**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, 2006**                                                       |
|       |       |                                                                                                  |
|       | ** ** | **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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**COMPANHIAENERGÉTICA DE MINAS GERAIS – CEMIG**

**(Exact name of Registrant asspecified in its charter)**

**ENERGYCO OF MINAS GERAIS**

**(Translation of Registrant’s nameinto English)**

**BRAZIL**

**(Jurisdiction of incorporation ororganization)**

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

**(Address of principal executiveoffices)**

**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, as of June 11, 2007 |   |                                       |
|                                         |   |                                       |
| 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, as of June 12, 2007 |   |                                       |

 

**Securities registered or to be registered pursuant toSection 12(g) of the Act:**

**None**

**Securities for which there is a reporting obligationpursuant to Section 15(d) of the Act:**

**None**

**Indicatethe number of outstanding shares of each of the issuer’s classes of capital orcommon stock as of the close of the period covered by the annual report:**

**70,874,167,923 Common Shares**

** 91,210,522,699 Preferred Shares**

**Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act.    Yes  **x    No o

**Ifthis report is an annual or transition report, indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934.    Yes   **o   No x

**Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days.   Yes  **x    Noo

**Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule12b-2 of the Exchange Act.  (Check one):**

**Largeaccelerated filer  **x   Accelerated Filer  o    Nonaccelerated filer o

**Indicateby check mark which financial statement item the registrant has elected tofollow:  Item 17   **o      Item 18   x

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

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* Not for trading but only in connection with theregistration of American Depositary Shares, pursuant to the requirements of theSecurities and Exchange Commission.

 

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

 

**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.References in this annual report to “CEMIG,” “we” or 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 ofDecember 15, 1976, Law No. 9,457 of May 5, 1997 and LawNo. 10,303 of October 31, 2001, which we refer to collectively as theBrazilian Corporate Law. For purposes of this annual report, we have presented,and in future reports to be filed with the United States Securities andExchange 

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Commission, or the Commission, we intend to present,our consolidated financial statements and other financial information in *reais* in accordance with accountingprinciples generally accepted in the United States, or U.S. GAAP. For purposesof this annual report we prepared balance sheets as of December 31, 2006and 2005 and the related statements of operations and comprehensive income,cash flows and changes in shareholders’ equity for the years endedDecember 31, 2006, 2005 and 2004, in *reais*all in accordance with U.S. GAAP. Deloitte Touche Tohmatsu AuditoresIndependentes has audited our consolidated financial statements atDecember 31, 2006 and 2005 and for each of the three years endedDecember 31, 2006, 2005 and 2004.

From and after January 1, 1998, Brazil ceased tobe considered a highly inflationary economy under U.S. GAAP and we have notrestated financial information to reflect the effects of inflation as from thatdate. Therefore, for subsequent periods and dates, our financial statements andother financial data are presented in nominal *reais*and do not reflect effects of inflation. See Note 2(b) to our consolidatedfinancial statements.

This annual report contains translations of certain *real* amounts into U.S. dollars atspecified rates solely for the convenience of the reader. Unless otherwiseindicated, such U.S. dollar amounts have been translated from *reais* at an exchange rate of R$2.1342 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 ofDecember 29, 2006. The *real*has historically experienced high volatility. See “Item 3. KeyInformation—Exchange Rates” for additional information regarding exchangerates. 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.

**MARKET POSITION AND OTHER INFORMATION**

The information contained in this annual reportregarding our market position is, unless otherwise indicated, presented for thetwelve-month period ended December 31, 2006 and is based on, or derivedfrom, reports issued by the *Agência Nacionalde Energia Elétrica* (The Brazilian National Electric Energy Agency),or ANEEL.

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 “American Depositary Shares” or “ADSs” are toAmerican Depositary Shares, each representing 1,000 preferred shares as ofDecember 31, 2006.  On May 3, 2007, weeffected a partial stock split in the form of a 50% stock dividend of ourpreferred shares, with a corresponding adjustment to our preferred share ADSs.  Effective on June 11, 2007, after giving effectto (i) a reverse stock split of our preferred shares in the form of aconsolidation whereby every 500 preferred shares, par value R$0.01, wasconsolidated into one preferred share with a par value of R$5.00, and (ii) a100% forward split of the preferred share ADSs, the ADS ratio was changed toone preferred share per ADS.  The ADSsare evidenced by American Depositary Receipts, or ADRs, issued pursuant to aSecond Amended and Restated Deposit Agreement, dated as of August 10,2001, as amended on June 11, 2007, by and among us, Citibank, N.A., asdepositary, and the holders and beneficial owners of ADSs evidenced by ADRsissued thereunder (the “Second Amended and Restated Deposit Agreement”).  Unless otherwise noted herein, the preferredshare and ADS and per preferred share and per ADS data in this annual reporthave not been adjusted for to reflect the reverse stock split and consolidationof our preferred shares or the 100% forward split of our ADSs that we undertookin June 2007.

On May 3, 2007, we effected a partial stock split inthe form of a 50% stock dividend of our common shares.  On June 11, 2007, we effected a reverse stocksplit of our common shares in the form of a consolidation whereby every 500preferred shares, par value R$0.01, was consolidated into one common share witha par value of R$5.00. On June 12, 2007, we established an American DepositaryShares program for our common shares, with each common share ADS representingone common share, referred to as the common share ADSs.  Unless otherwise noted herein, the commonshare and per common share data in this annual report have not been adjustedfor to reflect the reverse stock split and consolidation of our common sharesthat we undertook in June 2007.

Unless indicated otherwise, references herein toAmerican Depositary Shares, ADSs, American Depositary Receipts and ADRs referonly to those represented by our preferred shares.

**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 these forward-looking statements largely on our currentexpectations and projections about future events and financial trends affectingour business. These forward-looking statements are subject to risks,uncertainties and assumptions relating to, among other things:

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·                                          generaleconomic, political and business conditions, principally in Latin America,Brazil and the State of Minas Gerais, Brazil, or Minas Gerais;

·                                          inflationand changes in currency exchange rates;

·                                          enforcementof legal regulation in Brazil’s electricity sector;

·                                          changesin volumes and patterns of consumer electricity usage;

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

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

·                                          ourlevel of debt;

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

·                                          trendsin the electricity generation, transmission and distribution industry in Braziland Minas Gerais;

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

·                                          ourcapital expenditure plans;

·                                          ourability to serve our consumers on a satisfactory basis;

·                                          ourability to renew our concessions;

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

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

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

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

·                                          otherrisk factors as set forth under “Item 3. 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:

·                                          delayor prevent successful completion of one or more projects;

·                                          increasethe costs of projects; and

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

The words “believe,” “may,” “will,” “estimate,” “continue,”“anticipate,” “intend,” “expect” and similar words are intended to 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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Neither our independent auditors, nor any otherindependent accountants, have compiled, examined or performed any procedureswith respect to the forward-looking financial information contained herein, norhave they expressed any opinion or any other form of assurance on suchinformation or its achievability, and they assume no responsibility for, anddisclaim any association with, such forward-looking financial information.

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**PART I**

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

Not applicable.

# **Item 2.  OfferStatistics and Expected Timetable**

Not applicable.

# **Item 3.  KeyInformation**

**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 ofDecember 31, 2006 and 2005 and for each of the three years endedDecember 31, 2006, 2005 and 2004 have been derived from our auditedconsolidated financial statements and the notes thereto included elsewhere inthis annual report. The selected consolidated data as of December 31,2004, 2003 and 2002 and for the each of the two years ended December 31,2003 and 2002 has been derived from our audited consolidated financialstatements 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$2.1342 per US$1.00, the noon buying rate as of December 29, 2006. The*real* has historically experiencedhigh 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 July 17, 2007, the noon buying rate for *reais* was R$1.8639 per US$1.00. See “— Exchange Rates.”

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**SelectedConsolidated Financial Data**
| ** **                                                      | ** ** | **As of and for the year ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                                                                              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                      | ** ** | **(in millions  of US$)(1)(2)**                                             | ** ** | **(In millions of R$ except per share/ADS data or as otherwise indicated)** | ** ** |
| **Income  Statement Data:**                                     | ** ** | ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net operating  revenues                                         |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Electricity sales to final consumers                            |       | 4,367                                                                                 |       | 9,319 |   | 8,708 |   | 8,541 |   | 7,163 |   | 5,458 |   |
| Regulatory extraordinary rate adjustment(3)                     |       | —                                                                                |       | 1 |   | 8 |   | 89 |   | 63 |   | 281 |   |
| Deferred rate adjustment(3)                                     |       | —                                                                                |       | — |   | 110 |   | 640 |   | 199 |   | — |   |
| Electricity sales to the interconnected power system            |       | 414                                                                                   |       | 884 |   | 237 |   | 36 |   | 56 |   | 161 |   |
| Use of basic transmission and distribution networks             |       | 833                                                                                   |       | 1,780 |   | 1,523 |   | 245 |   | 257 |   | 185 |   |
| Other operating revenues                                        |       | 94                                                                                    |       | 199 |   | 168 |   | 536 |   | 468 |   | 260 |   |
| Tax on revenues                                                 |       | (1,660                                                                                | )          | (3,543 | ) | (3,241 | ) | (2,608 | ) | (2,190 | ) | (1,473 | ) |
| Total net operating revenues                                    |       | 4,048                                                                                 |       | 8,640 |   | 7,513 |   | 7,479 |   | 6,016 |   | 4,872 |   |
|                                                            |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Operating costs  and expenses                                   |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Electricity purchased for resale                                |       | (894                                                                                  | )          | (1,907 | ) | (1,455 | ) | (1,370 | ) | (1,396 | ) | (1,333 | ) |
| Natural gas purchased for resale                                |       | —                                                                                |       | — |   | — |   | (268 | ) | (246 | ) | (152 | ) |
| Use of basic transmission and distribution networks             |       | (322                                                                                  | )          | (687 | ) | (709 | ) | (538 | ) | (310 | ) | (298 | ) |
| Depreciation and amortization                                   |       | (380                                                                                  | )          | (810 | ) | (669 | ) | (677 | ) | (686 | ) | (666 | ) |
| Personnel                                                       |       | (490                                                                                  | )          | (1,046 | ) | (779 | ) | (788 | ) | (710 | ) | (532 | ) |
| Regulatory charges                                              |       | (483                                                                                  | )          | (1,031 | ) | (983 | ) | (861 | ) | (585 | ) | (548 | ) |
| Regulatory liability – special liabilities                 |       | (495                                                                                  | )          | (1,057 | ) | — |   | — |   | — |   | — |   |
| Third-party services                                            |       | (223                                                                                  | )          | (475 | ) | (420 | ) | (329 | ) | (325 | ) | (265 | ) |
| Employee post-retirement benefits                               |       | (115                                                                                  | )          | (245 | ) | (257 | ) | (153 | ) | (109 | ) | (207 | ) |
| Materials and supplies                                          |       | (54                                                                                   | )          | (116 | ) | (95 | ) | (83 | ) | (88 | ) | (78 | ) |
| Employees profit sharing                                        |       | (98                                                                                   | )          | (210 | ) | (260 | ) | (110 | ) | (93 | ) | (38 | ) |
| Other                                                           |       | (110                                                                                  | )          | (234 | ) | (379 | ) | (280 | ) | (313 | ) | (200 | ) |
| Reversal (Provision) for loss on deferred regulatory  assets(3) |       | (22                                                                                   | )          | (49 | ) | (183 | ) | (9 | ) | 174 |   | (28 | ) |
| Total operating costs and expenses                              |       | (3,686                                                                                | )          | (7,867 | ) | (6,189 | ) | (5,466 | ) | (4,687 | ) | (4,345 | ) |
|                                                            |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Operating income                                                |       | 362                                                                                   |       | 773 |   | 1,324 |   | 2,013 |   | 1,329 |   | 527 |   |
|                                                            |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Financial income  (expenses), net                               |       | 157                                                                                   |       | 335 |   | 754 |   | 350 |   | 674 |   | (525 | ) |
|                                                            |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Non-Operating  Income                                           |       | 43                                                                                    |       | 91 |   | 29 |   | 105 |   | — |   | — |   |
|                                                            |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Income before  income taxes and minority interests              |       | 562                                                                                   |       | 1,199 |   | 2,107 |   | 2,468 |   | 2,003 |   | 2 |   |
| Income taxes  expense                                           |       | (233                                                                                  | )          | (497 | ) | (300 | ) | (731 | ) | (607 | ) | (26 | ) |
| Minority  interests                                             |       |                                                                                  |       | — |   | 2 |   | 2 |   | — |   | 12 |   |
| Net income  (loss)                                              |       | 329                                                                                   |       | 702 |   | 1,809 |   | 1,739 |   | 1,396 |   | (12 | ) |
|                                                            |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Other  comprehensive income (loss)                              |       | 66                                                                                    |       | 140 |   | 25 |   | (474 | ) | (64 | ) | 242 |   |
| Comprehensive  income                                           |       | 395                                                                                   |       | 842 |   | 1,834 |   | 1,265 |   | 1,332 |   | 230 |   |
|                                                            |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Basic earnings  (loss): (5)                                     |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Per common share                                                |       | 0.67                                                                                  |       | 1.44 |   | 3.72 |   | 3.58 |   | 2.87 |   | (0.02 | ) |
| Per preferred share                                             |       | 0.67                                                                                  |       | 1.44 |   | 3.72 |   | 3.58 |   | 2.87 |   | (0.02 | ) |
| Per ADS                                                         |       | 0.67                                                                                  |       | 1.44 |   | 3.72 |   | 3.58 |   | 2.87 |   | (0.02 | ) |
|                                                            |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings  (loss): (5)                                   |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Per common share                                                |       | 0.66                                                                                  |       | 1.41 |   | 3.69 |   | 3.58 |   | 2.87 |   | (0.02 | ) |
| Per preferred share                                             |       | 0.66                                                                                  |       | 1.41 |   | 3.69 |   | 3.58 |   | 2.87 |   | (0.02 | ) |
| Per ADS                                                         |       | 0.66                                                                                  |       | 1.41 |   | 3.69 |   | 3.58 |   | 2.87 |   | (0.02 | ) |

 

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| ** **                                       | ** ** | **As of and for the year ended December 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                                                              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                       | ** ** | **(in millions  of US$)(1)(2)**                                             | ** ** | **(In millions of R$ except per share/ADS data or as otherwise indicated)** | ** ** |
| ** **                                       | ** ** | ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance  Sheet Data:**                         | ** ** | ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Assets                                           |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Current assets                                   |       | 2,274                                                                                 |       | 4,853 |   | 4,778 |   | 3,276 |   | 2,630 |   | 1,845 |   |
| Property, plant and equipment, net               |       | 6,403                                                                                 |       | 13,665 |   | 11,971 |   | 11,191 |   | 10,917 |   | 10,099 |   |
| Deferred regulatory assets — long-term      |       | 725                                                                                   |       | 1,548 |   | 2,315 |   | 2,929 |   | 2,069 |   | 1,670 |   |
| Account receivable from State Government         |       | 809                                                                                   |       | 1,726 |   | 1,519 |   | 1,097 |   | 891 |   | 755 |   |
| Other assets                                     |       | 795                                                                                   |       | 1,696 |   | 763 |   | 504 |   | 612 |   | 1,139 |   |
| Total assets                                     |       | 11,006                                                                                |       | 23,488 |   | 21,346 |   | 18,997 |   | 17,119 |   | 15,508 |   |
|                                             |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Liabilities                                      |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Current portion of long-term financing           |       | 324                                                                                   |       | 691 |   | 985 |   | 1,417 |   | 1,660 |   | 946 |   |
| Other current liabilities                        |       | 1,734                                                                                 |       | 3,700 |   | 3,953 |   | 2,286 |   | 1,869 |   | 2,097 |   |
| Long-term financing                              |       | 2,733                                                                                 |       | 5,833 |   | 3,841 |   | 2,750 |   | 2,331 |   | 2,593 |   |
| Employee post-retirement benefits—long-term |       | 781                                                                                   |       | 1,666 |   | 1,535 |   | 1,606 |   | 1,023 |   | 1,091 |   |
| Shareholders’  equity                       |       | 3,922                                                                                 |       | 8,370 |   | 9,252 |   | 9,209 |   | 8,524 |   | 7,442 |   |
| Capital stock                                    |       | 669                                                                                   |       | 1,428 |   | 1,428 |   | 1,428 |   | 1,428 |   | 1,428 |   |
| ** **                                       | ** ** | ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other  Data:**                                 | ** ** | ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average  outstanding shares - basic (5) |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Common                                           |       | —                                                                                |       | 212,622,504 |   | 212,622,504 |   | 212,622,504 |   | 212,622,504 |   | 212,622,504 |   |
| Preferred                                        |       | —                                                                                |       | 273,631,569 |   | 273,631,569 |   | 273,631,569 |   | 273,631,569 |   | 273,631,569 |   |
| Dividends per  share                             |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Common                                           |       | 1.30                                                                                  |       | R$2.77 |   | R$3.68 |   | R$1.19 |   | R$0.51 |   | R$0.68 |   |
| Preferred                                        |       | 1.30                                                                                  |       | R$2.77 |   | R$3.68 |   | R$1.19 |   | R$0.51 |   | R$0.68 |   |
| Dividends per  ADS Preferred                     |       | 1.30                                                                                  |       | R$2.77 |   | R$3.68 |   | R$1.19 |   | R$0.51 |   | R$0.68 |   |
| Dividends per  share (4)                         |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Common                                           |       | —                                                                                |       | US$1.30 |   | US$1.58 |   | US$0.45 |   | US$0.18 |   | US$0.19 |   |
| Preferred                                        |       | —                                                                                |       | US$1.30 |   | US$1.58 |   | US$0.45 |   | US$0.18 |   | US$0.19 |   |
| Dividends per  ADS(4)                            |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Preferred                                        |       | —                                                                                |       | US$1.30 |   | US$1.58 |   | US$0.45 |   | US$0.18 |   | US$0.19 |   |
|                                             |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Weighted average  outstanding shares diluted (5) |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Common                                           |       | —                                                                                |       | 217,250,274 |   | 214,450,359 |   | 212,622,504 |   | 212,622,504 |   | 212,622,504 |   |
| Preferred                                        |       | —                                                                                |       | 279,587,214 |   | 275,983,902 |   | 273,631,569 |   | 273,631,569 |   | 273,631,569 |   |
| Dividends per  share diluted                     |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Common                                           |       | 1.27                                                                                  |       | R$2.71 |   | R$3.65 |   | R$1.19 |   | R$0.51 |   | R$0.68 |   |
| Preferred                                        |       | 1.27                                                                                  |       | R$2.71 |   | R$3.65 |   | R$1.19 |   | R$0.51 |   | R$0.68 |   |
| Dividends per  ADS                               |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Preferred                                        |       | 1.27                                                                                  |       | R$2.71 |   | R$3.65 |   | R$1.19 |   | R$0.51 |   | R$0.68 |   |
| Dividends per  share diluted (4)                 |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Common                                           |       | —                                                                                |       | US$1.27 |   | US$1.57 |   | US$0.45 |   | US$0.18 |   | US$0.19 |   |
| Preferred                                        |       | —                                                                                |       | US$1.27 |   | US$1.57 |   | US$0.45 |   | US$0.18 |   | US$0.19 |   |
| Dividends per  ADS diluted (4)                   |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Preferred                                        |       | —                                                                                |       | US$1.27 |   | US$1.57 |   | US$0.45 |   | US$0.18 |   | US$0.19 |   |

 

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(1)             Convertedat the exchange rate of US$1.00 to R$2.1342, the noon buying rate as ofDecember 29, 2006.  See “—ExchangeRates.”

(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 reverse stock split andconsolidation of our shares, and per ADS numbers have been adjusted to reflectthe 100% forward split of our ADSs, each of which occurred in June, 2007. SeeNote 31, items “g” and “h” to our consolidated financial statements.

3

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## **Exchange Rates**

Prior to March 14, 2005 there were two principalforeign exchange markets in Brazil - the commercial rate exchange market andthe floating rate exchange market. Most trade and financial foreign-exchangetransactions were carried out on the commercial rate exchange market. Thefloating market rate generally applied to transactions to which the commercialmarket rate did not apply. On March 4, 2005, the National Monetary Council(Conselho Monetário Nacional) enacted Resolution No. 3,265 that, effectiveMarch 14, 2005, consolidated the two foreign exchange markets into oneforeign exchange market for the general purpose of making foreign exchangetransactions simpler and more efficient. All foreign exchange transactions arenow carried out in this single foreign exchange market through financialinstitutions authorized to operate in the market.

Brazilian law provides that, whenever there(i) is a significant imbalance in Brazil’s balance of payments, or(ii) are major reasons to foresee a significant imbalance in Brazil’sbalance of payments, temporary restrictions may be imposed on remittances offoreign capital abroad. In the past, the Central Bank has intervenedoccasionally to control unstable movements in foreign exchange rates. We cannotpredict whether the Central Bank or the Federal Government will continue to letthe *real* float freely or will intervene inthe exchange rate market through a currency band system or otherwise. 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 ADSs or commonshare 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 ADSs and common share ADSs. Exchange rate fluctuations may alsoaffect the U.S. dollar equivalent of the *real*price of the preferred shares or common shares on the Brazilian stock exchangewhere they are traded. Exchange rate fluctuations may also affect our resultsof operations. See “Risk Factors — Exchange rate instability may adversely affect our business, results ofoperations and financial condition and the market price of our shares, the ADSsand the common share 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 2006                           |       | 2.1342                          |       | 2.1675 |   | 2.1476 |   | 2.1342 |   |
| January 2007                            |       | 2.1225                          |       | 2.1520 |   | 2.1376 |   | 2.1225 |   |
| February 2007                           |       | 2.0740                          |       | 2.1200 |   | 2.0939 |   | 2.1200 |   |
| March 2007                              |       | 2.0540                          |       | 2.1385 |   | 2.0883 |   | 2.0580 |   |
| April 2007                              |       | 2.0192                          |       | 2.0465 |   | 2.0302 |   | 2.0308 |   |
| May 2007                                |       | 1.9225                          |       | 2.0330 |   | 1.9836 |   | 1.9225 |   |
| June 2007                               |       | 1.9010                          |       | 1.9680 |   | 1.9323 |   | 1.9301 |   |
| July 2007 (through  July 17, 2007) |       | 1.8639                          |       | 1.9160 |   | 1.8912 |   | 1.8639 |   |

 
| ** **                                 | ** ** | **Reais per US$1.00** | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|
| **Year Ended December 31,** | ** ** | **Low**                         | ** ** | **High** | ** ** | **Average** | ** ** | **Period-  end** | ** ** |
| 2002                                       |       | 2.2730                          |       | 3.9450 |   | 2.9213 |   | 3.5400 |   |
| 2003                                       |       | 2.8230                          |       | 3.6640 |   | 3.0757 |   | 2.8950 |   |
| 2004                                       |       | 2.6510                          |       | 3.2085 |   | 2.9262 |   | 2.6550 |   |
| 2005                                       |       | 2.1695                          |       | 2.7755 |   | 2.4352 |   | 2.3340 |   |
| 2006                                       |       | 2.0549                          |       | 2.3580 |   | 2.1738 |   | 2.1342 |   |

 

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Source: Federal ReserveBank of New York

4

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## **Risk Factors**

#### *You should consider the following risks aswell as the other information in this annual report in evaluating an investmentin our company.*

## **Risks Relating to CEMIG**

#### *We are controlled by the State Governmentwhich may have interests that are different from yours.*

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

The operations of CEMIG have had and will continue tohave an important impact on the commercial and industrial development of theState of Minas Gerais, and on its social conditions. In the past, the StateGovernment has used, and may use in the future, its status as our controllingshareholder to decide that we should engage in certain activities and make certaininvestments aimed, principally, to promote its political, economic or socialobjectives and not necessarily to meet the objective of improving our businessand/or operational results.

#### *We are subject to extensive governmentallegislation and regulation.*

The Brazilian Federal Government has been implementingpolicies that have a far-reaching impact on the Brazilian power industry and,in particular, the electricity industry. As part of the restructuring of theindustry, Federal Law No. 10,848 of March 15, 2004, (“LawNo. 10,848/04” or the “New Industry Model Law”) introduced a newregulatory framework for the Brazilian electricity industry.

Law No. 10,848/04 and Decree 5,163/04 ofJuly 30, 2004 governing the purchase and sale of electricity under the NewIndustry Model Law remain subject to the implementation of resolutions byANEEL. Moreover, the constitutionality of Law No. 10,848/04 is currentlybeing challenged before the Brazilian Supreme Court. The Brazilian SupremeCourt has not yet reached a final decision and, therefore, LawNo. 10,848/04 is currently in force. If all or a portion of LawNo. 10,848/04 is considered to be unconstitutional by the BrazilianSupreme Court, all or a portion of the regulatory scheme introduced by LawNo. 10,848/04 may not come into effect, generating uncertainty as to howand when the Federal Government will be able to introduce changes to theelectricity industry. Accordingly, we cannot now evaluate the impact of the newregulation to be issued by ANEEL or the impact that a decision on theconstitutionality of Law No. 10,848/04 would have on our futureactivities, results of operations and financial condition.

#### *The new rules for the sale of electric energyand market conditions could affect our generation selling prices.*

Under the lawcreating the new model for the industry, our generation company is not allowedto sell energy directly to our distribution company. As a result, we have tosell our electricity in a regulated market through public auctions conducted byANEEL, or in the Free Contracting Environment (the “ACL”).  Legislationallows distributors that contract with our generation company under theRegulated Contracting Environment (the “ACR”) to reduce the quantity of energycontracted under these contracts up to a certain limit, exposing our generationcompany to the risk of failing to contract that energy at adequate prices.

Contracts in the ACL with consumers that are allowed to purchase energydirectly from generating companies or from energy traders (these are generallyconsumers with demand equal to or greater than 3 MW or consumers with demandbetween 500 KW and 3 MW if they choose to purchase their energy from renewableenergy sources, such as small hydroelectric facilities, and referred to as “FreeConsumers”) also give such consumers the flexibility to purchase less energy(nearly 10%) from us than was originally contracted for by such consumers,which may adversely impact our business, results of operations and financialcondition.

If we are unable to sell all of our energy capacity in the auctions or inthe ACL, we may be forced to sell it in the spot market, where prices are veryvolatile. If this occurs in periods of low spot prices, our revenues andresults of operations could be adversely affected.

5

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 *ANEEL hassubstantial discretion to establish the rates we charge to captive consumers**and the rates we charge to Free Consumers and topower generating companies for using our distribution system. Such rates are determined pursuant to concessioncontracts entered with ANEEL and in accordance with ANEEL’s regulatorydecision-making authority.*

Concession agreements and Brazilianlaw establish a price cap mechanism that permits three types of rateadjustments: (1) the annual adjustment; (2) the periodic revision; and(3) the extraordinary revision. We are entitled to apply each year for theannual adjustment, which is designed to offset some of the effects of inflationon rates and pass through to consumers certain changes in our cost structurethat are beyond our control, such as the cost of electricity we purchase fromcertain sources and certain other regulatory charges, including charges for theuse of transmission and distribution facilities. In addition, ANEEL carries outa periodic 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 unpredictable events significantlyalter our cost structure. The periodic revision and extraordinary revision are subjectto a certain degree of ANEEL’s discretion.

Although our concession agreement provides that thecompany must remain in economic and financial balance, we cannot assure you that ANEEL will establish rates that will adequatelycompensate us and that our revenues and results of operations will not beadversely affected by such rates. In addition, to the extent any of theseadjustments are not granted by ANEEL in a timely manner, our business, resultsof operations and financial condition may be adversely affected.

*We maynot be able to collect the full amount of a significant receivable from theState Government.*

We have an account receivable from the StateGovernment, referred to as the CRC Account, that totaled R$1,726 million as ofDecember 31, 2006. The agreement between CEMIG and the State Governmentthat governs the CRC Account receivable is referred to as the CRC AccountAgreement. Historically we have had difficulty collecting amounts due from theState Government under the CRC Account. On January 23, 2006, CEMIG and theState Government executed a Fourth Amendment to the CRC Account Agreement,under which the State Government agreed to pay its debt in 61 semi-annualpayments and irrevocably authorized us to retain 65% of the dividends andinterest on capital due to it through June 30, 2035 to offset amounts dueunder the CRC Account Agreement. However, no assurance can be given that we will be able to pay dividendssufficient to allow us to retain dividends due to the State Government in theamount necessary to cover the repayment of the full amount of the principal andinterest due under the CRC Account.  Inaddition, a fifth amendment to the CRC Account is currently being considered,to adjust the outstanding balance of the CRC Agreement in accordance with aprovision in the Fourth Amendment in which the parties recognized that therewas a disagreement regarding the outstanding balance of the CRC Agreement atDecember 31, 2004. See “Item 10. Additional Information—Material Contracts—CRCAccount Agreement”.

*We arestrictly liable for any damages resulting from inadequate rendering ofelectricity services, and our contracted insurance policies may not fully coversuch damages.*

Under Brazilian law, we are strictly liable for directand indirect damages resulting from the inadequate rendering of electricitytransmission and distribution services. In addition, the damages caused to endconsumers as a result of interruptions or disturbances arising from thegeneration, transmission or distribution systems, whenever these interruptionsor disturbances are not attributed to an identifiable member of the OperadorNacional do Sistema (National System Operator, or “ONS”) or the ONS itself,shall be shared among generation, distribution and transmission companies.Until a final criteria is defined, the liability for such damages shall beshared in the proportion of 35.7% to distribution agents, 28.6% to transmissionagents and 35.7% to generation agents. Therefore,our business, results of operations and financial condition may be adverselyaffected.

*We aresubject to rules and limits applied to levels of public sector borrowingand to restrictions on the use of certain funds we raise, which could preventus from obtaining financing.*

As a state controlled company, we are subject torules and limits on the level of credit applicable to the public sectorissued by the National Monetary Council and by the Central Bank. Theserules set certain parameters and conditions for financial institutions tobe able to offer credit to public sector entities. Thus, if our operations donot fall within these parameters and conditions, we may have difficulty inobtaining financing from Brazilian financial institutions, which could createdifficulties in the implementation of our investment plan or in refinancing ourfinancial obligations. Brazilian legislation also establishes that astate-controlled company, in general, may only use proceeds of external orlocal transactions (debt, including bonds) to refinance financial obligations. 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 arecontractual restrictions on our capacity to incur debt.*

6

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

*We couldbe penalized by ANEEL for failing to comply with the terms of our concessionagreements, which could result in fines, other penalties and, depending on theseverity of non-compliance, expropriation of the concession agreements.*

We conduct our generation, transmission anddistribution activities pursuant to concession agreements entered into with theFederal Government through ANEEL. ANEEL may impose penalties on us if we failto comply with any provision of the concession agreements, including compliancewith the established quality standards. Depending on the severity of thenon-compliance, these penalties could include:

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

·                                          injunctionsrelated to the construction of new facilities and equipment;

·                                          restrictionson the operation of existing facilities and equipment;

·                                          temporarysuspension from participating in bidding processes for new concessions;

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

·                                          terminationof the concession.

In addition, the FederalGovernment has the power to terminate any of our concessions prior to the endof the concession term in the case of bankruptcy or dissolution, or by means ofexpropriation for reasons related to the public interest.

We cannot assure you that ANEEL will not imposepenalties or terminate our concessions in the event of a breach. Anycompensation we may receive upon the termination of the concession contract maynot be sufficient to compensate us for the full value of certain investments.If any of our concession agreements are terminated and we are at fault, theeffective amount of compensation could be reduced through fines or otherpenalties. Termination or imposition of penalties could adversely affect ourbusiness, results of operations and financial condition.

#### *We are uncertain as to the renewal of ourconcessions.*

We carry out our power generation, transmission anddistribution activities pursuant to concession agreements entered into with theFederal Government. The Brazilian Constitution requires that all concessionsrelating to public services be awarded through a bidding process. In 1995, inan effort to implement these constitutional provisions, the Federal Governmentadopted certain laws and regulations, known collectively as the ConcessionsLaw, governing bidding procedures in the electricity industry. In accordancewith the 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 theFederal Government by the Concessions Law with respect to new concessioncontracts and the renewal of existing concessions, and given the lack of long-standingprecedents with respect to the Federal Government’s exercise of such discretionand interpretation and application of the Concessions Law, we cannot assure youthat new concessions will be obtained or that concessions will be renewed onterms as favorable as those currently in effect. See “Item 4. Information onthe Company—Competition—Concessions” and “The Brazilian PowerIndustry—Concessions” in Annex A. Non-renewal of our concessions couldadversely affect our business, results operations and financial condition.

#### *The present structure of the Brazilian electricity sector is highlyconcentrated in hydroelectric generation, which makes it subject to certainrisks.*

7

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The Brazilian electricity industry is highlyconcentrated in hydroelectric generation and faces a natural limitation on itsgeneration capacity, as hydroelectric power plants cannot generate moreelectricity than is made possible by the country’s water resources. As aresult, natural factors may affect our generating capacity, by increasing orreducing the level of reservoirs. Control of the level of reservoirs by the ONSseeks to optimize the level of water available for hydroelectric generation ineach of the power plants associated with the respective reservoirs. In thiscontext, the ONS could, for example, prevent a generating plant located at thebeginning of a river from increasing its throughput of water, if this increasewere to negatively affect other plants further downstream. In the same way, theONS may decide to increase thermal generation and reduce hydro generation inorder to conserve water in the reservoirs.

Shortages and/or rationing due to adverse hydrologicalconditions not covered by the Energy Reallocation Mechanism (as described in “TheBrazilian Power Industry—Energy Reallocation Mechanism” Annex A) could resultin increased costs and reduced cash flow. In addition, if the new energy auctions under the newindustry model fail to result in an expansion in electricity generationcapacity to adequate levels to meet growing demand, rationing measures could beimplemented. Any limitation on our electricity generation capacity couldadversely affect our business, results of operations and financial condition.

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

We are currently engaged in the construction ofadditional hydroelectric plants and the evaluation of other potential expansionprojects. Our ability to complete an expansion project on time, within adetermined budget and without adverse economic effects, is subject to a numberof 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 maynot operate at designated capacity or may cost more to operate than we expect;

·              we may not be able to obtainadequate working capital to finance our expansion projects; and

·              we may encounter environmentalissues and claims by the local population during power plant construction.

If we experience these or other problems relating tothe expansion of our electricity generation, transmission or distributioncapacity, our ability to sell electric energy in amounts in line with ourprojections may be harmed and we may be exposed to increased costs.Consequently, we may fail to produce the revenues we anticipate in connectionwith such expansion projects.

#### *Impositions and restrictions by theenvironmental agencies could cause additional costs for us.*

Our operationsrelated to the generation, transmission and distribution of electricity as wellas to the distribution of natural gas, are subject to various federal, stateand municipal laws and regulations, and also to numerous requirements relatingto the protection of health and the environment.

Non-compliancewith environmental laws and regulations could, independently of the obligationto redress any damages that may be caused, result in criminal andadministrative sanctions being applied. Based on Brazilian legislation,criminal penalties such as restricting rights, and even imprisonment, may beapplied to individuals (including managers of legal entities), and penaltiessuch as fines, restriction of rights or community service may be applied tolegal entities. With respect to administrative sanctions, depending on thecircumstances, the environmental authorities may impose warnings and fines,require partial or total suspension of activities; suspend or restrict taxbenefits or cancel or suspend financing lines from governmental lendingestablishments as well as prohibit the entity from contracting withgovernmental agencies, companies and authorities. Any of these events couldadversely affect our business, results of operations or financial condition.

#### *Our level of consumer default could adverselyaffect our business, results of operations and financial condition.*

As of December 31,2006, our total past due receivables from final consumers were approximatelyR$804 million, corresponding to 9.3% of our net revenue for 2006.  As of December 31, 2006, our allowancefor doubtful accounts was R$297 million. Approximately 10.6% of the past duereceivables were owed by entities in the public sector. We may be unable torecover debts from several municipalities and other defaulting clients. Ifthese debts are not totally or partially recovered, we will experience anadverse impact on our business, results of operations and financial condition.In addition, any consumer defaults in excess of our allowance fordoubtful accounts could have an adverse effect on our business, results ofoperations and financial condition.

*We maynot be able to complete our proposed capital expenditure program.*

8

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We plan to spendapproximately R$6.0 billion during the period from 2007 through 2011 on theconstruction of new power installations and the refurbishment and maintenanceof existing power plants and transmission and distribution systems. Our abilityto carry out this capital expenditure program is dependent upon a number offactors, including our ability to charge adequate rates for our services, ouraccess to domestic and international capital markets and a variety of operatingand other factors. In addition, our plans to expand our generation andtransmission capacity are subject to the competitive bidding process governedby the Concessions Law. We cannot give any assurance that we will have thefinancial resources to complete this program.

*Ourability to distribute dividends is subject to limitations.*

Whether or not youreceive a dividend depends on the amount of the mandatory distribution requiredunder our by-laws, whether our financial condition permits us to distributedividends under Brazilian law, and whether our shareholders, on therecommendation of our Board of Directors acting in its discretion, determinethat our financial condition warrants a suspension of the distribution ofdividends.

Because CompanhiaEnergética de Minas Gerais—CEMIG is a holding company with no revenue-producingoperations other than those of its operating subsidiaries, we will be able todistribute dividends to shareholders only if Companhia Energética de MinasGerais—CEMIG receives dividends or other cash distributions from its operatingsubsidiaries. The dividends that our regulated subsidiaries may distribute tous depend on our subsidiaries generating a sufficient profit in any givenfiscal year. Dividends can be paid out from accumulated profits from previousyears or from capital reserves. Such profits are calculated and paid inaccordance with Brazilian Corporate Law and the provisions of the by-laws ofeach of our regulated subsidiaries. Any capital reduction that would enable ourshareholders to receive distributions would be subject to the prior approval ofANEEL.

*We operatewithout general third party liability and catastrophe insurance policies.*

We do not havegeneral third party liability insurance covering accidents and have not askedfor bids relating to this type of insurance. In addition, we have not asked forbids for, nor do we carry, insurance coverage for major catastrophes affectingour facilities such as earthquakes and floods, for business interruption riskor for operating system failures. Accidents or catastrophic events mayadversely affect our business, results of operations or financial condition.See “Item 10. Additional Information—Insurance.”

*We willneed short-term funds to pay and refinance our obligations.*

OnDecember 31, 2006, our total debt was R$6,524 million, of which R$691million matures in 2007. We will need funds in the short term to pay andrefinance these obligations. For this reason, we intend to refinance our debtprofile in 2007 to lengthen maturities. We plan to raise approximately R$600million in 2007.

We cannot assure you that we will be able to raisethese funds prior to the maturities of our current debt obligations, in theamounts necessary or at competitive rates. If the refinancing does notsuccessfully take place, we may not be able to pay our debt. On the other hand,if we simply pay our debt without refinancing, our investment program couldsuffer significant delays, which could adversely affect our business, resultsof operations or financial condition.

*We mayincur losses in connection with pending litigation.*

We are currentlydefending several legal proceedings relating to civil, administrative,environmental, tax and other claims. These claims involve a wide range ofissues and seek substantial amounts of money. Several individual disputesaccount for a significant part of the total amount of claims against us. Ourconsolidated financial statements include reserves relating to litigationclaims totaling R$245 million as of December 31, 2006 (excludinglabor-related matters) for probable and reasonably estimable losses and expenseswe may incur in connection with pending litigation. In the event that ourreserves for litigation claims prove to be insufficient, the payment oflitigation claims in an amount in excess of the reserved amounts could have anadverse effect on our business, results of operations or financial condition.

*Labor-relatedlegal claims, strikes and/or work stoppages could have an adverse impacton our business.*

Substantially allof our employees are covered by Brazilian labor legislation applicable toprivate sector employees. We have entered into a collective bargainingagreement with the labor unions representing most of these employees.

We are currentlydefending a number of labor-related claims brought by our employees thatgenerally relate to overtime and hazardous occupation compensation. As ofDecember 31, 2006, these employees were seeking, in the aggregate,approximately R$135.8 million in compensation, and at that date we had accrueda liability of approximately R$35 million for losses we expect from 

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theseclaims.****For a more detaileddiscussion of labor-related proceedings, see “Item 8. FinancialInformation—Legal Proceedings—Labor and Pension Fund Obligations.”

We have notexperienced any material labor unrest during the last six years, although in2006 three work stoppages did occur. Nevertheless, our operations might beinterrupted by a labor disturbance in the future. We do not carry insurance forlosses incurred as a result of business interruptions caused by labor action.In the event of a strike, we might face an immediate loss of revenue.

Contract disputes,strikes, legal claims or other types of conflicts relating to our employees orthe labor unions that represent them may have an adverse effect on ourbusiness, results of operations or financial condition and our ability tomaintain ordinary service levels or otherwise operate our business in themanner that our consumers expect.

*Foreignshareholders may not be able to enforce judgments against our directors orofficers.*

All of our directors andofficers named in this annual report reside in Brazil. Substantially all of ourassets, as well as the assets of these persons, are located in Brazil. As aresult, it may not be possible for foreign shareholders to effect service ofprocess within the United States or other jurisdictions outside Brazil uponthese persons, attach their assets, or enforce against them or us in UnitedStates courts, or the courts of other jurisdictions outside Brazil, judgmentspredicated upon the civil liability provisions of the securities laws of theUnited States or the laws of such other jurisdictions. See “Item 10.Additional Information—Difficulties of Enforcing Civil Liabilities AgainstNon-U.S. Persons.”

*Effectivecontrol of CEMIG is subject to judicial challenge.*

In connection with the purchase in 1997 ofapproximately 33% of our common shares by Southern Electric BrasilParticipações Ltda., or Southern, the State Government entered into ashareholders’ agreement with Southern, granting Southern control over certainsignificant corporate decisions. In 1999, the State Government filed a lawsuitseeking to nullify the shareholders’ agreement on constitutional grounds. InAugust 2001, after several rulings and appeals, the Minas Gerais StateCourt of Appeals ruled that the shareholders’ agreement is null and void. InDecember 2003, this ruling was appealed to the Superior Tribunal deJustiça (Superior Court of Justice), which upheld the Minas Gerais State Courtof Appeals ruling. The decision of the Superior Court of Justice is subject toreview and therefore the effective control of CEMIG remains subject to furtherjudicial challenge in the Supreme Court (Supremo Tribunal Federal). See “Item8. Financial Information—Legal Proceedings—Shareholders’ Agreement” and “Item 10.Additional Information—Material Contracts—Shareholders’ Agreement, datedJune 18, 1997, between the State Government and Southern.”

## **Risks Relating to Brazil**

#### *The Federal Government exercises significantinfluence on the Brazilian economy. Political and economic conditions can havea direct impact on our business.*

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

·              fluctuations in the exchange rate;

·              inflation;

·              instability of prices;

·              changes in interest rates;

·              fiscal policy;

·              other political, diplomatic,social and economic developments which may affect Brazil or the internationalmarkets;

·              control on capital flow; and

·              limits on foreign trade.

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Measures by theBrazilian government to maintain economic stability, and also speculation onany future acts of the government, can generate uncertainties in the Brazilianeconomy and increased volatility in the domestic capital markets, adverselyaffecting our business, results of operations or financial condition. If thepolitical and economic situations deteriorate, we may face increased costs.

Brazil’s Presidentwas recently reelected for another four-year term. The President hasconsiderable power to determine governmental policies and actions that relateto the Brazilian economy and, consequently, affect the operations and financialperformance of businesses, such as CEMIG. In his new term, the President mayseek to implement new policies and/or make changes to existing governmentalpolicies. We cannot make any assurances that such policies would not have anadverse effect on our business, results of operations or financial condition.

*Inflationand certain governmental measures to curb inflation may contributesignificantly to economic uncertainty in Brazil and could harm our business andthe market value of our shares, the ADSs and the common share ADSs.*

Brazil has in the past experienced extremely high rates ofinflation. Inflation, and some of the Federal Government’s measures taken in anattempt to curb inflation, have had significant negative effects on theBrazilian economy. Since the introduction of the *real*in 1994, Brazil’s inflation rate has been substantially lower than in previousperiods. However, inflationary pressures persist, and action taken in an effortto curb inflation, coupled with speculation about possible future governmentalactions, have contributed to economic uncertainty in Brazil and heightenedvolatility in the Brazilian securities market. According to theAmplified National Consumer Price Index, or IPCA, Brazilian annual inflationrates in 2004, 2005 and 2006 were 7.6%, 5.7% and 3.1%, respectively. Noassurance can be given that inflation will remain at these levels.

Future measurestaken by the Federal Government, including interest rate increases,intervention in the foreign exchange market and actions to adjust or fix thevalue of the *real* may trigger increases ininflation, and consequently, have adverse economic impacts on our business,results of operations and financial condition. If Brazil experiences highinflation in the future, we may not be able to adjust the rates we charge ourconsumers to offset the effects of inflation on our cost structure.

Substantiallyall of our cash operating expenses are denominated in *reais*and tend to increase with Brazilian inflation. Inflationary pressures may alsohinder our 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 ADSs and common share ADSs.

*Exchangerate instability may adversely affect our business, results of operations andfinancial condition and the market price of our shares, the ADSs and the commonshare ADSs.*

TheBrazilian currency has been devalued periodically during the last four decades.Throughout this period, the Federal Government has implemented various economicplans and utilized a number of exchange rate policies, including suddendevaluations, periodic mini-devaluations during which the frequency ofadjustments has ranged from daily to monthly, floating exchange rate systems,exchange controls and dual exchange rate markets. Although over long periodsdepreciation of the Brazilian currency generally has correlated with the rateof inflation in Brazil, devaluation over shorter periods has resulted insignificant fluctuations in the exchange rate between the Brazilian currencyand the U.S. dollar and currencies of other countries.

In 2002,the *real* depreciated 52.3% against the U.S.dollar, due in part to political uncertainty surrounding the Brazilianpresidential elections and the global economic slowdown. Although the *real*appreciated 39.71% against the U.S. dollar from 2003 to2006, no assurance can be given that the *real*will notdepreciate against the dollar again. On December 29, 2006, the noon buying U.S.dollar/*real* exchange rate wasR$2.1342/US$1.00. See “— Exchange Rates”.

Asof December 31, 2006, approximately 10.13% of our total indebtedness fromloans, financings and debentures was denominated in currencies other than the *real* (83.81% in U.S. dollars). If the U.S.dollar/real exchange rate appreciates, our financing expenses will increase andour results of operations and financial condition could be adversely affected.Although 45.84% of our debt denominated in foreign currencies is subject tocurrency swaps that convert our foreign currency obligations into *reais* in order mitigate this risk.

We also have entered into certain power purchase agreements that are dollardenominated.  We cannot assure you that these derivatives instruments and the proceedsfrom our dollar-denominated purchase agreements will be sufficient to avoid anadverse effect on our business, results of operations and financial conditionin case of unfavorable exchange rate fluctuations. See “Item 11. —Quantitative and Qualitative Disclosures about Market Risk—Exchange Rate Risk”for information about our foreign exchange risk hedging policy.

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*Changes in economic and market conditionsin other countries, especially Latin American and emerging market countries,may adversely affect our business, results of operations and financialcondition, as well as the market price of our shares, the ADS and the commonshare ADSs.*

The marketvalue of securities of Brazilian companies is affected to varying degrees byeconomic and markets conditions in other countries, including other LatinAmerican and emerging market countries. Although economic conditions in suchcountries may differ significantly from economic conditions in Brazil,investors’ reactions to developments in these other countries may have anadverse effect on the market value of securities of Brazilian issuers. Crisesin other emerging market countries may diminish investor interest in securitiesof Brazilian issuers, including us. This could also make it more difficult forus access the capital markets and finance our operations in the future onacceptable terms or at all. Due to the characteristics of the Brazilianelectricity industry (which requires significant investments in operatingassets) and due to our financing needs, if access to the capital and creditmarkets is limited, we could face difficulties in completing our investmentplan and refinancing our obligations which could adversely affect our business,results of operations and financial condition.

*Political and economic instability inBrazil may affect us.*

During Luis Inácio Lula da Silva’s first term asPresident of Brazil, allegations of unethical or illegal conduct were made withrespect to certain figures in his government, including legislators and partyofficials. Some of these allegations are still under investigation by Brazilianauthorities, and relate to alleged violations of rules relating toelection laws and campaign financing, allegations of influencing officials andother allegedly corrupt behavior. Several members of both the FederalGovernment and the political party of the current President (including thePresident’s chief of staff) have resigned as a result. If the allegations orinvestigations lead to a materially adverse perception of Brazil amonginvestors, the trading value of our shares, the ADSs and the common share ADSsmay decline and our ability to access international markets would suffer. Inaddition, any political instability resulting from the allegations orinvestigations could cause us to re-evaluate our strategies if the Brazilianeconomy suffers as a result.

## **Risks Relating to the Preferred Shares,ADSs  and Common Share ADSs**

#### *The preferred shares and ADSs and the commonshare ADSs generally do not have voting rights.*

In accordance withthe Brazilian Corporate Law and our by-laws, holders of the preferred shares,and, by extension, holders of the ADSs representing preferred shares, are notentitled to vote at our shareholders’ meetings, except in very limitedcircumstances. Holders of ADSs may also encounter difficulties in the exerciseof certain rights, including limited voting rights. Under some circumstances,such as failure to provide the depositary with voting materials on a timelybasis, holders of ADSs and common share ADSs may not be able to vote byinstructing the depositary.

#### *Exchange controls and restrictions onremittances abroad may adversely affect holders of ADSs and common share ADSs.*

You may beadversely affected by the imposition of restrictions on the remittance toforeign investors of the proceeds of their investments in Brazil and theconversion of *reais* into foreigncurrencies. 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, as the case may be, 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 anadverse impact on the taxes applicable to a disposition of our shares, ADSs orcommon share ADSs.*

LawNo. 10,833 of December 29, 2003 provides that the disposition ofassets located in Brazil by a non-resident to either a Brazilian resident or anon-resident is subject to taxation in Brazil, regardless of whether thedisposition occurs outside or within Brazil. This provision results in theimposition 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 ADSs andcommon share ADSs between non-residents of Brazil. However, in the event thatthe disposition of assets is interpreted to include a disposition of our ADSsand common share ADSs, this tax law would accordingly result in the impositionof withholding taxes on the disposition of our ADSs and common share ADSs by anon-resident of Brazil to another non-resident of Brazil.

#### *Exchanging ADSs or common share ADSs forunderlying shares may have unfavorable consequences.*

The Brazilian custodianfor the preferred shares and common shares must obtain an electroniccertificate of registration from the Central Bank to remit U.S. dollars abroadfor payments of dividends, any other cash distributions, or upon thedisposition of the 

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shares and sales proceedsrelated thereto. If you decide to exchange your ADSs or common share ADSs forthe underlying shares, you will be entitled to continue to rely, for five businessdays from the date of the exchange, on the depositary bank’s electroniccertificate of registration. Thereafter, you may not be able to obtain andremit U.S. dollars abroad upon the disposition of the shares, or distributionsrelating to the shares, unless you obtain your own certificate of registrationunder Resolution No. 2,689 of January 26, 2000, of the Brazilian *Conselho Monetário Nacional*, or NationalMonetary Council, which entitles foreign investors to buy and sell on theBrazilian stock exchanges. If you do not obtain this certificate, you will besubject to less favorable tax treatment on gains with respect to the preferredor common shares. If you attempt to obtain your own certificate ofregistration, you may incur expenses or suffer significant delays in theapplication process. Obtaining a certificate of registration involvesgenerating significant documentation, including completing and filing variouselectronic forms with the Central Bank and the *Comissãode Valores Mobilíarios* (the Brazilian securities regulatory body),or the CVM. In order to complete this process, the investor will usually needto have a consultant or attorney who has expertise in Central Bank and CVMregulations. Any delay in obtaining this certificate could adversely impactyour ability to receive dividends or distributions relating to the preferredshares or common shares abroad or the return of your capital in a timelymanner. If you decide to exchange your preferred shares or common shares backinto ADSs or common share 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 assureyou that the depositary bank’s certificate of registration or any certificateof foreign capital registration obtained by you may not be affected by futurelegislative or other regulatory changes, or that additional Brazilianrestrictions applicable to you, the disposition of the underlying preferredshares or the repatriation of the proceeds from disposition could not beimposed in the future.

#### *The r**elative volatility and illiquidity of the Brazilian securities marketmay adversely affect ourshareholders.*

Investing in LatinAmerican securities, such as the preferred shares, common shares, ADSs orcommon share ADSs, involves a higher degree of risk than investing insecurities of issuers from countries with more stable political and economicenvironments and such investments are generally considered speculative innature. These investments are subject to certain economic and political risks,such as, among others:

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

·                                          restrictionson foreign investment and on repatriation of capital invested.

The Braziliansecurities market is substantially smaller, less liquid, more concentrated andmore volatile than major securities markets in the United States. This maysubstantially limit your ability to sell the shares underlying your ADSs orcommon share ADSs at a price and time at which you wish to do so. The *Bolsa de Valores de São Paulo* — *BOVESPA*, or São Paulo Stock Exchange, theonly stock exchange in Brazil upon which shares are traded, had a marketcapitalization of approximately US$722 billion as of December 31, 2006 andan average daily trading volume of approximately US$948 million for 2006. Incomparison, the New York Stock Exchange, Inc., or the NYSE, had a marketcapitalization of US$25.0 trillion as of December 31, 2006 and an averagedaily trading volume of approximately US$65 billion for 2006.

There is alsosignificantly greater concentration in the Brazilian securities market than inmajor securities markets in the United States. The ten largest companies in termsof market capitalization represented approximately 51.2% of the aggregatemarket capitalization of the São Paulo Stock Exchange as of December 31,2006. The top ten stocks in terms of trading volume accounted for approximately46.1% of all shares traded on the São Paulo Stock Exchange in 2006. See “Item9. The Offer and Listing—Trading Market.”

#### *Shareholders may receive reduced dividendpayments if our net income does not reach certain levels.*

Under theBrazilian Corporate Law and our by-laws, we must pay our shareholders amandatory distribution equal to at least 50% of our net income for thepreceding fiscal year, based on our financial statements prepared in accordancewith the accounting practices adopted in Brazil, with holders of preferredshares having priority of payment. In addition, our by-laws require us to payholders of our preferred shares annual dividends equal to the greater of 10% ofthe par value of our shares or 3% of the book value of our shares. If we do nothave net income or our net income is insufficient in a fiscal year, ourmanagement may recommend at the annual shareholders’ meeting in respect of thatyear that the payment of the mandatory dividend should not be made. However,under the guarantee of the State Government, our controlling shareholder, aminimum annual dividend of 6% of par value would in any event be payable to allholders of common shares and preferred shares issued up to August 5, 2004(other than 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.

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#### *Holders of the ADSs and common share ADS and holders of our shares haveless well-defined shareholders’ rights than holders of shares in U.S.companies.*

Our corporategovernance, disclosure requirements and accounting standards applicable toBrazilian companies are governed by our by-laws and by the Brazilian CorporateLaw, which may differ from the legal principles that would apply if we wereincorporated in a jurisdiction in the United States, such as Delaware or NewYork, or in other jurisdictions outside Brazil. Your rights to protect yourinterests relative to actions taken by our Board of Directors or by our controllingshareholder may be less well defined and less well supported by establishedrules and judicial precedents than under the laws of certain jurisdictionsoutside Brazil.

Although Brazilianlaw imposes restrictions on insider trading and price manipulation, theBrazilian securities market is not as highly regulated and supervised as theU.S. securities market or markets in certain other jurisdictions. In addition,rules and policies against self-dealing and regarding the preservation ofshareholder interests are less developed and enforced in Brazil than in theUnited States, potentially disadvantaging holders of the preferred shares,common shares, ADSs and common share ADSs.

#### *Shares eligible for future sale may adversely affect the market priceof our shares and the ADSs and common share ADS.*

Sales of asubstantial number of shares or the perception that such sales could take placecould adversely affect the prevailing market price of our shares, the ADSs andthe common share ADSs. As a consequence of the issuance of new shares or salesby existing shareholders, the market price of our shares and, by extension, theADSs and common share ADSs, may decrease significantly.

#### *You may not be able to exercise preemptive rights with respect to oursecurities.*

You may not beable to exercise the preemptive rights relating to the shares underlying yourADSs or common share ADSs unless a registration statement under the UnitedStates Securities Act of 1933, as amended, or the Securities Act, is effectivewith respect to those rights or an exemption from the registration requirementsof the Securities Act is available. We are not obligated to file a registrationstatement with respect to the shares relating to these preemptive rights, andwe cannot assure you that we will file any such registration statement. Unlesswe file a registration statement or an exemption from registration applies, youmay receive only the net proceeds from the sale of your preemptive rights bythe depositary or, if the preemptive rights cannot be sold, they will beallowed to lapse.

# **Item 4.****    Informationon the Company**

#### **Organization and Historical Background**

We were organizedin Minas Gerais, Brazil on May 22, 1952 as a *sociedade de economia mista* (a state-controlled mixedcapital company) with limited liability and indefinite duration, pursuant toMinas Gerais State Law No. 828 of December 14, 1951 and itsimplementing 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 order to comply with legal andregulatory provisions pursuant to which we were required to unbundle ourvertically integrated businesses, in 2004 we incorporated two wholly-ownedsubsidiaries of CEMIG — Cemig Geração eTransmissão S.A., referred to as Cemig Generation and Transmission, and Cemig Distribuição S.A., referred toas Cemig Distribution. Cemig Generationand Transmission and CemigDistribution were created to carry out the activities of electricitygeneration and transmission, and distribution, respectively.

On August 4, 2004 the State of MinasGerais issued Law 15,290 governing the corporate restructuring of CEMIG.Subsequently, ANEEL, by Resolution 407/2004 dated December 23, 2004,approved our proposal for transfer of the concessions, assets and liabilitiesto the two new companies created, with CEMIG being maintained as a holdingcompany. On December 30, 2004, an extraordinary general shareholders’meeting of CEMIG authorized the transfer of assets and liabilities of CEMIG tothe two wholly-owned subsidiaries — Cemig Generation and Transmission and CemigDistribution. On the same date, extraordinary general shareholders’ meetings ofCemig Generation and Transmission and of Cemig Distribution were held andapproved capital increases of such subsidiaries. Pursuant to such shareholders’meetings, CEMIG subscribed newly issued shares of each such subsidiary, whichshares were paid in with assets of CEMIG. As a consequence of this process, theassets and liabilities of the power generation and transmission operations andelectricity distribution operations were transferred to Cemig Generation andTransmission and Cemig Distribution, respectively. Cemig Generation andTransmission and Cemig Distribution began their operations on January 1,2005.

The following chart shows our corporatestructure as of May 31, 2007.

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**COMPANIES AND CONSORTIA OF THE CEMIG GROUP**

Through our subsidiaries, we believe we arethe 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. Until 1997, we had individual concessions for each ofour generation facilities and for various regions within our distribution area.On July 10, 1997, we entered into new concession agreements with ANEELthat consolidated 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. On thesame date, we also entered into a new concession agreement with ANEEL withrespect to our transmission operations. In connection with the unbundling, ourconcession for distribution services was transferred to Cemig Distribution onSeptember 16, 2005, and our concession for transmission services wastransferred to Cemig Generation and Transmission on September 16, 2005.Our generation concession will also be transferred to Cemig Generation andTransmission, although we cannot assure you of the timing of that transfer asit will be determined by ANEEL.

OnDecember 31, 2006, we generated electricity at 51 hydroelectric plants,four thermoelectric plants and one wind farm, and had a total installedcapacity of 6,523 MW. At the same date, we owned and operated 3,040 milesof transmission lines and 255,095 miles of distribution lines. We holdconcessions to distribute electricity in 96.7% of the territory of MinasGerais.

The Brazilianelectricity industry has undergone extensive regulatory restructuring as aresult of which our electric generation, transmission and distributionbusinesses have been and will continue to be subject to increased competition.For a more detailed description of regulatory changes that affect our business,see “The Brazilian Power Industry” in Annex A.

Pursuant to MinasGerais state legislation, our by-laws were amended in 1984 to allow us toparticipate in an expanded range of activities relating to the energy sectorthrough separate companies. In 1986, we created *Companhia de Gás de Minas Gerais*—GASMIG, or Gasmig, as asubsidiary to undertake the distribution of natural gas through pipelineslocated in Minas Gerais. In December 2004, we sold a 40% stakein Gasmig to Petrobras Gás S.A. — Gaspetro, or Gaspetro, and TSS ParticipaçõesS.A., or TSS, both of which are wholly-owned subsidiaries of Petrobras S.A.,for approximately R$154 million. See “Item 10. Additional Information—MaterialContracts—Gasmig Shareholders Agreement and Association Agreement.”

Additional MinasGerais state legislative changes enacted in 1997 authorized us to participatein non-energy activities that can be carried out using our operating assets. InJanuary 1999, we incorporated *Empresade Infovias S.A.*, a telecommunication service provider, as a jointventure with *AES Força Empreendimentos Ltda.*,part of the AES Corporation Group. In 2002, we purchased *AES Força Empreendimentos Ltda.*’s interestin Empresa de Infovias S.A. We also provide consulting services and haveentered into consulting agreements with electricity companies in severalcountries.

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## **Investment in Light**

Through Rio MinasEnergia Participações S.A. (“RME”), we also hold an indirect interest in LightS.A. (“Light”).  RME is a company formedby us together with Andrade Gutierrez Concessões S.A., Luce Brasil Fundo deInvestimento em Participações and Pactual Energia Participações S.A., in whicheach partner has a 25% interest.  OnMarch 28, 2006, RME signed an agreement (the “EDFI Agreement”) with EDFInternational S.A. (“EDFI”) to purchase from EDFI 88.84% of its shares ofLight, which represented 79.39% of the total registered capital of Light at thetime of the purchase.

Completion of thetransaction was subject to approval by ANEEL, issuance of a Ministerial Decreein France after a Statement of Opinion by the Commission des Participants etdes Transferts of France (CPT), and also agreement of third parties, undercontracts signed by Light or by Light Serviços de Electricidade S.A. (“LightSESA”), including BNDES Participações S.A. - BNDESPar.  On August 10, 2006 the transfer to RME of theshares in Light and in Lidil Comercial owned by EDFI was completed. Therestructuring and change in the controlling block was duly authorized by ANEEL,through Authorizing Resolution 641/06.

On May 16, 2007, theBrazilian Development Bank (“BNDES”), which held convertible debentures issuedby Light, exercised its option and converted 90% of the convertible debenturesinto shares. As a result of this conversion, representingapproximately R$713 million, BNDES became the holder of 31.44% of thetotal capital of Light.  The conversionby BNDES of its convertible debentures of Light into shares of Light dilutedthe percentage holdings of the other stockholders of Light.  RME, which controls Light, had its percentageholding reduced from 79.39% to 54.17%. BNDES became the second largeststockholder, outside the control block, now holding a larger percentage thanthe previous controlling stockholder, EDFI, which had its interest reduced from9.98% to 6.82%.

InMarch 2006, CEMIG entered into an agreement with its partners in one of CEMIG’sunconsolidated equity investments, which gives CEMIG an option to purchase its partners’ interests in the powergeneration assets of the underlying equity investee.  The option price amounted to R$1,124 millionas of December 31, 2006. The option price is restated based on the IGP-Mvariation plus interest of 13.44% per year.

Pursuantto the agreement, theoption expires in two years on March 23, 2008 and, under certain restrictedconditions, may be extended for an additional two-year period. The exercise ofthe option is contingent upon the completion of a corporate restructuring bythe equity investee to spin-off its power generation assets. 

TheCompany’s managementbelieves that the possibility that CEMIG will exercise this option is remoteconsidering that its terms are currently economically unfeasible.

*The Business*

Light**has a history of more than 100 years in Brazil. It wascreated on May 31, 1905, to provide gas transmission and supply services in thecity of Rio de Janeiro. In the same year it acquired the city’s gas lightingconcession holder.

The company has headoffice and is incorporated in the city of Rio de Janeiro, in the State of Riode Janeiro, at Avenida Marechal Floriano 168, 2nd Floor, Corridor A, Centro, and its corporatepurpose is to provide electricity generation, transmission and distributionservices, and other related services, directly or indirectly though othercompanies.

*Ownership* Structure

The following chart shows Light’scorporate structure as of May 31, 2007:

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******

***Light Group Activities***

***The main activities of LightGroup are as follows :***

Generation.Light Energia S.A. (“Light Energia”) is involved in the generation ofelectricity.  Light Energia uses thehydroelectric energy of the Paraíba do Sul and Ribeirão das Lajes rivers forits  generation plants located in theStates of Rio de Janeiro and São Paulo. The maximum total capacity of thegenerating system of Light Energia is 852 MW. This installed system is made upof five generating plants, two elevation plants and other hydraulic structuressuch as reservoirs, dams, canals, dykes, spillways, tunnels, rotor channels anddam gates.

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

In 2006 the companyinvoiced a total of 18,260 GWh. The breakdown of these sales by consumer groupwas approximately 39% from the residential segment, 31% from the commercialsegment, 13% from the industrial segment and 17% from other consumers.

Energy trading.Light Esco Ltda., a wholly owned subsidiary of Light, is an energy tradingcompany which operates in the free market (ACL) and also deals with alternativeenergy sources and is an “ESCO” (Energy Services Company), a provider of energyand infrastructure services, focused on energy solutions for its clients.

*Operational Data*

Thefollowing table shows Light’s principal operational data as of December 31,2006 and 2005.
|                                                     | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Concession area  (km2)                         |       | 10,970                          |       | 10,970                          |       |
| Municipalities  served                              |       | 31                              |       | 31                              |       |
| Consumer units  billed                              |       | 3,801,692                       |       | 3,775,342                       |       |
| Sourced energy  (GWh)                               |       | 25,264                          |       | 25,559                          |       |
| Energy billed  and internal consumption (GWh)       |       | 18,260                          |       | 19,139                          |       |
| Installed  generation capacity (MW)(1)              |       | 852                             |       | 852                             |       |
| Assured energy  (average MW)                        |       | 637                             |       | 637                             |       |
| Number of  substations                              |       | 96                              |       | 96                              |       |
| DEC – Consumer  Outage Time per 12 months      |       | 7.4                             |       | 8.8                             |       |
| FEC – Consumer Outage  Frequency per 12 months |       | 5.5                             |       | 7.7                             |       |

 

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(1)  Including elevationstations, the capacity is 973.6MW.

*The Market*

Electricity invoiced byLight SESA in 2006 totaled 18,260 GWh, compared to 19,139 GWh in 2005, areduction in sales volume of 4.6%, mainly due to migration of captive consumersto the free contracting environment.
| Number of Light consumers by category | ** ** | **December 31,   2006** | ** ** | **December 31,   2005** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| Residential                                                    |       | 3,495,597                         |       | 3,465,954                         |       |
| Industrial                                                     |       | 13,380                            |       | 14,513                            |       |
| Commercial,  services and others                               |       | 271,568                           |       | 273,928                           |       |
| Rural                                                          |       | 10,641                            |       | 10,559                            |       |
| Public  authorities                                            |       | 8,844                             |       | 8,750                             |       |
| Public  illumination                                           |       | 148                               |       | 148                               |       |
| Public service                                                 |       | 1,187                             |       | 1,155                             |       |
| Own consumption                                                |       | 328                               |       | 333                               |       |
| Total                                                          |       | 3,801,692                         |       | 3,775,342                         |       |

 

The highest percentage ofLight’s energy sales are to residential consumers. The total number of clientsbilled by Light in 2006 was 3,801,692 consumer units, 0.7% more than in 2005,with 26,350 new clients linked to Light’s distribution network in 2006.

Energy sourced by Lightin 2006 totaled 25,940 GWh, of which 8,288 GWh came from energy purchases fromItaipu; 11,907 GWh from auctions; 6,351.0 GWh from Norte FluminenseThermoeletric Power Plant, 224.2 GWh from the *Program toEncourage Alternative Energy Sources*–*PROINFA*,and 333 GWh from Tractebel Energia S.A. Through an auction held on December 7, 2004, quantities of 380 averageMW and 130 average MW were contracted, under 8-year contracts, with supplybeginning in January of the years 2005 and 2006, respectively. These amountsmake up 95% of the limit of energy to be sold by Light (assured energy).

*Performance Indicators*

At the end of 2006 theindicators that measure quality of supply by Light SESA (DEC – Consumer OutageDuration in hours per year, and FEC, Number of Outages Per Year) were 7.4 and5.5 for Light respectively, compared to 8.8 and 7.7 in 2005.

*Lossesand Default*

Light’s energy losses in2006 totaled 6,251 GWh, representing 25.5% of Light’s total load, in comparisonwith a loss of 5,899 GWh in 2005, or 23.6% of Light’s load.

The change in the totalpercentage of losses from 2005 reflects the effect of a lower average number ofdays’ billing in 2006, compared with 2005 (two days’ less high voltage billingand three days’ less low voltage billing), the impact on load and energyinvoiced of the migration of 10 clients from the captive market to the freemarket, and the reduction, as from September, of the volume of electricityrecovery actions due to the implementation and stabilization of the newcommercial management system (CCS-SAP).

Light has been makingefforts to reduce default, especially through negotiations with the publicauthorities, Light’s main debtors. In the fourth quarter of 2006 Lightnegotiated the amount of R$77.8 million with six municipalities. Also in 2006,a total of R$134.8 million was negotiated with the water utility Cedae. An ICMStax credit in the amount of R$43.3 million was deducted from this amount, to becredited in 40 installments, the remaining R$91.5 million to be paid in 46installments using a mechanism of compulsory guaranteed transfer of amountsfrom Cedae’s current account.

*CapitalExpenditure*

Light invested a total ofR$322 million in 2006 in the acquisition of fixed assets and improvements toand expansion of the distribution system, expansion of the fleet, combat oflosses and waste of electricity and the improvement of the billing system, 

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contributing toward moreefficient service and better quality for its clients. This amount represented a16.7% increase from the same period of the previous year, when capitalexpenditure were R$276 million.

*Concession Agreement*

On June 4, 1996 Lightsigned Concession Agreement 001/96 with the Federal Government, regulatingcommercial operation by Light of public electricity generation, distributionand transmission services in the State of Rio de Janeiro, under the terms of adecree issued on May 28, 1996.

The electricity distributionconcession area under Light’s Concession Agreement 001/96 is the metropolitanregion of the city of Rio de Janeiro. The contract expires 30 years from thedate of its signature, on June 4, 2026. This contract can be renewed upon application by Light, which must bepresented 36 months or more before the termination of the period of thecontract, accompanied by proofs of regularity and compliance with tax andSocial Security obligations and the liabilities and charges undertaken with theFederal Government.

***Acquisition of Transmission Concession Holders***

On May 4, 2006, CEMIG, inpartnership with MDU Brasil Ltda. and Brascan Brasil Ltda., entered into sharepurchase and sale contracts with Schahin Holding S.A. (“Schahin”) for theacquisition of 100% of Schahin’s (i) 50% ownership of the voting share capitalof electricity transmission concession holders Empresa Amazonense deTransmissão de Energia S.A., Empresa Paraense de Transmissão de Energia S.A.,Empresa Norte de Transmissão de Energia S.A. and Empresa Regional deTransmissão de Energia S.A. and (ii) 40% ownership of the voting capital ofelectricity transmission concession holder ECTE – Empresa Catarinense deTransmissão de Energia S.A.  The totalpurchase price for the transaction will be R$656 million.  Approval was obtained from ANEEL and BNDES,and this transaction closed on August 16, 2006.

In these companies’concession contracts, revenues to be earned in the final 15 years are50.0% lower than those in the first 15 years of the concession. Werecognize revenue on these contracts on a straight-line basis, in accordancewith the nature of the services provided.

*Description of the transmission concession holders*

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

Empresa Amazonense deTransmissão de Energia S.A. (“EATE”) was incorporated in March 2001 and beganoperations in February 2003, with the specific purpose of commercial operationof electricity transmission lines.  By aconcession contract dated July 12, 2001, granted by the Federal Governmentthrough ANEEL, EATE acquired the right to commercial operation of publicelectricity transmission service for a period of 30 years, renewable for thesame period.  This concession consists ofa 500kV transmission line connecting the substations of Tucuruí, Marabá,Açaílândia, Imperatriz and Presidente Dutra, in the states of Pará andMaranhão, totaling 577 miles. The provision of services of operation andmaintenance of the transmission lines is carried out by Eletronorte.

The ownership structureof the voting capital of EATE is as follows:

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

Empresa Catarinense deTransmissão de Energia S.A. (“ECTE”) was incorporated in August 2000 and beganoperating in March 2002, with the specific purpose of commercial operation ofelectricity transmission lines.  By aconcession contract datedNovember 1, 2000, granted by the Federal Government through ANEEL, ECTEacquired the right to commercial operation of public electricity transmissionservice for a period of 30 years, renewable for the same period.  This concession consists of a 500kV 

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transmission lineconnecting the substations of Campos Novos and Blumenau, in the State of SantaCatarina, totaling 157 miles. The provision of services of operation andmaintenance of the transmission lines is carried out by Celesc.

## The ownership structure of ECTE is as follows:

## *Empresa Norte deTransmissão de Energia S.A - ENTE*

Empresa Norte deTransmissão de Energia S.A. (“ENTE”) was incorporated in September 2002 andbegan operating in February 2005, with the specific purpose of commercialoperation of electricity transmission lines. By a concession contract dated December 11, 2002, granted by the Federal Governmentthrough ANEEL, ENTE acquired the right to commercial operation of publicelectricity transmission service for a period of 30 years, renewable for thesame period.  This concession consists ofa 500kV transmission line linking the substations of Tucuruí, Marabá andAçailândia, in the State of Pará, totaling 285 miles. The provision of servicesof operation and maintenance of the transmission lines will be executed byEletronorte.

## The ownership structure of ENTE is as follows:

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

Empresa Regional deTransmissão de Energia S.A. (“ERTE”) was incorporated in September 2002 andbegan operating in September 2004, with the specific purpose of operatingelectricity transmission lines.  By aconcession contract datedDecember 11, 2002, granted by the Federal Government through ANEEL, ERTEacquired the right to commercial operation of public electricity transmissionservice for a period of 30 years, renewable for the same period.  This concession consists of a 230kVtransmission line linking the substations of Vila do Conde and Santa Maria, inthe State of Pará, passing through the future substation to be built inCastanhal, totaling 96 miles. The provision of services of operation andmaintenance of the transmission lines is carried out by Eletronorte.

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## The ownership structure of ERTE is asfollows:

*EmpresaParaense de Transmissão de Energia S.A - ETEP*

Empresa Paraense deTransmissão de Energia S.A. (“ETEP”) was incorporated in March 2001 and beganoperating in August 2002, with the specific purpose of operating electricitytransmission lines.  By a concessioncontract dated July12, 2001, granted by the Federal Government through ANEEL, ETEP acquired theright of commercial operation of public electricity transmission service for aperiod of 30 years, renewable for the same period.  This concession consists of a 500kVtransmission line linking the substations of Tucuruí and Vila do Conde, in theState of Pará, totalling 201 miles. The provision of services of operation andmaintenance of the transmission lines is carried out by Eletronorte.

## The ownership structure of the voting capitalof ETEP is as follows:

## **Brazil’s Energy Market**

#### *General*

Traditionally, in the Brazilian electricity sector, generation, transmissionand distribution activities were conducted by a small number of companies thathad always been the property of either the Federal Government, or ofgovernments of Brazil’s individual states. In the last ten years, severalcompanies controlled by the state were privatized, in an effort to increaseefficiency and competition. The previous administration, ruled by FernandoHenrique Cardoso (1995-2002), stated its objective to privatize thestate-controlled part of the electricity sector, but the present administrationhas stopped this process, and has implemented a “new industry model” for theBrazilian electricity sector as set forth in Law No. 10,848, ofMarch 15, 2004.

#### *The**New Industry Model*

The main objectives****of the new industry model are to guarantee:  (i) security of supply; and (ii) reasonableness****of rates. To guarantee supply, the newmodel creates the requirements (a) that distributors must contract theirentire load, and will be responsible for making realistic projections of demandrequirements and (b) that building new hydroelectric and thermal plantswill be determined in ways that best balance security of supply andreasonableness of rates. The means of achieving reasonableness of rates includethe 

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following:  (a) all purchases of electricity bydistributors will occur by auction, based on the lowest-rate criterion;(b) contracting is to be through the Pool system, as described below; and(c) contracting of load will be separated into two types of transactions,both of which will always be by auction: (i) contracting of theelectricity of the new plants, which will target expansion; and(ii) contracting of the electricity of the existing plants, which willtarget the existing electricity demand.

The new industry model also creates two environments for the contractingof electricity supply:  (i) theRegulated Contracting Environment (the “ACR”), for contracting of electricityto meet the demands of distributors supplying captive consumers under regulatedrates; and (ii) the Free Contracting Environment (the “ACL”), forcontracting of energy to supply Free Consumers, through freely negotiatedcontracts. Distributors will be allowed to operate only in the regulatedenvironment, while generators may operate in both, maintaining their competitivecharacteristics.

Expansion requirements of the sector****will be evaluated by the Federal Governmentthrough the Ministry of Mines and Energy (the “MME”). Two new institutionalagents have been created: (i) the Energy Research Company (the “EPE” ), astate-controlled company responsible for execution of the planning of expansionof generation and transmission; and (ii) the Electricity Trading Chamber(the “CCEE”), a private company, which is the successor of the Wholesale EnergyMarket, (formerly the MAE), and is responsible for the accounting andsettlement of the short term energy.  TheCCEE is also responsible, through delegation by ANEEL, for organizing andconducting the public power auctions in the ACR in which all distributors buyenergy, referred to as the Pool system.

#### *Regulationunder the new industry model*

The Brazilianelectricity industry is regulated and supervised by ANEEL. After the enactment of LawNo. 10,848, ANEEL’s primary responsibility is to regulate and supervisethe power industry in line with the policy to be dictated by the MME and torespond to matters which are delegated to it by the Federal Government and by the MME. ANEEL’s currentresponsibilities include, among others, (i) administering concessions forelectricity generation, transmission and distribution activities, including theapproval of electricity rates, (ii) enactingregulations for the electricity industry, (iii) implementing andregulating the exploitation of hydroelectric resources, (iv) promoting thepublic bidding process for new concessions, (v) settling administrativedisputes among electricity generation entities and electricity purchasers and(vi) defining the criteria and methodology for the determination of distribution and transmissionrates.

#### *Rates*

Electric energyrates in Brazil are set by ANEEL, which has the authority to readjust andreview rates in accordance with the provisions under the relevant concessioncontracts. Each distribution company’s concession contract provides for anannual rate adjustment (reajuste anual). In general, Parcel A costs are fullypassed through to consumers. Parcel A costs are the portion of the regular ratecalculation formula, which provides for the recovery of certain costs that arenot within the control of the distribution company. Parcel B costs, which arecosts that are under the control of the distributors, are restated forinflation in accordance with the General Market Price Index (Indice Geral dePreços do Mercado), or IGP-M index.

As part of ourannual rate adjustment for 2007, ANEEL, through Resolution No. 446 dated as ofApril 3, 2007, established an average rate adjustment of 9.43%. This adjustmentincludes a component of 1.47% to recoup revenue we did not achieve in 2004 dueto the lower rates under re-issued Resolution No. 83. On April 6, 2006, throughResolution No. 310, ANEEL established an average rate increase of 16.19%. Thisadjustment included a component of 1.45% representing an increase to recouprevenue we did not achieve in 2004 as stated above.  Our next annual rate adjustment will takeplace in April 2008.

The average annualrate adjustment includes components such as the inter-year variation of fixedcosts (CVA) and other financial adjustments, which compensate for changes inthe company’s costs that were not previously taken into account in the rate wecharged the year before. Since this inter-year variation is to reimbursechanges in costs that took place in the previous year, it should not be part ofnext year’s annual adjustment. As a result, our authorized average annual ratefor the 2007 increase was 9.43%, but the actual increase after adjusting forthe CVA was 5.16%.

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 such company’s concessionand (ii) determining the X factor, which is calculated based on expectedproductivity gains from increases in scale, evaluations by consumers (verifiedby ANEEL) and labor costs.

On April 8,2003, we went through our first periodic rate revision and ANEEL established a31.53% temporary average increase to be applied to our rates. On April 4,2005, through Resolution No. 71, ANEEL reconsidered such decision andestablished a 44.41% average increase to be applied to our rates. In order toguarantee low rates to our end consumers, ANEEL only allowed us to 

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reposition our rates upto 31.53% retroactive to April 8, 2003. ANEEL has also indicated that therate adjustments expected for the years from 2004 to 2007 would be adjusted torecover the difference between the average rate increase of 44.41% we wereentitled to and the 31.53% rate adjustment that was authorized. Our rateadjustments on April 8, 2005, April 8, 2006 and April 3, 2007 eachincluded a recovery of a portion of the difference between the average rateincrease of 44.41% we were entitled to by the periodic revision and the rateadjustment of 31.53% that was authorized. However, during the process of thelast annual adjustment, ANEEL postponed to the next year the recovery of theportion we were entitled to receive in 2007. The next periodic rate revisionwill take place in April 2008.

In addition, concessionaires of electricitydistribution are entitled to extraordinary review of rates (*revisão extraordinária*), on a case by casebasis, to ensure their financial equilibrium and compensate them forunpredictable costs, including taxes, that significantly change their coststructure.

ANEEL has also issued regulations that govern theaccess to the distribution and transmission facilities and establish the ratefor use of the local distribution grid, or Distribution Usage Rates (“TUSD”),and the rate for the use of the interconnected transmission grid, orTransmission Usage Rates (“TUST”). The rates to be paid by distributioncompanies, generators and Free Consumers for use of the interconnected powersystem are reviewed annually. The review of the TUST takes into account therevenues that are permitted of transmission concessionaires pursuant to theirconcession contracts. For more detailed information regarding the rate-settingstructure in Brazil, see “The Brazilian Power Industry—Rates for the Use of theDistribution and Transmission Systems” in Annex A.

#### *Concessions*

Under theBrazilian Constitution, companies seeking to construct or operate a generation,transmission or distribution facility in Brazil are required to apply for anauthorization or a concession from the Federal Government which is generallygranted through a public bidding process conducted by ANEEL. Concessions grantexclusive rights to generate electricity in a particular plant, and to transmitor distribute electricity in a particular area for a specified period of time,generally 35 years for new generation concessions, 30 years for newtransmission and distribution concessions, and 20 years for the renewal ofexisting concessions. For more detailed information regarding concessions, see “TheBrazilian Power Industry—Concessions” in Annex A.

#### *Land Acquisition*

The concessionsgranted to us by the Federal Government do not include a grant of the land uponwhich the plants are located. Electricity concessionaires in Brazil typicallyhave to negotiate with the individual landowners to obtain needed land.However, in the event that a concessionaire is unable to obtain needed land inthis way, such land may be condemned for the concessionaire’s use throughspecific 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. Our resettlement policy has generally resulted in the settlement ofcondemnation disputes.

**Unbundling under the New IndustryModel**

LawNo. 10,848/04, which provides for the new industry model, prohibitsholders of distribution concessions, permissions or authorizations that operatein the interconnected power system from: (i) performing activities related to generation, transmission andsale of energy to Free Consumers at freely negotiated prices; (ii) holdinginterest in other companies, directly or indirectly, other than (a) incompanies whose corporate purpose is to manage financial resources necessaryfor rendering of services or (b) as provided in the concession contracts;or (iii) performing activities outside their corporate purpose, except asprovided by law and the concession contracts. These restrictions do not applyto distributors: (i) supplying energy to isolated electricity systems;(ii) supplying their own market, provided such market has a demand of lessthan 500 GWh/year and the totality of energy produced is destined to suchmarket; or (iii) when funding, investing or borrowing funds destined tothe distributor itself or a company of the same economic group, subject to prioragreement by ANEEL. Holders of generation concessions or authorizations thatoperate in the interconnected system may not be affiliates or controllingshareholders of companies which are responsible for distribution activities.

In order to complywith regulatory provisions pursuant to which we were required to unbundle ourvertically integrated businesses, we have incorporated two wholly-ownedsubsidiaries of CEMIG — CemigGeneration and Transmission. and CemigDistribution — created to carry out the activities of electricitygeneration and transmission, and distribution, respectively. For more detailedinformation regarding these entities and the corporate restructuring of CEMIG,see “—Organization and Historical Background.”

## **Capital Expenditures**

Capital expendituresfor the years ended December 31, 2006, 2005 and 2004, in millions of *reais*, are as follows:

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| ** **                                                            | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                            | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Acquisition of  interest in Light through RME                         |       | 174                                        |       | — |   | — |   |
| Acquisition of  interests in transmission companies                   |       | 349                                        |       | — |   | — |   |
| Other  acquisitions                                                   |       | 45                                         |       | 32 |   | 10 |   |
|                                                                  |       |                                       |       |   |   |   |   |
| Total capital expenditures under affiliates                           |       | 568                                        |       | 32 |   | 10 |   |
| Generation power  projects — under Property, plant and equipment |       | 264                                        |       | 575 |   | 679 |   |
| Transmission  network expansion                                       |       | 55                                         |       | 48 |   | 59 |   |
| Distribution  network expansion                                       |       | 983                                        |       | 868 |   | 245 |   |
| Others                                                                |       | 26                                         |       | 20 |   | 78 |   |
| Total capital expenditures under property, plant and  equipment       |       | 1,328                                      |       | 1,511 |   | 1,061 |   |
| Total Capital  expenditures                                           |       | 1,896                                      |       | 1,543 |   | 1,071 |   |

We currently project total capital expenditures ofapproximately R$1,148 million in 2007. The principal uses of these expendituresare expected to be for expansion of our distribution infrastructure andincreases in our generation capacity.

## **Business Overview**

#### *General*

We are required,like other Brazilian electric utilities, to purchase electricity from Itaipu inan amount determined by the Federal Government based on our electricity sales.See “—Generation and Purchase of Electric Power—Purchase of ElectricPower—Itaipu.”  In addition, we purchaseenergy from other concessionaires and the interconnected power system. See “—Generationand Purchase of Electric Power—Purchase of Electric Power—Interconnected PowerSystem.”  We also purchase energygenerated by self power producers, or SPPs, and independent power producers, orIPPs, that are located within our concession area.

The followingtable sets forth certain information, in GWh, pertaining to the electricitythat we generated, purchased from other sources and delivered during theperiods specified:

CEMIG’S ELECTRIC ENERGY BALANCE

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| ** **                                                        | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------|------------|
| **(GWh)**                                                         | ** ** | **2006**                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| RESOURCES(1)                                                      |       | 63,964                      |       | 52,748 |   | 45,117 |   |
| Electricity generated by CEMIG(2)                                 |       | 32,187                      |       | 30,411 |   | 26,922 |   |
| Electricity generated by auto-producers                           |       | 1,147                       |       | 1,098 |   | 1,581 |   |
| Electricity generated by Ipatinga                                 |       | 300                         |       | 299 |   | 237 |   |
| Electricity generated by Barreiro                                 |       | 51                          |       | 18 |   | 72 |   |
| Electricity generated by Sá Carvalho(3)                      |       | 395                         |       | 467 |   | 468 |   |
| Electricity generated by Horizontes(3)(4)                         |       | 41                          |       | 76 |   | 105 |   |
| Electricity generated by Cemig PCH(4)                             |       | 7                           |       | 16 |   | — |   |
| Electricity generated by Rosal                                    |       | 326                         |       | 417 |   | — |   |
| Electricity generated by Capim Branco                             |       | 243                         |       | — |   | — |   |
| Electricity bought from Itaipu                                    |       | 12,109                      |       | 12,144 |   | 11,936 |   |
| Electricity bought from CCEE and other companies(5) (6)      |       | 17,158                      |       | 7,802 |   | 3,796 |   |
|                                                              |       |                        |       |   |   |   |   |
| REQUIREMENTS                                                      |       | 63,964                      |       | 52,748 |   | 45,117 |   |
| Electricity delivered to final consumers(7)                       |       | 37,707                      |       | 38,068 |   | 36,669 |   |
| Electricity delivered to auto-producers                           |       | 1,013                       |       | 974 |   | 1,472 |   |
| Electricity delivered by Ipatinga                                 |       | 300                         |       | 299 |   | 237 |   |
| Electricity delivered by Barreiro                                 |       | 97                          |       | 76 |   | 72 |   |
| Electricity delivered by Sá Carvalho(3)                      |       | 472                         |       | 472 |   | 474 |   |
| Electricity delivered by Horizontes(3)                            |       | 95                          |       | 84 |   | 80 |   |
| Electricity delivered by Pai Joaquim                              |       | 105                         |       | 61 |   | — |   |
| Electricity delivered by Rosal                                    |       | 262                         |       | 263 |   | — |   |
| Electricity delivered to the national grid and other companies(8) |       |                        |       | — |   | 9,720 |   |
| Electricity delivered to the CCEE and other companies(5) (6) |       | 18,476                      |       | 8,355 |   | 1,798 |   |
|                                                              |       |                        |       |   |   |   |   |
| Losses                                                            |       | 5,437                       |       | 4,096 |   | 4,315 |   |

 

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(1)             In2004 there was a change in the method of calculating and recordingtransactions in the wholesale market and with other companies, as stated inNotes 6 and 7 below. This change is responsible for the variation in thefigures for sources and demand from 2003 to 2004.

(2)             Discountingthe losses attributed to generation (662 GWh) and the internal consumption of thegenerating plants.

(3)             Up to2003, these portions referred to the total amounts of energy available anddemand. Beginning in 2004, the short-term transactions on the CCEE and withother companies are included in the items “Electricity bought from the CCEE andother companies” and “Electricity delivered to the CCEE and other companies”.

(4)             For2004, the generation by the Pai Joaquim small hydro plant was included togetherwith Horizontes.

(5)             Beginningin 2004, this amount refers to contracts, purchases and sales of electricityunder the CCEE, including the Energy Reallocation Mechanism (*Mecanismo de Realocação de Energia*).

(6)             Includes bilateral contracts with other agents of the CCEE.

(7)             Includes electricitydelivered to consumers outside the concession area.

(8)             Inprevious years, this portion represented contracts and the physicalinterchanges between CEMIG’s network and the national grid, and also “optimization”supply.

*Generation*

According toANEEL, at December 31, 2006, we were the fifth largest electric powergeneration concessionaire in Brazil as measured by total installed capacity. AtDecember 31, 2006, we generated electricity at 51 hydroelectric plants,four thermoelectric plants and one wind farm and had a total installedgeneration capacity of 6,523 MW, of which hydroelectric plants accounted for6,338 MW, thermoelectric plants accounted for 184.3 MW and our wind farmaccounted for 1 MW. Eight of our hydroelectric plants accounted forapproximately 82.5% of our installed electric generation capacity in 2006. Wesupplied approximately 96.1% of the electricity consumed in Minas Gerais during2006.

*Transmission*

We are engaged inthe electric power transmission business, which consists of transportingelectric power from the facilities where it is generated to the distributionnetworks for delivery to end users. We transport energy produced at our owngeneration

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facilities as well asenergy that 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 of thenational transmission grid regulated by the ONS. See “The Brazilian PowerIndustry” in Annex A. As of December 31, 2006, our transmission network inMinas Gerais consisted of 1,352 miles of 500 kV lines, 1,202 miles of 345 kVlines and 467 miles of 230 kV lines, as well as 33 substations with a total of92 transformers and an aggregate transformation capacity of 15,393 MVA.

*Distribution*

We have adistribution concession in Minas Gerais that grants us rights to supplyelectric energy to consumers within our concession area except for consumersthat may be eligible, in accordance with the legislation, to become FreeConsumers (currently consumers with demand equal to or greater than 3 MW).Our concession area covers approximately 219,103 square miles, or 96.7% of theterritory of the state. As of December 31, 2006, we owned and operated255,095 miles of distribution lines, through which we supplied electricity toapproximately 6.2 million consumers. At December 31, 2006, we were thelargest electricity distribution concessionaire in Brazil in terms of GWhtransported.  Of the total amount ofelectricity we supplied to final consumers as of December 31, 2006, 61.1%was to industrial consumers, 17.1% was to residential consumers, 9.9% was tocommercial consumers and 11.9% was to rural and other consumers.

*Other Businesses*

While our mainbusiness consists of the generation, transmission and distribution of electricpower, we also engage in the following businesses: (i) distributingnatural gas in Minas Gerais through our equity investee Gasmig;  (ii) telecommunications through ourconsolidated subsidiary Empresa de Infovias S.A., a company created for thepurpose of providing a fiber-optics and coaxial cable network installed alongour transmission and distribution lines through which telecommunicationservices can be provided; and (iii) national and international consultingbusiness through our subsidiary Efficientia S.A.

