865million in 2008. This variation arises from: (i) the July 2008increase of 11.8% in the permitted revenue in the transmission sector from theadjustment made by applying the IGP-M inflation index over the 12 previousmonths; and (ii) operational startup of network expansions, resulting inthe Regulator allowing a higher revenue level. Additionally there was a R$35million reduction in revenue from the basic grid in 2007, due to the review, asper ANEEL decisions, of the annual permitted revenues linked to the newfacilities of the basic grid and other transmission facilities for electricitytransmission concession holders. See Note 19 to our consolidated financialstatements.

 

Taxes on revenues were R$3,844 million in 2008,compared to R$3,836 million in 2007, and showed no significant variation. Taxeson revenues consist of: (i) VAT, assessed at an average rate of 21% onelectricity sales to final consumers, and VAT billed to consumers related tothe deferred regulatory assets; (ii) COFINS, assessed at a rate of 7.6%;and (iii) PASEP, assessed at a rate of 1.65%. See Note 19 to ourconsolidated financial statements.

 

*Operating Costs and Expenses*

* *

Operating costs and expenses increased 2.6% to R$7,541million in 2008 from R$7,351 million in 2007. This increase was principally dueto electricity purchased for resale, personnel expenses and employeepost-retirement benefits, partially offset by a lower provision for loss ondeferred regulatory assets and depreciation and amortization.

 

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| ** **                                          | ** ** | **2008**                  | ** ** | **% of net  operating  revenues** | ** ** | **2007**                 | ** ** | **% of net  operating  revenues** | ** ** | **2008 versus  2007 - %** | ** ** |
|-----------------------------------------------------|------------|---------------------------|------------|---------------------------------------------|------------|--------------------------|------------|---------------------------------------------|------------|------------------------------------------|------------|
| ** **                                          | ** ** | **(in millions   of R$)** | ** ** | ** **                                  | ** ** | **(in millions  of R$)** | ** ** | ** **                                  | ** ** | ** **                               | ** ** |
|                                                |       |                      |       |                                        |       |                     |       |                                        |       |                                     |       |
| Electricity purchased for resale                    |       | (2,267)                   |       | (23.1)                                      |       | (2,147)                  |       | (22.8)                                      |       | 5.6                                      |       |
|                                                |       |                      |       |                                        |       |                     |       |                                        |       |                                     |       |
| Use of basic transmission and distribution networks |       | (634)                     |       | (6.5)                                       |       | (564)                    |       | (6.0)                                       |       | 12.4                                     |       |
|                                                |       |                      |       |                                        |       |                     |       |                                        |       |                                     |       |
| Depreciation and  amortization                      |       | (769)                     |       | (7.8)                                       |       | (878)                    |       | (9.3)                                       |       | (12.4)                                   |       |
|                                                |       |                      |       |                                        |       |                     |       |                                        |       |                                     |       |
| Personnel                                           |       | (1,004)                   |       | (10.2)                                      |       | (884)                    |       | (9.4)                                       |       | 13.6                                     |       |
|                                                |       |                      |       |                                        |       |                     |       |                                        |       |                                     |       |
| Regulatory charges                                  |       | (1,024)                   |       | (10.4)                                      |       | (967)                    |       | (10.3)                                      |       | 5.9                                      |       |
|                                                |       |                      |       |                                        |       |                     |       |                                        |       |                                     |       |
| Regulatory liability—special liabilities       |       | -                         |       | -                                           |       | -                        |       | -                                           |       | -                                        |       |
|                                                |       |                      |       |                                        |       |                     |       |                                        |       |                                     |       |
| Third-party services                                |       | (605)                     |       | (6.2)                                       |       | (550)                    |       | (5.8)                                       |       | 10.0                                     |       |
|                                                |       |                      |       |                                        |       |                     |       |                                        |       |                                     |       |
| Employee post-retirement benefits                   |       | (277)                     |       | (2.8)                                       |       | (140)                    |       | (1.5)                                       |       | 97.9                                     |       |
|                                                |       |                      |       |                                        |       |                     |       |                                        |       |                                     |       |
| Materials and supplies                              |       | (170)                     |       | (1.7)                                       |       | (148)                    |       | (1.6)                                       |       | 14.9                                     |       |
|                                                |       |                      |       |                                        |       |                     |       |                                        |       |                                     |       |
| Provision for loss on deferred regulatory assets    |       | (19)                      |       | (0.2)                                       |       | (146)                    |       | (1.5)                                       |       | (87.0)                                   |       |
|                                                |       |                      |       |                                        |       |                     |       |                                        |       |                                     |       |
| Employee profit sharing                             |       | (362)                     |       | (3.7)                                       |       | (455)                    |       | (4.8)                                       |       | (20.4)                                   |       |
|                                                |       |                      |       |                                        |       |                     |       |                                        |       |                                     |       |
| Other                                               |       | (410)                     |       | (4.2)                                       |       | (472)                    |       | (5.0)                                       |       | (13.1)                                   |       |
|                                                |       |                      |       |                                        |       |                     |       |                                        |       |                                     |       |
| Total operating costs and expenses                  |       | (7,541)                   |       | (76.7)                                      |       | (7,351)                  |       | (78.0)                                      |       | 2.6                                      |       |

 

Electricity purchased for resale consists primarily ofpurchases from Itaipu through Eletrobrás and competitive biddings. We arerequired under applicable regulations to purchase 17.3% of Itaipu’s capacity atU.S. dollar-denominated prices. We also purchase electricity from the CCEE andthrough bilateral contracts. Electricity purchased for resale increased 5.6%from R$2,147 million in 2007 to R$2,267 million in 2008. 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 networkmainly correspond to the cost of transporting electricity in the Brazilian basictransmission network which is prorated among the Brazilian distributioncompanies. Charges for use of the basic transmission network are fixed costs,which increased 12.4% from R$564 million in 2007 to R$634 million in 2008. Theamount reported in the income statement refers to the amounts that were in factincluded in the calculation of the tariff to be applied, in accordance withSFAS 71 “Accounting for the Effects of Certain Types of Regulation.”

 

Depreciation and amortization expenses decreased 12.4%from R$878 million in 2007 to R$769 million in 2008. This decrease arises fromthe depreciation of “Special Obligations,” from April 8, 2008, the date ofthe second-cycle tariff review.

 

Personnel expenses increased 13.6% from R$884 millionin 2007 to R$1,004 million in 2008. This increase was due to: (i) salaryincreases of 5.00% and 7.26% given to employees in November 2007 and 2008,respectively; (ii) dismissal expenses of R$50 million in 2008, under theVoluntary Dismissal Program; and (iii) lower transfer of costs frompersonnel expenses to works in progress (R$161 million in 2008 compared toR$179 million in 2007) due to less capital expenditure activity in 2008. SeeNote 30 to our consolidated financial statements.

 

Regulatory charges increased 5.9% from R$967 millionin 2007 to R$1,024 million in 2008, primarily due to the increase of R$34million in the fuel usage quota and an increase of R$34 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.”

 

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Third-party services expense increased 10.0% fromR$550 million in 2007 to R$605 million in 2008. The increase was due mainly tohigher costs in 2008 related to maintenance and conservation of installationsand equipment and outsourcing services.

 

Employee post-retirement benefits expenses increased97.9% from R$140 million in 2007 to R$277 million in 2008.  These expenses primarily represent intereston the actuarial liabilities net of the expected return on plan assets, asestimated by an external expert.  Thehigher expense in 2008 arose from the adjustment to the actuarial assumptionsin December 2007 and the reduction of the interest rates, used tocalculate our Projected Benefit Obligation, which increased the value of theactuarial obligations.  See Note 16 toour consolidated financial statements. We recorded a provision for losses ondeferred regulatory assets of R$19 million in 2008 compared to R$146 million in2007. The provision recorded is related to the amounts that CEMIG receives fromother distribution companies in connection with energy transactions on theCCEE/MAE during the Electricity Rationing Plan. These distribution companieshave a limited time, as stipulated by ANEEL, to transfer the amounts owed tous. See Note 4 to our consolidated financial statements.

 

Employee profit sharing decreased 20.4% from R$455million in 2007 to R$362 million in 2008. This decrease is due to a lowerpayment amount established under the collective labor agreements entered intoby CEMIG and the labor unions in November 2008. See Note 21 to ourconsolidated financial statements.

 

Other expenses decreased 13.1% from R$472 million in2007 to R$410 million in 2008, primarily due to R$57 million of provisions fordoubtful accounts in 2008, compared to R$93 million in 2007, and R$99 millionof provisions for contingencies related to labor claims and civil lawsuits in2008, compared to R$118 million in 2007. See Note 20 to our consolidatedfinancial statements.

 

*Operating Income*

* *

As a result of the foregoing, we had operating incomeof R$2,287 million in 2008 compared to operating income of R$2,079 million in2007.

 

*Financial Income, Net*

* *

Financial income net, includes (i) financialincome, which is mainly comprised of interest and a monetary restatement of ouraccount receivable from the State Government, investment income earned, latecharges on overdue electricity bills, foreign exchange gains, monetaryrestatement on deferred regulatory assets and (ii) financial expenses, whichare mainly comprised 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, which was extinguished on January of2008, foreign exchange losses, monetary restatement losses, monetaryrestatement of deferred regulatory liabilities and other expenses. We had netfinancial income of R$17 million in 2008 compared to net financial expense ofR$48 million in 2007, principally due to a 47.0% decrease in monetaryrestatements on deferred regulatory assets net of liabilities in 2008. Thisdecrease mainly resulted from a reduction in assets related to the deferredrate adjustment in 2008 compared to 2007, due to receipt of values receivableinto electricity energy accounts paid by clients.

 

*Non-Operating Income*

* *

We had non-operating income of R$204 million in 2008compared to non-operating income of R$272 million in 2007. This difference ismainly due to R$49 million recognized in 2007, as result of sale of EmpresaInfovias S.A.’s equity interest in WAY TV Belo Horizonte S.A.

 

*Income Taxes*

* *

Income taxes were an expense of R$755 million onpre-tax income of R$2,508 million in 2008, compared to an expense of R$685 millionon pre-tax income of R$2,303 million in 2007. The main difference in 2008between income tax calculated at the statutory rate and the income tax expenserecorded is the tax benefit mainly due to equity in investees. See Note 5 toour consolidated financial statements.

 

*Net Income*

* *

As a result of the foregoing, we had a net income of R$1,753 million in2008 compared to net income of R$1,618 million in 2007.

 

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*Other Comprehensive Income (Loss)*

* *

Other comprehensive income was R$299 million in 2008 compared to othercomprehensive loss of R$400 million in 2007. 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 in that year.

 

*Comprehensive Income*

* *

As a result of the factors stated above, comprehensive income wasR$2,052 million in 2008 compared to R$1,218 million in 2007.

 

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

** **

*Net Operating 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 adjustmentsof  7.1% increase in April 2006(full effect in 2007) and 5.2% increase in April 2007, and 3.1% increasein the volume of our electricity sales to final consumers in 2007. The TUSDcharges related to the use of the local distribution network of the FreeConsumers, which began to be charged separately in 2004 and recorded under theitem “Use of basic transmission and distribution networks”, were R$1,173million in 2007 compared to R$1,122 million in 2006. This increase was due to ashift in certain industrial consumers to the category of Free Consumers in2007. Electricity sales to final customers and the TUSD revenues togetherincreased 8.8% in 2007 compared to 2006.

 

Electricity sales to the interconnected power system were R$1,134 millionin 2007, a 28.3% increase compared to R$884 million in 2006. This significantincrease arises primarily from the start up of the Irapé plant in the secondhalf of 2006, a higher volume of electricity traded through contracts withelectricity 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, resultingmainly from the charges paid by Cemig Generation and Transmission’s consumersto Cemig Distribution for the use of the distribution network. In addition,there was an increase in revenues related to use of the facilities that arepart of CEMIG’s basic transmission network by electric power generators anddistributors that comprise the national grid, in the amount of R$437 million in2007 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.

 

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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 average rate of 21% on electricity sales tofinal consumers, and VAT billed to consumers related to the deferred regulatoryassets; (ii) COFINS, assessed at 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 regulatoryliability—special obligations in the amount of R$1,057 million and also areduction in personnel, employee post-retirement benefits expenses and the useof the basic transmission network. The decrease was partially offset by anincrease in Electricity purchased for resale, Employees profit sharing andOther expenses.

 
| ** **                                          | ** ** | **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 of electricitypurchased for resale reported in the income statement refer to the amounts thatwere in fact included in the calculation of the tariff to be applied, inaccordance with SFAS 71 “Accounting for the Effects of Certain Types ofRegulation.” 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 decreased17.9% from R$687 million in 2006 to R$564 million in 2007. The amount reportedin the income 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.”

 

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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.

 

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. The resources represent eitherinfrastructure assets or cash to fund the acquisition and/or construction ofsuch assets usually to obtain connection to our distribution network or toextend the existing network. For regulatory purposes, the depreciation of theseassets was 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 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 a reductionof 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 expensein the 2006 statement of operations, with an offset to deferred regulatoryliabilities. See more information on Note 4, item “f” to our consolidatedfinancial 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 planassets, as estimated by an external expert. The reduction reflects highergrowth of the assets of the pension plan than the growth of the obligations tothe participants. 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 2006 related to labor claims and civillawsuits. See Note 20 to our consolidated financial statements.

 

*Operating Income*

* *

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.

* *

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* *

*Financial Income, 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 net financial income of R$335 million in 2006, principally due to areduction of R$127 million on accrued interest on our account receivable fromthe State Government, net of provision (reversion provision) for losses recordedand mentioned in Note 3 to our consolidated financial statements, and adecrease of 22.0% in monetary restatement on deferred regulatory assets net ofliabilities in 2007. This decrease is mainly due to a reduction in assetsrelated to the deferred rate adjustment in 2007 compared to 2006 as a result ofthe increases in the electricity energy accounts. Additionally, there was anincrease of 21.7% in the charges on loans and financings from R$529 million in2006 to R$644 million in 2007, due mainly to the increase in our debt in 2007compared to 2006, and also an increase of 47.4% in losses on derivativecontracts to R$171 million in 2007 from R$116 million in 2006.

 

*Non-Operating Income*

* *

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 Infovias S.A.’s profit from this sale, in the amount of R$49million, was recognized in the fourth quarter of 2007, when the approval waspublished in the federal Official Gazette.

 

*Income Taxes*

* *

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 consolidatedfinancial statements.

 

*Net Income*

* *

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.

 

*Other Comprehensive 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.

 

*Comprehensive Income*

* *

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

 

**Liquidity andCapital 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 anddistribution facilities. Our liquidity requirements are also affected by ourdividend policy. See “Item 8. Financial Information—Dividend Policy andPayments.” We have funded our liquidity and capital requirements primarily withcash provided by operations and, to a lesser extent, with proceeds offinancings. We believe that our current cash reserves, cash provided byoperations and anticipated proceeds from financings will be sufficient duringthe next 12 months to meet our liquidity requirements.

 

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*Cash and Cash Equivalents*

* *

Cash and cash equivalents as of December 31, 2008 were R$1,969million compared to R$1,784 million as of December 31, 2007 and R$1,108million as of December 31, 2006. None of our cash or cash equivalents washeld in currencies other than *reais* as of December 31,2008.

 

*Cash Flow from Operating Activities*

* *

Net cash provided by operating activities in 2008, 2007 and 2006totaled R$2,961 million, R$2,836 million and R$2,286 million, respectively. Theincrease in cash provided by operating activities in 2008 compared to 2007 wasdue mainly to the higher net income in 2008. The increase in 2007 compared to2006 was due primarily to the higher net income in 2007 and higher amount oftaxes paid from cash in 2006. Significant non-cash items affecting earningsincluded depreciation and amortization expense as a result of our on-goingcapital improvements projects, recognition of deferred regulatory assets andliabilities, the effects of monetary variation and exchange rate variations anddeferred income taxes.

 

*Cash Flow from Investing Activities*

 

Net cash used in investing activities during 2008, 2007 and 2006amounted to R$1,280 million, R$1,114 million and R$2,086 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$220 million, R$26 million and R$568 million in 2008, 2007 and 2006,respectively. Capital expenditures from the acquisition of property, plant andequipment amounted to R$971 million, R$1,120 million and R$1,328 million in2008, 2007 and 2006, respectively. See “Item 4. Information on theCompany—Capital Expenditures and Investments in Affiliates” for more detailregarding how these capital expenditures were applied by us.

 

*Cash Flow from Financing Activities*

* *

Net cash used by financing activities during 2008 was R$1,496 million,comprised of the repayment of R$807 million of *real*andforeign currency-denominated long-term financing and the payment of R$865million in dividends and interest on capital, partially offset by R$176 millionin proceeds from long-term financings.

 

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.

 

Our indebtednessfrom loans, financings and debentures as of December 31, 2008 was R$6,511million, composed of R$5,314 million of long-term debt and R$1,197 million ofthe current portion of long-term debt. This compares with indebtedness fromloans, financings and debentures as of December 31, 2007 of R$6,814million, composed of R$5,873 million of long-term debt and R$941 million of thecurrent portion of long-term debt. Of our long-term debt (including the currentportion) at December 31, 2008, R$445 million was denominated in foreigncurrencies (R$315 million of which was U.S. dollar-denominated) and R$6,066million was denominated in *reais.*Of ourtotal indebtedness from loans, financings and debentures of R$6,511 million asof December 31, 2008, R$5,787 million is subject to variable interestrates. See Notes 14 and 25 to our consolidated financial statements.

 

We are committedto lengthening our debt profile through long-term financing vehicles at lowinterest rates, the maturities and obligations of which are compatible with thenature of our business, which is capital-intensive. We seek to balance theproportions of short and long-term financings and not to increase our exposureto short-term rates, nor undergo any liquidity pressures. Through this policy,we have succeeded in continually improving our credit ratings, reducing ourcost of capital and improving our debt profile. Our principal form of fundingis through issuance of debentures and issuance of medium-term notes (known inBrazil as “commercial paper”), the latter being most used for meetingshort-term obligations.

 

We are subject to financial covenants contained in some of our debtagreements that require us to maintain certain financial ratios.  These ratios are computed based on ourfinancial statements prepared in accordance with accounting practices adoptedin Brazil.  These and other covenantscould limit our ability to support our liquidity and capital requirements. TheCompany is in compliance with all its debt covenants in December 31, 2008.Given the current portion of our financings in the amount of R$1,197 milliondue in 2009, we need funds in the short term to pay and refinance theseobligations. For this reason, we plan to refinance our 

 

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debtin 2009 to lengthen maturities. We cannot assure you that we will successfullyconsummate 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. Therestrictions mentioned in this paragraph have not prevented us from obtainingfinancing, although there is no assurance that our ability to obtain financingwill not be hindered in the future. See “Item 3. Key Information—RiskFactors—Risks Relating to Brazil—We currently face limitations on our abilityto obtain financing.”

 

We currently plan to make capital expenditures related to our property,plant, and equipment of approximately R$970 million in 2009. We disbursed atotal of R$170 million under our capital expenditure program in the firstquarter of 2009 and have commitments to fund substantially all of the remainingR$800 million. The principal uses of these capital expenditures are expected tobe for expansion of our distribution infrastructure and increases in ourgeneration capacity. We also have committed R$820 million to announcedinvestments in affiliates in 2009. In addition, we have announced theacquisition of Terna, which, when approved by the relevant regulatory bodiesand financial institutions, will represent an investment of more than R$3.0billion. See “Item 4. Information on the Company—Recent Developments.” In 2008,we funded our capital expenditures and investments in affiliates and met ourliquidity requirements through a combination of cash flow from operations andfinancings. We expect that we will fund our proposed capital expenditures,investments in affiliates, and acquisitions and meet our other liquidityrequirements in 2009 through a combination of cash flow from operations andfinancings. Because we rely primarily on cash generated from operations to fundour liquidity and capital requirements, factors that cause our revenues and netincome to increase or decrease could have a corresponding effect on our accessto sources of liquidity.

 

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.

 

**Researchand 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 2008, we spent R$7million for R&D. Nevertheless, R$18.6 million has been transferred to the *Fundo Nacional de Desenvolvimento Científico e Tecnológico*,or FNDCT, a federal research and development fund; and R$9.2 million has beentransferred to *Empresa de Pesquisa Energética*,or EPE (the federal power planning company). During the years ended December 31,2008, 2007 and 2006, we spent an aggregate of R$24.3 million, on research anddevelopment projects, and we transferred an aggregate of approximately R$67.3million to FNDCT during that time. We expect to spend a total of approximatelyR$85.8 million on research and development in 2009. We conduct these efforts inaccordance with Federal law, which requires Brazilian power utilities to spendat least 1% 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.

 

In accordance with ANEEL instructions, we recorded a liability in 2008for future expenditures on research and development programs and energyefficiency programs in the amount of R$58.8 million relating to amounts thathad already been included in the determination of our tariffs in 2008.

 

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.

 

**We implemented the Strategic Technology ManagementCenter *(Centro de Gestão Estratégica deTecnologia* — CGET), an independent nonprofit entity whose partnersare subsidiaries of CEMIG. In 2008, CGET executed about 36 scientific andtechnological agreements with universities, research centers and the equipmentindustry, to support the implementation of our research and developmentprojects.**

 

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** **

**Trends**

 

The purchase of energy from the Itaipu Power Plant constitutedapproximately 32% of the captive load of Cemig Distribution in 2008. To meetthe 68% remaining energy needs of Cemig Distribution in 2008, we bought energythrough our bilateral contracts (6%) and through contracts in the ACR (48%),received energy from the Proinfa program (1%), and bought from the spot market onCCEE. For more details about the energy purchased from Cemig Distribution inthe ACR, see “Item 4. Information on the Company—The Brazilian PowerIndustry—The Regulated Market (the ACR or the Pool).”

 

As a public service utility, we are subject to regulations issued bythe Federal Government as described in “Item 4. Information on the Company—TheBrazilian Power Industry.” Therefore, any change in the regulatory frameworkmay affect us significantly either with respect to our revenue if the changerelates to prices or with respect to our operating expenses if the changerelates to costs incurred to provide service to consumers.

 

We do not anticipate any significant change in revenues with respect tothe 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 “Item 4. Information on the Company —The BrazilianPower Industry—Rates for the Use of the Distribution and Transmission Systems.”This difference in application may have an impact on sales volume growth in thefuture since large industrial clients tend to develop co-generation projects tosupply energy to themselves at a lower cost. We are taking steps to mitigatethis impact through the connection of new clients of different categories aswell as clients based in other states. In the coming years, we expectelectricity consumption to grow toward the pre-rationing level based on anassumption that economic activity in Brazil will continue to grow. However,there can be no assurance that this 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 that the extension of electricityservices to all potential clients represents a significant trend in ourindustry. Utilities are currently required to provide service to all potentialclients according to a schedule established by ANEEL. Pursuant to Federal Law No. 10,438of April 26, 2002, as amended, and the relevant ANEEL resolution,financing for this extension of electricity services is to come from the fundsof the Energy Development Account (*Conta de DesenvolvimentoEnergético*), or CDE, and the Global Reversion Fund (*Reserva Global de Reversão*), or RGR. According to the Lightfor All (*Luz para Todos*)**Program,launched by the MME and Eletrobrás to promote extension of electricity servicesin rural areas, in its second phase, 31% of the necessary funds will come fromthe CDE, 26.6% from the RGR, 26.2% from the State Government and the remaining 16.2%from CEMIG. For further discussion of the Light for All program, see “Item 4.Information on the Company—Distribution and Purchase of ElectricPower—Expansion of Distribution Capacity.”

 

An important project that CEMIG invests in is the Minas PCH Program.This project aims to build dozens 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 isrunning from 2006 to December 2009 and will provide infrastructure andimprovements to the electricity distribution system throughout Minas Gerais to improve the quality of electricitysupply and adapt it to the new conditions of the market.

 

**With respect to energy supply, we expect the currentcapacity and favorable reservoir levels to prevail in the near term. However,there are concerns about supply conditions in the mid term, since Brazil’sproduction and importing of natural gas is not sufficient to meet all theconsumption of thermal units in the case of a severe drought. Investment in newgenerating capacity is one of the major concerns of the Federal Government andit is expected that the new regulatory framework will encourage investment innew generation capacity.**

** **

**Off-Balance SheetArrangements**

** **

We do not have any off-balance sheet arrangements.

 

**ContractualObligations**

** **

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 transportelectric power from Itaipu as well as 

 

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constructioncommitments. The following table provides information, as of December 31,2008, about our contractual obligations and commitments in millions of *reais*.

 
|   | ** **                                            | ** ** | **2009**  | ** ** | **2010**  | ** ** | **2011**  | ** ** | **2012**  | ** ** | **2013**  | ** ** | **2014**  | ** ** | **2015 and  beyond** | ** ** | **Total**  | ** ** |   |
|--------|-------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|----------------------|------------|------------|------------|--------|
|   | Long-Term debt (1)                                    |       | 1,197     |       | 739       |       | 812       |       | 967       |       | 1,085     |       | 886       |       | 825                  |       | 6,511      |       |   |
|   | Derivative financial  instruments (“swaps”) |       | 49        |       | 12        |       | 11        |       | 11        |       | 11        |       | -         |       | -                    |       | 94         |       |   |
|   | Purchase of Electricity  from Itaipu (2)              |       | 860       |       | 918       |       | 947       |       | 979       |       | 1,014     |       | 1,029     |       | 4,127                |       | 9,874      |       |   |
|   | Transportation of  Electric Power from Itaipu (2)     |       | 67        |       | 72        |       | 75        |       | 77        |       | 83        |       | -         |       | -                    |       | 374        |       |   |
|   | Pension Plan Debt—Forluz                         |       | 75        |       | 78        |       | 68        |       | 63        |       | 41        |       | 44        |       | 573                  |       | 942        |       |   |
|   | “Luz para todos” (Light for All) Program    |       | 157       |       | 250       |       | -         |       | -         |       | -         |       | -         |       | -                    |       | 407        |       |   |
|   | Regulatory Investments                                |       | 677       |       | 474       |       | 422       |       | 419       |       | -         |       | -         |       | -                    |       | 1,992      |       |   |
|   | Concession Granted (3)                                |       | 2         |       | 2         |       | 2         |       | 7         |       | 15        |       | 15        |       | 313                  |       | 356        |       |   |
|   | Electricity Power  Purchase (4)                       |       | 1,966     |       | 2,755     |       | 3,660     |       | 4,187     |       | 4,291     |       | 4,615     |       | 22,974               |       | 44,448     |       |   |
|   | Total                                                 | ** ** | **5,050** | ** ** | **5,300** | ** ** | **5,997** | ** ** | **6,710** | ** ** | **6,540** | ** ** | **6,589** | ** ** | **28,812**           | ** ** | **64,998** | ** ** |   |
|   |                                                  |       |
|        |                                                       |            |           |            |           |            |           |            |           |            |           |            |           |            |                      |            |            |            |        |  |  |

(1)           In the event of ournon-compliance with certain covenants in our loan agreements, the totalprincipal, future interest and any penalties due under these agreements maybecome immediately due and payable. These amounts do not include interestpayments on debt or payments under interest rate swap agreements. We expect topay approximately R$623 million in interest payments on debt in 2009. Interestpayments on debt for years following 2009 have not been estimated since theyare subject to future variations in variable interest rates and foreigncurrency exchange rates. We do not believe projections of interest payments andpayments under interest rate swap agreements would be meaningful.

 

(2)           Contract withFurnas, denominated in U.S. dollars, to supply electric power purchased fromItaipu until May 2013. Amounts are calculated based on the U.S. dollarexchange rate as of December 31, 2008.

 

(3)           In obtaining theconcessions for construction of some generation projects, Cemig Generation andTransmission undertook to make payments to the concession-granting power, overthe period of validity of the contract, as compensation for commercialoperation.

 

(4)           It includes spotmarket, purchases through auctions and bilateral agreements

 

**Item 6.**           Directors, Senior Management and Employees

** **

**Directorsand Senior Management**

** **

CEMIG is managed by our Board of Directors, which has 14 members, eachwith his or her respective substitute member, and by our Executive Board, whichconsists of nine Chief Officers. Since it is the majority stockholder, thegovernment of the State of Minas Gerais has the right to elect the majority ofour Board of Directors and can thus control the decisions of the Board’smeetings. Every holder of CEMIG common shares has the right to vote in anelection for members of our Board of Directors. Under the Brazilian CorporateLaw, any stockholder holding at least 5% of our common shares in circulationmay request the adoption of a multiple vote procedure, which confers upon eachshare a number of votes equal to the present number of members of our Board ofDirectors and gives the stockholder the right to accumulate his or her votes inone sole candidate, or distribute them among several.

 

Under the Brazilian Corporate Law, holders of preferred sharesrepresenting at least 10% of our voting capital, and also holders of commonshares representing at least 15% of our registered capital (other than thecontrolling stockholder) have the right to appoint a member of the Board ofDirectors and his or her respective substitute member. If none of the holdersof common shares or preferred shares qualifies under the minimum limitsspecified above, shareholders representing, in the aggregate, a minimum of 10%of our registered capital may combine their holdings to appoint a member of theBoard of Directors, and his or her respective substitute member.

 

CEMIG and its wholly-owned subsidiaries Cemig Generation andTransmission and Cemig Distribution all have the same Board of Directors,Fiscal Council and Executive Board, except that, in relation to thewholly-owned susbsidiaries’ Executive Board, only Cemig Distribution has aChief Distribution Sales Officer, and only Cemig Generation and Transmissionhas a Chief Generation and Transmission Officer.

 

**Boardof Directors**

** **

Our Board of Directors normally meets once every two months. Itsresponsibilities include setting the corporate strategy, general orientation ofour businesses and election, dismissal and monitoring of our Chief Officers.

 

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Each member of the Board of Directors has a substitute member, electedin a General Meeting of Stockholders in the same manner as the member. The substitute members act as replacements for their respective memberswhenever the members are not available to carry out their normal functions asmembers, or when there is a vacancy on the Board of Directors, until theappointment of a replacement member to fill the vacancy. No member of the Boardof Directors, and no substitute member, has any employment contract with ourCompany or any subsidiary that provides for any benefit in the event ofrescission of the employment contract.

 

The members of our Board of Directors are elected for a period of threeyears, and may be re-elected. The complete body of members is elected everythree years. Our Board of Directors is made up of 14 members, of whom eight areelected by the government of the State of Minas Gerais, five by SouthernElectric Brasil Participações Ltda., or Southern, and one by the holders ofpreferred shares. The periods of office of the present members of our Board ofDirectors expire in April 2012. The names, positions and dates of originalappointment of our present board members and their respective substitutemembers are as follows:

 
| **Name**                                     | ** ** | **Position**      | ** ** | **Date of original    appointment** |
|----------------------------------------------|------------|-------------------|------------|-------------------------------------|
| Sérgio Alair Barroso                    |       | Chairman          |       | March 5, 2009                  |
| Paulo Sérgio Machado  Ribeiro           |       | Substitute Member |       | April 25, 2008                 |
| Djalma Bastos de Morais       |       | Vice-Chairman     |       | January 14, 1999               |
| Lauro Sérgio  Vasconcelos David         |       | Substitute Member |       | April 28, 2006                 |
| Francelino Pereira dos  Santos               |       | Board Member      |       | February 27, 2003              |
| Luiz Antônio Athayde  Vasconcelos       |       | Substitute Member |       | February 27, 2003              |
| Antônio Adriano Silva                   |       | Board Member      |       | January 14, 1999               |
| Marco Antonio Rodrigues da Cunha             |       | Substitute Member |       | February 27, 2003              |
| João Camilo Penna                       |       | Board Member      |       | April 25, 2008                 |
| Guilherme Horta  Gonçalves Junior       |       | Substitute Member |       | February 27, 2003              |
| Britaldo Pedrosa Soares  (1)                 |       | Board Member      |       | April 25, 2008                 |
| Jeffery Atwood Safford  (1)                  |       | Substitute Member |       | April 25, 2008                 |
| André Araújo Filho (1)             |       | Board Member      |       | April 25, 2008                 |
| Andréa Leandro Silva  (1)               |       | Substitute Member |       | May 7, 2004                    |
| Roberto Pinto Ferreira Mameri Abdenur (1)    |       | Board Member      |       | April 25, 2008                 |
| Clarice Silva Assis (1)                      |       | Substitute Member |       | July 24, 2008                  |
| Evandro Veiga Negrão de Lima (1)        |       | Board Member      |       | April 28, 2006                 |
| Maria Amália Delfim de Melo Coutrim (1) |       | Substitute Member |       | April 25, 2008                 |
| Thomas Anthony Tribone  (1)                  |       | Board Member      |       | July 24, 2008                  |
| José Castelo Branco da Cruz (1)         |       | Substitute Member |       | April 25, 2008                 |
| Eduardo Lery  Vieira                         |       | Board Member      |       | May 28, 2003                   |
| Kleber Antonio  de Campos                    |       | Substitute Member |       | March 05, 2009                 |
| Maria Estela Kubitschek  Lopes               |       | Board Member      |       | February 27, 2003              |
| Fernando Henrique  Schüffner Neto       |       | Substitute Member |       | June 22, 2007                  |
| Alexandre Heringer  Lisboa                   |       | Board Member      |       | February 27, 2003              |
| Franklin Moreira  Gonçalves             |       | Substitute Member |       | February 27, 2003              |
| Guy Maria Villela  Paschoal (2)              |       | Board Member      |       | April 25, 2008                 |
| Cezar Manoel de  Medeiros (2)                |       | Substitute Member |       | April 29, 2009                 |

 

(1)     Elected by Southern.

(2)     Elected by the preferredshareholders.

 

Below is some briefbiographical information about each member of the Board of Directors:

 

*Sergio Alair Barroso —*Mr. Barroso has a degree ineconomics from São Lucas University (São Paulo); a master’s degree ininternational economics from the University of Boston (USA); andspecializations in business administration from the University of Michigan(USA) and management of executives from Columbia University (USA) and theGetúlio Vargas Foundation (São Paulo). He is a former chairman of the Board ofDirectors of Fosfertil, Ultrafertil and Fertifos. He works as a consultant andis a partner in ventures in the areas of agribusiness, social responsibilityand environmental investments.

 

*Djalma Bastos de Morais* — Mr. Morais holds a bachelor’sdegree in engineering from the Military Institute of Engineering and hascompleted additional post-graduate studies in telephony and computers at thesame institute. Since January 1999 he has been our Chief ExecutiveOfficer, and since July 2002 he has been the Chief Executive Officer ofEmpresa de Infovias S.A. From January 1999 to December 2004 he wasthe 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 

 

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BrasileirasS.A.—Telebrás; chief operating officer of Telecomunicações de MatoGrosso—Telemat; chief operating officer of Telecomunicações doAmazonas—Telemazon; and manager of Telefônica Municipal S.A.—Telemusa.

 

*Francelino Pereira dos Santos* — Mr. Santos earned a law degreefrom the Law School of the Federal University of Minas Gerais in 1949. Mr. Santoswas a Minas Gerais state senator from 1995 to 2002 and the Governor of MinasGerais from 1979 to 1983. He also was a congressional representative for foursuccessive terms from 1963 to 1979 and alderman for the city of Belo Horizontefrom 1951 to 1954. From 1961 to 1966 he was Chief of Cabinet of the MinasGerais State Secretary of Internal Affairs and Justice, Chief of the MinasGerais State General Management Department and Chief Counselor forMunicipalities Affairs of the Cabinet of the Governor. From 1985 to 1990, hewas vice-president of management of Banco do Brasil S.A. and the chiefexecutive officer of Acesita from October 1983 to August 1984. Mr. Santoswas also a professor and director of the Municipal Accounting High School inBelo Horizonte from 1955 to 1959.

 

*Antônio Adriano Silva* — Mr. Silva holds a businessadministration degree with a specialization in marketing. He hasworked for several private entities, including Mesbla S.A., Empresa Brasileirade Varejo S.A.—Embrava, Agência Jornalística Imagem, Associação Comercial deMinas, Asa Criação de Publicidade, and Coteminas.

 

*JoãoCamilo Penna* — Mr. Pennaearned his degree in engineering in 1948 from Minas Gerais Federal University(UFMG). He was a works engineer with CVRD from January 1949 to April 1951;Planning and Works Officer at CEMIG from May 1951 to March 1961; andTechnical Director of CEMIG from March 1961 to March 1967. He wasChairman of CEMIG from March 1967 to March 1975. He served as FinanceSecretary of Minas Gerais State in the governments of Aureliano Chaves andOznam Coelho from March 1975 to March 1979, as Brazil’s Trade andIndustry Minister 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 Directors of Eletrobrás, Vice-Chairman of the Brazilian TechnicalStandards Association, Director of the Large Dams Committee, and of theBrazilian Group for the World Energy Conference. From 1990 he was a consultantand member of boards of organizations such as Mannesmann, the Dom CabralFoundation, Copersucar, Companhia Siderúrgica do Pará, Companhia Força e LuzCataguazes-Leopoldina, Biobrás, Copasa, and the Minas Gerais Industries’Federation (Fiemg). From 1984 to 1992 he was a member of the Board of Directorsof Itaipu Binacional, and Chairman of the Board of the Horizontes Institute atAtech—Sivam. At Coopers and Lybrand, he was president of the SupervisionCommittee of the Brazilian Industry Competitiveness Study. In 2002 he wasConsultant in the preparation of the study “Minas Gerais in the 21st Century”,an initiative of the Minas Gerais Development Bank (BDMG); and President of theorganization “Economy and Energy—E&E.” He was a member of the President ofthe Republic’s Ethics Committee, from September 2000 to March 2005,and from April 2004 to April 2005 was a member of the Public EthicsCommittee of the Minas Gerais State government.

 

*Britaldo Pedrosa Soares —* Mr. Soares earned his degree in Metallurgical Engineering from MinasGerais Federal University, with postgraduate studies in Engineering Economics from the DomCabral Foundation, and an extension course in Management and Leadership fromDarden School of Business of the University of Virginia. He began his careerwith Citibank/Citigroup in 1980, where he was Corporate Bank and InternationalCorporate Finance Vice-President from 1988 to 1992. From 1992 to 1998 he wasFinancial Director of the pulp area of the Caemi/Jari Companies, and CEO ofJari Celulose. He was Vice-President for Finance of Enron South America, andPrisma Energy, the holding company of the electricity distributor Elektro, fromFebruary 1999 to August 2005. At Elektro he was Finance and InvestorRelations 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 from MackenzieLaw Faculty in 1968, with postgraduation in Labor Law from the Getúlio VargasFoundation. He studied in the Global Leadership course at the InternationalStrategic Studies Center at Georgetown University, Washington DC, and haspublished 3 books: A Escola do Rio—Fundamentos Políticos da Nova EconomiaBrasileira, pubished by Editora Alfa Omega, in 1998; MercadosSoberanos—Globalização, Poder e Nação, pubished by Editora Alfa Omega, in 1999;and Moeda e Prosperidade—O Impasse do Crescimento na Política de Estabilização,pubished by Editora Top Books, in 2005. He was Treasury Director of TheBrazilian Household Appliances Industry Association (Abinee) for three periodsof office, from 1974 to 1983, and First Treasurer of the National HousholdAppliances Manufacturers’ Association (Sinaees) from 1974 to 1985, also forthree periods of office. He was Chairman of Emplasa,Empresa de Planejamento Metropolitano da Grande São Paulo S.A., in 1994;Financial Director of Prodam—Companhia de Processamento de Dados do Municípiode São Paulo, in 2000; and from 1972 to 1983 was Financial Director and CEO ofBúfalo 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,

 

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Coordinatorfor Economic and Trade Affairs to the Office of the Foreign Relations Ministerfrom 1979 to 1984 and Secretary General for Foreign relations from 1993 to1995. He has been Assistant Consul-General in London from 1969 to 1973, FirstSecretary in the Brazilian Embassy in Washington from 1973 to 1975; and wasBrazilian Ambassador to Ecuador from 1985 to 1988, to China from 1989 to 1993,to Germany from 1995 to 2002, to Austria from 2002 to 2004, and to the USA from2004 to 2007. Since 2007 he has acted as consultant on international politicaland economic subjects related to Brazil.

 

*Evandro Veiga Negrão de Lima*— Mr. Negrão de Lima graduated witha degree in medicine with a specialization in psychiatry from the medicalfaculty of Minas Gerais Federal University in 1964, where, after hospital anduniversity experience in Colorado, USA, he later became a lecturer andsubsequently Monitor in Forensic Medicine. He was a clinical psychiatrist forthe private social security institute of the employees of Minas Gerais state,retiring as head of medical services for the interior of the state. He has beenDirector of the Minas Gerais Commercial Association, Vice-president of the RealEstate Company Managers’ Club, Vice-president of América Football Club,director of the two steel trading companies, Cobraço and Cobrafer, and alicensed aircraft pilot since 1968. He is currently chairman of the planningand engineering company Sancruza, president of the Pampulha yacht club in BeloHorizonte, and chairman of the construction and development company, NL, andtwo real estate management companies.

 

*Thomas Anthony Tribone*— Mr. is the founder and currentlyCEO of the Guggenheim Global Infrastructure Company. As a former ExecutiveVice-president of AES Corporation, he took part in the initial project thatbrought AES into being, and has extensive experience in operations andtransactions in the electricity and infrastructure sectors. He has also been amember of the management of Atlantic Richfield Company. He has a degree inchemical engineering from Case Western Reserve University, and an MBA degreeand a law degree from Duquesne University.