**Revenue Sources**

The followingtable shows the revenues attributable to each of our principal revenue sources,for the periods indicated:

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| ** **                                            | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Electricity sales to  final consumers                 |       | 9,319                                      |       | 8,708 |   | 8,541 |   |
| Regulatory  extraordinary rate adjustment             |       | 1                                          |       | 8 |   | 89 |   |
| Deferred rate adjustment                              |       | —                                     |       | 110 |   | 640 |   |
| Electricity sales to  the interconnected power system |       | 884                                        |       | 237 |   | 36 |   |
| Use of basic  transmission and distribution networks  |       | 1,780                                      |       | 1,523 |   | 245 |   |
| Natural gas sales                                     |       | —                                     |       | — |   | 420 |   |
| Services rendered                                     |       | 31                                         |       | 26 |   | 21 |   |
| Telecommunication and  other                          |       | 168                                        |       | 142 |   | 95 |   |
| Total                                                 |       | 12,183                                     |       | 10,754 |   | 10,087 |   |

## **Generation**

#### *Generation*

The followingtable sets forth certain operating information concerning our electric powergeneration plants as of December 31, 2006: 
| **Facility**                  | ** ** | **Installed  Capacity  (MW)** | ** ** | **Assured  Energy(1)  (average MW)** | ** ** | **Year  Commenced  Operations** | ** ** | **Installed  Capacity  % of Total** | ** ** | **Date  Concession  Expires** | ** ** |
|-------------------------------|------------|-------------------------------|------------|-------------------------------------------|------------|---------------------------------|------------|-----------------------------------------------|------------|-------------------------------|------------|
| Major  Hydroelectric Plants   |       |                          |       |                                      |       |                            |       |                                          |       |                          |       |
| São Simão           |       | 1,710                         |       | 1,281.00                                  |       | 1978                            |       | 26.0                                          |       | January 2015             |       |
| Emborcação          |       | 1,192                         |       | 497.00                                    |       | 1982                            |       | 18.3                                          |       | July 2025                |       |
| Nova Ponte                    |       | 510                           |       | 276.00                                    |       | 1994                            |       | 7.8                                           |       | July 2025                |       |
| Jaguara                       |       | 424                           |       | 336.00                                    |       | 1971                            |       | 6.5                                           |       | August 2013              |       |
| Miranda                       |       | 408                           |       | 202.00                                    |       | 1998                            |       | 6.3                                           |       | December 2016            |       |
| Três Marias              |       | 396                           |       | 239.00                                    |       | 1962                            |       | 6.1                                           |       | July 2015                |       |
| Volta Grande                  |       | 380                           |       | 229.00                                    |       | 1974                            |       | 5.8                                           |       | February 2017            |       |
| Irapé                    |       | 360                           |       | 206.30                                    |       | 2006                            |       | 5.5                                           |       | February 2035                 |       |
| Aimorés                  |       | 161.7                         | (7)        | 84.28                                     | (7)        | 2005                            |       | 2.6                                           |       | December 2035            |       |
| Salto Grande                  |       | 102                           |       | 75.00                                     |       | 1956                            |       | 1.6                                           |       | July 2015                |       |
| Funil                         |       | 88                            | (5)        | 43.61                                     | (5)        | 2002                            |       | 1.4                                           |       | December 2035            |       |
| Queimado                      |       | 86.6                          | (6)        | 47.85                                     | (6)        | 2004                            |       | 1.3                                           |       | January 2033             |       |
| Sá Carvalho              |       | 78                            |       | 58.00                                     |       | 2000                            | (2)        | 1.2                                           |       | December 2024            |       |
| Rosal                         |       | 55                            |       | 30.00                                     |       | 2004                            | (2)        | 0.8                                           |       | May 2032                 |       |
| Itutinga                      |       | 52                            |       | 28.00                                     |       | 1955                            |       | 0.8                                           |       | July 2015                |       |
| Capim Branco I                |       | 50.5                          | (8)        | 32.63                                     | (8)        | 2006                            |       | 0.8                                           |       | August/2036                   |       |
| Camargos                      |       | 46                            |       | 21.00                                     |       | 1960                            |       | 0.7                                           |       | July 2015                |       |
| Porto Estrela                 |       | 37                            | (3)        | 18.60                                     | (3)        | 2001                            |       | 0.6                                           |       | July 2032                |       |
| Igarapava                     |       | 30.4                          |       | 25.21                                     | (4)        | 1999                            |       | 0.4                                           |       | December 2028            |       |
| Pai Joaquim (11)              |       | 23                            |       | 13.91                                     |       | 2004                            |       | 0.4                                           |       | April 2032               |       |
| Piau                          |       | 18                            |       | 8.00                                      |       | 1955                            | (2)        | 0.3                                           |       | July 2015                |       |
| Gafanhoto                     |       | 14                            |       | 6.68                                      |       | 1946                            |       | 0.2                                           |       | July 2015                |       |
| Smaller  Hydroelectric Plants |       | 116                           |       | 68.42                                     |       | —                          |       | 1.8                                           |       | —                        |       |
| Thermoelectric  Plants        |       |                          |       |                                      |       |                            |       |                                          |       |                          |       |
| Igarapé                  |       | 131                           |       | 103.00                                    | (9)        | 1978                            |       | 2.0                                           |       | August 2024              |       |
| Ipatinga                      |       | 40                            |       | —                                    |       | 2000                            | (2)        | 0.6                                           |       | December 2014            |       |
| Barreiro                      |       | 12.90                         |       | 11.45                                     |       | 2004                            |       | 0.2                                           |       | April 2023               |       |
| Formoso                       |       | 0.4                           |       | 0.22                                      |       | 1992                            |       | 0.0                                           |       | Indefinite                    |       |
| Wind Farm                     |       | 1                             |       | 0.30                                      |       | 1994                            |       | 0.0                                           |       | Indefinite                    |       |
| Total                         |       | 6,523.5                       | (10)       | 3,942,5                                   | (10)       | —                          |       | 100.0                                         | %          | —                        |       |

----

(1)              Assured Energy is the plant’s long-termaverage output, as established by EPE in accordance with studies conducted bythe ANEEL and ONS. Calculation of Assured Energy considers such factors asreservoir capacity and connection to other power plants. Contracts with finalconsumers and other concessionaires do not provide for amounts in excess of aplant’s Assured Energy.

(2)              Indicates our acquisition date.

(3)              Represents our interest in the Porto Estrelaplant (33.3%).

(4)              Represents our interest in the Igarapavaplant (14.5%). The amount of 5.49 average MW of assured energy, representingthe agreement with a consortium formed by Cemig Generation andTransmission  and Companhia Vale do RioDoce, Companhia Siderúrigica Nacional, Votorantim Metais e Zinco S.A andAnglogold Ashanti Brasil Ltda., is included.

(5)              Represents our interest in the Funil plant(49.0%).

(6)              Represents our interest in the Queimado plant(82.50%).

(7)              Represents our interest in the Aimorés Plant(49%).

(8)              Represents our interest in the Capim Branco Iplant (21.05%)

(9)              Represents the available energy established bythe EPE.

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| (10) |   | This amount does not include the Light acquisition.                                                                                                                                                            |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (11) |   | On December 19,  2005, ANEEL approved the transfer of the authorization to produce and sell  the energy of the Pai Joaquim small power plant from Central Hidrelétrica Pai  Joaquim S.A to CEMIG PCH S.A. |

 

The followingtables set forth certain additional operating information pertaining to ourelectricity 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** | ** ** | **2006**                                                                                                                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| 500 kV                                         |       | 4                                                                                                                                                     |       | 4 |   | 4 |   |
| 345 to 230 kV                                  |       | 10                                                                                                                                                    | (1)        | 8 |   | 7 |   |
| 161 to 138 kV                                  |       | 69                                                                                                                                                    | (2)        | 43 |   | 42 |   |
| 69 to 13.8 kV                                  |       | 102                                                                                                                                                   |       | 102 |   | 102 | (3) |
| Total                                          |       | 185                                                                                                                                                   | (4)        | 157 |   | 155 |   |

 
| ** **                       | ** ** | **Step-Down Transformation Capacity(5)  of Generation Substations** | ** ** |
|----------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| ** **                       | ** ** | **As of December 31,**                                                   | ** ** |
| ** **                       | ** ** | **2006**                                                                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                       | ** ** | ** **                                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Number of  step-down substations |       | 56                                                                                      | (4)        | 54 | (3) | 52 | (3) |
| MVA                              |       | 7,078                                                                                   | (4)        | 6,604 |   | 6,433 |   |

----

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

 

#### *Generation Assets*

We have formed inMinas Gerais and other states of Brazil, the following subsidiaries to operatecertain of our generation facilities and to hold the related concessions:

*UsinaTérmica Ipatinga S.A.*We operate the Ipatinga thermoelectricplant through our subsidiary Usina Térmica Ipatinga S.A. This plant is an SPPinstalled and operated within the premises of Usinas Siderúrgicas de MinasGerais S.A.—USIMINAS, or Usiminas, a large Brazilian steel manufacturer. Theplant supplies power to a large steel mill owned by Usiminas located in easternMinas Gerais. We acquired the Ipatinga plant in 2000 for R$90 million fromUsiminas as payment for outstanding power supply debts. We have signed a powerpurchase agreement with Usiminas for power produced at Ipatinga. The plantcurrently has an installed capacity of 40 MW, generated by two units that beganoperating in 1984 and that use blast furnace gas as fuel.

*SáCarvalho S.A.*We operate the Sá Carvalho hydroelectric powerplant, located on the Piracicaba River in the municipality of Antônio Dias inthe State of Minas Gerais, through our subsidiary Sá Carvalho S.A., which weacquired in 2000 for R$87 million from Acesita S.A., or Acesita, a steelcompany. This acquisition was funded by an issuance of debentures by a specialtrust, UHESC S.A., which we are obligated to repay. On June 5, 2003, werenegotiated the interest rate applicable to 46.67% of the aggregate principalamount of these debentures for the following two year period and the remaining53.33% was redeemed for R$64 million.

*RosalEnergia S.A.*In November 2004 we bought the *Rosal*hydroelectric plant, which hasinstalled capacity of 55 MW, from Caiuá Serviços de Eletricidade S.A., orCaiuá, for a payment of R$134 million. The Rosal plant, the sole asset of RosalEnergia S.A**.**, is located on theItabapoana River, which runs along the border between the states of EspíritoSanto (Municipality of Guaçuí) and Rio de Janeiro (Municipality of Bom Jesus deItabapoana). It operates in integrated connection with the *Alegre*and *Mimoso do Sul*electricity systems, which are owned by theelectricity utility of the State of Espírito Santo, Escelsa (Espírito SantoCentrais Elétricas S.A.). The plant’s first and second rotors started operatingin December 1999 and January 2000, respectively. It has a concessioncontract for 35 years, maturing in 2032. ANEEL approved the transfer of controlon December 20, 2004.

*CemigCapim Branco Energia S.A.*We incorporated Cemig Capim BrancoEnergia S.A. to develop the Capim Branco Power Facility in partnership withCompanhia Vale do Rio Doce—CVRD, or CVRD, a mining company, Comercial eAgrícola Paineiras, an agricultural company, and Companhia Mineira de Metais,or CMM a metallurgic company. On April 11, 2006, ANEEL published itsResolution 314, allowing for the transfer of the electricity generationconcession of CMM to Votorantim Metais Zinco S.A. — VMZ. 

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The project consists ofthe Capim Branco I and Capim Branco II hydroelectric power plants, withinstalled capacity of 240 MW and 210 MW, respectively. See “Capim Branco PowerFacility”, under “Expansion of Generation Capacity” below. We have entered intoa purchase contract with Cemig Capim Branco Energia S.A. under which CemigDistribution will purchase the energy produced by Capim Branco I and CapimBranco II for 20 years from the start date of each plant’s commercialoperations, which in the case of Capim Branco I was February 21, 2006, and inthe case of Capim Branco II was March 9, 2007. This contract was submitted toANEEL in 2003 and was approved in December 2004. See “Item 8. FinancialInformation—Legal Proceedings—Legal Proceedings Related to EnvironmentalMatters.”

*Horizontes Energia S.A.*Weformed Horizontes Energia S.A., or Horizontes Energia, to generate and tradeelectricity as an IPP through the commercial operation of the following of oursmaller hydroelectric plants:  theMachado Mineiro Power Plant (located on the Pardo River in the municipality ofNinheira in the State of Minas Gerais with an installed capacity of 1.72 MW);the Salto do Paraopeba Power Plant (located on the Paraopeba River in the townof Jeceaba in the State of Minas Gerais with an installed capacity of 2.37 MW);the Salto Voltão Power Plant (located on the Chapecozinho River in the town ofXanxerê in the State of Santa Catarina with an installed capacity of 8.2 MW);and the Salto do Passo Velho Power Plant (located on the Chapecozinho River inthe town of Xanxerê in the State of Santa Catarina with an installed capacityof 1.8 MW), as well as other generating projects to be acquired or built withour participation. The concession relating to the Machado Mineiro Power Plantexpires on July 7, 2025 and the concessions relating to the other plantsexpire on October 4, 2030. All the electricity generated by HorizontesEnergia S.A. is allocated for sale in the ACL, and part of this electricity hasbeen sold up to the year 2010.

*Usina Termelétrica Barreiro S.A.*Weformed Usina Termelétrica Barreiro S.A. to participate, in partnership withVallourec & Mannesmann—V&M do Brasil S.A., or Vallourec &Mannesmann, a metallurgic company, in the construction and operation of the12.9 MW Barreiro thermoelectric power plant, located on Vallourec &Mannesmann’s premises in the Barreiro section of the city of Belo Horizonte inMinas Gerais.Construction started in July 2002 and commercial generation beganin February 2004. As of December 31, 2006, we had invested R$5.9 millionin this project.  Usina TermelétricaBarreiro S.A. holds the assets of the Barreiro thermoelectric power plant andtrades its production of energy.

*CEMIGPCH S.A.*We formed CEMIG PCH S.A. to generate and tradeelectric energy as an IPP. Its main activity is the production and sale ofelectricity energy through the Pai Joaquim small hydroeletric power plant, asan IPP. This plant, located on Araguari River, has an installed capacity of 23MW and begin its commercial operation on March 31, 2004. CEMIG PCH S.A. holdsthe assets of the Pai Joaquim small hydroeletric power plant, which amounted toR$54.4 million as of December 31, 2006, and trades the energy produced bythis plant.

Cemig Generationand Transmission also operates the following power plants:

*QueimadoHydroelectric Power Plant. *Our partner in this projectis Companhia Energética de Brasília, or CEB, a state-controlled electricitycompany. 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, andencompasses areas in the states of Minas Gerais and Goiás and in Brazil’sFederal District. The power plant began its commercial generation onApril 9, 2004, with the operation of its first unit. The commercialoperation of the second and third units began on June 16, 2004, andJuly 8, 2004, respectively. As of December 31, 2006, we had investedR$122.9 million in the project. The concession relating to this plant expireson January 02, 2033.

*AimorésHydroelectric Power Plant. *The Aimorés hydroelectricpower plant located on the Doce River will have an installed capacity of 330MW. We have a 49% interest in this enterprise and our partner, CVRD, 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 andNatural Renewable Resources, or IBAMA. As of December 31, 2006, we hadinvested R$395.7 million in this project. We are a defendant in a class actionlawsuit concerning the Aimorés hydroelectric power plant. See “Item 8.Financial Information—Legal Proceedings—Legal Proceedings Related toEnvironmental Matters.”

*IrapéHydroelectric Power Plant.*The Irapé hydroelectric powerplant, which has installed capacity of 360 MW, is located on the JequitinhonhaRiver, in northern Minas Gerais. Construction began in April 2002 and itsthree units began to generate electricity commercially on July 20, 2006, August5 and October 3, 2006, respectively. At December 31, 2006, we had investedR$1,072.4 million in this project, including R$90 million from debentures thatwere acquired by the State Government, using dividends that would otherwisehave been payable to the State Government under an agreement between the StateGovernment and our company. The concession relating to this plant expires onFebruary 28, 2035.  For informationregarding a legal proceeding we have been involved with related to the Irapéhydroelectric power plant, see “Item 8. Financial Information—LegalProceedings—Legal Proceedings Related to Environmental Matters.”

*Capim Branco Power Facility. *Thisproject consists of the Capim Branco I and Capim Branco II hydroelectric powerplants, with installed capacity of 240 MW and 210 MW, respectively. These powerplants are located on the Araguari River in western Minas 

29

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Gerais. Construction of Capim Branco I began in****September 2003 and Capim Branco II inMarch 2004.  The commercialgeneration at Capim Branco I began on February 21, 2006, and at CapimBranco II on March 9, 2007.  As ofDecember 31, 2006, we had invested R$46.5 million in this project. Theconcessions relating to these plants expire on August 29, 2036. We are adefendant in two lawsuits concerning the environmental licensing of the CapimBranco I and Capim Branco II hydroelectric power plants. See “Item 8. FinancialInformation—Legal Proceedings—Legal Proceedings Related to EnvironmentalMatters.”

*Expansionof Generation Capacity*

Weare involved in the construction of three hydroelectric plants,  Baguari, Cachoeirão and Pipoca, that will increasethe installed generation capacity of our hydroelectric facilities by 70.63 MWduring the next three years. The following is a brief description of theseprojects, the completion of which are subject to various contingencies, certainof which are beyond our control.

*Baguari Hydroelectric Power Plant*.* *A consortium formed by CemigGeneration and Transmission, Furnas Centrais Elétricas S.A., or Furnas, anelectricity concessionaire of generation and transmission controlled by theFederal Government, and Baguari I Geração de Energia Elétrica S.A, a specialpurpose company (SPC) that belongs to Neoenergia S.A., a private integratedelectricity sector holding company, has the concession to build and operate theBaguari hydroelectric power plant and sell its energy. The power plant willhave an installed capacity of 140 MW and will be located on the Doce River, inthe State of Minas Gerais. Cemig Generation and Transmission has a 34% interestin this consortium. The energy generated will be commercialized in theACR.  On December 15, 2006 the State ofMinas Gerais Environmental Policy Council (“COPAM”), issued the power plantinstallation license. Construction began on May 9, 2007.  Commercial generation at Baguari is expectedto begin in September 2009. The concession relating to this plant expires onAugust 15, 2041.

*PipocaSmall Hydroelectric Power Plant*. Cemig Generation andTransmission has also negotiated a stake in the construction and operation ofthe *Pipoca Small Hydroelectric Power Plant*,in partnership with HP2 do Brasil S.A., founded by Hydro Partners, a USinvestment company, to implement and operate the project. We will have a 49%interest in this SPC. The plant, with installed capacity of 20 MW, will belocated on the Manhuaçu River, in the eastern part of the State of MinasGerais. Construction is expected to begin in the second half of 2007, andcommercial generation at the end of 2008. The concession relating to this plantexpires on September 10, 2031.

*CachoeirãoSmall Hydroelectric Power Plant*. Cemig Generation andTransmission has negotiated an ownership interest in the construction andoperation of Cachoeirão Small Hydroelectric Power Plant. Our partner in thisproject is Santa Maria Energética S.A. (“Santa Maria Energética”), which formedwith us SPC Hidrelétrica Cachoeirão S.A., to build and operate the Cachoeirãopower plant. This plant, with an installed capacity of 27 MW, will be locatedon the Manhuaçu River, in the eastern part of Minas Gerais. Cemig Generationand Transmission has a 49% ownership interest in the SPC and Santa MariaEnergética has a 51% ownership interest. Santa Maria Energética is a specialpurpose company owned by a group based in the state of Espírito Santo whichengages in cattle raising, meat packing and energy distribution. Santa MariaEnergética, which holds the authorization for commercial operation of theCachoeirão small hydro power plant, applied to ANEEL at the end of January 2007for permission to transfer this authorization to Hidrelétrica Cachoeirão S.A. Constructionbegan in March 2007 and commercial generation is expected to begin in October2008. The concession relating to this plant expires on July 27, 2030.

*Co-generationJoint Ventures with Consumers*

We intend to enterinto joint ventures with industrial consumers to develop co-generationfacilities. These facilities would be built on consumers’ premises and wouldgenerate electricity using fuel supplied by the consumers’ industrialprocesses. Each co-generation project would be funded in part through an agreementwith the particular consumer to purchase the electricity generated in thatconsumer’s facility. We would assume the responsibility for operating andmaintaining the co-generation facility.

*Wind Farm*

Our wind farm,Morro do Camelinho, began operating in 1994. It is located in Gouveia, amunicipality in northern Minas Gerais. This project is the first wind farm inBrazil to be connected to the national electricity transmission grid and it isconnected to CEMIG’s distribution system. It has a total generation capacity of1 MW, powered by four turbines with a capacity of 250 kW each. Morro doCamelinho was built through a technical and scientific cooperation arrangementwith the government of Germany. The cost of the project was US$1.5 million,with 51% of the cost provided by us and the remaining 49% provided by thegovernment of Germany.

**Transmission**

*Overview*

30

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Our transmissionbusiness consists of the bulk transfer of electricity from the power plantswhere it is generated to the distribution system, which carries the electricityto final consumers, and others consumer agents connected directly in the basictransmission grid. Our transmission system is comprised of transmission linesand step-down substations with voltages ranging from 230 kV to 500 kV.

In 1998, ANEELcreated the ONS, a non-profit legal entity under private law, authorizedto carry out the activities of coordination and control of the operation ofgeneration and transmission of electricity in Brazil’s national electricitygrid in relation to Free Consumers, energy utilities engaged in powergeneration, transmission and distribution, and other private participants suchas importers and exporters. The ONS’s primary role is to coordinate andcontrol the generation and transmission operations in the interconnected powersystem, subject to ANEEL’s regulation and supervision. Until the enactment ofLaw No. 10,848, the ONS was a self-regulated entity and its management wasnot subject to interference from the Federal Government. Law No. 10,848 grantedthe Brazilian government the power to nominate the main directors of the ONS.One of the main objectives of the ONS is to guarantee that all parties in theindustry have access to the transmission network in a non-discriminatorymanner. Under ANEEL regulations, holders of concessions to operate facilitiesbelonging to the national transmission grid, linking the electricity systems atvoltages higher than 230 kV in Brazil, must transfer coordination of theoperation of their transmission facilities to the ONS.  We complied with this requirement by enteringinto a transmission service agreement on December 10, 1999. Pursuant tothis agreement, the ONS may represent us in contracts with generationcompanies, distribution companies and Free Consumers for use of the basictransmission network. The users of the basic transmission network pay us aportion of the revenues we are permitted to receive (as determined by ANEEL)pursuant to our concession agreements. During the year ended December 31, 2006, we recorded revenuetotaling R$417 million as a result of this arrangement. In turn, because we arealso a distribution company and because we purchase electricity from Itaipu andothers, our use of the basic transmission network requires us to pay scheduledrates to the ONS and owners of different parts of the basic transmissionnetwork. During the year ended December 31, 2006, we recorded expensestotaling R$687 million relating to payments made to the ONS and owners ofdifferent portions of the basic transmission network. See “Item 5. Operatingand Financial Review and Prospects” and “The Brazilian Power Industry” in AnnexA.

We transmit boththe energy that we generate and the energy that we purchase from Itaipu, theinterconnected power system and other sources. On December 31, 2006, wealso had 12 industrial consumers whom we supplied directly with high voltage(equal to or greater than 230 kV per industrial consumer) energy through theirconnections to our transmission lines. Eight of these industrial consumers areour clients and accounted for approximately 17.7% of the total volume ofelectricity we sold in the year ended December 31, 2006. We also transmitenergy to distribution systems through the South/Southeast linked system of thegrid.

The following tablesset forth certain operating information pertaining to our transmission capacityfor the dates indicated:
| ** **                                       | ** ** | **Circuit Length of Transmission Lines in Miles  (from generation substations to distribution substations)** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **As of December 31,**                                                                                                                               | ** ** |
| **Voltage of Transmission Lines** | ** ** | **2006**                                                                                                                                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| 500 kV                                           |       | 1,352                                                                                                                                                               |       | 1,345 |   | 1,344 |   |
| 345 kV                                           |       | 1,202                                                                                                                                                               |       | 1,228 |   | 1,206 |   |
| 230 kV                                           |       | 467                                                                                                                                                                 |       | 467 |   | 467 |   |
| Total                                            |       | 3,021                                                                                                                                                               |       | 3,040 |   | 3,017 |   |

 
| ** **                       | ** ** | **Step-Down Transformation Capacity(1)  of Transmission Substations** | ** ** |
|----------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **                       | ** ** | **As of December 31,**                                                     | ** ** |
| ** **                       | ** ** | **2006**                                                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Number of  step-down substations |       | 33                                                                                        |       | 32 |   | 32 |   |
| MVA                              |       | 15,393                                                                                    |       | 15,393 |   | 15,393 | (2) |

----

| (1) |   | Step-down transformation capacity refers to the  ability of a transformer to receive energy at a certain voltage and release  it at a reduced voltage for further distribution. |
|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Increment due to Itajubá 3 and Vespasiano 2.                                                                                                                               |

 

*Expansionof Transmission Capacity*

We believe thatour transmission system will need to be reinforced and expanded through theconstruction of new substations and transmission lines within the next fiveyears. See “Item 5. Operating and Financial Review and Prospects—Liquidity andCapital Resources.”

In accordance withthe new regulatory framework in the Brazilian electricity sector, concessionsfor the expansion of the electricity transmission infrastructure in Brazil areawarded by means of public biddings or are authorized by ANEEL. The following 

31

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is a brief description ofour current transmission projects, the completion of which are subject tovarious contingencies, certain of which are beyond our control:

*MontesClaros - 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 requiredin the bidding process, the partners formed the Companhia Transleste deTransmissão, which is responsible for building and operating the transmissionline. We have a 24.5% 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 inJanuary 2005 and transmission line operations began on December 18,2005. The concession expires on February 18, 2034. As of December 31,2006, we had invested R$12.3 million in this project.

*Furnas- Pimenta. *In September 2004, a consortium formedby Furnas and CEMIG, with interests of 49%, and 51%, respectively, won theconcession 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 transmission line. This 345 kV transmission line, with a lengthof approximately 47 miles, will connect the substation of the FurnasHydroelectric Power Plant and a substation located in Pimenta, a city in theCenter West region of Minas Gerais. We began the project in March 2005 andthe transmission line operation is expected to begin in January 2009. As ofDecember 31, 2006, we had invested R$6.7 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%, and 24% respectively, won theconcession auctioned by ANEEL to the Itutinga — Juiz de Fora transmission line.As required in the bidding process, the partners formed the CompanhiaTransudeste de Transmissão, which will be responsible for building andoperating this transmission line. This 345 kV transmission line, with a lengthof approximately 89 miles, will connect the substation of the Itutinga HydroelectricPower Plant and a substation located in Juiz de Fora, a city in thesoutheastern Minas Gerais. We began the project in March 2005 andcommercial operations began on February 23, 2007. As of December 31, 2006,we had invested R$7.3 million in this project .

*Irapé- Araçuaí. *In November 2004, a consortium formed byAlusa, Furnas, Orteng and CEMIG with interests of 41%, 24.5%, 10% and 24.5%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 the northeastern Minas Gerais. We began the project inMarch 2005 and commercial operations began on May 23, 2007. As ofDecember 31, 2006, we had invested R$5.5 million in this project.

*Charrúa— Nueva Temuco*.* *InApril 2005 a consortium formed by Alusa and CEMIG, with interests of 51%and 49%, respectively, won the concession auctioned by Centro de DespachoEconómico de Carga del Sistema Interconectado Central (CDEC — SIC) of Chile tobuild, operate and maintain the Charrúa — Nueva Temuco 220 kV transmission linefor 20 years. This was an important event in CEMIG’s history, as it was ourfirst asset outside of Brazil. We and Alusa formed Transchile Charrúa TransmisiónS.A., a special purpose company incorporated in Chile and responsible forbuilding and operating the transmission line. With a length of approximately116 miles, the transmission line will connect the substations of Charrúa andNueva Temuco in central Chile. We began the project in June 2005 andconstruction began in April 2007. Commercial operations are expected to beginin July 2008. As of December 31, 2006, we had invested R$13.4 millionin this project.

**Distribution andPurchase of Electric Power**

#### *Overview*

Our distributionoperations consist of the transfer of electricity from distribution substationsto final consumers. Our distribution network is comprised of a widespreadnetwork of overhead and underground lines and substations with voltages lowerthan 230 kV. We supply electricity to smaller industrial consumers at thehigher end of the voltage range and residential and commercial consumers at thelower end of the range.

FromJanuary 1, 2001 through December 31, 2006, we invested approximatelyR$1,328 million in the construction and acquisition of property, plant andequipment used to expand our distribution system.

The followingtables provide certain operating information pertaining to our distributionsystem, as of the dates presented:

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| ** **                                       | ** ** | **Circuit Length of Distribution Lines in Miles  (from distribution substations to final consumers)** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **As of December 31,**                                                                                                                        | ** ** |
| **Voltage of Distribution Lines** | ** ** | **2006**                                                                                                                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| 161 kV                                           |       | 34.2                                                                                                                                                         |       | 34.2 |   | 34.2 |   |
| 138 kV                                           |       | 6,736.9                                                                                                                                                      |       | 6,537.4 |   | 6,526.9 |   |
| 69 kV                                            |       | 2,804.2                                                                                                                                                      |       | 2,784.4 |   | 2,823.5 |   |
| 34.5 kV + Others                                 |       | 600.2                                                                                                                                                        |       | 610.8 |   | 610.8 |   |
|                                             |       |                                                                                                                                                         |       |   |   |   |   |
| Total                                            |       | 10,175.5                                                                                                                                                     |       | 9,966.8 |   | 9,995.4 |   |

 
| ** **                                    | ** ** | **Circuit Length of Distribution Lines in Miles  (from distribution substations to final consumers)** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **As of December 31,**                                                                                                                        | ** ** |
| **Type of Distribution Lines** | ** ** | **2006**                                                                                                                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| Overhead urban  distribution lines            |       | 52,642.9                                                                                                                                                     |       | 52,086.9 |   | 51,461.2 |   |
| Underground  urban distribution lines         |       | 471.6                                                                                                                                                        |       | 471.6 |   | 439.9 |   |
| Overhead rural  distribution lines            |       | 191,809.9                                                                                                                                                    |       | 183,188.9 |   | 176,412.8 |   |
| Total                                         |       | 244,924.4                                                                                                                                                    |       | 235,747.4 |   | 228,313.9 |   |

 
| ** **             | ** ** | **Step-Down Transformation Capacity(1)  of Distribution Substations** | ** ** |
|------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **             | ** ** | **As of December 31,**                                                     | ** ** |
| ** **             | ** ** | **2006**                                                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Number of  substations |       | 355                                                                                       |       | 354 |   | 350 |   |
| MVA                    |       | 8,162                                                                                     |       | 8,070 |   | 8,050 |   |

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 (1)            Step-downtransformation capacity refers to the ability of a transformer to receiveenergy at a certain voltage and release it at a reduced voltage for furtherdistribution.

Physical data forthe Control and Management Investment Program, or PROOBRA, were calculated byprojection from the existing network. In 2003, we began to calculate this asthe sum of the linear extension of the medium-voltage network and thelow-voltage network available in the GEMINI system, double counting (inrelation to the previous criterion) where joint medium and low voltage networksare in existence. The GEMINI system is the manager of CEMIG’s distributionnetwork. With the inclusion and startup of the Operation, Projects, ClientRegistry and Planning modules, all the distributor’s assets are now beingmanaged by the GEMINI system and are now the source of information for ANEEL inassembling the data on assets for the rate reviews.

As a result, thestatistics on extent of networks, number of transformers, public illuminationand quantity of transmission posts are now supplied by the GEMINI system on ageo-referenced basis. We believe this has resulted in more precise data,reduction of errors in valuing fixed assets, and increased reliability.

*Expansionof Distribution Capacity*

Our distribution expansion plan for the next fiveyears is based on projections of market growth. We anticipate that this growthwill be fueled by new consumer connections, increased electricity usage amongour existing consumers and additional electricity distribution needs from newIPP projects. According to applicable law, IPPs have the right to use ourdistribution network upon payment of certain fees. During the next five years,we anticipate connecting approximately 745,000 new urban consumers and 225,000rural consumers. In order to accommodate this growth, we expect that we willneed to add 851,000 medium-voltage poles, 2,053 miles of transmission lines and11 step-down substations (456 MVA) to our distribution network, increasing thenetwork’s installed capacity by 2,360 MVA, including reinforcement. Over thenext five years, we expect to invest approximately R$4.28 billion to expand ourdistribution system. See “Item 5. Operating and Financial Review andProspects—Liquidity and Capital Resources.”

We have adopted a rural electricity development program, with theparticipation of the Federal Government and the State Government, called *Luz Para Todos*. Our plan is to use the *Luz Para Todos* program to meet our targetfor supply of electricity to 100% of rural consumers in Minas Gerais. To meetthis objective, we will need funding in the amount of approximately R$1,641million. The *Luz Para Todos*program includes the *Luz no Saber*sub-program, which uses solar energy to light schools, community centers andrural homes in remote locations not yet reached by the distribution network.Additionally, the *Luz no Saber*sub-program connected 479 state and municipal schools in 2004 and 646 in 2005,thereby completing the connection of electricity services to all the schools inthe State of Minas Gerais.

The *Projeto Noroeste.*In2003 and 2004, planning was made for the electricity system to receiveinjection of 150 MVA in the Northeastern region of Minas Gerais state, startingin 2004. This increases the current availability to 300 MVA, aiming to supply 

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energy up to 2008 toreplace the diesel fuel traditionally used by rural producers, with theobjective of contributing to local growth in a sustainable manner. The cost of the project is R$153million.

The *Cresce Minas* program.This project will benefit approximately 340 municipalities (41% of thetotal) of Minas Gerais, a population of approximately 4.1 million and around1.1 million consumers throughout the state. The amount of capital expenditurecoming from CEMIG’s own funds for 2006, exclusively to strengthen themedium-voltage distribution system, was R$13.2 million, of a total of R$270.8million, which will be completed with turnkey projects in 2007, 2008 and2009.  In order to strengthen thesub-transmission system, the amount of R$4.3 million was invested in 2006. Inthe next three years, we expect to invest R$476 million and R$8 million,respectively, in our sub-transmission and transmission systems.

#### *Purchase of Electric Power*

During the yearended December 31, 2006, we purchased 12,109 GWh of electricity fromItaipu, which represented approximately 32.1% of the electricity we sold to endusers. In addition to the electricity purchased from Itaipu, we have two otherbasic types of supply arrangements: (i) purchases through public auctions,which accounted for approximately 64.9% of the electricity we purchased forresale during the year ended December 31, 2006, and (ii) long-termagreements existing prior to the New Industry Model Law, with representedapproximately 8.1% of the electricity we purchased in 2006.

*Itaipu. *Itaipuis one of the largest operating hydroelectric plants in the world, with aninstalled capacity of 12,600 MW. CentraisElétricas Brasileiras S.A., or Eletrobrás, a holding company controlledby the Federal Government, owns a 50% interest in Itaipu, while the remaining50% is owned by the government of Paraguay. Brazil, pursuant to its 1973 treatywith Paraguay, has the option to purchase all of the electricity generated byItaipu that is not consumed by Paraguay. In practice, Brazil generallypurchases more than 95% of the electricity generated by Itaipu.

We are one of the19 electric power distribution companies operating in the South, Southeast andCenter West regions of Brazil that are jointly required to purchase all ofBrazil’s portion of the electricity generated by Itaipu. The Federal Governmentallocates Brazil’s portion of Itaipu’s power among these electric companies inamounts proportionate to their respective historical market share of totalelectricity sales. We are currently required to purchase approximately 17% ofthe total amount of electricity purchased by Brazil from Itaipu at rates fixedto defray Itaipu’s operating expenses and payments of principal and interest onItaipu’s dollar-denominated borrowings and the cost in *reais* of transmitting such power to theinterconnected power system. These rates have been above the national averagefor bulk supply of power and are calculated in U.S. dollars. Therefore,fluctuations in the U.S. dollar/*real*exchange rate affect the cost, in real terms, of electricity we are required topurchase from Itaipu.  Historically, wehave been able to recover the cost of such electricity by charging supply ratesto consumers. According to our concession agreement, increases in the supply ratemay be transferred to the final consumer upon approval by ANEEL.

Beginning inJanuary 2008, the amount of electricity purchased from Itaipu by each ofthe electric power distribution companies in South, Southeast and Center Westregions of Brazil will be reviewed and reallocated based on the actualconsumption of each of these companies in 2004. This change will result ineither an increase or decrease in the energy required to be purchased fromItaipu by each of these electric power distribution companies. In CEMIG’s case,there will be a reduction of approximately 326 average MW of the total amountof energy we purchase from Itaipu. Companies for which the required Itaipupurchases decrease due the reallocation will be allowed to receive energy tomake up for the difference through the Mechanism of Compensation of Surplus andDeficits, or MCSD, which is currently applied to CCEARs (RegulatedEnvironment Energy Sale Contracts). Such companies will also be able to buythis energy in the A-1 Auction that is expected to take place in 2007, inthe event that the exchanges in the MCSD alone are not enough to supply theirenergy requirements. We cannot yet predict the impact of such changes on therates charged to the final consumer.

*Auction Contracts. *We purchasedelectricity in public auctions at the CCEE. These contracts were formalizedbetween CEMIG and the several sellers in accordance with the terms andconditions established in the invitation to bid. The following table sets forththe amounts of electricity contracted, average tariff and prices related to theCCEAR contracts arising from the electricity acquired by CEMIG in the auctions:
| Avarage Tariff | ** ** | **Electricity Contracted  (MW — average per year)** | ** ** | **Term of the Contract** | ** ** |
|---------------------|------------|-----------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| 57.51               |       | 530.17                                                                            |       | 2005 to 2012                            |       |
| 67.33               |       | 919.14                                                                            |       | 2006 to 2013                            |       |

 

*Bilateral Agreements *We entered into bilateral agreements with varioussuppliers prior to the enactment of the New Industry Model Law. Such agreementsare valid under their original terms but cannot be renewed. During the yearended December 31, 2006, we purchased 1,190 GWh, which represented 4.1% ofthe total electricity purchased by us during the year.

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**Energy Losses**

In 2004, therules under the New Industry Model for the electricity sector resulted ina change in our method of calculating losses resulting from the energy thatpasses through our system. Under the New Industry Model for the electricitysector, as an incentive for competition, there is now free access to thetransmission and distribution networks, enabling certain consumers to buy theirelectricity freely from other suppliers. Consumers who opt for thisfree-negotiation mode of supply now have two contracts: one with the owner ofthe distribution or transmission network for the use of the networks, and theother with the selling agent or generator for the electricity. Also, under thenew regulations, (i) our transmission assets with voltage of greater thanor equal to 230 kV became part of the national basic grid which is operated bythe ONS, referred to as the Basic Grid; and (ii) energy losses occurringin this Basic Grid are divided equally so that 50% is allocated amonggeneration agents in proportion to each of their levels of energy generationand the other 50% is allocated among consumption agents (distributors and FreeConsumers) in proportion to each of their energy loads. As a result, the lossesin the Basic Grid attributed to a given agent now have no direct relationshipwith its Basic Grid assets, nor can the agents have control over them.Therefore, these losses take on the status of an electricity transmissionservice charge for the agents of the sector, and become part of the coststructure covered by the distributors’ retail rate, substantially reducing therisk of financial losses.

In 2005, CEMIG wasde-verticalized, or “unbundled”, and its activities of (a) generation andtransmission and (b) distribution began to be managed in two separatecompanies, thus complying with the legal requirements instituted by the newregulatory framework for the Brazilian electricity sector.  Due to this unbundling, and in accordancewith a commercial strategy of CEMIG, in 2005 a significant portion of consumersmigrated from being captive market customers of Cemig Distribution to beingfree market customers of Cemig Generation and Transmission.  This event resulted in a non-recurring changein sales revenue for Cemig Distribution in January 2005.  Since the calculation of non-technical lossestakes into account the amounts billed in the calendar year, this change inrevenue affected the amount of the non-technical losses calculated in 2005.

2005 was the first yearin which we had 12 months of sales revenue as an unbundled company, free fromnon-recurring effects.  The calculationof losses in 2006 will serve as a reference point for losses in future yearssince it (i) is free of non-recurring effects and (ii) is calculated using thenew method of calculation of losses put in place in 2004 to improve thecalculation and representation of losses in the new regulatory environment.

CEMIG’s totalenergy losses in 2006 were 5,437 GWh, compared to 4,096 GWh in 2005. Of thistotal in 2006, 388 GWh related to losses in the whole national grid systemattributed to CEMIG by the National System Operator (ONS). The remaining 5,049GWh were losses in CEMIG’s own local distribution system and represent 11.8% ofthe total energy (2,788 GWh) that passed through that local system. Losses inthe national grid system are allocated to the operators in proportion to eachoperator’s own total load. Thus, the migration of captive clients to the freemarket, which reduced the total load of CEMIG Distribution, reduced the amountof national grid system losses attributed to CEMIG, contributing to thereduction in our total energy loss.

The differences intotal losses from 2005 to 2006 is mainly due to the following:

·                  A low comparisonbase in 2005 due to a non-recurring event: the mass migration of captiveclients to the free contracting environment in December 2004, resulting in achange in sales revenue in January 2005 which reduced the non-technical lossesin that month, affecting total losses that year for Cemig Distribution.

·                  The maximizationof generation in the Southeastern region of the country, including thegeneration capacity connected to the CEMIG network, for orders from the ONS, toprovide optimum operation of the national grid system to deal with a shortageof electricity in the Southern region caused by the drought in that region fromMay to September, 2006.

·                  A significantexpansion of the distribution network to meet the electrification programs.

·                  An increasedload on CEMIG’s distribution network.

We divide ourenergy losses into two basic categories: technical losses and non-technicallosses. Technical losses account for approximately 76% of our energy losses inthe distribution grid. These losses are the inevitable result of the step-downtransformation process and the transportation of electric energy through the3,019 miles of transmission lines and 255,095 miles of distribution lines thatwe operate.

We attempt tominimize technical losses by performing rigorous and regular evaluations of thequality of our electricity supply. We routinely upgrade and expand ourtransmission and distribution systems in order to maintain quality andreliability standards, and consequently, reduce technical losses. In addition,we operate our transmission and distribution systems at certain specifiedvoltage levels in order to minimize losses.

Other measures tocombat technical losses that can be highlighted include:

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

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

·                   Evaluating theexpansion of the reactive compensation capacity of the high voltage electricitysystem; and

·                   Replacement ofold cables with thicker cables, and substitution of the lower voltage levels(34.5 kV to 69 kV) with high voltage levels (138 kV).

Non-technicallosses account for the remaining 24% of our energy losses in the distributiongrid and result from fraud, illegal connections, metering errors and meterdefects. These non-technical losses accounted for 2.78% of the electricity thatpassed through our distribution grid during 2006. In order to minimizenon-technical losses, we regularly take preventive actions, including:

·                                          inspectionof consumers’ meters and connections;

·                                          modernizationof metering systems;

·                                          trainingof meter-reading personnel;

·                                          standardizationof meter installation and inspection procedures;

·                                          installationof meters with quality control warranties;

·                                          consumerdatabase updating; and

·                                          developmentof a theft-protected distribution network.

Additionally, wehave developed an integrated system designed to help detect and measurecontrollable losses in all parts of our distribution system.

At the end of 2006, the indicators that measure thequality of supply by Cemig Distribution (DEC – Consumer Outage Duration inhours per year, and FEC – Number of Outages Per Year) were 13.02 and 6.42,respectively, compared to 12.21 and 6.77 in 2005.

**Consumers andBilling**

#### *Consumer Base*

Our distributionbusiness consumers, all of whom are located within our concession area in MinasGerais, are divided into five principal categories: industrial (includingmining, manufacturing and processing activities); residential; commercial(including service-oriented businesses, universities and hospitals); rural; andother (including governmental and public entities). During the year endedDecember 31, 2006, we sold  38,891GWh of energy.

For 2006, ascompared to 2005, the volume of electric power sold by us to industrial andcommercial consumers increased by 1.2% and 2.6% respectively and the volume ofelectric power sold by us to rural consumers decreased by 0.2%. The otherconsumer category grew 3.6% (this excludes wholesale supply). The residentialconsumption increased 0.9% from 2005 to 2006. The following table provides information regarding the number of ourconsumers as of December 31, 2006 and consumption by consumer category forthe years ended December 31, 2006, 2005 and 2004.

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| ** **            | ** ** | **Number of**         | ** ** | **Consumption (GWh)** | ** ** |
|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **            | ** ** | **consumers at**      | ** ** | **Years ended**       | ** ** |
| ** **            | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| **Consumer Category** | ** ** | **2006**              | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Industrial            |       | 70,809                | (2)        | 23,759                | (1)        | 23,472 | (1) | 22,969 | (1) |
| Residential           |       | 5,064,556             |       | 6,647                 |       | 6,590 |   | 6,526 |   |
| Commercial            |       | 549,378               |       | 3,851                 |       | 3,754 |   | 3,537 |   |
| Rural                 |       | 495,067               |       | 1,938                 |       | 1,941 |   | 1,846 |   |
| Own consumption       |       | 796                   | (3)        | 30                    |       | 29 |   | 55 |   |
| Other                 |       | 59.583                | (4)        | 2,666                 |       | 2,573 |   | 2,498 |   |
| Total                 |       | 6,240,189             |       | 38,891                |       | 38,359 |   | 37,431 |   |

 

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

(2)              Includes subsidiaries and affiliatedcompanies.

(3)              Does not include consumption through supply toother concessionaires.

(4)             Refersto the number of our plants, facilities and offices that use our energy, eachof which is considered a consumer pursuant to ANEEL regulations.

In 2006, we added and billed 230,202 new finalconsumers, representing growth of 3.8% compared to 2005, through the expansionof our transmission and distribution systems.

The largestportion of the energy we sell is purchased by large industrial consumers. AtDecember 31, 2006, 12 of our industrial consumers had high voltageelectrical energy supplied through direct connections to our transmissionlines. These consumers constituted 17.7% of our total volume of electricalpower sales during 2006, and approximately 6.6% of our revenues. In the sameperiod, our ten largest industrial consumers accounted for nearly 19.9% ofenergy consumed. None of our ten largest consumers is owned by the StateGovernment or by the Federal Government.

As ofDecember 31, 2006, we had entered into power purchase agreements with2,773 of our industrial consumers, of which 525 consumers had demand above 500kW. Our power purchase agreement with industrial consumers has a term of threeor five years and contains a minimum demand clause that requires the consumerto pay for the contracted demand, which represents the system capacity reservedfor that consumer, as well as the consumer’s actual consumption. We believethat this billing method provides us with a relatively stable source ofrevenue.

The followingtable shows our industrial energy sales volumes by type of industrial consumeras of December 31, 2006:
| **Industrial Consumers** | ** ** | **Energy Sales Volume   in GWh** | ** ** | **Consumption as a  Percentage of Total  Industrial Energy Sales  Volume** | ** ** |
|-------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| Steel industry                |       | 6,880                                                | (1)        | 28.96                                                                                                    |       |
| Ferroalloy  industry          |       | 4,432                                                |       | 18.65                                                                                                    |       |
| Chemical  industry            |       | 2,608                                                | (2)        | 10.98                                                                                                    |       |
| Non-ferrous  metal industry   |       | 1,584                                                |       | 6.66                                                                                                     |       |
| Mining industry               |       | 1,422                                                |       | 5.99                                                                                                     |       |
| Food processing               |       | 1,450                                                | (3)        | 6.10                                                                                                     |       |
| Cement industry               |       | 920                                                  |       | 3.87                                                                                                     |       |
| Others                        |       | 4,463                                                | (4)        | 18.79                                                                                                    |       |
| Total                         |       | 23,759                                               |       | 100.00                                                                                                   |       |

 

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(1)  Includesconsumption by *Sá Carvalho S.A., Usina TermelétricaBarreiro S.A.**and Usina Térmica IpatingaS.A.*

(2)  Includes *Horizontes Energia S.A.*

(3)  Includes consumption by *Cemig PCH S.A.*

(4)  Includes *Cemig PCH S.A.*and *Horizontes S.A.*

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The followingtable sets forth the names and related industries of our ten largest consumersin 2006:
| Ten Largest Consumers  (listed in order of total GWh of electricity purchased from us in 2006) | ** ** | **Industry** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|
| Companhia  Siderúrgica Paulista - COSIPA                                                                                                                        |       | Steel        |       |
| Usinas  Siderúrgicas de Minas Gerais S.A. — USIMINAS                                                                                                       |       | Steel        |       |
| Ligas de  Alumínio S.A.                                                                                                                                         |       | Ferroalloys  |       |
| Italmagnésio  Nordeste S.A.                                                                                                                                     |       | Ferroalloys  |       |
| Companhia Brasileira de Carbureto de Cálcio - CBCC                                                                                                              |       | Ferroalloys  |       |
| White Martins  Gases Industriais S.A.                                                                                                                                |       | Chemical     |       |
| Votorantim Metais e Zinco S.A                                                                                                                                        |       | Non-ferrrous |       |
| Saint Gobain  Materiais Cerâmicos Ltda                                                                                                                          |       | Chemical     |       |
| Companhia Ferro  Ligas Minas Gerais                                                                                                                                  |       | Ferroalloys  |       |
| Belgo Siderurgia S.A                                                                                                                                                 |       | Steel        |       |

 

As a result of our strategy to maintain and capture alarger market share in the free market, we have entered into contracts with largeFree Consumers within and outside of Minas Gerais leading to an electricitysale volume in 2006 of 18,100 GWh. As a result of the unbundling, most of ourcontracts with large consumers within our concession area were assigned toCemig Generation and Transmission in 2006. Most of our large clients, thatrepresent almost 50% of the MWh volume of our energy sold, have already boughtelectricity from Cemig Generation and Transmission for the next several years.Consumers that opt to become Free Consumers are primarily industrial consumerswhose demand generally exceeds 3 MW. Consumers that consume between 500 kW and3 MW may opt to purchase energy from other sources, if such source is arenewable energy source, such as small hydroelectric facilities or biomass. Atotal of 690 of our clients which currently purchase electricity at regulatedrates (“captive consumers”) representing annual sales revenue of R$633 million(or 8.0% of our annual sales revenue), may elect to become Free Consumers oropt to purchase energy from alternative sources.

#### *Billing*

Our monthlybilling and payment procedures for electricity supply vary by consumercategory. Our large consumers with direct connections to our transmissionnetwork are billed on the same day their meters are read. Payment is requiredwithin five days after delivery of the bill. Other consumers receiving high andmedium voltage electricity (approximately 8,000 consumers supplied at a voltagelevel equal to or greater than 2.3 kV or connected by underground distributionlines, with the exception of public sector entities) are billed within one(70%) or two (30%) days of their meter reading and payment is required withinfive days after delivery of the bill. Our remaining consumers are billed withinseven days of their meter reading and payment is required within 10 days afterdelivery of the bill or 15 days after delivery of the bill in the case ofpublic sector entities. Bills are prepared from meter readings or on the basisof estimated consumption.

*Seasonality*

Our sales areaffected by market seasonality. Usually, an increase in consumption byindustrial and commercial consumers occurs in the third quarter due toincreases in industrial and commercial activities. In addition, there isgenerally an increase in usage across all consumer categories during the summerdue to the increase in temperatures. Certain figures representing quarterlyconsumption by final consumers from 2004 through 2006, in GWh, are set forthbelow:
| Year             | ** ** | **First Quarter** | ** ** | **Second Quarter** | ** ** | **Third Quarter** | ** ** | **Fourth Quarter** | ** ** |
|------------------|------------|------------------------|------------|-------------------------|------------|------------------------|------------|-------------------------|------------|
| 2004(1) (2) |       | 9,067                  |       | 9,353                   |       | 9,496                  |       | 9,617                   |       |
| 2005(1) (2) |       | 8,622                  |       | 9,730                   |       | 9,867                  |       | 10,140                  |       |
| 2006 (1) (2)     |       | 9,485                  |       | 9,619                   |       | 9,901                  |       | 9,886                   |       |

 

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(1)             Includesconsumption by *Sá Carvalho S.A., Usina Térmica IpatingaS.A., Usina Térmica Barreiro S.A., Cemig PCH S.A.* and*Horizontes Energia S.A*.

(2)             Does notinclude supply to other concessionaires.

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

**Competition**

*Contracts with Free Consumers*

The management of our portfolio through a majorcommercial effort in relation to our client base resulted in our successfullyobtaining signatures to 152 contracts with Free Consumers by December 31,2006.  Eleven of these contracts are withcompanies located outside of our distribution company’s concession area andwhich consume 1,849 GWh of energy per year. These contracts with Free Consumershave an average term of three to ten years, and represent a volume ofapproximately 17,000 GWh/year.

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Of our previous captiveconsumers, only nine did not sign contracts with us and instead opted to becomeFree Consumers. These nine formerly captive consumers represented an annualvolume of 772 GWh, equivalent to 4.3% of the total volume of electricity sold during2006. Another twelve consumers, representing approximately 1,261 GWh,elected to opt out of the ACR and choose their own generation subsidiary as asupplier.

In addition to our salesin the ACL auctions, we have been successful in entering into agreements in theACR that represent a volume of 8,120 GWh/year. These contracts have a term ofeight years, beginning in 2006. Also, in April 2005, we obtained newcontracts in the ACR that represent a volume of 920 GWh/year. The contractshave a term of eight years, beginning on January 1, 2008. In addition, inJune 2006 we sold through energy contracts the energy produced by ourindependent power producers, in the ACL, with 30-year terms beginning on January 1, 2009, that represent avolume of 3,110 GWh/year.

Through this strategy wehave been successful in the sale of the greater part of our existing generationcapacity through contracts which will mostly be renewed beginning in 2010. Atthat time, demand of electricity in Brazil is expected to exceed supply, whichshould result in better price conditions than in the current market wheresupply exceeds demand.

*Concessions*

Each concessionthat we currently hold is subject to a competitive bidding process upon itsexpiration. However, in accordance with the Concessions Law, existingconcessions may be renewed without a bidding process by the Federal Governmentfor an additional period of up to 20 years upon application by theconcessionaire, provided the concessionaire has met minimum performancestandards and the proposal is otherwise acceptable to the Federal Government. On September 22, 2004, we applied toANEEL for a 20-year renewal of the concessions of the Emborcação and NovaPonte Hydroelectric Plants. On June 14, 2007, the Federal Governmentpublished Ministerial Order 124, extending the concessions of these powerplants for a period of 20 years, beginning on July 24, 2005.

In addition, it ispossible that a number of our large industrial clients may become SPPs pursuantto the Concessions Law in order to obtain the right to generate electricity fortheir own use. The granting of certain concessions to our large industrialclients could adversely affect our results of operations.

**Raw Materials**

Our principal rawmaterials expense 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, 2006 represented an expense ofR$37 million. See “Item 5. Operating and Financial Review and Prospects” and “TheBrazilian Power Industry—Regulatory Charges” in Annex A. We believe thatsupplies of fuel oil are readily available.

**Other Businesses**

*Natural Gas Distribution*

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

InJanuary 1993, the State Government granted Gasmig an exclusive 30-yearconcession for distribution of natural gas covering the entire State of MinasGerais and consumers located within it. Gasmig’s marketing efforts focus on itsability to provide a more economically efficient and environmentally friendlyalternative to oil, liquefied petroleum gas (LPG) and wood. In 2006, Gasmigsupplied approximately 2.06 million cubic meters of gas per day to 261consumers: 162 industrial and commercial clients, 84 vehicle natural gas (VNG)retail distribution stations, two thermal power plants and six distributors ofcompressed natural gas (GNC). Gasmig supplied 0.55 million cubic meters of gasper day to thermal power plants and 1.58 million cubic meters of gas per day toretail consumers. In addition to serving the conventional market and thethermal power plants, Gasmig also supplied eight clients with re-gasifiedliquefied natural gas (LNG). In 2006 Gasmig distributed approximately 4.8% ofall natural gas distributed in Brazil.

On August 25,2004, CEMIG, Gasmig, Gaspetro and Petrobras entered into an AssociationAgreement, pursuant to which CEMIG agreed to sell a 40% equity interest inGasmig to Gaspetro, a subsidiary of Petrobras. Under the terms of theAssociation Agreement, Petrobras agreed to make investments to expand thecapacity of the current pipelines connected to the Gasmig distribution networkas well in the construction of new pipelines, and CEMIG and Gaspetro agreed tofund Gasmig’s capital expenditure plan to expand its distribution network.

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Thetransaction was implemented on December 15, 2004 when Petrobras, throughits subsidiaries Gaspetro and TSS, concluded its acquisition of a 40% equityinterest in Gasmig. On July 26, 2006, TSS was merged into Gasmig. As acondition to such investment, Petrobras and CEMIG entered into a ShareholdersAgreement in which CEMIG agreed with Petrobras and its subsidiaries to share inthe management of Gasmig. See “Item 10. Additional Information—MaterialContracts—Gasmig Shareholders Agreement and Association Agreement”. OnDecember 15, 2004, Gasmig executed an additional supply contractwith Petrobras which guarantees a gradual increase in supply of up to 5.1million m3/day of natural gas, in addition to the 3.5 million m3/day that waspreviously contracted for. This additional supply agreement is for the supplyof natural gas to the regions of the “Steel Valley” (*Vale do Aço*)and the South of Minas Gerais, and also for expansion of service to the regionsof Greater Belo Horizonte, the *Zona da Mata*(in the Southeast of Minas Gerais) and the *Campos das Vertentes*(historic region), in the industrial, commercial, automotive and residentialmarkets. The additional supply agreement has a term of 20 years, and isscheduled to begin the commercial supply in 2007, under this agreement theprice will be established based on the international oil price in the New Yorkmarketplace.

We expect that theassociation with Petrobras will expand Gasmig’s distribution capacity, as ourability to offer natural gas to our consumers will increase significantly withthe implementation of Petrobras’s investments in pipelines. We expect thatGasmig’s capital expenditures for 2007 will be mostly used for the expansion ofour distribution network in highly industrialized areas of Minas Gerais. Gasmighas already begun the necessary expansions to serve the regions of the “SteelValley” and the Southern region of the State of Minas Gerais.

Gasmig is not aconsolidated investment in our financial statements in accordance with EmergingIssues Task Force (“EITF”) Issue No. 96-16, “Investor’s Accountingfor an Investee When the Investor Has a Majority of the Voting Interest but theMinority Shareholder or Shareholders Have Certain Approval or Veto Rights.”  We consolidated Gasmig’s revenues andexpenses for the period from January 1, 2004 to December 15, 2004,the date of our sale of a 40.00% equity interest in Gasmig to Petrobras.

Other than with respect to the liquefied natural gas(LNG) supplied to Gasmig by a joint venture between Petrobras and White MartinsGases Industriais Ltda. (“White Martins”), Gasmig purchases all its natural gasneeds from Petrobras, and such gas is mainly provided by Petrobras’ own naturalgas deposits. Our relationship with Petrobras is governed by two long termagreements, expiring in 2021 and 2027. The price Gasmig charges its clients isbased on the price charged by Petrobras plus a margin. Therefore, all the costsrelated to the purchase of natural gas are passed to the clients through thetariff.

Minas Geraisaccounts for approximately 12% of the total energy consumption in Brazil. Manyenergy-intensive industries such as the cement, steel, ferroalloys andmetallurgy have significant operations in the state. We estimate that the totaldemand for natural gas in Minas Gerais will amount to nearly 7 million cubicmeters of gas per day by 2009, which exceeds the projected availablesupply.  Gasmig’s key strategy is toexpand its distribution network in order to serve the portion of the demand yetnot reached. Gasmig is engaged in the development of new projects to extend itsnatural gas distribution systems to reach consumers in other areas of MinasGerais, mainly in heavily industrialized areas. In 2006, Gasmig began supplyingnatural gas to three industrial companies and two vehicle natural gas (VNG)retail distribution stations in the region of the Vale do Aço (“Steel Valley”),thus concluding the first phase of service to that region of the State of MinasGerais. The average volume of natural gas to be distributed in this first stageis approximately 200,000 cubic meters/day. Gasmig brought forward its startdate, in August, 2006, for service to the Southern region of the State of MinasGerais, through re-gasification of the liquefied natural gas (LNG) contractedwith Gaslocal, a company formed between association of Petrobras and WhiteMartins.

For 2006, Gasmighad gross revenues of approximately R$540 million and net income after taxes ofapproximately R$74 million.

In 2006, Gasmiginvested approximately R$36 million in the expansion of its gas pipelinenetwork to serve more clients in the State of Minas Gerais. The funds tofinance the expansion came primarily from its own cash flow and dividendreinvestment. Currently, the natural gas pipeline which brings natural gas fromthe Campos oil basin (State of Rio de Janeiro, Brazil) operates at fullcapacity and further investment by the Federal Government will be necessary toexpand the capacity or construct a new pipeline to supply the growing naturalgas demand in the State of Minas Gerais.

*Telecommunications, Internet and Cable Television*

OnJanuary 13, 1999, we incorporated Empresa de Infovias S.A. in MinasGerais, Brazil, as a joint venture with AES Força Empreendimentos Ltda., anaffiliate of AES Corporation Group. Currently, we own 100.00% of the commonshares of Empresa de Infovias S.A. Empresa de Infovias S.A. has an opticalfiber-based long-distance communications backbone installed along our powergrid using optical ground wire cables. This communications backbone isconnected to an access network that is based on hybrid fiber-coaxial cabletechnology and is deployed along our power grid. Pursuant to Braziliantelecommunications law, we also make our network infrastructure available toother telecommunications providers interested in leasing it.

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Empresa deInfovias S.A. started its business operations in January 2001. The maintelecommunication services provided by Empresa de Infovias S.A. through itsnetwork are signal transportation and access, both for point-to-point andpoint-to-multipoint applications, delivered mainly to telecommunicationsoperators and Internet service providers on a clear channel basis. Empresa deInfovias S.A. is also extending its broadband Internet services, currentlyavailable in the cities of Belo Horizonte, Poços de Caldas, Barbacena,Contagem, Sete Lagoas, Ipatinga and Uberaba, to other cities in Minas Gerais.

Empresa deInfovias S.A. provides the network for cable television service in 12 cities inMinas Gerais pursuant to a 15-year service agreement with WAY TV BeloHorizonte S.A. (“WAY TV”) and Brasil Telecomunicações S.A., each a holder ofconcessions to provide cable television and Internet service in certain citiesin Minas Gerais, under which Empresa de Infovias S.A. allows these companies touse its network infrastructure. In return, WAY TV and Brasil Telecomunicaçõesare obligated to deliver to Empresa de Infovias S.A. a percentage of therevenues derived from their cable television and Internet subscribers. AtDecember 31, 2006, these two companies had approximately 72 thousand cabletelevision subscribers and 57.5 thousand Internet service subscribers.

Empresa deInfovias S.A. holds a 69.25% equity interest in WAY TV, including 49.9% of itscommon shares. The control of WAY TV is exercised by Empresa de Infovias S.A.and CLIC—Clube de Investimentos dos Empregados da Cemig, or CLIC, which owns1.1% of WAY TV’s common shares, through a shareholders’ agreement. Under thisagreement, CLIC has agreed to vote in accordance with Empresa de Infovias S.A.’sinterests at the WAY TV shareholders’ meetings and board of directors. To date,Empresa de Infovias S.A. has invested approximately R$61.9 million in WAY TV.In light of the need for additional investments in our telecommunicationssubsidiaries in order to take advantage of the opportunities in voice overinternet protocol services, our Board of Directors decided on December 22,2005 to authorize the sale, through an auction on a stock exchange, of all ofEmpresa de Infovias S.A.’s equity interest in WAY TV.

At the auction,held on the São Paulo Stock Exchange on July 27, 2006, TNL PCS ParticipaçõesS.A, a company of the OI Group, previously named TELEMAR, the purchaser of WAYTV (the “Purchaser”), paid a total price of R$132 million, 65% above theminimum price. The share sale contract was signed on August 1, 2006, and theamount of the sale price is held in escrow by Banco do Brasil S.A., inaccordance with that contract, until consent for disposal of the control of WAYTV has been given by the *AgênciaNacional de Telecomunicações*(“ANATEL”), at which point the shares will be transferred to thePurchaser and the funds will be released to Empresa de Infovias S.A. and theother sellers.  The amount paid forEmpresa de Infovias S.A.’s interest in the stock of WAY TV was R$91 million.

In a special meeting held on March 19, 2007, ANATEL declined to approvethe sale of our ownership and control of WAY TV to the Purchaser. WAY TVfiled an administrative appeal before ANATEL on April 13, 2007 for the reversalof its decision not to approve the sale of our ownership and control of WAY TV,which is still pending.  ANATEL’s decision does not result in thecancellation of the share sale contract, which remains in effect until a finaldecision is rendered by ANATEL.****It isnot possible at the present time to estimate the outcome of the appeal.

Empresa deInfovias S.A. also provides intracompany data transmission services to uspursuant to a five-year agreement signed in 2001. The agreement expired in 2006, but the parties are in the process offinalizing a renewal contract.  We usethis service for internal communications as well as for certain communicationswith our consumers.

During 2006,Empresa de Infovias S.A. had consolidated gross revenues of R$125 million, ofwhich R$47 million related to the provision of telecommunication services andR$78 million related to the provision of cable television and Internetservices.

Empresa deInfovias S.A.’s capital expenditures for the past five years were R$352million. Empresa de Infovias S.A.’s capital expenditures for 2007 will bemostly used for expansion of its telecommunications network.

*Consulting and Other Services*

We provideconsulting services to governments and public utility companies in theelectricity industry in order to derive additional revenues from the technologyand expertise we have developed through our operations. During the past tenyears, we have provided such services to government agencies and utilities inten countries, including Canada, Paraguay, Honduras and El Salvador and to thegovernment of Panama.

On January 9,2002 we created Efficientia S.A., referred to as Efficientia, in Minas Gerais,to provide project efficiency optimization solutions and operational andmanagement services to energy supply facilities. We have a 100% interest inEfficientia, which began operating in 2003. Efficientia has increased itsmarket share and revenues in the Brazilian market for specialized consultancyservices every year since it began operations. Such services include consultancyin the areas of efficiency, energy solutions, reduction of non-technical lossesin other electricity distribution concession holders and the provision ofpreventive maintenance services

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In 2006,Efficientia posted profit of R$414 thousand, after distribution of dividends ofR$238 thousand in the form of interest on equity. Efficientia’s gross revenuesin 2006 were R$4.3 million, 11.71% more than in 2005. This increase in grossrevenue was achieved with operational costs of R$3.5 million, 2.94% more thanin 2005. In this period Efficientia crossed Brazilian frontiers into theinternational market for energy efficiency, providing specialized consultancyand training.

**EnvironmentalMatters**

*Overview*

Our generation,transmission and distribution activities are subject to comprehensive federaland state legislation relating to the preservation of the environment. See “TheBrazilian Power Industry—Environmental Regulations” in Annex A. The primaryenvironmental authorities in the State of Minas Gerais are *Fundação Estadual do Meio Ambiente* (Stateof Minas Gerais Environmental Foundation), or FEAM, Instituto Mineiro de Gestãodas Águas (State of Minas Gerais Water Management Institute), or IGAM, *Secretaria de Meio Ambiente e DesenvolvimentoSustentável* (State Secretariat for the Environmental and SustainableDevelopment), or SEMAD, and *ConselhoEstadual de Política Ambiental* (State of Minas Gerais EnvironmentalPolicy Council), or COPAM. At the Federal level, the mainauthorities are *Conselho Nacional de MeioAmbiente* (National Environment Council), or CONAMA, *Instituto Brasileiro do Meio Ambiente e dos RecursosNaturais**Renováveis*(the Brazilian Institute of the Environment and Natural Renewable Resources),or IBAMA, and *Agência Nacional de Águas*(NationalWater Agency), or ANA.

We believe that we are incompliance in all material respects with the relevant laws and regulations. In2006 we maintained NBR ISO 14001/2004 environmental certification on theItutinga and Nova Ponte hydroelectric plants and on the Cemig EnvironmentalManagement System (EMS), for a total of 180 municipalities, and for ourmaterials storage and logistics warehouses, and the Camargos hydroelectricpower plant.

In addition we obtained thefollowing certification on CEMIG’s generating facilities in 2006:

·                     the Três Marias, Volta Grandeand Jaguará hydroelectric power plants (1,200 MW);

·                     the Igarapé thermal power plant(131 MW),

·                     the Volta Grande environmentalstation, and the Galheiros Environmental Reserve; and

·                     management of the industrialsafety, property management and operational contingency services.

This increased our totalgeneration capacity certified under the environmental management system from562 MW to 1,939 MW.

In 2006, for theseventh consecutive year CEMIG was selected to be a component of Dow JonesSustainability Index (DJSI World Index). CEMIG was also selected for the second consecutive year tobe a component of the new BOVESPA Sustainability Index (*Indice de SustentabilbidadeEmpresarial*).

In accordance withour environmental policy, we have established various programs for preventionand control of damage aiming at limiting our risks related to environmentalissues.

In 2006 weinvested approximately R$38 million in environmental compliance projects forplant and equipment , and in the implementation of new projects, and also spentR$19.5 million on operational and maintenance expenses for our currentactivities, such as final disposal of waste, putting environmental managementsystems in place, audits, planting of riverside forests, fish cultivation,putting in place tree pruning and oil policies, environmental educationprograms, maintenance of conservation units, training and other activities. Wealso invested R$597 thousand inenvironmental research and development projects developed with universities andresearch institutes.

*Licensing*

Applicable law inBrazil requires that licenses be obtained in connection with the construction,installation, expansion and operation of any facility that utilizesenvironmental resources, causes environmental degradation, pollutes or has thepotential to cause environmental degradation or pollution or harmarchaeological wealth. Generally, state governments manage the environmentallicensing process for facilities that are to be built within their territories.However, the Federal Government manages the environmental licensing process forfacilities that are expected to have an environmental impact on more than onestate and/or are located between two or more states.

COPAM RegulatoryOrdinances No. 17, dated December 17, 1996, and No. 23, datedOctober 21, 1997, provide that operational licenses shall be renewed fromtime to time for periods of four to eight years depending on the size andpollution potential of the facility. Aimed at surveying and rescuingarchaeological wealth that has not been previously considered, the provisionsof 

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Ordinance No. 28,dated January 31, 2003, of *Instituto doPatrimônio**Histôrico e Art**ístico Nacional*(National Historical and Artistic Heritage Institute), or IPHAN, set forth thatthe renewal of operational licenses for hydroelectric power plants shall beconditioned on a favorable opinion of IPHAN concerning archaeological studieson the depletion area of the reservoir. These studies are to be sponsored bythe plant operator.

Gasmig’sdistribution of natural gas through pipelines in Minas Gerais is also subjectto environmental control. We believe that all licenses for the regularoperation of Gasmig’s activities have been obtained.

The environmentallicenses for the operation of the Natural Gas Distribution Network were dulyissued by the State Environmental Foundation (FEAM).

*CorrectiveEnvironmental Operation Licensing*

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

Federal Law No. 9,605, dated February 12,1998, sets forth penalties for facilities that operate without environmentallicenses. In 1998, the Federal Government issued Provisional MeasureNo. 1,710 (currently Provisional Measure No. 2,163/41), whichestablishes the potential for project operators to enter into agreements withrelevant environmental regulators for the purpose of coming into compliancewith Federal Law No. 9,605/98. Accordingly, we have been negotiating withthe *Instituto Brasileiro do Meio Ambiente edos Recursos Naturais**Renováveis*(the Brazilian Institute of the Environment and Natural Renewable Resources),or IBAMA, and FEAM to obtain the corrective environmental operation licensingfor all 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 a gradualbasis. We do not currently anticipate any costs and commitments in connectionwith any recommendations that may be made by IBAMA and FEAM.

Currently, those CEMIG generation and transmissionfacilities that started operation before the Brazilian environmentallegislation was passed, and which have not obtained corrective licencing, havefiled applications with the appropriate environmental bodies.

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

The environmental licenses, either issued by state orfederal bodies, are subject to several conditions imposed in light of theforeseen environmental impacts. In extreme circumstances, the failure to complywith such conditions may result in the revocation of the license. We believe weare in compliance with the requirements mentioned in our licenses.Environmental licenses are obtained upon conditional requirements which have tobe met during the period of their validity. Non-compliance with theseconditional requirements can result in application of administrative penalties,including fines and repeal of the environmental license. CEMIG has beencomplying with the demands of the environmental conditions of the licenses, andperiodically sends reports to the environmental regulatory authorities.

*Compensation measures*

According toFederal Law No. 9,985, dated July 18, 2000, and corresponding DecreeNo. 4,340, dated August 22, 2002, the companies whose activities aredeemed to cause high environmental impacts are required to invest in protectedareas in order to offset those impacts. These companies are required to investat least 0.5% of total amounts invested in implementation of its correspondingproject in activities and areas defined by environmental agents.

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During thelicensing procedure, in light of the environmental impacts identified by theenvironmental assessment studies presented by the operator, environmentalbodies may determine the amount to be invested and which protected areas shallbe benefited.

The criteria forenvironmental and social compensation have not been clearly defined, and thereis a possibility that requests from environmental agencies, the Public Attorneys’Office, NGOs or affected populations may be added to those traditionallyproposed. Due to these uncertainties, licensing (including correctivelicensing), timing and budgets of new projects, and even their feasibility, maybe affected. Discussions are currently in progress with official environmentalbodies (at both the federal and state level) for the purpose of establishingcriteria to govern environmental compensations.

A work groupcreated by the Brazilian Federal Government approved Resolution No. 371,dated April 5, 2006, by the National Environmental Council which set forthcriteria for charging environmental compensation. In the approved resolution,the maximum percentage to be applied to the total value of a project forcalculation of the compensation is not stated, however a range between 0.5% and5% of the value of the project is currently being debated. The percentage isexpected to be established in subsequent legislation. The resolution does notstate whether the payment of environmental compensation will cover projects putin place before the legislation, which would include the majority of CEMIG’sfacilities. As a result, any decision to backdate compensation may result inadditional costs for us.

In the state of Minas Gerais, where CEMIG has most itsfacilities and enterprises, the Chairman of the state’s Environmental PolicyCouncil  (COPAM) issued RegulatoryOrdinance No. 94 in April 2006, applying an environmentalcompensation charge, at rates between 0.5% and 1.1% of the total amountsinvested in the implementation of the projects that cause environmentalimpacts. This regulatory ordinance also indicated that the compensation chargeapplies to projects implemented before the issuance of the new legislation.Since this legislation is still recent, there has not been time to assess whateffects it will have on CEMIG, but depending on the manner in which it isapplied, it could result in additional costs for CEMIG.

*Fishways*

The dams at each of our hydroelectric generationfacilities can put fish that inhabit the adjoining reservoirs in danger. Inorder to reduce the impact of these facilities on nearby fish populations, theState Government enacted State Law No. 12,488, dated April 9, 1997,which imposes measures assuring that migratory fish that pass through dams willbe redirected to fishways, through which they can pass safely. As ofDecember 31, 2005, we had fishway projects installed at our Aimorés,Funil, Igarapava, Igarapé, Pandeiros and Salto de Moraes facilities. In April 2002we sent COPAM a study relating to our dams. In July 2002 we received aresponse from SEMAD that requires us to provide additional studies relating tothe feasibility of installing fishways in our dams located in Minas Gerais. Weexecuted an agreement with a non-governmental organization, named SMC (*Sociedade Mineira de Cultura*) and theuniversity PUC Minas (Pontificia Universidade Católica de Minas Gerais) inorder to proceed with the studies for SEMAD in connection with the Gafanhoto,Cajuru, Miranda and Nova Ponte hydroelectric plants. The studies that are inprogress are not yet conclusive as to the need for the provision offishways. In addition, studies will be necessary in others facilities includingPandeiros, Salto Paraopeba, Luiz Dias, Sá Carvalho, Sumidouro, and Bom Jesus doGalho. In addition, there has been no decision by the environmental authoritiesregarding the building of fishway projects at CEMIG’s hydroelectricgeneration facilities. However, there is a possibility that futuredecisions by the environmental authorities, or changes in theenvironmental legislation, or even new information obtained from the studieswhich are in progress, may lead to a need for the construction offishways at our hydroelectric generation facilities.

*Fish Management*

In view of its policy for environmental conservationand sustainable development, CEMIG carries out numerous procedures to mitigateaccidents involving fish in its hydroelectric power plants, such as use ofsonar and counting to detect shoals; monitoring of oxygen in solution; and useof teams of professional divers to assess shoals during activities with greaterenvironmental risk, such as startup and shutdown of rotors.

In spite of these efforts two incidents occurred, onein 2006 and one in 2007, at the Três Marias hydroelectric power plant,resulting in the death of approximately 17 tons of fish in 2007 due to lack ofoxygenation, according to IEF and environmental police estimates (8.2 tons perCEMIG’s estimate).  The volume of deadfish was not estimated or measured in 2006. As a result the IEF applied twofines to CEMIG, totaling approximately R$5.6 million. Although CEMIG isdisputing the fines and the amount is not a material liability for CEMIG, CEMIGis implementing an environmental project in the affected region as a way ofresponding to the event and reaffirming its commitment to economic and socialdevelopment of the regions where it operates and where its projects arelocated.

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

Our piped naturalgas distribution networks are underground, crossing through inhabited areas,and using public rights of way in common with underground piping utilitiesoperated by other public concession holders and public agencies. This increasesthe potential for risk of undue work without prior communication andconsultation of our gas distribution network registers, and there is apossibility of this causing accidents, with potentially significant personal,property and environmental damage. However, all our gas networks areexplicitly, and intensively, marked and signaled. Gasmig, through its “DigSafely” (“*Escave com Segurança*”)program, has been building partnerships with the community, mainly with publicauthorities and holders of concessions, in addition to the companies whichcarry out digging in public rights of way, to ensure that before digging closeto the natural gas network, they telephone Gasmig’s 24-hour helpline andrequest support for safe execution of their work.

*Transmission lines*:  Several of the safety bands under ourtransmission lines have been occupied by unauthorized facilities (buildings,etc.) and dwellings. These occupations generate risks of electric shock andaccidents involving people living at the location, and constitute an obstacle tomaintenance of our electricity system. It is thus necessary to solve thissituation over the coming years, either removing some of the occupants, orintroducing improvements to make it possible to live with these invasions.Faced with the risks associated with this situation, we planned two lines ofaction for the coming years. The first is preparation of a document entitled “Diagnosis of areas invaded and under risk ofinvasion, for strengthening of inspection activities, including installation ofimprovements in locations classified as having high invasion risk”.  The company is identifying the areas withpotential for invasion, making possible decisions on measures and procedures inrelation to control, monitoring and inspection of the transmission line pathswhere there is a high risk of invasion. The second line of action involves the evacuation of areas already invaded.The withdrawal of people from these areas involves payment of indemnities,regularization of electricity connections and the opening of bands for theconstruction of squares and streets.

# *Invasion of reservoir areas ownedby CEMIG*

CEMIG’s power plants have security services to protecttheir properties, using both fixed and mobile units, as well as an electronicsurveillance system (SVE). The banks of the reservoirs of CEMIG’s hydroelectricpower plants have signs indicating ownership and advising of the existence ofsecurity systems. Trespassers are deterred by the mobile inspection unit’speriodic patrol of the reservoir banks. When trespassers are apprehended,police reports are filed, which are then sent to the Company’s legal departmentfor review. Due to the very large area and number of CEMIG’s reservoirs, theCompany is continually subject to new invasions.  However, we are dedicated to preventing theseinvasions and any resulting environmental damage to the Permanent PreservationAreas (APPs) around the reservoirs.

In April 2006 CEMIG’sheadquarters was invaded by social protesters, who were participating in ameeting being held in connection with the 47th Meeting of the Governors of the Inter-AmericanDevelopment Bank (IADB). Minor damage was done to the Company’s property andfacilities. After this incident, CEMIG took measures to increase the protectionof its premises, including placement of screens on the entries to the buildingand strengthening of the security arrangements.

**Environmentalregulations**

Environmentalissues can significantly impact the operations of our company. For example,large hydroelectric power plants can require flooding of considerable areas andas a result relocation of a considerable population. The Brazilian Constitutiongives the Federal Government, states and municipalities powers to enact lawsdesigned to protect the environment and issue enabling regulations under theselaws. While the Federal Government has the power to promulgate generalenvironmental regulation, state governments have the power to enact morestringent environmental regulation.

The “BrazilianNational Environment System” (SISNAMA—*SistemaNacional do Meio Ambiente*) was created for the purpose of protectingthe Brazilian environment. It consists of: an administrative body, theGoverning Council (*Conselho Governamental*);a consultative and decision-making body, the National Environment Council, orCONAMA) (*Conselho Nacional de Meio Ambiente*);a central body, the Environment Ministry, or MMA (*Ministério do Meio Ambiente*); an executive body, theBrazilian Environment and Renewable Natural Resources Institute, or IBAMA (*Instituto Brasileiro do Meio Ambiente e dos RecursosNaturais Renováveis*); and various local and sectorial bodies. Theagencies that merit special attention are CONAMA and IBAMA. CONAMA carries outor approves studies and assists and advises the Government Council on theofficial orders for government policy on environmental and natural resources,and on decisions, within its attributed scope, on regulations and otherlegislative rules applicable to the Brazilian environment. IBAMA enforcesthe national environment policy and inspects, preserves and supports the use ofnatural resources.

LawNo. 6,938/81, of August 31, 1981, is known as the EnvironmentalPolicy Law, and regulates civil liability for damage to the environment. Inlegal terms, this responsibility has an “objective” nature, and is not onlystrict but also expands the list of liable parties adopting the principle ofjoint and several responsibilities. Irrespective of the nature of the offendingact, demonstration of a 

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cause-and-effectrelationship between the damage caused and an action or omission is enough tocreate a legal obligation, on the party responsible for the contamination, toredress the environmental damage. Also, compliance with environmental licensesdoes not eliminate environmental liability.

Activities whichcause damage to the environment may also lead to administrative and criminalfines, under Law No. 9,605, of February 12, 1998 (the EnvironmentalCrimes Law). The effects of the aforementioned law apply to any person,individual or legal entity, who by any means contributes to damage caused tothe environment to the extent of his/her fault, in the amount of the damagecaused. This law provides that a legal entity may be held liable for conductdeemed harmful to the environment, provided that the infraction was committedin its interest or benefit, upon the decision of its legal or contractualrepresentatives or of its plenary board. Management and members of the boardwho are aware of any criminal conduct of another and are thus able to preventit but do not do so, are, by their omission, also considered participants inthe crime.

The Federal DecreeNo. 3,179, issued in September 1999, established administrative finesapplicable to conduct or activities damaging to the environment and to theregulations governed by the Environmental Crimes Law. This Decree sets forthpenalties, such as fines of up to R$50 million, and authorizes facilities to beclosed down.

In relation towater resources, Law No. 9,433 of January 8, 1997 created theNational Water Resources Policy, which was organized in accordance with thevarious river basins of Brazil. This policy is implemented by the governmentaland non-governmental agencies, and classifies water as a public asset. Thus, noindividual or company may appropriate the use of water, and any use of waterdoes not result in absolute exclusion of all potential users.

Also, public authoritiesmust supply a justification for the concession of rights to use water.

The right to usefederal water is given by the National Waters Agency, or ANA (*Agência Nacional de Águas*), created by LawNo. 9,984 of July 17, 2000, and regulated by Decree No. 3,692 ofDecember 19, 2000, in collaboration with ANEEL. As well as granting theserights, ANA also regulates and supervises the use of federal water resourcesand implements the collection of charges for the use of water, at a ratio of0.75% of the value of the energy generated. Permission for use of non-federalwater resources must be obtained from the respective state-level environmental/waterresource agency.

The National Water Resources Policy also created theneed for the grant of permission for the use of water in the production ofelectricity. At the phase of planning of the plant, application must be made byANEEL to the water resources authorities for reservation of water availability,which will be transformed into permission to use water resources and grantedtogether with the grant of concession for commercial operation of hydroelectricenergy. The plants which already are in operation, and have the concessiongrant, automatically also have the grant of the water resources right. However,when application is made for renewal of the concession for commercial use ofhydroelectric energy, grant of the right to use the water resources must alsobe applied for.

For theconstruction of the hydroelectric power plant, Brazilian electricity companieshave to comply with several environmental protection measures. First, anenvironmental impact study must be prepared by external experts, who shouldmake recommendations on how to minimize the impact of the plant on theenvironment. The study, in conjunction with a environmental impact assessmentreport on the project prepared by the company, is then submitted to the stateor federal-level governmental authorities for analysis and approval. Theproject undergoes a process of licensing in three stages, which includes aPrior License which indicates the viability of the project, an InstallationLicense for the beginning of construction, and an Operation License for startupof the plant. Environmental licenses also have to be obtained for expansion ofthe plant or installation of new equipment. It should be mentioned that onbasis of the environmental impact studies conclusions, the issued license is subjectto several conditions or requirements that must be observed; otherwise thelicenses may be revoked.

Installations thatare considered to represent a considerable environmental impact are obliged bylaw to allocate a minimum of 0.5% of their total investment costs to thecreation of environmental preservation areas.

Under theBrazilian Forest Code (*Código FlorestalBrasileiro* - Law No. 4,771 of September 15, 1965), theland area surrounding water reservoirs, whether it is natural or artificial, isconsidered to be a permanent preservation area, which represents restriction onuse. The amendments to the Brazilian Forest Code introduced by ProvisionalMeasure 2,166-67 of August 24, 2001 provide that the operator of areservoir is obliged to acquire such surrounding areas with respect to any newprojects. The Forest Policy of the State of Minas Gerais (LawNo. 14,309 of June 19, 2002) and Decree No. 43,710 ofJanuary 8, 2004 does not oblige the operator to acquire the land area surroundingthe reservoir, but it does demand indemnity for the restriction on use, informs provided for by law. These rules will result in additional costs inconnection with the installation of new hydroelectric power plants.

State Law 15,972of January 12, 2006, governing environmental inspection, changed thestructure of the environmental agencies of Minas Gerais and made severalprovisions increasing the amounts of fines to be paid in the State andbroadening the inspection mechanisms, which now include the Minas Gerais EnvironmentalPolice. Some of its articles have not yet been regulated. 

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We believe thepromulgation and regulation of this law will strengthen the environmentalinspection in the State of Minas Gerais, where the majority of the company’sfacilities are located.

Any corporate entityinvolved in activities which cause pollutant effects, or the potential forpollutant effects, or which involve products which are considered dangerous tothe environment, is obliged to register with IBAMA. This registry involves quarterlypayments of an environmental control and inspection charge—TCFA, which forCEMIG’s activities is equal to an amount of approximately R$10 thousand peryear.

**Carbon**Market

## The Kyoto Protocol became effective onFebruary 16, 2005. According to the Kyoto Protocol, the reduction ofgreenhouse gas emissions through projects designed under the Clean DevelopmentMechanism, or CDM, may be converted into “Carbon Credits”, which may benegotiated worldwide. Legislation that would govern the carbon market in Brazil and taxincentives in connection therewith is currently before Congress in Brazil. Brazil has great potential to generate Carbon Credits arising fromclean energy projects that comply with the CDM.

CEMIG has implemented a strategy to studyCDM project development opportunities in the carbon market. In order toundertake CDM projects, we are training our professionals, including throughcourses administered by USAID and the World Bank.  CEMIG has sponsored a course promoted byUSAID and the World Bank at the State of Minas Gerais Industry Federation todiscuss CDM projects in the State of Minas Gerais. In 2005 we created amultidisciplinary task force to mobilize our wholly-owned subsidiaries andaffiliated companies to identify projects that would allow us to obtaincertificates of reduction of greenhouse gases.

**OperationalTechnologies**

We continue toinvest in automated monitoring and control equipment in connection with ourstrategy of increasing efficiency and further modernizing and automating ourgeneration, distribution and transmission systems.

*Load Dispatch Center*

Cemig’s System OperationCenter (“COS”), located at our head office in Belo Horizonte, is the nervecenter of our operations. It coordinates the operations of our entireelectricity and energy system, in real time, providing operational integrationof the generation and transmission of our energy. It also provides the linkwith other generation, transmission and distribution companies. The supervisionand control executed by the COS now extends to 43 extra high and high voltagesubstations and 27 major generating power plants.

Through its activities the COS permanently guaranteesthe security, continuity and quality of our supply of electricity. Theactivities of the COS are supported by up-to-date telecommunications,automation and information technology resources, and executed by highlyqualified personnel.  The COS has aQuality Management System, with ISO 9001:2000 certification.

*Regional Distribution Operation Centers*

Our distributionnetwork is managed through seven *Centros deOperações Regionais de Distribuição* (Regional Distribution OperationCenters), or CODs. The CODs monitor and coordinate our distribution networkoperations in real time. The CODs are responsible for the supervision andcontrol of 355 distribution substations, 235,799 miles of medium voltagedistribution lines, 10,113 miles of sub-transmission lines and 6.2 millionconsumers in our concession area, comprising 774 municipalities of MinasGerais.

The seven CODsdispatch an average of 24,000 services a day. All of the CODs are certifiedaccording to the Quality Standard ISO 9001: 2000. There are various systems inuse to automate and support the CODs processes including trouble call, fieldcrew management, distribution substation supervision and control, restorationof power, emergency switching, network disconnection and inspection.Technologies like geographic information system and radio/satellite datacommunication help to reduce the consumer restoration time and to providebetter consumer attendance.

*GeospatialInformation & Technology*

We are intensivelyusing the geospatial and technical document management technology to supportand improve engineering processes. Geo-referenced information of the electricalnetwork, satellite and aerial photographs of the concession area, diagrams andtechnical document images are stored in geospatial databases and can be easilyretrieved by computers connected to our Corporate Network, helping techniciansto plan, design,construct, operate and maintain the generation, transmissionand distribution network. We are using mobile technology in service dispatchfor distribution network maintenance and medium and high-voltage network dataacquisition.

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*Internal Telecommunications Network*

Ourtelecommunications network is one of the largest in Brazil. It includes a highperformance microwave links with 198 communication stations, an optical systemwith 2,500 km of optical fibers and a mobile communication system with 480trunking radios.

*Corporate Data Network*

Our corporate network integrates enterprise servers(one 649 MIPS Mainframe processing the billing system and eight Risc machinesfor the ERP and the new commercial systems), more than 7,000 Intelmicrocomputers,  359 servers and 1,002 unitsof connectivity equipment, serving 165 sites in 100 cities of Minas Gerais. Thecentralized infrastructure uses modern servers and devices with service levelagreements for hardware maintenance and software support. The process ofreception of meter reading data, digital calculation of electricity bills, andissuance of electricity bills to consumers in CEMIG’s secondary network isISO-9001:2000 certified since 2005.

*IT Governance Program*

We started an IT Governance Program in 2005.  The IT Governance program is based on twomain principles: (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 were taken in 2006. The most importantof these actions was the implementation of ITIL® best practices.  The following ITIL® processes and functions were prioritizedfor implementation: Incident Management, Configuration Management, ChangeManagement, Problem Management, Release Management, Capacity Management,Service Level Management, and Service Desk. The implementation of each of theseprocesses will help CEMIG to ensure that it is in compliance with the controlsand procedures requirements of the Sarbanes-Oxley Act.

*Call Centers*

We have two call centers, both in Belo Horizonte.Clients can use a toll-free number to get information on their accounts andreport service problems. Both call centers are integrated with the technologiesavailable in the CODs, allowing us to give clients up-to-date information onservice issues. The call centers have modern facilities, with a staff of over1,100, and are able to receive about 65,000 calls per day. Clients can alsocontact us by e-mail, by fax or via our website. As an indication of the servicequality provided, our call centers have had ISO 9001 Quality Certificationsince 2001.

*Commercial Management System*

To update the technology of our Consumer InformationSystem (SICO), which has been on a mainframe platform since the 1970s, CemigDistribution is investing R$178 million in a new Commercial Management System(SGC), based on the CCS (Customer Care & Service), CRM (CustomerRelationship Management) and BW (Business Warehouse) systems.  This new system will serve not onlylow-voltage clients, but medium- and high-voltage clients as well.

*Maintenance and Repair Systems*

The 10,123 miles of high voltage transmission lines inCemig Distribution’s network, operating at 34.5 kV to 161 kV, are supported on53,495 poles, mainly metal.  CemigGeneration and Transmission’s network has 3,019 miles of high voltagetransmission lines supported on 11,400 structures.  The majority of the service interruptions toour distribution and transmission lines are due to lightening, fire, vandalism,wind, and corrosion.  Cemig Distribution’sand Cemig Generation and Transmission’s entire high voltage transmission linesystems are inspected from the air once a year, using a helicopter equippedwith a gimbal-gyro-stabilized camera, followed by simultaneous visual andthermographic (infra-red) inspection. Land-based inspections are also carried out at intervals of between oneand three years, depending on the characteristics and age of the transmissionline, number of outages, type of structure, and the line’s importance to theelectricity system as a whole.

To supportemergencies involving fallen towers, we have used modern modular aluminumstructures. Most of our intervention on transmission lines is done using liveline methods. Being the first company in Brazil to use bare hand live linetechniques in the maintenance of transmission lines and substations, we haveaccumulated, through the last almost thirty years, significant experience inthis area. We have trained our staff in this area and have special vehicles andother necessary tools to support live and dead line maintenance.

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To guaranteeavailability of power to its consumers with no impact on the environment,CEMIG, in partnership with Asea and Brown Boveri (ABB) and Du Pont, hasdeveloped a retrofit project of a transformer, with the intention of maximizingthe installed capacity in CEMIG’s substations, at a lower cost. In a projectthat is unprecedented worldwide, a transformer 100% filled with vegetalinsulating oil was developed.

Vegetal oilcreates a revolution in insulating fluids for transformers, because it hasexcellent features for electrical insulation with high thermal stability and anignition point far above mineral oils. It is not toxic, and provides safeloading, increased transformer lifetime, more safety in use, and reduction ofthe risk of fire in electrical substations. It is 97% biodegradable in 21 daysand does not have components that can adversely affect the environment.

Due to the specialdesign features, combined with the vegetal oil and insulating materialstechnology, CEMIG’s transformer, which was initially designed for 25 MVA, at138 kV, now can be overloaded until 43 MVA, during four consecutive hours,without loss of lifetime. These new values correspond to power reserve of 70%,increasing the reliability of the power supply to consumers connected to thesubstation in which it is installed. These special features also provide higherlifetime expectancy for the transformer.

We also have crewsstrategically located throughout the State of Minas Gerais in order to promptlyattend to our transmission and distribution system needs.

*Information Security Management*

As part of the CorporateInformation Security Projects Plan for 2006, two projects to meet thesecurity requirements of the Sarbanes-Oxley Act were prioritized and developed:*Critical Analysis and Validation of InformationSystem Access Rights* and the *Security Operation Center*.The total investment was R$1.75 million. Six new rules were included in theInformation Security Policy.

A training program inInformation Security Concepts for all company employees was implemented, usinge-learning technology. In 2006, 8,338 employees (78% of the company’s totalworkforce) completed the course. In October 2006, a seminar on *Information Security and Civil Liability* directed tomanagers and senior staff was presented by two well-known Brazilian lawyersspecialized in Digital Rights.

**Management Tools**

*Enterprise Resource Planning*

Our currentEnterprise Resource Planning (SAP R/3), or ERP, was updated in 2005 and hasfunctionalities covering accounting, cost and funds control, budgeting,investment management, treasury, cash flow management, quality control, projectmanagement, inventory management, maintenance, asset control, human resourcesmanagement (including payroll, time management and personnel development),travel management, financial consolidation, sales management, business information warehouse, corporatefinance management, real estate, sales and distribution and a workflowfunctionality covering the finance and supply chains. The ERP also includesdata warehouse functionality, balanced scorecard and long-term cash flowmonitoring.

*Quality Management Systems*

In 1991, CEMIG instituteda quality control program referred to as the Total Quality Program. In 1999, aspart of this program, we adopted the International Standardization OrganizationProject—ISO, through which different parts of our operations and managementhave been certified according to International Standards known as ISO 9001, ISO14001. In addition, we also certify parts of our environmental processoperations according to internal criteria.

In addition to the continued implementation of theQuality and Environment Management systems in our activities and processes, wealso have in progress the implementation of a Health and Safety ManagementSystem, providing control in accordance with the standards for this type ofsystem.

Besides the InternationalStandardization Organization Project, we have elaborated CEMIG’s ManagementSystem Manual and Procedures that integrates the Quality, Environment andHealth and Safety Management Systems. This is an internal document based on ourexperience acquired in the last few years.