 

*Eduardo Lery Vieira*— Mr. Vieira earned his MechanicalEngineering degree from Pontifical Catholic University of Minas Gerais in 1976,with postgraduate studies in Management from IBMEC Business School andEconomical Engineering from Dom Cabral Foundation. He worked at the DevelopmentBank of Minas Gerais, or BDMG, from 1976 to 2003 in various positions, such as,trainee, engineer and manager. He was Under Secretary of Industry, Trade andServices of the State Secretary of Economic Development from 2003 to 2005. In2005 he was appointed as director of the Minas Gerais Institute for IntegratedDevelopment, or INDI, and in July 2007 he assumed responsibility as thePresident of INDI.

 

*José Castelo Branco da Cruz*—****Mr. Brancoda Cruz 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 & Dias law office. He was Counsel and legal manager forthe Lorentzen Group from 1986 to 1992. He was also Assistant Executive Attorneyto the government of the State of Maranhão from 1983 to 1986.

 

*Maria Estela Kubitschek Lopes* — Mrs. Lopes holds a degree inarchitecture and is an interior designer and entrepreneur. She is a managingpartner of DF Consultores Ltda. and of Santa Júlia Importação, Exportação eParticipações. Mrs. Lopes is also the adviser to the president of theMunicipal Theater Foundation of the City of Rio de Janeiro, to the president ofthe Friends of the State of Rio de Janeiro—AME-RIO and to the president of theboard of Casa Santa Ignez (a philanthropic association responsible for thenourishment and education of children and aid to low-income families in theRocinha neighborhood in Rio de Janeiro). She was one of the founders ofMemorial JK, an organization founded in the memory of Juscelino Kubitschek deOliveira (former President of Brazil), and served as its vice-president from September 1981to May 2000 and as acting president since October 2000. Mrs. Lopeshas also served as president of the council of the Cultural InstituteCesgranrio, vice-president of the council of the Women’s Bank, president of theBeneficent Institutions of the State of Rio de Janeiro and a member of the councilof Casa das Palmeiras, a cultural institution. Mrs. Lopes has receivedseveral cultural and social merit awards.

 

*Alexandre Heringer Lisboa* — Mr. Lisboa holds a degree inelectrical engineering from the Polytechnic Institute of the PontificalCatholic University of Minas Gerais and a master’s degree in mechanicalengineering with an emphasis in solar energy from the Federal University ofParaíba, in the city of João Pessoa (State of Paraíba). He also has receivedspecialized wind energy training from the Deutsches Windenergie-Institut andfrom the Summer School on Wind Energy Technology at the University of Oldenburgin Germany. Mr. Lisboa has worked as an engineer for CEMIG since May 1985and he is a director of SENGE as well as a counselor of the Regional Council ofEngineering and Architecture. Mr. Lisboa served as an alternate member ofthe Board of Directors of CEMIG from January 1999 to December 2000.He was a researcher for and a consultant to the Technological Foundation Centerof Minas Gerais—CETEC from November 1983 to April 1985. From January 1977to May 1979, he was a trainee at Usiminas, Companhia SiderúrgicaBelgo-Mineira and Delle-Alstom S.A.—DASA.

 

*Guy Maria Villela Paschoal —*Mr. Villela Paschoal, holds a degreein mechanical and electrical engineering from the Federal University of MinasGerais (UFMG). He is a former Chairman of CEMIG’s Board of Directors and hasworked as an employee of CEMIG for 28 years.

 

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**Boardof Executive Officers**

 

Our Executive Board is responsible for putting into effect thedecisions of our Board of Directors and for day-to-day management. The Membersof the Executive Board, the Chief Officers, have individual responsibilitiesestablished in the by-laws and hold their positions for a period of office ofthree years. The period of office of the present Chief Officers expires in April 2012.The Chief Officers are elected by our Board of Directors. Usually, ordinarymeetings are held at least twice per month, with extraordinary meetings heldwhenever called by the Chief Executive Officer, or CEO, or by two ChiefOfficers other than the CEO.

 

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

 
| **Name**                                  | ** ** | **Position**                                                           | ** ** | **Date of original  appointment** |
|-------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------|
| ** **                                | ** ** | ** **                                                             | ** ** | ** **                        |
| Djalma Bastos de Morais                   |       | Chief Executive Officer  (CEO)                                         |       | January 14,  1999            |
| Arlindo Porto Neto                        |       | Deputy CEO                                                             |       | January 20,  2009            |
| José Carlos de Mattos                |       | Chief New Business  Development Officer                                |       | January 9,  2007             |
| Luiz Henrique de Castro Carvalho          |       | Chief Generation and  Transmission Officer                             |       | August 18,  2008             |
| Fernando Henrique  Schüffner Neto    |       | Chief Distribution and  Sales Officer                                  |       | August 18,  2008             |
| Luiz Fernando Rolla                       |       | Chief Officer for  Finance, Investor Relations and Control of Holdings |       | 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              |
| José Carlos de Mattos                |       | Chief Officer for the  Gas Division                                    |       | February 12,  2009           |

 

Belowis brief biographical information about each member of the Executive Board.

 

*Djalma Bastos de Morais* — For biographical information regardingMr. Morais, see “— Board of Directors.”

 

*Arlindo Porto Neto*— Mr. Porto Neto has a degree inBusiness Administration and Accounting from the Federal University ofUberlândia. Since 2004 he has been Vice President of the Minas Gerais EconomicDevelopment Company, or Codemig. He was Senator for the State of Minas Geraisfrom 1995 to 2003 and Brazil’s Minister of Agriculture and Supply from 1996 to1998. From 1991 to 1994 he was Deputy Governor of the State of Minas Gerais.From 1983 to 1988 he was Mayor of Patos de Minas.

 

*José Carlos de Mattos —*Mr. Mattos has a degree inliterature from the Central University of Belo Horizonte. He is currently CEOof Gasmig. From 2004 to 2007 he was CEO of Previminas, the Social SecurityFoundation of the State of Minas Gerais. In 2003 and 2004 he was FinancialDirector of Codemig. From 1983 to 1992 he was Regional Superintendent of theFederal Savings Bank (*Caixa Econômica Federal*)in the states of São Paulo, Rio de Janeiro and Minas Gerais, and was alsoFinancial Director of the Federal Savings Bank from 1992 to 1994. During thesame period of 1992 to 1994, he was also a Director of Biape, theInter-American Savings and Loan Bank. In 1995 and 1996 he was Vice President ofBemge, the state bank of Minas Gerais. He was appointed CEMIG’s Director forPlanning, Projects and Construction in January 2007.

 

*Luiz Henrique de Castro Carvalho—* Mr. Castroholds a degree in electrical engineering from the Federal University of MinasGerais (UFMG), with post-graduate work in Systems Analysis, specializing inMainframe Support, in 1983, and an International Executive MBA in BusinessManagement and Information Technology from the Getúlio Vargas Foundation (FGV)in 2000. Mr. Castro began his career in the Research and Development Centerof Telebrás as an electrical engineer from 1983 to 1984 and joined CEMIG as aSupport Analyst in the Software and Support Group in 1984. He has held thefollowing positions at CEMIG: Group Leader in the IT User Support Division,Joint Head of the IT User Support Division, Assistant in the IT SupportDepartment, Manager of the IT User Support Division, Superintendent ofTelecommunications and IT, Superintendent of Material, Logistics and Services,Assistant to the President of Gasmig, and Substitute Member of the Board ofDirectors of CEMIG. Other positions he holds in the CEMIG group include:Director of Horizontes Energia S.A., Member of the Board of Directors ofCentral Termelétrica de Cogeração S.A., and Substitute Member of the Board ofDirectors of CGET (Strategic Technology Management Center) and CentralHidrelétrica Pai Joaquim S.A. He has also been Administrative Director of theCEMIG Employees’ Investment Club (CLIC) from 1999 to 2003, Social ActionDirector of the Minas Gerais Information Technology and TelecommunicationsUsers’ Association (SUCESU-MG) from 2000 to 2002, and President of the CEMIGInter-Management Association (AIC) from 2005 to 2007.

 

*Fernando Henrique Schüffner Neto —* Mr. Schüffner received his degreein electrical engineering from PUC University of Minas Gerais in 1982, a master’sdegree from Unicamp in 1984 and an MBA from Ibmec in 2000. After working inuniversity research, he joined CEMIG in 1985, working as a manager and regionaladministrator before becoming, successively, General Planning and CoordinationManager for Distribution, Expansion of Distribution, and Expansion of theDistribution Market. He then became Executive Coordination General Manager forthe Light for Everyone (*Luz para Todos*)Program of CEMIG. He has spoken at many conferences at universities andpublished numerous scientific articles between 1983 and 2005, ranging from awork on

 

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topologiesof switching circuits in 1983 to co-authorship of “Fuzzy Preference Relationsand Multiobjective Decision Making” presented at the Fourth IEEE InternationalWorkshop on Soft Computing as Transdisciplinary Science and Technology,**in Muroran, Japan, in May 2005. His works presented atinternational congresses include three papers on induction motor control.Courses in which he has participated include the Amana Key APG managementcourse in São Paulo in 2004. He was elected Chief Generation and TransmissionOfficer of CEMIG in January 2007 and, on August 18, 2008, was electedChief Distribution and Sales Officer.

 

*Luiz Fernando Rolla* — Mr. Rolla joined CEMIG in 1974. Mr. Rollaearned a degree in electrical engineering from the Federal University of MinasGerais in 1974, having finished several specialization courses. He became CEMIG’sInvestor Relations Manager in 1986 and was appointed Chief Financial andInvestor Relations Officer in January 2007. As CEMIG’s Investor RelationsManager, Mr. Rolla was responsible for the formulation and implementationof CEMIG’s investor relations strategy beginning in 1986, including thestructuring of the Level I and II ADR programs in 1993 and 2001, share saletransactions, prospectuses, investor presentations, roadshows, CVMregistrations, detailed corporate governance matters, shareholders’ meetings,shareholder services, the Annual Report, our website, earnings releases andconference calls, market analyst meetings, and presentations at many of themost important emerging markets conferences in the last 15 years. In his 33years with the Company he has also been involved in other responsibilitiesincluding coordination of long-term planning, structured company-wide budgetcontrol and cost analysis, project finance transactions, and negotiation ofimportant debt rollover contracts and issues. Recognition of Mr. Rolla’swide experience and present outstanding status in Brazilian investor relationsincludes Apimec’s “Best IR Professional” in 1999 and 2005; “Best Brazilian IRO”from *IR*Magazine in 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 adegree in civil engineering from Minas Gerais Federal University in 1978, withlater specialization in structures and transportation, and in engineeringvaluation, accounting, and economics. He has subsequently gained numerousqualifications in quality management, finance, accounting and related subjects.Among university lecturing activities, has given a course in Creation ofCompanies and Business at Una University since 2001. He joined BDMG (the MinasGerais State Development Bank) in 1978, working in assessment of publicprojects, including major infrastructure development projects. He served as Presidentof the Employees’ Association from 1998 to 1990, and Manager of the FinancialDivision from 1988 to 1991. From 1988 to 1990 he was also President of theNational Association of Official Banks’ Representative Associations. From 1991to 1995 he was chairman of Minas Gerais Silos and Warehouses Company, thepublic-sector company coordinating the state’s farming infrastructurefacilities, and from 1995 to 1999 was Chairman of INDI — the Minas GeraisDevelopment Institute — which provides support for numerous importantindustrial development projects in the State of Minas Gerais. During this timehe negotiated international missions to Spain, France, Belgium, Holland,Canada, Argentina, Korea, Japan, and the USA to promote cooperation with MinasGerais industry. He returned to the BDMG in 1999 to handle developmentplanning, coordinating the state’s economic and social development budgeting,and other important strategic studies. He was appointed Chief CorporateManagement Officer of CEMIG in January 2007.

 

*Bernardo Afonso Salomão de Alvarenga*—**Mr. Alvarengaearned a degree in electrical engineering from Minas Gerais Federal Universityin 1978, and an MBA from the Getúlio Vargas Foundation in 2001. He joined CEMIGin 1980, and worked in operational and pre-operational sales, sales totransmission consumers, and large client operational sales, before becoming ourSales Superintendent for Large Clients from 1998 to 2001, and for corporateclients from 2001 to 2005. From March 2006 to April 2007, he was ourSuperintendent for Wholesale Electricity Purchases and Sales, and in April 2007he was appointed our Chief Trading Officer. Mr. Alvarenga has beeninvolved in several strategic projects at CEMIG, including the pioneeringsystem for differentiated tariffs based on the season and time of day, from1980 to 1982. His renegotiations in 1998 with industrial clients in defaultresulted in defaults being brought to near-zero, improving CEMIG’s financialposition and resulting in the acquisition of several small hydroelectric plantsand one thermal plant.

 

**Compensationof Directors and Executive Officers**

** **

For the year ended December 31, 2008, the aggregate amount ofcompensation, including pension and other retirement benefits, that we paid toall directors and executive officers was approximately R$6.5 million.

 

**Fiscal Council**

** **

Our Fiscal Council is requiredto meet once every quarter, but in practice it has been meeting once a month.Our Fiscal Councilconsists of three to five members and their respective alternates elected byour shareholders at the annual meeting for a one-year term. Holders of thepreferred shares as a group are entitled to elect one member of the FiscalCouncil and a corresponding alternate. Holders of common shares representing atleast 10%, individually or in the aggregate, are entitled to elect one memberof the Fiscal Council and a corresponding alternate. The primary responsibilityof the Fiscal Council, which is independent from management and from theindependent public accountants appointed by the Board of Directors, is toreview our financial statements and report on them to our shareholders. TheFiscal Council is also entitled to give opinions on any proposals from ourmanagement to be submitted to the shareholders’ meeting related to (i) changesin our share capital, (ii) issuances of debentures or rights offerings 

 

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entitlingthe holder to subscribe for equity (bonus de subscrição), (iii) investmentplans and capital expenditures budgets, (iv) distribution of dividends, (v) changesto our corporate form and (vi) corporate restructurings such as mergers,consolidations and spin-offs. The Fiscal Council also examines the activitiesof management and reports these activities to the shareholders.

 

The current members of the Fiscal Council,and their Substitute members, all whose terms expire on April 30, 2010,are as follows:

** **
| **Name**                                                  | ** ** | **Position**       | ** ** | **Date of initial  appointment** |
|-----------------------------------------------------------|------------|--------------------|------------|----------------------------------|
| ** **                                                | ** ** | ** **         | ** ** | ** **                       |
| Luiz Guarita 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           |
| Vicente de Paulo Barros Pegoraro (2)                      |       | Member             |       | April 29, 2009              |
| Ari Barcelos da Silva                                     |       | Substitute  Member |       | April 29, 2005              |
| Marcus Eolo de Lamounier Bicalho                          |       | Substitute  Member |       | February 27, 2003           |
| Leonardo Guimarães  Pinto (1)                        |       | Substitute  Member |       | April 26, 2007              |
| Aliomar Silva Lima                                        |       | Substitute  Member |       | February 27, 2003           |
| Newton de Moura (2)                                       |       | Substitute  Member |       | April 29, 2009              |
| (1) Elected  by Southern.                            |       |               |       |                             |
| (2) Elected  by the holders of the preferred 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. UnderSection 10A-3 of the SEC rules on Audit Committees of listedcompanies, non-U.S. issuers are permitted not to have a separate AuditCommittee made up of independent members if there is a Fiscal Councilestablished and chosen in accordance with the legal rules of its origincountry, expressly requiring or allowing that such council follow certainobligations. Also in accordance with this exemption, a Fiscal Council mayexercise the obligations and responsibilities of an Audit Committee of theUnited States up to the limit permitted by Brazilian Law. The financial experts of our FiscalCouncil are Luiz Otávio Nunes West and Ari Barcelos da Silva.

 

**Employees**

** **

As of December 31, 2008, we had 10,422 employees,of which 265 were at management level, and we had an average of 353 temporaryemployees. As of December 31, 2007 we had 10,818 employees, of which 236were at the management level, and we had an average of 225 temporary employees.As of December 31, 2006, we had 10,658 employees, of which 180 were at themanagement level, and we had an average of 111 temporary employees. This tableshows the breakdown of our employees by type on those dates:

 
| ** **                                       | ** ** | **Number of Employees at** |
|--------------------------------------------------|------------|-------------------------------------------|
| ** **                                       | ** ** | **December 31, 2008**           | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** |
| Managers                                         |       | 265                                       |   | 236 |   | 180 |
| Professional staff                               |       | 1,398                                     |   | 1,427 |   | 1,451 |
| Operational technical staff and office employees |       | 8,759                                     |   | 9,155 |   | 9,027 |
| Total                                            |       | 10,422                                    |   | 10,818 |   | 10,658 |

 

In 2008, 6 employees were hired and 402 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 13 years ago,CEMIG ceased to follow the previous market practice in Brazil of automaticallyadjusting salaries based on inflation.

 

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In December 2008, after wide-ranging discussion of all the termsand conditions with the union entities that represent our employees, wecompleted the annual collective wage agreement for the period from November 1,2008 to October 31, 2009. The resulting collective agreement establishedan increase of 7.26% for all salaries, effective November 1, 2007. It alsoestablished an extraordinary distribution of amounts under the profit sharingprogram totaling 4.67 times the value of the monthly remuneration of eachemployee, which was paid in December 2008.

 

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 would not be entitled to the “MariaRosa” special bonus of 16.67% in addition to their base salary.

 

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. On November 20, 2008, 10% of the employees participated in an eighthour work stoppage during the collective agreement negotiations for2008/2009. 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 what effect, if any, future litigation underthe labor laws may have on our operating 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,” CEMIG provides itsemployees hired on or before October 31, 2005 with an annual 1% increasein monthly base salary for each year of employment with CEMIG, up to a limit of35 years. Based on an agreement with our labor unions, on April 27, 2006,CEMIG offered each of its employees hired on or before October 31, 2005 anup-front payment in exchange for the relinquishment by the employee of his orher rights to the Anuênio. Under the terms of this offer, CEMIG pays theemployee an amount equal to (i) an estimate of the future amounts to bepaid to the employee under the Anuênio, but based on the number of yearsremaining for the employee to complete his or her contributions to the NationalSocial Security Institute, or INSS, rather than the remaining years to reach upto the limit of 35 years under the Anuênio, (ii) multiplied by a 12%discount rate and (iii) reduced by the application of a variable reductionfactor stipulated by the Company for each individual employee. The total amountpaid to our employees as a result of this offer was approximately R$178million.

 

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.

 

·             The collective labor agreement signed in2008 added flexibility to the clause that previously guaranteed a minimumheadcount of 10,000 employees; now allowing this number to be as low as 9,000.It also permitted the Company to employ less than 9,000 people, provided thatthis reduction arises from employee enrollment into the Voluntary RetirementProgram or the Voluntary Dismissal Program, dismissals (rescission of the employee contract) forjust cause, rescissions of the employment contract at the employee’s initiativeor by joint agreement, and retirement.

 

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*Profit Sharing Plan*

 

In 1995, we established a profit-sharing program for 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 2008, the payment of employees’ profit shares, including mandatorycharges and payments based on payroll, totaled R$362 million and were paidin December. In 2007,payment of employees’ profit shares, including the mandatory charges andpayments based on payroll, totaled R$455 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, 2008, a total of R$125 million was paid inbenefits to employees, consisting of pension plan contributions and assistancebenefits.

 

*Voluntary*Retirement 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. In 2008, 486 employees accepted the terms of our Voluntary RetirementProgram.

 

*Voluntary Dismissal Program*

 

In April 2009, CEMIGimplemented a Voluntary Dismissal Program, starting in April 2009 andending in June 2009, which sets rules and conditions applicable tofree and voluntary rescission of employment contracts by employees, and alsoestablishes criteria applicable to employees who meet certain retirementrequirements. Employees who opt for Program B, as established in the VoluntaryDismissal Program, receive a payment equal to four times their monthly salaryat the time of the employment agreement termination. The Company may definesuch termination until January 2011.

 

*Programfor*Sharing in Profit, Results, and Productivity

* *

CEMIG authorized a distributionequal to 3% of its consolidated operational results for the year ended December 31,2008 under its Program for Sharing in Profit, Results, and Productivity, whichwas paid in March 2009.

 

*Health and Safety*

* *

With the establishment of our Health and Safety Management System in2006, our standards for classifying work accidents became more rigorous. Thishas resulted in a higher number of accidents being recorded, but generally of aless serious nature than accidents in previous years. The increase in safetyreflects the increased safety measures taken by the Company, and also bettermanagement by contractors. In 2008, our work-related accidents, including thoseof employees of our contractors, caused 11.6% fewer employee absences and were54.89% less severe, both compared to 2007.

 

We took several actions in the last two years to ensure the safety,health and wellbeing of our own employees and those of contracted entities.These included: creation of the intranet Portal for Specialized SafetyEngineering and Work-related Medicine Services (SESMT) to disseminateinformation and orientations for prevention of accidents; and the “SafetyMoment”, in which all employees are invited, on the first Monday of each month,to reflect on Safety, Health and Wellbeing.

 

**ShareOwnership**

** **

Each of our directors and executive officers beneficially owns lessthan 0,001% of our preferred shares and less than 0,003% of our common shares.

 

**Item 7.**           MajorShareholders and Related Party Transactions

** **

**PrincipalShareholders**

** **

As of December 31, 2008, the State Government owned, directly orindirectly, 110,569,812 common shares, or 50.97% of our outstanding votingstock, and 4,974,466 preferred shares, or approximately 1.78% of thoseoutstanding. As of the same date, Southern, our second largest shareholder,owned 71,506,613 common shares, or approximately 32.96% of those outstanding. Southern 

 

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is ajoint venture formed in 1994. We believe that the principal participant inSouthern is Cayman Energy Traders, a subsidiary of Mirant Corporation (formerlySouthern Energy Inc.), a large United States-based power company. We believethat the other significant member of Southern is, as of December 31, 2008,AES Corporation, a global power company based in Arlington, Virginia that isengaged in the energy generation, distribution and retail supply businesses. Webelieve that the Opportunity Fund, a Brazilian investment fund, has a minorityinterest in Southern through 524 Participações S.A. Our principal shareholdersdo not have different 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 31,2008.

 
| **Shareholder**                                 | ** ** | **Common  Shares** | ** ** | **%  of Class** | ** ** | **Preferred  Shares** | ** ** | **%  of Class** |
|-------------------------------------------------|------------|--------------------|------------|----------------------|------------|-----------------------|------------|----------------------|
| State Government (1)                            |       | 110,569,812        |       | 50.97%               |       | 4,974,466             |       | 1.78%                |
| Southern                                        |       | 71,506,613         |       | 32.96%               |       | ---                   |       | ---                  |
| All directors and executive officers as a group |       | 6,333              |       | ---                  |       | 809                   |       | ---                  |
| Other                                           |       | 34,840,636         |       | 16.06%               |       | 274,191,265           |       | 98.14%               |
| Total of outstanding shares                     |       | 216,923,394        |       | 100%                 |       | 279,166,540           |       | 99.92%               |
| Treasury shares                                 |       |               |       | ---                  |       | 211,579               |       | 0.08%                |
| Total of authorized and issued shares           |       | 216,923,394        |       | 100%                 |       | 279,378,119           |       | 100%                 |

 

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(1)                                  The shares in this line item attributedto the State Government include shares held by MGI, other State Governmentagencies and state-controlled companies.

 

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, 2008, we had 41 common shareholders of recordin the United States, holding a total of 6,695,217 common shares. We also had213 preferred shareholders of record in the United States, holding a total of133,574,259 preferred shares. These numbers do not include the 82,631,960preferred shares and 16,205 common shares converted into ADRs.

 

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 February 8, 2008, CapitalResearch and Management Company owned 13,644,250 preferred shares of CEMIG,corresponding to 4.98% of our preferred shares and, as a result of buyingtransactions on February 8, 2008, now owns a total of 13,990,050 preferredshares of CEMIG, corresponding to 5.11% of our preferred shares. We are notaware of any changes in ownership of our outstanding preferred shares bymajority shareholders in 2006 or 2007. Although our by-laws do not provide anyrestrictions concerning a change in our control, a state law authorizing achange of control would be required for a change of control to take place.Because we are a state-controlled company, the sale of more than 50% of thevoting stock of CEMIG by the State Government requires the passage of specificauthorizing legislation by the legislature of Minas Gerais.

 

**RelatedParty Transactions**

** **

We are party to the following related-party transactions:

 

·                  Our agreement with the State Governmentwith respect to the CRC Account and related financial income and provision forloss and VAT advance payments, expenses, assets and liabilities;

 

·                  Our agreement with Forluz, the entityresponsible for managing our employee pension fund, pertaining to the fund andrelated balances; and

 

·                  Our agreement with COPASA, a Minas Geraisstate-controlled company, related to accounts receivable from energy sales.

 

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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

** **

**ConsolidatedFinancial Statements and Other Financial Information**

** **

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**

** **

TheCompany and its subsidiaries and jointly-controlled companies are parties inadministrative and court proceedings involving tax, regulatory, administrative,environmental and third-party matters relating to its business. There is also alegal case in progress arguing the validity of the agreement signed in 1997among our principal stockholders.

 

Theprovisions for contingencies in these proceedings have been made in accordancewith the criteria in the Public Electricity Service Accounting Manual, amountsbeing provisioned in proceedings when the chance of loss is rated “probable.”The following paragraphs give a summary of the most material proceedings towhich we are a party.

 

For more information regarding such contingencies, seeNotes 17 and 27 to our consolidated financial statements.

 

*Shareholders’ Agreement*

* *

In connection with the sale in 1997 of approximately33% of our shares to Southern, Southern and the State Government entered into ashareholders’ agreement that contained special quorum and veto provisionsgranting Southern expanded control over certain decisions. In 1999, after a newState Government administration took office, the State Government filed alawsuit seeking to nullify the shareholders’ agreement on the grounds thatthese special provisions constituted an unlawful transfer of control from us toSouthern 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 Public Authoritiesand Public Companies Court of Belo Horizonte rendered a decision declaring theshareholders’ agreement null and void, and this decision was ratified on August 7,2001 by the Minas Gerais State Court of Appeals. At present, the State Governmenthas been restored to its position as our sole controlling shareholder and noneof the special quorum or veto provisions are in effect. This decision wasappealed to the Superior Court of Justice**(*Superior Tribunal de Justiça*), which upheld the decision ofthe Minas Gerais State Court of Appeals, in December 2003. The decision ofthe Superior Court of Justice is subject to a bill of review and therefore theeffectiveness of the shareholders’ agreement and control of CEMIG remainsubject to further judicial challenge in the Supreme Court (*Supremo Tribunal Federal*).

 

*Rate Increases*

* *

We are the defendant in several lawsuits brought byindustrial consumers alleging that increases in electricity rates, determinedby DNAEE, predecessor of ANEEL, during a price freeze imposed by the FederalGovernment from March through November 1986, known as the CruzadoPlan, were illegal. Some of the plaintiffs further allege that all our ratesafter the Cruzado Plan period were illegal, in part because they included the CruzadoPlan period increases in the amounts that served as the basis for calculatingthe further increases. Some of these claims have been decided at the trialcourt level in our favor, whereas others have been decided in favor of ourconsumers. All of the cases that have been decided at the trial court levelhave been appealed to the Superior Court of Justice**(*Superior Tribunal de Justiça*), which ruled, in most of thecases, that the plaintiffs were entitled only to reimbursement for rateincreases introduced during the Cruzado Plan. We are actively contesting all ofthe aforementioned rate increase claims. As of December 31, 2008, theaggregate rate increase claims brought against us totaled, approximately, R$135million, for which we recorded a provision of R$78 million.

 

We are also a defendant in lawsuits and class actionsbrought by consumers, consumer rights groups and the office of the publicprosecutor of Minas Gerais contesting the rates we charge our consumers, theapplication of the rate increases determined by ANEEL, the inflationary indexused to increase our rates and the rate subsidies granted to low incomeconsumers. These lawsuits involve claims for the suspension of the rateincreases and for the reimbursement to our consumers of twice the amount of anyadditional rates we collected. All our rate increases are granted based onANEEL’s prior authorization and we believe we have a meritorious defense toeach of these lawsuits. It is not possible at the present time to estimate theamounts involved in these claims. We have not accrued any liability related tothese claims.

 

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CemigDistribution is a party, together with ANEEL, in a civil public action broughtby the Public Attorneys’ Office seeking to prevent the exclusion of consumersfrom the Low Income Residential Tariff’s subclass frame and also to requireCemig Distribution to pay double the amount overpaid by the low incomeconsumers. The lowercourt found in favor of the Public Attorney’s Office, and Cemig Distribution and ANEEL appealed to the RegionalFederal Appeals Court (*Tribunal Regional Federal*).The decision of the appeals court on the proceeding has been pending sinceMarch, 2008. Cemig Distribution assesses its chance of loss as “possible” andestimates the amount involved in this dispute to be, approximately, R$83.6million, as of December 31,2008.

 

*Taxes and Other Contributions*

 

CEMIG and its subsidiaries are parties in severaladministrative and judicial tax related proceedings concerning the impositionof the *Imposto Sobre a Circulação de Mercadorias eServiços* (value-added tax), or ICMS, *ImpostoSobre a Propriedade Territorial Rural* (rural real estate tax), orITR, *Programa de Integração Social*, or PIS, *Programa de Formação do Patrimônio do Servidor Público*, orPASEP, and *Contribuição para o Financiamento da SeguridadeSocial*,**or COFINS, (which are socialcontributions imposed on gross revenues), *Contribuição Social Sobreo Lucro Líquido*, or CSLL, (social contribution on net profits) and *Imposto de Renda da Pessoa Jurídica*,**orIRPJ (income tax), among others.

 

Since 2002, we havebeen receiving a subsidy from Eletrobrás to reimburse us for losses incurred asa result of the discount we were required to provide to low-income consumers,under the provisions of Federal Law No. 10,604/02. In 2005, the State ofMinas Gerais issued Decree 43,999/05 determining the imposition of ICMS on thissubsidy. We believe that the subsidy is not taxable, and, therefore, we are notcollecting the ICMS on the amounts derived from the subsidy. However, the Stateof Minas Gerais filed a tax foreclosure against us in connection with thismatter, demanding the collection of the ICMS. In July, 2008, we received anunfavorable decision in the court of first impression. We appealed to the courtof appeals and are currently waiting for a decision. We estimate the amountinvolved in this dispute to be, approximately, R$130.6 million, as of December 31, 2008.No provision has been recorded with respect to this dispute, since CEMIGassesses its chance of loss as “possible.”

 

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 onthose payments, since it is our opinion that such tax should not be imposed onsuch payments. As a result, we received tax assessments from the BrazilianRevenue Service. In order to avoid the risk of imposition of penalties, wefiled a writ of mandamus, receiving an adverse judgment in the first instance.We filed an appeal in February, 2007, and made a deposit for the full amountinvolved, but we are still waiting for a decision from the appeal. We estimate the amount involved in theseclaims to be of, approximately, R$86.0 million, as of December 31, 2008. CEMIG assesses its chance of loss in this dispute as“possible.”

 

We were assessed by the INSS in 2006 due to the non-payment of the socialsecurity contribution on the amounts paid to our employees as profit sharing in the period between 2000 and2004. In 2007, we filed a writ of mandamus in order to obtain a judicialdecision declaring that such payments were not subject to the imposition ofsocial security contributions. The total amount involved in this claim is of,approximately, R$112.2 million, as of December 31, 2008. Notwithstanding the judicial proceeding, we are alsocontesting the assessment at the administrative level. No provision has beenrecorded since the CEMIG assesses its chance of loss in this dispute as “possible.”

 

In2007, Gasmig, a subsidiary of CEMIG, in which it holds a 55% ownershipinterest, received an assessment from the Brazilian Revenue Service for the paymentof PIS and COFINS contributions supposedly imposed on the sale of natural gasfor the production of electricity under the Thermoelectricity PPT program (*Termoeletricidade PPT*). The tax authorities alleged thatGasmig misunderstood Law No. 10,312/01, which provided for a 0% tax rateon those transactions, but, allegedly, was subject to furtherregulations by the Ministry of Finance and the Ministry of Mines and Energy.The amount involved in such claim is approximately R$50.1 million, as of December 31,2008. We estimate the chance of loss in relation to this proceeding as “possible.”However, an eventual loss in this proceeding will not directly impact CEMIG’sresults, as it will only affect the results of Gasmig and, consequently, thecapacity of dividend distributions.

 

*Labor Obligations*

* *

CEMIG is adefendant in several claims filed by our employees and third parties(outsourced workers). These claims generally relate to overtime andcompensation for occupational hazards. In addition to these actions, there areothers relating to outsourcing of labor, readjustment of retirement pensionpayments by Forluz and salary adjustments.

 

Under Brazilianlabor laws, claimants must file a labor claim for unpaid services within twoyears of the termination of their employment agreement (limited to rights whicharose no more than five years prior to termination). As of December 31,2008, the amount in dispute involved in the aforementioned claims wasapproximately R$194 million, and we had provisioned R$82 million for thepayment of these labor contingencies.

 

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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 fromusing outsourcing for its end-activities. In the judgment, a period of ninemonths was given for CEMIG to abstain from contracting employees throughoutsourced companies. In March 2008, the Higher Labor Appeal Court**(*Tribunal Superior doTrabalho*) granted a preliminary injunction suspending the effects ofthe prior decision and its consequences until it reaches a final decision. Theamount involved in the case is approximately R$37 million, as of December 31,2008, with the contingency for loss being assessed as “possible.”

 

*Claims in the OrdinaryCourse of Business*

* *

We are a party in several civil claims, mainly as adefendant of claims relating to (i) people who request indemnification dueto accidents which have occurred during the ordinary course of the business ofCEMIG; (ii) consumer claims; and (iii) contractual and othercommercial obligations. As of December 31, 2008, the total amount involvedin the claims where the loss is assessed as “probable” is approximately R$193.7million, and the total amount involved in the claims where the loss is assessedas “possible” is approximately R$410.3 million.

 

*Legal Proceedings Related to Environmental Matters*

* *

We are a party in a number of proceedings and claimsinvolving environmental matters. These proceedings and claims include court andadministrative disputes regarding certain environmental matters, protected andIndian areas, environmental licenses and remediation of environmental damages.As of December 31, 2008, the amount involved in these claims totaledapproximately R$1,105.4 million. Of this total amount, R$6.6 million is relatedto proceedings for which the likelihood of loss is evaluated as “probable,”R$1,018.5 million is related to proceedings for which the likelihood of loss isassessed as “possible,” and R$80.2 million is related to proceedings for whichthe likelihood of loss is assessed as “remote.” As of December 31, 2008,we had provisioned R$6.6 million for the payment of the contingences assessedas “probable.”

 

Nevertheless, since CEMIG and its subsidiaries aredefendants in several class action style lawsuits, the amounts involved inthese proceedings cannot be precisely assessed, due to the fact that most ofthese lawsuits require indemnification, remediation and compensation measuresthat will be defined during the process. Additionally, the class action stylelawsuits may affect those other than the parties directly involved, and thesethird parties may be awarded other remedies as determined by the respectivejudges and courts. Therefore, the values above may not correspond to the actualamounts that will be spent by CEMIG in legal proceedings involvingenvironmental matters.

 

Finally, we are a defendant in a public civil actionfiled on February 5, 2007 by the Regional Environmental Association ofPatrocínio against CEMIG, Southern Electric and FEAM, which involves a claimfor indemnifying and redressing environmental damages caused by the Nova PonteHydroelectric Power Plant, which amounted to R$941.0 million on December 31,2008. The public civil action is awaiting judgment, and the likelihood of lossis assessed as “possible.”

 

*Regulatory Matters*

* *

Prior to 1993, electric utilities in Brazil wereguaranteed a rate of return on investments in assets used to provide electricservice to consumers, the rates charged to consumers were uniform throughoutthe country, and profits from more profitable utilities were reallocated toless profitable ones so that the rate of return for all companies would equalthe national average. Shortfalls experienced by most electric utilities inBrazil were accounted for in each company’s CRC Account. When the CRC Accountand the guaranteed return concept were abolished, we used our positive balancesin the CRC Account to offset 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, or the Cadin. Although therelief was denied by the lower court, we appealed to the Federal Court of theFirst Region which granted us a temporary injunction to suspend the inclusionin the Cadin. Therefore, we have not accrued any liability related to thisclaim. The amount of this proceeding, as of December 31, 2008, isapproximately R$1,032.6 million. No provision has been recorded for this mattersince we assess the chance of an adverse outcome as “possible.”

 

We are the defendant in suits challenging the chargingof tax on public lighting. The value of these claims is approximately R$772million, as of December 31, 2008. We believe we have sound arguments indefense of these claims. We assess thelikelihood of a loss in these actions as “possible.”

 

A class actionwas brought against CEMIG and nine other defendants requesting nullification ofthe Conduct Adjustment Undertaking (TAC) signed between the Public Attorneys’Office and the Company, ordering the restitution to public funds of the 

 

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amounts transferred to the defendantcompanies for implementation of the Light for All (*Luz paraTodos*) program. The application for interim remedy was refused, andthe plaintiff appealed to the Regional Federal Appeals Court* *(*Tribunal Regional Federal*). The updated amount involved, ofR$1,441.3 million, as of December 31, 2008, refers to the request forrestitution of the amounts received by the companies that carried out theservices contracted by CEMIG in order to comply with such governmental program,and fees of counsel. The chance of loss is assessed as “possible.”

 

CEMIG has also filed a writof mandamus in order to require its qualification as a co-defendant in a claimbrought by AES Sul against ANEEL. The judge granted CEMIG an injunction tosuspend the deposit order in the amount of approximately R$79.2 million, whichwas determined in a settlement. In the event of AES Sul’s success, CEMIG willpay such updated amount. The chance of loss is assessed as “possible.”

 

**DividendPolicy and Payments**

** **

*ObligatoryDividend—Priority and Amount of Dividends*

* *

Under our by-laws, we are required to pay to ourshareholders, as obligatory dividends, 50% of the net income of each fiscalyear ending December 31. Our preferred shares have priority in theallocation of the obligatory dividend for the period in question. The order ofpriority of the dividends distribution is as follows:

 

·                                          The annual minimum dividend for thepreferred shares: These have preference in the event of reimbursement ofshares, and have an annual minimum dividend equal to the greater of thefollowing:

 

·                  10% of their par value; or

 

·                  3% of the shareholders’ equity associatedwith it.

 

·                                          The dividends on the common shares, up tothe minimum percentage for the preferred shares.

 

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

 

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legalreserve in relation to any fiscal year in which the sum of the legal reserveand the other established capital reserves exceeds 30% of the Company’s total paid-incapital. Any net losses may be 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 ourregistered capital 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 (before taxes for social contribution on net profits, incometax, and the deduction of the interest attributable to shareholders’ equity)for the period in respect of which the payment is made or (ii) 50% ofretained earnings as of the date of the beginning of the period in respect ofwhich the payment is made. Shareholders who are not resident in Brazil mustregister with the Brazilian Central Bank so that the foreign currency proceedsof their dividend payments, or of sale or other amounts relating to theirshares, may be remitted to them outside Brazil. The preferred shares underlyingour Preferred ADSs and the common shares underlying our Common ADSs are held inBrazil by the custodian bank, as agent for the depositary bank, which is theregistered 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 depreciatedapproximately 31.95% relative to the U.S. dollar in 2008. 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 specific record date upon which the depositary bankwill determine the exchange rate to be used in connection with converting cashdividends or other cash distributions. Pursuant to the Deposit Agreements, thedepositary bank will arrange for the funds to be converted into U.S. dollarsupon receipt of notice of 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. Key Information—Selected Consolidated FinancialData.”

 

**DeclarationHistory of Dividends and Interest on Capital (1)**

 

 
| **Dividend Year** | ** ** | **Common Shares** |       | **Preferred Shares** |       |
|------------------------|------------|------------------------|------------|---------------------------|------------|
|                   | ** ** | **(R$)(2)**            | ** ** | **(US$)(3)**              | ** ** | **(R$)(2)** |   | **(US$)(3)** |   |
| 2005                   |       | 904,951,727            |       | 432,991,257               |       | 1,165,497,675 |   | 557,654,390 |   |
| 2006                   |       | 603,948,640            |       | 298,836,536               |       | 777,832,359 |   | 384,874,992 |   |

 

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| 2007     |   | 379,426,703 |   | 227,392,246 |   | 488,297,923 |   | 292,639,292 |   |
|----------|--------|-------------|--------|-------------|--------|-------------|--------|-------------|--------|
| 2008 (4) |   | 412,568,595 |   | 190,853,770 |   | 530,949,405 |   | 245,616,600 |   |

 

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| (1) |     | In accordance with the accounting practices adopted  in Brazil, dividends and interest on capital are accounted for as having been  paid in the dividend year in which they are proposed, even if such dividends  or interest on capital were formally approved by 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 of dividends paid, expressed in nominal *reais*,  by the Federal Reserve Board ́s rate on respective Record Dates (04/28/2006,  04/26/2007, 04/25/2008 and 04/29/2009).                                                                                  |
| (4) |     | The 2008 dividends were approved at the ordinary and  special general shareholders’ meetings held on April 29, 2009. The 2008  dividends will be paid in two equal installments in June 2009 and  December 2009. The first installment will be paid on June 30, 2009.                          |

 

**Item 9.**           The Offer and Listing

** **

**TradingMarket**

** **

The principal trading market for our preferred shares is the São PauloStock Exchange. Our Preferred ADSs, each representing one preferred share as ofDecember 31, 2008, 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, 2008, there were approximately82,631,960 Preferred ADSs outstanding (each representing one preferred share),representing approximately 29.58% of our 279,378,119 outstanding preferredshares.