CEMIG has been increasingits certification program, which ensures functionality in our activities andgreater efficiency in the results. We have received ISO 9001/2000 certificationfor, among others, the following aspects of our business: consumer serviceoffices, call centers, laboratories, maintenance of remote protection system equipment, data reception andbilling, the São Simão, Emborcação, Miranda, Nova Ponte, Jaguara, Três Marias,Volta Grande, Itutinga, Camargos hydroelectric power plants and IgarapéThermoelectric Power Plant (which represented 80% of our installed capacity atDecember 31, 2006) and our subsidiary Efficientia, 

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the first and only Brazilian ESCO certified. Productsand services certified include: new consumer connections; billing; collection;product sales and services; network expansion and improvement; networkoperation; public lighting maintenance and restoration; overhead lines andnetwork maintenance and inspection; electric system planning; and substationand equipment maintenance and inspection.

Other processes havereceived NBR ISO 9001:2000 certification, including: processing, control andaccounting of CEMIG’s payroll; planning, management and predictive engineeringof the generation system; and monitoring of the safety of dams and builtstructures of generation, operated and maintained by CEMIG.

Currently more than 60%of the employees of CEMIG carry out their activities in a systematized form, inprocesses certified in conformity with international standards.

In 2006, we maintainedISO 9001, OHSAS 18001 and Cemig EMS (Environmental Management System)certification for the Commercial Relationship and Services Management unit atMontes Claros and the Camargos hydroelectric power plant.

In February 2000,the Nova Ponte hydroelectric power plant received ISO 14001 certification, andin 2005 it was certificated under the Integrated Management System (ISO 9001,ISO 14001 and OHSAS 18001). The certification includes Galheiro’s****nature reserve and the 156 square milereservoir. Itutinga hydroelectric power plant was certificated under IntegratedManagement System in 2005. In 2006, the São Simão, Jaguara, Três Marias,Volta Grande hydroelectric power plant and Igarapé thermoelectric power plantwere also certificated under OHSAS 18001.

*RiskManagement*

With the assistance of aleading consulting firm chosen through a formal selection process, we beganestablishment of a Corporate Risk Management System in 2003, and consolidatedit during the period of 2004 through 2006 in connection with our unbundlingprocess. As holder of a concession in the Brazilian electricity sector, weoperate in environments where factors such as corporate restructurings,regulations issued by energy sector government agencies, technologicaldevelopment, globalizations and changes in the consumer market generateuncertainties and threats.

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

Our Corporate RiskManagement System 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.

CEMIG is working to provide the major ERM objective ofan open environment conducive to effective communications about risks and riskmanagement up, down and across the enterprise, so that a truly holistic,integrated, proactive, forward-looking and process-oriented approach is takento assess all key business risks and opportunities, not only those of afinancial nature.  During 2005 and2006, CEMIG’s Corporate Risk Management System was revised and updated for asecond time in order to adapt to the regulatory changes implemented by the NewIndustry Model Law. We also initiated the activities of the Corporate RiskManagement Committee CGRC, which will approve the final version of theCorporate Risks Management Policy and published and implemented a CorporateRisk Management Procedures Manual.

CEMIG’s Electricity Risks Management Committee, orCGRE, created in 2003, continues to propose policies and procedures forapproval by the executive officers, according to corporate risk policy, to minimizerisks in the contracting (purchase and sale) of energy. The committee hasmembers from numerous areas of the Company, including generation, distribution,sales, legal and financial. TheCGRE gives support to the decisions of the executive officers in relation tothe Company’s energy commercialization to Free Consumers and participation inthe CCEE auctions. Based on risk analyses, the CGRE proposes the maximumvolumes that could be sold and the amounts purchased by distributors in theauctions.

*Managementof**Financial Risks*

CEMIG’s risk managementalso has the benefit of a Financial Risk Management Committee, which wascreated (i) to monitor the financial risks related to volatility and trends ofthe inflation indices, exchange rates and interest rates that affect our 

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financial transactions,and which could negatively affect the Company’s liquidity and profitability,and (ii) to implement guidelines for proactive operation in relation to theenvironment of financial risks when implementing action plans.

**Property, Plantand Equipment**

Our principalproperties consist of the power generation plants and transmission anddistribution facilities described in this Item 4. Our net book value of totalproperty, plant and equipment, including our investment in certain consortiathat operate electricity generation projects, was R$13,665 million atDecember 31, 2006 (including ongoing construction projects). Generationfacilities represented 44.9% of this net book value, transmission anddistribution facilities represented 51.5% and other miscellaneous property andequipment, including telecommunication facilities, represented 3.6%. Theaverage annual depreciation rate applied to these facilities was 2.4% forhydroelectric generation facilities, 3.0% for transmission facilities, 5.1% fordistribution facilities, 9.2% for administration facilities, and 7.9% fortelecommunication facilities.  Apart fromour distribution network, no single one of our properties produced more than10% of our total revenues in 2006. Our facilities are generally adequate forour present needs and suitable for their intended purposes. We have rights ofway for our distribution lines, which are our assets and do not revert to thelandowner upon expiration of our concessions.

**Item4A.**              UnresolvedStaff Comments

Not Applicable

**Item5.**                          Operatingand Financial Review and Prospects

*Youshould read the information contained in this section together with ourfinancial statements contained elsewhere in this annual report. The followingdiscussion is based on our financial statements, which have been prepared inaccordance with U.S. GAAP and presented in reais.*

#### **General**

We are astate-controlled energy company engaged, through our subsidiaries,primarily in the generation, transmission and distribution of electricity inMinas Gerais. According to ANEEL, at December 31, 2006, we were the fifthlargest electric power generation concessionaire in Brazil as measured by totalinstalled capacity, and for the year ended December 31, 2006, we were thelargest electric power distribution concessionaire in Brazil, as measured byGWh of energy sold to final consumers. We supplied approximately 96.1% of theelectricity consumed in Minas Gerais during the year ended December 31,2006. See “Item 4. Information on the Company—Consumers and Billing.”  At December 31, 2006, we generatedelectricity at 51 hydroelectric plants, four thermoelectric plants and one windfarm and had a total installed generation capacity of 6,523 MW, of which thehydroelectric plants accounted for 6,338 MW. See “Item 4. Information on theCompany—Generation and Purchase of Electric Power.”  The State Government as our controllingshareholder establishes our operating and long-term strategy.

The following are ourprincipal subsidiaries as of December 31, 2006:

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

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

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

·                                          RosalS.A. (100% interest). Rosal is engaged in the production and sale of electricenergy and holds the concession to operate Rosal hydroelectric power plant.

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

·                                          Empresade Infovias S.A. (100.0% interest). In April 2006, our ownership ofEmpresa de Infovias S.A. became 100.00%. The principal activities of Empresa deInfovias S.A. are rendering telecommunications services and developingactivities related thereto, through multiservice networks using optical fibercable, coaxial cable and other electronic equipment. Empresa de Infovias S.A.currently owns 69.25% of the capital stock of WAY TV Belo Horizonte S.A., acable TV and internet services provider in certain cities of the State of MinasGerais.  On August 

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1, 2006, Empresade Infovias S.A signed a share sale contract to sell its interest in WAY TV,and the amount of the sale price is held in escrow by Banco do Brasil S.A., inaccordance with that contract, until consent for disposal of the control of WAYTV has been given by the Brazilian telecommunications regulator, ANATEL, atwhich point the shares will be transferred to the purchaser and the funds willbe released to Empresa de Infovias S.A. and the other sellers.  For additional information on the sale of WAY TV, see “Item 4.Information on the Company – Other Businesses – Telecommunications, Internetand Cable Television.”

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

·                                          HorizontesEnergia S.A. (100% interest). Horizontes Energia is engaged in the productionand 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. Horizontes Energiainitiated operations in the first quarter of 2003.

·                                          UsinaTermelétrica Barreiro S.A. (100% interest). Usina Termelétrica Barreiro is anIPP engaged in the production and sale of electric energy of the Barreirothermoelectric power plant.

·                                          CEMIGPCH S.A. (100% interest). Cemig PCH is an IPP engaged in the production andsale of electric energy of the Pai Joaquim small power plant.

·                                          CemigCapim Branco Energia S.A. (100% interest). Cemig Capim Branco Energia isengaged in the production and sale of electric energy of Capim Branco PowerFacility.

We also have a100% interest in CEMIG Trading S.A. which was organized to conduct specificprojects in the electric energy sector and has not yet commenced operations.Our consolidated financial statements as of and for the years endedDecember 31, 2006 and 2005 include the financial results of CEMIG and allof our subsidiaries (operational and pre-operational) described above.  Central Termelétrica de Cogeração S.A. andCentral Hidrelétrica Pai Joaquim S.A. were not consolidated in 2004 becausethey were jointly controlled and became wholly owned in 2005. Additionally,Gasmig was not consolidated for the years ended December 31, 2006 and2005. In 2004, we entered into a Shareholders’ Agreement with Petrobras andGaspetro in connection with the sale of 40% of our equity interest in Gasmig.Gasmig’s revenues and expenses were included in our consolidated Statement ofIncome up to December 15, 2004. Gasmig’s assets and liabilities are notincluded in our consolidated financial statements as of December 31, 2004,December 31, 2005 and December 31, 2006. See Notes 2 and 9 to our consolidated financial statements. As ofDecember 31, 2006, we had the following unconsolidated investments:

·                                          RioMinas Energia Participações S.A. (“RME”) (25.0% interest).  RME is the controlling shareholder of theLight group, with a 54.17% interest in its total registered capital (79.39% asof December 31, 2006). The main holdings of the Light group are as follows:Light Energia, which is engaged in the generation of electricity, LightSESA, which is engaged in the distribution of electricity, and Light EscoLtda., which is engaged in energy trading.

·                                          EmpresaParaense de Transmissão de Energia S.A. (“ETEP”) (jointly controlled, 17.51%interest).  ETEP is the holder of apublic service electricity transmission concession for the transmission lineoriginating at the Tucuruí Substation and ending at the Vila do CondeSubstation in the State of Pará. We acquired our interest in ETEP in August2006.

·                                          EmpresaNorte de Transmissão de Energia S.A. (“ENTE”) (jointly controlled, 18.35%interest).  ENTE is the holder of apublic service electricity transmission concession for two 500-kV transmissionlines, the first from the Tucuruí Substation to the Marabá Substation in theState of Pará, and the second from the Marabá Station to the AçailândiaSubstation in the State of Maranhão. We acquired our interest in ENTE in August2006.

·                                          EmpresaRegional de Transmissão de Energia S.A. (“ERTE”) (jointly controlled, 18.35%interest).  ERTE 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. We acquired our interest in ERTE in August 2006.

·                                          EmpresaAmazonense de Transmissão de Energia S.A. (“EATE”) (jointly controlled, 14.94%interest).  EATE is the holder of thepublic service electricity transmission concession for the 500-kV transmissionlines between the 

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sectionalizingsubstations of Tucuruí, Marabá, Imperatriz, Presidente Dutra and Açailândia. Weacquired our interest in EATE in August 2006.

·                                          EmpresaCatarinense de Transmissão de Energia S.A. (“ECTE”) (jointly controlled, 7.50%interest).  ECTE 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. We acquired our interest in ECTE in August2006.

·                                          Companhia de Gás de Minas Gerais—GASMIG(55.19% interest). Gasmig is engaged in the acquisition, transportation anddistribution of natural gas. In December 2004, CEMIG sold 40% of itsinterest in Gasmig. See Note 9 to our consolidated financial statements.

·                                          Companhiade Transmissão Centroeste de Minas (51% interest). Companhia de TransmissãoCentroeste de Minas is engaged in building, implementing, operating andmaintaining the 345 kV transmission line from the substation of the FurnasHydroelectric Power Plant and a substation located in Pimenta.

·                                          CompanhiaTransleste de Transmissão (25.0% interest). Companhia Transleste de Transmissãowill be responsible for building and operating the 345 kV transmission lineconnecting a substation located in Montes Claros and the substation of theIrapé Hydroelectric Power Plant.

·                                          CompanhiaTransudeste de Transmissão (24.0% interest). Companhia Transudeste deTransmissão will be responsible for building, implementing, operating andmaintaining the 345 kV transmission line from Itutinga to Juiz de Fora.

·                                          CompanhiaTransirapé de Transmissão (24.5% interest). Companhia Transirapé de Transmissãowill be responsible for constructing, implanting, operating and maintaining the230 kV transmission line LT Irapé — Araçuaí.

·                                          TranschileCharrúa Transmisión S.A. (49% interest). Transchile Charrúa Transmisión will beresponsible for constructing, installing, operating and maintaining the 220 kVtransmission line LT Charrúa — Nueva Temuco in Chile.

·                                          ConsórcioAHE Baguari**(34% interest). Consórcio AHE Baguari was formed to build, operate and maintain the Baguari HydroelectricPlant, in the Rio Doce River basin, in the State of Minas Gerais, in themunicipalities of Fernandes Tourinho, Governador Valadares, Periquito,Alpercata and Sobrália.

·                                          HidrelétricaCachoeirão S.A. (49% interest). Hidrelétrica Cachoeirão S.A.’s purpose is theconstruction of the Cachoeirão Small Hydro Plant and the generation and sale ofelectricity. The plant is on the Manhuaçu River, in the municipality ofPocrane, in the State of Minas Gerais.

**CriticalAccounting Estimates**

The preparation ofour consolidated financial statements in conformity with U.S. GAAP requires usto make estimates and assumptions that affect the reported amounts of assetsand liabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements, as well as the reported amounts of revenues andexpenses during the reporting periods. We evaluate our estimates on an ongoingbasis and base them on a combination of historical experiences and variousother assumptions that we believe to be reasonable under the circumstances.Actual results could differ materially from those estimates. Our criticalaccounting policies that affect our more significant judgments used in thepreparation of our consolidated financial statements are set forth below.

*Regulatory assets*

Due to changes in the electric utilities sector inBrazil in 2001 and 2002 and related acts by regulatory bodies of the FederalGovernment, we have concluded that because the rate-setting structure in Brazilwas designed to recover certain allowable costs, we are subject to theprovisions of Statement of Financial Accounting Standards No. 71 “Accountingfor the Effects of Certain Types of Regulation,” or SFAS No. 71.

SFAS No. 71 requiresrate-regulated public utilities such as CEMIG to record certain costs andcredits allowed in the rate-setting process in different periods than fornon-regulated entities. These costs and credits are deferred as regulatoryassets and are recognized in the consolidated statement of operations at thetime they are reflected in rates. Accordingly, we capitalize allowable incurredcosts as deferred regulatory assets when there is a probable expectation thatfuture revenue equal to the costs incurred will be 

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billed and collected as adirect result of the inclusion of the costs in an increased rate set by theregulator. The deferred regulatory asset is realized when we collect therelated costs through billings to consumers. ANEEL performs a rate review on anannual basis. If ANEEL excludes all or part of a cost from recovery, thatportion of the deferred regulatory asset is impaired and is accordingly reducedto the extent of the excluded cost. We evaluate and revise the accounting forour regulatory assets on an ongoing basis as new regulatory orders are properlyissued and account for our activities under SFAS No. 71. As we recognizeregulatory assets in accordance with rulings of the regulatory authorities ofthe Federal.

Government, future regulatory rulings may impact thecarrying value and accounting treatment of our regulatory assets.

During 2001, theelectricity markets in significant portions of Brazil experienced rationing, orreduced availability of electricity to consumers, due to low rainfall, reducedreservoir levels and Brazil’s significant dependence on electricity generatedfrom hydrological resources. These factors resulted in lower sales. InDecember 2001, electricity concessionaires in Brazil, including us,reached an industry-wide agreement with the Federal Government that providedresolution to rationing related issues as well as certain electricityrate-related issues. This agreement, known as the General Agreement of theElectricity Sector, generally allows for increased rates to be charged toelectric power consumers until the amounts lost by the power generation anddistribution concessionaires as a result of the rationing are recovered. Therate increases set forth in the General Agreement of the Electricity Sectorintended to reimburse rationing-related losses are expected to remain in effectfrom January 2002 for an average of 74 months. However, no assurance canbe given that the full amount of the rationing-related losses we incurred willbe recovered over this period.

In addition, weare subject to the provisions of Emerging Issues Task Force Issue No. 92-07“Accounting by Rate-Regulated Utilities for the Effects of Certain AlternativeRevenue Programs,” or EITF 92-07, which establishes a 24-monthlimit for collection of regulatory assets related to billing losses. Accordingly,we were required to estimate this asset recovery based on assumptions of futurebillings.

We performperiodic evaluations of the recoverability of our deferred regulatory assets inorder to determine whether impairment provisions are necessary based onapplicable ANEEL regulations. We record loss provisions as necessary. Theseprovisions are based on projections prepared by us, which projections maychange in response to regulatory changes and other developments. See Notes2(p) and 4 to our consolidated financial statements. If ANEEL disallows amaterial amount of capitalized costs to be included in future rates, thewrite-off of the regulatory assets may have a material adverse impact on ouroperating results.

*Valuationof assets*

We have long-livedassets, including power generation plants. Many of these assets are the resultof recent capital investments and have not yet reached a mature life cycle inconstruction. We assess the carrying amount and potential impairment of theselong-lived assets whenever events or changes in circumstances indicate that thecarrying value may not be recoverable. Factors we consider in determiningwhether an impairment review is necessary include a significantunderperformance of the assets relative to projected future operating resultsand significant negative industry or economic trends. We determine when animpairment review is necessary through a comparison between the expectedundiscounted future cash flows and the carrying amount of the asset. If thecarrying amount of the asset is the larger of the two amounts, an impairmentloss is recognized by the amount that the carrying amount of the asset exceedsthe fair value of the asset. The fair value is determined by quoted marketprices, appraisals or the use of valuation techniques such as expecteddiscounted future cash flows. We must make assumptions regarding theseestimated future cash flows and other factors to determine the fair value ofthe respective assets. In determining estimated future cash flows, we considerhistorical experience as well as future expectations and estimated future cashflows are based on expected future rates and expected future consumer demand. Asignificant reduction in actual cash flows and estimated cash flows may have amaterial adverse impact on our operating results and financial condition.

*Accrualfor contingencies*

We are party tocertain legal proceedings in Brazil arising in the normal course of businessregarding tax, labor, civil and other issues.

We account forcontingencies in accordance with SFAS No. 5 “Accounting for Contingencies.”  Such accruals are estimated based onhistorical experience, the nature of the claims, as well as the current statusof the claims. Accounting for contingencies requires significant judgment bymanagement concerning the estimated probabilities and ranges of exposure topotential liability. Management’s assessment of our exposure to contingenciescould change as new developments occur or more information becomes available.The outcome of the contingencies could vary significantly and could materiallyimpact our consolidated results of operations, cash flows and financialposition. Management has applied its best judgment in applying SFAS No. 5to these matters.

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*Employeepost-retirement benefits*

We sponsor adefined-benefit pension plan and defined-contribution pension plan coveringsubstantially all of our employees. We have also established post-retirementhealth and dental care plans and pay life insurance premiums. We account forthese benefits in accordance with SFAS No. 87 “Employers’ Accounting forPensions” and SFAS No. 106 “Employers’ Accounting for Post-retirementBenefits other than Pensions.”  We haveapplied SFAS 132(R) ”Employers Disclosures about Pensions and OtherPost-retirement Benefits” to disclose information about pension plans and otherpost-retirement benefit plans and we also have implemented SFAS No. 158 “EmployersAccounting for Defined Benefit Pension and Other Postretirement Plans” as ofDecember 31, 2006.

The determinationof the amount of our obligations for pension and other post-retirement benefitsdepends on certain actuarial assumptions. These assumptions are described innote 15 to our consolidated financial statements and include, among others, theexpected long-term rate of return on plan assets and increases in salaries andhealthcare costs. In accordance with U.S. GAAP, actual results that differ fromour assumptions are accumulated and amortized over future periods and generallyaffect our recognized expenses and recorded obligations in such future periods.While we believe that our assumptions are appropriate, significant differencesin actual results or significant changes in our assumptions may materiallyaffect our pension and other post-retirement obligations.

*Deferredtaxes*

We account forincome taxes in accordance with SFAS No. 109 “Accounting for Income Taxes,”which requires an asset and liability approach to recording current anddeferred taxes. Accordingly, the effects of differences between the tax basisof assets and liabilities and the amounts recognized in our consolidatedfinancial statements have been treated as temporary differences for the purposeof recording deferred income tax.

We regularlyreview our deferred tax assets for recoverability and establish a valuationallowance based on historical taxable income, projected future taxable income,and the expected timing of the reversals of existing temporary differences. Ifwe are unable to generate sufficient future taxable income, or if there is amaterial change in the actual effective tax rates or time period within whichthe underlying temporary differences become taxable or deductible, we could berequired to establish a valuation allowance against all or a significantportion of our deferred tax assets resulting in a substantial increase in oureffective tax rate and a material adverse impact on our operating results.

*Depreciation*

Depreciation iscomputed using the straight-line method, at annual rates based on the estimateduseful lives of the assets, in accordance with ANEEL regulations and industrypractice in Brazil. To the extent that the actual lives differ from theseestimates, there would be an impact on the amount of depreciation accrued inour consolidated financial statements. A significant decrease in the estimateduseful life of a material amount of property, plant and equipment, or in theassets of the electricity generation project consortium in which we are apartner, could have a material adverse impact on our operating results in theperiod in which the estimate is revised and in subsequent periods.

*Allowancefor doubtful accounts*

We record anallowance for doubtful accounts in an amount that we estimate to be sufficientto cover presently foreseeable losses.

We continuously monitorcollections and payments from consumers and review and refine our estimationprocess. A future change in our estimates could result in an increase in theallowance for doubtful accounts which could have a material adverse impact onour operating results and financial condition.

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**Recently IssuedU.S. GAAP Pronouncements**

*FIN 48  - Accounting for Uncertainty in Income Taxes*

In June 2006, theFASB issued FIN 48, “Accounting for Uncertainty in Income Taxes”, thatprescribes a recognition threshold and measurement attribute for the financialstatement of a tax position taken or expected. This interpretation will resultin increased 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. This interpretation is effective forfiscal years beginning after December 15, 2006. Earlier application of theprovisions of this interpretation is encouraged if the enterprise has not yetissued financial statements, including interim financial statements, in theperiod this interpretation is adopted. CEMIG is evaluating the potentialimpacts of this interpretation on its consolidated financial statements.

*SFAS.157- Fair Value Measurements*

In September 2006,the FASB issued SFAS 157, “Fair Value Measurements”, that establishes aframework for measuring fair value under U.S. GAAP, and expands disclosuresabout fair value measurements. This statement applies under other accountingpronouncements that require or permit fair value measurements and will changesome current practices because of the need for increased consistency andcomparability in fair value measurements and for expanded disclosures aboutfair value measurements. This statement applies to derivatives and otherfinancial instruments measured at fair value under Statement 133 at initialrecognition and in all subsequent periods and should provide users of financialstatements with information that is useful in making investment, credit, andsimilar decisions. This statement is effective for financial statements issuedfor fiscal years beginning after November 15, 2007, and interim periods withinthose fiscal years. Earlier application is encouraged, provided that thereporting entity has not yet issued financial statements for that fiscal year,including financial statements for an interim period within that fiscal year.CEMIG is evaluating the potential impacts of this interpretation on itsconsolidated financial statements.

*SFAS 159- The Fair Value Option for Financial Assets and Financial Liabilities*

In February 2007,the FASB issued SFAS 159, “The Fair Value Option for Financial Assets andFinancial Liabilities—Including an amendment of FASB Statement No. 115”. Thisstatement permits entities to choose to measure many financial instruments andcertain other items at fair value. This statement is effective as of thebeginning of an entity’s first fiscal year that begins after November 15, 2007.Early adoption is permitted as of the beginning of a fiscal year that begins onor before November 15, 2007, provided the entity also elects to apply theprovisions of FASB Statement No. 157, Fair Value Measurements. No entity ispermitted to apply this statement retrospectively to fiscal years preceding theeffective date unless the entity chooses early adoption. The choice to adoptearly should be made after issuance of this statement but within 120 days ofthe beginning of the fiscal year of adoption, provided the entity has not yetissued financial statements, including required notes to those financialstatements, for any

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interim period of thefiscal year of adoption.  CEMIG isevaluating the potential impacts of this interpretation on its consolidatedfinancial statements.

*StaffAccounting Bulletin No. 108 - Financial Statements - Considering theEffects of Prior Year Misstatements when Quantifying Misstatements in CurrentYear Financial Statements*

InSeptember 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 in the current period. There are two widely recognized methods forquantifying the effects of financial statement misstatements: the “rollover” orincome statement method and the “iron curtain” or balance sheet method.Historically, we used the “rollover” method. Under this method we quantifiedour financial statement misstatements based on the amount of errors originatingin the current-year income statement, and as a result did not consider theeffects of prior-year misstatements to be material to our financial statements.SAB 108 now requires that we must consider both the rollover and iron curtainmethods (“dual method”) when quantifying misstatements in the financialstatements.

The iron curtainmethod quantifies a misstatement based on the effects of correcting themisstatement existing in the balance sheet at the end of the current year,irrespective of the misstatement’s origination. Upon adoption, SAB 108 permitsadjustments for the cumulative effect of errors that were previously consideredimmaterial under the rollover method that are now considered material under thedual method.

The SAB 108adjustment affects the carrying amount of assets and liabilities as of thebeginning of the current fiscal year, with an offsetting adjustment to theopening balance of retained earnings in the year of adoption. The adoption ofSAB 108 resulted in a cumulative effect adjustment of R$133 million, net oftaxes, to the opening balance of unapropriated retained earnings. See Note 2 toour consolidated financial statements.

The cumulativeeffect adjustment was required to correct an error relating to the accountingfor certain 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.

**Analysis ofElectricity Sales and Cost of Electricity Purchased**

Electricity ratesin Brazil are set by ANEEL, which has the authority to readjust and reviewrates in accordance with the applicable provisions of the concession contracts.See Annex A—“The Brazilian Power Industry—Rates for the Use of the Distributionand Transmission Systems”.

We charge captiveconsumers for their actual electricity consumption during each 30-daybilling period at specified rates. Certain large industrial consumers arecharged according to the electricity capacity contractually made available tothem by us, with adjustments to those rates according to consumption duringpeak demand time as well as capacity requirements that exceed the contractedamount.

In general, rateson electricity that we purchase are determined by reference to the capacitycontracted for as well as the volumes actually used. In the case of Itaipu, weare committed to purchase 17.3% of the amount of its capacity that Brazil isrequired to purchase at a fixed price denominated in dollars paid three times amonth at exchange rates determined at the time of each payment.

The followingtable sets forth the average rate (in *reais*per MWh) and volume (by GWh) components of electricity sales and purchases forthe periods indicated. The term “average rate” refers to revenues for therelevant class of consumers divided by the MWh used by such class and does notnecessarily reflect actual rates and usage by a specific class of end-usersduring any particular period.

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|                                           | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Electricity  Sales:**                   |       |                                       |       |   |   |   |   |
| Average rate to  final consumers (R$/MWh) |       |                                       |       |   |   |   |   |
| Industrial rate                           |       | 123.62                                     |       | 121.42 |   | 154.51 |   |
| Residential rate                          |       | 488.04                                     |       | 463.04 |   | 405.00 |   |
| Commercial rate                           |       | 429.50                                     |       | 401.17 |   | 355.10 |   |
| Rural rate                                |       | 260.58                                     |       | 243.69 |   | 213.98 |   |
| Public services rate and others           |       | 288.82                                     |       | 270.01 |   | 236.99 |   |
|                                      |       |                                       |       |   |   |   |   |
| Total sales to  final consumers (GWh)     |       |                                       |       |   |   |   |   |
| Industrial consumers                      |       | 23,759                                     |       | 23,472 |   | 22,969 |   |
| Residential consumers                     |       | 6,647                                      |       | 6,589 |   | 6,526 |   |
| Commercial consumers                      |       | 3,851                                      |       | 3,754 |   | 3,537 |   |
| Rural consumers                           |       | 1,938                                      |       | 1,941 |   | 1,846 |   |
| Public services and other consumers       |       | 2,666                                      |       | 2,574 |   | 2,498 |   |
|                                      |       |                                       |       |   |   |   |   |
| Average rate  (R$/MWh)                    |       | 236.61                                     |       | 223.72 |   | 225.68 |   |
| Total revenues  (millions of R$)          |       | 9,319                                      |       | 8,708 |   | 8,541 |   |
| Sales to  distributors:                   |       |                                       |       |   |   |   |   |
| Volume (GWh)                              |       | 10,914                                     |       | 1,255 |   | 364 |   |
| Average rate (R$/MWh)                     |       | 63.86                                      |       | 90.84 |   | 68.68 |   |
| Total revenues (millions of R$)(1)        |       | 697                                        |       | 114 |   | 24 |   |
| **Electricity  Purchases from Itaipu:**   |       |                                       |       |   |   |   |   |
| Volume (GWh)                              |       | 12,109                                     |       | 12,144 |   | 11,936 |   |
| Average cost (R$/MWh)                     |       | 67.88                                      |       | 67.93 |   | 93.50 |   |
| Total cost  (millions of R$)              |       | 822                                        |       | 825 |   | 1,116 |   |

 

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(1)             Doesnot include R$187 million, R$123 million and R$12 million relating to energytransactions on the CCEE during 2006, 2005 and 2004, respectively.

**Rates**

Our results of operations in the past have beensignificantly affected by fluctuations in the levels of rates that we arepermitted to charge for the generation and distribution of electricity. Therate-setting process in Brazil has historically been influenced by governmentattempts to control inflation. With the restructuring of the electric powersector in Brazil that commenced in 1995 and under the terms of the renewal ofthe concession agreement that we signed with ANEEL in 1997, the process bywhich rates are set has changed to a significant degree. Electricity that wedistribute to captive consumers (those consumers that have demand lower than 3MW and connected at voltage levels lower than 69 kV, including residential,commercial and some industrial consumers) is provided at rates that areadjusted and revised by ANEEL in accordance with the provisions of ourconcession contract. We have entered into electricity supply contracts atfreely negotiated rates with our Free Consumers (those consumers that have a demandof 3 MW or more of electricity at voltage levels of 69 kV or more that havechosen to become Free Consumers) that elected not to be subject to ANEEL’srate-setting structure. Under Law No. 10,848, distribution companies areno longer allowed to enter in new contracts for sale of electricity to FreeConsumers at non-regulated prices. See “The Brazilian Power Industry—Rates forthe Use of the Distribution and Transmission Systems” in Annex A.

ANEEL has approved extraordinary rate increasesdesigned to compensate generation and distribution companies for lossesincurred as a result of the Electricity Rationing Plan. See “—Power Rationingand Government Measures to Compensate Electric Utilities.”

ANEEL, through Resolution No. 71, dated as ofApril 4, 2005, established our first periodic rate revision, allowing forrecovery of operating costs and an appropriate return on investments.

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 will 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. From more information see “Item 8. FinancialInformation—Legal Proceedings—Regulatory Matters.”

The difference between the revenue under the 31.53%rate adjustment and the revenue that would have been earned based on the 44.41%rate adjustment was recorded by CEMIG as a deferred regulatory asset of R$919million as of December 31, 2006, 

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including monetary variation and accrued interest at arate of 11.26%, to be recovered through the annual readjustments until 2007.See Note 4 to our consolidated financial statements.

ANEEL issued Resolution No. 446 on April 3, 2007,which established our average annual rate adjustment of 9.43%. The componentsof this increase were as follows: (i) 3.42% due to the Rate Adjustment Index (*Índice de Reajuste Tarifário*), or IRT; (ii) 0.48% due tointra-annual variation of fixed costs, or CVA; (iii)  3.26% due to 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* (afederal social security contribution), or COFINS, taxes; (iv) 1.47% due torevenue which we did not earn in 2004 as a result of the re-issuing ofResolution No. 83 on May 24, 2004, which reduced our rates; and (v) 0.80% dueto other financial adjustments.  The lastthree average annual readjustments with their respective components were asfollows:
|                                                                                                                                                                                                                                                             | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
|                                                                                                                                                                                                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Average annual rate adjustment**                                                                                                                                                                                                                          |       | 9.43       | %          | 16.19      | %          | 23.88      | %          | 19.13      | %          |
|                                                                                                                                                                                                                                                        |       |       |       |       |       |       |       |       |       |
| **Components**                                                                                                                                                                                                                                              |       |       |       |       |       |       |       |       |       |
| Rate adjustment index                                                                                                                                                                                                                                       |       | 3.42       | %          | 5.31       | %          | 6.68       | %          | 7.59       | %          |
|                                                                                                                                                                                                                                                        |       |       |       |       |       |       |       |       |       |
| Deferred regulatory  asset                                                                                                                                                                                                                                  |       | 0          | %          | 5.82       | %          | 5.72       | %          | 2.53       | %          |
|                                                                                                                                                                                                                                                        |       |       |       |       |       |       |       |       |       |
| Intra-annual variation  of fixed costs (CVA)                                                                                                                                                                                                                |       | 0.48       | %          | 1.24       | %          | 7.35       | %          | 8.88       | %          |
|                                                                                                                                                                                                                                                        |       |       |       |       |       |       |       |       |       |
| Increases in the  Programa de Formação do Patrimônio do Servidor (a found for the benefit of  public employees), or PASEP, and the Contribuição para Seguridade Social (a  federal social security contribution), or COFINS, taxes |       | 3.26       | %          | 1.81       | %          | 2.49       | %          | —     |       |
|                                                                                                                                                                                                                                                        |       |       |       |       |       |       |       |       |       |
| 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       | %          | 1.45       | %          | 1.60       | %          | —     |       |
|                                                                                                                                                                                                                                                        |       |       |       |       |       |       |       |       |       |
| Other financial adjustments                                                                                                                                                                                                                                 |       | 0.80       | %          | 0.56       | %          | 0.05       | %          | 0.14       | %          |

**PowerRationing and Government Measures to Compensate Electric Utilities**

Low amounts ofrainfall in 2000 and early 2001, vigorous growth in demand for energy andBrazil’s significant dependence on electricity generated from hydrologicalresources resulted in abnormally low water levels in many reservoirs that areused to power Brazil’s major hydroelectric generation facilities. InMay 2001, the Federal Government announced several measures in response tothese conditions. First, the President of Brazil passed Provisional MeasureNo. 2,147 on May 15, 2001 (as updated by Provisional MeasureNo. 2,152-2 on June 1, 2001), creating the *Câmara de Gestão da Crise de Energia Elétrica*,or Energy Crisis Committee. The Energy Crisis Committee resolved onMay 16, 2001 to require certain electricity distributors, including us, tosuspend distribution of electricity to new consumers (except residential andrural consumers) and for certain non-essential purposes such as nighttimesporting events and advertising use, and to reduce distribution for theillumination of public areas by 35%. Second, the President passed DecreeNo. 3,818, on May 15, 2001, requiring the Federal Government toreduce its electricity consumption by 35% beginning July 1, 2001. Third,on May 18, 2001, the Federal Government announced additional powerrationing measures to be imposed on industrial, commercial and residentialconsumers in the most industrialized and heavily populated areas of Brazilbeginning on June 1, 2001. These measures required most residential consumersto reduce their electricity consumption by 20% of the average consumption inMay, June and July 2000. Industrial and commercial consumers also hadto reduce their consumption by 15% to 25% of the average consumption during thesame period. Further measures provided that bonuses would be paid toresidential consumers whose energy consumption was lower than the requisitetarget and that power cuts and surcharges would be imposed on consumers whoseenergy consumption exceeded the requisite target. ANEEL established specificaccounts and controls to record the effect of the rationing measures relatingto the bonus, surcharge and other related costs. The power rationing measuresultimately ceased on February 28, 2002.

OnOctober 17, 2001, the Federal Government, through Provisional MeasureNo. 4, approved by Law No. 10,310 of November 22, 2001, statedthat electric utilities, including us, would be reimbursed for expensesassociated with payment of bonuses to consumers and other related costs thatexceeded the aforementioned surcharges. In 2002, we received approximatelyR$132 million as reimbursement for a portion of the expenses we incurred inconnection with payment of bonuses to consumers. In addition, we are currentlynegotiating with ANEEL our reimbursement of approximately R$23 million relatingto surcharges that were not paid by certain consumers because their surchargesare under dispute. There is no assurance that ANEEL will reimburse us, andtherefore the total estimated exposure to the Company for this matter is fullyreserved. In accordance with ANEEL Resolution No. 600, datedOctober 31, 2002, we have been reimbursed for operating costs ofapproximately R$28 million that relate to the adoption of the 

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Electricity RationingPlan and that exceed amounts received from surcharges on consumer rates.Reimbursement of these operating costs was made through rate increases in forcesince April 8, 2003, April 8, 2004 and April 8, 2005.

On December 12, 2001,through Provisional Measure No. 14, approved on April 26, 2002 by LawNo. 10,438, the Federal Government authorized the creation of the GeneralAgreement of the Electricity Sector. The General Agreement of the ElectricitySector provides that electric power distribution and generation companies inBrazil, such as us, will be compensated for revenue losses caused by thereduction in amounts of energy sold and the purchase of energy on the CCEE, asapplicable, due to the Federal Government-mandated rationing measures.Compensation is made by means of an extraordinary increase in the energy rateapplicable to future power sales and companies are entitled to use thisincreased rate for an average period of 74 months, beginning January 2002.See Note 4 to our consolidated financial statements.

# **Impact of Our Account Receivable fromthe State Government**

As described further in “Additional Information—Material Contracts”,we have an account receivable from the State Government, referred to as the CRCAccount, that totaled R$1,540 million as of January 27, 2006, the date oftransfer of the CRC credits into a Receivables Investment Fund – FIDC. 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 four times, as described below.

On January 24, 2001, the First Amendment to the CRC Account Agreement replaced themonetary adjustment index of UFIR with the IGP-DI, retroactive toNovember 2000, since the UFIR was eliminated in October 2000.

The State Government didnot make any payments to us under the CRC Account Agreement in 2001 or 2002 andtherefore, in October 2002, the Second and Third Amendments to the CRCAgreement were signed, which separated the debt into two amounts andestablished new payment terms. In 2003 and 2004, we offset a portion of theseoverdue amounts from 2001 and 2002 against payments of interest oncapital that we are required to make to the State Government as ourshareholder. 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 thepayment of amounts due under the CRC Account Agreement since  2001, and in order to ensure the full paymentto us of the installments due by the State Government under the CRC Accountbalance, the Fourth Amendment to the CRC Account Agreement was signed onJanuary 23, 2006. Under the Fourth Amendment, the State Governmentirrevocably agreed to pay the outstanding CRC Account balance, corresponding toR$2,942 million at December 31, 2004, plus interest, by authorizing CEMIGto retain 65% of the ordinary dividends and interest on capital due to theState Government. The outstanding balance is subject to monetary correction forinflation by the variation in the IGP-DI inflation index and will bear interestat 8.18% per year, compounded semi-annually.

Under the Fourth Amendment, the State is required tomake 61 semi-annual payments due on June 30 and December 31 of eachyear. The Fourth Amendment applies retroactively to December 31, 2004,with the first payment date being June 30, 2005 and the final paymentbeing due on June 30, 2035. The semi-annual payments will be adjusted forinflation by the IGP-DI inflation index. The 65% of dividends and interest oncapital retained by CEMIG are to be applied in the following order: (i) thesettlement of any past due installments, (ii) the settlement of theinstallment relating to the half-year in which dividend or interest on capitaltakes place, (iii) pre-payment of up to two installments and(iv) amortization of the outstanding balance due under the CRC Account.

A fifth amendment to the CRC Account is currentlybeing considered, to adjust the outstanding balance of the CRC Agreement 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. The State of Minas Gerais and CEMIGhave reached an agreement that the correct value of the outstanding balance ofthe CRC Account as of December 31, 2004 is R$2,839 million. CEMIG and the Stateof Minas Gerais are ready to sign the Fifth Amendment to the CRC Agreement, butmust wait for approval by the Cemig CRC Account Securitization Fund (*Cemig—Fundo de Investimento em Direitos Creditorios Conta CRC*),or FIDC, to which the CRC Account receivables were transferred in January 2006.

If the retention of ordinary dividends and interest oncapital is not sufficient to cover the applicable installment, beginning onJanuary 1, 2008, CEMIG is entitled to retain up to 65% of any extraordinarydividends or interest on equity due to the State Government for the payment ofthat installment. Furthermore, if the sum of 65% of the ordinary dividends andinterest and capital and 

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extraordinary dividends on interest and capital is notsufficient to cover an installment due, CEMIG is entitled to retain 100% ofsuch dividends and interest on capital, beginning in the six-month periodimmediately following that of the past due date of the past due installment. Inaddition, if there is a reduction in the ownership of CEMIG by the StateGovernment, the retention percentage will be automatically adjusted upward suchthat the amount of the dividend retained will remain the same as the amountequal to 65% of dividends based on the current ownership of CEMIG by the StateGovernment.

InJanuary 2006, we created the Cemig CRC Account Securitization Fund (*Cemig—Fundo de Investimento em Direitos Creditorios Conta CRC*),or the FIDC. We assigned all our receivables under the CRC Account Agreement tothe FIDC. The present value of the CRC Account receivables transferred to theFIDC was R$1,659 million, as of January 27, 2006 and the capital structure ofthe FIDC is composed of R$900 million of senior quotas held by third partiesand approximately R$759 million of subordinated quotas held by us.  The FIDC is fully consolidated by us and thesenior quotas are recorded as long-term financing.

The Company hasrecorded a reversal provision for losses on the CRC Account receivable underthe Fourth Amendment of the CRC Account Agreement in the amount of R$99 millionand R$223 million in 2006 and 2005, respectively. Our estimate of future netincome to calculate such provision did not take into account the new assetacquisitions foreseen in our long-term strategic plan.

For additionalinformation regarding the FIDC, see “Additional Information—Material Contracts”.

**ExchangeRates**

Substantially allof our revenues and operating expenses are denominated in *reais*. Although our electricity purchasesfrom Itaipu are denominated in U.S. dollars, the related foreign exchange riskis no longer reflected in our operating revenues and operating expenses due torate legislation changes in 2001 which allow electricity utilities such as usto record exchange rate losses related to Itaipu purchases as deferredregulatory assets. However, we have foreign currency-denominated debt. As aresult, in reporting periods when the *real*declines against the dollar or other foreign currencies in which our debt isdenominated, our operating results and financial position are adverselyaffected. Foreign exchange gain or loss and monetary variation gain or loss mayimpact our results of operations in periods in which there are wide swings inthe value of the *real* relative tothe 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 2006, we used financial instruments such as interestrate swaps in order to reduce the risk from exchange rate fluctuations. As ofDecember 31, 2006, we had entered into swap agreements in the notionalamount of US109.1 million and, with respect to the Japanese yen, in the amountof ¥3,879 million (equivalent to US$32.5 million), in order to change theoriginal interest rate of certain financing from an interest rate calculatedbased on the U.S. dollar and Japanese yen variations to an interest ratecalculated based on the *Certificado deDepósito Interbancário*—CDI (Interbank Certificates of Deposit) rate,or CDI. See Notes 2(d), 13, 20, 22 and 23 to our consolidated financialstatements.

**Unbundling**

In 2004, weundertook a reorganization of our corporate structure to comply with Law10,848/04, which establishes that a distribution company may not exercise otheractivities such as the generation and transmission of electric energy. Twowholly-owned subsidiaries were created, CemigGeneration and Transmission****and Cemig Distribution, which carry outthe activities of electricity generation and transmission and electricitydistribution, respectively. This process was finalized by ANEEL with respect toour distribution and transmission concessions through amendments to theexisting concession contracts, and will be finalized with respect to thegeneration concession upon ANEEL’s convocation to sign amendments to theexisting generation contracts.

Following theunbundling of CEMIG’s operations, ANEEL determined that CEMIG, CemigDistribution and Cemig Generation and Transmission must prepare a formal ‘cooperationagreement’ and submit it for approval by ANEEL. This agreement is to governcommon use of human or physical resources when they are shared by theconcession holders and the division and reimbursement of costs incurred by eachcompany.

*FinancialReporting and Tax Considerations*

The unbundling has notresulted in material differences in the presentation of our reporting forfinancial purposes in accordance with U.S. GAAP or Brazilian GAAP since thefinancial results of the new generation, transmission and distributionsubsidiaries are consolidated with ours. Our marginal tax rate, on aconsolidated basis, has not changed materially as a result of the unbundling.However, our operating results were adversely affected as a consequence of theapplication of certain Brazilian revenue taxes. The revenue taxes which causedthe adverse effect on operating results include the *Contribuição para Seguridade Social* (a federal socialsecurity contribution), or COFINS, and the *Programade Formação do Patrimônio do Servidor* (a fund for the benefit ofpublic employees), or PASEP, and were assessed against our consolidatedrevenues at a combined rate of approximately 4.65% from December 2002 toJanuary 2004 and 3.65% from January through November 2002. SinceFebruary 2004, the combined tax rate for these contributions is 9.25% of atax base equal to the gross revenue less certain deductions. Due to theunbundling, the revenue taxes 

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were assessed at thesubsidiary level with respect to revenues of the generation subsidiary and,separately, revenues of the distribution subsidiary.

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

*Netoperating revenues*

Netoperating revenues increased 15.0% from R$7,513 million in 2005 to R$8,640million in 2006.
|                                                       | ** ** | **2006**                                                      | ** ** | **% of net  operating  revenues** | ** ** | **2005**                                                      | ** ** | **% of net  operating  revenues** | ** ** | **2006  versus  2005 - %** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------|------------|
| ** **                                            | ** ** | **(in millions)**                                        | ** ** | ** **                                  | ** ** | **(in millions)**                                        | ** ** | ** **                                  | ** ** | ** **                           | ** ** |
| Electricity sales to  final consumers                 |       | R$         9,319 |       | 107.9                                       |       | R$         8,708 |       | 115.8                                       |       | 7.0                                  |       |
|                                                  |       |                                                          |       |                                        |       |                                                          |       |                                        |       |                                 |       |
| Regulatory  extraordinary rate adjustment             |       | 1                                                             |       | —                                      |       | 8                                                             |       | 0.1                                         |       | (87.5                                | )          |
|                                                  |       |                                                          |       |                                        |       |                                                          |       |                                        |       |                                 |       |
| Deferred rate  adjustment                             |       | —                                                        |       | —                                      |       | 110                                                           |       | 1.5                                         |       | (100.0                               | )          |
|                                                  |       |                                                          |       |                                        |       |                                                          |       |                                        |       |                                 |       |
| Electricity sales to  the interconnected power system |       | 884                                                           |       | 10.2                                        |       | 237                                                           |       | 3.2                                         |       | 273.0                                |       |
|                                                  |       |                                                          |       |                                        |       |                                                          |       |                                        |       |                                 |       |
| Use of basic  transmission and distribution networks  |       | 1,780                                                         |       | 20.6                                        |       | 1,523                                                         |       | 20.3                                        |       | 16.9                                 |       |
|                                                  |       |                                                          |       |                                        |       |                                                          |       |                                        |       |                                 |       |
| Other operating  revenues                             |       | 199                                                           |       | 2.3                                         |       | 168                                                           |       | 2.2                                         |       | 18.5                                 |       |
|                                                  |       |                                                          |       |                                        |       |                                                          |       |                                        |       |                                 |       |
| Tax on revenues                                       |       | (3,543                                                        | )          | (41.0                                       | )          | (3,241                                                        | )          | (43.1                                       | )          | 9.3                                  |       |
|                                                  |       |                                                          |       |                                        |       |                                                          |       |                                        |       |                                 |       |
| Total net operating revenues                          |       | R$         8,640 |       | 100                                         |       | R$         7,513 |       | 100.0                                       |       | 15.0                                 |       |

 

Revenues from electricity sales to final consumersincreased 7.0% from R$8,708 million in 2005 to R$9,319 million in 2006 due torate adjustments of 20.7% in April 2005 (full effect in 2006) and 7.1% inApril 2006 and a 1.4% increase in the volume of our electricity sales tofinal consumers in 2006. The TUSD charges related to the use of the localdistribution network of the Free Consumers, which began to be chargedseparately in 2004 and recorded under the item “Use of basic transmission anddistribution networks”, were R$1,261 million in 2006 compared to R$1,058million in 2005. This increase was due to a shift in certain industrialconsumers to the category of Free Consumers in 2006. Electricity sales to finalcustomers and the TUSD revenues together increased 8.3% in 2006 compared to2005.

We recorded revenue relating to the regulatoryextraordinary rate adjustment in accordance with the terms of the GeneralAgreement of the Electricity Sector, which provides for reimbursement ofrevenue losses incurred during the period of the Electricity Rationing Plan andrelated spot market transactions through special rate increases to be billed tofinal consumers, and in accordance with EITF Issue No. 92-07, “Accountingby Rate-Regulated Utilities for the Effects of Certain Alternative RevenuePrograms,” which establishes a 24-month limit for the recovery of revenuelosses incurred during the Electricity Rationing Plan. See Note 4 to ourconsolidated financial statements.

Revenues related to the deferred rate adjustment wereR$110 million in 2005. ANEEL Resolution No. 71, dated April 4, 2005,disclosed the results of CEMIG’s periodic rate review. According to thisresolution, the rate adjustment to be applied to CEMIG’s rates beginning onApril 8, 2003 was 44.4%, instead of the 31.5% previously applied. Thedifference is being included by ANEEL in our rate adjustments. The deferredrate adjustment recorded in 2005 represents the difference between the tariffadjustment that CEMIG is entitled to and the rate previously applied.  See Note 4 to our consolidated financialstatements.

Electricity sales to the interconnected power systemwere R$884 million in 2006, a 273.0% increase compared to R$237 million in2005. This increase was primarily due to the sale of energy by Cemig Generationand Transmission to other distributors in 2006 as a result of the energyauction. In 2005, a substantial portion of the sale of energy by CemigGeneration and Transmission was to Cemig Distribution and was thus eliminatedas inter-company transactions in the consolidated financial statements ofCEMIG.

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Income from the use of the basic transmission networkincreased R$257 million, or 16.9%, from R$1,523 million in 2005 to R$1,780million in 2006.  This increase wasprimarily due to the higher TUSD revenues of Cemig Distribution, which totaledR$1,261 million in 2006 compared to R$1,058 million in 2005, resulting from thecharges paid by Free Consumers for the power sold by Cemig Generation andTransmission.  In addition, there was anincrease in revenues related to use of the facilities that are part of CEMIG’sbasic transmission network by electric power generators and distributors thatcomprise the national grid, in the amount of R$417 million in 2006 compared toR$403 million in 2005.

Other operating revenues increased 18.5%, from R$168million in 2005 to R$199 million in 2006. The variation in our other operatingrevenues in 2006 is primarily due to an increase in telecommunications andcable TV services revenues which was R$121 million in 2006 compared to R$92million in 2005.

Taxes on revenuesincreased 9.3% to R$3,543 million in 2006, compared to R$3,241 million in 2005,as a result of the increase in our electricity sales to final consumers(including TUSD revenue) in 2006 as compared to 2005. Taxes on revenues consistof:  (i) VAT, assessed at an averagerate of 21% on electricity sales to final consumers, and VAT billed to consumersrelated to the deferred regulatory assets; (ii) COFINS, assessed at a rateof 7.6%; and (iii) PASEP, assessed at a rate of 1.65%. Through the end of2005, the *Encargo de Capacidade Emergencial*(Emergency Capacity Charge), a charge established in 2002 that was proratedamong final consumers of electric energy and relates to the *Comercializadora Brasileira de Energia Elétrica*—CBEE,or CBEE, a Federal Government agency set up to supply energy to utilities inthe event of future shortages, was also assessed. Due to the high reservoirlevels of Brazilian hydroelectric plants in 2006, such charge was eliminatedbeginning in 2006. See Notes 14 and 18 to our consolidated financialstatements.

*Operatingcosts and expenses*

Operating costsand expenses increased 27.1% to R$7,867 million in 2006 from R$6,189 million in2005. This increase was principally due to increases in our electricitypurchased for resale, personnel expenses and our provision for loss on deferredregulatory assets and an expense recorded in 2006 related to a regulatoryliability – special obligations.  
|                                                      | ** ** | **2006**                         | ** ** | **% of net  operating  revenues** | ** ** | **2005**                         | ** ** | **% of net  operating  revenues** | ** ** | **2006 versus  2005 - %** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|---------------------------------------------|------------|----------------------------------|------------|---------------------------------------------|------------|------------------------------------------|------------|
| ** **                                           | ** ** | **(in millions)**           | ** ** | ** **                                  | ** ** | **(in millions)**           | ** ** | ** **                                  | ** ** | ** **                               | ** ** |
|                                                 |       |                             |       |                                        |       |                             |       |                                        |       |                                     |       |
| Electricity  purchased for resale                    |       | R$  (1,907)            |       | (22.1                                       | )          | R$  (1,455)            |       | (19.4                                       | )          | 31.1                                     |       |
|                                                 |       |                             |       |                                        |       |                             |       |                                        |       |                                     |       |
| Use of basic  transmission and distribution networks |       | (687                             | )          | (8.0                                        | )          | (709                             | )          | (9.4                                        | )          | (3.1                                     | )          |
|                                                 |       |                             |       |                                        |       |                             |       |                                        |       |                                     |       |
| Depreciation and  amortization                       |       | (810                             | )          | (9.4                                        | )          | (669                             | )          | (8.9                                        | )          | 21.1                                     |       |
|                                                 |       |                             |       |                                        |       |                             |       |                                        |       |                                     |       |
| Personnel                                            |       | (1,046                           | )          | (12.1                                       | )          | (779                             | )          | (10.4                                       | )          | 34.3                                     |       |
|                                                 |       |                             |       |                                        |       |                             |       |                                        |       |                                     |       |
| Regulatory  charges                                  |       | (1,031                           | )          | (11.9                                       | )          | (983                             | )          | (13.1                                       | )          | 4.9                                      |       |
|                                                 |       |                             |       |                                        |       |                             |       |                                        |       |                                     |       |
| Regulatory  liability – special liabilities     |       | (1,057                           | )          | (12.2                                       | )          | —                           |       | —                                      |       | —                                   |       |
|                                                 |       |                             |       |                                        |       |                             |       |                                        |       |                                     |       |
| Third-party  services                                |       | (475                             | )          | (5.5                                        | )          | (420                             | )          | (5.6                                        | )          | 13.1                                     |       |
|                                                 |       |                             |       |                                        |       |                             |       |                                        |       |                                     |       |
| Employee post-retirement  benefits                   |       | (245                             | )          | (2.8                                        | )          | (257                             | )          | (3.4                                        | )          | (4.7                                     | )          |
|                                                 |       |                             |       |                                        |       |                             |       |                                        |       |                                     |       |
| Materials and  supplies                              |       | (116                             | )          | (1.3                                        | )          | (95                              | )          | (1.3                                        | )          | 22.1                                     |       |
|                                                 |       |                             |       |                                        |       |                             |       |                                        |       |                                     |       |
| Provision for  loss on deferred regulatory assets    |       | (49                              | )          | (0.6                                        | )          | (183                             | )          | (2.4                                        | )          | (73.2                                    | )          |
|                                                 |       |                             |       |                                        |       |                             |       |                                        |       |                                     |       |
| Employees profit  sharing                            |       | (210                             | )          | (2.4                                        | )          | (260                             | )          | (3.5                                        | )          | (19.2                                    | )          |
|                                                 |       |                             |       |                                        |       |                             |       |                                        |       |                                     |       |
| Other                                                |       | (234                             | )          | (2.7                                        | )          | (379                             | )          | (5.0                                        | )          | (38.3                                    | )          |
|                                                 |       |                             |       |                                        |       |                             |       |                                        |       |                                     |       |
| Total operating costs  and expenses                  |       | R$    (7,867 | )          | (91.0                                       | )          | R$    (6,189 | )          | (82.4                                       | )          | 27.1                                     |       |

Electricity purchased forresale consists primarily of purchases from Itaipu through *Eletrobrás*. We are required underapplicable regulations to purchase 17.0% of Itaipu’s capacity at U.S.dollar-denominated prices. We also purchase electricity from the 

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CCEE, Furnas andthrough competitive biddings. Electricity purchased for resale increased 31.1%to R$1,907 million in 2006 from R$1,455 million in 2005. The amounts ofelectricity purchased for resale reported in the income statement refer to theamounts that were in fact included in the calculation of the tariff to beapplied, in accordance with SFAS 71 “Accounting for the Effects of CertainTypes of Regulation”. See Note 19 to our consolidated financial statements.

Charges for use ofthe basic transmission network mainly correspond to the cost of transporting electricityin the Brazilian basic transmission network which is prorated among theBrazilian distribution companies. Charges for use of the basic transmissionnetwork are fixed costs, which decreased 3.1% from R$709 million in 2005 toR$687 million in 2006. The amount reported in the income statement refers tothe amounts that were in fact included in the calculation of the tariff to beapplied, in accordance with SFAS 71 “Accounting for the Effects of CertainTypes of Regulation”.

Depreciation andamortization expense increased 21.1% from R$669 million in 2005 to R$810million in 2006. This increase was primarily due to depreciable assets inservice in 2006 in the amount of R$23,699 million, compared to R$18,875 millionin 2005.

Personnel expenseincreased 34.3% from R$779 million in 2005 to R$1,046 million in 2006. Thisvariation was due to the following factors: (i) a 7.6% salary increase grantedto CEMIG’s employees in November 2005 (full effect in 2006) and a 4.0%salary increase granted in November 2006; (ii) a R$178 million expenserecorded in 2006 for an upfront payment to employees in exchange for theirrelinquishment of future benefits for time of service; (iii) an increase of3.8% in the number of employees of CEMIG and its subsidiaries Cemig Generationand Transmission and Cemig Distribution, and (iv) an increase in fixedpersonnel costs from R$92 million in 2005 to R$158 million in 2006 due to workon the “Luz Para Todos” program.

Regulatory chargesincreased 4.9% from R$983 million in 2005 to R$1,031 million in 2006, primarilydue to the increase of R$90 million in the fuel usage quota. The fuel usagequota represents contributions made by the electricity company concessionairesto subsidize the cost of fuel used in the thermoelectric energy generatingprocess in the Brazilian energy system. The amounts reported in the incomestatement related to regulatory charges refer 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”.

We recorded anexpense in 2006, in the amount of R$1,057 million, related to specialobligations, which are resources obtained by us from consumer contributions,federal budget allocations, as well as federal, state and municipal funds, andspecial credits relating to investments made in projects linked to theconcession. The resources represent either infrastructure assets or cash tofund the acquisition and/or construction of such assets usually to obtainconnection to our distribution network or to extend the existing network. Forregulatory purposes, the depreciation of these assets was included in thetariff rate setting process and the corresponding liability was recorded forthe amount of the total contributions. Under U.S. GAAP, the contributions wereconsidered reimbursements of construction costs and credited against the costof the related fixed assets. On October 31, 2006, ANEEL issued a newregulation which changed the treatment of special obligations with respect tothe tariff setting process. The regulation establishes, among other items, thatbeginning on the date of the next respective tariff revision, the specialobligations will be amortized as a reduction of net allowable costs over futureperiods, thereby reducing tariffs. Consequently, in accordance with SFAS No. 71“Accounting for the Effects of Certain Types of Regulation”, the specialobligations became a regulatory liability as a result to this new regulation.Therefore, we recorded an expense in the 2006 statement of operations, with anoffset to deferred regulatory liabilities. See more information on Note 4, item“f” to our consolidated financial statements.

Third-partyservices expense increased 13.1% from R$420 million in 2005 to R$475 million in2006. The increase was due to higher costs in 2006 related to meter reading,delivery of bills to consumers, maintenance and conservation of vehicles andcontracted labor.

Employee post-retirement benefits expenses decreased4.7% from R$257 million in 2005 to R$245 million in 2006 due to the reductionin payments for our Defined Contribution Plan from R$68 million in 2005 to R$53million in 2006. See Note 15 to our consolidated financial statements.

We recorded a provisionfor losses on deferred regulatory assets of R$49 million in 2006 compared toR$183 million in 2005. The provision recorded is related to the amounts thatCEMIG receives from other distribution companies in connection with energytransactions on the CCEE/MAE during the Electricity Rationing Plan. Thesedistribution companies have a limited time, as stipulated by ANEEL, to transferthe amounts owed to us. See Note 4 to our consolidated financial statements.

Employees profit sharingdecreased 19.2% from R$260 million in 2005 to R$210 million in 2006. Thisdecrease is a result of a lower payment amount established under the collectivelabor agreements entered into by CEMIG and the labor unions in November 2006.

Other expensesdecreased 38.3% from R$379 million in 2005 to R$234 million in 2006. Thedecrease in other expenses was primarily due to the reversal of provisions ofR$97 million in 2006 compared to provisions recorded in 2005 of R$31 million,related to labor claims and civil lawsuits. See Note 19 to our consolidatedfinancial statements.

*Operatingincome*

As a result of theforegoing, we had operating income of R$773 million in 2006, compared tooperating income of R$1,324 million in 2005.

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*Financialincome, 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,which are 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, foreign exchange losses, monetary restatementlosses, monetary restatement of deferred regulatory liabilities and otherexpenses. We had net financial income of R$335 million in 2006 compared to netfinancial income of R$754 million in 2005, principally due to a R$99 millionreversal provision for losses on accrued interest on our account receivablefrom the State Government in 2006 compared to a reversal provision of R$223million in 2005 due to the execution of the Fourth Amendment to the CRC AccountAgreement mentioned in Note 3 to our consolidated financial statements.Additionally, there was an increase of 61.3% in the charges on loans andfinancings from R$328 million in 2005 to R$529 million in 2006, due mainly tothe increase in our debt in 2006 compared to 2005.

*Non-Operatingincome*

We hadnon-operating income of R$91 million in 2006 compared to non-operating incomeof R$29 million in 2005. The non-operating income recorded in 2006 is relatedto our equity investment in RME and other jointly controlled companies. SeeNote 9 to our consolidated financial statements.

*Incometaxes*

Income taxes werean expense of R$497 million on pre-tax income of R$1,199 million in 2006,compared to an expense of R$300 million on pre-tax income of R$2,107 million in2005. The main difference between income tax calculated at the statutory rateand the income tax expense recorded is the tax benefit mainly due to interestand monetary variation on our provision for losses on our account receivablefrom the State Government. See Note 5 to our consolidated financial statements.

*Netincome*

As a result of theforegoing, we had a net income of R$702 million in 2006 compared to net incomeof R$1,809 million in 2005.

*Othercomprehensive income (loss)*

Othercomprehensive income was R$140 million in 2006 compared to other comprehensiveincome of R$25 million in 2005. This variation was due to a reduction in theadditional minimum liability related to post-retirement benefits in 2006, as aresult of a higher increase in plan assets compared to the increase in the projectedbenefit obligation.

*Comprehensiveincome*

As a result of thefactors stated above, comprehensive income was R$842 million in 2006 comparedto R$1,834 million in 2005.

**YearEnded December 31, 2005 Compared to Year Ended December 31, 2004**

*Netoperating revenues*

Netoperating revenues increased 0.5% from R$7,479 million in 2004 to R$7,513million in 2005.

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|                                                       | ** ** | **2005**                                                      | ** ** | **% of net  operating  revenues** | ** ** | **2004**                                                      | ** ** | **% of net  operating  revenues** | ** ** | **2005  versus  2004 - %** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------|------------|
| ** **                                            | ** ** | **(in millions)**                                        | ** ** | ** **                                  | ** ** | **(in millions)**                                        | ** ** | ** **                                  | ** ** | ** **                           | ** ** |
|                                                  |       |                                                          |       |                                        |       |                                                          |       |                                        |       |                                 |       |
| Electricity  sales to final consumers                 |       | R$         8,708 |       | 115.8                                       |       | R$         8,541 |       | 114.2                                       |       | 2.0                                  |       |
|                                                  |       |                                                          |       |                                        |       |                                                          |       |                                        |       |                                 |       |
| Regulatory  extraordinary rate adjustment             |       | 8                                                             |       | 0.1                                         |       | 89                                                            |       | 1.2                                         |       | (91.0                                | )          |
|                                                  |       |                                                          |       |                                        |       |                                                          |       |                                        |       |                                 |       |
| Deferred rate  adjustment                             |       | 110                                                           |       | 1.5                                         |       | 640                                                           |       | 8.5                                         |       | (82.8                                | )          |
|                                                  |       |                                                          |       |                                        |       |                                                          |       |                                        |       |                                 |       |
| Electricity  sales to the interconnected power system |       | 237                                                           |       | 3.2                                         |       | 36                                                            |       | 0.5                                         |       | 558.3                                |       |
|                                                  |       |                                                          |       |                                        |       |                                                          |       |                                        |       |                                 |       |
| Use of basic  transmission and distribution networks  |       | 1,523                                                         |       | 20.3                                        |       | 245                                                           |       | 3.3                                         |       | 521.6                                |       |
|                                                  |       |                                                          |       |                                        |       |                                                          |       |                                        |       |                                 |       |
| Other operating  revenues                             |       | 168                                                           |       | 2.2                                         |       | 536                                                           |       | 7.2                                         |       | (68.7                                | )          |
|                                                  |       |                                                          |       |                                        |       |                                                          |       |                                        |       |                                 |       |
| Tax on revenues                                       |       | (3,241                                                        | )          | (43.1                                       | )          | (2,608                                                        | )          | (34.9                                       | )          | 24.3                                 |       |
|                                                  |       |                                                          |       |                                        |       |                                                          |       |                                        |       |                                 |       |
| Total net operating  revenues                         |       | R$         7,513 |       | 100.0                                       |       | R$         7,479 |       | 100.0                                       |       | 0.5                                  |       |

 

Although there were rate adjustments of 14.0% inApril 2004 (full effect in 2005) and 20.7% in April 2005 and a 2.6%increase in the volume of our electricity sales to final consumers in 2005,revenues from electricity sales to final consumers increased only 2.0%. Asignificant number of industrial consumers were moved to the category of FreeConsumers beginning in January 2005. As a result, the TUSD charges relatedto the use of the local distribution network of the Free Consumers began to becharged separately and recorded under the item “Use of basic transmission anddistribution networks” in the amount of R$1,058 million in 2005. In 2004, TUSDwas included in the total revenues from electricity sales to final customers.Based on the total of the TUSD revenues and the revenues from the electricitysales to final customers, total revenues increased 16.0% in 2005 compared to2004.

We recorded revenue relating to the regulatoryextraordinary rate adjustment in accordance with the terms of the GeneralAgreement of the Electricity Sector, which provides for reimbursement ofrevenue losses incurred during the period of the Electricity Rationing Plan andrelated spot market transactions through special rate increases to be billed tofinal consumers, and in accordance with EITF Issue No. 92-07, “Accountingby Rate-Regulated Utilities for the Effects of Certain Alternative RevenuePrograms,” which establishes a 24-month limit for the recovery of revenuelosses incurred during the Electricity Rationing Plan. See Note 4 to ourconsolidated financial statements.

Revenues relatedto the deferred rate adjustment were R$110 million and R$640 million in 2005and 2004, respectively. ANEEL Resolution No. 71, dated April 4, 2005,disclosed the results of CEMIG’s periodic rate review. According to thisresolution, the rate adjustment to be applied to CEMIG’s rates beginning onApril 8, 2003 was 44.4%, instead of the 31.5% previously applied. Thedifference will be included by ANEEL in future rate adjustments. The amountsrecorded represent the difference between the tariff adjustment that CEMIG isentitled to and the rate previously applied. The higher amount recorded in 2004represents the difference that occurred in the period between April 2003to December 2004. See Note 4 to our consolidated financial statements.

Electricity salesto the interconnected power system were R$237 million in 2005, a 558.3%increase compared to R$36 million in 2004. This increase resulted primarilyfrom the sale of power surplus by Cemig Distribution on the spot market in2005.

Income from theuse of the basic transmission network increased R$1,278 million, or 521.6%,from R$245 million in 2004 to R$1,523 million in 2005. This increase wasprimarily due to the TUSD revenues of Cemig Distribution, which totaled R$1,058million in 2005, resulting from the charges paid by Free Consumers for thepower sold by Cemig Generation and Transmission. As noted above, the TUSD hadbeen included in the power supply tariff of Final Consumers until 2004. Thebalance of this item also includes income from the use of the facilities thatare part of CEMIG’s basic transmission network by electric power generators anddistributors that comprise the national grid, in the amount of R$403 million in2005 compared to R$243 million in 2004.

Other operating revenuesdecreased 68.7%, from R$536 million in 2004 to R$168 million in 2005. Thevariation in our other operating revenues in 2005 is due in part to ourconsolidation of Gasmig’s revenues for the period from January 1, 2004 toDecember 15, 2004, the date of our sale of a 40.00% equity interest inGasmig to Petrobras. In 2005, we reported our investment in Gasmig under theequity method. The Gasmig revenues consolidated in 2004 were R$420 million. SeeNotes 9 and 18 to our consolidated financial statements.

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Taxes on revenuesincreased 24.3% to R$3,241 million in 2005, compared to R$2,608 million in2004, as a result of the increase in our electricity sales to final consumers(including TUSD revenue) in 2005 as compared to 2004. Taxes on revenues consistof:  (i) VAT, assessed at an averagerate of 21% on electricity sales to final consumers, and VAT billed toconsumers related to the deferred regulatory assets; (ii) COFINS, assessedat a rate of 7.6%; (iii) PASEP, assessed at a rate of 1.65%; and(iv) the *Encargo de CapacidadeEmergencial* (Emergency Capacity Charge), a charge established in2002 that is prorated among final consumers of electric energy and relates tothe *Comercializadora Brasileira de EnergiaElétrica*—CBEE, or CBEE, a Federal Government agency set up to supplyenergy to utilities in the event of future shortages. See Note 18 to ourconsolidated financial statements.

*Operatingcosts and expenses*

Operating costsand expenses increased 13.2% to R$6,189 million in 2005 from R$5,466 million in2004. This increase was principally due to an increase in regulatory charges in2005, increased use of the basic transmission network and a provision for aloss on deferred regulatory assets.
|                                                      | ** ** | **2005**               | ** ** | **% of net  operating  revenues** | ** ** | **2004**               | ** ** | **% of net  operating  revenues** | ** ** | **2005 versus  2004 - %** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|---------------------------------------------|------------|------------------------|------------|---------------------------------------------|------------|------------------------------------------|------------|
| ** **                                           | ** ** | **(in millions)** | ** ** | ** **                                  | ** ** | **(in millions)** | ** ** | ** **                                  | ** ** | ** **                               | ** ** |
|                                                 |       |                   |       |                                        |       |                   |       |                                        |       |                                     |       |
| Electricity  purchased for resale                    |       | R$ (1,455)        |       | (19.4                                       | )          | R$ (1,370)        |       | (18.3                                       | )          | 6.2                                      |       |
|                                                 |       |                   |       |                                        |       |                   |       |                                        |       |                                     |       |
| Natural gas  purchased for resale                    |       | —                 |       | —                                      |       | (268                   | )          | (3.6                                        | )          | —                                   |       |
|                                                 |       |                   |       |                                        |       |                   |       |                                        |       |                                     |       |
| Use of basic  transmission and distribution networks |       | (709                   | )          | (9.4                                        | )          | (538                   | )          | (7.2                                        | )          | 31.8                                     |       |
|                                                 |       |                   |       |                                        |       |                   |       |                                        |       |                                     |       |
| Depreciation and  amortization                       |       | (669                   | )          | (8.9                                        | )          | (677                   | )          | (9.0                                        | )          | (1.3                                     | )          |
|                                                 |       |                   |       |                                        |       |                   |       |                                        |       |                                     |       |
| Personnel                                            |       | (779                   | )          | (10.4                                       | )          | (788                   | )          | (10.5                                       | )          | (1.1                                     | )          |
|                                                 |       |                   |       |                                        |       |                   |       |                                        |       |                                     |       |
| Regulatory  charges                                  |       | (983                   | )          | (13.1                                       | )          | (861                   | )          | (11.5                                       | )          | 14.2                                     |       |
|                                                 |       |                   |       |                                        |       |                   |       |                                        |       |                                     |       |
| Third-party  services                                |       | (420                   | )          | (5.6                                        | )          | (329                   | )          | (4.5                                        | )          | 27.7                                     |       |
|                                                 |       |                   |       |                                        |       |                   |       |                                        |       |                                     |       |
| Employee  post-retirement benefits                   |       | (257                   | )          | (3.4                                        | )          | (153                   | )          | (2.0                                        | )          | 68.0                                     |       |
|                                                 |       |                   |       |                                        |       |                   |       |                                        |       |                                     |       |
| Materials and  supplies                              |       | (95                    | )          | (1.3                                        | )          | (83                    | )          | (1.2                                        | )          | 14.4                                     |       |
|                                                 |       |                   |       |                                        |       |                   |       |                                        |       |                                     |       |
| Provision for  loss on deferred regulatory assets    |       | (183                   | )          | (2.4                                        | )          | (9                     | )          | (0.1                                        | )          | 1,933.3                                  |       |
|                                                 |       |                   |       |                                        |       |                   |       |                                        |       |                                     |       |
| Employees profit  sharing                            |       | (260                   | )          | (3.5                                        | )          | (110                   | )          | (1.5                                        | )          | 136.4                                    |       |
|                                                 |       |                   |       |                                        |       |                   |       |                                        |       |                                     |       |
| Other                                                |       | (379                   | )          | (5.0                                        | )          | (280                   | )          | (3.7                                        | )          | 35.4                                     |       |
|                                                 |       |                   |       |                                        |       |                   |       |                                        |       |                                     |       |
| Total operating costs  and expenses                  |       | R$ (6,189)        |       | (82.4                                       | )          | R$ (5,466)        |       | (73.1                                       | )          | 13.2                                     |       |

Electricity purchased forresale consists primarily of purchases from Itaipu through *Eletrobrás*. We are required underapplicable regulations to purchase 17.0% of Itaipu’s capacity at U.S.dollar-denominated prices. We also purchase electricity from the CCEE, Furnasand through competitive biddings. Electricity purchased for resale increased6.2% to R$1,455 million in 2005 from R$1,370 million in 2004. 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 19 to our consolidated financial statements.

Natural gaspurchased for resale was R$268 million in 2004. We consolidated Gasmig’srevenues for the period from January 1, 2004 to December 15, 2004,the date of our sale of a 40.00% equity interest in Gasmig to Petrobras. In2005, we accounted for our investment in Gasmig using the equity method andtherefore we did not consolidate its revenues and expenses in 2005.

Charges for use ofthe basic transmission network mainly correspond to the cost of transportingelectricity in the Brazilian basic transmission network which is prorated amongthe Brazilian distribution companies. Charges for use of the basic transmissionnetwork are fixed costs that represented a 31.8% increase from R$538 million in2004 to R$709 million in 2005. The amount reported in the income statement refersto the amounts that were in fact included in the calculation of the tariff tobe applied, in accordance with SFAS 71 “Accounting for the Effects of CertainTypes of Regulation”.

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Depreciation andamortization expense did not vary significantly, decreasing 1.2% from R$677million in 2004 to R$669 million in 2005. This reduction is due to the certainitems that became fully depreciated in 2004. See Note 10 to our consolidatedfinancial statements.

Personnel expensedecreased from R$788 million in 2004 to R$779 million in 2005. Although therewas a 7.00% salary increase granted to CEMIG’s employees in November 2004(full effect in 2005), and a 7.6% salary increase granted inNovember 2005, we recorded a R$27 million provision in 2004 in connectionwith the implementation of our voluntary termination program and no suchprovision was recorded in 2005.

Regulatory chargesincreased 14.2% from R$861 million in 2004 to R$983 million in 2005, primarilydue to the increase of R$124 million in the fuel usage quota. The fuel usagequota represents contributions made by the electricity company concessionairesto subsidize the cost of fuel used in the thermoelectric energy generatingprocess in the Brazilian energy system. The amounts reported in the incomestatement related to regulatory charges refer 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”.

Third-partyservices expense increased 27.7% from R$329 million in 2004 to R$420 million in2005. The increase was due to higher costs in 2005 related to meter reading,delivery of bills to consumers, collection services and maintenance ofdistribution and transmission lines and buildings.

Employee post-retirementbenefits increased 68.0% from R$153 million in 2004 to R$257 million in 2005,due to a higher projected net periodic cost in 2005 as a result of a higherexpected interest expense compared to the expected return on plan assets. SeeNote 15 to our consolidated financial statements.

We recorded a provisionfor losses of R$183 million in 2005 compared to a provision for losses ondeferred regulatory assets of R$9 million in 2004. The provision recorded in2005 is related to the amounts that CEMIG receives from other distributioncompanies in connection with energy transactions on the CCEE/MAE during theElectricity Rationing Plan. These distribution companies have a limited time,as stipulated by ANEEL, to transfer the amounts owed to us. The provisionrecorded in 2005 is based on a study we prepared to determine whether the timestipulated for the distribution companies to carry out the transfer would beenough time for the recovery of the amounts due. See Note 4 to our consolidatedfinancial statements.

Employees profit sharingincreased 136.4% from R$110 million in 2004 to R$260 million in 2005. Thisvariation due to the collective labor agreements entered into by CEMIG and thelabor unions in November 2005.

Other expensesincreased 35.4% from R$280 million in 2004 to R$379 million in 2005. The mainvariation in other expenses between 2004 and 2005 was an increase of R$31million in provision for contingencies from R$34 million in 2004 to R$65million in 2005.  See Note 19 to ourconsolidated financial statements.

*Operatingincome*

As a result of theforegoing, we had operating income of R$1,324 million in 2005, compared tooperating income of R$2,013 million in 2004.

*Financialincome, net*

Financial income,net, includes (i) financial income, which is mainly comprised of interestand a monetary restatement of our account receivable from the State Government,investment income earned, late charges on overdue electricity bills, foreignexchange gains, monetary restatement on deferred regulatory assets and(ii) financial expenses, which are mainly comprised of interest expense onloans and financing, the *ContribuiçãoProvisória sobre a Movimentação ou Transmissão de Valores e de Créditos eDireitos de Natureza Financeira* (a financial transaction tax), orCPMF, foreign exchange losses, monetary restatement losses, monetaryrestatement of deferred regulatory liabilities and other expenses. We had netfinancial income of R$754 million in 2005 compared to net financial income ofR$350 million in 2004, principally due to a R$223 million reversal provisionfor losses on accrued interest on our account receivable from the StateGovernment in 2005 compared to a provision of R$326 million in 2004  which was recorded on accrued interest onthis receivable due to the execution of the Fourth Amendment to the CRC AccountAgreement mentioned in Note 3 to our consolidated financial statements.

*Non-Operatingincome*

We hadnon-operating income of R$29 million in 2005 compared to a non-operating incomeof R$105 million in 2004. The non-operating income recorded in 2005 is relatedto Equity on investment on Gasmig. In 2004, CEMIG sold part of its shares inGasmig, corresponding to 40% of the registered capital for R$154 million,resulting in a income of R$102 million.

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*Incometaxes*

Income taxes werean expense of R$300 million on pre-tax income of R$2,107 million in 2005,compared to an expense of R$731 million on pre-tax income of R$2,468 million in2004. The main difference between income tax calculated at the statutory rateand the income tax expense recorded is the tax benefit of R$216 million andR$173 million in 2005 and 2004, respectively, with respect to interest oncapital. See Note 5 to our consolidated financial statements.

*Minorityinterests*

The minority interest represented income of R$2million in 2005, and was related to Empresa de Infovias S.A.

*Netincome*

As a result of theforegoing, we had a net income of R$1,809 million in 2005 compared to netincome of R$1,739 million in 2004.

*Othercomprehensive income (loss)*

Othercomprehensive income was R$25 million in 2005 compared to other comprehensiveloss of R$474 million in 2004  In theprior year, CEMIG made a change in some actuarial assumptions related to annualdiscount rate and the mortality rate. The effect of these changes was asignificant increase in our retirement benefit obligation, which was recordedas an other comprehensive loss in 2004.

*Comprehensiveincome*

As a result of thefactors stated above, comprehensive income was R$1,834 million in 2005 comparedto R$1,265 million in 2004.

# **Liquidity and Capital Resources**

Our business iscapital intensive. Historically, we have required capital to finance theconstruction of new generation facilities and the expansion and modernizationof existing generation, transmission and distribution facilities. Our liquidityrequirements are also affected by our dividend policy. See “Item 8. FinancialInformation—Dividend Policy and Payments.” 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.

*Cashand cash equivalents*

Cash and cashequivalents as of December 31, 2006 were R$1,108 million compared toR$1,349 million as of December 31, 2005 and R$916 million as ofDecember 31, 2004. None of our cash or cash equivalents was held incurrencies other than *reais* as ofDecember 31, 2006.

*Cashflow from operating activities*

Net cash providedby operating activities in 2006, 2005 and 2004 totaled R$2,286 million, R$1,775million and R$1,498 million, respectively. The increase in cash provided by operatingactivities in 2006 compared to 2005 was due mainly to higher amounts receivedrelated to deferred regulatory assets and the increase in 2005 compared to 2004was due primarily to the financial settlement of the CCEE transactions in 2004.Significant non-cash items affecting earnings included depreciation andamortization expense as a result of our on-going capital improvements projects,recognition of deferred regulatory assets, the effects of monetary variationand exchange rate variations and a partial reversal of the provision for losson the receivable under the CRC Account Agreement.

*Cashflow from investing activities*

Net cash used ininvesting activities during 2006, 2005 and 2004 amounted to R$2,086 million,R$1,548 million and R$910 million, respectively, principally relating to theacquisition of property, plant and equipment and the modernization of existinggeneration, transmission and distribution facilities, as well as theacquisition of an interest in Light and transmission companies in 2006.Investments in affiliates amounted to R$568 million, R$32 million and R$10million in 2006, 2005 and 2004, respectively. Capital expenditures from theacquisition of property, plant and equipment amounted to R$1,328 million,R$1,511 million and 

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R$1,061 million in 2006,2005 and 2004, respectively. See “Item 4. Information on the Company—CapitalExpenditures” for more detail regarding how these capital expenditures wereapplied by us.

*Cashflow from financing activities*

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

Net cash providedby financing activities during 2005 was R$206 million, comprised of R$1,515million in proceeds from long-term financing, offset by the repayment of R$818million of real- and foreign currency-denominated long-term financing and thepayment of R$491 million in dividends and interest on capital.

Net cash used forfinancing activities during 2004 was R$138 million, comprised of R$1,207million and R$316 million in proceeds from long-term financing and short-termloans, respectively, offset by the repayment of R$1,424 million of real- andforeign currency-denominated long-term financing and the payment of R$237million in dividends and interest on capital.

Our indebtednessfrom loans, financings and debentures as of December 31, 2006 was R$6,524million, composed of R$5,833 million of long-term debt and R$691 million of thecurrent portion of long-term debt. This compares with indebtedness from loans,financings and debentures as of December 31, 2005 of R$4,826 million,composed of R$3,841 million of long-term debt and R$985 million of the currentportion of long-term debt. Of our long-term debt (including the currentportion) at December 31, 2006, R$661 million was denominated in foreigncurrencies (R$554 million of which was U.S. dollar-denominated) and R$5,863million was denominated in *reais*. Of ourtotal indebtedness from loans, financings and debentures of R$6,524 million asof December 31, 2006, R$5,876 million is subject to variable interestrates. See Notes 13 and 22 to our consolidated financial statements.

We are subject tofinancial covenants contained in some of our debt agreements that require us tomaintain certain financial ratios, one of which has been waived by the relevantcreditor. These ratios are computed based on our financial statements preparedin accordance with accounting practices adopted in Brazil. These and othercovenants could limit our ability to support our liquidity and capitalrequirements. See “Item 13—Defaults, Dividend Arrearages andDelinquencies—Restrictive Covenants”.

Given the currentportion of our financings in the amount of R$691 million due in 2007, we needfunds in the short term to pay and refinance these obligations. For thisreason, we are refinancing our debt in 2007 to lengthen maturities. We plan toraise approximately R$600 million in 2007, which will be used not only to repaydebt but also to finance the capital expenditure. We cannot assure you that wewill successfully consummate this refinancing.

On July 19,2004, we set up a Local Note Program, or the Program, according to “InstruçãoCVM No. 400”, dated December 29, 2003. Under the Program we were permittedto issue debentures in an amount of up to R$1.5 billion, and issued debenturesin July 2004. As a result of the unbundling, we are unable to issueadditional debentures under the Program. We may in the future establish otherlocal note programs directly or through our subsidiaries.

As a state-controlledcompany, we are subject to restrictions under current financing laws andregulations in Brazil on our ability to obtain financing in certain situations.For example, we must obtain approval from the Brazilian Ministry of Finance andthe Central Bank prior to certain international financial transactions and suchapproval is typically granted only if the purpose of the transaction is tofinance the import of goods or to roll over our external debt. In addition,financial institutions in Brazil are subject to risk exposure restrictions withregard to state governments, governmental agencies and state-controlledcompanies such as us. The restrictions mentioned in this paragraph have notprevented us from obtaining financing, although there is no assurance that ourability to obtain financing will not be hindered in the future. See “Item 3.Key Information—Risk Factors—Risks Relating to Brazil—We currently facelimitations on our ability to obtain financing.”

We currently planto make capital expenditures aggregating approximately R$1,148 million in 2007.The principal uses of these expenditures are expected to be for expansion ofour distribution infrastructure and increases in our generation capacity. In2006, we funded our capital expenditures and met our liquidity requirementsthrough a combination of cash flow from operations and financings. We expectthat we will fund our proposed capital expenditures and meet our otherliquidity requirements in 2007 through a combination of cash flow fromoperations and financings. Because we rely primarily on cash generated fromoperations to fund our liquidity and capital requirements, factors that causeour revenues and net income to increase or decrease could have a correspondingeffect on our access to sources of liquidity.

Over the longterm, we anticipate that it will be necessary to make significant capitalexpenditures in connection with the maintenance and upgrading of ourgeneration, transmission and distribution facilities, and we expect to employ avariety of liquidity 

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sources, such as cashflow from operations and financings, in connection with such requirements. See “Item3. Key Information—Risk Factors” for a discussion of certain matters that mightadversely affect our liquidity position.

InJanuary 2006, we sold the senior quotas of Cemig CRC AccountSecuritization Fund (“FIDC”) in the amount of R$900 million which increased ourliabilities in this same amount. For additional information regarding the FIDC,see “Additional Information - Material Contracts”.

**Off-BalanceSheet Arrangements**

We do not have any off-balance sheet arrangements.

**TabularDisclosure of Contractual Obligations**

We haveoutstanding contractual obligations and commitments which include principaldebt payment provisions, the obligation to purchase electricity for resale fromItaipu, the obligation to transfer and transport electric power from Itaipu aswell as construction commitments. The following table provides information, asof December 31, 2006, about our contractual obligations and commitments inmillions of *reais*.
| ** **                                            | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013 and   beyond** | ** ** | **Total** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|---------------------------------|------------|-----------|------------|
|                                                  |       |     |       |     |       |     |       |     |       |     |       |     |       |                            |       |      |       |
| Long-Term debt (1)                                    |       | 691      |       | 547      |       | 869      |       | 658      |       | 756      |       | 911      |       | 2,092                           |       | 6,524     |       |
| Derivative financial  instruments (“swaps”) |       | 103      |       | 15       |       | 36       |       | 9        |       | 8        |       | 8        |       | 8                               |       | 187       |       |
| Purchase of Electricity  from Itaipu for resale (2)   |       | 1,216    |       | 1,021    |       | 1,070    |       | 1,103    |       | 1,115    |       | 1,159    |       | 499                             |       | 7,183     |       |
| Transportation of  Electric Power from Itaipu (2)     |       | 78       |       | 82       |       | 85       |       | 89       |       | 93       |       | 97       |       | 42                              |       | 566       |       |
| Baguari hydroelectric  power plant(3)                 |       | 56       |       | 76       |       | 31       |       | 4        |       | —   |       | —   |       | —                          |       | 167       |       |
| Aimorés hydroelectric  power plant (3)           |       | 33       |       | 4        |       | —   |       | —   |       | —   |       | —   |       | —                          |       | 37        |       |
| Três Marias  hydroelectric power plant (3)       |       | 25       |       | 3        |       | —   |       | —   |       | —   |       | —   |       | —                          |       | 28        |       |
| “Luz para todos” (Light  for All) Program   |       | 204      |       | —   |       | —   |       | —   |       | —   |       | —   |       | —                          |       | 204       |       |
| Cresce Minas I                                        |       | 176      |       | 438      |       | 107      |       | —   |       | —   |       | —   |       | —                          |       | 721       |       |
| Sales Management System  I                            |       | 77       |       | 41       |       | 16       |       | —   |       | —   |       | —   |       | —                          |       | 134       |       |
| Furnas-Pimenta  Transmission Line                     |       | 14       |       | 2        |       | —   |       | —   |       | —   |       | —   |       | —                          |       | 16        |       |
| Pension Plan Debt -  Forluz                           |       | 120      |       | 89       |       | 94       |       | 96       |       | 87       |       | 85       |       | 746                             |       | 1,317     |       |
| Purchase of Energy —  Spot Market                |       | 748      |       | 1,023    |       | 1,261    |       | 1,533    |       | 1,662    |       | 1,742    |       | 4,415                           |       | 12,384    |       |
| Total                                                 |       | 3,541    |       | 3,341    |       | 3,569    |       | 3,492    |       | 3,721    |       | 4,002    |       | 7,802                           |       | 29,468    |       |

 

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(1)              Inthe event of our non-compliance with certain covenants in our loan agreements,the total principal, future interest and any penalties due under these agreementsmay become immediately due and payable. These amounts do not include interestpayments on debt or payments under interest rate swap agreements. We expect topay approximately R$664 million in interest payments on debt in 2007. Interestpayments on debt for years following 2007 have not been estimated since theyare subject to future variations in variable interest rates and foreigncurrency exchange rates,  We do notbelieve projections of interest payments and payments under interest rate swapagreements would be meaningful.

(2)              Contract withFurnas, denominated in U.S. dollars, to supply electric power purchased fromItaipu until May 2013. Amounts arecalculated based on the U.S. dollar exchange rate as of December 31, 2006.

(3)              Contractualobligations with contractors.

# **Research and Development**

We are engaged inprojects that explore technological advances not only in electric power systemsbut in all energy-related fields such as the development of the usage ofalternative energy sources, environmental control and power system performanceand safety optimization.

In 2006, we spentapproximately R$33 million on research and development, including transfers to *Fundo Nacional de Desenvolvimento Cientifico eTecnológico*—FNDCT (a federal research and development fund). Duringthe years ended December 31, 2006, 2005 and 2004, we spent an aggregate ofapproximately R$50 million on research and development, and we transferred asimilar amount to FNDCT during that time. We expect to spend a total of approximatelyR$56 million on research and development in 2007. We conduct these efforts inaccordance with Federal Law No. 9,991, which requires Brazilian powerutilities to 

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spend at least 1% oftheir net income on research and development projects (including transfers toFNDCT), as well as in accordance with our strategic corporate plans.

Some of the research and development programs as wellas energy efficiency programs related to 2006 and previous fiscal years havenot yet been concluded by us. These delays have been caused by the time spentby ANEEL on the approval of the programs and for****establishment of partnerships and development of theprojects by the partners. In accordance with ANEEL instructions CEMIG recordeda liability in 2006 for future expenditures in research and developmentprograms and energy efficiency programs in the amount of R$85 million relatingto amounts that had already been included in the determination of our tariffsin 2006.

We have dedicateda substantial portion of our research and development activities to thedevelopment of the usage of alternative energy sources, including wind, solarand biomass power generation. For example, our experimental Morro do Camelinhowind farm, with an installed capacity of 1 MW, began operating in 1994. See “Item4. Information on the Company—Generation and Purchase of Electric Power—WindFarm.”  We are currently involved inalternative energy research and development through projects that involve:

·                                          thedevelopment of the first Latin American 500W and 1,000W prototypes of hydrogenfuel cells (Direct Hydrogen Proton Exchange Membrane Fuel Cells) and researchregarding the development of cells fueled directly by ethanol without externalreform (Direct Ethanol Proton Exchange Membrane Fuel Cell);

·                                          theuse of low cost technologies for electricity generation such as Elsbeth andStirling motors, internal combustion engines, photovoltaic panels, microturbines, high temperature fuel cells, biomass gasification, and bio-gas fromanimal biomass;

·                                          thecreation of an experimental laboratory for the production of hydrogen as anenergy source;

·                                          ajoint research program with *Universidade Federal deItajubá* relating to small hydroelectric plants, thermal generationand distributed energy resources;

·                                          ajoint research program with *Centro Tecnológico deMinas Gerais* focusing on the development of a low-cost photovoltaiccell;

·                                          ajoint research program with *Universidade Federal deViçosa* relating to planted biomass for electricity generation; and

·                                          ajoint research program with *Centro Federal de EducaçãoTecnológica* focusing on the development of small solar thermal powerplants using low-cost materials.

Our research anddevelopment projects in areas other than alternative energy sources include:

·                                          projectsregarding the minimization of the environmental impact in areas like fishsafety, limnology, aquifers recharge, geology-related researches, riparianvegetation and environmental problems caused by turbines;

·                                          projectsfor monitoring and optimizing of thermal and hydroelectric plants;

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

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

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

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

We have also beeninstrumental in developing programs relating to the generation of electricityin remote areas and for low-income consumers, such as our Lumiar and Luz Solarprograms.

In view of theimportance of technology with respect to our business strategy, the annualincrease in funds allocated by CEMIG to technological research and development,and the need to maximize results achieved through these initiatives, we 

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implemented the StrategicTechnology Management Center *(Centro deGestão Estratégica de Tecnologia* — CGET), an independent nonprofitentity whose partners are subsidiaries of CEMIG. Its mission is “to promoteresearch and development on technological innovations, with a goal ofincreasing the competitiveness in the power industry in the state of MinasGerais, fostering sustainable regional development”.

**Trends**

The purchase ofenergy from the Itaipu power plant and our generation resources were sufficientto meet almost 73.2% of our own load and our sale contracts in 2006. Tocomplement our remaining energy needs (26.8%) in 2006, we bought energy under “BilateralContracts”, through contracts with other participants in the CCEE, and throughcontracts in the Regulated Contracting Environment (ACR).   For more details about the energy purchasedand sold in the ACR, see “Item 10. Additional Information—Material Contracts—Electricity Sale Contracts in the RegulatedEnvironment (CCEARs).”

As a publicservice utility, we are subject to regulations issued by the Federal Governmentas described in “Item 4. Information on the Company—Brazil’s EnergyMarket—Regulation.”  Therefore, anychange in the regulatory framework may affect us significantly either withrespect to our revenue if the change relates to prices or with respect to ouroperating expenses if the change relates to costs incurred to provide serviceto consumers.

We do notanticipate any significant change in revenues in respect of the transmissionand distribution businesses since the regulation in place meets the plans ofthe Federal Government administration.

The ratereadjustment was applied differently to different client categories withindustrial clients having higher readjustments than residential clients. Formore information, see “Item 4. Information on the Company—Brazil’s Energy Market—Rates”and “Annex A—The Brazilian Power Industry—Rates for the Use of the Distributionand Transmission Systems”. This difference in application may have an impact onsales volume growth in the future since large industrial clients tend todevelop co-generation projects to supply energy to themselves at a lower cost.We are taking steps to mitigate this impact through the connection of newclients of different categories as well as clients based in other states. Inthe coming years, we expect electricity consumption to grow toward thepre-rationing level based on an assumption that economic activity in Brazilwill return to the levels it reached prior to the Federal Government-imposedrationing in 2001. However, there can be no assurance that this will occur.

We expect that ourParcel A costs will increase at a rate well above inflation, which will requirefurther rate increases. We expect our Parcel B costs to rise more or less atthe rate of inflation since most of these cost items are adjusted for inflationaccording to contractual terms. We have taken measures to cut operating costsso as to meet benchmarks proposed by ANEEL in the periodic rate review process.

With respect toexpansion, the most significant trend relates to universalization of clientservice. Utilities are currently required to provide service to all clientsaccording to a schedule settled by ANEEL. The legislation establishes thatfinancing for universalization of the services will come from the funds of theEnergy Development Account (Conta de Desenvolvimento Energético), or CDE, andthe Global Reversion Fund (Reserva Global de Reversão), or RGR. According tothe Luz Para Todos Program launched by the MME and Eletrobrás for theuniversalization of electric services in rural areas, 22% of the necessaryfunds will come from CDE, 18.6% from RGR, 9.8% from the State Government andthe remaining 49.6% will come from CEMIG.

An importantprojects that CEMIG invests in is the Minas PCH Program. This project aims tobuild hundreds of small hydroelectric power plants in the State of MinasGerais, and will guarantee a diversified and higher energy supply for thegrowth of the regional economy.

Another highlightin new investment in distribution is the *CresceMinas* program. This program will run from 2006 to December 2008and will provideinfrastructure and improvements to the electricity distribution systemthroughout Minas Gerais to improve the quality of electricity supply andadapt it to the new conditions of the market.

 With respect to energy supply, we expect thecurrent capacity and favorable reservoir levels to prevail in the nearterm.  However, there are concerns aboutsupply conditions in the mid term, since Brazil’s production and importing ofnatural gas is not sufficient to meet all the consumption of thermal units inthe case of a severe drought. Investment in new generating capacity is one ofthe major concerns of the Federal Government and it is expected that the newregulatory framework will encourage investment in new generation capacity.

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# **Item 6.****    Directors, Senior Managementand Employees**

**Directorsand Senior Management**

We are managed byour Board of Directors (*Conselho deAdministração)*, which consists of 14 directors, with each directorhaving a corresponding alternate, and our Board of Executive Officers (*Diretoria)*, which consists of eightexecutive officers. As our majority shareholder, the State Government has theright to elect the majority of our Board of Directors and, therefore, cancontrol the outcome of Board of Director meetings. Each holder of our commonshares is entitled to vote to elect members of our Board of Directors. Pursuantto the Brazilian Corporate Law, any shareholder holding at least 5% of ouroutstanding common shares may request that a cumulative voting procedure beadopted that would entitle each share to a number of votes equal to the currentnumber of members of our Board of Directors and giving each shareholder theright to either vote cumulatively for a candidate or to distribute its votesamong several candidates.

Pursuant to theBrazilian Corporate Law, holders of preferred shares representing at least 10%of our share capital or holders of common shares representing at least 15% ofour voting capital (other than our controlling shareholder) have the right toappoint one member and an alternate to the Board of Directors. If none of theholders of common shares or preferred shares meets the respective thresholdsdescribed above, shareholders representing in the aggregate at least 10% of ourshare capital will be able to combine their holdings to appoint one member andan alternate to the Board of Directors.

CEMIG and itswholly-owned subsidiaries, Cemig Generation and Transmission and CemigDistribution, all have the same Board of Directors, Board of Executive Officersand Fiscal Council.

**Boardof Directors**

Our Board ofDirectors ordinarily meets once every two months. Its responsibilities includethe establishment of corporate strategy, the general direction of our businessand the election, dismissal and supervision of our executive officers.

Each regularmember of the Board of Directors has an alternate member, who is elected atgeneral shareholder meetings in the same manner as a regular member. Alternatedirectors act as substitutes for their respective directors from time to timewhen the directors are not available to perform normal director functions, or,in the case of a vacancy on the Board of Directors, until a replacementdirector is appointed to fill such vacancy. No member or alternate member ofour Board of Directors has a service contract with us or any subsidiary thatprovides for benefits upon termination of employment.

The members of our Boardof Directors are elected to serve three-year terms and may be reelected. Ourfull Board of Directors is elected every three years. Of the current 14 membersof our Board of Directors, eight were elected by the State Government, fivewere elected by Southern and one was elected by our preferred shareholders. Theterms of the current members of our Board of Directors expire inApril 2009. The names, positions and dates of initial appointment of ourdirectors and their respective alternates are as follows:

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| Name                                        | ** ** | **Position** | ** ** | **Date of Initial  Appointment** |
|---------------------------------------------|------------|--------------|------------|----------------------------------|
| Márcio Araújo  Lacerda (1)        |       | Director     |       | June 22, 2007                    |
| Francisco de  Assis Soares                  |       | Alternate    |       | June 22, 2007                    |
| Djalma Bastos de  Morais                    |       | Director     |       | January 14, 1999            |
| Lauro Sérgio  Vasconcelos David        |       | Alternate    |       | April 28, 2006                   |
| Francelino  Pereira dos Santos              |       | Director     |       | February 27, 2003           |
| Luiz Antonio Athayde  Vasconcelos           |       | Alternate    |       | February 27, 2003           |
| Antônio Adriano  Silva                 |       | Director     |       | January 14, 1999            |
| Marco Antônio Rodrigues da Cunha       |       | Alternate    |       | February 27, 2003           |
| Wilson Nélio  Brumer                   |       | Director     |       | February 27, 2003           |
| Guilherme Horta  Gonçalves Júnior |       | Alternate    |       | February 27, 2003           |
| Haroldo  Guimarães Brasil(2)           |       | Director     |       | December 30, 2004           |
| Antônio Renato  do Nascimento (2)      |       | Alternate    |       | December 30, 2004           |
| Carlos Augusto  Leite Brandão(2)       |       | Director     |       | May 07, 2004                |
| Eduardo Leite  Hoffmann(2)                  |       | Alternate    |       | April 28, 2006              |
| Andréa Paula  Fernandes Pansa(2)       |       | Director     |       | May 07, 2004                |
| Maria Amália Delfim de Melo Coutrim(2) |       | Alternate    |       | April 28, 2006              |
| Evandro Veiga Negrão de Lima(2)        |       | Director     |       | April 28, 2006              |
| Andréa Leandro  Silva(2)               |       | Alternate    |       | May 07, 2004                |
| José Augusto  Pimentel Pessôa(2)  |       | Director     |       | May 07, 2004                |
| Nohad Toufic  Harati(2)                     |       | Alternate    |       | June 22, 2007                    |
| Aécio Ferreira  da Cunha               |       | Director     |       | May 28, 2003                |
| Eduardo Lery  Vieira                        |       | Alternate    |       | May 28, 2003                |
| Maria Estela  Kubitschek Lopes              |       | Director     |       | February 27, 2003           |
| Fernando  Henrique Shuffner Neto            |       | Alternate    |       | June 22, 2007                    |
| Alexandre  Heringer Lisboa                  |       | Director     |       | February 27, 2003           |
| Franklin Moreira  Gonçalves            |       | Alternate    |       | February 27, 2003           |
| Wilton de  Medeiros Daher(3)                |       | Director     |       | April 28, 2006              |

 

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(1)              Chairman of theBoard of Directors.

(2)              Elected by Southern.

(3)     Elected by our preferredshareholders.

Set forth below isbrief biographical information for each member of our Board of Directors.

*Márcio Araújo de Lacerda**,*******Mr. Lacerda received a degree in business administration from MinasGerais Federal University (1977). Mr. Lacerda was Executive Secretary of the National Integration Ministry from 2003to 2005, and head of the Regional Development Council of the Minas Gerais StateIndustries Federation (Fiemg) from 2006 to 2007. He has founded, and untilJanuary 2003 served as CEO of, the following companies: Construtel, a telecomssystems company operating worldwide (founded in 1975); the management companyPartcom (incorporated in 1988); and the telephone equipment manufacturer Batik(founded in 1979), control of which was sold to Lucent Technologies in 1999.From 1973 to 1975 he was director of the telecoms engineering companyTele-America, and from 1996 to 1972 he was on the technical staff of the MinasGerais Telecoms Company, CTMG. He was a member of the Council of the MinasGerais State Industries Center (CICI) from 1993 until 2000 and has participatedin many international telecom and technology industry events worldwide.Furthermore, Mr. Lacerda represented the Minas Gerais State Government inmissions to Korea, Portugal and Chile. He has been a board member and managerof a large number of public-interest industrial and technological organizationsconnected with the State of Minas Gerais, and a board member of theprivate-sector educational company Pitágoras Apollo.

*DjalmaBastos de Morais* — Mr. Morais holds a bachelor’s degreein engineering from the Military Institute of Engineering and has completedadditional post-graduate studies in telephony and computers at the sameinstitute. Since January 1999 he has been our Chief Executive Officer, andsince July 2002 he has been the Chief Executive Officer of Empresa deInfovias S.A. From January 1999 to December 2004 he was the ChiefExecutive Officer of Gasmig. From May 1999 to August 2001 he was theChief Executive Officer of Empresa de Infovias S.A. From 1995 to 1998, he wasVice-President of Petrobrás Distribuidora S.A., the Brazilian oil company. From1993 to 1994, Mr. Morais served as Brazilian Minister of Communications.He has also held various other positions, such as chief executive officer ofTelecomunicações de Minas Gerais S.A.—Telemig; manager of TelecomunicaçõesBrasileiras S.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.

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*FrancelinoPereira dos Santos* — Mr. Santos earned a law degree fromthe Law School of the Federal University of Minas Gerais in 1949.Mr. Santos was a Minas Gerais state senator from 1995 to 2002 and theGovernor of Minas Gerais from 1979 to 1983. He also was a congressionalrepresentative for four successive terms from 1963 to 1979 and alderman for thecity of Belo Horizonte from 1951 to 1954. From 1961 to 1966 he was Chief ofCabinet of the Minas Gerais State Secretary of Internal Affairs and Justice,Chief of the Minas Gerais State General Management Department and ChiefCounselor for Municipalities Affairs of the Cabinet of the Governor. From 1985to 1990, he was vice-president of management of Banco do Brasil S.A. and thechief executive officer of Acesita from October 1983 to August 1984.Mr. Santos was also a professor and director of the Municipal AccountingHigh School in Belo Horizonte from 1955 to 1959.

*AntônioAdriano Silva* — Mr. Silva holds a businessadministration degree with a specialization in marketing. He has worked forseveral private entities, including Mesbla S.A., Empresa Brasileira de VarejoS.A.—Embrava, Agência Jornalística Imagem, Associação Comercial de Minas, AsaCriação de Publicidade, and Coteminas.

*WilsonNélio Brumer* — Mr. Brumer earned a degree in businessadministration from the Economics, Administration and AccountingCollege—FUMEC-BH in 1975 and has completed several financial management,planning and managerial development courses in Brazil and abroad. He was theMinas Gerais State Secretary of Economic Development from January 2003 toMarch 2007 and a director of Valepar S.A. since January 2001. He is thecoordinator of the Strategic Development Group of the State of Minas Gerais anda member of the board of directors of Usiminas. He is the former chairman of the following companies:  BHP Billiton Brasil from November 1998to December 2002; Grupo Paranapanema from February 1996 to October 1998;Aço Minas Gerais — Açominas from May 1995 to June 1997; EletrometalMetais Especiais S.A. from 1994 to 1996; Brasifco S.A. from 1993 to 1996; RioDoce Finance Ltd.—RDF from 1990 to 1992; Itabira International Company Ltd. —  ITACO from 1990 to 1992 and Navegação RioDoce S.A.—DOCENAVE from 1990 to 1991. Mr. Brumer is a former vicepresident of the board of directors of the following companies:  Acesita from November 1992 toOctober 1998; Acesita Energética S.A. from 1992 to 1996; Forjas AcesitaS.A. from 1992 to 1996; CVRD from 1990 to 1992 and the Villares Groupconsisting of Indústrias Villares, Aços Villares S.A. and Elevadores Atlas S.A.from February 1995 to October 1998. He is a former director of:  Companhia Siderúrgica de Tubarão—CST fromJuly 1996 to April 1999; Varig from November 1994 toFebruary 1996; Usiminas from October 1991 to November 1992;Companhia Siderúrgica Tubarão from August 1992 to November 1992; RioDoce Geologia e Mineração S.A.—DOCEGEO from 1988 to 1990; Florestas Rio DoceS.A. from 1988 to 1990 and Ferritas Magnéticas S.A.—FERMAG from 1984 to 1986.Mr. Brumer is also the former chief executive officer of:  Acesita from November 1992 toOctober 1998; Companhia Siderúrgica de Tubarão from July 1996 toApril 1999; CVRD from April 1990 to November 1992, AcesitaEnergética S.A. from 1992 to 1993 and Forjas Acesita S.A. from 1992 to 1993. Heserved as the chief financial officer of CVRD from February 1988 toApril 1990. Mr. Brumer has also served as a member of the fiscal councilsof:  Navegação Rio Doce S.A. — DOCENAVEfrom 1983 to 1987 (president); Urucum Mineração S.A. from 1983 to 1984 andFundação Vale do Rio Doce de Seguridade Social—VALIA from 1982 to 1983.Mr. Brumer has also served as the president of the Brazilian Steel CompanyInstitute from August 1997 to May 1999, president of the IndustrialPolicy Council of the Industry Federation of Minas Gerais from 1994 to 1999,president of the finance committee of Valesul Alumínio S.A. from 1984 to 1988,executive director of the Brazilian Foreign Trade Association — AEB from 1994to 1997, and a member of several councils and committees.

*HaroldoGuimarães Brasil* — Mr. Guimarães was born onJuly 13, 1962. He graduated with a degree in electrical engineering fromPUC University of Minas Gerais, and earned a doctorate in economics from Rio deJaneiro Federal University in 1997. He was awarded a Master’s Degree inBusiness Administration by Minas Gerais Federal University in 1991, andcompleted the Central Bank Technical Graduation Course (Sao Paulo, 1994), aswell as post-graduation studies in Public Policies from ENAP of Brasília(1990), and a specialization in economic engineering from the Dom CabralFoundation in 1986. He is a Director of Strategor Ltda — Consultoria e Treinamento,a Consultant of the Management Development Foundation, a Lecturer in the Master’sDegree Course in Business Administration of the Pedro Leopoldo Foundation,Lecturer at IBMEC Educacional S.A., and a visiting professor in the BusinessAdministration Master’s Degree Program of Minas Gerais Federal University.

*C**arlos Augusto Leite Brandão* — Mr. Brandão was born onJanuary 3, 1956. He obtained a degree in electrical engineering from MinasGerais Federal University in 1978, and subsequently completed post-graduatestudies in economic engineering at the Dom Cabral Foundation in 1980. In 2000he attended the MBA course in finance at IBMEC (the Brazilian Capital MarketsInstitute). He is currently the Business Coordination Director for AESEletropaulo, where he is responsible for regulatory and institutional action,and management coordination of the group’s companies in Brazil. He is alsochairman of the Audit Committee of the CCEE (*Câmara de Comercialização de Energia Elétrica*), was a memberof the Market Executive Committee of that organization, and is a member of theBoard, and Director, of ASMAE. He has been a member of IEEE — The Institute ofElectrical Engineers, Inc. — since 1980, and a Senior Member since 1990. He was head of the Rio deJaneiro section of the IEEE from 1990 to 1992, and the Minas Gerais section(which he founded) from 1993 to 1996. He was chairman of *Conselho Brasil*from 1999 to 2001. He is a member of the Editorial Council ofthe Power Computer Society, has held several posts in the Power EngineeringSociety, and is the only foreign representative holding a position in theUnited States Activities Board, headquartered in Washington, D.C. He has been alecturer in the Computer Science Center of Minas Gerais Federal University,various courses held by Eletrobrás and at the PUC University of Minas Gerais,and the Instituto Brasil-Estados-Unidos. He has more than 50 publications inand outside Brazil, and published a book 

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andCD-ROM jointly with the João Pinheiro Foundation, on Models for the ElectricitySector, in 1995. He coordinated the course in Regulation of the ElectricitySector held by the João Pinheiro Foundation in 1997, the first course of itstype in Brazil. He began his career at CEMIG on March 15, 1979, and hasheld the positions of Engineer, Manager of the Operation and MaintenanceEngineering Division, Manager of the Operation and Maintenance Department,Manager of the Planning and Automation Department, Consultant for Sales toLarge Clients, and Manager of the Transmission Department. Mr. Brandãocurrently serves as CEMIG’s advisor to the Vice-Presidency and Consultant tothe Financial Director.

*Andréa Paula Fernandes Pansa* — Ms. Fernandes was born onOctober 19, 1969. In 1992 she obtained a degree in business administrationfrom FIRP (Faculdades Integradas Rio-Pretense), and completed postgraduatestudies at the Getúlio Vargas Foundation (FGV) in 1995. She attended theExtension Business Course of the University of California at Berkeley in 1996,and the Banking Extension Course (GVPEC) of the Getúlio Vargas Foundation in1998. In 2001 she obtained an MBA in Finance from IBMEC (the Brazilian CapitalMarkets Institute). She is an advisor to the Business Coordination Directorateof the AES Brasil group companies. Previously she worked at EletropauloMetropolitana Eletricidade de São Paulo S.A. as a financial analyst andInvestor Relations analyst from 2000 to 2003. She was a portfolio analyst atBanco Santander Brasil S.A. from 1998 to 2000, worked in the marketingdepartment of Tyson Foods in the United States in 1996, and worked at CitibankN.A in 1990 and 1991.

*Evandro Veiga Negrão de Lima*—Mr. Negrão de Lima graduated with a degree in medicine with aspecialization in psychiatry from the medical faculty of Minas Gerais Federal Universityin 1964, where, after hospital and university experience in Colorado, USA, helater became a lecturer and subsequently Monitor in Forensic Medicine. He was aclinical psychiatrist for the private social security institute of theemployees of Minas Gerais state, retiring as head of medical services for theinterior of the state. He has been Director of the Minas Gerais CommercialAssociation, Vice-president of the Real Estate Company Managers’ Club,Vice-president of América Football Club, director of the two steel tradingcompanies, Cobraço and Cobrafer, and a licensed aircraft pilot since 1968. Heis currently chairman of the planning and engineering company Sancruza,president of the Pampulha yacht club in Belo Horizonte, and chairman of the constructionand development company, NL, and two real estate management companies.

*JoséAugusto Pimentel Pessôa* — Mr. Pimentel was born onMay 27, 1937, and obtained a degree in Civil Engineering from Minas GeraisFederal University (UFMG) in 1961, with additional specialization in waterengineering and services. He worked for Tenenge as chief of the works office atReduc, as a self-employed engineer (1963-1964), and as an engineer atCEMIG (1974-1974), where he worked in construction of transmission linesand as a field reconnaissance engineer for dam locations. In such capacity hewas responsible for the structures sector of the Jaguara power plant. He washead of the Studies and Projects Department of Eletronorte (Centrais Elétricasdo Norte do Brasil S.A.) from 1974 to 1978, and a director of Engevix from 1978to 1994. Since 1994 he has been an independent consultant for Engevix. He wasdirector of the National Union of Architecture and Engineering Companies (in1994), Administrative Director and Director of the energy area of Amec, theMinas Gerais Association of Consulting and Engineering Companies (in 1992), andcurrently he is a consulting engineer for Amec. He was a Member and CouncilMember of the Brazilian Large Dams Committee from 1977 to 1996, and in 1977 wasCoordinator of the GTCN — the Northern Costs Working Group.

*AécioFerreira da Cunha* — Mr. Cunha earned his law degree fromthe National Law Faculty of the University of Brazil, in Rio de Janeiro, in1951. He was certified by the Brazilian Superior School of War in 1973.Presently, Mr. Cunha is an agribusiness entrepreneur in northern MinasGerais. Since 1993, he has been a director of Furnas. In 1993 he was thechairman of BNDES. He was the congressional representative for six terms from 1963to 1987, and representative of the Minas Gerais House of Representatives fortwo terms from 1955 to 1962. Prior to that, Mr. Cunha was the Chief of theCabinet of the Minas Gerais State Secretary of Agriculture, Commerce and Labor.In 1988 Mr. Cunha was nominated Minister of the Brazilian Court of Audit,having his name approved by the Brazilian Congress, but for personal reasons,he declined before taking office.

*MariaEstela 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 fromSeptember 1981 to May 2000 and as acting president sinceOctober 2000. Mrs. Lopes has also served as president of the councilof the Cultural Institute Cesgranrio, vice-president of the council of theWomen’s Bank, president of the Beneficent Institutions of the State of Rio deJaneiro and a member of the council of Casa das Palmeiras, a culturalinstitution. Mrs. Lopes has received several cultural and social meritawards.

*AlexandreHeringer 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 

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from the FederalUniversity of Paraíba, in the city of João Pessoa (State of Paraíba). He alsohas received specialized wind energy training from the DeutschesWindenergie-Institut and from the Summer School on Wind Energy Technology atthe University of Oldenburg in Germany. Mr. Lisboa has worked as anengineer for CEMIG since May 1985 and he is a director of SENGE as well asa counselor of the Regional Council of Engineering and Architecture.Mr. Lisboa served as an alternate member of the board of directors ofCEMIG from January 1999 to December 2000. He was a researcher for anda consultant to the Technological Foundation Center of Minas Gerais—CETEC fromNovember 1983 to April 1985. From January 1977 to May 1979,he was a trainee at Usiminas, Companhia Siderúrgica Belgo-Mineira andDelle-Alstom S.A.—DASA.

*Wiltonde Medeiros Daher ** *— Mr. Dahergraduated with a degree in economics in 1972 and a degree in businessmanagement in 1975, from the University of Rio Grande do Norte, followed bypost-graduation studies in foreign trade at the University of Brasília in 1984.He earned an MBA from the Economics Faculty of São Paulo University in 1994 anda masters’ degree in administration (specializing in international trade) fromthe University of Fortaleza in 2005. At Banco de Brasil, he served asInternational Business Advisor to the President’s Office (from 1979-1985),joint manager of the bank’s branches in Lisbon and Porto (1986-7), andJoint Managing Director and Managing Director for the state of Ceará (1988-1995).In the private sector, he has served as Executive Director of IntercreditFomento Mercantil Ltda., has been a member of the Audit Board of NeoenergiaS.A. (formerly Guaraniana S.A.), which is a company controlling six electricityutilities in the states of Rio Grande do Norte, Pernambuco and Bahia, has beena representative of Previ, the Banco do Brasil pension fund (2003), has been amember of the Audit Board of Duratex S.A., of the Itaúsa group, representingPrevi (2004-2006), has been a member of the Brazilian CorporateGovernance Institute (IBGC) in São Paulo, and has served as Vice-president ofthe Ceará State Federation of Trade, Industry, Services and FarmingAssociations (Facic) for the period 2006-2009.

**Boardof Executive Officers**

Our Board ofExecutive Officers is responsible for the execution of decisions made by ourBoard of Directors and for our day-to-day management. Our executive officershave individual responsibilities established by our by-laws and serve forthree-year terms. The terms of the current executive officers expire inApril 2009. They are elected by our Board of Directors. Generally,ordinary meetings are held at least twice monthly and special meetings are heldwhenever called by the Chief Executive Officer or by two executive officersother than the Chief Executive Officer.

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

 

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

Set forth below isbrief biographical information for each member of the Board of ExecutiveOfficers.

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

*JoséCarlos de Mattos* — Mr. Mattos received a degree in literaturefrom Uni-BH (Belo Horizonte Central University) in 1972. He is currently theChief Executive Officer of Gasmig. From 2004 to 2007 he was Director-Presidentof Previminas, the Minas Gerais Social Security Foundation. In 2003 and 2004 hewas the financial director of Codemig, the Minas Gerais Development Company.From 1983 to 1992 he was Regional Superintendent of the Federal Savings Bank (*Caixa Econômica Federal*) in the states of São Paulo, Rio deJaneiro and Minas Gerais, and was also Financial Director of the FederalSavings Bank from 1992 to 1994. From 1992 to 1994 he was also the Director ofBIAPE – the Inter-American Savings and Loan Bank. From 1995 to 1996, hewas Vice-President of Bemge – the State Bank of Minas Gerais. He was appointedChief Planning, Projects and Construction Officer of CEMIG in January 2007.

*FernandoHenrique Schuffner Neto* — Mr. Schuffner has a degree inelectrical engineering from PUC University of Minas Gerais (1982), a master’sdegree from Unicamp (1984), and an MBA from Ibmec in 2000. After working inuniversity research he joined CEMIG in 1985, working as a regional manager andadministrator before becoming Superintendent for Coordination of 

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Planning and Management,successively, for Distribution, Distribution Expansion, and Distribution MarketExpansion. He then became CEMIG’s Executive Coordination Superintendent of the *Light for All* Program. He has lectured atuniversities, and published many scientific articles over the period from 1983to 2005, from work on topologies of commutating circuits (1983) to jointauthorship of *Fuzzy Preference Relations andMultiobjective Decision Making –*presented to**the Fourth IEEE International Workshop onSoft Computing as Transdisciplinary Science and Technology, in Muroran, Japan,May 2005. His work presented to international congresses includes three workson control of induction motors. Courses he has taken include the Amana Key APGmanagement course in Sao Paulo in 2004. He was appointed Chief EnergyGeneration and Transmission Officer of CEMIG in January 2007.

*JoséMaria de Macedo* — Mr. Macedo earned a degree inelectrical engineering from the Federal University of Minas Gerais in 1967 andhas completed several specialization courses on electricity and management. Hewas a trainee at the Bonneville Power Administration in Portland, Texas, at theTennessee Valley Authority, at the Bureau of Reclamation in Denver, Coloradoand Southern California Edison in California. Since March 2003, he hasbeen the Executive Officer of Cemig Trading S.A. and since December 2005he has been the Executive Officer of Central Hidrelétrica Pai Joaquim S.A.Mr. Macedo worked at CEMIG from September 1969 to May 1994, whenhe retired as superintendent of electricity transmission. After his retirementfrom CEMIG, Mr. Macedo was an organizer of Cooperativa de Prestação deServiços de Engenharia Ltda., where he currently serves as president. Prior tojoining CEMIG, Mr. Macedo served as an engineer at Sociedade InstalaçõesTécnicas—SIT. Mr. Macedo has conducted several studies and seminars on theelectricity field in Brazil.

*LuizFernando Rolla* — Mr. Rolla joined CEMIG in 1974. Mr. Rollaearned a degree in electrical engineering from the Federal University of MinasGerais in 1974 and obtained 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 Relations Manager, Mr. Rolla was responsible for theformulation and implementation of CEMIG’s investor relations strategy beginningin 1986, including the structuring of the Level I and II ADR programs in 1993and 2001, share sale transactions, prospectuses, investor presentations,roadshows, CVM registrations, detailed corporate governance matters,stockholders’ meetings, shareholder services, the Annual Report, our website,earnings releases and conference calls, market analyst meetings, andpresentations at many of the most important emerging markets conferences in thelast 15 years. In his 32 years with the company he has also been involved inother responsibilities including coordination of long-term planning, structuredcompany-wide budget control and cost analysis, project finance transactions,and negotiation of important debt rollover contracts and issues. Recognition ofMr. Rolla’s wide experience and present outstanding status in Brazilianinvestor relations includes Apimec’s “Best IR Professional” in 1999 and 2005; “BestBrazilian IRO” from *IR*Magazinein 2006; Honorable Mention in *IR*Magazine’s“Best Latin American IRO” in 2004, naming of CEMIG as “Best Listed Company” byApimec in 2006; recognition by Abrasca for “Best Annual Report” in 2005; and “BestPresentation of 2006” by the Apimec organizations of both São Paulo and RioGrande do Sul.

*MarcoAntonio Rodrigues da Cunha* — Mr. Rodrigues da Cunha obtaineda degree in civil engineering from Minas Gerais Federal University in 1978,with later 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 (theMinas Gerais State Development Bank) in 1978, working in assessment of publicprojects, including major infrastructure development projects. He served asPresident of the Employees’ Association from 1998 to 1990, and Manager of theFinancial Division from 1988 to 1991. From 1988 to 1990 he was also Presidentof the National Association of Official Banks’ Representative Associations.From 1991 to 1995 he was chairman of Minas Gerais Silos and Warehouses Company,the public-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.

*BernardoAfonso Salomão de Alvarenga*—**Mr. Alvarenga earned adegree in electrical engineering from Minas Gerais Federal University in 1978,and an MBA from the Getúlio Vargas Foundation in 2001.  He joined CEMIG in 1980, and worked inoperational and pre-operational sales, sales to transmission consumers, andlarge client operational sales, before becoming our Sales Superintendent forLarge Clients from 19998 to 2001, and for corporate clients from 2001 to 2005.From March 2006 to April 2007, he was our Superintendent for WholesaleElectricity Purchases and Sales, and in April 2007 he was appointed our ChiefCommercial Officer.  Mr. Alvarenga hasbeen involved in several strategic projects at CEMIG, including the pioneering systemfor differentiated tariffs based on the season and time of day, from 1980 to1982.  His renegotiations in 1998 withindustrial clients in default resulted in defaults being brought to near-zero,improving CEMIG’s financial position and resulting in the acquisition ofseveral small hydroelectric plants and one thermal plant.

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**Compensationof Directors and Executive Officers**

For the year endedDecember 31, 2006, the aggregate amount of compensation, including pensionand other retirement benefits, that we paid to all directors and executive officerswas approximately R$5.5 million.

**FiscalCouncil**

Our Fiscal Council is required to meet once everyquarter, 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) changes in our share capital, (ii) issuances of debentures orrights offerings entitling the holder to subscribe for equity (bonus desubscrição), (iii) investment plans and capital expenditures budgets,(iv) distribution of dividends, (v) changes to our corporate form and(vi) corporate restructurings such as mergers, consolidations andspin-offs. The Fiscal Council also examines the activities of management andreports these activities to the shareholders.

The currentmembers of the Fiscal Council and their alternates, all of whose terms expireon April 30, 2008, are as follows: 
| Name                                                 | ** ** | **Position** | ** ** | **Date of Initial  Appointment** |
|------------------------------------------------------|------------|--------------|------------|----------------------------------|
| Luiz Guaritá  Neto                              |       | Member       |       | February 27, 2003           |
| Aristóteles Luiz  Menezes Vasconcellos Drummond |       | Member       |       | April 27, 1999              |
| Luiz Otávio  Nunes West(1)                      |       | Member       |       | April 27, 1999              |
| Thales de Souza  Ramos Filho                         |       | Member       |       | February 27, 2003           |
| Celene Carvalho  de Jesus (2)                        |       | Member       |       | April 26, 2007              |
| Ronald Gastão  Andrade Reis                     |       | Alternate    |       | April 30, 1998              |
| Marcus Eolo de Lamounier Bicalho                     |       | Alternate    |       | February 27, 2003           |
| Leonardo  Guimarães Pinto (1)                   |       | Alternate    |       | April 26, 2007              |
| Aliomar Silva  Lima                                  |       | Alternate    |       | February 27, 2003           |
| Ari Barcelos da  Silva(2)                            |       | Alternate    |       | April 29, 2005              |

 

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(1)           Electedby Southern.

(2)           Elected by shareholdersholding our preferred shares.

**ConsumerCouncil**

We haveestablished a Consumer Council pursuant to Brazilian law, which is comprised ofrepresentatives of consumer groups and advocacy organizations, but not membersof our Board of Directors. The Consumer Council advises us as to service andother concerns of our consumers.

**AuditCommittee**

 Our Fiscal Council acts as our audit committeefor purposes of the Sarbanes-Oxley Act of 2002. Under Section10A-3 of the SEC rules on Audit Committees of listed companies, non-U.S. issuersare permitted not to have a separate Audit Committee made up of independentmembers if there is a Fiscal Council established and chosen in accordance withthe legal rules of its origin country, expressly requiring or allowing thatsuch council follow certain obligations. Also in accordance with thisexemption, a Fiscal Council may exercise the obligations and responsibilitiesof an Audit Committee of the United States up to the limit permitted byBrazilian Law.  The financialexpert of our Fiscal Council is Luiz Otávio Nunes West.

**Employees**

On December 31,2006 we had 10,658 employees, of which 180 were at the management level. Duringthe year ended on that date we had an average of 111 temporary employees. As ofDecember 31, 2005, we had 10,271 employees, of which 176 were at themanagement level. During the year ended on that date we had an average of 168temporary employees. As of December 31, 2004, we had 10,668 employees, ofwhich 161 were at the management level, with an average of 327 temporary employeesduring the period then ended.  This tableshows the breakdown of our employees by type on those dates:

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|                                                   | ** ** | **Number of Employees at** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                        | ** ** | **December 31, 2006**           | ** ** | **December 31, 2005** | ** ** | **December 31,  2004** | ** ** |
| Managers                                          |       | 180                                       |       | 176 |   | 161 |   |
| Professional  staff                               |       | 1,451                                     |       | 1,191 |   | 1,285 |   |
| Operational  technical staff and office employees |       | 9,027                                     |       | 8,904 |   | 9,222 |   |
| Total                                             |       | 10,658                                    |       | 10,271 |   | 10,668 |   |

 

In 2006, 529 newemployees were hired, and 142 employees left the company.

*Unions*

Once a year we hold collective negotiation meetingswith the unions that represent our employees. The resulting contract remains ineffect for the subsequent 12-month period beginning on November 1. About11 years ago CEMIG ceased to follow the previous market practice in Brazil ofautomatically adjusting salaries based on inflation.

In November 2006, weconcluded the annual collective wage agreement for the period from November 1,2006 to October 31, 2007, after wide-ranging discussion of all theterms and conditions with the unions that represent our employees. Theresulting collective agreement established an increase of 3.98% for allsalaries, effective on November 1, 2006. The collective agreement also established an extraordinary distributionof amounts under the profit sharing program totaling 2.8 times the monthly basesalary of each employee, which was paid in December 2006.

Our employees have not heldany strikes in the last six years. We cannot predict what effect, if any,future litigation under the labor laws may have on our operating results or ourfinancial condition. In 2006, three work stoppages occurred during thecollective work negotiations for 2006/2007: for one hour on October 31, 2006;for half the working day on November 8, 2006; and for one hour on November 22,2006. These stoppages did not have any negative effects on the Company.

*Remuneration*

In 2003, theCareers and Remuneration Plan was approved. The goal of this plan is to provideus with the remuneration tools necessary to maintain an equitable andcompetitive pay structure and establish criteria for promotions. The plan wasimplemented 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 programreferred to as the Anuênio, CEMIG provides its employees hired on or beforeOctober 31, 2005 with an annual 1% increase in monthly base salary for eachyear  of employment with the Company, upto a limit of 35 years.  Based on anagreement with our labor unions, on April 27, 2006, CEMIG offered each of itsemployees hired on or before October 31, 2005 an up-front payment in exchangefor the relinquishment by the employee of its 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 be paidto the employee under the Anuênio, but based on the number of years remainingfor the employee to complete its contributions to the National Social SecurityInstitute (“INSS”), rather than the remaining years to reach up to the limit of35 years under the Anuênio, (ii) multiplied by a 12% discount rate and (iii)reduced by the application of a variable reduction factor stipulated by theCompany for each individual employee. The total amount paid to our employees as a result of this offer wasapproximately R$178 million.

*ProfitSharing Plan*

In 1995, we established aprofit-sharing program for the employees in accordance with the applicableBrazilian labor legislation. Under this program, we may not contribute anamount to the employee profit sharing plan that is in excess of 25% of thetotal dividends proposed for that year. In 2006, payment of employeeprofit shares, including the mandatory charges and payments based on payroll,totaled R$210.0 million.

*Benefits*

As ofJanuary 1, 2003, we implemented changes to our existing employee healthcare plans. The changes are a result of an agreement we entered into with ouremployees’ labor unions, most of which are represented by Sindieletro. Thechanges modified the contributions that we, our employees and our retirees areresponsible for and the types of benefits covered by each plan. A total ofR$ 173.6 million was paid in benefits to employees, consisting of pensionplan contributions and assistance benefits.

*VoluntaryEmployee Termination Program*

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In December 2003, in order to effectively manageour employment relations while following our strategic guidelines for growthand the addition of value, we implemented a voluntary employee terminationprogram.

In 2004, a total of 1,101 employees accepted the termsof our voluntary termination agreement. Of these, 656 left the company in 2004,and another 318 completed the procedures and left in 2005. Of the 127 remainingemployees, four retired in 2006, three retired in January 2007, one isscheduled to retire in 2007, five lost the right to take part in the programdue to medical leave, and 114 were withdrawn from the program in accordancewith the terms of the contract signed between the company and each employee dueto the fact that the INSS did not accept their early retirement.

*Healthand Safety*

With the establishment of our Health and SafetyManagement System in 2006, our standards for classifying work accidents becamemore rigorous.  This has resulted in ahigher number of accidents being recorded, but generally of a less seriousnature than accidents in previous years. The increase in safety reflects the increased safety measures taken bythe Company, and also better management by contractors.

**ShareOwnership**

Each of ourdirectors and executive officers beneficially owns less than 1% of ourpreferred shares.

# **Item 7.****    Major Shareholders and RelatedParty Transactions**

**PrincipalShareholders**

As ofDecember 31, 2006, the State Government owned, directly or indirectly,36,125,857,399 common shares, or 50.97% of our outstanding voting stock, and1,776,588,408 preferred shares, or approximately 1.95% of those outstanding. Asof the same date, Southern, our second largest shareholder, owned23,362,956,173 common shares, or approximately 32.96% of those outstanding. Southern is a joint venture formedin 1994. We believe that a principal participant in Southern is Cayman EnergyTraders, a subsidiary of Mirant Corporation (formerly Southern Energy Inc.), alarge United States-based power company. We believe that the other significantmember of Southern is, as of December 31, 2006, AES Corporation, a globalpower company based in Arlington, Virginia that is engaged in the energygeneration, distribution and retail supply businesses. We believe that theOpportunity Fund, a Brazilian investment fund, has a minority interest inSouthern through 524 Participações S.A. Our principal shareholders do not havedifferent voting rights with respect to the shares they own.

The followingtable sets forth certain information regarding the ownership of our outstandingcommon shares and preferred shares at December 31, 2006.
| Shareholder                                      | ** ** | **Common  Shares** | ** ** | **%  of Class** | ** ** | **Preferred  Shares (2)** | ** ** | **%  of Class** | ** ** |
|--------------------------------------------------|------------|--------------------|------------|----------------------|------------|--------------------------------|------------|----------------------|------------|
| State Government  (1)                            |       | 36,125,857,399     |       | 50.97                |       | 1,776,588,408                  |       | 1.95                 |       |
| Southern                                         |       | 23,362,956,173     |       | 32.96                |       | —                         |       | —               |       |
| All directors  and executive officers as a group |       | 1,933,058          |       | —               |       | 128,359                        |       | 0.00                 |       |
| Other                                            |       | 11,383,421,293     |       | 16.07                |       | 89,433,805,932                 |       | 97.97                |       |
| Total of  outstanding shares                     |       | 70,874,167,923     |       | 100.00               |       | 91,210,522,699                 |       | 99.92                |       |
| Treasury shares                                  |       | —             |       | —               |       | 69,128,403                     |       | 0.08                 |       |
| Total of authorized and  issued shares           |       | 70,874,167,923     |       | 100.00               |       | 91,279,651,102                 |       | 100.00               |       |

 

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(1)     Theshares in this line item attributed to the State Government include shares heldby MGI, other State Government agencies and state controlled companies.

(2)     On May 3, 2007, we effected apartial stock split in the form of a 50% stock dividend of our preferredshares.  On June 11, 2007, we effected areverse stock split of our preferred shares in the form of a consolidationwhereby every 500 preferred shares, par value R$0.01, was consolidated into onepreferred share with a par value of R$5.00.

Since ourincorporation, our operations have been influenced by the fact that the StateGovernment controls us. Our operations have had and will continue to have animportant impact on the development of business and industry in Minas Geraisand on social conditions in the state. The State Government has from time totime in the past directed us to engage in certain activities and make certainexpenditures designed primarily to promote the social, political or economicgoals of the State Government and not necessarily designed with a view to ourprofitability, and it may direct us to do so in the future. See, “Item 3. KeyInformation—Risk Factors—Risks Relating to CEMIG—We are controlled by the StateGovernment.”

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As of December 31,2006, we had 22 common shareholders in the United States, holding a total of 2,037,549,823 common shares. We also had 183 preferredshareholders in the United States, holding a total of 12,554,351,108 preferred shares. These numbers do notinclude the 22,264,439,788 preferred shares converted into ADRs.

We are not awareof any significant changes in the percentage ownership of any shareholders thatheld 5% or more of our outstanding voting shares during the past three years.

Based on publiclyavailable filings with the SEC, we are aware of the following changes inownership of our outstanding preferred shares. On March 8, 2005, CapitalGroup International, Inc., or CGII, a foreign investment managementcompany, acquired, on behalf of its clients, ADRs that increased its holdings ofpreferred shares of CEMIG to 4,598,610,000, corresponding to 5.03% of CEMIG’spreferred shares. In addition, Capital Research and Management Company, also aforeign investment management company and an affiliate of CGII, holds ADRsrepresenting 2,702,900,000 preferred shares in CEMIG, corresponding to 2.96% ofthe preferred shares. On April 12, 2005, the aggregate proprietaryposition of the UBS Group****inpreferred shares of CEMIG increased to 6,098,366,579 preferred shares,representing 6.68% of the Company’s total preferred shares. OnSeptember 21, 2005 the position of Morgan Stanley Uruguay Ltda., a foreigninvestor under Resolution 2,689/00 of the Brazilian National Monetary Council,increased to 5.03% of CEMIG’s total preferred shares. This position includedboth 2,603,500,952 nominal preferred shares and 1,983,984 ADRs (correspondingto 1,983,984,000 nominal preferred shares). We are not aware of any changes in ownership by majority shareholders in2006.

Although ourby-laws do not provide any restrictions concerning a change in our control, astate law authorizing a change of control would be required for a change ofcontrol to take place. Because we are a state-controlled company, the sale ofmore than 50% of the voting stock of CEMIG by the State Government requires thepassage of specific authorizing legislation by the legislature of Minas Gerais.

**Related Party Transactions**

We are party tothe following related-party transactions:

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

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

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

For a more detaileddiscussion of related party transactions, see Notes 3, 7, 8, 12, 13, 15, 18 and20 to our consolidated financial statements.

# **Item 8.****    Financial Information**

**ConsolidatedFinancial Statements and Other Financial Information**

Please refer toour financial statements that appear beginning on page F-1 of thisdocument as well as “Item 3. Key Information—Selected Consolidated Financial Data.”

**LegalProceedings**

We are affected byan ongoing dispute between our shareholders. We are also defending severaljudicial proceedings involving rate increases, taxes and contributions, laborand pension fund obligations and civil liabilities, as well as severaladministrative proceedings regarding tax obligations, environmental penaltiesand other charges imposed by governmental agencies, including ANEEL. Werecognize contingencies only when a loss is probable and estimable. The mostrelevant proceedings in which we are involved are summarized below. See alsoNotes 16 and 24 to our consolidated financial statements.

*Shareholders’Agreement*

In connection with thesale in 1997 of approximately 33% of our shares to Southern as described in “Item 7.Major Shareholders and Related Party Transactions—Principal Shareholders,”Southern and the State Government entered into a shareholders’ agreement thatcontained special quorum and veto provisions granting Southern expanded controlover certain decisions. 

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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 claiming inparticular that the State Government may only cede control of us pursuant tospecific state legislation providing for the same.

On March 21,2000, the First Court of Fazenda Pública e Autarquias in Belo Horizonterendered a decision declaring the shareholders’ agreement null and void, andthis decision was ratified on August 7, 2001 by the Minas Gerais StateCourt of Appeals. At present, the State Government has been restored to itsposition as our sole controlling shareholder and none of the special quorum orveto provisions are in effect. This decision was appealed to the SuperiorTribunal de Justiça (Superior Court of Justice), which upheld the decision ofthe Minas Gerais State Court of Appeals in December 2003. The decision ofthe Superior Tribunal de Justiça is subject to a bill of review and thereforethe effectiveness of the shareholders’ agreement and control of CEMIG remainsubject to further judicial challenge in the Supreme Court (*Supremo Tribunal Federal*).

*RateIncreases*

We are thedefendant in several lawsuits brought by industrial consumers alleging thatincreases in electricity rates 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 theCruzado Plan period increases in the amounts that served as the basis forcalculating the further increases. Some of these claims have been decided atthe trial court level in our favor, whereas others have been decided in favorof our consumers. All of the cases that have been decided at the trial courtlevel have been appealed to the Superior Tribunal de Justiça (Superior Court ofJustice), which ruled, in most of the cases, that the plaintiffs were entitledonly to reimbursement for rate increases introduced during the Cruzado Plan. Weare actively contesting all of the aforementioned rate increase claims. In theaggregate, these rate increase claims brought against us amounted to R$104.3million as of December 31, 2006, which were fully provisioned.

We are also adefendant in lawsuits and class actions brought by consumers, consumer rights groupsand the office of the public prosecutor of Minas Gerais contesting the rates wecharge our consumers, the application of the rate increases determined byANEEL, the inflationary index used to increase our rates and the rate subsidiesgranted to low income consumers. These lawsuits involve claims for thesuspension of the rate increases and for the reimbursement to our consumers oftwice the amount of any additional rates we collected. All our rate increasesare granted based on ANEEL’s prior authorization and we believe we have ameritorious defense to each of these lawsuits. It is not possible at thepresent time to estimate the amounts involved in these claims. We have notaccrued any liability related to these claims. The Associação Brasileira de Consumidores— ABC (Brazilian Association of Consumers) has filed a class action lawsuitagainst us, seeking to prevent us from suspending the energy supply in cases ofconsumer default. We received a favorable decision at the trial court levelthat is subject to appeal. We have not accrued any liability related to thislawsuit. The Company believes that the likelihood of an adverse outcome in thismatter is remote.

We are adefendant, together with *ComercializadoraBrasileira de Energia Elétrica* — CBEE, in several lawsuits filedbetween February 2002 and March 2004 contesting the Encargo deCapacidade Emergencial (Emergency Capacity Charge) which we collect from ourconsumers on behalf of the CBEE. It is not possible at the present time toestimate the amounts involved in these claims. We believe we have a meritoriousdefense since we merely act as the agent for raising these funds. However,there is a remote risk that we might at some time be made jointly responsiblefor their return by a court judgment.

In addition, theFederal Public Auditing Court is challenging the criteria used by ANEEL tocalculate the adjustments we applied to our rates in 2003 and in connectionwith the energy reduction emergency program. See “—Regulatory Matters.”

*Taxesand Other Contributions*

We are party to anumber of proceedings and claims involving the Federal Government as well asother proceedings and claims arising in the ordinary course of business. Theseproceedings and claims include judicial disputes regarding the payment of taxesand contributions, including three disputes regarding corporate income tax andsocial contribution tax, for which we have accrued a total liability of R$42.6million as of December 31, 2006.

We also areinvolved in disputes regarding the ISS tax involving R$13.5 million, theImposto de Transmissão Causa Mortis e Doação — ITCMD (inheritance and donationtax) involving R$131.9 million, the Imposto Predial Territorial Urbano — IPTU(real state tax) involving R$19.6 million, the PIS/COFINS contributionsinvolving R$280.7 million, and the CPMF (banking tax) involving R$10.4 million.We have not recorded any reserve for these disputes since wedo not believe that the likelihood of a loss on any of these claims isprobable.  Our defense is based primarilyon the fact that we timely joined a tax amnesty program that granted tax payersrelief from any outstanding interest and penalties provided that theoutstanding principal amount of tax debt was paid.

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In addition, we are a party to two *Fundo de Investimento Social* (“Finsocial”) contribution disputes.We received an unfavorable decision in connection with a claim initiated in1990 related to Finsocial contributions, and incurred a loss equivalent toR$199.62 million, which had been deposited. We filed a motion for a new trialseeking to nullify that decision and recover the amount involved. We have alsofiled an injunction contesting the value-added tax (*Impostosobre Circulação de Mercadoria* — ICMS) assessed on thatdeposit, for which we have accrued a reserve of R$20.5 million for the fullamount involved.

We have also contested a number of administrativeproceedings asserted by federal tax authorities with respect to an income taxset-off resulting from an adjustment made in 2001 to our consolidated financialstatements prepared in accordance with accounting practices adopted in Brazilfor the years ended December 31, 1997, 1998 and 1999. The adjustmentrelated to new accounting rules for pension fund obligations wasestablished by CVM Instruction No. 371 of December 13, 2000. Wereceived a favorable decision relative to the years 1997 and 1998; with respectto the year 1999, for which we received an unfavorable decision, we filed aninjunction. We estimate the amount involved in these claims to be R$554 million.No reserve has been recorded as a result of this claim, since the Companybelieves that the procedures which generated the tax credits are legally sound.An adverse outcome in this mater has been deemed remote.

 Several Municipalities of the State of MinasGerais have assessed us for the payment of the tax referred to as *Taxa de Ocupação do Solo*. There are several administrativeproceedings and lawsuits related to this matter, in the total amount ofapproximately R$11.1 million, for which we have not accrued any reserves. The Company believes that thelikelihood of an adverse outcome in this matter is possible.

The State of Minas Gerais filed several administrative proceedings againstus related to the ICMS, in the total amount of approximately R$119.2 million.We have not accrued reserves in connection with these administrativeproceedings since we believeour chances of success in these disputes arepossible. We have also contested nine administrative proceedings asserted byfederal tax authorities regarding the alleged absence of payment of the ruralreal estate tax (*Imposto Territorial Rural* — ITR),which involve a total amount of approximately R$233.5 million. We have notaccrued reserves in connection with these administrative proceedings sincewe believe that the likelihood of an adverse outcome in this matter is remote.

Since 2002, we have been receiving a subsidy fromEletrobrás to reimburse us for losses incurred as a result of the discount wewere required to provide to low income consumers under Federal LawNo. 10,604/02. In 2005, the State of Minas Gerais issued DecreeNo. 43,999/05 charging the ICMS on this subsidy. We believe the subsidy isnot taxable and we are therefore not collecting the ICMS on the subsidy.However, the State of Minas Gerais filed an administrative proceeding againstus with regard to this matter. We estimate the contingency to be approximatelyR$78.1 million. No provision has been recorded with respect to this dispute,since the Company believes that the likelihood of an adverse outcome in thismatter is possible.

In 2006, CEMIG made an up-front payment to certain of its employees for inexchange for such employees’ rights for future payments under the Anuênio.CEMIG did not pay income tax or make social security contributions on thesepayments, since it is CEMIG’s opinion that these obligations do not apply tothese payments. As a result, CEMIG received notices from the Federal RevenueService and from the INSS.  To avoid therisk of a possible fine, CEMIG applied to the judiciary for a writ ofmandamus.  CEMIG received an unfavorabledecision at the trial court level, which the Company appealed in February 2007.No provision has been recorded with respect to this matter.  The Company believes that the likelihood ofan adverse outcome is in this matter is possible.

 Also in 2006, CEMIG was notified bythe INSS regarding the non-payment of the social security contribution on theamounts paid to its employees as profit sharing in the period from 2000to 2004.  We received an unfavorabledecision and filed a writ of mandamus seeking to reverse the federal taxauthority’s position. The total amount involved is R$91.5 million. TheCompany appealed the decision in an administrative proceeding. No provision hasbeen recorded since the Company believes that the likelihood of an adverseoutcome in this action is possible.

Also in 2006, the Federal Revenue Service issued a taxassessment against CESIBA and against us (as a co-obligor) alleging that PISand COFINS potentially due on foreign exchange variations related to a creditfacility agreement have not been collected. We submitted an administrativedefense requesting the cancellation of such assessment notice and are awaitinga decision. The total amount involved is R$21.2 million. Noprovision has been recorded with respect to this matter since the Companybelieves that the likelihood of an adverse outcome is remote.

*Labor Obligations*

We are the defendant in approximately 7,100 claims filed by our employeesand third parties (outsourced manpower). These claims generally relate toovertime and hazardous occupation compensation. In the fourth quarter of 2006,the Company reviewed the labor-law cases and the expectation of loss withrespect to these cases, and changed the criteria for provisioning from apercentage over the total amount of the cases to an individual analysis of thecases, which resulted in a reduction of the amounts provisioned.

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Pursuant to Brazilian labor laws, claimants must file a labor claim forunpaid services within two years of the termination of their employmentagreement (limited to rights which arose no more than five years prior totermination). As of December 2006, the amount in dispute involved in theaforementioned claims was approximately R$135.8 million. As of December 2006,we had provisioned R$35 million for the payment of these laborcontingencies.

*Claims in the Ordinary Course of Business*

We are a party to several civil claims brought bypeople who have suffered damages arising mainly from accidents that occurredduring the ordinary course of our business and damages suffered as a result ofthe interruption of the supply of energy to them. We are also a party to claimsunder contractual and other commercial obligations. These claims totaled anestimated R$170.1 million as of December 31, 2006. As of that date, we hadaccrued a liability of R$69.2 million with respect to these claims.

We have contested a lawsuit brought by a Brazilian company, referring toalleged damages estimated at R$138.2 million arising from a services agreementthat was affected by economic distress caused by the real devaluation in 1999.No provision has been recorded with respect to this matter since the Companybelieves that the likelihood of an adverse outcome is remote.

Legal Proceedings Related to Environmental Matters

We are party to anumber of proceedings and claims involving environmental matters. Theseproceedings and claims include court and administrative disputes regardingcertain environmental matters, including fauna and flora issues, disposal ofwaste and protected areas. These claims totaled an estimated R$142.80 millionon December 31, 2006. We have not accrued any liability related to thefollowing claims since the Company does not believe that the likelihood of a losson any of these claims is probable.

CEMIG is a defendant in two public civil actions whichinvolve claims for the suspension or cancellation of the Capim Branco I and IIpower plants’ environmental licenses. The value involved in each one of theseactions is R$23.7 million. CEMIG is also the defendant in a public civil actionbrought by the Federal Public Attorneys’ Office and the Public Attorneys’Office for Minas Gerais involving the Capim Branco I and II plants claiming (i)R$10 million for pain and suffering and property damage, and (ii) R$10.5million for losses of environmental and mineral resources, and theimplementation of environmental programs. The licenses of the Capim Branco Iand II plants have not been suspended or cancelled by reason of any of theseactions.

We are also a co-defendant, along with CVRD, in apublic civil action lawsuit brought by the Federal Public Attorneys’ Office,concerning the Aimorés hydroelectric power plant. The plaintiffs allege that wedid not obtain proper licensing for this project, and seek to recover damagesand annul the environmental licenses relating to this plant and those of therelated concessions. We have not accrued any liability related to this claim.We have also contested a lawsuit related to this power plant brought by amunicipality that alleges that the project authorizations have not been dulyapproved and seeks to stop construction of the power plant.

The Federal Public Attorneys’ Office filed a suitagainst CEMIG alleging irregularities in the installation of the Irapéhydroelectric power plant, which allegedly would result in material adverseimpacts on the environment and the local population. The action was settledafter CEMIG signed an undertaking and committed to implement social and environmentalmeasures. Recently, the Federal Public Attorneys’ Office filed another actionalleging non-compliance with the obligations assumed and claiming foreclosureon the guarantee that CEMIG had given.

A Conduct Adjustment Agreement (“TAC”) was entered intobetween the Federal Public Attorneys’ Office and CEMIG in relation to the Irapéplant. The Federal Public Attorneys’ Office alleged that CEMIG did not complywith its social-environmental responsibilities and sued us.  The trial court found CEMIG to be incompliance with the TAC and the case was dismissed. The Federal Public Attorney’sOffice appealed, and CEMIG counter-appealed, to the federal court of appeals.The estimated value of the case is R$5.5 million.

CEMIG also received an infringement notice from theEnvironmental Agency of the State of Goiás, claiming that CEMIG operated theSão Simão plant without the appropriate operational license. An administrativeappeal was presented against the infringement notice. CEMIG’s defense allegedthat the Goiás State Environment and Natural Resources Office did not havestanding to sue the Company in this case. The preliminary argument was acceptedand the case was submitted to the Brazilian Environmental Authority, IBAMA, in2001. That agency has not yet made any decision on the case. The project waslicensed by IBAMA in 2006.  The estimatedvalue of the fine is R$6.5 million.

There is also a Civil Public Action brought by theorganization S.O.S. São Francisco against CEMIG (and others), allegingpollution of the waters of the São Francisco River supposedly caused byVotorantim Metais e Zinco S.A.’s discharge of zinc into the river. CEMIG is aparty to the action because the opening of the spillways of our Três MariasPlant allegedly exacerbated the damage by agitating the substances on the river’sbottom. There has been a decision by the First Level Federal Court in MinasGerais, Judicial Sub-Section and Single Court of Sete Lagoas, granting therequest for interim relief made by the plaintiff. CEMIG was duly served 

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notice and answered in atimely manner. The plaintiff presented an interlocutory appeal which CEMIG hasanswered. The approximate value of the claim is R$6.5 million.

We are defendant in a Civil Public Action in which theMunicipality of Raposos is requesting the adoption of preventive measures byCEMIG to avoid damage such as that caused by the Rio das Pedras plant in thefloods of 1995 and 1997, and for the defendant to be ordered to control andmonitor the environmental impact of the dam and to update its safety standardsby desilting of the Rio das Velhas River, recomposing the upstream anddownstream forest on the banks of the river, and other actions. The plaintifffiled an interlocutory appeal, requesting suspension of the effect of theinterlocutory decision that allowed it to shift of the burden of proof in thematter.  CEMIG presented its answer tothe appeal in a timely manner. The 8th Civil Chamber of the Minas Gerais StateAppeal Court refused to grant the interlocutory appeal. The municipality ofRaposos filed a motion for declaration against the Appeal Court judgment thatrefused the interlocutory appeal. This motion was rejected. The approximatevalue of the claim is R$31.5 million.

A public civil action was brought by the FederalPublic Attorneys’ Office requesting an order that CEMIG be required to providewater to the seven municipalities downstream from the Irapé dam that have noclean water due to possible contamination of the Jequitinhonha River. Theaction also sought an analysis of the river’s water and, if contamination isfound, an order requiring the defendant to take measures necessary tore-establish the water parameters indicated by Conama Resolution 357/2005 whichsets forth the water bodies’ classification and standards/parameters for thedischarge of liquid effluents. An preliminary injunction was granted requiringCEMIG to provide water to the river bank population and carry out a wateranalysis of the Jequitinhonha River. CEMIG filed an interlocutory appealagainst the injunction and obtained a decision temporarily suspending thepreliminary injunction until a final decision is rendered by the court ofappeals. The approximate value of the claim is R$103 thousand.

In view of the Brazilian environmental legislation, weare carrying out environmental works in our facilities to avoid contaminationof the soil by insulating mineral oil. On October 20, 2005 we received anotice of infringement from the Minas Gerais State Environmental Foundation(FEAM), the environmental body of the government of Minas Gerais, in which thatagency alleged inappropriate storage of high-voltage transformers with directleaks into the soil of insulating mineral oil at one of our facilities,named the Materials Distribution Center, in the municipality of Juatuba. We areappealing this notice of infringement because the equipment referred toconsists of powerful transformers which are in our reserve inventory, inperfect technical condition, for replacement of similar transformers to avoidelectricity supply outages in the event of an emergency situation insubstations throughout Minas Gerais. Also, these transformers were built withhigh-technology seals to avoid oil leaks, which also provide more effectivecontrol of any leaks that do happen. An investigative study was carried out in2006 in this area to find any contamination of the soil by mineral oil. Thestudy concluded that the levels of concentration of mineral oil found in thesoil were within the environmental quality standards used in benchmarkreferences such as the “Dutch List” - VROM 2000. This study was submitted toFEAM, which requested the investigation of the contamination of thesubterranean waters of this area.  CEMIGhas agreed to undertake this study.

In 2006, CEMIG voluntarily carried out anenvironmental investigation at the Conselheiro Lafaiete substation in MinasGerais for soil contamination with polychlorinated biphenyls (BCPs). Thecontaminated area of the substation was marked out and the volume of soilcontaminated was estimated to be 10.20 m3. CEMIG is arranging for the removal andincineration of this material.

*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 brought an administrative proceeding againstus, contesting a R$623 million credit related to such positive balance. OnOctober 31, 2002 ANEEL issued a final administrative decision against us.On January 9, 2004, the Brazilian Treasury Authority (“Secretaria doTesouro Nacional”) issued an Official Collection Letter to us in the amount ofR$516.2 million to be paid by January 30, 2004. We filed a writ ofmandamus to suspend our inclusion in the national non-payers registry (“CADIN”).Although the relief was denied by the lower court, we appealed to the FederalCourt of the First Circuit which granted us a temporary injunction to suspendthe inclusion in the CADIN. Therefore, we have not accrued any liabilityrelated to this claim. No provision has been recorded with respect to this mattersince the Company believes that the likelihood of an adverse outcome ispossible.

We are a defendantin an administrative proceeding brought by ANEEL because we did not meet theSeptember 21, 2002 deadline for completion of the unbundling process. OnNovember 11, 2002, ANEEL imposed a fine of R$5.5 million upon us. Howeverwe believe we should not be responsible for any non-compliance with therestructuring requirements and, for this reason, on 

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November 28, 2002, we appealed ANEEL’s fine. OnFebruary 23, 2005 ANEEL issued a ruling reducing the fine to R$2.7million. On March 7, 2005 we filed an appeal requesting thecancellation of the fine and the infraction notice. We also presented argumentsbefore ANEEL on August 8, 2005. We continue to contest this fine. Noprovision has been recorded with respect to this matter since the Companybelieves that the likelihood of an adverse outcome is possible.

On June 12, 2003, ANEEL imposed a R$5.1 millionfine on us for our alleged failure to comply with certain electric power supplyquality standards with respect to our consumers. We have recorded a fullprovision for this fine and have filed a suit to suspend the fine and ourinclusion in CADIN and in the active list of debts of the Federal Government(Dívida Ativa da União).

On November 14, 2003, the Federal Public AuditingCourt, which has the authority to audit any decision by ANEEL that may impactpublic finance, initiated an administrative proceeding against ANEEL to evaluatethe criterion adopted by ANEEL in the Energy Consumption Reduction EmergencyProgram (*Programa Emergencial de Redução de Consumo deEnergia Elétrica*), or PERCEE. The Federal Public Auditing Court hasasked us to provide certain information with respect to our rates, which,according to the Federal Public Auditing Court, were mistakenly approved byANEEL. If we cannot provide support for these rates and ANEEL fails to confirmthe legality of the criterion adopted, we may incur losses in the amount ofR$122.9 million. No provision has been recorded with respect to this mattersince we believe that can provide the necessary support and that ANEELcan confirm the legality of the rates. The likelihood of an adverse outcome ispossible.

In addition, the Federal Public Auditing Courtcontested the index and the X Factor applied by ANEEL in our rate revision of2003. We have filed an administrative proceeding before the Federal PublicAuditing Court to challenge its decision. Currently this administrative proceedingis still under review of the Attorney General of Minas Gerais. Thisadministrative proceeding may involve losses of up to approximately R$79.8million No provision has been recorded with respect to this matter since theCompany believes that the likelihood of an adverse outcome is possible.

We are the defendant in a suit challenging thecharging of tax on public lighting. The plaintiffs allege that we supplied only11 hours and 8 minutes of public light and charged the municipalities for 12hours. The approximate value of this claim is R$399 million.  We believe we have sound arguments in defenseof this claim, and therefore have made no provisions for this suit. TheCompany believes the likelihood of an adverse outcome is possible.

We filed an administrative appeal against ANEEL onJuly 25, 2005, seeking reconsideration of ANEEL’s Ruling No. 787, dated June 30,2005, which declared null and void the registries before ANEEL and the CCEE ofsome supply agreements entered into by and between consumers connected in 13.8kV. We continue to contest this Ruling. Such contracts under discussion beforeANEEL amount to R$14 million. No provision has been recorded withrespect to this matter since the Company believes that the likelihood of anadverse outcome is possible.

On January 25, 2006, Companhia Força e LuzCataguazes Leopoldina - CFLCL alleged that Horizontes Energia S.A. wascommercializing energy with prices below market values with CompanhiaIndustrial Cataguazes - CIC (a company located in the CFLCL’s concession area)and filed an administrative appeal before ANEEL, alleging anti-competitiveconduct. We were mistakenly included in the appeal as the energy supplier ofCIC. With a view to clarifying this misunderstanding, we filed ourcounter-arguments before ANEEL on November 28, 2005. The value of suchcontingency is estimated in R$37 million. No provision has been recorded withrespect to this matter since the Company believes that the likelihood of anadverse outcome is possible.

We are currently contesting a Class Action *(Ação Popular)*lawsuit  in which ourprocedures related to a public bid are being challenged. Due to the lack oflegal requirements with respect to some items of the bidding notice, wedeclared it null and void. The class action seeks to have the bidding noticealtered and the public bid procedures restarted. A request for summary judgmentwas denied and therefore we presented our pleadings. TheCompany believes the likelihood of an adverse outcome is possible.

On January 9, 2007, Cemig Distribution received anotification from ANEEL pursuant to a possible breach of the applicableelectric energy legislation concerning different tariffs to low incomeconsumers. On February 27, 2007 Cemig Distribution answered ANEEL’snotification setting forth that the consumers should be classified as lowincome consumers pursuant to the National Department of Water and ElectricEnergy (*Departamento Nacional de Energia Elétrica – DNAEE*)Administrative Act No. 242/96 (Portaria DNAEE no 242/96) and that, therefore,CEMIG’s tariffs were correctly applied. On March 1, 2007, ANEEL responded toCemig Distribution setting forth that the differences between the amountsconsidered adequate by ANEEL and those defined by Cemig Distribution were notlegally ratified by ANEEL. The amount of the fine is of R$143 million. TheCompany recorded a provision in 2007 of R$30 million, which, according to itsestimates, represents the potential loss relating to these matters.

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**Dividend Policyand Payments**

*Obligatorydividend; priority and amount of dividends*

Under our by-laws, we arerequired to pay to our shareholders, as obligatory dividends, 50% of the netincome of the fiscal year ending December 31. Our preferred shares havepriority in the allocation of the obligatory dividend for the period inquestion. The order of priority of the distribution of dividends is as follows:

·                    The annualminimum dividend for the preferred shares: These have preference in the eventof reimbursement of shares, and have an annual minimum dividend equal to thegreater of the following:

·                  10%of their par value; or

·                  3%of the shareholders’ equity associated with it.

·                    The dividendson the common shares, up to the minimum percentage for the preferred shares.

If a portion of theobligatory dividend remains after the payment of the common dividend, theremaining funds are to be distributed on an equal, pro rata basis with respectto all preferred shares and common shares.

Without prejudice to theobligatory dividend, beginning in fiscal year 2005, every two years, or shorterperiod if the company’s cash position permits, we will distribute extraordinarydividends, up to the limit of the cash available, as determined by the Board ofDirectors, under the Company’s Strategic Guidelines Plan and the dividendpolicy specified in that plan.

The dividends declared,whether obligatory shall be paid in two equal installments, the first byJune 30 and the second by December 30 of each year. The extraordinarydividends shall be paid according to the board of directors decision.

Under the BrazilianCorporate Law, the Board of Directors may declare interim dividends, in theform of interest on capital, to be paid from retained earnings, income reservesor income ascertained in semi-annual or quarterly financial statements. Anyinterim dividends paid shall be calculated based on the dividend to be paid inthe fiscal year in which the interim dividend was declared. Our by-lawsauthorize our Board of Directors to declare interim dividends. Any interimdividend paid may be set off against the amount of the obligatory dividendpayable for the fiscal year in which the interim dividend was paid.

In the fiscal years inwhich we do not have sufficient income to pay dividends to our preferred andcommon shareholders, the State of Minas Gerais guarantees a minimum dividend of6% of the per value of the preferred or common shares, respectively, per yearto all shares in the company issued up to August 5, 2004 and held byindividuals.

*Amounts availablefor distribution*

The amount available fordistribution is calculated on the basis of the financial statements prepared inaccordance with accounting practices adopted in Brazil and the proceduresdescribed below.

The obligatory dividendis calculated on the basis of *adjusted net income*,defined as net income after addition or subtraction of: (a) amountsallocated to the legal reserve, (b) amounts destined to the formation ofthe contingency reserves and reversal of these reserves formed in previousfiscal years, and (c) any unrealized income transferred to the unrealizedincome reserve account, and any amounts previously posted to this reserveaccount which have been realized in the fiscal year and used to offset losses.

We are obliged tomaintain a legal reserve, to which 5% of the net income of each fiscal yearmust be allocated until the reserve’s total value is equal to 20% of thecompany’s total paid-in capital. However, we are not obliged to make anyallocation to the legal reserve in relation to any fiscal year in which the sumof the legal reserve and the other established capital reserves exceeds 30% ofthe company’s total paid-in capital. Any net losses may be charged against thelegal reserve.

Under the BrazilianCorporate Law, income in subsidiaries or affiliated companies reported by theequity method, and income on term sales, realizable after the end of the nextfiscal year, are also considered to be unrealized income.

The total of incomereserves (with the exception of the reserve for contingencies relating toexpected losses and the unrealized income reserve), the legal reserve, thespecial reserves, the reserve for investment projects, and retained earningsmay not be greater than the company’s registered capital. The amount in excessof our registered capital must be used to increase our registered capital or bedistributed as cash dividends.

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Under the Brazilian Corporate Law and our by-laws,dividends not claimed within three years from the date on which they aredistributed revert to us.

*Interest on equity*

Under Brazilian law we may pay interest on equity asan alternative for the distribution of funds to shareholders. Funds distributedas interest on equity qualify within the calculation of minimum dividendestablished in the by-laws. These amounts may be paid in cash; and the companymay treat them as an expense for purposes of the calculation of the income taxand the social contribution tax. The total amount paid in interest on equity islimited to the result of application to the company’s shareholders’ equity ofthe Long Term Interest Rate (TJLP), published by BNDES and may not exceed thegreater of (i) 50% of the net income(before taxes for social contributionon net profits, income tax, and the deduction of the interest attributable toshareholders’ equity) for the period in respect to which the payment is made or(ii) 50% of retained earnings as of the date of the beginning of theperiod in respect of which the payment is made. Shareholders who are not resident in Brazil must register with theBrazilian Central Bank so that the foreign currency proceeds of their dividendpayments, or of sale or other amounts relating to their shares, may be remittedto them outside Brazil. The preferred shares underlying our ADSs and the commonshares underlying our common share ADSs are held in Brazil by the custodianbank, as agent for the depositary bank, which is the registered owner of theshares.

*Currency Exchange*

Payments of cash dividends and distributions, if any,will be made in *reais* to the custodian on behalfof the depositary bank, which will then convert such proceeds into U.S. dollarsand will cause such U.S. dollars to be delivered to the depositary bank fordistribution to holders of ADRs. In the event that the custodian is unable toimmediately convert the *reais* receivedas dividends into U.S. dollars, the amount of U.S. dollars payable to holdersof ADRs may be adversely affected by devaluations of the *real*that occur before such dividends are converted and remitted. The realappreciated approximately 8.13% relative to the U.S. dollar in 2006. See “Item3. Key Information—Risk Factors—Risks Relating to Brazil—The Braziliangovernment exercises a significant influence on the Brazilian economy.Political and economic conditions can have a direct impact on our business.”

Dividends in respect of the preferred shares andcommon shares paid to holders who are not Brazilian residents, includingholders of ADSs and common share ADSs, are generally not subject to Brazilianwithholding tax, although in general payments of interest on capital aresubject to withholding tax. See “Item 10. Additional Information—Taxation—BrazilianTax Considerations—Taxation of Dividends” and “—U.S. TaxConsiderations—Taxation of Distributions.” There is no specific record date upon which the depositary bank willdetermine the exchange rate to be used in connection with converting cashdividends or other cash distributions. Pursuant to the Second Amended andRestated Deposit Agreement, the depositary bank will arrange for the funds tobe converted into U.S. dollars upon receipt of notice of cash dividends orother cash distributions.

*History of Dividend Payments*

The following table sets forth the recent history ofdeclarations of dividends and interest on capital on our common shares andpreferred shares. For each year in the table, the payment of the dividendsoccurred during the year following declaration. For the periods indicated, thedividends paid per 1,000 common shares and per 1,000 preferred shares were thesame.  As a result of a shareconsolidation on June 4, 2007 with respect to both our preferred shares and ourcommon shares, dividends payments subsequent to that date will be per onecommon share and one preferred share. See “Item 3. Key Information—Selected Consolidated Financial Data.”

**DeclarationHistory of Dividends and Interest on Capital (1)**
| Dividend Year | ** ** | **Common Shares** | ** ** | **Preferred Shares** | ** ** |
|--------------------|------------|------------------------|------------|---------------------------|------------|
| ** **         | ** ** | **(R$)(2)**            | ** ** | **(US$)(3)**              | ** ** | **(R$)(2)** | ** ** | **(US$)(3)** | ** ** |
| 2002               |       | 96,198,579             |       | 33,846,035                |       | 123,801,421 |   | 43,557,683 |   |
| 2003               |       | 140,081,485            |       | 47,630,144                |       | 180,412,546 |   | 61,343,408 |   |
| 2004               |       | 302,634,209            |       | 119,476,593               |       | 389,766,059 |   | 153,875,270 |   |
| 2005               |       | 904,951,727            |       | 432,991,257               |       | 1,165,497,675 |   | 557,654,390 |   |
| 2006 (4)           |       | 603,948,640            |       | 297,394,445               |       | 777,832,359 |   | 383,017,706 |   |

 

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(1)           Inaccordance with the accounting practices adopted in Brazil, dividends andinterest on capital are accounted for as having been paid in the dividend yearin which they are proposed, even if such dividends or interest on capital wereformally approved by a shareholders’ meeting in the following year.

(2)           Realamounts are expressed in nominal *reais*.

(3)           U.S.dollar amounts are calculated by dividing the amount of dividends paid,expressed in nominal *reais*, by thenoon buying rate on the respective dates when we first paid the indicateddividends.

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(4)           The 2006 dividends wereapproved at the ordinary and special general shareholders’ meetings held onApril 26, 2007. On April 26, 2007, R$497 million ofextraordinary dividends were also approved. The 2006 dividends and theextraordinary dividends will be paid in two equal installments by June 30, 2007and December 30, 2007. The first installment was paid on June 29, 2007. Seenote 17 to our consolidated financial statements.

**SignificantChanges**

A significant change inour financial condition since the date of our financial statements that areincluded in this annual report on Form 20-F is a 9.43% rate increaseimplemented in 2007, which has had a positive effect on our electricity salesrevenues.

**Item9.**** ****The Offerand Listing**

**TradingMarket**

The principal tradingmarket for our preferred shares is the São Paulo Stock Exchange. Our ADSs, eachrepresenting 1,000 preferred shares as of December 31, 2006 (and each ADSrepresenting one preferred share as of June 11, 2007), have traded on the NYSEunder the symbol “CIG” since September 18, 2001. Prior to that date, ourADSs were traded in the over-the-counter, or OTC, market in the United States.The ADSs are evidenced by ADRs issued by Citibank, N.A., as depositary,pursuant to a Second Amended and Restated Deposit Agreement, dated as ofAugust 10, 2001, as amended on June 11, 2007, by and among us, thedepositary and the holders and beneficial owners of ADSs evidenced by ADRsissued thereunder. As of December 31, 2006, there were approximately22,264,440 ADSs outstanding, representing approximately 22,264 million preferredshares or approximately 24.4% of our 91,210 million outstanding preferredshares. Such ADSs were held by 10 record holders as of that date. Our commonshares are also listed and traded on the São Paulo Stock Exchange and, on June12, 2007, we established an American Depositary Shares program for our commonshares on the NYSE under the symbol “CIG.C”, under which each AmericanDepositary Share represents one of our common shares.

The following table setsforth the reported high and low closing sale prices for the preferred shares onthe São Paulo Stock Exchange (per lot of 1,000 preferred shares through June 1,2007) and the ADSs on the NYSE for the periods indicated.
|                    | ** ** | **Preferred Shares(1)**           | ** ** | **ADSs**                   | ** ** |
|--------------------|------------|----------------------------------------|------------|----------------------------|------------|
| **Period**         | ** ** | **Price in Nominal R$** | ** ** | **Price in US$** | ** ** |
| ** **         | ** ** | **High**                               | ** ** | **Low**                    | ** ** | **High** | ** ** | **Low** | ** ** |
| 2002               |       | 39.70                                  |       | 18.90                      |       | 16.73 |   | 4.85 |   |
| 2003               |       | 52.75                                  |       | 20.74                      |       | 18.46 |   | 6.00 |   |
| 2004               |       | 68.00                                  |       | 36.80                      |       | 25.10 |   | 11.42 |   |
| 2005               |       | 95.00                                  |       | 53.49                      |       | 41.07 |   | 19.71 |   |
| 2006               |       | 114.01                                 |       | 80.00                      |       | 52.65 |   | 34.58 |   |
|               |       |                                   |       |                       |       |   |   |   |   |
| 2005               |       |                                   |       |                       |       |   |   |   |   |
| First quarter      |       | 68.20                                  |       | 53.49                      |       | 26.10 |   | 19.71 |   |
| Second quarter     |       | 77.09                                  |       | 61.71                      |       | 31.85 |   | 23.40 |   |
| Third quarter      |       | 88.75                                  |       | 70.50                      |       | 39.15 |   | 29.41 |   |
| Fourth quarter     |       | 95.00                                  |       | 76.70                      |       | 41.10 |   | 33.55 |   |
|               |       |                                   |       |                       |       |   |   |   |   |
| 2006               |       |                                   |       |                       |       |   |   |   |   |
| First quarter      |       | 114.01                                 |       | 93.50                      |       | 52.65 |   | 39.37 |   |
| Second quarter     |       | 105.85                                 |       | 80.00                      |       | 51.45 |   | 34.58 |   |
| Third quarter      |       | 97.34                                  |       | 83.20                      |       | 44.75 |   | 37.60 |   |
| Fourth quarter     |       | 104.99                                 |       | 84.80                      |       | 49.20 |   | 38.81 |   |
|               |       |                                   |       |                       |       |   |   |   |   |
| 2007               |       |                                   |       |                       |       |   |   |   |   |
| First quarter      |       | 106.31                                 |       | 96.72                      |       | 50.76 |   | 45.52 |   |
|               |       |                                   |       |                       |       |   |   |   |   |
| January 2007  |       | 105.90                                 |       | 97.00                      |       | 49.30 |   | 45.52 |   |
| February 2007 |       | 105.70                                 |       | 98.70                      |       | 50.76 |   | 46.85 |   |
| March 2007    |       | 106.31                                 |       | 96.72                      |       | 49.98 |   | 46.29 |   |
| April 2007    |       | 107.55                                 |       | 92.97                      |       | 56.46 |   | 48.82 |   |
| May 2007  (2) |       | 76.00                                  |       | 71.06                      |       | 39.47 |   | 36.05 |   |
| June 2007 (3) |       | 42.80                                  |       | 38.10                      |       | 22.36 |   | 18.92 |   |
| July 2007 (4)      |       | 42.29                                  |       | 40.50                      |       | 22.54 |   | 21.50 |   |

 

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(1)             Preferred shareprices and volumes per 1,000 preferred shares through June 1, 2007.

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(2)             OnMay 3, 2007, a 50% stock dividend was paid on the preferred shares, resultingin an adjustment to the price per preferred share.  On May 7, 2007, a corresponding adjustment wasmade to the ADSs through the issuance of one additional ADS for every two ADSs,resulting in an adjustment to the price per ADS.

(3)             Thelast 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 shareconsolidation on June 4, 2007 whereby every 500 preferred shares, par value ofR$0.01, were consolidated into one preferred share with a par value ofR$5.00.  In addition, a 100% forwardsplit of the ADSs was effected on June 11, 2007.  The price per preferred share and pre ADSwere adjusted accordingly.

(4)             ThroughJuly 17, 2007.

On July 17, 2007,the closing price per preferred share on the São Paulo Stock Exchange was R$41.2and the closing price per preferred ADS on the NYSE was US$21.9.

On June 12, 2007, ourcommon share ADSs began trading on the NYSE. The high and low closing sale prices from that date through July 17,2007 per common share ADS were US$23.74 and US$19.30, respectively.  On July 17, 2007, the closing price percommon share ADSs was US$23.25.

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

**Tradingon the São Paulo Stock Exchange**

The preferred shares andcommon shares are traded on the São Paulo Stock Exchange, the only Brazilianstock exchange that trades shares. Trading on the São Paulo Stock Exchange islimited to member brokerage firms and a limited number of authorizednon-members. The CVM and São Paulo Stock Exchange have discretionary authorityto suspend trading in shares of a particular issuer under certaincircumstances.

If you were to trade inthe preferred shares or common shares on the São Paulo Stock Exchange, yourtrade would settle in three business days after the trade date. Delivery of andpayment for shares is made through the facilities of separate clearinghousesfor each exchange, which maintain accounts for member brokerage firms. Theseller is ordinarily required to deliver the shares to the exchange on thesecond business day following the trade date. The clearinghouse for the SãoPaulo Stock Exchange is Companhia Brasileira de Liquidação e Custódia.

In order to bettercontrol volatility, the São Paulo Stock Exchange has adopted a “circuit breaker”system pursuant to which trading sessions may be suspended for a period of 30minutes or one hour whenever the index of this stock exchange falls more than10% from the index registered for the previous trading session.

The São Paulo StockExchange is less liquid than the NYSE and other major exchanges in the world.As of December 31, 2006, the aggregate market capitalization of the 350companies listed on the São Paulo Stock Exchange was equivalent toapproximately US$722 billion and the 10 largest companies listed on the SãoPaulo Stock Exchange represented approximately 51.2% of the total market capitalizationof all listed companies. Although any of the outstanding shares of a listedcompany may trade on a Brazilian stock exchange, in most cases fewer than halfof the listed shares are actually available for trading by the public. Theremainder of these shares is held by small groups of controlling persons,governmental entities or one principal shareholder. As of December 31,2006, we accounted for approximately 1.03% of the total market capitalizationof all listed companies on the São Paulo Stock Exchange.

Our preferred shares andcommon shares have daily liquidity on the São Paulo Stock Exchange and have hadno suspension of trading in the past five years

We have been a member ofSpecial Corporate Governance Level 1 of the São Paulo Stock Exchange sinceOctober 2001. As a result, we have agreed to do the following:

·                   presenta consolidated balance sheet, a consolidated statement of results and theaccompanying letter to shareholders;

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

·                   discloseany direct or indirect ownership interest, including beneficial ownershipinterest, exceeding five percent of our capital stock;

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·                   disclosethe amount and characteristics of our securities held directly or indirectly byinsiders;

·                   disclosechanges in the amount of securities held by insiders within the preceding 12months;

·                   disclosethe amount of free float shares and their respective percentage in relation tototal shares outstanding, which shall be of at least 25% of shares representingour capital stock;

·                   disclose,at the end of January of each year, an annual schedule of corporate events, andany subsequent changes to the schedule;

·                   discloseany agreements which we have executed with any of our affiliates, subsidiaries,managers (or any company owned or controlled by our managers) or controllingshareholders (or any affiliate or subsidiary of our controlling shareholders),whenever the aggregate value of such agreement exceeds either R$200 thousand or1% of our net equity.  For each suchagreement we must disclose the purpose, term, amounts, provisions fortermination and expiration and, if applicable, the influence the agreement mayhave over our management or business;

·                   holdat least one annual meeting with market analysts and any other interestedparties; and

·                   adoptmechanisms that provide for capital dispersion in any public share offerings.

*Disclosureof Trading by Insiders*

Braziliansecurities regulations require our controlling shareholders, management, membersof our Fiscal Council and any other technical or advisory body to disclose tous, the CVM and the São Paulo Stock Exchange the number and types of securitiesissued by us, our subsidiaries and our controlling companies that are held bythem or by persons closely related to them and any changes in their respectiveownership positions during the preceding 12 months. The information regardingthe acquisition of such securities (amount, price and date of acquisition) mustbe provided to us within 10 days of the end of the month in which they wereacquired.

*Disclosure of Material Developments*

Under Braziliansecurities regulations, we must disclose any material development related toour business to the CVM and the São Paulo Stock Exchange. We are also requiredto publish a notice of those material developments. A development is deemedmaterial if it has a material impact on the price of our securities, thedecision of investors to trade in our securities or the decision of investorsto exercise any rights as holders of any of our securities. Under specialcircumstances, we may submit to the CVM a request for confidential treatmentfor certain material developments.

Trading on Brazilianstock exchanges by non-residents of Brazil is subject to limitations under Brazilianforeign investment legislation. See “Item 10. Additional Information—Exchange Controls.”

**Regulation ofBrazilian Securities Markets**

The Brazilian securitiesmarkets are principally governed by Law No. 6,385, dated December 7,1976, and the Brazilian Corporate Law, each as amended and supplemented, and byregulations issued by the CVM, the National Monetary Council and the CentralBank, which has, among other powers, licensing authority over brokerage firmsand which regulates foreign investments and foreign exchange transactions.

Under the BrazilianCorporate Law, a corporation is either publicly owned , such as we are, orclosely held (*companhia fechada*). All publiclyowned companies, including us, are registered with the CVM and are subject toreporting requirements. Our shares are traded on the São Paulo Stock Exchange,but may be traded privately subject to certain limitations. The Brazilian OTCmarket consists of direct trades and trades between individuals in which afinancial institution registered with the CVM serves as intermediary.

We have the option to askthat trading in our securities on the São Paulo Stock Exchange be suspended inanticipation of a material announcement. Trading may also be suspended on theinitiative of the São Paulo Stock Exchange or the CVM based on or due to, amongother reasons, a belief that a company has provided inadequate informationregarding a material event or has provided inadequate responses to inquiries bythe CVM or the stock exchange.

Brazilian law provides general restrictions on unfairtrading practices and market manipulation, although in Brazil there may befewer instances of enforcement actions and judicial precedent is less welldefined than in certain other countries. The Brazilian Corporate Law providesthat the controlling shareholders, any shareholder that appoints members to theboard of directors and to the 

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fiscal council, membersof the board of directors, members of the fiscal council and executive officerswill be required to disclose any purchase or sale of shares to the CVM and theSão Paulo Stock Exchange.

Trading on the São Paulo Stock Exchange bynon-residents of Brazil is subject to limitations under Brazilian foreigninvestment and tax legislation. The Brazilian custodian for the preferredshares or the common shares and the depositary bank must obtain a certificateof registration from the Central Bank of Brazil to be eligible to remit U.S.dollars abroad for payments of dividends, any other cash disbursements, or uponthe disposition of the shares and sales proceeds thereof. In the event that aholder of ADSs exchanges its ADSs for preferred shares, the holder will beentitled to continue to rely on the depositary bank’s certificate ofregistration for five business days after the exchange. Thereafter, the holdermay not be able to obtain and remit U.S. dollars abroad upon the disposition ofthe preferred shares or common shares, or distributions relating to thepreferred shares or common shares, unless the holder qualifies for and obtainsa new certificate of registration. See “Item 10. Additional Information—Exchange Controls.”

**Item10.**                   AdditionalInformation

**CorporateGovernance Differences from NYSE Practices**

OnNovember 4, 2003, the New York Stock Exchange (“NYSE”) established new corporategovernance rules. Under the rules, foreign private issuers are subject to amore limited set of corporate governance requirements than U.S. domesticissuers. Under these rules, we are required to set forth in our annual reportto shareholders a description of the significant differences between CEMIG’scorporate governance practices and those that would apply to a U.S. domesticissuer under the NYSE corporate governance rules. The following tablesummarizes these differences.
| **Section**         | ** ** | **NYSE Corporate Governance Rule for  U.S.  Domestic Issuers**                                                                                                                                                                                                           | ** ** | **Our Approach**                                                                                                                                                                                                                                                                                                                                                                           |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 303A.01             |       | A listed company must have a majority of independent  directors. “Controlled companies” are not required to comply with this  requirement.                                                                                                                          |       | CEMIG is a controlled company because more than a majority  of its voting power is controlled by the government of the State of Minas  Gerais. As a controlled company, CEMIG would not be required to comply with  the majority of independent directors requirements if it were a U.S. domestic  issuer. There is no legal provision that requires CEMIG to have independent  directors. |
|                |       |                                                                                                                                                                                                                                                                          |       |                                                                                                                                                                                                                                                                                                                                                                                       |
| 303A.03             |       | The non-management directors of a listed company  must meet at regularly scheduled executive sessions without management.                                                                                                                                                     |       | The non-management directors of CEMIG do not meet at  regularly scheduled executive sessions without management.                                                                                                                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                          |       |                                                                                                                                                                                                                                                                                                                                                                                       |
| 303A.04             |       | A listed company must have a nominating/corporate  governance committee composed entirely of independent directors, with a  written charter that covers certain minimum specified duties. “Controlled  companies” are not required to comply with this requirement. |       | As a controlled company, CEMIG would not be required  to comply with the nominating/corporate governance committee requirements if  it were a U.S. domestic issuer. CEMIG does not have a nominating/corporate  governance committee.                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                          |       |                                                                                                                                                                                                                                                                                                                                                                                       |
| 303A.05             |       | A listed company must have a compensation 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 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 Exchange Act, with a written  charter that covers certain minimum specified duties.                     |       | CEMIG has a permanent conselho fiscal, or Fiscal  Council in accordance with the applicable provisions of Brazilian Corporate  Law. As required by Brazilian Corporate Law, our Fiscal Council is  independent of our management and external auditors. The primary responsibility  of the Fiscal Council is to review management’s activities and the financial  statements, and to  |

 

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|    |   |                                                                                                                                                                                         |   | report its findings to the shareholders. Our Fiscal  Council acts as our audit committee for purposes of the Sarbanes-Oxley Act of  2002. Under Section 10A-3 of the SEC rules on Audit Committees of listed  companies, non-U.S. issuers are permitted not to have a separate Audit  Committee made up of independent members if there is a fiscal council  established and chosen in accordance with the legal rules of its origin  country, expressly requiring or allowing that such council follow certain  obligations. Also in accordance with this exemption, a fiscal council may  exercise the obligations and responsibilities of an Audit Committee of the  United States up to the limit permitted by Brazilian Law. |
|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 303A.08 |   | Shareholders must be given the opportunity to vote  on all equity-compensation plans and material revisions thereto, with limited  exemptions set forth in the NYSE rules.                   |   | Under Brazilian Corporate Law, shareholder  preapproval is required for the adoption of equity compensation plans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|    |   |                                                                                                                                                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 303A.09 |   | A listed company must adopt and disclose corporate  governance guidelines that cover certain minimum specified subjects.                                                                     |   | CEMIG does not have formal corporate governance  guidelines.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|    |   |                                                                                                                                                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 303A.12 |   | Each listed company Chief Executive Officer must  certify to the NYSE each year that he or she is not aware of any violation by  the company of NYSE corporate governance listing standards. |   | CEMIG’s Chief Executive Officer will promptly notify  the NYSE in writing after any executive officer of CEMIG becomes aware of any  material non-compliance with any applicable provisions of the NYSE corporate  governance rules.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

 

**By-laws**

We are astate-controlled company registered under the laws of Brazil. The registrationnumber given to us by Junta Comercial do Estado de Minas Gerais, or the Boardof Trade of Minas Gerais, is 3130004012. Set forth below is a brief summary ofcertain significant provisions of (i) our by-laws, as amended by ourspecial shareholders’ meeting on April 26, 2007, and (ii) BrazilianCorporate Law. The description of our by-laws contained herein does not purportto be complete and is qualified by reference to our by-laws, which have beenfiled as an exhibit to this annual report.

*Object and Purpose*

As described inArticle 1 of our by-laws, we have four main purposes: (i) toconstruct and operate electric power generation, transformation, transmissionand distribution systems and to trade electric power and related services;(ii) to develop commercial activities in the energy field; (iii) torender consulting services to companies in Brazil and abroad; and (iv) toperform activities directly or indirectly relating to our corporate purposes.

*Preferred Shares*

Holders ofpreferred shares have the right to receive annual minimum dividends in anamount equal to the greater of 10% of the par value of each preferred share or3% of the shareholders’ equity associated with each preferred share. Holders ofour preferred shares also will have priority over any other class of shares ifwe decide to redeem shares. A preferred share does not entitle its owner tovote at the general shareholders’ meetings.

*Share Subscription*

Shares purchasedby the State Government, which must constitute at all times the majority of ourvoting shares, are paid for in accordance with the Brazilian Corporate Law.Shares purchased by other shareholders (whether natural persons or companies)shall be paid for in accordance with the decision resulting from the generalmeeting of shareholders that addresses the matter.

Article 171 of theBrazilian Corporate Law provides that each shareholder has a general preemptiveright to subscribe for new shares or convertible securities issued in any capitalincrease, in proportion to that shareholder’s shareholding, except in the event

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of the exercise of anyoption to 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 acapital increase, holders of ADSs, which represent preferred shares, andholders of common share ADSs, which represent common shares, would havepreemptive rights to subscribe only to newly issued preferred shares or commonshares, as the case may be, in proportion to their shareholdings but may not beable to exercise these rights because of U.S. securities law limitations. See “Item3. Risk Factors—Risks Relating to the Preferred Shares and ADSs—You may not beable to exercise preemptive rights with respect to the preferred shares.”

*Minority Shareholders*

Our by-lawsprovide that the preferred and minority common shareholders are entitled toelect one member and an alternate to the Board of Directors, as more fully describedin “—Rights of Shareholders—Rights of Minority Shareholders.”

*Dividends*

For a discussionof our dividend policy, see “Item 8. Financial Information—Dividend Policy andPayments.”