 

The principal trading market for our common shares is the São PauloStock Exchange. Our Common ADSs, each representing one common share as of December 31,2008, have traded on the NYSE under the symbol “CIG.C” since June 12,2007, when we established an American Depositary Shares program for our commonshares. The Common ADSs are evidenced by Common ADRs issued by Citibank, N.A.,as depositary, pursuant to a Deposit Agreement, dated as of June 12, 2007,by and among us, the depositary and the holders and beneficial owners of CommonADSs evidenced by Common ADRs issued thereunder. As of December 31, 2008,there were approximately 16,205 Common ADSs outstanding (each representing onecommon share), representing less than 0.01% of our 216,923,394 outstandingcommon shares.

 

On June 5, 2009, the closing price per preferred share on the SãoPaulo Stock Exchange was R$27.99 and the closing price per Preferred ADS on theNYSE was US$14.37.

 

On June 12, 2007, our common share ADSs begantrading on the NYSE. On June 5, 2009, the closing price per common shareon the São Paulo Stock Exchange was R$20.50 and the closing price per CommonADS on the NYSE was US$10.74.

 

The following table sets forth the reported high and low closing saleprices for the preferred and common shares on the São Paulo Stock Exchange andthe Preferred and common ADSs on the NYSE for the periods indicated.

 
| ** **             | ** ** | **Common  Shares (1)**   | ** ** | **Common  ADSs (1)** | ** ** | **Preferred  Shares(2)** | ** ** | **Preferred  ADSs (2)** | ** ** |
|------------------------|------------|--------------------------|------------|----------------------|------------|--------------------------|------------|-------------------------|------------|
| **Period**

** ** | ** ** | **Price in  Nominal R$** | ** ** | **Price in  US$**    | ** ** | **Price in  Nominal R$** | ** ** | **Price in  US$**       | ** ** |
| ** **             | ** ** | **High**                 | ** ** | **Low**              | ** ** | **High**                 | ** ** | **Low**                 | ** ** | **High** | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| 2004                   |       | 22.22                    |       | 12.02                |       | -                        |       | -                       |       | 22.22 |   | 12.03 |   | 8.34 |   | 3.81 |   |
| 2005                   |       | 31.04                    |       | 17.47                |       | -                        |       | -                       |       | 31.03 |   | 17.47 |   | 13.70 |   | 6.55 |   |
| 2006                   |       | 31.01                    |       | 23.07                |       | -                        |       | -                       |       | 37.24 |   | 26.13 |   | 17.55 |   | 11.53 |   |
| 2007                   |       | 31.07                    |       | 18.57                |       | 24.00                    |       | 17.00                   |       | 30.25 |   | 21.13 |   | 20.87 |   | 13.07 |   |
| 2008                   |       | 26.05                    |       | 15.65                |       | 21.75                    |       | 9.95                    |       | 31.90 |   | 19.26 |   | 25.46 |   | 8.92 |   |
|                   |       |                     |       |                 |       |                     |       |                    |       |   |   |   |   |   |   |   |   |
| 2007                   |       |                     |       |                 |       |                     |       |                    |       |   |   |   |   |   |   |   |   |
| 1Q                     |       | 22.11                    |       | 18.57                |       | -                        |       | -                       |       | 23.49 |   | 21.13 |   | 15.10 |   | 13.16 |   |
| 2Q                     |       | 29.01                    |       | 21.36                |       | 21.25                    |       | 19.30                   |       | 30.25 |   | 21.68 |   | 20.87 |   | 14.12 |   |

 

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| ** **         | ** ** | **Common  Shares (1)**   | ** ** | **Common  ADSs (1)** | ** ** | **Preferred  Shares(2)** | ** ** | **Preferred  ADSs (2)** | ** ** |
|--------------------|------------|--------------------------|------------|----------------------|------------|--------------------------|------------|-------------------------|------------|
| **Period**         | ** ** | **Price in  Nominal R$** | ** ** | **Price in  US$**    | ** ** | **Price in  Nominal R$** | ** ** | **Price in  US$**       | ** ** |
| ** **         | ** ** | **High**                 | ** ** | **Low**              | ** ** | **High**                 | ** ** | **Low**                 | ** ** | **High** | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| 3Q                 |       | 31.07                    |       | 22.16                |       | 24.00                    |       | 17.00                   |       | 30.09 |   | 21.93 |   | 20.42 |   | 13.07 |   |
| 4Q                 |       | 27.58                    |       | 21.95                |       | 22.74                    |       | 17,97                   |       | 38.85 |   | 22.51 |   | 20.60 |   | 15.83 |   |
|               |       |                     |       |                 |       |                     |       |                    |       |   |   |   |   |   |   |   |   |
| 2008               |       |                     |       |                 |       |                     |       |                    |       |   |   |   |   |   |   |   |   |
| 1Q                 |       | 23.47                    |       | 17.88                |       | 19.00                    |       | 15.17                   |       | 24.47 |   | 19.26 |   | 18.51 |   | 13.60 |   |
| 2Q                 |       | 26.05                    |       | 18.99                |       | 21.75                    |       | 16,52                   |       | 30.37 |   | 22.18 |   | 23.92 |   | 16.26 |   |
| 3Q                 |       | 25.72                    |       | 18.37                |       | 25.19                    |       | 13.75                   |       | 31.90 |   | 21.72 |   | 25.46 |   | 14.44 |   |
| 4Q                 |       | 24.60                    |       | 15.65                |       | 17.00                    |       | 9.95                    |       | 29.70 |   | 20.97 |   | 19.51 |   | 8.92 |   |
|               |       |                     |       |                 |       |                     |       |                    |       |   |   |   |   |   |   |   |   |
| 2009               |       |                     |       |                 |       |                     |       |                    |       |   |   |   |   |   |   |   |   |
| 1Q                 |       | 19.38                    |       | 16.69                |       | 11.00                    |       | 9.65                    |       | 26.49 |   | 23.21 |   | 15.03 |   | 11.88 |   |
|               |       |                     |       |                 |       |                     |       |                    |       |   |   |   |   |   |   |   |   |
| January 2009  |       | 19.00                    |       | 17.29                |       | 11.84                    |       | 10.15                   |       | 25.65 |   | 23.31 |   | 14.09 |   | 12.46 |   |
| February 2009 |       | 18.26                    |       | 16.87                |       | 11.15                    |       | 9.75                    |       | 25.44 |   | 23.21 |   | 14.35 |   | 11.88 |   |
| March 2009    |       | 19.38                    |       | 16.69                |       | 11.00                    |       | 9.65                    |       | 26.49 |   | 23.37 |   | 15.03 |   | 12.08 |   |
| April 2009    |       | 21.48                    |       | 19.01                |       | 12.78                    |       | 11.00                   |       | 28.03 |   | 24.60 |   | 16.17 |   | 14.08 |   |
| May 2009      |       | 20.98                    |       | 19.07                |       | 12.20                    |       | 9.50                    |       | 27.20 |   | 24.98 |   | 16.20 |   | 12.26 |   |
| June 2009 (3) |       | 20.64                    |       | 19.50                |       | 10.75                    |       | 10.20                   |       | 28.02 |   | 25.60 |   | 14.37 |   | 13.21 |   |

 

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| (1) |   | On May 3, 2007, a  50% stock dividend was paid on the common shares, resulting in an adjustment  to the price per common share. The last day of trading of the common shares  in lots of 1,000 shares was June 1, 2007. A reverse stock split of the  common shares was effected in the form of 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 value of R$5.00. The price per  common share was 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  corresponding adjustment was made to the Common ADSs through the issuance of  additional Common ADSs, resulting in an adjustment to the price per Common  ADS. On April 30, 2009, a 25.000000151% stock dividend was paid on the  common shares, resulting in an adjustment to the price per common share. On  May 14, 2009, 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. The common share prices and Common ADS prices have  been adjusted to reflect all of the above items.                                                                                                                                                                                                                                                                                                                                                        |
|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | On May 3, 2007, a  50% stock dividend was paid on the preferred shares, resulting in an  adjustment to the price per preferred share. On May 7, 2007, a  corresponding adjustment was made to the ADSs through the issuance of one  additional ADS for every two ADSs, resulting in an adjustment to the price  per ADS. The last day of trading of the preferred shares in lots of 1,000  shares was June 1, 2007. A reverse stock split of the preferred shares  was effected in the form of a share consolidation on June 4, 2007  whereby every 500 preferred shares, par value of R$0.01, were consolidated  into one 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 and Preferred ADS were adjusted accordingly. 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. On April 30, 2009, a 25.000000151% stock dividend was  paid on the preferred shares, resulting in an adjustment to the price per  preferred share. On May 14, 2009, 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. The preferred  share prices and Preferred ADS prices have been adjusted to reflect all of  the above items. |
| (3) |   | Through June 5, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

 

Since July 12, 2002, our depositary receipts have traded on theLATIBEX, under the ticker symbol “XCMIG.” The LATIBEX is an electronic tradingmarket created in 1999 by the Madrid Stock Exchange in order to facilitate thetrading market of Latin American Securities in Euros.

 

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**Tradingon 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. Tradingon the São Paulo Stock Exchange is limited to brokerage firms and a limitednumber of authorized entities. The CVM and São Paulo Stock Exchange havediscretionary authority to suspend trading in shares of a particular issuerunder certain circumstances.

 

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. Theclearinghouse for the São Paulo Stock Exchange is Companhia Brasileira deLiquidação 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, 2008, the aggregatemarket capitalization of the 392 companies listed on the São Paulo StockExchange was equivalent to approximately R$1.4 trillion and the 10 largestcompanies listed on the São Paulo Stock Exchange represented approximately53.15% 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 actuallyavailable for trading by the public. The remainder of these shares is held bysmall groups of controlling persons, governmental entities or one principalshareholder.

 

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 other than due to BOVESPA utilizing circuit breakers on a few occasionsin 2008 with respect to the trading of all shares on the BOVESPA.

 

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:

 

·                  present a consolidated balance sheet, aconsolidated statement of results and the accompanying letter to shareholders;

 

·                  include, in the explanatory notes to ourfinancial statements, a cash flow statement;

 

·                  disclose any direct or indirect ownershipinterest, including beneficial ownership interest, exceeding five percent ofour capital stock;

 

·                  disclose the amount and characteristicsof our securities held directly or indirectly by insiders;

 

·                  disclose changes in the amount ofsecurities held by insiders within the preceding 12 months;

 

·                  disclose the amount of free float sharesand their respective percentage in relation to total shares outstanding, whichshall be of at least 25% of shares representing our capital stock;

 

·                  disclose, at the end of January ofeach year, an annual schedule of corporate events, and any subsequent changesto the schedule;

 

·                  disclose any agreements which we haveexecuted with any of our affiliates, subsidiaries, managers (or any companyowned or controlled by our managers) or controlling shareholders (or anyaffiliate or subsidiary of our controlling shareholders), whenever theaggregate value of such agreement exceeds either R$200 thousand or 1% of ournet equity, whichever is larger. For each such agreement we must disclose thepurpose, term, amounts, provisions for termination and expiration and, ifapplicable, the influence the agreement may have over our management orbusiness;

 

·                  hold at least one annual meeting withmarket analysts and any other interested parties; and

 

·                  adopt mechanisms that provide for capitaldispersion in any public share offerings.

 

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The rules applicable to the members of Corporate Governance Level1 are currently under review and, therefore, those requirements are subject tochange. In addition, new disclosure requirements may be established.

 

*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 on:the 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.”

 

**Regulationof 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 registeredwith the CVM and are subject to reporting requirements. Our shares are tradedon the São Paulo Stock Exchange, but may be traded privately subject to certainlimitations. The Brazilian OTC market consists of direct trades and tradesbetween individuals in which a financial institution registered with the CVMserves as intermediary.

 

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.

 

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 thedepositary bank must obtain a certificate of registration from the Central Bankof Brazil to be eligible to remit U.S. dollars abroad for payments of dividends,any other 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.”

 

**Item 10.**    Additional Information

** **

**Memorandumand Articles of Association**

** **

We are a state-controlled company registered under the laws of Brazil.The registration number given to us by the Board of Trade of Minas Gerais (*Junta Comercial do Estado de Minas Gerais*) is 3130004012.Set forth below is a brief summary of certain 

 

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significantprovisions of (i) our by-laws, as amended by our general and specialshareholders’ meeting on April 29, 2009, and (ii) Brazilian CorporateLaw. The description of our by-laws contained herein does not purport to becomplete and is qualified by reference to our by-laws, which have been filed asan 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 activities in theenergy field; (iii) to render consulting services to companies in Braziland abroad; and (iv) to perform activities directly or indirectly relatingto 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 issued preferredshares 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 providesthat the following actions may only be taken at a shareholders’ meeting:

 

·                  amendment of our by-laws;

 

·                  increases or decreases to our issuedcapital stock or subscription of new shares;

 

·                  election of members to our Board ofDirectors and Fiscal Council;

 

·                  authorization of the issuance ofdebentures or any convertible securities;

 

·                  suspension of the rights of a shareholderwho has violated Brazilian Corporation Law or our by-laws;

 

·                  approval of any merger (*fusão*) or consolidation (*incorporação*)with another company in which we are not the surviving company or a spin-off (*cisão*);

 

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·                  acceptance or rejection of the valuationof in-kind contributions offered by a shareholder in consideration for theissuance of shares of our capital stock;

 

·                  approval of our transformation into alimited liability company (*sociedade empresárialimitada*) or any other corporate form;

 

·                  approval of any dissolution orliquidation, the appointment and dismissal of the respective liquidator andreview of the reports prepared by him or her;

 

·                  any action regarding an application forbankruptcy or compulsory rescheduling of our debts;

 

·                  approval of the financial statements onan annual basis; and

 

·                  cancellation of registration with the CVMas a publicly-held company or delisting of our common shares from the São PauloStock Exchange, except in the case of a privatization 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:

 

·                  create preferred shares or to increasedisproportionately an existing class of preferred shares relative to the otherclasses of shares, unless such action is provided for or authorized by ourby-laws;

 

·                  modify a preference, privilege orcondition of redemption or amortization conferred on one or more classes ofpreferred shares, or to create a new class with greater privileges than theexisting classes of preferred shares;

 

·                  reduce the percentage of mandatorydividends;

 

·                  change our corporate purpose;

 

·                  merge us with another company if we arenot the surviving company or consolidate us with another company;

 

·                  spin off a portion of our assets orliabilities;

 

·                  approve our participation in a group ofcompanies;

 

·                  apply for cancellation of liquidationstatus;

 

·                  approve our dissolution; and

 

·                  approve the compulsory transfer of all ofour shares to another company in order to make us a wholly-owned subsidiary ofthat 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:

 

·                  the Fiscal Council, if the Board ofDirectors fails to call a general shareholders’ meeting within one calendarmonth after the date it was required to do so under applicable laws or aspecial shareholders’ meeting in the case of serious and urgent mattersaffecting us; any shareholder, whenever the executive officers fail to call themeeting of shareholders within 60 days of being required to do so by theBrazilian Corporate Law or by our by-laws; and

 

·                  shareholders holding at least fivepercent of our capital stock, if our Board of Directors fails to call a meetingwithin eight days after receipt of a request from that shareholder to call themeeting that indicates the issues to be discussed or calls for the creation ofthe 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.

 

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Our Board of Directors is responsible for:

 

·                  establishing the general direction of ourbusiness;

 

·                  electing and dismissing executiveofficers;

 

·                  approving the sale or pledge of our fixedassets, or the granting of guarantees to third parties, with a value of atleast R$14 million;

 

·                  approving, upon proposal by the Board ofExecutive Officers, the sale or the creation of any “in rem” guarantees withrespect to our permanent assets and the granting by us of any personalguarantee to any third party in an amount exceeding R$14 million;

 

·                  approving, upon a proposal by the Boardof Executive Officers, loans, financings, agreements and any actions whichwould bind us in an amount exceeding R$14 million;

 

·                  calling the general meetings ofshareholders;

 

·                  supervising the management of the Boardof Executive Officers, reviewing our books and documents and requestinginformation regarding executed and soon-to-be executed contracts, as well asother items of interest;

 

·                  approving our annual and interimfinancial statements;

 

·                  appointing and dismissing independentauditors;

 

·                  approving, upon proposal by the Board ofExecutive Officers, the commencement or waiver of bidding proceedings for thepurchase of goods or services with a value of at least R$14 million;

 

·                  authorizing, upon proposal by the Boardof Executive Officers, legal and administrative action to be taken on ourbehalf and the settlement of judicial and extra judicial matters in which weare involved with a value of at least R$14 million;

 

·                  approving the issuance of securities(debentures, commercial papers, *notaspromissórias*, among others) in the local and international capitalmarkets;

 

·                  delegating to Board of Executive Officersthe power to authorize signature contracts of commercialization of electricenergy or rendering distribution and transmission services, in terms oflegislation;

 

·                  approving CEMIG’s long-term strategicplan, the multi-year strategic implementation plan, and the annual budget, andany alterations or revisions thereto;

 

·                  annually, setting the directives andestablish the limits, including financial limits, for spending on personnel,including concession of benefits and collective work agreements, subject to thecompetency of the shareholders meeting and in obedience to the annual budgetapproved;

 

·                  authorizing the exercise of the right ofpreference under Stockholders’ agreements or to vote in wholly-ownedsubsidiaries, jointly-controlled companies, affiliated companies and theconsortia in which CEMIG participates, except in the case of Cemig Distributionand Cemig Generation and Transmission, for which the competency to decide onthese matters shall be that of the shareholders meeting; and

 

·                  approving the declarations of vote in theshareholders meetings and the orientations for voting in the meetings of theboards of directors of the wholly-owned subsidiaries, jointly-controlledcompanies, affiliated companies and the consortia in which CEMIG participates,when participation in the capital of other companies or consortia is involved,and the decisions must, in any event and not only in matters relating toparticipation in the capital of other companies or consortia, obey theprovisions of the bylaws, the long-term strategic plan and the multi-yearstrategic implementation plan.

 

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 is materiallyinterested, (ii) borrowing powers exercisable by the directors, (iii) agelimits for retirement of board members, and (iv) number of shares requiredfor director qualification.

 

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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 or impeded fromexercising his functions.

 

Our shareholders have the responsibility of setting the remuneration ofthe board members at the General Meeting of Stockholders at which the boardmembers are elected.

 

**Rightsof 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:

 

·                  the right to have a share of thecorporation’s earnings;

 

·                  the right to have a share of thecorporation’s assets, in the event of liquidation thereof;

 

·                  the right to supervise our managementaccording to the Brazilian Corporate Law;

 

·                  preemptive rights to subscribe new sharesor securities convertible into shares, except for exceptions provided by theBrazilian Corporate Law and our by-laws; and

 

·                  the right to withdraw from the companyunder certain circumstances provided in the Brazilian 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.

 

*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:

 

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);

 

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;

 

toreduce the mandatory distribution of dividends;

 

tochange our corporate purposes;

 

tomerge us with another company or consolidate us;

 

totransfer all of our shares to another company in order to make us awholly-owned subsidiary of such company;

 

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toapprove the acquisition of control of another company at a price that exceedscertain limits set forth in Brazilian Corporate Law;

 

toapprove our participation in a centralized group of companies as defined underBrazilian Corporate Law; or

 

in theevent that the entity resulting from (a) a merger, (b) a transfer ofshares 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 general shareholders’meeting giving rise to redemption rights occurred more than 60 days after thedate of the last approved balance sheet, a shareholder would be entitled todemand that his or her shares be valued on the basis of a new balance sheetdated 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:

 

·                  the right to require that the books ofthe corporation be made available for review, whenever these shareholdersbecome suspicious that Brazilian law or the corporation’s by-laws have beenviolated, or that irregularities have been committed by the management of thecorporation;

 

·                  the right to call a general meeting ofshareholders, under certain circumstances, whenever the corporation’s directorsor officers, as the case may be, fail to do so; and

 

·                  the right to file an action forindemnification by directors or officers, as the case may be, for damagescaused to the assets of the corporation, whenever it is determined at thegeneral meeting of shareholders that such a claim shall not be filed.

 

Minority shareholders that own, individually or in the aggregate, ouroutstanding common shares (since at least 10% of our outstanding common sharesare held by minority shareholders), and also holders of our preferred shares,have the right to appoint one member of the Fiscal Council and an alternate.All shareholders have the right to attend general meetings of shareholders.

 

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.

 

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*Going Private Transactions and Delisting from theSão Paulo 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:

 

·                  the price offered for the shares underthe public offering must be the fair value of those shares, as established inBrazilian Corporate Law; and

 

·                  shareholders holding more than two thirdsof our float shares shall have expressly agreed to our decision to become aprivate 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**

** **

**For information concerning our material contracts,see “Item 4. Information on the Company” and “Item 5. Operating and FinancialReview and Prospects.”**

** **

**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.

 

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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 ADSsexchanges such Preferred ADSs for preferred shares, or a holder of Common ADSsexchanges such Common ADSs for common shares, such holder will be entitled tocontinue to rely on the depositary bank’s certificate of registration for fivebusiness days after the exchange. Thereafter, the holder may not be able toconvert into foreign currency and remit outside Brazil the proceeds from thedisposition of, or distributions with respect to, the preferred shares or thecommon 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 in 1989 and early 1990, the Federal Governmentfroze all dividend and capital repatriations held by the Central Bank that wereowed to foreign equity investors, in order to conserve Brazil’s foreigncurrency reserves. These amounts were subsequently released in accordance withFederal Government directives. We cannot assure you that the Federal Governmentwill not impose similar 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 —*The following discussion summarizes the mainBrazilian material tax consequences of the acquisition, ownership anddisposition of preferred shares, common shares, Preferred ADSs or Common ADSs,as the case may be, by a holder that is not domiciled in Brazil, which we referto as a non-Brazilian holder for purposes of Brazilian taxation. In the case ofa holder of preferred shares or common shares, we assume the investment isregistered with the Central Bank. The following discussion does not address allof the Brazilian tax considerations applicable to any particular non-Brazilianholder. Therefore, each non-Brazilian holder should 

 

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consulthis or her own tax adviser concerning the Brazilian tax consequences of aninvestment in our preferred shares, common shares, Preferred ADSs or CommonADSs.

 

*Taxation of Dividends —*Dividends paid by us, including stockdividends and other dividends paid in property to the depositary in respect ofthe preferred shares or common shares, or to a non-Brazilian holder in respectof the preferred shares or common shares, are currently exempted fromwithholding tax in Brazil to the extent that the dividends are paid out ofprofits generated asof January 1, 1996. Dividends relating to profits generated prior to January 1,1996 may be subject to Brazilian withholding tax at varying rates, depending onthe year the profits were generated.

 

*Payments of Interest on Capital —*Law No. 9,249, dated as of December 26,1995, as amended, permits Brazilian corporations to make distributions toshareholders of interest on equity, or interest attributed to shareholders’equity. These distributions may be paid in cash. Such payments represent adeductibleexpensefrom 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 (after the socialcontribution on net profits and before the provisions for corporate, incometax, and the amounts attributable to shareholders as interest on net equity)for the period in respect of which the payment is made; or

 

·                  50% of retained earnings as of the dateof the beginning of the period in respect of 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%, or 25% if thenon-Brazilian holder is domiciled in a jurisdiction that does not impose incometax or where the maximum income tax rate is lower than 20% or where the locallegislation imposes restrictions on disclosing the shareholding composition orthe ownership of the investment, or a Tax Haven Holder. These payments may beincluded, at their net value, as part of any mandatory dividend.

 

On June 24, 2008, Law No. 11,727 was enacted, which providesthat, as of January 1, 2009, a “tax haven” will also include:

 

(1)           jurisdictions orcountries whose local legislation imposes restrictions on the access ofinformation relating to the ownership of shares of a Brazilian entity or agiven investment; and

 

(2)           any “privileged taxregime.” Under this new law, a “privileged tax regime” is a tax regime thatmeets any one of the following requirements: (i) does not tax income ortaxes income at a maximum rate of less than 20%; (ii) grants taxadvantages to a non-resident entity or individual (a) without requiringsubstantial economic activity in the jurisdiction of such non-resident entityor individual or (b) to the extent such non-resident entity or individualdoes not conduct substantial economic activity in the jurisdiction of suchnon-resident entity or individual; (iii) does not tax income generatedabroad, or imposes tax on income generated abroad at a maximum rate of lessthan 20%, or (iv) restricts the ownership disclosure of assets andownership rights or restricts disclosure about economic transactions carriedout.

 

Since Law No. 11,727 has only recently been enacted, regulationsby the Brazilian Revenue Service are likely to be issued, and such regulationsmight affect the analysis of what constitutes a “tax haven” for purposes of theBrazilian regulations.

 

Specifically with respect to the part of the new Law No. 11,727described in clause (2) above, our Brazilian counsel has advised thatalthough this part of the new law should apply only to determining whatconstitutes a “tax haven” for purposes of Brazilian transfer pricing rules,because several Brazilian regulations utilize the “privileged tax regime”concept when referencing Tax Haven Jurisdictions, there is a possibility thatthe privileged tax regime concept may impact the definition of what constitutesa “tax haven” for purposes of the Brazilian regulations.

 

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 theapplicable withholding 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.

 

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*Taxation of Gains —*According to Law No. 10,833/03,the gains recognized on a disposal of assets located in Brazil, such as ourshares, by a non-Brazilian holder, are subject to withholding income tax inBrazil. This rule is applicable regardless of whether the disposal is conductedin Brazil or abroad and/or if the disposal is made or not to an individual orentity resident or domiciled in Brazil.

* *

As a general rule, capital gains realized as a result of a disposaltransaction are the positive difference between the amount realized on thedisposal of the asset and the respective acquisition cost.

 

Capital gains realized by non-Brazilian holders on the disposal ofshares sold on the Brazilian stock exchange (which includes the transactionscarried out on the organized over-the-counter market):

 

·                  are subject to the withholding income taxat a zero percent rate, when realized by a non-Brazilian holder that (i) hasregistered its investment in Brazil before the Central Bank under the rules ofthe Brazilian Monetary Counsel , or a Registered Holder, and (ii) is not aTax Haven Holder; and

 

·                  are subject to income tax at a rate of15% with respect to gains realized by a non-Brazilian holder that is not aRegistered Holder (including a non-Brazilian holder who qualifies under Law No. 4,131/62)and gains earned by Tax Haven Holders that are Registered Holders. In thiscase, a withholding income tax of 0.005% shall be applicable and can be offsetagainst any income tax due on the capital gain.

 

Any other gains realizedon the disposal of shares that are sold on the Brazilian stock exchange:

 

·                  are subject to income tax at a rate of15% when realized by any non-Brazilian holder that is not a Tax Haven Holder,no matter if a Registered Holder or not; and

 

·                  are subject to income tax at a rate of25% when realized by a Tax Haven Holder, no matter if a Registered Holder ornot.

 

In the cases above, if the gains are related totransactions conducted on the Brazilian non-organized over-the-counter marketwith intermediation, the withholding income tax of 0.005% shall also beapplicable and can be offset against any income tax due on the capital gain.

 

Any exercise of preemptive rights relating to shareswill not be subject to Brazilian income tax. Gains realized by a non-Brazilianholder on the disposal of preemptive rights will be subject to Brazilian incometax according to the same rules applicable to disposal of shares.

 

There can be no assurance that the current favorabletax treatment of Registered Holders will continue in the future.

 

*Sale of Preferred ADSsand Common ADSs by U.S. Holders to Other Non-Residents in Brazil —*Pursuant to Section 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. Insofar as the regulatory normreferred to in Section 26 is recent and generic and has not been testedthrough the administrative or judicial courts, we are unable to assure thefinal outcome of such discussion.

* *

If such argument does not prevail, it is important to mention that withrespect to the cost of acquisition to be adopted for calculating such gains,Brazilian law has conflicting provisions regarding the currency in which suchamount must be determined. CEMIG’s Brazilian counsel’s view is that the capitalgains should be based on the positive difference between the cost ofacquisition of the preferred shares or common shares registered with theBrazilian Central Bank in foreign currency and the value of disposition ofthose preferred shares or common shares in the same foreign currency. This viewhas been supported by a precedent issued by the Brazilian administrative court.However, considering that tax authorities are not bound by such precedent,assessments have been issued adopting the cost of acquisition in Braziliancurrency.

 

*Gains on the Exchange of Preferred ADSs for PreferredShares or the Exchange of Common ADSs for Common Shares —*Although there is no clear regulatory guidance, the exchangeof ADSs for shares should not be subject to Brazilian tax. Non-Brazilianholders may exchange Preferred ADSs for the underlying preferred shares orCommon ADSs for the underlying common shares, sell the preferred shares orcommon shares on a Brazilian stock exchange and remit abroad the proceeds ofthe sale within five business days from the date of exchange (in reliance onthe depositary’s electronic registration), with no tax 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 

 

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preferred shares or common sharesas a foreign portfolio investment under Resolution No. 2689/00, which willentitle 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 “Taxation of Gains.”

 

*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:

* *

·                  the average price per preferred share orcommon share on the Brazilian stock exchange on which the greatest number ofsuch preferred shares or common shares were sold on the day of deposit; or

 

·                  if no preferred shares or common shareswere sold on that day, the average price on the Brazilian stock exchange onwhich the greatest number of preferred shares or common shares were sold duringthe 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% or 25% for Tax Haven Holders.

 

*Taxationof Foreign Exchange Transactions —* Brazilian law imposes a Tax on Foreign ExchangeTransactions, or IOF/ Exchange tax, due on the conversion of *reais*into foreign currency and on theconversion of foreign currencyinto *reais.*Currently, IOF rates for almost all foreign currency exchangetransactions is 0.38%. In the case of transactions performed in the stockmarket or under the regulations issued by the Monetary Council of Brazil, theapplicable rate is zero. In any situation the Brazilian Federal Government**is permitted to increase the rateat any time, up to 25%. However, any increase in rates may only apply to futuretransactions.

 

*Tax onTransactions Involving Bonds and Securities.* Brazilian law imposes a Tax on Transactions InvolvingBonds and Securities, or IOF/Bonds Tax, including those carried out on aBrazilian stock exchange. The rate of IOF applicable to transactions involvingstocks (such as our preferred shares, Preferred ADSs, common shares and CommonADSs) is currently zero, although the Minister of Finance is permitted toincrease such rate at any time up to 1.5% per day, but only in respect tofuture transactions.

 

*Other Brazilian Taxe*s —**Some Brazilian states impose gift and inheritance tax ongifts or bequests made by individuals or entities not domiciled or residing inBrazil to individuals or entities domiciled or residing within such states.There are no Brazilian stamp, issue, registration, or similar taxes or dutiespayable by holders of preferred shares, common shares, Preferred ADSs or CommonADSs.

 

*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 theshares or the ADSs (other than distributions in redemption of the sharessubject to Section 302(b) of the Code or in a liquidation of theCompany) will, to the extent made from current or accumulated earnings andprofits of the Company as determined under U.S. federal income tax principles,constitute dividends. Whether such current or accumulated earnings and profitswill be sufficient for all such distributions on the shares or ADSs to qualifyas dividends for U.S. federal income tax purposes depends on the futureprofitability of the Company and other factors, many of which are beyond thecontrol of the Company. To the extent that such a distribution exceeds theamount of the Company’s earnings and profits, it will be treated as anon-taxable return of capital to the extent of the U.S. holder’s basis in theshares or ADSs, and thereafter as capital gain (provided that the shares orADSs are held as capital assets). As used below, the term “dividend” means adistribution that constitutes a dividend for U.S. federal income tax purposes.Cash dividends (including amounts withheld in respect of Brazilian taxes) paidwith respect to (i) the shares generally will be includible in the grossincome of a U.S. holder as ordinary income on the day on which the dividendsare received by the U.S. holder or (ii) the shares represented by ADSsgenerally will be includible in the gross income of a U.S. holder as ordinaryincome on the day on which the dividends are received by the depositary bankand, in either case, will not be eligible for the dividends received deductionallowed to corporations. Dividends paid in *reais* will beincludible in the income of a U.S. holder in a U.S. dollar amount calculated byreference to the exchange rate in effect on the day they are received by theU.S. holder, in the case of shares, or the depositary bank, in the case ofshares represented by ADSs.

 

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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 and generallywill 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 of such shares or rights generally would beincludible in the U.S. holder’s gross income to the same extent and in the samemanner as distributions payable in cash. 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 not entirely clear whether the preferredshares will be treated as “preferred stock” or “common stock” for this purpose.If the preferred shares are treated as “common stock” for this purposes thetreatment above would apply to distributions of shares or preemptive rightswith respect to preferred shares or Preferred ADSs, On the other hand, if thepreferred shares are treated as “preferred stock” a distribution of additionalshares or preemptive rights would be includible in gross income to the sameextent as a cash distribution whether or not such distribution is considered apro rata distribution.

 

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 onshares or ADSs, unless such income is effectively connected with the conduct bythe holder of a trade or business in the United States.

 

*Qualified Dividend Income —* Notwithstanding the foregoing, certaindividends received by individual U.S. holders that constitute “qualifieddividend income” currently may be subject to a reduced maximum marginal U.S.federal income tax rate. Qualified dividend income generally includes, amongother dividends, dividends received during the taxable year from “qualifiedforeign corporations.” In general, a foreign corporation is treated as aqualified 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-day periodbeginning on the date which is 60 days before the date on which such share orthe shares backing the ADS become ex-dividend with respect to such dividends(as measured under section 246(c) of the Code) or (ii) dividends tothe 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 byU.S. holders in exchange for ADSs will not result in the realization of gain orloss for U.S. federal income tax purposes.

 

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 

 

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distributionis treated 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 —*Informationreporting requirements will generally apply to U.S. holders of ADSs and U.S.holders will be required to comply with applicable certification procedures toestablish that they are nto subject to back up withholding. A holder of ADSsthat is not a U.S. holder may be required to comply with applicablecertification procedures to establish that they are not United States personsin order to avoid the application of U.S. information reporting requirementsand backup withholding tax.

 

**Dividendsand 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 pay dividends in respect of preferred sharesrepresented by Preferred ADSs or common shares represented by Common ADSs tothe custodian for the depositary bank, as record owner of the preferred sharesrepresented by Preferred ADSs or the common shares represented by Common ADSs.As promptly as practicable after receipt of the dividends we pay throughCitibank N.A. to the custodian, it will convert these payments into U.S.dollars and remit such amounts to the depositary bank for payment to theholders of Preferred ADSs or Common ADSs in proportion to individual ownership.

 

**Documents onDisplay**

** **

We are subject to the informational requirements of the SecuritiesExchange Act of 1934, as amended, or the Exchange Act. In accordance with theserequirements, we file reports and other information with the SEC. Thesematerials, including this annual report and the accompanying exhibits, may beinspected and copied at the SEC’s Public Reference Room at 100 F Street,N.E., Room 1580, Washington, D.C. 20549. Copies of the materials may beobtained from the SEC’s Public Reference Room at prescribed rates. Thepublic may obtain information on the operation of the SEC’s Public Reference Room bycalling the SEC in the United States at 1-800-SEC-0330. In addition, copies ofthe exhibits that accompany this annual report may be inspected at ourprincipal executive offices located at Avenida Barbacena, 1200, 30190—131 BeloHorizonte, Minas Gerais, Brazil.

 

**Insurance**

** **

We have insurance policies to cover damages to our headquartersbuilding and to the turbines, generators and transformers of our major powerplants and substations caused by fire and risks such as equipment failures. Wedo not have general third party liability insurance covering accidents and havenot solicited bids relating to this type of insurance. However, we may contractfor this type of insurance in the future. In addition, we have not solicitedbids for, nor do we carry, insurance coverage for major catastrophes affectingour facilities such as earthquakes and floods or for operating system failures.We do not have insurance coverage for business interruption risk, which meansdamages we suffer and consequential damages suffered by our consumers resultingfrom an interruption in power distribution are generally not covered by ourinsurance and we may be subject to significant related losses. See “Item 3. KeyInformation—Risk Factors—Risks Relating to CEMIG—We operate without generalthird party liability and catastrophe 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.

 

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**Difficultiesof Enforcing Civil Liabilities Against Non-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 enforceabilityunder the laws of the country where the foreign judgment is granted;

 

·                  is issued by a competent court after proper service ofprocess is made in accordance with Brazilian law;

 

·                  is not subject toappeal;

 

·                  is for the payment of a sum certain;

 

·                  is authenticated by a Brazilian consular officer in thecountry where the foreign judgment is issued and is accompanied by a sworntranslation into Portuguese; and

 

·                  is not contrary to Brazilian national sovereignty, publicpolicy 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 basedon the federal securities laws of the United States may be brought in Braziliancourts and that, subject to Brazilian public policy and national sovereignty,Brazilian courts will enforce liabilities in such actions against us and ourofficers; and

 

·                  the ability of ajudgment creditor or the other persons named above to satisfy a judgment byattaching our assets or those of the selling shareholders is limited byprovisions 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 Qualitative Disclosures about MarketRisk

** **

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*)*.*Despitethe fact that our electricity purchases from Itaipu, which represented R$1,000million in 2008, are denominated in U.S. dollars, the related foreign exchangerisk is no longer reflected in our operating revenues and operating expensesdue to rate legislation changes in 2001 which allow electricity utilities suchas us to record exchange rate losses related to Itaipu purchases as deferred regulatoryassets. See “Item 5. Operating and Financial Review and Prospects—CriticalAccounting Estimates.”

 

**ExchangeRate Risk**

** **

At December 31, 2008, approximately 6.8% of our outstandingindebtedness, or R$445 million, was denominated in foreign currencies, of whichapproximately 70.8%, or R$315 million, was denominated in U.S. dollars. We donot have substantial revenues 

 

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denominatedin any foreign currencies and, due to regulations that require us to keepexcess cash on deposit in *real*-denominatedaccounts at Brazilian banks, we do not have monetary assets denominated inforeign currencies.

 

In 2008, 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 CDI rate. See Notes 2(d), 14, 22, 24 and 25 to our consolidated financialstatements.

 

In 2009, the potential loss we would experience in the event of ahypothetical 20% depreciation of the *real* against the U.S. dollar and other foreigncurrencies would be approximately R$56 million related principally toloans and financing and primarily due to an increase in our *real*-denominated interest expense, which would be reflectedon our income statement. In 2009, a hypothetical 20% depreciation of the*real* against the U.S. dollar would result in an additional annualcash outflow of approximately R$241.8 million, reflecting the increased cost in*reais* of servicing foreigncurrency-denominated indebtedness from loans, financings and debentures andincreased purchasing power relating to Itaipu. This sensitivity analysisassumes a simultaneous unfavorable 20% fluctuation in each of the exchangerates affecting the foreign currencies in which our indebtedness, the relatedinterest expense and the expenses relating to the purchase of energy fromItaipu are denominated. This sensitivity analysis also assumes that theunfavorable fluctuation in the exchange rate affecting the purchase of energyfrom Itaipu would affect the annual cash payments but would not affect theexpense recorded on the statement of operations, since the additional currencyexchange expense would be recorded as a deferred regulatory asset.

 

The tables below provide summary information regarding our exposure toexchange rate risk as of December 31, 2008:

 
| ** **                                     | ** ** | **R$  (Million)** |
|------------------------------------------------|------------|-------------------|
| U.S. Dollar                                    |       |              |
| Financing                                      |       | 315               |
| Less Contracted  derivative instruments        |       | (63)              |
|                                           |       | 252               |
| Japanese Yen                                   |       |              |
| Financing                                      |       | 100               |
| Less Contracted  derivative instruments        |       | (100)             |
|                                           |       | -                 |
| Other Currencies                               |       |              |
| Financing                                      |       | 30                |
| Net liabilities  exposed to exchange rate risk |       | 282               |

 

**InterestRate Risk**

** **

At December 31, 2008, we had R$6,511 million in loans andfinancing outstanding, of which approximately R$5,787 million bore interest atfloating rates. Of this R$5,787 million, R$5,696 million is subject to monetaryrestatement through the application of inflation indices established by theFederal Government, principally the IGP-M, and R$91 million is subjectprincipally to LIBOR.

 

At December 31, 2008, we had liabilities, net of other assets,that bore interest at floating rates in the amount of R$1,265 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 basispoints in interest rates applicable to floating rate financial assets andliabilities held at December 31, 2008 would result in a potential loss ofR$12.65 million to be recorded as a financial expense in our consolidatedfinancial statements.

 

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Total Debt Portfolio

 
| ** **                   | ** ** | **R$****(Million)** |
|------------------------------|------------|---------------------|
| Floating rate debt:          |       |                |
| *Real*-denominated           |       | 5,696               |
| Foreign currency-denominated |       | 91                  |
|                         |       | 5,787               |
| Fixed rate debt:             |       |                |
| Foreign currency-denominated |       | 354                 |
|                         |       |                |
| Total                        |       | 6,141               |

 
| ** **                                                                          | ** ** | **Total Portfolio**                  |
|-------------------------------------------------------------------------------------|------------|-------------------------------------------|
| ** **                                                                          | ** ** | **Floating Rate  (R$ million)** |
| Assets:                                                                             |       |                                      |
| Cash and cash equivalents                                                           |       | 1,798                                     |
|                                                                                |       |                                      |
| Account receivable from State Government                                            |       | 1,801                                     |
| Deferred regulatory assets                                                          |       | 1,086                                     |
| Total                                                                               |       | 4,685                                     |
|                                                                                |       |                                      |
| Liabilities:                                                                        |       |                                      |
|                                                                                |       |                                      |
| Account payable to suppliers-payment to generator for energy  purchased on the CCEE |       | -                                         |
| Financings (Floating Rate)                                                          |       | (5,787)                                   |
| Derivative instruments (1)                                                          |       | (163)                                     |
| Total liabilities                                                                   |       | (5,950)                                   |
|                                                                                |       |                                      |
| Total                                                                               |       | (1,265)                                   |

 

----

(1)            Swaps to reduce our exposure on the original interestrate of certain financing from an interest rate calculated based on the U.S.dollar/*real* exchange rate to aninterest rate calculated based on the CDI rate.