*General Meetings*

General meetingsof shareholders are held for any legal purpose, as provided by the BrazilianCorporate Law. Ordinary general meetings of shareholders are held within thefirst four months of the fiscal year and are called upon 15 days prior notice.The Brazilian Corporate Law also provides that the following actions may onlybe taken at a shareholders’ meeting:

·                                          amendmentof our by-laws;

·                                          increasesor decreases to our issued capital stock or subscription of new shares;

·                                          electionof members to our Board of Directors and Fiscal Council;

·                                          authorizationof the issuance of debentures or any convertible securities;

·                                          suspensionof the rights of a shareholder who has violated Brazilian Corporation Law orour by-laws;

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

·                                          acceptanceor rejection of the valuation of in-kind contributions offered by a shareholderin consideration for the issuance of shares of our capital stock;

·                                          approvalof our transformation into a limited liability company (*sociedadeempresária limitada*) or any other corporate form;

·                                          approvalof any dissolution or liquidation, the appointment and dismissal of therespective liquidator and review of the reports prepared by him or her;

·                                          anyaction regarding an application for bankruptcy or compulsory rescheduling ofour debts;

·                                          approvalof the financial statements on an annual basis; and

·                                          cancellationof registration with the CVM as a publicly-held company or delisting of ourcommon shares from the São Paulo Stock Exchange, except in the case of aprivatization tender offer.

As a general rule,the affirmative vote of shareholders representing at least the majority of ourissued and outstanding common shares present in person or represented by proxyat a shareholders’ meeting is required to approve or ratify any proposedaction, and abstentions are not taken into account. However, the affirmativevote of shareholders representing one half of our issued and outstanding votingcapital is required to:

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·                                          createpreferred shares or to increase disproportionately an existing class ofpreferred shares relative to the other classes of shares, unless such action isprovided for or authorized by our by-laws;

·                                          modifya preference, privilege or condition of redemption or amortization conferred onone or more classes of preferred shares, or to create a new class with greaterprivileges than the existing classes of preferred shares;

·                                          reducethe percentage of mandatory dividends;

·                                          changeour corporate purpose;

·                                          mergeus with another company if we are not the surviving company or consolidate uswith another company;

·                                          spinoff a portion of our assets or liabilities;

·                                          approveour participation in a group of companies;

·                                          applyfor cancellation of liquidation status;

·                                          approveour dissolution; and

·                                          approvethe compulsory transfer of all of our shares to another company in order tomake us a wholly-owned subsidiary of that other company (*incorporação de ações*).

Shareholders maybe represented at a shareholders’ meeting by an attorney-in-fact appointed nomore than one year prior to the meeting date. To be eligible to represent ashareholder in a shareholders’ meeting, the attorney-in-fact must be ashareholder, one of our executive officers or directors or an attorney-at-law.In a publicly held corporation, such as ours, the attorney-in-fact may also bea financial institution.

Subject to theprovisions of the Brazilian Corporate Law and our by-laws, our Board ofDirectors may ordinarily call our shareholders’ meetings. These meetings mayalso be called by:

·                                          theFiscal Council, if the Board of Directors fails to call a general shareholders’meeting within one calendar month after the date it was required to do so underapplicable laws or a special shareholders’ meeting in the case of serious andurgent matters affecting us; any shareholder, whenever the executive officersfail to call the meeting of shareholders within 60 days of being required to doso by the Brazilian Corporate Law or by our by-laws; and

·                                          shareholdersholding at least five percent of our capital stock, if our Board of Directorsfails to call a meeting within eight days after receipt of a request from thatshareholder to call the meeting that indicates the issues to be discussed orcalls for the creation of the Fiscal Council.

*Board of Directors*

Our by-lawsmandate that our Board of Directors shall be comprised of 14 directors and 14alternates. One director is designated a chairman and another director isdesignated the vice-chairman.

Our Board of Directors is responsible for:

·                                          establishingthe general direction of our business;

·                                          electingand dismissing executive officers;

·                                          approvingthe execution contracts between us and our shareholders or any entity thatcontrols, is controlled by or is under joint control with our shareholders;

·                                          approvingthe sale or pledge of our fixed assets, or the granting of guarantees to thirdparties, with a value of at least R$5 million;

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·                                          approving,upon proposal by the Board of Executive Officers, the sale or the creation ofany “in rem” guarantees with respect to our permanent assets and the grantingby us of any personal guarantee to any third party in an amount exceeding R$5million;

·                                          approving,upon a proposal by the Board of Executive Officers, loans, financings, agreementsand any actions which would bind us in an amount exceeding R$5 million;

·                                          callingthe general meetings of shareholders;

·                                          supervisingthe management of the Board of Executive Officers, reviewing our books anddocuments and requesting information regarding executed and soon-to-be executedcontracts, as well as other items of interest;

·                                          approvingour annual and interim financial statements;

·                                          appointingand dismissing independent auditors annually;

·                                          approving,upon proposal by the Board of Executive Officers, the commencement or waiver ofbidding proceedings for the purchase of goods or services with a value of atleast R$5 million;

·                                          authorizing,upon proposal by the Board of Executive Officers, legal and administrativeaction to be taken on our behalf and the settlement of judicial and extrajudicial matters in which we are involved with a value of at least R$5 million;

·                                          approvingthe issuance of securities (debentures, commercial papers, *notas promissórias*, among others) in thelocal and international capital markets; and

·                                          delegatingto Board of Executive Officers the power to authorize signature contracts ofcommercialization of electric energy or rendering distribution and transmissionservices, in terms of legislation.

Under theBrazilian Corporate Law, directors of a corporation generally have certainduties equivalent to those imposed under the laws of most states of the UnitedStates, including a duty of loyalty to the corporation, a duty to refrain fromself-dealing and a duty to use reasonable care in the management of thecorporation’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 noprovisions in our by-laws with respect to (i) a director’s power to voteon proposals or contracts in which such director is materially interested,(ii) borrowing powers exercisable by the directors, (iii) age limitsfor retirement of board members, and (iv) number of shares required fordirector qualification.

The chairman andvice-chairman of our Board of Directors are chosen by our Board of Directors atits first meeting following the election of the board members. Thevice-chairman of our Board of Directors will act as a temporary replacement forour chairman when the chairman is absent from board meetings.

Our shareholdersdetermine the remuneration of our directors during the general meeting ofshareholders at which our directors are elected to office.

**Rightsof Shareholders**

We extend to ourshareholders all of the rights that are provided under Brazilian law. Ourby-laws are in compliance with the Brazilian Corporate Law.

*Essential Rights*

Article 109of the Brazilian Corporate Law provides that a corporation may not deny certainrights to its shareholders under any circumstances. These shareholders’ rightsinclude:

·                                          theright to have a share of the corporation’s earnings;

·                                          theright to have a share of the corporation’s assets, in the event of liquidationthereof;

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·                                          theright to supervise our management according to the Brazilian Corporate Law;

·                                          preemptiverights to subscribe new shares or securities convertible into shares, exceptfor exceptions provided by the Brazilian Corporate Law and our by-laws; and

·                                          theright to withdraw from the company under certain circumstances provided in theBrazilian Corporate Law.

*Voting Rights*

As a general rule,only our common shares are entitled to vote and each common share correspondsto one vote. Holders of preferred shares acquire voting rights if, during threeconsecutive fiscal years, we fail to pay a fixed or minimum dividend to whichthe preferred shares are entitled. If a holder of preferred shares acquiresvoting rights in this manner, such rights will be identical to the votingrights of a holder of common shares and will continue until the dividend ispaid. No restrictions exist on the right of a holder of common shares orpreferred shares to exercise voting rights with respect to such shares byvirtue of such holder being a non-resident of Brazil or a citizen of a countryother than Brazil. However, holders of ADSs may only vote the underlyingpreferred shares through the depositary according to the terms of the SecondAmended and Restated Deposit Agreement. In any circumstance in which holders ofpreferred shares are entitled to vote, each preferred share will entitle itsholder to one vote.

*Redemption rights*

Our common shares and preferred shares are notredeemable, except that a dissenting shareholder is entitled under Braziliancorporate law to obtain redemption upon a decision made at a shareholders’meeting by shareholders representing at least 50% of the voting shares:

(1)                                 to create a new class of preferred sharesor to disproportionately increase an existing class of preferred sharesrelative to the other classes of shares (unless such actions are provided foror authorized by the by-laws);

(2)                                 to 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;

(3)                                 to reduce the mandatory distribution ofdividends;

(4)                                 to change our corporate purposes;

(5)                                 to merge us with another company orconsolidate us;

(6)                                 to transfer all of our shares to anothercompany in order to make us a wholly-owned subsidiary of such company;

(7)                                 to approve the acquisition of control ofanother company at a price that exceeds certain limits set forth in Braziliancorporate law;

(8)                                 to approve our participation in acentralized group of companies as defined under Brazilian corporate law; or

(9)                                 in the event that the entity resultingfrom (a) a merger, (b) a transfer of shares as described in clause(6) above or (c) a spin-off that we conduct fails to become a listedcompany within 120 days of the shareholders’ meeting at which such decision wastaken.

Only holders of shares adversely affected by thechanges mentioned in items (1) and (2) above may require us to redeemtheir shares. The right of redemption mentioned in items (5), (6) and(8) above may only be exercised if our shares do not satisfy certain testsof liquidity at the time of the shareholder resolution. The right of redemptionlapses 30 days after publication of the minutes of the relevant shareholders’meeting, unless, in the case of items (1) and (2) above, theresolution is subject to confirmation by the preferred shareholders (which mustbe made at a special meeting to be held within one year), in which case the30-day term is counted from the publication of the minutes of the specialmeeting.

We would beentitled to reconsider any action giving rise to redemption rights within 10days following the expiration of such rights if the redemption of shares ofdissenting shareholders would jeopardize our financial stability. LawNo. 9,457 dated May 5, 1997, which amended Brazilian corporate law,contains provisions which, among other provisions, restrict redemption rightsin certain cases and allow companies to redeem their shares at their economicvalue, subject to certain requirements. Our by-laws currently do not providethat 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 

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the shareholders; provided that if the generalshareholders’ meeting giving rise to redemption rights occurred more than 60days after the date of the last approved balance sheet, a shareholder would beentitled to demand that his or her shares be valued on the basis of a newbalance sheet dated within 60 days of such general shareholders’ meeting.

*Rights of Minority Shareholders*

The BrazilianCorporate Law provides that shareholders who own at least 5% of the capitalstock of a corporation are afforded the following rights, among others:

·                                          theright to require that the books of the corporation be made available forreview, whenever these shareholders become suspicious that Brazilian law or thecorporation’s by-laws have been violated, or that irregularities have beencommitted by the management of the corporation;

·                                          theright to call a general meeting of shareholders, under certain circumstances,whenever the corporation’s directors or officers, as the case may be, fail todo so; and

·                                          theright to file an action for indemnification by directors or officers, as thecase may be, for damages caused to the assets of the corporation, whenever itis determined at the general meeting of shareholders that such a claim shallnot be filed.

Minorityshareholders that own, individually or in the aggregate, 10% of our outstandingcommon shares, and also holders of our preferred shares, have the right toappoint one member of the Fiscal Council and an alternate. All shareholdershave the right to attend general meetings of shareholders.

The BrazilianCorporate Law also provides that minority shareholders that hold either(i) preferred shares representing at least 10% of the total share capitalof a company or (ii) common shares representing at least 15% of the votingcapital of a company, have the right to appoint one member and an alternate tothe board of directors. If no common or preferred shareholder meets thesethresholds, shareholders holding preferred shares or common shares representingat least 10% of the total share capital of the company are entitled to combinetheir holdings to appoint one member and an alternate to the board of directors.

*Changes in Rights of Shareholders*

Any change withrespect to the rights of holders of our common shares or preferred sharesrequires a shareholders’ meeting. Under the Brazilian Corporate Law, theproposed changes must be approved by a majority of the affected class. Certainchanges with respect to the rights of non-voting shares, including preferredshares, such as a change in payment or voting rights, may give rise to theexercise of redemption rights by the holders of the affected shares.

*Going Private Transactions and Delisting from the São PauloStock Exchange*

Our delisting, as a public company, must be precededby a tender offer by our controlling shareholders or ourselves for theacquisition of all our then outstanding shares, subject to the conditionsbelow:

·                                          theprice offered for the shares under the public offering must be the fair valueof those shares, as established in Brazilian Corporate Law; and

·                                          shareholdersholding more than two thirds of our float shares shall have expressly agreed toour decision to become a private company or accepted the offer.

According to Brazilian corporate law, a fair priceshall be at least be equal to our valuation, as determined by one or more ofthe following valuation methods: book value, net book value assessed by marketprice, discounted cash flow, multiples, price of our shares in the market orany other valuation method accepted by the CVM. This price of the offer may berevised if challenged within 15 days of its publication by holders of at least10% of our outstanding shares, by means of a request sent to our managementthat a special shareholders` meeting be called to decide on whether to requesta new valuations under the same or different valuation method. Our shareholdersthat request a new valuation and those who approve such request shall reimburseus for incurred costs if the new valuation is lower than the challengedvaluation. However, if the second valuation is higher, the offeror will havethe option to continue the offer with the new price or quit the offer.

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**Arbitration**

Pursuant to theBrazilian Corporate Law and related regulations, if provided for in a company’sby-laws, disputes among shareholders will be subject to arbitration. Ourby-laws currently do not provide for arbitration.

**MaterialContracts**

*CRC Account Agreement - Contract forAssignment of Credit of the Remaining Balance of the Revenue CompensatingAccount, dated May 31, 1995, between the State Government and CEMIG, andAmendments thereto*

Prior to 1993,electric utilities in Brazil were guaranteed a rate of return on investments inassets used to provide electric service to consumers, the rates charged toconsumers were uniform throughout the country, and profits from more profitableutilities were reallocated to less profitable ones so that the rate of returnfor all companies would equal the national average. Shortfalls experienced bymost electric utilities in Brazil were accounted for in each company’s CRCAccount. When the CRC Account and the guaranteed return concept were abolished,concessionaires with positive balances were permitted to offset such balancesagainst their liabilities to the Federal Government.

After all of oureligible payables and debt to the Federal Government had been offset againstour CRC Account balance, we entered into an agreement with the State Governmentin May 1995 to transfer the right to receive the balance of our CRCAccount from the Federal Government to the State Government in return for apromissory note from the State Government payable in monthly installments plusinterest. This account receivable had a balance of approximately R$2,942million as of December 31, 2004, which included a significant amount ofoverdue installments. The agreement relating to this transfer, the CRC AccountAgreement, originally required the State Government to make monthly payments tous over twenty years with an initial three-year grace period for interest andprincipal payments. Interest on the amount receivable under the CRC AccountAgreement accrues at a rate of 6% per year plus inflation adjustments. Interestbegan to accrue on May 2, 1995, and deferred interest during the initialthree-year grace period was capitalized.

SinceMay 1995, the CRC Account Agreement has been amended as follows:

(a)           The CRC Account Agreementwas first amended in February 2001 to replace the monetary restatementindex originally applicable to the outstanding balance with the IGP-DI.

(b)           The CRC AccountAgreement was next amended by the Second Amendment to the CRC AccountAgreement, signed on October 14, 2002, which refers to 149 monthlyinstallment payments, with maturities from January 1, 2003 throughMay 1, 2015, representing the total amount of R$1,845 million ofDecember 31, 2004, bearing interest at 6% per year, with restatement basedon the IGP-DI. We entered into this Second Amendment with the State Governmentin order to preserve the terms and conditions of the original CRC AccountAgreement with respect to the above-referenced installments. We did not receiveany scheduled payments from the State Government with respect to this SecondAmendment. In 2001, we recorded a full loss provision with respect to theentire outstanding balance of the Second Amendment. See Note 3 to ourconsolidated financial statements.

(c)             The CRC Account Agreementwas next amended by the Third Amendment to the CRC Account Agreement, signed onOctober 24, 2002, which refers to outstanding installments originally dueunder the CRC Account Agreement from April 1, 1999 throughDecember 1, 1999 and from March 1, 2000 through December 1,2002. These installments, which totaled R$1,097 million as of December 31,2004, bear interest at an annual rate of 12%, with restatement based on theIGP-DI. We were permitted to retain payments of dividends and interest oncapital due to the State Government as our shareholder as a set-off againstamounts that the State Government owes us under this Third Amendment. For thisreason, did not record a loss provision for amounts due thereunder. We paid interest on capital in lieu of dividendsin December 2004, of which R$72 million was due to the State Government.Part of this interest on capital, amounting to R$49 million, was used bythe State Government to settle part of the CRC overdue credits and theremainder, in the amount of R$23 million, to acquire debentures issued by CEMIGfor the Irapé power plant construction. See Note 3 to our consolidatedfinancial statements.

(d)           Given the prior defaultby the State Government in the payment of amounts due under the CRC AccountAgreement and in order to ensure the full payment to CEMIG of the installmentsdue from the State Government under the CRC Account balance, a Fourth Amendmentto the CRC Account Agreement was signed on January 23, 2006. Under theFourth Amendment, the State Government irrevocably agreed to pay theoutstanding CRC Account balance, corresponding to R$2,942 million atDecember 31, 2004, plus interest, by authorizing CEMIG to retain 65% ofthe dividends and interest on capital due to the State Government. The outstandingbalance is subject to monetary correction for inflation by the variation in theIGP-DI inflation index and will bear interest at 8.18% per year, compoundedsemi-annually.

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Under the FourthAmendment, the State is required to make 61 semi-annual payments due onJune 30 and December 31 of each year. The Fourth Amendment appliesretroactively to December 31, 2004, with the first payment date beingJune 30, 2005 and the final payment being due on June 30, 2035. Thesemi-annual payments are adjusted for inflation by the IGP-DI inflation indexand range from approximately R$29.4 million for the first five installments andapproximately R$76.5 million for the last installment. The 65% of dividends andinterest on capital retained by CEMIG are to be applied in the following order:(i) the settlement of any past due installments, (ii) the settlementof the installment relating to the half-year in which dividend or interest oncapital takes place, (iii) pre-payment of up to two installments and (iv) amortizationof the outstanding balance due under the CRC Account.

If the retention ofordinary dividends and interest on capital is not sufficient to cover theapplicable installment, beginning on January 1, 2008, CEMIG is entitled toretain up to 65% of any extraordinary dividends or interest on equity due tothe State Government for the payment of that installment. Furthermore, if thesum of 65% of the ordinary dividends and interest and capital and extraordinarydividends on interest and capital is not sufficient to cover an installmentdue, CEMIG is entitled to retain 100% of such dividends and interest oncapital, beginning in the six-month period immediately following that of thepast due date of the past due installment. In addition, if there is a reductionin the ownership of CEMIG by the State Government, the retention percentagewill be automatically adjusted upward such that the total dividend amountretained will remain the same.

A fifth amendment to the CRC Account is currentlybeing considered, to adjust the outstanding balance of the CRC Agreement 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. The State of Minas Gerais and CEMIGhave reached an agreement that the correct value of the outstanding balance ofthe CRC Account as of December 31, 2004 is R$2,839 million. CEMIG and the Stateof Minas Gerais are ready to sign the Fifth Amendment to the CRC Agreement, butmust wait for approval by the Cemig CRC Account Securitization Fund (*Cemig—Fundo de Investimento em Direitos Creditorios Conta CRC*),or FIDC, to which the CRC Account receivables were transferred in January 2006.

*Contracton Concessions for Generating Electric Energy, dated July 10, 1997,between the Federal Government and CEMIG*

In order toprovide electric energy generation services to the public, we entered into acontract with the Federal Government. This concession contract establishesterms of the concessions for each of our generation plants. Although theconcessions for different generation plants have different expiration dates,these concessions are extendable by the Federal Government for a period of upto 20 years upon our application. This contract grants us free access to landin the public domain, certain rights of way, and existing transmission anddistribution systems so that we may transmit the energy produced in ourgenerating stations. In return, among other things, we must maintain a minimumlevel of regularity, continuity, efficiency and safety and we must set asidefunds to account for fuel consumption, use of water resources and contributionsto the RGR. We do not pay the Charge for Use of Public Assets (*Uso do Bem Público)*,**or UBP, when generatingunder the public service regime.

This contract alsoprovides that ANEEL (formerly DNAEE) or a substitute agency will supervise usin the provision of our energy generation services and that we will be subjectto penalties if we fail to comply with certain contractual provisions. As aparty to this contract, we serve a public utility function and we must receiveauthorization from the Federal Government prior to entering into any otherentrepreneurial activities. The Federal Government may 

intervene in ourconcession at any time in order to ensure that we are providing our electricenergy generation services properly and that we are acting in compliance withthis contract.

In connection with the unbundling process, thisagreement was assigned to Cemig Generation and Transmission. This assignmentremains subject to the approval of ANEEL through an amendment to the agreement,which is expected to occur in the near future.

*Contract for Concessions of ElectricEnergy Transmission Services, dated July 10, 1997, between the FederalGovernment and CEMIG*

In July 1997,we entered into a contract with the Federal Government authorizing us toprovide our electric energy transmission services to the public untilJuly 8, 2015. This contract also provides the rates at which we may chargeour consumers for our services. Upon our application, this contract may beextended by the Federal Government, at its own discretion, for a 20-yearperiod. Pursuant to the contract, we are given free access to land in thepublic domain and certain rights of way in order to operate our electric energytransmission service. In return, among other things, we must maintain adequatetechnology, equipment, facilities and operating methods to ensure optimizationof the use of existing and future electric energy resources and we must satisfythe demands of the electric energy market. We are also required to enter into atransmission service agreement with the ONS, pursuant to which we must make thefacilities of our transmission service available to the interconnected powersystem.

These contracts also provide that ANEEL or a substitute agency willsupervise us in the provision of our energy transmission services and that wewill be subject to penalties if we fail to comply with certain contractualprovisions. The Federal Government may 

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intervenein our concession at any time in order to ensure that we are providing ourelectric energy transmission services properly and that we are complying withthis contract.

Inconnection with the unbundling process, this agreement was assigned to CemigGeneration and Transmission. The assignment was approved by ANEEL onNovember 16, 2005.

*Contract on Concessions for**Distributing**Electric Energy, dated July 10, 1997, between the FederalGovernment and CEMIG*

To enable us to provide electricity distributionservice to the public, we have a concession contract with the Brazilian FederalGovernment. This contract also provides for the rates at which we may chargeclients for our services. We may apply for a 20-year extension of theperiod of this contract, and the Federal Government has the discretion to grantor refuse this extension.

The contract gives us free access to land in thepublic domain, and certain rights of way, in order to operate our electricitydistribution service. In return we are required, among other obligations, tomaintain certain specified minimum levels of regularity, continuity, efficiencyand safety of service; to keep our infrastructure, equipment and servicesup-to-date; and to maintain availability to the population as a whole, courtesyin provision of services, and moderateness in the rates we charge.

The concession contract covers the state of MinasGerais, divided into four areas (the North, South, East, and West of thestate).

The rates we charge for our services are regulated bythe concession-granting power, which grants: (i) an annual adjustment; and(ii) an overall review every five years. The last five-year review tookplace on April 8, 2003, and the next will be on April 8, 2008.

This contract alsoprovides that ANEEL or a substitute agency will supervise us in the provisionof our energy generation services and that we will be subject to penalties ifwe fail to comply with certain contractual provisions. As a party to this contract,we serve a public utility function and we must receive authorization from theFederal Government prior to entering into any other entrepreneurial activities.The Federal Government may intervene in our concession at any time in order toensure that we are providing our electric energy generation services properlyand that we are acting in compliance with this contract.

Inconnection with the unbundling process, this agreement was assigned to CemigDistribution. The assignment was approved by ANEEL on March 31, 2005.

*Contract for the Supply and Exchangeof Electricity, and Passthrough and Transport of Power from Itaipu, dated 31May 1993, between Furnas and CEMIG*

In 1993, we signeda contract with Furnas governing the supply and exchange of energy betweenFurnas and CEMIG, for a period of 10 years, and also the transfer of power andenergy generated by Itaipu, for a period of 20 years.

Since January 2003,Decree 4,550 of December 27, 2002 has governed the sale of energygenerated by Itaipu, appointing Eletrobrás as a trader of Itaipu’s output. Thevolumes of energy purchased by CEMIG and the prices of such energy are, sincethen, established annually by ANEEL. Under decree 4,550, contracts executedwith Furnas were required to be assigned to Eletrobrás.

*Shareholder’sAgreement, dated June 18, 1997, between the State Government and Southern*

In 1999, after anew State Government administration took office, the State Government filed alawsuit to nullify this shareholders’ agreement on the grounds that it violatedthe state and federal constitutions because the Special Quorum Provisions wouldconstitute an unlawful transfer of the control of CEMIG to Southern. Accordingto the lawsuit, state legislation would be required in order for the StateGovernment to relinquish control of CEMIG to Southern.

After somepreliminary decisions unfavorable to the State Government by the lower courts,in 1999 the State Government obtained an injunction from the State Court ofAppeals, which suspended the effects of the Special Quorum Provisions pendingthe result of the lawsuit.

In August 2001, the Minas Gerais State Court of Appeals rendered adecision declaring the shareholders’ agreement null and void. Given thisdecision, the voting rights as set forth in our by-laws, not those contained inthe shareholders’ agreement, are currently in effect. Our by-laws provide thateach common share entitles the holder thereof to one vote at shareholders’meetings. The by-laws do not provide Southern with any extraordinary rights orprivileges other than the rights it possesses by virtue of its ownership of ourcommon shares. The decision of the State Court of Appeals has been appealed toa superior court, the Superior Tribunal de 

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Justiça,and a final decision, subject only to a request of amendment, was rendered inDecember 2003. Therefore the effectiveness of the shareholders’ agreementand control of CEMIG remain subject to judicial challenge in theSupreme Court.

*Indenture Covering the First PublicIssuance of Debentures, Divided into Two Series of the Same Class, WithoutGuarantee or Preference, of CEMIG, dated October 4, 2001, between CEMIGand Planner Corretora de Valores S.A.*

OnNovember 1, 2001, pursuant to an indenture entered into between us and PlannerCorretora de Valores S.A, as fiduciary agent, we publicly issued R$625 millionof debentures in two series of R$312.5 million each. The first series ofdebentures will mature on November 1, 2009 and the second series ofdebentures will mature on November 1, 2011. The debentures are subject toearly redemption at the option of the debenture holders (in 2005 in the case ofthe first series and in 2006 in the case of the second series). Upon maturity,we are obligated to pay to the debenture holders an amount equal to the indexedpar value of any debentures still outstanding plus compensatory interest. Thesedebentures are not convertible and do not have preferences or guarantees.

Should we make alate payment of any amount due to the debenture holders, we will have to pay,in addition to the amount due, a penalty of 10% of the amount due plus interestcalculated from the date payment was due to the date of actual payment at therate of 1% per month on the amount due. In addition, if we do not pay an amountdue on a maturity date, the related debentures must be accepted by us aspayment by the debenture holders for electricity that we supply to them.

The proceeds fromthis issuance were used to finance generation, transmission and distributionprojects, including projects in partnership with private sector companies inaccordance with our capital investment program for 2001 and 2002.

At the GeneralMeeting of Holders of the Company’s First Issue of Non-convertible Debenturesheld on December 3, 2004, the debenture holders approved an amendment tothe indenture providing for the compulsory exchange of the Company’s FirstIssue of Debentures for debentures to be issued by Cemig Generation andTransmission, in connection with the implementation of the process of “unbundling”of the Company. Such exchange must occur in a 180 day period beginning on thedate of the transfer of the concessions to Cemig Generation and Transmission,which date will be considered as the date of the publication of the amendmentsto the concession contracts. If CEMIG fails to make such mandatory exchange inthis time period, there will be an automatic early redemption of thedebentures. On the other hand, the time period can be extended if a debentureholders meeting so authorizes. In addition, it was provided that the debenturesto be issued by Cemig Generation and Transmission will keep the samecharacteristics and financial terms of the debentures that will be exchangedand will be guaranteed by CEMIG, the holding company.

OnNovember 1, 2005, the debentures of the first series were subject to earlyredemption at the option of the debenture holders. As an alternative toredemption, we proposed the following new terms for the debentures of the firstseries: (i) the second remuneration period (the period following the earlyredemption option date) would begin on November 1, 2005 and end onNovember 1, 2009, the date of the final maturity of the debentures of thefirst series; (ii) the debentures of the first series would earn interestcorresponding to 100% of the CDI, plus a spread of 1.20% per year, calculatedbased on a 252 business day year. Any debenture holders not agreeing to theproposed new terms could redeem the debentures of the first series inaccordance with their terms on November 1, 2005. As a result, we acquired28.49% of the outstanding debentures of the first series for an amount ofR$139.5 million, equal to the monetarily adjusted nominal value plus anyaccrued and unpaid interest. We have not yet decided whether to cancel theacquired debentures or resell them in the market.

OnNovember 1, 2006, the debentures of the second series were subject toearly redemption at the option of the debenture holders. As an alternative toredemption, we proposed the following new terms for the debentures of thesecond series: (i) the second remuneration period (the period followingthe early redemption option date) would begin on November 1, 2006 and endon November 1, 2011, the date of the final maturity of the debentures ofthe second series; and (ii) the debentures of the second series would earninterest corresponding to 104% of the CDI rate, based on a year of 252 businessdays. Any debenture holders not agreeing to the proposed new terms could redeemthe debentures of the second series in accordance with their terms onNovember 1, 2006. As a result, we acquired 52.63% of the outstandingdebentures of the second series for an amount of R$265.3 million, equal to themonetarily adjusted nominal value plus any accrued and unpaid interest. We havenot yet decided whether to cancel the acquired debentures or resell them in themarket.

In connection with the unbundlingprocess, the indenture, as amended, provided for the mandatory exchange of thedebentures issued by CEMIG for debentures issued by Cemig Generation andTransmission. Such issuance was approved by the CVM on April 17, 2007,and the exchange took place on April 27 and April 30, 2007. The debenturesissued by CemigGeneration and Transmission have the same characteristics and financialterms as the debentures that were exchanged, and are guaranteed by CEMIG, asthe holding company. The First Public Issuance of Common Debentures of CEMIGwas cancelled following the exchange. As a consequence, the debentures are nolonger listed in the *Câmara de Custódia eLiquidação,*“CETIP”.

*Financing Agreements by Extension ofCredit No. 02.2.962.3.1, dated February 7, 2002 andNo. 03.2.286.3.1 dated July 1, 2003, between BNDES and CEMIG andIntervening Third Parties*

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OnFebruary 7, 2002 and on July 1, 2003, we entered into two financingagreements pursuant to which BNDES, upon satisfaction of certain conditions,extended two loans to us in the amounts of approximately R$396.7 million andR$176.5 million, respectively. We borrowed R$335 million pursuant to theseagreements and used the proceeds to partially settle our outstandingobligations to the CCEE relating to spot market energy we purchased during theperiod of the Electricity Rationing Plan. This financing was extended to uspursuant to the terms of the General Agreement of the Electricity Sector. Thefirst loan is repayable to BNDES through 60 monthly installments over fiveyears, beginning March 15, 2003, with the final payment due onFebruary 15, 2008. The second loan is repayable to BNDES through 55monthly installments over five years, beginning August 15, 2003, with thefinal payment due on February 15, 2008. Interest on the outstandingbalance of both financings accrues at a rate of 1% over the Sistema Especial deLiquidação e Custódia (Special System for Settlement and Custody) overnightrate, or SELIC, the Brazilian benchmark interest rate. We may prepay all or apart of the outstanding balance under these agreements.

BNDEShas agreed that as a result of theunbundling process, these contracts wereassigned to Cemig Generation and Transmission.

Ourobligations under these loans were originally guaranteed by the rate revenuerelating to electricity sales to final consumers corresponding to 3.27% (asdefined in the first loan agreement) and 1.36% (as defined in the second loanagreement) of our monthly sales. As a consequence of the transferring ofthe debt to Cemig Generation and Transmission, since the revenueof CemigGeneration and Transmission is lower than that of CEMIG which guaranteedthe debt prior to the unbundling, the guarantee was increased as follows: theloans will be guaranteed by the rate revenue of Cemig Generation and Transmission relating toelectricity sales to final consumers corresponding to 9% (as defined in thefirst loan agreement) and 5% (as defined in the second loan agreement) of themonthly sales.

*Indenture Covering theThird Public Issuance of Common Debentures, Without Guarantee or Preference, ofCEMIG, dated June 14, 2004, between CEMIG and Pavarini Distribuidora deTítulos e Valores Mobiliários*

On June 14,2004, we and Pavarini Distribuidora de Títulos e Valores Mobiliários, asfiduciary agent, executed an indenture covering the public issuance of 40,000debentures, in a total amount of R$400 million. The debentures issued pursuantto this agreement are unsecured, not convertible into shares, with anominal unit value of R$10,000. On August 2, 2004, a total of 23,042 debentureswere subscribed and fully paid up, representing the total amount of R$230.4million issued on June 1, 2004. The remaining debentures, which were notsubscribed, were cancelled. The debentures will mature on the first businessday of June 2014. Upon maturity, we are obligated to pay to the debentureholders an amount equal to the indexed outstanding par value of the debenturesplus interest. The proceeds from this issuance were used to roll over part ofthe debt raised to finance investments in the distribution segment.

In connection with the unbundlingprocess, the indenture provided for the mandatory exchange of the debenturesissued by CEMIG for debentures issued by Cemig Distribution. Such exchangeoccurred on November 1, 2006. In accordance with the indenture, the debenturesissued by CemigDistribution have the same characteristics and financial terms as thedebentures that were exchanged and are guaranteed by CEMIG, as the holdingcompany. The Third Public Issuance of Common Debentures of CEMIG were cancelledfollowing the exchange. As a consequence, the debentures are no longer listedin the *Câmara de Custódia e Liquidação,*“CETIP”.

*SecondIssuance of Commercial Paper of Cemig Distribution*

On December 14, 2006, Cemig Distribution entered into a placementagreement with Banco Citibank S.A. relating to the second public issuance ofcommercial paper of Cemig Distribution in an aggregate total amount of R$200million. On January 2, 2007, the commercial paper was subscribed and fully paidup. The commercial paper matured 180 days after the subscription date, on July1, 2007. Upon maturity, Cemig Distribution will be obligated to pay tothe holders an amount equal to the par value of the paper plus interest at therate of 102% of CDI.

*Third Issuance of Commercial Paperof Cemig Distribution*

On June 12, 2007, CemigDistribution entered into a placement agreement with Caixa Econômica Federalrelating to the third public issuance of commercial paper of Cemig Distributionin an aggregate total amount of R$400 million. The commercial paper wassubscribed and fully paid up on June 29, 2007. The commercial paper matures 180days after the subscription date, on December 26, 2007. Upon maturity, CemigDistribution will be obligated to pay to the holders an amount equal to the parvalue of the paper plus interest at the rate of 101.6% of CDI.

*Banknotes (Cédulas deCrédito Bancário) to Banco do Brasil S.A. — Cemig Distribution and CemigGeneration and Transmission*

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On October 24,2006, Cemig Generation and Transmission issued banknotes (*Cédulas de Crédito Bancário*) to Banco doBrasil S.A. in the aggregate amount of R$900 million, which were used to repayoutstanding obligations previously issued by Cemig Generation and Transmissionwith the same aggregate value. The banknotes bear interest equal to 104.1% ofthe CDI, and are guaranteed by CEMIG. Payment of the banknotes will be made in three equal annual installmentsin 2012, 2013 and 2014. 

OnOctober 24, 2006, Cemig Distribution also issued banknotes (*Cédulas de Crédito Bancário*) to Banco doBrasil S.A. in the aggregate amount of R$300 million, with the same terms andconditions.

*ElectricitySale Contracts in the Regulated Environment (CCEARs)*

In2004, Law 10,848 and Decree 5,163 came into force, altering the structure ofthe electricity sector, especially the sale of electricity. Under the newregulations, the distributors must buy energy, to serve their markets, throughpublic auctions in the regulated environment, in which the CCEARs are signed.In December 2004, the first auction of existing electricity under the newindustry model was held. In this auction Cemig Distribution and CemigGeneration and Transmission made electricity purchase and sale contracts.

CemigDistribution purchased, to serve its market, 530 average MW in contracts withterms of eight years, with the supply starting on January 1, 2005, at anaverage price of R$57.51/MWh, and 919 average MW in contracts with terms ofeight years with the supply starting on January 1, 2006 at an averageprice of R$67.33 MWh. The contracts were signed with 12 companies holdinggeneration concessions, including Cemig Generation and Transmission.

Inthe same auction Cemig Generation and Transmission sold 927 average MW incontracts with terms of eight years, with the supply beginning onJanuary 1, 2006. The sale price of the electricity is R$69.58/MWh,referring to January 2005. The contracts were signed with 35 distributors,including Cemig Distribution, which serve consumers in all the regions of theBrazilian national grid system.

In April 2005, the second auction of existing electricityunder the new industry model was held. In this auction Cemig Distribution andCemig Generation and Transmission signed CCEARs. Cemig Distribution purchased,to serve its market, 105 average MW in contracts with terms of eight years,with the supply starting on January 1, 2008, at an average price ofR$83.13/MWh. The contracts were signed with ten companies holding generation concessions,including Cemig Generation and Transmission. In the same auction CemigGeneration and Transmission sold 105 average MW in contracts with terms ofeight years, with the supply beginning on January 1, 2008. The sale priceof the electricity is R$83.50/MWh, referring to April 2005. The contractswere signed with 34 distributors, including Cemig Distribution, which supplyconsumers in all the regions of the Brazilian national grid system.

In October 2005, the third and fourth auctions ofexisting electricity took place, however Cemig Distribution and CemigGeneration and Transmission did not participate in these auctions.

In December 2005 thefirst auction for electricity to be produced by the new generation plants washeld, and Cemig Distributionacquired 282.8 average MW in contracts with terms of 30 and 15 years forhydroelectric and thermal energy, respectively, which is equivalent toapproximately 76% of its energy needs for 2008, 2009 and 2010 as described inan energy requirements statement provided by Cemig Distribution to the MME.

In June 2006, the second auction for electricity to be produced by thenew generation plants was held, and Cemig Distribution acquired 98 average MWin contracts with terms of 30 and 15 years for hydroelectric and thermal energy,respectively. In the same auction, Cemig Generation and Transmission sold 355average MW in contracts with terms of 30 years. The supply of energy underthese contracts will begin on January 1, 2009.

In October 2006, thethird auction for electricity to be produced by new generation plants was held,and Cemig Distribution acquired 48 average MW in contracts with terms of 30 and15 years for hydroelectric and thermal energy, respectively, with the supplybeginning on January 1, 2011. Cemig Generation and Transmission did not takeplace in this auction.

*Purchases of Power by CemigDistribution:*At the end of 2006, acquisitions by CemigDistribution in the regulated environment totaled 1,501 average MW undercontracts for “existing energy” (generated by existing power plants), withstart dates ranging from 2005 to 2008, and 429 average MW in contracts for “newenergy” (from new generation projects) with start dates ranging from 2008 to2011, to meet part of its needs for energy in those years. 

*Sales of Powerby Cemig Generation and Transmission:*Similarly, at the endof 2006, sales made by Cemig Generation and Transmission in the regulatedenvironment totaled 989 average MW in “existing energy” contracts with datesranging from 2006 to 2008, and 355 average MW in contracts for supply from newgeneration projects, with supply starting in 2009, and 26 average MW to

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be provided by one new hydro power plant, Baguari,with supply starting in 2010. These figures include the reductions under the “Surplusesand Deficits Compensation Mechanism” (MCSD).

For more information aboutthe CCEAR and the energy auctions, see “Annex A—The Brazilian PowerIndustry”.

*Contractsfor Sale of Energy to Free Consumers*

Cemig Generation and Transmission sold,through “bilateral” contracts, power capacity averaging approximately 1,900 MWto a wide range of Free Consumers, the majority of them being in the State ofMinas Gerais, under contracts with terms between six and ten years. The averageprice of these transactions for the year 2006 is around R$77/MWh. In 2010, assome of these contracts expire, there will be a reduction of approximately 600MW in the amount contracted, especially with large clients such as Usiminas,Cosipa and White Martins. Our expectation is that these contracts will berenewed at better prices in 2010 than the present prices, since we do notexpect that there will be the same excess of energy in 2010 that exists today.

These contractsprovide for flexibility in the clients’ purchase of energy. The revenue of CemigGeneration and Transmission may vary due to this contractual flexibility.

*Gasmig ShareholdersAgreement and Association Agreement*

As a condition to the investment ofPetrobras in Gasmig, we and Petrobras entered into a Shareholders Agreement,pursuant to which the prior approval of Petrobras is required in mattersrelated, among others, to new investments to be conducted by Gasmig,distribution of dividends, nomination of members to the Board of Directors, theissuance of new shares or debentures, annual budget investment plans and anytransaction involving more than R$1.5 million. Under the terms of the GasmigShareholders Agreement, our ability to transfer our shares in Gasmig islimited, and Petrobras shall have a right of first refusal in any future transferof shares. As a result of this Shareholders Agreement, our ability to manageGasmig was considerably reduced.

OnDecember 15, 2004, CEMIG sold part of its shares in Gasmig, correspondingto 40% of the registered capital, 0.5% to Gaspetro and 39.5% to its subsidiary,TSS Participações S.A. The total value of the transaction was R$154 million,providing a gain for CEMIG of R$102 million. This gain was posted in the incomestatement for 2004 as non-operational revenue. On July 26, 2006, TSS, a wholly-ownedsubsidiary of Gaspetro, was merged into Gasmig, and Gaspetro remained with 40%of Gasmig’s registered capital.

Gasmig is not a consolidated subsidiary in ourfinancial statements as of the year ended December 31, 2004, in accordancewith the FASB’s 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.”  We consolidated Gasmig’s revenues andexpenses for the period from January 1, 2004 to December 15, 2004.

This sale is theresult of the Association Agreement between CEMIG, Gasmig, Gaspetro andPetrobras signed on August 25, 2004, the purpose of which is to developthe market for natural gas throughout the State of Minas Gerais. Under theagreement, a Guidelines Plan specifies the markets to be served, the investmentto be made by Petrobras and its subsidiaries in gas pipelines and theinvestment to be made by Gasmig in expansion of the gas distribution networks.

This capitalinvestment will increase the volume of gas sold from its present level of 2.7million m3/day to 4.2 million m3/day at the end of 2006, and 10.0 millionm3/day in 2023. In 2005 Gasmig sold 1.9 million m3/day.

*Agreement between CEMIG and companies in the New Agreementof the Electric Sector*

Resolution No. 91 of the Electricity CrisisManagement Chamber (Câmara de Gestão da Crise de Energia Elétrica), or GCE, ofDecember 21, 2001, and Law 10,438 of April 26, 2002, established theprocedures for implementing the General Agreement for the Electricity Sector,which came into force on December 27, 2001, and resulted in the repaymentby consumers of losses incurred by distributors and generators during theperiod of rationing of 2001 to 2002. These repayments are referred to as anextraordinary rate readjustment, or RTE (Recomposição TarifáriaExtraordinária). The RTEs became part of the assets of the companies, and areamortized through “extraordinary revenue”. See note 4 to our consolidatedfinancial statements.

A condition to receipt of the RTE is that therecipient must not to be involved in any lawsuit with ANEEL that questions theRTE or any related regulation. As CEMIG has contested the clearance process atthe CCEE, ANEEL issued an order to suspend the payment of the RTE to CEMIG.

CEMIG executed a settlement agreement with ANEEL, theCCEE and the CCEE participants, to settle the lawsuit CEMIG filed to contestthe procedures used by the CCEE during the settlement process. As a conditionto the agreement, CEMIG withdrew its

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lawsuit against ANEEL. As a result of this agreement,ANEEL revoked the ruling that suspended the payment of the RTE to ourdistribution subsidiary, which will result in a payment of approximately R$219million to CEMIG. CEMIG agreed to repay the other CCEE participants theoutstanding amounts that ANEEL calculated as being due by CEMIG during thesettlement process held by the CCEE between September 2002 andJanuary 2003. The calculation of the exact amount due to the participantsof the CCEE was determined by the CCEE to be a total of R$171 million, and suchamount  is being paid in up to 50installments, depending on the total amount due to each creditor and areindexed to the SELIC interest rate plus a spread of 1%. We had fully accrued aliability related to this matter. See “Item 8. Financial Information — LegalProceedings — Regulatory Matters.”

*The Cemig CRC Account Securitization Fund, dated asof January 26, 2006.*

As part of our taxplanning on January 26, 2006 we created the Cemig CRC AccountSecuritization Fund (*Cemig — Fundo deInvestimento em Direitos Creditorios Conta CRC*), or the FIDC. TheFIDC was arranged and placed by Banco Itaú BBA S.A. and Banco Bradesco S.A.,and it is managed by Intrag Distribuidora de Títulos e Valores MobiliáriosLtda., an affiliate of Banco Itaú BBA S.A. The FIDC will continue until thefull amortization of the receivables under the Fourth Amendment to the CRCAccount Agreement, which is expected to occur no later than June 2035.

We assigned allour receivables under the CRC Account Agreement to the FIDC. The present valueof the CRC Account receivables transferred to the FIDC as of December 31, 2006 isR$1,726 million. The FIDC is composed of 900,000,000 senior quotas and760,125,012 non-transferable subordinated quotas, with the nominal value ofR$1.00 per each quota. The quotas were fully subscribed and paid in onJanuary 27, 2006 and we subscribed to and hold all the subordinatedquotas.

The senior quotashave a benchmark return of the CDI plus 1.70% per year, and will be amortizedover a 10 year period in 20 semi-annual payments. Each of the semi-annualpayment dates of the senior quotas match the dates on which CEMIG pays itssemi-annual dividends, and consequently gets repaid under the Fourth Amendmentto the CRC Account Agreement. 65% of the dividends payable to the StateGovernment on each dividend payment date are retained by CEMIG andautomatically transferred to the FIDC. In the event that dividends are notsufficient to make a certain scheduled payment with respect to the seniorquotas, CEMIG, as a co-obligor, is required to contribute whatever amount isnecessary to make the scheduled payment. The amortization schedule was designedto meet CEMIG’s dividend forecast and to minimize the risk of CEMIG beingrequited to make any additional payment. The subordinated quotas will beamortized with any excess of cash available at the FIDC or upon the terminationof the FIDC.

**ExchangeControls**

There are norestrictions on the ownership of preferred shares or common shares by legalentities domiciled outside Brazil. However, your right to convert dividendpayments and proceeds from the sale of preferred shares or common shares intoforeign currency and to remit such amounts outside Brazil is subject torestrictions under foreign investment legislation which generally requires,among other things, that you register the relevant investment with the CentralBank and the CVM.

Investments in thepreferred shares through the holding of ADSs, or in the common shares throughthe holding of common share ADSs, must be made pursuant to Annex V toResolution No. 1,289, as amended, of the National Monetary Council, alsoknown as the Annex V Regulations. Direct investments in the preferred sharesupon the cancellation of the ADSs, or in the common shares upon thecancellation of the common share ADSs, may be held by foreign investors underLaw No. 4,131 of September 3, 1962 or Resolution No. 2,689 ofthe 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 ResolutionNo. 2,689, foreign investors may invest in almost all financial assets andengage in almost all transactions available in the Brazilian financial andcapital markets, provided that certain requirements are fulfilled. Inaccordance with Resolution No. 2,689, the definition of foreign investorincludes individuals, legal entities, mutual funds and other collectiveinvestment entities that are domiciled or headquartered abroad.

Securities andother financial assets held by Resolution No. 2,689 investors must beregistered or maintained in deposit accounts or in the custody of an entityduly licensed by the Central Bank or the CVM. In addition, any transfer of asecurity that is held pursuant to Resolution No. 2,689 must be madethrough the stock exchanges or organized OTC markets licensed by the CVM,except for a transfer resulting from a corporate reorganization outside ofBrazil or occurring upon the death of a foreign investor by operation of law orwill.

Holders of ADSs orcommon share ADSs who have not registered their investment with the CentralBank could be adversely affected by delays in, or refusals to grant, anyrequired government approval for conversions of payments made in *reais* and remittances abroad of theseconverted amounts.

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The Annex VRegulations provide for the issuance of depositary receipts in foreign marketsin respect of shares of Brazilian issuers. The ADSs have been approved underthe Annex V Regulations by the Central Bank and the CVM, and the common shareADSs have been approved by the CVM (since authorization from the Central Bankis no longer necessary).

Electroniccertificates of registration have been issued in the name of Citibank, N.A.,the depositary bank, with respect to the ADSs and the common share ADSs, andare maintained by Citibank Distribuidora de Títulos e Valores Mobiliários S.A.,the Brazilian custodian for the preferred shares and the common shares, on behalfof the depositary bank. These electronic certificates of registration areregistered through the Central Bank Information System. Pursuant to thecertificates of registration, the custodian and the depositary bank are able toconvert dividends and other distributions or sales proceeds with respect to thepreferred shares represented by ADSs and the common shares represented by thecommon share ADSs into foreign currency and remit the proceeds outside Brazil.In the event that a holder of ADSs exchanges such ADSs for preferred shares, ora holder of common share ADSs exchanges such common share ADSs for commonshares, such holder will be entitled to continue to rely on the depositary bank’scertificate of registration for five business days after the exchange.Thereafter, the holder may not be able to convert into foreign currency andremit outside Brazil the proceeds from the disposition of, or distributionswith respect to, the preferred shares or the common shares, unless the holderis a duly qualified investor under Resolution No. 2,689 by registeringwith the CVM and the Central Bank and appointing a representative in Brazil. Ifnot so registered, the holder will be subject to less favorable Brazilian taxtreatment than a holder of ADSs or common share ADSs. Regardless ofqualification under Resolution No. 2,689, residents in tax havens aresubject to less favorable tax treatment than other foreign investors. See “—Taxation—BrazilianTax Considerations.”

Under currentBrazilian legislation, the Federal Government may impose temporary restrictionsof foreign capital abroad in the event of a serious imbalance or an anticipatedserious imbalance of Brazil’s balance of payments. For approximately ninemonths in 1989 and early 1990, the Federal Government froze all dividend andcapital repatriations held by the Central Bank that were owed to foreign equityinvestors, in order to conserve Brazil’s foreign currency reserves. Theseamounts were subsequently released in accordance with Federal Governmentdirectives. We cannot assure you that the Federal Government will not impose similarrestrictions on foreign reparations in the future.

**Taxation**

The followingsummary contains a description of the material Brazilian and U.S. federalincome tax consequences of the purchase, ownership and disposition of preferredshares, common shares, ADSs or common share ADSs by a U.S. person, as definedin the Internal Revenue Code of 1986, or the Code, or a holder that otherwisewill be subject to U.S. federal income tax on a net income basis in respect ofpreferred shares, common shares, ADSs or common share ADSs, which we refer toas a U.S. holder, but it does not purport to be a comprehensive description ofall of the tax considerations that may be relevant to a decision to purchasepreferred shares, common shares, ADSs or common share ADSs. In particular thissummary deals only with U.S. holders that will hold preferred shares, commonshares, ADSs or common share ADSs as capital assets and does not address thetax treatment of U.S. holders that own or are treated as owning 10% or more ofthe voting shares of the Company or that may be subject to special tax rules,such as banks, insurance companies, dealers in securities or currencies,persons that will hold preferred shares, common shares, ADSs or common shareADSs as a position in a “straddle” or a “conversion transaction” for taxpurposes, and persons that have a “functional currency” other than the U.S.dollar.

The summary isbased upon tax laws of Brazil and the United States as in effect on the datehereof which are subject to change possibly with retroactive effect.Prospective purchasers of ADSs or common share ADSs are encouraged to consulttheir own tax advisors as to the Brazilian, U.S. or other tax consequences ofthe purchase, ownership and disposition of preferred shares, common shares,ADSs or common share ADSs, including, in particular, the effect of any foreign,state or local tax laws.

Although there iscurrently no income tax treaty in force between Brazil and the United States,the tax authorities of both countries have had discussions that may culminatein such a treaty. No assurance can be given, however, as to whether or when atreaty will enter into force or how it will affect the U.S. holders ofpreferred shares, common shares, ADSs or common share ADSs.

*Brazilian Tax Considerations*

*General*.The following discussion summarizes the main Brazilian material taxconsequences of the acquisition, ownership and disposition of preferred shares,common shares, ADSs or common share ADSs, as the case may be, by a holder thatis not domiciled in Brazil, which we refer to as a non-Brazilian holder forpurposes of Brazilian taxation. In the case of a holder of preferred shares orcommon shares, we assume the investment is registered with the Central Bank.The following discussion does not address all of the Brazilian taxconsiderations applicable to any particular non-Brazilian holder. Therefore,each non-Brazilian holder should consult his or her own tax adviser concerningthe Brazilian tax consequences of an investment in our preferred shares, commonshares, ADSs or common share ADSs.

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*Taxationof Dividends*. Dividends paid by us, including stock dividendsand other dividends paid in property to the depositary in respect of thepreferred shares or common shares, or to a non-Brazilian holder in respect ofthe preferred shares or common shares, are currently exempted from withholdingtax in Brazil to the extent that the dividends are paid out of profits earned afterJanuary 1, 1996. Dividends relating to profits generated prior toJanuary 1, 1996 may be subject to Brazilian withholding tax at varyingrates, depending on the year the profits were generated.

*Paymentsof Interest on Capital*. Law No. 9,249, dated as ofDecember 26, 1995, as amended, permits Brazilian corporations to makedistributions to shareholders of interest on equity, or interest attributed toshareholders’ equity. These distributions may be paid in cash.  Such payments represent a deductible expense  from the payor’s  income tax and social contribution tax basis.This interest is limited to the daily pro rata variation of the FederalGovernment’s long-term interest rate, as determined by the Central Bank fromtime to time, and cannot exceed the greater of:

·                                          50%of net income (before taxes for social contribution on net profits, income tax,and the deduction of the interest attributable to shareholders’ equity) for theperiod in respect of which the payment is made; or

·                                          50%of retained earnings as of the date of the beginning of the period in respectof which the payment is made.

Any payment ofinterest on capital to shareholders (including holders of ADSs in respect ofpreferred shares and common share ADSs in respect of common shares) is subjectto a withholding tax at a rate of 15%. These payments may be included, at theirnet value, as part of any mandatory dividend.

To the extent thatpayments of interest on capital are included as part of a mandatory dividend,we are required to distribute an additional amount to ensure that the netamount received by shareholders, after payment of the applicable withholdingtax is at least equal to the mandatory dividend.

Distributions ofinterest on net equity to foreign holders may be converted into U.S. dollarsand remitted outside Brazil, subject to applicable exchange controls, to theextent that the investment is registered with the Brazilian Central Bank.

We cannot assure you that our Board of Directors will notdetermine that future distributions should be made by means of dividends orinterest on net equity.

*Taxationof Gains*.

For purposes ofBrazilian taxation, there are two types of non-Brazilian holders of ADSs orpreferred shares:

·                                          marketinvestors, which represent those non-Brazilian residents who register with theCentral Bank and the CVM to invest in Brazil, in accordance with ResolutionNo. 2,689 of the National Monetary Council; and

·                                          ordinarynon-Brazilian holders, which include any and all non-residents in Brazil whoinvest in the country through any other means.

The commentscontained below are applicable to all non-Brazilian holders, includingnon-Brazilian holders investing under Resolution No. 2,689, except whereotherwise noted.

ResolutionNo. 2,689 grants a favorable tax treatment to all non-Brazilian holders of preferred shares or common sharesprovided the respective disposal occurs on the Brazilian stock exchange and thefollowing conditions are met:

·                                          toappoint a representative in Brazil with powers to take action relating to theirinvestment;

·                                          toappoint an authorized custodian in Brazil for their investments;

·                                          toregister as a foreign investor with the CVM; and

·                                          toregister their investment with the Central Bank.

As mentioned, the sale of preferred shares or common sharesby U.S. market investors carried out on the Brazilian stock exchange isexempted from the income tax rate. We cannot assure you that the currentpreferential treatment for U.S. market investors under ResolutionNo. 2,689 will continue in the future.

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The sale of preferred shares or common shares that occursout of the Brazilian stock exchange will be subject to the same tax treatmentapplicable to Ordinary U.S. Holders. The redemption or distribution of proceedsderiving from the liquidation of preferred shares or common shares will betreated as a sale carried out of the Brazilian stock exchange.

*Non-Brazilian Holders*

Non-Brazilian holders are subject to income tax at a 15%rate, as of January 1, 2005, on gains realized on the sale, redemption ordistribution of proceeds deriving from the liquidation of preferred shares orcommon shares.

With respect to the cost of acquisition to be adopted forcalculating such gains, Brazilian law has conflicting provisions regarding thecurrency in which such amount must be determined. Cemig’s Brazilian counsel’sview is that the capital gains should be based on the positive differencebetween the cost of acquisition of the preferred shares or common sharesregistered with Brazilian Central Bank in foreign currency and the value ofdisposition of those preferred shares or common shares in the same foreigncurrency. This view has been supported by a precedent issued by the Brazilianadministrative court. However, considering that tax authorities are not boundby such precedent, assessments have been issued adopting the cost ofacquisition in Brazilian currency.

As of January 1, 2005 the purchase price of preferredshares or common shares sold on the Brazilian stock exchange is subject to awithholding tax rate of 0.005%, except in case of non-Brazilian holders, whichinvest in Brazil pursuant to Resolution No. 2,689. This tax may be offsetagainst the 15% income tax due on the gains realized upon the sale of thepreferred shares or common shares. The withholding tax must be withheld by oneof the following entities: (i) the agent receiving the sale or dispositionorder from the client; (ii) the stock exchange responsible for registeringthe transactions; or (iii) the entity responsible for the settlement andpayment of the transactions.

Any exercise of preemptive rights relating to the preferredshares or common shares will not be subject to Brazilian taxation. Conversely,any gain on the sale or assignment of preemptive rights relating to thepreferred shares or common shares by the depositary on behalf of the holders ofADSs or common share ADSs or by a non-Brazilian holder of preferred shares orcommon shares will be subject to the same rules of taxation applicable tothe sale or assignment of preferred shares or common shares. The maximum rateis currently 15%.

*Sale of ADS, common share ADS, preferred shares and common shares byU.S. Holders to other non-residents in Brazil*

Pursuant to Article 26 of Law No. 10,833,published on December 29, 2003, the sale of property located in Brazilinvolving non-resident investors is subject to Brazilian income tax as ofFebruary 1, 2004. Our understanding is that ADSs do not qualify asproperty located in Brazil and, thus, should not be subject to the Brazilianwithholding tax. Insofar, as the regulatory norm referred to inArticle 26, is recent and generic and has not been tested through theadministrative or judicial courts, we are unable to assure the final outcome ofsuch discussion.

If such argumentdoes not prevail, it is important to mention that with respect to the cost ofacquisition to be adopted for calculating such gains,  Brazilian law has conflicting provisionsregarding the currency in which such amount must be determined. CEMIG’sBrazilian counsel’s view is that the capital gains should be based on thepositive difference between the cost of acquisition of the preferred shares orcommon shares registered with Brazilian Central Bank in foreign currency andthe value of disposition of those preferred shares or common shares in the sameforeign currency. This view has been supported by a precedent issued by theBrazilian administrative court. However, considering that tax authorities arenot bound by such precedent, assessments have been issued adopting the cost ofacquisition in Brazilian currency.

*Gains on the exchange of ADSs forpreferred shares or the exchange of common share ADSs for common shares*

The exchange of ADSs for preferred shares or common shareADSs for common shares is not subject to Brazilian tax. Non-Brazilian Holdersmay exchange ADSs for the underlying preferred shares or common share ADSs forthe underlying common shares, sell the preferred shares or common shares on aBrazilian stock exchange and remit abroad the proceeds of the sale within fivebusiness days from the date of exchange (in reliance on the depositary’selectronic registration), with no tax consequences.

Upon receipt of the underlying preferred shares in exchangefor ADSs or the underlying common shares in exchange for common share ADSs,Non-Brazilian Holders may also elect to register with the Central Bank the U.S.dollar value of such preferred shares or common shares as a foreign portfolioinvestment under Resolution No. 2689/00, which will entitle them to thetax treatment referred above in connection with “U.S. market investors”.

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Alternatively,the Non-Brazilian Holder is also entitled to register with the Central Bank theU.S. dollar value of such preferred shares or common shares as a foreign directinvestment under Law 4,131/62, in which case the respective sale would besubject to the tax treatment referred in the section “Ordinary Non-BrazilianHolders”.

*Gains on the exchange of preferred sharesfor ADSs or common shares for common share ADSs*

The deposit ofpreferred shares in exchange for the ADSs of common shares in exchange for thecommon share ADSs may be subject to Brazilian income tax on capital gains ifthe amount previously registered with the Central Bank as a foreign investmentin preferred shares or common shares or, in the case of other market investorsunder Resolution No. 2,689, the acquisition cost of the preferred sharesor common shares, as the case may be, is lower than:

·                                          theaverage price per preferred share or common share on the Brazilian stockexchange on which the greatest number of such preferred shares or common shareswere sold on the day of deposit; or

·                                          ifno preferred shares or common shares were sold on that day, the average priceon the Brazilian stock exchange on which the greatest number of preferredshares or common shares were sold during the 15 preceding trading sessions.

The differencebetween the amount previously registered, or the acquisition cost, as the casemay be, and the average price of the preferred shares or common shares,calculated as set forth above, is considered a capital gain subject to incometax at a rate of 15%.

*BeneficiariesResiding or Domiciled in Tax Havens or Low-Tax Jurisdictions*.

Law No. 9,430, dated as ofDecember 27, 1996, defines low-tax jurisdictions as those that do not taxincome or impose a rate lower than 20%.

 Law No. 9,779, dated as ofJanuary 19, 1999, states that, except under limited circumstances, anyincome derived from operations by a beneficiary that resides or is domiciled ina country considered to be a tax haven is subject to income tax to be withheldby the source at a rate of 25%.

Accordingly,if the distribution of interest attributed to shareholders’ equity is made to abeneficiary residing or domiciled in a tax haven, the applicable income taxwill be at a rate of 25% instead of 15%. The increased rate also applies forcapital gains earned in transactions carried out of the Brazilian stockexchange and paid to residents of low-tax jurisdictions as ofFebruary 2004. However, the increased rate does not apply to dividendsdistributions, which remain exempted even if the beneficiary resides in a low-taxjurisdiction.

Inaccordance with Law No. 9,959, non-Brazilian holders of ADSs, preferredshares, common share ADSs or common shares, which are resident in tax havensare also excluded from the tax incentives granted to holders of ADSs andinvestors under Resolution No. 2,689 as of January 1, 2000 and willbe subject to the same tax treatment applicable to holders that are resident ordomiciled in Brazil in case of transactions carried out on the Brazilian stockexchange.

*Taxationof Foreign Exchange Transactions*. A financial transaction taxis imposed on the conversion of *reais*into foreign currency and on the conversion of foreign currency into *reais*. Although the current applicablerate for almost all foreign currency exchange transactions is zero, the Ministryof Finance may increase the rate at any time, up to 25%. However, it may onlydo so with respect to future transactions.

*Taxationof Bonds and Securities Transactions*. Law No. 8,894,dated as of June 21, 1994, created the Tax on Financial Transactions, orIOF, which may be imposed on any transaction involving bonds and securities,even if the transaction includes Brazilian stock, futures or commoditiesexchanges. The rate of IOF/Títulos with respect to transactions of preferredshares, ADSs, common shares and common share ADSs is currently zero, althoughthe executive branch may increase the rate up to 1.5% per day of the terms ofthe securities, but only with respect to future preferred shares, commonshares, ADSs and common share ADSs transactions.

*Other Brazilian Taxe*s. SomeBrazilian states impose gift and inheritance tax on gifts or bequests made byindividuals or entities not domiciled or residing in Brazil to individuals orentities domiciled or residing within such states. There are no Brazilianstamp, issue, registration, or similar taxes or duties payable by holders ofpreferred shares, common shares, ADSs or common share ADSs.

CPMF is imposed onbank account debits at  0.38%.Constitutional Amendment No. 42/2003 approved the continued imposition ofthe CPMF tax until December 31, 2007. The responsibility for thecollection of the CPMF tax is borne by the financial

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institution that carriesout the relevant financial transaction. Additionally, when the non-Brazilianholder transfers the proceeds from the sale or assignment of preferred sharesor common shares by a currency exchange transaction, the CPMF tax will belevied on the amount to be remitted abroad in *reais*.If we perform any exchange transaction in connection with ADSs, common share ADSs,preferred shares or common shares, we will bear the CPMF tax.

Non-Brazilian holders investing in theBrazilian stock exchange are granted a CPMF exemption upon the entrance offunds into Brazil and the remittance abroad.

*U.S. Tax Considerations*

As of December 31,2006, no common share ADSs were outstanding. The following U.S. tax considerations refer only to our preferred sharesand the preferred share ADSs.

In general, forU.S. federal income tax purposes, holders of ADRs evidencing ADSs will be treatedas the beneficial owners of the preferred shares represented by those ADSs.

*Taxationof Distributions*. Distributions with respect to the preferredshares or the ADSs (other than distributions in redemption of the preferredshares subject to Section 302(b) of the Code or in a liquidation ofthe Company) 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 preferred shares or ADSsto qualify as dividends for U.S. federal income tax purposes depends on thefuture profitability of the Company and other factors, many of which are beyondthe control 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 thepreferred shares or ADSs, and thereafter as capital gain (provided that thepreferred shares or ADSs are held as capital assets). As used below, the term “dividend”means a distribution that constitutes a dividend for U.S. federal income taxpurposes. Cash dividends (including amounts withheld in respect of Braziliantaxes) paid with respect to (i) the preferred shares generally will beincludible in the gross income of a U.S. holder as ordinary income on the dayon which the dividends are received by the U.S. holder or (ii) thepreferred shares represented by ADSs 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 depositary bank and, in either case, will not be eligiblefor the dividends received deduction allowed to corporations. Dividends paid in*reais* will be includible in the incomeof a U.S. holder in a U.S. dollar amount calculated by reference to theexchange rate in effect on the day they are received by the U.S. holder, in thecase of preferred shares, or the depositary bank, in the case of preferredshares represented by ADSs.

If dividends paidin *reais* are converted into U.S.dollars on the day they are received by the U.S. holder or the depositary bank,as the case may be, U.S. holders generally should not be required to recognizeforeign currency gain or loss in respect of the dividend income. U.S. holdersshould consult their own tax advisors regarding the treatment of any foreigncurrency gain or loss if any *reais*received by the U.S. holder or the depositary bank are not converted into U.S.dollars on the date of receipt, as well as the tax consequences of the receiptof any additional *reais* from the custodian onaccount of Brazilian inflation.

Dividendsgenerally will constitute foreign source income and, with certain exceptions,for taxable years beginning on or before December 31, 2006, will be “passiveincome” or “financial services income”, which is treated separately from other types of income for U.S. foreigntax credit purposes. For taxable years beginning after December 31, 2006,such income generally will constitute “passive category income” or, in the caseof certain U.S. holders, “general category income,” for foreign tax creditpurposes. In the event Brazilian withholding taxes are imposed on suchdividends, such taxes may be treated as a foreign income tax eligible, subjectto generally applicable limitations and conditions under U.S. federal incometax law, for credit against a U.S. holder’s U.S. federal income tax liability (orat a U.S. holder’s election, may be deducted in computing taxable income). Thecalculation and availability of foreign tax credits and, in the case of a U.S.holder that elects to deduct foreign taxes, the availability of deductions,involves the application of rules that depend on a U.S. holder’sparticular circumstances. In the event Brazilian withholding taxes are imposed,U.S. holders should consult their own tax advisors regarding the availabilityof foreign tax credits with respect to Brazilian withholding taxes.

It is not entirelyclear whether the preferred shares will be treated as “preferred stock” or “commonstock” within the meaning of section 305 of the Code. If the preferred sharesare treated as “common stock” for purposes of section 305, distributions toU.S. holders of additional shares of such “common stock” or preemptive rightsrelating to such “common stock” with respect to their preferred shares or ADSsthat are made as part of a pro rata distribution to all shareholders of theCompany generally will not be treated as dividend income for U.S. federalincome tax purposes, but could result in additional U.S.-source taxable gainupon the sale of such additional shares or preemptive rights. On the otherhand, if the preferred shares are treated as “preferred stock” within themeaning of section 305, or if the U.S. holder receives a distribution ofadditional shares or preemptive rights other than as described in the precedingsentence, such distributions (including amounts withheld in respect of anyBrazilian taxes) will be treated as dividends that are includible in the U.S.holder’s gross income to the same extent and in the same manner asdistributions payable in cash. In that

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event, the amountof such distribution (and the basis of the new shares or preemptive rights soreceived) generally will equal the fair market value of the shares orpreemptive rights on the date of distribution.

A holder ofpreferred shares or ADSs that is not a U.S. holder generally will not besubject to U.S. federal income or withholding tax on dividends received onpreferred shares or ADSs, unless such income is effectively connected with theconduct by the holder of a trade or business in the United States.

*QualifiedDividend Income*. Notwithstanding the foregoing, certaindividends received by individual U.S. holders that constitute “qualifieddividend income” will be subject to a reduced maximum marginal U.S. federalincome tax rate. Qualified dividend income generally includes, among otherdividends, dividends received during the taxable year from “qualified foreigncorporations.”  In general, a foreigncorporation is treated as a qualified foreign corporation with respect to anydividend paid by the corporation with respect to stock of the corporation thatis readily tradable on an established securities market in the United States.For this purpose, a share is treated as readily tradable on an establishedsecurities market in the United States if an ADR backed by such share is sotraded.

Notwithstandingthis previous rule, dividends received from a foreign corporation that is apassive foreign investment company (as defined in section 1297 of the Code), orin either the taxable year of the corporation in which the dividend was paid orthe preceding taxable year will not constitute qualified dividend income. Inaddition, the term “qualified dividend income” will not include, among otherdividends, any (i) dividends on any share of stock or ADS which is held bya taxpayer for 60 days or less during the 120-day period beginning on thedate which is 60 days before the date on which such share or the shares backingthe ADS become ex-dividend with respect to such dividends (as measured undersection 246(c) of the Code) or (ii) dividends to the extent that thetaxpayer is under an obligation (whether pursuant to a short sale or otherwise)to make related payments with respects to positions in substantially similar orrelated property. Moreover, special rules apply in determining a taxpayer’sforeign tax credit limitation under section 904 of the Code in the case ofqualified dividend income.

Individual U.S.holders should consult their own tax advisors to determine whether or notamounts received as dividends from us will constitute qualified dividend incomesubject to a reduced maximum marginal U.S. federal income tax rate and, in suchcase, the effect, if any, on the individual U.S. holder’s foreign tax credit.

*Taxationof Capital Gains*. Deposits and withdrawals of preferredshares by U.S. holders in exchange for ADSs will not result in the realizationof gain or loss for U.S. federal income tax purposes.

Gain or lossrealized by a U.S. holder on the sale, redemption or other disposition ofpreferred shares or ADSs will be subject to U.S. federal income taxation ascapital gain or loss in an amount equal to the difference between such U.S.holder’s basis in the preferred shares or the ADSs and the amount realized onthe disposition. Gain realized by a U.S. holder on a sale, redemption or otherdisposition of preferred shares or ADSs, including gain that arises because theU.S. holder’s basis in the preferred shares or ADSs has been reduced because adistribution is treated as a return of capital rather than as a dividend,generally will be treated as U.S. source income for U.S. foreign tax creditpurposes.

If a Brazilianwithholding tax or income tax is imposed on the sale or disposition ofpreferred 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 creditrules to their investment in, and disposition of, preferred shares orADSs.

A holder ofpreferred shares or ADSs that is not a U.S. holder will not be subject to U.S.federal income or withholding tax on gain realized on the sale of preferredshares 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) in the case of gain realized by an individual holder, the holder ispresent in the United States for 183 days or more in the taxable year of thesale and certain other conditions are met.

*InformationReporting and Backup Withholding*. The information reportingrequirements will generally apply to U.S. holders of ADSs. 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.

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**Dividendsand Paying Agents**

We pay dividendson preferred shares and common shares in the amounts and in the manner setforth under “Item 8. Financial Information—Dividend Policy and Payments.”  We will pay dividends in respect of preferredshares represented by ADSs or common shares represented by common share ADSs tothe custodian for the depositary bank, as record owner of the preferred sharesrepresented by ADSs or the common shares represented by common share ADSs. Aspromptly as practicable after receipt of the dividends we pay through CitibankN.A. to the custodian, it will convert these payments into U.S. dollars andremit such amounts to the depositary bank for payment to the holders of ADSs orcommon share ADSs in proportion to individual ownership.

**Documentson Display**

We are subject tothe informational requirements of the Securities Exchange Act of 1934, asamended. In accordance with these requirements, we file reports and otherinformation with the Commission. These materials, including this annual reportand the accompanying exhibits, may be inspected and copied at the Commission’sPublic Reference Room at 100 F Street, N.E., Room 1580, Washington,D.C. 20549. Copies of the materials may be obtained from the Commission’sPublic Reference Room at prescribed rates. The public may obtaininformation on the operation of the Commission’s Public Reference Room bycalling the Commission in the United States at 1-800-SEC-0330.In addition, copies of the exhibits that accompany this annual report may beinspected at our principal executive offices located at Avenida Barbacena,1200, 30190—131 Belo Horizonte, Minas Gerais, Brazil.

**Insurance**

We have insurancepolicies to cover damages to the turbines, generators and transformers of ourmajor power plants and substations caused by fire and risks such as equipmentfailures. We do not have general third party liability insurance coveringaccidents and have not solicited bids relating to this type of insurance.However, we may contract for this type of insurance in the future. In addition,we have not solicited bids for, nor do we carry, insurance coverage for majorcatastrophes affecting our facilities such as earthquakes and floods or foroperating system failures. We do not have insurance coverage for businessinterruption risk, which means damages we suffer and consequential damagessuffered by our consumers resulting from an interruption in power distributionare generally not covered by our insurance and we may be subject to significantrelated losses. See “Item 3. Key Information—Risk Factors—Risks Relating toCEMIG—We operate without general third party liability and catastropheinsurance policies.”

We believe that,since we have contracted for fire and operational risk insurance, our insurancecoverage will be at a level that is customary in Brazil for the type ofbusinesses in which we are engaged.

**Difficultiesof Enforcing Civil Liabilities Against Non-U.S. Persons**

We are a state-controlled mixed capital company established under the lawsof Brazil. All of our executive officers and directors presently reside inBrazil. In addition, substantially all of our assets are located in Brazil. Asa result, it will be necessary for holders of ADSs or common share ADSs tocomply with Brazilian law in order to obtain an enforceable judgment againstour executive officers or directors or our assets. It may not be possible forholders of ADSs or common share ADSs to effect service of process within theUnited States upon our executive officers and directors, or to realize in theUnited 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:

·                                          fulfillsall formalities required for its enforceability under the laws of the countrywhere the foreign judgment is granted;

·                                          is issuedby a competent court after proper service of process is made in accordance withBrazilian Law;

·                                          is not subject to appeal;

·                                          is for thepayment of a sum certain;

·                                          isauthenticated by a Brazilian consular officer in the country where the foreignjudgment is issued and is accompanied by a sworn translation into Portuguese;and

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·                                          is notcontrary to Brazilian national sovereignty, public policy or public morality.

We cannot assure you theconfirmation process described above will be conducted in a timely manner orthat Brazilian courts would enforce a monetary judgment for violation of theUnited States securities laws with respect to the ADSs and the preferred sharesrepresented by the ADSs or the common share ADSs and the common sharesrepresented by the common share ADSs.

We were further advised byrespective Brazilian counsel that:

·                                          original actions based on the federal securities lawsof the United States may be brought in Brazilian courts and that, subject toBrazilian public policy and national sovereignty, Brazilian courts will enforceliabilities in such actions against us and our officers; and

·                                          the ability of a judgment creditor or the otherpersons named above to satisfy a judgment by attaching our assets or those ofthe selling shareholders is limited by provisions of Brazilian law.

A plaintiff (whether Brazilian ornon-Brazilian) residing outside Brazil during the course of litigation inBrazil must provide a bond to guarantee court costs and legal fees if theplaintiff owns no real property in Brazil that could secure such payment. Thebond must have a value sufficient to satisfy the payment of court fees anddefendant’s attorney fees, as determined by a Brazil judge. This requirementdoes not apply to proceeding to enforce a foreign judgment, which has beenconfirmed by the Brazilian Superior Court of Justice.

**Item 11.**                   Quantitativeand Qualitative Disclosures about Market Risk

We are exposed tomarket risk from changes in foreign currency exchange rates and interest rates.

We are exposed toforeign exchange risk because certain of our loans and financings aredenominated in currencies (primarily the U.S. dollar) other than the currencyin which we earn revenues (the *real*).Despite the fact that our electricity purchases from Itaipu, which representedR$822 million in 2006, are denominated in U.S. dollars, the related foreignexchange risk is no longer reflected in our operating revenues and operatingexpenses due to rate legislation changes in 2001 which allow electricityutilities such as us to record exchange rate losses related to Itaipu purchasesas deferred regulatory assets. See “Item 5. Operating and Financial Review andProspects—Critical Accounting Estimates.”

**Exchange Rate Risk**

AtDecember 31, 2006, approximately 10.1% of our outstanding indebtedness, orR$661 million, was denominated in foreign currencies, of which approximately83.8%, or R$554 million, was denominated in U.S. dollars. We do not havesubstantial revenues denominated in any foreign currencies and, due toregulations that require us to keep excess cash on deposit in *real*-denominated accounts at Brazilian banks, we do not havemonetary assets denominated in foreign currencies.

In 2006, we usedfinancial instruments such as interest rate swaps to hedge our foreign exchangerate exposure. The purpose of the swaps was to reduce our exposure on theoriginal interest rate of certain financing from an interest rate calculatedbased on the U.S. dollar/*real*exchange rate to an interest rate calculated based on the Certificado deDepósito Interbancário—CDI (Interbank Deposit Certificate) rate. See Notes2(d), 13, 20, 22 and 23 to our consolidated financial statements.

In 2007, thepotential loss we would experience in the event of a hypothetical 20%depreciation of the *real* against the U.S. dollar would beapproximately R$110.8 million related principally to loans and financing andprimarily due to an increase in our *real*-denominatedinterest expense, which would be reflected on our income statement. In 2007, ahypothetical 20% depreciation of the*real*would result in an additional annual cash outflow of approximately R$397million, reflecting the increased cost in *reais*of servicing foreign currency-denominated indebtedness from loans, financingsand debentures and increased purchasing power relating to Itaipu. Thissensitivity analysis assumes a simultaneous unfavorable 20% fluctuation in eachof the exchange rates affecting the foreign currencies in which ourindebtedness, the related interest expense and the expenses relating to thepurchase of energy from Itaipu are denominated. This sensitivity analysis alsoassumes that the unfavorable fluctuation in the exchange rate affecting thepurchase of energy from Itaipu would affect the annual cash payments but wouldnot affect the expense recorded on the statement of operations, since theadditional currency exchange expense would be recorded as a deferred regulatoryasset.

The tables belowprovide summary information regarding our exposure to exchange rate risk as ofDecember 31, 2006:

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|                                                | ** ** | **2006** | ** ** |
|------------------------------------------------|------------|----------|------------|
| U.S. Dollar                                    |       |     |       |
| Financing                                      |       | 554      |       |
| Less Contracted  derivative instruments        |       | (233     | )          |
|                                           |       | 321      |       |
| Japanese Yen                                   |       |     |       |
| Financing                                      |       | 70       |       |
| Less Contracted  derivative instruments        |       | (70      | )          |
|                                           |       | —   |       |
| Other Currencies                               |       |     |       |
| Financing                                      |       | 37       |       |
| Net liabilities exposed  to exchange rate risk |       | 358      |       |

 

**Interest Rate Risk**

AtDecember 31, 2006, we had R$6,524 million in loans and financingoutstanding, of which approximately R$5,876 million bore interest at floatingrates. Of this R$5,876million,R$5,650 million is subject to monetary restatement through the application ofinflation indices established by the Federal Government, principally the IGP-M,and R$226 million is subject principally to LIBOR.

AtDecember 31, 2006, we had liabilities, net of other assets, that bore interestat floating rates in the amount of R$1,076 million. These assets consistedmainly of our account receivable from the State Government and deferredregulatory assets, partially offset by CCEE obligations, bearing interest atrates tied to IGP-DI and SELIC, respectively, as summarized in the tables below.  A hypothetical, instantaneous and unfavorablechange of 100 basis points in interest rates applicable to floating ratefinancial assets and liabilities held at December 31, 2006 would result in apotential loss of R$10.8 million to be recorded as a financial expense in ourconsolidated financial statements.

Total Debt Portfolio

|                              | ** ** | **R$ Million** | ** ** |
|------------------------------|------------|---------------------|------------|
| Floating rate  debt:         |       |                |       |
| *Real-denominated*           |       | 5,650               |       |
| Foreign currency-denominated |       | 226                 |       |
|                         |       | 5,876               |       |
| Fixed rate debt:             |       |                |       |
| Foreign currency-denominated |       | 435                 |       |
|                         |       |                |       |
| Total                        |       | 6,311               |       |

 

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|                                                                                     | ** ** | **Total Portfolio**                  | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                          | ** ** | **Floating Rate  (R$ million)** | ** ** |
| ** **                                                                          | ** ** |
| Assets:                                                                             |       |                                      |       |
| Cash and cash  equivalents                                                          |       | 1,008                                     |       |
|                                                                                |       |                                      |       |
| Account  receivable from State Government                                           |       | 1,726                                     |       |
| Deferred  regulatory assets                                                         |       | 2,697                                     |       |
| Total                                                                               |       | 5,431                                     |       |
|                                                                                |       |                                      |       |
| Liabilities:                                                                        |       |                                      |       |
|                                                                                |       |                                      |       |
| Account payable  to suppliers-payment to generator for energy purchased on the CCEE |       | (328                                      | )          |
| Financings  (Floating Rate)                                                         |       | (5,876                                    | )          |
| Derivative  instruments(1)                                                          |       | (303                                      | )          |
| Total  liabilities                                                                  |       | (6,507                                    | )          |
|                                                                                |       |                                      |       |
| Total                                                                               |       | (1,076                                    | )          |

 

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(1)          Swapsto reduce our exposure on the original interest rate of certain financing froman interest rate calculated based on the U.S. dollar/*real* exchange rate to an interest rate calculated based onthe Certificado de Depósito Interbancário-CDI (Interbank Deposit Certificate)rate.

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

Not applicable.

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**PART II**

**Item 13.**                   Defaults,Dividend Arrearages and Delinquencies

Certainof CEMIG’s loans, financing agreements and debentures contain covenants thatrequire us to maintain financial ratios, calculated according to BrazilianCorporate Law.  As of December 31, 2006,we were not in compliance with one such covenant, the Capital Expenditures /EBITDA ratio, contained in a credit instrument (*Cédulas deCrédito Bancário*) among Cemig Distribution, Banco Itaú BBA S.A.,HSBC Bank Brasil S.A. and West LB do Brasil. Such ratio is required to be lessthan or equal to 60%, and as of December 31, 2006, the ratio was 73.59%.  Cemig Distribution has obtained awaiver from the creditors that are parties to this contract. The waiver affirmsthat such creditors will not exercise their rights to demand either acceleratedor immediate payment of the total amount due until December 31, 2007.   

**Item 14.**                   MaterialModifications to the Rights of Security Holders and Use of Proceeds

Not applicable.

**Item 15.**                   Controls andProcedures

**(a)****                                 Evaluationof disclosure controls and procedures**

Our executive board, including our Chief ExecutiveOfficer (“CEO”) and Chief Financial and Investor Relations Officer (“CFO”),evaluated the effectiveness of our controls and procedures for disclosure, andconcluded that on December 31, 2006, these controls and procedures wereeffective for providing reasonable assurance that our financial information andthat of our consolidated subsidiaries was recorded, processed, summarized anddisclosed in accordance with the rules and regulations provided by the Commission.

**(b)****                                 Management’sannual report on internal control over financial reporting**

Our executive board, including our CEO and CFO, isresponsible for the implementation, effectiveness and maintenance of the systemof internal controls over financial reporting.

Our internal controls over financial reporting includepolicies and procedures were implemented to provide reasonable assurance as to:(i) the reliability of the recording accounting and financial information; (ii)the preparation of accounting records in accordance with U.S. GAAP; (iii) theprocessing of payments and receipts in accordance with management authorization;and (iv) the timely detection of inappropriate acquisitions, and the disposalor allocation of material assets. We emphasize that due to their inherentlimitations, the possibility exists that these actions may not prevent ordetect misstatements. Also, projections of any evaluation of the effectivenessof the internal control over financial reporting to future periods are subjectto the risk that controls may become inadequate because of changes inconditions, or the degree of compliance with the policies or procedures maydecline.

The company’s managementevaluated the effectiveness of our internal controls related to theconsolidated financial statements as of December 31, 2006, based on the criteriaestablished in Internal Control - Integrated Framework issued by  the Committee of Sponsoring Organizations ofthe Treadway Commission  (COSO) - andconcluded that, for the year ended December 31, 2006, our system of internalcontrols related to the consolidated financial statements is effective.

Management’s evaluation of the effectiveness of ourinternal controls related to the consolidated financial statements, for theyear ended December 31, 2006, was audited by Deloitte Touche Tohmatsu AuditoresIndependentes, an auditing firm independent from the Company, whose opinion iscontained in the attached report.

### *The Ethics Committee*

The Ethics Committee was established on August 12,2004, and is made up of three permanent members and three alternate members. Itis responsible for the management, interpretation, dissemination, application andupdating of the Code of Professional Conduct.

The Committee receives and investigates all reports ofviolation of the ethical principles and standards of conduct, provided they arepresented in a written document signed by the interested party and addressedto: CEMIG, Av. Barbacena 1200, SA/17th Floor/B2, and accompanied by evidentiaryproof. The Committee may also be contacted by e-mailcomissaodeetica@cemig.com.br or telephone at + 55 31 3299-4970. 

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In December 2006 we implemented the Anonymous ReportingChannel, available on our website.  Thepurpose of this program is to receive, channel and process accusations ofirregular practices, such as financial fraud, misappropriation of assets,receipt of unfair advantages, and the engagement of illegal contracts. Thischannel represents the Company aim of improving transparency, correctingunethical or illegal behavior and enhancing corporate governance, as well asbeing an instrument that meets the requirements of the Sarbanes-Oxley Act.

**(c)****                              Attestationreport of the registered public accounting firm**

** **REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders andManagement of

Companhia Energética deMinas Gerais - CEMIG

Belo Horizonte –MG, Brazil

We have auditedmanagement’s assessment, included in the accompanying Management’s annualreport on internal control over financial reporting, that Companhia Energéticade Minas Gerais S.A. - CEMIG and subsidiaries (the “Company”) maintainedeffective internal control over financial reporting as of December 31, 2006based on criteria established in Internal Control—Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting.  Our responsibility is toexpress an opinion on management’s assessment and an opinion on theeffectiveness of the Company’s internal control over financial reporting basedon our audit.

We conducted ouraudit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects.  Our audit included obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, testingand evaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis forour opinions.

A company’sinternal control over financial reporting is a process designed by, or underthe supervision of, the company’s principal executive and principal financialofficers, or persons performing similar functions, and effected by the company’sboard of directors, management, and other personnel to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial 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)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

Because of theinherent limitations of internal control over financial reporting, includingthe possibility of collusion or improper management override of controls,material misstatements due to error or fraud may not be prevented or detectedon a timely basis.  Also, projections of any evaluation of theeffectiveness of the internal control over financial reporting to futureperiods are subject to the risk that the controls may become inadequate becauseof changes in conditions, or that the degree of compliance with the policies orprocedures may deteriorate. 

In our opinion,management’s assessment that the Company maintained effective internal controlover financial reporting as of December 31, 2006, is fairly stated, in allmaterial respects, based on the criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission.  Also in our opinion, theCompany maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2006, based on the criteria establishedin Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission.

We have alsoaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated balance sheets of CompanhiaEnergética de Minas Gerais – CEMIG and subsidiaries (the “Company”) as ofDecember 31, 2006 and 2005, and the related consolidated statements of income,stockholders’ equity, and cash flows for each of the three years in the periodended December 31, 2006 and our report dated June 29, 2007, expressed an unqualifiedopinion on those financial statements and included an explanatory paragraphregarding the Company’s adoption of new accounting standards.

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/s/ Deloitte ToucheTohmatsu Auditores Independentes

Belo Horizonte, Brazil

June 29, 2007

**(d)****                                 Changesin internal control over financial reporting**

There has been no changein our internal control over financial reporting during the year endedDecember 31, 2006 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

**Item 16A.**          Audit CommitteeFinancial Expert

Our Fiscal Councilacts as our audit committee for purposes of the Sarbanes-Oxley Act of 2002.  Under Section 10A-3 of the SEC rules on AuditCommittees of listed companies, non-U.S. issuers are permitted not to have aseparate Audit Committee made up of independent members if there is a FiscalCouncil established 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 expert of our Fiscal Council is LuizOtávio Nunes West.

**Item 16B.**          Code of Ethics

We have adopted a code of ethics, as defined in Item16B of Form 20-F under the Securities Exchange Act of 1934, asamended. Our code of ethics applies to our Chief Executive Officer, ChiefFinancial and Investor Relations Officer and persons performing similarfunctions as well as to our directors and other officers and employees. Ourcode of ethics was filed with the SEC as Exhibit 11 to our Annual Reporton 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 waiveron our web site at www.cemig.com.br.

**Item 16C.   PrincipalAccountant Fees and Services**

**Auditand Non-Audit Fees**

The following table summarizes the aggregate feesbilled to us by Deloitte Touche Tohmatsu Auditores Independentes during thefiscal years ended December 31, 2006 and 2005:

|                     | ** **   | **Year ended December 31,** | ** ** |
|---------------------|--------------|--------------------------------------------|------------|
| ** **          | ** **   | **2006**                                   | ** ** | **2005** | ** ** |
| ** **          | *** *** | **(thousands of *reais*)**       | ** ** |
| Audit fees          |         | 955                                        |       | 466 |   |
| Tax fees            |         | 47                                         |       | 48 |   |
| Audit-related  fees |         | 2,080                                      |       | 221 |   |
| Total fees          |         | 3,082                                      |       | 735 |   |

 

*Auditfees*. Audit fees in the above table are the aggregate feesbilled by Deloitte Touche Tohmatsu Auditores Independentes in connection withthe audit of our annual financial statements prepared in accordance with theaccounting practices adopted in Brazil and the United States and the review ofour quarterly statutory financial statements.

*TaxFees*. Tax fees are fees for professional services rendered byDeloitte Touche Tohmatsu Auditores Independentes for tax compliances services.

*Audit-relatedfees*. Audit-related fees for 2006 related to internal controlreview.  The 2005 fees related to duediligence in connection with the acquisition of transmission lines. 

**AuditCommittee Pre-Approval Policies and Procedures**

Our Fiscal Councilcurrently serves as our audit committee for purposes of the Sarbanes-Oxley Actof 2002. However, as required by Brazilian legislation, we have adoptedpre-approval policies and procedures by which all audit and non-audit servicesprovided by external auditors must be approved by the Board of Directors. Anyservice proposals submitted by external auditors need to be discussed andapproved by the Board of Directors during its meetings. Once the proposedservice is approved, we formalize the

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engagement of services.The approval 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.**          Not Applicable

**Item 16E.**            Purchases of EquitySecurities by the Issuer and Affiliated Purchasers.

None.

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**PART III**

### **Item 17.**                   **Financial Statements**

Not applicable.

### **Item 18.**                   **Financial Statements**

Reference is madeto pages F-1 through F-67 hereof.

The followingfinancial statements are filed as part of this annual report on Form 20-F:

·                                          Reportof Deloitte Touche Tohmatsu Auditores Independentes

·                                          AuditedConsolidated Balance Sheets as of December 31, 2006 and 2005

·                                          AuditedConsolidated Statements of Operations and Comprehensive Income (Loss) for theyears ended December 31, 2006, 2005 and 2004

·                                          AuditedConsolidated Statements of Changes in Shareholders’ Equity for the years endedDecember 31, 2006, 2005 and 2004

·                                          AuditedConsolidated Statements of Cash Flows for the years ended December 31,2006, 2005 and 2004

·                                          Notesto the Consolidated Financial Statements

### **Item 19.**                   **Exhibits**

The followingdocuments are included as exhibits to this annual report:
| Exhibit    | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                        |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number** | ** ** | **Document**                                                                                                                                                                                                                                                                                                                                                                                      |
| 1          |       | Corporate by-laws of CEMIG, as amended and in effect  since April 26, 2007.                                                                                                                                                                                                                                                                                                                       |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                              |
| 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 June 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 June 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)).                                       |

 

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| 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 June 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   |   | Financing Agreement by Extension of Credit  No. 02.2.962.3.1, dated February 7, 2003, between BNDES and CEMIG  and Intervening Third Parties (incorporated by reference to Exhibit 4.9  to our Annual Report on Form 20-F filed on March 26, 2003  (File No. 1-15224)).                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.13   |   | 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)).                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.14   |   | 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)).                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.15   |   | 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)).                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.16   |   | 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.                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.17   |   | 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.                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.18   |   | Summary of Indenture Covering Public Distribution of  Non-Convertible Unsecured Debentures, dated August                                                                                                                                                                                                                                                                                                                                                |

 

124

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|        |   | 24, 2006, between CEMIG Distribuição S.A. and  Unibanco – União dos Bancos Brasileiros S.A.                                                                                                                      |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                 |
| 4.19   |   | 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. |
|   |   |                                                                                                                                                                                                                                 |
| 4.20   |   | 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.                |
|   |   |                                                                                                                                                                                                                                 |
| 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 July 2, 2007.                                                                                                      |
|   |   |                                                                                                                                                                                                                                 |
| 12.2   |   | Chief Financial and Investor Relations Officer  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,  dated July 2, 2007.                                                                              |
|   |   |                                                                                                                                                                                                                                 |
| 13.1   |   | Chief Executive Officer Certification pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002, dated July 2, 2007.                                                                                                      |
|   |   |                                                                                                                                                                                                                                 |
| 13.2   |   | Chief Financial and Investor Relations Officer  Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,  dated July 2, 2007.                                                                              |

 

125

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**SIGNATURES**

The registranthereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersigned tosign this annual report 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:  July 23,2007

126

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**ANNEX A**

**THE BRAZILIAN POWER INDUSTRY**

## **TheBrazilian Electricity System Overview**

Brazil’s system ofelectricity production and transmission is a large-scale hydroelectric andthermal system made up predominantly of hydroelectric power stations, withmultiple owners. The Sistema Interligado Nacional — SIN (the NationalInterlinked System), or the Brazilian Grid, is comprised of companies in thesouthern, southeastern, center-west, and northeastern regions and part of thenorthern region of Brazil. Only 3.0% of the country’s electricity productioncapacity is outside the National Grid, in small isolated systems located mainlyin the Amazon region.