 

**Item 12.**    Description of Securities Other than Equity Securities

** **

Not applicable.

 

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**PART II**

** **

**Item 13.**    Defaults, Dividend Arrearages and 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, 2008, we were in compliancewith all such covenants.

 

**Item 14.**    Material Modifications to the Rights of SecurityHolders 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, or CEO, andChief Financial and Investor Relations Officer, or CFO, evaluated theeffectiveness of our disclosure controls and procedures, and concluded that on December 31,2008, these disclosure controls and procedures were effective to providereasonable assurance that information required to be disclosed in our filingsand submissions under the Exchange Act is (i) recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms and (ii) accumulated and communicated to our management, includingour CEO and CFO, as appropriate to 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 effectiveinternal 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 managementauthorization; and (iv) the timely detection of inappropriateacquisitions, and the disposal or allocation of material assets. We emphasizethat due to their inherent limitations, the possibility exists that theseactions may not prevent or detect misstatements. Also, projections of anyevaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that controls may becomeinadequate because of changes in conditions, or the degree of compliance withthe policies or procedures may decline.

 

Our management evaluated the effectiveness of our internal controlsover financial reporting at December 31, 2008, based on the criteriaestablished in the Integrated Internal Control Framework specified by theCommittee of Sponsoring Organizations of the Treadway Commission, or COSO, andconcluded that, for the year ended December 31, 2008, 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 31,2008, KPMG Auditores Independentes, has audited the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2008 andissued 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.

 

In December 2006 we implemented the Anonymous Reporting Channel,available on our website. The purpose of this program is to receive, channeland process accusations of irregular practices, such as financial fraud,misappropriation of assets, receipt of unfair advantages, and the engagement ofillegal contracts. This channel represents the Company aim of improvingtransparency, correcting unethical or illegal behavior and enhancing corporategovernance, as well as being an instrument that meets the requirements of theSarbanes-Oxley Act.

 

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**(c)**                                  AttestationReport of the Registered Public Accounting Firm

 

**Report of Independent RegisteredPublic Accounting Firm**

 

TheBoard of Directors and Shareholders of

CompanhiaEnergética de Minas Gerais – CEMIG

 

We have audited CompanhiaEnergética de Minas Gerais – CEMIG (collectively, “the Company”)’s internalcontrol over financial reporting as of December 31, 2008, based oncriteria established in*Internal Control –Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). The Company’s management is responsiblefor maintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting,included in the accompanying “Management’s Annual Report on Internal Controlover Financial Reporting”. Our responsibility is to express an opinion on theCompany’s internal control over financial reporting based on our audit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,assessing the risk that a material weakness exists, and testing and evaluatingthe design and operating effectiveness of internal control based on theassessed risk. Our audit also included performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

 

A company’s internal controlover financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture 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, CompanhiaEnergética de Minas Gerais – CEMIG maintained, in all material respects,effective internal control over financial reporting as of December 31,2008, based on criteria established in *Internal Control –Integrated Framework* issued by COSO.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of Companhia Energética deMinas Gerais – CEMIG and subsidiaries as of December 31, 2008 and 2007,and the related consolidated statements of operations and comprehensive income,changes in shareholders’ equity and comprehensive income, and cash flows foreach of the years then ended, and our report dated June 18, 2009 expressedan unqualified opinion on those consolidated financial statements.

 

KPMG Auditores Independentes

 

/s/ KPMG AuditoresIndependentes

 

Belo Horizonte,Brazil

June 18, 2009

 

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**(d)**                                  Changesin Internal Control over Financial Reporting

** **

There has been no change in our internal control over financialreporting during the year ended December 31, 2008 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

**Item 16A.**Audit Committee Financial Expert

** **

Our Fiscal Council acts as our audit committee for purposes of theSarbanes-Oxley Act of 2002. Under Section 10A-3 of the SEC rules onAudit Committees of listed companies, non-U.S. issuers are permitted not tohave a separate Audit Committee made up of independent members if there is aFiscal Council established and chosen in accordance with the legal rules ofits origin country, expressly requiring or allowing that such council followcertain obligations. Also in accordance with this exemption, a Fiscal Councilmay exercise the obligations and responsibilities of an Audit Committee of theUnited States up to the limit permitted by Brazilian law. The financial expertsof our Fiscal Council are Luiz Otávio Nunes West and Ari Barcelos da Silva.

 

**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, andis also available on our website at www.cemig.com.br. If we amend theprovisions of our code of ethics that apply to our Chief Executive Officer,Chief Financial Officer and persons performing similar functions, or if wegrant any waiver of such provisions, we will disclose such amendment or waiverwithin five business days following the date of the amendment or waiver on ourweb site at www.cemig.com.br.

 

**Item 16C.Principal Accountant Fees and Services**

** **

**Auditand Non-Audit Fees**

** **

The following table summarizes the aggregate fees billed to us by KPMGAuditores Independentes during the fiscal years ended December 31, 2008and 2007:

 
| ** **         | ** ** | **Year ended December 31,** |
|--------------------|------------|----------------------------------|
| ** **         | ** ** | **2008**                         | ** ** | **2007** |
| ** **         | ** ** | **(thousands of *reais*)**       |
| Audit fees         |       | 1,005                            |   | 912 |
| Tax fees           |       | 82                               |   | 60 |
| Audit-related fees |       | 280                              |   | - |
| Total fees         |       | 1,367                            |   | 972 |

 

*Audit fees—*Audit fees in the above table are theaggregate fees billed by KPMG Auditores Independents in 2008 and 2007,  in connection with the audit of our annualfinancial statements prepared in accordance with the accounting practicesadopted in Brazil and the United States and the review of our quarterlystatutory financial statements. 

 

*Tax Fees—*Tax fees are fees for professionalservices in relation to tax return reviews (tax compliance).

 

*Audit-Related Fees—*Audit-related fees are for diagnosticservices in connection with the implementation of the International FinancialReporting Standards, or IFRS.

 

**AuditCommittee 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 

 

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to bediscussed and approved by the Board of Directors during its meetings. Once theproposed service is approved, we formalize the engagement of services. Theapproval of any audit and non-audit services to be provided by our externalauditors 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.

 

**Item 16F. Not Applicable**

** **

**Item 16G.**

** **

**CorporateGovernance Differences from NYSE Practices**

** **

On November 4, 2003, the New York Stock Exchange, or 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.                                                                                                                                     |       | Under Section 303A of the rules of the New York  Stock Exchange, “controlled company” is taken to include a company in which  more than 50% of the voting power is held by one individual, a group or  another company. Since 50.97% of the voting stock of CEMIG is held by the  State of Minas Gerais, it is considered to be a controlled company.  Therefore, this requirement currently does not apply to CEMIG. Nonetheless,  the majority of the members of CEMIG’s Board of Directors are independent  members. |
|                |       |                                                                                                                                                                                                                                                                                     |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 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 is not be required to  have a nominating/governance committee.

 

Nonetheless, CEMIG has a Corporate Governance  Committee, composed of dependent and independent directors, and its  responsibilities are clearly defined in the internal regulations of the Board  of Directors.                                                                                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                     |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 303A.05             |       | A listed company must have a compensation committee  composed entirely of independent directors, with a written charter that  covers certain minimum specified duties. “Controlled companies” are not  required to comply with this requirement.                               |       | As a controlled company, CEMIG would not be required  to comply with the compensation committee requirements as if it were a U.S.  domestic issuer. CEMIG does not have a compensation committee.                                                                                                                                                                                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                     |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 303A.06 and 303A.07 |       | A listed company must have an audit committee with a  minimum of three independent directors that satisfy the independence  requirements of Rule 10A-3 under the Securities Exchange Act of 1934, as  amended, with a written charter that covers certain minimum specified duties. |       | CEMIG exercised its prerogative under SEC Rule 10A-3  and the Sarbanes Oxley Act of 2002, which allow the Fiscal Council of a non-U.S.  issuer to carry out the functions of the Audit Committee.

                                                                                                                                                                                                                                                                                                                               |

 

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| **Section** | ** ** | **NYSE  Corporate Governance Rule for U.S.  Domestic Issuers**                                                                                                                          | ** ** | **Our  Approach**                                                                                                                                                                                                                                                                                                                                                                                                                           |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                         |       | CEMIG’s Fiscal Council is a permanent body,  responsible, principally, for inspection and supervision of the activities of  the management and for verifying the managers’ compliance with their duties  under the law and under the bylaws.                                                                                                                                                                                      |
|        |       |                                                                                                                                                                                         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 303A.08     |       | Shareholders must be given the opportunity to vote  on all equity-compensation plans and material revisions thereto, with limited  exemptions set forth in the NYSE rules.                   |       | Under Brazilian Corporate Law, shareholder preapproval  is required for the adoption of equity compensation plans.                                                                                                                                                                                                                                                                                                                          |
|        |       |                                                                                                                                                                                         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 303A.09     |       | A listed company must adopt and disclose corporate  governance guidelines that cover certain minimum specified subjects.                                                                     |       | CEMIG’s listing on BOVESPA is at Corporate  Governance Level 1, and CEMIG is thus obliged to comply with the rules  contained in those related regulations.

 

In addition, CEMIG’s Manual for Disclosure and Use  of Information, its Securities Trading Policy, the Internal Regulations of  its Board of Directors, and its Code of Ethics outline important rules of  corporate governance which orient its management. |
|        |       |                                                                                                                                                                                         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 303A.12     |       | Each listed company 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.                                                                                                                                                                                                   |

 

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** **

**PART III**

** **

**Item 17.     FinancialStatements**

 

Not applicable.

 

### **Item 18.****Financial Statements**

###  

Reference is made to pages F-1 through F-78 hereof.

 

The following financial statements are filed as part of this annualreport on Form 20-F:

 

·                  Report of KPMG Auditores Independentesfor the years 2008 and 2007

 

·                  Report of Deloitte Touche TohmatsuAuditores Independentes for the year 2006

 

·                  Audited Consolidated Balance Sheets as ofDecember 31, 2008 and 2007

 

·                  Audited Consolidated Statements ofOperations and Comprehensive Income (Loss) for the years ended December 31,2008, 2007 and 2006

 

·                  Audited Consolidated Statements ofChanges in Shareholders’ Equity for the years ended December 31, 2008,2007 and 2006

 

·                  Audited Consolidated Statements of CashFlows for the years ended December 31, 2008, 2007 and 2006

 

·                  Notes to the Consolidated FinancialStatements

 

### **Item 19.****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 29, 2009.                                                                                                                                                                                                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 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                                                                                                                                                                                                                                                                                           |

 

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|   |   | 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)).                                                                      |

 

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| 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.  (incorporated by reference to Exhibit 4.20 to our Annual Report on  Form 20-F filed on June 30, 2008 (File No. 1-15224)).                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 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 (incorporated by reference to Exhibit 4.21 to our  Annual Report on Form 20-F filed on June 30, 2008 (File  No. 1-15224)).                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.22   |   | Share Purchase  Agreement, dated April 23, 2009, between Cemig Geração and Transmissão  S.A., Terna—Rete Elettrica Nazionale S.p.A., and CEMIG.                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 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 19, 2009.                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 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 19, 2009.                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 13.1   |   | Chief Executive Officer Certification pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002, dated June 19, 2009.                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 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 19, 2009.                                                                                                                                                                                                     |

 

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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 19, 2009

 

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**Exhibit Index**

 
| **Exhibit Number** | ** ** | **Document**                                                                                                                                                                                                                                                                                                                                                                                                |
|--------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1                  |       | Corporate by-laws of  CEMIG, as amended and in effect since April 29, 2009.                                                                                                                                                                                                                                                                                                                            |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 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                                                                                                                                                                                                                                                                                              |

 

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Tableof Contents

 
|   |   | 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.  (incorporated by reference to Exhibit 4.20 to our Annual Report on  Form 20-F filed on June 30, 2008 (File No. 1-15224)).                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 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 (incorporated by reference to Exhibit 4.21 to our  Annual Report on Form 20-F filed on June 30, 2008 (File  No. 1-15224)).                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.22   |   | Share Purchase  Agreement, dated April 23, 2009, between Cemig Geração and Transmissão  S.A., Terna—Rete Elettrica Nazionale S.p.A., and CEMIG.                                                                                                                                                                                                                                                                                 |

 

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Tableof Contents

 
| 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 19, 2009.                                                             |
|   |   |                                                                                                                                                                                          |
| 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 19, 2009. |
|   |   |                                                                                                                                                                                          |
| 13.1   |   | Chief Executive Officer  Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,  dated June 19, 2009.                                                             |
|   |   |                                                                                                                                                                                          |
| 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 19, 2009. |

 

----

 

***Companhia Energética de Minas Gerais — CEMIG***

** **

*Financial Statements asof December 31, 2008 and December 2007 and for the Years Ended December 31,2008, 2007 and 2006 and Report of Independent Registered Public Accounting Firm*

 

----

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

Tothe Board of Directors and Shareholders of

Companhia Energética de Minas Gerais — CEMIG

Belo Horizonte — MG, Brazil

 

We have audited theaccompanying consolidated balance sheets of Companhia Energética de MinasGerais — CEMIG and subsidiaries (collectively, “the Company”) as of December 31,2008 and 2007, and the related consolidated statements of operations andcomprehensive income, changes in shareholders’ equity and comprehensive income,and cash flows for the years then ended. These consolidated financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Companhia Energética de MinasGerais — CEMIG and subsidiaries as of December 31, 2008 and 2007, andthe results of their operations and their cash flows for the years then endedin conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates), Companhia Energética de Minas Gerais — CEMIG’s internal control overfinancial reporting as of December 31, 2008, based on criteria establishedin *Internal Control — Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO), and our report dated June 18, 2009 expressed an unqualifiedopinion on the effectiveness of the Company’s internal control over financialreporting.

 

KPMG Auditores Independentes

 

/s/ KPMG Auditores Independentes

 

Belo Horizonte, BrazilJune 18, 2009

 

F-2

----

 

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

** **

Tothe Shareholders and Management of

Companhia Energética de Minas Gerais – CEMIG

BeloHorizonte – MG, Brazil

 

Wehave audited the accompanying consolidated statements of income, shareholders’equity and cash flows of Companhia Energética de Minas Gerais - CEMIG andsubsidiaries (the “Company”) for the year ended December 31, 2006. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan 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 that ouraudit provides a reasonable basis for our opinion.

 

Inour opinion, such consolidated financial statements present fairly, in allmaterial respects, the results of operations and cash flows of CompanhiaEnergética de Minas Gerais - CEMIG and subsidiaries for the year ended December31, 2006, in conformity with accounting principles generally accepted in theUnited 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 PostretirementPlans - an amendment of FASB Statements No. 87, 88, 106, and 132(R)”, effectiveDecember 31, 2006. Also, as discussed in Note 2 to the consolidated financialstatements, the Company adopted the Securities and Exchange Commission’s StaffAccounting Bulletin 108 “Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements”, effectiveJanuary 1, 2006.

 

/s/ Deloitte Touche Tohmatsu AuditoresIndependentes

 

Belo Horizonte, Brazil

June 29, 2007

 

F-3

----

 

**COMPANHIAENERGÉTICA DE MINAS GERAIS - CEMIG**

 

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2008 AND 2007**

 

**(Expressed in millions of Brazilian *reais*)**

 

**ASSETS**

 
| ** **                                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|
| CURRENT ASSETS:                                                 |       |     |       |     |       |
| Cash and cash  equivalents (note 6)                             |       | 1,969    |       | 1,784    |       |
| Accounts receivable,  net (note 7)                              |       | 1,705    |       | 1,684    |       |
| Accounts receivable -  use of basic transmission network        |       | 439      |       | 458      |       |
| Deferred regulatory  assets (note 4)                            |       | 754      |       | 903      |       |
| Deferred income tax  assets (note 5)                            |       | 48       |       | 71       |       |
| Recoverable taxes (note  8)                                     |       | 672      |       | 689      |       |
| Dividends                                                       |       | 86       |       | 51       |       |
| Escrow accounts                                                 |       | 207      |       | 116      |       |
| Materials and supplies                                          |       | 27       |       | 35       |       |
| Other                                                           |       | 309      |       | 144      |       |
|                                                            |       | 6,216    |       | 5,935    |       |
|                                                            |       |     |       |     |       |
| INVESTMENTS IN  AFFILIATES (note 9)                             |       | 1,203    |       | 869      |       |
|                                                            |       |     |       |     |       |
| PROPERTY, PLANT AND,  EQUIPMENT, NET (note 10)                  |       | 13,733   |       | 13,602   |       |
| INTANGIBLES (note 10)                                           |       | 278      |       | 233      |       |
|                                                            |       | 14,011   |       | 13,835   |       |
|                                                            |       |     |       |     |       |
| OTHER ASSETS:                                                   |       |     |       |     |       |
| Deferred regulatory  assets (note 4)                            |       | 332      |       | 823      |       |
| Account receivable from  Minas Gerais State Government (note 3) |       | 1,801    |       | 1,763    |       |
| Recoverable taxes (note  8)                                     |       | 253      |       | 316      |       |
| Accounts receivable,  net (note 7)                              |       | 17       |       | 44       |       |
| Deferred income tax  assets (note 5)                            |       | 435      |       | 452      |       |
| Escrow deposits (note  11)                                      |       | 351      |       | 282      |       |
| Other                                                           |       | 162      |       | 34       |       |
|                                                            |       | 3,351    |       | 3,714    |       |
| Total assets                                                    |       | 24,781   |       | 24,353   |       |

 

The accompanying notes are an integral part of theconsolidated financial statements.

 

F-4

----

 

**COMPANHIAENERGÉTICA DE MINAS GERAIS - CEMIG**

 

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2008 AND 2007**

 

**(Expressed in millions of Brazilian *reais*, except share amounts)**

 

**LIABILITIES AND SHAREHOLDERS’ EQUITY**

 
| ** **                                                                                                                     | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CURRENT LIABILITIES:                                                                                                           |       |     |       |     |       |
| Accounts payable to  suppliers (note 12)                                                                                       |       | 719      |       | 784      |       |
| Payroll and related  charges                                                                                                   |       | 279      |       | 222      |       |
| Taxes payable (note 13)                                                                                                        |       | 471      |       | 559      |       |
| Deferred income tax  liabilities (note 5)                                                                                      |       | —   |       | 140      |       |
| Dividends and interest  on capital (note 18)                                                                                   |       | 960      |       | 874      |       |
| Financing (note 14)                                                                                                            |       | 1,197    |       | 941      |       |
| Regulatory charges  payable (note 15)                                                                                          |       | 460      |       | 384      |       |
| Employee  post-retirement benefits (note 16)                                                                                   |       | 75       |       | 89       |       |
| Employee profit sharing  (note 21)                                                                                             |       | 117      |       | 100      |       |
| Derivative contracts  (note 24)                                                                                                |       | 94       |       | 184      |       |
| Regulatory liabilities –  Tariff Review (note 26)                                                                         |       | 214      |       | —   |       |
| Other                                                                                                                          |       | 303      |       | 236      |       |
|                                                                                                                           |       | 4,889    |       | 4,513    |       |
| LONG-TERM LIABILITIES:                                                                                                         |       |     |       |     |       |
| Financing (note 14)                                                                                                            |       | 5,314    |       | 5,873    |       |
| Employee  post-retirement benefits (note 16)                                                                                   |       | 1,765    |       | 2,182    |       |
| Deferred income tax  liabilities (note 5)                                                                                      |       | 148      |       | 162      |       |
| Accrued liability for  contingencies (note 17)                                                                                 |       | 472      |       | 346      |       |
| Accounts payable to  suppliers (note 12)                                                                                       |       | —   |       | 341      |       |
| Taxes payable (note 13)                                                                                                        |       | 106      |       | 2        |       |
| Regulatory charges  payable (note 15)                                                                                          |       | 20       |       | 15       |       |
| Special obligations  (note 2r)                                                                                                 |       | 2,510    |       | 2,459    |       |
| Other                                                                                                                          |       | 224      |       | 236      |       |
|                                                                                                                           |       | 10,559   |       | 11,616   |       |
|                                                                                                                           |       |     |       |     |       |
| SHAREHOLDERS’ EQUITY:  (note 18)                                                                                          |       |     |       |     |       |
| Share capital -                                                                                                                |       |     |       |     |       |
| Preferred – 279,378,119  thousand shares authorized and issued and 279,170,735 outstanding as of  December 31, 2008. |       | 1,286    |       | 1,258    |       |
| Common – 216,923,395  thousand shares authorized, issued and outstanding as of December 31,  2008.                   |       | 1,002    |       | 981      |       |
|                                                                                                                           |       | 2,288    |       | 2,239    |       |
| Additional paid-in  capital                                                                                                    |       | 3,170    |       | 3,170    |       |
| Appropriated retained  earnings                                                                                                |       | 2,200    |       | 2,155    |       |
| Unappropriated retained  earnings                                                                                              |       | 2,386    |       | 1,670    |       |
| Accumulated other  comprehensive loss                                                                                          |       | (711     | )          | (1,010   | )          |
|                                                                                                                           |       | 9,333    |       | 8,224    |       |
| Total liabilities and shareholders’ equity                                                                                |       | 24,781   |       | 24,353   |       |

 

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, 2008, 2007 AND2006**

** **

**(Expressed in millions of Brazilian *reais*, except share and per share amounts)**

 
| ** **                                                                                                                                   | ** ** | **2008**    | ** ** | **2007**    | ** ** | **2006**    | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| NET OPERATING REVENUES:                                                                                                                      |       |        |       |        |       |        |       |
| Electricity sales to  final customers (note 19a)                                                                                             |       | 10,497      |       | 10,191      |       | 9,319       |       |
| Electricity sales to  the interconnected power system (note 19a)                                                                             |       | 1,069       |       | 1,134       |       | 884         |       |
| Use of basic  transmission network (note 19d)                                                                                                |       | 1,865       |       | 1,705       |       | 1,780       |       |
| Other operating  revenues (note 19b)                                                                                                         |       | 241         |       | 236         |       | 200         |       |
| Taxes on revenues (note  19c)                                                                                                                |       | (3,844      | )          | (3,836      | )          | (3,543      | )          |
| Total net operating  revenues                                                                                                                |       | 9,828       |       | 9,430       |       | 8,640       |       |
|                                                                                                                                         |       |        |       |        |       |        |       |
| OPERATING COSTS AND  EXPENSES:                                                                                                               |       |        |       |        |       |        |       |
| Electricity purchased  for resale (note 20)                                                                                                  |       | (2,267      | )          | (2,147      | )          | (1,907      | )          |
| Use of basic  transmission network                                                                                                           |       | (634        | )          | (564        | )          | (687        | )          |
| Depreciation and  amortization                                                                                                               |       | (769        | )          | (878        | )          | (810        | )          |
| Personnel (note 20)                                                                                                                          |       | (1,004      | )          | (884        | )          | (1,046      | )          |
| Regulatory charges  (note 20)                                                                                                                |       | (1,024      | )          | (967        | )          | (1,031      | )          |
| Special obligations  (note 4)                                                                                                                |       | —      |       | —      |       | (1,057      | )          |
| Third-party services  (note 20)                                                                                                              |       | (605        | )          | (550        | )          | (475        | )          |
| Employee  post-retirement benefits (note 16)                                                                                                 |       | (277        | )          | (140        | )          | (245        | )          |
| Materials and supplies                                                                                                                       |       | (170        | )          | (148        | )          | (116        | )          |
| Provision for loss on  deferred regulatory assets (note 4)                                                                                   |       | (19         | )          | (146        | )          | (49         | )          |
| Employees profit  sharing (note 21)                                                                                                          |       | (362        | )          | (455        | )          | (210        | )          |
| Other (note 20)                                                                                                                              |       | (410        | )          | (472        | )          | (234        | )          |
| Total operating costs  and expenses                                                                                                          |       | (7,541      | )          | (7,351      | )          | (7,867      | )          |
| Operating income                                                                                                                             |       | 2,287       |       | 2,079       |       | 773         |       |
|                                                                                                                                         |       |        |       |        |       |        |       |
| FINANCIAL (EXPENSE)  INCOME, NET (note 22)                                                                                                   |       | 17          |       | (48         | )          | 335         |       |
|                                                                                                                                         |       |        |       |        |       |        |       |
| NON OPERATING INCOME                                                                                                                         |       |        |       |        |       |        |       |
| Equity in results of  Investments                                                                                                            |       | 204         |       | 223         |       | 91          |       |
| Gain on sale of Way TV                                                                                                                       |       | —      |       | 49          |       | —      |       |
|                                                                                                                                         |       | 204         |       | 272         |       | 91          |       |
| Income before income  taxes                                                                                                                  |       | 2,508       |       | 2,303       |       | 1,199       |       |
|                                                                                                                                         |       |        |       |        |       |        |       |
| INCOME TAXES (note 5)                                                                                                                        |       |        |       |        |       |        |       |
| Current tax expense                                                                                                                          |       | (973        | )          | (941        | )          | (575        | )          |
| Deferred tax benefit                                                                                                                         |       | 218         |       | 256         |       | 78          |       |
|                                                                                                                                         |       | (755        | )          | (685        | )          | (497        | )          |
|                                                                                                                                         |       |        |       |        |       |        |       |
| NET INCOME                                                                                                                                   |       | 1,753       |       | 1,618       |       | 702         |       |
| OTHER COMPREHENSIVE  INCOME (LOSS):                                                                                                          |       |        |       |        |       |        |       |
| Pension Plan  adjustments (note 16)                                                                                                          |       | 453         |       | (605        | )          | 212         |       |
| Deferred tax (expense)  benefit                                                                                                              |       | (154        | )          | 205         |       | (72         | )          |
|                                                                                                                                         |       | 299         |       | (400        | )          | 140         |       |
| COMPREHENSIVE INCOME                                                                                                                         |       | 2,052       |       | 1,218       |       | 842         |       |
|                                                                                                                                         |       |        |       |        |       |        |       |
| Weighted average number  of common and preferred shares outstanding during the year (thousand) for  purposes of calculating basic earnings   |       | 496,094,130 |       | 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 |       | 498,878,577 |       | 496,094,130 |       | 496,837,488 |       |
|                                                                                                                                         |       |        |       |        |       |        |       |
| Basic earnings per  thousand common and preferred shares - In Brazilian reais                                                                |       | 3.53        |       | 3.33        |       | 1.44        |       |
| Diluted earnings per  thousand common and preferred shares - In Brazilian reais                                                              |       | 3.51        |       | 3.26        |       | 1.41        |       |

 

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 AND COMPREHENSIVE INCOME**

**FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND2006**

 

**(Expressed in millions of Brazilian *reais*)**

 
| ** **                                                             | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| SHARE CAPITAL:                                                         |       |     |       |     |       |     |       |
| Preferred -                                                            |       |     |       |     |       |     |       |
| Balance, beginning of  year                                            |       | 1,258    |       | 804      |       | 804      |       |
| Transfer from  appropriated retained earnings                          |       | 28       |       | 454      |       | —   |       |
| Balance, end of year                                                   |       | 1,286    |       | 1,258    |       | 804      |       |
|                                                                   |       |     |       |     |       |     |       |
| Common -                                                               |       |     |       |     |       |     |       |
| Balance, beginning of  year                                            |       | 981      |       | 624      |       | 624      |       |
| Transfer from  appropriated retained earnings                          |       | 21       |       | 357      |       | —   |       |
| Balance, end of year                                                   |       | 1,002    |       | 981      |       | 624      |       |
|                                                                   |       | 2,288    |       | 2,239    |       | 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                                            |       | 1,837    |       | 2,648    |       | 2,648    |       |
| Transfer to capital  stock                                             |       | (49      | )          | (811     | )          | —   |       |
| Balance, end of year                                                   |       | 1,788    |       | 1,837    |       | 2,648    |       |
|                                                                   |       |     |       |     |       |     |       |
| Legal reserve-                                                         |       |     |       |     |       |     |       |
| Balance, beginning of  year                                            |       | 273      |       | 186      |       | 100      |       |
| Transfer from  unappropriated retained earnings                        |       | 94       |       | 87       |       | 86       |       |
| Balance, end of year                                                   |       | 367      |       | 273      |       | 186      |       |
|                                                                   |       | 2,200    |       | 2,155    |       | 2,879    |       |
| UNAPPROPRIATED RETAINED  EARNINGS:                                     |       |     |       |     |       |     |       |
| Balance, beginning of  year                                            |       | 1,670    |       | 1,503    |       | 2,367    |       |
| Cumulative effect  adjustment for adoption of SAB 108, net of tax |       | —   |       | —   |       | (133     | )          |
| Net income                                                             |       | 1,753    |       | 1,618    |       | 702      |       |
| Transfer to  appropriated retaining earnings                           |       | (94      | )          | (87      | )          | (86      | )          |
| Dividends and interest  on capital                                     |       | (943     | )          | (1,364   | )          | (1,347   | )          |
| Balance, end of year                                                   |       | 2,386    |       | 1,670    |       | 1,503    |       |
|                                                                   |       |     |       |     |       |     |       |
| ACCUMULATED OTHER  COMPREHENSIVE INCOME (LOSS):                        |       |     |       |     |       |     |       |
| Balance, beginning of  year                                            |       | (1,010   | )          | (610     | )          | (506     | )          |
| Adjustment to initial  adoption SFAS No 158, net of tax           |       | —   |       | —   |       | (244     | )          |
| Other comprehensive  income (loss)                                     |       | 299      |       | (400     | )          | 140      |       |
| Balance, end of year                                                   |       | (711     | )          | (1,010   | )          | (610     | )          |
| Shareholders’ equity at  end of year                              |       | 9,333    |       | 8,224    |       | 8,370    |       |

 

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, 2008, 2007 AND2006**

 

**(Expressed in millions of Brazilian *reais*)**

 
| ** **                                                                        | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                            |       |     |       |     |       |     |       |
| Net income                                                                        |       | 1,753    |       | 1,618    |       | 702      |       |
| Adjustments to  reconcile net income to net cash provided by operating activities |       |     |       |     |       |     |       |
| Depreciation and  amortization                                                    |       | 769      |       | 878      |       | 810      |       |
| Deferred regulatory  assets and liabilities                                       |       | —   |       | —   |       | (70      | )          |
| Monetary variation and  exchange rate variation gain                              |       | (40      | )          | (438     | )          | (408     | )          |
| Loss on disposal of  property, plant and equipment                                |       | 32       |       | 37       |       | 21       |       |
| Employee  post-retirement benefits                                                |       | 22       |       | 106      |       | 193      |       |
| Provision for  contingencies and doubtful accounts receivable                     |       | 231      |       | 70       |       | (97      | )          |
| Regulatory liability –  special obligations                                  |       | —   |       | —   |       | 1,057    |       |
| Provision for loss on  deferred regulatory assets                                 |       | 19       |       | 146      |       | 49       |       |
| Deferred tax benefit                                                              |       | (218     | )          | (256     | )          | (78      | )          |
| Equity in results of  investments                                                 |       | (204     | )          | (223     | )          | (91      | )          |
| Other                                                                             |       | (51      | )          | 49       |       | (2       | )          |
|                                                                              |       |     |       |     |       |     |       |
| Decrease (increase) in  operating assets-                                         |       |     |       |     |       |     |       |
| Accounts receivable                                                               |       | (136     | )          | 7        |       | (263     | )          |
| Recoverable taxes                                                                 |       | 81       |       | (237     | )          | (229     | )          |
| Accounts receivable –  use of basic transmission network                     |       | 19       |       | (108     | )          | (47      | )          |
| Deferred regulatory  assets                                                       |       | 330      |       | 965      |       | 1,053    |       |
| Other                                                                             |       | 243      |       | 229      |       | 71       |       |
|                                                                              |       |     |       |     |       |     |       |
| Increase (decrease) in  operating liabilities-                                    |       |     |       |     |       |     |       |
| Accounts payable to  suppliers                                                    |       | (90      | )          | (41      | )          | (102     | )          |
| Payroll and related  charges                                                      |       | 56       |       | 48       |       | —   |       |
| Taxes payable                                                                     |       | (61      | )          | 4        |       | (236     | )          |
| Regulatory charges  payable                                                       |       | 79       |       | (32      | )          | 79       |       |
| Accrued interest on  long-term financing and short-term loans                     |       | 72       |       | (77      | )          | (38      | )          |
| Other                                                                             |       | 55       |       | 91       |       | (88      | )          |
| Net cash provided by  operating activities                                        |       | 2,961    |       | 2,836    |       | 2,286    |       |

 

F-8

----

 
| ** **                                                                   | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                         |       |     |       |     |       |     |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                        |       |     |       |     |       |     |       |
| Escrow deposits                                                              |       | (89      | )          | (17      | )          | (190     | )          |
| Acquisition of  investments in affiliates                                    |       | (220     | )          | (26      | )          | (568     | )          |
| Acquisition of  property, plant and equipment                                |       | (971     | )          | (1,120   | )          | (1,328   | )          |
| Proceeds from sale of  affiliates                                            |       | —   |       | 49       |       | —   |       |
| Net cash used in  investing activities                                       |       | (1,280   | )          | (1,114   | )          | (2,086   | )          |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                       |       |     |       |     |       |     |       |
| Proceeds from issuance  of long-term financing                               |       | 176      |       | 589      |       | 2,248    |       |
| Repayment of long-term  financing and short-term loans                       |       | (807     | )          | (1,134   | )          | (1,817   | )          |
| Proceeds from  short-term loans                                              |       | —   |       | 833      |       | 1,200    |       |
| Dividends and interest  on capital paid                                      |       | (865     | )          | (1,334   | )          | (2,072   | )          |
| Net cash used in  financing activities                                       |       | (1,496   | )          | (1,046   | )          | (441     | )          |
| NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS                        |       | 185      |       | 676      |       | (241     | )          |
|                                                                         |       |     |       |     |       |     |       |
| CASH AND CASH  EQUIVALENTS:                                                  |       |     |       |     |       |     |       |
| Beginning of the year                                                        |       | 1,784    |       | 1,108    |       | 1,349    |       |
| End of the year                                                              |       | 1,969    |       | 1,784    |       | 1,108    |       |
|                                                                         |       | 185      |       | 676      |       | (241     | )          |
|                                                                         |       |     |       |     |       |     |       |
| SUPPLEMENTARY CASH  FLOWS DISCLOSURE:                                        |       |     |       |     |       |     |       |
| Taxes paid - income  taxes                                                   |       | 867      |       | 1,091    |       | 696      |       |
| Interest paid, net of  interest capitalized                                  |       | 644      |       | 672      |       | 756      |       |
| SCHEDULE OF NONCASH INVESTING  AND FINANCING ACTIVITIES:                     |       |     |       |     |       |     |       |
| Accounts receivables  from State Government offset by dividends              |       | 129      |       | 122      |       | 79       |       |
| Debentures issued  related to Irapé power plant offset by dividends     |       | —   |       | —   |       | 30       |       |
| 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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**COMPANHIAENERGÉTICA DE MINAS GERAIS - CEMIG**

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2008, 2007 AND 2006**

 

**(Amounts expressed in millions of Brazilian *reais*, unless otherwise indicated)**

 

**1.****                 ****THE COMPANYAND ITS OPERATIONS**

 

(a) The Company

 

Companhia Energética de Minas Gerais, “CEMIG” or the “Company”,a listed company, has operated solely and exclusively as a holding company sinceJanuary 1, 2005, with shareholder participations in individually andjointly controlled subsidiaries. The principal objectives of its subsidiariesare the construction and operation of systems used in production,transformation, transmission, distribution and sales of electric energy, aswell as the development of activities in the different fields of energy.

 

Since the majority of CEMIG’ssubsidiaries 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, 2008 are as follows(the information related to number of plants and capacity has not been auditedby our independent registered public accounting firm):

 

·                  Cemig Geração e Transmissão S.A. (“Cemig Geração e Transmissão”)(100.00% interest) – Electric power generation and transmission, through 46plants – (43 hydroelectric, 1 wind and 2 thermoelectric plants) – andtransmission lines mostly belonging to the basic grid of the Braziliangeneration and transmission system. Cemig Geração e Transmissão S.A. hasinterests in the following development-stage companies, of which only CemigBaguari Energia S.A. was consolidated.

 

·                  Hidrelétrica Cachoeirão S.A. (“Cachoeirão”) (jointlycontrolled - 49.00% interest) –Generationand sale of electric energy as an independent power producer, through theCachoeirão hydroelectric power plant located at Pocrane, in the State of MinasGerais. The power plant has generation capacity of 27 MW and began operationsin December 30, 2008.

 

·                  Guanhães Energia S.A. (“Guanhães”) (jointly controlled – 49.00%interest) - Generation and sale ofelectric energy through the construction and commercial operation of thefollowing Small Hydro Plants: Dores de Guanhães; Senhora do Porto; and Jacaré,located in the municipality of Dores de Guanhães; and Fortuna II, located inthe municipality of Virginópolis, in Minas Gerais State. The plants are in theconstruction phase, with operations scheduled to begin in 2010, and will haveaggregate installed capacity of 44 MW;

 

·                  Cemig Baguari Energia S.A. (“Baguari”)(subsidiary – 100.00% interest) - Generation and sale ofelectric energy as an independent power producer in future projects;

 

·                  Madeira Energia S.A. –(jointly controlled – 10.00%interest) - Implementation, construction, operation and commercial operation ofthe Santo Antônio hydroelectric plant in the Madeira River Basin, in the Stateof Rondônia, with power of 3,150 MW and commercial start up scheduled for 2012;

 

F-10

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·                  Hidrelétrica Pipoca S.A.(jointly controlled - 49.00% interest) - Independent production of electricity,through construction and commercial operation of the Pipoca PCH (Small HydroPlant), with 20 MW of installed capacity, located on the Manhuaçu River, in theMunicipalities of Caratinga and Ipanema, in the State of Minas Gerais.Operational startup is scheduled for April 2010;

 

·                  Baguari Energia S.A. (jointlycontrolled - 69.39% interest) - Construction, operation, maintenance andcommercial operation of the Baguari Hydroelectric Plant, through participationin the UHE Baguari Consortium (Baguari Energia 49.00% and Neoenergia 51.00%),with 140 MW of installed capacity, located on the river Doce in GovernadorValadares, Minas Gerais State. The first unit is scheduled for startup in October 2009,the second in December 2009, and the third in February 2010;

 

·                  Empresa Brasileira deTransmissão de Energia S.A. (“EBTE”) (jointly controlled - 49.00% interest) -holder of concession for public electricity transmission service, through thetransmission lines of the State of Mato Grosso. Operational startup isscheduled for June 2010.

 

·                  Cemig Distribuição S.A. (“Cemig Distribuição”) (100.00% interest) –Electric power distribution through distribution grids and lines coveringapproximately 97.00% of the State of Minas Gerais;

 

·                  Sá Carvalho S.A. (“Sá Carvalho”) (100.00% interest) - Generation andsale of electric energy from the Sá Carvalho hydroelectric power plant, as anelectric energy public service concessionaire;

 

·                  Usina Térmica Ipatinga S.A. (“Ipatinga”) (100.00% interest) -Generation and sale of electric energy, as an independent power producer, atthe Ipatinga thermoelectric power plant located at the facilities of UsinasSiderúrgicas de Minas Gerais S.A. – USIMINAS;

 

·                  Empresa de Infovias S.A. (“Infovias”) (100.00% interest) - Renderingtelecommunication services and developing activities related thereto, throughmultiservice networks using optical fiber cable, coaxial cable and otherelectronic equipment;

 

·                  Efficientia S.A. (“Efficientia”) (100.00% interest) - Renderingefficiency, optimization and energy solutions services through studies andcarrying out projects, as well as providing operating and maintenance servicesto energy supply facilities;

 

·                  Horizontes Energia S.A. (“Horizontes”) (100.00% interest) - Generationand sale of electric energy, as an independent power producer, at the MachadoMineiro and Salto do Paraopeba hydroelectric power plants, located in the Stateof Minas Gerais, and the Salto Voltão and Salto do Passo Velho hydroelectricpower plants, located in the State of Santa Catarina;

 

·                  Central Termelétrica de Cogeração S.A. (“Cogeração”) (100.00% interest)– Generation and sale of electric energy, as an independent power producer infuture projects;

 

·                  Rosal Energia S.A. (“Rosal”) (100.00% interest) – Generation and saleof electric energy as an electric energy public service concessionaire throughRosal hydroelectric plant, located on the border between Rio de Janeiro andEspírito Santo States;

 

·                  Central Hidrelétrica Pai Joaquim S.A.(“Pai Joaquim”) (100.00% interest)– Generation and sale of electric energy, as an independent power producer infuture projects;

 

·                  Cemig PCH S.A. (100.00% interest) - Generation and sale of electricenergy, as an independent power producer, at the Pai Joaquim hydroelectricpower plant, located in the state of Minas Gerais;

 

·                  Cemig Capim Branco Energia S.A. (100.00% interest) - Generation andsale of electric energy, as an independent power producer, at the Capim BrancoI and II hydroelectric power plants, located in the state of Minas Gerais,built through a consortium with private-sector partners;

 

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·                  UTE Barreiro S.A. (100.00% interest) - Generation and sale of electricenergy, as an independent thermoelectric power producer, at the CentralTermelétrica Barreiro (“UTE Barreiro”) located at the facilities of Vallourec &Mannesmann Tubes, in Minas Gerais State;

 

·                  Cemig Trading S.A. (100.00% interest) – A development stage enterpriseengaged in the purchase and sale of energy.

 

As of December 31,2008, the Company also has the following equity interests (the informationrelated to number of plants and capacity has not been audited by ourindependent registered public accounting firm):

 

·                  Rio Minas Energia Participações S.A .(“RME”) (jointly controlled -25.00% interest) – holding company with 52.13% (see note 9) interest of LightServiços de Eletricidade S.A. (electric power distribution) with 3.9 millionconsumers in 31 municipalities of the state of Rio de Janeiro and Light EnergiaS.A.(electric power generation) with 855 MW;

 

·                  Companhia de Gás de Minas Gerais - GASMIG (“GASMIG”) (jointlycontrolled - 55.19% interest) - Acquisition, transportation and distribution ofnatural gas and related products through concession from the government of theState of Minas Gerais for distribution of gas in the State;

 

·                  Companhia Transleste de Transmissão (“Transleste”) (jointly controlled- 25.00% interest) – Operation of the 345 KV transmission line (“TL”)connecting the substation located in Montes Claros and the substation of theIrapé Hydroelectric Power Plant;

 

·                  Companhia Transudeste de Transmissão (“Transudeste”) (jointlycontrolled - 24.00% interest) –Construction and operation of the 345 KV TLItutinga – Juiz de Fora;

 

·                  Companhia Transirapé de Transmissão (“Transirapé”) (jointly controlled- 24.50% interest) –Construction and operation of the 230 KV TL Irapé –Araçuaí;

 

·                  Empresa Paraense de Transmissão de Energia S.A.(“ETEP”) (jointlycontrolled – 19.25% interest) –Electric energy public service concessionairewith 500KV transmission line (“TL”) from Tucuruí substation to Vila do Condesubstation, located in the state of Pará. See more information of an increasedstake in this company in note 9;

 

·                  Empresa Norte de Transmissão de Energia S.A.(“ENTE”) (jointlycontrolled - 18.35% interest) –Electric energy public service concessionairewith two transmission line (“TL”) of 500 KV, one from Tucuruí substation toVila do Conde substation, located in the state of Pará and the other fromMarabá substation to Açailândia substation, located in the state of Maranhão.See more information of an increased stake in this company in note 9;

 

·                  Empresa Regional de Transmissão de Energia S.A. (“ERTE”) (jointlycontrolled – 18.35% interest) - Electric energy public service concessionairewith 230 KV transmission line (“TL”) from Vila do Conde substation to SantaMaria, located in the state of Pará. See more information of an increased stakein this company in note 9;

 

·                  Empresa Amazonense de Transmissão de Energia S.A. (“EATE”) (jointlycontrolled – 17.17% interest) - Electric energy public service concessionairewith 500 KV transmission line (“TL”) between its substation of Tucuruí, Marabá,Imperatriz, Presidente Dutra and Açailândia. See more information of anincreased stake in this company in note 9;

 

·                  Empresa Catarinense de Transmissão de Energia S.A. (“ECTE”) (jointlycontrolled – 7.50% interest) - Electric energy public service concessionairewith 525 KV transmission line (“TL”) from Campos Novos substation to Blumenausubstation, both located in the state of Santa Catarina. See more informationof an increased stake in this company in note 9;

 

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·                  Axxiom Soluções TecnológicasS.A. (“AXXIOM”) (former Focus Soluções Tecnológicas S.A.) (jointly controlled – 49.00% interest) -Formed in August 2007 to provide services of implementation and managementof systems for electricity sector companies.

 

CEMIGalso has interests in the following development-stage companies as of December 31,2008:

 

·                  Companhia de Transmissão Centroeste de Minas (“Centroeste”) (jointlycontrolled - 51.00% interest) –Construction and operation of the 345 KV Furnas –Pimenta transmission line;

 

·                  Transchile Charrúa Transmisión S.A. – (“Transchile”) (jointlycontrolled – 49.00% interest) – Installation, operation and maintenance of theCharrúa – Nueva Temuco 220 kV transmission line and two transmission linesections in the Charrúa and Nueva Temuco sub-stations, in the central region ofChile;

 

·                  Cemig Serviços S.A. (100.00% interest) – Formed in April 2008 toprovide services related to generation, transmission and distribution ofelectric power.

 

Where Cemig exercisesjoint control it does so through shareholders ́ agreements with the othershareholders of the investee company that they share the power of control insuch investees.

 

(b) Theelectricity sector in Brazil:

 

The electricity sector inBrazil is regulated by the Federal Government, acting through its Ministry ofMines and Energy (“MME”), which has exclusive authority over the electricitysector. 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**

 

(a)          **Basis of presentation** - The consolidated financial statementshave been prepared in accordance with accountingprinciples generally accepted in the United States of America (“U.S.GAAP”), which differ in certain respects from the Company’s statutory financialstatements prepared in accordance with accounting 

 

F-13

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practices adopted in Brazil (“Brazilian GAAP”), whichare prepared and filed in accordance with the specific rules of the *Comissão de Valores Mobiliários* (theBrazilian Securities Commission, or “CVM”) and ANEEL.

 

(b)         **Use of Estimates -**The preparationof consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the consolidated financial statements and thereported amounts of revenues and expenses during the reporting period. Actualresults could differ from those estimates. Significant items subject to suchestimates and assumptions include the useful lives of property, plant andequipment; valuation allowances for accounts receivables, deferred income taxbenefits and the accounts receivable from the State Government; therecoverability of deferred regulatory assets; the valuation of derivatives;income tax uncertainties and other contingencies; estimates of post-retirementbenefit obligations; and other similar estimates. The current economicenvironment has increased the degree of uncertainty inherent in those estimatesand assumptions.

 

(c)            **Principles ofconsolidation** - The consolidated financial statements includethe accounts of CEMIG and its majority owned subsidiaries, except jointlycontrolled companies which are reported under the equity method. In accordancewith the FASB Interpretation No. 46(R), Consolidation of Variable InterestEntities, the Company also consolidates any variable interest entities (VIEs)of which it is the primary beneficiary, as defined. When the Company does nothave a controlling interest in an entity, but exerts a significant influence overthe entity, the Company applies the equity method of accounting. Allsignificant intercompany balances and transactions have been eliminated inconsolidation.

 

(d)           **Foreign currencies** - Assets and liabilities denominated inforeign currencies are related principally to financing and are translated into*reais* at the official exchangerates reported by the Brazilian Central Bank at each balance sheet date. Theresulting gains and losses are recognized currently and included in thestatements of operations for the appropriate period.

 

(e)            **Cash and cashequivalents** - TheCompany considers unrestricted cash on hand, deposits in banks and short-terminvestments readily convertible to cash to be cash and cash equivalents.

 

(f)              **Accounts receivable** - Includes both amounts billed tocustomers and accrued revenues relating to unbilled energy supplied tocustomers as of the balance sheet date. Late fees arising from overdueelectricity bills are accounted for on a cash basis.

 

                          The allowance for doubtful accounts is recorded at anamount estimated by management as sufficient to cover probable losses,according to the ANEEL criteria, as follows: (i) for consumers withsignificant debts, an individual analysis of the balance is made, taking intoaccount the history of default, negotiations in progress and the existence ofreal guarantees; (ii) for other consumers, the debts that are more than 90days past due for residential consumers, or more than 180 days past due forcommercial consumers, or more than 360 days past due for the other consumertypes, are provisioned at 100%.

 

(g)           **Investments inaffiliates** - TheCompany’s investments in affiliated companies in which the Company has theability to exercise significant influence, but not control, are accounted forusing the equity method of accounting.

 

(h)           **Property, plant andequipment and intangible** – These assets are recorded at acquisition or construction cost,restated to reflect price-level changes through December 31, 1997.Interest and other financing charges, excluding foreign exchange losses,incurred during the construction period on third-party financing arecapitalized, in accordance with Statement of Financial Accounting StandardsSFAS No 34 “Capitalization of Interest Cost”. Expenditures for maintenance andrepairs are charged to operating costs as incurred. Materials to be used inconstruction are included in electric generation, distribution and transmissionassets under construction in progress. The net results of disposals of fixedassets are recorded as part of operating income.

 

Property, plant and equipment are depreciated usingthe straight-line method, at annual rates based on the estimated useful life ofassets, in accordance with ANEEL regulations and industry practice adopted inBrazil, or residual value at the end of the concession period that it will beat least the book value of the property, plant and equipment. Under BrazilianGAAP, the residual value at the end of the concession, net of specialobligation, is equal to the amount to be reimbursed by the Brazilian governmentat that time.

 

F-14

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Intangibles are amortizated using the straight-linemethod until the end of the concession period.

 

TheCompany’s investments in consortia (groups of organizations participating injoint ventures formed to promote common objectives or engage in projects tobenefit all the members without the creation of a legal entity), are recordedat acquisition or construction 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-livedassets** - 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)             **Research and Developmentand Advertising -**Research and development and advertising costs areexpensed as incurred. Research and development costs amounted to R$25, R$23 andR$38 in 2008, 2007 and 2006, respectively. Advertising costs amounted to R$31,R$26 and R$21 in 2008, 2007 and 2006, respectively.

 

(k)          **Revenues, costs andexpenses** -Revenues, costs and expenses are recognized on an accrual basis. Revenue isrecognized when persuasive evidence of an arrangement exists, delivery of goodshas occurred or services have been rendered, rates have been fixed or aredeterminable, and collectibility is reasonably assured regardless of when cashis received.

 

Revenues from the sale of electricity generation arerecorded based upon the output delivered provided at rates as specified undercontract terms or prevailing regulatory rates. Electricity distribution salesto final customers are recognized when power is provided. Billings for thesesales are made on a monthly basis. Unbilled revenues from the billing cycle upto the end of each month are estimated based on the prior month’s billing andare accrued at the end of the month. Differences between estimated and actualunbilled revenues, which historically have not been significant, are recognizedin the following month.

 

Use of basic transmission network revenues arerecorded when earned and billed monthly, according to the revenue establishedthrough the concession contracts. In certain contracts, revenues to be earnedin the final 15 years are 50.0% lower than those in the first 15 years of the concession.The Company recognizes revenue on these contracts on a straight-line basis, inaccordance with the nature of the services provided.

 

Revenues received by the Company from otherconcessionaires and free consumers using its basic transmission anddistribution network are recognized in the month that the network services areprovided.

 

Services rendered include connection fees and otherrelated services and the revenues are recognized when the services areprovided.

 

Taxes on revenue consist of: (i) value-added tax(“VAT”), which is a state tax due on the sales to final customers, is billed tothe consumers and recorded as part of gross revenue; (ii) COFINS revenuetax; (iii) PIS-PASEP social contribution tax on revenues; and (iv) Emergencycapacity charge. It is the Company’s policy to deduct these taxes from grossrevenues.

 

(l)                 **Income taxes**- CEMIG accounts for income taxes in accordance with SFAS No 109 “Accountingfor Income Taxes”, which requires an asset and liability approach to recordingdeferred tax assets and liabilities for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective income tax bases.

 

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CEMIG has 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 to be taken. This Interpretation resulted in increased relevanceand comparability in financial reporting of income taxes because all taxpositions 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 FIN48 did not result in any adjustment in the financial statements of the Company.

 

(m)           **Commitments and Contingencies** - Liabilities for loss contingencies arising fromclaims, assessments, litigation, fines, and penalties and other sources, arerecorded when it is probable that a liability has been incurred and the amountof the assessment can be reasonably estimated. Legal costs incurred inconnection with loss contingencies are expensed as incurred.

 

(n)             **Employees’ benefit plans** - The Company sponsors a defined-benefitpension plan and a defined-contribution plan covering substantially all of itsemployees. The Company has also established post-retirement health care plansand dental plans and payslife insurance premiums for its retirees. The Company accounts for the plansaccording to the provisions of SFAS No 87, “Employers’ Accounting for Pensions”and SFAS No 106, “Employers’ Accounting for Post-retirement Benefits Other ThanPensions”. On December 31, 2006, the Company adopted the provisions ofSFAS No 158 “Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans” related to recognition and disclosures, which requires anemployer to recognize the over or under-funded status of a defined benefitpostretirement plan as an asset or liability in its statement of financialposition and to recognize changes in that funded status in the year in whichthe changes occur through other comprehensive income. The impact of theadoption of SFAS No 158 was a charge of R$244, net of income taxes, recordeddirectly in accumulated other comprehensive income (AOCI) in 2006. The Companyhas disclosed information about pension plans and other postretirement benefitplans as required by SFAS No 132(R) “Employers’Disclosures about Pensions and Other Postretirement Benefits.”

 

Under Brazilian law, employees are entitled to aminimum of one-month vacation upon conclusion of each year of service. CEMIGfully accrues this liability based on the vested entitlement of the employeesat each period end, plus related social security costs.

 

(o)         **Environmental and remediation costs** - CEMIG, in accordance with itsenvironmental policy, has established various damage control and preventionprograms in order to help limit its risks with respect to majorenvironmental-related liabilities. The cost of these programs is expensed asincurred. CEMIG’s policy is to provide remediation costs when theresponsibility to remediate is probable and the amount of associated costs isreasonably determinable. No provision with respect to these matters has beenrequired to date.

 

(p)         **Comprehensive income (loss)** - CEMIG reports comprehensive income(loss) in accordance with SFAS No 130 “Reporting Comprehensive Income” and haselected to present it in the statement of operations. The components ofaccumulated other comprehensive loss are as follows:

 
| ** **                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                 |       |     |       |     |       |
| Under-funded  status of postretirement benefit plans |       | (1,077   | )          | (1,530   | )          |
| Income  tax                                          |       | 366      |       | 520      |       |
| Total  accumulated other comprehensive loss          |       | (711     | )          | (1,010   | )          |

 

F-16

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(q)         **Regulation and deferred regulatoryassets and liabilities** - As a result of various actions taken by the Federal Government andANEEL in 2001, the Company ́s distribution business is subject to the provisionsof SFAS No 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 FederalGovernment instituted an electricity rationing plan in response to an energyshortage caused by low rainfall, reduced reservoir levels and Brazil’ssignificant dependence on electricity generated from hydrological resources.The rationing resulted in losses for the Company and other electricitydistribution companies in Brazil. In December 2001, electricityconcessionaires including the Company reached an industry-wide agreement (theGeneral Agreement of the Electricity Sector or the “General Agreement”) withthe Federal Government that provided resolution to rationing-related issues aswell as to certain other electricity rate-related issues. The General Agreementprovided for a rate increase intended to reimburse revenues lost as a result ofthe rationing program in 2001 and 2002. The increased rates were in force inthe Company for a period of 74 months from February 2002. The amount wasfully recovered in accordance with Emerging Issues Task Force (“EITF”) No. 92-7“Accounting by Rate Regulated Utilities for the Effects of Certain AlternativeRevenue Programs”.

 

The General Agreementalso addressed Parcel A costs, which are certain costs that each distributioncompany is permitted to defer and pass through to its customers via a futurerate adjustment. Parcel A costs are limited by the concession contracts to thecost of purchased power and certain other costs and taxes not controlled by theCompany. ANEEL had granted rate increases to recover a portion of previouslydeferred Parcel A costs. The General Agreement provided a tracking accountmechanism, created in October 2001 through Executive Order No. 296,to record the variation in the Parcel A costs for rate adjustment calculationpurposes. Parcel A costs incurred previous to January 1, 2001 are notrecoverable through the tracking account. As a result, the Company has notrecognized any regulatory asset for Parcel A costs incurred prior to 2001,except for the system services charges from September 2000 (as allowed byANEEL). Parcel A costs started to be collected in March 2008. (See note4).

 

(r)            **Special obligations -**Special obligations representcontributions received by concessionaires from customers for the purpose ofexpanding the electric distribution system. These contributions areincorporated into the Company’s distribution assets. For regulatory purposes,the depreciation of these assets were included in the tariff rate settingprocess and the corresponding liability was recorded for the amount of thetotal contributions. Under U.S. GAAP, the contributions were considered reimbursementsof construction costs and credited against the cost of 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 regulation establishes,among other items, that beginning on the date of the next respective tariffrevision, the special obligations would be amortized as a reduction of netallowable costs over future periods, therefore reducing tariffs.

 

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(s)          **Earnings per share -**The Companypresents its earnings per share in accordance with SFAS No. 128 “EarningsPer Share”. Basic earnings per share is computed by dividing net income by theweighted average number of common and preferred shares outstanding during theyear. Diluted earnings per share is computed in a manner consistent with thatof basic earnings per share while giving effect to all potentially dilutivecommon and preferred shares that were outstanding during the year.

 

(t)           **Segment information** - SFAS No. 131“Disclosures about Segments of Enterprise and Related Information” (“SFAS 131”)requires that a business enterprise supplementally disclose certain financialinformation about its various and distinct operating activities. Suchinformation is to be presented from the point of view of how operating andfinancial decisions are made for each business sector. The Company has adoptedSFAS 131 for all years presented, as further disclosed in Note 32.

 

(u)         **Derivatives and hedgingactivities** - 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.

 

(v)         **Fair Value Measurements-**On January 1, 2008, the Company adopted the provisions FASBStatement No. 157, Fair Value Measurements, for fair value measurements offinancial assets and financial liabilities and for fair value measurements ofnonfinancial items that are recognized or disclosed at fair value in thefinancial statements on a recurring basis. Statement 157 defines fair value asthe price that would be received to sell an asset or paid to transfer aliability in an orderly transaction between market participants at themeasurement date. Statement 157 also establishes a framework for measuring fairvalue and expands disclosures about fair value measurements (Note 25). FASBStaff Position FAS 157-2, “Effective Date of FASB Statement No. 157,”delays the effective date of Statement 157 until fiscal years beginning after November 15,2008 for all nonfinancial assets and nonfinancial liabilities that arerecognized or disclosed at fair value in the financial statements on anonrecurring basis. In accordance with FSP FAS 157-2, the Company has not appliedthe provisions of Statement 157.

 

On January 1, 2009, theCompany will be required to apply the provisions of Statement 157 to fair valuemeasurements of nonfinancial assets and nonfinancial liabilities that arerecognized or disclosed at fair value in the financial statements on anonrecurring basis. The Company is in the process of evaluating the impact, ifany, of applying these provisions on its financial position and results ofoperations.

 

In October 2008, theFASB issued FASB Staff Position FAS 157-3, “Determining the Fair Value of aFinancial Asset When the Market for That Asset is Not Active,” which waseffective immediately. FSP FAS 157-3 clarifies the application of Statement 157in cases where the market for a financial instrument is not active and providesan example to illustrate key considerations in determining fair value in thosecircumstances. The Company has considered the guidance provided by FSP FAS157-3 in its determination of estimated fair values during 2008.

 

(w)       **Fair Value Option -**Effective January 1,2008, the Company adopted the provisions of FASB Statement No.159, The FairValue Option for Financial Assets and Financial Liabilities. Statement 159gives the Company the irrevocable option to report most financial assets and financialliabilities at fair value on an instrument-by-instrument basis, with changes infair value reported in earnings. Fair value option has not been elected for anyof the Company’s financial assets and liabilities.

 

F-18

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(x)           **Effects of correctingprior 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 methodquantifies a misstatement based on the effects of correcting the misstatementexisting in the balance sheet at the end of 2006, irrespective of themisstatement’s origination. Upon adoption, SAB 108 permits the Company toadjust for the cumulative effect of errors that were previously consideredimmaterial under the rollover method that were in the previous year consideredmaterial under the dual method.

 

The SAB 108 adjustmentaffects the carrying amount of assets and liabilities as of the beginning of2006, with an offsetting adjustment to the opening balance of retained earningsin the year of adoption. The adoption of SAB 108 resulted in a cumulativeeffect adjustment of R$133, net of taxes, to the opening balance ofunappropriated retained earnings.

 

The cumulative effectadjustment was required to correct an error relating to the accounting forcertain administrative costs which were improperly capitalized as Property,plant and equipment in periods prior to 2005. This adjustment was not deemed tobe material, both quantitatively and qualitatively, prior to the adoption ofSAB 108, using the rollover method.

 

(y)         **Recently IssuedAccounting Standards -**In December 2007, the FASB issued FASB StatementNo. 141(R), Business Combinations, and FASB Statement No. 160,Noncontrolling Interests in Consolidated Financial Statements –an amendment to ARB No. 51. Statements 141(R) and 160 require mostidentifiable assets, liabilities, noncontrolling interests, and goodwillacquired in a business combination to be recorded at “full fair value” andrequire noncontrolling interests (previously referred to as minority interests)to be reported as a component of equity, which changes the accounting fortransactions with noncontrolling interest holders. Both Statements areeffective for periods beginning on or after December 15, 2008, and earlieradoption is prohibited. Statement 141(R) will be applied to businesscombinations occurring after the effective date. Statement 160 will be appliedprospectively to all noncontrolling interests, including any that arose beforethe effective date. All of the Company’s subsidiaries are wholly owned, so theadoption of Statement 160 is not expected to impact its financial position andresults of operations. The Company is currently evaluating the impact ofadopting Statement 141(R) on its financial position and results ofoperations.

 

In February 2008,the FASB issued FASB Staff Position FAS 140-3, “Accounting for Transfers ofFinancial Assets and Repurchase Financing Transactions.” The objective of theFSP is to provide guidance on accounting for a transfer of a financial assetand repurchase financing. The FSP presumes that an initial transfer of afinancial asset and a repurchase financing are considered part of the samearrangement (linked transaction) under Statement 140. However, if certaincriteria are met, the initial transfer and repurchase financing shall not beevaluated as a linked transaction and shall be evaluated separately underStatement 140. FSP FAS 140-3 is effective for annual and interim periodsbeginning after November 15, 2008 and early adoption is not permitted. TheCompany is currently evaluating the provisions of this standard, but does notexpect adoption to have a material impact on its financial position and resultsof operations.

 

F-19

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In March 2008, theFASB issued FASB Statement No. 161, Disclosures about DerivativeInstruments and Hedging Activities—an amendment of FASB Statement No. 133. Statement 161 requires entities thatutilize derivative instruments to provide qualitative disclosures about theirobjectives and strategies for using such instruments, as well as any details ofcredit-risk-related contingent features contained within derivatives.  Statement 161 also requires entities todisclose additional information about the amounts and location of derivativeslocated within the financial statements, how the provisions of Statement 133have been applied, and the impact that hedges have on an entity’s financialposition, financial performance, and cash flows.  Statement 161 is effective for fiscal yearsand interim periods beginning after November 15, 2008.  The Company is currently evaluating theimpact of Statement 161 on the disclosures about its hedging activities and useof derivatives.

 

In April 2008, theFASB issued FASB Staff Position FAS 142-3, “Determination of the Useful Life ofIntangible Assets.” FSP FAS 142-3 amends the factors that should be consideredin developing renewal or extension assumptions used to determine the usefullife of a recognized intangible asset under Statement 142. FSP FAS 142-3is effective for fiscal years beginning after December 15, 2008. TheCompany is currently evaluating the impact, if any, of adopting FSP FAS 142-3on its financial position and results of operations.

 

In June 2008, theFASB’s Emerging Issues Task Force reached a consensus on EITF Issue No. 07-5,“Determining Whether an Instrument (or Embedded Feature) Is Indexed to anEntity’s Own Stock.” This EITF Issue provides guidance on the determination ofwhether such instruments are classified in equity or as a derivativeinstrument. The Company will adopt the provisions of EITF 07-5 on January 1,2009. The Company is currently evaluating the impact, if any, of adopting EITF07-5 on its financial position and results of operations.

 

In November 2008,the FASB’s Emerging Issues Task Force reached a consensus on EITF Issue No. 08-6,“Equity Method Investment Accounting Considerations”.  EITF 08-6 continues to follow the accountingfor the initial carrying value of equity method investments in APB Opinion No. 18,The Equity Method of Accounting for Investments in Common Stock, which is basedon a cost accumulation model and generally excludes contingent consideration.EITF 08-6 also specifies that other-than-temporary impairment testing by theinvestor should be performed at the investment level and that a separateimpairment assessment of the underlying assets is not required.  An impairment charge by the investee shouldresult in an adjustment of the investor’s basis of the impaired asset for theinvestor’s pro-rata share of such impairment. In addition, EITF 08-6 reached aconsensus on how to account for an issuance of shares by an investee thatreduces the investor’s ownership share of the investee. An investor shouldaccount for such transactions as if it had sold a proportionate share of itsinvestment with any gains or losses recorded through earnings. EITF 08-6 alsoaddresses the accounting for a change in an investment from the equity methodto the cost method after adoption of Statement 160. EITF 08-6 affirms theexisting guidance in APB 18, which requires cessation of the equity method ofaccounting and application of FASB Statement No. 115, Accounting for CertainInvestments in Debt and Equity Securities, or the cost method under APB 18, asappropriate.  EITF 08-6 is effective fortransactions occurring on or after December 15, 2008. The Company does notanticipate that the adoption of EITF 08-6 will materially impact the Company’sfinancial position or results of operations.

 

In December 2008,the FASB issued FASB Staff Position FAS 132(R)-1, “Employers’ Disclosures aboutPostretirement Benefit Plan Assets.” FSP FAS 132(R)-1 provides guidance on anemployer’s disclosures about plan assets of a defined benefit pension or otherpostretirement plan. The disclosures about plan assets required by FSP FAS132(R)-1 must be provided for fiscal years ending after December 15, 2009.The Company is currently evaluating the impact of the FSP on its disclosuresabout plan assets.

 

F-20

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**3.ACCOUNT RECEIVABLE FROM MINAS GERAIS STATE GOVERNMENT**

 

On March 4, 1993, theCompany recorded a receivable with a corresponding credit in the statement ofoperations, from the Federal Government relating to the remaining balance ofthe amount of return guaranteed by the regulatory agency and the actual returnrecorded by the Company prior to that date. During 1993 and 1994, the Companyrecovered part of the rate shortfall by offsetting amounts due to FederalGovernment-owned entities arising from purchased power and financing. On May 2,1995, the obligation to pay the remaining balance of this receivable amountingto R$602, was transferred from the Federal Government to the State Government,the Company’s controlling shareholder, through a credit assignment contract(the “CRC Agreement”). In connection with this assignment, the State Governmentagreed to pay the amount due to the Company over 20 years, with an initialthree-year grace period, as restated based on the UFIR (Tax Reference UnitIndex) plus interest of 6% per year. In the event that the Company receivespayments or retains declared dividends to offset amounts receivable, theCompany is obligated 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 modifiedby certain amendments commencing in 2001 that addressed issues relating toremuneration of the receivable and certain guarantees relating to dividendretention by the State government. Prior to the Fourth Amendment describedbelow, a portion of the receivable was not guaranteed by the State Government.Consequently, the Company had recognized a provision amounting to the fullunguaranteed amount which was R$1,845 as of December 31, 2004.

 

## **a) Fourth Amendment tothe CRC Agreement**

 

The Extraordinary ShareholdersMeeting which commenced on December 30, 2005, and ended on January 12,2006, approved the Fourth Amendment to the CRC Agreement which extended theguarantee relating to dividends payable to the State Government to the fullbalance receivable and changed the remuneration to IGP-DI plus annual interestof 8.18% per year. The balance is payable in 61 semi-annual installments whichare due on June 30 and December 31 of each year, retroactively asfrom December 2004. The payments are being made by withholding 65.00% ofthe regular dividends and interest on capital due to the State Government. Thedividends withheld is being used in the following order: (i) thesettlement of past due installments, (ii) the settlement of thesemi-annual installments, (iii) the pre-payment of up to 2 installments;and (iv) the payment of the remaining principal.

 

OnDecember 31, 2008, the amount of R$73 had been received in advance of thecontract coming due on June 30 and December 30, 2009.

 

F-21

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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 accounts receivable under the CRC AccountAgreement to the fund. The book value of the CRC Account receivables that weretransferred to the FIDC in January 2006 was R$1,659. A portion of the FIDCwas used by the Company to obtain R$900 in financing in the form of seniorquotas issued by the FIDC. The senior quotas accrue interest based on CDI plus1.7% per year and are being amortized in 20 semi-annual installments. Thesenior quotas were acquired by financial institutions and are guaranteed byCEMIG. Consequently, the FIDC is fully consolidated by the Company and thesenior quotas are recorded as Long-term financing.

 

The changes on the CRCAccount Securitization Fund in 2008 were as follows:

 
| Balance  at December 31, 2007                                            |   | 1,763  |   |
|-------------------------------------------------------------------------------|--------|--------|--------|
| Monetary  updating on the senior quotas                                       |   | 128    |   |
| Monetary  updating on the subordinated quotas                                 |   | 26     |   |
| Funds  received — subordinated quotas                                    |   | 13     |   |
| Amortization  of the senior quotas                                            |   | (128   | )      |
| Amortization  of the subordinated quotas                                      |   | (1     | )      |
| Balance  at December 31, 2008                                            |   | 1,801  |   |
|                                                                          |   |   |   |
| Composition  of the CRC Account Securitization Fund at December 31, 2008 |   |   |   |
| -  Senior quotas held by third parties                                        |   | 990    |   |
| -  Subordinated quotas held by CEMIG                                          |   | 738    |   |
|   Dividends  held by the Fund                                       |   | 73     |   |
| TOTAL                                                                         |   | 1,801  |   |

 

The dividends to be distributed to shareholders arising from net incomerecorded for the period ended of December 31, 2008, proposed by theExecutive Board and the Board of Directors, in accordance with the Company ́sBylaws, are recorded as Current liabilities. Of the dividends to bedistributed, R$210 is payable to the government of the State of Minas Gerais,and R$138 will be retained for settlement of part of the CRC Agreement.

 

In connection with theFourth Amendment, the Company committed to comply with financial covenantswhich are calculated based on the financial statements prepared in accordancewith 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 |

 

----

(1) Indebtedness= total consolidated short-term and long-term financing

(2) EBTIDA =Earnings before interest, income taxes, depreciation and amortization.

 

In the event the Company does not comply with the above covenants, thenon-compliance is reported and addressed by the Company’s Board of Directors.As of December 31, 2008 and 2007, the Company was in compliance with theabove covenants.

 

F-22

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**4. DEFERRED REGULATORY ASSETS AND LIABILITIES**

 

The components of thedeferred regulatory assets and liabilities are as follows:

 
| ** **                                                                                                                                                  | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                  | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Energy Rationing Plan -  Extraordinary rate adjustment (a):                                                                                                 |       |                  |       |   |   |
| Revenue losses incurred  during the rationing period                                                                                                        |       | —                |       | 35 |   |
| Amounts to be  transferred to generators                                                                                                                    |       | —                |       | 334 |   |
|                                                                                                                                                        |       | —                |       | 369 |   |
|                                                                                                                                                        |       |                  |       |   |   |
| Energy transactions on  Câmara de Comercialização de Energia Elétrica — CCEE (“CCEE/MAE”) during the  rationing plan (b) |       | 38                    |       | 413 |   |
| Provision for loss on  Transactions on the CCEE/MAE                                                                                                         |       | (26                   | )          | (391 | ) |
|                                                                                                                                                        |       | 12                    |       | 22 |   |
| Additional Parcel A  costs:                                                                                                                                 |       |                  |       |   |   |
| - Period from  January 1, 2001 to October 25, 2001 (c.1)                                                                                          |       | 515                   |       | 708 |   |
| - Period from  October 26, 2001 and thereafter (c.2)                                                                                                   |       | 380                   |       | (35 | ) |
|                                                                                                                                                        |       |                  |       |   |   |
| Deferred rate  adjustment (d)                                                                                                                               |       | 133                   |       | 545 |   |
| PIS-PASEP/COFINS (e)                                                                                                                                        |       | 46                    |       | 117 |   |
|                                                                                                                                                        |       |                  |       |   |   |
| Tariff review (note 26)                                                                                                                                     |       | (214                  | )          | — |   |
|                                                                                                                                                        |       | 872                   |       | 1,726 |   |
|                                                                                                                                                        |       |                  |       |   |   |
| Current assets                                                                                                                                              |       | 754                   |       | 903 |   |
| Other assets                                                                                                                                                |       | 332                   |       | 823 |   |
| Current liabilities                                                                                                                                         |       | (214                  | )          | — |   |

 

The regulatory assets relatedto the Energy Rationing Plan, Energy transactions on CCEE/MAE and additionalParcel A costs bear interest at the SELIC (Brazilian benchmark interest rate)rate. The deferred rate adjustment and PIS-PASEP/COFINS regulatory assets arerestated based on IGP-M (General Market Price Index). These assets are beingrecovered based on the rate adjustment on April 8, 2008. CEMIG estimatesthe remaining recovery period for these assets at December 31, 2008 to besubstantially less than 24 months, except for a portion of the Parcel A costs,related to the period from January 1, 2001 to October 25, 2001, forwhich the recovery period, established by the regulatory agency, started in March 2008.The Company expects to recover that asset by 2010.

 

The Company has not recordedVAT related to the above items. The VAT, amounting to R$36 as of December 31,2008 (R$234 as of December 31, 2007), will be assessed when these amountsare invoiced to the customers as a gross-up to the revenue invoiced. The VATcollected will then be passed on to the state tax authorities, resulting in noeffect on net operating revenues. VAT is not assessed on Parcel A costs andPIS-PASEP/COFINS.

 

(a) Energy RationingPlan — Extraordinary rate adjustment (“RTE”)

 

An emergency energy-rationing program (the “EnergyRationing Plan”) was created by the Federal Government on May 22, 2001, toreduce energy consumption and avoid unplanned interruption in power supply.Average reduction in monthly consumption of electricity during the rationingperiod was estimated at 20% of the actual consumption for the months of May, Juneand July 2000. The energy rationing became effective on June 1, 2001and ended February 28, 2002, when the Federal Government determined thatthe water levels in the reservoirs serving Brazil’s hydroelectric facilitieshad returned to normal. As a result of the Energy Rationing Plan, many electricgeneration and distribution companies in Brazil, including CEMIG, experiencedsignificant reductions in their profit margins. In December 2001, theFederal Government 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.

 

F-23

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The General Agreement addressed margin losses incurredby the electric distribution and generation companies during the period of theEnergy Rationing Plan and the costs of energy purchased in the spot marketthrough the *Mercado Atacadista de Energia*(the Wholesale Energy Market or “MAE”), succeeded by the CCEE/MAE, up to December 2002.These items were recovered by an extraordinary rate 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’sResolution No. 130, dated April 30, 2002; and

II.        anincrease of 7.90% for all other consumers.

 

The RTE described aboveis being used to compensate the following items:

 

·                                  Losses of invoiced sales revenue in theperiod from June 1, 2001 to February 28, 2002, corresponding to thedifference between estimated revenue if the rationing program had not been putin place and the actual revenue while the program was in place, according to aformula published by ANEEL. Calculation of this value did not take into accountany losses from default by consumers.

 

·                                  Amounts represent losses incurred by thegeneration companies that bought power in the MAE, held in 2004 by the ElectricPower Trading Chamber (“CCEE/MAE”), in the period from June 1st, 2001until February 28, 2002, with prices exceeding the amount of R$49.26/MWh (“freeenergy”).

 

The period of validity ofthe RTE of 74 months expired in February 2008, and the Company wrote-offas a loss the amount of R$349 as a result of this period not having been longenough for all of the assets relating to the rationing-related losses to bereceived. It did not impact the statement of operations because a provision forthis amount had already been recorded.

 

Also as a result of thetermination of the period of validity of the RTE, the Company wrote-off valuesto be retained for pass through to the generators, in the amount of R$323, and therelated obligations, posted in the Accounts payable to suppliers, in relationto making of the pass through payment. This transaction did not impact thestatement of operations since the asset and the related liability write-offwere performed in the same amount (See note 12).

 

(b) Energytransactions on CCEE/MAE during the rationing plan

 

The amounts receivablerefer to the difference between the prices paid by CEMIG in the CCEE/MAE energytransactions, during the energy rationingperiod and the amount of R$49.26/MWh that is recovered through the “extraordinaryrate adjustment” (RTE), as defined in the General Agreement. Distribution concessionaires collect and transfer, on a monthly basis, thespecial rate adjustment amounts to generators and distributors, including CEMIG, that haveamounts receivable, starting in March 2003.

 

The conclusion of certainlawsuits filed by other generators that are still in progress may result infuture changes in the amounts recorded.

 

Write-off and Provisionfor losses

 

As described above, theCompany received RTE amounts from other distribution companies. ANEELestablished a time limit for these distribution companies to collect RTE fromtheir respective consumers. Since these companies did not collect the fullamount, the Company did not receive the recorded asset. As of December 31,2008, the Company had a recorded provision for losses in the amount of R$26that represents the losses that were expected to occur due to the period ofreceipt of the RTE from the other distributors that are still passing throughfunds to the Company in case of not being sufficient for full payment of theamounts owed.

 

F-24

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(c) Recovery ofadditional 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 isequal to the difference between the Parcel A costs actually incurred and theestimated Parcel A costs used for purposes of computing the last annual rateadjustment prior to the Energy Rationing Plan. This amount bears interest atthe SELIC rate from the day that the actual cost was paid until the date ofrecovery.

 

The recovery of the Parcel A began in March 2008,immediately after the ending of the period of recovery of Energy Rationing Plan – Extraordinary rateadjustment, using the same mechanisms. Inother words, the adjustment applied to tariffs for compensation of the amountsof the RTE will continue, for compensation of the items of the Parcel A.

 

When the amounts ofParcel A are received in the tariff, the Company transfers the correspondingamount, posted in assets, to the income statement. The table bellow shows theamounts transferred in 2008:

 
| **Amounts  transferred to expenses**                             | ** ** | ** ** | **December 31, 2008** | ** ** |
|------------------------------------------------------------------|------------|------------|----------------------------|------------|
| Electricity  purchased for resale                                |       | 161        |                       |
| Fuel  usage quota                                                |       | 71         |                       |
| Global  reserve for reversion quota                              |       | 7          |                       |
| Tariff  for transport of electricity from Itaipu                 |       | 3          |                       |
| Tariff  for use of the transmission facilities of the basic grid |       | 18         |                       |
| Charges  for use of water resources                              |       | 6          |                       |
| Energy  Service Inspection fee                                   |       | 1          |                       |
|                                                             |       | 267        |                       |

 

(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 trackingaccount mechanism to control the variation of Parcel A costs for rateadjustment calculation purposes. This account is comprised of the amountsresulting from the difference between the Parcel A costs actually incurred,from October 26, 2001 and thereafter, and the estimated Parcel A costsused for purposes of computing the annual rate adjustment as of April 8,2001.

 

The amounts determinedfor the Parcel A costs for the period from October 26, 2001 and thereafterare recorded as deferred regulatory assets, as follows:

 
| **Parcel A  Items**                                                      | ** ** | **December 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                                                                     |       |                        |       |                        |       |
| System service charges                                                   |       | 158                         |       | 20                          |       |
| Electricity purchase  rate                                               |       | 110                         |       | (36                         | )          |
| Itaipu Binacional  electricity transport rate                            |       | 5                           |       | (1                          | )          |
| Fuel usage quota — CCC                                              |       | 61                          |       | (27                         | )          |
| Rate for use of basic  transmission network                              |       | 28                          |       | (11                         | )          |
| Energy development  account quota — CDE                             |       | 10                          |       | 10                          |       |
| Charges for use of  water resources                                      |       | 3                           |       | 3                           |       |
| Incentive program for  Alternative Electric Power Sources – PROINFA |       | 5                           |       | 7                           |       |
|                                                                     |       | 380                         |       | (35                         | )          |

 

The above-mentioned amounts are restated based on theSELIC through annual rate adjustments.

 

F-25

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(d) Deferred rate adjustment

 

ANEEL Resolution No. 71,dated April 4, 2004, determined that the rate adjustment that should havebeen applied to the Company’s rates on April 8, 2003 was 44.41%, insteadof 31.53% which was originally applied. The percentage differenceof 12.88% (in absolute terms) has been offset through an increase of R$301, in April 2003values, in each one of the tariff adjustments scheduled to take place in 2004through 2008,including monetary restatement calculated based on IGP-M variation plus 11.26%interest.

 
| ** **                                                | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                | ** ** | **2008**              | ** ** | **2007** | ** ** |
|                                                      |       |                  |       |   |   |
| Deferred rate  adjustment – since April 8, 2003 |       | 950                   |       | 950 |   |
| Interest (defined by  Aneel – 11.26% per year)       |       | 447                   |       | 434 |   |
| Monetary restatement –  IGP-M Index                  |       | 202                   |       | 190 |   |
| (-) Amounts collected                                     |       | (1,466                | )          | (1,029 | ) |
|                                                      |       | 133                   |       | 545 |   |

 

**(e) PIS-PASEP/COFINS**

 

The Federal Laws No. 10,637 and 10,833, increasedthe rates and changed the basis of calculation of PIS/PASEP and COFINS taxes onrevenues. As a result of those changes, there was an increase in expenserelating to PIS/PASEP and COFINS, from December 2002 to June 2005 andfrom February of 2004 to June 2005, respectively.

 

In view of the fact thatthis increase in the expense should be repaid to the Company through tariffs,the credits were registered, in accordance with a criteria defined by ANEEL, asa regulatory asset and there was a counterpart reduction in the expense onPIS/PASEP and COFINS taxes.