Since the electricity system has been growing at ahigh rate in terms of both generation and transmission, the process ofintegration is advancing fast, and its operational complexity is growingproportionately.

Brazil’s abundant hydrological resources are managedthrough storage reservoirs. It is estimated that Brazil has a hydroelectricpower generation potential close to 260,000 MW, of which only 27% has beendeveloped, according to the Energy Research Company, or EPE.

The table below shows the installed capacity ofelectric power generation in the interconnected power system (excludingnon-connected systems and self-production capacities), divided intohydroelectric and thermoelectric generation capacity, from 1991 through 2006 inMW.
| Year | ** ** | **Hydroelectric** | ** ** | **Thermoelectric** | ** ** | **Proinfa(*)** | ** ** |
|------|------------|-------------------|------------|--------------------|------------|----------------|------------|
| 1991 |       | 45,808            |       | 3,789              |       | —         |       |
| 1992 |       | 46,995            |       | 3,672              |       | —         |       |
| 1993 |       | 47,834            |       | 3,514              |       | —         |       |
| 1994 |       | 49,136            |       | 3,490              |       | —         |       |
| 1995 |       | 50,582            |       | 3,490              |       | —         |       |
| 1996 |       | 52,266            |       | 3,724              |       | —         |       |
| 1997 |       | 53,664            |       | 3,730              |       | —         |       |
| 1998 |       | 55,519            |       | 3,903              |       | —         |       |
| 1999 |       | 57,724            |       | 4,135              |       | —         |       |
| 2000 |       | 59,452            |       | 6,217              |       | —         |       |
| 2001 |       | 61,044            |       | 7,096              |       | —         |       |
| 2002 |       | 63,739            |       | 10,223             |       | —         |       |
| 2003 |       | 66,321            |       | 11,000             |       | —         |       |
| 2004 |       | 67,012            |       | 12,090             |       | —         |       |
| 2005 |       | 69,760            |       | 12,363             |       | —         |       |
| 2006 |       | 71,411            |       | 12,701             |       | 612            | (**)       |

 

Sources : NationalSystem Operator- ONS, Annual Energy Planning

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(*)                                 Proinfa— the Program to Support Alternative Electricity Sources — was created to workwith the Mining and Energy Ministry (MME) by Law 10348 of April 26, 2002.Its purpose is to help diversify Brazil’s sources of energy, and also to seekregional solutions through advantageous economic use of renewable sources,using available resources and applicable technologies. Initially the aim is toincrease the proportional contribution to the National Grid System ofelectricity output produced from wind energy by Small Hydroelectric Plants(PCHs) and from biomass.

(**)                          SmallHydroelectric Plant - SHP, Small Thermal Plant - STP and Wind Power Plants

Brazil has an installed capacity in the interconnectedpower system of 84.74 GW, approximately 85% of which is hydroelectric. Thisinstalled capacity includes half of the installed capacity of Itaipu — 12,600 MWowned equally by Brazil and Paraguay. According to data from the NationalSystem Operator — ONS, Brazil’s installed capacity is projected to increase toapproximately 96.94 GW by 2011, of which 18% is projected to be thermoelectricand 82% is projected to be hydroelectric. There are approximately 49,723 milesof transmission lines with voltages equal to or higher than 230 kV in Brazil.

Approximately 35% of Brazil’s installed generatingcapacity and 64% of Brazil’s high voltage transmission lines are operated byCentrais Elétricas Brasileiras S.A., or Eletrobrás, a company owned by thefederal government of Brazil, or the Federal Government. Eletrobrás hashistorically been responsible for implementing electric policy, conservationand environmental management programs. It controls five subsidiariesresponsible for the generation, transmission and distribution of electricity inthe

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north, northeast and southeast of Brazil: CentraisElétricas do Norte do Brasil S.A., or Eletronorte; Companhia Hidroelétrica doSão Francisco, or CHESF; Furnas Centrais Elétricas S.A., or Furnas; Companhiade Geração Térmica de Energia Elétrica — CGTEE and Empresa Transmissora deEnergia Elétrica do Sul do Brasil S.A. — Eletrosul;  As a result of the restructuring of theBrazilian electric sector, however, these federally—owned companies have beenchanging their roles from regional development utilities to generation and/ortransmission companies acting in a competitive market. Eletrobrás also controlsEletrobrás Termonuclear S.A., or Eletronuclear, a company formed following apartial split-up of Furnas. The remaining high voltage transmission lines areowned by state-controlled 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.

#### *ElectricitySupply and Demand*

Between 1986 and 2006, the consumption of electricityin Brazil grew by approximately 3.7% per year (from 166.7 GWh to 352.9 GWh),the number of consumers increased by approximately 4.2% per year (from 25,900thousand to 58,980 thousand) and the total installed capacity increased by morethan 4.2% per year (from 43,264 MW to 98,207 MW). The following table setsforth the growth in Brazil’s energy consumption, population and growth rate ofthe gross domestic product, or GDP, from 1986 through December 31, 2006.
|            | ** ** | **Energy**                 | ** ** | **Energy**                   | ** ** | ** **                   | ** ** | **Population**         | ** ** |
|------------|------------|----------------------------|------------|------------------------------|------------|------------------------------|------------|------------------------|------------|
| ** ** | ** ** | **Consumption**            | ** ** | **Consumption**              | ** ** | **GDP Growth (%)** | ** ** | **(in millions)** | ** ** |
| **Year**   | ** ** | **(in GWh) (5)** | ** ** | **(% Growth) (5)** | ** ** | **(6)**                      | ** ** | **(6)**                | ** ** |
| 1986       |       | 166.7                      |       | 10.6                         |       | 7.5                          |       | 137.7                  |       |
| 1987       |       | 181.3                      |       | 7.4                          |       | 3.5                          |       | 140.3                  |       |
| 1988       |       | 191.8                      |       | 5.8                          |       | (0.1                         | )          | 142.8                  |       |
| 1989       |       | 200.5                      |       | 4.5                          |       | 3.2                          |       | 145.2                  |       |
| 1990       |       | 204.4                      |       | 2.0                          |       | (4.3                         | )          | 147.6                  |       |
| 1991       |       | 213.5                      |       | 4.4                          |       | 1.0                          |       | 149.9                  |       |
| 1992       |       | 217.4                      |       | 1.8                          |       | (0.5                         | )          | 152.2                  |       |
| 1993       |       | 226.2                      |       | 4.0                          |       | 4.9                          |       | 154.5                  |       |
| 1994       |       | 231.6                      |       | 2.4                          |       | 5.9                          |       | 156.8                  |       |
| 1995       |       | 248.7                      |       | 7.4                          |       | 4.2                          |       | 159.0                  |       |
| 1996 (1)   |       | 259.3                      |       | 4.3                          |       | 2.2                          |       | 161.2                  |       |
| 1997       |       | 276.8                      |       | 6.7                          |       | 3.4                          |       | 163.4                  |       |
| 1998       |       | 287.5                      |       | 3.9                          |       | 0.0                          |       | 165.7                  |       |
| 1999       |       | 292.7                      |       | 1.8                          |       | 0.3                          |       | 167.9                  |       |
| 2000       |       | 307.5                      |       | 5.1                          |       | 4.3                          |       | 170.1                  |       |
| 2001       |       | 283.3                      |       | (7.9                         | )          | 1.3                          |       | 172.4                  |       |
| 2002       |       | 290.5                      |       | 2.5                          |       | 2.7                          |       | 174.6                  |       |
| 2003       |       | 307.0                      |       | 5.7                          |       | 1.1                          |       | 179.0                  |       |
| 2004       |       | 320.8                      |       | 4.5                          |       | 5.7                          |       | 181.6                  |       |
| 2005 (2)   |       | 334.6                      |       | 4.3                          |       | 2.9                          |       | 184.2                  | (2)        |
| 2006 (3)   |       | 352.9                      |       | 5.5                          |       | 3.7                          |       | 187.0                  | (4)        |

 

----

(1)    Figureswere changed in the data series from 1996 to 2006, due to a new method ofcalculation for GDP introduced by the IBGE (Brazilian Statistics Institute).

(2)    ElectricityMarket Statistics and Analysis (*Estatísticae Análise do Mercado de Energia Elétrica*) – Monthly Bulletin,   published by EPE, December 2006).

(3)    IBGEforecast

(4)    MarketMonitoring System – Total consumption (May 2007) (EPE).

(5)    *Energy’s Forecasts*– published by EPE (Energy Research Company), linked to the  Mining and Energy Ministry (MME).

(6)    *Population*and*GDP* – published by IBGE (Brazilian Statistics Institute).

Between 1986 and the end of 2006, consumption ofelectricity in Brazil generally grew at a faster rate than Brazil’s GDP, withthe exception of 1993 and 1994, during which labor intensive industries loweredtheir output. Even in years in which the GDP had negative growth, electricityconsumption increased. Overall electricity consumption growth averaged 5.6% peryear from 1970 to 2006. According to the energy consumption forecast studies ofEPE (Energy Research Company) for the 2006 Planning Cycle, the

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Brazilian consumption growth rate should reach anaverage of 5.0% per year for the next -five-year period. The following tableillustrates the forecasted breakdown of the consumption growth rate per region:
|            | ** ** | ** **     | ** ** | ** **     | ** ** | **Southeast/** | ** ** | ** **     | ** ** | ** **                 | ** ** |
|------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------------------|------------|
| ** ** | ** ** | **North**      | ** ** | **Northeast**  | ** ** | **Midwest**    | ** ** | **South**      | ** ** | ** **                 | ** ** |
| **Period** | ** ** | **Integrated** | ** ** | **Integrated** | ** ** | **Integrated** | ** ** | **Integrated** | ** ** | **Brazilian Average** | ** ** |
| 2006-2011  |       | 6.2            | %          | 5.2            | %          | 4.8            | %          | 4.7            | %          | 5.0                        | %          |

 

Source: —EPE — PlanningCycle 2006

The following table provides information on the risksof an energy deficit of more than 5% of the market of each subsystem in thesouth, southeast-center-west, north and northeast regions in the coming years. 
|                   | ** ** | **Probability of Electricity Shortfalls (%)** | ** ** |
|-------------------|------------|-------------------------------------------------------------------|------------|
| **Region**        | ** ** | **2007**                                                          | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** |
| South             |       | 0.0                                                               |       | 2.7 |   | 4.4 |   | 6.6 |   | 10.1 |   |
|              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Southeast/Midwest |       | 0.1                                                               |       | 3.4 |   | 4.7 |   | 7.8 |   | 10.4 |   |
|              |       |                                                              |       |   |   |   |   |   |   |   |   |
| North             |       | 1.1                                                               |       | 11.5 |   | 6.4 |   | 7.6 |   | 10.1 |   |
|              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Northeast         |       | 0.9                                                               |       | 5.1 |   | 4.5 |   | 8.0 |   | 10.2 |   |

 

Source: National SystemOperator — ONS, Monthly Operation Planning, January 2007

The increase in the risk of an energy deficit to morethan 5% in 2010 and 2011, shown in the above table, is due to exclusion fromthe study of part of the capacity of some natural gas thermal power plants thatdid not have sufficient fuel to generate energy, based on the test made by theNational System Operator, in December 2006. In the forthcoming years, theBrazilian companies that supply oil and natural gas will have a challenge inbuilding the supply of natural gas to meet the needs of the thermal powerplants. In April 2007 Petrobras proposed a plan to increase the production ofnatural gas, and import LNG, to build the supply of natural gas to meet theneeds of the consumption that is forecast. This plan aims to supply the entireneeds of the thermal power plants until 2010.

## **Historical Background**

The Brazilian Constitution provides that thedevelopment, use and sale of energy may be undertaken directly by the FederalGovernment or indirectly through the granting of concessions, permissions orauthorizations. Historically, the Brazilian power industry has been dominatedby generation, transmission and distribution concessionaires controlled by theFederal and State Governments. In recent years, the Federal Government hastaken a number of measures to restructure the power industry. In general, thesemeasures were aimed at increasing the role of private investment andeliminating foreign investment restrictions, thus increasing overallcompetition in the power industry.

In particular, the Federal Government has taken thefollowing measures:

·                                          In1990, the Federal Government created the National Privatization Program aimedat transferring certain companies controlled by it to the private sector,including those from the power industry.

·                                          TheBrazilian Constitution was amended in 1995 to authorize foreign investment inpower generation. Prior to this amendment, all generation concessions were heldeither by a Brazilian individual or an entity controlled by Brazilian individualsor by the Federal or State Governments.

·                                          TheFederal Government enacted Law No. 8,987 on February 13, 1995, or theConcessions Law, and Law No. 9,074 on July 7, 1995, or the PowerConcessions Law, that together

·                  requiredthat all concessions for the provision of energy-related services be grantedthrough public bidding processes;

·                  graduallyallowed certain electricity consumers with significant demand (generallygreater than 3 MW), referred to as Free Consumers, to purchase electricitydirectly from suppliers holding a concession, permission or authorization;

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·                  providedfor the creation of generation entities, or Independent Power Producers, which,by means of a concession, permission or authorization, may generate and sellall or part of their electricity to Free Consumers, distributionconcessionaires and trading agents, among others;

·                  grantedFree Consumers and electricity suppliers open access to all distribution andtransmission systems; and

·                  eliminatedthe need for a concession to construct and operate power projects with capacityfrom 1 MW to 30 MW, or Small Hydroelectric Power Plants.

·                                          Beginningin 1995, a portion of the controlling interests held by Eletrobrás and variousstates in generation and distribution companies were sold to private investors.At the same time, certain state governments also sold their stakes in majordistribution companies. While the majority of the distribution companies havebeen privatized, most generation capacity is still controlled by Eletrobrás, bymeans of its subsidiaries Chesf, Eletronorte and Furnas.

·                                          In1998, the Federal Government enacted Law No. 9,648, or the Power IndustryLaw, to overhaul the basic structure of the electricity industry. The PowerIndustry Law provided for the following:

·                  theestablishment of a self-regulated body responsible for the operation of theshort-term electricity market, or the Wholesale Energy Market, which replacedthe prior system of regulated generation prices and supply contracts;

·                  arequirement that distribution and generation companies enter into initialenergy supply agreements, or the Initial Contracts, generally “take or pay”commitments, at prices and volumes approved by the Brazilian National ElectricEnergy Agency  — ANEEL. The main purposeof the Initial Contracts was to ensure distribution companies have access to astable electricity supply at prices that guarantee a fixed rate of return forthe electricity generation companies during the transition period leading tothe establishment of a free and competitive electricity market;

·                  thecreation of the National Integrated System Operator (*OperadorNacional do Sistema*, or ONS), a non-profit, private entityresponsible for the operational management of the generation and transmissionactivities of the interconnected power system; and

·                  theestablishment of public bidding processes for concessions for theconstruction and operation of power plants and transmission facilities, inaddition to the bidding process requirements under the Concessions Law and thePower Concessions Law.

·                                          In2001, Brazil faced a serious energy crisis that lasted until the end of thefirst quarter of 2002. As a result, the Federal Government implemented measuresthat included:

·                  aprogram for the rationing of electricity consumption in the most adverselyaffected regions, namely the southeast, central-west and northeast regions ofBrazil; and

·                  thecreation of the Electricity Crisis Management Chamber (*Câmara de Gestão da Crise de Energia Elétrica,*or GCE), which passed a series of emergency measures that provided for reducedelectricity consumption targets for residential, commercial and industrialconsumers in the affected regions by introducing special rate regimes thatencouraged the reduction of electricity consumption.

·                                          InMarch 2002, the GCE terminated the emergency measures and electricityrationing as a result of large increases in supply (due to a significant risein reservoir levels) and a moderate reduction in demand.  Accordingly, the Federal Government enactednew measures in April 2002 that, among other things, stipulated anextraordinary rate readjustment, or RTE, to compensate financial lossesincurred by the electricity suppliers as a result of the mandatory electricityrationing. For additional information regarding the rationing, see “Rationingand Extraordinary Rate Increases”.

·                                          On December 17, 2002, with the enactmentof Law 10,604, the Federal Government granted a subsidy for distributioncompanies in order to contributeto the moderation of the rates charged to low-income consumers.

·                                          OnMarch 15, 2004, the Federal Government enacted Law No. 10,848, or theNew Industry Model Law, in an effort to further restructure the power industrywith the ultimate goal of providing consumers with secure electricity

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supplies combined withlow rates. On July 30, 2004 the FederalGovernment published Decree 5,163, governing the purchase and sale ofelectricity under the New Industry Model Law, as well as the granting ofauthorizations and concessions for electricity generation projects. Theseinclude rules relating to auction procedures, the form of power purchaseagreements and the method of passing costs through to final consumers.

## **Rationing and Extraordinary Rate Increases**

Below average rainfall in the years preceding 2001resulted in low reservoir levels and low hydroelectric capacity in thesoutheast, central west and northeast regions. Attempts to offset dependence onhydroelectric plants with gas-fired thermal generation plants delayed due toregulatory and other issues. In response to the energy shortage, onMay 15, 2001, the Federal Government created the GCE to regulate andadminister the program for reduction of energy consumption to avoid theinterruption of electricity supply. This program, known as the Electricity RationingProgram, established limits for energy consumption for industrial, commercialand residential consumers, which ranged from a 15% to a 25% reduction in energyconsumption, and lasted from June 2001 until February 2002.

As a result of the end of the rationing measures, theFederal Government, through Decree No. 4,261 of June 6, 2002,terminated the GCE and created the *Câmara de Gestão do SetorElétrico* (the Electricity Sector Management Committee), or CGSE, toreplace the GCE as coordinator of the electricity sector revitalizationmeasures, and to lend support to the Federal Government with respect to relatedissues.

Law No. 10,438 of April 26, 2002 authorized the creation of the General Agreement ofthe Electricity Sector, which was designed to resolve issues related to theElectricity Rationing Plan by providing for compensation for rationing-relatedlosses to generation and distribution companies in Brazil and restoring theeconomic equilibrium of the concession agreements, which was thrown out ofbalance during the rationing period.

Such Law authorized an extraordinary rate increase, orRTE, applicable to final consumers that would compensate both generators anddistributors for such rationing-related losses. The increased rates will be inforce for an average period of 72 months beginning January 2002. The RTEalso covers financial losses resulting from those costs that are beyond thecontrol of the distributor, referred to as Parcel A costs, fromJanuary 2001 to October 2001 as well as losses of generators incurredas a result of payment of free energy costs above the Initial Contract averageprice. The RTE percentage charged for residential consumers (excludinglow-income consumers), rural consumers, public street lighting and high-tensionindustrial consumers whose costs related to electric energy represent at least18% of average production cost and fulfill certain other criteria was 2.9% andthe RTE percentage charged to all other consumers was 7.9%, producing aweighted average increase of 5.87%.

Pursuant to Law 10,438, the National Bank for EconomicDevelopment (*Banco Nacional de Desenvolvimento Econômicoe Social*, or BNDES), created a special program to finance 90% of theamounts recoverable by means of the RTE. The loans are repayable over the rate increasecollection period.

In April 2003, the Federal Government, fearingthat rate increases may contribute to overall inflation in Brazil, decided todelay a rate increase to which distribution companies were entitled under ANEELresolutions to recover intra-annual variation of Parcel A costs. OnNovember 11, 2003, with the enactment of Law 10,792, the FederalGovernment implemented an emergency program designed to compensate distributioncompanies for the losses incurred due to the non-consideration of theintra-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 oroperate facilities for generation, transmission or distribution of electricityin Brazil must apply to the MME or to ANEEL, by delegation of MME, as grantingauthority, for a concession, permission or authorization, as the case may be.Concessions grant rights to generate, transmit or distribute electricity in therelevant concession area for a specified period. This period is usually 35years for new generation concessions, and 30 years for new transmission ordistribution concessions. An existing concession may be renewed at the grantingauthority’s discretion.

The Concession Law establishes, among other things,the conditions that the concessionaire must comply with in renderingelectricity services, the consumer’s rights and the obligations of theconcessionaire and the granting authority. Furthermore, the concessionaire mustcomply with regulations in force governing the electricity sector. The mainprovisions of the Concession Law are summarized as follows:

·                                          *Adequate service*. The concessionaire mustrender an adequate service to satisfy, among other things, regularity,continuity, efficiency, safety and accessibility of the service.

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·                                          *Use of Land.*The concessionaire may usepublic land or request the granting authority to declare the public interest ofprivate real estate, so as to benefit the concessionaire. In such case theconcessionaire shall compensate the affected owners.

·                                          *Strict liability.*The concessionaire isstrictly liable for all damages arising from the performance of its servicesand caused to consumers, to third parties or to the granting authority.

·                                          *Changes in controlling interest*. Thegranting authority must approve any direct or indirect change in theconcessionaire’s controlling interest.

·                                          *Intervention by the Granting Authority*.The granting authority may intervene in the concession, by means of apresidential decree, to ensure the concessionaire’s adequate performance ofservices, as well as the full compliance with applicable contractual, regulatoryand legal provisions in casethe concessionaire fails to do so. Within 30 days after the decree date, thegranting authority’s representative is required to commence an administrativeproceeding in which the concessionaire is entitled to due process of law.During the term of the administrative proceeding, a person appointed by thegranting authority’s decree becomes responsible for carrying on the concession.If the administrative proceeding is not completed within 180 days after thedecree date, the intervention ceases and the concession is returned to theconcessionaire. The concession is also returned to the concessionaire if thegranting authority’s representative decides not to terminate the concession andthe concession term has not yet expired.

·                                          *Termination of the concession*. Theconcession termination agreement may be terminated through expropriation and/orforfeiture. Expropriation isthe early termination of a concession for reasons related to the publicinterest that must be expressly declared by law and based on publicinterest grounds. Following the expropriation, the concessionaire is entitledto receive an indemnification, which may or may not adequately compensateinvestments made by the concessionaire in expropriated assets that have notbeen fully amortized or depreciated by the time of the expropriation.Forfeiture must be declared by the granting authority after ANEEL, or MME, hasmade a final administrative ruling that the concessionaire has failed toadequately perform its obligations under the concession agreement. Theconcessionaire is entitled todue process of law in the administrative proceeding declaring the forfeiture ofthe concession and can resort to the courts . The concessionaire isentitled to receive anindemnification for the investments made by the concessionaire in expropriatedassets that have not been fully amortized or depreciated, after deduction ofany amounts corresponding to outstanding fines and damages due by theconcessionaire.

·                                          *Expiration.*When the concession expires,all assets, rights and privileges that are materially related to the renderingof the electricity services revert to the Brazilian government. Following theexpiration, the concessionaire isentitled to receive an indemnification for the investments made by theconcessionaire in expropriated assets that have not been fully amortizedor depreciated by the time of the expiration.

**Penalties**

ANEEL’s Resolution 63, enacted on May 12, 2004(which revoked Resolution 318 enacted on October 6, 1998), 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 periodpreceding any assessment notice. Some infractions that may result in finesrelate to the failure of the operator to request ANEEL ́s approval in case of:

·                                          Executionof contracts with related parties in the cases provided by regulation;

·                                          Sale or assignment of the assets or revenues related to the services renderedas well as the imposition of any encumbrances (including any security, bond,guarantee, pledge and mortgage) on them or any other assets related to theconcession or the revenues of the electricity services; and

·                                          Changesin controlling interest of the holder of the authorization or concession.

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**Principal Regulatory Authorities**

#### *NationalEnergy Policy Council*

In August 1997, the National Energy PolicyCouncil (*Conselho Nacional de Política Energética*,or CNPE) was created to advise the Brazilian president regarding thedevelopment and creation of the national energy policy. The CNPE is presidedover by the MME, and the majority of its members are officials of the FederalGovernment. The CNPE was created to optimize the use of Brazil’s energyresources and to assure the supply of electricity to the country.

#### *Ministry ofMines and Energy*

The MME is the Federal Government’s primary regulatorof the power industry. Following the adoption of the New Industry Model Law,the Federal Government, acting primarily through the MME, undertook certainduties that were previously under the responsibility of ANEEL, including thedrafting of guidelines governing the granting of concessions and the issuance ofdirectives governing the bidding process for concessions relating to publicservices and public assets.

#### *ANEEL*

The Brazilian power industry is regulated by ANEEL, anindependent federal regulatory agency. After enactment of the New IndustryModel Law, ANEEL’s primary responsibility is to regulate and supervise thepower industry in line with the policy to be dictated by the MME and to respondto matters which are delegated to it by the Federal Government and by the MME.ANEEL’s current responsibilities include, among others,

·                                          administeringconcessions for electricity generation, transmission and distributionactivities, including the approval of electricity rates;

·                                          enactingregulations for the electricity industry;

·                                          implementingand regulating the exploitation of energy sources, including the use ofhydroelectric energy;

·                                          promotingthe public bidding process for new concessions;

·                                          settlingadministrative disputes among electricity generation entities and electricitypurchasers; and

·                                          definingthe criteria and methodology for the determination of transmission rates.

#### *ONS*

The ONS was created in 1998 as a non-profit privateentity comprised of Free Consumers and energy utilities engaged in thegeneration, transmission and distribution of electricity, in addition to otherprivate participants such as importers and exporters. The New Industry ModelLaw, regulated by Decree 5,163 of July 2004, and Decree 5,081 of May 14,2004, granted the Federal Government the power to appoint three directors ofthe ONS, including the Director-general. The primary role of the ONS is tocoordinate and control the generation and transmission operations in theinterconnected power system, subject to ANEEL’s regulation and supervision. Theobjectives and principal responsibilities of the ONS include, among others:

·                                          planning andscheduling of the operation and the centralized dispatching of the generationin order to optimize the interconnected power system;

·                                          supervision andcoordination of the electric system operation centers;

·                                          supervision andcontrol of the national interconnected electric and energetic systems and theinternational interconnections;

·                                          retaining and managing of the electric energytransmission services and respective access conditions, as well as theancillary services;

·                                          proposing to ANEEL the expansion and reinforcement ofthe basic transmission network facilities; and

·                                          submitting rules for the operation of thetransmission system for ANEEL’s approval. Generators must declare theiravailability to the ONS, which then attempts to establish an optimalelectricity dispatch program.

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The active participation of the ONS to ensure accessto transmission grids occurs by means of contractual relationships establishedbetween the ONS, the owners of the basic transmission grid and the users of thetransmission grid. Such contractual relationships comprise the following:

·                                          the*Contratode Prestação de Serviços de Transmissão*(Operating Agreement)*,*a contract entered into by the ONS withthe concessionaires which regulates the technical and financial terms forengaging in transmission activities;

·                                          the*Contrato de Uso do Sistema de Transmissão*(GridUtilization Contract), a contract entered into by the ONS and the transmissiongrid users that regulates the use of the Brazilian grid, as well as proceduresfor invoicing and payment);

·                                          the*Contrato de Constituição de Garantia*(GuaranteeContract, or CCG)*,*a contractwhich gives the ONS access to available funds in banks accounts designated bytransmission grid users for the purpose of providing funds in case such usersfail to make their monthly payments to the concessionaires;

·                                          the*Contrato de Conexão à Rede Básica*(ConnectionContract)*,*a contract between theconcessionaires and the transmission grid users which establishes the technicalterms required to connect to the Brazilian grid; and

·                                          the*Contrato de Compartilhamento de Instalações*(InfrastructureSharing Agreement)*,*a contractbetween the concessionaires for the sharing of the Brazilian grid facilities.

#### *WholesaleEnergy Market and its successor, the Energy Trading Chamber - CCEE*

Originally a self-regulated entity,the Wholesale Energy Market became subject to the authorization, supervisionand regulation of ANEEL in 2002. Participants in the Wholesale Energy Marketinclude all of the large energy generating entities, distribution agents,importers and exporters of electricity and other entities authorized by ANEELto trade electric energy, or Energy Traders. Smaller generation entities arealso eligible to participate in the Wholesale Energy Market.

On August 12, 2004, the Federal Government enacted a decree settingforth the regulations applicable to the new Energy Trading Chamber (*Câmara de Comercialização de Energia Elétrica*),or CCEE and, accordingly, on November 10, 2004 the Wholesale Energy Marketwas substituted by CCEE and its activities and assets were absorbed bythis new entity. One of the main roles of theCCEE is to conduct public auctions in the regulated market, including theauction of existing electricity and new electricity. Additionally, the CCEE isresponsible, among other things, for (1) registering the volume of all theenergy 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 of electricitybought or sold in the spot market, known as the Price of Liquidation ofDifferences (*Preço de Liquidação deDiferenças*), or PLD, will take into account factors similar to theones used to determine the Wholesale Energy Market spot prices prior to the NewIndustry Model Law. Among these factors, the variation of the PLD will bemainly linked to the equilibrium between the market supply and demand forelectricity as well as the impact that any variation on this equilibrium mayhave on the optimal use of the electricity generation resources by the ONS.

The CCEE is comprised of powergeneration, distribution, trading agents and free consumers, and its board ofdirectors is comprised of four members appointed by these agents and one by theMME, who is the Chairman of the board of directors.

#### *EnergyResearch Company - EPE*

On August 16, 2004, the Federal Government enacted the decree that created theElectricity Research Company, or EPE,**astate-owned company, which is responsible for conducting strategic research onthe energy industry, including, among others, electric energy, oil, gas, coaland renewable energy sources. EPE is responsible for (i) studyingprojections of the Brazilian energy matrix, (ii) preparing and publishingthe national energy balance, (iii) identifying and quantifying energyresources and (iv) obtaining the required environmental licenses for newgeneration concessionaires. The researchcarried out by EPE will be used to subsidize MME in its policymaking role inthe domestic energy industry. EPE is also responsible for approving thetechnical qualification of new electric energy projects to be included in therelated auctions.

*The Electricity Sector Monitoring Committee (CMSE)*

Decree5,175 dated August 9, 2004 established the Electricity Sector MonitoringCommittee, or CMSE, which acts under the direction of the MME. The CMSE is responsible for monitoring and permanently evaluating the continuityand security of the electricity supply conditions and for indicating necessarysteps to correct identified problems.

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## **Independent PowerProducer**

An Independent Power Producer, orIPP, is a legal entity or a consortium which is granted an authorization orconcession to generate electric energy at its own account and risk.

An IPP may sell energy to(i) distribution companies by means of public auctions held by ANEEL orCCEE upon termination of the existing contracts, (ii) consumers with ademand of at least 3MW supplied at a voltage level equal to or greater than 69kV, (iii) new consumers with a demand of at least 3MW supplied at anyvoltage, (iv) consumers who are part of an industrial or commercialcomplex to which the IPP also supplies steam or some other by-product resultingfrom the co-generation process, (v) any group of consumers subject toagreement with the local distribution concessionaire, and (vi) anyconsumer to which the local distribution concessionaire is unable to supplyenergy prior to 180 days after an initial request.

## **Free Consumers**

Law No. 9,074 of July 7,1995, as amended by Law Nos. 9,648/98 and 10,848/04, partially abolished theexclusivity of supply of electricity that distribution concession holders hadpreviously enjoyed within their concession areas. Consumers that qualify asFree Consumers may choose their energy supply between generators and traders ofelectricity. Currently, such consumers are the ones (i) connected prior toJuly 1995 with a demand equal to or greater than 3 MW, supplied at avoltage level equal to or greater than 69 kV or (ii) connected afterJuly 1995 with a demand equal to or greater than 3 MW, supplied at anyvoltage level or (iii) that consume between 500kW and 3MW if they chooseto purchase their energy from renewable energy sources, such as smallhydroelectric facilities or biomass, also referred to as “special consumers”.  On December 21, 2006, ANEEL issued Resolution247, which regulates activities related to special consumers.

Law No. 10,848 prevents distribution companies from selling power toFree Consumers at freely negotiated prices. Supply to captive consumers must bemade only at regulated rates. In order to exercise the option to be a FreeConsumer, a consumer that complies with the legal requirements and does nothave a previously agreed term in the contract with the local distributor mustdeliver a prior notice to such concessionaire, not exceeding 36 months, unlessthe distribution concessionaire, at its discretion, agrees to a shorter term.Law No. 10,848 exceptionally allows that, until December 31, 2009,those consumers that intend to become self-producers of power or even IPPs maydo so upon delivery of a written notice to the supplier, at least 180 days inadvance.

Additionally, those who choose to be Free Consumers may only return to thestatus of captive consumers, i.e., to be once again subject to regulated rates,upon a five-year prior communication to the local distribution company, unlesssuch company, at its discretion, agrees to a shorter term. With the publicationof Decree 5,163, of July 30, 2004, Free Consumers became subject topenalties if they do not contract all of their demand under the so-called “bilateral”contracts. Also, under the new market rules, Free Consumers are obliged to joinand subscribe to the CCEE. Presidential Decree 4,413 and ANEEL’s Resolution665, of  November of 2002, setdirectives for the separation of the wholesale supply contracts of largeelectricity consumers whose supply voltage is 2.3 kV or higher. Suchlegislation determined that these large electricity consumers split theircurrent supply contracts into three types: (i) a supply agreement,(ii) a main transmission grid connection and use agreement and(iii) a distribution grid connection and use agreement. The deadlinesestablished for compliance with this resolution are (i) July 1, 2003,for those consumers whose purchased demand is higher than 3 MW, (ii) July 1,2004, for those consumers whose purchased demand is higher than 1 MW and(iii) July 1, 2005, for all other consumers.

## **Ownership Limitations**

In 2000, ANEEL established new limits on theconcentration of certain services and activities within the power industry.Under these limits, with the exception of companies participating in theNational Privatization Program (which need only comply with such limits oncetheir final corporate restructuring is accomplished) no power company(including both its controlling and controlled companies) may (1) own morethan 20% of Brazil’s installed capacity, 25% of the installed capacity of theSouth/Southeast/Central-West region or 35% of the installed capacity ofthe North/Northeast region, except if such percentage corresponds to theinstalled capacity of a single generation plant, (2) own more than 20% ofBrazil’s distribution market, 25% of the South/Southeast/Central-Westdistribution market or 35% of the North/Northeast distribution market, exceptin the event of an increase in the distribution of electricity exceeding thenational or regional growth rates or (3) own more than 20% of Brazil’strading market with final consumers, 20% of Brazil’s trading market with non-finalconsumers or 25% of the sum of the above percentages.

On February 6, 2007 ANEEL issued Resolution No. 252,which revoked some of the above mentioned limits on the concentration ofcertain services and activities within the power industry.  Resolution No. 252 revoked the limits applicableto power companies owning installed capacity in Brazil, as described in item(1) above. The limits  applicable to thedistribution and trading markets pursuant to (2) and (3) above remain in force.

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## **Incentives for Alternatives Sources of Power**

In 2000, a federal decree created the ThermoelectricPriority Program (*Programa Prioritário de Termeletricidade*,or PPT), for purposes of diversifying the Brazilian energy matrix anddecreasing its strong dependency on hydroelectric plants. The benefits grantedto thermoelectric plants under the PPT include (1) guaranteed gas supplyfor 20 years, (2) assurance of the application of the normative value bydistribution companies who purchase their electricity for 20 years, accordingto regulation from ANEEL, thereby assuring that costs related to the acquisitionof the electricity produced by thermoelectric plants will be transferred torates and (3) guaranteed access to a BNDES special financing program forthe power industry.

In 2002, the Proinfa Program was established by theFederal Government to create certain incentives for the development ofalternative sources of energy, such as wind energy projects, SmallHydroelectric Power Plants and biomass projects. Under the Proinfa Program,Eletrobrás will purchase the electricity generated by these alternative sourcesfor a period of 20 years and will pass it on to distributors. Inits initial phase, the Proinfa Program is limited to a total contractedcapacity of 3,300 MW. Projects seeking to qualify for the benefits offered bythe Proinfa Program must be fully operational by December 31, 2008.

Law 9,427/96, asamended by Law 10,762/03, further established that hydroelectric plants withinstalled capacity of 1,000 kW or less, generation plants classified as smallhydroelectric plants, and those with qualifying solar, wind, biomass orcogeneration sources with installed capacity of 30,000 kW or less, used forindependent production or self-production, will have the right to a discount of50% on the rates for use of the transmission and distribution systems, chargedon production and consumption of the energy sold. This article of the law wasregulated by ANEEL through its Resolution 077/2004.

## **Regulatory Charges**

In certain circumstances, power companies arecompensated for assets used in connection with a concession if the concessionis eventually revoked or is not renewed. In 1971, the Brazilian Congresscreated a Global Reversion Fund (*Reserva Global de Reversão*,or RGR Fund) designed to provide funds for such compensation. InFebruary 1999, ANEEL revised the assessment of a fee requiring alldistributors and certain generators operating under public service regimes tomake monthly contributions to the RGR Fund at an annual rate equal to 2.5% ofthe company’s fixed assets in service, but not to exceed 3.0% of totaloperating revenues in any year. In recent years, the RGR Fund has been usedprincipally to finance generation and distribution projects. The RGR Fund isscheduled to be phased out by 2010, and ANEEL is required to revise the rate sothat the consumer will receive some benefit from the termination of the RGRFund.

The Federal Government has imposed a fee on IPPsreliant on hydrological resources, except for small Hydroelectric Power Plantsand generators under the public services regime, similar to the fee levied onpublic-industry companies in connection with the RGR Fund.  IPPs are required to make contributions tothe Public Use Fund (*Fundo de Uso de BemPúblico*, or UBP Fund) according to the rules of thecorresponding public bidding process for the granting of concessions.Eletrobrás received the UBP Fund payments until December 31, 2002. Allpayments to the UBP Fund since December 31, 2002 are paid directly to theFederal Government.

Distribution companies must contribute to the FuelConsumption Account (*Conta de Consumo deCombustível*, or CCC Account). The CCC Account was created in 1973 togenerate financial reserves to cover elevated costs associated with theincreased use of thermoelectric energy plants, in the event of a rainfallshortage, given the higher marginal operating costs of thermoelectric energyplants compared to hydroelectric energy plants. Each energy company is requiredto contribute annually to the CCC Account. The annual contributions arecalculated on the basis of estimates of the cost of fuel needed by thethermoelectric energy plants in the following year. The CCC Account, in turn,reimburses energy companies for a substantial portion of the fuel costs oftheir thermoelectric energy plants. The CCC Account is administered by Eletrobrás.

In February 1998, the Federal Government providedfor the phasing out of the CCC Account. Subsidies from the CCC Account will bephased out over a three-year period beginning in 2003 for thermoelectric energyplants constructed prior to February 1998 and currently belonging to theInterconnected Power System. Thermoelectric energy plants constructed afterthat date will not be entitled to subsidies from the CCC Account. InApril 2002, the Federal Government established that subsidies from the CCCAccount would continue to be paid to those thermoelectric plants located inisolated systems for a period of 20 years in order to promote generation ofelectricity in these regions.

With the exception of Small Hydroelectric PowerPlants, all hydroelectric utilities in Brazil must pay fees to Brazilian statesand municipalities for the use of hydrological resources. Such amounts arebased on the amount of electricity generated by each utility and are paid tothe states and municipalities where the plant or the plant’s reservoir islocated.

In 2002, the Federal Government instituted the EnergyDevelopment Account (*Conta de DesenvolvimentoEnergético*, or CDE), which is funded through annual payments made byconcessionaires for the use of public assets, penalties and fines imposed byANEEL and, since 2003, the annual fees to be paid by agents offeringelectricity to final consumers, by means of a charge to be added

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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) universalization of energy services throughout Brazil. The CDE shallbe in effect for 25 years and shall be managed by Eletrobrás.

The New Industry Model Law establishes that thefailure to pay the contribution to RGR, Proinfa Program, the CDE, the CCCAccount, or payments due by virtue of purchase of electricity in the regulatedmarket  will prevent the non-paying partyfrom receiving a rate readjustment (except for an extraordinary revision) orreceiving resources arising from the RGR, CDE or CCC Accounts.

## **Energy Reallocation Mechanism**

Under the Wholesale Energy Market, protection from hydrologicalrisks for centrally dispatched hydrogenerators is provided through an EnergyReallocation Mechanism, or ERM, which attempts to mitigate the risks involvedin the generation of hydrological electricity by mandating that hydrogeneratorsshare the hydrological risks of the Interconnected Power System. According toBrazilian Law, the revenue arising from the sale of energy by generators doesnot depend on the energy effectively generated by them, but rather on theAssured Energy (the “Effective Power,” a reference amount of electricityestablished by the MME in accordance with studies conducted by the ONS) of eachnew plant, which is determined by the government in each relevant concessionagreement. Any imbalances between the energy actually generated and the AssuredEnergy is covered by the ERM. The purpose of the ERM is to mitigatehydrological risks, guaranteeing that all participant plants in the ERM receiverevenue related to their Assured Energy, irrespectively of the volume of energygenerated by them. In other words, the ERM reallocated the energy, transferringsurplus energy from those who generated in excess of their Assured Energy tothose who generated less than their Assured Energy. However, it is possiblethat this reallocation may correspond to an amount less than 100% of theAssured Energy of the participant plant and, if all the Assured Energy has beensold through long-term contracts, the participant plants would then be exposedto the short-term market, paying for the balance at the PLD Price (theDifferences Settlement Price). Such a situation may happen, as periods ofdrought could lead to a reduction of the hydro generating capacity of theBrazilian system as a whole. In this case, the ERM mechanism will not be ableto guarantee the Assured Energy to all hydro producers. As a result, we wouldbe forced to buy energy in the wholesale market to meet the selling contractswe have made.

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

ANEEL oversees rate regulations that govern access tothe distribution and transmission systems and establish rates (i) for theuse of the local distribution grid, or Distribution Usage Rates (“TUSD”), and(ii) for the use of the interconnected transmission grid, or TransmissionUsage Rates (“TUST”). Additionally, distribution companies of the South/South-Eastinterconnected system pay specific charges for the transmission of electricitygenerated at Itaipu. In recent years, the Federal Government has had a goal ofimproving the national transmission system, and as a result, certaintransmission companies have engaged in significant expansion programs, whichhave been paid for by increases in transmission rates and charges. The increasein transmission rates and charges paid by distribution concessionaires arepassed on to their respective consumers through Annual Rate Adjustments. Thefollowing is a summary of each rate or charge:

#### *TUSD*

The TUSD is paid by generation companies, distributionconcessionaires which use the distribution grid of others and Free Consumersfor the use of the distribution system of the distribution concessionaire towhich they are connected  and are revisedannually according to an inflation index and investments made by the distributorsin the preceding year for the maintenance and expansion of the grid. The amountto be paid by the user connected to the distribution system is calculated bymultiplying the amount of electricity contracted with the distributionconcessionaire for each connection point, in kW, by the rate in R$/kW which isset by ANEEL.

#### *TUST*

The TUST is paid by generation companies and FreeConsumers for the use of the basic transmission grid to which they areconnected and are readjusted annually according to an inflation index and theannual revenue of the transmission companies adjustment. According to criteriaestablished by ANEEL, owners of the different parts of the transmission gridhave transferred 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 published rates. Other parts of the grid that areowned by transmission companies but which are not considered part of thetransmission grid are made available directly to the interested users who pay aspecified fee.

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The TUST is currently based on the nodal costscalculated according to the long-range incremental costs methodology.Regulation by ANEEL changed the current criteria for determination of the TUSTso that the physical location of the users of the transmission grid (near orfar from the center of load) was taken into consideration. This change did notaffect CEMIG Generation and Transmission.

In accordance with Law 9,648/98 power purchase contracts, knownas Initial Contracts, have being reduced 25% since 2002. As of January, 2006,CEMIG does not have the amount of power contracted under the Initial Contracts.With this reduction the responsibility for payment of the TUST, which waspreviously paid by the distribution companies, has been transferred togeneration companies. Generation companies are paying transmissioncharges on the basis of the amount of power demand sold to consumers. Chargesfor load will be determined on the basis of maximum use of the transmissionsystem during periods of peak usage.

**ANEELInspection Charge**

Energy Services Inspection Charge (TFSEE) was institutedby Law No. 9,427/96 and is regulated by Decree No. 2,410/97. TFSEE isan annual tax calculated based on the type of service (including independentproduction), and is proportional to the size of the concession, permission orauthorization. The TFSEE is limited to 0.5% of the annual economic benefitearned by the concessionaire, permit holder or authorized party and must bepaid directly to ANEEL in twelve monthly installments.

#### *Distribution*

Until early 1993, two important principles dominatedthe rate-setting process in Brazil: (i) that electric utilities should beguaranteed an annual real rate of return of between 10% and 12%, known as theguaranteed return, on service-related assets included in the rate base and(ii) that the rates charged to each class of consumer for electricityshould be uniform throughout Brazil, notwithstanding the high costs ofdistribution to remote areas of the country. In cases where the rates set bythe Federal Government resulted in returns below 10% or above 12%, shortfalls orexcesses were credited or debited to each company’s CRC Account. In general,until 1975, rates were set at levels that afforded the guaranteed return tocompanies in the sector. From 1975 through early 1993, however, rates werefixed at levels that in nearly all cases did not permit electric utilities toachieve the guaranteed return because the Federal Government sought to uselower rates to combat inflation. The practical effects of this rate-setting andcompensation system were significant fluctuations in real terms in the level ofrates during the period and a substantial increase in the CRC Account balancesof most utilities.

Legislative changes in 1993 abolished the guaranteedreturn concept and the requirement that electricity rates be uniform throughoutBrazil. Instead, each utility was to propose a rate structure based on itsparticular circumstances for approval by federal regulatory authorities. Theproposed rate was to be calculated taking into account the concessionaire’sdesired level of remuneration as well as, among other things, operatingexpenditures, including personnel costs, the costs of electricity purchasedfrom other concession companies, certain construction costs, depreciation andamortization charges, taxes other than income taxes and other charges. Thislegislation abolished the CRC Accounts and permitted concessionaires withpositive CRC Account balances to offset such balances against obligations ofsuch concessionaires to the Federal Government, to federal financial institutionsand to other concessionaires in the electricity sector. In connection withthese regulatory reforms, the authorities granted electric utilitiessignificant real rate increases and established a mechanism for automaticadjustments in rates to take account of inflation.

The concession agreements for distribution servicesexecuted with the Federal Government establish the maximum rates distributionconcessionaires are allowed to charge their consumers.

Distribution rates are subject to review by ANEEL,which has the authority to adjust and review rates in response to changes inelectricity purchase costs and market conditions. When adjusting distributionrates, ANEEL divides the costs of distribution companies between (1) coststhat are beyond the control of the distributor, or Parcel A costs, and(2) costs that are under the control of the distributor, or Parcel Bcosts. The rate adjustment is based on a formula that takes into account thedivision of costs between the two categories.

Parcel A costs include, among others, the following:

·                                          costsof electricity purchased for resale pursuant to Initial Contracts;

·                                          costsof electricity purchased pursuant to bilateral agreements that are freelynegotiated between parties; and

·                                          certainother charges for the transmission and distribution systems.

The pass-through of electricity purchase costs under supply agreementsnegotiated before the enactment of the New Industry Model Law is subject to aceiling based on a normative value established by ANEEL for each different sourceof energy (such as

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hydroelectric,thermoelectric and alternative sources of energy). The normative value appliedto the supply contracts is adjusted annually in order to reflect increases incosts incurred by generators. Such adjustment takes into account(1) inflation, (2) costs incurred in hard currency and (3) fuelrelated costs (such as supply of natural gas). Costs incurred in IGP-M shallcorrespond to at least 25% of all costs incurred by generators.

ParcelB costs are those that are within our control and include, among others:

·                  return on investment related to the concession areaand its expansion;

·                  taxes on revenue;

·                  depreciation costs; and

·                  operation and maintenance costs of the distributionsystem.

Each distribution company’s concession agreementprovides for an annual rate adjustment (*reajuste anual*).In general, Parcel A costs are fully passed through to consumers. Parcel Bcosts, however, are restated for inflation in accordance with General MarketPrice Index (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*)every few years. 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 such company’s concession and (2) determining the X factor, whichis based on three components:(i) Xc, whichis a factor based on our consumer satisfaction as surveyed by ANEEL and is seteach year; (ii) Xa, which is a factor based on the difference between theIPCA and IGP-M inflation indexes multiplied by our total personnel costs (sinceour labor increases are based on the IPCA and our tariff increases are based onthe IGP-M) and is set each year; and (iii) Xe, which is a factor based onour productivity gains over a five-year period and is set every five years.

The X factor is used to adjust the proportion of thechange in the IGP-M index that is used in the annual adjustments. Accordingly,upon the completion of each periodic revision, application of the X factorrequires distribution companies to share their productivity gains with finalconsumers.

In addition, concessionaires of electricitydistribution are entitled to extraordinary review of rates (*revisão extraordinária*), on a case by case basis, to ensuretheir financial equilibrium and compensate them for unpredictable costs,including taxes, that significantly change their cost structure.

Low-incomeconsumers benefit from a special rate established by the Federal Government(through ANEEL), subsidized by regular consumers. Since 2002, the deficitgenerated by the application of this special rate for new low-income consumershas been financed by Eletrobrás with funds from the RGR (Global ReversionReserve) and the CDE (the Energy Development Account). In 2002, Decree4336/02 determined that the distribution companies would be compensated forthe revenue loss resulting from the Special rate, with funds fromEletrobrás.

## **The New Industry Model Law**

The New Industry Model Law introduced material changesto the regulation of the power industry with a view to providing incentives toprivate and public entities to build and maintain generation capacity that willassure the supply of electricity within Brazil at low rates through competitiveelectricity public bidding processes. The key features of the New IndustryModel Law include:

·                                          Creation of two environmentsfor the sale of energy with (i) a more stable market in terms of supply ofenergy, so as to provide an additional guarantee of supply to captiveconsumers, referred to as the Regulated Contracting Environment (ACR) orregulated market; and (ii) a market especially destined for certainparticipants (that is to say, Free Consumers and selling companies) which willpermit a certain degree of competition in the context of the regulated market,known as the Free Contracting Environment (ACL), or free market.

·                                          Restrictionson certain activities of distributors, so as to permit them to focus on theircore business to promote more efficient and reliable services to captiveconsumers.

·                                          Eliminationof self-dealing, in order to provide an incentive to distributors to purchaseelectricity at the lowest available prices rather then buying electricity fromrelated parties.

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·                                          Respectfor contracts executed prior to the New Industry Model Law, in order to provideregulatory stability to transactions carried out before its enactment.

The New Industry Model Law also excluded Eletrobrásand its subsidiaries from the National Privatization Program, which is aprogram originally created by the Federal Government in 1990 with a view topromote the privatization process of state-owned companies.

***Challenges to the Constitutionality of the New Industry Model Law***

The New Industry Model Law is currently being challenged on constitutionalgrounds before the Brazilian Supreme Court. The Federal Government moved todismiss the actions arguing that the constitutional challenges were mootbecause they related to a provisional measure that had already been convertedinto law. However, on August 4, 2004, the Brazilian Supreme Court deniedthe government’s motion and decided to hear the actions and rule on theirmerits. OnMarch 30th, 2005, after the vote by two (2) Justices in favor of apreliminary injunction to suspend the effects of the New Industry Model Law,five (5) other Justices voted against such suspension and the New IndustryModel is currently in full force and effect. In such vote, the Justicesappreciated the main challenge of the lawsuit, which is based on the fact thatthe New Industry Model Law was established by a Provisional Measure, instead ofa Law, approved by National Congress. Thus a trend for the vote of theconstitutionality of the New Industry Model Law has been demonstrated.Notwithstanding such trend, the merits of the lawsuit has not yet beenappreciated and a final decision upon the matter is subject to the favorablevote of the majority of the 11 Justices, provided that a quorum of at least eightJustices must be present. To date, the Brazilian Supreme Court has not reacheda final decision upon the merits of such lawsuit and we do not know when such adecision may be reached. Therefore, the New Industry Model Law is currently inforce. Regardless of the Supreme Court’s final decision, certain portions ofthe New Industry Model Law relating to restrictions on distributors performingactivities unrelated to the distribution of electricity, including sales ofenergy by distributors to Free Consumers and the elimination of contractsbetween related parties are expected to remain in full force and effect.

If all or a portion of the New Industry Model Law is determinedunconstitutional by the Brazilian Supreme Court, the regulatory schemeintroduced by the New Industry Model Law may not come into effect, generatinguncertainty as to how and when the Federal Government will be able to introducechanges to the electric energy sector. We have already contracted a significantportion of our electricity capacity and needs until 2013, and the pass-throughto rates of such electricity is expected to continue to be governed by theregulation in effect on the date of the contract. As such, irrespective of theoutcome of the Supreme Court’s decision, we believe that in the short term, theeffects of any such decision on our activities will be limited. Nevertheless,the exact effect of an unfavorable outcome of the legal proceedings on us isdifficult to predict and it could have an adverse impact on our business andresults of operations.

*Coexistenceof Two Electricity**Trading Environments.*Underthe New Industry Model Law, electricity purchase and sale transactions will becarried out in two different market segments: (1) the regulated market, orthe Pool, which contemplates the purchase by distribution companies throughpublic bids of all electricity necessary to supply their consumers and(2) the free market, which encompasses purchase of electricity bynon-regulated entities (such as the Free Consumers and energy traders).

The electricity arising from (1) low capacitygeneration projects located near the consumption points (such as certainco-generation plants and the Small Hydroelectric Power Plants), (2) plantsqualified under the Proinfa program, as defined below,(3) Itaipu and(4) purchase and sale agreements entered into before the New IndustryModel Law,  will not be subject tothe public bidding process for the supply of electricity to the Pool. Theelectricity generated by Itaipu, located on the border of Brazil and Paraguay,is traded by Eletrobrás and the Federal Government, by means of ANEEL, anddetermines the volumes that shall be mandatorily purchased by each distributionconcessionaire. The rates at which the Itaipu-generated electricity is tradedare denominated in U.S. dollars and established by ANEEL pursuant to a treatybetween Brazil and Paraguay. As a consequence, Itaipu rates rise or fall inaccordance with the variation of the U.S. Dollar/real exchange rate. Changes inthe price of Itaipu-generated electricity are, however, subject to the Parcel Acost recovery mechanism.

#### *TheRegulated Market (the ACR)*

In the regulated market, distribution companieswill buy purchase electricity for their captive consumers through public bidsregulated by ANEEL and conducted by CCEE.

Energy purchases, will take place through two types of bilateral contract:(i) Energy Agreements (*Contrato deQuantidade de Energia*) to be executed with hidroelectric generatingunits and (ii) Capacity Agreements (*Contratosde Disponibilidade de Energia*). Under an Energy Agreement, agenerator commits to supply a certain amount of electricity and assumes therisk that electricity supply could be adversely affected by hydrologicalconditions and low reservoir levels, among other conditions, that couldinterrupt the supply of electricity, in which case the generator will berequired to purchase the electricity elsewhere in order to comply with its supplycommitments. Under a Capacity Agreement, a generator commits to make a certainamount of capacity available to the ACR.

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In this case, the revenue of the generator is guaranteed and thehydrological risk is passed on to distributors. However potential additionalcosts of the distributors are passed on to consumers. Together, theseagreements comprise the energy purchase agreements in the ACR (*Contratos de Comercialização de Energia no AmbienteRegulado*), or CCEAR).

Under the New Industry Model Law, the estimate of demand fromdistributors is the principal factor in determining how much electricity thesystem as a whole will contract. Under the new system, distributors areobligated to contract 100% of their projected electricity needs, as opposed to95% under the previous regime.

Theregulation under the New Industry Model Law stipulates that distributioncompanies that contract less than 100% of their total captive consumption maybe subject to fines. There are mechanisms to reduce this possibility, such asthe purchase of energy from other distribution companies whose energy purchasesexceeded forecasted demand, or the purchase of energy in auctions during theyear. Any remaining shortfall from 100% of total captive consumption can bebought at the spot market price and the concessionaire would be subject to apenalty payment equivalent to the shortfall multiplied by the reference valuerate established by ANEEL. If a company contracts more than 103% of its captiveconsumption, it would be subject to price risk if it sells this energy in thespot market in the future. To reduce such price risk, a company may reduce thepurchase contracts in the “existing energy” auction by up to 4% each year, andreduce those contracts due to loss of consumers that became free and aresupplied by generators directly. Any surplus may be negotiated in the spotmarket.

#### Accordingto the New Industry Model Law, electricity distribution concessionaires will beentitled to pass on to their respective consumers, in  costs related to electricity purchasedthrough public bids, limited to the equivalent of 103% of their verified annualload, as well as any taxes and industry charges related to the public bids.

#### *The FreeMarket (the “ACL”)*

In the free market electricity is traded between generation concessionaires, IPPs,self-generators, energy traders, importers of energy and Free Consumers. Thefree market will also include existing bilateral contracts between generatorsand distributors until they expire. Upon expiration, such contracts must beexecuted under the New Industry Model Law guidelines.

A consumer that is eligible to choose its supplier, known as “potentiallyfree consumer”, and that has a contract with a distribution company for anundetermined duration, may only be able to purchase electricity from othersuppliers in the year following the declaration of its intention to terminatesuch contract, which declaration is required to be sent to the distributor atleast 15 days before the day such distributor is required to state itselectricity needs for the next auction, except as otherwise provided in thecontract.

Potentially free consumers are those whose demand exceeds 3 MW at a voltageequal to or higher than 69kV or at any voltage level, so long as the supplybegan after July 1995. In addition, consumers with contracted demand equal toor higher than 500kW or more may be serviced by suppliers other than theirlocal distribution company if they move to energy from alternative energysources, such as wind, biomass or small hydroelectric plants.

Once a consumer has opted for the free market, it mayonly return to the regulated system once it has given the distributor of itsregion five years notice, provided that the distributor may reduce such term atits discretion, except for special consumers, which may provide 180 days’notice. This extended  notice periodseeks to assure that, if necessary, the construction of cost efficient newgeneration could be finalized in order to supply the re-entry of Free Consumersinto the regulated market. In addition, distributors may also reduce theamount of energy purchased according to the volume of energy that they will nolonger distribute to free consumers. State-owned generators may sellelectricity to Free Consumers, but as opposed to private generators, they areobliged to do so through an auction process.

Currently, high tension consumers who purchase their electricity fromdistributors in the regulated market do so at a subsidized price. This subsidy,known as the “cross-subsidy,” is being gradually eliminated by ANEEL, and itsfull termination is scheduled for 2007. The potentially free consumers arerequired to enter into separate contracts for the connection and use of thetransmission or distribution lines and for the purchase of power.

#### *RestrictedActivities of Distributors*

Distributors in the interconnected Brazilian grid arenot permitted to (1) develop activities related to the generation ortransmission of electricity, (2) sell electricity to Free Consumers,except for those in their concession area and under the same conditions andrates maintained with respect to captive consumers in the ACR, (3) hold,directly or indirectly, any interest in any other company, except interestin entities incorporated for raising, investment and management of fundsnecessary for the distributor or its controlled, controlling or under commoncontrol companies,  corporation orpartnership or (4) develop activities that are unrelated to theirrespective concessions, except for those permitted by law or in the relevantconcession agreement. Such requirement is also not

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applicable for distributors with respect to services rendered for isolatedpower systems and for its own market when demand is up to 500 GWh per year. Therationale of this requirement is to (1) preserve each concession’sidentity, enabling specific analysis of generation, transmission anddistribution activities and (2) stimulate competition in generation andtrading activities and, at the same time, to improve regulation in transmissionand distribution activities. The New Industry Model Law has granted atransition period of 18 months for companies to adjust to these rules, andANEEL can extend such term for another 18 months in the event that companiesare unable to comply with such requirements within the prescribed timeframe.

#### *Eliminationof Self-Dealing*

Since the purchase of electricity for captiveconsumers will be performed through the ACR, so-called self-dealing, whendistributors were permitted to meet up to 30% of their electricity needsthrough electricity that was acquired from affiliated companies, is no longerpermitted, except in the context of agreements that were duly approved by ANEELbefore the enactment of the New Industry Model Law. Distributors may, however,make purchases from affiliated companies if the distributor participates in thepublic bidding process through the ACR, and the generator that bids the lowestprice is an affiliated party.

#### *ContractsExecuted prior to the New Industry Model Law*

The New Industry Model Law provides that the contractsexecuted by electricity distribution companies and approved by ANEEL before theenactment of the New Industry Model Law will not be amended to reflect anyextension in their terms or modification in prices or volumes of electricityalready contracted, with the exception of Initial Contracts, as describedbelow.

During the transition period to a free and competitiveenergy market (1998-2006) that was established by the Power Industry Law,purchases and sales of electricity between generation and distributionconcessionaires must occur pursuant to Initial Contracts. The purpose of thetransition period was to permit the gradual introduction of competition in theindustry and to protect market participants against exposure to potentiallyvolatile spot market prices.

Under the Power Industry Law, electricity committed toInitial Contracts is reduced by 25% each year from 2002 to 2005. Generationcompanies will be allowed to trade their excess, non-contracted electricity inthe ACR or in the free electricity market and may conduct public auctions totrade any non-contracted volumes with Free Consumers or energy traders “The “Initial Contracts” expired inDecember 2005, and all the released energy was renegotiated in the  ACR or inthe ACL.

***Electricity Purchases under the New IndustryModel Law***

Decree 5,163/04 provides that * *distributors must contract all oftheir electricity demand necessary to serve 100% of their markets under theguidelines of the New Industry Model Law. Electricity-selling agents *(agentes vendedores)*must provideevidentiary support linking the allotted energy to be sold to existing orplanned power generation facilities. Agents that do not comply with suchrequirements are subject to penalties imposed by ANEEL.

Beginning in 2005, all electricity distribution companies are required tonotify MME, by August 1 of each year, of their estimated electricitydemand for each of the subsequent five years. In addition, distributioncompanies will be required to specify the portion of the amount they intend tocontract to supply its Potentially Free Consumers.

The MME will establish the total amount of energy to be traded in theregulated market and the list of generation facilities that will be allowed toparticipate in the auctions in each year.

The new regulations provide for electricity distribution companies tofulfill their electricity supply obligations primarily through public auctions,in accordance with the procedures described below.

*In addition to these auctions,a distribution company may purchase electricity:  (1) from generation companies that areconnected directly to the distribution company other than hydrogenerationcompanies with capacity higher than 30MW and certain thermogenerationcompanies, (2) from electricity generation projects participating in theProinfa Program, and (3) power purchase agreement entered into before theNew Industry Model Law was enacted.*

***EnergyAuctions in the Regulated Contracting Environment***

Since August 2005, all electricity  distribution companies and  free consumers are required to notify MME, byAugust 1 of each year, of their estimated electricity demand or estimatedelectricity generation, as the case may be, for each of the subsequent tenyears. Each distribution company will be required to notify MME, within the 60day period preceding each electricity auction, of the amounts of electricitythat it intends to contract in the auction. In addition, distribution companieswill be required to specify the portion of the contracted amount they intend touse to supply potentially free consumers.

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On December 7, 2004, CCEE, under the coordination of ANEEL, conductedthe first existing energy auction, under the procedures and conditionsestablished by the New Industry Model Law.

Distributors delivered by December 2, 2004 their declaration ofestimated contracting demand for the next five years (including a portionrelated to the Potentially Free Consumers). Based on these declarations, theMME established the total amount of energy to be traded in the 2004 auction.The auction was held in two phases, through an electronic system.

Following the conclusion of the 2004 auction, the distribution companiesand sellers signed CCEARs setting forth the terms, conditions, prices andcontracted amounts of electricity. The distributor was also required to providesecurity interests in connection with the CCEARs. Generally, the seller will begranted an interest in receivables in an amount equal to 110.0% of the averageamount of the last three invoices under the CCEAR.

During the auction, a total of 17,008 MW were sold, corresponding to 96.0%of the distribution companies’ total demand, of which 9,054 MW were sold at anaverage price of R$57.51/MWh for eight-year contracts beginning in 2005; 6,782MW were sold at an average price of R$67.33/MWh for eight-year contractsbeginning in 2006; and 1,172 MW were sold at an average price of R$75.46/MWhfor eight-year contracts beginning in 2007- all prices refer to December, 2004.

We sold 65,008,656 MWh through our generation company at an average priceof R$69.58/MWh for eight-year contracts beginning in 2006 and acquired37,180,042 MWh at an average price of R$57.51/MWh for eight-year contractbeginning in 2005; and 64,457,335 MWh at an average price of R$67.33/MWh foreight-year contracts beginning in 2006.

The security interests offered by the distributors tothe generators in connection with the CCEARs are usually in the form ofreceivables or bank certificates of deposit. In a few cases, bank guaranteeshave been used.

The second existing energy auction under the NewIndustry Model Law was held in April 2005. CemigDistribution and CemigGeneration and Transmission entered into electricity purchase and salecontracts in this auction.During the auction, a total of 1,325 MW weresold, corresponding to only 42% of the energy initially foreseen bythe MME for 2008, at an average price of R$83.13/MWh for eight-year contractsbeginning in 2008. The energy to be sold with delivery initiating in 2009 wasautomatically excluded from the auction in accordance with therules determined by MME, as the price for this product during the auctionreached a value that was below the market expectations.

Cemig Distribution purchased, to serve its market, 105average MW in contracts with eight-year terms, with the supply starting onJanuary 1, 2008, at an average price of R$83.13/MWh. The contracts weresigned with 10 companies holding generation concessions, including CemigGeneration and Transmission.

In the same auction, Cemig Generation and Transmissionsold 105 average MW in contracts with eight-year terms, with the supplybeginning on January 1, 2008. The sale price of the electricity isR$83.50/MWh. The contracts were signed with 34 distributors, including Cemig Distribution,which serve consumers in all the regions of the Brazilian national grid system.

The third auction took place on October 11, 2005.It was designed for distributors to buy the energy they were not able to buy inthe previous auctions. Two products were offered: (i) a three yearcontract for the period 2006-2008 and (ii) a eight year contractbeginning in 2009. The demand of 102 MW for the three year contract was fullyserved, and the average price was R$ 62.95/MWh. For the contract beginning in2009, 1,166 MW (59% of the total demand for that year) were sold at an averageprice of R$ 94.91/MWh. Our companies did not sell or purchase energy in thisauction.

New Energy Auctions will be held (1) five years before the initialdelivery date (referred to as “A-5” auctions), and (2) three yearsbefore the initial delivery date (referred to as “A-3” auctions). Therewill also be electricity auctions from existing power generation facilities(1) held one year before the initial delivery date (referred to as “A-1”auctions) and (2) held no longer than four months before the delivery date(referred to as “market adjustments”), in which the total amount contracted maynot exceed 1% of the distribution concessionaire’s total demand.  The invitations to bid in the auctions willbe prepared by ANEEL, in compliance with guidelines established by the MME.

Each generation company that participates in the auctions will execute apower purchase agreement with each distribution company, in proportion to thedistribution companies’ respective estimated demand for electricity. The onlyexception to these rules relates to the market adjustment auction, wherethe contracts will be between specific selling and distribution companies. TheCCEAR of both “A-5” and “A-3” auctions will have  terms between 15 and 30 years, and the CCEAR of “A-1” auctions will havea term between five and 15 years. Contracts arising from market adjustmentauctions will be limited to a two-year term.

The first auction for theexpansion of the generation capacity, also referred to as the “NewEnergy Auction”, under the New Industry Model Law  was held in December 2005. A total of 3,286 average MW wassold, corresponding to 49 plants, 20 of which are

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yet to be built, 11 hydroelectric plants and 9 thermalplants. The term of these contracts is 30 years for hydroelectric plants and 15years for thermal plants, with supply to begin in 2008, 2009 and 2010.

As a result of the First New Energy Auction, Cemig Generation andTransmission has been granted the right to construct a new 140MW hydroelectricplant, in the State of Minas Gerais, named UHE Baguari, in a consortium withFurnas Centrais Elétricas S.A and Neoenergia. S.A.

Cemig Distributionparticipated in this auction, purchasing an amount of 39.8 average MW forinitial supply in 2008, 62 average MW for initial supply in 2009, and 181average MW for initial supply in 2010, at respective average prices of R$127.15/MWh, R$ 127.77/MWh and R$ 117.11/MWh.

Only 855 averageMW, that is to say 26% of the volume sold in the first New Energy Auction,actually refers to new power plants that did not have any concession orauthorization previously granted. Of these new projects, 53% are hydroelectric.Only 70% of the purchasing needs declared by the distributors were sold at theauction.

At the auction 64%of the participants were public-sector companies, Petrobras representing 38%,and Eletrobrás 20%. Of the 855 average MW of new concessions andauthorizations, only 29% of the investments are from the private sector.

One of the factorsthat contributed to the low participation by private investors in the totalamount sold at the First New Energy Auction was the maximum price stipulated bythe government for contracting of hydroelectric energy, R$ 116.00/MWh.Investors considered this amount to be insufficient for the return oninvestment in almost all the hydroelectric plants. At the same time, all thenew projects tendered for were contracted, basically by public-sectorcompanies.

Brazil needs significantinvestments for expansion of the supply of electricity compatible with thedemand growth. For these investments to be feasible, participation byprivate-sector capital is essential. In this context the results of the firstNew Energy Auction are not yet enough to represent attractiveness for the newmodel for the electricity sector. However, the new sector regulations put inplace important mechanisms necessary for expansion of generation capacity —including long-term energy purchase contracts.

In 2006, CCEE, under thecoordination of ANEEL, conducted two new energy auctions. In the second newenergy auction the total amount of energy sold was on average 1,682 MWs. Thestart date for the supply of this energy is in 2009 and recorded in 15-year(thermal plants) and 30-year (hydro plants) contracts according to the sourceof the energy. Only 49% of the energy sold in this auction was from new powerplants, which are still not operating. The other 51% was from existing plants,which participated in the auction like “botox” plants. The average price of theenergy sold at the auction was R$128.95/MWh. The average price for hydro wasR$126.77/MWh and the average price for thermal was R$132.39/MWh. These priceswere the result of the auction’s rules which give a maximum price for hydroelectricplants that is less than the maximum price for thermal plants. Cemig Generationand Transmission sold an average of 355 MWs in a 30-year contract at an averageprice of R$125.48/MWh. The energy sold is from “botox” hydro plants like Irapé,Queimado, Porto Estrela and Aimorés. Cemig Distribution bought an average of 98MWs at an average price of R$128.12 from different sellers and differentsources (hydro and thermal plants).

In the third new energyauction, CEMIG sold an average of 1,104 MWs in 15-year (thermal) and 30-year(hydro) contracts each beginning in 2011. The average price of this auction wasR$128.90/MWh. The average hydroelectric price was R$120.86/MWh and an averageof 569 MWs were soldfrom this source. The average thermal price was R$ 137.44/MWh and withan average of 535 MWs sold from this source. Cemig Generation and Transmission did not sell energy in this auction.Cemig Distribution bought an average of 48 MW at the average price of the auction.

CCEE also conducted twoexisting energy auctions in 2006. In the fifth existing energy auction thetotal amount of energy sold was 204 MW in eight-year contracts beginning in2007. The average price of this auction was R$ 104.74/MWh. According to thecommercial strategy of the Company, Cemig Generation and Transmission and CemigDistribution did not participate in this auction.

The other existingauction was only a market adjustment auction with three-month contracts withaverage sales of 10 MW. Cemig Generation and Transmission and Cemig Distributiondid not participate in this auction, according to the commercial strategy.

In June 2007, the Electricity Trading Chamber (CCEE),under the coordination of ANEEL, conducted the first Alternative-SourcesElectricity Auction, under procedures and conditions set by the Federal Governmentthrough the Mining and Energy Ministry (MME). The auction placed a total of 186average MW – all for supply starting in 2010, under contracts for 30 years (forSmall Hydro Plants) and 15 years (for biomass, wind, and other sources). Of thetotal contracted, 75% was for supply from alternative sources (biomass) and 25%from Small Hydro Plants. The average price of the energy sold at this auctionwas R$137.90/MWh (R$134.99/MWh for the hydroelectric product and R$138.85/MWhfor alternative-sources product).

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The total amount of power offered was about 515average MW, of which only 36% was contracted. CEMIG Generation and Transmissiondid not participate in this auction as a seller, but CEMIG Distribution bought81.35 average MW, at the average price of the auction.

We are planning toparticipate in the 5th and 6th  Public Auction for New Energy to be held byANEEL on July 26, 2007.

***Reduction of the Level of Contracted Electricity***

Decree No. 5,163/04, which regulates the trade of electricity underthe New Industry Model Law, allows distribution companies to reduce theirCCEARs:  (1) to compensate for theexit of Potentially Free Consumers from the regulated market, pursuant to aspecific declaration delivered to MME, (2) by up to 4.0% per year of theinitial contracted amount due to market deviations from the estimated marketprojections, at the distribution companies’ discretion, beginning two yearsafter the initial electricity demand was declared and (3) in the event ofincreases in the amounts of electricity acquired pursuant to contracts enteredinto before March 17, 2004.

The circumstances in which the reduction of the level of contractedelectricity will occur will be duly set forth in the CCEARs, and may be exercisedat the sole discretion of the distribution company and in compliance with theprovisions described above and ANEEL regulations.

Pursuant to ANEEL’s regulations, the reduction of the level of contractedenergy under the CCEARs of existing energy shall be preceded by the so-calledMechanism of Compensation of Surplus and Deficits, or MCSD, by means of whichdistribution companies which have contracted energy in excess of their demandmay assign a portion of their CCEARs to distribution companies which havecontracted less energy than needed to meet their consumer’s demand.

***Limitation on Pass-Through***

The rules also limit the pass-through of costs of electricity to finalconsumers. The Annual Reference Value corresponds to the weighted average ofthe electricity prices in the “A-5” and “A-3” auctions, calculatedfor all distribution companies, and creates an incentive for distributioncompanies to contract for their expected electricity demands in the “A-5”auctions, where the prices are expected to be lower than in “A-3”auctions. The Annual Reference Value will be applied in the first three yearsof the power purchase agreements from new power generation projects. After thefourth year, the electricity acquisition costs from these projects will beallowed to be fully passed-through. The decree establishes the followinglimitations on the ability of distribution companies to pass through costs toconsumers:

·                                          nopass-through of costs for electricity purchases that exceed 103% of regulatorydemand;

·                                          limitedpass-through of costs for electricity purchases made in an “A-3” auction,if the volume of the acquired electricity exceeds 2.0% of the demand verifiedin “A-5” auctions;

·                                          limitedpass-through of electricity acquisition costs from new electricity generationprojects if the volume re-contracted through CCEARs of existing generationfacilities is below a “Contracting Limit” defined by Decree No. 5,163;

·                                          from2005 to 2009, electricity purchases from existing facilities in the “A-1”auction is limited to 1.0% of distribution companies’ demand. If the acquiredelectricity in the “A-1” auction exceeds 1.0%, pass-through of costs ofthe exceeding portion to final consumers is limited to 70.0% of the averagevalue of such acquisition costs of electricity generated by existing generationfacilities. The MME will establish the maximum acquisition price forelectricity generated by existing projects;

·                                          electricitypurchases in “market adjustment” auctions are limited to 1% of a distributionconcessionaire’s total demand and passthrough of costs is limited to annualreference value; and

·                                          ifdistributors fail to comply with the obligation to fully contract their demand,the pass-through of the costs from energy acquired in the short-term marketwill be the equivalent to the lower of the PLD or the Annual Reference Value.

A-19

----

#### *Rationingunder the New Industry Model Law*

The New Industry Model Law establishes that, in asituation where the Federal Government decrees a compulsory reduction in theconsumption of electricity in a certain region, all energy amount agreements inthe regulated market, registered within the CCEE in which the buyer is located,shall have their volumes adjusted in the same proportion to the consumptionreduction.

## **Environmental Regulations**

Brazilian environmental legislation requires thatenvironmental licenses must be obtained wherever there is construction,installation, expansion or operation of any undertaking that uses naturalresources, causes environment degradation, pollutes or has the potential to causedegradation or pollution to the environment.

New generation, transmission or distribution projectsor activities that expand the electricity sector require a series ofenvironmental procedures to be complied with. Environmental impact studies areprepared by multi-disciplinary teams, which analyze the environmental impactand propose solutions to minimize the effects of these projects on theenvironment.

The environmental impact studies are then submitted tothe federal or state authorities for examination, and also, in public hearings,to the population of the communities affected by the project.

The process of licensing of undertakings withsignificant environmental impact follows a three-phase procedure, in which thefollowing licenses have to be acquired:

·                                          *prior license*, attesting that the projectis environmentally viable;

·                                          *installation license*, enabling the work tobe built; and

·                                          *operation license*, for actual startup ofthe project.

For the following undertakings, the application mustbe made to the federal environmental body:

·                                          thoselocated on international borders or developed in conjunction with an adjoiningcountry, or in territorial waters, on the continental shelf, in an exclusiveeconomic zone, on indigenous lands or in federal protected areas;

·                                          locationsor developments in more than one Brazilian state;

·                                          wherethe direct environmental impacts surpass the country’s territorial limits orthe limit of one or more Brazilian state; or

·                                          whereradioactive material is involved, or nuclear energy used.

Applications for the following types of project haveto be made to the environmental bodies of the relevant Brazilian state:

·                                          thoselocated or developed in more than one municipality, or in state or FederalDistrict conservation areas;

·                                          thoselocated or developed in forests or other forms of natural vegetation subject topermanent preservation;

·                                          thosewhose direct environmental impacts exceed the territorial limits of one or moremunicipalities; or

·                                          whendelegated, by legal instrument or agreement, by the union to the states or tothe Federal District.

The municipal environmental body, after acquiring aposition statement from the competent bodies of the federal government, and thestates or Federal District, as applicable, gives the environmental license forprojects and activities with local environmental impact, and for any which aredelegated by the state, by legal instrument or agreement.

A-20

----

**Exhibit Index**
| Exhibit    | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                        |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number** | ** ** | **Document**                                                                                                                                                                                                                                                                                                                                                                                      |
| 1          |       | Corporate by-laws of CEMIG, as amended and in effect  since April 26, 2007.                                                                                                                                                                                                                                                                                                                       |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                              |
| 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 June 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 June 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 June 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   |   | Financing Agreement by Extension of Credit  No. 02.2.962.3.1, dated February 7, 2003, between BNDES and CEMIG  and Intervening Third Parties (incorporated by reference to Exhibit 4.9  to our Annual Report on Form 20-F filed on March 26, 2003  (File No. 1-15224)).                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.13   |   | 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)).                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.14   |   | 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)).                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.15   |   | 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)).                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.16   |   | 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.                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.17   |   | 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.                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.18   |   | 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.                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.19   |   | 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.                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.20   |   | 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.                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 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 July 2, 2007.                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 12.2   |   | Chief Financial and Investor Relations Officer  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,  dated July 2, 2007.                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 13.1   |   | Chief Executive Officer Certification pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002, dated July 2, 2007.                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 13.2   |   | Chief Financial and Investor Relations Officer  Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,  dated July 2, 2007.                                                                                                                                                                                                                                                                                                  |

 

----

***Companhia Energética de Minas Gerais – CEMIG***

*Financial Statements as of December 31, 2006 and2005 and for the Years Ended December 31, 2006, 2005 and 2004 and Report ofIndependent Registered Public Accounting Firm*

----

REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Management of

Companhia Energética de Minas Gerais - CEMIG

Belo Horizonte – MG,Brazil

We have auditedthe accompanying consolidated balance sheets of Companhia Energética de MinasGerais – CEMIG and subsidiaries (the “Company”) as of December 31, 2006 and2005, and the related consolidated statements of income, shareholders’ equity,and cash flows for each of the three years in the period ended December 31,2006.  These financial statements are the responsibility of the Company’smanagement.  Our responsibility is to express an opinion on thesefinancial statements based on our audits.

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining,on a test basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

In our opinion,such consolidated financial statements present fairly, in all materialrespects, the financial position of the Companhia Energética de Minas Gerais –CEMIG as of December 31, 2006 and 2005, and the results of their operations andtheir cash flows for each of the three years in the period ended December 31,2006, in conformity with accounting principles generally accepted in the UnitedStates of America.

As discussed inNotes 2 and 15 to the consolidated financial statements, the Company adoptedStatement of Financial Accounting Standards No. 158, “Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans – an amendment of FASBStatements No. 87, 88, 106, and 132(R)”, effective December 31, 2006. Also, asdiscussed in Note 2 to the consolidated financial statements, the Companyadopted the Securities and Exchange Commission’s Staff Accounting Bulletin 108 “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements”, effective January 1, 2006.

We have alsoaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the effectiveness of the Company’s internalcontrol over financial reporting as of December 31, 2006, based on the criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated June 29,2007, expressed an unqualified opinion on management’s assessment of theeffectiveness of the Company’s internal control over financial reporting and anunqualified opinion on the effectiveness of the Company’s internal control overfinancial reporting.

/s/ Deloitte Touche Tohmatsu Auditores Independentes

 

Belo Horizonte, Brazil

June 29, 2007

F-2

----

**COMPANHIA ENERGÉTICA DE MINASGERAIS - CEMIG**

**CONSOLIDATEDBALANCE SHEETS**

**DECEMBER 31, 2006 AND 2005**

**(Expressed in millions ofBrazilian *reais*)**

**ASSETS**
| ** **                                                      | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                      | ** ** | **2006**              | ** ** | **2005** | ** ** |
| CURRENT ASSETS:                                                 |       |                  |       |   |   |
| Cash and cash equivalents (note 6)                              |       | 1,108                 |       | 1,349 |   |
| Accounts receivable, net (note 7)                               |       | 1,692                 |       | 1,316 |   |
| Accounts receivable - use of basic transmission  network        |       | 350                   |       | 303 |   |
| Deferred regulatory assets (note 4)                             |       | 1,149                 |       | 1,150 |   |
| Deferred income taxes benefits (note 5)                         |       | 89                    |       | 43 |   |
| Recoverable taxes (note 8)                                      |       | 205                   |       | 350 |   |
| Materials and supplies                                          |       | 29                    |       | 25 |   |
| Other                                                           |       | 231                   |       | 242 |   |
|                                                            |       | 4,853                 |       | 4,778 |   |
|                                                            |       |                  |       |   |   |
| INVESTMENTS  (note 9)                                           |       | 523                   |       | 136 |   |
|                                                            |       |                  |       |   |   |
| PROPERTY, PLANT  AND EQUIPMENT, NET (note 10)                   |       | 13,665                |       | 11,971 |   |
|                                                            |       |                  |       |   |   |
| OTHER ASSETS:                                                   |       |                  |       |   |   |
| Deferred regulatory assets (note 4)                             |       | 1,548                 |       | 2,315 |   |
| Account receivable from Minas Gerais State  Government (note 3) |       | 1,726                 |       | 1,519 |   |
| Recoverable taxes (note 8)                                      |       | 559                   |       | 216 |   |
| Accounts receivable, net (note 7)                               |       | 50                    |       | 64 |   |
| Deferred income taxes benefits (note 5)                         |       | 269                   |       | 192 |   |
| Escrow deposits                                                 |       | 273                   |       | 83 |   |
| Other                                                           |       | 22                    |       | 72 |   |
|                                                            |       | 4,447                 |       | 4,461 |   |
| Total assets                                                    |       | 23,488                |       | 21,346 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

F-3

----

**COMPANHIA ENERGÉTICA DE MINASGERAIS - CEMIG**

**CONSOLIDATEDBALANCE SHEETS**

**DECEMBER 31, 2006 AND 2005**

**(Expressed in millions ofBrazilian *reais*, except shareamounts)**

**LIABILITIESAND SHAREHOLDERS’ EQUITY**
| ** **                                                                                                                       | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                       | ** ** | **2006**              | ** ** | **2005** | ** ** |
| CURRENT  LIABILITIES:                                                                                                            |       |                  |       |   |   |
| Accounts payable to suppliers (note 11)                                                                                          |       | 768                   |       | 734 |   |
| Payroll and related charges                                                                                                      |       | 174                   |       | 174 |   |
| Taxes payable (note 12)                                                                                                          |       | 501                   |       | 401 |   |
| Deferred income taxes (note 5)                                                                                                   |       | 392                   |       | 184 |   |
| Dividends and interest on capital                                                                                                |       | 877                   |       | 1,602 |   |
| Current portion of long-term financing (note 13)                                                                                 |       | 691                   |       | 985 |   |
| Regulatory charges payable (note 14)                                                                                             |       | 420                   |       | 266 |   |
| Employee post-retirement benefits (note 15)                                                                                      |       | 120                   |       | 161 |   |
| Employee profit sharing (note 19)                                                                                                |       | 74                    |       | 77 |   |
| Derivative contracts (note 22)                                                                                                   |       | 187                   |       | 143 |   |
| Other                                                                                                                            |       | 187                   |       | 211 |   |
|                                                                                                                             |       | 4,391                 |       | 4,938 |   |
|                                                                                                                             |       |                  |       |   |   |
| LONG-TERM  LIABILITIES:                                                                                                          |       |                  |       |   |   |
| Long-term financing (note 13)                                                                                                    |       | 5,833                 |       | 3,841 |   |
| Employee post-retirement benefits (note 15)                                                                                      |       | 1,666                 |       | 1,535 |   |
| Deferred income taxes (note 5)                                                                                                   |       | 238                   |       | 730 |   |
| Accrued liability for contingencies (note 16)                                                                                    |       | 280                   |       | 377 |   |
| Accounts payable to suppliers (note 11)                                                                                          |       | 264                   |       | 337 |   |
| Taxes payable (note 12)                                                                                                          |       | 41                    |       | 124 |   |
| Deferred regulatory liability – special obligations  (note 4)                                                               |       | 2,194                 |       | — |   |
| Other                                                                                                                            |       | 192                   |       | 193 |   |
|                                                                                                                             |       | 10,708                |       | 7,137 |   |
|                                                                                                                             |       |                  |       |   |   |
| MINORITY  INTEREST                                                                                                               |       | 19                    |       | 19 |   |
|                                                                                                                             |       |                  |       |   |   |
| SHAREHOLDERS’  EQUITY: (note 17)                                                                                            |       |                  |       |   |   |
| Capital stock -                                                                                                                  |       |                  |       |   |   |
| Preferred – 273,838,953 thousand shares authorized  and issued and 273,631,569 outstanding as of December 31, 2006 and 2005 |       | 804                   |       | 804 |   |
| Common – 212,622,504 thousand shares authorized,  issued and outstanding as of December 31, 2006 and 2005                   |       | 624                   |       | 624 |   |
|                                                                                                                             |       | 1,428                 |       | 1,428 |   |
| Additional paid-in capital                                                                                                       |       | 3,170                 |       | 3,170 |   |
| Appropriated retained earnings                                                                                                   |       | 2,879                 |       | 2,793 |   |
| Unappropriated retained earnings                                                                                                 |       | 1,503                 |       | 2,367 |   |
| Accumulated other comprehensive loss                                                                                             |       | (610                  | )          | (506 | ) |
|                                                                                                                             |       | 8,370                 |       | 9,252 |   |
| Total  liabilities and shareholders’ equity                                                                                 |       | 23,488                |       | 21,346 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

F-4

----

**COMPANHIA ENERGÉTICA DE MINAS GERAIS – CEMIG**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME**

**FOR THE YEARS ENDED DECEMBER 31,2006, 2005 AND 2004**

**(Expressed in millions ofBrazilian *reais*, except share andper share amounts)**
| ** **                                                                                                                                   | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| NET OPERATING  REVENUES:                                                                                                                     |       |                                        |       |   |   |   |   |
| Electricity sales to final customers (note 18)                                                                                               |       | 9,319                                       |       | 8,708 |   | 8,541 |   |
| Regulatory extraordinary rate adjustment (note 4)                                                                                            |       | 1                                           |       | 8 |   | 89 |   |
| Deferred rate adjustment (note 4)                                                                                                            |       | —                                      |       | 110 |   | 640 |   |
| Electricity sales to the interconnected power system  (note 18)                                                                              |       | 884                                         |       | 237 |   | 36 |   |
| Use of basic transmission network (note 18)                                                                                                  |       | 1,780                                       |       | 1,523 |   | 245 |   |
| Other operating revenues (note 18)                                                                                                           |       | 199                                         |       | 168 |   | 536 |   |
| Taxes on revenues (note 18)                                                                                                                  |       | (3,543                                      | )          | (3,241 | ) | (2,608 | ) |
| Total net operating revenues                                                                                                                 |       | 8,640                                       |       | 7,513 |   | 7,479 |   |
| OPERATING COSTS  AND EXPENSES:                                                                                                               |       |                                        |       |   |   |   |   |
| Electricity purchased for resale (note 19)                                                                                                   |       | (1,907                                      | )          | (1,455 | ) | (1,370 | ) |
| Natural gas purchased for resale                                                                                                             |       | —                                      |       | — |   | (268 | ) |
| Use of basic transmission network                                                                                                            |       | (687                                        | )          | (709 | ) | (538 | ) |
| Depreciation and amortization                                                                                                                |       | (810                                        | )          | (669 | ) | (677 | ) |
| Personnel (note 19)                                                                                                                          |       | (1,046                                      | )          | (779 | ) | (788 | ) |
| Regulatory charges (note 19)                                                                                                                 |       | (1,031                                      | )          | (983 | ) | (861 | ) |
| Regulatory liability – Special obligations (note 4)                                                                                     |       | (1,057                                      | )          | — |   | — |   |
| Third-party services (note 19)                                                                                                               |       | (475                                        | )          | (420 | ) | (329 | ) |
| Employee post-retirement benefits (note 15)                                                                                                  |       | (245                                        | )          | (257 | ) | (153 | ) |
| Materials and supplies                                                                                                                       |       | (116                                        | )          | (95 | ) | (83 | ) |
| Provision for loss on deferred regulatory assets  (note 4)                                                                                   |       | (49                                         | )          | (183 | ) | (9 | ) |
| Employees profit sharing (note 19)                                                                                                           |       | (210                                        | )          | (260 | ) | (110 | ) |
| Other (note 19)                                                                                                                              |       | (234                                        | )          | (379 | ) | (280 | ) |
| Total operating costs and expenses                                                                                                           |       | (7,867                                      | )          | (6,189 | ) | (5,466 | ) |
| Operating income                                                                                                                             |       | 773                                         |       | 1,324 |   | 2,013 |   |
|                                                                                                                                         |       |                                        |       |   |   |   |   |
| FINANCIAL  INCOME, NET (note 20)                                                                                                             |       | 335                                         |       | 754 |   | 350 |   |
|                                                                                                                                         |       |                                        |       |   |   |   |   |
| NON-OPERATING  INCOME                                                                                                                        |       |                                        |       |   |   |   |   |
| Equity in results of Investments                                                                                                             |       | 91                                          |       | 29 |   | 3 |   |
| Gain on GASMIG shares Sale                                                                                                                   |       | —                                      |       | — |   | 102 |   |
|                                                                                                                                         |       | 91                                          |       | 29 |   | 105 |   |
| Income before income taxes and minority interests                                                                                            |       | 1,199                                       |       | 2,107 |   | 2,468 |   |
| INCOME TAXES  (note 5)                                                                                                                       |       |                                        |       |   |   |   |   |
| Current                                                                                                                                      |       | (575                                        | )          | (271 | ) | (543 | ) |
| Deferred                                                                                                                                     |       | 78                                          |       | (29 | ) | (188 | ) |
|                                                                                                                                         |       | (497                                        | )          | (300 | ) | (731 | ) |
| MINORITY  INTERESTS                                                                                                                          |       | —                                      |       | 2 |   | 2 |   |
| NET INCOME                                                                                                                                   |       | 702                                         |       | 1,809 |   | 1,739 |   |
| OTHER  COMPREHENSIVE INCOME (LOSS):                                                                                                          |       |                                        |       |   |   |   |   |
| Minimum pension liability adjustment (note 15)                                                                                               |       | 212                                         |       | 38 |   | (717 | ) |
| Deferred income taxes (expense) benefits                                                                                                     |       | (72                                         | )          | (13 | ) | 243 |   |
|                                                                                                                                         |       | 140                                         |       | 25 |   | (474 | ) |
| COMPREHENSIVE  INCOME                                                                                                                        |       | 842                                         |       | 1,834 |   | 1,265 |   |
| Weighted average  number of common and preferred shares outstanding during the year (thousand)  for purposes of calculating basic earnings   |       | 486,254,073                                 |       | 486,254,073 |   | 486,254,073 |   |
| Weighted average  number of common and preferred shares outstanding during the year (thousand)  for purposes of calculating diluted earnings |       | 496,837,488                                 |       | 490,434,261 |   | 486,254,073 |   |
| Basic earnings  per thousand common and preferred shares - In Brazilian reais                                                                |       | 1.44                                        |       | 3.72 |   | 3.58 |   |
| Diluted earnings per  thousand common and preferred shares - In Brazilian reais                                                              |       | 1.41                                        |       | 3.69 |   | 3.58 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

F-5

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**COMPANHIA ENERGÉTICA DE MINASGERAIS - CEMIG**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY**

**FOR THE YEARS ENDED DECEMBER 31,2006, 2005 AND 2004**

**(Expressed in millions ofBrazilian *reais*)**
| ** **                                                             | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                             | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| CAPITAL STOCK:                                                         |       |                                        |       |   |   |   |   |
| Preferred -                                                            |       | 804                                         |       | 804 |   | 804 |   |
| Common -                                                               |       | 624                                         |       | 624 |   | 624 |   |
|                                                                   |       | 1,428                                       |       | 1,428 |   | 1,428 |   |
| ADDITIONAL  PAID-IN CAPITAL                                            |       | 3,170                                       |       | 3,170 |   | 3,170 |   |
| APPROPRIATED  RETAINED EARNINGS:                                       |       |                                        |       |   |   |   |   |
| Fiscal incentive investment reserve-                                   |       | 45                                          |       | 45 |   | 45 |   |
| Rate shortfall reserve-                                                |       | 2,648                                       |       | 2,648 |   | 2,648 |   |
| Legal reserve-                                                         |       |                                        |       |   |   |   |   |
| Balance, beginning of year                                             |       | 100                                         |       | — |   | — |   |
| Transfer from unappropriated retained earnings                         |       | 86                                          |       | 100 |   | — |   |
| Balance, end of year                                                   |       | 186                                         |       | 100 |   | — |   |
|                                                                   |       | 2,879                                       |       | 2,793 |   | 2,693 |   |
| UNAPPROPRIATED  RETAINED EARNINGS:                                     |       |                                        |       |   |   |   |   |
| Balance, beginning of year                                             |       | 2,367                                       |       | 2,449 |   | 1,290 |   |
| Cumulative effect adjustment for adoption of  SAB 108, net of tax |       | (133                                        | )          | — |   | — |   |
| Net income                                                             |       | 702                                         |       | 1,809 |   | 1,739 |   |
|                                                                   |       |                                        |       |   |   |   |   |
| Transfer to appropriated retaining earnings                            |       | (86                                         | )          | (100 | ) | — |   |
| Dividends and interest on capital                                      |       | (1,347                                      | )          | (1,791 | ) | (580 | ) |
| Balance, end of year                                                   |       | 1,503                                       |       | 2,367 |   | 2,449 |   |
|                                                                   |       |                                        |       |   |   |   |   |
| ACCUMULATED  OTHER COMPREHENSIVE INCOME (LOSS):                        |       |                                        |       |   |   |   |   |
| Balance, beginning of year                                             |       | (506                                        | )          | (531 | ) | (57 | ) |
| Adjustment to initial adoption SFAS no 158, net of  tax           |       | (244                                        | )          | — |   | — |   |
| Other comprehensive income (loss)                                      |       | 140                                         |       | 25 |   | (474 | ) |
| Balance, end of year                                                   |       | (610                                        | )          | (506 | ) | (531 | ) |
| Shareholders’  equity at end of year                              |       | 8,370                                       |       | 9,252 |   | 9,209 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

F-6

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**COMPANHIA ENERGÉTICA DE MINASGERAIS - CEMIG**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**FOR THE YEARS ENDED DECEMBER 31,2006, 2005 AND 2004**

**(Expressed in millions ofBrazilian *reais*)**
| ** **                                                                               | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                               | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                   |       |                                        |       |   |   |   |   |
| Net income                                                                               |       | 702                                         |       | 1,809 |   | 1,739 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities        |       |                                        |       |   |   |   |   |
| Depreciation and amortization                                                            |       | 810                                         |       | 669 |   | 677 |   |
| Deferred regulatory assets and liabilities                                               |       | 912                                         |       | 626 |   | (598 | ) |
| Monetary variation and exchange rate variation gain                                      |       | (309                                        | )          | (866 | ) | (953 | ) |
| Loss on disposal of property, plant and equipment                                        |       | 21                                          |       | 52 |   | 29 |   |
| Employee post-retirement benefits                                                        |       | (68                                         | )          | (72 | ) | (118 | ) |
| Provision for contingencies and doubtful accounts  receivable                            |       | (97                                         | )          | 19 |   | 146 |   |
| Regulatory liability – special obligations                                          |       | 1,057                                       |       | — |   | — |   |
| Provision (reversal) for loss on account receivables  from Minas Gerais State Government |       | (99                                         | )          | (223 | ) | 326 |   |
| Provision for loss on deferred regulatory assets                                         |       | 49                                          |       | 183 |   | 9 |   |
| Deferred income taxes                                                                    |       | (78                                         | )          | 29 |   | 188 |   |
| Gain on sale of GASMIG shares                                                            |       | —                                      |       | — |   | (102 | ) |
| Equity in results of investments                                                         |       | (91                                         | )          | (29 | ) | (3 | ) |
| Other                                                                                    |       | (2                                          | )          | 1 |   | (28 | ) |
|                                                                                     |       |                                        |       |   |   |   |   |
| Decrease (increase) in operating assets-                                                 |       |                                        |       |   |   |   |   |
| Accounts receivable                                                                      |       | (263                                        | )          | (188 | ) | (196 | ) |
| Recoverable taxes                                                                        |       | (229                                        | )          | (311 | ) | (25 | ) |
| Accounts receivable – use of basic transmission  network                            |       | (47                                         | )          | (275 | ) | — |   |
| Other                                                                                    |       | 71                                          |       | 61 |   | 126 |   |
|                                                                                     |       |                                        |       |   |   |   |   |
| Increase (decrease) in operating liabilities-                                            |       |                                        |       |   |   |   |   |
| Accounts payable to suppliers                                                            |       | (102                                        | )          | 89 |   | (101 | ) |
| Payroll and related charges                                                              |       | —                                      |       | (15 | ) | (25 | ) |
| Taxes payable                                                                            |       | (236                                        | )          | (259 | ) | 240 |   |
| Regulatory charges payable                                                               |       | 79                                          |       | 153 |   | 21 |   |
| Accrued interest on long-term financing and short-term  loans                            |       | (38                                         | )          | 78 |   | 3 |   |
| Other                                                                                    |       | 244                                         |       | 244 |   | 143 |   |
| Net cash  provided by operating activities                                               |       | 2,286                                       |       | 1,775 |   | 1,498 |   |

 

F-7

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| ** **                                                                    | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                    | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                          |       |                                        |       |   |   |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                         |       |                                        |       |   |   |   |   |
| Escrow deposits                                                               |       | (190                                        | )          | (5 | ) | 7 |   |
| Proceeds from sale of GASMIG                                                  |       | —                                      |       | — |   | 154 |   |
| Acquisition of investments                                                    |       | (568                                        | )          | (32 | ) | (10 | ) |
| Acquisition of property, plant and equipment                                  |       | (1,328                                      | )          | (1,511 | ) | (1,061 | ) |
| Net cash used in investing activities                                         |       | (2,086                                      | )          | (1,548 | ) | (910 | ) |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                        |       |                                        |       |   |   |   |   |
| Proceeds from issuance of long-term financing                                 |       | 2,248                                       |       | 1,515 |   | 1,207 |   |
| Repayment of long-term financing and short-term  loans                        |       | (1,817                                      | )          | (818 | ) | (1,424 | ) |
| Proceeds from short-term loans                                                |       | 1,200                                       |       | — |   | 316 |   |
| Dividends and interest on capital paid                                        |       | (2,072                                      | )          | (491 | ) | (237 | ) |
| Net cash provided by (used in) financing activities                           |       | (441                                        | )          | 206 |   | (138 | ) |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                         |       | (241                                        | )          | 433 |   | 450 |   |
|                                                                          |       |                                        |       |   |   |   |   |
| CASH AND CASH  EQUIVALENTS:                                                   |       |                                        |       |   |   |   |   |
| Beginning of the year                                                         |       | 1,349                                       |       | 916 |   | 466 |   |
| End of the year                                                               |       | 1,108                                       |       | 1,349 |   | 916 |   |
|                                                                          |       | (241                                        | )          | 433 |   | 450 |   |
|                                                                          |       |                                        |       |   |   |   |   |
| SUPPLEMENTARY  CASH FLOWS DISCLOSURE:                                         |       |                                        |       |   |   |   |   |
| Taxes paid - income taxes                                                     |       | 696                                         |       | 735 |   | 225 |   |
| Interest paid, net of interest capitalized                                    |       | 756                                         |       | 500 |   | 383 |   |
| Accounts receivables from State Government offset by  dividends               |       | 79                                          |       | 77 |   | 49 |   |
| Debentures  issued related to Irapé power plant offset by dividends      |       | 30                                          |       | 23 |   | 23 |   |
| Disclosure of  non-cash investing activity                                    |       |                                        |       |   |   |   |   |
| Property, plant  and equipment increase on the special obligation recognition |       | 1,137                                       |       | — |   | — |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

F-8

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**COMPANHIA ENERGÉTICA DE MINASGERAIS - CEMIG**

**NOTES TOTHE CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2006, 2005 AND 2004**

**(Amounts expressed in millions ofBrazilian *reais*, unless otherwiseindicated)**

**1.****      THE COMPANY AND ITS OPERATIONS**

(a) The Company

CompanhiaEnergética de Minas Gerais, “CEMIG” or the “Company”, a listed company, hasoperated solely and exclusively as a holding company as from January 1, 2005,with shareholder participations in individually and jointly controlledsubsidiaries. The principal objectives of its subsidiaries are the constructionand operation of systems used in production, transformation, transmission,distribution and sales of electric energy, as well as the development ofactivities in the different fields of energy, with a view to the their economicexploitation.