 

**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 an individual basis for each subsidiary and cannot beconsolidated according to the Brazilian tax law.

 

F-26

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(a) Income taxreconciliation:

 

The amounts reported as income tax expense in thefinancial statements are reconciled to the statutory rates as follows:

 
| ** **                                                 | ** ** | **Year ended  December 31,** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                 | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                       |       |                              |       |   |   |   |   |
| Income before income  taxes                                |       | 2,508                             |       | 2,303 |   | 1,199 |   |
| Income tax expense  (34%)                                  |       | (853                              | )          | (783 | ) | (407 | ) |
| Effects of:                                                |       |                              |       |   |   |   |   |
| Income tax benefit  (expense)-                             |       |                              |       |   |   |   |   |
| Interest on capital (1)                                    |       | —                            |       | — |   | 57 |   |
| Reversal on account receivable  from State Government (2)  |       | —                            |       | — |   | 143 |   |
| Social Contribution on  Complementary Monetary Restatement |       | —                            |       | — |   | (3 | ) |
| Adjustment on special  obligations (3)                     |       | —                            |       | — |   | (359 | ) |
| Equity in Investees                                        |       | 70                                |       | 77 |   | 30 |   |
| Change in valuation  allowance                             |       | —                            |       | 14 |   | — |   |
| Others                                                     |       | 28                                |       | 7 |   | 42 |   |
| Income tax expense                                         |       | (755                              | )          | (685 | ) | (497 | ) |
| Current tax expense                                        |       | (973                              | )          | (941 | ) | (575 | ) |
| Deferred tax benefit                                       |       | 218                               |       | 256 |   | 78 |   |
| Income tax expense                                         |       | (755                              | )          | (685 | ) | (497 | ) |

 

The effective tax rates are30% in 2008, 30% in 2007 and 41% in 2006.

 

----

(1) Brazilian companies are permitted to pay interest on capital. Thecalculation is based on the shareholders’ equity amounts prepared in accordancewith Brazilian GAAP. The interest rate applied may not exceed the long-terminterest rate determined by the Brazilian Central Bank and interest paid maynot exceed the greater of 50% of net income for the year or 50% of retainedearnings 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 statementpresentation, 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.

 

(2) Due tothe transfer of CRC Agreement receivables to the FIDC, described in 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.

 

(3) As a consequenceof changes in ANEEL’s regulations in 2006, mentioned in Note 2r, the Companyrecorded an expense in the 2006 Statement of operations in the amount ofR$1,057 related to the portion of special obligations previously chargedagainst property, plant and equipment and which were previously depreciated bythe Company for regulatory purposes.

 

F-27

----

 

(b) Analysis ofdeferred tax balances:

 

As of December 31, 2008 and 2007, the deferredtax balances have been computed using a 34% rate, which is the enacted tax rateexpected to be in force upon realization. The major components of the deferredincome taxes accounts in the consolidated balance sheets are as follows:

 
| ** **                                                                           | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                           | ** ** | **2008**              | ** ** | **2007** | ** ** |
|                                                                                 |       |                  |       |   |   |
| Deferred Tax Assets:                                                                 |       |                  |       |   |   |
| Tax loss carryforwards                                                               |       | 508                   |       | 548 |   |
| Employee  post-retirement benefits                                                   |       | 306                   |       | 411 |   |
| Provision for  contingencies                                                         |       | 126                   |       | 95 |   |
| Provision for doubtful  accounts                                                     |       | 88                    |       | 110 |   |
| Temporary difference on  regulatory assets                                           |       | —                |       | 451 |   |
| Other temporary  differences                                                         |       | 32                    |       | 2 |   |
| Total gross deferred  tax assets                                                     |       | 1,060                 |       | 1,617 |   |
|                                                                                 |       |                  |       |   |   |
| Offset balance between  assets and liabilities                                       |       | (140                  | )          | (657 | ) |
|                                                                                 |       |                  |       |   |   |
| Valuation allowance on  realization of deferred tax balances                         |       | (437                  | )          | (437 | ) |
| Net deferred tax assets                                                              |       | 483                   |       | 523 |   |
|                                                                                 |       |                  |       |   |   |
| Deferred Tax  Liabilities:                                                           |       |                  |       |   |   |
| Temporary difference on  regulatory assets                                           |       | (2                    | )          | (674 | ) |
| Effects of differences  between book and tax basis of property, plant and equipment. |       | (276                  | )          | (285 | ) |
| Other temporary  differences                                                         |       | (10                   | )          | — |   |
| Total gross deferred  tax liabilities                                                |       | (288                  | )          | (959 | ) |
|                                                                                 |       |                  |       |   |   |
| Offset balance between  liabilities and assets                                       |       | 140                   |       | 657 |   |
| Net deferred tax  liabilities                                                        |       | (148                  | )          | (302 | ) |
|                                                                                 |       |                  |       |   |   |
| Net deferred tax asset                                                               |       | 335                   |       | 221 |   |
|                                                                                 |       |                  |       |   |   |
| Current Assets                                                                       |       | 48                    |       | 71 |   |
| Other Assets                                                                         |       | 435                   |       | 452 |   |
| Current Liabilities                                                                  |       | —                |       | (140 | ) |
| Long-term Liabilities                                                                |       | (148                  | )          | (162 | ) |

 

In assessing the realizability of deferred tax assets,management considers whether it is more likely than not that some portion orall of the deferred tax assets will not be realized. The ultimate realizationof deferred tax assets is dependent upon the generation of future taxableincome during the periods in which those temporary differences becomedeductible. Management considers the scheduled reversal of deferred tax liabilities,projected future taxable income, and tax-planning strategies in making thisassessment. Based on the level of historical taxable income and projections forfuture taxable income over the periods for which deferred tax assets aredeductible, management believes that it is more likely than not that theCompany will realize the benefits of these deductible differences, net ofexisting valuation allowance at December 31, 2008. The amount of thedeferred tax assets considered realizable; however, could be reduced in thenear term if estimates of future taxable income are reduced.

 

Tax loss carryforwards of R$1,494 as of December 31,2008 may be offset against a maximum of 30% of annual taxable income and do notexpire under Brazilian tax law.

 

F-28

----

 

Considering, as mentioned before, that the BrazilianTax Law permits companies to benefit from the payment of interest on capitaland deduct such payments from their taxable income, the Company adopted the taxposition of paying interest on capital to their shareholders. According to ourtax planning strategy, after utilizing a balance of withholding taxes currentlyrecorded as “Recoverable Taxes” in the next few years, we will distributeinterest on capital in an amount that will reduce our taxable income to closeto or equal to zero.  As a consequence,this alternative should eliminate the payment of the income and socialcontribution taxes by Cemig Holding and the tax loss carryforwards would not berecovered.

 

As previously mentioned, the Company considers thepayment of interest on capital as part of its tax-planning strategies and alsoconsiders that the payment of interest on capital in the future is a betteralternative than the recovery of its tax loss carryforwards. Therefore, theCompany recorded a valuation allowance in its Financial Statements in theamount of R$437 as of December 31, 2008 related to tax loss carryforwardsnot expected to be recovered.

 

The Company adopted the provisions of FIN 48 on January 1,2007 and recognizes the effect of income tax positions only if those positionsare more likely than not of being sustained. Recognized income tax positionsare measured 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 Upon the implementation of FIN 48, theCompany did not record any further adjustments related to uncertainty in incometaxes, beyond those already recorded. A reconciliation of the beginning andending amount of unrecognized tax benefits is as follows:

 
| ** **                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Balance at  January 1,                     |       | 32       |       | 28       |       |
| Increase related to  current year tax positions |       | 4        |       | 4        |       |
| Increase related to prior  year tax positions   |       | 8        |       | —   |       |
| Balance at  December 31,                   |       | 44       |       | 32       |       |

 

Included in the balance of total unrecognized taxbenefits at December 31, 2008 and 2007, are potential benefits of R$44 andR$32, respectively, if recognized, would affect the effective rate on incomefrom continuing operations. The Company recorded R$12 and R$1 of interest andpenalties related to unrecognized tax benefits during 2008 and 2007 in thestatements of operations. Total amount of interest and penalties accrued as of December 31,2008 and 2007 was R$34 and R$22, respectively.

 

The Company and its subsidiaries file federal incometax returns only in Brazil (except Transchile Charrua Transmission S.A. whichdomiciled in Chile and is in a start-up phase). The Company is no longersubject to Brazilian federal income tax examinations for years before 2003. Allincome before taxes and related income taxes are from Brazilian sources. Themain lawsuits challenged by the Brazilian Revenue Service are described in note17. Management, based on the opinion of the legal counsel, considers that thereare no significant risks that are not covered by liabilities already recordedor that would result in a material change to its financial position or resultsof operations. The Company does not expect that the total amounts of unrecognizedtax benefits will significantly increase or decrease within the next 12 months.

 

The Company’s policy is to record penalties andinterests related to unrecognized tax benefits as financial expenses in theconsolidated statements of income.

 

F-29

----

 

**6. CASHAND CASH EQUIVALENTS**

 

The following table sets forthamounts of cash and cash equivalents for the dates indicated:

 
| ** **                                             | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|
| ** **                                             | ** ** | **2008**              | ** ** | **2007** | ** ** |
|                                                   |       |                  |       |   |   |
| Cash on hand and in  banks                             |       | 171                   |       | 360 |   |
| Cash equivalents,  principally certificates of deposit |       | 1,798                 |       | 1,424 |   |
|                                                   |       | 1,969                 |       | 1,784 |   |

 

Cash and cash equivalentsconsist of transactions with Brazilian financial institutions, contracted onnormal market conditions and at normal market rates. These are highly liquid,able to be converted into a known amount of cash and are subject to aninsignificant risk of change of value.

 

**7. ACCOUNTSRECEIVABLE, NET**

 

The following table sets forthinformation concerning accounts receivable:

 
| ** **                       | ** ** | **As of December 31, 2008** | ** ** | ** **   | ** ** |
|----------------------------------|------------|----------------------------------|------------|--------------|------------|
| ** **                       | ** ** | ** **                       | ** ** | ** **   | ** ** | **Total** | ** ** |
| ** **                       | ** ** | ** **                       | ** ** | **Past-due** | ** ** | **December 31,** | ** ** |
| ** **                       | ** ** | ** **                       | ** ** | **Up to 90** | ** ** | **Over 90** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **Current**                      | ** ** | **days**     | ** ** | **days** | ** ** | **2008** | ** ** | **2007** | ** ** |
|                             |       |                             |       |         |       |   |   |   |   |   |   |
| Residential                      |       | 309                              |       | 127          |       | 108 |   | 544 |   | 614 |   |
| Industrial                       |       | 306                              |       | 51           |       | 331 |   | 688 |   | 559 |   |
| Commercial                       |       | 175                              |       | 40           |       | 83 |   | 298 |   | 340 |   |
| Rural                            |       | 53                               |       | 17           |       | 32 |   | 102 |   | 108 |   |
| Governmental  entities           |       | 73                               |       | 22           |       | 70 |   | 165 |   | 220 |   |
| Public  services                 |       | 43                               |       | 4            |       | 11 |   | 58 |   | 54 |   |
| Subtotal                         |       | 959                              |       | 261          |       | 635 |   | 1,855 |   | 1,895 |   |
| Distributors                     |       | 90                               |       | 14           |       | 7 |   | 111 |   | 128 |   |
|                             |       | 1,049                            |       | 275          |       | 642 |   | 1,966 |   | 2,023 |   |
|                             |       |                             |       |         |       |   |   |   |   |   |   |
| Allowance for doubtful  accounts |       | —                           |       | —       |       | (244 | ) | (244 | ) | (295 | ) |
|                             |       | 1,049                            |       | 275          |       | 398 |   | 1,722 |   | 1,728 |   |
| Current assets                   |       |                             |       |         |       |   |   | 1,705 |   | 1,684 |   |
| Other non-current  assets        |       |                             |       |         |       |   |   | 17 |   | 44 |   |

 

No single customer represented more than 10% of totalreceivables as of December 31, 2008 and 2007 or of electricity sales tofinal customers for the years ended December 31, 2008, 2007 and 2006.

 

F-30

----

 

The accounts receivable, other non-current asset, ofR$17 as of December 31, 2008 (R$44 on December 31, 2007), refers torenegotiated payment of the debts with COPASA (Minas Gerais Water Company- acompany controlled by the Minas Gerais State Government ) and other customers,up to September 2012.

 

Thereare recorded credits receivable from an industrial consumer in the amount ofR$93 as of December 31, 2008 (R$91 on December 31, 2007), not paiddue to an injunction that allowed this payment to be deferred until finaljudgment of a legal action challenging the rate increase during the CruzadoEconomic Plan, by Ministerial Order 045/86. The Company expects this action tobe concluded before the end of 2009 and expects the amounts to be received infull.

 

Theallowance for doubtful accounts, by class of customer, is as follows:

 
| ** **             | ** ** | **Year ended  December 31,** | ** ** |
|------------------------|------------|-----------------------------------|------------|
| ** **             | ** ** | **2008**                          | ** ** | **2007** | ** ** |
|                   |       |                              |       |   |   |
| Residential            |       | 68                                |       | 77 |   |
| Industrial             |       | 79                                |       | 159 |   |
| Commercial             |       | 62                                |       | 40 |   |
| Rural                  |       | 14                                |       | 8 |   |
| Governmental  entities |       | 16                                |       | 8 |   |
| Public  services       |       | 5                                 |       | 3 |   |
|                   |       | 244                               |       | 295 |   |

 

The changes in allowance for doubtful accounts were asfollows:

 
| ** **                                                | ** ** | **Year ended  December 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                      |       |                              |       |   |   |   |   |
| Balance at beginning of  the year                         |       | 295                               |       | 297 |   | 214 |   |
| Accounts written off                                      |       | (108                              | )          | (95 | ) | (11 | ) |
| Provision for the year  recorded as other operating costs |       | 57                                |       | 93 |   | 94 |   |
| Balance at end of the  year                               |       | 244                               |       | 295 |   | 297 |   |

 

**8. RECOVERABLE TAXES**

 

The following table sets forthamounts of taxes recoverable for the dates indicated:

 
| ** **                  | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2008**              | ** ** | **2007** | ** ** |
|                        |       |                  |       |   |   |
| Current assets -            |       |                  |       |   |   |
| Income tax                  |       | 311                   |       | 254 |   |
| Social contribution tax     |       | 120                   |       | 99 |   |
| VAT                         |       | 159                   |       | 152 |   |
| PIS-PASEP                   |       | 14                    |       | 27 |   |
| COFINS                      |       | 65                    |       | 135 |   |
| Other                       |       | 3                     |       | 22 |   |
|                        |       | 672                   |       | 689 |   |
| Other non-current  assets - |       |                  |       |   |   |
| Income tax                  |       | 163                   |       | 233 |   |
| Social contribution tax     |       | 11                    |       | 26 |   |
| VAT                         |       | 79                    |       | 57 |   |
|                        |       | 253                   |       | 316 |   |

 

F-31

----

 

The Income and Social Contribution Taxcredits refer to amounts calculated in the Company’s previous years taxreturns, and advance payments made in 2008, which will be compensated in theIncome and Social Contribution taxes payable in 2009.

 

The credits of ICMS recoverable, recorded as Other Non-Current Assets,arise from acquisitions of fixed assets and are offset in 48 months.

 

**9. INVESTMENTS IN AFFILIATES**

 

The following table describes the Company’s equityinvestments:

 
| ** **        | ** ** | **December 31,** | ** ** |
|-------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2008**              | ** ** | **2007** | ** ** |
|              |       |                  |       |   |   |
| Rio Minas Energia |       | 303                   |       | 276 |   |
| GASMIG            |       | 320                   |       | 193 |   |
| EATE              |       | 183                   |       | 186 |   |
| ENTE              |       | 59                    |       | 63 |   |
| Transleste        |       | 12                    |       | 12 |   |
| ETEP              |       | 38                    |       | 38 |   |
| Transchile        |       | 34                    |       | 12 |   |
| Centroeste        |       | 7                     |       | 7 |   |
| Transudeste       |       | 7                     |       | 7 |   |
| ERTE              |       | 13                    |       | 14 |   |
| ECTE              |       | 10                    |       | 11 |   |
| Transirapé   |       | 5                     |       | 5 |   |
| Cachoeirão   |       | 17                    |       | 17 |   |
| Guanhães     |       | 10                    |       | 10 |   |
| Axxiom            |       | 3                     |       | — |   |
| Pipoca            |       | 4                     |       | — |   |
| EBTE              |       | 7                     |       | — |   |
| Baguari Energia   |       | 140                   |       | — |   |
| Other investments |       | 31                    |       | 18 |   |
|              |       | 1,203                 |       | 869 |   |

 

(a) Acquisitionof interest in transmission companies

 

On September 24, 2008, Brookfield exercised itsoption to sell, to CEMIG and Alupar Investimento S.A., who bought them in theproportion of 95% and 5% respectively, its holdings, as follows, in the votingstock of the following companies: 24.99% of the voting stock of EmpresaAmazonense de Transmissão de Energia S.A. – EATE; 24.99% of the voting stock of Empresa Paraense de Transmissão deEnergia S.A. – ETEP; 18.35%of the voting stock of Empresa Norte de Transmissão de Energia S.A. – ENTE; 18.35% of the voting stock of Empresa Regional de Transmissão deEnergia S.A. – ERTE; and7.49% of the voting stock of Empresa Catarinense de Transmissão de Energia S.A.– ECTE.

 

Completion of the transaction and final acquisition ofthe shares by CEMIG were subject to approval of the transfer of the shares ofthe above-mentioned companies by the Brazilian electricity regulator, ANEEL,the Brazilian Development Bank (BNDES) and other financial entities. Theapprovals were obtained by the Company in June of 2009 and CEMIG expects toconclude the transaction in July of 2009.

 

F-32

----

 

The amount to be paid by CEMIG for the 95% of theshares previously owned by Brookfield will be R$331, with value as of August 16,2006 (R$489 updated at December 31, 2008), updated until the date ofclosing.

 

On October 31, 2008,after approval by ANEEL, the BNDES and other creditors, CEMIG, through itsjointly-controlled subsidiary Empresa Amazonense de Transmissão de Energia S.A.– EATE, concluded the acquisition of 80% of the registered capital of Lumitrans– Companhia Transmissora de Energia Elétrica and 80% of the registered capitalof STC – Sistema de Transmissão Catarinense S.A.  EATE paid R$32 for the shares of Lumitransand R$57 for the shares in STC.

 

(b) 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 profit of Infovias from this sale, in the amountof R$49 was recognized in the 4th quarter of 2007, when the approval waspublished in the Official Federal Gazette.

 

(c) Consortia forthe Itaocara Hydroelectric Plant, and the Paracambi and Lajes Small HydroPlants

 

On July 3, 2008, the Board of Directorsauthorized Cemig Geração e Transmissão the acquisition of theinterest of 49% ofthe registered capital of the Itaocara Hydro Plant and the Paracambi and LajesSmall Hydro Plants, and to constitute, the following consortia: the ItaocaraHydro Plant Consortium (Consórcio UHE Itaocara), in partnership with ItaocaraEnergia Ltda.; the Paracambi Small Hydro Plant Consortium (Consórcio BCHParacambi), in partnership with Lightger Ltda.; and the Lajes Small Hydro PlantConsortium (Consórcio PCH Lajes), in partnership with Light Energia S.A. – allhaving as their object technical and economic feasibility studies, preparationof projects and implementation, operation, maintenance and commercial operationof the respective projects.

 

All the private contracts mentioned above are pendingauthorizations or consents required from the competent regulatory bodies,including ANEEL.

 

F-33

----

 

**10.PROPERTY, PLANT, EQUIPMENT AND INTANGIBLES,NET**

 

a) Property, Plant andEquipment

 

The following tabledescribes the consolidated property, plant and equipment:

 
| ** **                                          | ** ** | ** **                  | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------|------------|-----------------------|------------|
| ** **                                          | ** ** | **Annual  average rate of** | ** ** | ** **            | ** ** |
| ** **                                          | ** ** | **depreciation**            | ** ** | ** **            | ** ** |
| ** **                                          | ** ** | **%**                       | ** ** | **2008**              | ** ** | **2007** | ** ** |
| In service                                          |       |                        |       |                  |       |   |   |
| Generation-                                         |       |                        |       |                  |       |   |   |
| Hydroelectric                                       |       | 2.48                        |       | 9,210                 |       | 9,140 |   |
| Hydroelectric-  Consortia                           |       | 2.49                        |       | 1,229                 |       | 1,185 |   |
| Thermoelectric                                      |       | 3.91                        |       | 260                   |       | 260 |   |
|                                                |       |                        |       | 10,699                |       | 10,585 |   |
| Transmission                                        |       | 3.01                        |       | 1,723                 |       | 1,701 |   |
| Distribution                                        |       | 4.74                        |       | 11,983                |       | 11,522 |   |
| Administration                                      |       | 12.08                       |       | 524                   |       | 516 |   |
| Telecom                                             |       | 8.34                        |       | 336                   |       | 311 |   |
|                                                |       |                        |       | 25,265                |       | 24,635 |   |
| Accumulated  depreciation and amortization          |       |                        |       |                  |       |   |   |
| Generation –  Hydroelectric and thermoelectric |       |                        |       | (4,921                | )          | (4,707 | ) |
| Generation – Consortia                         |       |                        |       | (126                  | )          | (93 | ) |
| Transmission                                        |       |                        |       | (1,025                | )          | (981 | ) |
| Distribution                                        |       |                        |       | (6,448                | )          | (6,048 | ) |
| Administration                                      |       |                        |       | (414                  | )          | (408 | ) |
| Telecom                                             |       |                        |       | (162                  | )          | (135 | ) |
|                                                |       |                        |       | (13,096               | )          | (12,372 | ) |
| Total in service                                    |       |                        |       | 12,169                |       | 12,263 |   |
|                                                |       |                        |       |                  |       |   |   |
| Construction in  progress                           |       |                        |       |                  |       |   |   |
| Generation                                          |       |                        |       | 218                   |       | 226 |   |
| Generation – Consortia                         |       |                        |       | 43                    |       | 122 |   |
| Transmission                                        |       |                        |       | 64                    |       | 61 |   |
| Distribution                                        |       |                        |       | 1,092                 |       | 806 |   |
| Administration                                      |       |                        |       | 119                   |       | 117 |   |
| Telecom                                             |       |                        |       | 28                    |       | 7 |   |
| Total in construction  in progress                  |       |                        |       | 1,564                 |       | 1,339 |   |
| Total of property,  plant and equipment             |       |                        |       | 13,733                |       | 13,602 |   |

 

Interest cost capitalized during the years ended December 31,2008, 2007 and 2006 was R$155, R$120, and R$293, respectively.

 

Under Brazilian law,CEMIG’s power generation, transmission and distribution assets may not beretired, disposed of, transferred, sold or mortgaged without the priorauthorization of ANEEL. The proceeds received from the disposal of assets mustbe deposited in an earmarked bank account and used in the purchase of otherconcession assets. In accordance with normal practice in Brazil for electricutilities, from time to time, CEMIG constructs distribution systems for thebenefit of consumers for which the consumer reimburses the cost. Thesereimbursements are accounted for as a reduction to the cost basis of therelated assets as they are received.

 

TheCompany has recorded R$256 as Construction in progress - Distribution on December 31,2008 (R$307 on December 31 2007) related to the “Light for All Program”which approximately 184,778 consumers (information has not audited) wereconnected, mainly in rural areas. The program is being carried out with fundsfrom the federal and state governments.

 

F-34

----

 

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 areincluded in the previous table, is as follows:

 
| ** **                                                              | ** ** | ** **                         | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------|------------|-----------------------|------------|
| ** **                                                              | ** ** | **CEMIG’s  Participation  %** | ** ** | **2008**              | ** ** | **2007** | ** ** |
|                                                                    | ** ** | ** **                         | ** ** | ** **            | ** ** | ** ** | ** ** |
| In service-                                                             |       |                               |       |                  |       |   |   |
| Queimado Hydroelectric  Power Plant                                     |       | 82.50                              |       | 209                   |       | 207 |   |
| Funil Hydroelectric  Power Plant                                        |       | 49.00                              |       | 163                   |       | 152 |   |
| Igarapava Hydroelectric  Power Plant                                    |       | 14.50                              |       | 56                    |       | 56 |   |
| Porto Estrela  Hydroelectric Power Plant                                |       | 33.33                              |       | 55                    |       | 55 |   |
| Aimorés Hydroelectric  Power Plant                                 |       | 49.00                              |       | 692                   |       | 661 |   |
| Amador Aguiar I and II Hydroelectric  Power Plant (former Capim Branco) |       | 21.05                              |       | 54                    |       | 54 |   |
| ( - ) Accumulated  depreciation                                         |       |                               |       | (126                  | )          | (93 | ) |
|                                                                    |       |                               |       | 1,103                 |       | 1,092 |   |
| Construction in  progress-                                              |       |                               |       |                  |       |   |   |
| Queimado Hydroelectric  Power Plant                                     |       | 82.50                              |       | 25                    |       | 14 |   |
| Aimorés Hydroelectric  Power Plant                                 |       | 49.00                              |       | 11                    |       | 25 |   |
| Funil Hydroelectric  Power Plant                                        |       | 49.00                              |       | 2                     |       | 11 |   |
| Baguari Hydroelectric  Power Plant                                      |       | 34.00                              |       | 5                     |       | 72 |   |
|                                                                    |       |                               |       | 43                    |       | 122 |   |
|                                                                    |       |                               |       | 1,146                 |       | 1,214 |   |

 

The participation of the other partners in energygeneration from consortia is as follows:

 
| **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                  |       |
|                                 |       |                                                           |       |                   |       |
| Amador Aguiar I and II 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-35

----

 

b) Intangibles

 
| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2008**              | ** ** | **2007** | ** ** |
|                                      |       |                  |       |   |   |
| Intangibles – gross  carrying amount |       | 426                   |       | 360 |   |
| Accumulated  amortization                 |       | (148                  | )          | (127 | ) |
| Total of Intangibles                      |       | 278                   |       | 233 |   |

 

**11. ESCROW DEPOSITS**

 

The escrow deposits relate principally to tax andlabor issues.

 

The escrow deposits are mainlycomprised of tax refer to ITCMD – Imposto de Transmissão Causa Mortis e Doação(Inheritance and Donation Tax)  in theamount 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, and to PASEP/COFINS– related to exclusion of Value-added tax (ICMS) from the tax basis in theamount of R$96.

 

**12. ACCOUNTS PAYABLE TO SUPPLIERS**

 
| ** **                                                                           | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                           | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Electricity suppliers-                                                               |       |                  |       |   |   |
| Eletrobrás –  Energy from Itaipu                                           |       | 169                   |       | 197 |   |
| Furnas Centrais Elétricas S.A.                                                  |       | 68                    |       | 66 |   |
| Spot market – CCEE/MAE                                                          |       | 76                    |       | 83 |   |
| Payments to generators  for energy purchased on CCEE/MAE during the rationing period |       | —                |       | 338 |   |
| Others                                                                               |       | 178                   |       | 148 |   |
|                                                                                 |       | 491                   |       | 832 |   |
|                                                                                 |       |                  |       |   |   |
| Supplies and services                                                                |       | 228                   |       | 293 |   |
|                                                                                 |       | 719                   |       | 1,125 |   |
|                                                                                 |       |                  |       |   |   |
| Current liabilities                                                                  |       | 719                   |       | 784 |   |
| Long-term liabilities                                                                |       | —                |       | 341 |   |

 

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 force atthe time of the realization of the transactions in the ambit of the CCEE/MAE,may result in changes in the amounts recorded. (See Note 4).

 

F-36

----

 

**13.****TAXES PAYABLE**

 

The following table describes taxes payable:

 
| ** **                   | ** ** | **December 31,** | ** ** |
|------------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Current -                    |       |                  |       |   |   |
| Income tax                   |       | 44                    |       | 40 |   |
| Social contribution tax      |       | 17                    |       | 13 |   |
| VAT                          |       | 277                   |       | 300 |   |
| Tax on revenue – COFINS |       | 80                    |       | 125 |   |
| Tax on revenue – PASEP  |       | 17                    |       | 32 |   |
| Others                       |       | 36                    |       | 49 |   |
|                         |       | 471                   |       | 559 |   |
| Long-term -                  |       |                  |       |   |   |
| Income tax                   |       | 1                     |       | 2 |   |
| Tax on revenue – COFINS |       | 75                    |       | — |   |
| Tax on revenue – PASEP  |       | 30                    |       | — |   |
|                         |       | 106                   |       | 2 |   |
|                         |       | 577                   |       | 561 |   |

 

The long-term PASEP and COFINS obligations refer tothe legal proceedings challenging the constitutionality of inclusion of theICMS tax in the basis of calculation of the taxable amount for these taxes. Theaction also applies for offsetting of the amounts paid in the last 10 years.The Company has obtained interim relief from the court allowing it not to makethe payment and authorizing payment into court starting in 2008.

 

**14. FINANCING**

 

(a)              The followingtables describe the Company ́s financings:

 
| ** **                                   | ** ** | ** **                  | ** ** | ** **              | ** ** | ** **   | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|--------------|------------|-----------------------|------------|
| ** **                                   | ** ** | ** **                  | ** ** | **Annual**              | ** ** | ** **   | ** ** | ** **            | ** ** | **2008** | ** ** | ** ** | ** ** | **2007** | ** ** |
| **LENDERS**                                  | ** ** | **Payments  of Principal**  | ** ** | **Interest  Rates (%)** | ** ** | **Currency** | ** ** | **Current**           | ** ** | **Long********Term** | ** ** | **Total** | ** ** | **Total** | ** ** |
| ** **                                   | ** ** | ** **                  | ** ** | ** **              | ** ** | ** **   | ** ** | **R$ million**   | ** ** |
| **IN  FOREIGN CURRENCY**                     |       |                        |       |                    |       |         |       |                  |       |   |   |   |   |   |   |
| ABN AMRO Bank — N. II                   |       | Annually  through 2013      |       | 6.00                    |       | US$          |       | —                |       | 117 |   | 117 |   | 89 |   |
| ABN AMRO Real S.A.  III, IV and V       |       | Semi-annually  through 2009 |       | 6.35                    |       | US$          |       | 17                    |       | — |   | 17 |   | 26 |   |
| Banco do Brasil S.A. — Various (1) |       | Semi-annually  through 2024 |       | Various                 |       | US$          |       | 15                    |       | 79 |   | 94 |   | 93 |   |
| Banco do Brasil S.A.  II                |       | Single  payment in 2009     |       | 3.90                    |       | JPY          |       | 100                   |       | — |   | 100 |   | 61 |   |
| Banco Paribas II                             |       | Semi-annually  through 2012 |       | 5.89                    |       | EURO         |       | 4                     |       | 9 |   | 13 |   | 13 |   |
| Banco Paribas I and III                      |       | Semi-annually  through 2010 |       | Libor + 1.87            |       | US$          |       | 28                    |       | 14 |   | 42 |   | 52 |   |
| KFW                                          |       | Semi-annually  through 2016 |       | 4.50                    |       | EURO         |       | 2                     |       | 15 |   | 17 |   | 16 |   |
| UNIBANCO I, III e VIII                  |       | Through  various            |       | 6.50                    |       | US$          |       | 11                    |       | — |   | 11 |   | 8 |   |
| UNIBANCO III and V                           |       | Single  payment in 2009     |       | 5.50                    |       | US$          |       | 5                     |       | — |   | 5 |   | 4 |   |
| UNIBANCO IV and IX                           |       | Single  payment in 2009     |       | 5.00                    |       | US$          |       | 20                    |       | — |   | 20 |   | 15 |   |
| MBK Furukawa Sistemas S.A. / UNIBANCO        |       | Semi-annually  through 2008 |       | Libor + 5.45            |       | US$          |       | —                |       | — |   | — |   | 6 |   |
| Toshiba do Brasil S.A.                       |       | Quarterly  through 2009     |       | Libor + 6.00            |       | US$          |       | 9                     |       | — |   | 9 |   | 7 |   |
| **Total  foreign currency financing**        |       |                        |       |                    |       |         | ** ** | **211**               | ** ** | **234** | ** ** | **445** | ** ** | **390** | ** ** |

 

F-37

----

 
| ** **                                                        | ** ** | ** **                  | ** ** | ** **            | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                        | ** ** | ** **                  | ** ** | ** **            | ** ** | **2008**              | ** ** | **2007** | ** ** |
| ** **                                                        | ** ** | ** **                  | ** ** | **Annual  Interest**  | ** ** | ** **            | ** ** | ** ** | ** ** | **Long** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **LENDERS**                                                       | ** ** | **Payments  of Principal**  | ** ** | **Rates (%)**         | ** ** | **Currency**          | ** ** | **Current** | ** ** | **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$                    |       | 121 |   | — |   | 121 |   | 121 |   |
| Banco do Brasil S.A. IV and VIII                                  |       | Annually  through 2013      |       | CDI + 1.70            |       | R$                    |       | 5 |   | 109 |   | 114 |   | 113 |   |
| Banco do Brasil S.A. V and IX                                     |       | Single  payment in 2013     |       | 107.60% of CDI        |       | R$                    |       | 12 |   | 126 |   | 138 |   | 136 |   |
| Banco do Brasil S.A.                                              |       | Annually  through 2014      |       | 104.10% of CDI        |       | R$                    |       | 30 |   | 1,200 |   | 1,230 |   | 1,224 |   |
| Banco Itaú — BBA V                                      |       | Single  payment in 2008     |       | IGP-M + 10.48         |       | R$                    |       | — |   | — |   | — |   | 180 |   |
| Banco Itaú — BBA III e VI                               |       | Single  payment in 2008     |       | CDI + 2.00            |       | R$                    |       | — |   | — |   | — |   | 41 |   |
| Banco Itaú — BBA IV and VII                             |       | Annually  through 2014      |       | CD + 1.70             |       | R$                    |       | 16 |   | 304 |   | 320 |   | 318 |   |
| HSBC Bank Brasil S.A.                                             |       | Single  payment in 2008     |       | CDI + 2.00            |       | R$                    |       | — |   | — |   | — |   | 61 |   |
| Banco Votorantim S.A. I and III                                   |       | Single  payment in 2010     |       | 113.50% of CDI        |       | R$                    |       | — |   | 55 |   | 55 |   | 57 |   |
| Banco Votorantim S.A. II,III, IV                                  |       | Annually  through 2013      |       | CDI + 1.70            |       | R$                    |       | 2 |   | 101 |   | 103 |   | 106 |   |
| Banco WESTL do Brasil                                             |       | Single  payment in 2008     |       | IGP-M + 10.48         |       | R$                    |       | — |   | — |   | — |   | 45 |   |
| Banco Nacional de Desenvolvimento Econômico e Social - BNDES |       | Monthly  through 2008       |       | SELIC + 1.00          |       | R$                    |       | — |   | — |   | — |   | 26 |   |
| Bradesco S.A. II, III                                        |       | Annually  through 2013      |       | CDI + 1.70            |       | R$                    |       | 22 |   | 379 |   | 401 |   | 398 |   |
| Debentures II                                                     |       | Single  payment in 2009     |       | CDI + 1.20            |       | R$                    |       | 357 |   | — |   | 357 |   | 356 |   |
| Debentures II                                                     |       | Single  payment in 2011     |       | 104% of CDI           |       | R$                    |       | 5 |   | 239 |   | 244 |   | 243 |   |
| Debentures III–Minas  Gerais State Government                |       | Through  various            |       | IGP-M                 |       | R$                    |       | — |   | 33 |   | 33 |   | 18 |   |
| Debêntures IV                                                |       | Single  payment in 2014     |       | IGP-M + 10.50         |       | R$                    |       | 19 |   | 306 |   | 325 |   | 295 |   |
| Debêntures V                                                 |       | Single  payment in 2017     |       | IPCA + 7.96           |       | R$                    |       | 2 |   | 426 |   | 428 |   | 402 |   |
| ELETROBRÁS I and III                                         |       | Monthly  through 2013       |       | FINEL + 7.50 and 8.50 |       | R$                    |       | 12 |   | 49 |   | 61 |   | 79 |   |
| ELETROBRÁS IV                                                |       | Quarterly  thorough 2023    |       | UFIR + 6.00 to 8.00   |       | R$                    |       | 46 |   | 324 |   | 370 |   | 337 |   |
| Large consumers —  C.V.R.D.                                  |       | Semi-annually  through 2011 |       | Various               |       | R$                    |       | 3 |   | 2 |   | 5 |   | 5 |   |
| Banco Santander Brasil S.A. I and II                              |       | Annually  through 2013      |       | CDI + 1.70            |       | R$                    |       | 1 |   | 80 |   | 81 |   | 81 |   |
| UNIBANCO V                                                        |       | Single  payment in 2009     |       | CDI + 2.98            |       | R$                    |       | 107 |   | — |   | 107 |   | 106 |   |
| UNIBANCO VI and X                                                 |       | Annually  through 2013      |       | CDI + 1.70            |       | R$                    |       | 13 |   | 309 |   | 322 |   | 320 |   |
| UNIBANCO I                                                        |       | Annually  through 2013      |       | CDI + 1.70            |       | R$                    |       | 7 |   | 74 |   | 81 |   | 79 |   |
| Banco Itaú and Bradesco (2)                                  |       | Semi-annually  through 2015 |       | CDI + 1.70            |       | R$                    |       | 132 |   | 858 |   | 990 |   | 990 |   |
| Caixa Econômica Federal                                      |       | Single  payment in 2008     |       | CDI + 101.50          |       | R$                    |       | — |   | — |   | — |   | 200 |   |
| Banco do Nordeste do Brasil                                       |       | Single  payment in 2010     |       | TR + 7.30             |       | R$                    |       | 74 |   | 31 |   | 105 |   | — |   |
| Others                                                            |       | Through  various            |       | Various               |       | R$                    |       | — |   | — |   | — |   | 12 |   |
| **Total local currency**                                          | ** ** | ** **                  | ** ** | ** **            | ** ** | ** **            | ** ** | **986** | ** ** | **5,080** | ** ** | **6,066** | ** ** | **6,424** | ** ** |
| **TOTAL**                                                         | ** ** | ** **                  | ** ** | ** **            | ** ** | ** **            | ** ** | **1,197** | ** ** | **5,314** | ** ** | **6,511** | ** ** | **6,814** | ** ** |

 

----

(1)     These interest rates vary from 2.00 to8.00% per year;

(2)     Refers to senior quotas of the FIDC;

 

F-38

----

 

(b) Compositionof foreign currency financings anddomestic currency financings by indices:

 
| ** **                                                                                          | ** ** | **2009**  | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013**  | ** ** | **2014** | ** ** | **2015** | ** ** | **2016 and  thereafter** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|----------|------------|-----------|------------|----------|------------|----------|------------|--------------------------|------------|-----------|------------|
| Currency -                                                                                          |       |      |       |     |       |     |       |     |       |      |       |     |       |     |       |                     |       |      |       |
| United States Dollars                                                                               |       | 105       |       | 54       |       | 40       |       | 37       |       | 35        |       | 3        |       | —   |       | 41                       |       | 315       |       |
| Euro                                                                                                |       | 6         |       | 6        |       | 6        |       | 4        |       | 2         |       | 2        |       | 2        |       | 2                        |       | 30        |       |
| Japanese yen                                                                                        |       | 100       |       | —   |       | —   |       | —   |       | —    |       | —   |       | —   |       | —                   |       | 100       |       |
|                                                                                                | ** ** | **211**   | ** ** | **60**   | ** ** | **46**   | ** ** | **41**   | ** ** | **37**    | ** ** | **5**    | ** ** | **2**    | ** ** | **43**                   | ** ** | **445**   | ** ** |
| Index -                                                                                             |       |      |       |     |       |     |       |     |       |      |       |     |       |     |       |                     |       |      |       |
| *Certificado de Depósito Interbancário*–*CDI*  (Interbank deposit rate)              |       | 830       |       | 594      |       | 706      |       | 869      |       | 998       |       | 536      |       | 206      |       | —                   |       | 4,739     |       |
| *Índice Geral de Preços de Mercado*– “IGP-M” (General  Market Price Index) |       | 19        |       | —   |       | —   |       | —   |       | —    |       | 306      |       | —   |       | 33                       |       | 358       |       |
| *Unidade Fiscal de Referência*– “UFIR” (Tax Reference Unit)                     |       | 46        |       | 42       |       | 47       |       | 44       |       | 38        |       | 38       |       | 36       |       | 79                       |       | 370       |       |
| *Índice Interno da Eletrobrás*– “FINEL” (Eletrobrás Internal Index)   |       | 12        |       | 12       |       | 13       |       | 13       |       | 11        |       | —   |       | —   |       | —                   |       | 61        |       |
| *Índice de Preço ao Consumidor Amplo*– “IPCA” (Consumer  Price Index)      |       | 2         |       | —   |       | —   |       | —   |       | —    |       | —   |       | 142      |       | 284                      |       | 428       |       |
| *Taxa Referencial*– “TR”  (Referencial Tax Index)                                    |       | 74        |       | 31       |       | —   |       | —   |       | —    |       | —   |       | —   |       | —                   |       | 105       |       |
| Others                                                                                              |       | 3         |       | —   |       | —   |       | —   |       | 1         |       | 1        |       | —   |       | —                   |       | 5         |       |
|                                                                                                | ** ** | **986**   | ** ** | **679**  | ** ** | **766**  | ** ** | **926**  | ** ** | **1,048** | ** ** | **881**  | ** ** | **384**  | ** ** | **396**                  | ** ** | **6,066** | ** ** |
|                                                                                                | ** ** | **1,197** | ** ** | **739**  | ** ** | **812**  | ** ** | **967**  | ** ** | **1,085** | ** ** | **886**  | ** ** | **386**  | ** ** | **439**                  | ** ** | **6,511** | ** ** |

 

(c) The following table sets forth the variations for the periodsindicated in the foreign currency / Brazilian *real*exchange rates for the principal foreign currencies used to restate financing,expressed as a percentage:

 
| ** **            | ** ** | **Year ended  December 31,** | ** ** |
|-----------------------|------------|-----------------------------------|------------|
| ** **            | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Currency-             |       |                              |       |   |   |   |   |
| United States Dollars |       | 31.94                             |       | (17.15 | ) | (8.66 | ) |
| Japanese Yen          |       | 62.89                             |       | (11.78 | ) | (9.47 | ) |
| Euro                  |       | 24.13                             |       | (7.50 | ) | 1.85 |   |

 

(d) The following table sets forth the variations for the periodsindicated of the principal indices applied to domestic currency financing,expressed as a percentage:

 
| ** ** | ** ** | **Year ended  December 31,** | ** ** |
|------------|------------|-----------------------------------|------------|
| ** ** | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Index-     |       |                              |       |   |   |   |   |
| CDI        |       | 12.32                             |       | 11.82 |   | 15.05 |   |
| IGP-M      |       | 9.81                              |       | 7.75 |   | 3.83 |   |
| SELIC      |       | 12.48                             |       | 11.88 |   | 15.10 |   |
| FINEL      |       | 1.90                              |       | 1.51 |   | 0.76 |   |

 

F-39

----

 

(e) The movement on financing is as follows:

 
| ** **                               | ** ** | **Year ended  December 31,** | ** ** |
|------------------------------------------|------------|-----------------------------------|------------|
| ** **                               | ** ** | **2008**                          | ** ** | **2007** | ** ** |
|                                     |       |                              |       |   |   |
| Balance  at beginning of year            |       | 6,814                             |       | 6,524 |   |
| Loans  and financings                    |       | 176                               |       | 1,389 |   |
| Monetary  and Foreign currency variation |       | 322                               |       | 63 |   |
| Financial  charges provisioned           |       | 650                               |       | 649 |   |
| Financial  charges paid                  |       | (644                              | )          | (672 | ) |
| Amortization  of financings              |       | (807                              | )          | (1,139 | ) |
| **Balance at end of year**               | ** ** | **6,511**                         | ** ** | **6,814** | ** ** |

 

(f) The consolidatedtotals of funds raised in 2008 are as follows:

 
| **Loans / financing sources**       | ** ** | **Principal  maturity** | ** ** | **Annual  cost** | ** ** | **Amount  raised** | ** ** |
|-------------------------------------|------------|-------------------------|------------|------------------|------------|--------------------|------------|
| **IN LOCAL CURRENCY**               | ** ** | ** **              | ** ** | ** **       | ** ** | ** **         | ** ** |
|                                |       |                    |       |             |       |               |       |
| ***Cemig  Distribuição*** | * *   | * *                | * *   | * *         | * *   | * *           | * *   |
| Banco do Nordeste do Brasil         |       | 2010                    |       | TR + 7.30        | %          | 100                |       |
| ELETROBRÁS                     |       | 2020                    |       | 6.00             | %          | 44                 |       |
| ELETROBRÁS                     |       | 2016                    |       | 6.00             | %          | 6                  |       |
| ELETROBRÁS                     |       | 2015                    |       | 7.00             | %          | 18                 |       |
| ELETROBRÁS                     |       | 2013                    |       | 6.50             | %          | 6                  |       |
| ELETROBRÁS                     |       | 2013                    |       | 6.50             | %          | 2                  |       |
| **Total raised**                    | ** ** | ** **              | ** ** | ** **       | ** ** | **176**            | ** ** |

 

(g) Restrictive Covenants

 

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, 2008 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 debtless (cash balance plus tradable securities)

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, 2008 and 2007.