As the most partof its subsidiaries are concessionaires of electric utility services, they aresubject to regulations set by the Agência Nacional de Energia Elétrica (theBrazilian National Electric Energy Agency or “ANEEL”), an agency of theBrazilian Federal Government (the “Federal Government”).

The Company’sconsolidated operating subsidiaries as of December 31, 2006 are as follows:

·      CemigGeração e Transmissão S.A. (“Cemig Geração e Transmissão”) (100.00% interest) –Electric power generation and transmission, through 46 plants – of which 43hydroelectric, 1 wind and 2 thermoelectric plants – and transmission linesmostly belonging to the basic grid of the Brazilian generation and transmissionsystem;

·      CemigDistribuição S.A. (“Cemig Distribuição”) (100.00% interest) – Electric powerdistribution through distribution grids and lines covering approximately 97.00%of the State of Minas Gerais;

·      SáCarvalho S.A. (“Sá Carvalho”) (100.00% interest) - Generation and sale ofelectric energy from the Sá Carvalho hydroelectric power plant, as an electricenergy public service concessionaire;

·      UsinaTérmica Ipatinga S.A. (“Ipatinga”) (100.00% interest) - Generation and sale ofelectric energy, as an independent power producer, at the Ipatingathermoelectric power plant located at the facilities of Usinas Siderúrgicas deMinas Gerais S.A. – USIMINAS;

·      Empresade Infovias S.A. (“Infovias”) (100.00% interest) - Rendering telecommunicationsservices and developing activities related thereto, through multiservicenetworks using optical fiber cable, coaxial cable and other electronicequipment;

·      EfficientiaS.A. (“Efficientia”) (100.00% interest) - Rendering efficiency, optimizationand energy solutions services through studies and carrying out of projects, aswell as providing operating and maintenance services, to energy supplyfacilities;

·      HorizontesEnergia S.A. (“Horizontes”) (100.00% interest) - Generation and sale ofelectric energy, as an independent power producer, at the Machado Mineiro andSalto do Paraopeba hydroelectric power plants, located in the State of MinasGerais, and the Salto Voltão and Salto do Passo Velho hydroelectric powerplants, located in the State of Santa Catarina;

·      CentralTermelétrica de Cogeração S.A. (“Cogeração”) (100% interest) – Generation andsale of electric energy, as an independent power producer, through theconstruction and operation of the Barreiro thermoelectric power plant, locatedon Vallourec & Mannesmann Tubes’s facilities, in Minas Gerais State. Theconcession was transferred to UTE Barreiro S.A. in the first quarter of 2006;

F-9

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·      RosalEnergia S.A. (“Rosal”) (100.00% interest) – Generation and sale of electricenergy as an electric energy public service concessionaire through Rosalhydroelectric plant, located on the border between Rio de Janeiro and EspíritoSanto States;

·      CentralHidrelétrica Pai Joaquim S.A.(“Pai Joaquim”) (100.00% interest) – Generationand sale of electric energy, as an independent power producer. The concessionof generation was transferred to Cemig PCH S.A. in the first quarter of 2006;

·      CemigPCH S.A. (100.00% interest) - Generation and sale of electric energy, as anindependent power producer, at the Pai Joaquim hydroelectric power plant,located in the state of Minas Gerais;

·      CemigCapim Branco Energia S.A. (100.00% interest) - Generation and sale of electricenergy, as an independent power producer, at the Capim Branco I and IIhydroelectric power plants, located in the state of Minas Gerais, built througha consortium with private-sector partners;

·      UTEBarreiro S.A. (100.00% interest) - Generation and sale of electric energy, asan independent thermoelectric power producer, at the Central TermelétricaBarreiro (“UTE Barreiro”) located at the facilities of Vallourec &Mannesmann Tubes’s, in Minas Gerais State. The concession was received fromCentral Termelétrica de Cogeração S.A. in the first quarter of 2006;

·      CemigTrading S.A. (100.00% interest) – a development stage enterprise engaged in thepurchase and sale of energy;

The Company alsohas the following equity interests:

·      RioMinas Energia Participações S.A .(“RME”) (jointly controlled - 25.00% interest)– holding company with 79.39% (see note 9 and note 31) interest of LightServiços de Eletricidade S.A. (electric power distribution) with 3.8 million ofconsumers and Light Energia S.A.(electric power generation) with 852MW;

·      Companhiade Gás de Minas Gerais - GASMIG (“GASMIG”) (jointly controlled - 55.19% interest)- Acquisition, transportation and distribution of natural gas and relatedproducts. GASMIG was granted a concession by the State Government to distributegas in the State of Minas Gerais. GASMIG’s bylaws also permit the performanceof activities related to the exploration, production and storage of naturalgas; these activities, however, are not currently being performed.

·      CompanhiaTransleste de Transmissão (“Transleste”) (jointly controlled - 25.00% interest)– Operation of the 345 KV transmission line (“TL”) connecting the substationlocated in Montes Claros and the substation of the Irapé Hydroelectric PowerPlant;

·      EmpresaParaense de Transmissão de Energia S.A.(“ETEP”) (jointly controlled - 17.51%interest) –Electric energy public service concessionaire with 500KVtransmission line (“TL”) from Tucuruí substation to Vila do Conde substation,located in the state of Pará. The process of acquisition of 17.51% of thecapital stock of ETEP was completed in August 2006 (see note 9);

·      EmpresaNorte de Transmissão de Energia S.A.(“ENTE”) (jointly controlled - 18.35%interest) –Electric energy public service concessionaire with two transmissionline (“TL”) of 500KV, one from Tucuruí substation to Vila do Conde substation,located in the state of Pará and the other from Marabá substation to Açailândiasubstation, located in the state of Maranhão. The process of acquisition of18.35% of the capital stock of ENTE was completed in August 2006 (see note 9);

·      EmpresaRegional de Transmissão de Energia S.A. (“ERTE”) (jointly controlled – 18.35%)- Electric energy public service concessionaire with 230KV transmission line (“TL”)from Vila do Conde substation to Santa Maria, located in the state of Pará. Theprocess of acquisition of 18.35% of the capital stock of ERTE was completed inAugust 2006 (see note 9);

F-10

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·      EmpresaAmazonense de Transmissão de Energia S.A. (“EATE”) (jointly controlled –14.94%) - Electric energy public service concessionaire with 500KV transmissionline (“TL”) between its substation of Tucuruí, Marabá, Imperatriz, PresidenteDutra and Açailândia. The process of acquisition of 14.94% of the capital stockof EATE was completed in August 2006 (see note 9);

·      EmpresaCatarinense de Transmissão de Energia S.A. (“ECTE”) (jointly controlled –7.50%) - Electric energy public service concessionaire with 525KV transmissionline (“TL”) from Campos Novos substation to Blumenau substation, both locatedin the state of Santa Catarina. The process of acquisition of 7.50% of thecapital stock of ECTE was completed in August 2006 (see note 9).

CEMIG also has interests in the followingdevelopment-stage companies as of December 31, 2006:

·      Companhiade Transmissão Centroeste de Minas (“Centroeste”) (jointly controlled - 51.00%interest) –Construction and operation of the 345 KV TL Furnas – Pimenta;

·      CompanhiaTransudeste de Transmissão (“Transudeste”) (jointly controlled - 24.00%interest) –Construction and operation of the 345 KV TL Itutinga – Juiz de Fora;

·      CompanhiaTransirapé de Transmissão (“Transirapé”) (jointly controlled - 24.50% interest)–Construction and operation of the 230 KV TL Irapé – Araçuaí;

·      TranschileCharrúa Transmisión S.A. – (“Transchile”) (jointly controlled – 49.00%) –Installation, operation and maintenance of the Charrúa – Nueva Temuco 220 kVtransmission line and two transmission line sections in the Charrúa and NuevaTemuco sub-stations, in the central region of Chile.

Where Cemigexercises joint control it does so through stockholders ́ agreements with theother stockholders of the investee company that gives CEMIG participating rightsin such investees.

(b)The electricity sector in Brazil:

The electricitysector in Brazil is regulated by the Federal Government, acting through itsMinistry of Mines and Energy, which has exclusive authority over theelectricity sector. Regulatory policy for the sector is implemented by ANEEL.

Retail electricitysales by the Company are made pursuant to provisions of its long-termelectricity sales concession agreements. Under the terms of the concessionagreements, the Company is authorized to charge its customers a rate forelectricity supply that consists of two components: (1) a non-controllableenergy generation, transmission and distribution cost pass-through component (“ParcelA costs”); and (2) an operating cost component (“Parcel B costs”). Bothcomponents are established as part of the original concession for certaininitial periods. Subsequent to the initial periods, and at regular intervalsthereafter, ANEEL has the authority to review the costs of the Company todetermine the inflation adjustment (or other similar adjustment factor), ifany, to the Parcel B costs (the “Adjustment Escalator”) for the subsequentperiod. This review can result in an Adjustment Escalator that has a positive,zero or negative value.

In addition to theadjustments of Parcel A costs and Parcel B costs mentioned above, theelectricity sales concessions provide for an annual rate adjustment based onseveral factors, including inflation. In addition, as a result of regulatorychanges in December 2001, the Company may now request rate adjustments arisingfrom significant events which disrupt the economic and financial equilibrium ofits business. 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 lawcreating the new model for the industry, a generation company is not allowed tosell energy directly to the distribution company. As a result, the Company hasto sell its electricity in a regulated market through public auctions conductedby ANEEL, 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 under these contracts up to acertain limit.

F-11

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**2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

In preparingfinancial statements in accordance with accounting principles generallyaccepted in the United States of America (“U.S. GAAP”), management is requiredto make estimates and assumptions that affect reported amounts of assets andliabilities and disclosures of contingent assets and liabilities at the date ofthe financial statements, as well as the reported amounts of revenues andexpenses during the reporting period. Actual results could vary from these estimates. The Company’s financialstatements therefore include various estimates concerning (i) therecoverability of deferred regulatory assets, (ii) valuation allowances foraccounts receivable, deferred tax assets and the account receivable from theState Government, (iii) the useful lives of property, plant and equipment andconsortia, (iv) provisions necessary for contingent losses, and (v) estimatesof employee post-retirement benefit obligations and other similar estimates.

(a)   Basis of presentation - The financialstatements have been prepared in accordance with U.S. GAAP, which differ incertain respects from the Company’s statutory financial statements prepared inaccordance with accounting practices adopted in Brazil (“Brazilian GAAP”),which are prepared and filed in accordance with the specific rules of the *Comissão de Valores Mobiliários* (theBrazilian Securities Commission, or “CVM”) and ANEEL.

(b)    Constant currencyremeasurement - Up to December 31, 1997, Brazil was considered a highlyinflationary economy (cumulative inflation exceeding a total of 100% over aconsecutive three-year period) and, for U.S. GAAP purposes, the Companyprepared its financial statements under the constant currency method up to thatdate. CEMIG adopted the IGP-DI (General Price Index - Internal Availability) torestate its financial statements for inflation.

Under the constant currency method, all relevantnon-monetary assets and liabilities, shareholders’ equity accounts andcomponents of the statements of operations, cash flows and changes inshareholders’ equity were expressed in the constant purchasing power of thecurrency as of the most recent balance sheet date.

Beginning on January 1, 1998, Brazil ceased to beconsidered a highly inflationary economy under U.S. GAAP and, accordingly, theCompany ceased to restate its financial statements in constant *reais* for the effects of inflation as fromthat date. The restated balances of non-monetary assets and liabilities as ofDecember 31, 1997 thus constitute the historical amounts of such assets andliabilities as from that date.

Shareholders’ equity presented in these financialstatements differs from that included in the statutory accounting recordsprepared in accordance with Brazilian GAAP as a result of the following: (i) asof January 1, 1996, indexation of Brazilian financial statements prepared forBrazilian Corporate Law purposes was abolished, whereas for U.S. GAAP purposessuch indexation was applied up to December 31, 1997; (ii) differences betweenthe IGP-DI and the official indices mandated for indexation of thefinancial statements prepared in accordance with Brazillian GAAP; and (iii)adjustments made to reflect the requirements of U.S. GAAP. Current income taxesand dividend distribution capacity are determined based on the financialstatements prepared in accordance with Brazilian GAAP.

(c)    Principles of consolidation -The consolidated financial statements include the accounts of allmajority-owned subsidiaries, except jointly controlled companies. As discussed innote 9, in December 2004, 40% of GASMIG’s capital stock was sold and enteredinto a shareholders’ agreement giving the minority shareholder in GASMIGsubstantive participating rights. These rights preclude the Company fromconsolidating GASMIG. Consequently, the Company’s investment in GASMIG isaccounted for using the equity method of accounting as of the date of theshareholders’ agreement.

In consolidation, all significant intercompanybalances and transactions were eliminated. The company also eliminatesintercompany gains and losses on transactions with investments accounted forusing the equity method. The minority interest in the positive equity insubsidiaries is shown as a separate caption on the face of the balance sheet.

(d)    Foreign currencies - Assetsand liabilities denominated in foreign currencies are related principally tofinancing and are translated into *reais*at the official exchange rates reported by the Brazilian Central Bank at eachbalance sheet date. The resulting gains and losses are recognized currently andincluded in the statements of operations for the appropriate period.

F-12

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(e)    Cash and cash equivalents -The Company considers unrestricted cash on hand, deposits in banks andshort-term investments with original maturities of three months or less, whenpurchased, and readily convertible to cash to be cash and cash equivalents.

(f)     Accounts receivable -Includes both amounts billed to customers and accrued revenues relating tounbilled energy supplied to customers as of the balance sheet date. Late feesarising from overdue electricity 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 with significantdebits, an individual analysis of the balance is made, taking into account thehistory of default, negotiations in progress and the existence of realguarantees; (ii) for other consumers, the debits that are more than 90 dayspast 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 - The Company’sinvestments in affiliated companies in which the company has the ability toexercise significant influence, but not control, are accounted for using theequity method of accounting.

(h)    Property, plant and equipment –These assets are recorded at acquisition or construction cost, restated toreflect price-level changes through December 31, 1997. Interest and otherfinancing charges, excluding foreign exchange losses, incurred during theconstruction period on third-party financing are capitalized, in accordancewith Statement of Financial Accounting Standards (“SFAS”) 34 “Capitalization ofInterest Cost”. Depreciation is computed on the straight-line method, at annualrates determined by ANEEL, which represent the estimated useful lives of theassets. Expenditures for maintenance and repairs are charged to operating costsas incurred. Materials to be used in construction are included in electricgeneration, distribution and transmission assets. The net results of disposalsof fixed assets are recorded as part of operating income.

The Company’s investments in consortia (groups oforganizations participating in joint ventures formed to promote commonobjectives or engage in projects to benefit all the members without thecreation of a legal entity), are recorded at acquisition or construction costless allowance for loss, when applicable. Interestand other financing charges, excluding foreign exchange losses, incurredduring the construction period on third-party financing are capitalized, inaccordance with SFAS No 34. The consortium depreciation is computed on thestraight-line method, at annual rates determined by ANEEL, which represent theestimated useful lives of the consortia’s underlying assets. The consortiumexpenditures for maintenance and repairs are charged proportionally to operatingcosts by the Company as incurred.

(i)    Impairment of long-livedassets - CEMIG follows SFAS No 144, “Accounting for the Impairment or Disposalof Long-Lived Assets”. Whenever events or changes in circumstances indicatethat the carrying value of long-lived assets may not be recoverable, CEMIGperforms calculations of undiscounted cash flows expected to be derived fromassets in service to determine whether impairment has occurred. In the eventsuch cash flows are not expected to be sufficient to recover the recorded valueof the assets, such assets are written down to their estimated fair valuesbased on discounted cash flow analyses. The Company has not recognized anyimpairment as a result of the application of this accounting policy for allperiods presented.

(j)    Revenues, costs and expenses -Revenues, costs and expenses are recognized on an accrual basis, i.e., whenpersuasive evidence of an arrangement exists, delivery of goods has occurred orservices have been rendered, our rates have been fixed or are determinable, andcollectibility is reasonably assured regardless of when cash is received.

Revenues from the sale ofelectricity generation are recorded based upon the output delivered provided atrates as specified under contract terms or prevailing regulatory rates.Electricity distribution sales to final customers are recognized when power isprovided. Billings for these sales are made on a monthly basis. Unbilledrevenues from the billing cycle up to the end of each month are estimated basedon the prior month’s billing and are accrued at the end of the month.Differences between estimated and actual unbilled revenues, which have not beensignificant, are recognized in the following month.

F-13

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Use of basic transmissionnetwork revenues are recorded when earned and billed monthly, according to therevenue established through the concession contracts. In certain contracts,revenues to be earned in the final 15 years are 50.0% lower than those in thefirst 15 years of the concession. The Company recognizes revenue on thesecontract on a straight-line basis, in accordance with the nature of theservices provided.

Revenues received by theCompany from other concessionaires and free consumers using its basictransmission and distribution network are recognized in the month that thenetwork services are provided.

Services rendered includeconnection fees and other related services and the revenues are recognized whenthe services are provided.

Taxes on revenue consistof: (i) value-added tax (“VAT”), which is a state tax due on the sales to finalcustomers, is billed to the consumers and recorded as part of gross revenue;(ii) COFINS revenue tax; (iii) PIS-PASEP social contribution tax on revenues;and (iv) Emergency capacity charge. It is the Company’s policy to deduct thesetaxes from gross revenues.

(k)     Income taxes - CEMIG accountsfor income taxes in accordance with SFAS No 109 “Accounting for Income Taxes”,which requires an asset and liability approach to recording deferred tax assetsand liabilities for the future tax consequences attributable to differencesbetween the financial statement carrying amounts of existing assets andliabilities and their respective income tax bases.

(l)      Contingencies - The Companyrecords provisions for contingencies when the loss is considered to be probablebased on the opinion of internal and external legal counsel and is reasonablyestimable, in accordance with SFAS No 5 “Accounting for Contingencies”.

(m)    Employees’ benefit plans - TheCompany sponsors a defined-benefit pension plan and a defined-contribution plancovering substantially all of its employees. The Company has also establishedpost-retirement health care plans and dentalplans and pays life insurance premiums for its retirees. The Companyapplies SFAS No 87, “Employers’ Accounting for Pensions”, SFAS No 106, “Employers’Accounting for Post-retirement Benefits Other Than Pensions”. On December 31,2006, the Company adopted the SFAS 158 “Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans” provisions related torecognition and disclosures, which requires an employer to recognize the over-or under-funded status of a defined benefit postretirement plan as an asset orliability in its statement of financial position and to recognize changes inthat funded status in the year in which the changes occur through othercomprehensive income. The impact of the adoption of SFAS 158 was as a charge ofR$244, net of income taxes, recorded directly in accumulated othercomprehensive income (AOCI) at year end. The Company has disclosed informationabout pension plans and other postretirement benefit plans as required by SFASNo 132(R) “Employers’ Disclosuresabout Pensions and Other Postretirement Benefits.”

Under Brazilian law,employees are entitled to a minimum of one-month vacation upon conclusion ofeach year of service. CEMIG fully accrues this liability based on the vestedentitlement of the employees at each period end, plus related social securitycosts.

(n)   Environmental and remediationcosts - CEMIG, in accordance with its environmental policy, has establishedvarious damage control and prevention programs in order to help limit its riskswith respect to major environmental-related liabilities. The cost of theseprograms is expensed as incurred. CEMIG’s policy is to provide remediationcosts when the responsibility to remediate is probable and the amount ofassociated costs is reasonably determinable. No provision in respect of thesematters has been required to date.

F-14

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(o)    Comprehensive income (loss) -CEMIG reports comprehensive income (loss) in accordance with SFAS No 130 “ReportingComprehensive Income” and has elected to present it in the statement ofoperations. Comprehensive income (loss) comprises the minimum pension liabilityadjustments made pursuant to SFAS No 87. The components of accumulated othercomprehensive income are as follows:
|                                                      | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                           | ** ** | **2006**                              | ** ** | **2005** | ** ** |
|                                                 |       |                                  |       |   |   |
| Additional  minimum liability                        |       | —                                |       | 767 |   |
| Under-funded  status of postretirement benefit plans |       | 925                                   |       | — |   |
| Income tax                                           |       | (315                                  | )          | (261 | ) |
| Total accumulated other  comprehensive loss          |       | 610                                   |       | 506 |   |

 

(p)   Regulation and deferred regulatory assetsand liabilities - As a result of various actions taken by the FederalGovernment and ANEEL in 2001, the Company is subject to the provisions of SFASNo 71 “Accounting for the Effects of Certain Types of Regulation”. Therate-setting structure in Brazil is now designed to provide for recovery of theCompany’s allowable costs, including those incurred as a result of FederalGovernment-mandated power rationing measures imposed in 2001, as describedfurther below. Accordingly, the Company capitalizes incurred allowable costs asdeferred regulatory assets when instructed by ANEEL and there is a probableexpectation that future revenue equal to the costs incurred will be billed andcollected as a direct result of the inclusion of the costs in an increased rateset by the regulator. The deferred regulatory asset is eliminated when theCompany collects the related costs through billings to customers at theincreased rate. ANEEL performs a rate review on an annual basis. If ANEELexcludes all or part of a cost from recovery, that portion of the deferredregulatory asset is impaired and is accordingly reduced to the extent of theexcluded cost. The Company has recorded net deferred regulatory assets that itexpects to pass through to its customers in accordance with and subject toregulatory provisions.

During 2001, theFederal Government instituted an electricity rationing plan in response to anenergy shortage 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 electricity distributioncompanies in Brazil. In December 2001, electricity concessionaires includingthe Company reached an industry-wide agreement (the General Agreement of theElectricity Sector or the “General Agreement”) with the Federal Government thatprovided resolution to rationing-related issues as well as to certain otherelectricity rate-related issues. The General Agreement provided for a rateincrease intended to reimburse revenues lost as a result of the rationingprogram in 2001 and 2002. The increased rates will be in force in theelectricity industry for an average period of 74 months as from January 2002.As of December 31, 2006, the asset of R$209 (note 4) recognized by the Companyrepresents the amount expected to be recovered until February, 2008, in accordancewith Emerging Issues Task Force (“EITF”) No. 92-7 “Accounting by Rate RegulatedUtilities for the Effects of Certain Alternative Revenue Programs”. Thebalances of the deferred regulatory assets are periodically compared with theCompany’s recoverability projections, which are reviewed by Managementdepending on market events, changes in regulation and related circumstances.The respective provision for losses is adjusted accordingly.

The GeneralAgreement also addressed Parcel A costs, which are certain costs that eachdistribution company is permitted to defer and pass through to its customersvia a future rate adjustment. Parcel A costs are limited by the concessioncontracts to the cost of purchased power and certain other costs and taxes notcontrolled by the Company. ANEEL had granted rate increases to recover aportion of previously deferred Parcel A costs. The General Agreement provided atracking account mechanism, created in October 2001 through Executive Order No.296, to record the variation in the Parcel A costs for rate adjustmentcalculation purposes. Parcel A costs incurred previous to January 1, 2001 arenot recoverable 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). See note 4.

F-15

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Specialobligations represent contributions received by concessionaires from customersfor the purpose of expanding the electric distribution system. Thesecontributions are incorporated into the Company’s distribution assets. Forregulatory purposes, the depreciation of these assets were included in thetariff rate setting process and the corresponding liability was recorded forthe amount of the total contributions. Under U.S. GAAP, the contributions wereconsidered reimbursements of construction costs and credited against the costof the related fixed assets.

On October 31,2006, ANEEL issued a new regulation which changed the treatment of specialobligations with respect to the tariff setting process. The regulationestablishes, among other items, that beginning on the date of the nextrespective tariff revision, the special obligations will be amortized as areduction of net allowable costs over future periods, therefore reducingtariffs. Consequently, in accordance with SFAS No. 71, the special obligationsbecame a regulatory liability as a result of this new regulation.

(q)   Earnings per share - Since eachclass 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”). Asmentioned in note 3, the Company has a contingent obligation to issue capitalstock in connection with payments received on the account receivable from theState Government. This accounts receivable is currently being paid withdividends due to the State Government. Shares to be issued in connection withthis obligation are considered dilutive for purposes of calculating earningsper share only when all necessary conditions for their issuance have beensatisfied. At December 31, 2006 and 2005, the Company has obligation to issueshares in connection with dividends destined to offset the related receivablethat are included in the weighted average shares outstanding. The followingshare information has been retroactively restated to reflect the stock splitdisclosed in Note 31:
|                                                                                                            | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| Basic weighted  average shares outstanding                                                                 |       | 486,254,073 |       | 486,254,073 |       |
| Dilutive effect  shares to be issued in connection with the account receivable from the State  Government. |       | 10,583,415  |       | 4,180,188   |       |
| Diluted weighted  average shares outstanding                                                               |       | 496,837,488 |       | 490,434,261 |       |

 

(r)    Segment information - TheCompany currently operates in the power generation and transmission, anddistribution of energy segments. Until December 31, 2004, the Company’selectric energy business was managed centrally on the basis of the consolidatedresults of the generation, transmission and distribution operations and,accordingly, the electric energy business represented a single segment per thecriteria described in SFAS No 131- “Disclosures about Segments of an Enterpriseand Related Information” at that time. As described in note 28, the Companyrestructured its operations on January 1, 2005 to separate its generation andtransmission and distribution activities.

(s)   Derivatives and hedgingactivities - As required by SFAS No 133 - Accounting for Derivative Instrumentsand Hedging Activities” derivative financial instruments are being recordedbased on their fair values as assets or liabilities in the accompanying balancesheet, and corresponding changes in fair value are being recognized inearnings. Hedge accounting has not been applied to any of the Company’sderivative financial instruments. The Company calculates the fair value offinancial instruments using quoted market prices whenever available. Whenquoted market prices are not available, the Company uses standard pricingmodels with market-based inputs, which take into account the present value ofestimated future cash flows.

F-16

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(t)    Effects of correcting prioryear misstatements - In September 2006, the SEC issued Staff AccountingBulletin No. 108 (Topic 1N) “Financial Statements - Considering theEffects of Prior Year Misstatements when Quantifying Misstatements in CurrentYear Financial Statements” (“SAB 108”). SAB 108 provides guidance on how toevaluate prior period financial statement misstatements for purposes ofassessing their materiality in the current period. There are two widelyrecognized methods for quantifying the effects of financial statementmisstatements: the “rollover” or income statement method and the “iron curtain”or balance sheet method. Historically, the Company used the “rollover” method.Under this method the Company quantified its financial statement misstatementsbased on the amount of errors originating in the current-year income statement,and as a result did not consider the effects of prior-year misstatements to bematerial to the Company’s financial statements. SAB 108 now requires that theCompany must consider both the rollover and iron curtain methods (“dual method”)when quantifying misstatements in the financial statements.

The iron curtainmethod quantifies a misstatement based on the effects of correcting themisstatement existing in the balance sheet at the end of the current year,irrespective of the misstatement’s origination. Upon adoption, SAB 108 permitsthe Company to adjust for the cumulative effect of errors that were previouslyconsidered immaterial under the rollover method that are now consideredmaterial under the dual method.

The SAB 108adjustment affects the carrying amount of assets and liabilities as of thebeginning of the current fiscal year, with an offsetting adjustment to theopening balance of retained earnings in the year of adoption. The adoption ofSAB 108 resulted in a cumulative effect adjustment of $133, net of taxes, tothe opening balance of unappropriated retained earnings.

The cumulativeeffect adjustment was required to correct an error relating to the accountingfor certain 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.

**3. ACCOUNT RECEIVABLE FROM MINAS GERAIS STATEGOVERNMENT**

On March 4, 1993, the Company recorded a receivable with a correspondingcredit in the statement of operations, from the Federal Government relating tothe remaining balance of the amount of return guaranteed by the regulatoryagency and the actual return recorded by the Company prior to that date. During1993 and 1994, the Company recovered part of the rate shortfall by offsettingamounts due to Federal Government-owned entities arising from purchased powerand financing. On May 2, 1995, the obligation to pay the remaining balance ofthis receivable amounting to R$602, was transferred from the Federal Governmentto the State Government, the Company’s controlling shareholder, through acredit assignment contract (the “CRC Agreement”). In connection with thisassignment, the State Government agreed to pay the amount due to the Companyover 20 years, with an initial three-year grace period, as restated based onthe UFIR (Tax Reference Unit Index) plus interest of 6% per year. In the eventthat the Company receives payments or retains declared dividends to offsetamounts receivable, the Company is obligated to issue shares to allshareholders in proportion to their shareholdings, transferring the principalamount of the related paid installments from Appropriated retained earnings -Rate shortfall reserve to Capital Stock.

The CRC Agreement was modified by certain amendments commencing in 2001that addressed issued relating remuneration of the receivable and certainguarantees relating to dividend retention by the State government. Prior to theFourth Amendment described below, a portion of the receivable was notguaranteed by the State Government. Consequently, had recognized a provisionamounting to the full unguaranteed amount which was R$1,845 as of December 31,2004.

F-17

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## **a)Fourth Amendment to the CRC Agreement**

The ExtraordinaryShareholders Meeting which commenced on December 30, 2005, and ended on January12, 2006, approved the Fourth Amendment to the CRC agreement which extended theguarantee relating to dividends payable to the State Government to the full balancereceivable and changed the remuneration to IGP-DI plus annual interest of 8.18%per year. The balance is payable in 61 semi-annual installments which are dueon June 30 and December 31 of each year, retroactively as from December 2004.The payments will be made by withholding 65.00% of the regular dividends andinterest on capital due to the State Government. The dividends withheld will beused in the following order: (i) the settlement of past due installments, (ii)the settlement of the semi-annual installments, (iii) the pre-payment of up to2 installments; and (iv) the payment of the remaining principal.

On December 31, 2006, theinstallments of the contract coming due on June 30, and December 30, 2007 hadbeen received in advance.

Following are the balancesof the CRC Agreement and related provision for losses for the periodspresented:
| CRC Agreement – balance on  December 31, 2006          |   | 3,252  |   |
|-------------------------------------------------------------|--------|--------|--------|
| Provision                                                   |   | (1,526 | )      |
| Net                                                         |   | 1,726  |   |
|                                                        |   |   |   |
| Balance, net of  provision for losses, on December 31, 2005 |   | 1,519  |   |
| Balance, net of  provision for losses, on December 31, 2004 |   | 1,097  |   |
| Balance, net of  provision for losses, on December 31, 2003 |   | 891    |   |

 

The dividends andInterest on Equity to be distributed to stockholders arising from net incomerecorded for the year ended December 31, 2006, proposed by the Executive Boardand the Board of Directors, and approved by the General Stockholders Meeting onApril 26, 2007 are recorded as Current liabilities. Of the dividends to bedistributed, R$308 is payable to the government of the State of Minas Gerais,and R$128 will be retained for settlement of part of the CRC Agreement. Theremaining amount of R$180 will be paid in cash to the government of the Stateof Minas Gerais.

In connection withthe Fourth Amendment, the Company committed to comply with the followingfinancial covenants which are calculated based on the financial statementsprepared in accordance with Brazilian GAAP:

| Target Description –According  to Brazilian Gaap    | ** ** | **Index Required**                         |
|----------------------------------------------------------|------------|--------------------------------------------|
| Indebtedness  (1)/EBTIDA (2)                             |       | Less than 2                                |
| Indebtedness(1)  / Indebtedness plus Shareholders Equity |       | Less than or equal to 40.00%               |
| Capital  expenditures                                    |       | Less than or equal to 40.00% of EBTIDA (3) |

 

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(1) Indebtedness = totalconsolidated short-term and long-term financing

(2) EBTIDA = Earningsbefore interest, income taxes, depreciation and amortization.

(3) For the yearsof 2006 and 2007 the indexes required will be of 65.00% and 55.00%respectively.

In the event ofthe Company does not comply with the above covenants, the non-compliance isreported and addressed by the Company’s Board of Directors. As of December 31,the Company is in compliance with the above covenants.

**b)****Creation of Cemig CRC Account Securitization Fund**

In January 2006, the Company created the CEMIG CRC Account SecuritizationFund (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 FIDC wasused by the Company to obtain R$900 in financing in the form of senior quotasissued by the FIDC. The senior quotas accrue interest based CDI plus 1.7% peryear and are being amortized in 20 half-yearly installments. The senior quotaswere acquired by financial institutions and are guaranteed by CEMIG.Consequently, the FIDC is fully consolidated by the Company and the seniorquotas are recorded as Long-term financing.

F-18

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**4.DEFERRED REGULATORY ASSETS AND LIABILITIES**

The components of the deferred regulatory assets are as follows:
|                                                                                                            | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                 | ** ** | **2006**         | ** ** | **2005** | ** ** |
| Energy Rationing Plan –  Extraordinary rate adjustment:                                               |       |             |       |   |   |
| Revenue losses  (expected to be recovered within the next 24 months) incurred during the  rationing period |       | 209              |       | 331 |   |
| Amounts to be  transferred to generators                                                                   |       | 337              |       | 367 |   |
|                                                                                                       |       | 546              |       | 698 |   |
|                                                                                                       |       |             |       |   |   |
| Energy transactions on  CCEE/MAE during the rationing plan                                                 |       | 403              |       | 518 |   |
| (-) Provision for loss  on Transactions on the CCEE/MAE                                                    |       | (245             | )          | (196 | ) |
|                                                                                                       |       | 158              |       | 322 |   |
| Additional Parcel A  costs:                                                                                |       |             |       |   |   |
| - Period from January  1, 2001 to October 25, 2001                                                         |       | 632              |       | 549 |   |
| - Period from October  26, 2001 and thereafter                                                             |       | 143              |       | 277 |   |
|                                                                                                       |       |             |       |   |   |
| Deferred rate  adjustment                                                                                  |       | 919              |       | 1,175 |   |
| PIS-PASEP/COFINS                                                                                           |       | 299              |       | 444 |   |
|                                                                                                       |       |             |       |   |   |
| Special obligations                                                                                        |       | (2,194           | )          | — |   |
|                                                                                                       |       | 503              |       | 3,465 |   |
|                                                                                                       |       |             |       |   |   |
| Current assets                                                                                             |       | 1,149            |       | 1,150 |   |
| Other assets                                                                                               |       | 1,548            |       | 2,315 |   |
| Long-term liabilities                                                                                      |       | 2,194            |       | — |   |

 

The Company has notrecorded VAT related to the above items. The VAT, amounting to R$406 as ofDecember 31, 2006 (R$549 as of December 31, 2005), will be assessed when theseamounts are invoiced to the customers as a gross-up to the revenue invoiced.The VAT collected will then be passed on to the state tax authorities,resulting in no affect on net operating revenues. VAT is not assessed on ParcelA costs and PIS-PASEP/COFINS.

(a) Energy Rationing Plan –Extraordinary rate adjustment

An emergencyenergy-rationing program (the “Energy Rationing Plan”) was created by theFederal Government on May 22, 2001, to reduce energy consumption and avoidunplanned interruption in power supply. Average reduction in monthlyconsumption of electricity during the rationing period was estimated at 20% ofthe actual consumption for the months of May, June and July 2000. The energyrationing became effective on June 1, 2001 and ended February 28, 2002, whenthe Federal Government determined that the water levels in the reservoirsserving Brazil’s hydroelectric facilities had returned to normal. As a resultof the Energy Rationing Plan, many electric generation and distributioncompanies in Brazil, including CEMIG, experienced significant reductions intheir profit margins. In December 2001, the Federal Government and the electricutilities in Brazil affected by the Energy Rationing Plan signed a General Agreementto re-establish the financial-economic equilibrium of the existing concessioncontracts and recover revenues relating to the period during which the EnergyRationing Plan was in effect.

F-19

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The GeneralAgreement addressed margin losses incurred by the electric distribution andgeneration companies during the period of the Energy Rationing Plan and thecosts of energy purchased in the spot market through the *Mercado Atacadista de Energia* (theWholesale Energy Market or “MAE”), succeeded by the *Câmara de Comercialização de Energia Elétrica* – CCEE (“CCEE/MAE”),up to December 2002. These items will be recovered by an extraordinary rateadjustment as follows:

| I.  |   | an increase of 2.90% for rural and residential  consumers (excluding low-income consumers), lighting streets and high-tension  industrial consumers whose costs related to electric energy represent at  least 18.00% of average production cost and fulfill certain criteria, related  to charge and demand energy factors which were determined by ANEEL’s  Resolution No. 130, dated April 30, 2002; and |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| II. |   | an increase of 7.90% for all other consumers.                                                                                                                                                                                                                                                                                                                                                                    |

 

These assets, which will be reimbursed through thespecial rate adjustment are monetarily restated based on SELIC from January 1,2002. The extraordinary rate adjustment regulatory asset had its maximumrecovery period, initially established as being 82 months, reduced to 74months, from January 2002 to February 2008, pursuant to ANEEL’s Resolution No.1 dated January 12, 2004. During the years ended December 31, 2006, 2005, and2004, the Company collected R$257, R$261, and R$310, respectively, as a resultof application of the extraordinary rate adjustment. Management periodicallyreviews its projections and, in the event that the estimates change in thefuture, the allowance will be adjusted as appropriate.

The recovery ofthe credits through the extraordinary rate adjustment regulatory asset, inaccordance with ANEEL ́s Resolution 45, from March 3, 2004, is carried out inthe ratio of 64,29% and 35,71% for the credits relating to revenue losses andamounts to be transfer to generators, respectively.

(a.1) Recovery ofrevenue losses incurred during the period of the Energy Rationing Plan:

CEMIG recorded aregulatory asset under U.S. GAAP amounting to of R$209 as of December 31, 2006(R$331 as of December 31, 2005), in accordance with the consensus reached bythe FASB’s - EITF Issue No 92-07, “Accounting by Rate-Regulated Utilities forthe Effects of Certain Alternative Revenue Programs”.

(a.2) Amounts to be collected from consumers andtransferred to generators:

Amounts representlosses incurred by the generation companies that bought power in the MAE, heldin 2004 by the Electric Power Sales Chamber (“CCEE/MAE”), in the period fromJune 1st, 2001 until February 28, 2002, with prices exceeding the amount ofR$49.26/MWh (“free power”). These amounts will be collected by the Company andpassed on the generation companies (see note 11). This asset includes taxes onrevenues and regulatory charges. When the amounts are received by theconsumers, the amounts relating to taxes on revenue and regulatory charges willbe paid directly to the Federal Government.

(b)Energy transactions 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 March2003.

The conclusion of certainlawsuits filed by other generators that are still in progress may result infuture changes in the amounts recorded.

Provision for losses

As described above, theCompany receives RTE amounts from other distribution companies. ANEELestablished a time limit for these distribution companies to collect RTE fromtheir respective consumers. In the event that these companies do not collectthe full amount, the Company will not receive the recorded asset. During 2006,the Company prepared an analysis to estimate whether these amounts will becollected by the respective distribution companies and based on this analysis,a provision for losses was recorded amounting to R$245 as of December 31, 2006.

F-20

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(c) Recovery ofadditional Parcel A costs:

(c.1) AdditionalParcel A Costs from January 1, 2001 to October 25, 2001

The base amount ofParcel A costs to be reimbursed is equal to the difference between the Parcel Acosts actually incurred and the estimated Parcel A costs used for purposes ofcomputing the last annual rate adjustment prior to the Energy Rationing Plan.This amount bears interest at the SELIC rate from the day that the actual costwas paid until the date of recovery. In January 2004, ANEEL declared that thevariations in Parcel A costs are not subject to a maximum recovery period.Recovery of Parcel A costs will start immediately after the end of special rateadjustment recovery period, using the same recovery criteria. Thus, theextraordinary rate adjustment applied to recover billing losses and free powerwill also be used to recover the Parcel A costs.

(c.2) Additional Parcel ACosts from October 26, 2001 and thereafter

On October 25, 2001, theFederal Government, through Executive Act No 296, created a tracking accountmechanism to control the variation of Parcel A costs for rate adjustmentcalculation purposes. This account is comprised of the amounts resulting fromthe difference between the Parcel A costs actually incurred, from October 26,2001 and thereafter, and the estimated Parcel A costs used for purposes ofcomputing the annual rate adjustment as from April 8, 2001.

The amounts determinedfor the Parcel A costs for the period from October 26, 2001 and thereafter arerecorded as deferred regulatory assets, as follows:
| Parcel A Items                                                 | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                                                                     |       |                        |       |                        |       |
| System service  charges                                                  |       | 44                          |       | 89                          |       |
| Electricity  purchase rate                                               |       | 100                         |       | 158                         |       |
| Itaipu  Binacional electricity transport rate                            |       | 4                           |       | 12                          |       |
| Fuel usage quota  – CCC                                             |       | (10                         | )          | (40                         | )          |
| Rate for use of  basic transmission network                              |       | (21                         | )          | 27                          |       |
| Energy  development account quota – CDE                             |       | 8                           |       | 10                          |       |
| Charges for use  of water resources                                      |       | 7                           |       | 17                          |       |
| Incentive  program for Alternative Electric Power Sources – PROINFA |       | 11                          |       | 4                           |       |
|                                                                     |       | 143                         |       | 277                         |       |

 

Theabove-mentioned amounts are restated based on the SELIC through annual rateadjustments.

The recoverableamounts recorded in current assets refer to variations of uncontrollable coststhat are being recovered based on the annual rate adjustment on April 8, 2006,according to management’s estimates.

(d) Deferred rateadjustment

ANEEL Resolution No. 71, dated April 4, 2004,determined that the rate adjustment that should have been applied to theCompany’s rates on April 8, 2003 was 44.41%, instead of 31.53% which wasoriginally applied. The difference will be included by ANEEL in the future rateadjustments. Thepercentage difference of 12.88% will be offset through an increase of R$301, inApril 2003 values, in each one of the tariff adjustments scheduled to takeplace in 2004 through 2007, including monetary restatement calculatedbased on IGP-M variation plus 11.26% of interest. The adjustment applied to the tariffs which came into effect on April 8,2004 included an additional percentage of 2.91%, which corresponds to R$159.Since the amount of the first portion should have been R$301, the difference ofR$142 is being recovering in the rate adjustments since 2005.
|                                                      | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **2006**              | ** ** | **2005** | ** ** |
|                                                 |       |                  |       |   |   |
| Deferred rate  adjustment – since April 8, 2003 |       | 950                   |       | 950 |   |
| Interest  (defined by Aneel – 11.26% per year)  |       | 351                   |       | 206 |   |
| Monetary  restatement – IGP-M Index             |       | 137                   |       | 99 |   |
| (-) Amounts  collected                               |       | (519                  | )          | (80 | ) |
|                                                 |       | 919                   |       | 1,175 |   |

 

F-21

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**(e)PIS-PASEP/COFINS**

TheFederal Laws No. 10,637 and 10,833, increased the rates and changed the basisof calculation of PIS/PASEP and COFINS taxes on revenues. As a result of thosechanges, there was an increase in expense relating to PIS/PASEP and COFINS,from December 2002 to June 2005 and from February of 2004 to June 2005,respectively.

In view of the fact that this increase in the expenseshould be repaid to the Company through tariffs, the credits were registered,in accordance with a criteria defined by ANEEL, as a regulatory asset and therewas a counterpart reduction in the expense on PIS/PASEP and COFINS taxes.

(f) Specialobligations

Specialobligations are resources obtained by the concessionaire from consumercontributions, federal budget allocations, as well as federal, state andmunicipal funds, and special credits relating to investments made in projectslinked to the concession. The resources represent either infrastructure assetsor cash to fund the acquisition and/or construction of such assets usually toobtain connection to the Company’s distribution network or to extend theexisting network. For regulatory purposes, the depreciation of these assets wasincluded in the tariff rate setting process and the corresponding liability wasrecorded for the amount of the total contributions. Under U.S. GAAP, thecontributions were considered reimbursements of construction costs and creditedagainst 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 areduction of net allowable costs over future periods, thereby reducing tariffs.Consequently, in accordance with SFAS No. 71, the special obligations became aregulatory liability as a result of this new regulation.

Accordingly, theCompany recorded a regulatory liability amounting to R$2,194 as of December 31,2006, as follows:

(i) The gross-upof the net book value of the Company’s assets recorded through consumercontributions for regulatory purposes amounting to R$1,137 recorded asProperty, plant and equipment; and,

(ii) Therecognition of the remaining portion of the regulatory liability amounting toR$1,057, with a corresponding operating expense during the year ended December31, 2006. This amount represents the depreciation that was previously includedin historical tariff increases prior to the new regulation.

F-22

----

**5.DEFERRED INCOME TAXES**

Income taxes in Brazilinclude federal income tax and social contribution on income (which is anadditional federal income tax). The statutory annual rates applicable are 25%for federal income tax and 9% for social contribution tax.

The income taxes arecalculated on individual basis for each subsidiary and according to theBrazilian tax law can not be consolidated.

(a) Income tax reconciliation:

The amountsreported as income tax expense in the financial statements are reconciled tothe statutory rates as follows:
|                                                                           | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                      |       |                                       |       |   |   |   |   |
| Income before  income taxes and minority interests                        |       | 1,199                                      |       | 2,107 |   | 2,468 |   |
| Income taxes  (34%)                                                       |       | (407                                       | )          | (716 | ) | (839 | ) |
| Effects of:                                                               |       |                                       |       |   |   |   |   |
| Tax benefit (expense)-                                                    |       |                                       |       |   |   |   |   |
| Interest on capital                                                       |       | 57                                         |       | 216 |   | 173 |   |
| Reversal (provision) on account receivable from  State Government         |       | 143                                        |       | 76 |   | (111 | ) |
| Social Contribution on Complementary Monetary  Restatement                |       | (3                                         | )          | 51 |   | (9 | ) |
| Adjustment on Deferred regulatory liabilities –  special obligations |       | (359                                       | )          | 38 |   | 35 |   |
| Others                                                                    |       | 72                                         |       | 35 |   | 20 |   |
| Income tax expense                                                        |       | (497                                       | )          | (300 | ) | (731 | ) |

 

Brazilian companies arepermitted to pay interest on capital. The calculation is based on theshareholders’ equity amounts prepared in accordance with Brazilian GAAP. Theinterest rate applied may not exceed the long-term interest rate determined bythe Brazilian Central Bank and interest paid may not exceed the greater of 50%of net income for the year or 50% of retained earnings plus profit reserves.

Theamount of interest on capital is deductible for income taxes purposes.Accordingly, as opposed to a payment of dividends, the benefit to CEMIG is areduction in its income taxes payable equivalent to the statutory tax rateapplied to such amount. Income tax is withheld from the payment of such amountto shareholders’ at the rate of 15%. The interest on capital are registered infiscal and accounting books as financial income, when declared by subsidiaries,and as financial expense when declared to be paid to stockholders. However, forfinancial statements presentation, the Company considers the transactionessence. As such, interest on capital is considered as dividends received orpaid, with no effect on statements on income. In the financial statements, therecords mentioned above are reclassified, which means received interest oncapital is credited to investments and interest on capital paid is debited toretained earnings, and the income tax effects remain in statement ofoperations.

Dueto the transfer of CRC Agreement receivables to the FIDC, described on note 3,the provision for losses arising from the difference between the gross assetand the recorded amount of CRC agreement became deductible for income taxespurposes according to the Brazilian Corporate and Taxes Laws. Therefore, CEMIGrecorded a tax benefit in the 2006 year in the amount of R$143, net of aprovision for losses of R$423. Such provision was calculated considering theweight of positive and negative evidence for the foreseeable future, pursuantto the guidance provided by SFAS No 109 “Accounting for Income Taxes”.

As a consequence of changes in ANEEL’s regulations in2006, mentioned on Note 4, item “f”, the Company recorded an expense in 2006Statement of operations in the amount of R$1,057 related to the portion ofspecial obligations previously charged against property, plant and equipmentand which were previously depreciated by the Company for regulatory purposes.

F-23

----

(b) Analysis of deferred tax balances:

As of December 31,2006 and 2005, the deferred tax balances have been computed using a 34% rate,which is the rate expected to be in force upon realization. The majorcomponents of the deferred income taxes account in the balance sheet are asfollows:
|                                                                                      | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                           | ** ** | **2006**              | ** ** | **2005** | ** ** |
|                                                                                 |       |                  |       |   |   |
| Tax loss carryforwards                                                               |       | 571                   |       | 62 |   |
| Employee post-retirement benefits                                                    |       | 199                   |       | 85 |   |
| Provision for contingencies                                                          |       | 75                    |       | 116 |   |
| Provision for doubtful accounts                                                      |       | 108                   |       | 81 |   |
| Other temporary differences                                                          |       | 9                     |       | 35 |   |
| Temporary difference on regulatory assets                                            |       | (477                  | )          | (654 | ) |
| Effects of differences between book and tax basis of  property, plant and equipment. |       | (334                  | )          | (404 | ) |
|                                                                                 |       | 151                   |       | (679 | ) |
| Provision for losses on realization of deferred tax  balances                        |       | (423                  | )          | — |   |
|                                                                                 |       | (272                  | )          | (679 | ) |
| Current Assets                                                                       |       | 89                    |       | 43 |   |
| Other Assets                                                                         |       | 269                   |       | 192 |   |
| Current Liabilities                                                                  |       | (392                  | )          | (184 | ) |
| Long-term Liabilities                                                                |       | (238                  | )          | (730 | ) |

 

Income Tax LossCarryforwards may be offset against a maximum of 30% of annual taxable income.Tax loss carryforwards do not expire under Brazilian tax law.

**6. CASHAND CASH EQUIVALENTS**

The following table sets forth amounts of cash and cash equivalents forthe dates indicated:
|                                                              | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                   | ** ** | **2006**              | ** ** | **2005** | ** ** |
|                                                         |       |                  |       |   |   |
| Cash on hand and  in banks                                   |       | 100                   |       | 50 |   |
| Short-term  investments, principally certificates of deposit |       | 1,008                 |       | 1,299 |   |
|                                                         |       | 1,108                 |       | 1,349 |   |

 

F-24

----

**7. ACCOUNTS RECEIVABLE, NET**

The following table sets forth information concerning accounts receivableby type of consumers for the dates indicated:
|                                  | ** ** | ** **  | ** ** | **Past-due**                 | ** ** | **Total  December 31,** | ** ** |
|----------------------------------|------------|-------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                       | ** ** | **Current** | ** ** | **Up to 90  days** | ** ** | **Over 90  days**       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Residential                      |       | 387         |       | 148                          |       | 91                           |       | 626 |   | 509 |   |
| Industrial                       |       | 224         |       | 53                           |       | 254                          |       | 531 |   | 480 |   |
| Commercial                       |       | 199         |       | 57                           |       | 82                           |       | 338 |   | 273 |   |
| Rural                            |       | 57          |       | 16                           |       | 18                           |       | 91 |   | 73 |   |
| Governmental entities            |       | 111         |       | 15                           |       | 65                           |       | 191 |   | 197 |   |
| Public services                  |       | 72          |       | 2                            |       | 3                            |       | 77 |   | 44 |   |
| Subtotal                         |       | 1,050       |       | 291                          |       | 513                          |       | 1,854 |   | 1,576 |   |
| Distributors                     |       | 185         |       | —                       |       | —                       |       | 185 |   | 18 |   |
|                             |       | 1,235       |       | 291                          |       | 513                          |       | 2,039 |   | 1,594 |   |
|                             |       |        |       |                         |       |                         |       |   |   |   |   |
| Allowance for  doubtful accounts |       | —      |       | —                       |       | (297                         | )          | (297 | ) | (214 | ) |
|                             |       | 1,235       |       | 291                          |       | 216                          |       | 1,742 |   | 1,380 |   |
| Current assets                   |       |        |       |                         |       |                         |       | 1,692 |   | 1,316 |   |
| Other non-current  assets        |       |        |       |                         |       |                         |       | 50 |   | 64 |   |

 

No single customerrepresented more than 10% of total receivables as of December 31, 2006 and 2005and electricity sales to final customers for the years ended December 31, 2006,2005 and 2004.

The accounts receivable,other non-current asset, of R$50 as of December 31,2006 (R$64 on December 31,2005), refers to renegotiated payment of the debts with COPASA (Minas GeraisWater Company- a company controlled by the Minas Gerais State Government ), up to September 2012, and PBH (the Municipalityof Belo Horizonte), up to March 2010.

The provision for doubtfulaccounts, by class of consumer, is as follows:
|                       | ** ** | **Year ended December 31** | ** ** |
|-----------------------|------------|-------------------------------------------|------------|
| ** **            | ** ** | **2006**                                  | ** ** | **2005** | ** ** |
|                  |       |                                      |       |   |   |
| Residential           |       | 102                                       |       | 81 |   |
| Industrial            |       | 106                                       |       | 64 |   |
| Commercial            |       | 62                                        |       | 47 |   |
| Rural                 |       | 13                                        |       | 9 |   |
| Governmental entities |       | 11                                        |       | 10 |   |
| Public services       |       | 3                                         |       | 3 |   |
|                  |       | 297                                       |       | 214 |   |

 

The changes inallowance for doubtful accounts were as follows:
|                                                           | ** ** | **Year ended December 31** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                  | ** ** | **2005** | ** ** |
|                                                      |       |                                      |       |   |   |
| Balance at  beginning of the year                         |       | 214                                       |       | 165 |   |
| Accounts written  off                                     |       | (11                                       | )          | (5 | ) |
| Provision for  the year recorded as other operating costs |       | 94                                        |       | 54 |   |
| Balance at end of the  year                               |       | 297                                       |       | 214 |   |

 

F-25

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**8.RECOVERABLE TAXES**

The following table sets forth amounts of taxes recoverable for the datesindicated:
|                             | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2006**              | ** ** | **2005** | ** ** |
|                        |       |                  |       |   |   |
| Current assets -            |       |                  |       |   |   |
| Income tax                  |       | 96                    |       | 293 |   |
| Social  contribution tax    |       | 27                    |       | 38 |   |
| VAT                         |       | 9                     |       | 6 |   |
| Other                       |       | 73                    |       | 13 |   |
|                        |       | 205                   |       | 350 |   |
| Other non-current  assets - |       |                  |       |   |   |
| Income tax                  |       | 260                   |       | — |   |
| Social  contribution tax    |       | 29                    |       | — |   |
| VAT                         |       | 270                   |       | 216 |   |
|                        |       | 559                   |       | 216 |   |

The income tax and Social Contribution Taxes creditsbasically refer to advance payments for the year 2006 and retentions ofsubsidiaries’ interest on Equity. There are also amounts calculated in thecompanies’ previous years tax returns which may be compensated in the followingyears with other federal taxes.

The credits of ICMSrecoverable, recorded as Other Non-Current Assets, arise from acquisitions offixed assets and are offset in 48 months. The Company is in the process ofadaptation to the new requirements for electronic information demanded by theMinas Gerais State Government, which will enable the credits to be offsetstarting in the second quarter of 2007.

**9. INVESTMENTS**

The followingtable describes the Company equity investments:
|                                           | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2006**              | ** ** | **2005** | ** ** |
|                                      |       |                  |       |   |   |
| Equity Investments in  Rio Minas Energia  |       | 213                   |       | — |   |
| Equity investments in  GASMIG             |       | 153                   |       | 94 |   |
| Equity Investments in  EATE               |       | 49                    |       | — |   |
| Equity Investments in  ENTE               |       | 25                    |       | — |   |
| Equity Investments in  Transleste         |       | 14                    |       | 13 |   |
| Equity Investments in  ETEP               |       | 14                    |       | — |   |
| Equity Investments in Transchile          |       | 13                    |       | 4 |   |
| Equity Investments in Centroeste de Minas |       | 7                     |       | 3 |   |
| Equity Investments in Transudeste         |       | 7                     |       | 6 |   |
| Equity Investments in  ERTE               |       | 6                     |       | — |   |
| Equity Investments in  ECTE               |       | 5                     |       | — |   |
| Equity Investments in Transirape          |       | 5                     |       | 5 |   |
| Other investments                         |       | 12                    |       | 11 |   |
|                                      |       | 523                   |       | 136 |   |

 

F-26

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a) Acquisition of capital interest of Light

On March 28, 2006, CEMIG, Andrade Gutierrez Concessões S.A., J.L.A.Participações S.A. and Pactual Energia Participações S.A. created Rio MinasEnergia Participações S.A. (“RME”), a newly formed holding company, in whicheach partner holds a stake of 25%. On the same date, RME entered into a SharePurchase Contract (“the Contract”) with EDF International S.A. (“EDFI”) for theacquisition of the interest held by EDFI, directly and indirectly, in LIGHTS.A. (“LIGHT”), corresponding to 79.39% of the total registered capital ofLIGHT, a holding company which owns several electricity companies, includingthe distribution concessionaire Light Serviços de Eletricidade S.A., which has3.8 million consumers (unaudited) (6.4% of the Brazilian market-unaudited) in 31municipalities in the State of Rio de Janeiro, and the generator Light EnergiaS.A., which has installed capacity in hydroelectric power 852 MW(unaudited).  The purchase was fundedequally through capital contributions by each of RME’s shareholders. On May 17,2007 there was a reduction in the Company’s interest in LIGHT S.A. (see note31). Following is the purchase price allocation recorded by the Company:
|                                | ** ** | **LIGHT** | ** ** |
|--------------------------------|------------|-----------|------------|
|                           |       |      |       |
| Current assets                 |       | 2,683     |       |
| Property, plant  and equipment |       | 3,863     |       |
| Other assets                   |       | 1,983     |       |
| Total assets  acquired         |       | 8,529     |       |
| Current  liabilities           |       | (1,624    | )          |
| Long-term  financing           |       | (3,063    | )          |
| Other long-term  liabilities   |       | (2,963    | )          |
| Total  liabilities             |       | (7,650    | )          |
| Net consolidated  assets       |       | 879       |       |
| Interest  acquired             |       | 19.85     | %          |
| Net assets  acquired           |       | 174       |       |
| Price paid                     |       | 174       |       |

b) Acquisition of interestin transmission companies

On August 16, 2006, CEMIG, in partnership with MDU Brasil Ltda. (“MDU”) andBrascan Brasil Ltda. (“Brascan”),entered into agreements (“the Agreements”) with Schahin Holding S.A. topurchase interests in the electricity transmission concessions EmpresaAmazonense de Transmissão de Energia S.A.– EATE, Empresa Paraense deTransmissão de Energia S.A. – ETEP, Empresa Norte de Transmissão de EnergiaS.A. – ENTE, Empresa Regional de Transmissão de Energia S.A.– ERTE and EmpresaCatarinense de Transmissão de Energia S.A. – ECTE.

The net consolidated assets acquired of thetransmission companies at July 31, 2006 are as follows:
|                                   | ** ** | **ETEP** | ** ** | **ENTE** | ** ** | **ERTE** | ** ** | **EATE** | ** ** | **ECTE** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |     |       |     |       |     |       |
| Current assets                    |       | 39       |       | 58       |       | 10       |       | 195      |       | 33       |       |
| Property, plant  and equipment    |       | 290      |       | 633      |       | 126      |       | 1,623    |       | 239      |       |
| Other assets                      |       | 20       |       | 15       |       | 2        |       | 111      |       | —   |       |
| Total assets  acquired            |       | 349      |       | 706      |       | 138      |       | 1,929    |       | 272      |       |
| Current  liabilities              |       | (18      | )          | (57      | )          | (8       | )          | (88      | )          | (14      | )          |
| Long-term  financing              |       | (67      | )          | (243     | )          | (41      | )          | (391     | )          | (61      | )          |
| Other long-term  liabilities      |       | (19      | )          | (25      | )          | (2       | )          | (65      | )          | (24      | )          |
| Total  liabilities                |       | (104     | )          | (325     | )          | (51      | )          | (544     | )          | (99      | )          |
| Net consolidated  assets          |       | 245      |       | 381      |       | 87       |       | 1,385    |       | 173      |       |
| Interest  acquired                |       | 17.51    | %          | 18.35    | %          | 18.35    | %          | 14.94    | %          | 7.50     | %          |
| Net consolidated  assets acquired |       | 43       |       | 70       |       | 16       |       | 207      |       | 13       |       |
| Price paid                        |       | 43       |       | 70       |       | 16       |       | 207      |       | 13       |       |

 

F-27

----

c) GASMIG - Sale of 40% of CEMIG’s interestin GASMIG to PETROBRAS

On December 15,2004, CEMIG sold 40% of the capital stock of GASMIG to PETROBRAS for R$154,resulting in a gain of R$102. The price of the sale was determined based onGASMIG’s discounted cash flows.

The sale is partof the Association Agreement signed on August 25, 2004 among CEMIG, GASMIG, andPETROBRAS to develop the natural gas market. The Agreement includes aninvestment plan to expand the gas distribution networks serviced by GASMIG.According to the plan, these capital investments were increase GASMIG’s dailynatural gas volume distribution from 3.5 million m3/day to 4.5 million m3/dayat the end of 2006, ultimately reaching 11.1 million m3/day in 2023.

In connection withthe sale, the Company signed a shareholders’ agreement, pursuant to which theprior approval of PETROBRAS is required in matters related, among others, tonew investments to be conducted by GASMIG, distribution of dividends,nomination of members to the Board of Directors, the issuance of new shares ordebentures, annual budget investment plans and any transaction involving morethan R$2. Under the terms of the GASMIG Shareholders Agreement, the Company’sability to transfer its shares in GASMIG is limited, and PETROBRAS shall have aright of first refusal in any future transfer of shares. As a result of thisShareholders Agreement, the Company’s ability to manage GASMIG was considerablyreduced and it is not a consolidated subsidiary in the financial statements, inaccordance with the FASB’s EITF Issue No. 96-16, “Investor’sAccounting for an Investee When the Investor Has a Majority of the VotingInterest but the Minority Shareholder or Shareholders Have Certain Approval orVeto Rights.”

(d) 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, Way TVBelo Horizonte S.A. was sold in its entirety to TNL PCS Participações S.A., asubsidiary of Tele Norte Leste Participações S.A., for R$132. The conclusion ofthe sale depends on the authorization by the National TelecommunicationsAgency, ANATEL.

Considering thatthe sale is still pending, the Company did not recognize the sale as ofDecember 31, 2006.

On March 19, 2007, during an extraordinary meeting,ANATEL ́s Board of Directors did not authorized the sale of WAY TV.Administrative and legal actions are being evaluated to overturn the decisionof the Board.

The net income (loss) of WAY TV for the years ended in2006, 2005 and 2004 is R$1, (R$2) and (R$8), respectively.

F-28

----

**10.PROPERTY, PLANT AND EQUIPMENT, NET**

The following table describes the consolidated property, plant andequipment:

|                                            | ** ** | **Annual**                                        | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **average rate of   depreciation** | ** ** | **2006**              | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | **%**                                             | ** ** | ** **            | ** ** | ** ** | ** ** |
| In service                                 |       |                                              |       |                  |       |   |   |
| Generation-                                |       |                                              |       |                  |       |   |   |
| Hydroelectric                              |       | 2.40                                              |       | 9,187                 |       | 7,903 |   |
| Hydroelectric- Consortia                   |       | 2.51                                              |       | 1,156                 |       | 472 |   |
| Thermoelectric                             |       | 1.44                                              |       | 260                   |       | 260 |   |
|                                       |       |                                              |       | 10,603                |       | 8,635 |   |
| Transmission                               |       | 2.98                                              |       | 1,871                 |       | 1,613 |   |
| Distribution                               |       | 5.06                                              |       | 10,259                |       | 7,693 |   |
| Administration                             |       | 9.23                                              |       | 576                   |       | 564 |   |
| Telecom                                    |       | 7.94                                              |       | 390                   |       | 370 |   |
|                                       |       |                                              |       | 23,699                |       | 18,875 |   |
| Accumulated  depreciation and amortization |       |                                              |       |                  |       |   |   |
| Generation                                 |       |                                              |       | (4,593                | )          | (4,373 | ) |
| Generation – Consortia                |       |                                              |       | (63                   | )          | (34 | ) |
| Transmission                               |       |                                              |       | (928                  | )          | (894 | ) |
| Distribution                               |       |                                              |       | (5,867                | )          | (4,068 | ) |
| Administration                             |       |                                              |       | (452                  | )          | (423 | ) |
| Telecom                                    |       |                                              |       | (146                  | )          | (110 | ) |
|                                       |       |                                              |       | (12,049               | )          | (9,902 | ) |
| Total in service                           |       |                                              |       | 11,650                |       | 8,973 |   |
|                                       |       |                                              |       |                  |       |   |   |
| Construction in  progress                  |       |                                              |       |                  |       |   |   |
| Generation                                 |       |                                              |       | 156                   |       | 1,327 |   |
| Generation – Consortia                |       |                                              |       | 40                    |       | 640 |   |
| Transmission                               |       |                                              |       | 169                   |       | 49 |   |
| Distribution                               |       |                                              |       | 1,532                 |       | 883 |   |
| Administration                             |       |                                              |       | 112                   |       | 95 |   |
| Telecom                                    |       |                                              |       | 6                     |       | 4 |   |
| Total in construction in progress          |       |                                              |       | 2,015                 |       | 2,998 |   |
| Total                                      |       |                                              |       | 13,665                |       | 11,971 |   |

Interest cost capitalizedduring the years ended December 31, 2006, 2005 and 2004 was R$293, R$237, andR$194, 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.

The Company has recordedR$931 as Construction in progress - Distribution on December 31, 2006 (R$451 onDecember 31 2005) related to the “Light for All” program. The initial targetfor the Light for All Program was to connect 176,000 consumers (unaudited),basically in the rural area, with a total estimated cost of R$1,641.

In the fourth quarter of2006, due to the startup of the Irapé Plant, the costs referring to theconstruction of that project, in the amount of R$1,200 were transferred tofixed assets in service. The depreciation expense in relation to this projectfor the year 2006, in the amount of R$14, was recognized in the IncomeStatement.

The Company owns land andbuildings recorded as fixed assets – Administration, which were given inguarantee for legal proceedings involving tax, labor-law and civil lawsuits andother contingencies in the amount, net of depreciation, of R$10 on December 31,2006.

F-29

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Consortia

CEMIG is a partnerin certain 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** | ** ** | **2006**              | ** ** | **2005** | ** ** |
| ** **                                   | ** ** | **%**                                 | ** ** | ** **            | ** ** | ** ** | ** ** |
| In service-                                  |       |                                  |       |                  |       |   |   |
| Queimado Hydroelectric Power Plant           |       | 82.50                                 |       | 207                   |       | 207 |   |
| Funil Hydroelectric Power Plant              |       | 49.00                                 |       | 154                   |       | 154 |   |
| Igarapava Hydroelectric Power Plant          |       | 14.50                                 |       | 56                    |       | 56 |   |
| Porto Estrela Hydroelectric Power Plant      |       | 33.33                                 |       | 55                    |       | 55 |   |
| Aimorés Hydroelectric Power Plant       |       | 49.00                                 |       | 659                   |       | — |   |
| Cemig Capim Branco Hydroelectric Power Plant |       | 21.05                                 |       | 25                    |       | — |   |
| (-) Accumulated depreciation                 |       |                                  |       | (63                   | )          | (34 | ) |
|                                         |       |                                  |       | 1,093                 |       | 438 |   |
| Construction in  progress-                   |       |                                  |       |                  |       |   |   |
| Aimorés Hydroelectric Power Plant       |       | 49.00                                 |       | 9                     |       | 601 |   |
| Cemig Capim Branco Hydroelectric Power Plant |       | 21.05                                 |       | 18                    |       | 31 |   |
| Funil Hydroelectric Power Plant              |       | 49.00                                 |       | 8                     |       | 8 |   |
| Baguari Hydroelectric Power Plant            |       | 34.00                                 |       | 5                     |       | — |   |
|                                         |       |                                  |       | 40                    |       | 640 |   |
|                                         |       |                                  |       | 1,133                 |       | 1,078 |   |

In May 8, 2006, due to thestartup of the Aimorés Hydroelectric Power Plant, the costs referring to the construction ofthat project, in the amount of R$659 were transferred to consortia in service.

The participationof the other partners in energy generation from consortia is as follows:
| Consortium                                    | ** ** | **Consortium participants, other then CEMIG** | ** ** | **Participation** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                    | ** ** | ** **                                                        | ** ** | **(%)**           | ** ** |
| Porto Estrela  Hydroelectric Power Plant      |       | Companhia  de Tecidos Nortes de Minas Gerais – COTEMINAS     |       | 33.34             |       |
|                                          |       | Companhia  Vale do Rio Doce – CVRD                           |       | 33.33             |       |
|                                          |       |                                                              |       |              |       |
| Igarapava  Hydroelectric Power Plant          |       | Companhia  Vale do Rio Doce – CVRD                           |       | 38.15             |       |
|                                          |       | Companhia  Mineira de Metais – CMN                           |       | 23.93             |       |
|                                          |       | Compahia  Siderúrgica Nacional - CSN                         |       | 17.92             |       |
|                                          |       | Mineração  Morro Velho - MMV                            |       | 5.50              |       |
|                                          |       |                                                              |       |              |       |
| Funil  Hydroelectric Power Plant              |       | Companhia  Vale do Rio Doce - CVRD                                |       | 51.00             |       |
|                                          |       |                                                              |       |              |       |
| Queimado  Hydroelectric Power Plant           |       | Companhia  Energética de Brasília                       |       | 17.50             |       |
|                                          |       |                                                              |       |              |       |
| Aimorés  Hydroelectric Power Plant       |       | Companhia  Vale do Rio Doce - CVRD                                |       | 51.00             |       |
|                                          |       |                                                              |       |              |       |
| Cemig Capim  Branco Hydroelectric Power Plant |       | Companhia  Vale do Rio Doce - CVRD                                |       | 48.43             |       |
|                                          |       | Comercial  e Agrícola Paineiras Ltda.                        |       | 17.89             |       |
|                                          |       | Companhia  Mineira de Metais - CMN                                |       | 12.63             |       |
|                                          |       |                                                              |       |              |       |
| Baguari  Hydroelectric Power Plant            |       | Furnas  Centrais Elétrica S.A                                |       | 15.00             |       |
|                                          |       | Baguari I Geração de Energia Elétrica S.A          |       | 51.00             |       |

 

F-30

----

**11. ACCOUNTS PAYABLE TO SUPPLIERS**
|                                                                                      | ** ** | **December 31** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                           | ** ** | **2006**             | ** ** | **2005** | ** ** |
| Electricity  suppliers-                                                              |       |                 |       |   |   |
| Eletrobrás – Energy from Itaipu                                            |       | 191                  |       | 210 |   |
| Furnas Centrais Elétricas S.A.                                                  |       | 61                   |       | 39 |   |
| Spot market – CCEE/MAE                                                          |       | 79                   |       | 119 |   |
| Payments to generators for energy purchased on  CCEE/MAE during the rationing period |       | 328                  |       | 362 |   |
| Others                                                                               |       | 137                  |       | 99 |   |
|                                                                                 |       | 796                  |       | 829 |   |
|                                                                                 |       |                 |       |   |   |
| Supplies and  services                                                               |       | 236                  |       | 242 |   |
|                                                                                 |       | 1,032                |       | 1,071 |   |
|                                                                                 |       |                 |       |   |   |
| Current  liabilities                                                                 |       | 768                  |       | 734 |   |
| Long-term liabilities                                                                |       | 264                  |       | 337 |   |

Due to the agreement established between CEMIG, ANEELand market agents, the amounts due to CCEE/MAE shall be paid until September2009 and are adjusted using the SELIC rate plus annual interest of 1%. See note4.

**12. TAXES PAYABLE**

The followingtable describes accrued taxes payable:
|                              | ** ** | **December 31** | ** ** |
|------------------------------|------------|----------------------|------------|
| ** **                   | ** ** | **2006**             | ** ** | **2005** | ** ** |
| Short-term -                 |       |                 |       |   |   |
| Income tax                   |       | 20                   |       | 31 |   |
| Social contribution tax      |       | 8                    |       | 3 |   |
| VAT                          |       | 256                  |       | 229 |   |
| Tax on revenue – COFINS |       | 143                  |       | 92 |   |
| Others                       |       | 74                   |       | 46 |   |
|                         |       | 501                  |       | 401 |   |
| Long-term -                  |       |                 |       |   |   |
| Tax on revenue – COFINS |       | 34                   |       | 103 |   |
| Tax on revenue – PASEP  |       | 7                    |       | 21 |   |
|                         |       | 41                   |       | 124 |   |
|                         |       | 542                  |       | 525 |   |

The federal taxesclassified in long-term liabilities refer to taxes on the assets recorded as aresult of the General Agreement of the Electricity Sector and the deferred rateadjustment, which are due when these assets are realized. These taxes arerecorded based on the rates expected to be in force upon realization.

F-31

----

**13. FINANCING**

(a)              The following tables describe financings:
| ** **                                                   | ** ** | ** **                          | ** ** | ** **                                     | ** ** | ** **   | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------------------------|------------|--------------|------------|-----------------------|------------|
| ** **                                                   | ** ** | ** **                          | ** ** | ** **                                     | ** ** | ** **   | ** ** | ** **            | ** ** | **2006** | ** ** | ** ** | ** ** | **2005** | ** ** |
| **LENDERS**                                                  | ** ** | **Payments of Principal** | ** ** | **Annual Interest   Rates (%)** | ** ** | **Currency** | ** ** | **Short   Term** | ** ** | **Long  Term** | ** ** | **Total** | ** ** | **Total** | ** ** |
| **IN  FOREIGN CURRENCY**                                     | ** ** | ** **                          | ** ** | ** **                                     | ** ** | ** **   | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ABN AMRO Bank –  N. II                                  |       | Annually  through 2013              |       | 6.00                                           |       | US$          |       | —                |       | 107 |   | 107 |   | 117 |   |
| ABN AMRO Real  S.A. III, IV and V                            |       | Semi-annually  through 2009         |       | 6.35                                           |       | US$          |       | 16                    |       | 31 |   | 47 |   | 69 |   |
| Banco do Brasil  S.A. – Various (1)                     |       | Semi-annually  through 2024         |       | Various                                        |       | US$          |       | 15                    |       | 117 |   | 132 |   | 157 |   |
| Banco do Brasil  S.A. II                                     |       | Single  payment in 2009             |       | 3.90                                           |       | JPY          |       | —                |       | 70 |   | 70 |   | 77 |   |
| Banco Paribas II                                             |       | Semi-annually  through 2012         |       | 5.89                                           |       | EURO         |       | 3                     |       | 14 |   | 17 |   | 21 |   |
| Banco Paribas I  and III                                     |       | Semi-annually  through 2010         |       | Libor  + 1.87                                  |       | US$          |       | 1                     |       | 62 |   | 63 |   | 69 |   |
| Banco  Interamericano de Desenvolvimento – BID I and II |       | Semi-annually  through 2006         |       | 7.67                                           |       | US$+  CB     | (3)        | —                |       | — |   | — |   | 5 |   |
| KFW                                                          |       | Semi-annually  through 2016         |       | 4.50                                           |       | EURO         |       | 2                     |       | 17 |   | 19 |   | 20 |   |
| UNIBANCO I, III  e VIII                                      |       | Various                             |       | 6.50                                           |       | US$          |       | 143                   |       | 10 |   | 153 |   | 168 |   |
| UNIBANCO III and  V                                          |       | Single  payment in 2009             |       | 5.50                                           |       | US$          |       | —                |       | 4 |   | 4 |   | 5 |   |
| UNIBANCO IV and  IX                                          |       | Single  payment in 2009             |       | 5.00                                           |       | US$          |       | —                |       | 18 |   | 18 |   | 20 |   |
| MBK Furukawa Sistemas S.A. / UNIBANCO                        |       | Semi-annually  through 2008         |       | Libor  + 5.45                                  |       | US$          |       | 13                    |       | 7 |   | 20 |   | 37 |   |
| Toshiba do  Brasil S.A.                                      |       | Quarterly  through 2009             |       | Libor  + 6.00                                  |       | US$          |       | 3                     |       | 5 |   | 8 |   | 11 |   |
| Other                                                        |       | Various                             |       | Various                                        |       | Various      |       | 3                     |       | — |   | 3 |   | 3 |   |
| **Total foreign currency  financing**                        | ** ** | ** **                          | ** ** | ** **                                     | ** ** | ** **   | ** ** | **199**               | ** ** | **462** | ** ** | **661** | ** ** | **779** | ** ** |

 

F-32

----

 
| **IN  LOCAL CURRENCY**                                             | ** ** | ** **                  | ** ** | ** **             | ** ** | ** ** | ** ** |    |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------|------------|------------------------|------------|------------|------------|---------|--------|------------|------------|------------|------------|------------|------------|
| Banco Credit  Suisse First Boston S.A. I and III                   |       | Single  payment in 2006     |       | 100.00%  of CDI        |       | R$         |       | —  |   | —     |       | —     |       | 66         |       |
| Banco Credit  Suisse First Boston S.A. II                          |       | Single  payment in 2010     |       | 106.00%  of CDI        |       | R$         |       | —  |   | 75         |       | 75         |       | 75         |       |
| Banco do Brasil  S.A. III and VII                                  |       | Single  payment in 2009     |       | 111.00%  of CDI        |       | R$         |       | 2       |   | 119        |       | 121        |       | 122        |       |
| Banco do Brasil  S.A. IV and VIII                                  |       | Annually  through 2013      |       | CDI  + 1.70            |       | R$         |       | 5       |   | 109        |       | 114        |       | 116        |       |
| Banco do Brasil  S.A. V and IX                                     |       | Single  payment in 2013     |       | 107.60%  of CDI        |       | R$         |       | 13      |   | 126        |       | 139        |       | 141        |       |
| Banco do Brasil  S.A.                                              |       | Annually  through 2014      |       | 104.10%  of CDI        |       | R$         |       | 28      |   | 1,200      |       | 1,228      |       | —     |       |
| Banco Itaú – BBA  V                                      |       | Single  payment in 2008     |       | IGP-M  + 10.48         |       | R$         |       | 9       |   | 165        |       | 174        |       | 161        |       |
| Banco Itaú – BBA III e VI                                |       | Single  payment in 2008     |       | CDI  + 2.00            |       | R$         |       | 1       |   | 40         |       | 41         |       | 103        |       |
| Banco Itaú – BBA  IV and VII                             |       | Annually  through 2013      |       | CDI  + 1.70            |       | R$         |       | 16      |   | 301        |       | 317        |       | 321        |       |
| Banco Itaú – BBA                                         |       | Annually  through 2014      |       | CDI  + 1.70            |       | R$         |       | 1       |   | 3          |       | 4          |       | —     |       |
| HSBC Bank Brasil S.A.                                              |       | Single  payment in 2008     |       | CDI  + 2.00            |       | R$         |       | 1       |   | 60         |       | 61         |       | —     |       |
| Banco Votorantim  S.A. I and III                                   |       | Single  payment in 2010     |       | 113.50%  of CDI        |       | R$         |       | 3       |   | 54         |       | 57         |       | 59         |       |
| Banco Votorantim  S.A. II,III, IV                                  |       | Annually  through 2013      |       | CDI  + 1.70            |       | R$         |       | 6       |   | 101        |       | 107        |       | 109        |       |
| Banco WESTL do  Brasil                                             |       | Single  payment in 2008     |       | IGP-M  + 10.48         |       | R$         |       | 2       |   | 41         |       | 43         |       | 42         |       |
| Banco Nacional  de Desenvolvimento Econômico e Social - BNDES |       | Monthly  through 2008       |       | SELIC  + 1.00          |       | R$         |       | 144     |   | 26         |       | 170        |       | 292        |       |
| Bradesco S.A.  II, III                                             |       | Annually  through 2013      |       | CDI  + 1.70            |       | R$         |       | 22      |   | 377        |       | 399        |       | 407        |       |
| Bradesco S.A.                                                      |       | Annually  through 2014      |       | CDI  + 1.70            |       | R$         |       | —  |   | 2          |       | 2          |       | —     |       |
| Debentures I                                                       |       | Annually  through 2006      |       | IGP-M  + 12.70         |       | R$         |       | —  |   | —     |       | —     |       | 501        |       |
| Debentures II                                                      |       | Single  payment in 2009     |       | CDI  + 1.20            |       | R$         |       | 8       |   | 350        |       | 358        |       | 360        |       |
| Debentures II                                                      |       | Single  payment in 2011     |       | 104%  of CDI           |       | R$         |       | 5       |   | 239        |       | 244        |       | —     |       |
| Debentures III–Minas  Gerais State Government                 |       | Various                     |       | IGP-M                  |       | R$         |       | —  |   | 14         |       | 14         |       | 12         |       |
| Debêntures IV                                                 |       | Single  payment in 2014     |       | IGP-M  + 10.50         |       | R$         |       | 15      |   | 258        |       | 273        |       | 264        |       |
| ELETROBRÁS I and  III                                         |       | Monthly  through 2013       |       | FINEL  + 7.50 and 8.50 |       | R$         |       | 19      |   | 76         |       | 95         |       | 111        |       |
| ELETROBRÁS II                                                 |       | Monthly  through 2005       |       | IGP-M  + 12.00         |       | R$         |       | —  |   | —     |       | —     |       | 5          |       |
| ELETROBRÁS IV                                                 |       | Quarterly  thorough 2023    |       | UFIR  + 6.00 to 8.00   |       | R$         |       | 35      |   | 178        |       | 213        |       | 137        |       |
| Large consumers –  C.V.R.D.                                   |       | Semi-annually  through 2011 |       | Various                |       | R$         |       | 5       |   | 2          |       | 7          |       | 8          |       |
| Banco Santander  Brasil S.A. I and II                              |       | Annually  through 2013      |       | CDI  + 1.70            |       | R$         |       | 5       |   | 80         |       | 85         |       | 81         |       |
| UNIBANCO V                                                         |       | Single  payment in 2009     |       | CDI  + 2.98            |       | R$         |       | 3       |   | 104        |       | 107        |       | 108        |       |
| UNIBANCO VI and  X                                                 |       | Annually  through 2013      |       | CDI  + 1.70            |       | R$         |       | 12      |   | 309        |       | 321        |       | 318        |       |
| UNIBANCO I                                                         |       | Annually  through 2013      |       | CDI  + 1.70            |       | R$         |       | 7       |   | 74         |       | 81         |       | 82         |       |
| Banco Itaú and  Bradesco (2)                                  |       | Semi-annually  through2015  |       | CDI  + 1.70            |       | R$         |       | 104     |   | 878        |       | 982        |       | —     |       |
| Others                                                             |       | Various                     |       | Various                |       | R$         |       | 21      |   | 10         |       | 31         |       | 46         |       |
| **Total  local currency**                                          | ** ** | ** **                  | ** ** | ** **             | ** ** | ** ** | ** ** | **492** |   | **5,371**  | ** ** | **5,863**  | ** ** | **4,047**  | ** ** |
| **TOTAL**                                                          | ** ** | ** **                  | ** ** | ** **             | ** ** | ** ** | ** ** | **691** |   | **5,833**  | ** ** | **6,524**  | ** ** | **4,826**  | ** ** |

 

----

(1)    These interest rates vary from2.00 to 8.00% per year;

(2)    Refers to senior quotas of theFIDC;

(3)    CB – Currency baskets – Indexestablished by BID which includes some currencies in its composition as U.S.Dollar, Euro and Yen.

F-33

----

In addition to the financings described above, the Company hasunused credit lines with financial institutions in the amount of R$148(unaudited) on December 31, 2006.

A substantial part of thesefinancings is guaranteed by the Federal and State Governments, and the fundsare usually used as working capital and to finance expansion of the electricitygeneration, transmission and distribution systems. As of December 31, 2006,CEMIG has pledged its future revenue from the sale of electricity in the amountof R$638, as guarantee of some financings.

On November 1, 2006, Cemig Geração e Transmissão S.A.offered the debenture holders of the second series of non-convertibledebentures the opportunity to change the remuneration, from the IGP-M inflationIndex plus 12.7% p.a. to 104% of the CDI per year, establishing maturity inNovember 2011. As a result, 47.37% of the debentures in circulation, equivalentto R$239, had their terms modified under the new conditions.

The remaining 52.63% of the debentures issued in 2006,corresponding to R$265, were redeemed. The Company had already redeemed, in2005, the amount of R$142 arising from the re-negotiation of the debentures ofthe first series. Thus, the total value held in treasury of R$407 may be placedagain in the market, at the Company’s option at some future date.

(b) Composition of foreign financings by currency and domestic currencyindices:
|                                                                                                                         | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2011**   | ** ** | **2012**   | ** ** | **2013**   | ** ** | **2014 and   thereafter** | ** ** | **Total**  | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|-------------------------------------|------------|------------|------------|
| Currency -                                                                                                              |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |                                |       |       |       |
| United States Dollars                                                                                                   |       | 193        |       | 62         |       | 87         |       | 49         |       | 37         |       | 34         |       | 32         |       | 60                                  |       | 554        |       |
| Euro                                                                                                                    |       | 5          |       | 5          |       | 5          |       | 5          |       | 5          |       | 3          |       | 2          |       | 6                                   |       | 36         |       |
| Japanese yen                                                                                                            |       | —     |       | —     |       | 70         |       | —     |       | —     |       | —     |       | —     |       | —                              |       | 70         |       |
| Others                                                                                                                  |       | 1          |       | —     |       | —     |       | —     |       | —     |       | —     |       | —     |       | —                              |       | 1          |       |
|                                                                                                                    | ** ** | **199**    | ** ** | **67**     | ** ** | **162**    | ** ** | **54**     | ** ** | **42**     | ** ** | **37**     | ** ** | **34**     | ** ** | **66**                              | ** ** | **661**    | ** ** |
| Index -                                                                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                          | ** ** | ** ** | ** ** |
| *Certificado de Depósito Interbancário – CDI*(Interbank  deposit rate)                                   |       | 242        |       | 197        |       | 671        |       | 569        |       | 680        |       | 843        |       | 970        |       | 671                                 |       | 4,843      |       |
| *Índice Geral de Preços de Mercado –*“IGP-M”  (General Market Price Index)                     |       | 30         |       | 206        |       | —     |       | —     |       | —     |       | —     |       | —     |       | 272                                 |       | 508        |       |
| *Sistema Especial de Liquidação e Custódia –*“SELIC”  (Brazilian benchmark interest rate) |       | 144        |       | 26         |       | —     |       | —     |       | —     |       | —     |       | —     |       | —                              |       | 170        |       |
| *Unidade Fiscal de Referência –*“UFIR”  (Tax Reference Unit)                                        |       | 35         |       | 23         |       | 24         |       | 23         |       | 22         |       | 19         |       | 15         |       | 52                                  |       | 213        |       |
| *Índice Interno da Eletrobrás**–*“FINEL” (Eletrobrás Internal Index)                      |       | 19         |       | 17         |       | 12         |       | 12         |       | 12         |       | 12         |       | 11         |       | —                              |       | 95         |       |
| Others                                                                                                                  |       | 22         |       | 11         |       | —     |       | —     |       | —     |       | —     |       | —     |       | 1                                   |       | 34         |       |
|                                                                                                                    | ** ** | **492**    | ** ** | **480**    | ** ** | **707**    | ** ** | **604**    | ** ** | **714**    | ** ** | **874**    | ** ** | **996**    | ** ** | **996**                             | ** ** | **5,863**  | ** ** |
|                                                                                                                    | ** ** | **691**    | ** ** | **547**    | ** ** | **869**    | ** ** | **658**    | ** ** | **756**    | ** ** | **911**    | ** ** | **1,030**  | ** ** | **1,062**                           | ** ** | **6,524**  | ** ** |

 

F-34

----

(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,** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|
| ** **            | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Currency-             |       |                                       |       |   |   |   |   |
| United States Dollars |       | (8.66                                      | )          | (11.82 | ) | (8.74 | ) |
| Japanese Yen          |       | (9.47                                      | )          | (23.43 | ) | (7.02 | ) |
| Euro                  |       | 1.85                                       |       | (23.50 | ) | (0.85 | ) |
| Currency baskets      |       | —                                     |       | (17.44 | ) | 2.81 |   |

(d) The following table sets forth the variations for the periodsindicated of the principal indices applied to domestic currency financing, inpercentages:
|            | ** ** | **Year ended December 31,** | ** ** |
|------------|------------|--------------------------------------------|------------|
| ** ** | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Index-     |       |                                       |       |   |   |   |   |
| CDI        |       | 15.05                                      |       | 18.15 |   | 17.46 |   |
| IGP-M      |       | 3.83                                       |       | 1.21 |   | 12.41 |   |
| SELIC      |       | 15.10                                      |       | 18.24 |   | 17.50 |   |
| FINEL      |       | 0.76                                       |       | 0.24 |   | 2.38 |   |

(e)Restrictive Covenants

Certainof CEMIG’s loans, financing agreements and debentures contain certain financialcovenants which are calculated using financial statements prepared inaccordance with Brazilian GAAP. The subsidiary Cemig Distribuição S.A. has not compliedwith one of them as of December 31, 2006 as described below:
| Description of the Restrictive Clause | ** ** | **Required Index**   | ** ** | **Position on December   31, 2006 according to   the financial   statements prepared in   accordance with   Brazilian GAAP** | ** ** |
|-----------------------------------------------------------|------------|---------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Cemig  Distribuição                             |       |                      |       |                                                                                                                                                                                                    |       |
| Capital  Expenditures/EBITDA                              |       | Less than or equal to 60% |       | 73.59                                                                                                                                                                                                   |       |

 

----

EBITDA = Earnings Before Interest, Income Taxes,Depreciation and Amortization

Some contractsestablished specific criteria to define adjustments to the EBITDA to be used inthe covenants compliance.

Cemig DistribuiçãoS.A has obtained waivers from the related creditors that affirm that suchcreditors will not exercise their rights to demand accelerated or immediatepayment of the total amount due until after December 31, 2007. Consequently,these financings are classified in current and long-term liabilities accordingto the original terms of respective contracts and amendments, in accordancewith the respective waivers obtained.

**14. REGULATORY CHARGES PAYABLE**

The followingtable describes the Company’s accrued regulatory charges payable:
|                                        | ** ** | **December, 31** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Global reserve  for reversion quota    |       | 10                    |       | 33 |   |
| Fuel usage quota                       |       | 74                    |       | 6 |   |
| Emergency  capacity charge             |       | 40                    |       | 56 |   |
| Energy development account             |       | 32                    |       | 24 |   |
| Energy  efficiency and R&D program |       | 259                   |       | 185 |   |
| Other                                  |       | 5                     |       | 4 |   |
|                                   |       | 420                   |       | 308 |   |
| Current  liabilities                   |       | 420                   |       | 266 |   |
| Non current  liabilities – other  |       | —                |       | 42 |   |

 

F-35

----

(a) Global reserve for reversion quota:

The global reserve for reversion quota was established as a fund managedby ELETROBRÁS (*Centrais ElétricasBrasileiras S.A*., the Federal Government-owned holding company forinvestments in the Brazilian power sector)for the purpose of reimbursement of electricity companies’ investments when theirconcessions expire and assets subject to the concession revert to the FederalGovernment. It is funded through assessments on power companies and is based on2.5% of assets in service, limited to 3% of total annual operating revenues,net of value-added tax on sales to final customers.

(b) Fuel usage quota:

The fuel usage quota represents contributions made by the electricitycompany concessionaires to subsidize the cost of fuel used in thethermoelectric energy generating process in the Brazilian power system.

(c) Emergency capacity charge:

The emergency capacity charge represents a charge established in 2002,which is prorated 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) Energy development account:

The energy 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 ResolutionNo. 42 dated January 31, 2003.

(e) Energy efficiency and R&D program

In compliance with the regulation of the electric power sector, theelectric power distributors and generators are required to spend 1% of theirnet revenues in energy efficiency and research and development programs. Thepercentage is included annually in CEMIG’s revenues through a rate adjustmentstipulated by ANEEL, which should be destined to this program.

**15. EMPLOYEE POST-RETIREMENT BENEFITS**

The Company sponsors a pension plan, administered by *Fundação Forluminas de Seguridade Social* -FORLUZ (Forluminas Social Security Foundation, or “FORLUZ”) coveringsubstantially all of its employees. The Company has applied SFAS No 87 “Employers’Accounting for Pensions” as from January 1,1995. However, amortization of thenet transition obligation existing at January 1, 1995 has been computedretroactively as if it had been established on January 1, 1989, which is thedate that SFAS No 87 first became applicable for non-U.S. pension funds.

Until October 1997, the Company sponsored only a defined benefit pensionplan. From September 29, 1997 to May 1, 1998, participants were permitted toelect 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.

Under the 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, 2006 and 2005 was R$1,663 andR$1,316, respectively, and the contribution expense for the years endedDecember 31, 2006, 2005 and 2004 was R$53, R$68 and R$37, respectively.

F-36

----

The dental care plan wasimplemented in the third quarter of 2006 and the costs related to theparticipants who are retired was fully recognized in the income statement, inthe amount of R$10.

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-retirement benefits.

Amortization of deficit inactuarial reserves

Part of thepost-retirement benefit liabilities, in the amount of R$1,317, as of December31, 2006 (R$1,524 as of December 31, 2005), was recognized as obligationspayable by the Company. These obligations are being amortized through monthlyinstallments, through June 2024, calculated under the fixed-installment system(“Price Table”). Part of these amounts is restated annually according to thesalary 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.

Thechange in benefit obligations for the years ended December 31, 2006 and 2005 isas follows:
|                                                        | ** ** | **Defined benefit pension plan** | ** ** | **Post-retirement health care,   insurance and dental benefits** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **Year ended December 31,**      | ** ** | **Year ended December 31,**                                                     | ** ** |
| ** **                                             | ** ** | **2006**                                        | ** ** | **2005**                                                                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                   |       |                                            |       |                                                                                           |       |   |   |   |   |
| Projected Benefit  obligation – beginning of year |       | 4,988                                           |       | 4,498                                                                                          |       | 721 |   | 706 |   |
| Service cost                                           |       | 6                                               |       | 7                                                                                              |       | 31 |   | 31 |   |
| Interest cost                                          |       | 545                                             |       | 491                                                                                            |       | 78 |   | 78 |   |
| Actuarial (gain) loss                                  |       | (173                                            | )          | 253                                                                                            |       | (16 | ) | (37 | ) |
| Plan amendment                                         |       | —                                          |       | 81                                                                                             |       | 39 |   | — |   |
| Benefits paid to  participants                         |       | (357                                            | )          | (342                                                                                           | )          | (63 | ) | (57 | ) |
| Projected Benefit obligation – end of year        |       | 5,009                                           |       | 4,988                                                                                          |       | 790 |   | 721 |   |

 

As of December 31, 2005, the Company changed the termsof its plan to convert the account balance accumulated under this plan into amonthly life annuity at the date of retirement, which was previously based onAT-49 mortality table that was changed to AT-83. This change resulted in a planamendment in the amount of R$81 in 2005. The effect will be amortized on astraight-line basis over twelve years, representing the estimated remainingservice period of the related employees.

The implementation of thedental care plan resulted in a plan amendment in the amount of R$39 in2006.

F-37

----

The change in planassets for the years ended December 31, 2006 and 2005 is as follows:
|                                                            | ** ** | **Defined benefit pension plan** | ** ** | **Post-retirement health care,   insurance and dental benefits** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **Year ended December 31,**      | ** ** | **Year ended December 31,**                                                     | ** ** |
| ** **                                                 | ** ** | **2006**                                        | ** ** | **2005**                                                                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                 | ** ** | ** **                                      | ** ** | ** **                                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fair market  value of plan assets – beginning of year |       | 3,572                                           |       | 3,065                                                                                          |       | 30 |   | 32 |   |
| Employer  contributions                                    |       | 223                                             |       | 230                                                                                            |       | 38 |   | 31 |   |
| Employee  contributions                                    |       | —                                          |       | —                                                                                         |       | 22 |   | 18 |   |
| Actual return on  plan assets                              |       | 545                                             |       | 619                                                                                            |       | 3 |   | 6 |   |
| Benefits paid to  participants                             |       | (357                                            | )          | (342                                                                                           | )          | (63 | ) | (57 | ) |
| Fair market value of  plan assets – end of year       |       | 3,983                                           |       | 3,572                                                                                          |       | 30 |   | 30 |   |

 

The funded statusof the defined benefit pension plan, post-retirement health care, insurance anddental is as follows:
|                                                                                | ** ** | **Defined benefit pension plan** | ** ** | **Post-retirement health care,  insurance and dental benefits** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **December 31,**                           | ** ** | **December 31,**                                                                    | ** ** |
| ** **                                                                     | ** ** | **2006**                                        | ** ** | **2005**                                                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| Projected  benefit obligation in excess of plan assets                         |       | 1,026                                           |       | 1,416                                                                                    |       | 760 |   | 691 |   |
| Unrecognized net  transition obligation, being recognized from January 1, 1995 |       | —                                          |       | —                                                                                   |       | — |   | (22 | ) |
| Unrecognized  prior service cost                                               |       | —                                          |       | (120                                                                                     | )          | — |   | (30 | ) |
| Unrecognized net  actuarial loss                                               |       | —                                          |       | (871                                                                                     | )          | — |   | (135 | ) |
| Accrued pension  liability                                                     |       | 1,026                                           |       | 425                                                                                      |       | 760 |   | 504 |   |
| Additional  minimum liability – Other comprehensive income                |       | —                                          |       | 767                                                                                      |       | — |   | — |   |
| Total accrued  pension liability                                               |       | 1,026                                           |       | 1,192                                                                                    |       | 760 |   | 504 |   |
|                                                                           |       |                                            |       |                                                                                     |       |   |   |   |   |
| Current  liabilities                                                           |       | 120                                             |       | 161                                                                                      |       | — |   | — |   |
| Long-term liabilities                                                          |       | 906                                             |       | 1,031                                                                                    |       | 760 |   | 504 |   |

 

The changes inbenefit obligations recognized in Accumulated other comprehensive income forthe years ended December 31, 2006, 2005 and 2004, net of taxes, are as follows:
|                                                              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Accumulated  other comprehensive income at beginning of year |       | 506      |       | 531      |       | 57       |       |
| Initial adoption  of SFAS 158, net of taxes of R$126         |       | 244      |       | —   |       | —   |       |
| Increase  (decrease) in additional miminum liability         |       | (140     | )          | (25      | )          | 474      |       |
| Accumulated other  comprehensive income at the end of year   |       | 610      |       | 506      |       | 531      |       |

 

F-38

----

The components ofnet periodic benefit costs for the years ended December 31, 2006, 2005 and 2004are as follows:
|                                        | ** ** | **Defined benefit pension plan** | ** ** | **Post-retirement health care,   insurance and dental benefits** | ** ** |
|----------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **Year ended December 31,**      | ** ** | **Year ended December 31,**                                                     | ** ** |
| ** **                             | ** ** | **2006**                                        | ** ** | **2005**                                                                                       | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                   |       |                                            |       |                                                                                           |       |   |   |   |   |   |   |   |   |
| Service cost                           |       | 6                                               |       | 7                                                                                              |       | 6 |   | 31 |   | 31 |   | 24 |   |
| Interest cost                          |       | 545                                             |       | 491                                                                                            |       | 449 |   | 78 |   | 78 |   | 66 |   |
| Expected return  on plan assets        |       | (506                                            | )          | (437                                                                                           | )          | (422 | ) | (4 | ) | (5 | ) | (3 | ) |
| Amortization of  transition obligation |       | —                                          |       | —                                                                                         |       | — |   | 6 |   | 5 |   | 5 |   |
| Amortization of  loss (gain)           |       | 33                                              |       | 27                                                                                             |       | — |   | 11 |   | 10 |   | 3 |   |
| Expected  Employee contribution        |       | —                                          |       | —                                                                                         |       | — |   | (22 | ) | (23 | ) | (19 | ) |
| Amortization of  prior service cost    |       | 10                                              |       | 3                                                                                              |       | 3 |   | 2 |   | 2 |   | 2 |   |
| Net periodic benefit  cost             |       | 88                                              |       | 91                                                                                             |       | 36 |   | 102 |   | 98 |   | 78 |   |

 

The components ofthe projected net periodic post-retirement benefit costs for 2007 are asfollows:
|                                        | ** ** | **Defined benefit pension   plan** | ** ** | **Post-retirement health   care, insurance and dental** | ** ** |
|----------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
|                                   |       |                                              |       |                                                                             |       |
| Service cost                           |       | 5                                                 |       | 36                                                                               |       |
| Interest cost                          |       | 546                                               |       | 85                                                                               |       |
| Expected return  on plan assets        |       | (566                                              | )          | (4                                                                               | )          |
| Amortization of  prior service cost    |       | 10                                                |       | 6                                                                                |       |
| Amortization of  transition obligation |       | —                                            |       | 5                                                                                |       |
| Amortization of  loss                  |       | —                                            |       | 9                                                                                |       |
| Expected  Employee contribution        |       | —                                            |       | (26                                                                              | )          |
|                                   |       | (5                                                | )          | 111                                                                              |       |

 

**Effect ofinitial recognition provision of SFAS 158**

The FASB issuedSFAS no 158, “Employer’s Accounting for Defined Benefit Pension and OtherPostretirement Plans” in September 2006. As required, the Company adopted thisstatement effective on December 31, 2006.

The followingtable illustrates the adjustments of the incremental effect of applying thisstatement in the consolidated balance sheet as of December 31, 2006:
|                                         | ** ** | **Defined benefit pension plan**    | ** ** |
|-----------------------------------------|------------|----------------------------------------------------|------------|
| ** **                              | ** ** | **Before application of  SFAS 158** | ** ** | **Incremental effect   of applying  SFAS 158** | ** ** | **After application of  SFAS 158** | ** ** |
|                                    |       |                                               |       |   |   |   |   |
| Total accrued  pension liability        |       | 845                                                |       | 181 |   | 1,026 |   |
| Deferred Income  taxes                  |       | (23                                                | )          | (62 | ) | (85 | ) |
| Accumulated other  comprehensive income |       | 366                                                |       | 119 |   | 485 |   |

 

 
|                                         | ** ** | **Post-retirement health care, insurance and dental benefits** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **Before application of  SFAS 158**                                           | ** ** | **Incremental effect   of applying  SFAS 158** | ** ** | **After application of  SFAS 158** | ** ** |
|                                    |       |                                                                                         |       |   |   |   |   |
| Total accrued  pension liability        |       | 571                                                                                          |       | 189 |   | 760 |   |
| Deferred Income  taxes                  |       | (50                                                                                          | )          | (64 | ) | (114 | ) |
| Accumulated other  comprehensive income |       | —                                                                                       |       | 125 |   | 125 |   |

 

F-39

----

The weighted-averageasset allocations by asset category is as follows:
|                                  | ** ** | **Defined benefit pension plan, Post-retirement health care and Dental** | ** ** |
|----------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|
| ** **                       | ** ** | **Asset allocation  at December 31,**                                                             | ** ** | **Target asset allocation as per   FORLUZ Investment Committee   percentage or range of ** | ** ** |
| **Type of investment** | ** ** | **2006**                                                                                                         | ** ** | **2005** | ** ** | **percentage’s** | ** ** |
|                             |       |                                                                                                             |       |   |   |   |   |
| Debt Securities                  |       | 84.15                                                                                                            | %          | 83.68 | % | From 70% to 100% |   |
| Equity  Securities               |       | 10.61                                                                                                            | %          | 10.10 | % | Up to 20% |   |
| Real Estate                      |       | 2.48                                                                                                             | %          | 3.41 | % | Up to 7% |   |
| Participant  loans               |       | 2.76                                                                                                             | %          | 2.81 | % | Up to 10% |   |
| Total                            |       | 100.00                                                                                                           | %          | 100.00 | % |   |   |

 

Investmentstrategies:

·      FORLUZ Investment Committee determines investmentguidelines;

·      Investment objectives: achieve the minimumactuarial yield (IPCA/IPEAD plus 6% per year), in both long and short terms;

·      Types of allowed investments: Fixed income – lowcredit risk assets, stocks, real estate and loans to participants;

·      Types of investments not allowed: medium and highcredit risk assets, foreign currencies and others according to the Brazilianlegislation;

·      Use of derivatives: with the purpose of hedgingexposures.

Benchmarks for investing planassets:

·      Debt securities: CDI, IGP-M, INPC (1), IPCA/IBGE(2);

·      Equity securities: Average IBOVESPA (3);

·      Real Estate: IPCA/IPEAD + 6% per year;

·      Participant loans: 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 the Brazilian Instituteof Geography and Statistics – IBGE)

(3)   *Indice da Bolsa de Valores de São Paulo –*IBOVESPA (Index which represents the variation of the main shares negotiated onSâo Paulo Stock exchange)

As of December 31,2006 and 2005, the pension plan assets includes securities issued by CEMIG asfollows:
|            | ** ** | **Defined benefit pension plan** | ** ** |
|------------|------------|-------------------------------------------------|------------|
| ** ** | ** ** | **December 31, 2006**                 | ** ** | **December 31, 2005** | ** ** |
|       |       |                                            |       |   |   |
| Debentures |       | 203                                             |       | 203 |   |
| Shares     |       | 27                                              |       | 39 |   |
|       |       | 230                                             |       | 242 |   |

 

Assumptions usedby the Company in 2006 and 2005 for its defined benefit pension plans were asfollows (percentage including projected inflation of 5% per annum):
| Actuarial method                       |   | Projected Unit Credit |   |
|----------------------------------------|--------|-----------------------|--------|
| Annual discount  rate                  |   | 11.30                 |   |
| Annual expected  return on plan assets |   | 14.45                 |   |
| Annual salary  increase                |   | 7.10                  |   |
| Annual increase  in benefits           |   | 5.00                  |   |
| Mortality rate                         |   | AT - 83               |   |
| Disability rate                        |   | Light Medium          |   |
| Disable  mortality rate                |   | IAPB-57               |   |
| Expected annual  turnover rate         |   | 2.00                  |   |

 

F-40

----

Therationale used in determination of long-term return on assets rate describedabove is based in the asset managers mid to long-term expectations and theBrazilian government bonds rates, reduced by 2% or 3% as the Company deemedreasonable.

CEMIG’s obligation related to its post-retirementhealth care plan is calculated using a defined annual contribution per employeeduring the rest of their lives. The contribution amount is not based on theincrease or decrease in medical care cost. If the predetermined contributionsdo not cover future benefit expenses, CEMIG’s employees will be required tomake additional contributions or the related medical benefits will be reduced,in accordance with an agreement between CEMIG and the labor union relating tothe health care plan.

Estimated FutureBenefit Payments

The followingbenefit payments, which reflect expected future service, as appropriate, areexpected to be paid:
|                     | ** ** | **Pension benefits** | ** ** | **Post-retirement health  care, insurance and dental  benefits** | ** ** |
|---------------------|------------|---------------------------|------------|--------------------------------------------------------------------------------------|------------|
| 2007                |       | 375                       |       | 67                                                                                   |       |
| 2008                |       | 393                       |       | 70                                                                                   |       |
| 2009                |       | 413                       |       | 74                                                                                   |       |
| 2010                |       | 434                       |       | 78                                                                                   |       |
| 2011                |       | 455                       |       | 82                                                                                   |       |
| 2012 and thereafter |       | 2,642                     |       | 473                                                                                  |       |
|                |       | 4,712                     |       | 844                                                                                  |       |

 

**16. ACCRUEDLIABILITY FOR CONTINGENCIES**

CEMIGand its subsidiaries are party to certain legal proceedings in Brazil arisingin the normal course of business, regarding tax, labor, civil and other issues.The Company believes that any loss in excess of the amounts provided for inrespect of such contingencies will not have a material adverse effect on theCompany’s results of operations or financial position. For those contingenciesfor which an adverse outcome has been deemed probable based on the assessmentof management and the Company’s legal counsel, the Company has recordedprovisions for losses as follows: 
|                                          | ** ** | **December 31** | ** ** |
|------------------------------------------|------------|----------------------|------------|
| ** **                               | ** ** | **2006**             | ** ** | **2005** | ** ** |
| **Labor Claims**                         | ** ** | ** **           | ** ** | ** ** | ** ** |
| Various                                  |       | 35                   |       | 114 |   |
|                                     |       |                 |       |   |   |
| **Civil Lawsuits**                       | ** ** | ** **           | ** ** | ** ** | ** ** |
| Personal Injury                          |       | 8                    |       | 36 |   |
| Rate Increase                            |       | 104                  |       | 132 |   |
| Other                                    |       | 61                   |       | 29 |   |
|                                     |       |                 |       |   |   |
|                                     |       | 173                  |       | 197 |   |
| **Tax**                                  | ** ** | ** **           | ** ** | ** ** | ** ** |
| FINSOCIAL                                |       | 21                   |       | 21 |   |
| VAT                                      |       | 2                    |       | — |   |
| Taxes payable – Suspended Liability |       | 40                   |       | 38 |   |
| INSS                                     |       | 1                    |       |   |   |
| Other                                    |       | 2                    |       | 2 |   |
|                                     |       |                 |       |   |   |
| ** **                               |       | 66                   |       | 61 |   |
| **Regulatory**                           | ** ** | ** **           | ** ** | ** ** | ** ** |
| ANEEL Administrative Proceedings         |       | 6                    |       | 5 |   |
| Total                                    |       | 280                  |       | 377 |   |

 

F-41

----

Certain details relating tosuch provisions are as follows:

(a) Labor Claims:

The labor claims relate principally to overtime andhazardous occupation compensation. In the fourth quarter of 2006 the company reviewed the labor-law casesand the expectation of loss in the actions, changing the criteria forprovisioning from a percentage over the total amount of the actions to anindividual analysis of the cases,which resulted in a reduction of the amounts provisioned.

(b) Rate Increase

A number of industrialconsumers have brought legal action against the Company seeking refunds ofamounts paid to CEMIG as a result of a rate increase that became effectiveduring the Brazilian government’s economic stabilization “Cruzado Plan” in1986, alleging that such increases violated the price controls instituted aspart of that plan. CEMIG determines the amounts to be reserved based on theamount billed subject to consumers’ claims and recent court decisions. Theprovision for these rate increase claims is R$104 as of December 31, 2006.

(c) Taxes payable –Suspended Liability

The recorded provision ofR$40 as of December 31, 2006 (R$38 as of December 31, 2005) is related to thededuction of the social contribution tax paid in the calculation of income tax.CEMIG has a preliminary court order granted by the Eighth Civil Court of theFederal Justice, on April 17,1998, for the exemption of payment.

(d) ANEEL AdministrativeProceedings

CEMIG was fined by ANEELin some administrative proceedings due to alleged failure to comply withcertain quality standards with respect to consumers and other matters. TheCompany is defending against such fines. The provision as of December 31, 2006represents the potential loss relating to these matters.

(e) Other Civil lawsuits

Refer basically toseveral civil claims brought by people who have suffered damages arising mainlyfrom accidents that occurred during the ordinary course of CEMIG business anddamages suffered as a result of the interruption of the supply of energy tothem. The provision as of December 31, 2006 represents the potential lossrelating to these matters.

(f) Contingencies forwhich an adverse outcome has been deemed remote or reasonably possible

CEMIG has other relevantlegal proceedings against it for which the Company considers an unfavorableoutcome to be remote or reasonably possible. The Company does not expect toincur any material losses with respect to these contingencies and therefore theCompany has not recorded any accruals for such claims. Certain details relatingto such matters are as follows:

(I) Income and socialcontribution taxes on post retirement benefits

On October 11, 2001, theBrazilian Federal Tax Authorities (Secretaria da Receita Federal) issued an assessmentnotice, in the updated amount of R$297, arising from the utilization of taxcredits that resulted from the amendment of the Company’s 1997, 1998 and 1999tax 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. No reserve hasbeen recorded as a result of this assessment notice, since the Company believesthat the procedures which generated the tax credits are legally sound. Anadverse outcome in this mater has been deemed remote.

F-42

----

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$257. 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 mater 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$132 as of December 2006. No reserve has been recorded for these claims,since the Company believes that the probability of an adverse outcome relatingto this mater is reasonably possible.

(III) Regulatory agencyacts

ANEEL has filedregulatory proceeding pending against CEMIG claiming that CEMIG owes theFederal Government R$623 due to a miscalculation of credits in the amount of thecumulative rate deficit (CRC) applied to reduce amounts owed to the FederalGovernment. On October 31, 2002, ANEEL issued a final administrative decisionagainst the Company. On January 9, 2004, the Brazilian Treasury Authority (“Secretariado Tesouro Nacional”) issued an official collection notice, in the amount ofR$516, to be paid before January 30, 2004. The Company did not make suchpayment since it believes that the likelihood of an adverse outcome isreasonably possible.

On November 14, 2003, theFederal Public Auditing Court, which has the authority to audit any decision byANEEL that may impact public finance, initiated an administrative proceedingagainst ANEEL to evaluate the criterion adopted by ANEEL in the EnergyConsumption Reduction Emergency Program (Programa Emergencial de Redução deConsumo de Energia Elétrica), or PERCEE. The Federal Public Auditing Court hasasked 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$80. The Company has not recorded a provision relating to this matter as thelikelihood of an adverse outcome is reasonably possible.

(IV) 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$78. No provision was constituted for the result of this dispute, since thecompany believes that it is not a legal obligation and that it has arguments onthe merit for defense against this demand. The Company believes that thelikelihood of an adverse outcome in this matter is reasonably possible.

(V) Land usage taxes (“taxade ocupação do solo”)

Several Municipalities ofthe State of Minas Gerais have assessed the Company for the payment of the landusage taxes. There are several administrative proceedings and lawsuits relatedto this matter, in the total amount of approximately R$11. The Company believesthat the likelihood of an adverse outcome in this matter is reasonablypossible.

F-43

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(VI) Civil lawsuits -Consumers

Various consumers and thePublic Prosecutor of Minas Gerais have brought civil claims against CEMIGcontesting rate adjustments applied in prior years, including rate subsidiesgranted to low-income consumers, the special rate adjustment, the inflationaryindex used to increase the electric rates in April 2003 and doublereimbursement for any amounts that the Company found to have wrongfullycollected and substitution of current adjustment index contained in theconcession agreement as well as a revision of the methodology for calculationof the “X” Factor. It is not possible at the present time to estimate theamounts involved in these claims. The Company believes that the likelihood ofan adverse outcome in this matter is remote.

The Company is thedefendant in suits challenging the charging of tax on public lighting. Theseclaims are totaled an estimated amount of R$399 as of December 31, 2006. TheCompany believes that the likelihood of an adverse outcome in this matter isreasonably possible.

(VII) Social Security and tax obligations –indemnity for the “Anuênio” and profit shares

CEMIG and its subsidiaries Cemig Geração e TransmissãoS.A. and Cemig Distribuição S.A. paid an indemnity to the employees in 2006, inthe amount of R$178, in exchange for the rights to future payments known as “Anuênios”which would be incorporated into salaries. The company and its subsidiaries didnot make the payments of income tax and social security contribution on thisamount because it considered that these obligations are not applicable toamounts paid as indemnity. However, to avoid the risk of a future fine arisingfrom a different interpretation by the Federal Tax Authority and the NationalSocial Security Institution (“INSS”), the company and its subsidiaries decidedto file for orders of mandamus to allow payment into Court of the amount of anyobligations, in the amount of R$122, posted in Deposits connected to legalactions in Long term assets. No provision was made for possible losses in thismatter since the company and its subsidiaries classify the risk of loss in thisaction as reasonably possible.

In September 2006 CEMIG wasnotified by the Social Security National Institute, INSS, as a result of thenon-payment of the Social Security contribution on the amounts paid as profitsharing in the period 2000 to 2004, representing R$92. The Company appealed inthe administrative sphere against the decision. No provision has beenconstituted since CEMIG believes it has arguments on the merit for defense, andthe adverse outcome in this action is considered to be reasonably possible.

In addition to the mattersdescribed above, CEMIG and its subsidiaries are involved in other litigationarising from the normal course of business. Management believes that any lossesrelating to these items would not have a material adverse effect on theconsolidated financial position and results of operations of the Company.

(g)Environmental Matters

CEMIG has some relevantlegal proceedings related to Environmental Matters. Certain details relating tosuch matters are as follows:

(I) Aimorés

CEMIG is also a co-defendant, along with CVRD, in apublic civil action lawsuit brought by the Federal Public Attorneys’ Office,concerning the Aimorés hydroelectric power plant. The plaintiffs allege thatCEMIG did not obtain proper licensing for this project, and seek to recoverdamages and annul the environmental licenses relating to this plant and thoseof the related concessions. CEMIG has not accrued any liability related to thisclaim since CEMIG believes it has arguments on the merit for defense, and theadverse outcome in this action is considered to be reasonably possible. CEMIGalso contested a lawsuit related to this power plant brought by a municipalitythat alleges that the project authorizations have not been duly approved.

F-44

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(II) Irapé

The Federal PublicAttorneys’ Office filed a suit against CEMIG alleging irregularities in theinstallation of the Irapé hydroelectric power plant, which allegedly wouldresult in material adverse impacts on the environment and the local population.The action was settled after CEMIG signed an undertaking and committed toimplement social and environmental measures. Recently, the Federal PublicAttorneys’ Office filed another action alleging non-compliance with theobligations assumed and claiming foreclosure on the guarantee that CEMIG hadgiven.

A Conduct AdjustmentAgreement (“TAC”) was entered into between the Federal Public Attorneys’ Officeand CEMIG in relation to the Irapé plant. The Federal Public Attorneys’ Officealleged that CEMIG did not comply with its social-environmentalresponsibilities and sued us.  The trialcourt found CEMIG to be in compliance with the TAC and the case was dismissed.The Federal Public Attorney’s Office appealed, and CEMIG counter-appealed, tothe federal court of appeals. CEMIG has not accrued any liability related tothis claim since CEMIG believes it has arguments on the merit for defense, andthe adverse outcome in this action is considered to be remote. The estimatedvalue of the case is R$6.

**17.SHAREHOLDERS’ EQUITY**

(a)Capital stock:
| ** **                          | ** ** | **Year ended December 31,   (thousands of shares)** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| PREFERRED  SHARES:                  |       |                                                                              |       |   |   |   |   |
| Balance                             |       | 273,838,953                                                                       |       | 273,838,953 |   | 273,838,953 |   |
|                                |       |                                                                              |       |   |   |   |   |
| COMMON SHARES:                      |       |                                                                              |       |   |   |   |   |
| Balance                             |       | 212,622,504                                                                       |       | 212,622,504 |   | 212,622,504 |   |
|                                |       |                                                                              |       |   |   |   |   |
| TREASURY STOCK  (Preferred shares): |       |                                                                              |       |   |   |   |   |
| Balance                             |       | (207,384                                                                          | )          | (207,384 | ) | (207,384 | ) |
| Total                               |       | 486,254,073                                                                       |       | 486,254,073 |   | 486,254,073 |   |

 

AtDecember 31, 2006, the State Government owned 51% of the Company’s commonshares and 2% of its preferred shares, equal to 23% of total capital. Theholders of the preferred shares are not entitled to vote at shareholders’meetings, but the shares have priority in the repayment of capital uponliquidation and are entitled to a minimum annual dividend as described in note17 (d.1). As described in Note 31 (g) and 31 (h), on June 4, 2007, the Companycompleted an increase of registered capital, followed by a reverse stock split.All share data has been retroactively restated to reflect these transactions.

As of December 31, 2006, the common and preferred shares have a par valueamount of R$0.01.

(b) Additional paid-in capital:

The balance refers to premium received by the Company when shares wereissued.

(c) Appropriated retained earnings:

The followingdescribes certain reserves that are included in shareholders’ 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 toMarch 1993.

F-45

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Legalreserve - this reserve is a requirement for all Brazilian corporations and representsthe appropriation of 5% of annual net income up to a limit of 20% ofshare capital. This appropriation is not required in the fiscal year in whichthis legal reserve balance, added to the other established capital reserves,exceeds 30% of the paid-in capital, which has been the case with respect to2006 and 2005. However, the Company opted to appropriate 5.00% of 2006 annualnet income, according to Brazilian corporate law, in the amount of R$86.

(d) Unappropriate retained earnings:

This balance representsretained earnings determined in accordance with U.S. GAAP after (i) theallocation of the amount for legal reserve (when required) as described in note17 (c); (ii) allocation or transfer to or from other reserves; and (iii)dividends and interest on capital in lieu of dividends as described in note 17(d.1).

(d.1) Dividends and interest on capital in lieu of dividends:

The Company pays50% of adjusted net income as mandatory dividends. Additionally, the Companydistributed extraordinary dividends, to the extent that cash is available, asdetermined by the Board of Directors, subject to the guidelines of the CompanyDirective Plan. Declared dividends are paid in two equal installments, thefirst on June 30 and the second on December 30 of the year subsequent to theprofit generation.

Each preferredshare is entitled to an annual dividend equal to the greater of 10% of parvalue per preferred share or 3% of the book value of such preferred share, alsobased on the financial statements prepared in accordance with Brazilian GAAP.This preferred dividend has priority over the allocation of the mandatorydividend amount for the relevant period.

After payment ofthe preferred dividend, the remainder of the mandatory dividend amount, if any,is allocated first to the payment of an annual dividend to the holders ofcommon shares in an amount up to the annual cash dividend guaranteed to thepreferred shares.  If a portion of themandatory dividend amount remains after the payment of the common dividend, theremaining funds are to be distributed on an equal, pro rata basis with respectto all preferred shares and common shares.

The Company mayalso pay interim dividends to holders of preferred shares and common shares.Any interim dividends paid will count toward the calculation of the dividendpayable for the fiscal year in which the interim dividend was declared. Underthe Brazilian Corporate Law, the Company’s Board of Directors is permitted torecommend, under certain conditions, the non-payment of the mandatory dividendfor any year.

The StateGovernment guarantees that the amount of dividends received by certain holdersof preferred shares and common shares with respect to any fiscal year willequal at least 6% of the par value of the preferred shares and the commonshares.  Accordingly, even if net income,based on the Company’s financial statements prepared in accordance withBrazilian GAAP, is none 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 theBrazilian Corporate Law, if the Company does not distribute the minimumpreferred dividends for three consecutive years, the preferred shares becomeentitled to vote.

Effective December26, 1995, Brazilian law allows the deductibility of interest on capital paid toshareholders for income tax purposes, provided such interest is computed basedon the Brazilian Long-term Interest Rate (TJLP), effective in the year theinterest on capital is computed.

In 2006, 2005 and2004, the minimum dividend requirements have been met and dividenddistributions have been made on an equal, pro rata basis with respect to allpreferred shares and common shares.

F-46

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UnderUSGAAP, the Company declared dividends and interest on capital in lieu ofdividends as follows:
|                               | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|                          |       |                                       |       |   |   |   |   |
| Regular  Dividends            |       | 1,178                                      |       | 182 |   | 70 |   |
| Extraordinary  dividends      |       | —                                     |       | 897 |   | — |   |
| 2005  supplementary dividends |       | —                                     |       | 77 |   | — |   |
| Interest on  capital          |       | 169                                        |       | 635 |   | 510 |   |
| Total                         |       | 1,347                                      |       | 1,791 |   | 580 |   |

 

The Companyreverts the dividends not claimed by the shareholders within three years of thedate they were distributed in accordance with the Brazilian Corporate Law and itsby-laws. The amounts of the dividends not claimed is “de minimis”.

**18. NETOPERATING REVENUES**

(a) The composition of electric energy supplied by consumer classis as follows:
|                                                       | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                            | ** ** | **GWh (unaudited)**                   | ** ** | **R$** | ** ** |
| ** **                                            | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                  |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Residential                                           |       | 6,647                                      |       | 6,589 |   | 6,526 |   | 3,244 |   | 3,051 |   | 2,643 |   |
| Industrial                                            |       | 23,759                                     |       | 23,472 |   | 22,969 |   | 2,937 |   | 2,850 |   | 3,549 |   |
| Commercial                                            |       | 3,851                                      |       | 3,754 |   | 3,537 |   | 1,654 |   | 1,506 |   | 1,256 |   |
| Rural                                                 |       | 1,938                                      |       | 1,941 |   | 1,846 |   | 505 |   | 473 |   | 395 |   |
| Governmental  entities                                |       | 1,650                                      |       | 1,593 |   | 1,532 |   | 512 |   | 464 |   | 392 |   |
| Public services                                       |       | 1,016                                      |       | 981 |   | 966 |   | 258 |   | 231 |   | 200 |   |
| Own consumption                                       |       | 30                                         |       | 29 |   | 55 |   | — |   | — |   | — |   |
| Unbilled, net                                         |       | —                                     |       | — |   | — |   | 209 |   | 133 |   | 106 |   |
|                                                  |       | 38,891                                     |       | 38,359 |   | 37,431 |   | 9,319 |   | 8,708 |   | 8,541 |   |
| Electricity  sales to the interconnected power system |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Supply                                                |       | 10,914                                     |       | 1,255 |   | 364 |   | 697 |   | 114 |   | 24 |   |
| Energy transactions on CCEE/MAE                       |       | —                                     |       | — |   | — |   | 187 |   | 123 |   | 12 |   |
| Total                                                 |       | 49,805                                     |       | 39,614 |   | 37,795 |   | 10,203 |   | 8,945 |   | 8,577 |   |

 
|                        | ** ** | **Number of consumers (unaudited)** | ** ** |
|------------------------|------------|----------------------------------------------------|------------|
| ** **             | ** ** | **2006**                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|                   |       |                                               |       |   |   |   |   |
| Residential            |       | 5,064,556                                          |       | 4,927,966 |   | 4,830,935 |   |
| Industrial             |       | 70,795                                             |       | 69,207 |   | 68,263 |   |
| Commercial             |       | 549,378                                            |       | 537,656 |   | 530,158 |   |
| Rural                  |       | 495,066                                            |       | 417,026 |   | 388,445 |   |
| Governmental  entities |       | 51,929                                             |       | 49,955 |   | 48,475 |   |
| Public services        |       | 7,654                                              |       | 7,400 |   | 7,305 |   |
| Own consumption        |       | 796                                                |       | 769 |   | 1,324 |   |
|                   |       | 6,240,174                                          |       | 6,009,979 |   | 5,874,905 |   |
| Supply                 |       | 43                                                 |       | 8 |   | 5 |   |
| Total                  |       | 6,240,217                                          |       | 6,009,987 |   | 5,874,910 |   |

 

F-47

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Rate Readjustment

The rates of CemigDistribuição S.A. were increased by an average of 7.05% from April 8, 2006. Theadjustment was applied in different percentages by category of consumption forthe purpose of gradually eliminating, as stated in a note by ANEEL, thecross-subsidies existing between consumer groups. As an example, residentialconsumers had an increase of 5.14% in their electricity bills, whilehigh-voltage consumers had an increase of 11.32%. The increase of the rates donot represent an increase of the CEMIG’s operating revenues in the samepercentage because part of it is used to the regulatory assets settlement. Seenote 4.

Low-income consumers

The Federal Government, through Centrais Elétricas Brasileiras – “ELETROBRAS”is reimbursing distributors for billing losses incurred from 2002 resultingfrom the new classification criteria established for low income consumers dueto the lower rate applied to them.

(b) The composition of other operating revenues is as follows:

|                                | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------|------------|
| ** **                     | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|                           |       |                                       |       |   |   |   |   |
| Gas sales                      |       | —                                     |       | — |   | 420 |   |
| Telecom and  cable TV services |       | 121                                        |       | 92 |   | 62 |   |
| Services  rendered             |       | 31                                         |       | 26 |   | 21 |   |
| Rental and  leasing            |       | 29                                         |       | 31 |   | 23 |   |
| Others                         |       | 18                                         |       | 19 |   | 10 |   |
|                           |       | 199                                        |       | 168 |   | 536 |   |

 

(c) The composition of taxes on revenues is as follows:
| ** **                 | ** ** | **Year ended December 31,** | ** ** |
|----------------------------|------------|--------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|                       |       |                                       |       |   |   |   |   |
| VAT                        |       | 2,286                                      |       | 2,164 |   | 1,784 |   |
| Emergency  capacity charge |       | —                                     |       | 176 |   | 292 |   |
| COFINS                     |       | 1,026                                      |       | 721 |   | 473 |   |
| PIS-PASEP                  |       | 231                                        |       | 175 |   | 57 |   |
| Others                     |       | —                                     |       | 5 |   | 2 |   |
|                       |       | 3,543                                      |       | 3,241 |   | 2,608 |   |

 

The emergencycapacity charge is not collected since December 2005, according with ANEEL ́sresolution.

(d) The composition of use of basic transmission network is as follows:
|                                                        | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                   |       |                                       |       |   |   |   |   |
| TUSD – Tariff  for Use of the Distribution System |       | 1,261                                      |       | 1,058 |   | — |   |
| Use of basic transmission                              |       | 417                                        |       | 403 |   | 243 |   |
| Use of  connection of basic transmission               |       | 102                                        |       | 62 |   | 2 |   |
|                                                   |       | 1,780                                      |       | 1,523 |   | 245 |   |

 

F-48

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**19.OPERATING COSTS AND EXPENSES**

Some of the operatingcosts and expenses consist of the following:

(a) Electricity purchased for resale:
|                                                                      | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                           | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                 |       |                                       |       |   |   |   |   |
| Itaipu  Binacional                                                   |       | 822                                        |       | 825 |   | 1,116 |   |
| Initial  contracts                                                   |       | 128                                        |       | 151 |   | 107 |   |
| Bilateral  contracts                                                 |       | 42                                         |       | — |   | — |   |
| Incentive  Program for Alternative Electric Power Sources -PROINFA - |       | 41                                         |       | — |   | — |   |
| From suppliers  though CCEE/MAE                                      |       | 26                                         |       | 23 |   | 41 |   |
| System services  charge                                              |       | 50                                         |       | 67 |   | 85 |   |
| Energy Public  Bids                                                  |       | 793                                        |       | 371 |   | — |   |
| From other  sources                                                  |       | 5                                          |       | 18 |   | 21 |   |
|                                                                 |       | 1,907                                      |       | 1,455 |   | 1,370 |   |

 

 (b) Personnel:
|                                                          | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                     |       |                                       |       |   |   |   |   |
| Salary and  payroll charges                              |       | 911                                        |       | 788 |   | 802 |   |
| Benefits                                                 |       | 115                                        |       | 83 |   | 80 |   |
|                                                     |       | 1,026                                      |       | 871 |   | 882 |   |
| Personnel costs  transferred to construction in progress |       | (158                                       | )          | (92 | ) | (121 | ) |
|                                                     |       | 868                                        |       | 779 |   | 761 |   |
| Voluntary  termination program                           |       | —                                     |       | — |   | 27 |   |
| Voluntary  Indemnity for future annual bonus             |       | 178                                        |       | — |   | — |   |
|                                                     |       | 1,046                                      |       | 779 |   | 788 |   |

 

Removal of certainemployees salary benefits — “Anuênio”

On April 27, 2006, Cemig presented a proposal to its employees to payan amount in exchange for certain benefits representing an annual percentage of1% on future salaries, called “Anuênio”. The amount of this payment representsthe estimate of the future incremental salaries to be received until theemployees complete 35 years of contribution to the National Social SecuritySystem (INSS), discounted at a rate of 12.00%, plus application of a variablepercentage reduction factor established by the Company. Employees accepted theproposal in June 30, 2006, and the payment of the indemnity was R$178 in August2006 which was recorded in operating expenses.

 (c) Regulatory charges:
|                                     | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                |       |                                       |       |   |   |   |   |
| Fuel usage quota                    |       | 506                                        |       | 416 |   | 292 |   |
| Global reserve  for reversion quota |       | 18                                         |       | 103 |   | 204 |   |
| Energy  development account         |       | 334                                        |       | 295 |   | 238 |   |
| ANEEL inspection  fee               |       | 34                                         |       | 24 |   | 19 |   |
| Charges for use  of water resources |       | 139                                        |       | 145 |   | 108 |   |
|                                |       | 1,031                                      |       | 983 |   | 861 |   |

 

F-49

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(d) Employee Profit Sharing

TheCompany records employee profit sharing based on 3% of the service income,which resulted in an expense of R$71, R$76 and R$62, respectively, for theyears ended December 31, 2006, 2005 and 2004. Additionally, in the collectivelabor agreement reached with the unions in November 2006, 2005 and 2004, theCompany agreed to pay additional installments of R$139, R$184 and R$48, respectively.

(e)Third-party Services
|                                                                      | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                           | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                 |       |                                       |       |   |   |   |   |
| Tax collecting agents/reading of measurers                           |       | 93                                         |       | 84 |   | 76 |   |
| Marketing                                                            |       | 49                                         |       | 49 |   | 46 |   |
| Maintenance and electric conservation of installations and equipment |       | 84                                         |       | 78 |   | 55 |   |
| Building  maintenance                                                |       | 29                                         |       | 27 |   | 21 |   |
| Outsourcing  services                                                |       | 27                                         |       | 13 |   | 15 |   |
| Transportation  and fares                                            |       | 8                                          |       | 3 |   | 4 |   |
| Lodging and  feeding                                                 |       | 16                                         |       | 16 |   | 15 |   |
| Security                                                             |       | 14                                         |       | 13 |   | 13 |   |
| Management  Consulting                                               |       | 22                                         |       | 16 |   | 8 |   |
| Maintenance of  furniture                                            |       | 21                                         |       | 18 |   | 18 |   |
| Maintenance of  vehicle                                              |       | 17                                         |       | 5 |   | 4 |   |
| Electric service                                                     |       | 20                                         |       | 17 |   | 9 |   |
| Other                                                                |       | 75                                         |       | 81 |   | 45 |   |
|                                                                 |       | 475                                        |       | 420 |   | 329 |   |

 

(f) Other:
|                                          | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                     |       |                                       |       |   |   |   |   |
| Provision for doubtful accounts          |       | 94                                         |       | 54 |   | 62 |   |
| Disposal of  fixed assets, net           |       | 37                                         |       | 39 |   | 28 |   |
| Provisions for  contingencies-           |       |                                       |       |   |   |   |   |
| Labor claims                             |       | (79                                        | )          | 3 |   | 20 |   |
| Civil lawsuits – Consumers          |       | (18                                        | )          | 28 |   | 8 |   |
| ANEEL administrative proceedings         |       | —                                     |       | — |   | (10 | ) |
| Civil lawsuits – Other              |       | 19                                         |       | 34 |   | (8 | ) |
| Bonus paid during the rationing period   |       | —                                     |       | — |   | 24 |   |
| Rentals                                  |       | 33                                         |       | 42 |   | 34 |   |
| Grants and  donations                    |       | 35                                         |       | 24 |   | 19 |   |
| Consumption –  electric energy      |       | 16                                         |       | 12 |   | 20 |   |
| Advertising                              |       | 21                                         |       | 29 |   | 20 |   |
| CCEE/MAE  contribution                   |       | 3                                          |       | 3 |   | 2 |   |
| Other taxes  (real estate, vehicle, etc) |       | 29                                         |       | 22 |   | 6 |   |
| General expenses                         |       | 44                                         |       | 89 |   | 55 |   |
|                                     |       | 234                                        |       | 379 |   | 280 |   |

 

F-50

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**20.FINANCIAL INCOME (EXPENSES), NET**

Financial income (expense) consists of the following:
|                                                                                | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                     | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Financial  income-                                                             |       |                                       |       |   |   |   |   |
| Interest and monetary restatement of account  receivable from State Government |       | 187                                        |       | 277 |   | 581 |   |
| Reversal (provision) for losses on account  receivable from State Government   |       | 99                                         |       | 223 |   | (326 | ) |
| Interest income                                                                |       | 169                                        |       | 193 |   | 137 |   |
| Late charges on overdue electricity bills, recorded  on the cash basis         |       | 129                                        |       | 81 |   | 63 |   |
| Foreign exchange gains                                                         |       | 90                                         |       | 164 |   | 110 |   |
| Monetary restatement on deferred regulatory assets                             |       | 574                                        |       | 672 |   | 573 |   |
| Gains on derivatives contracts                                                 |       | 25                                         |       | 6 |   | 2 |   |
| Taxes on financial revenues                                                    |       | (69                                        | )          | (93 | ) | (57 | ) |
| Other                                                                          |       | 125                                        |       | 63 |   | 32 |   |
|                                                                           |       | 1,329                                      |       | 1,586 |   | 1,115 |   |
| Financial  expense-                                                            |       |                                       |       |   |   |   |   |
| Interest on loans and financing                                                |       | (529                                       | )          | (328 | ) | (255 | ) |
| Monetary restatement on deferred regulatory  liabilities                       |       | (133                                       | )          | (158 | ) | (80 | ) |
| Financial transaction tax (CPMF)                                               |       | (83                                        | )          | (65 | ) | (49 | ) |
| Foreign exchange losses                                                        |       | (2                                         | )          | (18 | ) | (25 | ) |
| Monetary restatement losses                                                    |       | (34                                        | )          | (16 | ) | (124 | ) |
| Losses on derivative contracts                                                 |       | (116                                       | )          | (156 | ) | (176 | ) |
| Other expenses                                                                 |       | (97                                        | )          | (91 | ) | (56 | ) |
|                                                                           |       | (994                                       | )          | (832 | ) | (765 | ) |
| Financial income, net                                                          |       | 335                                        |       | 754 |   | 350 |   |

 

The foreign exchangegains and losses are substantially related to the variation of the *real* in relation to the U.S. dollar.

**21. RELATED PARTY TRANSACTIONS**

The Company enters into avariety of related party transactions, the main transactions are as follows:

(a) State Government -
| Account receivable and related financial income |   | Note 3 and 20 |
|-------------------------------------------------|--------|---------------|
| VAT - Assets                                    |   | Note 8        |
| VAT - Liabilities                               |   | Note 12       |
| VAT - Expense                                   |   | Note 18(c)    |
| Debentures - Liabilities                        |   | Note 13       |

(b*)*FORLUZ-
| Employee post-retirement benefits related  balances |   | Note 15 |
|-----------------------------------------------------|--------|---------|

(c) COPASA -
| Accounts receivable, net |   | Note 7 |
|--------------------------|--------|--------|

 

Other related party transactions are not material.

F-51

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**22.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 2006and 2005. 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 cash equivalents :

Asof December 31, 2006 and 2005, cash and cash equivalents are stated at costplus accrued interest and approximate fair value, given the short termmaturities of these items.

(b) Financing and other 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 December31, 2006 and 2005 is R$5,710 and R$3,783, respectively, compared to book valuesof R$6,524 and R$4,826, respectively.

In March 2006, CEMIGentered into an agreement with its partners in one of CEMIG’s unconsolidatedequity investments, which gives CEMIG an option to purchase its partners’interests in the power generation assets of the underlying equity investee. Theoption price amounted to R$1,124 as of December 31, 2006. The option price isrestated based on the IGP-M variation plus interest of 13.44% per year.

Pursuant to theagreement, the option expires in two years on March 23, 2008 and, under certainrestricted conditions, may be extended for an additional two-year period. Theexercise of the option is contingent upon the completion of a corporaterestructuring by the equity investee to spin-off its power generation assets. 

The Company’s managementbelieves that the possibility that CEMIG will exercise this option is remoteconsidering that its terms are currently economically unfeasible.

(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, 2006, 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$109 million (US$103 millionin 2005) and the Japanese yen in the notional amount of ¥3,879 million (¥3,879million in 2005). The net realized and unrealized losses from these operationsfor 2006, in the net amounts of R$91 (R$150 in 2005 and R$174 in 2004), wererecorded as financial expenses.

The table belowsummarizes the Company’s derivative financial instruments and the unrealizedlosses recorded on these instruments as of December 31, 2006 and December 31,2005:
| ** **                                                            | ** ** | ** **                                                                        | ** ** | ** **                          | ** ** | **December 31, 2006**                               | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|-------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                            | ** ** | ** **                                                                        | ** ** | ** **                          | ** ** | **Unrealized Losses**                                    | ** ** |
| **CEMIG’s  Right**                                               | ** ** | **CEMIG’s  obligation**                                                      | ** ** | **Maturity Date**              | ** ** | **Principal   amount   contracted-   million** | ** ** | **Fair Value** | ** ** |
|                                                                  |       |                                                                              |       |                                |       |                                                          |       |   |   |
| ¥ (Japanese Yen)   exchange gains or losses + rate  (3,90% p.a.) |       | R$  pegged to the CDI  variation(111.00% CDI)                                     |       | On  12/2009                         |       | ¥3,879                                                   |       | (1 | ) |
|                                                                  |       |                                                                              |       |                                |       |                                                          |       |   |   |
| US$  exchange gains or losses + rate   (5.58% p.a. 7.48% p.a.)        |       | R$  100% of the CDI + rate  from 1.50% p.a. to 3.01%  p.a.                   |       | From  04/2007  to 06/2013 |       | US$138                                                        |       | (186 | ) |
|                                                                  |       |                                                                              |       |                                |       |                                                          |       |   |   |
| R$  106% of the CDI                                                   |       | R$or  US$  48% of the CDI or exchange  gains or losses (whichever is higher) |       | On  04/2010                    |       | (US$29)                                                       |       | — |   |
|                                                                  |       |                                                                              |       |                                |       |                                                          |       | (187 | ) |

 

F-52

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| ** **                                                           | ** ** | ** **                                                                    | ** ** | ** **                | ** ** | **December 31, 2005**             | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------------------------|------------|
| ** **                                                           | ** ** | ** **                                                                    | ** ** | ** **                | ** ** | **Unrealized Losses**                  | ** ** |
| **CEMIG’s  Right**                                              | ** ** | **CEMIG’s  obligation**                                                  | ** ** | **Maturity Date**    | ** ** | **Principal  amount  contracted-  million** | ** ** | **Fair Value** | ** ** |
|                                                                 |       |                                                                          |       |                      |       |                                        |       |   |   |
| ¥ (Japanese Yen)  exchange gains or losses + rate  (3.90% p.a.) |       | R$  pegged to the CDI  variation(111.00% CDI)                                 |       | On  12/2009               |       | ¥3,879                                 |       | (41 | ) |
|                                                                 |       |                                                                          |       |                      |       |                                        |       |   |   |
| US$  exchange gains or losses + rate  (5.58% p.a. 7.14% p.a.)        |       | R$  100% of the CDI + rate  from 2.00% p.a to 3.01%  p.a.                     |       | From  12/2005  to 06/2013 |       | US$155                                      |       | (102 | ) |
|                                                                 |       |                                                                          |       |                      |       |                                        |       |   |   |
| R$  100% of the CDI                                                  |       | R$or  US$  60% of the CDI or exchange  gains or losses (whichever is  higher) |       | From  10/2006  to 11/2006 |       | (US$23                                      | )          | — |   |
|                                                                 |       |                                                                          |       |                      |       |                                        |       |   |   |
| R$  106% of the CDI                                                  |       | R$or  US$  48% of the CDI or exchange  gains or losses (whichever is  higher) |       | On  10/2006               |       | (US$29                                      | )          | — |   |
|                                                                 |       |                                                                          |       |                      |       |                                        |       | (143 | ) |

 

At December 31, 2006, theCompany had recorded the amount of R$187 as other current liabilities,representing the fair value of these financial instruments at the respectivebalance sheet date.

(d) Other financialinstruments:

The carrying value ofCEMIG’s other financial instruments, in *reais*,approximates fair values at such dates reflecting the short-term maturity orfrequent repricing at December 31, 2006 and 2005 of these instruments.

**23. 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 establishedof a Corporate Risk Management Program in January 2003, and implemented thisprogram in 2004 in connection with its restructuring. This Corporate RiskManagement Program aims to achieve the following: operate as an auxiliary inachievement of the objectives set by the strategic plan; create awareness amongshareholders of the possible events that could constitute a risk of loss ofvalue; structure the company to be able to take proactive stances in relationto its risk environment; provide the company's executives with a methodologyand tools for effective management of risk; and provide other areas ofstrategic management with input concepts and procedures, and factors thatstrengthen the company's organizational control infrastructure.

F-53

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The main market riskswhich affect CEMIG’s operations are described as follows:

(a) Exchange rate risk

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$233, equivalent to the notionalamount of US$109 and R$70, 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 22(c)). The exchange rate net exposure is as follows:
| ** **                                                    | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                    | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **U.S.  Dollar**                                              |       |                  |       |   |   |
| Financing                                                     |       | 554                   |       | 653 |   |
| (-) Contracted  derivative instruments– notional amounts |       | (233                  | )          | (241 | ) |
|                                                          |       | 321                   |       | 412 |   |
| **Japanese  Yen**                                             |       |                  |       |   |   |
| Financing                                                     |       | 70                    |       | 77 |   |
| (-) Contracted  derivative instruments– notional amounts |       | (70                   | )          | (77 | ) |
|                                                          |       | —                |       | — |   |
| **Other  Currencies**                                         |       |                  |       |   |   |
| Financing                                                     |       |                  |       |   |   |
| Euro                                                          |       | 36                    |       | 41 |   |
| Other                                                         |       | 1                     |       | 8 |   |
|                                                          |       | 37                    |       | 49 |   |
| Net liabilities exposed  to exchange rate risk                |       | 358                   |       | 461 |   |

 

(b) Interest rate risk

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$146 (R$178 as of December31, 2005).

The Company is alsoexposed in 2006 to the risk of increases in interest rates on real denominatedfinancial liabilities, partially offset by real denominated financial assets asfollows:
| ** **                                                                           | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                           | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **CEMIG’s  exposure to domestic interest rates**                                |       |                  |       |   |   |
| ** **                                                                           |       |                  |       |   |   |
| **Asset**                                                                            |       |                  |       |   |   |
| CRC Agreement                                                                        |       | 1,726                 |       | 1,519 |   |
| Short-term  investments                                                              |       | 1,008                 |       | 1,299 |   |
| Deferred  regulatory assets                                                          |       | 2,697                 |       | 3,465 |   |
| ** **                                                                           |       | 5,431                 |       | 6,283 |   |
| **Liabilities**                                                                      |       |                  |       |   |   |
| Financing (local  currency)                                                          |       | 5,863                 |       | 4,047 |   |
| Payments to  generators for energy purchased on CCEE/MAE during the rationing period |       | 328                   |       | 362 |   |
| Derivative  instruments                                                              |       | 303                   |       | 318 |   |
| ** **                                                                           |       | 6,494                 |       | 4,727 |   |
| Net liabilities exposed  to interest rate risk                                       |       | (1,063                | )          | 1,556 |   |

 

F-54

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(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) Debt accelerationrisk

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 Company has not complied with a covenantof several financial institutions loan for which the Company has obtainedwaiver stating that the creditors will not demand accelerated or anticipatedpayments until December 31, 2007. 

(e) Risk of non-renewalof concessions

The Company hasconcessions 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 forconsideration"), the present levels of profitability and activity could bealtered.

**24. SHAREHOLDERS' AGREEMENT**

In 1997, the StateGovernment of Minas Gerais sold approximately 33% of the Company’s commonshares to a group of investors led by Southern Electric Brasil ParticipaçõesLtda. (“Southern”). As part of this transaction the State of Minas Gerais andSouthern entered into a Shareholders’ Agreement that provided for, among otherthings, the requirement of a qualified quorum to approve significant corporateacts, certain amendments to CEMIG’s by-laws, the issuance of debentures andconvertible securities, the distribution of dividends other than that providedfor in the by-laws and changes to the corporate structure. 

On September 1999, theState 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-55

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**25. CONCENTRATIONS**

(a) Labor:

The majority of CEMIG’swork force are members of SINDIELETRO (employee labor union). CEMIG andSINDIELETRO negotiate a collective bargaining agreement on an annual basis,which includes wage increases and profit sharing, along with other matters. Thecollective bargaining agreement becomes effective in November of each year. The2006 collective bargaining agreement included an 4.0% average salary increase.

(b) Renewal of concessionagreements:

At a meeting on October3, 2006 the Board of Directors of ANEEL decided by majority to approvesubmission to the Mining and Energy Ministry (MME) of a group of alternatives(duly instructed and indicating their advantages and disadvantages), fordecision, in relation to applications for extension of concessions made by thesubsidiary Cemig Geração e Transmissão S.A. for the following plants –Pandeiros, Rio das Pedras, Poço Fundo, São Bernardo, Xicão, Luiz Dias,Emborcação, Nova Ponte and Santa Luzia – with total installed capacity of1,735MW. 

On June 14, 2007, theMining and Energy Ministry (MME) extended such concessions for a period of 20years, indistinctly, from the dates of maturity of the respective grants. Thesignature of the respective Amendment will be celebrated probably on the secondhalf of 2007. The Amendment to the contract of Concession will observe thenorms and conditions established for the pertinent legislation, as well asthose foreseeing in the Law in the 10,848, of 15 of March of 2004, and itsrespective regulations.

Seven of the Company’shydroelectric plants accounted for approximately 75% of its installed electricgeneration capacity as of December 31, 2006.
| 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                       |       | 1,048                                        |       | July 20015 to August  2036 |       |
| Total installed  capacity    |       | 6,692                                        |       |                       |       |

 
| DISTRIBUTION CONCESSIONS- | ** ** | ** ** | ** ** | **Date concession  expires** | ** ** |
|--------------------------------|------------|------------|------------|-----------------------------------|------------|
| Northern Region                |       |       |       | February/2016                     |       |
| Southern  Regional             |       |       |       | February /2016                    |       |
| Eastern Region                 |       |       |       | February /2016                    |       |
| Western Region                 |       |       |       | February /2016                    |       |

 

F-56

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**26. INSURANCE (Unaudited)**

The Company has insurancepolicies for part of its property, plant and equipment, as follows:
| Risk                                                    | ** ** | **Coverage** | ** ** | **Effective   Date** | ** ** | **Insured  Amount** | ** ** |
|---------------------------------------------------------|------------|--------------|------------|---------------------------|------------|---------------------|------------|
| Aircraft – 2006  to 2007                           |       | Fuselage     |       | 04/28/06 to 04/28/07      |       | 14                  |       |
| Aircraft – 2007  to 2008                           |       | Fuselage     |       | 04/29/07 to 04/29/08      |       | 14                  |       |
| Warehouses and  buildings – 2006 to 2007           |       | Fire         |       | 07/10/06 to 07/10/07      |       | 576                 |       |
| Generators,  turbines and equipment – 2006 to 2007 |       | Total        |       | 05/05/06 to 05/05/07      |       | 1,548               |       |
| Generators, turbines  and equipment – 2007 to 2008 |       | Total        |       | 05/05/07 to 05/05/08      |       | 1,770               |       |

 

CEMIG does not havegeneral third-party liability insurance covering accidents and has notrequested bids relating to this type of insurance. The Company has notrequested bids for, nor does it carry, insurance coverage for majorcatastrophes 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 notexperienced significant losses arising from the aforementioned risks. 

**27. COMMITMENTS (Unaudited)**

Cemig has outstandingcontractual obligations and commitments which include principal debt paymentprovisions, the obligation to purchase electricity for resale from Itaipu, theobligation to transfer and transport electric power from Itaipu as well as constructioncommitments. The following table provides information, as of December 31, 2006,about our contractual obligations and commitments.
| ** **                                            | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013 and  beyond** | ** ** | **Total** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|---------------------------|------------|-----------|------------|
|                                                  |       |     |       |     |       |     |       |     |       |     |       |     |       |                      |       |      |       |
| Long-Term debt                                        |       | 691      |       | 547      |       | 869      |       | 658      |       | 756      |       | 911      |       | 2,092                     |       | 6,524     |       |
| Derivative  financial instruments (“swaps”) |       | 103      |       | 15       |       | 36       |       | 9        |       | 8        |       | 8        |       | 8                         |       | 187       |       |
| Purchase of  Electricity from Itaipu for resale (1)   |       | 1,216    |       | 1,021    |       | 1,070    |       | 1,103    |       | 1,115    |       | 1,159    |       | 499                       |       | 7,183     |       |
| Transportation  of Electric Power from Itaipu (1)     |       | 78       |       | 82       |       | 85       |       | 89       |       | 93       |       | 97       |       | 42                        |       | 566       |       |
| Baguari  hydroelectric power plant                    |       | 56       |       | 76       |       | 31       |       | 4        |       | —   |       | —   |       | —                    |       | 167       |       |
| Aimorés  hydroelectric power plant               |       | 33       |       | 4        |       | —   |       | —   |       | —   |       | —   |       | —                    |       | 37        |       |
| Três Marias  hydroelectric power plant           |       | 25       |       | 3        |       | —   |       | —   |       | —   |       | —   |       | —                    |       | 28        |       |
| “Luz para todos”  (Light for All) Program   |       | 204      |       | —   |       | —   |       | —   |       | —   |       | —   |       | —                    |       | 204       |       |
| Cresce Minas I                                        |       | 176      |       | 438      |       | 107      |       | —   |       | —   |       | —   |       | —                    |       | 721       |       |
| Sales Management  System I                            |       | 77       |       | 41       |       | 16       |       | —   |       | —   |       | —   |       | —                    |       | 134       |       |
| Furnas-Pimenta  Transmission line                     |       | 14       |       | 2        |       | —   |       | —   |       | —   |       | —   |       | —                    |       | 16        |       |
| Pension Plan  Debt - Forluz                           |       | 120      |       | 89       |       | 94       |       | 96       |       | 87       |       | 85       |       | 746                       |       | 1,317     |       |
| Purchase of  Energy — Spot Market                |       | 748      |       | 1,023    |       | 1,261    |       | 1,533    |       | 1,662    |       | 1,742    |       | 4,415                     |       | 12,384    |       |
| Total                                                 |       | 3,541    |       | 3,341    |       | 3,569    |       | 3,492    |       | 3,721    |       | 4,002    |       | 7,802                     |       | 29,468    |       |

 

----

(1) Contract with Furnas,denominated in U.S. dollars, to supply electric power purchased from Itaipuuntil May 2013. 

F-57

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**28. SEGMENT INFORMATION**

Under CEMIG’sdistribution concession agreements, CEMIG was required to restructure itsoperations in order to place its generation, transmission and distributionoperations into separate subsidiaries, wholly owned by CEMIG. To comply withthis requirement, in 2004, CEMIG incorporated two new wholly-ownedsubsidiaries: CEMIG Geração e Transmissão S.A. and CEMIG Distribuição S.A. TheCompany’s Extraordinary Shareholders’ General Meeting on December 30, 2004authorized the transfer, as of January 1, 2005, of the Company’s investmentsand separate assets and liabilities to these subsidiaries to separate itsgeneration, transmission and distribution activities. Cemig Geração eTransmissão S.A. and CEMIG Distribuição S.A. began to operate as from January1, 2005.  The effective transfer ofconcessions of electricity transmission, generation and distribution to the newsubsidiaries was subject to ANEEL’s approval, in accordance with Resolution N.o407, of December 20, 2004.

As of and for the yearsended December 31, 2006 and 2005, the Company’s reportable segments are itsgeneration and transmission, and distribution segments. As of December 31,2004, the Company’s reportable segments were the electricity, gas andtelecommunications operations. The gas segment was consolidated until December15, 2004, when the Company sold 40% of its interest in GASMIG and signed anAssociation Agreement with PETROBRAS, which gave PETROBRAS substantive participatingrights. The gas segment principal activities were the acquisition,transportation and distribution of natural gas. The telecommunications segmentprincipal activities are rendering telecommunications services and developingrelated activities through integrated systems using optical fiber cable,coaxial cable, electronic equipment and other, as well as providing cable TVand internet access services.

Due to the fact that theCompany changed in 2005 the structure of its internal organization in a mannerthat caused the composition of its reportable segments to change, and it isimpracticable to restate the corresponding information for earlier periods, theCompany has not disclosed its 2004 segment information in accordance with thecurrent criteria.

The Company’s chiefoperating decision maker utilizes information prepared in accordance withBrazilian GAAP. Consequently, the Company has presented its segment informationin accordance with Brazilian GAAP, reconciled to U.S. GAAP. The operations ofall reportable segments of the Company are conducted substantially in the Stateof Minas Gerais, Brazil. Reportable segments are strategic business units thatoffer different products and services. Each of the reportable segments has aresponsible senior officer. All inter-segment activity has been eliminated.Financial information for each of the Company’s reportable segments is asfollows:

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| ** **                  | ** ** | **BRGAAP  2006** | ** ** | **Adjustment** | ** ** | **USGAAP  2006** | ** ** | **BRGAAP  2005** | ** ** | **Adjustment** | ** ** | **USGAAP  2005** | ** ** |
|-----------------------------|------------|------------------|------------|----------------|------------|------------------|------------|------------------|------------|----------------|------------|------------------|------------|
| Identifiable  assets        |       |             |       |           |       |             |       |             |       |           |       |             |       |
| Electricity                 |       |             |       |           |       |             |       |             |       |           |       |             |       |
| Distribution                |       | 12,687           |       | 305            |       | 12,992           |       | 10,309           |       | 1,271          |       | 11,580           |       |
| Generation and Transmission |       | 7,834            |       | 829            |       | 8,663            |       | 7,592            |       | 742            |       | 8,334            |       |
| Other                       |       | 1,843            |       | (10            | )          | 1,833            |       | 1,266            |       | 166            |       | 1,432            |       |
| Total consolidated assets   |       | 22,364           |       | 1,124          |       | 23,488           |       | 19,167           |       | 2,179          |       | 21,346           |       |

 

The Company allocated theaccount receivable from Minas Gerais State Government to the Distributionsegment.

F-59

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| **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-60

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| **2005**                                    | ** ** | **Power  Generation  and  Transmission** | ** ** | **Distribution of  Energy** | ** ** | **Other** | ** ** | **BRGAAP** | ** ** | **Adjustment** | ** ** | **USGAAP** | ** ** |
|---------------------------------------------|------------|------------------------------------------|------------|----------------------------------|------------|-----------|------------|------------|------------|----------------|------------|------------|------------|
|                                        |       |                                     |       |                             |       |      |       |       |       |           |       |       |       |
| Net operating revenues                      |       | 1,475                                    |       | 6,361                            |       | 83        |       | 7,919      |       | (406           | )          | 7, 513     |       |
|                                        |       |                                     |       |                             |       |      |       |       |       |           |       |       |       |
| Operating income                            |       | 853                                      |       | 1,060                            |       | (97       | )          | 1,816      |       | (492           | )          | 1, 324     |       |
|                                        |       |                                     |       |                             |       |      |       |       |       |           |       |       |       |
| Financial income (expenses), net            |       | (241                                     | )          | 329                              |       | 531       |       | 619        |       | 135            |       | 754        |       |
|                                        |       |                                     |       |                             |       |      |       |       |       |           |       |       |       |
| Income tax – (Expense) Benefit         |       | (110                                     | )          | (399                             | )          | 46        |       | (463       | )          | 163            |       | (300       | )          |
|                                        |       |                                     |       |                             |       |      |       |       |       |           |       |       |       |
| Minority interests                          |       | —                                   |       | —                           |       | 2         |       | 2          |       | —         |       | 2          |       |
|                                        |       |                                     |       |                             |       |      |       |       |       |           |       |       |       |
| Net income                                  |       | 531                                      |       | 990                              |       | 482       |       | 2,003      |       | (194           | )          | 1,809      |       |
|                                        |       |                                     |       |                             |       |      |       |       |       |           |       |       |       |
| Depreciation and amortization charges       |       | 194                                      |       | 364                              |       | 34        |       | 592        |       | 77             |       | 669        |       |
|                                        |       |                                     |       |                             |       |      |       |       |       |           |       |       |       |
| Equity method                               |       | —                                   |       | —                           |       | 29        |       | 29         |       | —         |       | 29         |       |
|                                        |       |                                     |       |                             |       |      |       |       |       |           |       |       |       |
| Additions to property,  plant and equipment |       | 425                                      |       | 890                              |       | 41        |       | 1,356      |       | 155            |       | 1,511      |       |

 

F-61

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**29. PERIODIC RATE REVIEW OFELECTRICITY CONCESSIONS**

ANEEL ́s Resolution 234 ofOctober 31, 2006, established new concepts and guidelines relating to thesecond cycle of the Periodic Review for Distributors of Electricity. The mainlydifferences are the base of assets to be used in the second Tariff Review thatshall be the previous base of assets updated by the IGP-M Inflation Index andthe definition of the operational costs to be covered by the rates. ANEEL willcontinue to use the Reference Company as the comparative base. 

The future financialimpacts arising from the second cycle of the Periodic Tariff Review, in 2008,are still being studied by the Company, and it is not possible at present toestimate the effects on its business.

**30. CONDENSED UNCONSOLIDATEDFINANCIAL INFORMATION OF CEMIG**

The condensedunconsolidated financial information of CEMIG, as of December 31, 2006 and 2005and for each of the two years in the period ending on December 31, 2006, under U.S.GAAP is as follows:

As discussed in Notes 1 and 28, CEMIG was required to restructureits operations in order to place its generation, transmission and distributionoperations into separate subsidiaries, wholly owned by CEMIG. To comply withthis requirement, in 2004, CEMIG incorporated two new wholly-ownedsubsidiaries: CEMIG Geração e Transmissão S.A. and CEMIG DistribuiçãoS.A.. The Company’s Extraordinary Shareholders’ General Meeting on December 30,2004 authorized the transfer, as of January 1, 2005, of the Company’sinvestments and separate assets and liabilities to these subsidiaries toseparate its generation, transmission and distribution activities. CemigGeração e Transmissão S.A. and CEMIG Distribuição S.A. began to operate asfrom January 1, 2005.  As such,CEMIG became a holding company in January 1, 2005, and unconsolidatedfinancial information is presented for the years 2006 and 2005.

**BALANCE SHEETS AS OF DECEMBER 31,2006 AND 2005 (UNCONSOLIDATED)**

**(Expressed in millions of Brazilian *reais*)**
| ** **                                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ASSETS                                                                |       |     |       |     |       |
| CURRENT ASSETS                                                        |       |     |       |     |       |
| Cash and cash  equivalents                                            |       | 23       |       | 300      |       |
| Tax recoverable                                                       |       | 13       |       | 216      |       |
| Deferred income  and social contr. taxes                              |       | 24       |       | 43       |       |
| Dividends  receivable                                                 |       | 1,153    |       | 1,317    |       |
| Other                                                                 |       | 7        |       | 60       |       |
|                                                                  |       | 1,220    |       | 1,936    |       |
|                                                                  |       |     |       |     |       |
| NONCURRENT  ASSETS                                                    |       |     |       |     |       |
| Accounts receivable  from Minas Gerais State government (note 3) |       | —   |       | 1,519    |       |
| CRC Account  Securitization Fund (FIDC) (note 3)                 |       | 744      |       | —   |       |
| Deferred income  and social contr. taxes (note 5)                |       | 213      |       | 171      |       |
| Tax recoverable  (note 8)                                        |       | 289      |       | —   |       |
| Other                                                                 |       | 135      |       | 99       |       |
|                                                                  |       | 1,381    |       | 1,789    |       |
|                                                                  |       |     |       |     |       |
| PERMANENT ASSETS                                                      |       |     |       |     |       |
| Investments in  subsidiaries and affiliates                           |       | 6,815    |       | 6,135    |       |
| Property, plant  and equipment                                        |       | 2        |       | 7        |       |
|                                                                  |       | 6,817    |       | 6,142    |       |
|                                                                  |       |     |       |     |       |
|                                                                  |       |     |       |     |       |
| TOTAL ASSETS                                                          |       | 9,418    |       | 9,867    |       |

 

F-62

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| ** **                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| LIABILITIES AND  SHAREHOLDERS’ EQUITY       |       |     |       |     |       |
|                                             |       |     |       |     |       |
| CURRENT LIABILITIES                              |       |     |       |     |       |
| Accounts payable to  suppliers                   |       | 6        |       | 20       |       |
| Payroll and related  charges                     |       | 8        |       | 9        |       |
| Taxes payable                                    |       | 23       |       | 38       |       |
| Dividends and interest  on capital               |       | 877      |       | 1,602    |       |
| Current portion of  long-term financing          |       | 7        |       | 9        |       |
| Other                                            |       | 35       |       | 36       |       |
|                                             |       | 956      |       | 1,714    |       |
|                                             |       |     |       |     |       |
| LONG TERM LIABILITIES                            |       |     |       |     |       |
| Long-term financing  (note 13)                   |       | 103      |       | 74       |       |
| Employee  post-retirement benefits (note 15)     |       | 82       |       | 71       |       |
| Accrued liability for  contingencies (note 16)   |       | 277      |       | 372      |       |
| Other                                            |       | 51       |       | 48       |       |
|                                             |       | 513      |       | 565      |       |
|                                             |       |     |       |     |       |
| SHAREHOLDERS’ EQUITY                        |       | 7,949    |       | 7,588    |       |
|                                             |       |     |       |     |       |
| TOTAL LIABILITIES AND  SHAREHOLDERS’ EQUITY |       | 9,418    |       | 9,867    |       |

 

**STATEMENTS OF OPERATIONS FOR THE YEARS ENDEDDECEMBER 31, 2006 AND 2005 (UNCONSOLIDATED)**

**(Expressed in millions ofBrazilian *reais*)**
| ** **                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
|                                  |       |     |       |     |       |
| OPERATING REVENUES                    |       | 1        |       | 2        |       |
| OPERATING EXPENSES                    |       | (17      | )          | (100     | )          |
|                                  |       |     |       |     |       |
| EQUITY IN EARNINGS OF  INVESTEES      |       | 1,590    |       | 1,523    |       |
|                                  |       |     |       |     |       |
| FINANCIAL INCOME  (EXPENSES), NET     |       | 123      |       | 532      |       |
|                                  |       |     |       |     |       |
| INCOME AND SOCIAL  CONTRIBUTION TAXES |       | 18       |       | 46       |       |
| NET INCOME                            |       | 1,715    |       | 2,003    |       |
|                                  |       |     |       |     |       |
| OTHER COMPREHENSIVE  INCOME           |       | 8        |       | 1        |       |
| COMPREHENSIVE INCOME                  |       | 1,723    |       | 2,004    |       |

 

F-63

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**STATEMENTSOF CASH FLOWS (UNCONSOLIDATED)**

**FOR THE YEARS ENDED DECEMBER 31,2006 AND 2005**

**(Expressed in millions ofBrazilian *reais*)**
| ** **                                             | ** **                                           | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------|------------------------------------------------------|----------|------------|----------|------------|
| CASH FLOWS FROM  OPERATING ACTIVITIES:                 |                                                 | 1,404    |       | 58       |       |
|                                                   |                                                 |     |       |     |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES                  |                                                 |     |       |     |       |
| Escrow deposits                                        |                                                 | 4        |       | —   |       |
| Acquisition of investments                             |                                                 | (570     | )          | (91      | )          |
|                                                   |                                                 |     |       |     |       |
|                                                   | Net cash used in  investing activities               |     | (566       | )        | (91        | ) |
|                                                   |                                                 |     |       |     |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                 |                                                 |     |       |     |       |
| Proceeds from issuance of long-term financing          |                                                 | 30       |       | 51       |       |
| Repayment of long-term financing and short-term  loans |                                                 | —   |       | (55      | )          |
| Sale of FIDC quotas                                    |                                                 | 900      |       | —   |       |
| FIDC – amounts received                           |                                                 | 27       |       | —   |       |
| Dividends and interest on capital paid                 |                                                 | (2,072   | )          | (491     | )          |
|                                                   |                                                 |     |       |     |       |
|                                                   | Net cash  provided by (used in) financing activities |     | (1,115     | )        | (495       | ) |
|                                                   |                                                 |     |       |     |       |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS  |                                                 | (277     | )          | (528     | )          |
|                                                   |                                                 |     |       |     |       |
| CASH AND CASH  EQUIVALENTS:                            |                                                 |     |       |     |       |
| Beginning of the year                                  |                                                 | 300      |       | 828      |       |
| End of the year                                        |                                                 | 23       |       | 300      |       |
|                                                   |                                                 | (277     | )          | (528     | )          |
| SUPPLEMENTARY  CASH FLOWS DISCLOSURE:                  |                                                 |     |       |     |       |
| Taxes paid - income taxes                              |                                                 | 9        |       | 20       |       |
| Interest paid,  net of interest capitalized            |                                                 | 14       |       | 19       |       |

 

F-64

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Following is information relating to CEMIGunconsolidated condensed financial statements presented above:
| · | Investments — As of December 31, 2006 and 2005,  investments in subsidiaries and affiliates are comprised as follows (see note  9): |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|

 
|        | ** **                                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------|----------------------------------------------------------------|------------|----------|------------|----------|------------|
|   | Cemig Geração e Transmissão S.A.                |       | 2,951    |       | 2,920    |       |
|   | Cemig Distribuição S.A.                              |       | 2,350    |       | 2,312    |       |
|   | Companhia de Gás de Minas Gerais - GASMIG                 |       | 153      |       | 94       |       |
|   | Empresa de Infovias S.A.                                       |       | 286      |       | 261      |       |
|   | Sá Carvalho S.A.                                          |       | 92       |       | 112      |       |
|   | Usina Térmica Ipatinga S.A.                               |       | 65       |       | 72       |       |
|   | Cemig Capim Branco  Energia S.A.                               |       | 46       |       | 31       |       |
|   | UTE Barreiro S.A.                                              |       | 10       |       | 12       |       |
|   | Cemig PCH S.A.                                                 |       | 51       |       | 49       |       |
|   | Efficientia S.A.                                               |       | 3        |       | 2        |       |
|   | Horizontes Energia S.A.                                        |       | 66       |       | 71       |       |
|   | Companhia Transleste de Transmissão - Transleste          |       | 14       |       | 13       |       |
|   | Central Térmica de Cogeração S.A.               |       | 2        |       | 3        |       |
|   | Rosal Energia S.A.                                             |       | 137      |       | 153      |       |
|   | Companhia Transudeste  de Transmissão - Transudeste       |       | 7        |       | 6        |       |
|   | Companhia Transirape de  Transmissão - Transirape         |       | 5        |       | 5        |       |
|   | Companhia de Transmissão Centroeste de Minas              |       | 7        |       | 3        |       |
|   | Transchile Charrúa  Transmisión S.A.                 |       | 13       |       | 4        |       |
|   | Rio Minas Energia  Participações S.A. - RME          |       | 212      |       | —   |       |
|   | Empresa Regional de Transmissão de Energia S.A. - ERTE    |       | 15       |       | —   |       |
|   | Empresa Amazonense de Transmissão de Energia S.A. - EATE  |       | 204      |       | —   |       |
|   | Empresa Catarinense de Transmissão de Energia S.A. - ECTE |       | 12       |       | —   |       |
|   | Empresa Norte de Transmissão de Energia S.A. - ENTE       |       | 66       |       | —   |       |
|   | Empresa Paraense de Transmissão de Energia S.A. - ETPE    |       | 41       |       | —   |       |
|   | Others                                                         |       | 7        |       | 12       |       |
|   |                                                           |       | 6,815    |       | 6,135    |       |

 

* *

F-65

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| · | Taxes recoverable — As of December 31, 2006 and  2005, taxes recoverable are mainly comprised as follows  (see note 8): |
|--------|-----------------------------------------------------------------------------------------------------------------------------------|

 
| ** **                  | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Current assets -            |       |                  |       |   |   |
| Income tax                  |       | —                |       | 15 |   |
| Social contribution tax     |       | 7                     |       | 192 |   |
| VAT                         |       | 4                     |       | 4 |   |
| Other                       |       | 2                     |       | 5 |   |
|                        |       | 13                    |       | 216 |   |
| Other  non-current assets - |       |                  |       |   |   |
| Income tax                  |       | 260                   |       | — |   |
| Social contribution tax     |       | 29                    |       | — |   |
| VAT                         |       | —                |       | — |   |
|                        |       | 289                   |       | — |   |

 

| · | Deferred income and social contribution taxes — As  of December 31, 2006 and 2005, the major components of the deferred  income and social contribution taxes are as follows (see note 5): |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|                                                               | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                    | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Tax loss carryforwards                                        |       | 531                   |       | 48 |   |
| Employee  post-retirement benefits                            |       | 12                    |       | 5 |   |
| Provision for  contingencies                                  |       | 74                    |       | 115 |   |
| Provision for  doubtful accounts                              |       | 35                    |       | 39 |   |
| Other temporary  differences                                  |       | 8                     |       | 7 |   |
|                                                          |       | 660                   |       | 214 |   |
| Provision for  losses on realization of deferred tax balances |       | (423                  | )          | - |   |
|                                                          |       | 237                   |       | 214 |   |
| Current Assets                                                |       | 24                    |       | 43 |   |
| Other Assets                                                  |       | 213                   |       | 171 |   |

 

| · | Accrued  liabilities for contingencies — As of December 31, 2006 and 2005,  accrued liabilities for contingencies are mainly comprised as follows (see  note 16): |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|                                          | ** ** | **December 31** | ** ** |
|------------------------------------------|------------|----------------------|------------|
| ** **                               | ** ** | **2006**             | ** ** | **2005** | ** ** |
| **Labor Claims**                         |       |                 |       |   |   |
| Various                                  |       | 32                   |       | 109 |   |
|                                     |       |                 |       |   |   |
| **Civil Lawsuits**                       |       |                 |       |   |   |
| Personal Injury                          |       | 8                    |       | 36 |   |
| Rate Increase                            |       | 104                  |       | 132 |   |
| Other                                    |       | 61                   |       | 29 |   |
|                                     |       | 173                  |       | 197 |   |
| ** **                               |       |                 |       |   |   |
| **Tax**                                  |       |                 |       |   |   |
| FINSOCIAL                                |       | 21                   |       | 21 |   |
| VAT                                      |       | 2                    |       | - |   |
| Taxes payable – Suspended Liability |       | 40                   |       | 38 |   |
| INSS                                     |       | 1                    |       |   |   |
| Other                                    |       | 2                    |       | 2 |   |
| ** **                               |       | 66                   |       | 61 |   |
| ** **                               |       |                 |       |   |   |
| **Regulatory**                           |       |                 |       |   |   |
| ANEEL Administrative Proceedings         |       | 6                    |       | 5 |   |
| ** **                               |       |                 |       |   |   |
| **Total**                                |       | 277                  |       | 372 |   |

 

F-66

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·*             *Restrictionof transfer of funds from subsidiaries – The subsidiaries described bellowqualify as either concessionaires of public services or independent powerproducer. As such, any transfer of funds to the respective parent company, inthe form of loans or advances, requires approval by ANEEL. This regulatoryrestriction does not apply to cash dividends determined in accordance with theBrazilian Corporate Law.

As ofDecember 31, 2006, total restricted subsidiaries net assets amount toR$5,780 composed as follows:
|                                                   | ** ** | **2006** | ** ** |
|---------------------------------------------------|------------|----------|------------|
| Cemig Geração e Transmissão S.A.   |       | 2,951    |       |
| Cemig  Distribuição S.A.                |       | 2,350    |       |
| Sá Carvalho S.A.                             |       | 92       |       |
| Usina Térmica Ipatinga S.A.                  |       | 65       |       |
| Cemig Capim  Branco Energia S.A.                  |       | 46       |       |
| UTE Barreiro  S.A.                                |       | 10       |       |
| Cemig PCH S.A.                                    |       | 51       |       |
| Efficientia S.A.                                  |       | 3        |       |
| Horizontes  Energia S.A.                          |       | 66       |       |
| Central Térmica de Cogeração S.A.  |       | 2        |       |
| Rosal Energia  S.A.                               |       | 137      |       |
| Companhia de Transmissão Centroeste de Minas |       | 7        |       |
|                                              |       | 5,780    |       |

 

**31. SUBSEQUENT EVENTS**

**(a) Rates readjustment**

The rates of CemigDistribuição S.A. were increased by an average of 5.16% from April 8, 2007. Theadjustment was applied in different percentages by category of consumption. Theincrease of the rates do not represent an increase of the CEMIG’s operatingrevenues in the same percentage because part of it is used to the regulatory assetssettlement. See note 4.

**(b)****Issuance of PromissoryNotes (commercial paper)**

On January 2, 2007 Cemig Distribuição S.A. issuedR$200 in Promissory Notes (commercial paper), which will have tenor of 180 daysand pay interest corresponding to 102.00% of the daily interbank deposit. Thefunds raised will be used for replenishment of cash in relation to the debtmaturing and settled between August 2006 and December 2006. The PromissoryNotes may be redeemed early by the Issuer at his exclusive option.

**(c) Reductionof interest in LIGHT S.A.**

On May 16,2007 the Brazilian National Development Bank (“BNDES”)converted 90% of its issues debentures in interest in Light S.A. correspondingto 31.50% of the total registered capital. The consequence of this transactionwas a reduction in the interest ownership of Rio Minas Energia ParticipaçõesS.A. (“RME”) in Light S.A. from 79.39% to 54.20% and a decrease in the indirectinterest ownership of CEMIG from 19.89% to 13.55%.

**(d) American Depositary Receipts (ADRs)**

In accordance with thedecision of the meeting of CEMIG’s Board of Directors held on February 28,2007, the American Depositary Receipts (ADRs) representing the Common Shares ofthe Company will be available for investors as from June 12, 2007, without theissuance of any new shares. This ADR program has been registered with the CVM(Brazilian Securities Commission) and will be registered with the SEC(Securities and Exchange Commission) of the USA, and listed on the New YorkStock exchange(NYSE). This gives US

F-67

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investors the same accessto the Common (ON) shares of Cemig as is currently available under the existingADR program for the preferred (PN) shares.

**(e)Regulatory agency acts**

On January 9,2007, ANEEL has filed regulatory proceeding against Cemig Distribuição S.A.questioning some criteria used by the subsidiary to calculate the amount billedto the low-income consumers to be reimbursed by Centrais Elétricas Brasileiras – “ELETROBRAS” in the amount of R$143.The Company recorded a provision in 2007 of R$30 which represents the potentialloss relating to these matters.

**(f)Issuance of debentures of Cemig Geração e Transmissão S.A.**

In the first half of 2007, Cemig Geração e TransmissãoS.A. concluded its first issuance of debentures in the amount of R$993, withthe purpose of carrying out the obligatory exchange specified in the deed ofthe first issuance by CEMIG, as a result of the process of unbundling. CemigGeração e Transmissão S.A. did not receive the net funds of this offer, norwill there be an increase in debt, since the liabilities arising from the deedof the first CEMIG issuance are already allocated in Cemig Geração eTransmissão S.A. since the beginning of its operational activities on January1, 2005. Of the total of the issue, R$558 was posted as debt and 41% of the newissue was exchanged for the debentures that the Company holds in treasury,arising from the redemptions made at the time of the re-negotiations.

**(g) Proposal for increase in theregistered capital**

On April 26, 2007, theAnnual General Meeting approved an increase in the registered 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 registered capital of CEMIG increased from R$1,621 to R$2,432 withissuance of new shares, through capitalization of R$811 of the balance on theRetained Earnings Reserve, distributing as a consequence to stockholders abonus of 50%, in new shares, of the same type as those held, and with nominalvalue R$0.01.

**(h) Reverse split**

The Annual General Meetingapproved a reverse split of the shares of the company, of each lot of 500shares of nominal value R$0.01 for one share of nominal value R$5.00. The reversesplit occurred on June 4, 2007. All share and per share data has beenretroactively restated to reflect the reverse stock split.

**(i) Third Issuance of Commercial Papers of Cemig Distribuição S.A.**

OnJune 12, 2007, Cemig Distribuição S.A. entered into a placement agreement witha creditor, Caixa Econômica Federal, relating to the third public issuance ofcommercial paper in an amount of R$400. The commercial papers are expected tobe subscribed and fully paid up on June 29, 2007. The commercial paper matures180 days after the subscription date, on December 26, 2007. Upon maturity,Cemig Distribuição S.A. will be obligated to pay to the holders an amount equalto the par value of the paper plus interest at the rate of 101.6% of CDI.

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**32 - RECENTLY ISSUED U.S. GAAP PRONOUNCEMENTS NOT YETADOPTED**

InJune 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes”,that prescribes a recognition threshold and measurement attribute for thefinancial statement of a tax position taken or expected. ThisInterpretation will result in increased relevance and comparability infinancial reporting of income taxes because all tax positions accounted for inaccordance with FASB Statement 109,*Accounting for Income Taxes,* will beevaluated for recognition, derecognition, and measurement using consistentcriteria. This Interpretation is effective for fiscal years beginning afterDecember 15, 2006. Earlier application of the provisions of this Interpretationis encouraged if the enterprise has not yet issued financial statements,including interim financial statements, in the period this Interpretation isadopted. CEMIG is evaluating the potential impacts of this interpretation incompany’s consolidated financial statements.

In September 2006, the FASB issued SFAS 157, “FairValue Measurements”, that establishes a framework for measuring fair value ingenerally accepted accounting principles (GAAP), and expands disclosures aboutfair value measurements. This Statement applies under other accountingpronouncements that require or permit fair value measurements and will changesome current practice because of the need for increased consistency andcomparability in fair value measurements and for expanded disclosures aboutfair value measurements. It applies for derivatives and other financialinstruments measured at fair value under Statement 133 at initial recognitionand in all subsequent periods and should provide users of financial statementswith information that is useful in making investment, credit, and similardecisions . This Statement is effective for financial statements issued forfiscal years beginning after November 15, 2007, and interim periods withinthose fiscal years. Earlier application is encouraged, provided that thereporting entity has not yet issued financial statements for that fiscal year,including financial statements for an interim period within that fiscal year.CEMIG is evaluating the potential impacts of this interpretation in company’sconsolidated financial statements.

In February 2007, the FASB issued SFAS 159, “The FairValue Option for Financial Assets and Financial Liabilities - Including anamendment of FASB Statement No. 115. This Statement permits entities to chooseto measure many financial instruments and certain other items at fair value.This Statement is effective as of the beginning of an entity’s first fiscalyear that begins after November 15, 2007. Early adoption is permitted as of thebeginning of a fiscal year that begins on or before November 15, 2007, providedthe entity also elects to apply the provisions of FASB Statement No. 157, *Fair Value Measurements.* No entity ispermitted to apply this Statement retrospectively to fiscal years preceding theeffective date unless the entity chooses early adoption. The choice to adoptearly should be made after issuance of this Statement but within 120 days ofthe beginning of the fiscal year of adoption, provided the entity has not yetissued financial statements, including required notes to those financialstatements, for any interim period of the fiscal year of adoption. CEMIG isevaluating the potential impacts of this interpretation in company’sconsolidated financial statements.

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