 

F-40

----

 

**15. REGULATORY CHARGES PAYABLE**

 

The following table describes the Company’s regulatorycharges payable:

 
| ** **                             | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Global reserve for  reversion quota    |       | 32                    |       | 23 |   |
| Fuel usage quota                       |       | 42                    |       | 30 |   |
| Emergency capacity  charge             |       | 36                    |       | 38 |   |
| Energy  development account            |       | 30                    |       | 34 |   |
| Energy efficiency and  R&D program |       | 327                   |       | 267 |   |
| Other                                  |       | 13                    |       | 7 |   |
|                                   |       | 480                   |       | 399 |   |
| Current liabilities                    |       | 460                   |       | 384 |   |
| Non current liabilities  – other  |       | 20                    |       | 15 |   |

 

(a) Global reservefor reversion quota:

 

Theglobal reserve for reversion quota was established as a fund managed byELETROBRÁS (*Centrais Elétricas Brasileiras S.A*., theFederal Government-owned holding company for investments in the Brazilian powersector) for the purpose of reimbursement ofelectricity companies’ investments when their concessions expire and assetssubject to the concession revert to the Federal Government. It is fundedthrough assessments on power companies and is based on 2.5% of assets inservice, limited to 3% of total annual operating revenues, net of value-addedtax on sales to final customers.

 

(b) Fuel usagequota:

 

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 capacitycharge:

 

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 andR&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 dedicated to this program.

 

F-41

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**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 net transitionobligation existing at January 1, 1995 has been computed retroactively asif it had been established on January 1, 1989, which is the date that SFASNo 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, 2008 and 2007 was R$2,386 andR$2,131, respectively, and the contribution expense for the years ended December 31,2008, 2007 and 2006 was R$49, R$34 and R$53, 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$942, as of December 31,2008 (R$1,063 as of December 31, 2007), 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 annually according tothe salary adjustment index for the Company’s employees (not includingproductivity) included in the defined benefit plan, and part is adjustedaccording to the IPCA — IPEAD (consumer price index calculated by the MinasGerais Accounting Management and Economic Research Institute of Minas GeraisFederal University), plus 6% per year.

 

In case FORLUZreports a surplus for three consecutive years, such surplus may be used toreduce CEMIG’s obligations mentioned in the previous paragraph, ascontractually agreed. Therefore, the surplus presented by FORLUZ in 2006, inthe amount of R$207, was used to reduce the Company’s debt mentioned above andtherefore the annual payments of contributions from CEMIG to Forluz. Suchcompensation does not represent a reduction on CEMIG’s benefit obligation,which is measured according to actuarial criteria.

 

F-42

----

 

The reconciliation 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,**                                | ** ** |
| ** **                    | ** ** | **2008**                          | ** ** | **2007**                                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Projected Benefit  obligation |       | 5,572                             |       | 5,789                                                            |       | 922 |   | 900 |   |
| Fair Value of plan  assets    |       | (4,654                            | )          | (4,385                                                           | )          | — |   | (33 | ) |
| Funded status                 |       | 918                               |       | 1,404                                                            |       | 922 |   | 867 |   |

 

Thechange in benefit obligations for the years ended December 31, 2008 and 2007is as follows:

 
| ** **                                             | ** ** | **Defined  benefit pension plan** | ** ** | **Post-retirement  health care,  insurance and dental benefits** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **Year  ended December 31,** | ** ** | **Year  ended December 31,**                                | ** ** |
| ** **                                             | ** ** | **2008**                          | ** ** | **2007**                                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Projected Benefit  obligation – beginning of year |       | 5,789                             |       | 5,009                                                            |       | 900 |   | 790 |   |
| Service cost                                           |       | 6                                 |       | 6                                                                |       | 45 |   | 36 |   |
| Interest cost                                          |       | 543                               |       | 546                                                              |       | 84 |   | 86 |   |
| Actuarial (gain) loss                                  |       | (387                              | )          | 601                                                              |       | (65 | ) | 60 |   |
| Benefits paid to  participants                         |       | (379                              | )          | (373                                                             | )          | (42 | ) | (72 | ) |
| Projected Benefit  obligation – end of year       |       | 5,572                             |       | 5,789                                                            |       | 922 |   | 900 |   |

 

TheAccumulated Benefit Obligation as of December 31, 2008 and 2007 amountedto R$5,445 and R$7,796, respectively, and the contributions expected to be paidto the defined benefit pension plan and other plans for the next year are R$140and R$320, respectively.

 

The change in plan assets for the years ended December 31,2008 and 2007 is as follows:

 
| ** **                                                 | ** ** | **Defined  benefit pension plan** | ** ** | **Post-retirement  health care,  insurance and dental benefits** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **Year  ended December 31,** | ** ** | **Year  ended December 31,**                                | ** ** |
| ** **                                                 | ** ** | **2008**                          | ** ** | **2007**                                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Fair market value of  plan assets — beginning of year |       | 4,385                             |       | 3,983                                                            |       | 33 |   | 30 |   |
| Employer contributions                                     |       | 165                               |       | 191                                                              |       | 42 |   | 36 |   |
| Employee contributions                                     |       | —                            |       | —                                                           |       | — |   | 33 |   |
| Actual return on plan  assets                              |       | 483                               |       | 584                                                              |       | (33 | ) | 5 |   |
| Benefits paid to  participants                             |       | (379                              | )          | (373                                                             | )          | (42 | ) | (71 | ) |
| Fair market value of  plan assets — end of year       |       | 4,654                             |       | 4,385                                                            |       | — |   | 33 |   |

 

The changes inbenefit obligations (net of taxes) recognized in Accumulated othercomprehensive income for the years ended December 31, 2008, 2007 and 2006,net of taxes, are as follows:

 
| ** **                                                   | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Accumulated other  comprehensive income at beginning of year |       | 1,010    |       | 610      |       | 506      |       |
| Initial adoption of  SFAS No 158, net of taxes          |       | —   |       | —   |       | 244      |       |
| Increase (decrease) in  liability                            |       | (299     | )          | 400      |       | (140     | )          |
| Accumulated other  comprehensive income at the end of year   |       | 711      |       | 1,010    |       | 610      |       |

 

F-43

----

 

The components of accumulatedother comprehensive loss/income (SFAS No158) ended December 31, 2008 are  asfollows:

 
| ** **                                                                                                                | ** ** | **Defined benefit  pension plan** | ** ** | **Post-retirement  health care,  insurance  and dental** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------------------------------------|------------|
| Transition obligation  (asset) not yet recognized in net periodic pension cost (“NPPC”) at beginning  of period |       | —                            |       | 12                                                            |       |
| Transition obligation  (asset) recognized in NPPC during period                                                           |       | —                            |       | (5                                                            | )          |
| Prior service cost  (credit) not yet recognized in NPPC at beginning of period                                            |       | 100                               |       | 58                                                            |       |
| Prior Service Cost  (credit) recognized in NPPC during period                                                             |       | (10                               | )          | (6                                                            | )          |
| Gain/loss not yet  recognized in NPPC at beginning of period                                                              |       | 1,209                             |       | 151                                                           |       |
| Gain/loss recognized in  NPPC during period                                                                               |       | (38                               | )          | (12                                                           | )          |
| Total net actuarial  (gain)/ loss arising during period                                                                   |       | (389                              | )          | 7                                                             |       |
| Total accumulated in  other comprehensive loss as of 12/31/2008                                                           |       | 872                               |       | 205                                                           |       |

 

The components ofnet periodic benefit costs for years ended December 31, 2008, 2007 and2006 are as follows:

 
| ** **                             | ** ** | **Defined benefit pension  plan** | ** ** | **Post-retirement health  care,  insurance and dental benefits** | ** ** |
|----------------------------------------|------------|-----------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                             | ** ** | **Year  ended December 31,** | ** ** | **Year  ended December 31,**                                | ** ** |
| ** **                             | ** ** | **2008**                          | ** ** | **2007**                                                         | ** ** | **2006** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                           |       | 6                                 |       | 5                                                                |       | 6 |   | 45 |   | 36 |   | 31 |   |
| Interest cost                          |       | 543                               |       | 545                                                              |       | 545 |   | 84 |   | 86 |   | 78 |   |
| Expected return on plan  assets        |       | (481                              | )          | (566                                                             | )          | (506 | ) | (4 | ) | (4 | ) | (4 | ) |
| Amortization of  transition obligation |       | —                            |       | —                                                           |       | — |   | 5 |   | 5 |   | 6 |   |
| Amortization of loss  (gain)           |       | 38                                |       | —                                                           |       | 33 |   | 12 |   | 9 |   | 11 |   |
| Expected Employee  contribution        |       | —                            |       | —                                                           |       | — |   | (34 | ) | (26 | ) | (22 | ) |
| Amortization of prior  service cost    |       | 10                                |       | 10                                                               |       | 10 |   | 6 |   | 5 |   | 2 |   |
| Net periodic benefit  cost             |       | 116                               |       | (6                                                               | )          | 88 |   | 114 |   | 111 |   | 102 |   |

 

The components ofthe projected net periodic post-retirement benefit costs for 2009 are asfollows:

 
| ** **                             | ** ** | **Defined benefit pension  plan** | ** ** | **Post-retirement health  care, insurance and dental** | ** ** |
|----------------------------------------|------------|-----------------------------------|------------|--------------------------------------------------------|------------|
| Service cost                           |       | 5                                 |       | 11                                                     |       |
| Interest cost                          |       | 549                               |       | 93                                                     |       |
| Expected return on plan  assets        |       | (558                              | )          | —                                                 |       |
| Amortization of prior  service cost    |       | 10                                |       | 6                                                      |       |
| Amortization of  transition obligation |       | —                            |       | 5                                                      |       |
| Amortization of loss                   |       | —                            |       | 12                                                     |       |
|                                   |       | 6                                 |       | 127                                                    |       |

 

F-44

----

 

The weighted-average asset allocations by assetcategory 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** | ** ** | **2008**                                                                  | ** ** | **2007** | ** ** | **percentage’s** | ** ** |
|                    |       |                                                                      |       |   |   |   |   |
| Debt Securities         |       | 85.46                                                                     |       | 80.70 | % | From 70% to 100% |   |
| Equity Securities       |       | 8.56                                                                      |       | 14.57 | % | Up to 20% |   |
| Real Estate             |       | 3.03                                                                      |       | 1.81 | % | Up to 7% |   |
| Participant loans       |       | 2.95                                                                      |       | 2.92 | % | Up to 10% |   |
| Total                   |       | 100.00                                                                    | %          | 100.00 | % |   |   |

 

Investmentstrategies:

 

·                  FORLUZ InvestmentCommittee determines investment guidelines;

·                  Investmentobjectives: achieve the minimum actuarial yield (IPCA/IPEAD plus 6% per year),in both long and short terms;

·                  Types of allowedinvestments: Fixed income — low credit risk assets, stocks, real estate andloans to participants;

·                  Types ofinvestments not allowed: medium and high credit risk assets, foreign currenciesand others according to the Brazilian legislation;

·                  Use of derivatives:with the purpose of hedging exposures.

 

Benchmarksfor investing plan assets:

 

·                  Debtsecurities:  Market quotations - CDI,IGP-M, INPC (1), IPCA/IBGE (2);

·                  Equity securities:Market quotations for traded securities and estimated selling price fornon-traded securities - Average IBOVESPA (3);

·                  Real Estate:Estimated selling price, based on external appraisal reports - IPCA/IPEAD + 6%per year;

·                  Participant loans:Recorded using contractual terms of the respective participant agreements.These loans have floating rates, which approximate market rates - IPCA/IPEAD +10.03% per year.

 

----

(1)          *Indice Nacional de Preços ao Consumidor*– INPC (Consumer Price National Index)

(2)          *Indice de Preços ao Consumidor Amplo*- IPCA (Consumer Price Index calculated by theBrazilian Institute of Geography and Statistics – IBGE)

(3)          *Indice da Bolsa de Valores de SãoPaulo*– IBOVESPA(Index which represents the variation of the main shares negotiated on SâoPaulo Stock exchange)

 

As of December 31, 2008 and 2007, the pensionplan assets include securities issued by CEMIG as follows:

 
| ** ** | ** ** | **Defined benefit pension  plan** | ** ** |
|------------|------------|-----------------------------------|------------|
| ** ** | ** ** | **December 31, 2008**        | ** ** | **December 31, 2007** | ** ** |
|       |       |                              |       |   |   |
| Debentures |       | 354                               |       | 342 |   |
| Shares     |       | 29                                |       | 31 |   |
|       |       | 383                               |       | 373 |   |

 

F-45

----

 

Assumptionsused by the Company in 2008 and 2007 for its defined benefit pension plans wereas follows (percentage including projected inflation of 5% per annum):

 
| ** **                             | ** ** | **2008**              | ** ** | **2007**              | ** ** |
|----------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| Actuarial method                       |       | Projected Unit Credit |       | Projected Unit Credit |       |
| Annual discount rate                   |       | 10.24                 |       | 11.28                 |       |
| Annual expected return  on plan assets |       | 12.32                 |       | 9.72                  |       |
| Annual salary increase                 |       | 6.08                  |       | 6.08                  |       |
| Annual increase in  benefits           |       | 4.00                  |       | 4.00                  |       |
| 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 Future Benefit Payments:

 

The following benefit payments, which reflect expectedfuture service, as appropriate, are expected to be paid:

 
| ** **          | ** ** | **Pension  benefits** | ** ** | **Post-retirement  health  care, insurance and dental  benefits** | ** ** |
|---------------------|------------|-----------------------|------------|-------------------------------------------------------------------|------------|
| 2009                |       | 410                   |       | 79                                                                |       |
| 2010                |       | 406                   |       | 82                                                                |       |
| 2011                |       | 402                   |       | 87                                                                |       |
| 2012                |       | 397                   |       | 91                                                                |       |
| 2013                |       | 391                   |       | 95                                                                |       |
| 2014 and thereafter |       | 1,857                 |       | 550                                                               |       |
|                |       | 3,863                 |       | 984                                                               |       |

 

Contribution:

 

The Company expects to contribute R$172 to its pensionplan and R$12 to post-retirement health care, insurance and dental benefitsplan in 2009.

 

 

**17. ACCRUED LIABILITY FORCONTINGENCIES**

 

CEMIG and itssubsidiaries are party to certain legal proceedings in Brazil arising in thenormal course of business, regarding tax, labor, civil and other issues. TheCompany believes that any loss in excess of the amounts provided for in respectof such contingencies will not have a material adverse effect on the Company’sresults of operations or financial position. For those contingencies for whichan adverse outcome has been deemed probable based on the assessment ofmanagement and the Company’s legal counsel, the Company has recorded provisionsfor losses as follows:

 

F-46

----

 
| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2008**              | ** ** | **2007** | ** ** |
| **Labor Claims**                          |       |                  |       |   |   |
| Various                                   |       | 82                    |       | 78 |   |
|                                      |       |                  |       |   |   |
| **Civil Lawsuits**                        |       |                  |       |   |   |
| Personal  Injury                          |       | 35                    |       | 8 |   |
| Rate  Increase                            |       | 78                    |       | 72 |   |
| Other                                     |       | 109                   |       | 55 |   |
|                                      |       | 222                   |       | 135 |   |
| **Tax**                                   |       |                  |       |   |   |
| FINSOCIAL                                 |       | 21                    |       | 21 |   |
| VAT                                       |       | —                |       | 2 |   |
| Taxes  payable – Suspended Liability |       | 77                    |       | 46 |   |
| INSS                                      |       | 1                     |       | 1 |   |
| Other                                     |       | 13                    |       | 9 |   |
| ** **                                |       | 112                   |       | 79 |   |
| **Regulatory**                            |       |                  |       |   |   |
| ANEEL  Administrative Proceedings         |       | 56                    |       | 54 |   |
| **Total**                                 |       | 472                   |       | 346 |   |

 

Certain details relating tosuch provisions are as follows:

 

(a) LaborClaims:

 

The labor claims relate principally to overtime andhazardous occupation compensation besides indemnity for personal injuritylitigation and property damages.

 

(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. Theprovision for these rate increase claims is R$78 as of December 31, 2008.

 

One of the industrialconsumers that is taking legal proceedings against the Company on this issuehad been granted a court injunction that prevented interruption of supply ofelectricity to its facilities. On February 19, 2009, the Higher AppealCourt accepted CEMIG’s request to suspend the effects of the injunction, on theunderstanding that it is not possible to impose upon CEMIG that it wouldcontinue to distribute electricity without receipting of compensation for theservice.

 

(c) Taxes payable –Suspended Liability

 

The recorded provision ofR$74 as of December 31, 2008 (R$46 as of December 31, 2007) 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$44.

 

F-47

----

 

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$7.

 

(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, 2008 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 andsocial contribution 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$320, 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$29. 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$286. 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$141 as of December 2008. 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$1,033 due to a miscalculation of credits in the amount of thecumulative rate deficit (CRC) applied to reduce amounts owed to the Federal Government.On October 31, 2002, ANEEL issued a final administrative decision againstthe Company. On January 9, 2004, the Brazilian Treasury Authority (“Secretariado Tesouro Nacional”) issued an official collection notice for the amountreferred to, to be paid before January 30, 2004. The Company did not makesuch payment since it believes that the likelihood of an adverse outcome ispossible.

 

F-48

----

 

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 possible.

 

(IV) SocialSecurity and tax obligations – indemnity for the “Anuênio” and profit shares

 

CEMIG and itssubsidiaries Cemig Geração e Transmissão S.A. and Cemig Distribuição S.A. paidan indemnity to the employees in 2006, in the amount of R$178, in exchange forthe rights to future payments known as “Anuênios” which would be incorporatedinto salaries. The Company and its subsidiaries did not make the payments ofincome tax and social security contribution on this amount because itconsidered that these obligations are not applicable to amounts paid asindemnity. However, to avoid the risk of a future fine arising from a differentinterpretation by the Federal Tax Authority, the Company and its subsidiariesdecided to file for orders of mandamus to allow payment to the Court of the amountof any obligations, in the amount of R$86 as of December, 31, 2008, posted inDeposits connected to legal actions in Long term assets. No provision was madefor possible losses in this matter since the company and its subsidiariesclassify the risk of loss in this action as possible.

 

InSeptember 2006 CEMIG was notified by the Social Security NationalInstitute, INSS, as a result of the non-payment of the Social Securitycontribution on the amounts paid as profit sharing in the period 2000 to 2004, representingR$112. The Company appealed in the administrative sphere against the decision.No provision has been constituted since CEMIG believes it has arguments on themerit for defense, and the adverse outcome in this action is considered to bepossible.

 

(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$130. No provision was constituted for the result of this dispute, sincethe company believes that it is not a legal obligation and that it has argumentson the merit for defense against this demand. The Company believes that thelikelihood of an adverse outcome in this matter is possible.

 

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$22. 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 possible.

 

(VI) The ISS tax onservices

 

The company is involvedin litigation with the City Hall of Belo Horizonte on the criteria forapplicability of the ISS tax on services carried out by the Company. The amountinvolved in the action is R$33. No provision has been constitutedsince CEMIG believesit has arguments on the merit for defense. The expectation of loss in this matter is possible.

 

F-49

----

 

(VII) Regulatorycontingency – CCEE

 

In an action dating from August 2002,AES Sul Distribuidora has challenged in the courts the criteria for accountingof electricity sale transactions in the wholesale electricity market during theperiod of rationing. It obtained a judgment in its favor in February 2006,which orders the CCEE to recalculate the transactions during the rationingperiod leaving out of account its Dispatch No. 288/2002. This was to beput into effect in the CCEE in November 2008, resulting in an additionaldisbursement for CEMIG, referring to the expense on purchase of energy in theshort-term market, in the CCEE, in the amount of approximately R$76. On November 9,2008 the Company obtained an injunction in the Regional Federal Court suspendingthe obligatory nature of the requirements to pay into court the amount owedarising from the Special Financial Settlement carried out by the CCEE. Noprovision has been constituted since CEMIG believes it has arguments on the meritfor defense. The expectationof loss in this matter is possible.

 

(VIII) Civillawsuits - 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.

 

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, 2008. TheCompany believes that the likelihood of an adverse outcome in this matter ispossible.

 

Through popular actionthat questions the Terms of Adjustment of Conduct signed between CEMIG andprosecutors, is required to return the amounts paid to service providers of theCompany that runs the program Light for All to the Federal Government. Theamount involved in the action is R$1,441. No provision has been constitutedsince CEMIG believesit has arguments on the merit for defense. The expectation of loss in this matter is possible.

 

(g) EnvironmentalMatters

 

CEMIG has some legalproceedings related to Environmental Matters. Certain details relating to such matters are as follows:

 

A certain environmentalassociation has brought a public civil action claiming indemnity for supposedcollective environmental damage from the construction and operation of the NovaPonte Hydroelectric Plant. The amount involved in the action is R$941. Noprovision has been recorded since CEMIG believes it has arguments on the meritfor defense. Theexpectation of loss in this matter is possible.

 

F-50

----

 

**18. SHAREHOLDERS’ EQUITY**

 

(a) Capitalstock:

 
| ** **                         | ** ** | **Year ended December 31,****(thousands of shares)** | ** ** |
|------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                         | ** ** | **2008**                                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| PREFERRED SHARES:                  |       |                                                      |       |   |   |   |   |
| Balance                            |       | 279,378,119                                               |       | 273,838,953 |   | 273,838,953 |   |
|                               |       |                                                      |       |   |   |   |   |
| COMMON SHARES:                     |       |                                                      |       |   |   |   |   |
| Balance                            |       | 216,923,395                                               |       | 212,622,504 |   | 212,622,504 |   |
|                               |       |                                                      |       |   |   |   |   |
| TREASURY STOCK (Preferred shares): |       |                                                      |       |   |   |   |   |
| Balance                            |       | (207,384                                                  | )          | (207,384 | ) | (207,384 | ) |
| Total                              |       | 496,094,130                                               |       | 486,254,073 |   | 486,254,073 |   |

 

At December 31,2008, 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 29, 2008, 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$2,432 to R$2,481 with issuance of 9,840,057 new shares, throughcapitalization of R$49 of the balance on the Capital Reserve for Donations and Subsidies forInvestments, distributing as a consequence to shareholders a bonus of 2.02%, in newshares, of the same type as those held, and with nominal value 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 theappropriation of 5% of annual net income up to a limit of 20% of share capital.This appropriation is not required in the fiscal year in which this legalreserve balance, added to the other established capital reserves, exceeds 30%of the paid-in capital, which has been the case with respect to 2006. However,the Company opted to appropriate 5.00% of December 31, 2008  net income, according to Brazilian corporatelaw, in the amount of R$94.

 

F-51

----

 

(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.

 

The State Government guarantees that the amount of dividends receivedby certain holders of preferred shares and common shares with respect to anyfiscal year will equal at least 6% of the par value of the preferred shares andthe common shares.  Accordingly, even ifnet income, based on the Company’s financial statements prepared in accordancewith Brazilian 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 2008, 2007 and 2006, 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.

 

F-52

----

 

UnderU.S. GAAP, the Company declared dividends and interest on capital in lieu ofdividends as follows:

 
| ** **              | ** ** | **Year ended December 31,** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|                    |       |                             |       |   |   |   |   |
| Regular Dividends       |       | 943                              |       | 867 |   | 1,178 |   |
| Extraordinary dividends |       | —                           |       | 497 |   | — |   |
| Interest on capital     |       | —                           |       | — |   | 169 |   |
| Total                   |       | 943                              |       | 1,364 |   | 1,347 |   |

 

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”.

 

(e) Earningsper share - Sinceeach class of shares participates equally in earnings in the years presented,earnings per share was computed by dividing net income by the weighted averagenumber of common and preferred shares outstanding during the year. Consistentwith many other Brazilian corporations, CEMIG discloses earnings per onethousand shares, as this is the minimum number that can be traded on the Bolsade Valores de São Paulo (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’s bylawsand (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, 2008and 2007, 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:

 
| ** **                                                                                                | ** ** | **2008**    | ** ** | **2007**    | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| Basic weighted average shares outstanding                                                                 |       | 496,094,130 |       | 486,254,073 |       |
| Dilutive effect shares to be issued in connection  with the account receivable from the State Government. |       | 2,784,447   |       | 9,840,057   |       |
| Diluted weighted average shares outstanding                                                               |       | 498,878,577 |       | 496,094,130 |       |

 

F-53

----

 

**19. NETOPERATING REVENUES**

 

(a) The composition of electric energy supplied byconsumer class is as follows:

 
| ** **                                            | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                            | ** ** | **GWh (unaudited)**              | ** ** | **R$** | ** ** |
| ** **                                            | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                  |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Residential                                           |       | 7,164                            |       | 6,813 |   | 6,647 |   | 3,389 |   | 3,529 |   | 3,244 |   |
| Industrial                                            |       | 26,198                           |       | 24,183 |   | 23,759 |   | 3,801 |   | 3,216 |   | 2,937 |   |
| Commercial                                            |       | 4,423                            |       | 4,111 |   | 3,851 |   | 1,898 |   | 1,865 |   | 1,654 |   |
| Rural                                                 |       | 2,296                            |       | 2,200 |   | 1,938 |   | 554 |   | 591 |   | 505 |   |
| Governmental entities                                 |       | 1,737                            |       | 1,678 |   | 1,650 |   | 553 |   | 562 |   | 512 |   |
| Public services                                       |       | 1,073                            |       | 1,060 |   | 1,016 |   | 294 |   | 297 |   | 258 |   |
| Own consumption                                       |       | 35                               |       | 34 |   | 30 |   | — |   | — |   | — |   |
| Unbilled, net                                         |       | —                           |       | — |   | — |   | 8 |   | 131 |   | 209 |   |
|                                                  |       | 42,926                           |       | 40,079 |   | 38,891 |   | 10,497 |   | 10,191 |   | 9,319 |   |
| Electricity  sales to the interconnected power system |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Supply                                                |       | 11,162                           |       | 12,755 |   | 10,914 |   | 922 |   | 1,108 |   | 697 |   |
| Energy transactions on CCEE/MAE                       |       | —                           |       | — |   | — |   | 147 |   | 26 |   | 187 |   |
| Total                                                 |       | 54,088                           |       | 52,834 |   | 49,805 |   | 11,566 |   | 11,325 |   | 10,203 |   |

 
| ** **            | ** ** | **Number of consumers (unaudited)** | ** ** |
|-----------------------|------------|-------------------------------------|------------|
| ** **            | ** ** | **2008**                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                  |       |                                |       |   |   |   |   |
| Residential           |       | 5,400,214                           |       | 5,188,604 |   | 5,064,556 |   |
| Industrial            |       | 74,482                              |       | 73,606 |   | 70,795 |   |
| Commercial            |       | 578,021                             |       | 560,910 |   | 549,378 |   |
| Rural                 |       | 482,952                             |       | 554,286 |   | 495,066 |   |
| Governmental entities |       | 57,165                              |       | 54,199 |   | 51,929 |   |
| Public services       |       | 8,543                               |       | 7,799 |   | 7,654 |   |
| Own consumption       |       | 829                                 |       | 829 |   | 796 |   |
|                  |       | 6,602,206                           |       | 6,440,233 |   | 6,240,174 |   |
| Supply                |       | 46                                  |       | 47 |   | 43 |   |
| Total                 |       | 6,602,252                           |       | 6,400,280 |   | 6,240,217 |   |

 

Rate Readjustment

 

The impact in the billsof the consumers of Cemig Distribuição S.A. was a reduction by an average of12.24% from April 8, 2008. The adjustment was applied in differentpercentages by category of consumption for the purpose of graduallyeliminating, as stated in a note by ANEEL, the cross-subsidies existing betweenconsumer groups. As an example, residential consumers had a reduction of 17.11%in their electricity bills, while high-voltage consumers had a reduction of8.02%.

 

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.

 

ANEEL reviewed theprocedures used by the Company in calculating revenue associated with thesubsidy for low-income consumers.  As aresult of this review, the amounts posted in 2007 were based on estimates and theamount for the period from February through November 2007 totalingR$119 was received in February 2009.

 

ANEEL included in thetariff review of April 2008 the amounts to be reimbursed to the Companyfor the subsidy for low-income consumers as from that date.

 

F-54

----

 

There is no individual customer that representmore than 10% of the operating revenues of the Company.

 

(b) The composition of other operatingrevenues is as follows:

 
|                           |   | **Year  ended December 31,** |       |
|--------------------------------|--------|-----------------------------------|------------|
|                           |   | **2008**                          | ** ** | **2007** | ** ** | **2006** |   |
|                           |   |                              |       |   |   |   |   |
| Telecom and cable TV  services |   | 95                                |       | 76 |   | 121 |   |
| Services rendered              |   | 82                                |       | 61 |   | 31 |   |
| Rental and leasing             |   | 49                                |       | 39 |   | 29 |   |
| Services rated                 |   | 14                                |       | 13 |   | 10 |   |
| Others                         |   | 1                                 |       | 47 |   | 9 |   |
|                           |   | 241                               |       | 236 |   | 200 |   |

 

(c) The composition of taxes on revenuesis as follows:

 
|      |   | **Year ended  December 31,** |       |
|-----------|--------|-----------------------------------|------------|
|      |   | **2008**                          | ** ** | **2007** | ** ** | **2006** |   |
|      |   |                              |       |   |   |   |   |
| VAT       |   | 2,521                             |       | 2,493 |   | 2,286 |   |
| COFINS    |   | 1,080                             |       | 1,088 |   | 1,026 |   |
| PIS-PASEP |   | 241                               |       | 254 |   | 231 |   |
| Others    |   | 2                                 |       | 1 |   | — |   |
|      |   | 3,844                             |       | 3,836 |   | 3,543 |   |

 

(d) The composition of use of basictransmission network is as follows:

 
|                                                   |   | **Year ended December 31,** |       |
|--------------------------------------------------------|--------|----------------------------------|------------|
|                                                   |   | **2008**                         | ** ** | **2007** | ** ** | **2006** |   |
|                                                   |   |                             |       |   |   |   |   |
| TUSD – Tariff for Use of  the Distribution System |   | 1,266                            |       | 1,173 |   | 1,261 |   |
| Use of basic transmission network                      |   | 472                              |       | 437 |   | 417 |   |
| Use of connection of basic transmission                |   | 127                              |       | 95 |   | 102 |   |
|                                                   |   | 1,865                            |       | 1,705 |   | 1,780 |   |

 

**20. OPERATING COSTS AND EXPENSES**

 

Some of the operatingcosts and expenses consist of the following:

 

(a) Electricity purchased for resale:

** **
|                                                                 |   | **Year ended December 31,** |       |
|----------------------------------------------------------------------|--------|----------------------------------|------------|
|                                                                 |   | **2008**                         | ** ** | **2007** | ** ** | **2006** |   |
|                                                                 |   |                             |       |   |   |   |   |
| Itaipu Binacional                                                    |   | 776                              |       | 1,000 |   | 822 |   |
| Initial contracts                                                    |   | —                           |       | 12 |   | 128 |   |
| Bilateral contracts                                                  |   | 233                              |       | 149 |   | 42 |   |
| Incentive Program for Alternative Electric Power  Sources -PROINFA - |   | 123                              |       | 65 |   | 41 |   |
| From suppliers though CCEE/MAE                                       |   | 234                              |       | 100 |   | 26 |   |
| System services charge                                               |   | 51                               |       | 20 |   | 50 |   |
| Energy Public Bids                                                   |   | 706                              |       | 780 |   | 793 |   |
| Parcel A and other sources (see Note 4)                              |   | 144                              |       | 21 |   | 5 |   |
|                                                                 |   | 2,267                            |       | 2,147 |   | 1,907 |   |

 

F-55

----

 

(b) Personnel:

 
|                                                                          |   | **Year ended December 31,** |       |
|-------------------------------------------------------------------------------|--------|----------------------------------|------------|
|                                                                          |   | **2008**                         | ** ** | **2007** | ** ** | **2006** |   |
|                                                                          |   |                             |       |   |   |   |   |
| Salary and payroll charges                                                    |   | 990                              |       | 946 |   | 911 |   |
| Benefits                                                                      |   | 125                              |       | 117 |   | 115 |   |
|                                                                          |   | 1,115                            |       | 1,063 |   | 1,026 |   |
| Personnel costs transferred to construction in  progress                      |   | (161                             | )          | (179 | ) | (158 | ) |
|                                                                          |   | 954                              |       | 884 |   | 868 |   |
| Voluntary Termination Program “ PPD”                                |   | 50                               |       | — |   | — |   |
| Voluntary Indemnity for future annual bonus – “  Anuênio” |   | —                           |       | — |   | 178 |   |
|                                                                          |   | 1,004                            |       | 884 |   | 1,046 |   |

 

The Voluntary TerminationProgram (PPD)

 

On March 11, 2008,the Executive Board approved the permanent Voluntary Termination Program (PPD),which applies to any free and spontaneous terminations of employment contractsas from that date. The program’s main financial incentives include payment of 3times the gross amount of monthly remuneration, 6 months’ contributions to theHealth Plan after leaving the company, deposit of the 40% “penalty” payment dueon the balance of the FGTS on termination of an employment contract, andpayment of up to 24 months’ contributions to the Pension Fund and the NationalSocial Security System after termination of the contract, in accordance withcertain criteria established in the regulations of the program.

 

For employees aged 55 whohave contributed for 35 years (men) or 30 years (women), the financialincentives of the program are only available if they subscribe within 90 daysafter the date of meeting these time and contribution criteria.

 

On December 31,2008, 486 employees had joined the program (104 employees of Cemig Geração eTransmissão S.A., 372 of Cemig Distribuição S.A., and 10 of the Cemig holdingcompany), and a provision for the financial incentives in the amount of R$50was made.

 

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.

 

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.

 

F-56

----

 

(c) Regulatory charges:

** **
|                               |   | **Year ended December 31,** |       |
|------------------------------------|--------|----------------------------------|------------|
|                               |   | **2008**                         | ** ** | **2007** | ** ** | **2006** |   |
|                               |   |                             |       |   |   |   |   |
| Fuel usage quota                   |   | 364                              |       | 330 |   | 506 |   |
| Global reserve for reversion quota |   | 160                              |       | 126 |   | 18 |   |
| Energy development account         |   | 328                              |       | 337 |   | 334 |   |
| ANEEL inspection fee               |   | 41                               |       | 37 |   | 34 |   |
| Charges for use of water resources |   | 131                              |       | 137 |   | 139 |   |
|                               |   | 1,024                            |       | 967 |   | 1,031 |   |

 

(d) Third-partyServices

 
|                                                                  |   | **Year ended December 31,** |       |
|-----------------------------------------------------------------------|--------|----------------------------------|------------|
|                                                                  |   | **2008**                         | ** ** | **2007** | ** ** | **2006** |   |
|                                                                  |   |                             |       |   |   |   |   |
| Tax collecting agents/reading  of measurers                           |   | 107                              |       | 101 |   | 93 |   |
| Marketing                                                             |   | 61                               |       | 64 |   | 49 |   |
| Maintenance and electric  conservation of installations and equipment |   | 113                              |       | 101 |   | 84 |   |
| Building maintenance                                                  |   | 37                               |       | 35 |   | 29 |   |
| Outsourcing services                                                  |   | 35                               |       | 19 |   | 27 |   |
| Transportation and fares                                              |   | 11                               |       | 8 |   | 8 |   |
| Lodging and feeding                                                   |   | 19                               |       | 17 |   | 16 |   |
| Security                                                              |   | 15                               |       | 14 |   | 14 |   |
| Management Consulting                                                 |   | 19                               |       | 13 |   | 22 |   |
| Maintenance of furniture                                              |   | 28                               |       | 26 |   | 21 |   |
| Maintenance of vehicle                                                |   | 22                               |       | 19 |   | 17 |   |
| Electric service                                                      |   | 22                               |       | 26 |   | 20 |   |
| Other                                                                 |   | 116                              |       | 107 |   | 75 |   |
|                                                                  |   | 605                              |       | 550 |   | 475 |   |

 

(e) Other:

 
|                                                |   | **Year ended December 31,** |       |
|-----------------------------------------------------|--------|----------------------------------|------------|
|                                                |   | **2008**                         | ** ** | **2007** | ** ** | **2006** |   |
|                                                |   |                             |       |   |   |   |   |
| Provision for doubtful  accounts                    |   | 57                               |       | 93 |   | 94 |   |
| Disposal of fixed assets, net                       |   | 30                               |       | 40 |   | 37 |   |
| Provisions (reversion provision) for contingencies- |   |                             |       |   |   |   |   |
| Labor claims                                        |   | 4                                |       | 43 |   | (79 | ) |
| Civil lawsuits – Consumers                     |   | 19                               |       | 28 |   | (18 | ) |
| ANEEL administrative proceedings                    |   | 7                                |       | 43 |   | — |   |
| Civil lawsuits – Other                         |   | 59                               |       | (6 | ) | 19 |   |
| Other                                               |   | 10                               |       | 10 |   | — |   |
| Rentals                                             |   | 39                               |       | 34 |   | 33 |   |
| Grants and donations                                |   | 43                               |       | 41 |   | 35 |   |
| Consumption – electric energy                  |   | 15                               |       | 17 |   | 16 |   |
| Advertising                                         |   | 31                               |       | 26 |   | 21 |   |
| CCEE/MAE contribution                               |   | 4                                |       | 3 |   | 3 |   |
| Other taxes (real estate, vehicle, etc)             |   | 42                               |       | 39 |   | 29 |   |
| General expenses                                    |   | 50                               |       | 61 |   | 44 |   |
|                                                |   | 410                              |       | 472 |   | 234 |   |

 

F-57

----

 

**21. EMPLOYEE PROFIT SHARING**

 

TheCompany records employee profit sharing based on 3% of the service income,which resulted in an expense of R$89, R$96 and R$71, respectively, for theyears ended December 31, 2008, 2007 and 2006. Additionally, in thecollective labor agreement reached with the unions in November 2008, 2007and 2006, the Company agreed to pay additional installments of R$273, R$359 andR$139, respectively.

 

Underthese agreements, the share in the profits of 2008, 2007 and 2006, includingthe contribution to the pension plan payable on these amounts, were R$362,R$455 and R$210, respectively.

 

**22. FINANCIAL INCOME (EXPENSES),NET**

 

Financial income (expense) consists of the following:

 
| ** **                                                                                                    | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                    | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Financial income-                                                                                             |       |                             |       |   |   |   |   |
| Interest and monetary  restatement of account receivable from State Government , net of provision  for losses |       | 154                              |       | 159 |   | 286 |   |
| Interest income                                                                                               |       | 256                              |       | 177 |   | 169 |   |
| Late charges on overdue  electricity bills, recorded on the cash basis                                        |       | 145                              |       | 112 |   | 129 |   |
| Foreign exchange gains                                                                                        |       | 13                               |       | 118 |   | 90 |   |
| Monetary restatement on  deferred regulatory assets                                                           |       | 215                              |       | 520 |   | 574 |   |
| Gains on derivatives  contracts                                                                               |       | 45                               |       | 4 |   | 25 |   |
| Taxes on financial revenues                                                                                   |       | (45                              | )          | (65 | ) | (69 | ) |
| Financial compensation –  RME                                                                            |       | 83                               |       | – |   | – |   |
| Other                                                                                                         |       | 156                              |       | 150 |   | 125 |   |
|                                                                                                          |       | 1,022                            |       | 1,175 |   | 1,329 |   |
| Financial expense-                                                                                            |       |                             |       |   |   |   |   |
| Interest on loans and  financing                                                                              |       | (624                             | )          | (644 | ) | (529 | ) |
| Monetary restatement on  deferred regulatory liabilities                                                      |       | (31                              | )          | (176 | ) | (133 | ) |
| Financial transaction tax  (CPMF)                                                                             |       | (4                               | )          | (66 | ) | (83 | ) |
| Foreign exchange losses                                                                                       |       | (126                             | )          | (12 | ) | (2 | ) |
| Monetary restatement losses                                                                                   |       | (85                              | )          | (47 | ) | (34 | ) |
| Losses on derivative contracts                                                                                |       | —                           |       | (171 | ) | (116 | ) |
| Other expenses                                                                                                |       | (135                             | )          | (107 | ) | (97 | ) |
|                                                                                                          |       | (1,005                           | )          | (1,223 | ) | (994 | ) |
| Financial income, net                                                                                         |       | 17                               |       | (48 | ) | 335 |   |

 

The foreign exchangegains and losses are substantially related to the variation of the *real* in relation to the U.S. dollar.

 

F-58

----

 

**23. RELATED PARTY TRANSACTIONS**

 

The Company enters into avariety of related party transactions, the main transactions are as follows:

 
| Holding  and Consolidated | ** ** |
|---------------------------|------------|

 
| ** **                                             | ** ** | **ASSETS** | ** ** | **LIABILITIES** | ** ** | **REVENUES** | ** ** | **EXPENSES** | ** ** |
|--------------------------------------------------------|------------|------------|------------|-----------------|------------|--------------|------------|--------------|------------|
| **ENTITIES**                                           | ** ** | **2008**   | ** ** | **2007**        | ** ** | **2008**     | ** ** | **2007**     | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                   |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| ***Cemig Distribuição S.A.***                |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| Dividendes and interest on Capital                     |       | 682        |       | 674             |       | —       |       | —       |       | — |   | — |   | — |   | — |   |
| Electricity sales to final consumers                   |       | —     |       | —          |       | —       |       | 13           |       | — |   | — |   | — |   | (80 | ) |
| Others                                                 |       | 12         |       | —          |       | 10           |       | 2            |       | — |   | — |   | — |   | — |   |
|                                                   |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| ***Cemig Geração e Transmissão S.A.***  |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| Dividendes and interest on Capital                     |       | 518        |       | 565             |       | —       |       | —       |       | — |   | 188 |   | — |   | — |   |
| Electricity sales to final consumers                   |       | —     |       | 22              |       | —       |       | —       |       | — |   | 80 |   | — |   | — |   |
| Others                                                 |       | —     |       | —          |       | —       |       | 3            |       | — |   | — |   | — |   | — |   |
|                                                   |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| ***State Government  of Minas Gerais***                |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| Accounts receivable                                    |       | 2          |       | 2               |       | —       |       | —       |       | 70 |   | 66 |   | — |   | — |   |
| Recoverable taxes - VAT - current                      |       | 159        |       | 164             |       | 277          |       | 264          |       | (2,521 | ) | (2,493 | ) | — |   | — |   |
| Account receivable from Minas Gerais State  Government |       | 1,801      |       | 1.763           |       | —       |       | —       |       | — |   | 123 |   | — |   | — |   |
| Recoverable taxes — VAT — non current        |       | 79         |       | 57              |       | —       |       | —       |       | — |   | — |   | — |   | — |   |
| Accounts receivable                                    |       | 17         |       | 37              |       | —       |       | —       |       | — |   | — |   | — |   | — |   |
| Dividendes and interest on Capital                     |       | —     |       | —          |       | —       |       | 126          |       | — |   | — |   | — |   | — |   |
| Debentures                                             |       | —     |       | —          |       | 33           |       | 18           |       | — |   | — |   | — |   | (35 | ) |
| Account Securitization Fund (FIDC)                     |       | —     |       | —          |       | 990          |       | 990          |       | — |   | — |   | — |   | — |   |
| Financing - BDMG                                       |       | —     |       | —          |       | 19           |       | 18           |       | — |   | — |   | — |   | — |   |
|                                                   |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| ***Forluz***                                           |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| Employee post-retirement benefits - current            |       | —     |       | —          |       | 75           |       | 89           |       | — |   | — |   | (277 | ) | (140 | ) |
| Employee post-retirement benefits — non current   |       | —     |       | —          |       | 1,765        |       | 2,182        |       | — |   | — |   | — |   | — |   |
| Others                                                 |       | —     |       | —          |       | 73           |       | 89           |       | — |   | — |   | — |   | — |   |
| Personnel                                              |       | —     |       | —          |       | —       |       | —       |       | — |   | — |   | (49 | ) | (34 | ) |
| Administrative Costs                                   |       | —     |       | —          |       | —       |       | —       |       | — |   | — |   | (16 | ) | (21 | ) |
|                                                   |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| ***Other***                                            |       |       |       |            |       |         |       |         |       |   |   |   |   |   |   |   |   |
| Interest on Capital                                    |       | —     |       | 116             |       | —       |       | —       |       | — |   | — |   | — |   | — |   |

 

F-59

----

 

**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 2008and 2007. 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, 2008 and 2007, 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 31,2008 and 2007 is R$6,440 and R$6,628, respectively, compared to book values ofR$6,511 and R$6,814, 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, 2008, 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$91 million (US$69 millionin 2007) and the Japanese yen in the notional amount of ¥3,879 million (¥3,879million in 2007). The net realized and unrealized losses from these operationsfor 2008 in the net amounts of R$28 (R$167 in 2007 and R$91 in 2006), wererecorded as financial expenses.

 

The table belowsummarizes the Company’s derivative financial instruments and the unrealizedlosses recorded on these instruments as of December 31, 2008 and December 31,2007:

 
| ** **                                                       | ** ** | ** **                                                                       | ** ** | ** **            | ** ** | **December 31, 2008**                  | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|-----------------------|------------|---------------------------------------------|------------|
| ** **                                                       | ** ** | ** **                                                                       | ** ** | ** **            | ** ** | **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$pegged to the CDI  variation(111.00% CDI)                                      |       | On12/2009             |       | ¥3,879                                 |       | 3 |   |
|                                                             |       |                                                                             |       |                  |       |                                        |       |   |   |
| US$exchange gains or losses + rate(5.58% p.a. 7.48% p.a.)        |       | R$100% of the CDI + ratefrom 1.50% p.a. to 3.01%  p.a.                           |       | From04/2009to 06/2013 |       | US$59                                       |       | (97 | ) |
|                                                             |       |                                                                             |       |                  |       |                                        |       |   |   |
| R$106% of the CDI                                                |       | R$ or US$48% of the CDI or exchange  gains or losses (whichever is  higher) |       | On04/2010             |       | R$75                                        |       | — |   |
|                                                             |       |                                                                             |       |                  |       |                                        |       |   |   |
|                                                             |       |                                                                             |       |                  |       |                                        |       | (94 | ) |

 

F-60

----

 
| ** **                                                       | ** ** | ** **                                                 | ** ** | ** **            | ** ** | **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. |       | From04/2008to 06/2013 |       | US$69                                       |       | (136 | ) |
|                                                             |       |                                                       |       |                  |       |                                        |       |   |   |
|                                                             |       |                                                       |       |                  |       |                                        |       | (184 | ) |

 

At December 31,2008, the Company had recorded the amount of R$94 as other current liabilities,representing the fair value of these financial instruments at the respectivebalance 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 31,2008 and 2007 of these instruments.

 

**25. FAIR VALUE MEASUREMENTS**

 

OnJanuary 1, 2008, the Company adopted SFAS 157, “Fair Value Measurements”,which increased the disclosures related to assets and liabilities measured atfair value on a recurring basis.

 

SFAS157 defines fair value, establishes a framework for measuring fair value andexpands disclosure for each major asset and liability category measured at fairvalue on either a recurring or nonrecurring basis. SFAS 157 clarifies that fairvalue is the price that would be received to sell an asset or paid to transfera liability in an orderly transaction between market participants at themeasurement date.

 

Assuch, fair value is a market-based measurement that should be determined basedon assumptions that market participants would use in pricing an asset orliability. To increase consistency and comparability, the fair value hierarchyprioritizes the inputs used in measuring into three broad levels as follows:

 

· Level 1.Observable inputs such as quoted prices in active markets for identical assetsor liabilities;

 

· Level 2. Inputs,other than the quoted prices in active markets, that are observable eitherdirectly or indirectly; and

 

· Level 3.Unobservable inputs in which there is little or no market data, which requirethe reporting entity to develop its own assumptions.

 

F-61

----

 

Followingis a summary of instruments that are valued at fair value:

 
| ** **                        | ** ** | ** **                                    | ** ** | **Fair Value Measurements at  December 31, 2008 Using**                 | ** ** |
|-----------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| **Description**                   | ** ** | **Balance at  December 31,********2008** | ** ** | **Quoted Prices  in  Active Markets********for Identical  Assets (Level 1)** | ** ** | **Significant  Other********Observable  Inputs********(Level 2)** | ** ** | **Significant  Unobservable  Inputs (Level 3)** | ** ** |
|                              |       |                                          |       |                                                                         |       |   |   |   |   |
| **Assets**                        |       |                                          |       |                                                                         |       |   |   |   |   |
| **Cash equivalents**              |       |                                          |       |                                                                         |       |   |   |   |   |
| Bank deposit certificates         |       | 1,729                                         |       | —                                                                       |       | 1,729 |   | — |   |
| Treasury Financial Notes  (LFTs)  |       | 40                                            |       | 40                                                                           |       | — |   | — |   |
| Overnight deposits                |       | 29                                            |       | —                                                                       |       | 29 |   | — |   |
|                              |       | 1,798                                         |       | 40                                                                           |       | 1,758 |   | — |   |
| **Liabilities**                   |       |                                          |       |                                                                         |       |   |   |   |   |
| Foreign  exchange swaps contracts |       | 94                                            |       | —                                                                       |       | 94 |   | — |   |

 

(a) Bankdeposit certificates and Overnight deposits:

 

TheCompany determines the fair values of its bank deposit certificates andOvernight deposits using a discounted cash flow model. This model is primarilyindustry-standard model that consider various assumptions, including time valueand yield curve as well as other relevant economic measures. SFAS No. 157requires that the valuation of derivative liabilities must take into accountthe company’s own nonperformance risk. The counterparty nonperformance risk wasnot considered in the fair value measurement by the Company due to managementconsidered it was not significant considering the entities’ credit risk basedon rating agencies.

 

(b) Foreignexchange swaps contracts:

 

Ourderivatives are valued using a discounted cash flow model that use as its basisreadily observable market inputs, such as time value, forward interest rates,and current and forward market prices foreign currency exchange rates. Weclassify these instruments within Level 2 of the valuation hierarchy.

 

**26. FINAL RESULT OF THE SECOND TARIFF REVIEW OFCEMIG DISTRIBUIÇÃO**

 

In March 2009 ANEELhomologated the final result of the tariff review of Cemig Distribuição S.A.,the effects of which take place from April 2008.

 

The final result of theCompany’s second tariff review was an average reduction of 19.62%, whichcompares with the average reduction of 18.09% applied on a provisional basis inApril 2008.

 

As a result of thehomologation of the final tariff review, ANEEL recalculated the amounts which,in its judgment, should have been those effectively recognized in the Company’stariff adjustment as from April 2008. The net effect of this homologationin the net income was in the amount of R$93 in 2008.

 

The adjustments in thenet profit, which relate principally to (i) the reduction in the value ofthe “Reference Company” used as a basis for reimbursement of the Company’smanageable costs and also from ANEEL (ii) the new calculation criterionfor reimbursement of financial regulatory assets via tariffs, with aconsequence of discounts in the amounts that in the opinion of the regulatoryagency, were included higher in the Company ́s tariff rate.

 

F-62

----

 

**27. 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.

 

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$63, equivalent to the notional amountof US$91 and R$100, 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,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                       | ** ** | **2008**              | ** ** | **2007** | ** ** |
| **U.S. Dollar**                                                  |       |                  |       |   |   |
| Financing                                                        |       | 315                   |       | 300 |   |
| ( - ) Contracted derivative instruments— notional  amounts  |       | (63                   | )          | (122 | ) |
|                                                             |       | 252                   |       | 178 |   |
| **Japanese Yen**                                                 |       |                  |       |   |   |
| Financing                                                        |       | 100                   |       | 61 |   |
| ( - ) Contracted  derivative instruments—  notional amounts |       | (100                  | )          | (61 | ) |
|                                                             |       | —                |       | — |   |
| **Other Currencies**                                             |       |                  |       |   |   |
| Financing                                                        |       |                  |       |   |   |
| Euro                                                             |       | 30                    |       | 29 |   |
|                                                             |       | 30                    |       | 29 |   |
| Net liabilities exposed to exchange rate risk                    |       | 282                   |       | 207 |   |

 

The exposure to exchangerates shown above is reduced by the Company through contracts to sell electricityto free consumers, which is 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$91 (R$104 as of December 31,2007).

 

F-63

----

 

The Company is alsoexposed in 2008 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**                                | ** ** | **2008**              | ** ** | **2007** | ** ** |
| ** **                                                                           |       |                  |       |   |   |
| **Asset**                                                                            |       |                  |       |   |   |
| CRC Agreement                                                                        |       | 1,801                 |       | 1,763 |   |
| Short-term investments                                                               |       | 1,798                 |       | 1,424 |   |
| Deferred regulatory assets                                                           |       | 1,086                 |       | 1,726 |   |
| ** **                                                                           |       | 4,685                 |       | 4,913 |   |
| **Liabilities**                                                                      |       |                  |       |   |   |
| Financing (local currency)                                                           |       | 6,066                 |       | 6,424 |   |
| Payments to generators for energy purchased on  CCEE/MAE during the rationing period |       | —                |       | 338 |   |
| Derivative instruments                                                               |       | 163                   |       | 183 |   |
| ** **                                                                           |       | 6,229                 |       | 6,945 |   |
| Net liabilities exposed to interest rate risk                                        |       | (1,544                | )          | (2,032 | ) |

 

(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, 2008, and throughoutthe whole of the 2008 business year.

 

(e) Risk ofnon-renewal of concessions

 

TheCompany has concessions for commercial operation of electricity generation, transmissionand distribution services with the expectation, by the management, that ANEELand/or the Mining and Energy Ministry will renew them. If the renewals of theconcessions are not granted by the Regulatory Body or if those Bodies renewthem for requirement of additional costs (“concession for consideration”), thepresent levels of profitability and activity could be altered.

 

**28. SHAREHOLDERS’ AGREEMENT**

 

In 1997, the StateGovernment of Minas Gerais sold approximately 33% of the Company’s common sharesto a group of investors led by Southern Electric Brasil Participações Ltda. (“Southern”).As part of this transaction the State of Minas Gerais and Southern entered intoa Shareholders’ Agreement that provided for, among other things, therequirement of a qualified quorum to approve significant corporate acts,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.

 

F-64

----

 

**29. 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 2008 collective bargaining agreement included an 7.26% averagesalary increase.

 

(b) Renewalof concession agreements:

 

The Mining and EnergyMinistry (MME) has constituted a technical working group to analyze the criteriathat will be applied in the renewals of the concessions for generation,transmission and distribution expiring from 2015 onward. Suggestions will besent to the National Energy Policy Council and, according to statements by theparticipants in this group, will have as their objective the reduction oftariffs for consumers. The Company has the expectation of renewal of itsconcessions, and is not yet able to estimate the effect on its financialstatements arising from this issue.

 

Seven of the Company’shydroelectric plants accounted for approximately 75% of its installed electricgeneration capacity as of December 31, 2008.

 
| **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                      |       | 923                                      |       | July 2015 to  August 2036 |       |
| Total installed capacity    |       | 6,567                                    |       |                                |       |

 
| **DISTRIBUTION CONCESSIONS-** |   |   |   | **Date concession  expires** |   |
|-------------------------------|--------|--------|--------|------------------------------|--------|
| Northern Region               |   |   |   | February 2016           |   |
| Southern Regional             |   |   |   | February 2016           |   |
| Eastern Region                |   |   |   | February 2016           |   |
| Western Region                |   |   |   | February 2016           |   |

 

F-65

----

 

**30. INSURANCE**

 

The Company has insurance policies for part of its property, plant andequipment, as follows:

 
| **Risk**                                               | ** ** | **Coverage**          | ** ** | **Effective  Date**  | ** ** | **Insured  Amount****(*)** | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|----------------------------|------------|
| Aircraft — 2008 to 2009                           |       | Fuselage              |       | 04/28/08 to 04/28/09 |       | 16                         |       |
| Aircraft — 2008 to 2009                           |       | Third party liability |       | 04/28/08 to 04/28/09 |       | 56                         |       |
| Warehouses and buildings — 2008 to 2009           |       | Fire                  |       | 08/10/08 to 08/10/09 |       | 626                        |       |
| Generators, turbines and equipment — 2008 to 2009 |       | Total                 |       | 05/05/08 to 05/05/09 |       | 1,777                      | (**)       |

 

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

(**)The maximum limit of indemnity is R$144

 

**31. 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, 2008, about our contractualobligations and commitments.

 
| ** **                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2015**   | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **and**    | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2011**   | ** ** | **2012**   | ** ** | **2013**   | ** ** | **2014**   | ** ** | **beyond** | ** ** | **Total**  | ** ** |
|                                                  |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Long-Term debt (1)                                    |       | 1,197      |       | 739        |       | 812        |       | 967        |       | 1,085      |       | 886        |       | 825        |       | 6,511      |       |
| Derivative financial  instruments (“swaps”) |       | 49         |       | 12         |       | 11         |       | 11         |       | 11         |       | —     |       | —     |       | 94         |       |
| Purchase of Electricity  from Itaipu (2)              |       | 860        |       | 918        |       | 947        |       | 979        |       | 1,014      |       | 1,029      |       | 4,127      |       | 9,874      |       |
| Transportation of Electric Power from Itaipu (2)      |       | 67         |       | 72         |       | 75         |       | 77         |       | 83         |       | —     |       | —     |       | 374        |       |
| Pension Plan Debt - Forluz                            |       | 75         |       | 78         |       | 68         |       | 63         |       | 41         |       | 44         |       | 573        |       | 942        |       |
| “ Luz para todos” (Light for  all) Program  |       | 157        |       | 250        |       | —     |       | —     |       | —     |       | —     |       | —     |       | 407        |       |
| Regulatory Investments                                |       | 677        |       | 474        |       | 422        |       | 419        |       | —     |       | —     |       | —     |       | 1,992      |       |
| Concession Granted (3)                                |       | 2          |       | 2          |       | 2          |       | 7          |       | 15         |       | 15         |       | 313        |       | 356        |       |
| Electricity Power Purchase (4)                        |       | 1,966      |       | 2,755      |       | 3,660      |       | 4,187      |       | 4,291      |       | 4,615      |       | 22,974     |       | 44,448     |       |
| Total                                                 | ** ** | **5,050**  | ** ** | **5,300**  | ** ** | **5,997**  | ** ** | **6,710**  | ** ** | **6,540**  | ** ** | **6,589**  | ** ** | **28,812** | ** ** | **64,998** | ** ** |

 

----

(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. TheCompany expects to pay approximately R$623 million in interest payments on debtin 2009. Interest payments on debt for years following 2008 have not beenestimated since they are subject to future variations in variable interestrates and foreign currency exchange rates. The Company does not believe projections of interest payments andpayments under interest rate swap 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, 2008.

(3)           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.

(4)           Itincludes spot market, purchase through auctions and bilateral agreements.

 

F-66

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**32. SEGMENT INFORMATION**

 

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 for theyears ended December 31, 2008, 2007 and 2006 ( only for the consolidatedstatements of operations and comprehensive income), is as follows:

 

F-67

----

 
| ** **                   | ** ** | **BRGAAP********2008** | ** ** | **Adjustment** | ** ** | **USGAAP  2008** | ** ** | **BRGAAP  2007** | ** ** | **Adjustment** | ** ** | **USGAAP  2007** | ** ** |
|------------------------------|------------|------------------------|------------|----------------|------------|------------------|------------|------------------|------------|----------------|------------|------------------|------------|
| Identifiable  assets         |       |                   |       |           |       |             |       |             |       |           |       |             |       |
| Electricity                  |       |                   |       |           |       |             |       |             |       |           |       |             |       |
| Distribution                 |       | 13,196                 |       | 149            |       | 13,345           |       | 13,207           |       | 256            |       | 13,463           |       |
| Generation  and Transmission |       | 8,281                  |       | 826            |       | 9,107            |       | 8,136            |       | 797            |       | 8,933            |       |
| Other                        |       | 2,340                  |       | (11            | )          | 2,329            |       | 1,954            |       | 3              |       | 1,957            |       |
| Total consolidated  assets   |       | 23,817                 |       | 964            |       | 24,781           |       | 23,297           |       | 1,056          |       | 24,353           |       |

 

The Company allocated theaccount receivable from Minas Gerais State Government to the Distributionsegment.

 

F-68

----

 
| **2008**                                    | ** ** | **Power  Generation  and  Transmission** | ** ** | **Distribution of  Energy** | ** ** | **Other** | ** ** | **BRGAAP** | ** ** | **Adjustment** | ** ** | **USGAAP** | ** ** |
|---------------------------------------------|------------|------------------------------------------|------------|-----------------------------|------------|-----------|------------|------------|------------|----------------|------------|------------|------------|
|                                        |       |                                     |       |                        |       |      |       |       |       |           |       |       |       |
| Net operating revenues                      |       | 3,334                                    |       | 6,412                       |       | 93        |       | 9,839      |       | (11            | )          | 9,828      |       |
|                                        |       |                                     |       |                        |       |      |       |       |       |           |       |       |       |
| Operating income                            |       | 1,750                                    |       | 847                         |       | (101      | )          | 2,496      |       | (209           | )          | 2,287      |       |
|                                        |       |                                     |       |                        |       |      |       |       |       |           |       |       |       |
| Financial income (expenses), net            |       | (171                                     | )          | (12                         | )          | 68        |       | (115       | )          | 132            |       | 17         |       |
|                                        |       |                                     |       |                        |       |      |       |       |       |           |       |       |       |
| Income tax – (Expense) Benefit         |       | (431                                     | )          | (226                        | )          | (126      | )          | (783       | )          | 28             |       | (755       | )          |
|                                        |       |                                     |       |                        |       |      |       |       |       |           |       |       |       |
| Net income                                  |       | 1,148                                    |       | 609                         |       | 55        |       | 1,812      |       | (59            | )          | 1,753      |       |
|                                        |       |                                     |       |                        |       |      |       |       |       |           |       |       |       |
| Depreciation and amortization charges       |       | (240                                     | )          | (354                        | )          | (26       | )          | (620       | )          | 149            |       | (769       | )          |
|                                        |       |                                     |       |                        |       |      |       |       |       |           |       |       |       |
| Equity method                               |       | —                                   |       | —                      |       | 214       |       | 214        |       | (10            | )          | 204        |       |
|                                        |       |                                     |       |                        |       |      |       |       |       |           |       |       |       |
| Additions  to property, plant and equipment |       | 96                                       |       | 716                         |       | 46        |       | 858        |       | 113            |       | 971        |       |

 

F-69

----

 
| **2007**                                    | ** ** | **Power  Generation  and  Transmission** | ** ** | **Distribution of  Energy** | ** ** | **Other** | ** ** | **BRGAAP** | ** ** | **Adjustment** | ** ** | **USGAAP** | ** ** |
|---------------------------------------------|------------|------------------------------------------|------------|-----------------------------|------------|-----------|------------|------------|------------|----------------|------------|------------|------------|
|                                        | ** ** | ** **                               | ** ** | ** **                  |       |      |       |       |       |           |       |       |       |
| Net operating revenues                      |       | 2,999                                    |       | 6,368                       |       | 111       |       | 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       | )          |
|                                        |       |                                     |       |                        |       |      |       |       |       |           |       |       |       |
| 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-70

----

 
| **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-71

----

 

**33.CONDENSED UNCONSOLIDATED FINANCIAL INFORMATION OF CEMIG**

 

**BALANCESHEETS AS OF DECEMBER 31, 2008 AND 2007 (UNCONSOLIDATED)**

**(Expressedin millions of Brazilian *reais*)**

** **
| ** **                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
| ASSETS                                            |       |     |       |     |       |
| CURRENT ASSETS                                    |       |     |       |     |       |
| Cash and cash equivalents                         |       | 257      |       | 22       |       |
| Tax recoverable (note 8)                          |       | 12       |       | 33       |       |
| Deferred income and social  contr. Taxes (note 5) |       | 18       |       | 93       |       |
| Dividends receivable                              |       | 1,437    |       | 1,384    |       |
| Other                                             |       | 21       |       | 10       |       |
|                                              |       | 1,745    |       | 1,542    |       |
|                                              |       |     |       |     |       |
| NONCURRENT ASSETS                                 |       |     |       |     |       |
| CRC Account Securitization  Fund (FIDC) (note 3)  |       | 811      |       | 773      |       |
| Deferred income and social  contr. Taxes (note 5) |       | 158      |       | 111      |       |
| Tax recoverable (note 8)                          |       | 174      |       | 260      |       |
| Escrow deposits                                   |       | 88       |       | 131      |       |
| Other                                             |       | 107      |       | 7        |       |
|                                              |       | 1,338    |       | 1, 282   |       |
|                                              |       |     |       |     |       |
| PERMANENT ASSETS                                  |       |     |       |     |       |
| Investments in subsidiaries  and affiliates       |       | 7,897    |       | 6,745    |       |
| Property, plant and  equipment                    |       | 5        |       | 231      |       |
|                                              |       | 7,902    |       | 6,976    |       |
|                                              |       |     |       |     |       |
| TOTAL ASSETS                                      |       | 10,985   |       | 9,800    |       |

 

F-72

----

 
| ** **                                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| LIABILITIES AND  SHAREHOLDERS’ EQUITY       |       |     |       |     |       |
|                                             |       |     |       |     |       |
| CURRENT LIABILITIES                              |       |     |       |     |       |
| Accounts payable to  suppliers                   |       | 7        |       | 12       |       |
| Payroll and related charges                      |       | 16       |       | 9        |       |
| Taxes payable                                    |       | 32       |       | 39       |       |
| Dividends and interest on  capital               |       | 960      |       | 881      |       |
| Current portion of  long-term financing          |       | 7        |       | 6        |       |
| Other                                            |       | 39       |       | 119      |       |
|                                             |       | 1,061    |       | 1,066    |       |
|                                             |       |     |       |     |       |
| LONG TERM LIABILITIES                            |       |     |       |     |       |
| Long-term financing (note  14)                   |       | 74       |       | 74       |       |
| Employee post-retirement  benefits (note 16)     |       | 90       |       | 115      |       |
| Accrued liability for  contingencies (note 17)   |       | 397      |       | 292      |       |
| Other                                            |       | 30       |       | 29       |       |
|                                             |       | 591      |       | 510      |       |
|                                             |       |     |       |     |       |
| SHAREHOLDERS’ EQUITY                        |       | 9,333    |       | 8,224    |       |
|                                             |       |     |       |     |       |
| TOTAL LIABILITIES AND  SHAREHOLDERS’ EQUITY |       | 10,985   |       | 9,800    |       |

 

**STATEMENTSOF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007(UNCONSOLIDATED)( Expressed in millions of Brazilian *reais*)**

** **
| ** **                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
|                                  |       |     |       |     |       |
| OPERATING REVENUES                    |       | —   |       | 37       |       |
| OPERATING EXPENSES                    |       | (127     | )          | (98      | )          |
| OTHER INCOME                          |       | 1,940    |       | 1,917    |       |
| FINANCIAL INCOME  (EXPENSES), NET     |       | 58       |       | 7        |       |
| INCOME AND SOCIAL  CONTRIBUTION TAXES |       | (118     | )          | (245     | )          |
| NET INCOME                            |       | 1,753    |       | 1,618    |       |
|                                  |       |     |       |     |       |
| OTHER COMPREHENSIVE INCOME            |       | 299      |       | (400     | )          |
| COMPREHENSIVE INCOME                  |       | 2,052    |       | 1,218    |       |

 

F-73

----

 

** STATEMENTSOF CASH FLOWS (UNCONSOLIDATED)**

**FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007**

 

**(Expressed in millions of Brazilian *reais*)**

** **
| ** **                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                  |       |     |       |     |       |
| CASH FLOWS FROM  OPERATING ACTIVITIES                 |       | 1,281    |       | 1,399    |       |
|                                                  |       |     |       |     |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES                 |       |     |       |     |       |
| Escrow deposits                                       |       | 5        |       | (10      | )          |
| Acquisition of  investments                           |       | (181     | )          | (7       | )          |
| Net cash used in  investing activities                |       | (176     | )          | (17      | )          |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                |       |     |       |     |       |
| Payment of long-term  financing and short-term loans  |       | —   |       | (30      | )          |
| FIDC – amounts received                          |       | —   |       | 7        |       |
| Dividends and interest  on capital paid               |       | (870     | )          | (1,360   | )          |
| Net cash provided by  (used in) financing activities  |       | (870     | )          | (1,383   | )          |
| NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS |       | 235      |       | (1       | )          |
|                                                  |       |     |       |     |       |
| CASH AND CASH  EQUIVALENTS:                           |       |     |       |     |       |
| Beginning of the year                                 |       | 22       |       | 23       |       |
| End of the year                                       |       | 257      |       | 22       |       |
|                                                  |       | 235      |       | (1       | )          |
| SUPPLEMENTARY CASH  FLOWS DISCLOSURE:                 |       |     |       |     |       |
| Taxes paid - income taxes                             |       | 84       |       | 50       |       |
| Interest paid, net of  interest capitalized           |       | 9        |       | 11       |       |

 

F-74

----

 

Following is information relating to CEMIGunconsolidated condensed financial statements presented above:

 

**·****           **Investments — As of December 31, 2008 and 2007,investments in subsidiaries and affiliates are comprised as follows (see note9):

 
| ** **                                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cemig  Geração e Transmissão S.A.                     |       | 3,808    |       | 3,304    |       |
| Cemig  Distribuição S.A.                                   |       | 2,209    |       | 2,049    |       |
| Companhia  de Gás de Minas Gerais — GASMIG                 |       | 320      |       | 193      |       |
| Empresa  de Infovias S.A.                                            |       | 259      |       | 323      |       |
| Sá  Carvalho S.A.                                               |       | 95       |       | 94       |       |
| Usina  Térmica Ipatinga S.A.                                    |       | 66       |       | 66       |       |
| Cemig  Capim Branco Energia S.A.                                     |       | 55       |       | 51       |       |
| UTE  Barreiro S.A.                                                   |       | 2        |       | 7        |       |
| Cemig PCH S.A.                                                       |       | 52       |       | 52       |       |
| Efficientia  S.A.                                                    |       | 6        |       | 4        |       |
| Horizontes  Energia S.A.                                             |       | 67       |       | 66       |       |
| Companhia  Transleste de Transmissão — Transleste          |       | 12       |       | 12       |       |
| Central  Térmica de Cogeração S.A.                    |       | 154      |       | —   |       |
| Rosal  Energia S.A.                                                  |       | 125      |       | 129      |       |
| 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.                       |       | 34       |       | 12       |       |
| Rio  Minas Energia Participações S.A. — RME           |       | 303      |       | 276      |       |
| Empresa  Regional de Transmissão de Energia S.A. — ERTE    |       | 13       |       | 5        |       |
| Empresa  Amazonense de Transmissão de Energia S.A. — EATE  |       | 183      |       | 38       |       |
| Empresa  Catarinense de Transmissão de Energia S.A. — ECTE |       | 10       |       | 4        |       |
| Empresa  Norte de Transmissão de Energia S.A. — ENTE       |       | 59       |       | 24       |       |
| Empresa  Paraense de Transmissão de Energia S.A. — ETEP    |       | 38       |       | 12       |       |
| Axxiom                                                               |       | 3        |       | —   |       |
| Others                                                               |       | 5        |       | 5        |       |
|                                                                 |       | 7,897    |       | 6,745    |       |

 

F-75

----

 

·             Taxes recoverable — As of December 31,2008 and 2007, taxes recoverable are mainly comprised as follows (see note 8):

 
| ** **                  | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|------------------|------------|
| ** **                  | ** ** | **2008**         | ** ** | **2007** | ** ** |
|                        |       |             |       |   |   |
| Current assets -            |       |             |       |   |   |
| VAT                         |       | 4                |       | 3 |   |
| COFINS                      |       | 5                |       | 21 |   |
| PIS                         |       | 1                |       | 5 |   |
| Other                       |       | 2                |       | 4 |   |
|                        |       | 12               |       | 33 |   |
| Other non-current  assets - |       |             |       |   |   |
| Income tax                  |       | 163              |       | 234 |   |
| Social contribution tax     |       | 11               |       | 26 |   |
|                        |       | 174              |       | 260 |   |

 

·             Deferred incomeand social contribution taxes — As of December 31, 2008 and 2007, the majorcomponents of the deferred income and social contribution taxes are as follows(see note 5):

 
| ** **                                                    | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------|------------|------------------|------------|
| ** **                                                    | ** ** | **2008**         | ** ** | **2007** | ** ** |
|                                                          |       |             |       |   |   |
| Tax loss carryforwards                                        |       | 479              |       | 519 |   |
| Employee  post-retirement benefits                            |       | 15               |       | 22 |   |
| Provision for  contingencies                                  |       | 100              |       | 77 |   |
| Provision for doubtful  accounts                              |       | 18               |       | 22 |   |
| Other temporary  differences                                  |       | 1                |       | 1 |   |
|                                                          |       | 613              |       | 641 |   |
| Provision for losses on  realization of deferred tax balances |       | (437             | )          | (437 | ) |
|                                                          |       | 176              |       | 204 |   |
| Current Assets                                                |       | 18               |       | 93 |   |
| Other Assets                                                  |       | 158              |       | 111 |   |

 

·             Accruedliabilities for contingencies— As of December 31, 2008 and 2007, accruedliabilities for contingencies are mainly comprised as follows (see note17):

 
| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|------------------|------------|
| ** **                                | ** ** | **2008**         | ** ** | **2007** | ** ** |
| **Labor Claims**                          |       |             |       |   |   |
| Various                                   |       | 75               |       | 73 |   |
|                                      |       |             |       |   |   |
| **Civil Lawsuits**                        |       |             |       |   |   |
| Personal  Injury                          |       | 28               |       | 7 |   |
| Rate  Increase                            |       | 76               |       | 70 |   |
| Other                                     |       | 94               |       | 51 |   |
|                                      |       | 198              |       | 128 |   |
| **Tax**                                   |       |             |       |   |   |
| FINSOCIAL                                 |       | 21               |       | 21 |   |
| VAT                                       |       | —           |       | 2 |   |
| Taxes  payable — Suspended Liability |       | 77               |       | 47 |   |
| INSS                                      |       | 1                |       | 1 |   |
| Other                                     |       | 13               |       | 8 |   |
| ** **                                |       | 112              |       | 79 |   |
| **Regulatory**                            |       |             |       |   |   |
| ANEEL  Administrative Proceedings         |       | 12               |       | 12 |   |
| **Total**                                 |       | 397              |       | 292 |   |

 

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**34. SUBSEQUENT EVENTS**

 

**(a) Ratesreadjustment**

 

The rates of Cemig Distribuição S.A. were increased byan average of 6.21% from April 8, 2009. The adjustment was applied in differentpercentages by category of consumption. As an example, residential consumershad an increase of 4.87% in their electricity bills, while high-voltageconsumers had an increase of 9.42%. The increase of the rates do not representan increase of the CEMIG ́s operating revenues in the same percentage becausepart of it is used to the regulatory assets settlement.

 

**(b) Acquisitionof interest in wind farms plants**

 

On February 4, 2009 CEMIGannounced the acquisition of a 49% of the capital interest in three wind farms:Central Eólica Praias de Parajuru (28.8 MW), Central Eólica Praia do Morgado(28.8 MW) and Central Eólica Volta do Rio (42.0 MW), – in Ceará state, totaling99.6 MW of installed capacity to start operation within 90 days. CEMIG willinvest R$213 million on these three wind farms.

 

CEMIG is subject toapproval by the regulator, ANEEL; by the Federal Savings Bank (CEF); and byEletrobrás. The Monopolies Authority, CADE (Administrative Defense Council)will also be notified of the transaction.

 

**(c) Acquisitionof capital interest of Terna Participações S.A.**

 

On May 13, 2009, CEMIGshareholders approved the execution of a share purchase agreement, betweenCemig Generation and Transmission and Terna – Rete Ellettrica Nazionale S.p.A (“TernaS.p.A.”), for the acquisition of approximately 82.27% of the voting and 65.86%of the total capital of Terna Participações S.A. (“Terna”) for the amount ofapproximately R$2,330.5 million.

 

Terna is a holdingcompany, with interests in electricity transmission companies with operationsin 11 states of Brazil, which are:  TSN –Transmissora Sudeste Nordeste S.A.; Novatrans Energia S.A.; ETEO – Empresa deTransmissão de Energia do Oeste S.A.; ETAU – Empresa de Transmissão do AltoUruguai S.A.; Brasnorte Transmissora de Energia S.A.; and Terna Serviços Ltda.;which, jointly, have over 3,330 km of transmission lines.

 

The closing of theacquisition and the payment of the purchase price is expected to be on or afterSeptember 30, 2009, and Cemig Geração e Transmissão shall, upon the closing,carry out a mandatory tender offer for the acquisition of the floating sharesof Terna, for the same purchase price and conditions of the purchase from TernaS.p.A.  (for an expected amount of,approximately, R$1,207.8 million), as required by the Brazilian Corporate Law,CVM Instruction No. 361/2002 and by the Special Corporate Governance Level 2 ofthe São Paulo Stock Exchange.  Suchacquisition shall be submitted to the approval of the antitrust authorities andthe regulatory agency.

 

**(d) Increasein the Recorded Capital to be proposed to the Annual General Meeting ofShareholders in April 2009**

 

The Board of Directors ofCEMIG proposed to the General Meeting of Stockholders an increase in therecorded capital, through the use of the Earnings Reserve so as to comply with Article199 of the Corporate Law, which limits the amount of the reserves to the amountof the company’s registered capital.

 

An increase in theregistered capital of CEMIG from R$2,481 to R$3,102 was proposed, with issuanceof new shares through capitalization of R$606 of the balance of the RetainedEarnings Reserve, and R$14 from the Capital Reserve, distributing tostockholders as a consequence a 25% stock bonus, in new shares of the same typeas those held, with a nominal unit value of R$5.00.

 

**(e) TemporaryVoluntary dismissal program (PDV)**

 

In April 2009, CEMIG put inplace its temporary voluntary dismissal program (PDV), available to employeesbetween April 22 and June 5, 2009.

 

Employees who subscribe to the PDVreceive a financial incentive varying between 3 and 16 times their monthlyremuneration, according to criteria established in the program’s regulations,of which the principal one 

 

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is the time of contributionremaining for full retirement entitlement under the national social securitysystem (INSS). The incentive includes payment of the contributions to thepension fund and the INSS up to the date when the employee would have compliedwith the requirements for applying for retirement benefit under the INSS(limited to five years), and deposit of the obligatory “penalty” payment(applicable to dismissals) of 40% on the balance of the employee’s accumulatedfunds under the FGTS system.

 

Additionally, CEMIG guaranteesfull payment of the costs of the group life insurance plan, for 6 months, andof the health plan, for 12 months, from the date of leaving the company.

 

The provision for the expensesunder this program will be made in the second quarter of 2009, depending on howmany employees subscribe to the program.

 

***************

 

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